Content. On the cover: Aivis Rozenfelds, SIA Lattelecom Technology, Member of the Board Arija Pavasare, SIA Lattelecom, Administrator

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2 Content On the cover: Aivis Rozenfelds, SIA Lattelecom Technology, Member of the Board Arija Pavasare, SIA Lattelecom, Administrator

3 Joint Address from the Supervisory Council Chairman and the Chief Executive Officer of Lattelecom 3 Introduction 7 The Structure of the Lattelecom Group 9 Key Events for the Lattelecom Group in Subsidiary Companies 15 Developing the Lattelecom Group 21 Business amplitude 25 Development of the sector 27

4 Nils Melngailis, SIA Lattelecom, Chief Executive Officer Gundars Strautmanis, SIA Lattelecom, Chairman of The Supervisory Council

5 Joint Address from the Supervisory Council Chairman and the Chief Executive Officer of Lattelecom* 3

6 4 The electronic communications market continued to develop very rapidly in This was facilitated by the growth of the IT market greater demand for outsourced IT services, IT infrastructure solutions, systems integration and software development. The development of the sector was affected by demand for fixed data and Internet services, mobile telephony and mobile data transmission services that are based on various technologies. The entrance into the market of a third mobile communications operator in Latvia facilitated the availability of new services and increased competition in the market. Changes in the sector had a positive effect on the operations and revenue of the Lattelecom Group. In comparison with previous years, 2005 revenue and profits increased. The revenue increase was enabled by increased demand for various information technology services, by the establishment of new subsidiaries, and by the company s successful strategy to become a provider of a wide range of IT&T solutions. The biggest increases in revenue were from achievements in the provision of data transmission, Internet access and contact centre outsourcing services. Due to the shrinking market for fixed voice telephony in most parts of Europe, electronic communications operators must seek new sources of revenue and restructure company operations. One common trend is for fixed telecommunications operators to merge with information technology companies to enhance competitiveness in both domestic and international markets. Electronic communications operators are increasingly making use of business process outsourcing services to reduce costs, improve profitability, and facilitate the development of core and new business areas. The electronic communications sector in Latvia is also developing rapidly, and clients increasingly demand integrated communications and IT solutions that completely cover their needs and ensure the security of their businesses. By acquiring and integrating MicroLink Latvia (now Lattelecom Technology), the leading provider of information technology services in Latvia, Lattelecom has created a strong base of IT&T resources that offers clients a wide range of new and integrated IT and telecommunications solutions and outsourced IT services. During the reporting period, Lattelecom split off its Contact Centre and Network Maintenance divisions and created two new subsidiaries C1 (now Lattelecom BPO) and Citrus Solutions. At the end of 2005, the Lattelecom Group consisted of seven companies. In 2005, the most rapid growth was experienced in the number of computers in Latvian households and in the level of Internet penetration. Customer demand for broadband Internet services will continue to increase during the next few years, opening up wider market opportunities. The increase in Internet usage has allowed Lattelecom to develop access services and Internet content. Internet television is the most significant innovation in this regard. One of the biggest obstacles in the growth of Internet services in Latvia is that many residents are not motivated

