MMK.L Regulatory News (MMK)

30 Apr 2008 13:45

OJSC Magnitogorsk Iron &Steel Works30 April 2008 Open Joint Stock Company Magnitogorsk Iron & Steel Works and Subsidiaries Independent Auditors' Report Consolidated Financial Statements As of and for the years endedDecember 31, 2007 and 2006 OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 Consolidated balance sheets as of December 31, 2007 and 2006 2-3 Consolidated statements of operations and comprehensive income for the years ended December 31, 2007 and 2006 4 Consolidated statements of cash flows for the years ended December 31, 2007 and 2006 5 Consolidated statements of changes in shareholders' equity for the years ended December 31, 2007 and 2006 6 Notes to the consolidated financial statements for the years ended December 31, 2007 and 2006 7-37 INDEPENDENT AUDITORS' REPORT To the Shareholders of OJSC "Magnitogorsk Iron & Steel Works": We have audited the accompanying consolidated balance sheets of OJSC "Magnitogorsk Iron & Steel Works" and its subsidiaries (the "Group") as ofDecember 31, 2007 and 2006 and the related consolidated statements of operationsand comprehensive income, cash flows and changes in shareholders' equity for theyears then ended. These financial statements are the responsibility of theGroup's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Group's internal control overfinancial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Group as of December 31, 2007and 2006 and the results of its operations and its cash flows for the years thenended in conformity with accounting principles generally accepted in the UnitedStates of America. March 12, 2008 OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2007 AND 2006(Amounts in millions of U.S. dollars) December 31, Note 2007 2006 ASSETS Current assets: Cash and cash equivalents 3 256 338Short-term bank deposits 4 1,279 228Short-term investments 5 393 325Accounts receivable from third parties, less 6 1,306 851allowance for doubtful accounts of USD 8 and USD 12 as of December 31, 2007 and 2006, respectively Accounts receivable from related parties 24 85 74Prepaid expenses 13 14Inventories 7 946 631Current deferred income tax assets 21 13 19 Total current assets 4,291 2,480 Property, plant and equipment, net 8 3,879 2,764Investments in affiliates 9 76 123Long-term investments 5 993 146Long-term bank deposits 4 - 109Long-term deferred income tax assets 21 16 10Goodwill 10 65 2Other intangible assets, net 10 46 43Other long-term assets 11 16 12 TOTAL ASSETS 9,382 5,689 See notes to the consolidated financial statements. OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)AS OF DECEMBER 31, 2007 AND 2006(Amounts in millions of U.S. dollars) December 31, Note 2007 2006 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdrafts 9 2Short-term borrowings and current portion of 12 1,189 373long-term debt Current portion of long-term capital lease 14 26 25obligations Accounts payable and accrued liabilities 15 673 545Accounts payable to related parties 24 13 8Current deferred income tax liabilities 21 11 11 Total current liabilities 1,921 964 Long-term debt, net of current portion 13 200 577Long-term capital lease obligations, net of 14 30 29current portion Employee benefit obligations 16 37 30Long-term deferred income tax liabilities 21 283 50 Total liabilities 2,471 1,650 Commitments and contingencies 25,26 - - Minority interest 22 87 12 Shareholders' equity: Common stock 17 386 363Treasury stock, at cost 17 (1) (85)Additional paid-in capital 17 1,105 254Accumulated other comprehensive income 5 614 18Retained earnings 4,720 3,477 Total shareholders' equity 6,824 4,027 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 9,382 5,689 See notes to the consolidated financial statements. The consolidated financial statements were approved and signed on March 12,2008, by: ____________________________ _____________________________V. I. Shmakov A. S. BatrutdinovVice-President Finance Deputy Chief Accountant OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006(Amounts in millions of U.S. dollars, except earnings per share amounts) Years ended December 31, Note 2007 2006 Net revenue 19 8,197 6,424Cost of products sold (exclusive of (4,912) (3,619)depreciation and amortization shown separately below) Depreciation and amortization (211) (188)Selling and distribution expenses (551) (415)Administrative and other expenses (278) (285)Social expenses Social asset construction costs (7) (18)Social and maintenance expenses (75) (58)Taxes other than income tax (85) (63)Loss on disposal of property, plant and (52) (52)equipment Other operating income, net 20 53 39 Income from operating activities 2,079 1,765 Equity in net losses of affiliates (7) (8)Interest income 133 69Interest expense (87) (63)Net foreign exchange gain 175 132 Income before income tax and minority 2,293 1,895interest Income tax expense 21 (507) (468) Income before minority interest 1,786 1,427 Minority interest 22 (14) (1) Net income 1,772 1,426 Other comprehensive income: Unrealized gain on securities classified as 5 596 18available for sale, net of income tax effect of USD 188 and USD 5 for the years ended December 31, 2007 and 2006, respectively Comprehensive income 2,368 1,444 Basic and diluted earnings per common share 18 0.164 0.140(USD) See notes to the consolidated financial statements. OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006(Amounts in millions of U.S. dollars) Years ended December 31, Note 2007 2006 Operating activities: Net income 1,772 1,426Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 211 188Loss on disposal of property, plant and 52 52equipment Change in allowance for doubtful accounts (4) (8)receivable Net gain on trading securities (7) (2)Gain on disposal of affiliate 9 (23) -Deferred income tax 31 18Equity in net losses of affiliates 7 8Minority interest 14 1 Changes in operating assets and liabilities: Increase in inventories (317) (65)Increase in trade and other receivables (410) (264)Increase in investments classified as (51) (308)trading securities Increase in trade accounts payable, accrued 85 132liabilities and other current liabilities Increase in prepaid income tax (29) (48) Net cash provided by operating activities 1,331 1,130 Investing activities: Proceeds from sales of property, plant and 40 25equipment Proceeds from disposal of subsidiary 27 - 7Proceeds from disposal of affiliate 9 70 -Purchases of investments in affiliates - (5)Acquisition of subsidiaries, net of cash (60) -acquired Purchases of property, plant and equipment (1,240) (697)Purchases of intangible assets (17) (28)Net change in bank deposits (942) (228)Loans provided to related parties (75) (77)Loans repaid by related parties 59 3Purchases of investment securities (55) (122)classified as available for sale Net cash of other investments (11) (11) Net cash used in investing activities (2,231) (1,133) Financing activities: Proceeds from loans 2,075 1,724Loan principal repaid (1,647) (1,387)Proceeds of share issue, net of issue costs 17 977 -Net increase in bank overdrafts 7 2Acquisition of treasury shares (58) (24)Proceeds from re-issuance of treasury shares 39 10Principal payments on capital lease (34) (27)obligations Dividends paid (547) (1,077) Net cash provided by/(used in) financing 812 (779)activities Effect of exchange rate changes on cash and 6 (18)cash equivalents Net decrease in cash and cash equivalents (82) (800) Cash and cash equivalents at beginning of 338 1,138the year Cash and cash equivalents at end of the year 256 338 Supplementary information: Interest paid 76 30Income tax paid 505 498 Non-cash investing and financing activities: Machinery and equipment acquired under 27 33capital leases See notes to the consolidated financial statements. OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006(Amounts in millions of U.S. dollars) Note Common Common Additional Accumulated Stock treasury stock Paid-in other Retained capital comprehensive earnings Total income Balance as of January 363 (64) 247 - 3,131 3,6771, 2006 Acquisition of treasury - (24) - - - (24)shares Re-issuance of treasury - 3 7 - - 10shares, net of income tax effect of USD 2 Revaluation of 5 - - - 18 - 18securities classified as available for sale, net of income tax effect of USD 5 Dividends 17 - - - - (1,080) (1,080)Net income - - - - 1,426 1,426 Balance as of December 363 (85) 254 18 3,477 4,02731, 2006 Share issue 17 40 - 937 - - 977Acquisition of treasury - (58) - - - (58)shares Cancellation of 17 (17) 125 (108) - - -treasury shares Re-issuance of treasury - 17 22 - - 39shares, net of income tax effect of USD 7 Revaluation of 5 - - - 596 - 596securities classified as available for sale, net of income tax effect of USD 188 Dividends 17 - - - - (529) (529)Net income - - - - 1,772 1,772 Balance as of December 386 (1) 1,105 614 4,720 6,82431, 2007 See notes to the consolidated financial statements. OPEN JOINT STOCK COMPANYMAGNITOGORSK IRON & STEEL WORKS AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Amounts in millions of U.S. dollars, unless otherwise stated) 1. DESCRIPTION OF BUSINESS The consolidated financial statements of Open Joint Stock Company MagnitogorskIron & Steel Works and its subsidiaries ("the Group") comprise the parentcompany, Open Joint Stock Company Magnitogorsk Iron & Steel Works ("the ParentCompany"), and its 59 subsidiaries. The Parent Company is an open joint stockcompany as defined in the Civil Code of the Russian Federation.The head office of the Group is located at: Ulitsa Kirova 93,455002, Magnitogorsk,The Russian Federation. The Parent Company was established as a state owned enterprise in 1932. It wasincorporated as an open joint stock company on October 17, 1992 as part of theRussian Federation privatization programme. The principal activity of the Groupis the production of ferrous metal products at the Parent Company's plantlocated in the city of Magnitogorsk in the Chelyabinsk region of the RussianFederation. The Group's products are sold in the Russian Federation and abroad.The Group's subsidiaries are mainly involved in the various sub-processes withinthe production cycle of ferrous metal products or in the distribution of thoseproducts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS Basis of presentation The accompanying consolidated financial statements have been prepared inconformity with the accounting principles generally accepted in the UnitedStates of America ("U.S. GAAP"). The Group's Russian