In Estonia, 2006 was a year for rapid economic development. This provided good
growth opportunities for the telecommunications sector, but also generated
increased competition and new possibilities for development.
Economic environment
The economic growth that gained momentum in 2005 accelerated even further in
2006. The increase in Estonia's GDP reached 11% in the past year. With this
result, Estonia together with its neighbors Latvia and Lithuania clearly form
the three top economic performers in the European Union.
Domestic demand has been the principal motor for economic growth. Estonia's
accession to the European Union has generated an extensive inflow of money
through structural funds, which has supported investments into agricultural
infrastructure, the social sphere, and much more. Membership in the EU and close
ties to Nordic banking have kept interest rates low and enlivened the use of
loans by entrepreneurs and private individuals. Tough competition on the job
market has generated comprehensive salary increases—compared to 2005, average
wages increased by more than 15%.
In 2006, the excellent economic environment also supported the development of
the telecommunications sector. Thanks to larger incomes, the consumption of
communications services increased. Using beneficial financing opportunities,
both private individuals and companies have traded in their telephones,
computing technology, and other telecommunications equipment for something newer
and more up-to-date. Construction activity, which has been increasing for seven
years, has provided abundant orders for equipping new homes, offices, and
production facilities with communications solutions.
The majority of economic analysts believe that Estonia achieved the apex of its
economic growth in 2006. Stabilization at a more sustainable 7-8% is projected
for the Estonian economy.
Telecommunications market
Since telecommunications companies primarily provide services, their activities
are largely limited to the domestic market. For Estonian companies, the domestic
market means 1.3 million residents and about 40 thousand companies. The deficit
of fixed-line telephones that prevailed during the period that Estonia was part
of the Soviet Union is ancient history. The number of mobile telephones has
exceeded the number of residents. The wish to keep developing and to increase
turnover and profits forces telecommunications companies to search for new
fields of activity.
In 2006, one of the keywords in Estonian telecommunications was data
communications. The Estonian population has been quick to adopt new
telecommunications innovations—the majority of Estonians prefer Internet banking
to visiting the local bank branch; during the past few years, the e-tax office,
the e-school, and e-commerce has significantly improved; and the e-government
has also garnered a great deal of attention in the world. Thus, the Internet is
a natural part of Estonians' well-being. For several years, the number of
permanent connections added every year has been measured in the tens of
thousands, while the availability of quality permanent connections has primarily
been the privilege of residents in cities and larger towns. However, in 2006,
several steps were taken by the state, to guarantee access to permanent
connections for every home or office. In 2005-2006, within the framework of the
Külatee 3 project, state procurements were organized in order to provide access
to permanent connections for 90% of all the counties. The Communications Board
organized a competition for creating a communications network based on broadband
technology to cover the entire territory of Estonia. As a result, the
construction of a network based on numerous technologies was started that should
bring permanent Internet connections to every solitary farm in the woods during
the next few years.
The e-world is becoming increasingly popular and an ever-increasing number of
people wish to be connected, regardless of their location or the time of day.
This, in turn, has accelerated the development of mobile data communications. In
October 2005, AS EMT was the first in Estonia to put a 3G mobile communications
network into commercial operation. In 2006, the possibilities of 3.5G were added
to 3G. Third generation mobile communications can currently be used in the
larger cities; all the largest settlements are covered by an EDGE network, and
mobile data communications are possible throughout Estonia with GPRS.
The multitude of connection possibilities has made operators think about the new
services they could provide to their customers, to entice them to choose their
technology. Mobile operators introduced several new and interesting offers in
2006. Thus, the owners of 3G telephones could follow the Winter Olympics and the
Eurovision Song Competition on their mobile phone screens. In everyday life, it
is possible to avoid traffic jams when driving to and from work, by accessing
pictures from traffic cameras through your mobile phone.
The second keyword in 2006 was the rapid expansion of digital TV. The first
offers for digital TV arrived in our market in 2005. In April 2006, Elion
Enterprises introduced the DigiTV solution for the broader market. The success
of DigiTV also inspired Elion's principal competitors to promote digital TV more
actively, and by year's end, about 50,000 Estonian families had decided in favor
of a better quality TV picture. By 2010, the service providers expect the
majority of Estonia's households to be customers of digital TV.
In 2006, the third important development in the telecommunications market was
the development of the regulatory side. On 1 January 2005, Estonia's new
Electronic Communications Act came into force, and thereby, the common
regulatory framework for European Union electronic communications networks and
services was adopted. In 2006, the Communications Board issued the first
declarations for undertakings with significant market power.
Eesti Telekom Group in 2006
The fact that in 2006 the Eesti Telekom Group kept pace with the advantageous
economic environment and developments in the telecommunications sector is
reflected in our financial results.
2006 saw record levels for the numbers of call minutes, mobile messages, and
data volumes passing through the communications networks. Growth in the number
of mobile customers and permanent connections continued. Despite falling rates,
the revenues earned from customers remained stable. The growth of revenues from
the private and business sector, as well as favorable financing conditions,
swelled the group's retail sales results.
Last year, satisfaction can be gained from the following developments in the
group's branches of operations:
For years, a challenge for the Eesti Telekom Group has been to find new growth
opportunities in the Estonian telecommunications market, with its limited
volumes and decreasing rates. At the end of 2005, a powerful entry into the IT
service market was made by acquiring AS MicroLink Eesti, Estonia's largest IT
company. 2006 saw MicroLink and Elion IT reorganized along with their provision
of data communications services. Today, IT services have become the third most
important branch of operations after mobile and standard communications
solutions. At the same time, this is also the Group's great competitive
advantage, since, compared to other telecommunications companies, we can provide
our customers with a wider range of services.
