| JSFC SISTEMA | ANNUAL REPORT 2004 2 Contents About the Company . .5 The President’s Message . .7 The Chairman of the Board of Directors Message . .9 Shareholding Structure . .10 Asset Structure . .11 Board of Directors . .14 Executive Management . .16 Organizational Structure . .18 Development strategy . .20 Telecommunications . .25 High Technology . .29 Insurance . .33 Real Estate . .37 Retail . .41 Multimedia . .45 Finance . .49 Other projects . .52 Social responsibility . .56 Human Resources . .57 Social Investment . .58 Culture and Art . .59 Social support . .60 3 | JSFC SISTEMA | ANNUAL REPORT 2004 Contents Corporate governance . .62 Contacts . .64 Consolidated Financial Statements Independent auditors’ report . .67 Consolidated balance sheets . .68 Consolidated statements of operations and comprehensive income . .70 Consolidated statements of cash flows . .72 Consolidated statements of changes in shareholders’ equity . .76 Notes to consolidated financial statements . .78 Management’s discussion and analysis of financial condition and results of operations . .140 In the present Annual Report, except where the context implies a different interpretation, the terms Sistema, the Group, the Company, Corporation, ‘we’, ‘us’, ‘our’ and similar terms apply to the consolidated business of Sistema and its subsidiaries. Certain phrases in the present Annual Report may be related to forecasts and projections concerning forthcoming events, based on assumptions and estimates of the executive management of Sistema. Such words as ‘expected’, ‘considered’, ‘estimated’, ‘intended’, ‘will be’, ‘may be’ and other similar terms reflect these forecasts and projections. These statements reflect a true position of the company. Considering possible risks and unforeseeable circumstances, including changes in the overall economic situation, changes in the currency and stock markets, and so forth, we wish to warn you that actual results may differ from those indicated in the statements and forecasts. In the information in the sections ‘Structure of the Shareholding Capital’, ‘Board of Directors’, ‘Executive Management’, ‘Asset Structure’ and ‘Organizational Structure’ is cited as of July 1, 2005. 4 About the Company ABOUT THE COMPANY SISTEMA: WE BRING UP LEADERS Sistema JointStock Financial Corporation: Sistema’s Strategic Areas of Activity: ■ the largest publicly held diversified com telecommunications; pany in Russia and the CIS oriented to the insurance; market of hightechnology services with high technology; more than 40 million consumers; finance; real estate; ■ in February 2005, following an initial pub retail; ic offering, placed global depository mass media. receipts (GDRs) on the London Stock Exchange; Sistema in 2004: (US dollars, millions) ■ maintaining steady growth of its assets and profitability, aimed at achieving leading positions in diverse, fastgrowth Sales 5711 sectors of the economy; +51,9% Operating Profit 1665 +50,5% ■ expanding strategic partnership with leading international companies while Net Profit 411 independently entering overseas markets; +6,2% Summary Assets 8780 +29% ■ continuing its mission of developing high technology in Russia, seeing this as Number of Employees: 70000 its social responsibility; ■ constantly evaluating opportunities to enter new market segments; ■ possessing a modern corporate governa nce structure and implementing a long term social policy 5 | JSFC SISTEMA | ANNUAL REPORT 2004 President, Sistema Vladimir Yevtushenkov 6 The President’s Message THE PRESIDENT’S MESSAGE For Sistema, the year 2004 represented a period of ma As a whole the consolidated sales of the corporation ximum concentration of all of the company’s intellectual increased by 52% to $5.71 billion in 2004. The operating and organizational resources during the runup to the profit grew to $1.66 billion and the figure for net profit biggest event in its history, the initial public offering of reached $411 million, a 6% increase compared to 2003. shares on the London Stock Exchange. Once again we In 2004, thanks to successful merger and acquisition confirmed our reputation as leaders and pioneers. The deals, asset restructuring and the completion of business IPO undertaken by Sistema was the largest ever underta plans by operating companies, we were able to scale new ken by a Russian company and permitted the corporation business heights. Entry to the London Stock Exchange to begin the process of further integration into the glo allowed Sistema to gain access to unprecedented invest bal business community. ment capital. The funds raised by the IPO, $1.3 billion, This achievement, significant for the entire Russian expand our business horizons and give us the ability to economy, required considerable work. The primary