entities maintain theiraccounting records in Russian Rubles ("RUB") in accordance withthe requirements of the Russian accounting and tax legislation. The accompanying consolidated financial statements differ from financialstatements prepared for statutory purposes in the Russian Federation in thatthey reflect certain adjustments, appropriate to present the consolidatedfinancial position, results of operations and cash flows in accordance with U.S.GAAP. Principles of consolidation The consolidated financial statements include the financial statements of theParent Company as well as entities where the Parent Company has operating andfinancial control through direct or indirect ownership of a majority votinginterest. In addition, in accordance with Interpretation No. 46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",("FIN 46R"), the Group consolidates variable interest entities for which it isdeemed to be the primary beneficiary. All significant intercompany transactions,balances and unrealized gains/(losses) on transactions have been eliminated. Entities acquired or disposed of during the year are included in theconsolidated financial statements from the date of acquisition or to the date ofdisposal. Set forth below is a summary of the Group's primary subsidiaries: Effective ownership, % As of December 31,Group entity Registered Core business 2007 2006 in OJSC Russia Production of hardware 85.88 85.85Metizno-Kalibrovochniy productsZavod "MMK-Metiz"LLC IK RFC Russia Investing activities 100.00 100.00CJSC Stroitelny Fond Russia Renting services 100.00 100.00CJSC A-Kapital (Note Russia Investing activities - 100.0027)CJSC Stroitelniy Russia Construction 100.00 100.00KomplexCJSC Ogneupor Russia Production of refractory 99.50 98.89 materialsCJSC Mekhanoremontny Russia Maintenance of 100.00 100.00Komplex metallurgical equipmentCJSC Mechanoremont Russia Renting services 98.93 98.93OJSC MTSOZ Russia Production of cement and 98.89 98.89 refractory materialsMMK Steel Trade AG Switzerland Trading activities 100.00 100.00MMK Trading AG Switzerland Trading activities 99.60 99.60MMK Finance S.A. Luxemburg Financing activities 96.77 96.77LLC Bakalskoe Russia Mining activities 51.00 -Rudoupravlenie(Note 22, (a))MMK Atakas Metalurji Turkey Developing a metal 50.00 -(Note 22, (c)) processing facilityCJSC Interkos-IV Russia Production of spare parts 75.00 -(Note 22, (d)) for the automotive industryOJSC Bashmetalloptorg Russia Trading activities 87.99 -(Note 22, (e)) The effective ownerships indicated in the table above are also the nominalholdings, except for CJSC Ogneupor (54.72% is held by the Parent Company and45.28% by OJSC MTSOZ as of December 31, 2007 and a 100% was held by OJSC MTSOZas of December 31, 2006). Use of estimates The preparation of consolidated financial statements in conformity with U.S.GAAP requires management of the Group to make a number of estimates andassumptions relating to the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe period. Examples of significant estimates include the allowance for doubtfulaccounts, the recoverability of intangible assets and other long-lived assetsand valuation allowances on deferred tax assets. Actual results could differfrom those estimates. Concentration of business risk The Group's principal business activities are within the Russian Federation.Laws and regulations affecting businesses operating in the Russian Federationare subject to rapid changes, which could impact the Group's assets andoperations. Reporting and functional currencies The Group follows a translation policy in accordance with Statement on FinancialAccounting Standards ("FAS") No. 52, "Foreign Currency Translation", ("FAS 52"). The national currency of the Russian Federation is the RUB, the local currencyof the Group's primary operating subsidiaries. The U.S. dollar ("USD") is thefunctional currency of all of the Group's worldwide operations except for itssubsidiary MMK Atakas Metalurji's, where the functional currency is the NewTurkish Lira ("TRY"). Assets and liabilities of this entity are translated fromTRY to USD at period-end exchange rates; revenue and expenses are translatedusing the average exchange rate for the reporting period. Resulting translationadjustments are recorded in other comprehensive income in the consolidatedstatements of operations and comprehensive income. Monetary assets and liabilities have been remeasured from RUB into USD at therate prevailing at each balance sheet date. Non-monetary assets and liabilitieshave been remeasured from RUB into USD at historical rates. Revenues, expensesand cash flows have been remeasured from RUB into USD at rates which approximateactual rates at the date of the transaction. Remeasurement differences resultingfrom the use of these rates are included in the consolidated statement ofoperations and comprehensive income. As of December 31, 2007 and 2006, exchange rates of 24.55 RUB and 26.33 RUB to 1USD, respectively, have been used for remeasurement purposes. The weightedaverage exchange rates for the years ended December 31, 2007 and 2006 were 25.58RUB and 27.32 RUB to 1 USD, respectively. As of December 31, 2007, an exchange rate of 1.17 TRY to 1 USD has been used forremeasurement purposes. The weighted average exchange rate for the year endedDecember 31, 2007 was 1.25 TRY to 1 USD. The RUB is not a readily convertible currency outside the territory of theRussian Federation. Accordingly, remeasurement of amounts recorded in RUB intoUSD should not be construed asa representation that RUB amounts have been, could be, or will in the future beconverted into USD at the exchange rate shown or at any other exchange rate. Other comprehensive income Accumulated other comprehensive income includes foreign currency translationadjustments, unrealized holding gains and losses on available-for-salesecurities and on derivative financial instruments, as well as additionalpension liabilities not yet recognized as net periodic pension cost. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and liquidpromissory notes with original maturities of ninety days or less at the date ofpurchase. Restricted cash Restricted cash represents legally restricted collateral deposited with variousbanks as margin for irrevocable letters of credit. Financial instruments The Group's financial instruments include cash and cash equivalents, short-termand long-term investments, receivables, payables and debt. Except as describedin Note 23, the estimated fair value of such financial instruments approximatestheir carrying value as reflected in the consolidated balance sheet. Investment securities The Group's investment securities include debt and equity securities. The Group classifies its debt securities in one of three categories: trading,available-for-sale or held-to-maturity; and its equity securities as trading oravailable-for-sale. Trading securities are bought and held principally for thepurpose of selling them in the short term. Held-to-maturity debt securities arethose securities, for which the Group has the ability and intent to hold untilmaturity. All securities not included in trading or held-to-maturity areclassified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Unrealizedholding gains and losses on trading securities are included in earnings.Unrealized holding gains and losses, net of the related tax effect, onavailable-for-sale securities are reported as a separate component of othercomprehensive income until realized. Realized gains and losses from the sale ofavailable-for-sale securities are determined on a specific-identification basis.Held-to-maturity securities are recorded at amortized cost using the effectiveinterest method, adjusted for the amortization or accretion of premiums ordiscounts. A decline in the market value of any available-for-sale or held-to-maturitysecurity below cost, that is deemed to be other than temporary, results in areduction of the carrying amount to fair value. The impairment is charged toearnings and a new cost basis for the security is established. To determinewhether impairment is other than temporary, the Group considers whether it hasthe ability and intent to hold the investment until the market price recoversand considers whether evidence indicating the cost of the investment isrecoverable outweighs evidence to the contrary. Evidence considered in thisassessment includes the reasons for the impairment, the severity and duration ofthe impairment, changes in value subsequent to year end and forecastedperformance of the investee. Investments in affiliates and joint ventures Investments in majority owned affiliates and joint ventures, where control doesnot exist, and 20% to 50% owned affiliates in which the Group has the ability toexercise significant influence are accounted for under the equity method ofaccounting whereby the investment is carried at the cost of acquisition, plusthe Group's equity in net earnings or losses since acquisition, less dividendsreceived. Investments in affiliates and joint ventures, over which the Group does not havethe ability to exercise significant influence and which have readilydeterminable fair value, are accounted for at fair value.To the extent that these investments do not have a readily determinable fairvalue, they are accounted for under the cost method. The Group periodically reviews all of its investments in affiliates and jointventures for which fair value is less than cost to determine if the decline invalue is other than temporary. If the decline in value is judged to be otherthan temporary, the cost basis of the investment is written down to fair value.The amount of any write-down is included in the consolidated statement ofoperations and comprehensive income. Trade and other receivables Accounts receivable are stated at their net realizable value after deducting anallowance for doubtful accounts. The allowance for doubtful accounts is theGroup's best estimate of the amount of probable credit losses in the Group'sexisting accounts receivable balances. The Group reviews its allowance fordoubtful accounts monthly. Account balances are written off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote. Value-added tax Value-added tax ("VAT") related to sales are payable to the tax authorities uponissuance of invoices to the customer. VAT incurred for purchases may bereclaimed, subject to certain restrictions, against VAT related to sales. VATrelated to purchase transactions not reclaimable as of