WIN KOI DOS MAC ENG
WRITE A LETTER!
SEARCH



ABOUT COMPANY
- news
- history and traditions
- today
- management
- production
- with concern for people
- public opinion
- prizes and awards
FOR BUYERS
- price-list
FOR INVESTORS
- fin. statements
- annual reports
- reputation of company
CLUB
 



StartFor investorsAnnual reports

1996 annual report

INTRODUCTION

The year 1996 was one of modernization and structural development for the joint-stock company Red October.

The company successfully placed a new share issue in 1996, which allowed the company to finance its modernization needs. The structure of the charter capital also changed significantly.

Red October continued to develop its production and distribution systems: the company acquired a large stake in the Tula-based factory Yasnaya Polyana and a new factory under construction in Kolomna, scheduled to begin operations in the middle of 1997. The company also completed the construction of several stores and a warehouse in Lubertsy.

Although there was a slight drop in production of the main company, subsidiaries in Tambov and Ryazan significantly increased output.

PRODUCTION AND SALES

Red October produced 57,223 tons of confectionery goods in 1996, out of which 5,450 tons were produced by the subsidiary in Ryazan. Output over the last ten years is on shown on Chart 1 below, and output according to main product lines for 1995 and 1996 on Chart 2 (including the Ryazan factory).

The decrease in production in 1996 compared to 1995 can be explained by the following factors:

  • total working time decreased by 0.9 %;
  • reconstruction of the caramel shop decreased total working hours, and thus output of caramels;
  • lower demand for toffee, chocolate, and cocoa.

    Total sales were Rb 972.0 bn in 199, while the output of the Ryazan subsidiary was Rb 80.6 bn (including VAT, excluding discounts).

The company sold 52,733 tons of goods in 1996 (including resale of subsidiaries' and related companies' products). Of the total volume, 73.2% (38,859 tons) was sold to Moscow trading companies, and 3.9% (2,073 tons) to trading companies in the Moscow region. The company distributed 77.1% of its products in Moscow and the surrounding region. Compared to 1995, sales in Moscow and the Moscow region increased by 11.9 %.

Of total sales, 6.0% (3,185 tons) was exported (including to CIS countries). However, exports to CIS countries decreased by 30%.

FINANCIAL SITUATION

The financial position of Red October was relatively stable in 1996. At the beginning of the year, the company experienced seasonally lower demand. The company increased delivery on consignment. As a result, accounts receivable rose, leading to a lack of working capital. This forced the company to use short-terms bank loans. The share of solvent customers has increased since the middle of 1996.

Below are the company's official financial results for 1996 compared to 1995 results.

Results in Tables 1 and 2 are dollar-adjusted.

All results are non-consolidated.

Table 1. 1996 balance sheet
 
Rubles (thousand)
US dollars (thousand)
Beg. of year End of year Beg. of year End of year
ASSETS
I. NON-CURRENT ASSETS
Intangible assets
275 327
583 774
59.3
105.0
Fixed assets and construction in progress
205 611 456
311 618 256
44 312.9
56 046.5
Long-term investments
10 786 797
18 909 662
2 324.7
3 401.0
Other non-current assets
-
-
-
-
Total non-current assets:
216 673 580
331 111 692
46 696.9
59 552.5
II. CURRENT ASSETS
Inventory
97 764 218
126 635 669
21 069.9
22 776.2
Debtors (long-term)
13 524 026
3 789 009
2 914.7
681.5
Debtors (short-term)
34 186 570
62 708 444
7 367.8
11 278.5
Short term financial assets
5 483 444
8 451 141
1 181.8
1 520.0
Cash
9 375 270
43 080 888
2 020.5
7 748.4
Other current assets
602 006
717 665
129.7
129.1
Total current assets:
160 935 534
245 382 816
34 684.4
44 133.6
TOTAL ASSETS:
377 609 114
576 494 508
81 381.3
103 686.1

 
Rubles (thousand)
US dollars (thousand)
Beg. of year
End of year
Beg. of year
End of year
EQUITY AND LIABILITIES
I. SHARE CAPITAL AND RESERVES
Charter capital8 355 775 8 355 775 1 800.8 1 502.8
Reserve capital1 588 944 7 931 277 342.4 1 426.5
Accumulation funds324 888 802 495 468 801 70 019.1 89 113.1
Retained earnings - - - -
Deferred income - - - -
Total of section I:334 833 521 511 755 853 72 162.4 92 042.4
II. LONG TERM LIABILITIES
Long-term bank loans - - - -
Long-term borrowings - - - -
Long-term payables - - - -
Total of section II: - - - -
III. SHORT-TERM LIABILITIES
Short-term bank loans4 083 248 18 344 374 880.0 3 299.3
Short-terms borrowings - - - -
Short-term payables,37 657 705 42 628 196 8 115.9 7 666.9
Including:
Dividend payments - - - -
Other current liabilities1 034 640 3 766 085 223.0 677.4
Total of section III:42 775 593 64 738 655 9 218.9 11 643.6
TOTAL LIABILITIES AND ASSETS : 377 609 114 576 494 508 81 381.3 103 686.0

