Gallery Media Holding Ltd. Consolidated Financial …gallerymedia.com/upload/iblock/d32/Gallery...

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Gallery Media Holding Ltd.

Consolidated Financial Statements

Annual Report 2010

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DISCLAIMER Forward Looking Statements This discussion and analysis should be read in conjunction with the the audited consolidated financial statements and the notes thereto of Gallery Out of Home Media Group Ltd. (the “Group”). Some statements in this discussion, including any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance, are not historical facts and are “forward-looking.” The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this discussion. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "believe," "anticipated," "estimated," "intends," "expects," "plans," "seek," "projection" and "outlook." These statements involve known and unknown risks, uncertainties and other factors, and are made based on estimates, assumptions and uncertainties, all of which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to such factors. The factors discussed above, as well as other factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made in this report by us or on our behalf, thus you should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors will emerge in the future, and it is not possible for us to predict such factors. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those described in any forward-looking statements.

Reporting While our presentation currency is US dollars, the functional currencies of our group companies are Russian rubles, Ukrainian hryvnias and US dollars. As at the reporting date, the assets and liabilities of the Group’s subsidiaries are translated into the presentation currency at the rate of exchange ruling at the balance sheet date, and their statement of operations is translated at the weighted average exchange rates for the respective period. The exchange differences arising on the translation are taken directly to a separate component of equity.

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DESCRIPTION OF THE BUSINESS The Group was founded in 1994 as a regional outdoor advertising contractor and has grown, organically and through acquisitions, to become the second largest outdoor advertising contractor in Russia and the Ukraine in terms of number of advertising faces owned. We have in the past pursued complementary acquisitions in markets where we already have operations in order to increase market penetration and operating efficiencies, as well as strategic expansions into new geographic markets and product lines. We offer our clients a comprehensive package of services related to outdoor advertising, including campaign planning and a diverse product and location mix. We have three principal outdoor advertising product lines comprising 33,031 total advertising faces as of 31 December 2010, (as of 31 December 2009: 34,341 total advertising faces). Billboards Billboards include traditional 3x6 meter roadside billboards. As of 31 December 2010, we owned 9,248 and 3,613 billboard advertising faces in Russia and the Ukraine, respectively (as of 31/12/09: 8,978 and 3,556 respectively). Street Furniture We own street furniture in Moscow, several regional cities and the Ukraine. Our primary street furniture formats are directional signs, pedestrian road fences, scrollers, 1.2x1.8 meter city formats and lamp posts. As of 31 December 2010, we owned 15,590 and 2,839 street furniture advertising faces in Russia and the Ukraine, respectively (as of 31/12/09: 17,994 and 2,781 respectively). Transport Until 31 December 2010 Gallery was holder of an exclusive five year advertising agreement with the city of Moscow to place advertising on public surface transport, which gave the right to place advertising on more than 5,000 buses, trolleys and trams and inside more than 7,000 buses, trolleys and trams. As of 31 December 2010, we owned 12,221 transport faces in Russia (as of 31/12/09 12,459) The City has announced an auction for a new five year exclusive adverting agreement on 5 May 2011. Gallery will participate in the auction but there is no guarantee that it will win. Other Displays Our category «Other Displays» includes big sized advertising formats such as Rooftops, Superboards, Supersites, Arches and some other. By the end of the year 2010 we owned 1,482 in Russia and 259 in the Ukraine of such advertising faces (as of 31/12/09: 836 and 196 respectively).

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RESTRUCTURING & FIRST NINE MONTHS OF 2010 UPDATE

1. NEW APPOINTMENT On 1 April 2011, the Board of Directors appointed Dmitry Zaitsev to the post of Chief Executive Officer. Dmitry Zaitsev was born in 1969. He is a Master of Engineering, Finances and Economics. He began his career in Gallery starting from position of Director of St. – Petersburg branch, being as a co-owner of the advertising agency «Remas – City» (Izhevsk), which in 2006 was affiliated to Gallery. Later he was transferred to the headquarter of Gallery in Moscow and was appointed Regional Director, being responsible for the increasing operational effectiveness of all Gallery’s regional offices. For the last 5 years Dmitry Zaitsev has been responsible for operational activities of Gallery and its branches. Before the appointment Dmitry has been working for Gallery at a position of First Deputy CEO

2. ACQUISITIONS & DISPOSALS Starting from 2008, the Group shifted its focus from growth through acquisitions to the integration of previously acquired entities and extracting synergies from the existing portfolio. So the Group did not pursue any new acquisitions during the years of 2009 and 2010. As part of its cash preservation policy in 2009 and 2010 the Group has executed disposals of entities, whose value-in-use in current market conditions was below their eventual selling price. As of 31 October 2008, the Group entered into a revised Shareholder Agreement related to the ultimate ownership of a regional subsidiary Larisa City, of which the Group owned a 50.1% interest. This revised agreement provided for both a put and call option over the remaining 49.9% ownership interest. The exercise price of the option was dependent upon Larisa City’s future earnings, but the agreement stipulated that the price might not be less than $4,000. The $3,093 difference between the value of this put option liability and the carrying amount of the minority interest as of the agreement date was recognized directly in equity in 2008. As of 31 December 2009, the fair value of the financial liability under the put option was $4,000. On 17 March 2010 the Group signed a new agreement with the minority shareholder of Larisa City. According to the new agreement the Group and its minority shareholder became 50 / 50 joint owners of Larisa City and the clause of the put option is removed in the new shareholders agreement. As a result, the Group lost its majority control and as of 17 March 2010 ceased full consolidation of Larisa City and began to account for it as an investment in a joint venture (using equity method) and derecognized the related put option liability. This transaction resulted in a gain of $3,245.

3. OUTLOOK The worldwide global financial crisis has contributed to a significant slowdown in demand for advertising in 2009. Improved market conditions in 2010, combined with the positive effects of on-going comprehensive cost-cutting efforts and a significant deleveraging of the balance sheet, have improved the Group’s liquidity position and will put it on stable financial footing going forward. Following the Restructuring, the Group is now well capitalized and focused on providing best in class service to its customers. We are continuing with our organic growth strategy begun in the second half of last year acquiring attractively priced advertising constructions on an opportunistic basis as they come available. We have also considered the possibility of buying back some of our outstanding bond debt should it become available. During 2010 the overall outdoor advertising spend in Russia was estimated to be $1.1 billion, an overall increase of 18% from 2009. During the first months of 2011 we see this strength in the market continuing and taking into account our own experience plus the estimates of several rating agencies, we believe the outdoor advertising is on track to expand another 15 to 20% in 2011.

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Billboards are still the core of the market, accumulating 48% of total OOH media spendings showed just +14% increase, but large formats having 23% of total outdoor spendings demonstrated the highest growth of +25% among roadside inventory segments. In regions, short gap in price with billboards did not allow street furniture to grow significantly, just +5% (occupancy grew on the key markets) In geographic perspective, Moscow was the most growing market (+21.2%) in 2010 vs 2009, where large formats (+31%) and street furniture (+22%) show the highest increase. Regions were the lowest growth area (+14%). That is because in 2009 Moscow suffered both in occupancy and in prices, but regions in prices only having kept almost pre-crisis occupancy levels. Considering the demand structure - Retail, Telecom, Banks, Travel & Entertainment kept their positions in rating of top OOH spending categories. In 2011 we expect that Retail and Banks would continue growing (based on the results of first months). Beeline, MTS, VW, Nestle and Kraft were the Top-5 OOH advertisers in 2010. There were no significant changes in the positions of outdoor advertisers in 2010. Dramatic clutter, recession implications and uncertainty about prolongation of licenses are the reasons why market participants are holding the investments into significant inventory growth. However, in 2012 after expected clarification in the legislation the significant changes may be expected in the positions of outdoor advertisers both in Moscow and on the regional markets: At the same time there have been setbacks in our transport division. Gallery held an exclusive five year advertising agreement with the city of Moscow to place advertising on public surface transport. This agreement expired as of December 31, 2010. While the Group has been allowed to honor contracts written in 2010 and extending into 2011, it has not been allowed to write new advertising agreements. The City has announced an auction for a new five year exclusive adverting agreement on May 5, 2011. Gallery will participate in the auction but there is no guarantee that it will win. Whether or not Gallery wins the auction for transport in Moscow, we expect the Group’s total revenues, EBITDA, and cash flow to continue to improve substantially from 2010 due to the strong results on our other inventory.

4. LICENSES / IMPAIRMENTS The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Over the next three years the majority of licenses for out-of-home advertising operators in Russia which grant the right to place advertising on their constructions in Moscow and across the country will come up for renewal. According to existing Russian Legislation, upon the expiration of a license, renewal of such license is accomplished through an open auction. As a result, under existing legislation, a significant portion of advertising faces from all out-of-home operators may go to open auction over the next three years. At present, it is not possible to accurately forecast what the effect might be for Gallery or for other operators. The company’s portfolio of licenses may increase or diminish in size, and, their economic attractiveness may be higher or lower than its present portfolio. Gallery’s exclusive license to be the sole provider of advertising on Moscow city public transport expired on December 31, 2010 and was not renewed. The Moscow city organization responsible for transport, “Mosgortrans,” in April announced that the transport advertising license would go to an open auction to be held May 5. The minimum fees payable to secure a new license are in excess of fees paid by Gallery for the previous license. The minimum fees are not insignificant relative to the total expected revenues that could potentially be earned over

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the five-year period of the license term. During 2010 transport revenues under the previous contract were less than 4% of company revenues. The operating income contribution from these assets represented an even smaller percentage of total operating income. If the Company is not successful in gaining a license renewal at terms satisfactory to the Company, the Company nevertheless believes that it will meet its overall revenue and EBITDA 2011 budget targets for the year. Based on the experience with Mosgortrans and other available information, it has become apparent that there is substantial uncertainty over the terms and conditions of future licenses that might be available to the Group and other outdoor operators in the future. Due to this uncertainty, the company has determined that assigning an indefinite life to its portfolio of licenses is no longer the most appropriate valuation method for its licenses. Instead the Company will begin to amortize the value of licenses over the remaining license period beginning January 1, 2011. This change will be accounted for prospectively as a change in estimate. As of December 31, 2010 the combined value of these licenses represented on the Company’s balance sheet was approximately $85 million. The Group estimates that over 95% of this amount will be amortized over the next three years.

5. DEBT BUY BACK The Company or one or more of its affiliates may, at their discretion, at any time and from time to time purchase the Company’s outstanding debt (including the Senior Secured Notes) in the open market or otherwise.

6. RESTRUCTURING On 18 August 2010, the Group completed the restructuring of its financial liabilities in accordance with the agreement reached on 6 October 2009 with a Committee representing the majority of holders of the $175 million 10.125 % senior secured notes due 2013 (“Committee”). The Restructuring was implemented by way of two schemes of arrangement in the English courts (“Schemes”). The Schemes were approved by the Scheme Creditors on 18 May 2010 and sanctioned by the High Court of Justice of England and Wales at a fairness hearing held on 26 May 2010. Under the terms of the Restructuring, the total indebtedness of the Group was reduced from $342.2 million to $100.3 million, leaving PIK loan outside the legal structure of the New Group, while holders of $161.5 million face value of the senior secured notes received 68% of the equity in a new holding company, Gallery Media Holding Limited, and 90% of $100.3 million of 10% new notes due 2015 (”New Notes”). $13.5 million face value of old senior secured notes held by Group were cancelled as part of the Schemes. Funds advised by Baring Vostok Capital Partners Limited and a company owned by Anatoly Mostovoy have invested an additional $5.0 million in Gallery Media Holding Ltd. and will continue to provide ongoing support to the new Group in return for 30% of the equity of Newco and $10.0 million of the New Notes. The Committee allocated 2% of Newco equity to a third party who assisted the negotiating process in the lead up to the Restructuring.

