MANAGEMENT REPORT 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%). On April 5 2007 AS Merko Ehitus acquired 75% holding of OÜ Fort Ehitus (Registry Code 10722444). Principal activities of OÜ Fort Ehitus are hydraulic engineering and pile works. The holding was acquired in order to strengthen competence of the group in the field of pile works and hydraulic engineering construction. (http://www.baltic.omxgroup.com/market/?pg=news&news_id=213583) Business operations The sales of Merko Ehitus Group for 3 months in 2007 was 1014.9 million kroons, with a 86.4% rise within a year. The capacity of activities carried out outside Estonia rise from 30.3% to 31.9% of the Group's sales. 68.1% of revenue was earned in Estonia, 15.2% in Latvia and 16.7% in Lithuania. Compared to 3 months in 2006 the sales grew 82.0% in Estonia, 45.8% in Latvia and 186.6% in Lithuania. The warm winter jointly with the cyclic nature of residential building construction operations had a positive effect on the sales. Companies of the Group 3M 2007 consolidated revenue (sales outside the Group) were (in thousand kroons and euros): 3M 2007 3M 2006 EEK EUR EEK EUR Estonian companies Construction AS Merko Ehitus (parent company) 464 357 29 678 278 427 17 795 AS Gustaf (75% partnership) 22 411 1 432 16 949 1 083 OÜ Gustaf Tallinn (80% partnership) 34 221 2 187 20 416 1 305 AS Merko Tartu (66% partnership) 40 030 2 558 28 204 1 803 Tallinna Teede AS (100% partnership) 20 650 1 320 2 734 175 OÜ Woody (100% partnership) 123 227 7 876 47 688 3 048 Latvian company SIA Merks (100% partnership) 127 341 8 139 93 298 5 963 Lithuanian company UAB Merko Statyba (100% partnership) 156 893 10 027 56 799 3 630 Due to the volume growth and appreciation of labour and material costs, the cost of goods sold increased by 88.6% and the distribution and administrative expenses increased by 6.8%, contributing 87.3% and 4.1%, respectively, to sales revenue. Due to the improved sales, the operating profit increased from 6.3 per cent to 8.7 per cent of the sales as compared with the first quarter of 2006. The net profit of the Group for 2007 3M was 88.5 million kroons, with a yearly growth of 149.9%. The cyclic nature of residential building construction operations and increased sales had a positive effect on the profit of the first quarter. The ratios and calculation methods characterizing the operating activities of the Group 2007 3 months 2006 3 months Net profit margin 8.7 % 6.4 % Operating profit margin 8.7 % 6.3 % Return on equity per annum 21.6 % 12.4 % Return on assets per annum 10.9 % 6.0 % Current ratio 2.1 2.0 Equity ratio 51.0 % 47.4 % General expenses to sales 4.1 % 7.1 % Staff costs to sales 12.8 % 13.3 % Average number of full-time employees 907 790 Net profit margin: Net profit / Sales Operating profit margin: Operating profit / Sales Return on equity: Net profit x 4* / Average equity during the period* Return on assets: Net profit x 4* / Average assets during the period Current ratio: Current assets / Current liabilities Equity ratio: Owners equity* / Total assets General expenses to sales: General expenses / Sales Staff costs to sales: Staff costs / Sales * calculated from the share of the parent company's shareholders In 31.03.2007, the average number of full-time employees in the Group's service was 907, having increased by 57 employees in last quarter. The gross salaries paid to full-time personnel in 1st quarter amounted to 78.7 million kroons. INCOME STATEMENT 3M 2007 consolidated, in thousand EEK and EUR EEK EUR 3M 2007 3M 2006 3M 2007 3M 2006 Revenue 1 014 864 544 576 64 862 34 805 Cost of goods sold (886 352) (470 008) (56 648) (30 039) GROSS PROFIT 128 512 74 568 8 214 4 766 Marketing expenses (5 605) (6 134) (358) (392) Administrative and general expenses(35 610) (32 469) (2 276) (2 075) Other operating income 2 102 1 407 134 90 Other operating expenses (1 038) (3 260) (66) (209) OPERATING PROFIT 88 361 34 112 5 648 2 180 Financial income and expenses from stocks of associate companies and joint ventures 6 831 3 203 437 205 Financial income and expenses from other long-term financial investments 0 3 0 0 Interest expense (2 733) (2 194) (175) (140) Foreign exchange gain (3 447) (1 199) (220) (77) Other financial income 3 257 1 467 208 94 Other financial expenses (1) (0) (0) (0) Total financial income and expenses 3 907 1 280 250 82 PROFIT BEFORE TAX 92 268 35 392 5 898 2 262 Corporate income tax expense (881) (0) (57) (0) NET PROFIT FOR CURRENT PERIOD 91 387 35 392 5 841 2 262 incl. net profit attributable to equity holders of the parent company 88 450 34 723 5 653 2 219 minority interest 2 937 669 188 43 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 5,00 1,96 0,32 0,13 BALANCE SHEET AS OF 31.03.2007 consolidated, in thousand EEK and EUR EEK EUR 31.03.2007 31.12.2006 31.03.2007 31.12.2006 ASSETS Current assets Cash and cash equivalents 321 903 676 143 20 573 43 213 Trade and other receivables 1 152 343 860 531 73 648 54 998 Inventories 1 480 273 1 356 734 94 607 86 712 Assets held for sale 0 733 0 47 Total current assets 2 954 519 2 894 141 188 828 184 970 Non-current assets Long-term financial investments 220 192 215 866 14 073 13 796 Investment property 3 840 3 900 245 249 Property, plant and equipment 99 795 90 445 6 378 5 781 Intangible assets 10 901 10 177 697 650 Total non-current assets 334 728 320 388 21 393 20 476 TOTAL ASSETS 3 289 247 3 214 529 210 221 205 446 LIABILITIES AND OWNERS' EQUITY Current liabilities Borrowings 223 605 283 792 14 291 18 138 Trade and other payables 1 096 400 1 100 264 70 073 70 320 Government grants 1 472 1 498 94 96 Short-term provisions 80 580 33 517 5 150 2 142 Total current liabilities 1 402 057 1 419 071 89 608 90 696 Non-current liabilities Loans, bonds and finance lease liabilities 149 814 159 335 9 575 10 183 Other long-term payables 8 963 23 277 572 1 488 Long-term customer prepayments 30 507 0 1 950 0 Total non-current liabilities 189 284 182 612 12 097 11 671 Total liabilities 1 591 341 1 601 683 101 705 102 367 Equity Minority interest 21 840 18 904 1 396 1 208 Equity attributable to equity holders of the parent company Share capital 177 000 177 000 11 312 11 312 Statutory reserve capital 17 700 17 700 1 131 1 131 Currency translation adjustment (12 077) (5 751) (771) (368) Retained earnings 1 493 443 1 404 993 95 448 89 796 Total equity attributable to equity holders of the parent company 1 676 066 1 593 942 107 120 101 871 Total equity 1 697 906 1 612 846 108 516 103 079 TOTAL LIABILITIES AND EQUITY 3 289 247 3 214 529 210 221 205 446 Alar Lagus Member of Board +372 6 805 109