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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 333-6768
FAGE DAIRY INDUSTRY S.A.
(Exact name of Registrant as specified in its charter)
FAGE DAIRY INDUSTRY S.A.
(Translation of Registrant's name into English)
PREFECTURE OF ATHENS ATTICA, HELLENIC REPUBLIC
(Jurisdiction of incorporation or organization)
35, HERMOU STREET, 144 52 METAMORFOSSI, ATHENS, GREECE
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
None None
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Securities registered or to be registered pursuant to Section 12(g) of the
Act:
None
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Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act:
$ 92,632,000 aggregate principal amount of 9% Senior Notes due 2007
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Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
Capital: 9,610,400 shares as of December 31, 2002
The issuer's common stock is privately held.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 /X/ Item 18 / /
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TABLE OF CONTENTS
FORM 20-F
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<Caption>
Page
Introduction (i)
PART I
Item 1 Identity of Directors, Senior Management and Advisers Not Applicable
Item 2 Offers statistics and expected timetable Not Applicable
Item 3 Key Information 1
Item 4 Information on the Company 5
Item 5 Operating and Financial Review and Prospects 13
Item 6 Directors, Senior Management and Employees 19
Item 7 Major Shareholders and Related Party Transactions 21
Item 8 Financial Information 23
Item 9 The Offer and Listing 24
Item 10 Additional Information 24
Item 11 Quantitative and Qualitative Disclosure about Market Risk 26
Item 12 Descriptions of Securities other than Equity Securities Not Applicable
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies Not Applicable
Item 14 Material Modifications to the Rights of Security Not Applicable
Holders and Use of Proceeds
Item 15 Controls and Procedures 26
Item 16A Audit Committee Financial Expert Not Applicable
Item 16B Code of Ethics Not Applicable
Item 16C Principal Accountant Fees and Services Not Applicable
</Table>
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<Table>
PART III
Item 17 Financial Statements *
Item 18 Financial Statements and Exhibits 27
Item 19 Exhibits 27
Signatures 28
</Table>
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* The Registrant has responded to Item 18 in lieu of responding to this Item.
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INTRODUCTION
Fage Dairy Industry S.A., a corporation organized under the laws of the
Hellenic Republic (also known as Greece), is the successor to a business founded
in Athens in 1926 by the family of Mr. Athanassios Filippou, the father of the
current shareholders, Messrs. Ioannis and Kyriakos Filippou. References to
the "Company" or "Fage" include, unless the content requires otherwise, Fage
Dairy Industry S.A. and its consolidated subsidiaries.
The Company's principal executive offices are located at 35, Hermou Street,
144 52 Metamorfossi, Athens (telephone 32-10-289-2555).
EXCHANGE RATE INFORMATION
On January 1, 2002 the Company, commencer publishing its consolidated
financial statements in Euros. For comparison purposes, results of previous
years included in this annual report have also been stated in Euros based on the
fixed exchange rate of GRD 340.75 to Euro 1.00. The translations of the Euro
amounts into U.S. Dollars at the rate of US $ 1.0485 to Euro 1.00 are included
solely for the convenience of the reader. This convenience exchange rate is
computed based on the noon buying rate in New York City for cable transfers in
Euros, as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2002, which was US $ 1.0485 to Euro 1.00. The convenience
translations should not be construed as representations that the Euros amounts
have been, could have been, or could in the future be, converted into U.S.
Dollars at this or any other rate of exchange.
The table below sets forth, for the years and dates indicated, certain
information concerning the exchange rate for the drachma (converted to Euros),
up to December 31, 2001, or the euro, for the year 2002, against the dollar
based on the Noon Buying Rate.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
(DOLLARS PER EURO)
High........................... 1.0545 1.0348 0.8305 0.9535 1.0485
Low............................ 1.2319 1.2355 1.0645 0.8370 0.8594
Average (1).................... 1.1507 1.1047 0.9284 0.8909 0.9495
Rate at year-end............... 1.2174 1.0392 0.9388 0.8901 1.0485
</Table>
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(1) The average of the Noon Buing Rate on the last day of each month during the
applicable period.
i
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PART I
ITEM 1 : IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
NOT APPLICABLE
ITEM 2 : OFFER STATISTICS AND EXPECTED TIMETABLE
NOT APPLICABLE
ITEM 3 : KEY INFORMATION
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION
TO THE OTHER INFORMATION SET FORTH IN THIS REPORT. REFERENCES TO THE "COMPANY"
OR "FAGE" REFER TO FAGE DAIRY INDUSTRY S.A. AND UNLESS THE CONTEXT OTHERWISE
INDICATES, ITS CONSOLIDATED SUBSIDIARIES.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS
As of December 31, 2002, the Company's consolidated indebtedness was
approximately EURO 93.2 million ($ 97.7 million) and the Company's shareholders'
equity was approximately EURO 28.6 million ($ 30.0 million). In addition,
subject to the restrictions in the Indenture (the "Indenture") pertaining the
Company's 9% Senior Notes due 2007 (the "Senior Notes"), the Company may incur
additional indebtedness from time to time. The degree to which the Company is
leveraged could have important consequences to investors, including the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate purposes may be
limited; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on indebtedness, thereby reducing
the funds available to the Company for other purposes; (iii) the Company may be
hindered in its ability to adjust rapidly to changing market conditions, and
(iv) the Company may be more vulnerable in the event of a downturn in general
economic conditions or in its business. Any inability of the Company to service
its indebtedness or obtain additional financing, as needed, would have a
material adverse effect on the Company.
The Company's ability to satisfy its other debt obligations will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond its control. If the Company's cash flow and capital resources are
insufficient to fund its debt service obligations, the Company may be forced to
reduce or delay capital expenditures, sell assets, obtain additional equity
capital or restructure its debt. There can be no assurance that the Company's
cash flow and capital resources will be sufficient for payment of its
indebtedness in the future. In the absence of such operating results and
resources, the Company could face substantial liquidity problems and might be
required to dispose of material assets or operations to meet its debt service
and other obligations, and there can be no assurance as to the timing of such
sales or the proceeds which the Company could realize therefrom.
RISKS OF FOREIGN EXCHANGE RATE FLUCTUATION
Substantially all of the Company's operations are conducted in Greece and,
as a result, the Company's operating results will depend on the prevailing
economic conditions in Greece. Furthermore, substantially all of the Company's
revenues are in euros. The Senior Notes are denominated in dollars and require
the Company to make all principal and interest payments in dollars. As a result,
the Company may be subject to significant foreign exchange risks. The Company
currently does not hedge against exchange rate fluctuations.
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The Company remeasures the euro equivalent of the dollar-denominated Senior
Notes each quarter. To the extent the dollar has appreciated versus euro, which
has usually been the case, the Company recognizes a foreign exchange loss. These
non-cash losses have had an adverse effect on the Company's net income, and
similar losses may occur in future periods.
GOVERNMENTAL REGULATION
The Company's operations, production facilities and products are subject to
Greek, and in certain cases, European Union laws and regulations concerning,
among other thing, health and safety matters, agricultural production, food
manufacture, product labeling, advertising and the environment. Although the
Company does not expect that compliance with existing laws and regulations will
have a material adverse effect upon its operating results, it cannot predict the
effect, if any, of laws and regulations that may be enacted in the future, or of
changes and enforcement of existing laws and regulations that are subject to
regulatory discretion. Stricter European Union legislation applicable to the
food industry is under discussion in the E.U.
COMPETITION
The Company competes in highly competitive markets with companies of
varying sizes. From time to time, competitors may be able to devote greater
financial and other resources to advertising and other competitive activities
and may, in addition sell products below cost in an attempt to gain market share
from the Company. There can be no assurance that the Company will continue to
compete successfully with such other companies. Competitive pressures or other
factors could cause the Company's products to lose market share or result in
significant price erosion, which would have a material adverse effect on the
Company's results of operations.
RAW MATERIALS
The primary raw materials used by the Company are cow, ewe and goat milk.
Such products, as well as plastic and paper for packaging materials, constitute
significant components of the Company's cost of sales. There can be no assurance
that the Company would be able to pass the effect of any raw material price
increases on to its customers for any extended period of time, if at all.
Although the Company has not to date been adversely affected by either the cost
or the availability of its raw materials, there can be no assurance that this
will continue to be the case.
In recent years, the Company's results have been negatively impacted by
certain events affecting certain of its agricultural raw materials. In 1999, the
discovery of dioxin-contaminated cattlefeed in Belgium, a country from which the
Company purchases certain milk products, adversely affected demand for dairy
products in general. The outbreak in 2001 of foot and mouth disease in cattle
and sheep throughout the European Union had a similar adverse affect on demand.
Events such as these, which are out of the control of the Company, may continue
to adversely affect the dairy industry in general, reducing demand and requiring
the Company to expend additional funds for advertising in order to restore
public confidence in its products.
INVESTMENT IN CHEESE SECTOR
As part of its long-term strategy to expand the package cheese market, the
Company has purchased interests in several small regional cheese producers, and
the Company intends to continue this strategy. These investments are having an
adverse impact on the Company's current results. For the years 2000, 2001 and
2002 management recognized an impairment loss with respect to these investments
of EURO 2.5 million ($2.6 million), EURO 3.7 million ($ 3.9 million) and EURO
0.6 million ($ 0.6 million), respectively. The packaged cheese market in Greece
has not developed in line with management's expectations. In addition, continued
uncertainty regarding legal challenges to European Union legislation intended to
protect "feta" cheese, an important product of the Company, has had an adverse
impact on the Company's cheese operations. For further discussion of this, see
"Information on the Company - Governmental Regulation - PDO Designation".
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CONTROLLING STOCKHOLDERS
The Company is wholly owned by Messrs. Ioannis and Kyriakos Filippou (50%
each). By virtue of this stock ownership, they have the power to control all
matters submitted to the stockholders of the Company and to elect all the
directors of the Company and its subsidiaries.
LACK OF ACTIVE PUBLIC MARKET
There is not an active market for the Senior Notes, and the Company does
not expect one to develop.
WAR IN IRAQ IMPLICATION
Although the Company does not believe that the war in Iraq will have any
material effect on its results and its financial condition in the forthcoming
period, no assurance can be given as to this.
FINANCIAL STATEMENTS INCLUDED IN THIS REPORT WERE AUDITED BY ARTHUR ANDERSEN
The financial statements included in this report for 2000 and 2001 were
audited by Arthur Andersen and their report dated March 27, 2002 is included
herein. The financial statements as of December 31, 2002 and for the year ending
on such date have been audited by Ernst & Young. The ability of investors to
assert claims against Arthur Andersen based on its report may be limited.
SELECTED FINANCIAL DATA
The following table presents certain historical consolidated financial
information of the Company for the dates and periods indicated and should be
read in conjunction with "Operating and Financial Review and Prospects" and the
Consolidated Financial Statements of the Company included elsewhere herein. The
Company's Consolidated Financial Statements have bee n prepared in accordance
with U.S. GAAP. The Company maintains its accounting records and publishes its
statutory financial statements in accordance with Greek tax and corporate
regulations. For purposes of the annual report, certain out-of-book memorandum
adjustments have been made to these records to prepare the Consolidated
Financial Statements and other financial information included herein in
accordance with U.S. GAAP. The information presented below as of December 31,
1998, 1999 and 2000 and for the years ended December 31, 1998 and 1999 has been
derived from audited consolidated financial statements of the Company not
included herein.
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<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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1998 1999 2000 2001 2002 2002 (1)
----------- ---------- ----------- ---------- ---------- ----------
(IN MILLIONS EXCEPT PER SHARE DATA AND RATIO AMOUNTS)
Income Statement Data
Net sales...................................... EUR 259.4 EUR 257.9 EUR 280.1 EUR 303.8 EUR 331.3 $ 347.4
Cost of sales.................................. 166.2 168.1 184.6 195.3 207.3 217.4
----------- ---------- ----------- ---------- ---------- ----------
Gross profit................................... 93.2 89.8 95.5 108.5 124.0 130.0
Selling, general and administrative
expenses................................... 65.0 67.4 74.8 83.5 95.2 99.8
Impairment loss (2)............................ 0.0 0.0 2.5 3.7 0.0 0.0
----------- ---------- ----------- ---------- ---------- ----------
Income from operations......................... 28.2 22.3 18.2 21.3 28.8 30.2
Interest expense............................... 10.1 10.5 11.3 11.7 10.5 11.0
Foreign exchange losses (gains), net........... 3.2 15.6 10.9 5.2 (18.4) (19.3)
Losses on equity investee...................... 0.2 0.2 0.2 0.3 1.2 1.3
Other expenses (income), net................... (1.1) (7.7) 5.3 (1.5) (1.3) (1.4)
----------- ---------- ----------- ---------- ---------- ----------
Income (loss) before income taxes
and minority interests...................... 15.8 3.7 (9.5) 5.6 36.8 38.6
Provision for income taxes..................... 6.8 2.0 (0.1) 5.3 14.9 15.6
----------- ---------- ----------- ---------- ---------- ----------
Income (loss) before minority interests........ 9.0 1.7 (9.4) 0.3 21.9 23.0
Minority interests (3)......................... (0.3) 0.0 (0.1) 0.0 (0.1) (0.1)
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Net income (loss).............................. EUR 9.2 EUR 1.7 EUR (9.3) EUR 0.3 EUR 22.1 $ 23.1
=========== ========== =========== ========== ========== ==========
Income (loss) per share, basic and diluted..... 1.12 0.21 (1.12) 0.04 2.65 2.78
=========== ========== =========== ========== ========== ==========
Weighted average number of shares,
basic and diluted ......................... 8,310,200 8,310,200 8,310,200 8,310,200 8,310,200 8,310,200
=========== ========== =========== ========== ========== ==========
Balance Sheet Data (at year end)
Net property, plant and equipment.............. EUR 76.4 EUR 75.0 EUR 79.2 EUR 82.5 EUR 91.4 $ 95.8
Total assets................................... 173.9 186.1 186.4 206.7 214.8 225.2
Long-term obligations.......................... 101.5 107.3 99.2 103.5 87.4 91.6
Total debt (4)................................. 107.4 115.6 122.4 135.6 93.2 97.8
Shareholders' equity........................... 17.4 14.5 6.5 6.6 28.6 30.0
Other Financial Data
Net cash from (used in) operating
activities................................. EUR 22.7 EUR 11.6 EUR 15.9 EUR 14.9 EUR 35.5 $ 37.2
Net cash from (used in) investing
activities................................. (12.8) (9.4) (22.6) (23.0) (4.4) (4.6)
Net cash from (used in) financing
activities................................. 1.8 (12.3) (1.9) 7.6 (26.0) (27.3)
EBITDA (5), (7)................................ 33.6 22.4 21.9 29.6 56.0 58.7
Depreciation, amortization and
impairment loss............................ 7.8 8.3 11.2 12.3 8.7 9.1
Capital expenditure............................ 11.4 7.0 10.7 11.3 19.0 19.9
Dividends per share............................ - 0.50 - - - -
Ratio of earnings to fixed charges (6)......... 2.5x 1.4x 1.0x 1.5x 4.6x 4.6x
Ratio of total debt to EBITDA.................. 3.2x 5.2x 5.6x 4.6x 1.7x 1.7x
Ratio of EBITDA to interest expense (7)....... 3.3x 2.1x 1.9x 2.5x 5.3x 5.3x
</Table>
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(1) Translation of euros into dollars has been made at the rate of $1.0485 = EUR
1.00 (the Noon Buying Rate on December 31, 2002). Such translation is
provided solely for the convenience of the reader.
(2) As part of its long-term strategy to expand the packaged cheese market the
Company has invested in majority interests in small regional cheese
producers. In 2000 and 2001, in accordance with Statement of Financial
Accounting Standards 121 "Accounting for Impairment of Long-lived Assets to
be Disposed of", management reviewed the carrying amounts of the goodwill
that arose from these investments. The estimated undiscounted cash flows
from future operations of these subsidiaries indicated that the carrying
amount of goodwill exceeded expected recoverable amounts. Accordingly,
management recognized an impairment loss. The Company remains committed to
its strategy of competing in the packaged cheese sector.
(3) Substantially all of the assets and the operations of Fage are held directly
by it, rather than through subsidiaries. The consolidated financial
information of the Company includes the results of the following
subsidiaries in which the Company owns majority interests: Pindos S.A.,
Foods Hellas S.A., Voras S.A., Xylouris S.A., Ellenica S.R.L., Tamyna
S.A.(since 2000), Agroktima Agios Ioannis S.A., Iliator S.A. and Fage USA
Corp. and Zagas S.A.(since 2001).
(4) Total debt includes short-term borrowings, long-term debt (including the
current portion thereof) and long-term capital lease obligations (including
the current portion thereof).
(5) Management believes that EBITDA, along with the ratios of total debt to
EBITDA and EBITDA to fixed charges, provides useful information to the
holders of the Company's senior notes for two reasons. First, these measures
are an indication of the Company's ability to service the notes and other
debt. Second, that EBITDA impacts the application of certain covenants
contained in the indenture governing senior notes. To the extent the ratio
of EBITDA to interest expense exceeds 2.5 to 1, the Company may incur
additionally indebtedness, make distributions to its shareholders, and take
certain other actions under the terms of such indenture. The Company
believes that EBITDA, while providing useful information, should not be
considered in isolation as an alternative to net income and cash flows as
determined under GAAP. The following table reconciles EBITDA to income from
operations for each of the periods presented above.
<Table>
<Caption>
1998 1999 2000 2001 2002
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Income from operations EUR 28.2 EUR 22.3 EUR 18.2 EUR 21.3 EUR 28.8
Foreign exchange (losses) gains -3.2 -15.6 -10.9 -5.2 18.4
Depreciation, amortization and impairment loss 7.8 8.3 11.2 12.3 8.7
Losses on equity investee -0.2 -0.2 -0.2 -0.3 -1.2
Other income (expenses) 1.0 7.6 -5.3 1.5 1.3
Realized losses on marketable securities 8.9
------------ ----------- ------------ ---------- -----------
EBITDA EUR 33.6 EUR 22.4 EUR 21.9 EUR 29.6 EUR 56.0
============ =========== ============ ========== ===========
</Table>
(6) For purposes of calculating the ratio of earnings to fixed charges, earnings
are determined by adding to income before income taxes, fixed charges
(excluding capitalised interest) and amortization of capitalised interest.
Fixed charges consist of (i) interest expense (including amortization of
debt issuance costs), (ii) interest capitalised and (iii) the interest
portion of the Company's rental expense under operating leases.
(7) If unrealized foreign exchange differences of EUR 14.5 ($15.2), EUR 9.7
($10.2), EUR 5.4 ($5.6) and EUR 16.3 ($17.1),were included to EBITDA for the
years 1999, 2000, 2001 and 2002, respectively, then EBITDA and ratio of
EBITDA to interest expense would have amounted to EUR 36.9 ($38.7) and 3.5x,
EUR 31.6 ($ 33.1) and 2.8x, EUR 35.0 ($ 36.7) and 3.0x, and EUR 39.7 ($
41.6) and 3.8x, respectively. The impact of the unrealized foreign exchange
differences on EBITDA for the year 1998 is not material.
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ITEM 4 : INFORMATION ON THE COMPANY
COMPANY OVERVIEW
Fage is the second largest Greek food company based on net 2002 sales.
Through its extensive distribution network, the Company sells a wide range of
branded dairy products, including yogurt and dairy desserts, milk and milk
cream, and cheese. These products are sold under the FAGE(R) trademark, which is
one of the most recognized in Greece. The Company has approximately 58% and 25%
market shares respectively in branded yogurt (which comprises approximately 74%
of the total yogurt market) and packaged cheese products (which comprises
approximately 6% of the total cheese market). Fage has the second largest market
share in the refrigerated milk market with approximately 19%. The Company also
distributes and sells fruit juices and refrigerated snacks, which are produced
by third parties. Fage is the successor to a business founded in 1926 by the
family of Mr. Athanassios Filippou, the father of the Company's two present
stockholders. Substantially all of the Company's assets and operations are held
by Fage directly, rather than through subsidiaries. For the years ended December
31, 2001 and 2002, Fage had net sales of EURO 303.8 million ($ 318.5 million)
and EURO 331.3 million ($ 347.4 million), respectively.
GREEK DAIRY MARKET
Yogurt and feta cheese have traditionally been staples of the Greek diet.
In contrast to other countries where yogurt is typically only a dessert or
breakfast product, it is also consumed in Greece as a stand-alone snack or as
part of a meal. Feta cheese is an integral part of the typical Greek meal. As a
result of such dietary habits, Greece is one of the world's highest per capita
consumers of yogurt and cheese. The Company believes that this explains, in
part, the development of Greece's distinctive yogurts and cheeses and the
importance that Greek consumers place on purchasing Greek-made dairy products.
