Final Results

18th Apr 2006 07:21

Pyaterochka Holding N.V.18 April 2006 THE INFORMATION CONTAINED IN THIS ANNOUNCEMENT IS RESTRICTED AND NOT FOR PUBLICATION, DISTRIBUTION OR RELEASE IN THE RUSSIAN FEDERATION, AUSTRALIA, CANADA, JAPAN OR THE UNITED STATES OF AMERICA. PYATEROCHKA HOLDING N.V. RESULTS FOR FY 2005 AND Q1 2006 HIGHLIGHTS OUTSTANDING SALES GROWTH ENHANCED BY IMPROVED MARGINS Pyaterochka Holding N.V. ("Pyaterochka" or "the Company") today announces itsconsolidated financial results for the 12 months ending 31 December 2005 inaccordance with IFRS. 2005 Financial Highlights Gross banner sales totaled USD 2,084 million, up 31% from FY 2004 Net sales reached USD 1,359 million, up 23% from FY 2004 • Sales from St. Petersburg area stores reached USD 708 million in 2005, up 22% from FY 2004 • Sales from Moscow area stores reached USD 644 million in 2005, up 24% from FY 2004 • Net franchise revenues reached USD 7 million in 2005, up 53% from FY 2004 • LFL 12 month sales of -1% for the Group in FY 2005 (+5% Moscow 12M LFL, -6% St. Petersburg 12M LFL) Gross profit up 38% to USD 339 million; gross margin of 24.9% vs. 22.2% in FY 2004 EBITDA up 46% to USD 163 million; EBITDA margin of 12.0% vs. 10.1% in FY 2004 Net Income up 23% to USD 91 million Full Year 2006 expectations: • 130 new company-managed Pyaterochka stores to be opened in 2006 • 2006 LFL sales of +3% to +4% expected in Moscow area and -2% to -3% expected in St. Petersburg 2005 Operating Highlights Total number of stores operating under Pyaterochka's brand reached 751on 31 December 2005, up 70% since the beginning of 2005. Record 91 new stores opened in core regions of Moscow (35) and St.Petersburg (56) in 2005, for a total of 326 stores operating in Moscow (159) andSt. Petersburg (167) as of 31 December 2005. Continued strong growth of franchisees network reaching 404 stores asof 31 December (excluding Yekaterinburg), up 95% from 207 stores from 1 January2005 with 197 new stores opened by Pyaterochka's franchisees in 2005.Pyaterochka had master franchise agreements in 18 Russian regions, Ukraine andKazakhstan as of 31 December 2005. Net selling space reached 100,174 sqm (+22%) in Moscow and 96,167 sqm(+53%) in St. Petersburg as of 31 December 2005. Pyaterochka's stores served over 222 million customers in 2005,including over 104 million customers in Moscow and over 118 million customers inSt. Petersburg. Pyaterochka's average check reached $6.10 in 2005 (+9% vs. 2004 checkof $5.60), with an average check of $6.20 in Moscow and $6.00 in St. Petersburg. Gross margin improvement of 270 bps as a result of improved purchasingterms. Commenting, Mr. Vysotsky, the CEO of Pyaterochka Holding, said: "Our final figures for 2005 represent record sales and income for the companyand we are pleased to have achieved a significant increase in our margins.Initial indications for 2006 from the first quarter results show solidperformance in like-for-like sales. We are well positioned for excellentgrowth this year, based on our greater scale, our enhanced operatingefficiencies and the stabilization in St. Petersburg, following the successfulimplementation of the store improvement initiatives." Q1 2006 Highlights Net Sales Pyaterochka's net sales reached USD 439 million in Q1 2006, up 41% vs. Q1 2005sales of USD 312 million. Like-for-Like Sales Pyaterochka experienced LFL sales for the group of +7% in Q1 2006, comprised ofa +15% LFL sales in Moscow and -1% LFL sales in St. Petersburg. Group LFL sales of +7% in Q1 2006 were composed of a 10% increase in the averagebasket and a 3% decrease in traffic. Moscow LFL sales of +15% were composed ofa 12% increase in the average basket and a 3% increase in traffic during Q12006. In St. Petersburg, LFL sales of -1% were composed of an 8% increase inthe average basket and an 8% decrease in traffic during Q1 2006. Store Openings During Q1 2006, Pyaterochka opened 26 new stores in its core markets, with 18new stores opened in Moscow (including 13 stores acquired in December 2005 froma franchisee of Kopeika), and 8 new stores opened in St. Petersburg. Inaddition, 19 stores in Yekaterinburg have been company-managed since 1 January2006. As of 31 March 2006, Pyaterochka operated a total of 371 stores in its coremarkets of Moscow (177 stores), St. Petersburg (175 stores) and Yekaterinburg(19). Pyaterochka's franchisees added 35 new stores during Q1 2006, and operated atotal of 439 stores across 15 regions of Russia, Ukraine and Kazakhstan as of 31March 2006. Pyaterochka currently has master franchise agreements in 20regions of Russia, Ukraine and Kazakhstan. Pyaterochka operated 810 stores under its brand as of 31 March 2006. - End - Notes to Editors: Pyaterochka is one of the largest grocery retailers in Russia in terms of sales,with a chain of 371 company-managed stores located in the Moscow, St. Petersburgand Yekaterinburg areas as of 31 March 2006. 2005 net sales reached USD 1,359 million, with gross banner sales in 2005 ofover USD 2 billion. Q1 2006 net sales were USD 439 million. In addition to the company's own stores, franchisees operated 439 Pyaterochkabranded stores in 15 regions of Russia, Ukraine and Kazakhstan as of 31 March2006. Pyaterochka currently has master franchise agreements in 20 regions ofRussia, Ukraine and Kazakhstan. Pyaterochka's stores are conveniently located "soft" discount stores, open sevendays a week from 9am to 10pm or 11pm, offering a product range of up to 5,000items covering the day-to-day needs of its customers. Enquiries to: Tanja Djurdjevic Citigate Dewe Rogerson Investor Relations David Westover Mobile +7 495 724 6414 +44 (0)20 7282 8226 +1 646 229 3782 Email [email protected] The release, publication and distribution of this announcement may be restrictedby law. No action has been or will be taken by Pyaterochka to permit thepossession or distribution of this announcement in any jurisdiction where actionfor that purpose may be required. Accordingly, neither this announcement nor anyadvertisement or any other material relating to it may be distributed orpublished in any jurisdiction except under circumstances that will result incompliance with any applicable laws and regulations. Persons into whosepossession this announcement comes should inform themselves about and observeany such restrictions. Any failure to comply with these restrictions mayconstitute a violation of the securities law of any such jurisdictions. No global depositary receipts, shares or other securities of Pyaterochka havebeen registered under the Securities Act or otherwise qualify for sale or resaleunder federal or state laws in the United States of America or under theapplicable laws of any of Canada, Australia or Japan, and, subject to certainexceptions, may not be offered or sold in the US or to, or for the account orbenefit of, US persons (as such term is defined in Regulation S under theSecurities Act) or to any national, resident or citizen of Canada, Australia orJapan. Neither this document nor any copy of it may be sent to or taken intothe US, Canada, Australia or Japan nor may it be distributed to any US person(within the meaning of Regulation S under the Securities Act) or to any Canadianpersons. This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identifiedby the fact that they do not only relate to historical or current events.Forward-looking statements often use words such as" anticipate", "target", "expect", "estimate", "intend", "expected", "plan", "goal" believe", or otherwords of similar meaning. By their nature, forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances, a number of which are beyondPyaterochka's control. As a result, Pyaterochka's actual future results maydiffer materially from the plans, goals and expectations set out in theseforward-looking statements. Any forward-looking statements made by or on behalf of Pyaterochka speak only asat the date of this announcement. Save as required by any applicable laws orregulations, Pyaterochka undertakes no obligation publicly to release theresults of any revisions to any forward-looking statements in this document thatmay occur due to any change in its expectations or to reflect events orcircumstances after the date of this document. PYATEROCHKA HOLDING N.V. Independent Auditors' Report Consolidated Financial Statements Years Ended 31 December 2005, 2004 and 2003 PYATEROCHKA HOLDING N.V. TABLE OF CONTENTS Pages STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003 1 INDEPENDENT AUDITORS' REPORT 2 CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003: Consolidated income statements 3 Consolidated balance sheets 4 Consolidated statements of changes in shareholders' equity 5 Consolidated statements of cash flows 6 Notes to the consolidated financial statements 7-30 PYATEROCHKA HOLDING N.V. STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OFTHE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 dECEMBER 2005, 2004 AND 2003 The following statement, which should be read in conjunction with theindependent auditors' responsibilities stated in the independent auditors'report set out on page 2, is made with a view to distinguishing the respectiveresponsibilities of management and those of the independent auditors in relationto the consolidated financial statements of Pyaterochka Holding N.V. and itssubsidiaries (the "Group"). Management is responsible for the preparation of the consolidated financialstatements that present fairly the consolidated financial position of the Groupat 31 December 2005, 2004 and 2003, and the consolidated results of itsoperations, cash flows and changes in shareholders' equity for the years thenended, in compliance with International Financial Reporting Standards ("IFRS"). In preparing the consolidated financial statements, management is responsiblefor: - Selecting suitable accounting principles and applying them consistently; - Making judgments and estimates that are reasonable and prudent; - Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and - Preparing the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future. Management is also responsible for: - Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; - Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; - Maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions in which the Group operates; - Taking such steps as are reasonably available to them to safeguard the assets of the Group; and - Preventing and detecting fraud and other irregularities. The consolidated financial statements for the years ended 31 December 2005, 2004and 2003 were approved on 14 April 2006 by O.Vysotsky, Chief Executive Officerand A. Li, Chief Financial Officer. INDEPENDENT AUDITORS' REPORT To the Shareholders of Pyaterochka Holding N.V.: We have audited the accompanying consolidated balance sheet of PyaterochkaHolding N.V. and its subsidiaries (the "Group") as at December 31, 2005, 2004and 2003 and the related consolidated statements of income, changes inshareholders' equity and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Group'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 accompanying consolidated financial statements presentfairly, in all material respects, the consolidated financial position of theGroup as at December 31, 2005, 2004 and 2003 and the consolidated results of theGroup's operations and cash flows for the year then ended, in accordance withInternational Financial Reporting Standards. 