Gallery Media Holding Ltd. Nine Months Ended 30 September ... 3Q 2010 Unaudited... · advertising...

MD&A 1

Gallery Media Holding Ltd.

Nine Months Ended 30 September 2010

Unaudited Financial Results

29 November 2010

MD&A 2

DISCLAIMER Forward Looking Statements This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements for the nine months ended 30 September 2010 as well as the audited consolidated financial statements for the year ended 31 December 2009 of Gallery Out of Home Media Group Ltd. (the “Group”). Some statements in this discussion, including any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance, are not historical facts and are “forward-looking.” The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this discussion. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "believe," "anticipated," "estimated," "intends," "expects," "plans," "seek," "projection" and "outlook." These statements involve known and unknown risks, uncertainties and other factors, and are made based on estimates, assumptions and uncertainties, all of which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to such factors. The factors discussed above, as well as other factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made in this report by us or on our behalf, thus you should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors will emerge in the future, and it is not possible for us to predict such factors. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those described in any forward-looking statements.

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

MD&A 3

DESCRIPTION OF THE BUSINESS The Group was founded in 1994 as a regional outdoor advertising contractor and has grown, organically and through acquisitions, to become the second largest outdoor advertising contractor in Russia and Ukraine in terms of number of advertising faces owned. We have in the past pursued complementary acquisitions in markets where we already have operations in order to increase market penetration and operating efficiencies, as well as strategic expansions into new geographic markets and product lines. We offer our clients a comprehensive package of services related to outdoor advertising, including campaign planning and a diverse product and location mix. We have three principal outdoor advertising product lines comprising 47,076 total advertising faces as of 30 September 2010, including 13,704 transport (as of 31 December 2009: 47,170 total, including 12,459 transport). Billboards Billboards include traditional 3x6 meter roadside billboards. As of 30 September 2010, we owned 9,038 and 3,556 billboard advertising faces in Russia and Ukraine, respectively (as of 31/12/09: 8,978 and 3,556 respectively). Street Furniture We own street furniture in Moscow, several regional cities and Ukraine. Our primary street furniture formats are directional signs, pedestrian road fences, scrollers, 1.2x1.8 meter city formats and lamp posts. As of 30 September 2010, we owned 16,205 and 2,839 street furniture advertising faces in Russia and Ukraine, respectively (as of 31/12/09: 17,994 and 2,781 respectively). Transport & Other Displays Through the acquisition of Techprogress in 2006, the Group acquired a five year contract with “Mosgortrans” (Moscow State Public Transport Company) for placement of advertising on and inside various types of transportation units. Currently the Group has the right to place advertising on more than 5,000 buses, trolleys and trams and inside more than 7,000 buses, trolleys and trams. As of 30 September 2010, we owned 13,704 transport faces in Russia (as of 31/12/09: 12,459) and 1,479 and 255 other advertising faces in Russia and Ukraine, respectively (as of 31/12/09: 1,206 and 196 respectively).

MD&A 4

RESTRUCTURING & FIRST NINE MONTHS OF 2010 UPDATE

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

2. NEW APPOINTMENT On 19 July 2010, the Board of Directors appointed Dmitry Cheltsov to the post of Chief Executive Officer. Mr Cheltsov previously managed the operations business of TNT Express Worldwide Moscow and was General Manager of the logistics company Itella. Since 2000, Mr. Cheltsov has also been holding the post of Chairman of the Committee for Transport and Customs of the Association of European Business.

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

MD&A 5

4. OUTLOOK The worldwide global financial crisis has contributed to a significant slowdown in demand for advertising in 2009. Improved market conditions in 2010, combined with the positive effects of on-going comprehensive cost-cutting efforts and a significant deleveraging of the balance sheet, have improved the Group’s liquidity position and will put it on stable financial footing going forward. Following the Restructuring, the Group is now well capitalized and focused on providing best in class service to its customers.

MD&A 6

MANAGEMENT DISCUSSION AND ANALYSIS OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following discussion of the Group’s financial position and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements for the nine months ended 30 September 2010, the audited consolidated financial statements for the year ended 31 December 2009 and the related notes thereto, as well as other financial information included elsewhere in this document. The unaudited interim condensed consolidated financial statements for the nine months ended 30 September 2010 have been prepared in accordance with IAS 34, Interim Financial Reporting. Financial Highlights In $ thousands Nine months ended

30-September-2010 Nine months ended 30-September-2009

Revenues 92,469 73,731 Gross Profit 36,878 16,694 EBITDA 20,784* 2,454 EBITDA margin 22% 3% In $ thousands Three months ended

30-September-2010 Three months ended

30-September-2009 Revenues 33,323 27,292 Gross Profit 15,659 7,786 EBITDA 8,141* 4,520 EBITDA margin 24% 17% Capitalization In $ thousands 30 September 2010 31 December 2009 Senior Secured Notes1 101,507 179,930 PIK Loan2 - - Finance leases 17 22 Total Gross debt 101,524 179,952 Senior Gross debt 101,507 179,930 Total debt/LTM EBITDA3 3.4X 15.8X Senior debt/LTM EBITDA 3.4X 15.8X *before loss on restructuring recognized on 18/08/10 in the amount of $5,810

1 The amounts are measured based on principal amounts of obligations plus accrued interest 2 On 26 July 2007, Gallery Out of Home Media Ltd. (the former parent company of the Group) entered into a term loan facility agreement (“PIK Loan”) with a number of international financial institutions for the total amount of $95,271 (net of transaction costs of $4,729). In the financial statements of Gallery Out of Home Media Ltd. PIK Loan has been accounted for at amortized cost using the effective interest rate method and had a carrying value of $135,389 and $116,954 as of 31 December, 2009 and 2008, respectively. The financing received by Gallery Out of Home Media Ltd. in the form of PIK Loan has been subsequently contributed to Gallery Media Group Ltd. without any contractual obligation for repayment. Therefore, at the level of Gallery Media Holding Ltd. the amount of $95,271 has been treated as equity contribution from the earliest period presented.

