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ABC COMPANY LIMITED AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME


FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Note

2006

2005

Net sales
Cost of sales

100,828
(57,077)

Gross profit

43,751

Selling and distribution expenses


Advertising and marketing expenses
General and administrative expenses

14

Operating income

29,798

(19,458)
(4,508)
(4,834)
14,951

Interest expense
Currency translation gain/(loss)
Step up acquisition of shares

15

Profit before minority interest


and income taxes

71,126
(41,328)

(12,862)
(2,874)
(3,773)
10,289

(742)
1,142
(406)

14,945

Minority interest

(469)
(6)
-

9,814

(725)

Profit before income taxes

14,220

Income tax expense

(1,600)

Net income

12,620

(199)
9,615

8,340

These financial statements and accompanying notes on pages 5 to 29 which form an


integral part of these financial statements, were approved by the Board of Directors on
April 22, 2007 and signed on its behalf on April 25, 2007 by:

Eli Davidai
President

Leon Schachar
Chief Financial Officer

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
1

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Note

December 31, 2006

December 31, 2005

1,295
11,960

1,956

7,546

Assets

Cash
Trade receivables, net

Inventories, net
Other current assets
Total current assets

5
6

7,444
3,170
23,869

4,576
1,763
15,841

Property, plant and equipment, net


Intangible assets, net
Investments
Deferred tax asset
Total non-current assets

7
8

22,852
324
38
925
24,139

17,523
570
38
18,131

48,008

33,972

7,788
12,855
4,495
__287
25,425

4,419
8,567
2,445
__131
15,562

73
73

28
111
139

Total liabilities

25,498

15,701

Minority interest

1,952

1,633

Total assets
Liabilities and Shareholders Equity
Short-term borrowings
Trade payables
Other liabilities
Capital leases- current portion
Total current liabilities

9
10

Due to affiliates
Capital leases long-term portion
Total non-current liabilities

Shareholders Equity
Common stock (165,000 authorised shares,
139,179 issued and outstanding;
USD 0.01 par value)
12
Additional paid-in capital
12
Preferred stock
13
Accumulated deficit
Total shareholders equity

1,392
6,869
21,016
(8,719)
20,558

Total Liabilities and Shareholders Equity48,008

33,972

1,392
6,869
26,894
(18,517)
16,638

These financial statements and accompanying notes on pages 5 to 29 which form an


integral part of these financial statements, were approved by the Board of Directors on
April 22, 2007and signed on its behalf on April 25, 2007by:
Eli Davidai
President

Leon Schachar
Chief Financial Officer

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
2

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)

Common
stock
Balance at December 31, 2004
Dividends declared on
preferred stock
Dividends paid
Net income for 2003
Balance, December 31, 2005
Dividends declared on
preferred stock
Dividends paid
Preferred stock redeemed
Net income for 2004
Balance, December 31, 2006

Additional Preferred
paid-in capital
stock

1,392

6,869

1,392

6,869

1,392

6,869

Accumulated
deficit

Total
shareholders
equity

25,504

(23,797)

9,968

3,060
(1,670)
-

(3,060)
8,340

(1,670)
8,340

26,894

(18,517)

16,638

2,822
(1,800)
(6,900)
-

(2,822)
12,620

(1,800)
(6,900)
12,620

21,016

(8,719)

20,558

These financial statements and accompanying notes on pages 5 to 29 which form an


integral part of these financial statements, were approved by the Board of Directors on
April 22, 2007and signed on its behalf on April 25, 2007by:

Eli Davidai
President

Leon Schachar
Chief Financial Officer

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
3

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Cash flows provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Minority interest
Loss/(Gain) on disposal of fixed assets
Bad debts allowance
Provision for SARs
Difference on the step up acquisition of shares
Accruals for bonuses, marketing and provisions for risks
Interest expense, net
Changes in operating assets and liabilities:
Increase in trade receivables and other receivables
Increase in inventories
Increase in other current assets
Increase in trade payables and other liabilities
Net cash provided by operating activities
Cash flows used in investing activities:
Purchase of property, plant and equipment,
Purchase of intangible assets
Interest received
Proceeds for the step up acquisition of shares
Proceeds from sale of property plant and equipment
Net cash used in investing activities
Cash flows used in financing activities
Repayments of borrowings from affiliates and capitalized interest on
Dividends and preferred stock paid (USD 800,000 in advance)
Interest paid
Cash proceeds from short-term borrowings
Cash payment of borrowings
Cash repayments of capital leases
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents

2006

2005

12,620

8,340

4,657
725
76
177
93
406
1,177
742

4,271
199
(96)
154
106
282
469

(4,591)
(2,868)
(1,532)
5,088
16,770
(10,673)
(45)
188
(860)
1,281
(10,109)