14 April 2006 Deloitte & Touche PYATEROCHKA HOLDING N.V. CONSOLIDATED INCOME STATEMENTs FOR THE years ENDED 31 December 2005, 2004 and 2003 2005 2004 2003 Notes 'mln USD 'mln USD 'mln USD REVENUE 7 1,359.3 1,105.8 759.6 COST OF SALES (1,020.8) (860.4) (612.9) GROSS PROFIT 338.5 245.4 146.7 Selling, general and administrative 25 (201.2) (148.9) (103.3)expenses OPERATING PROFIT 137.3 96.5 43.4 Finance costs, net 14 (13.5) (3.7) (1.2)Foreign currency exchange (loss)/gain (3.6) 1.1 0.3 PROFIT BEFORE INCOME TAX 120.2 93.9 42.5 INCOME TAX 18 (29.0) (19.5) (8.7) NET PROFIT 91.2 74.4 33.8 Earnings per share attributable to theequity holders, USD per share (Note 17):Basic 2.38 1.94 0.88Diluted 2.34 1.94 0.88 The notes on pages 7 to 30 form an integral part of these consolidated financialstatements. PYATEROCHKA HOLDING N.V. CONSOLIDATED BALANCE SHEETs AT 31 December 2005, 2004 and 2003 31.12.2005 31.12.2004 31.12.2003 Notes 'mln USD 'mln USD 'mln USD ASSETS NON-CURRENT ASSETS:Property, plant and equipment 8 421.0 236.9 153.1Long-term prepayments 7.3 4.0 8.9Goodwill 9 46.8 - -Other long-term assets 10 9.0 - -Deferred tax assets 18 7.0 2.9 1.5 491.1 243.8 163.5CURRENT ASSETS:Inventories 11 55.5 39.8 36.4Receivables and prepayments 12 64.9 117.4 32.4Cash 13 56.5 14.7 14.3 176.9 171.9 83.1 TOTAL ASSETS 668.0 415.7 246.6 EQUITY AND LIABILITIES CAPITAL AND RESERVES:Share capital 15 45.5 45.7 43.0Share premium 6.0 6.2 5.9Retained earnings 144.3 114.1 56.4 195.8 166.0 105.3 NON-CURRENT LIABILITIES:Long-term borrowings 19 220.0 38.5 11.7Long-term liability for share-based 26 5.4 - -paymentsLong-term obligations under finance leases 20 3.8 3.5 1.4Deferred tax liability 18 16.2 12.3 9.8 245.4 54.3 22.9 CURRENT LIABILITIES:Trade accounts payable 22 177.9 123.9 78.5Short-term loans and overdrafts 21 6.8 32.5 9.9Short-term obligations under finance 20 1.7 1.0 0.1leasesOther payables and accrued expenses 23 40.4 38.0 29.9 226.8 195.4 118.4 TOTAL EQUITY AND LIABILITIES 668.0 415.7 246.6 The notes on pages 7 to 30 form an integral part of these consolidated financialstatements. PYATEROCHKA HOLDING N.V. CONSOLIDATED STATEMENTs OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE years ENDED 31 December 2005, 2004 and 2003 Notes Share Share Retained Total earnings capital premium shareholders' 'mln USD equity 'mln USD 'mln USD 'mln USD Balance at 1 January 2003 0.4 5.4 61.6 67.4 Share issue 42.6 - (42.6) -Dividends paid 16 - - (2.3) (2.3)Net profit - - 33.8 33.8Translation adjustment - 0.5 5.9 6.4 Balance at 31 December 2003 43.0 5.9 56.4 105.3 Distribution to - - (17.9) (17.9)shareholdersDividends paid 16 - - (3.4) (3.4)Net profit - - 74.4 74.4Translation adjustment 2.7 0.3 4.6 7.6 Balance at 31 December 2004 45.7 6.2 114.1 166.0 Distribution to 27 - - (59.6) (59.6)shareholdersNet profit - - 91.2 91.2Translation adjustment (0.2) (0.2) (1.4) (1.8) Balance at 31 December 2005 45.5 6.0 144.3 195.8 The notes on pages 7 to 30 form an integral part of these consolidated financialstatements. PYATEROCHKA HOLDING N.V. CONSOLIDATED STATEMENTs OF CASH FLOWS FOR THE years ENDED 31 December 2005, 2004 and 2003 2005 2004 2003 Notes 'mln USD 'mln USD 'mln USD OPERATING ACTIVITIES:Profit before income tax 120.2 93.9 42.5Adjustments for:Depreciation of property, plant and equipment 25.7 14.5 8.2Amortization of long-term prepayments 0.1 0.1 0.2Loss on disposal of property, plant and equipment 2.3 0.5 0.3Loss on disposal of long-term prepayments 0.1 -Change in provision for doubtful receivables 3.0 0.8 0.5Change in provision for inventory losses 0.2 0.4 (0.2)Share-based payments expense 5.4 - -Interest expense 13.3 4.5 1.3Operating cash flow before movements in working capital 170.3 114.7 52.8Decrease/(increase) in receivables and prepayments 5.8 (28.3) (15.8)Increase in inventories (14.2) (3.7) (14.6)Increase in trade accounts payable 49.9 45.6 31.4(Decrease)/increase in other payables and accrued (5.5) 0.9 25.7expensesCash provided by operations 206.3 129.2 79.5 Income tax paid (23.0) (16.6) (7.2)Interest paid (11.9) (4.8) (0.9)Net cash provided by operating activities 171.4 107.8 71.4 INVESTING ACTIVITIES:Purchase of property, plant and equipment (165.2) (78.7) (63.3)Construction in progress (33.1) (22.4) (5.8)Financing provided to related party - (31.6) -Proceeds on disposal of property, plant and equipment 2.8 1.4 1.2Long-term prepayments (3.4) (0.3) (3.1)Proceeds on disposal of long-term prepayments 1.6 - -Acquisition of subsidiaries 24 (74.6) - -Acquisition of other long-term assets (9.0) - -Net cash used in investing activities (280.9) (131.6) (71.0) FINANCING ACTIVITIES:Proceeds from borrowings 206.8 68.5 33.6Repayments of borrowings (40.3) (21.5) (27.4)Net (decrease)/increase in bank overdrafts (5.4) (0.6) 4.7Repayment of obligations under finance leases (1.2) (1.6) (0.7)Dividends paid - (3.4) (2.3)Distributions to shareholders - (17.9) -Net cash from financing activities 159.9 23.5 7.9 EFFECT OF FOREIGN EXCHANGE RATES ON CASH (8.6) 0.7 0.4 NET INCREASE IN CASH 41.8 0.4 8.7CASH, beginning of year 14.7 14.3 5.6CASH, end of year 56.5 14.7 14.3 The notes on pages 7 to 30 form an integral part of these consolidated financialstatements. PYATEROCHKA HOLDING N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE years ENDED 31 december2005, 2004 and 2003 General Information Pyaterochka Holding N.V. (the "Company") is a joint stock limited liabilitycompany established in August 1975 under the laws of the Netherlands. Theprincipal activity of the Company is to act as the holding company for the groupof companies that operate under the "Pyaterochka" name in St. Petersburg, Moscowand Ekaterinburg. The principal activities of the subsidiaries (the "Group") aredescribed in Note 6. Following the initial public offering of the Company's shares in May 2005,12,284,901 of its shares (or 32.07% of the total shares outstanding) are listedon the London Stock Exchange in the form of Global Depository Receipts (GDRs),each GDR representing an interest of 0.25 in a share. After the listing, theCompany's principal controlling shareholders Tayleforth N.V. and Marie-CarlaCorporation N.V. owned 48.72% and 19.21% of the Company's equity, respectively.The ultimate beneficial interests are held indirectly by A. Rogachev, A. Girda,T. Franus and I. Vidiaev through Marie-Carla Corporation N.V. and TayleforthN.V. The joint beneficial interest of A. Rogachev and A. Girda is more than 50%. The Group's principal business activities are within the Russian Federation. Asof 31 December 2005, 2004 and 2003 the "Pyaterochka" retail chain operated inSt. Petersburg and in Moscow under the brand name "Pyaterochka" with thefollowing number of stores: 31.12.2005 31.12.2004 31.12.2003 St. Petersburg 167 111 92Moscow 159 124 97Ekaterinburg (acquired on 30 December 2005) 21 - - In addition, as of 31 December 2005 the Group's franchisees operated 404 storesunder the Pyaterochka brand in the Russian regions outside the Moscow and St.Petersburg areas and in the neighboring countries, Kazakhstan and Ukraine. The average numbers of employees of the Group for the years ended 31 December2005, 2004 and 2003 were 12,291, 11,559 and 11,027, respectively. PRESENTATION OF FINANCIAL STATEMENTS Basis of presentation - These consolidated financial statements have beenprepared in accordance with International Financial Reporting Standards ("IFRS"). Pyaterochka Holding N.V. maintains its accounting records in Euro(EUR) in accordance with the accounting and reporting regulations of theNetherlands. Speak Global Ltd. maintains its accounting records in Cyprus poundsin accordance with the accounting and reporting regulations of Cyprus. All otheroperating entities of the Group maintain their accounting records in RussianRubles in accordance with the accounting and reporting regulations of theRussian Federation. Statutory accounting principles and procedures in Russiadiffer substantially from those generally accepted under IFRS. Accordingly, theconsolidated financial statements, which have been prepared using the Group'sstatutory accounting records, reflect adjustments necessary for such financialstatements to be presented in accordance with IFRS. Before 2005 the Group presented its financial statements on a combined andconsolidated basis, including Speak Global Ltd, a company under common controlwith Pyaterochka Holding N.V. In March 2005 the shareholders of the Groupcontributed their 100% interest in the shares of Speak Global Ltd to theCompany. These consolidated financial statements include the accounts of SpeakGlobal Ltd as if it had always been part of the Group. Use of estimates and assumptions - The preparation of the consolidated financialstatements in conformity with IFRS requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, revenuesand expenses and the disclosure of contingent assets and liabilities. Due to theinherent uncertainty in making those estimates, actual results reported infuture periods could differ from such estimates. Functional and presentation currency - The functional currency of theaccompanying consolidated financial statements is the Russian Ruble (RUB). TheRussian Ruble is not a fully convertible currency outside the territory of theRussian Federation. The translation of Ruble denominated assets and liabilitiesinto US Dollars for the purpose of these financial statements does not indicatethat the Group could or will in the future realize or settle in US Dollars thetranslated values of these assets and liabilities. The Group has chosen to present these financial statements in US Dollars (USD).The restatement of the financial statements from the measurement currency to thepresentation currency is done in accordance with the requirements of IAS 21 "TheEffects of Changes in Foreign Exchange Rates". Generally the requirements statethat when financial statements are presented in a currency other than thefunctional currency and the functional currency is not a currency of ahyperinflationary economy, assets and liabilities for all balance sheetspresented are translated at the closing rate at the date of each balance sheetpresented; income and expense items for all periods presented are translated atthe exchange rates existing at the dates of the transactions or a rate