AUDIT REPORT on VSMPO-AVISMA Corporation Fi- Nancial Statements for 2005

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The Annual Report was preliminary approved by the Board of Directors of VSMPO – AVISMA Corporation on May 12, 2006 COMPANY INFORMATION

Full Company Name State Registration Number Public Stock Company 1026600784011 VSMPO-AVISMA Corporation Independent Auditor Company’s Site Joint Stock Company 1, Parkovaya Str., Analytic-Express Verkhnaya Salda, Sverdlovsk Region, Russia Company’s Print Newspaper “Novator” Company’s Mailing Address Newspaper “Metallurgist” 1, Parkovaya Str., Verkhnaya Salda, Web-server: www.vsmpo.ru Sverdlovsk Region, www.avisma.ru Russia, 624760 E-mail: State Registration Date [email protected] February 18th, 1993 [email protected] [email protected] Registration Number 162 II ВИ

Annual report 2005 CONTENTS

A LETTER TO SHAREHOLDERS ______5 BOARD OF DIRECTORS ______6 KEY PERFORMANCE INDICATORS______7 ANTICIPATED 2005 NET PROFIT DISTRIBUTION ______8 PRODCUTION AND MARKETING ACTIVITY ______9 Titanium Production ______10 Aluminum Production ______12 Steel and Nickel-Base Alloy Products ______13 Manufacturing Engineering ______14 QUALITY AND CERTIFICATION ______15 INNOVATIONS ______17 Capital Construction, Reconstruction and Modernization ______17 Melting ______17 Forging ______18 Rolling ______19 Bar Rolling ______20 Die Forging Machining Shop Construction ______20 LABOR PROTECTION AND SAFETY ENGINEERING ______22 ENVIRONMENTAL PROTECTION ______23 PERSONNEL MANAGEMENT ______25 SOCIAL SPHERE ______27 Medicine ______28 Culture ______29 Sports ______30 Health Improvement and Recreation ______31 Social Project «Cadet School» ______32 Social Assistance and Charity ______33 AVISMA - AFFILIATE ______34 ACCOUNTING ______43 Balance Sheet ______44 Profit-and-Loss Statement ______46 Cash Flow Statement ______47 AUDIT REPORT ______49 SHAREHOLDER INFORMATION ______51 RISK FACTORS ______52 OBSERVANCE OF THE CORPORATE GOVERNANCE CODE ______53

Annual report 2005 A LETTER TO SHAREHOLDERS

In 2005 we faced a unique situ- computer control systems were in- ation: along with the significant gr- troduced at all the conversion st- owth of the global aircraft build-ra- ages in accordance with customer tes, the airplane structure has been requirements and material prope- considerably changing. Aluminum rties. We extended our capabilities is replaced with composites and for product quality inspection by titanium, and titanium content in purchasing new fluorescent pene- the airplane structure is increasing. trant and multizone ultrasonic in- The rapidly developing nuclear spection units. The sixth tube-we- power industry will also require a lding line was launched. And fi- lot of titanium. nally, our high road into the future Thus, the Corporation is seei- – rough machining of large-size co- Vladislav Tetyukhin: ng great prospect and our present mplex shape die forgings. New ma- «2005 was a success for task is to be prepared to meet the chines were purchased and put us. All the plans are being growing titanium demand from into operation in the machining fa- implemented» conventional and emerging econ- cility. omic sectors. It would be even be- Customers cognized as a producer of high-qu- tter if we could be ahead of such Whilst we have become the nu- ality value-added products. demand. In the past 2005 our joint mber one supplier to Airbus seve- Salaries efforts were aimed at achieving th- ral years ago, only in 2005 we ma- The positive trend is observed ese objectives. naged to become the strategic su- in one of the most important indic- VSMPO and AVISMA pplier to Boeing which introduced es of the company’s competitiven- July 1, 2005 is the date of offi- into the market its revolutionary ess - output per man in money te- cial registration of our Corporation project B787 with the increased ti- rms. Salary has also grown and am- that unites with the single process tanium content. And of course we ounted to RR 11 000 in 2005 (20% cycle two companies which have maintain our cooperation with do- increase compared to 2004). been working together for a long mestic customers as we are practi- Social Sphere time. cally their only supplier of titanium Every year the Company’s soci- Titanium Production products and we fully meet their ti- al expenses are increasing. In 2005 Since 2000, titanium products tanium demand. they amounted to RR 321.1 mln, output in tons has increased 2 ti- Development which is 17% higher compared to mes, in money terms – 3 times. Ex- We manage to maintain our le- 2004. These means are used to support volumes have grown 3.5 times ading position and credibility in the port sports, medicine, culture, and and domestic shipments - 2.4 ti- world market through constant re- social assistance. mes. In this way, while Vladimir Pu- construction and upgrading of eq- So, the results of the Compan- tin is planning to double the gross uipment, process improvement, y’s activities in 2005 are quite im- domestic product by 2010, the Co- regular and capital repairs. Investm- pressive. There is a lot of difficult, rporation has achieved it by 2005. ents are made into production de- intensive, interesting work to be Upgrading velopment and conversion. In 2005 done, which means the Company During 2005 we upgraded die- we spent USD 54 mln for these pu- will live and develop further. forging and sheet-rolling equipm- rposes (in 2004 – USD 30 mln). Pr- ent in the main production shops oduct complexity was significantly Vladislav Tetyukhin of the Company. State-of-the-art increased. Currently VSMPO is re-

Annual report 2005 BOARD OF DIRECTORS

Vyacheslav Chairman of the Board of Directors I. BRECHT

Dennis Chief Financial Officer KELLY VSMPO-Tirus US, USA

Director Wasil Maintenance, Reconstruction and Repair A. BESEDIN AVISMA-Affiliate VSMPO-AVISMA Corporation

Vladislav Director General V. TETYUKHIN VSMPO-AVISMA Corporation

Director Nikolai Production Planning and Management K. MELNIKOV VSMPO-AVISMA Corporation

John President MONAHAN VSMPO-Tirus US, USA

Director Pavel Investment Banking Services A. RIZANENKO Renaissance Capital

Annual report 2005 KEY PERFORMANCE INDICATORS

Units 2002 2003 2004 2005 in millions Sales Revenue (net of VAT) 8 769 8 370 10 572 16 800 rubles Costs per Ruble of Product Sold in kopecks 68 76 83 76 in millions Net Profit 1 390 1 279 1 601 3 174 rubles in millions Balance-Sheet Total 8 121 10 063 12 407 20 447 rubles Average Listed Number of Personnel in persons 14 866 15 234 15 280 18 846

Average Monthly Salary in rubles 6 471 7 436 9 000 11 563

Annual report 2005 ANTICIPATED 2005 NET PROFIT DISTRIBUTION

Net Profit for the Reporting Period RR 3 174 137 K

Undistributed Profit of the Reporting Year shall be allocated as follows:

1.Payment of Dividends for 2005 RR 436 739 K

2. Capital Investments RR 2 255 198 K

3. Remuneration to the Members of the Board of Directors RR 840 K

4. Remuneration to the Members of the Auditing Committee RR 360 K

5. Consumption Fund RR 481 000 K

Dividend per share: 37.88 rubles

Dynamics of Dividend Payments per Share (in rubles)

* Growth vs the previous year, %

Annual report 2005 PRODCUTION AND MARKETING ACTIVITY

In 2005, VSMPO product sales in The Company has consistent gr- Association, Irkut Corporation (Ir- value terms were RR 16 800 mln. Ex- owth of its production output and kutsk), Salut (Moscow), Saturn (Mo- port share was 69% of the sales vo- hence, stable profit increase ensur- scow), Kiev Aircraft Plant “Aviant” lume. The general increase of the Co- ing production reconstruction and (Kiev), Gas and Turbine Construction mpany’s product sales was primarily development. Facility “ZORIA” – “MASHPROJECT”, due to export of titanium mill produ- The major CIS market customers Motor-Sich (Zaporozhye), Kazakhm- cts and ferrotitanium. are Ufa Motor Building Production ys Corporation (Zhezkazgan), etc.

Sales by Product Type in 2005 (in millions rubles)

Annual report 2005 Titanium Production

Titanium products account for nual increase of 247.5%. Export die and the share of low-value added pr- 71% of Company’s sales, the majority forging and forging output and ship- oducts was reduced. of which is exported - 74% of the to- ments have grown by 57% and their So, if in 2004 ingot production tal titanium products output. share increased from 4.2% to 6.3%. accounted for 17% of the total ou- In 2005, titanium mill products Shipments of titanium products tput, then in 2005 the share was red- export shipments significantly incr- to the domestic market remained at uced almost by half and equaled 9% eased. The share of titanium mill pr- the same level as in 2004. Shipments and slab output reduced from 11% oducts in physical terms accounted structure has undergone some ch- in 2004 to 9% in 2005. for 89% in 2005 compared to 81% in anges. The significant share – 16% – still 2004. VSMPO-AVISMA Corporation The share of ingot and bar as falls at die forgings. Last year several has made a significant breakthrough well as section and power equipme- dozens of new parts were at the de- in terms of export titanium tube pr- nt increased. velopment stage. oduction. The share of the abovem- The share of value-added prod- After putting into operation the entioned products came to 5.5% co- ucts in the structure of titanium pr- machining shop for large-size die fo- mpared to 1.6% in 2004, with the an- oducts sold in 2005 remained high rgings for aircraft building companies, VSMPO has reached a new level, i.e. not just metal but a machined st- VSMPO Titanium Products Sales ock is shipped to the Customer. Cu- in 2005 (in millions rubles) rrently rough machining operations are mastered and in the long term mastering of finishing operations is planned. All the abovementioned allows VSMPO to turn from a manufacturer of the stock material like ingot and slab into a highly-developed producer of competitive products at final conversion stages

10 Annual report 2005 Titanium Products (in thousands tons)

Annual report 2005 11 Aluminum Production

In 2005 aluminum products ac- exported including 65% of sections uminum articles for many years; Ur- counted for 4% of the Company’s sa- and panels and 35% of forgings and alvagonzavod that places orders for les.The main aluminum production bars. Sections and panels were deliv- tank wheel forgings. parts produced by VSMPO are large ered to Chinese aircraft-building co- Significant aluminum plate- or extruded panels and sections used mpanies for manufacture of aircraft ders are fulfilled in cooperation with for manufacture of aircraft body. body and to the western countries Kamensk-Uralsk Metallurgical Plant, The demand for aluminum pro- for aircraft engine casings. using unique VSMPO equipment for ducts from the domestic aircraft-bu- In addition to aircraft-building heat treatment, stretching and ul- ilding companies and CIS countries companies, traditional customers of trasonic inspection of plates, since is low, since for the last several years VSMPO products are as follows: Ga- the partner-company does not have they produced only several commer- zprom using aluminum tubes in gas- such equipment. As for consumer go- cial aircraft per annum. pumping stations; the Ministry of ods, sales of structural sections acco- In 2005 approximately 11.5% of Nuclear Power Engineering that has unted for 47.5%, wheel disks – 25.4% aluminum production items were been provided with the special al- and hothouse sections – 22.4%.

