Financial Statements

2 0 0 6 Financial Statements

2006 Financial Statements

ЗПАД Армеец Финансов отчет 31 Декември 2006 Contents Balance sheet 4 Balance sheet 5 Income statement 6 Statement of cash flows (direct) 7 Statement of changes in equity 8 Insurance reserves 9 10

Balance sheet Note Assets Non-current Investment property 5 11 572 2 594 Investment in associates 6 300 300 Intangible assets 7 278 258 Property, plant and equipment 8 1 443 915 Investment in subsidiaries 10 50 50 Deferred tax assets 11 26 13 13 669 4 130 Current Inventories 12 242 165 Insurance receivables 13 13 055 8 098 Reinsurance receivables 14 496 372 Short-term financial assets 15 43 293 21 639 Related parties receivables 37.3 415 3 382 Other receivables 16 4 233 3 269 Cash and cash equivalents 17 5 473 2 689 67 207 39 614 Total assets 80 876 43 744 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by: The notes from page 8 to page 49 are an integral part of the financial statement.

Balance sheet Note Insurance reserves 18 Premium reserves carried forward 20 761 14 236 Reserves for outstanding payments 11 602 7 761 Contingency fund 125 58 Other reserves 7 677 3 245 Reinsurers share in reserves formed (2 378) (2 531) Total insurance reserves 37 787 22 769 Equity Share capital 19 15 019 8 591 Other reserves 962 685 Retained earnings 17 497 6 705 Total equity 33 478 15 981 Liabilities Non-current Deferred tax liabilities 11 68 311 Finance lease 20 113 41 181 352 Current Insurance payables 21 2 376 2 511 Reinsurance payables 22 604 1 097 Co-insurance payables 55 - Short-term financial liabilities 23 80 17 Tax liabilities 24 2 965 358 Payables to employees and social security institutions 25.2 756 365 Related parties payables 37.3 1 355 48 Other 24 1 239 246 9 430 4 642 Total liabilities 9 611 4 994 Total equity, liabilities and insurance reserves 80 876 43 744 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by:

Income statement Note Insurance income 27 83 733 61 226 Insurance expense 28 (68 709) (46 832) Reinsurance income 29 3 954 3 732 Reinsurance expense 30 (8 282) (6 810) Technical result 10 696 11 316 Other income 70 83 Other expense 31 (10 411) (5 598) Employee benefit expenses 25.1 (4 560) (2 919) Gains from operations with financial instruments 32 24 250 4 450 Interest expenses\income, net 33 (8) 286 Other financial expenses 34 (92) (98) Result for the year before tax 19 945 7 520 Tax expenses, net 35 (2 448) (823) Profit for the year 17 497 6 697 Note Earnings per share 36 142.79 115.53 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by: 6

Statement of cash flows (direct method) Note Cash flow from insurance operations Cash inflow from insurance premiums 52 931 37 580 Insurance collaterals paid (15 510) (10 397) Tax payables (325) (1 019) Other cash inflow from insurance operations 54 928 Other cash outflow for insurance operations (31 908) (25 803) Net cash flow from insurance operations 5 242 1 289 Cash flow from investing operations Interests received 33 321 Purchase of property, plant and equipment (718) (507) Acquisition of intangible assets (116) (199) Acquisition of financial assets (1 213) (2 848) Net cash flow from investing operations (2 014) (3 233) Cash flow from financial operations Cash inflows from short-term financial assets - 1 370 Interest paid (41) (35) Other cash outflow for financial activities (386) (1 518) Net cash flow from financial operations (427) (183) Exchange gains/(losses) on cash and cash equivalents (17) 6 Net increase (decrease) of cash and cash equivalents 2 784 (2 121) Cash and cash equivalents, beginning of year 2 689 4 810 Cash and cash equivalents, end of year 16 5 473 2 689 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by:

Statement of changes in equity Share Common Retained Total capital reserves earnings equity Balance 1 January 2005 4 914 182 188 9284 Increase of the capital 3 677 - (3 677) - Distribution of the profit - 503 (503) - Net result for the period - - 6 697 6 697 Balance 31 December 2005 8 591 685 6 705 15 981 Increase of the capital 6 428 - (6 428) - Distribution of the profit 277 (277) - Net result for the period - - 17 497 17 497 Balance 31 December 2006 15 019 962 17 497 33 478 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by:

Insurance reserves Premium Reserves for Contingency Other Total eserves carried outstanding fund reserves forward payments Balance 1 January 2005 8 751 3 765 174 386 13 076 Changes in gross insurance reserves 4 860 2 975 (116) 2 834 10 553 Changes in reinsurers share in the reserves formed (659) (186) - (15) (860) Balance 31 December 2005 12 952 6 554 58 3 205 22 769 Changes in gross insurance reserves 6 525 3 840 68 4 432 14 865 Changes in reinsurers share in the reserves formed (344) 506 - (9) (153) Balance 31 December 2006 19 133 10 900 126 7628 37 787 Prepared by: Manager: J. Staneva R. Georgiev Date: 1 March 2007 Audited by:

1. General information ZAD Armeec was incorporated in the Republic of Bulgaria in 1996. The address of its registered office is 21 Gurko Str., Sofia. By Permit for Execution of Insurance Activity No 7/ 15 May 1998, issued by the National Insurance Council, ZAD Armeec has obtained the right to execute insurance activity in the sphere of general insurance. The sale of insurance policies by the Company is organised on the basis of general and special conditions, tariffs and methods per insurances, which have been adopted and approved by the Company s management. The shares of the Company are not registered on the Bulgarian stock exchange. As of 31 December 2006 the Company has 260 employees. ZAD Armeec has two-tier system of management consisting of Supervisory Board and Managing Board. Borislav Chilikov, Georgy Konstantinov and Tihomir Atanasov, representatives of Central Co-operative Bank AD. The members of the Supervisory Board are: Rumen Georgiev, chairman; Valentin Dimov manager of Varna Agency; Alexander Kerezov; Cvetanka Krumova. The Company is represented by the executive director Rumen Georgiev and Cvetanka Krumova. Company s main activity includes insurance and with Decision No 34 dated 8 September 2006, Sofia City Court, reinsurance activity is added. The members of the Supervisory Board are: Nikola Mishev, Chairman of Chimimport AD; Sonya Iankulova, vice-chairman; 10

The principal groups of insurance products offered by the Company are the following: Accident Insurance Personal Accident Insurance; Group Accident Insurance; Accident Insurance of Motor Vehicle Passengers; Accident Insurance of Marine Vessel Passengers; Accident Insurance of Aviation Passengers; Accident Insurance of Public Transport Passengers; Accident Insurance of Hotel Guests Tourist Insurance. Casco (Hull) Insurance Motor Casko Insurance; Aviation Hull Insurance; Marine Hull Insurance; Cargo Insurance. The Casco insurance is offered in different combinations of covered risks, grouped into three main sections: minimum, partial and main casco. Public Liability Insurance Motor Third Party Liability Insurance of vehicles registered in Bulgaria and abroad; Aviation Third Party Liabilities Insurances; General Public Liability Insurance, including: public liability insurance of legal entities when performing their main activities, employer`s indemnity insurance, professional indemnity insurance, road cargo and passenger public liabilities of the haulier, public liability insurance of persons owning and using firearms, tourist agent s public liability insurance, public liability insurance of persons employed for construction of buildings, public liability insurance for government s receivables in customs. The Public Liability Insurances are offered in accordance with the requirements of the Insurance Act and the conditions stated in the Instruction for Mandatory Insurance. Travel Assistance Insurance Medical Expenses for Travelling Abroad; Medical Expenses for foreigners in Bulgaria. Fire and Natural Calamities Perils Insurance Fire and Natural Calamities Perils Insurance - large enterprises; Fire and Natural Calamities Perils Insurance small enterprises; Fire and Natural Calamities Perils Insurance - citizens; Fire and Natural Calamities Perils Insurance of Electronic Techniques; Real estate property Property Damage Insurances Insurance of Agricultural Crops; Livestock Insurance; Insurance of Construction and Assembly Works; Insurance of All Risks of Undertaker; Insurance of Perennial Plants. Credit and Lease Insurance Credits; Lease. Guarantee Insurance Insurance of some financial losses 11

