GENERAL INFORMATION
Management Board Mirosław Kochalski Rafał Pasieka Marek Trosiński Wojciech Wardacki
Supervisory Board Grzegorz Miś Alicja Pimpicka Wiktor Cwynar Wojciech Fedko Dariusz Krajowski–Kukiel
Registered Office ul. Powązkowska 46/50 01-728 Warszawa Poland
Statutory Auditor Deloitte Audyt Sp. z o.o. ul. Piękna 18 00-549 Warsaw Poland
1
Ladies and Gentlemen,
Events of the previous year proved that CIECH SA along with the Ciech Chemical Group is one of the leaders in the chemical market in this part of Europe. Auspicious recommendations of brokerage houses for the CIECH SA's shares quoted on the Warsaw Stock Exchange, increasing turnover and new marketplaces won over can be all viewed as positive signs. We do business in over 90 countries worldwide. Acquisitions made in 2006 considerably strengthened the Soda and Organika divisions ensuring income at PLN 3.5 billion annually for the Group.
The Soda Division of CIECH SA integrated the Romanian company known as S.C. Uzinele Sodice Govora S.A. in December 2006. In terms of quality, this transaction brings us a new competitive position in the European soda marketplace and guarantees a strong leading position in Central Europe. Apart from the plant, CIECH SA also purchased the market and ancillary productive capacity.
Takeover of S.C. Uzilene Sodice Govora S.A. is our first investment in a foreign production plant. On November 30th, 2006, in Bucharest CIECH SA and Romanian government agency, AVAS, signed an annex to the privatisation agreement concluding the purchase of the majority interest in the soda manufacturing plant Uzinele Sodice Govora S.A. entitling to the right of ownership of 93.14% shares in S.C.Uzinele Sodice Govora S.A. The project total value will amount to approx. EURO 60 million. As a result, the Ciech Chemical Group has emerged to become the second largest soda ash manufacturer in Europe and acquired a more competitive position in the Czech Republic, Slovakia, Hungary, Austria and the Balkan countries. Competitors from the Romanian soda market have slowed down in Western Europe (Great Britain, Germany), which makes it possible to exert more influence on the pricing policy. Pursuant to the concluded agreement, CIECH SA intends to perform an investment program in S.C. Uzinele Sodice Govora S.A. engaging approx. EUR 26 million. Investments entail the transfer of know-how, doubling in sales revenues and increases in manufacturing capacity to 530 thousand tonnes of soda annually. Forecast shows that a stable demand for soda ash will be continue not only until 2007 but also in the following years to come.
On December 20th, 2006 CIECH SA finalised two important transactions with Nafta Polska S.A. We purchased 80% shares in ZACHEM S.A. in Bydgoszcz at PLN 80 million, under the warranty that we will invest PLN 176.12 million in the company. The second transaction is a purchase of 80% shares in Z.Ch. "Organika-Sarzyna" S.A. in Nowa Sarzyna at PLN 244.5 million. The guaranteed investments are estimated at PLN 130 million in five years. Thanks to these acquisitions, the Organika Division emerged among the first league players in Europe in terms of production of epoxy and polyester resins, TDI, EPI and plant protection agents. These investments will allow for a considerable increase in revenues and achieved mark-ups. In 2007 the Organika Division's share in the Group sales will increase from 20.6% to 41.7%.
Furthermore, the Management Board of CIECH SA expects to have a new concept of growth evolved for the Foschem Division, which will include strengthening of the Group's positioning in the markets of products intended for farming, silicates and glass.
Our last year’s forecast has been substantially exceeded. I am convinced that the next financial report on the activity of CIECH SA will be just as optimistic.
President of the Management Board of CIECH SA
Mirosław Kochalski
2
in thousands of PLN in thousands of EUR
SELECTED FIGURES 2006 2005 2006 2005
Net sales revenue 2 174 330 2 209 545 557 654 549 193 Operating profit (loss) 146 319 143 555 37 527 35 681 Profit (loss) before taxes 151 776 143 001 38 926 35 544 Total net profit (loss) 150 434 117 853 38 582 29 293 Net profit (loss) of shareholders of the parent company 150 109 111 584 38 499 27 735 Net profit (loss) of minority shareholders 325 6 269 83 1 558 Net cash flow from operating activities 176 487 113 363 45 264 28 177 Net cash flow from investing activities (476 297) (117 430) (122 157) (29 188) Net cash flow from financing activities 346 032 67 847 88 747 16 864 Total net cash flow 46 222 63 780 11 855 15 853 Total Assets 2 729 513 1 635 132 712 443 423 631 Long-term liabilities 559 961 109 998 146 158 28 498 Short-term liabilities 1 032 334 506 003 269 454 131 096 Total equity 1 137 218 1 019 131 296 831 264 037 Equity attributable to equity holders of the parent 1 086 783 969 641 283 666 251 215 company Minority's share 50 435 49 490 13 164 12 822 Share capital 164 115 164 115 42 836 42 519 Profit (loss) per share (in PLN / EUR) 5.36 4.16 1.37 1.03
3
CONTENTS:
REPORTTU ON THE ACTIVITY OF THE CIECH GROUP FOR 2006UT ...... 6
1TU UT DTU ESCRIPTION OF THE CIECH GROUPUT ...... 6
2TU UT MTU AJOR ACHIEVEMENTS OF THE CIECH GROUP IN 2006UT ...... 7
3TU UT CTU OMMENTS ON THE FINANCIAL RESULTS OF THE CIECH GROUPUT ...... 11
4TU UT CTU LARIFICATION REGARDING SEASON TYPE OR PERIODICAL TYPE OF THE CIECH GROUP’S ACTIVITYUT ...... 18
5TU UT ETU XPLANATION OF DIFFERENCES BETWEEN THE FINANCIAL RESULTS AND THE FORECASTS PUBLISHED EARLIERUT ..... 19
6TU UT FTU ACTORS SHAPING THE CIECH GROUP’S FINANCIAL PERFORMANCEUT ...... 19
7TU UT UTU SE OF THE ISSUER'S FUNDS COMING FROM ISSUE OF SHARESUT ...... 19
8TU UT TU MAIN PRODUCTS, GOODS, OR SERVICESUT ...... 20
9TU UT CTU HANGES IN THE MARKETSUT ...... 20
10TU UT CTU HANGES IN SUPPLY SOURCES OF MANUFACTURING MATERIALS, GOODS, AND SERVICESUT ...... 20
11TU UT CTU ONCLUDED CONTRACTS SIGNIFICANT FOR THE CIECH GROUP'S ACTIVITY (INCLUDING CONTRACTS CONCLUDED
BETWEEN SHAREHOLDERS AND INSURANCE OR COOPERATION CONTRACTS)UT ...... 20
12TU UT DTU ESCRIPTION OF TRANSACTIONS WITH AFFILIATESUT...... 21
13TU UT BTU ORROWINGS, LOAN AGREEMENTS, AND SURETIES AND GUARANTEES GRANTEDUT ...... 21
14TU UT STU IGNIFICANT OFF-BALANCE SHEET ITEMSUT ...... 21
15TU UT ITU NFORMATION ON EMPLOYMENTUT ...... 21
16TU UT STU IGNIFICANT RESEARCH-AND-DEVELOPMENT ACHIEVEMENTS OF THE CIECH GROUPUT ...... 21
17TU UT ITU NFORMATION CONCERNING PROTECTION OF THE NATURAL ENVIRONMENTUT ...... 23
18TU UT ITU NVESTMENT ACTIVITYUT ...... 25
19TU UT CTU HANGES IN CORPORATE LINKAGE OF THE CIECH GROUPUT ...... 29
20TU UT DTU ESCRIPTION OF MAJOR EQUITY INVESTMENTS AND METHODS OF THEIR FINANCINGUT ...... 31
21TU UT ITU NFORMATION ON SECURITIES ISSUES IN CIECH SA.UT ...... 33
22TU UT PTU URCHASE OF TREASURY SHARES BY THE PARENT COMPANYUT ...... 33
23TU UT CTU HANGES IN THE BASIC MANAGEMENT PRINCIPLES OF THECOMPANY/GROUPUT ...... 33
24TU UT CTU HANGES IN THE MANAGING AND SUPERVISORY BODIES THE PREVIOUS YEARUT ...... 33
25TU UT RTU ULES OF APPOINTMENT AND DISMISSAL OF THE MANAGING BODIES AND AUTHORISATION OF THE MANAGING
BODIES, IN PARTICULAR THE RIGHT TO TAKE THE DECISION ON SHARE ISSUE OR BUYOUTUT ...... 35
26TU UT CTU ONTRACTS CONCLUDED BETWEEN THE ISSUER AND THE MANAGING BODIES, PROVIDING FOR THE REIMBURSEMENT IN CASE OF THEIR RESIGNATION OR LAY-OFF WITHOUT ANY JUSTIFIABLE REASON OR WHEN THEIR DISMISSAL OR LAY-
OFF TAKES PLACE DUE TO THE ISSUER'S MERGERS THROUGH TAKEOVERSUT ...... 35
27TU UT RTU EMUNERATION FOR THE MANAGEMENT BOARD AND THE SUPERVISORY BOARDUT ...... 35
28TU UT TTU OTAL NUMBER AND NOMINAL VALUE OF THE COMPANY’S SHARES AND SHARES IN AFFILIATES HELD BY MEMBERS OF
THE MANAGEMENT AND SUPERVISORY BODIESUT...... 35
29TU UT STU HAREHOLDERS ENTITLED TO AT LEAST 5% OF VOTES AT CIECH SA’S GENERAL ASSEMBLYUT ...... 36
30TU UT CTU ONTRACTS WHICH MAY CHANGE THE OWNERSHIP INTERESTS OF THE CURRENT SHAREHOLDERS AND BOND
HOLDERSUT ...... 37
31TU UT ITU NFORMATION ON HOLDERS OF ANY SECURITIES WHICH EMPOWER TO EXERCISE SPECIAL CONTROLLING POWERS IN
RELATION TO THE ISSUER WITH DESCRIPTION OF THE POWERS ENCLOSEDUT ...... 37
32TU UT ITU NFORMATION ON ANY LIMITATIONS CONCERNING TRANSFER OF THE OWNERSHIP OF THE ISSUER'S SECURITIES AND
ANY LIMITATIONS IN EXERCISING THE RIGHT TO VOTE PER THE ISSUER'S SHARESUT ...... 37
33TU UT ITU NFORMATION ON CONTROL SYSTEM OF EMPLOYEE SHARE PLANSUT ...... 38
34TU UT ITU NFORMATION ON CONTRACTS CONCLUDED WITH THE ENTITY ENTITLED TO AUDIT CONSOLIDATED FINANCIAL
STATEMENT OF THE CIECH GROUPUT ...... 38
35TU UT FTU INANCIAL RESOURCES MANAGEMENT IN THE CIECH GROUPUT ...... 42
36TU UT ETU XPECTED FINANCIAL SITUATION OF THE CIECH GROUPUT ...... 44
37TU UT ATU SSESSMENT OF THE POSSIBILITIES FOR IMPLEMENTATION OF INVESTMENT ASSUMPTIONS IN COMPARISON WITH THE AMOUNT OF FUNDS HELD, TAKING INTO CONSIDERATION POSSIBLE CHANGES IN THE STRUCTURE OF FINANCING
OF THAT ACTIVITYUT ...... 44
38TU UT MTU ATERIAL EVENTS IN 2006 THAT IMPACTED OR ARE LIKELY TO IMPACT THE COMPANY’S OPERATIONSUT ...... 44
39TU UT PTU ROSPECTS OF GROWTH FOR THE CAPITAL GROUPUT ...... 45
40TU UT ITU NTERNAL AND EXTERNAL FACTORS SIGNIFICANT FOR THE CIECH GROUP GROWTHUT ...... 45
41TU UT MTU ATERIAL RISK FACTORS AND THREATS AND DEGREE OF EXPOSURE IN THE GROUPUT ...... 47
42TU UT ATU NTICIPATED GROWTH OF THE GROUPUT ...... 48
43TU UT GTU OALS AND PRINCIPLES OF FINANCIAL RISK MANAGEMENTUT...... 49
ATU PPENDIX NO. 1UT ...... 50
MTU AIN PRODUCTS, GOODS AND SERVICESUT ...... 50
ATU PPENDIX NO. 2UT ...... 55
CTU HANGES IN THE MARKETSUT ...... 55
ATU PPENDIX NO. 3UT ...... 61
CTU HANGES IN SUPPLY SOURCES OF MANUFACTURING MATERIALS, GOODS, AND SERVICESUT ...... 61
CONSOLIDATEDTU FINANCIAL STATEMENT OF THE CIECH GROUP FOR 2006UT ...... 64
CTU ONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE PERIOD FROM JANUARY 1ST, TO DECEMBER 31ST, 2006UT ...... 65
CTU ONSOLIDATED BALANCE SHEET AS OF DECEMBER 31ST, 2006UT ...... 66
4 STU TATEMENT OF CHANGES IN CONSOLIDATED EQUITY FOR THE PERIOD FROM JANUARY 1ST, 2006, TO DECEMBER 31ST,
2006UT ...... 68
CTU ONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD FROM JANUARY 1ST TO DECEMBER 31ST, 2006UT ...... 70
ADDITIONALTU INFORMATION AND EXPLANATIONS TO THE CONSOLIDATED FINANCIAL STATEMENTT
...... 72U
1TU UT GTU ENERAL INFORMATIONUT ...... 72
2TU UT BTU ASIS FOR PREPARING CONSOLIDATED FINANCIAL STATEMENTSUT ...... 72
3TU UT BTU USINESS SEGMENTSUT ...... 89
4TU UT OTU THER OPERATING INCOME AND EXPENSEUT ...... 98
5TU UT ITU NCOME TAXUT ...... 101
6TU UT NTU ON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONSUT ...... 103
7TU UT ETU ARNINGS PER SHAREUT ...... 105
8TU UT DTU IVIDENDS PAID AND DECLAREDUT ...... 106
9TU UT PTU ROPERTY, PLANT AND EQUIPMENTUT ...... 107
10TU UT ITU NVESTMENT PROPERTYUT ...... 113
11TU UT PTU ERPETUAL FREEHOLD RIGHTSUT ...... 114
12TU UT ITU NTANGIBLE ASSETSUT ...... 115
13TU UT ITU MPAIRMENT LOSSUT ...... 119
14TU UT MTU EASUREMENT OF IMPAIRMENT LOSSES ON GOODWILLUT ...... 121
15TU UT ITU NVESTMENTS IN ASSOCIATESUT ...... 122
16TU UT BTU USINESS MERGERS – INITIAL SETTLEMENT ESTABLISHED ON PROVISIONAL BASISUT ...... 126
17TU UT LTU ONG-TERM RECEIVABLESUT ...... 133
18TU UT OTU THER LONG-TERM INVESTMENTSUT ...... 133
19TU UT ITU NVENTORIESUT ...... 134
20TU UT TTU RADE RECEIVABLES AND OTHER RECEIVABLESUT ...... 134
21TU UT STU HORT-TERM INVESTMENTSUT ...... 135
22TU UT CTU ASH AND CASH EQUIVALENTSUT ...... 136
23TU UT CTU APITALUT ...... 136
24TU UT LTU ONG-TERM LIABILITIES - CREDITS AND LOANS AND OTHER DEBT INSTRUMENTSUT ...... 138
25TU UT PTU ROVISIONSUT ...... 149
26TU UT ETU MPLOYEE BENEFITSUT ...... 153
27TU UT STU HORT-TERM LIABILITIESUT ...... 154
28TU UT OTU FF-BALANCE SHEET ITEMSUT ...... 174
28.1.1TU UT CTU IECH SAUT ...... 174
28.1.2TU UT STU UBSIDIARIESUT ...... 176
28.2TU UT ITU NVESTING OBLIGATIONSUT ...... 178
28.3TU UT STU URETIES AND GUARANTEES AND OTHER OFF-BALANCE SHEET RECEIVABLES AND LIABILITIESUT ...... 182
29TU UT FTU INANCIAL LEASEUT ...... 185
30TU UT OTU PERATING LEASEUT ...... 186
31TU UT ATU FFILIATESUT ...... 186
31.1TU UT LTU IST OF COMPANIES COVERED BY THE CONSOLIDATED FINANCIAL STATEMENT OF THE GROUPUT ...... 186
31.2TU UT STU COPE OF CORE BUSINESS OF THE CIECH GROUP COMPANIESUT ...... 187
31.3TU UT BTU ASIC DATA OF THE NON-CONSOLIDATED SUBSIDIARIESUT ...... 189
31.4TU UT TTU OTALS FROM TRANSACTIONS WITH THE AFFILIATESUT ...... 191
31.5TU UT STU IGNIFICANT AGREEMENTS CONCLUDED BETWEEN THE AFFILIATES:UT ...... 195
31.6TU UT TTU RANSACTIONS WITH THE KEY MANAGEMENTUT ...... 196
32TU UT GTU OALS AND PRINCIPLES OF FINANCIAL RISK MANAGEMENTUT...... 196
33TU UT FTU INANCIAL INSTRUMENTSUT ...... 197
34TU UT ETU VENTS OCCURRING AFTER THE BALANCE SHEET DAYUT...... 201
35TU UT FTU INANCIAL STANDING OF THE SUBSIDIARY PRZEDSIĘBIORSTWO CHEMICZNE CHEMAN S.A.UT ...... 203
36TU UT STU TATEMENT OF BUSINESS REASONS FOR THE PURCHASE OF SHARES IN S.C UZINELE SODICE GOVORA S.A. IN
ROMANIAUT ...... 204
36.1TU UT ITU SSUES CONCERNING STRATEGYUT ...... 204
PTU ROGRAM FOR PERMANENT PROFITABILITY ACHIEVEMENTUT ...... 205
37TU UT GTU OING CONCERN OF EC KUJAWY SP. Z O.O.UT ...... 205
38TU UT GTU OING CONCERN OF THE ZACHEM GROUPUT ...... 206
39TU UT ITU NFORMATION CONCERNING IMPORTANT EVENTS REGARDING PREVIOUS YEARS, INCLUDED IN THE FINANCIAL
STATEMENT FOR A FINANCIAL YEARUT ...... 206
40TU UT OTU THER INFORMATION NOT MENTIONED ABOVE THAT COULD HAVE A CONSIDERABLE IMPACT ON THE ASSESSMENT OF
THE FINANCIAL STANDING AND THE FINANCIAL RESULT OF THE CIECH GROUPUT ...... 206
41TU UT DTU IFFERENCES BETWEEN THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31ST, 2006 PRESENTED IN THE
REPORT FOR THE FIRST QUARTER 2007 AND THE ONE PRESENTED IN THE ANNUAL REPORT FOR 2006UT ...... 206
STATEMENTTU OF THE MANAGEMENT BOARDUT...... 208
5 The report on the activity of Ciech Group for 2006
REPORTT ON THE ACTIVITY OF THE CIECH GROUP FOR 2006
1 Description of the Ciech Group
Ciech Group is a group of domestic and foreign manufacturing, distribution and trade companies operating in the chemical industry. As at December 31st, 2006, it comprised 52 business entities, including:
• parent company CIECH SA, • 34 subsidiaries, including: - 26 domestic subsidiaries, - 8 foreign subsidiaries, • 15 domestic associates, • 2 foreign associates.
Ciech Group comprises direct subsidiaries and directly associated companies, for which CIECH SA is the parent company, as well as indirect subsidiaries and indirectly associated companies, whose parent companies are direct subsidiaries of CIECH SA.
Ciech Group conducts manufacturing activity connected with the sale of own products, and trading activity related to trading with goods. Trading activity is carried in major part by CIECH SA and by domestic and foreign commercial companies being CIECH SA's subsidiaries, manufacturing activity, however, is carried out by the CIECH SA's subsidiaries of the manufacturing type.
Ciech Group sells chemicals in the Polish market, and is a major contributor to Poland’s foreign trade with regard to the import and export of chemical industry products. The main goods sold by the Group in the Polish market in 2006 were: soda ash, fertilizers, glass blocks and glass packaging, salt, liquid fuel, sodium tripolyphosphate, plastics, plant protection agents, and other chemicals. The main goods exported by the Group included: soda ash, isocyanates (TDI), sulphur, epichlorohydrin, PVC, mineral fertilizers, salt, calcium chloride. The Ciech Group’s largest markets were the European Union countries.
When preparing the consolidated financial statement for 2006 the following companies were taken into consideration:
• full consolidation method: 1. CIECH SA – parent company 2. Zakłady Chemiczne "Alwernia" Spółka Akcyjna 3. Przedsiębiorstwo Chemiczne Cheman Spółka Akcyjna 4. "VITROSILICON" Spółka Akcyjna 5. "CIECH POLFA" Spółka z ograniczoną odpowiedzialnością 6. Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna 7. Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością 8. CIECH FINANCE Spółka z ograniczoną odpowiedzialnością 9. POLSIN PRIVATE LIMITED 10. DALTRADE PLC 11. S.C. Uzinele Sodice Govora S.A.
The consolidated financial statement also includes four lower-level capital groups:
1. FOSFORY Group, including: - Gdańskie Zakłady Nawozów Fosforowych "FOSFORY" Spółka z ograniczoną odpowiedzialnością – parent company - "AGROCHEM" Spółka z ograniczoną odpowiedzialnością – in Człuchów
6 The report on the activity of Ciech Group for 2006
- "AGROCHEM" Spółka z ograniczoną odpowiedzialnością – in Dobre Miasto 2. SODA MĄTWY Group, including: - Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna – parent company - Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością - TRANSODA Spółka z ograniczoną odpowiedzialnością - Polskie Towarzystwo Ubezpieczeń Spółka Akcyjna (the company measured using the equity method) 3. JANIKOSODA Group, including: - Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna – parent company - Polskie Towarzystwo Ubezpieczeń Spółka Akcyjna (company performance measured using the equity method) 4. ZACHEM Group, including: - Zakłady Chemiczne ZACHEM Spółka Akcyjna – parent company - ZACHEM UCR Spółka z ograniczoną odpowiedzialnością - ZACHEM Barwniki Spółka z ograniczoną odpowiedzialnością
The ZACHEM Group, Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna, S.C. Uzinele Sodice Govora S.A. and CIECH FINANCE Spółka z ograniczoną odpowiedzialnością were included in consolidation as of December 31st, 2006 on the basis of their balance sheets. The presented account of results, the cash flow statement and additional notes to these reports do not include results of these companies recorded in 2006. Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością was valuated in the consolidated financial statement of the Ciech Group using the equity method by December 31st, 2006. Due to a change in share percentage and in the company’s dependence on CIECH SA until December 31st, 2006, Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością is consolidated using the full method.
The parent company does not have branches.
As at December 31st, 2006 the composition of the Management Board of CIECH SA was as follows:
Mirosław Kochalski President Rafał Pasieka Member Wojciech Wardacki Member
On January 31st, 2007 the Extraordinary General Meeting of Shareholders of CIECH SA appointed Mr. Marek Trosiński to the composition of the Management Board of the Company.
The commercial representative of the parent company was Mr. Kazimierz Przełomski.
As at December 31st, 2006 the composition of the Supervisory Board of CIECH SA was as follows:
Grzegorz Miś – Chair of the Supervisory Board Alicja Pimpicka – Deputy Chair Wiktor Cwynar – Member Wojciech Fedko – Member Dariusz Krajowski-Kukiel – Member
2 Major achievements of the Ciech Group in 2006
CIECHU SA
On January 10th, 2006 transaction of selling 100% shares in the subsidiary Petrochemia Blachownia S.A. in Kędzierzyn Koźle in favour of BorsodChem Rt. (income from the sale amounted to PLN 104 million) was finalised.
On May 30th, 2006 CIECH SA signed a commercial contract with Z.Ch. "POLICE" S.A. on the purchase of 3,000 tonnes of fertilizers. It is another contract concluded with this company within 12 months on deliveries of nitrogenous fertilisers, two-material and mixed phosphate fertilisers, sodium compounds and phosphoric acid. Their total value amounts to PLN 97.8 million.
7 The report on the activity of Ciech Group for 2006
On June 14th, 2006 the Ordinary General Meeting of Shareholders of CIECH SA approved the individual financial statement of CIECH SA and consolidated financial statement of the Ciech Group for 2005. Furthermore, the Ordinary General Meeting approved the distribution of the CIECH SA profit recorded in 2005. The amount of PLN 22,400 thousand was assigned as the dividend, which accounted for PLN 0.80 per one share.
On June 27th, 2006, the President of the Office of Competition and Consumer Protection, after carrying out antitrust proceedings instituted on the motion of CIECH SA, gave consent to the concentration depending on CIECH SA’s takeover of control over Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna with its registered office in Nowa Sarzyna by means of purchase of shares accounting for an 80% share capital of this company entitling to 80% votes at the General Assembly.
On August 7th, 2006 the President of the Office of Competition and Consumer Protection, after carrying out antitrust proceedings, instituted on the motion of CIECH SA, gave consent to the concentration depending on CIECH SA’s takeover of control over Zakłady Chemiczne "ZACHEM" Spółka Akcyjna with its registered office in Bydgoszcz by means of purchase of shares accounting for 80% share capital of this company entitling to 80% votes at the General Assembly.
On October 11th, 2006 CIECH SA signed with Nafta Polska SA, with participation of the Minister of Treasury, a protocol of subsidiary arrangement to the sales agreement for shares in Zakłady Chemiczne Zachem Spółka Akcyjna (80% shares) concluded in Warsaw on March 29th, 2006, with its registered office and to the sales agreement for shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna (80% shares) concluded in Warsaw on March 29th, 2006. The parties agreed that the purchase price, set forth in the sales agreement for shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna, has changed and currently amounts to PLN 80,038 thousand.
On November 30th, 2006 the Council of Ministers consented to the sale of shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna and Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna by Nafta Polska SA to CIECH SA.
On December 5th, 2006 the Extraordinary General Meeting of Shareholders of Nafta Polska S.A. agreed to sell shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna and in Zakłady Chemiczne "Organika- Sarzyna" Spółka Akcyjna to CIECH SA.
On December 13th, 2006 CIECH SA signed a loan agreement with Bank Pekao S.A. for the amount of PLN 216,000 thousand. The repayment period is 8 years with the option of prolonging it to 10 years. The transaction is co-organised by Bank Handlowy w Warszawie S.A. and Bank Millennium S.A. The loan is earmarked for the purchase of 80% shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna for the amount of PLN 244,512,000 from Nafta Polska S.A. (the remaining part of the amount, that is PLN 28,512,000, will come from CIECH SA’s own funds). The loan was secured on shares in Janikowskie Zakłady Chemiczne JANIKOSODA Spółka Akcyjna (CIECH SA is an owner of 99.26% shares in JANIKOSODA S.A.).
On December 20th, 2006 transactions of sale of share parcels in Zakłady Chemiczne ZACHEM Spółka Akcyjna and Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna were finalised. The amount of guaranteed investments shall be no less than PLN 176,120,000.00 for ZACHEM S.A. and PLN 130,000,000 for Z.Ch. "Organika-Sarzyna" S.A. - within five years after the two agreements enter into force.
On December 20th, 2006 CIECH SA submitted a non-cancellable offer to the State Treasury on acquisition of all shares in ZACHEM S.A. and Z.Ch. "Organika-Sarzyna" S.A. (put option) belonging to the State Treasury. In addition, the Company committed to purchase shares issued free of charge for the persons entitled pursuant to article 36 of the Act of August 30th, 1996 on Commercialization and Privatization of State Enterprises.
On October 26th, 2006 CIECH SA signed an agreement in Bucharest, the parties of which were CIECH SA, S.C. Begacom S.A. and the Romanian government agency AVAS. The subject of the agreement is the assignment of a privatisation contract, concerning S.C. Uzinele Sodice Govora S.A., the largest manufacturer of soda ash in Romania, from S.C. Begacom S.A. to CIECH SA.
On November 30th, 2006, in Bucharest CIECH SA and the Romanian government agency AVAS signed an annex to the privatisation agreement, finalising the purchase of the majority interest in the soda manufacturing plant Uzinele Sodice Govora S.A. The annex signed, made the additional agreements effective, these agreements ensure CIECH SA the ownership right to 93% shares in S.C. Uzinele Sodice Govora S.A., including the share parcel in S.C. Begacom, the previous owner of the privatisation contract of S.C. Uzinele Sodice Govora S.A. As soon as practicable CIECH SA will begin implementation of the modernisation and investment plan providing for an increase in soda output within three years to 530,000
8 The report on the activity of Ciech Group for 2006
tonnes per year. The value of the entire project will amount to EUR 60 million, including EUR 25 million for debt clearing and debt restructuring, EUR 26 million for development investments and EUR 9.2 million for the purchase of the block of shares.
On December 4th, 2006, upon the registration with the Romanian court registration, RIAVEST, with its registered office in Timisoara, CIECH SA became the owner of a 93.135% share parcel in the plant S.C. Uzinele Sodice Govora S.A. (31,875,516 shares). The Romanian government privatisation agency owns 2.888% shares (988,338 shares), while other shareholders hold 3.976% (1,360,862 shares).
On December 5th, 2006 at the Extraordinary General Meeting of Shareholders of S.C. Uzinele Sodice Govora S.A., the persons recommended by CIECH SA assumed four out of five positions in the Board of Directors of the company.
On October 27th, 2006 CIECH SA and CIECH POLFA Sp. z o.o. (the subsidiary of CIECH SA) signed a letter of intent on sale of the CIECH SA's shares in CIECH POLFA Sp. z o.o. with Polski Holding Farmaceutyczny S.A. Adequate steps shall be taken for the relevant contracts and agreements to be concluded between the Parties. The agreement expires on December 31st, 2007. The Ciech Group Strategy assumes a gradual withdrawal from business activity in the market of pharmaceutical distribution.
CIECH SA has launched the integration scheme for the Soda Division in the Ciech Group. As planned, by the end of the second quarter of 2007, Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna, Inowrocławskie Zakłady Chemiczne Soda Mątwy Spółka Akcyjna and Elektrociepłownie Kujawskie Sp. z o.o. will have formed a company, Soda Polska S.A., with the output of 12 million tonnes of soda per year. The execution of the integration plan, prepared in collaboration with a strategy consulting company, will lead to an increase in the cost efficiency of the Division, making good use of the results of synergy, improvement in management efficiency and facilitation of integration with foreign soda companies.
On December 15th, 2006 the Extraordinary General Meeting of Shareholders of the CIECH SA subsidiary "InChem" Spółka z ograniczoną odpowiedzialnością, in which CIECH SA holds 100% share capital, passed a resolution to terminate and put "Inchem Sp. z o.o." into liquidation. The resolution ensues from the strategy of capital withdrawal from "InChem Sp. z o.o."
On December 28th, 2006 CIECH SA sold 1,880,864 shares in Cheman S.A. at PLN 1, accounting for 100% share capital, to the subsidiary CIECH FINANCE Spółka z ograniczoną odpowiedzialnością, in which CIECH SA holds 100% share capital. The transaction ensues from the restructuring strategy adopted for Cheman S.A.
"VITROSILCON"U Spółka Akcyjna
On March 15th, 2006 the subsidiary "VITROSILICON" Spółka Akcyjna signed the final contract on purchase of assets of Huta Szkła Pobiedziska, the bottle manufacturer, from Alcol Sp. z o.o. registered at ul. Roosevelta 106, Gniezno. The value of the contract is PLN 13.5 million. Project of the glassworks purchase along with new investments shall enclose in the amount of PLN 25 million. Its fulfilment is intended for strengthening of the leading position of "VITROSILICON" Spółka Akcyjna in the market of glass candleholders.
Between May and June 2006 "VITROSILICON" Spółka Akcyjna launched another assembly line for glass blocks thus doubling its manufacturing capacity for these goods (from 3.5 million to 7 million items annually). The investment also covered assembly of the processing line and modernisation of the production department. Thanks to the modernisation, emission of deleterious substances to environment has been diminished and production parameters have been improved. Total value of the investment regarding the glass block production department shall estimate at PLN 25,435 thousand. The Company was granted the structural fund within the Sectoral Operational Program "Improvement of the Competitiveness of Enterprises. Submeasure 2.2.1. Support to enterprises making new investments" by the Ministries of Economy and Labour, in the amount of PLN 3,170 thousand.
Thanks to the fulfilled investments, the manufacturing capacity has increased in relation to 2005: glass blocks by 100%, glass packaging by 75%.
FOSFORYU Group
• During a symposium held on June 8th, 2006 concerning harmful effects of phosphogypsum dump on the natural environment, the explicit opinion was submitted on the lack of any negative effects of the dump on the environment, including the inhabitants' health.
9 The report on the activity of Ciech Group for 2006
• The sodium bisulfate system has been adjusted to increase production from 150 tonnes to 300 tonnes monthly and renegotiations of the contract terms with MONDI PACKAGING PAPER ŚWIECIE S.A. on sale of this product in the volume of 300 tonnes monthly (two times more than under the previous contract) have been started.
