MERKO EHITUS

REPORT



REPORT OF THE DIRECTORS 1999



The Year of 1999 was a year of ongoing development for Merko Ehitus. Completed

were several large projects, for instance the main office of Eesti Ühispank 

and Kristiine Trading Center. Merko Ehitus also pioneered some larger 

infrastructure and environmental facilities. The Group continued the expansion

of its operations in the neighboring markets of Lithuania and Latvia. Worked 

out and implemented was the quality system, which was then successfully 

certified.



Business activity



The Group's sales decreased by 13 percent to 734 million kroon, as compared to 

843 million kroon in 1998. The decrease of sales was accounted for by the weak

sales trends in the building market in Estonia, being 11.9 billion kroon in 

1999 as against 14 billion kroon in 1998, according to short-cut statistics. 

The Group's net profit was 16.5 million kroon, excluding the one-off financial

expense of 56.2 million kroon, incurred by the spin-off of E.L.L. Kinnisvara.

 

Income from construction accounted for 91.8 % of operating income of Merko 

Ehitus Group, the earnings from other services provided and goods sold 

accounting for 8,2 % of operating income.

As per type of construction, the building activity of Merko Ehitus in 1999 

distributed as follows:



non-residential buildings			89%

  whereof: office buildings			25%

           industrial buildings		 	 4%

              public service buildings etc.     60%

residential buildings				 5%

civil engineering				 6%



Of aggregate building activity of the Group, 68% was accounted for by new 

buildings and 32% by renovation and reconstruction works. 

Exports constituted 11% of the Group's sales in 1999. 



The ratios characterizing the operating activity of the Group in 1999 were:



net profit margin		2.2%*

net operating profit    	3.2%

return on owners' equity       12.6%*

return on assets		5.0%*



* Excluding the one-off financial expense due to spin-off of E.L.L. 

Kinnisvara, amounting to 56.2 million kroon.



The average number of full-time staff in parent company AS Merko Ehitus was

189, with gross salaries averaging 20.1 million kroon. The average number of

full-time staff of the Group was 348, with gross salaries averaging 32.9 

million kroon.



In 1999, the following changes were effected, as regards the subsidiaries and

associate companies:



1. Regarding the subsidiaries:

1.1. In accordance with the resolution of the extraordinary general meeting of

shareholders of AS Merko Ehitus on 05.07.1999, spun off of the Group was E.L.L.

Kinnisvara AS, by way of selling off the whole participation (which used to be

100%), at the total cost of 21,287 thou kroon. All shareholders of Merko Ehitus

were treated equitably in the process, all of them given the right to obtain 

shares in E.L.L. Kinnisvara. The purpose of the spin-off of E.L.L. Kinnisvara 

was to separate real estate development from construction. The spin-off of 

E.L.L. Kinnisvara incurred to the Group a one-off financial expense of 56.2 

million kroon. 

1.2. The Group sold 8.05% of participation in OÜ Matek (which used to be 73%, 

constituting now 64.95%), at the total cost of 266 thou kroon.

1.3. The Group incorporated OÜ Merko Ehitustööd (100%), of share capital 40 

thou kroon, OÜ Merko Ehitusteenused (100%) of share capital 40 thou kroon, 

and Eesti Ehitusekspordi OÜ, of share capital 40 thou kroon.



2. Regarding the associate companies:

2.1. The Group sold participation in AS Stik-Elekter (used to be 34%) and in

ESS Kinnisvarahoolduse AS (used to be 30%). 

2.2. The Group increased participation in AS Insenervõrgud (used to be 49%,

constituting now 50%).

2.3. Eesti Ehitusekspordi AS was merged with its 100% subsidiary AS Tartu Maja

Betoontooted, the originator-mergee being Eesti Ehitusekspordi AS. The emerging

enterprise was named AS Tartu Maja Betoontooted.



Currently, Merko Ehitus is focused on construction. Being involved in main 

contracts and project management, the Group's needs for investments are 

confined mainly to creating new jobs and development.



Tangible investments of Merko Ehitus Group in 1999 were as follows:

land and buildings acquired  				23,772 thou kroon

machinery, equipment and other inventory acquired  	 2,042 thou kroon



Financial position



Thanks to the profitability of the company in past periods, and due to a 

successful share issue in 1997, the need for leverage of Merko Ehitus has been

kept at minimum. The enterprise has been liquid and well capitalized. The 

ratios characterizing the financial position in 1999 were:



equity ratio, percent		38.8%

current ratio			 1.3

receivables turnover		 8.4



Financing of construction is effected, as a general rule, under a financial

schedule, appended to the building contract, usually covering the 

project-related outgoing cash flows. The financing shortage is covered by 

overdraft facility.

For purposes of currency risk management the building contracts are usually 

linked to Euro. 



Share and shareholders



Closing price of share of Merko Ehitus at Tallinn Stock Exchange, as of 

31.12.1999 was 17.3 kroons. Net earnings per share in 1999 were 1.86 kroons.

Basing on this ratio, the Board of AS Merko Ehitus proposed the shareholders

receive a dividend of 40 sents per share in 1999, amounting to the dividend

rate 21.5%. After the one-off financial expense 56.2 million kroon, incurred

by the spin-off of E.L.L. Kinnisvara, the net loss on share was 4.49 kroons.



Structure of shareholders of Merko Ehitus at the end of 1999 was as follows:



Merko Group					74.0%

Merita Bank, clients				11.1%

Skandinaviska Enskilda Banken, clients	   	 4.2%

Zimmer Management				 2.0%

Hansapank					 1.4%

Optiva Pank					 1.1%

Hansa Investment Fund				 1.0%

Other shareholders				 5.2%



Council and Board



Council of the company is composed of 3 members, the Board of 4 members. 

Members of Board do not receive any remuneration for their services. 

Members of Board have full-time positions with AS Merko Ehitus, their gross

salaries in 1999 averaging 994 thou kroon. Members of Council do not receive

any remuneration for their services. Two members of Council have full-time 

positions with AS Merko Ehitus, their gross salaries averaging 509 thou kroon

in 1999. Gross salary of a senior executive amounted to 280 thou kroon. 



Outlooks in 2000



In this year, we plan to retain the market share in our traditional sector

of putting up buildings. We also plan to increase the volume of infrastructure

and environmental facilities. As a strategic direction, Merko Ehitus will 

continue expansion of operations in Latvia and Lithuania, hopefully winning,

in the nearest years already, a considerable market share through our 

subsidiaries SIA Merks and UAB Merko Statyba.

The Group's anticipated net profit  in 2000, as prognosticated by the Board 

of Merko Ehitus, will be 38 million kroon, the sales being 980 million kroon,

whereof in Estonia 780 million kroon, in Latvia 150 million kroon and in 

Lithuania 50 million kroon. The prognosis is based on the volume of building

contracts made for 2000, amounting to 870 million kroon, at the time (i.e. 

09.03.2000) the prognosis was disclosed. 

We plan to maintain, also in the future our flexible relationship selling 

strategy, providing to the customers the services they need.





Ülo Metsaots

Financial Director

+372 6105110