PHARMACEUTICAL CHEMICAL COSMETICAL INDUSTRY ANNUAL REPORT ON THE PERFORMANCE OF ALKALOID AD SKOPJE FOR THE PERIOD JANUARY - DECEMBER 2010 February 2011 Annual report on the performance 31 December 2010 CONTENTS 1. General information 2. Financial risk management 3. Additions to non-current assets 4. Dividends 5. Borrowings 6. Major transactions 7. Related party transactions 8. Share capital 9. Key management compensations 10. Production and sales Production in tons Total sales Sales by segments Domestic market sales by segments Foreign market sales by segments Foreign market sales by regions/countries Total revenues, determination and allocation of profit Total revenues Total expenses Income statement Balance sheet Performance indicators Number of employees This is an English translation of the original Report issued in Macedonian language 2 Annual report on the performance 31 December 2010 1. General information Alkaloid AD Skopje, the parent Company is a joint stock company, established and with head office in the Republic of Macedonia. The registered address of the Company is: Aleksandar Makedonski 12 1000 Skopje, Republic of Macedonia. Majorbusinessactivity:AlkaloidADSkopjeproducesandsellswiderangeofpharmaceutical,chemicaland cosmeticproducts,aswellasgoodsfromherbalorigin.AccordingtotheTradeRegistry,AlkaloidADSkopje can perform wholesale operations and foreign trading with food and non food products. The main scope is production of pharmaceutical products. The shares of Alkaloid AD Skopje have been listed on the Macedonian Stock Exchange, since 2002. TheannualreportontheperformanceofAlkaloidADSkopjehasbeenpreparedinaccordancewiththeTrade CompanyLaw("OfficialGazetteoftheRepublicofMacedonia"no.28/2004,84/2005,25/2007and87/2008) and the Rulebook for accounting ("Official Gazette of the Republic of Macedonia" no. 94/2004, 11/2005, 116/2005, 159/2009 and 164/2010). The report is prepared in accordance with the concept of purchase price, excluding the land property, construction buildings and investments and available -for-sale financial assets, which are presented by their market price. The presentation of the financial statements in accordance with the Trade Companies Law and the Rulebook for Accounting requires management to make best estimates and reasonable assumptions that affect the amounts presented in the financial statements. These estimations and assumptions are based on information availabletous,asofthedateofpreparationofthefinancialstatements.However,actualresultsmayvaryfrom these estimates. 2. Financial risk management Financial risk factors The Company's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and interest rate risk. The Company's overall riskmanagementprogramfocusesontheunpredictabilityoffinancialmarketsandseekstominimizepotential adverse effects on the Company's financial performance. The financial risk management is preformed by the Company's financial department, based on Decisions from Managing board. Market risk а) Foreign exchange risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures. To manage the foreign exchange risk the Companyprovides enough cash in foreign currencies held in banks in order to maintain its future commercial transactions. This is an English translation of the original Report issued in Macedonian language 3 Annual report on the performance 31 December 2010 b) Price risk The Company is exposed to equity securities price risk because of available-for-sale investments held by the Company. The Company is not exposed to commodity price risk. Credit risk TheCompanyhasno significantconcentrationsofcreditrisk. Ithaspoliciesin placetoensurethatwholesale sales of products are made to customers with an appropriate credit history. Trade receivables consist of large number of balances. The Company has policies that limit the amount of credit exposure. Liquidity risk Prudent liquidityrisk management implies maintaining