Sibirtelecom»
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OJSC «SIBIRTELECOM» Annual Report 2005 COntents Letter from the General Director ............................................4 1. Business Profile ...................................................................6 2. Basic Corporate Events .......................................................12 3. Review of Results for 2005 ..................................................16 4. Financial Review.................................................................28 5. Investments and Technological Network Development ...........34 6. Associated Business............................................................46 7. Personnel ..........................................................................52 8. Prospects of Development ..................................................58 9. Securities ..........................................................................64 10. Corporate Governance .........................................................70 11. Financial Statement (RAS) ..................................................78 Corporate Information ........................................................86 Annual Report 2005 Letter from ThE GEneraL Director To always move forward! Dear Ladies and Gentlemen, The largest Siberian telecoms operator Sibirtelecom OJSC would like to present you an annual report for the year of 2005. The reporting year was marked for the Management of the Company by qualitative changes in all kinds of Company’s activities. The chosen policy of the complete modernization was confirmed right by the results of 2005. This course made it possible to successfully carry out the worked out plans and considerably advance in a wide range of lines. We realize that Company’s welfare, observance of our shareholders’ interests, and harmonization of relations with our customers depend on timely change in priorities from the traditional regulated services to the new ones that are supported by a demand on the market. In view of the above, our marketing strategy is under the following development: we examine our customers’ behaviour, watch our competitors’ activity, introduce technological innovations, and improve the system of the Company’s management. Our marketing policy is oriented to the demand of the customers concentrated in 15 largest cities of the Siberian Federal District. We consider that the demand for the fixed telephony services has been quite satisfied. Today the company provides services for more than 4 million subscribers of fixed telephony. Such a broad subscriber base enable us to use “the last mile”, that is our key competitive resource, with confidence to develop the sector of broadband access to Internet. Having a purpose of occupying this segment, the Management of the Company decided to diverse the existing brand by entering a new market under the Webstream trademark developed for the young people and representatives of small- and medium-scale business. In the future we plan to provide IP-TV services with the required content under this trademark. Having counted on state-of-the-art technological solutions, our company was among the first ones to introduce the NGN packet network in Omsk and Novokuznetsk. Letter from the General Director Great attention is paid to the cellular business of the Company. Within a year, our operators doubled the subscriber base that amounted to 2 million people. The number of base stations considerably increased, and the Company’s coverage at the cellular map of the region became broader. We purchased a control packet of the shares of GSM operator Altaisvyaz that has licences for providing the services in Altai Krai and the Republic of Altai. We also counted on the development of new standards in cellular communications. In 2005, Yeniseitelecom CJSC, a subsidiary operator, put the CDMA-2000 standard network into revenue service in Krasnoyarsk Krai. A similar standard was proposed to the customers of Tomsk and Irkutsk regions in the beginning of 2006. Last year 6.1 milliard rubles were invested in the infrastructure development. The biggest part of the capital investments is intended to develop local telephony facilities, data transmission network, and communication infrastructure facilities. The level of investments for application of new services made up 12% in 2005. As a result, the Company’s revenue grew up to 21.9 milliard rubles in 2005. The 1 milliard US dollars level of market capitalization reached by the company in September 2005 became a significant event for the company. In October we expanded the geography of trading out shares. First level ADRs began public float at Berlin and Frankfurt stock exchanges. The effectiveness of the Company’s work is confirmed by its growing international rating. Standard&Poor’s Agency announced about a rise in the Company’s Corporate Government Score (CGS) by the international scale (from CGS-4+ to CGS-5 (by the national scale: from CGS-4.7 to CGS-5.1). Fitch Ratings Agency confirmed the Long-term Issuer Default Rating of the Company at level ‘B+’, Short-term Rating at level ‘B’, and changed the rating outlook from “Positive” to “Stable”. Today our company successfully raises long-term funds at the debenture market and constantly improves the process organization, technology and the scheme of bond issue. The cost of drawing the financial resources is decreasing. During the last year the company profitably employed the existing economic situation two times. The interest rate for bonded debts made up 9.2% and 7.85% p.a. Our company was the first one in Svyazinvest holding company to introduce Oracle E-Business Suite (ERP) system of enterprise’s management in the general directorate and three branches: Novosibirsk, Altai, and Omsk, where Master-system of the first release was employed. It was responsible for the creation of uniform accounting systems in the management of fixed assets and personnel. It is used to create a uniform data base for the enterprise, which makes it possible to systematize the information with respect to fixed assets, organization structure of the enterprise, daily performance records, and transfer of personnel. In addition, a unified reporting system will be developed for all branches of Sibirtelecom OJSC. Company’s management sees further improvement of corporate management, effective protection of shareholders’ and investors’ rights, providing the subscribers with the required services, efficient and profitable work of the Company as its paramount task. We make every effort to create an efficient system of communication between the investors and the management, provide a high level of transparency of all aspects of our activity, management structures and regulations. Distinguished shareholders, I assure you that our policy to complete modernization and to achieve success on the market is unfailing! Sincerely yours, General Director of Sibirtelecom OJSC Аnatoly Nikulin Annual Report 2005 Business Profile General information about the Company 1 Sibirtelecom Joint-Stock Company, hereinafter referred to as Sibirtelecom OJSC or the Company, is one of the largest telecoms operators in Russia acting on the territory of the Siberian Federal District (SFD). Area: 5 115 thousand sq.km (30% of Russia’s territory) Population: 20 mln.people (14% of Russia’s population) The urbanization level of population: 70% Share of population in the largest cities: 45% Except for the Republic of Tyva, the branches of Sibirtelecom OJSC are located in the following regions of the SFD: in the Republics of Altai, Buryatia, and Khakassia, the Altai and Krasnoyarsk Krais (including Taimyr and Evenki Autonomous Areas), Irkutsk (including the Ust-Ordyn Autonomous District), Kemerovo, Novosibirsk, Omsk, Tomsk, Chita Regions (including Aginsk Buryat Autonomous District). Sibirtelecom OJSC provides the telecommunication services ranging from the traditional telephone communication to the new services based on the intelligent networks. Business profile The Company’s Position in the Telecommunications Market of SFD General Characteristics of the Telecommunications Market of SFD Telecommunication services market of SFD amounted to 10.3% of telecommunication services market of Russian Federation in 2005. The current macroeconomic situation promotes growth of the telecommunications market in the Siberian Federal District. The predictable growth value of the actual gross regional product (GRP) of Siberia in 2006- 2007 within the range of 3-6% provides for rapid expansion of the SFD telecommunications market. This enables an increase of revenues in the telecommunications sector presently accounting for 2.5% of GRP in the Siberian Federal District. The low value of this figure being less than the average for Russia and most countries of the world evidences that the supply of telecommunication services does not meet the potential demand as yet. Proceeding from the above, experts forecast that the average annual growth of telecommunication sector revenues in the forthcoming three years may reach at least 20-22% or in excess of 25% provided that the goals of growth acceleration are achieved. Market Position of the Company. Sibirtelecom continues to be the leader on the telecommunication market in the region, occupying 45% of the total market size. The most stable positions of the Company are at the markets of traditional services of local and intrazone telephony (79% and 86% of the market respectively). The Company can have the dominant position on the fixed communication market in the Siberian Federal District due to, first of