Annual Report CenterTelecom OJSC 2007 Annual Report CenterTelecom OJSC 2007 Table of Contents
4 Key Performance Figures 8 Company Profile 10 Mission and Strategy 12 Address to Shareholders 16 Key 2007 – 2008 Events 20 Event of the Year: “Education” Priority National Program 22 Key Results of 2007 and Objectives for 2008 – 2009 24 Key Business Directions of the Company 24 Short Summary of Telecommunications Industry Development in Russia 27 The Company's Position in the Telecommunications Services Market of the Central Federal District in Russia 28 Core Development Trends of the Company 29 Prospects for Development 32 Results of the Company's Operations in 2007 32 Key Economic Figures 34 Structure of Income from Telecommunications Services for 2007 37 Financial Activities 37 Investment Activities 38 Tariff Policy 40 Equity Capital and Securities 40 Charter Capital 42 Shares 44 The Company's Capitalization 44 American Depository Receipts 46 Corporate Bonds 48 Social Responsibility 48 Personnel and HR Policy 50 HR Development 51 Social Responsibility and Charity 54 Corporate Governance 54 Board of Directors 54 Managing Board 55 Audit Committee 55 Corporate Governance System 55 Dividend Policy 56 Subsidiaries and Affiliates 57 Public and Investor Relations 58 Ratings 58 Improvement of Corporate Governance Practice 60 Information for Shareholders 62 Risk Factors 64 Glossary 65 Disclaimer 66 Information about the Company mo January 1 tu 2 we Key Performance Figures 3 th 4 fr 5 sa 6 su 7 mo 8 tu 9 we 10 11 th 12 fr 13 sa 14 su mo 15 16 tu we 17 18 th 19 fr 20 sa su 21 mo 22 23 tu we 24 25 th 26 fr 27 sa su 28 mo 29 30 tu we 31 Key Performance Figures
Key Economic Figures 2007 2006 Change, % Revenues from core operations, RUR million 32,409 28,395 +14.14 Expenses on core operations, RUR million 23,969 21,209 +13.01 EBITDA*, RUR million 11,704 9,784 +19.62 CAPEX, RUR million 5,266 3,774 +139.5 Depreciation, RUR million 3,834 3,767 +1.78 Sales profit, RUR million 8,440 7,186 +17.45 Net profit, RUR million 3,635 2,048 +77.49 Basic earnings per share, RUR 2.073 1.167 +77.63 EBITDA margin 36.11% 34.46% - Profitability on sales profit 26.04% 25.31% - Profitability on net profit 11.22% 7.21% - Net debt/EBITDA 1.56 2.08 - Share price at year end, USD 0.87 0.77 +12.99% *EBITDA is calculated as earnings before taxes plus interest payable plus depreciation plus leasing payment minus interest receivable.
Revenues, RUR billion
35
32.41 30
27.59 28.4 25 24.96
20
15
10
5
0 2004 2005 2006 2007
EBITDA, RUR billion
12 11.7
10 9.78
8
7.19 6 5.38 4
2
0 2004 2005 2006 2007
4 Net profit, RUR million
4,000
3,635 3,500
3,000
2,500
2,000 2,047.9
1,500
1,000
500 654.9 397.7 0 2004 2005 2006 2007
Key Operating Indicators 2007 2006 Change, % Number of employees 46,637 56,317 -17.19 Number of lines 6,739,610 6,633,266 +1.60 Number of lines per employee** 132.1 111.7 +18.4 Installed capacity of telephone network including: 7,102,574 6,983,115 +1.71 city telephone network, numbers 6,080,502 5,957,476 +2.07 rural telephone network, numbers 1,022,072 1,025,639 -0.35 Activated capacity of local telephone network including: 6,711,392 6,609,951 +1.53 city telephone network, numbers 5,807,488 5,686,507 +2.13 rural telephone network, numbers 903,904 923,444 -2.12 Input of installed capacity, numbers 119,459 193,662 -38.32 Level of digitalization of local telephone network including: 57.7% 52.8% - city telephone network, numbers 62.4% 58.1% - rural telephone network, numbers 29.7% 22.1% - Number of automatic telephone exchanges 8,400 8,452 -0.62 Number of ADSL Internet users 304,000 115,052 +164.23 Length of fiber optic inter-zone telecommunications lines, km 16,613.7 15,555.2 +6.80 **The indicator is calculated using the figure "average number of employees" which reached 51,019 and 59,352 people for 2007 and 2006 respectively.
5 Personnel number, thousand people
80
70 67.4 65.2 60 56.3 50 46.6 40
30
20
10
0 2004 2005 2006 2007
Number of lines per employee
150
132 120 111 100 90 91
60
30
0 2004 2005 2006 2007
Dividend per share, RUR
0,40
0,35 0.3547131
0,30
0,25
0,20 0.1999622
0,15
0,10
0,05 0.0630084 0.0674191
0,00 2004 2005 2006 2007
6 th February 1 fr 2 sa Company Profile 3 su 4 mo 5 tu 6 we 7 th 8 fr 9 10 sa 11 su mo 12 13 tu we 14 15 th 16 fr 17 sa su 18 mo 19 20 tu we 21 22 th 23 fr 24 sa su 25 mo 26 27 tu we 28 Company Profile
Open Joint Stock Company Central Telecommunication Company OJSC (CenterTelecom) is the largest fixed line communications operator in the Russian Federation supplying a wide range of communications services and providing access to global information resources to private individuals, corporate clients and governmental bodies in Russia's Central Federal District.
The Company’s history dates from 1890. CenterTelecom has The Company's management pays special attention to the 15 branches formed as a result of the Company's reorganiza- improvement of its corporate governance system. An impor- tion merging 17 leading regional operators on the basis of the tant assessment of positive changes in this field is a "7+" Moscow region telecommunications operator. The Company's corporate governance rating (signifying a company with a biggest shareholder is Svyazinvest OJSC. CenterTelecom suc- high level of corporate governance) assigned by the Expert cessfully operates in all segments of the telecommunications RA rating agency. market providing local and inter-zone telephone commu- nications services, data transmission services, intellectual The Company's certified quality management system functions services, ISDN, dial up and dedicated internet access, cable successfully. The GOST К certificate assigned by the National TV, wired and over-the-air broadcasting and communications Certification System states that the quality management channel leasing. system meets GOST К ISO 9001-2001 (ISO 9001:2000) requi- rements with regard to telecommunications services and Improvement and the promotion of services based on multi- demonstrates the high level of the Company's management service networks, creation of service packages and rates for and its strong position in the telecommunications market. various categories of user, development of interregional and telecommunications transport networks are among the Com- The integrated interregional Company employs more than pany's strategic development directions. 46,000 people. The Company's HR policy is focused on the creation of a highly professional team, improved profession- Emphasizing investors' and partners' confidence to the Com- alism among employees, harmonious professional develop- pany, CenterTelecom management is continuously improving ment of personnel and improvement of the incentive system. corporate standards of information disclosure and is working on increasing the Company's business transparency. A unique corporate policy, implementation of the latest technologies, and modern forms of business development Currently the Company reports in accordance with both Russian have allowed the Company to retain its leading position in Accounting Standards (RAS) and International Accounting Stan- the Russian telecommunications market. dards (IAS). The Company's auditor for 2007 was Ernst & Young. CenterTelecom is a public company. Its stock is traded on the Russian Trading System (RTS), Moscow Interbank Currency Ex- change (MICEX) and is traded on international stock exchanges through its ADR program. Investors' confidence and efficiency of investment policy have allowed the Company to attract fi- ancial resources in the domestic debt markets. CenterTelecom has "B+" long term credit rating (Stable outlook) and "ruA+" long term credit rating according to the Russian credit rating scale of Standard & Poor's. Fitch Ratings international rating agency has assigned CenterTelecom a "B-" priority uncovered rating in foreign currency (Positive outlook), "B" short term credit rating in foreign currency, and "BBB" (rus) national rating (Positive outlook).
8 th March 1 fr 2 sa Mission and Strategy 3 su 4 mo 5 tu 6 we 7 th 8 fr 9 10 sa su 11 mo 12 13 tu we 14 15 th 16 fr 17 sa su 18 mo 19 20 tu we 21 22 th 23 fr 24 sa su 25 mo 26 27 tu we 28 29 th 30 fr 31 sa Mission and Strategy
As the biggest telecommunications operator in Russia's Central Federal District (CFD), CenterTelecom sees its mission as the provision of newest high quality telecommunications solutions and world class services within the district.
The Company seeks to: Among CenterTelecom's key strategic lines are: customer demand for telecommunications products and maintenance of its leadership and maximum increase › services and create a single information and communica- › of revenues in the traditional telephony segment in tions field in Central Federal District’s regions; Central Federal District's market; take part in the creation of new markets implementing advanced development of broadband Internet access › new information and telecommunications services in the › services; Central Federal District; › product range expansion; secure increased revenues for the Company’s shareholders technical modernization of the network; › and contribute to the development of the society in which › the Company operates; › increased efficiency of investment activities; develop long term mutually beneficial relations with part- › debt reduction. › ners on the basis of mutual trust, fairness and transparency provide all necessary conditions for harmonious develop- › ment of each employee.
The Company’s activities are aimed at: development of the Russian Federation’s economy › through the formation of information infrastructure in the Central Federal District; provision of the latest telecommunications infrastructure › in the Central Federal District in conjunction with the rate of development of business and people; increase the well-being and level of information and › communications development of the population by pro- viding high quality telecommunications services and access to information technologies; increase the Company's profitability to make it more › attractive for investors; of a flexible corporate structure meeting current require- › ments and allowing each employee to reach his/her full creative potential.
10 su April 1 mo 2 tu Address to Shareholders 3 we 4 th 5 fr 6 sa 7 su 8 mo 9 10 tu we 11 12 th 13 fr 14 sa 15 su mo 16 17 tu we 18 19 th 20 fr 21 sa su 22 mo 23 24 tu we 25 26 th 27 fr 28 sa su 29 mo 30 Address to Shareholders
Alexander Kiselev Vaagn Martirosyan Chairman of the Board of Directors General Director
Dear shareholders, Today we are summing up the results of CenterTelecom's op- In 2007 in accordance with the approved CenterTelecom erations for 2007. CenterTelecom is a stable company which Development Program we elaborated strategies for the has significant development potential. Though CenterTelecom development of the Company's business directions and works in a competitive market in Russia's Central Federal programs of large scale changes including CenterTelecom's District, the Company's management strives to follow recent new marketing strategy, a program of transformation in market trends and get ahead of them. sales and maintenance, and a program of optimization of the Company’s real estate assets. While reviewing the last year's results we want to point out a number of achievements focused on increasing the Com- Working in the interests of CenterTelecom's business deve- pany's business efficiency. Elaboration of a CenterTelecom lopment the Company's management in 2007 began exe- Development Program for 2008-2012, later approved by the cuting the ambitious tasks outlined in the CenterTelecom Board of Directors, became an important step for the Com- Development Program. This led to considerable improvement pany. We chose as the Company's key priority maintenance in the Company's financial performance and significant income of our leading position in the telecommunications market growth. For instance CenterTelecom’s revenues for 2007 of Russia's Central Federal District through active promotion reached RUR32.409 billion or more than US$1.32 billion, of new services, increased income share from non-regulated and net profit amounted to the record sum of RUR3.635 services, strengthening of the Company's position in the billion or more than US$148 million. corporate customer segment, and reorganization of sales and maintenance system.
12 In 2007 the Company continued implementation of the CenterTelecom actively cooperated with construction companies DOMOLINK program which provides broadband Internet ac- and developers specializing in the construction of residential cess service based on ADSL2+ technology. The program cov- and commercial property. During the year, agreements with ered 9 more regions of the Central Federal District. Currently Russia's leading construction companies were prepared and the orange DOMOLINK logo is known in 15 of the 17 regions signed. The agreements involved the complex provision of of Central Russia. More than 304,000 users selected DOMOLINK telecommunications services by CenterTelecom in new real service in 2007. The share of income from Internet access and estate units. Work in this direction is expected to continue in data transmission services in total income structure increased the coming year. by more than 60% reaching RUR2.488 billion. In accordance with the requirements of legal acts regulat- Usage of new approaches to the sales system and marketing ing the operations of telecommunications operators in the support of the Company's initiatives will allow CenterTelecom Russian Federation, CenterTelecom has made major progress to increase its subscriber base to 730,000 users in 2008. changing the terms of cooperation with telecommunications operators connected to the Company's network. This helped In 2007 CenterTelecom actively modernized its regional net- contribute to an efficient dialogue with other participants in work infrastructure in order to provide further development Russia's telecommunications market and formed the basis for of the new services segment. Last year the Company com- future increases in the Company's income. pleted and put into operation the Central Federal District's largest interregional data transmission network which later Another priority factor for CenterTelecom in 2007 was the will be the basis for development of IP-TV, for formation of improvement in the quality of services rendered to subscrib- virtual private networks and will allow the Company to be ers and reorganization of the sales system in accordance more flexible in managing its tariffs for new services. More- with the Program for CenterTelecom's Transformation in the over the Company significantly modernized its network in- Sphere of Sales and Maintenance. The Company expanded its frastructure in rural areas. This was done in conjunction with capabilities in the receipt of payments for telecommunica- implementation of the Education Priority National Program tions services. The conclusion of centralized agreements with and implementation of the mechanism for universal servic- Russian Post Federal State Unitary Enterprise, Sberbank of ing. This modernization allowed the provision of reliable and Russia, a number of commercial banks and electronic pay- high quality telecommunications to inhabitants of thousands ment systems allowed the Company to outsource a number of Central Russia's distant localities. of functions related to the servicing of the clients. Focusing on the accomplishment of tasks outlined by the A system of measures aimed at improvement of management CenterTelecom Development Program, the Company continued and HR contributed to the maintenance of the Company's strengthening its cooperation with corporate clients. Given leadership in the Central Federal District. In 2007 the Compa- the growth of the telecommunications market and strength- ny began implementing the active stage of its management ening of the impact of the telecommunications industry on system reorganization and started practical implementation Russia’s economy, CenterTelecom sees the maintenance of of a process-based approach to management in its branches. partner relations with authorities, in particular with the ad- Reorganization of commercial and technical units in regional ministrations of the regions where the Company operates, as divisions allowed to centralize managerial functions, formed one of its priorities. In 2007, significant work on the prepara- assumptions for further optimization of the personnel number tion and signing of cooperation agreements with the Central and became the basis for modernization of the sales system. Federal District's regional administrations was undertaken.
13 In 2007 the Company continued implementation of a program It will include competitive wages, personal motivation of the for optimization of the personnel number. As of January 1, 2008 employees for efficient work, and high economic indicators. the number of CenterTelecom employees was reduced by up Even now, a well considered managerial policy allowed to 46,637 people. The reduction in personnel became possible CenterTelecom to raise labor efficiency by half within 2007. because of optimization of business processes, modernization of the sales system, implementation of new technical solu- We are happy to thank the employees of CenterTelecom for tions necessary for development of the network infrastructure their daily work which allows millions of people to communicate, of the Company, and implementation of a strict policy of to gain new knowledge and to feel themselves as part of the control over expenditures. It is worth adding that the pro- global information space. We are sure that well coordinated gram for personnel count optimization is being held in strict work by the Company's managers and employees as well as conformance with legislation of the Russian Federation and is the support of the shareholders will allow CenterTelecom to conducted in cooperation with industry's trade unions. Accor- maintain its leadership in the telecommunications market of ding to our estimates, further optimization of the personnel the Russian Federation and will contribute to further growth count combined with intensified business will allow CenterT- of the operator's value. elecom to form a new system of labor organization in 2008.
Alexander Kiselev Chairman of the Board of Directors Vaagn Martirosyan General Director Moscow, May 14, 2008
14 tu May 1 we 2 th Key 2007 2008 events 3 fr 4 sa 5 su 6 mo 7 tu 8 we 9 10 th 11 fr 12 sa 13 su mo 14 15 tu we 16 17 th 18 fr 19 sa su 20 mo 21 22 tu we 23 24 th 25 fr 26 sa su 27 mo 28 29 tu we 30 31 th Key 2007 2008 events
January With effect from January 1, 2007, the new tariffs for broadcas- CenterTelecom has concluded a loan agreement for revolving ting of national TV and radio programs were introduced by credit line with RUR3 billion limit with 7.9% annual interest Order # 379-c/1 dated December 15, 2006 issued by the Federal rate with Sberbank of Russian Federation. The contract was Service for Tariffs of the Russian Federation. Tariffs rose 15%. concluded after an open tender by CenterTelecom. The matu- rity term of the credit line is 2 years. February Starting February 1, 2007, new tariffs for local telephone com- May munications services were introduced and the tariffs for inter- CenterTelecom concluded a contract with RTK-Leasing OJSC zone telephone connections were changed by Order # 261-c/1 for financial leasing of a property complex with the purpose dated November 11, 2006 issued by Federal Service for Tariffs of of provision of universal telecommunications services and the Russian Federation. broadband internet access services. The contract conclusion became possible after an open tender by CenterTelecom. The following tariffs where time-based local billing is techni- According to the signed contract the lessor's total expenditures cally possible are established for the Company: for acquisition of the property was RUR2.999 billion including three mandatory tariff plans based on flat fee, time based VAT, and the gross leasing interest rate was 8.59% (exclusive › and combined payment systems for individual subscribers; of insurance costs and property tax). The term of the contract is 36 months. › one mandatory tariff plan with a time based payment system for corporate clients. June In June 2007, the Board of the Directors of CenterTelecom Starting February 1, 2007, the compensation adjustment approved the pre-term termination of powers of Sergei for services of local and zone call initiation was decreased Pridantsev, General Director, and approved the appointment from RUR0.62 to RUR0.50. of Vaagn Martirosyan as General Director from June 7, 2007.
