Mirax Group

Mirax Group Pro forma Group

Pro forma Consolidated Financial Statements

for the years ended December 31, 2004 and 2003

(With Independent Auditors’ Report Thereon)

Mirax Group

Contents

Independent Auditors’ Report Ошибка! Закладка не определена. Pro forma Consolidated Income Statement 5 Pro forma Consolidated Balance Sheet 6 Pro forma Consolidated Statement of Cash Flows 8 Pro forma Consolidated Statement of Changes in Stockholders’ Equity 10 Notes to the pro forma Consolidated Financial Statements 11

Mirax Group Pro forma consolidated Income Statement for the years ended December 31, 2004 and 2003

2004 2003

(unaudited)

Note ’000 RUR ’000 RUR

Revenues earned 13 3,663,119 3,757,160

Cost of revenues earned 14 (1,712,607) (1,851,067)

Gross profit 1,950,512 1,906,093

Selling, general, and administrative expenses 15 (729,718) (536,674)

Operating income 1,220,794 1,369,419

Other income (net) 109,044 1 120,816

Interest expense (net) (298,882) (178,609)

Income before income taxes and minority interest 1,030,956 1,311,626

Income tax expense 16 (282,533) (315,406)

Net income before minority interest 748,423 996,220

Minority interest (42,607) –

Net income 705,816 996,220

The pro forma consolidated financial statements were approved on September 30, 2005:

President Vice-President on finance Polonsky S.Y. Lutsenko D.V.

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The pro forma consolidated Income Statement is to be read in conjunction with the notes to and forming part of the pro forma consolidated financial statements set out on pages 10 to 29.

Mirax Group Pro forma consolidated Balance Sheet as at December 31, 2004 and 2003

2004 2003

(unaudited)


ASSETS

Cash 155,630 251,564

Trade and other accounts receivable (net) 2 3,454,608 2,740,600

Construction inventories 195,321 173,868

Prepayments (net of allowance for doubtful amounts of RUR 20,765 thousand and RUR 10,505 thousand at December 31, 2004 and 2003, respectively) 238,164 243,064

Investments 3 27,834 138,610

Construction in progress 5 3,010,009 2,753,350

Property, plant, and equipment 4

Land and buildings 367,081 2,496

Machinery and equipment 55,348 29,154

Other property, plant, and equipment 55,840 30,370

Less accumulated depreciation and amortization (36,320) (19,472)

Net property, plant and equipment 441,949 42,548

Total assets 7,523,515 6,343,604

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The pro forma consolidated Balance Sheet is to be read in conjunction with the notes to and forming part of the pro forma consolidated financial statements set out on pages 10 to 29.

Mirax Group Pro forma consolidated Balance Sheet as at December 31, 2004 and 2003

2004

2003 (unaudited)


LIABILITIES AND STOCKHOLDERS’ EQUITY

Loans and borrowings 6 2,098,307 3,079,300

Trade and other payables 8 1,121,144 977,917

Advances from customers 19,771 5,075

Income tax payable 29,173 2,027

Other taxes payable 9 416,434 205,046

Due to employees 21 25,093 19,368

Accrued interest payable 2,357 466

Billings in excess of costs and estimated earnings 10 1,241,806 736,689

Deferred tax liability 11 609,042 371,678

Total liabilities 5,563,127 5,397,566

Stockholders’ equity 12

Parent company stock 600,015 15

Retained earnings 1,317,766 946,023

Total equity attributable to stockholders of the parent 1,917,781 946,038

Minority interest 42,607 –

Total stockholders’ equity 1,960,388 946,038

Total liabilities and stockholders' equity 7,523,515 6,343,604

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The pro forma consolidated Balance Sheet is to be read in conjunction with the notes to and forming part of the pro forma consolidated financial statements set out on pages 10 to 29.