Interests accrued on PIK Loan in the financial statements of Gallery Out of Home Media Ltd. in the amounts of $40,118 and $13,685 as of 31 December 2009 and for the nine months ended 30 September 2009, respectively, were eliminated in these interim condensed consolidated financial statements. 3LTM EBITDA EBITDA for the last twelve months.

MD&A 7

EBITDA Reconciliation to Net Profit In $ thousands Nine months ended

30-September-2010 Nine months ended 30-September-2009

Net loss (3,464) (28,317) Add back: Income tax expense 1,405 1,994 Loss/(gain) on disposal of property, equipment and intangible assets

1,057

885

Gain on disposal of subsidiaries (3,132) (178) Finance income (720) (614) Finance costs 14,407 13,431 Depreciation & amortization 6,081 10,161 Effect of foreign exchange movement (660) 5,092 EBITDA 20,784 2,454 REVENUES Total revenues for the first nine months of 2010 increased by 25% in total compared to the same period of the last year. The underlying reason is the recovery of the economy after worldwide global financial crisis resulting in the increase of demand for advertising and the Group’s efforts in attraction of strategic customers. Along with the market recovery another significant reason for increase of reported revenues is the appreciation of Russian national currency to US dollar by 7% compared to the average exchange rate for the same period in 2009. In $ thousands Nine months

ended 30-September-

2010

Nine months ended

30-September-2009

Revenues on own boards 73,631 61,594 Media buying revenues 18,838 12,137 Total revenues 92,469 73,731 Revenues on own boards Similar to the first half of the year, revenues from own boards increased by 20% for the first nine months 2010 in comparison to the same period in 2009. The main reasons were increase of occupancy rate of own faces compared to the prior year. Media buying revenues Revenues from subcontracted advertising faces increased by 55% for the nine months of 2010, reflecting increased demand for national advertising campaigns Seasonality The Group’s business generally experiences seasonality over the course of the calendar year with respect to occupancy rates. In prior years, the lowest rates of occupancy for our advertising faces were in the months of January, February, March and August. This seasonality trend reflects reduced advertising spending in the first quarter being the lowest in terms of occupancy following the Christmas holiday season and in the third quarter due to summer school holidays. In the last five years, the Group’s business has generally experienced this seasonality trend. In those months when occupancy rates are lower, the Group works to satisfy its social advertising requirements by placing a larger amount of social advertising than in other months.

8

COST OF REVENUES

In $ thousands Nine months ended 30-September-2010

Nine months ended 30-September-2009

Subcontractors fees 15,899 10,855 City fees and permits 14,599 17,687 Maintenance and repair expenses 9,797 8,947 Payroll of production personnel 7,327 7,396 Depreciation 4,354 7,317 Electricity 1,392 1,271 Warehouse expenses 980 1,080 Transportation expenses 664 699 Other 579 1,785 Total 55,591 57,037

City fees and permits City fees include payments made to landowners (principally municipalities), building owners and advertising agreements for the right to place advertising displays on the property or buildings owned by third parties. City fees have decreased by 17% constituting now 16% of total revenues versus 31% during fist nine months of 2009. Decrease of city fees is mainly associated with the 30% discount granted by the Moscow government for placing social advertizing at the Group’s faces. The discount was initially provided in May 2009 and was effective until 30 June 2010. Starting from July 2010 it was revised to 20% effective until 31 December 2010. Subcontractor fees Subcontractor fees increased during the first nine months of 2010 by 46% in conjunction with increase of media buying revenues. The margin between media buying revenues and subcontractor fees was 16% for the first nine months of 2010 in comparison with 11% for the same period of 2009. Maintenance and repair expenses Maintenance and repair expenses include cost of materials and spare parts for the day to day maintenance and monitoring of advertising structures, materials for posting and servicing the units as well as outsourcing fees to perform maintenance and repairs on our advertising displays during peak demand periods. Maintenance and repair expenses increased by only 2% in absolute amount (or by 10% in USD due to revaluation of RUB) compared to nine months in 2009. Payroll of technical personnel Though USD reported Payroll expense remained flat in comparison with nine months 2009, the Group has undertaken voluntary personnel reduction within implementation of cost saving policy. The RUB decrease of these expenses resulted to 8% change. Depreciation This expense category includes depreciation of fixed assets. The decrease in depreciation and amortization expense by 40% is mainly associated with the previous impairment of fixed assets as of 31 December 2009. Other Other expenses consist primarily of agency commissions, which fell by 80% compared to the nine months 2009 due to Group’s focus to work with direct clients in the customer base.

9

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In $ thousands Nine months ended 30-September-2010

Nine months ended 30-September-2009

Payroll 13,566 14,365 Bad debt expense 2,355 1,575 Depreciation and amortization 1,750 2,844 Office rent and related expenses 1,612 2,327 Audit and consulting expenses 892 859 Taxes other than profit tax 670 701 Communication expense 482 573 Advertising and marketing expenses 344 230 Transportation expenses 187 158 Business trip and representative expenses 174 247 Security expenses 169 158 Bank charges 62 92 Other 1,028 647 Total 23,292 24,776

Payroll Payroll expenses (incl. UST) decreased by 13% in RUB terms during the first nine months 2010, largely due to the voluntary reductions in personnel that begin in early 2009. The underlying reason is the voluntary personnel reduction caused by total cost saving policy undertaken by the Group in the process of debt restructuring started in the second half 2009. The lower decrease in USD terms (by only 3%) is due to appreciation of RUB against USD by 7%. Depreciation and amortization This expense category includes depreciation of non-production fixed assets and amortization of intangible assets consisting primarily of software, tender fees and long-term contracts. The decrease of this category of expense by 42% is associated with the previous impairment of these assets as of 31 December 2009. Office rent and related expenses The decrease in the office rent expense by 30% came as a result of the Company’s efforts to renegotiate terms with various landlords, who provided significant discount on the basis of economic recession, and its ability to sublet a portion of its Moscow headquarters to third parties. Bad debt expense Despite the implementation of effective procedures to collect outstanding receivables, the Group has recorded 50% increase in bad debt expense which was associated with written-down receivables identified as non-recoverable in the process of reorganization of the Group legal structure. Advertising and marketing expenses Increase of this category of expenses is caused by more aggressive marketing efforts in the reviving advertizing market seen in the first nine months 2010. In particular in April 2009 the Group was active participant of Advertising Congress which has taken place in Moscow. Business trip and representative expenses This category of expenses have decreased due to the Group’s cost cutting measures.