BUSINESS STRATEGY
The Company's well regarded brand image, its extensive distribution network
and high product quality establish it as one of the leading food production and
marketing companies in Greece. The Company's strategy is to capitalize on these
factors to strengthen its leading position in the Greek dairy industry while
expanding export opportunities for its yogurt and cheese products. Key elements
of its business strategy include: (i) continued investment in the FAGE(R)
trademark and its associated brand lines; (ii) further promotion and distinct
positioning of its existing product range; (iii) the introduction of new,
innovative and well-researched products; and (iv) selective acquisitions of
additional production facilities, particularly in the cheese sector.
INDUSTRY
The Greek dairy market consists of three principal product categories:
yogurt and dairy desserts, milk and milk cream, and cheese. The industry is
fragmented with several large dairy groups and many small to medium sized local
and regional dairies.
The industry was adversely affected significantly in 1999 by the discovery
of dioxin contaminated cattle food in Belgium and France and the reaction of the
Greek media and public. The dioxin crisis led to a decline in the sales of
imported milk and milk by-products from the European Union at a large. The most
adversely affected products were the evaporated milks, UHT milks and imported
yogurt and imported cheese. The Greek traditional cheese sector benefited from
an increased consumer preference for Greek-made products. While European food
crisis is subsiding and the Greek dairy market shows signs of healing, stricter
legislation applicable to the food industry is under discussion in the EU. The
Company cannot at this time assess the impact of these discussions.
YOGURT AND DAIRY DESSERTS. The Company estimates that the sales volume for
yogurt in 2002 was approximately 92,000 metric tons (representing approximately
$ 365 million in retail sales) showing an increase of 4.5% in volume compared to
2001. The Company believes that Greece has one of the highest per capita rates
of yogurt consumption in the world. Industry research indicates that yogurt
consumption
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growth has primarily been driven by increased advertising and promotion together
with further market segmentation as producers have broadened their range of
offerings with new products such as low fat, children's and fruit yogurts. In
2002, the sectors of the yogurt market that grew were the children's sector, the
low fat strained yogurt sector and the desserts category (2002 volume of
approximately 5,000 tons, an increase of more than 25% compared to 2001). The
Company believes that opportunities to export Greek yogurt throughout the world
will continue.
MILK AND MILK CREAM. The Company estimates that the sales volume for milk
and milk cream in 2002 was approximately 707,000 metric tons showing an increase
of 1% in volume compared to 2001 (representing approximately $ 650 million in
retail sales). Market volume includes catering market and the evaporated market
calculated in diluted form. The market consists of four sectors: fresh,
evaporated or canned, high temperature pasteurized (extended shelf life, or ESL)
and ultra high temperature pasteurized, or UHT. The Company believes the ESL
sector offers strong potential for further development. Greece's annual per
capita milk consumption is approximately 54 liters which is low compared to that
of most European countries. Industry data indicate refrigerated (fresh and ESL)
milk sales have increased in place of evaporated or canned products. The Company
believes that this trend is attributable to a number of changes which have taken
place in the production and distribution process, including the increased
availability of refrigerated milk, higher advertising expenditures and the
development and introduction of new milk products. The Company expects the trend
towards refrigerated products to continue.
CHEESE. The Company estimates that the sales volume for cheese in 2002 was
approximately 278,000 metric tons, approximately the same as 2001 (representing
approximately $1.3 billion in retail sales). The cheese industry is
characterized by approximately 700 small to medium sized cheese makers located
throughout rural Greece, which have traditionally marketed cheese in bulk at
commodity prices. Industry data indicate, however, that while bulk cheese
accounts for approximately 94% of the market, there has been a growing consumer
interest in convenience and premium-priced packaged cheeses, which are of high
quality and more consistent in taste. The Company believes that while overall
demand is expected to be stable, there will continue to be opportunities to
expand the growing packaged sector. The Company estimates that the packaged
cheese market, in which Fage is market leader, is currently approximately 19,000
metric tons, an increase of approximately 12% compared to year 2001. The Company
believes that opportunities exist for increased export sales of certain Greek
cheeses. The European Union's designation of 20 Greek cheeses, including
Graviera of Crete and Kefalotyri, as "P.D.O." should benefit the exports of
Greek producers. See "- Governmental Regulation - P.D.O. Designation."
PRODUCTS
Fage has 30 product lines and markets 125 products under 50 individual
brand names. These products include a wide variety of yogurt and dairy desserts,
milk and milk creams, and cheeses. The Company's dairy products are marketed
under the FAGE(R) trademark, with brand names such as TOTAL(R), AGELADITSA(R),
AGELADITSA PLUS(R), SILOUET(R), FRUYO(R), VELOUTELA(R), JUNIOR(R) and BEGIN WITH
JUNIOR(R) in yogurt, GLYKOKOUTALIES(R) in desserts and FETA FAGE(R), GRAVIERA OF
CRETE FAGE(R) , KEFALOTYRI FAGE(R) , KASERI FAGE(R), REGATO FAGE(R) ,
SANDWICH(R) , JUNIOR(R) , TRIKALINO(R), FLAIR(R) , NEW YORK(R) and GOUDA FAGE(R)
in cheese. Fresh white milk and milk cream are sold under the FAGE(R) trademark
without an additional brand name, while the ESL Milk is sold under the FARMA(R),
FARMA PLUS(R) and ABC(R)(ABC(R)) trademarks. Chocolate milk is marketed
under the brand names N'JOY(R) and JUNIOR(R). The Company also distributes fresh
fruit juices produced by Evga S.A. ("Evga") and refrigerated snacks produced by
Ferrero S.p.a. of Italy. Evga is owned by members of the Filippou family. See
"Major Shareholders and Related Party Transactions."
YOGURT AND DAIRY DESSERTS. Greek consumers typically prefer authentic Greek
yogurt, which has a fuller, richer taste and a thicker texture than that of most
yogurts sold in the United States and other parts of Europe. These distinctive
characteristics have developed through the use of different ingredients and
production processes. Fage's yogurt products include traditional strained and
set Greek yogurts made from fresh milk, cream and yogurt culture; low fat and
fat free yogurt made using skimmed milk; yogurts with honey, strawberries and
other fruits; and yogurts flavored or mixed with fruit juice, fruit pieces,
fruit preserves, cereals and other ingredients. Fage was also the first to open
the enriched food and children's yogurt sectors. The Company also markets other
dairy and dessert products, such as fromage frais, puddings, cream caramel and
yogurt drinks.
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The Company's five major yogurt brand lines are TOTAL(R) , AGELADITSA(R) ,
SILOUET(R) FRUYO(R) and JUNIOR(R). The TOTAL(R) line is a strained yogurt made
from cow milk or skimmed cow milk and is produced in seven variations; TOTAL(R)
(classic, 10% fat), TOTAL Light(R) (low fat, 5%), TOTAL 2%(R) (low fat), TOTAL
0%(R) (fat free), TOTAL SPLIT-CUP(R) with sweet fruit preserves (three variantS,
10% fat). AGELADITSA(R) is a set yogurt made from cow milk. The SILOUET(R) line
is a set diet yogurt made from skimmed milk And includes SILOUET 0%(R) (fat
free) and SILOUET 2%(R) (low fat). The FRUYO(R) brand name is used to market
most of the Company's FruIT yogurts and is Greece's leading brand name in the
fruit yogurt category. The JUNIOR(R) brand name represents a line of yogurt anD
dessert products for children, also first in this category. Fage also produces a
strained yogurt (8% fat) made from cow milk that is sold in one, five and ten
kilogram containers under the FAMILY FAGE(R) name. In addition, the Company
produces other yogurT brands, including VELOUTELA(R), which is a set yogurt with
fruit and two yogurts from ewe milk, SHEEP'S(R) and PROVATAKI(R) (with cream).
Fage concentrates its yogurt export sales on TOTAL(R), its leading strained
yogurt brand line. The Company's yogurt products are exported throughout Europe
with its strongest markets being the United Kingdom and Italy. During 2001 Fage
launched a new line of enriched and low fat yogurts under the AGELADITSA(R)
brand name, an enriched toddler yogurt under the JUNIOR(R) brand and a new line
of fruit yogurts under the FRUYO(R) brand. At the end of 2001, the Company
launched an umbrella brand for its new range of dairy desserts called
GLYKOKOUTALIES(R), meaning "sweet spoonfuls".
MILK AND MILK CREAM. The Company's milk and cream products include fresh
milk, pasteurized and packaged both at the Company's plant in Athens and at the
Company's Voras factory in Amintaio, ESL milk, various types of UHT milk and
milk cream. The Company's fresh white milk products are sold in three varieties
and marketed simply as FAGE(R) milk. The fresh chocolate milk products are sold
under the N'JOY(R) brand name. The fresh chocolate milk N'JOY 0%+0%(R) (fat free
and sugar free), complements the range of N'JOY(R). E.S.L white milk products
are sold under the brand FARMA FAGE(R) HIGH TEMPERATURE PASTEURIZED MILK. ESL
milk is produced by heat treatment at 127 degrees Celsius for 2 seconds followed
by aseptic packaging. This results in a shelf life of 20 to 45 days under
refrigeration condition and is called high heat pasteurization. Due to a new
method of heat transfer (steam infusion) the organoleptic properties of the ESL
milk produced in the Company's facilities are very close to fresh milk. In 2001,
Fage's ESL line "FARMA" was extended into enriched milks (calcium and
iron-fortified), as well as an enriched toddler milk under the brand name ABA(R)
(ABC(R)). The chocolate ESL pasterized milk products are sold under the
JUNIOR(R) brand name. In 2002 one more fortified product (with Omega) was
introduced in this line. DROSSATO(R) is the Company's buttermilk product. The
non-refrigerated UHT White and Chocolate Milks, marketed as FAGE(R) and YOKO
CHOCO(R) respectively, are imported from Belgium and France. The heat treatment
of UHT milk is above 135 degrees Celsius for at least 1 second followed by
aseptic packaging and results in a product with a shelf life of 3 months at
ambient temperature.
CHEESE. The Company markets five different Greek cheeses: FETA FAGE(R), a
traditional soft white ewe and goat milk cheese made both at the Company's
factory in Ioannina (the "Pindos factory") and at a factory in Elassona ( the
"Bizios factory") in which the Company owns a 45% interest; GRAVIERA OF CRETE
FAGE(R), a traditional hard yellow Cretan ewe and goat milk cheese made at the
Company's factory on the island of Crete (the "Xylouris factory"); KEFALOTYRI
FAGE(R), a traditional hard yellow ewe and goat milk cheese, made at the Bizios
factory, KASERI FAGE(R) a traditional semi-hard ewe milk cheese and TRIKALINO(R)
, a semi-hard yellow ewe, goat and cow milk cheese, made at the Company's
factory in Trikala, Central Greece. In addition to the Greek cheeses, Fage
imports and markets PLAYIA(R) (a hard yellow spicy cheese) that is also packaged
in grated form, EDAM FAGE(R) and GOUDA FAGE(R) (both semi-hard yellow cheeses),
REGATO FAGE(R) (a hard yellow cheese), NEW YORK(R) (cream cheese), SANDWICH(R)
(sliced cheese) and JUNIOR(R) (spread cheese). The Company launched into the
light cheese segment with TRIKALINO LIGHT (R) and expanded the children's
categorY under the JUNIOR(R) line with a tub spread and sandwich slices. In
2001, the Company launched value added cheese in convenient forms such as feta
cheese packaged in its natural brine and resealable packages of grated cheese
(Gouda, Regato, Playia).
The Company's packaged cheese products, GRAVIERA OF CRETE FAGE(R), KASERI
FAGE(R) and KEFALOTYRI FAGE(R), are made from EWE and goat milk and enjoy the
European Union's "P.D.O." designation. This designation, intended to protect the
integrity of traditional regional products of Europe, restricts manufacturers of
imitation products from labeling their products with the traditional names. Feta
was originally also under the P.D.O. system. However this designation is subject
to an ongoing
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challenge by Northern European countries that produce feta-like soft white
cheese. See "- Governmental Regulation - P.D.O. Designation".
SALES AND MARKETING
The Company seeks to increase sales to its customer-base, which are
primarily food retailers, by promoting consumer loyalty to products carrying the
FAGE(R) trademark and its other brand lines. The Company believes that consumer
loyalty and product preference are the main drivers of its sales, and that
retailers stock Fage's goods in response to consumer demand for such products.
The Company supports its products by investing in numerous advertising and
promotional activities. Direct advertising of the Company's products to
consumers is primarily accomplished through television advertising campaigns but
also via outdoors, radio and print media. Such advertising seeks to support new
product launches, reinforce the Company's existing brands and position each
product distinctively and positively in the minds of consumers. Trade Marketing
activities, which are usually undertaken in cooperation with supermarkets and
other retailers, typically target higher volume sales and consist of
competitions, free gifts or price-offs. Consumer promotional activities
incorporate the Company's major brands or newly introduced products. Other
promotional activities include prominent in-store displays, marketing activities
with key accounts and the distribution of coupons via direct mail.
The Company strives to enhance its long-term relationships with its food
retailers by offering greater product variety, better service and more value
than its competitors. In addition, Fage employs a experienced salesforce which
seeks to increase account penetration and establish new retail customer
relationships with retailers. The Company's current salesforce consists of
approximately 200 direct employees and an estimated 500 other individuals
employed by the Company's sales representatives. The Company equips the
salesforce with up-to-date sales materials to assist customers in retailing the
products and training their staff. The sales and marketing teams assist
customers in reviewing new product offerings and evaluating current product
lines and market trends. The sales and marketing teams work actively with
customers to provide seasonal, holiday and promotional product offerings to
maximize the impact of marketing activities and to ensure the optimal shelf
space allocation for the Company's products. The Company believes that these are
all important factors for its customers. A salesperson's compensation is based
on a commission structure according to sales volume, account profitability, new
account origination and collection of accounts receivable.
To promote export sales of selected yogurt and cheese products, the Company
relies on 22 independent sales representatives and distributors in 18 countries.
Fage's yogurt and feta cheese are marketed as authentic Greek dairy products
which are of superior taste and quality. The Company believes export sales
benefit from the large number of tourists who sample the Company's goods while
vacationing in Greece, and then purchase FAGE(R) products in their home
countries.
CUSTOMERS
In Greece, the Company serves approximately 23,500 retailers and
distributes to approximately 25,000 retail outlets located throughout the
country. In export markets, Fage's yogurt and cheese products are sold to
approximately 250 supermarket chains, with approximately 20,000 retail outlets
throughout Europe and around the world. No one customer accounted for more than
10% of net sales in 2002. As the country's leading dairy producer, Fage is a key
supplier to Greek retailers selling dairy products and the Company has not lost
any significant customers in the past three years. The retail outlets serviced
by the Company include supermarkets (1,000), large stores (2,000), bakeries
(5,000), confectionaries (4,500), dairy stores (5,500) and other smaller,
sometimes seasonal, convenience stores (7,000). The Company believes that the
wide availability of its products enhances its strong brand image which further
assists in maintaining consumer demand for FAGE(R) products.
DISTRIBUTION
Fage distributes its products to the Greek market through an extensive and
well-organized distribution network. The Company believes that its ability to
make regular, and in many cases, daily,
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sales calls to each of its domestic customers' retail outlets (approximately
25,000) is unsurpassed in the Greek food industry. The Company supplies its
branded yogurt to retail outlets that account for more than 98% of the total
sales of branded yogurt in Greece according to IRI Hellas and Amer-Nielsen.
In the high-volume greater Athens area, Fage's products are delivered daily
by a fleet of over 200 company-owned refrigerated vehicles. This fleet is
comprised of three groups based on product shelf life: yogurt (approximately 75
vehicles), fresh and ESL milk and juice (approximately 100 vehicles), and cheese
and UHT products (approximately 25 vehicles). In the case of yogurt and milk
products, the trucks make one or more stops each day at each retail outlet to
ensure product freshness and provide superior service. In lower volume areas
throughout the rest of Greece, the Company distributes its products through 70
representatives with over 200 refrigerated vehicles making frequent deliveries.
Trade customers place orders either at the point of sale (the "ex-van
system") or via telephone or facsimile machine. Under the ex-van system, each
driver takes customer orders at the retail outlet, entering the orders into
hand-held computers to facilitate inventory checking and order procedures. In
the case of telephone or facsimile orders, the Company usually processes the
order and delivers the product within 18 hours.
Fage distributes its products to export markets through 22 sales
representatives and distributors in 18 countries. Products are shipped from
Athens and delivered to approximately 20,000 retail outlets in the countries of
destination. Beginning in 1999, the Company began distributing yogurts to the
U.S. market and achieved placement in three major supermarket chains in the
Northeast.
COMPETITION
The Greek dairy market is characterized by a significant amount of
competitive activity. The Company operates primarily in Greece, where its
principal competitor in both yogurt and milk is Delta Dairy Industry S.A.
("Delta"). From its position as the largest fresh milk producer in Greece, Delta
entered the yogurt market in 1994 with an aggressive advertising and
price-cutting campaign, and attained the second largest market share. The
Company responded with increased advertising and other marketing efforts and has
maintained its market leadership. In 1999, Danone (BSN) increased its ownership
of the Delta Dairy Group to 30%. In 2000, Delta launched new brands in the
children's yogurt sectors, new multi form packaging in its set yogurt line and
relaunched its strained yogurt line. However, despite further launches backed by
Danone in 2001, Delta's share decreased significantly through the course of 2001
and continued to decline in 2002, down to 24.7%. Fage also competes with Mevgal
S.A. and Agno Dairy Industry S.A., two Northern Greek dairies, and the Friesland
Co (Frico Domo). Friesland is dominant in the evaporated milk segment and
continues to expand into the ESL segment under their historically strong
brandname "Nounou".
In the cheese market, the Company's principal competitors are Mevgal S.A.,
Agricultural Dairy Industry of Epirus, S.A. (Dodoni), a western Greek dairy
producing feta, Kolios S.A., a Northern Greek company producing semi-hard
cheese, and Optima S.A., a distributor of mainly hard cheese as well as the
Danish Company MD Foods. Fage also competes with a number of other regional and
local dairy businesses that have strengthened due to the crises, as well as some
foreign dairy companies.
The Company believes that competition in the branded food industry is based
on brand image, consistent product quality, price, effective advertising, trade
customer relations, service and overall consumer acceptance. The Company
believes it competes effectively in its markets primarily through the strength
of the FAGE(R) trademark and its other brand names, its extensive distribution
network and its superior product quality.
In export markets, which are primarily located in Europe, the Company
competes with various local and multinational dairy companies. While similar
factors prevail in export competition, the Company also competes based upon the
quality and distinctiveness of Greek yogurt and cheese products.
GOVERNMENTAL REGULATION
Greece is a member of the European Union, and as a result the Company is
subject to certain
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regulations adopted by the European Union.
ECONOMIC AND MONETARY UNION. Pursuant to the Treaty for the European Union,
member states must formulate their economic policies in light of general
guidelines issued by the European Council (the "Council"). The Council reviews
the economic policies of the member states and may issue recommendations. On
January 1, 1999 11 member states entered the third stage of the Economic and
Monetary Union (the E.M.U.). In order to participate in the third stage of the
E.M.U., member states had to meet certain criteria. Greece, as expected, pledged
to implement economic policies to achieve such criteria and the Greek government
submitted an application for the participation of Greece in the third stage in
March 2000. The application was accepted by the Council and therefore Greece
joined the E.M.U. effective in January 2001. The fixed rate for the drachma
against the EURO is 340.75 GRD/EURO.
COMMON AGRICULTURAL POLICY. The primary objective of the European Union's
Common Agricultural Policy in the dairy sector is to ensure the survival of the
milk production industry in the European Union by providing an equitable income
for producers, encouraging structural reform of the industry, reducing over-
production and maintaining prices of the products at competitive levels in the
international markets. In order to achieve this objective, a system of price
fixing, quotas and structural aids have been adopted at the European Union and
national levels.
The European Union sets national quotas and member states establish regional, as
well as individual, quotas for each milk producer. If milk production quotas are
exceeded, national authorities may impose and collect levies either from
individual producers or from the dairy companies which acquired the excess milk.
Greece has opted for the second alternative and the Company can therefore be
liable for the payment of such levies in the event its suppliers overproduce.
The Company, however, takes steps to ensure that its suppliers are within their
production quotas and does not expect such provisions to have a material adverse
effect upon it. Greece has the second lowest milk quota in the European Union
and as a result shortages have occurred from time to time. The last revision of
the quota mechanism by the Agricultural Ministers of the European Union took
place in early May 1999. According to that revision, the Greek quota has
increased by 45,000 tons in the year 2000 and by an additional amount of 25,000
in the year 2001.