Court Expenses Insurance Court Expenses; Court Expenses for Nuclear Damages Liability. The Financial statements for the year ended 31 December 2006 (including the comparative information for the year ended 31 December 2005) were approved by the Board of Directors on 5 March 2007. 2. Basis for the preparation of the financial statements The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as developed and published by the International Accounting Standards Board (IASB), approved by EU and the national accounting legislation. The financial statements of the Company are presented in TBGN. 3. Change in accounting policies 3.1 Amendments to published standards effective in 2006 IAS 19 (Amendment), Employee Benefits, is mandatory for the Group s accounting periods beginning on or after 1 January 2006. As the Company does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of disclosures presented in the accounts. 3.2 Standards early adopted by the Company IFRS 7, Financial Instruments: Disclosures, and the complementary Amendment to IAS 1, Presentation of Financial Statements Capital Disclosures, were early adopted in 2006. IFRS 7 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Group s financial instruments. 3.3 Standards, amendments and interpretations effective in 2006 but not relevant The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group s operations: IAS 21 (Amendment), Net Investment in a Foreign Operation; IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions; IAS 39 (Amendment), The Fair Value Option; IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts; IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; IFRS 6, Exploration for and Evaluation of Mineral Resources; I FRIC 4, Determining whether an Arrangement contains a Lease; and IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. IFRIC 6, Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment. 4. Summary of accounting policies 4.1 Overall considerations The significant accounting policies that have been used in the preparation of these financial statements are summarized below. The financial statements have been prepared on the historical cost basis except for the revaluation of certain properties and certain financial assets and liabilities. The measurement bases are more fully described in the accounting policies below. It should be noted that accounting estimates and assumptions 12

are used in preparation of the financial statements. Although these estimates are based on management s best knowledge of current events and actions, actual results may ultimately differ from those estimates 4.2 Investments in subsidiaries Subsidiaries are these entities which are under the control of the Company. Control of a subsidiary is the right to manage financial and operating policies of an entity in order to obtain benefits from its activities. In the financial statements of the Company investment in subsidiaries is accounted at cost of investment. 4.3 Investments in associates Associates are those entities over which the Company is able to exert significant influence but which are neither subsidiaries nor interests in a joint venture. Investments in associates are initially recognized at cost and subsequently accounted for using the equity method. Investment is recorded at cost. The income statement reflects income from investment only to the extent that the investor receives distribution from accumulated net profits of the investee, arising subsequent to the date of acquisition. Distribution received in excess of these profits is considered a recovery of the investment and is recorded as a reduction of the cost of the reinvestment. 4.4 Foreign currency translation The separate elements of the financial statements of the Company are in the currency of the main economic environment in which it carries out its activities ( functional currency ). Company s financial statements are presented in Bulgarian Leva (BGN), which is also is the functional currency of the Company. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions (spot exchange rate as published by the Bulgarian National Bank). Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of remaining balances at year-end exchange rates are recognized in the income statement. The Currency Board was introduced in Bulgaria on 01 July 1997 following the recommendations by the International Monetary Fund (IMF) and fixed the value of the BGN against the DEM in ration 1:1. Following the introduction of the EURO, the BGN was fixed to the EURO at rate 1 EURO = 1.95583 BGN. At the end of the year The Company has made a revaluation of all its positions in foreign currency according to the final rate of BNB as at 31 December 2006. 4.5 Income and expense recognition Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates, allowed by the Company. In case of similar assets with similar values are exchanged, the transaction is not recognized as generating income. Revenue from sale of goods is recognized, provided all of the following conditions are satisfied: the Company has transferred to the buyer the significant risks and rewards of ownership of the goods; the Company retains neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; the value of the revenue can be measured reliably;; it is probable that the economic benefits associated with the transaction will flow to the enterprise; the cost incurred or to be incurred in respect of the transaction can be measured reliably. Revenue from rendering of services is recognized, when the outcome of the transaction can be measured reliably. Revenue recognition from premiums over insurance contracts 13

