NOTES to the Financial Statements of the Public Stock Company VSMPO AVISMA Corporation for 2009

Transcription

1 NOTES to the Financial Statements of the Public Stock Company VSMPO AVISMA Corporation for 2009

2 Table of Contents 1. GENERAL INFORMATION Company history and development Information on state registration of the Company Information on Company incorporation and development Sectoral risks Financial risks Management of financial risks Market risk Target markets for the products (works, services) of VSMPO-AVISMA Contacts Information about the Company s autonomous division Governance structure Auditors of the Company Information about the branches and representative offices of the Company FINANCIAL AND ECONOMIC ACTIVITIES Core business Basis of representation Changes in the accounting policy for the year following the reporting one Changes in accounting for basic raw material (titanium sponge) and mill products of own production Accounting for allowances Property, plant and equipment Methods for evaluating PPE acquired under contracts providing for discharge of obligations without using cash Useful life periods adopted by the Company for PPE (by main group) Methods of depreciation Information about state registration of title to PPE (VSMPO) of VSMPO-AVISMA Corporation Information about state registration of title to PPE of AVISMA branch of VSMPO- AVISMA Corporation Intangible assets Methods of evaluation of intangible assets acquired on a cashless basis Useful lives of intangible assets as adopted by the Company Methods of depreciation of intangible assets Construction-in-progress Long-term financial investments Financial investments in affiliates and dependent companies in Methods of valuation of financial investments at their retirement by group (type) Depreciation of long-term investments in affiliates and dependent companies Inventories Methods of valuation of inventories by group (type) Reserve for impairment of inventories Research and design Write-off methods in relation to expenses on research and design R&D result application periods as adopted by the Company

3 2.10. Debt receivable Short-term financial investments Cash funds Charter capital Additional paid-in capital Reserve capital Retained earnings Borrowings, collateral Collateral for obligations and payments, received and issued Accounts payable Payables to shareholders Regular and deferred tax liabilities and assets Sales revenue and financial indicators Recognition of sales revenue Expenses on ordinary activities Other income and expense, income tax and other similar obligatory payments Segment information Taxes Earnings per share Contingencies and events after the reporting date Remuneration, privileges and/or compensation of expenses broken down by business management and business control body of the company Related party information Related parties Changes that occurred in the list of related parties during the period Contracts with related parties Settlement of debt receivable with related parties Labor and salaries FINANCIAL ANALYSIS OF THE COMPANY General evaluation of the structure of assets and their sources Assets Liabilities Evaluation of the financial status of the Company Liquidity analysis Analysis of financial stability Profitability analysis NOTES TO THE FINANCIAL STATEMENTS OF THE AVISMA BRANCH OF VSMPO-AVISMA CORPORATION FOR Characteristics of financial and business activities of AVISMA COMPANY PLANS FOR THE FUTURE

4 1. GENERAL INFORMATION 1.1 Company history and development Company name. Full company name. In Russian - открытое акционерное общество Корпорация ВСМПО-АВИСМА In English - Public stock company VSMPO-AVISMA Corporation Short company name. In Russian - ОАО Корпорация ВСМПО-АВИСМА In English - VSMPO-AVISMA Corporation Date and grounds for changing the name of the Company: Decision of the joint general meeting of shareholders of OAO Verkhnaya Salda Metal Processing Plant and OAO AVISMA Titanium and Magnesium Works dated Certificate of Entry in the General State Register of Legal Entities of January 24, 2005 under the state registration number Previous full and short company names. 1. Open-type joint stock company Verkhnaya Salda Metal Processing Plant (AOOT "VSMPO"). Date and grounds for company establishment: Decision of Sverdlovsk Oblast State Property Management Committee of No. 38 On Approval of State Property Privatization Plan. Legal entity state registration number: 162 II-ВИ Date of state registration: State registration authority: Administration of Verkhnaya Salda, Sverdlovsk Oblast. 2. Open joint stock company Verkhnaya Salda Metal Processing Plant (OAO "VSMPO"). Date and grounds for changing the company name: Decision of the general meeting of shareholders dated , Resolution of the Head of Administration of Verkhnaya Salda of Sverdlovsk Oblast dated No. 250-d. 1.2 Information on state registration of the Company Legal entity state registration number: 162 II-ВИ Date of state registration: State registration authority: Administration of Verkhnaya Salda, Sverdlovsk Oblast. Main state registration number of the legal person: Taxpayer identification number (INN) Code of reason for registration (KPP) OKATO Code Registrar (as specified in the certificate of entry in the Uniform State Register of Legal Entities with regard to legal entity registered before July 1, 2002): Interdistrict inspection No. 3 for Sverdlovsk Oblast, Ministry of Taxation of Russia. Date entry made: Information on Company incorporation and development The company exists since Brief description of the history of incorporation and development. VSMPO s corporate predecessor was built in 1933 in the vicinity of Moscow. It was the USSR s first manufacturer of aluminum parts for engines and aircraft. During World War II, the factory was evacuated to Verkhnaya Salda, Sverdlovsk Oblast. 4