the balance sheet datesis recorded as VAT receivable in the consolidated financial statements. Inventories Inventories are stated at the lower of purchase price, manufacturing cost ormarket value. The cost of inventories is determined on the weighted averagebasis and includes all costs in bringing the inventory to its present locationand condition. The elements of cost include direct material, labour and manufacturingoverheads. Costs of production in process and finished goods include thepurchase costs of raw materials and conversion costs such as direct labour andan allocation of fixed and variable production overheads. Raw materials arevalued at purchase cost inclusive of freight and other shipping costs. Market value is the estimated price at which inventories can be sold in thenormal course of business after allowing for cost of completion and sale. Property, plant and equipment Owned assets Property, plant and equipment are stated at historical cost less accumulateddepreciation and impairment losses. Capitalized production costs for internallydeveloped assets include materials, direct labor costs and manufacturingoverhead costs. When construction activities are performed over an extendedperiod, interest costs incurred during construction are capitalized.Construction-in-progress and equipment held for installation are not depreciateduntil the constructed or installed asset is substantially ready for its intendeduse. The costs of planned major maintenance activities are recorded as costs asincurred. Costs for activities that lead to the prolongation of useful life orto expanded future use capabilities of an asset are capitalized. Maintenance andrepair costs are expensed as incurred. Leased assets Capital leases are recorded at the lower of the fair market value of the assetor the present value of future minimum lease payments, less accumulateddepreciation and impairment losses. The discount rate used in determining thepresent value of the minimum lease payments is the Group's incremental borrowingrate, unless (1) it is practicable to obtain the implicit rate computed by thelessor and (2) the implicit rate is less than the Group's incremental borrowingrate. If both of those conditions are met, the interest rate implicit in thelease is used. Amounts due within one year are classified as short-term leaseliabilities and the remaining balance as long-term lease liabilities. Mineral licenses Mineral licenses to develop mineral reserves and resources are stated athistorical cost less accumulated amortization. Mineral licenses are presented asa separate component of property, plant and equipment in the consolidatedbalance sheet. Depreciation Depreciation is charged to the consolidated statement of operations andcomprehensive income on a straight line basis over the estimated useful lives ofthe individual assets. Depreciation commences on the date of acquisition or, inrespect of internally constructed assets, from the time an asset is completedand substantially ready for use. Land is not depreciated. The following useful lives are used as a basis for calculating depreciation: Buildings 33-44 yearsMachinery and equipment 17-32 yearsTransportation equipment 8-22 yearsFixtures and fittings 8-14 years Mineral rights are amortized using the straight-line basis over the license termassuming constant production during the period of license. Goodwill and other intangible assets Goodwill represents the excess of the cost of businesses acquired over the fairvalue of identifiable net assets at the date of acquisition. Goodwill and intangible assets acquired in business combinations that have anindefinite useful life are not amortized. Goodwill is reviewed annually forimpairment or whenever it is determined that impairment indicators exist. TheGroup determines whether an impairment has occurred by assigning goodwill to thereporting unit identified, and comparing the carrying amount of the reportingunit to the fair value of the reporting unit. If goodwill impairment hasoccurred, the Group recognizes a loss for the difference between the carryingamount and the implied fair value of goodwill. Intangible assets, that primarily represent production licenses and variouspurchased software costs, with finite useful lives are amortized over theirrespective estimated useful lives to their estimated residual values and arereviewed periodically for impairment. Debt issuance costs Debt issuance costs are amortized using the effective interest method over theterms of the related loans. Impairment of long-lived assets The Group periodically evaluates the recoverability of the carrying amount ofits long-lived assets. Whenever events or changes in circumstances indicate thatthe carrying amounts of those assets may not be recoverable, the Group comparesundiscounted net cash flows estimated to be generated by those assets to thecarrying amount of those assets. When these undiscounted cash flows are lessthan the carrying amounts of the assets, the Group records impairment losses towrite the asset down to fair value, measured by the estimated discounted netfuture cash flows expected to be generated from the use of the assets. Accrued and contingent liabilities Liabilities for loss contingencies, arising from claims, assessments,litigation, fines, penalties and other sources are recorded when it is probablethat a liability has been incurred and the amount ofthe assessment can be reasonably estimated. Borrowing costs Borrowing costs are recognized as an expense in the period in which they areincurred. Borrowing costs for assets that require a period of time to get themready for their intended use are capitalized and amortized over the relatedassets' estimated useful lives. Employee benefits Defined contribution plans The Group's Russian subsidiaries are legally obliged to make definedcontributions to the Russian Federation State Pension Fund (a definedcontribution plan financed on a pay-as-you-go basis).The Group's contributions to the Russian Federation State Pension Fund relatingto defined contribution plans are charged to income in the period to which theyrelate. In the Russian Federation all state social contributions, includingcontributions to the Russian Federation State Pension Fund, are collectedthrough a unified social tax ("UST") calculated bythe application of a regressive rate from 26% to 2% of the annual grossremuneration of each employee. UST is allocated to three state social funds,including the Russian Federation State Pension Fund, where the rate ofcontributions to that fund vary from 20% to 2%, depending onthe annual gross remuneration of each employee. The Group's obligations for contributions to other defined contribution plansare recognized as an expense as incurred. Defined benefit plans The Group accounts for the cost of defined benefit plans using the projectedunit credit method. Under this method, the cost of providing pensions is chargedto the consolidated statement of operations and comprehensive income, so as toattribute the total pension cost over the service lives of employees inaccordance with the benefit formula of the plan. The Group's obligation inrespectof defined retirement benefit plans is calculated separately for each definedbenefit plan by discounting the amounts of future benefits that employees havealready earned through their service in the current and prior periods. Thediscount rate applied represents the yield on government bonds that havematurity dates approximating the terms of the Group's obligations. Revenue recognition Revenue is recognized on an accrual basis when earned and realizable, whichgenerally occurs when products are shipped and the customer takes ownership andassumes risk of loss, collection of the relevant receivable is probable,pervasive evidence of an arrangement exists and the sales price is fixed ordeterminable. Revenue is recognized net of applicable provisions for discounts, allowances,associated value-added taxes and export duties. Income taxes Current income tax Current income tax has been computed in accordance with the respective nationaltax laws. The Group's liability for current income tax is calculated using taxrates that have been enacted by the balance sheet date. Income tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the consolidated statement ofoperations and comprehensive income as it excludes certain items of income orexpense that are taxable or deductible in other periods or excludes items thatare not taxable or deductible. Income tax paid or payable by the seller on intercompany profits on transfers ofassets such as sales of inventory or depreciable assets within the Group isdeferred upon consolidation as prepaid income tax and is not recorded until theinventory or other asset is sold to an unrelated third party. In July 2006, the Financial Accounting Standards Board ("the FASB") issuedInterpretation No. 48, "Accounting for Uncertainty in Income Taxes", ("FIN 48").FIN 48 clarifies the accounting for uncertainty in income taxes recognized in anentity's financial statements in accordance with FAS No. 109, "Accounting forIncome Taxes", ("FAS 109") and prescribes a recognition threshold andmeasurement attributes for financial statement recognition and measurement oftax positions taken or expected to be taken on a tax return. FIN 48 alsorequires entity to make explicit disclosures at the end of each reporting periodabout uncertainties in their income tax positions, including a detailedrollforward of tax benefits taken that do not qualify for financial statementrecognition. The Group adopted the provisions of FIN 48 on January 1, 2007,which did not have a significant impact on the Group's consolidated financialposition or results of operations. Deferred income tax Deferred income tax is accounted for under the liability method and reflects thetax effect of all significant temporary differences between the tax bases ofassets and liabilities and their reported amounts in the consolidated financialstatements. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in earnings in theperiod that includes the enactment date. Deferred income tax assets andliabilities arising in different tax jurisdictions are not offset. Deferred tax assets and liabilities are not recognized for temporary differencesarising from the remeasurement of assets and liabilities from the local currencyinto the functional currency using historical exchange rates. Additionally,deferred tax assets or liabilities are not recognized for the effects of taxindexation of property, plant and equipment. A valuation allowance is provided for deferred tax assets if it is more likelythan not that the deferred tax assets will not be realized. In making thisassessment, the Group's management considers all available evidence, includingthe scheduled reversal of deferred income tax liabilities, projected futuretaxable income and tax planning strategies. Derivative financial instruments and hedging activities Derivative instruments, consisting primarily of foreign currency forward andoption contracts, are utilized by the Group to manage its exposure tofluctuations in foreign exchange rates. The Group does not enter into foreigncurrency hedging contracts related to its investment in affiliated companies. All derivatives are recorded as either assets or liabilities in the consolidatedbalance sheets and measured at their respective fair values. The accounting for changes in the fair value of derivative financial instrumentsdepends on whether it has been designated and qualifies as an accounting hedgeand further, on the type of hedging relationship. If a derivative is designatedas a fair value hedge, the changes in the fair value ofthe derivative and the hedged item are recognized in earnings. If a derivativeis designated as a cash flow hedge, changes in the fair value of the derivativeare recorded in other comprehensive income and are recognized in the statementof operations and comprehensive income when the hedged item affects earnings.For a derivative not designated as a hedging instrument, the gain or loss isrecognized in earnings in the period of change. Distributions to shareholders Distributable retained earnings of the Group are based on amounts recorded inthe statutory financial statements of individual entities and may significantlydiffer from amounts calculated on the basis of financial statements, prepared inaccordance with U.S. GAAP. Guarantees A liability is recorded for the fair value of a guarantee issued by the Groupwhich is equal to the present value of the expected loss. The Group determinesthe expected loss by multiplying the creditor's default rate by the guaranteeamount reduced by the expected recovery, if applicable, for each future periodthe guarantee will be outstanding. If at inception of a guarantee, the Groupdetermines there is a probable related contingent loss, a liability for thegreater of (a) the fair value of the guarantee as described above or (b) theprobable contingent loss amount will be recognized. Subsequent to initialmeasurement and recognition, the fair value assigned to the guarantee would beadjusted and recognized in the consolidated statement of operations andcomprehensive income as the Group is released from risk under the guarantee, asappropriate. All other guarantees are disclosed as a contingency in theconsolidated financial statements. Segment information Segment reporting follows the internal organizational and reporting structure ofthe Group. The Group operates in a single business segment, which is composed ofthe manufacturing of semi-finished and finished steel products. The revenuesfrom the sale of these products constitute more than 95 percentof total revenues. All significant assets, production and management andadministrative facilities are located in the city of Magnitogorsk, RussianFederation. New and recently adopted accounting pronouncements In December 2007, the FASB issued FAS No. 141(R), "Business Combinations", ("FAS141(R)"), which replaces FAS No. 141, "Business Combinations". FAS 141(R)applies to all transactions in which an entity obtains control of one or morebusinesses, including mergers and combinations achieved without the transfer ofconsideration. FAS 141(R) applies to all business entities, including mutualentities that previously used the pooling-of-interests method of accounting forsome business combinations. FAS 141(R) requires the acquiring entity in abusiness combination to recognize all assets acquired and liabilities assumed inthe transaction, establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed and requires theacquirer to disclose certain information related to the nature and financialeffect of the business combination. FAS 141(R) also establishes principles andrequirements for how an acquirer recognizes any noncontrolling interest in theacquiree and the goodwill acquired in a business combination. Additionally, FAS141(R) changes the way entities account for business combinations achieved instages by requiring the identifiable assets and liabilities to be measured attheir full fair values. Also, contractual contingencies and contingentconsideration shall be measured at fair value at the acquisition date andacquisition-related transaction costs are to be expensed in the period incurred.FAS 141(R) is effective on a prospective basis to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. Earlier adoption isprohibited. Depending on the terms, conditions and details of the businesscombination, if any, that take place subsequent to December 15, 2008, FAS 141(R)may have a material impact on the Group's consolidated financial statements. FAS141 (R) also amends FAS 109, such that adjustments made to deferred taxes andacquired tax contingencies after December 15, 2008, even for businesscombinations completed before this date, will impact net income. The Group iscurrently evaluating the impact of the adoption of FAS 141(R) on itsconsolidated financial position and results of operations. In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interests inConsolidated Financial Statements - an amendment of Accounting Research BulletinNo. 51", ("FAS 160"). FAS 160 applies to all entities that prepare consolidatedfinancial statements, except not-for-profit organizations, but will affect onlythose entities that have an outstanding noncontrolling interest in one or moresubsidiaries or that deconsolidate a subsidiary. FAS 160 requires entity toreport noncontrolling interests in subsidiaries (also known as minorityinterest) as a separate component of equity in the consolidated statement offinancial position, to clearly identify consolidated net income attributable tothe parent and to the noncontrolling interest on the face of the consolidatedstatement of income and to provide sufficient disclosure that clearly identifiesand distinguishes between the interest of the parent and the interests ofnoncontrolling owners. FAS 160 also establishes accounting and reportingstandards for changes in a parent's ownership interest and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated.FAS 160 is effective for the first annual reporting period beginning on or afterDecember 15, 2008. Earlier adoption is prohibited. The Group is currentlyevaluating the impact of the adoption of FAS 160 on its consolidated financialposition and results of operations. In February 2007, the FASB issued FAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities - Including an Amendment of FAS No.115", ("FAS 159"). FAS 159 provides entities with an option to measure, atspecified election dates, certain financial instruments and other items at fairvalue that are not currently measured at fair value. An entity that adopts FAS159 will report unrealized gains and losses on items for which the fair valueoption has been elected in its consolidated financial results during eachsubsequent reporting date. FAS 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.FAS 159 is effective for the first annual reporting period beginning on or afterNovember 15, 2007. The Group does not plan to elect the fair value measurementoption to any additional assets or liabilities not already required to bemeasured at fair value. In September 2006, the FASB issued FAS No. 157, "Fair Value Measurements", ("FAS157"). FAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosures aboutfair value measurements. FAS 157 applies under other accounting pronouncementsthat require or permit fair value measurements and, accordingly, does notrequire any new fair value measurements. FAS 157 was initially effective for thefirst annual reporting period beginning on or after November 15, 2007. InFebruary 2008, the FASB issued a FASB Staff Position ("FSP") No. FAS 157-2,"Effective Date of FASB Statement No. 157", delaying the effective date of FAS157 for nonfinancial assets and nonfinancial liabilities, except for items thatare recognized or disclosed at fair value in the financial statements on arecurring basis. FSP deferred the effective date of FAS 157 to annual reportingperiod beginning on or after November 15, 2008, and interim periods within thoseannual reporting period for items within the scope of this FSP. The Group iscurrently assessing the impact of the adoption of FAS 157. Reclassifications Certain reclassifications of prior year amounts have been made to conform to thepresentation adopted for the year ended December 31, 2007. Revenue, net incomeor net assets were not affected by these reclassifications. 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise local and foreign currency bank balances,call deposits and highly-liquid bank promissory notes. December 31, 2007 2006 Trade accounts receivable 699 422Value-added tax receivable 244 191Advances paid 80 137Loans provided 72 14Interest receivable 70 23Prepaid income tax 65 36Other receivables 84 40 1,314 863 Allowance for doubtful accounts (8) (12) 1,306 851 As of December 31, 2007 and 2006, the weighted average interest rates on bankdeposits with original maturities less than ninety days were 10.80% and 6.43%,respectively. As of December 31, 2007 and 2006, the weighted average interest rates on bankpromissory notes were 7.81% and 7.50%, respectively. 4. SHORT-TERM AND LONG-TERM BANK DEPOSITS December 31, 2007 2006 Raw materials 439 303Work-in-progress 133 124Finished goods and goods for resale 374 204 946 631 As of December 31, 2007 and 2006, the weighted average interest rates onshort-term bank deposits with original maturities exceeding ninety days were9.82% and 10.08%, respectively. As of December 31, 2006, the long-term cash deposits were placed in a Russianbank and were due to mature on December 15, 2009. However during 2007, thelong-term cash deposits were withdrawn before the due date by agreement with thebank. The weighted average interest rate on long-term bank deposits was 6.50%. 