In 2007 Eesti Telekom Group was characterized by good profitability growth.
Satisfaction can be gained from growth of client base, growth of DigiTV rapid
popularity and also from increase of mobile data usage.
Economic environment
Economic growth in Estonia after accession to the European Union has been very
rapid. This has been based on an increase in the trustworthiness of the state,
the opening of the labor market, as well as the development of the financial
sector.
Developments in the world's economy and financial markets also affected
Estonia's economy in 2007. An anticipated slowdown in the growth of the
Estonian economy started. By the end of the year, Estonia's economic growth
reached 7%, which was based on reductions in domestic consumption and real
estate investments. Some events from the economic developments of 2007 can be
highlighted. Deteriorating relations with Russia; a faster than expected cooling
of the real estate market; the continued acceleration of wage increases, the
faster than predicted rise in world foodstuff and fuel prices, which, together
with the domestic inflationary pressure incidental to fast wage increases,
accelerated inflation.
In 2007, the telecommunications sector demonstrated good results. The merger and
purchase of companies helped the development and growth of the sector. The
consequences of the US junk-loan crisis that started at the end of the year, had
an effect on the future of world economic development and therefore also the
telecommunications sector. Price increases in energy, raw materials, and
foodstuffs significantly reduce consumption which increase competition in the
sector and reduce profit expectations.
According to analysts, uncertainty in the Estonian economy is increased by the
developments in the world. In 2008, economic growth of 4-5% is projected for the
Estonian economy.
Telecommunications market
More than ever before, European telecommunications operators are being forced to
juggle the decreasing revenues of their principal activities on the one hand,
with the opportunity of conquering new attractive markets related to new
technologies and innovative services on the other hand. The communications
sector is the only field of activity where prices continue to fall, while the
resources necessary for the provision of communications services—personnel
costs, fuel, rents, and knowledge-based development services—are all becoming
more expensive. A general trend in the communications sector is that the service
itself is no longer as important as the content that is provided to the client.
The need for interactivity is also increasing.
In the mobile communications field, the trend of “adding intellect” to the
terminal equipment is continuing. In other words, modern mobile phones are
increasingly becoming computers with good multimedia features, and the
connections to mobile communications networks that are becoming faster, creating
a combination that delivers good results. The effects of Internet-based social
networks and UGC (User Generated Content) or content created by the users
themselves—photo and video albums, blogs—continue to expand. Virtual reality
environments are improving and become increasingly popular.
Last year, the development of mobile-ID definitely turned a new page in the use
of mobile phones, whereby they have also become a secure means of providing
authentication and electronic signatures for using modern e-services. Currently,
many types of location-based services are gathering steam, which have been
available to Estonian users for many years, but the rapid development of mobile
terminals—the integration of GPS satellite positioning and mobile-network-based
positioning and the improvement of map applications—make the use of these
services more convenient and faster.
Even today, hundreds of thousands of people use m-Internet and this continues to
increase. The expansion of the coverage area of today's high-speed 3.5G mobile
communications network provides an opportunity for more people to satisfy their
Internet needs by mobile means even outside urban areas. The maximum speed of up
to 7.2Mbps for downloading and 1.4Mbps for uploading is significantly better
than the speeds of many permanent home connections. Of course, due to
fluctuations in mobile communications, it is only possible to approach maximum
speeds near the base stations, if there are few hindrances, although the maximum
megabits per second are becoming a reality in an ever-widening area.
In the broadband segment, the latest significant innovations and technological
developments are related primarily to the development of DigiTV. The
implementation of IPTV (television through the Internet) has allowed
significantly different television transmission to be provided to the Estonian
population. Compared to other television transmission methods, IPTV technology
provides significantly more possibilities (Internet and TV transmission synergy)
compared to other means of transmission and provides the opportunity to provide
very different additional services through the TV screen in the future.
As of May 2007, Elion was the first in Estonia to provide video rental, which is
available to all DigiTV clients. What is innovative about this service is that
people can rent films without leaving home. The introduction of video rental to
the market means that people's habits in using certain services change with the
development of technology—people use the same services but in a different way.
In October 2007, Elion and EMT opened the first digital music sales environment
in Estonia, which contains about 4 million songs from foreign and Estonian
artists from 12,000 record companies around the world. The music store is
available to clients from the hot.ee Internet portal and EMT mobile portal
SurfPort. In November, the provision of the Pildialbum (PictureAlbum) service
was also introduced. This is an added-value service based on the hot.ee
environment and Elion IP-based television, which allows the users to load their
photos onto the web and exchange them with friends through their TVs.
Telekom Group
The 2007 Eesti Telekom Group results reflect the favorable economic environment
as well as developments in the telecommunications sector.
Compared to previous year, the economic results for the Eesti Telekom Group were
good. The largest increase in revenues was produced by the mobile communications
service segment—contributions were made by new customers, increased call
minutes, equipment sales, as well as the growth of data communications. In the
broadband services segment, the triple solution demonstrated good sales results.
However, the IT services segment had the greatest proportional growth.
The following developments in the Group's course of activity are rewarding:
The AS EMT mobile data communications revenues exceeded revenues for the same
period in 2006 by 50%. The number of mobile data communications users increased
by 51 thousand during the year. The increase of popularity in mobile data
communications is based on the one hand on the introduction of new data
communications packages based on monthly fees introduced to the market in the
summer of 2007, and on the other hand, on the dynamic expansion of the 3G
coverage area, which has allowed clients to use high-quality and high-speed data
communications with conveniently controllable costs.
The use of Mobiil-ID (Mobile-ID) introduced to the market in May 2007 is growing
rapidly. New users are being added and the frequency of use by current users is
also increasing, which demonstrates that people have accepted the idea that
Mobile-ID is a secure and convenient way to operate in the Internet.
Of all DigiTV clients, one in two has chosen Elion as their service provider,
whereby the company has captured over half of the DigiTV market in one year, and
this primarily because Internet-based television allows for services to be
provided in a new innovative way. The number of DigiTV users has doubled during
2007. The video rental service that was introduced to the market in the first
half of 2007 has become very popular among clients due to its convenience and
simplicity of use.
As of July 1st, MicroLink Eesti was transferred from Elion Enterprises to the
direct management of Eesti Telekom. The main purpose of the transfer was to
place greater importance on the IT business at Eesti Telekom. With its rapid
increase in turnover, MicroLink Eesti is among the best IT companies in the
Baltic countries. At the same time, Microlink was recognized by Sun MicroSytems,
the world's largest manufacturer of servers, which chose MicroLink as its best
cooperation partner in the Baltic States.
The structure of the Telekom Group
As of July 1, 2007, AS MicroLink Eesti AS is a direct 100% subsidiary of Eesti
Telekom. AS Eesti Telekom bought AS MicroLink Eesti from AS MicroLink, a 100%
subsidiary of Elion Enterprises. The holding company, AS MicroLink, was merged
with Elion Enterprises.
The goal of the changes was to improve the customer service and efficiency of
the Eesti Telekom Group and to improve cooperation between the companies in the
Group.
Financial results
Revenues, costs, profit
The consolidated sales revenues of the Eesti Telekom Group in 2007 reached 6,261
million EEK, increasing by 9% compared to 2006 (2006: 5,768 million EEK).
Over 50% of the outside revenue growth of the Eesti Telekom Group came from the
mobile communications services segment. The sales revenues for the mobile
communications services segment in 2007 were 3,904 million EEK, increasing by
12% compared to 2006 (2006: 3,502 million EEK). The costs for the mobile
communications services segment outside the Eesti Telekom Group increased by 9%
and the revenues of the Group's subsidiaries dealing with trading by 3%.
The revenue increase of the principal activity of the mobile communications
services segment during the last year was primarily related to an increase in
the number of call minutes initiated from and completed in the EMT network and
the growth of mobile data communications. The number of call minutes initiated
from the EMT network increased by approximately 14% compared to 2006. The
increased number of call minutes is based on more active use by the customer.