5 In 1957, the first titanium ingot was smelted, and in 1958 the plant started full-scale production of primary titanium. From 1957 to 1990, VSMPO scaled up output substantially, being the only supplier of titanium for the Soviet aerospace and defense industry. In 1991, VSMPO produced 50 % more titanium ingots than the USA, Europe and Japan taken together. In the early 1990s, the military budget was curtailed and the demand for domestic aircraft from civil aviation dropped dramatically; as a result, internal demand for titanium fell times, and for aluminum 5-6 times, which put VSMPO on the verge of bankruptcy. Striving to keep the factory, the only major employer in the town with a population of 55,000 people, with strong research and design potential, the new management of VSMPO made a strategic decision to go into diversification and produce not only titanium for the military sector of the domestic market but also products for export. This aspiration went counter to the fact that the composition of the titanium alloys produced abroad differed from those used in the Russian aircraft industry. New technologies were developed and introduced, which allowed the company to produce titanium products of the quality required by international customers. The equipment was retrofitted, and new workshops were set up, mainly for finishing and control operations. As a result, from 1993 to 1997 the Company increased its volume of exports 6 times. The main element in the strategy for attacking the external markets was a program of certification of the Company s products with potential buyers abroad. The company also invested heavily in the modernization of the production processes, the quality control system in particular. More than 120 quality certificates, including from major aircraft manufacturers and their suppliers, confirm the quality of the Company's products. Today the Company exports more than 68 % of its titanium products, mainly for use in aerospace industries in the USA and Europe. Currently, the Company works to increase the share of higher added-value products in its produce range, including thin titanium sheet, thin-walled welded titanium tubes, and die-forgings. In addition to the above, the Company set up off-range business lines such as building construction, wheels, kitchenware, heat-exchanging equipment of titanium, and gas-cleaning systems. All the above has enabled the Company to keep its human resources, including the core staff of engineers, R&D experts and workers, who are responsible for the town as well, because the plant is the major employer, as well as keeping all of its industrial potential and capacities and maintaining them in absolutely working condition and, moreover, raising them to a higher level of technological and quality requirements. On July 1, 2005, OAO "VSMPO" was reorganized through the acquisition of OAO AVISMA Titanium and Magnesium Works (now the AVISMA branch of VSMPO-AVISMA Corporation), an enterprise with its own history of development. In 1941, the USSR Government commissioned the construction of Berezniki Magnesium Plant. The new factory was to provide a sharp growth in the production of magnesium in the USSR. It was decided that the factory should be located in the town of Berezniki in the Urals, where there was a virtually inexhaustible deposit of potassium and magnesium salts, Verkhnekamskoye. 5

6 The first ingots of magnesium in Berezniki were produced in 1943, followed by two decades of development in magnesium production to a considerable level. An essentially new stage of development in the Russian magnesium industry came in the 1950s in connection with intensive growth of titanium production. The need to supply the titanium sponge fabrication process with magnesium led to the creation of combined titanium and magnesium production facilities. In 1960, the first Ural titanium was produced. For its achievements in the production of titanium and magnesium and for efficiency and quality of work the Berezniki Titanium and Magnesium Works (BTMK) was awarded the order the Red Banner of Labor and medals. Another important stage in the history of the Company was the privatization of BTMK and its transformation into a public stock company, the AVISMA Titanium and Magnesium Works. In 1994, OAO "AVISMA" became a full member of the International Magnesium Association. The objective of this organization is to promote the use of the metal magnesium in industry internationally and raise the awareness of developments in nonferrous metallurgy among magnesium market participants. In 1998, the controlling block of shares passed to OAO "VSMPO" (OAO Verkhnaya Salda Metal Processing Plant ). Goals of the Company: To manufacture products that meet customer requirements and expectations and conform to international and national standards and mandatory requirements of supervising agencies. To enhance the competitiveness of products on domestic and international markets. Also, VSMPO-AVISMA Corporation works to supply its products to the key sectors of the economy and approach the most prestigious international markets such as aircraft, space, chemistry, power, and environmental protection industries. The mission of VSMPO-AVISMA Corporation is to ensure the sustainability of the Company, continuation of the titanium industry in Russia and integration into the world economy. 1.4 Sectoral risks The main consumers of VSMPO-AVISMA Corporation s titanium products are companies in the aerospace, power, chemical machine engineering and oil and gas industries, and nonconventional consumers, specifically, producers of sports products, etc. Each of the above industries features their specific development trends and, therefore, they are reviewed separately. About 65 percent of products manufactured by VSMPO-AVISMA Corporation are intended for use in the aerospace industry and, therefore, the situation in this sector of the Russian and world economy has a profound influence on the technical and economic performance indicators of the Company. The aerospace sector of the world market features a cyclic pattern with a period of about 4 years. The world titanium market follows the same pattern. It should be noted, though, that in the recent years these markets have been affected by the Asian financial crisis of 1998 and the September 11, 2001 terrorist attack in the USA. Nevertheless, steady growth in the consumption of titanium in this sector of the world economy is to be expected, and there is no replacement for titanium alloys in the foreseeable future Moreover, the consumption of titanium alloys in the aerospace sector of the economy has essentially increased owing to the increasing demand for aircraft and an increased share of 6

