18 Apr 2006 07:02
OJSC Novolipetsk Steel18 April 2006 OJSC Novolipetsk Steel (NLMK)18 April, 2006 For immediate release: Tuesday 18 April, 2006 OJSC Novolipetsk Steel Preliminary Results for the Year Ended 31 December, 2005 OJSC Novolipetsk Steel (NLMK), the LSE listed leading Russian steel producer,today announces its preliminary results for the year ended 31 December, 2005. HIGHLIGHTS • Strong 2005 financial results o Sales revenues were USD 4,469 million o Cash flows from operating activities were USD 1,515 million o EBITDA* margin was 47% o Cash and cash equivalents USD 1,897 million as at 31 December, 2005 o 65% total dividend increase to USD 0.1063 per ordinary share • Continued dynamic development through M&A activities o Acquisition of a license to develop a high quality coking coal deposit, Zhernovskoe-1, scheduled to supply 50% of the company's needs by 2009 o Building up steel rolling capacity in core markets through the acquisition of DanSteel A/S, the Danish steel manufacturer, for USD 104 million • Successful completion of the USD 1.26 billion first phase of the technical upgrading program, bringing NLMK to highly competitive operational level. The Company continues to implement second stage of the program estimated at USD 3.2 billion. • Successful listing on the LSE representing 7.46%** of the existing issued ordinary share capital, global offering raised USD 609 million, resulting in a market capitalisation of USD 8.7 billion. • Launch of an internal restructuring plan to optimise the management structure and maximise operational efficiency. • NLMK received the highest corporate credit ratings among Russian steel companies. • Continued M&A activity in 2006 o Altai Koks, Prokopievskugol o Lebedinsky GOK, KMAruda Financial highlights for year ended 31 December, 2005 ----------------------------------------------------------------------------------- Year ended Year ended Change($million, unless stated) 31 December, 2005 31 December, 2004 % Sales Revenue 4,469 4,539 -2% Gross Profit 2,067 2,406 -14% Operating Income 1,860 2,223 -16% EBITDA 2,094 2,563 -18% EBITDA Margin 47% 56% Basic and diluted net income per share 0.2312 0.2958 -22% Total Dividends (US dollars per share): 0.1063 0.0643 65% Interim Dividend 0.0352 0.0357*** Recommend Final Dividend 0.0711 0.0286 NLMK's Chairman, Dr. Vladimir Lisin, commented: "I am delighted to present NLMK's strong financial results and strategicdevelopments for the year ended 31 December, 2005. In 2005, NLMK's revenuesamounted to USD 4,469 million and the company produced an EBITDA margin of 47%.The Group successfully listed on the London Stock Exchange at the end of 2005.NLMK's strong financial position allowed it to increase total dividends for theyear by 65%. These results enable NLMK to maintain its position as the world'smost profitable steel company. " * EBITDA = Net income (post minorities) + income tax - interest earned + losseson disposal + depreciation ** including greenshoe option *** dividends for 9 months of 2004 For further information: NLMK Anton Bazulev +7 495 915 1575 Financial Dynamics Jon Simmons +44 207 831 3113 CHAIRMAN'S STATEMENT I am delighted to present NLMK's strong financial results and strategicdevelopments for the year ended 31 December, 2005. This has been an outstandingyear for our company. We have made strong progress in fulfilling our strategicgoals, enhancing our main competitive advantages as one of the world's mostprofitable steel producers and creating value for all our shareholders. Last year, the main objectives were to bring the company to the internationalstock market, achieve further vertical integration through M&A activities todeliver substantial synergy benefits, and successfully accomplish the firstphase of the technical upgrading program. I believe that NLMK's outstandingshare price performance since the commencement of trading on the London StockExchange on 15 December, 2005, is a strong endorsement of our corporatestrategy. Our successful listing on the LSE raised NLMK's international profile andincreased the company's global liquidity. The NLMK Global Offer comprised 7.46%of its existing issued ordinary share capital. According to analysts' reports,NLMK is now the most liquid steel stock in Russia. Despite the fact that the market environment significantly deteriorated in thesecond half of the year, the company maintained a high level of revenues. In2005, NLMK's revenues amounted to USD 4,469 million, remaining almost at therecord level attained in 2004. The slight decrease in operating income from 2004is primarily a result of the reduction of steel output caused by scheduledmaintenance activities. However, it is particularly pleasing to note that inthis challenging pricing and cost environment, we were able to produce a 47%EBITDA margin. This result enables NLMK to maintain its position as the world'smost profitable steel company. NLMK's continued strong cash generation, with net income at USD 1,385 millionfor 2005, allows us to fund an ongoing technical upgrading program. We havealready spent USD 1.26 billion on the first phase of the program, targetingstate-of-the art technologies to become a best in class operator. The total costof the technical upgrading program for the next five years will be a lot moreambitious. The strong balance sheet forms the basis of NLMK's organic growth.Thus, we are planning to expand rolling capacity, focusing on the production ofhigh value-added products, from 4.8 million tonnes at present to over 6 milliontonnes by 2010. The strong cash flows from our operations give NLMK the capacity to finance itsproduction costs, capital expenditures and M&A activities, in full, fromexisting cash funds. The company has excess cash and the Board has decided thata large portion of it will now be returned to shareholders. NLMK's Board isproposing to amend the stated dividend policy so that it now targets minimumdividend payments of 20% of US GAAP net income (previously 15% of US GAAP netincome) and to target an average dividend payment during a five-year period of30% of US GAAP net income. The recommended final dividend for 2005 will be USD0.0711 per ordinary share. Last year, we paid a single dividend of USD 0.0352for the first six months of 2005. The total dividend for the year is thereforeUSD 0.1063. In addition, starting in 2006, the Board will recommend using theproceeds from divesting non-core businesses for special dividends payments.Thus, we remain committed to the strong dividend policy. In regard to the main components of the corporate strategy, we continued tofocus on strengthening vertical integration as the company's key competitiveadvantage. As a result of further consolidation of iron ore assets, NLMK has nowachieved 100% self-sufficiency in iron ore, and used strategic acquisitionopportunities in the coal-mining sector to purchase a license for theZhernovskoe-1 coal deposits in Western Siberia. Along with the recentacquisition of coking coal and coke facilities, JSC "Altai-koks" and"Prokopievskugol" Coal Company, completed last month, this will allow us toachieve 100% self-sufficiency in coking coal by 2009. The second pillar of the vertical integration strategy is purchasinghigh-quality rolling capacities in our strategic markets. In 2005, NLMKparticipated in the privatization auction for the stake in Erdemir to extend thecompany's access to the Turkish market. However, the auction price escalated tolevels beyond adequate value creation opportunities. I would like to confirm,once again, that we continue to look selectively at value enhancing M&Aopportunities. The acquisition of DanSteel A/S at the beginning of 2006demonstrates that NLMK's fundamental approach is based on introducingvalue-added products as opposed to simply increasing capacity. We are expecting to come back to 2004 production levels (of more than 9 milliontonnes of crude steel) this year and to bring steel production to over 10million tonnes by 2010. Our policy remains focused on improving NLMK's EBITDA,the key benchmark of our operating performance, and strengthening company'smarket leadership. As previously announced, the Board has approved an internalrestructuring plan aimed at centralizing key management functions in accordancewith NLMK's value chain. Optimizing the company's business processes provides anupside potential for maximizing operational efficiencies and delivering organicgrowth. The outlook for the global economy is positive. The core markets demonstratestable growth and strong underlying demand for NLMK's products. We anticipatethat prices and demand will continue at or near current levels throughout 2006,allowing NLMK to produce strong operating profit and margins. We continue to ensure constant enhancement of our corporate governancepractices. In 2005 we elected four independent Board members who took activepart in implementing the principles of our new Corporate Governance Code. Wealso endeavour to ensure timely and precise disclosure of information and toprovide maximum transparency of our financial and business operations. In conclusion, I want to thank all our employees, Board members and managementteam who contributed to NLMK's success story in 2005. Your dedication,experience, and industry knowledge are NLMK's most valuable assets. MANAGEMENT BOARD'S COMMENTS Over recent years Novolipetsk Steel has shown consistently stable results,remaining a market leader in terms of cost efficiency. This was achieved withinNLMK's strategy, aimed at increasing the Company's value, creating long-termcompetitive advantages and reducing dependence on market conditions. Even though prices on the steel market took a downturn in the second half of2005, it was a successful year for NLMK. Sales revenues were USD 4,469 million;EBITDA was USD 2,094 million, with an EBITDA margin of 47%. Net cash provided byoperating activities reached USD 1,515 million, fully covering the Company'scash used in investing and financing activities, and contributed to the growthin cash and cash equivalents of USD 548 million (up 40.6% from 2004), whichtotaled USD 1,897 million at the year-end. Production output of steel products decreased in 2005 due to major repairs ofthe blast furnace and converter facilities. Steel manufacturing was reduced by7.2% to 8.47 million tonnes, finished steel products were down 7.0% to 7.98million tonnes. Output was reduced mainly by lowering commercial slab production(-14.9% on 2004 levels), while flat-rolled steel products output was maintainedat almost the same level as last year, at 4.78 million tons (-0.8%). NLMK's production policy provides for major repairs of primary equipment inperiods of poor conditions in sales markets. This policy was applied in 2005. Steel Segment Steel segment continues to be the key segment of the Company. In 2005, thissegment generated USD 4 175 million sales revenue from external customers andUSD 1 519 million from operating activities. Steel segment includes the Parentcompany - OJSC NLMK as well as service companies whose business is metalproduction procurement and sales of final products. The share of steel segmentwas 93.4% in consolidated revenues and 81.7% in operating profit. In 2005, export steel prices were fluctuating: the price level was stable at thebeginning of the year, dropped and remained low in the course of the secondquarter. In the third quarter the prices were stable and finally in fourthquarter prices for selected products increased. Overall, in 2005 prices for theprincipal types of flat-rolled steel products in the major regional markets ofthe world dropped by 8-35% (depending upon the region and product type). The global negative pricing environment has resulted in a price decrease on thedomestic market. Despite the growing influence of world prices on domesticprices, domestic price fluctuation was not as big as world price fluctuation. Decreased steel prices in second half of 2005 and production decline resulted ina 5.1% decline in the 2005 sales revenue from external customers and in a 25.4%drop in operating income. The steel segment revenue decrease resulted not only from the fall in salesrevenue, but also from a substantial growth of raw materials prices. Althoughin the second half of 2005 coal and iron ore prices went down, the average pricelevel was higher than in 2004. Mining segment NLMK's mining segment comprises OJSC Stoilensky GOK, OJSC Dolomit and OJSCStagdok, a companies that produce metal raw materials for the Parent company. Stoilensky GOK is the principal mining company within the Group. In 2005, itproduced 10.81 million tonnes of iron-ore concentrate and 1.08 million tonnes ofagglomerated ore. In 2005, the output of its subsidiary Dolomit, a dolomiteproducer, was 1.81 million tonnes of flux dolomite. Stagdok, which supplieslimestone, produced 2.94 million tonnes of fluxing limestone in the same period. In 2005, the mining segment's revenue from external customers was USD 119.5million, which exceeds the level of 2004 by 59.4%. The segment revenue,including intersegmental transactions, was USD 580.1 million (+40,7% on 2004).Revenue growth is attributable to the growth of segment product prices, and tothe effect of consolidation with Stoilensky GOK starting from the second quarterof 2004. As 79.4% sales volume (in value terms) of the mining segment is generated byintercompany transactions, this segment's share in the 2005 consolidated salesrevenue was 2.7%. Increased iron-ore prices led to the mining segment's operating profit growth of53.1% from USD 186 million in 2004 up to USD 291 million in 2005. The segment'sshare in consolidated operating profit was 15.6%. Starting from the second quarter, NLMK had significant influence over OJSCCombinat KMA Ruda (KMAruda), which in 2005 produced 1.85 million tons ofiron-ore concentrate. In February-March 2006, additional KMA Ruda shares wereacquired, which resulted in an increase of NLMK's ownership up to 76.26%.Stoilensky GOK together with KMAruda fully cover NLMK's requirement for iron-oreconcentrate, and concentrate surplus is sold to third parties. Other Segments Other segments include the OJSC Tuapse Commercial Sea Port (TMTP) - the fifthlargest Black Sea port in Russia, OJSC Lipetskcombank, LLC LIS Chance and theLipetskaya Municipal Energy Company (LMEC) that supplies electric power to thelocal population. In 2005, these segments' revenue from external customers amounted to USD 174.5million, or up 172% on the 2004 figure. Such significant revenue growth islargely attributed to asset consolidation, in particular, TMTP was consolidatedonly in July 2004, and the LMEC, after it was created in May 2004, began activeoperations in the second half of the year. In 2005, other segments' operating income totalled USD 39.7 million, or 119%against the 2004 level, as a result of consolidation and increased TMTP cargohandling volumes and profit margin. Consolidated financial result As a result of both lower volumes of metal products shipped and worsening marketconditions, in 2005 sales decreased by 1.5% to USD 4,469 million. NLMK managedto avoid a sharp decline in revenue by modifying its sale policies. NLMKrechanneled part of its export flows to the domestic market, where the pricedecline was of a smaller magnitude; as a result of this, in 2005 the domesticmarket accounted for 42% of revenue as compared with 36% in 2004. 