«WE CAN ALWAYS FIND A LARGER NUMBER, AS IT IS POTENTIALLY INFINITE. THEREFORE, THE INFINITE IS POTENTIAL». Aristotle Information about the Company ...... 3 General Director’s address ...... 7 I. Major corporate events in 2008 ...... 9 II. The Company’s position in the industry...... 15 III. The Company’s business priorities...... 21 IV. The results of the Company’s development in priority trends...... 25 V. The Company’s expected future development ...... 37 VI. Risk management...... 41 VII. HR management...... 43 VIII. Corporate governance...... 49 IX. Securities...... 59 X. Major corporate events after the balance-sheet date...... 63 XI. Enclosures...... 65
Information about the Company’s equity participation in other entities providing telecommunications services (the Company’s equity stake in their authorized capital is at least 25%)...... 66 Accounting balance-sheet...... 67 Audit opinion...... 78 Reference information for shareholders...... 81 Information about the Company 3 Nizhny Novgorod | Nizhny Novgorod regional subsidiary
Kirov city | Kirov regional subsidiary
Ioshkar Ola town | Mariy-El Republic regional subsidiary
Izhevsk city | Udmurtia Republic regional subsidiary
Cheboksary town | Chuvashia Republic regional subsidiary
Ulyanovsk city | Ulyanovsk regional subsidiary
Saransk town | Mordovia Republic regional subsidiary
Penza city | Penza regional subsidiary
Samara city | Samara regional subsidiary
Saratov city | Saratov regional subsidiary
Orenburg city | Orenburg regional subsidiary
Aristotle is credited with dis- tinguishing between potential and actual infinite. He introduced the no- tions of potentiality in general and the actuality of the infinite. Aristotle suggests that the belief in infinity is derived from five sources: time, di- visibility of magnitude, perpetuity of generation in nature, anything limited has to be limited by something else, the fact that there is no limit to our power of thinking. 4 Full brand name: Open Joint Stock Company VolgaTelecom. Registered office: Dom Svyazi, Maxim Gorky Square, Nizhny Novgorod city, 603000, the Russian Federation.
The date of the The certificate of legal entity state registration - series НРП-НН № 20362, the date of registration – December 15, 1993; state registration number 448 was issued on June 28, 2002. Company’s state registration and the OJSC VolgaTelecom was registered in the Uniform State Register of Legal Entities by the Inspection of Russia’s Ministry of Taxation for Nizhegorodskyi registration number: district of Nizhny Novgorod city on August 01, 2002 under the basic state registration number 1025203014781. The Company was registered by Order of the head of the Administration of Nizhny Novgorod city No 1605-р of December 15, 1993. By virtue of the resolution of general meeting of shareholders of OJSC “Nizhegorodsvyazinform” of November 09, 2001 the Company was reorganized by way of affiliation to it of:
• OJSC “Kirovelectrosvyaz”, • OJSC “Electrosvyaz of Orenburg oblast”, • OJSC “Saratovelectrosvyaz”, • OJSC “Svyazinform” of Chuvashia Republic. • OJSC “Martelcom”, • OJSC “Svyazinform” of Penza oblast, • OJSC “Telecommunications network of Udmurtia Republic”, • OJSC “Svyazinform” of Samara oblast, • OJSC “Svyazinform” of Mordovia Republic, • OJSC “Ulyanovskelectrosvyaz”,
On June 28, 2002 general meeting of shareholders of OJSC “Nizhegorodsvyazinform” passed the resolution to rename the Company into Open Joint Stock Company VolgaTelecom (OJSC VolgaTelecom).
OJSC VolgaTelecom’s Mission OJSC VolgaTelecom’s Mission is to encourage the creation of modern society, the growth of regional economy and improvement of the quality of life of the Volga region residents through implementing advanced information technologies in day-to-day life. We aim at offering the people new challenges, at making their life easier and livelier. Meeting the demand for telecommunications services and developing advanced communications infrastructure at priority rates we are achieving the growth of operating efficiency thus increasing the equity value and creating jobs for the residents of the Volga Federal District. Ensuring sustained growth of business OJSC VolgaTelecom takes care of the employees’ welfare, their professional development and social security system. Relying on the principle of customer focus we are implementing new technologies, improving quality of services and subscribers’ servicing level by ap- plying innovation methods of marketing and sales in our activity. 5 Global objectives
Integration of new technologies in 1 day-to-day life.
Leadership position in telecommunications 2 market of the Volga region.
Improvement of quality of rendered services through the development 3 and modernization of communications infrastructure, implementation of digital technologies, improvement of client servicing system.
Arrangement of favorable conditions Development and efficient use of OJSC VolgaTelecom personnel potential for attraction of investments through to ensure priority trends of business development. capitalization growth and maintaining 4 established business reputation.
5 6 7 Improvement of corporate Achievement and maintaining governance system in accordance high profitability through the with the best world practices. enhancement of business efficiency and optimization of costs.
6 12:45 General Director’s address
Dear shareholders,
The past 2008 year was marked by a number of important events in VolgaTelecom’s life. We have completed the process of network upgrading, created the facilities for realization of services of high added value. Strategic vision of the Company’s future was rethought, and now the matters of economic efficiency and long-term financial results are making the corner-stone. Having performed in-depth analysis of market trends changes the Company has started to develop alternative business models capable in the future to ensure the growth of business in any environment. The trends characterizing general behavior of global and Russian telecommunications market, such as damping of demand for traditional telephony services resulted from mobile substitution, as well as rapid development of Internet market, have predetermined the Company’s selection in favor of intensive development of data transmission network and mobile services. Timely made decision to develop Internet broadband access services and to invest in mobile assets has made it possible for the Company to compensate for stagnation of traditional telephony revenues. In three years VolgaTelecom’s subscribers’ base of Internet broadband access services users has grown by factor of 25 and the share of new services in the Company’s revenue structure accounted for 20%. In June 2008 we made important gains for the Company – connected the 500 000-th subscriber, and at the year-end the subscribers’ base accounted for 785 000 users. Despite strong competition we are retaining dominant positions among the providers of the Volga Federal District with the market share of 59.4%. In many ways owing to VolgaTelecom’s efforts Internet broadband access services penetration in the Volga Federal District is one of the highest in Russia. With the view of enhancing the efficiency of VolgaTelecom’s traditional business model the Company did serious work of valuation of fundamental criteria having material effect on shareholders value. As a result such factors as the change of dynamics of global financial markets and also the amount of free cash flow as an indicator of the Com- pany’s management efficiency underlay the Program of VolgaTelecom’s development to 2013; the strategic objective of the Program is the growth of shareholders value and the supporting objective – sustained growth of free cash flow. The Company is successful when it uses any available opportunities for efficient growth. Decisions made by VolgaTelecom’s management are based on the understanding that even amid the global crisis the management is expected not only to maintain absolutely the stability but also to use the opportunities for consolidation of the Company’s market position. And it is already time to start thinking about postcrisis development prospects. The growth of operating efficiency through sound cost management, prudent investment and leverage, design of innovation development models, introduction of new services and convergent offers on the market are the major factors which will be the basis for establishing the company which is cost effective and viable in the longer term. All the tasks listed above, as well as ensuring the Company’s capitalization growth will be performed only with high transparency in the management’s actions. Compliance with the highest standards of corporate governance is the most important principle of the Company’s management operation which is open for partnership. New 2009 year will be the year of opportunities for VolgaTelecom. We set ourselves the primary objectives and got down to their accomplishment. Strong professionalism and cohesion of our employees, confidence of shareholders and clients, understanding and materialization of common objectives give grounds for my stating that VolgaTelecom will meet global financial crisis worthily and become even more efficient company.
Sincerely yours, VolgaTelecom’s General Director Vladimir Rybakin 7 8 I. Major corporate events in 2008 9 • VolgaTelecom’s collective was awarded Certificate of honor of the Ministry of IT and Communications of the Russian Federation for substantial contribution to the realization of priority national project “Education”. By September 1, 2007 the Company had provided Internet access to 8 334 educational institutions of the Volga Federal District. • “Expert RA” rating agency had conducted the monitoring of VolgaTelecom’s corporate governance rating and based on its results it affirmed the rating January at “A” level (“7+” in numerical rating). Based on the monitoring results the Company was recognized as one of the leaders in management quality in Russia. • International rating agency Standard & Poor’s affirmed its “BB-” long-term corporate credit and “ruAA-” Russia national scale ratings on regional telecoms operator VolgaTelecom (OJSC). The outlook is “Stable”.
• VolgaTelecom won VII All-Russian contest “Russian entity of high social efficiency” in the field of IT and communications. February • International rating agency Fitch Ratings assigned VolgaTelecom long-term Issuer Default Rating (IDR) of “BB-”; national long-term rating of “A+(rus)” and short-term IDR of “B”. The outlooks on the long-term IDR and national long-term ratings are “Stable”.
• VolgaTelecom won the tender for providing telecommunications services to governmental authorities of Udmurtia Republic. • VolgaTelecom’s General Director Sergey Omelchenko won international management contest “The best achievements in business”. March • Saratov regional subsidiary won the oblast’s contest “Investor 2007” in nomination “Investor of the year in the field of communications, telecommunications and IT”. • Regional subsidiary in Mariy-El Republic was awarded the diploma of winner of VII republican contest “Best goods of Mariy-El Republic” in “Services” nomination.
• Digital head-end station of cable TV network was put into operation in Ioshkar Ola town, the capital of Mariy-El
In 1655 English mathematician Republic. The network subscribers are able to enjoy image and sound of the highest quality, and 50 analog TV John Wallis, one of predecessors channels were supplemented by 28 TV channels broadcast in digital DVB-C format. of modern calculus, published “Arithmetica Infinitorum” (“Arithmetica April • Centralized “Procedure of management of relations with requests and complaints of telecommunications services infinilorum, sive nova methodus subscribers and users” was implemented, which made it possible to reduce the time of subscribers’ requests inquirendi curvilineorum quadratura”) where we see the symbol ∞ for infinity examination. 10 invented by him. May VolgaTelecom’s Orenburg regional subsidiary was entered into “All-Russian Book of Honor” on the initiative of executive authorities as the entity contributing to social and economic development of the territory, to the enhancement of the industry’s efficiency, to the growth of budget and social efficiency. The regional subsidiary got the Certificate of its entering in Federal Register.
June VolgaTelecom won the regional contest of PR projects in social sphere “Synergy” having presented the project of blogs contest “Live Journal is communications”. • Annual general meeting of OJSC VolgaTelecom’s shareholders was held on June 24, 2008 in Nizhny Novgorod. In the course of the meeting the shareholders approved the annual report, the annual accounting statement, and also restated versions of the Company’s Articles of association, Regulations for the Board of directors and Regulations for Auditing committee. July
VolgaTelecom started test broadcasting of IPTV in the territory of Nizhny Novgorod. • The Company acquired 40 ordinary registered shares of ZAO Ulyanovsk – GSM (40% of the authorized capital) from OJSC SMARTS and became its sole shareholder. • On July 15, 2008 VolgaTelecom’s Board of directors made the decision of establishing the committees of the Company’s Board of directors and approving their members. • On July 30, 2008 the Company registered the 500 000-th subscriber who connected Internet broadband access service under “J”TM.
August
VolgaTelecom’s Board of directors meeting was held on August 1, 2008. Basing on the decision of the Board of directors the Company’s Management board consisting of 8 persons was formed. The term of office of the new Management board is defined from August 1, 2008 to July 31, 2009. • VolgaTelecom reported 2007 results according to International Financial Reporting Standards (IFRS). The financial statements were audited by independent auditor Ernst & Young LLC. • On August 23, 2008 VolgaTelecom completed the payment of dividend on its preferred shares at 2007 fiscal year-end.
11 • Orenburg regional subsidiary won VIII oblast’s contest “Economics leader” in nomination “The best enterprise”. • Regional subsidiary in Mordovia Republic won diploma of XIII international exhibition-fair “Business Mordovia – 2008” for “Development and active promotion of new technologies in telecommunications September area”. • The Company introduced new tariff plans of Internet broadband access services for subscribers-residents in all its regional subsidiaries.