Mirax Group Pro forma consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003

2004 2003

(unaudited)

’000 RUR ’000 RUR

Net income 705,816 996,220

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization of property, plant and equipment 16,848 10,217

Increase in construction in progress (256,659) (985,115)

Increase/(decrease) in billings in excess of costs and estimated earnings 505,117 (948,889)

Gain on disposal of property, plant and equipment (4,302) (6,773)

Minority interest 42,607 –

Increase in deferred tax liability 237,364 318,043

Increase in construction inventories (21,453) (48,688)

Increase in prepayments, trade and other accounts receivable, net (709,108) (1,758,810)

Increase in trade and other payables, advances received, interest and taxes payable and due to employees 404,073 464,147

Net cash from operating activities 920,303 (1,959,648)

Cash flows from investing activities

Proceeds from disposal of property, plant and equipment 11,898 16,049

Acquisition of property, plant and equipment (423,845) –

Proceeds from disposal of investments 138,436 –

Purchase of investments (27,660) (138,610)

Net cash from investing activities (301,171) (122,561)

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The pro forma consolidated Statement of Cash Flows is to be read in conjunction with the notes to and forming part of the pro forma consolidated financial statements set out on pages 10 to 29.

Mirax Group Pro forma consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003

The pro forma consolidated Statement of Cash Flows is to be read in conjunction with the notes to and forming part of the pro forma consolidated financial statements set out on pages 10 to 29.

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2004 2003

(unaudited)

’000 RUR ’000 RUR

Cash flows from financing activities

Proceeds from issuance of common stock 600,000 –

Proceeds from loans and borrowings 3,421,386 5,337,528

Repayment of loans and borrowings (4,402,379) (2,892,081)

Distributions to stockholders (334,073) (201,400)

Net cash from financing activities (715,066) 2,244,047

Net (decrease)/increase in cash and cash equivalents (95,934) 161,838

Cash and cash equivalents at the beginning of the year 251,564 89,726

Cash and cash equivalents at the end of the year 155,630 251,564

Supplemental disclosures of cash flow information

Interest paid 301,536 179,388

Income taxes paid/(recovered) 18,023 (2,919)

Mirax Group Pro forma consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2004 and 2003

The pro forma consolidated Statement of Changes in Stockholders’ Equity is to be read in conjunction with the notes to and forming part of pro forma consolidated the financial statements set out on pages 10 to 29.

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Parent company stock Retained earnings

Total equity attributable to stockholders of

the parent Minority interest

Total stockholders’

equity

Note ’000 RUR ’000 RUR ’000 RUR ’000 RUR ’000 RUR

Balance at 1 January 2003 (unaudited) 15 151,203 151,218 – 151,218

Net income (unaudited) – 996,220 996,220 – 996,220

Distributions (unaudited) 12(b) – (201,400) (201,400) – (201,400)

Balance at December 31, 2003 (unaudited) 15 946,023 946,038 – 946,038

Net income – 705,816 705,816 42,607 748,423

Distributions 12(b) – (334,073) (334,073) – (334,073)

Issue of common stock 12(a) 600,000 – 600,000 – 600,000

Balance at December 31, 2004 600,015 1,317,766 1,917,781 42,607 1,960,388

Mirax Group Notes to the pro forma consolidated Financial Statements for the years ended December 31, 2004 and 2003

1 Summary of Significant Accounting Policies and Practices

(a) Description of business

Mirax Group is a privately owned group of companies (the “Mirax Group” or the “pro froma Group”), which has been operating in the construction and real estate business in Moscow (Russian Federation) since 2001. The operations of the Mirax Group include the construction of and selling the apartments in residential complexes.

In 2004, the Mirax Group commenced restructuring the Group’s ownership structure. As a result of this process, which is to be substantially finalized by the end of 2005, the Mirax Group will include 17 entities. Those entities are together referred to as the “Consolidated Entities” and together with the Parent Company as the “pro forma Group”.