7 enough to start using the Internet. Therefore, great importance has been placed on the work done in this reporting period to implement electronic signatures in Latvia. Lattelecom is a strategic partner in the provision of technologies for e-signatures. In 2005, Lattelecom invested a total of LVL 28.9 million in the development of the company and its network infrastructure. Since the liberalisation of Latvia s electronic communications market, these were the largest investments to be made in modernisation of the electronic communications network and the expansion of the data transmission and access network. Total investments in the 12 years since the establishment of the company amount to LVL million. This allows us to state with certainty that Lattelecom is one of the leading investors for the improvement of Latvia s infrastructure. Lattelecom continued modernising its network during the reporting period with anticipated completion by the end of For this purpose, the company is using both wire technologies and wireless CDMA technologies. Subscribers with telephone lines that are being modernised with CDMA technologies will enjoy quicker connections, better call quality, and all of the supplemental services that are available from the digital network. At the end of 2005, 93% of all telephone lines in Latvia were connected to the digital network. The complete modernisation of the network will allow Latvia to become one of the few countries in Eastern Europe in which all fixed network clients can enjoy the advantages of the digital network. In 2006, Lattelecom will expand its range of services for private clients with multimedia, and content development and management services. Thus the company hopes to become a trusted provider of a wide range of electronic communications and entertainment services. Outsourced data and infrastructure services are a priority. We will continue to develop managed services and business process outsourcing solutions, and will also offer new TV and content services. Operations in the dynamic and changing environment of the electronic communications sector present a great challenge to Lattelecom employees, and they are the chief guarantors of the group s achievements. Despite rapid changes, our specialists worked as a united and professional team during the reporting period. Therefore, the employees of Lattelecom are the very first to deserve our gratitude. Gundars Strautmanis, Chairman of the Supervisory Council Nils Melngailis, Chief Executive Officer 5 * On May 18, 2006, the name of SIA Lattelekom was changed in the Commercial Register to SIA Lattelecom. In the Annual Report, the name SIA Lattelecom is used, as are the new names of subsidiaries -- SIA Lattelecom BPO (previously SIA C1) and SIA Lattelecom Technology (previously SIA MicroLink Latvia). The Financial Report that is attached to the Annual Report preserves the legal names that were in force in 2005.

8 Introduction

9 7 SIA Lattelecom is the leading provider of electronic communications services in Latvia. The company offers integrated E-communications and IT solutions, as well as telecommunications and network design and construction services. Lattelecom also provides data transmission and IT infrastructure solutions, Internet, contact centre and business process outsourcing services. Our priority is to become the leading Internet Services Provider in Latvia, offering state-of-the-art and integrated information technology, electronic communications and business process outsourcing services to all our clients. During the current year, Lattelecom focused most of its attention on the strategic development of its group of companies. MicroLink Latvia was acquired, and two subsidiaries SIA Citrus Solutions and SIA Lattelecom BPO were established. This considerably improved our competitiveness and value, and has led to a significant increase in the range of services provided to clients. Lattelecom continued with its targeted programme of making significant capital investments in the modernisation of Latvia s electronic communications network infrastructure. At the end of 2005, the Lattelecom Group had seven companies SIA Lattelecom, SIA Lattelecom BPO, SIA Citrus Solutions, SIA MicroLink Latvia (now SIA Lattelecom Technology) and its subsidiaries, SIA Baltijas Datoru Akademija (Baltic Computer Academy) and SIA FMS, as well as SIA Lattelekom Sakaru Sistemas (Lattelecom Communications Systems, abbr. LSS).

10 The Structure of the Lattelecom Group

11 Sonera Holding B.V % 100% Republic of Latvia TILTS Communications A/S Sonera Corporation 51% 49% 99,4% SIA LMT 23% SIA Lattelecom Telia Sonera AB 100% 100% 100% 100% SIA Lattelecom BPO SIA Lattelecom Technology SIA Lattelekom Sakaru Sistēmas SIA Citrus Solutions 100% 100% SIA FMS SIA Baltijas Datoru Akadēmija Lattelecom also owns 50% of the equity capital in the stock company A/S Pirmais Slēgtais Pensiju Fonds (First Closed Pension Fund), which is the only closed and private pension fund registered in Latvia with employers as shareholders. Its sole shareholders are Lattelecom and the joint stock company Latvenergo.

