**CLOSED JOINT STOCK COMPANY "COMCOR-TV"CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2002 and 2001(In thousands of US Dollars, except per share information)**

** **

**Notes**

**2002**

2001

 

**ASSETS**

 

 

** **

 

** **

 

 

** **

 

 
**Current assets**

** **

** **

** **

** **

 
Cash  and cash equivalents

 

4 

**$     91 **

$1,188 

 
Trade  accounts receivable 

 

 

**60 **

35 

 
Inventories

 

8 

**3,768 **

810 

 
Prepaid  expenses

 

 

**605 **

81 

 
Taxes  recoverable

 

5 

**1,154 **

770 

 
Other current assets

 

 

**336 **

46 
 
 
**Total  current assets**

 

 

**6,014 **

2,930 

 
 
**Non-current assets**

 

 

** **

 

 
Property,  plant and equipment, net

 

6 

**13,374 **

1,733 

 
Advances  for network construction and design

 

7 

**915 **

1,362 

 
Intangible  assets, net

 

9 

**7,916 **

8,987 

 
Investment  in Institute for Automated Systems 

 

10 

**6,291 **

2,768 
 
 
**Total  non-current assets**

 

 

**28,496 **

14,850 
 
 
**Total  assets**

 

 

**$34,510 **

$17,780 

      

 
**LIABILITIES  AND SHAREHOLDERS' EQUITY**

 

 

 

 
                
 
**Current  liabilities**

 

 

 

 

 
Trade  accounts payables

 

 

**$    299 **

$    44 

 
Accounts  payable to a related party

 

3 

**1,343 **

570 

 
Loan from related party

 

3 

**552 **

2,266 

 
Accrued expenses

 

11 

**610 **

605 

 
Other current liabilities

 

 

**320 **

146 
 
 
**Total  current liabilities**

 

 

**3,124 **

3,631 

 
 Deferred tax liability

 

13 

**1,816 **

2,099 
 
 
**Total  liabilities**

 

 

**4,940 **

5,730 
 
 
**Commitments and contingent  liabilities**

 

14 

** **

 

 
**Minority  interest**

 

 

**28 **

25 
 
 
**Shareholders'  equity**

 

 

** **

 

 
Preferred stock

 

 

**3 **

- 

 
Ordinary shares, RR 10  par value; 61,810 shares authorised and outstanding in 2002;  43,642 authorised  and outstanding in 2001

 

12 

**40 **

34 

 
Additional paid-in  capital

 

12 

**42,307 **

19,941 

 
Accumulated deficit

 

 

**(12,808)**

(7,950)
 
 
**Total  shareholders' equity**

 

 

**29,542 **

**12,025 **

 
 
**Total  liabilities and shareholders' equity**

 

 

**$34,510 **

**$17,780 **

 
The accompanying notes  are an integral part of these financial statements. 

 
**CLOSED JOINT STOCK COMPANY "COMCOR-TV"  CONSOLIDATED STATEMENT OF OPERATIONS   YEARS ENDED DECEMBER 31, 2002, 2001 and 2000  (In thousands of US Dollars)**

 

 
** **

** **

** **

 
** **

**2002**

2001 

2000 

**Revenues**

** **

 

 

Subscription fees

**$1,365 **

$    663 

$    90 

Connection fees and  equipment sales

**481 **

472 

248 

Other

**95 **

65 

21 

Total revenue

**1,941 **

1,200 

359 

**Cost of  revenue**

** **

 

 

Cost of CATV and  Internet from related party

**883 **

547 

267 

Equipment and  connection costs

**386 **

355 

177 

Wages, salaries,  benefits and payroll taxes

**788 **

786 

370 

Amortization of  intangibles

**1,071 **

1,095 

721 

Other

**563 **

316 

76 

Total cost of  revenue 

**3,691 **

3,099 

1,611 

**Operating  expenses**

** **

 

 

Wages, salaries,  benefits and payroll taxes

**1,488 **

1,582 

1,034 

Depreciation of  property, plant and equipment

**680 **

271 

41 

Lease of facilities  from a related party

**507 **

542 

237 

General and  administrative

**535 **

807 

1,010 

Total operating  expenses

**3,210 **

3,202 

2,322 

**Loss  from operations**

**(4,960)**

(5,101)