10

OTHER KEY EXPENSES Gain from disposal of subsidiary Starting 17 March 2010 the Group ceased consolidation of Larisa City, began further accounting as an investment in joint venture and derecognized the related put option liability. This transaction resulted in a gain of $3,245. Restructuring loss During the reporting period the Group has recognized a loss from its debt extinguishment in the amount of $5,810 which consists of the effects from debt-to-debt and debt-to-equity conversion of the Group’s financial liabilities (Senior Secured Notes) and previously capitalized restructuring expenses. Finance costs Finance costs increased by 7% compared to the same period last year due to the Group has accrued additional $1.3 million of penalty interest in the process of its debt restructuring. At the same time from 18/08/10 the Group started to accrue interest on a smaller principal amount of the New Notes, which was reduced from $161.5m to $100.3m upon completion of debt restructuring. Net foreign exchange gain Foreign exchange gains or losses arise when transactions are denominated in a currency different from the operational unit’s functional currency. As the US dollar depreciated by 7% against the ruble during first nine months of 2010, the Group recognized a gain of approximately $0.8 million due primarily to the devaluation of the principal amount of the Senior Secured debt to be repaid by the Group’s main Russian subsidiary.

11

PERFORMANCE ANALYSIS The Group measures its performance using certain indicators. With respect to the consolidated statement of operations, the Group uses three key indicators: Gross Profit Gross profit is calculated as revenues less cost of revenues. Gross profit increased in 2010 to $36.9 million from $16.7 million for the first nine months of 2009 principally as result of significantly increased revenues and market recovery and fixed nature of the Group’s costs. EBITDA EBITDA is defined as net profit plus income tax expense (or minus benefit), plus net interest expense, plus loss (or minus gain) on disposal of subsidiaries or property and equipment or impairment losses, plus depreciation of property and equipment and amortization of intangibles and plus non-cash share-based payments. In addition, we adjust the calculation for foreign currency exchange differences resulting from debt held in foreign currencies at the operating level. Other companies may calculate EBITDA differently. We believe that EBITDA is useful to investors as a measure of operating performance because it eliminates variances caused by the amounts and types of capital employed and amortization policies and helps investors evaluate the performance of our underlying business. We also believe that EBITDA is a measure commonly used by analysts and investors in the outdoor advertising industry. The Group’s EBITDA for the first nine months of 2010 was $20.8 million, which increased by $18.1 million from $2.5 million earned by the Group during the same period last year. CASH FLOW During the first nine months of 2010, cash flow from operations increased to $12.5 million in sharp contrast to the same period in 2009 when the Group reported a $2.9 million cash outflow. Cash used in investing activities of $2.8 million was mainly spent on advances issued for fixed assets. Cash used in financing activities of $2.5 million was mainly spent on restructuring expenses $7.5 million which was offset by $5 million cash contribution from shareholders upon completion of debt restructuring. The overall cash increase for the period amounted to $7 million, or $6.8 million net of the effect of exchange rate change on cash flows.

12

Key Performance Indicators Revenues breakdown In $ thousands

Nine months ended

30-September-2010

Nine months ended

30-September-2009

RUSSIA Billboards 31,832 25,872 Street Furniture 20,329 18,726 Transport & Other 16,495 13,528 Total 68,656 58,126 UKRAINE Billboards 3,166 2,408 Street Furniture 1,262 566 Transport & Other 547 494 Total 4,975 3,468 Revenues on Own Boards 73,631 61,594 Russia Media Buying 17,459 10,303 Ukraine Media Buying 1,379 1,834 Media Buying Revenues 18,838 12,137 GRAND TOTAL 92,469 73,731 Number of Advertising Faces

30-September-2010 31-December-09

Formats Russia Ukraine TOTAL Russia Ukraine TOTAL Billboards 9,038 3,556 12,594 8,978 3,556 12,534 Street Furniture 16,205 2,839 19,044 17,994 2,781 20,775 Transport 13,704 - 13,704 12,459 - 12,459 Other 1,479 255 1,734 1,206 196 1,402 Total 40,426 6,650 47,076 40,637 6,533 47,170

Occupancy 3Q2010 2Q2010 1Q2010 4Q2009 3Q2009 2Q2009 1Q2009 4Q2008 3Q2008 RUSSIA Billboards 89% 87% 76% 85% 78% 78% 57% 83% 85% Street Furniture 81% 74% 70% 74% 75% 75% 72% 76% 74% Transport & Other n/a n/a n/a n/a n/a n/a n/a n/a n/a UKRAINE Billboards 57% 49% 67% 77% 50% 49% 38% 80% 83% Street Furniture 41% 45% 68% 55% 34% 35% 41% 39% 81% Transport & Other n/a n/a n/a n/a n/a n/a n/a n/a n/a


Unaudited interim condensed consolidated financial statements

Nine months ended 30 September 2010


Unaudited interim condensed consolidated financial statements

Nine months ended 30 September 2010

Contents Report on review of interim condensed consolidated financial statements ................................... 1 Interim condensed consolidated statement of financial position ................................................... 2 Interim condensed consolidated statement of operations ............................................................. 3 Interim condensed consolidated statement of comprehensive income ......................................... 4 Interim condensed consolidated statement of cash flows ............................................................. 5 Interim condensed consolidated statement of changes in equity .................................................. 6 Notes to the interim condensed consolidated financial statements ............................................... 7

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

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

A member firm of Ernst & Young Global Limited

Report on review of interim condensed consolidated financial statements

To the Shareholders of Gallery Media Holding Ltd. Introduction We have reviewed the accompanying interim condensed consolidated financial statements of Gallery Media Holding Ltd. and its subsidiaries (“the Group”), comprising the interim condensed consolidated statement of financial position as at 30 September 2010 and the related interim condensed consolidated statements of operations, comprehensive income, cash flows and changes in equity for the nine months then ended and explanatory notes. Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Financial Reporting Standard IAS 34, Interim Financial Reporting (“IAS 34”). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review. Scope of review We conducted our review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34.