2005 witnessedbetter structure of shipments from NLMK. Due to the greater volumes of shipmentof grain-oriented steel and polymer-coated rolled products as well as lowervolumes of raw iron and slabs, the proportion of products featuring high addedvalue considerably increased. NLMK has a well-developed distribution network. In 2005, NLMK's sales coveredover 60 countries of the world. Its geographical proximity to clients createsadditional advantages to NLMK. These are industrial regions of Russia, Europe,Turkey, Middle East and India, which account for approximately 70% of sales. Allocation of total revenue by geographical segments in 2005 was as follows: - Russia USD 1,883 million,- Asia and Oceania USD 848 million,- EU countries USD 626 million,- Middle East, including Turkey USD 571 million,- North America USD 307 million,- Other regions USD 234 million. The Company seeks to diversify its sales, both by product and market outlet.That strategy enables NLMK to concentrate its effort and capital expenditures onthose market segments, which ensure the highest profits. Apart from the increase in proportion of sales to Russia, in 2005 sales to Asiaand Oceania rose from 14% to 19% in comparison with 2004. The proportion ofsales in North America fell from 14% to 7%. Also, there was a slight decrease inthe proportion of sales to EU countries (from 17% down to 14%), whereas theshare of Middle East countries, including Turkey (13% in 2005) and other regions(5% in 2005) remained at the same level. One of NLMK's priorities is to reinforce its status as a metals company with lowcost of production. To this end, NLMK pursues a range of activities to ensurestringent control of operating costs. As a result of this course of action, despite a considerable rise in prices ofraw materials and energy in comparison with 2004, operating costs in 2005 onlyincreased by 12%. (For information: prices of raw materials includingtransportation costs increased as follows: coking coal by 33%, natural gas by18%, electricity by 8%). As a result of higher production cost in the context of lower revenue, NLMK'sgross profit in 2005 decreased by 14% as compared with 2004 and amounted to USD2,067 million. A relatively insignificant decrease in gross profits as comparedwith both price decline rate in the metal markets and growth rate of prices ofraw materials was attained due to the coordinated work of all Parent company'ssubdivisions (including sales & distribution, production and technicalfunctions), and Group's mining segment. In 2005, EBITDA was USD 2,094 million, representing 47% of sales. Forcomparison, in 2004, EBITDA was USD 2,563 million and EBITDA margin was 56.5%. In 2005, depreciation charges were USD 283.6 million or 16% higher than in 2004.Higher depreciation resulted from commissioning new manufacturing facilities andexpansion of the Group through acquisition of Stoilensky GOK and TMTP in 2004. In 2005, interest expense rose by 22% up to USD 15.1 million primarily due tothe growing scale of operations of the Group's subsidiary bank. An increase ininterest income by 97% up to USD 98.9 million is explained by expandingoperations of the subsidiary bank in addition to a rise in the deposited cashand cash equivalents. In 2005, profit before interest and tax (EBIT) was USD 1,797 million that is 22%less than in 2004. In 2005, profit before tax and minority interest was USD1,906 million having decreased by 19% against the 2004 level. Income tax reported in the profit and loss statement for 2005 was USD 495.7million that is USD 76.4 million or 13% less than in 2004. A reduction in tax iscaused by lower financial results for the reporting year. In 2005, net profit was USD 1,385 million that is 22% less than in 2004.Earnings per share (EPS) were USD 0.23 in 2005. In spite of a decrease in profits, NLMK remains one of the most efficient steelplants in Russia and worldwide. Consolidated balance sheet data At the end of 2005, NLMK's assets increased by 17% and reached USD 6,051million. The Company's assets grew mostly by means of net profit. Profitable business allows NLMK to finance its own activities and thedevelopment of the group primarily from its own funds. A share of the Company'sown capital in the structure of the sources used to finance NLMK's operations ispermanently high and exceeded 80% over the last three years; at the end of 2005,it was 84%. Highly liquid assets of NLMK substantially exceed the amount of its debt and asa consequence NLMK has negative net debt, which amounted to USD (1,669 million)at 31.12.2005. Over the last five years, the working capital ratio of NLMK did not drop below4.8. At the end of 2005 it reached 6.0. The structure of NLMK's balance sheet is evidence of high financial stabilityand absolute business solvency of the Company. Strong financial position isconfirmed by the highest credit ratings amongst Russia's steel companies. In 2005, return on assets (ROA) was 24% and return equity (ROE) was 29%. Theseindicators are lower than in 2004 due to a decrease in the Company's net profitin parallel with an increase in its assets and share capital. In 2005, the Company's current assets increased by USD 715 million or by 28%against 2004. Primarily this growth was achieved through a rise in cash and cashequivalents which increased by USD 548 million. Cash Flow NLMK's operational cash flow fully covers the requirements of Investment andFinancial activities. During the previous years, it ensured increased generationof the Company's cash and cash equivalents. Net operational cash flow was USD 1,515 million in 2005, which is almost 2.6times more than net cash used for fixed assets construction and acquisition thatequaled USD 573 million. Since practically no loans or borrowings are used to finance the Company'soperations, the main cash outflow associated with financial activities isdividend payment to shareholders. In 2005, the net increase in cash and cash equivalents was approximately USD548.1 million, and the NLMK cash balance was USD 1,897 million as of the end of2005, which is up 40.6% on 2004. The Company's sustainable financial position allows for a flexible businessdevelopment strategy. Creation of additional shareholder values remains NLMK'spriority, and NLMK will continue to pursue the policy based on stringentfinancial discipline and balanced investment projects. Capital Expenditure In 2005, NLMK successfully completed the first phase of the Technical UpgradingProgram, covering the period from 2000 to 2005. The program was developed byexperts representing leading R&D centers and design institutes. In connectionwith the program development, the best practices of iron-and-steel companies inEurope, Asia and Americas were used. The total costs of acquisition and construction of NLMK's fixed assets from 2000through 2005 were USD 1,549 million. The first phase of the Technical Upgrading Program saw reconstruction andlarge-scale overhauls of the existing operating facilities and construction ofnew ones. Renovation and expansion of its basic production assets have allowedthe Company to strengthen its competitive position in the sales markets byexpanding its product portfolio, increasing product quality and reducingproduction costs. The total amount of capital expenditures in 2005 was USD 573 million, which ishigher by USD 304 million as against the 2004 level. The considerable increaseresulted from expenditures allotted to the following facilities: - reconstruction of coke furnace battery #1, - overhaul of Blast Furnace #5, - reconstruction of the aspiration system of Blast Furnace #5 casting yard, - construction of a cast iron desulphurization section in converter plant #1, - replacement of one of the 300-ton converters in converter plant #2, - replacement of the automated control system at the cold-rolling mill 2030, - construction of a continuous hot galvanizing unit #3. In addition, integration within the NLMK Group of large industrial companies in2004 gave rise to an increase in the amount of capital expenditures in themining and "Other" segments. Thus, in 2005 capital expenditures in the miningsegment totaled USD 67.5 million, in the "Other" segment - USD 12.8 millionagainst USD 44.5 million and USD 5.2 million respectively in 2004. Vertical integration The company's vertical integration allowed ensures a high level of independencefrom suppliers of raw materials and significantly improves the potential forlong-term planning of operations. In 2004 the company acquired shares of Stoilensky GOK, one of the largestiron-ore producers in Russia, which decreased the company's dependence on theiron-ore concentrate's price fluctuation. In 2005 NLMK acquired a license to explore and produce coal at the Zhernovskoe-1site of the Zhernovsky coal deposit (Kemerovskaya Oblast, Russia). Based on thecurrent estimates, the coal production and enrichment plant will be commissionedin 2008 and starting from 2009 its output will meet 50% of NLMK's demand forcoking coal. In January 2006 NLMK acquired 100% of the shares of DanSteel A/S (Danishsteel-rolling company) from its shareholders who had previously acquired thiscompany in November 2005. The consideration totaled USD 104 million. DanSteel A/S production output of hot-rolled plate is approximately 500,000 tons per year.Since 2002 NLMK has been the leading slab supplier to DanSteel. In February-March 2006, the company completed the deal to acquire 43.37% sharesin OJSC Combinat KMA Ruda (KMAruda), provider of iron-ore raw materials, for USD60.6 million, bringing the NLMK share in the KMAruda charter capital to 76.26%.At present, Stoilensky GOK and KMAruda supply 100% of NLMK's iron oreconcentrate requirements. In March 2006 an agreement was reached to acquire from a group of investors an82% interest in OJSC Altai-Koks (Altai-Koks), coke-chemical plant, and a 100%interest in holding company Kuzbass Asset Holdings Limited, Gibraltar, whichowns 100% of interest in Prokopievskugol Coal Company, for a total of about USD750 million. In January-April 2006, another 6.18% of Altai-Koks shares were purchased fromvarious minority shareholders. Thus, the deal will result in the total Group'sownership of Altai-Koks shares reaching 88%. Altai-Koks is the leader among the Russian coke-chemical companies. It produceshigh-quality coke and chemical products. Altai-Koks has production capacity of3.8 million tons, which is expected to increase up to five million tons by 2007.Prokopievskugol Coal Company has stable position in production and processing ofhigh-value grades of coking coal in Kemerovskaya Oblast. Prokopievskugol CoalCompany has at its disposal seven mines and three enrichment plants with thetotal production of five million tons per year, including three million tonnesof coking coal. Outlook We foresee improved market conditions in 2006: prices on principal steelproducts are expected to grow from current level, both on the domestic andforeign markets. Yet the average price level will be slightly lower than in2005. NLMK plans to increase its metals output to match 2004 levels. Production ofiron-ore concentrate at the Stoilensky GOK will increase. We expect that revenues in 2006 will be slightly higher than in 2005. This willbe influenced by bigger sales volumes and by adding new assets to the Group.Profits from operations will remain at last year's levels. NLMK's strategy for sustainable development and its highly qualified team ofmanagers allow us to make a positive forecast and look confidently into thefuture. OJSC Novolipetsk Steel (NLMK) Preliminary results for the year ended 31 December, 2005 CONSOLIDATED BALANCE SHEETS As at As at As at December 31, December 31, December 31, Note 2005 2004 2003ASSETS Current assetsCash and cash equivalents 4 1,896,741 1,348,615 729,641Short-term investments 6 27,040 21,153 180,797Accounts receivable, net 7 660,054 588,562 377,746Inventories, net 8 501,556 475,303 301,303Other current assets, net 9 208,920 148,748 63,336Restricted cash 5 7,979 5,094 23,104 3,302,290 2,587,475 1,675,927Non-current assetsLong-term investments 6 31,470 51,425 39,925Property, plant and equipment, net 10 2,393,549 2,257,628 1,332,579Intangible assets, net 11 16,655 21,594 -Goodwill 11 173,357 179,815 -Other non-current assets, net 9 133,747 67,984 36,834 2,748,778 2,578,446 1,409,338Total assets 6,051,068 5,165,921 3,085,265 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilitiesAccounts payable and other liabilities 12 507,637 455,042 251,687Current income tax liability 40,639 78,638 23,032Short-term capital lease liability - 232 6,114 548,276 533,912 280,833Non-current liabilitiesLong-term capital lease liability - 313 11,563Deferred income tax liability 16 294,337 305,472 159,716Other long-term liabilities 13 61,675 19,946 6,593 356,012 325,731 177,872Total liabilities 904,288 859,643 458,705 Commitments and contingencies 25 - - - Minority interest 14 92,576 85,787 16,652 Stockholders' equityCommon stock, 1 Russian ruble parvalue - 5,993,227,240, 5,993,227,240and 5,987,240 shares issued andoutstanding at December 31, 2005,2004 and 2003 15 221,173 221,173 14,440Statutory reserve 15 10,267 10,267 32Additional paid-in capital 1,812 680 680Other comprehensive income 71,899 242,387 27,672Retained earnings 4,749,053 3,745,984 2,567,084 5,054,204 4,220,491 2,609,908Total liabilities and stockholders' equity 6,051,068 5,165,921 3,085,265 CONSOLIDATED STATEMENTS OF INCOME For the year For the year For the year ended Ended ended December 31, December 31, December 31, Note 2005 2004 2003 Sales revenue 22 4,468,726 4,538,686 2,468,022 Cost of sales Production cost (2,118,111) (1,888,702) (1,293,330) Depreciation and amortization (283,622) (243,656) (157,809) (2,401,733) (2,132,358) (1,451,139) Gross profit 2,066,993 2,406,328 1,016,883 General and administrative expenses (107,867) (92,517) (69,524) Selling expenses (62,614) (57,839) (40,760) Taxes other than income tax (36,473) (33,108) (24,325) Operating income 1,860,039 2,222,864 882,274 Loss on disposals of property, plant and equipment (11,812) (12,231) (7,949) Gain / (loss) on investments (1,523) 165,174 12,136 Interest income 98,872 50,069 33,633 Interest expense (15,091) (12,296) (7,344) Foreign currency exchange loss, net (7,900) (39,101) (42,999) Other income / (expense), net (16,342) (10,477) 11,983 Income before income tax and minority interest 1,906,243 2,364,002 881,734 Income tax 16 (495,683) (572,221) (223,035) Income before minority interest 1,410,560 1,791,781 658,699 Equity in net earnings of associate 3,701 - - Minority interest 14 (28,925) (19,280) (2,243) Net income 1,385,336 1,772,501 656,456 Income from continuing operations per share (US dollars) basic and diluted 0.2312 0.2958 0.1095 Net income