galenika .d. belgrade

GALENIKA А.D. BELGRADE

Notes to the consolidated financial statements for the year ended December 31, 2009 (All amounts are presented in 000’s of RSD, unless otherwise stated)

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1. GENERAL INFORMATION

The parent company is registered with the Business Registers Agency as Galenika a.d., a Closed

Joint-Stock Company for the Production of Drugs, Dentals, Antibiotics, Pharmaceutical Raw

Materials, Parapharmaceuticals, Veterinary Products and Additives, Belgrade-Batajnicki drum bb,

with the Registration Number 07726325, Tax Identification Number 100001038 and Code of Main

Business Activity 24420. The company was founded in 1946 by the government of the Federative

People's Republic of Yugoslavia under the name Galenika Enterprise for the Production of

Pharmaceutical and Chemical Products. In 1961, the company changed its name to Galenika

Pharmaceutical & Chemical Industry, Belgrade. In 1991 the company changed its status and

organized itself as a Holding Company Galenika Belgrade-Zemun with joint-stock companies.

The Joint-Stock Company “ICN Galenika” for the Production of Drugs, Dentals, Antibiotics,

Pharmaceutical Raw Materials, Parapharmaceuticals, Veterinary Products and Additives was

founded on April 30, 1991 with a capital of USD 360,000,000. The founders were:

� SPI PHARMACEUTICALS INC., a corporation from the USA (Delaware), with 75% of capital

� Holding Company “Galenika” Belgrade-Zemun with 25% of capital

By a Decision of the Commercial Court in Belgrade of April 7, 1997, ICN Galenika changed its

name to Joint-Stock Company ICN Yugoslavia for the Production of Drugs, Dentals, Antibiotics,

Pharmaceutical Raw Materials, Parapharmaceuticals, Veterinary Products and Additives,

Belgrade, Zemun.

By a Commercial Court Decision No.5189/99, the new value of capital was determined at

USD140,000,000 as well as the founding share percentage, namely:

� SPI PHARMACEUTICALS INC., a corporation from the USA (Delaware), with 35.714%

� Republic Health Insurance Fund, Belgrade with 64.286%

On March 15, 1999, '' ICN Yugoslavia'' changed its name to Joint-Stock Company “Galenika” for

the Production of Drugs, Dentals, Antibiotics, Pharmaceutical Raw Materials, Parapharmaceuticals,

Veterinary Products and Additives, Belgrade. On June 2, 2006, the Business Registers Agency

issued a Decision No. 126573/2006 providing for a change of data regarding the business entity to

be registered in the Register of Business Entities and the following capital structure in ''Galenika''

a.d. was established:

-Republic Health Insurance Fund Belgrade – capital share equals USD 140,000,000

As per Decision No. BD 10788/2007 of March 12, 2007 issued by the Business Registers Agency, a

change of the legal form was entered, namely the legal form - Closed Joint-Stock Company was

entered. As per Agreement on the Transfer of “Galenika” a.d. stocks authenticated by the Municipal

Court in Belgrade under II/2 Authentication No. 2485/08 of December 24, 2008, concluded

between The Republic of Serbia as Transferee of stock and The Republic Health Insurance Fund as

Transferor of stock, the Republic of Serbia as Transferee may make an entry with the Register of

Business Entities and the Central Securities Depositary and Clearing House. As per Decision No.

BD 21917/2009 of March 25, 2009, the change of ownership was registered with the Register of

Business Entries.

These consolidated financial reports have been approved by the General Manager of Galenika a.d.

on April 23, 2010. The approved financial reports may be subsequently amended as per auditor's

instructions, in accordance with current regulations.



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1. GENERAL INFORMATION (continued)

The parent company has an ownership share in the capital of the following legal entities:

• Galenika Crna Gora d.o.o., Podgorica, Montenegro (75% capital)

• Galing d.o.o. Belgrade-Zemun, Serbia (100% capital).

• Galenika d.o.o. Banja Luka, Republic of Srpska (100% capital)

� The subsidiary Galenika Crna Gora d.o.o, a Company registered for the Production and Trade

of Pharmaceuticals, Podgorica, founded according to an Agreement between ICN Galenika

d.d Belgrade-Zemun and the Republic of Montenegro and registered with the Court Register in

Podgorica as per Decision No. FI 2791/96 of December 26, 1996. A change in ownership was

entered on July 16, 1999, whereby, instead of ICN Galenika d.d. Belgrade-Zemun, the new

owner became ICN Pharmaceuticals INC. In compliance with the Law of Economic Entities of

the Republic of Montenegro, the Company was registered on August 14, 2002 under

Registration No. 5-0058683/001. The seat of the subsidiary is in Podgorica, the address being

Ulica 8. marta 55-a. Business activity of the Company is production of pharmaceuticals,

wholesale trade of pharmaceuticals, issuing and manufacturing magistral preparations and

retail trade of medicinal, cosmetic and toiletry products.

In 2008, based on a Decision of the Commercial Court in Podgorica, as per legally binding

court decision of the Supreme Court of the Republic of Montenegro, Confirmation of

registration of April 24, 2008 and Decision No. 300-023-02-00650/2008-12, Galenika a.d.'s

share in the capital of Galenika Crna Gora d.o.o. was confirmed to be 12,750 thousands of US

Dollars. The investment was booked at purchase cost, in the dinar equivalent amount and

revaluated according to the retail price index increase prior to 2003, devaluated on January 1,

2004. As the reasons for depreciation have ceased to exist, the investment is carried back to

dinar value as of January 1, 2004, i.e. the purchase cost to date that equals adjustment of value

in the amount of 464.475 thousands of dinars in favor of income from reconciliation of value

of long-term financial investments. In the course of 2009, the average number of employees at

Galenika Crna Gora d.o.o. was 96.

� Based on the Decision on accepting transfer of basic capital of Galing d.o.o. Zemun, the

investment was entered in the books for 2008. Galing d.o.o. was founded as per Decision No.

FI-4595/91 of April 23, 1991, as a Joint-Stock Company Stan (Housing) for management and

control of housing units and other facilities. As per Decision No. FI-40809/93 of February 23,

1994, it changed its name to Galing, a Joint-Stock Company for Engineering, Manufacture and

Trade, functioning as part of Galenika Holding. As per Decision No. BD-124257/2006 of June

19, 2006, this company registered a change of legal form and full company name into Galing

d.o.o., Joint-Stock Company for Engineering and Services, Registration Number 07725949, the

company name currently registered with the Business Registers Agency. The founder of

Galing d.o.o registered with the Business Registers Agency is Galenika a.d. with 100%

ownership share, or subscribed capital of 500 Euros. In 2009, Galing d.o.o. had no permanent

employees on staff.

� The subsidiary Galenika d.o.o. Banja Luka was founded based on the Decision of the Board of

Directors of Galenika a.d. No. U.O.38/09 of August 27, 2009 regulating the founding of a

business company abroad, Decision on Registration No. 071-0-Reg-09-001787 of October 15,

2009 and the Statute of the Subsidiary Company OPU 1160/09 of September 1, 2009. Based on

the Decision of the Serbian Ministry of Economy and Regional Development No. 300-023-02-



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1. GENERAL INFORMATION (continued)

01533/2009-12 of October 30, 2009 the subsidiary Galenika d.o.o. was registered as a company

abroad with the Business Registers Agency under Registration No. 2539, having its head office at

Vidovdanska bb, Banja Luka B&H. Pursuant to the Decision on the founding of a limited liability

company OPU 1158/09, the subsidiary company was registered for representation and agency in

internal and foreign trade.

In 2009, the average number of employees at Galenika d.o.o. Banja Luka was 5.

2. Summary of significant accounting policies

The basic principles used in preparing these financial statements are given below.

2.1.1. Basis for the presentation of the consolidated financial statements

The financial statements are prepared in accordance with International Accounting Standards (IAS)

and International Financial Reporting Standards (IFRS), with the exception in the part referring to

the net unrealized foreign exchange differences calculated as per long-term receivables and

payables on time apportionment accounts of the parent company.

Besides the International Accounting Standards, the following national accounting regulations were

also used in the preparation of these financial statements: The Law on Accounting and Auditing

(Official Gazette of the Republic of Serbia No.46/06), The Rules on Accounting Frameworks and

Account Items in the Accounting Framework for Enterprises, Cooperatives and Entrepreneurs and

the Rules on Forms and Item Position in the Financial Reports Forms for Enterprises, Cooperatives

and Entrepreneurs (Official Gazette of the Republic of Serbia No.114/06), Accounting Regulations

of Galenika a.d., the Regulations on Accounting Policy of Galenika a.d., the Rules on Amendments

and Supplements of Accounting Policy Regulations, adopted for the purpose of evaluationg

property, plant and equipment at fair value, as well as the Rules on Amendments and Supplements

of Accounting Policy Regulations adopted for the purpose of preparing the Consolidated Financial

Reports for the Group of Companies, the Rules on Amendments and Supplements of the Layout of

Chart of Accounts for Companies, Cooperatives, other Legal Entities and Entrepreneurs (Official

Gazette of the Republic of Serbia No.04/10), the Rules on Supplements of the Rules on Accounting

Policies adopted due to the need for presentation of net unrealized foreign exchange differences on

time apportionment accounts of the parent company.