29 November 2010

http://www.ey.com/russia


Unaudited interim condensed consolidated statement of financial position

as at 30 September 2010

(in thousands of US dollars)

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

2

Notes

30 September 2010

Unaudited

31 December 2009

Audited (Note 1) Assets Non-current assets Intangible assets 10 $ 88,464 $ 89,573 Property and equipment 9 29,330 31,249 Investment in joint venture 6 1,092 – Other non-current assets 2,711 3,800 Total non-current assets 121,597 124,622 Current assets Trade and other receivables 21,693 16,022 Advances issued and prepaid expenses 6,429 13,763 Inventory 909 1,088 VAT receivable 104 200 Other current assets 4,594 3,832 Cash and cash equivalents 5 35,731 28,714 Total current assets 69,460 63,619

Total assets $ 191,057 $ 188,241 Equity and liabilities Equity attributable to equity holders of the parent Share capital 12 $ 0.005 $ 100 Additional paid-in capital 11,12 283,281 202,675 Accumulated deficit (222,247) (218,883) Foreign currency translation (20,622) (19,858) Total equity 40,412 (35,966) Liabilities Non-current liabilities Loans and borrowings 11 100,308 15 Deferred income tax liabilities 7 12,907 12,653 Other non-current liabilities 15 – Total non-current liabilities 113,230 12,668 Current liabilities Trade and other payables 16,885 14,399 Deferred revenues and advances from customers 14,252 13,982 Put option liability – 4,000 Taxes payable 4,975 4,232 Loans and borrowings 11 1,198 174,808 Current portion of finance lease obligations 2 22 Other current liabilities 103 96 Total current liabilities 37,415 211,539

Total equity and liabilities $ 191,057 $ 188,241


Unaudited interim condensed consolidated statement of operations

for the nine months ended 30 September 2010



3

For the three months ended 30 September

For the nine months ended 30 September

Notes 2010 2009 2010 2009

Unaudited Unaudited

(Note 1) Unaudited Unaudited

(Note 1) Revenues $ 33,323 $ 27,292 $ 92,468 $ 73,731 Cost of revenues (17,664) (19,506) (55,590) (57,037) Gross profit 15,659 7,786 36,878 16,694 Selling, general and administrative

expenses (8,546) (7,497) (23,292) (24,776) Loss due to restructuring 11 (5,810) – (5,810) – (Loss)/gain on disposal of property and

equipment 9 (763) (5) (1,057) (885) (Loss)/gain on disposal of subsidiaries 6 (74) (48) 3,132 178 Finance income 169 119 720 614 Finance costs 11 (5,698) (4,659) (14,407) (13,431) Net foreign exchange gain/(loss) 3,047 5,592 818 (5,212) Other operating income 282 155 809 495 Net result from joint venture 92 – 150 – Profit/(loss) before income tax (1,642) 1,443 (2,059) (26,323) Income tax benefit/(expense) 7 535 (2,444) (1,405) (1,994) Net loss $ (1,107) $ (1,001) $ (3,464) $ (28,317)


Unaudited interim condensed consolidated statement of comprehensive income




4

For the three months ended 30 September

For the nine months ended 30 September

Notes 2010 2009 2010 2009

Unaudited Unaudited

(Note 1) Unaudited Unaudited

(Note1) Net loss for the period $ (1,107) $ (1,001) $ (3,464) $ (28,317) Exchange differences on translation of

foreign currencies 289 2,587 (764) 572 Other comprehensive income/(loss)

for the period, net of tax 289 2,587 (764) 572 Total comprehensive income/(loss)

for the period, net of tax $ (818) $ 1,586 $ (4,228) $ (27,745)


Unaudited interim condensed consolidated statement of cash flows




5

For the nine months ended

30 September Notes 2010 2009 (Note 1) Cash flows from operating activities (Loss)/profit before income tax expense $ (2,059) $ (26,323) Adjustments for:

Depreciation of property and equipment 4,632 7,826 Amortization of intangible assets and other assets 1,449 2,335 Finance income (720) (614) Finance costs 14,407 13,431 Bad debt expense 2,355 1,575

Loss/(gain) on disposal of property and equipment 1,057 885 Gain on disposal of subsidiaries 6 (3,132) (178)

Net foreign exchange loss (818) 5,212 Changes in operating assets and liabilities:

Change in trade and other receivables (5,770) (399) Change in other assets (609) (269) Change in advances issued and prepaid expenses (1,420) (6,888) Change in trade and other payables 2,564 1,943 Change in deferred revenues and advances from

customers 343 (2,790) Change in taxes payable, other than income tax 859 3,077

Cash generated from operations 13,138 (1,177) Income taxes paid (1,138) (677) Imputed tax paid – (1,582) Interest paid – – Interest received 525 499

Net cash flows from operating activities 12,525 (2,937) Cash flows from investing activities

Payments for property, equipment and other non-current assets (3,155) (4,164)

Proceeds from sale of subsidiaries – 1,216 Proceeds from disposal of property and equipment 213 24 Payments for long-term contracts – (256) Dividends received from joint venture 131 –

Net cash flows used in investing activities (2,811) (3,180) Cash flows from financing activities

Payments under finance leases – (3,805) Dividends paid – – Proceeds from shareholders 5,000 – Payments for restructuring (7,463) – Repayment of borrowings – – Proceeds from borrowings – 3

Net cash flows used in financing activities (2,463) (3,802) Effect of exchange rate changes on cash & cash equivalents (234) (885) Net increase in cash and cash equivalents 7,017 (10,804) Cash and cash equivalents at 1 January 28,714 36,074 Cash and cash equivalents at 30 September $ 35,731 $ 25,270