12 Baiba Ebulina, SIA Lattelecom, Telecommunications Solutions Department, Manager of Customer and Sales Department Andis Locmelis, SIA Lattelecom, Chief Finance Director Valdis Vancovics, SIA Lattelecom, Network Director

13 Key Events for the Lattelecom Group in

14 12 The number of the permanent Internet connections provided by the company nearly doubled to 69,000 by the end of the year. After several years of decline, Lattelecom s revenue increased by 2.1% over the previous year. Two subsidiaries were established SIA Lattelecom BPO was created based on the former Lattelecom Contact Centre Division, and SIA Citrus Solutions was created based on the former Lattelecom Network Maintenance Division. Lattelecom purchased the leading information technology company in Latvia SIA MicroLink Latvia (now SIA Lattelecom Technology) as a means of developing internationally competitive IT&T services and solutions in the Baltic Sea region. Latvia s government selected Lattelecom and the Latvian Postal Service as its partners for developing and implementing the secure electronic signature project. Lattelecom provided voice and data transmission services during the visit of U.S. President George Bush to Latvia in May Important voice and data communications solutions were provided to companies and institutions such as the stock company Latvijas Gāze, the stock company Balta, the National Social Security Agency, the Prosecutor General s Office of the Republic of Latvia, and others. Lattelecom was one of the first companies in Latvia to launch Internet TV services on a test basis. This technology is being tested by some 30 European E-communications operators and Internet service providers at this time. In accordance with the national (telecommunications) numbering plan, the Lattelecom information service changed its number on 15 December 2005 to the four-digit number In 2005, Lattelecom was one of Latvia s leading taxpayers, paying LVL 28.4 million in various taxes.

15 13 Major indicators Revenue (LVL 000) 134, ,370 EBITDA (LVL 000) 59,718 64,887 EBITDA % 45% 49% Operating profit (LVL 000) 25,667 25,623 Operating profit margin % 19% 20% Net Profit (LVL 000) 34,650 33,460 Capital expenditure (LVL 000) 28,927 15,317 Level of digitalisation 92.6% 89.7% Number of telephone lines ( 000) Number of employees, end of year 3,062 2,814

16 Kristine Berzina, SIA Lattelecom, Corporate Development Director Nadezhda Semjonova, SIA Baltijas Datoru Akadēmija, Chairman of the Board Janis Berzins, SIA Lattelecom BPO, Chief Financial Officer Iveta Pundure, SIA Lattelecom, Director of Business Solutions Department Inga Piraga, SIA Lattelecom Technology, Member of the Board Gints Kirsteins, SIA Lattelecom, Director of Content Business Division Rinalds Sprogis, SIA Citrus Solutions, Chairman of the Board

17 Subsidiary Companies 15

18 16 SIA Lattelecom BPO The Lattelecom subsidiary SIA C1 (now Lattelecom BPO) was established on 11 July Lattelecom BPO offers business process outsourcing services and solutions, as well as 1188 information and inquiry services. During the reporting period, Lattelecom BPO focused on the formation of the company, the development of operating strategies for subsequent years and the stabilisation of its operations. Lattelecom BPO also introduced new solutions, established alliances with other market participants, and achieved quality certification in accordance with ISO 9001:2000 for several areas of the company s operations. Changing the information service s number and trademark to 1188 proceeded successfully. During the last four months of 2005 (beginning on 1 September), Lattelecom BPO had revenue of LVL 2.3 million and net income of LVL 448,000. The largest share of Lattelecom BPO revenue came from providing customer service to Lattelecom customers, content delivery services, and from providing services based on SMS and WAP technologies. During the reporting year, Lattelecom BPO had capital investments of LVL 37,000. The money was invested in improving the technologies and software of the contact centre. Lattelecom BPO is Latvia s largest and most experienced contact centre and business process outsourcing services provider. The company is also constantly expanding its capabilities to successfully provide services to foreign clients on an export basis. In 2005, Lattelecom provided contact centre services to companies outside of Latvia, including Sweden and Germany. SIA Citrus Solutions SIA Citrus Solutions was established on 28 June The company s core business activities are the design, construction and maintenance of electronic communications network infrastructures. During the reporting year, Citrus Solutions established its organisational structure and introduced a new quality management system. Basic operating processes were improved in accordance with ISO 9001:2000 quality certification standards, including customer service, construction and network maintenance. The technical skills of employees were enhanced for both installation and maintenance of the following: wireless CDMA data transmission technologies, Ericsson data transmission equipment, Marconi transport network systems, Cisco data network systems, and Alcatel systems. Citrus Solutions concluded co-operation agreements with several internationally recognised partners for the delivery of equipment, cables and technical materials so as to provide clients in Latvia and abroad with installation