Note:

1) Dollar adjustment based on the official Central Bank ruble/dollar exchange rate as of December 31 (4,640 and 5,560 rubles/dollar, respectively);

Table 2. Financial results for 1996 (thousand rubles)
 
Rubles (thousand)
US dollars (thousand)
Revenues (net of VAT, excise and other)
779 802 777
152 305
Cost of goods sold and operating expenses
614 266 663
119 974
Selling and distribution expenses
2 122 948
415
Administrative expenses
-
-
Operating profit (loss)
163 413 166
31 917
Interest revenue
8 828 057
1 724
Interest expense
-
-
Non-operating profit
807 491
158
Other non-operating revenue
57 006 746
11 134
Other operating expences
48 259 235
9 426
Financial income (loss)
181 796 225
35 507
Other revenues
5 071 666
991
Other expenses
19 025 934
3 716
Pretax profit
167 841 957
32 782
Tax
40 086 790
7 829
Allocation of earnings
127 755 167
24 952
Retained profit (loss) of fiscal period
-
-

Note:

Dollar adjustment based on the average ruble/dollar exchange rate in 1996 according to the Central Bank (5,120 rubles/dollar)

Table 3. Quarterly ratio analysis for 1996
 
IQ
IIQ-1996
IIIQ-1996
IVQ-1996
LIABILITIES AND EQUITY
Total liabilities and equity447 612 903 446 091 056 475 341 673 576 494 508
Including:
Equity397 437 224 398 688 613 402 599 561 515 521 938
% of total88.8 89.4 84.7 89.4
Liability50 175 679 47 402 443 72 742 112 60 972 570
% of total11.2 10.6 15.3 10.6
WORKING CAPITAL
Gross working capital212 761 235 212 512 230 233 991 945 245 382 816
Including:
Net working capital as % of gross working capital 76.4 77.768.9 75.2
Current liabilities as % of gross working capital 23.6 22.331.1 24.8
FINANCIAL STABILITY
Equity ratio0.89 0.89 0.85 0.89
Debt/Equity ratio0.13 0.12 0.18 0.12
Current/non-current assets ratio0.91 0.91 0.97 0.74
LIQUIDITY
Broad current ratio4.24 4.48 3.224.02
Current ratio4.24 3.84 2.553.96
Instant ratio0.39 0.52 0.520.71
Long-term liquidity0.50 0.54 0.560.85
SOLVENCY
Current ratio4.24 4.48 3.224.02
Equity ratio0.76 0.77 0.690.74
Solvency recovery coefficient2.55 2.51 0.342.81
Loss of solvency coefficient2.34 2.38 0.982.41

The asset structure remained unchanged throughout the entire year. The share of working capital in total assets also remained stable at 90%. The share of net working capital was 75-77% of gross working capital.

Financial stability, liquidity, and turnover were also highly stable.

It should be noted that the company's financial stability and liquidity are higher than those recommended for Russian companies to be recognized as stable. This means there is room for improvement of asset management, and the company could use debt financing for its own needs to a greater degree. However, the company's strategy is to rely primarily on its own capital and maintain high liquidity because of high interest rates on bank loans and generally high economic risk.

The company had no overdue payables in 1996. The structure of the balance sheet was in accordance with the bankruptcy law, and the company is considered solvent.

PRICING POLICY, PRODUCTION COSTS

The company's financial position was determined by the pricing policy, targeted at facilitating and speeding up distribution.

To increase turnover, the company continued to offer discounts for products delivered under 100% prepayment terms. The company also introduced discounts as an incentive for customers to maintain and increase purchases.

Operating margins decreased by 7.94% to 21.52% in 1996 as a result of tougher price competition and higher production costs. The increase in production costs resulted from the following factors, in addition to inflation:

  • In May 1996, import duties on some main ingredients were introduced, for instance cocoa beans (10%) and nuts (5%), for example;

  • Taxes included in costs rose (the road tax increased from 1.5% to 2.5% of net sales);

  • In 1996 the company used accelerated depreciation for the first time (at a rate twice as high as the norm established by legislation);

The structure of production costs is shown in Figure 3. The average price and cost performance are shown in Figure 4.

CHARTER CAPITAL

In 1996 the sixth share issue took place. Red October issued 2 m shares (registration ü 73-1-5866 of November 23, 1995), which were placed at a share price of $8.75. The company acquired two new shareholders: the Moscow city government (represented by the Moscow Property Fund) and a long-term partner of Red October (one of its suppliers).

The placement of the sixth issue was done within the framework of the charter capital approved at the annual shareholders' meeting held on April 15, 1995 (Rb 8,355.775 bn, or 8,355,775 common shares with a par value of Rb 1,000). The placement was also carried out in accordance with the rights given to the board by the shareholders' meeting of December 17, 1994.