5. SHORT-TERM AND LONG-TERM INVESTMENTS December 31, 2007 2006 Short-term investmentsTrading equity securities 321 30Trading debt securities 59 78Share in mutual investment fund 12 5Trading promissory notes 1 212 393 325Long-term investments Equity securities classified as available for sale 993 146 Trading equity securities are liquid publicly traded shares of Russiancompanies. They are reflected at period-end market value based on trade pricesobtained from investment brokers. Trading debt securities and trading promissory notes are liquid publicly tradedbonds and notes of Russian companies and banks. They are reflected at period-endmarket value based on trade prices obtained from investment brokers. Net gains on trading securities for the years ended December 31, 2007 and 2006were USD 7 million and USD 2 million, respectively. Those gains are included inother operating income in the consolidated statement of operations andcomprehensive income (refer to Note 20). In 2007, the Group ceased to accept trading promissory notes as payment formetal sales in order to reduce its credit risk exposure. Long-term equity securities classified as available for sale representinvestments in equity securities of a foreign entity, where the Group has lessthan a 20% equity interest and no significant influence. As of December 31, 2007and 2006, unrealized holding gains on these securities were USD 614 million andUSD 18 million, respectively, net of related income tax effect of USD 193million andUSD 5 million, respectively. These gains are reported as a separate component ofother comprehensive income. 6. ACCOUNTS RECEIVABLE FROM THIRD PARTIES December 31, 2007 2006 Trade accounts receivable 699 422Value-added tax receivable 244 191Advances paid 80 137Loans provided 72 14Interest receivable 70 23Prepaid income tax 65 36Other receivables 84 40 1,314 863 Allowance for doubtful accounts (8) (12) 1,306 851 7. INVENTORIES December 31, 2007 2006 Raw materials 439 303Work-in-progress 133 124Finished goods and goods for resale 374 204 946 631 8. PROPERTY, PLANT AND EQUIPMENT, NET Gross Accumulated Net carrying depreciation carrying value value Land and buildings 1,623 (734) 889Mineral license 43 (1) 42Machinery and equipment 3,704 (2,036) 1,668Transportation equipment 184 (117) 67Fixtures and fittings 132 (63) 69Construction-in-progress 790 - 790Advance payments for property, 354 - 354plant and equipment Balance as of December 31, 2007 6,830 (2,951) 3,879 Land and buildings 1,395 (714) 681Mineral license 23 - 23Machinery and equipment 3,551 (1,961) 1,590Transportation equipment 173 (109) 64Fixtures and fittings 107 (44) 63Construction-in-progress 243 - 243Advance payments for property, 100 - 100plant and equipment Balance as of December 31, 2006 5,592 (2,828) 2,764 In December 2006, the Group acquired at a state auction an exploration anddevelopment license for the Prioskolskoe iron ore deposit located in theKurskaya region, Russian Federation, expiring in 2026. The carrying value ofthis license was USD 23 million as of December 31, 2007 and 2006. As of December31, 2007, the construction of mining facilities at Prioskolskoe iron ore depositwas in process. In January 2007, the Group acquired mineral licenses for USD 20 million as aresult of the acquisition of LLC Bakalskoe Rudoupravlenie (refer to Note 22,(a)). Depreciation expense for the years ended December 31, 2007 and 2006 amounted toUSD 197 million and USD 177 million, respectively. Capitalized borrowing costs for the years ended December 31, 2007 and 2006amounted to USD 15 million and USD 8 million, respectively. Management did not identify any indicators of impairment relating to the Group'sinvestments in long-lived assets during the years ended December 31, 2007 and2006. 9. INVESTMENTS IN AFFILIATES The Group's equity method investments in affiliates as of December 31, 2007 and2006 comprised the following: Ownership and voting interest, Investment carrying value % December 31, December 31,Affiliate Registered 2007 2006 2007 2006 inCarrying value of investmentCJSC Kazankovskaya Mine Russia 26 33 50% 50%LLC MMK Trans Russia 4 5 50% 50%LLC M-Port Russia - 46 - 50% Loans provided to affiliateCJSC Kazankovskaya Mine Russia 46 39 76 123 As of December 31, 2007 and 2006, the Group provided CJSC Kazankovskaya Minewith a total of USD 46 million and USD 39 million in unsecured RUB-denominatedloans, respectively, with maturity in December 2013. These loans bear interestat 10% per annum. As of December 31, 2007 and 2006, the outstanding amount ofloans provided included accrued interest of USD 8 million andUSD 4 million, respectively. During the year ended December 31, 2006, the Group received dividends of USD 3million from LLC MMK Trans. In August 2007, the Group sold its 50% share in LLC M-Port for a total cashconsideration of USD 70 million. The gain on disposal of USD 23 million wasincluded in other operating income in the consolidated statement of operationsand comprehensive income (refer to Note 20). 10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Goodwill The change in the carrying value of goodwill for the year ended December 31,2007 was as follows: Balance as of December 31, 2006 2 Goodwill arising on acquisitions (Note 22) 63 Balance as of December 31, 2007 65 No impairment of goodwill and other intangible assets was recognized in theyears endedDecember 31, 2007 and 2006. Other intangible assets As of December 31, 2007 and 2006, other intangible assets comprised thefollowing: Gross carrying Accumulated Net carrying value amortization value Licenses 36 (11) 25Purchased software 35 (19) 16Other intangibles 8 (3) 5 Balance as of December 31, 2007 79 (33) 46 Licenses 33 (9) 24Purchased software 24 (10) 14Other intangibles 6 (1) 5 Balance as of December 31, 2006 63 (20) 43 Amortization expense for licenses, purchased software and other intangibles forthe years ended December 31, 2007 and 2006 amounted to USD 14 million and USD 11million, respectively. The estimated amortization expense for each of the next five years andthereafter is as follows: Year ended December 31,2008 122009 92010 62011 22012 2Thereafter 15 46 Actual amortization expense to be reported in future periods could differ fromthese estimates asa result of new intangible assets acquisitions, changes in useful lives andother relevant factors. 11. OTHER LONG-TERM ASSETS December 31, 2007 2006 Loans provided 11 6Restricted cash 4 5Loans to employees 1 1 16 12 12. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT Type of Annual interest interest rate rate (actual as of December 31, December 31, 2007) 2007 2006 Short-term borrowings:Secured loans, USD Floating 6% 495 226Secured loans, EUR Floating 6% 62 -Secured loans, RUB Fixed 7% 125 6Unsecured loans, RUB Floating 8% 12 17Unsecured loans, RUB Fixed 9% 16 1 710 250 Current portion of long-term debt:Unsecured corporate bonds, USD Fixed 9% 303 4Secured loans, RUB Fixed 14% 1 1Unsecured loans, USD Floating 5% 118 98Unsecured loans, RUB Floating 7% 12 10Unsecured loans, RUB Fixed 9% 38 7Unsecured loans, USD Fixed 5% 4 2Unsecured loans, EUR Fixed 7% 3 1 479 123 1,189 373 The weighted average interest rate of the RUB-denominated short-term borrowingsas of December 31, 2007 and 2006 was 8% and 9%, respectively. The weightedaverage interest rate of the USD-denominated short-term borrowings as ofDecember 31, 2007 and 2006 was 7% and 6%, respectively. The weighted averageinterest rate of the EUR-denominated short-term borrowings as of December 31,2007 was 6%. As of December 31, 2007 and 2006, short-term borrowings were secured by theGroup's property, plant and equipment with a net carrying amount of USD 2million and USD 1 million, respectively, and inventory of USD 6 million and USD9 million, respectively. 13. LONG-TERM DEBT, NET OF CURRENT PORTION Type of Annual interest interest rate rate (actual as of December 31, December 31, 2007) 2007 2006 Unsecured corporate bonds, USD Fixed 9% - 299Secured loans, RUB Fixed 13% 5 1Unsecured loans, USD Floating 5% 145 257Unsecured loans, USD Fixed 5% 13 10Unsecured loans, RUB Fixed 10% 22 5Unsecured loans, EUR Fixed 7% 5 3Unsecured loans, RUB Floating 7% 10 2 200 577 Credit facilities The most significant bank financing comprised credit line facilities fromcertain Russian and foreign banks. As of December 31, 2007 and 2006, the totalunused element of all credit facilities wasUSD 94 million and USD 246 million, respectively. The information provided below refers to total long-term debt, including itscurrent portion, identified in Note 12. Corporate bonds In October 2003, MMK Finance S.A., a wholly-owned subsidiary of the Group,issued on the Luxembourg Stock Exchange USD 300 million of 8% notes at an issueprice of 98.99 percent.The notes are fully, unconditionally and irrevocably guaranteed by the ParentCompany. Interest payments on the notes are due semi-annually in equalinstallments on April 21 and October 21 of each year, commencing April 21, 2004.The notes are subject to certain restrictive covenants including, but notlimited to, limitations on the incurrence of additional indebtedness,restrictions on mergersor consolidations, limitations on liens and dispositions of assets andlimitations on transactions with affiliates. For the years ended December 31,2007 and 2006, interest payments on these notes amounted to USD 24 million perannum. The notes and outstanding interest payable are due to be repaid inOctober, 2008. Loans In 2006, foreign banks provided USD-denominated loans, bearing interest atLIBOR+1.00% (5.86% as of December 31, 2007) per annum with maturity in June2009. As of December 31, 2007 and 2006, the outstanding balance was USD 108million and USD 144 million, respectively. In 2005, foreign banks provided USD-denominated loans, bearing interest atLIBOR+0.25% (4.90% as of December 31, 2007), LIBOR+0.30% (4.95% as of December31, 2007) and 4.05% per annum, repayable from 2009 to 2011. The commitment feeson these loans are from 0.07% to 0.08% per annum on the undrawn facilities. Asof December 31, 2007 and 2006, the outstanding balance of these loans was USD 67million and USD 70 million, respectively. In 2004, foreign banks provided USD-denominated loans, bearing interest atLIBOR+0.18% (4.83% as of December 31, 2007) and LIBOR+0.25% (4.90% as ofDecember 31, 2007) per annum, repayable from 2010 to 2011. The commitment feeson these loans are from 0.08% to 0.10% per annum on the undrawn facilities. Asof December 31, 2007 and 2006, the outstanding balance of these loans was USD 81million and USD 103 million, respectively. In 2003, foreign banks provided