• The Company prepared its first corporate social responsibility report in accordance with AA 1000 international standard. The report covered the Company’s operations in 2006-2007. • VolgaTelecom took part in VIII international exhibition “InfoCom-2008”. The exhibition was held under the auspices of the Ministry of Communications and Mass Communication of the Russian Federation. October • Penza regional subsidiary was a prize winner of the oblast’s contest “Best goods and services of Penza oblast” 2008 for the achievements in providing ADSL-based high rate Internet access. • The Company created and implemented the system of monitoring of service and technical quality of Internet access service. As a result the Company got the opportunity to conduct monthly monitoring with the view of developing the arrangements intended at improving the quality of broadband access service.
12 • International Rating Agency Standard & Poor’s advised on raising VolgaTelecom’s Corporate Governance Score (Russia national scale) from CGS-5.2 to CGS-5.4. Standard & Poor’s affirmed the Company’s Corporate Governance Score (global scale) at CGS-5. • VolgaTelecom was awarded “OLYMPUS OF QUALITY” national prize for distinguished achievements in providing telecommunications services. • The Company was a prize winner of annual contest of annual reports and sites. In nomination “The best level of information disclosure for the investors on the issuer’s site” the Company won the 1-st prize. • Regional subsidiary in Mordovia Republic was a prize winner of contest “The best goods of Mordovia” and “100 best goods of Russia” for 2008 in nomination “Services “Dedicated line Internet access under “J”TM. November • VolgaTelecom was among 100 winners of the oblast’s contest “Elite of Nizhny Novgorod business”. The Company was awarded diploma and plaque “For dynamic development and considerable contribution to the development of economics of Nizhny Novgorod oblast”.
• Orenburg regional subsidiary was awarded “Certificate of confidence in employer”. It was the award for successful participation of the subsidiary in the project “Voluntary statement of employers’ operation of realizing labor rights of employees”. • VolgaTelecom was a prize winner of public confidence “Most popular-2008” awarded in Samara city. • At 2008 year-end Mrs. Natalia Pokrovskaya, VolgaTelecom’s corporate secretary, was the winner of the contest “Russian leaders in corporate governance” in nomination “The best corporate secretary” for “high competence in discharging her duties”. • Penza regional subsidiary was a prize winner of program “100 best goods of Russia” 2008 in nomination “ADSL-based December high-rate Internet access”. • Kirov regional subsidiary was a prize winner of annual independent award “Zolotaya piramida-2008” in nomination “TOP- 100. Companies of 2008”. • The Company completed the annual program of connecting Internet broadband access services users under “J”TM. At 2008 year-end the number of Internet broadband access services users grew more than 1.8 times vs. the year beginning and accounted for 693 040 subscribers. • On December 31, 2008 VolgaTelecom completed the payment of dividend attributed to ordinary shares at 2007 fiscal year-end. 13 14 II. The Company’s position in the industry 15 Description of business site
VolgaTelecom’s business site comprises 11 of 14 regions making up the Volga Federal District (VFD): • 7 oblasts: Kirov, Nizhny Novgorod, Orenburg, Penza, Samara, Saratov, and Ulyanovsk • 4 Republics: Mariy-El Republic, Mordovia Republic, Udmurtia Republic and Chuvashia Republic.
VFD territory is 1 038 thousand square km (7.27% of the Russian Federation territory). More than 30 million people are living here (21.25% of the total population of Russia). The Volga Federal District is the second outman (after Central Federal District) and the most multi-national Federal district; about 140 various nations, nationalities and ethnic groups are living here.
Prior to Wallis invention of the In 2008 all the regions in VFD demonstrated positive dynamics of development of economic, social, cultural and other domains. Machine symbol ∞ for infinity many cultures used their own symbols to denote manufacturing and fuel and energy complex occupy the major share in the structure of industry. Agricultural sector, chemical industry and light industry this notion. In different cultures there make a substantial input into the volume of industrial production of the Volga Federal District. Electric-power supply industry is an important industry of appeared such symbols as Ouroboros, market specialization of the Volga Federal District. Yin and yang, Anantasesha.
The invention of Ouroboros (“tail- devouring snake”) is traditionally Russia’s telecommunications market in 2008 credited to the Egyptians of Middle Kingdom, however, similar artefacts dated 3000 BC were found in China. In the opinion of a number of researchers As per the estimates of the Ministry of Economic Development in 2008 the Russian Federation telecommunications market has grown the form of Milky Way galaxy gave rise to the creation of this symbol. by 12.8% vs. 2007 and amounted to RUB 1 234.4 billion. All sectors of telecommunications industry were growing. The leader in growth ratio was mobile radio communications services market; at 2008 year-end the market volume has grown by 22.9% vs. 2007. Ouroboros represents self- As before the amount of revenues of mobile business operators is the first in the structure of telecommunications industry revenues – 44.6%. reflexivity or cyclicality, especially in the sense of something constantly Recording communications (including Internet and data transmission services) kept high growth ratio: in 2008 the volume of services has grown re-creating itself, the eternal return in philosophy of history. The fact that one by 16.2% vs. similar period of 2007. side of the snake is light and the other is dark represents eternal unity and struggle of opposites. VFD telecommunications market in 2008 Carl Jung calls the Ouroboros as the basic mandala of alchemy, an archetype and a sign of immortality relating it to the dialectic of conscious Telecommunications services market in VFD was developing at high rates as upon the whole in Russia. In 2008 the volume of telecommunications market and unconscious in the human where VolgaTelecom is operating amounted to RUB 95 billion. At 2008 year-end VolgaTelecom’s share is 26.78% of all revenues of telecommunications psyche. sector in VFD.
After Wallis published his works In 2008 the growth ratio of the Company’s revenues from communications services accounted for 104.4 % vs. 2007. As before the major source of some of the artists started to depict the communications services revenues was local telephony, its share in the total amount of revenues was 44.1% (in 2007 – 46.9%). In the Company’s revenue 16 Ouroboros as the symbol of infinity. structure telematic services revenue (Internet and data transmission network inclusive) has grown from 13.1% in 2007 to 20.0% in 2008. VolgaTelecom’s share in telecommunications services market of VFD
% 97.5 97.1
82.2 82.2
59.4 59.4*
2007 2008 2007 2008 2007 2008 Local Zonal Internet and data *Market shares were calculated as per the data of Rosstat “Data on telecommunications services revenue”. telephony telephony transmission network
Telecommunications services revenue structure in 2008.
Urban telephony 39% Rural telephony 6%
Payphones calls 0.03%
Telematic services (Internet and data transmission network inclusive) 20%
Radio communications, radio broadcasting, TV and satellite communications 1%
Mobile communications 1.5%
Wire broadcasting 1%
Intrazonal telephony19% Connection and traffic transit services 12% 17 Major factors affecting the industry’s development
At present three key factors affect the formation and development of telecommunications market:
Industry’s technological development 1 Improvement of technologies results in emergence of new players in the market which in its turn ensures the improvement of competition. Development and replacement of technologies are key market opportunities and at the same time – the threat to all market players.
2 Industry convergence Mass entering related markets by companies (cable TV operators enter Internet and telephony services market, mobile operators enter Internet services market, Inter- net providers enter IT-solutions, content production and aggregation market, etc.) results in change of level and principles of competition on industry markets. Offers of information communications technologies market players as related to new services upon the whole exceed end-users expectations formed on the market.
Government regulation of industry 3 The government is actively affecting the development of all segments of Russia’s telecommunications industry (telephony, Internet, TV, operators’ market). Antimonopoly regulation and stimulation of competition positively affecting new technologies penetration rates are one of priorities of national policy.
Major factors affecting the change in demand in the industry
Traditional telephony market
The market of traditional wire telephony services is very much affected by mobile substitution. Among basic trends formed by mobile substitution one should note the reduction in volumes of local, zonal, DLD/ILD traffic which affects the Company’s revenues from these services. In the medium term it is anticipated that the reduction of DLD/ILD traffic in wire networks under the influence of mobile and IP substitution will continue.
Substantial growth of mobile segment of the market also has its effect on the subscribers’ base: in 2008 the subscribers’ base of traditional wire telephony has actually stopped to grow, and new connections compensate for the current churn. Pursuing the policy of long-term cooperation with the developers VolgaTelecom sees the potential 18 of subscribers’ base growth at the cost of new constructions. Connection and traffic transit The following factors have effect on the development of connection and traffic transit services market and on dynamics of VolgaTelecom’s revenues from these services: • Improvement of competition at zonal level. Due to obtaining licenses for zonal communications and construction of zonal nodes by the operators the Company is planning to reduce the cost of zonal termination to its network. • Reduction in the volumes of transited zonal and DLD/ILD traffic as affected by mobile substitution and traffic churn through alternative zonal transit nodes. The effect of mobile substitution results in the reduction in volumes of transited traffic in fixed-line network operators and the growth of traffic volumes in the networks of mobile operators. • Substitution of Internet dial-up access by broadband access. The result of this substitution is substantial reduction of traffic of local initiation service. • Conclusion of direct contracts for connection and traffic transit services among the operators. This results in the reduction of the Company’s traffic in item “Local transit”. Mobile communications In mobile communications market VolgaTelecom is represented basically by subsidiaries’ assets. The subscribers’ base of mobile operators continues to grow, but the gain in active subscribers is insignificant. In this regard ARPU is growing at the cost of migration of traffic from the networks of fixed-line operators, and also at the cost of development of value-added services, which ensures the growth of the Company’s mobile services revenues. Internet and data transmission The market of Internet and data transmission network services is in the stage of active growth. The following trends are affecting the market development: • Growth of broadband access services market. Particularly active growth of broadband access services subscribers is demonstrated by “home” market segment. In 2008 the growth ratio of Internet and data transmission network services market in the Volga Federal District accounted for 159%. • Development of wireless broadband access. The most common services of wireless access to Internet are Wi-Fi and mobile Internet of mobile communications network operators. • Substitution of Internet dial-up access services. Active reduction in the number of dial-up access services users is going on. In 2008 the amount of the Company’s revenues from dial-up access services reduced by 22%. • Growth of IP-telephony services revenues (migration of voice traffic to IP networks). At present the major users of IP-telephony services are legal entities. In the medium term the growth of IP- telephony subscribers is expected, VolgaTelecom’s subscribers inclusive. IP networks allowing for terminating and making intracorporate voice traffic free of charge are becoming more popular in “Organizations” segment. • Development of IPTV. The projected development of IPTV will have positive effect on the growth of the Company’s revenues from Internet and data transmission network services, it will allow for increasing subscriber’s ARPU and raising the Company’s competitive capacity in the market. In 2009 it is scheduled to launch the service in the markets of Samara and Nizhny Novgorod cities. If the project is successful, it is scheduled to launch the service in other regions since 2010. • Development of value-added services on the basis of IP solutions. One of extra factors of industry’s revenues growth may be the realization of services for household on the basis of “smart home” concept. Within the concept the following groups are marked out: communication (SIP-telephony, videophony, etc.), information-entertainment services (IPTV, including but not limited to value- added services), security services (video surveillance, fire alarm system), services for day-to-day life (IT-support to households). 19 20 III. The Company’s business priorities 21 Forecast of the region’s telecommunications market.
As per the experts’ forecasts the VFD telecommunications market will continue to grow and by 2013 it will reach RUB 154.3 billion. The changes in the market structure will be related to the growth in demand for Internet and data transmission network services (RUB 18 billion in 2013), increase in volumes of long-distance communications market (RUB 6 billion in 2013) and significant redistribution of traffic and revenues in favor of mobile communications. VolgaTelecom is planning to remain the leader of local and zonal communications services market (the market share is 82%) and Internet and data transmission network services (58%).