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MANAGEMENT DISCUSSION AND ANALYSIS OF AUDITED CONSOLIDATED FINANCIAL STATEMENTS The following discussion of the Group’s financial position and results of operations should be read in conjunction with the audited consolidated financial statements for the year ended 31 December 2010 and the related notes thereto, as well as other financial information included elsewhere in this document. The audited consolidated financial statements for the year ended 31 December 2010 have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial Highlights In $ thousands Year ended Year ended

31-December-2010 31-December-2009 Revenues 132,893 105,479 Gross Profit 54,627 29,386 EBITDA 31,278 * 11,365 EBITDA margin 24% 11%

Capitalization In $ thousands 31 December 2010 31 December 2009 Senior Secured Notes1 101,908 179,930 PIK Loan2 - - Total Gross debt 101,908 179,930 Total debt/LTM EBITDA 3.4X 15.8X *before loss on restructuring recognized on 18/08/10 in the amount of $5,837 1 The amounts are measured based on principal amounts of obligations plus accrued interest 2 On 26 July 2007, Gallery Out of Home Media Ltd. (the former parent company of the Group) entered into a term loan facility agreement (“PIK Loan”) with a number of international financial institutions for the total amount of $95,271 (net of transaction costs of $4,729). In the financial statements of Gallery Out of Home Media Ltd. PIK Loan has been accounted for at amortized cost using the effective interest rate method and had a carrying value of $135,389 and $116,954 as of 31 December, 2009 and 2008, respectively. The financing received by Gallery Out of Home Media Ltd. in the form of PIK Loan has been subsequently contributed to Gallery Media Group Ltd. without any contractual obligation for repayment. Therefore, at the level of Gallery Media Holding Ltd. the amount of $95,271 has been treated as equity contribution from the earliest period presented.

Interest accrued on PIK Loan in the financial statements of Gallery Out of Home Media Ltd. in the amount of $40,118 as of 31 December 2009 was eliminated in these consolidated financial statements.

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EBITDA Reconciliation to Net Profit In $ thousands Year ended 31-

December-2010 Year ended 31-December-2009

Net loss (3,602)

(117 785)

Add back: Income tax (benefit)/expense 2,711 (17,020) Loss/(gain) on disposal of property, equipment and intangible assets

3,548 2,180

Debt restructuring costs 5,837 - Gain on disposal of subsidiaries (229) (566) Impairment loss - 88,422 Finance income (1,111) (801) Finance costs 16,903 36,127 Depreciation & amortization 7,919 14,705 Effect of foreign exchange movement (698) 6,103 EBITDA 31,278* 11,365 *before loss on restructuring recognized on 18/08/10 in the amount of $5,837 REVENUES Total revenues for the year 2010 increased by 26% in total compared to the same period of the last year. The underlying reason is the recovery of the economy after worldwide global financial crisis resulting in the increase of demand for advertising and the Group’s efforts in attraction of strategic customers. Along with the market recovery another significant reason for increase of reported revenues is the appreciation of Russian national currency to US dollar by 4,5% compared to the average exchange rate for the same period in 2009. In $ thousands Year ended

31-December-2010 Year ended

31-December -2009 Revenues on own boards 103,697 87,443 Media buying revenues 29,196 18,036 Total revenues 132,893 105,479 Revenues on own boards Revenues from own boards increased by 19% when comparing 2010 to 2009. The main reasons were growth of occupancy rate of own faces compared to the prior year. Media buying revenues Revenues from subcontracted advertising faces increased by 62% for the year 2010 comparing 2009. The increase in media buying revenue was principally due to escalating demand for national advertising campaigns. Seasonality The Group’s business generally experiences seasonality over the course of the calendar year with respect to occupancy rates. In prior years, the lowest rates of occupancy for our advertising faces were in the months of January, February, March and August. This seasonality trend reflects reduced advertising spending in the first quarter being the lowest in terms of occupancy following the Christmas holiday season and in the third quarter due to summer school holidays. In the last five years, the Group’s business has generally experienced this seasonality trend. In those months when occupancy rates are lower, the Group works to satisfy its social advertising requirements by placing a larger amount of social advertising than in other months.

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COST OF REVENUES

In $ thousands Year ended 31-December-2010

Year ended 31-December -2009

Subcontractors fees 24,679 14,947 City fees and permits 18,413 22,736 Maintenance and repair expenses 14,331 11,708 Payroll of production personnel 10,126 9,946 Depreciation 5,719 10,080 Electricity 2,113 2,071 Warehouse expenses 1,246 1,412 Transportation expenses 928 934 Other 711 2,259 Total 78,266 76,093

Subcontractor fees The most significant part of our cost of revenues are fees paid to subcontractors. In the years ended December 31, 2009 and 2010, subcontractors fees represent 31,5% and 19,6%, respectively, out of total cost of revenue. In most cases, when we place advertising on subcontracted advertising faces, we recognize revenues for payments made to us by our clients. We than pay subcontractors a fee for use of their advertising faces, which is generally 80-85% of revenues invoiced to the customers. In 2010 subcontractor fees increased by 65% in conjunction with increase of media buying revenues. The margin between media buying revenues and subcontractor fees was 15% for year 2010 in comparison with 17% for the same period of 2009 which is caused by increased total amount of subcontracted revenues. City fees and permits City fees and permits is the second largest component of our cost of revenue. This item includes payments made to landowners (principally municipalities), building owners and advertising agreements for the right to place advertising displays on the property or buildings owned by third parties. City fees have decreased by 19% constituting now 24% of total cost of revenues versus 30% during year 2009. Decrease of city fees is mainly associated with the 30% discount granted by the Moscow government for placing social advertizing at the Group’s faces The discount was initially provided in May 2009 and was effective until 30 June 2010. Starting from July 2010 it was revised to 20% effective until 31 December 2010. Maintenance and repair expenses Maintenance and repair expenses include cost of materials and spare parts for the day to day maintenance and monitoring of advertising structures, materials for posting and servicing the units as well as outsourcing fees to perform maintenance and repairs on our advertising displays during peak demand periods. Maintenance and repair expenses increased by 22% compared to year 2009 mainly reflecting the growth of revenues. Payroll of technical personnel The USD reported Payroll expense increased 2% in comparison with 2009, when the Group has undertaken voluntary personnel reduction within implementation of cost saving policy. In RUB terms Payroll expenses increased by 4%in comparison with year 2009. Depreciation This expense category includes depreciation of fixed assets. The decrease in depreciation and amortization expense by 43% is mainly associated with the previous impairment of fixed assets as of 31 December 2009. Other Other expenses consist primarily of agency commissions, which fell by 69% compared to the year 2009 due to Group’s focus to work with direct clients in the customer base.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Year ended Year ended In $ thousands 31-December-2010 31-December -2009 Payroll 19,246 18,514 Bad debt expense 1,548 1,472 Office rent and related expenses 2,225 2,967 Depreciation and amortization 2,200 4,625 Audit and consulting expenses 1,824 1,375 Taxes other than profit tax 891 1,098 Communication expense 846 733 Advertising and marketing expenses 611 321 Business trip and representative expenses 420 310 Transportation expenses 277 264 Security expenses 225 217 Other 334 1,523 Total 30,647 33,419

Payroll Payroll expenses (incl. UST) increased by 4% in USD terms for year 2010 comparing to 2009, which is associated with the depreciation of USD against RUB. The change in RUB remained flat. Bad debt expense Despite the implementation of effective procedures to collect outstanding receivables, the Group has recorded 148% increase in bad debt expense which was associated with written-down receivables identified as non-recoverable in the process of reorganization of the Group legal structure. Office rent and related expenses The decrease in the office rent expense by 25% came as a result of the Company’s efforts to renegotiate terms with various landlords, who provided significant discount on the basis of economic recession, and its ability to sublet a portion of its Moscow headquarters to third parties. Depreciation and amortization This expense category includes depreciation of non-production fixed assets and amortization of intangible assets consisting primarily of software, tender fees and long-term contracts. The decrease of this category of expense by 52% is associated with the previous impairment of these assets as of 31 December 2009.

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OTHER KEY EXPENSES Gain from disposal of subsidiary On 17 March 2010 the Company signed the agreement with the minority shareholder of Larisa City. According to the agreement the Company and its minority shareholder become joint owners of Larisa City. As a result, the Group lost control over Larisa City as at 17 March 2010. Starting from that date the Group ceased consolidation of Larisa City, began further accounting as an investment in joint venture. This transaction resulted in a gain of $3,245. Restructuring loss During the reporting period the Group has recognized a loss from its debt extinguishment in the amount of $5,837 which consists of the effects from debt-to-debt and debt-to-equity conversion of the Group’s financial liabilities (Senior Secured Notes) and previously capitalized restructuring expenses. Finance costs Finance costs decrease by 10% compared to year 2009 is due to the Group started to accrue interest on a smaller principal amount of the New Notes, which was reduced from $161.5m to $100.3m upon completion of debt restructuring. Net foreign exchange gain Foreign exchange gains or losses arise when transactions are denominated in a currency different from the operational unit’s functional currency. As the US dollar appreciated by 1% against the ruble during the year 2010, the Group recognized a loss of approximately $0.72 million due primarily to the devaluation of the principal amount of the Senior Secured debt to be repaid by the Group’s main Russian subsidiary.

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PERFORMANCE ANALYSIS The Group measures its performance using certain indicators. With respect to the consolidated statement of operations, the Group uses three key indicators: Gross Profit Gross profit is calculated as revenues less cost of revenues. Gross profit increased to $54.6 million for the year of 2010 from $29.4 million in 2009 principally as result of significantly increased revenues, market recovery and fixed nature of the Group’s costs. EBITDA EBITDA is defined as net profit plus income tax expense (or minus benefit), plus net interest expense, plus loss (or minus gain) on disposal of subsidiaries or property and equipment or impairment losses, plus depreciation of property and equipment and amortization of intangibles and plus non-cash share-based payments. In addition, we adjust the calculation for foreign currency exchange differences resulting from debt held in foreign currencies at the operating level. Other companies may calculate EBITDA differently. We believe that EBITDA is useful to investors as a measure of operating performance because it eliminates variances caused by the amounts and types of capital employed and amortization policies and helps investors evaluate the performance of our underlying business. We also believe that EBITDA is a measure commonly used by analysts and investors in the outdoor advertising industry. The Group’s EBITDA for the year 2010 was $31.3 million, which increased by $19.9 million from $11.4 million earned by the Group during the same period in the prior year. CASH FLOW During the year 2010, cash flow from operations increased to $29.0 million in contrast to $13.9 million in 2009. Cash used in investing activities of $9.6 million was mainly spent for fixed assets and expansion projects. Cash used in financing activities of $3.4 million was mainly spent on restructuring expenses $8.4 million which was offset by $5 million cash contribution from shareholders upon completion of debt restructuring. The overall cash increase for the year amounted to $15.5 million, or $16.0 million before the effect of exchange rate change on cash flows.