USD-denominated loans, bearing interest atLIBOR+0.30% (4.95% as of December 31, 2007), LIBOR+0.45% (4.65% as of December31, 2007) and LIBOR+0.75% (5.89% as of December 31, 2007) per annum, repayablefrom 2008 to 2011. The commitment fees on these loans are from 0.10% to 0.20%per annum on the undrawn facilities. As of December 31, 2007 and 2006, theoutstanding balance of these loans was USD 25 million and USD 48 million,respectively. In 2002, a foreign bank provided a USD-denominated loan, bearing interest atLIBOR+0.80% (5.91% as of December 31, 2006) per annum with maturity in June2007. As of December 31, 2006, the outstanding balance of this loan was USD 3million. In 2007, the loan was fully repaid. The Group also has RUB-denominated loans, provided by Russian banks, bearinginterest rate from 5.00% to 14.00% per annum, repayable from 2008 to 2012. As ofDecember 31, 2007 and 2006, the outstanding balance of these loans was USD 88million and USD 26 million, respectively. The bank loans are subject to certain restrictive covenants, including, but notlimited to: • The ratio of consolidated debt to consolidated EBITDA should not exceed 3.5:1; and • The ratio of consolidated EBITDA to consolidated debt service should not be less than 3:1. As of December 31, 2007 and 2006, the Group was in compliance with all of itsdebt covenants. As of December 31, 2007 and 2006, long-term loans were secured by the Group'sproperty, plant and equipment with a net carrying amount of USD 1 million andUSD 2 million, respectively, and inventory of USD 2 million and USD 2 million,respectively. Debt repayment schedule Year ended December 31,2008 (presented as current portion of long-term debt, Note 12) 4792009 1082010 552011 272012 and thereafter 10 679 14. CAPITAL LEASE OBLIGATIONS The following table presents future minimum lease payments under capital leasestogether withthe present value of the net minimum lease payments as of December 31, 2007 and2006: December 31, 2007 2006Year ended December 31,2007 - 312008 33 182009 22 102010 7 42011 5 22012 1 - Total minimum lease payments (undiscounted) 68 65 Less amount representing interest (12) (11)Present value of net minimum lease payments 56 54 Less current portion of long-term capital lease obligations (26) (25) Long-term capital lease obligations 30 29 As of December 31, 2007 and 2006, the weighted average discount rate for capitallease obligations was 16%. As of December 31, 2007 and 2006, leased assets with a net carrying amount ofUSD 76 million and USD 72 million, respectively, were included in property,plant and equipment as follows: Gross carrying Accumulated Net carrying value depreciation Value Machinery and equipment 86 (13) 73Construction-in-progress 3 - 3 Balance as of December 31, 2007 89 (13) 76 Machinery and equipment 76 (12) 64Construction-in-progress 8 - 8 Balance as of December 31, 2006 84 (12) 72 15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES December 31, 2007 2006 Trade accounts payable 326 225Advances from customers 160 191Salary payable 76 53Other taxes payable 42 37Dividends payable 11 20Other current liabilities 58 19 673 545 16. EMPLOYEE BENEFITS Defined contribution plans Payments to the Russian Federation State Pension Fund amounted to USD 95 millionand USD 59 million for the years ended December 31, 2007 and 2006, respectively. In addition, the Group makes monthly contributions to a non-government pensionfund, Sotsialnaya Zashchita Starosti, where its employees have individualaccumulation agreements with the fund. The Group has the ability to exercisesignificant influence over the financial and operating policy decisions of thefund through representation on the Board of Directors of the fund. The monthlycontribution made by the Group is equal to the employee's contribution, unlessthe employee is a male aged between 55 and 60, or a female aged between 50 and55, in which case the contribution is 1.5 times the employee's contribution. Forthe years ended December 31, 2007 and 2006, the maximum monthly contributions bythe Group for each employee were RUB 6,000 (USD 235) and RUB 6,000 (USD 221),respectively. The Group's total contributions to the fund amounted to USD 6.1million and USD 5.5 million for the years ended December 31, 2007 and 2006,respectively. Defined benefit plan The Group has a defined benefit plan in favour of employees who retired prior toApril 1, 2001. Effective April 1, 2001, employees retiring after that date arenot allowed to participate in the plan. Pensions from this defined benefit planare administered by the independent charity fund BOF Metallurg. Entitled employees receive lifetime pension payments, which in July 2007increased by 20% and vary from RUB 300 (USD 11.73) to RUB 540 (USD 21.11) permonth depending on the employee's actual years of service and qualifications. For the years ended December 31, 2007 and 2006, the Group made monthly paymentsto the fund of RUB 466 (USD 18.23) and RUB 389 (USD 14.30), respectively, perfund member, which were then distributed to the individual members. As of December 31, 2007 and 2006, the principal actuarial assumptions used indetermining the projected benefit obligations and net periodic pension expensewere as follows: December 31, 2007 2006 Discount rate 9.0% 9.0%Future pension benefit increases 8.4% 8.4%Average life expectancy of members from date of retirement 10.1 10.4 The change in the projected benefit obligations is presented in the followingtable: 2007 2006 Projected benefit obligations at beginning of the year 30 26Interest cost 3 2Actuarial losses 5 3Benefit payments during the year (4) (3)Foreign exchange losses 3 2 Unfunded status of the plan at end of the year 37 30 The fund does not hold any assets set aside for the benefit of retirees underthis plan. The accumulated benefit obligations as of December 31, 2007 and 2006 were asfollows: December 31, 2007 2006 Accumulated benefit obligations 37 30 The components of the net periodic benefit costs for the years ended December31, 2007 and 2006 were as follows: 2007 2006 Interest cost 3 2Actuarial losses 5 3Foreign exchange losses 3 2 11 7 Net periodic benefit costs were recognized as part of administrative expenses inthe consolidated statement of operations and comprehensive income. The future benefit payments to retirees under the defined benefit plan areexpected to be as follows: Year ended December 31,2008 42009 32010 32011 32012 32013-2017 10Thereafter 11 37 17. SHAREHOLDERS' EQUITY Common stock December 31, 2007 2006 Issued and fully paid common shares with a par value 11,174,330 10,630,222of RUB 1 each In April 2007, minority shareholders of the Parent Company acquired 2,603thousand common shares in accordance with their pre-emptive rights. Also inApril 2007, the Parent Company completed an initial public offering ("IPO") of1,040,000 thousand shares in the Russian Federation and on the London StockExchange in the form of common shares and global depository receipts ("GDRs"),with each GDR representing 13 newly issued common shares. The offer price wasUSD 0.96 per common share and USD 12.50 per GDR. Proceeds from the shareissuance above totalled USD 977 million, net of issuance costs of USD 25million. Of the total proceeds,USD 40 million represented the nominal value of the common shares issued. In December 2007, the Parent Company cancelled 498,495 thousand common shares itheld as treasury stock. The cancellation resulted in a decrease of share capitalof USD 17 million and a decrease of additional paid-in capital of USD 108million. Treasury stock As of December 31, 2007 and 2006, the Group held 4,457 thousand and 485,062thousand, respectively, issued common shares of the Parent Company as treasurystock. All treasury stock is recorded at cost. Shareholders' voting rights The shareholders of fully paid common stock are entitled to one vote per shareat the annual general shareholders' meeting of the Parent Company. Dividends Year ending December 31, 2007 On August 30, 2007 the Parent Company declared an interim dividend of RUB 0.418(USD 0.016) per common share in respect of the six months ended June 30, 2007representing a total dividendof USD 189 million. Of this total, USD 8 million was attributable to Groupentities. Year ending December 31, 2006 On March 30, 2007, the Parent Company declared a final dividend of RUB 0.891(USD 0.034) per common share in respect of the year ended December 31, 2006representing a total dividend of USD 364 million. Of this total, USD 16 millionwas attributable to Group entities. On November 28, 2006, the Parent Company declared an additional interim dividendof RUB 0.910 (USD 0.035) per common share in respect of the nine months endedSeptember 30, 2006 representing a total dividend of USD 366 million. Of thistotal, USD 16 million was attributable to Group entities. On August 29, 2006, the Parent Company declared an additional interim dividendof RUB 0.815 (USD 0.030) per common share in respect of the six months endedJune 30, 2006 representing a total dividend of USD 324 million. Of this total,USD 14 million was attributable to Group entities. On May 26, 2006, the Parent Company declared an interim dividend of RUB 0.593(USD 0.022) per common share in respect of the three months ended March 31, 2006representing a total dividend of USD 233 million. Of this total, USD 10 millionwas attributable to Group entities. Year ending December 31, 2005 On April 21, 2006, the Parent Company declared a final dividend of RUB 0.532(USD 0.019) per common share in respect of the year ended December 31, 2005representing a total dividend of USD 206 million. Of this total, USD 9 millionwas attributable to Group entities. 18. EARNINGS PER COMMON SHARE Basic net income per common share is based on the weighted average number ofcommon shares outstanding during the period. Diluted net income per common shareassumes the exercise of stock options, the vesting of restricted stock and theconversion of preferred stock, provided in each case the effect is dilutive. The calculation of basic and diluted earnings per common share for the yearsended December 31, 2007 and 2006 was as follows: 2007 2006 Net income applicable to common stock 1,772 1,426 Weighted average number of common shares outstanding (inthousands):Basic and diluted 10,830,276 10,160,990 Earnings per common share (USD):Basic and diluted 0.164 0.140 There were no dilutive securities issued as of December 31, 2007 and 2006. 