Management Report Q4, 2006 Important Events in Q4, 2006 Recording Acquisition of Silvano Fashion Group AS in Accounting and Consolidated Reports PTA Grupp AS (hereinafter referred to as ‘PTA') acquired the subsidiary - public limited company Silvano Fashion Group AS (hereinafter referred to as ‘SFG') - on 16 October 2006. The performance results of the subsidiary are consolidated as of 1 October 2006. Financial statements of SFG as of 30 September 2006, which were audited by auditors in the course of survey on financial information, served as a basis for recording the business combination. The reports have been prepared on the basis of the principles of the International Financial Reporting Standards - IFRS. In accounting of PTA the acquisition of the subsidiary SFG has been recorded at the adjusted purchase method, in accordance with which the acquisition cost of the subsidiary is the balance sheet value of its net assets EEK 404,263 thousand (EUR 25,837 thousand). The purchase method under IFRS 3 has not been applied as in accordance with IFRS 3.3 the aforementioned standard is not applicable with regard to business combinations, whose parties are units under joint control. The comparative data presented in the Interim Report are the financial ratios of PTA for 2005. No comparative data of SFG for 2005 have been presented as the company had no essential operating activities, which could be compared to the period under review. Consolidated Performance Results of Q4 and 12 months of 2006 The performance results of PTA Grupp were considerably affected by consolidation of the performance results related to acquisition of the subsidiary, SFG, as of Q4, 2006. In Q3 of 2006 PTA earned net profit in the amount of EEK 35.1 million (EUR 2.2 million), which increased by EEK 30.0 million (EUR 1.9 million) as compared to Q4 of the previous year. The net profit of Q4 of this year increased by approximately 6.9 times as compared to Q4 of the previous year and the achieved profit margin amounted to 10.9%. The sharp increase in profit in Q4 is due to consolidation of the performance results of the subsidiary SFG within the performance results of PTA Grupp. The sales revenue in Q4 amounted to EEK 322.2 million (EUR 20.6 million), increasing by EEK 297.0 million (EUR 19.0 million) as compared to the same period of the previous year. Addition of the sales turnover of SFG increased the consolidated turnover of PTA Grupp in Q4 by EEK 286.5 million (EUR 18.3 million). Compared to the same period of the previous year, the turnover of PTA related to sales of apparel increased by EEK 10.5 million (EUR 0.7 million), i.e. 41.9%. The operating profit of the Group in Q4 increased by EEK 52.2 million (EUR 3.3 million) and the operating profit margin amounted to 18.3% (in Q3 of 2005: 0.3%). The consolidated sales revenue of PTA Grupp for 12 months of 2006 amounted to EEK 423.0 million (EUR 27.0 million). The sales revenue increased by EEK 308.5 million (EUR 19.7 million), including the sales revenue of PTA increased by EEK 22 million (EUR 1.4 million) as compared to the year 2005. The operating profit of the Group for the 12 months amounted to EEK 67.9 million (EUR 4.3 million). The operating profit margin for the 12 months amounted to 16.0% (12 months of 2005: 2.6%). The net profit for the 12 months amounted to EEK 42.9 million (EUR 2.7 million). Sales Revenue Sales by Products/Services With regard to sales of products an important change took place in Q4 of 2006. In relation to acquisition of the subsidiary, as of Q4 new sales segment - lingerie, which formed 67.3% of the sales revenue of 2006 - was added. Compared to the year 2005, apparel sales revenue increased by EEK 21.8 million (EUR 1.4 million), forming 26.2% of the consolidated sales revenue (12 months of 2005: 77.9%). The sales revenue of the subcontracted service has remained almost at the same level as compared to the previous year. Increasing by EEK 0.6 million (EUR 0.04 million), the sales of the subcontracted service formed 5.2% of the sales revenue (in 2005: 18.7%). Sales by Markets In 2006 the sales volume to the Estonian market increased EEK 19.4 million (EUR 1.2 million) as compared to the previous year, forming 17.5% of the consolidated sales revenue (2005: 