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Key Performance Indicators Revenues breakdown In $ thousands

Year ended 31-December-2010

Year ended 31-December -2009

RUSSIA Billboards 44,587 37,119 Street Furniture 27,736 25,533 Other Transport

19,595 4,965

14,669 5,277

Total 96,883 77,320 UKRAINE Billboards 4,444 3,339 Street Furniture 1,443 831 Other 922 675 Total 6,814 4,845 Revenues on Own Boards 103,697 82,165 Media Buying - Russia 27,464 15,495 Media Buying - Ukraine 2,104 2,541 Media Buying Revenues 29,196 18,036 GRAND TOTAL 132,893 105,479 Number of Advertising Faces

31-December-10 31-December-09

Formats Russia Ukraine TOTAL Russia Ukraine TOTAL Billboards 9,248 3,613 12,861 8,978 3,556 12,534 Street Furniture 15,590 2,839 18,429 17,994 2,781 20,775 Transport * 12,221 - 12,221 12,459 - 12,459 Other 1,482 259 1,741 836 196 1,032 Total 38,451 6,711 45,252 40,637 6,533 47,170 Total without Transport 26,230 6,711 33,031 28,178 6,533 34,711

Occupancy 4Q2010 3Q2010 2Q2010 1Q2010 4Q2009 3Q2009 2Q2009 1Q2009 4Q2008 RUSSIA Billboards 89% 89% 87% 76% 85% 78% 78% 57% 83% Street Furniture 77% 81% 74% 70% 74% 75% 75% 72% 76% Transport & Other n/a n/a n/a n/a n/a n/a n/a n/a n/a UKRAINE Billboards 63% 57% 49% 67% 77% 50% 49% 38% 80% Street Furniture 32% 41% 45% 68% 55% 34% 35% 41% 39% Transport & Other n/a n/a n/a n/a n/a n/a n/a n/a n/a * Gallery’s 5-year agreement for transport advertising in Russia has expired as of December 31, 2010.


Consolidated financial statements

31 December 2010


Consolidated financial statements

31 December 2010

Contents

Independent auditors‟ report ...................................................................................................... 1 Consolidated statement of financial position .............................................................................. 3 Consolidated income statement ................................................................................................. 4 Consolidated statement of comprehensive income .................................................................... 5 Consolidated statement of changes in equity ............................................................................ 6 Consolidated statement of cash flows ........................................................................................ 7 Notes to consolidated financial statements ................................................................................ 8

A member firm of Ernst & Young Global Limited

Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, 115035, Russia Tel: +7 (495) 705 9700 +7 (495) 755 9700 Fax: +7 (495) 755 9701 www.ey.com

ООО «Эрнст энд Янг» Россия, 115035, Москва Садовническая наб., 77, стр. 1 Тел: +7 (495) 705 9700 +7 (495) 755 9700 Факс: +7 (495) 755 9701 ОКПО: 59002827

Independent auditors’ report To the Shareholders of Gallery Media Holding Ltd. We have audited the accompanying consolidated financial statements of Gallery Media Holding Ltd. and its subsidiaries (“the Group”), which comprise the consolidated statement of financial position as at 31 December 2010, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group and its subsidiaries as at 31 December 2010, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

29 April 2010


Consolidated statement of financial position

As at 31 December 2010

(Thousands of US dollars)

The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements.

3

Notes 2010 2009

(Note 1, 7)

Assets Non-current assets Intangible assets 8 85,071 89,068 Property and equipment 7 30,215 31,754 Investment in joint venture 13 1,002 – Advances issued 10 1,856 3,800

Total non-current assets 118,144 124,622

Current assets Trade and other receivables 11 18,057 16,022 Advances issued and prepaid expenses 10 8,532 13,763 Inventory 1,280 1,088 Other current assets 3,871 4,032 Cash and cash equivalents 12 44,260 28,714

Total current assets 76,000 63,619

Total assets 194,144 188,241

Equity and liabilities Equity attributable to equity holders of the parent Share capital 14 0.005 100 Additional paid-in capital 14,15 283,281 202,675 Accumulated deficit (222,385) (218,883) Foreign currency translation (19,898) (19,858)

Total equity 40,998 (35,966)

Liabilities Non-current liabilities Loans and borrowings 15 100,308 15 Deferred income tax liabilities 17 14,391 12,653 Other non-current liabilities 15 –

Total non-current liabilities 114,714 12,668

Current liabilities Trade and other payables 16 15,556 14,399 Deferred revenues and advances from customers 16,770 13,982 Put option liability 5 – 4,000 Taxes payable 17 4,302 4,232 Loans and borrowings 15 1,672 174,808 Other current liabilities 132 118

Total current liabilities 38,432 211,539

Total equity and liabilities 194,144 188,241


Consolidated income statement

For the year ended 31 December 2010



4

Notes 2010 2009

(Note 1)

Revenues 132,893 105,479 Cost of revenues 18 (78,266) (76,093)

Gross profit 54,627 29,386 Selling, general and administrative expenses 19 (30,647) (33,419) Loss due to restructuring 1,15 (5,837) – Loss on disposal of property and equipment and intangible assets (3,548) (2,180) Gain on disposal of subsidiaries 6 229 566 Impairment loss – (88,422) Finance income 20 1,111 801 Finance costs 20 (16,903) (17,692) Net foreign exchange loss (729) (6,149) Other operating income 744 739 Net result from joint venture 13 62 –

Loss before income tax expense (891) (116,370)

Income tax (loss)/benefit 21 (2,711) 17,020

Loss for the year (3,602) (99,350)


Consolidated statement of comprehensive income




5

Note 2010 2009

(Note 1)

Loss for the year (3,602) (99,350)

Other comprehensive (loss) / income Exchange difference on translation of foreign currencies (40) 614

Other comprehensive (loss) / income for the year, net of tax (40) 614

Total comprehensive loss for the year (3,642) (98,736)

Attributable to:

- equity holders of the parent (3,642) (98,736) - non-controlling interests – –

(3,642) (98,736)


Consolidated statement of changes in equity




6

Attributable to equity holders of the parent

Notes Share capital

Additional paid-in capital

Accumulated deficit

Foreign currency

translation Total equity

Balance as at 31 December 2008 1 100 202,675 (119,533) (20,472) 62,770

Loss for the period – – (99,350) – (99,350)

Other comprehensive income – – – 614 614

Total comprehensive income – – (99,350) 614 (98,736)

Balance as at 31 December 2009 1 100 202,675 (218,883) (19,858) (35,966)

Loss for the period – – (3,602) – (3,602)

Other comprehensive loss – – – (40) (40)

Total comprehensive income – – (3,602) (40) (3,642)

Changes in equity resulting from debt restructuring 1,15 (100) 75,606 100 – 75,606

Contribution from shareholders 14 – 5,000 – – 5,000

Balance as at 31 December 2010 0.005 283,281 (222,385) (19,898) 40,998


Consolidated statement of cash flows




7

For the year ended

31 December

Notes 2010 2009

(Note 1)

Cash flows from operating activities (Loss)/profit before income tax expense (891) (116,370) Adjustments for:

Depreciation of property and equipment 18,19 6,116 10,722 Amortization of intangible assets and other assets 19 1,803 3,983 Finance income 20 (1,111) (801) Net result from joint venture 13 (62) Finance costs 20 16,903 17,692 Bad debt expense 19 1,548 1,472 Loss on disposal of property and equipment 3,548 2,180 (Gain)/loss on disposal of subsidiaries 5 (229) (566) Impairment loss 9 – 88,422 Net foreign exchange loss 729 6,149

Changes in operating assets and liabilities: Change in trade and other receivables (6,308) 1,938 Change in other assets 675 (2,082) Change in advances issued and prepaid expenses 4,256 6,229 Change in trade and other payables 1,436 (2,827) Change in deferred revenues and advances from customers 2,894 (2,450) Change in taxes payable, other than income tax 222 2,531

Cash generated from operations 31,529 16,222

Income taxes paid (1,532) (1,275) Imputed tax paid – (1,639) Interest paid (2,075) – Interest received 1,050 592

Net cash flows from operating activities 28,972 13,900

Cash flows from investing activities Payments for property, equipment and other assets (10,024) (7,090) Proceeds from sale of subsidiaries, net of transaction costs 5 – 1,152 Proceeds from disposal of property and equipment 300 17 Dividends received from joint venture 13 131 –

Net cash flows used in investing activities (9,593) (5,921)

Cash flows from financing activities Purchase of Senior Secured Notes – – Payments under finance leases (8) (4,878) Payments for restructuring 1 (8,400) (9,836) Dividends paid to minority interests – – Repayment of borrowings (11) – Proceeds from shareholders 5,000 –

Net cash flows used in financing activities (3,419) (14,714)

Effect of exchange rate changes on cash & cash equivalents (414) (625)

Net increase in cash and cash equivalents 15,546 (7,360) Cash and cash equivalents at 1 January 12 28,714 36,074

Cash and cash equivalents at 31 December 12 44,260 28,714


Notes to the consolidated financial statements



8

1. Corporate information These consolidated financial statements are the first annual IFRS financial statements issued by the Group (as defined herein) after completion of its restructuring started in 2009 in accordance with the agreement reached on 6 October 2009. As a result of restructuring the legal structure of the reporting group changed as follows:

• The former parent of the Group, Gallery Out of Home Media Ltd. (or “GHOM”) and intermediate parent of the Group, Gallery Media Group Ltd. were left outside the new legal structure;

• The new holding company Gallery Media Holding Ltd., has been established on top of the operating companies of the Group;

• The Group significantly simplified its legal structure. These consolidated financial statements include the financial statements of Gallery Media Holding Ltd. and its subsidiaries (together referred to as the “Company” or the “Group”) and are presented as a continuation of Gallery Media Group Ltd.‟s financial statements using the pooling of interests method. The parent company, Gallery Media Holding Ltd., is an international business corporation registered under the laws of the British Virgin Islands on 3 March 2010. The registered address of Gallery Media Holding Ltd. is at the premises of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. The principal activities of the Group are described in Note 6. The principal subsidiaries consolidated within the Group, and the share of voting interest held by the Group, are as follows:

Name of company Country of

incorporation Nature of business 2010

ownership 2009

ownership

European Capital S.A. Luxemburg Special Purpose Entity – Issuer of

New Senior Secured Notes 0% 0%

Gallery Capital S.A Luxemburg Special Purpose Entity – Issuer of

Old Senior Secured Notes 0% 0%

Gallery Service LLC Russia Operating Company 100% 100%

Westdia Media LLC Russia Operating Company 100% 100%

Westdia Media Technik LLC Russia Operating Company 100% 100%

Octagon Outdoor LLC Ukraine Operating Company 100% 100%

The consolidated financial statements of the Group were authorized for issue by the Group‟s management on 29 April 2011.


Notes to the consolidated financial statements (continued)

9

1. Corporate information (continued) Restructuring On 12 May 2006, Gallery Capital S.A (a special purpose entity organized under the laws of Luxemburg) issued Senior Secured Notes, guaranteed on a senior basis by Gallery Media Group Ltd. and certain of its subsidiaries (“Old notes”). The Old notes had interest rate of 10.125% per annum and maturity on 15 May 2013. Interest on the Old notes was payable on 15 May and 15 November of each year, beginning on 15 November 2006. In May 2009, the Group determined to postpone the interest payment due 15 May 2009 and initiated debt restructuring negotiations with the noteholders. As a result on 18 August 2010, the Group successfully completed the restructuring of its financial liabilities in accordance with the agreement reached on 6 October 2009 with a committee representing the majority of holders of the Old notes. The restructuring was implemented by way of two schemes of arrangement in the English courts (“Schemes”). The Schemes were approved by the Scheme Creditors on 18 May 2010 and sanctioned by the High Court of Justice of England and Wales at a fairness hearing held on 26 May 2010. Under the terms of the Restructuring the Old notes were converted to debt and equity of Gallery Media Holding Ltd., where holders of $161,490 face value of Old notes (with carrying value of $187,991 as of the date of restructuring) received 68% of the equity in Gallery Media Holding Limited, and 90% of $100,308 of 10%-bearing New Notes, issued by European Media Capital S.A. due 2015 (”New Notes”). $13,510 face value of old senior secured notes held by the Group were cancelled as part of the Schemes. The remaining 10% of New notes were distributed between existing owners of the Group, represented by Baring Vostok Capital partners and a company controlled by Anatoly Mostovoy. 2% of the Gallery Media Holding Ltd.‟s equity has been allocated to a third party who assisted the negotiating process in the lead up to the restructuring. The remaining 30% of Gallery Media Holding Ltd.‟s equity were kept by existing owners of the Group. Comparative financial information As discussed above, these consolidated financial statements are presented as a continuation of Gallery Media Group Ltd.‟s financial statements using the pooling of interests method. Therefore, the comparative information in these consolidated financial statements has been derived from previously issued IFRS consolidated financial statements of Gallery Out of Home Media Ltd., immediate parent of Gallery Media Group Ltd. The bellow reconciliation outlines the difference between the consolidated financial statements of Gallery Out of Home Media Ltd. as at 31 December 2009 and the comparative information presented in these consolidated financial statements:

1. On 26 July 2007, Gallery Out of Home Media Ltd. (the former parent company of the Group) entered into a term loan facility agreement (“PIK Loan”) with a number of international financial institutions for the total amount of $95,271 (net of transaction costs of $4,729). In the financial statements of Gallery Out of Home Media Ltd. PIK Loan has been accounted for at amortised cost using the effective interest rate method and had a carrying value of $135,389 and $116,954 as of 31 December, 2009 and 2008, respectively. The financing received by Gallery Out of Home Media Ltd. in the form of PIK Loan has been subsequently contributed to Gallery Media Group Ltd. without any contractual obligation for repayment. Therefore, at the level of Gallery Media Holding Ltd. the amount of $95,271 has been treated as equity contribution from the earliest period presented.