Unaudited interim condensed consolidated statement of changes in equity




6

For the nine months ended 30 September 2010

Notes Share capital

Additional paid-in capital

Accumulated (deficit)/

profit

Foreign currency

translation Total Equity Balance as at

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

Net loss for the period – – (3,464) – (3,464)

Other comprehensive loss – – – (764) (764) Total comprehensive

loss – – (3,464) (764) (4,228) Changes in equity

resulting from debt restructuring

11, 12 (100) 75,606 100 – 75,606

Contribution from shareholders 12 – 5,000 – – 5,000

Total change in equity (100) 80,606 (3,364) (764) 76,378 Balance as at

30 September 2010 $ 0.005 $ 283,281 $ (222,247) $ (20,622) $ 40,412

For the nine months ended 30 September 2009

Notes Issued capital

Additional paid-in capital

Accumulated deficit

Foreign currency

translation Total Equity Balance as at

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

Net loss for the period – – (28,317) – (28,317) Other comprehensive

income – – – 572 572 Total comprehensive

(loss)/income – – (28,317) 572 (27,745) Balance as at

30 September 2009 $ 100 $ 202,675 $ (147,850) $ (19,900) $ 35,025


Notes to the interim condensed consolidated financial statements



7

1. Corporate information These interim condensed consolidated financial statements are the first IFRS financial statements issued by the Group (as defined herein) after completion of its restructuring started in 2009 in accordance with the agreement reached on 6 October 2009. As a result of the restructuring the legal structure of the reporting group changed as follows: • The former parent of the Group, Gallery Out of Home Media Ltd. (or “GOHM”) and

intermediate parent of the Group, Gallery Media Group Ltd. were left outside the new legal structure;

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

• The Group significantly simplified its legal structure leaving 27 of its “empty shell” subsidiaries outside the Group.

These interim condensed consolidated financial statements include the financial statements of Gallery Media Holding Ltd. and its subsidiaries (together referred to as the “Company” or the “Group”) and are presented as a continuation of Gallery Media Group Ltd.’s financial statements using the pooling of interests method. The parent company, Gallery Media Holding Ltd., is an international business corporation registered under the laws of the British Virgin Islands on 3 March 2010. The registered address of Gallery Media Holding Ltd. is at the premises of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. The interim condensed consolidated financial statements of the Group for the nine months ended 30 September 2010 were authorized for issue by the Group’s management on 29 November 2010. Restructuring On 12 May 2006, Gallery Capital S.A (a special purpose entity organized under the laws of Luxemburg) issued Senior Secured Notes, guaranteed on a senior basis by Gallery Media Group Ltd. and certain of its subsidiaries (“Old notes”). The Old notes had interest rate of 10.125% per annum and maturity on 15 May 2013. Interest on the Old notes was payable on 15 May and 15 November of each year, beginning on 15 November 2006. In May 2009, the Group determined to postpone the interest payment due 15 May 2009 and initiated debt restructuring negotiations with the noteholders. As a result on 18 August 2010, the Group successfully completed the restructuring of its financial liabilities in accordance with the agreement reached on 6 October 2009 with a committee representing the majority of holders of the Old notes. The restructuring was implemented by way of two schemes of arrangement in the English courts (“Schemes”). The Schemes were approved by the Scheme Creditors on 18 May 2010 and sanctioned by the High Court of Justice of England and Wales at a fairness hearing held on 26 May 2010.


Notes to the interim condensed consolidated financial statements (continued)

8

1. Corporate information (continued) Restructuring (continued) Under the terms of the Restructuring the Old notes were converted to debt and equity of Gallery Media Holding Ltd., where holders of $161,490 face value of the Old notes (with carrying value of $187,991 as of the date of restructuring) received 68% of the equity in Gallery Media Holding Limited, and 90% of $100,308 of 10%-bearing New Notes, issued by European Media Capital S.A. due 2015 (”New Notes”). $13,510 face value of the Old notes held by Group were cancelled as part of the Schemes. The remaining 10% of New notes were distributed between existing owners of the Group, represented by Baring Vostok Capital partners and a company controlled by Anatoly Mostovoy. 2% of the Gallery Media Holding Ltd.’s equity has been allocated to a third party who assisted the negotiating process in the lead up to the restructuring. The remaining 30% of the Gallery Media Holding Ltd.’s equity were kept by existing owners of the Group. Comparative financial information As discussed above, these interim condensed consolidated financial statements are presented as a continuation of Gallery Media Group Ltd.’s financial statements using the pooling of interests method. Therefore, the comparative information in these interim condensed consolidated financial statements has been derived from previously issued IFRS consolidated financial statements of Gallery Out of Home Media Ltd., immediate parent of Gallery Media Group Ltd. The below reconciliation outlines the differences between the consolidated financial statements of Gallery Out of Home Media Ltd. as at 31 December 2009 and the comparative information presented in these interim condensed consolidated financial statements:

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

2. Interests accrued on PIK Loan in the financial statements of Gallery Out of Home Media Ltd. in the amounts of $40,118, $21,683 and $13,695 as at 31 December 2009 and 2008 and for the nine months ended 30 September 2009, respectively, were eliminated in these interim condensed consolidated financial statements.

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

4. Furthermore, in interim condensed consolidated financial statements of Gallery Out of Home Media Ltd. for the nine months ended 30 September 2009 restructuring costs in the amount of $6,496 were initially recognized as expense of the period instead of being deferred until the date of restructuring.