In January 2003, the European Commission issued a number of legislative
proposals concerning the common Agricultural Policy, including specifically the
milk market. According to those proposals, the quota system will stay in place
until year 2015. Only small increases of national quotas will take place at a
later stage. For Greece a small increase of 7,000 tons is proposed for the milk
year 2007/2008 as well as 2008/2009. Furthermore, the European Commission
proposed large decreases in minimum prices for butter and skimmed milk as well
as changes in the structure and the level of financial aid directed by the
European Union to farmers. These proposals have to be voted upon by the Member
states of the European Union and the European Parliament. The Company is unable
to influence the outcome of such a legislative process or predict the effect
that the changes finally decided by the European Union might have on it. See
"Suppliers and raw Materials".
P.D.O. DESIGNATION. Pursuant to the European Union's Protected Designation
of Origin ("P.D.O.") system, Greece obtained the protection of the right to use
product names in connection with 20 traditional Greek cheeses, including
Graviera of Crete and Kefalotyri. Producers in member states are restricted from
labeling products with protected names. The original system also included Feta
as a P.D.O product. However, certain North European member states had the right
to continue to label certain cow-milk white cheese as "feta" until May 2001.
Furthermore, Denmark, Germany and France, as well as organizations representing
certain producers, petitioned the European Court of Justice to dispute the
characterization of "feta" cheese as a uniquely Greek cheese. The Company
through its cheese producing subsidiary, Pindos S.A., participated in the cases.
On March 16, 1999 the Court ruled against the validity of the legislation
protecting "feta" cheese but on procedural grounds. In October 2002 the European
Commission has issued Regulation 1929/2002 again that included "feta" cheese as
P.D.O. According to this Regulation "feta" cheese will be produced only in
designated areas in Greece after a 5 year transitional period. In December 2002
the same EU member states and producers as in 1996 have again petitioned before
the European Court of Justice against the above Regulation. The Company is
closely following the procedure and considering ways to participate directly or
indirectly. The Company cannot predict the outcome of such procedure and cannot
estimate the effect it may have on the Company.
HEALTH AND SAFETY REGULATIONS. Pursuant to European Union directives, the
Greek government has implemented regulations respecting the production,
packaging, labeling, storage and transportation of milk and dairy products. In
accordance with such regulations, among other required steps, the Company
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has implemented the HACCP system, a systematic approach to the recognition and
control of potential hazards in the production process.
TRADEMARKS AND PATENTS
All of Fage's products are marketed under registered trademarks. The
Company considers its FAGE(R) trademark, as well as its major product brands, to
be important competitive advantages and material to its business. The Company
actively takes steps to protect its intellectual property rights when and where
it deems appropriate. Trademarks are registered in Greece and in certain other
European countries.
The Company uses six patents in its production process, all of which are
registered in Greece. Five of such patents are owned by Mr. Kyriakos Filippou,
one of the two shareholders of the Company, who has given the Company an
irrevocable, royalty-free, license to use such patents in perpetuity.
DESCRIPTION OF THE COMPANY'S PROPERTIES
The Company's main facility in Metamorfossi, Athens, houses its principal
yogurt and milk production facilities as well as its corporate headquarters.
Additionally, the Company owns facilities in Trikala (production of semi-hard
cheese), in Thessaloniki (distribution center of Northern Greece), in Ioannina
(production of "feta"), in Crete (facility owned by Xylouris S.A., a subsidiary
in which the Company owns a 68% interest, for the production of "Graviera of
Crete"), in Amintaio, in Aliveri, in Agrinio (facility owned by Zagas S.A., a
subsidiary in which the Company owns a 99.988% interest) and in Fthiotida, a
subsidiary called Agroktima in which the Company owns a 99.996% interest.
As of December 31, 2002, the Company and its subsidiaries also leased 25
properties located throughout Greece consisting primarily of milk collection
stations, warehouses and office space. Most of the commercial leases will expire
between 2003 and 2008, subject to Greek statutory provisions which enable
commercial and industrial tenants to extend the contractual term of a lease for
a period of 6 to 12 years in total.
In addition the Company has an interest in a cheese production facility
through its minority interest in Bizios S.A.
ORGANIZATIONAL STRUCTURE CHART WITH COMPANY'S SUBSIDIARIES AND OTHER INTERESTS.
Substantially all of the assets and operations of the Company are held directly
by it rather than through subsidiaries. At December 31, 2002 Fage held interests
in the following companies (1):
CONSOLIDATED SUBSIDIARIES
<Table>
<Caption>
directly totally(1)
-------- ----------
VORAS SA(2) (100%)
ELLENIKA SRL (88.87%)
XYLOURIS SA (68%)
FOODS HELLAS SA (99.38)
AGROKTIMA SA (99.33%), (99.996%)
FAGE USA CORP. (100%)
ILIATOR SA (97%)
ZAGAS SA (98%), (99.988%)
</Table>
OTHER INTERESTS
<Table>
BIZIOS SA (45%)
TYRAS SA (5.4%)
PACKING ITEMS
DEVELOPMENT S.A. (8.82%)
</Table>
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Additionally, Foods Hellas SA as at December 31, 2002 participates in the
following companies :
AGROKTIMA SA (0.67%)
ZAGAS SA (0.012%)
(1) Total participation interest through the participation interest from Foods
Hellas SA.
(2) All assets of Voras S.A. have been transferred in the Company, and Voras
S.A. is in the process of being liquidated.
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ITEM 5 : OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
AND THE OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE HEREIN. THE COMPANY
MAINTAINS ITS ACCOUNTING RECORDS AND PUBLISHES ITS STATUTORY FINANCIAL
STATEMENTS IN ACCORDANCE WITH GREEK TAX AND CORPORATE REGULATIONS. FOR THE
PURPOSES OF THE ANNUAL REPORT, CERTAIN OUT-OF-BOOK MEMORANDUM ADJUSTMENTS HAVE
BEEN MADE TO THESE RECORDS TO PREPARE THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER FINANCIAL INFORMATION INCLUDED HEREIN IN ACCORDANCE WITH U.S. GAAP.
GENERAL
The Company, the successor to a business founded in 1926 by the family of
Mr. Athanassios Filippou, is the second largest Greek food company based on 2002
net sales. During the period from its inception until the mid-1970's, Fage was
involved primarily in the small scale production and distribution of traditional
Greek yogurt. Until that time, retail outlets typically sold yogurt as a
commodity product in bulk quantities often without reference to the
manufacturer. In 1975, the Company was the first to introduce branded yogurt
products into the Greek market. These products, which carried the FAGE(R)
trademark, were sold in smaller, sealed tubs and presented in more attractively
designed packaging. Over the last two decades, branded yogurt products have
steadily replaced the traditional bulk varieties thus transforming the Greek
yogurt industry into a predominantly branded market. The Company estimates that
branded yogurt products now account for approximately 74% of yogurt sales volume
in Greece and that the Company accounts for approximately 60% of sales of
branded yogurt. During the period since 1975, the Company has devoted
substantial resources to building its distribution network and enhancing the
image of the FAGE(R) trademark and its other brand lines.
The Company's commercial success in selling yogurt and the positive image
of the FAGE(R) trademark have enabled it to increasE revenues and profitability
through diversification into other areas of the dairy industry. The Company
introduced its first cheese products in 1991 and began the production and
distribution of fresh milk in 1993. While yogurt and milk products currently
account for approximately three-fourths of 2002 net sales, over the last several
years, the Company has increased its cheese production capabilities by acquiring
interests in six regional Greek cheese companies: Pindos, Xylouris, Voras,
Tamyna and Zagas (in which Fage owns a majority interest and which are
consolidated) and Bizios (in which Fage owns a minority interest). Tamyna has
been consolidated since August 1, 2000 and Zagas from January 1, 2001.
Additionally, during 2002 Pindos and Tamyna were absorbed by Fage and Voras is
in the process of being liquidated with its assets transferred to the Company.
The Company's long-term strategy includes continued investment in the packaged
cheese market. The Company has also expanded its business to include the
distribution of fruit juices and refrigerated snacks. See "Major Shareholders
and Related Party Transactions". In addition to entering new product categories,
the Company has used the strength of the FAGE(R) trademark and its extensive
distribution network to increase sales and profitability through marketing new
product launches and brand line extensions.
The Company has improved its operating efficiency through technological and
other capital improvements to its production facilities, consolidation of its
raw materials purchasing and other modifications to production processes and
methods. These initiatives have lowered unit production costs, thereby
contributing to Fage's steady improvement in gross profit margin. The Company
plans to make additional investments with the aim of further enhancing
efficiency in its production facilities. The Company also plans to continue
investing in and expanding its distribution system, particularly in Northern
Greece, thereby reducing transportation costs and improving operating
efficiency.
In 2002 Fage continued investing in a comprehensive nutritional educational
program for children aged 7 to 11 in elementary schools throughout Greece. This
program started in 2001, has already covered 80,000 children and is expected to
continue over the coming years.
Also, in March 2001, the Company became Grand Sponsor of the Athens 2004
Olympic Games with exclusivity in the yogurt, cheese and creams (butter, dairy
desserts) categories. Thus, Fage has already started developing various programs
in order to capitalize on this Grand Sponsorship and enhance the Company's
image. These programs are expected to become more intensive during the period of
2003 - 2004 until the Games time.
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The Company's primary market is Greece. Substantially all of its yogurt
products are sold as branded products with a small proportion distributed in the
traditional bulk market. In the milk sector, substantially all products,
including all of the Company's products, are sold as branded goods. The Company
sells the majority of its cheese products in the packaged sector, which
currently accounts for approximately 6% of Greek cheese sales. The Company
believes that growth in the packaged cheese sector will continue in a manner
similar to that which has been seen in branded yogurt over the last two decades.
See "Risk Factors - Investment in Cheese Sector". In export markets, which are
primarily in the European Union, the Company sells branded yogurts and packaged
cheeses.
Despite the publicity surrounding European food crisis and unrest that
affected the Greek dairy industry since 1999, the Company continued to invest in
marketing and communication activities to restore consumer confidence. Although
the Greek dairy market currently shows signs of "healing", further European food
issues already under discussion in the EU may continue to affect the Greek dairy
industry.
In the twelve months ending December 31, 2002, the total milk and cream
market volume increased by 1%. This was due to an increase of 47% in the ESL
white milk sector, an increase of 5% in the chocolate milk sector and an
increase of 8% in milk cream volume sales. While fresh milk sector remained
stable, evaporated and UHT white milk continued their downward trend (-4% and
- -9% respectively). The Greek yogurt market also experienced an increase of 4.5%
stemming primarily from the strained and children's sectors. Desserts market
volume increased by 27%. The packaged cheese market had a significant increase
of 12% over the same period last year.
In the twelve months ending December 31, 2002, the Company's (both domestic
and exports) yogurt volume increased by 1.4%. The respective increase in revenue
was 10% due to the Company's support of value-added categories. In 2002, the
Company launched new flavors in the fruit segment under the FRUYO(R) brand name
and added new extensions in the children'S sector. Fage also continued
developing the GLYKOKOUTALIES(R) brand in desserts market by launching three
more products in 2002. In 2002, the Company continued to focus advertising
expenditure on its major brands to strengthen sales of high volume products and
the categories in which the Company has competitive advantages. This resulted in
a solid 58% market share. Volume sales of the Company's yogurt exports increased
by 12.7%, whereas the respective revenue increase was 13.8%.
The Company's sales volume in the milk and cream sector for the twelve
months ending December 31, 2002, decreased by 1.3% due to the decline of Fresh,
Chocolate and UHT milk, whereas sales revenue increased by 3.2%. The volume of
all refrigerated pasteurized milk products for the twelve months ending December
31, 2002, decreased by 1% over prior year with growth being driven only by the
ESL sector, which experienced a 38.3% increase . One more size (500 ml) was
launched in the FARMA(R) brand line, while a new product was added to the new
line of functional milk for adults under the FARMA PLUS(R) braND. Sales volume
of the Company's fresh white pasteurized milk for the twelve months ending
December 31, 2002, remained negative at 7% over the same twelve-month period of
2001. This resulted from the increased distribution and sales of smaller local
brands throughout Greece, as well as a halt on nation wide price-off promotions
by the Company with a goal of improving fresh milk profitability. Finally milk
cream volume increased by 2.4% and revenue by 3.1%.
The Company's (both domestic and export) volume sales in the cheese sector
for the twelve months ended December 31, 2002 increased by 2.9% over the same
period prior year whereas the respective increase in value was 9.0%. Packaged
cheese volume sales increased by 7.5% while sales of bulk cheese dropped by
5.7%. During 2002, Fage's cheese sales were supported by advertising spending
behind Fage-branded packaged cheese. The Company launched in June a 400 gr
package of FETA FAGE(R) packaged in its natural brine while in December a new
shredded cheese (4 CHEESE MIX(R)) and one more Greek traditional cheese
(MANOURI(R)) were added to the existing range.
On March 11, 2002 prices of all product categories increased by average of
4.0%.
In 2002, the Company retroactively applied EITF 01-09 and reflected
trade support actions that are generally invoiced by customers as a deduction of
sales rather than selling expenses. Such costs amounted to EURO 7,409, EURO
14,474 and EURO 19,441 for the years ended December 31, 2000, 2001 and 2002,
respectively. In addition, distribution costs incurred by the Company and
provided to representatives as an
14
<Page>
allowance on sales were reflected as selling expenses. Such distribution costs
amounted to EURO 20,439, EURO 23,816 and EURO 27,298 for the years ended
December 31, 2000, 2001 and 2002, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items in
the Company's consolidated income statements expressed as percentages of net
sales:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------
2000 2001 2002
------ ------- -------
Net sales............................................................ 100.0% 100.0% 100.0%
Cost of sales........................................................ 65.9 64.3 62.6
------ ------- -------
Gross profit......................................................... 34.1 35.7 37.4
Selling, general and administrative expenses......................... 26.7 27.5 28.7
Impairment loss...................................................... 0.9 1.2 0.0
------ ------- -------
Income from operations............................................... 6.5 7.0 8.7
Interest expense..................................................... 4.0 3.8 3.2
Foreign exchange losses (gains), net................................. 3.9 1.7 (5.6)
Losses on equity investee............................................ 0.1 0.1 0.4
Other income (expenses), net......................................... (1.9) 0.4 0.4
------ ------- -------
Income (loss) before income taxes and minority interests............. (3.4) 1.8 11.1
Provision for income taxes........................................... 0.1 1.7 4.5
------ ------- -------
Income (loss) before minority interests.............................. (3.3) 0.1 6.6
Minority interests................................................... 0.0 0.0 0.1
------ ------- -------
Net income (loss).................................................... (3.3)% 0.1% 6.7%
====== ======= =======
</Table>
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES. Net sales for 2002 were of EURO 331.3 million ($ 347.4 million),
an increase of EURO 27.5 million ($ 28.8 million), or 9.1%, from EURO 303.8
million ($ 318.5 million) for 2001, representing a total volume increase of
1.5%. The increase was attributable to the factors discussed above under
"General".
GROSS PROFIT. Gross profit for 2002 was EURO 124.0 million ($ 130.0
million), an increase of EURO 15.6 million ($ 16.4 million), or 14.4%, from EURO
108.4 million ($ 113.7 million) for 2001. This improvement is attributable to
the factors discussed above under "General". Gross profit as a percentage of net
sales for 2002 increased to 37.4% from 35.7% for 2001. Cost of sales for 2002
was EURO 207.3 million ($217.4 million), an increase of EURO 12.0 million ($
12.6 million) or 6.1% from EURO 195.3 million ($ 204.8 million) for 2001. Cost
of sales as a percentage of net sales decreased from 64.3% in 2001 to 62.6% in
2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") for 2002 were EURO 95.2 million ($ 99.8
million), an increase of EURO 11.7 million ($ 12.3 million), or 14.0%, from EURO
83.5 million ($ 87.5 million) for 2001. SG & A as a percentage of net sales
increased from 27.5% in 2001 to 28.7% in 2002, an increase of 4.4%.
IMPAIRMENT LOSS. As of January 1,2002, the Company applied SFAS No. 142,
"Goodwill and Other Intangible Assets", which application indicated that the
carrying amount of goodwill as of such date was not impaired. Impairment loss
for 2001 was EURO 3.7 million ($ 3.9 million).
15
<Page>
INCOME FROM OPERATIONS. Income from operations for 2002 was EURO 28.8
million ($ 30.2 million), an increase of was EURO 7.5 million ($ 7.9 million),
or 35.2%, from EURO 21.3 million ($ 22.3 million) for 2001. Income from
operations as a percentage of net sales for 2002 increased from 7.0% in 2001 to
8.7% in 2002.
INTEREST EXPENSE. Interest expense for 2002 was EURO 10.5 million ($ 11.0
million), a decrease of EURO 1.2 million ($ 1.3 million), or 10.3%, from EURO
11.7 million ($ 12.3 million) for 2001. This decrease is mainly due to the
revaluation of the EURO against the US dollar for 2002 in comparison with the
respective exchange rate for 2001 and due to the decreased short-term borrowings
in 2002.
FOREIGN EXCHANGE LOSSES (GAINS), NET. Foreign exchange gains for 2002 were
EURO 18.4 million ($ 19.3 million) mainly due to the Senior Notes year end
remeasurement. For 2001 there was a foreign exchange loss of EURO 5.2 million ($
5.5 million).
LOSSES ON EQUITY INVESTEE. Losses on equity investee for 2002 was EURO 1.2
million ($ 1.3 million), an increase of EURO 0.9 million ($ 0.9 million) from
EURO 0.3 million ($ 0.3 million) for 2001. This increase is mainly due to the
impairment loss of EURO 0.6 million ($ 0.6 million) of the Company's investment
in Bizios S.A. for 2002.
OTHER INCOME (EXPENSES), NET. Other income for 2002 were EURO 1.3 million
($ 1.4 million). Other income for 2001 were EURO 1.6 million ($ 1.7 million).
PROVISION FOR INCOME TAXES. The provision for income taxes for 2002 was
EURO 14.9 million ($ 15.6 million). For 2001 the provision for income taxes was
EURO 5.3 million ($ 5.6 million).
NET INCOME ( LOSS). Net income for 2002 was EURO 22.1 million ($ 23.2
million). For 2001 there was a net income of EURO 0.3 million ($ 0.3 million).
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES. Net sales for 2001 were EURO 303.8 million ($ 318.5 million), an
increase of EURO 23.7 million ($ 24.8 million), or 8.5%, from EURO 280.1 million
($ 293.7 million) for 2000, representing a total volume increase of 1.0%.
GROSS PROFIT. Gross profit for 2001 was EURO 108.4 million ($ 113.7
million), an increase of EURO 12.9 million ($ 13.5 million), or 13.5%, from EURO
95.5 million ($ 100.1 million) for 2000. This improvement is attributable to the
factors discussed above under "General". Gross profit as a percentage of net
sales for 2001 increased to 35.7% from 34.1% for 2000. Cost of sales for 2001
was EURO 195.3 million ($ 204.8 million), an increase of EURO 10.7 million
($ 11.2 million) or 5.8% from EURO 184.6 million ($ 193.6 million) for 2000.
Cost of sales as a percentage of net sales decreased from 65.9% in 2000 to
64.3% in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") for 2001 were EURO 83.5 million ($ 87.5
million), an increase of EURO 8.7 million ($ 9.1 million), or 11.6%, from EURO
74.8 million ($ 78.4 million) for 2000. SG & A as a percentage of net sales
increased from 26.7% in 2000 to 27.5% in 2001, an increase of 3.0%.
Approximately 60% of the increase over 2000 was due to the Company's
acquisition of the Athens 2004 Olympic sponsorship rights.
IMPAIRMENT LOSS. As part of its long-term strategy to expand the packaged
cheese market the Company has invested in majority interests in small regional
cheese producers. In 2000 and 2001, in accordance with statement of Financial
Accounting Standards 121 " Accounting for Impairment of Long-lived Assets and
Long-lived Assets to be Disposed of", management reviewed the carrying amounts
of the goodwill that arose from these investments. The estimated undiscounted
cash flows from future operations of these subsidiaries indicated that the
carrying amount of goodwill exceeded expected recoverable amounts. Accordingly,
management recognized an impairment loss of EURO 2.5 million ($ 2.6 million) and
EURO 3.7 million ($ 3.9 million) respectively. The Company remains committed to
its strategy of competition in the packaged cheese sector. The main reason for
the impairment was that the packaged cheese market in Greece is not developing
in line with management's expectations. In addition the European Court's 1999
ruling against the validity, on procedural grounds, of the legislation of
protecting "feta" cheese, an important product of several of the cheese
producing subsidiaries has had an adverse impact on the Company's estimates as
to its future turnover from this product.
INCOME FROM OPERATIONS. Income from operations for 2001 was EURO 21.3
million ($ 22.3 million), an
16
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increase of EURO 3.0 million ($ 3.1 million), or 16.4%, from EURO 18.3 million
($ 19.2 million) for 2000. Income from operations as a percentage of net sales
increased from 6.5% in 2000 to 7.0% in 2001.