12 Annual report 2005 Steel and Nickel-Base Alloy Products

In 2005, steel products account- for aircraft engine disc forgings in eels; however the activity was suspe- ed for 1% of the Company’s sales in heat-resistant nickel-base alloys. The nded since there are no electrode su- value terms. Export forging shipme- trial lots of such forgings have been pplies available. nts significantly increased. already shipped. For about 10 years the Company The share of these products ac- Both domestic and foreign cu- has been continuously producing st- counted for 9.9% (in tons), whereas stomers are satisfied with the quality eel blades (from purchased raw main 2004 it was 3.3%. The Company of VSMPO products; however the pr- terials) for industrial gas and steam delivers steel and nickel alloy prod- ice for the steel products is not qu- turbines made by Uralturbo (Yeka- ucts in the form of forgings and die ite competitive since there is no VS- terinburg). forgings. MPO-owned steel-smelting facility. Several hundreds of industrial The main customers of VSMPO The Company has developed pr- turbines are currently in operation in steel products are engine-building oduction of the unique structural Russia and they are subject to repa- companies. For Russian customers forgings in high-strength steels of ir every ten years with the entire re- the Company supplies rolled rings, 4340М and 300М grades destined placement of the blades. Due to the shafts and discs for aircraft engines for Boeing and Airbus aircraft load- intensive repair process of the ex- and ground gas turbine units. For fo- bearing elements. The Company has isting turbines, VSMPO enjoys the in- reign customers the Company is de- also developed the process for va- creased demand for the steel turbine veloping and obtaining approvals cuum arc remelt of ingots of such st- blades

Annual report 2005 13 Manufacturing Engineering

One of VSMPO activities is prod- The Company set up product- um products as flanges, fittings, ad- uction of power equipment and ve- ion of titanium heat exchange and apters that are used for installation ssels in titanium alloys and steels. column equipment, as well as pipe and operation of nuclear power pl- In 2005 the share of such pr- modular systems that can be insta- ants and oil-producing platforms. oducts accounted for 2% of the Co- lled in the shells of the existing eq- There is no any other company mpany’s sales. In money terms the uipment. in Russia except VSMPO that could output of products intended for ma- Along with titanium, the bi-met- produce such titanium items; there- chine-building industry in 2005 in- allic material, titanium-steel, is used. fore this business appears to be pr- creased 2.4 times compared to the Recently the customers showed omising for VSMPO. previous year. the growing interest in such titani-

14 Annual report 2005 QUALITY AND CERTIFICATION

Competitiveness of any compa- dependent Certification Authorities with the Audit/Survey Plan was co- ny, regardless of the form of owner- and Customers. ntinued. 12 surveillance audits were ship and size, for the most part de- From year to year the number of held and 27 questionnaires were su- pends on the quality of its products companies cooperating with VSMPO bmitted. and compatibility of the price for the is increasing and more markets are In 2005 PRI certification audits products with the proposed quality, developed; as result not only the nu- were held per Nadcap Program – the i.e. on the extent to which the pr- mber of Customers’ audits, but also Etching Process (Certificate of Co- oducts meet the Customer’s requir- their profoundness is enhanced. mpliance to AC 7108), Materials Tes- ements. Current market established In 2005, 107 external audits were ting (Certificate of Compliance to AC a new tool for quality assurance of held (that is by 26 audits more co- 7101), NDT of Materials (Certificates products deliveries implemented as mpared to 2004), including 66 Cu- of Compliance to AC7114). a requirement for establishment of stomer’s audits (that is by 33 audits In 2005: the company’s Quality Management more compared to 2004). - Automated Test Report Data Tr- System. It ensures that the require- 11 audits were held by Certific- ansmission System was put into op- ments stipulated in the contract or ation Authorities (that is by 1 audit eration; agreement will be actually fulfilled. more compared to 2004). - the decision on development Due to the abovementioned, one of Six (6) internal audits of QMS of the electronic system of distribu- the major areas of the Company’s ac- and production processes were held tion, recording and retention of do- tivities is improvement of the current in the shops. For the purpose of me- cumentation was taken; Quality Management System (QMS). eting Rolls-Royce requirements four - the work in regard to electronic Company’s activities aimed at (4) production hazard review au- on-line access of all Company’s Div- maintaining and further improvem- dits were held. Two (2) contract ex- isions to OST Standards, Process Sp- ent of QMS are based on the Quality ecution audits were performed as di- ecifications (TU), Manufacturing Pl- Policy objectives and requirements rected by Quality Department Ma- ans was carried out; of the key Customers. VSMPO’s Qu- nagement. - the procedure for review of Cu- ality Management System efficiency The work for assessment of raw stomer documentation was impr- has been repeatedly approved by In- material Suppliers in accordance oved, allowing to flow down all the

Annual report 2005 15 requirements to the Company’s Di- major production shops studied st- with a more profound check and as- visions in full; atistical methods of product and pr- sessment of the process document- - UST unit for titanium products ocess quality analysis and the theory ation requirements implementation was put into operation in the bar ro- of solving engineering tasks; at work places. QMS certification to lling shop; - some of the inspection respo- AS/EN 9100, ISO 9001, GOST R ISO - 9584 employees (in total), incl- nsibilities of the Technical Control 9001 was maintained. uding 6 501 of blue-collar employe- Department were delegated to pr- In 2005 VSMPO-AVISMA Corpor- es and 3 083 of managers, specialists oduction personnel allowing them ation ensured stable, high level and and white-collar employees were tr- to become responsible for the work efficient performance of QMS. ained in the Personnel Training De- fulfilled. As of December 31, 2005 the Co- partment; among them 1800 em- In 2005 production volumes mpany holds 240 current certificates, ployees were trained in QMS; were growing and the product mix including 17 – for Quality System, 59 - production and economic se- was expanded, at that the products – for processes, and 164 – for prod- minar «Foremen School» was held in quality was continuously improving. ucts. the course of which the foremen of Production process audits were held

16 Annual report 2005 INNOVATIONS

Capital Construction, Reconstruction and Modernization of Production Facilities

Melting

Melting production developm- Process Support: - Purchase and installation of the ent was aimed at increasing produ- - Purchase, installation and putti- turning lathe for intermediate melt ction volumes, mostly by way of re- ng into operation two ingot abrasive ingot conditioning. construction of VAR furnaces to es- grinding units. Quality Control Improvement: tablish conditions for additional in- - Reconstruction of Recycled Ch- - Design, manufacture and involvement of recycled charge ma- arge Materials Etching Area. stallation of X-ray inspection unit for terials and improve ingot quality as- - Purchase and installation of master alloys. surance system. 250 ton and 400 ton chopping pres- - Installation and commissioning Basic Actions: ses and guillotine shears for titanium of 3 units for 100% titanium sponge - Upgrading of 9 VAR furnaces scrap cutting. inspection.

Annual report 2005 17 Forging

The undertaken actions allowed - Centralized control and mo- LOCHER chamber gas furnace were to improve metal deformation pr- nitoring system of heating furnaces put into operation that ensured the ocesses, optimize production flows, with accurate stock heating allowing required spare heating capacities to enhance key equipment loading and to increase rotor-grade billet output support the planned production vo- increase production volumes with was commissioned. lumes. the costs reduced on the account of - Putting into operation of the - Two mechanized grinding units yield growth. bogie-hearth furnace solved the is- were installed allowing to solve the Hydraulic presses: sue of homogenization of the high- problem of grind-out of defects of - The overhaul and upgrading alloy ingots (10-2-3 alloy) at the te- the intermediate stock. of 6000 ton press control system al- mperature of 1230 °C for 3 hours. 10 ton electric bridge crane was lowed to manufacture billets with re- Auxiliary equipment: put into operation at the titanium pr- duced allowances and the extended - Milling equipment upgrading oducts release area. length. allowed to perform partial machini- Due to sharp output increase st- - Basic construction and instal- ng of die forgings. arting from 2003 the number of pi- lation works were completed at the - Roller beds manufactured and eces of the key and auxiliary equip- area of 1500 ton press: the press was installed for KASTO band-saw allow- ment had to be increased in order to installed, basements for heat treatm- ed to increase its throughput and eli- ensure the throughput and fulfill the ent furnaces were built. minate the problem of stock cutting. required volumes. - GLAMA 1 ton loader was purc- - Construction of the grinding In order to ensure the maximum hased for 30 000 and 70 000 ton pr- area and installation of four grinding load of 2000 ton press forging co- esses. units allowed to enhance use of non- mplex the following additional units Heating facilities: machined ingots in the production were installed: - Two (2) heating furnaces instal- process and solve the problem of gr- - Two grinding machines for re- led at 30 000 and 70 000 ton presses ind-out of defects at intermediate st- moval of surface defects on interm- allowed to increase the loading and ages that resulted in yield increase. ediate stocks. production capacity of the equipm- 6000 ton Forging Press Area: - Two heating furnaces for stock ent. - Electric heating furnaces and heating for forging on radial-forging

18 Annual report 2005 machine RKM-800. In order to increase forged billets - Diamond-finishing machine - Computer-aided control of th- output, four KASTO band-saws were was put into operation ree electric furnaces. installed. - Two rotary-table machines - Installation of the tools (dies) In order to increase machined were put into operation. heating furnace for 2 000 ton press disc and ring output: - GLAMA manipulator with the li- was started. - New FPI area was commission- fting capacity of 2.5 ton was purcha- - Test template upsetting furna- ed. sed for rolling of rings of a larger we- ce. - Installation of ScanMaster UST ight and size. - Four die-head forging block for unit for discs is in process. radial forging on 2 000 ton press was - 7 worn rotary-table machines designed and tried-out. are upgraded.

Rolling

The basic intention was to in- KASTO band saw allowed to expand - construction of a new brush- crease production output. The gr- mill products machining area and re- washing machine; eat scope of work was fulfilled for reduce plate machining labor intensi- After putting into operation mi- placement of morally obsolete and ty. lling and grinding machines, output worn-out equipment and tools by Process modernization: of panels of 12.0 and 18.0 mm in th- new, advanced equipment allowing - equipment of 2000 hot rolling ickness increased 2.5-3 times. to improve the quality of the proce- mill with ring load cells; Vacuum-creep furnace # 1 was ssed metal with general reduction of - upgrading of 1200 rolling mill reconstructed to reduce plate anne- the labor-output ratio. hydraulic system; aling cycle. Commissioning of the electric - purchasing and installation of Software for OPTEL measurem- heating furnace with the transfer de- versatile circular grinding machine ent complex was developed for au- vice allowed to increase output by BUB 40 CNC/2000; tomation of product thickness and 1280 tpy. - purchasing of the roller shape flatness inspection. Purchasing and installation of inspection instrument;

Annual report 2005 19 Bar Rolling

In order to eliminate the bottle chine. Implementation of these ac- lling mill were re-equipped with necks in rolled bar production the tions allowed to increase the shop temperature monitoring and reco- following equipment was commi- capacity for the existing product rding controllers; temperature pa- ssioned: electric bar annealing fu- mix up to 4550 tpy. rameters recording unit for all the rnace, additional bar induction he- To ensure product quality and heating equipment of the shop and ating unit for I 5532 straightening fulfill Customers’ requirements, th- the lengthwise identification unit machine and abrasive-cutting ma- ree furnaces of the radial-shear ro- for bars were purchased.