19. NET REVENUE By product 2007 2006 Rolled steel 4,555 3,752Assorted rolled products 833 604Slabs 472 107Galvanized steel 373 377Wire, sling, bracing 299 30Band 273 251Hardware products 213 283Galvanized steel with polymeric coating 191 168Tin plated steel 170 254Formed section 168 127Coking production 124 113Tubes 54 49Others 472 309 8,197 6,424 By customer destination 2007 2006 Russian Federation and the CIS 66% 62%Turkey 7% 8%Iran 7% 5%Italy 5% 5%India 2% 2%USA 1% 3%China - 1%Others (countries each representing less than 2% of total net 12% 14%revenue) 100% 100% 20. OTHER OPERATING INCOME, NET 2007 2006 Gain on disposal of affiliate 23 -Net gains on sales of other assets 11 24Net gains on trading securities (Note 5) 7 2Change in allowance for doubtful accounts receivable 4 8Other operating gains, net 8 5 53 39 21. INCOME TAXES The Group's provision for income taxes attributable to different taxjurisdictions for the years ended December 31, 2007 and 2006 was: 2007 2006 Current provision for income tax:Russian Federation 475 449Switzerland 1 1 Deferred income tax expense:Russian Federation 31 18 Total income tax expense 507 468 The provision for income taxes is different from that which would be obtained byapplying the Russian Federation statutory income tax rate of 24% to net incomebefore income tax and minority interest. The items causing this difference areas follows: 2007 2006 Statutory rate applied to income before income tax and minority 550 455interest Adjustments due to:Expenses not deductible and income not taxable 8 33for tax purposes, netEffect of dividends paid within the Group 2 4Adjustments of prior years' income taxes (12) (2)Currency exchange and translation differences (35) (22)Other permanent differences (6) - Income tax expense 507 468 Deferred income tax assets and liabilities were comprised of differences arisingbetween the tax and accounting bases of the following assets and liabilities: December 31, 2007 2006 Accounts payable 20 12Loans 9 15Inventories - 1Accounts receivable - 1 Gross deferred income tax assets 29 29 Investments (207) (8)Property, plant and equipment (76) (41)Inventories (8) (10)Accounts receivable (3) (2) Gross deferred income tax liabilities (294) (61) Net deferred income tax liabilities (265) (32) As of December 31, 2007 and 2006, deferred income tax liabilities arising ondifferences in valuation of investments included USD 193 million and USD 5million, respectively, related to unrealized holding gains on long-term equitysecurities classified as available for sale (refer toNote 5). Deferred income tax balances were classified in the consolidated balance sheetas follows: December 31, 2007 2006 Current deferred income tax assets 13 19Current deferred income tax liabilities (11) (11)Long-term deferred income tax assets 16 10Long-term deferred income tax liabilities (283) (50) Net deferred income tax liabilities (265) (32) For the years ended December 31, 2007 and 2006, statutory retained earnings ofthe Group's foreign subsidiaries amounted to USD 35 million and USD 21 million,respectively, on which deferred income tax of USD 2 million and USD 1 million,respectively, has not been recognised because remittance of the earnings hasbeen indefinitely postponed through reinvestment and, as a result, such amountsare considered to be permanently invested. Based upon historical taxable income and projections for future taxable incomeover the periods in which deferred income tax assets are deductible, managementof the Group believes it is more likely than not that Group will realize thebenefits of the deductible differences. Accordingly, no valuation allowanceshave been provided against deferred tax assets as of December 31, 2007 and 2006. 22. ACQUISITIONS AND MINORITY INTEREST Acquisitions (a) LLC Bakalskoe Rudoupravlenie On January 31, 2007, the Group acquired a 51% share in LLC BakalskoeRudoupravlenie, a mining company located in the Chelyabinsk region, RussianFederation, for a cash consideration ofUSD 15 million. This acquisition was accounted for using the purchase method. The excess of thefair value of the net assets acquired over the purchase price has been allocatedas a pro rata reduction of USD 2 million of the amounts that otherwise wouldhave been assigned to property, plant and equipment. The purchase priceallocation for the acquisition is as follows: Current assets 3Non-current assets 29Deferred income tax (7)Current liabilities (6)Non-current liabilities (2)Minority interest (2) Purchase price 15 (b) LLC UK RFTs-Kapital On January 9, 2007, the Group acquired a 100% stake in LLC UK RFTs-Kapital, aninvestment company located in the Russian Federation, for a cash considerationof USD 2 million. The excess of the fair value of the net assets acquired overthe purchase price in amount of USD 1 million has been included in otheroperating income. (c) MMK Atakas Metalurji In July 2007, the Group acquired a 50% plus 1 share in the Turkish companyAtakas Metalurji for a total cash consideration of USD 104 million. AtakasMetalurji was subsequently renamed MMK Atakas Metalurji. This acquisition wasmade with the intention of establishing a metal processing facility in Turkey. This acquisition was accounted for using the purchase method. The Group hasdetermined the fair values of identifiable assets, liabilities and contingentliabilities of the acquired company at the date of acquisition on a provisionalbasis. The provisional purchase price allocation for the acquisition is asfollows: Current assets 105Non-current assets 22Goodwill 36Deferred income tax (3)Current liabilities (1)Minority interest (55) Purchase price 104 The purchase price allocation for this acquisition will be finalized during2008. (d) CJSC Interkos-IV In August 2007, the Group acquired a 75% share in CJSC Interkos-IV, amanufacturer of spare parts for the automotive industry, located inSaint-Petersburg, Russian Federation, for a total cash consideration of USD 20million. This acquisition was accounted for using the purchase method. The Group hasdetermined the fair values of identifiable assets, liabilities and contingentliabilities of the acquired company at the date of acquisition on a provisionalbasis. The provisional purchase price allocation for the acquisition is asfollows: Current assets 4Non-current assets 6Goodwill 17Deferred income tax (1)Current liabilities (4)Non-current liabilities (1)Minority interest (1) Purchase price 20 The purchase price allocation for this acquisition will be finalized during2008. (e) OJSC Bashmetalloptorg In August 2007, the Group acquired a 25.67% share in OJSC Bashmetalloptorg, awholesale trader of metal products, located in Bashkortostan republic, RussianFederation, for a total cash consideration of USD 2 million. In October 2007,the Group acquired an additional 62.32% share in OJSC Bashmetalloptorg for atotal cash consideration of USD 15 million. This acquisition was accounted for using the purchase method. The Group hasdetermined the fair values of identifiable assets, liabilities and contingentliabilities of the acquired company at the date of acquisition on a provisionalbasis. The provisional purchase price allocation for the acquisition is asfollows: Current assets 1Non-current assets 11Goodwill 10Deferred income tax (3)Current liabilities (2) Purchase price 17 The purchase price allocation for this acquisition will be finalized during2008. Minority interest Changes in the carrying value of minority interest for the year ended December31, 2007 were as follows: Balance as of December 31, 2006 12 Acquisitions (as disclosed above in this Note) 58Minority interest recognised on issue of new shares of other subsidiaries of the 3GroupMinority's share in income from operations of the Group's subsidiaries 14 Balance as of December 31, 2007 87 23. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK Fair value of financial instruments The estimated fair value of certain financial instruments have been determinedusing available market information or other valuation methodologies that requireconsiderable judgment in interpreting market data and developing estimates.Accordingly, the estimates applied are not necessarily indicative of the amountsthat the Group could realize in a current market exchange. The use of differentassumptions and/or estimation methodologies may have a material impact on theestimated fair values. As of December 31, 2007, the estimated fair value of financial instruments,consisting of cash and cash equivalents, accounts receivable and accountspayable, approximates their carrying value due tothe short-term nature of these instruments. As of December 31, 2007, USD 300million of corporate bonds due in 2008 have a fair value of 101.09% or USD 303million. The fair value of other fixed-rate debt including capital leaseobligations and floating-rate debt approximate their carrying values. For the years ended December 31, 2007 and 2006, no derivatives were designatedas hedges. A net gain of USD 0.7 million and a net loss of USD 0.4 million,respectively, relating to a change in the fair value of derivative instrumentswas included in net foreign exchange gain in the consolidated statement ofoperations and comprehensive income. Credit risk Credit risk represents the accounting loss that would be recognized at thereporting date if counterparties failed completely to perform as contracted andfrom movements in interest rates and foreign exchange rates. The Group does notanticipate non-performance by counterparties. The Group generally does notrequire collateral or other security to support financial instruments withcredit risk. Financial instruments that potentially subject the Group to significant creditrisk primarily consist of cash and cash equivalents, bank deposits and accountsreceivable. The Group has bank accounts, held in OJSC Credit Ural Bank ("OJSC CUB"), arelated party of the Group. In addition the Group classifies promissory notes,purchased from OJSC CUB, as cash equivalents. Also the Group holds significantamounts of cash in bank deposits in Russian banks. To reduce risk the Groupperforms credit risk exposure evaluations for all banks in which the Group holdsbank deposits on a monthly basis. The Group sells its products to a number of customers globally. The Group grantscredit to its customers based on an evaluation of each customer's financialposition, in certain cases, without requiring guarantees or letters of credit,and thereafter monitors the exposure of potential losses from granting credit.To reduce risk the Group routinely assesses the financial strength of itscustomers and as a consequence, believes that its accounts receivable creditrisk exposure is limited. The maximum credit risk exposure is represented by the carrying amount of eachfinancial asset and the contractual amounts of the financial guarantees anddisclosed in Note 26. 