(2,377)
(1,652)
(2,188)
3,671
11,073
(5,869)
(300)
(6,169)

(9,500)
(930)
3,987
(618)
(261)
(7,322)

(385)
(1,670)
(487)
2,858

(661)

1,161

(4,059)
(3,743)

Cash and cash equivalents, at the beginning of the year

1,956

795

Cash and cash equivalents, at the end of the year

1,295

1,956

Supplemental disclosure of cash flow information


Cash paid for interest
Cash paid for income taxes
Gross book value of fixed assets acquired under finance leases

930
1,902
379

487
796
3,275

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
ABC Company Limited is a British Virgin Islands corporation. References to the
Company in these Notes include the Companys subsidiaries, as the context requires.
ABC has an Exclusive Bottling Appointment (as amended, the Exclusive Bottling
Appointment) issued as of May 28, 1991, by PepsiCo, Inc. (PepsiCo) granting ABC
the exclusive right to manufacture, sell and distribute Pepsi-Cola and related beverages,
including Seven-Up, Mountain Dew and Mirinda , in the country of Romania. A majority
of the Companys current business is dependent upon the Exclusive Bottling
Appointment. The Company also manufactures, sells and distributes certain noncarbonated fruit juice-based products under the brand name of PriGat. PriGat products
are manufactured in Romania primarily by SiGat Beverage Company S.A.. Also, the
Company produces and distributes water products under Perla and Roua Muntilor
brands.
The Exclusive Bottling Appointment was for an initial term of ten years, renewing
automatically for additional terms of five years each, unless ABChas failed to achieve
and maintain certain target bottling capacities at the end of each term. Such renewal was
first effected in May 28, 2001 till May 27, 2006. ABCs current bottling capacity
substantially exceeds the present capacity target. In the event of a sale, transfer, change
of ownership or other disposition of assets or shares that would result in a change of
majority voting control of ABC(as defined in the Exclusive Bottling Appointment),
PepsiCo has the right to consent to such transaction as well as a right of first offer.
Under the terms of the Exclusive Bottling Appointment, ABC is required to actively
advertise PepsiCo products in Romania. Advertising and marketing expenditure budgets,
which include the cost of point-of-sale coolers supplied to customers, are agreed upon
annually and PepsiCo generally reimburses approximately 50% of such costs to ABCCL.
Approximately 57% of the Companys sales in 2006 (54% in 2003) were products of
PepsiCo, which is the sole supplier of concentrate required to manufacture these
products. ABC conducts its business principally through Romanian subsidiaries in which
it holds more than 50% interest. The following is a description of ABCs subsidiaries as
of December 31, 2006.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Operating Companies:
ABC S.A.; (100% - owned) was formed in December 1994, and activated in December
1997. From the beginning of 1998, ABC commenced activity as the primary distributor
of all the Companys distribution activities in Romania. In November 2004, Sitaco S.A.
(the Companys longstanding subsidiary in Bucharest) was merged with and into ABC.
The purpose of ABC is to manage substantially all of the Companys Romanian
distribution activities and to engage in production of beverage products in plastic and
glass packages.
SiGat Beverage Company S.A. (SiGat) (69.65% - owned through a 74.971%
ownership of QuadGat Beverage Company Limited and 11.606% owned directly) was
formed in Romania in May 1993. In February 2003, Aradgat Beverage Company S.A.
(the Companys former subsidiary in Arad) merged with and into Sigat Beverage
Company.
Vitarom S.A. (Vitarom) (99.843% - owned) was acquired in April 1998 and produces
mineral water (Perla) and (Roua Muntilor) for certain areas of Romania. The plant
was located at Sincraieni till May 2004 when a new plant was built at Covasna.
Vitaroms office is located in Bucharest.
ABC Moldova (100% owned by ABC )- is a subsidiary which has not been consolidated
as its activity is not material for the activity of ABCCL.
Holding Companies:
QuadGat Beverage Company Limited (QuadGat) (75% - owned) is a British Virgin
Islands company formed in 1993. QuadGats purpose is to undertake business (through
sublicenses) in the non-carbonated fruit juice-based products industry in Romania.
Ouadrant-Amroq Bottling Company (Europe) Limited (ABCCEL) is a wholly owned
Cypriot corporation formed in August 1994 to, among other things, centralize and
coordinate the Companys licensing arrangements and purchase of concentrate for its
operations in Romania. Its activity has been principally inter-company.
QuadGat Beverage Company (Europe) Limited (QGBCEL) is a wholly owned
subsidiary of QuadGat. QGBCEL, a Cypriot corporation, was formed in September 1994
to, among other things, centralize and coordinate QuadGats licensing arrangements and
operations in Romania. Its activity has been principally inter-company.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
BASIS OF PRESENTATION AND CONSOLIDATION
(a)