(3,574)

Interest expense

**(27)**

(7)

- 

Foreign exchange loss 

**(56)**

(29)

35 

Equity in losses of unconsolidated  subsidiary

**(95)**

- 

- 

Other (expense) income,  net

**- **

58 

192 

**Loss  before income taxes and minority interest**

**(5,138)**

(5,079)

(3,347)

Income tax benefit  (expense)

**283 **

1,367 

(252)

**Loss  before  minority interest**

**(4,855)**

(3,712)

(3,599)

Minority  interest

**(3)**

8 

- 

Net loss 

**$(4,858)**

$(3,704)

$(3,599)

The accompanying notesare an integral part of these financial statements.

 

 

 

 
**CLOSED JOINT STOCK COMPANY "COMCOR-TV"CONSOLIDATED STATEMENT OF CASH FLOWSYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000** 
   **2002**20012000  
Cash flows from operating activities:

** **

 

 

 
Net loss

**$(4,858)**

$(3,704)

(3,599)

 
Equity in losses of unconsolidated subsidiary

**95 **

- 

- 

 
Deferred tax (benefit)/provision

**(283)**

(1,367)

252 

 
Depreciation and amortization

**1,751 **

1,365 

762 

 
Provision for inventory obsolescence

**240 **

- 

- 

 
Expenses paid for by a shareholder as part of  charter capital   contribution

**- **

  - 

  418 

 
  Changes in  working capital assets and liabilities:

** **

 

 

 
  (Decrease)  increase in inventories  

**280 **

(612)

(198)

 
  Increase in  taxes recoverable 

**(384)**

(351)

(419)

 
   Decrease/(increase) in other current assets

**(839)**

161 

(307)

 
Increase in accounts payable and accrued liabilities

**1,206 **

703 

661 

 
 
Net cash used by operating activities:

**(2,792)**

(3,805)

(2,430)

 
 
Cash flows from investing activities

** **

 

 

 
Acquisition of property and equipment

**(2,042)**

(809)

(1,240)

 
Advances for network construction and design

**447 **

(483)

(880)

  
Net cash used by investing activities

**(1,595)**

(1,292)

(2,120)

 
 
Cash flows from financing activities:

** **

 

 

 
Capital contributions

**5,000 **

- 

9,217 

 
Loan repayments

**(2,610)**

- 

(685)

 
Loan from shareholder

**900 **

2,260 

- 

  
 
Net cash provided by financing activities

**3,290 **

2,260 

8,532 

  
Effect of exchange rates movements on cash

**- **

- 

(5)

  
Net (decrease)/ increase in cash and cash  equivalents

**(1,097)**

2,837 

(3,977)

 
 

** **

 

 

 
Cash and cash equivalents at beginning of year

**1,188 **

4,025 

48 

 
 
Cash and cash equivalents at end of year

**$     91 **

$1,188 

$4,025 

 
 
Supplemental cash flow information

** **

 

 

  
Interest paid

**$      34**

-

-

  
Profit tax paid

**-**

-

-

 
The accompanying notes are an integral part of these financialstatements.

 

**CLOSED JOINT STOCK COMPANY "COMCOR-TV"CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000(In thousands of US Dollars)**

 

 

**Preferred  stock**

**Capital  stock**

**Additional  paid in capital**

**Accumulated  deficit**

**Total  shareholders'  (deficit)/equity**

**Balance at December 31, 1999**

$  - 

$22 

$         - 

$    (647)

$    (625)

Capital contribution

- 

12 

19,941 

- 

19,953 

Net  loss

- 

- 

- 

(3,599)

(3,599)

**Balance at December 31, 2000**

$  - 

$34 

$19,941 

$(4,246)

$15,729 

Net loss

- 

- 

- 

(3,704)

(3,704)

**Balance at December 31, 2001**

$  - 

$34 

$19,941 

$(7,950)

$12,025 

Capital contributions

3 

6 

22,366 

- 

22,375 

Net loss

- 

- 

- 

(4,858)

(4,858)

**Balance at December 31, 2002**

**$ 3 **

**$40 **

**$42,307 **

**$(12,808)**

**$29,542 **

 The accompanying notesare an integral part of these financial statements.