Die Forging Machining Shop Construction

Construction of the die forging - reduction of the lead times of constructed in the area of 9.5 thous- machining shop was initiated, prim- the finished products due to elimin- and square meters in the existing pr- arily, owing to the desire of our Cu- ation of subcontracting; emises of the house-building facility. stomers to get value added products - guaranteed implementation of Equipment for the new machi- from VSMPO aiming at manufacture the Customers’ requirements for pr- ning shop was primarily selected so of the finished parts in the near fu- oducts quality. that to perform machining of the die ture. Project benefits: forgings delivered to our Customers Landing gear components are - additional profits on die forgi- like Goodrich, Boeing, and others, as subject to machining. ng machining; well as to enable machining of any The project objective is produ- - saving in purchasing of charge VSMPO die forging. ction efficiency increase on account materials due to scrap involvement When selecting machine types of: increase. VSMPO specialists consulted leading - expansion of the service range Die forging machining shop is machining specialists of our Custom- rendered to the Customers;

20 Annual report 2005 ers, visited facilities of potential equ- machining shop comprising 12 ma- - commissioning of BP130CNC ipment suppliers and got acquainted chines; machine; with their production. - installation and commissioning - purchasing and installation of Final decision on signing the su- of CNC turning lathe; inspection stands; pply contracts was taken after verifi- - purchasing of TMM 4200/420 - arrangement of work places for cation of machine operation in both identification system; design and process engineers and CNC Russian facilities and abroad - purchasing and installation of machines software programmers; The project includes: 2 portal bed-type CNC milling ma- - construction of coordinate-me- - construction of the die forging chines; asuring machines area.

Annual report 2005 21 LABOR PROTECTION AND SAFETY ENGINEERING

Labor and Environmental Pr- in order to decrease physical loads To improve thermal conditions otection and Industrial Safety De- of the workers in the tube extrusion in the shops the equipment was department deals with labor safety at shop. Air conditioning equipment signed and purchased, construction VSMPO. was purchased for the monitoring and installation works for low pr- As in the previous years, in 2005 and control station of the furnaces in essure gas piping were partially fu- engineering tasks under the Agree- the tube extrusion shop, for the br- lfilled and 18 sets of radiators were ment to the Labor Contract were fu- idge crane in the forging shop and installed. Drinking water distribution lfilled. RR 136 491 K was spent on the industrial air conditioner for the station was purchased for the Cater- implementation of the actions stipu- tooling shop. ing Division. lated by the labor safety agreement. Amenity rooms were repaired in 34 gas water machines were in- Working environment was improved the sheet rolling shop and in two fo- stalled in the shops. In addition, in 15 for 1217 employees including 418 rging shops. shops in the heat generation areas 1 women. Methane leak detectors, alarms liter of tea per shift/worker is provid- Working places in all VSMPO divi- for detection of combustible gases in ed (RR 774 K was spent). sions are qualified for preparation for the air of the thermopower shop and Special glasses were purchased certification for the compliance with oil-fuel level control gages for boiler for eyesight protection of the perso- labor safety requirements. In 2005, room # 1 were purchased. nnel using PC. based on qualification results the be- For non-conventional equipm- RR 12.011 K was spent for impl- low mentioned efficient engineering ent production shop hydraulic st- ementation of the abovementioned tasks were fulfilled which allowed to acking trucks with telescopic ma- engineering tasks. RR 95 mln. was sp- improve working conditions in most sts and electric lifting forks were co- ent for repair of production premises of the shops. mmissioned; exhaust ventilation for and constructions in order to ensure Antivibration chairs with damp- thermal cutting machine and dry fl- safety operation and improve amen- ing springs reducing transportation oor cleaning unit for the machining ities of employees. vibration of the crane cabin were pu- area were assembled. With the growth of production rchased for electric bridge crane op- The tilting cradle for thick plates volumes new work places are intro- erators of the forging shop. was manufactured for the finished duced leading to the increase in the The pneumocylinder for tools products acceptance area of the sh- number of actions required to ensu- assembly on the feeder was installed eet rolling shop. re labor safety conditions.

22 Annual report 2005 ENVIRONMENTAL PROTECTION

Central Testing Laboratory of ns, discharge, generation, handing water supply shop and treatment pl- Ecological and Production Enviro- and distribution of wastes. Licenses ants; nment Protection Department (CT- for wastes handling activities and hy- - equipment of gas-treatment LE&PEP) included into the Health, drometeorology works were granted units with flow meters and pressure Environmental and Safety Division to the Company. gages. is responsible for addressing environmental issues at VSMPO-AVISMA Ambient Air Protection Water Resources Protection Corporation. This laboratory was am- The Company does not exceed The Company uses five perma- ong the first in Sverdlovsk Region to the limits of pollutants discharged nent effluent discharge outlets. Qu- be accredited for the technical co- into the air. ality control for 24 pollutants of efflu- mpetence. VSMPO uses 169 gas-treatment ent water is carried out every month CTLE&PEP Department is engag- units that allow to reduce pollutant at the outlets. 99.6 % of effluent -wa ed in control and implementation of emissions of the Company by 63%. ter is subjected to cleaning through Environmental and Production Envi- In 2004-2005, 26 new gas-treatment treatment plants of the Company. In ronment Protection law and regulat- units were put into operation. 2005, only 24% of pollutants by we- ions during products manufacture. Ambient air protection is arran- ight were discharged with effluent The environmental protection ged by the Company in such a ma- water against the planned discharge system of the Company is based on nner that emissions discharged by all rate established by the Company. the following principle: planning-ra- production facilities of the industrial In 2005 the following was perfo- ting-control-recording-registration- sites are comparable by weight with rmed for water protection: reporting-review-planning and ma- emissions produced by boiler hous- - Activities ensuring the effective naged in the following three basic fi- es engaged in providing heating for operation of the sewage disposal pl- elds: both the Company and the city. ant including local disposal plants; - Protection of ambient air; In 2005, the following was fu- - The dike dam of the sludge co- - Protection of water resources; lfilled in order to ensure safety of the llector was repaired; - Handling of industrial and co- neutralization system and reduce - Replacement of utility and dr- nsumption wastes emissions into the air: inking water supply; The Company carries out enviro- - replacement of dust and gas - Design works for advanced tr- nmental activity in accordance with cleaning equipment in the used et- eatment from fluorides using treat- the approved standards of emissio- chants neutralizing premises in the ment plants of site A.

Annual report 2005 23 Development of the project for The major actions in 2005 were ility and drinking water supplies, cl- the maximum permissible emissions as follows: eaning of the sludge reservoir at the of pollutants with effluent water al- - Reconstruction of the used et- drinking water treatment station. lows to reduce the effluent water co- chants neutralization area with the The projects for the sanitary pr- ntamination charge 5 times. gas-treatment unit replaced; otection area, reconstruction of tr- - Reconstruction of 8 aerotanks eatment plants with advanced trea- Wastes Handling with installation of fine-bubble aera- tment from fluorides and treatment Wastes of Hazard Classes 1-5 tors for treatment plants of industrial plants of rainwater collectors at site are generated on industrial sites of and domestic sewage; A are developed. the Company. In 2005, 60.2% of wa- - Repairs and replacement of ut- stes generated in the Company were used in-house, 27.1% - handed over to outside organizations, 12.7% - allocated on site. The whole volume of wastes allocated on site meets the Wastes Distribution in 2005 established standards. Most of allocated wastes are non-toxic wastes of Hazard Class 5. More than 80 employees hold wastes handling certificates.

Ecological Program used on site Safe environment can be en- handed to outside organizations sured only owning to continuous at- allocated on site tention paid by the Company’s management and employees. Mid-term ecological program subjected to the state environmental appraisal has been put into effect in the Company.

24 Annual report 2005 PERSONNEL MANAGEMENT

In 2005 the number of the Com- Contest “The Best Russian Personnel and white-collar employees. Among pany employees was 15204 persons. Office-2005” was granted to the Pe- them there were young employees And although it is by 76 people less rsonnel Department of VSMPO-AV- (under 30) – 3816 persons (in 2004 compared to 2004, the number of ISMA Corporation. – 3540 persons). the personnel in the major produc- Increasingly high requirements 958 people acquired a new rela- tion shops increased due to the ou- are set up for the personnel and its ted profession. 862 people improved tput growth. ability to fulfill the established tasks their qualification degree. 3066 peo- In 2005 the average monthly sa- in the conditions of severe competit- ple finished intentional training cou- lary equaled 11374 rubles (in 2004 ion at product markets. rses. The same number of people at- – 9000 rubles). As in 2004, in 2005 In 2005, the work of the speciali- tended short-term courses. 575 pe- the average age of VSMPO employ- sts of the Personnel Department and ople attended permanent seminars. ees was 38 years old. the managers of the Company’s divi- 1245 people attended courses ar- Just as in 2004, the average work sions was aimed at enhancing interr- ranged by the Russian Technical Su- experience of blue collar employees elation between employees’ produc- rveillance Authority. equaled 13 years, specialists – 15 ye- tion training level and stimulation of Training resulted in more effic- ars; white collar employees – 17 yea- their interest in production results. ient personnel management at the rs; managers – 19 years. The average In 2005, 9584 VSMPO employees work places and re-distribution of work experience was 14 years. were trained in the Personnel Traini- employees in case of insufficient -pr In 2005 the honorary certificate ng Department, including 6501 wo- oduction load. of the Winner of the First All-Russian rkers and 3083 managers, specialists In 2005, order and production

Annual report 2005 25 volumes growth made the Personnel - upon graduation of education- rsons (in 2004 - 149) were trained in Department take efficient actions for al institutions – 484 people (38.8%); practice at VSMPO. supporting production facilities with - upon completion of the milita- In 2005 the Company’s organiza- the qualified graduates finishing Ve- ry service – 142 people (11.4%); tional structure was changed. For the rkhnaya Salda Professional Lyceum, - under work contracts – 606 pe- purpose of production optimization, Verkhnaya Salda Aero-Metallurgical ople (48.6%). three divisions (Shop 17, 44, 51) were College, Nizhnaya Salda Vocational As of December 31, 2005, 766 withdrawn from the Company’s st- School # 131 (NPU-131), high educ- VSMPO employees were the studen- ructure. ation institutions. ts of the Urals Polytechnic Institute, The following self-financing sub- In 2005 the Company hired 510 the affiliate of the Urals State Techn- sidiaries were established on the ba- graduates (37.7% of the total numb- ical University. In 2005 the students sis of the above-mentioned shops: er of newly employed), 112 persons of Verkhnaya Salda Professional Ly- VSMPO-LESTA LLC, VSMPO-POSUDA (8.3%) who returned from the mi- ceum – 689 persons (in 2004 - 676), LLC, VSMPO-Stroitel LLC. After re-or- litary service, and 730 persons (54%) Verkhnaya Salda Aero-Metallurgical ganization the number of personnel under work contracts. For 2004 the College – 466 persons (in 2004 – 407), neither reduced nor increased. figures were as follows: high education institutions – 139 pe-

26 Annual report 2005 SOCIAL SPHERE

PSC VSMPO-AVISMA Corporati- The Company’s social policy is for by the RF legislation. on is a city - constituting, socially re- based on holding to the traditions On the basis of 2005 performa- sponsible company actively particip- and maintaining of the common in- nce results, V. V. Tetyukhin, Director ating in development of the city interests of the Company employees General of PSC VSMPO-AVISMA Co- frastructure and paying considerate and their families. rporation, was awarded a Letter of attention to the social sphere su- One of the fundamentals of the Gratitude from E. E. Rossel, Governor pport and development. The corpo- corporate social policy is labor cont- of Sverdlovsk region, for active part- rate social expenses in 2005 equaled ract. It provides for labor remunerat- icipation in charitable activities and RR 321.1 mln that is by 17% more co- ion guarantees and for social and le- help to people in-need of social as- mpared to the last year. gal protection which is not provided sistance.