Basis of presentation
The Company and QuadGat maintain their statutory books in United States
dollars (USD) in accordance with accounting principles generally accepted in
the United States of America (US GAAP) and ABCCEL and OGBCEL in
accordance with IFRS. These companies are located in either the British Virgin
Islands or Cyprus.
ABC, Vitarom and Sigat maintain their statutory books and prepare their statutory
financial statements in Romanian Lei (ROL) in accordance with Romanian law
and generally accepted accounting principles in Romania (RAS). The statutory
accounts of the above mentioned Romanian entities, which were maintained under
the historical cost convention in the currency of an inflationary economy, have
been adjusted for conformity with US GAAP through certain adjustments and
reclassifications including the re-measurement of ROL financial statements into
USD by applying the re-measurement principles defined in the (SFAS) 52
issued by (FASB).
The cumulative inflation rate in Romania for the last three years ending December
31, 2006 was 46,91%(in the three years ended December 31, 2005 80.7%).
Based on the cumulative inflation rate evolution, Romania will most probably
come off highly inflationary status.
In accordance with SFAS 52, Foreign Currency Translation, non-monetary
balance sheet items recorded in currencies other than the reporting currency are
re-measured at historical rates of exchange, and monetary balance sheet items are
measured at current rates. The translation adjustment resulting from remeasurement is included in the income statement for the year.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
2.
BASIS OF PRESENTATION AND CONSOLIDATION (CONTINUED)
The USD financial statements of ABC, Vitarom and Sigat have been prepared by
using the following exchange rates:
Caption

2006

2005

Year end (1 USD =


29,067 ROL)

Year end (1USD =


32,595 ROL)

Historical rate
Historical rate

Historical rate
Historical rate

Profit and loss (except


Average rate for the month
for depreciation expense)
of original booking
Depreciation
Historical rate

Average rate for the month


of original booking
Historical rate

Monetary assets and liabilities

Equity
Tangibles

(b)

Consolidation

In preparing the consolidated financial statements, the financial statements


of the Company and its subsidiaries are combined on a line-by-line basis
by adding together like items of assets, liabilities, equity and expenses;

The carrying amount of the Companys investment in each subsidiary and


the Companys portion of equity of each subsidiary are eliminated;

Minority interest in the net income of consolidated subsidiaries for the


reporting period are identified and adjusted against the income of the
consolidated subsidiaries in order to arrive at the net income attributable to
the owners of the Company;

Minority interest in the net assets of the consolidated subsidiaries are


identified and presented in the consolidated balance sheet separately from
the liabilities and the Companys shareholders equity;

Intra-group balances and intra-group transactions, including sales,


expenses and dividend, and resulting unrealized profits are eliminated in
full. Unrealized profits resulting from intra-group transactions that are
included in the carrying amount of assets, such as inventory and property,
plant and equipment are eliminated in full.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
3.
SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied in preparation of the accompanying
consolidated financial statements, is set out below:
(a)

Currency of presentation
The accompanying financial statements are presented in thousands of US Dollars
(USD) or otherwise where indicated.

(b)

Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

(c)

Revenue and expense recognition


Revenues are represented by sales of beverages to three types of customers: direct
sales (e.g. small shops that sell directly to end user), key accounts (e.g. chains of
stores) and indirect sales (e.g. sales to distributors).
Income and expenses are recognised on the accrual basis. Revenues are
recognised when ownership title is transferred which is generally upon delivery of
the goods.
Payments made to third parties as commissions related to selling activity are
recorded as a reduction of net sales. Payments made to customers for the rights to
sell the Companys products in certain venues is recorded as a reduction of net
sales over the term of the agreement. Customer discounts and allowances are
recorded as a reduction of net sales based on actual customer sales volume during
the period.

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
(d)

Bottler incentives
PepsiCo provides the Company with various forms of marketing support. The
marketing support, including some support that is at its sole direction. The
marketing support is intended to cover a variety of initiatives including direct
marketplace, shared media and advertising support, to support volume and market
share growth. The bottler incentives totaled USD 3,937,362 and USD 3,213,326
for the years ended December 31, 2006 and December 31, 2005, respectively.
Under the 2006 marketing support program, bottler incentives that are directly
attributable to incremental expenses incurred are reported as either an increase to
net sales or a reduction to advertising and marketing expenses, commensurate
with the recognition of the related expenses. Such bottler incentives include
amounts received for direct support of advertising commitments and exclusivity
agreements with various customers. All other bottler incentives are recognized as
a reduction of cost of goods sold when the related products are sold based on the
agreements with vendors. Such bottler incentives primarily include base level
funding amounts which are fixed in amount based on the previous year's volume
and variable amounts that are reflective of the current year's volume performance.
The consolidated income statement include the following bottler incentives
recorded as income or as a reduction of expenses:

Net sales
Cost of goods sold
Advertising and marketing expenses
General and administrative expenses

(e)

December 31, 2006

December 31, 2005

1,253
2,684
3,937

1,046
72
2,081
15
3,214

Advertising and marketing expenses


The Company is involved in a variety of programs to promote its products.
Advertising and marketing costs are expensed in the year incurred. Certain
advertising and marketing costs incurred by the Company are partially reimbursed
by PepsiCo in the form of marketing support (refer to d) above).