24. RELATED PARTY TRANSACTIONS Related parties include shareholders, key management personnel, affiliates andentities under common ownership, and entities over which the Group has theability to exercise a significant influence. Issuance of guarantees in favor of related parties is disclosed in Note 26. The following companies are considered to be related parties to the Group: CJSC Profit CJSC Profit, a company affiliated with the Group's controlling shareholders,purchases scrap metal from third parties and Group entities, reprocesses it andsells reprocessed scrap metal to the Group. LLC MEK LLC MEK, a company affiliated with the Group's controlling shareholders, sellselectric power to the Group. OJSC NUB The Group holds certain deposits and current accounts in OJSC NUB, a commercialbank affiliated with the Group's management. The Group receives financing fromOJSC NUB in the form of loans for the Group's operating activities. LLC MMK Trans LLC MMK Trans, the Group's affiliate, provides transportation and forwardingservices to the Group. OJSC SKM OJSC SKM, an insurance company affiliated with the Group's controllingshareholders andthe Group's management, provides insurance services to the Group. CJSC Kazankovskaya Mine CJSC Kazankovskaya Mine, the Group's affiliate, holds a license to explore andmine coal deposits located in Kemerovo region, Russian Federation. The Groupprovides loans to CJSC Kazankovskaya Mine. NJSC SKM-Invest CJSC SKM-Invest, a leasing company affiliated with the Group's management,provides assets under capital lease to the Group. Transactions 2007 2006 RevenueCJSC Profit 136 125LLC MEK 1 -LLC MMK Trans - 1Total 137 126 PurchasesCJSC Profit 1,235 716LLC MEK 139 -LLC MMK Trans 27 24Total 1,401 740 Loans providedCJSC Profit 75 55CJSC Kazankovskaya Mine - 20OJSC SKM - 2Total 75 77 Loans repaidCJSC Profit 59 -OJSC SKM - 2Transactions 2007 2006 Other - 1Total 59 3 Bank chargesOJSC CUB 5 12 Loans and overdrafts obtainedOJSC CUB 85 36 Loans and overdrafts repaidOJSC CUB 84 40 Insurance paymentsOJSC SKM 28 37 Lease paymentsCJSC SKM-Invest 17 15 December 31,Balances 2007 2006 Cash and cash equivalentsOJSC CUB 115 151 Loans and overdraft facilitiesOJSC CUB 8 6 Loans providedCJSC Profit 78 57CJSC Kazankovskaya Mine 45 39Total 123 96 Accounts receivableCJSC Profit 1 13LLC MMK Trans 6 4Total 7 17 Accounts payableCJSC Profit 8 5OJSC SKM 2 1LLC MMK Trans 3 2Total 13 8 Lease payableCJSC SKM-Invest 22 25 25. COMMITMENTS In the course of carrying out its operations and other activities the Groupenters into various agreements, which requires the Group to invest in or providefinancing to specific projects or undertakings. In the opinion of the Group'smanagement, these commitments are entered into under standard terms, which arerepresentative of each project's feasibility and should not result inunreasonable losses for the Group. As of December 31, 2006, the Group executed non-binding purchase agreements ofapproximately USD 2,834 million to acquire in future periods through 2007 - 2012property, plant and equipment, coking coal, zinc and aluminum. As of December31, 2007, the Group executed non-binding purchase agreements of approximatelyUSD 16,689 million to acquire in future periods through 2008 - 2017 property,plant and equipment, coking coal, zinc, aluminum, iron ore and natural gas.Penalties are payable or receivable under these agreements in certaincircumstances and where supply terms are not adhered to. Management does notexpect such conditions to result in a loss to the Group. In 2007, the Group executed a non-binding framework purchase agreement with itsrelated party, CJSC Profit, to acquire in future periods through 2007 - 2011metal scrap. The volume and prices are defined on a monthly basis. In the past the Group has transferred social assets to local municipalauthorities. The Group's management expects that the Group will continue topartly fund those social operations in the foreseeable future. These costs arerecognized in the consolidated statement of operations and comprehensive incomeas incurred. Operating leases The land in the Russian Federation on which the Group's production facilitiesare located is owned by the State. The Group pays land tax based on the totalarea and the location of the land occupied. The amounts of land tax for theyears ended December 31, 2007 and 2006 were approximatelyUSD 26 million and USD 23 million, respectively. The Group leases land through operating lease agreements, which expire invarious years through 2054. Future minimum lease payments due undernon-cancelable operating lease agreements as ofDecember 31, 2007 were as follows: Due in one year 2Due in the second year 1Due thereafter 5 8 26. CONTINGENCIES Issued guarantees As of December 31, 2007 and 2006, the Group has provided financial guaranteesfor loans obtained by certain related and third party suppliers of the Group.The amounts related to the Group's financial guarantees were as follows: December 31, 2007 2006Non-currentRelated parties 145 200Third parties 76 37 221 237 CurrentRelated parties 40 1Third parties 8 7 48 8 Total 269 245 The Group's estimated maximum exposure to credit risk in the event of non-performance by other parties to these financial guarantees is represented by thecontractual amounts disclosed above. The Group's management believes that thelikelihood of material payments being required under these agreements is remote. As of December 31, 2007 and 2006, the Group did not have any contractualcommitments to extend financial guarantees, credit or other assistance. Litigation As of December 31, 2007 and 2006, the Group was subject to various lawsuits,claims and proceedings related to matters incidental to its business. In theopinion of the Group's management, there were no material unresolved adverseclaims or other matters. Russian business environment As an emerging market, the Russian Federation does not possess a fully developedbusiness and regulatory infrastructure including stable banking and judicialsystems, which would generally exist in a more mature market economy. Theeconomy of the Russian Federation is characterized by a currency that is notfreely convertible outside of the country, currency controls, low liquiditylevels for debt and equity markets, and continuing inflation. As a result,operations in the Russian Federation involve risks that are not typicallyassociated with those in more developed markets. Stability and success of theRussian economy and the Group's business mainly depends on the effectiveness ofeconomic measures undertaken by the government as well as the development oflegal and political systems. Tax contingencies The tax system in the Russian Federation is relatively new and is characterizedby frequent changes in legislation, official pronouncements and court decisions,which are often unclear, contradictory and subject to varying interpretation bydifferent tax authorities. Taxes are subject to review and investigation by anumber of authorities, which have the authority to impose severe fines,penalties and interest charges. A tax year remains open for review by the taxauthorities during the three subsequent calendar years; however, under certaincircumstances a tax year may remain open longer. Recent events within theRussian Federation suggest that the tax authorities are taking a more assertiveposition in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that aresubstantially more significant than in other countries. Management believes thatit has provided adequately for all tax liabilities based on its interpretationsof applicable Russian tax legislation, official pronouncements and courtdecisions. However, the interpretations of the relevant authorities could differand the effect on these financial statements, if the authorities were successfulin enforcing their interpretations, could be significant. Environmental liabilities The Group is obligated to undertake certain environmental remediation activitiesto ensure site restoration of a large iron ore quarry in the Magnitogorsk regionof the Russian Federation. In accordance with permission granted by theMagnitogorsk Regional Ecological Committee, the Group utilizes production wasteto fill the iron ore quarry where this waste does not exceed a prescribedtoxicity level. Amounts of waste which exceed this toxicity level are notsignificant and are treated by licensed specialists. The future cost associatedwith the restoration of the iron ore quarry are not expected to be significant.These costs and other environmental compliance costs associated with air andwater pollution are included in the normal operating expenses of the Group asthey are incurred. Environmental regulations are currently under consideration in the RussianFederation and the Group is continuously evaluating its obligations relating tonew and changing legislation. The likelihood and amount of liabilities relatingto environmental obligations under proposed or any future legislation cannot bereasonably estimated at present and could become material. Under existing legislation, management believes that there are no significantunrecorded liabilities or contingencies, which could have a significant adverseeffect on the operating results or financial position of the Group. 27. DISPOSAL OF SUBSIDIARIES On March 10, 2006, the Group disposed of its shareholding in CJSCShakhtouchastok Uregolskiy, a subsidiary of the Group, to OJSC Coal CompanyYuzhniy Kuzbass for a cash consideration of USD 7 million. The net assets ofCJSC Shakhtouchastok Uregolskiy comprised property, plant and equipment with anet carrying amount of USD 7 million. In December, 2007, CJSC A-Kapital, a wholly owned subsidiary of the Group, wasliquidated due to a restructuring of the Group. 28. SUBSEQUENT EVENTS In February 2008, Russian banks provided short-term RUB-denominated loans of USD81 million, bearing interest of 6.15% per annum with maturity in August 2008. In February and March 2008, Russian banks provided short-term USD-denominatedloans of USD 204 million, bearing interest of 4.70% per annum with maturity in2008. This information is provided by RNS The company news service from the London Stock Exchange