MANAGEMENT REPORT General information The principal activity of Eesti Telekom Group, the parent company of which is AS Eesti Telekom (registration number 10234957; address: Valge 16, 19095 Tallinn), is the provision of telecommunications services. Since 1999, the shares of AS Eesti Telekom have been listed on the Tallinn and London stock exchange (OMX: ETLAT / LSE: EETD). Changes in the structure of the Eesti Telekom Group In October 2008, AS MicroLink Eesti acquired the majority participation in the IT Training Center. The acquisition of the training company gives MicroLink the opportunity to provide high-quality training and consultation services to both clients and partners in various cooperation projects in all three Baltic countries. The ownership structure of AS Eesti Telekom In the first quarter of 2008, TeliaSonera AB increased its share of AS Eesti Telekom (through its subsidiary Baltic Tele AB). TeliaSonera acquired an additional 1,197,400 AS Eesti Telekom shares and thereby increased its participation to 60.12%. As of the end of 2008, 24.17% of the shares belong to the government of Estonia and 3.00% to Estonian Development Fund. As of 31 December 2008, the ratio of freely traded shares converted to GDRs was 12.71%. Of these, 12.91% were converted into GDRs traded on the London Stock Exchange. As of 31 December 2008, the 10 largest shareholders in AS Eesti Telekom were: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | | 31 December 2008 | -------------------------------------------------------------------------------- | | Number of | Participation | | | securities | | -------------------------------------------------------------------------------- | | Changed | | | compared to 31 | | | December 2007 | -------------------------------------------------------------------------------- | Baltic Tele AB | 82,936,299 | 60.12% | 1,197,400 | -------------------------------------------------------------------------------- | Ministry of Finance | 33,346,464 | 24.17% | - | -------------------------------------------------------------------------------- | Estonian Development Fund | 4,138,636 | 3.00% | - | -------------------------------------------------------------------------------- | SEB clients | 2,864,734 | 2.08% | 1,462,384 | -------------------------------------------------------------------------------- | Deutsche Bank (GDR accounts) | 2,264,220 | 1.64% | (948,018) | -------------------------------------------------------------------------------- | ING Luxembourg S.A. | 2,055,783 | 1.49% | 257,453 | -------------------------------------------------------------------------------- | Clearstream Banking Luxembourg | 584,976 | 0.42% | (48,264) | | S.A. clients | | | | -------------------------------------------------------------------------------- | UniCredit Bank Austria AG | 496,386 | 0.36% | (706,024) | -------------------------------------------------------------------------------- | Mellon Treaty Omnibus | 392,152 | 0.28% | 89,460 | -------------------------------------------------------------------------------- | State Street Bank and Trust | 335,945 | 0.24% | 255,171 | | Omnibus Account | | | | -------------------------------------------------------------------------------- AS Eesti Telekom shares During 2008, the price of AS Eesti Telekom shares decreased by 50%. The share price was 122.04 EEK at the beginning of the year and 61.02 EEK at the end of the year. The highest and lowest share price during the reporting period was 125.02 EEK and 59.61 EEK respectively. The turnover for the reporting period was 1,822 million EEK. During 2008, the share price of AS Eesti Telekom has moved at a higher level than the OMX Tallinn Index and the index of the 10 most actively traded shares on the OMX Baltic 10. Dividends Eesti Telekom has no official dividend policy. However, the shares have been characterized by relatively high-yield dividends. The shareholders were paid a dividend of 10.50 EEK per share for the 2007 financial year. Dividend information: -------------------------------------------------------------------------------- | | 2004 | 2005 | 2006 | 2007 | 2008 | -------------------------------------------------------------------------------- | Year-end number | 137,954, | 137,954,5 | 137,954,5 | 137,954,5 | 137,954,5 | | of shares | 528 | 28 | 28 | 28 | 28 | -------------------------------------------------------------------------------- | Annual average | 137,825, | 137,954,5 | 137,954,5 | 137,954,5 | 137,954,5 | | number of shares | 320 | 28 | 28 | 28 | 28 | -------------------------------------------------------------------------------- | Equity per share, | 29.40 | 29.28 | 29.78 | 31.19 | 31.08 | | EEK | | | | | | -------------------------------------------------------------------------------- | Earnings per | 7.16 | 7.88 | 9.49 | 10.91 | 10.40 | | share, EEK | | | | | | -------------------------------------------------------------------------------- | P/E ratio | 15.7 | 15.1 | 13.8 | 11.2 | 5.9 | -------------------------------------------------------------------------------- | Dividends per | 8.00 | 9.00 | 9.50 | 10.50 | | | share for the | | | | | | | year, EEK | | | | | | -------------------------------------------------------------------------------- | Dividend payout | 111.7 | 114.2 | 100.1 | 96.2 | | | ratio, % | | | | | | -------------------------------------------------------------------------------- Economic environment The soft landing anticipated at the beginning of 2008 suddenly turned into an economic recession in the last quarter. The cooling of the real estate market and the toughening of loan terms by the banks that started in 2007 was followed by a decrease in domestic demand in the second quarter of 2008, which altogether resulted in negative economic growth. The downturn in the real estate market continued until the end of 2008. In the fall, the impact of the global financial crisis was added, which resulted in a decline of demand on Estonia's export markets. In the third quarter, export and industrial production suddenly decreased. As the total for the year, the reduction in GDP was 3.6 % according to Statistics Estonia. Unemployment increased during the second half of the year from 4.7% to 9.2%. Compared to the global economy, the economic downturn arrived in Estonia six months earlier. In the European Union, the anticipated average economic growth for 2008 was 1-2%. 2009 will be one of the most difficult years for Estonia during the period after the restoration of independence. The external economic environment will continue to be unfavorable throughout the year. This primarily is due to difficult-to-obtain and expensive loan resources and the reduced demand for export goods and services. In the Europe Union as a whole, an economic downturn of 2% is projected. The economic recession should bottom out in the middle of the year, and based on various projections, Estonia's economic decline in 2009 will be between 5% and 9%. A decline in domestic demand of the same caliber is also expected. The growth of unemployment will continue until the first half of 2010. The wages paid out will be reduced by up to 15%. At the same time, since the beginning of the year, trends have appeared that point to a restoration of economic growth in 2010. These include decreases in raw materials and fuel prices as well as a decline of producer prices. Inflation has halted suddenly and a decrease in consumer prices may already occur in the third quarter. An improvement in credit conditions is expected at the end of the year, as is an increase in the new company startups. However, economic growth will continue to be negative during the final months of the year. Telecommunications market The economic crisis has had less impact on the telecommunications sector than on the economy generally. 2008 was successful for telecommunications companies on the whole and the market continued to grow. However, a reduction in demand did appear in the private segment, and by the end of the year, also in the business segment. Traditional telecommunications services, such a phone calls, are relatively unaffected by events in the economic environment, and their consumption is autonomous, i.e. they are only slightly affected by prices and consumers' incomes. However, traditional communications services have exhausted their growth potential in Estonia: the number of ordinary phones has started to decrease and the increase of the number of mobile clients has also ended. The growth of broadband connection users has also slowed, and even if economic growth has continued, market saturation would have been achieved by 2010. However, the impact of the economic recession was added to the natural deceleration of the growth of traditional communications services, and therefore, new fields of activity are increasingly playing an important role in the revenues of telecommunications companies. Clients want telecommunications that will provide access to necessary information and entertainment, rather than just call communications for their home or office. In 2009, a decrease in consumption by private individuals and companies will continue, and the price pressure on telecommunications services will increase. However, modest growth will continue in the cable and digital television market. In addition to television services, the clients will be provided with video rental, photo uploading, games and other