The following is the list of these entities:

Ownership interest Country of incorporation 2003 2004

1 OOO “Mirax-Group” (Parent Company) Russia 90% 90%2 ZAO “SK Stroimontazh” Russia 90% 100%3 ZAO “Stroimontazh 2001” Russia 90% 90%4 ZAO “IPK Stroimontazh” Russia 80% 80%5 ZAO “Russkie Valenki” Russia 100% 100%6 ZAO “Stolichny Dom Nedvizhimosti” Russia 100% 100%7 ZAO “Stroimontazh” Moscow office Russia 100% 100%8 OOO “PSF Stroimontazh” Russia 90% 90%9 OOO “ISK Stroimontazh” Russia 90% 90%

10 OOO “Stroimontazh - Vysotnye Zdaniya” Russia 100% 100%11 ZAO “Mirax-City” Russia 90% 90%12 ZAO “Stroimontazh-Monolit” Russia 100% 100%13 ZAO “Stroimontazh-1” Russia 100% 100%14 ZAO “MiraxCapital” Russia - 100%15 OOO “Stroimontazh-Avto” Russia 90% 90%16 ZAO “Vladenie-5” Russia 50% 50%17 OOO “Aetoon” Russia 100% 100%

OOO “Mirax-Group” is the parent company (the “Parent Company”) for the pro forma Group. It was established in July 2000 as a limited liability company in accordance with the legislation of the Russian Federation under the name OOO “Lenstroymontazh” and was subsequently renamed as OOO “Mirax-Lenstroymontazh” in 2004 and renamed as OOO “Mirax-Group” – in the first half of 2005. Other Consolidated Entities are located in Russia and abroad, they include closed joint stock companies and companies with limited liability.

(b) Purpose and limitations of pro forma consolidated financial statements

These pro forma consolidated financial statements have been prepared for the purpose of presenting the pro forma consolidated financial position of the pro forma Group as at December 31, 2003 and December 31, 2004 as if the restructuring of Mirax Group, described in Note 1(a),

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had taken place and had been completed before December 31, 2002. The pro forma consolidated financial statements are not necessarily indicative of the results or related effects on the financial position that would have been attained had the above-mentioned restructuring actually taken place before December, 31 2002.

(c) Russian business environment

The Russian Federation has been experiencing political and economic change which has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks which do not typically exist in other markets. The accompanying pro forma consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the pro forma Group. The future business environment may differ from management’s assessment.

(d) Statement of compliance

The Parent Company and the Consolidated Entities maintain their accounting records in accordance with the legislative requirements of the Russian Federation or respective countries in which they are located. The accompanying pro forma consolidated financial statements have been prepared from those accounting records and adjusted as necessary to comply with the accounting principles generally accepted in the United States of America.

(e) Principles of consolidation

(i) Consolidated Entities

Consolidated Entities are those enterprises that will be controlled by the Parent Company, directly or indirectly, upon finalisation of the restructuring process. Control exists when the Parent Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of the Consolidated Entities are included in the pro forma consolidated financial statements from the date when the Mirax Group effectively commences exercising control over the assets and liabilities of the Consolidated Entities, until the date that control effectively ceases.

(ii) Variable Interest Entities (“VIEs”)

In addition to the Consolidated Entities described above, the management of the pro forma Group has established a number of VIEs for tax minimization, transactions financing and financial resources (re)distribution purposes. Neither the Parent Company nor the pro forma Group hold any direct or indirect equity interest in these entities. However, these entities are established with arrangements that impose strict limits on the decision-making powers of the VIEs’ management over the operations of the entities. Accordingly, the financial statements of these VIEs are consolidated in the pro forma consolidated financial statements of the Group.

(iii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the pro forma consolidated financial statements.

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(f) Functional currency

The national currency of the Russian Federation is the rouble (“RUR”). Management has determined the pro forma Group’s functional currency to be the RUR as it reflects the economic substance of the underlying events and circumstances of the pro forma Group.

Financial information presented in RUR has been rounded to the nearest thousand.

(g) Foreign currencies

Transactions in foreign currencies are translated to RUR at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to RUR at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated to RUR at the foreign exchange rate ruling at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement.

(h) Going concern

The accompanying pro forma consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The recoverability of the pro forma Group’s assets, as well as the future operations of the pro forma Group, may be significantly affected by the current and future economic environment – refer Note 1(c). The accompanying pro forma consolidated financial statements do not include any adjustments should the pro forma Group be unable to continue as a going concern.