per share (US dollars) basic and diluted 17 0.2312 0.2958 0.1095 CONSOLIDATED STATEMENTS OF CASH FLOWS For the year For the year For the year ended ended ended December 31, December 31, December 31, Note 2005 2004 2003CASH FLOWS FROM OPERATING ACTIVITIESNet income 1,385,336 1,772,501 656,456Adjustments to reconcile net income to net cash providedby operating activities:Minority interest 14 28,925 19,280 2,243Depreciation and amortization 283,622 243,656 157,809Loss on disposals of property,plant and equipment 11,812 12,231 7,949(Gain) / loss on investments 1,523 (165,174) (12,136)Equity in net earnings of associate (3,701) - -Deferred income tax (benefit) / expense 16 162 (35,945) (13,498)Stock-based compensation 24 (e) 1,132 - -Other movements (21,609) 2,096 (19,342)Changes in operating assets and liabilitiesIncrease in accounts receivable (96,486) (158,628) (86,853)Increase in inventories (47,077) (132,375) (71,038)Decrease / (increase) in othercurrent assets (33,208) 331 328Increase in loans provided by thesubsidiary bank (69,142) (86,501) (44,357)Increase in accounts payable andother liabilities 107,377 146,731 86,360Increase / (decrease) in currentincome tax payable (33,990) 51,140 4,390Net cash provided by operating activities 1,514,676 1,669,343 668,311CASH FLOWSFROM INVESTING ACTIVITIESAcquisitions of subsidiaries,net of cash acquired of $38,109 21 - (173,856) -Proceeds from sale of property,plant and equipment 10,616 8,352 15,677Purchases and construction ofproperty, plant and equipment (573,220) (269,459) (239,279)Proceeds from sale of investments 72,872 518,866 17,650Purchase of investments (42,722) (185,594) (187,590)Movement of restricted cash (3,122) 3,378 (15,589)Net cash used in investing activities (535,576) (98,313) (409,131) For the year For the year For the year ended ended ended December 31, December 31, December 31, Note 2005 2004 2003CASH FLOWSFROM FINANCING ACTIVITIESProceeds from borrowings andnotes payable 20,143 2,545 470Repayment of borrowings andnotes payable (7,234) (22,161) (930)Proceeds from issuance of additionalstock in subsidiaries to minoritystockholders - - 388Capital lease payments - (40,818) (6,648)Payments to controlling shareholdersfor common control transfer ofinterests in a new subsidiary, netof cash of $1,070 receivedin transferred subsidiary 21 - (635,383) -Payments to controlling shareholdersfor common control transfers ofinterests in existing subsidiaries 24 - (2,617) -Repayment of loan by controllingshareholders 24 - - 71,415Proceeds from controllingshareholders for sale of investments 24 - 5,554 38,104Dividends to shareholders (384,973) (332,817) (61,675)Net cash provided by / (used in)financing activities (372,064) (1,025,697) 41,124Net increase in cash and cashequivalents 607,036 545,333 300,304Effect of exchange rate changes oncash and cash equivalents (58,910) 73,641 46,380Cash and cash equivalents atthe beginning of the year 4 1,348,615 729,641 382,957Cash and cash equivalents atthe end of the year 4 1,896,741 1,348,615 729,641 Supplemental disclosures of cash flow information: Cash paid during the year for:Income tax 434,885 479,732 190,810Interest 13,623 12,002 7,369 Non cash operating activities:Offset of income tax payablewith VAT receivable 96,427 76,251 41,333 Non cash investing activities:Capital lease liabilities incurred 18 - 19,920 17,059Reclassification of restricted cashto long-term investments 5 - 15,000 - Non cash investing and financing activities as a result of:Transfers of subsidiary interests fromcommon control parties reflected ascapital contribution, net of cash receivedof $1,070 21 - 597,665 -Fair value of net assets acquired fromthird parties in new subsidiaries, net ofcash acquired of $38,109 inOJSC TMTP and its subsidiaries 21 - 173,856 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OJSC Novolipetsk Steel (the "Parent Company") and its subsidiaries (together -the "Group") is one of the largest iron and steel holdings in the RussianFederation with facilities that allow the Group to operate an integrated steelproduction cycle. The Parent Company is a Russian Federation open joint stockcompany in accordance with the Civil Code of the Russian Federation. The ParentCompany was originally established as a State owned enterprise in 1934 and wasprivatized in the form of an open joint stock company on January 28, 1993. OnAugust 12, 1998 the Parent Company's name was re-registered as an open jointstock company in accordance with the Law on Joint Stock Companies of the RussianFederation. The Group's principal activity is the production and sale of ferrous metals,primarily consisting of pig iron, steel slabs, hot rolled steel, cold rolledsteel, galvanized cold rolled sheet and cold rolled sheet with polymericcoatings. These products are sold both in the Russian Federation and abroad. TheGroup also operates in the mining and has relatively insignificant interests inthe financial and seaport segments (Note 22). The Group's main operations are in the Lipetsk region of the Russian Federationand are subject to the legislative requirements of both the Russian Federationand the Lipetsk regional authorities. The Group's primary subsidiaries, located in Lipetsk and other regions of theRussian Federation, comprise: • Mining companies OJSC Stoilensky GOK (acquired in 2004), OJSCStAGDoK and OJSC Dolomite. The principal activity of these companies is miningand processing of iron-ore raw concentrate, fluxing limestone and metallurgicaldolomite. • Transport company OJSC Tuapse Trade Seaport ("OJSC TMTP") andits subsidiaries (acquired in 2004). The principal business activity of OJSCTMTP is cargo loading and unloading, transshipment of cargo to sea transport andvice versa. • Trading companies LLC Trading House NLMK, LLC Stahl, LLC Vimetand LLC Larmet. The principal activity of the trading companies is the purchaseof raw materials for the Group's metallurgical production and the sale of metalproducts. • The commercial bank OJSC Lipetskcombank and its subsidiary. Thebank possesses a general banking license issued by the Central Bank of theRussian Federation, a license for foreign currency operations and a license forbrokerage activity. The bank provides banking services to commercial and retailcustomers and other Group companies. • The insurance company LLC LIS Chance and its subsidiaries. Theprincipal business activities of these companies are corporate propertyinsurance, voluntary medical insurance, vehicle insurance and public liabilityinsurance to commercial and retail customers and other Group companies. 2 BASIS OF PREPARATION (a) Statement of compliance The Group maintains its accounting records in accordance with the legislativerequirements of the Russian Federation. The accompanying consolidated financialstatements have been prepared from those accounting records and adjusted asnecessary to comply, in all material respects, with the requirements ofaccounting principles generally accepted in the United States of America ("USGAAP"). (b) Functional and reporting currency The accounting records of the Group are maintained in Russian rubles and theParent Company prepares its statutory financial statements and reports in thatcurrency to its stockholders in accordance with the laws of the RussianFederation. The Group's functional currency is considered to be the Russian ruble. Theaccompanying consolidated financial statements have been prepared using the USdollar as the Group's reporting currency. The translation into US dollars hasbeen performed in accordance with the provisions of SFAS No. 52, ForeignCurrency Translation. 2 BASIS OF PREPARATION (continued) The Russian economy ceased to be considered hyperinflationary as of January 1,2003. At January 1, 2003, the monetary and non-monetary assets and liabilitiesof the Group as well as the related stockholders' equity balance were translatedinto Russian rubles at the current exchange rate prevailing at January 1, 2003.This translation established a new functional currency basis for the Group. Forperiods subsequent to January 1, 2003, the functional currency of theconsolidated financial statements (Russian rubles) are translated into thereporting currency (US dollars) utilizing period-end exchange rates for assetsand liabilities, period average exchange rates for consolidated income statementaccounts and historic rates for equity accounts in accordance with the relevantprovisions of SFAS No. 52. As a result of these translation procedures, acumulative translation adjustment of ($170,495), $214,649 and $171,472 as atDecember 31, 2005, 2004 and 2003, respectively, which accounts for suchtranslation gains and losses, was recorded directly in stockholders' equity. The deferred income tax effect of $145,133 resulting from the change infunctional currency was recorded directly in stockholders' equity as at January1, 2003. The Central Bank of the Russian Federation's closing rates of exchange atDecember 31, 2005, 2004 and 2003 were 1 US dollar to 28.7825, 27.7487 and29.4545 Russian rubles, respectively. The annual weighted average exchange rateswere 28.2864, 28.8150 and 30.6877 Russian rubles to 1 US dollar for the yearsended December 31, 2005, 2004 and 2003, respectively. (c) Consolidation principles These consolidated financial statements include all majority-owned andcontrolled subsidiaries of the Group. All significant intercompany accounts andtransactions have been eliminated. 3 SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies have been applied in thepreparation of the consolidated financial statements. These accounting policieshave been consistently applied by the Group from one reporting period to anotherwith the exception of newly adopted accounting pronouncements. (a) Use of estimates The preparation of financial statements in accordance with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities, disclosure of contingent assets and liabilities at thedate of the financial statements, and revenue and expenses during the periodsreported. Estimates are used when accounting for certain items such asallowances for doubtful accounts; employee compensation programs; depreciationand amortization lives; property, plant, and equipment valuation allowances;asset retirement obligations; legal and tax contingencies; inventory values;valuations of investments and determining when investment impairments are otherthan temporary; goodwill; assets and liabilities assumed in a purchase businesscombinations and deferred tax assets, including valuation allowances. Estimatesare based on historical experience, where applicable,and other assumptions thatmanagement believes are reasonable under the circumstances. Actual results maydiffer from those estimates under different assumptions or conditions. (b) Cash and cash equivalents Cash and cash equivalents comprise cash balances, cash on current accounts withbanks, bank deposits and other highly liquid short-term investments withoriginal maturities of less than three months. (c) Restricted cash Restricted cash comprise funds legally or contractually restricted as towithdrawal. (d) Accounts receivable Receivables are stated at cost less an allowance for doubtful debts. Managementquantifies this allowance based on current information regarding the customers'ability to repay their obligations. Amounts previously written off which aresubsequently collected are recognized as income. (e) Value added tax Value added tax related to sales and services rendered is payable to the taxauthorities upon the collection of receivables from customers. Input VAT isreclaimable against sales VAT upon payment for purchases. VAT related to sales /purchases and services rendered / used which have not been settled at thebalance sheet date (VAT deferred) is recognised in the balance sheet on a grossbasis and disclosed separately as a current asset and liability. Where allowancehas been made for doubtful debts, loss is recorded for the gross amount of thedebtor, including VAT. (f) Inventories Inventories are stated at the lower of acquisition cost inclusive of completionexpenses or market value. Inventories are released to production or written offotherwise at average cost. In the case of manufactured inventories and work inprogress, cost includes an appropriate share of production overheads. The provision for obsolescence is calculated on the basis of slow-moving andobsolete inventories analysis. Such items are provided for in full. (g) Investments in marketable debt and equity securities Marketable debt and equity securities consist of investments in corporate debtand equity securities where the Group does not exert control or significantinfluence over the investee. The Group classifies marketable debt and equitysecurities using three categories: trading, held-to-maturity andavailable-for-sale. The specific identification method is used for determiningthe cost basis of all such securities. Trading securities Trading securities are bought and held principally for the purpose of sellingthem in the near term. Trading securities are carried in the consolidatedbalance sheet at their fair value. Unrealized holding gains and losses ontrading securities are included in the consolidated statement of income. Held-to-maturity securities Held-to-maturity securities are those securities which the Group has the abilityand intent to hold until maturity. Such securities are recorded at amortizedcost. Premiums and discounts are amortized and recorded in the consolidated statementof income over the life of the related security held-to-maturity, as anadjustment to yield using the effective interest method. Available-for-sale securities All marketable securities not included in trading or held-to-maturity areclassified as available-for-sale. Available-for-sale securities are recorded at their fair value. Unrealizedholding gains and losses, net of the related tax effect, are excluded fromearnings and reported as a separate component of accumulated other comprehensiveincome in the stockholders' equity until realized. Realized gains and lossesfrom the sale of available for sale securities, less tax, are determined on aspecific identification basis. Dividend and interest income are recognized whenearned. (h) Investments in associates and non-marketable securities Investments in associates Associates are those enterprises in which the Group has significant influence,but not control, over the financial and operating policies. Investments inassociates are accounted for using the equity method of accounting. Theconsolidated financial statements include the Group's share of the totalrecognized gains and losses of associates from the date that significantinfluence effectively commences until the date that significant influenceeffectively ceases. Investments in non-marketable securities Investments in non-marketable securities where the Group does not exercisecontrol or significant influence over the investee are carried at cost lessprovisions for any other than temporary diminution in value. Provisions arecalculated for the investments in companies which are experiencing significantfinancial difficulties for which recovery is not expected within a reasonableperiod in the future, or under bankruptcy proceedings. (i) Property, plant and equipment Owned assets Items of property, plant and equipment are stated at acquisition cost lessaccumulated depreciation and impairment losses (Note 3(k)). The cost ofself-constructed assets includes the cost of materials, direct labor and anappropriate proportion of production overheads. Property, plant and equipment also includes assets under construction and plantand equipment awaiting installation. Where an item of property, plant and equipment comprises major components havingdifferent useful lives, they are accounted for as separate items of property,plant and equipment. Leased assets Leases that meet the definition of capital leases under the requirements of SFASNo. 