 

 

 

 
**CLOSED JOINT- STOCK COMPANY "COMCOR-TV"****NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2002 AND FOR THE YEAR THEN ENDED****(Inthousands of US Dollars, except per share amounts)**

** Note 1:NATURE OF OPERATIONS AND BASIS OF PRESENTATION**

** (a) Operations of the Company**

 Closed Joint Stock Company COMCOR-TV (the "Company")was established on July 15, 1995 as a closed joint stock company underthe laws of the Russian Federation. The Company is engaged in provision ofcable television services and high speed internet access in Moscow. The Company'soperations are subject to licenses for cable television broadcasting and datatransmitting. The current licenses granted by the State Committee of the RussianFederation on Telecommunications are valid until 2004. The numberof subscribers is limited by the terms of the license for cable televisionbroadcasting at 1,500,000.

As at December 31, 2002, the Company has installed service capacity forup to 107,026 homes in Moscow. In  2003,the Company expects to continue the construction of networks, increase itssales of services, and implement new broadband services.

 **(b) Ownership, subsidiaries, associates**

 The shareholders of the Company are Joint Stock Company MoscowTelecommunication Corporation COMCOR ("COMCOR") and ABC MoscowBroadband Communication Ltd. ("MBC").

 The entities, included in these consolidated financial statementsinclude:

 

***Name***

**Principle  activities**

**Ownership interest**

 

 

**December 31, 2002**

December 31,  2001

LLC  Persey-Service ("Persey")

Broadcasting and  publishing

**51%**

51%

Open Joint Stock  Company Institute for Automated Systems ("IAS")

Data transfer  and telecommunication services

**42%**

  19%

Persey also acts as a sales representative of the Company.

Since August 2002 the Company has owned 41.7% of IAS as a result of thereceipt of additional shares as noted below, and has subsequently included itsequity interest in IAS's results of operations in its statement of operations. 

 **(c) Issue of shares**

In 2002, the Company made two additional issues ofshares: 10,910 preference shares were purchased by MBC for US $ 5,000 in cashand 18,168 ordinary shares were sold to COMCOR. COMCOR contributed coaxialnetworks for 89,000 subscribers in Chertanovo and Khamovniki, internetequipment, inventory, valued at  US$13,755, and 55,675 shares of IAS valued at US $3,618. 

** (d) Basis of presentation**

The Company maintains its accounting records and prepares statutoryaccounting reports in accordance with local accounting regulations. Theaccompanying consolidated financial statements are based on the statutoryrecords of each entity, which are maintained in Russian rubles ("roubles"),the official currency of the Russian Federation, and are recorded under thehistorical cost convention, except for the revaluations of property, plant andequipment, intangible assets and inventory. They have been adjusted in order to present the financialposition and the results of operations in U.S. Dollars ("US$" or "$")and in accordance with US GAAP.

The Company has experienced net losses since inception and expects toincur additional operating losses in the future as the Company continues toexpand its service offerings and customer base and to construct its ownnetwork.  As a result, the Company'smanagement believes that additional financing will be required to support itsplanned expenditures. The agreements signed in May 2003 under which AndersenGroup, Inc. ("Andersen"), a public U.S. company that currently owns25% of the equity interests of MBC, proposes to acquire the outstanding equityof the Company provide for additional capital contributions, including $6.0million in cash to be invested by Andersen, of which $3.5 million will becontributed  in May 2003. In addition, the agreements provide for $1,143 of liabilities of theCompany to COMCOR as of December 31, 2002 and a portion of charges forvarious services in 2003 from COMCOR to be converted into equity of theCompany. The agreements also provide for the elimination of certain fees toCOMCOR from the Company's utilization of its Moscow Fiber Optic Network, andfor a limitation of payments of fees charged for the lease of COMCOR's secondarynodes.  The Company expects that suchsources of capital will be adequate to allowit to meet its operating requirements for the foreseeable future.