In view of the differences between these two regulations, these financial reports differ from the

IFRS in the following:

• Off-balance assets and liabilities are presented on the balance sheet form (note 26).

According to IFRS these positions are defined as neither assets nor liabilities.

• The Company has prepared these financial statements in the format issued by the Ministry of

Finance which does not conform to IAS 1 requirements - Presentation of Financial Reports.

• As per Article 77g of the Rules on Amendments and Supplements of the Layout of the Chart

of Accounts for Companies, Cooperatives, other Legal Entities and Entrepreneurs (Official

Gazette of the Republic of Serbia No. 04/10), the Parent Company has carried over

unrealized effects of foreign exchange differences on apportionment accounts, which is

contrary to IAS 21 requirements. Subsidiaries have not made apportionments accordingly.



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2. Summary of significant accounting policies (continued)

2.1.1.Basis for the presentation of the consolidated financial statements (continued)

Subsidiaries are legal entities in which the Parent Company has an ownership share above 50% or

more than half of the voting right or the right to control decision-making in relation to financial and

operating policy of the subsidiary. Subsidiaries are consolidated in full from the day the control is

transferred to the Parent Company, and are excluded from consolidation as of the date that such

control ceases to exist.

Enclosed consolidated financial reports include financial reports of the Parent Company and the

following domestic and foreign subsidiaries:

Name of company % share

• Galenika Crna Gora d.о.о Podgorica 75%

• Galing d.о.о, Zemun-Belgrade 100%

• Galenika d.o.o. Banja Luka 100 %

Financial statements of the Parent Company and Consolidated Subsidiares used in preparing the

enclosed consolidated financial reports have the same reporting date. Consolidated financial

statements of the Group were prepared using uniform accounting policies for similar transactions

and events, consistently applied.

All amounts resulting from business transactions between the Parent Company and Consolidated

Subsidiaries were eliminated in consolidation.

Financial statements of Consolidated Subsidiaries abroad were converted into dinars (RSD) at the

current exchange rate as of the balance sheet date for balance sheet positions, cash flow statement,

changes in equity, statistical annex. Balance sheet positions were converted into dinar equivalents

applying the average middle rate for the accounting period (calender year). All resulting exchange

rate differences are recognized as a separate item (reserve) under capital. Conversion is performed

as per Decision of the General Manager number 1266 of March 23, 2010.

In preparing the consolidated financial statement for the parent company and the subsidiaries, the

method of full consolidation is applied, meaning full merger of all identical positions according to

the item by item principle, and exclusion of all amounts contained in the individual statements

representing internal relations between group members. In essence, the method described eliminates

effects of relations between the parent company and its subsidiaries.

2.1.2. Comparative information

Comparative information and beginning balances represent information contained in the

consolidated financial statements for 2008.

2.1.3. Segment reporting

The Company is under no obligation of reporting business segments as per IAS 14 requirements.



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2.1. Foreign exchange translation

2.1.1. Functional and reporting currency

Positions included in the Company's financial statements are determined and presented in the

currency of the primary economic environment in which the Company operates (functional

currency). Financial statements are presented in dinars [RSD] representing the functional and

reporting currency of the Company.

2.1.2. Transactions and balances

Changes in foreign currency are translated into dinars by applying the Interbank Market middle rate

at the date of the business transaction. Assets and liabilities denominated in foreign currencies are

translated into dinars by applying the Interbank Market middle rate as of the balance sheet date.

Net foreign exchange gains and losses arising from business transactions in foreign currency and

translation of balance sheet items presented in foreign currency are credited or charged to the

income statement, as translation gains and losses. Recognition, measurement and presentation of

business events resulting from foreign currency transactions are performed according to IAS 21.

2.2.Investments in intangible assests

In the parent company, investments in intangible assets applies to investments in trademarks,

software, as well as solid and liquid pharmaceutical dosage forms. For the group of consolidated

companies, intangible assets are recorded at historical cost or purchase price at the time of purchase.

Amortization is calculated by applying a proportional method in order to spread the costs during

estimated useful life. Costs reflecting maintenance of computer software programs are recognized

as expenses as they occur.

In the parent company, subsequent to initial recognition, value of intangible assets is determined

according to revalued cost representing fair value on the date of evaluation, decreased by the

adjusted value as per amortization and possible accumulated impairment loss, according to IAS 36.

In accordance with IAS, an assessment of the value of investments in intangible assets was

performed by the Economic Institute on January 1, 2008 for the purpose of establishing the fair

value of assets.

The estimate was performed by applying the replacement cost method by which the evaluated

present value of an asset, in the absence of an active market, is established as a difference between

present value of a new asset and total depreciation which includes physical, functional and

economic depreciation. Increase of bookkeeping value based on ravaluation is presented in

revaluation reserve under capital. Depreciation reducing previous increase of value of the same

assets is a liability of revaluated reserves directly in capital, all other reductions are treated as a

liability in the income statement. Planned investments in intangible assets were not subject of the

evaluation.

At the subsidiary Galenika Crna Gora d.o.o., investments in intangible assets, even after intitial

recognition, are valued at purchase cost corrected by the value adjustment.



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2.3.Property, plant and equipment

Subsequent to initial recognition in the parent company, property, plant and equipment valuation is

performed at revalued amount representing the fair value as of the evaluation date, decreased by the

adjusted value per amortization and any accumulated impairment loss, in accordance with IAS 16.

In accordance with IAS, an assessment of the value of Galenika a.d. property, plant, equipment,

investments in progress was performed by the Economic Institute on January 1, 2008 for the

purpose of establishing the fair value of assets.

Valuation was performed by applying the method of replacement costs by which the valuation of

the current value of an asset is determined, in the absence of an active market, as a difference

between the current price of a new asset and total depreciation which includes physical, functional

and economic depreciation. The other method apllied is market oriented by providing information

on market prices of assets with similar characteristics to those being evaluated.

All other property, plant and equipment is stated at purchase (historical) cost less adjusted value.

Historical cost includes expenses directly attributable to the acquisition of an asset. Additional costs

are included in the purchase price of an asset or are recognized as a separate asset, if applicable,

only if it is probable that future economic benefits associated with the item will flow to the

Company and if the cost of the asset can be measured reliably. The book value of the replaced asset

is written-off. All other day-to-day repair and maintenance costs are expensed under profit and loss

as incurred.

Increases of book value based on revaluation is credited to equity under the heading of revaluation

reserve. Decreases of previous increases of value of the same assets are debited to revaluation

reserves directly in equity, otherwise all decreases are debited to profit and loss.

Property, plant, equipment is written off to expenditure by applying the proportional method of

write off, whereby their purchase value or revaluated value is allocated to the accounting periods of

their use.

Land and buildings refer mainly to production plants and administrative offices. Land and buildings

are recorded at fair value based on periodic, at least three-year estimates, prepared by external

independent valuers, less the subsequent amortization of buildings.

Subsequent expenses are included in the purchase cost of assets or are recognized as a separate

asset, if applicable, only when it is probable that the future economic benefits associated with the

item shall flow to the Company and if the cost of the item can be reliably measured. The book

value of the replaced asset is written-off. All other day-to-day repair and maintenance costs are

expensed under profit and loss as incurred.

Immovable assets at Galenika Crna Gora d.o.o. were estimated at fair value as of December 31,

2008 by an authorized valuer.

At Galenika Crna Gora d.o.o., subsequent to initial recognition property, plant and equipment

valuation is performed at revalued amount representing the fair value as of the evaluation date,

decreased by the adjusted value per amortization and any accumulated impairment loss, in



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2.3. Property, plant and equipment (continued)

accordance with IAS 16. In accordance with IAS, an assessment of the value of property, plant,

equipment, investments in progress at Galenika Crna Gora d.o.o. was performed by an authorized

valuer on December 31, 2009 for the purpose of establishing the fair value of assets.

Land is not depreciated. Depreciation of other assets is calculated on a proportional basis in order to

distribute their cost or revalued amount to their residual value over expected useful life, as shown

below:

I BUILDINGS

(2.5 - 10%)

II EQUIPMENT

1. Machines, devices, tools (2.5 - 100%)

2. Furniture (20 - 33.33%)

3. Computers and IT equipment (33.33 - 50%)

4. Passenger and road vehicles (7.69 – 33.33%)

5. Motor vehicles used by employees (12.5 – 14.29%)

Depreciation at Galenika Crna Gora d.o.o. is calculated on a proportional basis applying the

following deprecation rates:

I BUILDINGS (1.5%)

II EQUIPMENT (6-9%)

2.4.Investment property

Investment property is recorded in books of the parent company and the subsidiary company in

Montenegro. Investment property is property held to earn rentals. Investment property, mainly

referring to administrative buildings which are not under a mortgage, is property held to earn long-

term rentals and is not used by the Company.

