Gallery Media Holding Ltd. Consolidated Financial Statements

Transcription

1 Consolidated Financial Statements Annual Report 2010 MD&A 1

2 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. MD&A 2

3 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 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). MD&A 3

4 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 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 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 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, OUTLOOK The worldwide global financial crisis has contributed to a significant slowdown in demand for advertising in 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 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 MD&A 4

5 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 There were no significant changes in the positions of outdoor advertisers in 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, 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, 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 MD&A 5

6 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, 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 % 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 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. MD&A 6

7 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 December-2009 Revenues 132, ,479 Gross Profit 54,627 29,386 EBITDA 31,278 * 11,365 EBITDA margin 24% 11% Capitalization In $ thousands 31 December December 2009 Senior Secured Notes 1 101, ,930 PIK Loan Total Gross debt 101, ,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. MD&A 7

8 EBITDA Reconciliation to Net Profit In $ thousands Year ended 31- December-2010 Year ended 31- December-2009 Net loss (3,602) ( ) 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 In $ thousands Year ended 31-December-2010 Year ended 31-December Revenues on own boards 103,697 87,443 Media buying revenues 29,196 18,036 Total revenues 132, ,479 Revenues on own boards Revenues from own boards increased by 19% when comparing 2010 to 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 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. MD&A 8

9 COST OF REVENUES In $ thousands Year ended 31- December-2010 Year ended 31- December 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 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 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 Starting from July 2010 it was revised to 20% effective until 31 December 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 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 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. MD&A 9

10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Year ended Year ended In $ thousands 31-December December 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 Advertising and marketing expenses Business trip and representative expenses Transportation expenses Security expenses 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 MD&A 10

11 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 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. MD&A 11

12 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 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. MD&A 12

13 Key Performance Indicators Revenues breakdown In $ thousands Year ended 31-December-2010 Year ended 31-December 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, Other 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, ,479 Number of Advertising Faces 31-December 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, , ,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, MD&A 13

14 Consolidated financial statements 31 December 2010

15 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

16 Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, , Russia Tel: +7 (495) (495) Fax: +7 (495) ООО «Эрнст энд Янг» Россия, , Москва Садовническая наб., 77, стр. 1 Тел: +7 (495) (495) Факс: +7 (495) ОКПО: 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. A member firm of Ernst & Young Global Limited

17 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

18 Consolidated statement of financial position As at 31 December 2010 (Thousands of US dollars) Notes (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, ,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, ,241 Equity and liabilities Equity attributable to equity holders of the parent Share capital Additional paid-in capital 14,15 283, ,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 , 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, ,808 Other current liabilities Total current liabilities 38, ,539 Total equity and liabilities 194, ,241 The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements. 3

19 Consolidated income statement For the year ended 31 December 2010 (Thousands of US dollars) Notes (Note 1) Revenues 132, ,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 Impairment loss (88,422) Finance income 20 1, Finance costs 20 (16,903) (17,692) Net foreign exchange loss (729) (6,149) Other operating income Net result from joint venture 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) The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements. 4

20 Consolidated statement of comprehensive income For the year ended 31 December 2010 (Thousands of US dollars) Note (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) The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements. 5

21 Consolidated statement of changes in equity For the year ended 31 December 2010 (Thousands of US dollars) Notes Share capital Attributable to equity holders of the parent Additional Foreign paid-in Accumulate currency capital d deficit translation Total equity Balance as at 31 December ,675 (119,533) (20,472) 62,770 Loss for the period (99,350) (99,350) Other comprehensive income Total comprehensive income (99,350) 614 (98,736) Balance as at 31 December ,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 Contribution from shareholders 14 5,000 5,000 Balance as at 31 December ,281 (222,385) (19,898) 40,998 The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements. 6

22 Consolidated statement of cash flows For the year ended 31 December 2010 (Thousands of US dollars) For the year ended 31 December 2009 (Note 1) Notes 2010 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, 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 Dividends received from joint venture 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 The accompanying notes on pages 8 to 49 are an integral part of these consolidated financial statements. 7

23 Notes to the consolidated financial statements For the year ended 31 December 2010 (Thousands of US dollars) 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 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 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

24 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 % per annum and maturity on 15 May Interest on the Old notes was payable on 15 May and 15 November of each year, beginning on 15 November 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 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. 9

25 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 As reported by the Company Reconciliation 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, ,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, ,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. 10

26 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 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. 11