47.8%) and increasing 35.4% as compared to the same period of the previous year. In 2006 the structure and sales volume of export countries changed considerably. While up to now the main export markets of PTA Grupp have been Finland and Latvia, the main export markets of SFG are now Belarus and Russia. Compared to the same period of the previous year, in 2006 the export increased by EEK 289.2 million (EUR 18.5 million). Export made up 82.5% of total sales revenue (2005: 52.2%). The export sales in main export markets of PTA increased 21.2%, incl. to Latvia 22.4% and to Finland 19.9%. Retail Sale With regard to acquisition of SFG, in addition to the retail chain of women's apparel as of Q4 of 2006 the Group also operates the following retail chains of lingerie: Oblicie, Splendo, Lauma and Milavitsa. By the end of 2006 the Group had in total 51 stores with a total area of 6,075 square metres. The retail sales areas are located in Estonia, Latvia, Russia, Belarus and Poland. Entry into the Lithuanian and Ukrainian markets with the retail chains of PTA and Oblicie is being prepared. The total retail sales of the Group in 2006 amounted to EEK 82.5 million (EUR 5.3 million), which is formed from the PTA retail sales turnover of the year and the sales turnover of the retail chains of lingerie for Q4. The PTA retail chain turnover amounted to EEK 78.2 million (EUR 5.0 million) in 2006, increasing 22.4% as compared to the previous year. In total the PTA retail sales chain included 13 stores with a total retail sales area of 3,020 square metres (31 December 2005: 2,646 square metres). At the end of the year 2 first stores selling women's apparel and operating under the PTA trademark were opened in Russia. The increase in the sales of the like-for-like spaces was 28% as compared to the year 2005. The increase in the retail sale was supported by a renewed collection, the successful launch of the regular customer programme and the general growth in consumption. The retail sales results at the end of the year were supported by the successful sales of women's festive apparel collection and the well-timed marketing campaigns. At the end of the year 2006 the Oblicie retail chain had 13 stores in Russia with the total retail sales area of 1,313 square metres, of which the first store was opened in May 2006. In Q4 of 2006 the retail sales of lingerie in Russia amounted to EEK 4.1 million (EUR 0.3 million). In November 2006 SFG expanded to Poland, acquiring the Splendo lingerie retail sale chain. The Splendo lingerie retail sale chain has 7 stores with 307 square metres. Wholesale In 2006 the wholesale amounted to EEK 314.3 million (EUR 20.1 million). The sharp increase in wholesale turnover is due to adding the wholesale turnover of Q4 to the turnover of the Group. In 2006 the sales turnover of women's apparel increased 34.2% as compared to the same period of the previous year, incl. the wholesale turnover increased almost twice in Q4 as compared to Q4 of the year 2005. Sales of Subcontracted Service The sales turnover of subcontracted service is at the same level as compared to the previous year. Small increase in service provision by EEK 0.7 million (EUR 0.04) is due to provision of a new subcontracted service - lingerie manufacturing. In 2006 the proportion of women's apparel manufactured by outside producers increased. For lingerie manufacturing, subcontracted service is purchased from other Belarusian companies producing lingerie. Profit The results of PTA Grupp of Q4 and 12 months of 2006 were affected considerably by consolidation of the performance results related to acquisition of the subsidiary SFG within the Group. The net profit of the Group for the year 2006 amounted to EEK 42.9 million (EUR 2.7 million). The net profit related to sales of lingerie in the amount of EEK 34.7 million (EUR 2.2 million) was added to the result of the Group in Q4. The net profit related to sales of women's apparel in 2006 amounted to EEK 8.3 million (EUR 0.5 million). The operating profit before depreciation of fixed assets and financial income and expenses formed EEK 79.6 million (EUR 5.1 million), increasing by EEK 69.7 million (EUR 4.4 million) as compared to the same period last year. The total operating charges amounted to