1 Annual report of OJSC VolgaTelecom for year 2009 1 November December Annual report of OJSC VolgaTelecom 2009 Content 2 disclosure manual Reading implies at least two depth Auxiliary facilities levels. That what is on the surface is comprehensible to the naked eye. We will equip you. Disclosing its depth essence, the book will appear in a new light. This light of superhuman subspectrum is designed to establish authenticity. Advance page by page. Illuminate your route. Accessory is attached 3 For nothing is hidden that will not be made manifest, nor is anything secret that will not be known and come to light. The Evangel of St.Matthew 4 Contents 6 Information about the Company 10 Address of the Board of directors’ Chairman 11 General Director’s address 14 I. Major corporate events in 2009 18 II. The Company’s position in the industry 22 III. The Company’s business priorities 26 IV. The results of the Company’s development in priorities 36 V. Development prospects 38 VI. Risk management 40 VII. Personnel development 46 VIII. Corporate governance 52 IX. Securities 58 Х. Major corporate events after balance sheet date 60 Supplement No 1. Information about the Company’s equity participation in other entities providing telecommunications services 61 Supplement No 2. Balance sheet and audit opinion 73 Reference information for shareholders 74 Disclaimer of forward-looking statements 5 Kirov Kirov branch Mariy-El Republic branch Mordovia Republic branch Nizhny Novgorod branch Orenburg branch Izhevsk Penza branch Nizhny Ioshkar Ola Samara branch Novgorod Saratov branch Cheboksary Udmurtia Republic branch Ulyanovsk branch Chuvashia Republic branch Saransk Ulyanovsk Penza Samara Orenburg Saratov 6 Information about the Company The date of the Company’s state registration and the registration number The certificate of legal entity state registration - series НРП-НН No 20362, the date of registration – December 15, 1993; state registration number 448, was issued on June 28, 2002. Open Joint Stock Company VolgaTelecom (hereinafter – OJSC VolgaTelecom or the Company) was registered in the Uniform State Register of Legal Entities by the Inspection of Russia’s Ministry of Taxation for Nizhegorodskyi district of Nizhny Novgorod on August 01, 2002 under primary state registration number 1025203014781. Open Joint Stock Company “Svyazinform” of Nizhny Novgorod oblast (OJSC “Nizhegorodsvyazinform”) was established by the Committee for management of state property of Nizhny Novgorod oblast pursuant to the Edict of the President of the Russian Federation of July 01, 1992 No 721 “On Organizational Measures for Reorganization of State Enterprises, Voluntary Affiliation of State Enterprises into Joint Stock Companies” and also the Regulation of the Government of the Russian Federation of December 22, 1992 No 1003 “On Privatization of Communications Enterprises” on the basis of state enterprise of communications and IT “Rossvyazinform” of Nizhny Novgorod oblast (SECIT “Rossvyazinform”) and is the successor of all its rights and obligations. The Company was registered by Order of the head of the Administration of Nizhny Novgorod No 1605-r of December 15, 1993. Basing on the resolution of general meeting of shareholders of OJSC “Nizhegorodsvyazinform” of November 9, 2001 the Company was reorganized by way of affiliation to it of OJSC “Kirovelectrosvyaz”, OJSC “Martelcom”, OJSC "Svyazinform” of Mordovia Republic, OJSC “Electrosvyaz of Orenburg oblast”, OJSC “Svyazinform” of Penza oblast, OJSC “Svyazinform” of Samara oblast, OJSC “Saratovelectrosvyaz”, OJSC “Udmurt Telecom”, OJSC “Ulyanovskelectrosvyaz”, and OJSC “Svyazinform” of Chuvashia Republic. On June 28, 2002 general meeting of shareholders of OJSC “Nizhegorodsvyazinform” approved the Company’s Articles of association as restated where the Company’s name was changed to Open Joint Stock Company VolgaTelecom (OJSC VolgaTelecom). 7 Mission Global objectives OJSC VolgaTelecom’s Mission is to encourage the creation of 1 Integration of new technologies in day-to-day life; 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 2 Leadership position in telecommunications market of the life. We aim at offering the people new challenges, at making their Volga region; life easier and livelier. Meeting the demand for telecommunications services and developing advanced communications infrastructure at priority 3 Improvement of quality of rendered services through rates we are achieving the growth of operating efficiency thus the development and modernization of communications increasing the equity value and creating jobs for the residents of infrastructure, implementation of digital technologies, the Volga Federal District. Ensuring sustained growth of business improvement of client servicing system; OJSC VolgaTelecom takes care of the employees’ welfare, their professional development and social security system. Development and efficient use of OJSC VolgaTelecom’s Relying on the principle of customer focus we are implementing 4 personnel potential to ensure priority trends of business new technologies, improving quality of services and subscribers’ development; servicing level by applying innovation methods of marketing and sales in our activity. 