MANAGEMENT REPORT General information AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction group providing integrated construction solutions. Largest companies of the Group 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%). The presented report provides an overview of the economic activities and financial indicators of AS Merko Ehitus in the first 9 months of 2008, including the economic activities and financial indicators of the company's legal predecessor AS Järvevana (previous name AS Merko Ehitus) in the first 7 months of 2008. On 7 October 2008, AS Merko Ehitus transferred its 100-percent holding in the company OÜ Põrguvälja Soojus (registry code 10711682) as a business area not necessary for the fulfilment of the group's strategic objectives. (http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=227308). On 1 August 2008, the registration department of Harju County Court made an entry in the Commercial Register registering the division of AS Merko Ehitus (registry code 10068022, with the new business name ‘Aktsiaselts Järvevana') into the limited companies Merko Ehitus (registry code 11520257) and Järvevana (registry code 10068022). Pursuant to the division plan (http://www.merko.ee/upload/File/Restrukturee rimise%20dokumendid/AS%20Merko%20Ehitus%20jagunemiskava%20ENG.pdf), upon the division, AS Järvevana transferred to AS Merko Ehitus the entire set of assets related to the economic activities of the building company, including all concluded building, subcontracting and supply contracts; the equipment, machinery and employees; all professional know-how and cash-flows without interrupting the continuing economic activities. On 3 June 2008 the Annual General Meeting (http://www.baltic.omxnordic exchange.com/market/?pg=news&news_id=226094) approved the division of the company to into the limited companies new Merko Ehitus (registry code 11520257) and Järvevana (registry code 10068022). On May 21 2008 AS Merko Ehitus transferred the 50-percent holding in the company OÜ Tornimäe Apartments (registry code 11016607) to the co-partner AS EKE Invest. The sale price of the company was 58 million kroons (http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=223709). On May 2 2008 AS Merko Ehitus transferred the 100-percent holding in the company OÜ Karulaugu Kinnisvara (registry code 11034491) to AS E.L.L. Kinnisvara. The sale price of the company was 42 million kroons; from this amount, 4.12 million kroons, the balance of company's financial obligations and current assets, were deducted (http://www.baltic.omxnordicexchange.com/ market/?pg=details&instrument=EE3100003559&list=2&tab=news&news_id=223284). On 15 April 2008, the management of AS Merko Ehitus presented the Company's restructuring plan (http://www.baltic.omxgroup.com/market/?pg=details& instrument=EE3100003559&list=2&tab=news&news_id=222602), according to which AS Merko Ehitus was split up/demerged so that AS Merko Ehitus, e.g. assets (other than liquid assets in the amount of 250 million kroons), liabilities and contracts as well as the business name was separated and transferred to the new company being set up. The exact description of assets and the division plan were published in the materials announcing the general meeting of shareholders http://www.merko.ee/eng/investor/generalmeeting/2008. At a joint meeting held at 14 March 2008, the Management Board and the Supervisory Board of AS Merko Ehitus adopted a resolution to restructure the Company and separate operating activities from the criminal proceedings related to the land swap. The Company's management estimates that the restructuring of the Company is the best way to ensure its sustainable development and protect the interests of shareholders and employees in the long-lasting criminal proceedings related to the land swap. Business operations Group's revenue for the 9 months in 2008 was 3552.4 million kroons, which constitutes an annual decrease of 8.1%. 