10

1. Corporate information (continued) Comparative financial information (continued)

2. Interests accrued on PIK Loan in the financial statements of Gallery Out of Home Media Ltd. in the amounts of $40,118, $21,683 as of 31 December 2009 and 2008, respectively, were eliminated in these consolidated financial statements.

3. The share capital of Gallery Out of Home Media Ltd. has been replaced by the share capital of Gallery Media Group Ltd. with the difference of $28 posted to accumulated deficit.

As reported by

GOHM Reconciliation As reported by the Company

Consolidated Statement of financial position as at 31 December 2009

Loans and borrowings 135,404 (135,389) 15

Total non-current liabilities 148,057 (135,389) 12,668

Share capital 128 (28) 100 Additional paid-in capital 107,404 95,271 202,675 Accumulated deficit (259,029) 40,146 (218,883)

Total equity (171,355) 135,389 (35,966)

Consolidated Statement of financial position as

at 31 December 2008 Loans and borrowings 272,144 (116,954) 155,190

Total non-current liabilities 306,815 (116,954) 189,861

Share capital 128 (28) 100 Additional paid-in capital 107,404 95,271 202,675 Accumulated deficit (141,244) 21,711 (119,533)

Total equity (54,184) 116,954 62,770

Consolidated Income statement for the year

ended 31 December 2009 Finance costs (36,127) 18,435 (17,692)

Net loss for the period (117,785) 18,435 (99,350)

2. Basis of preparation Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Going concern These consolidated financial statements have been prepared on a going concern basis that contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.



11

2. Basis of preparation (continued) Basis of accounting The Group companies maintain their records and prepare their financial statements in their functional currency. The functional currency of the Group‟s Russian subsidiaries is the Russian ruble (RUB). The functional currency of the Group‟s Ukrainian subsidiaries is the hryvnia (UAH), and the functional currency of the overseas subsidiaries is the US Dollar (USD). These consolidated financial statements are presented in US dollars for the convenience of the users and all values are rounded to the nearest thousand except when otherwise indicated. These consolidated financial statements differ from the financial statements issued for statutory purposes in Russia and Ukraine in that they reflect certain adjustments, which are appropriate to present the financial position, results of operations and cash flows of the Group in accordance with IFRS. These consolidated financial statements have been prepared on a historical cost basis. 3. Summary of accounting policies Changes in accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of Gallery Out of Home Media Ltd‟s annual financial statements for the year ended 31 December 2009, except for the adoption of new Standards and Interpretations, noted below:

• IFRS 2 Share-based Payment – Group Cash-settled Share-based Payment Transactions The standard has been amended to clarify the accounting for group cash-settled share-based payment transactions. This amendment also supersedes IFRIC 8 and IFRIC 11. The adoption of this amendment did not have any impact on the financial position or performance of the Group.

• IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)

The Group applies the revised standards from 1 January 2010. IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will they give rise to gains or losses. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests.



12

3. Summary of accounting policies (continued) Changes in accounting policies (continued)

• IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The amendment had no effect on the financial position nor performance of the Group.

• IFRIC 17 Distribution of Non-cash Assets to Owners This interpretation provides guidance on accounting for arrangements whereby an entity distributes noncash assets to shareholders either as a distribution of reserves or as dividends. The interpretation had no effect on the financial position nor performance of the Group. Improvements to IFRSs (issued May 2008) In May 2008, the Board issued its first omnibus of amendments to its standards. All amendments issued are effective for the Group as at 31 December 2009, apart from the following:

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: Clarifies when a subsidiary is classified as held for sale, all its assets and liabilities are classified as held for sale, even when the entity remains a non-controlling interest after the sale transaction. The amendment is applied prospectively and had no impact on the financial position nor financial performance of the Group.

Improvements to IFRSs (issued April 2009) In April 2009 the Board issued its second omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group.

• IFRS 8 Operating Segment Information: Clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. As the Group‟s chief operating decision maker does review segment assets and liabilities, the Group has continued to disclose this information consistently. For segment information details refer to Note 6.

• IAS 7 Statement of Cash Flows: Explicitly states that only expenditure that results in recognising an asset can be classified as a cash flow from investing activities. The amendment has no impact on the statement of cash flows of the Group.

• IAS 36 Impairment of Assets: The amendment clarified that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes. The amendment has no impact on the Group as no operating segments are aggregated for reporting purposes and annual impairment test is performed at the level of operating segments.



13

3. Summary of accounting policies (continued) Changes in accounting policies (continued) Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:

• IFRS 2 Share-based Payment

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

• IAS 1 Presentation of Financial Statements

• IAS 17 Leases

• IAS 38 Intangible Assets

• IAS 39 Financial Instruments: Recognition and Measurement

• IFRIC 9 Reassessment of Embedded Derivatives

• IFRIC 16 Hedge of a Net Investment in a Foreign Operation The Group has also early adopted the following Interpretation:

• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19, which was published in November 2009, provides guidance on how to account for the extinguishment of financial liability by the issuance of equity instruments. These transactions are often referred to as debt-for-equity swaps. IFRIC 19 includes the following guidance: (i) the entity‟s equity instruments issued to a creditor are part of the consideration paid to extinguish the financial liability; (ii) the equity instruments issued are measured at their fair value; (ii) the difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity‟s profit and loss for the period. The Group early adopted this interpretation (Note 15). The Group also decided to voluntary change its accounting policy in respect of joint ventures from proportional consolidation to equity method, as it provides more reliable and relevant information and is consistent with the current projects of IASB. Standards issued but not yet effective

The Group has not applied the following IFRSs and IFRIC Interpretations that have been issued, but are not yet effective:

IAS 24 Related Party Disclosures (Amended) In November 2009 the IASB replaced IAS 24 Related Party Disclosures with a new version. The IASB believes the amended standard simplifies the disclosure requirements for government–related entities by focusing disclosures on significant transactions, and clarifies the definition of a related party. The amended standard is effective for annual periods beginning on or after 1 January 2011. The amended standard will not result in additional disclosures for the Group.

Amendments to IAS 32 Financial instruments: Presentation: Classification of Rights Issues” In October 2009, the IASB issued amendment to IAS 32. Entities shall apply that amendment for annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment alters the definition of a financial liability in IAS 32 to classify rights issues and certain options or warrants as equity instruments. This is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity‟s non-derivative equity instruments, in order to acquire a fixed number of the entity‟s own equity instruments for a fixed amount in any currency. The Group expects that this amendment will have no impact on the Group's consolidated financial statements.



14

3. Summary of accounting policies (continued) Standards issued but not yet effective (continued)

Amendment to IFRS 1: Limited Exemption from Comparative IFRS 7 Disclosures for First–Time Adopters The amendment, which was issued in January 2010, provides relief to first–time adopters of IFRSs from providing the additional disclosures introduced by the recent amendments to IFRS 7. As a result, first–time adopters receive the same transition provisions provided to current IFRS preparers. This amendment is effective for financial years beginning on or after 1 July 2010, with early application permitted. The Group expects that this amendment will have no impact on the Group's consolidated financial statements as the Group is not a first–time adopter. Amendment to IFRIC 14: Prepayments of a Minimum Funding Requirement Amendment to IFRIC 14 was issued in November 2009 and becomes effective for financial years beginning on or after 1 January 2011 with early application permitted. The amendment applies in the limited circumstances when an entity is a subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. The amendment permits such an entity to treat the benefit of such an early payment as an asset. The Group expects that this amendment will have no impact on the Group's consolidated financial statements. IFRS 9 Financial Instruments In November 2009 the IASB issued the first phase of IFRS 9 Financial instruments. This Standard will eventually replace IAS 39 Financial Instrument: Recognition and Measurement. IFRS 9 becomes effective for financial years beginning on or after 1 January 2013. Entities may adopt the first phase for reporting periods ending on or after 31 December 2009. The first phase of IFRS 9 introduces new requirements on classification and measurement of financial assets. In particular, for subsequent measurement all financial assets are to be classified at amortised cost or at fair value through profit or loss with the irrevocable option for equity instruments not held for trading to be measured at fair value through other comprehensive income. The Group expects that this amendment will have no impact on the Group's consolidated financial statements. Amendments to IFRS 7 Financial Instruments: Disclosures The Amendments were issued in October 2010 and are effective for annual periods beginning on or after 1 July 2011. The Amendments introduce additional disclosure requirements for transferred financial assets that are not derecognized. The Group expects that these amendments will have no impact on the Group's financial position. Amendments to IAS 12 Income Taxes – Deferred tax: Recovery of underlying assets In December 2010 the IASB issued amendments to IAS 12 effective for annual periods beginning on or after 1 January 2012. IAS 12 has been updated to include a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale and a requirement that deferred tax on non-depreciable assets, measured using the revaluation model in IAS 16, should always be measured on a sale basis. The Group expects that these amendments will have no impact on the Group's financial position.



15

3. Summary of accounting policies (continued) Standards issued but not yet effective (continued)

Improvements to IFRSs In May 2010 the IASB issued the third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. Most of the amendments are effective for annual periods beginning on or after 1 January 2011. There are separate transitional provisions for each standard. Amendments included in May 2010 “Improvements to IFRS” will have impact on the accounting policies, financial position or performance of the Group, as described below.

• IFRS 3 Business combinations: limits the scope of the measurement choices that only the components of NCI that are present ownership interests that entitle their holders to a proportionate share of the entity‟s net assets, in the event of liquidation, shall be measured either at fair value or at the present ownership instruments‟ proportionate share of the acquiree‟s identifiable net assets. As the amendment should be applied from the date the Group applies IFRS 3 Revised, it may be required to restate for effects incurred under IFRS 3 Revised, but before the adoption of this amendment. The Group expects that other amendments to IFRS 3 will have no impact on financial statements of the Group.

• IFRS 7 Financial instruments: Disclosures; introduces the amendments to quantitative and credit risk disclosures. The additional requirements are expected to have minor impact as information is expected to be readily available.

• IAS 34 Interim Financial Reporting: adds disclosure requirements about the circumstances affecting fair values and classification of financial instruments, about transfers of financial instruments between levels of the fair value hierarchy, changes in classification of financial assets and changes in contingent liabilities and assets. Additional disclosures required will be introduced in interim financial statements of the Group.

• Amendments to IFRS 1, IAS 1, IAS 27 and IFRIC 13 will have no impact on the accounting policies, financial position or performance of the Group.