thatapproximates the actual exchange rates and all exchange differences resultingfrom translation are recognized directly in equity. USD/RUB Average rate for 2005 28.2933 31 December 2005 28.7825 Average rate for 2004 28.8100 31 December 2004 27.7487 Average rate for 2003 30.6800 31 December 2003 29.4545 Adoption of new and revised International Financial Reporting Standards The following new or revised standards and interpretations issued byInternational Accounting Standards Board became effective for the Group's 2005annual financial statements: IAS 1 (revised) "Presentation of Financial Statements" IAS 2 (revised) "Inventories" IAS 8 (revised) "Accounting Policies, Changes in Accounting Estimates and Errors" IAS 10 (revised) "Events after the Balance Sheet Date" IAS 16 (revised) "Property, Plant and Equipment" IAS 17 (revised) "Leases" IAS 21 (revised) "Effect of Changes in Foreign Exchange Rates" IAS 24 (revised) "Related Party Disclosures" IAS 27 (revised) "Consolidated and Separate Financial Statements" IAS 28 (revised) "Investments in Associates" IAS 31 (revised) "Interests in Joint Ventures" IAS 32 (revised) "Financial Instruments: Disclosure and presentation" IAS 33 (revised) "Earnings per Share" IAS 36 (revised) "Impairment of Assets" IAS 38 (revised) "Intangible Assets" IAS 39 (revised) "Financial Instruments: Recognition and Measurement" IAS 40 (revised) "Investment Property" IFRS 2 "Share-based Payments" IFRS 3 "Business Combinations" IFRS 4 "Insurance Contracts" IFRS 5 "Non-current Assets Held for Sale" IFRIC 1 "Changes in Existing Decommissioning, Restoration and Similar Liabilities" IFRIC 2 "Members' Shares in Co-operative Entities and Similar Instruments" Following the adoption of IAS 1 (revised) and public comments by theInternational Financial Reporting Interpretations Council ("IFRIC") the Groupchanged its classification of certain items of income and expense such as gains/losses from disposal and impairment of non-current assets and other similaritems. Such items are now included in arriving at the Group's operating result.Comparative information has been restated to comply with current year'spresentation. Except for the presentational changes described above, the adoption of the newor revised standards and interpretations has not resulted in significant changesto the Group's accounting policies. Certain additional disclosures were providedby the Group as required by the new standards. Certain of the new standards areapplied to transactions and affect the amounts reported in the current year asfollows. IFRS 2 " Share-based payment" - This requires the recognition of equity-settledshare-based payments at fair value at the date of grant and the recognition ofliabilities for cash-settled share-based payments at the current fair value ateach balance sheet date. Prior to the adoption of IFRS 2, the Group did not havea share-based payments program. The Standard therefore applies to share optionsgranted in 2005. In 2005, the impact of share-based payments is a net charge to income of USD 5.4million. At 31 December 2005, the liability recognized for share-based paymentsamounted to USD 5.4 million. The share-based payment expense has been included in selling, general andadministrative expenses in the income statement. IFRS 3 "Business combinations" - IFRS 3 has been adopted for businesscombinations for which the agreement date is on or after 31 March 2004.Therefore, the transactions to which the new Standard has been applied are theacquisitions of LLC Beta Estate (a retail chain in St. Petersburg) in June 2005and the Ekaterinburg franchisee in December 2005. After initial recognition, IFRS 3 requires goodwill acquired in a businesscombination to be carried at cost less any accumulated impairment losses. UnderIAS 36 "Impairment of Assets", impairment reviews are required annually, or morefrequently if there are indications that goodwill might be impaired. IFRS 3prohibits the amortization of goodwill. At the date of authorization of these financial statements, the following newstandards and interpretations were in issue but not yet effective: IFRS 6 "Exploration for and Evaluation of Mineral Resources" IFRS 7 "Financial Instruments: Disclosures" IAS 39 Amendments: "The Fair Value Option", "Hedges of Forecast Intragroup Transactions", "Financial Guarantee Contracts" IAS 19 (revised) "Employee Benefits" IFRS 4 Amendment "Financial Guarantee Contracts" IFRIC 4 "Determining whether an Arrangement contains a Lease" IFRIC 5 "Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds" IFRIC 6 "Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment" IFRIC 7 "Applying the Restatement Approach under IAS 29" IFRIC 8 "Scope of IFRS 2" IFRIC 9 "Reassessment of Embedded Derivatives" The Group's management anticipates that the adoption of these Standards andInterpretations in future periods will have no material impact on the financialstatements of the Group. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business combinations - The acquisition of subsidiaries is accounted for usingthe purchase method. The cost of the acquisition is measured at the aggregate ofthe fair values, at the date of exchange, of assets given, liabilities incurredor assumed, and equity instruments issued by the Group in exchange for controlof the acquiree, plus any costs directly attributable to the businesscombination. The acquiree's identifiable assets, liabilities and contingentliabilities that meet the conditions for recognition under IFRS 3 are recognizedat their fair values at the acquisition date, except for non-current assets (ordisposal groups) that are classified as held for sale in accordance with IFRS 5"Non-Current Assets Held for Sale and Discontinued Operations", which arerecognized and measured at fair value less costs to sell. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary,adjustments are made to the financial statements of subsidiaries to bring theiraccounting policies into line with those used by other members of the Group. Allintra-group transactions, balances, income and expenses are eliminated onconsolidation. Goodwill - Goodwill arising on the acquisition of a subsidiary or a jointlycontrolled entity represents the excess of the cost of acquisition over theGroup's interest in the net fair value of the identifiable assets, liabilitiesand contingent liabilities of the subsidiary or jointly controlled entityrecognized at the date of acquisition. Goodwill is initially recognized as anasset at cost and is subsequently measured at cost less any accumulatedimpairment losses. For the purpose of impairment testing, goodwill is allocated to each of theGroup's cash-generating units expected to benefit from the synergies of thecombination. Cash-generating units to which goodwill has been allocated aretested for impairment annually, or more frequently when there is an indicationthat the unit may be impaired. If the recoverable amount of the cash-generatingunit is less than the carrying amount of the unit, the impairment loss isallocated first to reduce the carrying amount of any goodwill allocated to theunit and then to the other assets of the unit pro-rata on the basis of thecarrying amount of each asset in the unit. An impairment loss recognized forgoodwill is not reversed in a subsequent period. On disposal of a subsidiary or a jointly controlled entity, the attributableamount of goodwill is included in the determination of the profit or loss ondisposal. Foreign currency transactions - Transactions in currencies other than thefunctional currency are initially recorded at the rates of exchange prevailingon the dates of the transactions. Monetary assets and liabilities denominated insuch currencies are translated at the rates prevailing on the balance sheetdate. All translation differences are recognized in the consolidated incomestatement. Revenue recognition - The Group generates and recognizes sales to retailcustomers at the point of sale in its stores. In addition, the Group recognizesincome from franchisee fees based on contractual arrangements over the term ofthe contracts. The up-front non-refundable franchise fees received by the Groupare deferred and recognized over the standard contractual term of 10 years.Revenues are measured at the fair value of the consideration received orreceivable. Discounts earned by customers through loyalty cards, are recorded by the Groupas a reduction of the sales price at the time of the sale. Revenues arerecognized net of value added tax. Property, plant and equipment - Property, plant and equipment is stated at cost,except as stated below. Where historical cost information was not available, management used valuationsperformed by independent professionally qualified appraisers to arrive at thefair value cost as of the date of initial application of IFRS, which was 1January 2002. Capitalized cost includes major expenditures for improvements and replacementsthat extend the useful lives of the assets or increase their revenue generatingcapacity. Repairs and maintenance expenditures that do not meet the foregoingcriteria for capitalization are charged to the consolidated income statement asincurred. Deprecation is computed under the straight-line method utilizing the usefullives of the assets determined by independent appraisers and over the estimateduseful economic lives of assets, for those acquired subsequent to valuation, asfollows: Buildings 20-50 years Refrigerating equipment 7-10 years Vehicles 5-7 years Other equipment 3-5 years Construction in progress comprises costs directly related to the construction ofproperty, plant and equipment including an appropriate allocation of directlyattributable variable overheads that are incurred in construction. Loans tocertain entities which are established solely to administer constructionprojects for the Group are classified as construction in progress. The Groupnormally acquires full ownership of such entities on completion of construction.Depreciation of these assets, on the same basis as for other property assets,commences when the assets are put into operation. Construction in progress isreviewed regularly to determine whether its carrying value is fairly stated andwhether appropriate provision for impairment is made. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognized in the consolidated income statement. Long-term prepayments - Long-term prepayments represent up-front payments forthe lease of land and are amortized over the term of the lease, which is 49years. Impairment of tangible and intangible non-current assets - At each balance sheetdate, the Group reviews the carrying amounts of its tangible and intangibleassets to determine whether there is any indication that those assets havesuffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where it is impossible to estimate the recoverableamount of an individual asset, the Group estimates the recoverable amount of thecash-generating unit to which the asset belongs. Recoverable amount is thehigher of an asset's net selling price and its value in use, which is thepresent value of estimated future cash flows expected to arise from thecontinuing use of an asset and from its disposal at the end of its useful life. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (orcash-generating unit) is reduced to its recoverable amount. Impairment lossesare recognized as an expense immediately. Finance leases - Leases are classified as finance leases whenever the terms ofthe lease transfer substantially all the risk and rewards of ownership to thelessee. All other leases are classified as operating leases. Assets held under finance leases are recognized as assets of the Group at theirfair value at the date of acquisition. The corresponding liability to the lessoris included in the balance sheet as a finance lease obligation. Finance costswhich represent the difference between the total leasing commitments and thefair value of the assets acquired, are charged to the consolidated incomestatement over the term of the relevant lease so as to produce a constantperiodic rate of charge on the remaining balance of the obligations for eachaccounting period. Leased assets are depreciated over their estimated useful economic lives or overthe term of the lease, if shorter. If there is reasonable certainty that thelessee will obtain ownership by the end of the lease term, the period ofexpected use is the useful life of the asset. Rents paid under operating leasesare charged to the consolidated income statement as incurred. Inventories - Inventories are stated at the lower of cost or net realizablevalue. Cost comprises direct cost of goods, transportation and handling costs.Cost is calculated using the weighted average method. Net realizable valuerepresents the estimated selling price less all estimated costs to be incurredin marketing, selling and distribution. The Group provides for estimated inventory losses (shrinkage) between physicalinventory counts on the basis of a percentage of sales. The provision isadjusted at the end of each reporting period to reflect the historical trend ofthe actual physical inventory count results. Supplier bonuses - The Group receives various types of allowances from suppliersin the form of slotting fees, volume discounts and other form of payments thateffectively reduce the cost of goods purchased from the supplier or the cost ofpromotional activities conducted by the Group that benefit the supplier. Bonuses received from suppliers are presumed to be reduction in prices paid forthe product and are recognized in cost of sales as the related inventory is soldunless specific criteria are met to recognize the bonus as revenue or fortreatment as reimbursement of special incremental, identifiable costs. Receivables and prepayments - Receivables and prepayments are stated at originalcost after deducting an allowance for uncollectible amounts. Cash - Cash includes petty cash and cash held on current bank accounts. Cashequivalents include short-term investments that are readily convertible to aknown amount of cash and which are subject to insignificant risk of changes invalue. Bank loans and other non-bank borrowings - All loans and borrowings areinitially recorded at the proceeds received, net of direct issue costs. Afterinitial recognition all loans and borrowings are subsequently measured atamortized cost, which is calculated by taking into account any discount orpremium on settlement. Borrowing costs - Before 2005 the Group capitalized the borrowing costs that aredirectly attributable to the acquisition, construction or production of aqualifying asset, as part of the cost of that asset. During 2005 the Groupchanged its accounting policy in respect of the recognition of borrowing costs.From 2005 all borrowing costs are recognized as an expense in the period inwhich they are incurred. Management believes that this treatment will result ina less judgmental treatment and a more transparent presentation of the Group'sfinance costs. The impact of the application of the new policy was not materialand thus no adjustments were made in respect of the prior years. Trade and other payables - Liabilities for trade and other short-term amountspayable are stated at their nominal value. Value added tax on purchases and sales - Value added tax (VAT) related to salesis payable to the tax authorities upon collection of receivables from customers.Input VAT is reclaimable against sales VAT upon payment for purchases. The taxauthorities permit the settlement of VAT on a net basis. VAT related to salesand purchases, which have not been settled at the balance sheet date (VATdeferred) is recognized in the consolidated balance sheet on a gross basis.Where provision has been made against debtors deemed to be uncollectible, a baddebt expense is recorded for the gross amount of the debtor, including VAT. Income taxes - Income taxes for the Group entities have been computed inaccordance with the laws of the respective jurisdictions. They are based on theresults for the year as adjusted for items that are non-assessable or non-taxdeductible. Income tax expense includes any adjustments to provisions in respectof management's estimates of additional amounts payable as a result of disputeswith the tax authorities over the Group's compliance with tax legislation. Deferred tax is accounted for using the balance sheet liability method inrespect of temporary differences arising from differences between the carryingamount of assets and liabilities in the consolidated financial statements andthe corresponding tax basis used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporarydifferences and deferred tax assets are recognized to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilized. Deferred tax assets and liabilities areoffset when they relate to income taxes levied by the same taxation authorityand the Group intends to settle its tax assets and liabilities on a net basis. Deferred tax is calculated at rates that are expected to apply to the periodwhen the asset is realized or the liability is settled. It is charged orcredited to the consolidated income statement, except when it relates to itemscredited or charged directly to equity, in which case the deferred tax is alsodealt with in equity. Retirement benefit costs - The operating entities of the Group contribute to theRussian Federation state pension, medical and social insurance and employmentfunds on behalf of all its current employees. Any related expenses arerecognized in the consolidated income statement as incurred. There is nounfunded element at the balance sheet date. Earnings per share - Earnings per share have been determined using the weightedaverage number of Pyaterochka Holding N.V. shares outstanding during thereporting periods. Dividends - Dividends are recognized at the date they are declared by theshareholders in general meeting. Retained earnings legally distributable by theGroup are based on amounts available for distribution in accordance withapplicable legislation and as reflected in the statutory financial statements ofthe individual entities that make up the Group. These amounts may differsignificantly from the amounts calculated on the basis of IFRS. Share-based payments - The Group issues options to certain employees which givethe employees the right to choose whether a share-based payment transaction issettled in cash or by issuing equity instruments. Share-based payment transactions, or the components of such transactions, areaccounted for as a cash-settled share-based payment transaction if, and to theextent that, the entity has incurred a liability to settle in cash or otherassets, or as an equity-settled share-based payment transaction if, and to theextent that, no such liability has been incurred. Share-based payment transactions are measured at fair value (excluding theeffect of non market-based vesting conditions) of the compound financialinstrument at the measurement date, taking into account the terms and conditionson which the rights to the cash or equity instruments were granted. The fairvalue is determined using the Black-Scholes pricing model. The expected lifeused in the model has been adjusted, based on management's best estimate, forthe effects of non-transferability, exercise restrictions and behavioralconsiderations. A liability equal to the portion of the services received is recognized at thecurrent fair value determined at each balance sheet date. The Group records anexpense, based on its estimates of the discount related to shares expected tovest, on a straight-line basis over the vesting period. At the date of settlement, the Group will remeasure the liability to its fairvalue. If the Group issues equity instruments on settlement rather than payingcash, the liability will be transferred directly to equity, as the considerationfor the equity instruments issued. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the entity's accounting policies, which are describedin Note 4, management has made the following judgments that have the mostsignificant effect on the amounts recognized in the financial statements (apartfrom those involving estimations, which are dealt with below). Recognition of supplier bonuses - In accounting for supplier bonuses received bythe Group the Group makes an assumption that all such supplier bonuses arerelated to the performance of the Group in the reporting period. The key assumptions concerning the future, and other key sources of estimationuncertainty at the balance sheet date, that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within thenext financial year, are discussed below. Impairment of goodwill - Goodwill related to the current year's acquisitionswill be tested for impairment at 31 December 2006 which will require anestimation of the value in use of the cash-generating units to which goodwillhas been allocated. The value in use calculation requires the entity to estimatethe future cash flows expected to arise from the cash-generating unit and asuitable discount rate in order to calculate present value. Compliance with tax legislation - As discussed further in Note 30 compliancewith tax legislation, particularly in the Russian Federation, is subject tosignificant degree of interpretation and can be routinely challenged by the taxauthorities. SUBSIDIARIES Details of the Company's significant subsidiaries at 31 December 2005 are asfollows: Name of subsidiary Place of incorporation Proportion of Proportion of Principal activity (or registration) and ownership voting power operation interest held % % Speak Global Ltd Republic of Cyprus, 100 100 Trade mark owner and Nicosia property managementLLC