services. Estonia is fertile ground for telecommunications companies to find new outputs. The reason is excellent technological education, the government's continued intention of making Estonia a leading e-country, as well as a Nordic disposition that prefers communicating by computers, and TV or telephone screens to direct face-to-face contact. In regards to the spread of computer and ordinary literacy (competence in IT- and telecommunication technology), Estonia is among the most quickly developing countries in both “new” and “old” European countries. Based on the percentage of households connected to the broadband network, Estonia is definitely among the top ten in Europe. Estonia is almost totally covered with a high-quality mobile data communications network, and the development of mobile TV has been started. The companies that will be successful in 2009 are the ones that are able to make their operations more effective and to develop new technologies and services. In 2009, the “0-growth” scenario is most probable in the Estonian telecommunications market, in which case companies will develop new services to compensate for the reduction in traditional services. Eesti Telekom Group The 2008 financial results for the Eesti Telekom Group met expectations. The greatest increase in turnover was created by the broadband service segment - a contribution was made by the number of triple packages as well as an increase in the number of digiTV clients. In the mobile communications segment, the number of contractual mobile communications clients and number of data communications connections demonstrated good growth. In the IT services segment, the greatest growth was experienced by IT services sales (including IT training). The following developments in the Group's course of action during last year were satisfying: Compared to 2007, the number of AS EMT clients has increased by 18 thousand, reaching 487 thousand by the end of 2008. The revenues received from the mobile Internet continued to demonstrated rapid growth and exceeded the revenues for the previous year by 50%. The data volumes being transmitted also increased several times. Elion is Estonia's largest provider of digital television service, and in 2.5 years, it has become the second largest television operator on the market. In 2008, the number of digiTV clients has increased by 43%, reaching 82,500 by the end of the year. The number of Elion's permanent Internet connections increased by 8% in 2008 reaching 175,400 by the end of the year. In October 2008, MicroLink Eesti acquired the majority share (82.87%) in IT Koolituskeskuse OÜ (IT Training Center). The acquisition of the training company provides MicroLink the opportunity to provide high-quality training and consultation services to clients and partners in various cooperation projects. The client base of the IT Training Center and sales units in Latvia and Lithuania create excellent opportunities for growth in these markets. The Eesti Telekom Group considers rapid adjustment to the macro-economy and competitive situation, as well as maintaining and effectively increasing the client and revenue bases to be its primary objectives in 2009. Relations with the regulator Pursuant to the resolution of the Communications Board, the termination fee for voice calls in the mobile phone networks (interconnection fee) for AS EMT, Elisa Eesti AS and Tele2 Eesti AS for the period 1 July 2006 to 30 June 2007 was fixed at 2.05 EEK per minute and the interconnection fee was fixed at 1.66 EEK for the period 1 July 2007 to 30 June 2008. Since Elisa Eesti AS and Tele2 Eesti AS disputed the decisions in court, and in the course of provisional legal protection, the validity of the aforementioned administrative act was suspended the interconnection fees of all three mobile operators remained at 2.50 EEK until 5 November 2007. On 5 November 2007, the ruling of the Tallinn Circuit Court came into force, whereby the provisional legal protection was cancelled, and from the given date, all three mobile operators undertook to implement interconnection fees of 1.66 EEK. The litigation with Tele2 concluded at the end of December to the benefit of the latter. The litigation Elisa Eesti AS is continuing and EMT is participating in the litigation as a third party. For the period between 1 July 2008 and 30 June 2009, the Competition Board, which is the legal successor to the Communications Board, established a fee of 1.37 EEK per minute for the termination of voice calls in the mobile phone networks of AS EMT, Elisa Eesti AS and Tele2 Eesti AS. On 5 December 2008, the Competition Board announced new market analysis results, based on which they plan to declare ProGroup Holding OÜ an undertaking with significant market power in the market for the termination of voice calls in its mobile phone network, in addition to AS EMT, Elisa Eesti AS and Tele2 Eesti AS. According to the resolution plan, within the framework of the price control obligation, the given companies will be obligated to apply benchmark-based interconnection fees that correspond to the average in the European countries during the next three years, which will make 1.36 EEK per minute the maximum tariff to be applicable as of 1 July 2009. At the end of February, the Competition Board ended the proceeding regarding Elion's claim regarding the high interconnection fees charged by the Elisa Eesti AS telephone network, as a result of which Elisa decreased the fees for initiating calls by 0.04 EEK. Based on a resolution of the Competition Board, which was based on a 2006 cost calculation, as of 1 August 2008, Elion reduced the monthly rental fee for copper pairs by 2 EEK and by 3 EEK for selected copper pairs, which does not have a significant financial impact on Elion's results. At the end of July, the Competition Board completed its proceeding of the investigation of Elion's fees for wholesale leased line services and approved all the valid fees. At the end of August, the Competition Board approved all Elion's currently valid regulated prices (interconnection fees, fees for access to copper pairs and fees for broadband access). Based on 2007 cost information and the requirements of the Competition Board, as of 1 December 2008, Elion reduced the monthly fee for rental of copper pairs and selected copper pairs by 3 EEK on average and the fees for broadband access by 9-16% depending on speed. The price changes do not have any significant impact on Elion's results. Financial results In 2008, the market shares of the Eesti Telekom Group remained stable. Satisfying was the increase in the number of contractual mobile communications clients and mobile data communications connections, as well as the increase in the number of triple package and digiTV clients. Compared to the previous year, the EBITDA increased. Revenues, costs, profits In 2008, the consolidated sales revenues of the Eesti Telekom Group reached 6,190 million EEK, decreasing by 1% compared to 2007 (2007: 6,261 million EEK). In 2008, the consolidated turnover in the mobile communications services segment reached 3,682 million EEK, decreasing by 6% compared to 2007 (2007: 3,904 million EEK). The decrease of total revenues was caused by a decline in interconnection fees, which was partially compensated by a certain increase in the number of call minutes incoming to the network, an increase in mobile data communications, and growth in the volume of subcontracting services. In addition, the revenues received from the retailing and wholesaling of telecommunications goods decreased in 2008, which was caused by changes in consumer behavior due to postponing the purchase of more expensive permanent goods. At the end of 2008, the client base of AS EMT was 14 thousand more than a year earlier, reaching, 779 thousand active SIM cards (December 2007: 765 thousand cards). Compared to a year ago, the number of contractual clients has increased by 18 thousand, reaching 487 thousand by the end of 2008, while at the same time, the number of pre-paid card users has decreased by more than four thousand during the year to 292 thousand at the end of the 2008. EMT assesses its market share of active SIM cards to be 47%. The estimated penetration of active cards in Estonia is on 121%. The number of call minutes initiated by EMT clients showed an increase of 1% compared to 2007. The revenues received from the mobile Internet continued to demonstrate rapid growth. In 2008, the revenues from AS EMT mobile data communications exceeded the revenues for 2007 by half. At the same time, the volume of data that was transmitted increased several times. As of December 2008, the users of AS EMT mobile data communications amounted to 168 thousand, i.e. 7 thousand more users than a year ago. The increase in the popularity of mobile data communications is based on the rapid expansion of the 3G coverage area and advantageous offers for laptops in combination with Internet connection services. Today, most data communications already takes place in the 3G network, which allows clients to use high-quality Internet connections that approach ADSL speeds with conveniently controllable costs. Since EMT is the only operator in Estonia that provides EDGE data communications throughout its GSM coverage area, then investments in new base stations during the last months have been directly primarily at expanding external and internal 3G coverage in