Basis of consolidation Basis of consolidation from 1 January 2010 The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2010. Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights, or otherwise has power to exercise control over their operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated in full; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction. Losses are attributed to the non-controlling interests even if that results in a deficit balance.



16

3. Summary of accounting policies (continued) Basis of consolidation (continued) If the Group loses control over a subsidiary, it derecognises the assets (including goodwill) and liabilities of the subsidiary, the carrying amount of any non-controlling interests, the cumulative translation differences, recorded in equity; recognises the fair value of the consideration received, the fair value of any investment retained and any surplus or deficit in profit or loss and reclassifies the parent‟s share of components previously recognised in other comprehensive income to profit or loss. Basis of consolidation prior to 1 January 2010 In comparison to the above mentioned requirements which were applied on a prospective basis, the following differences applied:

• Losses incurred by the Group were attributed to the non-controlling interests until the balance was reduces to nil. Any further excess losses were attributable to the parent, unless the non-controlling interests had a binding obligation to cover these.

• Upon loss of control, the Group accounted for the investment retained at its proportionate share of net asset value at the date control was lost.

Business combinations Business combinations from 1 January 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the acquirer measures the non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree‟s identifiable net assets. Acquisition costs incurred are expensed. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss.



17

3. Summary of accounting policies (continued) Business combinations (continued) After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group‟s cash generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Business combinations prior to 1 January 2010 In comparison to the above mentioned requirements, the following differences applied: Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interests (formerly known as minority interest) was measured at the proportionate share of the acquiree‟s identifiable net assets. Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill. When the Group acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. Contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration affected goodwill. Non-current assets held for sale Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probably and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Property and equipment and intangible assets once classified as held for sale are not depreciated/amortized.



18

3. Summary of accounting policies (continued) Interest in joint venture The Group has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The agreement requires unanimous agreement for financial and operating decisions among the venturers. The Group recognizes its interest in the joint venture using the equity method. Under the equity method, the investment in the joint venture is carried in the statement of financial position at cost plus post acquisition changes in the Group‟s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The income statement reflects the share of the results of operations of the joint venture. Where there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The share of profit of a joint venture is shown on the face of the consolidated income statement. This is the profit attributable to equity holders of the joint venture and therefore is profit after tax and non-controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Group. Adjustments are made to bring into line any dissimilar accounting policies that may exist. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group‟s investment in its joint venture. The Group determines at each reporting date whether there is any objective evidence that the investment in the joint venture is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value and recognises the amount in the „share of profit of a joint venture‟ in the consolidated income statement. Foreign currency transactions The consolidated financial statements are presented in US dollars, which is the Group‟s presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using the functional currency. The functional currency of the Group‟s Russian subsidiaries is the Russian ruble (RUR). The functional currency of the Group‟s Ukrainian subsidiaries is the hryvnia (UAH), and the functional currency of the overseas subsidiaries is the US Dollar (USD). Transactions in foreign currencies are initially recorded in the entity‟s functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All resulting differences are taken to the consolidated income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.



19

3. Summary of accounting policies (continued) Foreign currency transactions (continued) As at the reporting date, the assets and liabilities of the Group‟s subsidiaries are translated into the presentation currency at the rate of exchange ruling at the reporting date, and their income statement is translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The Group earns revenues by displaying advertising materials on billboards and advertising structures that are owned by the Group as well as on billboards that are subcontracted from third parties. Revenues earned and subcontractor fees incurred from advertisements displayed on subcontracted billboards are recognized on a gross basis in the consolidated income statement as all risks and rewards related to these sales transactions are borne by the Group. Revenue from advertising services displayed both on the Group‟s owned and subcontracted billboards and advertising structures is recognized over the period the advertising is displayed. Revenues related to new one year contracts for directional signs are prepaid by clients and initially recorded as deferred revenues. These revenues are amortized straight-line over the 12 month contract period. Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised on a straight-line basis over the useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are not amortized, but tested for impairment annually at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Property and equipment Property and equipment are carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. The cost of an item of property and equipment includes all directly attributable costs to bring the asset to working condition for its intended use. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met.



20

3. Summary of accounting policies (continued) Property and equipment (continued) Repair and maintenance expenditures are expensed as incurred. Major renewals and improvements are capitalized. Items of property and equipment that are retired or otherwise disposed of are eliminated from the consolidated statement of financial position, along with the corresponding accumulated depreciation. Any gain or loss resulting from such retirement or disposal (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years

Billboards and other advertising structures, excluding directional signs 5-10 Directional signs 2 Computers 5 Other 5

The asset‟s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset‟s recoverable amount. An asset‟s recoverable amount is the higher of an asset‟s or cash-generating unit‟s (“CGU”) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset‟s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated income statement. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually and when circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill and indefinite lived assets as at 31 December.



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3. Summary of accounting policies (continued) Impairment of non-financial assets (continued) Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than their carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Financial assets Financial assets within the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. Financial assets are recognized initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets at initial recognition. The Group‟s financial assets comprise primarily cash and cash equivalents and trade and other receivables. The Group‟s receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated income statement when the receivables are derecognized or impaired, as well as through the amortization process. Financial liabilities Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. Financial liabilities are recognized initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs. The Group determines the classification of its financial liabilities at initial recognition. The Group‟s financial liabilities comprise primarily loans and borrowings and trade and other payables. Interest Bearing Loans and Borrowings After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated income statement when the liabilities are derecognized as well as through the amortization process.



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3. Summary of accounting policies (continued) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. Fair value of financial instruments The fair value of financial instruments where there is no active market is determined using valuation techniques. Such techniques may include using recent arm‟s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. Amortized cost of financial instruments Amortized cost is computed using the effective rate interest method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Impairment of financial assets The Group assesses at each reporting date whether a financial asset or group of financial assets is impaired. In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognized when they are assessed as uncollectible. Derecognition of financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at the inception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.



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3. Summary of accounting policies (continued) Leases (continued) Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the consolidated income statement. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognized as an expense in the consolidated income statement on a straight-line basis over the lease term. Inventories Inventories are valued at the lower of cost and net realizable value. The Group‟s inventories consist primarily of materials for the production of direction signs as well as supplies for the ordinary maintenance of advertising structures. These supplies are accounted for at cost on a first in, first out basis. Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements. Where an inflow of economic benefits is probable, they are disclosed. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated income statement net of any reimbursement.



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3. Summary of accounting policies (continued) Provisions (continued) If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Employee benefits State pension scheme In the normal course of business, the Group contributes to the Russian Federation state pension scheme on behalf of its employees. Mandatory contributions to the governmental pension scheme are expensed when incurred. Taxes Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rate and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Value added tax The Russian tax legislation permits the settlement of sales and purchases value added tax (VAT) on a net basis. Value added tax payable VAT is payable upon invoicing and delivery of goods, performing work or rendering services, as well as upon collection of prepayments from customers. VAT on purchases, even if they have not been settled at the reporting date, is deducted from the amount of VAT payable. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. Value added tax receivable VAT receivable arises when VAT related to purchases exceeds VAT related to sales. Deferred income taxes Deferred income tax is provided using the balance sheet method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.



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3. Summary of accounting policies (continued) Taxes (continued) Deferred income tax liabilities are recognized for all taxable temporary differences, except:

• where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except:

• where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. Equity Share capital Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognized as additional paid-in capital.



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3. Summary of accounting policies (continued) Equity (continued) Net assets attributable to minority participants In accordance with Russian legislation, participants in limited liability companies (“LLCs) may unilaterally withdraw from the company. In such cases, the Group will be obliged to pay the withdrawing participant's share of net assets of the company, determined on the basis of statutory accounting reports for the year of withdrawal, in cash or, subject to consent of the participant, by an in kind transfer of assets. Based on the provisions of the law determining the exit period, the net assets attributable to the minority participants are presented within non-current liabilities.

4. Significant accounting judgments, estimates and assumptions The preparation of the Group‟s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods. Judgments In the process of applying the Group‟s accounting policies, management has made the following judgments, apart from those involving estimates, which have the most significant effect on the amounts recognized in the consolidated financial statements: Classification of lease agreements A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership, otherwise it is classified as an operating lease. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. If the lease term is for longer than 75 percent of the economic life of the asset, or if at the inception of the lease the present value of the minimum lease payments amount to at least 90 percent of the fair value of the leased asset, the lease is classified by the Group as a finance lease, unless it is clearly demonstrated otherwise. Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Useful life of property and equipment and intangible assets The Group assesses the remaining useful lives of items of property and equipment and intangible assets at least at each financial year end. These estimates may have a material impact on the amount of the carrying values of property and equipment and intangible assets and on depreciation and amortization recognized in the consolidated income statement.



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4. Significant accounting judgments, estimates and assumptions (continued)

Estimates and assumptions (continued)

As part of this assessment, in accordance with IAS 38 Intangible Assets, the Group assess whether the useful lives of its intangible assets are definite or indefinite. Indefinite lived intangible assets consist of licenses and permits acquired through business combinations. The cost of these intangibles equals their fair value as of the date of acquisition measured by discounting their estimated future cash flows. These permits and licenses have been granted by the relevant municipalities for periods ranging from one to seven years. Based on prior history and current international market practices, before the end of the year 2010 management expected to be able to renew these licenses for an indefinite period of time at an insignificant cost (Note 26). If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and other indefinite lived intangibles are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. Further details, including a sensitivity analysis of key assumptions, are given in Note 9.

Fair values of assets and liabilities acquired in business combinations

The Group is required to recognize separately, at the acquisition date, the identifiable assets, liabilities and contingent liabilities acquired or assumed in the business combination at their fair values, which involves estimates. Such estimates are based on valuation techniques, which require considerable judgment in forecasting future cash flows and developing other assumptions.

Allowance for doubtful accounts

Management maintains an allowance for doubtful accounts to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the aging of accounts receivable balances and historical write-off experience, customer credit worthiness and changes in customer payment terms. If the financial condition of customers were to deteriorate, actual write-offs might be higher than expected.

Current taxes

Russian tax, currency and customs legislation is subject to varying interpretations and changes occurring frequently. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group‟s entities may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group‟s entities may be assessed additional taxes, penalties and interest, which can be significant. The periods remain open to review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As of 31 December 2010, management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group's tax, currency and customs positions will be sustained. More details are provided in Note 23.



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4. Significant accounting judgments, estimates and assumptions (continued)

Estimates and assumptions (continued)

Deferred tax assets Management judgment is required for the calculation of current and deferred income taxes. Deferred tax assets are recognized to the extent that their utilization is probable. The utilization of deferred tax assets will depend on whether it is possible to generate sufficient taxable income in the respective tax type and jurisdiction. Various factors are used to assess the probability of the future utilization of deferred tax assets, including past operating results, the operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that of estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that an assessment of future utilization indicates that the carrying amount of deferred tax assets must be reduced, this reduction is recognized in the consolidated income statement.

Fair value valuation of the Group’s equity For the purposes of these consolidated financial statements the management of the Group performed the assessment of the fair value of the Group‟s equity as of the date of restructuring. The value of equity was appraised based on cash flow projections from financial budgets approved by senior management for 2010 and projected growth rates for the subsequent five years. The pre-tax discount rate applied to cash flow projections is 14.6% and cash flows beyond the five-year period are extrapolated using a 2.6% growth rate. Key assumptions used in the valuation The fair value of the Group‟s equity is most sensitive to the following assumptions:

• Occupancy rates;

• Average advertising placement prices;

• Discount rates;

• Growth rate estimates. Occupancy rates – Occupancy rates are based on the Group‟s current market experience, industry forecasts as well as financial budgets approved by senior management Average advertising placement prices – Average advertising placement prices are derived from sales budgets approved by senior management. The price inflation rate is used to consider price growth in future years. Discount rates – Discount rates reflect management‟s estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The discount rate was estimated based on the average percentage of a weighted average cost of capital in the advertising industry. Growth rate estimates (prices, direct costs and indirect costs growth rates) – Growth rates related to prices, direct and indirect costs are based on industry research and used by senior management in long-term financial budgeting.