Competitive environment
Permanently strong com- Improvement of competi- Substantial improvement of Permanently strong com- Tightening of competition in petition between alternative tion between services- competition in the segment petition in mobile communi- the market of broadband ac- operators of local telephony substitutes: mobile com- of long-distance communi- cations market. cess and toll-TV services. services in the segment of munications, traditional cations. legal entities and new build- wire communications and ings. IP-telephony.
The Company’s competitive strategy
VolgaTelecom’s competitive advantage in broadband access services market is based on wide geographical cover of network infrastructure allowing for The concept of interaction of op- posing forces of yin and yang, which rapid deployment of Internet access network. are though to be the major cosmic forces of motion, causing everything to Since 2009 the competition will shift mostly to non-price competition in the following trends: happen in the nature lies at the heart of most of dialectics of Chinese philoso- 1. Improvement of quality of customer service phers. The ideas of yin and yang were also represented in the development of In the environment of improvement of competition and the development of alternative operators’ networks the importance of such factors as quality of theoretical bases of Chinese medicine, chemistry, music, etc. service, including but not limited to organization of customer service, is growing. The Company’s major efforts will be focused on the enhancement of the efficiency of agency direct sales, development of distance servicing, optimization of business processes of sales and servicing offices, development Originally, “Yin” referred to “the north, shady”, and “Yang” to “the of the system of control of service quality. south, sunny side of a mountain.” 2. Improvement of technical features of service provision The image of the infinity is widely used in graphic form: in national orna- Modernization of transport infrastructure with due account for increasing clients’ demands will allow for the Company to have minimum number of ment of coat-of-arms of many coun- tries, in companies’ logos, signs and failures and disconnection of calls, and also to reduce the time rate of troubleshooting in the network and to raise the level of qualified technical 22 pictographs. support. 3. Assurance of Internet access rate in accordance with market requirements Taking into account market expectations of Internet access rate at the level of 100 Mbps the Company is planning to develop Internet high-rate access networks on the basis of FTTB+Ethernet technology. 4. Expansion of the range of provided services The Company is planning to launch IPTV services, to expand the range of content services, to realize FMC-solutions (Fraud Management System). 5. Network condition One of VolgaTelecom’s strengths is the availability of network resources (buildings, constructions, communications lines), and particularly in zonal networks and in subscriber access networks. This allows for minimizing capital investments for extra increase in the network capacity at the development of services. The Company pursues the policy intended at creation of competitive advantages of rapid deployment of technological platforms to provide communications services in the segments having consumer demand.
The Company’s strategic initiatives
VolgaTelecom has defined three key trends of enhancing the efficiency of the existing business model: 1. Revenue maximization within the basic portfolio of services Development and realization of a complex of measures intended to the development of fiber-optic networks, to build up a strong brand, to enhance the efficiency of sales and service channels, which will allow for increasing the revenues within the basic portfolio of services; 2. Search for new sources of revenues Realization of arrangements intended at identifying new sources of revenues; 3. Enhancement of operating efficiency The optimization of business processes will allow the Company to reduce operating costs in a number of business lines, thereby to save on costs and to get extra competitive advantages.
23 24 IV. The results of the Company’s development in priority trends 25 Successfully developing Company is the Company which has required resources for efficient operation, clearly sees the priorities and trends of further development, and also pursues the policy outstripping the actions of competitors. These were the principles that had been laid in the Program of VolgaTelecom’s development for 2008-2012; development strategies were formalized in this Program.
The Program’s primary objective is to increase the Company’s capitalization through strengthening its lead in developing market of high-tech services subject to maintaining the share of traditional telephony market and enhancing the efficiency of the Company’s operations. The arrangements intended at realization of declared objectives in the environment of traditional telephony market stagnation and dynamic growth of mobile services allowed for VolgaTelecom to maintain the market share upon the whole having taken the lead in Internet and data transmission services market.
Key indicators within the Program of development
Indicator 2008
Share in electric communications services market, % 26.78
Digitalization of local telephony network, % 80
Revenue per a line, RUB thousand 5.2
EBITDA margin, % 37.53
Leverage ratio 0.52
In Sanskrit Anantasesha means “Endless Shesha”. One of the forms of Number of lines per an employee, lines 157 the God in Hinduism and Vedic religion is a thousand-headed serpent. Shesha is the incarnation of the eternity of ROIC,% 11.48 time, cyclicity and possibility transiting to reality. Anantasesha is generally depicted Internet and data transmission network services market was growing at higher rates than telecommunications services market upon the whole. In this as an enormous serpent that floats regard, the Company’s market share of revenues from broadband access services (exclusively of data transmission network) increased by 6% and at 2008 coiled in space, or on the universal ocean. Its coils form the bed on which end it reached 70%. Vishnu and his eternal wife Lakshmi lie. Anantasesha is depicted with many As a result of the arrangements realized within the Program the Company has modern communications network with digitalization level above 80%. The heads. In the Puranas, Shesha is said to hold all the planets of the Universe indicator of debt load – Net Debt ratio (inclusive of leasing being on the lessor’s balance) to EBITDA – 1.46. 26 on his hoods. Next Generation Networks (NGN)
Ten regional subsidiaries (Kirov, Mariy-El Republic, Nizhny Novgorod, Orenburg, Penza, Samara, Saratov, Udmurtia Republic, Ulyanovsk and Chuvashia Republic) have successfully realized the next phases of the project of networks reconstruction on the basis of NGN equipment. 199 000 numbers were put into operation.
Universal service
In 2007-2008 the Company participated in realization of Federal program of providing universal service by means of payphones. Within this program VolgaTelecom installed 23 000 payphones, of which 16 469 payphones were installed during the first phase of implementation of the program of universal service provision (tenders of 2006), and 6 531 payphones were installed during the second phase of the program (tenders of 2007).
The Company’s intra-region multi-service data transmission network
In 2008 the Company started to realize the third stage of construction of DWDM-based intra-region multi-service data transmission network (the equipment was supplied by Huawei Technologies). 18 nodes were modernized and 22 new nodes were constructed. So, intra-region network comprises 89 nodes located in the territory of 11 regions of the Volga Federal District. In addition to the central node of intra-region multi-service data transmission network located in Nizhny Novgorod, the Company arranged the second backup network center in Samara. Within the third stage the channels of 10 Gbps carrying capacity were arranged from Orenburg and Saratov regional subsidiaries to the two centers. The channels of 2 Gbps carrying capacity were arranged in the other regional subsidiaries between the network central nodes and each oblast/republic centers. Juniper Networks equipment is used as master routers. All the channels have redundancy configuration. The project realization made it possible for the Company to improve the reliability of provision of data transmission and Internet services to clients, to optimize the Company’s costs for backbone Internet traffic. Also this network allows for expanding the range of provided services, such as provision of VPN to large corporate customers having distributed structure of branches in the Volga region. The Company realized the system of centralized monitoring of the hardware of intra-region multi-service data transmission network and of the key elements of data transmission network equipment in the regional subsidiaries.
Development of data transmission networks of the Company’s regional subsidiaries
All VolgaTelecom’s regional subsidiaries have expanded and modernized regional data transmission networks, the carrying capacity of these regional subsidiaries’ data transmission networks has been substantially increased. Due to the fact that all the subscribers were switched over to BRAS Huawei Ме60 (broadband access aggregators designed for termination of the sessions of broadband access users and flexible management of subscribers’ services), the number of parallel users accounts for 360 000. In 2008 seven regional subsidiaries (Mordovia Republic, Nizhny Novgorod, Orenburg, Penza, Saratov, Ulyanovsk and Chuvashia Republic) realized the projects of construction of DWDM-based data transmission networks. 27 Development of wire broadband access networks
In 2008 the Company constructed 941 data transmission network access nodes and modernized 1 326 data transmission network access nodes. The total number of access nodes accounted for 3 933 units. With the view of providing broadband access services the Company increased the number of installed DSL ports twofold - from 529 900 to 1 028 400.
Information Technologies
In 2008 VolgaTelecom’s major IT projects were the following:
• The project of implementation of ERP-system of Oracle E-business suite. Within the project the system was put into operation in all 11 regional subsidiaries. Common Data Processing Center was established; it accumulates all financial and economic information.
• Realization of “Joint Program of Ensuring Settlements and Relations with Clients”. In 2008 within the framework of this program billing business- processes and software were aligned on the basis of “START” automated settlements system: creation of technical architecture for deployment and operation of common “START” billing system; creation of the database with common centralized directory of “START” billing system, ensuring harmonization of business processes in all regional subsidiaries.
Investment policy
Year 2008 featured global changes in financial markets which materially affected the cost of money resources for the companies investing at the cost of raised funds. It was these events that had effect on VolgaTelecom’s measures of minimization of investments in the projects the return on which became lower than the cost of the Company’s borrowings. So, the Company cut the amount of investments other than the projects related to revenue generation and assurance of network robustness.
In 2008 VolgaTelecom’s total investments amounted to RUB 6.061 billion, which is 19% lower vs. 2007. RUB 1.440 billion were spent for construction and installation activities. RUB 4.068 billion were spent for the purchase of equipment. Fixed assets of RUB 5.606 billion were commissioned. 28 Composition of investment
Other 8.4%
Traditional telephony 20.7% Transmission links and objects of communications infrastructure 12.9%
New services and IT 58.0%
Basic requirements of the rate of return to projects, and also the Company’s strategic policy intended at year-on-year growth in the structure of investments of projects with high rate of return predetermined industry reallocation of investments. So, the major share in the investment program falls on the investments in the development of new services – RUB 3.094 billion or 51.1% of the total investments. In 2008 the major investments into the development of new services were: • RUB 1.844 billion or 59.6% for arranging xDSL access; • RUB 1.091 billion or 35.2% for the construction of Softswitch-based networks. The investments in traditional telephony development amounted to RUB 1.253 billion or 20.7% of the total investments. Major trend of investments in traditional telephony projects is digitalization of urban telephony networks which creates the platform for the development of services with high added value. In 2008 the Company realized the 2-nd stage of the program of providing universal service by means of payphones. The cost of construction amounted to RUB 1.851 billion. 34 992 local telephony lines were commissioned within the projects of “Modernization of Switches within Universal Service Provision Program”, 24 810 lines were replaced which required RUB 257.4 million investments. In 2008 the Company continued to implement centralized software products providing for optimization of business processes and requiring the upgrade of existing technical architecture. Total investments in creation and development of IT amounted to RUB 423.5 million. RUB 780 million or 12.9% of the total investments was invested in the construction of data transmission links and the objects of communications infrastructure. Other investments in 2008 amounted to RUB 509.1 million. The projects designed for ensuring the arrangements intended at enhancement of network reliability and uninterrupted provision of communications services are prevailing in the structure of these investments. In particular, the Company purchased power supply equipment to ensure failure-free operation of switches at urban and rural networks and of microwave radios under unattended modes of operation in emergency situations. 29 Basic indicators of network development
As a result of communications network development efforts made by the Company with due account for the existing demand, the features of telecommunications network infrastructure were substantially improved. Digitalization level was brought to 80%. The redundancy of zonal communications channels required for provision of high quality communications services and guaranteed reliability accounted for 78%.
Basic indicators of network development
Indicators rate of change No Indicators Measure unit 2007 2008 2008/2007
Thousand 761.6 5 022.8 +559.5% Gain in the length of DLD (intrazonal) telephony channels – total Of channel/km 1 which those arranged by digital transmission systems Thousand channel/km 939.6 5 109.5 +443.8%
2 Percentage of digitalization of local telephony network % 73.9 80.03 +6.13 percentage points
3 Installed capacity of broadband access ports – total Thousand ports 552.5 1 062.3 +92.2%
* The gain in the length of communication links arranged by digital transmission systems exceeds the total gain in the length of communication links due to retirement from service of analog transmission systems in 2008.