is based on the amount, due by the insured (insuring) person for the whole term of the insurance, which the insurer has the right to receive according to insurance contracts signed during the accounting period and for insurances with terms covering whole or parts of the next accounting period. Reinsurance premiums from inward reinsurance are recognized as revenue based on the premiums due in the accounting period from assignors in connection with reinsurance contracts. In case of co-insurance revenue is recognized only for insurer s part from the whole amount of premiums. Premiums signed away to reinsurers for common insurance include premiums due to reinsurers according to reinsurance contracts for reinsurance of risks over signed during the period contracts on direct insurance and inward reinsurance. The reinsurance premiums, which are not paid as at the balance sheet date, are accounted for as payables. The amounts for reimbursement by reinsurers in connection with paid by the insurer during the period claims, are accounted for as reinsurer s share including the case in which the settlement of the relations with reinsurers occurs in following accounting period. Operating expenses are recognized in the income statement upon utilization of the service or at the date of their origin. Expenditure for warranties is recognized and charged against the associated provision when the related revenue is recognized. Interest income and expenses are reported on an accrual basis. Dividends received, other than those from investments in associates, are recognized at the time of their distribution. Acquisition costs are recognized as insurer s expenses in full for the term of the corresponding insurance contracts as expenses in the accounting period in which they occurred. The expenses for paid collaterals are recognized for the period, in which they occure. They include the expenses for collaterals paid and the expenses related with the valuation of the collateral due (liquidation expenses), less the income from the appliance of regressive rights and the refundable collaterals from reinsurers corrected with the change of the reserve for outstanding payments, net of reinsurance for the financial year. Expenses for remuneration of agents and brokers are accounted for the period, for which the respective premium income is related. 4.6 Borrowing costs All borrowing costs are expensed as incurred. Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. 4.7 Intangible assets Intangible fixed assets are measured initially at cost. If an intangible asset is acquired separately, the cost comprises its purchase price, including any import duties and non-refundable purchase taxes, and any directly attributable expenditure on preparing the asset for its intended use. If an intangible asset is acquired in a business combination, the cost of that intangible asset is based on its fair value at the date of acquisition. After initial recognition, according to the benchmark treatment, an intangible asset is carried at its cost less any accumulated amortization and any accumulated impairment losses. Impairment losses are recognized in the current period income statement. Subsequent expenditure on an intangible asset after its purchase or its completion is recognized as an expense when it is incurred unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance; and this expenditure can be measured and attributed to the asset reliably. If these two conditions are met, the subsequent expenditure is 14

added to the cost of the intangible asset. Depreciation is calculated using the straight-line method over the estimated useful life of individual assets as follows: software 2 years others 4 years Careful judgment by Company s management is applied when deciding whether the recognition requirements for development costs have been met. Judgments are based on the best information available at each balance sheet date. In addition, all internal activities related to the research and development of new software products are continuously monitored by Company s management. The recognition threshold, selected by the Company for intangible fixed assets amounts to BGN 500. 4.8 Property, plant and equipment An item of property, plant and equipment is initially measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. Subsequent to initial recognition as an asset, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses according to benchmark treatment. Impairment losses are recognized in the current period income statement. Subsequent expenditure relating to an item of property, plant and equipment that has already been recognized in the financial statements is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the Company. All other subsequent expenditures are recognized as an expense in the period in which it is incurred. Property, plant and equipment acquired under finance lease agreement, are depreciated based on their expected useful life, determined by reference to comparable assets or based on the period of the lease contract in shorter. Amortization is calculated using the straight-line method over the estimated useful life of individual assets as follows: Buildings 25 years Machines 3,33 years Vehicles 4 years Fixtures & Fittings 6,66 years IT equipment 2 years Others 6,66 years The recognition threshold, selected by the Company for tangible fixed assets amounts to BGN 500. 4.9 Leases In accordance with IAS 17 (rev 2003), the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognized at the time of inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. A corresponding amount is recognized as a finance leasing liability, irrespective of whether some of these lease payments are payable up-front at the date of inception of the lease. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed to finance costs. Assets acquired under the terms of finance lease are depreciated in accordance with IAS 16 Property, plant and equipment or IAS 38 Intangible assets. 15

All other leases are treated as operating lease agreements. Operate lease payments are recognized as an expense on a straight-line basis. Affiliated costs, such as maintenance and insurance, are expensed as incurred. 4.10 Impairment of the asstes of the Company The Company s assets are subject to impairment testing at every balance sheet date, other intangible assets and property, plant and equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Individual assets or cash-generating units that include goodwill and other intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s or cash-generating unit s carrying amount exceeds its recoverable amount. Subsequently the expected cash flows should be decreased as follows: For receivables from insured parties with overdue payments from 90 to 180 days - 25 % from 181 to 365 days - 75% over 365 days - 100% after expiration of the deadline or at pro-term termination of the insurance contract - 100 % for all overdue payment receivables: from 31 to 60 days - 10 % from 61 to 90 days - 50 % over 90 days - 100 % The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognized for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. As at 31 December 2006 all assets are tested for the presence of impairment. 4.11 Investment property Investment property represents land and buildings held to earn rental income or for capital appreciation or both, rather than held for: Production or supply of goods or services or for administrative purposes; Sale in the ordinary course of the business. Investment property is recognized in the financial statements of the company as an asset only to the extend that the following conditions are present: It is probable that future economic benefits, associated with the investment property, will flow to the company; The cost of the investment property can be measured reliably. The investment property is initially measured at cost, which comprises purchase price and any directly attributable expenses, e.g. legal fees, property transfer taxes and other transaction costs. 16