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5. Disposal of subsidiaries Disposal of subsidiaries in 2010 During 2008, the Group shifted its focus from growth through acquisitions to the integration of previously acquired entities and extracting synergies from the existing portfolio. So the Group did not pursue any new acquisitions during the year of 2010 and 2009. As part of its cash preservation policy in 2010 and 2009 the Group has executed disposals of entities, whose value-in-use in current market conditions was below their eventual selling price. Under the restructuring scheme in August 2010 nine subsidiaries were disposed: City Project, Gallery Indor, Gorod Media, Kraun, Reka Vremeni, Remas RA, Robar, Train Group, TV Project. The $3,016 carrying value of these subsidiaries, which includes $3,240 in current assets and $224 in short-term liabilities was recognized as loss in the consolidated income statement for the year ended 31 December 2010. On 31 October 2008, the Group entered into a revised Shareholder Agreement related to the ultimate ownership of Larisa City, of which the Group owned a 50.1% interest. This revised agreement provided for both a put and call option over the remaining 49.9% ownership interest. The exercise price of the option was dependent upon Larisa City‟s future earnings, but the agreement stipulated that the price might not be less than $4,000. The $3,093 difference between the value of this put option liability and the carrying amount of the non-controlling interest as of the agreement date was recognized directly in equity in 2008. As of 31 December 2009, the fair value of the financial liability under the put option was $4,000. On 17 March 2010 the Company signed the new agreement with the non-controlling shareholder of Larisa City. According to the new agreement the Company and its non-controlling shareholder became joint owners of Larisa City and the clause of put option was removed from the new shareholders agreement. As a result, the Group lost control over Larisa City as at 17 March 2010. Starting from that date the Group ceased consolidation of Larisa City, began further accounting as an investment in joint venture and derecognized the related put option liability. The interest retained in Larisa City was recognized at its fair value as at 17 March 2010. The management‟s estimation of the fair value of 50% in the equity of Larisa City as at that date was $1,110. As a result of loss of control of Larissa City a gain of $3,245 was recognized in these consolidated financial statements. During the reporting period the Group received dividends from joint venture Larisa City related to 2009 in the amount of $131 which were paid in April and September 2010.



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5. Disposal of subsidiaries (continued) Disposal of subsidiaries in 2010 (continued) The carrying and fair values of the identifiable assets and liabilities of Larisa City as at the date of transaction were:

Carrying value as of the date of disposal

Fair value recognised

Intangible assets 484 704 Property and equipment 417 1,055 Accounts receivable 586 586 Cash and cash equivalents 187 187 Other assets 50 50

1,724 2,582

Short-term liabilities (246) (246) Deferred tax liability – (116) Total identifiable net assets 1,478 2,220

Share of the Group in net assets of joint venture 1,110

Disposals of subsidiaries and assets held for sale in 2009 During the fourth quarter of 2008, the Group‟s management and Board of Directors decided to sell four subsidiaries: IMTV, Gallery Digital, Transreklama and Stimul Group. As of 31 December 2008, the Group determined that the $6,823 carrying value of these subsidiaries, which includes $2,267 in property and equipment, $5,895 in intangibles, $1,787 in other current assets and $3,126 in short-term liabilities, exceed the fair value less costs to sell by $5,678. The resulting impairment loss was recognized in the consolidated income statement for the year ended 31 December 2008. On 20 January 2009, the Group completed the sale of Transreklama Almaz Advertising Limited LLC for cash consideration of $486, which resulted in an additional loss of $8 on the disposal of this entity, recorded as held for sale as of 31 December 2008. At the date of disposal Transreklama had no cash at balance, total assets of Transreklama was equal to $798 and total liabilities equal to $304. On 17 March 2009, the Group completed the sale of Stimul Group LLC for cash consideration of $502. This sale resulted in a gain of $92. At the date of disposal Stimul Group LLC had $7 in cash, total assets amounting to $431 and total liabilities equal to $21. On 30 March 2009, the Group sold ADV Technology LLC, a small outdoor operator in Barnaul, for cash consideration of $90, resulting in a loss of $78. At the date of disposal ADV Technology LLC had no cash, total assets were equal to $333 and total liabilities equal to $165. On 2 April 2009, the Group sold Gallery Indoor-Neva LLC, a small St. Petersburg operator, for the nominal value of its shares, which resulted in a loss of $270. At the date of disposal Gallery Indoor-Neva LLC had $1 in cash, total assets amounting to $519 and total liabilities equal to $249. On 20 April 2009, the Group sold IMTV, a company that specializes in indoor digital advertising in Moscow, for the nominal value of shares, which resulted in a gain of $352. At the date of disposal IMTV had $197 in cash, total assets amounting to $823 and total liabilities equal to $1,175.



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5. Disposal of subsidiaries (continued)

Disposals of subsidiaries and assets held for sale in 2009 (continued)

On 23 April 2009, the Group sold Gallery Digital CJSC for the nominal value of shares, resulting in a gain of $57. At the date of disposal Gallery Digital CJSC had $180 in cash, total assets amounting to $1,694 and total liabilities equal to $1,751.

On 26 May 2009, the Group sold its 51% holding in Gallery Vologda LLC, a small outdoor operator in Vologda, for the nominal value of its shares, resulting in a gain of $4. At the date of disposal Gallery Vologda LLC had no cash, total assets were equal to $14 and total liabilities equal to $18.

6. Segment information

For management purposes, the Group is organized into business units based upon the economic environment in which the outdoor advertising services are being provided, and thus the Group has two reportable operating segments:

• The Russian segment provides outdoor advertising services to advertising agencies and direct clients throughout Russia.

• The Ukrainian segment provides outdoor advertising services to advertising agencies and direct clients throughout Ukraine.

No operating segments have been aggregated to form the above reportable operating segments.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss. Group financing (including finance costs and finance income) is managed on a group basis and is not allocated to the operating segments.

The following tables present revenue and net profit information regarding the Group‟s operating segments.

Year ended 31 December 2010 Russia Ukraine

Adjustments and

eliminations Consolidated

Revenues: Billboards 44,587 4,449 – 49,036 Street furniture 27,736 1,443 – 29,179 Transport and other 24,560 922 – 25,482 Media buying 27,092 2,104 – 29,196

Total revenues 123,975 8,918 – 132,893 Results Depreciation 6,094 22 – 6,116 Amortization 1,796 7 – 1,803 Impairment – – – – Net result from joint venture 62 – – 62 Income tax expense/(benefit) (2,701) (10) – (2,711)

Segment profit 12,352 567 (16,521)1 (3,602)

Assets Capital expenditures (property & equipment) 6,488 778 – 7,266 Capital expenditures (intangible assets) 554 – – 554 Investment in joint venture 1,002 – – 1,002

Operating assets 191,311 2,833 – 194,144

Operating liabilities 48,576 2,590 101,9802 153,146



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6. Segment information (continued)

Year ended 31 December 2009 Russia Ukraine

Adjustments and

eliminations Consolidated

Revenues: Billboards 37,119 3,339 – 40,458 Street furniture 25,533 831 – 26,364 Transport and other 19,946 675 – 20,621 Media buying 15,495 2,541 – 18,036

Total revenues 98,093 7,386 – 105,479 Results Depreciation 10,706 16 – 10,722 Amortization 3,931 52 – 3,983 Impairment 88,422 – – 88,422 Net result from joint venture – – – –

Income tax expense/(benefit) 17,022 (2) – 17,020

Segment profit (74,617) (1,693) (23,040)1 (99,350)

Assets Capital expenditures (property & equipment) 8,037 230 – 8,267 Capital expenditures (intangible assets) 37 6 – 43

Operating assets 186,527 1,714 – 188,241

Operating liabilities 47,202 2,183 174,822 224,207

1. Profit for each reportable segment excludes finance income (2010: $1,111, 2009: $801), finance costs (2010: $16,903, 2009: $17,692) and net foreign exchange loss (2010: $729, 2009: $6,149) as financing activity is managed on a group basis.

2. Segment liabilities do not include loans and borrowings as they are managed on a group

basis.



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7. Property and equipment The movements in property and equipment were as follows:

Billboards and other

advertising structures Computers Other

Assets under construction Total

Cost 31 December 2008 (as revised) 81,377 1,956 3,418 5,840 92,591

Additions – – – 8,267 8,267 Assets put into operation 5,386 56 2,918 (8,360) – Disposals (3,318) (392) (622) (714) (5,046) Translation difference (1,831) (68) (89) (425) (2,413)

31 December 2009 (as revised) 81,614 1,552 5,625 4,608 93,399

Additions – 329 545 6,392 7,266 Assets put into operation 7,247 36 42 (7,325) – Disposals (3,073) (24) (831) (891) (4,819) Disposal of subsidiaries (Note 5) (911) (5) (58) (65) (1,039) Translation difference (538) (12) (39) (26) (615)

31 December 2010 84,339 1,876 5,284 2,693 94,192

Accumulated depreciation and

impairment 31 December 2008 (as revised) (29,108) (863) (552) (610) (31,133)

Depreciation charge (9,275) (316) (1,418) – (11,009

) Disposals 1,453 231 333 – 2,017 Impairment (17,985) (256) (2,338) (1,087) (21,666) Translation difference 106 17 23 – 146

31 December 2009 (as revised) (54,809) (1,187) (3,952) (1,697) (61,645)

Depreciation charge (5,167) (187) (782) – (6,136) Disposals 1,790 16 739 270 2,815 Disposal of subsidiaries (Note 5) 557 3 47 15 622 Assets put into operation (904) (4) – 908 – Impairment – – – – – Translation difference 337 9 14 7 367

31 December 2010 (58,196) (1,350) (3,934) (497) (63,977)

Net book value: 31 December 2009 26,805 365 1,673 2,911 31,754

31 December 2010 26,143 526 1,350 2,196 30,215

In 2010 and 2009 the Group did not enter into any new finance lease agreements. All significant lease liabilities were repaid by the Group in full in 2009. In the course of preparation of the consolidated financial statements for the year ended 31 December 2010, the Group identified certain prior year misclassifications between the groups of property and equipment and related accumulated depreciation. In order to comply with the current year presentation the Group made certain reclassifications in the opening balances as at 31 December 2008. As a result of these reclassifications gross book value of property and equipment as at 31 December 2008 decreased by $2,331 with the corresponding decrease in the amount of accumulated depreciation. In addition, 2009 impairment charge in the amount of $505 has been reallocated between property and equipment and intangible assets.



