General information Merko Ehitus is a leading building corporation offering integral solutions, with branches currently in Estonia, Latvia and Lithuania. Merko Ehitus has been in business since 1990. The Group consists of 32 subsidiaries and 7 associates and joint ventures the largest of which are: SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%), OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%). In 2006, the following important changes took place in the Group's structure. • In February AS Merko Ehitus sold a 12% holding in the associated company AS Telegrupp for 1847 thousand kroons. In June, the remaining 19% holding in AS Telegrupp was sold for 3004 thousand kroons. • In July AS Merko Ehitus sold a 25% holding in the subsidiary AS Gustaf for 5125 thousand kroons. • In December a Latvian subsidiary of AS Merko Ehitus SIA Merks sold its 100% holding in a trading company SIA Arena Riga, as a non-related operating area to primary activities. The sales price was 17.61 million euros. • In December AS Merko Ehitus sold its 100% holding in a trading company OÜ Rannamõisa Kinnisvara for 31.89 million kroons. Regarding the whole Group, the sales transaction is considered as sale of real estate. Business operations The revenue from sales of Merko Ehitus Group for 12 months in 2006 was 4414.4 million kroons, with a 36.6% rise within a year. The capacity of activities carried out outside Estonia rise from 24.5% to 36.7% of the Group's revenue from sales. 63.3% of revenue from sales was earned in Estonia, 23.9% in Latvia and 12.8% in Lithuania. Compared to 2005 the revenue from sales grew 14.5% in Estonia, 88.5% in Latvia and 144.4% in Lithuania. In 4th quarter of 2006 the Group's revenue from sales was 1343.3 million kroons, which exceeded the numbers of 2005 for the same period by 77.7%, which is 587.5 million kroons more. The seasonal and cyclical influence of the construction activities for Group's 4th quarter's revenues was insignificant. Companies of the Group 12M 2006 consolidated net sales (sales outside the Group) were (in thousand kroons and euros): 12M 2006 12M 2005 EEK EUR EEK EUR Estonian companies Construction AS Merko Ehitus (parent company) 1 789 157 114 348 1 779 827 113 752 AS Gustaf (75% partnership) 97 049 6 203 60 922 3 894 OÜ Gustaf Tallinn (80% partnership) 124 068 7 929 77 555 4 957 AS Merko Tartu (66% partnership) 255 769 16 347 232 972 14 890 Tallinna Teede AS (100% partnership) 317 591 20 298 204 005 13 038 OÜ Woody (100% partnership) 306 354 19 580 106 080 6 780 Latvian companies Construction SIA Merks (100% partnership) 973 636 62 227 545 068 34 836 Lithuanian companies Construction UAB Merko Statyba (100% partnership) 507 309 32 423 208 850 13 348 Due to the growth of capacities, rise in prices for work labor and materials, the expense for the output grew 36.1% within a year constituting 84.4% from sales. Marketing and administrative expenses grew 14.5%, constituting 3.9% from sales. Despite the rapid rise of expenses for work labor and materials and also intensive situation in labor market, the company managed to maintain the total profit margin on a 15.6% level from sales and rise the operating profit margin from 13.5% to 14.3% from revenue. The Group's net profit for 12 months was 581.7 million kroons. 125.1 million kroons from net profit was earned as extraordinary profit from sales of shareholdings, 284.7 million kroons from development activities, 164.2 million from construction activities and 7.7 million kroons from financing activities. The benefit-cost ratio of the net profit without extraordinary profit was 10.3% and profit margin for construction activities 4.6%. The Group's net profit grew by 32.6% within a year and profit earned outside Estonia grew by 155.9%. For the first time the net profit of Latvian and Lithuanian units (252.7 million kroons) exceeded parent company AS Merko Ehitus' 218.1 million kroons profit. The net profit of the Group for 4th quarter of 2006 was 246.5 million kroons, with a yearly growth of 82.1%. Construction market 4th quarter did not bring significant changes in the construction landscape, the demand in the sector was