5 Achievement and maintaining high profitability through the enhancement of business efficiency and optimization of costs; 6 Arrangement of favorable conditions for attraction of investments through capitalization growth and maintaining established business reputation; 7 Improvement of corporate governance system in accordance with the best world practices. 8 9 Each spoken word has an action behind it, and sometimes a lifetime 10 Address of the Board of directors’ Chairman Dear shareholders! Today Svyazinvest Group is verging towards sweeping credit ratings, which exhibits progressive trends of the changes. Holding’s reorganization started by the government Company’s operations positively perceived by the investment decision through affiliation of Mega-Regional Companies community. to OJSC Rostelecom will ensure the creation of national operator – leader of Russia’s telecommunications industry, Today we are facing the task to use new business and result in considerable growth of capitalization and credit environment of telecommunications market to the full extent: ratings of the consolidated company. New Rostelecom will change of consumers’ preference, introduction of innovation become a real blue chip. However, to achieve it we all have to technologies, and emergence of efficient business-models. do serious hard work. It is important not just timely react to ongoing structural changes, but through their analysis, to act proactively and to In 2009 OJSC VolgaTelecom as well as all the companies use the opportunities presented by the market. of communications industry operated in anything but simple environment. But the Company’s management was I am sure that shareholders will in full appraise positive able to oppose negative trends through considered anti- dynamics of OJSC VolgaTelecom’s development throughout recessionary measures intended at cost reduction and tight 2009 and support the initiatives intended at creating control of operating expenses. Satisfactory result of such incorporated telecommunications company. In my earnest competent and timely actions was positive dynamics of conviction the company being created will become development demonstrated by the Company amid the crisis unchallenged leader of the industry. and forthcoming reorganization. These measures of the management in financial field were worthily appraised by the largest rating agencies which raised OJSC VolgaTelecom’s Sincerely yours, Chairman of OJSC VolgaTelecom’s Board of directors Evgeny Yurchenko 11 General Director’s address Dear shareholders! Presenting the report of the results of OJSC VolgaTelecom’s One of the most important challenges met by OJSC operations I would like to note that in 2009 the Company VolgaTelecom’s management within the framework of continued to develop and upgrade the network, to introduce reducing the impact of economic crisis on the Company’s and to promote modern communications services thus operations was the maximum use of proprietary funds to strengthening its positions on the market and confirming finance operating and investment activities. This allowed for the status of the largest telecommunications operator of the enhancing the efficiency of financial and economic operations Volga region. and increasing the growth of free cash flow. Our indicators demonstrate sustainable growth and provide for the The Company’s major objective is stated in its Mission: “to opportunity to plan further active development for certain. encourage the creation of modern society, the growth of At 2009 year-end the Company’s revenues have increased regional economy and improvement of the quality of life of by 2.5% amounting to RUB 27, 077 million and the net profit the Volga region residents through implementing advanced has grown by 44.4% coming up to RUB 4, 263 million. An information technologies in day-to-day life”. It was this idea important achievement was 43.1% reduction of the amount that became the starting point for the development of the of VolgaTelecom’s net debt. strategy of OJSC VolgaTelecom’s operations in the time of crisis. The management’s key attention was focused on the We have fulfilled everything what was planned, but the