EEK 346.1 million (EUR 22.1 million). The increase in costs is related to consolidation of the performance results of SFG within the performance results of PTA Grupp as of Q4 and thus cannot be compared to the results of the previous year. The total financial income and expenses of the Group for 2006 amounted to EEK 11.4 million (EUR 0.7). The negative goodwill arisen as a result of acquisition of subsidiaries of SFG in the amount of EEK 9.5 million (EUR 0.6 million) has been recorded under income. Balance Sheet and Ratios The consolidated balance sheet total of the Group amounted to EEK 812.5 million (EUR 51.9 million) as of 31 December 2006. As compared to the end of previous year the balance sheet total has increased by EEK 760.6 million. The increase in balance sheet total is related to acquisition of SFG and consolidation of the same within the performance results of PTA Grupp. The balance of trade receivables in the Group is at the usual level, taking into consideration the fact that the subsidiaries of SFG are mainly engaged in wholesale. The balance of inventories with regard to women's apparel has increased 29% as compared to that at the end of the year 2005 and with regard to lingerie more than 14%. With regard to women's apparel the increase in the balance of inventories is related to expansion of activities into new markets, incl. particularly to the Russian market, and with regard to lingerie the increase is related to better provision of products to customers and completion of new collections at the end of the year. Fixed assets increased mainly with regard to opening new stores in Q4. Trade creditors of the Group as a whole are at a bit lower level than the usual arrears, incl. trade creditors of PTA have increased by about 18% as compared to the end of the last year. With regard to increase in sales volumes and the needs of the stores to be opened in Q1 of 2007, the volumes of deliveries of PTA have also increased. As of the end of the accounting period the balance of debts amounts to EEK 29.9 million (EUR 1.9 million) and it has increased by EEK 14.6 million (EUR 0.9 million) since the beginning of the year. The increase in the balance of debts is due to adding the debts of SFG to the debts of the Group. Employees As of 31 December 2006 the number of employees of PTA Grupp AS amounted to 2,909 (as of 31 December 2005: 414), including in production 2,569 (as of 31 December 2005: 294) and in retail trade 215 (as of 31 December 2005: 104). The Main Figures of the Group The main financial indicators and ratios that characterize the consolidated data of the PTA Grupp AS Group for the 12 months of 2006 are as follows: 12 months 12 months Change Main financial indicators 2006 2005 Operating revenue, EEK thousand 425 712 132 473 221% Operating profit/loss before 79 617 9 888 69 729 depreciation of fixed assets and financial income/expenses (EBITDA), EEK thousand Margin, % 18,7% 7,5% - Operating profit/loss (EBIT), EEK 67 872 2 938 64 934 thousand EBIT to net sales, % 16,0% 2,6% - Profit/loss of the period, 42 902 -3 215 46 117 thousand EEK Profit margin, % 10,1% -2,8% - ROA, % 9,9% -4,0% - ROE, % 18,4% -19,3% - Earnings per share (EPS), EEK 5,07 -1,66 6,73 Current debt ratio 3,62 0,95 - Quick ratio 2,28 0,24 - Inventory turnover ratio 3,31 4,3 - The ratios were calculated as follows: Profit margin = Net profit / Sales revenue Return on assets (ROA) = Net profit (attributable to parent) / Average total assets Return on Equity (ROE) = Net profit (attributable to parent) / Average owners' equity Earnings per share (EPS) = Net profit (attributable to parent) / Average number of ordinary shares Current debt ratio = Current assets / Current liabilities Quick ratio = (Current assets - Inventories) / Current liabilities Inventory turnover ratio = Net sales / Average inventory for the period Balance Sheet Consolidated, unaudited 31.12. 31.12. 31.12. 31.12. 