**Note 2: SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Use of estimates.*** Thepreparation of financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amount ofassets and liabilities and the reported amount of revenues and expenses duringthe reporting period. The most significant estimates relate to recoverabilityand useful lives of property, plant and equipment and intangible assets andvaluation of investments. Actual results could differ from these estimates.** **

***Principles of consolidation.***The consolidatedfinancial statements of the Company are based on the financial statements ofthe entities presented in Note 1 "Nature of operations and basis ofpresentation".  

Subsidiary undertakings, which are those entities in which the Companyhas an interest of more than one half of the voting rights, or otherwise haspower to exercise control over the operations, are consolidated. Subsidiariesare consolidated from the date on which control is transferred to the Companyand are no longer consolidated from the date that control ceases. Allintercompany transactions, balances and unrealised gains on transactionsbetween group companies are eliminated; unrealised losses are also eliminatedunless cost cannot be recovered.  

Minority interest at the balance sheet date represents the minorityshareholders' portion of the pre-acquisition carrying amounts of theidentifiable assets and liabilities of the subsidiary at the acquisition date,and the minorities' portion of movements in equity since the date of theconsolidation. Minority interest is presented separately from liabilities andshareholders' equity. 

Investments in associated undertakings are accounted for by the equitymethod of accounting. These are undertakings over which the Company generallyhas between 20% and 50% of the voting rights, or otherwise the Company hassignificant influence, but which it does not control. Unrealised gains ontransactions between the Group and its associated undertakings are eliminatedto the extent of the Company's interest in the associated undertakings;unrealised losses are also eliminated unless the transaction provides evidenceof an impairment of the asset transferred.** **

***Foreign currency translation****.*The Russian economy ishyperinflationary. The US$ is the reporting and the functional currency for thepurpose of these financial statements. Accordingly, transactions not alreadymeasured in US$ have been remeasured into US$ in accordance with the relevantprovisions of Statement of Financial Accounting Standards ("SFAS")No. 52, "Foreign Currency Translation".** **

Monetary assets and liabilities of the consolidated entities have beentranslated at the rate prevailing at the balance sheet date. Non-monetaryassets and liabilities have been translated at historic rates and adjusted forimpairment as necessary. Revenues, expenses and cash flows have been translatedat the exchange rate  on the date of thetransaction. Translation gains and losses from the remeasurement of assets andliabilities that are not denominated in US$ are credited or charged to theconsolidated statement of income.  

Exchange restrictions and controls exist relating to converting the rouble into other currencies. At present, the rouble isnot convertible outside of Russia and, further, consolidated entities arerequired to convert 50% of their hard currency earnings into roubles. Futuremovements in the exchange rates between the rouble and the US$ will affect thecarrying value of the Company's rouble denominated monetary assets andliabilities. Such movements may also affect the Company's ability to realisenon-monetary assets represented in US$ in these consolidated financial statements.Accordingly, any translation of local currencies to US$ should not be construedas a representation that such amounts have been, could be, or will in thefuture be converted into US$ at the exchange rate shown or at any otherexchange rate.  

The official rate of exchange, as determined by the Central Bank of theRussian Federation, between the Russian Rouble and the US Dollar at December31, 2002 was 31.7844 for US$ 1 (30.14 at December 31, 2001).  

***Cash and cash equivalents.***The Company considersonly those short-term, highly liquid investments with original maturity of 90days or less to be cash equivalents net of any restricted cash amounts. 

 

***Accounts receivable.***Accounts receivable arepresented net of any provision for bad and doubtful debts. 

***Revenuerecognition.***Revenue is primarily derived from the saleof cable television and Internet services to subscribers and is recognized inthe period the related services are provided. Under SAB 101 the Company defersconnection fees, set-box sales and related costs, and recognizes them over afive year period, which represents the estimated customer relationship period.Company follows the guidance of FASB 51 in recognizing initial connectionrevenues and direct selling costs.  Allrevenue figures are recorded net of VAT.** **

***Inventories.***Carrying amounts of inventory are determined on an average cost basis,including the contributed values of inventories contributed by COMCOR, and arestated at the lower of cost or market. Inventory is reviewed for obsolescenceat each reporting date.  