On February 21, 2007, Sergei Pridantsev, General Director, The Annual General Meeting of the shareholders of Center- CenterTelecom, and Vyacheslav Makrushin, Head of Inter- Telecom was held June 18, 2007. regional Trade Union, CenterTelecom, signed a collective contract for 2007-2009 which regulates the rights and July mutual responsibilities of the employer and employees. On July 24, 2007, the international rating agency Standard & Poor’s upgraded CenterTelecom's long term credit rating from The Russian Fund for Federal Property at its specialized auction "B" to "B+" (Positive outlook) and long term rating according for the sale of CenterTelecom's shares sold 15,135,627 common to the Russian credit rating scale from "ruBBB+" to "ruA+." inscribed shares which represented 7.2% of the Company's charter capital and 9.6% of voting shares. On July 26, 2007, the Board of Directors of CenterTelecom considered recommendations by the Company's Committee On February 27, 2007 Moscow Arbitration Court ruled as largely for HR and Remuneration and approved the formation of a groundless a decision by Interregional Office No.7 of the Russian Managing Board of CenterTelecom for the period from August 2, 2007 to August 1, 2008. The Managing Board includes 11 Federation Tax Administration decision based on the results members. of a scheduled field tax audit of CenterTelecom’s operations for the years 2002-2003 which declared the Company accoun- August table for a tax offence. In accordance with the court's decision With effect from August 9, 2007, in accordance with Decree CenterTelecom paid an additionally charged tax in the amount No. 477 “Rules of Provision for Local, Inter-zone and Long of RUR12.436 million. Distance Telephone Communications Services” issued by the Government of the Russian Federation on July 25, 2007, CenterTelecom made a full payment against the fifth coupon new rules of rounding for connection durations came into of its interest-bearing documentary non-convertible series effect. In accordance with the procedure for calculating local 04 bearer bonds in the amount of RUR389,027,348.05. telephone connection costs, an incomplete unit of tariff clas- sification of half or more than half of the unit is regarded as a March full unit and an incomplete unit which amounts to less than In March 2007, CenterTelecom participated in CeBIT, the world’s half is regarded as half a unit. Prior to this an incomplete unit largest information and telecommunications technology of tariff classification which amounted to less than half a unit exhibition, which is annually held in Hanover, Germany. was regarded as a full unit. CenterTelecom made a full payment against the first coupon In August 2007, the international rating agency Fitch Ratings of its interest-bearing documentary non-convertible series upgraded the long term rating of CenterTelecom from "B-" to "B" 05 bearer bonds in the amount of RUR121,020,000. (Positive outlook) and national long term rating from "BB+(rus)" to "BBB(rus)." The rating for CenterTelecom's series 05 bond CenterTelecom's interest-bearing documentary non-convert- issue was also upgraded from "BB+(rus)" to "BBB(rus)," and ible series 05 bearer bonds were included into Quotation List the recoverability rating was confirmed at "RR4" level. B of MICEX Stock Exchange CJSC. On August 14, 2007, the RID-Expert RA consortium assigned April CenterTelecom the national corporate governance rating of 7+. According to results of monitoring conducted by the consortium, In April 2007, CenterTelecom held a number of meetings with the Company was recognized as one of the leaders in the cor- representatives of the investment community as part of the porate governance sphere in Russia. Company's road show in London.
16 November CenterTelecom and Russian Post Federal State Unitary Enterprise, In November 2007 CenterTelecom was included in the list of respectively the largest provider of fixed-line telecommunica- Russia's most transparent companies. CenterTelecom was tions services of the Central Federal District and the national ranked 22nd among 80 companies assessed by the interna- postal service operator of Russia, signed a cooperation agrement. tional rating agency Standard & Poor’s. On August 17, 2007, CenterTelecom paid out dividends in the CenterTelecom concluded a contract with RTK-Leasing OJSC amount of RUR0.3893300 on its registered non-documentary for financial leasing of a property complex with the purpose class A preferred share for 2006. The dividend payment was of provision of universal telecommunications services. The made in accordance with decision by CenterTelecom's annual contract conclusion became possible after an open tender by general meeting of shareholders. CenterTelecom. According to the signed contract the lessor's total expenditures for acquisition of the property was RUR2,319.9 CenterTelecom effected payment under the sixth coupon of million including VAT, gross leasing interest rate was 11.48% its series 04 interest-bearing documentary non-convertible (exclusive of insurance costs and property tax). The term of bearer bonds in full in the amount of RUR 389.027 million. the leasing contract is 60 months. By September 2007, CenterTelecom completed in full the In November 2007, CenterTelecom held a number of meetings connection of the Central Federal District's educational orga- with representatives of the investment community during the nizations to the Internet within the framework of Education Company's road show in Vienna (Austria) and Stockholm(Sweden). National Program. The Company provided Internet access to 11,050 schools in 17 regions of Central Federal District. On November 30, 2007, CenterTelecom celebrated its 5th anniversary. CenterTelecom is named universal service operator in the territory of all 17 regions of Central Federal District. December The Company developed and approved its Marketing Strategy September and Product Development Strategy in compliance with Center- On September 25, 2007, Alexander Lutsky, Deputy General Telecom Development Program for 2008-2012. The Product Director and Financial Director, CenterTelecom, and Konstantin Development Strategy established directions for optimization Zverev, IT Director, CenterTelecom, were listed among the 1000 of the Company's product portfolio on the basis of segmentation Most Professional Russian Managers by Russia's Managers of its client base and analysis of competition in the market Association. and basic market trends. CenterTelecom made a full payment against the second coupon In December 2007, Sergei Grushin, Corporate Secretary, Center- of its interest-bearing documentary non-convertible series 05 Telecom, won the prize "Russian Leaders in Corporate Governance bearer bonds in the amount of RUR121.02 million. Sphere-2007." The prize's organizer is the Investor Protection Association. Mr. Grushin also won the "Director of the Year 2007" October prize in "Best Corporate Secretary" category. This prize was On October 16, 2007, CenterTelecom and Svyaz-Bank OJSC founded by the Independent Directors Association and Price- signed an agreement providing for the receipt of payments waterhouseCoopers. for the Company's telecommunications services by the bank. On December 11, 2007, CenterTelecom was named winner of Starting October 21, 2007, new tariffs for inter-zone telegram National Purchase Transparency Rating 2007 in the category transmission were set by Order #199-c/23 dated August "Best Corporate Purchaser." The rating was organized by the 28, 2007 issued by Federal Service for Tariffs of the Russian National Association of Electronic Trade Participants and Federation. Tariffs were increased an average 14%. Interregional Social Movement Against Corruption with support of State Duma Anti-Corruption Committee, Russia's The Company approved the CenterTelecom Development Federal Antimonopoly Service and Russia's Audit Chamber. Program for 2008-2012 which includes the Company's main strategic priorities and directions of development in the tele- On December 20, 2007, CenterTelecom paid out dividends for communications market of the Central Federal District for five 2006 in the amount of RUR0. 1999621 per registered non- years. Key target indicators of the Program demonstrate dynamic documentary common share. development of the Company and conform to best indicators in the industry. On December 25, 2007, Expert RA rating agency confirmed the "7+" corporate governance rating (company with high In October 2007, the Company was included in the list of 200 level of corporate governance) assigned to CenterTelecom major Russian companies ranked by market value. The rating previously. CenterTelecom follows Russian legislative requi- was issued by Expert RA rating agency. rements related to corporate governance and the Russian Corporate Conduct Code's basic recommendations. On October 25, 2007, the international rating agency Standard & Poor’s upgraded CenterTelecom's corporate governance rating CenterTelecom completed formation of an interregional data according to the Russian credit rating scale from CGR-5.0 to transmission network (IDTN) which united 17 regional multi- CGR-5.2, and reaffirmed the international corporate governance service networks. Total length of the IDTN is 5,880 kilometers; rating of CGR-5.0. Standard & Poor’s subsequently withdrew total transmission capacity is 40 Gbps. the corporate governance rating for the Company in accordance with a decision of CenterTelecom's management. The number of subscribers of CenterTelecom's xDSL Internet access service reached more than 304,000 in December 2007.
17 Developments Occurring after the Reporting Date January Since January 1, 2008, the new tariff plan for corporate cus- CenterTelecom removed itself from the charter capital of Teleservis tomers using the flat fee payment system (where time-based OJSC with the sale of its stake in the Company. The decision on local billing is technically possible) was introduced by Order this was made previously by CenterTelecom’s Board of Directors. # 178-c/2 dated August 28, 2007 issued by Federal Service for Tariffs of the Russian Federation. Tariffs for the provision CenterTelecom and Sky Link CJSC signed a General Cooperation of a telephone line and for local connection through a shared Agreement aimed at development and implementation of joint telephone line were set at half the level of equivalent tariffs programs in Russia’s Central Federal District. established for individual customers. On March 26, 2008, Moscow Arbitration Court ruled as groundless The compensation adjustment to the price for local and zone a tax claim based on the results of a scheduled field tax audit call initiation services was canceled starting January 1, 2008. of CenterTelecom’s operations for the years 2004-2006 conducted by Interregional Office #7 of the Russian Federation Tax Admi- CenterTelecom sold stakes in the charter capital of Optimum- nistration. Svyaz CJSC and Oskoltelecom CJSC. CenterTelecom made a full RUR121.02 million payment against February the third coupon of its interest-bearing documentary non- Starting February 1, 2008, a new tariff plan for corporate cus- convertible series 05 bearer bonds. tomers using combined payment system (where time-based local billing is technically possible) was approved by Order April # 356-c/1 dated November 23, 2007 issued by Federal Service CenterTelecom's management approved the retention of flat for Tariffs of the Russian Federation. fee payment for unlimited volumes through local telephone connections. The flat fee for individual subscribers in the Moscow CenterTelecom won additional tenders by the Federal Agency region was established at RUR290, and for individual subscribers for Telecommunications for rights to provide universal telecom- in other Central Federal District regions it was set at RUR250. munications services through public pay telephones in the Ivanovo, Kaluga, Kostroma, Lipetsk, Moscow, Ryazan, Smolensk, CenterTelecom and SU-155 CJSC, one of Russia's biggest con- Tambov, Tver, Tula and Yaroslavl regions. struction companies, signed an agreement aimed at organization of access to CenterTelecom's telecommunications services in The Company held a tender for insurance of its electronic SU-155's property units. equipment and concluded a contract with ROSNO OJSC which won the tender. The insurance tariff rate was set at 0.149% The Federal Arbitration Court of Moscow region considered a per annum, and insurance coverage was RUR2,599.8 million. cassation petition filed by Interregional Office #7 of the Russian Federation Tax Administration. The petition was related to the CenterTelecom effected payment in full of the sum of RUR 389.027 Moscow Arbitration Court's decision and Ninth Arbitration million under the seventh coupon of its series 04 interest-bearing Appellation Court's ruling declaring CenterTelecom accountable documentary non-convertible bearer bonds. for a tax offence on basis of the results of a scheduled field tax audit of CenterTelecom’s operations for the years 2002-2003. March The Federal Arbitration Court of Moscow region affirmed the Moscow Arbitration Court's decision and the Ninth Arbitration Starting March 1, 2008, payment for maintenance of a point Appellation Court's ruling, and dismissed the cassation petition. of interconnect (POI) was canceled in accordance with Decree #776 issued by the Russian Government on November 11, 2007.
18 June fr 1 sa 2 su Event of the Year: «Education» 3 mo 4 tu 5 we Priority National Program 6 th 7 fr 8 sa 9 su 10 mo 11 12 tu we 13 14 th 15 fr 16 sa su 17 mo 18 19 tu we 20 21 th 22 fr 23 sa su 24 mo 25 26 tu we 27 28 th 29 fr 30 sa Event of the Year: ´Educationª Priority National Program
Development of broadband Internet access services in Russia The educational organizations are connected through Center- is mostly being stimulated by the implementation of national Telecom’s telecommunications network employing various and state programs which provide mass connection of state technological solutions. In particular, in 2006-2007 the Company financed organizations to the Internet. Under the priority nati- arranged Internet access through xDSL fixed line communica- onal program "Education", broadband Internet access has been tions channels for 10,659 schools. 262 educational organiza- provided to 53 thousand Russian schools. It has led to the formation tions were connected to the Internet through cellular communi- of a national educational network which allows Russian schools cations channels. 125 educational organizations were connected to use Internet resources in the course of the educational process. to the Internet via wireless communications channels. In September 2006, the Ministry of Education and Science of the Participation in the priority national program "Education" was Russian Federation jointly with the Ministry for Information one of the most important social investments' directions for Technologies and Communications of the Russian Federation CenterTelecom in 2007. Investing in the implementation of conducted a tender for the provision of Internet access to Russian information technologies in the educational sphere, we started educational institutions. RTComm OJSC, a national telecom- forming a new type of society. That's why CenterTelecom's munications operator, won the tender. RTComm provided un- management considers the national program as one of the most limited 24-hour Internet access to Russian educational insti- successful investment programs of the Company because demand tutions up to late 2007. for the Company's services will grow simultaneously with the increasing information educational level of the population. In 2006-2007 the Company provided broadband Internet access based on ADSL technology to 11,050 educational organizations located in 17 regions of the Central Federal District. Thus the Company fulfilled its obligations on a contract concluded with RTComm providing for CenterTelecom to arrange traffic trans- fer in the last-mile segment from educational organizations to Internet access points with a speed not less than 128 Kbps.
20 su July 1 mo 2 tu Key Results of 2007 and Objectives 3 we 4 th 5 fr for 20082009 6 sa 7 su 8 mo 9 10 tu we 11 12 th 13 fr 14 sa su 15 mo 16 17 tu we 18 19 th 20 fr 21 sa su 22 mo 23 24 tu we 25 26 th 27 fr 28 sa su 29 mo 30 31 tu Key Results of 2007 and Objectives for 20082009
Results of 2007 Objectives for 2008-2009 Maintenance of leadership in Central Federal District telecommunications market › 14.14% growth of the Company's revenues up to RUR32.4 › increase of latest and most highly profitable billion given that total volume of the Central Federal District telecommunications services' contribution to the telecommunications market was RUR44 billion (excluding Company's total income; Moscow city market and mobile operators income); › advanced development of broadband Internet access › the Company's share in the Central Federal District market infrastructure based on xDSL, FTTx and Ethernet technologies was 72% (excluding mobile operators); which allow the subscribers to get full range of modern fixed telecommunications services; › number of traditional telephony subscribers exceeded 6.6 million people; › increased volumes in the provision of content services in broadband network (VoD, PVR, SoD, IPTV); › the number of subscribers of CenterTelecom's xDSL Internet › development of new services, improvement of the quality access service exceeded 304,000 people. of existing services rendered to the corporate clients (including IP VPN), and outsourcing of the services; › development of local telephone network and increase of income from traditional services; › competitive tariff formation; › formation and promotion of brands focused on separate market segments; › expansion of sales channels, formation of well-managed sales and maintenance system including dealer network. Technical modernization of a network › formation of interregional data transmission network (IDTN) › improvement of broadband Internet access infrastructure which joined the regional network infrastructures of the and reconstruction of public telephone network by means Company's 15 branches; of NGN technologic solutions; › active improvement of telecommunications network through › reduction of the number of traditional copper wire deployment of the latest technological solutions within the distributing networks; investment in channel switching framework of expansion of DOMOLINK program geography, technologies; implementation of the priority national program "Education", and implementation of universal service through public pay › switch to NGN/IMS; telephones. › migration from ADSL to Ethernet and G-PON; › switch to Fiber to the Home (FTTH) – expansion of bandwidth, modernization of transportation networks (active construction of optic fiber lines and implementation of FTTH concept); › implementation of WiMax technology in construction and development of telecommunications network; › implementation and modernization of latest IT solutions. Increase in the Company's operational efficiency › debt under credits and loans decreased by RUR2.584 billion; › implementation of programs aimed at raising operational efficiency through optimization of costs and improved › charged credits' and loans' costs reduced by RUR341.8 million; control over expenses; › Net Debt/EBITDA decreased from 2.09 in 2006 to 1.56 in 2007 owing to reduction of debt in 2007 and increase of › implementation of programs aimed at reduction of debt EBITDA by RUR1.921 billion. burden and decrease of debt costs; › increased efficiency of the Company's investments; › increased efficiency of the management of the Company's current assets. Optimization of CenterTelecom's personnel number and management system › the Company completed the second stage of the program for › organizational development of the Company; optimization of the personnel number which in 2007 led to 14.2% › formation and implementation of incentive system aimed staff reduction against 2006; at harmonization of the Company's employees' interests and › the Company completed the first stage of a switch to process CenterTelecom's strategic tasks. approach to the Company's business management which led to significant reorganization of the model for branch operations; › a collective contract for 2007-2009 was signed; › the Company founded a Corporate University which contributes to advanced training and education of the Company's employees.
22 we August 1 th 2 fr Key Business Directions of the Company 3 sa 4 Prospects forDevelopment Core DevelopmentTrends oftheCompany of theCentralFederalDistrictinRussia Telecommunications ServicesMarket The Company'sPositioninthe Industry DevelopmentinRussia Short SummaryofTelecommunications su 5 mo 6 tu 7 we 8 th 9 10 fr 11 sa 12 su mo 13 14 tu we 15 16 th 17 fr 18 sa su 19 mo 20 21 tu we 22 23 th 24 fr 25 sa su 26 mo 27 28 tu we 29 30 th 31 fr Short Summary of Telecommunications Industry Development in Russia
Rates of growth of information and telecommunications technologies in the Russian Federation for 2007 reached 25.8% against 20% for 2006.