(i) Use of estimates

Management of the pro forma Group has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these pro forma consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

(j) Cash and cash equivalents

For purposes of the pro forma consolidated statement of cash flows, the pro forma Group considers cash and all highly liquid debt instruments with original maturities of three months or less to be cash and cash equivalents.

(k) Trade and other accounts receivables

Trade and other accounts receivable are recorded at the invoiced amount and do not bear interest. The provision for doubtful debts is the pro forma Group’s best estimate of the amount of probable credit losses in trade and other accounts receivable.

(l) Construction inventories

Construction inventories are stated at the lower of average cost or market.

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(m) Investments

Investments are recognised (derecognised) when the pro forma Group obtains (loses) control over the contractual rights inherent in that asset.

Investments are stated initially at cost. Subsequent to initial recognition they are measured at amortised cost. Amortised cost is calculated using the effective interest rate method.

(n) Property, plant and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation.

Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings is 25 years, while plant and equipment is estimated to have a useful life of 5 to 15 years.

(o) Deferred income taxes

Deferred income tax assets and liabilities are recognized in respect of future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purposes of the consolidated financial statements and their respective tax bases and in respect of operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse and the assets be recovered and liabilities settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of income in the reporting period which includes the enactment date.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

(p) Impairment of long-lived assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as oil and gas properties, other property, plant, and equipment, and purchased intangibles subject to amortization, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by that group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by writing down the carrying amount to the estimated fair value of the asset group, generally determined as discounted future net cash flows. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

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(q) Loans and borrowings

Loans and borrowings are initially recorded at the value of net proceeds received. Any difference between the net proceeds and the redemption value is amortized at a constant rate over the term of the loan or borrowing. Amortization is included in the pro forma consolidated income statement each year and the carrying amounts are adjusted as amortization accumulates.

If loan or borrowing is repurchased or settled before maturity, any difference between the amount paid and the carrying amount is recognized in the pro forma consolidated income statement in the period in which the repurchase or settlement occurs.

(r) Trade and other payables

Trade and other payables are stated at cost.

(s) Billings in excess of costs and estimated earnings

Billings in excess of costs and estimated earnings on uncompleted contracts represent billings in excess of revenues recognized.

(t) Revenues and expenses

In accordance with FASB Statement No 66, Mirax Group recognizes revenue from fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of construction costs incurred to date to the estimated total construction costs for each construction project. Revenue is recognized when individual units in condominium projects are being sold separately and all the following criteria are met:

� Construction is beyond a preliminary stage (i.e. after completion of the building foundation);

� The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit (apartment);

� Sufficient number of units (apartments) have already been sold to assure that the entire property will not revert to rental property;

� Sales prices are collectible; and

� Aggregate sales proceeds and costs can be reasonably estimated.

This method is used because management considers actual costs incurred to be the best available measure of progress on the construction projects.

Construction costs include all direct material, labor and borrowing costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, and repairs costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Construction costs related to unsold spaces in residential complexes and business centers are presented as construction in progress.

Selling, general, and administrative costs are charged to expense as incurred.

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(u) Balance sheet classifications

The length of the pro forma Group’s construction contracts varies but is typically approximately three years. Therefore, assets and liabilities are not classified as current and non-current because they have realization and liquidation periods extending beyond one year.

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2 Trade and other accounts receivable (net)

2004 2003

(unaudited)

’000 RUR ’000 RUR

Loans and other amounts receivable from related parties 1,004,229 469,163

Promissory notes receivable 977,113 1,437,810

VAT and other taxes receivable 629,269 466,842

Accounts receivable – trade 265,249 36,289

Due from officers and employees 5,986 4,133

Other receivables 613,460 358,002

Total receivables 3,495,306 2,772,239

Provision for doubtful debt (40,698) (31,639)

Total receivables, net 3,454,608 2,740,600

Included in “Other receivables” is a payment made under an investment contract for the construction of an apartment building on Veernaya street totaling RUR 249,000 thousand (refer note 10).

3 Investments The pro forma Group companies have investments in the form of a portfolio of equity securities amounting to RUR 27,834 thousand as at December, 31 2004 and promissory notes of third parties amounting to RUR 138,610 thousand as at December 31, 2003. All these promissory notes were repaid during 2004.