9

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

As reported by

GOHM Reconciliation As reported by the Company

Consolidated statement of financial position as at 31 December 2009

Loans and borrowings $ 135,404 $ (135,389) $ 15 Total non-current liabilities 148,057 (135,389) 12,668 Share capital $ 128 $ (28) $ 100 Additional paid-in capital 107,404 95,271 202,675 Accumulated deficit (259,029) 40,146 (218,883) Total equity (171,355) 135,389 (35,966)

Consolidated statement of financial position as at

31 December 2008 Loans and borrowings $ 272,144 $ (116,954) $ 155,190 Total non-current liabilities 306,815 (116,954) 189,861 Share capital $ 128 $ (28) $ 100 Additional paid-in capital 107,404 95,271 202,675 Accumulated deficit (141,244) 21,711 (119,533) Total equity (54,184) 116,954 62,770

Consolidated statement of operations for nine

months ended 30 September 2009 Selling, general and administrative expenses $ (31,272) $ 6,496 $ (24,776) Finance costs (27,126) 13,695 (13,431) Net loss for the period (48,508) 20,191 (28,317)

Consolidated statement of operations for the year

ended 31 December 2009 Finance costs $ (36,127) $ 18,435 $ (17,692) Net loss for the period (117,785) 18,435 (99,350)



10

2. Operating environment of the group Russia Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The ongoing global financial crisis has resulted in capital markets instability, currency risks and significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian government has introduced a range of stabilization measures aimed at providing liquidity and supporting refinancing of foreign debt for Russian banks and companies, there continues to be uncertainty regarding access to capital and cost of capital for the Group and its counterparties, which could affect the Group’s financial position, results of operations and business prospects. Ukraine The Ukrainian economy while deemed to be of market status continues to display certain characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation and the existence of currency controls which cause the national currency to be illiquid outside of Ukraine. The stability of the Ukrainian economy will be significantly impacted by the Government’s policies and actions with regard to administrative, legal, and economic reforms. As a result, operations in Ukraine involve risks that are not typical for developed markets.

The Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in a decline in the gross domestic product, capital markets instability, and significant deterioration in the liquidity in the banking sector, tighter credit conditions within Ukraine, and significant devaluation of the Ukrainian hryvnia against major currencies. In 2010 with the political environment in Ukraine becoming more stable, all industries tend to revive. Given outward investment has always been essential to the development of Ukraine’s economy, international rating agencies upgraded their ratings of Ukraine. The stabilization of Ukraine’s political and investment environment, coupled with the revival of banking, seem to have laid the groundwork for the recovery. Ukraine’s investment attractiveness will largely depend on the strategic programs of the state authorities. Ukraine's long-term economic prospects depend on improving governance, building investor confidence through acceleration of market reforms, and replacing and upgrading infrastructure. Although Ukrainian segment represent less than 10% of the Group’s operations, all these factors could influence the Group’s financial position and results. While management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.



11

3. Basis of preparation and accounting policies Basis of preparation The interim condensed consolidated financial statements for the nine months ended 30 September 2010 have been prepared in accordance with IAS 34, Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Gallery Out of Home Media Ltd.’s annual financial statements as at 31 December 2009. These interim condensed consolidated financial statements are presented in US dollars, which is the Group’s presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using the functional currency. The functional currency of the Group’s Russian subsidiaries is the Russian ruble (RUB). The functional currency of the Group’s Ukrainian subsidiaries is the hryvnia (UAH), and the functional currency of the Company and overseas subsidiaries is the US Dollar (USD). Significant accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of Gallery Out of Home Media Ltd’s annual financial statements for the year ended 31 December 2009, except for the adoption of new Standards and Interpretations, noted below:

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

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

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



12

3. Basis of preparation and accounting policies (continued) Significant accounting policies (continued) • IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The amendment had no effect on the financial position nor performance of the Group. • IFRIC 17 Distribution of Non-cash Assets to Owners This interpretation provides guidance on accounting for arrangements whereby an entity distributes noncash assets to shareholders either as a distribution of reserves or as dividends. The interpretation had no effect on the financial position nor performance of the Group. Improvements to IFRSs (issued May 2008) In May 2008, the Board issued its first omnibus of amendments to its standards. All amendments issued are effective for the Group as at 31 December 2009, apart from the following: • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: Clarifies when a

subsidiary is classified as held for sale, all its assets and liabilities are classified as held for sale, even when the entity remains a non-controlling interest after the sale transaction. The amendment is applied prospectively and had no impact on the financial position nor financial performance of the Group.

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

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

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

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



13

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

• IFRS 2 Share-based Payment • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations • IAS 1 Presentation of Financial Statements • IAS 17 Leases • IAS 38 Intangible Assets • IAS 39 Financial Instruments: Recognition and Measurement • IFRIC 9 Reassessment of Embedded Derivatives • IFRIC 16 Hedge of a Net Investment in a Foreign Operation The Group has also early adopted the following Interpretation:

• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19, which was published in November 2009, provides guidance on how to account for the extinguishment of financial liability by the issuance of equity instruments. These transactions are often referred to as debt-for-equity swaps. IFRIC 19 includes the following guidance: (i) the entity’s equity instruments issued to a creditor are part of the consideration paid to extinguish the financial liability; (ii) the equity instruments issued are measured at their fair value; (ii) the difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity’s profit and loss for the period. The Group early adopted this interpretation (Note 11). The Group also decided to voluntary change its accounting policy in respect of joint ventures from proportional consolidation to equity method, as it provides more reliable and relevant information and is consistent with the current projects of IASB. The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key estimates and assumptions used in the preparation of these interim condensed consolidated financial statements are consistent with those disclosed in the Gallery Out of Home Media Ltd.’s annual financial statements as at 31 December 2009, except for those discussed below: Fair value valuation of the Group’s equity For the purposes of these interim condensed consolidated financial statements the management of the Group performed the assessment of the fair value of the Group’s equity as of the date of restructuring.