The telecommunications sector's contribution to the increased rate of growth in the industry reached 25.4%
Russia's Information and Telecommunications Industry Development, RUR billion
1,500 1,500
1,200 1,197
968 900
797
600
300
0 2004 2005 2006 2007
Source: Ministry for Information Technologies and Communications of the Russian Federation
24 Traditional fixed (local) telecommunications has demonstrated "universal service" will also incorporate broadband Internet slow dynamics within recent years. For instance revenues rose access with 256 Kbps speed, home Internet access and Internet approximately 10% for 2007. Telephone density increased for access in schools, hospitals and libraries. At the same time 2007 to 0.8 (32 telephone sets for 10 inhabitants) for 2007 there is a significant imbalance in local telecommunications against 1.2 for 2006. At the same time the queue for a home development in various Russian territories. For instance in telephone line connection in Russia reduced by 500,000 ap- rural areas penetration of fixed line telecommunications plications to 1 million applications. services reaches only 13%. According to information from the Ministry for Information Broadband Internet access with its 50% growth and 5 million Technologies and Communications of the Russian Federation, Internet connected households was one of the key drivers in the more than 73,000 universal public pay telephones were ins- telecommunications market in 2007. Two years ago it replaced talled in Russia in 2007. Most of the work on the installation another core market driver – mobile telecommunications. of public pay telephones is conducted by interregional telecom- According to experts’ estimates, the number of Internet con- munications companies which are a part of the Svyazinvest nected users in Russia will double in 2008. holding company. It is expected that after 2008 the term
Telecommunications Sector's Income Dynamics, RUR Billion
1,000 983
800
668 668
600
400
200
0 2005 2006 2007
Source: Ministry for Information Technologies and Communications of the Russian Federation
25 At the same time Internet connected subscribers prefer high access) is regarded by many companies, including fixed line and speed Internet access, and unlimited tariff plans lead because of mobile operators, as progressive and competitive technology, and high competition. However market analysts think that despite it has led to the emergence of WiMAX projects in Russia. high demand for high quality Internet access services in Russia, the cost of services does not always correspond with Russian Stability of the information and telecommunications technol- users' salaries level. For instance, the average Internet connection ogies sector is strengthening its role in the national economy price is around RUR1,460. and is changing the evaluation criteria for development. Information and telecommunications technologies develop- The share of dial-up Internet users in Russia is quite large now, ment is estimated on the basis of international but not do- but according to the forecasts, it will not exceed 5%-7% by late mestic Russian criteria, in particular, on basis of international 2011. Internet dial up access is becoming "niche" technology ratings. The telecommunications market's participants are in major Russian cities, but its share decrease will be slower in eager to provide for the Russian economy’s growing demand Russian regions. The priority national program "Education" which for the latest telecommunications services. Their purposeful provides Internet connections for about 53 thousand Russian work will allow Russia to be ranked 20th in international schools will contribute to the development of the situation in the ratings of information society development and 10th on the market since 7,425 schools which are planned to be connected accessibility of telecommunications infrastructure with in are located in Russia's remote areas. the next few years. Among basic Internet access technologies in Russia are dial-up, xDSL, Ethernet through optic and copper lines, VSAT and wireless technologies. WiMAX (wireless fixed line and mobile Internet
Broadband Internet Access Services Penetration Globally and in Russia Growth in Number of Personal Computers and Internet Users, million
Africa Russia (on average) Moscow Internet Users
Europe On Average in the World Personal Computers 50% 35
40% 30 40% 40%
30% 25
20% 20
18%
10% 15 10%
4%
0% 10 2004 2005 2006 2007
Source: Ministry for Information Technologies and Communications of the Russian Federation
26 The Company's Position in the Telecommunications Services Market of the Central Federal District in Russia
To date the Company maintains a leading position in the tele- Among basic competitors of CenterTelecom are leading national communications market of Central Federal District of Russia. operators (Golden Telecom, including Corbina Telecom), and the The Company's share in the telecommunications market for companies operating in the Moscow regional market (Central 2007 reached 72% (excluding the Moscow city market and Telegraph OJSC, COMSTAR-United Telesystems OJSC). mobile operators' share). The Company's position with regard to separate types of telecommunications services is as follows: The share of corporate operators in the data transmissionmar- 88% - local telecommunications; ket is quite high (Transtelecom OJSC). Mobile operators are › actively working in the Internet access market as well as in › 90% - inter-zone telecommunications; the market for inter-zone and local telephone communications. › 37% - Internet access, data transmission, intelligent network; 49% - interconnection and traffic transfer. Major regional operators quite often compete with Center- › Telecom's regional branches in strategically important markets and at the same time are quite important partners for national and corporate telecommunications operators.
CenterTelecom's Share in the Local Telecommunications Market* CenterTelecom's Share in Inter-Zone Telecommunications Market*
CenterTelecom 88% Other companies 12% CenterTelecom 90% Other companies 10%
CenterTelecom's Share in the Internet Access CenterTelecom's Peers Share in the CFD Market* and Data Transmission Services Market*
CenterTelecom 63% Other companies 37% CenterTelecom 72% Regional Operators 5.2%
COMSTAR-United Telesystems 2%
Transtelecom 7.3%
Golden Telecom (including Corbina Telecom) 13.5%
* for 2007 excluding cell operators' income and Moscow market
27 Core Development Trends of the Company
In 2007, the Company approved the CenterTelecom Develop- › provision of a social package of services guaranteed by the state ment Program for 2008-2012 which includes core strategic to the population; priorities and trends for the Company's development for five › reduction of queues for the provision of telephone communica- years. Key target indicators for the Program demonstrate tions services; dynamic development of the Company and conform to the best indicators in the industry. › provision of Universal Telecommunications Service in all Central Federal District localities; CenterTelecom's activities are aimed at the formation of a centralization of telecommunications network management convenient integrated and multifunctional information and › systems for the purposes of management optimization communications space and at the fullest possible use of the and cost reduction; potential of the Company's subsidiaries. joint participation with regional administrations in programs › relating to the provision of the latest telecommunications In 2008-2012 the Company's key development directions given services to the population; the need to maintain leadership in the region will be as follows: implementation of state information and telecommuni › cations programs including: › qualitative change in income basis by means of increasing the › formation of the Federal Treasury's corporate telecommu- contribution to the Company's total income from the latest nications network; highly profitable telecommunications services; › connection of the offices of Russian Post Federal State › strengthening of the Company's position in the corporate Unitary Enterprise to Russian Post's corporate telecom- segment and increasing income share from corporate clients; munications network; reorganization of the sales and maintenance system in the › provision of Internet access services to educational › mass segment, and strengthening of the role of indirect and organizations. virtual sales; › switch to closed numbering plan in local telephone networks possible increase in income from traditional telecommunications and provision of access to emergency services across the Russian › services by means of efficient management of tariff plans and Federation through the standardized telephone number 112 for deployment of service packages; all subscribers; › modernization of the existing regional infrastructure for the › centralization of information servicing; purpose of development of priority commercial types of activi- implementation of IP TV. ties, and formation of integrated flexible multiservice network › infrastructure on the basis of NGN technologies; Among core priority directions of the Company's information › provision of broadband Internet access services through existing technologies development are: networks on the basis of xDSL technologies with emphasis on › execution of work in accordance with the United System of network modernization and development of networks based on Settlements and Interactions with Customers; Ethernet technology and implementation of the FTTH principle; › execution of work in accordance with ERP based on Oracle › implementation of state tasks combined with modernization of E-Business Suite; networks based on NGN technologies; › development of the technical architecture of the Data › increased operating efficiency through optimization of business Processing Center ; processes, centralizing of functions, outsourcing of auxiliary › work on formation of the Centralized Platform of Collection and functions, adoption of new network technologies and imple- Preliminary Data Processing ; mentation of information systems. › automation of business processes of corporate information Accomplishing the tasks of improvement and development of processing and electronic document interchange (EDI); Central Federal District infrastructure, CenterTelecom sees its implementation of OSS/BSS. goal as provision to the population of Central Russia of tele- › communications services based on the latest technologies. Among the key priority directions of the Company's technical development are: › development of the Company's core infrastructure: › trunk optic fiber lines and data transmission systems; › inter-zone optic fiber lines connecting each district's center or other territory. › modernization of the existing telephone network to supply to each subscriber a full package of services based on NGN tech- nology including: › traditional telephone communications; › broadband data transmission.
28 Prospects for Development
The key strategic advantage of CenterTelecom in the short › competitive tariff formation (differentiation of tariffs in ac and long terms is its developed infrastructure. The Company cordance with consumer demand, introduction of additional is developing dynamically and follows active commercial tariff plans supportive of "upselling", granting of discounts and position implementing the newest telecommunications development of new service packages); technologies. CenterTelecom is one of the few companies creation promotion of brands targeting different market segments; offering a full range of telecommunications services from › traditional telephony to the organization of VPN networks › expansion of sales channels, formation of a well-managed sales with integrated multimedia services. and maintenance system including dealer network; formation of integrated flexible multiservice network infra- The development of priority commercial directions for the › structure based on NGN technologies providing access to all Company’s operations is followed by modernization of existing types of telecommunications services and traffic transfer; telecommunications infrastructure, adoption of the newest implementation of programs aimed at increased operational innovative technologies, increased operating efficiency and › efficiency through optimization of costs and improvement of cost reductions. expense controls; The Company’s operations are aimed at the achievement of › implementation of programs aimed at reduction of debt burden the following target indicators established by CenterTelecom and decreased debt costs; Development Program for 2008-2012: › increased efficiency of the Company's invesments; › maintenance of the leading position in telecommunications › increased efficiency of the management of the Company's current market of Central Federal District with not less than 35.88% assets; share by 2012; organizational development of the Company; an increase in the contribution to the Company's total income up › › formation and implementation of the incentive system aimed to 31.7% of the newest high-profit telecommunications services; › at harmonization of the Company's employees' interests and strengthening of the Company's position in the corporate CenterTelecom's strategic tasks; › customer segment and provision for an income share from this implementation of the real estate assets optimization program. segment of up to 36.2% by 2012. › In compliance with the CenterTelecom Development Program CenterTelecom plans to complete the construction of interregional for 2008-2012, the Company developed and approved a Market- and inter-zone optic fiber telecommunications lines and the inter- ing Strategy and a Product Development Strategy which pro- regional data transmission network in CFD in 2008-2009. vide directions of the Company's product portfolio optimization on the basis of segmentation of the Company's client base, The total length of telecommunications lines built in 2008 will analysis of competition and main market trends. reach 3,070 kilometers, and total optic fiber telecommunications line construction will triple by comparison with 2007. Construction Among the most important factors of CenterTelecom's succes- of parts of inter-zone telecommunications lines in three branches sful operations is the development of new services on offer to will be completed in the first half of 2009. non-corporate users. At present these services include broad- band Internet access, and content services based on broadband Implementation of the second stage of interregional data transmis- Internet access (multimedia and internet content services). sion network will allow increased traffic transfer speeds up to 20 Gbps and an increased reliability factor up to 0.9999. To accomplish these tasks and for the efficient development of its business the Company is implementing the following In 2008 the Company plans to provide 1-10 Gbps data transmission strategic initiatives: speed within each region of Russia's Central Federal District, and 20 Gbps data transmission speed between regions. Thus the volume advanced development of broadband Internet access infrastruc- of traffic transferred to the national operators will exceed 2,000 › ture based on xDSL, FTTx and Ethernet technologies which allow Terabyte per month. the subscribers to get a full range of modern fixed telecommuni- cations services; The Company also plans to provide 809,233 ports of total installed › more content services on the broadband network (VoD, PVR, capacity of CenterTelecom's xDSL broadband Internet access networks. SoD, IPTV); development of new services, improved quality of existing CenterTelecom plans to develop broadband Internet access services › services for corporate clients (including IP VPN) in the Central based on Fiber To The Building (FTTB) technology in major Central Federal District, and service outsourcing; Federal District cities. FTHB technology allows the provision of 100 Mbps access and other NGN services. Pilot segments of FTTB › development of a suite of free services including content networks will be put into operation by the Company in 2008. services which contribute to broadband Internet access services; › development of the local telephone network and increased income from traditional services;
29 Given the importance of implementation of NGN services In 2008 CenterTelecom jointly with Start Telecom OJSC and the Company is working on organization of the first stage of Sinterra CJSC is implementing a program connecting the offices construction of an IP TV network in its five branches. of Russian Post Federal State Unitary Enterprise to Russian Post's corporate telecommunications network. CenterTelecom's In 2008 the Company intends to develop NGN networks in its branches plan to connect 1,228 Russian post offices located branches as follows: in the Central Federal District to Russian Post's corporate tele- › The Company plans to install SoftSwitch equipment in Bryansk, communications network. This will allow the provision of Tula, Smolensk, Tambov and Moscow branches; uninterrupted operations for the money transfer system and collective points of Internet access within the framework of In the cities of Tver and Rzhev, for services supplied by Center- implementation of universal service. › Telecom’s Tver branch, a Magelan exchange with SoftSwitch functions produced by Rustelcom company will be installed; It is supposed to connect 17 directorates and 464 branches of CenterTelecom is arranging gradual conversions to NGN networks the Federal Treasury located in Central Federal District to its › in the Voronezh, Tula and Tambov branches. In the first stage corporate telecommunications network. This will be done by the Company built a 10 GE IP/MPLS telecommunications network CenterTelecom as part of its program related to the formation with Huawei switching systems. In 2008 the Company plans step of the Federal Treasury's corporate telecommunications network. by step to replace central exchanges in Central Federal District capitals with equipment for media gateways and subscriber The Company plans to form a United Interregional Network access nodes; Managing Center and Network Managing Centers in each The Company will install SoftSwitch equipment with 192,000-port CenterTelecom branch. › capacity in the Moscow branch as part of its implementation of the "Reconstruction of Zone Telecommunications Network" project. Currently the telephone numbers beginning with “1” are ex- In 2008 the Company will put into operation 812,015 fixed line cluded from the numbering plans of the local telephone networks. telephone numbers including 743,850 to replace old tele- CenterTelecom has also switched to the closed numbering plan phone numbers. The level of digitalization will reach 66.3%, for inter-zone telephone connections in areas where the allowing the Company to provide social and expanded service Company is operating in accordance with its licenses. These packages to the population, and to considerably reduce the changes, along with replacement of analogue exchanges and number of queued applications for traditional telephone services. installation of the new digital switching equipment incorpo- rating functions necessary for emergency services' operations, The Company connected to the Internet more than 11,000 will allow the provision of access to emergency services across educational organizations under a project entitled "Provision the Russian Federation through the standardized telephone of Internet access services to educational organizations." In number 112 for all subscribers and users of fixed line and mobile 2008 CenterTelecom will connect 521 educational institutions telecommunications services and to switch to a closed num- to the Internet. bering plan for local telephone connections. In 2007 the Company won tenders by the Federal Agency for In 2008 the Company intends to continue implementation of Telecommunications for rights to provide universal telecom- its centralized IT solutions, to launch a Centralized Platform munications services through public pay telephones in all the of Collection and Preliminary Data Processing, a system of Central Federal District's regions. The Company concluded mutual settlements between telecommunications operators, 228 contracts for provision of these services with the Federal to implement EDI in the Company's branches, and to put Agency for Telecommunications. Total number of universal OSS/BSS into operation. public pay telephones installed by the Company up to August 2008 will reach 54,778 or 37.32% of all public pay telephones installed in the Russian Federation.
30 September sa su mo tu we th fr sa su mo tu we th fr sa su mo tu we th fr sa su mo tu we th fr sa su 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Key Economic Figures
Income Structure from Telecom munications Services for 2007
Financial Activities
Investment Activities
Tariff Policy Results of the Company's Operations in 2007 Key Economic Figures
In April 2008 CenterTelecom reported its audited financial results for 2007 in accordance with Russian Accounting Standards (RAS). The Company's efforts to increase its broadband Internet access service's subscriber base, headcount reduction, optimization of the management system and strengthening of control over costs led to: › raising CenterTelecom revenue from core operations to RUR32.409 billion for 2007 against RUR28.395 billion for 2006; › 13.01% increase in expenditures on core operations, to RUR23.969 billion; › EBITDA growth to RUR11.704 billion or a 19.62% increase against 2006; increase of EBITDA margin to 36.11% against 34.46% for 2006; › 77.49% rise in net profit to a record RUR3.635 billion, compared with RUR2.048 billion for 2006; › 0.99% decrease in net cost per ruble of revenues, to RUR0.7396 against RUR0.7470 for 2006; › 18.92% rise in number of lines per employee, to 132 lines (compared with 111 for 2006).
RUR Million 2007 2006 Change, % Revenue from core operations 32,409 28,395 +14.14 including revenue from telecommunications services 30,821 26,637 +15.71 Expenditure on core operations 23,969 21,209 +13.01 including depreciation 3,834 3,767 +1.78 EBITDA (1) 11,704 9,784 +19.62 EBITDA margin (2) 36.11% 34.46% - Sales profit 8,440 7,186 +17.45 Net profit 3,635 2,048 +77.49 Profitability on sales profit 26.04% 25.31% - Profitability on net profit 11.22% 7.21% - 1) EBITDA is calculated as earnings before taxes plus interest payable plus depreciation plus leasing payment minus interest receivable; 2) EBITDA margin is calculated as EBITDA/revenues.