good and the construction market grew strongly in all three Baltic States. In market prices, the growth of the construction sector during the last 9 months amounted to 37.9% in Estonia, 38.5% in Latvia and 31.2% in Lithuania according to the Statistical Offices. Constantly increasing construction prices contributed significantly to this growth. Rapidly increasing volumes have affected the availability of workforce and building materials, and have also boosted the rise of construction costs. As compared to the fourth quarter in 2005, construction costs increased by 25.0% in Latvia, 13.7% in Estonia and 9.9% in Lithuania including the respective 41.1% and 25.2% increase in labour costs in Latvia and Estonia. The deficit for work labor and construction details as well rapid growth in real estate prices will still be biggest challenges for the development of the sector. Rapid growth brings instability to the sector; the risk for due date and post-budget construction rises. In short term perspective the demand exceeds offerings and the growth in construction sector exceeds the economic growth. In middle term perspective the rapid growth of prices of construction services and according to economy analysts' predictions the slackening of economic growth can have a negative effect on the demand and the growth in building sector might slow down. The ratios and calculation methods characterizing the operating activities of the Group were as follows: 12M 2006 12M 2005 Net profit margin * 10.2 % 9.0 % Operating profit margin 14.3 % 13.5 % Return on equity per annum 43.2 % 48.2 % Return on assets per annum 21.4 % 24.9 % Current ratio 2.0 2.0 Equity ratio 49.6 % 49.6 % General expenses to net sales 3.9 % 4.6 % Staff costs to net sales 8.0 % 7.3 % Average number of full-time employees 850 695 * less extraordinary profit Net profit margin: Net profit / Sales Operating profit margin: Operating profit / Sales Return on equity: Net profit x 4/3* / Average equity during the period* Return on assets: Net profit x 4/3* / Average assets during the period Current ratio: Current assets / Current liabilities Equity ratio: Owners equity* / Total assets General expenses to net sales: General expenses / Sales Staff costs to net sales: Staff costs / Sales * calculated from the share of the parent company's shareholders In 31.12.2006, the average number of full-time employees in the Group's service was 850, having increased by 9 employees in last quarter and by 155 employees in last year. The gross salaries paid to full-time personnel amounted to 276.5 million kroons, an increase of 59.0% compared to the year 2005. Shares and shareholders AS Merko Ehitus biggest shareholders as of 31.12.2006 No. of shares Ownership AS Merko Grupp 12 742 686 71.99% ING Luxembourg S.A. 1 214 700 6.86% Skandinaviska Enskilda Banken Ab, clients 789 365 4.46% Nordea Bank Finland Plc, clients 503 172 2.84% OKO Bank Plc, clients 248 594 1.40% J.P. Morgan Bank Luxembourg S.A. 189 306 1.07% The shares of Merko Ehitus are listed in the main list of Tallinn Stock Exchange. In 2006 the number of transactions with Merko Ehitus' shares was 3589, during which 3.4 million shares changed ownership and the turnover of the transactions was 832.6 million kroons. The cheapest bargain with a share was 197.46 kroons and highest 326.23 kroons per share. The closing share price with a state of 29.12.2006 was 307.46 kroons. 31.12.2006 31.12.2005 +/- No. of shares, thousand pcs 17 700 17 700 Earnings per share (EPS), in kroons 32.87 24.78 +32.6% Equity per share, in kroons 90.05 62.23 +44.7% P/B (share price to equity per share) 3.41 4.34 -21.4% P/E (share price / earnings per share) 9.35 10.89 -14.1% INCOME STATEMENT IV quarter 2006 consolidated, unaudited in thousand EEK and EUR EEK EUR IVq 2006 IVq 2005 IVq 2006 IVq 2005 Sales 1 343 319 755 843 85 854 48 307 Cost of goods sold (1 131 204) (663 648) (72 297) (42 415) GROSS PROFIT 212 115 92 195 13 557 5 892 Marketing expenses (7 921) (7 146) (506) (457) Administrative and general expenses(51 824) (43 965) (3 312) (2 810) Other operating income 133 435 89 115 8 528 5 695 Other operating expenses (14 485) (2 