During the year, the number of call minutes per customer has also increased and
the number of call minutes initiated from the EMT network per customer has
increased by 8% compared to 2006. The large number of call minutes also
compensated for the drop in minute rates that continued in 2007 and the revenues
earned from call services (including the monthly fees for packages that allow
for a specified number of call minutes for a fixed monthly fee) increased by
almost 11% compared to 2006. The number of call minutes terminated in the EMT
network increased at approximately the same tempo as the call minutes initiated
from the EMT network.
Compared to the end of 2006, the customer base of AS EMT was larger by 6
thousand, reaching
765 thousand active SIM cards (December 2006: 759 thousand
cards). Compared to a year ago, the number of contractual clients increased by
36 thousand, reaching 469 thousand, while at the same time, the number of users
of active pre-paid cards decreased by 30 thousand to 296 thousand by the end of
the year. As opposed to the previous year, an aggressive campaign to attract new
pre-paid card users was not organized at the end of 2007. EMT assesses its
market share of active SIM cards as 48%. The approximate penetration of active
cards in Estonia is 119%.
Very rapid growth continued to be demonstrated by mobile Internet revenues. This
year, the revenues for mobile data communications exceeded the revenues for the
same period in 2006 by more than 50%. At the same time, the volume of data
transmitted increased eightfold. The number of AS EMT mobile data communications
users in December 2007 was 161 thousand, 51 thousand more user than a year ago.
The increase in popularity of mobile data communications is caused, on the one
hand, by the introduction on new data communications packages with fixed monthly
fees in the summer of 2007, and on the other hand, by the dynamic expansion of
the 3G coverage area, which provided clients with quality and high-speed data
communications at conveniently controllable prices. At the end of 2007, 3G
coverage extended to all the county seats in Estonia, as well as many other
towns and their vicinities. Rapid development in the private segment was caused
by the EMT Internet startup package, which includes a free high-speed 3.5G modem
for loyal customers signing up for the EMT Internet 399 package. This provides
the client with an opportunity to use Estonia's 3G network with the largest
coverage area and provides Internet connections with speeds approaching those of
ADSL. Secondly, the number of mobile Internet users has been positively affected
by the establishment of a price ceiling of 9 EEK per day for the use of EMT
SurfPort. This has made using the Internet on their mobile phones affordable for
many customers. In the fourth quarter of 2007, EMT doubled the downloading speed
of the 3.5G network to 7.2 Mbit/sec, which increased both the capacity of the
network as well as the speeds provided to the users. At the same time, the EMT
also introduced faster data uploading in the 3.5G network (so-called HSUPA),
which increased speeds for the senders of voluminous e-mails over three times to
1.4 Mbit/sek.
A regulation applies to AS EMT, as it does to other mobile operators in the
European Community, which specifies that as of September 2007 the rate per
minute for outgoing calls made within the borders of the European Community
cannot exceed the maximum price established by the European Community.
Therefore, revenues from roaming customers have decreased by a third.
The revenues for the mobile communications services segment from retailing and
wholesaling telecommunications merchandise increased in 2007 compared by the
same period in 2006 due primarily to larger mobile phone sales volumes.
In 2007, AS EMT earned average revenues of 341 EEK per client per month, which
is 2.7% more than in 2006 (2006: 332 EEK).
In 2007, the sales revenues for the broadband services segment increased by 9%,
reaching
2,984 million EEK (2006: 2,748 million EEK). The most significant
impact on the growth of sales revenues was caused by the continued increase of
the number of customers for integrated solutions, which increased the revenues
earned from these monthly fees by 54%. As a result of the increase in the users
of integrated solutions, the revenues earned from the monthly fees for single
Internet connection products have decreased by 12%.
During the year, the choice of Elion integrated solutions has constantly
expanded. At the end of 2007, a VoIP Business Solution was introduced to the
market, which differs from the usual Business Solution primarily due to Internet
calling and additional call communications services. As of August 2007, private
clients have been offered a Korrusmaja (Multi-Story) solution including DigiTV.
At the end of 2007, the number of Elion Group triple package clients reached
53.5 thousand
(31 December 2006: 25.5 thousand). The popularity of the triple
package has been significantly enhanced by the offering of supplemental
services. The video rental service that was introduced to the market in the
first half of 2007 has proven to be very popular among clients due to the
convenience and simplicity of its use. The service has no monthly or
subscription fee and films can be rented for a one-time fee, which is added to
the monthly service bill. The selection of rental films, karaoke videos, and
programs has also constantly improved. As a result of a successful marketing
campaign, 207,000 viewings were achieved by the end of 2007. As of October,
Elion in cooperation with the Estonian Conference Center and SEB Eesti Ühispank
offers free video rental of lectures from Estonia's top conferences. The
objective of the service is to make educational services available to as many
people as possible. Thanks to the development of the video rental system, Elion
was chosen as the winner in the Innovator 2007 category of the enterprise
competition organized by Enterprise Estonia.
Starting in October 2007, clients of Elion's Home and Multi-Story Solutions can
watch DigiTV on several TV sets. Home Solution clients have the opportunity to
order an additional DigiTV viewing location, while Multi-Story Solution clients
are offered the opportunity for up to four additional viewing locations. In
order to enable ADSL2+ lines to transmit two TV pictures, the downloading speed
for Home Solution DigiTV clients was increased. As of February 2007, Elion is
the first in Estonia to provide new generation high-definition television (HDTV)
services, which initially are only available to Elion cable TV clients.
In December, a new service called PictureAlbum was also introduced to the
market. This is an added-value service based on the hot.ee environment and Elion
IP-based television, which allows the users to load their photos onto the web
and exchange them with friends through their TVs. The service is available for
use by all registered hot.ee clients.
By the end of 2007, the total number of Elion IP and cable TV clients reached 58
thousand, which is 109% more than at the end of 2006 (31 December 2006: 28
thousand clients). In June, Elion also started to offer DigiTV to business
clients, thereby providing high-quality digital television broadcasts to
offices, public service institutions, and lodging establishments.
The number of permanent Internet connection in the broadband services segment
increased by 16% in 2007, reaching 163 thousand by the end of the year (December
2006: 141 thousand). The growth of the number of the Group's permanent Internet
connections coincided with the growth of the volume of the entire Internet
market. Elion assesses that its Internet market share among private clients
continues to be 56%. In May 2007, Elion Enterprises received a license from the
Communications Board for the 3.7 GHz frequency band that allowed Elion to
develop a network of WiMAX base stations across Estonia. In the second half of
the year, base stations were installed in all the counties, except for Hiiu and
Põlva Counties. As a result, the number of Elion's Internet connections based on
WiMAX technology increased 3.5 times in 2007.
The rental revenues for connections in the broadband services segment increased
in 2007 by 44%, which was based primarily on greater sales volumes of services
with lower margins.
Although call communications around the world are moving from fixed networks to
mobile networks, the fixed-line telephone continues to be a popular means of
communication in Estonia and this especially among business clients, among whom
the number of telephone lines has increased in recent years. Despite the
decrease in the market volume of fixed call communications and of Elion's
intra-network call revenues, Elion's market position continues to be strong.
Elion assesses its market share for call minutes initiated in a fixed network to
be 81% (December 2006: 83%). In 2007, Elion Group's call revenues increased by
3% compared to 2006. The increased was based primarily on domestic call transit
and an increase in the volume of international calls initiated from the mobile
network. During the year, the revenues for international calls initiated from
the mobile network and domestic call transit increased by 60% and 168%
respectively. At the same time, the revenues from intra-network calls decreased
by 14%.
In 2007, Elion started to offer a Business Client VolP service that enables
communications over the Internet, which, in addition to a VoIP number includes
10 e-mail addresses and the possibility of hosting the company's website. In
November, the testing of a Private Client VolP product was started in areas
where ordinary telephone connections cannot be provided.