***Property, plant and equipment***. Property, plantand equipment is stated at cost less accumulated depreciation. Depreciation ofproperty, plant and equipment is applied on a straight-line basis over thefollowing estimated useful lives: 

Broadcasting equipment

 10 to 15 years

Other network equipment

  5 years

Other           

   3 to 5 years

In accordance with Statement of Financial Accounting Standards No. 144 "Accountingfor the Impairment and of Long-Lived Assets" ("SFAS 144"), property,plant and equipment held and used by the Company are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. For the purpose of evaluating therecoverability of property, plant and equipment, the recoverability test isperformed using undiscounted net cash flows. 

***Financial instruments.***The fair value offinancial instruments (primarily cash and cash equivalents, accounts receivableand accounts payable) is determined with reference to various marketinformation and other valuation methods as considered appropriate. At December31, 2002, the fair values of financial instruments held by the Company did notmaterially differ from their recorded book values due to their shortmaturities. 

***Capital contributions from the shareholders.***Thenon-cash assets contributed by the shareholders have been recorded at theirestimated fair values determined by reference to cash contributions made at thesame time and in accordance with a plan of contributions to the charter capitalof the Company (see also Note 15 "Subsequent events"). 

***Comprehensiveincome*.**SFAS No. 130, "Reporting ComprehensiveIncome", requires disclosure of all changes in equity during a periodexcept those resulting from investments by and distributions to the Company'sshareholders. The Company's comprehensive loss for the year ended December 31,2002 did not differ from the reported net loss. 

***Income taxes.***Deferred tax assets and liabilitiesare calculated in respect to temporary differences in accordance with Statementof Financial Accounting Standards No. 109 "Accounting for Income Taxes"("SFAS 109"). SFAS 109 requires the recognition of deferredincome tax assets and liabilities for future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates in the years in which thesetemporary differences are expected to reverse. Valuation allowances areprovided for deferred income tax assets to the extent that it is more likelythan not that the assets will not be realized. 

***Value-Added Taxes.*** Value-Added Taxes ("VAT")related to sales are payable to the tax authorities at the time of the sale.VAT on purchases is reclaimable against sales VAT upon payment forpurchases.  The tax authorities permitthe settlement of VAT on a net basis. VAT related to sales and purchase transactions, which have not beensettled at the balance sheet date, are recognized in the balance sheet on agross basis. 

***Unified Social Tax.*** Chapter 24 of the Tax Code ofthe Russian Federation "Unified Social Tax" came into effect fromJanuary 1, 2001. This tax replaced payments to the pension, medical insurance,employment and social insurance funds. Average rate of this tax was 25.9%. TheCompany has no obligation to provide pensions to any of its management or staffand, accordingly, no provision for future pension costs is recorded. 

***Advertising expenses.***Advertising expenses arecharged to the Income Statement as incurred.*** ***

***Recently issued accounting standards***. In June2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accountingfor Asset Retirement Obligations." This statement establishes standardsfor accounting for obligations associated with the retirement of tangiblelong-lived assets.   SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  The adoption of this standard will not have amaterial impact on the Company's financial condition or results of operations. 

In April 2002, the Financial Accounting Standards Board issued SFAS No.145 "Rescission of FASB Statements No.4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". TheStatement eliminates an inconsistency between the required accounting forsale-leaseback transactions and the required accounting for certain leasemodifications that have economic effects that are similar to sale-leasebacktransactions.  This Statement also amendsother existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. The Company believes that the adoption of this standard will haveno material impact on its consolidated financial statements. 

In June 2002, the FASB issued SFAS No. 146, "Accounting for CostsAssociated with Exit or Disposal Activities." SFAS No. 146 nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity,"under which a liability for an exit cost was recognized at the date of anentity's commitment to an exit plan. SFAS No. 146 requires that a liability fora cost associated with an exit or disposal activity be recognized at fair valuewhen the liability is incurred. The provisions of this statement are effectivefor exit or disposal activities that are initiated after December 31, 2002. 