• The prize was won in the 5th edition of the "Polskie Nawozy" (Polish Fertilizers) competition organised by weekly "Zielony Sztandar" for enriched super phosphate, acknowledged by farmers as the best and universal phosphatic fertilizer.
Efforts to develop the individual network of local agencies have been finalised.
The investment has been completed and the line for NP and NPK fertilizer granulation has been launched at zero waste.
Works have been finalised and the modernised absorption tower spray system has been launched in the Sulphuric Acid Production Plant. After modernization, the system has an increased manufacturing capacity of the acid and low degree of chimney emission retained - as required by BAT.
SODAU MĄTWY Group
Construction of the monohydrate system to produce dense soda ash have been continued in SODA MĄTWY S.A., which fulfils the goal of increasing quality and meeting the market demands and increasing its competitiveness. Dense soda ash produced according to the monohydrate method is marked by a higher quality and there is an increasing demand for it recorded in the market.
JANIKOSODAU S. A.
In December 2006, a purchased turbine (a turbine generator) has been submitted for use - the turbine is being leased to the subsidiary EC KUJAWY Sp. z o.o. Exploitation of the new turbine will allow us to reduce purchases of electrical power in future. Savings of approx. 1,400 MWh are expected at failure- free traffic.
JANIKOSODA S.A. has launched a system to screen and crush limestone, which enabled to meet stable technological parameters in the process of limestone burning and to decrease use of coke.
JANIKOSODAU S.A. and SODA MĄTWY S.A.
Based on the decision issued by the District Court in Bydgoszcz, 13th Commercial Division of the National Court Register dated March 10th, 2006 received on March 14th, 2006, the merger of indirect subsidiaries of CIECH SA, where TRANSODA Sp. z o.o. is an acquiring company and Jantrans- Janikowo Fosfory Sp. z o.o. is a disappearing company, was carried out in accordance with article 492 §1 item 1 of the Commercial Companies Code. After merger, share capital of TRANSODA Sp. z o.o. amounts to PLN 27,652,500.00.
On May 1st, 2006 the IT system known as ORACLE was launched (within development of mutual IT platform). It made it possible to integrate and coordinate the key business processes within the area of finance, accounting, purchases and sales for the companies using the mutual IT platform and these companies are CIECH SA, SODA MĄTWY S.A. and JANIKOSODA S.A.
"Alwernia"U S.A.
The company has developed a new technology of food-grade sodium tripolyphosphate production on the basis of extractive acid, which will effect in reduction of the production costs.
The company sold its shares in Alwernia Chrom Spółka z ograniczoną odpowiedzialnością at PLN 450 thousand.
"Alwernia" S.A. introduced new goods to the market – nitromagnesite and refined nitric acid.
In addition, the company continues to work on adaptation of idle sodium sulphate to produce fertilizers based on waste product use.
10 The report on the activity of Ciech Group for 2006
ChemanU S.A.
Withdrawal from the fuel industry − Termination of lease contracts for petrol stations (Kleszczów, Kalisz, Koło, Stawiszyn, Szczytniki and Zduńska Wola) − Sale of the petrol station in Jarocin − Talks with MPK Sieradz continued to terminate the contract. − Preparations for the sale of a base in Błaszki.
CIECHU POLFA Sp. z o.o.
▪ Increase in export sales of medication to Kazakhstan and Bulgaria and increase in export sales of pharmaceutical substances (mainly to Japan).
3 Comments on the financial results of the Ciech Group
The ZACHEM Group, Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna, S.C. Uzinele Sodice Govora S.A. and CIECH FINANCE Spółka z ograniczoną odpowiedzialnością were included in consolidation as of December 31st, 2006 on the basis of their balance sheets. The presented account of results, the cash flow statement and additional notes to these reports do not include results of these companies recorded in 2006. Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością was valuated in the consolidated financial statement of the Ciech Group using the equity method until December 31st, 2006. Due to a change in share percentage and in the company’s dependence on CIECH SA until December 31st, 2006, Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością is consolidated using the full method.
Furthermore, provisional settlement provided for by IFRS 3 has been applied upon inclusion of these companies in consolidation (except for Przedsiębiorstwo Transportowo-Usługowego TRANSCLEAN Spółka z ograniczoną odpowiedzialnością). This means that on the date of joining the group, the entities' assets and liabilities were recognized in the book values. After the pending measurement at fair value, the presented data shall be adjusted.
In 2006 the Ciech Group recorded the consolidated net profit in the amount of PLN 150,434 thousand, the balance sheet showed the total of PLN 2,729,513 thousand and changes in net cash increased by PLN 46,222 thousand (in relation to PLN 63,780 thousand in 2005). The tables below present the selected financial figures along with basic financial ratios for 2006 and 2005.
Table 1. Selected Figures in thousands of PLN 2006 2005 2006/2005 dynamics Net sales revenue 2 174 330 2 209 545 (1.6%) Cost of sales (1 676 009) (1 709 982) (2.0%) Gross profit 498 321 499 562 (0.2%) Selling costs (157 338) (188 281) (16.4%) Administrative expenses (160 414) (167 114) (4.0%) Other Operating Income / Expense (34 250) (613) - Operating profit 146 319 143 555 1.9% Financial income / expense 3 546 (3 926) - Share of the net profits of subsidiaries accounted 1 911 3 372 (43.3%) for using the equity method Income tax (28 151) (25 148) 11.9% Sales profit relative to discontinued operations 26 809 - - Net profit 150 434 117 853 27.6% Net profit attributable to minority interests 325 6 269 (94.8%) Profit attributable to equity holders of the 150 109 111 584 34.5% parent company EBITDA 242 200 235 778 2.7%
11 The report on the activity of Ciech Group for 2006
31.12. 2006 31.12. 2005 2006/2005 dynamics Value of assets 2 729 513 1 635 132 66.9% Non-current assets 1 628 671 817 821 99.1% Current assets, including: 1 100 842 817 311 34.7% - inventories 243 179 132 450 83.6% - short-term receivables 707 269 498 915 41.8% - cash and cash equivalents 147 453 101 216 45.7% - short-term investments 614 269 128.3% Total equity 1 137 218 1 019 131 11.6% Parent company's equity 1 086 783 969 641 12.1% Minority interest 50 435 49 490 1.9% Long-term liabilities 559 961 109 998 409.1% Short-term liabilities 1 032 334 506 003 104.0%
2006 2005 2006/2005 dynamics Cash flow from operating activities 176 487 113 363 55.7% Cash flow from investing activities (476 297) (117 430) 305.6% Cash flow from financing activities 346 032 67 847 410.0% Total cash flow 46 222 63 780 (27.5%)
2006 2005 2006/2005 dynamics Net earnings per share 5.36 4.16 28.9% Net profit margin 6.9% 5.3% 29.7% EBIT% 6.7% 6.5% 3.6% EBITDA % 11.1% 10.7% 4.4% Current ratio 1.1 1.6 (31.3%) Quick ratio 0.8 1.4 (42.9%) Total debt ratio 58.3% 37.7% 54.8% Equity to assets ratio 41.7% 62.3% (33.2%) Source: CIECH SA Calculation principles: Net earnings per share – net earnings / weighted average number of ordinary shares in the given period (pursuant to the definition of IAS 33 "Earnings per share") Net return – net profit for a given period / net income from sales of products, services, goods and materials in a given period, EBIT% – operating profit for a given period / net income from sales of products, services, goods and materials in a given period, EBITDA% – (operating profit + depreciation for a given period) / net income from sales of products, services, goods and materials in a given period, Current ratio – current assets at the period-end / current debt at the period-end, Quick ratio – current assets less inventories at the period-end / current debt at the period-end, Total debt ratio – short- and long-term debt at the period-end / total assets at period-end, Equity to assets ratio – total equity as at period-end / total assets as at period-end
SalesU revenues
Consolidated net sales income in the Ciech Group was estimated at PLN 2,174,330 thousand and was lower by 1.6% than the one recorded in 2005. Sales in the soda segment constituted the largest share in the overall income earmarked by high dynamics in 2006 (favourable relationships between product and raw material prices). In the fourth quarter, the Ciech Group recorded an explicit growth of sales in the organic segment, whose share in revenue increased to 20% (9% the year before). This was largely an effect of intensified trade cooperation with ZACHEM S.A. Increase in revenue in the organic and soda segments enabled to make amends for decrease in revenue of other segments, in particular in the petrochemical segment (mostly the effect of sale of the fully- consolidated entity Petrochemia Blachownia S.A.).
12 The report on the activity of Ciech Group for 2006
Figure 1. Structure of income from sales
The 2006 income by business segments was as follows:
Agro-Chemical segment 15.6% Inorganic Segment 11.5%
Petrochemical segment Organic Segment 3.9% 20.4%
Segment of silicates and glass products 5.5%
Pharmaceutical segment 2.3% Soda Segment 37.4% Power Generation Discontinued Segment 1.2% Operations Other 0.7% 1.5%
Source: CIECH SA
In 2006 the Ciech Group focused on the four fundamental segments of activity - on the soda, agrochemical, organic and inorganic segments. These segments generated the total of 85% income of the Group sales.
Soda Segment The soda segment's share in the Group's total sales in 2006 was 37%. The parent company, Ciech SA, is a key player in the sales operations, processing the sales of the output manufactured by the subsidiaries SODA MĄTWY S.A. and JANIKOSODA S.A. The main product in this segment is soda ash, which accounted for 74% sales in this segment in 2006. The Group companies are the sole manufacturers of soda in Poland. As compared with 2005 sales revenues in the segment increased by 7%; mostly due to increase in selling prices of the main goods in the segment.
Agro-Chemical Segment The agrochemical segment generated approx. 16% income of the Group sales in 2006. The FOSFORY Group handling production and sales of fertilizers in the domestic marketplace and CIECH SA, the parent company, exporting products of GZNF "FOSFORY" Sp. z o.o. and of other domestic manufacturers and finally importing raw materials intended for fertilizer production, operate within the agrochemical segment. Fertilizers (80%) and plant protection agents (approx. 9%) make the leading positions generating the segment's income. A slight (4%) decrease in sales was caused mainly by a low demand for fertilizers and plant and crop protection chemicals in the first quarter of 2006. It was caused by the factors such as: (a) shorter period of crops sowing due to a long winter and (b) lack of resources held by the agricultural manufacturers (the EU funds granted later than in 2005 and difficulties with sales of farm produce). Due to decrease in sales a considerably lower result has been recorded for this segment.
13 The report on the activity of Ciech Group for 2006
Organic segment The organic segment accounted for 20% of the Group's sales income in 2006. The key player in the segment is CIECH SA, which renders export agency services, handled in major part on a consignment basis or on a processing basis (ZACHEM S.A. – EPI). Main products of the segment are: TDI - 30%, epichlorohydrin (EPI) accounting for 23% segment sales and PVC – 18%. Income from the organic segment more than doubled as compared to income results recorded in 2005. The main reasons for the increase were as follows: (a) change in the type of commercial agency CIECH SA represents while selling selected goods from the segment (mainly TDI) based on switch from consignment settlements into settlements for own account, (b) transactions of processing EPI in the second quarter of 2006 (c) full takeover of sales of TDI production by CIECH SA and ZACHEM S.A. (contract concluded in the 4th quarter of 2006). As a result the segment's result increased by over 11%. A drop in the profitability ratio in the segment (from 16% to 8%) was almost entirely due to change in the method of TDI sales from the consignment agency to own account.
Inorganic segment The inorganic segment accounted for 12% of the Group's sales income in 2006. The subsidiary, "Alwernia" SA, which manufactures phosphorus and chromium compounds, is the main manufacturer in this segment; the company imports raw materials and exports some of its products through CIECH SA. The segment comprises such products as trading goods from manufacturers outside the Group sold by CIECH SA and other commercial companies of the Group. Trading structure of the inorganic segment is fragmented; the main commodity of this segment is sodium tripolyphosphorus, which accounts for 27% segment income and boric acid (14% segment sales). Phosphorus compounds accounting for 19% total segment sales are also important for the segment. In 2006 the segment income decreased as compared to 2005 by 6%. It was caused by lower sulphur export ratios and to smaller extent by the sales volume of "Alwernia" S.A. products, including in particular decrease in demand for sodium tripolyphosphorus. A decrease of the segment result by 29% mainly ensued from: (a) lower sales of sulphur, which is handled on the consignment basis and (b) restrictions of sales of sodium tripolyphosphorus.
Segment of silicates and glass products
The segment’s share in income of the Group sales amounted to 6%. The subsidiary, "VITROSILICON" Spółka Akcyjna that manufactures silicates, glass blocks, and glass lanterns, is the main manufacturer in this segment. "VITROSILICON" Spółka Akcyjna is the sole manufacturer of glass blocks in Poland. Glass blocks and lanterns accounted for 54% of the segment income and contributed to the segment's revenue just as well as sodium water glass which accounted for 38% of the segment income. The growth of sales in the segment as compared to 2005 was 11% and was caused by an increase in sales of particular product groups in the segment, resulting from good market growth and higher demand.
Petrochemical Segment Due to sale of the fully-consolidated entity Petrochemia Blachownia S.A. and the Group's withdrawal from production in the petrochemical segment, its share in the Group sales decreased to 4% (13% one year before). Currently, the segment comprises of commercial agency transactions handled by CIECH SA and Cheman S.A.
Discontinued Operations In 2006 discontinued operations in the segment were recognized as the fuel activity gradually withdrawn by Cheman S.A. In 2005 mostly transactions of Petrochemia Blachownia S.A. and Cheman S.A. were disclosed in the segment in order to present the comparative figures.
14 The report on the activity of Ciech Group for 2006
The figure below shows the Group's sales income distribution by leading products.
Figure 2. Sales income distribution by leading product shares
szkło w odne sodow e; farmaceutyki; 2,3% 2,1% trójpolifosforan sodu; pozostałe; 15,2% 3,0% soda oczyszczona; 2,3% słoje i lampiony szklane; 3,0%
izocyjaniany (TDI); 6,9%
soda kalcynow ana; 28,1% epichlorohydryna; 5,1%
smoła surow a; 1,4% środki ochrony roślin; 2,3%
sól; 5,2%
tw orzyw a sztuczne; 10,5% naw ozy; 12,6%
Source: CIECH SA [translator note; Starting with the largest product share going clockwise: Soda ash 28.1% Fertilizers 12.6% Plastics 10.5% Salt 5.2% Plant Protection Agents 2.3% Crude Tar 1.4% Epichlorohydrin 5.1% Isocyanates (TDI) 5.1% Jars and Glass Lanterns 3.0% Baking soda 2.3% Sodium Tripolyphosphorus 3.0% Pharmaceuticals 2.3%
15 The report on the activity of Ciech Group for 2006
Sodium Water Glass 2.1% Other 15.2%]
GrossU sales profit
In 2006 the consolidated gross sales profit was PLN 498,321 thousand. The profit value was similar to the one previous year (gross profit in 2005 was PLN 499,562 thousand). The profit volume was retained largely owing to increase in profitability of the soda goods; increased sales prices while decreasing unit costs of production (including: decrease in prices of coke and increase in efficiency of raw material exploitation) and development of the organic segment (increased sales of EPI and TDI). It allowed the making of amends for decrease in profit elsewhere, in particular in Petrochemia Blachownia S.A. whose result was not included in the consolidated income statement for 2006.
OperatingU profit (EBIT)
In 2006, the operating profit amounted to PLN 146,319 thousand (PLN 143,555 thousand in 2005). The main source of profit - similarly to last year - was the result attained in core business, gross sales profit less sales costs and overhead costs, which increased by 25% to the amount of PLN 180,569 thousand. Such a considerable increase in profit from core business with the negative revenue momentum along the way (-1.6%) is contributed to realisation of the long-term strategy of increasing profitability in the Group business. The balance of other operating activity negatively affected level of the operating profit. Surplus of other operating expense over income was estimated at PLN -34,250 thousand in 2006 (in 2005 loss due to the aforesaid amounted to PLN -613 thousand). Other operating income lower than the one recorded in 2005 was the main reason for increase of the negative balance of other operating activity. In 2005, the following aspects were recognized for this item: (a) surplus of the acquiree's net assets over the merger cost of SODA MĄTWY S.A., JANIKOSODA S.A., GZNF "FOSFORY" Sp. z o.o. and "VITROSILICON" Spółka Akcyjna in the total of PLN 18,932 thousand and (b) reversal of provision for compensation by CIECH SA in the amount of PLN 5,207 thousand. Profitability of the operating activity improved in 2006 – increase in EBIT margin rates from 6.5% to 6.7% and EBITDA from 10.7% to 11.1%.
NetU result
The consolidated net profit in 2006 was PLN 150,434 thousand, including PLN 150,109 thousand accounting for net profit for the shareholders in the parent company. The net profitability reached level of 6.9% (5.3% the year before). The Group recorded increase in the net result by approx. 28% in relation to the previous year. It was in the largest part due to the sale of the fully-consolidated entity Petrochemia Blachownia S.A. – net profit of this transaction stood at PLN 26,409 thousand. The positive balance of financial activity had a positive impact on the net profit; in 2006 the Group made use of interest-bearing debt to a minuscule extent, thanks to which it incurred low interest expense. Furthermore, thanks to an intensive policy of hedging the currency transactions, positive results have been recorded in the area of exchange rate differences (the exchange rate difference balance for the Ciech Group amounted to approx. PLN +1.9 million as compared to PLN -6.9 million in 2005). It is remarkable that profit from sales of CIECH SA shares, generated by the subsidiaries (over PLN 17 million gross is the positive aspect of the transaction) was a significant element affecting the net result in 2005.
Thanks to the intensified involvement of the CIECH SA capital in soda companies and in GZNF "FOSFORY" Sp. z o.o. in 2005, the net profit share in the minority interests decreased. It resulted in increase of profit for the parent company shareholders by approx. PLN 6 million.
Table 2. Financial performance by type of business operations (PLN ‘000) 2006/2005 2006 2005 dynamics 1. Operating profit 146 319 143 555 1.9% 2. Net finance income (costs) 3 546 (3 926) - 3. Share of the net profits of subsidiaries accounted for using the equity method 1 911 3 372 (43.3%) 4. Income tax (28 151) (25 148) 11.9% 5. Sales profit relative to discontinued operations 26 809 - - 6. Net profit (1+2+3-4+5) 150 434 117 853 27.6% 7. Profit attributable to minority interests 325 6 269 (94.8%) 8. Profit for the shareholders in the parent company (6-7) 150 109 111 584 34.5% Source: CIECH SA
16 The report on the activity of Ciech Group for 2006
Balance Sheet
EquityU
The consolidated equity of the Group as at December 31st, 2006, was PLN 1,137,218 thousand (including equity of the parent company worth PLN 1,086,783 thousand), which is higher than the equity of the previous year by the amount of PLN 118,087 thousand. The decisive reason for the increase in equity was generation of net profit in 2006 in the amount of PLN 150,434 thousand. At the end of 2006, the Group showed treasury shares in equity worth PLN -6,124 thousand – the CIECH SA's shares that had been acquired by Z.Ch. "Organika-Sarzyna" S.A. before CIECH SA purchased shares from Z.Ch. "Organika-Sarzyna" S.A.
Non-currentU assets
As at December 31st, 2006, the Group's non-current assets amounted to PLN 1,628,671 thousand. Value of the non-current assets doubled by PLN 810,850 thousand as compared to 2005. The increase concerned mainly acquisitions conducted in the fourth quarter of 2006; which resulted in increase of non-current assets by PLN 715,901 thousand (including the goodwill of PLN 323,052 thousand). Furthermore, the Group companies carried out the investment projects (mainly in production property) in order to keep up with the current pace of organic growth within the Group. In particular it concerned the following companies: "VITROSILICON" Spółka Akcyjna, the SODA MĄTWY Group and JANIKOSODA S.A. An increase of fixed assets share in total assets up to 60% (50% the year before) was prompted by the aforesaid factors.
CurrentU assets
The Group's current assets amounted to PLN 1,100,842 thousand as at December 31st, 2006. In the current asset structure the following elements were dominant: (a) trade and other receivables – 63% current assets, (b) inventories – 22% and (c) cash and cash equivalents – 13%. In comparison to the status at the end of 2005, current asset value increased by approx. 35%. It resulted mostly from increase in: (a) trade and other receivables (by PLN 203,278 thousand) and (b) inventories (by PLN 110,729 thousand). In major part, it resulted from recognition of assets of the companies acquired in the fourth quarter of 2006, in the consolidated balance sheet.
ConsolidatedU liabilities
The total short-term and long-term debt of the Ciech Group as at December 31st, 2006 stood at PLN 1,592,295 thousand, which is more than at the end of 2005 by PLN 976,294 thousand. The long-term liabilities were worth st PLN 559,961 thousand as compared to PLN 109,998 thousand as of December 31P ,P 2005. This balance sheet item increased over five times, in major part, due to the increase of liabilities for long-term credits and loans by PLN 267,558 thousand. Credits increased mainly in CIECH SA (by PLN 187,436 thousand – mostly financing the acquisition purchases) and to a lesser extent in the following companies: (a) "VITROSILICON" Spółka Akcyjna (by PLN 27,496 thousand - financing investment purchases: Huta Pobiedziska) and (b) soda companies at the total amount of PLN 27,744 thousand – financing development projects. Increase in other long-term liabilities was prompted, most of all, by the Ciech Group expansion depending on inclusion of new companies and their recognition in the consolidated balance sheet. Short-term liabilities were worth PLN 1,032,334 thousand, which makes an increase by PLN 526,331 thousand as compared to the status as at December 31st, 2005. The following liabilities were subject to increase: (a) trade and other payables increased by PLN 334,600 thousand (mainly acquisitions conducted in the fourth quarter of 2006) and (b) borrowings by PLN 152,178 thousand (in the largest part increase in CIECH SA by PLN 133,427 thousand – mainly financing investments carried out in the fourth quarter of 2006).
ConsolidatedU debt
Net debt as at December 31st, 2006 (comprising bank loans, other loans, and other financial liabilities less cash) amounted to 460,089 thousand PLN (85,255 thousand PLN the year before). A change in net debt ensued from: (a) growing bank liabilities of CIECH SA (financing the acquisition expenses) and (b) development investments managed by the manufacturing companies (such as "VITROSILICON" Spółka Akcyjna, JANIKOSODA S.A., SODA MĄTWY S.A.) financed partly with credits. As a result the Group's debt index (calculated as the ratio of net debt to the total assets) increased from 5.2% to 16.9% in comparison to December 31st, 2005. The financial leverage (the ratio of net debt to the sum of net debt and total equity) at the end of 2006 was 28.8%. The year before this same index was 7.7%.
The non-current assets to fixed assets cover ratio (total equity, liabilities and long-term reserves) amounted to 104% as at December 31st, 2006, as compared to 138% at the end of 2005.
17 The report on the activity of Ciech Group for 2006
The net debt ratio to EBITDA amounted to 1.9 as of December 31st, 2006. The net debt ratio / equity stood at 40.5%.
CashU flows
The net cash flows in 2006 amounted to PLN 46,222 thousand. The Group generated higher cash flows of approx. PLN 18 million than previous year. Net cash from operating activities was PLN 176,487 thousand and was higher by approx. 56% than generated in 2005. Cash flow resulting from a change in working capital and provision items was similar to the one generated in 2005 and stood at PLN –51,335 thousand.
In 2006, particularly in the fourth quarter, the Ciech Group managed an intensive investment activity. Consequently, cash flows from the activity were negative and were estimated at PLN -476,297 thousand. The most important expenses were acquisitions of the companies, in particular of: Z.Ch. "Organika-Sarzyna" S.A., ZACHEM S.A. and S.C. Uzinele Sodice Govora S.A. (expenditure less the cash taken over amounted to PLN 298,722 thousand). The amount of PLN 160,606 thousand was spent on non-current assets (mostly production assets in soda companies and in "VITROSILICON" Spółka Akcyjna). In the fourth quarter of 2006 CIECH SA granted long-term borrowings to newly-acquired companies such as ZACHEM S.A. and S.C. Uzinele Sodice Govora S.A. at the total of PLN 127,805 thousand (consolidated cash flow statement for 2006, cash flows from the loans granted was not subject to elimination, since the newly-acquired entities were included in consolidation st exclusively on the basis of their balance sheets as of December 31P ,P 2006). Sale of Petrochemia Blachownia S.A. (PLN 104,000 thousand) was the main source of investment inflows.
Net cash generated in financing activities totalled at PLN +346,032 thousand. The main source for the increase in cash levels were credits taken out worth PLN 491,965 thousand in total, including: (a) CIECH SA PLN 396,022 thousand (financing the acquisition activity) and (b) "VITROSILICON" Spółka Akcyjna PLN 49,020 thousand (financing the investment of "Huta Pobiedziska"). The amount of repaid credits was PLN 124,492 thousand. In 2006 the dividend was paid to the owners and minority shareholders in the total amount of PLN 23,211 thousand (PLN 9,888 thousand the previous year).
Cash as disclosed in the cash-flow statement at the end of December 2006 amounted to PLN 133,142 thousand.
4 Clarification regarding season type or periodical type of the Ciech Group’s activity
The Ciech Group's level of income and financial performance to a large extent depends on standing of the economy. Cyclic fluctuations in income and profit are especially noticeable in the organic segment, which is marked by high-demand cycles. Since one half revenues of the Group were achieved in 2006 owing to sales of inorganic chemical products (including soda products), markets which are known for their stability, and only 20% income from sales of organic chemical products, fluctuations of revenues and results of the Group are relatively small. Additional factors keeping the Group safe from effects of changes in the industry standing include:
■ stable sales structure of the Group, ■ large share of product supply by the Group's manufacturing entities in the sales structure, ■ small share of finished-product sales to end customers, and the resulting low sensitivity to changes in demand, ■ large share of loyal customers in the total sales (high customer loyalty rates), ■ diverse directions of the market activities, exports and domestic sales.
The seasonality resulting from the periodic demand and supply fluctuations have inconsiderable impact on the general sales trends in the Ciech Group. Products especially prone to seasonality are the goods associated with agriculture and they are:
■ fertilizers, ■ base stock for manufacture of fertilisers, ■ plant protection agents.
Concentration of sales of fertilizers takes place in the 3rd quarter of the year. This is because of the intensive field fertilisation in the autumn. Majority of plant protection agents were used in the first half of the year, in the period of intense plant growth, when approx. 90% total sales of these goods are carried out.
Seasonality of sales is recorded in the two key product ranges of the silicates and glass products segment: glass blocks and glass lanterns. The highest sales for those products are recorded between May and October (blocks) and between June and November (lanterns). Measures were taken in Q1 2006 to reduce the impact of seasonality by introducing longer payment deadlines and factoring solutions.
18 The report on the activity of Ciech Group for 2006
In case of other products, the Group's annual income and profits are not impacted by any major seasonal fluctuations. On that account, seasonality played a relatively small role in the overall sales of the Group in 2006.
5 Explanation of differences between the financial results and the forecasts published earlier
In its Current Report RB/13/2006 of February 15th, 2006, the Management Board published a forecast of the consolidated profit of the Ciech Group for 2006. The projected consolidated sales revenues were PLN 1,984 million, and the consolidated net profit of Ciech Group was PLN 121 million. After an analysis of the financial results of the Ciech Group key companies covering the 6-month period and on the basis of the prepared estimates for the financial result of the Ciech Group for the 1st half of 2006, on July 19th, 2006 the Management Board of CIECH SA decided to change the Group net financial result forecast for 2006 to the level of PLN 134 million (Current Report RB/49/2006) from PLN 121 million published originally in the previous forecast. The Ciech Group reached sales income worth PLN 2,174 million and net profit worth PLN 150 million in 2006.
Net sales revenue as well as net profit, are higher than expected owing to increased sales of TDI and EPI and the soda goods. Exchange rate differences had also a positive impact on the financial result.
6 Factors shaping the Ciech Group’s financial performance
Positive factors
■ good standing of the European glass industry (chief recipient of soda ash) and in industries for baking soda recipients, ■ considerable increase of production and sales of the domestic chemical industry in general (by a dozen percent as compared to the previous year), ■ very high dozen-percent increase in sales of construction production, for which the chemical industry manufactures many materials and semi-finished products, ■ considerable increase in the European and global prices of TDI (one of the main products of the Ciech Group) in 2006.
Negative factors
■ large fluctuations of oil prices causing insecurity in the chemical markets and weakening the general economic situation, ■ continuing high exchange rate of the Polish currency (in relation to EUR and USD) unfavourable for improvement of export profitability of CIECH SA.
7 Use of the Issuer's funds coming from issue of shares
CIECH SA’s prospectus was published on January 6th, 2005, while on February 10th, 2005 the CIECH SA's shares successfully debuted on the Warsaw Stock Exchange. In the prospectus the Issuer defined the investment program covering the series of projects at the total value of PLN 500-600 million carried out in 2005-2006. In order to finance the investment plan, CIECH SA uses funds from the issues, its own funds and external financing in the form of long-term investment credits.
Organic segment
On March 29th, 2006 the contract on purchase of shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna and Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna was signed with Nafta Polska S.A. and was finalised on December 20th, 2006. The purchase price of 80% shares in ZACHEM S.A. amounted to PLN 80,038,400, while the amount of guaranteed investments is PLN 176,120 thousand. Whereas, the purchase price of 80% shares in Z.Ch. "Organika-Sarzyna" S.A. is PLN 244,512 thousand, while the amount of guaranteed investments is PLN 130,000 thousand.
Soda Segment
On November 30th, 2006 in Bucharest, CIECH SA and a Romanian government agency, AVAS, signed an annex to the privatisation agreement concluding the purchase for the majority interest in the soda manufacturing plant Uzinele Sodice Govora S.A. On December 4th, 2006, upon the registration with the Romanian court registration, RIAVEST, with its registered office in Timisoara, CIECH SA became the owner of a 93.135% share parcel in the soda plant S.C. Uzinele Sodice Govora S.A. (31,875,516 shares). The Romanian government privatisation agency owns 2.888% shares (988,338 shares). The other shareholders have 3.976% (1,360,862 shares). CIECH SA began implementation of the modernisation and investment plan providing for an increase in
19 The report on the activity of Ciech Group for 2006
soda output within three years to 530,000 tonnes per year. The value of the entire project will amount to EUR 60 million, including EUR 25 million for debt clearing and debt restructuring, EUR 26 million for development investments and EUR 9.2 million for the purchase of the block of shares.
The construction of the monohydrate system was continued in 2006 in Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna. That system will enable production of heavy "monohydrate" soda, which has better physical properties than the soda currently produced in the Company and which reflects market expectations reported by the recipients of the product. The implementation of that project will allow the Ciech Group to strengthen its position towards main customers interested in that product. At the beginning of the second quarter of 2007 the company initiated a mechanical start-up of the investment. The estimated cost of the monohydrate system construction is about PLN 47.2 million.
The project aimed at introducing vacuum pan salt in the market under the company's own brand known as Sól Kujawska. It is targeted at end customers through another method of distribution and through implementation of the company's own explicit brand. As a consequence, it will lead to increase in the Ciech Group mark-ups obtained on the product of vacuum pan salt.
Agro-Chemical Segment
The construction of the feed phosphate system in "Alwernia" S.A. has been completed. Also, construction of the feed phosphate system is still in progress in the subsidiary GZNF "Fosfory" Sp. z o.o. where the phase of elementary investment works has been completed.
Segment of silicates and glass products
Modernisation of the glass block production department has been finalised in the subsidiary "VITROSILICON" Spółka Akcyjna in Iłowa, which allowed doubling the output from 3.5 million to 7 million glass blocks annually. Total value of the investment regarding the glass block production department shall estimate at PLN 25,435 thousand. The Company was granted the structural fund within the Sectoral Operational Program "Improvement of the Competitiveness of Enterprises. Submeasure 2.2.1. Support to enterprises making new investments" by the Ministries of Economy and Labour, in the amount of PLN 3,170 thousand.
8 Main products, goods, or services
Detailed information is disclosed in Schedule No. 1.
9 Changes in the markets
Detailed information is disclosed in Schedule No. 2.
10 Changes in supply sources of manufacturing materials, goods, and services
Detailed information is disclosed in Schedule No. 3.
11 Concluded contracts significant for the Ciech Group's activity (including contracts concluded between shareholders and insurance or cooperation contracts)
■T On January 5th, T CIECHT SA approvedT the contracts concerning sales of dense soda ash to the enterprises within the Owens Illinois Group (one of the largest manufacturers of glass containers) in 2006. Total value of the contracts amounts to PLN 81,000 thousand.