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4 Property, plant, and equipment

2004 2003

(unaudited)

’000 RUR ’000 RUR

Assets

Land and buildings 367,081 2,496



478,269 62,020

Accumulated depreciation and amortization

Buildings 2,374 2,361



36,320 19,472

Net property, plant, and equipment 441,949 42,548

5 Construction in progress

’000 RUR

Residential complex Zolotye Klyuchi

Residential complex Korona

Business center Pollars

Business center

Moscow-City

(Bashnya Federatsii)

Other constructions in progress Total

At January 1, 2003 879,109 693,235 – 54,868 172,807 1,818,019

Construction costs incurred 1,490,883 675,982 227,626 161,585 228,740 2,784,816

Recognized as cost of revenues earned (1,158,091) (691,394) – –

– (1,849,485)

At December 31, 2003 1,229,901 677,823 227,626 216,453 401,547 2,753,350

Construction costs incurred 987,702 48,129 341,742 469,228 502,201 2,349,002

Transfer to PPE – – – – (399,576) (399,576)

Recognized as cost of revenues earned (1,128,741) (398,469) (165,556) –

– (2,092,343)

At December 31, 2004 1,088,862 327,483 403,812 685,681 504,172 3,010,009

Other construction in progress includes residential complexes Mirax-Park, Kutuzovskaya Riviera and Dom na Taganke.

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6 Loans and borrowings The pro forma Group’s loans and borrowings are comprised of the following:

2004

2003 (unaudited)Lender Rate Maturity

Collateral/ Pledged cost

’000 RUR ’000 RUR

Alfa-Bank 14.25

% June 29, 2006 real estate property / RUR ’000 463,376 456,466 –

Probusinessbank 26% April 20, 2006 promissory notes / RUR ’000 200,000 200,000 –

IBG Nikoil 14% May 25, 2005

real estate property / RUR ’000 386,669; stake in share capital / RUR ’000 18, physical person’s guarantee 568,848 1,321,035

Alfa-Bank 11-

12% September 1, 2004

real estate property / RUR ’000 123,426, equipment / RUR ’000 9,240, property rights / RUR ’000 8,132, physical person’s guarantee – 235,636

Avtobank-Nikoil 18% July 25, 2005

Property / RUR ’000 13,565, promissory notes / RUR ’000 378,576, property rights / RUR ’000 8,132 80,000 –

Kazkommercbank 12% December 1, 2004 guarantee from Avtobank-Nikoil / RUR ’000 624,346 – 589,089

MDM 12% April 30, 2004 guarantee from CB IBG Nikoil – 170,836

Avtobank-Nikoil 13% May 25, 2004

Property / RUR ’000 13,565, promissory notes / RUR ’000 352,353, property rights / RUR ’000 8,132 – 294,545

Russky Mezhdunarodny bank 17% October 22, 2004

promissory notes / RUR ’000 50,558 – 44,182

Russky Mezhdunarodny bank 17% June 10, 2004

promissory notes / RUR ’000 26,334, third parties’ guarantee – 23,564

Aizkraukles Banca 5% September 5, 2004 not secured 21,300 21,300

Total loans 1,326,614 2,700,187

Letters of credit 283,064 –

0% promissory notes issued 40,000 30,000

Unsecured borrowings: RUR – fixed at 0% 41,968 32,540

Unsecured borrowings: USD – fixed at 0% 83,349 1,370

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Borrowings from related parties: RUR – fixed at 0% 323,312 315,203

Total loans and borrowings 2,098,307 3,079,300

The aggregate maturities of loans and borrowings for years subsequent to December 31, 2004 are: RUR 1,634,694 in 2005 and RUR 463,613 in 2006.

For more information about the pro forma Group’s exposure to interest rate and foreign currency risk, see Note 17.

86 apartments in the residential complex Korona were pledged at December 31, 2004 as collateral for the loan received. In the first half of 2005 an agreement with a bank was signed and registered to decollateralize these and to replace a pledge with the office building the Parent Company is situated in.