Social Expenses (in millions rubles)

Annual report 2005 27 Medicine

The established system of the period, 7 958 people received med- of the medicine expenses in the Co- Company’s personnel health protec- ical treatment in the Health and Re- mpany’s consumption fund in 2005 tion permits to provide qualified me- habilitation Center, including 560 amounted to 24.7%. dical treatment directly on site, co- employees of basic occupations who The employee voluntary health nduct diagnostics of diseases, render took complex therapy under packa- insurance system is widely used at ambulatory and stationary assistan- ge tours. VSMPO-AVISMA Corporation. ce, rehabilitation and preventive tr- In 2005, 2 712 employees receiv- According to the voluntary he- eatment. ed medical treatment in the Compa- alth insurance contracts, RR 22.6 mln The medical-preventive comp- ny’s in-patient departments. (RR 1 460 per employee) was spent lex of VSMPO-AVISMA Corporation Prevention program for cardiov- for purchase of medicines and pa- includes: an outpatient department ascular and other chronic noninfect- yment for treatment and surgeries in for 600 visits during a shift; a diagno- ious diseases is implemented at VS- 2005. stic center for 100 visits during a day; MPO-AVISMA Corporation. Considering the unsatisfactory two in-patient departments with 122 This work in 2005 included re- demographic situation in the city, beds; recovery center; interplant sa- duction of the disease development the Company undertook additional nitary centers; shop health units. risk and organization of recreation obligations to render assistance to The medical-preventive complex and rehabilitation activities of the newly married couples. provides services to 15.5 thousand Company’s employees. Gynecology department was es- employees and 7 thousand retirees. After 5 years of the program im- tablished in the city. 1129 women, With commissioning of the He- plementation the premature mortal- 46% of which are employees of mu- alth and Rehabilitation Center in ity rate of working age was reduced nicipal enterprises, received treatm- July 2005, new medical technologies by 40%, hypertension occurrences ent in this department in 2005. were implemented, which would su- – by 6% and labor losses due to il- In 2005 repair of the children’s bsequently allow to solve the major lnesses - by 8%. health center was started. The work task - reduction of the Company’s In 2005, investments in medicine performed by the Company’s repair employee sick rate. In the 6 month amounted to RR 79.4 mln. The share division amounted to RR 4335 K

28 Annual report 2005 Culture

For development of the childre- All divisions of the Cultural Ce- Creative groups from the Cultur- n’s and youth’s creative abilities, crea- nter organize events for gross audi- al Center regularly participate in the tion of the culture of communicatio- ences: traditional shows devoted to regional contests and festivals and ns, arrangement of leisure for the Co- calendar holidays – Women’s Day, Vi- the soloists of band “Dombra+” were mpany’s employees and city citizens ctory Day, Youth Day, New Year and awarded a diploma of the All-Russia VSMPO Cultural Center was created, other. Contest of Performing Art. including: Shop anniversary parties, family VSMPO-AVISMA Corporation cu- - Palace of Culture named after vacation days, festivals and exhibi- ltural expenses steadily increase ev- G. D. Agarkov; tions (e.g. “City of Businessmen”, all- ery year, only in 2005 expenses per - teenager club “Druzhba”; Russia exposition “Ural Forgers”) are person amounted to RR 1500. - children’s club “Rovesnik”; very popular. - membership club “Rodnik”; - cultural and health-improvement center “Semya”; - entertaining center “Uralsky”. Active concert, entertainment Cultural Expenses (in thousands rubles) and educational activities are carried out in all the departments covering musical, choreographic, arts and cr- afts, and other directions. 38 clubs and creative groups are attended by 1308 people. Seven groups were given the rank of “Recog- nized”. Choreographic group “Rossiyan- ochka”, choreographic studio “Dance Island”, theater and choreographic studio “Shalunishki”, dance studio “Ku- razh”, youth theater, academic choir, brass band, art studio “Fantasy”, dance club “Improvizatcia” and other groups successfully function in the Cu- ltural Center.

Annual report 2005 29 Sports

One of the major objectives of The management pays attention - in winter time the Company VSMPO-AVISMA Corporation is su- to providing facilities for operation runs 2 hockey courts on the basis of pport and improvement of health of of shop health groups (85 groups) schools. the Company’s employees, children attended by 2300 employees. Wi- Every year the number of the wi- and teenagers – the main source of nter and summer shop competitions nners of regional and all-Russia com- the Company’s workforce, as well as have become a tradition. The comm- petitions and championships foster- creation of conditions for regular ex- on sports tournament is held annual- ed in Verkhnaya Salda in increasing. ercises and sports activities. ly among the Company’s employees. Thus, in 2005, 4 young sportsmen ac- The Company has a constantly In 2005, 44 shops took part in 13 co- hieved the candidate master results developing sports base, which in- mpetitive events with the total nu- in ski racing, 10 sportsmen achieved cludes: mber of participants of 5062. the results of the first grown-up ca- - stadium “Start” with a hockey At any sports facility one can tegory, 3 sportsmen became the wi- court and a football ground; rent the following sports equipment: nners of the cross-country champi- - sports complex “Chaika” with a racing and mountain ski, snow-tubi- onships of Russia in semi-marathon swimming pool and sports hall; ngs, snow bikes, skates, skateboards, among the youth and in 10000 me- - sports and health improvem- balls etc. ter race among the juniors. ent facility “Melnichnaya” (tracks for The Company actively supports downhill racing, hoisters, ski and ro- development of physical education ller tracks, tracks for ski racing with and sports in the educational instit- the length of up to 20 km, track for utions. sledging and snow tubing), where -8 sports grounds with 43 sports Physical Education military sports camp “Olimp” functio- clubs attended by 986 school child- and Sports Expenses ns during summer vacations and sp- ren are arranged on the basis of sc- (in thousands rubles) orts and health improvement camp hools; – during winter, spring and autumn - at the Company’s expense add- vacations. itional physical education lessons are 400 children and 2160 Compa- given in two schools of the city; ny’s employees and members of th- - annually the schools receive pa- eir families regularly attend the sw- tronage assistance in repair of sports imming pool in the sports complex halls, hockey courts and purchasing “Chaika”. of new sports equipment;

30 Annual report 2005 Health Improvement and Recreation

The Company has two recreation camp, named after Z. Kosmodemja- The Company provides three meals centers: “Tirus” – for 128 reservations nskaya; daily to the students involved in the and “Sosnovka” - for 66 reservations. - day camps “Start” and “Olimp”; lyceum repair. In 2005 the maintenance costs - non-company camps “Zeleny 10 vacancies are available for te- equaled RR 9 419 K. Mys” (Novouralsk) and “Niva” (Gele- enagers in children camps. During 7122 people recreated at the ce- ndzhik); summer of 2005, 32 schoolchildren nters, among which: - sanatoriums “Usk-Kachka” and of the city worked as junior counse- - 4943 people in “Tirus” on va- “Krasny Yar” in Perm region; lors. cation package tours and 15 on one- - tourist trips to Moscow, St. Pe- In 2005 the program of health day package tours; tersburg, Yekaterinburg. improvement and recreation cove- - 2181 people in “Sosnovka” on The Company’s employees have red 170 teenagers after sixteen ye- vacation and one-month package 3140 children in the age of 7 to 17 ars old. tours. years (schoolchildren) what makes In 2005 expenses for organizati- For the purpose of the Compan- up 70% of the total number of the on of health improvement and recre- y’s employees’ health improvement, city schoolchildren, 1241 children ation for children amounted to RR 26 the Company spent RR 3331.1 K on are from broken and large families or K, including RR 14.8 K from the Co- health resort therapy and 418 peop- are under guardianship. mpany’s assets. le received medical treatment. Each child has a chance to spe- Certificates of Honor from Sver- 370 people received medical tr- nd time in one of the camps during dlovsk Region Government and the eatment in the regional hospital of a year. Federation of Trade Unions were aw- medical rehabilitation “Lipovka”. The- In 2005 the camps were attend- arded to the country camp “Tirus” se expenses amounted to RR 1700 K. ed by: and sports camp “Start”. Organization of health impro- 924 children from broken famil- The Company’s trade union be- vement and recreation for children ies; came one of the winners in the com- during vacations is one of the social 116 children from families, ha- petition for the best arrangement of programs implemented by the Co- ving many children; summer recreation for children and mpany. 42 children under guardianship teenagers held by the Russian Fe- Throughout a year children he- 27 handicapped children. deration of Independent Trade Un- alth improvement and recreation are For 4 years a labor camp has ions and devoted to the 100th an- organized in: been organized on the basis of Ve- niversary of the Russian trade union - country camps “Tirus” and the rkhnaya Salda professional lyceum. movement.

Annual report 2005 31 Social Project «Cadet School»

On VSMPO-AVISMA Corporation couraged by a trip to the North Navy Evstigneev, two of them entered Ver- initiative the social project on creat- at the expense of the Company. The khnaya Salda evening department of ion of a new kind of educational es- cadet upbringing greatly influenced the Urals State Technical University. tablishment – naval cadet school for the teenagers’ personal developme- Concurrently with the basic ed- teenagers from problem families rent and increased their motivation for ucational process, 50 cadets of the quiring social assistance – was de- studies, discipline and self-organiza- 5th -8th grades of the boarding sc- veloped and implemented. The total tion. hool «Cape of Good Hope» master amount assigned to this project by As a result of this project, the nu- the sailing basics and participate in the Company is RR 21.4 mln. mber of school-children registered sailing ship construction in the yacht In 2004-2005 academic year, the in the commission on juvenile affairs club «Romantica». school was attended by 180 children for various delinquencies was reduc- In 2005 the representatives of including 97 cadets, 50% of children ed and the quality of education also the yacht club took part in 8 regatt- live in the boarding school. changed. as at the territory of Russia and were The school is under the patron- The number of pupils with good awarded diplomas of the 1st and 2nd age of VSMPO-AVISMA Corporation and excellent marks increased. In degrees. and the neighboring Army Missile 2005, 9 pupils of the 11th grade gr- The Company’s expenses for the Division which keep working on the aduated from the school. project «Cadet School» in 2005 eq- military and patriotic upbringing of All graduates continued their ualed RR 2.6 mln, for the yacht club the pupils. The best cadets were en- education in the lyceum named after «Romantica» – RR 493 K.