739) (926) (175) OPERATING PROFIT 271 320 127 460 17 341 8 145 Financial income and expenses from stocks of subsidiaries 0 2 356 0 151 Financial income and expenses from stocks of associate companies and joint ventures 5 346 5 274 342 337 Financial income and expenses from other long-term financial investments 0 11 0 1 Interest expense (4 023) 593 (257) 38 Foreign exchange gain (2 298) (1 693) (147) (108) Other financial income and expenses 3 046 887 195 57 Total financial income and expenses 2 071 7 428 133 476 PROFIT BEFORE TAX 273 391 134 888 17 474 8 621 Corporate income tax expense (24 264) 4 598 (1 551) 294 NET PROFIT FOR CURRENT PERIOD 249 127 139 486 15 923 8 915 incl. net profit attributable to equity holders of the parent company 246 463 135 374 15 752 8 652 minority interest 2 664 4 112 171 263 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 13,92 7,65 0,89 0,49 INCOME STATEMENT 01.01.2006-31.12.2006 consolidated, unaudited in thousand EEK and EUR EEK EUR 2006 2005 2006 2005 Sales 4 414 361 3 232 392 282 129 206 588 Cost of goods sold (3 727 561) (2 738 714) (238 234) (175 036) GROSS PROFIT 686 800 493 678 43 895 31 552 Marketing expenses (23 390) (22 595) (1 495) (1 444) Administrative and gener. expenses(148 654) (127 632) (9 501) (8 157) Other operating income 148 067 185 052 9 463 11 827 Other operating expenses (29 952) (93 452) (1 914) (5 973) OPERATING PROFIT 632 871 435 051 40 448 27 805 Financial income and expenses from stocks of subsidiaries 2 326 7 499 149 479 Financial income and expenses from stocks of associate companies and joint ventures 17 461 19 632 1 116 1 255 Financial income and expenses from other long-term financial investments 7 11 0 1 Interest expense (14 288) (2 418) (913) (155) Foreign exchange gain (6 064) (2 277) (388) (145) Other financial income and expenses 8 291 6 226 530 398 Total financial income and expenses 7 733 28 673 494 1 833 PROFIT BEFORE TAX 640 604 463 724 40 942 29 638 Corporate income tax expense (49 913) (18 437) (3 190) (1 178) NET PROFIT FOR CURRENT PERIOD 590 691 445 287 37 752 28 460 incl. net profit attributable to equity holders of the parent company 581 738 438 638 37 180 28 034 minority interest 8 953 6 649 572 426 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 32,87 24,78 2,10 1,58 BALANCE SHEET AS OF 31.12.2006 consolidated, unaudited in thousand EEK and EUR EEK EUR 31.12.2006 31.12.2005 31.12.2006 31.12.2005 ASSETS Current assets Cash and cash equivalents 676 143 268 446 43 213 17 157 Trade receivables 860 531 544 581 54 998 34 806 Inventories 1 351 190 964 088 86 357 61 617 Non-current assets held for sale 733 0 47 0 Total current assets 2 888 597 1 777 115 184 615 113 580 Non-current assets Long-term financial investments 215 866 196 886 13 796 12 583 Investment property 9 444 42 506 604 2 716 Property, plant and equipment 90 382 199 004 5 777 12 718 Intangible assets 10 240 4 365 654 279 Total non-current assets 325 932 442 761 20 831 28 296 TOTAL ASSETS 3 214 529 2 219 876 205 446 141 876 LIABILITIES AND OWNERS' EQUITY Current liabilities Borrowings 283 792 114 841 18 138 7 340 Trade payables 1 079 371 712 186 68 985 45 517 Government grants 1 498 22 225 96 1 420 Short-term provisions 54 410 21 741 3 477 1 390 Total current liabilities 1 419 071 870 993 90 696 55 667 Non-current liabilities Loans, bonds and finance lease liabilities 159 335 202 824 10 183 12 963 Other long-term payables 23 277 22 726 1 488 1 452 Long-term provisions 0 11 385 0 728 Total non-current liabilities 182 612 236 935 11 671 15 143 Total liabilities 1 601 683 1 107 928 102 367 70 810 Equity Minority interest 18 904 10 552 1 208 674 Equity attributable to equity holders of the parent company Share capital 177 000 177 000 11 312 11 312 Statutory reserve capital 17 700 8 850 1 131 566 Currency translation adjustment (5 751) (5 059) (368) (323) Retained earnings 1 404 993 920 605 89 796 58 837 Total equity attributable to equity holders of the parent company 1 593 942 1 101 396 101 871 70 392 Total equity 1 612 846 1 111 948 103 079 71 066 TOTAL LIABILITIES AND EQUITY 3 214 529 2 219 876 205 446 141 876 Alar Lagus Member of Board +372 6 805 109