Investment property is recognized at fair value, which is the amount for which the property could

be exchanged on the open market, and which is annually valuated by external valuers. Fair vlue is

based on active market prices adjusted, if necessary, to reflect any change in the nature, location or

condition of the specific asset. All changes of fair value are recorded in the income statement as

part of other income. All day-to-day repair and maintenance costs of investment property are

expensed as incurred.

2.5.Long-term financial investments



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2.5.1. Classification and evaluation

The parent company classifies its financial assets into the following categories: loans and

receivables, assets held to maturity. Classification is defined according to the purpose for which the

assets were acquired. The management classifies its financial investments at initial recognition.

Long-term financial investments are measured at purchase cost upon initial recognition.

Subsequent measurement of long-term financial investments is realized by restating purchase price

by adjustment of value, or writing off long-term financial investments with expected non-collection

by indirect write-off.

During the year investments for which collection is no longer probable and documented, write off is

carried out as a whole or partially by direct write-off (IAS 36). Only in the case of market

determined value of investments, the book entry amount is depreciated to market value and

impairment loss recognized as expense for the period, whenever recoverable amount is below book

value.

2.5.2. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that

are not quoted in an active market. They are included in current assets, except for maturities greater

than 12 months from the balance sheet date. These are classified as long-term assets.

2.5.3. Financial assets held-to-maturity

Financial assets held-to-maturity, in the parent company, are non-derivative financial assets with

fixed or determinable payments and maturity that the management has the positive intention and

ability to hold to maturity. In the event that the Company decides to sell a significant portion of the

financial assets held to maturity, the whole category will be reclassified as available-for-sale.

Financial assets held-to-maturity are classified as long-term assets, unless maturity is within 12

months from the balance sheet date; in this case, they are classified as short-term assets.

2.6. Inventories

Inventory of purchased raw materials and materials is accounted for at purchase cost (IAS 2). Raw

materials and materials withdrawn from inventory for use are valued in the subsidiary in

Montenegro using the FIFO method by which the first unit that arrived in inventory is used first

(first-in cost equals first-out cost).

Small inventories and tools in use with useful life over one year are recognized in inventory of

small inventories and tools in use.

Inventory of work in progress and finished products as a result of the production process are stated

at the standard purchase price. The difference between inventory value at the standard purchase

price and established actual cost price after cost accounting represents a finished products price



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2.6. Inventories (continued)

variance. Cost price of production in progress and finished products is adjusted for the difference

between the higher cost price and lower net selling price charged to expense. Inventory of goods is

stated at purchase price. Adjustment of inventory balances for the established value of defective

inventory of raw materials, finished products and goods is calculated to expense.

2.7. Receivables

Short-term receivables in the parent company and subsidiaries are measured at the selling price of

the product, less the granted discount and rebate amounts. Receivables ages over 3 years with

uncertain collection and date of collection for whatever reason, are considered doubtful.

Receivables of the parent company with established risk of collection (doubtful collection) are

written-off indirectly as expense, for domestic customers 60 days from due date of receivables, and

90 days for foreign customers. Subsequent collection of amount already written off is recognized in

the income statement in other income. Direct write-off to expense is made in the case when there is

convincing proof that the receivable is uncollectible. In the case of the subsidiary in Montenegro the

accounting policy of write-off of receivables of the parent company is not applied but only doubtful

receivables are indirectly written off.

2.8. Cash and cash equivalents

Cash and cash equivalents comprise: cash on hand, dinar and foreign currency demand deposits

with banks, other short-term highly liquid investments intitially with maturity three months or less,

other cash instruments (letters of credit) and bank overdrafts. Bank overdrafts are included within

credit borrowings in current liabilitites on the balance sheet.

2.9. Off-balance sheet items and liabilities

Off-balance sheet items/liabilities inlcude: leased property, materials supplied for processing and

finishing and other assets not owned by the Parent Company, as well as receivables/liabilities

referring to instruments for securing payment such as guarantees and other forms of indemnity.

Accounts of off-balance assets may correspond only with relevant accounts of off-balance liabilities

so that these accounts are always in balance.

2.10.1. Capital stock

Capital stocks of the Parent Company are common stock. Subsidiaries are organized as a limited

liability company and their capital represents ownership share (of the founders).



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2.10.2. Minority interest

Minority interest represents ownership share in the capital and results of the subsidiary by entities

other than the parent company. The method of full consolidation means that items of subsidiary

undertakings are brought into the consolidated financial statements of a group, even if the parent

company does not have ownership of the entire capital of the subsidiary, where minority interest

should be presented separately.

Minority interest is presented in the consolidated balance sheet under capital, separately from the

parent company’s own capital. Minority interest profit or loss of the group is also presented

separately. Profit or loss is attributed to shareholders of the parent company and minority holders.

As both represent capital, the amount attributed to minority interst holders does not represent

income or expenditure. Losses reflecting minority interest in the consolidated subsidiary entity may

have amounts greater than minority interest in the subsidiary entity’s capital.

This overrun and all further losses reflecting minority interest are charged to majority interest,

except to a degree in which the minority interest holder has a firm obligation and ability to make an

additional investment in order to cover losses. If the subsidiary entity later operates with a profit,

such profit is allocated to majority interest until losses of the minority interest for which the

majority interest was charged is recovered.

2.11. Provisions

Long-term provisions are recognized when an entity has a present obligation (legal or constructive)

arisen as a result of a past event, when it is probable that settlement will result in an outflow of

resources and the amount can be estimated reliably (IAS 37).

Measurement of provisions is made in the amount of the expenditure required to settle an

obligation. Provision for one event may not be used as a provision for another event, and they

cannot be netted off. If expenditure for a provision is not effected, the provision is reversed to

income. Provisions are expensed to current business operations.

2.12. Liabilities – loans

Foreign long-term loans of the parent company refer to foreign currency transactions (IAS 21), that

are to be settled according to the foreign currency exchange rate on the date of the transaction or

payment date. All foreign currency liabilities that are accounted for at the end of the financial

period at the average rate of the reporting currency will be accounted for at the average rate, with

recording of exchange gains or losses. In 2009, as per Article 77g of the Rules on Amendments and

Supplements of the Rules on Layout of Charts of Accounts for Companies, Cooperatives, other

Legal Entities and Entrepreneurs (Official Gazette of the Republic of Serbia No. 04/10) the parent

company has carried forward net unrealized effects of foreign exchange differences to the expense

of apportionment.



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2.13. Liabilities - suppliers

Liabilities to suppliers are initially disclosed at book value, representing laibilities based on debit-

credit relationship resulting from the sale of goods and services.

2.14. Income tax

2.14.1. Current tax

Income tax represents the amount calculated and paid under the Enterprise Income Tax Law of the

Republic of Serbia and the Law on Income Tax of Legal Entities of the Repubic of Montenegro. In

the Republic of Serbia income tax is calculated at a rate of 10% on the tax base, and 9% in the

Republic of Montengro, presented in the tax balance, less utilized tax credits. Taxable base includes

income stated in the income statement adjusted for the differences defined by the tax regulations of

the Republic of Serbia and the Republic of Montenegro.

Under the Enterprise Income Tax Law of the Republic of Serbia, the taxpayer with investments in

fixed assets is acknowledged the right to a tax credit of 20% of the amount of the effected

investment, whereby the tax credit may not exceed 50% of tax caluclated in the year in which the

investment was made. The unutilized portion of the tax credit may be transferred to income tax in

future accounting periods, but not for longer than ten years. Tax regulations in the Republic of

Montengro do not provide for such tax relief. Tax regulations in the Republic of Serbia and the

Republic of Montengro do not allow tax losses from current periods to be used as a base for tax

return on the tax amount paid in a specific previous period. However, losses from the current period

may be used for reduction of the tax base of future accounting periods, but for not longer than 10

years in the Republic of Serbia, and for not longer than 5 years in the Republic of Montengro.

Tax consolidation of the group was not effected in the presented accounting periods.

2.14.2. Deferred tax

Deferred income tax is calculated for all temporary differences between the tax base and book

value. The current tax rates on the balance sheet date were used for the calculation of deferred

income. Deferred tax liabilities are recognized for all taxable temporary differences.

Deferred tax assets should be recognized for deductible temporary differences, unused tax losses

and unused tax credits from previous periods to the extent that it is probable that future taxable

profit will be available against which the deferred tax differences can be utilized. Current and

deferred tax should be recognized as income or expense and included in net profit for the period.

2.15. Employee benefits under IAS 19

In accordance with IAS 19, the Center for Scientific Research of the Faculty of Economics in

Belgrade (NICEF), published an actuarial valuation of short-term (unused annual leave) and long-

term employee benefits (severance pay and jubilee benefits) of the parent company. Valuation-



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2.15. Employee benefits under IAS 19 (continued)

provisions effects are recorded in financial statements for 2009 in the income statement and balance

sheet.