Following the initial recognition, the investment property is stated at fair value. Fair value is determined by external professional valuers, with sufficient experience with respect to both the location and the nature of the investment property. The carrying amounts recognized in the balance sheet reflect the prevailing market conditions at the balance sheet date. Any gain or loss resulting from either a change in the fair value or the sale of an investment property is immediately recognized in the Income statement as result from investment property. Subsequent expenditure relating to investment property is added to the carrying amount of the investment property when it is probable that future economic benefits, in excess of the originally assessed standards of performance of the existing investment property, will flow to the Company. All other subsequent expenditures are recognized as an expense in the period they are incurred. Investment property is recognized on disposal or when it is permanently withdrawn from use in case no future economic benefits are expected from its disposal. Gains or losses arising from the retirement or disposal are recognized in the Income statement and represent the difference between the net disposal proceeds and the carrying amount of the Investment property. 4.12 Financial assets Company s financial assets include cash and financial instruments other than hedging instruments. They can be divided into the following categories: loans and receivables, financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which a choice of classification or accounting treatment is available. All financial assets are recognized on their transaction date. All financial assets are initially recognized at fair value. Transaction costs which are directly attributable to the acquisition or issue of the financial asset of financial liability, except for financial assets or liabilities at fair value through profit or loss. Derecognition of financial instruments occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least at each balance sheet date whether or not there is objective evidence that a financial asset or a group of financial assets is impaired. Non-compounding interest and other cash flows resulting from holding financial assets are recognized in the Income statement when received, regardless of how the related carrying amount of financial assets is measured. Financial assets at fair value through profit or loss include financial assets that are accounted or incurred particularly for the purpose of selling or repurchasing in the near term. Derivative financial instruments that do not qualify for hedge accounting are classified as held for trading. Subsequent to initial recognition, the financial instruments included in this category are measured at fair value, except those which have no market value at active markets and hence their fair value cannot be measured reliably. Those without quoted market prices are measured at amortized cost using the effective interest method or at cost in cases when they don t have fixed date of payment. The changes in their fair value are recognized in the Income statement at their ocuurence. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are subsequently measured at amortized cost using the effective interest method, less pro- 17

vision for impairment. Any change in their value is recognized in the Income statement. Trade receivables are provided against when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the write-down is determined as the difference between the carrying amount of the asset and the present value of estimated future cash flows. 4.13 Inventories The inventories include raw materials, advertising materials and blanks. Financial assets are not included in the inventory cost. At the end of every year inventories are measured at the lower of cost and net realizable value. The amount of any writedown of inventories to net realisable value and all losses of inventories is recognized as an expense in the period the writedown or loss occurs. The inventory expenses are fixed by the Company according to the method of specific identification of the inventories. In case inventories have already been impaired to their net realizable value and in the following period the impairment conditions are no longer present, than a new net realizable value is determined up to the initial value prior impairment. The inventory recovery amount is accounted for as decrease in inventory expenses for the period in which the recovery takes place. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. 4.14 Accounting for income taxes Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in the income statement. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the financial statements with their respective tax bases. However, in accordance with the rules set out in IAS 12, no deferred taxes are recognized in conjunction with goodwill. This applies also to temporary differences associated with shares in subsidiaries and joint ventures if the Company can control reversal of these temporary differences and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Company are assessed for recognition as deferred tax assets. Deferred tax asset in relation to carried forward losses is recognized to the extent that the realization of the related tax benefits through the future taxable profits is probable. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognized to the extent that it is probable that they will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantively enacted at the balance sheet date. 4.15 Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand as well as current bank accounts, short term or highly liquid investments which can easily be turned into money and contain insignificant risk of change in value. 4.16 Insurance operations As of the date of preparation of the financial statements the Company applies IFRS 4 Insurance contracts. The standard defines the requirements for disclosure of the accounting policy 18