7 titanium in the latest aircraft models (B787 by Boeing and A350 by Airbus), which are supposed to become the principal models for long-haul flights. In 2009, the market situation in this sector deteriorated due to the following reasons: - a delay of 27 months in the development, testing and certification of titanium-rich Boeing 787, in which about half of the titanium needs is met by VSMPO-AVISMA Corporation; - a delay in the commercial production of the largest Airbus A380, for which the Company is the only supplier of forgings for chassis parts; - a delay in the designing and prototyping of parts, assemblies and plants for A350, a new generation aircraft of Airbus; - an industrial action at Boeing which started in September 2008 and lasted 58 days; it had a negative effect on the output of aircraft of this company in the fourth quarter of 2008 and on the implementation of programs of commercial development and production of new aircraft models; - during crisis, aircraft building companies reduce inventories, ordering smaller volumes of metal products. These factors led to a substantial reduction in demand for titanium products for the abovementioned projects in 2009, which affected order volumes, equipment utilization and the economic performance indicators of the Company. However, the long-term contracts with Boeing and Airbus have not led to any serious negative consequences for VSMPO-AVISMA Corporation because these companies have met their obligations for the purchasing of the minimum quantities of titanium products as per contracts. The stagnation of the world titanium market has led to a fall in the market prices for titanium products. This fall, however, has mainly affected the wholesale market, and the prices under longterm contracts remained unchanged. Moreover, as a result of reviewing the long-term contracts during the period of growth in demand for titanium, the Company managed to raise considerably the prices for its products. It should be noted that there is no alternative to the development and large-scale production of the above-mentioned aircraft models of new generation because they ensure an appreciable increase in fuel efficiency, which is becoming a decisive factor for increasing air traffic in the context of the shortage and ever increasing costs of hydrocarbon production. It is therefore to be expected that in the near term ( ) the crisis in the development of new aircraft will, no doubt, be overcome, and the consumption of titanium products by the main customer, the aerospace industry, will correspond to the forecasts. Taking into account the aircraft building cycle (6-8 months) the demand for titanium products will recover even earlier. The power sector, nuclear power in the first place, has now become a heavy user of titanium alloys, mainly in heat-exchanging systems, especially at nuclear power stations that employ sea water, including latest mobile nuclear power installations. Another large potential consumer of titanium alloys is represented by power installations that use the temperature difference of the seawater on the surface and in ocean depths. The chemical industry, for which the unique anticorrosive properties of titanium alloys are a major attraction, is a stable consumer and a good prospect, steadily increasing the consumption of these materials. In recent years, the production of energy materials (oil, gas, gas condensate) has been shifting towards sea shelf sites. Titanium alloys are an almost ideal structural material for offshore drilling and extracting platforms; raiser pipes and pipeline systems because titanium and its alloys feature absolute corrosion resistance in seawater. In the last five to seven years, a considerable volume of low-grade titanium alloys (up to 7,000 tons a year) has been used for fabricating golf club heads. Even if a replacement for titanium alloys is found in this area in the near future, there are considerable potential markets for titanium alloys in the production of products for sports and leisure such as bicycles, tourist and climbing equipment, hand-held tools, etc. Generally, industrial development does not point to any decrease in the consumption of titanium alloys, and risks in the sector are minimal. Moreover, since 2004 there has been a steeply growing trend in the demand for titanium alloys 7