sufficientcash and the availabilityof funding through an adequate amount of committed credit facilities. Interest risk AstheCompanyhasnosignificantinterest-bearingassets,theCompany’sincomeandoperatingcashfloware substantially independent of changes in market interest rates. The Company’s interest rate risk arises from borrowings. The Company has no specific policy, but in direct negotiation with lenders attempts to reduce interest rate risk. Interest rates of long-term borrowings are significantly lower than short term. Interest rates on short term borrowings are decreased in respect of previous year. Fair value estimation The fair value of available-for-sale financial assets traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Company is the last traded price. The fair value of financial instruments that are not traded in an active market is determined by makes assumptions that are based on public information for recent arm’s length transactions or reference to other instruments that are substantially the same. The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial assets and liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the This is an English translation of the original Report issued in Macedonian language 4 Annual report on the performance 31 December 2010 3. Additions to non-current assets Additions to non-current assets include additions to property, plant and equipment and Intangibles. Additions to non-current assets - segment reporting (In 000 MKD) 2010 2009 IND Segments Amount % Amount % 10/09 Pharmacy 267,226 95 470,985 97 57 Chemistry Cosmetics Botanicals 13,412 5 13,234 3 101 Total: 280,638 100 484,219 100 58 4. Dividends The Company does not recognize the dividend payable before it is approved on the Annual General Meeting. The dividends approved by shareholders on 19 April 2010 were Denar 216,293 thousands. Tax of paid dividend and other allocation of profit was amounting Denar 35,105 thousands. Approved dividends in 2010 in respect of 2009 are paid and retained earnings are appropriately decreased. 5. Borrowings (In 000 MKD) 2010 2009 IND Borrowings Amount % Amount % 10/09 Non-current 223 - 811 - 27 Current 391,891 100 412,340 100 95 Total: 392,114 100 413,151 100 95 The maturity of the borrowings is as follows: (In 000 MKD) 2010 2009 IND Maturity Amount % Amount % 10/09 Up to 1 year 391,891 100 412,340 100 95 Between 1 to 3 years 223 - 811 - 27 Total: 392,114 100 413,151 100 95 6. Major transactions According to the Trade Company Law, Alkaloid AD Skopje has no major transactions in 2010. This is an English translation of the original Report issued in Macedonian language 5 Annual report on the performance 31 December 2010 7. Related party transactions The Company has no ultimate parent. The shares are widely held. Alkaloid AD Skopje has investments in twelve subsidiaries and one foundation in Macedonia and abroad. Sales and purchases of goods and services between related parties are based on regular market terms and prices. Investments in subsidiaries and associates (In 000 MKD) 2010 2009 IND Subsidiary Amount % Amount % 10/09 Alkaloid INT DOO Ljubljana, Slovenia 557 1 557 2 100 Alkaloid DOO Zagreb, Croatia 14,822 21 14,822 47 100 Alkaloid DOO Sarajevo, Bosnia and Herzegovina 39 - 39 - 100 Alkaloid DOO Beograd, Serbia 43,131 60 2,537 8 1,700 ALK&KOS Shpk Prishtina, Kosovo 307 - 307 1 100 Alkaloid EOOD Sofia, Bulgaria 2,748 4 2,748 9 100 Alkaloidfarm SA Fribourg, Switzerland 4,285 6 4,285 14 100 Alkaloid Kons DOOEL Skopje, Macedonia 154 - 154 - 100 Alkaloid USA LLC Columbus, Ohio US 2,365 3 2,365 7 100 Fund ”Trajce Mukaetov” Skopje, Macedonia 3,000 4 3,000 10 100 OOO Alkaloid RUS, Moscow, Russia 619 1 619 2 100 Alkaloid DOO Podgorica, Montenegro - - - - - Alkaloid FARM DOO Ljubljana, Slovenia 461 - - - - Total: 72,488 100 31,433 100 231 All subsidiaries are 100% owned by the Company, except the investment in Alkaloid USA with