The beginning value required for calculating the present value of (not yet incurred) severance pay in

case of retirement and jubilee benefits is the number of Company employees who will be eligible

for the said benefits. Projection of the required value is made based on the total number of

employees as of December 31, 2009, adjusted by the demographic assumptions (mortality,

fluctuation rate) as provided for under paragraph 73, IAS 19, for the present number of employees

not expected to collect severance pay. The number of Company employees who will be collecting

severance pay and jubilee benefits was calculated pursuant to the above using actuarial techniques.

This number was segmented on the grounds of gender. An actuarial evalutaion as per IAS 19 was

not performed in the subsidiaries.

2.15.1. Liabilities for severance pay and jubilee benefits

In accordance with the Employee Collective Agreement, the consolidated subsidiaries are under

obligation to pay the severance pay amount in case of retirement as well as jubilee benefits for

continuous service with the company.

2.16.Recognizing revenue

Revenue represents amounts receviable for goods or services provided in the normal course of

business of the group. Revenue is presented without VAT, return of goods, rebate and discount.

The group recognizes revenue when the revenue amount can be measured reliably, when it is

probable that future economic benefits will flow to the group and when certain specific criteria, for

each of the group’s activities are met, as given below. The amount of revenue cannot be measured

reliably until all potential liabilities arising from sale of goods are settled.

2.16.1. Revenue from sales-wholesale

The parent company and the subsidiary Galenika Crna Gora d.o.o. manufacture and sell products

(pharmaceuticals, parapharmaceuticals, dentals, veterinary products, as well as pharmaceutical raw

materials) on the wholesale market. Revenue from sale of goods is recognized when the Group

delivers the products to the wholesaler.

Delivery of goods is not recognized as an event until the goods are delivered at the designation

point, until risk of aging and loss pass to a wholesaler. Products are usually sold at a rebate

established by the purchase agreement. Customers have a right to return the defective products to a

wholesaler.



13


2.16.2. Revenue from sale of goods in the company cafeteria and coffee counters

The parent company earns revenue from sale of food in the company cafeteria and from sale of

beverages in the coffee counters. Revenue form sale of goods is recognized based on issued

receipts. Retail sales are paid in cash.

2.16.3. Proceeds from sale of services

The parent company sells services originating from secondary activities, namely the production of

steam, water, transportation and lease. Proceeds are recognized based on issued invoices.

2.16.4. Interest income

Interest income includes income from credits to buyers, receivables from loans, default and other

interest.

2.16.5. Leases

Certain property and motor vehicels are leased by the consolidated companies. Property and motor

vehicles lease is regulated under the lease agreements.

2.17.Government grants

Government grants (from the Ministry of Science) are grants in the form of incentives, premiums

and donations which are recognized as income when there is reasonable assurance that the grant

will be received and that the parent company will comply with the conditions attached to them.

2.18.Interest share in the capital of dependent legal entities (subsidiaries)

Subsidiaries are legal entities in which the parent company has an ownership share above 50 % or

more than half of the voting power or power to govern the financial and operating policies of a legal

entity. Ownerhsip share in the capital of dependent legal entities are accounted for at the cost of

initial investment.

3. FINANCIAL RISK MANAGEMENT

3.1. Financial risk factors

The operations of the parent company are exposed to various financial risks: market risk (meaning

the risk of changes in foreign currency exchange rates and the risk of changes in the interest rate

fair values), credit risk, solvency risk and cash flow risk. Risk management in the Company is

directed towards efforts to minimize potential negative influences on the Company’s financial

operations in the circumstances of financial market contingencies.

3.1.1. Market risk



14

3.1.1.1. Risk of changes in foreign currency exchange rates

The parent company operates within an international environment and is exposed to the risk of

changes in foreign currencies exchange rates, arising from financial transactions with various

currencies, primarily with the Euro. The risk arises from future commercial transations, recognized

funds and liabilities.

The management of the parent company has established a policy for risk management referring to

changes in foreign currency rates in relation to its functional currency. The risk of changes in

foreign currency exchange rates appears when future transactions and recognized funds and

liabilities are stated in currency that is not the functional currency of the Company.

The parent company’s policy regarding risk management is defined in such a way as to protect

between 80% and 90% of the expected cash flows (which is mostly income from export and

inventory purchase expenditure). As a result of changes in the exchange rate of the Euro, the profit

was higher in 2009 than in 2008, because of considerable variations of domestic currency in

relation to foreign currency, which happened in the IV quarter of 2009. The exchange rate changes

of other currencies did not significantly effect profit in 2009. The subsidiary Galenika Crna Gora

d.o.o. faces no risk from changes in foreign currencies, as euro is the official reporting currency in

Montenegro.

3.1.1.2. The risk of price changes

Most selling prices are state-controlled.

3.1.1.3. Cash flow and the risk of changes in fair values of the interest rate

In view of the Company having deposited funds in banks (fixed-term deposits and non-time

deposits) the change in interest rates influences the interest-bearing assets. There is a risk of fair

value interest rate change.

3.1.2. Credit risk

The parent company has no significant concentration of credit risk. The Company has its established rules

for ensuring sales of products to wholesale customers with appropriate credibility and adequate high-quality

means for provision of payments.

Provision for credit risk is established by the parent company. Credit risk appears in the following

cases: in cash and cash equivalents, deposits in banks and financial institutions; in wholesale risk

exposure, including uncollected receivables and assumed liabilities. This ranking is used for

wholesale customers. In risk control, an estimation of their credit rating is performed, taking into

consideration the customer’s financial position, previous experiences and other factors.

3.1.3. Solvency risk

A cautious solvency risk management means keeping sufficient amount of cash, as well as providing

adequate financing sources through sufficient credit liabilities, and the possibility to even the position on the



15

market. Due to the dynamic nature of the Company’s operations, the Finance Division tends to keep the

financing flexibility by keeping the provided credit lines at disposal.

The management supervises the continuous planning of the Parent Company’s solvency reserves

which encompass unused credit lines and cash and cash equivalents based on the expected cash

flows.

3.2. Capital risk management

Capital management is carried out with the aim to have the parent company maintain its capability

to continue to operate in the predictable future, in order to provide a return (profit) to shareholders,

benefits to other parties concerned, and in order to keep the optimal capital structure, with the aim

of reducing the cost of capital.

In order to preserve, i.e. correct the structure of the capital, the Company can make a correction in

dividend payments to shareholders, return the capital to shareholders, issue new stocks, or sell the

funds in order to reduce debts.

The Conoslidated Group monitors capital on the basis of the gearing ratio. This ratio is calculated

based on the proportion of Group’s net debt and total capital. Net debt is calculated as total loans

(including short-term and long-term, as shown in the balance sheet) less cash and cash equivalents.

Total capital is calculated as capital shown in the balance sheet plus net debt.

2009 2008

Loan liabilities for the group of companies – total

4,892,241

1,487,651

Less: cash and cash equivalents 1,041,956 2,628,678

Net debt of the group of companies 3,850,285 (1,141,027)

Own capital of the group of companies 10,890,904 10,867,274

Total capital of the group of companies 14,741,189 9,726,247

Gearing ratio 26.12% -11.73%

The degree of burden of owner’s capital as a guarantee substance of the consolidated group has

significantly increased in 2009 due to payment of instalments per approved long-term loan for the

construction of a solid dosage forms plant, as well as short-term loans for solvency due to the need

for overcoming insolvency in terms of manufacturers of pharmaceutical products-wholesalers. The

owner’s capital was additionally burdened as a result of the investment made by the subsidiary in

Montengro in the construction of the plant for production of Flonivin. Pursuant to the above stated,

long-term financial security of the consolidated group has worsened, however there is still room for

burdening the guarantee substance with loaned sources of financing.

3.3. Fair value

As there is insufficient market experience in Serbia and Montenegro, as well as a lack of stability

and solvency in purchase and sales of receivables and other financial assets and liabilities, bearing



16

in mind that the official market information are not always available, therefore, it is not possible to

make a reliable estimation of the fair value in the absence of an active market. The Company’s

management, instead of making an assessment at fair value, makes a risk assessment and in cases

where it is estimated that the value at which assets (primarily receivables and liabilities) are

recorded in business books will not be realized, it makes value adjustments.



17

INCOME STATEMENT

1. INCOME FROM SALES

2009 2008

� Income from domestic sales 8,391,662 7,000,449

• Goods 237,825 135,692

• Products 10,476,186 8,697,054

• Services 21,291 18,016

• Approved discount (2,343,640) (1,850,313)

� Income from sales in foreign markets 1,013,258 834,624

• Products and services 1,013,258 834,624

• Total 9,404,920 7,835,073

� In the consolidation process, profit of 38,642 thousands of dinars generated from internal

turnover within the consolidated group, based on services performed - contract

manufacturing by the subsidiary in Montenegro for the parent company, was eliminated.

� In the course of 2009, the subsidiary Galenika Crna Gora d.o.o. recorded a significant

increase in sales, primarily due to a significant increase of retail turnover of goods.