■T OnT January 12th, 2006 CIECH SA signed a sales contract with Mrs. Jadwiga and Mr. Jan Ciarkowski 2 concerning sale of property occupying 5,000 mP ,P P locatedP in the village Petryki, in Stawiszyn commune, along with buildings, facilities, devices and equipment in the fuel station. Price of the contract subject amounted to gross PLN 1,464 thousand, payable in cash. The price includes:
o Value of the land – PLN 300 thousand o Value of buildings, facilities, devices and equipment of the fuel station – PLN 900 thousand. o Total VAT – PLN 264 thousand.
■T OnT March 15th, 2006 the subsidiary "VITROSILICON" Spółka Akcyjna signed the final contract on purchase of assets of Huta Szkła Pobiedziska, the bottle manufacturer, from Alcol Sp. z o.o. from Gniezno. The value of the contract is PLN 13.5 million. "VITROSILICON" Spółka Akcyjna, manufacturer of glass blocks, lanterns, glaze, water sodium and potassium glass intends to present the glassworks' profile concerning glass lantern activity.
20 The report on the activity of Ciech Group for 2006
■T OnT May 30th, 2006 CIECH SA signed one of routine commercial contract with Z. Ch. "POLICE" S.A. on the purchase of 3,000 tonnes of fertilizers. It is another contract concluded with this company within 12 months on deliveries of nitrogenous fertilisers, two-material and mixed phosphate fertilisers, sodium compounds and phosphoric acid. Their total value amounts to PLN 97.8 million.
■T InT May 2006 CIECH SA approved the previously agreed terms and conditions of the frame contract with OCP Casablanca Maroko on import of phosphorites to Poland. The recipients are CIECH SA’s subsidiary GZNF "FOSFORY" Sp. z o.o. and ZCh "Siarkopol" TARNOBRZEG Sp. z o.o. This means warranted deliveries (as of July 2006) of one of the most important materials for fertilizer production for 12 months within the Ciech Group. Value of the contract is approx. PLN 26.7 million.
■T OnT December 01st, 2006 CIECH SA, as the seller, and Petrochemia Blachownia, as the buyer, concluded the contract concerning deliveries of 18,000 tonnes (plus 6,000 tonnes as an option) of the benzene fraction by INA Industrija Nafte d.d. from Croatia. Estimated value of the contract is approx. PLN 287 million (plus the option for further PLN 9 million).
■T OnT December 13th, 2006 CIECH SA signed a loan agreement with Pekao S.A. for the amount of PLN 216,000 thousand. The repayment period is 8 years with the option of prolonging it to 10 years. The transaction is co-organised by Bank Handlowy w Warszawie S.A. and Bank Millennium S.A. The loan is earmarked for the purchase of 80% of shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna for the amount of PLN 244,512,000 from Nafta Polska S.A. (the remaining part of the amount, that is PLN 28,512,000, will come from own funds of CIECH SA). The loan was secured on shares in Janikowskie Zakłady Chemiczne JANIKOSODA Spółka Akcyjna.
Other significant contracts have been defined in item 2 of the Report on the activity of the Ciech Group for 2006.
12 Description of transactions with affiliates
Description of transactions with affiliates has been disclosed in item 31.5 of the additional information and notes to the consolidated report of the Ciech Group.
13 Borrowings, loan agreements, and sureties and guarantees granted
The particulars have been disclosed in items 24, 27 and 28.3 of the additional information and notes to the consolidated report of the Ciech Group.
14 Significant off-balance sheet items
The particulars have been disclosed in item 28 of the additional information and notes to the consolidated report of the Ciech Group.
15 Information on employment
Employment in the Ciech Group (the parent company CIECH S.A. and the fully-consolidated subsidiaries) was estimated at 7,024 persons in 2006. It amounted to 3,356 persons in the corresponding period of 2005. A considerable increase in the level of employment in the Ciech Group at the end of 2006 is an effect of new companies joining the Group. Total employment in the newly acquired companies stands at 3,625 persons.
16 Significant research-and-development achievements of the Ciech Group
SODA MĄTWY Group
■T AnalysisT of the water and wastewater disposal have been managed.
■T WasteT ponds have been further reclaimed and rebuilt.
■T SurveyT on noise abatement has been carried out.
■T WorksT associated with improvement of gas parameters in furnaces have been carried out.
■T ResearchT on improvement of the product quality has been initiated, as well as on adjustments to the NDT requirements through determination of directions of the production process based on domestic and foreign best practice.
■T ResearchT on improvement of the soda process efficiency has been initiated.
■T ResearchT on launch of sodium percarbonate production has been initiated.
21 The report on the activity of Ciech Group for 2006
■T ResearchT on possibility of launching production of new products based on the apparatus for the Calcium Blend and Builder Systems and the research on possibilities of power generation development have been initiated.
JANIKOSODA S. A.
■T ResearchT on monitoring underground and surface waters in the surrounding areas of sediment ponds has been further carried out. The monitoring activity included: o Permanent monitoring – measurements in the selected piezometers, wells and ditches o Seasonal monitoring – in the areas of drain barriers o Further management of the data base AKWEDUKT
■T ResearchT on the reclamation process of sediment ponds have been carried out.
■T SedimentT ponds were subject to analysis in terms of structure and mass composition of waste and assessments of progress of the waste dump surface settling and stability of the embankments.
■T ResearchT on improvement of the soda process efficiency on a selected carbonating column has been carried out.
■T ConceptT of construction of the system to produce salt tablets with the maximum capacity of over 50,000 tonnes per year, has been evolved.
■T NewT graphic design has been compiled for 1 kg salt packaging. Furthermore, modernisation of packaging machines has been started, the aim of which is to enhance product quality and reach the maximum manufacturing capacity of 80,000 tonnes per year.
■T AssumptionsT for development of a modern dry salt multi-storey and computer-controlled warehouse have been developed. Preparation of technical documentation is planned for 2007.
"Alwernia" S.A.
■T MethodsT of PKMgS fertilizer production have been developed and tested on a semi-commercial scale on the basis of waste materials, potassium chloride, sulphuric acid, and NPKMgS fertilizer and additionally with ammonium sulphate. Methods allowing obtaining mixed fertilizers meeting the requirements of EC fertilizers in one production cycle using waste materials have been evolved.
■T MethodT of food-grade sodium tripolyphosphate production with up to 98% extractive phosphoric acid on a commercial scale has been tested with positive results. On the basis of the results obtained, projects of production nodes have been developed and will be carried out within the investment project.
GZNF “FOSFORY” Sp. z o.o.
■T TheT Sulphuric Acid Production Plant has been adjusted to increase production of sodium bisulfate from 150 tonnes to 300 tonnes monthly. Preparations to conduct industrial tests to produce new fertilizer PMgS have been completed. The production will be conducted at zero waste.
CIECH SA
■T OnT October 26th and 27th, 2006 a certification audit was conducted in CIECH SA by SGS Polska Sp. z o.o. No system incompatibility was identified during the audit. Thus, CIECH SA completed implementation of new quality assurance system compliant with GMP B2 standards within the area of feed material trade (baking soda and soda ash). The GMP certificate enhances competitiveness of the Ciech Group as a manufacturer and supplier of the certified products - so far Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna is the only manufacturer of baking soda and soda ash in Europe enjoying the certificate of this type.
■T GeneralT concept of IT security has been elaborated.
■T DevelopmentT of the mutual IT platform supporting business processes in the following companies of the Group has been continued.
"VITROSILICON" Spółka Akcyjna
■T VenturesT concerning development of the lithium-silicate production have been continued. Obtained during research, potassium and sodium water glass modified by lithium was applied in the production of covered electrodes. The application results are positive. The research gives reasons to hope for a patent, the co- owner of which will be "VITROSILICON" Spółka Akcyjna.
■T TheT company works on a research and development project "Obtaining nanomolecular silica and silicates on a semi-commercial scale and their use in the industry of plastics, paints, varnishes and adhesives". The basic aim of this project is to develop terms of obtaining and analysing the physical properties of synthetic silica and silicates and further on to analyse possibilities of their application as fillers and nanofillers in various
22 The report on the activity of Ciech Group for 2006
systems of plastometers and elastometers, used as construction, packaging materials and also used in coating and adhesive materials. The research concerns the two types of hydrated silica magnesium and the Carbonate and Silicate Filler (silica co-precipitated with calcium carbonate).
17 Information concerning protection of the natural environment
In 2006 the manufacturing companies of the Ciech Group continued their operations pursuant to the binding or obtained in 2006 administrative decisions and majority of them (GZNF "FOSFORY" Sp. z o.o. does not have ISO 14001) operates in accordance with obtained and retained environmental management systems based on ISO 14001, or with the integrated management system based on ISO 9001, ISO 18001, ISO 14001 (ZACHEM S.A.).
A considerable progress has occurred within the area of integrated permits:
JANIKOSODA S. A. • integrated permits obtained for a system to produce soda and chalk and for sediment ponds no. 9, 18 a and b (December 2006), • integrated permits obtained for other systems (production of salt, agricultural limestone, freight cableway – December).
SODA MĄTWY S.A. • application for an integrated permit filed for the IPPC system (June) and on January 2nd, 2007, the Decision to grant the permit obtained.
“VITROSILICON” Spółka Akcyjna • application for an integrated permit filed for the Plant Huta Pobiedziska (November 2006). As the offices of the district authorities declare, the permit shall be issued in the 2nd half of 2007 due to the complexity of the matter.
"Alwernia" S.A. • integrated permit granted for the system to produce nitrate salt (June 2006), • initiation of efforts to obtain the integrated permits for the systems to produce granular fertilizers and for the existing waste area (fourth quarter of 2006).
GZNF “FOSFORY” Sp. z o.o. • In December 2006 an integrated permit was granted for the system of sulphuric acid and mineral fertilizer production. However, the issued integrated permit was appealed to the Minister of Environment by the association of Wrzeszczańskie Komitety Obywatelskie. There are formal conditions and favourable projections as to dismiss the appeal and keep the Pomorskie Governor's decision concerning issue of the Integrated Permit for the system in GZNF, in force.
The Pomorskie Governor, granting the integrated permit for manufacturing systems under decision of December 29th, 2006, limited at the same time the possibility to manufacture phosphogypsum waste from 500 thousand to 250 thousand tonnes per year and made the company responsible for development of a program to shut down the phosphoric acid production and to switch to fertilizer production using zero waste technology. With regard to the above, obligation to adjust the current application to obtain an integrated permit for the phosphogypsum disposal site in Wiślinka arose. On February 26th, 2007 the Management Board of GZNF "FOSFORY" Sp. z o.o. filed an application in the Pomorskie Voivodeship Office to issue an integrated permit for the disposal site with deadline terminating the phosphogypsum disposal by December 31st, 2009. On March 15th, 2007 the Pomorskie Governor declared initiation of administrative proceedings to shut down the phosphogypsum waste disposal site in Wiślanka. The ultimate deadline for shutting down the disposal site shall be December 31st, 2009. Currently, the phosphogypsum disposal site is reclaimed to the 60% level. The disposal site reclamation is expected to be completed on December 31st, 2009. Material for reclamation (soil composition) is delivered by the Sewage Treatment Plant in Gdańsk at its own expense. Other efforts concerning placing soil on the dump are handled from the company's own resources (workforce plus the available mechanical devices). Depreciation of assets used in the department of phosphoric acid (where phosphogypsum is formed) in 2006 is worth PLN 275 thousand. Net fixed assets within this area amounts to PLN 2,892 thousand as of December 31st, 2006. Total cost of the phosphoric acid department liquidation will be approx. PLN 2 million. The Management Board of GZNF "FOSFORY" Sp. z o.o. presently does not have any grounds for raising reserves for costs of liquidating the phosphoric acid department since: 1. There are concepts of new phosphate fertiliser production with direct participation of sulphuric acid considered 2. There is a possibility to use phosphogypsum to manufacture construction materials binding according to the technology of Multichem Eko Sp. z o.o. with its registered office in Pyrzyce.
23 The report on the activity of Ciech Group for 2006
Issues concerning environmental protection in the newly acquired entities of the Ciech Group
Z.Ch. "Organika- Sarzyna" S.A. • integrated permit granted to manage 12 IPPC systems (to manufacture organic chemical products or semi- finished products – 9 systems, to manufacture inorganic chemical products or semi-finished products – 1 system, to manufacture plant protection agents – 2 systems) – October 2006.
ZACHEM S.A. • integrated permits granted to manage IPPC systems, including: o system to manufacture brine electrolysis (S-9000); o phosgene – including production of CO (S-9100); o tolylene diamine – TDA (S-9200); o tolylene diisocyanate – TDI (S-9200); o dinitrotoluene – DNT (S-9600); o epichlorohydrin – EPI (ZE); o PUR foams (ZP); o Isolated Sewage Sludge Dump Site (ISO); o Intraplant Waste Disposal Site for other than dangerous and inactive waste;
On application of ZACHEM S.A., the Kujawski and Pomorski Governor issued on December 15th, 2006 regulation no. 102/2006 on designation of the industrial zone known as "Bydgoska Strefa Przemysłowa ‘ZACHEM’ w Bydgoszczy", which forms an integral part of the integrated permit issued for the Plants.
S.C. Uzinele Sodice Govora S.A. S.C. Uzinele Sodice Govora S.A. has its legal status confirmed within the area of exploiting the environment, while solutions used by it have been acknowledged by the environmental authorities (Environmental Protection Agency) to meet requirements of the best techniques available, included in the reference documents evolved and approved by the European Soda Ash Producers Association.
The company enjoys an integrated permit and carries out the adjustment program that constitutes its integral part. Any delays in its completion may result in withdrawal of the integrated permit. The transitional period for the company to shut down storing basins is one of the most important elements of the adjustment program. Pursuant to the Government Decision 359/2005 on waste disposal, S.C. Uzinele Sodice Govora S.A. is obliged to cease storing liquid waste in the current spot by December 31st, 2012.
On June 14th, 2006 the company obtained water management approval Autorizatia de Gospodarire a Apelor.
CO2B B emission allowance trading
Based on the Act of December 22nd, 2004 on the Greenhouse Gas and Other Substance Air Emission Allowance Trading Scheme, "VITROSILICON" Spółka Akcyjna, "Alwernia" S.A., Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością, JANIKOSODA S.A. and SODA MĄTWY S.A. are included in the scheme of the greenhouse gas emission allowance trading (CO2B ).B Significant information on the companies:
“VITROSILICON” Spółka Akcyjna In June 2006 the Preliminary Sales Contract on Emission Rights has been signed with Boston Investment Group to pledge the emission rights. This operation was finalised on August 16th, 2006 by means of the allowance surplus transfer in the National Register of Emission Allowances. The Management Board resolved then to sell the surplus for 2005 in the volume of 19 thousand certificates at the total of EUR 229 thousand. On December 8th "VITROSILICON" Spółka Akcyjna resolved once again to sell the surplus for 2007-2008 in the volume of 35 thousand tonnes to Fortis Bank at the total of EUR 252 thousand.
"Alwernia" S.A. In March 2006 a permit to participate in the emission trading scheme was granted for the local heat and power station. Pursuant to the ordinance the Council of Ministers of December 27th, 2005 on adoption of National
Allocation Plans of CO2B B Emission Allowances for 2005-2007, the heat and power station of Zakłady Chemiczne
"Alwernia" Spółka Akcyjna holds allowances to emit 63,600 Mg of CO2B B per year. In April 2006 the annual report on the volume of carbon dioxide emission in 2005 was filed for verification in the Małopolskie Voivodship Environmental Protection Inspection. The report was verified on July 7th, 2006 and further on forwarded to the National Administrator of the Emission Allowance Trading Scheme. On December 20th, 2006 45,000 allowances were sold to CONSUS-FRANCE S.A.R.L. at PLN 1,112 thousand.
SODA MĄTWY S.A.
24 The report on the activity of Ciech Group for 2006
In 2006, the report on the volume of CO2B B emission from lime-kilns for 2005 was verified. 33,898 Mg of the allowance surplus was recorded in relation to the actual volume of carbon dioxide emitted. Income from sales of the surplus worth EUR 243 thousand was disbursed in 2007.
JANIKOSODA S. A.
In 2006, the report on the volume of CO2B B emission from lime-kilns for 2005 was verified. 33,723 Mg of the allowance surplus was recorded in relation to the actual volume of carbon dioxide emitted. Sale of the surplus in the volume of 95,000 tonnes of allowances to emit gas was conducted in 2007.
Pursuant to the ordinance of the Minister of Environment of March 7th, 2006 concerning data required to develop National Allocation Plan for Allowances, the Plant submitted data related to the systems, sources of emission and production volumes as well as CO2B B emission volumes to the National Administrator, accounting for the elementary data for KPRU (National Allocation Plan for Allowances) in the second settlement period between 2008-2012. According to the KPRU project (version of June 30th, 2006) JANIKOSODA S.A. was granted an average annual limit of allowances for CO2B B emission in the volume of 175,600 Mg for the second settlement period.
Fulfilment of the statutory obligation to recycle packaging introduced to the environment
Pursuant to: • Act of May 11th, 2001 on packaging and packaging waste; • Act of May 11th, 2001 on producers' obligations regarding management of certain types of waste and product fee and deposit fee (Journal of Laws No. 63, item 638 and 639 as amended and with relevant ordinances included),
Importers and exporters of packed products are obliged to recover certain volumes of packaging used in the market and further on to recycle them. This obligation, as defined by the aforesaid provisions of law, may be fulfilled individually or through the recovery organizations. Those producers who do not meet the legal requirements are expected to pay the product fee. The nature of the CIECH SA's activity does not help fulfil the obligation of packaging waste recovery and recycling individually, thus cooperation with a company specialising in the field and fulfilling this obligation on behalf of CIECH SA had to be initiated. A good side of such a situation is that CIECH SA may focus on its core business and reliably fulfil its obligations resulting from the acts.
In 2006, the team "Chemia.Com S.A." completed a project based on automation of the registration process of packaging or packed products in the Company's trade.
REACH – Registration, Evaluation, Chemical Substance Authorisation
On December 18th, 2006 the European Parliament and the Council adopted the REACH regulation. Pursuant to the REACH timeline, the Regulation will come into force in June 2007, which means the initial registration of substances in the system is likely to start in autumn of 2008.
Pursuant to the Resolution No. 7/2007 of January 16th, 2007 the Management Board of CIECH SA appointed the REACH Task Force which will be committed to prepare CIECH SA and the Ciech Group companies to implement the system and decrease any risks included to minimum. The Task Force actions in cooperation with the persons responsible for the REACH affairs in the companies will be determined by the adopted schedule.
18 Investment activity
Investments carried out in 2006
In the Ciech Group total investment expenditure amounted to PLN 193,553 thousand in 2006.
Total investment expenses incurred by "Alwernia" S.A. were estimated at PLN 4,951 thousand in 2006. The following assignments were carried out: • adaptation of idle sodium sulphate to produce nitrate salt along with the system to store and unload nitric acid, • upgrade of the system to produce phosphates on the basis of EKF (Extractive Phosphoric Acid) • implementation of EKF to manufacture phosphoric table salt, • reorganisation and designation of new plots on the waste product disposal site • building the systems to produce granular fertilizers from waste materials; 1st phase of the investment in progress (building dry and waste granulation with EKF and magnesium sulphate, adaptation of chromium furnace),
25 The report on the activity of Ciech Group for 2006
• change in the method of calciner dedusting to manufacture sodium tripolyphosphorus with a high phase, • continuation of investment work within the area of adaptation and development of an idle system to utilise magnesium sludge, • purchase of forklift trucks, • purchase of devices and modernisation of the laboratory equipment.
Total investment expenditure incurred by the FOSFORY Group amounted to PLN 12,114 thousand in 2006. The following assignments were carried out: • modernization of the fertilizer system - reorientation of the fertilizer production into the one at zero waste, • installation of the feed phosphates production, • modernization of Chemikow Quay, • building the phosphoric acid terminal, • modernisation of the sulphuric acid system, • modernization of the productive assets of "AGROCHEM" Spółka z ograniczoną odpowiedzialnością in Człuchów and "AGROCHEM" Spółka z ograniczoną odpowiedzialnością in Dobre Miasto, • expansion of the IT system, • replacement of pneumatic transport of ground phosphate rock with mechanical transport, • upgrade of local centres of distribution.
Total investment expenditure incurred by JANIKOSODA S.A. was worth PLN 47,737 thousand in 2006. The following assignments were carried out: • a system to crush limestone, • modernization of system to prepare charges to lime-kilns, • a system to produce salt tablets, • upgrade and modernization of system of custom packing of salt in 1 kg packaging, • installation of turbine set with electric switching station, • modernization of distillation column no. 3, • modernization of steam calciners, • modernization of steam boilers op-140 – boilers no. 4 and no. 5, • modernization of process pipelines, • implementation of ORACLE Information system, • modernization and upgrade of computer network.
Total investment expenditure incurred by the SODA MĄTWY Group amounted to PLN 64,303 thousand in 2006. The following assignments were carried out: • manufacture of soda in the monohydrate system, • intensification of baking soda production, • modernization of packing node for calcium chloride, • modernization of cable and power network in the plant, • modernization of control systems and measuring and control apparatus, • modernization of apparatus and devices for the Calcium Chloride System, • automation and modernization of the Heat and Power Station, • modernization of railway siding, • purchase of transport equipment, • installation of distribution of ammonia water, • building system to prepare fuel mixers for lime-kilns, • modernization of lime-kilns FCH, • implementation of ORACLE Information system, • modernization of apparatus RH-DS, • modernization of computer network.
Total investment expenditure incurred by "VITROSILICON" Spółka Akcyjna was estimated at PLN 59,261 thousand in 2006. The following assignments were carried out: • purchase of the Huta Szkła Pobiedziska • building warehouse base for finished products in Iłowa, • modernization of the glass block production department in Iłowa, • building industrial chimney for the glass block production department, • upgrade of the sodium glass production section - purchase of chemical method reactor with filtration system, • modernization computer network, launch of Oracle Information system.
Total investment expenditure incurred by CIECH POLFA Sp. z o.o. was PLN 690 thousand in 2006. The following assignments were carried out:
26 The report on the activity of Ciech Group for 2006
• modernization work in the Ciechanów warehouse - adjustment to the requirements of the pharmaceutical law - best practice in distribution, • purchase of new fixed assets related to reconstruction of property, • finalisation of the ERP system implementation.
Total investment expenses incurred by Cheman S.A. were estimated at PLN 96 thousand in 2006. The following assignments were carried out: • in September 2006 an investment connected with purchase and assembly of packer was launched on the premises of the Inowrocław Sales Region headquarters. The machine was re-bought from SODA MĄTWY S.A. The investment covers purchase of the machine, disassembly, transport and re-assembly in the Cheman S.A. warehouse in Inowrocław. The investment was not completed in 2006 since the packer needs further improvements and adjustments.
Total investment expenditure incurred by the parent company CIECH S.A. amounted to PLN 4 401 thousand in 2006. The following assignments were carried out: • building the IT security management system, • completion of implementation of Oracle Information system within the area of purchase, sales and financial processes.
Investment plans for the next 12 months
In 2007 the Ciech Group planned total investment expenditure in the amount of PLN 307,493 thousand, the main items of which account for the fixed-asset investments in subsidiaries.
In "Alwernia" S.A. the following investments are planned for 2007 (in the amount of PLN 4,200 thousand): • adaptation and upgrade of idle system to produce fertilizers based on by-products, • intensification of the nitrate salt production – flaker, • purchase of devices and modernisation of the laboratory equipment, • modernizations of the Phosphoric Compound Plants, • modernizations in the Facilities Maintenance Department, • use of heat of combustion of phosphorus to produce steam, • modernization of sewage and draining system and of chemical purification plant, • modernization of computer hardware and licences,
In the FOSFORY Group the following investments are planned for 2007 (in the amount of PLN 14,000 thousand): • installation of the feed phosphates production - optimisation of solutions, • modernisation of Chemikow Quay, • the phosphoric acid terminal, • modernization of the fertilizer system - reorientation of the fertilizer production into the one at zero waste, • modernisation of the sulphuric acid system, • replacement of dry node on the "X" line, • upgrade of local centres of distribution, • building the palletization node, • modernization of the "AGROCHEM" Sp. z o.o. productive assets in Dobre Miasto, • modernization of the "AGROCHEM" Sp. z o.o. assets in Człuchów, • modernization of the gas absorption system after drying fertilizers, • replacement of pneumatic transport of ground phosphate rock with mechanical transport, • expansion of the IT system.
In JANIKOSODA S.A. the following investments are planned for 2007 (in the amount of PLN 45,000 thousand): • modernization of measuring and control systems - carbonization node, • upgrade of system of custom packing of salt, • implementation of another modules of Oracle Information system, • line for palletization of soda, • upgrade of the pelletizing system, • modernization of lime-kilns, • modernization of the carbonating column, • modernization of the gas cooling system after distillation, • purchase of steam circulating of salt evaporator, • modernization of OP-140 boilers, • modernization of turbine generator no. 5,
27 The report on the activity of Ciech Group for 2006
• Investments related to energetic assets.
In the SODA MĄTWY Group the following investments are planned (in the amount of PLN 36,594 thousand) for 2007: • launch of the production of soda in the monohydrate system, • building the KDS "B" system, • upgrade of gas cooling node after calcination, • upgrade of storage bin for soda ash, • automation and modernization of boiler-room, • modernization of apparatus and installation of the calcium chloride system, • modernization of wagons, • modernizations of control systems and measuring and control apparatus, • modernizations of TBS turbocompressors,
In Z.Ch. "Organika-Sarzyna" S.A. the following investments are planned for 2007 (in the amount of PLN 58,072 thousand): • upgrade of epoxy resin systems, • upgrade of polyamide hardeners, • building a new system line to manufacture unsaturated polyester resins, • upgrade of the system to treat brine sewage, • implementation of Oracle Information system, • modernization of fire protection system.
In ZACHEM S.A. the following investments are planned for 2007 (in the amount of PLN 73,259 thousand): • building the TDI complex, • building and modernization of the Foam Plant to increase productive capacity, • modernization of evaporator battery ZS/S-9000, • modernization of two cells of the existing mechanical draft cooling tower - ZS/S-9000, • replacement investments in the Epichlorohydrin Plant, • modernization of chlorine unloading and forcing-through system in the chlorine warehouse in the S-910 Department for the purposes of the Epichlorohydrin Plant • building technical gas plant on an outsourcing basis, • adjustment of settlement system completion of technical requirements put forward by Enea to purchase electric energy on the free market, • building the system to decrease concentration of ammonia nitrogen in sewage (water-sewage disposal), • monitoring of the sewage quality in accordance with the decision conditioning a permit to dispose industrial sewage in the sewage system, • installation of candle filter to process deposit in the Central Station for Sewage Neutralisation, • repair/replacement of industrial sewage system k-3/ o 300, o 500, • reduction of losses on the industrial network of energy.
In "VITROSILICON" Spółka Akcyjna the following investments are planned for 2007 (in the amount of PLN 21,151 thousand): • building warehouse base for finished products, • upgrade of the sodium glass production department, • modernization of computer network, implementation of Oracle Information system, • purchase of extra assets of HS Pobiedziska, • purchase of new machine to paint glass blocks' edges.
In S.C. Uznile Sodice Govora S.A. the following investments are planned for 2007 (in the amount of EUR 11,300 thousand which is equal to PLN 43,279 thousand translated according to an exchange rate estimated for 2007, namely being 3.83): • building the RH-DS system based on panel heat exchangers, • building steam calciner no. 2, • raising waste pond bunds and building new surrounding ditches around waste ponds, • building new absorption column, • building band filter BSB, • modernization of the system to compress air, • modernization of the lime-kilns system, • modernization of the crude soda system, • modernization of the filtration and calcination system, • modernization of the railway transport systems and equipment, • investment purchases,
28 The report on the activity of Ciech Group for 2006
• modernization of computer network, implementation of Oracle Information system, • automation of absorption - distillation - filtration control systems, • automation of control systems by silicates' installation – furnaces no. 2 and 3, • development plans.
In Przedsiębiorstwo Transportowo – Usługowe TRANSCLEAN Sp. z o.o. the following investments are planned for 2007 (in the amount of PLN 1,339 thousand): • purchase of a car and trailer to transport PUR foams, • purchase of tractor and cistern to transport liquid chemical products, • organization of a stand to wash cisterns after food product transportation, • modernization of the administrative building.
In CIECH POLFA Sp. z o.o. investments associated with replacement of used fixed-assets and with modernization of IT network are planned for 2007 in the amount of PLN 500 thousand.
In the following 12 months the parent company CIECH SA shall make investments mainly in the area of IT services. The following projects will be conducted totalling at PLN 9,639 thousand: • increasing efficiency of IT solutions, • optimisation of solution supporting budgeting and financial consolidation processes, • making tools supporting the Ciech Group management, • optimisation of IT security monitoring system.
In Cheman S.A. investments associated with adjustment of the packer to requirements appropriate for packing also other products for instance such as sodium nitrate, barium carbonate, are planned for 2007 in the amount of PLN 10 thousand
19 Changes in corporate linkage of the Ciech Group
Investment and divestment activities undertaken in 2005 and compliant with directions of the Ciech Group growth were continued in 2006 and they were dependent on reorganisation of the Group's structure with respect to the planned equity investments.
As a result of investment:
• The parent company CIECH SA made a purchase of shares in three companies in 2006, which considerably affected the Group's structure.
1. Zakłady Chemiczne ZACHEM Spółka Akcyjna (acquired share in equity - 80%, with respect to the put option issue, the 100% share was adopted for the consolidation purposes) – is the company manufacturing inorganic basic chemicals, dyes and pigments, as well as providing services within the area of installations, repairs and maintenance of general-purpose machines.
Through acquisition of ZACHEM S.A., the following subsidiaries and indirectly associated companies joined the Ciech Group:
• Zachem UCR Spółka z ograniczoną odpowiedzialnością • Zachem Barwniki Spółka z ograniczoną odpowiedzialnością • Przedsiębiorstwo Transportowo Spedycyjne "TRANSCHEM" Spółka z ograniczoną odpowiedzialnością • "BUDPUR" Spółka z ograniczoną odpowiedzialnością • Zakład Remontowo-Produkcyjny "Metalpur" Spółka z ograniczoną odpowiedzialnością • Przedsiębiorstwo "CARGO" Spółka z ograniczoną odpowiedzialnością • Natural Chemical Products Spółka z ograniczoną odpowiedzialnością
In relation to acquisition of shares in ZACHEM S.A., share in Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. has also been subject to change from 50% to 90% (with respect to the put option issued on the remaining 20% shares in ZACHEM S.A., share in Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. adopted for consolidation, amounts to 100%).
2. Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna (acquired share in equity - 80%, with respect to the put option issue, the 100% share was adopted for the consolidation purposes) – is the company manufacturing plastics, pesticides and other agro-chemical products.
29 The report on the activity of Ciech Group for 2006
Through acquisition of Z.Ch. "Organika-Sarzyna" S.A., the following subsidiaries and indirectly associated companies joined the Ciech Group:
• Zakład Doświadczalny "ORGANIKA" Spółka z ograniczoną odpowiedzialnością • Zakłady Chemiczne "Silikony Polskie" Spółka z ograniczoną odpowiedzialnością • "Komunalna Biologiczna Oczyszczalnia Ścieków - Spółka z ograniczoną odpowiedzialnością" • Zakład Remontowo-Budowlany "Organika" Spółka z ograniczoną odpowiedzialnością • Zakład Usługowo-Produkcyjny "Gumokor -Organika" Spółka z ograniczoną odpowiedzialnością • ZAKŁAD PROJEKTOWO-USŁUGOWY "ORGANIKA-PROJEKT" Spółka z ograniczoną odpowiedzialnością • Zakład Usługowo-Produkcyjny "DREWREM -ORGANIKA" Spółka z ograniczoną odpowiedzialnością • Zakład Usług Elektroenergetycznych "EL -CHEM" Spółka z ograniczoną odpowiedzialnością • Zakład Usług Energetycznych "WOD -REM" Spółka z ograniczoną odpowiedzialnością • "NS Automatyka" Przedsiębiorstwo Produkcyjno -Handlowo-Usługowe Spółka z ograniczoną odpowiedzialnością.
3. S.C. Uzinele Sodice Govora S.A. Romania (share of 93.14% in equity) – is the company manufacturing and selling soda ash and other soda products.
Through acquisition of S.C. Uzinele Sodice Govora S.A. the Ciech Group integrated the indirectly associated company – Govcrest International SRL (38.78%).
As a result of incorporation:
Jantrans-Janikowo Sp. z o.o. and TRANSODA Sp. z o.o. ● On the basis of decision of the District Court in Bydgoszcz, dated March 10th, 2006, the merger of indirect subsidiaries of CIECH SA, where TRANSODA Sp. z o.o. is an acquiring company and Jantrans-Janikowo Sp. z o.o. is a disappearing company, was carried out. After the merger, share capital of TRANSODA Sp. z o.o. amounts to PLN 27,653 thousand. Pursuant to the decision of the District Court in Bydgoszcz, Jantrans-Janikowo Sp. z o.o. was struck from the Business Register on March 24th, 2006. Thereby incorporation process of the companies in question has been completed.