***Risks and concentrations.***The Company's businessis subject to risks and uncertainties common to growing technology-basedcompanies, including rapid technological change, growth and commercialacceptance of broadband services in Russia, dependence on third-partytechnology, new service introductions and other activities of competitors,significant financing requirements, dependence on key personnel and limitedoperating history. 

**Note3: RELATED PARTY TRANSACTIONS **

The Company receives signal delivery services and data network servicesfrom COMCOR. In addition, the Company pays COMCOR for Internet traffic. Theamount of such expenses, charged to the income statement for the year endedDecember 31, 2002, was US$ 883 (December 31, 2001: US$546), and the amountpayable to COMCOR at December 31, 2002 was US $1,143 (December 31, 2001: US$570). At December 31, 2002, the Company had pledged its assets (Khamovnikicoaxial network and IAS shares) to COMCOR as security for this payable. Thepledge and carrying value of those assets was US$ 8,549 and US$ 8,489 atDecember 31, 2002.  

During 2001 and 2002, the Company received short-term loans from MBC inthe amount of US$ 2,260 and US $ 900 respectively. All loans carry interest atLIBOR+1%. The Company repaid the 2001 loan and US$ 350 of the 2002 loans withaccrued interest. Total accrued interest expense paid or accrued on these loansduring 2002 was US$ 28. Amount payable to MBC for the loan at December 31, 2002was US$ 550 and interest payable was US $2. At December 31, 2002 the Company haspledged its assets (Chertanovo coaxial networks and other equipment) to MBC assecurity for this loan. The value pledge and carrying value of those assets wasUS$ 10,032 and US$ 9,019 at December 31, 2002. 

The Company leases its primary office facilities from IAS. The amountcharged to operations for the year ended December 31, 2001, was US$ 498 (2001;US$ 534), and the amount payable to IAS as at December 31, 2002 was US $ 194. 

**Note 4: CASH AND CASHEQUIVALENTS** 

 

**December 31, 2002**

December 31, 2001

Cash at bank (denominated in Roubles)

**$86 **

$   103 

Cash at bank (denominated in US Dollars)

**5 **

1,085 

Total cash and cash equivalents

**$91 **

$1,188 

**Note 5: TAXES RECOVERABLE** 

 

**December 31, 2002**

December 31, 2001

VAT recoverable

**$1,128 **

$743 

Income tax recoverable

**26 **

27 

Total taxes recoverable

**$1,154 **

$770 

 

**Note 6: PROPERTY, PLANT ANDEQUIPMENT** 

At December 31, 2002 and December 31, 2001, property, plant andequipment comprised:  
 **December 31, 2002**December 31, 2001Construction in progress**$2,408 **$963 Motor vehicles**278 **274 Computer equipment**459 **429 Office furniture and fixtures**447 **379 Network equipment**9,995 **- Internet equipment**507 **- Other**273 **- Total cost**14,367 **2,045 Accumulated depreciation**(993)**(312)Property, plant and equipment, net**$13,374 **$1,733 
**Note 7: ADVANCES FORNETWORK CONSTRUCTION AND DESIGN** 

 

**December 31, 2002**

December 31, 2001

Advance payments made to contractors

**$570 **

$1,136 

Internal project costs

**345 **

226 

Total advances for network construction and design

**$915 **

$1,362 

**Note 8: INVENTORY** 

 

**December 31, 2002**

December 31, 2001

Materials for construction

**$2,608  **

$322 

Cable 

**422 **

49 

Installation equipment and suppliers

**710 **

330 

Other

**268 **

109 

Reserve for obsolescence

**(240)**

- 

Total inventory

**$3,768 **

$810 

 **Note 9:INTANGIBLE ASSETS **

Intangible assets comprise: 
- A license for     provision of cable television broadcasting services to 1.5 million     subscribers. This license was contributed by COMCOR as consideration for     the shares issued on April 24, 2000.      The gross book value of the license of US$ 10,714 is being     amortized over a ten-year period.      The license term ends in September 2004 but the Company does not     foresee any problems with complying with the requirements of the renewal.     The license is required to provide services and management expects to     renew it at no significant cost, after the first five years of its     operation. Accumulated amortization as at December 31, 2002 is US$ 2,857. 
- Goodwill on     acquisition of Persey in July 2000 with carrying value of US$ 59 net.