2. INCOME FROM USE OF OWN PRODUCTS AND GOODS

2009 2008

• Income from use of goods for own needs 13,999 11,034

• Income from use of products and services for own

needs

3,458 1.768

• Total 17,457 12,802

3. OTHER INCOME FROM OPERATIONS

2009 2008

• Income from grants from the Ministry of Science 11,463 5,231

• Income from rental fees 5,464 17,502

• Other 10,595

• Total 27,522 22,733

� Income from grants from the Ministry of Science increased in 2009 based on approved

projects, namely:

− Development of a probiotic product for human use;

− Evaluation of the effects of hormones and cytostatics by applying a cytogenetic comet assay;



18

− Ecophysiological and genetic animal tesing for the purpose of increasing reproduction and

resistance

� Income from rental fees first appeared in 2009 originating from the subsidiary from

Montenegro as per income from rental of a part of the pharmacy premises to the Community

Health Center in Bar.

� The category other comprises mostly of buying up of vehicles from the parent company by

employees.

4. COSTS OF MATERIALS

2009 2008

• Raw materials used 2,821,705 2,158,620

• Packaging material used 478,663 392,480

• Costs of other materials 180,234 226,123

• Fuel and energy costs 400,259 369,016

• TT oo tt aa ll 3,880,861 3,146,239

� Increase of costs of materials (raw materials and packaging materials) is the result of

increased production volume in 2009

� Costs of fuel and energy have increased in 2009 as a result of increase of the price of fuel

and energy, reflecting increase of the foreign exchange rates

5. DEPRECIATION AND PROVISION EXPENSES

2009 2008

• Depreciation 286,488 266,955

• Provisions for employee salaries according to IAS

19 – short-term

90,124 51,931

• Other long-term provisions for litigation 4,737

• Provisions for employee salaries according to IAS

19- long-term

94,048 79,986

• TT oo tt aa ll 475,397 398,872

� More detailed explanations relating to provisions according to IAS 39 and provisions for

litigations are presented under item 22 of the Notes to the Financial Statements

6. OTHER OPERATING EXPENSES

Costs of manufacturing services 2009 2008

• Services rendered for producing output 103,140 74,374

• Transportation 34,966 40,050

• Maintenance 54,251 72,167

• Rent 43,019 19,262

• Advertizing and promotion 173,459 138,304



19

• Registration 24,460 22,301

• Utilities 14,778 12,615

• Other 23,952 26,898

• TT oo tt aa ll 472,025 405,971

� Costs of services rendered of the parent company for producing output have significantly

increased in 2009 as, besides the existing agreement on contract manufacturing with Birgim

from Istanbul (Turkey), contract manufacturing agreements have been concluded with

Hemofarm a.d. Vrsac and the subsidiary Galenika Crna Gora d.o.o.

� In the consolidation process, costs of producing output have been eliminated based on

internal changes within the consolidated group, after the contract manufacturing has been

performed by the subsidiary in Montenegro for the parent company, in the amount of 37,987

thousands of dinars.

� Costs of rent of the parent company have increased largely due to the increase of costs of

leasing vehicles as the price indexing is in euros and the increase of the exchange rate has

resulted in higher costs in dinar equivalents. Also, these vehicles were bought out in this

year.

� Costs of introducing new production of the parent company are the result of trial production

of placebo product in the new solid dosage forms plant.

� Advertizing and promotion costs of the parent company in 2009 have significantly increased

due to increased media presence, primarily through advertizements in daily newspapers.

� Costs of utilities of the parent company have increased primarily due to an increase of costs

of heating i.e. the price of energy sources.

� The greatest portion of costs in the category Other of the parent company represent costs of

the External audit (Second phase of the certification audit and compliance of Galenika a.d.

business operations with international standards ISO 9001:2008, ISO 13485:2003/MDD

93/42 and HACCP system). A significant share in the costs in this category, besides the

said costs of the external audit, fall to costs of Licence agreements with legal entities and

costs of safety at work.

Intangible expenses 2009 2008

• Costs of non-production services 66,367 63,658

• Entertainment expenses 43,153 28,012

• Insurance premium costs 39,763 32,640

• Payment operations 18,532 12,760

• Membership expenses 10,677 8,605

• Tax expenses 36,815 18,675

• Other intangible expenses 17,454 22,243

• TT oo tt aa ll 232,761 186,593

•• TTOOTTAALL OOTTHHEERR OOPPEERRAATTIINNGG EEXXPPEENNSSEESS 704,786 592,564



20

� Payment operations expenses of the parent company have significantly increased due to the

brokerage house expenses for the emission of short-term notes, and also due to the increase

of other bank charges and fees;

� Tax expenses of the parent company have significantly increased in 2009 mainly as a result

of increase of property tax expenses as the tax base has increased because of property

evaluation at fair value.

� Under other intangible expenses of the parent company, court and administrative taxes

account for the largest share in these expenses.

7. FINANCIAL INCOME

2009 2008

• Interest income 144,452 83,742

• Positive exchange rate differences (liabilities,

receivables and investments)

315,075 390,372

• Positive exchange rate differences long-term foreign

loans)

51,258 67,808

• Positive exchange rate differences as per foreign currency

account abroad

228,641 536,646

• Positive exchange rate differences as per domestic

foreign curreny account

36,608 69,700

• Other financial income 1,477 198

• TT oo tt aa ll 777,511 1,148,466

� In the consolidation process, in the income from interest account elimination was made in

the amount 689 thousands of dinars based on the effects of conversion of foreing currency

to the reporting curreny (RSD)

� Interest income of the parent company has increased primarily due to an increase in income

from special purpose and term deposits deposited with business banks;

� Positive exchange rate differences of the parent company were reduced in 2009 primarily

due to reduced amounts of deposited (available) funds on the foreign currency accounts

abroad and domestic.

8. FINANCIAL EXPENSES

2009 2008

• Interest expenses 352,885 108,047

• Negative exchange rate differences - payment and

collection abroad

15,898 14,173

• Negative exchange rate differences – foreign currency

account abroad

84,160 248,899



21

• Negative exchange rate differences - suppliers 232,025 254,345

• Negative exchange rate differences - receivables from

foreign customers

79,314 135,593

• Negative exchange rate differences – domestic foreign

currency account

19,574 58,557

• Negative exchange rate differences – long-term loans

abroad

64,761 124,147

• Other financial expenses 7,978 4,562

• TT oo tt aa ll 856,595 948,323

� Interest expense of the parent company has increased in 2009 primarily due to an increase of

costs of discounting bills which the parent company re-invoices to the charge of the issuer

of the bill, i.e. the buyer.

� Positive exchange rate differences of the parent company were decreased in 2009 primarily

due to a decrease of the amount of deposited (available) assets on the foreign currency

account abroad and in the country.

� A rapid increase of the exchange rate, particularly in the IV quarter of 2009, reflected the

increase of negative exchange rate differences for liabilities abroad, mostly relating to long-

term loans abroad and payables to foreign suppliers.

� Pursuant to Article 77g of the Rules on Amendments and Supplements of the Layout of

Chart of Accounts for Companies, Cooperatives, other Legal Entities and Entreprenuers

(Official Gazette of the Republic of Serbia No. 4/10) the unrealized net effect of exchange

rate differences in the amount of 87,105,544.35 dinars is rebooked to the prepayments and

accrued income account.

Financial expenses i.e. negative exchange rate differences were decreased by the above

stated amount, resulting in increase of profit before tax. The effects relating to unrealized

effects of exchange rate differences are shown under item EDP 020 of the Balance Sheet.

9. OTHER INCOME

2009 2008

• Income form sale of property, plant, equipment 28 3,721

• Other income not reported elsewhere 447,283 341,366

• Income from adjustment of domestic customers value 365,630 121,594

• Income from adjustment of advance payment 2,388

• Income from adjustment of receivables – foreign

currency customers

367,495 86,018

• Income from adjustment of receivables-foreign currency

advance payments

4,221 2

• Income from value adjustment-property, plant, equipment 3,562 12,825

• Income from decrease in liabilities 20,197

• Income from discontinuation of long-term provisions 479,435

• TT oo tt aa ll 1,188,219 1,067,546



22

� Other income of the consolidated group not reported elsewhere has been increased by

139,161 thousands of dinars due to the consolidation process. Namely, offsetting of the

parent company’s share in the capital of the subsidiary in Montenegro and the capital of

the subsidiary was performed.

� Other income of the parent company not reported elsewhere is greatly increased due to an

increase in income generated from re-invoicing costs of bills of exchange discount to

customers or emitters of bills of exchange.

� Income from adjustment of receivables of the parent company (domestic and foreign

currency customers) are increased as a result of collection of receivables indirectly written-

off last year.

10. OTHER EXPENSES

2009 2008

• Losses based on expenditure and sales of fixed assets 202 2,467

• Losses based on sales of materials 4,638 2,704

• Shortage of materials and fixed assets 365 431

• Expenses based on direct write-off of receivables 471 787

• Expenses based on materials and goods removed from

inventory

1,494 72,715

• Other expenses not reported elsewhere 1,052,033 351,682

• Devaluation of property, plant and equipment 755 65,698

• Devaluation of long-term financial investments 3,610 3,806

• Devaluation of receivables (indirect write-off) 571,948 1,083,698

• TT oo tt aa ll 1,635,516 1,583,988

� In the consolidation process, elimination was performed of the group of depreciated

receivables resulting from indirect write-off of receivables caused by the internal turnover

of goods in 2008, i.e. the sale of goods in the amount of 4,886 thousands of dinars by the

parent company to the subsidiary.