As of December 31, 1996, the company had 8,355,775 shares outstanding.

Table 4. Ownership structure as of January 1, 1997
 
#
# of shares
% of total
Moscow Property Fund1 1 650 000 19.7%
Affiliated companies( Russian and foreign) 10646 446 7.7%
Russian companies95 1 867 527 22.4%
Foreign companies16 2 645 062 31.7%
Legal entities, total 122 6 809 035 81.5%
Individuals10 847 1 511 216 18.1%
Total 9 8456 355 787 99.6%
Shares in collateralõ 35 524 0.4%
Total of charter capital:õ 8 355 775100.0%

Share price performance is shown on graph 5, and valuations in table 5.

Table 5. Red October valuation
 
Currency
As of 1.01.95
As of 1.01.96
As of 1.01.97
Market price (average between bid and offer)
$
3.9
5.9
19.3
P/E Ratio
-
1.12
1.25
6.46
EPS
ðóá
7 650
21 471
15 289
EPS Dollar adjusted
$
3.47
4.72
2.99
Note:
1. Number of shares is based on the number of shares issued as of the date shown
2. Source: Finmarket

The table above shows that the P/E ratio continued to grow, mainly due to falling margins and a higher share price.

INVESTMENTS AND DEVELOPMENT

In 1996, the company had considerable capital expenditures of Rb 93.7 bn (Rb 63.1 m in 1996) in production (52.4%), trading, and the social sphere.

Table 6. 1996 capex breakdown, million rubles
Expenditure
1996
% of total
Construction76 292.9 81.4 %
Equipment17 411.618.6%
TOTAL:93 704.5 100.0%

Accelerated depreciation allowed the company to finance 34.0% of its capital expenditure in 1996 (6.2% in 1995); total depreciation for 1996 was Rb 31 bn. The remaining 66.0% of capex was financed out of internal capital (net profit, proceeds from placement of shares).

In addition to capital expenditures, the company made long-term investments into shares.

Table 7. Long-term investments, thousand rubles
Type of investment
As of 1.01.96
As of 01.01.97
Stakes and shares in other firms, '000 rubles 10 786 79718 909 662
Number of investment objects37 53
T-bills and other equities, '000 rubles 00

As of January 1, 1997, the portfolio of Red October comprised 53 companies, 20 of which are subsidiaries (37.5% of total investment) and eight are dependent companies of Red October (36.6%). The amount of investment and the number of companies invested in increased because Red October invested into 13 of its subsidiaries as well as obtained a large stake in the Tula-based factory Yasnaya Polyana.

The company received Rb 692.5 m in dividends (after taxes).

WAGES

Even though the excess wage tax was rescinded in 1996, wage increases at Red October were limited. Salaries were increased in line with output and sales, in accordance with management's policy of increasing salaries in line with production and financial results. The average monthly salary in 1996 was Rb 1,785,000.

STAFF AND PERSONNEL POLICY

The company was fully staffed in 1996. Workers were hired primarily on a competitive basis. Red October is an attractive company to work at for the following reasons:

  • higher salaries compared to the average in Moscow and at Red October's competitors;

  • attractive employee benefits.

The company increased its number of employees by 12 in 1996 (a 0.4% increase), and currently employs 3,116. Structurally, new employees appeared in the main production and non-production groups, while employment fell in non-core activities.

Most candidates came from Technical School # 116, which is owned by the company.

The company's turnover rate (excluding contractors) remains at 13% for the second year in a row, a sign of stability. Women comprise 64.0% of the workforce (63.9% in 1995).

BENEFITS AND SOCIAL POLICY

To ensure that the company's employees remain loyal to the company and maintain good health, Red October provides good benefits for its staff, including:

  • cafeteria;

  • food allowance;

  • health care center, hospital, partial coverage of dental care;

  • day care center;

  • retirement plan arranged with a non-state pension fund;

  • vacation subsidies;

  • program for improvement of living conditions.

The company spent Rb 22.6 bn on the above benefits, which accounted for 17.7% of net revenues for the whole year.

The company also spent Rb 908.5 m (0.7% of net profit) sponsoring charitable activities.

ACCOUNTING POLICY (main features)

The company's balance sheet and income statement were prepared in accordance with Russian Statutory Accounts.

The main statements of the accounting policy in 1996 were as follows.

  1. Goods sold are goods delivered that are gradually being paid for.

  2. Accelerated depreciation of assets was introduced in 1996. Accelerated depreciation of buildings, vehicles and other equipment was calculated based on twice the statutory rate.

  3. Low value items are 100% expenced.

  4. Maintenance was financed out of the maintenance fund (future expenditures fund).

  5. The company does not have a vacation fund because salaries are only a small part of costs.

  6. Forex gains or losses are deferred within the reported year and included in the P&L at the end of that year.