CenterTelecom Income Structure for 2007, RUR million Indicator 2007 2006 Change, % Inter-zone telephone communications (3) 5,912 3,885 +52.18 City and rural telephone communications 15,874 14,444 +9.90 Internet access and data transmission services 3,082 1,929 +59.77 Including Internet access services 2,488 1,553 +60.21 Interconnection and traffic transfer services 4,685 5,037 -6.99% Cooperation and agency services 1,148 1,398 -17.88% Other telecommunications services (core operations) 1,268 1,342 -5.51% Income from other sales 440 360 +22,22% Total 32,409 28,395 +14.14% (3) Income from inter-zone telecommunications services including income from inter-zone communications through public pay phones and from the provision of services on behalf of other inter-zone communications carriers.
32 Income from Core Operations Expenses on Core Operations The 14.14% rise in CenterTelecom's revenues for 2007 to A 13.01% increase in CenterTelecom expenses for 2007, to RUR32.409 billion is mainly caused by increased income from RUR23.969 billion (RUR21.209 billion for 2006), was caused traditional telephony services, Internet access and data trans- by a 105.97% increase in expenses on settlements with tele- mission services, and also from inter-zone telecommunications communications operators as a result of putting into effect of services. The 9.9% rise in income from traditional telephony a new mutual settlements scheme. services reaching RUR15.874 billion for 2007 against RUR14.444 billion for 2006 is connected with the growth of the Company's A 6.75% growth of wage expenses, including payments subscriber base. under a collective contract, from RUR7.824 billion for 2006 to RUR8.352 billion for 2007, and a related 3.61% increase An active marketing policy and implementation of the DOMOLINK in social insurance payments, to RUR1.895 billion for 2007, broadband Internet access service based on ADSL 2+ technol- were caused by a 14% headcount reduction and compensa- ogy contributed to a 160% increase in the number of ADSL tion payments, and also by a differentiated increase in Center- Internet access subscribers, to 304,000 users. Income from data Telecom employees wages which depended on personal transmission and Internet access services for 2007 amounted contribution of each employee to production activities. to RUR3.082 billion. This is 59.77% more than for 2006. And at the same time the contribution from Internet access An increase in expenses on fixed assets depreciation by 1.78%, services to CenterTelecom's income structure reached 7.68% from RUR3.767 billion for 2006 to RUR3.834 billion for 2007, for 2007 (5.47% in 2006). was related to implementation of CenterTelecom's invest- ment policy aimed at improvement of telecommunications In accordance with the Rules for Local, Inter-Zone, Long Distance infrastructure in the territory of Central Federal District. and International Telecommunications Services Provision approved by Decree #310 dated May 18, 2005 issued by the Profit Government of the Russian Federation, the Calling Party Pays For 2007 the Company's sales profit rose by 17.45% to RUR8.44 (CPP) principle came into effect starting July 1, 2006. In accor- billion. EBITDA grew by 19.62% and amounted to RUR11.704 dance with the Rules all connections between fixed line tele- billion with 36.11% EBITDA margin (34.46% for 2006). Imp- communications services subscribers with ABC numbering zone rovement of EBITDA margin was caused by increased operati- code and mobile telecommunications services subscribers with onal efficiency. Net profit for 2007 was RUR3.635 billion DEC numbering zone code are regarded as inter-zone connections. (RUR2.048 billion for 2006). Implementation of the CPP principle led to a 52.18% increase in CenterTelecom's income from inter-zone telecommunications services, to RUR5.912 billion for 2007 in comparison with RUR3.885 billion for 2006.
CenterTelecom Expenses Structure for 2007, RUR million Costs elements 2007 2006 Change, % Wages 8,352 7,824 +6.75 Depreciation 3,834 3,767 +1.78 Social insurance 1,895 1,829 +3.61 Material costs 1,921 1,989 -3.42 Expenses on telecommunications operators' services 2,933 1,424 +105.97 Provisions for universal telecommunications service 314 259 +21.24 Rent payment 1,326 1,210 +9.59 Other expenses 3,394 2,907 +16.75 Total 23,969 21,209 +13.01
33 CenterTelecom Income Structure from Telecommunications Services for 2007
Analysis of dynamics of CenterTelecom's income structure for 2007 reveals that the Company, following global industry trends, is actively increasing the share of new telecommunications services such as broadband Internet access and data transmission services in its income structure given the decreasing proportion derived from traditional telecommunications services.
Local Telecommunications CenterTelecom's Installed Capacity CenterTelecom's telecommunications network is being as of December 31, 2007, units improved continuously. The Company has put into operation CTE, numbers – RTE, numbers – the latest multifunctional switching equipment, and has 6,080,502 1,022,072 organized radio relay digital lines. Within 2007 the Com- pany continued expanding subscriber capacity. In 2007 the Company was developing local telephone communications mostly on the basis of digital exchanges, and this allowed improvements in quality and more services. CenterTelecom's local telephone network consists of 8,400 automated telephone exchanges with 7,102,574 numbers total installed capacity including 1,601 City Telephone Ex- changes (CTEs) with installed capacity for 6,080,502 numbers and 6,799 Rural Telephone Exchanges (RTEs) with installed capacity for 1,022,072 numbers. During 2007 the installed capacity of local telephone networks increased by 119,459 numbers. The number of the Company's main telephone sets for 2007 reached 6,652,985 items, including 5,684,310 CTE main telephone sets and 968,675 RTE main telephone sets. The number of main telephone sets for 2007 rose by 106,008.
Dynamics in Increase of CenterTelecom's Installed Capacity, units
8,000 000
7,000 000 7,102,574 6,798,128 6,950,668 6,983,115 6,000 000 5,000 000 4,000 000 3,000 000 2,000 000 1,000 000 0 2004 2005 2006 2007
The structure of CenterTelecom's subscriber categories did Distribution of CenterTelecom's Subscribers not change in 2007. Individual subscribers represent 86.6% Individuals – 86.6%State Funded of all users, 8.8% are corporate customers, and 4.6% of the Organizations – 4.6% Company's subscribers are state financed organizations, as of 31 December 2007. Corporate Subscribers – 8.8%
34 The level of digitalization of the local telephone network as CenterTelecom's Activated Capacity of December 31, 2007 reached 57.7% (52.8% for 2006), in- as of December 31, 2007, units cluding 62.4% in CTEs (58.1% for 2006) and 29.7% in RTEs (22.1% for 2006). The number of electronic telephone exchan- CTE – 5,807,488 RTE – 903,904 ges increased by 438 for 2007, including 89 CTE electronic telephone exchanges and 349 RTE electronic telephone exchan- ges. Installed capacity of electronic telephone exchanges in- creased by 409,608 numbers, including 332,042 CTE numbers and 77,566 RTE numbers. Usage of installed capacity at local telephone networks was 94.5% as of December 31, 2007 (94.7% as of December 31, 2006) including 95.5% at CTEs (95.5% as of December 31, 2006) and 88.4% at RTEs (90.0% as of December 31, 2006). Capacity of telephone exchanges which have access to auto- mated long distance exchanges reached 7,093,512 numbers as of December 31, 2007 including 6,072,414 CTE numbers and 1,021,098 RTE numbers. The ratio of capacity of telephone exchanges which have access to automated long distance exchanges to total installed capacity of the Company's tele- phone exchanges reached 99.87% as of December 31, 2007 (99.8% as of December 31, 2006).
Dynamics in Increase of CenterTelecom's Activated Capacity, units
8,000 000 7,000 000 6,609,951 6,711,392 6,000 000 6,298,611 6,483,569 5,000 000 4,000 000 3,000 000 2,000 000 1,000 000 0 2004 2005 2006 2007
Installed capacity of telephone exchanges with the technical Inter-Zone Telecommunications capability for time-based local billing reached 5,512,024 In 2007 CenterTelecom focused on a further increase in automa- numbers as of December 31, 2007 including 5,083,655 CTE tion and digitalization of long distance telecommunications numbers and 428,369 RTE numbers. The ratio of capacity of for the purpose of improvement in the quality of telecommu- telephone exchanges with the technical capability for time- nications services. The length of inter-zone transmission lines based local billing to total installed capacity of the Company's as of December 31, 2007 reached 29,166.6 kilometers, including telephone exchanges reached 77.6% as of December 31, 2007 16,613.7 kilometers of optic fiber telecommunications lines. (73.1% as of December 31, 2006). A significant increase in the length of inter-zone long distance circuits occurred owing to construction and putting into oper- In 2007 the Company was building optic fiber telecommu- ation of intra-zone optic fiber telecommunications lines and nications lines in its local networks. Length of the optic fiber to upgrading of the equipment up to the higher STM level. telecommunications lines reached 7,311 kilometers. Total number of carrier channels for 2007 reached 972,633 chan- The total increase in length of CenterTelecom's inter-zone long nels, and digital channels represent 97.3% of all channels. distance circuits for 2007 was 3,599,100 kilometers. Currently digital zone centers of types EWSD, S-12, AXE-10 are installed CenterTelecom, striving to improve the quality and reliability in all regions where the Company operates. of its telecommunications network, has been laying cable telecommunications lines in place of overhead circuits, and has transitioned interconnecting lines from low traffic to New Services multichannel systems, including to digital systems, increas- ing the number of telecommunications channels. In 2007, In December 2007 the new Interregional Data Transmission 8,364 kilometers of overhead wire were taken out of operation. Network (IDTN) was put into operation. The IDTN incorporates DWDM telecommunications equipment by ECI Telecom and Some 21,020 CenterTelecom public pay telephones were in CRS-1 routers by Cisco Systems. Launch of the IDTN allowed operation as of December 31, 2007, of which 19,879 were high speed data transmission channels with 10-40 Gbps trans- represented by universal public pay telephones. mission capacity as well as more services and improved quality.
35 In 2007 the Company successfully implemented a program of Active development of broadband Internet access services expansion of its DOMOLINK-2 broadband Internet access nodes, based on xDSL technologies allowed the Company to signi- and a program of building the Corporate Data Transfer Network ficantly increase the number of subscribers to more than for DOMOLINK. This allowed an expansion of Internet access 304,000 people for 2007 (115,052 users for 2006). In 2007 and improvements in the Internet access service's quality. Internet access service based on xDSL technology was pro- vided by 13 CenterTelecom branches (Belgorod, Bryansk, In 2007 the Company fulfilled its investment program in the Verkhnevolzhsky, Vladimir, Voronezh, Kaluga, Lipetsk, Moscow, amount of RUR1.205 billion at the expense of its own finan- Orel, Ryazan, Smolensk, Tambov and Tula branches). Thus cial sources, with a further investment of RUR1.94 billion on CenterTelecom significantly strengthened its position in the leasing property reflected in leaser's financial statements. broadband Internet access market.
Growth Trends of CenterTelecom's xDSL Internet access service's subscribers
350,000
300,000 304,000 250,000
200,000
150,000
100,000 115,052
50,000 6,232 16,619 0 2004 2005 2006 2007
Income from New Services, RUR billion
3.5
3.0 3.1
2.5
2.0 1.9 1.5 1.4 1.0 0.9 0.5
0 2004 2005 2006 2007
The volume of Internet traffic through dedicated lines increased of the development of CDMA 2000, CenterTelecom installed 360% for 2007 against 2006 and reached 2,435,029.9 GB. At upgraded switching equipment for EVDO, 3G mobile telecom- the same time for 2007 the volume of Internet traffic transferred munications technology, for digital network switching centers through dial up lines decreased by 13.6% against 2006 and in Yaroslavl, Kostroma and Ivanovo. This will allow the Company reached 2,724 million minutes. to compete successfully with alternative 3G networks since the Company is able to provide 2.4Mbps speed and coverage not Number of contracts for cable TV services concluded for 2007 only in densely populated city districts but also in underpopu- rose by 7.3% against 2006 and reached 73,554 contracts. lated rural areas. In addition to mobile telephony, a traditional service for a cell network, the Company provides fixed radio Verkhnevolzhsky branch successfully completed construction, access, Internet access, and is forming a new network for the assembly and adjustment and startup procedures of the second provision of telephone communications in localities not covered stage of IMT-MC-450 (CDMA 2000) network based on CDMA- by traditional telephony and for the formation of a technolo- 450 equipment by Huawei Technologies Co. Ltd., China. As of gical base for the provision of universal services to the popu- December 31, 2007, the Company had installed 25 base stations lation in future. and connected 12,236 subscribers. Within the framework
36 Financial Activities
In 2007 CenterTelecom continued implementation of the fi- Company concluded two contracts with RTK-LEASING OJSC. nancial strategy approved in 2006 strategic tasks of which One was concluded for three years providing for an 8.59% include improvement of debt structure, reduction of debt costs, annual lease rate. The second contract was concluded for five decreased debt burden and increased operational efficiency. years and provided for an 11.48% lease rate per annum. For financing of its operations, the Company attracted loans Taking measures aimed at decreasing the Company's debt on a short and long term basis. The borrowed funds were at- burden allowed CenterTelecom to achieve the following tracted mainly in the form of bank loans. In April 2007, the indicators for 2007 compared with 2006: Company concluded a contract with Sberbank of the Russian debt under loans and borrowings decreased by RUR2.584 billion; Federation for the provision of a RUR3 billion revolving loan › with two years maturity. Interest on the debt is accrued at › charged expenses for debt and borrowing costs reduced by 7.9% per annum. Receivables on the basic sum of the revolv- RUR341.8 million; ing loan as of December 31, 2007 reached RUR1.125 billion. Net Debt/EBITDA ratio decreased to 1.56 for 2007 (2.09 for 2006) › owing to the decrease in debt for 2007 and increase of EBITDA by For financing broadband Internet access programs and provi- RUR1.921 billion. sion of universal telecommunications services, the Company used off-balance sheet leasing. Total amount of the lessor's In 2008 – 2009 CenterTelecom plans to continue decreasing costs reached RUR5.319 billion including VAT. In 2007 the its debt burden and optimizing its credit portfolio.
Investment Activities
In 2007 CenterTelecom secured RUR5.266 billion for its invest- Financing of traditional telephony services program was redu- ment program. This is 39.5% more than for 2006. Capital assets ced by 10% in 2007. Among the priorities in this sphere were reached RUR5.749 billion for 2007 or 58.6% more than in 2006. construction of new digital exchanges, as well as the recon- struction and replacement of existing analogue exchanges. One of CenterTelecom's priorities in its investment activities In 2007 the amount of investment into construction of tele- was implementation of programs with high levels of profita- communications lines rose 215% in comparison with 2006. bility and short terms for returns on investment. Among them are programs focused on development of the Company's tele- Among other important CenterTelecom investment directions communications infrastructure oriented on the provision of new were the programs focused on meeting the requirements of telecommunications services including the DOMOLINK program. Russia's telecommunications industry legislation with regard Implementation of these programs allowed the Company to to rendering of universal service, provision of Internet access apply new technologies, to expand considerably the range of to educational organizations, provision of the points of inter- services rendered through digital networks and to strengthen connect for local and inter-zone telecommunications, and pro- its position in the telecommunications services market. Total vision for the right to choose an operator of long distance do- value of investments in this sphere for 2007 rose by 26.2% in mestic and international telecommunications services providers. comparison with 2006 and reached RUR1.04 billion.
Indicator Measurement unit 2007 2006 2007/2006 (%) investments into the Company's equity capital in total RUR million 5,266 3,774 139.5 including: fixed line communications; RUR million 1,832 2,037 90 communications lines; RUR million 1,842 584 315.4 new services and technologies; RUR million 1,040 824 126.2 other. RUR million 552 329 167.8 Share of equity funds for financing of investments % 98.6 100 - Share of attracted funds for financing of investments % 1.4 0 - Fixed assets put into operation RUR million 5,749 3,624 158.6 Production facilities put into operation Numbering capacity numbers 250,638 207,684 120.7 Automatic trunk exchange channels 480 3,630 13.2 Optic fiber and microwave links km 930 796 116.8
37 Tariff Policy
CenterTelecom's tariff policy for 2007 was focused on provision The Federal Tariff Service by Order #199-s/23 dated August of a full range of services to its customers, maintenance of lea- 28, 2007 established new tariffs for the transmission of a local dership in the Central Federal District telecommunications mar- telegram which came into effect starting October 21, 2007. ket and increased profitability and investment attractiveness. The average change in tariffs reached 14%. Formation of the Company's tariff policy is influenced by market The Federal Tariff Service by Order #379-s/1 dated December and off-market factors including state regulators' activities. 15, 2006 established new tariffs for broadcasting national TV programs which came into effect starting January 1, 2007. The most noticeable change in tariff policy has been the intro- The average change in tariffs was 15%. duction of new tariff plans for local telephony services in Russian regions where time-based local billing is technically possible. In 2007, the Company carried out unification of non-regulated services including: Order No. 261-s/2 of the Federal Tariff Service of Russia, dated › a number of local telephone services (subscriber-requested November 14, 2006, approved tariffs on telephone communi- itemization of monthly bills, installation of a security alarm cations services which were put into effect starting February system on a subscriber line, introduction of changes to 1, 2007. subscriber base and to an agreement for telecommunica- tions services provision, and change in scheme of installa- Monthly payment for local telephone services was divided into tion of subscriber's equipment etc); two parts: mandatory payments for the provision of a perma- nent subscriber line and provision of local telephone connection › provision of access to a telephone conduit; (according to the payment system selected by the subscriber). › additional inter-zone telephone and telegraph communications services. The Company established the following tariff plans subject to the technical possibility of time based billing: In 2007, the Company paid special attention to the Domolink program. In six regions of the Central Federal District (Bel- › three mandatory tariff plans for individual subscribers – time gorod, Voronezh, Kaluga, Lipetsk, Moscow and Tula regions) based payment, flat fee, and combined payment; where the program was launched in 2006, the Company de- veloped not only unlimited tariff plans and introduced other › one mandatory time based tariff for corporate subscribers. promotional actions but also developed service packages which incorporate local telephone communications services The Company established a flat fee tariff plan for all categories and Internet access based on ADSL technology. of subscribers where there was no technical possibility of time based billing. The flat fee sum is calculated on the basis of ave- The Company launched the DOMOLINK-2 program in the second rage duration of local telephone connections. half of 2006 in another nine regions (Bryansk, Vladimir, Ivanovo, Kostroma, Orel, Ryazan, Smolensk, Tambov and Yaroslavl). The average change in CenterTelecom tariffs for 2007 reached The Company introduced unified tariff plans in these regions. 109.3%. The tariff levels depended on the level of competition in the regional markets, level of the population's payment capacity, Simultaneously with the establishment of new tariffs for local and the cost of external traffic bought by the Company from telephone connections, the Company decreased by 5% the tariff upper level operators. for inter-zone telephone connections in 2nd tariff zone in the circuit busy hour. Moreover the Government of the Russian Federation by Decree No. 477 issued on July 25, 2007 amended the “Rules of Provision for Local, Inter-Zone and Long Distance Telephone Communi- cations Services.” In particular the Rules include a paragraph governing the procedure for mathematical rounding of con- nection duration. In accordance with the procedure for calcu- lating local telephone connection cost, an incomplete unit of tariff classification which reaches half or more than half of the unit is regarded as a full unit and an incomplete unit which amounts to less than half is regarded as half the unit. The new rules came into effect on August 9, 2007. Prior to this an in- complete unit of tariff classification which amounted to less than half a unit was regarded as a full unit.