cities. At the same time, the constant improvement of the GSM network continues. A regulation of the European Parliament and Council applies to AS EMT, as it does to other mobile operators in the European Community, which specifies that as of September 2007 the rate per minute for outgoing and incoming calls made within the borders of the European Community cannot exceed the price ceiling established by regulation. In addition, in the third quarter, discount contracts for roaming services came into force that reduced both revenues and costs from roaming fees. Therefore, for the year as a whole, the revenues received from roaming clients have decreased by almost 13%. The turnover of the broadband services segment increased by 10% in 2008 to 3,280 million EEK (2007: 2,984 million EEK). The largest increase in revenues resulted from the sale of subcontracting services and international interconnection services, which increased by 118% and 55% respectively. The increase in revenues from international interconnection services resulted primarily from the significant increase of volumes for incoming international call minutes. The increase in sales revenues from subcontracting services was also related to the growth of minute volumes and the increase in brokered subservices. The third field of substantial revenue growth was the sale of comprehensive service packages that increased by 27% on the year. Active marketing campaigns and the general increase in the clients' data volumes have successfully supported the transfer of business clients' connections to greater speeds, which has in turn increased the profitability of comprehensive service packages. Based on the significant increase in the volume of comprehensive solutions, the revenues from the individual service fees for call connections and Internet connections has decreased by 10% and 14% respectively. At the same time, the revenues earned from the sale of comprehensive solutions considerably exceeded this decline. Due to the decrease in minute volumes, the revenues for call services in the broadband services segment declined by 6.5% during the year. The total number of Elion clients with permanent Internet connections increased by 12.3 thousand connections in 2008, reaching 175.4 thousand by the end of December (31 December 2007: 163.1 thousand). In addition to the sale of comprehensive solutions, the increase of permanent connections has been supported by the WiMAX base stations that were completed in February in Võru, Pärnu and Rapla Counties within the framework of the Külatee 3 follow-up project. The company assesses its market share based on the permanent connections of private clients to be 54%. As the result of an active marketing campaign, the number of Elion triple-package users increased by 22.6 thousand during the year, reaching 76.1 thousand as of 31 December (31 December 2007: 53.5 thousand). By the end of the year, Elion had 82.5 thousand IP and cable television clients (31 December 2007: 57.7 thousand). Elion assesses that the company's market share in the Estonian cable coverage market was 26% by the end of the year (31 December 2007: 19%), which, in the given market, indicates the greatest increase in 2008 in absolute terms. As of the fall, Elion is the only television services provider in Estonia that provides all its digiTV services in Russian. All of Elion's digiTV menus, programs for the Russian channels, most popular Estonian channels and international channels, screen notices and descriptions for the video-rental films are available in both Estonian and Russian. At the same time, in the fall, several famous Russian movies were added to digiTV's video rental service. The purpose of the improvements was to increase digiTV's user-friendliness for Russian-speaking clients and to provide the most diverse entertainment possible. A marketing campaign conducted in 2008 providing free films within the framework of the remote video rental service significantly accelerated the rental of films for a fee. In 2008, Elion video rental revenues increased by 172% compared to the previous year. As of December, Elion is the first in Estonia to offer games as a new content element of its Internet-based digiTV service, in which each game can be ordered separately or as theme packages for a monthly fee. At the end of 2008, the number of Elion's active call interfaces totalled 469 thousand (31 December 2007: 482 thousand interfaces), remaining stable at the same level during the year. In 2008, Elion focused primarily on the development and provision of IP-based call communications connections and solutions. The number of IP-based Centrex call communications connections increased more than 50% during the year. In addition, during the second half of the year, Business Client VoIP call services based on Internet connections started to be provided in areas with wireless WiMAX Internet coverage. Elion assesses its market share for call minutes initiated in the fixed network to be 80.5% (December 2007: 81%). The market share for local call minutes is 82% (December 2007: 83%), 66% for international call minutes (December 2007: 64%) and 71% for call minutes made to mobile phones (December 2007: 72%). As a result of the general deceleration of retail sales in Estonia, the retail sales of the Elion Group's telecommunications and IT goods slowed by 15% in 2008 compared to the previous year. At the end of May, OÜ Viru Net, a 100% subsidiary of Elion, was merged with the parent company, Elion Enterprises. Viru Net was the leading provider of Internet services in East-Viru County, specializing in the provision of services to multi-story buildings. Upon the merger of the two companies, Elion initiated a broader program to introduce and develop the Internet in multi-story buildings in East-Viru County, by combining Viru Net's knowledge of the client segment and its long-term experiences in the area with Elion's systematic solutions, as well as its high-quality and broad product portfolio. In 2008, the consolidated sales revenues for the IT services segment reached 371 million EEK (2007: 365 million EEK). The 2008 IT services segment data includes consolidated data as of 1 November 2008 for the companies of the IT Training Center Group that was acquired in October 2008. Sales revenues increased by 1.5%, compared to the previous year, while the sales revenues increased by 8.8% for services (including IT training) and decreased by 5.2% for merchandise. In 2008, one of the most important events for MicroLink Eesti was the move to the Ülemiste technology campus, where new worker-friendly office space is being completed. A 150-sq-m information technology demo center unique to Estonia will be established there, where MicroLink and other IT companies will have an opportunity to demonstrate how various information technology solutions work in practice to Estonian companies and foreign visitors, and thereby to promote export. In October 2008, MicroLink Eesti acquired the majority share (82.87%) of the IT Koolituskeskuse OÜ (IT Training Center). The acquisition of the training company provides MicroLink the opportunity to provide high-quality training and consultation services to clients and partners in various cooperation projects. The company also plans to start providing its services in all three Baltic countries. The client base of the IT Training Center and sales units in Latvia and Lithuania create excellent opportunities for growth in these markets. In regard to infrastructure solutions, the following large procurements were won: the Health Insurance Fund and Ministry of Defense servers, the drive array for the Ministry of Social Affairs e-health project, the expansion of Eesti Energia's existing drive array, the Ministry of Justice procurement for desktop computers, the Estonian Informatics Center servers, etc. In the third quarter of 2008, the “Laptops for Teachers” procurement organized by the Tiger's Leap Foundation was won. Within the framework of the procurement, laptop computers were procured for almost 4,100 teachers. The transaction totalled more than 34 million EEK. AS MicroLink Eesti designed and procured technological solutions for the server farm with large computing power created at the Scientific Computation Center of the University of Tartu. The procurement placed great importance on the achievement of the best energy consumption and computing power ratio. For new infrastructure solution, MicroLink became a distributor and technical support provider for Apple computers. MicroLink became an official Apple partner and acquired resale rights for Apple products. In 2008, two of the largest public procurements that were won for the provision of permanent services were the procurement organized by the Ministry of Social Affairs for the purchase of the hosting environment for digital prescription (provision of services for four years at a total cost of 35.4 million EEK) and the procurement for the hosting service for the register of plans organized by the Tallinn City Planning Department (provision of services during three years at a total cost of 2 million EEK). In the fourth quarter, AS MicroLink Eesti also won three procurement organized by the Ministry of Social Affairs for hosting information systems. Within the framework of these procurements, MicroLink Eesti will host and manage the registers of the Ministry of Social Affairs with