As a result of divestment:
● Petrochemia Blachownia S.A. On January 10th, 2006 transaction of selling shares in the CIECH SA's subsidiary Petrochemia Blachownia S.A. in favour of BorsodChem Rt. with its registered office in Kazincbarcika (Hungary) was finalised.
● Alwernia Chrom Sp. z o.o. On December 08th, 2005 the sales contract on 100% of shares of partially owned subsidiary Alwernia Chrom Sp. z o.o. was signed. The contract became effective on the day of full payment of the purchase price in the amount of 450 thousand PLN on January 04th, 2006.
● Zach-Ciech Sp. z o.o. By way of decision of January 24th, 2006, the District Court in Katowice declared Zach-Ciech Sp. z o.o. bankrupt. The impairment loss was recognized in the consolidated financial statement for Zach-Ciech at the beginning of the liquidation process in 2004.
As a result of other changes:
• Cheman S.A. On December 28th, 2006 CIECH SA sold 1,880,864 shares at the nominal value of PLN 9, in Cheman S.A. at PLN 1, accounting for 100% share capital, to the subsidiary CIECH FINANCE Spółka z ograniczoną odpowiedzialnością, in which CIECH SA holds 100% share capital. The transaction results from a restructuring strategy adopted for Cheman S.A.
30 The report on the activity of Ciech Group for 2006
20 Description of major equity investments and methods of their financing
EQUITY INVESTMENTS AND DIVESTMENTS MADE IN THE CURRENT REPORTING PERIOD AND DESCRIPTION OF THE METHODS OF THEIR FINANCING
Investment and divestment activities taken in 2006 by CIECH SA were intended for concentration of capital in the companies handling production and trading products from the "basic portfolio" as defined by the CIECH SA strategy. The aim of the activities is growth of the strong Chemical Group efficiently competing with other significant players of the chemical product marketplace. Activities undertaken in the current reporting period depended not only on acquisitions of material share parcels of the companies within the area of interest, but also on continuation of activities initiated in previous years and reorganizing the Group's structure.
INVESTMENTS
Acquisition of two domestic companies such as Zakłady Chemiczne ZACHEM Spółka Akcyjna and Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna is one of the most important domestic equity investments taken and completed in 2006. ● Zakłady Chemiczne ZACHEM Spółka Akcyjna On March 29th, 2006 the Contract on sales of 11,840,000 shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna at PLN 5.79 per share or at the total value of transactions PLN 68,553,600 by Nafta Polska S.A. to CIECH SA and the obligation of CIECH SA to carry out the guaranteed investments in the amount of PLN 176,120,000 were signed. On October 11th, 2006 CIECH SA signed with Nafta Polska SA with its registered office in Warsaw, with participation of the Minister of Treasury, a protocol of subsidiary arrangement to the sales agreement for shares in Zakłady Chemiczne Zachem Spółka Akcyjna with its registered office in Bydgoszcz (80% shares) concluded in Warsaw on March 29th, 2006, with its registered office and to the sales agreement for shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna (80% shares) concluded in Warsaw on March 29th, 2006. The parties agreed that the purchase price, set forth in the sales agreement for shares in ZACHEM S. A., has changed and currently amounts to PLN 80,038,400.00. After the Contract on sales of the company's shares became effective on December 20th, 2006, CIECH SA became the owner of 11,840,000 shares accounting for 80% share capital of ZACHEM S.A. ● Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna On March 29th, 2006 the Contract on sales of 6,792,000 shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna at PLN 36.00 per share or at the total value of transactions PLN 244,512,000 by Nafta Polska S.A. to CIECH SA and the obligation of CIECH SA to carry out the guaranteed investments in the amount of PLN 130,000,000 were signed. After the Contract on sales of the company's shares became effective on December 20th, 2006, CIECH SA became the owner of 6,792,000 shares accounting for 80% share capital of Z.Ch. "Organika-Sarzyna" S.A.
● Moreover, as for Cheman S.A., on March 15th, 2006 increase of the share capital was registered in the National Court Register, which had been approved under resolution of the Extraordinary Meeting of Shareholders of Cheman S.A. of December 29th, 2005.
The aforesaid equity investments have been financed from the company's own funds and with a credit for the purchase of Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna.
The most important foreign investment was: ● S.C. Uzinele Sodice Govora S.A. On December 4th, 2006, CIECH SA became the owner of a 93.135% share parcel in the plant S.C. Uzinele Sodice Govora S.A. (31,875,516 shares). The Romanian government privatisation agency owns 2.888% shares (988,338 shares), while the other shareholders hold 3.976% (1,360,862 shares). CIECH SA will begin the implementation of the modernisation and investment plan providing for an increase in soda output within three years to 530,000 tonnes per year. Value of the entire project will amount to EUR 60 million, including EUR 25 million for debt clearing and debt restructuring, EUR 26 million for development investments and EUR 9.2 million for the purchase of the block of shares.
DIVESTMENTS
In 2006 CIECH SA sold 100% shares in Cheman S.A. to CIECH FINANCE Spółka z ograniczoną odpowiedzialnością (sales within the Group) at PLN 1. Furthermore, due to undertaken efforts share capital of "Chemia.com S.A." was decreased and "InChem Sp. z o.o." was put into liquidation. In addition, it is worth noting that CIECH SERVICE Sp. z o.o. share capital was decreased by the Extraordinary Meeting of Shareholders on November 17th, 2005. The capital's decrease was registered in the National Court Register in 2006.
31 The report on the activity of Ciech Group for 2006
● "InChem" Sp. z o.o.
On December 15th, 2006 the Extraordinary General Meeting of Shareholders of the subsidiary "InChem Sp. z o.o.", in which CIECH SA holds 100% of share capital (PLN 2.7 million) a resolution was adopted to terminate and put the company into liquidation. The resolution ensues from the strategy of capital withdrawal from "InChem Sp. z o.o."
● "Chemia.com S.A."
On May 25th, 2006 the Extraordinary Meeting of Shareholders passed a resolution to decrease share capital of "Chemia.com S.A." from PLN 3,500,000 to PLN 525,000 by decreasing the face value of 1 share (from PLN 100 per share to PLN 15 per share). The amount of PLN 2,975,000 acquired from the decrease was entirely transferred to reserves in order to assign it for coverage of losses brought forward which were estimated at PLN 3,143,980.80. Coverage of loss with the amount from the share capital decrease could be carried out upon registration in the National Court Register of the share capital decrease. The registration of the share capital decrease took place on October 20th, 2006.
● CIECH-SERVICE Sp. z o.o.
On May 8th, 2006 the District Court registered decrease of the CIECH SERVICE Sp. z o.o. share capital. Decision to decrease the Company's share capital was taken by the Extraordinary Meeting of Shareholders on November 11th, 2005 through voluntary redemption of 600 shares, upon shareholder's consent, with remuneration, by means of purchasing shares by the Company. Since voluntary redemption of shares requires decrease of share capital, the decrease took place upon registration in the National Court Register of changes in the share capital.
● Petrochemia Blachownia S.A.
On January 10th, 2006 transaction of selling shares in the CIECH SA's subsidiary Petrochemia Blachownia S.A. in favour of BorsodChem Rt. with its registered office in Kazincbarcika (Hungary) was finalised.
● Alwernia Chrom Sp. z o.o.
On December 08th, 2005 the sales contract on 100% of shares in the partially owned subsidiary Alwernia Chrom Sp. z o.o. was signed. The contract became effective on the day of full payment of the purchase price in the amount of PLN 450 thousand on January 04th, 2006.
● Zach-Ciech Sp. z o.o.
By way of decision of January 24th, 2006, the District Court in Katowice declared Zach-Ciech Sp. z o.o. bankrupt. The impairment loss was recognized in the consolidated financial statement for Zach-Ciech at the beginning of the liquidation process in 2004.
EQUITY INVESTMENTS AND DIVESTMENTS PLANNED FOR THE FOLLOWING 12 MONTHS
Investments and divestments planned for the next 12 months will be implemented according to the adopted growth strategy, which aims at increasing value of the Company. Efforts are underway to finalise acquisitions of the conducted equity investments and to acquire new investment projects, both in Poland and abroad.
The purpose of those efforts is to take over manufacturers thereby reinforcing the CIECH Group’s standing in its current markets and providing opportunities for development of the Group’s operations in the key segments.
Within implementation of the adopted projects for the next 12 months CIECH SA intends to:
● Finalise consolidation of the soda segment through establishment of one company on the basis of SODA MĄTWY S.A., JANIKOSODA S.A. and Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością. ● Continue the process of investments in the plants manufacturing inorganic goods in Central and Eastern Europe to strengthen the existing Divisions. ● Continue the process of investment analysis in the plants manufacturing silicates in Central and Eastern Europe to develop the Inorganic Division.
32 The report on the activity of Ciech Group for 2006
● Increase the S.C. Uzinele Sodice Govora S.A. share capital, also planned in 2007, through conversion of liabilities towards CIECH SA in the amount of EUR 8 million. On October 27th, 2006 CIECH SA and CIECH POLFA Sp. z o.o. signed a letter of intent with Polski Holding Farmaceutyczny S.A. on sale of the CIECH SA's shares in CIECH POLFA Sp. z o.o. within withdrawal from operation and expansion on the pharmaceutical distribution market. Furthermore, on December 15th, 2006 the Extraordinary General Meeting of Shareholders of the subsidiary "InChem Sp. z o.o.", in which CIECH SA holds 100% share capital, passed a resolution to terminate and put the company into liquidation. The resolution ensues from the strategy of capital withdrawal from "InChem Sp. z o.o."
21 Information on securities issues in CIECH SA.
In 2006 CIECH SA did not issue any securities.
On 22 March 2005 CIECH SA redeemed bills of exchange issued in the previous periods at the par value of PLN 15,000 thousand, due to deadline determined for that very day.
th Share capital was increased on February 16P ,P 2005 by the amount of PLN 41,020,000, which resulted from issue of C shares at a value PLN 5 per each.
In the nearest future no increases of the Company’s capital or any issues of debt securities are expected except for an issue of ordinary bonds to finance the Ciech Group investment and growth program.
22 Purchase of treasury shares by the parent company
In 2006 the parent company CIECH SA did not purchase any treasury shares.
The newly acquired subsidiary Z.Ch. "Organika-Sarzyna" S.A. holds 95,100 shares in CIECH SA. In the consolidated financial statement, value of these shares was recognized in equity in the "Treasury shares" item.
23 Changes in the basic management principles of the Company/Group
With regard to acquisition of Zakłady Chemiczne ZACHEM Spółka Akcyjna and Zakłady Chemiczne "Organika- Sarzyna" Spółka Akcyjna, the Management Board of CIECH SA approved an optimum organizational structure of the Organika Division allowing efficient completion of internal consolidation in the organic product segment within manufacturing and trading activity. Appointed at the beginning of 2006, the Organika Division in Organisation (presently the Organika Division) accounts for, apart from other two operating Divisions, another implementation stage of the growth strategy adopted by the Ciech Group. Analytical work aiming for feasibility study of the Phosphorus Division and the Inorganic Division projects is in progress.
24 Changes in the managing and supervisory bodies the previous year
On January 1st, 2006 the composition of the Management Board of CIECH SA comprised the following members:
Mr. Ludwik Klinkosz - President of the Management Board, Mr. Jerzy Golis - Member of the Management Board, Mr. Stefan Rojewski - Member of the Management Board.
On July 24th, 2006 the Extraordinary General Shareholders' Meeting of CIECH SA dismissed Mr. Ludwik Klinkosz – President of the Management Board and Mr. Jerzy Golis – Member of the Management Board.
On the same day the Extraordinary General Meeting of Shareholders of CIECH SA appointed Mr. Mirosław Kochalski as the President of the Management Board and Mr. Wojciech Wardacki as the Member of the Management Board.
On August 2nd, 2006 the Extraordinary General Shareholders' Meeting of CIECH SA dismissed Mr. Stefan Rojewski from the composition of the Management Board.
On August 08th, 2006 the Supervisory Board of CIECH SA delegated Mr. Wiktor Cwynar to perform temporarily the duties of a member of the CIECH SA Management Board as a replacement of a dismissed member of the
33 The report on the activity of Ciech Group for 2006
Management Board of CIECH SA by the time the Management Board of the Company is supplemented at the General Meeting of Shareholders as defined in the Articles of Association of CIECH SA.
On September 15th, 2006 the Extraordinary General Meeting of Shareholders of CIECH SA supplemented the composition of the CIECH SA Management Board appointing Mr. Rafał Pasieka as the Member of the Management Board.
As at December 31st, 2006 the composition of the Management Board of CIECH SA was as follows: 1. Mr. Mirosław Kochalski - President of the Management Board, 2. Mr. Wojciech Wardacki - Member of the Management Board, 3. Mr. Rafał Pasieka - Member of the Management Board.
On January 31st, 2007 the Extraordinary General Meeting of Shareholders of CIECH SA appointed Mr. Marek Trosiński to the composition of the Management Board of the Company.
On July 25th, 2006 the Management Board of CIECH SA dismissed the joint commercial proxy of Mr. Kazimierz Przełomski.
As of November 27th, 2006 the Management Board of CIECH SA granted another proxy to Mr. Kazimierz Przełomski which entitles to act jointly with a member of the Management Board of CIECH SA.
On January 1st, 2006 the composition of the Supervisory Board of CIECH SA was as follows:
1. Mr. Edmund Pietrzak – Chair of the Supervisory Board, 2. Ms. Elżbieta Boniuszko – Deputy Chair, 3. Ms. Magdalena Bąkowska – Member, 4. Mr. Zygmunt Bosiakowski – Member, 5. Mr. Andrzej Buczak – Member, 6. Mr. Dariusz Krajowski-Kukiel – Member, 7. Mr. Edmund Kozak – Member, 8. Mr. Ireneusz Król – Member.
On 17th February 2006 the Extraordinary General Meeting of Shareholders of CIECH SA made some changes in the composition of the Supervisory Board by means of:
▪ dismissal of the following members of the Supervisory Board:
1) Ms. Elżbieta Boniuszko, 2) Mr. Zygmunt Bosiakowski, 3) Mr. Andrzej Buczak, 4) Mr. Edmund Kozak, 5) Mr. Ireneusz Król.
▪ appointment of the following persons to the Supervisory Board of CIECH SA:
1) Ms. Krystyna Dziworska, 2) Mr. Maksymilian Klank, 3) Mr. Marek Konopczyński, 4) Mr. Zbigniew Markowski, 5) Mr. Wiesław Piosik, 6) Mr. Maciej Rudnicki.
On 24th July 2006 the Extraordinary General Meeting of Shareholders of Ciech SA dismissed the following members of the Supervisory Board:
1) Mr. Edmund Pietrzak, 2) Mr. Maksymilian Klank, 3) Ms. Magdalena Bąkowska, 4) Ms. Krystyna Dziworska, 5) Mr. Marek Konopczyński, 6) Mr. Wiesław Piosik, 7) Mr. Maciej Rudnicki.
34 The report on the activity of Ciech Group for 2006
On the same day the Extraordinary General Meeting of Shareholders of CIECH SA appointed the following persons as members of the Supervisory Board of CIECH SA:
1) Mr. Andrzej Cwynar, 2) Mr. Grzegorz Miś, 3) Mr. Wojciech Fedko.
nd On August 02P ,P 2006 the Extraordinary General Meeting of Shareholders of CIECH SA made amendments to the composition of the Supervisory Board by means of:
▪ dismissal of the following persons of the Board:
1) Mr. Andrzej Cwynar, 2) Mr. Zbigniew Markowski,
▪ appointment of the following persons to the Board:
1) Mr. Wiktor Cwynar, 2) Ms. Alicja Pimpicka.
On December 31st, 2006 the composition of the Supervisory Board of CIECH SA was as follows:
1. Mr. Grzegorz Miś – Chair of the Supervisory Board, 2. Ms. Alicja Pimpicka – Deputy Chair, 3. Ms. Wiktor Cwynar – Member, 4. Mr. Wojciech Fedko – Member, 5. Mr. Dariusz Krajowski-Kukiel – Member.
25 Rules of appointment and dismissal of the managing bodies and authorisation of the managing bodies, in particular the right to take the decision on share issue or buyout
As stipulated in the Articles of Association of CIECH SA, appointment and dismissal of the Management Board members, including the President of the Management Board are included in the competencies of the General Meeting of Shareholders. Authorisations of the managing bodies are regulated by the provisions of the Commercial Code of Companies and the Articles of Association of CIECH SA. The managing bodies do not hold any specific rights to take a decision on share issue or buyout
26 Contracts concluded between the issuer and the managing bodies, providing for the reimbursement in case of their resignation or lay-off without any justifiable reason or when their dismissal or lay-off takes place due to the issuer's mergers through takeovers
In case of dismissal from the occupied position or termination of employment contract out of any other reasons than infringement of elementary responsibilities resulting from the employment, the employment contracts with the Management Board Members provide for a single gratuity in the amount of total remuneration payable for the last six months of the term.
A non-competition agreement with the Management Board Members, after termination of employment, provides for a payment of compensation for 12 months in the amount of 80% average remuneration paid in a period of 12 calendar months preceding termination of employment.
27 Remuneration for the Management Board and the Supervisory Board
The particulars have been disclosed in item 31.6 of the additional information and notes to the consolidated report of the Ciech Group.
28 Total number and nominal value of the Company’s shares and shares in affiliates held by members of the management and supervisory bodies
Mr. Kazimierz Przełomski – Commercial Representative of the Company holds 1,200 shares in CIECH SA.
Other managing and supervising persons do not hold any shares in CIECH SA, nor shares and stakes in affiliates.
35 The report on the activity of Ciech Group for 2006
29 Shareholders entitled to at least 5% of votes at CIECH SA’s General Assembly
As determined in the notifications under article 69 of the Act of July 29th, 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading and Public Companies (Journal of Laws no. 184 item 1539) the following entities hold at least 5% of the total number of votes at the general meetings of the company as of May 11th, 2007:
- Kompania Węglowa S.A. - 10,270,800 shares equal to 36.68% CIECH SA's share capital; votes: 10,270,800, which constitute 36.68% total number of votes at the General Meeting.
- Otwarty Fundusz Emerytalny PZU 'Złota Jesień' – 1,712,732 equal to 6.12% CIECH SA's share capital; votes: 1,712,732, which constitute 6.12% total number of votes at the General Meeting.
- Commercial Union Investment Management S.A. (CUIM) Polska – 1,504,961 equal to 5.37% CIECH SA's share capital; votes: 1,504,961, which constitute 5.37% total number of votes at the General Meeting.
- Pioneer Pekao Investment Management S.A. (PPIM) – 2,812,949 equal to 10.05% CIECH SA's share capital; votes: 2,812,949 which constitute 10.05% total number of votes at the General Meeting:
including the Pioneer investment funds managed by PPIM – 2,813,956 equal to 10.05% CIECH SA's share capital; votes 2,813,956 accounting for 10.05% total number of votes at the General Meeting.
As is on Shares Shareholder Shares sold As is on 11.05.07 31/12/2006 acquired Kompania Węglowa SA 10 270 800 - - 10 270 800 Franklin Templeton Investments 2 000 000 - 2 000 000 - Otwarty Fundusz Emerytalny PZU "Złota Jesień" 1 712 732 - - 1 712 732 Commercial Union Investment Management S.A. 1 504 961 - - 1 504 961 (CUIM) Polska Pioneer Pekao Investment Management S.A. 1 410 325 2 812 949 (PPIM): 1 402 624 - including the Pioneer investment funds managed 1 370 577 by PPIM 1 443 379 2 813 956
On February 5th, 2007 CIECH SA received a notification that due to two transactions of selling the CIECH SA shares conducted on February 2nd, 2007 on the Warsaw Stock Exchange, Franklin Recources, Inc. and its associates did not hold any shares in CIECH SA any more. After finalisation of the transactions Franklin Recources Inc and its associates hold 0% share capital in CIECH SA.
On March 26th, 2007 Pioneer Pekao Investment Management S.A. (PPIM) informed CIECH SA about an increase in the total commitment to 10.05% total number of votes at the General Meeting of the Company's Shareholders with respect to shares belonging to the portfolios managed as a part of the commissioned brokerage financial instrument portfolio management service by PPIM.
▪ On March 29th, 2007 CIECH S.A. was informed by Pioneer Pekao Investment Management, executing the agreement for the commissioned brokerage financial instrument portfolio management services entered into by Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. and PPIM, and on behalf of the following funds:
1. Pioneer Akcji Polskich Fundusz Inwestycyjny Otwarty 2. Pioneer Dochodu MIX20 Fundusz Inwestycyjny Otwarty 3. Pioneer Wzrostu i Dochodu MIX40 Fundusz Inwestycyjny Otwarty 4. Pioneer Wzrostu MIX60 Fundusz Inwestycyjny Otwarty 5. Pioneer Małych i Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 6. Pioneer Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 7. Pioneer Zrównoważony Fundusz Inwestycyjny Otwarty 8. Pioneer Stabilnego Wzrostu Fundusz Inwestycyjny Otwarty 9. Specjalistyczny Fundusz Inwestycyjny Otwarty Telekomunikacji Polskiej
36 The report on the activity of Ciech Group for 2006
concerning an increase in the commitment of the above funds to 10.04% of the total number of votes at the General Shareholder's Meeting of the company: CIECH SA with regard to shares belonging to the portfolios of these funds.
The above Pioneer investment funds are the shareholders which jointly hold the indicated number of votes at GM. Portfolios of Pioneer investment funds are a subgroup of portfolios of PPIM's Customers.
▪ On April 24th, 2007 CIECH SA was informed by Pioneer Pekao Investment Management, executing the agreement for the commissioned brokerage financial instrument portfolio management services entered into by Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. and PPIM, and on behalf of the following funds:
1. Pioneer Akcji Polskich Fundusz Inwestycyjny Otwarty 2. Pioneer Dochodu MIX20 Fundusz Inwestycyjny Otwarty 3. Pioneer Wzrostu i Dochodu MIX40 Fundusz Inwestycyjny Otwarty 4. Pioneer Wzrostu MIX60 Fundusz Inwestycyjny Otwarty 5. Pioneer Małych i Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 6. Pioneer Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 7. Pioneer Zrównoważony Fundusz Inwestycyjny Otwarty 8. Pioneer Stabilnego Wzrostu Fundusz Inwestycyjny Otwarty 9. Specjalistyczny Fundusz Inwestycyjny Otwarty Telekomunikacji Polskiej concerning a decrease in the commitment of the above funds to 9.99% of the total number of votes at the General Shareholders' Meeting of CIECH SA with regard to shares belonging to the portfolios of these funds.
The above Pioneer investment funds are the shareholders which jointly hold the indicated number of votes at GM. Portfolios of Pioneer investment funds are a subgroup of portfolios of PPIM's Customers.
▪ On May 4th, 2007 CIECH SA was informed by Pioneer Pekao Investment Management, executing the agreement for the commissioned brokerage financial instrument portfolio management services entered into by Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. and PPIM, and on behalf of the following funds:
1. Pioneer Akcji Polskich Fundusz Inwestycyjny Otwarty 2. Pioneer Dochodu MIX20 Fundusz Inwestycyjny Otwarty 3. Pioneer Wzrostu i Dochodu MIX40 Fundusz Inwestycyjny Otwarty 4. Pioneer Wzrostu MIX60 Fundusz Inwestycyjny Otwarty 5. Pioneer Małych i Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 6. Pioneer Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty 7. Pioneer Zrównoważony Fundusz Inwestycyjny Otwarty 8. Pioneer Stabilnego Wzrostu Fundusz Inwestycyjny Otwarty 9. Specjalistyczny Fundusz Inwestycyjny Otwarty Telekomunikacji Polskiej concerning an increase in the commitment of the above funds to 10.05% of the total number of votes at the General Shareholder's Meeting of the company: CIECH SA with regard to shares belonging to the portfolios of these funds.
The above Pioneer investment funds are the shareholders which jointly hold the indicated number of votes at GM. Portfolios of Pioneer investment funds are a subgroup of portfolios of PPIM's Customers.
30 Contracts which may change the ownership interests of the current shareholders and bond holders
CIECH SA does not have any information concerning contracts that may change the ownership interests of the current shareholders.
31 Information on holders of any securities which empower to exercise special controlling powers in relation to the issuer with description of the powers enclosed
No securities occur in CIECH SA that may entitle to any special controlling powers in relation to the issuer.
32 Information on any limitations concerning transfer of the ownership of the issuer's securities and any limitations in exercising the right to vote per the issuer's shares
37 The report on the activity of Ciech Group for 2006
There are no limitations in CIECH SA as to transfer of the ownership rights to securities, except for limitations resulting from the Act on financial instrument trading of July 29th, 2005. There are no limitations in exercising the right to vote per the CIECH SA shares either.
33 Information on control system of employee share plans
No employee share plan is applied in CIECH SA or in any other company from the Ciech Group.
34 Information on contracts concluded with the entity entitled to audit consolidated financial statement of the Ciech Group
Contracts concluded in 2006
Name of the Date of contract Contents of contract Contract value entity conclusion
"Alwernia" S.A. Contract to audit the financial statement for 2006 Deloitte Audyt and review of the consolidation package for the 1. 12.07.2006 EUR 30,500 + 10% extra cost Sp. z o.o. first half of 2006 and audit the consolidation package for 2006
CIECH POLFA Sp. z o.o.
Deloitte Audyt 1. 28.07.2006 Audit of the financial statement for 2006 EUR 15,400 Sp. z o.o.
"VITROSILICON" Spółka Akcyjna Audit of the financial statement for 2006 and Deloitte Audyt review of the consolidation package for the first 1. 21.07.2006 EUR 25,500 +VAT Sp. z o. o. half of 2006 and audit of the consolidation package for 2006
Cheman S.A. Net EUR 24,500 + 10% extra cost (for costs of business Audit of the financial statement for 2006 and trips, telephones, shipments Deloitte Audyt review of the consolidation package for the first etc.); due to necessity to 1. 26.07.2006 Sp. z .o.o half of 2006 and audit of the consolidation perform duties not agreed package for 2006 upon through the fault of the Ordering Party - EUR 70 per man-hour. FOSFORY Group Audit of the financial statement, consolidated financial statement of the Capital Group and Deloitte Audyt 1. 28.07.2006 review of the consolidation package for the first EUR 48,400 Sp. z o. o. half of 2006 and audit of the consolidation package for 2006
SODA MĄTWY Group
Contract to audit the financial statement and the EUR 46,000 + costs incurred consolidated financial statement of the Capital by the contractor in relation to Deloitte Audyt 1. 17.07.2006 Group and review the consolidation package for fulfilment of the contract in the Sp.z .o.o the first half of 2006 and audit the consolidation amount of 10% remuneration package for 2006 volume
Contract to audit the financial statement for 2006 Deloitte Audyt 24.07.2006 (EC and to review the consolidation package for the EUR 13,000 + costs in the 2. Sp. z .o.o KUJAWY Sp. z o.o.) first half of 2006 and to audit the consolidation amount of 10% remuneration package for 2006
38 The report on the activity of Ciech Group for 2006
Name of the Date of contract Contents of contract Contract value entity conclusion
Contract to audit the financial statement for 2006 24.07.2006 Deloitte Audyt and to review the consolidation package for the EUR 9,900 + extra costs in the 3. (TRANSODA Sp. z Sp. z .o.o first half of 2006 and to audit the consolidation amount of 10% remuneration o.o.) package for 2006
JANIKOSODA S. A. Audit of the financial statement for 2006 and Deloitte Audyt review of the consolidation package for the first EUR 36,500 + VAT Extra 1. 24.07.2006 Sp. z.o.o half of 2006 and audit of the consolidation costs 10% package for 2006
CIECH SA Review and audit of the individual financial EUR 111,770 + cost refunds to Deloitte Audyt statement, consolidated financial statement of the 1. 21.06.2006 the amount of 10% contract Sp.z o.o Capital Group and the consolidation package for value the first half of 2006 and for 2006
Z.Ch. "Organika Sarzyna" S.A. EUR 10,000 + costs (business Deloitte Audyt Conducting audit of the financial statement for 1. 16.11.2006 trips, accommodation, phone Sp. z o.o. 2006 calls etc.) + VAT
ZACHEM S.A. 13 630 EUR + any costs incurred by the contractor in relation to fulfilment of the contract (business trips, Deloitte Audyt Audit of the financial statement and consolidated accommodation) + EUR 70 1. 13.11.2006 Sp. z o.o. financial statement for 2006 per hour if the circumstances shall force the person performing the audit to considerably increase the labour intensity
Contracts concluded in 2005
Date of Name of the contract Contents of contract Contract value entity conclusion Petrochemia Blachownia SA Deloitte & Touche Audit Review of the consolidation package for the EUR 15,000 + VAT + 10% cost 1 30.06.2005 Services Sp. z first half of 2005 refunds. o. o. Audit of the individual and consolidated Deloitte Audyt EUR 18,000 + VAT + 10% cost 2 25.11.2005 financial statement and the consolidation Sp. z o.o. refunds. package for 2005.
Date of Name of the contract Contents of contract Contract value entity conclusion "Alwernia" S.A. Deloitte & Touche Audit Audit of the individual and consolidated EUR 18,000 + VAT and extra costs - 1 28.10.2005 Services Sp. z statement for 2005. to 10% contract value. o.o. Review of the consolidation package for the EUR 17,000 + VAT and extra costs - Deloitte & first half of 2005 generated according to IFRS to 10% contract value; EUR 70 per Touche Audit accounting for its base for the accounting 2 30.06.2005 man-hour if it is required to make Services Sp. z books to prepare "Report from the review of the corrections in the 2nd version more o.o. consolidated financial statement for the Ciech than once Capital Group"
39 The report on the activity of Ciech Group for 2006
Date of Name of the contract Contents of contract Contract value entity conclusion Audit of the individual and consolidated EUR 18,000 + VAT and extra costs - statement for 2005. to 10% contract value; EUR 70 per Deloitte Audyt Audit of the consolidation package for 2005 to 3 25.11.2005 man-hour if it is required to make Sp. z o.o. prepare "Opinion and Report on the audit of the corrections in the 2nd version more consolidated financial statement of the Ciech than once Capital Group".
FOSFORY Group
Review of the consolidation package for the EUR 19,900 + VAT + EUR 70 per Deloitte & first half of 2005 generated according to IFRS man-hour if it is required to make Touche Audit accounting for its base for the accounting corrections in the 2nd version more 1 30.06.2005 Services Sp. books to prepare "Report from the review of the than once + 10% contract value to z o. o. consolidated financial statement for the Ciech cover the costs incurred by the Capital Group" contractor.
Audit of the financial statements and consolidation package for 2005, including: EUR 21,000 + VAT + EUR 70 per - individual financial statement man-hour if it is required to make Deloitte Audyt - consolidated financial statement of capital corrections in the 2nd version more 2 18.11.2005 Sp. z o.o. group than once + 10% contract value to - consolidation package prepared according to cover the costs incurred by the IFRS contractor. - selected procedures in subsidiaries. CIECH SA Deloitte Audyt Verification of valuations and implementation of EUR 123,000 + VAT and 10% cost 1 04.07.2005 Sp. z o.o. IAS/IFRS. refund EUR 39,500 + VAT and 10% cost Deloitte Audyt Audit of the financial statements and refunds; EUR 70 per man-hour if it is 2 15.11.2005 Sp. z o.o. consolidation package for 2005. required to make corrections in the 2nd version more than once Advisory services in the area of the proposed Deloitte Audyt 3 14.12.2005 transaction of acquiring the ZACHEM S.A. EUR 70,000 + VAT and expenses. Sp. z o.o. shares Deloitte & EUR 29,700 + VAT and 10% cost Touche Audit Review of the individual and consolidated refunds; EUR 70 per man-hour if it is 4 30.06.2005 Services Sp. z financial statement for the first half of 2005 required to make corrections in the o.o. 2nd version more than once
Deloitte & Touche Audit 5 05.01.2005 Training session on IFRS. EUR 6,100 + VAT Services Sp. z o.o.
Deloitte & Touche Audit Advisory services concerning implementation of 6 24.01.2005 EUR 4,500 +VAT Services Sp. z IFRS. o.o.