and representation of the comparative information with respect to the insurance assets and liabilities as well as income and expenses related with the insurance activity. The accounting policy of the Company is taken into consideration with respect to the specificity of the insurance services and the respective legal requirements. 4.17 Insurance contracts Insurance contracts are those that transfer significant insurance risk over the Group. The Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event are at least 10% higher than the benefits payable if the insured event has not occurred. Once classified as insurance contracts at the date of the inception, the Group continues to present them as insurance contracts over the period of their lifetime, even if the insurance risk reduces significantly during this period. 4.18 Reinsurance contracts The Group assumes and cedes to reinsurers risk undertaken in the normal course of business. The anticipated benefits arising from reinsurance contracts are recognized as assets in the balance sheet. The Group performs an impairment review on all reinsurance assets when an indication of impairment occurs. Reinsurance assets are impaired only if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract and that this can be measured reliably. The difference is performed as change in the reinsurers share into a reserve for outstanding payments in the technical statements for the insurance cativity. The Company also performes an active reinsurance. The premiums and the collaterals on active reinsurance are accounted together with the registered insurance premiums and the paid gross collaterals on direct insurance operations. 4.19 Insurance reserves Insurance reserves are formed by the insurance company in order to cover present and future liabilities to insured persons or organisations in accordance with the insurance contract. Insurance reserves do not form part of the equity. Insurance reserves are calculated by the actuary of the Company by the use of actuarial methods, which consist of mathematical methods and rules. Insurance reserves are presented in gross in the Company s balance sheet and they are reduced with the amount of the reinsurers share in the reserves formed. When the insurance is denominated in foreign currency, the corresponding reserves are formed in the same currency. The insurance reserves that have been formed during the prior period are recognized as income from released insurance reserves in the current period. The reserves formed at the year-end are recognized as expense for the formation of insurance reserves in the income statement. The insurance reserves referring to the reinsurers share formed in the prior period are recognised as expense for released insurance reserves in the current period income statement and the reserves formed at the year-end are recognised as income from released insurance reserves in the current period income statement. The Company should invest its insurance reserves reduced by the reinsurer s share (net amount of insurance reserves) in the ratios regulated by the Insurance Code. 4.20 Adequacy test At each balance sheet date, an adequacy test is performed by the actuaries, to ensure that the reserves are sufficient to meet potential future payments. In accordance with the regulation requirements the amount of the reserves formed should be completely secured with investments in high liquid assets. When an adequacy test is performed the cash flows related with payment of collaterals, cash flows, generated by collected premiums and paid commissions, are taken into consideration. 19

4.21 Equity Share capital is determined using the nominal value shares that have been issued. Retained earnings include all current result as determined in the income statement and prior period results. 4.22 Pension obligations and short term employee benefits The Company has not elaborated and does not apply plans for employee benefits after leaving, nor other long term income and plans for income after leave or ones in the form compensations with shares of the share capital or interest. The Company reports short-term payables relating to unutilized paid leaves, which shall be compensated in case it is expected the leaves to occur within 12 months after the end of the accounting period during which the employees have performed the work related to those leaves. The short term payables to personnel include wages, salaries and related social security payments. 4.23 Financial liabilities The Company s financial liabilities include bank loans and overdrafts, trade and other payables and finance lease liabilities. Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognized as an expense in the Income statement. Bank loans are raised for support of long - term funding of the Company s operations. They are recognized at proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accrual basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Finance lease liabilities are measured at initial value less the capital element of lease repayments. Trade liabilities are initially recognized at nominal value and accounted subsequent at amortized value less payment related to the liability. Dividend distributions to shareholders are included when the dividends are approved by the shareholders meeting. 4.24 Other provisions, contingent liabilities and contingent assets Provisions, representing current obligations of the Company arising from past events, the settlement of which is expected to result in an outflow of resources, are recognized as liabilities. A provision is recognized only when the following conditions are present The Company has a present obligation as a result of a past event; It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; A reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. In reaching the best estimate of the provision, the Company takes into account the risks and uncertainties that inevitably surround many events and circumstances as well as the effect of the time value of the money, when it is material. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed. 20

The Company does not recognize contingent assets in the financial statements as possible obligations arise, whose existence is not yet confirmed or this may result in the recognition of income that may never be realized. 5 Investment property The investment properties of the Company are held for investment purpose. They present investment of insurance reserves in unencumbered real estates from the net amount of the insurance reserves in compliance with the Insurance Code. Investment property Year ended 31 December 2005 Opening net book amount 2 407 Change in fair value 187 Closing net book amount 2 594 Year ended 31 December 2006 Opening net book amount 2 594 Additions 218 Disposals (86) Change in fair value 8 846 Closing net book amount 11 572 The investment properties are presented in the financial statements of the company through fair value model. As of 31 December 2006 the Cmpany acquires an investment property representing 4 300 sq.m. registered property in Iztok. The property has been revaluated at fair value. Subsequently, income amounting to TBGN 8 846 has been accounted. No change, more than 10%, has occurred in the index, which reflects the change in the prices of real estates. The decrease of the investment property has been performed with respect to the derecognition of an office premise in Veliko Turnovo and its recognition in the group of Property, plant and equipment. The property has been written-off at fair value. The income from investment property during the year amounts to BGN 131 900. During the year direct operating expenses have not been performed with respect to the investment property of the Company. 21