INTEREST EXPENSE. Interest expense for 2001 was EURO 11.7 million ($ 12.3
million), an increase of EURO 0.4 million ($ 0.4 million), or 3.5%, from EURO
11.3 million ($ 11.8 million) for 2000. This increase is mainly due to the
devaluation of the EURO against the US dollar for 2001 in comparison with the
respective exchange rate for 2000.
FOREIGN EXCHANGE LOSSES (GAINS), NET. Foreign exchange losses for 2001 were
EURO 5.2 million ($ 5.5 million) mainly due to the Senior Notes year end
remeasurement. For 2000 there was a foreign exchange loss of EURO 10.9 million
($ 11.4 million).
OTHER INCOME (EXPENSES), NET. Other income for 2001 were EURO 1.6 million
($ 1.7 million). Other expenses for 2000 were EURO 5.4 million ($ 5.7 million)
mainly due to equity securities realized loss of EURO 8.9 ($ 9.3 million) partly
offset by the amount of EURO 1.0 million ($ 1.0 million) due to the repurchase
of Senior Notes for a price below the aggregate face amount.
PROVISION FOR INCOME TAXES. The provision for income taxes for 2001 was
EURO 5.3 million ($ 5.6 million). For 2000 the provision for income taxes was
EURO 0.1 million benefit ($ 0.1 million).
NET INCOME ( LOSS). Net income for 2001 was EURO 0.3 million ($ 0.3
million). For 2000 there was a net loss of EURO 9.3 million ($ 9.8 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital expenditures
and working capital requirements through a combination of cash flows from
operations, short-term borrowings, long-term debt and capital lease obligations.
Cash flows from operations can be impacted by the Company's extension of
credit and the terms and collection of its receivables. The Company has
established criteria for granting credit to customers, which are generally based
upon the size of the customer's operations and consideration of relevant
financial data. Business is generally conducted with such customers under normal
terms with collection expected within sixty (60) days after shipment. At each
reporting period date, all potentially uncollectible accounts are assessed
individually for purposes of determining the appropriate allowance for doubtful
accounts. It is the Company's policy to attach liens against the property of
most of its delinquent customers. Because of the prolonged and complex legal
procedures in Greece, it is not unusual for the collection process to take three
to five years before a case is finalized. Notwithstanding this, the Company does
not consider its accounts receivable collection process to be delayed. Rather,
the Company believes its cash management policies are effective in ensuring that
the turnover of its accounts receivable and accounts payable are properly
balanced within general business practices in Greece.
OPERATING ACTIVITIES. Net cash from operating activities for 2002 was EURO
35.5 million ($ 37.2 million), an increase of EURO 20.6 million ($ 21.6 million)
from EURO 14.9 million ($ 15.6 million) for 2001, which mainly is due to an
increase in earnings and change in working capital.
INVESTING ACTIVITIES. Net cash used in investing activities for 2002 was
EURO 4.4 million ($ 4.6 million), a decrease of EURO 18.6 million ($ 19.5
million), from EURO 23.0 million ($ 24.1 million) for 2001. Capital expenditures
of EURO 19.0 ($ 19.9 million) were made in continued investments in Company's
facilities in order to further realize operating efficiencies as discussed above
under "General".
FINANCING ACTIVITIES. Net cash used in financing activities for 2002 was
EURO 26.0 million ($ 27.3 million) compared to net cash from financing
activities of EURO 7.6 million ($ 8.0 million) for 2001, mainly as a result of
the short-term loan decrease in 2002 of EURO 24.8 million ($ 26.0 million).
CONTRACTUAL OBLIGATIONS.
17
<Page>
Contractual obligations as of December 31, 2002, were as follows:
<Table>
<Caption>
(stated in thousands of Euro)
PAYMENT DUE IN:
--------------------------------------------------------
TOTAL 2003 2004-05 2006-07 AFTER 2007
-------- -------- --------- --------- ----------
Long Term Debt 87,407 - - 87,407 -
Operating Leases 3,458 1,065 1,765 589 39
Maturity of other long term payables 3,603 524 1,048 1,048 983
------ ----- ----- ------ -----
Total 94,468 1,589 2,813 89,044 1,022
====== ===== ===== ====== =====
</Table>
CRITICAL ACCOUNTING POLICIES.
The Company maintains its accounting records and publishes its statutory
financial statements following Greek tax and corporate regulations and has made
certain out-of-book memorandum adjustments to these records to present the
consolidated financial statements included in this report in accordance with
U.S. generally accepted accounting principles. The preparation of consolidated
financial statement in accordance with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that effect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The Company continually
evaluates the policies and estimates it uses to prepare its consolidated
financial statements. In general, the estimates are based on historical
experience, information from third-party professionals and various other
assumptions that are believed to be reasonable under the facts and
circumstances. Actual results may differ from those estimates made by
management.
The Company believes that of our accounting policies the following may
involve a higher degree of judgment and complexity:
CONCENTRATION OF CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Financial
assets that potentially subject us to concentrations of credit risk are trade
accounts receivable. Due to the large volume and diversity of our customer base,
concentrations of credit risk with respect to trade accounts receivable are
limited. At each reporting period, all accounts receivable are assessed on
historical trends, statistical information and future expectations and a
provision is recorded for the probable and reasonably estimable loss for these
accounts. The balance of such allowance for doubtful accounts is adjusted by
recording a charge to the consolidated statement of income for the reporting
period.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost,
net of subsidies provided by the Greek State, plus interest costs incurred
during periods of construction based upon the weighted average borrowing rate.
Repairs and maintenance are expensed as incurred. The cost and related
accumulated depreciation of assets retired or sold are removed from the accounts
at the time of sale or retirement, and any gain or loss is included in the
accompanying consolidated statements of income. For statutory reporting
purposes, the Company was obliged to revalue its property, plant and equipment
at various dates following the provisions of the respective mandatory tax laws.
These revaluations have been reversed in the accompanying consolidated financial
statements, after giving effect to the related deferred income taxes. The
reversal of the net revaluation gains is reflected as a separate component of
shareholders' equity.
IMPAIRMENT OF LONG-LIVED ASSETS: The U.S. Financial Accounting Standards Board
issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long lived assets. The Company adopted SFAS No. 144 as of January
1, 2002, without any effect on the Company's financial position and results of
operations. The standard requires that long-lived assets and certain
identifiable intangibles held and used or disposed of by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. An impairment loss for an
asset held for use is recognized, when the estimate of undiscounted future cash
flows, excluding interest charges, expected to be generated by the use of the
asset is less than its carrying amount. Measurement of the impairment loss is
based on the fair value of the asset.
18
<Page>
GOODWILL: Goodwill is the excess of the purchase price over the fair value of
net identifiable assets acquired in business combinations accounted for as a
purchase. Prior to January 1, 2002, goodwill was amortized on a straight-line
basis over periods not exceeding 20 years. Effective with the adoption of SFAS
No. 142 on January 1, 2002, the Company is no longer amortizing goodwill, and is
instead testing it for impairment at least annually. Impairment loss is
recognized when the estimated expected future cash flows (undiscounted and
without interest) are less than the carrying amount of the asset.
INCOME TAXES: Our estimates of income taxes and the significant items giving
rise to the deferred assets and liabilities are shown in Note 14 to the
consolidated financial statements. These reflect our assessment of actual future
taxes to be paid on items reflected in the financial statements, giving
consideration to both timing and probability of these estimates. Actual income
taxes could vary from these estimates due to future changes in income tax law or
on results from final review of our tax returns by the competent tax
authorities.
ITEM 6 : DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The following table identifies each of the executive officers and directors
of the Company. Directors are elected for a term of three years or until their
successors are elected and qualified.
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Ioannis Filippou.................... 67 Chairman of the Board*
Kyriakos Filippou................... 64 Chief Executive Officer and Director*
Athanassios Filippou................ 37 Director
Athanassios-Kyros Filippou.......... 34 Director
Ioannis Granitsas................... 55 Vice Chairman and Director
Dimitrios Marinos................... 64 Director
Christos Koloventzos................ 47 Chief Financial Officer
Kostas Antonakis.................... 52 Chief Commercial Officer
Alexios Leris....................... 52 Chief Plants Officer
Ioannis Palatianos.................. 52 Chief Engineering and Works Officer
Emmanuel Papaefthimiou.............. 51 Exports/Imports Logistics Manager and Director
</Table>
- ---------
*There is an arrangement between Mr. Ioannis Filippou and Mr. Kyriakos Filippou
pursuant to which they rotate their positions as the Chairman of the Board and
Chief Executive Officer of the Company in June of each year. This arrangement
has been in effect since 1989.
MR. IOANNIS FILIPPOU is currently the Chairman of the Board of the Company.
Pursuant to the arrangement with Mr. Kyriakos Filippou, he has been the
Company's Chairman or its Chief Executive Officer in alternate years since 1989.
Previously, he was a Managing Director of the Company from 1977 to 1989. He has
been the Chairman of the Board of HQF (Hellenic Quality Foods), a commercial and
industrial food products company (formerly known as Kanaki S.A.) owned by him
and members of his family, since 1988, the Chairman of the Board of Iofil S.A.
("Iofil"), an industrial, commercial and services company owner by him and
members of his family, since 1989, the Chairman of the Board of Vis S.A.
("Vis"), a company listed on the Athens Stock Exchange, controlled by him and
members of his family, since 1989, the Chairman of the Board of Agrofil S.A.
("Agrofil"), a real estate development company owned by him and members of his
family, since 1991, and the Chairman of the Board of A.E.K. Basketball Club,
which is owned by Iofil, since 1995. In addition Mr. Filippou holds interests,
directly and indirectly, in these and several other companies. He is the brother
of Mr. Kyriakos Filippou. See "Control of Registrant" and "Major Shareholders
and Related Party Transactions".
MR. KYRIAKOS FILIPPOU is currently the Chief Executive Officer and a
director of the Company. Pursuant to the arrangement with Mr. Ioannis Filippou,
he has been the Company's Chief Executive Officer or its Chairman in alternate
years since 1989. Previously, he was a Managing Director of the Company from
1977 to 1989. He has been the Chairman of the Board of Hellenic Biscuit Company
S.A., a public company that is listed on The Athens Stock Exchange and that
produces and sells biscuits and snacks and distributes bread, and that is
controlled by him and members of his family, since 1990, the
19
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Chairman of the Board of Evga, a fruit juice and ice cream producer owned by him
and members of his family, since 1992, Chairman of the Board of Dafnos S.A.
("Dafnos"), a services and holding company owned by him and members of his
family, since 1991 and Chairman of the Board of Palace S.A. ("Palace"), a
service company controlled by him and members of his family, since 1993. In
addition Mr. Filippou holds interests, directly and indirectly, in these and
several other companies. He is the brother of Mr. Ioannis Filippou. See "Major
Shareholders and Related Party Transactions".
MR. ATHANASSIOS FILIPPOU is a director of the Company, a position he has
held since 1994. He has been the Chief Executive Officer and Vice Chairman of
HQF since 1988, a director of Agrofil since 1991, the Chief Executive Officer of
Iofil from 1992 up to 1997 and Vice Chairman since 1998 onwards, the Chairman of
the Board of Aspect Communication Services S.A. ("Aspect"), an advertising
company controlled by him and members of his family, since 1993, the Managing
Director of A.E.K. Basketball Club since 1999 and the Vice Chairman of Vis since
1999. He is the son of Mr. Ioannis Filippou. See " Major Shareholders and
Related Party Transactions ".
MR. ATHANASSIOS-KYROS FILIPPOU is a director of the Company, a position he
has held since 1994. He has been the Chief Executive Officer of Evga since 1996.
From 1994 to 1996, he was its Deputy Chief Executive Officer. He is the son of
Mr. Kyriakos Filippou. See "Major Shareholders and related Party Transactions".
MR. GRANITSAS is the Vice Chairman and a director of the Company, positions
he has held since 1999 and 1977, respectively. He was the Chief Financial
Officer of the Company from 1975 to 1995 and the Deputy General Manager from
1995 to 1999.
MR. MARINOS is a director of the Company, a position he has held since
1978. He is the co-founder, and since 1971 has been the Chief Executive Officer,
of Marinos-Zaimis S.A., a consulting firm.
MR. KOLOVENTZOS is the Chief Financial Officer of the Company, a position
he has held since 1995. Previously he was the Group Financial and Administrative
Director of Bingo S.A., a wafer and chocolate manufacturer, from 1989 to 1995.
MR. ANTONAKIS is the Chief Commercial Officer of the Company, a position he
has held since 1999. He was the Sales Director of the Company from 1986 to 1998.
MR. LERIS is the Chief Plants Officer of the Company, a position he has
held since 1992. Previously he was the Company's Production Manager from 1985 to
1991.
MR. PALATIANOS is the Chief Engineering and Works Officer of the Company, a
position he has held since 1995. Previously he was the Company's Technical
Manager from 1993 to 1995, its Fleet Manager from 1980 to 1994, and its
Maintenance Manager from 1985 to 1993.
MR. PAPAEFTHIMIOU is the Exports/Imports Logistics Manager and a director
of the Company, positions he has held since 1994 and 1995, respectively.
Previously he was the Exports/Imports Logistics Supervisor for the Company from
1984 to 1994.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company paid an aggregate of EURO 1.8 million ($ 1.9 million) for the
year ended December 31, 2002 to its executive officers and directors for
services in all capacities. The Company has no stock option, or other
stock-based compensation, and no employment agreement with any executive
officer.
EMPLOYEES
The Company had approximately 1,350 full-time employees as of December 31,
2002, substantially all of whom were covered by one of 24 collective bargaining
agreements. These agreements, which are renewed every year, generally provide
for inflation-indexed wages in addition to productivity-linked wage adjustments.
The Company promotes the recruitment, development and retention of appropriately
20
<Page>
qualified managers and employees. The Company believes that its relationship
with its employees is good and the Company has not experienced any work
stoppages due to labor unrest in the last five years. Following there is a
breakdown of employees by main category of activity.
<Table>
<Caption>
NUMBER OF EMPLOYEES
-------------------
Production process 860
General & Administrative 176
Selling & Distribution 314
------------
1,350
------------
</Table>
ITEM 7 : MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
CONTROL OF REGISTRANT
The Company is wholly-owned by Messrs. Ioannis and Kyriakos Filippou, the
sons of the Company's founder, Athanassios Filippou. Each brother owns fifty
percent (50%) of the capital stock of the Company. The Company's charter
requires a vote of ninety percent (90%) for any sale or transfer of any amount
of capital stock to be effected.
TRANSACTIONS WITH FAMILY OWNED COMPANIES
The stockholders of the Company, Messrs. Ioannis and Kyriakos Filippou, and
members of their respective families (including Messrs. Athanassios Filippou and
Athanassios-Kyros Filippou) own interests, directly and indirectly, in several
companies. The Company purchases goods and services from certain of such
companies in the ordinary course of its business. The Company believes that in
each case the terms of such transactions are comparable to those that would be
attainable by the Company in the ordinary course from unaffiliated third parties
under similar circumstances. The following briefly describes the material
transactions between such companies.
MORNOS. The Company purchases plastic yogurt tubs, aluminium yogurt tub
tops and other packaging products from Mornos. Mrs. Dimitra Filippou, the
wife of Mr. Kyriakos Filippou and companies controlled by Mr. Kyriakos
Fillippou and members of his family own 100% of Mornos. Mr. Kyriakos Filippou
is the Chairman of the Board of Mornos. The Company's purchases from Mornos
totaled EURO 15.1 million ($ 15.8 million), EURO 17.3 million ($ 18.1
million) and EURO 21.1 million ($ 22.1 million) for 2000, 2001 and 2002,
respectively.
VIS. The Company purchases corrugated boxes from Vis, a public company that
is listed on The Athens Stock Exchange. Mr. Ioannis Filippou, members of his
family and a company owned by them own 55% of Vis and Fage owns 7.1%. Mr.
Ioannis Filippou is Chairman and Mr. Athanassios Filippou Vice Chairman of the
Board of Vis. The Company's purchases from Vis totaled EURO 3.9 million ($ 4.1
million), EURO 4.6 million ($ 4.8 million) and EURO 2.5 million ($ 2.6 million)
for 2000, 2001 and 2002, respectively.
VIHEP. The Company purchases sugar, cocoa and various other ingredients
from Vihep. Mr. Dimitrios Anagnostou, the brother-in-law of Mr. Kyriakos
Filippou, owns the 75% of Vihep. The Company's purchases from Vihep totaled EURO
2.8 million ($ 2.9 million), EURO 2.8 million ($ 2.9 million) and EURO 2.7
million ($ 2.8 million) for 2000, 2001 and 2002, respectively.
EVGA. The Company purchases fresh fruit juices from Evga Holdings S.A. and
its subsidiaries, which are owned by Mr. Athanassios-Kyros Filippou, Mrs.
Dimitra Filippou and by companies controlled by them and by Mr. Kyriakos
Filippou. The Company is the exclusive distributor of Evga's fresh fruit juices
in Greece. These products, which bear the EVGA(R)trademark, are purchased by the
Company from Evga at a negotiated discounted price and are sold to retailers at
a mark-up. Evga retains responsibility for all marketing, advertising and
promotion costs. The Company's purchases from Evga totaled EURO 6.5 million ($
6.8 million), EURO 7.4 million ($ 7.8 million) and EURO 8.5 million ($ 8.9
million) for 2000, 2001 and 2002, respectively. The Company believes this
arrangement is attractive because it widens the range of products offered to
retailers at little incremental cost since the Company utilizes its existing
distribution network. In
21
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addition, from time to time, the Company sells to Evga various raw materials for
its products. The Company's sales to Evga totaled EURO 0.5 million ($ 0.5
million), EURO 0.6 million ($ 0.6 million) and EURO 0.7 million ($ 0.7 million)
for 2000, 2001 and 2002, respectively.
MYRTOS FOODS ("MYRTOS"). Myrtos, which is 100% owned by Mr. Kyriakos
Filippou, Mr. Athanassios - Kyros Filippou and a company owned by Mr. Kyriakos
Filippou, sold to the Company mainly for 1999 fresh and UHT fruit juices and ice
cream produced by Evga. The Company's purchases from Myrtos totaled EURO 0.6 ($
0.6 million), 0 and 0 for 2000, 2001 and 2002, respectively.
ASPECT. Aspect is an advertising and media agency, associated with J.
Galanakis Advertisements S.A. Iofil owns 73.80%, Mr. Ioannis Filippou and
members of his family own 23.45% and J. Galanakis Advertisements S.A. owns
2.75%. Mr. Athanassios Filippou is the Chairman of the Board of Aspect. The
Media Department of Aspect is engaged in planning, scheduling and buying time
and space on television and radio and in publications for all companies
controlled by the Filippou family and a number of other companies on a
commission basis. The Company believes it benefits from this arrangement because
Aspect receives favorable pricing and placement terms due to the large volume of
its purchases. In addition, Aspect's Creative and Client Service Departments are
engaged in developing advertising and promotional campaigns for several of the
Company's products and brands. When Aspect handles a product or brand
advertising and/or promotion, it charges the Company an additional commission on
the total campaign cost. Billings by Aspect to the Company totaled EURO 13.5
million ($ 14.2 million), EURO 14.2 million ($ 14.9 million) and EURO 17.4
million ($ 18.2 million) for 2000, 2001 and 2002, respectively. Aspect's
commissions out of the above were 4% for media planning, scheduling and buying
and an additional 12% for handling advertising and promotional campaigns.
IOFIL. Iofil is 100% owned by Mr. Ioannis Filippou and members of his
family. Mr. Ioannis Filippou is Chairman and Mr Athanassios Filippou is Vice
Chairman of the Board of Iofil. Iofil is an industrial, commercial and services
company and is also the controlling shareholder of Vis. Iofil provides corporate
management services to the Company and other companies controlled by the
Filippou family. Additionally, since 2002, the Company has purchased from Iofil
corrugated boxes which previously had been purchased from Vis. The Company's
purchases from Iofil totaled EURO 1.0 million ($ 1.0 million), EURO 1.2 million
($ 1.3 million) and EURO 4.1 million ($ 4.3 million) for 2000, 2001 and 2002,
respectively. There is an agreement between the Company and Iofil for the
continuation of corporate management services in 2003. Services provided for by
such agreement for 2003 will total EURO 3.8 million ($ 4.0 million).
PALACE. Palace is 100% owned by Mr. Athanasios-Kyros Filippou and a company
controlled by Mr. Kyriakos Filippou. Mr. Kyriakos Filippou is Chairman of the
Board of Palace and Mr. Athanassios-Kyros Filippou is a director. Palace is a
services company and provides corporate management services to other companies
controlled by the Filippou family. Services provided for 2000, 2001 and 2002
totaled EURO 1.0 million ($ 1.0 million), EURO 1.4 million ($ 1.5 million) and
EURO 1.6 million ($ 1.7 million), respectively. There is an agreement between
the Company and Palace for the continuation of such services in 2003. Services
provided for by such agreement for 2003 will total EURO 3.2 million ($3.4
million).