The number of Elion call interfaces reached 487 thousand by the end of 2007 (31
December 2006:
463 thousand interfaces). The increase in the number of call
interfaces is based on the company's energetic activities directed at keeping
existing clients and finding new ones. A significant impact on the increase in
the number of interfaces was caused by additional users of integrated solutions,
since telephone connections are also a component of double and triple packages.
Retail sales revenues in the broadband services segment increased by 18%,
including revenues from the sale of home electronics, computers and
supplementary appliances that demonstrated the greatest growth. Thanks to the
increase in the number of financing contracts, the financing revenues from
private and business clients increased by 42% compared to 2006. A significant
accomplishment was the creation of the possibility to formalize installment
payment contracts in Elion's e-store. This is the first fully automatic
installment payment solution in Estonia, which has quickly become popular among
clients. By the end of the year, the majority of Elion's e-store clients had
used the installment purchase option.
In October 2007, Elion, in cooperation with its sister company EMT AS, opened a
digital music sales environment, which is the first in Estonia to offer the
works of both local and international artists. The music store contains about 4
million foreign and Estonian songs from 12,000 record companies around the
world. The music store is available to clients through the hot.ee Internet
environment and the EMT mobile port, SurfPort.
In 2007, sales revenues in the IT services segment reached 365 million EEK
(2006: 280 million EEK). The increase in sales revenues of the IT services
segment, without the Võrguteenuse (Network Service) business sphere that was
transferred to Elion Enterprises in 2006, was 38% compared to the same period
last year, increasing from 265 million to 365 million EEK. The sales turnover
for IT services increased by 31% and the sales turnover for IT merchandise by
45%.
The most important events in the IT services segment in 2007 were the startup of
customer management, the renewal of many important contracts and the
implementation of important IT solutions, as well as the creation of a sales
unit for standard leased services.
In respect to the sale of IT merchandise to business clients, undeniably the
largest transaction was winning the procurement for the Schengen information
system platform financed within the framework of the Schengen Facility Program
and its successful implementation, in which MicroLink Eesti executed the SIS
infrastructure solution. In addition, several large IT infrastructure solutions
were executed for business clients based on HP and SUN products, including the
Molcode GRID solution and the cyber-defense project at the Ministry of Defense.
From a sales standpoint, the development of cooperation with HP and the creation
of a HP sales and support services team, as well as the startup of cooperation
with Symantec in the field of data security and archiving solutions was
important.
In the Business Solutions area, the largest contracts concluded by MicroLink
Eesti were for implementation of a digi-recipe and digi-picture archival
information system for the Ministry of Social Affairs and a document management
system for the Tax and Customs Board. The given projects will continue in 2008.
In addition to the startup of the Dynamics AX financial accounting system at
Elion Enterprises. OpenText, the world's leading software corporation, chose
MicroLink Eesti as its best partner in Central and Eastern Europe. At the end of
2007, MicroLink's first Livelink modules were exported to Lithuania. MicroLink
Eesti took over the representation of Progress software in Estonia from AS
Andmevara. As of 1 December 2007, MicroLink has the right to sell OpenEdge,
Sonic, Actional, Business Objects (Crystal Products) and Tugboat (Roundtable)
products. For OpenEdge, MicroLink is the only authorized reseller in Estonia.
In respect to the development of leased services, the emphasis last year was on
putting the existing product portfolio in order and standardizing it, with the
goal of finding suitable solutions for servicing mid-and small-sized companies.
Based on the complexity of a client's office solutions and how crucial its
effectiveness is, the sales units now have a choice of three solutions based on
different taxation principles, as well as special solutions. In 2007, the
greatest victories in the area of leased services included the hosting of the
Construction Register of the Ministry of Economics and Communications, the
renewal of the SAP application hosting agreement with the Tallinn City
Government, the CV Online backup data center service, the procurement for the
Estonian Informatics Center e-health development environment and the hosting of
the Tallinn Space Register.
At the beginning of this year, there are plans to introduce a number of office
solutions that use standard server solutions—starting from simple file and
printer servers to the hosting of financial and customer management software. In
addition, there are plans to introduce several simple solutions related to data
recording and data security and to provide monitoring and administrative
services for the servers administered by the clients themselves.
Eesti Telekom Group total revenues for the retailing and wholesaling of
telecommunications and IT merchandise increased in 2007 by almost 17% compared
to 2006, thanks primarily to greater volumes of sold merchandise.
The operating costs of the Eesti Telekom Group increased by 9% in 2007 reaching
3,947 million EEK (2006: 3,621 million EEK).
In 2007, the operating costs in the mobile communications services segment were
2,463 million EEK, increasing during the year by 14% (2006: 2,158 million EEK).
The principal part of the supplemental operating costs is related to principal
activities. Operating costs increases in connection with greater costs for
interconnection services (resulting from an increase in the number of call
minutes made by clients to other networks) and increased roaming costs. The
generally strong pressure on wages in the Estonian economy had an effect on the
mobile communications services segment and the personnel costs increased by 17%
compared to 2006. At the same time, the ratio of personnel costs in the total
costs of the mobile communications services segment is relatively modest. Since
the retailing and wholesaling of telecommunications and IT merchandise is a
field of activity with very low profitability compared to the principal
activity, then the increase in the trading revenues of the mobile communications
services segment is accompanied by a comparable large increase in operating
costs.
In 2007, the operating costs in the broadband services segment reached 2,115
million EEK
(2006: 1,935 million EEK), increasing 9% during the year. More
than half of the additional operating costs resulted from increases in the
service volumes. The greatest increases were in sales costs for connections,
purchase costs for network resources, the costs for international outgoing
termination units, and the retail sales costs of merchandise. Personnel costs
increased, basically due to increases in salary costs, by 18% compared to 2006.
Costs for the maintenance of communications equipment and buildings increased
during last year by 10%. Marketing costs in the broadband services segment
increased by 35% during the year and IT costs by 34%. The increase in IT costs
was primarily related to the more active purchase of services from MicroLink
Eesti.
The operating costs of IT services segment increased in 2007 by 30% compared to
the previous year, reaching 343 million EEK (2006: 264 million EEK).
The Eesti Telekom Group EBITDA in 2007 was 2,336 million EEK (2006: 2,195
million EEK).
The EBITDA of the mobile communications services segment increased by 3%
compared to 2006 reaching 1,387 million EEK (2006: 1,346 million EEK). The
modest growth is basically related to the one-time provision of 62 million EEK
created in 2007 in order to cover possible retroactive claims resulting from
interconnection fee disputes.
Pursuant to the resolution of the Communications Board dated 21 March 2006, the
termination fee for voice calls in the mobile phone networks (interconnection
fee) for AS EMT, Elisa Eesti AS and Tele2 Eesti AS for the period 1 July 2006 to
30 June 2007 was fixed at 2.05 EEK per minute, and pursuant to the resolutions
of the Communications Board dated 20 June and 22 June 2007, was fixed at 1.66
EEK for the period 1 July 2007 to 30 June 2008. Since Elisa Eesti AS and Tele2
Eesti AS disputed the decisions in court, and in the course of provisional legal
protection, the validity of the aforementioned administrative act was suspended,
the interconnection fees of all three mobile operators remained at 2.50 EEK
until 5 November 2007. On 5 November 2007, the ruling of the Tallinn Circuit
Court came into force, whereby the provisional legal protection was cancelled
and all three mobile operators were obligated to apply interconnection fees of
1.66 EEK.
The possible effect of a retroactive claim on the consolidated profit of the
Eesti Telekom Group is eliminated since Elion Enterprises has submitted claims
to the three mobile operators that exceed the EMT provision.
The EBITDA of the broadband services segment also increased by 3% in 2007
reaching 882 million EEK (2006: 858 million EEK). Here the modest growth of
EBITDA is primarily affected by the profit of
43 million EEK that Elion
Enterprises earned from the sale of real estate in the second quarter of 2006.