8 accompanied by rapidly growing production all over the world. It has been caused by full recovery from the consequences of the September 11, 2001 terrorist attack in the USA and by growth in the output of aircraft by all of the major international aircraft manufacturers. At the same time, there has been a substantial growth of the market of titanium alloy industrial applications, mainly in the chemical and power industries, predominantly in the Southeast Asia (China, India). This tendency continued in 2008 and However, the global financial crisis has had an effect on the titanium market as well. On the one hand, the business recession caused by the crisis has entailed a reduction in the demand for air traffic and orders for new civil aircraft from airlines. On the other hand, limited opportunities for borrowing from banks hamper the placing of orders for civil aircraft and construction of other projects involving the use of titanium. From the viewpoint of fluctuation of the world prices for raw and energy materials, titanium is not an exception among metals. In terms of prevalence in the nature, titanium ranks fourth among structural materials (after aluminum, magnesium and iron), and there are considerable explored reserves of this metal. Considering the fact that only about 5 % of the raw material is used for fabricating metal titanium (the rest is used for the production of paint pigments on the basis of titanium dioxide), risks associated with any shortage of the raw materials or increasing prices for it are virtually non-existent. It should be noted that in the last three years there has been a substantial rise in prices for the alloying elements that are used in titanium alloys: 3.7 times for vanadium and 4.4 times for molybdenum, which has had an appreciable effect in costs and prices for titanium ingots and mill products. For offsetting these risks, the Company periodically increases wholesale prices for titanium mill products, and long-term contracts provide for regular reviews of prices for products taking into account changes in the prices for alloying components on the world market. At the same time, in the context of the global financial crisis, the prices for the alloying elements that are used in titanium alloys (aluminum, vanadium, molybdenum, zirconium, tin) have decreased considerably, which may serve as an appreciable factor of production cost reductions. The core products of the AVISMA branch of VSMPO-AVISMA Corporation are titanium sponge and powders and also magnesium and magnesium alloys. The main markets for the above products are as follows: for titanium sponge/titanium powders - Europe (LSM, Bostlan, ThyssenKrupp, GfE-MIR GmbH), Asia (Stork, Sojitz), the USA (VSMPO Tirus); for magnesium - the USA (VSMPO-Tirus), The principal risks in the production of titanium sponge, magnesium and magnesium alloys are as follows: - an increase in rates for energy resources, which may increase production costs; - an increase in prices for raw materials and stock, which may also result in an increase in production costs; - expansion of cheap Chinese magnesium and titanium sponge on the world market, reducing the competitive edge of VSMPO-AVISMA Corporation; - exclusion of the Russian Federation from the system of preferences by the USA and introduction of an import duty for titanium products supplied to the US market: from 5.5 % for die-forgings to 15.0 % for bar, sheet, plate and tubing. This decision has not caused any substantial damage to the business of VSMPO-AVISMA Corporation in the USA since the Company supplies its products to the aerospace manufacturers (Boeing, Pratt&Whitney, Perryman, Dynamet, TECT), which export a considerable share of their output. They are able to offset the import duty using TIB or other options for keeping the prices for the products of VSMPO-AVISMA Corporation unchanged; - the protectionist policy of the US government directed at protecting the US manufacturers of magnesium from Russian magnesium imports and, as a consequence, introduction of an antidumping duty in relation to the magnesium produced by VSMPO-AVISMA Corporation. 1.5 Financial risks Considerable risk factors influencing the performance of the Company are associated with the 8

9 dollar exchange rate, euro exchange rate, and inflation. VSMPO-AVISMA Corporation is a major exporter, exports occupying a considerable share of its deliveries. The Company also imports process equipment and materials and is therefore subject to risks of loss due to fluctuations in currency exchange rates. Thus, any misbalance between dollar and euro in export and import presents a risk of efficiency reduction for the Company: whereas most of the Company s products are sold abroad in dollars, European companies are the main supplier of equipment for modernization. A growth in the European currency against the dollar and the ruble leads to an actual rise in prices for any equipment purchased. The currency risk can affect the size of profit: an increase in foreign currency exchange rate increases profit and vice versa, an increase in the national currency rate reduces it. In the event that negative changes in a currency exchange rate tend to become serious and persistent, the Company may take the following actions: 1. change the payment currency in export contracts; 2. hedge partially against this risk by concluding import and export contracts in one currency, and contracts for deliveries and for transport and other service provision in a foreign currency; 3. reorientation to the home market and to domestic raw materials with the aim to reduce production costs and financial dependence. An increasing inflation burden may have negative consequences for the Company; however, the Company believes that this factor cannot seriously affect the payment of dividends on securities as the level of return on sales of VSMPO-AVISMA Corporation is above the rate of inflation. The risk of a negative effect of the global financial crisis and, as a consequence, of the banking crisis on the performance of the Company entailing more expensive borrowings and, accordingly, reduction in investments, suspension of new capital-intensive projects and some reduction in liquidity. VSMPO-AVISMA Corporation relies on bank borrowings as a source of finance and thus the Company may incur additional expenses as a result of an increase in interest rates, which will lead to a reduction in profit. Also, the risk of further economic recession in the Russian Federation should not be excluded, which may have an adverse effect on the performance of the Company. 1.6 Management of financial risks The performance of VSMPO-AVISMA Corporation is connected with a variety of financial risks: market risk (including foreign currency exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The overall risk management program is aimed at maximum reduction of their adverse effect on the financial results of VSMPO-AVISMA Corporation Market risk Currency risk Currency risk is a risk of losses due to adverse changes in the exchange rates of various foreign currencies in relation to the functional currency of VSMPO-AVISMA Corporation. The currency risk occurs as a result of international operations performed by VSMPO-AVISMA Corporation, forward deals in foreign currencies, including repayment of loans and recognition of assets and liabilities in a foreign currency that is not the functional currency of VSMPO-AVISMA Corporation. The purpose of VSMPO-AVISMA Corporation with regard to foreign currency exchange risk management is to reduce fluctuations in financial performance by means of comparing similar assets and liabilities expressed in foreign currency. Currently, VSMPO-AVISMA Corporation does not hedge against currency risk by means of financial instruments. The enterprises of VSMPO- AVISMA Corporation are forbidden to borrow and make investments in foreign currencies on a speculative basis. The policy of VSMPO-AVISMA Corporation with regard to borrowings in foreign currency depends 9