7 Interest incurred The pro forma Group capitalizes interest as a component of the cost of construction in progress. The following is a summary of interest costs incurred during 2004 and 2003:

2004 2003

(unaudited)

’000 RUR ’000 RUR

Interest capitalized 18,164 –

Interest charged to the income statement 303,427 179,854

Total interest incurred 321,591 179,854

8 Trade and other payables

2004 2003

(unaudited)

’000 RUR ’000 RUR

Promissory notes 777,698 651,434

Accounts payable – trade 318,039 300,992

Other payables 25,407 25,491

1,121,144 977,917

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9 Other taxes payable

2004 2003

(unaudited)

’000 RUR ’000 RUR

VAT payable 412,932 200,902

Other taxes payable 3,502 4,144

416,434 205,046

10 Billings in excess of costs and estimated earnings

2004 2003

(unaudited)

’000 RUR ’000 RUR

Residential complex Mirax-Park 283,910 –

Business center Pollars 266,086 79,916

Apartment building on Veernaya street 261,781 193,539

Residential complex Kutuzovskaya Riviera 186,715 –

Residential complex Dom na Taganke 120,496 11,228

Residential complex Korona 81,242 202,682

Residential complex Zolotye Klyuchi 41,576 234,312

Other – 15,012

1,241,806 736,689

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11 Deferred income taxes

Recognized deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following items:

’000 RUR Assets Liabilities Net

2004 2003

(unaudited) 2004 2003

(unaudited) 2004 2003

(unaudited)

Construction in progress 753,629 203,899 – – 753,629 203,899

Property, plant and equipment 2,876 1,711 – – 2,876 1,711

Construction inventories 244 – – (67) 244 (67)

Trade and other accounts receivable – – (1,399,393) (594,521) (1,399,393) (594,521)

Prepayments 3,831 2,428 – – 3,831 2,428

Loans and borrowings – – (2,824) (3,828) (2,824) (3,828)

Advances from customers 71,136 – – – 71,136 –

Trade and other payables – 18,700 (38,541) – (38,541) 18,700

Net tax assets/(liabilities) 831,716 226,738 (1,440,758) (598,416) (609,042) (371,678)

12 Stockholders’ equity

(a) Pro forma Group stock

At December 31, 2004, the pro forma Group stock represents the statutory share capital of the Parent Company OOO “Mirax-Group”.

(b) Distributions

During 2004 the pro forma Group distributed RUR 334,073 thousand (2003: RUR 201,400 thousand) to the stockholders of the Parent Company.

Under Russian Law, dividends are limited to the net profits of the reporting year as set out in the statutory consolidated financial statements of the companies in the pro forma group. These Laws and other legislative acts governing the rights of the stockholders to receive dividends are subject to various interpretations. As at December 31, 2004 the accumulated loss, including the loss of the current year of the Parent Company amounted to RUR 56,900 thousand (as at December 31, 2003 RUR: 17,495 thousand).

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13 Revenues earned

2004 2003

(unaudited)

’000 RUR ’000 RUR

Revenues from construction contracts:

Residential complex Zolotye Klyuchi 2,497,406 2,562,343

Residential complex Korona 659,754 1,144,756

Business center Pollars 386,382 –

Other revenues 119,577 50,061

3,663,119 3,757,160

14 Cost of revenues earned

2004 2003

(unaudited)

’000 RUR ’000 RUR

Cost of construction:

Residential complex Zolotye Klyuchi 1,128,741 1,158,091

Residential complex Korona 398,469 691,394

Business center Pollars 165,556 –

Other costs 19,841 1,582

1,712,607 1,851,067

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15 Selling, general, and administrative expenses

2004 2003

(unaudited)

’000 RUR ’000 RUR

Selling expenses:

Advertising 57,214 103,873

Other 2,321 3,386

59,535 107,259

General and administrative expenses:

Officers’ salaries 293,346 176,045

Insurance and other commissions 66,251 68,026

Professional services 59,439 43,827

Depreciation and amortization 16,848 10,217

Pension and social contributions 16,386 10,450

Other salaries 13,192 8,054

Communication 11,540 8,687

Doubtful debt expense 19,319 11,258

Rent 7,697 37,556

Stationery and supplies 3,288 1,080

Other 162,876 54,216

670,183 429,415

Total selling, general, and administrative expenses 729,718 536,674

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16 Income tax expense

2004 2003

(unaudited)

’000 RUR ’000 RUR

Current tax expense

Current year 45,169 (2,637)

45,169 (2,637)

Deferred tax expense

Origination and reversal of temporary differences 237,364 318,043

237,364 318,043

282,533 315,406

The pro forma Group’s applicable tax rate is the corporate income tax rate of 24% (2003: 24%).