KPMG Polska 16.06.2004 7 Audyt Sp. z annex Accounting intelligence services (IFRS level). EUR 62,000 + VAT and cost refund. o.o. 15.04.2005 SODA MĄTWY S.A. EUR 19,000 + VAT + 10% net Deloitte & remuneration value + VAT; EUR 70 Touche 1 30.06.2005 Review of the consolidation package. per man-hour if it is required to make Services Sp. z corrections in the 2nd version more o.o. than once EUR 24,000 EUR + VAT + 10% net Deloitte Audyt Audit of the financial statements and remuneration value + VAT; costs of 2 25.11.2005 Sp. z o.o. consolidation package for 2005. extra hours – EUR 70 per man-hour + VAT "VITROSILICON" Spółka Akcyjna
40 The report on the activity of Ciech Group for 2006
Date of Name of the contract Contents of contract Contract value entity conclusion
EUR 11,000 + VAT + 10% contract Deloitte & value to cover the costs incurred by Touche Review of the consolidation package for the 1 30.06.2005 the contractor; EUR 70 per man-hour Services Sp. z first half of 2005 generated according to IFRS. if it is required to make corrections in o.o. the 2nd version more than once
EUR 12,000 + VAT + 10% contract Audit of the financial statement and value to cover the costs incurred by Deloitte Audyt 2 30.09.2005 consolidation package for 2005 prepared the contractor; EUR 70 per man-hour Sp. z o.o. according to IFRS. if it is required to make corrections in the 2nd version more than once
Deloitte & Provision of tax advisory services: preparation Touche Audit of written commentary on VAT, on corporate 3 5.08.2005 EUR 1,275 + VAT Services Sp. z income tax; presentation of recommendations o.o. as to reduce the tax risk.
Provision of services to help the Company obtain the EU funding for its planned investments - analysis of possibilities to obtain the funding; support in winning the funds Deloitte & covering execution of initial analysis of EUR 11,600 + VAT + 2.75 % total Touche Audit 4 12.05.2005 investment assumptions in terms of formal amount of the funding proposed by Services Sp. z requirements of program and preparation of an the Ministry of Economy and Labour o.o. application and required documentation; services associated with use and settlement of funds during realisation and exploitation of investment project.
CIECH POLFA Sp. z o.o. Deloitte & EUR 5,500 + VAT and 10% cost Touche Audit Review of the consolidation package for the refunds + EUR 70 per man-hour if it is 1 30.06.2005 Services Sp. z first half of 2005 required to make corrections in the o.o. 2nd version more than once EUR 7,500 + VAT and 10% cost Deloitte Audyt Audit of the financial statement and refunds + EUR 70 per man-hour if it is 2 18.11.2005 Sp. z o.o. consolidation package for 2005. required to make corrections in the 2nd version more than once JANIKOSODA S. A. Deloitte & EUR 14,500 + VAT and 10% cost Touche Audit Review of the consolidation package for the refunds + EUR 70 per man-hour if it is 1 4.07.2005 Services Sp. z first half of 2005 generated according to IFRS. required to make corrections in the o.o. 2nd version more than once
EUR 19,000 + VAT and 10% cost Audit of the financial statement and Deloitte Audyt refunds + EUR 70 per man-hour if it is 2 7.11.2005 consolidation package for 2005 prepared Sp. z o.o. required to make corrections in the according to IFRS. 2nd version more than once Cheman S.A. Deloitte & EUR 10,000 + VAT and 10% cost Touche Audit Review of the consolidation package for the refunds + EUR 70 per man-hour if it is 1 30.06.2005 Services Sp. z first half of 2005 required to make corrections in the o.o. 2nd version more than once
EUR 13,000 + VAT and 10% cost Deloitte Audyt refunds + EUR 70 per man-hour if it is 2 02.12.2005 Audit of the financial statement for 2005. Sp. z o.o. required to make corrections in the 2nd version more than once
41 The report on the activity of Ciech Group for 2006
35 Financial resources management in the Ciech Group
It is the Group's key objective to maintain full liquidity. The Ciech Group has the full capacity to repay all its debts. Method of financing acquisitions carried out in 2006 allowed to optimise the financing structure and to use the effects of financial leverage without loosing liquidity. The decision-making processes applied to purchases of both base stock, and auxiliary materials and services stipulate the necessity to negotiate the best possible financial terms with particular stress put on the payment deadlines. The same rule applies to sales, where determination of the partner's reliability, degree of certainty as to recoverability of the payments receivable, and, where necessary, application of execution measures, are particularly emphasised.
• Ciech Group's profitability analysis
In 2006 the Ciech Group recorded an explicit increase in net profit on sales (gross profit on sales less sales costs and overhead costs), which was accompanied by a considerable increase in profitability of sales (from 6.5% to 8.3%). It shows that the company's goodwill is subject to growth based on core business. The Ciech Group focuses on developing product segments regarded as strategic. In 2006 development of the Organic Division was introduced, which resulted in an explicit increase of income especially in the fourth quarter of the year. High dynamics was recorded also in the Soda Division (mostly the effect of benefiting from the good market situation - price increase). Furthermore, within completion of the strategy, the Group considerably limited its activity in the petrochemical segments. A considerable increase was recorded in 2006 by almost all profitability ratios, which was affected by development of the Group's core business, as well as by finalisation of selling the Petrochemia Blachownia S.A. shares.
The tables below show the main figures concerning the financial results and profitability:
Table 3. Consolidated profitability ratios for the Ciech Group Specification 2006 2005 Net sales revenue 2 174 330 2 209 545 Sales profit 180 569 144 167 Operating profit 146 319 143 555 Net profit 150 434 117 853 Return on sales (%) 8.3% 6.5% Return on operating activity (%) 6.7% 6.5% Return on sales (%) 6.9% 5.3% Total return on assets (%) 5.5% 7.2% Return on equity (%) 13.2% 11.6% Source: CIECH SA Calculation principles: Profitability ratios – the ratio of the relevant sales profit, operating profit, and net profit figures for the period concerned to the net income from sales of products, services, and materials, Return on assets (ROA) – net profit for a financial year/ assets as at the period-end, Return on equity (ROE) – net profit / equity as at the period-end.
• Liquidity assessment in the Ciech Group
The Ciech Group has the full capacity to promptly settle its liabilities. In 2006 all liquidity ratios were subject to a decrease, which was mostly prompted by: (a) increases in the level of short-term credits (including largely in CIECH SA – optimisation of financing through intensified use of foreign sources) and (b) consolidation of the companies such as: S.C. Uzinele Sodice Govora S.A. and ZACHEM S.A., whose liquidity ratios are lower than the ones shown by the main companies of the Ciech Group. Restructuring steps taken in the newly acquired companies lead to restore liquidity in these enterprises.
Table 4. Liquidity ratios for the Ciech Group
Specification 2006 2005 Current ratio 1.1 1.6 Quick ratio 0.8 1.4 Source: CIECH SA Calculation principles:
42 The report on the activity of Ciech Group for 2006
Current ratio – the ratio of the current assets to the total current debt at the period-end; the current ratio reflects the company’s ability to repay its current debt using its current assets. Quick ratio – the ratio of the current assets less inventories to the total current debt at the period-end; the quick ratio reflects the company’s ability to accumulate cash in a short time to finance its payable debt.
• Working capital and turnover ratios in the Ciech Group
Working capital demand, at the end of 2006, amounted to PLN 211,120 thousand, which signifies a decrease within 12 months by 39%. It was an effect of balance sheets of ZACHEM S.A. and S.C. Uzinele Sodice Govora S.A. recognized in the consolidated statement, whose working capital demand was negative at the end of 2006.
Table 5. Current assets of the CIECH Group (PLN '000)
Specification 31.12.2006 31.12.2005 1. Current assets 1 100 842 817 311 2. Cash and other short-term investments 148 067 101 485 3. Adjusted working assets (1-2) 952 775 715 826 4. Short-term liabilities 1 032 334 506 003 5. Short-term loans and other financial liabilities 290 679 137 166 6. Adjusted short-term debt (4-5) 741 655 368 837 7. Working capital (1-4) 68 508 311 308 8. Working capital demand (3-6) 211 120 346 989 9. Net cash balance (7-8) (142,612) (35,681) Source: CIECH SA
Increase in inventory, receivables and liabilities turnovers in 2006 in relation to 2005 results mostly from recognition of the acquired companies in the fourth quarter of 2006 in the consolidated balance sheet at the end of 2006, together with recognition of income and costs of these companies in the consolidated profit and loss account. Cash conversion cycle took 46 days in 2006 and continued on the level similar to the one in 2005.
Table 6. Turnover cycles for Ciech Group's main working capital items (days)
Specification 2006 2005 Inventory turnover 34 23 Trade receivables turnover 100 84 Trade payables turnover 88 62 Operating cycle 134 107 Cash conversion cycle 46 45 Source: CIECH SA Calculation principles: Inventory turnover – the ratio of average inventories at the period-end [arithmetic mean of inventories at the year beginning and end] to the operating cost for the period, multiplied by the number of days in the period, Receivables turnover – the ratio of average receivables due to deliveries and services at the period-end [arithmetic mean of receivables at the year beginning and end] to the net sales income for the period, multiplied by the number of days in the period, Liabilities turnover – the ratio of average liabilities due to deliveries and services at the period-end [arithmetic mean of liabilities at the year beginning and end] to the operating cost for the period, multiplied by the number of days in the period, Operating cycle- total inventory turnover and trade receivables turnover, Cash conversion cycle – the difference between the operating cycle and the payables turnover.
• Ciech Group debt assessment
In 2006 the debt volume of the Ciech Group increased yet remained at satisfactory level. Increase in the debt was prompted by optimisation of the financing structure carried out within the Group strategy. Acquisition expenditure and investments in productive assets carried out in 2006 were mostly financed by bank credits, the cost of which is lower than the capital cost. The table below shows the key debt ratios.
43 The report on the activity of Ciech Group for 2006
Table 7. Debt ratios for the Ciech Group
Specification 2006 2005 Total debt ratio 58.3% 37.7% Long-term debt ratio 20.5% 6.7% Debt to equity ratio 146.5% 63.5% Equity to assets ratio 41.7% 62.3% Source: CIECH SA
Calculation principles: Total debt ratio – the ratio of long- and short-term debt to total assets; the ratio reflects the share of external financing sources. Long-term debt ratio – the ratio of long-term debt to total assets; it reflects the share of long-term liabilities in the overall financing of operations. Debt to equity ratio – the ratio of total liabilities to equity. Equity to assets ratio – the ratio of equity to total assets; it reflects the share of equity in the financing of operations.
36 Expected financial situation of the Ciech Group
As assumed by the implemented strategy, the Ciech Group expects a dynamic growth of sales and results. The main impulse for growth will come from strategic acquisitions both conducted in the fourth quarter of 2006 and planned for the years to come. In addition, material growth programs will be held in the manufacturing companies of the Group. The Management Board of CIECH SA expects the planned expenses will be financed from three main sources: own funds, ordinary bonds of CIECH SA and bank credits. Optimisation of the financing structure in terms of decreasing the financial costs, linked with retention of the financial liquidity on a secure level shall constitute a key criterion for selection of particular instruments.
37 Assessment of the possibilities for implementation of investment assumptions in comparison with the amount of funds held, taking into consideration possible changes in the structure of financing of that activity
A part of investment expenditure shall be financed from the Ciech Group own funds. The Group plans to take out long-term investment loans and to use other financial products (such as issue of securities, financial and operating lease) in order to carry out more valuable investment projects. The financial products will be adjusted to projects' character and available financial possibilities of the Ciech Group companies.
As it is the Management Board's belief, the Ciech Group is creditworthy to finance the projects planned.
38 Material events in 2006 that impacted or are likely to impact the Company’s operations
▪ Considerable increase in CIECH SA's and the Ciech Group's business scope and revenues owing to purchases made by CIECH SA in 2006 of 80% shares in ZACHEM S.A. and Z.Ch. "Organika-Sarzyna" S.A. and 93.14% shares in the Romanian soda company known as S.C. Uzinele Sodice Govora S.A. ▪ Continuation of the investment process in the plants manufacturing inorganic goods in Central and Eastern Europe to strengthen the existing Divisions. ▪ Continuation of investment analysis process in plants manufacturing silicates in Central and Eastern Europe. ▪ Continuation of a good situation in the European glass industry and in the construction industry, accounting for significant target markets for CIECH SA (specifically, it applies to new assembly lines of glass recently launched and planned in Central and Eastern Europe and in Eastern Europe). ▪ Projected increase of manufacturing capacity of soda ash in Russia, Ukraine, Romania and Bulgaria in the years to come, production of which will be targeted mainly at satisfaction of growing demand on markets of these countries. ▪ Plans to shut down systems parts manufacturing NPK fertilizers in France (Grande Paroisse), which will allow to better balance the market of these products in Europe and will improve the competitive position of the Ciech Group within this scope. ▪ Shutting down TDI system in the Dow Chemical concern in Italy in August 2006 (with a manufacturing capacity of approx. 110 thousand tonnes per year accounting for a dozen percent of the Europe’s manufacturing capacity), which contributed to improvement in positioning of other competitive European suppliers with CIECH SA included.
44 The report on the activity of Ciech Group for 2006
▪ Price increases of soda ash by the largest European suppliers on average by approx. 2-3% for the contracts in 2007. ▪ Lessened frequency of supplies to Europe expected in 2007 within the scope of competitive soda ash from USA (in favour of export to China).
39 Prospects for growth for the Capital Group
Prospects for development in CIECH SA and the Ciech Group are both associated with the pace of progress in the adopted growth strategy of the Company and of the Ciech Group, and external factors, which include:
▪ large potential growth of demand for chemicals in Poland (where their use per capita on the level of barely over EUR 300 is still approx. four times lower than in Western Europe), ▪ competitiveness of Polish chemical products on foreign markets, supported by high export dynamics.
CIECH SA believes that the positive macroeconomic trends and the assumed parameters of key investment projects of the Group will be the driving force for achieving the critical strategic targets, including in particular higher operating profitability in the next two to three years.
CIECH SA’s and the Ciech Group’s short-term goal is to strengthen their current market position in their core business segments and key product sales. CIECH SA’s range of products also includes many “mature” products (soda ash, vacuum pan salt, baking soda), with an established market standing and stable growth dynamics. CIECH SA’s activity with respect to that product group will include: ▪ continuation of cutting manufacturing costs through improvement of the operational excellence, ▪ use of market niches to build the Group's core portfolio, ▪ acquisition of cheap base-stock to reduce the unit costs of manufactured products.
For products with higher growth dynamics (glass blocks, lanterns, TDI, resins), CIECH SA is planning to increase sales of those products and their market share.
CIECH SA’s and the Ciech Group’s long-term strategy will focus on: ▪ strengthening of the leading position in the core product markets, ▪ horizontal concentration of the manufacturing processes (from securing cheap base stock sources to reaching the end consumer, using its own distribution network where it is economically sound), ▪ manufacturing maximally processed products with high-potential application markets, defined as the so- called “core portfolio”.
40 Internal and external factors significant for the Ciech Group growth
External factors of general nature
Economic situation in Europe and worldwide Ciech SA's commercial activities rely to a large extent on chemical product exports, the level and profitability of which depend on the global economic situation in Europe and worldwide. A global economic slump could affect the demand for raw materials in international markets, thus reducing the exports of CIECH SA.
Global economic growth is estimated to become slower in 2007 than previous year (the GDP increased by 3.1% against 3.9 % in 2006 according to the European Chemistry Industry Council - CEFIC). This dynamics will be even slower in the European Union (25) (2.3% against 2.7% in 2006). In Eastern Europe, economic growth (also slower than previous year) will be twice as fast as in the EU though. CEFIC forecasts decrease in the chemical output in 2007 in the 25 countries of the European Union (within the area of chemicals without pharmacy to 2.2% against 2.5% in 2006).
Furthermore, it is expected that the growth of demand for chemicals in the years to come will be growing in Central and Eastern Europe by 5-6% year-to-year.
Situation in the industries of the recipients of the Company's products in Poland CIECH SA supplies most of its products to the following Polish industries: the chemical industry, the glass manufacturing industry, and the plastics industry. How those industries expand depends on the general economic situation in Poland. The increase in industrial production at fixed prices recorded in 12 months of 2006 increased merely by 11.8% (in the whole 2005 by 4.1%). The dynamics of the chemical industry was +11.0% (in 2005 +3.3%) with regard to the manufacture of chemical products, and +14.2% (in 2005 +9.1%) with regard to the manufacture of rubber and plastics products.
45 The report on the activity of Ciech Group for 2006
Forecasts for 2007 are very restrained as they predict a slight stagnation in economic growth rates in the country as compared to 5.8% dynamics in GDP in 2006. Judging from very good economic results at the beginning of the year, dynamics in GDP will rise in 2007. This translates into continuation of high dynamics of sales in the chemical sector, which tends to grow in a similar manner as the whole economy or even faster.
Financial standing of the agricultural industry CIECH SA derives a certain portion of its income, mainly generated from mineral fertilizers, and plant protection chemicals, from the agricultural sector. CIECH SA estimates that the demand for its mineral fertilisers in Poland should remain stable, with a growing significance of mixed fertilisers. The factors that will most likely increase the demand for agrochemical products and thereby demand for the products manufactured by the Ciech Group include processes aimed at improving the condition and profitability of agricultural production, including production quotas and direct payments, yielding higher revenues for CIECH SA. If no purchasing-power improvement is recorded in the agricultural sector, the demand for fertilizers and plant protection chemicals will slacken, as will the CIECH SA’s income from agrochemical product sales.
Situation in the raw materials market A major portion of the CIECH SA’s turnover is generated from imports of chemical raw materials to Poland. The raw-material markets are characterised by high cyclicality, prompted by fluctuations in the world economies. On the one hand, the growing prices of raw materials force the trading agents to lower their mark-ups, while dropping prices. On the other hand, falling prices are usually a sign of declining demand and the onset of an economic slump. If the stable growth rate and steady prices of chemical raw materials continue, this will benefit CIECH SA's imports of raw materials. Large fluctuations in demand and prices caused either by high economic growth rate, or by an economic slump, may affect the CIECH SA's trade in chemical raw materials.
Project concerning new European Union provisions regarding registration and evaluation of chemicals (REACH system) On December 18th, 2006 the European Parliament and the Council adopted the REACH regulation. Pursuant to the REACH timeline the Regulation will come into force in June 2007, which means the initial registration of substances in the system is likely to start in autumn of 2008. Pursuant to the Resolution of January 16th, 2007 the Management Board of CIECH SA appointed the REACH Task Force that will be committed to prepare CIECH SA and the Ciech Group Companies to implement the system and decrease any risks included to minimum. The Task Force actions in cooperation with the persons responsible for the REACH affairs in the companies will be determined by the adopted schedule.
PLN/EUR exchange rates The majority of the Ciech Group's export sales are settled by the parent company CIECH SA and the main currency of export is EURO. EUR to PLN exchange rate was strengthening in the first half of 2006, which will have good influence on the CIECH SA's results in the second half of the year, however a downward trend will prevail. At the beginning of the second half of the year transactions hedging approx. 60% net exposure of CIECH SA were concluded, which largely reduced losses on export contracts, resulting from the EUR exchange rate fall.
Internal factors
Feasibility of technology investments: construction of a monohydrate system, development of a countrywide distribution system for vacuum pan salt distribution The purpose of the technology investments planned at the Ciech Group is to increase the production capacity for high-yield products, to enhance the quality and properties of its products (the monohydrate investment), and introduce new products with potential for becoming the market leaders (animal feed phosphates). The vacuum pan salt project is aimed at introducing the Ciech Group to the vacuum pan salt distribution market, and allowing it to create its own trademark. The project will increase the capacity of custom packing of salt, thanks to equity or fixed-asset investments. The projects will be crucial to maintaining the competitive edge and strengthening the market position in selected areas of the Ciech Group's operations. The Ciech Group expects that its technology investments will enable it to maintain its leadership of the Polish soda-ash market, strengthen its positioning in the agrochemical sector and achieve a leading position in the vacuum pan salt retail market. Achievement of the project targets should also bring about an increase in income and return on sales.
Feasibility of technology investments in the recently acquired companies such as ZACHEM S.A., Z.Ch. "Organika-Sarzyna"” S.A. and S.C. Uzinele Sodice Govora S.A. Pursuant to the commitments under the Privatisation Agreements concerning ZACHEM S.A. and Z.CH. "Organika- Sarzyna" S.A. and concerning plans with respect to S.C. Uzinele Sodice Govora S.A., CIECH SA carries out investment parcels directed at modernisation and growth of these companies.
46 The report on the activity of Ciech Group for 2006
ZACHEM S.A. – the main directions of investments cover: ■ Modernisation of basic assembly lines resulting from current condition of technique, intended for higher capacity and decreased manufacturing costs, ■ Development of new production units to balance the need for the main raw materials and to become independent of external sources and to decrease the manufacturing costs, ■ Completion of investment assignments reducing adverse effects on environment and at the same time complying with the Environmental Protection Rights. The main investment assignment within this area is development of modern electrolysis to produce chlorine.
Z.Ch. "Organika-Sarzyna" S.A. – development plans cover the following steps: ■ New investments, implementation of which will enrich the current market offering of the Company, ■ Development of the existing manufacturing capacity of the products attractive for the marketplace, ■ Reconstruction of productive property of the Company - technological modernisations and modern control systems, ■ Investments connected with environmental protection.
S.C. Uzinele Sodice Govora S.A. – development plans cover the following steps: ■ Development of manufacturing capacity of soda ash, ■ Modernisation of the existing productive property of the Company, ■ Investments connected with environmental protection.
Effective internal consolidation of the soda segment The soda segment consolidation project involves acquisition 100% shares in two soda companies by buying back the share parcels from small shareholders, integration of the Division by means of merger of soda companies and continuation of cost restructuring. Decision concerning integration of the Soda Division has been taken and by the end of the second quarter of 2007, as planned, Janikowskie Zakłady Chemiczne JANIKOSODA Spółka Akcyjna, Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna and Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością will have formed one company with the output of 12 million tonnes of soda per year. The internal consolidation and implementation of operational excellence projects will allow for further cuts of the Division operation, leading to an increase in the Ciech Group's competitive edge in the soda segment.
Growth strategy advancement, with a focus on new division building The Organika Division was established in 2006. It was established on the basis of ZACHEM S.A. and Z.Ch. "Organika-Sarzyna" S.A. and parts of CIECH SA. In January 2007 formal steps were taken to update the growth strategy for the Ciech Group and the Organika Division, including all synergies expected as a result of the integration in progress of the newly acquired companies of the Ciech Group. As part of this growth strategy, the Ciech Group plans to build divisions (complementary to the existing Soda and Organika Division) to handle other key areas for the chemical sector: agrochemicals and inorganic division.
Quality and continuity of the management and staff The market position of the Ciech Group is largely owed to the high level of skills of its top and middle management. The Group's HR policy guarantees stability and career and growth opportunities to its staff.
41 Material risk factors and threats and degree of exposure in the Group
Risk of reversal of the positive economic growth rate trends in Poland The Ciech Group activity is associated with numerous segments of the chemical industry whose growth is directly correlated with the general standing of the economy. Presently, pace of economic growth in Poland rises to several GDP percentage points a year. Although the long-term forecasts show in general retention of high growth, one cannot exclude the risk of temporary downward trend in Poland (for instance due to low growth pace of internal demand and export attenuation). Possible attenuation of this branch of economy may affect indirectly the chemical sector. A weaker demand for chemical products may impact the Ciech Group's revenues, and impair its financial performance.
Risk of economic stagnation in Europe and worldwide The Ciech Group's commercial activities rely to a large extent on chemical product exports, the level and profitability of which depend on the global economic situation in Europe and worldwide. A global economic slump could affect the export trade volumes achieved in international markets, thus reducing the sales income in the individual segments of the Ciech Group's operations.
47 The report on the activity of Ciech Group for 2006
Risk of increase of competition in the soda segment The main products of the CIECH Group include soda products manufactured in subsidiaries: JANIKOSODA S.A., SODA MĄTWY S.A. and SC Uzinele Sodice Govora S.A. The processes of concentration of production, which can be more and more often observed in Europe, contribute to the increase of competition from big, over-regional chemical corporations that manufacture soda ash. CIECH SA participates in these processes conducting acquisition of new entities in the soda industry.
Risk of lower demand in the segment of the toluene diisocyanate (TDI) recipients As a result of purchase of 80% shares in ZACHEM S.A., CIECH S.A. became the main shareholder of the sole manufacturer of the toluene diisocyanate (TDI) - a semi-finished product used to manufacture polyurethane foams for the furniture and automotive industries. CIECH SA is the sole vendor of TDI with ZACHEM S.A. (one of the main products of the Ciech Group). The market of TDI is a global marketplace, however, in practical terms the majority of the product turnover is carried out within the continent of Europe. With a view to the destination segments of recipients (the furniture and automotive industries) TDI is strongly dependent on a general state of the economy. In the event of drastic attenuation of this branch of the economy, demand for TDI falls as well. A fixed number of suppliers in numerous global marketplaces may be a solution to secure oneself against the worsening economic situation but only in particular local marketplaces. CIECH SA also conducts the same activities.
42 Anticipated growth of the Group
The Ciech Group growth strategy is aimed at reaching the highest possible value of the Company by creating a strong regional chemical corporation focused on selected market segments, covering products with high added value, high growth potential, and of complementary nature. In January 2007 appropriate steps were taken to update the growth strategy for the Ciech Group and the Organika Division, including all synergies expected as a result of the integration in progress of the Ciech Group with the newly acquired entities such as ZACHEM S.A., Z.Ch. "Organika-Sarzyna" S.A. and S.C. Uzinele Sodice Govora S.A.
Aim of the updated strategy is to make the Ciech Group a chemical concern composed of four separate divisions handling the four key areas of the chemical sector. Each division will manage a specific product portfolio with parameters guaranteeing an income level for the Group of over 1 billion euro per year, and an EBITDA of more than 12%.
Implementation of the growth strategy entails: ■ increasing the added value in the soda sector by further internal consolidation of the soda segment (establishment of one company on the basis of JANIKOSODA S.A., SODA MĄTWY S.A. and Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością), and by technological investments (the monohydrate) and acquisition (integration of S.C. Uzinele Sodice Govora S.A. with the Soda Division), ■ development of the Organika Division on the basis of ZACHEM S.A. and Z.Ch. "Organika-Sarzyna" S.A. and parts of CIECH SA, ■ acquisition of a strong position in the Polish agrochemical market due to development of agrochemical division realised by investing fixed assets in subsidiaries such as GZNF "FOSFORY" Sp. z o.o. and "Alwernia" S.A. and as a result of future capital investments, ■ development of inorganic division thanks to fixed-asset investments to improve manufacturing capacity of the subsidiary "VITROSILICON” Spółka Akcyjna, and also through future equity investments.
Ultimately, the Ciech Group’s operations will comprise almost exclusively the manufacture of and trade in the products of the “core portfolio”, meeting the acquired market position and the predefined added-value requirements. The process of reorganising the portfolio will be carried out on two levels: on the one hand, the share of non-core products and goods in the Ciech Group’s portfolio is gradually decreasing (e.g. the petrochemical products), and, on the other hand, the portfolio will be enriched with attractive non-Group products. At the same time, the entities included in the Ciech Group implement their own investment programs to increase the volumes of core-product manufacturing (organic growth - e.g. glass blocks, vacuum pan salt).
While gradually abandoning the non-core portfolio, CIECH SA makes divestments from selected manufacturing and commercial Group companies. Intention to sell them results from, first, willingness to focus on the core business (core portfolio), and, second, necessity to gain funds to finance another acquisitions and investments. CIECH SA’s trade in non-core low-yield products is also simultaneously reduced.
48 The report on the activity of Ciech Group for 2006
43 Goals and principles of financial risk management
The particulars concerning goals and principles of financial risk management have been disclosed in item 32 and 33 of the additional information and notes to the consolidated report.
49 The report on the activity of Ciech Group for 2006
APPENDICES
Appendix No. 1 Main products, goods and services
CIECH SA 01.01.2006 - 31.12.2006 Quantity in Product, product group, or service thousands of Net sales value Percentage share tonnes Dense soda ash 829 471 748 29% Light soda ash 275 156 781 10% Fertilizers 156 116 492 7% EPI 17 108 236 7% PVC 26 86 086 5% Dry salt 278 70 441 4% Phosphorites 273 51 966 3% TDI 12 51 199 3% Other - 527 969 32% Total 1 640 918 100%
01.01.2005-31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Soda ash 1 103 587 838 37% Aromatic hydrocarbons 59 158 800 10% Fertilizers 174 126 329 8% Salt 332 99 935 6% PVC 23 68 551 4% Yellow phosphorus 7 51 040 3% Phosphorites 264 49 047 3% Silicates 74 42 692 3% Other - 404 660 26% Total 1 588 892 100%
"Alwernia" S.A. 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes TPFS 26 60 550 41% Phosphoric acid 15 32 007 22% Megapyr 7 16 409 11% Services - 8 103 6% Acid sodium pyrophosphate 2 5 485 4% Animal feed phosphate 5 5 328 4% Chromium oxide 0.4 4 154 3% Magnesium sulphate 6 3 679 2% Inactive sodium pyrophosphate 1 2 163 1% Other - 8 387 6% Total 146 265 100%
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes TPFS 34 84 624 51% Phosphoric acid 13 27 211 17%
50 The report on the activity of Ciech Group for 2006
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Chromium-aluminium alloys 6 12 231 7% Services - 8 016 5% Acid sodium pyrophosphate 2 4 816 3% Animal feed phosphate 5 4 769 3% Magnesium sulphate 6 4 144 3% Chromium oxide 0.4 4 125 3% Inactive sodium pyrophosphate 1 2 334 1% Other - 12 284 7% Total 164 554 100%
FOSFORY Group 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Superphosphate 96 62 630 28% Amofosmag 64 39 296 17% Goods and materials - 36 250 16% Amofoska 45 30 357 13% Agrafoska 31 26 509 12% Transhipment services - 13 233 6% Sulphuric acid 88 8 948 4% Other - 8 186 4% Total 225 409 100%
01.01.2005 -31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Superphosphates 77 47 930 22% Amofosmag 63 38 682 17% Agrafoska 41 34 613 16% Amofoska 55 36 071 16% Other - 65 193 29% TOTAL 222 489 100%
JANIKOSODA S. A. 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Dense soda ash 396 181 431 54% Light soda ash 174 76 151 23% Dry vacuum salt 268 35 228 10% Wet vacuum salt 301 27 108 8% Other sales - 18 020 5% Total 337 938 100%
01.01.2005 -31.12.2005 Quantity in Name of the product, product group, good, or service Net sales value Percentage share thousands of tonnes Dense soda ash 179 81 418 23% Light soda ash 394 187 127 54% Wet vacuum salt 332 29 584 9% Dry vacuum salt 236 30 996 9% Other - 16 839 5%
51 The report on the activity of Ciech Group for 2006
01.01.2005 -31.12.2005 Quantity in Name of the product, product group, good, or service Net sales value Percentage share thousands of tonnes Total 345 964 100%
SODA MĄTWY Group 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Dense soda ash 430 189 801 40% Power Generation segment - 142 933 30% Light soda ash 101 45 757 10% Baking soda 65 37 270 8% Calcium chloride 45 22 507 5% Other - 35 114 7% Total 473 382 100%
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, good, or service thousands of Net sales value Percentage share tonnes Dense soda ash 428 194 846 42% Light soda ash 107 49 152 10% Baking soda 63 38 300 8% Calcium chloride 46 23 776 5% Other - 163 109 35% Total 469 183 100%
"VITROSILICON" Spółka Akcyjna 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Glass goods 37 64 800 56% silicate goods 96 47 924 41% Other - 3 021 3% Total 115 745 100%
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Glass goods 31 58 319 56% silicate goods 88 43 742 42% Other - 2 549 2% Total 104 610 100%
Cheman S.A. 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Soda Products 2 32 978 24% Plastics 1 24 168 17% Fuel and oils 4 13 953 10% Basic chemicals 22 11 812 9% Petrochemicals and chipboards 8 10 439 8% Food additives 8 10 125 7% Solvents 9 9 890 7%
52 The report on the activity of Ciech Group for 2006
Household chemicals 7 8 780 6% Glass and ceramics 9 8 257 6% Auxiliary agents 0.5 2 568 2% Products use for water treatment 6 3 237 2% Other - 2 684 2% Total 138 891 100%
01.01.2005 - 31.12.2005 Quantity in Name of product and commodity groups thousands of Net sales value Percentage share tonnes Fuel 6 33 602 21% Soda products 41 28 900 18% Plastics 4 17 655 11% Basic chemicals 14 15 165 10% Household chemicals 4 12 582 8% Solvents 4 11 349 7% Food and feed additives 4 10 956 7% Petrochemicals and chipboards 3 9 831 6% Glass and ceramics 3 7 449 5% Other - 9 804 7% Total 157 293 100%
CIECH POLFA Sp. z o.o. 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Ready-made medications - 27 693 56% Pharmaceutical substances - 16 470 33% Packaging - 4 174 8% Other - 1 463 3% Total 49 800 100%
01.01.2005 – 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Ready-made medications - 33 156 60% Pharmaceutical substances - 16 312 29% Packaging - 5 047 9% Other - 1 070 2% Total 55 585 100%
POLSIN PRIVATE LIMITED 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Caprolactam 6 39 698 49% TDI 2 14 638 18% EPI 2 7 437 9% Other - 19 458 24% Total 81 231 100%
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes
53 The report on the activity of Ciech Group for 2006
Caprolactam 9 64 020 56% TDI 4 24 424 22% Caustic soda 2 2 799 2% Other - 22 314 20% Total 113 557 100%
DALTRADE PLC 01.01.2006 - 31.12.2006 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Dense soda ash 21 15 990 42% Baking soda 7 7 162 19% Monochlorobenzene 1 3 127 8% Other - 11 856 31% Total 38 135 100%
01.01.2005 - 31.12.2005 Quantity in Name of the product, product group, commodity or service thousands of Net sales value Percentage share tonnes Dense soda ash 30 3 779 44% Baking soda 8 1 379 16% Monochlorobenzene 1 671 8% Other - 2 682 32% Total 8 511 100%
54 The report on the activity of Ciech Group for 2006
Appendix No. 2 Changes in the markets
"Alwernia" S.A.'s recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share
CIECH SA 33 369 23% Parent company
Other 112 896 77% Total 146 265 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value share
Reckitt Benckiser 17 889 11% None
CIECH SA 17 413 11% Parent company Other 129 252 78% Total 164 554 100%
The FOSFORY Group's recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share Agrolak Sp. z o.o. 25 911 11% None Other 199 498 89% Total 225 409 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value Share Agrolok Sp. z o.o. 28 136 13% none Kazgod Sp. z o.o. 22 533 10% none Other 171 820 77% none Total 222 489 100%
JANIKOSODA S.A.'s recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share CIECH SA 325 649 96% Parent company Other 12 289 4% Total 337 938 100%
01.01.05 -31.12.05 Name of recipient Affiliation with CIECH SA Net sales value Share CIECH SA 334 329 97% Parent company Other 11 635 3% none Total 345 964 100%
55 The report on the activity of Ciech Group for 2006
The SODA MĄTWY Group's recipients accounting for more than 10% of the total sales (PLN ‘000). 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share CIECH SA 316 717 67% Parent company JANIKOSODA S. A. 123 499 26% Subsidiary Other 33 166 7% Total 473 382 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value Share CIECH SA 320 827 68% Parent company JANIKOSODA S. A. 121 380 26% Subsidiary Other 26 976 6% none Total 469 183 100%
"VITROSILICON" Spółka Akcyjna's recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share
CIECH SA 39 421 34% Parent company Other 76 324 66% Total 115 745 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value share
CIECH SA 36 223 35% Parent company Other 68 387 65% Total 104 610 100%
CIECH POLFA Sp. z o.o.'s recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share
Polfa Pabianice SA 11 735 24% None Polfa Warszawa 5 377 11% None Other 32 688 65% Total 49 780 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value share
Polfa Pabianice SA 12 594 23% None Other 42 991 77% Total 55 585 100%
DALTRADE PLC 's recipients accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Affiliation with Name of recipient Net sales value share CIECH SA
Guardian Industries 5 555 15% None Other 32 580 85% Total 38 135 100%
56 The report on the activity of Ciech Group for 2006
Recipients of POLSIN PRIVATE LIMITED accounting for more than 10% of the total sales (PLN ‘000) 01.01.2006 - 31.12.2006 Name of recipient Affiliation with CIECH SA Net sales value share
Ningbo Free Trade 17 106 21% Sinolion 11 504 14% Ningbo Jin lun 8 999 11% Other 43 622 54% Total 81 231 100%
01.01.2005 - 31.12.2005 Name of recipient Affiliation with CIECH SA Net sales value share
Ningbo Free Trade 23 461 21% Sinolion 22 239 20% Shanghai C&J 11 780 10% Other 56 077 49% Total 113 557 100%
CIECH S.A., Cheman S.A. (in 2006) and CIECH S.A., DALTRADE PLC, Cheman S.A. (in 2005) do not have any recipients exceeding 10% sales value.