13, Accounting for Leases, are classified accordingly. Plant and equipmentacquired by way of capital lease are stated at the lower of its fair value orthe present value of the minimum lease payments at inception of the lease, lessaccumulated depreciation (refer below) and impairment losses (Note 3(k)). Subsequent expenditures Expenditures incurred to replace a component of an item of property, plant andequipment that is accounted for separately, are capitalized with the carryingamount of the component subject to depreciation. Other subsequent expendituresare capitalized only when they increase the future economic benefits embodied inan item of property, plant and equipment. All other expenditures are recognizedas expenses in the consolidated statement of income as incurred. Capitalized interest Interest is capitalized in connection with the construction of major productionfacilities. The capitalized interest is recorded as part of the asset to whichit relates, and is depreciated over the asset's useful life. Mineral rights Mineral rights acquired in business combinations are recorded in accordance withprovisions of SFAS No. 141, Business Combinations, ("SFAS No. 141") at theirfair values at the date of acquisition, based on their appraised fair value. TheGroup reports mineral rights as a separate component of property, plant andequipment in accordance with the consensus reached by Emerging Issues Task Forceon Issue No. 04-2, Whether Mineral Rights Are Tangible or Intangible Assets. Depreciation and amortization Depreciation is charged on a straight-line basis over the estimated useful livesof the individual assets. Plant and equipment under capital leases andsubsequent capitalized expenses are depreciated on a straight-line basis overthe estimated useful life of the individual assets. Depreciation commences fromthe time an asset is put into operation. Depreciation is not charged on assetsto be disposed of or land. The range of estimated useful lives is as follows: Buildings and land and buildings 20 - 45 years improvements Machinery and equipment 2 - 40 years Vehicles 5 - 25 years Mineral rights are amortized using the straight-line basis over the license termgiven approximately even production during the period of license. (j) Goodwill and intangible assets Goodwill represents the excess of purchase price over the fair value of netassets acquired. The Group adopted the provisions of SFAS No. 142, Goodwill andOther Intangible Assets, ("SFAS No. 142") as of January 1, 2002. Under SFAS No.142 goodwill and intangible assets with indefinite useful lives are subject toimpairment test at least annually and on an interim basis when an event occursor circumstances change between annual tests that would more-likely-than-notresult in impairment. Under SFAS No. 142, goodwill is assessed for impairment by using the fair valuebased method. The group determines fair value by utilizing discounted cashflows. The impairment test required by SFAS No. 142 includes a two-stepapproach. Under the first step, companies must compare fair value of a "reporting unit" to its carrying value. A reporting unit is the level at whichgoodwill impairment is measured and it is defined as an operating segment or onelevel below it if certain conditions are met. If the fair value of the reportingunit is less than its carrying value, step two is required to determine ifgoodwill is impaired. Under step two, the amount of goodwill impairment is measured by the amount, ifany, that the reporting unit's goodwill carrying value exceeds its "implied"fair value of goodwill. The implied fair value of goodwill is determined bydeducting the fair value of all tangible and intangible net assets of thereporting unit (both recognized and unrecognized) from the fair value of thereporting unit (as determined in the first step). The Group performs the required annual goodwill impairment test at the end ofeach calendar year. The excess of the fair value of net assets acquired over purchase cost isdetermined as negative goodwill, and is allocated to the acquired non-currentassets, except for deferred taxes, if any, until they are reduced to zero. Intangible assets that have limited useful lives are amortized on astraight-line basis over the shorter of their useful or legal lives. (k) Impairment of long-lived assets Long-lived assets, such as property, plant and equipment, mineral rights andpurchased intangibles, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the estimated undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated undiscounted future cash flows, an impairmentcharge is recognized for the amount by which the carrying amount of the assetexceeds the fair value of the asset, generally determined by reference to thediscounted future cash flows. Assets held for sale that meet certain criteriaare measured at the lower of their carrying amount or fair value less cost tosell. (l) Pension and postretirement benefits other than pensions The Group follows the Pension and Social Insurance legislation of the RussianFederation, which requires contributions to the Russian Federation Pension Fundby the employer calculated as a percentage of current gross salaries. Suchcontributions are expensed as incurred. The Parent Company and some other Group companies have an agreement with anon-Government pension fund (the "Fund") in accordance with which contributionsare made on a monthly basis. Contributions are calculated as a certain fixedpercentage of the employees' salaries. These pension benefits are accumulated inthe Fund during the employment period and distributed by the Fund subsequently.As such, all these benefits are considered as made under a defined contributionplan and are charged to expense as incurred. Accordingly, the Group has nolong-term commitments to provide funding, guarantees, or other support to theFund. In addition, lump sum benefits are paid to employees of a number of the Group'scompanies on retirement depending on the employment period and the salary levelof the individual employee. The scheme is considered as a defined benefit plan.The expected future obligations to the employees are assessed by the Group'smanagement and accrued in the consolidated financial statements, however theseare not material. (m) Asset retirement obligations The Group's land, buildings and equipment are subject to the provisions of SFASNo. 143, Accounting for Asset Retirement Obligations. Based on the currentrequirements under the laws of the Russian Federation and various contractualagreements associated with these assets, the Group has no material commitmentsrelated to the retirement of its long-lived assets. (n) Long-term borrowings Long-term borrowings are recognized initially at cost. Subsequent to the initialrecognition, long-term borrowings are stated at amortized cost with anydifference between cost and redemption value being recognized in theconsolidated statement of income over the period of the borrowings. When borrowings are repurchased or settled before maturity, any differencebetween the amount received and the carrying amount is recognized immediately inthe consolidated statement of income. (o) Commitments and contingencies Contingent liabilities, including environmental remediation costs, arising fromclaims, assessments, litigation, fines, penalties and other sources are recordedwhen it is probable that a liability can be assessed and the amount of theassessment and / or remediation can be reasonably estimated. Estimated losses from environmental remediation obligations are generallyrecognized no later than completion of remedial feasibility studies. Groupcompanies accrue expenses associated with environmental remediation obligationswhen such expenses are probable and reasonably estimable. Such accruals areadjusted as further information becomes available or circumstances change. (p) Income tax Income taxes are accounted for under the asset and liability method. Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to temporary differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards. Deferred tax assets and liabilitiesare measured using enacted tax rates expected to be applied to taxable income inthe years in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period when a different tax rate isenacted. Pursuant to the provisions of SFAS No. 109, Accounting For Income Taxes, theGroup provides valuation allowances for deferred tax assets for which it doesnot consider realization of such assets to be more likely than not. The deferred tax effect associated with the temporary differences that arosefrom the change in the functional currency of the Group (from the US dollar tothe Russian ruble) when Russia ceased to be considered highly inflationary onJanuary 1, 2003, was reflected as an adjustment to the cumulative translationadjustment component of accumulated other comprehensive income on January 1,2003. (q) Dividends Dividends are recognized as a liability in the period in which they aredeclared. (r) Revenue recognition Goods sold Revenue from the sale of goods is recognized in the consolidated statement ofincome when there is a firm arrangement, the price is fixed and determinable,delivery has occurred, and collectibility is reasonably assured. Interest income Interest income is recognized in the consolidated statement of income as it isearned. (s) Expenses Operating lease payments Operating leases are recognized as an expense in the consolidated statement ofincome as incurred. Interest expense All interest and other costs incurred in connection with borrowings are expensedas incurred as part of interest expense, except for interest which is incurredon construction projects and capitalized (Note 3(i)). (t) Non-cash transactions Non-cash settlements represent offset transactions between customers andsuppliers, when exchange equivalent is defined and goods are shipped between theparties without exchange of cash. The related sales and purchases are recorded in the same manner as cashtransactions. The fair market value for such transactions is based on the valueof similar transactions in which monetary consideration is exchanged with athird party. Purchases of property, plant and equipment under capital lease arrangements arealso recognized as non-cash transactions. (u) Recent accounting pronouncements In March 2005, the FASB issued Interpretation No. 47, Accounting for ConditionalAsset Retirement Obligations. The interpretation requires entities to record aliability for the fair value of a conditional asset retirement obligation if thefair value of the liability can be reasonably estimated. The term "conditionalasset retirement obligation" refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The interpretation shall be effective no later than December 31, 2005and early adoption is encouraged. The adoption of this interpretation in 2005did not have a material impact on its consolidated financial statements. In May 2005, the FASB issued Statement of Financial Accounting Standards No.154, Accounting Changes and Error Corrections, ("SFAS No. 154") which replacesAPB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, ReportingAccounting Changes in Interim Financial Statements. This Statement providesguidance on the accounting for and reporting of accounting changes and errorcorrections. It establishes, unless impracticable, retrospective application asthe required method for reporting a change in accounting principle in theabsence of explicit transition requirements specific to the newly adoptedaccounting principle. The Statement shall be effective for accounting changesmade in fiscal years beginning after December 15, 2005. The impact of SFAS No.154 will depend on the accounting change, if any, in a future period. (v) Segment reporting According to SFAS No. 131, Disclosures about Segments of an Enterprise andRelated Information, segment reporting follows the internal organizational andreporting structure of the Group. The Group's organization comprises tworeportable segments: • Steel segment, comprising production and sales of steel products,primarily pig iron, steel slabs, hot rolled steel, cold rolled steel, galvanizedcold rolled sheet and cold rolled sheet with polymeric coatings, • Mining segment, comprising mining, processing and sales of iron ore,fluxing limestone and metallurgical dolomite, which supplies raw materials tothe steel segment and third parties, and other segments, not reported separately in the consolidated financialstatements. The accounting policies of the segments are the same as those described in thesummary of significant accounting policies. 4 CASH AND CASH EQUIVALENTS As at As at As at December 31, December 31, December 31, 2005 2004 2003 Cash - Russian rubles 124,003 269,860 26,927Cash - foreign currency 392,787 2,437 164,659Deposits - Russian rubles 247,724 39,822 98,457Deposits - US dollars 917,670 709,457 435,601Deposits - Euro 214,378 310,782 3,000Other cash equivalents 179 16,257 997 1,896,741 1,348,615 729,641 Other cash equivalents as at December 31, 2004 include a deposit of $16,217 madeas a mandatory condition of participation in a privatization tender andrecovered by the Group on its completion in February 2005. 5 RESTRICTED CASH As at As at As at December 31, December 31, December 31, 2005 2004 2003 Obligatory cash reserves 7,979 5,094 8,104Long-term bank deposit - - 15,000 7,979 5,094 23,104 Restricted cash balances as at December 31, 2005, 2004 and 2003 includeobligatory cash reserves, placed with the Central Bank of the Russian Federationby the subsidiary bank in accordance with statutory requirements applicable tocredit institutions. Restricted cash balance as at December 31, 2003 also includes a US dollardenominated 6.5% bank deposit with a maturity date of October 2006. The Grouppledged this deposit as a guarantee for a related party obligation to a thirdparty. In 2004 the contract of pledge was discontinued due to the termination ofthe underlying obligation. The deposit was recorded within long-term investmentsas at December 31, 2004 (Note 6(e)). 