In order to strengthen competitiveness among private clients, during the past
year, Elion expanded its range of services by adding ones that had to date only
been provided by its competitors. Thus, Elion, which entered the television
transmission market in 2005, has become the most successful provider of digital
TV. At the same time, it is possible for Elion customers to use Elion's
Estonian-language VoIP solution.
Increased competition in the telecommunications market had made customer
segmentation, along with the development of solutions and approaches for each
customer group, topical for many years. I consider one of the achievements in
this field in 2006 to be EMT's purchase of a majority shareholding in the
company that administers Rate.ee, Estonia's most popular social communications
portal. Also important is the introduction of products that integrate the
potential of the web and mobile communications, thereby enabling rapid growth of
market share in the youth segment.
Financial results
Profit
In 2006, the Eesti Telekom Group consolidated sales revenues reached 368.6
million EUR, increasing by 12% compared to 2005 (2005: 329.7 million EUR).
Almost 40% of the increase in external turnover came from mobile communications.
In 2006, the sales revenues for the EMT Group, the group active in the mobile
communications field, were 223.8 million EUR, increasing 14% compared to 2005.
The revenues for the EMT Group principal activities outside the Eesti Telekom
Group increased by 10% and the revenues of the Group's companies dealing with
trading increased 15%.
During the past year, the increase in the revenues for the principal activity in
the mobile field was related primarily to an increase in the number of call
minutes. The number of call minutes initiated from the EMT network increased in
2006 by approximately 20% compared to 2005. The larger number of call minutes
was caused by an increase in the number of users for call services, as well as
more active use of the service on average by each customer.
As of 31 December 2006, AS EMT had 759 thousand active SIM-cards, which is 82
thousand more than at the end of 2005 (31 December 2005: 677 thousand). The
company also maintained its 47% market share in 2006.
The number of AS EMT contractual customers remained stable throughout 2006. If
the year started with 406 thousand active SIM-cards, then during the year, the
number of cards increased by 27 thousand and 2006 ended with 433 thousand
contractual SIM-cards.
The pre-paid card market was passive at the beginning of 2006, and the first six
months ended with a decrease in the number of active SIM-cards. However, in the
second half of the summer, the trend reversed and the number of pre-paid cards
started to increase. During 2006 as a whole, the number of pre-paid cards
increased by 55 thousand, reaching 326 thousand as of 31 December 2006 (31
December 2005: 271 thousand). The principal portion of the increase in the
number of pre-paid cards can be ascribed to the newcomer, Ratemobiil. On 5 April
2006, AS EMT acquired 51% of the shares of Serenda Invest OÜ. The Rate trademark
belongs to Serenda Invest OÜ and it administers the popular youth Internet
communications environment of the same name—Rate.ee. In the summer of 2006, AS
EMT introduced a mobile package, Ratemobiil, especially designed to appeal to
Rate.ee user, which by the end of the year had attracted 35,000 users. The rapid
growth in the number of pre-paid cards in the second half of the year has
increased their proportion in the total number of active EMT cards. If at the
end of 2005, pre-paid cards constituted 40% of the total number of cards, then
by the end of 2006, their relative importance had increased to 43%.
In addition to the increase in the client base, the number of call minutes used
per customer also increased, and in 2006, more than 5% more minutes per customer
were initiated from the EMT network than in 2005. The increase of the customer
base, along with the greater number of call minutes, also compensated the
decline in the minute rates that continued in 2006, and the revenues earned from
call services increased by 7% compared to 2005 (including the fees for packages
that allow for a certain number of call minutes for a monthly fee).
The number of call minutes terminated in the EMT network increased at
approximately the same rate as the call minutes initiated in the AS EMT network.
In 2006, the Communications Board declared all the companies operating mobile
networks as undertakings with significant power in the voice communications
termination market of their mobile phone network, and, among other things,
demanded they decrease the termination fees from 0.16 EUR per minute to 0.13 EUR
per minute as of 1 July 2006. However, since Elisa Mobiilsideteenused AS and
Tele2 Eesti AS have challenged the decision of the Communications Board, the
termination fees of all the mobile networks remained unchanged at
0.16 EUR per
minute throughout 2006, and the increase in the number of terminated call
minutes in the EMT network was accompanied by a similarly paced increase in the
revenues earned from connection fees.
In addition to call services, the volume of other mobile services increased
rapidly in 2006. The number of SMS messages increased by almost 60%. The number
of MMS messages increased by more than 30%. One of the factors fostering the use
of these services was definitely Ratemobiil, since young people are the most
active users of message services. Since, in 2006, the users of many packages,
including Ratemobiil, were able to send free messages within the framework of
various campaigns, the increase in revenues earned from messages grew at a
slower rate than the number of messages, but still reached 13%.
In 2006, the number of mobile data communications users increased by almost 10%.
At the end of December, AS EMT had 110,000 users of mobile data communications
(31 December 2005: 103 000). Since mobile data communications activity also
increased, the increase in the revenues earned from this field of activity grew
significantly faster than the increase in the number of customers.
In 2006, AS EMT earned average revenues of 21.22 EUR per customer per month,
which is 1.4% less than in 2005 (2005: 21.54 EUR).