The given factor is reflected in the consolidated data of the Eesti Telekom
Group.
In 2007, the EBITDA of IT services segment reached 24 million EEK (2006: 27
million EEK, including revenues from the disposal of the Metroo network).
The Eesti Telekom Group EBITDA margin has declined somewhat during the year,
reaching 37.3% in 2007 (2006: 38.1%).
The Eesti Telekom Group's depreciation costs in 2007 were 496 million EEK (2006:
548 million EEK). The decrease of depreciation costs was mainly affected by the
application of new depreciation rates in 2006. At the beginning of 2006,
TeliaSonera established new uniform useful life spans for the fixed assets for
their 100% subsidiaries. The companies of the Eesti Telekom Group also decided
to apply the depreciation periods suggested by TeliaSonera as of 1 May 2006. In
connection with the application of new depreciation periods, adjustments were
not made regarding the depreciation costs already calculated on the fixed
assets. The lengths of the remaining useful life spans were adjusted for the
existing fixed assets.
During the last year, the Eesti Telekom Group earned an operating profit of
1,840 million EEK which was an increase of 12% compared to 2006 (2006: 1,646
million EEK). The financial revenues (net) earned by the Eesti Telekom Group
increased somewhat in 2007 compared to 2006, reaching 46 million EEK (2006: 41
million EEK).
On 1 July 2007, AS Microlink sold AS MicroLink Eesti shares to AS Eesti Telekom.
The unrealized intra-group profit from the sale of the shares was 93.7 million
EEK.
In 2007, AS Eesti Telekom paid its shareholders record-setting dividends.
Despite the increase in the amount of dividends, the income tax due on the
dividends decreased in connection with the decrease in the tax rate, reaching
371 million EEK in 2007 (2006: 373 million EEK).
The Eesti Telekom Group earned a net profit of 1,512 million EEK in 2007 (2006:
1,314 million EEK). The income per shares reached 10.91 EEK (2006: 9.49 EEK).
Investments
During 2007, the Eesti Telekom Group invested 863 million EEK (2006: 771 million
EEK) into tangible and intangible fixed assets.
The mobile communications services segment has invested 330 million EEK in 2007
(2006: 274 million EEK). In mobile communications, in addition to continuous GSM
network development, a large field of development was the implementation of
technologies supporting high-speed mobile data communications. By the end of the
year, EDGE, which operates on the basis of the GSM network, covered 94% of base
stations. A noteworthy result was achieved in the development of the 3G
network—all Estonia's county seats were covered. As of November 2007, it is
possible to use data communications speeds of up to 7.2 Mbits/s for downloading
and 1.4 Mbit/s for uploading in the 3G network. In addition, the reliability of
the network was significantly increased— all the exchanges of the network were
put into operation as a single resource, so that a failure of one exchange will
not cause the base station serving it to fail or cause a widespread disruption
of service. In the second quarter of 2007, the development of the Mobile-ID
service was completed. Mobile-ID is a means of authentication developed in
cooperation with the Certification Center, an associated company of the Eesti
Telekom Group, which is actually a further development of the ID card in the
mobile phone. Mobile-ID enables the convenient but secure verification of an
individual's identity, without requiring the existence of a special card reader.
Since people always carry their mobile phones, this provides greater freedom in
the execution of Internet transactions that need the verification of an
individual's identity and the provision of digital signatures. Mobile-ID
promotes e-services that require great security, for instance, the use of
e-banking or the e-tax board, making this possible even in public Internet
points or abroad. Cooperation has already been started in Latvia and Lithuania
to develop Mobile-ID into a personal identification and electronic signature
service based on a uniform technical standard that could unite the three Baltic
countries.
During the 12 months of 2007, investments into fixed assets in the broadband
services segment reached 513 million EEK (2006: 467 million EEK). The principal
part of the investments continued to be directed at improving the availability
of permanent connections and DigiTV, the development of network resources, and
several cooperation projects with local governments to improve communications in
various corners of Estonia. Compared to 2006, significantly more was invested in
the reconstruction of space for equipment housing services. In May 2007, the
Communications Board issued a frequency license to Elion for expanding the
network of WiMax base stations throughout Estonia, thereby expanding the
opportunity to use permanent high-speed Internet connection in low-density rural
areas.
In 2007, the IT services segment invested 33 million EEK (2006: 30 million EEK),
of which 39% constituted the AS MicroLink trademarks that were acquired in the
course of the merger of the parent company AS MicroLink and Elion Enterprises
that took place within the framework of the structural changes at the Eesti
Telekom Group. The majority of the remaining investments went to the expansion
of the infrastructure necessary for the provision of services. In 2007,
MicroLink Eesti installed a cornerstone for its new 10-story headquarters that
is being constructed in the heart of Tallinn's new innovation center. The
projected cost of the building is 120 million EEK.
Balance sheet and cash flows
As of 31 December 2007, the Eesti Telekom Group balance sheet was 5,023 million
EEK (31 December 2006: 4,812 million EEK). The fixed assets of the Group have
increased by 355 million EEK during the year. The increase in fixed assets
resulted primarily from the investments made by the Group's companies. Current
assets have decreased by 144 million EEK during the year, whereas cash and cash
equivalents, as well as short-term financial investments, have decreased by 298
million EEK. The reason for the reduction in cash and short-term investments is
a dividend payment that was 69 million EEK larger than last year, income taxed
paid on dividends, and investments.
As of 31 December 2007, the Group's equity totaled 4,314 million EEK (31
December 2006: 4,113 million EEK).
As of 31 December 2007, the Eesti Telekom Group has long-term obligations of 25
million EEK
(31 December 2006: 38 million EEK) and short-term debt obligations
of 683 million EEK (31 December 2006: 660 million EEK). The Group's net debt at
the end of 2007 was -1,087 million EEK and the net debt to equity ratio was -25%
(31 December 2006: -1,383 million EEK and -34%).
The 2007 operating cash flow for the Eesti Telekom Group was 1,902 million EEK
(2006: 1,899 million EEK). The Groups cash flow into investment activities was
518 million EEK (2006: 761 million EEK). Cash flow for the acquisition of
tangible and intangible fixed assets increased during the year, reaching 861
million EEK during the last year (2006: 750 million EEK). The Eesti Telekom
Group cash flow from financing activities in 2007 was 1,311 million EEK (2006:
1,243 million EEK), of which the majority was used to pay dividends.
Personnel
As of 31 December 2007, the number of Eesti Telekom Group employees was 2,398
(31 December 2006: 2,294). The average number of employees during 2007 was 2,327
(2006: 2,206).
The number of employees in the mobile communications services segment as of 31
December 2007 was 597 (31 December 2006: 553). The number of employees has
increased in connection with the expansion of the service portfolio.
The number of employees in the broadband services segment as of 31 December 2007
was 1,533. Compared to the end of 2006, the number of employees in the group
increased by 55. The increase was primarily based on the increase of the volume
of paid services provided to clients and the contact centers created in Pärnu
and Tartu in the first half of the year.
The number of employees in the IT services segment as of 31 December 2007 was
261 (31 December 2006: 258).
The amount of wages paid to the employees of the Eesti Telekom Group in 2007
totaled 569 million EEK (2006: 484 million EEK). In the mobile communications
services segment, the employees were paid 153 million EEK (2006: 128 million
EEK). In the broadband services segment, the employees were paid 327 million EEK
(2006: 279 million EEK). In the IT services segment, the employees were paid 76
million EEK (2006: 65 million EEK)
As of 31 December 2007, the operating and upper management of the Eesti Telekom
Group included 52 people (31 December 2006: 54 people). The salaries for the
operating and upper management calculated during 2007 totaled 57 million EEK
(2006: 57 million EEK).