10 on current and forward exchange rates in relation to the Russian ruble. Borrowings are mainly determined in US dollars, which is the currency of general contracts for export trade. For the purpose of making profit in foreign currency, VSMPO-AVISMA Corporation conducts export sales. As VSMPO-AVISMA Corporation sells a considerable part of its products outside the Russian Federation, it is exposed to a currency risk caused, mainly, by US dollar rate fluctuations, the US dollar being the currency used in the majority of export sales. Interest rate risk The interest rate risk results from changes in the interest rate, which may affect the financial performance of VSMPO-AVISMA Corporation or the prices of the securities issued by VSMPO- AVISMA Corporation. A change in the interest rate may become a reason for fluctuations in interest income and expense. The main objective for VSMPO-AVISMA Corporation in interest risk management is the protection of results with regard to net interest. The treasury of VSMPO- AVISMA CORPORATION performs interest risk management. The objective of VSMPO-AVISMA Corporation in interest rate risk management is the protection of the end results with regard to interest. The function of interest rate risk management belongs to the treasury of VSMPO-AVISMA Corporation. Data on changes in market interest rates are monitored and the treasury of VSMPO-AVISMA CORPORATION within the framework of interest rate risk management reviews the Company's positions with regard to interest-bearing borrowings. Monitoring is performed allowing for current refinancing terms and conditions, recovery of current positions and alternative financing. VSMPO- AVISMA Corporation does not apply interest hedging, having mainly short-term borrowings, and works with major banks, which are able to provide loans at a lower interest rate. The interest rate risk of VSMPO-AVISMA Corporation is associated with various short-term borrowings. Borrowings with a variable interest rate expose the cash flow of VSMPO-AVISMA Corporation to interest rate risk. As of December 31, 2008 and December 31, 2009 borrowings with a variable interest rate amounted to 23,612 thousand US dollars and 5,152 thousand US dollars, respectively. The reduction in total short-term borrowings with a variable interest rate is connected with the new policy of the Company s financial management, aimed at reducing interest rate risks. 1.7 Target markets for the products (works, services) of VSMPO- AVISMA Corporation Main markets where the Company operates The distribution of product deliveries by country (region) in 2009 was as follows: the USA = 43.6 %; European countries = 41.5 %; countries in the Middle East and Southeast Asia (Israel, China, India) = 5.3 %, Japan = 5.1 %; countries in Northern and South America (without the USA) = 4.3 %; other countries = 0.2 %. The Company s partners on the world market are more than 300 companies in 48 countries. Today VSMPO-AVISMA Corporation meets the needs for titanium at a level of up to 40 % for Boeing, 60 % for EADS, 100 % for Embraer, and 95 % for BF Goodrich. The Company supplies titanium alloy bars for blade fabrication at % of the total need and ingots and billets for disk fabrication to engine manufacturers such as Snecma, Rolls-Royce, Honeywell, GEAE, Pratt and Whitney, Pratt and Whitney Canada and to their subcontractors. In fact, there is not a single titanium-consuming company in the world that would not use titanium from VSMPO-AVISMA Corporation. VSMPO-AVISMA Corporation expands R&D programs with companies abroad for the development of new titanium alloys and steel and aluminum part fabrication for the aerospace industry. New materials and technologies will be broadly used in both aircraft structures and parts and promising developments. 10

11 In Russia and other CIS countries, VSMPO-AVISMA Corporation co-operates with more than 1500 companies. The Company s products are used in all Russian aerospace projects, in both airframes and engines and rockets. The main markets for the Company s products are as follows: - for titanium sponge/titanium powders - the USA, Europe, China; - for titanium mill products - aerospace companies in the USA, Americas and Europe (Boeing, EADS, Embraer, Snecma, Rolls-Royce, Honeywell, GEAE, Pratt and Whitney and their subcontractors); - for titanium sheet and bars for golf club production the President Country Club in Taiwan; - for metallurgical mill products from CP titanium for the chemical and power industries, sea water desalination plants (welded and seamless-rolled pipes, sheets, plates) are supplied through a joint venture, UniTi, to Japan, Southeast Asia, and the Middle East; - for magnesium and magnesium alloys - the USA (VSMPO Tirus US); Western Europe (Georg Fischer, Daimler Chrysler, Cezus). The factors that may adversely affect the sales of products (works, services) and the possible action that the Company may take to reduce such influence - target markets for the core products of the Company (metallurgical mill products from titanium alloys), current status and development prospects, possible negative phenomena on these markets - are described in detail in sections Contacts Company location: 1 Parkovaya Str., Verkhnaya Salda, Sverdlovsk Oblast, Russia Principal place of business: 1 Parkovaya Str., Verkhnaya Salda, Sverdlovsk Oblast, Russia Postal address: 1 Parkovaya Str., Verkhnaya Salda, Sverdlovsk Oblast, Russia, Phone: +7(34345) , Fax: +7(34345) , webmaster@vsmpo.ru. 1.9 Information about the Company s autonomous division Full name of the autonomous division Postal address Certificate of registration with tax authorities Certificate of registration with the Social Security Fund and the Pension Fund of the Russian Federation AVISMA division of Public Stock Company VSMPO-AVISMA Corporation 29 Zagorodnaya Str., Berezniki, , Perm Krai, Russia Based on the Certificate of Legal Entity Registration with Local Tax Authority within the Russian Federation, the Division was registered on OGRN KPP Notice of registration as insured legal entity with the Social Security Fund at the place of business of the Division: Registration number /