Agroaspekt Russia, Moscow 100 100 Trade operatorLLC Agroavto Russia, Moscow 100 100 Logistic operatorCJSC Remtransavto Russia, Moscow 100 100 Property managementLLC Pyaterochka 2005 Russia, Moscow 100 100 Property managementLLC Agrotorg Russia, St Petersburg 100 100 Trade operatorCJSC Agrostar Russia, St Petersburg 100 100 Logistic operatorCJSC Zeiser Russia, St Petersburg 100 100 Property managementLLC Beta Estate Russia, St Petersburg 100 100 Property managementLLC Pyaterochka Finance Russia, St Petersburg 100 100 Bonds issuerLLC Ural Retail Russia, Ekaterinburg 100 100 Trade operatorLLC Economtorg Russia, Ekaterinburg 100 100 Trade operatorLLC Legion Russia, Ekaterinburg 100 100 Property management The subsidiaries were established between 1997-2005. As part of its capital investments in new store construction the Group acquires100% ownership in entities which hold title to respective properties. Theseentities are subsequently legally merged into the Group's operating companieswhen the construction phase is complete. Individually these subsidiaries are notsignificant to the Group. As of 31 December 2003, the Group included companies that were in nominalownership of some of the Group's employees in addition to the direct ownershipinterest held through a Group company, LLC Agrotorg. Based on contractualarrangements with the nominal shareholders 100% of equity of the followingcompanies was consolidated by the Group: - LLC Pyaterochka Plus; - LLC Foodsale; - LLC Shop Pyaterochka 501; - LLC Shop Pyaterochka 502. Speak Global Ltd. is a limited liability company established in 2001 under thelaws of Cyprus, the company owns the trademark "Pyaterochka". During the year ended 31 December 2004 LLC Foodsale and LLC Shop Pyaterochka 501were merged under the name LLC Foodsale and the Group increased its directshareholdings in LLC Pyaterochka Plus, LLC Foodsale and LLC Shop Pyaterochka 502to 100% by acquiring shares from the nominal shareholders of these companies.These transactions had no material effect on the combined and consolidatedfinancial statements of the Group. In March 2005, the Group disposed of its shareholdings in LLC Pyaterochka Plus,LLC Foodsale, and LLC Pyaterochka Shop 502 to a party under common control (Note27 details the transfer of assets to the Carousel Group). In March 2005 the shareholders of the Group contributed their 100% interest inthe shares of Speak Global Ltd to the Company. In June 2005, the Group acquired a 100% interest in LLC Beta estate (the ownerof the Kopeika network of retail trading) which operates 18 retail stores in St.Petersburg region under the Kopeika name (see Note 24 for the details). On 30 December 2005 the Group acquired a 100% interest in its franchise operatorin Ekaterinburg (the Southern Urals region of Russia) - LLC Ural Retail, LLCLegion and LLC Economtorg. As of 31 December 2005 the acquired franchiseeoperated 21 stores under the Pyaterochka brand (Note 24). Revenue The Group's operations are located in Moscow, St. Petersburg and Ekaterinburg.The following table provides an analysis of the Group's sales by geographicalmarket where the products and services are sold. Year ended Year ended Year ended 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Moscow (revenue from retail operations) 643.6 517.9 313.2St Petersburg (revenue from retail operations) 708.2 583.0 442.6St Petersburg (revenue from franchise 7.5 4.9 3.8operations) 1,359.3 1,105.8 759.6 The Ekaterinburg operations were acquired on 30 December 2005 therefore noamounts were recognized in the consolidated income statement for the 2005. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of 31 December 2005, 2004 and 2003 consisted ofthe following: Land and Refrigerating Vehicles Other CIP Total buildings equipment equipment 'mln USD 'mln USD 'mln USD 'mln USD 'mln USD 'mln USD Cost At 1 January 2003 43.2 8.9 1.4 10.0 25.0 88.5Additions - - - - 69.2 69.2Disposals - (0.8) (0.1) (0.9) - (1.8)Transfers 43.5 8.1 0.7 13.1 (65.4) -Currency adjustment 5.2 1.0 0.1 1.3 2.0 9.6At 31 December 2003 91.9 17.2 2.1 23.5 30.8 165.5 Additions 28.9 2.5 0.9 - 56.1 88.4Disposals (0.5) (0.8) (0.3) (1.6) - (3.2)Transfers 31.7 3.5 0.6 14.3 (50.1) -Translation 7.8 1.2 0.2 1.7 1.9 12.8adjustmentAt 31 December 2004 159.8 23.6 3.5 37.9 38.7 263.5 Additions 63.7 4.1 0.2 5.9 127.1 201.0Acquired on 23.3 - - 2.6 - 25.9acquisition ofsubsidiariesDisposals (5.5) (0.1) (0.3) (1.1) - (7.0)Transfers 67.8 8.7 1.4 15.9 (93.8) -Translation (8.2) (1.1) (0.1) (1.7) (2.0) (13.1)adjustmentAt 31 December 2005 300.9 35.2 4.7 59.5 70.0 470.3 Accumulateddepreciation At 1 January 2003 (0.7) (0.7) (0.2) (2.5) - (4.1)Charge for the year (2.1) (1.2) (0.2) (4.7) - (8.2)Eliminated on - - - 0.3 - 0.3disposalsTranslation (0.1) - - (0.3) - (0.4)adjustmentAt 31 December 2003 (2.9) (1.9) (0.4) (7.2) - (12.4) Charge for the year (3.6) (1.9) (0.4) (8.6) - (14.5)Eliminated on - 0.2 0.1 1.1 - 1.4disposalsTranslation (0.3) (0.1) - (0.7) - (1.1)adjustmentAt 31 December 2004 (6.8) (3.7) (0.7) (15.4) - (26.6) Charge for the year (7.4) (5.8) (1.0) (11.5) - (25.7)Eliminated on 0.2 - - 1.7 - 1.9disposalsTranslation 0.4 0.2 0.5 - 1.1adjustmentAt 31 December 2005 (13.6) (9.3) (1.7) (24.7) - (49.3) Net book value At 31 December 2003 89.0 15.3 1.7 16.3 30.8 153.1 At 31 December 2004 153.0 19.9 2.8 22.5 38.7 236.9 At 31 December 2005 287.3 25.9 3.0 34.8 70.0 421.0 At 31 December 2005, 2004 and 2003, refrigerating equipment and vehicles includeassets held under a number of finance lease agreements (Note 20). At the end ofthe lease term the Group takes automatic ownership of the assets. The net bookvalue of the leased refrigerating equipment at 31 December 2005, 2004 and 2003was USD 8.3 million, USD 6.0 million and USD 2.3 million, respectively. The netbook value of the leased vehicles at 31 December 2005, 2004 and 2003 was USD 1.4 million, USD 0.9 million and USD nil, respectively. At 31 December 2005, 2004 and 2003 property, plant and equipment with a net bookvalue of USD 43.1 million, USD 38.3 million and USD 20.2 million, respectivelywere pledged to secure certain loans granted to the Group (Notes 19 and 21). GOODWILL 'mln USD CostAt 1 January 2005 -Arising on acquisition of subsidiaries 46.8Carrying amount at 31 December 2005 46.8 Goodwill acquired in a business combination is allocated, at acquisition, to thecash generating units (CGUs) that are expected to benefit from that businesscombination. The carrying amount of goodwill had been allocated as follows: Acquisition of Translation 31.12.2005 subsidiaries movement 'mln USD 'mln USD 'mln USD 21 stores in Ekaterinburg (former franchisee) 9.6 - 9.618 stores in St Petersburg (former Kopeika) 36.8 0.4 37.2 46.4 0.4 46.8 Other long-term assets Other long-term assets comprise a prepayment of the USD 9 million made for thepurchase of LLC "Set' Roznichnoi Torgovli" - a franchise operator of the Kopeikaretail chain in Moscow and the Moscow region with a total of 25 stores (Note29). INVENTORIES Inventories as of 31 December 2005, 2004 and 2003 consisted of the following: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Merchandise 56.1 40.2 36.4Less: valuation allowance (0.6) (0.4) -Total 55.5 39.8 36.4 At 31 December 2005, 2004 and 2003 merchandise with an approximate book value ofUSD 16.0 million, USD 38.7 million and USD 5.0 million, respectively, werepledged to secure loans granted to the Group (Notes 19 and 21). RECEIVABLES AND PREPAYMENTS Receivables and prepayments as of 31 December 2005, 2004 and 2003 consisted ofthe following: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD VAT reimbursable 39.8 27.3 16.5Other receivables and prepayments 5.6 11.1 10.1Advances paid 19.9 7.2 5.4Advances paid to related parties (Note 27) 0.2 0.4 0.6Promissory notes receivable - 2.2 -Income tax receivable 1.4 0.7 0.3Other taxes receivable 2.4 1.0 0.1Receivables from related parties (Note 27) - 66.3 -Loan receivable from related parties (Note 27) - 2.6 -Provision for doubtful accounts (4.4) (1.4) (0.6)Total 64.9 117.4 32.4 Management considers that the carrying amount of receivables and prepaymentsapproximates their fair value. CASH Cash as of 31 December 2005, 2004 and 2003 consisted of the following: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Petty cash 1.3 0.7 0.5Cash in banks, RUB accounts 42.8 3.4 9.5Cash in banks, USD and other accounts 0.4 5.2 0.4Cash in transit 12.0 5.4 3.9Total 56.5 14.7 14.3 Cash in transit represents cash collected by the bank from the Group's stores asof the end of the working day and not deposited into the bank accounts as of therelevant period end. Finance costs, net 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Interest income (0.6) (0.8) (0.1)Interest expense relating to finance lease 1.2 3.7 1.1obligationsOther interest expense 12.9 0.8 0.2Finance costs, net 13.5 3.7 1.2 SHARE CAPITAL As of 31 December 2005, 2004 and 2003 the issued and fully paid share capitalconsisted of: Nominal Number of 31.12.2005 31.12.2004 31.12.2003 par value shares 'mln USD 'mln USD 'mln USD issued and fully paid Pyaterochka Holding N.V. EUR 1 38,306,785 45.5 45.7 43.0 The Company has one class of ordinary share which carries no right to fixedincome. Dividends During the years ended 31 December 2005, 2004 and 2003 the Group declared andpaid dividends of USD nil, USD 3.4 million (USD 0.09 per share) and USD 2.3million (USD 0.06 per share), respectively. Earnings per share The calculation of the basic and diluted earnings per share attributable to theordinary equity holders is based on the following data: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD EarningsEarnings for the purposes of basic earnings per 91.2 74.4 33.8shareEffect of dilutive potential ordinary shares - - -Earnings for the purposes of diluted earnings 91.2 74.4 33.8per share Number of sharesWeighted average number of ordinary shares for 38,306,785 38,306,785 38,306,785the purposes of basic earnings per shareEffect of dilutive potential ordinary shares:Employee share options 721,165 - -Weighted average number of ordinary shares for 39,027,950 38,306,785 38,306,785the purposes of diluted earnings per share INCOME TAX The statutory tax rate effective in the Russian Federation, the location of themajority of the Group's entities, was 24% in the periods ended 31 December 2005,2004 and 2003. The foreign entities of the Group pay income taxes in theirrespective jurisdictions. The taxable profits of Pyaterochka Holding N.V., a legal entity incorporated inthe Netherlands, are taxed at a rate of 34.5% for the periods ended 31 December2005, 2004 and 2003. The taxable profits of Speak Global Ltd., a legal entityincorporated in Cyprus, are taxed at 4.25% for the periods ended 31 December2005, 2004 and 2003. The Group's provision for income tax for the periods ended 31 December 2005,2004 and 2003 is as follows: 