Structure of capital and restrictions on transfer of shares
The share capital of AS Eesti Telekom (hereinafter “Eesti Telekom“) is divided
into registered shares of one class, each with a par value of ten (10) EEK. The
shares of Eesti Telekom can be freely transferred. Each share grants its holder
one vote at the general meeting of shareholders and entitles the shareholder to
participate in the general meeting, in the distribution of profit, and in the
distribution of the remaining assets upon Eesti Telekom's liquidation, as well
as other rights provided by law. The share capital of Eesti Telekom does not
include securities that are not admitted to trading on a regulated securities
market of a member state.
The articles of association of Eesti Telekom do not prescribe any restrictions
on the transfer of shares.
Eesti Telekom has not entered into any agreements with shareholders for
restricting the transfer of shares, and nor is the Management Board of Eesti
Telekom aware of any such agreements having being entered into between the
shareholders.
As at 31.12.2007, the following shareholders have a qualifying holding in Eesti
Telekom: Baltic Tele Aktiebolag (a holding of 59.25 per cent) and the Republic
of Estonia through the Ministry of Finance and (a holding of 24.17 per cent).
Eesti Telekom has no securities granting special control rights.
Eesti Telekom has not set up any employee share schemes.
The Management Board of Eesti Telekom is not aware of any agreements on voting
rights between the shareholders. The regulation of voting rights contained in
the articles of association of Eesti Telekom does not in any way differ from
that prescribed by law. The shareholders of Eesti Telekom do not hold preferred
shares.
Management
Election of management board members. The Management Board of Eesti Telekom has
two (2) to five (5) members as decided by the Supervisory Board. According to
the articles of association, the members of the Management Board are elected by
the Supervisory Board for a term of three (3) years unless otherwise decided by
the Supervisory Board. The articles of association may not prescribe a term of
office longer than five years for the members of the Management Board. The
members of the Management Board must be residents of Estonia. In order to elect
a member of the Management Board, his or her consent is required.
The Supervisory Board appoints one member of the Management Board as the
Chairman of the Management Board. The Chairman of the Management Board is the
chief executive officer of Eesti Telekom. The Supervisory Board defines the
allocation of duties and responsibilities among the members of the Management
Board and the chief executive officer.
Extension of the term of office of a member of the Management Board may not be
decided earlier than one year before the planned date of expiry of the term of
office, and not for a period longer than the maximum term of office prescribed
by the articles of association. A decision for extension of the term of office
of a member of the Management Board entered in the commercial register must be
immediately sent to the registrar of the commercial register.
Appointment of Management Board members. With good reason, a court may appoint a
new member of the Management Board to replace a withdrawn member of the
Management Board on the petition of the Supervisory Board, a shareholder or
other interested person. The authority of the court-appointed member of the
Management Board will continue until appointment of a new member of the
Management Board by the Supervisory Board. A member of the Management Board
appointed by a court has the right, at the company's expense, to be compensated
for his or her costs to a reasonable extent and to receive a reasonable fee, the
amount of which shall be established, in the case of dispute, by a court ruling.
Resignation of Management Board members. A member of the Management Board may
resign from the Management Board with good reason if he or she gives notice of
his or her resignation to the Supervisory board and, if this is impossible,
submits a relevant application to the registrar of the commercial register.
Removal of Management Board members. The Supervisory Board may remove a member
of the Management Board regardless of the reason, but the rights and obligations
arising from a contract concluded with him or her will terminate pursuant to the
contract.
The Chairman of the Supervisory Board or a person authorised by him or her must
sign a petition for entry of expiry of the authority of a member of the
Management Board or for entry of a new member of the Management Board in the
register. The corresponding minutes of the meeting of the Supervisory Board must
be appended to the petition.
The general meeting of shareholders of Eesti Telekom has the authority to amend
the articles of association. A resolution on amendment of the articles of
association is adopted by the general meeting if at least two-thirds of the
votes represented at the general meeting are in favour. A resolution on
amendment of the articles of association will enter into force as of the making
of a corresponding entry in the commercial register.
The Management Board of Eesti Telekom is a directing body of the company that
represents and directs the company. The Management Board must, in directing,
adhere to the lawful orders of the Supervisory Board. The Management Board is
required to act in the most economically purposeful manner. Transactions that
are beyond the scope of everyday economic activities may only be concluded by
the Management Board with the consent of the Supervisory Board; however, the
lack of such consent does not render the concluded transactions invalid.
Either the Chairman of the Management Board alone or two members of the
Management Board jointly may represent Eesti Telekom and sign documents on
behalf of Eesti Telekom.
Issue and buyback of shares
Members of the Management Board of Eesti Telekom do not have the authority to
issue shares; only the general meeting of shareholders is entitled to issue
shares. The Management Board of Eesti Telekom may represent Eesti Telekom in a
transaction whereby the shares of Eesti Telekom are acquired
upon a resolution of the general meeting, provided that:
this occurs within one year after adoption of a resolution of the general
meeting which specifies the terms and conditions and term for the acquisition or
taking as security of shares and the sums to be paid for the shares;
the sum of the nominal values of the shares held or taken as security by the
company does not exceed one-tenth of the share capital; and
the shares are paid for from assets exceeding the share capital, reserve capital
and premium;
upon a resolution of the Supervisory Board without a resolution of the general
meeting if the acquisition of shares is necessary to prevent significant damage
to the company. The shareholders must be informed of the circumstances
surrounding and the details of the acquisition of shares at the next general
meeting of shareholders;
without the restrictions set forth above if the shares are acquired by
succession.
The annual general meeting of shareholders held on 22 May 2007 granted a right
to Eesti Telekom to acquire shares of Eesti Telekom within one year as of
adoption of the resolution (i.e. until 22 May 2008) in such a way that the sum
of the nominal values of the shares held by Eesti Telekom does not exceed the
limit prescribed by law (i.e. 10%) and that the amount paid for a share does not
exceed the highest price paid for that share on the Tallinn Stock Exchange on
the day of acquiring the share. Eesti Telekom may pay for the shares from the
company's assets exceeding the share capital, reserve capital and premium. The
number of shares to be acquired in a certain transaction will be determined
separately before each purchase transaction by a resolution of the Supervisory
Board of Eesti Telekom.
Effects of takeover bids
Eesti Telekom has not entered into agreements with the Management Board or
employees containing provisions on payment of compensation in the case of a
takeover bid.
Eesti Telekom has not entered into agreements that take effect, alter or
terminate upon a change of control of the company following a takeover bid in
accordance with the provisions of chapter 19 of the Securities Market Act.
Report on Corporate Governance
As from 1 January 2006, AS Eesti Telekom (“Eesti Telekom”) follows the
instructions of the Estonian Principles of Corporate Governance (“the
Principles”). This report describes the management of Eesti Telekom in 2007 and
its conformity with the Principles. In 2007, Eesti Telekom believes it adhered
to the Principles except in the cases noted in this report.
Eesti Telekom
Eesti Telekom is a public limited company registered in the Republic of Estonia,
at Valge 16, 19095 Tallinn, with the registry code of 10234957. The share
capital of Eesti Telekom in 2007 was 1,379,545,280 EEK, which is divided into
registered shares of a single type with a nominal value of 10 EEK. Eesti Telekom
shares are listed on the main list of the Tallinn Stock Exchange (Baltic Main
List), with the abbreviation ETLAT. The Eesti Telekom share register is
maintained by the registrar of the Estonian Central Register of Securities.
Eesti Telekom has approximately 3500 shareholders. In addition, the global
depositary receipts (GDR) of Eesti Telekom shares are listed on the Main Market
of the London Stock Exchange, with the abbreviation EETD. Every Eesti Telekom
GDR represents three Eesti Telekom shares.
General Meeting
The highest management body of Eesti Telekom is the shareholders' general
meeting. General meetings can be annual or extraordinary. The authority of the
general meeting is defined by the Estonian Commercial Code and the Eesti Telekom
articles of association (the articles of association are available on the Eesti
Telekom website at www.telekom.ee). Among other things, the authority of the
general meeting includes amending the Eesti Telekom articles of association,
approving the annual report, distributing the profits, and electing the members
of the Supervisory Board.