12 Code of reporting relationship Date of registration: Date notice issued: Notice of registration with the Pension Fund of the Russian Federation at the place of business of the Division Registration number Date of registration Governance structure Membership In accordance with the Charter, the principal governance bodies of the Company are: the general meeting of shareholders, the Board of Directors, and the Chief Executive Officer (Director-General). In 2009, from to , the Director-General of VSMPO-AVISMA Corporation was Evgeny V. Romanov. On , acting in accordance with the Charter of the Company, the Board of Directors appointed Mikhail V. Voevodin as the Director-General of VSMPO-AVISMA Corporation. Members of the Board of Directors of VSMPO-AVISMA Corporation as of : Chemezov, Sergey Viktorovich, b Chairman of the Board of Directors Aleshin, Alexey Vladislavovich, b Voevodin, Mikhail Viktorovich, b Melnikov, Nikolay Konstantinovich, b Tetyukhin, Vladislav Valentinovich, b Tankeyev, Vladimir Petrovich, b Shelkov, Mikhail Evgenyevich, b The Company's Charter provides for no collective executive body. The management structure of the Company also includes an internal audit committee. Members of the Internal Audit Committee as of NAME Tanayev, Alexander Fedotovich Gorokhova, Vera Sergeyevna Tetter, Svetlana Vyacheslavovna Place of work and post Chairman of the Internal Audit Committee of VSMPO- AVISMA Corporation Member the Internal Audit Committee of VSMPO-AVISMA Corporation Member the Internal Audit Committee of VSMPO-AVISMA Corporation 12

13 Yakovleva, Lyudmila Kimovna Member the Internal Audit Committee of VSMPO-AVISMA Corporation Andreyeva, Larisa Alexandrovna Member of the Internal Audit Committee of VSMPO-AVISMA Corporation Mazikhina, Valentina Lavrentyevna Meshchaninova, Elena Petrovna Member of the Internal Audit Committee of VSMPO-AVISMA Corporation Member of the Internal Audit Committee of VSMPO-AVISMA Corporation 1.11 Auditors of the Company Full and short names of the company that audited the consolidated financial statements of the Company according to IAS. Full name: Closed joint stock company KPMG Short name: ZAO "KPMG" Principal place of business: 18/1 Olimpiisky Prospekt, Moscow, Russia Telephone: ( ) Fax ( ) Auditor license number: Е Issued in accordance with the Order of the Ministry of Finance of the Russian Federation on License expires on Factors that may influence the independence of the auditor from the company: none. Material interests relating the auditor (Auditor s officials) to the Company (Company officials): none: there are no participatory shares of the auditor (Auditor s officials) in the Company s charter capital; no loans have been provided by the Company to the auditor (officials of the auditor); there are no close business relationships (participation in the Company s product (service) promotion, participation in a joint entrepreneurial activity, etc.), and there are no relationships of kinship; there are no officials in the Company who are simultaneously officials (auditors) of the auditor. The auditor s fee is determined in accordance with contracts concluded. The actual fee paid to the Auditor by the Company based on the results for each fiscal year: Services involving the auditing the consolidated financial statements according to IAS for 2008: 10,620 thousand rubles; Services involving the auditing of the consolidated financial statements according to IAS for 2009: 12,390 thousand rubles; There are no deferred and overdue payables for the services provided by the auditor. Full and short name of the Company s auditor in accordance with the legislation of the Russian Federation. Full name: Rosexpertiza Limited Liability Company Short name: OOO Rosexpertiza Principal place of business: 11 Mashi Poryvayevoy Str., Moscow, Russia Phone/fax: ( ), / ( ) rosexp@online.ru Auditor license number: Е

14 Issued on: License expires on: Issuing authority: Ministry of Finance of the Russian Federation The fiscal year for which the auditor carried out an independent audit of the business accounting practices and the financial statements of the Company: No audits of the Company had been carried out by OOO "Rosexpertiza" previously. Factors that can influence the independence of the auditor on the Company, none. The price of the audit of the Company s financial (accounting) statements for 2009 under contract amounts to 3,200 thousand rubles (including VAT and overhead costs). The actual fee paid by the Company to the auditor in 2009 is 1,600 thousand rubles. Final settlement in the amount of 1,600 thousand rubles will be made in 2010 following the completion of the audit. There are no deferred and overdue payables for the services provided by the auditor Information about the branches and representative offices of the Company. According to the resolution of the Board of Directors of OAO "VSMPO" dated , "AVISMA" (Berezniki) and VSMPO (Verkhnaya Salda) branches were set up on July The "VSMPO" branch was liquidated on based on the resolution of the Board of Directors dated The company does not have any branches or representative offices abroad. 14