38 October mo tu we th fr sa su mo tu we th fr sa su mo tu we th fr sa su mo tu we th fr sa su mo tu we 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Charter Capital
Shares
The Company's Capitalization
American Depository Receipts
Corporate Bonds Equity Capital and Securities Charter Capital
CenterTelecom's charter capital and its securities as of December 31, 2007: › Charter capital was RUR6,311,998,965; › outstanding and declared shares: Categories (types) of shares Number, items Par value, RUR I. Outstanding shares: Common shares 1,578,006,833 3.0 Type A preferred shares 525,992,822 3.0 II. Declared shares: Common shares 76,166,167 3.0 Type A preferred shares 25,405,178 3.0
Equity Capital Structure as of December 31, 2007 Number of Number of Number of type A % in charter % of common shareholders common shares preferred shares capital shares Russian corporate owners 125 809,871,604 1,866,670 38.5807 51.3224 Russian corporate nominee holders 23 680,815,589 443,955,355 53.4587 43.1440 Foreign corporate owners 19 314,332 10,743,697 0.5256 0.0199 Individuals 24,025 87,005,308 69,427,100 7.4350 5.5136 Total 24,192 1,578,006,833 525,992,822 100.0000 100.0000
Distribution of charter capital
Foreign corporate owners – 1%
Individuals – 7%
Russian corporate owners – 39%
Russian corporate nominee holders – 53%
Distribution of common shares
Individuals – 6%
Russian corporate owners – 51%
Russian corporate nominee holders – 43%
40 Information about the Owners of Major Stakes as of December 31, 2007 Number of Number of type % in charter % of common common shares A preferred shares capital shares Telecammunication Inverstment Joint Stock Company (owner) 799,867,813 0 38.0165 50.6885 Depository Clearing Company CJSC (nominee holder) 159,791,946 127,655,117 13.6619 10.1262 National Depository Center Not-for-Profit Partnership (nominee holder) 183,451,470 33,134,452 10.2940 11.6255 ING BANK (Eurasia) CJSC (nominee holder) 187,547,723 23,774,272 10.0438 11.8851 Citibank Commercial Bank CJSC (nominee holder) 55,551,757 153,981,066 9.9588 3.5204 UBS Nominees CJSC (nominee holder) 61,950,858 99,003,260 7.6499 3.9259 Deutsche Bank LLC (nominee holder) 16,470,846 700,000 0.8161 1.0438 Other corporate shareholders 26,369,112 18,317,555 2.1239 1.6710 Individuals (CenterTelecom employees) 28,000,501 27,099,274 2.6188 1.7744 Other individuals 59,004,807 42,327,826 4.8162 3.7392 Total 1,578,006,833 525,992,822 100.0000 100.0000
Distribution of charter capital Svyazinvest OJSC – 38.02% among shareholders Individuals – 7.44% CenterTelecom employees – 2.62% Other individuals – 4.82%
Deutsche Bank LLC – 0.82%
UBS Nominees CJSC – 7.65%
Citibank CJSC – 9.96%
ING Bank – 10.04%
NDC – 10.29%
DCC CJSC – 13.66%
Other corporate holders – 2.12%
Distribution of common shares Svyazinvest OJSC – 50.69% among shareholders Individuals – 5.51% CenterTelecom employees – 1.77% Other individuals – 3.74%
Deutsche Bank LLC – 1.04%
UBS Nominees CJSC – 3.93%
Citibank CJSC – 3.52%
ING Bank – 11.88%
NDC – 11.63%
DCC CJSC – 10.13%
Other corporate holders – 1.67%
41 Shares
The Company's shares are traded in exchange Trading volumes for CenterTelecom and OTC markets. common shares for 2007 CenterTelecom shares were traded on the following MICEX CJSC – 85.65% main Russian stock exchanges: RTS OJSC – 13.61% › MICEX Stock Exchange CJSC. The Company's shares (CTLK,CTLKP) are listed in Quotation list B; RTS NP – 0.74% RTS OJSC. CenterTelecom's common shares (ESMO, ESMOG) are › traded on the Classic and Order-Driven markets and listed in the second level of Quotation list A, and the Company's preferred shares (ESMOP, ESMOPG) are traded on the Classic and Order-Driven markets and listed in the Quotation list B.
The Company's shares are included in the following indices: Trading volumes for CenterTelecom › common shares: preferred shares for 2007 › RTS; MICEX CJSC – 89.65% › RTS-2; › RTS –Telecom; RTS OJSC – 10.31% › MICEXC TLC. RTS NP – 0.05% › preferred shares - РТС-2. The aggregate value of CenterTelecom's shares for 2007 was RUR13,023,830,449.48 including RUR12,494,179,605.72 representing the value of common shares and RUR529,650,843.76 representing the value of preferred shares.
Price and trading volume trends for CenterTelecom Price, RUR common shares in 2007 at RTS OJSC Trading volume, RUR million
Price, RUR Volume, RUR million 27 70
60 25 50
23 40
21 30 20 19 10
17 0
07 07 07 07 07 07 07 07 07 07 07 07 07 07 07
07 07 07
8. 2. 7. 8. 1. 2. 6. 8. 0. 5. 9. 3. 4. 3. 4.
2. 1. 3.
.0 .1 .0 .0 .1 .1 .0 .0 .1 .0 .0 .0 .0 .0 .0
.0 .0 .0
03 04 10 13 20 20 07 27 24 17 28 27 16 20 03
20 26 09
Price and trading volume trends for CenterTelecom Price, RUR preferred shares in 2007 at RTS OJSC Trading volume, RUR million
Price, RUR Volume, RUR million 17 10 16 8
15 6
14 4
13 2
12 0
07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07
2. 2. 1. 2. 1. 9. 0. 0. 4. 5. 9. 4. 4. 8. 2. 3. 2. 3. 1.
.1 .1 .1 .1 .1 .0 .1 .1 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0
03 25 23 13 08 27 11 08 11 22 14 05 20 01 22 26 21 05 11
42 MICEX was the main stock exchange trading in CenterTelecom's shares for 2007, with transactions in the Company's shares conducted there on a daily basis, and the number of transac- tions in CenterTelecom common shares rose by 150%, while the number of transactions in the Company's preferred shares rose by more than 70% against 2006.
Price and trading volume trends for CenterTelecom Price, RUR common shares in 2007 at MICEX CJSC Trading volume, RUR million
Price, RUR Volume, RUR million 27 500
25 400
23 300
21 200
19 100
17 0
07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07 07
1. 2. 2. 3. 3. 4. 4. 5. 5. 6. 6. 7. 7. 7. 8. 8. 9. 9. 0. 0. 1. 1. 2. 2.
.0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .1 .1 .1 .1 .1 .1
09.01.07
23 06 20 07 22 05 19 04 21 04 19 03 17 31 14 28 11 25 09 23 07 21 05 19
Price and trading volume trends for CenterTelecom Price, RUR preferred shares in 2007 at MICEX CJSC Trading volume, RUR million
Price, RUR Volume, RUR million 18 30
17 25
16 20
15 15
14 10
13 5
12 0
19.12.07 28.11.07 07.11.07 16.10.07 25.09.07 04.09.07 14.08.07 24.07.07 03.07.07 09.06.07 21.05.07 26.04.07 05.04.07 15.03.07 20.02.07 30.01.07 09.01.07
43 The Company's Capitalization
External and internal factors had impacts on the market value RUR43.197 billion. The growth rate for capitalization decreased of CenterTelecom for 2007. In general this followed general trends by 17.2% in 2007 based on RTS trading results, and by 14.8% in the Russian stock market. From January to December 2007, according to MICEX trading results. The decrease in the rate trading on the RTS produced a rise in the Company's capital- of capitalization growth was mainly connected with the crisis ization of 19% to RUR44.327 billion, while MICEX trading re- of liquidity in the global financial market because of the US sults generated an 11.5% increase to total capitalization of mortgage crisis.
Dynamics of CenterTelecom's RTS Index, % Capitalization for 2007 CenterTelecom's capitalization, %
% 140.0
130.0
120.0
110.0
100.0
90.0
09.01.07 25.01.07 10.02.07 26.02.07 14.03.07 30.03.07 15.04.07 01.05.07 17.05.07 02.06.07 18.06.07 04.07.07 20.07.07 05.08.07 21.08.07 06.09.07 22.09.07 08.10.07 24.10.07 09.11.07 25.11.07 11.12.07 27.12.07
American Depository Receipts
On August 22, 2001, the US Securities and Exchange Commission concluded by CenterTelecom, JPMorgan Chase Bank and holders registered CenterTelecom's Level 1 American Depository Receipts of ADRs on September 4, 2001, reviewed and amended on (ADR) Program. The number of common shares permitted to December 10, 2001, one ADR represents 100 common shares. circulate outside the Russian Federation was 623,312,699. Level 1 ADRs are traded on the OTC market of the US (CRMUY), JPMorgan Chase Bank, N.A. is depository for CenterTelecom's Berlin Stock Exchange (CRMUy.BE) and Frankfurt Stock Ex- ADR Program. In accordance with the depository agreement change (CRMUy.F).
Price and trading volumes trends for Centertelecom's ADR Price (common shares) on the US OTC market in 2007 Volume
ADR price, US$ Volume, US$ thousand 105.00 30.00
100.00 25.00 95.00 20.00 90.00 15.00 85.00 10.00 80.00
75.00 5.00
70.00 0.00 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 01 01 02 02 03 04 04 05 05 06 07 07 08 08 09 10 10 11 11 12 12 01. 18. 06. 23. 14. 02. 19. 08. 25. 13. 02. 19. 07. 24. 12. 01. 18. 06. 23. 12. 31. Trading volume of CenterTelecom's ADRs on the US OTC market for 2007 reached US$128,220 or increased nine fold against 2006 (US$14,270).
44 Price trand for CenterTelecom's ADR (common shares) on the Berlin Stock Exchange in 2007
ADR price, € 70.00 68.00 66.00 64.00 62.00 60.00 58.00 56.00 54.00 52.00 50.00 7 7 7 7 7 7 7 7 7 7 7 7 06 01 .0 02 .0 03 .0 04 .0 05 .0 06 .0 07 .0 08 .0 09 .0 10 .0 11 .0 12 .0 12. 28. 31. 30. 31. 30. 31. 31. 30. 31. 30. 31. 31. 31.
There were no transactions with CenterTelecom's ADRs at Berlin Stock Exchange in 2007.
Price trand for CenterTelecom's ADR (common shares) on the Frankfurt Stock Exchange in 2007
ADR price, € 70.00 68.00 66.00 64.00 62.00 60.00 58.00 56.00 54.00 52.00 50.00 06 07 07 07 07 07 07 07 07 07 07 07 07 2. 1. .0 .1 2. 28 .0 3. 31 .0 4. 30 .0 5. 31 .0 6. 30 .0 7. 31 .0 8. 31 .0 9. 30 .0 0. 31 .1 1. 30 .1 2. 31 .1 31 31
There were no transactions with CenterTelecom's ADRs on the Frankfurt Stock Exchange in 2007.
In the course of the ADR program, the number of ADRs in circulation has grown from 10,000 at launch to 454,600 as of December 31, 2007. This confirms the strong interest of international investors in the Company, and the share of ADRs in the total number of Company common shares has risen from 0.063% to 2.88%. In connection with the expiry of the depository agreement and the decision on extension of JPMorgan Chase Bank’s powers as depository for CenterTelecom ADRs for a further seven years, in late 2007 the Company received JPMorgan Chase Bank's acceptance of amendments to the depository agreement related to: › change of coefficient for conversion of one CenterTelecom ADR into one common share from 1/100 to 1/25, i.e. one ADR represents rights to 25 common shares; › the appointment of United Registration Company OJSC as a registrar of CenterTelecom's shares; › a change in ADR form in compliance with legislative requirements and other changes.
45 Key Institutional Investors ADR Holders as of December 31, 2007 Share of the total number Name City Country Number of ADRs of common shares 1 ABN AMRO Kapitalförvaltning AB Stockholm Sweden 114,823 0.73% 2 INVESCO Asset Management Limited Henley-on-Thames United Kingdom 61,800 0.39% 3 Swedbank Robur AB Stockholm Sweden 40,000 0.25% 4 Universal-Investment-Gesellschaft mbH Frankfurt Germany 8,550 0.05% 5 Julius Baer Investment Management LLC New York United States 1,244 0.01% Total 226,417 1.43%
Corporate Bonds
For the purpose of diversifying the sources of financing, decrea- in circulation. CenterTelecom's bonds are included in the MICEX sing costs and extension of debt terms, CenterTelecom actively Quotation List (RU000A0DBR52, RU000A0JNK8) and the RTS uses the Russian bond market. In 2007 two CenterTelecom bond List "Securities Permitted to Circulation but not Included into issues (series 04 and 05) for the total sum of RUR8.6 billion were Quotation Lists" (ESMO04, ESMO05).
CenterTelecom Bond Issues in Circulation in 2007 Key parameters of bond issue Series 04 Series 05 Issue's amount RUR5,622,595,000 RUR3,000,000,000 Issue's start/close date 17.08.2004/31.08.2004 05.09.2006/05.09.2006 Maturity date/ 21.08.2009/1830 days 02.03.2010 / 1274 days -10% of par value; circulation period 31.08.2010 / 1456 days -20% of par value; 01.03.2011 / 1638 days -30% of par value; 30.08.2011 / 1820 days -40% of par value. Repayment date and 16.02.05, 18.08.05, 17.02.06, 19.08.06, 18.02.07, 06.03.07, 04.09.07, 04.03.08, 02.09.08 – 8.09% coupon rate 20.08.07, 19.02.08, 20.08.08, 19.02.09, 21.08.09 - per annum, interest rates on other coupons are 13.8% per annum to be established by the Company in accordance with the issuing documents Members of syndicate Organizer and underwriter: ROSBANK Key organizer and underwriter: Bank of Moscow Co-organizers and co-underwriters: Troika Dialog, Co-organizers: Svyaz-Bank, Deutsche Bank, Promsvyazbank, Bank SOYUZ, Guta-Bank, Svyaz-Bank Promsvyazbank Co-underwriters: Bank ZENIT, Web-Invest Bank, Underwriters: Drezdner Bank, International Moscow International Moscow Bank, Gazprombank Bank, Nomos-Bank, BK Region, IG Renaissance Capital Paying agent: ROSBANK Co-underwriters: Agropromcredit, IK Veles Capital, MDM-Bank, IFG RIGroup-Finance, Shipbuilding Bank Paying agent: Svyaz-Bank
Additional information Offer: 16.11.06 – 100% of par value plus Offer: 04.09.08 – 100% of par value plus accumulated coupon income on date of offer accumulated coupon income on date of offer Guarantor: Telecom-Terminal LLC Guarantor: CenterFinance LLC
46 th November 1 fr 2 sa Social Responsibility 3 su 4 Social Responsibilityand Charity HR Development Personnel andHRPolicy mo 5 tu 6 we 7 th 8 fr 9 10 sa su 11 mo 12 13 tu we 14 15 th 16 fr 17 sa su 18 mo 19 20 tu we 21 22 th 23 fr 24 sa su 25 mo 26 27 tu we 28 29 th 30 fr Personnel and HR Policy
In 2007 the Company's operations in the HR sphere were aimed at improving remuneration, optimization of headcount, creation of incentives for the Company's efficient operations. CenterTelecom's aggregated expenses for personnel for 2007 were RUR10.429 billion. This is 5.2% or RUR516 million more than in 2006. Labor costs for 2007 increased by RUR469 million or 6.2%, reaching RUR8.008 billion. The increase in labor costs was mainly caused by implementation of incentive schemes aimed at increasing the Company's income and implementation of state social programs. The increased labor costs and reduced headcount provided a 24.3% rise of average wages (from RUR10,522 in 2006 to RUR13,079 in 2007).