6 INVESTMENTS Balance sheet classification of investments: As at As at As at December 31, December 31, December 31, 2005 2004 2003 Short-term investments and current 27,040 21,153 180,797portion of long-term investmentsLong-term investments 31,470 51,425 39,925 Total investments 58,510 72,578 220,722 (a) Trading securities As at As at As at December 31, December 31, December 31, 2005 2004 2003 Investments in shares 3,990 - 158,280Corporate bonds 7,971 - 3,378Eurobonds 7,759 - 9,630Government bonds 6,401 - -Other 919 1,469 1,146 27,040 1,469 172,434 Investments in shares are represented by the securities of companies which arelisted on the Russian Trade System. These shares and bonds are held by theGroup's subsidiary bank. The income generated from trading securities for the years ended December 31,2005, 2004 and 2003 amounts to $439, $162,874 and $8,436, respectively. TheGroup's future return on such investments is affected by the operatingenvironment of the Group (Note 23(a)). (b) Available-for-sale securities As at As at As at December 31, December 31, December 31, 2005 2004 2003 Russian government and other bondswith annual coupon rates ranging from 3% to 9.4%Acquisition cost 590 2,216 905Gross unrealized gains / (losses) (31) 1,784 1,718Deposit certificates with interestrates ranging from 5.2% p.a. to 20% p.a. - 35,817 29,304 Fair value 559 39,817 31,927 The maturities of debt securities classified as available-for-sale as atDecember 31, 2005, 2004 and 2003 are presented below. As at As at As at December 31, December 31, December 31, 2005 2004 2003 Due within one year - 19,684 8,363Due in one to five years 559 18,619 20,898Due after five years - 1,514 2,666 559 39,817 31,927 Russian Government bonds with a face value $2,908 and $2,908 as at December 31,2004 and 2003, respectively, are pledged to secure the redemption of the ParentCompany's promissory notes issued in 2000. (c) Investments in associates As at As at As at December December December As at As at As at 31, 2005 31, 2004 31, 2003 December December December Ownership Ownership Ownership 31, 2005 31, 2004 31, 2003 CJSC Korpus - - 40.00% - - 3,232CJSC Stalconverst - - 36.80% - - 2,130OJSC AKBLipetskcredit - - 22.19% - - 1,116OJSC Avron - - 26.70% - - 406OJSC LipetskyGipromez 43.44% 43.44% 43.44% 8 8 8OJSC CombinatKMAruda 32.89% - - 16,034 - - 16,042 8 6,892 Provision for other than temporary diminution in value - - (3,652) 16,042 8 3,240 During the year ended December 31, 2005 the Group sold 18% share in OJSCCombinat KMAruda to a third party for $1,966, thereby reducing its stake to32.89%. (d) Non-marketable securities As at As at As at December December December As at As at As at 31, 2005 31, 2004 31, 2003 December December December Ownership Ownership Ownership 31, 2005 31, 2004 31, 2003 Non-marketable securities, net ofcurrent portion:OJSC LebedinskyGOK 11.96% 11.96% 11.96% 9,456 9,808 9,240OJSC Yakovlevskyrudnik - - 9.48% - - 5,797OJSC Lipetskenergo 14.11% 14.11% 12.21% 148 3,388 2,268OJSC Lipetsk powergenerating company 14.11% - - 2,719 - -OJSC Lipetskenergy managementcompany 14.11% - - 0.2 - -OJSC Lipetsk energysales company 14.11% - - 33 - -OJSC Lipetskmains systems 14.11% - - 366 - -OJSC Lipetskoblgaz 19.40% 19.40% 19.40% 712 738 695OJSC AlmetievskyPipe Plant - - 14.53% - - 557OJSC Moscow PipePlant Filit - - 12.00% - - 423Other 788 1,686 708 14,222 15,620 19,688 Provision for other than temporary diminution in value (353) (336) (6,567) 13,869 15,284 13,121 In 2006 the Group sold 11.96% share in OJSC Lebedinsky GOK to a third party for$400 million (Note 26(c)). Shares in OJSC Lipetsk power generating company, OJSC Lipetsk energy managementcompany, OJSC Lipetsk energy sales company and OJSC Lipetsk mains systems wereacquired by the Parent Company due to reorganization of OJSC Lipetskenergo in2005. There was no cash outflow to the Group as a result of this transaction. (e) Long-term bank deposits Long-term bank deposits amounted to $1,000 and $16,000 as at December 31, 2005and 2004. The long-term bank deposit of $15,000 was recorded within restrictedcash as at December 31, 2003 (Note 5). 7 ACCOUNTS RECEIVABLE As at As at As at December 31, December 31, December 31, 2005 2004 2003 Trade accounts receivable 401,770 357,948 245,404Advances given to suppliers 55,589 57,260 23,834Taxes receivable 194,848 157,736 95,634Accounts receivable from employees 1,646 1,192 896Other accounts receivable 18,633 22,765 18,556 672,486 596,901 384,324 Allowance for doubtful debts (12,432) (8,339) (6,578) 660,054 588,562 377,746 As at December 31, 2005 and 2004, the Group had accounts receivable from SteelcoMediterranian Trading Ltd., Cyprus, Tuscany Intertrade (UK) and MoorfieldCommodities Company, UK, each of which exceeded 10% of the gross trade accountsreceivable balances. The outstanding balances owed by these debtors totaled$155,798, $108,670 and $65,748 at December 31, 2005, $140,265, $102,908 and$50,342 at December 31, 2004. As at December 31, 2003 accounts receivable from Steelco Mediterranian TradingLtd., Cyprus and Tuscany Intertrade (UK) exceeded 10% of the gross tradeaccounts receivable balances and totaled $121,658 and $87,272, respectively. 8 INVENTORIES As at As at As at December 31, December 31, December 31, 2005 2004 2003 Raw materials 348,860 333,414 201,610Work in process 109,679 102,692 64,326Finished goods and goods for resale 51,618 47,054 37,813 510,157 483,160 303,749 Provision for obsolescence (8,601) (7,857) (2,446) 501,556 475,303 301,303 9 OTHER CURRENT AND NON-CURRENT ASSETS As at As at As at December 31, December 31, December 31, 2005 2004 2003Other current assetsShort-term loans provided bythe subsidiary bank 163,055 131,267 53,904Other current assets 51,875 20,047 12,781 214,930 151,314 66,685 Allowance for doubtful loans (6,010) (2,566) (3,349) Total other current assets 208,920 148,748 63,336 Other non-current assetsLong-term loans provided by the subsidiary bank 71,138 37,500 21,851Other non-current assets 62,609 30,484 14,983 Total other non-current assets 133,747 67,984 36,834 Weighted average interest rates on loans, provided to companies (including otherbanks) and individuals in 2005 by the subsidiary bank of the Group were 10.7%p.a. for loans denominated in Russian rubles and 12.7% p.a. for foreign currencyloans. 10 PROPERTY, PLANT AND EQUIPMENT As at As at As at December 31, December 31, December 31, 2005 2004 2003 Land 55,575 46,466 35,442Mineral rights 522,802 500,996 -Buildings 708,004 715,759 550,005Land and buildings improvements 757,066 798,892 686,332Machinery and equipment 4,234,424 4,320,088 3,831,976Vehicles 219,431 205,297 105,027Construction in progress and advances forconstruction and acquisition of property,plant and equipment 465,425 254,271 270,574Leased assets - 862 21,819Other 37,229 38,787 7,011 6,999,956 6,881,418 5,508,186 Accumulated depreciation (4,606,407) (4,623,790) (4,175,607) Net book value 2,393,549 2,257,628 1,332,579 According to US GAAP, the Group's property, plant and equipment should bereported at their actual historical depreciated cost. However, due to theabsence of reliable US GAAP accounting records and impairment calculations, thebook value of certain property, plant and equipment was determined with theassistance of an independent appraiser, which management considers provided thebest basis for the recognition and depreciation of such items. The appraiserprovided US dollar estimates of the fair value, determined on the basis ofdepreciated replacement cost, which the Group has recorded as its property,plant and equipment balance as of January 1, 2000. As at December 31, 2005, 2004and 2003, the net book value of these items amounted to 21%, 28% and 49% oftotal net book value of property, plant and equipment, respectively. In August 2005, the Group acquired a license for exploration and mining ofZhernovsky coal deposit, expiring in 2025. The carrying value of this license asat December 31, 2005 is $38,272. The remaining part of mineral rights was acquired by Group in 2004 through abusiness combination (Note 21). They expire January 1, 2016 and managementbelieves that they will be extended at the initiative of the Group. 11 GOODWILL AND OTHER INTANGIBLE ASSETS (a) Goodwill Goodwill Balance as at January 1, 2004 -Acquired in new subsidiaries (Note 21) 173,677Cumulative translation adjustment (Note 2(b)) 6,138 Balance as at December 31, 2004 179,815 Cumulative translation adjustment (Note 2(b)) (6,458) Balance as at December 31, 2005 173,357 Goodwill arising on acquisitions was allocated to the appropriate businesssegment in which each acquisition took place. Goodwill arising from theacquisition of a controlling interest in OJSC Stoilensky GOK amounted to $95,501was allocated to the mining segment. Goodwill related to the acquisition of OJSCTMTP and its subsidiaries of $78,176 was allocated to other non-reportablesegments (Note 22). Negative goodwill of $110,837 generated on acquisitions of minority interest inOJSC Stoilensky GOK was allocated to the acquired assets other than currentassets in accordance with SFAS No. 141. The Group performed a test for impairment of goodwill at December 31, 2005 and2004 which indicated no impairments at such dates. (b) Other intangible assets Gross book Gross book Total useful value as at value as at life, December 31, December 31, months 2005 2004 Customers relationships OJSC TMTP (oil) 66 10,865 11,270Customers relationships OJSC TMTP (dry cargo) 66 12,036 12,484 22,901 23,754 Accumulated amortization (6,246) (2,160) Total intangible assets 16,655 21,594 The intangible assets were acquired in a business combination (Note 21) and metthe criteria for separate recognition outlined in SFAS No. 141. They wererecorded under provisions of SFAS No. 141 at fair values at the date ofacquisition, based on their appraisal. Amortization expenseAggregate amortization expenseFor the year ended December 31, 2005 (4,087) Estimated amortization expenseFor the year ended December 31, 2006 (4,164)For the year ended December 31, 2007 (4,164)For the year ended December 31, 2008 (4,164)For the year ended December 31, 2009 (4,164) 12 ACCOUNTS PAYABLE AND OTHER LIABILITIES As at As at As at December 31, December 31, December 31, 2005 2004 2003 Trade accounts payable 90,637 78,651 65,606Advances received 130,347 127,776 81,447Customers' deposits and accountsin the subsidiary bank 188,265 156,176 55,704Taxes payable other than income tax 18,209 19,044 6,166Accounts payable and accrued liabilitiesto employees 55,945 51,628 33,356Dividends payable 2,572 6,332 -Notes payable 5,282 5,312 2,803Other accounts payable 16,380 10,123 6,605 507,637 455,042 251,687 13 OTHER LONG-TERM LIABILITIES As at As at As at December 31, December 31, December 31, 2005 2004 2003 Customers' deposits in the subsidiary bank 45,377 16,150 4,855Notes payable 16,298 3,796 1,738 61,675 19,946 6,593 14 MINORITY INTEREST Balance as at December 31, 2002 12,891 Minority's share in subsidiaries' income from continuing operations 2,243Issuance of additional stock by subsidiaries to minority stockholders 388Cumulative translation adjustment (Note 2(b)) 1,130 Balance as at December 31, 2003 16,652 Minority's share in subsidiaries' income from continuing operations 19,280Acquisitions of new subsidiaries (Note 21) 49,147Purchase of the minority interest in existing subsidiaries (2,289)Cumulative translation adjustment (Note 2(b)) 2,997 Balance as at December 31, 2004 85,787 Minority's share in subsidiaries' income from continuing operations 28,925Disposal of a stake in a non-wholly owned subsidiary (Note 6(c)) (19,147)Cumulative translation adjustment (Note 2(b)) (2,989) Balance as at December 31, 2005 92,576 15 STOCKHOLDERS' EQUITY (a) Stock In May 2004, the Parent Company made a stock split through an additional issueof 5,987,240,000 common stock with a par value of 1 Russian ruble each. Theseshares were distributed to all existing shareholders of the Parent Company inproportion to their interest held at the date of additional shares distribution.Shareholders are eligible for 1,000 additional shares per share held. Inaccordance with legal requirements the stock split was followed by a transferfrom cumulative retained earnings to capital stock at par value totaling to$206,733. As at December 31, 2005, 2004 and 2003, the Parent Company's share capitalconsisted of 5,993,227,240, 5,993,227,240 and 5,987,240 issued common shares(5,993,227,240 at all the dates given the retrospective effect of the stocksplit), respectively, with a par value of 1 Russian ruble each. For each commonshare held, the stockholder has the right to one vote at the annualstockholders' meeting. In August 2004 the Group increased the statutory reserve of the Parent Companyup to the amount of $10,267 following the change in common stock value. (b) Dividends Dividends are paid on common stock at the recommendation of the Board ofDirectors and approval at the annual Stockholders' Meeting, subject to certainlimitations as determined by Russian legislation. Profits available fordistribution to stockholders in respect of any reporting period are determinedby reference to the statutory financial statements of the Parent Company. AtDecember 31, 2005, 2004 and 2003 the retained earnings of the Parent Company, inaccordance with the legislative requirements of the Russian Federation,available for distribution amounted to $4,137,791, $3,411,114 and $1,855,959,respectively, converted into US dollars using exchange rates at December 31,2005, 2004 and 2003, respectively. The dividend policy, which was approved by a General Shareholders' Meeting onJune 25, 2004, provides for a minimum annual dividend payment of at least 15% ofannual net income and sets an objective of making dividend payments of 25% ofannual net income, as determined in accordance with US GAAP. In May 2005 the Parent Company declared dividends for the year ended December31, 2004 of 1.8 Russian ruble per share for the total of $385,556, includinginterim dividends for the nine months ended September 30, 2004 of 1 Russianruble per share ($214,081). In September 2005 the Parent Company declaredinterim dividends for the six months ended June 30, 2005 of 1 Russian ruble pershare for the total of $210,792. Dividends payable amount to $2,572 at December31, 2005 (Note 12). In 2004 and 2003 the Parent Company declared dividends of 0.6 and 312.5 Russianrubles per share based on the results of 2003 and 2002, respectively, for atotal of $124,834 and $61,675. At the dates dividends were declared, owners of 5,993,227,240 shares wereeligible to receive dividends for all periods mentioned, except the results ofyear 2002, where owners of 5,987,240 shares were eligible (Note 15(a)). 