equityshare of 49%, but the Company exercises control. During 2010 Alkaloid AD, Skopje established a new subsidiary in Slovenia, Alkaloid Farm DOO Ljubljana.The new subsidiary is 100% owned by the Company. The existing subsidiary in Slovenia is rebranded into Alkaloid INT DOO Ljubljana. Alkaloid’srepresentativeofficesinRussia,UkraineandAlbaniaareincludedinthefinancialstatementsofthe Company. Prepayments and short-term loans (In 000 MKD) 2010 2009 IND Subsidiary Amount % Amount % 10/09 Alkaloid Kons DOOEL Skopje, Macedonia 17,409 23 30,641 34 57 Alkaloid DOO Beograd, Serbia 12,982 17 12,978 14 100 OOO Alkaloid RUS, Moscow, Russia 45,195 60 46,146 51 98 Total: 75,586 100 89,765 100 84 This is an English translation of the original Report issued in Macedonian language 6 Annual report on the performance 31 December 2010 8. Share capital Number of Ordinary Treasury Total Share shares shares shares premium At 1 January 2009 1,422,846 2,220,127 -13,344 2,206,783 906 Treasury shares purchased -150 - -235 -235 -172 Sale of treasury shares - - - - - At 31 December 2009 1,422,696 2,220,127 -13,579 2,206,548 734 Treasury shares purchased - - - - - Sale of treasury shares - - - - - At 31 December 2010 1,422,696 2,220,127 -13,579 2,206,548 734 Thetotalauthorizednumberofordinarysharesis1,431,353withaparvalueofEUR25.56(Denar1,551)per share. All issued shares are fully paid. During 2010 the Entity has no purchases or sales of treasury shares. The total number of treasury shares is 8,657.Thenumberof3,287sharesisreservedforformerproprietorsofwhich3,228areprioritysharesand59 are ordinary shares. Earning per share (In MKD) 2010 2009 IND Amount Amount 10/09 Profit attributable to shareholders (in denars) 581,577,640 503,267,196 116 Number of shares 1,422,696 1,422,696 100 Basic earning per share (in denars): 408.79 353.74 116 9. Key management compensations No compensations were paid to the Management Board members in 2010 and 2009. In 2010, the amount of Denar 3,584 thousands were paid to the Supervision Board members (2009: Denar 3,391 thousands). 10. Production and sales Production in tons (In tons) 2010 2009 IND Segment Amount % Amount % 10/09 Pharmacy 808 11 782 11 103 Chemistry Cosmetics Botanicals 6,847 89 6,619 89 103 Total: 7,655 100 7,401 100 103 The total amount produced for 2010 is 7,655 tons, which is an increase of 3% compared to last years' production amount of 7,401 tons. This is an English translation of the original Report issued in Macedonian language 7 Annual report on the performance 31 December 2010 Total sales (In 000 MKD) 2010 2009 IND Market Amount % Amount % 10/09 Domestic market 1,972,723 38 1,814,094 39 109 Foreign market 3,169,794 62 2,874,051 61 110 Total: 5,142,517 100 4,688,145 100 110 Thetotalsalesrevenuesfor2010are5,142,517thousanddenarswhichindicates10%growthcomparedtothe salesrevenuesfrom2009 (4,688,145 thousand denars). Thegrowth in totalsalesrevenuesisaresultfromthe increase of sales revenues on domestic market for 9% and on foreign market for 10%. The largest portion of total sales revenues, 62% belongs to the foreign market sales. Total sales - segment reporting (In 000 MKD) 2010 2009 IND Segmet Amount % Amount % 10/09 Pharmacy 4,200,041 82 3,811,328 81 110 Chemistry Cosmetics Botanicals 942,476 18 876,817 19 107 Total: 5,142,517 100 4,688,145 100 110 The largest portion in total sales revenues, 4,200,041 thousand denars belongs to the Pharmacy segment with 82%, which compared to last years' 3,811,328 thousand denars is an increase of 10%. Domestic market sales - segment reporting (In 000 MKD) 2010 2009 IND Segment Amount % Amount % 10/09 Pharmacy 1,489,825 76 1,359,570 75 110 Chemistry Cosmetics Botanicals 482,898 24 454,524 25 106 Total: 1,972,723 100 1,814,094 100 109 Total sales revenues on domestic market are 1,972,723 thousand denars, which compared to last years' 1,814,094 have increased for 9%. The largest portion in total sales revenues belongs