factor implement a more flexible development strategy, both in setting Sistema apart from other participants in the mar the investment plan for existing companies as well as ket, which operate primary in raw material sectors, is the plans for possible acquisitions of new assets. The long concentration of a large part of our assets in the area of term plans of Sistema envision the eventual placement high technology production and services. It is in this of a range of large subsidiary structures on the interna sphere that Sistema tightly focuses all of its potential tional capital markets. and energy. The corporation views the high technology But the IPO of the corporation has already passed into sector as the primary driver of the development of the history. We must now think about moving forward. The Russian economy and, over the longterm perspective, world is constantly changing, particularly the business the basis for the wellbeing of the country. world. In order to keep pace and to move ahead we must In 2004 Sistema consolidated its leadership in key, make quantum leaps forward. strategically important sectors. Telecommunications, We would like to acknowledge all of our shareholders, first of all, dominated the financial indicators of the cor managers, partners and employees for their support and poration. But we also made substantial advances in in their understanding of our common goals. I am entirely creasing the diversification of our business. The high convinced that it is the quality of people that separates technology segment showed strong growth. The share of a successful company from an unsuccessful one. Sistema, Concern Scientific Center of the total sales of the corpo occupying a leading position in the hightechnology ration increased by more than four times in comparison business, has enormous potential and all of the necessa with 2003 and reached 8.5%. The Real Estate business ry components to become a company on the global level area demonstrated an impressive rate of growth, increa and maintain our position in conditions of global com sing sales by the end of the year by more than two petition. Of course this cannot be accomplished in a times. The Insurance segment of the ROSNO corporation single year. But we have established a good pace and are and its affiliates showed 60% growth in insurance premi confident of success. ums, outpacing the overall market. We believe that the share of nontelecommunications assets in the corpora Vladimir Yevtushenkov tion’s business portfolio will continue to grow steadily. President, Sistema 7 | JSFC SISTEMA | ANNUAL REPORT 2004 Chairman of the Board of Directors, Sistema Yevgeny Novitsky 8 The Chairman of the Board of Directors Message THE CHAIRMAN OF THE BOARD OF DIRECTORS MESSAGE A high degree of integration into the global economy business community in the global arena and increase is an indispensable condition for the successful deve our attractiveness to investors. lopment of a modern, large business. For our corporation One of the most important principles that Sistema this is an axiom. From the moment of its founding, Sis always strives to follow in full measure is the respon tema has striven to meet the requirements of the global sible development of business in the interests of socie marketplace. ty. We see real values, which form the national wealth of The basic principles that are the foundation of our the country, in intellectual leadership. The very nature activity — efficient management, wide diversification, of the corporation’s activities is a part of its exercise of the high profitability of all of our businesses and trans social responsibility. Our investments in high techno parent management — have allowed the corporation to logy are dictated by the steadfast belief that it is the become one of the most successful financial industrial economy of ideas and innovation that are most effective groups in Russia. and have the greatest potential for Russia, rather than The year 2004 will go down in the history of Sistema an economy based on the exploitation of raw material as a moment when we reached yet another frontier. It resources. was the last year of our work as a private company. The We are investing in the development of an intellec placement of shares of Sistema on the London Stock tually driven society where our services will be most Exchange at the beginning of 2004 positioned the cor called upon. The corporation is working actively with poration in a new orbit, confirming the interest of inves the leading scientific institutions of the country — tors in the market where Sistema is the acknowledged providing scholarships for the best students, taking part leader. in teaching activities and the creation of joint programs Our new status as