Reconciliation of effective tax rate:

2004 2003 (unaudited)

’000 RUR % ’000 RUR %

Income before tax 1,030,956 1,311,626

Income tax at applicable tax rate 247,429 24% 314,790 24%

Non-taxable / (non-deductible) items, net 35,104 3% 616 –

282,533 27% 315,406 24%

17 Financial instruments Exposure to credit, interest rate and currency risk arises in the normal course of the pro forma Group’s business.

(a) Credit risk

The pro forma Group does not require collateral in respect of financial assets. Credit evaluations are performed on all customers, other than related parties, requiring credit over a certain amount.

At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

(b) Interest rate risk

Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the pro forma Group’s exposure should be to fixed

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or variable rates. However, at the time of taking new loans and borrowings, management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable to the pro forma Group over the expected period until maturity.

(c) Foreign currency risk

The pro forma Group incurs foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Russian rouble. The currencies giving rise to this risk are primarily US dollar and euro. Management does not hedge the pro forma Group’s exposure to foreign currency risk.

(d) Fair values

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No.107. The pro forma Group has performed an assessment of its financial instruments to determine whether it is practicable within the constraints of timeliness and cost to determine their fair values with sufficient reliability.

The pro forma Group has concluded that due to the lack of liquidity and published “indicator interest rates” in the Russian market, and the fact that some of its transactions are with related parties and of a specialized nature, it is not possible to determine the fair values of receivables from and payables to related parties.

In other cases fair value has been determined as of the balance sheet date by discounting the estimated future cash flows using market interest rates for similar instruments. As a result of this exercise management believes that the fair value of its financial assets and liabilities is not materially different from their carrying values.

This estimate of fair value is intended to approximate the amount at which these financial assets and liabilities could be exchanged in a current transaction between willing parties. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realizable in an immediate sale of the assets or settlement of liabilities.

18 Commitments The pro forma Group did not enter into significant contracts to purchase plant and equipment nor has other significant commitments as at 31 December 2004.

19 Contingencies

(a) Insurance

The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The pro forma Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on pro forma Group property or relating to pro forma Group operations. Until the pro forma Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the pro forma Group’s operations and financial position.

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(b) Litigation

Other claims include a number of small claims and litigations. Based on experience in resolving such matters, management believes that these will be resolved without significant loss to the pro forma Group and, accordingly, no provision has been made for these unresolved claims and litigation.

(c) Taxation contingencies

The taxation system in the Russian Federation is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. Fiscal years remain open for review by the authorities for three calendar years preceding the year of review; however, under certain circumstances a fiscal year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could alter and differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

The pro forma Group enters into transactions with various intermediates, including, as discussed in Note 1(e), with variable interest entities (“VIEs”), in which it does not hold any direct or indirect equity interest, for tax minimization, transactions’ financing and financial resources (re)distribution purposes. The VIEs only conduct transactions on behalf of the pro forma Group companies. The management of the pro forma Group controls these companies and transactions. Accordingly, the financial statements of these VIEs have been included in the pro forma consolidated financial statements of the pro forma Group. The reduction in tax resulting from the transactions under the special agreements involving the above-mentioned intermediaries and VIEs is based on a formalistic approach to applicable Russian tax legislation. The management of these intermediaries is responsible for the correctness and timeliness of the tax payments by the companies.

The Management of the pro forma Group believes that the probability of an actual outflow of funds from the VIEs or other pro forma Group companies to settle potential tax and other related liabilities is remote and, therefore, no provision for tax liabilities resulting from the matter described in the preceding paragraph has been made in these pro forma consolidated financial statements. The tax authorities, however, can interpret the substance of the above transactions in a different way and it could result in such tax and other liabilities (and related penalties and interest) that could materially impact the pro forma Group consolidated financial statements.