16 INCOME TAX For the year For the year For the year Ended ended ended December 31, December 31, December 31, 2005 2004 2003 Current tax expense 495,521 608,166 236,533 Deferred tax (benefit) / expense:origination and reversal of temporary differences 162 (35,945) (13,498) Total income tax expense 495,683 572,221 223,035 The corporate income tax rate in Russia applicable to the Group was 24% in 2005,2004 and 2003. Income before income tax is reconciled to the income tax expense as follows: For the year For the year For the year ended ended ended December 31, December 31, December 2005 2004 31, 2003 Income before tax 1,876,063 2,364,002 881,734 Income tax at applicable tax rate 450,255 567,360 211,616Increase in income tax resulting from:non-deductible expenses 45,428 4,861 11,419 Total income tax expense 495,683 572,221 223,035 The tax effects of temporary differences that give rise to the deferred taxassets and deferred tax liabilities are presented below: As at As at As at December 31, December 31, December 31, 2005 2004 2003Deferred tax assetsAccounts payable and other liabilities 8,486 6,948 8,659Non-current liabilities 88 222 2,455Accounts receivable 1,066 1,129 1,572Other 381 - -Allowance - (28) - 10,021 8,271 12,686Deferred tax liabilitiesProperty, plant and equipment (272,202) (302,529) (160,021)Intangible assets (4,156) (5,183) -Inventories (12,906) (6,031) (11,145)Other (15,094) - (1,236) (304,358) (313,743) (172,402) Total deferred tax liability (294,337) (305,472) (159,716) An allowance for deferred tax assets is recognized in respect of the temporarydifferences, where it is not probable that future taxable profit will beavailable and therefore realization of these tax assets is doubtful. The deferred tax effect of establishing a new functional currency basis atJanuary 1, 2003 (Note 2(b)) was recorded within the cumulative translationadjustment directly in other comprehensive income within stockholders' equity. At December 31, 2005, $130,253 (December 31, 2004: $155,663) of the deferred taxliability on property, plant and equipment relate to differences between the USGAAP and tax carrying values of property, plant and equipment of the acquiredsubsidiaries. As noted in Note 21(c), the US GAAP carrying value was recorded atfair value on acquisition. 17 EARNINGS PER SHARE Year ended Year ended Year ended December 31, December 31, December 31, 2005 2004 2003Average number of sharesbefore restatement 5,993,227,240 3,948,404,836 5,987,240after restatement 5,993,227,240 5,993,227,240 5,993,227,240Net income (thousands of US dollars) 1,385,336 1,772,501 656,456Basic and diluted net income per share (US dollars) 0.2312 0.2958 0.1095 Basic net income per share of common stock is calculated by dividing net incomeby the weighted average number of shares of common stock outstanding during thereporting period, after giving retroactive effect to any stock splits. In May 2004, the Parent Company made a stock split through an additional issueof 5,987,240,000 common stock with a par value of 1 Russian ruble each (Note 15(a)). Earnings per share data for 2004 and 2003 have been restated to reflectthis share distribution. The average shares outstanding for purposes of basic and diluted earnings pershare information were 5,993,227,240 for the years ended December 31, 2005, 2004and 2003. The Parent Company does not have potentially dilutive shares outstanding. 18 NON-CASH TRANSACTIONS Approximately $7,300, $4,400 and $3,000 of the Group's 2005, 2004 and 2003revenues, respectively, were settled in the form of mutual offset against theliability to pay for raw materials supplied. Prices for goods sold and purchased through non-cash settlement arrangements arefixed in the respective contracts and generally reflect current market prices. In 2004 and 2003, the Group acquired equipment and vehicles under capital leasearrangements with the right to buy out leased assets upon completion of theunderlying agreements. The amount of capital lease liabilities incurred duringthe years ended December 31, 2004 and 2003, was $19,920 and $17,059,respectively. In 2004 the majority of capital lease liabilities were settled(Note 20). In 2004 the Group acquired assets and liabilities as a result of acquisitions ofnew subsidiaries (Note 21). 19 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrumentcould be exchanged in a current transaction between willing parties. Management believes, that the carrying amounts of financial assets andliabilities approximate to a reasonable estimate of their fair value. The fair values of available-for-sale securities are based on quoted marketprices for these or similar instruments. 20 CAPITAL AND OPERATIONAL LEASES At December 31, 2004 and 2003, net book value of the machinery, equipment andvehicles held under the capital lease arrangements with a related party was: As at As at As at December 31, December 31, December 31, 2005 2004 2003 Machinery and equipment - 198 4,620Vehicles - 664 17,199 - 862 21,819 Accumulated depreciation - (87) (1,067) Net value of property, plant andequipment obtained undercapital lease arrangements - 775 20,752 In September 2004, the Group cancelled the majority of its capital leasearrangements and bought out leased assets. The capital lease liability in theamount of $30,625 at the date of cancellation was settled. The difference of$6,656 between the carrying amount of the capital lease liability settled andpurchase price was accounted as an adjustment of the carrying value of theassets. The discount rates used for the calculation of the present value of net minimumlease payments was 14%. Capital lease charges of $3,155 and $3,405 were recordedin the consolidated statements of income for the years ended December 31, 2004and 2003, respectively. The Group incurred expenses in respect of operational leases of $7,347, $6,595and $5,584 in 2005, 2004 and 2003, respectively. 21 BUSINESS COMBINATIONS (a) OJSC Stoilensky GOK In March 2004 the companies under common control of the controlling shareholdersof the Parent Company ("the Companies under common control") transferred to theParent Company 59.8% and in November 2004 - 31.1% of the outstanding commonshares of OJSC Stoilensky GOK. In these consolidated financial statements, theGroup accounted for these transfers retrospectively, in a manner similar topooling by reflecting the controlling shareholders' book value of theiracquisition cost in such transfers of $598,735 as capital contributions. TheGroup transferred cash consideration to such control parties of $636,453 whichis reflected as distributions to controlling shareholders. A part of the primary acquisition cost in the amount of $60,761 representstransaction related fees paid for by the Companies under common control. Theacquisition agreements contain no material future contingent payments orcommitments. The acquisitions resulted in the Group's ownership of 91.4% of thevoting shares of the company. Prior to March 2004 the Group's 0.5% interest inOJSC Stoilensky GOK was accounted for at cost. This transaction was consummated to acquire one of the largest iron-oreconcentrate and agglomerated ore producers in Russia in order to securelong-term supplies of raw materials for the Group. The acquisition of OJSC Stoilensky GOK by the control party was accounted forusing the purchase method of accounting. The entity was consolidated by theGroup for the first time as at the effective date of obtaining control by thecontrol party which management considers to be March 31, 2004. The results ofoperations of the acquired entity were included in the consolidated statement ofincome starting from April 1, 2004. In October and November 2004 the Group acquired, at an auction for sale of astate-owned shareholding and from other minority shareholders, an additional5.6% of the common stock of OJSC Stoilensky GOK for a consideration of $22,793paid in cash. The Group generated positive goodwill of $95,501 on acquisition of thecontrolling stock (59.8%) and negative goodwill $110,837 on subsequentacquisitions. Negative goodwill was allocated to the acquired assets other thancurrent assets in accordance with SFAS No. 141. (b) OJSC TMTP In June 2004 the Group acquired 69.4% of the common stock of OJSC TMTP for aconsideration of $189,172 paid in cash to unrelated parties. The Group alsoobtained control over its subsidiaries OJSC Tuapse Dockyard, OJSCTuapsegrazhdanstroi, LLC Nafta-T and LLC Karavella. The agreement contains nofuture contingent payments or commitments. This transaction was consummated to provide smooth transportation of the Group'sproducts within the respective area of export sales. The acquisition of OJSC TMTP and its subsidiaries was accounted for using thepurchase method of accounting. OJSC TMTP and its subsidiaries were consolidatedfor the first time as of the effective date of obtaining control whichmanagement considers to be June 30, 2004. The results of operations of theacquired entities were included in the consolidated statement of income startingfrom July 1, 2004. (c) Fair values of the assets acquired and liabilities assumed The following table summarizes the fair values of the assets acquired andliabilities assumed in the business combinations, determined in accordance withSFAS No. 141 provisions. The fair values of property, plant and equipment,including mineral extraction rights, and intangible assets were established byindependent appraisers: OJSC OJSC TMTP Stoilensky and its Total GOK subsidiaries acquisitions Current assets 29,197 56,270 85,467Mineral rights 486,880 - 486,880Other property, plant and equipment 223,307 95,545 318,852Intangible assets - 22,712 22,712Other non-current assets 616 1,000 1,616Goodwill (Note 11(a)) 95,501 78,176 173,677 Total assets acquired 835,501 253,703 1,089,204 Current liabilities (49,577) (5,969) (55,546)Non-current liabilities (4,139) (1,208) (5,347)Deferred income tax liability (154,280) (14,184) (168,464) Total liabilities assumed (207,996) (21,361) (229,357) Minority interest (5,977) (43,170) (49,147) Fair value of net assets acquired 621,528 189,172 810,700 Less: cash acquired (1,070) (38,109) (39,179) Fair value of net assets acquired, netof cash acquired 620,458 151,063 771,521 Transfers of subsidiary interests fromcommon control parties reflected ascapital contribution, net of cashreceived of $1,070 597,665 - 597,665 Fair value of net assets acquired from thirdparties, net of cash acquired of $38,109 atOJSC TMTP and its subsidiaries 22,793 151,063 173,856 Fair value of net assets acquired,net of cash acquired 620,458 151,063 771,521 The transfers of subsidiary interests were recorded in the statement ofstockholders' equity as capital contributions of $598,735, comprising $597,665of non-cash contributions and $1,070 of cash owned by the subsidiary at thedates of contributions. The payments to the common control parties for thetransfer of the shares in OJSC Stoilensky GOK of $636,453 were recorded as areduction in stockholders' equity. (d) Other acquisitions In 2004 the Group made a number of immaterial acquisitions of stock in otherGroup's subsidiaries and an immaterial acquisition of the controlling stock inLLC Independent Transport Company from related parties for the totalconsideration of $2,617 (Note 24). (e) Pro forma financial statements The following unaudited pro forma statements of income are presented relating tothe acquisitions by the Group of OJSC Stoilensky GOK and OJSC TMTP and itssubsidiaries (together - "TMTP Group") in the transactions accounted for aspurchases. The unaudited pro forma statements of income are based on theconsolidated statements of income of the Group and TMTP Group and individualstatements of income of OJSC Stoilensky GOK. The unaudited pro forma statements of income combine the results of operationsof the Group, OJSC Stoilensky GOK (acquired by the Group as of March 31, 2004)and TMTP Group (acquired by the Group as of June 30, 2004) for the years endedDecember 31, 2004 and 2003 as if the acquisitions occurred on January 1, 2004and 2003, respectively. These unaudited pro forma statements of income should beread in conjunction with the consolidated financial statements of the Group. Unaudited proforma income statement data for the year ended December 31, 2004and 2003 are as follows: For the year For the year Ended ended December 31, December 31, 2004 2003 Sales revenue 4,620,124 2,720,714Operating income 2,217,107 841,781Income before income tax and minority interest 2,354,558 815,623Income before minority interest 1,781,686 605,035Net income 1,760,792 602,621Net income per share (US dollars) 0.2938 0.1006 The above statements give effect to the following pro forma adjustmentsnecessary to reflect the acquisitions: (a) A depreciation charge and respective deferred tax effect for the periodspreceding business combinations was calculated on the basis of appraised fairvalue of property and equipment, including mineral rights, acquired in newsubsidiaries. (b) An amortization charge and respective deferred tax effect for the periodspreceding business combination was calculated on the basis of appraised fairvalue of intangible assets identified and separated from goodwill in the processof TMTP Group's purchase price allocation. (c) Minority interest in net income of acquired subsidiaries for the periodspreceding business combinations was calculated on the basis of interest owned bythe Group at December 31, 2004. The unaudited proforma amounts are provided for informational purposes only anddo not purport to present the results of operations of the Group had thetransactions assumed therein occurred on or as of the date indicated, nor is itnecessarily indicative of the results of operations which may be achieved in thefuture. 