**Note 10:INVESTMENT IN INSTITUTE FOR AUTOMATED SYSTEMS **

IAS is a Russiantelecommunications company that has a data communications network in Russia.From April 2000 to July 2002, the Company had a 19% equity interest in IAS. AtJuly 31 2002, the Company received additional 55,675 shares of IAS from COMCORrepresenting approximately 23% of IAS, thus increasing the Company's equityinterest to 41.7%. During the period from August 2002 through December 2002,the Company recorded US$ 95 as its equity in the losses of IAS. 

At December 31, 2002, the Company's investment inIAS was recorded at US$ 6,291 and its proportionate share of IAS's equity wasUS$ 3,377. The difference is attributable to the fair market value of the IAScontribution at the dates of contributions, as determined by the Company'sshareholders in negotiation of contributions to the Company's equity tomaintain ultimate parity of ownership. The following presents the summarizedfinancial condition of IAS as of December 31, 2002 and the results of itsoperations for the five month period ended December 31, 2002 (unaudited). 

Balance Sheet

**December  31, 2002**

 Current assets

**$1,151 **

 Noncurrent assets

**9,596 **

     Total assets

**$10,747 **

 

** **

 Current liabilities

**$1,566 **

 Noncurrent liabilities

**1,082 **

     Total liabilities

**2,648 **

 

** **

     Shareholders' equity

**8,099 **

 

**$10,747 **

 

Statement  of Operations

**Five Months ended December 31, 2002**

Revenues

**$1,884 **

Cost  of revenue

**(1,385)**

Operating  expenses

**(869)**

Loss  from operations

**(370)**

Non  operating income

**144 **

Income  tax expense

**(2)**

Net  loss

**$ 228 **

** Note 11: ACCRUED EXPENSES **

** **

**December 31, 2002**

December 31, 2001

Salaries

**$227 **

$227 

Consulting services

**312 **

312 

Other accrued expenses

**71 **

66 
Total accrued expenses
**$610 **
$605 ** **Note 12:SHAREHOLDERS' EQUITY **

The Company's chartercapital consists of 61,810 issued and fully paid ordinary shares with nominalvalue of US$ 40 and 10,910 preferred common stock shares with nominal value ofUS$3. Additional paid-in capital represents difference between the nominalvalue of the issued shares and the amounts contributed by the shareholders.Preference shares do not carry voting rights. No dividends were declared forthe previous years.** **

In October 2002 the Company registered new issue of additional 18,168ordinary shares which are intended to be sold to Andersen pursuant to theagreements signed in April 2003.  (Seealso Note 16 "Subsequent events").  

**Note 13: INCOME TAXES **

Deferred income taxes reflect the impact of temporary differencesbetween the amounts of assets and liabilities recognized for financialreporting purposes under US GAAP and such amounts recognized for statutory taxpurposes The significant components of the net deferred tax liability are asfollows:** **

 

**December 31, 2002**

December 31, 2001

Deferred tax assets:

** **

    Tax loss carry forward

**$  759 **

$  778 

    Property, plant and equipment

**127 **

44 

    Other

**17 **

- 

    Valuation allowance

**(759)**

(778)

Total deferred tax assets, net  of valuation allowance 

**144 **

44 

 Deferred tax liabilities:

** **

    Intangible assets

**(1,886)**

(2,143)

    Deferred costs 

**(74)**

- 

Total deferred tax liabilities 

**(1,960)**

(2,143)

Net deferred tax liability

**$(1,816)**

$(2,099)

** **The difference between income tax expense provided in the financialstatements and the expected income tax benefit at the statutory rate isreconciled as follows:**  **

 

**December  31, 2002**

December  31, 2001

Loss  before income taxes and minority interest

**$5,138 **

$  5,079 

Statutory  income tax rate

**24%**

35%

Income  tax benefit at the statutory rate 

**(1,233)**

(1,778)

(Increase)/decrease  due to:

** **

 

Expenses  not deductible for tax purposes

**158 **

350 

Taxable  losses not qualifying for carry forward 

**792 **

502 

Effect  of the change in statutory income tax rate

**- **

(625)