2005 2004 2003 'mln USD 'mln USD 'mln USD Current tax 28.9 19.0 8.0Deferred tax 0.1 0.5 0.7Total income tax expense 29.0 19.5 8.7 Deferred taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for tax purposes. The movement in the Group's deferred tax position is as follows: 2005 2004 2003 'mln USD 'mln USD 'mln USD Net liability at the beginning of the year 9.4 8.3 6.9Charged to income statement for the year 0.1 0.5 0.7Currency adjustment (0.3) 0.6 0.7Net liability at the end of the year 9.2 9.4 8.3 The tax effect on the major temporary differences that give rise to the deferredtax assets and liabilities as at 31 December 2005, 2004 and 2003 is presentedbelow: 2005 2004 2003 'mln USD 'mln USD 'mln USDDeferred tax assetsAccrued expenses 1.1 0.8 0.1Provision for doubtful receivables 2.3 0.3 0.2Provision for inventory losses 0.2 0.4Difference in depreciable value of property, 3.1 1.4 1.0plant and equipmentOther adjustments 0.3 - 0.2Total 7.0 2.9 1.5 Deferred tax liabilitiesDifference in depreciable value of property, 16.2 12.3 9.8plant and equipmentTotal 16.2 12.3 9.8 The taxation charge for the year is different from that which would be obtainedby applying the statutory income tax rate to the net profit before income tax.Below is a reconciliation of theoretical income tax at 24% to the actual expenserecorded in the Group's income statement: 2005 2004 2003 'mln USD % 'mln USD % 'mln USD % Profit before income tax 120.2 93.9 42.5Theoretical income tax at 28.8 24% 22.5 24% 10.2 24%statutory rateAdjustments due to:Effect of income, taxed at (12.2) (10%) (8.9) (9%) (2.6) (6%)rates different fromstandardTax effect of expenses that 12.4 10% 5.9 6% 1.1 3%are not deductible indetermining taxable profitIncome tax expense 29.0 24% 19.5 21% 8.7 21% LONG-TERM BORROWINGS Currency Annual interest 31.12.2005 31.12.2004 31.12.2003 rate (actual at 31 December 2005) 'mln USD 'mln USD 'mln USD Raiffeisenbank USD 9.24% / 8.19% 36.7 19.6 10.0Sberbank RUB 11.6% - 8.3 -Sberbank RUB 14.0%-15.0% 15.8 8.6 1.6Sberbank RUB 16% - 1.4 0.8Sberbank RUB 11.5%-12.5% - 4.0 -Sberbank RUB 10.5% 17.9 - -Bonds 1st issue RUB 11.45% 52.2 - -Bonds 2nd issue RUB 9.3% 104.2 - -Carmel Alliance Limited USD 5.5% - - 2.1 226.8 41.9 14.5Less current portion of (6.8) (3.4) (2.8)long-term loans (Note 21) Total long-term loans 220.0 38.5 11.7 Raiffeisenbank - In September 2003, the Group entered into two credit agreementswith Raiffeisenbank for an aggregate amount of USD 10.0 million. In Septemberand January 2005 and January 2004, the Group entered into five additional creditagreements with Raiffeisenbank for an aggregate amount of USD 7.5 million, USD12.5 million and USD 9.9 million, respectively. Loans received in 2004 and 2003bear interest of LIBOR+5.25% (average rate is 9.24%) and are being repaid inquarterly installments. These loans will be fully repaid by August 2008. Forthese loans the Group has already started to make quarterly repayments. Loansreceived in 2005 bear interest of LIBOR+4.85% (average rate is 8.19%) arerepayable in quarterly installments starting in April 2006 and will be fullyrepaid by January 2010. As of 31 December 2005 and 31 December 2004, USD 36.7million and USD 19.6 million, respectively, were outstanding under theseagreements. Property, plant and equipment with a book value of USD 35.3 millionand USD 19.4 million were pledged to collaterize the outstanding balances as of31 December 2005 and 31 December 2004, respectively. Sberbank - In July 2004, the Group entered into a loan agreement with Sberbankfor RUB 230.0 million (equivalent to USD 8.0 million as of 31 December 2005) tofinance its working capital. The loan bore interest of 11.6% per annum and wasfully repaid in 2005. As of 31 December 2004 the outstanding balance was USD 8.3million. In 2003-2004, the Group entered into several credit facilities with Sberbank tofinance its capital expenditures. In November 2003, the Group entered into acredit facility in the amount of RUB 130.0 million (equivalent to USD 4.5million as of 31 December 2005) redeemable in quarterly installments starting inMarch 2008 and maturing in November 2008. In July 2004, the Group entered into acredit facility for RUB 124.0 million (equivalent to USD 4.3 million as of 31December 2005) redeemable in a quarterly installments starting in December 2008and will be fully repaid in July 2009. In 2005 the Group entered into anadditional agreement with Sberbank for RUB 200.0 million (equivalent to USD 6.9million as of 31 December 2005) redeemable in quarterly installments starting inSeptember 2009 and maturing in September 2010. The credit facilities bearinterest from 14.0% to 15.0% per annum. As of 31 December 2005, 2004 and 2003USD 15.8 million, USD 8.6 million and USD 1.5 million, respectively, wereoutstanding under these agreements. In September 2002, the Group entered into credit facilities of RUB 70.5 million(equivalent to USD 2.4 million as of 31 December 2005) maturing in September2007. The credit facility bore interest of 16% per annum. During the reportingperiod the loan was repaid in full. As at 31 December 2004 and 2003 USD 1.4million and USD 0.8 million, respectively, were outstanding under thisagreement. In July 2004, the Group entered into a credit facility with Sberbank of up toRUB 170.0 million (equivalent to USD 5.9 million as of 31 December 2005) tofinance its working capital. Interest rate on this credit facility was11.5%-12.5%. The loan which was to mature in January 2006 was repaid in full in2005. As at 31 December 2004 USD 4.0 million was outstanding under thisagreement. In August and November 2005, the Group entered into credit facilities withSberbank of up to RUB 250.0 million and RUB 354.2 million (equivalent to USD 8.7million and USD 12.3 million as of 31 December 2005), respectively to financeits working capital. Interest rate on these credit facilities is 10.5%. Loansmature in January and May 2007, respectively. As at 31 December 2005 USD 8.6million and USD 9.3 million were outstanding under these agreements. As of 31 December 2005 and 2004 loans from Sberbank were collaterized by pledgesof buildings with a book value of USD 7.8 million and USD 9.9 million,respectively. As of 31 December 2005 and 2004 the loans were also secured bypledges of merchandise with a book value of USD 16.0 million and USD 15.2million, respectively. Bonds - On 31 March 2005, the issuance of Ruble-denominated bearer bonds ofPyaterochka Finance LLC, a 99.99 per cent owned subsidiary of Agrotorg LLC, wasregistered with the Federal Service for Financial Markets of the RussianFederation. The aggregate nominal value of the bonds amounted to RUB 1,500million (equivalent of USD 52.1 million as of 31 December 2005). The bonds whichwere placed by open subscription conducted on the Moscow Interbank CurrencyExchange ("the MICEX") on 18 May 2005 have a maturity of five years from thedate of placement. The rate of a coupon payable on the bonds was determinedthrough an auction conducted on MICEX (11.45%). Interest is payable every sixmonths. The proceeds of the bond issue were used to finance the capitalexpenditures associated with the opening of new stores by the Group, as well asto refinance the Group's short-term borrowings. On December 20, 2005, the second bond issue was placed on MICEX. The issuer wasthe Pyaterochka Finance LLC. The bonds with a total nominal value of 3 billionRubles (equivalent of USD 104.2 million as at 31 December 2005) are 5-year bondsbearing a semi-annual coupon. The coupon rates are fixed at 9.3% per annum tomaturity. Loan repayments over the five-year period beginning on 1 January 2006 are asfollows: 'mln USD 31 December 2006 6.831 December 2007 28.331 December 2008 17.431 December 2009 12.931 December 2010 161.4Total 226.8 OBLIGATIONS UNDER FINANCE LEASES The Group leases certain refrigerating equipment and vehicles under financelease terms. The agreements expire in 2007-2009 and assume transfer of ownershipfor the leased assets to the Group at the end of the lease term. The effectiveborrowing rate on lease agreements as of 31 December 2005, 2004 and 2003 variesfrom 9.0% to 11.0% per annum on USD agreements and from 24.0% to 31.0% per annumon RUB agreements. Lease obligations of the Group as of 31 December 2005, 2004 and 2003 consistedof the following: Minimum lease payments Present value of minimum lease payments 31.12.2005 31.12.2004 31.12.2003 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD 'mln USD 'mln USD 'mln USD Amounts payable underfinance leases:Within one year 2.9 2.0 0.5 1.7 1.0 0.1In the second to fifth years 4.9 4.8 2.1 3.8 3.5 1.4inclusive 7.8 6.8 2.6 5.5 4.5 1.5 Less: future finance charges (2.2) (2.2) (1.0) N/A N/A N/APresent value of minimum 5.6 4.6 1.6 5.5 4.5 1.5lease payments SHORT-TERM LOANS AND OVERDRAFTS Currency Annual interest 31.12.2005 31.12.2004 31.12.2003 rate (Actual at 31 December 'mln USD 'mln USD 'mln USD 2005) Sberbank RUB 11.6% - 14.0 0.9Promstroibank RUB 11.7% - 1.1 -LLC Kaiser (Note 27) RUB 0.1% - 8.5 -Sberbank overdraft RUB 9.0% - 2.8 5.0Raiffeisenbank overdraft USD 5.0% - 2.7 1.2 - 29.1 7.1Current portion of long-term 6.8 3.4 2.8loans (Note 19) Total short-term loans 6.8 32.5 9.9 Sberbank - In 2003 and 2004 the Group entered into a number of credit lineagreements with Sberbank. These credit lines bore interest of 11.6% per annumand were collaterized by a pledge of merchandise with a book value of USD 23.5million and property, plant and equipment with a book value of USD 9.0 millionas of 31 December 2004. During 2005 the loans were repaid in full. Promstroibank - In December 2004, the Group entered into a loan agreement withPromstroibank for RUB 30.0 million (equivalent of USD 1.0 million). The loan wasunsecured, bearing interest rate of 11.7% per annum and was repaid in January2005. LLC Kaiser - In November 2004, the Group entered into a loan agreement with LLCKaiser, a party under common control, for RUB 236.8 million (equivalent of USD8.5 million). The loan bore interest of 0.1% per annum and was repaid in fullduring 2005. Sberbank Overdraft - At 31 December 2004 the Group had an overdraft of USD 2.8million. The short-term overdraft facility was limited to RUB 250.0 million(equivalent to USD 8.7 million as of 31 December 2005), bore interest of 9.0%per annum and matured in July - September 2005. Raiffeisenbank Overdraft - At 31 December 2004 the Group had an overdraft of USD2.7 million. The short-term overdraft facility was limited to RUB 100.0 million(equivalent to USD 3.5 million as of 31 December 2005) and bore interest at theinternal Raiffeisenbank base rate set for loans denominated in Rubles plus 3.5%. TRADE ACCOUNTS PAYABLE Trade payables principally comprise amounts outstanding for trade purchases.Management considers that the carrying amount of trade payables approximatestheir fair value. OTHER PAYABLES