The contribution of fixed communications to the turnover of the Telekom Group in
2006 was almost equal to mobile communications. In this connection, both the
revenues earned from IT services, a new field of activity, and traditional
telecommunications services increased. In 2006, the turnover of the Elion Group,
the Eesti Telekom Group subsidiary operating in the fixed communications field
increased by 13% reaching 187.3 million EUR (2005: 165.2 million EUR). The
revenues of the Elion Group outside the Eesti Telekom Group increased by 12% and
the revenues earned from retail sales by 25%.
Of the Elion Group's principal fields of activity, the fastest growth was
demonstrated by revenues from the monthly fees for integrated solutions.
Compared to 2005, the revenues from the given category have increased by almost
70%. The reason for the growth is the great popularity of integrated solution
among the customers. While Elion had offered double solutions (Internet and
fixed-line telephone connections) to its customers starting in 2004, then in
April 2006, a triple solution was introduced, which, in addition to Internet
with a downloading speed of up to 12 Mb per second and voice communications,
also offers the provision of quality digital TV reception through a permanent
connection network. While initially the service was only available in Tallinn
and its immediate vicinity, then by the end of the year, the coverage area had
expanded to all Estonian cities and about 100 larger settlements. In addition
to the basic package offered for the triple solution monthly fee, as of June
2006, customers can order theme packages for an extra fee. At the digiExpo in
Tallinn in November, remote video rental, which enables users to order films and
programs directly from the TV screen, was first demonstrated to the fair
visitors. In February 2007, the first HD TV channel in Estonia and the Baltic
States, Voom HD, should reach the viewers of DigiTV. Supported by all these
interesting offers, the number of Elion DigiTV customers increased more than 30
times in 2006, reaching 28,400 by the end of the year (31 December 2005: 918).
Regrettably the increase of revenues from integrated solutions has partially
been achieved at the expense of separate communications services. Thus, the
number of Elion permanent Internet connections also increased at a record pace,
reaching 141,700 by the end of the year (31 December 2005: 108 000). The
increase in permanent Internet connections has been helped on the one hand by
the development of the market as a whole. Elion has actively participated in
Külatee 3, the government's targeted project for introducing the Internet to
rural areas, the goal of which is to improve the availability of permanent
Internet connections in sparsely populated rural areas. As a result of the
program, the Internet should become as available in rural areas as it is in
densely populated areas. Within the framework of the project, Elion has
completed the internetization of the first counties. In September 2006, Elion
started to offer wireless Internet in Harju and Lääne counties. By the end of
the year, the construction of a WiMAX network was completed in Rapla County,
Elva, and West-Viru County and work continued in Tartu County. At the same time,
the consolidation of Estonia's permanent connections market continued. Thus, in
the last quarter of 2006, Elion acquired Norby Telecom's private client service
business. Elion's market share of the permanent connection market for private
clients increased to almost 56%. Since during the past year, Elion invested
primarily in the provision of integrated solutions, then the revenues earned
from permanent Internet connection decreased by 15% compared to 2005. In
addition to the popularity of integrated solutions, the decrease in revenues is
caused by an increase in the proportion of Kortermaja Internet customers, who
thereby pay a lower monthly fee.
After several years during which the number of Elion call interfaces1 The users
of VoIP services and active users of call services decreased, the number
increased slightly in 2006 reaching 463,900 by the end of the year (31 December
2005: 458,450). The decrease of call interfaces was halted thanks to the active
efforts by the company to retain existing customers and find new ones. This
included offering various customer segments different solutions that are
suitable for their needs. Therefore, in 2006, campaigns for discount packages
targeting price-sensitive clients were organized. New voice communications
customers have been added along with the increase in the number of customers for
integrated solutions, since telephone connections are a component of both the
double and triple packages. The number of call interfaces has also been
increased by the introduction of Elion's own VoIP service, Hotifon, in the
second quarter of 2006. However, in 2006, the monthly fees earned from voice
communications connections decreased by 14% compared to 2005, since the relative
importance of packages with the lower monthly fees has increased.
Another important field of activity that showed an increase among Elion's
principal fields of activity in 2006 was IT, the 2006 revenues for which exceed
those for 2005 by almost 200%. The acquisition of the subsidiaries AS MicroLink
and AS MicroLink Eesti by Elion Enterprises on 31 October 2005, and the
consolidation of their revenues as of November 2005, also played an important
role in the increase of IT revenues. If the effect of adding the new companies
were deducted, the increase of revenues in 2006 would be 25%. At the beginning
of 2006, IT and data communications at MicroLink and Elion were reorganized, in
the course of which the provision of all IT services was concentrated in
MicroLink Eesti and the field of data communications was concentrated in Elion
Enterprises. The synergy that has developed from the cooperation of the two
companies has helped the Elion Group strengthen its position in the provision of
telecommunications and IT services, primarily in the business client segment.
The sale of permanent IT services to clients has increased over 35% and the sale
of business projects, consultations, and projects by 13%.
In 2006, the Elion Group call revenues have decreased by 6% compared to 2005.
The basic part of the decrease in revenues came at the expense of local calls,
the revenues of which decreased 23% during the year. The decrease in the
revenues from local calls is caused predominantly by making free call minutes
available to the users of call and integrated solutions, by a decrease in minute
volumes, and the more active use of various discounts by customers. The
revenues earned from international calls decreased by 13% compared to 2005, and
the revenues from calls made from fixed-line telephones to mobile communications
networks by 7%. Other voice communications revenues, including connection fees
and revenues earned from call transit, increased by 5% during the year.