Directions of sales:
CIECH SA 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 779 013 10 075 exports: 816 532 35 298 - European Union 663 734 2 871 - Other European countries 61 953 280 - Africa 31 374 29 524 - Asia 55 221 2 593 - Other 4 250 30
01.01.2005-31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services country 908 277 11 792 exports: 601 655 67 168 - European Union 581 105 67 168 - Other European countries 16 267 - - Africa 1 001 - - Asia 1 547 - - Other 1 735 -
"Alwernia" S.A. 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 2 466 83 705 exports: 1 119 58 975 - European Union 1 081 37 636 - Other European countries 38 18 399 - Africa - 2 250
57 The report on the activity of Ciech Group for 2006
01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services
- Asia - 50 - Other - 640
01.01.2005 - 31.12.2005
Net sales in PLN ‘000 Goods and materials Products and services country 5 462 82 457 exports: 2 079 74 556 - European Union 2 048 44 679 - Other European countries 31 26 379 - Africa - 860 - Other - 2 638
FOSFORY Group 01.01.2006 - 31.12.2006 Net sales in PLN ‘000 Goods and materials Products and services country 36 242 189 160 exports: 7 - - European Union 7 -
01.01.2005 - 31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services country 30 529 187,929 exports: 7 4,024 - European Union 7 4,024
JANIKOSODA S. A. 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 578 337 360
01.01.2005 -31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services country 409 345 555
SODA MĄTWY Group 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 23 300 448 619 exports: - 1 463 - European Union - 1 463
01.01.2005 - 31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services country 1 147 467 546 exports: - 490 - European Union - 490
58 The report on the activity of Ciech Group for 2006
"VITROSILICON" Spółka Akcyjna 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 2 586 106 052 exports: 121 6 986 - European Union 121 5 732 - Other European countries - 985 - Africa - 30 - Asia - 239
01.01.2005 - 31.12.2005
Net sales in PLN ‘000 Goods and materials Products and services country 2 188 95 317 exports: 136 6 969 - European Union 136 5 844 - Other European countries - 1 067 - Asia - 58
Cheman S.A. 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 138 071 372 exports: 448 - - European Union 419 - - Other European countries 29 -
01.01.2005 – 31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services country 155 758 673 exports: 853 9 - European Union 390 9 - Other European countries 463 -
CIECH POLFA Sp. z o.o. 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services country 14 149 1 002 exports: 34 649 - - European Union 9 266 - - Other European countries 17 688 - - Africa 12 - - Asia 7 158 - - Other 525 -
01.01.2005 - 31.12.2005
Net sales in PLN ‘000 Goods and materials Products and services country 14 737 1 070 exports: 39 778 - - European Union 10 605 - - Other European countries 23 190 - - Africa 10 - - Asia 5 491 - - Other 482 -
59 The report on the activity of Ciech Group for 2006
POLSIN PRIVATE LIMITED 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services exports: 81 231 - - Poland 10 471 - - Asia 70 760 -
01.01.2005 - 31.12.2005
Net sales in PLN ‘000 Goods and materials Products and services exports: 113 557 - Poland 11 343 - - Asia 102 214 -
DALTRADE PLC 01.01.2006 - 31.12.2006
Net sales in PLN ‘000 Goods and materials Products and services exports: 38 135 - - European Union (without Poland) 37 876 - - Africa 105 - - Asia 154 -
01.01.2005 - 31.12.2005 Net sales in PLN ‘000 Goods and materials Products and services exports: 8 511 - European Union (without Poland) 8 368 - - Africa 8 - - Asia 135 -
60 The report on the activity of Ciech Group for 2006
Appendix No. 3 Changes in supply sources of manufacturing materials, goods, and services
CIECH SA’s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
JANIKOSODA S. A. 325 678 24% Subsidiary SODA MĄTWY S.A. 316 790 23% Subsidiary Other 714 104 53% Total 1 356 572 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share SODA MĄTWY S.A. 312 016 23% Subsidiary JANIKOSODA S. A. 334 810 25% Subsidiary Petrochemia Blachownia S.A. 148 149 11% Subsidiary Other 551,212 41% none Total 1 346 187 100%
"Alwernia" S.A.'s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
CIECH SA 57 626 53% Parent company Other 52 091 47% Total 109 717 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share
CIECH SA 101 084 71% Parent company Other 42 249 29% Total 143 333 100%
The FOSFORY Group’s suppliers accounting for more than 10% total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share CIECH SA 61 553 52% Parent company Other 56 698 48% Total 118 251 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share CIECH SA 62,484 40% Parent company Other 93 45060% none Total 155 934100%
61 The report on the activity of Ciech Group for 2006
JANIKOSODA S.A.'s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
SODA MĄTWY S.A. 122 233 52% Other 113 098 48% Total 235 331 100%
01.01.2005 -31.12.2005 Affiliation with Specification Net purchase value Percentage share CIECH SA EC KUJAWY Sp. z o.o. 119 263 50% Indirect subsidiary Other suppliers 121 278 50% Total 240 541100
SODA MĄTWY S.A.'s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share Kompania Węglowa S.A. 112 671 37% Other 193 003 63% Total 305 674 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share Kompania Węglowa S.A. 104 450 33% Węglohut Rybnik 33 229 10% Other 179 973 57% Total 317 652 100%
"VITROSILICON" Spółka Akcyjna’s suppliers accounting for more than 10% total supplies (PLN ‘000). 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
CIECH SA 18 342 13% Parent company PGNIG 17 121 12% Other 105 060 75% Total 140 523 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share
CIECH SA 18 336 21% Parent company PGNIG 12 754 15% Other 56 572 64% Total 87 662 100%
Cheman S.A.'s suppliers accounting for more than 10% total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
CIECH SA 29 537 25% Parent company Other 88 808 75% Total 118 345 100%
62 The report on the activity of Ciech Group for 2006
01.01.2005 – 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share CIECH SA 25 665 19% Parent company Other 108 92781% none Total 134 592100%
CIECH POLFA Sp. z o.o.'s suppliers accounting for more than 10% total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share
PF JELFA SA 3 905 13% Other 26 591 87% Total 30 496 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share
Polfa Kutno SA 4 098 13% JELFA S.A. 3 441 10% Other 25 452 77 % Total 32 991 100%
POLSIN PRIVATE LIMITED’s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share Puławy 38 459 50% None CIECH SA 24 852 32% Parent company Other 14 181 18% Total 77 492 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share
Puławy 61 853 57% None CIECH SA 27 847 25% Parent company Other 19 372 18% Total 109 072 100%
DALTRADE PLC’s suppliers accounting for more than 10% of the total supplies (PLN ‘000) 01.01.2006 - 31.12.2006 Supplier Affiliation with CIECH SA Net purchase value Share CIECH SA 20 052 65% Parent company Other 10 767 35% Total 30 819 100%
01.01.2005 - 31.12.2005 Supplier Affiliation with CIECH SA Net purchase value Share CIECH SA 22 956 53% Parent company Other 20 287 47% Total 43 243 100%
63 Consolidated financial statement of the Ciech Group for 2006
CONSOLIDATED FINANCIAL STATEMENT OF THE CIECH GROUP FOR 2006
64 Consolidated financial statement of the Ciech Group for 2006
Consolidated profit and loss account for the period from January 1st, to December 31st, 2006
CONSOLIDATED INCOME STATEMENT 01.01-31.12.2006 01.01-31.12.2005
Note Discontinued Continued Discontinued in thousands of Polish zloty Continued operations TOTAL TOTAL operations operations operations
Net sales revenue 2 160 133 14 197 2 174 330 2 088 689 120 856 2 209 545 Cost of sales 4 (1 663 137) (12 872) (1 676 009) (1 600 898) (109 085) (1 709 982) Gross profit/loss on sales 496 996 1 325 498 321 487 791 11 771 499 562 Other operating income 4 20 264 3 040 23 304 49 866 2 576 52 441 Selling costs 4 (153 898) (3 440) (157 338) (179 701) (8 580) (188 281) Administrative expenses 4 (160 414) - (160 414) (157 095) (10 019) (167 114) Other operating expenses 4 (56 523) (1 031) (57 554) (42 545) (10 509) (53 054) Operating profit (loss) 146 425 (106) 146 319 158 316 (14 761) 143 555 Finance income 4 19 673 - 19 673 31 365 3 394 34 759 Finance costs 4 (16,127) - (16 127) (37 894) (791) (38 685) Net financial income / costs 3 546 - 3 546 (6 529) 2 603 (3 926)
Share of the net profits of subsidiaries accounted for using 15 1 911 - 1 911 3 372 - 3 372 the equity method Profit (loss) before taxes 151 882 (106) 151 776 155 159 (12 158) 143 001 Income tax 5 (28 151) - (28 151) (24 595) (553) (25 148) Net profit (loss) 123 731 (106) 123 625 130 564 (12 711) 117 853
Sales profit/loss relative to discontinued operations 6 - 26 809 26 809 - - - Profit for the marketing year 123 731 26 703 150 434 130 564 (12 711) 117 853 including: Net profit (loss) of shareholders of the parent company 123 511 26 598 150 109 124 253 (12 669) 111 584 Net profit (loss) of minority shareholders 220 105 325 6 311 (42) 6 269 Profit per share (in PLN): Basic 7 4.41 0.95 5.36 4.30 (0.14) 4.16 Diluted 7 4.41 0.95 5.36 4.15 (0.14) 4.01
The consolidated profit and loss account shall be analysed jointly with the additional information and explanations that constitute the integral part of the consolidated financial statement.
65 Consolidated financial statement of the Ciech Group for 2006
Consolidated balance sheet as of December 31st, 2006 in thousands of Polish zloty
CONSOLIDATED BALANCE SHEET 31.12.2006 31.12.2005 Note in thousands of Polish zloty ASSETS Non-current assets Property, plant and equipment 9 1 156,719 704 458 Perpetual leasehold rights 11 1 534 733 Intangible assets, including: 12 354 705 21 588 - goodwill 323 091 39 Investment property 10 14 430 15 552 Long-term receivables 17 37 166 Investments in associates accounted for using the equity method 15 42 220 39 431 Other long-term investments 18 39 464 25 752 Deferred tax assets 5 19 562 10 141 Total non-current assets 1 628 671 817 821 Current assets Inventories 19 243 179 132 450 Short-term investments 21 614 269 Income tax receivable 10 400 5 324 Trade and other receivables 20 696 869 493 591 Cash and cash equivalents 22 147 453 101 216 Current assets available for sale 6 2 327 84 461 Total current assets 1 100 842 817 311 Total assets 2 729 513 1 635 132
EQUITY AND LIABILITIES Equity Share capital 23 164 115 164 115 Treasury shares 23 (6 124) - Share premium reserve 23 151 328 151 328 Equity components relative to assets available for sale 6 - - Revaluation reserve 23 11 986 3 543 Other reserve capital 23 78 683 78 683 Foreign exchange differences arising from translation of subsidiaries 23 (1 082) ( 248) Retained earnings 687 877 572 220 Equity attributable to equity holders of the parent company 1 086 783 969 641 Minority interest 50 435 49 490 Total equity 1 137 218 1 019 131 Liabilities Borrowings and other debt instruments 24 316 863 49 305 Other long-term liabilities 68 518 0 Employee benefits 26 55 502 25 821 Provisions (other long-term) 25 103 935 21 609 Deferred tax provision 5 15 143 13 263 Total non-current liabilities 559 961 109 998 Overdraft facility 22 14 311 12 976 Borrowings and other debt instruments 27 276 368 124 190
66 Consolidated financial statement of the Ciech Group for 2006
CONSOLIDATED BALANCE SHEET 31.12.2006 31.12.2005 Note in thousands of Polish zloty Trade and other payables 27 648 929 314 329 Income tax payable 27 713 995 Provisions (short-term employee-benefit and other provisions) 25 26 65 013 30 659 Liabilities arising from non-current assets available for sale 6 - 22 854 Total current liabilities 1 032 334 506 003 Total liabilities 1 592 295 616 001 Total liabilities 2 729 513 1 635 132
The consolidated balance sheet shall be analysed jointly with the additional information and explanations that constitute the integral part of the consolidated financial statement.
67 Consolidated financial statement of the Ciech Group for 2006
Statement of changes in consolidated equity for the period from January 1st, 2006 to December 31st, 2006
Allocated to shareholders of the parent company
Equity Foreign Equity attributable exchange Share components Other Retained to equity Minority Total Share differences in thousands of Polish zloty Treasur premium relative to Revaluatio reserve earnings holders of the interest equity capital arising from y shares reserve assets available n reserve capital parent the translation for sale company of subsidiaries
Equity as at (beginning of the period) 01/01/2006: Brought forward 164 115 - 151 328 - 3 543 78 683 (248) 572 220 969 641 49 490 1 019 131 Changes in accounting principles ------
Balance (restated) at: 164 115 - 151 328 - 3 543 78 683 (248) 572 220 969 641 49 490 1 019 131
Exchange differences on translating foreign ------(834) - (834) (850) (1 684) operations Long-term investment measurement - - - - 8 443** - - - 8 443 2 488 10 931
Total income and expenditure for the financial - - - - 8 443 - (834) - 7 609 1 638 9 247 year recognized directly in equity Net profit (loss) ------150 109 150 109 325 150 434
Total income and expenditure for the financial year - - - - 8 443 - (834) 150 109 157 718 1 963 159 681
Payment of dividend ------(22 400) (22 400) (811) (23 211) Changes in the Group's composition - (6 124) - - - - - (10 612)* (16 736) 61 (16 675) Other changes ------(1 440) (1 440) (268) (1 708)
Equity as at (end of period) 31/12/2006: 164 115 (6 124) 151 328 - 11 986 78 683 (1 082) 687 877 1 086 783 50 435 1 137 218
The statement of changes in equity shall be analysed jointly with the additional information and explanations that constitute the integral part of the consolidated financial statement. * Coverage of losses of minority interests in relation to negative equity of S.C. Uzinele Sodice Govora S.A., (the amount of PLN – 11,407 thousand) ** Measurement at the market value of the investment portfolio of PTU S.A. and POLSIN PRIVATE LIMITED
68 The consolidated financial statement of the Ciech Group for the first half of 2006
Statement of changes in consolidated equity for the period from January 1st to December 31st, 2005
Allocated to shareholders of the parent company
Foreign Equity Equity exchange attributable components differences Share Other Retained to equity Minority Share relative to arising from Total equity in thousands of Polish zloty Treasur premium Revaluatio reserve earnings holders of interest capital assets the y shares reserve n reserve capital the parent available for translation company sale of subsidiaries Equity as at (beginning of the period)
01/01/2005: Brought forward 123 096 (18 80 - - - 84 633 (1 067) 467 021 654 878 103 106 757 984 Changes in accounting principles ------
Balance (restated) at: 123 096 (18 805) - - - 84 633 (1 067) 467 021 654 878 103 106 757 984
Exchange differences on translating foreign ------819 - 819 415 1 234 operations Long-term investment measurement - - - - 3 543 - - 3 543 20 3 563
Total income and expenditure for the financial - - - - 3 543 - 819 - 4 362 435 4 797 year recognized directly in equity Net profit (loss) ------111 584 111 584 6 269 117 853 Total income and expenditure for the financial - - - - 3 543 - 819 111 584 115 946 6 704 122 650 year Issue of share capital 41 019 - 151 328 - - - - - 192 347 - 192 347 Disposal of treasury shares - 18 805 - - - (3 966) - - 14 839 - 14 839 Payment of dividend ------(8 400) (8 400) (1 488) (9 888) Change due to additional purchase of shares from ------(58 832) (58 832) minority shareholders Transfer from the reserve capital to retained profit - - - - - (2 210) - 2 210 - - -
Other changes - - - - - 226 - (195) 31 - 31
Equity as at (end of period) 31/12/2005: 164 115 - 151 328 - 3 543 78 683 (248) 572 220 969 641 49 490 1 019 131
The statement of changes in equity shall be analysed jointly with the additional information and explanations that constitute the integral part of the consolidated financial statement.
69 Consolidated financial statement of the Ciech Group for 2006
Consolidated cash flow statement for the period from January 1st to December 31st, 2006
CONSOLIDATED CASH FLOW STATEMENT 01.01-31.12.2006 01.01-31.12.2005 in thousands of PLN
Cash flows from operating activities Profit (loss) for the period 150 434 117 853 Adjustments Depreciation 95 881 92 223 Recognition / reversal of revaluation write-downs (18 850) 7 478 Gains / losses on foreign exchange differences 2 919 (4 298) Investment property revaluations - (4 371) Gains / losses on investing activities 23 938 (28 808) Gains / losses on disposal of current assets (2 255) (4 795) Dividend and interest 7 725 11 105 Input income tax 28 151 25 148 Gains / losses on shares in entities accounted for using the equity method (1 911) (3 372) Operating profit before changes in current assets and reserves 286 032 208 163 Changes in receivables 14 192 34 494 Changes in inventories (12 275) (18 838) Changes in current liabilities (57 187) (72 848) Changes in reserves and employee benefits 3 935 4 873 Net cash generated from operations 234 697 155 844 Interest paid (8 837) (13 492) Income taxes paid (18 581) (31 664) Gains / losses on disposal of discontinued operations (26 809) - Other adjustments (3 983) 2 675 Net cash from operating activities 176 487 113 363
Cash flows from investing activities Inflows (in "+") 189 781 89 952 Disposal of intangible assets and property, plant and equipment 5 839 9 818 Disposal of investments 77 077 76 995 Dividends received 1 733 1 891 Interest received 370 1 226 Disposal of a subsidiary 104 750 - Other inflows 12 22 Outflows (in "-") (666 078) (207 382) Acquisition of subsidiary (net of cash acquired) (298 722) - Acquisition of intangible assets and property, plant and equipment (160 606) (120 457) Purchase of investment property - - Purchase of other investments (75 000) (86 881) Research and development expense - - Loans granted (126 695) - Other inflows (5 055) (44) Net cash used in investing activities (476 297) (117 430)
70 Consolidated financial statement of the Ciech Group for 2006
CONSOLIDATED CASH FLOW STATEMENT
Cash flows from financing activities
Inflows (in "+") 495 559 305 452 Proceeds from issue of share capital and other equity instruments, and capital - 192 875 contributions Proceeds from issue of convertible preference shares - - Proceeds from borrowings 491 965 110 280 Subsidies received 3 170 - Other financial inflows 424 2 297 Outflows (in "-") (149 527) (237 605) Purchase of treasury shares - - Dividends paid and other payments to equity holders (22 400) (8 400) Dividends paid to minority interest holders (811) (1 488) Repayment of borrowings (124 492) (205 279) Redemption of debt securities - (15 000) Payment of finance lease liabilities (1 356) (7 329) Other financial outflows (468) (109) Net cash used in financing activities 346 032 67 847
Total net cash flow 46 222 63 780
Cash at beginning of the period 88 240 28 521 Impact of foreign exchange differences (1 320) 1 294 Cash at end of period 133 142 93 595
The consolidated cash flow statement in material items results from the amounts recognized in the consolidated balance sheet. The consolidated cash flow statement shall be analysed jointly with the additional information and explanations that constitute the integral part of the consolidated financial statement.
71 Consolidated financial statement of the Ciech Group for 2006
ADDITIONAL INFORMATION AND EXPLANATIONS TO THE CONSOLIDATED FINANCIAL STATEMENT
1 General Information
On May 11th, 2007 the Management Board of CIECH SA approved for publication the presented consolidated financial report for the period from January 01st, 2006 to December 31st, 2006, including comparative figures. The presented consolidated financial statement was prepared in compliance with the International Financial Reporting Standards (IFRS) as adopted by the European Union.
CIECH Spółka Akcyjna, with its registered offices in Warsaw at ul. Powązkowska 46/50 is the parent company of the Ciech Group. Since 1995 CIECH SA has been registered in the Commercial Register B kept by the District Court for the Capital City of Warsaw, 16th Business Register Division, under entry number RHB 44665. On May 24th, 2001 the District Court for the Capital City of Warsaw, 19th Commercial Division of the National Court Register issued the decision on CIECH SA's entry to the Business Register of the National Court Register, under entry number KRS 0000011687. Currently, after organizational changes have taken place in the Court, CIECH SA is registered under entry number 0000011687 in the District Court for the Capital City of Warsaw, 12th Commercial Division of the National Court Register.
As at December 31st, 2006 the State Treasury held a considerable interest and possibility to control CIECH SA indirectly through Kompania Węglowa S.A.
The core business of the parent company, as defined in the Articles of Association includes: trade activities, investments, manufacturing, services, and financial operations, including in particular foreign and domestic trade in chemicals and related operations. The Company is also licensed to act as agent for Polish and foreign companies. The scope of core business of the Ciech Group companies has been presented in item 31.2 of the additional information and notes to the consolidated report of the Ciech Group.
2 Basis for preparing consolidated financial statements
The Management Board of CIECH SA declares that to the best of its knowledge, the consolidated financial statement, as at December 31st, 2006 and the comparative figures were prepared according to the accounting principles in force, and that they reflect the property and financial situation of the company, as well as its financial result, in a true, reliable and fair manner. Furthermore, the Management Board of CIECH SA declares that the annual report is a true picture of development, achievements, and situation of the company, including the description of basic risks and threats.
As for the newly acquired entities such as Zakłady Chemiczne ZACHEM Spółka Akcyjna, Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna and S.C. Uzinele Sodice Govora S.A. initial settlement established on provisional basis, provided for by IFRS 3 "business mergers" has been applied. These companies were included in consolidation as of December 31st, 2006 on the basis of the book value of their assets and liabilities. After the pending measurement at fair value of particular identifiable assets, liabilities and contingent liabilities of these companies, any adjustments resulting from completion of initial provisional settlement shall be entered into the consolidated financial statement as at the date of acquisition and as at the following balance sheet dates. Particulars of the companies' merger have been included in item 16 of the additional information and notes to the consolidated statement.
The Management Board of CIECH SA declares that the entity authorised to audit financial statement for the period from January 1st to December 31st, 2006 has been selected according to the provisions of law and this entity is: Deloitte Audyt Sp. z o.o. with its registered office in Warsaw entered into the list of entities authorised to audit financial statements kept by the National Council of Statutory Auditors under register no. 73. That entity and statutory auditors conducting the audit meet the conditions required to prepare an independent opinion and report on the audit, pursuant to the relevant provisions of the national law.
The individual statements of the parent company and subsidiaries of the Ciech Group, generated based on the accounting books managed according to the binding balance sheet law, account for the basis for preparing consolidated financial statements. For the purposes of the consolidated financial statements, the individual statement figures have been adjusted to the accounting policy, as defined by the International Financial Reporting Standards.
All entities of the Ciech Group apply the unified accounting principles (policy) stipulated by the parent company CIECH SA. The Ciech Group's accounting year is the same as the calendar year.
72 Consolidated financial statement of the Ciech Group for 2006
The consolidated profit and loss account of the Ciech Group has been generated according to the classification of expenses by function. The consolidated cash flow statement has been prepared according to the indirect method.
The measurement and reporting currency for the purposes of this consolidated financial statement is Polish zloty. Unless provided otherwise, the data in the consolidated financial statement have been presented in thousands of Polish zloty (PLN '000). The individual financial statements of the Ciech Group companies are expressed in the currency valid in prime markets for particular entities, or in the functional currency. In the consolidated financial statement, the financial results and items of particular entities are presented in Polish zloty, being the functional currency for the parent company and the currency presented in the consolidated financial statement.
Upon consolidation, assets and liabilities of entities registered abroad are translated into Polish zloty at the exchange rate valid on the balance sheet date. Income and expenses are translated using average exchange rate in a particular reporting period, except for the situation of considerable exchange rate fluctuations (in that case an exchange rate valid on a date of transaction is applied). Any possible exchange rate differences are recognized in the consolidated financial statement in equities in the "foreign exchange differences arising from translation of subsidiaries" item. Such exchange rate differences are recognized as income or cost in a period in which sales of entities registered abroad takes place.
Goodwill and re-measurement to fair value resulting from acquisition of an entity registered abroad are treated as an element of assets or liabilities of the entity registered abroad and are subject to translation into Polish zloty using an exchange rate valid on the balance sheet date.
For the purposes of note "Selected financial data" presentation, certain assets and liabilities were translated into euros at the average exchange rate announced at the balance sheet date (December 31st, 2006) by the National Bank of Poland to be 3.8312. Particular items on the income statement were translated into euros at a rate calculated as the arithmetical mean of the average EUR exchange rates determined by the National Bank of Poland at the last day of each month: from January to December 2006 respectively: 3.8285; 3.7726; 3.9357; 3.8740; 3.9472; 4.0434; 3.9321; 3.9369; 3.9835; 3.8871; 3.8166; 3.8312. The exchange rate for the reporting period in 2006 is 3.8991.
Preparation of financial statements in compliance with the International Financial Reporting Standards requires the Management to exercise professional judgement, estimates, and objectives that impact the adopted accounting principles and the measurement of the assets, liabilities, income, and expense. All estimates and the related assumptions are based on a historical experience and various factors considered reasonable under the given circumstances, and the results of such estimates are the basis for a professional judgement of the carried value of the assets and liabilities that cannot be calculated using other sources. The actual values may differ from the estimated values. The estimates and assumptions are revised in a continuing basis. Changes in accounting estimates are recognized in the period in which they are made, if such changes only apply to that period, or in the current period and future periods if such changes apply both to the current period and the future periods.
The presented consolidated financial statement was prepared under the assumption of remaining a going concern in the foreseeable future. Particulars of financial standing of the companies facing a threat to the going concern have been stipulated in the following items of the additional information and notes to the consolidated statement: Item 35 - financial standing of the indirect subsidiary Cheman S.A. Item 36 - statement of business reasons for the purchase of shares in S.C Uzinele Sodice Govora S.A. Item 37 - going concern of EC KUJAWY Sp. z o.o. Item 38 - going concern of the ZACHEM Group
The Management Board is not aware of any circumstances that could indicate any significant threat to the business continuity as a going concern of any consolidated companies. Duration of the parent company CIECH SA, as well as of the subsidiaries is unlimited.
However, it needs to be noted that matters connected with obtaining the integrated permits within required deadlines, condition the Company's possibility to fulfil its statutory activity. The current status is as follows:
"Alwernia" S.A. "Alwernia" S.A. holds the integrated permits for all systems exploited. On April 29th, 2005 the Company was granted an integrated permit for feed calcium phosphate system, while on June 23rd, 2006 it obtained an integrated permit for nitrate salt production. These permits are valid until 2015. In the fourth quarter of 2006 the company started to work on preparation of the application to obtain the integrated permits for the systems to produce granular fertilizers and for the existing waste disposal site.
SODA MĄTWY S.A. The water and sewage policy of SODA MĄTWY S.A. is covered by a separate water use licence due to provision of services within that actual scope in favour of other entities. The company enjoys entitlements regulating the entire water and sewage policy valid until 2009. A complete application on integrated permit was submitted at the end of the first half of 2006. On January 2nd, 2007 the company received a decision to be granted the permit.
73 Consolidated financial statement of the Ciech Group for 2006
JANIKOSODA S. A. Pursuant to the Ordinance of the Minister of Environment of September 26th, 2003 on later deadlines for granting integrated permits, JANIKOSODA S.A. was obliged to obtain the integrated permit by December 31st, 2006. In the first half of 2006 efforts connected with preparation of an application to the Kujawskie and Pomorskie Governor to issue the subjected permit, were finalised. The application was supplemented with data regarding production of agricultural limestone and activities associated with reduction of dust emission. On May 15th, 2006 the company filed a complete application in the Department of Environment and Agriculture in the Kujawski and Pomorski Voivodeship Office in Bydgoszcz. In December 2006 the company obtained an integrated permit for the system to produce soda and chalk and sediment ponds no. 9, 18 a and b and for other systems (production of salt, agricultural limestone, freight cableway).
GZNF "FOSFORY" Sp. z o.o. In December 2006 an integrated permit was granted for the system of sulphuric acid and mineral fertilizer production. However, the issued integrated permit was appealed to the Minister of Environment by the association of Wrzeszczańskie Komitety Obywatelskie. There are formal conditions and favourable projections as to dismiss the appeal and keep the Pomorskie Governor's decision binding concerning issue of the Integrated Permit for the system in GZNF "Fosfory" Sp. z o.o.
The Pomorskie Governor, granting the integrated permit for manufacturing systems under decision of December 29th, 2006, limited at the same time the possibility to manufacture phosphogypsum waste from 500 thousand to 250 thousand tonnes per year and made the company responsible for development of a program to shut down the phosphoric acid production and to switch to fertilizer production using zero waste technology. With regard to the above, it became necessary to adjust the current application to obtain an integrated permit for the phosphogypsum dump site in Wiślinka. On February 26th, 2007 the Management Board of GZNF "FOSFORY" Sp. z o.o. filed an application in the Pomorskie Voivodeship Office to issue an integrated permit for the dumpsite with the phosphogypsum disposal deadline by December 31st, 2009. On March 15th, 2007 the Pomorskie Governor declared that administrative proceedings were initiated to shut down the phosphogypsum waste dumpsite in Wiślanka. An application to shut down the dumpsite in Wiślanka, which according to the Governor must be closed by 2009, is being prepared.