Movement  in valuation allowance on tax losses carry  forward

**- **

184 

**Income tax benefit**

**$(283)**

**$(1,367)**

 Russian tax losses can generally be used tooffset future taxable profits for the subsequent 10 years. The maximum offsetin each year is limited to 30% of the total taxable profit of the year. ** **

**Note 14: COMMITMENTS AND CONTINGENCIES  **

**Operating environment**

The economy of the Russian Federation continuesto display the characteristics of an emerging market. These characteristicsinclude, but are not limited to, the existence of a currency that is not freelyconvertible outside of the country, currency controls, a low level of liquidityin the public and private debt and equity markets and high inflation. 

The prospects for future economic stability arelargely dependent upon the effectiveness of economic measures undertaken by thegovernment, together with legal, regulatory, and political developments. 

**Taxation** 

Russian tax legislation is subject to varyinginterpretations and constant changes, which may be retroactive. Furthermore,the interpretation of tax legislation by tax authorities as applied to thetransactions and activity of the Company may not coincide with that ofManagement. As a result, transactions may be challenged by tax authorities andthe Company may be assessed additional taxes, penalties and interest, which canbe significant.  The tax years remainopen to review by tax authorities for three years.** **

**Political environment** 

The operations and earnings of the Company areaffected by political, legislative, fiscal and regulatory developments,including those related to environmental protection. Because of thecapital-intensive nature of the industry, the Company is also subject to physicalrisks of various kinds. The nature and frequency of these developments andevents associated with these risks, which generally are not covered byinsurance, as well as their effect on future operations and earnings, are notpredictable. ** **

**Note 15: SUBSEQUENT EVENTS **

In May  2003, COMCOR and Andersen entered into agreements, pursuant towhich Andersen will acquire all of the equity interests of the Company.  The agreements require that Andersen makeequity investments totaling US $6 million, of which US $3.5 million has beencommitted to be made within 20 days of the signing of the agreements.Additional investments by Andersen into the Company are also required within 20days of Andersen's acquisition of COMCOR's equity interests in the Company, and nolater than August 31, 2004.  Theagreements allow, but do not require, Andersen to make further equityinvestments into the Company in the aggregate total of US $5,828. The Companyexpects Andersen to contribute amounts owned by the Company to MBC, additionalshares of IAS and the value of amounts owed by the Company to others whichAndersen has agreed to settle as part of this additionally allowed investment. 

The agreements also provide for the conversion of $1,381 of liabilitiesand future liabilities of the Company to COMCOR  into shares of the Company.  Additionally, in the agreements, COMCORagreed to discontinue a fee of 10% of the Company's television service revenuesfor the Company's utilization of COMCOR's Moscow Fiber Optic Network and tolimit the payment for charges for the Company lease of COMCOR's secondary node switchingequipment to the lesser of $350 per month per secondary node or 20% of theCompany's television service networks as calculated on a cumulative basiseffective with January 2003 through December 2005. 

The agreement further requires Andersen to acquire substantially all ofthe shares of stock of MBC which it does not presently own.

 
**ANDERSEN GROUP, INC.Schedule II - Valuation and Qualifying Accounts**(Amounts in thousands)

 

 

 

Additions

 

 

 

 

 

 

 

 

 

 

Charged

 

 

 

 

Balance at

(credited) to

Charged to

 

 

 

beginning

costs and

to other

 

Balance at

Description

of year

expenses

accounts

Deductions

end of year

February 28, 2003

 

 

 

 

 

Allowance for doubtful accounts 

$96 

(19)

 

$(52)

$25 

Reserve for returns

$70 

- 

(44)b

$(26)

- 

February 28, 2002

 

 

 

 

 

Allowance for doubtful accounts

$77 

$20 

- 

$(1)

$96 

Reserve for returns

$70 

- 

- 

- 

$70 

February 28, 2001

 

 

 

 

 

Allowance for doubtful accounts

$111 

$(7)

- 

(27)

$77 

Reserve for returns

$80 

(10)

- 

- 

$70 

 

 

 **