6 Investments in associates The Company owns shares in the capital of the following companies: Name 2006 share % Capital Management АDSIC 150 30 CCB Real Estate Fond ADSIC 150 30 300 The investment n associates is recognized in the financial statements of the Company using the cost method. The shares of the associates are not registered at a public market, as a result of which their fair value cannot be determined. Capital Management ADSIC is established with Decision No 1 dated 8 November 2005 under No 12495/2005, Sofia City Court. The major activity of the Company includes investment of cash and cash equivalents, obtained by issuing securities. The share capital amounts to BGN 500 thousand. The financial information for the associate company may be performed as follows: Assets 72 724 500 Liabilities 64 583 - Income 308 - Net result for the period 216 - Share of the investor in the financial result 65 CCB Real Estate Fond is established with Decision No 1 dated 8 November 2005 under No 12496/2005, Sofia City Court. The major activity of the company includes investment of cash and cash equivalents, obtained by issuing securities. CCB Group Assets Management EAD is a majority owner of the capital. The share capital amounts to BGN 500 thousand The financial information for the associate company may be performed as follows: Assets 950 500 Liabilities 22 500 Income - - Net result for the period (22) - Share of the investor in the financial resultv (7) - 22

7 Intangible assets Software Other Total At 01 January 2005 Cost 274 246 520 Accumulated amortization (210) (140) (350) Net book amount 64 106 170 Year ended 31 December 2005 Opening net book amount 64 106 170 Additions 37 162 199 Amortization (72) (39) (111) Closing net book amount 29 229 258 At 31 December 2005 Cost 311 408 719 Accumulated amortization (282) (179) (461) Net book amount 29 229 258 Year ended 31 December 2006 Opening net book amount 29 229 258 Additions 45 71 116 Amortization (20) (76) (96) Closing net book amount 54 224 278 At 31 December 2006 Cost 356 479 835 Accumulated amortization (302) (255) (557) Net book amount 54 224 278 Intangible assets have not been pledged as collaterals. 23

8 Property, plant and equipment Buildings Computers Vehicles Other Total At 1 January 2005 Cost 557 426 83 444 1 510 Accumulated depreciation (147) (316) (13) (226) (702) Net book amount 410 110 70 218 808 Year ended 31 December 2005 Opening net book amount 410 110 70 218 808 Additions 12 97 173 125 407 Disposals - (19) (72) (2) (93) Amortization - 19-2 21 Depreciation charge (22) (103) (36) (67) (228) Closing net book amount 400 104 135 276 915 At 31 December 2005 Cost 569 504 184 567 1 824 Accumulated depreciation (169) (400) (49) (291) (909) Net book amount 400 104 135 276 915 Year ended 31 December 2006 Opening net book amount 400 104 135 276 915 Additions 120 260 214 210 804 Depreciation charge (23) (115) (63) (75) (276) Closing net book amount 497 249 286 411 1 443 At 31 December 2006 Cost 689 764 398 777 2628 Accumulated depreciation (192) (515) (112) (366) (1 185) Net book amount 497 249 286 411 1 443 24

As of 31 December 2006 the Company has pledged for securities as guarantee for insurance Green card the following assets: Building in Sofia Building in Pleven Building in Haskovo and Building in Stara Zagora 9 Leases 9.1 Finance leases As of 31 December 2005 the Company has three active finance lease agreements relating to acquisition of Volkswagen Golf automobile with a maturity date 7 March 2007 with Unitrade Leasing OOD, a contract with CKB Leasing plus EOOD for Volkswagen Passat with maturity date 20 January 2006, a contract with Transleasing EOOD for Pegeout 307 with maturity date 25 August 2006 and a contract with Bultrako AD for acquisition of Honda with maturity date 8 November 2009, a contract with Bulbank leasing for Mitsubishi Pajero with maturity date 16 December 2009, a contract with Unitrade Leasing for Volkswagen Golf with maturity date 28 August 2008, Volkswagen Golf with maturity date 27 March 2010 and Volkswagen Turan with maturity date 25 April 2010. The acquired automobiles under finance lease are included in Vehicles. Their carrying amount as of 31 December 2006 amounts to TBGN 286. Future minimum lease payments as per 31 December 2006 are as follows: Up to 1 year 1 to 5 years Total Lease payments 81 114 195 Discounts (1) (1) (2) Net present value 80 113 193 The lease agreement includes fixed lease payments and a purchase option at the end of the year lease term. The agreement is non-cancelable but does not contain any further restrictions. 9.2 Operating lease The Company s minimum operating lease payments are as follows: Up to 1 year 1 to 5 years Total As per 31 December 2005 32 27 59 As per 31 December 2006 32 27 59 The operating lease contracts are rental contract for office premises of the agencies all over the country and of the Central management in Sofia Operating lease agreements do not contain any contingent rent clauses. None of the operating lease agreements contain renewal or purchase options. 25