22 SEGMENTAL INFORMATION The Group has two reportable business segments: steel and mining. These segmentsare combinations of subsidiaries, have separate management teams and offerdifferent products and services. The above two segments meet criteria forreportable segments. Subsidiaries are consolidated by the segment to which theybelong based on their products and management. Revenue from segments that does not exceed the quantitative thresholds isprimarily attributable to the two operating segments of the Group. Thosesegments include the trade seaport services business, represented by OJSC TMTPand its subsidiaries, and finance business, comprising banking and insuranceservices to commercial and retail customers. None of these segments has met anyof the quantitative thresholds for determining reportable segments. The Group accounts for intersegmental sales and transfers as if the sales ortransfers were to third parties. The Group's management evaluates performance of the segments based on segmentrevenues, gross profit, operating income and income before minority interest. Segmental information for the year ended December 31, 2005 is as follows: Intersegmental operations and Steel Mining All other Totals balances Consolidated Revenue fromexternal customers 4,174,715 119,496 174,515 4,468,726 - 4,468,726Intersegmentrevenue 4,402 460,579 5,154 470,135 (470,135) -Depreciation andamortization (197,110) (69,354) (17,158) (283,622) - (283,622)Gross profit 1,667,880 318,227 65,939 2,052,046 14,947 2,066,993Operating income 1,518,890 290,904 39,712 1,849,506 10,533 1,860,039Interest income 58,741 10,736 30,249 99,726 (854) 98,872Interest expense (1) (28) (15,916) (15,945) 854 (15,091)Income tax (394,344) (68,093) (14,541) (476,978) (18,705) (495,683)Income beforeminority interest 1,165,120 224,778 44,524 1,434,422 (23,862) 1,410,560Segment assets,including goodwill 4,422,873 1,071,717 706,761 6,201,351 (150,283) 6,051,068Capital expenditures (492,984) (67,467) (12,769) (573,220) - (573,220) Segmental information for the year ended December 31, 2004 is as follows: Intersegmental operations and Steel Mining All other Totals balances Consolidated Revenue fromexternal customers 4,399,606 74,965 64,115 4,538,686 - 4,538,686Intersegmentrevenue 3,365 337,344 204 340,913 (340,913) -Depreciation andamortization (174,646) (59,972) (9,038) (243,656) - (243,656)Gross profit 2,182,293 207,805 20,873 2,410,971 (4,643) 2,406,328Operating income 2,037,325 186,105 18,084 2,241,514 (18,650) 2,222,864Interest income 31,110 2,382 17,236 50,728 (659) 50,069Interest expense (3,326) (443) (9,186) (12,955) 659 (12,296)Income tax (530,694) (40,818) (4,238) (575,750) 3,529 (572,221)Income beforeminority interest 1,639,276 140,813 17,322 1,797,411 (5,630) 1,791,781Segment assets,including goodwill 3,767,196 984,495 654,131 5,405,822 (239,901) 5,165,921Capital expenditures (219,673) (44,541) (5,245) (269,459) - (269,459) Segmental information for the year ended December 31, 2003 is as follows: Intersegmental operations and Steel Mining All other Totals balances Consolidated Revenue fromexternal customers 2,450,193 17,179 650 2,468,022 - 2,468,022Intersegmentrevenue 1,017 23,099 - 24,116 (24,116) -Depreciation andamortization (155,439) (2,054) (316) (157,809) - (157,809)Gross profit / (loss) 1,004,013 4,973 (55) 1,008,931 7,952 1,016,883Operatingincome / (loss) 884,209 2,598 (289) 886,518 (4,244) 882,274Interest income 23,820 - 10,394 34,214 (581) 33,633Interest expense (3,151) (691) (4,083) (7,925) 581 (7,344)Income tax (221,372) (435) (1,228) (223,035) - (223,035)Income beforeminority interest 653,775 2,193 3,504 659,472 (773) 658,699Segment assets 3,022,399 19,431 125,427 3,167,257 (81,992) 3,085,265Capital expenditures (232,955) (2,803) (3,521) (239,279) - (239,279) The allocation of total revenue by territory is based on the location of endcustomers who purchased the Group's products from international traders (Note 23(c)) and the Group. It does not reflect the geographical location of theinternational traders. The Group's total revenue from external customers bygeographical area for the years ended December 31, 2005, 2004 and 2003, was asfollows: For the year For the year For the year ended Ended ended December 31, December 31, December 31, 2005 2004 2003 Russia 1,882,839 1,628,242 1,043,880Asia and Oceania 847,605 628,238 533,987European Union 626,332 783,014 384,139Middle East, including Turkey 571,331 636,044 348,743North America 306,996 657,427 46,354Other regions 233,623 205,721 110,919 4,468,726 4,538,686 2,468,022 Geographically, all assets, production and administrative facilities of theGroup are located in Russia. As disclosed in Note 23(c), the Group sells to three international traders thataccounted for a majority of the Group's export sales in 2005, 2004 and 2003. LLCInsaur-Stal accounted for in excess of 10% of the Group's 2004 and 2003 domesticsales. 23 RISKS AND UNCERTAINTIES (a) Operating environment of the Group The Russian Federation economy continues to display some characteristics of anemerging market. These characteristics include, but are not limited to, theexistence of a currency that is not freely convertible in most countries outsideof the Russian Federation, restrictive currency controls, and relatively highinflation. The tax, currency and customs legislation within the RussianFederation is subject to varying interpretations, and changes, which can occurfrequently. Whilst there have been improvements in the economic trends, the future economicdirection of the Russian Federation is largely dependent upon the effectivenessof economic, financial and monetary measures undertaken by the Government,together with tax, legal and political developments. (b) Convertibility of Russian ruble Exchange restrictions and controls exist relating to converting Russian rublesinto other currencies. At present, the Russian ruble is not a convertiblecurrency outside of the Russian Federation and, further, the Group is requiredto convert 10% of its foreign currency earnings into Russian rubles starting2005 (25% before 2005). Future movements in the exchange rate between theRussian ruble and the US dollar will affect the reported US dollar amountsrelated to the Russian ruble carrying values of the Group's assets andliabilities. Such movements may also affect the Group's ability to realizeassets presented in US dollars in these consolidated financial statements.Accordingly, any translation of ruble amounts to US dollars should not beconstrued as a representation that such ruble amounts have been, could be, orwill in the future be converted into US dollars at the exchange rate shown or atany other exchange rate. (c) Commercial risks The Group minimizes its sales risks by having a wide range of geographical zonesfor sales, which allows the Group to respond quickly to unexpected changes inthe situation on one or more sales markets on the basis of an analysis of theexisting and prospective markets. The Group's exports in monetary terms in 2005 were 58% (2004: 64%, 2003: 58%) ofthe total sales. The Group relies on export sales to generate foreign currency earnings. As theGroup exports a significant portion of its production, it is exposed to foreigncurrency risk as well as global economic and political risks. Due to its foreign currency denominated assets and liabilities, the Group issubject to the risk arising from foreign exchange rate fluctuations. The Group'sobjective in managing its exposure to foreign currency fluctuations is tominimize earnings and cash flow volatility associated with foreign exchange ratechanges. The net foreign currency position as at December 31, 2005 is asfollows: Other US Dollar EURO currenciesCash and cash equivalents 960,508 487,582 -Accounts receivable 286,855 205,741 1,197Other current assets 14,446 - -Investments and long-term deposit 1,559 - -Other non-current assets 27,223 4,465 -Accounts payable and other liabilities (26,863) (15,215) (389)Other long-term liabilities (8,500) - - The Group sells to three international traders that account for the majority ofits export sales. In 2005, Steelco Mediterranean Trading Ltd., Cyprus, TuscanyIntertrade (UK), and Moorfield Commodities Company, UK, purchased 41%, 26% and17% of the Group's export sales, respectively (2004: 43%, 30% and 17%; 2003:45%, 33% and 9%). These companies were indirect shareholders of the ParentCompany during 2003. The maximum shareholdings during 2003 were 7.59%, 9.99% and7.59%, and at December 31, 2003 were 4.16%, 4.11% and 4.16%, respectively. In2004 these companies ceased to be indirect shareholders of the Parent Company.Price fluctuations of sales to these companies are in line with general trendsin global price fluctuations. The Group's export prices are comparable to theprices of Russian competitors. In August 2005, 1.199% of the share capital ofthe Parent Company was acquired by a company beneficially owned by theshareholders of these traders. The Group's future profitability and overall performance is strongly affected bythe prices of ferrous metal products set in the international metal tradingmarket that are subject to significant fluctuations. 24 RELATED PARTY TRANSACTIONS Related parties relationships are determined with reference to SFAS No. 57,Related Party Disclosures. Balances as at December 31, 2005, 2004 and 2003 andtransactions for the years ended December 31, 2005, 2004 and 2003 with relatedparties of the Group consist of the following: (a) Sales to and purchases from related parties Sales Sales to related parties, either the Companies under common control or companiesunder control or significant influence of the Group's management, were $38,436,$45,715 and $24,502 for the years ended December 31, 2005, 2004 and 2003,respectively, which accounts for 0.9%, 1% and 1% of the total sales revenue.Related accounts receivable equaled $33,178, $6,501 and $7,397 as at December31, 2005, 2004 and 2003, respectively. Purchases and services Purchases of raw materials, technological equipment and management services fromthe Companies under common control, were $22,247, $114,255 and $77,216 for theyears ended December 31, 2005, 2004 and 2003, respectively. Purchases of energyfrom the companies under significant influence of the Group's management (OJSCLipetsk energy sales company and other companies, which originated fromreorganization of OJSC Lipetskenergo (Note 6(d)), in 2005, and OJSCLipetskenergo in 2004 and 2003), were $140,005, $106,377 and $85,735 for theyears ended December 31, 2005, 2004 and 2003, respectively. In 2004 and 2003, the Group made payments to one of the Companies under commoncontrol, acting as an agent between the Group and railroad companies, for thetransportation of raw materials and the Group's products. The payments includeboth railroad tariff (transferred to railroad companies), and agent fee,retained by the agent. The agent fee and purchases of other materials from thisCompany under common control amounted to $8,452 and $2,979 for the years endedDecember 31, 2004 and 2003, respectively. Accounts payable to the related parties were $4,152, $2,044 and $7,689 as atDecember 31, 2005, 2004 and 2003, respectively. (b) Financial transactions The subsidiary bank of the Group had loans receivable from related parties,either associates or companies under control or significant influence of theGroup's management, of $10,633, $7,538 and $9,221 as at December 31, 2005, 2004and 2003, respectively. Deposits and current accounts of related parties, either the Companies undercommon control or companies under control or significant influence of theGroup's management, in the subsidiary bank amounted to $88,090, $28,642 and$8,217 as at December 31, 2005, 2004 and 2003, respectively. Deposits and current accounts of Group companies in a bank under significantinfluence of the Group's management (OJSC Bank Zenit) amounted to $70,967 as atDecember 31, 2005 (nil at December 31, 2004 and 2003). Related interest incomefrom these deposits and current accounts for the year ended December 31, 2005amounted to $10,235. The Group leased property, plant and equipment under capital lease arrangementswith one of the Companies under common control. The amount of capital leaseliabilities incurred during the years ended December 31, 2004 and 2003, was$19,920 and $17,059, respectively. The capital lease liabilities to this relatedparty as at December 31, 2004 and 2003 amounted to $545 and $17,677,respectively. The Group granted interest free loans to management in the total amount of $817,$71 and $40 for the years ended December 31, 2005, 2004 and 2003, respectively.The aggregate amount of such loans outstanding as at December 31, 2005, 2004 and2003 was $514, $60 and $38, respectively. As at December 31, 2003, the Group had issued guarantees to the Companies undercommon control amounting to $38,980 in respect of borrowings from non-groupcompanies (Note 25(h)). There were no guarantees issued to related parties as atDecember 31, 2005 and 2004. In 2003 the Parent Company's shareholders repaid remaining portion of thelong-term interest free loan in the amount of $71,415. A gain on the earlyrepayment of the loan in the amount of $20,984 was recognized in theconsolidated statement of income for the year ended December 31, 2003. (c) Acquisitions and investments In 2004 the Companies under common control transferred to the Parent Company91.4% of the outstanding common shares of OJSC Stoilensky GOK. Such transfers of$598,735 were recorded as capital contributions. The Group transferred cashconsideration to such control parties of $636,453 which is reflected asdistributions to controlling shareholders (Note 21(a)). In the second half of 2004 the Group made a number of immaterial acquisitions ofstock in the Group's companies OJSC Dolomit, OJSC StAGDoK, and an immaterialacquisition of the controlling stock in LLC Independent Transport Company fromthe Companies under common control in the total amount of $2,617 (Note 21(d));acquired non-marketable securities, shares in OJSC Lipetskenergo, for $944 fromone of the Companies under common control, and sold non-marketable securities,shares in OJSC Moscow Pipe Plant Filit, OJSC Almetyevsky Pipe Plant and CJSCEngels Pipe Plant, for the total consideration of $2,430 to the Companies undercommon control (Note 6(d)). The Group sold an investment in associate CJSCKorpus to one of the Companies under common control for the consideration of$3,124 (Note 6(c)). In 2003 the Group sold its share in OJSC Coal Mining CompanyKuzbassugol for the consideration of $38,104 to one of the Companies undercommon control. (d) Contributions to non-governmental pension fund and charity fund Total contributions to a non-governmental pension fund amounted to $2,729,$2,607 and $2,216 in 2005, 2004 and 2003, respectively. The Group has the rightto appoint and dismiss top management of the fund as the major contributor toits capital. The Group has no long-term commitments to provide funding,guarantees, or other support to the fund. Contributions to the charity fund controlled by the Parent Company's managementwere $6,941 in 2004. There were no such contributions in 2005 and 2003. (e) Stock-based compensation In August 2005, the controlling shareholder of the Parent Company effectivelysold 200,100,000 of NLMK shares to companies beneficially owned by certainmembers of its Board of Directors and management of the Group. The purchaseprice of these shares was based on the Russian Trade System ("RTS") tradingprice at the date of the transaction. This purchase price is payable by December31, 2006 with no interest charged on the outstanding debt. The respective shareswere pledged to secure the payment. There were no shares under such arrangementsas at and for the years ended December 31, 2004 and 2003. The only movementswhich took place in the year ended December 31, 2005 were as described above. This transaction was achieved through contractual arrangements between companiesowned by the controlling shareholder of the Parent Company and companiesbeneficially owned by certain members of NLMK's Board of Directors andmanagement of the Group, and therefore there was no cash outflow to the Group asa result of this transaction. The Group applied SFAS No. 123, Accounting for Stock-Based Compensation, ("SFASNo. 