32 Annual report 2005 Social Assistance and Charity

Social security of VSMPO-AV- ny lent support to the veterans in the - to the city educational establis- ISMA Corporation’s employees is the amount of RR 34.2 mln. hments – RR 180 K; necessary condition of the stable VSMPO-AVISMA Corporation is - for free meals for 50 children economic development of the Co- the winner of the anniversary contest from disadvantaged families of the mpany. Annually 16 kinds of social show of the International Forum “Gl- city – RR 440 K; payments are made out of the Com- obal Experience and Economy of Ru- - to orphan children from the or- pany’s profit. These include parent’s ssia” in 2005 and a holder of the Ho- phanage and boarding school – RR support for the children under 3 ye- norary Diploma “National Star” for 239 K; ars old in excess of the rate set by the rendering efficient assistance to War - for construction of Church of St. legislation, assistance to families ha- and Labor veterans and vigorous ac- John of Evangelist in Verkhnaya Sa- ving many children, to disabled pe- tivity related to civil, military and pa- lda – RR 501 K; rsons and single mothers, discharge triotic education of the youths. - to municipal and regional hea- allowances for the retirees, addition- In 2005 charity was rendered: lth authorities, law enforcement bo- al payments for kindergartens, social - for repair of the city objects of dies, social protection agencies – RR maternity leaves, unemployment re- social sphere – RR 4.8 mln.; 628 K lieves for unemployed retirees and other. In 2005, social payments amounted to RR 109 mln. More than 7500 persons are veterans of VSMPO-AVISMA Corpora- tion. All of them are united into the public organization “Council of Ve- terans”. All the veterans have the benefits established by the Company’s administration and enlisted in the labor contract. These benefits include services of the Company’s medical unit; medical insurance (payment for medicines and surgeries). Money for purchasing of firewood is appropria- ted to the veterans living in the pr- ivate houses. Veterans are given free package tours to the Company’s recreation center. In 2005, the Compa-

Annual report 2005 33 AVISMA - AFFILIATE

34 Annual report 2005 Production world market of primary magnesi- - Magnesium plant in Asbest, Ru- AVISMA is considered to be a um. Actually, if China stops the expo- ssia on the basis of serpentine du- multi-branch chemical and metallu- rt today, the world market will suffer mps. rgical facility. The major lines of AV- from the acute shortage of primary These are production plants or- ISMA activities are as follows: magnesium. iented to the almost zero cost of raw - sponge titanium production; Supplies build-up became, prob- materials with the forecasted magn- - magnesium and magnesium al- ably, one of the Chinese major achi- esium cost at the level of USD 1250- loys production; evements, as in no other market the 1350. - production of chemicals such Western world feels the leading po- In practice use of cheap raw ma- as: sition of this country as distinctly as terial will require considerable ex- - titanium tetrachloride; in the magnesium market. Providing penses for its development, brine re- - vanadium oxychloride; for about 70% of the world magnes- fining, conversion into carnalite, thus - vanadium pentoxide; ium supplies without any signs of sl- the cost will hardly be lower than - barium flux and carnallite flux; owdown and having the capabilities USD 1600-1650. - cuprichloric modifier; to produce this light metal at low co- Besides, Rusal studies and carri- - potassium chloride electrolyte; sts, China is notably ahead of all its es out economical evaluation of the - antiicing material “Kama-M; competitors. magnesium plant project on the ba- - calcium chloride (solution). CIS countries also constitute a sis of Gorodishchensk bishofite de- very important region of magnesium posit not far from Volgograd. Sponge Titanium Industry production. Four main manufacture- The largest end users of magne- AVISMA is considered to be a rs are located here: Solekamsk Ma- sium are producers of aluminum al- monopolist in production of sponge gnesium Plant and VSMPO-AVISMA loys which account for 40% of the to- titanium in Russia and one of the la- Corporation in Russia, Ust-Kameno- tal demand for this metal. In 2005 rgest among the world manufact- gorsk Titanium and Magnesium Wo- magnesium supplies to this sector urers. Currently the production vo- rks in Kazakhstan and Zaporozhje Ti- constituted more than 192 thousand lume of VSMPO-AVISMA Corporation tanium and Magnesium Works in Uk- tons. is estimated as one third of the en- raine. Production of magnesium alloys tire global sponge titanium output. In the West currently there are for die casting of motor car compon- It shows a great potential. Russian only three major magnesium produ- ents has been developing dynamica- influence on the world market is si- cers: US Magnesium (MagCorp), USA, lly. Supplies to this sector constituted milar only with regard to nickel and with the production capacity of 43 more than 164 thousand tons. This palladium. 000 tpy, Dead Sea Magnesium, Israel, sector of the metal market in the last with the production capacity of 33 decade demonstrated 15% annual Magnesium and Magnesium 000 tpy and Hydro Magnesium, Ca- growth. According to the forecasts Alloy Industry nada, with the production capacity this tendency will remain for the fo- AVISMA is considered to be the of 48 000 tpy. llowing 5 – 10 years. The annual gro- largest producer of magnesium and The following new magnesium wth of the European automotive ma- magnesium alloys in Russia. projects are developed: rket alone will constitute 12 – 14%. - Magnesium plant in Kongo us- Today the amount of magnesium al- Magnesium and Magnesium ing cheap magnesium carbonite and loy parts used in motor cars exceeds Alloys Market magnesium chloride brines; 300 designations, and at an average Chinese supplies fundamentally - Magnesium plant in Australia about 2.5 kg of magnesium is used changed the overall situation in the using dump slag of thermal stations; per motor car.

Annual report 2005 35 During the next ten years ma- used for deicing and oil well control. and Magnesium Works in Ukraine. gnesium consumption will increase Demand for liquid calcium chloride In 2006 production of marketab- twofold. Particularly, in Europe the has been steadily increasing from le titanium tetrachloride, used in ru- bulk of magnesium alloys – almost 2003. However calcium chloride de- bber and plastics industry, was co- 85% - is used for manufacture of st- mand is of seasonal nature due to ntinued. eering wheels. Magnesium alloys are its main application as deicer. The Metallurgical fluxes in 2005 were used in other automobile systems as most promising product of this se- produced mainly for domestic sales well, e.g. engines, interior, carbody ctor is solid granulated product. This to non-ferrous metallurgical and en- components and safety systems. The product is practically not influenced gineering companies. most important sector of increase of by the seasonal market fluctuations, magnesium alloy application in mo- unlike liquid calcium chloride, and it Future Prospects tor cars will be engines. is of higher quality compared to pr- Considering the global develop- evailing flaked calcium chloride as it ment trends and the situation in the Chemical Industry. Chemical is easier to proportion and more re- product markets, the following lines Products adily soluble. of AVISMA development were set as Chemicals produced by AVISMA AVISMA is at the final stage of strategic priorities for 2006 and fu- are the co-products of magnesium establishing granulated calcium ch- rther: and sponge titanium production. loride manufacture, commissioning 1. Increase in sponge titanium Owing to their variability they have is scheduled for spring of 2006. The production capacities up to 44 000 multiple applications: metallurgy, major consumers of dehydrated ca- tpy by 2010. paints and lacquers industry, cataly- rnallyte in the domestic market and 2. Maintaining magnesium and sis in chemical industry and agro-in- CIS market are: JSC Solekamsk Ma- magnesium chloride production at dustrial sector. Today one of priority gnesium Plant, Ust-Kamenogorsk Ti- the level necessary to increase the production lines for AVISMA is pr- tanium and Magnesium Works in Ka- sponge titanium output. eparation of liquid calcium chloride zakhstan and Zaporozhje Titanium 3. Ensuring reliable production

36 Annual report 2005 power supply by establishing ex- and ancillary process equipment; fume and sewage treatment plants, ternal power supply via power ne- - Organization of magnesium observe the rules of wastes handling twork of JSC “Federal Unified Energy and magnesium alloy semi-continu- to avoid land pollution, reduce wa- Systems”. ous casting in the form of billets and stes generation by process improve- 4. Expansion of raw material base slabs; ment and introduce wastes recycling for titanium slag production with im- - Reconstruction of treatment pl- processes. plementation of titanium slag techn- ants to restrict pollution of Kama ba- Among the major activities in ology using charge pellets. sin and decrease environmental pa- the second half of 2005 were the fo- 5. Organization of production fa- yments; llowing: cility for designated sponge titanium - Sales of the full volumes of the - training of the Company’s pe- to increase rotor grade sponge titan- spent electrolyte. rsonnel in the EMS requirements; ium output. - reduction of negative impacts 6. Organization of magnesium Environmental Protection of air and water pollution by improv- alloy die-casting. In the second half of 2005, the ement of treatment plants, optimiza- 7. Maintaining production of work on improvement of the Com- tion of processes and implementati- new alloys for automotive applicati- pany’s Environmental Management on of more ecofriendly equipment; ons. System (EMS) was continued. - reduction of production wastes 8. Continuous reduction of ma- The Environmental Policy of AV- volumes stored at AVISMA by increa- gnesium costs by way of: ISMA – Affiliate was developed. sing wastes recycling; - Commissioning of granulated Acting in accordance with the - monitoring of compliance to calcium chloride unit; Environmental policy, AVISMA staff the target environmental indices set - Modernization of the existing tends to continuously improve ind- for AVISMA divisions; corrective ac- casting equipment in electrolysis ices of environmental effectiveness, tion implementation, etc. shop; reduce air and water pollution by im- - Extension of lifetime of major plementation and improvement of

Annual report 2005 37 AVISMA pays a lot of attention to municipal commission comprising boratory under adverse weather co- popularization of the Environmental environmental engineers and traffic nditions, 287 samples were taken in Management System, status of envi- police officers visited AVISMA control Berezniki residential area for chlorine ronmental protection work and spre- and diagnostics center. No findings determination, 287 samples – for ch- ading of information about ecologic- were detected at the Company in the lorine hydride, 60 samples – for sus- al aspects of the Company’s activity. course of inspection. Exhaust toxicity pended substances, 30 samples – for In September 2005, the Company’s and smoking of all inspected transp- sulfur dioxide. The maximum conc- specialists took part in the workshop ort vehicles was within the limits. Th- entration limit was not exceeded in “Social and Economic Development ere is a very good reason for it, since any sample. of the Region”, where they shared ex- the Company’s vehicles are subject Actual pollutant emission into perience in implementation of EMS to such monthly checks according water reduced by 27.3% compared at the Company. to the schedule. Based on the results to the first half of 2005. In December 2005, within the fr- of the “Clean Air” campaign, AVISMA amework of the personnel develop- was the second in the group of com- ment 22 internal Company auditors panies having more than 50 vehicles were trained at the Environmental on balance. Consulting Center of the Perm St- Air condition is also constantly ate Technical University in “Environ- checked at the industrial site and in mental Audit for Compliance to ISO the city. 14001:2004”. Actual pollutant emission into air Environmental information is re- in the second half of the year was lo- gularly brought to the notice of AV- wer than the established maximum ISMA personnel via corporate TV, permissible discharge rate by 50.2%, large circulation newspaper “Me- particularly, chlorine emission was tallurg” and corporate magazine “VS- lower than the maximum permissib- MPO-AVISMA Bulletin”. le discharge by 43% and chlorine hy- AVISMA actively participates in drate emission – by 65%. AVISMA co- the annual regional environmental mplies with the established rates of campaign “Clean Air”. It is held annu- the maximum permissible discharge ally from May to September with the in all pollutants. No unauthorized, purpose to restrict air pollution with emergency emissions took place. Ac- vehicle exhaust gases. cording to the results of air monito- In the second half of 2005, the ring performed by the certified la-