to the Pharmacy segment with 1,489,825 thousand denars or 76%. This is an English translation of the original Report issued in Macedonian language 8 Annual report on the performance 31 December 2010 Foreign market sales - segment reporting (In 000 MKD) 2010 2009 IND Segment Amount % Amount % 10/09 Pharmacy 2,710,216 86 2,451,758 85 111 Chemistry Cosmetics Botanicals 459,578 14 422,293 15 109 Total: 3,169,794 100 2,874,051 100 110 Total sales revenues on foreign market are 3,169,794 thousand denars, which compared to last years' 2,784,051 have increased for 10%. The increase of total sales revenue is a result from increased export in all operating segments The largest portion in total sales revenues belongs to the Pharmacy segment with 2,710,216 thousand denars or 86%. Foreign market sales by regions/countries (In 000 MKD) 2010 2009 IND Region/Country Amount % Amount % 10/09 South Eastern Europe 2,298,124 73 2,304,453 80 100 Albania 114,329 4 110,044 4 104 Bosnia and Herzegovina 612,695 19 592,921 21 103 Kosovo 258,126 8 244,746 8 105 Serbia 738,469 23 871,252 30 85 Croatia 406,783 13 338,057 12 120 Monte Negro 167,722 5 147,433 5 114 Russia and CIS 523,307 17 323,856 11 162 Russia and CIS 451,328 14 280,460 10 161 Georgia - - 286 - - Armenia 6,591 - 8,863 1 74 Ukraine 65,388 2 34,247 - 191 Western Europe (EU and EFTA) 311,057 10 207,733 7 150 Bulgaria 131,176 4 73,305 3 179 Germany 81,139 3 44,551 2 182 Romania 3,839 - - - - Slovenia 94,727 3 83,491 3 113 France - - 1,534 - - Switzerland 176 - 4,852 - 4 Other countries 37,306 1 38,009 1 98 Australia 4,419 - 4,171 - 106 Jordan 1,239 - 1,365 - 91 USA 30,109 1 31,972 1 94 Other countries 1,539 - 501 - - Total: 3,169,794 100 2,874,051 100 110 Russia and CIS region with 62% has the largest increase in foreign market sales compared to last year. The largest portion of 73% of the total sales in foreign markets belongs to the South Eastern Europe region. This is an English translation of the original Report issued in Macedonian language 9 Annual report on the performance 31 December 2010 Total revenues (In 000 MKD) 2010 2009 IND Revenues Amount % Amount % 10/09 1. Revenues from sales of goods and services 5,142,517 97 4,688,145 97 110 -Domestic market 1,972,723 37 1,814,094 38 109 Sales of goods 1,727,426 33 1,574,922 33 110 Sales of commodities 192,250 4 186,033 4 103 Sales of services 2,194 - 14,637 - 15 Other sales revenues 50,853 1 38,502 - 132 -Foreign market 3,169,794 60 2,874,051 59 110 Sales of goods 3,013,810 57 2,733,221 56 110 Sales of commodities 155,984 3 140,830 3 111 2. Other operating income 151,829 3 143,355 3 106 Collected written off receivables 12,789 - 48,032 1 27 Income from previous years 30,445 1 16,009 - 190 Dividends income 34 - 38 - 89 Interest income 251 - 2,304 - 11 Foreign exchange transaction gains 68,025 1 49,506 1 137 Other income 40,285 1 27,466 1 147 3. Finance income 50 - 1,430 - 3 Foreign exchange transaction gains on borrowings - 38 - - Interest income on borrowings 50 - 1,392 - 4 Total: 5,294,396 100 4,832,930 100 110 Total revenues for 2010 of 5,294,396 thousand denars have increased for 10%, compared to last years' 4,832,930 thousand denars. The largest portion of 97% in the total revenues belong to the sales revenues, which compared to last year have the largest increase of 10%. Otheroperating incomehaveaportion of3%intotalrevenues.Compared tolastyearotheroperatingincome has increased for 6%. Finance income only includes income on borrowings. The portion of finance income in total revenue is irrelevant. Sales by category (In 000 MKD) 2010 2009 IND Sales revenue Amount % Amount % 10/09 Sales of goods 4,741,236 92 4,308,143 92 110 Sales of commodities 348,234 7 326,863 7 107 Sales of services 2,194 - 14,637 - 15 Other sales revenues 50,853 1 38,502 1 132 Total: 5,142,517 100 4,688,145 100 110 This is an English translation of the original Report issued in Macedonian language 10