"VITROSILICON" Spółka Akcyjna In 2005 "VITROSILICON" Spółka Akcyjna was granted integrated permits for the Plants in Iłowa and in Żary, which replace all the partial permits previously issued. In November 2006 the company filed an application on granting integrated permit for the Pobiedziska Plant. As the offices of the district authorities declare, the permit shall be issued later due to complexity of the matter. Presently, the Plant holds binding sector permits related to emission allowances, manufacture of waste and glass recovery.
Z.Ch. "Organika- Sarzyna" S.A. The company holds integrated permits granted to manage 12 IPPC systems (to manufacture organic chemical products or semi-finished products – 9 systems, to manufacture inorganic chemical products or semi-finished products – 1 system, to manufacture plant protection agents – 2 systems).
ZACHEM S.A. The company holds integrated permits for management of the IPPC system, including: o system to manufacture brine electrolysis (S-9000); o phosgene – including production of CO (S-9100); o tolylene diamine – TDA (S-9200); o tolylene diisocyanate – TDI (S-9200); o dinitrotoluene – DNT (S-9600); o epichlorohydrin – EPI (ZE); o PUR foams (ZP); o Isolated Sewage Sludge Disposal Site (ISO); o Intraplant Waste Disposal Site for other than dangerous and inactive waste;
On application of ZACHEM S.A., the Kujawski and Pomorski Governor issued on December 15th, 2006 regulation no. 102/2006 on designation of the industrial zone known as "Bydgoska Strefa Przemysłowa ‘ZACHEM’ w Bydgoszczy", which is an integral part of the integrated permit issued for the Plants.
S.C. Uzinele Sodice Govora S.A. S.C. Uzinele Sodice Govora S.A. has its legal status confirmed within the area of exploiting the environment, while solutions used by it have been acknowledged by the environmental authorities (Environmental Protection Agency) to meet requirements of the best techniques available, included in the reference documents evolved for and approved by the European Soda Ash Producers Association.
The company enjoys an integrated permit and carries out the adjustment program that constitutes its integral part. Any delays in its completion may result in withdrawal of the integrated permit. The transitional period for the
74 Consolidated financial statement of the Ciech Group for 2006
company to shut down storage basins is one of the most important elements of the adjustment program. Pursuant to the Government Decision 359/2005 on waste disposal, S.C. Uzinele Sodice Govora S.A. is obliged to cease storing liquid waste in the current spot by December 31st, 2012.
On June 14th, 2006 the company obtained water management approval Autorizatia de Gospodarire a Apelor.
As the Management Boards and the Management Board of the Parent Company judge, there are no indications as to any threats to obtain the aforesaid permits or to any failures to complete the adjustment activities.
Statement of the Management Board of Compliance with the International Financial Reporting Standards
The Management Board of CIECH SA declares that the consolidated financial statement of the Ciech Group and the financial statements for all subsidiaries and associates of CIECH SA for the presented period and corresponding periods have been prepared according to the International Financial Reporting Standards (IFRS) adopted for usage in the European Union and according to its Interpretations published in the form of the European Commission Regulations.
Accounting policy principles
The consolidated financial statement was prepared in compliance with the historical cost concept, except for revaluation of some fixed assets and financial instruments.
The Ciech Group abides by the Unified Accounting Principles and Unified Consolidation Rules applied by all companies of the Group.
Changes in comparative figures
The accounting policy described below was applied to all the periods presented in the consolidated financial statements, as well as in the preparation of the IFRS Opening Balance as at January 1st, 2004 for the purposes of the transition to IFRS reporting, except for a change in presentation of sales costs in soda companies. A change in presentation of comparative figures has been implemented upon preparation of the consolidated statement for 2006. It is prompted by the organizational changes in the Ciech Group related to the establishment of the Soda Division, which services sales of the core-product manufacture for the subsidiaries such as SODA MĄTWY S.A. and JANIKOSODA S.A., and at the same time is for these companies the sole recipient of these products, and in 2005 - 2006 the soda companies did not incur any sales costs. Due to the abovementioned, costs of packaging and loading are counted in the technical cost of manufacture. Due to its intangibility, the cost of intraplant transport to the plant's gate entrance is recognized in the technical costs of manufacture. A change entered to the statement for 2005, concerned reclassification of PLN 33,397 thousand from the costs of sales to the prime cost of sales. What is more, with regard to occurrence of discontinued operations in 2006, a change in comparative figures was made. a) Consolidation principles
(i) Subsidiaries Subsidiaries are entities controlled by the Parent. Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. The degree of control is assessed taking into account the existing and potential voting rights that can be exercised or converted at the balance sheet date. The financial statements of subsidiaries are included in the consolidated financial statements throughout the period from control takeover until control loss.
(ii) Associates and jointly-controlled entities Associates are entities on whose financial and operating policies the Group has significant influence, but which it does not control.
Jointly controlled entities are entities over which the Group exercises contractually agreed shared control. No jointly-controlled entities occurred in the periods covered by the Ciech Group statement.
Consolidated financial statements disclose the Group's share in the profits and losses of the associates and jointly controlled entities accounted for using the equity method from the moment of acquisition to the loss of significant influence or joint control. The Group also measures the impairment of its shares in the net assets of its associates and jointly controlled entities, and recognizes impairment losses as appropriate. If the Group's share in an entity's losses is larger than the book value of that entity, the book value is reduced to zero, and no further losses are recognized unless there is a legal requirement to cover such losses, or unless a payment has already been made on behalf of the entity to cover any of its liabilities.
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Goodwill arising on acquisition of interests in associates or jointly controlled entities is disclosed as part of such interests. Any excess of the Group's share in the fair value of the entity's identifiable assets, liabilities, and contingent liabilities over the cost of the investment is recognized in Group's income statement.
(iii) Consolidation adjustments Balances of internal settlements between Group members, intra-Group transactions, and any resulting unrealised profits or losses, income or expenses, allowances against intragroup receivables, investment revaluation write- downs, intragroup dividends or intragroup fixed-asset sales are eliminated when preparing consolidated financial statements. Any unrealised profits on transactions with associates or jointly-controlled entities are eliminated from the consolidated financial statements to the extent of the Group's interest those entities. Any unrealised losses are also eliminated unless they provide evidence of impairment. Principles regarding the consolidation adjustments of capital have been depicted in item I Capital. b) Foreign currencies
(i) Foreign-currency transactions Foreign-currency transactions are recorded in PLN at the transaction date, at the average NBP exchange rate for the foreign currency in question applicable on that date. Monetary assets and liability items expressed in Polish zloty are translated at the balance sheet date at the average NBP exchange rate for the foreign currency in question applicable on that date. Foreign exchange differences arising on foreign-currency transaction settlements and resulting from balance sheet measurement of monetary asset and liability items expressed in foreign currencies are recognized as profit or loss. Non-monetary foreign-currency asset and liability items measured at historical cost are translated at the average NBP exchange rate applicable on the transaction date. Non-monetary foreign-currency balance sheet items measured at fair value are translated at the average NBP rate applicable on the fair value measurement date.
(ii) Financial statements of foreign operations The Ciech Group's foreign companies operate in economies other than hyperinflationary economies within the meaning of IAS 29.
Income and expenses for each income statement prepared in foreign currencies should be translated into PLN at the exchange rates applicable at the transaction dates (IAS 21.39(b)). The Group applies the "convenience translation" allowance, and applies average end-of-period exchange rates (IAS 21.40), as no exchange rate fluctuations were recorded that would be so high as to significantly impact the consolidated profit.
All balance sheet items except for equity are translated into PLN at the average NBP exchange rate published on the date of preparation of the consolidated financial statements. All fair-value adjustments in the net assets and any goodwill arising on acquisition of a foreign entity are translated at the exchange rate applicable at the date of the acquisition into the functional currency of the foreign entity, and, subsequently, into the presentation currency, in accordance with general principles applied to translations of the assets and liabilities of subsidiaries (at the balance sheet date).
Any differences arising on equity translation at rates other than the average exchange rate applicable at the balance sheet date and used for translating other balance sheet items are recognized in equity as "differences in foreign currency translations of subsidiaries". c) Financial instruments
Financial instruments are recognized and measured in accordance with IAS 32 (Financial Instruments: disclosure and presentation) and IAS 39 (Financial Instruments: recognition and measurement). Methods of financial assets measurement and disclosure described below, do not apply to measurement of shares in subsidiaries, lease contracts, financial instruments within employee plans, and financial instruments issued by an entity accounting for equity instruments.
The most significant assets, which are subject measurement methods applicable for the financial instruments, are as follows: 1. shares in other entities, 2. stocks of other entities, 3. bonds issued by other entities, 4. other securities issued by other entities, 5. receivables due to loans, 6. derivative instruments for instance: 6.1 options, 6.2 forwards or futures,
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6.3 swaps, 6.4 embedded derivatives, 7. other financial assets including the reservation below. Short-term trade receivables are measured at their outstanding amounts less impairment losses. Receivables for which the interest charging effect is significant as agreed in IAS 18 are measured initially at fair value and further on are measured at amortised cost using the effective interest rate method.
The most significant liabilities, which are subject to measurement methods applicable for the financial instruments, are as follows: 1. liabilities due to loans, 2. liabilities due to credits, 3. liabilities due to the bonds issued, 4. other financial liabilities including the reservation below. Trade liabilities that are measured at their outstanding amounts. Liabilities for which the interest charging effect is significant, are at the initial recognition discounted the first time they may be outstanding, and then measured at amortised cost using the effective interest rate.
Financial instruments by type
Financial assets fall into: 1. financial assets measured at fair value through profit or loss 2. loans granted and receivables, 3. financial assets held to maturity, 4. financial assets available for sale.
(i) Financial assets measured at fair value through profit or loss Financial assets measured at fair value through profit or loss are classified as short-term assets and recognized in their fair value, and any gains or losses arising on the measurement are recognized in the income statement. Financial assets measured at fair value through profit or loss include: ● financial assets purchased for sale in a short term, ● financial assets in a jointly managed portfolio which is certain to generate short-term profits in the future, ● financial assets classified as such on initial recognition. Financial assets measured at fair value through profit or loss also include derivative instruments unless they meet the requirements of hedge accounting.
(ii) Held-to-maturity investments Held to maturity investments are financial assets other than derivative instruments, with fixed or determinable payments and fixed maturity that a group has the positive intent and ability to hold to maturity. That asset category excludes loans and receivables, or assets that were classified as financial assets measured at fair value through profit and loss on initial recognition, or available-for-sale financial assets.
The Group does not classify any financial assets as held to maturity, if it sold or was reclassified in the current financial year or in two previous financial years more than what is considered an insignificant amount of investments held to maturity, except for sales or reclassifications made:
● soT close to maturity date or redemption of financial assets that shifts in the market interest rates would not have any impact on the fair value of the financial assets; ● after recovery of the material part of the principal amount through repayments or prepayments made according to the agreed schedule; or ● due to a single event that is not subject to control and that is not a repeating event and is not predictable on the basis of reasonable premises. Held-to-maturity financial assets are measured at amortised cost using the effective interest rate method.
(iii)T Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market, other than derivative instruments and financial assets which: ● the Group intends to sell immediately or in the near term, which are classified as assets held for trading, or financial assets that were classified as financial assets measured at fair value through profit and loss on initial recognition; ● the Group designated as available-for-sale assets on initial recognition; or ● the Group is not able to substantially recover all of its initial investment, other than because of credit
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deterioration, which is classified as available-for-sale assets. Loans and receivables are measured at amortised cost using the effective interest rate method.
(iv) Financial assets available for sale Available-for-sale financial assets are financial assets other than derivative instruments, which were designated as available for sale, and other than loans and receivables, held-to-maturity investments, or financial assets measured at fair value through profit and loss. Available-for-sale financial assets are measured at fair value, and any gains or losses on such measurement are recognized in the revaluation reserve. For interest-bearing debt instruments included in that category, the interest element measured using the effective interest rate method is recognized in the income statements.
(v) Financial liabilities Financial liabilities held for trading, including in particular derivatives with a negative fair value, which were not classified as hedging instruments, are recognized in their fair value, and any gains or losses arising on the measurement are recognized in the profit and loss account. Other financial liabilities are measured at amortised cost using the effective interest rate method. All financial liabilities are entered to the accounting books on a date of contract conclusion.
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Methods of measurement and presentation of the financial instruments in the financial statement are as follows:
Principles of recognition in the The group of assets or liabilities Method of measurement financial statement Assets measured at fair value At fair value (except for these ones Differences from valuation recognized in through profit or loss whose fair value cannot be established) profit or loss in the current reporting period in the financial income or financial costs item. Liabilities held for trading At fair value (except for these ones Difference from valuation recognized in whose fair value cannot be established) profit or loss in the current reporting period in the financial income or financial costs item. Other financial liabilities At amortised purchase price using the Difference from valuation adjustment effective interest rate (IRR - Internal value of the measured assets and is Return Rate) recognized in profit or loss in the current reporting period. Loans granted and receivables At amortised purchase price using the Difference from valuation adjustment effective interest rate (IRR) and in case value of the measured assets and is a payment date is unknown at purchase recognized in profit or loss in the current price (for instance in case of loans reporting period. without the repayment date agreed) Assets held to maturity At amortised purchase price using the Difference from valuation adjustment effective interest rate (IRR - Internal value of the measured assets and is Return Rate) recognized in profit or loss in the current reporting period. Financial assets available for sale At fair value (except for these ones Difference from valuation to fair value is whose fair value cannot be established) recognized in the revaluation reserve. In case of debt instruments, interest is recognized directly in the profit and loss account. Assets and financial liabilities held At purchase price adjusted by Asset or liability is recognized at for trading or available for sale impairment losses purchase price by the time it is exploited whose fair value cannot be (e.g. sold). Impairment losses are established recognized in the financial costs.
Hedge accounting and embedded derivatives
Hedge accounting Derivatives such as options, forwards, and swaps are usually intended for hedging fair value of assets or liabilities or for hedging future cash flows. Hedge accounting principles are applied with reference to these derivatives only when all the conditions of the hedge accounting are fulfilled. If those conditions are not met, the derivative instruments are accounted for according to the valuation principles applicable to assets and liabilities held for trading.
Embedded derivative instruments Contracts with derivative instrument embedded are the contracts which include such conditions under which a part of cash flows for the contract, changes in a manner similar to cash flows resulting from independent derivative instrument. Embedded derivative instruments are subject to exclusion from compound instrument and to separate measurement at fair value, provided that all the following criteria are fulfilled: 1. economic nature and risk of the embedded derivative are not strictly connected with the economic nature and risk of the contract in which this instrument is embedded, 2. individual instrument with fulfilment conditions identical to embedded instrument would comply with the definition of a derivative instrument, 3. reasonable establishment of fair value of imbedded instrument is possible, 4. compound instrument is not measured nor recognized in the financial statement at fair value. The FIFO method is applied to establish costs for outgoing financial instruments (first in - first out). d) Property, plant and equipment
(i) Own property, plant and equipment
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Property, plant and equipment are carried at cost less depreciation and impairment losses. Cost includes the costs incurred on acquisition of an item of property, plant and equipment (i.e. the amount paid to the seller less any deductible taxes, such as VAT or excise tax), regulatory liabilities (for imports), and the costs incurred to purchase and bring the asset to a working condition required for its intended use, including transport costs, loading and unloading costs, and storage costs. Any discounts and other allowances and returns reduce the cost of the asset. Cost also includes the costs incurred to construct an item of property, plant and equipment, such as the total costs incurred by the entity during the period of construction, installation, adaptation, or development of the item, until the date that item is complete and ready for use (or until the balance sheet date, if the item is not ready for use yet), including non-deductible VAT and excise tax, and the costs of servicing the debt incurred to finance the purchase (construction) of the item and the related exchange differences to the extent that they are considered to be an adjustment of the interest charged on such debt.
Items of property, plant and equipment adjusted to their fair value at January 1st, 2004, the date of first-time adoption of IFRS by the Group, are measured at recognized cost that is considered to be the fair value at the revaluation date. Any revaluation effects are transferred to retained earnings.
(ii) Leased property, plant and equipment Leases under which the Group bears substantially all the risks and receives substantially all the rewards incident to ownership are classified as finance leases. Property, plant and equipment held under finance leases are initially recognized at the lower of their fair value or the present value of the minimum lease payments, and subsequently reduced by depreciation and impairment losses. Payments under operating lease contracts signed by the Group companies are recognized in the income statement throughout the term of the lease.
(iii) Subsequent expenses Subsequent expenses incurred to replace a separately recognized element of an item of property, plant and equipment are capitalised. Other expenses are capitalised only if they can be reliably measured and if they increase the future economic benefits entailed in the asset. Other expenditure is regularly charged against the income statement.
According to IAS 16 (paragraph 13), parts of some items of property, plant and equipment that require replacement at regular intervals are depreciated over their economic useful lives. Repair costs are capitalised if the costs incurred cover the part recognized as a separate part of the asset. If no such parts were recognized separately on initial recognition of the fixed assets, this can be done the moment new expenditures are borne. the Group increases the value of the plant, property or equipment by the costs of the regular overhauls necessary for continued operation of the asset, in accordance with IAS 16 (paragraph 14). Such overhaul costs are treated as separate assets, and are amortised over the expected time to the next overhaul. On capitalisation of new overhaul costs, the non-depreciated value of the previous overhauls is charged against operating expense.
On acquisition or construction of an item of property, plant and equipment, the Group separates an amount of the necessary expenditure on the next overhaul from the cost, and amortises that amount over the time remaining until the next planned overhaul.
(iv) Amortisation Property, plant and equipment, or their important separate parts, are depreciated on a straight-line basis over their economic useful lives. Land is not depreciated. The Group has estimated the following economic useful lives for its property, plant and equipment items:
Buildings 20 - 25 years Machinery and equipment 2 - 20 years
Period of amortisation and residual values are subject to verification on each balance sheet date. Any changes resulting from the executed verification are recognized as changes in approximate figures, as defined in IAS 8 "Principles (policy) of accounting, changes in approximate figures and adjusting errors"
In case of fixed assets used on the basis of lease contracts, if purchase of a fixed asset ownership before the end of the contract's term is not certain, then the fixed assets are fully depreciated in the shorter term out of the two terms mentioned below: – lease agreements term, – time of using. In case of classification of a contract as financial lease, a subject of a contract is included in fixed assets of the Company (the lessee) and depreciations are made in line with general principles. e) Intangible assets
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(i) Goodwill Goodwill arises on combination of separate entities or operations into one entity preparing financial statements. This includes in particular acquisition of shares in subsidiaries, associates, or jointly-controlled entities. All combinations of non-related entities are accounted for using the purchase method. Goodwill is defined as the excess of the cost of the business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets. If the cost of an entity or its branch of activity is lower than the fair value of the net assets acquired, the Group revises the measurement of the fair value of the assets and liabilities, and recognizes the resulting difference in the income statement under other operating income.
According to the regulations in force, business valuation for the purposes of goodwill measurement on acquisition of shares is made at fair value. As a rule, fair value is measured at the moment a subsidiary relation arises and significantly grows. The Group recognizes that goodwill must be regularly revised to account for impairment and new circumstances of which it had no knowledge on initial measurement. Re-measurement of the fair value of net assets within 12 months of the transaction date impacts the goodwill amount. The changes disclosed in the subsequent months impact the current profit/loss, except for where an error is found (and recognized in compliance with IAS 8), a deferred-tax asset is recognized, or cost is adjusted, and recognized in relation to the goodwill using the prudent assessment principle.
Goodwill of the associates is carried at the book value of those associates recognized in the Group’s consolidated financial statements. Consequently, goodwill impairment tests are conducted taking into account all the interests in the associates and their goodwill.
(ii) Other intangible assets Other intangible assets acquired by the group are carried at cost less amortisation and impairment losses. Expenditure incurred on internally generated goodwill or brands are recognized in the income statement at the moment they are incurred.
(iii) Subsequent expenses Subsequent expenses on existing intangible assets are capitalised only if they increase the future economic benefits entailed in the assets. Other expenditure is charged directly against the income statement.
(iv) Amortisation Intangible assets are amortised on a straight-line basis over their economic useful lives. The Group has estimated the following economic useful lives for its intangible assets:
Research and development expense 2 - 5 years Patents and licences 2 - 10 years Other 2 - 5 years
Period of amortisation and residual values are subject to verification on each balance sheet date. Any changes resulting from the executed verification are recognized as changes in approximate figures, as defined in IAS 8 "Principles (policy) of accounting, changes in approximate figures and adjusting errors"
(iiv) Costs of finished development work The research is an innovative and planned search for solutions undertaken to acquire and adopt new spectrum of knowledge in terms of science and technology. Development work, whereas, is deemed as a practical use of research discoveries or achievements from other knowledge branches in planning and managing projects concerning production of new or considerably upgraded materials, devices, products or technological processes, systems or services which take place before lot production launch or before their application. Any costs incurred during research are recognized in a profit and loss account for the period in which they were incurred. If it is not possible to divide a process of asset establishment into a stage of research or a stage of development work, then a group treats the expenditure on a venture, leading to create intangible asset element, as if it was incurred only in the stage of research. Intangible asset element occurring due to development work should be recognized only if the group is able to prove: – possibility to finish the intangible asset element so that it is ready for use or available for sale (assessment from the technical angle), – intention to finish the element and to use or sell it, – capability of the element to be used or sold, – manner in which the element will bring the future economic benefits (in particular an entity should prove there is a market for products made thanks to the element or for the element itself, or if the element is to be used by the group - useful life of the intangible asset element),
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– availability of the technical equipment and financial funds and other funds to be used to finish the development work and to use or sell the element, and – possibility of a reliable establishment of expenditure incurred during the development work, which may be assigned to this element. No trademarks, magazine titles, publishing titles, list of recipients nor any other items similar in nature made by the company itself are recognized in the financial statement. Depreciation period for the activated costs of development work should be as long as the period their economic lives.
f) Costs of external financing
Costs of external financing are recognized as costs made in a period when they were incurred. g) Investment property
Investment properties are held to generate rent income or in expectation of an increase in their value, or both.
Investment properties are measured in accordance with the measurement principles applicable to non-current assets, i.e. at cost less depreciation and impairment losses. All investment property is depreciated according to the straight-line method. Depending on property, depreciation/amortisation rate varies from 1.7% to 4%, while economic life cycles take from 25 to 60 years. Machines and equipment, used as parts of the investment property are depreciated at rate 8.5% (cranes and thermal systems) and 10% (installations inside buildings) and their periods of economic lives are 12 and 10 years respectively.
Income from property rental to third parties is recognized as described in item q. h) Trade and other receivables
Short-term trade and other receivables are measured at the amount receivable unless the interest charging effect is significant. Otherwise, receivables are initially carried at their fair value, and then measured at amortised cost using the effective interest rate. The Group discounts its amounts receivable due in over 180 days.
Foreign-currency receivables are recognized at the transaction date at the average NBP exchange rate for the currency in question applicable at that date, unless another exchange rate was determined in the customs application or another binding document.
At the balance sheet date, foreign-currency receivables are measured based on the average NBP exchange rate for the currency in question applicable at that date.
Receivables are revalued after taking into account a degree of probability of their payment, by means of making a revaluation write-down. Making a revaluation write-down is obligatory in relation to the receivables: - from debtors put into liquidation or declared bankrupt, to the value of receivables not covered by any guarantee or any other collateral of receivables reported to a liquidator or receiver during bankruptcy proceedings, - from debtors in case the motion on declaration of bankruptcy is dismissed, provided that the debtor's property is not sufficient to settle the costs of bankruptcy proceedings, - questioned by debtors (disputable receivables) and the receivables, with payment of which debtors are behind and according to assessment of their financial and property situation, repayment if the receivables in question is not probable - to the amount of the claim not covered by any guarantee or any other collateral, or - pursued by way of court proceedings. Moreover, revaluation write-downs are made against receivables, whose maturity date as at the balance sheet date exceeded: – 180 days in the amount of 100%. The revaluation amount established as a result of the abovementioned estimates, may be a subject to decrease in case the Management Board holds reliable documents which confirm that the receivables had been secured and their repayment is very likely. Revaluation write-downs against receivables are recognized in other operating expenses.
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i) Inventories
Inventories of materials and goods are measured at cost, i.e. the purchase price plus the costs incurred to purchase and prepare the asset for use or sale.
Inventories of finished products and production underway are measured at cost, i.e. the direct costs plus reasonable costs indirectly incurred in the production.
If the cost of an inventory item is higher than the net realisable value determined in the sales transaction made in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale, the Group recognizes NRV write-downs.
Inventories are carried in their net value, i.e. less revaluation write-downs. Inventory sales are measured according to the "first in - first out" principle.
(i) The normal manufacturing capacity
Normal ordinary manufacturing capacity shall be defined on the level of 80% maximum manufacturing capacity. However, it does not exclude application of other ratio where it is justified. The normal manufacturing capacity may be estimated on the basis of the historical data e.g. from the previous two or more years, provided that the business scale has not changed over the years.
If the estimated (normal) manufacturing capacity is used in at least 85% normal manufacturing capacity, then fixed indirect costs are rewritten in the costs of manufacture. If this ratio is lower than 85%, the fixed indirect costs of production are subject to division into founded costs and unfounded costs. j) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and call deposits. Short-term investments that are not subject to significant value changes and that can be easily converted into cash are a part of the Group's liquidity management policy, and are recognized as cash and cash equivalents in the cash-flow statement. k) Impairment loss on assets
The book value of the Group's assets other than inventories and deferred-tax assets is assessed for evidence of impairment at each balance sheet date. If such evidence is found, the Group estimates the recoverable amount of the assets.
The recoverable amount of goodwill, assets with indefinite useful lives, and intangible assets not yet available for use is estimated at each balance sheet date, regardless of whether there is any evidence of impairment.
Impairment losses are recognized when the carried value of an asset or a cash generating unit is higher than the recoverable value. Impairment losses are recognized in the income statement.
Impairment of a cash generating unit is first charged against the goodwill of that unit (or unit group), and then against the carried value of that unit's (or unit group's) other assets, on a pro rata basis.
The goodwill and intangible assets with an indefinite useful life were tested for impairment at January 1st, 2004, that is, the date of adoption of IFRS, even if there was no evidence of impairment.
(i) Recoverable amount calculation The recoverable amount of held-to-maturity investments and receivables measured at amortised cost is measured as the current value of future cash flows discounted using the effective interest rate (internal rate of return on the asset concerned). Short-term receivables are not discounted.
For unquoted equity instruments measured at cost whose fair value cannot be reliably measured, the present value of the future cash flows is measured using the current interest rates for similar financial assets.
(ii) Reversal of impairment losses In case of increase in the value of financial investments that can be objectively attributed to events occurring after recognition of an impairment loss, the Group reverses the impairment loss as appropriate and recognizes such reversal in profit and loss, except for equity investments classified as available for sale.
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Impairment losses recognized as goodwill may not be reversed.
Otherwise, impairment losses may be reversed only if there has been a change in the estimates used to determine the asset's recoverable amount.
The increased carrying amount of an asset attributable to a reversal of an impairment loss cannot exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognized for the asset in prior years. l) Equity
Pursuant to the principles of presentation of financial statements prescribed in IAS 1 "Presentation of Financial Statements", the total consolidated equity comprises the equity attributable to equity holders of the parent, and minority interest.
Share capital of the parent company is the share capital of the Group and it is recognized at fair value adjusted by the effects of hyperinflation for the years between 1989 and 1996.
The equities of subsidiaries as at the acquisition date, in their parts corresponding to the Group's share in those equities, are offset against the cost of subsidiary shares recognized in the parent's (investor's) balance sheet at the date of acquisition (the difference is recognized as goodwill). Any increase (decrease) in equity after the date of acquisition in its part attributable to the parent (investor) is credited to (charged against) the Group's equity and recognized under the Group's appropriate equity items. The balance of the equity of fully consolidated entities is recognized as minority interest as described below.
Any consolidation adjustments are recognized as equity items as appropriate.
On the disposal of a consolidated foreign subsidiary, the exchange differences from consolidation of that subsidiary are charged against the income statement.
On purchase of treasury shares, the payment amount and the direct costs of the transaction are recognized in equity. The purchased treasury shares are charged against the equity.
Dividends are recognized as liabilities in the period in which they are declared.
Dividends received by the parent for the period preceding the takeover of control over the subsidiary are charged against the acquisition cost. This changes the measurement of the goodwill arising on consolidation or of the excess of the acquirer's interest in the acquired assets over the cost of the acquisition (formerly "negative goodwill"). Note that no adjustments are recognized with respect to dividends paid to minority interest holders.
Dividends received by the parent for the period after the takeover of control are eliminated from the parent's financial income, and are recognized in the equity of the entity paying the dividends. The recognition follows the allocation of the entity's equity to shares attributable to the Group and to the minority interests.
The elimination of dividends is credited to the Group's retained earnings.
Consolidated profit (loss) is disclosed under retained earnings in the equity, and represents the total of the profit (loss) of the parent, the interests in the profits (losses) of subsidiaries accounted for using the equity method, the profits (losses) of the fully-consolidated entities, and the profits (losses) of minority interests.
Minority interest Minority interests are calculated as a percentage of the minority shareholders' equities at the balance sheet date. The resulting amount represents the amount of the minority equities calculated by adding the minorities' share of changes in equity in the reporting period to the amount of the minority equities at the end of the previous period (brought forward as the opening balance). Such changes in equity may be the result of: – increase or decrease of the shares held by the minority interests, for instance, sale, purchase, or increase or decrease of the share capital, – increase or decrease in equity not directly related to changes in the percentage of shares held, for instance, an equity increase or decrease without changing the share percentage held, equity contributions by minority interests, profit from the current year, revaluation gains, if the revaluation was made in the current year, or dividend payments from prior year's profit.
In case when losses concerning minority interests in a consolidated subsidiary exceed minority interests in equity of this subsidiary, surplus and further losses regarding the minority interests are charged against majority interests, except for the situation when minority shareholders are obliged or are capable of making an additional investment to cover losses. If the subsidiary shows profit some time later, the profit is assigned for the majority
84 Consolidated financial statement of the Ciech Group for 2006
shareholders by the time the losses corresponding to the minority interests, previously acquired by the majority shareholders, are covered. m) Employee benefits
Longevity and retirement bonuses:
The Group's salary regulations provide that the employees of the Group's companies are entitled to receive longevity bonuses and retirement pays. Those commitments are the effect of the employee entitlements acquired in the current period and in the prior periods.
The Group's commitments under longevity bonuses and retirement pays are calculated by a licensed actuary using the projected unit credit method and discounted to their present value net of the fair value of any related assets. Establishing this type of provisions for the first time, provided that an entity was earlier obliged to do it, is treated as adjustment of an error from the previous years. Raising for the first time this type of provisions, if an entity was not earlier obliged to do it, does not account for any change in the account policy or any error adjustment.
Using this type of provisions causes decrease of provision (current charging of costs of operation with the amounts of paid benefits along with adjustment of the provision at the end of the period is not permitted), reversal of the provision in question, whereas, increases other operating income. n) Provisions
A provision is recognized when the Group has a present obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations. Where the effect of the time value of money is material, the amount of a provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
(i) Restructuring Restructuring provisions are recognized if the restructuring is an integral part of the acquirer's plan for the acquisition and, among other things, the main features of the restructuring plan were announced at, or before, the date of acquisition, while a reliable estimate of future liabilities is possible.
(ii) Reclamation In accordance with the Group's widely published and followed environmental policy and the relevant environmental legislation, a provision is recognized for the best estimate of the costs of land reclamation. The provision is estimated based on budget defining cost amounts associated with compulsory works and further on discounted. o) Trade liabilities and other liabilities
Trade liabilities and other liabilities are divided into long- and short-term liabilities using the following criteria: liabilities due within 12 months from the balance sheet date are recognized as short-term liabilities, all liabilities that are not related to deliveries and services and do not meet the criteria for recognition as short- term liabilities, are recognized as long-term liabilities.
Trade liabilities with maturity date within 180 days, are measured on the balance sheet date at their outstanding amounts, plus possible due interest for delay.
Trade liabilities with maturity date exceeding 180 days, are measured on the balance sheet date at amortised cost (discounted using the effective interest rate).
Any turnover and balances of the accounts should be agreed and any possible adjustments entered to the books and recognized in a financial statement of an entity. In case of any differences in opinions as to the manner of balance agreement between an entity and a contractor, the selling party's opinion is acknowledged and upon closing of the year a possible adjustment is entered to the books in the current year.