Elion's market share for call minutes initiated in a fixed network was 83% in
December 2006 (December 2005: 85%). The market share of local call minutes was
85% (December 2005: 86%), 65% for international call minutes (December 2005:
66%), 70% for minutes for calls made to mobile phones (December 2005: 72%), and
97% for called-in minutes (December 2005: 97%).
In 2006, revenues for the Eesti Telekom Group as a whole from the retail and
wholesale trading of telecommunications and IT merchandise increased by almost
20% compared to 2005. The increase was caused by an expansion of the assortment
being offered, as well as favorabe developments in the Estonian economy and an
increase in the purchasing power of residents and companies.
The operating expenses of the Eesti Telekom Group have increased in 2006 by 20%
reaching
231.4 million EUR (2005: 192.9 million EUR).
In 2006, the EMT Group operating expenses totaled 138.0 million EUR, growing 20%
during the year (2005: 114.6 million EUR). The basic part, or almost 12.8
million EUR, of the additional operating expenses were related to principal
activities. Operating expenses increased in connection with larger costs for
connection services (resulting from a larger number of call minutes made to the
networks of other operators) and increased roaming costs. A strong pressure on
salaries in the Estonian economy generally also affected EMT, and the personnel
costs increased by 12% compared to 2005. At the same time, the proportion of
personnel costs in the total costs of EMT is relatively modest. Since the retail
and wholesale trading of telecommunications and IT merchandise is a field of
activity that has very low profitability compared to the principal fields of
activity, then EMT Group's increase in trading revenues has been accompanies by
an increase of comparable size in operating expenses.
In 2006, the operating expenses of the Elion Group were 134.5 million EUR,
increasing 23% on the year (2005: 109.5 million EUR). The increase in the
expenses for the Elion Group principal activities were influenced primarily by
the consolidation of MicroLink and MicroLink Eesti. In 2006, the operating
expenses of MicroLink and MicroLink Eesti throughout the year, but only during
the last two months of 2005. The amount of MicroLink operating expenses subject
to consolidation increased four-fold in 2006. The Elion Group personnel costs
increased 12% compared to 2005. The relative importance of personnel costs among
total operating expenses is greater for fixed communications than for the mobile
field. The increase in the operating expenses of the Elion Group, as well as the
EMT Group, has been significantly influenced by the increase in the turnover of
the sales of merchandise and the greater costs for purchasing the necessary
goods.
The Eesti Telekom Group EBITDA in 2006 was 140.3 million EUR (2005: 137.4
million EUR). The EBITDA of the EMT Group increased 5% compared to 2005,
reaching 86.0 million EUR. Elion Group EBITDA decreased a bit, to 56.0 million
EUR (2005: 56.4 million EUR). At the same time, the 2006 number for the Elion
Group (and the Eesti Telekom Group consolidated number) also included a
2.7-million-EUR profit, which Elion Enterprises earned from the sale of real
estate in the second quarter of 2006. The EBITDA margin during the year fell,
reaching 38.1% in 2006 (2005: 41.7%). The margins decreased in both the mobile
and fixed communication fields. The drop in the margin is primarily caused by
the rapid growth of activities with lower margins (commerce, IT) and their
relative importance in the Group's turnover.
The Eesti Telekom Group depreciation in 2006 was 35.0 million EUR (2005: 48.1
million EUR). The primary factor for the decrease in depreciation is the
application of new depreciation rates. At the beginning of 2006, TeliaSonera
introduced new uniform useful life spans for the fixed assets of its 100%
subsidiaries. As the result of a thorough analysis, the companies in the Eesti
Telekom Group also decided to introduce the depreciation periods suggested by
TeliaSonera (with some adjustments based on local peculiarities) in Eesti
Telekom, starting on 1 May 2006. However, adjustments in connection with the
implementation of new periods were not made in the depreciation that has already
been calculated. The remaining useful life spans of existing fixed assets will
be adjusted. Another important factor influencing the decrease in depreciation
is the modest investments made during the last few years.
If depreciation in 2006 has decreased extensively, then the operating profit of
the Eesti Telekom Group increased by 18% compared to 2005 reaching 105.2 million
EUR (2005: 89.3 million EUR). The (net) financial revenues earned by the Eesti
Telekom Group in 2006 increased somewhat compared to 2005 reaching 2.6 million
EUR (2005: 2.4 million EUR). In 2006, AS Eesti Telekom paid its shareholders a
record-setting dividend. Due to the increase in the amount of the dividend,
despite the decrease in the tax rate, the income tax due upon the payment of the
dividend increased in 2006 to 23.9 million EUR (2005: 22.3 million EUR).
In 2006, the Eesti Telekom Group earned a net profit of 84.0 million EUR (2005:
69.5 million EUR). The revenue per share reached 0.61 EUR (2005: 0.50 EUR).
Investments
In 2006, the Eesti Telekom Group invested 49.3 million EUR into tangible and
intangible fixed assets.
The investments of EMT Group reached 17.5 million EUR in the past year (2005:
12.2 million EUR). The significant increase of investments compared to 2005
results from relatively low investments in the base period as well as the rapid
development of the mobile data communications network in 2006. During the last
quarter of 2005, AS EMT was the first operator to put a third-generation mobile
communications network into commercial operation in Estonia. In 2006, the
coverage area of the 3G and EDGE networks expanded significantly. On 25 April
2006, EMT opened a 3.5G service in Tallinn, being the second operator in the
Nordic countries and the first in Estonia that put a HSDPA into operation. By
the end of 2006, 3G and 3.5G had also reached Tartu, Pärnu and Viljandi.