10 Investments in subsidiaries The Company has the following investments in subsidiaries: Name of the subsidiary 2006 Share 2005 Share BGN 000 % BGN 000 % Armeec leasing OOD 50 100 50 100 50 50 The Company is registered in Bulgaria. The cost method is used in the financial statement of ZAD Armeec. The shares of the subsidiary are not registered at the public market and therefore their fair value cannot be established. The Company has no activity. 11 Deferred tax assets and liabilities Deferred taxes arising from temporary differences and unused tax losses under the liability method, using a principal tax rate of 2007 10% (2006 15 %), can be summarized as follows: 2006 2005 Deferred Deferred Deferred Deferred tax asset tax liability tax asset tax liability Long-term liabilities Employee obligations 26-13 - Non current assets - 68-311 26 68 13 311 Refer to note 35 relating to tax expenses of the Company. 12 Inventories 2005 2004 Inventories 242 165 242 165 The materials consist of advertising materials and blanks. 26

13 Insurance receivables 000 лв Insurance premiums accrued, but unpaid 13 047 8 089 Receivables from DZI on co-insurance contract 8 9 13 055 8 098 As of 31 December 2006 the Company has receivables from Hemus Air EAD related with due premiums from insurances amounting to TBGN 1 415. 14 Receivables from reinsurance Receivables from DZI ЕАD 111 192 Heat Lambart Grup 344 139 Receivables from Bulstrad АD 41 41 496 372 The receivable from Bulstrad AD amounting to TBGN 41 has occurred in prior period and a trial has been initiated. The receivable has not been impaired at the end of 2006 as the Company expects its full recovery. 15 Short-term financial assets The financial assets of the company present an investment of insurance reserves according to Law for Insurance in Government Securities, in shares and obligations issued by trade companies and accepted for trade activities at stock exchange and in mortgage bonds issued according the Law for Mortgage Bonds. The financial assets are classified as financial instruments held for trading. Shares of Central Co-operative Bank AD 22 786 8 909 Investigation of oil and gas 2 290 84 St. Konstantin and Elena 18 10 Government securities 13 813 11 819 Chimimport 2 360 817 Parahodstvo i Bulgarsko rechno plavane 2 026-43 293 21 639 27

As of 31 December 2006 short-term financial liabilities hae the following values: Company Emission Nominal Fair value as of 31 December 2006 BGN. PDNG AD BG1100019022 280 241 2 289 568,97 PBRP AD BG 1100100038 13 399 2 025 661,00 Chimimport AD BG1100046066 309 735 2 360 180,70 CCB AD BG1100014973 3 218 375 22 786 166,00 St. Konstantin and Elena BG11SVVAAT11 500 18 000,00 3 822 250 29 479 576,70 The revenue resulting from the revaluations performed are included in the Income statement. As of 31 December 2005 the fair value of the government securities amount to TBGN 13 813. As a result of the revaluation, the profit is recognized in the Income statement. The emissions are with nominal and maturity date as it follows: Emission Date of purchase Nominal Fair value as of Падеж Profitability % 31 December 2006 BGN. 301/04 23.10.2006 2 548 100 2 558 547 23.01.2007 4.75% 300/02 29.11.2006 900 000 931 050 05.01.2007 4.75% 302/02 16.10.2006 600 000 627 120 16.01.2007 4.75% 300/03 30.10.2006 1 158 300 1 208 223 30.01.2007 4.75% 402/02 29.11.2006 1 272 000 1 510 373 01.03.2007 4.75% BG2030203116 12.02.2004 256 000 258 714 09.07.2008 4.75% BG2040104213 22.06.2004 1 790 000 1 830 275 11.02.2011 4.75% BG2040302213 16.04.2004 500 000 534 800 17.07.2009 7.00% BG2040003217 06.10.2005 76 600 90 212 08.01.2013 7.50% BG2030005115 22.08.2005 1 349 000 1 340 771 16.03.2008 3.50% BG2040004215 08.09.2005 450 000 478 755 04.02.2014 5.20% BG2030006113-2 554 600 2 444 497 25.01.2011 3.00% 13 454 600 13 813 337 28