The total length of DLD channels accounted for 35 973.2 thousand channel/km (of which the length of digital network was 35 389.4 thousand channel/km or 98.4%). The length of cable transmission lines accounted for 96.7% (34 790.3 thousand channel/km), of which the length of fiber-optic cables accounted for 94.3% (33 939.1 thousand channel/km). For the transit of outgoing DLD and ILD traffic the Company engages 49 697.5 outgoing DLD telephony channels, of which 48 412 channels (97.4%) have automatic equipment for outgoing traffic, 1 022 national channels (2.1%) have automatic equipment for outgoing traffic and 263.5 manually operated channels (0.5%). In 2008 VolgaTelecom put into operation the switches of the total installed capacity of 438 700 lines (311 700 lines in urban telephony network and 127 000 lines in rural telephony network) in local telephone networks at the cost of new construction, expansion and equipment reutilization. In doing so, the major part of commissioned installed capacity in urban telephony networks falls on digital switches having NGN function. At 2008 end the total number of ATX accounted for 5 544 units of the total installed capacity of 5 250 300 lines (of which 4 411 200 lines are in urban telephony network and 839 000 lines are in rural telephony network). 743 analog switches were dismantled due to 30 commissioning and switching over the subscribers to new digital switches. Major economic indicators of the Company’s operations
The Company’s operations in 2008 were entailed with external factors having significant effect on VolgaTelecom’s economics. In particular, apart from substantial growth of the cost of borrowings and as consequence – the revision of a number of projects, the Company faced the crisis in the real sector of the economy. This was most obvious in the segment of consumption of services by small and medium enterprises and had effect on the dynamics of the growth of revenues. At the same time, owing to a complex of measures of anti-recessionary impact on economics, the Company was able to achieve plan figures of profit from operating activities having increased free cash flow.
Major indicators of economic operations
Rate of change Indicator, RUB million 2007 2008 2008/2007 (%)
Revenues from sales of goods, works and services 25 163 26 420 105.0
Communications services revenues 23 887 24 944 104.4
Expenditures 19 061 20 898 109.6
Sales profit 6 102 5 522 90.5
Sales profit under comparable conditions with due account for compensation for losses from 6 422 6 405 99.7 universal service provision
Pretax earnings 4 710 4 076 86.6
Net profit 3 323 2 952 88.8
31 Revenue structure by types and categories of consumers
1. Earnings gain in 2008 amounted to RUB 1 257 million. The share of communications services revenues was 94.4% of the total revenues (lower by 0.5% vs. 2007), 2.1% (RUB 547 million) is the share of revenues under the contracts of assistance. 2. The growth ratio of revenues from Internet and data transmission network services was 159%. The major source of the Company’s earnings gain was revenue from Internet services over leased channel. 3. Transfer of indexation of local telephony tariffs to 2009. 4. Abolishment of compensation mark-up for the service of zonal initiation of call and abolishment of fee for connection points maintenance since March 01, 2008. 5. Full year of operation of the Russian Federation Government Regulation No 477 of 25.07.2007 “On Introduction of Modifications into the Rules of Providing Local, Intrazonal, DLD and ILD Telephony Services”, which abolishes the fee for subscriber’s change of tariff plan of local telephony services. 6. Reduction of services consumption in the sector of small and medium enterprises related to implications of global financial crisis.
Revenue structure from communications services in 2008*
Total (exclusive of VAT), Of which From household, Services RUB million RUB million Communications services revenues – total 24 944.280 14 090.760 Of which:
Intrazonal, DLD & ILD telephony 4 822.221 2 056.762
Local telephony 11 003.962 8 334.868 Recording communication 5 097.133 2 809.363
Of which data transmission and telematic services 5 000.936 2 777.691
Mobile services 381.067 328.690
Interconnect and traffic transit services 2 928.438 0
Other 711.458 561.077
32 *The information is provided on the basis of data of form No 65-communications for 2008. Expenditure pattern for 2008
Amid traditional telephony market saturation and ever increasing competition the only possible response to this situation may be constant and systematic cost control.
Within the Program of the Company’s development in 2008 – 2012 VolgaTelecom has designed the strategy of operating costs saving. The Company’s major objectives in this strategy realization are as follows:
• Cutting the Company’s costs for communications services provision without loss of clients’ servicing quality;
• Costs management of developing services in such a way so as to maximize the Company’s profit per a unit of rendered service;
• The effect of made efforts should encourage the growth of EBITDA margin.
In 2008 in addition to the above stated strategy the Company made additional efforts of crisis management, which resulted in substantial cutting of “monetary items of expenditure” and offered opportunities for creating required positive trends in the future.
Expenditure pattern for 2008
Other costs of core and non-core business 19.9%
Remuneration for personnel 38.0% Interconnect expenses Material costs, electric power supply (payment for services of Russian and heat supply 8.9% and foreign operators, operators of the Holding’s companies) 12.3%
Amortization charges 20.8%
33 Major factors of expenditure effect on the Company’s indicators:
1. As a result of personnel optimization arrangements made in 2008 the number of employees, inclusive of dual jobholders and persons working under civil law contracts, reduced by 10% or by 3 524 persons. Labor compensation fund saving due to personnel optimization amounted to RUB 626 million which had positive effect on indicators of EBITDA efficiency and prime cost of RUB 100 of earnings. 2. Major achievements in costs management of traffic transit are abandonment of megabyte-based settlements for Internet traffic with backbone Internet providers and transition to channels lease. Realization of these arrangements under comparable conditions produced 30-50% saving. Besides, the competition between backbone Internet providers plays an important role in the reduction of costs for backbone traffic transit. 3. The growth of amortization charges in the structure of prime cost results from communications infrastructure development policy which the Company pursued in 2006-2008. In 2008 the share of this item in the structure of prime cost has increased by 2.5% to 20.8%. 4. In 2008 the growth of prime cost was affected by the expenditure of universal services provision. In accordance with the accounting policy the Company reflects the costs related to universal service provision at the prime cost in items of expenditure. Compensation for expenses from universal service fund is reflected in other operating revenues. At the year-end pretax earnings amounted to RUB 4 076 million, 86.6% growth ratio. The dynamics of pretax earnings was materially affected by: Facts Effect on indicator dynamics
The growth of debt service cost, inclusive of running contracts, resulted in increase in interest due - RUB 375 million vs. the prior reporting period (+45%).
Results of operations with accounts receivable of privileged persons, most of the debt was repaid in 2006-2007. In particular, in 2007 the amount of recovery of allowance for doubtful accounts - RUB 326 million affecting the profit markup accounted for RUB 445 million, while in 2008 - RUB 119 million.
As a result of implementation in full of ERP-system of Oracle E-Business Suit in all the Company’s regional subsidiaries, the inventory of all actual users of the system was made; basing on the results of this inventory ERP-system of Oracle E-Business Suit licenses were put out of operation, - RUB 247.5 million which affected the financial results. The cost of ERP-system of Oracle E-Business Suit licenses put out of operation was written off to the Company’s other costs.
Key indicators of the Company’s operating efficiency
In 2008 efficiency indicators were mostly affected by: 1. Revenue structure and profit margin of every service; 2. Activities of search for resources of operating costs optimization; 3. Arrangements of personnel optimization, the share of personnel costs in prime cost structure is substantial; 4. Reflection of costs and universal service provision compensation amounts which assumes the reflection of costs of universal service provision in the prime cost, 34 while compensation amounts are reflected in other operating costs. Efficiency indicators
Rate of change Indicator 2007 2008 2008/2007 Sales profit margin, % 32.0 26.4 -5.6 percentage point Sales profit margin under comparable conditions with due account for compensation for losses of universal service provision, % 25.5 24.2 -1.3 percentage point Net profit margin, % 17.4 14.1 -3.3 percentage point Prime cost of RUB 100 of revenues 75.75 79.10 104.4% Prime cost of RUB 100 of revenues under comparable conditions with due account for compensation for losses of universal service provision 74.80 76.54 102.3% EBITDA, RUB million 9 020 9 916 109.9% EBITDA margin, % 35.8 37.5 1.7 percentage point Revenue per a line, RUB 5 007 5 179 103.4% Profit per a line, RUB 1 214 1 082 89.2% Profit per a line under comparable conditions with due account for compensation for losses of universal service provision, RUB 1 278 1 256 98.3% Revenue per an employee RUB/man 694 240 811 727 116.9% Profit per an employee RUB/man 168 342 169 654 100.8% Number of lines per an employee * lines 139 157 113.0% * Staff on the payroll for the reporting period is taken into account.
In 2008 EBITDA increased by RUB 896 million (9.9%), and EBITDA margin grew by 1.7 percentage point to 37.5%.
Information about the size of net assets
At December 31, 2008 Net assets (RUB thousand) 23 074 361 Authorized capital (RUB thousand) 1 639 765 Required reserve (RUB thousand) 81 988 Ratio of net assets to authorized capital (line 1/line 2) (%) 1407.17 Ratio of net assets to authorized capital and required reserve (line 1/(line 2+line 3)) (%) 1340.17
For the reporting period the net assets have grown by RUB 2 022 916 thousand or by 9.61%. 35 36 V. The Company’s expected future development 37 VolgaTelecom is a dominating enterprise in the market of traditional telephony and data transmission network services in the Volga Federal District. Taking into account the influence of various trends of the industry’s development the Company has made its choice in favor of intensive development of telematic services and data transmission network services. Timely made decision of developing broadband access and investing in mobile assets allowed the Company to compensate for the decline in earnings from traditional telephony services due to growth retardation of fixed-line telephony. So, due to intensive development of Internet services the Company compensated for shortfall in income from traditional services to the amount of RUB 5.6 billion. In 2008 the Company did serious work of valuation of fundamental criteria having material effect on shareholders value. The Company’s experts in cooperation with analysts of investment and financial institutions defined major factors affecting capitalization. The factor of change of dynamics of global financial markets (global crisis) was referred to external factors beyond the management’s control. The second group of factors, which are within the management’s capabilities, comprised a number of economic indicators, among which free cash flow (taken in the longer term) as an integral indicator of the Company’s management efficiency achieved through ensuring the dynamics of revenue growth, implementation of sound investment policy and cost management was defined as the most important.
VolgaTelecom’s development priorities in 2009-2010
In 2008 VolgaTelecom updated the Program of the Company’s development for 2009-2013; the major objective of the Program is increase in the value of the Company’s capital for shareholders. The Program provides for choosing such strategic course, which through revenue growth, costs optimization, and ROI growth will generate free cash flow for increasing the base of value of capital. The Program comprises two basic parts: the first part analyses the environment where the Company conducts its business; the second part presents the management’s vision of business development prospects in the medium term. Taking into account the trends of communications industry development VolgaTelecom has defined its major strategic objectives: • ensure earnings gain through the expansion in new markets (product and geographical), and probably to build new markets (new services); • strengthen its positions in the markets which traditionally ensured substantial portion of its revenues; • improve operating efficiency. In the future not only high quality of services and technical support, but also low prime cost, as well as its sound structure will be the passport to competitive success of telecommunications companies. VolgaTelecom's major objective is to defend its leadership in the market, accelerate the pace of revenue growth from traditional telephony, Internet and data transmission network services, and also to reduce the loss in income from interconnect and traffic transit services. To achieve the stated objectives the Company sets itself the following tasks: • To minimize the effect of mobile substitution; • To ensure scheduled volume of broadband access subscribers’ connections through active marketing policy; • To work out a group of actions designed for the improvement of the Company’s services quality; 38 • To intensify the construction of fiber-optic networks; • To expand the range of services rendered to a subscriber; • To enhance the efficiency of sales and servicing channels; • To realize a group of actions designed for building up a strong brand. The Company defined the search for additional sources of revenue as the strategic priority, and in particular through the introduction of new services. It is planned to develop new services for household on the basis of “smart home” concept. The core of the concept is to create maximum comfortable environment in the house by means of modern household appliances and communications technologies. The concept realization anticipates providing communications services to clients (SIP-telephony, videophony, Internet, convergent solutions, etc.), entertainment services (IPTV, including but not limited to a range of value-added services, provision of content for home stereo systems, information-inquiry services, etc.), security services (antivirus, parent control, video surveillance, fire alarm system, etc.). The concept of developing the services for corporate clients comprises the provision of a full range of info-telecommunications services with a view of revenue increase and improvement of clients’ loyalty. In this regard, the list of services may comprise communications services (Internet, telephony, FMC, etc), data-centers services, security services (antivirus, video surveillance, etc.), software remote access services, integrated individual technical solutions and IT outsourcing.