Exercise of the Rights of Shareholders
Each Eesti Telekom share provides one vote at the general meeting and
shareholders can participate in general meetings and vote at the meetings
personally or through representatives. Usually, the general meeting has the
authority to pass resolutions if more than half the votes represented by shares
are present. Resolutions of the general meeting are passed if over half the
votes represented at the general meeting are in favor, except in certain cases
(e.g. amending the articles of association, increasing and reducing share
capital, issuing convertible bonds, and the merger, division, reorganization,
and termination of Eesti Telekom), in which case the resolution is passed if at
least 2/3 of the votes represented at the general meeting are in favor.
On 6 February 2007, an extraordinary shareholders' meeting took place based on
the application of Eesti Telekom shareholder Baltic Tele AB, which recalled
three members of the Eesti Telekom Supervisory Board and elected three new
members to replace them. The recall of the Supervisory Board members was related
to internal structural changes at TeliaSonera AB, the parent company of Baltic
Tele AB, which caused changes in the work assignments of some of the TeliaSonera
employees who were members of the Eesti Telekom Supervisory Board, thereby
making the performance of their assignments as Supervisory Board members more
difficult. 89.93% of the votes represented by shares were present at the general
meeting, and therefore the meeting had the authority to pass resolutions.
In 2007, the shareholders' annual general meeting took place on 22 May. The
meeting approved the 2006 Annual Report and proposal for the distribution of
profits, amended the Eesti Telecom articles of association, approved the
conditions for the repurchase of Eesti Telekom shares, recalled the members of
the Eesti Telekom Supervisory Board and elected new members, approved the
procedure for the remuneration of Supervisory Board members, chose the Eesti
Telekom auditor for the 2007 financial year, and approved the procedure for
paying for auditing services, deciding that the provision of auditing services
and payment for those services shall be regulated by an agreement to be signed
with the auditor. 87.94% of the votes represented by shares were present at the
annual general meeting, and therefore the meeting had the authority to pass
resolutions.
On 6 September 2007, an extraordinary shareholders' meeting took place based on
the application of Eesti Telekom shareholder Baltic Tele AB, which recalled one
member of the Eesti Telekom Supervisory Board and elected one new member to
replace him. The recall of the Supervisory Board member was related to the
termination of his employment relationship with TeliaSonera AB Group, the parent
company of Baltic Tele AB, making the performance of his assignments as a
Supervisory Board member more difficult. 83.43% of the votes represented by
shares were present at the general meeting, and therefore the meeting had the
authority to pass resolutions.
Calling of the General Meeting and Publishing of Information
The Eesti Telekom Management Board announces the convening of a general meeting
at least three weeks in advance in the case of an annual meeting and at least
one week in advance in the case of an extraordinary meeting, by publishing a
corresponding notice in at least one newspaper with national circulation in the
Republic of Estonia.
A notice regarding the extraordinary general meeting to be held on 6 February
2007 was published in the Postimees on 12 January 2007 and through the Tallinn
Stock Exchange information system on
11 January 2007. A notice calling the 2007
annual general meeting was published in the Postimees on 20 April 2007 and
through the Tallinn Stock Exchange information system on 19 April 2007. A notice
regarding the extraordinary general meeting to be held on 6 September 2007 was
published on 28 August 2007 both in the Postimees and through the Tallinn Stock
Exchange information system. No questions were asked regarding the agendas
presented in the given notices and no supplementary proposals were made.
Therefore, as regards the general meetings of Eesti Telekom, the Principles were
followed in 2007, except for the rule prescribed by clause 1.3.2. of the
Principles. Pursuant to the given clause, the candidates for Supervisory Board
member who have not previously been members of the issuer's Supervisory Board
will participate in the general meeting. Jüri Raatma, a candidate for
Supervisory Board member, did not participate in the 2007 annual general meeting
for reasons not related to Eesti Telekom. Lars Klasson, a candidate for
Supervisory Board member, did not participate in the extraordinary general
meeting held on 6 September 2007 for reasons not related to Eesti Telekom.
Supervisory Board
Duties
The Supervisory Board plans the activities of Eesti Telekom, elects the members
of the Management Board, and executes supervision over the activities of the
Management Board. In conformity with the Eesti Telekom articles of association,
the Supervisory Board makes decisions regarding the company's activities in
significant fields of activity and questions that are not under the sole
authority of the general meeting according to the law or articles or association
and which are outside the framework of the company's everyday economic
activities (i.e. approval of budgets and business plans, resolving
organizational issues related to Eesti Telekom and its group, etc.).
Members and Remuneration
Pursuant to the articles of association, the Eesti Telekom Supervisory Board
comprises six to ten members who are elected by the general meeting for a term
of two years. Until 22 May 2007, the Eesti Telekom Supervisory Board included
the following people: Terje Christoffersen, Anders Gylder, Jörgen Latte, Tarmo
Porgand, Mats Salomonsson, Aare Tark, and Heido Vitsur. As from 22 May 2007, the
following people comprised the Eesti Telekom Supervisory Board: Terje
Christoffersen, Anders Gylder, Jörgen Latte, Tarmo Porgand, Mats Salomonsson,
Aare Tark, and Jüri Raatma. At the extraordinary general meeting of the
shareholders of Eesti Telekom held on 6 September 2007, Terje Christoffersen was
recalled from the Supervisory Board and Lars Klasson was elected as a new
member.
The term of office of the current members will expire on the following dates: on
22 May 2009 in the case of Anders Gylder, Jörgen Latte, Tarmo Porgand, Mats
Salomonsson, Aare Tark, and Jüri Raatma; and on
6 September 2009 in the case of
Lars Klasson.
The following Supervisory Board members are associated with the Swedish company
TeliaSonera AB that controls Eesti Telekom: Lars Klasson, Anders Gylder, Jörgen
Latte, and Mats Salomonsson. The Supervisory Board member, Aare Tark, has had
business connections (provision of legal services) with Eesti Telekom through a
company controlled by him, but the company providing the services did not
receive a significant amount of compensation for the services and therefore Aare
Tark can be considered an independent member of the Supervisory Board.
The members of the Supervisory Board will elect a Chairman from among
themselves. Until 6 February 2007, Erik Hallberg acted as Chairman of the
Supervisory Board. At the Supervisory Board meeting held on the same day, the
Supervisory Board elected Terje Christoffersen as the new Chairman. Terje
Christoffersen was the Chairman until 6 September 2007. At the Supervisory Board
meeting held on 20 September 2007, Mats Salomonsson was elected as the new
Chairman of the Supervisory Board.
Remuneration for the work of the members of the Supervisory Board was paid
according to the resolution of the 2007 annual shareholders' meeting. In 2007,
the monthly payment for the Chairman of the Supervisory Board was 20,000 EEK and
9,000 EEK for the members of the Supervisory Board, and the actual costs
incurred by the members of the Supervisory Board related to the performance of
their obligations were compensated.
Activities
The work of the Eesti Telekom Supervisory Board (location, meetings,
resolutions, and minutes of the Supervisory Board) is organized according to the
Supervisory Board regulations approved by them. In 2007, the Supervisory Board
held eleven meetings. The Management Board presented reports to the Supervisory
Board on the economic activities and financial status of the Eesti Telekom Group
on a regular basis. The Supervisory Board was provided a summary of the topics
discussed by the Auditing Committee and the Committee on Remuneration and
Appointments, including the results of the audits conducted by the internal and
external auditors. During 2007, the Supervisory Board approved the 2006 Annual
Report, the bonuses to be paid to the top management of the Eesti Telekom Group
for 2006, the Group's business plan for 2008-2009, the Group's budget for 2008
and the motivational system for the top management of the Group for 2008, drew
up the agendas for the general meetings of shareholders, approved the
restructuring of the Eesti Telekom Group and acquisition of AS MicroLink Eesti
from Elion Ettevõtted AS, and decided on recalling and election of Management
Board members and signing of contracts of service with Management Board members.