information on those registered as unemployed and job seekers as well as information on the provision of labor market services, and the register of those dealing with pharmaceuticals. Administration of the operating platform of the Estonian Social Insurance Board information system will also be performed. Also worth noting are the administration of the central systems and workplace computers at Empower Eesti and Trust Media, as well as the hosting of the Ministry of Culture's URRAM information system and the information systems for the Estonian Private Forest Union. The most important activities in the project business in 2008 included jobs related to the e-health project (patient portal, digital photos and digital prescriptions). MicroLink was the principal contractor for the Digital Picture and Digital Prescription solutions and the creator of the Patient Portal within the framework of the Digital Health Record Project. The 2008 development work for the given systems has been completed, and in 2009, they will be actively implemented. The most important projects for 2008 include the implementation of document management (Livelink) and Service Desk software at the Estonian Post; the implementation of Livelink at the Tax and Customs Board; identity management at the North-Estonia Medical Center and the further development of the KUNDE information system at Statistics Estonia. Work will also continue at Estonian Post and the North-Estonia Medical Center in 2009, as will the Ergo Insurance archival solution project that was started in the fourth quarter. The Eesti Telekom Group operating costs decreased in 2008 by 2% to 3,865 million EEK (2007: 3,947 million EEK). The operating costs for the mobile communications services segments decreased by 8% compared to 2007 to 2,277 million EEK (2007: 2,463 million EEK). The greatest decrease was in interconnection costs, which was caused by a drop in interconnection fees. The operating costs related to retailing and wholesaling also decreased, which correspond to the drop in merchandise sales turnovers. Operating costs in the broadband services segment increased in 2008 by 12%, reaching 2,366 million EEK (2007: 2,115 million EEK). Of the increase in operating costs, 60% resulted from an increase of direct sales costs caused by a growth of sales volumes. The second primary growth factor for operating costs was personnel costs that increased by 9% compared to the previous year. Of the cost increase, 13% were non-recurring costs and related to efficiency projects and other costs related to the improvement of network resources and service quality. The cost for hopeless receivables in the broadband services segment increased 3.5 times during the year (by 16.5 million EEK). The consolidated operating costs in the IT services segment increased by 2% in 2008 compared to the previous year reaching 351 million EEK (2007: 343 million EEK). In 2008, labor costs increased by 9.5% and other operating costs by 29.3% compared to the previous year. The operating costs for 2008 were affected by increased costs accompanying the consolidation of the IT Training Center as well as by the non-recurring cost of MicroLink Eesti moving to new offices. The Eesti Telekom Group EBITDA in 2008 totalled 2,348 million EEK (2007: 2,336 million EEK), increasing by 1% compared to the previous year. The EBITDA in the mobile communications services segment increased by 2% compared to 2007, reaching 1,414 million EEK (2007: 1,387 million EEK). In connection with the decrease of the interconnection prices between telecommunications operators and the reduction in the relative importance of merchandise with lower profitability, the EBITDA margin for the year has increased. At the same time, the 2007 EBITDA margin was negatively impacted by a one-time provision of 62 million EEK. In 2008, the EBITDA for the broadband services segment increased by 5%, reaching 928 million EEK (2007: 882 million EEK). The EBITDA in the IT services segment reached 21 million EEK in 2008 (2007: 24 million EEK). The Eesti Telekom Group EBITDA margin has increased slightly during the year, reaching 37.9% in 2008 (2007: 37.3%). The Eesti Telekom Group's depreciation costs were 575 million EEK in 2008 (2007: 496 million EEK). During the last year, the Eesti Telekom Group earned EBIT of 1,773 million EEK, which was a reduction of 4% compared to 2007 (2007: 1,840 million EEK). During 2008 AS Eesti Telekom paid their shareholders a record-breaking dividend of 10.50 EEK per share (2007: 9.50 EEK per share). The income tax subject on the payment of the dividends totalled 386 million EEK (2007: 371 million EEK). The Eesti Telekom Group earned a net profit 1,438 million EEK in 2008 (2007: 1.512 million EEK). The earnings per share were 10.40 EEK (2007: 10.91 EEK). Investments During 2008, the Eesti Telekom Group invested 755 million EEK into property, plant and equipment and intangible assets (2007: 863 million EEK). Investments in the mobile communications services segment totalled 297 million EEK in 2008, decreasing by 10% compared to the previous year (2007: 330 million EEK). In mobile communications, a development priority, in addition to the constant development of the GSM network, was the implementation of technologies to support high-speed mobile data communications. In the broadband services segment, the 12-month investments in property, plant and equipment and intangible assets totalled 428 million EEK (2007: 513 million EEK). The majority of the capital volume was invested in the development of network resources, for the improvement of service quality and for increasing the availability of permanent Internet connections and digiTV. In the first quarter of 2008, Elion's international network node in Amsterdam was completed, which was established based on a need to increase the reliability of the London and Frankfurt connections. The creation of the Amsterdam network node enables Elion to better distribute network traffic between various foreign connections and to provide clients with increasingly fast access to various Internet networks. The new network node also enables Elion's call communications network to be developed. In addition to the Amsterdam network node, Elion also has network nodes in London Frankfurt, Helsinki (two), Riga (two), Vilnius, St. Petersburg, and Moscow. In 2008, the IT services segment invested 30 million EEK (2007: 33 million EEK), the majority of the investments were for the expansion of infrastructure necessary for the provision of services. It is planned to maintain investments at last year's levels in 2009. Investments will continue to be made in the construction of the mobile data communications (3,5G) network and the development of Elion's broadband network. Balance sheet and cash flows As of 31 December 2008, the Eesti Telekom Group balance sheet totalled 4,999 million EEK (31 December 2007: 5,023 million EEK). Compared to the beginning of the year, the non-current assets increased by 175 million EEK, the balance of which reached 2,925 million EEK by the end of the year (31 December 2007: 2,750 million EEK). The increase in no-current assets resulted primarily from the investments of the Group's companies. The Group's current assets decreased by 198 million EEK during the year, reaching 2,075 million EEK by the end of the year (31 December 2007: 2,273 million EEK). Cash and cash equivalents, as well as the balance of short-term financial investments, have decreased by 228 million EEK. This was related to a dividend payment that was larger by 138 million EEK, to income tax on the dividends and the investments that were made. As of 31 December 2008, the Eesti Telekom Group equity was 4,295 million EEK, which is 19 million EEK less than at the end of 2007 (31 December 2007: 4,314 million EEK). The decrease in equity is related to the payment of dividends. As of the end of December, the Group had long-term obligations of 33 million EEK (31 December 2007: 25 million EEK) and short-term debt obligations of 671 million EEK (31 December 2007: 683 million EEK). The net debt (see definition, page 23) of the Eesti Telekom Group at the end of the fourth quarter was -853 million EEK and the net debt to equity ratio was -20% (31 December 2007: -1,087 million EEK and -25%). The Eesti Telekom Group cash from operations in 2008 totalled 1,983 million EEK (2007: 1,902 million EEK). The Group's cash flow from investment activities was 568 million EEK (2007: 518 million EEK). The cash flow into the acquisition of property, plant and equipment and intangible assets in 2008 was 743 million EEK (2007: 861 million EEK). In 2008, the Eesti Telekom Group cash flow into financial activities was 1,449 million EEK (2007: 1,311 million EEK), the majority of which was used to pay dividends. Personnel As of 31 December 2008, the number of employees in the Eesti Telekom Group was 2,371 (31 December 2007: 2,398). The average number of workers in 2008 was 2,341 (2007: 2,327). The number of employees in the mobile communications segment as of 31 December 2008 was 600 (31 December 2007: 597). As of 31 December 2008, the number of employees in the broadband services segment totalled 1,465. Compared to the end of 2007, the number of workers in this segment decreased by 68 (2007: 1,533). The reduction of the number of workers was related to the reorganization of work and improvements in the efficiency of operations in the