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
(f)
Shipping and handling costs
The Company records shipping and handling costs related to sales, into selling
and distribution expenses.
(g)

Trade receivables
Trade receivables are shown net of an allowance for doubtful accounts that is
recorded for purposes of reflecting the estimated recoverable amount of these
accounts. The allowance is based on specific amounts that were considered
having a low probability to be recovered.

(h)

Inventories
Inventories consist of finished goods, packaging and raw materials. Costs of
inventories include the purchase price and related costs of acquisition (transport,
custom duties and insurance). Cost is determined using the first-in, first-out
(FIFO) method. The inventories balance is periodically reviewed by management
relative to its recoverability. If the value of inventory items exceed their market
value, the carrying value of those items is reduced to their market value through
the use of an inventory provision.

(i)

Property, plant and equipment


Property, plant and equipment are carried at cost, including related costs of
transport and customs duties. Depreciation is computed on a straight-line method
over the following estimated useful lives:
Years
Buildings, roads and platforms
Production equipment
Transportation equipment
Coolers and signs at customer locations
Others (mainly office equipment, furniture and fixtures)

3.

10 - 25
10
3 - 10
5-6

Expenditures incurred after the property, plant and equipment have been put into
operation, such as repairs and maintenance and overhead costs, are normally
charged to the income statement in the period when they are incurred.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j)

Impairment of long-lived assets

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
The Company adopted Statement 144 on January 1, 2002. The adoption of
Statement 144 did not affect the Companys financial statements.
In accordance with Statement 144, long-lived assets, such as property, plant and
equipment, and purchased intangible subject to amortization, are reviewed fir
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by comparison of carrying amount an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceed its estimated future cash flows, an
impairment charge is recognised by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Asset to be disposed of would be
separately presented in the balance sheet and reported at the lower of carrying
amount of fair value cost to sell, and are no longer depreciated. The asset and
liabilities of a disposal group classified as held for sale would be presented
separately in the appropriate asset and liability section of the balance sheet.
Goodwill is tested annually for impairment and its tested for impairment more
frequency if events and circumstances indicate that the asset might be impaired.
An impairment loss is recognised to the extend that the carrying amount exceed
the assets fair value. This determination is made at the reporting unit level and
consists of two steps. First, the Company determines the fair value of a reporting
unit and compares it to its carrying amount. Second, if the carrying amount of a
reporting units goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation in accordance with FASB
Statement No. 141, Business Combination. The residual fair value after this
allocation is implied fair value of the reporting of goodwill.
(k)

Intangible assets
The goodwill, which was previously recognized as such in the consolidated
financial statements, was allocated to the fair value of the net assets acquired on
the previous acquisitions, as no such assessment was done at the time of the
acquisition. The allocation of each item to each identifiable assets at the time of
the transaction was impracticable to be done and so it has been reclassified under
the fixed assets and estimated to be depreciated over a 10 year period .

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Software is recorded at historical cost and is amortised over the estimated useful
life, which is 3 years.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
10

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
(l)

Related parties
For the purposes of these financial statements, parties are considered to be related
if one party has the ability to control the other party or exercise significant
influence over the other party in making financial or operational decisions as
defined by SFAS 57 Related Party Disclosures. In considering each possible
related party relationship, attention is directed to the substance of the relationship,
not merely the legal form.

(m)

Operating leases
Rental payments in respect of operating leases are recognised as expense when
incurred.

(n)

Capital leases
Leases of property, plant and equipment where the Company assumes
substantially all the benefits and risks of ownership are classified as capital leases.
The leases are capitalised at the estimated present value of the underlying lease
payments. The corresponding rental obligations of finance charges are classified
between current and non-current liabilities. The interest element of finance
charges is recorded in the income statement over the lease period. The property,
plant and equipment acquired under capital leasing contracts is depreciated over
the useful life of the asset.

(o)

Pensions and other post retirement benefit


In the normal course of business, the Romanian subsidiaries make payments to the
Romanian State on behalf of its employees. All employees of the subsidiaries are
members of the Romanian State Social security plan and the Company deducts
9.5% of the employees gross salary on behalf of the Romanian State. The
Company and its subsidiaries do not operate any other pension scheme or post
retirement benefit plan and, consequently, has no obligation in respect of
pensions. In addition, the Company and its subsidiaries are not obligated to
provide further benefits to employees.