19 and maintenance solutions for effective communications infrastructures. During the first months of operations (beginning 1 September 2005), SIA Citrus Solutions achieved revenue of LVL 6.2 million and net income of LVL 700,000. In 2006, Citrus Solutions plans to attract even more external clients so as to increase its role in the market for electronic communications infrastructure construction and maintenance. The company s employees will continue to develop their skills in order to be able to offer integrated services to clients, ensuring a full cycle of electronic communications network operations (wireless, cable-based, power and security systems). SIA Lattelekom Sakaru Sistēmas SIA Lattelekom Sakaru Sistēmas (Lattelekom Communications Systems, abbr. LSS) was established on 16 August 2000, and provides information and communications technology solutions, data network installation and management, delivery of computer equipment and software, as well as telecommunications solutions. During the reporting year, LSS received a Silver Partnership certificate from the globally known Internet networking solutions company Cisco Systems. This allows LSS to sell, install and service Cisco solutions in Finland and the Baltic States. LSS also became a certified Cisco partner in the area of VPN (virtual private networks) security solutions. The company received ISO 9001:2000 quality management certification from Bureau Veritas Quality International. LSS has handled several major projects, including the delivery of computer equipment and software to the Rīga City Council, its departments and schools, as well as to A/S Balta, SIA Reuters Latvia, A/S Falck Apsargs, SIA VP Market, and others. During the report period, LSS established a data transmission network for both the National Land Service in the Republic of Latvia and the Latvian Postal Service. It also offered delivery and installation of computer equipment, security solutions, and other services to a variety of state companies and business clients. In 2005, LSS had net income of LVL 567,000 and revenue of LVL 10.2 million. Due to the expansion of the market for IT services and its increased importance to the Lattelecom Group, in 2006 we plan to further develop the company and restructure its operations. 17

20 18 SIA Lattelecom Technology SIA Lattelecom Technology (previously SIA MicroLink Latvia) was established on 9 August During 15 years of operations, the company has accumulated unique experience in the implementation of a wide variety of IT projects, and therefore has become the leading IT services provider in Latvia. Lattelecom Technology offers its clients a full range of information technology solutions and services IT infrastructure services, system integration, enterprise management solutions, software design, 24/7 computer services, IT training, data transmission and IT outsourcing services. During the reporting period, Lattelecom Technology implemented many major projects. The most significant of these include the Latvian National Unified Library Information System (the so-called Network of Light ), the development of information systems for the Latvian Interior Ministry and the Latvian State Revenue Service, the establishment of a data management system for the Latvian Central Statistical Bureau, maintenance of information systems for the Latvian National Mandatory Health Insurance Agency and for the Latvian Privatisation Agency, etc. In 2005, Lattelecom Technology received the ISO 9001:2000 quality management certificate in the area of IT services. The company became a Baltic partner for the global leader in informational security solutions Symantec, a pan-baltic partner for Hewlett-Packard, and was declared to be the company with the best reputation in Latvia s IT sector.* Lattelecom Technology had consolidated revenue from 1 July to 31 December 2005** of LVL 10 million, or 67% more than during the comparable period in The company received profits of LVL 1 million. In Novemer 2005, SIA MicroLink Latvia (now Lattelecom Technology) and its subsidiaries, SIA FMS and SIA Baltic Computer Academy, became a part of the Lattelecom Group. By bringing together the company s resources and competences, the Lattelecom Group will develop internationally competitive offers and various export services related to information technology and telecommunications (IT&T) services in the Baltic Sea region. SIA Baltijas Datoru Akadēmija SIA Baltijas Datoru Akadēmija (Baltic Computer Academy, abbr. BDA) is the largest IT training centre in Latvia and was established on 16 July BDA allows computer specialists to expand their qualifications, and computer users can receive authorised training on the basis of * According to data from a 2005 survey conducted by the newspaper Diena and DDB Porter Novelli. ** Lattelecom Technology adapted its fiscal year to that of the parent company, Lattelecom, in Previously the Lattelecom Technology fiscal year had run from July 1 to June 30, but now it corresponds to the calendar year.