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8. Intangible assets The movements in intangible assets were as follows:

Licenses and permits

(indefinite useful life)

Licenses and permits and

customer relationships

(definite useful life) Other Total

Cost 31 December 2008 167,737 6,316 915 174,968

Additions – – 43 43 Disposals – – – – Translation difference (4,791) (180) (24) (4,995)

31 December 2009 162,946 6,136 934 170,016

Additions 1 223 330 554 Disposals (4,787) – (154) (4,941) Disposal of subsidiaries (Note 5) (797) – – (797) Translation difference (1,225) (48) (8) (1,281)

31 December 2010 156,138 6,311 1,102 163,551

Accumulated amortization and

impairment 31 December 2008 (13,367) (2,048) (332) (15,747)

Amortisation charge – (1,299) (218) (1,517) Disposals – – – – Impairment (62,745) (1,155) (159) (64,059) Translation difference 382 (5) (2) 375

31 December 2009 (75,730) (4,507) (711) (80,948)

Amortisation charge – (491) (120) (611) Disposals 2,005 – 131 2,136 Disposal of subsidiaries (Note 5) 313 – – 313 Impairment – – – – Translation difference 566 36 28 630

31 December 2010 (72,846) (4,962) (672) (78,480)

Net book value: 31 December 2009 87,216 1,629 223 89,068

31 December 2010 83,292 1,349 430 85,071

Indefinite lived licenses and permits include intangible assets acquired through business combinations. The cost of these intangibles equals their fair value as of the date of acquisition measured by discounting their estimated future net cash flows. These permits and licenses have been granted by the relevant government municipalities for periods ranging from one to seven years. As at 31 December 2010 and 2009, these assets were tested for impairment (Note 9). Definite lived intangible assets include the cost of tenders won from municipalities that allow the Group to enter into rent agreements with the city to install advertising structures as well a customer relationships intangible asset that was identified and valued as part of the Westdia acquisition. These tenders typically cover a period ranging from three to five years, and the cost of the tender won is amortized over the life of the rent agreement from the date the assets are installed and the permits received.



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9. Impairment testing Licenses and permits with indefinite lives have been allocated to two cash-generating units, which are also reporting segments, for impairment testing as follows:

• Russia; and

• Ukraine. Carrying amounts of indefinite lived licenses and permits for each of the cash-generating units comprise the following as at 31 December: Russia Ukraine Total

2010 2009 2010 2009 2010 2009

Carrying amount of licenses and permits with indefinite lives 83,292 87,216 – – 83,292 87,216

As a result of impairment testing as of 31 December 2010, the Group did not identify any change of carrying amount of non-current assets. No impairment loss or reversal of impairment loss was recognized in 2010. Due to the effects of the global financial crisis, which has decreased the demand for outdoor advertising, the carrying amount of the Russian CGU exceeded its estimated value in use as of 31 December 2009. As a result, the Group recorded an impairment loss of $88,422 in Russia which consists of an impairment of $22,171 in property and equipment, $63,554 in intangible assets and $2,697 in long-term advances. Russia cash-generating unit The recoverable amount of the Russian unit has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management for 2011 and projected growth rates for the subsequent four years. The pre-tax discount rate applied to cash flow projections is 14.88% (2009: 17.5%) and cash flows beyond the five-year period are extrapolated using a 2.6% growth rate (2009: 2.6%). Key assumptions used in the value in use calculations The calculations of value in use is most sensitive to the following assumptions:

• Occupancy rates;

• Average advertising placement prices;

• Discount rates;

• Growth rate estimates. Occupancy rates Occupancy rates are based on the Group‟s current market experience, industry forecasts as well as financial budgets approved by senior management. Average advertising placement prices Average advertising placement prices are derived from sales budgets approved by senior management. The price inflation rate is used to consider price growth in future years.



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9. Impairment testing (continued) Discount rates Discount rates reflect management‟s estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The discount rate was estimated based on the average percentage of a weighted average cost of capital in the advertising industry. Growth rate estimates Growth rates related to prices, direct and indirect costs are based on industry research and used by senior management in long-term financial budgeting. Sensitivity to changes in assumptions The following table demonstrates the sensitivity to a reasonably possible change in the discount rate and growth rate, with all other variables held constant, of the Group‟s recoverable amount.

Increase / decrease in basis points

Effect on recoverable

amount

Discount rate +100 (7,674) -100 7,674 Growth rate +100 10,828 -100 (10,828)

10. Advances issued and prepaid expenses Advances issued and prepaid expenses comprise the following as of 31 December: 2010 2009

Non-current advances issued: Advances issued for billboards and advertising structures 34 201 Advances issued for long-term contracts 1,822 3,599

Total non-current advances issued 1,856 3,800

Current advances issued and prepaid expenses: Advances issued for city fees and permits 3,005 1,263 Advances issued for materials and services 2,988 1,168 Deferred restructuring costs – 9,836 Other prepaid expenses 2,539 1,496

Total current advances issued and prepaid expenses 8,532 13,763

11. Trade and other receivables Trade and Other receivables comprise the following as of 31 December: 2010 2009

Trade receivables 14,852 14,305 Other receivables 3,205 1,717

Total trade and other receivables 18,057 16,022



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11. Trade and other receivables (continued) Trade receivables are non-interest bearing and are generally on 30-90 day terms. As at 31 December 2010, trade and other receivables in the amount of $3,616 (2009: $4,126) were impaired and fully provided for. Movements in the allowance for doubtful accounts were as follows:

Advances

issued

Trade and other

receivables Total

At 31 December 2008 295 2,808 3,103 Charge for the year 265 1,882 2,147 Utilized – (375) (375) Unused amounts reversed (147) (528) (675) Translation difference (3) (71) (74)

At 31 December 2009 410 3,716 4,126 Charge for the year 272 2,718 2,990 Disposal of subsidiaries (Note 5) (187) (995) (1,182) Utilized – (495) (495) Unused amounts reversed (221) (1,566) (1,787) Translation difference (3) (33) (36)

At 31 December 2010 271 3,345 3,616

As at 31 December, the ageing analysis of trade receivables is as follows: Past due but not impaired

Total Not past

due < 30 days 30-60 days 60-90 days >90 days

2010 18,057 10,733 4,774 1,867 683 –

2009 16,022 7,262 4,366 1,546 653 2,195

12. Cash and cash equivalents Cash and cash equivalents comprise the following as of 31 December: 2010 2009

Cash at banks and on hand 9,214 4,273

Short-term bank deposits 35,046 24,441

44,260 28,714

Cash at banks generally earns no interest. Short-term bank deposits are made for periods ranging from one day to three months, depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates.



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13. Investment in joint venture As of December 31, 2010 the following joint venture was accounted for under the equity method:

Ownership /

Voting, % Country Date of

acquisition

Larisa City 50% Russia 17 March 2010

Movement in investments in joint venture was:

2010

Balance as at 31 December 2009 – Fair value of investment in joint venture as of the date of loss of control (Note 5) 1,110 Share of profit 62 Dividends declared (131) Translation difference (39)

Investments in joint venture as at 31 December 2010 1,002

The following table illustrates summarised financial information of the joint venture: 2010

Current assets 866

Non-current assets 1,386

2,252 Current liabilities (248)

Non-current liabilities –

(248) Net assets 2,004

Share of the Group in net assets of joint venture 1,002

Investment in joint venture as at 31 December 2010 1,002

Share of the Company in joint venture‟s revenue and profit:

Revenue 1,056

Net profit 62

14. Equity Gallery Media Holding Ltd. is authorized to issue a maximum of 53,763.44 ordinary shares of one class with a par value of US $0.0001. As at 31 December 2010 the fully paid capital of Gallery Media Holding Ltd. was $5 consisting of 50,000 ordinary shares with a par value of $0.0001 per share. As discussed in Note 1, these consolidated financial statements are presented as a continuation of Gallery Media Group Ltd.‟s financial statements using the pooling of interests method. Therefore, as at the date of restructuring the share capital of Gallery Media Group Ltd. of $100 has been replaced by the share capital of Gallery Media Holding Ltd. with the difference posted to accumulated deficit. According to the terms of restructuring the existing shareholders of the Group contributed $5,000 to Gallery Media Holding Ltd. without any contractual obligation for repayment. This amount has been credited to Additional paid-in capital.



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14. Equity (continued) Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. 15. Interest-bearing loans and borrowings Loans and borrowings are comprised of the following as of 31 December:

Effective interest

rate (%) Maturity 2010 2009

Short-term borrowings:

Old Senior Secured notes 11.6% On demand – 174,807 New Senior Secured notes 10% 1 February 2011 1,672 – Other borrowings – 1

1,672 174,808

Long-term borrowings:

New Senior Secured notes 10% 1 February 2015 100,308 – Other borrowings – 15

100,308 15

Senior secured notes As discussed in Note 1, on 18 August 2010, the Group successfully completed the restructuring of its financial liabilities. As a result of this restructuring the Old notes were extinguished in exchange for new equity in the Group and New notes. For the purposes of these consolidated financial statements the management of the Group performed the assessment of the fair value of the Group‟s equity and New notes as of the date of restructuring. As the restructuring terms did not specify what exact portion of Old notes was replaced by equity and what portion was replaced by New notes, the management made this allocation based on the relative fair values of the New notes and the new equity. Accordingly, 43% of the Old notes are considered replaced by equity, and 57% are attributed to the New notes. New notes have been issued by European Capital S.A. or “EurMedCap.” (a special purpose entity organized under the laws of Luxemburg) in the amount of $100,308. New notes are guaranteed on a senior basis by Gallery Media Holding Ltd. and certain of its subsidiaries. The New notes bear interest at the rate of 10% per annum. Interest on the New notes is payable on 1 February, 1 May, 1 August and 1 November of each year. The notes will mature on 1 February 2015. As the terms of New notes are substantially different to the terms of Old notes, the issue of New notes has been accounted for as an extinguishment of 57% of Old notes and recognition of new financial liability at the fair value of New Notes. As a result of restructuring, the Group recognized the equity instruments issued at their fair value of $75,606 and net loss of $5,837 in the consolidated income statement. During 2010, the Group recorded $13,184 (2009: $17,527) in interest expense related to the issuance of Old Notes.



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15. Interest-bearing loans and borrowings (continued) Senior secured notes (continued) From 18 August till 31 December 2010 the Group recorded $3,706 interest expense related to the issuance of New notes (2009: nil). In November 2010 the Group paid interest expense in amount $2,034. 16. Trade and other payables Trade and other payables comprised the following as of 31 December: 2010 2009

Trade payables 6,927 10,071

Other payables 5,919 2,624

Payroll payable 2,710 1,704

Total payables 15,556 14,399

17. Taxes payable Taxes payable comprised the following as of 31 December: 2010 2009

Imputed tax payable – 257 VAT payable 3,781 3,225 Income tax payable 227 320 Other 294 430

Total 4,302 4,232

18. Cost of revenues The following expenses were included in cost of revenues for the years ended December 31:

2010 2009

Subcontractor fees 24,679 14,947 City fees and permits 18,413 22,736 Maintenance and repair expenses 14,331 11,708 Payroll of technical personnel 8,564 8,322 Payroll unified social tax expense 1,562 1,624 Depreciation and amortization 5,719 10,080 Electricity 2,113 2,071 Warehouse expenses 1,246 1,412 Transportation expenses 928 934 Other 711 2,259

Total 78,266 76,093



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19. Selling, general and administrative expenses The following expenses were included in selling, general and administrative expenses for the years ended 31 December: 2010 2009

Payroll 16,965 16,297 Payroll unified social tax expense 2,281 2,217 Depreciation and amortization 2,200 4,625 Office rent and related expenses 2,225 2,967 Bad debt expense and write-offs 1,548 1,472 Audit and consulting expenses 1,824 1,375 Taxes other than profit tax 891 1,098 Communication expenses 846 733 Advertising and marketing expenses 611 321 Business trips and representative expenses 420 310 Transportation expenses 277 264 Security expenses 225 217 Bank charges 83 124 Other 251 1,399

Total 30,647 33,419

20. Finance income and costs The following items were included in finance income for the years ended 31 December:

2010 2009

Bank interest 1,111 801

Total finance income 1,111 801

The following items were included in finance costs for the years ended 31 December:

2010 2009

(re-presented)

Senior Secured Notes interest 16,890 17,527 Finance leasing 13 34 Other – 131

Total finance costs 16,903 17,692

21. Taxation The corporate income tax expense comprises: 2010 2009

Current tax charge/(credit) 1,437 795 Deferred tax charge/(credit) – origination and reversal of temporary

differences 1,274 (17,815)

Income tax expense 2,711 (17,020)