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


(p)

Taxation
Current

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
11

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
For the subsidiaries operating and registered in Romania, the tax provisions for
income tax, VAT, and other tax related items are calculated in accordance with
Romanian tax law and are accrued for the period to which they relate.
Deferred
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
For income tax purposes the deductibility of certain expenses may be limited to a
percentage of profit or not allowed, as defined by law. Romanian law may, from time
to time, also permit an adjustment of ROL denominated fixed assets to fair market
value, which could provide the Company and its subsidiaries with a tax basis in assets
that is greater than or less than the amounts reported for US GAAP purposes. The
provisions for bad debts, obsolete inventory and idle property, plant and equipment
recorded in the accompanying consolidated financial statements are also considered
to be a permanent difference as they are not allowable deductions for Romanian tax
purposes.

(q)

Financial instruments
Financial instruments on the balance sheet include cash and bank balances,
investments, receivables, trade creditors, leases and borrowings.

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


(r)

Other comprehensive income


The Company had no recognised gains or losses other than net gain or loss during
the periods presented and accordingly, a statement of other comprehensive income

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
12

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
has not been prepared.

(s)

Recently issued accounting pronouncements


A discussion of significant accounting matters promulgated by various regulatory
bodies follows.
In December 2005 the Financial Accounting Standards Board issued SFAS No.
132 (revised 2003) Employers Disclosures about Pensions and Other
Postretirement Benefits an amendment of FASB Statements No. 87, 88 and 106.
This statement extends the publishing rules for pension liabilities according to
SFAS No. 132. The accounting and valuation principles remain unchanged.
In December 2005, the Financial Accounting Standards Board issued FASB
Interpretation No. 46R Consolidation of Variable Interest Rate Entities (revised)
(FIN 46R) which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaced FASB
Interpretation No. 46 Consolidation of Variable Interest Rate Entities which was
issued in January 2005.
In December 2006 the FASB issued revised SFAS No. 123R, "Share-Based
Payment". SFAS No. 123R sets accounting requirements for "share-based"
compensation to employees and requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation. SFAS No. 123R is effective in interim or annual periods beginning
after June 15, 2007. The adoption of this statement is not expected to have any
impact on our financial condition or results of operations.
In November 2006 the FASB issued SFAS No. 151, "Inventory Costs". The new
Statement amends ARB No. 43, Chapter 4, "Inventory Pricing", to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


and wasted material. This Statement requires that those items be recognized as
current period charges and requires that allocation of fixed production overheads to
the cost of conversion be based on the normal capacity of the production facilities.
This statement is effective for fiscal years beginning after June 15, 2007. The
adoption of this statement is not expected to have any impact on our financial

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
13

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
condition or results of operations.
In December 2006 the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 is to be
applied prospectively for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2007. The Company's adoption of SFAS No. 153 is not
expected to have a material impact on its financial position or results of operations.
(t) Reclassifications
Where necessary, comparative figures have been adjusted and reclassified to
conform with changes in presentation in the current year. There is no impact on
net profit or equity for the respective periods.
(u) Investments
Investments in the common stock of the affiliated are accounted for by cost
method and represent investments were the Company has less than 20% voting
interest.
(v) Contingencies and contractual commitments
Liabilities for loss contingencies, including environmental remediation costs not
within the scope of FASB Statement No. 143, Accounting Retirement Obligations,
arising from claims, assessments, litigation, fines and penalties and other sources
are recorded when it is probable that a liability has been incurred and the amount
of assessment and/or remediation can be estimated.

4.

TRADE RECEIVABLES
Trade receivables consist of the following:
December 31, 2006
Trade receivables, gross
(Less): Allowance for doubtful accounts
Total

12,740
(780)
11,960

December 31, 2005


8,149
(603)
7,546

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
14

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
For the years ended December 31, 2006 and 2005, the Company recorded bad debt
provision expense of USD 177 and USD 154, respectively.
5.

INVENTORIES
Inventories consist of the following:

6.

December 31, 2006

December 31, 2005

Finished goods
Packaging materials
Raw materials
Other inventory

2,764
296
3,983
400

2,320
400
1,696
160

Total

7,444

4,576

December 31, 2006

December 31, 2005

OTHER CURRENT ASSETS


Advances paid to suppliers
Other debtors
PepsiCo refunds
Prepaid insurance and deferred expenditures
State taxes (VAT & income tax)
Prepayment to ongoing Preferred stock shareholders

853
306
649
187
375
800

1,131
118
507

3,170

1,763

PepsiCo refunds noted above represent refunds earned but not yet paid by PepsiCo for ABC
marketing expenses shared based on a marketing agreement concluded on an annual basis
(see Note 3 for further details).
7.