14

3. Basis of preparation and accounting policies (continued) Significant accounting judgments, estimates and assumptions The value of equity was appraised based on cash flow projections from financial budgets approved by senior management for 2010 and projected growth rates for the subsequent five years. The pre-tax discount rate applied to cash flow projections is 14.6% and cash flows beyond the five-year period are extrapolated using a 2.6% growth rate. Key assumptions used in the valuation The fair value of the Group’s equity is most sensitive to the following assumptions: • Occupancy rates; • Average advertising placement prices; • Discount rates; • Growth rate estimates. Occupancy rates – Occupancy rates are based on the Group’s current market experience, industry forecasts as well as financial budgets approved by senior management Average advertising placement prices – Average advertising placement prices are derived from sales budgets approved by senior management. The price inflation rate is used to consider price growth in future years. Discount rates – Discount rates reflect management’s estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The discount rate was estimated based on the average percentage of a weighted average cost of capital in the advertising industry. Growth rate estimates (prices, direct costs and indirect costs growth rates) – Growth rates related to prices, direct and indirect costs are based on industry research and used by senior management in long-term financial budgeting. Sensitivity to changes in assumptions A change in any of the above key assumptions could result in the change of value of equity and, accordingly, in the change of the financial effect of the restructuring (Note 11). 4. Seasonality of operations The outdoor advertising business generally experiences seasonality over the course of the calendar year with respect to occupancy rates, which affects the Group’s revenues. This seasonality trend reflects reduced advertising spending in the first quarter following the Christmas holiday season and in the third quarter due to summer school holidays. Therefore, these interim results are not necessarily indicative of future periods.



15

5. Cash and cash equivalents Cash and cash equivalents comprise the following as at 30 September 2010:

30 September

2010 31 December

2009 Cash at banks and on hand $ 15,943 $ 4,273 Short-term bank deposits 19,788 24,441

$ 35,731 $ 28,714 6. Acquisition and disposal of subsidiaries Disposals in 2010 During 2008, the Group shifted its focus from growth through acquisitions to the integration of previously acquired entities and extracting synergies from the existing portfolio. So the Group did not pursue any new acquisitions during the year of 2008, 2009 and the first nine months of 2010. As part of its cash preservation policy in 2008 and 2009 the Group has executed disposals of entities, whose value-in-use in current market conditions was below their eventual selling price. On 31 October 2008, the Group entered into a revised Shareholder Agreement related to the ultimate ownership of Larisa City, of which the Group owned a 50.1% interest. This revised agreement provided for both a put and call option over the remaining 49.9% ownership interest. The exercise price of the option was dependent upon Larisa City’s future earnings, but the agreement stipulated that the price might not be less than $4,000. The $3,093 difference between the value of this put option liability and the carrying amount of the minority interest as of the agreement date was recognized directly in equity in 2008. As at 31 December 2009, the fair value of the financial liability under the put option was $4,000. On 17 March 2010 the Company signed the new agreement with the minority shareholder of Larisa City. According to the new agreement the Company and its minority shareholder become joint owners of Larisa City and the clause of put option was removed from the new shareholders agreement. As a result, the Group lost control over Larisa City as at 17 March 2010. Starting from that date the Group ceased consolidation of Larisa City, began further accounting as an investment in joint venture and derecognized the related put option liability. The interest retained in Larisa City was recognized at its fair value as at 17 March 2010. The management’s estimation of the fair value of 50% in the equity of Larisa City as at that date was $1,110. As a result of loss of control of Larissa City a gain of $3,245 was recognized in these interim condensed consolidated financial statements. As of the date of issue of these interim condensed consolidated financial statements the Group did not finalize the purchase price allocation and accounted for investment in Larisa City based on preliminary numbers. During the reporting period the Group received dividends from joint venture Larisa City related to 2009 in amount $131 which were paid in April and September 2010.



16

7. Income taxes The major components of income tax expense in the interim condensed consolidated statement of operations are:

For the three months ended

30 September

For the nine months ended

30 September 2010 2009 2010 2009 Income tax expense – current $ 568 $ 465 $ 1,083 $ 848 Deferred tax expense/(income) – origination

and reversal of temporary differences (1,104) 1,979 321 1,146 $ (535) $ 2,444 $ 1,405 $ 1,994 The Russian Federation and Ukraine were the only tax jurisdiction in which the Group’s income was subject to taxation. The statutory income tax rates are 20% in Russia and 25% in Ukraine. 8. Segment information For management purposes, the Group is organized into business units based upon the economic environment in which the outdoor advertising services are being provided, and thus the Group has two reportable operating segments: • The Russian segment provides outdoor advertising services to advertising agencies and

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

direct clients throughout Ukraine. No operating segments have been aggregated to form the above reportable operating segments. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss. Operating segments The following tables present revenue and net profit information regarding the Group’s operating segments for the three and nine month periods ended 30 September 2010 and 2009.

Nine months ended 30 September 2010 (unaudited) Russia Ukraine

Adjustments and

eliminations1 Consolidated Revenues Third party $ 86,115 $ 6,353 $ – $ 92,468 Results Segment profit $ 15,354 $ (139) $ (18,679) $ (3,464)

1 Profit for each reportable segment excludes finance income (2010: $720, 2009: $614), finance costs (2010: $14,407, 2009: $13,431), net foreign exchange gain/(loss) (2010: $818, 2009: $(5,212)) and loss on restructuring (2010: $5,810, 2009: nil) as financing activity is managed on a group basis.



17

8. Segment information (continued) Operating segments (continued)

Nine months ended 30 September 2009 (unaudited) Russia Ukraine

Adjustments and

eliminations Consolidated Revenues Third party $ 68,429 $ 5,302 $ – $ 73,731 Results Segment profit (restated) $ (8,791) $ (1,497) $ (18,029) $ (28,317)

Three months ended 30 September 2010 (unaudited) Russia Ukraine

Adjustments and

eliminations2 Consolidated Revenues Third party $ 31,248 $ 2,075 $ – $ 33,323 Results Segment profit $ 7,605 $ (420) $ (8,292) $ (1,107)

Three months ended 30 September 2009 (unaudited) Russia Ukraine

Adjustments and

eliminations Consolidated

Revenues Third party $ 25,851 $ 1,441 $ – $ 27,292 Results Segment profit (restated) $ (1,913) $ (140) $ 1,052 $ (1,001) Profit for each reportable segment excludes finance income, finance costs, net foreign exchange gain/(loss), which are related to financing, and loss on restructuring since financing activity is managed on a group basis.