60.8% of the sales originated from Estonia, 21.0% from Latvia and 18.2% from Lithuania. As compared with the respective period in 2007, company's sales in Lithuania increased by 15.4%, and decreased in Latvia by 17.5% and in Estonia by 10.0%. Group's revenue in the third quarter of 2008 was 1180.1 million having decreased by 187.8 million kroons as compared to the same period in 2007. Revenue of the period decreased due to the weak economic situation in the building sector caused by overall economic recession. As at 30 September 2008, the group's backlog of construction contracts in progress amounted to 3611 million kroons (4040 million kroons as at 30 September 2007). Companies of the Group 9M 2008 consolidated revenue (sales outside the Group) were (in thousand kroons and euros): 9M 2008 9M 2007 EEK EUR EEK EUR Estonian companies AS Merko Ehitus (parent company) 1 390 113 88 844 1 608 086 102 775 AS Gustaf (75% partnership) 123 425 7 888 111 062 7 098 OÜ Gustaf Tallinn (80% partnership) 109 094 6 972 102 936 6 579 AS Merko Tartu (66% partnership) 155 907 9 964 181 502 11 600 Tallinna Teede AS (100% partnership) 368 506 23 552 253 327 16 191 OÜ Woody (100% partnership) 65 020 4 156 198 125 12 662 Latvian company SIA Merks (100% partnership) 718 407 45 915 779 876 49 843 Lithuanian company UAB Merko Statyba (100% partnership) 612 893 39 171 525 819 33 606 In one year, the Group's cost of goods sold decreased by 12.5%, whereas the marketing and general administrative expenses increased by 26.9%, constituting 83.5% and 5.2% of the revenue respectively. Various extraordinary expenses contributed to the increase of marketing and general administrative costs in the period: expenses incurred in the division of AS Merko Ehitus and AS Järvevana, legal aid costs related to the legal succession and experience of Merko Ehitus, redundancy payments and administrative personnel expenses included in general expenses. In the 3rd quarter, the group suffered a loss of 15.3 million kroons due to the finished residential development projects being impaired to recoverable value. Merko Ehitus group's inventories, incl. unfinished and finished production, have been recorded in the company's statements at acquisition cost, which in the management's estimate exceeds the recoverable value of the objects at the current price level. The group's profit before taxes in the first 9 months of 2008 was 398.3 million kroons, having grown 13.3 million kroons from the previous year. Net profit was 343.9 million kroons - having decreased by 4.0% in a year. Thanks to favourable climate conditions in the 1st quarter, the successful residential and real estate development activities in the first six months and the dropping prices of construction services, the net profit margin of the period increased from 9.3% to 9.7% compared to the same period last year. Group's net cash flow of the nine months of the year was +574.1 million kroons, including cash flow from operating activities +640.0 million kroons, from investing activities +25.6 million kroons, financing activities -66.5 million kroons and net assets separated in division -25,0 million kroons. The cash flow from operating activities were mostly influenced by operating profit +400.3 million kroons, adjustments of revenue from construction contracts under stage of completion method +261.2 million kroons, the change in trade and other receivables related to operating activities (+125.2 million kroons) and change in trade and other payables (-112.4 million kroons). As at 30 September 2008, the group has 776.1 million kroons of funds on the group's bank accounts. The ratios and calculation methods characterizing the operating activities of the Group 2008 9 months 2007 9 months Net profit margin 9,7 % 9,3 % Operating profit margin 11,3 % 8,6 % Return on equity per annum 22,2 % 27,9 % Return on assets per annum 11,2 % 13,5 % Current ratio 2,0 2,1 Equity ratio 50,0 % 47,0 % General expense ratio 5,2 % 3,7 % Gross remuneration ratio 8,8 % 7,5 % Net profit margin: Net profit* / Revenue Operating profit margin: Operating profit / Revenue Return on equity: Net profit x 4/3* / Average equity during the period* Return on assets: Net profit x 4/3* / Average assets during the period Current ratio: Current assets / Current liabilities Equity ratio: Owners equity* / Total assets General expense ratio: General expenses / Revenue Gross remuneration ratio: Gross remuneration / Revenue * calculated as attributable to the equity holders of the parent company In 30.09.2008, the number of employees in the Group's service was 1007, including 974 full-time employees. The group reduced the number of its personnel by 92 employees, or 8.4% in a year. The gross remuneration