38 Annual report 2005 All the Company’s divisions met and checks compliance to the estab- gorous activity of the Company rela- the established limits for waste dispo- lished rates of chlorine and chlorine ted to environmental protection and sal and consumption at AVISMA waste hydrate airborne emission. In the se- management contributing to the st- dump. By increasing the volume of sl- cond half of the year, the Department able development of the Russian ec- udge and electrolyte mix used for ma- of Environmental Monitoring carried onomy, health improvement of po- rketable products manufacture, waste out two checks at the Company. Th- pulation, and protection of the co- disposal at the dump was reduced by ere were no deviations detected. untry environmental security was co- 960.6 tons compared to the first half Sanitary protection area of AV- nfirmed by the Honorary Diploma. of the year. ISMA and the industrial site area are Besides, Vladimir Tankeev, Exec- In the second half of 2005, expen- among the best in the city. Condition utive Director of AVISMA, was awar- ses for implementation of environme- of the sanitary protection area is in- ded a medal “For Advances in Enviro- ntal actions equaled RR 58.4 mln. The spected by the Nature Protection De- nmental Protection” for considerable following actions were implemented: partment and Security Service. In the contribution into implementation of - design of the fourth line of the second half of 2005, the sanitary pr- the state environmental policy in the industrial effluent treatment plants otection area was cleaned from ga- Russian Federation. was completed and reviewed, the eq- rbage and broken trees and bushes. Stable work on environment- uipment was purchased and the line is Areas of unauthorized roads were al protection is the result of the En- under construction; restored, new trees were planted and vironmental Management System - construction of the calcium ch- grass cover was recovered, lawns and operation, regular implementation loride granulation unit is continued; flower gardens were laid out, fertilizi- of environmental actions and pers- - development and environment- ng, weeding and other required land onnel awareness of responsibility for al review of the project “Dump for Pr- treatment was carried out. The expe- compliance to all environmental re- oduction and Consumption Wastes” is nses for maintaining and improveme- quirements in the course of product continued. nt of the sanitary protection area am- manufacture. AVISMA jointly with Berezniki De- ounted to more than RR 15 mln. The results of environmental act- partment of Environmental Protection To eliminate unauthorized debris ivity implemented by the Company’s and Management developed and im- in the green shelterbelt of the city, cl- divisions in the second half of 2005 plemented the system of 24-hour co- aims were raised against two outside had positive effect on economic asp- ntrol of the maximum permissible di- companies. ects of AVISMA activities as well. The scharge at AVISMA. On December 22, 2005, AVISMA amount of the planned environmen- Under adverse weather conditio- became the winner of the all-Russia tal charges in the second half of 2005 ns, the municipal Department of En- contest for the title of the “Russian Le- was set at RR 8007 K, while the actual vironmental Monitoring visits AVISMA ader in Environmental Activities”. Vi- payments equaled RR 4100 K.

Annual report 2005 39 SOCIAL SPHERE

AVISMA is a community centered policy of disease prevention and tre- lth improvement centers constituted company, realizing its social respons- atment, rehabilitation and healthy life about one half of all expenses for ru- ibility. style promotion for the Company’s nning social objects. Work on development and impl- employees and their families. Organization of health care at the ementation of social programs is ca- The major objectives of the pr- Company ensures individual appr- rried out regularly and aimed at mu- ogram are as follows: oach. Based on the results of annual tual satisfaction of interests of the - Health care for extension of the medical examination and preventive employer, employees and local co- Company’s employees working age medical examinations for definite ca- mmunity. that will lead to increase of the qualif- tegories of employees, different grou- Conscientious and socially respo- ication level and make up for the lack ps of patients are formed. Those who nsible business practice, implementa- of qualified young workers. need more profound treatment are tion of internal and external social pr- - Increase of the Company appeal sent to the specialists of the diagno- ograms allows AVISMA to enhance la- to young and qualified workers. stics department or specialized mu- bor efficiency, maintain healthy moral - Improvement of morale and ps- nicipal and regional referral centers. and psychological environment and ychological environment at the Co- Those, who need regular treatment, form the understanding of one’s role mpany. are sent to the medical rehabilitation in the results of team work. - Improvement of the Company department on the basis of the preve- Besides, the Company manag- status and image. ntorium. Those, who need preventive ement realizes that by assuming re- The social development program treatment, visit shop health improv- sponsibility for realization of social encompasses four main trends. ement centers. Those, who need no programs, they contribute to impro- Physical and mental health ma- special treatment, attend sports faci- vement of the life quality of not only intenance is the top priority of the Co- lities, such as skiing lodge, swimming the Company employees, but also th- mpany’s social activity. pool, Sports Facility. ose, who live in the city. The system approach to health The developed Program of Social Health improvement and medical treatme- Sphere Development for 2001-2005 In 2005 the work within the fram- nt of employees allowed to reduce combined in the unified system all es of the abovementioned program the time of sick leaves by 7%, while health, sports and cultural projects. It was continued. Expenses for running the number of consultations increas- constituted the basis for the unified medical unit, country and shop hea- ed. This indicates the efficiency of -ea

40 Annual report 2005 rly diagnostics and improvement of cy” in nomination “Development of The Palace works in close coop- the medical treatment quality. Employee Medical Support System”. eration with the Council of Veterans Starting from 2003, the Volunta- and organizes holidays considering ry Health Insurance System is functi- Leisure and Recreation the interests of senior citizens. For oning. In 2005, expenses for the vo- Throughout the year the sports the Company shops the Palace team luntary health insurance equaled RR competition in 14 events was held holds anniversary parties. 19.2 mln. This allowed to extend the for the Company’s employees. In the 11 children clubs attended by list of provided medical services. course of the competition 2200 co- 1100 children function on a perma- In 2005, new equipment for the mpetitors visited the Sports Facility nent basis. Company’s health improvement fa- “Titan”, skiing lodge and swimming cilities was purchased at the amount pool. Charity of RR 3.2 mln. Sports events promote healthy Charity becomes an integral part In 2005, facilities of the country life style, involve people in exercises of relationships with the city comm- health improvement center were re- and prevent diseases. With the same unity. newed. A 50-room hotel was com- purpose Health Days are declared re- One of the charity priorities is as- missioned after the overhaul repair gularly at the skiing lodge, when me- sistance to children and teenagers. for recreation of the Company’s em- tallurgists and their families may rent The Company sponsors two re- ployees and their families and other skis for free. In 2005, 18 Health Days gional children clubs thus helping to visitors. were organized and attended by solve the problem of leisure time or- In 2005, summer health improv- 1400 persons. ganization for children. These expe- ement campaign was organized for Work of the Metallurgists’ Palace nses amount to about RR 1 mln. per 960 children in camp “Chaika” and of Culture contributes to family cons- year. In clubs any child may play ho- 100 children rested in the camps of olidation and children upbringing. In ckey or board games and participate Anapa and Gelendzhik. 2005, 319 events attended by 79 th- in competitions held by counselors The Company’s health mainten- ousand people were held in the Pa- free of charge. Qualified hockey co- ance activities in 2005 were awarded lace. Among them 58 entertaining aches work in each club. During su- - the Company became the winner and educational events attended by mmer vacations children day camps of the 5th all-Russia contest “Russian 16 thousand people were held for were traditionally organized. Organization of High Social Efficien- the Company. In 2005, some schools received

Annual report 2005 41 RR 432 K for incentive scholarship AVISMA makes monthly payments package tours to medical rehabilita- payments to pupils. to persons registered in the Council tion department at the total cost of Organization of several city ev- of Veterans. The amount of payment RR 1.9 mln.. ents was supported. In particular, co- depends on the working lifetime at For the past 7 years the Compa- ntest of social projects, fixing up of a the Company. The total amount assi- ny annually repairs apartments of la- monument to Reshetov, publication gned to this purpose during the year bor veterans appropriating RR 360 K of “The Memory Book”, repair of yard was about RR 12.4 mln. Besides, the for this purpose. In case of retireme- playgrounds. The total amount of Company renders assistance in or- nt each employee depending of the charity rendered by the Company is ganization of various events for gr- working lifetime at the Company re- about RR 3 mln. oss audience. ceives a nonrecurring disbursement Care of Veterans For the purpose of health supp- of up to 12 salaries that amounted to In order to reduce social strain ort veterans are annually given 180 RR 1.6 mln in 2004.

42 Annual report 2005 ACCOUNTING

Annual report 2005 43 BALANCE SHEET

Assets As of 1.01. 2005 As of 1.01.2006

I. Fixed assets

Intangible assets 1 087 1 038

Capital assets 2 245 965 4 543 705

Incompleted construction 1 035 802 1 743 163

Long-term investments 1 032 910 620 428

Deferred tax assets 69 3467

Other fixed assets

Section I, Total 4 315 833 6 911 801

II. Current assets

Inventories 5 720 129 8 959 514

Accounts receivable 2 296 611 4 279 421

Short-term financial investments 36 87117

Cash assets 74 787 208 771

Section II, Total 8 091 563 13 534 823

Balance 12 407 396 20 446 624

44 Annual report 2005 Liabilities As of 1.01.2005 As of 1.01.2006

III. Capital and reserves

Charter and additional capital 1 370 617 6 384 987

Reserve capital 624 668

Retained earnings 7 007 255 8 223 661

Own shares repurchased from shareholders (2 056) 0

Section III, Total 8 376 440 14 609 316

IV. Long-term liabilities 20 957 78 032

V. Short-term liabilities

Borrowed funds 1 811 324 3 369 438

Accounts payable 2 147 363 2 242 998 Debts to participants (promoters) in terms of 709 2664 income payment Reserves for prepaid expenses 50 000 139 019

Deferred revenue 603 5157

Section V, Total 4 009 999 5 759 276

Balance 12 407 396 20 446 624

Annual report 2005 45 PROFIT-AND-LOSS STATEMENT

Indicator 2004 2005

Proceeds (net) from sales of goods, products, works, services (after value added tax, 10 571 946 16 800 410 excises and similar payments)

Net cost of sold goods, products, works, services (7 377 393) (10 057 562)

Gross margin 3 194 553 6 742 848

Gross margin (318 040) (524 040)

Management expenses (1 127 988) (1 609 688)

Profit (loss) from sales 1 748 525 4 609 120

Operating revenues (expenses) (305 509) (616 860)

Other revenues (expenses) 755 880 371 906

Profit before tax 2 198 896 4 369 166

Profit tax and other similar compulsory payments (598 129) (1 195 029)

Extraordinary revenues (expenses)

Net profit 1 600 767 3 174 137

46 Annual report 2005 CASH FLOW REPORT

2004 2005

mln. rubles mln. rubles

1. Cash balance at the beginning of the year 208 75

2. Cash flow from operating activities

Cash receipts, Total 22 972 28 414 including:

Receipts from Buyers and Customers 11 802 17 444

Receipts from currency transactions 10 507 9 977

Other receipts 663 991

Cash disbursement, Total (21 736) (18 424) including:

Payment for procured goods, works, services (8229) (1 468)

Remuneration of labor (1234) (1995)

Payment of dividends, interest (103) (296)

Payment under taxes and dues (831) (1420)

Payment to the off-budget funds (469) (472)

Purchase of exchange (467) (57)

Sale of exchange (10065) (9 990)

Other payments (338) (530)

Net receipts from operating activities 1 236 1 032

3. Cash flow from investment activities

Cash receipts, Total 7 850 including:

Proceeds from sales of capital assets and other fixed assets 6 1

Annual report 2005 47 Proceeds from sales of securities and other investment 0 847

Dividends received 1 2

Interest received

Proceeds from repayment of loans granted to other organizations

Cash disbursement, Total 1568 1126

including:

Acquisition of subsidiaries (68) (68)

Acquisition of capital assets, income-bearing investment in tan- gibles and intangible assets (1496) (1007)

Acquisition of securities and other financial investment (50)

Loans granted to other organizations (4) -

Result of investment activities -1561 -276

4. Cash flow from financing activities

Cash receipt, Total 4019 7105

including:

Receipts from issue of shares or other papers

Receipts from loans and credits granted to other organizations 4019 7105

Cash disbursement, Total 3827 5637

including:

Redemption of own shares and stock 2 -

Repayment of loans and credits (at even) 3825 5612

Discharge of finance lease obligations 25

Result of financing activities 192 1468

4. Cash balance at the end of the reporting period 75 235

48 Annual report 2005 AUDIT REPORT on VSMPO-AVISMA Corporation Fi- nancial Statements for 2005

March 27, 2006 Ref. No. Л 45-06

Addressee: PSC VSMPO-AVISMA Corporation

Auditor: Name: Closed Joint Stock Company Analytic Express Legal address: 3/2, Gazetny Per., Moscow, 103918, Russia State registration: State Registration Certificate No. 539688, dd. 24.12.1993. Certificate on introduction of the entry into the Uniform Public Register of Legal Persons: 77 Series, No. 004301111, dd. July 22, 2002, state registration No. 1027700047451. License No. E 005434, issued by RF Ministry of Finance under Order No. 387, dd. De- cember 9, 2003 (validity period – 5 years). Scope of the license: general audits.