� The largest share in the category other expenses not mentioned elsewhere accounts for

additionally approved discounts to domestic customers.

11. INCOME TAX

2009 2008

• Galenika d.o.o., Belgrade 54,011 88,662

• Galing d.o.o. Belgrade 224 1,111

• Galenika Crna Gora d.o.o. Podgorica - -

• Galenika d.o.o. Banja Luka 69 -

• TT oo tt aa ll 54,304 89,773



23

BALANCE SHEET

12. INTANGIBLE INVESTMENTS

Other rights- Projects, Intangible investments Total

- trade mark softwares planned

Purchase value Balance at beginning of year 311,079 116,609 340,006 767,694

Purchases during the year 11,943 15,297 1,276,812 1,304,052

Transfers-decrease/increase

Alienation and write-off

Revaluation – effect of estimate

Year end balance 323,022 131,906 1,616,818 2,071,746

Value adjustment

Balance at beginning of year 18,518 8,998 47,323 74,839

Annual depreciation 18,517 7,731 26,248

Increase-decrease 676 676

Revaluation–effect of estimate

Year end balance 37,035 17,405 47,323 101,763

Current value as of December

31, 2009

285,987 114,501 1,569,495 1,969,983

13. PROPERTY, PLANT AND EQUIPMENT

Land Buildings and

investment

property

Equipment Current

investments

and advances

for fixed

assets

Total

Purchase value Balance at beginning of year 2,440,124 4,495,208 2,204,108 2,125,673 11,265,113

Purchases during the year 38,335 157,792 226,931 2,410,825 2,833,883

Transfers-decrease/increase

Alienation and write-off (5,191) (5,075) (10,266)

Revaluation –effect of estimate

Year end balance 2,478,459 4,647,809 2,425,964 4,536,498 14,088,730

Value adjustment

Balance at beginning of year 179,943 517,675 8,079 705,697

Annual depreciation 93,791 166,249 260,040

Alienation and write-off (3,710) (1,323) (5,033)

Increase -decrease (310) 2,490 2,180

Revaluation –effect of estimate

Year end balance 270,024 682,291 10,569 962,884

Current value as of December 31,

2009

2,478,459 4,377,785 1.743.673 4,525,929 13,125,846



24

� Increase of balance on account land of the parent company in 2009 was the result of

purchase of 20 acres of building land - cadastral lot no. 165/01 ZKUL 751 KO ZEMUN 4.

� Increase on account investment property of the parent company was the result of booking

business premises awarded as per court settlement with a customer.

� A committee in charge of determining the status of investments of the parent company,

appointed by Decision No. 118/06 of Nov. 17, 2009, has stated and proposed to continue

recording fixed assets in preparation (current investments) and intangible assets in

preparation at their book values until being activated, stating also that there are no

grounds for reducing them to the realizable value as of December 31, 2009.

Furthermore, the committee in charge of inventory taking has not observed in this group

assets in which investments have been completed and activated, as a result, there is no

need for rebooking on these grounds. Also, the committee has not observed investments

discontinued in this year, therefore there is no proposal for liquidation of current

investments.

The committee has observed that once the new plant starts operating, i.e. current

investments are activated and transferred from current investments to equipment, the

largest part of current investments that have been subject of this inventory taking will be

activated at fair value.

� Current investments in the subsidiary Galenika Crna gora d.o.o. have increased primarily

due to quality system investments and investments in GMP standards required for the

manufacture of antibiotics-cephalosporines at the plant in Podgorica. As a result, in the

course of 2009, there was an increase in value of equipment because of additional

investments in current machines.

14. LONG-TERM FINANCIAL INVESTMENTS

2009 2008

• Share in the capital -Investbanka 862 862

• Share in the capital-Unifarm Nis 7,810 7,810

• Share in the capital –Unifarm Podgorica 150 137

• Share in the capital -Beobanka 597 597

• Share in the capital -Jugobanka 3,851 3,851

• Share in the capital –Stankom holding 11,498 11,498

• Share in the capital –Beogradska banka 20,530 20,530

• Share in the capital -Cyprus 1,478 1,572

• Share in the capital -Skoplje 18,314 19,482

• Nigerian government bonds 804 19,455

• Other long-term ivestments –Zepter banka 26 26

• Other long-term ivestments –Montenegro banka 4,138 3,775

• Other long-term ivestments –Best corporation 9,686 9,686

• Long-term housing loans granted to employees 6,894 7,882

• УУ кк уу пп нн оо 86,638 107,163



25

Minus: Value adjustment of the share in the capital of other legal entities 2009 2008

• Value adjustment in the share of capital- Invest banka 862 862

• Value adjustment in the share of capital –Unifarm Nis 3,779 3,779

• Value adjustment in the share of capital -Beobanka 597 597

• Value adjustment in the share of capital -Jugobanka 3,851 3,851

• Value adjustment in the share of capital –Stankom holding 11,498 11,498

• Value adjustment in the share of capital –Beogradska banka 20,530 20,530

• Value adjustment in the share of capital -Cyprus 1,478 1,573

• Value adjustment in the share of capital - ICN Skoplje 18,314 19,482

• Value adjustment.-Nigerian government bonds 804 19,455

• Value adjustment in the share of capital –Zepter bank 26 26

• Value adjustment of the share –Best corporation 9,686 9,686

• TT oo tt aa ll vvaalluuee aaddjjuussttmmeenntt 71,425 91,339

•• LLoonngg--tteerrmm ffiinnaanncciiaall iinnvveessttmmeennttss ,, nneett 15,213 15,824

� In accordance with IAS 36 – Impairment of Assets, long-term financial investments of

the parent company in Investbanka, Beobanka, Jugobanka, Beogradska banka,

Stankom holding have been impaired, as these companies are under liquidation.

� According to information provided by the legal department, investment of the parent

company in Best Corporation is the subject of legal proceedings, the investment in ICN

Skopje and IGC Cyprus was subject of indirect write-off, based on a long-period of

receiving no response to confirmation (statement of open items).

� A long-term financial investment of the parent company in Nigerian government

bonds, indirectly written-off in the previous accounting periods, is collected almost in

full.

� A long-term investment in Zepter Bank was indirectly written off. No confirmation for

the share of the parent company in Unifarm Podgorica was received, while a

confirmation for Monetenegro banka was received. The investment of the parent

company in Unifarm Nis was devalued for the amount of 3,779 thousands of dinars,

thus regaining the dinar value of 4,031 thousands of dinars as of December 31, 2009.

Devaluation was performed based on the Report of the Central Securities Registry and

recommendations of the auditing company.

� In the consolidation process, elimination was performed of the bookkeeping value of

capital share of subisidiaries Galenika Crna Gora d.o.o., Podgorica (464,474), Galing

d.o.o. and Galenika d.o.o. Banja Luka (95) (accounts group 030).

15. INVENTORIES

2009 2008

• Material 1,248,554 937,055

• Small inventory 42,866 39,761

• Ongoing production 157,822 93,995



26

• Finished products 628,647 260,485

• Goods 41,931 29,244

• Advance payments made for inventories 1,054,908 590,098

• Value adjustment of advance payments (100,818) (96,881)

• Value adjustment of small inventory in use (42,228) ((3399,,337799))

•• TT oo tt aa ll 3,031,682 1,814,378

� Inventory of materials as well as advance payments to suppliers of the parent company

were increased in the course of the year due to increased purchases of raw materials as

per quarterly plan that corresponds to the increase in production volume.

� In the consolidation process, elimination was carried out under inventories in the

amount of 39,352 thousands of dinars. Elimination was carried out under advances

from the parent company to the subsidiaries Crna Gora (27,637) and Banja Luka (64).

Furthermore, under inventories, elimination was carried out of inventory of raw

materials and packaging materials for Cephalosporines (11,651) supplied by the parent

company to the subsidiary Crna Gora for contract manufacturing.