The Elion Group invested 31.7 million EUR in 2006 (2005: 26.5 million EUR). The
increase in investment resulted primarily from increased consumer demand for new
permanent connections and the demand presented by DigiTV on Internet
connections. Almost a third of the investments in 2006 were related to the
establishment and improvement of networks necessary for the provision of
broad-based solutions for end consumers. An important field of investment in
2006 was also increasing the power of the basic network, to guarantee quality
service to an increased number of customers and to reach the numerous new
housing developments.
In order to keep pace with developments in the telecommunications sector, at the
beginning of 2006, Elion put an IP-based multimedia service platform into
operation, which will enable private and business clients to use new
opportunities for IP-based voice communications, and in the future, also for new
multimedia services.
In 2006, investments were also made into the expansion of the Eesti Telekom
Group. At the beginning of 2006, Elion Enterprises increased its participation
in AS MicroLink to 100%. In April, AS EMT acquired a 51% participation in
Serenda Invest OÜ. Serenda Invest OÜ owns the trademark Rate and the company
administers the Estonian Internet communications portal Rate.ee. Of Serenda
Invest OÜ, 49% belongs to Rate Solutions OÜ, which is owned by Andrei
Korobeinik, the creator of Rate.ee.
Rate.ee is Estonia's largest social network which unites 360 thousand registered
users. AS EMT feels that Rate.ee provides new opportunities for offering
telecommunications and multimedia services. The total value of the transaction
is less than 40 million EEK (approximately 2.5 million euros).
Balance sheet and cash flows
As of 31 December 2006, the balance sheet total for the Eesti Telekom Group was
307.5 million EUR (31 December 2005: 297.8 million EUR). The Group's fixed
assets increased by 22.2 million EUR. The increase in fixed assets is based on
greater investments by the Group's companies in the past year. During the year,
the current assets decreased by 12.5 million EUR, while the cash and cash
equivalents, as well as short-term investments, have decreased by 18.1 million
EUR. The reason for the reduction in cash and short-term investments is a
dividend payment that is 8.8 million EUR larger than last year, along with a
large dividend income tax and growth of investments.
Eesti Telekom Group equity as of 31 December 2006 was 262.9 million EUR (31
December 2005:
258.2 million EUR). On the one hand, the equity was reduced by a
large dividend payment in 2005. However, on the other hand, equity was increased
by a net profit that was 14.5 million EUR larger than 2005.
As of 31 December 2006, the Eesti Telekom Group had long-term liabilities
totaling 0.5 million EUR
(31 December 2005: 0.4 million EUR) and short-term
liabilities totaling 41.8 million EUR (31 December 2005: 38.2 million EUR). As
of the end of the year, provisions totaling 2.3 million EUR had been made. The
Group's net debt at the end of 2006 was -88.4 million EUR and the ratio of net
debt to equity was -34% (31 December 2005: -106.3 million EUR and -41%).
The 2006 Eesti Telekom Group cash flow from operations was 121.3 million EUR
(2005: 128.2 million EUR). The Group's cash flow into investments in 2006 was
48.6 million EUR (2005: 49.6 million EUR). During the past year, the cash flow
into the acquisition of tangible and intangible fixed assets increased to 49.2
million EUR (2005: 35.4 million EUR). Cash flow into investment activities in
2006 was
79.5 million EUR (2005: 72.3 million EUR), including the payment of a
dividend of 79.4 million EUR (2005: 70.5 million EUR).
Management and personnel
The number of employees at Eesti Telekom Group as of 31 December was 2,312 (31
December 2005: 2186). The average number of employees during 2006 was 2,206.
As of 31 December 2006, the number of employees at EMT Group was 553 (31
December 2005: 507). The number of employees has increased in connection with
the growth of the client base and expansion of the service portfolio.
The number of employees at Elion Group as of 31 December 2006 was 1,736 (31
December 2005: 1673). The number of employees has increased in connection with
the growth of the client based for new business fields and the consolidation of
the Internet market, in the course of which small providers of connection
services have been acquired and their personnel has been transferred to Elion.
The total amount of the salaries paid in 2006 for Eesti Telekom Group employees
was 30.9 million EUR (2005: 25.3 million EUR). The employees at EMT Group were
paid 8.2 million EUR (2005: 7.3 million EUR). The Elion Group paid its employees
22.0 million EUR (2005: 17.5 million EUR).
As of 31 December 2006, there were 54 people in management and upper management
in the Eesti Telekom Group (31 December 2005: 61 people). During 2006, the
salaries calculated for management and upper management totaled 3.7 million EUR
(2005: 2.6 million EUR)
Report on Corporate Governance
As of 1 January 2006, AS Eesti Telekom (“Eesti Telekom”) follows the
instructions of the Estonian Principles of Corporate Governance (“PCG”). This
report describes the management of Eesti Telekom in 2006 and its conformity with
PCG instructions. In 2006, Eesti Telekom believes it adhered to PCG instructions
except in the cases noted in this report.
Eesti Telekom
Eesti Telekom is a public limited company registered in the Republic of Estonia,
at Roosikrantsi 2, 10119 Tallinn, with the registry code of 10234957. The share
capital of Eesti Telekom in 2006 was 88,169,013.08 EUR, which is divided into
registered shares of a single type with a nominal value of
0.64 EUR. 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 3,000 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 regular 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. 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 vote in favor, except in certain
cases (i.e. amending the articles of association, recalling members of the
Supervisory Board before the end of their term, 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 vote in favor.