39 40 VI. Risk management 41 The Company started to implement risk management system in 2007. VolgaTelecom’s General Director by his order established the Commission on the Company’s risks, which originally identified VolgaTelecom’s risks for 2008. The Company’s Board of directors approved “Program of the Company’s risks management” in December 2007. As a result the Commission identified 21 potential risk events accompanying the Company’s economic operations to the amount of RUB 1.5 billion. The basic objective of the Program of risks management is to enhance the efficiency of management of threats and opportunities which should contribute to the process of the Company’s capitalization growth. The Program is a document establishing key principles and approaches to identification of the Company’s risks, and defining the methods of risk management within the framework of the Company’s day-to-day operations, it allocates and fixes responsibility of specific managers and management bodies. The Program also upbuilds the feedback of risk management processes with the processes of strategic, operating and budget planning when the risk holder gets financial resources to manage the threats efficiently. In accordance with the provisions of the Program in Q 4-2008 the Company’s management updated the Program of risks management for 2009. Within this updating the risks were reassessed and Risk Register 2009 was drawn up; the Company’s management worked out plans of measures and defined key indexes of effectiveness of risk management, made modifications contributing to enhancement of efficiency of risk management processes in the Company and making the procedure of risk information exchange among the process participants easier. The Company’s meeting the target figures of effectiveness testifies to the successful operation of risk management system in 2008. However, general economic situation in the country in 2008 supported the realization of the following risks: • Regulatory risk related to the regulator’s decision making about putting-off raising of tariffs for local telephony services; • Market risk related to the reduction of ARPU of Internet leased line access services resulted from competitors’ application of price competition methods and Many nebulae have the form of the users’ selection of cheaper tariff plans; infinity sign or of the sand-glass. One of the theories of the origin of such • Financial risk related to the growth of interest rates under running loan contracts and borrowed finances resulted from the change of economic situation in symmetrical form states that it resulted the country. from propagation of 2 shock waves in helium layers of white dwarf forming in The amount of loss of realizing the risk events accounted for RUB 442 million. the center of the nebula. Symmetrical Ant nebula in Norma, Butterfly nebula in Ophiuchus and Southern Crab nebula in As a result of realized arrangements of reduction of implications of risk events occurrence the Company was able to remove completely their effect on its Centaurus are widely known. operating results. The effect of realized arrangements accounted for RUB 584 million. One more legend about nature cyclicity is related to Centaurus. In Hellenic mythology Chiron - the son of Kronos – the wisest centaur created the model of zodiac and reserved the first place in it for himself. His enemy centaur Krotos outpaced Chiron and occupied the first place in the zodiac, thus becoming Archer. After Chiron’s death Zeus turned him in Centaurus. More often than not the Archer is depicted with two faces; one faces the past and the other - the future. By this he resembles the Roman god Janus. The sun is in the Archer in winter. And 42 the center of our galaxy in the Archer. VII. HR management 43 Personnel development is focused on the creation of highly professional collective capable to ensure the Company’s leadership in telecommunications market and to meet clients’ demand in quality and affordable communications services. VolgaTelecom makes significant efforts for the development of personnel potential, improvement of professionalism, creativity to labor, ensuring social protection and healthy social climate in the collective.
Within the framework of realization of the Program of VolgaTelecom’s development in 2009-2013 the Company has worked out priority trends and principles of operation of HR management. To achieve them the following tasks are to be performed:
• Provision of strategic trends of the Company’s business with highly qualified personnel;
• Improvement of personnel incentives system (material and non-cash);
• Intelligent organizational design, contributing to efficient organization of production processes;
• Increase in labor productivity and provision of efficient planning of headcount through labor processes fixing;
• Improvement of the system of arrangements of retaining highly qualified personnel;
• Further development of social policy;
• Development of common corporate culture.
Labor and wages
Organization of labor and wages in OJSC VolgaTelecom is intended at optimization of personnel costs and implementation of advanced types of wages motivating increase in labor productivity.
In 2008 the average monthly wages of the Company’s employees amounted to RUB 16 479, the growth of 15.6% vs. the relevant period of 2007.
Since 2007 uniform Regulations for VolgaTelecom’s employees’ remuneration of labor is effective in the Company. The basis of remuneration of labor is a transparent system of compensatory payments on the basis of grades; this system provided the employees with additional incentive to improve their qualification. Janus (from Latin ianua – “home The grade system, being the most important link in the chain of building common HR management system, is consistently updated in accordance with the entrance”) in Roman mythology is a changes of the Company’s corporate structure, the improvement of business processes and management behavior processes. god with two faces. Janus is the god of beginnings in time: in the morning he opened heavenly gates to the sun, and In 2008 HR department worked out the Regulations for bonus payment to employees of commercial blocs of VolgaTelecom’s regional subsidiaries. The new locked them up for night. According to a system of incentives is built on several principles of bonus payment: for achieving key indicators of operating efficiency, for accomplishment of individual plans, legend he taught a man to count hours, days and months. He was depicted with for accomplishment of objectives. With the introduction of this system of incentives of commercial bloc employees the self-interest of workers in the results of two faces – old, as the sign of passing their operations and also the labor productivity has increased. past, and young - representing future ages; he incarnated on-going process of development. The first month of the HR department also worked out the drafts of Regulations for bonus payment to employees of technical, auxiliary and IT blocs. 44 year, January was called in his honor. Staff relations
VolgaTelecom lays the main emphasis in staff relations on the creation of the environment for maximum realization of labor and creative potential of every employees, moulding the sense of corporate solidarity and commitment to the Company’s interests.
Training indicators in 2006-2008
Training costs, RUB million RUB million
70.5 63.6
53.9 Trained, persons
16 860 17 037 16 897
2006 2007 2008
Staff training and development is a key function in HR management. The major tasks of staff training and development are: • to provide the Company with highly qualified staff; • to implement uniform methodology of management of staff training and development processes; • to build and improve overall and efficient staff training and development system in accordance with the documents effective in the Company; • to optimize the costs for personnel assessment, training and development. In 2008 16 897 employees were trained in various programs, which is 53.5% of the Company’s total headcount. The costs for the Company’s employees training and development amounted to RUB 53.9 million, which is 23.6% less vs. 2007.
45 In VolgaTelecom the priority forms of personnel training are as follows:
• Corporate training realized in accordance with top and mid-level management programs. In 2008 the Company’s employees were trained in 173 programs, the cost of these programs amounted to RUB 5.3 million;
• VolgaTelecom’s centralized training for mid-level managers and the candidates of the Company’s personnel reserve intended at getting knowledge and habit formation in modern techniques of management and leadership potential development. In 2008 within this kind of training the Company’s employees were trained in 1 144 programs, the cost of these training services amounted to RUB 10.3 million;
• Regional training initiated and organized by the Company’s regional subsidiaries (full-time training and in-service training). VolgaTelecom’s employees were trained in 30 164 programs of regional training, the cost of this training amounted to RUB 33.3 million.
Costs for personnel training and development
Regional training RUB Corporate training RUB 5.3 million. 33.3 million. Centralized training RUB 10.3 million.
Social policy
The Company’s social policy is goals and arrangements related to providing the employees with fringe benefits, services and social benefits. No matter whether social services are vital or offered only to attract qualified personnel, they create the motivation of employees in VolgaTelecom’s economic activity. So, the employees’ social security, development of their personality traits, health maintenance are the key stones of the Company’s success. The list of social safety net and benefits is stated in VolgaTelecom’s Collective agreement for 2006-2008. The Collective agreement provides both for compulsory government and corporate social programs. In December 2008 the effective period of VolgaTelecom’s Collective agreement was extended for the next three years. In 2008 434 key specialists of the Company were insured under the contracts of voluntary medical insurance concluded with OJSC SOGAZ and LLC Rosgosstrakh-Povolzhie; The Company’s employees are provided non-government pension fund scheme on the basis of the contract concluded by and between VolgaTelecom and Non-government Pension Fund “Telecom-Soyuz”. In 2008 more than RUB 221.2 million were allocated for non-government pension fund scheme of 46 the Company’s employees. Corporate culture
VolgaTelecom makes much of forming common corporate culture. The Company’s internal policy is focused on every employee's having the opportunity to develop, improving their professional skills and realizing their creative potential. Traditionally the Company has been practicing corporate emulation among regional subsidiaries, intended at improving the efficiency of regional subsidiaries operations, increasing profit, improving the quality of communications, expanding the range of provided services, stimulating the development of new services and technologies. The results of corporate emulation are summarized annually by May 7 – professional holiday of employees of all communication industries. The collectives of regional subsidiaries – winners of corporate emulation are awarded diplomas and cash bonuses. At 2008 year-end the winners of corporate emulation were Mordovia Republic regional subsidiary (1-st place), Nizhny Novgorod regional subsidiary (2-nd place) and Samara regional subsidiary (3-rd place). For the purpose of improving the image of blue-collar job, popularizing advanced work experience, and also of recognizing the merits of the most professional workers the tradition of holding the contests of professional skill was revived. In 2008 the first intraregional contest of professional skill for the title “Best in profession” was held. The contest’s participants were the winners of the 1-st stage held in regional subsidiaries in four nominations: cable jointer, electrician of external plants, electrician of exchange equipment and communications operator. All the participants of the 2-nd stage of the contest throughout the year were paid an increment to the salary for professional skill and high qualification. The contest was a perfect incentive to the increase of book knowledge and improvement of hand-on experience. Furthermore, every year the Company holds professional and corporate events intended at unifying and uniting the collective, awareness of employees’ affiliation to the entity and digestion of corporate values. These are traditional events “Father, mother and me are sports family”, “VolgaTelecom’s Olympics”, celebration of the Day of employees of all communication industries, the Club for the Cheerful and Sharp-witted, corporate New Year's Eve, etc. In 2008 VolgaTelecom employees were awarded the following prizes: • “Master of communication” title was bestowed to 73 employees; • 12 persons were awarded “Honorary radio operator” badge; • 32 persons were awarded Certificate of honor of OJSC Svyazinvest; • 49 persons were awarded Certificate of honor of OJSC VolgaTelecom. In 2008 12 best employees were entered the Book of Honor of OJSC VolgaTelecom and 12 employees were entered the honors board of OJSC VolgaTelecom.
Social responsibility reporting
In 2008 VolgaTelecom prepared the first social responsibility report in accordance with AA 1000 international standard providing for the feedback from various groups of stakeholders in making the report. The report covers the Company’s operations in 2006-2007. VolgaTelecom’s first social responsibility report covers the areas of social policy (including but not limited to remuneration of labor and bonus payment to employees, personnel training, non- government pension fund scheme and other matters) and quality of rendered services. To hold dialogues on the above areas the Company’s employees, end users and shareholders were selected as stakeholders. The dialogues were held in the form of panel discussions, face-to-face and telephone interviews. Basing on the results of the feedback VolgaTelecom committed to realize 16 proposals of 226 among which are providing the clients with unhampered redial to technical support service phones, implementation of virtual payment system, opportunity of remote control of selected tariff schedule, implementation of on-line office suits for clients and others. 47 48 VIII. Corporate governance 49 The Company’s corporate structure
VolgaTelecom as the company striving for meeting the best world practice of corporate governance makes serious efforts to ensure the compliance with rights and legitimate interests of its shareholders, employees, clients and partners. The basis of the Company’s corporate governance is its corporate structure comprising management and control bodies.