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21. Taxation (continued) The effective income tax rate differs from the statutory income tax rates. A reconciliation between the income tax expenses applicable to profit before income tax at the statutory tax rate to income tax expense at the Group‟s effective income tax rate is as follows: Years ended 31 December 2010 2009

Loss before income tax from continuing operations (891) (116,370)

Theoretical tax benefit at 20% Russian statutory rate (2009: 20%) (178) (23,274) Effect of higher tax rate in Ukraine (25%) 19 (69) Net (loss)/gain in other foreign jurisdictions (not subject to income tax) 1,131 1,488 Change in unrecognized deferred tax assets (453) (198) Non–deductible expenses and other permanent differences 2,192 5,033

Actual income tax provision for the year 2,711 (17,020)

Deferred tax assets and liabilities as of 31 December and their movements for the respective years comprise:

31 December

2009

Disposal of subsidiaries

(Note 5)

Differences recognized

and reversed Translation difference

31 December 2010

Tax effects of taxable temporary differences:

Licenses and permits (17,063) (88) 148 130 (16,873)

(17,063) (88) 148 130 (16,873) Tax effects of deductible temporary

differences: Property, equipment and inventory 2,584 (10) (1,300) (2) 1,272 Allowance for impairment of receivables 700 (248) 20 (3) 469 Accrued liabilities 1,096 15 (283) (6) 822 Losses carried forward 1,988 (659) (312) 3 1,020

6,368 (902) (1,875) (8) 3,583

Unrecognized deferred tax asset (1,958) 410 453 (6) (1,101)

(1,958) 410 453 (6) (1,101)

Total net deferred tax (liability)/asset (12,653) (580) (1,274) 116 (14,391)

31 December

2008

Differences recognized

and reversed Translation difference

31 December 2009

Tax effects of taxable temporary differences:

Property, equipment and inventory (3,526) 3,266 260 – Fair value of licenses and permits (30,667) 12,134 1,470 (17,063) Allowance for impairment of receivables – – – –

(34,193) 15,400 1,730 (17,063) Tax effects of deductible temporary differences: Property, equipment and inventory 1,645 934 5 2,584 Allowance for impairment of receivables 720 1 (21) 700 Accrued liabilities 1,798 (613) (89) 1,096 Losses carried forward – 1,895 93 1,988

4,163 2,217 (12) 6,368

Unrecognized deferred tax asset (2,231) 198 75 (1,958)

(2,231) 198 75 (1,958)

Total net deferred tax (liability)/asset (32,261) 17,815 1,793 (12,653)



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21. Taxation (continued) Deferred tax assets in the amount of $1,101 and expiry date in 2018 year have not been recognized as of 31 December 2010 (2009: $1,958) as it is not probable that future taxable profit will allow the deferred tax assets to be recovered. The Russian Federation and Ukraine were the only tax jurisdictions in which the Group‟s income was subject to taxation. The statutory income tax rates are 20% in Russia and 25% in Ukraine. 22. Related party disclosures Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The management considers that the Group has appropriate procedures in place to identify and properly disclose transactions with related parties and has disclosed all of the relationships identified and which it deemed to be significant. During the reporting period the Group‟s joint venture Larisa City entered in the following transactions with the Group:

• The Group received revenues of $142 from Larisa City

• The Group purchased services for $1,080 from Larisa City which were included in the Group‟s cost of revenue.

As of December 31, 2010 the Group has the following balances with Group‟s joint venture Larisa City:

• Trade payables to Larisa City in the amount of $543

• Trade receivables from Larisa City in the amount of $92. All the transactions were conducted on a market conditions basis. During the reporting period the Group received dividends from joint venture Larisa City related to 2009 in amount $131 which were paid in April and September 2010. Compensation to key management personnel Started the first quarter of 2010 the Group has included the amounts paid to the Board of Directors members in the key management personnel compensation. The Group believes that such change will represent financial statements to the users more fairly. Key management personnel are comprised of Management Board and Board of Directors members, totaling 12 persons in 2010. The comparatives for 2009 were restated to include Board members remuneration for corresponding period last year. Compensation to key management personnel consists of the following:

2010 2009

Current compensation 3,308 1,790

3,308 1,790



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23. Commitments and contingencies Operating environment Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. In 2010 the Russian Government continued to take measures to support the economy in order to overcome the consequences of the global financial crisis. Despite some indications of recovery there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Group‟s future financial position, results of operations and business prospects. While management believes it is taking appropriate measures to support the sustainability of the Group‟s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group‟s results and financial position in a manner not currently determinable. Taxation Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in its interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on the management‟s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities, which were identified by management at the reporting date as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in these financial statements could be up to approximately $750. Operating lease obligations Operating lease obligations within 1 year as at 31 December are as follows:

2010 2009

Russia Ukraine Russia Ukraine

Lease of office space 2,135 127 1,703 124 Lease of warehouse space 1,084 31 1,049 31

3,219 158 2,752 155



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23. Commitments and contingencies (continued) Operating lease obligations (continued) During 2010 and 2009, the Group entered into commercial leases of office and warehouse space in Moscow and regional cities. In 2010, the Group leased approximately 8,072 square meters of office space, including 5,097 square meters in Moscow, and 26,117 square meters of warehouse space, including 20,451 square meters in Moscow. These leases have an average life of 1 year with a renewal option included in the contracts. There are no restrictions placed upon the lessee by entering into these leases. Legal proceedings In the ordinary course of business, the Group may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Group operates. In the opinion of management, the Group‟s liability, if any, in all pending litigation, other legal proceeding or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Group. 24. Risk management Introduction The Group‟s principal financial liabilities comprise Senior Secured notes, bank loans and overdrafts, and trade payables. The main purpose of these financial liabilities is to raise financing for the Group‟s investing activity and day to day operations. The Group has various financial assets such as trade receivables, cash and short-term deposits, which arise directly from its operations. It is, and has been throughout 2010 and 2009 the Group‟s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group‟s financial instruments are liquidity risk, foreign currency risk and credit risk. Management reviews and sets policies for mitigating each of these risks which are summarized below and provides regular updates to the Board of Directors. Foreign currency risk The Group has transactional currency exposures. Such exposure arises from sales or purchases by an operating unit in currencies other than the unit‟s functional currency. The Group‟s sales are primarily denominated in the functional currency of the operating company making the sale, and less than 1% of the Group‟s sales are denominated in foreign currencies. Excluding interest expense, approximately 94% of the Group‟s remaining costs are denominated in the company‟s functional currency.



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24. Risk management (continued) Foreign currency risk (continued) The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group‟s profit before tax (due to changes in the fair value of monetary assets and liabilities). Increase /

decrease in US dollar rate

Effect on profit before

tax

2010 +9% (10,853) -9% 10,853 2009 +14.8% (20,900) -14.8% 20,900

Credit risk The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. In addition, receivable balances are monitored on an ongoing basis with the result that the Group‟s exposure to bad debts is not significant. The maximum exposure is the carrying amount of trade and other receivables as disclosed in Note 11. With respect to credit risk arising from the other financial assets of the Group, which comprise primarily cash and cash equivalents, the Group maintains its available cash, mainly in US dollars and Russian rubles, in international banks, Russian affiliates of international banks and major Russian banks. Management periodically reviews the creditworthiness of the banks in which it deposits cash. Liquidity risk The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the projected cash flows from operations, as well as financing and investment activities. The Group‟s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans. The Group‟s policy is that not more than 75% of borrowings should mature in the next 12 month period. The Group‟s borrowings primarily consist of Senior Secured notes, which mature in 2015. As at 31 December 2010, the Group‟s borrowings that will mature in the next 12 months consist of semi-annual coupon payments on the Senior Secured notes.



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24. Risk management (continued) Liquidity risk (continued) The tables below summarize the maturity profile of the Group‟s financial liabilities at 31 December based on contractual undiscounted repayment obligations.

On demand Less than 3 months

3 to 12 months

1 to 5 years > 5 years Total

Year ended 31 December 2010 Interest bearing loans

and borrowings – 2,508 7,523 132,909 – 142,940 Trade and other

payables – 15,556 – – – 15,556 Year ended

31 December 2009 Interest bearing loans

and borrowings 179,902 – – - – 179,902 Obligations under

finance leases – – 22 – – 22 Put option liability 4,000 – – – – 4,000 Trade and other

payables – 14,399 – – – 14,399

Concentration risk The Group‟s significant concentrations of risks in regards to customers and suppliers are detailed in the following tables: % of total Group revenue Client 2010 2009

M-Video Management 15.6% 10.1% Metro Cash & Carry 7.0% 3.8% Media Edge CIS 6.0% 1.3% Master AD 5.3% 3.0% Publicis Group Media Eurasia 2.6% 6.1%

All these customers are concentrated in Russian operating segment. Capital management The primary objective of the Group‟s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. The Group monitors its capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Group‟s policy is to steadily decrease the gearing ratio. The Group includes within net debt, interest bearing loans and borrowings, obligations under finance leases, less cash and cash equivalents. Capital includes equity attributable to the equity holders of the parent.



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24. Risk management (continued) Capital management (continued) 2010 2009

Loans and borrowings 101,980 174,823 Obligations under finance leases – 22 Less cash and short-term deposits (44,260) (28,714)

Net debt 57,720 146,131 Equity 40,998 (35,966)

Capital and net debt 98,718 110,165

Gearing ratio 58% 133%

25. Fair values of financial instruments Set out below is a comparison by class of the carrying amounts and fair values of the Group‟s financial instruments that are not carried at fair value in the consolidated statement of financial position.

Carrying value 2010

Fair value 2010

Carrying value 2009

Fair value 2009

Financial assets Cash and cash equivalents 44,260 44,260 28,714 28,714 Trade and other receivables 18,057 18,057 16,022 16,022 Financial liabilities Loans and borrowings 101,980 101,980 174,823 33,913 Finance lease obligations – – 22 22 Trade and other payables 15,556 15,556 14,399 14,399 Total unrecognised change in

unrealised fair value

The fair value of liabilities for Senior Secured Notes was determined based on latest available market quotations of these securities. For financial assets and financial liabilities that are having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. 26. Events after the reporting period On 17 February the Board of Directors approved Share option programme. This Share Option Programme has been established to reward and retain employees of the Gallery Media Holding Ltd. and its direct and indirect subsidiaries and to align the interests of employees of the Group with those of the shareholders of the Gallery Media Holding Ltd. On 18 February 2011 the Group sold 80% interest in equity of its 100% subsidiary Elen Media for $40. Elen Media is a operating company located in St. Petersburg.



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26. Events after the reporting period (continued) The Group‟s contract for placement of advertising on public transport in Moscow expired in December 2010. The carrying value of the related license in the amount of $2,801 has been written off to profit and loss in 2010. On 29 March 2011 the City organization in charge of conducting the auction, Mosgortrans, announced the rules, terms and conditions that must be met in order to participate in the auction process. Up for auction is the exclusive right to advertising on Moscow city public street transport over a period of five years in return for a fee to be paid over the life of the agreement. Upon reviewing the conditions of the auction, the Group decided that it would be in their interest to participate in the auction and submitted the necessary application materials. Considering the initial starting price of the auction the Group intends to participate in the auction. However, there is no guarantee that Gallery will win. In addition, the announcement of this auction may evidence the general intention of Moscow city municipalities to require higher than insignificant payments for the renewal of licenses and permits currently held by the Group. In the future as advertising licenses come up for renewal on all categories of advertising, there is uncertainty over the terms and conditions of their renewal. As the Group gains experience renewing licenses over the next year it expects to be able to more accurately predict what might be the future terms and conditions of such renewals. Because of the current uncertainty, there exists the possibility that the assumption about the indefinite useful life of intangible assets could be reconsidered. Management is currently assessing the impact of this event on the 2011 consolidated financial statements of the Group.

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