In 2006, the shareholders' regular general meeting took place on 18 May. The
meeting approved the 2005 Annual Report and proposal for the distribution of
profits, 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 2006 financial year, and
approved the procedure for paying for auditing services. No extraordinary
general meetings took place in 2006.
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. 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.
The Eesti Telekom Management Board announces the convening of a general meeting
at least three weeks in advance in the case of a regular meeting and at least
one week in advance in the case of an extraordinary meeting, by publishing the
corresponding notice in at least one newspaper with national circulation in the
Republic of Estonia. The notice regarding the 2006 regular general meeting was
published in the Postimees on 20 April 2006 and through the Tallinn Stock
Exchange information system on 19 April 2006. No questions were asked regarding
the agenda presented in the given notice and no supplementary proposals were
made.
Therefore, in respect to the 2006 Eesti Telekom general meeting, the PCG
instructions were followed, except for the rule prescribed by PCG clause 1.3.2,
which was partially observed. 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. Heido Vitsur, a
candidate for Supervisory Board member, did not participate in the 2006 regular
general meeting for reasons not related to Eesti Telekom.
Supervisory Board
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 companies activities in
significant fields of activity and questions that are not under the sole
authority of the general meeting according to the law or statutes and which are
outside the framework of the company's everyday economic activities (i.e.
approval of budgets and business plans, resolving organizational questions
related to Eesti Telekom and its group, etc.).
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
maximum of one year. Until 18 May 2006, the Eesti Telekom Supervisory Board
included the following people: Bengt Andersson, Erik Hallberg, Alo Kelder, Tarmo
Porgand, Tomas Lenke, Mats Salomonsson, and Raivo Vare. As of 18 May 2006, the
following people comprised the Eesti Telekom Supervisory Board: Bengt Andersson,
Erik Hallberg, Heido Vitsur, Tarmo Porgand, Hans Tuvehjelm, Mats Salomonsson,
and Aare Tark. The following people are associated with the Swedish company
TeliaSonera AB that controls Eesti Telekom: Bengt Andersson, Erik Hallberg,
Tomas Lenke, Mats Salomonsson, and Hans Tuvehjelm. Supervisory Board member Aare
Tark has had business connections with Eesti Telekom through a company
(provision of legal services) controlled by him. Therefore, it is not precluded
that as of 18. May 2006, Eesti Telekom will not observe the practice prescribed
by clause 3.2.2, according to which at least three members of a seven-member
Supervisory Board must be independent. In this respect, Eesti Telekom refers to
the regulations of the Tallinn Stock Exchange, according to which an acceptable
minimum standard is the existence of two totally independent members on the
Supervisory Board. The members of the Supervisory Board will elect a Chairman
from among themselves. In 2006, Erik Hallberg acted as Chairman of the
Supervisory Board.
At the extraordinary meeting of Eesti Telekom shareholders on 6 February Bengt
Andersson, Erik Hallberg, and Hans Tuvehjelm were recalled and Terje
Christoffersen, Jörgen Latte, and Anders Gylder were elected to replace them. At
the Supervisory Board meeting held on the same day, the Supervisory Board
elected Terje Christoffersen as the new chairman.
Remuneration for the work of the members of the Supervisory Board has be made
according to the resolution of the 2006 regular shareholders' meeting. In 2006,
the payment for the Chairman of the Supervisory Board was 1,278.23 EUR per month
and 575.20 EUR for the members of the Supervisory Board, and the direct costs
incurred by the members of the Supervisory Board related to the performance of
their obligations were compensated. No other additional payments are made to
the members of the Supervisory Board.
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 2006, the Supervisory Board
held eight meetings. The Management Board presented regular reports to the
Supervisory Board on the economic activities and financial status of the Eesti
Telekom Group. 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 2006, the Supervisory Board approved the 2005 Annual
Report, the 2005 results of the motivational system for Eesti Telekom Group top
management, the Group's business plan for 2007-2008, as well as the 2007 Eesti
Telekom Group and Eesti Telekom budgets and the motivational system for the top
management for 2007.
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 interest in 2006.
Therefore, in 2006, PCG instructions were followed in the work of the Eesti
Telekom Supervisory Board, except for the rule prescribed by PCG clause 3.2.2,
which was not observed starting on 18 May 2006.
Management Board
The Management Board is the Eesti Telekom management body that deals with the
management of everyday economic activities and the representation of Eesti
Telekom. Each member of the Management Board may represent Eesti Telekom alone
in all legal actions (in case of a two-member Management Board). For the
achievement of Eesti Telekom's objectives, the Management Board analyzes the
risks related to Eesti Telekom's activities and financial objects. With its own
resolution, the Eesti Telekom Management Board has established rules regarding
the maintenance of internal information, internal rules for accounting, etc. The
Management Board must comply with the legitimate regulations of the Supervisory
Board. In 2006, a constant exchange of information took place between the
Management Board and Supervisory Board of Eesti Telekom, i.e. the Management
Board submitted regular reviews on the economic activities and financial status
of the Eesti Telekom Group to the Supervisory Board.
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 members as the
Chairman, who also acts as the company's Managing Director. In 2006, the members
of the Eesti Telekom Management Board were Managing Director Jaan Männik and
Financial Director Hille Võrk.