Shareholders’ general meeting
Board of directors Auditing committee
Strategic Development Committee Committee for Audit Management board
General Corporate Governance Personnel Director Committee and Remuneration Committee Corporate secretary Internal Audit Department
Great Einstein had challenged the infinity, he said “Two things are infinite: Nizhny Novgorod regional subsidiary Ulyanovsk regional subsidiary the universe and human stupidity; General Kirov regional subsidiary Mordovia Republic regional subsidiary and I'm not sure about the universe”. directorate Mariy-El Republic regional subsidiary Penza regional subsidiary In 1917 Einstein hypothesized that the universe is infinite but finite. Udmurtia Republic regional subsidiary Samara regional subsidiary He believed that all the stars and Chuvashia Republic regional subsidiary Saratov regional subsidiary galaxies are in four-dimensional sphere, Orenburg regional subsidiary and its volume is a finite quantity, but 50 the surface of any sphere is infinite. Board of directors
The Board of directors is the Company’s collegial management body performing corporate management of the Company’s activities. The Company’s Board of directors is annually elected by annual general meeting of shareholders to the number of 11 persons by cumulative voting.
The composition of the Board of directors elected by annual general meeting of shareholders on June 24, 2008
Sergey I. Kuznetsov Chairman of OJSC VolgaTelecom’s Board of directors
Vladimir A. Andreev Rector of State Educational Institution of Postsecondary Vocational Education “Povolzhsky State Academy of Telecommunications and IT”
Valeryi N. Bugaenko CEO of Federal Communications Agency
Evgeniya S. Vinokurova Director of department of FSUE Russia’s Post
Alla B. Grigorieva Deputy director of corporate governance and legal department of OJSC Svyazinvest
Sergey V. Omelchenko Member of VolgaTelecom’s Board of directors
Victor D. Savchenko Deputy General Director of OJSC Svyazinvest
Dmitry Yu. Tushunov Chief of analytical department – Chief economist of ZAO Lider (the Company for administration of assets of pension fund)
Oleg R. Fedorov Chief Corporate Finance Management Officer of LLC Deutsche Bank
Anton A. Shchegolikhin Deputy General Director of FSUE Russia’s Post
Pavel O. Yunkin Member of VolgaTelecom’s Board of directors
VolgaTelecom’s Board of directors comprises four independent directors: Vladimir A. Andreev, Sergey I. Kuznetsov, Dmitry Yu. Tushunov and Oleg R. Fedorov.
The Board of directors performs strategic management of the Company’s operations, control of reasonable and bona fide performance by executive bodies of efficient management of the Company’s day-to-day operations in the interests of securing its long-term sustainable development. The Board of directors’ operation is intended at increasing the Company’s value growth, inclusive of its assets growth, price of shares and other securities, improvement of the Company’s image. 51 The Board of directors’ operations in 2008
In 2008 the Company’s Board of directors held 27 meetings and considered 245 issues. VolgaTelecom’s board of directors approved the following documents: • VolgaTelecom’s investment priorities for 2009; • The Program of VolgaTelecom’s risks management; • The Program of VolgaTelecom’s transformation in sales and servicing areas; • Restated version of VolgaTelecom’s Corporate Governance Code; • VolgaTelecom’s budget for 2009; • The Program of VolgaTelecom’s development for 2009-2013; • Terms and conditions of Contract of services of audit of VolgaTelecom’s financial (accounting) statements; • Regulations for the procedure of holding the tender for the right to conclude the contract of mandatory audit of accounting procedures and VolgaTelecom’s financial (accounting) statements; • Regulations for tender committee for selection of audit entity for mandatory audit of accounting procedures and VolgaTelecom’s financial (accounting) statements. The Board of directors appointed the Company’s Management board and approved terms and conditions of supplementary agreements to labor contracts concluded with VolgaTelecom’s Management board members. Due to reorganization of 100% subsidiary company ZAO NSS in the form of affiliation to it of OJSC TATINCOM-T, ZAO RTCOM, ZAO Saratov-Mobile, ZAO Chuvashia Mobile and ZAO Penza Mobile the Board of directors made the decision to change the quantity of ordinary, registered, uncertified shares of ZAO NSS, held by the Company, from 100 000 shares to 162 263 shares and change the par value of the Company’s equity share in ZAO NSS authorized capital from RUB 21 629 400 to RUB 35 096 513.32. With a view to further realization of the strategy of the Company’s mobile business development the Board of directors made the decision of increasing VolgaTelecom’s equity stake in ZAO Ulyanovsk-GSM to 100% by concluding amicable agreement with OJSC SMARTS. The Board of directors also considered the issues about the Company’s immediate measures of reducing the subscribers’ churn and increasing the volume of traffic in the segment of fixed-line telephony and broadband access, and the report of the Company’s IR activity and increase in capitalization in 2008. In the reporting period in accordance with the Company’s Articles of association the Board of directors approved 119 transactions. In accordance with Regulations for the Company’s Board of directors the members of the Board of directors are repaid the expenses related to exercising their functions and are paid quarterly and annual remuneration.
52 The Board of directors’ Committees
By its decision of July 15, 2008 the Board of directors set up Corporate Governance Committee, Strategic Development Committee, Personnel and Remuneration Committee and the Committee for Audit. The major objective of the Committees establishment is the enhancement of efficiency and improvement of quality of operation of the Board of directors through preliminary consideration of individual issues referred to the Board of directors’ competencies and preparation of recommendations on the issues within the Committees’ competencies.
General Director
General Director is the sole executive carrying out management of the Company’s day-to-day operations. General Director is appointed by the Company’s Board of directors. In 2008 VolgaTelecom’s General Director was Sergey V. Omelchenko.
Management board
Management board is the Company’s collegial executive body organizing the implementation of resolutions of shareholders’ general meeting and decisions of the Company’s Board of directors.
Composition of the Management board operating at December 31, 2008 Sergey V. Omelchenko VolgaTelecom’s General Director, Chairman of the Company’s Management board Svetlana L. Astakhova Deputy General Director of the Company – personnel director Mikhail V. Dyakonov Deputy General Director of the Company for capital construction Oleg V. Ershov First Deputy General Director of the Company – commercial director Andrey S. Zakharov Deputy General Director of the Company – technical director Denis B. Kostin Deputy General Director of the Company – CFO Nikolai I. Popkov Chief accountant Vladimir V. Ulyanov Deputy General Director of the Company – director for security and secrecy order In 2008 the Company’s Management board held 39 meetings and considered 408 issues. The members of the Company’s Management board are paid quarterly remuneration and compensations of expenses related to their exercising the functions of the members of the Management board 53 Auditing committee
The control over the Company’s financial-economic activities is exercised by the Auditing committee elected at the annual general meeting of shareholders on June 24, 2007 and consisting of the following persons:
Olga G. Koroleva Chief accountant of OJSC Svyazinvest
Svetlana N. Bocharova Chief of tax sector of the Department of bookkeeping, tax and statistics accounting of OJSC Svyazinvest
Polina V. Burmistrova Deputy chief of sector of legal support of OJSC Svyazinvest activities of Legal and Corporate Governance Department of OJSC Svyazinvest
Alexey V. Maltsev Chief of sector of strategic planning and analysis of efficiency of Group strategy implementation of the Department of strategic development of OJSC Svyazinvest
Mikhail V. Tret’yakov Director of the department of perspective development of FSUE Russia’s Post
In 2008 the Auditing committee operated in the following areas: • verification of compliance with established procedure of maintaining the accounting and of drawing up financial statements; • monitoring of legality of decisions and actions of the Company’s executive bodies, inclusive of concluded contracts and made transactions; • verification of compliance with legal acts in financial and economic operations in basic lines of business (capital construction, rendering of interconnect and traffic transit services, rendering of communications services); • verification of compliance with natural monopolies laws and regulations in acquiring financial services; • analysis of the Company’s financial position, assessment of efficiency of the Company’s financial investments management; • analysis of promptitude and accuracy of settlements with counterparties, budgets of various levels, shareholders and other creditors of the Company; • analysis of organization of internal control; • control of payment discipline; • analysis of settlements with the Company’s debtors, inclusive of promptitude and completeness of measures taken by executive bodies. The Auditing committee audited VolgaTelecom’s financial and economic operations for 2008. Based on the results of the audit the committee drew up its Findings on the Company’s statements for 2008. The violations identified by the Auditing committee are insignificant and do not have effect on the reliability of the Company’s 54 accounting statement and annual report for 2008. Information about the ratings
VolgaTelecom has several rating scores of the leading global and Russian rating agencies.
Corporate Governance Ratings
In November 2008 Standard & Poor’s Rating Service affirmed VolgaTelecom’s Corporate Governance Score (global scale) at CGS-5. At the same time Standard & Poor’s raised the Company’s Corporate Governance Score (Russia national scale) from CGS-5.2 to CGS-5.4. VolgaTelecom’s corporate governance vs. the best corporate practices is assessed as average. The Company’s corporate governance level is affected and will be substantially affected by country risks and the reality of condition of Russia’s market.
Standard & Poor’s Corporate Governance Rating
Date of rating 02.08.06 19.09.07 13.11.08
The Company’s general rating 5 / 5.1 5 / 5.2 5 / 5.4
Ownership structure and external influences 5 / 5.0 5 / 5.0 5 / 5.0
Shareholder rights and stakeholder relations 7 / 7.1 7 / 7.2 7 / 7.1
Transparency, disclosure, and audit 5 / 5.4 5+ / 5.7 6 / 6.3
Board structure and effectiveness 4 / 4.3 4+ / 4.6 4+/ 4.7
55 Credit ratings
Credit ratings assigned by rating agencies provide an opinion on the Company’s relative ability and willingness to meet timely and in full its financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims and counterparty obligations.
Standard & Poor’s credit ratings
International rating
Date of assignment Object of assignment National rating National currency / Foreign currency/outlook outlook
07.10.2008 Issuer ВB-/Negative* ВB-/Negative ruAA-
21.01.2008 ВТ-2, ВТ-3 and ВТ-4 series bonds - - ruAА-
* In revising the outlook from “Stable” to “Negative” the agency took into account serious deterioration in global and Russian credit markets related to the global economic crisis.