PROPERTY, PLANT AND EQUIPMENT, NET


Property, plant and equipment and related accumulated depreciation as of December 31,
2006 and 2005, are as follows:

Land
Building, roads and platforms

December 31, 2006

December 31, 2005

223
4,662

167
3,103

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
15

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Production equipment
19,115
Transportation equipment
5,716
Coolers and signs, at customer locations
10,317
Office equipment, furniture
and fixtures and other
2,736
Construction in progress
153
Total
42,922
Accumulated depreciation
Net book value

(20,070)

15,680
5,285
11,979
3,126
1,146
40,486
(22,963)

22,852

17,523

In 2006 and 2005, the depreciation expense for property, plant and equipment were
USD 4,517 and USD 4,250, respectively.
The following is a summary of leased property acquired under capital leases:
December 31, 2006
Transportation equipment acquired
under capital lease
Accumulated depreciation

710
(168)

Net book amount

December 31, 2005

615
(249)

542

366

Future minimum capital lease payments as of December 31, 2006 and 2005 were USD
374 and USD 242 respectively .
Capitallease

Payable at year end December 31:


2005
2006

298
57

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
16

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
2007
19
374
The Company also has several operating leases, primarily for warehouse serving the distribution of the
products over the country. These leases generally contain renewal options for periods ranging from one to
five year and require the Company to pay all executor cost such as maintenance and insurance. Rental
expense for operating lease (except those with lease terms of a month or less that were not renewed)
during 2006 and 2005.

Minimum rentals
Contingent rentals

8.

2006

2005

588
-

270
-

588

270

INTANGIBLE ASSETS, NET (CONTINUED)


Intangible assets as of December 31, 2006 and 2005, are as follows:

Software
Other
Total
Accumulated amortisation
Net book value

December 31, 2006

December 31, 2005

649
261
910

681
369
1,050

(586)

(480)

324

570

In 2006 and 2005, the amortisation expense for intangible assets were USD 140 and
USD 21, respectively.
During 2006, ABC acquired its accounting software from a related party, Wizrom
Software SRL, in the total amount of USD 142 (2003: USD 171).
9.

BORROWINGS
December 31, 2006

December 31,

2005

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
17

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Current portion
Alpha Bank Loan at LIBOR+2.75% interest due
monthly, principal due 2005-2006 (initial
loan: USD 464), collateralized by general pledge
Alpha Bank Overdraft at LIBOR 3 months+1.75%, due 2006
(initial overdraft: USD 6,500)
Alpha Bank Overdraft ROL at 23% , due 2007
(initial overdraft: ROL 20,000 millions;
2003: 12,000 millions)

4,199

2,041

116

HVB Bank at LIBOR +1.75% (initial loan: USD 505),


collateralized by pledged equipment and cession of
certain receivables from key accounts, due 2006

ING Bank at LIBOR 3 months+1.75% (initial loan: USD 4,000),


collateralized by current trade receivables, pledged
inventories in the total amount of USD 4,100, and
pledged equipment in the total amount of USD 1,540
3,473

1,760

TOTAL

4,419

7,788

Long - term portion


Total borrowings
4,419

7 ,788

Interest rate
The exposure to the interest rate risk and the effective interest rate are presented below:
December 31, 2006
(USD 000s)

December 31, 2005


(USD 000s)

Total borrowings:

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
18

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Floating interest rate
7,788

Effective interest rate:


Overdraft foreign currency $
Short term borrowings foreign currency $

4,419

Financial year
ended as at
December 31, 2006
(%)

Financial year
ended as at
December 31, 2005
(%)

4.15%
4.93%

4.74%
4.93%

Fair value of borrowings


The carrying value of short-term borrowings approximates their fair value.

10.

OTHER LIABILITIES
At December 31, 2006 and 2005, other liabilities consist of the following:

Salaries and social taxes


SARs payable
Agriculture tax
Accrued payables
VAT and other taxes payable
Provision for Water Perla
Provision for bonuses
Provision for marketing
Total

December 31, 2006

December 31, 2005

590
215
249
125
1,449
200
1,092
575
4,495

359
164
343
99
748
547
178
2,445

ABChas from time to time granted stock appreciation rights (SARs) to employees and/or
directors of the Company. SARs offer a means of providing deferred, long-term
incentive compensation based on the increase in value of the common stock of
ABCbetween the date of grant and the date of exercise. SARs do not involve the capital
stock of ABCor any of its subsidiaries.
As at December 31, 2005 a total of 2,783.6 SARs were issued and outstanding to five
employees. In 2004 all of them became vested and three of the employees exercised their
right and additional one exercised 40% of it (i.e. $42,500). As at December 31, 2006 one

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
19

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
of the remaining employee can exercise the 100% of his right while the other on the
remaining 60%.
The Companys actual compensation expense under the SARs cannot be determined until
the date of exercise. Nevertheless, based on the terms of the outstanding SARs, the
Company has made provisions of USD 93 and USD 164, for the years ended December
31, 2006 and 2005, respectively, for compensation expense that ultimately may be
incurred in connection with the settlement of its obligations due under the SARs. The
Companys compensation expense will be adjusted upward or downward, as required,
based on the Companys actual experience from time to time.
11.