group. In the IT services segment, the number of employees totalled 286 as of 31 December 2008 (31 December 2007: 261). The total amount of wages paid to Eesti Telekom Group employees was 625 million EEK in 2008 (2007: 569 million EEK). Employees in the mobile communications services segment were paid 168 million EEK (2007: 153 million EEK). Employees in the broadband services segment were paid 359 million EEK (2007: 327 million EEK). Employees in the IT services segment were paid 83 million EEK (2007: 76 million EEK). The management and upper management of the Eesti Telekom Group included 49 persons as of 31 December 2008 (31 December 2007: 52 persons). The remuneration for the management and upper management was calculated at 50 million EEK during 2008 (2007: 57 million EEK). Structure of capital and restrictions on transfer of shares The share capital of AS Eesti Telekom (hereinafter “Eesti Telekom“) is divided into registered shares of one class, each with a par value of ten (10) EEK. The shares of Eesti Telekom can be freely transferred. Each share grants its holder one vote at the general meeting of shareholders and entitles the shareholder to participate in the general meeting, in the distribution of profit, and in the distribution of the remaining assets upon Eesti Telekom's liquidation, as well as other rights provided by law. The share capital of Eesti Telekom does not include securities that are not admitted to trading on a regulated securities market of a member state. The articles of association of Eesti Telekom do not prescribe any restrictions on the transfer of shares. Eesti Telekom has not entered into any agreements with shareholders for restricting the transfer of shares, and nor is the management board of Eesti Telekom aware of any such agreements having being entered into between the shareholders. As at 31 December 2008, the following shareholders have a qualifying holding in Eesti Telekom: Baltic Tele Aktiebolag (a holding of 60.12%) and the Republic of Estonia through the Ministry of Finance and (a holding of 24.17%). Eesti Telekom has no securities granting special control rights. Eesti Telekom has not set up any employee share schemes. The management board of Eesti Telekom is not aware of any agreements on voting rights between the shareholders. The regulation of voting rights contained in the articles of association of Eesti Telekom does not in any way differ from that prescribed by law. The shareholders of Eesti Telekom do not hold preferred shares. Management Election of management board members. The management board of Eesti Telekom has two (2) to five (5) members as decided by the supervisory board. According to the articles of association, the members of the management board are elected by the supervisory board for a term of three (3) years unless otherwise decided by the supervisory board. The articles of association may not prescribe a term of office longer than five years for the members of the management board. The members of the management board must be residents of Estonia. In order to elect a member of the management board, his or her consent is required. The supervisory board appoints one member of the management board as the chairman of the management board. The chairman of the management board is the chief executive officer of Eesti Telekom. The supervisory board defines the allocation of duties and responsibilities among the members of the management board and the chief executive officer. Extension of the term of office of a member of the management board may not be decided earlier than one year before the planned date of expiry of the term of office, and not for a period longer than the maximum term of office prescribed by the articles of association. A decision for extension of the term of office of a member of the management board entered in the commercial register must be immediately sent to the registrar of the commercial register. Appointment of management board members. With good reason, a court may appoint a new member of the management board to replace a withdrawn member of the management board on the petition of the supervisory board, a shareholder or other interested person. The authority of the court-appointed member of the management board will continue until appointment of a new member of the management board by the supervisory board. A member of the management board appointed by a court has the right, at the company's expense, to be compensated for his or her costs to a reasonable extent and to receive a reasonable fee, the amount of which shall be established, in the case of dispute, by a court ruling. Resignation of management board members. A member of the management board may resign from the management board with good reason if he or she gives a notice of his or her resignation to the supervisory board and, if this is impossible, submits a relevant application to the registrar of the commercial register. Removal of management board members. The supervisory board may remove a member of the management board regardless of the reason, but the rights and obligations arising from a contract concluded with him or her will terminate pursuant to the contract. The chairman of the supervisory board or a person authorised by him or her must sign a petition for entry of expiry of the authority of a member of the management board or for entry of a new member of the management board in the register. The corresponding minutes of the meeting of the supervisory board must be appended to the petition. The general meeting of shareholders of Eesti Telekom has the authority to amend the articles of association. A resolution on amendment of the articles of association is adopted by the general meeting if at least two-thirds of the votes represented at the general meeting are in favour. A resolution on amendment of the articles of association will enter into force as of the making of a corresponding entry in the commercial register. The management board of Eesti Telekom is a directing body of the company that represents and directs the company. The management board must, in directing, adhere to the lawful orders of the supervisory board. The management board is required to act in the most economically purposeful manner. Transactions that are beyond the scope of everyday economic activities may only be concluded by the management board with the consent of the supervisory board; however, the lack of such consent does not render the concluded transactions invalid. Either the chairman of the management board alone or two members of the management board jointly may represent Eesti Telekom and sign documents on behalf of Eesti Telekom. Issue and buyback of shares Members of the management board of Eesti Telekom do not have the authority to issue shares; only the general meeting of shareholders is entitled to issue shares. The management board of Eesti Telekom may represent Eesti Telekom in a transaction whereby the shares of Eesti Telekom are acquired upon a resolution of the general meeting, provided that: this occurs within five years after adoption of a resolution of the general meeting which specifies the terms and conditions for the acquisition or taking shares as security and the amounts to be paid for the shares; the sum of the nominal values of the shares held or taken as security by the company does not exceed one-tenth of the share capital; and the acquisition of shares does not entail the reduction of net assets below the aggregate sum of the share capital and the reserve capital, the disbursement of which to the shareholders is not permitted, according to the law or the articles of association; upon a resolution of the supervisory board without a resolution of the general meeting if the acquisition of shares is necessary to prevent significant damage to the company. The shareholders must be informed of the circumstances surrounding and the details of the acquisition of shares at the next general meeting of shareholders; without the restrictions set forth above if the shares are acquired by succession. The annual general meeting of shareholders held on 22 May 2008 granted a right to Eesti Telekom to acquire shares of Eesti Telekom within five years as of adoption of the resolution (i.e. until 22 May 2013) in such a way that the sum of the nominal values of the shares held by Eesti Telekom does not exceed the limit prescribed by law (i.e. 10%) and that the price paid per share will not be lower than nominal value of one share and will not exceed the higher of the price of the last independent trade and the highest current independent bid on the Tallinn Stock Exchange on the day of the share acquisition. Eesti Telekom may pay for these shares from the company's assets that exceed its share capital, reserve capital and share premium. The maximum number of shares to be acquired each time in accordance will be determined on each occasion separately by a resolution of the supervisory board of Eesti Telekom. Effects of takeover bids Eesti Telekom has not entered into agreements with the management board or employees containing provisions on payment of compensation in the case of a takeover bid. Eesti Telekom has not entered into agreements that take effect, alter or terminate upon a change of control of the company following a takeover bid in accordance with the provisions of chapter 19 of the Securities Market Act. Report on Corporate Governance