G.S. KOSTAKOPOULOS & ASSOCIATES. The Company engages the law firm G.S.
Kostakopoulos & Associates for various legal services, and the firm is advising
the Company in connection with the Offering and the Exchange Offer. Mr. Georgios
Kostakopoulos, the managing partner of the firm, is the brother-in-law of
Messrs. Ioannis and Kyriakos Filippou. Payments by the Company to G.S.
Kostakopoulos were approximately EURO 0.1 million ($ 0.1 million), EURO 0.2
million ($ 0.2 million) and EURO 0.3 million ($ 0.3 million) for 2000, 2001 and
2002, respectively.
IOANNIS NIKOLOU ULP ("IOANNIS NIKOLOU"). Mr. Ioannis Nikolou is the
brother-in-law of Mr. Ioannis Filippou and is one of the Company's sales
representatives. As such, he buys products from the Company at a discounted
price and resells them at a marked-up price, with the difference being retained
as his commission. The Company determines the discounts offered to and mark-ups
charged by its sales representatives in a uniform manner. Purchases by Ioannis
Nikolou from the Company totaled EURO 3.9 million ($ 4.1 million), EURO 3.4
million ($ 3.6 million) and EURO 3.5 million ($ 3.7 million) for 2000, 2001 and
2002, respectively. Ioannis Nikolou derives a standard commission on resales of
such purchased products.
FOODS HELLAS. The Company owns 99.38% of Foods Hellas, a consolidated
subsidiary, and the Company's shareholders own the remaining 0.62%. Foods Hellas
owns 0.67% of Agroktima.
22
<Page>
ILIATOR. The Company owns 97% of Iliator, a consolidated subsidiary, and
the Company's shareholders own the remaining 3%.
COMPENSATION TO FAMILY MEMBERS
In addition to the relationships described above, certain members of the
Filippou family also are employees of the Company or provide various services to
the Company. The aggregate compensation paid in this respect to members of the
family in 2000, 2001 and 2002 was EURO 2.5 million ($ 2.6 million), EURO 2.8
million ($ 2.9 million) and EURO 7.0 million ($ 7.3 million), respectively. The
Company believes that in each case the terms of such arrangements, including the
services rendered and the rate of compensation, were comparable to those that
would be attainable by the Company in the ordinary course from unaffiliated
third parties.
ITEM 8 : FINANCIAL INFORMATION
LEGAL PROCEEDINGS
The Company is a party to various lawsuits and arbitration proceedings in
the normal course of business. According to the Company's management and its
legal advisors, all of the lawsuits will be settled without any material adverse
effect on the Company's consolidated financial position or results of
operations.
COMPANY'S POLICY ON DECLARING DIVIDENDS
Under Greek corporate law, companies are required each year to declare from
their profits, dividends of at least 35% of after-tax profit, after allowing for
legal reserve, or a minimum of 6% of the paid-in share capital, whichever is
greater. However, the Company can waive such dividend with the unanimous consent
of its shareholders.
Furthermore, Greek corporate law requires certain conditions to be met
before dividends can be distributed which are as follows:
a) No dividends can be distributed to the shareholders as long as the
Company's net equity, as reflected in the statutory financial statements, is, or
after such distribution, will be less than the outstanding capital plus
non-distributable reserves.
b) No dividends can be distributed to the shareholders as long as the
unamortized balance of "Preoperating Expenses", as reflected in the statutory
financial statements, exceeds the aggregate of distributable reserves plus
retained earnings.
No dividends have been declared during 2000, 2001 and 2002.
The Indenture under which the Company's Senior Notes were issued restricts
the amount of dividends and requires that certain financial tests be satisfied
prior to any payments of dividends.
EXPORT SALES
The Company's export sales made primarily to Western Europe and the United
States of America totaled EURO 31.4 million ($ 32.9 million), EURO 35.6 million
($ 37.3 million) and EURO 39.3 million ($ 41.2 million) for 2000, 2001 and 2002,
respectively. The above sales represent 5.4%, 6.4% and 7.0% of the total sales
volume for 2000, 2001 and 2002, respectively.
ITEM 9 : THE OFFER AND LISTING
23
<Page>
The Company's capital stock is privately owned. See Item 7-"Control of
Registrant". The Company's 9% of Senior Notes due 2007 were offered pursuant to
a transaction registered under the Securities Act of 1933, as amended, and trade
from time to time in the over-the-counter market. The Company has no information
regarding the prevailing prices at which the notes trade.
ITEM 10 : ADDITIONAL INFORMATION
SHARE CAPITAL
As of December 31, 2001 the Company's share capital consisted of 7,010,000
common, registered shares of EURO 2.93 par value each. In January 2002 and in
order to convert the denomination of the share capital from Greek Drachmae to
Euro and round the par value of the shares to the nearest decimal, the share
capital was increased through a cash contribution of EURO 0.04 million ($ 0.04
million) (par value of each share increased to EURO 2.94). Furthermore, in June
2002, the share capital was increased by the issuance of 2,600,400 common,
registered shares of EURO 2.94 par value each, through the capitalization of the
revaluation gains of EURO 7.6 million ($ 8.0 million). Accordingly, at December
31, 2002 the Company's share capital consisted Of 9,610,400 common,
registered shares of EURO 2.94 par value each. All shares and per share amounts
in the accompanying consolidated financial statements have been restated to give
effect to the issuance of these additional shares.
The Company's share capital is owned by Mr. Ioannis Filippou and Mr.
Kyriakos Filippou, each of whom owns directly 50% of the outstanding shares.
MEMORANDUM AND ARTICLES OF ASSOCIATION
The Company is organized under the laws of the Hellenic Republic (also
known as Greece). Its objects and purposes, as specified in its Memorandum and
Articles of Association (the "Memorandum"), include the production and trading
of dairy products, the distribution of other food products and the trading,
import and export, and representation of firms in Greece and abroad in
connection with such products. The Memorandum is an exhibit to this Report.
The board of directors may be composed of three to seven members, as
established by resolution of the directors. Currently, the board consists of
seven members. Directors are elected for terms of three years.
The authorized capital of the Company consists solely of common shares.
Holders of common shares are entitled to one vote per share on all matters
submitted to shareholders, and the presence in person or by proxy of holders
entitled to vote a majority of the total number of votes that may be cast at any
meeting constitutes a quorum for the transaction of business at such meeting.
Higher quorum thresholds (ranging from 80%-90%) apply in the event the General
Assembly is to consider a transfer of common shares. Holders of common shares
have an equal right to receive dividends when and if declared by the Company's
board of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of common shares
are entitled to share ratably in all assets of the Company which are legally
available for distribution to common shareholders.
The Company's Memorandum also contains provisions whereby if one of the
existing shareholders dies, his sons and grandsons from his sons' side have the
right to purchase the common shares formerly held by the deceased from his
heirs, and his heirs are obligated to sell such shares. The purchase price would
be calculated as provided by the Memorandum based upon the Company's net assets
as of its last balance sheet, excluding good will, trademarks and other
intangible assets. Except as aforesaid, the holders of common shares have no
preemptive, subscription, redemption or sinking fund rights.
ANNUAL MEETING
24
<Page>
The Company's memorandum provides for an annual meeting, referred to as the
General Assembly, during the first of six months of each calendar year. The
General Assembly must approve the Company's audited financial statements for the
prior year and appoint auditors for the current year.
EXCHANGE CONTROLS AFFECTING SECURITY HOLDERS
The export of capital from the Hellenic Republic is regulated by law and
regulation, as well as by several Acts issued by the Governor of the Bank of
Greece. However, a Greek company with securities held by non-residents, such as
the Company, may export capital without any prior approval by governmental
authorities provided the capital is exported to effect payments due to such
holders under the terms of an agreement pertaining to such securities, such as
the Intendure that governs the Senior Notes. There are no restrictions on the
ability of non-residents or non-citizens of Greece to hold or vote Senior Notes
imposed by the laws of the Hellenic Republic or by the constituent documents of
the Company.
TAXATION
All payments to U.S. Holders with respect to the Senior Notes by the
Company will be made without withholding or deduction for Greek taxes unless
required by law or the interpretation or administration thereof, in which case,
the Company will, except in certain circumstances, pay such additional amounts
as may be necessary so that the net amount received by the holders after such
withholding or deduction will not be less than the amount that would have been
received in the absence of such withholding or deduction; provided that such
payments to a holder other than a U.S. Holder would be limited to the amount
that would be payable to such holder if it were such a U.S. Holder. Greece has
entered into tax treaties with various other countries that provide for
reductions in or the elimination of Greek withholding tax. Holders of Senior
Notes should consult their tax advisors respecting the application of such
treaties to them. There can be no assurance that holders other than United
States residents or corporations would be entitled to full reimbursement from
the Company in the event the Company is required to withhold or deduct amounts
from payments to such holders in respect of the Senior Notes. For purposes
hereof, a "U.S. Holder" is an individual citizen or resident of the United
States or a corporation created and organized in the United States.
Under the income tax treaty (the "Treaty") between Greece and the United
States, interest on the Senior Notes paid to a U.S. Holder that is a United
States resident or corporation within the meaning of the Treaty is exempt from
Greek income tax if (i) the U.S. Holder is not engaged in a trade or a business
in Greece through a "permanent establishment" and (ii) the interest on the
Senior Notes does not exceed 9% per year. The mere holding of the Senior Notes
or the enforcement of rights with respect thereto would not constitute a
permanent establishment. The Company intends to treat all holders as U.S.
Holders not permanently established in Greece unless it has information to the
contrary.
Any capital gain earned by U.S. Holders upon the sale or exchange of the
Senior Notes is exempt from Greek income tax.
There are no Greek inheritance, gift or succession taxes applicable to the
ownership, transfer or disposition of the Senior Notes by a U.S. Holder, except
that such taxes will apply to the transfer by gift of the Senior Notes by a U.S.
Holder to a permanent resident of Greece and may apply to the transfer at death
of the Senior Notes by a U.S. Holder to a permanent resident of Greece. There
are no stamp, issue, registration, or similar taxes or duties payable by U.S.
Holders of Senior Notes.
ITEM 11 : QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INFLATION
Although the Greek economy has long been subject to both high levels of
inflation and the effects of the Greek government's measures to curb inflation
such as high real interest rates, the Company does not believe inflation has had
a material effect on its results of operations for the periods presented. Greece
experienced annual rates of inflation of 3.1%, 3.5% and 3.6% in the years 2000,
2001 and 2002, respectively.
25
<Page>
FOREIGN EXCHANGE RATE FLUCTUATION
Substantially all of the Company's operations are conducted in Greece and,
as a result, the Company's operating results depend on the prevailing economic
conditions in Greece. Furthermore, substantially all of the Company's revenues
are in Euros. The Senior Notes are denominated in dollars and will require the
Company to make all principal and interest payments thereon in dollars. As a
result, the Company may be subject to significant foreign exchange risks.
The Company's functional currency is the Euro. At each balance sheet date,
all monetary assets and liabilities denominated in other currencies, including
the Senior Notes, are adjusted to reflect the then current exchange rate. The
resulting decrease or increase is reflected on the Company's income statement as
foreign exchange loss or gain.
ITEM 12 : DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
NOT APPLICABLE
PART II
ITEM 13 : DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
NOT APPLICABLE
ITEM 14 : MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
NOT APPLICABLE
ITEM 15 CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of December 31, 2002 was carried
out by the Company under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer. Based on that evaluation the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures have been designed to provide, and are effective in providing,
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Subsequent to the date of the most recent evaluation of the
Company's internal controls, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
NOT APPLICABLE
26
<Page>
ITEM 16B CODE OF ETHICS
NOT APPLICABLE
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
NOT APPLICABLE
PART III
ITEM 17 : FINANCIAL STATEMENTS
NOT APPLICABLE
ITEM 18 : FINANCIAL STATEMENTS AND EXHIBITS
(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
1. Reports of Independent Auditors F-1, F-2
2. Consolidated Balance Sheets as of December 31, 2001 and 2002 F-3
3. Consolidated Statements of Operations for the years ended December 31, 2000,
2001, and 2002 F-5
4. Consolidated Statements of Shareholders' Equity as of December 31, 2000, 2001,
and 2002 F-6
5. Consolidated Statements of Cash Flows for the years ended December 31, 2000,
2001 and 2002 F-7
6. Notes to Consolidated Financial Statements F-8
</Table>
Other schedules are omitted because they are not applicable or because the
information required is included in the financial statements or notes thereto.
ITEM 19 : EXHIBITS
<Table>
<Caption>
Exhibit Number Description
- ----------------------------------------------------------------------------------------------
1 Articles of incorporation of Fage Dairy Industry S.A.
(incorporated by reference to Exhibit 3.01 to
Registration Statement on Form F-4 (No 333-6768)
- ----------------------------------------------------------------------------------------------
2 Indenture dated as of February 11, 1997, by and between
Fage Dairy Industry S.A. and The Bank of New York, (as
successor to IBJ Schroder Bank & Trust Company), as
Trustee (containing the form of security) (incorporated
by reference to Exhibit 4.01 to Registration Statement on
Form F-4 (No 333-6768)
- ----------------------------------------------------------------------------------------------
7 Statement re Computation of Ratio and Earnings to Fixed
Charges
- ----------------------------------------------------------------------------------------------
8 Subsidiaries of Fage Dairy Industry S.A.
- ----------------------------------------------------------------------------------------------
</Table>
27
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Athens, Greece.
FAGE DAIRY INDUSTRY S.A.
Date: March 31, 2003 By: /s/ Ioannis Filippou
------------------------------
Ioannis Filippou
Chairman of the Board
Date: March 31, 2003 By: /s/ Kyriakos Filippou
------------------------------
Kyriakos Filippou
Chief Executive Officer
and Director
Date: March 31, 2003 By: /s/ Christos Koloventzos
------------------------------
Christos Koloventzos
Chief Financial Officer
28
<Page>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of FAGE DAIRY
INDUSTRY S.A. (a Greek corporation) and subsidiaries ("Company") as of December
31, 2002 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of FAGE DAIRY INDUSTRY S.A. and subsidiaries as of December
31, 2001, and for each of the two years in the period ended December 31, 2001,
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated March 27, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FAGE DAIRY
INDUSTRY S.A. and its subsidiaries at December 31, 2002 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG
Athens, Greece,
March 31, 2003
F-1
<Page>
The audit report of Arthur Andersen, our former independent public
accountants, which is set forth below, is included in this Annual Report on Form
20-F for purposes of including the opinion of Arthur Andersen on our financial
statements for the years ended December 31, 2000 and 2001. Our financial
statements for the fiscal year ended December 31, 2002, have been audited by and
are reported on by Ernst & Young on page F-1 of this Annual Report on Form 20-F.
The audit report set forth below is a copy of the original audit report
dated March 27, 2002, rendered by Arthur Andersen that was included in our
Annual Report on Form 20-F for 2001 filed on April 1, 2002, and has not been
reissued by Arthur Andersen since that date. We are including this copy of the
March 27, 2002, Arthur Andersen audit report pursuant to Rule 2-02(e) of
Regulation S-X under the Securities Exchange Act of 1934. Your ability to assert
claims against Arthur Andersen based on its report may be limited.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To
FAGE DAIRY INDUSTRY S.A.:
We have audited the accompanying consolidated balance sheets of FAGE DAIRY
INDUSTRY S.A. (a Greek corporation) and subsidiaries ("Company") as of December
31, 2000 and 2001 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001 (expressed in thousands of Greek Drachmae). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FAGE DAIRY
INDUSTRY S.A. and subsidiaries as of December 31, 2000 and 2001 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with generally accepted
accounting principles in the United States.