AND ACCRUED EXPENSES Other payables and accrued expenses as of 31 December 2005, 2004 and 2003consisted of the following: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Taxes payable 0.1 15.2 14.0Other payables and accruals 40.3 22.8 15.9Total 40.4 38.0 29.9 Management considers that the carrying amount of other payables and accrualsapproximates their fair value. Acquisition of subsidiarIES In June 2005 the Group acquired 100 per cent of the issued share capital of LLC"Beta Estate" - owner of the Kopeika retail network in St. Petersburg for a cashconsideration of USD 60.8 million. All 18 stores operated by LLC "Beta Estate"were or will be rebranded by Pyaterochka subsequent to the acquisition. In December 2005 the Group acquired 100 per cent ownership of the issued sharecapital of the Ekaterinburg franchisee comprising the issued share capital ofthree legal entities, LLC Ural Retail, LLC Legion and LLC Economtorg, for a cashconsideration of USD 14.5 million. These transactions have been accounted for bythe purchase method of accounting. The net assets acquired in these transactions, and the goodwill arising, are asfollows: Acquiree's Fair value Fair value adjustments carrying amount at acquisition 'mln USD 'mln USD 'mln USD Net assets acquired:Property, plant and equipment 4.7 21.2 25.9Long-term land lease rights - 1.9 1.9Inventory 1.6 - 1.6Other receivables 3.6 - 3.6Bank and cash balances 0.7 - 0.7Trade payables (3.9) - (3.9)Other payables (0.9) - (0.9) 5.8 23.1 28.9 Goodwill 46.4 Total consideration, satisfied by cash 75.3 Net cash outflow arising on acquisition:Cash consideration paid (75.3)Cash and cash equivalents acquired 0.7Net cash outflow 74.6 The value of net assets acquired and the resulting goodwill are determined on aprovisional basis only. The Group's management intends to finalize the purchaseprice allocation in respect of the current year acquisitions during the yearending 31 December 2006. The goodwill arising on the acquisition of the subsidiaries is attributable tothe anticipated profitability of the distribution of the Group's products in thenew markets and the anticipated future operating synergies from the combination. Management of the Group considers it impracticable to disclose the financialimpact on the Group as if the acquisitions were made at the beginning of 2005,because the financial statements of the companies before acquisition wereprepared on a different basis. LLC Beta Estate contributed USD 29.3 million of revenue for the period betweenthe date of acquisition and the balance sheet date. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the years ended 31 December2005, 2004 and 2003 consisted of the following: 2005 2004 2003 'mln USD 'mln USD 'mln USD Payroll and related taxes 88.6 59.0 40.8Pension costs 6.8 6.5 1.8Rent 26.1 21.6 14.2Depreciation and amortization 25.8 14.6 8.4Advertising and promotional expenses 3.7 9.0 7.0Repair and maintenance 8.2 6.2 5.3Security 6.7 4.0 2.3Package and raw materials 4.6 3.5 3.0Utilities 5.2 3.3 1.5Transportation 4.8 2.9 1.5Insurance 0.6 2.0 4.0Taxes, other than income tax 1.9 1.3 0.8Share-based payments expense 5.4 - -Loss on disposal of property, plant and 2.3 0.1 0.1equipmentOther expenses 10.5 14.9 12.6Total 201.2 148.9 103.3 A significant portion of the Group's operational and accounting personnel isoutsourced from two external staff management companies. The related outsourcingfees paid by the Group are shown within the payroll expenses. The Group enters into various non-cancelable operating lease agreements for therent of stores, land and premises. The terms of operating leases vary from oneto fifty years. Future minimum lease payments under non-cancelable operatinglease commitments as of 31 December 2005 become due as follows: 2005 'mln USDWithin 12 months 29.7In the second to fifth year inclusive 65.6After five years 23.7Total 119.0 SHARE-BASED PAYMENTS Share-based payments with cash alternatives The Group has a share option scheme for certain key employees of the Group.Terms of the arrangement provide an employee with the choice of whether thetransaction will be settled in cash or by issuing equity instruments. Optionsare exercisable at a fixed price equal to EUR 0.25 (approx. USD 0.31). Thevesting period varies from 3 to 5 years. The Management Board or the Supervisory Board (as the case may be) may attachthe vesting conditions (performance criteria) to an option, such as: (i) thedevelopment of the EBITDA of the Group, (ii) the number of new stores opened bythe Group, (iii) the development of costs and expenses of the Group, during thevesting period and/or (iv) other parameters as set out by the Management Boardor the Supervisory Board (as the case may be). Options lapse if they remainunexercised after a period of one year from the date of vesting. Options areforfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the year are as follows: Number of share Weighted options average exercise price, USD Outstanding at the beginning of the year - -Granted during the year 6,129,088 0.31 Outstanding at the end of the year 6,129,088 0.31 The options outstanding at the end of the year have a weighted average remainingcontractual life of 4 to 6 years. The options were granted on 16 August, 2005and 2 December 2005. The estimated fair values of the options granted on thesedates are USD 64.8 million (expected life 4 years), USD 8.6 million (expectedlife 5 years) and USD 12.9 million (expected life 6 years). These fair values were calculated using the Black-Scholes option pricing model.The inputs into the model were as follows: 2005 Weighted average share price 14.45Weighted average exercise price 0.30Expected volatility 67.9%Expected life 4-6Risk free rate 3%Expected dividend 0.13% Expected volatility was determined by calculating the historical volatility ofthe Group's share price over the maximum available period - since May 2005. Theexpected life used in the model has been adjusted, based on management's bestestimate, for the effects of non-transferability, exercise restrictions andbehavioral considerations. The Group recognized an expense of USD 5.4 million related to share-basedpayment transactions during the year. TRANSACTIONS WITH RELATED PARTIES Related party balances as of 31 December 2005, 2004 and 2003 comprised of thefollowing: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Accounts receivable from LLC Kaiser for - 55.8 -construction assets soldAccounts receivable from Hirsova Trading Ltd - 7.0 -Accounts receivable from shareholders for - 3.5 -withholding taxesShort-term loan receivable from LLC Union-Stroi - 2.6 -Advances for construction paid to LLC Macromir 0.2 0.4 0.6Short-term loan payable to LLC Kaiser - (8.5) - The transactions with the related parties may not be available on the same termsfor third parties. Asset transfer and other transactions related to the Carousel group In 2004, the shareholders of the Group established a separate group of entitiesto operate the hypermarkets under the brand name "Carousel". As of 31 December2005 the Carousel group consists of Formata Holding B.V., Hirsova TradingLimited, LLC Rusel, LLC Rusel M, LLC Kaiser, LLC Union-Stroi, LLC PyaterochkaPlus, LLC Foodsale, LLC Pyaterochka Shop 502, LLC Matrix, LLC Krasnoborskoye,LLC Emitel, LLC Ukatan, LLC Stalebeton, LLC Carousel, LLC Bashkirsky retail, LLCAvtoport, LLC Dalnevostochny, LLC Kollontay, LLC Land invest, LLC Sportivny, LLC Inzhstroy NN, LLC Region proekt, LLC Oblast Fill 5, LLC Fili oblast 2. Allthese entities are considered related by means of common control. During 2004, the Pyaterochka Group transferred to the Carousel group all of itsinterests and investments in the partially constructed hypermarkets in St.Petersburg area (comprising land, buildings and construction in progress) with abook value equivalent to USD 23.4 million and provided the Carousel group withan amount of approximately USD 32 million as loans with interest accruing at theannual rate of 0.1 per cent. No cash consideration was received from theCarousel group in connection with the transfer and the loans were not repaid.As a consequence of this transfer and loan, a receivable of USD 55.8 million wasrecorded in the Group's financial statements as at and for the year ended 31December 2004, legally apportioned between Agrotorg's wholly owned subsidiariesLLC Foodsale, LLC Shop Pyaterochka Plus and LLC Pyaterochka 502. In March 2005 the Group sold all of the shares held by Agrotorg's subsidiariesin LLC Foodsale, LLC Shop Pyaterochka Plus and LLC Pyaterochka 502 to theCarousel group for nominal consideration. The economic effect of this sale wasto transfer the receivable arising out of the hypermarkets asset transfer andloan referred to above to the Carousel group, thereby releasing the Carouselgroup from its obligations under the receivable as well as to impose on thePyaterochka Group a debt of US 3.9 million in favor of the Carousel group(resulting from the intragroup indebtedness which was owed by the PyaterochkaGroup to LLC Foodsale, LLC Shop Pyaterochka Plus and LLC Pyaterochka 502 priorto the sale). The transaction was treated in the consolidated financialstatements of the Group as a dividend in kind and decreased shareholders' equityby the equivalent of USD 59.6 million. The controlling shareholders in theGroup have agreed to indemnify the Group against any tax liabilities arising inconnection with the sale (including any interest and penalties incurredthereon). During 2005 the Group shared certain back-office functions with the Carouselgroup companies, including a joint-purchasing arrangement, and received a totalof USD 0.1 million from the Carousel group for these services. In 2004, Speak Global Ltd. provided loans to Hirsova Trading Ltd. to financeCarousel group's capital expenditure and working capital. Such loans gave riseto a short-term receivable of USD 7 million recorded in the Group's balancesheet as at 31 December 2004. These loans were fully repaid in August 2005. During 2004 the Group provided financing to Carousel group by issuing loans toLLC Union-Stroi. As of 31 December 2004 the outstanding receivable balance fromLLC Union-Stroi for the amount of USD 2.6 million is recorded within receivablesand prepayments. In November 2004 the Group received a loan from LLC Kaiser for USD 8.5 million.The loan bears 0.1% per annum. The outstanding balance of this loan as at 31December 2004 is USD 8.5 million. The loan has been fully repaid during 2005. In April 2005 the Group provided loans to the Carousel group for 30.0 million tofinance working capital. The loans bear interest of 13% per annum. They werefully repaid in August 2005. Loans obtained from shareholder The Group entered into two loan agreements with its shareholder Marie-CarlaCorporation N.V. for a total of USD 60.1 million to finance the purchase of