123") for the purposes of accounting for this transaction, and estimated thefair value of the options at $31,463. Management of the Group estimated that$1,132 of this value related to the services provided by the individuals to theGroup, and accordingly recorded an expense in general and administrativeexpenses in the year ended December 31, 2005, with a corresponding increase instockholders' equity. The arrangement effectively represents the granting ofoptions, at zero consideration, to buy shares at the RTS trading price of theshares on the grant date (in August 2005), the option expiring on December 31,2006. The following assumptions were made in applying the Black-Scholes model inestimating the fair values of the options for the purposes of applying SFAS No.123: risk-free interest rate on Russian dollar-denominated bonds of 4.5%,expected life of 1.33 years, expected volatility of 25.91%, and expecteddividend yield of 4.24%. 25 COMMITMENTS AND CONTINGENCIES (a) Anti-dumping investigations The Group's export trading activities are subject to from time to timecompliance reviews of importers' regulatory authorities. The Group's exportsales were considered within several anti-dumping investigation frameworks. TheGroup takes steps to address negative effects of the current and potentialanti-dumping investigations and participates in the settlement effortscoordinated through the Russian authorities. No provision arising from anypossible agreements as a result of anti-dumping investigations has been made inthe accompanying consolidated financial statements. (b) Litigation The Group, in the ordinary course of business, is the subject of, or party to,various pending or threatened legal actions. The management of the Groupbelieves that any ultimate liability resulting from these legal actions will notsignificantly affect its financial position or results of operations, and noamount has been accrued in the consolidated financial statements. (c) Environmental matters The enforcement of environmental regulation in Russian Federation is evolvingand the enforcement posture of government authorities is continually beingreconsidered. The Group periodically evaluates its obligations underenvironmental regulations. As obligations are determined, they are recognisedimmediately. Potential liabilities, which might arise as a result of changes inexisting regulations, civil litigation or legislation, cannot be estimated butcould be material. In the current enforcement climate under existinglegislation, management believes that the Group has met the Government's federaland regional requirements concerning environmental matters, therefore there areno significant liabilities for environmental damage or remediation. (d) Insurance The Russian insurance market is in a developing stage and some forms ofinsurance protection common in other parts of the world are not yet generallyavailable in the Russian Federation. The Group has entered into insurance contracts to insure property, plant andequipment, land transport, an aircraft and purchased accident and healthinsurance, inter-city motor vehicle passenger insurance and medical insurancefor employees. Furthermore, the Group has purchased operating entities civilliability coverage for dangerous production units. (e) Capital commitments Management estimates the outstanding agreements in connection with equipmentsupply and construction works amounted to $264,903, $52,230 and $6,000 as atDecember 31, 2005, 2004 and 2003, respectively. (f) Social commitments The Group makes contributions to mandatory and voluntary social programs. TheGroup's social assets, as well as local social programs, benefit the communityat large and are not normally restricted to the Group's employees. The Group hastransferred certain social operations and assets to local authorities, however,management expects that the Group will continue to fund certain social programsthrough the foreseeable future. These costs are recorded in the year they areincurred. (g) Tax contingencies Russian tax, currency and customs legislation is subject to varyinginterpretations, and changes, which can occur frequently. Management'sinterpretation of such legislation as applied to the transactions and activityof the Group may be challenged by the relevant regional and federal authorities.Recent events within the Russian Federation suggest that the tax authorities maybe taking a more assertive position in their interpretation of the legislationand assessments, and it is possible that transactions and activities that havenot been challenged in the past may be challenged. As a result, significantadditional taxes, penalties and interest may be assessed. Fiscal periods remainopen to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may coverlonger periods. As at December 31, 2005 management believes that its interpretation of therelevant legislation is appropriate and the Group's tax, currency and customspositions will be sustained. Where management believes it is probable that aposition cannot be sustained, an appropriate amount has been accrued for inthese consolidated financial statements. (h) Financial guarantees issued As at December 31, 2005 and 2004, the Group has issued guarantees to thirdparties amounting to $540 and $1,365. As at December 31, 2003 the Group hadissued guarantees to related parties amounting to $38,980 in respect ofborrowings from non-group companies (Note 24(b)). No amount has been accrued inthe consolidated financial statements for the Group's obligation under theseguarantees as the projected outflows from such guarantees are immaterial. 26 SUBSEQUENT EVENTS (a) Acquisition of DanSteel A/S shares In January 2006, a company under common control outside of the Group transferredto the Parent Company 100% of the outstanding common shares of DanSteel A/S, asteel-rolling company acquired by the common control party in November 2005. TheGroup transferred cash consideration of $104,000 to such control party. Thetransaction value was determined based on an independent appraisal. The consideration paid will be reflected as distribution to controllingshareholders in the consolidated financial statements for the year endingDecember 31, 2006. Carrying values of the assets and liabilities contributedwill be reflected in the consolidated financial statements for the year endingDecember 31, 2006 as capital contribution from controlling shareholders: Current assets 138,257Property, plant and equipment 14,471Intangible assets 2,567Other non-current assets 4,904 Total assets 160,199 Current liabilities (50,300)Non-current liabilities (35,753)Deferred income tax liability (10,164) Total liabilities (96,217) Carrying value of net assets contributed 63,982 In the consolidated financial statements for the three years ending December 31,2006, this business combination will be accounted for retrospectively, as ifthis transaction had taken place in November 2005 (the date of purchase by thecontrolling shareholder). (b) Acquisition of OJSC Combinat KMAruda shares In February-March 2006, the Parent Company purchased from third parties 43.37%of the outstanding common shares of OJSC Combinat KMAruda, and iron oreproducer, for consideration of $60,597. The acquisition resulted in the Group'sownership of 76.26%. These transactions were consummated to improve the upstreamintegration of the Group. The following table summarizes the preliminary fair values of the assetsacquired and liabilities assumed in this business combination, determined inaccordance with SFAS No. 141 provisions. The fair values of property, plant andequipment, including mineral extraction rights, and intangible assets were basedon estimates of independent appraisers (in relation to the 43.37% stakeacquired): Current assets 7,873Mineral rights 18,926Other property, plant and equipment 15,687Other non-current assets 8,849Goodwill 16,836 Total assets acquired 68,171 Current liabilities (1,432)Deferred income tax liability (6,142) Total liabilities assumed (7,574) Fair value of net assets acquired 60,597 (c) Disposal of OJSC Lebedinsky GOK shares In January 2006, the Parent Company sold to third parties 11.96% of theoutstanding common shares of OJSC Lebedinsky GOK for consideration of $400million; carrying value of these shares at December 31, 2005 was $9,456 (Note 6(d)). This transaction was consummated in line with Group's strategy forinvestment management. (d) Acquisition of coal mines and coke plants In March 2006, the Parent Company signed agreements to acquire from thirdparties 82% of the outstanding common shares of OJSC Altai-koks, coke-chemicalplant, and 100% of the outstanding common shares of holding company KuzbassAsset Holdings Limited, Gibraltar, which owns 100% of Prokopievskugol CoalCompany for a consideration of approximately USD 750 million. OJSC Altai-koks is among leading coke-chemical plants in Russia. It produceshigh-quality coke and chemical products. In January - April 2006, the ParentCompany acquired additional 6.18% in OJSC Altai-koks from other minorityshareholders. The acquisitions resulted in the Group's ownership of more than88% of the voting shares of the company. Prokopievskugol Coal Company is the leader in high-grade coking coal productionand processing in the Kemerovo region of Russia. It owns seven mines and threeprocessing plants. These acquisitions were made in line with Group's vertical integration strategy,aiming on additional competitive advantages through the stable supply of key rawmaterials. The acquired companies will be consolidated by the Group for the first time asat the effective date of obtaining control which management considers to beApril 2006. Management considers disclosure of fair values of assets acquired andliabilities assumed in this business combination to be not practicable, giventhe effective date of obtaining control. GLOSSARY AGM or Annual General Meeting The Annual General Meeting of the Company which is scheduled to be held onTuesday 23 May 2006 at 2.00 pm in the London Marriott Hotel, County Hall,Westminster Bridge Road, London SE1 7PB Blast furnace A towering cylinder lined with heat-resistant (refractory) bricks, used byintegrated steel mills to smelt iron from ore. Its name comes from the "blast"of hot air and gases forced up through the iron ore, coke and limestone thatload the furnace. Board or Board of DirectorsThe board of directors of the Company BOF A basic oxygen furnace, which is a pear-shaped furnace, lined with refractory bricks that refines molten iron from the blast furnace and scrap into steel. Capital EmployedThe aggregate of equity attributable to shareholders, minority interests andBorrowings Carbon steel Type of steel generally having no specified minimum quantity of any alloyingelement and containing only an incidental amount of any element other thancarbon, silicon, manganese, copper, sulphur and phosphorus. Coating The process of covering steel with another material (tin, chrome, zinc),primarily for corrosion resistance. Coils Steel sheet that has been wound. A slab, once rolled in a hot-strip mill, can bemore than one mile long; coils are the most efficient way to store and transportsheet steel. Coke The basic fuel consumed in blast furnaces in the smelting of iron. Coke is a processed form of coal. Coking coal Bituminous coal used in the production of steel in basic oxygen furnaces,generally low in sulphur and phosphorous. Cold-rolling Changes in the structure and shape of steel achieved through rolling the steelat a low temperature (often room temperature). It is used to create a permanentincrease in the hardness and strength of the steel. Company or NLMKOJSC Novolipetsk Steel (NLMK) Crude steel Steel in primary form of hot molten metal. DirectorsThe directors of the Company Dollar, $ or USDUnited States dollars, the currency of the United States of America EBITDAEarnings before interest, tax, depreciation and amortisation EPSEarnings per share EPS based on Underlying ProfitEarnings per share based on Underlying Profit is calculated by dividingUnderlying Profit by the weighted average number of ordinary shares of 20 penceeach outstanding during the year. EPTExcess profits tax Finished steel products Steel that has been processed from crude steel into semi-finished steelproducts, such as slabs, or into rolled steel products. Flat-rolled steel/Flat products Category of steel that includes sheet, strip and tin plate, among others. Free Cash FlowNet cash flows from operating activities less sustaining capital expenditure ontangible and intangible assets and investment in mine stripping costs Galvanized steel Steel coated with a thin layer of zinc to provide corrosion resistance inunderbody auto parts, garbage cans, storage tanks, fencing wire, etc. The GroupOJSC Novolipetsk Steel (NLMK) and its subsidiary companies Hot-rolled Product that is sold in its "as-produced" state off the hot-rolling mill with nofurther reduction or processing steps, aside from being pickled and oiled (ifspecified). IFRSInternational Financial Reporting Standards Iron-ore Mineral containing enough iron to be a commercially viable source of the elementfor use in steel making. Iron ore concentrate Iron ore containing the valuable minerals of an ore from which most of the wastematerial has been removed by undergoing treatment. ListingThe listing of the Company's ordinary shares on the London Stock Exchange on December 15th, 2005 LSELondon Stock Exchange Pig Iron An alloy of iron and carbon, with a carbon content in excess of 2.14%, that isproduced in a blast furnace. Reserve That part of a mineral deposit which could be economically and legally extractedor produced at the time of the reserve determination. Rolled steel (products) Steel produced from a semi-finished steel to a desired thickness by being passedthrough a set of rollers. In relation to NLMK, it refers to the variousflat-rolled steel products that we produce, including hot-rolled steel,cold-rolled steel, galvanized steel and electrical steels. ROCEReturn On Capital Employed, defined as profit before taxation, finance items andnegative goodwill over capital employed Semi-finished steel Steel shapes - for example, blooms, billets or slabs - that may later beprocessed into more finished "rolled" products such as sheet. Sheet steel Thin, flat-rolled steel created in a hot-strip mill by rolling a cast slab flatwhile maintaining the side dimensions. The malleable steel lengthens to severalthousand feet as it is squeezed by the rolling mill. The most common differences among steel bars, strip, plate and sheet are merelytheir physical dimensions of width and gauge (thickness). Slab The most common type of semi-finished steel. Traditional slabs measure 18-25centimetres thick, 75-225 centimeters wide and are usually about 6-12 meterslong, while the output of the recently developed "thin slab" casters isapproximately five centimetres thick. After casting, slabs sent to the hot-stripmill to be rolled into coiled sheet and plate products. Strip Thin, flat steel that resembles hot-rolled sheet, but it is normally narrower(up to 30 centimetres wide) and produced to more closely control thicknesses. $/t , USD/tUS dollars per tonne T or tonneA metric tonne, equal to 1,000 kilograms For further information: NLMK Anton Bazulev +7 495 915 1575 Financial DynamicsJon Simmons +44 207 831 3113 This information is provided by RNS The company news service from the London Stock Exchange
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