ARTHUR ANDERSEN
Athens, Greece,
March 27, 2002
F-2
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS)
<Table>
<Caption>
2001 2002
-------- --------------------
NOTES EUR EUR U.S.$
-------- -------- -------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 2,831 7,866 8,248
Restricted cash 15,298 0 0
Marketable securities 3 3,251 3,116 3,267
Accounts receivable 4 71,881 80,463 84,365
Less: Allowance for doubtful accounts 4 (6,951) (7,453) (7,814)
-------- -------- --------
64,930 73,010 76,551
Due from related companies 5 1,755 1,587 1,663
Inventories 6 23,861 23,482 24,621
-------- -------- --------
TOTAL CURRENT ASSETS 111,926 109,061 114,350
-------- -------- --------
INVESTMENTS AND OTHER ASSETS
Investments in and advances to affiliates 7 3,624 2,433 2,551
Other non-current assets 8 806 1,653 1,733
-------- -------- --------
4,430 4,086 4,284
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT 9
Cost 138,547 154,824 162,333
Less: Accumulated depreciation (56,069) (63,420) (66,496)
-------- -------- --------
82,478 91,404 95,837
-------- -------- --------
BORROWING COSTS 1
Cost 3,334 3,334 3,495
Less: Accumulated amortization (2,119) (2,453) (2,571)
-------- -------- --------
1,215 881 924
-------- -------- --------
GOODWILL, RESULTING FROM CONSOLIDATED
SUBSIDIARIES 10 6,677 9,383 9,838
-------- -------- --------
TOTAL ASSETS 206,726 214,815 225,233
======== ======== ========
</Table>
Exchange rate used for the convenience translation of the December 31,
2002, Euro amounts: U.S.$ 1.0485 to EUR 1.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
F-3
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS EXCEPT PER SHARE DATA )
<Table>
<Caption>
2001 2002
-------- --------------------
NOTES EUR EUR U.S.$
-------- -------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable 37,020 48,211 50,549
Short-term borrowings 11 30,896 5,838 6,120
Current maturities of long-term debt 12 1,234 0 0
Due to related companies 5 4,580 7,850 8,231
Income taxes payable 14 4,019 6,512 6,828
Deferred income taxes 14 1,083 6,685 7,010
Other current liabilities 15 8,328 9,598 10,063
-------- -------- --------
TOTAL CURRENT LIABILITIES 87,160 84,694 88,801
-------- -------- --------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities 12,13 103,522 87,407 91,647
Staff retirement indemnities 16 1,199 1,401 1,469
Other long-term liabilities 2,560 3,079 3,228
Deferred income taxes 14 5,539 9,616 10,082
-------- -------- --------
112,820 101,503 106,426
-------- -------- --------
MINORITY INTERESTS 162 52 55
-------- -------- --------
CONTINGENCIES AND COMMITMENTS 22
SHAREHOLDERS' EQUITY
Share capital, nominal value EUR 2,93
each at December 31, 2001 and EUR 2,94 each
at December 31, 2002, (7,010,000 and 9,610,400
shares authorised, issued and outstanding
at December 31, 2001 and 2002, respectively) 17 20,572 28,254 29,624
Reversal of revaluation gains 17 (14,751) (22,396) (23,482)
Retained earnings 1,019 23,078 24,197
Accumulated other comprehensive income (256) (370) (388)
-------- -------- --------
6,584 28,566 29,951
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 206,726 214,815 225,233
======== ======== ========
</Table>
Exchange rate used for the convenience translation of the December 31,
2002, Euro amounts: U.S.$ 1.0485 to EUR 1.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
F-4
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2002
2000 2001 ------------------------
NOTES EUR EUR EUR U.S.$
---------- ---------- ---------- ---------- ----------
Net sales 1,20 280,089 303,771 331,308 347,376
Cost of sales 9 (184,588) (195,335) (207,316) (217,371)
---------- ---------- ---------- ----------
Gross profit 95,501 108,436 123,992 130,005
Selling, general and
administrative expenses 9,21 (74,794) (83,508) (95,197) (99,814)
Impairment loss 1,10 (2,456) (3,674) 0 0
---------- ---------- ---------- ----------
Income from operations 18,251 21,254 28,795 30,191
Interest expense 1,11,12,13 (11,251) (11,693) (10,483) (10,991)
Foreign exchange gains
(losses), net 1 (10,915) (5,235) 18,428 19,322
Losses on equity investee 7 (200) (303) (1,197) (1,255)
Other income (expenses), net 13 (5,368) 1,576 1,305 1,368
---------- ---------- ---------- ----------
Income (loss) before income taxes
and minority interests (9,483) 5,599 36,848 38,635
Provision for income taxes 1,14 80 (5,270) (14,900) (15,622)
---------- ---------- ---------- ----------
Income (loss) before minority interests (9,403) 329 21,948 23,013
Minority interests 74 13 111 116
---------- ---------- ---------- ----------
NET INCOME (LOSS) (9,329) 342 22,059 23,129
========== ========== ========== ==========
INCOME (LOSS) PER SHARE, BASIC AND DILUTED 1 (1.12) 0.04 2.65 2.78
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES, BASIC AND DILUTED 8,310,200 8,310,200 8,310,200 8,310,200
========== ========== ========== ==========
</Table>
Exchange rate used for the convenience translation of the December 31, 2002,
Euro amounts: U.S.$ 1.0485 to EUR 1.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-5
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS)
<Table>
<Caption>
RETAINED EARNINGS (DEFICIT)
-----------------------------------------
LEGAL, TAX
REVERSAL OF FREE AND
COMPREHENSIVE SHARE REVALUATION EXTRAORDINARY ACCUMULATED
INCOME CAPITAL GAINS RESERVES DEFICIT TOTAL
------------- ------- ----------- ------------- ------------- -------
BALANCE, DECEMBER 31, 1999 20,572 (14,751) 16,099 (6,093) 10,006
Net loss for the year (9,329) 0 0 0 (9,329) (9,329)
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0 2,504 (2,504) 0
Unrealized losses on marketable securities 1,304 0 0 0 0 0
-------------
Comprehensive income (8,025)
=============
------- ----------- ------------- ------------- -------
BALANCE, DECEMBER 31, 2000 20,572 (14,751) 18,603 (17,926) 677
======= =========== ============= ============= =======
Net income for the year 342 0 0 0 342 342
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0 913 (913) 0
Unrealized losses on marketable securities (256) 0 0 0 0 0
-------------
Comprehensive income 86
=============
------- ----------- ------------- ------------- -------
BALANCE, DECEMBER 31, 2001 20,572 (14,751) 19,516 (18,497) 1,019
======= =========== ============= ============= =======
Increase in share capital through
the capitalization of revaluation
gains 7,645 (7,645) 0 0 0
Increase in share capital through
cash contribution 37 0 0 0 0
Net income for the year 22,059 0 0 0 22,059 22,059
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0 4,415 (4,415) 0
Foreign currency translation 35 0 0 0 0 0
Unrealized losses on marketable securities (149) 0 0 0 0 0
-------------
Comprehensive income 21,945
=============
------- ----------- ------------- ------------- -------
BALANCE, DECEMBER 31, 2002 28,254 (22,396) 23,931 (853) 23,078
======= =========== ============= ============= =======
</Table>
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS)
<Table>
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE GRAND
INCOME TOTAL
------------- -------
BALANCE, DECEMBER 31, 1999 (1,304) 14,523
Net loss for the year 0 (9,329)
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0
Unrealized losses on marketable securities 1,304 1,304
Comprehensive income
------------- -------
BALANCE, DECEMBER 31, 2000 0 6,498
============= =======
Net income for the year 0 342
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0
Unrealized losses on marketable securities (256) (256)
Comprehensive income
------------- -------
BALANCE, DECEMBER 31, 2001 (256) 6,584
============= =======
Increase in share capital through
the capitalization of revaluation
gains 0 0
Increase in share capital through
cash contribution 0 37
Net income for the year 0 22,059
Transfer of statutory earnings to legal,
tax free and extraordinary reserves 0 0
Foreign currency translation 35 35
Unrealized losses on marketable securities (149) (149)
Comprehensive income
------------- -------
BALANCE, DECEMBER 31, 2002 (370) 28,566
============= =======
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-6
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(AMOUNTS IN 000'S OF EURO AND U.S. DOLLARS)
<Table>
<Caption>
2002
2000 2001 ----------------------
EUR EUR EUR U.S.$
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (9,329) 342 22,059 23,129
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 8,781 8,659 8,468 8,879
Impairment loss 2,456 3,674 0 0
Deferred income taxes (810) 2,329 9,679 10,148
Provision for personnel retirement cost 564 591 404 423
Provision for doubtful accounts receivable 1,467 531 1,171 1,228
Minority interests (74) (13) (111) (116)
Gain from sale of property, plant & equipment (258) (174) (227) (238)
(Gain) loss from marketable securities 8,869 (2) 0 0
Gain from Senior Notes repayment (876) 0 0 0
Unrealised foreign exchange (gains) losses 8,545 5,362 (16,558) (17,361)
Losses on equity investee 200 303 1,197 1,255
(Increase) Decrease in:
Accounts receivable (4,287) (9,597) (9,251) (9,700)
Due from related companies 574 (359) 168 176
Inventories (1,090) (2,391) 379 398
Increase (Decrease) in:
Trade accounts payable 1,092 4,081 11,191 11,734
Due to related companies 395 14 3,270 3,428
Income taxes payable (274) 372 2,493 2,614
Other current liabilities 964 (337) 1,686 1,768
Payment of staff retirement indemnities (514) (491) (201) (211)
Increase in other non-current assets (113) (273) (847) (888)
Increase (decrease) in other long-term liabilities (413) 2,290 519 545
--------- --------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES 15,869 14,911 35,489 37,211
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure for property, plant & equipment (10,712) (11,281) (18,964) (19,883)
Proceeds from sale of fixed assets 752 1,679 2,131 2,234
Proceeds from subsidies/grants 75 440 0 0
Investments in and advances to affiliates (4,039) (5,547) (2,823) (2,960)
Net change in restricted cash (8,233) (7,065) 15,298 16,040
Purchase of marketable securities (440) (1,261) (14) (15)
Proceeds from sale of marketable securities 0 27 0 0
--------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (22,597) (23,008) (4,372) (4,584)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings 15,029 8,951 (24,835) (26,040)
Repayment of long-term debt (1,350) (1,326) (1,242) (1,302)
Repayment of Senior Notes (15,619) 0 0 0
Increase of share capital 0 0 37 39
--------- --------- --------- ---------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (1,940) 7,625 (26,040) (27,303)
--------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 77 (144) (42) (45)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,591) (616) 5,035 5,279
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,038 3,447 2,831 2,969
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR 3,447 2,831 7,866 8,248
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
- interest, net of amounts capitalized 10,902 10,991 10,770 11,292
- income taxes 1,016 2,579 2,727 2,859
</Table>
Exchange rate used for the convenience translation of the December 31, 2002,
Euro amounts: U.S.$ 1.0485 to EUR 1.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-7
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
(AMOUNTS IN ALL TABLES AND NOTES ARE PRESENTED IN THOUSANDS OF EURO
UNLESS OTHERWISE STATED)
BUSINESS INFORMATION:
Fage Dairy Industry S.A., a corporation organized under the laws of the
Hellenic Republic (also known as Greece), is the successor to a business founded
in Athens in 1926 by the family of Mr. Athanassios Filippou, the father of the
current shareholders, Messrs. Ioannis and Kyriakos Filippou. References to the
"Company" or "Fage" include, unless the contents indicate otherwise, Fage Dairy
Industry S.A. and its consolidated subsidiaries.
Through its extensive distribution network, the Company sells a wide range
of branded dairy products, including yogurt and dairy desserts, milk and milk
cream and cheese. All operating activities are conducted in Greece and the
Company's products are sold under the FAGE(R) trademark.
No single customer accounted for more than 10% of the consolidated net
sales during the years ended December 31, 2000, 2001 and 2002.
1. SIGNIFICANT ACCOUNTING POLICIES:
a) PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements of the Company include the accounts of Fage Dairy Industry
S.A. and its majority owned subsidiaries: Foods Hellas S.A. (99.38%),
Voras S.A. (100%), Xylouris S.A. (68%), Ellenica S.r.l. (88.87%),
Agroktima Agios Ioannis S.A. (99.996%), Iliator S.A. (97%), Fage USA
Corp. (100%) and Zagas S.A. (99.988%). In addition, the consolidated
financial statements for the years ended December 31, 2000 and 2001,
include the accounts of Pindos S.A. (100%) and Tamyna S.A. (100%)
which subsidiaries were merged into Fage Dairy Industry S.A. during
fiscal year 2002. (See Note 10). All significant intercompany balances
and transactions have been eliminated in the accompanying consolidated
financial statements.
The Company's investments in unconsolidated (20%-50%) companies for
which Fage exercises significant influence are accounted for using the
equity method. Under this method the investment is carried at cost,
plus or minus the Company's equity in all increases and decreases in
the investee's net assets after the date of acquisition. All material
intercompany unrealized gains and losses have been reversed from
investee's net assets.
Investments of less than 20% ownership, where Fage does not exercise
significant influence, are accounted for at cost and adjusted for
impairment whenever facts and circumstances determine that a decline
in fair value below the cost basis is other than temporary.
b) BASIS OF FINANCIAL STATEMENTS: The Company maintains its accounting
records and publishes its statutory financial statements following
Greek tax and corporate regulations and has made certain adjustments
to these records to present the accompanying consolidated financial
statements in accordance with accounting principles generally accepted
in the United States ("U.S. GAAP").
c) USE OF ESTIMATES: The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-8
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
d) FOREIGN CURRENCY TRANSLATION: Effective January 1, 2001 and pursuant
to the Treaty for the European Union, Greece joined the Economic and
Monetary Union (E.M.U.). Accordingly, the rate for the Greek Drachmae
(GRD) against the Euro was fixed at GRD 340.75 to Euro 1.00. Effective
January 1, 2002, the official currency for all E.M.U. member states is
the Euro. Accordingly, as of January 1, 2002, Fage's functional
currency is the Euro. Transactions involving other currencies are
converted into Euro (or Greek Drachmae through December 31, 2001),
using the exchange rates, which are in effect at the time of the
transactions. At the balance sheet dates, monetary assets and
liabilities, which are denominated in other currencies, are adjusted
to reflect the current exchange rates.
Gains or losses resulting from foreign currency remeasurement are
reflected in the accompanying consolidated statements of operations.
Of the foreign exchange gains (losses), net, shown in the accompanying
consolidated statements of operations, losses of EURO 8,690 and EURO
5,165 for 2000 and 2001, respectively and gains of EURO 16,527 for
2002, relate to year-end remeasurement. Included in foreign exchange
gains (losses), net, for 2000, 2001 and 2002 are amounts of EURO
(9,738), EURO (5,414) and EURO 16,343, respectively, relating to
unrealized foreign exchange gains (losses) of Senior Notes referred to
in Note 13.
The functional currency of the Company's wholly owned subsidiary, Fage
USA Corp., is the U.S. Dollar. Accordingly, all balance sheet accounts
of this subsidiary are translated using the exchange rate in effect at
the balance sheet date. Revenues and expenses are translated at the
weighted average rate of exchange prevailing during the year.
Cumulative translation gains and losses are reported as cumulative
translation adjustment in "Accumulated Other Comprehensive Income", a
separate component of shareholders' equity. Transaction gains or
losses are reported in the consolidated statements of operations.
e) PRODUCT DEVELOPMENT COSTS: Product development costs are expensed as
incurred.
f) ADVERTISING COSTS: All advertising costs are expensed as incurred and
included in selling, general and administrative expenses in the
consolidated statements of operations. Advertising costs for the years
ended December 31, 2000, 2001 and 2002, were EURO 17,130, EURO 17,281
and EURO 22,147, respectively.
g) BORROWING COSTS: The expenses incurred in connection with the issuance
and distribution of the Senior Notes issued on February 11, 1997, (see
Note 13), including underwriting commissions, were capitalized as
deferred charges and are being amortized on a straight-line basis over
the term of the Senior Notes. Amortization for 2000, 2001 and 2002
totaled EURO 333 for each of the above years and is included in
interest expense in the accompanying 2000, 2001 and 2002 consolidated
statements of operations.
h) IMPAIRMENT OF LONG-LIVED ASSETS: The U.S. Financial Accounting
Standards Board issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting
and reporting for the impairment or disposal of long lived assets and
supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results
of Operations for a Disposal of a Segment of a Business". The Company
adopted SFAS No. 144 as of January 1, 2002, without any effect on the
Company's financial position and results of operations. The standard
requires that long-lived assets and certain identifiable intangibles
held and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. An impairment loss for an
asset held for use should be recognized, when the estimate of
undiscounted cash flows, excluding interest charges, expected to be
generated by the use of the asset is less than its carrying amount.
Measurement of the impairment loss is based on the fair value of the
asset.
i) GOODWILL: Goodwill is the excess of the purchase price over the fair
value of net identifiable assets acquired in business combinations
accounted for as a purchase. Prior to January 1, 2002, goodwill was
amortized on a straight-line basis over periods not exceeding 20
years. Effective with the adoption of SFAS No. 142 on January 1, 2002,
the Company is no longer amortizing goodwill, and is instead testing
it for impairment at least annually. See Note 10 for further
information regarding the adoption of this standard and the related
goodwill tests.
F-9
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
j) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
stated at cost, net of subsidies provided by the Greek State, plus
interest costs incurred during periods of construction based upon the
weighted average borrowing rate. Repairs and maintenance costs are
expensed as incurred. The cost and related accumulated depreciation of
assets retired or sold are removed from the accounts at the time of
sale or retirement, and any gain or loss is included in the
consolidated statements of operations. For statutory reporting
purposes, the Company was obliged to revalue its property, plant and
equipment at various dates following the provisions of the respective
mandatory tax laws. These revaluations have been reversed in the
consolidated financial statements, after giving effect to the related
deferred income taxes. The reversal of the net revaluation gains is
reflected as a separate component of shareholders' equity.
k) DEPRECIATION: Depreciation is computed based on the straight-line
method at rates, which approximate average economic useful lives.
The rates used are as follows:
<Table>
<Caption>
CLASSIFICATION ANNUAL RATES
-------------- -------------
Buildings 3%
Machinery and equipment 7%
Transportation equipment 12% - 15%
Furniture and fixtures 15%
</Table>
l) INVENTORIES: Inventories are stated at the lower of cost or market
value. Cost includes all costs incurred in bringing inventories to
their current location and state of manufacture and comprises raw
materials, labor, an applicable amount of production overhead and
packaging. The cost of raw materials and finished goods are determined
based on a first-in, first-out basis.
m) MARKETABLE SECURITIES: The Company has investments in equity
securities, which are traded on the Athens Stock Exchange. These
investments have been classified as available for sale and are carried
at their fair market value with the unrealized holding gains and
losses reflected under Accumulated Other Comprehensive Income in
Shareholders' Equity. As the significant downturn in the Athens Stock
Exchange during fiscal year 2000 was judged to be other than
temporary, the unrealized loss at December 31, 2000, was accounted for
as a realized loss and is included in other income (expenses), net in
the accompanying 2000 consolidated statement of operations, rather
than a separate component in shareholders equity. There were no
similar losses in 2001 and 2002.
n) REVENUE RECOGNITION: The Company recognizes revenues, net of trade
discounts and sales incentives, upon shipment of goods when title and
risk of loss pass to customers. Shipping and handling costs are
classified as part of selling, general and administrative expenses.
Such costs for the years ended December 31, 2000, 2001 and 2002
amounted to EURO 25,892, EURO 30,119, EURO 34,347, respectively.
Effective January 1, 2002, the Company adopted the Emerging Issues
Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's
Products". Prior period consolidated statements of operations have
been reclassified to reflect the adoption. The adoption resulted in
reflecting trade support actions that are generally invoiced to the
Company by customers as a deduction of sales rather than selling
expenses. Accordingly, net revenues were reduced by EURO 7,409, EURO
14,474 and EURO 19,441 for the years ended December 31, 2000, 2001 and
2002, respectively. In addition, distribution costs incurred by the
Company and provided to distributors as an allowance on sales were
reflected as selling expenses. Accordingly, selling, general and
administrative expenses increased by EURO 20,439, EURO 23,816 and EURO
27,298 for the years ended December 31, 2000, 2001 and 2002,
respectively with a corresponding increase in net revenues for the
respective years.
o) CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements
of cash flows, the Company considers time deposits and certificates of
deposits with original maturities of three months or less to be cash
equivalents.
p) RESERVE FOR STAFF RETIREMENT INDEMNITIES: Staff retirement obligations
are calculated at the discounted value of the future retirement
benefits deemed to have accrued at year-end, based on the employees
earning retirement benefit rights steadily throughout the working
period. Retirement obligations are calculated on the basis of
financial and actuarial assumptions detailed in Note 16. Net pension
costs for the period are included in payroll in the accompanying
consolidated statements of operations and consist of the present value
of benefits earned in the year, interest cost on the benefit
obligation, prior service cost, actuarial gains
F-10
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
or losses and any additional pension charges. Prior service costs are
recognized on a straight-line basis over the average remaining service
period of the employees expected to receive benefits under the plan.
Unrecognized gains or losses are recognized over the average remaining
service period of active employees and included as a component of net
pension cost for a year if, as of the beginning of the year, it
exceeds 10% of the projected benefit obligation. The retirement
benefit obligations are not funded.
q) INCOME TAXES: Income taxes have been accounted for using the liability
method in accordance with SFAS No. 109 "Accounting for Income Taxes".
Deferred income taxes have been provided for the tax effects of
temporary differences between financial reporting and tax bases of
assets and liabilities using enacted rates in effect during the years
the differences are expected to reverse. Valuation allowances are
recorded to reduce tax assets when it is more likely than not that a
tax benefit will not be realized.
r) CONCENTRATIONS OF CREDIT RISKS: Concentrations of credit risks are
limited with respect to receivables due to the large number of
customers comprising the Company's customer base. At December 31, 2001
and 2002, approximately EURO 6,178 and EURO 5,871, respectively (9.5%
and 8.0% of net accounts receivable, respectively) was due from a
group of supermarkets. The Company generally does not require
collateral or other security to support customer receivables.
s) ACCOUNTS RECEIVABLE CREDIT AND COLLECTION: The Company has established
criteria for granting credit to customers, which are generally based
upon the size of the customer's operations and consideration of
relevant financial data. Business is generally conducted with such
customers under normal terms with collection expected within sixty
days after shipment. At each balance sheet date, all potentially
uncollectible accounts are assessed individually for purposes of
determining the appropriate allowance for doubtful accounts. The
balance of such allowance for doubtful accounts is appropriately
adjusted by recording a charge to the consolidated statement of
operations of the reporting period. Any amount written-off with
respect to customer account balances is charged against the existing
allowance for doubtful accounts. It is the Company's policy not to
write-off an account until all possible legal action has been
exhausted. During 2000 and 2002, delinquent accounts were written-off
against the existing allowance for doubtful accounts of EURO 1,236 and
EURO 669 (see also Note 4). During 2001 no delinquent accounts were
written-off.
t) EARNINGS PER SHARE: Basic and dilutive earnings per share are computed
by dividing net income by the weighted average number of common shares
outstanding during each year. There were no dilutive securities
outstanding during any of the years presented.
u) SEGMENT REPORTING: SFAS No. 131, "Disclosures about Segments of an
Enterprise and related information " requires certain disclosures
about business segments of an enterprise, if applicable. The Company
produces dairy products and operates primarily in Greece. Due to the
nature of the products and the manner in which they are marketed to
customers, the chief operating decision makers operate and manage the
business as one business segment. Accordingly, no operating results by
individual or group of products are produced and neither are the
Company's assets and liabilities analyzed by various product groups.
Certain information maintained for sales exported to Western European
countries and the United States of America is included in Note 20
below.
v) DERIVATIVE FINANCIAL INSTRUMENTS: SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value, with changes in the derivatives' fair
value recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 as amended by SFAS No. 138,
is effective for fiscal years beginning after June 15, 2000 and cannot
be applied retroactively. During fiscal years 2000, 2001 and 2002, the
Company did not engage in any transaction with derivative instruments
or have any hedging activities.
w) RECENT ACCOUNTING PRONOUNCEMENTS: Recent Statements of Financial
Accounting Standards issued by the Financial Accounting Standards
Board ("FASB") are summarized as follows:
(i) SFAS No. 143, "Accounting for Asset Retirement Obligations",
relates to financial accounting and reporting requirements
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The statement is
effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company has not determined
the impact, if any, that the adoption of this statement will
have on the Company's results of operations or financial
position.
F-11
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
(ii) SFAS No. 145, In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, Amendment of FASB
Statement No. 13, and Technical Corrections", which is effective
for fiscal years beginning after May 15, 2002. This statement
requires most gains and losses from extinguishment of debt to be
presented as a gain or loss from continuing operations rather
than as an extraordinary item. Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations,
Reporting Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" will now be used to classify those gains and
losses. This Statement also amends FASB No. 13, which requires
that certain capital lease modifications be treated as a
sale-leaseback transaction. As of 2002, the Company adopted SFAS
No. 145 with respect to the presentation of gains or losses from
continuing operations rather than as an extraordinary item. The
adoption of SFAS No. 145 had no effect on the Company's
consolidated financial statements.
(iii) SFAS No. 146, In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 replaces EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to exit an Activity (including Certain Costs
Incurred in a Restructuring", and changes the timing of
recognition for certain exit costs associated with restructuring
activities. Under SFAS No. 146 certain exit costs would be
recognized over the period in which the restructuring activities
occur. Currently, exit costs are recognized when the Company
commits to a restructuring plan. SFAS No. 146 is applied
prospectively to exit or disposal activities initiated after
December 31, 2002, though early adoption is allowed. The Company
will adopt SFAS No. 146 for exit or disposal activities that are
initiated after December 31, 2002. The provisions of SFAS No.