Fitch Rating’s credit ratings
Date of International long-term International short-term Object of assignment National rating/outlook assignment IDR*/outlook IDR
14.02.2008 Issuer ВB-/Stable В A+(rus)/Stable
14.02.2008 ВТ-2, ВТ-3 and ВТ-4 series bonds - - A+(rus)
*IDR – Issuer Default Rating
56 VolgaTelecom’s registrar
Open Joint Stock Company Obiedinennaya Registratsionnaya Kompaniya Location (registered office) 15a Kalanchevskaya Street, Moscow De facto address 4 Floor, 3 Entrance, 15a Kalanchevskaya Street, Moscow Mailing address P.O.Box 162, 15a Kalanchevskaya Street, Moscow, 107078 Phone (495) 933-42-21, (495) 504-28-86 Fax (495) 933-42-21, (495) 504-28-86 E-mail [email protected] Web-site http://www.ork-reestr.ru The date since when the register of the issuer’s registered securities is maintained by this registrar – February 19, 2002. Data on the registrar’s license License number No 10-000-1-00314 Date of issue March 30, 2004 Date of license term expiry Unlimited Licensing authority Russia’s FCSM
VolgaTelecom’s auditor
Closed Joint Stock Company (ZAO) KPMG License number and date of issue Е 003330 of January 17, 2003 License validity term 5 years. The license validity term was extended to January 17, 2013 by order No 573 of September 17, 2007 of the Ministry of Finance of the Russian Federation. Licensing authority The Ministry of Finance of the Russian Federation
57 58 IX. Securities 59 OJSC VolgaTelecom is one of the largest Russian issuers. The Company is an open joint stock company established for an unlimited term of activities. The Company’s shareholders’ equity amounts to RUB 1 639 764 970 and consists of 327 952 994 shares with RUB 5 par value of each share. VolgaTelecom’s shareholders’ equity structure (at January 01, 2009) Shares categories (types) Quantity (pieces) Par value (RUB) Outstanding shares, of which 327 952 994 Ordinary registered 245 969 590 5 Preferred registered A type 81 983 404 5 Authorized shares, of which 1 830 589 Ordinary registered 1 299 093 5 Preferred registered A type 531 496 5
Einstein’s theory did not exist long: as early as in 1924 Russian physicist Information about the owners of largest blocks of shares Alexander Friedman proposed the theory of “Evolving Universe” where he proved that Einstein’s “Steady- OJSC Svyazinvest holds the controlling block of shares (its share in the Company’s authorized capital is 38%). Voting shares held by Svyazinvest account state Universe” is only a particular case, and overturned the thesis that for 50.67% of the total number of issued ordinary shares. general theory of relativity requires the assumption of finiteness of space. The list of persons registered in the Company’s register at December 31, 2008 In 1929 his theory was corroborated by Edwin Hubble’s astronomical (with the share of 1% and more of the authorized capital) observations. Friedman’s studies formed the basis of classical theory Share of stock in Share of Share of preferred of the expanding Universe. After a № Shareholder’s name Account type while following the publication of the authorized capital, % ordinary stock, % stock, % work Einstein accepted Friedman’s rightness. Open Joint Stock Company “Investment communications 1 Owner 38.00 50.67 0 Three potential consequences company” (Svyazinvest) resulted from Friedman’s calculations: • The Universe and its space are 2 “ING Bank (Eurasia) ZAO” (Closed Joint Stock Company) Nominee holder 17.88 12.80 33.12 expanding in the course of time; • The Universe is contracting; Closed Joint Stock Company “Depositary-Clearing 3 Nominee holder 14.66 12.86 20.05 • The periods of contraction Company” and expansion in the Universe are alternating in large intervals. Non-Commercial Partnership “National Depositary 4 Nominee holder 16.66 14.60 22.82 Hindu cosmology has the notion of Center” Pralaya - a period of time of inactivity in the Universe, before Pralaya period Commercial bank “JPMorgan Bank International” (Limited 5 Nominee holder 1.45 1.73 0.61 the world is annihilated. When this Liability Company) period ends the Universe is reborn and Kalpa period begins – this is a new 60 period of the Universe life. 6 Open Joint Stock Company “RTK-Leasing” Owner 1.08 1.43 0 The structure of VolgaTelecom’s shares owners at May 05, 2008.
Foreign natural persons 0.02% Russian natural persons 10.10% ADR holders 6.79%
OJSC Svyazinvest 38.00%
Foreign legal persons 26.5%
Russian legal persons 18.59%
Dividend Dynamics of declared (accrued) dividend on VolgaTelecom’s shares (per a share), RUB
The resolution on payment and the size of annual dividend is passed by general meeting of the Company’s shareholders on the recommendation of the Board of directors. VolgaTelecom’s Articles 4.0534 of association provides for the commitment to pay preferred dividend to the amount of at least 10% 3.6008 of the net profit at the last fiscal year-end, if annual general meeting of the Company’s shareholders passes the resolution to pay dividend. Annual general meeting of VolgaTelecom’s shareholders held on June 24, 2008 approved restated version of the Company’s Articles of association; in accordance with it the period of preferred dividend 2.9928 payment is reduced to 60 days. 2.7583 In 2008 the Company allocated 25.8% of net profit obtained at 2007 fiscal year-end for the 2.451 2.5082 payment of dividend on preferred and ordinary stock. The total amount allocated for dividend payment 2.1346 accounted for RUB 857 361 779.89. 1.7954 1.8002 1.5776 1.4744 1.3779 Ordinary shares
0.9186 0.7066 Preferred A type shares
61 * - The size of dividend proposed by the Company’s Board of directors for the approval by annual general meeting of shareholders. 2002 2003 2004 2005 2006 2007 2008* In 2005 VolgaTelecom’s shares passed through the listing procedure and were included into quotation lists of two leading Russian stock exchanges – Stock exchanges MICEX and RTS.
Stock exchanges
Stock exchange Ticker, ordinary shares Ticker, preferred shares Quotation list OJSC Stock Exchange RTS NNSI NNSIP A2 Classical market NNSIG NNSIPG A2 OJSC Stock Exchange RTS Stock market VTEL VTELP A2 ZAO Stock Exchange MICEX Most of the transactions with the Company’s shares (90%) are made on MICEX. At 2008 year-end the number of transactions with the Company’s shares (ordinary and preferred) on MICEX has grown by 86.8% vs. 2007.
ADR program ADRs for VolgaTelecom’s ordinary shares were issued in October 1997. The depositary bank was The Bank of New-York. In spring 2002 the program was moved from The Bank of New-York to JPMorgan Chase Bank. Nominee holder of ADR program in Russia is “ING Bank (Eurasia) ZAO”. The Company’s ADRs are traded on the USA OTC market and on Frankfurt Stock Exchange under the tickers VLGAY US and NZH GR accordingly (as per Bloomberg data). In December 2008 about 7.45% of ordinary shares were deposited within ADR program.
Bonds
One of the main tasks of the Company’s financial policy is to form optimal debt structure through diversification of sources of financing, reduction of cost and extension of borrowings duration. VolgaTelecom is actively using the Russian market of corporate bonds for raising debt. The Company has issued four bonded loans (BT-1 bonded loan was repaid on February 21, 2006).
Parameters of marketable bonded loans State registration number State registration date Series Quantity of the issue bonds Par value, RUB Amount of issue 4-46-00137-А 06.06.2006 ВТ-4 3 000 000 1 000 RUB 3 billion 4-45-00137-А 10.11.2005 ВТ-3 2 300 000 800 RUB 2.3 billion 4-44-00137-А 10.11.2005 ВТ-2 3 000 000 800 RUB 3 billion The Company discharges its obligations of bonded loans servicing in time and in full. In December 2008 the Company paid off (repaid) the first 20% of the par value of BT-2 and BT-3 series bonds to the amount of RUB 600 million and RUB 460 million accordingly. On December 04, 2008 VolgaTelecom acquired BT-2 series bonds on the terms of the offer. The total par value of acquired bonds amounted to RUB 2 389 368.8 thousand. The obligation of the bonds acquisition was discharged in full. 62 X. Major corporate events after the balance-sheet date 63 • The Arbitration Court of the city of Moscow invalidated tax claims filed by Inter-Regional Tax Inspectorate No 7 of Russia’s Federal Internal Revenue Service in charge of large taxpayers against OJSC VolgaTelecom based on the results of integrated field tax inspection of OJSC VolgaTelecom’s January operations for 2004-2006. • In Penza city VolgaTelecom put out of operation the last analog crossbar exchange of the total installed capacity of about 5000 lines. So, 100% digitalization was achieved in local telephony network of the oblast’s center.
• The Board of directors approved terms and conditions of liability insurance contract of the Company’s Board of directors members, February the Company’s Management board members and the Company’s General Director, as well as the persons who held or will hold these posts in the Company’s management bodies.
• Restated versions of Regulations for Corporate Governance Committee of VolgaTelecom’s Board of directors, Regulations for Strategic Development Committee of VolgaTelecom’s Board of directors, Regulations for the Committee for Audit of VolgaTelecom’s Board of directors, Regulations for Personnel and Remuneration Committee of VolgaTelecom’s Board of directors were approved. March • Regulations for VolgaTelecom’s dividend policy were modified and amended. • Regulations for the procedure of holding tender for the right to conclude the contract of mandatory audit of VolgaTelecom’s accounting (financial) statement drawn up in accordance with Russian Accounting Standards and of VolgaTelecom’s consolidated financial statements drawn up in accordance with International Financial Reporting Standards was approved. • In Tolyatti town VolgaTelecom put into operation digital switching equipment of the capacity exceeding 50 500 lines. This was the final stage of the program of digitalization of the town’s telephony network.
German chemist Friedrich August Kekule (1829—1896) said that he had discovered the ring shape of the benzene • Since April 27, 2009 Vladimir Rybakin is appointed VolgaTelecom’s General Director. molecule after having a reverie or day- April dream of a snake seizing its own tail (this is a common symbol in many ancient 64 cultures known as the Ouroboros). XI. Enclosures 65 Information about the Company’s participation in other entities providing telecommunications services (the Company’s equity stake in their authorized capital is at least 25%)
Key performance indicators Equity stake Share in in authorized authorized № Company’s name Core activity capital of capital, RUB Number of Revenues, Net profit, RUB entity, % thousand subscribers/ RUB thousand thousand lines
1 ZAO Nizhegorodskaya Sotovaya Svyaz GSM, AMPS-DAMPS mobile services 100 35 096.5 2 619 774 4 892 739 882 224
2 ZAO Ulyanovsk-GSM GSM mobile services 100 100 443 226 875 989 143 729
Data transmission services and telematic 3 LLC NIZHEGORODSKYI TELESERVICE 100 2 700 695 92 799 14 301 services
4 ZAO Orenburg-GSM GSM mobile services 51 102 247 598 262 765 4 417
50% + 1 Local telephony services via radio 5 ZAO Narodnyi Telephone Saratov preferred 50.01 40 535 58 792 - 40 639 access equipment share
Local telephony services via radio 6 ZAO NIZHEGORODSKYI RADIOTELEPHONE 50 50 2 092 9 192 - 287 access equipment
7 ZAO Samara Telecom Local telephony services 27.8 75.01 17 159 360 900 40 676
66 Balance sheet
BALANCE SHEET CODES OKUD Form No 01 0710001
At December 31, 2008 Date (year, month, day) 2008.12.31
Entity OJSC VolgaTelecom OKPO code 01142788
Taxpayer Identification Number 5260901817 TIN 5260901817
Line of business Electric communication OKVED code 64.20
Form of incorporation /ownership form Open Joint Stock Company / private OKOPF/OKFS code 47/16
Measure unit: RUB thousand OKEI code 384
Address: Dom Svyazi, M.Gorky Square, N.Novgorod city, 603000
Date of approval
Date of dispatch 31.03.2009 (receipt)
67 At the reporting period At the reporting ASSETS Notes Item code Line code beginning period end
1 1а 2 2а 3 4
I. NON-CURRENT ASSETS 110 110 2 927 2 486 Intangible assets
Property, plant and equipment 4.1 120 120 29 217 039 30 371 431
CAPEX 4.2 130 130 537 422 1 119 076
Income-bearing lease investments 135 135 81 018 71 676
Long-term financial investments 4.3 140 140 2 948 130 3 783 165
of which: 141 2 738 258 3 716 626 investments in subsidiaries
investments in associates 142 6 157 6 055
investments in other entities 143 67 027 19 133
other long-term financial investments 4.4 144 136 688 41 351