2006 2005 2006 2005 EEK EEK EUR EUR thousand thousand thousand thousand ASSETS Current assets Cash at bank and in 200,392 2,831 12,807 181 hand Trade receivables 112,046 3,052 7,161 195 Other short-term receivables and prepaid expenses 55,252 2,589 3,531 165 Prepaid taxes 21,186 25 1,354 2 Inventories 230,117 25,496 14,708 1,630 Total current assets 618,993 33,993 39,561 2,173 Fixed assets Long-term financial investments 3,649 0 233 0 Non-trade receivables 550 750 35 48 Tangible assets 172,778 10,536 11,043 673 Intangible assets 16,551 6,622 1,058 423 Total fixed assets 193,528 17,908 12,369 1,144 Total assets 812,521 51,901 51,930 3,317 LIABILITIES AND OWNERS` EQUITY Current liabilities Borrowings 29,907 15,294 1,911 977 Trade payables 86,436 12,573 5,524 804 Taxes liabilities 25,825 2,836 1,651 181 Other short-term 27,553 5,178 1,761 331 payables Short-term provision 1,192 12 76 1 Total current 170,913 35,893 10,923 2,294 liabilities Long-term liabilities Long-term borrowings 9,544 134 610 9 Other long-term payables 109 173 7 11 Long-term provisions 139 143 9 9 Total long-term 9,792 450 626 29 liabilities Total liabilities 180,705 36,343 11,549 2,323 Owners`equity Share capital 379,472 19,469 24,253 1,244 (nominal value) Share premium 85,253 40,994 5,449 2,620 Legal reserve 1,046 1,046 67 67 Retained profit -45,977 -42,762 -2,939 -2,733 Unrealised exchange rate differences -10,688 26 -683 2 Net profit/loss for 42,902 -3,215 2,742 -206 financial year Total equity 452,008 15,558 28,889 994 attributable to majority shareholder Minority interest 179,808 0 11,492 0 Total equity 631,816 15,558 40,381 994 TOTAL LIABILITIES AND 812,521 51,901 51,930 3,317 OWNERS` EQUITY Income Statement-Q4 Consolidated, unaudited 2006 2005 2006 2005 Q4 Q4 Q4 Q4 EEK EEK EUR EUR thousand thousand thousand thousand Operating revenue Sales revenue 322,150 25,102 20,589 1,604 Other operating revenue 2,380 17,487 152 1,117 Total operating revenue 324,530 42,589 20,741 2,721 Change in finished goods and work 6,264 -1,060 400 -68 in progress Goods, raw materials and services services -156,406 -11,405 -9,996 -729 Other operating expenses -45,063 -7,525 -2,880 -481 Staff costs -60,474 -11,032 -3,865 -705 Other operating charges -2,317 -3,236 -148 -206 Total operating charges -257,996 -34,258 -16,489 -2,189 EBITDA 66,534 8,331 4,252 532 Depreciation -7,696 -1,680 -492 -107 Operating profit/loss 58,838 -6,651 3,760 425 Financial income/expenses Interest expenses -45 -1,320 -3 -84 Gains / losses on conversion of foreign currencies 1,886 175 121 11 Other financial income / expenses 1,035 -49 66 -3 Written-off negative goodwill 9,468 0 605 0 Total financial income / expenses 12,344 -1,194 789 -76 Profit before corporate income 71,182 5,457 4,549 349 tax Corporate income tax -18,921 -360 -1,209 -23 Net profit 52,261 5,097 3,340 326 Net profit attributable to 17,186 0 1,098 0 minority shareholders Net profit attributable to parent 35,075 0 2,242 0 company Earnings per share Basic earnings per share 1.26 2.62 0.08 0.17 (EEK/EUR) Diluted earnings per share 1.26 2.62 0.08 0.17 (EEK/EUR) Income Statement-12 months Consolidated, unaudited 2006 2005 2006 2005 12 12 12 12 months months months months EEK EEK EUR EUR thousand thousand thousand thousand Operating revenue Sales revenue 423,048 114,524 27,038 7,319 Other operating revenue 2,664 17,949 170 1,147 Total operating revenue 425,712 132,473 27,208 8,466 Change in finished goods and 8,214 -5,849 525 -374 work in progress Goods, raw materials and services -192,451 -41,674 -12,300 -2,663 Other operating expenses -66,722 -26,629 -4,264 -1,702 Staff costs -91,867 -44,037 -5,871 -2,815 Other operating charges -3,269 -4,396 -209 -281 Total operating charges -346,095 -122,585 -22,119 -7,835 EBITDA 79,617 9,888 5,089 631 Depreciation -11,745 -6,950 -751 -444 Operating profit/loss 67,872 2,938 4,338 187 Financial income/expenses Interest expenses -938 -5,895 -60 -377 Gains / losses on conversion 1,884 175 120 11 of foreign currencies Other financial income / 987 -73 63 -4 expenses Written-off negative goodwill 9,468 0 605 0 Total financial income / 11,401 -5,793 728 -370 expenses Profit before corporate 79,273 -2,855 5,066 -183 income tax Corporate income tax -19,185 -360 -1,226 -23 Net profit 60,088 -3,215 3,840 -206 Net profit attributable to 17,186 0 1,098 0 minority shareholders Net profit / loss 42,902 0 2,742 0 attributable to parent company Earnings per share Basic earnings per share 5.07 -1.66 0.32 -0.11 (EEK/EUR) Diluted earnings per share 5.07 -1.66 0.32 -0.11 (EEK/EUR) Peeter Larin Chairman of the Management Board tel+372 6 710 700