On 5 December 2006, the Supervisory Board of Eesti Telekom decided to appoint
Valdo Kalm as the new Chairman of the Management Board. Valdo Kalm will take
over the position of Eesti Telekom's Chairman from the current Chairman, Jaan
Männik, after the regular Eesti Telekom shareholders' meeting, which is planned
for 22 May 2007. The Eesti Telekom Supervisory Board also decided to appoint
Valdo Kalm to be a member of the Eesti Telekom Management Board as of 1 January
2007. Until being named Chairman of the Management Board, he will serve as the
Deputy Chairman of the Management Board.
The salaries and severance pay of the members of the Management Board, and the
payment conditions are determined by the employment contracts 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 2006, the members of the
Management Board would receive a bonus equal to six months salary. The retiring
Chairman of the Management Board also has a pension agreement with Eesti
Telekom. In 2006, Eesti Telekom did not comply with PCG clause 2.2.7, 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 this time, the disclosure of such information is 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.
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 interest
in 2006.
Therefore, in 2006, PCG instructions were followed in the work of the Eesti
Telekom Management Board, except for the rule prescribed by PCG clause 2.2.7.
Control Functions
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 18 May 2006, the Committee members were Mats Salomonsson
(Committee Chairman), Tomas Lenke, and Alo Kelder. The secretary was Hille Võrk.
On 30 May 2006, Mats Salomonsson (Committee Chairman), Hans Tuvehjelm, and Tarmo
Porgand were elected as members of the Committee, and Hille Võrk was appointed
as secretary. During 2006, the Committee met five times.
External Auditors
According to the articles of association, the auditor(s) are chosen by the
general meeting. In 2006, the Eesti Telekom auditor was Urmas Kaarlep from 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 purchased 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 principle 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. The members of the Committee until 18 May 2006
were Erik Hallberg (Committee Chairman), Bengt Andersson, and Raivo Vare, and
the secretary was Jaan Männik. As of 30 May 2006, the members of the Committee
are Erik Hallberg (Committee Chairman), Bengt Andersson, and Aare Tark, and the
secretary is Jaan Männik. During 2006, the Committee met four times.
Information Disclosure and Financial Reporting
The information required by the PCG instructions are 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 2006, Eesti Telekom
complied with the PCG instructions on information disclosure.
Eesti Telekom prepares its accounting reports in accordance with the
international financial reporting standards applied in the European Union. 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.
CONSOLIDATED INCOME STATEMENT
In thousands of Euros
--------------------------------------------------------------------------------
| | Year ended 31 December |
--------------------------------------------------------------------------------
| | 2006 | 2005 |
--------------------------------------------------------------------------------
| Net sales | 368,626 | 329,744 |
--------------------------------------------------------------------------------
| Cost of sales | (208,359) | (189,074) |
--------------------------------------------------------------------------------
| Gross profit | 160,267 | 140,670 |
--------------------------------------------------------------------------------
| Sales, administrative, and research & | (58,086) | (51,895) |
| development expenses | | |
--------------------------------------------------------------------------------
| Other operating income | 3,387 | 1,472 |
--------------------------------------------------------------------------------
| Other operating expenses | (345) | (909) |
--------------------------------------------------------------------------------
| Operating profit | 105,223 | 89,338 |
--------------------------------------------------------------------------------
| Finance income | 2 734 | 2,608 |
--------------------------------------------------------------------------------
| Finance costs | (125) | (193) |
--------------------------------------------------------------------------------
| Finance income, net | 2,609 | 2,415 |
--------------------------------------------------------------------------------
| Share of profit/(loss) from associates | 12 | 29 |
--------------------------------------------------------------------------------
| Profit before tax | 107,844 | 91,782 |
--------------------------------------------------------------------------------
| Income tax on dividends | (23,863) | (22,274) |
--------------------------------------------------------------------------------
| Net profit for the period | 83,981 | 69,508 |
--------------------------------------------------------------------------------
| Attributable to: | | |
--------------------------------------------------------------------------------
| Equity holders of the Company | 83,689 | 69,498 |
--------------------------------------------------------------------------------
| Minority interest | 292 | 10 |
--------------------------------------------------------------------------------
| | 83,981 | 69,508 |
--------------------------------------------------------------------------------
| Earnings per share for profit | | |
| attributable to the equity holders of | | |
| the Company during the year | | |
--------------------------------------------------------------------------------
| Basic earnings per share (in EUR) | 0.61 | 0.50 |
--------------------------------------------------------------------------------
| Diluted earnings per share (in EUR) | 0.61 | 0.50 |
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
In thousands of Euros
--------------------------------------------------------------------------------
| | As at 31 December |
--------------------------------------------------------------------------------
| | 2006 | 2005 |
--------------------------------------------------------------------------------
| ASSETS | | |
--------------------------------------------------------------------------------
| Non-current assets | | |
--------------------------------------------------------------------------------
| Property, plant and equipment | 130,673 | 117,209 |
--------------------------------------------------------------------------------
| Intangible assets | 13,681 | 10,654 |
--------------------------------------------------------------------------------
| Investments in associates | 1,102 | 189 |
--------------------------------------------------------------------------------
| Other non-current receivables | 7,615 | 2,823 |
--------------------------------------------------------------------------------
| Total non-current assets | 153,071 | 130,875 |
--------------------------------------------------------------------------------
| Current assets | | |
--------------------------------------------------------------------------------
| Inventories | 9,120 | 5,552 |
--------------------------------------------------------------------------------
| Trade and other receivables | 56,511 | 53,490 |
--------------------------------------------------------------------------------