CenterTelecom's average salary trends, RUR
15,000
13,079 12,000
10,522 9,000 9,458 8,472
6,589 6,000 4,949
3,000
0 2002 2003 2004 2005 2006 2007
In 2007 expenses for unified social tax and contributions related to employees' accident insurance reached RUR1.894 billion. This is RUR66 million or 3.6% more than for 2006. Expenses for personnel training for 2007 reached RUR39 million. The rise in expenses in comparison with 2006 reached 49.4% or RUR12.9 million. Business trip expenses for 2007 were RUR32.6 million or 9.8% less than for 2006. A reduction in costs for other items of expenditure for personnel (voluntary medical insurance, cultural events, voluntary payments to trade unions made in accordance with the collective contract, compensation to employees in accordance with collective contract and the Company's regulatory acts) was mainly attributable to the Company's program of cost optimization and increases in efficiency. Expenses for voluntary medical insurance for 2007 were RUR45 million. This is 22.6% less than for 2006. Expenses for cultural events decreased 8.1% to RUR23 million. Voluntary payments to trade unions for 2007 reached RUR22.5 million or 9.3% less than for 2006. Social benefits and guaran- tees for 2007 amounted to RUR396 million or 3.4% less than for 2006. The average monthly social payment for 2007 reached RUR647 per employee. CenterTelecom's program of headcount optimization approved by the Company's Board of Directors in 2006 provided for a 25% staff reduction within 2006-2008. In 2007 the Company was actively implementing this program. The average number of Company employees was reduced by 8,505 people or 14.2% reaching 51,204 employees. The average number of enrolled personnel for 2007 reached 51,019 people, a decrease of 8,332 or 14% against 2006. The number of part time workers and temporary employees decreased considerably against 2006 (by 173 people or 48.3%).
48 CenterTelecom's Employee Number Trends
80,000
70,000 71,829 67,432 65,208 60,000 56,317 50,000 46,637 40,000
30,000
20,000
10,000
0 as of 01.01.2004 as of 01.01.2005 as of 01.01.2006 as of 01.01.2007 as of 01.01.2008
In 2007 among the key directions of the personnel number optimization program were: › implementation of new technologies, replacement of outdated equipment; › outsourcing; › optimization of organizational structure, review of labor standards; › optimization and re-engineering of business processes. The Company developed and implemented work-time standards for the provision of telecommunications services, and also estimated employee workloads within the framework of the personnel number optimization program. The results of the personnel workload assessment were used for development of the personnel number optimization plan for 2008. In February 2008, the Company approved a collective contract for 2007-2009. To improve efficiency, CenterTelecom developed and implemented: › Provisions for Bonus Payments to CenterTelecom Branch Employees and to the General Directorate which are based on the principle of Management by Objectives. CenterTelecom began implementation of a system of sales incentives. › Provisions for Industrial Competition approved by the General Director's Order #3 of January 10, 2008.
49 Personnel Development
CenterTelecom regards efficient development of its personnel as its key task in the HR field.
In 2007 the Company took measures aimed at improvement As a consequence of the recruitment of highly professional of the Company's organizational structure and optimization specialists, the pool of specialists with secondary vocational of the number of personnel in compliance with the Company's and higher education grew to 73.8% for engineering posi- strategic goals and tasks. The number of the Company person- tions and to 81% for technical positions. These indicators nel as of December 31, 2007 reached 46,637. for 2006 were 73% and 64% respectively. Employes with a speciazed education constituted 28.3% of total copmany Implementation of new technologies for services to clients and personnel in 2007 (26.8 for 2006). changes in CenterTelecom's organizational structure affected the Company's personnel structure. The number of managers The average age of the Company's employees, 43, did not change for 2007 decreased 16% against 2006, the number of special- against 2006. ists was reduced by 5.5%, and number of non-specialist workers was reduced by 25.7%. The number of managers with higher educations rose 2% to 2,605. All CenterTelecom's top managers have higher education, In 2007 the Company continued formation of highly professional and 36 managers have advanced degrees. General structure collective. In 2007 the number of employees with higher educa- of CenterTelecom personnel is represented in the table. tion rose 3.4% in comparison with 2006 and reached 14,141.
According to education According to age
Category of Number of Number of employees personnel as personnel as Professional General under 25 - 35 35 - 40 40-50 50 years of 01.01.07 of 31.12.07 higher secondary secondary 25 years years years years and older
Senior managers 4,080 3,429 2,605 715 109 9 377 473 1,198 1,372 Specialists 21,920 20,714 10,136 8,442 2,136 869 4,014 2,865 7,027 5,939 Departmental officers 295 185 52 67 66 14 44 29 59 39 Workers 30,022 22,309 1,348 6,502 14,459 1,213 4,271 3,203 7,740 5,882 Total 56,317 46,637 14,141 15,726 16,770 2,105 8,706 6,570 16,024 13,232 In 2007 personnel turnover in the Company reached 8.5%. › The Company developed and approved a United Standard of 9,680 people were dismissed for the reporting period. Servicing in Point of Sales of Telecommunications Services which has been adopted to meet client requirements, improve The Company arranged non-state pensions for 1,051 the quality of services in all CenterTelecom's branches, and dismissed employees. strengthen the Company's reputation and financial performance. The Company's staff business coaches held business training ses- The Company paid major attention to methodological and sions for CenterTelecom's front office telecommunications operators. practical assistance to its branches. Specialists from Center- Telecom's HR Department conducted six planned HR audits Provision for the necessary level of the employee competence was in the Company's branches. achieved owing to the continuous upgrade of their qualifications. For 2007, 16,845 employees upgraded their qualifications. This In 2007 the Company focused particularly on personnel is 36.12% of all personnel. Expenses for upgrading qualifications assessment, training and development. This led to the reached RUR39.026 million or 0.4% of all costs related to personnel following results: development. The Company used traditional forms of professional › The Company conducted a planned assessment of personnel training of personnel including: competence in the Company's General Directorate and branches, › internal corporate training; and prepared a training plan for 2008 on the basis of the external training. assess ment results. › The Company put the Center for Personnel Corporate Development › into operation. The Center's basic goals are to systematize actions and procedures aimed at staff education and training as well as at providing for employees' professional growth and optimization of CenterTelecom's expenses on education.
50 Internal corporate training included training sessions held in Among the Company's priorities in the field of education were the Company and in five CenterTelecom educational centers. the upgrading of qualifications for employees in divisions spe- Sessions held in the educational centers were conducted by cializing in development and operations of telecommunica- CenterTelecom line managers and highly qualified external tions facilities, sales of telecommunications services, provision trainers. The Company has improved its practices in the conduct of services to VIP clients, marketing and financial activities. of corporate seminars and training sessions with the attraction This was connected with the need to accomplish the Company's of outside trainers and in-house business coaches. Surveys core tasks. Issues of improvement of CenterTelecom's organi- conducted among participants of the training sessions revealed zational structure were regularly discussed at meetings of the their positive perception of the sessions held including their Managing Board. quality, topics and logistics. In 2007 the Company continued work on centralization of External training included participation by the Company's em- managerial functions in its branches. In 2007 CenterTelecom ployees in training programs held by educational organizations, completed the centralization of bookkeeping and tax acco- in programs for qualification upgrading conducted by Svyazinvest unting functions as well HR functions. OJSC for its interregional companies which include Center- Telecom. The Company collaborated with a number of regional In 2007 CenterTelecom took no measures aimed at uniting, and industrial educational institutions such as the MTUCI Tele- formation and liquidation of the Company's branches. communication College in Moscow (MTUCI TC), St. Petersburg State University of Telecommunications, Sodeistviye Educational For further improvement of the Company's management Center and Resonance Non-State Educational Organization, etc. structure the Managing Board developed and approved standard organizational structure of CenterTelecom's branch In sending employees for training the Company has taken into (protocol #24 of November 26, 2007). account branch demand and applied an individual approach to the candidates for participation. Each employee selected The Company envisages further improvement of the Company's for participation in expensive training sessions concluded a structure, optimization of the personnel number, strengthen- contract committing to mandatory work for the Company over ing of HR potential and formation of conditions for successful a defined term. implementation of CenterTelecom's HR policy among its key tasks in the HR field.
Social Responsibility and Charity
CenterTelecom emphasizes implementation of social projects, providing for improvements in Russian citizensë living standards through the support of disadvantaged groups and executing a number of longterm programs in the fields of culture, education, sport.
The Company's priority social activities are the following: In 2007 the Company continued working on the installation Supporting and implementing programs and activities providing of telephone networks in remote locations as part of the im- › financial assistance, medical and social rehabilitation of poor, plementation of universal telecommunications service. The unemployed people, as well as persons who need care and goal of this program is swift elimination of an existing gap in those who are disabled; accessibility to information and communications services in various regions and between cities and rural localities. At the › Health protection and disease prevention, popularization of a launch of the program in 2005, more than 40,000 localities in healthy life style, improvement of the moral and psychological Russia did not have access to telephone communications. This conditions of citizens, fitness and mass sports; was almost 30% of all localities in the country. In 2005-2006 Protection and proper maintenance of buildings, facilities and the first tenders for the provision of universal telecommunications › areas which are historically, culturally or environmentally services through public pay telephones and collective points significant, as well as storage sites. of Internet access were organized. Among the tender winners were companies which promised to form the appropriate In 2007 the Company participated in implementation of various infrastructure most swiftly and with minimal compensation state programs aimed at the development of the country's from allocations for universal telecommunications services. educational system, elimination of "digital inequality" among Russian citizens, and also at improvement of the population's In 2006-2007 CenterTelecom won tenders for the provision living standard through increased accessibility of telecommu- of universal telecommunications services through public pay nications services. These programs included the Education telephones in the territories where the Company operates. National Priority Program and implementation of universal Implementation of the universal telecommunications service telecommunications service through public pay telephones in program in the Central Federal District regions is one of the Central Russia. key tasks for CenterTelecom. In 2007 the Company fulfilled
51 the terms of the contracts concluded with the Federal Agency It is worth mentioning that social policies of CenterTelecom for Telecommunications and began rendering universal telecom- aimed at its employees are among the core directions of the munications service in Central Russia. Company's general social policy. The most important event of 2007 in this sphere was the signing of a collective contract for In the first half of 2008 the Company won additional tenders 2007-2009. The contract is aimed at the creation of a social by the Federal Agency for Telecommunications for rights to partnership system in the field of labor relations, at increasing provide universal telecommunications services through pub- the Company's efficiency, incentive related activities, streng- lic pay telephones in the Ivanovo, Kaluga, Kostroma, Lipetsk, thening of employee and employer social responsibility for Moscow, Ryazan, Smolensk, Tambov, Tver, Tula and Yaroslavl the Company's production results, and provision for growth regions. Implementation of the universal service mechanism of employees' well being and social protection level. The col- in the Central Federal District will allow CenterTelecom to sig- lective contract established mutual obligations for employees nificantly expand the universal public pay telephones network and the employer, provides a social benefits system for both providing telecommunications services to the populations of employees and pensioners and World War Two veterans. It is remote localities. worth adding that the new contract includes not only best provisions from the previous collective contract but also reflects CenterTelecom not only participates in federal programs but the experience of other interregional companies. Moreover also strives to actively take part in the Central Federal District's in the course of the contract discussion the developers of the regional life by granting sponsorships and charitable aid to contract took more than 250 amendments and suggestions organizations and individuals. The main principles of Center- into consideration. Telecom's philanthropic work are included in the Company's Concept for Charitable Activities. A Charities and Sponsorship The current version of the contract has a clear social character Committee of the Company formed in April 2006 coordinates and is focused on a thorough legal rationale for the Company's the Company's philanthropic activities. In 2007, 13 meetings employees' and managers' rights and obligations. The collective of the Committee considered 175 applications for aid. In 2007, contract fully reflects all existing possibilities for solutions of among CenterTelecom's key philanthropic and sponsorship problems related to labor remuneration, implementation of programs were support of Russia's Helicopter Sport Associa- employee social requests, and has also become a major example tion, Locomotive Hockey Club (Yaroslavl), Russian Telecom- of equal social partnership. According to CenterTelecom mana- munications History Foundation, and Philately International gement's and trade union's assessments, mutual obligations Exhibition, etc. allow the creation of favorable conditions for the Company's dynamic development and improvement of the Company's A committee for Compensation and Social Issues was also active employees' well being. simultaneously with the Charities and Sponsorship Committee. It considers applications from individuals and non-commercial organizations located in the Central Federal District's regions, related to issues of financial assistance for medical rehabilita- tion, support of victims of accidents and natural disasters, and the sale of CenterTelecom housing property to employees, etc. In 2007, nine meetings of the Committee considered 45 appli- cations for aid. More than RUR1 million was spent on aid to CenterTelecom employees.
52 sa December 1 su 2 mo Corporate Governance 3 tu 4 Practice Governance of Corporate Improvement Ratings Relations Public andInvestor and Affiliates Subsidiaries Policy Dividend System Governance Corporate Audit Committee Managing Board Board ofDirectors we 5 th 6 fr 7 sa 8 su 9 mo 10 11 tu we 12 13 th 14 fr 15 sa su 16 mo 17 18 tu we 19 20 th 21 fr 22 sa su 23 mo 24 25 tu we 26 27 th 28 fr 29 sa su 30 Board of Directors
At the annual general meeting held June 18, 2007, Center- Telecom's shareholders elected the following members of the Board of Directors:
1. Alexander Kiselev Chairman of the Board, CenterTelecom OJSC; General Director, Svyazinvest OJSC
2. Sergei Kuznetsov Member of the Board, CenterTelecom OJSC
3. Mikhail Alexeyev Member of the Board, CenterTelecom OJSC
4 Nikolai Arutyunov Head of Research, Moscow representative office of NCH Advisors Inc
5. Ekaterina Erofteyeva Executive Director, Director of Strategic Development Department, Svyazinvest OJSC Head of Methodology and Information Department in the Corporate Governance 6. Oksana Petrova and Legal Directorate, Svyazinvest OJSC 7 Viktor Polischyuk Advisor to the General Director, RTS OJSC
8. Viktor Savchenko Executive Director, Director of Corporate Governance and Legal Directorate, Svyazinvest OJSC
9. Elena Selvich Executive Director, Director of Economics and Finance Department, Svyazinvest OJSC
10. Maxim Tsyganov Managing Director, KIT Finance Investment Bank OJSC
11. Alexander Shevchuk Expert, Investor Rights Protection Association
Managing Board
On July 26, 2007, CenterTelecom's Board of Directors formed the Company's Managing Board in accordance with recom- mendations by the Committee for HR and Remuneration. The Managing Board included the following 11 members: • Vaagn Martirosyan, Chairman of the Managing Board, General Director, CenterTelecom OJSC • Rastyam Valishev, Deputy General Director, Commercial Director, CenterTelecom OJSC • Alexander Gribov, Administrative Director, CenterTelecom OJSC • Konstantin Zverev, IT Director, CenterTelecom OJSC • Andrei Kartashov, Chief Accountant, CenterTelecom OJSC • Vadim Kondratov, Deputy General Director, Technical Director, CenterTelecom OJSC • Alexander Lutsky, Deputy General Director, Financial Director, CenterTelecom OJSC • Dmitry Parkhomenko, Director responsible for Legal Issues and Government Relations, CenterTelecom OJSC • Viktoria Polikarpova, Advisor to the General Director, CenterTelecom OJSC • Evgeny Stepanov, Deputy General Director, HR Director, CenterTelecom OJSC • Sergei Yanyshev, Director of the Security Department, CenterTelecom OJSC
54 Audit Committee
At the annual general meeting held June 18, 2007, CenterTelecom's shareholders elected the following members of the Audit Committee:
1. Olga Korolyova Chairman of the Audit Committee, Chief Accountant, Svyazinvest OJSC Head of Law Department in the Directorate for Corporate Governance 2. Polina Burmistrova and Legal Support, Svyazinvest OJSC 3. Evgeny Nechayev Deputy Financial Director, Director of Finance Department, CenterTelecom OJSC Deputy Director, Head of Investment Department in the Directorate for Economics 4. Igor Pavlov and Finance, Svyazinvest OJSC, Expert since March 1, 2008 5. Sergei Podosinov Deputy Head of Internal Audit Department, Svyazinvest OJSC Head of Department for Methodology and Evaluation of Investment Activities 6. Mikhail Tretyakov in the Directorate for Economics and Finance, Svyazinvest OJSC Deputy Chief of the Reporting Department in the Directorate for Accounting, 7. Natalia Uzlova Taxation and Statistics, Svyazinvest OJSC
Corporate Governance System
Striving to maintain its investment attractiveness CenterTelecom On December 7, 2007, Sergei Grushin, Corporate Secretary, pays major attention to the development of its corporate go- CenterTelecom, won the prize "Russian Leaders in Corporate vernance system and implementation of the highest standards Governance Sphere-2007." The prize's organizer is the Investor in this field as part of the Company's practices. Given certain Rights Protection Association. It was pointed out at the awards changes in Russian legislation related to joint stock companies, ceremony that CenterTelecom is a leader in corporate governance CenterTelecom's annual general meeting of the shareholders in Russia, and the Corporate Secretary made an important approved a new version of Provisions for the Board of Directors contribution to this achievement. and new wording of the Company's Charter in June 2007. An appreciation of the Company's business culture reveals no The Corporate Secretary's office had the task of preparing breaches or limitations on shareholders' rights, and also con- provisions to fulfill the procedures provided by joint stock firms that CenterTelecom fully meets Russian legislative require- legislation and internal corporate documents. ments and follows the best international standards in corporate governance.