Deferred tax assets 4.5 145 145 233 511 247 381
Other non-current assets 4.6 150 150 3 725 495 3 462 455
Total for section I 190 190 36 745 542 39 057 670
68 At the reporting period At the reporting ASSETS Notes Item code Line code beginning period end
1 1а 2 2а 3 4 II. CURRENT ASSETS 210 210 703 670 545 381 Inventories of which: 211 211 413 937 412 603 raw materials, supplies and other similar values 4.7 work in progress expenses (distribution costs) 213 213 835 - finished goods and goods for resale 214 214 184 768 30 092 goods shipped 215 215 1 203 3 prepaid expenses 216 216 102 927 102 683 other inventories and expenditure 217 217 - -
220 220 248 336 105 740 VAT on acquired valuables of which: 221 71 295 27 639 t o b e r e f u n d e d i n m o r e t h a n 1 2 m o n t h s a f t e r t h e r e p o r t i n g d a t e
t o b e r e f u n d e d w i t h i n 1 2 m o n t h s a f t e r t h e r e p o r t i n g d a t e 222 177 041 78 101
Accounts receivable (payments are expected in more than 12 months 230 230 4 151 2 984 after the reporting date)
69 At the reporting period At the reporting ASSETS Notes Item code Line code beginning period end 1 1а 2 2а 3 4
of which: trade receivable 4.8 231 231 323 598
advances paid out 232 - -
other debtors 233 3 828 2 386
Accounts receivable (payments are expected within 12 months after the reporting date) 240 240 2 792 013 2 679 338
of which: trade receivable 4.9 241 241 2 037 935 2 044 063
advances paid out 242 162 122 145 736
other debtors 4.10 243 591 956 489 539
Short-term financial investments 4.4 250 250 7 243 203 283
Cash 260 260 357 220 1 562 117
Other current assets 270 270 575 601
Total for section II 290 290 4 113 208 5 099 444
BALANCE (sum of lines 190+290) 300 300 40 858 750 44 157 114
70 At the reporting period At the reporting LIABILITIES Notes Item code Line code beginning period end
1 1а 2 2а 3 4
III. EQUITY AND RESERVES Authorized capital 4.11 410 410 1 639 765 1 639 765
Capital surplus 420 420 3 664 819 3 533 964
Surplus 430 430 81 988 81 988
Treasury stock 411 440 - -
Retained earnings (uncovered loss) of past years 470 460 15 443 640 14 709 805
Retained earnings (uncovered loss) of the reporting year 470 470 - 2 952 019
Total for section III 490 490 20 830 212 22 917 541
IV. NON-CURRENT LIABILITIES Loans and borrowings 4.13 510 510 7 401 285 7 940 810 of which: 511 2 300 000 6 880 000 loans borrowings 512 5 101 285 1 060 810
Deferred tax liabilities 4.14 515 515 1 409 278 1 356 295
Other non-current liabilities 4.15 520 520 618 826 421 172
Total for section IV 590 590 9 429 389 9 718 277
71 At the reporting period At the reporting LIABILITIES Notes Item code Line code beginning period end
1 1а 2 2а 3 4
V. CURRENT LIABILITIES Loans and borrowings 4.13 610 610 6 014 650 5 153 872
of which: 611 2 411 887 808 041 loans
borrowings 612 3 602 763 4 345 831
Accounts payable, 4.16 620 620 3 719 017 5 534 904
of which: 621 621 2 530 241 3 413 900 trade payable
advances from customers 625 622 402 131 463 293
wages payable 622 623 101 167 80 447
debt to government extrabudgetary funds 623 624 42 388 50 943
tax debt 624 625 181 424 499 634
other creditors 625 626 461 666 1 026 687
Debt to members (founders) for income payments 630 630 19 469 18 620
Deferred revenue 4.17 640 640 221 233 156 820
Provision of costs to be incurred 4.18 650 650 611 723 647 419
Other current liabilities 4.19 660 660 13 057 9 661
Total for section V 690 690 10 599 149 11 521 296
72 BALANCE (sum of lines 490+590+690) 700 700 40 858 750 44 157 114 Statement of tangible assets shown on off-balance-sheet accounts
At the reporting period At the reporting Item Notes Item code Line code beginning period end
1 1а 2 2а 3 4 Leased property, plant and equipment 910 901 1 832 293 3 957 546 including leasing 911 911 543 275 2 372 033
Inventory items received in custody 920 902 49 346 51 262
Goods taken on commission 930 903 8 639 12 767
Written-off debts of insolvent debtors 940 904 301 726 350 279
Collaterals received on liabilities and payments 950 905 11 502 828 11 503 081
Collaterals issued on liabilities and payments 960 906 5 335 109 4 308 840
Depreciation of housing stock 970 907 10 251 9 758
Depreciation of land improvement facilities and other similar facilities 980 908 2 176 2 490
Statement of net assets value
At the reporting period At the reporting Item Notes Item code Line code beginning period end 1 1а 2 2а 3 4 Net assets 1000 21 051 445 23 074 361
73 INCOME STATEMENT CODES OKUD Form No 0710002 02 Date (year, For year ended December 31, 2008 2008.12.31 month, day)
Entity OJSC VolgaTelecom OKPO code 01142788
Taxpayer Identification Number 5260901817 TIN 5260901817
Line of business Electric communication OKVED code 64.20 OKOPF/OKFS Form of incorporation /ownership form Open Joint Stock Company / private 47/16 code Measure unit: RUB thousand OKEI code 384
For the similar For the reporting Item Notes Item code Line code period of the prior period year
1 1а 2 2а 3 4
I . R E V E N U E S A N D E X P E N S E S F R O M O R D I N A R Y O P E R AT I O N S Revenues (net) from sales of goods, products, works, and services 5.1 010 010 26 420 079 25 162 745 (minus VAT, excise taxes and similar mandatory payments)
Of which from sales: of telecommunications services 011 24 944 280 23 887 329
Prime cost of sold goods, products, works and services 5.2 020 020 (20 898 169) (19 061 174)
Of which: telecommunications services 021 (20 156 244) (18 358 314)
Sales profit (loss) (lines 010 - 020) 050 050 5 521 910 6 101 571
74 For the similar For the reporting Item Notes Item code Line code period of the prior period year
1 1а 2 2а 3 4 II. OTHER REVENUES AND EXPENSES 060 060 124 616 15 283 Interest receivable Interest due 070 070 (1 205 908) (831 375) Revenues from participation in other entities 080 080 402 017 57 678 Other revenues 5.3 090 090 1 732 347 1 011 091
Of which compensation for losses caused by universal services provision 091 882 971 320 078
Other costs 5.3 100 100 (2 498 759) (1 644 600)
Profit (loss) before tax (lines 050+060-070+080+090-100) 140 140 4 076 223 4 709 648
Income tax expenses (lines -151+/-152+/-153) 5.4 150 (1 124 204) (1 386 540) including: deferred tax liabilities 142 151 52 969 (391 636) deferred tax assets 141 152 13 870 (43 144) current income tax 150 153 (1 190 923) (994 085)
Additional payments of income tax for prior tax (reporting) periods 151 154 (120) 42 325
Net profit (loss) of the reporting period (lines 140-150) 190 190 2 952 019 3 323 108
FOR REFERENCE 201 (978 294) (1 130 315) Profit tax for accounting purposes
Recurrent tax liabilities 200 202 (282 310) (378 391)
Recurrent tax assets 200 203 136 400 122 166 75 For the similar For the reporting Item Notes Item code Line code period of the prior period year 1 1а 2 2а 3 4
Basic earnings (loss) per share (RUB) 6.5 301 0.01080 0.01216
Diluted earnings (loss) per share (RUB) 302 - -
* It is completed in annual accounting statement
Breakdown of individual profit and loss
For the similar period For the reporting period Item Item code Line code of the prior year Profit Loss Profit Loss 1 1а 2 3 4 5 6
Fines, late payment interests and forfeit penalties, which were acknowledged or to be collected according to court 401 62 516 (1 796) 82 149 (661) (arbitration court) judgment
Past years profit (loss) 402 77 651 (293 326) 268 603 (174 786)
Reimbursement of damages caused by default or 403 6 326 (2 016) 6 186 (1 009) inadequate erformance of obligations
Foreign exchange differences in foreign currency 404 12 706 (33 891) 16 983 (22 804) operations
Deductions to allowances 405 - (200 705) 96 812 -
Debt amortization of payables and receivables 406 10 875 (4 862) 6 927 (4 103) 76 77 Audit opinion
Audit opinion On accounting (financial) statement for year 2008
Audit opinion
To the shareholders of Open Joint Stock Company VolgaTelecom
We have audited the accompanying accounting (financial) statement of Open Joint Stock Company VolgaTelecom (hereinafter – the Company) for year 2008.
Accounting (financial) statement on 61 pages comprises:
• accounting balance-sheet at December 31, 2008;
• income statement for year 2008;
• supplements to accounting balance-sheet and income statement, including:
- statement of changes in equity for year 2008;
- cash flow statement for year 2008;
- supplement to accounting balance-sheet;
• notes.
The Company’s management body is responsible for preparation and presentation of this accounting (financial) statement. Accounting (financial) statement means the statement provided for by Federal Law “On Accounting”. Our responsibility is to express an opinion on the reliability in all material respects of this accounting (financial) statement based on our audit.
We conducted our audit in accordance with Federal Law “On the Audit Activity”; Federal standards of audit activity, KPMG own audit standards, as well as rules and standards accepted by Audit Chamber of Russia.
The audit was planned and performed to obtain reasonable assurance whether the accounting (financial) statement is free from material misstatements. The audit was conducted on a sample basis and included the examination by testing of evidence confirming the figures of accounting (financial) statement and the 78 disclosure of information on financial and economic activity in the accounting (financial) statement, the assessment of compliance with bookkeeping principles and rules applied at preparation of the accounting (financial) statement, the consideration of material estimates obtained by the Company’s management, and also the evaluation of presentation of accounting (financial) statement. We believe that the audit evidence we have obtained is sufficient to provide a basis for our opinion on the reliability of the accounting (financial) statement.
We believe that the Company’s accounting (financial) statement accompanying this Audit opinion presents fairly in all material respects the Company’s financial position at December 31, 2008 and its financial and operating results for the period from January 1 to December 31, 2008 inclusive in accordance with the Russian Federation legislation requirements as related to accounting (financial) statement preparation.
March 31, 2009
L. V. Klimanova
Director, ZAO KPMG (power of attorney No 17/07 of October 5, 2007)
E. A. Akylbek
Audit executive head, General audit qualification certificate No К029616, for an indefinite term
79 80 Reference information for shareholders 81 OJSC VolgaTelecom
Dom Svyazi, Maxim Gorky Square, Nizhny Novgorod city, 603000.
Office of VolgaTelecom’s General Director, Phone: +7 (831) 437-50-00 Fax: +7 (831) 430-67-68, Kirov regional subsidiary 43/1 Drelevsky Street, Kirov city, 601000 E-mail: [email protected] Phone: (8332) 35-95-02, Web-site: www.vt.ru Fax: (8332) 35-00-17 E-mail: [email protected] Mariy-El Republic regional subsidiary Udmurtia Republic regional subsidiary 138 Sovetskaya Street, Ioshkar Ola town, the 278 Pushkinskaya Street, Izhevsk city, Udmurtia Republic of Mariy-El, 424000 Republic, 426008 Phone: (8362) 66-45-71 Phone: (3412) 22-69-91 Fax: (8362) 63 -00-99 Fax: (3412) 51-01-41 Nizhny Novgorod regional E-mail: [email protected] E-mail: [email protected] subsidiary 56 Bolshaya Pokrovskaya Street, Chuvashia Republic regional subsidiary Nizhny Novgorod city, 603000 2 Lenin Avenue, Cheboksary town, Chuvashia Phone: (831) 430-55-32, Republic, 428000 Fax: (831) 430-87-53 Phone: (835-2) 62-43-04, E-mail: [email protected] Fax: (835-2) 66-22-93 E-mail: [email protected] Mordovia Republic regional Ulyanovsk regional subsidiary subsidiary 60 L.Tolstoy Street, Ulyanovsk city, 432063 13 Bolshevistskaya Street, Phone: (8422) 41-20-10 Saransk town, Fax: (8422) 41-13-52 the Republic of Mordovia, 430005 E-mail: [email protected] Phone: (8342) 32-70-04, Fax: (8342) 47-60-70 Penza regional subsidiary Samara regional subsidiary E-mail: [email protected] 1/3 Kuprin Street, Penza city, 440606 17 Krasnoarmeiskaya Street, Phone: (8412) 52-17-12 Samara city, 443010 Orenburg regional subsidiary Fax: (8412) 52-36-88 Phone: (846) 332-10-20 11 Volodarsky Street, Orenburg E-mail: [email protected] Fax: (846) 340-05-10 city, 460000 E-mail: [email protected] Phone: (3532) 77-34-10, Fax: (3532) 72-01-62. Saratov regional subsidiary E-mail: [email protected] 40 Kiselev Street, Saratov city, 410012 82 Phone: (8452) 27-14-18, Fax: (8452) 50-84-53, E-mail: [email protected] 83 VolgaTelecom’s annual report 2008
Redactor VolgaTelecom, 2009 www.vt.ru
License No 23245 Issued by the Russian Federation Ministry of Communications and IT on October 04, 2002. 84