Audited Company: Name: Public Stock Company VSMPO-AVISMA Corporation Legal address: 1, Parkovaya Str., Verkhnaya Salda, Sverdlovsk Region, Russia, 624760 State Registration: State Registration Certificate No. 162, dd. 18.02.1993. Certificate on introduction of the entry into the Uniform Public Register of Legal Persons: 66 Series, No. 002624651, dd. July 11, 2002, state registration No. 1026600784011.

We have conducted the audit of the attached financial (accounting) statements of PSC VSMPO-AVISMA Corporation for the period from January 1 to December 31, 2005 inclusive. The audited statements included the following:

Balance Sheet Profit and Loss statement Annex to Balance Sheet and Profit and Loss statement Explanatory note

Responsibility for development and submission of the financial statements is placed upon VSMPO-AVISMA Corporation executive board. We are responsible for expressing our opinion on validity of all the material aspects of the submitted accounting information and compliance of the accounting practices with the requirements of RF Legislation based on the audit results. We conducted the audit according to the Federal Law on Auditing Activity No. 119-FZ, dd. August 7, 2001; Federal Regulations (Standards) for Auditing Ac- tivity, approved by RF Government Resolution No. 696, dd. September 23, 2002 (with su- pplements); internal auditing regulations.

The audit was planned and conducted in such a way as to get reasonable confidence in the fact that the financial statements do not contain any significant misleading information. The random audit consisted in testing the evidences proving numerical values and degree of disclosure of the information on financial and economic activities as reflected in the accounting records, assessment of compliance to the generally accepted principals and methods of financial accounting, and the rules for financial statements preparation, review of the main evaluation indices received by the management of the audited company and assessment of the general concept of financial statements. We believe that the performed audit provides sufficient ground for expressing our opinion on validity of the submitted statements in all material aspects, including compliance of the accounting practices to the requirements of the RF Legislation.

As a result of the audit, we have not revealed any significant violations of the applicable accounting practices or financial statements development rules.

In our opinion, VSMPO-AVISMA Corporation financial statements in all material aspects validly reflect the financial status of the Company as of December 31, 2005 and the results of the Company’s financial and economic activity for the period from January 1 to December 31, 2005 inclusive.

Without prejudice to our opinion on the validity of the financial statements, we would like to draw attention to the information provided in the explanatory note. Specifically, in 2005 there was reorganization of the Company in the form of affiliation of JSC AVISMA to JSC VSMPO and all the rights and liabilities of JSC AVISMA were transferred to JSC VSMPO. Opening balance at the time of affiliation – July 1, 2005 – was confirmed by the auditing company JSC “Baker Tili Rusaudit”.

Director General, Auditing Company JSC Analytic Express U. G. Gritsun Auditor Qualification Certificate No. K003059 issued by the RF Ministry of Finance on April 14, 2003, for unlimited period of time.

Chief Auditor, Auditing Company JSC Analytic Express A. A. Postelnikov Auditor Qualification Certificate No. K003226 issued by the RF Ministry of Finance on April 14, 2003, for unlimited period of time. SHAREHOLDER INFORMATION

The Company’s registered capital totals 11 529 538 rubles, i.e. 11 529 538 shares with the nominal value of 1 ruble. The number of shareholders listed in the Company’s Register as of 01.01.2006: 5220, including 13 nominal shareholders The Company’s Register Holder: Joint Stock Company Central Moscow Depositary (JSC “CMD”) License No. 10-000-1-00255 dd. 13.09.2002 for unlimited period of time. The contract for keeping and custody of the Regis- tered Securities Holders Register No. CMD/VSMPO – No. 1, dd. 01.07.2004.

Annual report 2005 51 RISK FACTORS

The Issuer’s activities are obvi- introduced a number of changes to Issuer’s activities and will not cause ously influenced by the reforms cu- Article 21 of the Russian Federation any legal risks. No licenses were re- rrently implemented in the Russian Tax Code starting with 01.01.2006. called from the Issuer during the re- Federation and covering the curren- The Issuer forfeits a right to ch- porting period. The risk of revocati- cy regulations, banking, judicial, ta- oose the method of taxation base on or non-renewal of licenses is very xation systems, legislation on land determination, because accounting low. use, environment conservation, mi- “based on payment” was cancelled. ning, etc. At present the time for taxation base Risks Associated with the Ju- determination is the date of shipm- dicial Practices Changes Risks Associated with the Cu- ent (Article 167 of the RF Tax Code), During the reporting period no rrency Regulations Changes which corresponds to the accoun- changes that could significantly af- Federal law on Foreign Currency ting policy of the Issuer. The above fect the Issuer’s activities were in- and Currency Control, No. 173-FZ, mentioned limitations don’t interfe- troduced to the related judicial pr- dd. 10.12.2003 (came into effect on re with the Issuer’s activities. actices. 17.06.2004, except for some provisions with the specific effective dates), Risks Associated with the Lice- Risks Associated with the Is- stipulates for mandatory reservation nsing Regulations Changes suer’s Activities by the residents of the cash assets in Federal law No. 80-FZ, dd. Recently the Issuer was not in- Russian rubles on separate accounts 02.07.2005, on introduction of chan- volved in legal proceedings with the in the authorized banks prior to ma- ges to the federal law on licensing of significant amounts of claims (over king certain currency transactions, the certain types of activities, to the 5% of the balance sheet value of the as listed in the law. The above me- federal law on protection of legal en- Issuer’s assets). ntioned limitations don’t interfere tities and individual entrepreneurs In the reporting period legal ri- with the Issuer’s activities. during state control (supervision), sks didn’t significantly affect the Is- and to the Russian Federation Code suer’s activities and fulfillment of its Risks Associated with the Tax on Administrative Control, has made obligations. Law Changes some alterations to the licensing re- During the reporting period and Value-added tax. gulations. The list of types of licens- at present the legal risks of the Issuer Federal laws No. 117-FZ, No. 118- ed activities is significantly reduced. are moderate. FZ, and No. 119-FZ, dd. 22.07.2005, These changes will not affect the

52 Annual report 2005 OBSERVANCE OF THE CORPORATE GOVERNANCE CODE

Observed Provisions of the Corporate Governance Code / Not Notes observed

GENERAL SHAREHOLDERS MEETING

Notice of the general shareholders meeting Item 13.4.1 of must be given not later than 30 days before 1 Observed the Company’s the meeting, independent of the agenda items, Charter unless otherwise provided in the law.

The shareholders should be able to familiarize themselves with the list of persons authorized According to to participate in a general shareholders meeting Article 22 of from the moment of notice and until a general the Provisions 2 shareholders meeting held in person is over, or, for the general in the case of a general shareholders meeting shareholders held by means of absentee ballots, until the last meeting date for submitting voting ballots.

General shareholders meeting-related information should be communicated to the 3 Observed shareholders by electronic telecommunication means, including on the Internet.

The shareholders should be able to call general Observed shareholders meetings and propose agenda with items without producing any documents as Article 11 of regard to evidence of their rights to shares, when such the Provisions equirements 4 rights are recorded in the share register. When for the general for calling the rights to shares are recorded in a deposit shareholders general account, a current statement of the account meeting shareholders should be regarded as ample proof of the meeting shareholder’s right to the shares.

Article 7 of the The company’s charter or internal regulations Provisions for should contain the requirement for mandatory the board of presence of director general, members of directors 5 Observed executive bodies, board of directors, audit Item 2.2 of commission and the company’s auditor at the the Provisions general shareholders meeting. for audit commission

Annual report 2005 53 Candidates to the board of directors, director general, executive bodies, audit commission and the company’s auditor should mandatory 6 Not observed attend a general shareholders meeting when the agenda includes formation of the above bodies of the company.

Article 12 of The company’s internal regulations should the Provisions 7 describe the procedure for registering Observed for the general participants of a general shareholders meeting. shareholders meeting

BOARD OF DIRECTORS OF THE COMPANY

Article 5 of the The company’s charter should grant the board of Provisions for 8 directors with the authority to approve its annual Observed the board of financial and business plan. directors

Availability of the internal risk management 9 Not observed procedure approved by the board of directors.

The company’s charter should grant the board of Item 14.1.2, directors with the right to suspend the authority para. 31 of the 10 Observed of director general appointed by the general Company’s shareholders meeting. Charter

The company’s charter should grant the board of directors with the authority to set forth the requirements for qualification and 11 Not observed remunerations to director general, members of the managerial board and heads of major divisions of the company.

The company’s charter should grant the board of Item 14.1.2, directors with the authority to approve the terms para. 30 of the 12 and conditions of employment contracts with Observed Company’s director general and members of the managerial Charter board.

54 Annual report 2005 The company’s charter or internal regulations should contain the requirement that when approving the terms and conditions of employment contracts with the director general 13 and members of the managerial board, the Not observed votes of such members of the board of directors occupying the position of the director general and members of the managerial board should not be counted.

The board of directors should include at least 3 independent directors, meeting the 14 Not observed requirements of the Corporate Governance Code.

The board of directors should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or the persons 15 Observed who have records of administrative offences, primarily in such areas as entrepreneurial operations, finance, taxes and duties, or stock market operations.

The board of directors should not include the persons who are the members of the board 16 of directors, the director general, a member Observed of a management body or an employee of a competitor of the company.

Item 14.2.1 The company’s charter should contain the of the 17 requirement for election of members of the Observed Company’s board of directors by cumulative voting. Charter

The company’s internal regulations should obligate the members of the board of directors to refrain from actions that may result or may 18 potentially result in a conflict between their own Not observed interests and the interests of the company and, if such conflict of interests exists or arises, they must disclose it to the board of directors.

Annual report 2005 55 The company’s internal regulations should obligate the members of the board of directors to notify the board of directors in writing on Item 3.2 of their intention to enter into transactions, in the Provisions 19 Observed particular involving securities of the company on insider or its subsidiary (controlled) companies, and information disclose information about previous transactions with such securities.

The company’s internal regulations should contain the requirement that meetings of the 20 Not observed board of directors should be conducted at least once every six weeks.

During the reporting year covered in the company’s annual report, meetings of the board 21 Not observed of directors should be conducted at least once every six weeks.