146 could result in the Company recognizing the cost of future
restructuring activities over a period of time as opposed to as
a one-time expense.
(iv) FASB Interpretation No. 45 ("FIN No 45"), In November 2002, the
FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Other ". FIN No. 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under the guarantee. The
disclosure provisions of FIN No. 45 are effective for financial
statements of annual periods that end after December 15, 2002.
The provisions for initial recognition and measurement are
affective on a prospective basis for guarantees that are issued
or modified after December 31, 2002. Adoption of FIN No. 45 is
not expected to have a significant effect on the Company's
consolidated financial statements.
x) PRESENTATION CHANGES: Certain reclassifications have been made to the
2000 and 2001 consolidated financial statements to conform to the
presentation in the 2002 consolidated financial statements.
2. TRANSLATIONS OF EURO AMOUNTS INTO U.S. DOLLARS:
As explained in Note 1 (d), effective January 1, 2002, the Company's
measurement and reporting currency is the Euro. The translations of the
Euro amounts into U.S. Dollars at the rate of US $ 1.0485 to EURO 1.00 are
included solely for the convenience of the reader. This U.S. $ convenience
exchange rate is computed based on the noon buying rate in New York City
for cable transfers in Euro, as certified for customs purposes by the
Federal Reserve Bank of New York on December 31, 2002. The convenience
translation should not be construed as representations that the Euro
amounts have been, could have been, or could in the future be, converted
into U.S. Dollars at this or any other rate of exchange.
3. MARKETABLE SECURITIES:
Equity securities at December 31, 2001 and 2002, include: (a)
EURO 1,841 and EURO 1,150 respectively, representing the market value of
139,141 preferred and 210,719 common shares as at December 31, 2001 and
139,831 preferred and 212,849 common shares as at December 31, 2002, of Vis
S.A. (a related company ) representing approximately 7.0% and 7.1% at the
respective dates, of the authorized, issued and outstanding shares as of
those dates, and (b) EURO 1,410 and EURO 1,966 representing the market
value of 300,000 shares as at December 31, 2001 and 420,000 shares as at
December 31, 2002, of Hellenic Biscuit Company (a related company)
representing approximately 0.9%, on both dates, of Hellenic Biscuit
Company's authorized, issued and outstanding shares.
F-12
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
The above-mentioned investments have been classified as available for sale
and are carried at their fair market value with the difference in the
market values reflected in shareholders' equity. At December 31, 2001 and
2002, the cost of these investments in equity securities was EURO 3,507 and
EURO 3,521, respectively.
Proceeds from the sale of equity securities of the above mentioned
companies for 2001, totaled EURO 27 while the resulting gross gains
recognized in the consolidated statements of operations totaled EURO 2 for
2001. There were no sales of equity securities in 2000 and 2002.
The change in net unrealized holding loss on available for sale equity
securities totaled EURO 7,565 in 2000, EURO 256 in 2001 and EURO 149 in
2002.
As the significant downturn in the Athens Stock Exchange during fiscal
year 2000 was judged to be other than temporary, the unrealized loss at
December 31, 2000, was accounted for as a realized loss and is included in
other income (expenses), net in the accompanying 2000 consolidated
statement of operations, rather than a separate component in shareholders
equity. During fiscal years 2001 and 2002, the Athens Stock Exchange did
not experience a similar downturn effect as that of fiscal year 2000.
4. ACCOUNTS RECEIVABLE:
Accounts receivable are analyzed as follows:
<Table>
<Caption>
2001 2002
------- -------
TRADE:
- In Euro 57,058 64,882
- In foreign currencies 4,118 3,197
------- -------
61,176 68,079
- Less: allowance for doubtful accounts (3,098) (3,292)
------- -------
58,078 64,787
------- -------
OTHER:
- Value added tax 2,594 4,486
- Prepaid taxes, other than income taxes 952 1,022
- Prepaid expenses 190 590
- Custom brokers 128 181
- Advances to suppliers 5,300 4,855
- Various debtors 1,541 1,250
------- -------
10,705 12,384
- Less: allowance for doubtful accounts (3,853) (4,161)
------- -------
6,852 8,223
------- -------
64,930 73,010
======= =======
</Table>
F-13
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
The movement of the allowance for doubtful accounts during the years
ended December 31, 2000, 2001 and 2002, was as follows:
<Table>
<Caption>
TRADE OTHER TOTAL
--------- --------- ---------
Balance at December 31, 1999 2,532 2,422 4,954
Balance from newly acquired subsidiary - 968 968
Charge for 2000 602 1,132 1,734
Written-off in 2000 (251) (985) (1,236)
------- -------- --------
Balance at December 31, 2000 2,883 3,537 6,420
Charge for 2001 215 316 531
------- -------- --------
Balance at December 31, 2001 3,098 3,853 6,951
Charge for 2002 194 977 1,171
Written-off in 2002 - (669) (669)
------- -------- --------
Balance at December 31, 2002 3,292 4,161 7,453
======= ======== ========
</Table>
The Company, during 2000 and 2002 wrote-off accounts receivable and other
debtors aggregating to EURO 1,236 and EURO 669, respectively against the
existing allowance as all possible legal action was exhausted. There was no
write-off of accounts receivable during 2001.
It is the Company's policy to attach liens against the property of
most of its delinquent customers. Because of the prolonged and complex
legal procedures in Greece, it is not unusual for the collection process to
take three to five years before a case is finalized.
5. DUE FROM (TO) RELATED COMPANIES:
Fage purchases goods and services from and makes sales of goods to
certain related companies in the ordinary course of business. Such related
companies consist of affiliates or companies, which have common ownership
and/or management with Fage.
Account balances with related companies are as follows:
<Table>
<Caption>
2001 2002
----- -----
Due from:
- Ioannis Nikolou ULP 1,254 1,214
- Sideris & Co 367 367
- Bizios S.A. 134 -
- Vis S.A. - 6
----- -----
1,755 1,587
===== =====
Due to:
- Aspect S.A. 1,309 3,669
- Mornos S.A. 1,677 2,263
- Iofil S.A. 80 729
- Palace S.A. 230 433
- Vihep S.A. 336 329
- Evga S.A. 368 168
- Vis S.A. 580 -
- Bizios S.A. - 259
----- -----
4,580 7,850
===== =====
</Table>
F-14
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
Transactions with related companies for 2000, 2001 and 2002 are
analyzed as follows:
<Table>
<Caption>
PURCHASES SALES
FROM RELATED PARTIES TO RELATED PARTIES
------------------------ ------------------------
2000 2001 2002 2000 2001 2002
------ ------ ------ ------ ------ ------
Inventories, materials and
supplies 32,829 33,617 40,191 5,382 5,043 4,317
Advertising and media 13,454 14,227 17,410 - - -
Commercial services 2,398 2,774 3,027 - - -
------ ------ ------ ------ ------ ------
48,681 50,618 60,628 5,382 5,043 4,317
====== ====== ====== ====== ====== ======
</Table>
Purchases of inventories, materials and supplies, represent
approximately 18%, 19% and 22% of Fage's total purchases for 2000, 2001 and
2002, respectively.
Advertising, media buying and commercial services represent
approximately 93%, 85% and 73% of Fage's total advertising and commercial
costs for 2000, 2001 and 2002, respectively.
MORNOS. The Company purchases plastic yogurt tubs, aluminium yogurt
tub tops and other packaging products from Mornos. Mr. Kyriakos Filippou,
members of his family and companies controlled by them own 100% of Mornos.
Mr Kyriakos Filippou is the Chairman of the Board of Mornos. The Company's
purchases from Mornos totaled EURO 15,099, EURO 17,321 and EURO 21,062 for
2000, 2001 and 2002, respectively.
VIS. The Company purchases corrugated boxes from Vis, a public company
that is listed on The Athens Stock Exchange. Mr. Ioannis Filippou, members
of his family and a company owned by them own 59.3% of Vis and Fage owns
7.0%. Mr. Ioannis Filippou is Chairman and Mr. Athanassios Filippou Vice
Chairman of the Board of Vis. The Company's purchases from Vis totaled EURO
3,888, EURO 4,646 and EURO 2,538 for 2000, 2001 and 2002, respectively.
VIHEP. The Company purchases sugar, cocoa and various other
ingredients from Vihep. Mr. Dimitrios Anagnostou, the brother-in-law of Mr.
Kyriakos Filippou, owns 55%, and a company owned by Mr. Kyriakos Filippou
and members of his family owns 20% of Vihep. The Company's purchases from
Vihep totaled EURO 2,759, EURO 2,770 and EURO 2,704 for 2000, 2001 and
2002, respectively.
EVGA. Evga, which is 100% owned by Mr. Kyriakos Filippou, members of
his family and a company owned by them, produces fresh and UHT fruit juices
and ice cream which are sold to the Company. Mr Kyriakos Filippou is
Chairman of the Board of Evga and Mr. Athanassios-Kyros Filippou is its
Chief Executive Officer. The Company is the exclusive distributor of Evga's
fresh fruit juices in Greece. These products, which bear the EVGA(R)
trademark, are purchased by the Company from Evga at a negotiated
discounted price and are sold to retailers at a mark-up. Evga retains
responsibility for all marketing, advertising and promotion costs. The
Company's purchases from Evga totaled EURO 6,512, EURO 7,360 and EURO 8,474
for 2000, 2001 and 2002, respectively. In addition, from time to time, the
Company sells to Evga various raw materials for its products. The Company's
sales to Evga totaled EURO 514, EURO 610 and EURO 683 for 2000, 2001 and
2002, respectively.
ASPECT. Aspect is an advertising and media agency, associated with J.
Galanakis Advertisements S.A. Iofil owns 70.6%, Mr. Ioannis Filippou and
members of his family own 19.6% and J. Galanakis Advertisements S.A. owns
9.8%. Mr. Athanassios Filippou is the Chairman of the Board of Aspect. The
Media Department of Aspect is engaged in planning, scheduling and buying
time and space on television and radio and in publications for all
companies controlled by the Filippou family and a number of other companies
on a commission basis. In addition, Aspect's Creative and Client Service
Departments are engaged in developing advertising and promotional campaigns
for several of the Company's products and brands. When Aspect handles a
product or brand advertising and/or promotion, it charges the Company an
additional commission on the total campaign cost. Billings by Aspect to the
Company totaled EURO 13,454, EURO 14,227 and EURO 17,410 for 2000, 2001 and
2002, respectively. Aspect's commissions out of the above were 4% for media
planning, scheduling and buying and an additional 12% for handling
advertising and promotional campaigns.
IOFIL. Iofil is 100% owned by Mr. Ioannis Filippou and members of his
family. Mr. Ioannis Filippou is
F-15
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
Chairman and Mr Athanassios Filippou is Vice Chairman of the Board of
Iofil. Iofil is an industrial, commercial and services company and is also
the controlling shareholder of Vis. Iofil provides corporate management
services to the Company and other companies controlled by the Filippou
family. Additionally, since 2002, the Company purchases from Iofil
corrugated boxes which for 2000 and 2001 have been through Vis. The
Company's purchases from Iofil totaled EURO 1,027, EURO 1,174 and EURO
4,122 for 2000, 2001 and 2002, respectively.
PALACE. Palace is 100% owned by Mr. Kyriakos Filippou and a company
owned by him and members of his family. Mr. Kyriakos Filippou is Chairman
of the Board of Palace and Mr. Athanassios-Kyros Filippou is a director.
Palace is a services company and provides corporate management services to
other companies controlled by the Filippou family. Pursuant to an agreement
with the Company, continuing in 2003, Palace will provide the Company with
corporate management services. Services provided for 2000, 2001 and 2002
totaled EURO 998, EURO 1,359 and EURO 1,554, respectively.
IOANNIS NIKOLOU ULP ("IOANNIS NIKOLOU"). Mr. Ioannis Nikolou is the
brother-in-law of Mr. Ioannis Filippou and is one of the Company's sales
representatives. As such, he buys products from the Company at a discounted
price and resells them at a marked-up price, with the difference being
retained as his commission. The Company determines the discounts offered to
and mark-ups charged by its sales representatives in a uniform manner.
Purchases by Ioannis Nikolou from the Company totaled EURO 3,859, EURO
3,360 and EURO 3,547 for 2000, 2001 and 2002, respectively. Ioannis Nikolou
derives a standard commission on resale of such purchased products.
BIZIOS. Bizios is a cheese company in which Fage has a 45%
participating stake. Mr Zissis Bizios and Mr Nikos Bizios own equally the
remaining 55% of the company. Fage sells milk to Bizios and purchases
mainly feta cheese. The Company's sales to Bizios totaled EURO 921, EURO
986 and 0 for 2000, 2001 and 2002, respectively. The Company's purchases
from Bizios totaled EURO 3,950, EURO 1,523 and EURO 2,507 for 2000, 2001
and 2002, respectively.
6. INVENTORIES:
Inventories are analyzed as follows:
<Table>
<Caption>
2001 2002
-------- -------
Merchandise 1,311 1,561
Finished and semi-finished products 8,879 8,898
Raw materials and supplies 7,342 7,566
Advance payments to suppliers for materials
and supplies 6,329 5,457
-------- -------
23,861 23,482
======== =======
</Table>
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Company's investments are analyzed as follows:
<Table>
<Caption>
2001 2002
-------- -------
Equity participation:
- Tyras S.A. 1,109 1,109
- Bizios S.A. 2,427 1,236
- Packing Hellas Development S.A. 88 88
-------- -------
3,624 2,433
======== =======
</Table>
(i) Tyras S.A. is a cheese producer, in which the Company has a 5.4%
participation interest. The investment in Tyras is accounted for at
cost.
(ii) Bizios S.A. is a 45% owned cheese producer accounted for under the
equity method.
(iii) Packing Hellas Development S.A. is a packing material manufacturer in
which the Company has a 8.82% participation interest.
F-16
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
The Company's investments in Tyras S.A. and Packing Hellas Development
S.A. are accounted for at cost, while its investment in Bizios S.A. is
accounted for under the equity method. In this respect, losses of EURO 200,
EURO 303 and EURO 645 have been recognized in the accompanying 2000, 2001
and 2002 consolidated statements of operations, respectively.
In 2002, the review by the Company's management of the carrying amount
of its investment in Bizios S.A. in connection with its expected
recoverable amount and the estimated undiscounted cash flows from future
operations indicated that it exceeded its expected recoverable amount.
Accordingly, the Company recognized an impairment loss of EURO 552, which
is included in the accompanying 2002 consolidated statement of operations.
8. OTHER NON-CURRENT ASSETS:
Other non-current assets are analyzed as follows:
<Table>
<Caption>
2001 2002
-------- --------
Long-term notes receivable 813 1,968
Less: current maturities, included in
trade accounts receivable (380) (731)
------- -------
433 1,237
Trademarks, net of amortization 87 81
Utility deposits 236 264
Other 50 71
------- -------
806 1,653
======= =======
</Table>
9. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at original cost, net of
related Greek State subsidies of EURO 7,053 and EURO 7,002 in 2001 and
2002, respectively, plus interest costs incurred during periods of
construction based upon the weighted average borrowing rate.
<Table>
<Caption>
2001 2002
------- -------
COST
- Land 3,949 3,995
- Buildings 33,128 35,199
- Machinery and equipment 77,007 83,418
- Transportation equipment 8,234 7,779
- Furniture and fixtures 11,926 13,441
- Construction in progress 4,303 10,992
------- -------
138,547 154,824
======= =======
<Caption>
NET BOOK VALUE 2001 2002
-------------- ------- -------
- Land 3,949 3,995
- Buildings 24,925 26,182
- Machinery and equipment 46,079 46,560
- Transportation equipment 142 166
- Furniture and fixtures 3,081 3,509
- Construction in progress 4,302 10,992
------- -------
82,478 91,404
======= =======
</Table>
Depreciation expense for 2000, 2001 and 2002, amounted to EURO 7,492,
EURO 7,778 and EURO 8,134, respectively. Interest costs capitalized during
the years ended December 31, 2000, 2001 and 2002, totaled EURO 83, EURO 83
and EURO 195, respectively.
F-17
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
10. GOODWILL
Goodwill reflected in the accompanying consolidated balance sheets is
analyzed as follows:
<Table>
<Caption>
2001 2002
------- -------
Food Hellas S.A. 1,755 1,755
Pindos S.A. 374 374
Voras S.A. - 2,496
Xylouris S.A. 754 964
Ellenica S.R.L. 180 180
Tamyna S.A. 1,394 1,394
Agroktima S.A. 134 134
Iliator S.A. 31 31
Zagas S.A. 2,055 2,055
------- -------
6,677 9,383
======= =======
</Table>
FOODS HELLAS S.A.: Foods Hellas is owned 99.38% by Fage and the balance of
0.62% is owned in equal shares by the two shareholders of Fage. Foods Hellas is
a distribution company with a network that covers Northern Greece.
Fage acquired its participating interest in Foods Hellas in three tranches.
The first (46.9%) was acquired in 1990 for a consideration of EURO 1,174 from a
third party who had previously acquired the shares from Fage's present
shareholders. The second tranche (37.5%) was acquired in 1992 and the third
tranche (14.98%) was acquired in 2001 from Fage's present shareholders.
Effective January 1, 1998, the distribution network of Foods Hellas is being
operated under the name of Fage.
PINDOS S.A.: Fage acquired 100% of Pindos S.A. in seven tranches (51% in
1993, 19.6% in 1994, 11.2% in 1997, 12.09% in 1998, 2.22% in 1999, 1.37% in 2001
and 2.52% in 2002) for a total consideration of EURO 8,359. Pindos S.A. is a
cheese producer in Ioannina.
In September 1999 Foods Hellas S.A. acquired a 3.89% interest in Pindos
S.A. for an amount of EURO 440. During 2001, Fage increased its participation in
Pindos S.A. by 1.37% through an increase in share capital of Pindos S.A. of EURO
2,641 in which Food Hellas did not participate and as a result, its interest in
Pindos S.A. was reduced to 2.52%. Additionally, in September 2002 Fage purchased
from Foods Hellas S.A. its participation of 2.52% in Pindos S.A. for a
consideration of EURO 207. As of December 31, 2002 Pindos S.A. has been merged
into Fage Dairy Industry S.A.
VORAS S.A.: Fage acquired 100% of Voras S.A. in four tranches (45% in 1996,
25% in 1997, 5.5% in 1998 and 24.5% in 2002) for a total consideration of EURO
8,499. In December 2002, Fage acquired the participating interest of 24.5% in
Voras for a consideration of EURO 2,618 which was accounted for under the
purchase method of accounting. Voras S.A. is a milk producer in Amintaio. As of
December 31, 2002, all assets of Voras S.A. have been transferred to Fage Dairy
Industry S.A., and Voras S.A. is in the process of being liquidated.
XYLOURIS S.A.: Fage acquired its participating interest 68% in Xylouris
S.A. in four tranches (35% in 1995, 12% in 1996, 4% in 1997 and 17% in 2002) for
a total consideration of EURO 1,614. In October 2002, Fage acquired the
participating interest of 17% in Xylouris for a consideration of EURO 210.
Xylouris is a cheese producer in Crete.
ELLENIKA S.R.L.: Ellenika is a 88.87% owned Italian distribution company.
Fage acquired its participating interest in Ellenika in 1993 for a consideration
of EURO 457.
TAMYNA S.A.: Fage acquired 100% of Tamyna S.A. in five tranches (42.3% in
1996, 4.7% in 1997, 25.49% in 2000, 26.93% in 2001 and 0.58% in 2002) for a
total consideration of EURO 4,845. During 2000, Foods Hellas S.A. acquired a
0.58% interest in Tamyna S.A. for an amount of EURO 37. Additionally, in
September 2002, Fage purchased from Foods Hellas S.A. its participation of 0.58%
in Tamyna S.A. for a consideration of EURO 35. Tamyna is a cheese producer in
Aliveri. As of December 31, 2002, Tamyna S.A. has been merged into Fage Dairy
Industry S.A.
AGROKTIMA S.A.: Fage acquired its participating interest of 99.33% in
Agroktima in two tranches (33.24% in 1998 and 66.09% in 2000) for a total
consideration of EURO 1,573. Additionally, in 2000, Foods Hellas S.A. acquired a
0.666% interest in Agroktima for an amount of EURO 12. Therefore, Fage obtained
an additional (indirect) 0.57% interest
F-18
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
in Agroktima and, as of December 31, 2002, holds 99.996% of the company's
outstanding shares. Agroktima is an agricultural and farm development company.
ILIATOR S.A.: The Company has a participation interest of 97% in Iliator
S.A., a construction company.