Conflict of Interests
Pursuant to the law and the articles of association, decisions regarding
transactions between members of the Supervisory Board and Eesti Telekom are
under the authority of the general meeting, and the members of the Supervisory
Board may not compete with Eesti Telekom without the permission of the
shareholders' general meeting. Until the compilation of this report, the members
of the Supervisory Board have not notified the Eesti Telekom Management Board of
any cases of conflict of interests in 2007.
Hence, as regards the work of the Supervisory Board of Eesti Telekom, the
Principles were adhered to in 2007.
Management Board
Duties
The Management Board is the Eesti Telekom management body that deals with the
management of everyday economic activities and the representation of Eesti
Telekom. Eesti Telekom may be represented in all legal acts by Valdo Kalm alone
or two Management Board members jointly. For the achievement of Eesti Telekom's
objectives, the Management Board analyzes the risks related to Eesti Telekom's
activities and financial targets. By its resolution, the Management Board of
Eesti Telekom has established the Eesti Telekom Group's rules for handling of
inside information and other internal rules, e.g. accounting policies and
procedures. The Management Board must comply with the legitimate regulations of
the Supervisory Board. In 2007, there was a constant exchange of information
between the Management Board and Supervisory Board of Eesti Telekom; among other
things, the Management Board submitted reviews on the economic activities and
financial status of the Eesti Telekom Group to the Supervisory Board on a
regular basis.
Members and Remuneration
According to the Eesti Telekom articles of association, the Supervisory Board
may elect two to five members to the Management Board. The members of the
Management Board are elected for three years with the option of extending the
term. The Supervisory Board appoints one Management Board member as the
Chairman, who also acts as the company's Managing Director. As at 1 January
2007, the members of the Management Board of Eesti Telekom were Jaan Männik (the
Chairman), Valdo Kalm, and Hille Võrk.
In pursuance of a resolution of the Eesti Telekom Supervisory Board, dated 5
December 2006, Valdo Kalm took over the position of the Chairman of Eesti
Telekom's Management Board from the former Chairman, Jaan Männik, after the
annual shareholders' meeting of Eesti Telekom held on 22 May 2007. By a
resolution adopted on the same day, the Supervisory Board also decided to recall
Jaan Männik from the position of a Management Board member as from 22 May 2007.
On 18 April 2007, the Supervisory Board of Eesti Telekom decided to elect the
following new members to the Management Board of Eesti Telekom as from 1 July
2007: Leho Tamm, Valdur Laid, and Enn Saar. By a resolution adopted on the same
day, the Supervisory Board decided to recall the former Management Board member,
Hille Võrk, from the Management Board as from 1 July 2007.
The term of office of the current members will expire on the following dates: on
1 January 2010 in the case of Valdo Kalm; and on 1 July 2010 in the case of Leho
Tamm, Valdur Laid, and Enn Saar.
The salaries and severance pay of the members of the Management Board, and the
payment conditions are determined by the contracts of service concluded with the
members of the Management Board. The bonus system for members of the Management
Board is approved annually by a resolution of the Supervisory Board. Upon the
achievement of the maximum level of the objectives for 2007, the members of the
Management Board would receive a bonus equal to six months' salary. The retired
Chairman of the Management Board, Jaan Männik, also has a pension agreement with
Eesti Telekom. In 2007, Eesti Telekom did not comply with clause 2.2.7 of the
Principles, which provides for disclosing the benefits and bonus system of each
member of the Management Board on the website and in this report, as well as the
presentation of the principles for the remuneration of the members of the
Management Board at the general meeting. On 13 December 2005, the Eesti Telekom
Supervisory Board decided that, at that time, the disclosure of such information
was not in the interests of the Eesti Telekom Group and it would not provide an
adequate overview of the motivational system for the Group's top management.
Currently, there are no share option programs in the Eesti Telekom Group.
Conflict of Interests
Pursuant to the law and the articles of association, transactions between
members of the Management Board and Eesti Telekom must be approved by the
Supervisory Board, and members of the Management Board may not compete with
Eesti Telekom without the permission of the Supervisory Board. Until the
compilation of this report, the members of the Management Board have not
notified the Eesti Telekom Management Board of any cases of conflict of
interests in 2007.
Therefore, in 2007, the Principles were followed in the work of the Eesti
Telekom Management Board, except for the rule prescribed by clause 2.2.7 of the
Principles.
Control Functions and Auditing
In addition to a reporting system and procedures for risk management, the Eesti
Telekom Supervisory Board and Management Board have established various control
functions.
Auditing Committee
The Auditing Committee helps the Supervisory Board to perform its supervisory
function. Until 6 February 2007, the Committee members were Mats Salomonsson
(Committee Chairman), Hans Tuvehjelm, and Tarmo Porgand. As from 6 February
2007, Jörgen Latte is a member of the Committee instead of Hans Tuvehjelm.
During 2007, the Committee met 7 times.
External Auditors
According to the articles of association, the auditor(s) are chosen by the
general meeting. In 2007, the Eesti Telekom auditor was AS
PricewaterhouseCoopers. AS PricewaterhouseCoopers audited all the companies in
the Eesti Telekom Group and submitted the auditor's report to the general
meeting. The auditors also informed the Auditing Committee and Management Boards
of the Group's companies of their observations.
Internal Control
Since April 2002, the internal control service has been outsourced from AS
Deloitte & Touche Audit. The Audit Committee and Deloitte agree upon the extent
of the internal control projects once a year. Deloitte reports on the completed
work to the Audit Committee.
Committee on Remuneration and Appointments
The principal function of the Committee on Remuneration and Appointments is to
harmonize the remuneration principles for the top management of the Eesti
Telekom Group and to make proposals for the appointment of Supervisory Board
members and their remuneration. Until 6 February 2007, Erik Hallberg (Committee
Chairman), Bengt Andersson, and Aare Tark were the members of the Committee. As
from 6 February 2007, the Committee comprised the following members: Terje
Christoffersen (Committee Chairman), Anders Gylder, and Aare Tark. By its
resolution of 20 September 2007, the Supervisory Board of Eesti Telekom elected
Mats Salomonsson as the new Chairman of the Committee. During 2007, the
Committee met 4 times.
Disclosure of Information
The information required by the Principles is available on the Eesti Telekom
website www.telekom.ee, including the financial calendar, articles of
association, financial reports, information on presentations and meeting with
analysts, information on the members of the Supervisory Board and Management
Board, the auditors, and other information. Therefore, in 2007, Eesti Telekom
complied with the Principles in terms of the disclosure of information.
Financial Reporting
Eesti Telekom prepares its accounting reports in accordance with the
International Financial Reporting Standards as adopted by the European Union
(IFRS). In respect to the disclosure of financial reporting, Eesti Telekom
proceeds from the provisions of the law and the regulations of the Tallinn Stock
Exchange.