16. RECEIVABLES

2009 2008

• Domestic suppliers 3,384,815 5,092,235

• Adjustment of domestic suppliers (600,477) (1,092,099)

• Receivables from customers -Kosovo 18,627 1,772

• Foreign customers 637,144 502,947

• Adjustment of foreign customers (125,812) (38,910)

• Customers-ICN Macedonia 117,780 111,023

• Adjustment of customers – ICN Macedonia (117,780) (111,023)

• Foreign receivables- sued customers and bad debts 9,722 9,084

• Adjustment of foreign receivables- sued customers and bad

debts

(9,722) (9,084)

• Receivables from export companies 13,013 5,491

• Value adjustment –receivables from export companies (2,021) (226)

• Interest-related receivables from domestic customers 2,208 4,834

• Receivables for stimulation of export 15

• Receivables form BC Bank 1,944 1,944

• Adjustment fo receivables from BC Bank (1,944) (1,944)

• Reimbursements for paid sick leaves 4,862 6,319

• Receivables from employees 8,900 4,300

• Bad debt receivables from employees (purchases) 1,430 1,430

• Adjustment of bad debt receivables from employees

(purchases)

(1,430) (1,430)

• Other bad debts –customers BC Bank 33,736 32,249

• Value adjustment of bad debts-customers BC Bank (33,736) (32,249)

• Other bad debts – banks 30,283 30,283

• Value adjustment of bad debts – banks (30,283) (30,283)



27

• Other receivables 5 18

• TT oo tt aa ll 3,341,264 4,486,696

� Eliminated in the consolidation process are receviables and respective value adjustments

between the parent company and the subsidiary Galenika Crna Gora d.o.o. in the amount of

4,886 thousands of dinars based on receivables originating from the supply of finished

products by the parent company to the subsidiary in the course of 2008 which was indirectly

written-off. Further, in the consolidation process receivables were depreciated by 11,280

thousands of dinars based on elimination of receivables of the subsidiary from Banja Luka

from the parent company (1, 204 thousands of dinars) and receivables of the subsidiary

from Montenegro (10,076 thousands of dinars).

17. SHORT-TERM FINANCIAL INVESTMENTS

2009 2008

• Short-term bank deposits 11,835 1,032

• Short-term credit, loans to employees 57,191 25,922

• Short-term credits to customers 50,000 -

• Part of long-term loan with payment due in this year 560

• Part of long-term housing laon (payment in this year) 6 29

• Securities – bank drafts received from customers 5,233,775 1.457,163

• Value adjustment of bank drafts received (203,842) (296,541)

• TT oo tt aa ll 5,148,965 1,188,165

� A significant increase in short-term financial investments of the parent company, namely

receivables based on bank drafts received from customers is the result of stricter customer

credit line policy of Galenika a.d. and a tendency to have all receivables covered by

payment security instruments, i.e. bank drafts.

18. CASH EQUIVALENTS AND CASH

2009 2008

• Current account 12,502 83,202

• Foreign currency account 44,365 45,435

• Cash on hand (dinars and foreign currency) 306 217

• Other funds 16,671 129

• Fixed-term foreign deposits 1,582,547

• Limited-use funds 968,112 917,148

• TT oo tt aa ll 1,041,956 2,628,678

19. DEFERRED TAX FUNDS AND COMMITMENTS

2009 2008



28

Year-end book value 5,571,674 5,507,629

Year-end tax rate 1,656,010 1,506,306

Temporary difference 3,915,664 4,001,323

DEFERRED TAX LIABILITIES (3*10%) 391,566 400,132

Initial balance January 1st (deferred tax asset) 400,132 10,614

Deferred tax liability based on revaluation - 424,683

Deferred tax income recognized in profit and loss 8,566 13,937

The determined amount of deferred tax assets in the amount of 10% of the tax base consisting of the

difference of current value of fixed assets in financial reports and current value of fixed assets for

calculation of income tax depreciation.

At the end of 2009 the amount of deferred tax income of the parent company was determined at

8,566 thousands of dinars. The amount of deferred tax liability based on temporary differences as

of December 31, 2009 was 391,566 thousands of dinars. In view of the initial balance of deferred

tax liability as of December 31, 2009 of 400,132 thousands of dinars, and the calculated deferred

tax liability as of December 31, 2009 of 391,566 thousands of dinars, deferred tax liabilities

(account 498) were reduced by the amount of the difference, a recognition of deferred tax income

in the amount of 8,566 thousands of dinars was made which is recognized in profit and loss.

20. EQUITY CAPITAL OF THE GROUP OF COMPANIES

The structure and amount of equity of the consolidated group is as follows:

2009 2008

• Parent company Galenika a.d. 10,580,000 10,580,000

• Subsidiary Galenika Crna Gora d.o.o. 1,626,544 11,,550022,,992233

•• AAddjjuussttmmeenntt aass ppeerr ccoonnssoolliiddaattiioonn pprroocceedduurree ** (1,315,640) ((11,,221155,,664499))

•• TToottaall ccaappiittaall ooff tthhee ccoonnssoolliiddaatteedd ggrroouupp 10,890,904 1100,,886677,,227744

� The amount of the parent company’s ordinary shares of the of the 1st emission is 1,000,000.

The value of subscribed capital is EUR 126,018,527.77 as confirmed by the Serbian

Business Registers Agency.

� In the consolidation process, carried out was the offset of book value of share in the capital

of subsidiaries Galenika Crna Gora d.o.o., Podgoricam Galing d.o.o. and Galenika d.o.o.

Banja Luka (group 030 accounts) and the corresponding values of capital of the

subsidiaries.

� In the consolidation of the capital of the subisidiary from Montenegro, elimination was

performed of the proportionate amount of total capital of the dependent legal entity

(1,315,640) relating to capital stock.

Minority share in Galenika Crna Gora d.o.o.

Position name Total Majority share Minority share



29

100% 75% 25%

Shares of limited partnership companies 1,754,187 1,315,640 310,904

Unpaid subscribed capital 127,643

Revaluation reserves 271,493 203,620 67,873

Statutory reserves 3,892 2,919 973

Profit from previous years 360,119 270,089 90,030

Loss from current year (70,952) (53,214) (17,738)

Loss from previous years (1,514,665) (1,135,999) (378,666)

T o t a l 804,074 603,055 201,019

Based on the founding agreement, the Government of Montenegro had the obligation to pay 25% of

the subscribed shares amount. However, the payment of the subscribed capital was not made on the

balance sheet date as of 12/31/2009, so that the amount of the subscribed unpaid capital is 127,643

thousands of dinars.

The amount of the share in the capital of the subsidiary Galing is not a significant one (39), and

neither is the share in Galenika d.o.o. Banja Luka. It was eliminated in the consolidation process.

21. UNDISTRIBUTED PROFIT

2009 2008

• Undistributed profit from previous years 1,787,510 1,181,942

• Undistributed profit from previous years IAS

19

(286,172) (286,172)

• Undistributed profit of the current year 675,646 592,068

TT oo tt aa ll 2,176,984 1,487,838

� Undistributed profit of the current year of 665,808 thousands of dinars was increased for

the amount of deferred tax income in 2009 of 8.566 thousands of dinars, as well as for the

effect of reversal of revaluation reserves based on reversal of inventory of fixed assets in the

amount of 1,273 thousands of dinars which in alienation, removal from inventory or sale is

transferred from revaluation reserves formed at estimation of fair value of property, plant

and equipment to undistributed profit.

� In the consolidation process, by applying the method of full consolidation, elimination was

carried out of undistributed current year profit earned by the subsidiary Galing d.o.o.

(2,013 thousands of dinars) as well as undistributed current year profit earned by the

subsidiary Galenika d.o.o. Banja Luka (603 thousands of dinars).

� Besides the above, in the consolidation process, elimination was carried out of undistributed

previous year profit realized by the subsidiary Galing (10,305 thousands of dinars), as well

as aliquot part of undistributed profit from previous years of the subsidiary in Montenegro

(113,691 thousands of dinars).

22. PROVISIONS



30

2009 2008

• Provisions for law suits 4,794 57

•• Provisions for compensations and other employee benefits-

short-term 9900,,112244 51,931

•• Provisions for compensations and other employee benefits-

long-term 223377,,118844 250,465

•• TT oo tt aa ll 333322,,110022 302,453

� Actuarial calculation of provisions as per IAS 19 Employee benefits was performed only

in the case of the parent company Galenika a.d.

� Pursuant to IAS 37 – Provisions, contingent liabilities and contingent assets a

provisions was made for future bank balances and cash in 2010 and lost law suits

against Galenika a.d. initiated by current and former employees, namely:

� Nebojsa Bojovic, reimbursement for damages based on termination of the Employment

Contract, claiming the sum of monthly salaries starting from 1998, in the amount of

553,445.52 dinars;

� Pavle Perisic, reimbursement for damages based on termination of the Employment

Contract, claiming the sum of monthly salaries starting from 1998, in the amount of

3,430,040.47 dinars;

� Miroslav Milosavljevic, reimbursement for damages based on suspension from work, in the

amount of 773,080.82;

� Short-term provisions for unused annual leaves was significantly increased in 2009 as a

result of increased number of unused days of previous year’s annual leave in the in the

amount of 24,549 days.

23. LONG-TERM LIABILITIES

2009 2008

• Long-term loan Crediopt Italy 6,020

• Long-term loan – foreign currency 3,477,946 1,037,544

• Other long-term liabilities – leasing arrangements 2,623 4,339

• TT oo tt aa ll 3,480,569 1,047,903

� An increase in long-term liabilities is the result of loan drawdown as per approved credit for

completing woks on the new solid dosage forms plant, start up of which is expected in 2010.

As of December 31, 2009, €38,374,707.80 was drawn down of the total approved credit

amount.

� Galenika a.d. has signed with the contractor IMA-Industria Macchine Automatiche S.P.A.

from Italy an Agreement on the construction of the solid dosage forms plant, value of the

project is €46,362,265.00. The facility has a total of 9000 square meters and a production

capapcity of 2 billion tablets and 100 million capsules per year.