The company’s internal regulations should Provisions for 22 contain procedure for conducting meetings of Observed the board of the board of directors. directors

The company’s internal regulations should contain the requirement that the company’s transactions with a value equal to, or in excess of, 10 percent of the total value of company’s assets 23 Not observed (except when the company customarily engages in such transactions in the ordinary course of its business) should be approved by the board of directors of the company.

The company’s internal regulations should grant the members of the board of directors with the Article 9 of the authority to request all information they need to Provisions for 24 Observed properly discharge their duties from members the board of of executive bodies and officers of the company; directors and should provide penalties for failure to do so.

56 Annual report 2005 Establishment of the strategic planning committee of the board of directors, or imposing 25 such duties to another committee (except for the Not observed audit committee or the human resources and remuneration committee).

Establishment of the audit committee of the board of directors, which is to develop recommendations for the board of directors on 26 selection of an independent audit organization Observed and interact with the audit commission of the company and the independent audit organization of the company.

The audit committee should include only 27 Not observed independent and non-executive directors.

The audit committee should be headed by an 28 Observed independent director.

Article 14 of The company’s internal regulations should grant the Provisions the members of the audit committee access for the audit 29 to all the documents and information of the Observed committee of company, provided they do not disclose any the board of confidential information. directors

Establishment of the human resources and remuneration committee of the board of directors, which is to define eligibility criteria 30 Not observed applicable to candidates for the position of member of the board of directors and develop the company’s remuneration policy.

The head of the human resources and 31 remuneration committee should be an Not observed independent director.

The human resources and remuneration committee should consist of those members of 32 Not observed the board of directors who do not hold official positions with the company.

Annual report 2005 57 Establishment of the risk management committee of the board of directors, or imposing 33 such duties to another committee (except for the Not observed audit committee or the human resources and remuneration committee).

Establishment of the corporate conflicts resolution committee of the board of directors, 34 or imposing such duties to another committee Not observed (except for the audit committee or the human resources and remuneration committee).

The corporate conflicts resolution committee should consist of those members of the board of 35 Not observed directors who do not hold official positions with the company.

The corporate conflicts resolution committee 36 Not observed should be headed by an independent director.

Availability of the company’s internal regulations Article 11 of approved by the board of directors and the Provisions 37 Observed describing the procedure for establishment and for the board operations of the board of directors’ committees. of directors

The company’s charter should describe the procedure for quorum determination at the meetings of the board of directors and ensure 38 Not observed adequate representation of independent directors at the meetings of the board of directors.

EXECUTIVE BODIES OF THE COMPANY

Establishment of the collegial executive body 39 Not observed (managerial board) of the company.

58 Annual report 2005 The company’s charter or internal regulations should contain the mandatory requirement that the managerial board should approve any real 40 estate transactions and loans of the company, Not observed provided that the company does not customarily engage in such transactions in the ordinary course of its business.

The company’s internal regulations should describe the procedure for approval of 41 Not observed transactions that are beyond the scope of the financial and business plan of the company.

The executive bodies of the company should not include the individuals who are the members, 42 Observed officers or employees of legal entities competing with the company.

The executive bodies of the company should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or the persons who have a record of administrative offences, primarily in such areas as entrepreneurial operations, finance, taxes and duties, stock market operation. 43 Observed If the functions of the sole executive body of the company are delegated to a managing organization (manager), then director general and members of the managerial board of such managing organization (or manager) should meet the eligibility criteria for director general and members of the managerial board of the company.

The company’s charter or internal regulations should restrain the managing organization (manager) from carrying out similar functions 44 at a rival company or having any connection Not observed with the company apart from carrying out the functions of the managing organization (manager).

Annual report 2005 59 The company’s internal regulations should oblige the executive bodies to refrain from actions that will result or may potentially result 45 in a conflict between their interests and the Not observed interests of the company and, should any such conflict arise, they should immediately notify the board of directors accordingly.

The company’s charter or internal regulations 46 should set forth eligibility criteria for the Not observed managing organization (manager).

The executive bodies of the company should 47 report its performance results to the board of Not observed directors on a monthly basis.

The agreements between the company and its director general (managing organization, manager) and members of its managerial 48 Not observed board should contain a liability for the breach of their obligation to refrain from disclosure of confidential and insider information.

CORPORATE SECRETARY OF THE COMPANY

Appointment (election) of a special officer (the secretary of the company) whose sole objective should be to ensure that corporate bodies and 49 Not observed officers comply with procedural requirements safeguarding the rights and interests of the company’s shareholders.

The company’s charter or internal regulations should describe the procedure for appointment 50 Not observed (election) of the secretary of the company and his/her responsibilities.

The company’s charter or internal regulations 51 should set forth eligibility criteria for the Not observed secretary of the company.

60 Annual report 2005 MAJOR CORPORATE ACTIONS

The company’s charter or internal regulations 52 should require that major transactions be Not observed approved prior to their consummation.

Major transactions should be executed with the 53 Not observed participation of independent assessors.

The company’s charter should stipulate that at the time of acquisition of significant equity stakes (takeover), the company should refrain from actions that are aimed at protecting the interests of executive bodies (members of such bodies) and members of the board of directors, and which may result in weakening the position 54 Not observed of shareholders. In any event, pending the expiration of the acquisition period, the board of directors should refrain from issuing additional shares, convertible shares or securities that otherwise entitle their holders to purchase shares of the company, even if such issuance is authorized by the charter of the company.

The company’s charter should require that the board of directors invite an independent 55 assessor to determine the current market value Not observed of the company’s shares and how it could be affected by the takeover.

The company’s charter should not relieve the entity taking over the company of the 56 responsibility to offer to buy out shareholders’ Observed common stock (issuer’s shares convertible into common stock).

The company’s charter or internal regulations should require that an independent assessor be 57 Not observed used for determination of the conversion value of shares after the reorganization.

Annual report 2005 61 DISCLOSURE OF INFORMATION

Availability of the internal company document approved by the board of directors setting 58 forth rules of and approaches to disclosure of Not observed information by the company (Regulation on Information Policy).

The company’s internal regulations should require disclosure of information about the reasons for issuance of new shares and the persons purchasing new shares, including those 59 Not observed who intend to purchase a large percentage of shares, and whether senior executives of the company will purchase such shares offered for sale.

The company’s internal regulations should Para 13.4.2 contain a list of information, documents and of the 60 materials to be furnished to the shareholders to Observed Company’s enable them to make decisions regarding issues Charter brought up at a general shareholders meeting.

Availability of the company’s website and 61 disclosure of information about the company Observed through the site.

The company’s internal regulations should require to disclose information about the company’s transactions with its officials in accordance with the charter, and about 62 transactions between the company and entities Not observed in which the company’s senior executives directly or indirectly own 20 percent or more of the shares or which are otherwise subject to the influence of such executives.

The company’s internal regulations should The require to disclose information on all information is 63 transactions of the company which may affect disclosed as the market price of the company’s shares. required

62 Annual report 2005 Availability of the internal company document approved by the board of directors setting forth rules of handling the significant information about a company’s operations, shares and other 64 securities of the company and transactions Observed therewith, which is not available to the public and disclosure of which may substantially affect the market value of shares and other securities of the company.

SUPERVISION OF FINANCIAL AND BUSINESS OPERATIONS

Availability of the internal company document approved by the board of directors setting forth 65 Observed the procedures for supervision of the financial and business operations of the company.

Establishment of a special structural subdivision 66 of the company responsible for ongoing internal Observed supervision (control and audit service).

The company’s internal regulations should require that the structure and composition of 67 Not observed the control and audit service of the company are approved by the board of directors.

The control and audit service of the company should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local 68 Observed self-government, or the persons who have a record of administrative offenses, particularly in such areas as entrepreneurial operations, finance, taxes and duties, and stock markets.

The control and audit service of the company should not include the members of the executive bodies of the company or the persons being the 69 Observed participants, director general, members of the governing bodies or employees of a legal entity competing with the company.

Annual report 2005 63 The company’s internal regulations should stipulate the period of time for presentation to the control and audit service of the documents and materials for assessment of the financial and 70 Observed economic operations of the company, as well as responsibility of officials and employees of the company for failure to present same within such period.

The company’s internal regulations should oblige the control and audit service to report the information on errors and violations 71 discovered during business operations to the Observed audit committee, or, in case there is no such committee, to the board of directors of the company.

The company’s charter should require preliminary evaluation of non-standard 72 operations falling outside the scope of the Not observed financial and business plan by the control and audit service of the company.

The internal documents of the company should set forth a procedure for approval of non- 73 Not observed standard operations by the board of directors of the company.

Article 3 of the Availability of the internal company document Regulations approved by the board of directors setting forth for the audit 74 the procedure of auditing the financial and Observed commission. business activity of the company by the audit commission.

Para 3.1.6 of The audit committee should evaluate the the Provisions opinion of the independent audit organization for the Audit 75 Observed (auditor) before it is presented to the Committee of shareholders at a general shareholders meeting. the Board of Directors

64 Annual report 2005 DIVIDENDS

Availability of the internal company document approved by the board of directors so as 76 Observed to govern the latter in deciding dividends (Regulations on Dividend Policy).

The Regulations on Dividend Policy should provide procedures for determining the minimal portion of net profit of the company directed Article 3 of the for payment of dividends, and circumstances Regulations 77 Observed under which dividends are not paid or paid only on Dividend partially on preferred stock with respect to which Policy the amount of dividends is provided by the Company’s charter.

The company should publish its dividend policy and all amendments to it in a periodic Article 6 of the publication authorized by the company’s charter Regulations 78 Observed to announce general shareholders meetings, as on Dividend well as on the company’s Website, provided the Policy latter exists.

Annual report 2005 65 Changes in the Membership of the Board of Directors during the Reporting Period

1. Members of the Board of Directors Elected at the Regular General Shareholders Meeting in 2004

Vyacheslav I. Brecht, year of birth 1953 Nikolai K. Melnikov, year of birth 1955 Igor V. Levin, year of birth 1950 Igor L. Malygin, year of birth 1961 Eugene N. Olkhovik, year of birth 1955 Dennis Kelly, year of birth 1946 John Monahan, year of birth 1945

2. Members of the Board of Directors Elected at the Regular General Shareholders Meeting on June 10, 2005

Vyacheslav I. Brecht, year of birth 1953 Nikolai K. Melnikov, year of birth 1955 Wasil A. Besedin, year of birth 1953 Oleg I. Tsarkov, year of birth 1966 Vladislav V. Tetyukhin, year of birth 1932 Dennis Kelly, year of birth 1946 John Monahan, year of birth 1945

3. Members of the Board of Directors Elected at the Special General Shareholders Meeting on October 13, 2005

Vyacheslav I. Brecht, year of birth 1953, interest in the registered capital - none Nikolai K. Melnikov, year of birth 1955, interest in the registered capital - none Wasil A. Besedin, year of birth 1953, interest in the registered capital - none Pavel A. Rizanenko, year of birth 1975, interest in the registered capital - none Vladislav V. Tetyukhin, year of birth 1932, interest in the registered capital - none Dennis Kelly, year of birth 1946, interest in the registered capital - none John Monahan, year of birth 1945, interest in the registered capital - none

Director General VSMPO-AVISMA Corporation V. V. Tetyukhin

Chief Accountant VSMPO-AVISMA Corporation T. V. Novosadova

66 Annual report 2005