paid to employees in 9 months 2008 amounted to 312.8 million kroons an increase of 7.6% compared to previous year. INCOME STATEMENT 9M 2008 consolidated, in thousand EEK and EUR EEK EUR 9M 2008 9M 2007 9M 2008 9M 2007 Revenue 3 552 366 3 863 605 227 038 246 929 Cost of goods sold (2 964 881) (3 388 412) (189 490) (216 559) GROSS PROFIT 587 485 475 193 37 548 30 370 Marketing expenses (26 120) (20 244) (1 669) (1 294) Administrative and gen. expenses (157 215) (124 180) (10 048) (7 937) Other operating income 8 632 5 345 552 342 Other operating expenses (12 468) (4 338) (797) (277) OPERATING PROFIT 400 314 331 776 25 586 21 204 Financial income and expenses from stocks of associate comp. and joint ventures 1 185 61 486 76 3 930 Interest expense (12 442) (14 355) (795) (917) Foreign exchange gain (7 359) (3 179) (470) (203) Other financial income 17 869 9 295 1 142 594 Other financial expenses (1 307) (70) (85) (4) Total financial income and expenses (2 054) 53 177 (132) 3 400 PROFIT BEFORE TAX 398 260 384 953 25 454 24 604 Corporate income tax expense (47 579) (18 346) (3 041) (1 173) NET PROFIT FOR FINANCIAL YEAR 350 681 366 607 22 413 23 431 incl. net profit attributable to equity holders of the parent company 343 874 358 024 21 978 22 882 minority interest 6 807 8 583 435 549 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 19,43 20,23 1,24 1,29 INCOME STATEMENT III quarter 2008 consolidated, unaudited in thousand EEK and EUR EEK EUR IIIq 2008 IIIq 2007 IIIq 2008 IIIq 2007 Revenue 1 180 062 1 367 855 75 420 87 422 Cost of goods sold (1 051 633) (1 198 290) (67 212) (76 585) GROSS PROFIT 128 429 169 565 8 208 10 837 Marketing expenses (8 629) (7 788) (551) (498) Administrative and general expenses(56 195) (42 725) (3 592) (2 731) Other operating income 2 747 2 856 176 183 Other operating expenses (4 911) (1 393) (314) (89) OPERATING PROFIT 61 441 120 515 3 927 7 702 Financial income and expenses from stocks of associate companies and joint ventures (18) 8 711 (1) 557 Interest expense (4 763) (7 827) (304) (500) Foreign exchange gain (1 489) (3 317) (95) (212) Other financial income 9 346 4 225 597 270 Other financial expenses (10) (68) (1) (4) Total financial income and expenses 3 066 1 724 196 111 PROFIT BEFORE TAX 64 507 122 239 4 123 7 813 Corporate income tax expense (6 956) (3 267) (445) (209) NET PROFIT FOR FINANCIAL YEAR 57 551 118 972 3 678 7 604 incl. net profit attributable to equity holders of the parent company 53 696 116 023 3 432 7 416 minority interest 3 855 2 949 246 188 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 3,03 6,55 0,19 0,42 BALANCE SHEET AS OF 30.09.2008 consolidated, in thousand EEK and EUR EEK EUR 30.09.2008 31.12.2007 30.09.2008 31.12.2007 ASSETS Current assets Cash and cash equivalents 776 096 205 564 49 602 13 138 Trade and other receivables 992 325 1 201 942 63 421 76 818 Inventories 1 982 619 2 025 426 126 712 129 448 Total current assets 3 751 040 3 432 932 239 735 219 404 Non-current assets Long-term financial investments 249 044 290 852 15 916 18 589 Investment property 17 016 7 361 1 088 470 Property, plant and equipment 211 047 172 912 13 489 11 051 Intangible assets 11 868 12 574 758 804 Total non-current assets 488 975 483 699 31 251 30 914 TOTAL ASSETS 4 240 015 3 916 631 270 986 250 318 LIABILITIES AND OWNERS' EQUITY Current liabilities Borrowings 578 240 304 879 36 956 19 485 Trade and other payables 1 247 148 1 032 210 79 708 65 970 Government grants 0 1 498 0 96 Short-term provisions 43 567 73 212 2 784 4 680 Total current liabilities 1 868 955 1 411 799 119 448 90 231 Non-current liabilities Long-term borrowings 212 000 397 713 13 549 25 418 Long-term payables to suppliers 6 882 11 091 440 709 Long-term suppliers advance payments 0 46 332 0 2 961 Total non-current liabilities 218 882 455 136 13 989 29 088 Total liabilities 2 087 837 1 866 935 133 437 119 319 Equity Minority interest 34 209 33 939 2 186 2 169 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 (14 246) (5 085) (910) (325) Retained earnings 1 937 515 1 826 142 123 830 116 712 Total equity attributable to equity holders of the parent company 2 117 969 2 015 757 135 363 128 830 Total equity 2 152 178 2 049 696 137 549 130 999 TOTAL LIABILITIES AND EQUITY 4 240 015 3 916 631 270 986 250 318 Alar Lagus Member of Board +372 6 805 109 alar.lagus@merko.ee