20 Variable Interest Entities As mentioned in Note 1(e), the Consolidated Entities enter in transactions with the Variable Interest Entities (directly or via intermediaries) established with the purpose of (intermediary) financing of the other pro forma Group companies, tax minimization and financial resources

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(re)distribution. Although the shareholders of the pro forma Group do not hold any direct controlling power in such entities, they are ultimately under their control and, therefore, the financial results of the activities of such entities (several of them being established under the legislation of the Russian Federation and several – under the foreign jurisdictions) have been included into the pro forma consolidated financial statements.

Details of transactions with VIEs for the reporting period and the balances at the end of the period with other pro forma Group companies are as follows:

2004 2003

(unaudited)

’000 RUR ’000 RUR

Other payables 746,921 206,831

Other receivables 701,335 84,689

Loans given 412,831 1,100,649

Accounts payable – trade 120,000 –

Accounts receivable – trade 74,217 –

Interest income 21,574 13,873

Loans received – 14,000

All transactions and balances with other pro forma Group companies are eliminated on consolidation.

21 Related party transactions

(a) Control relationships

The majority of the pro forma Group companies included into the pro forma consolidated financial statements are ultimately owned by two individuals in a proportion of 90% to 10%. OOO “Mirax-Group” is 90% owned by OOO “Polonsky S.Yu.”, which, in turn, is fully owned by one of the above-mentioned individuals. The ultimate shareholders perform management functions in certain pro forma Group’ companies and receive nominal amounts of compensation for these services.

Related parties comprise the shareholders/owners of the companies included into the pro forma Group and all other companies in which those shareholders/owners, either individually or together, either directly or indirectly have a controlling interest; the pro forma Group companies’ management, their officers and employees and their close family members.

Trade and other receivables owing by related parties at the end of the year were as follows:

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2004 2003

(unaudited)

’000 RUR ’000 RUR

Due from OOO “Polonsky S.Yu.” 540,541 –

Due from ZAO “Stroimontazh” (Saint Petersburg) 435,476 443,584

Due from officers and employees 368 152

976,385 443,736

ZAO “Stroimontazh” represents a separate group controlled by the individual holding 10% in several entities included into the pro forma consolidated financial statements. This amount was settled in the first half of 2005 (refer to Note 22).

Loans given to related parties at the end of the year were as follows:

2004 2003

(unaudited)

’000 RUR ’000 RUR

Loans given to other related parties at 16% interest 22,226 21,446

Non-current loans given to officers and employees 5,618 3,981

27,844 25,427

Amounts due to related parties at the end of the year comprise the following:

2004 2003

(unaudited)

’000 RUR ’000 RUR

Loans and borrowings 323,312 315,203

Due to employees 25,093 19,368

348,405 334,571

Terms of the loans due to related parties are described in Note 6.

(b) Pricing policies

Related party transactions are based on prices determined between the parties, which are not always at market terms.

22 Events subsequent to the balance sheet date Subsequent to 31 December 2004, the pro forma Group was in the process of the reorganization of its legal structure which has not been finalized at the date of issuing of these pro forma consolidated financial statements. It is planned that as a result of this reorganization individuals owing shares in entities included into the pro forma Group will transfer their stakes in these

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entities to the Parent Company. As a result, a legal group of entities will be set up whereby one legal entity will hold shares in all the entities that are included into these pro forma consolidated financial statements. The management of the pro forma Group does not intend to change status and activities of the consolidated VIEs.

As stated in Note 1(a), the Parent Company was renamed OOO “Mirax-Group” in the first half of 2005.

As stated in Note 21(b), ZAO “Stroimontazh” settled its outstanding debt due to the pro forma Group in the first half of 2005.

In the first half of 2005 the pro forma Group changed collatarization of a bank loan as discussed in Note 6.

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Mirax Group

Documents

consolidated income

income net

net cash

net property

consolidated balance

rur net income705

rur assets cash

operating income