ZAGAS S.A.: Zagas S.A. is a cheese producer in Agrinio. Fage acquired its
participating interest of 98% on January 19, 2001, for a consideration of EURO
3,020. Additionally, in 2001 Foods Hellas S.A. acquired a 2% interest in Zagas
S.A. for an amount of EURO 62. Therefore, Fage obtained an additional (indirect)
1.988% interest in Zagas S.A. and, as of December 31, 2002, holds 99.988% of the
company's outstanding shares. The results of this investment have been included
in the Company's consolidated results of operations from the date of
acquisition. The purchase of Zagas S.A. was accounted for under the purchase
method of accounting.
In 2000 and 2001, the review by the Company's management of the carrying
amounts of the goodwill that arose from investments in subsidiaries in
connection with their expected recoverable amount and the estimated undiscounted
cash flows from future operations indicated that the carrying amount of goodwill
relating to subsidiaries operating in the "Feta" cheese product line exceeded
its expected recoverable amount. Accordingly, the Company recognized an
impairment loss of EURO 1,323 and EURO 3,324 in 2000 and 2001, respectively.
As discussed in Note 1(i), with the adoption of SFAS No. 142 on January 1,
2002, the Company is no longer amortizing goodwill, and is instead testing it
for impairment at least annually. The goodwill impairment test is a two-step
process that requires goodwill to be allocated to reporting units. In the first
step, the fair value of the reporting unit is compared to the carrying value of
the reporting unit. If the fair value of the reporting unit is less than the
carrying value of the reporting unit, a goodwill impairment may exist, and the
second step of the test is performed. In the second step, the implied fair value
of the goodwill is compared to the carrying value of the goodwill and an
impairment loss is recognized to the extent that the carrying value of the
goodwill exceeds the implied fair value of the goodwill. As a result of the
adoption of SFAS No. 142, the Company has re-assessed the classification of its
previously acquired goodwill. The assessment did not result in any adjustments
to previously recorded amounts. In addition, the Company has completed the first
step of the goodwill impairment test. Since the carrying value of the Company's
reporting unit did not exceed its fair value, no goodwill impairment charges
arose upon the adoption of SFAS No. 142. At December 31, 2002, the Company had
EURO 9,383 of goodwill that will no longer be amortized.
11. SHORT-TERM BORROWINGS:
Short-term borrowings are draw-downs under various lines of credit
maintained by the Company with several banks. The aggregate amount of
available lines of credit was EURO 49,900 and EURO 38,262 at December 31,
2001 and 2002, respectively, of which approximately EURO 19,004 and EURO
32,424 were unused as of the above dates. As of December 31, 2001, Fage
held an amount of EURO 15,298, including interest earned through that date
in a restricted cash account as collateral for short term borrowings
amounting to EURO 14.3 million. During July 2002, the related short-term
borrowings of EURO 14.3 million were paid and the restricted cash was
released.
Short-term borrowings are denominated in Euros, Japanese Yen and U.S.
Dollars and are secured by the corporate guarantee of Fage Dairy Industry
S.A.
The weighted average interest rates on short-term borrowings as of December
31, 2001 and 2002, were as follows:
<Table>
<Caption>
2001 2002
---- ----
CURRENCY
Euro 6.44% -
Japanese Yen 2.66% 2.48%
U.S. Dollar 6.10% -
</Table>
Interest on short-term borrowings for 2000, 2001 and 2002, totaled
EURO 278, EURO 1,583 and EURO 903 respectively, and is included in interest
expense in the accompanying consolidated statements of operations.
12. LONG-TERM DEBT:
Long-term debt consists of:
F-19
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
<Table>
<Caption>
2001 2002
--------- --------
(a) Senior Notes, due 2007 issued on February 11, 1997. Interest on the
Senior Notes is paid semi-annually in February and August,
commencing August 1, 1997, at the rate of 9% per annum. The Senior
Notes are redeemable, in whole or in part, at the option of the
Company at any time at premiums that reduce over time (see Note 13). 103,522 87,407
(b) Long-term loan obtained by Voras S.A. in July 1997 (JPY 248 million)
due in seven semi-annual installments, commencing July 31, 1999 (two
years grace period). The last installment was paid in July 2002. 614 -
(c) Long-term loan obtained by Voras S.A. in July 1997 (EURO 1.95
million changed in JPY 250.2 million in February 1999) due in seven
semi-annual installments, commencing July 31, 1999 (two years grace
period). The last installment was paid in July 2002. 620 -
--------- --------
104,756 87,407
Less: Current portion of Voras S.A.'s long-term debt (1,234) -
--------- --------
103,522 87,407
========= ========
</Table>
The fair value of the Company's Senior Notes at December 31, 2002,
approximates EURO 82,200.
The effective interest rates of the long-term loans under (b) and (c)
above were 3.29% and 2.46% for 2001, respectively.
Interest expense (excluding Senior Notes interest expense which is
disclosed in Note 13) for 2000, 2001 and 2002, totaled EURO 108, EURO 57
and EURO 13, respectively, and is included in interest expense in the
accompanying consolidated statements of operations.
The Company's outstanding long-term debt at December 31, 2002, of EURO
87,407 is repayable on February 1, 2007, in one balloon installment.
13. SENIOR NOTES DUE 2007:
In February 1997, the Company completed the issuance of debt
securities (Senior Notes) in the United States. The net proceeds of the
offering of U.S.$ 114.6 million were used to repay outstanding obligations
and for general working capital.
The Senior Notes issued at an aggregate face amount of U.S.$ 120
million, with maturity date on February 1, 2007, bear interest at a rate of
9% per annum, payable semi-annually on each February 1 and August 1, and
commenced on August 1, 1997. The Senior Notes are redeemable in whole or in
part, at the option of the Company at any time on or after February 1,
2002.
During 2000 the Company repurchased in privately negotiated
transactions Senior Notes with an aggregate face amount of U.S. $ 17.4
million. The repurchased Senior Notes have been canceled.
The gains incurred from the repurchase of the Senior Notes in 2000
amounted to EURO 876 and are included in other income (expenses), net in
the 2000 consolidated statements of operations.
Interest expense (including amortization of borrowing costs) for
2000, 2001 and 2002 totaled EURO 10,866, EURO 10,053 and EURO 9,566,
respectively and is included in interest expense in the accompanying
consolidated statements of operations.
F-20
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
The indebtedness evidenced by the Notes constitutes general unsecured
senior obligation of Fage Dairy Industry S.A. and ranks PARI PASSU in right
of payment with all other senior indebtedness and will rank senior in right
of payment to all subordinated indebtedness of Fage Dairy Industry S.A.
The Senior Notes Indenture contains certain covenants that, among
other things, limit the type and amount of additional indebtedness that may
be incurred by Fage Dairy Industry S.A. and its subsidiaries and imposes
certain limitations on investments, loans and advances, sales or transfers
of assets, liens, dividends and other payments, the ability of Fage Dairy
Industry S.A. and its subsidiaries to enter into sale-leaseback
transactions, certain transactions with affiliates and certain mergers. The
Company is in compliance with the terms of the Indenture.
14. INCOME TAXES:
According to the tax law, companies with registered shares not listed
on the Athens Stock Exchange were subject to income taxes at a rate of 40%
on their taxable profits (distributed or not). During fiscal year 2000, the
corporate enacted tax rate for fiscal year 2001 was reduced to 37.5% for
non-listed companies with bearer shares and for fiscal year 2002, it was
further reduced to 35%.
The provision for income taxes reflected in the accompanying
consolidated statements of operations is analyzed as follows:
<Table>
<Caption>
2000 2001 2002
------ ------ ------
Income taxes current 730 2,941 5,221
Deferred income taxes (810) 2,329 9,679
------ ------ ------
Total provision for income taxes (80) 5,270 14,900
====== ====== ======
</Table>
The reconciliation of the provision for income taxes to the amount
determined by the application of the Greek statutory tax rate to pretax
income is summarized as follows:
<Table>
<Caption>
2000 2001 2002
------- ------- -------
- Tax provision at the statutory rate (3,794) 2,100 12.897
- Additional tax assessments - 1,097 1,312
- Effects of non-taxable income and expenses not
deductible for tax purposes 4,089 2,073 691
- Effect of change in statutory tax rate from 40% to
37.5% and 35% (375) - -
------- ------- -------
- Provision for income taxes (80) 5,270 14,900
======= ======= =======
</Table>
Greek tax laws and related regulations are subject to interpretations
by the tax authorities.
During 2001, the tax authorities completed the tax audit of Fage
Dairy Industry S.A. for the years 1995 -- 1999, which resulted in an
assessment of additional taxes of EURO 4,006. The amount of EURO 2,909 was
off-set against the liability established in prior years, while the
remaining balance of EURO 1,097 was included in the provision for income
taxes in the accompanying 2001 consolidated statement of operations.
During 2002, the tax authorities completed the tax audit of the
companies Voras S.A. and Tamyna S.A. for the years 1993 -- 2000 and
1996-2001, respectively, which resulted in an assessment of total
additional taxes of EURO 1,593. The amount of EURO 281 was off-set against
the liability established in prior years, while the
F-21
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
remaining balance of EURO 1,312 is included in the provision for income
taxes in the accompanying 2002 consolidated statement of operations.
Pending the tax examination of the years 2000 through 2002, the
Company, based upon previous years' tax examinations and past
interpretations of the tax laws, believes they have provided adequate
provisions for probable future tax assessments.
The deferred income taxes relate to the temporary differences between
the book values and the tax bases of assets and liabilities. Significant
components of the Company's deferred tax liabilities and assets at December
31, 2001 and 2002, are summarized below:
<Table>
<Caption>
2001 2002
--------- ---------
Deferred tax liabilities
- Property, plant and equipment 7,335 8,346
- Tax free reserves 3,949 5,415
- Revaluation surplus 2,676 2,676
- Subsidies 1,152 1,059
- Foreign currency translation 430 5,061
- Other 772 -
--------- ---------
Deferred tax liability 16,314 22,557
Deferred tax assets
- Property, plant and equipment (5,957) (5,346)
- Deferred costs (5,657) (2,984)
- Accounts receivable (1,655) (1,282)
- Staff retirement indemnities (420) (491)
- Subsidiary tax loss carry forwards (2,228) (639)
- Other - (362)
--------- ---------
Gross Deferred tax asset (15,917) (11,104)
Less: Valuation allowance 6,225 4,848
--------- ---------
Deferred tax asset (9,692) (6,257)
--------- ---------
Net deferred tax liability 6,622 16,301
========= =========
</Table>
The classification of deferred income taxes in the accompanying
consolidated balance sheets is as follows:
<Table>
<Caption>
2001 2002
----- -----
Net current deferred tax liability 1,083 6,685
===== =====
Net non-current deferred tax liability 5,539 9,616
===== =====
</Table>
The Company has established a valuation allowance of EURO 4,848 at December
31, 2002, for deferred tax assets for which there is an uncertainty
regarding their realization.
F-22
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
15. OTHER CURRENT LIABILITIES:
The amount reflected in the accompanying consolidated balance sheets
is analyzed as follows:
<Table>
<Caption>
2001 2002
-------- --------
Taxes withheld:
Payroll 381 452
Third parties 248 434
Milk producers 49 61
Other 364 278
-------- --------
1,042 1,225
-------- --------
Advances from customers 313 1,597
-------- --------
Accrued interest 4,093 3,243
Social security funds payable 1,153 1,274
Accrued and other liabilities 1,727 2,259
-------- --------
6,973 6,776
-------- --------
TOTAL 8,328 9,598
======== ========
</Table>
16. PENSION AND STAFF RETIREMENT INDEMNITIES:
a) STATE PENSION: The Company's employees are covered by one of several
Greek State sponsored pension funds. Each employee is required to
contribute a portion of their monthly salary to the fund, with the
Company also contributing a portion. Upon retirement, the pension fund
is responsible for paying the employees retirement benefits. As such,
the Company has no legal or constructive obligation to pay future
benefits under this plan. The Company's contributions to the pension
funds for the years ended December 31, 2000, 2001 and 2002, have been
recorded to expenses and were EURO 2,415, EURO 2,464 and EURO 2,579,
respectively.
b) STAFF RETIREMENT INDEMNITIES: Under Greek labor law, employees and
workers are entitled to termination payments in the event of dismissal
or retirement with the amount of payment varying in relation to the
employee's or worker's compensation, length of service and manner of
termination (dismissed or retired). Employees or workers who resign or
are dismissed with cause are not entitled to termination payments. The
indemnity payable in case of retirement is equal to 40% of the amount
which would be payable upon dismissal without cause.
The provisions and liability for such retirement benefits have been
accounted for in the accompanying consolidated financial statements in
accordance with SFAS No. 87 and SFAS No.132 and are based on an
independent actuarial study. These retirement benefits are funded at
the time that individuals retire from the Company.
The components of the retirement indemnity expense recognized by the
Company in accordance with SFAS No. 132 are as follows:
<Table>
<Caption>
2000 2001 2002
-------- -------- --------
Service cost 115 121 125
Interest cost 78 78 95
Net amortization 3 4 13
Additional pension charge 368 388 171
-------- -------- --------
564 591 404
======== ======== ========
</Table>
The following is a reconciliation of the projected benefit obligation
to the liability recorded for retirement indemnities in accordance
with SFAS No. 132:
<Table>
<Caption>
2000 2001 2002
------ ------ ------
Projected benefit obligation at beginning of year 1,238 1,338 1,622
Service cost 115 121 125
Interest cost 78 78 95
Actuarial (gain) loss 421 576 483
Total benefits paid (514) (491) (201)
------ ------ ------
Projected benefit obligation at end of year 1,338 1,622 2,124
Unrecognized net actuarial loss (240) (423) (723)
------ ------ ------
Accrual benefit cost 1,098 1,199 1,401
====== ====== ======
</Table>
F-23
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
The assumptions underlying the actuarial valuation of staff retirement
indemnities are:
<Table>
<Caption>
2000 2001 2002
------ ------ ------
Discount rate 6.0% 6.0% 5.5%
Assumed rate of increase in future
compensation levels 4.0% 4.5% 4.5%
Increase in consumer price index 2.0% 2.5% 2.5%
</Table>
17. SHARE CAPITAL:
At December 31, 2001, the Company's share capital consisted of
7,010,000 common, registered shares of EURO 2.93 par value each. In January
2002 and in order to convert the denomination of the share capital from
Greek Drachmae to Euro and round the par value of the shares to the nearest
decimal, the share capital was increased through a cash contribution of
EURO 37 (par value of each share increased to EURO 2.94). Furthermore, in
June 2002, the share capital was increased by the issuance of 2,600,400
common, registered shares of EURO 2.94 par value each, through the
capitalization of the revaluation gains of EURO 7,645. All shares and per
share amounts in the accompanying consolidated financial statements have
been restated to give effect to the issuance of these additional shares. At
December 31, 2002, the Company's share capital consisted of 9,610,400
common, registered shares of EURO 2.94 par value each.
The Company's shareholders are Mr. Ioannis Filippou and Mr. Kyriakos
Filippou, each of whom owns directly 50% of the Company's outstanding
shares.
The amount of share capital at December 31, 2001 and 2002, includes
EURO 14,751 and EURO 22,396, which represents gains resulting from the
revaluation of fixed assets which have been capitalized according to the
provisions of the respective laws (Note 1(j)).
The Company's charter requires a vote of 90% for any sale or transfer
of any amount of capital shares to be effected.
F-24
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
18. LEGAL, TAX FREE AND EXTRAORDINARY RESERVES:
Legal, tax free and extraordinary reserves are as follows:
<Table>
<Caption>
2001 2002
------ ------
Legal reserve 1,588 1,813
------ ------
Tax free reserves
- Law 1892/1990 (Art. 12) 10,547 14,737
- Reserve for non taxable income 627 627
- Reserves established under various Laws
prior to 1978 104 104
------ ------
11,278 15,468
------ ------
Extraordinary reserves
-Law 1892/1990 (Art. 23a) 6,650 6,650
------ ------
19,516 23,931
====== ======
</Table>
LEGAL RESERVE: Under Greek corporate law, corporations are required to
transfer a minimum of 5% of their annual net profit as reflected in their
statutory books to a legal reserve, until such reserve equals one-third of
the outstanding share capital. The above reserve cannot be distributed
during the existence of the Company.
TAX FREE RESERVES:
a) Under the provisions of Law 1892/1990 (Art. 12), corporations
are allowed to provide tax free reserves equal to sixty percent
of their pre-tax profits, as reflected in their statutory books,
generated from manufacturing activities, after allowing for
legal reserve, dividends and Board of Directors fees, but
limited to sixty percent of the capital expenditures made in the
respective year under this law. This incentive will expire on
December 31, 2004. According to the Greek tax regulations, this
reserve is exempt from income tax, provided it is not
distributed to shareholders. Although the Company has no
intention of distributing this reserve, as required by SFAS No.
109, it has provided for income tax that would be required in
the event the reserve is distributed.
b) Other tax free reserves have been recorded under Greek law and
the Company has provided deferred income tax on such reserves on
the same basis as (a) above.
EXTRAORDINARY RESERVES: Under the provisions of Law 1892/1990 (Art.
23a) the Company submitted to the Greek State a business plan concerning
the expansion and upgrading of certain production units, during the period
from 1995 through 1997. The Company was obliged to record its own
contribution as an extraordinary reserve out of each year's profits as
reflected in the statutory books. The reserve can not be distributed for a
period of ten years from the completion of the business plan.
19. DIVIDENDS:
Under Greek corporate law, companies are required each year to declare
from their profits, dividends of at least 35% of after-tax profit, after
allowing for legal reserve, or a minimum of 6% of the paid-in share
capital, whichever is greater. However, the Company can waive such dividend
with the unanimous consent of its shareholders.
Furthermore, Greek corporate law requires certain conditions to be met
before dividends can be distributed, which are as follows:
a) No dividends can be distributed to the shareholders as long as
the Company's net equity, as reflected in the statutory
financial statements, is, or after such distribution, will be
less than the outstanding capital plus non-distributable
reserves.
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<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
b) No dividends can be distributed to the shareholders as long as
the unamortized balance of "Preoperating Expenses", as reflected
in the statutory financial statements, exceeds the aggregate of
distributable reserves plus retained earnings.
No dividends have been declared during 2000, 2001 and 2002.
20. GEOGRAPHICAL AND EXPORT DATA:
Net sales reflected in the accompanying consolidated statements of
operations are analyzed as follows:
<Table>
<Caption>
2000 2001 2002
------- ------- -------
Domestic sales 248,710 268,195 292,047
Exports primarily to Western Europe
and the United States of America 31,379 35,576 39,261
------- ------- -------
280,089 303,771 331,308
======= ======= =======
</Table>
21. EXPORT PROMOTION EXPENSES:
To promote exports, the Government, under the provisions of various
laws, permits companies to expense export promotion expenses on the
following basis:
- 2.00% on export sales up to EURO 2.2 million;
- 1.00% on export sales from EURO 2.2 million to EURO 8.8 million; and
- 0.50% on export sales over EURO 8.8 million
all of which are deductible for tax purposes, without support. Such
expenses for the years ended December 31, 2000, 2001 and 2002, amounted to
EURO 211, EURO 227 and EURO 232, respectively and were equally paid to the
Company's shareholders as reimbursement for such expenditures incurred for
export promotion. These amounts are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
22. CONTINGENCIES AND COMMITMENTS :
a) LITIGATION AND CLAIMS:
The Company is a party to various lawsuits and arbitration
proceedings in the normal course of business. According to the
Company's management and its legal advisors, all of the lawsuits
will be settled without any material adverse effect on the
Company's consolidated financial position or results of
operations.
b) COMMITMENTS:
i) As of December 31, 2002, the Company has entered into a
number of operating lease agreements relating to the rental of
buildings and transportation equipment, which expire on various
dates through 2008. Future annual payments under these
agreements are as follows:
<Table>
<Caption>
YEAR AMOUNT
---- ------
2003 1,065
2004 1,008
2005 757
2006 415
2007 174
Thereafter 39
------
3,458
======
</Table>
F-26
<Page>
FAGE DAIRY INDUSTRY S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
Rental expense included in the accompanying consolidated
statement of operations for the years ended December 31, 2000,
2001 and 2002, amounted to EURO 792, EURO 1,034 and EURO 1,150,
respectively.
ii) Fage S.A. has been appointed as an official sponsor of the
Olympic games to be held in Athens in 2004. The future
commitment under the sponsorship agreement amounts to
approximately EURO 4.1 million.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and short-term borrowings approximate the fair
value because of the short-term maturity of these instruments. In addition,
available-for-sale marketable securities are carried at their fair value
based on quoted market prices. Long-term notes receivable are carried at
their fair value. Furthermore, the fair value of the long-term debt at
December 31, 2002, estimated on market prices, approximates EURO 82,200.
F-27