21 unified and globally recognised standards in terms of programmes, educational materials, preparedness of instructors, and examination of students. The BDA offers training courses related to new IT products which appear on the market. In 2005, BDA received the status of Microsoft Gold Partner in the area of training solutions. The company took part in a number of major projects, some of which are continuing in The Latvian National Unified Library Information System project involves computer training for 600 librarians in all of Latvia. Some 4,500 unemployed people will take part in a project called Training in Computer and Internet Use for Latvia s Unemployed. Young people with special needs from Latvia, Lithuania, Germany and Finland will take part in a project called Hands-On Project Experience for Disabled Youngsters. It will help them to improve their knowledge about information technologies. the ISO 9001 certificate, and leveraged its competitive advantage in a very targeted way - the ability to offer quick and direct professional support to clients by being both the developer of standard software and solutions, and providing implementation and support services. In 2006, FMS operations will be aimed at maintaining its leadership position in the sector for financial and bookkeeping systems, expanding product capabilities, adapting products in response to the changing laws of Latvia and the European Union, and developing systems for the needs of individual companies. 19 SIA FMS SIA FMS was established on 18 March FMS develops, distributes, and provides implementation and support services for Apvārsnis and UVIS finance and resource management systems. It also provides implementation and support services for the world s leading data analysis solution MicroStrategy. During its first months of operations, FMS obtained

22 Inese Kalveite, SIA Lattelecom, Marketing Director Tomass Tikmers, SIA Lattelecom, Business Solutions Department, Internet Offers Manager

23 Developing the Lattelecom Group 21

24 22 The Lattelecom Group offers its clients a wide range of services, including design and construction of electronic communications networks, various integrated IT services and solutions, IT training and design of financial resources management systems, business process outsourcing services, content delivery, and many others. Taking into consideration market development trends and client needs, the Lattelecom Group is planning an operating strategy that will be aimed at expanding the range of services for all groups of clients while simultaneously ensuring outstanding service quality. The company s priority is to enhance the overall value of the Lattelecom Group, along with the competitiveness of each company that is a part of the group. For private clients Multimedia, content development and management services Increasing the number of broadband Internet connections, as well as developing Internet content and Internet TV Expanding the coverage zone for Wi-Fi wireless Internet access Providing Triple-Play digital TV services For business clients Integrated IT&T and business process outsourcing services IT services and computer hardware maintenance New Internet access and data transmission services Data transmission, infrastructure and business process outsourcing services (outsourced IT&T services) Network design, construction and maintenance services

25 In 2006, there will be further work done on merging telecommunications and IT services, and there will be more rapid development of the so-called Triple-Play services (Internet, fixed and mobile telephony, television), which are offered as a single package. The market sectors related to business process outsourcing services and customer relationship management will develop very dynamically in Latvia and the world, which will increase client demand for the outsourcing of various functions, including IT outsourcing services. The development of new business directions and changes in the Lattelecom structure during the transformation into a group with numerous component companies these are good reasons to change the Lattelecom brand, as well. The new Lattelecom brand name will bring together all of the companies in the concern which are directly linked to client services, the business of clients, and IT&T and content services. SIA MicroLink Latvia will hereafter be known as Lattelecom Technology, while SIA C1 will become Lattelecom BPO. This means that the association of the two companies to the Lattelecom Group is reflected clearly in their names. The new corporate brand reflects the group s business strategy and values development, trustworthiness and professionalism in everything that the company does. In order to simplify customer choices and to increase understanding of the wide range of services that are offered, while at the same time preserving a unified image. The brand colour blue will be used for corporate solutions. This colour symbolises new technologies and solutions, development, and prospects and innovations. The consumer and small and medium-size business lines will use the brand colour brick red. This is a friendly but dynamic colour which supports contacts and encourages a positive view of the future. A new and powerful brand will improve the value of Lattelecom, helping it to compete more successfully in various markets, while strengthening the reputation of the whole group. In the long-term, the brand will give added value to new products, promote the emergence of partnerships with other companies, help in hiring employees, and guarantee a high level of quality and trustworthiness. 23