As from 1 January 2006, AS Eesti Telekom (“Eesti Telekom”) follows the Estonian Principles of Corporate Governance (“the Principles”) in its activities. This report describes the management of Eesti Telekom in 2008 and its conformity with the Principles. In 2008, Eesti Telekom believes it adhered to the Principles except in the cases noted in this report. Eesti Telekom Eesti Telekom is a public limited company registered in the Republic of Estonia, at Valge 16, 19095 Tallinn, with the registry code of 10234957. The share capital of Eesti Telekom in 2008 was 1,379,545,280 EEK, which is divided into registered shares of a single type with a nominal value of 10 EEK. Eesti Telekom shares are listed on the main list of the Tallinn Stock Exchange (Baltic Main List), with the abbreviation ETLAT. The Eesti Telekom share register is maintained by the registrar of the Estonian Central Register of Securities. Eesti Telekom has approximately 4,000 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 shall be regular and extraordinary. The authority of the general meeting is defined by the Estonian Commercial Code and the Eesti Telekom articles of association (the articles of association are available on the Eesti Telekom website at www.telekom.ee). Among other things, the authority of the general meeting includes amending the Eesti Telekom articles of association, approving the annual report, distributing the profits, and electing the members of the Supervisory Board. Exercise of the Rights of Shareholders Each Eesti Telekom share provides one vote at the general meeting and shareholders can participate in general meetings and vote at the meetings personally or through representatives. Usually, the general meeting has the authority to pass resolutions if more than half the votes represented by shares are present. Resolutions of the general meeting are passed if over half of the votes represented at the general meeting are in favor, except in certain cases (e.g. amending the articles of association, increasing and reducing share capital, issuing convertible bonds, and the merger, division, reorganization, and termination of Eesti Telekom), in which case the resolution is passed if at least 2/3 of the votes represented at the general meeting are in favor. In 2008, the shareholders' annual general meeting took place on 22 May. The meeting approved the 2007 Annual Report and proposal for the distribution of profits, approved the conditions for the repurchase option 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, elected the Eesti Telekom auditor for the 2008 financial year, and approved the procedure for paying for auditing services, deciding that the provision of auditing services and payment for those services shall be regulated by an agreement to be signed with the auditor. 87.25% of the votes represented by shares were present at the annual general meeting, and therefore the meeting had the authority to pass resolutions. On 26 June 2008, an extraordinary shareholders' meeting took place based on the application of Eesti Telekom shareholder Baltic Tele AB, which recalled one member of the Eesti Telekom Supervisory Board and elected one new member to replace him. The recall of the Supervisory Board member was related to the change of his duties to be performed in the TeliaSonera AB Group, the parent company of Baltic Tele AB, making the performance of his duties as a Supervisory Board member more difficult. 84.69% of the votes represented by shares were present at the general meeting, and therefore the meeting had the authority to pass resolutions. Calling of the General Meeting and Publishing of Information The Eesti Telekom Management Board announces the convening of a general meeting at least three weeks in advance in the case of an annual meeting and at least one week in advance in the case of an extraordinary meeting, by publishing a corresponding notice in at least one newspaper with national circulation in the Republic of Estonia. A notice calling the 2008 annual general meeting was published in the Postimees daily on 24 April 2008 and through the Tallinn Stock Exchange information system on 23 April 2008. A notice regarding the extraordinary general meeting to be held on 26 June 2008 was published on 16 June 2008 both in the Postimees and through the Tallinn Stock Exchange information system. No questions were asked regarding the agendas presented in the given notices and no supplementary proposals were made. Therefore, as regards the general meetings of Eesti Telekom, the Principles were followed in 2008, except for the rules prescribed by clauses 1.3.2. and 1.3.3. of the Principles. Pursuant clause 1.3.2 of the Principles, the candidates for Supervisory Board member who have not previously been members of the issuer's Supervisory Board will participate in the general meeting. Björn Lindegren, a candidate for Supervisory Board member, did not participate in the 2008 extraordinary general meeting due to the performance of duties not related to Eesti Telekom. Clause 1.3.3. of the Principles stipulates that the issuer shall, if it has the necessary technical equipment and if it does not involve too high costs, make it possible to watch and participate in the general meeting through telecommunications. Eesti Telekom is of the opinion that adherence to this principle would involve too high costs and would not be sufficiently used by the shareholders. Supervisory Board Duties The Supervisory Board plans the activities of Eesti Telekom, elects the members of the Management Board, and executes supervision over the activities of the Management Board. In conformity with the Eesti Telekom articles of association, the Supervisory Board makes decisions regarding the company's activities in significant fields of activity and questions that are not under the sole authority of the general meeting according to the law or articles of association 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.). Members and Remuneration Pursuant to the articles of association, the Eesti Telekom Supervisory Board comprises six to ten members who are elected by the general meeting for a term of two years. Until 22 May 2008, the Eesti Telekom Supervisory Board included the following people: Anders Gylder, Lars Gunnar Klasson, Jörgen Latte, Tarmo Porgand, Mats Salomonsson, Aare Tark, and Jüri Raatma. As from 22 May 2008, the following people comprised the Eesti Telekom Supervisory Board: Anders Gylder, Lars Gunnar Klasson, Jörgen Latte, Tarmo Porgand, Mats Salomonsson, Aare Tark, and Jüri Raatma. At the extraordinary general meeting of Eesti Telekom shareholders held on 26 June 2008 Anders Gylder was recalled and Björn Lindegren was elected to replace him. The term of office of the current members will expire on the following dates: on 22 May 2009 in the case of Jörgen Latte, Tarmo Porgand, Mats Salomonsson, Aare Tark, Jüri Raatma, and Lars Klasson; and on 26 June 2010 in the case of Björn Lindegren. The following Supervisory Board members are associated with the Swedish company TeliaSonera AB that controls Eesti Telekom: Lars Klassen, Björn Lindegren, Jörgen Latte, and Mats Salomonsson. The Supervisory Board member, Aare Tark, has had business connections (provision of legal services) with Eesti Telekom through a company controlled by him, but the company providing the services did not receive a significant amount of compensation for the services and therefore Aare Tark can be considered an independent member of the Supervisory Board. The members of the Supervisory Board will elect a Chairman from among themselves. In 2008, Mats Salomonsson acted as Chairman of the Supervisory Board. Remuneration for the work of the members of the Supervisory Board was paid according to the resolution of the annual shareholders' meeting. Until 22 May 2008, the monthly payment for the Chairman of the Supervisory Board was 20,000 EEK and 9,000 EEK for the members of the Supervisory Board. By a resolution of the annual general meeting of shareholders held on 22 May 2008, the monthly remuneration payable to Supervisory Board members was increased to 11,000 EEK; remuneration payable to the Chairman was left unchanged. In addition, the actual costs incurred by the members of the Supervisory Board in relation to the performance of their duties were compensated on the basis of their respective applications. Activities The work of the Eesti Telekom Supervisory Board (location, meetings, resolutions, and minutes of the Supervisory Board) is organized according to the Supervisory Board regulations approved by them. In 2008, the Supervisory Board held seven 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 2008, the Supervisory Board approved the 2007 Annual Report, the results of the motivational system for the top management of the Group for 2007, the Group's budget for 2009 and the motivational system for the top management of the Group for 2009, drew up the agendas for the general meetings of shareholders, and approved the acquisition of IT Koolituskeskuse OÜ by AS MicroLink Eesti. All members of the Supervisory Board of Eesti Telekom participated in more than a half of the meetings of the Supervisory Board in 2008. Conflict of Interests Pursuant to the law and the articles of association, decisions regarding transactions between members of the Supervisory Board and Eesti Telekom are under the authority of the general meeting, and