--------------------------------------------------------------------------------
| Interim report | Interim report | Interim report | Interim report for |
| for the first | for the second | for the third | 2007 and the fourth |
| quarter of | quarter and first | quarter and nine | quarter of 2007 |
| 2007 | half-year of 2007 | months of 2007 | |
--------------------------------------------------------------------------------
| 19 April 2007 | 19 July 2007 | 19 October 2007 | 6 February 2008 |
--------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENT
In thousands of Estonian kroons (EEK)
--------------------------------------------------------------------------------
| | Year ended 31 December |
--------------------------------------------------------------------------------
| | 2007 | 2006 |
--------------------------------------------------------------------------------
| Revenue | 6,261,002 | 5,767,734 |
--------------------------------------------------------------------------------
| Cost of sales | (3,542,791) | (3,260,113) |
--------------------------------------------------------------------------------
| Gross profit | 2,718,211 | 2,507,621 |
--------------------------------------------------------------------------------
| Sales, administrative and research & | (900,011) | (908,854) |
| development | | |
| expenses | | |
--------------------------------------------------------------------------------
| Other operating income | 28,114 | 53,011 |
--------------------------------------------------------------------------------
| Other operating expenses | (6,336) | (5,405) |
--------------------------------------------------------------------------------
| Operating profit | 1,839,978 | 1,646,373 |
--------------------------------------------------------------------------------
| Finance income | 48,626 | 42,768 |
--------------------------------------------------------------------------------
| Finance costs | (2,342) | (1,950) |
--------------------------------------------------------------------------------
| Finance income, net | 46,284 | 40,818 |
--------------------------------------------------------------------------------
| Share of profit/(loss) from associates | (3,817) | 193 |
--------------------------------------------------------------------------------
| Profit before tax | 1,882,445 | 1,687,384 |
--------------------------------------------------------------------------------
| Income tax on dividends | (370,897) | (373,377) |
--------------------------------------------------------------------------------
| Net profit for the period | 1,511,548 | 1,314,007 |
--------------------------------------------------------------------------------
| Attributable to: | | |
--------------------------------------------------------------------------------
| Equity holders of the Company | 1,505,098 | 1,309,443 |
--------------------------------------------------------------------------------
| Minority interest | 6,450 | 4,564 |
--------------------------------------------------------------------------------
| | 1,511,548 | 1,314,007 |
--------------------------------------------------------------------------------
| Earnings per share for profit | | |
| attributable to the equity holders of | | |
| the Company during the year | | |
--------------------------------------------------------------------------------
| Basic earnings per share (in EEK) | 10.91 | 9.49 |
--------------------------------------------------------------------------------
| Diluted earnings per share (in EEK) | 10.91 | 9.49 |
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
In thousands of Estonian kroons (EEK)
--------------------------------------------------------------------------------
| | As at 31 December |
--------------------------------------------------------------------------------
| | 2007 | 2006 |
--------------------------------------------------------------------------------
| ASSETS | | |
--------------------------------------------------------------------------------
| Non-current assets | | |
--------------------------------------------------------------------------------
| Property, plant and equipment | 2,405,114 | 2,044,595 |
--------------------------------------------------------------------------------
| Intangible assets | 216,011 | 214,046 |
--------------------------------------------------------------------------------
| Investments in associates | 13,422 | 17,247 |
--------------------------------------------------------------------------------
| Other non-current receivables | 115,059 | 119,139 |
--------------------------------------------------------------------------------
| Total non-current assets | 2,749,606 | 2,395,027 |
--------------------------------------------------------------------------------
| Current assets | | |
--------------------------------------------------------------------------------
| Assets classified as held-for-sale | 1,732 | 771 |
--------------------------------------------------------------------------------
| Inventories | 187,573 | 142,692 |
--------------------------------------------------------------------------------
| Trade and other receivables | 992,939 | 884,212 |
--------------------------------------------------------------------------------
| Short-term investments | 694,040 | 1,064,859 |
--------------------------------------------------------------------------------
| Cash and cash equivalents | 396,778 | 324,405 |
--------------------------------------------------------------------------------
| Total current assets | 2,273,062 | 2,416,939 |
--------------------------------------------------------------------------------
| TOTAL ASSETS | 5,022,668 | 4,811,966 |
--------------------------------------------------------------------------------
| EQUITY AND LIABILITIES | | |
--------------------------------------------------------------------------------
| Capital and reserves attributable | | |
| to equity holders of the Company | | |
--------------------------------------------------------------------------------
| Share capital | 1,379,545 | 1,379,545 |
--------------------------------------------------------------------------------
| Share premium | 356,018 | 356,018 |
--------------------------------------------------------------------------------
| Statutory legal reserve | 137,955 | 137,955 |
--------------------------------------------------------------------------------
| Retained earnings | 2,429,361 | 2,234,831 |
--------------------------------------------------------------------------------
| Total capital and reserves | 4,302,879 | 4,108,349 |
| attributable to equity holders of | | |
| the Company | | |
--------------------------------------------------------------------------------
| Minority interest | 11,480 | 5,030 |
--------------------------------------------------------------------------------
| Total capital and reserves | 4,314,359 | 4,113,379 |
--------------------------------------------------------------------------------
| Non-current liabilities | | |
--------------------------------------------------------------------------------
| Interest bearing loans and | 1,343 | 3,124 |
| borrowings | | |
--------------------------------------------------------------------------------
| Retirement benefit obligations | 3,239 | 7,912 |
--------------------------------------------------------------------------------
| Provisions | 20,673 | 22,124 |
--------------------------------------------------------------------------------
| Non-interest bearing liabilities | - | 5,152 |
--------------------------------------------------------------------------------
| Total non-current liabilities | 25,255 | 38,312 |
--------------------------------------------------------------------------------
| Current liabilities | | |
--------------------------------------------------------------------------------
| Trade and other payables | 670,989 | 651,365 |
--------------------------------------------------------------------------------
| Interest bearing loans and | 2,778 | 2,742 |
| borrowings | | |
--------------------------------------------------------------------------------
| Retirement benefit obligations | 4,814 | 865 |
--------------------------------------------------------------------------------
| Provisions | 4,473 | 5,303 |
--------------------------------------------------------------------------------
| Total current liabilities | 683,054 | 660,275 |
--------------------------------------------------------------------------------
| Total liabilities | 708,309 | 698,587 |
--------------------------------------------------------------------------------
| TOTAL EQUITY AND LIABILITIES | 5,022,668 | 4,811,966 |
--------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
In thousands of Estonian kroons (EEK)
--------------------------------------------------------------------------------
| | Year ended 31 December |
--------------------------------------------------------------------------------
| | 2007 | 2006 |
--------------------------------------------------------------------------------
| Net cash from operating activities | 1,902,001 | 1,898,514 |
--------------------------------------------------------------------------------
| Cash flows from investing activities | | |
--------------------------------------------------------------------------------
| Tangible and intangible fixed assets | (861,490) | (749,876) |
| acquired | | |
--------------------------------------------------------------------------------
| Proceeds from sale of tangible and | 14,768 | 49,599 |
| intangible fixed assets | | |
--------------------------------------------------------------------------------
| Acquisition of business net of cash | (4,934) | (97,591) |
| acquired and settlements of deferred | | |
| consideration | | |
--------------------------------------------------------------------------------
| Acquisition of associates | - | (14,100) |
--------------------------------------------------------------------------------
| Net cash changes of short-term investments | 369,746 | 177,785 |
--------------------------------------------------------------------------------
| Net cash changes of other long-term | (36,073) | (130,548) |
| receivables | | |
--------------------------------------------------------------------------------
| Repayments of loans granted to associates | - | 4,100 |
--------------------------------------------------------------------------------
| Net cash used in investing activities | (517,983) | (760,631) |
--------------------------------------------------------------------------------
| Cash flow before financing activities | 1,384,018 | 1,137,883 |
--------------------------------------------------------------------------------
| Cash flows from financing activities | | |
--------------------------------------------------------------------------------
| Dividends paid | (1,310,568) | (1,241,591) |
--------------------------------------------------------------------------------
| Repayments of finance lease liabilities | (1,819) | (1,704) |
--------------------------------------------------------------------------------
| Proceeds from non-convertible debts | 1,020 | - |
--------------------------------------------------------------------------------
| Net cash used in financing activities | (1,311,367) | (1,243,295) |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents | 72,651 | (105,412) |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash and cash equivalents at beginning of | 324,405 | 430,393 |
| year | | |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents | 72,651 | (105,412) |
--------------------------------------------------------------------------------
| Effect of foreign exchange rate changes | (278) | (576) |
--------------------------------------------------------------------------------
| Cash and cash equivalents at end of year | 396,778 | 324,405 |
--------------------------------------------------------------------------------