INCOME TAX
Total income taxes for the year ended December 31, 2006 were allocated as follows:
2006
Income tax from continuing operations
Deferred tax asset
Plant and equipment, due to differences
in depreciation period

2,525

Total income tax expense net

1,600

12.

(925)

COMMON STOCK

The breakdown of the Companys common shareholders together with their common
shareholding percentages in the Company is as follows:
December 31, 2006 and 2005
Number of
Percentage
common shares
(%)
Quadrant-Amroq International Limited (QAIL)
European Beverage Holdings

100,000

71.9

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
20

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Limited
38,955
Other
224
Total
13.

139,179

28.0
0.1
100.0

PREFERRED STOCK

As at December 31, 2001, the Company agreed to exchange certain debt owed by the
Company to affiliates (comprising the loans commonly referred to as the Original
Shareholding Financing , the 1995 Financing and the 1996-97 Financing, including
principal and accrued interest) for shares of Preferred Stock of ABCCL, using an
exchange rate of USD 1,000 per share of Preferred Stock.
Prior to this exchange, the authorised capital of the Company was USD 2,000 divided
into 200,000 shares with a value of USD 0.01 each. Following this exchange the
authorised capital of the Company was divided into two classes consisting of (i) 165,000
shares of Common Stock with a par value of USD 0.01 each and (ii) 35,000 shares of
Preferred Stock with a par value of USD 0.01 each
Dividends on preferred stock
The holders of the Preferred Stock are entitled to receive cumulative dividends based on
the Stated Value of their shares at the rate of 12% per annum, compounded annually, from
the effective date of issuance until the date of redemption.
Liquidation preference
The Preferred Stock has priority over the Common Stock in the event of a liquidation of
the Company.
Redemption
The Company shall have the right to redeem the Preferred Stock in whole or in part at the
Stated Value plus accrued but unpaid dividends at any time, without premium or penalty;
provided that any partial redemption shall be effected proportionately among all holders
of the Preferred Stock.
Conversion rights
The holders of the Preferred Stock shall have no rights to convert the Preferred Stock into
shares of Common Stock.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
21

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Voting
The Preferred Stock shall be non-voting other than as required by law.
14.

2006

2005

Operating expenses
Management team remuneration
SARs provision
Travel and entertainment
Management fees
Professional fees
Agricultural taxes
Provision for bonuses

2,464
690
93
375
313
354
545

2,111
493
106
149
512
139
87
176

Total

4,834

3,773

2006

2005

Third party
Affiliates

742
-

444
25

Total

742

469

15.

16.

GENERAL AND ADMINISTRATIVE EXPENSES

INTEREST EXPENSE, NET

BALANCES AND TRANSACTIONS WITH RELATED PARTIES


Balances and transactions with related parties of the Group as at and for the years ended
December 31, 2006 and December 31, 2005 consist of the following:
(a)

Balances with related parties


Balance sheet caption
2005
Trade payables
Other payables

December 31, 2006

December 31,

507
-

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
22

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
Due to affiliates
Due from affiliates
236
(b)

Transactions with related parties


Statement of
income caption
2005
Trade purchases
Intangible assets purchases
Management fees
Legal
Rent and transportation

(c)

Year ended
December 31, 2006

Year ended
December 31,

4,570
142
313
72
430

3,133

Directors compensation
Directors who are also managers of the Company or affiliated with shareholders
of the Company are not paid directors fees as such. One director, who is not in
such position, is paid a directors fee for each meeting attended. All directors
receive reimbursement of expenses in connection with Company business.
As mentioned in Note 10, as at 31 December 2006, the liability resulting from
SARs granted amounts to USD 215 thousand, the 2006 expense being USD 93
thousand.

17.