� The loans have been provided by the following banks:



31

• “UniCredit Bank Serbia a.d.”, Belgrade €34,261,261

• ““BBaannccaa IInntteessaa aa..dd..””-- BBeellggrraaddee €€1122,,110011,,000044

� To secure the loan Galenika a.d.. registered a lien of executive extrajudicial mortgage over

the cadastre owner’s real estate as a lien debtor of the current value of 1,576,656 thousands

of dinars in favour of “UniCredit Bank Serbia a.d.” - Belgrade and “Banca Intesa a.d.”-

Belgrade.

� A long-term loan of 2,500,000 EUROS was taken out in 2008 with the HYPO ALPE

ADRIA Bank, for investment in the construction of the plant for the production of Flonivin

in Donji Zagarac, purchase of premises, purchase of equipment for the manufacture of

pharmaceuticals, reconstruction of the pharmacy in order to house a quality control

laboratory, purchase of equipment for the control laboratory, etc. As loan security Galenika

d.o.o. Crna Gora has registered a lien of executive extrajudicial mortgage over the cadastre

owner’s real estate as a lien debtor of the current value of 7,029,230 EUROS in favour of

Hypo Alpe Adria Bank.

24. SHORT-TERM LIABILITIES

Short-term financial liabilities 2009 2008

• Short-term domestic loans-foreign currency 778,263 443,005

• Liabilitites – leasing arrangements with due date up

to a year

436,032 1,082

• Liabiltiites per emitted notes 200,000

• TT oo tt aa ll 1,414,295 444,087

TToottaall 11,,441144,,229955 444433,,008877

� Short-term liabilities based on emitted short-term notes are the result of two emissions by

the parent company. Emitted notes have been purchased by a professional investor - Dunav

osiguranje a.d. with due date of emitted notes being 360 days from the date of issue.

� In the course of 2009, as a result of general insolvency of the system in terms of

manufacturers of pharmaceutical products – wholesalers, Galenika a .d. was forced to take

out short-term loans in order to be able to continue regular repayment of short-term

liabilities. Below is an overview of short-term loans:

Bank Type of loan Approved

amount

Repayment

schedule

Due date Current

portion used

(EUR)

Security

Societe

Generale

Subsidy 350,000 Euros In full March 31,

2010

350,000 Blank

promissory

notes

Uni Credit

Subsidy

1,681,000

Euros

In 7

instalments

Dec. 11, 2009

June 11, 2010

1,441,00

Blank

promissory

note and time

deposit



32

Univerzal

Short-term

280 million

dinars

In 9

instalments

Feb.15, 2009

Oct. 15, 2010

2,917,000

Blank

promissory

notes and

pledge of

goods

Privredna

Short-term

200 million

dinars

In 9

instalments

Nov. 30, 2010

2,085,000

Blank

promissory

notes and

contractual

authorizations

Raiffeisen

Overdraft

200 million

dinars

Overdraft

Overdraft

1,319,000

Blank

promissory

notes

Business liabilities 2009 2008

• Advance payments received 9,970 15,230

• Liabilities - domestic suppliers 520,452 288,286

• Liabilities referring to non-invoiced goods and local

services

951,281 303,178

• Foreign suppliers 1,142,378 426,964

• Other business liabilities 676,168 5,084

• TT oo tt aa ll 3,300,249 1,038,742

� Balance on accounts foreign suppliers of the parent company was significantly increased as

a result of increased purchases of raw materials and materials during the year.

� In the group other business liabilities of the parent company, the increase is a result of

issued bills to suppliers as payment security for accrued liabilities.

� In the consolidation process, elimination was performed under business liabilities (EDP

119) in the amount of 55,551 thousands of dinars which is based on offsetting liabilities to

suppliers related legal entities formed by the parent company towards subsidiaries from

Montenegro and Banja Luka, and based on liabilities of subsidiaries (Montenegro, as per

contract manufacturing) formed in relation to the parent company.

Liabilities based on VAT and other public revenue

related payments

11,980 43,491

Other short-term liabilities and accrued expenses and deferred income

• Net salaries and salary compensations 162,686 129,237

• Personal income tax and contribution related

liabilities

110,085 82,633

• Other liabilities 3,656 2,615

• Interest charged on housing loans 1,126 1,358

TT oo tt aa ll 277,553 215,843

Income tax 293 1,071



33

• SHORT-TERM LIABILITIES, TOTAL 5,004,370 1,743,234

.

25. CONTINGENT LIABILITIES

� In the previous accounting period, Galenika a.d. has discounted bills of its customers with

business banks before their due date. Below is an overview discounted bills:

VELEFARM VFB VELEFARM

PROLEK

BG PHARM Total

JANUARY 290,000 10,000 76,000 376,000

FEBRUARY 350,000 10,000 362,971 722,971

MARCH 638,749 10,000 132,705 781,455

APRIL 350,000 7,000 213,361 570,000

MAY 250,000 242,320 492,321

JUNE 298,756 158,755 457,512

JULY 60,000 140,000 200,000

2,237,505 37,000 1,326,114 3,600,620

26. PARENT COMPANY AGREEMENTS WITH THE SUBSIDIARIES

� On September 12, 2008, Galenika signed a Services Agreement with Galenika Crna Gora d.o.o.

The Agreement relates to the production of products from the Galenika a.d. product portfolio,

and is more closely defined in Annex 1.

� On December 17, 2008, Galenika a.d. signed a Sales and Distribution Agreement with Galenika

Crna Gora d.o.o. The Agreement relates to sales and distribution of products from the Galenika

a.d. product portfolio in the territory of Montenegro.

� On December 29, 2008, Galenika a.d. and Galenika Crna gora d.o.o. signed an Agreement on

Final Processing of Goods. The Agreement relates to final processing of products from the

Galenika a.d. product portfolio, and is more closely defined in Annex 1 which gives a precise

listing of products to be sent for final processing, as well as in Annex 2, in which the words

final processing are substituted with the words contract manufacturing.

� The Technical Cooperation Agreement concluded between the subsidiary from Montenegro and

the parent company on February 4, 2009 for borrowing measuring instruments for measuring

trial batches.

� The Agency Agreement for representing the parent company in the registration procedure of

Galenika’s products in the territory of Montenegro was concluded on March 2, 2009.



34

� The Agency and Cooperation Agreement concluded with Galenika d.o.o. Banja Luka on

November 12, 2009 relating to the sale of products from Galenika a.d.’s product portfolio in

the territory of Bosnia & Herzegovina – Republic of Srpska and other marketing activities

(market research of the territory, monitoring the competition, advertising and sale of

pharmaceutical products, etc.).

� Leasing business premises, property of Galenika a.d., as per agreement concluded on November

12, 2009, by the subsidiary Galenika d.o.o. Banja Luka, for an indefinite time period.

� Agency Agreement for regulating the procedure of registration of Galenika a.d.’s products by

Galenika d.o.o. Banja Luka in the territory of Bosnia & Herzegovina.

� The parent company Galenika a.d. has not concluded any agreements with the subsidiary Galing

d.o.o.

27. OFF-BALANCE SHEET ASSETS AND LIABILITIES

The parent company issued the following payment guarantees:

• Intesa San Paolo Bank in the amount of 12,101 thousands of euros,

• Yapi Bank in the amount of 34,261 thousands of euros,

• Hoffman la Roche in the amount of 3.000 thousands of CHF

• Republic of Serbia Customs in the amount of 35,000 thousands of dinars

• Velefarm VFB in the amount of 562,593 thousands of dinars.

The parent company received the following guarantees:

• From the foreign supplier IMA - Italy in the amount of 2,476 thousands of euros,

• From the foreign supplier IMA - Italy in the amount of 1,651 thousands of euros,

• From the foreign supplier Тelestar - Spain in the amount of 4,478 thousands of euros,

• From the foreign supplier Тelestar - Spain in the amount of 2,985 thousands of euros

• From the domestic supplier Elkoms – Belgrade in the amount of 1,603 thousands of dinars,

• From the domestic supplier Proces projekt - Belgrade in the amount of 3,204 thousands of

dinars,

• From the domestic supplier Masinoprojekat - Belgrade in the amount of 2,509 thousands of

dinars

28. FOREIGN CURRENCY EXCHANGE RATES



35

The official exchange rates for currencies important for company operations which were used for

calculation of foreign currency balance sheet positions into dinars, were as follows:

Currency 12/31/2009 12/31/2008

ЕUR 95.8888 88.6010

USD 66.7285 62.9000

For calculation of Balance Sheet and Income Statement positions of the subsidiaries, the following

rates were used:

Financial statement of Galenika Crna

Gora d.o.o. Exchange rate

used

Balance Sheet-EUR 95.8888

Income Statement-EUR 94.1198

Financial Statement Galenika d.o.o.

Banja Luka

Exchange rate

used

Balance Sheet-BAM (KM) 49.0272

Income Statement-BAM (KM) 48.1227

galenika .d. belgrade

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