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27 25 Brand: Business line: Business Consulting services Telecommunications services and solutions Infrastructure solutions Enterprise management solutions Business process outsourcing Telecommunications and IT-managed services Learning Industry specific solutions Products/ services: Business transformation Customer relationship management Finance management Personnel management Strategic IT management Strategic IT security management Fixed and mobile voice solutions Internet solutions Data transmission solutions Corporate IP VPN network solutions Infrastructure architecture and design Fixed and wireless networks Data centres User support SAP solutions Financial management solutions Data analysis solutions Document and content management solutions Software development Customer contact process outsourcing Financial process outsourcing services HR process outsourcing Industry specific process outsourcing Managed Multiservice VPN solutions Managed Security solutions Managed Contact centre solutions Managed Voice over IP Networks Managed LAN solutions Managed Application services Employees competence pre-assessment Learning program development IT learning project implementation Computing vendors authorized courses Evaluation of learning and skills after training E-learning Finance Insurance Telecommunications Media and entertainment

28 Inese Lensa, SIA Lattelecom, Corporate Development Division, Corporate Relations Manager Karina Udre, SIA Lattelecom, Corporate Development Division, Corporate Development Manager Agris Tamanis, SIA Lattelecom BPO, Head of Services Development Department Ilze Kivleniece, SIA Lattelecom, Corporate Development Division, Corporate Development Manager Janis Kronbergs, SIA Lattelecom BPO, Head of Outsourcing Programs Alvils Hincs, SIA Lattelecom BPO, Director of Business Development Baiba Gegere, SIA Lattelecom, Corporate Development Division, Corporate Development Manager

29 Development of the sector 27

30 28 There was rapid development in the electronic communications sector in 2005 both in the market for mobile communications and in the market for information technologies. Also, several new companies entered the market. During the reporting year, there was a much higher demand for Internet access services in Latvia. There was an increase in the number of computers in Latvian households, as well as a higher level of Internet usage. The level of computerisation in households increased to 38% (up by 9%), while the level of Internet availability rose to 23% (up by 8% over 2004). The number of broadband Internet connections provided by Lattelecom doubled over the course of the year. As the availability of mobile communications expanded, the fixed voice service market diminished a bit in 2005, although there was also an increase of more than 6% in terms of the volume of services offered in the sector. There were also significant changes in the structure of the mobile communications market. A new mobile communications operator, SIA BITE Latvija, entered the market after winning the tender for the third UMTS/GSM mobile communications license. SIA Telekom Baltija was successful in developing its operations in the area of CDMA mobile technologies. These changes resulted in more serious competition in the mobile communications market, promoting the availability of new mobile services. In line with a decision approved by the Public Services Regulatory Commission in 2003, fixed and mobile electronic communications service providers introduced number portability services which allow subscribers to keep their phone numbers when they switch operators. Over the next few years, it can be expected that there will be rapid development in such areas as broadband Internet access, content, mobile data transmission and voice services, as well as in the mobile services market. As Internet availability expands, there will be greater competition among fixed, mobile and IT telephony service providers. This will ensure new opportunities and services for clients. In the near future, dial-up access for mobile phones to the wireless Internet network will become available in the Latvian market, resulting in far cheaper or free-of-charge IP telephone calls for customers. During the reporting period, the coverage of the public wireless Internet access system expanded by 84%. At the end of the year, there were more than 180 public wireless Internet access locations in Latvia.

31 The Lattelecom operating structure 29 Brand Basic directions Home Business Corporate solutions Products, services Voice services Internet TV Lattelecom shops Voice services Integrated offers Internet IT products and services Business consulting services Telecommunications services and solutions Infrastructure solutions Enterprise management solutions Business process outsourcing Telecommunications and IT-managed solutions Learning Group companies Information services Entertainment and content services Training Networks, Design, Integrated solutions and construction