CONTINGENCIES, COMMITMENTS AND OPERATING RISKS


(a)

Taxation
The Romanian taxation system is undergoing a process of consolidation and
harmonization with the European Union legislation. However, there are still
different interpretations of the fiscal legislation. In various circumstances, the tax
authorities may have different approaches to certain issues, and assess additional
tax liabilities, together with late payment interest and penalties. In Romania, tax
periods remain open for 5 years. The companys management considers that the
tax liabilities included in these financial statements are fairly stated.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
23

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
ABC is incorporated in the British Virgin Islands, which does not impose a
corporate income tax on ABCsconsolidated earnings.
There is no corporate tax on the earnings of the companies registered in British
Virgin Islands (1.e.,ABCand QUADGAT) . The subsidiaries based in Cyprus (i.e.,
ABCCEL and QGBCEL )are subject to income tax at the rate of 4.25% (2003:
4.25 %) on the taxable profit. However, the Cyprus subsidiaries have no
actual liability for income taxes because the royalty income received is taxed at
the source in Romania at a rate of 5 % (2003: 5%). This amount is fully-allowable
for Cyprus taxation, due to the double tax treaty between Cyprus and Romania.
At present, Romanian tax legislation does not provide for the filing of consolidated
tax returns. As of December 31, 2006, the corporate income tax rate in Romania is
25% (December 31, 2005: 25%) and starting January, 1st, 2005 is 16%.
(b)

Transfer pricing
The Romanian fiscal legislation has included regulations regarding transfer
pricing between related parties since 2000. The current legislative framework
defines the arms length principle for transactions between related parties, as
well as the methods for determining the transfer prices. Thus, it is expected that
the tax authorities may initiate in depth inspections of the transfer prices, in order
to ensure that the taxable profit and/or the customs value of imported goods are
not misstated by the effects of transfer prices between related parties. The
Company and its subsidiaries cannot assess the outcome of any such inspection.

(c)

Insurance policies
The Company and its subsidiaries hold insurance policies in relation to their
assets, operations, product liability, public liability and other insurable risks, with
the exception of tangible fixed assets, finished goods and raw materials as well as
for the prevention of business interruption.

(d)

Environmental matters
Environmental regulations are developing in Romania and ABC has not recorded
any liability at 31 December 2004 for any anticipated costs.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
24

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
(e)
Legal proceedings
During 2006 and 2005, ABC was involved in a number of court proceedings (both
as a plaintiff and a defendant) arising in the ordinary course of business. In the
opinion of management, there are no current legal proceedings or other claims
outstanding that could have a material effect on the result of operations or
financial position of the Company and which have not been accrued or disclosed
in these consolidated financial statements.
18.

FINANCIAL RISK

(a)

Credit risk
Financial assets, which potentially subject the Company and its subsidiaries to
credit risk, consist principally of trade receivables. The Company and its
subsidiaries have policies in place to ensure that sales of products and services are
made to customers with an appropriate credit history. The carrying amount of
accounts receivable, net of provision for impairment, represents the maximum
amount exposed to credit risk. The Company and its subsidiaries have no
significant concentrations of credit risk. Although collection of receivables could
be influenced by economic factors, management believes that there is no
significant risk of loss to the ABC beyond the provision already recorded.
Cash is placed in financial institutions that are considered at time of deposit to
have minimal risk of default.

(b)

Market risk
The substantial majority of the Companys transactions with customers and
suppliers, and of its operations in general, are conducted in Romania, which therefore
creates market risk for the Companys operations.
The Romanian economy is in a relatively early stage of market development, and
there is a considerable degree of uncertainty surrounding the economys future
direction.

(c)

Currency risk
Material exchange restrictions and controls exist relating to converting ROL into

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
25

ABC COMPANY LIMITED AND ITS SUBSIDIARIES


CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(All amounts expressed in thousands of US Dollars, unless otherwise indicated)
other currencies. At present, there is no market for conversion of ROL into
foreign currencies outside of Romania.
At December 31, 2006 the closing exchange rate published by the National Bank
of Romania was 29,067 ROL for 1 USD (2005: ROL 32,595 for 1 USD).
(d)

Interest rate risk


The Companys income and operating cash flows are substantially independent of
changes in market interest rates. ABC is exposed to interest rate risk through
market value fluctuations of interest-bearing borrowings. The majority of interest
rates on borrowings are variable, as disclosed in Note 9. ABC has no significant
interest-bearing assets.

(e)

Liquidity risk
The Companys policy on liquidity is to maintain sufficient liquid resources to
meet its obligations as they fall due.

(f)

Fair values
The carrying amount of Preferred Stock outstanding approximates fair value. The
estimated fair value of Preferred Stock outstanding at December 31, 2006 was
USD 21,017 thousand (December 31, 2005: USD 26, 894 thousand).

19.

SUBSEQUENT EVENTS
In January 2005 the overdraft facilities granted by Alpha Bank and ING Bank to
the Company have been increased from 6.5 mill USD to 8 mill USD Alpha
Bank and from 4.0 mill USD to 5.0 mill USD- ING. The new facilities have been
renewed in the same terms as previous one.
The Company obtained a long term loan (5 years) from Alpha Bank Athens
(March 18, 2005) of 21 mill. USD - scope of this loan is the Redemption of the
Preferred Stock.

The accompanying notes on pages 5 to 29 are an integral part of the consolidated financial statements.
26