15 2. FINANCIAL AND ECONOMIC ACTIVITIES 2.1. Core business The core business of the company is the fabrication and supply of titanium products (bars, plates, sheets, ingots, billets, slabs, die-forgings, titanium alloy tubes, etc.). Also, the Company produces ferrotitanium and aluminum alloy products. The consolidated balance sheet, profit and loss account and appendices to the balance sheet for 2009 contain the results achieved by the Company autonomous accounting division: 1. The "AVISMA" branch was set up on the basis of OAO "AVISMA" reorganized through accession to VSMPO-AVISMA Corporation. AVISMA produces titanium sponge and magnesium and magnesium alloys. Settlements with this division within VSMPO-AVISMA Corporation are conducted through balance sheet account 79 Internal Settlements Basis of representation The financial statements have been prepared in accordance with the accounting and reporting rules of the Russian Federation, in particular in accordance with the requirements of the Federal Law On Accounting No.129-ФЗ and the Accounting and Reporting Regulation for the Russian Federation approved by the order of the Ministry of Finance of the Russian Federation dated No. 34н, by the Order of the Ministry of Finance of the Russian Federation No. 67н dated "On Financial Reporting Forms, and the following accounting regulations: PBU 1/2008 Corporate Accounting Policy ; PBU 2/2008 Accounting for Building Contracts ; PBU 3/2006 Accounting for Assets and Liabilities the Value of Which is Expressed in Foreign Currencies ; PBU 4/99 Corporate Accounting Reports ; PBU 5/01 Inventory and Stock Taking ; PBU 6/01 Accounting for Fixed Assets ; PBU 7/98 Events after Reporting Date ; PBU 8/01 Business Contingencies ; PBU 9/99 Corporate Income ; PBU 10/99 Corporate Expenses ; PBU 11/2008 Related Party Information ; PBU 12/2000 Information by Segment ; PBU 13/2000 Accounting for Government Assistance ; PBU 14/2007 Accounting for Intangible Assets ; PBU 15/2008 Accounting for Expenses on Borrowings ; PBU 16/02 Information on Discontinued Operation ; PBU 17/02 "Accounting for Expenses on Research and Design"; PBU 18/02 "Accounting for Income Tax Expense"; PBU 19/02 "Accounting for Financial Investments"; PBU 20/03 Information on Participation in Joint Ventures ; PBU 21/2008 Changes in Accounting Estimates and the following guides and instructions: Income Per Share Disclosure Guide approved by the order of the Ministry of Finance of the Russian Federation dated No. 29н, Instruction for Accounting for Inventory and Stock, 15

16 Instruction for Accounting for Special Tools, Special Devices, Special equipment and Special Clothes, and other orders of the Ministry of Finance of the Russian Federation and other statutory acts. According to the Report Preparation and Submission Instruction (the order of the Ministry of Finance No. 67н of ): material indicators shall be recognized in the financial reports separately; an amount shall be recognized material if it constitutes at least 5 % of the balance over corresponding data for reporting period. To ensure compliance with item 10 of the accounting regulation Corporate Financial Reports (PBU 4/99) ( for each numerical indicator of financial reports, excepting the report prepared for the first reporting period, data shall be provided for a minimum of two years for the reporting year and for the year preceding the reporting one ), the comparative data of Form No. 5 Exhibit to Balance Sheet are presented in these Notes Changes in the accounting policy for the year following the reporting one Changes in accounting for basic raw material (titanium sponge) and mill products of own production Since 2010, the titanium sponge received by VSMPO from AVISMA is classified as a semifinished product of own production (Balance Sheet item 21). Text of the Accounting Policy for 2009 (item 193): The following rules are established for accounting for the principal raw material, titanium sponge, received by the accounting center (TsFU) of VSMPO from AVISMA s TsFU. To ensure efficient closing of reporting periods and more accurate costing of finished products, titanium sponge produced by AVISMA and transferred to VSMPO shall be accounted for starting in January 2009 under item 10 using the planned book price equal to the planned production cost value (i.e. taking into account general production expenses). At the end of a reporting period, when closing the actual production cost value, deviations are established, which are then transferred from AVISMA accounting center to VSMPO accounting center by means of a letter of advice. At VSMPO accounting center, deviations are accounted for in subaccount Deviations in inventory costs from accounting prices and are then absorbed in costs within the reporting period according to item 151 of the Accounting Policy. At AVISMA accounting center, when calculating the cost of the core raw material fabricated under Intradepartmental Cooperation, freight and procurement costs are not accounted for. In the event of transfer of any other products from TsFU AVISMA to TsFU VSMPO, accounting shall be done similarly to the accounting for titanium sponge. Text of the Accounting Policy for 2010: The following rules are established for accounting for semifinished products of own production (including titanium sponge) transferred from financial reporting center AVISMA to financial reporting center VSMPO (or from financial reporting center VSMPO to financial reporting center AVISMA). For expeditious closing of a reporting period, starting in January 2010, all semifinished products of own production transferred from one financial reporting center to the other shall be accounted for in account 21 Semifinished Products of Own Production at accounting price equal to planned 16