Dividend Policy
CenterTelecom's dividend policy is aimed at the protection of In accordance with a decision by CenterTelecom's annual general shareholders' interests, improving their well being and pro- meeting of shareholders June 18, 2007, a dividend payment for viding for the Company's capitalization growth. In 2007 the 2006 was to be made in August 2007. As of April 1, 2008 the Company amended its Charter with regard to dividend pay- amount of dividend paid was to be as follows: ments on the basis of shareholders' suggestions and the annual dividend on common shares - RUR312,881,868.19; general meeting's decision. In accordance with the amendments › the Company has the right to make decisions on dividend pay- › dividend on type A preferred shares - RUR197,844,947.36 . ments for the first quarter, first half and three quarters or for a whole year. Decision on dividend payment for the first quarter, six months and nine months or for a whole year can be made within three months after end of the appropriate period.
55 This represents 98.16% of all dividends payable. Key reasons In connection with structural changes in the Company, the num- for non-payment are the following: ber of cash offices for the payment of dividends in cash is being failure by a shareholder or his/her heir to appear at the reduced. The Company is persuading its shareholders to switch › Company’s cash office to pick up dividends; from cash payment of bank transfer or postal bank transfer. › where a shareholder has failed to supply or has supplied The Company's Board of Directors established the amount of incorrect banking details for the transfer of dividend payouts; dividend for 2007 on the basis that the amount of dividend where a shareholder has asked for suspension of dividend should not be less than 25.4% of net profit indicated in the › payments. Company's consolidated financial statements (10% of net profit sum is to be used for dividends on preferred shares, and 15.4% for common shares).
Trends in Declared (Accrued) Dividend Common shares Sum of Dividend Dividend accrued on common shares, RUR thousand on CenterTelecom shares (per share) Preferred shares Accrued Dividend accrued on preferred shares, RUR thousand
0.80 600,000 559,739.64 0.6910119 0.70 500,000 0.60 363,467.30 400,000 0.50 315,541.56 0.38933 0.40 0.3547131 300,000 197,040.98 0.30 0.285662 200,000 106,384.02 204,784.79 0.20 0.124867 0.1270937 0.1999621 99,427.69 0.0756115 100,000 0.10 150,256.16 39,771.10 0.0630084 0.0674191 66,842.59 0.00 0 2003 2004 2005 2006 2007* 2003 2004 2005 2006 2007* * Amount of dividend for 2007 corresponds with the amount of dividend proposed by the Company's Board of Directors for approval by the Company's AGM
Subsidiaries and Affiliates
A Model for Reorganization of Subsidiary and Affiliated In 2007, CenterTelecom changed its scheme of interactions Companies of CenterTelecom approved by the Company's with its key subsidiaries including Vladimir Teleservis CJSC, Board of Directors in 2004 provides the following guidelines Teleport Ivanovo CJSC, RTS OJSC, and CenterTelecom Service for management of subsidiary businesses: CJSC. It is supposed to use these companies as CenterTelecom's monitoring of financial and economic activities of the agents for promotion of the Company's core services in future. › Company's subsidiaries and affiliates; This will allow CenterTelecom to maintain its leading position in the Central Federal District's market in general and to help the › acquisition of core-business companies; subsidiaries maintain leadership in their niches in the market too. › sale of inefficient and non-core business companies; diversification of subsidiary business; In 2007 CenterTelecom acquired 100% in Telecom-R CJSC which › was another shareholder of CenterTelecom Service CJSC. This › formation of an optimal corporate structure for was done by CenterTelecom in order to establish full control over a subsidiary business. CenterTelecom Service CJSC and reduce the risks of manage- ment decisions being blocked. As a part of optimization of the Company's investment portfolio in 2007 the Company sold stakes in Teleross-Voronezh CJSC (50%), The Company focuses on the following aspects with regard to Comincom-Chermozemye CJSC (0.06%), Tulsky Promyshlennik the corporate governance: OJSC (0.41%), Cell Communications Chernozemye 0.076% in connection with the companies' inefficiency. development and implementation of an optimal managerial › structure for subsidiaries; CenterTelecom's goal in reorganization of its subsidiary busine- › development and implementation of unified corporate sses is the achievement of synergies in its core activities, and standards; avoidance of competition between CenterTelecom's branches. building of a good corporate governance system in the In 2007 the Company took a number of measures aimed at the › Company's subsidiaries and affiliates; development and reorganization of subsidiary companies which led to the merger of businesses of ATS CJSC's group of companies › formation of the management bodies in subsidiaries and and Tver branch of CenterTelecom. According to preliminary affiliated companies; estimates, the value of economic benefit from this merger will development of key managerial solutions in the Company's reach over RUR49 million per year. › subsidiaries and affiliates. Diversification of business is a necessary condition for the deve- CenterTelecom regards increased economic efficiency of its lopment of the companies given the emergence of new tele- subsidiaries, and strengthening of its branches and subsidiaries' communications services and technologies; this is a reaction market positions as strategic goals of its subsidiary business. of the companies to changes in the business environment.
56 CenterTelecom's CenterTelecom's Key performance indicators share in the contribution to # Name of the company Key type of operations Company's the Company's Number of Revenues, Net profit, charter capital, subscribers/lines RUR thousand RUR thousand charter capital, % RUR thousand Telephony services, data services, 1 RTS OJSC telematic services, channels of com- 100 13,033.34 7,756 subscribers 729,581 (15,109) munications leasing, system integration Operatorsky Tsentr CJSC data transmission 2 (former ATS CJSC) and telematic services 100 84.00 1,210 lines 189,057 2,818 data transmission 946 subscribers, 3 Teleport Ivanovo CJSC and telematic services 100 151.25 60 lines 15,199 1,941 4 Mobilcom LLC Mobile telecommunications 100 2,250.00 135 subscribers 1,586 (1,045) data transmission and telematic 5 Vladimir Teleservis CJSC services 100 22.00 1,500 subscribers 39,338 6,881 data transmission 6 Tver Telecom LLC and telematic services 85 164.89 - - - local telecommunications services, 7 CenterTelecom Service CJSC data transmission, rent of channels 74.9 74.90 78 lines 297,626 34,259 local communications services through 8 Vladimirsky Taksofon LLC universal public pay telephones 51 92.50 1,329 lines 13,052 367 9 TELECOM CJSC traffic transfer 50.9 486.11 - 7,071 361 data transmission 10 TK Rinfotels OJSC and telematic services 26 25.40 386 subscribers 15,840 72
Public and Investor Relations
CenterTelecom's management pays considerable attention to In 2007, CenterTelecom continued its active participation in the building of efficient communications with the Russian and several professional associations and social organizations, international business communities, various social groups and including the Research Center for Telecommunications Devel- the mass media. The Company continually provides a significant opment Problems, the Russian Telecommunications History volume of reliable up-to-date information about CenterTelecom's Foundation, the Telecom-Soyuz Non-Governmental Pension programs in the financial, economic, investment and social spheres. Fund and other organizations. In 2007, the Company continued to improve its corporate web Throughout the year the Company disclosed information both site www.centertelecom.ru to provide efficient publication and actively and passively. distribution of information about the Company's and its branches' operations in the Central Federal District's market and Center- Compulsory information disclosure was conducted in full Telecom's brand promotion. According to Standard & Poor's compliance with requirements set out in federal laws and assessment, the Company's information openness level for 2007 standards regulating procedures of disclosure by securities reached the high rate of 64%. issuers. CenterTelecom published four quarterly reports and 50 factual notices concerning the Company's financial and With regard to public relations activities in 2007 the Company economic activities. This information was addressed to the was focused on strengthening of its top managers' reputations, Federal Financial Markets Service of the Russian Federation promotion of the Company's services, and raising customer loyalty. (FFMS), to Russian and foreign stock exchanges, and was published by information agencies charter by FFMS as well as CenterTelecom took part in a number of Russian and interna- in print media and on the corporate web site. tional telecommunications exhibitions, including СeBIT-2007 held in Hanover, Germany, and Infocomm-2007 which took The Company prepared and translated more than 100 corporate place in Moscow, Russian. materials forwarded to the depository bank JPMorgan, to the US Securities and Exchange Commission (SEC), and also placed In 2007, the Company strengthened its relations with govern- information on www.adr.com and on the Company's corporate mental bodies. In the second half of 2007, Vaagn Martirosyan, web site. No remarks about disclosures were received from General Director, CenterTelecom, took part in a number of meet- investors, regulatory authorities (FFMS, SEC) or stock exchanges. ings with the governors of the Central Federal District's regions. The meetings allowed the Company to begin implementing a During 2007, CenterTelecom disclosed information to the in- number of mutually beneficial programs focused on extension vestment community. The Company held meetings with the of telecommunications infrastructure of these regions. Moreover, analysts of Standard & Poor’s and Fitch Ratings, and with efficient interactions with Russian regional authorities contributed representatives of Russian and foreign investment funds and significantly to the successful implementation of the Education banks. During 2007, analysts conducted monitoring and analysis National Priority Program and to implementation of universal of main performance estimates of CenterTelecom which represen- telecommunications service. ted the target audience's feedback regarding the Company's acti- vities and financial results, and also allowed the Company to get the analysts' forecasts on CenterTelecom's future development.
57 Ratings
On July 24, 2007, the international rating agency Standard & The RID-Expert RA consortium assigned CenterTelecom the Poor’s upgraded CenterTelecom's long term credit rating from national corporate governance rating of 7+ which corresponded "B" to "B+" (Positive outlook) and long term rating according with developed corporate governance practice and low risks to the Russian credit rating scale from "ruBBB+" to "ruA+." in the corporate governance sphere. According to the results of monitoring conducted by the consortium, the Company was On August 8, 2007, the international rating agency Fitch Ratings recognized as one of the leaders in corporate governance in upgraded the long term rating of CenterTelecom from "B-" Russia. to "B" (Positive outlook) and national long term rating from "BB+(rus)" to "BBB(rus)." The issuer's short term credit rating Among the positive factors with an impact on the rating was confirmed at "B" level. The rating for CenterTelecom's agency's assessment of CenterTelecom's corporate governance series 05 bond issue was also upgraded from "BB+(rus)" to practices were a high level of information disclosure, strong "BBB(rus)," and the recoverability rating was confirmed at "RR4". dividend policy, existence of a Corporate Conduct Code, active work of the Board of Directors, independent audit of the In October 2007, the international rating agency Standard Company's financial operations, and the selection of suppliers & Poor’s announced a withdrawal of the corporate governance and contractors on the basis of tenders. rating for CenterTelecom in accordance with a decision of Center- Telecom's management. At the same time the rating agency CenterTelecom strives to maintain the high level of protection upgraded CenterTelecom's corporate governance rating according of its shareholders' rights and to increase the efficiency of the to the Russian credit rating scale from CGR-5.0 to CGR-5.2. corporate governance system in order to protect the interests of its stakeholders. Upgrade of the corporate governance rating according to the Russian credit rating scale was caused by such corporate gover- nance aspects as high transparency level, improvement of the quality of and reduced delay for IAS financial results publication, active work of the Company's Board of Directors and its four committees, and election of minority shareholders' represen- tatives to each Committee of the Board of Directors.
Improvement of the Corporate Governance Practices
Throughout the year the Company worked on the improvement of CenterTelecom shareholders' rights, timely and full disclo- of its corporate governance practices in line with its Concept sure of information, meeting the requirements of legislation for CenterTelecom Capitalization Growth for 2005-2007. regulating joint stock company operations, recommendations According to the concept the measures taken in order to im- on corporate governance issued by FFSM and other expert prove corporate governance are aimed at further protection organizations.
58 Information for Shareholders Information for Shareholders
CenterTelecom's Annual Report for 2007 is available in the Russian and English languages; a Russian electronic version is placed on the web site www.centertelecom.ru, and the English electronic version is available at www.centertelecom.ru/eng. You can also request additional information about the Company from CenterTelecom's General Directorate.
Position Name Phone Fax E-mail Director of PR and IR Department Yana Lavrentyeva +7 495 793 2486 +7 495 793 2999 [email protected] Corporate Secretary Sergey Grushin +7 495 793 2358 +7 495 699 0436 [email protected] Telephone numbers for shareholder inquiries Chief of Shareholder and Registrar Relations Department Olga Sorokina +7 495 793 2569 +7 495 793 2654 [email protected] Deputy Chief of Shareholder and Registrar Relations Department Tatyana Vedeneyeva +7 495 793 2654 +7 495 793 2654 [email protected] Leading Specialist of Shareholder and Registrar Relations Department Ksenia Dugina +7 495 793 2657 +7 495 793 2654 [email protected] Telephone numbers for investor inquiries Deputy Director of PR and IR Department Denis Muzykantov +7 495 793 2386 +7 495 793 2999 [email protected] Senior Specialist of IR Department Maria Savelyeva +7 495 793 2382 +7 495 793 2606 [email protected]
CenterTelecom informs its shareholders that correct data must be reflected by the Company's register for: the compilation of accurate and complete lists of participants › for the general meeting of shareholders; the timely transmission of information about general › meetings of the shareholders and voting ballots to the shareholders; › orderly conveyance of dividend payments it is necessary to inform the Company's registrar about any change in a shareholder's details, in accordance with paragraph 5 clause 44 of the Federal Law #208-FZ "About Joint Stock Companies' of November 24, 1995. If such information is not submitted, the Company and the registrar are not liable for losses which may arise. The Company's shareholders may address enquiries related to CenterTelecom's shareholders' rights and liabilities to the Corporate Secretary office: 5, Troitskaya str., Moscow (postal address: bldg 2, 6, Degtyarny per., 125993, Moscow).
60 The Company's shareholders may send documentation related to transactions to the following companies: Full name of the company Contacts OJSC Obyedinennaya PO box, Ent. 3, 15a Kalanchevskaya, Moscow, 107078 Registratsionnaya Kompaniya +7 495 933 4221, [email protected] ORK-Volgograd - OJSC Obyedinennaya 13A Nevskaya Volgograd, 400087 Registratsionnaya Kompaniya +7 8442 379919, 375240, [email protected] ORK-Voronezh OJSC Obyedinennaya 39 Truda, Voronezh, 394026 Registratsionnaya Kompaniya +7 4732 728864, 710876, [email protected] Krasnodar Regional Branch of OJSC 182 Krasnaya, Krasnodar, 350020 Obyedinennaya Registratsionnaya Kompaniya +7 8612 517439, 536460, [email protected] ORK-Omsk OJSC Obyedinennaya 36 Gagarina, Omsk, 644043 Registratsionnaya Kompaniya +7 3812 232889, 232889, [email protected] ORK-Penza OJSC Obyedinennaya 62 Moskovskaya, Penza, 440600 Registratsionnaya Kompaniya +7 8412 520185, [email protected] ORK-Rostov-na-Donu OJSC Obyedinennaya 404, 14A M.Magibina, , Rostov-na-Donu, 344038 Registratsionnaya Kompaniya +7 863 243 0777, 243 0755, [email protected] ORK-Saratov OJSC Obyedinennaya 61 Sovetskaya, Saratov, 410056 Registratsionnaya Kompaniya +7 8452 506612, [email protected] ORK-Samara OJSC Obyedinennaya 3 Lenina, Samara, 443110 Registratsionnaya Kompaniya +7 846 263 7375, 336 1760, [email protected] ORK-Sankt-Peterburg OJSC Obyedinennaya 20, 16A, Novgorodskaya, Saint- Petersburg, 191144 Registratsionnaya Kompaniya +7 812 274 4269, 274 4027, [email protected] ORK-Tambov OJSC Obyedinennaya 14 Kronshtdtskaya, Tambov, 392000 Registratsionnaya Kompaniya +7 4752 715086, [email protected] ORK-Tcheboksary OJSC Obyedinennaya 69, 79/16, Konstantina Ivanova, Tcheboksary, 428018 Registratsionnaya Kompaniya +7 8352 426000, 423938, [email protected] OJSC Centralnaya Telecommunikatsionnaya kompaniya General Directorate 6-2 Degtyarniy pereulok GSP-3, Moscow, 125993 +7 495 793 2657, 793 2654 [email protected] 3 Sobornaya plotschad, Belgorod, 308000 +7 4722 350322, [email protected] 9 pl.Karla Marksa, Bryansk, 241050 +7 4832 721575, 645588, 722256, [email protected], [email protected] 22 Komsomolskaya, Yaroslavl, 150000 +7 4852 73-24-40, 32-84-91, [email protected] 1 Podkopayeva, Kostroma, 156961 +7 4942 621023, 621212, [email protected] 1 10 Avgusta, Ivanovo, 153000 +7 4932 471682, 471294, [email protected] 42 Gorkogo, Vladimir, 600000 +7 4922 353350, 330663, 353350, [email protected] 35 Revolutsii prosp., Voronezh, 394000 +7 4732 533473, 530651, [email protected], [email protected] 38 Teatralnaya, Kaluga, 248600 +7 4842 796205, 531040, iug@eleсs.kaluga.com 8 Krasnaya plotshad, Kursk, 305000 +7 4712 701030, 701030, [email protected] 35A Tereshkovoy, Lipetsk, 398000 +7 4742 381248, 353435, [email protected] 23, Proletarskaya, Khimki, Moscow region, 141400, +7 495 572 7002, 572 7002, [email protected] 43 Lenina, Orel, 302000 +7 4862 431896, 431896, [email protected] 43 Tschedrina, Ryazan, 390006 +7 4912 272205, 216166, [email protected] 6 Oktyabrskoy revolutsii., Smolensk, 214000 +7 4812 683176, 385823, 163311, [email protected] 2V Astrkhanskaya, Tambov, 392002 +7 4752 750588, 750588, [email protected] 24 Novotorzhskaya, Tver, 170000 +7 4822 323717, 323630, [email protected] 33A Lenina prosp., Tula, 300000 +7 4872 217351, 360035, [email protected] Belgorodskiy branch №2 CJSC of Specialized Registrar Rekom 69A Pobedy, Belgorod, 308000 +7 4722 336313, 270801, [email protected] Kaluzhskiy Gazoviy I Energenicheskiy Bank Gazenergobank (OJSC) 38 Teatralnaya, Kaluga, 248600 +7 4842 548580, 531394, [email protected] Severo-Zapadnaya Finansovaya Kompaniya LLC 4A Izmailovskiy prosp., Saint-Petersburg, 190005 +7 812 333 2518, [email protected]
61 Risk Factors
CenterTelecom's policy aimed at lowering risks related to its operations is focused on expansion of the types of services provided by the Company, changing the structure of the services with a view to profit growth, and control over the Company's expenses. The Company conducts regular evaluations of its internal control system and works on its improvement.