the members of the Supervisory Board may not compete with Eesti Telekom without the permission of the shareholders' general meeting. Until the compilation of this report, the members of the Supervisory Board have not notified the Eesti Telekom Management Board of any cases of conflict of interests in 2008. Hence, as regards the work of the Supervisory Board of Eesti Telekom, the Principles were adhered to in 2008. Management Board Duties The Management Board is the Eesti Telekom management body that deals with the management of everyday economic activities and the representation of Eesti Telekom. Eesti Telekom may be represented in all legal acts by Valdo Kalm alone or two Management Board members jointly. For the achievement of Eesti Telekom's objectives, the Management Board analyzes the risks related to Eesti Telekom's activities and financial targets. By its resolution, the Management Board of Eesti Telekom has established the Eesti Telekom Group's rules for handling of inside information and other internal rules, e.g. accounting policies and procedures. The Management Board must comply with the legitimate regulations of the Supervisory Board. In 2008, 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. Members and Remuneration According to the Eesti Telekom articles of association, the Supervisory Board may elect two to five members to the Management Board. The members of the Management Board are elected for three years with the option of extending the term. The Supervisory Board appoints one Management Board member as the Chairman, who also acts as the company's Managing Director. In 2008, the members of the Management Board of Eesti Telekom were Valdo Kalm (the Chairman), Leho Tamm, Valdur Laid, and Enn Saar. The term of office of the current members will expire on the following dates: on 1 January 2010 in the case of Valdo Kalm; and on 1 July 2010 in the case of Leho Tamm, Valdur Laid, and Enn Saar. The salaries and severance pay of the members of the Management Board, as well as the payment conditions, are determined by the contracts of service concluded with the members of the Management Board. The bonus system for members of the Management Board is approved annually by a resolution of the Supervisory Board. Upon the achievement of the maximum level of the objectives for 2008, the members of the Management Board would receive a bonus equal to six months' salary. In 2008, Eesti Telekom did not comply with clause 2.2.7 of the Principles, which provides for disclosing the benefits and bonus system of each member of the Management Board on the website and in this report, as well as the presentation of the principles for the remuneration of the members of the Management Board at the general meeting. On 13 December 2005, the Eesti Telekom Supervisory Board decided that, at 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. Conflict of Interests Pursuant to the law and the articles of association, transactions between members of the Management Board and Eesti Telekom must be approved by the Supervisory Board, and members of the Management Board may not compete with Eesti Telekom without the permission of the Supervisory Board. Until the compilation of this report, the members of the Management Board have not notified the Eesti Telekom Supervisory Board of any cases of conflict of interests in 2008. Therefore, in 2008, the Principles were followed in the work of the Eesti Telekom Management Board, except for the rule prescribed by clause 2.2.7 of the Principles. Control Functions and Auditing In addition to a reporting system and procedures for risk management, the Eesti Telekom Supervisory Board and Management Board have established various control functions. Auditing Committee The Auditing Committee helps the Supervisory Board to perform its supervisory function. In 2008, the Committee members were Mats Salomonsson (the Chairman), Jörgen Latte, and Tarmo Porgand. During 2008, the Committee met 5 times. External Auditors According to the articles of association, the auditor(s) are chosen by the general meeting. In 2008, the Eesti Telekom auditor was AS PricewaterhouseCoopers. AS PricewaterhouseCoopers audited all the companies in the Eesti Telekom Group (except of IT Koolituskeskuse OÜ, OÜ Voicecom and AS Sertifitseerimiskeskus) and submitted the auditor's report to the general meeting. The auditors also informed the Auditing Committee and Management Boards of the Group's companies of their observations. Internal Control Since April 2002, the internal control service has been outsourced from AS Deloitte & Touche Audit. The Audit Committee and Deloitte agree upon the extent of the internal control projects once a year. Deloitte reports on the completed work to the Audit Committee. Committee on Remuneration and Appointments The principal function of the Committee on Remuneration and Appointments is to harmonize the remuneration principles for the top management of the Eesti Telekom Group and to make proposals for the appointment of Supervisory Board members and their remuneration. Until 17 July 2008, Mats Salomonsson (Committee Chairman), Anders Gylder, and Aare Tark were the members of the Committee. As from 17 July 2008, the Committee comprised the following members: Mats Salomonsson (Committee Chairman), Björn Lindegren, and Aare Tark. During 2008, the Committee met 2 times. Disclosure of Information The information required by the Principles, 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, is available on the Eesti Telekom website at www.telekom.ee. Therefore, in 2008, Eesti Telekom complied with the Principles in terms of the disclosure of information. Financial reporting and auditing Eesti Telekom prepares its accounting reports in accordance with the international financial reporting standards applied in the European Union (IFRS). In respect to the disclosure of financial reporting, Eesti Telekom proceeds from the provisions of the law and the regulations of the Tallinn Stock Exchange (please see the table below for dates of disclosure). At the meeting of the Supervisory Board where the annual report was examined, technical means were present for having a telephone conference with the auditors; however, the Supervisory Board did not consider it necessary to use this opportunity. By an opinion of the Supervisory Board sent along with the notice calling the general meeting, data regarding the auditor and the Supervisory Board's assessment of the work of the auditor, as well as information on the fees paid to the auditor, were disclosed to the shareholders. Thus, as regards financial reporting and auditing, Eesti Telekom adhered to the Principles in 2008. -------------------------------------------------------------------------------- | Interim report | Interim report | Interim report | Interim report for | | for the first | for the second | for the third | 2008 and the fourth | | quarter of 2008 | quarter and | quarter and nine | quarter of 2008 | | | first half-year | months of 2008 | | | | of 2008 | | | -------------------------------------------------------------------------------- | 23 April 2008 | 18 July 2008 | 24 October 2008 | 5 February 2009 | -------------------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENT In thousands of EEK -------------------------------------------------------------------------------- | | Year ended 31 December | -------------------------------------------------------------------------------- | | 2008 | 2007 | -------------------------------------------------------------------------------- | Revenue | 6,189,597 | 6,261,002 | -------------------------------------------------------------------------------- | Cost of sales | (3,532,648) | (3,542,791) | -------------------------------------------------------------------------------- | Gross profit | 2,656,949 | 2,718,211 | -------------------------------------------------------------------------------- | Selling, administrative and research & | (907,058) | (900,011) | | development | | | | expenses | | | -------------------------------------------------------------------------------- | Other operating income | 31,317 | 28,114 | -------------------------------------------------------------------------------- | Other operating expenses | (8,498) | (6,336) | -------------------------------------------------------------------------------- | Operating profit | 1,772,710 | 1,839,978 | -------------------------------------------------------------------------------- | Finance income | 55,185 | 48,626 | -------------------------------------------------------------------------------- | Finance costs | (871) | (2,342) | -------------------------------------------------------------------------------- | Finance income, net | 54,314 | 46,284 | -------------------------------------------------------------------------------- | Share of profit/(loss) from associates | (2,847) | (3,817) | -------------------------------------------------------------------------------- | Profit before tax | 1,824,177 | 1,882,445 | -------------------------------------------------------------------------------- | Income tax expense | (385,912) | (370,897) | -------------------------------------------------------------------------------- | Net profit for the period | 1,438,265 | 1,511,548 | -------------------------------------------------------------------------------- | Attributable to: | | | -------------------------------------------------------------------------------- | Equity holders of the Company | 1,434,835 | 1,505,098 | -------------------------------------------------------------------------------- | Minority interest | 3,430 | 6,450 | -------------------------------------------------------------------------------- | | 1,438,265 | 1,511,548 | -------------------------------------------------------------------------------- | Earnings per share for profit | | | | attributable to the equity holders of | | | | the Company during the year | | | -------------------------------------------------------------------------------- | Basic earnings per share (in EEK) | 10.40 | 10.91 | -------------------------------------------------------------------------------- | Diluted earnings per share (in EEK) | 10.40 | 10.91 | -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET In thousands of EEK -------------------------------------------------------------------------------- | | As at 31 December | -------------------------------------------------------------------------------- | | 2008 | 2007 | -------------------------------------------------------------------------------- | ASSETS | | | -------------------------------------------------------------------------------- | Non-current assets | | | -------------------------------------------------------------------------------- | Property, plant and equipment | 2,590,170 | 2,405,114 | -------------------------------------------------------------------------------- | Intangible assets | 228,312 | 216,011 | -------------------------------------------------------------------------------- | Investments in associates | 10,575 | 13,422 | -------------------------------------------------------------------------------- | Other non-current receivables | 95,680 | 115,059 | -------------------------------------------------------------------------------- | Total non-current assets | 2,924,737 | 2,749,606 | -------------------------------------------------------------------------------- | Current assets | | | -------------------------------------------------------------------------------- | Assets classified as held-for-sale | - | 1,732 | -------------------------------------------------------------------------------- | Inventories | 169,943 | 187,573 | -------------------------------------------------------------------------------- | Trade and other receivables | 1,041,685 | 992,939 | -------------------------------------------------------------------------------- | Short-term financial investments | 500,000 | 694,040 | -------------------------------------------------------------------------------- | Cash and cash equivalents | 363,099 | 396,778 | -------------------------------------------------------------------------------- | Total current assets | 2,074,727 | 2,273,062 | -------------------------------------------------------------------------------- | TOTAL ASSETS | 4,999,464 | 5,022,668 | -------------------------------------------------------------------------------- | EQUITY AND LIABILITIES | | | -------------------------------------------------------------------------------- | Equity | | | -------------------------------------------------------------------------------- | Capital and reserves attributable | | | | to equity holders of the Company | | | -------------------------------------------------------------------------------- | Share capital | 1,379,545 | 1,379,545 | -------------------------------------------------------------------------------- | Share premium | 356,018 | 356,018 | -------------------------------------------------------------------------------- | Statutory legal reserve | 137,955 | 137,955 | -------------------------------------------------------------------------------- | Translation reserve | 14 | - | -------------------------------------------------------------------------------- | Retained earnings | 2,413,843 | 2,429,361 | -------------------------------------------------------------------------------- | Total capital and reserves | 4,287,375 | 4,302,879 | | attributable to equity holders of | | | | the Company | | | -------------------------------------------------------------------------------- | Minority interest | 8,035 | 11,480 | -------------------------------------------------------------------------------- | Total equity | 4,295,410 | 4,314,359 | -------------------------------------------------------------------------------- | Non-current liabilities | | | -------------------------------------------------------------------------------- | Interest bearing loans and | 5,872 | 1,343 | | borrowings | | | -------------------------------------------------------------------------------- | Retirement benefit obligations | 2,158 | 3,239 | -------------------------------------------------------------------------------- | Provisions | 22,571 | 20,673 | -------------------------------------------------------------------------------- | Non-interest bearing liabilities | 1,989 | - | -------------------------------------------------------------------------------- | Total non-current liabilities | 32,590 | 25,255 | -------------------------------------------------------------------------------- | Current liabilities | | | -------------------------------------------------------------------------------- | Trade and other payables | 663,396 | 670,989 | -------------------------------------------------------------------------------- | Interest bearing loans and | 4,061 | 2,778 | | borrowings | | | -------------------------------------------------------------------------------- | Retirement benefit obligations | 1,032 | 4,814 | -------------------------------------------------------------------------------- | Provisions | 2,975 | 4,473 | -------------------------------------------------------------------------------- | Total current liabilities | 671,464 | 683,054 | -------------------------------------------------------------------------------- | Total liabilities | 704,054 | 708,309 | -------------------------------------------------------------------------------- | TOTAL EQUITY AND LIABILITIES | 4,999,464 | 5,022,668 | -------------------------------------------------------------------------------- CONSOLIDATED CASH FLOW STATEMENT In thousands of EEK -------------------------------------------------------------------------------- | | Year ended 31 December | -------------------------------------------------------------------------------- | | 2008 | 2007 | -------------------------------------------------------------------------------- | Net cash from operating activities | 1,983,002 | 1,902,001 | -------------------------------------------------------------------------------- | Cash flows from investing activities | | | -------------------------------------------------------------------------------- | Purchases of property, plant and equipment | (743,307) | (861,490) | | and intangible assets | | | -------------------------------------------------------------------------------- | Proceeds from sale of property, plant and | 10,219 | 14,768 | | equipment and intangible assets | | | -------------------------------------------------------------------------------- | Acquisition of business net of cash | (24,163) | (4,934) | | acquired and settlements of deferred | | | | consideration | | | -------------------------------------------------------------------------------- | Net cash changes of short-term financial | 194,042 | 369,746 | | investments | | | -------------------------------------------------------------------------------- | Net cash changes of other long-term | (4,313) | (36,073) | | receivables | | | -------------------------------------------------------------------------------- | Net cash used in investing activities | (567,522) | (517,983) | -------------------------------------------------------------------------------- | Cash flow before financing activities | 1,415,480 | 1,384,018 | -------------------------------------------------------------------------------- | Cash flows from financing activities | | | -------------------------------------------------------------------------------- | Dividends paid | (1,456,054) | (1,310,568) | -------------------------------------------------------------------------------- | Proceeds from finance lease | 9,057 | 1,020 | -------------------------------------------------------------------------------- | Repayments of finance lease liabilities | (2,409) | (1,819) | -------------------------------------------------------------------------------- | Net cash used in financing activities | (1,449,406) | (1,311,367) | -------------------------------------------------------------------------------- | Net change in cash and cash equivalents | (33,926) | 72,651 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cash and cash equivalents at beginning of | 396,778 | 324,405 | | year | | | -------------------------------------------------------------------------------- | Net change in cash and cash equivalents | (33,926) | 72,651 | -------------------------------------------------------------------------------- | Effect of foreign exchange rate changes | 247 | (278) | -------------------------------------------------------------------------------- | Cash and cash equivalents at end of year | 363,099 | 396,778 | --------------------------------------------------------------------------------