LLCBeta Estate retail network in St. Petersburg. In June 2005, the Group receivedUSD 59.2 million under such agreements. During 2005 the Group has fully repaidthe loan resulting in USD nil outstanding balance as of 31 December 2005. Other related party transactions In 2004-2005 the Group also entered into a number of transactions forconstruction of estate properties, for lease of advertising space and extendingloans with companies in which Directors of the Group hold equity interests andhave the ability to exercise significant influence over their operations.These transactions are summarized below. LLC Media 5 - In 2005 and 2004, the Group leased advertising space in its St.Petersburg stores to LLC Media 5, a company related by means of common control,for RUB 13.4 million and RUB 3.1 million (equivalent to USD 0.5 million and USD0.1 million), respectively. LLC Media 5M - In 2005 and 2004, the Group leased advertising space in itsMoscow stores to LLC Media 5M, a company related by means of common control, forRUB 22.3 million and RUB 4.5 million (equivalent to USD 0.8 million and USD 0.2million), respectively. LLC Macromir - In 2004, LLC Macromir performed capital construction for theGroup. The amount of capital construction services purchased by the Group fromMacromir was RUB 21.2 million (equivalent to USD 0.7 million). As of 31 December2005 the balance of advances paid by the Group to LLC Macromir included inconstruction in progress amounted to RUB 5.2 million (equivalent to USD 0.2million). LLC LEK Estate Concern, LLC LEK Estate Firm - In 2003, the Group purchased anewly completed building from LEK Estate for a total consideration of USD 0.5million. Compensation of key management personnel The remuneration of the Management Board and Supervisory Board directors of theGroup for the years ended 31 December 2005, 2004 and 2003 was as follows: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Short-term benefits 1.7 1.2 9.6Expenses recognized in respect of share-based 5.4 - -payments RISK MANAGEMENT POLICIES The main risks inherent to the Group's operations are those related to creditrisk exposures, market movements in interest rates and foreign exchange rates. Adescription of the Group's risk management policies in relation to those risksfollows. Credit risk - The Group's credit risk is primarily attributed to its receivablesand prepayments. The credit risk attributable to receivables and prepayments islimited due to a diversified base of counterparties. The Group does not havespecific policies in place to mitigate these risks. Interest rate risk - The Group is exposed to interest rate risk as a certainportion of its borrowings is at variable interest rate or short-term in nature,and the Group's refinancing activities are subject to risks associated withchanges in the applicable interest rate. The Group does not hedge against theserisks. Foreign currency risk - The Group incurs foreign currency risk on borrowingsthat are denominated in currencies other than rubles. The Group does not hedgeagainst its foreign currency risk exposure. Fair values - The fair value of assets and liabilities are not materiallydifferent from the financial statement carrying values, unless specificallyindicated elsewhere in these financial statements. CAPITAL COMMITMENTS Capital commitments represented by investment agreements for the construction ofstores in St. Petersburg and Moscow as of 31 December 2005, 2004 and 2003 wereas follows: 31.12.2005 31.12.2004 31.12.2003 'mln USD 'mln USD 'mln USD Commitments for the acquisition of property, 25.9 10.9 22.2plant and equipment Purchase of LLC Set Roznichnoi Torgovli (SRT) - In December 2005 the Groupreached an agreement in principle to acquire the largest franchisee of theKopeika retail chain in Moscow and the Moscow region which operates 25 storesunder "Kopeika" brand. The Group expects that the SRT stores will be rebrandedas part of the Pyaterochka. Following the acquisition, Pyaterochka increased the number of its stores inMoscow by 14, the Moscow region by 9, and 2 in the city of Vladimir. Of the 25stores, 12 are owned and 13 are on long-term leases. The consideration paid isapproximately USD 90.0 million including USD 7 million of assuming debt. InMarch 2005 the Group gained 100% control over SRT. Prepayment of USD 9.0 millionwas recorded as other long-term assets in these financial statements as at 31December 2005 (Note 10). OPERATING ENVIRONMENT AND CONTINGENCIES Operating and regulatory environment - Although in recent years there has been ageneral improvement in economic conditions in Russia, the Russian Federationcontinues to display certain characteristics of a transitional economy. Theseinclude, but are not limited to, currency controls and convertibilityrestrictions, relatively high level of inflation and continuing efforts by thegovernment to implement structural reforms. As a result laws and regulationsaffecting businesses continue to change rapidly. Taxation - Tax laws in Russia are subject to frequent changes and varyinginterpretations. Management's interpretation of such legislation in applying itto business transactions of the Group may be challenged by the relevant regionaland federal authorities enabled by law to impose fines and penalties. Recentevents within the Russian Federation suggest that the tax authorities are takinga more assertive position in its interpretation of the legislation andassessments and as a result, it is possible that the transactions that have notbeen challenged in the past may be challenged in the future. Fiscal periodsremain open to review by the tax authorities in respect of taxes for the threecalendar years proceeding the year of tax review. Under certain circumstancesreviews may cover longer periods. While the Group believes it has providedadequately for all tax liabilities based on its understanding of the taxlegislation, the above facts may create additional financial risks for theGroup. Insurance - The insurance industry in the Russian Federation is in the processof development and many forms of insurance protection common in developedmarkets are not yet generally available in Russia. The Group does not fullycover many risks that a group of a similar size and nature operating in a moreeconomically developed country would insure. Management understands that untilthe Group obtains adequate insurance coverage there is a risk that the loss ordestruction of certain assets could have an adverse effect on the Group'soperations and financial position. Post Balance Sheet Events Loans from related parties - In January 2006, the Group company Speak Global Ltdreceived loans from Technibel Worldwide Ltd for USD 8 million and DessideHolding Ltd for USD 12 million. The loans bore the interest of 8.5%. They havebeen matured and fully repaid in February 2006. The directors of the Group holdinterests in these companies and have the ability to exercise significantinfluence over their operations. Loan from Raiffeisenbank - In February 2006, the Group entered into a creditline agreement with Raiffeisenbank for RUB 1,000 million to finance its workingcapital needs. The loan is unsecured, matures in February 2007 and bearsinterest of 1 month Mosprime plus 1.5% (approximately 5%). Credit line from Promstroibank - In April 2006, the Group entered into auniversal credit line agreement with Promstroibank for RUB 1,000 million tofinance its working capital needs. The loan is unsecured, matures in 1.5 yearsand bears interest between 1.5% and 10.5%. Sale of Economtorg - On 20 March 2006, LLC Economtorg, the legal entity acquiredin Ekaterinburg, was sold to third parties for a nominal value. As a result ofthis transaction three stores being rented by Economtorg were closed. Purchase of franchise operator in Chelyabinsk - In January 2006 it was announcedthat the Group signed an agreement to acquire a 26% equity stake in itsfranchise operator in the Chelyabinsk region of Russia, LLC Ural-Agro-Torg, fora cash consideration of 43.5 million Russian rubles (approximately USD 1.5million). LLC Ural-Agro-Torg currently operates 29 stores in the Chelyabinskregion. This transaction is the first step towards the creation of a "cluster"of operations in the Ural region. The Group also signed agreements outlining steps for further consolidation ofits operations in the Chelyabinsk and Ekaterinburg regions. According to theseagreements, by 1 June 2006, Pyaterochka and the majority owner of LLCUral-Agro-Torg will combine the operations of the Chelyabinsk and Ekaterinburgregions to form a new entity, Pyaterochka Ural. Pyaterochka Ural will be owned 51% by Pyaterochka Holding N.V. and 49% by themajority shareholder in LLC Ural-Agro-Torg, the Chelyabinsk franchisee. Themajority shareholder of LLC Ural-Agro-Torg will contribute his 74% stake inUral-Agro-Torg in exchange for a 49% stake in Pyaterochka Ural. CJSC Agrostar,the Group's subsidiary, will contribute its 26% stake in LLC Ural-Agro-Torg, aswell as 100% of the equity in the company's Ekaterinburg operations, in exchangefor a 51% stake in Pyaterochka Ural. Pyaterochka Ural expects to obtain control over the operations in theChelyabinsk and Ekaterinburg regions in June 2006. Under the terms of theagreement, the existing management team of Ural-Agro-Torg is to continuemanaging the day-to-day operations and the expansion plans of Pyaterochka Uralin the Chelyabinsk and Ekaterinburg regions. Perekrestok transaction - In April 2006 the Group announced the merger ofPyaterochka and Perekrestok, a majority-owned subsidiary of Alfa Group, tocreate the clear leader in the fast growing Russian food retail market.Pyaterochka will acquire 100% of the equity in Perekrestok for USD 300 millionto be paid in cash and USD 15.8 million of new shares of Pyaterochka.Simultaneously, Alfa Group together with certain members of Perekryostokmanagement will acquire a controlling stake in Pyaterochka from the Company'scurrent controlling shareholders. As part of the Perekrestok transaction, the controlling shareholders of theGroup, who are also the beneficial owners of the Carousel group, have grantedPyaterochka a call option to acquire the entire share capital of Formata HoldingB.V., the parent company of the Carousel group. The consideration for theexercise of the call option will be calculated by reference to the futurefinancial performance of the Carousel group to be satisfied by a cash paymentequal to 75 per cent of the total consideration and by issuing shares inPyaterochka for the remaining part. The option is exercisable during the periodbeginning on 1 January 2008 and ending on 1 July 2008. The option agreement isconditional on completion of the Perekrestok transaction. This information is provided by RNS The company news service from the London Stock Exchange

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