| Short-term investments | 68,057 | 80,953 |
--------------------------------------------------------------------------------
| Cash and cash equivalents | 20,733 | 25,919 |
--------------------------------------------------------------------------------
| Total | 154,421 | 165,914 |
--------------------------------------------------------------------------------
| Assets classified as held-for-sale | 49 | 1,007 |
--------------------------------------------------------------------------------
| Total current assets | 154,470 | 166,921 |
--------------------------------------------------------------------------------
| TOTAL ASSETS | 307,541 | 297,796 |
--------------------------------------------------------------------------------
| EQUITY AND LIABILITIES | | |
--------------------------------------------------------------------------------
| Capital and reserves attributable | | |
| to equity holders of the Company | | |
--------------------------------------------------------------------------------
| Share capital | 88,169 | 88,169 |
--------------------------------------------------------------------------------
| Share premium | 22,753 | 22,753 |
--------------------------------------------------------------------------------
| Statutory legal reserve | 8,817 | 8,817 |
--------------------------------------------------------------------------------
| Retained earnings | 142,832 | 138,421 |
--------------------------------------------------------------------------------
| Total capital and reserves | 262,571 | 258,160 |
| attributable to equity holders of | | |
| the Company | | |
--------------------------------------------------------------------------------
| Minority interest | 321 | 74 |
--------------------------------------------------------------------------------
| Total capital and reserves | 262,892 | 258,234 |
--------------------------------------------------------------------------------
| Non-current liabilities | | |
--------------------------------------------------------------------------------
| Interest bearing loans and | 200 | 369 |
| borrowings | | |
--------------------------------------------------------------------------------
| Retirement benefit obligations | 506 | 443 |
--------------------------------------------------------------------------------
| Provisions | 1,414 | - |
--------------------------------------------------------------------------------
| Non-interest bearing liabilities | 329 | - |
--------------------------------------------------------------------------------
| Total non-current liabilities | 2,449 | 812 |
--------------------------------------------------------------------------------
| Current liabilities | | |
--------------------------------------------------------------------------------
| Trade and other payables | 41,631 | 37,992 |
--------------------------------------------------------------------------------
| Interest bearing loans and | 175 | 203 |
| borrowings | | |
--------------------------------------------------------------------------------
| Retirement benefit obligations | 55 | 55 |
--------------------------------------------------------------------------------
| Provisions | 339 | 500 |
--------------------------------------------------------------------------------
| Total current liabilities | 42,200 | 38,750 |
--------------------------------------------------------------------------------
| Total liabilities | 44,649 | 39,562 |
--------------------------------------------------------------------------------
| TOTAL EQUITY AND LIABILITIES | 307,541 | 297,796 |
--------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
In thousands of Euros
--------------------------------------------------------------------------------
| | Year ended 31 December |
--------------------------------------------------------------------------------
| | 2006 | 2005 |
--------------------------------------------------------------------------------
| Net cash from operating activities | 121,336 | 128,203 |
--------------------------------------------------------------------------------
| Cash flows from investing activities | | |
--------------------------------------------------------------------------------
| Tangible and intangible fixed assets | (47,962) | (35,402) |
| acquired | | |
--------------------------------------------------------------------------------
| Proceeds from sale of tangible and | 3,170 | 1,122 |
| intangible fixed assets | | |
--------------------------------------------------------------------------------
| Acquisition of business net of cash | (6,238) | (18,793) |
| acquired and settlements of deferred | | |
| consideration | | |
--------------------------------------------------------------------------------
| Proceeds from sales of subsidiaries | - | 13,899 |
--------------------------------------------------------------------------------
| Acquisition of associates | (901) | - |
--------------------------------------------------------------------------------
| Proceeds from sales of associates | - | 1,042 |
--------------------------------------------------------------------------------
| Net cash changes of short-term investments | 11,363 | (5,602) |
--------------------------------------------------------------------------------
| Net cash changes of other long-term | (8,343) | (5,890) |
| receivables | | |
--------------------------------------------------------------------------------
| Repayments of loans granted to associates | 262 | - |
--------------------------------------------------------------------------------
| Net cash used in investing activities | (48,612) | (49,624) |
--------------------------------------------------------------------------------
| Cash flow before financing activities | 72,724 | 78,579 |
--------------------------------------------------------------------------------
| Cash flows from financing activities | | |
--------------------------------------------------------------------------------
| Dividends paid | (79,352) | (70,547) |
--------------------------------------------------------------------------------
| Repayments of finance lease liabilities | (109) | (1,005) |
--------------------------------------------------------------------------------
| Proceeds from non-convertible debts | - | 132 |
--------------------------------------------------------------------------------
| Repayments of non-convertible debts | - | (294) |
--------------------------------------------------------------------------------
| Repayments of long-term borrowings | - | (21) |
--------------------------------------------------------------------------------
| Repayments of short-term borrowings | - | (569) |
--------------------------------------------------------------------------------
| Net cash used in financing activities | (79,461) | (72,304) |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents | (6,737) | 6,275 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash and cash equivalents at beginning of | 27,507 | 21,178 |
| year | | |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents | (6,737) | 6,275 |
--------------------------------------------------------------------------------
| Effect of foreign exchange rate changes | (37) | 54 |
--------------------------------------------------------------------------------
| Cash and cash equivalents at end of year | 20,733 | 27,507 |
--------------------------------------------------------------------------------