Russia Ukraine

Adjustments and

eliminations Consolidated

Segment assets At 30 September 2010 (unaudited) $ 188,533 $ 2,524 $ – $ 191,057 At 31 December 2009 $ 186,527 $ 1,714 $ – $ 188,241

2 Profit for each reportable segment excludes finance income (2010: $169, 2009: $119), finance costs (2010: $5,698, 2009: $4,659), net foreign exchange gain (2010: $3,047, 2009: $5,592) and loss on restructuring (2010: $5,810, 2009: nil) as financing activity is managed on a group basis.



18

9. Property and equipment During the nine months ended 30 September 2010, the Group acquired assets with a cost of $3,758 (2009: $7,704), which did not include any assets purchased under finance lease. Fixed assets with a net book value of $1,270 were disposed of by the Group during the nine months ended 30 September 2010 (2009: $1,531) resulting in a net loss on disposal of $1,057 (2009: $885). 10. Intangible assets

Net book value

Licenses and permits

(indefinite useful life)

Licenses and permits (definite

useful life) Other Total Balance as at 31 December 2009 $ 87,721 $ 1,629 $ 223 $ 89,573 Additions – – 316 316 Disposals (468) – (23) (491) Amortization expense – (372) (98) (470) Translation difference (454) (7) (3) (464) Balance as at 30 September 2010

(unaudited) $ 86,799 $ 1,250 $ 415 $ 88,464 Indefinite lived licenses and permits include intangible assets acquired through business combinations. The cost of these intangibles equals their fair value as of the date of acquisitions measured by discounting their estimated future net cash flows. These permits and licenses have been granted by the relevant government municipalities for periods ranging from one to seven years. Based on prior history and current international market practices, management expects to be able to renew these licenses for an indefinite period of time. 11. Interest-bearing loans and borrowings Senior secured notes As discussed in Note 1, on 18 August 2010, the Group successfully completed the restructuring of its financial liabilities. As a result of this restructuring the Old notes were extinguished in exchange for new equity in the Group and New notes. For the purposes of these interim condensed consolidated financial statements the management of the Group performed the assessment of the fair value of the Group’s equity and New notes as of the date of restructuring. As the restructuring terms did to specify what exact portion of Old notes was replaced by equity and what portion was replaced by New notes, the management made this allocation based on the relative fair values of the New notes and the new equity. Accordingly, 43% of the Old notes are considered replaced by equity, and 57% are attributed to the New notes.



19

11. Interest-bearing loans and borrowings (continued) Senior secured notes (continued) New notes have been issued by European Media Capital S.A. or EurMedCap (a special purpose entity organized under the laws of Luxemburg) in the amount of $100,308. New notes are guaranteed on a senior basis by Gallery Media Holding Ltd. and certain of its subsidiaries. The New notes bear interest at the rate of 10% per annum. Interest on the New notes is payable on 1 February, 1 May, 1 August and 1 November of each year. The notes will mature on 1 February 2015. As the terms of New notes are substantially different to the terms of Old notes, the issue of New notes has been accounted for as an extinguishment of 57% of Old notes and recognition of new financial liability at the fair value of New Notes. As a result of restructuring, the Group recognized the equity instruments issued at their fair value of $75,606 and net loss of $5,810 in the consolidated statement of operations. During the first nine months of 2010, the Group recorded $13,184 (2009: $13,096) in interest expense related to the issuance of Old Notes. From 18 August 2010 till 30 September the Group recorded $1,198 interest expense related to the issuance of New notes (2009: nil). 12. Equity Gallery Media Holding Ltd. is authorized to issue a maximum of 53,763.44 ordinary shares of one class with a par value of US $0.0001. As at 30 September 2010 the fully paid capital of Gallery Media Holding Ltd. was $5 consisting of 50,000 ordinary shares with a par value of $0.0001 per share. As discussed in Note 1, these interim condensed consolidated financial statements are presented as a continuation of Gallery Media Group Ltd.’s financial statements using the pooling of interests method. Therefore, as at the date of restructuring the share capital of Gallery Media Group Ltd. of $100 has been replaced by the share capital of Gallery Media Holding Ltd. with the difference posted to accumulated deficit. According to the terms of restructuring the existing shareholders of the Group contributed $5,000 to Gallery Media Holding Ltd. without any contractual obligation for repayment. This amount has been credited to Additional paid-in capital. 13. Balances and transactions with related parties In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.



20

13. Balances and transactions with related parties (continued) Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The management considers that the Group has appropriate procedures in place to identify and properly disclose transactions with related parties and has disclosed all of the relationships identified and which it deemed to be significant. During the reporting period the Group’s joint venture Larisa City entered in the following transactions with the Group: • The Group received revenues of $83 from Larisa City • The Group purchased services for $727 from Larisa City which were included in the

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

Nine months ended 30 September

2010 2009

(restated) Current compensation $ 1,291 $ 1,596

$ 1,291 $ 1,596 14. Legal proceedings Legal action has been commenced in 2009 against the Group in respect of rental fees of certain of its advertising structures. The maximum payout was approximately $2,284. In 2010 the Group has won all court hearings regarding this matter and no negative outcome resulted from this litigation. In the ordinary course of business, the Group may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Group operates. In the opinion of management, the Group’s liability, if any, in all pending litigation, other legal proceeding or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Group.



21

15. Taxation Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in its interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on the management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities, which were identified by management at the reporting date as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in these interim condensed consolidated financial statements could be up to approximately $770. 16. Events after the reporting period On 11 November 2010 Gallery’s 10% Senior Secured Notes in the amount of $100,308 due in 2015 were listed on the Luxembourg Stock Exchange and the first coupon payment was made simultaneously. The Notes are traded under the name European Media Capital S.A. or EurMedCap.

Gallery Media Holding Ltd. Nine Months Ended 30 September ... 3Q 2010 Unaudited... · advertising...

Documents

Transcript of Gallery Media Holding Ltd. Nine Months Ended 30 September ... 3Q 2010 Unaudited... · advertising...