In 2007, the Company began the development of an integrated › expansion of technological capabilities for alternative organiza- risk management system. This system is being developed in tion of the "last mile" and "last inch" contributing to alternative compliance with the following methodologies and requirements: operators' business development; requirements by the Committee of Sponsoring Organizations of › development of substitutes for local and inter-zone telecom- › the Treadway Commission (COSO) (Organizations' Risk Management: munications represented by cellular telecommunications and Integrated Model); convergent technologies (VoIP); › requirements by the Federation of European Risk Management › emegence of major new corporate clients in the Central Federal Associations (FERMA) (Risk Management Standards); District including companies with wide regional structures, requirements by Svyazinvest OJSC's Integrated Risk Management formation of demand for VPN, increased requirements for full › System approved by the Managing Board of Svyazinvest OJSC range and high quality sirvices; on July 27, 2007. › saturation of the traditional services segment, re-distribution of industry income structure in favor of new services; The Company has taken the following steps as part of the creation of the integrated risk management system: development of the content services' market, formation of › demand for content services, and converged fixed line and a plan of implementation and principles of formation of the risk mobile services; › management system were developed and approved by Center- Telecom's Managing Board; strengthening of competition in the new and content services › segment, involvement of interconnected and mobile operators, › a Risks Committee was formed by Order #731 of December 18, 2007; Moscow telecommunications operators, service and content Provisions for the Committee for Risks were approved. providers in the competition. According to the Company's assessments, currently industry and At the same time, the competitive environment in the Central legal risks are the most important risks for CenterTelecom. Federal District's telecommunications market is characterized Industry Risks by the following trends: › active integration of telecommunications operators, takeover of Currently the following trends in the telecommunications local operators by national telecommunications companies; market of the Company's license area are present: › active expansion of Moscow operators into regional markets › significant state influence on the business of the leading telecom through the takeover of mid-sized regional providers of tele- munications operators, including state regulations of local and communications and Internet access services), their entry inter-zone telecommunications, cost of interconnection and traffic into the national market and regional markets with support transfer and implementation of Order #142 "About Approval and from regional authorities, developers and investors; Implementation of the Russian Numbering System and Plan,” and introduction of the System for Operational-Investigative Activities.; › strengthening of competitors' pressure related to increased efficiency and lack of regulatory burden; › entry of new telecommunications operators in the long distance telecommunications services market; › active investment by all market participants in new technolo- gies development. › demonopolization of the "last mile" market, active construction of own "last mile" by alternative operators on basis of FTTH technology; The Company takes into consideration the following risk factors: › completion of distribution of a local telecommunications › integration of alternative telecommunications operators in major subscriber base in accordance with flat fee/time based/combined holding companies; payment system; › growth of competition in the telecommunications industry among › decrease in cost of technological solutions for local telecom- Russian and international telecommunications operators, expansion munications operators and subsequent elimination of market of companies using different telecommunications standards; entry barriers; specific Russian economic risks including the current level of macro › economic instability, possible changes in Russian legislation which could lead to a decrease in the Company's profitability, and possible tightening of securities income taxation;
62 › development of substitutes for local and inter-zone telecom- Legal Risks Connected to a munications represented by cellular telecommunications and Change in Currency Regulation convergent technologies (VoIP); The Company considers the legal risks connected to a change › emergence of major new corporate clients in the Central Federal in currency regulation as minimal since the change is aimed District including companies with wide regional structures; at a liberalization of Russia's currency legislation. formation of demand for VPN, increased requirements for full range and high quality services; Legal Risks Connected to a Change in Tax Legislation › saturation of the traditional services segment, re-distribution of A number of federal laws related to changes in tax legislation industry income structure in favor of new services; came into effect within the reporting period. However Center- › development of the content services' market, formation of demand Telecom, as a good faith taxpayer following all requirements for content services, converged fixed line and mobile services; of tax legislation, does not regard such changes as legal risks.
strengthening of competition in new and content services Legal Risks Connected to a Change in Customs Legislation › segment, involvement of interconnected and mobile operators, Moscow telecommunications operators, service and content Most purchased telecommunications equipment is being im- providers in the competition; ported or being produced from imported elements, thus changes in customs control rules and duties can bring the Company a › the Company's payment for traffic termination services ren- number of risks related to increased costs for purchased fixed dered by other telecommunications operators in accordance assets. In 2007 CenterTelecom did not have risks connected to with the Federal Law "About Telecommunications". a change in customs legislation. State regulation of the telecommunications industry brings risks Legal Risks Connected to a Change in Requirements to Licensing and uncertainty into CenterTelecom's and other interregional of Core Operations or Licensing of Right of Use of Assets Which telecommunications companies' operations. These risks are Are Included in the Company's Turnover for a Limited Term. connected with changes in tariffs and decreased cross subsidies. In connection with a possible reorganization of the Federal Changes in tariffs for telecommunications operators which are Service for Surveillance in the Mass Media Sphere, Telecom- natural monopolies must be approved by Russia's antimonopoly munications Industry and Cultural Heritage Protection, there services, with the result that subsequent tariff changes can be may be a risk of lengthier consideration of the Company's in arrears of the change in operator expenses and of the real applications for extension of its licenses for core operations. economic situation. Thus the telecommunications operators which are natural monopolies face a risk of delayed change in Legal Risks Connected to a Change in Judicial Practice tariffs. This decreases their competitiveness and can have a ne- gative impact on their efficiency. In such conditions CenterTelecom Change in judicial practice related to CenterTelecom's opera- actively promotes its services provided under unregulated tions is possible in connection with putting into effect of the tariffs. This allows the Company to maintain its income level. following documents: › Decree #815 by the Government of the Russian Federation of It is worth noting that CenterTelecom takes the potentially November 29, 2007 "About Amendment to Few Acts by the negative impacts of the aforementioned risks into consider- Government of the Russian Federation Related to Universal ation in striving to follow the newest business requirements Telecommunications Services" (in effect since December 13, 2007); and to successfully compete with other telecommunications › Decree #575 by the Government of the Russian Federation of companies. The Company tends to neutralize negative market September 10, 2007 "About Approval of the Rules of Telematic factors and strengthen its market position by means of restruc- Services' Provision" (in effect since January 1, 2008); turing its network infrastructure, launching new services, optimization and standardization of its business processes, › Decree #23 by the Government of the Russian Federation of and increasing sales and maintenance system's efficiency. January 24, 2008 "About Amendment to License Terms List" (in effect since April 1, 2008); Legal Risks › other legal acts establishing mandatory requirements for inter- CenterTelecom, being a telecommunications operator, does not connection of telecommunications networks and building of a export its services, products and goods. In connection with this public telecommunications network, traffic transfer and provision the legal risks can mainly be connected with the Company's of telecommunications services . activities in the domestic market. In general the Company's legal risks are typical for companies operating in the Russian Federation and can be regarded as country risk.
63 In connection with the implementation of the aforementioned For the reporting period CenterTelecom did not take part in legal acts there are risks of emergence of new categories of legal proceedings meeting these criteria, consequently we judicial proceedings with the possibility of court decisions which can say that there are no significant legal risks related to may be unfavorable for either the Company or its counterparties. CenterTelecom's participation in current judicial proceedings. However possible changes in judicial practice cannot have a signi- Risks related to the possible refusal of a ficant impact on CenterTelecom's core operations and its financial license extension can be connected with: performance because the total number of law suits filed against › absence of necessary documents from the Company. Compli- the Company to the close of reporting period was not significant. cations related to license extension can occur in connection with the extension of licenses for TV and radio broadcasting Risks Connected to CenterTelecom's Participation because these operations are connected with media broad- in Current Judicial Proceedings casting. A telecommunications operator shall submit an Currently CenterTelecom is a party to a number of judicial appropriate license for TV or radio broadcasting or a contract proceedings related to its current operations, and the risk with a broadcaster and its license. of possible negative court rulings on these issues does not › reorganization of licensing organizations. In connection exceed the usual level for a telecommunications operator. We with a possible reorganization of the Federal Service for assume that significant suits can include the following: Surveillance in the Mass Media Sphere, Telecommunica- › lawsuits where potential costs and/or penalties are equal to or tions Industry and Cultural Heritage Protection, there may exceed 10% of CenterTelecom's book value which was RUR4.712 be a risk of lengthier consideration of the Company's ap- billion as of September 30, 2007; plications for extension of its licenses for core operations. lawsuits which could block the Company's operations or are aimed › at its prohibition or termination (lawsuits seeking liquidation of the The Company regards the aforementioned risks minimal Company, the Company's or its subsidiaries' and affiliates' bankruptcy, because the Company in general provides timely preparation or contesting its rights for licenses, patents, on tax debt collection. of all necessary documents for receipt of all appropriate licenses.
Glossary
Asymmetric Digital Subscriber Line (ADSL) — Asymmetric Optic Fiber Telecommunications Lines — Optic Fiber Telecom- Digital Subscriber Line (Asymmetric Access) provides a sub- munications Lines represent a means of transmitting information scriber with an opportunity to receive large volume of data at through optic dielectric guides – "optic fiber." Currently optic possible speed of more than 2 Mbit/sec (inbound channel fiber is regarded as the ideal physical medium for information capacity — from 64Kbit/s up to 50Mb/s) and to transmit transmission and the most promising means of transmitting from the subscriber’s less data-intensive streams, basically of huge information flows major distances. requests and commands (outbound channel capacity — from 64Kbit/s to 1Mbit/s). It is this feature which creates the Time-Division Multiplexing switchboards (TDM) — This is a asymmetry. For this service a customer should purchase an technology for global SDH and PDH telecommunications net- ADSL modem or make a contract for responsible stored usage working. These switchboards attach fixed share of the bandwidth of a modem (in Verkhnevolzhskiy branch). ADSL equipment for each voice or data channel Voice channels can be multiple- does not operate on shared telephone lines. xed in order to save bandwidth, and the transmission capacity is closed anyway regardless whether data are being transmitted New Generation Network (NGN) — Concepts of new genera- or not. Moreover, transmission capacity should be reserved as tion networking, offering unlimited sets of services with flexible backup in the event of channel failures. facilities for control, personalization and the creation of new services owing to unification of network solutions. NGN is a Macroregion — Other wise unrelated economic regions and universal multipurpose network, aimed at transmitting speech, districts, which may be distinguished for their similar natural con- images and data, using packet switching technology. ditions, economic features and further developmemt trands. Basic principles of distinction are - level of economic development Softswitch — Program switchboard intended for switching in the area, ratio betwen the most important resources and how traffic via the telecommunications network and builds on the they are used, similar social and economic problems. basis of packet switching technology and fiber-optic telecom- munications. This way of arranging telecommunications where Multiservice Communication (МСС) — This is a universal, high- data is transmitted via optic fiber. Optic fiber nowadays is speed, data-transfer network, built on the basis of packet considered to be the ideal physical medium for data transfer, switching technology, the technical conditions of which allow as well as the most promising medium for transferring large the provision of triple-play services — voice, data, video. volumes of data over significant distances. This approach is based on integration of all users in a unified network of broadband access, providing various kinds of services — high-speed Internet access, IPTV, IP-telephony, local networking and various multimedia services.
64 New telecommunications services — A set of telecommu- RTV program translation, as well as modern telecommunica- nications services which have become topical within recent tions services (for example: data transfer, net telephony, video years. First of all, they include Internet access, IPTV, etc. on demand), wide network access radius, allowing integration of remote cable networks, high quality and reliability of trans- Mobile (cellular) telecommunications — Telecommunica- mission, an opportunity to enlarge available range of trans- tion between two subscribers, one or both of which change mitting by means of network segmentation, wide network their locations. capacity, available due to multiplexing technology application (DWDM), simple and inexpensive migration in the direction The last mile — This area of subscriber’s line from the client of the network access FTTC (Fiber To The Curb), FTTB (Fiber To to the telecoms operator connection point. Usually, a copper The Building), FTTH (Fiber To The Home) types. cable or fiber optic line is used for these purposes. The problem of the last mile is choosing how to arrange the subscriber’s Traditional telephony (traditional telecommunications network access and choosing relevant equipment. services) — A set of telecommunications services which tele- coms operators have provided users in recent decades. They Cable TV network (CTVN) — An aggregate of technologi- include, first of all, local, intercity and international services, cally adjoint communications facilities, used to distribute TV including intercity automatic telephone communications. and other audiovisual programs. Triple play services — Services via a single telecommunications Public telephone network (PTN) — An aggregate of auto- channel for transferring voice, video and data. Data transfer matic telephone exchange, switch nodes, lines, telephone services (high speed Internet access), network backup, personal network channel, terminal subscriber’s devices, meeting the file resources on the Internet, and game servers access. Voice requirements of a population, establishments and corpora- services (in-city and intercity telephony, voice mail, broad- tions for telephone network services. casting via IP). Videoservices (telecasting via IP (IP-TV, HD-IP-TV), chargeable videochannels PPV (Pay Per View), video on demand Hybrid Fiber Coax Technology (HFC) — Hybrid optic-fiber and (VoD), personal videorecorder (PVR), videotelephony, video- coaxial network — a technology of modern telecommunica- conference telecommunications, video surveillance, video tions networking, providing subscribers with packages of playstations). TV and radio programs as well as a wide choice of interactive multimedia services. HFC technology application guarantees: Fixed telecommunications — Telecommunications between wide range of services, offered in the net, which consists of two immobile (fixed-line) subscribers.x
Forward Looking Statements
Some of statements contained in this Annual Report do not performance as planned and targeted, expected results, present facts, but are of a forward-looking character. Oc- estimations and intensions, contained in forward-looking casionally, we may state in writing or orally some forecasts in statements. These circumstances include the following: reports addressed to shareholders, and via other channels of inflation, interest rate and currency exchange rate fluctuations; interaction and data exchange. Examples of such statements › are the following: › influence of Russian government policy and alterations in it; statements concerning our plans, objectives and tasks, including › influence of competition in other regions and fields of the › those connected with telecommunications services; Company’s activity; statements about future results of our economic activities; › influence of amendments to legal or other regulating documents, › taxation regulations, standards and order of accounting; › information on assumptions, which form the basis for such statements. › company’s opportunities to increase a share of telecommunica- tions services markets and to control expenditures; Forward-looking statements, issued occasionally, (but not › purchasing and selling assets; included in the present document), may contain planned changes in technologies; or expected data on receipts, profits (losses), profit (loss) › per share, dividends, capital structure and other financial › company’s successes in the management of these risk factors. performance and factors as well. Such words as “considers”, “supposes”, “expects”, “estimates”, “intends”, “plans” and This list of essential factors is not exhaustive. Using forward- similar expressions may indicate that this is a case where a looking statements it is necessary to consider carefully all the forecast is presented, although these are not the only ways to above mentioned factors as well as other events and uncertainty indicate the forecasting character of statements or informa- componentry, especially from the point of view of social, poli- tion offered. On account of their special features forward- tical, economic and legal conditions of a company’s business. looking statements are connected to risk and uncertainty, Forward-looking statements are effective on the date they are either general or particular. There is always some risk that made only. We cannot state, guarantee or predict that the desired preliminary estimations, forecasts, plans and other forward- results, contained in forward-looking statements, will be achieved looking statements will not occur in fact. It is necessary to in fact. In each case such statements represent only one of many remember that being affected by a large number of material possible evolutionary scenarios, which is why they are not to circumstances factual results may significantly differ from be considered as the most probable or typical scenario.
65 The Companyës Details
Location: 23 Proletarskaya, Khimki, Moscow region, 141400, Russia Phone: (495) 650-34-34, Fax: (495) 650-30-07 E-mail: [email protected] www.centertelecom.ru State registration date: The Company is registered by a decree of Moscow Region Administration Chief dated June, 9 1994 No. 567-r, State Registration Certificate dated 20.06.94 No. 127. In accordance with the Federal Law About State Registration of Legal Entities the Company is registered in Uniform State Register of Legal Entities on the 1st of November, 2002 with No. 1025006174710. Auditor: Limited Liability Company Ernst & Young. Location: 77-1 Sadovnicheskaya naberezhnaya, Moscow, 115035, Russia Phone: (495) 755-97-00, fax: (495) 755-97-01 Registrar: OSCJ Obyedinennaya Registratsionnaya Kompaniya Postal address: PO box 162, Moscow, 107078, Russia The shareholders can send the documents to the following address: 15a Kalanchevskaya, Moscow Phone: (495) 504-28-86, fax: (495) 933-42-21 e-mail: [email protected]
66