17 production cost value (direct costs plus general production expenses) calculated by the Planning and Economics on a monthly basis. At the end of a reporting period, when closing the actual cost value, deviations are established which are transferred by a letter of advice from AVISMA financial reporting center to VSMPO financial reporting center (or from VSMPO financial reporting center to AVISMA financial reporting center). These deviations are accounted for in a separate sub-account within account 21 and are absorbed in costs within the reporting period according to this Accounting Policy. If deviations from the accounting price of a semifinished product are transferred from financial reporting center to financial reporting center after the closure of the reporting period by one of the financial reporting centers, these deviations are accounted for in the balance of a separate subaccount in account 21 of the receiving financial reporting center and are to be absorbed in current (reporting) period and shall not be carried forward to next year. Reason for Change: To bring the accounting practice in conformity with the economics of intra-company production cooperation. Assessment of the consequences of the change in the accounting policy for financial reports: The change under consideration will take effect on The transfer of balances for titanium sponge from account 10 to 21 is made as of The change in values in the balance sheet is recognized in lines 211, 213 by the same amount as minus or plus accordingly, in the amount of RUR 101,985, Accounting for allowances According to item 25 of the Accounting Regulation "Accounting for Inventory and Stock", PBU 5/01, (approved by the order of the Ministry of Finance of the Russian Federation dated June 9, 2001 No. 44н with amendments as of November 27, 2006 and March 26, 2007) starting in 2009 the Company provides an allowance for depreciation of inventories in its accounting books. Added to the Accounting Policy for the purpose of accounting in 2010 is Appendix No.9 Regulation on Provisioning for Depreciation of Inventories. Assessment of consequences in the Accounting Policy for accounting: Data on the allowance created for depreciation of inventories for 2009 are presented in section 2.8 "Inventories Property, plant and equipment To be included in assets for accounting purposes, property, plant and equipment (PPE) must meet the following conditions all at the same time: a) they should be used in the fabrication of products, performance of jobs or provision of services, or for administrative needs of the organization; b) they should be used for a long time, i.e. for a useful lifetime of over 12 months or operation cycle if it exceeds 12 months; c) the organization does not intend to resell these assets; d) they should be able to bring economic gains (income) to the organization in future. Assets that meet the above conditions and the cost of which does not fall outside the limit established in the Accounting Policy of the Corporation but is no more than RUR 20,000 per unit 17

18 shall be recognized in the accounting books and financial statements under Materials and Stock shall not be recognized as PPE irrespective of their useful life and price: overalls and boots; hand-held, metal-cutting, building tools and measuring instruments; bed linen, curtains and other textiles; kitchenware and other items made of glass and ceramics. PPE are included in accounting at historical cost. The historical cost of PPE acquired by the Company shall be based on actual costs and shall include costs of construction and acquisition except for the value added tax and other refundable taxes. The historical cost of PPE received on a gratuitous basis shall be based on their market value. The historical cost of PPE acquired under contracts providing for the discharge of obligations (payment) without the use of cash shall be based on the cost of products (valuables) transferred. The cost of transferred products (valuables) shall be established based on the price that is usually used for determining the price of similar products (valuables) in comparable circumstances. The revaluation of PPE is not provided for by the Accounting Policy of the Company and thus has not been carried out. The depreciation of the PPE is estimated on a monthly basis by the straight-line method in accordance with the Accounting Regulation Accounting for Fixed Assets, PBU 6/01. The Company determines the useful life of PPE when these are being included in books for accounting purposes. For determining the useful life of PPE included in books for accounting purposes after the Company has been guided by the Classification of Fixed Assets Included in Depreciation Groups put into effect by the decree of the Government of the Russian Federation dated January 1, 2002, No. 1. With regard to leased-out PPE, the depreciation amount is estimated on a monthly basis under Miscellaneous Costs irrespective of rent invoicing. PPE leased out during 2009 were accounted for under the balance sheet account 03, and as of these PPE were transferred to account 01, separate sub-account Leased Out Fixed Assets in the amount of 813,423 thousand rubles because these PPE are used not only for renting purposes but may also be used for the Company s own needs. Form No.5 of the Financial Statements shows an amount of 921,766 thousand rubles, allowing for receipts and disposals during Because some property rental contracts do not contain information about the cost of the property, these property costs are therefore not shown in off-balance sheet accounts of the financial statements. The list of property rented for which there is no information on cost is presented in Table 1. 18

19 Table 1 Property leased by VSMPO-AVISMA Corporation as of No. Lessor Leased property Rent, RUR Contract duration 1 Nodri-423 dated Russian Railways Land S=2, sq.m. Verkhnaya Salda station 389,400 with VAT per year; 32,450 with VAT per month Indefinite 2 No.810 dated Property Management Committee Land S=7,634.0 sq.m. For construction and use of 5-storied apartment house 3,404, a year, 851,000 a quarter. Indefinite 3 No.960 dated Property Management Committee Land S=13, sq.m. For an educational institution, Rab.Molodezhi Str , per month No.1000 dated Property Management Committee Land S=2, sq.m. For accommodating free parking lot for company and personal cars (parking near DSK). 4, per month No.1004 dated Property Management Committee Land S=49,003.0 sq.m, for construction of skull furnaces 28, per month No.1012 dated Property Management Committee Land S=14,433 sq.m, for a free open-air parking lot for company and personal cars (parking in site "Б"). 28, per month No.1021 dated Property Management Committee Land S=3,526, sq.m for locating slurry pond. 783, per month