Liabilities expressed in foreign currency are measured based on the average NBP exchange rate for the currency in question applicable at that date.
Interest for delay on account of delayed payments of liabilities are not accrued if an entitled entity submits a declaration in writing on waiver of calculating interest, in other cases interest is calculated and evidenced according to the following principles:
85 Consolidated financial statement of the Ciech Group for 2006
– on a regular basis, upon receipt of interest notes received, – in an estimated value, provided that the estimation is based on the historical data presenting the amounts of interest accrued by particular contractors in relation to the dept towards them.
In each case, upon calculation of interest it is necessary to take into account other relevant risks that may cause calculation of the interest. p) Off-balance sheet contingent liabilities
For the Group, contingent liabilities are deemed potential future liabilities to perform tasks creation of which is dependent on presence of specific events. q) Income
(i) Sales of goods and rendering of services Revenue from the sale of products and goods is recognized in profit and loss if substantially all the risks and rewards of ownership are transferred to the buyer. Revenue from service provision is recognized in profit and loss by reference to the stage of completion of the service transaction at the balance sheet date. The stage of service completion is measured by surveying the work already performed. Revenue is not recognized if there is considerable uncertainty about the collection of the payable remuneration, refund of the costs incurred, or potential return of products and services.
(ii) Lease income Income from investment property leases is recognized in income on a straight-line basis over the lease term. Any discounts are carried together with the lease income. r) Costs
(i) Payment of finance lease liabilities Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term using the effective interest rate method.
(ii) Finance costs Finance costs include interest on borrowings calculated using the effective interest rate, dividends paid on preference shares, interest on cash invested by the Group, dividends receivable, gains and losses on exchange differences and gains and losses on hedging instruments, which are recognized in the income statement.
Interest income is recognized in the income statement on an accrual basis, using the effective interest rate method. Dividend income is recognized in the income statement when the Group's right to receive payment is established. The finance charge portion of finance lease payments is recognized in the income statement using the effective interest rate method. s) Tax
Income tax recognized in the income statement comprises the current tax and deferred tax income or expense. Income tax is recognized in the income statement, except for amounts relative to items recognized directly in equity. Such income tax amounts are then recognized in equity.
Current tax is the amount of income taxes payable in respect of the taxable profit for the period, calculated based on the income tax rates applicable at the balance sheet date and any tax adjustments relative to prior periods.
Deferred tax is calculated using the balance sheet method, based on temporary differences between the value of assets and liabilities calculated for accounting purposes, and the value calculated for tax purposes. No provisioning is made for the following temporary differences: goodwill not recognized for tax purposes, initial recognition of assets or liabilities that do not affect neither the accounting profit nor taxable profit, and temporary differences arising on investments in subsidiaries except to the extent that that it is probable that the temporary difference will not reverse in the foreseeable future. The recognized deferred tax is measured at the amount expected to be paid (recovered) when an asset is realised or a liability is settled, using the tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax assets are recognized for deductible temporary differences only if it is probable that taxable profit will be available against which the temporary difference can be utilised. The amount of a deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or that entire deferred tax asset to be utilised.
86 Consolidated financial statement of the Ciech Group for 2006
Receivables and liabilities due to current income tax and assets and provision for deferred tax are offset and recognized in the consolidated statement per balance. t) Government subsidies
Government subsidies are recognized if there is a founded certainty that the subsidy will be granted and all the conditions thereof will be met. If a subsidy is related to a particular cost item, it is recognized as income in a commensurate manner with the costs the subsidy is to offset. If the subsidy is related to assets, its fair value is recognized in the account of income for the following periods and further on gradually, by way of equal annual revaluation write-downs, written off from the profit and loss account in the estimated period of using the assets connected with it. u) Non-current assets held for sale and discontinued operations
Non-current assets are classified as held for sale if their carrying amounts can be recovered principally through a sale transaction and if they are available for immediate sale in their present condition, and the sale is highly probable. A discontinued operation is a component of the Group that either has been disposed of or is classified as held for sale, and: represents a separate major line of business, is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, is a subsidiary acquired exclusively with a view to resale. A component of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Group (a component may be a cash-generating unit or a group of cash-generating units), Those assets are measured at the lower of their net selling price and their net carried value. The Group applies the recognition criteria for assets held for sale prescribed in IFRS 5. v) Business combinations involving entities under common control
A business combination involving entities or businesses under the Group's control is a business combination in which the Group ultimately controls all of the combining entities or businesses both before and after the business combination, and that control is not transitory.
Business combinations involving entities under the Group's control are settled (for consolidated reporting purposes) so that the transaction does not in any way affect the Group's consolidated financial statements. w) Emission rights
Principles of the accounting recognition of the emission rights are as follows: – Rights of emission granted are not subject to recognition in the balance sheet at the moment of their granting or in the following periods. Charges for granting the rights, including the fee for entry to the register, are recognized as prepayments; however, if their value is not significant, it is possible to execute a one-off allocation of general expenses. The charge does not account for the value of these rights and value of these rights is not established in any other manner either. – Entity obtaining the rights evidences them on an off-balance sheet basis in the system section, off- balance sheet evidence also covers use of emission on an actual base. – Charges paid are capitalised in the prime cost of sales proportionally to their use in a particular settlement period. – On a balance sheet date a comparison is made by entity of the rights granted for a particular period with their actual use and if the use in a given year exceeds the rights granted for this year, then a provision is raised in the amount of a product of missing rights and their market price. If an entity is able to prove that it will not need to make an additional purchase of the rights throughout the whole accounting period to cover their shortage, the provision is not made. The provision made is charged against the prime cost of sales. – In the event of additional purchase of the rights from the market, the rights are measured at their purchase price as intangible and legal assets. If an entity is able to prove as of the balance sheet date that particular rights purchased from the market are intended for sale and it is highly likely that benefits from these rights will be used in this manner, this part of rights is recognized according to the historical cost and showed in the statement as investments in intangible and legal assets. – Emission rights acquired are not subject to depreciation as their residual value corresponds to the purchase price. In case of increase in the market price, their residual value rises as well, thus there are no grounds to make a revaluation write-off. However, as of the balance sheet date, these rights shall be tested for impairment in line with general principles, which in case of their value will make it necessary to recognize the impairment loss. The impairment loss is charged against other operating costs.
87 Consolidated financial statement of the Ciech Group for 2006
– In case the purchased rights are used to cover a shortage occurring on the date of the annual limit settlement, the used rights by the accounting value are settled with a provision raised previously to cover the shortage. – In case the rights granted are sold, the sold rights are subject to amortisation, which shall be reflected in the off-balance sheet evidence, while income from the sale are recognized in line with general principles, as other operating income. If the accrued rights are subject to sale, the prime cost of the sale of rights shall be recognized. The result of the rights' sales showed in the profit and loss account is recognized in the item of sales result of non-financial fixed assets. – Use of the purchased rights, as well as recognition of the cost of the rights' sales takes place according to the FIFO method.
In the context of the principles defined above, it is necessary to stress than no company from the Ciech Group has exceed the volume of the emission rights in 2006. With regard to the aforesaid, it is necessary to make any provisions to cover shortages in the prime cost of sales.
Application of new and revised accounting standards
These consolidated financial statements were prepared in compliance with the International Financial Reporting Standards (IFRS) in the scope adopted by the European Union (EU) as of December 31st, 2006.
In 2005, the European Union adopted new standards, revised standards and interpretations which were published with the effective date no later than on January 1st, 2006 (except for IFRIC 6 published with the effective date on December 1st, 2005):
1. Amendment to IAS 19 "Employee Benefits" - Actuarial Gains and Losses, Group Plans and Disclosures,
2. Amendment to IAS 39 "Financial Instruments: Recognition and Measurement" - The Fair Value Option,
3. Amendment to IAS 21 "The Effects of Changes in Foreign Exchange Rates" – Net Investment in a Foreign Operation,
4. Amendment to IAS 39 "Financial Instruments: Recognition and Measurement" - Cash Flow Hedge Accounting of Forecast Intragroup Transactions,
5. Amendment to IAS 39 "Financial Instruments: Recognition and Measurement" and IFRS 4 "Insurance Contracts" – Financial Guarantee Contracts,
6. IFRS 6 "Exploration For and Evaluation of Mineral Resources",
7. IFRIC 4 "Determining Whether an Arrangement Contains a Lease",
8. IFRIC 5 "Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds",
9. IFRIC 6 "Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment".
These amendments have no impact on the presented consolidated financial statement of the Ciech Group.
Furthermore, the European Union has presented the following standards, revised standards and their interpretations that are not in effect for annual periods ended December 31st, 2006, however, they may be applied retrospectively:
1. Amendment to IAS 1 "Presentation Of Financial Statements" Capital Disclosures – published with the effective date on: January 1st, 2007, the Ciech Group applied it retrospectively to the statement for 2006 with the comparative figures (details in item 33 of the additional information and notes),
2. IFRS 7 "Financial Instruments: Disclosures" – published with the effective date on: January 1st, 2007, the Ciech Group did not apply it retrospectively,
88 Consolidated financial statement of the Ciech Group for 2006
3. IFRIC 7 "Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies" - published with the effective date on March 1st, 2006. The Management Board of Ciech SA believes this interpretation shall not have any impact on the consolidated financial statement of the Ciech Group,
4. IFRIC 8 "Scope of IFRS 2" – published with the effective date on May 1st, 2006; the Ciech Group did not apply it retrospectively,
5. IFRIC 9 "Reassessment of Embedded Derivatives" – published with the effective date on June 1st, 2006; the Ciech Group did not apply it retrospectively.
Furthermore, the European Union has presented the following standards, revised standards and their interpretations that are not in effect for annual periods ended December 31st, 2006 and are not yet adopted for usage in the European Union:
1. IFRS 8 "Operating Segments" – published with the effective date on January 1st, 2009, probable date of adoption: June 2007, 2. IFRIC 10 "Interim Financial Reporting and Impairment" – published with the effective date on November 1st, 2006, probable date of adoption: May 2007, 3. IFRIC 11 "IFRS 2: Group and Treasury Share Transactions" – published with the effective date on March 1st, 2007, probable date of adoption: June 2007, 4. IFRIC 12 "Service Concession Arrangements" – published with the effective date on January 1st, 2008, probable date of adoption: June 2007, The Ciech Group has not abandoned application of any binding International Financial Reporting Standards. The following International Financial Reporting Standards were not applicable since these issues are not identified in the Group's activity: IFRS 2 "Share-Based Payment" IFRS 4 "Insurance Contracts" IAS 11 "Construction Contracts" IAS 26 "Accounting and Reporting By Retirement Benefit Plans" IAS 31 "Interests in Joint Ventures" IAS 41 "Agriculture"
3 Business segments
The Ciech Group divides its operating activities into business segments. Risk and investment returns are mainly influenced by the differences between goods, products, and services. The Ciech Group operates in the following business segments:
Soda Segment brings together products, particularly soda ash, manufactured by soda companies (JANIKOSODA S.A., SODA MĄTWY S.A., by December 31st, 2006 S.C. Uzinele Sodice Govora S.A. as well), and sold mainly by CIECH SA. As far as this segment is concerned, the Ciech Group is the sole manufacturer in Poland.
Agrochemical Segment provides a full range of commodities used in agriculture. Fertilizers manufactured by GZNF "FOSFORY" Sp. z o.o. and "Alwernia" S.A., as well as plant protection agents occur in this segment. CIECH SA exports fertilizers of GZNF "FOSFORY" Sp. z o.o. and other domestic fertilizer manufacturers. Raw materials used to produce fertilizers, delivered to GZNF "FOSFORY" Sp. z o.o. and "Alwernia" S.A. can be also found in this segment. From January 1st, 2007 income from sales of plant protection agents, manufactured by the newly acquired entity – Z.Ch. "Organika-Sarzyna" S.A., will be also included in the agrochemical segment.
Petrochemical Segment contains petrochemical goods, as well as fuel and oils delivered to its own petrol stations. The petrochemical segment mainly comprises such goods as liquid fuel and benzene.
Silicates and glass products Segment contains most of all products of "VITROSILICON" Spółka Akcyjna and other manufacturers, exported by CIECH SA, such as glass and sodium water glass.
Inorganic Segment includes products of "Alwernia" S.A., which are mainly sodium tripolyphosphorus and inorganic products from other manufacturers exported by CIECH SA. As of January 1st, 2007 income from sales of products manufactured by the newly acquired entity – ZACHEM S.A., will be also included in the inorganic segment.
Organic Segment comprises trading goods purchased and sold by CIECH SA outside the Ciech Group. Vinyl chloride polymers, caprolactam, EPI and TDI are the main products of the segment. As of January 1st, 2007 income from the organic segment will be increased by sales of the products mentioned thanks to ZACHEM S.A. and Z.CH. "Organika-Sarzyna" S.A. joining the Ciech Group.
89 Consolidated financial statement of the Ciech Group for 2006
Pharmaceutical Segment contains exported and imported medications and pharmaceutical substances, in the sale of which CIECH POLFA Sp. z o.o. participates.
Power Generation Segment includes power generated by Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością mainly for the purposes of soda companies and for the use of recipients outside the Ciech Group on a small scale.
Other Operations Segment provides goods and services outside the Group largely by CIECH SA and Cheman S.A. and foreign companies outside the area of basic chemistry.
Discontinued Operations Segment in this segment, results of sales of Petrochemia Blachownia S.A., Alwernia Chrom Sp. z o.o. were recognized, as well as results of fuel activity, from which Cheman S.A. is withdrawing. Geographical segments of the Group are established based on location of the Group's assets.
Transfer prices Transfer prices are agreed based on market prices or prices depending on quotations of goods quoted on stock exchanges worldwide.
Data regarding income and profit as well as assets and liabilities in particular business segments of the Ciech Group for the periods presented in the statement, has been included in the tables below:
90 Consolidated financial statement of the Ciech Group for 2006
Business segments 01.01 – 31.12.2006 Silicates Eliminations in thousands of Polish Agro- and Discontinued Other Soda Segment Organic Petrochemical Pharmaceutical Inorganic (consolidation TOTAL zloty Chemical glass operations Operations adjustments) products Revenue from third 2 113 757 959 23 934 440 743 83 813 339 132 49 293 119 871 249 621 14 197 35 374 - parties 937 Income from inter- 106 240 214 701 2 403 - 3 796 606 205 2 425 - 42 562 (312 545) 60 393 segment sales 2 174 Total revenue 864 199 238 635 443 146 83 813 342 928 49 899 120 076 252 046 14 197 77 936 (312 545) 330 Segment profit/loss 276 667 12 941 36 278 3 509 56 281 19 785 15 887 55 391 1 325 22 830 (26 277) 474 617 Unallocated (328 ------(expenses) / income 299) Operating profit ------146 319 Net finance income ------3 546 (costs) Share of profit of ------1 911 - 1 911 associates Tax ------(28 151) Profit on discontinued ------26 809 operations Net profit ------150 434
Consolidated financial statement of the Ciech Group for 2006
Business segments 01.01-31.12.2005 Silicates Eliminations in thousands of Polish Agro- and Discontinued Other Soda Segment Organic Petrochemical Pharmaceutical Inorganic (consolidation TOTAL zloty Chemical glass operations Operations adjustments) products Revenue from third 749 355 21 551 199 332 294 841 354 590 55 542 108 320 263 591 120 856 26 656 - 2 194 634 parties Income from inter- 57 680 215 629 9 277 56 393 341 453 212 7 288 144 975 31 816 (509 153) 14 911 segment sales Total revenue 807 035 237 180 208 609 351 234 354 931 55 995 108 532 270 879 265 831 58 472 (509 153) 2 209 545 Segment profit/loss 222 969 18 894 32 564 12 893 56 990 22 771 16 663 77 595 11 771 33 505 (13 511) 493 104 Unallocated ------(349 549) (expenses) / income Operating profit ------143 555 Net finance income ------(3 926) (costs) Share of profit of ------3 372 - 3 372 associates Tax ------(25 148) Profit on discontinued ------operations Net profit ------117 853
92 Consolidated financial statement of the Ciech Group for 2006
Business segments 31.12.2006
Silicates Eliminations in thousands of Polish Other Soda Segment Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic (consolidation TOTAL zloty Operations products adjustments)
Assets by segment 1 077 205 41 325 562 030 18 781 294 164 49 921 156 390 143 489 143 523 (57 907) 2 428 921 Current assets available ------2 327 - 2 327 for sale
Interests in associates ------42 220 - 42 220
Unattributed assets ------256 045 Total Assets 2 729 513
Silicates Eliminations in thousands of Polish Other Soda Segment Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic (consolidation TOTAL zloty Operations products adjustments)
Liabilities of the segment 339 142 45 145 534 355 6 518 135 647 43 463 95 643 71 973 39 348 (50 415) 1 260 819
Liabilities arising from non-current assets ------available for sale
Unattributed liabilities ------331 476 Total liabilities 1 592 295
93 Consolidated financial statement of the Ciech Group for 2006
Business segments 31.12.2005
Silicates Eliminations in thousands of Polish Other Soda Segment Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic (consolidation TOTAL zloty Operations products adjustments)
Assets by segment 603 799 35 302 39 834 168 848 261 655 65 066 88 860 155 333 34 224 (67 883) 1 385 038 Current assets available 13 - - 85 216 - - - 68 - - 85 297 for sale
Interests in associates ------39 431 - 39 431
Uncredited assets ------210 663 Total Assets 1 635 132
Silicates Eliminations in thousands of Polish Other Soda Segment Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic (consolidation TOTAL zloty Operations products adjustments)
Liabilities of the segment, 188 271 37 451 18 939 58 926 100 932 56 585 39 854 73 858 12 056 (60 886) 525 986 including:
Liabilities arising from non-current assets - - - 14 425 - - - 12 - - 14 437 available for sale
Unattributed liabilities ------90 015 Total liabilities 616 001
94 Consolidated financial statement of the Ciech Group for 2006
Business segments 01.01.-31.12.2006 Silicates Power Eliminations in thousands of Soda Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic Other Unattributed Generation (consolidation TOTAL Polish zloty Segment Segment. Segment Segment segment products Segment Operations items Segment adjustments) segment Redemption 56 933 1 252 695 188 11 296 622 7 718 4 959 5 510 6 781 (73) 95 881 Non-cash costs, other than 3 850 423 - - - - 3 586 - 742 - - 8 601 amortisation Capital expenses 83 875 334 102 6 11 507 748 58 767 5 125 1 340 4 495 (5 693) 160 606 Recognised 7 396 27 1 177 874 513 4 261 682 2 636 769 9 134 (39) 27 430 impairment losses Reversed 523 - 205 67 517 2 366 365 1 236 313 2 955 (2) 8 545 impairment losses
01.01. - 31.12.2005 Silicates Power Eliminations in thousands of Soda Organic Petrochemical Agro-Chemical Pharmaceutical and glass Inorganic Other Unattributed Generation (consolidation TOTAL Polish zloty Segment Segment. Segment Segment segment products Segment Operations items Segment adjustments) segment Redemption 52 346 473 39 4 268 8 231 439 8 670 3 424 6 024 8 279 30 92 223 Non-cash costs, other than 3 293 793 - - 303 - 6 441 2 260 507 - - 13 597 amortisation Capital expenses 67 082 - 875 13 955 14 772 1 438 10 738 8 080 864 2 653 - 120 457 Recognised 2 818 16 1 150 1 532 420 699 2 854 2 303 199 11 300 (47) 23 244 impairment losses Reversed 709 48 258 282 434 157 3 190 2 126 32 4 158 (204) 11 190 impairment losses
95 Consolidated financial statement of the Ciech Group for 2006
SALES REVENUES 01.01. - 31.12.2006 01.01. - 31.12.2005 in thousands of Polish zloty Soda Segment 813 452 760 426 Petrochemical Segment 83 813 292 479 Agro-Chemical Segment 339 240 354 906 Inorganic Segment 250 234 263 707 Organic Segment. 442 980 201 165 Segment of silicates and glass products 119 871 108 320 Pharmaceutical Segment 49 293 55 543 Power Generation Segment 25 213 21 631 Other 36 037 49 411 Discontinued Operations 14 197 101 957 TOTAL 2 174 330 2 209 545
Geographical segments
Data concerning income, some assets and expenditure regarding particular geographical segments for the periods presented in the statement, has been shown in the tables below: Consolidated financial statement of the Ciech Group for 2006
Geographical segments 01.01. - 31.12.2006
Other European in thousands of Polish zloty Poland European Union Africa Asia Other regions TOTAL countries
Revenue from third parties 1 128 717 765 591 118 864 14 095 135 488 11 575 2 174 330
Capital expenses 160 526 80 - - - - 160 606
01.01. - 31.12.2005 Other European in thousands of Polish zloty Poland European Union Africa Asia Other regions TOTAL countries
Revenue from third parties 1 200 913 708 788 89 167 48 349 155 295 7 033 2 209 545
Capital expenses 120 310 147 - - - - 120 457
31.12.2006 Other European in thousands of Polish zloty Poland European Union Africa Asia Other regions TOTAL countries Assets by segment 2 470 550 52 466 175 436 1 035 29 754 272 2 729 513
31.12.2005 Other European in thousands of Polish zloty Poland European Union Africa Asia Other regions TOTAL countries Assets by segment 1 529 682 39 087 37 529 47 28 257 530 1 635 132 Consolidated financial statement of the Ciech Group for 2006
4 Other operating income and expense
Other operating income in thousands of Polish zloty OTHER OPERATING INCOME 31.12.2006 31.12.2005 Deduction of negative goodwill - 18 932 Income from lease 2 289 3 255 Profit on net sale of non-financial fixed assets 3 762 3 735 Revaluation write-down on short-term receivables 5 091 5 457 Revaluation write-down on inventories 1 428 1 880 Revaluation write-down on intangible and legal assets 77 28 Revaluation write-down on property, plant and equipment 868 1 375 Extinguished liabilities 111 603 Penalties and damages received 1,139 1 591 Gifts received 6 10 Settlement of inventory 1 048 344 Payment of receivables previously redeemed - 60 Income from social activity managed 76 998 Litigation cost refunds 278 217 Settlement of sale-and-lease-back - 1 025 Subsidies 226 - Income from liquidation of current assets and liquidation of fixed assets 367 451 Reversal of provision for pensions and longevity bonuses 1 278 1 408 Reversal of provision for restructuring 2 965 - Reversal of provision for damages - 5 207 Reversal of provision for environmental protection 156 735 Reversal of provision for liabilities 619 1 535 Reversal of other provisions - 36 Cash bonuses received 690 489 Redeemed irrecoverable receivables written-off - 388 Reversals of provisions recognized as short-term liabilities 75 815 Provision for bonus 48 491 Rebilled costs of managing contractors 50 - Other 657 1 376 Total 23 304 52 441
Subsidies received
In 2006 "VITROSILICON" Spółka Akcyjna received funding from the European Regional Development Fund within the Sectoral Operational Program of Improvement of the Competitiveness of Enterprises intended for completion of the project known as "Development of the Plant through Implementation of Ecological Technology of Production of Glass Blocks" in the amount of PLN 3,170 thousand (including PLN 226 thousand which has been recognized in the operating income as the annual revaluation write-down). In the current period, no unfulfilled conditions or contingent events connected with the subsidy recognized in the consolidated financial statement, have taken place.
Consolidated financial statement of the Ciech Group for 2006
Other operating expenses in thousands of Polish zloty OTHER OPERATING EXPENSES 31.12.2006 31.12.2005 Restructuring costs 58 - Revaluation write-down on intangible assets 1 960 154 Revaluation write-down on property, plant and equipment 5 816 1 454 Revaluation write-down on short-term receivables 14 132 7 504 Revaluation write-down on investment property 1 568 - Revaluation of commodities - 697 Costs of removing consequences of accidents 746 - Depreciation - social facilities 139 66 Raised provisions recognized as short-term liabilities 5 679 910 Provision raised for bonus 84 137 Provision raised for retirement costs of fixed assets 240 387 Provision raised for stocktaking gaps - 52 Depreciation of investment property 442 - Provision raised for damages 1 219 9 474 Provision raised for liabilities - 816 Provision raised for restructuring costs 161 3 863 Provision raised for longevity and retirement bonuses 6 188 5 828 Provision raised for environmental protection 3 432 1 690 Other provisions raised 106 - Revaluation write-off on inventories 2 482 3 956 Costs arising from unused property and manufacturing capacity 1 994 3 262 Costs associated with future business 1 293 1 378 Costs of development work and intangible and legal assets written-off 391 170 Given donations 927 1 544 Litigation costs 574 804 Receivables written-off 94 146 fines, penalties, damages paid 1 627 2 693 Stocktaking differences 1 096 563 Accidents 3 119 Retirement of fixed assets 1 316 490 Liquidation of industrial waste - 113 Liquidation of materials 515 195 Social activities 818 525 Membership fees 272 169 Reimbursements - 40 Leased space maintenance costs 1 138 1 805 Loss on net sale of non-financial fixed assets 590 282 Other 454 1 768 Total 57 554 53 054
99 Consolidated financial statement of the Ciech Group for 2006
Net financial income / costs in thousands of Polish zloty NET FINANCIAL INCOME / COSTS 31.12.2006 31.12.2005 Interest 9 350 9 231 Dividends 1 650 1 713 Positive exchange rate differences 3 466 1 347 Reversal of provision for financial liabilities 620 212 Revaluation of receivables due to (trade and budget) interest 680 1 218 Income from debt sale 150 41 Received discount on bills of exchange and checks 26 24 Revaluation write-down on long-term investments and investments 401 1 232 Financial instrument measurement 946 657 Other revaluation 182 111 Net profit on sale of financial assets 2 076 18 732 Other 126 241 Total financial income 19 673 34 759
Interest 11 302 14 772 Net loss on revaluation of investments by fair value - 256 Negative exchange rate differences 1 672 8 250 Provisions raised for financial liabilities 16 620 Impairment losses on trade and budget interest 1 240 1 671 Commissions for factoring 4 376 Commissions for and bank fees 46 34 Commissions from credits 416 592 Costs due to sureties and guarantees 50 - Revaluation write-down on long-term investments and investments in associates 232 8 505 Financial instrument measurement - 2 499 Nominal value of sold debt 1 034 32 Other 115 1 078 Total financial costs 16 127 38 685
Net financial income / costs 3 546 (3 926)
Costs by type in thousands of Polish zloty COSTS BY TYPE 31.12.2006 31.12.2005 a) amortisation/depreciation 95 378 92 076 b) consumption of materials and energy 421 881 621 122 c) employee benefits 197 257 189 983 d) third-party services 296 580 334 249
Depreciation of property, plant and equipment and intangible assets in thousands of Polish zloty DEPRECIATION CHARGES OF INTANGIBLE AND LEGAL ASSETS 31.12.2006 31.12.2005 Prime cost of sales 1 514 620 Administrative expenses 4 982 4 260 Other operating expenses 139 28 Total 6 635 4 908
100 Consolidated financial statement of the Ciech Group for 2006
in thousands of Polish zloty DEPRECIATION CHARGES OF PROPERTY, PLANT AND EQUIPMENT 31.12.2006 31.12.2005 Prime cost of sales 78 557 77 233 Other operating expenses 1 747 897 Administrative expenses 8 516 8 281 Total 88 820 86 411
Personnel costs in thousands of Polish zloty EMPLOYEE BENEFITS 31.12.2006 31.12.2005 Remuneration 157 609 150 978 Social insurance and other benefits 38 958 38 141 Outflows on longevity and retirement bonuses (including resulting increases in 330 864 provisions) Other 360 - Total employee benefits 197 257 189 983
Research and development work expenses
Total expenditure on research and development work, recognized as cost in the period, amounted to PLN 1,891 thousand (PLN 1,663 thousand in the corresponding period).
5 Income tax
The main components of tax expense are as follows: in thousands of Polish zloty TAX RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT 31.12.2006 31.12.2005 Current tax Current income tax 25 135 32 132 Income tax for previous years (4 316) (1 478) Total 20 819 30 654 Temporary differences recorded/reversed 7 332 (5 430) Recognition of tax losses to be used in future periods - (76) Total 7 332 (5 506) Income tax disclosed in the profit and loss account 28 151 25 148
Current tax occurred in the Ciech Group recognized directly in equity. Deferred tax recognized in equity amounts to PLN 311 thousand.
Reconciliation of income tax on pre-tax gross profit at the statutory tax rate to income tax calculated at the effective tax rate of the Group for the periods presented in the statement:
31.12.2006 31.12.2005 EFFECTIVE TAX RATE in thousands in thousands % % of PLN of PLN Profit before tax 151 776 143 001 Tax based on valid tax rate 19.00% 28 837 19.00% 27 170 Difference resulting from application of tax rates valid in other 0.02% 31 0.09% 134 legal and tax regulations * Costs not accounting for tax deductible expenses * 28.98% 43 987 28.83% 41 234 Income not subject to tax * (25.55%) (38 783) (12.33%) (17 629) Adjustment of income tax for the previous years * (0.65%) (994) (0.80%) (1 137)
101 Consolidated financial statement of the Ciech Group for 2006
31.12.2006 31.12.2005 EFFECTIVE TAX RATE in thousands in thousands % % of PLN of PLN Other * (3.25%) (4 927) (17.22%) (24 624) Total 18.55% 28 151 17.57% 25 148 * The amounts represent tax calculated for the individual items ** In 2006 income tax of Daltrade (30%) and Polsin (20%) recognized in the profit and loss account amounted to PLN 117 thousand (in 2005: PLN 652 thousand)
Deferred income tax Deferred income tax results from the following items: in thousands of Polish zloty ASSETS DUE TO DEFERRED TAX AND PROVISION FOR 31.12.2006 DEFERRED TAX total assets total provisions net value Property, plant and equipment 1 915 27 575 (25 660) Investment property 298 - 298 Other investments 1 200 2 082 ( 882) Inventories 2 048 - 2 048 Trade and other receivables 1 107 529 578 Employee benefits 4 999 - 4 999 Provisions 11 716 20 11 696 Tax losses subject to deduction in future periods 26 - 26 Foreign exchange differences 557 398 159 Liabilities and accrued expenses 10 296 1 10 295 Foreign exchange differences - on the level of the companies' 334 105 229 statements Other 907 274 633 Assets / provision due to deferred tax 35 403 30 984 4 419 Revaluation write-down on assets - - - Assets / provision due to deferred tax disclosed in the balance 35 403 30 984 4 419 sheet in thousands of Polish zloty ASSETS DUE TO DEFERRED TAX AND PROVISION FOR 31.12.2005 DEFERRED TAX total assets total provisions net value Property, plant and equipment 2 011 23 209 (21 198) Other investments 2 679 10 2 669 Inventories 1 532 - 1 532 Trade and other receivables 710 132 578 Employee benefits 3 248 - 3 248 Provisions 1 532 23 1 509 Foreign exchange differences 57 30 27 Liabilities and accrued expenses 8 535 447 8 088 Foreign exchange differences - on the level of the companies' 469 365 104 statements Other 385 64 321 Assets / provision due to deferred tax 21 158 24 280 (3 122) Revaluation write-down on assets - - - Assets / provision due to deferred tax disclosed in the balance 21 158 24 280 (3 122) sheet
102 Consolidated financial statement of the Ciech Group for 2006
Temporary differences in thousands of Polish zloty Change in temporary Change in differences temporary Foreign Changes in CHANGE IN TEMPORARY DIFFERENCES As is on As is on recognized differences exchange the group's IN THE PERIOD 01.01.2006 31/12/2006 in the profit recognized differences composition and loss in equity account Property, plant and equipment (111 567) (19 837) - (37) (3 613) (135 054) Investment property - 1 568 - - - 1 568 Other investments 14 048 (11 306) (1 635) - (5 749) (4 642) Inventories 8 061 (874) - - 3 592 10 779 Trade and other receivables 3 043 1 268 - - (1 269) 3 042 Employee benefits 17 093 175 - - 9 044 26 312 Provisions 7 943 (1 370) - 13 54 974 61 560 Other items 1 689 820 - - 820 3 329 Tax losses subject to deduction in future - - - - 139 139 periods Foreign exchange differences 142 1 038 - - (341) 839 Liabilities and accrued expenses 42 570 (10 729) - - 22 344 54 185 Foreign exchange differences - on the level of 548 655 - - - 1 203 the companies' statements Total (16 430) (38 592) (1 635) ( 24) 79 941 23 260 in thousands of Polish zloty Change in temporary Change in differences temporary Foreign Changes in CHANGE IN TEMPORARY DIFFERENCES As is on As is on recognized differences exchange the group's IN THE PERIOD 01.01.2005 31.12.2005 in the profit recognized differences composition and loss in equity account Property, plant and equipment (115 274) (6 393) - 95 10 005 (111 567) Other investments 1 089 12 959 - - - 14 048 Inventories 7 695 650 - - (284) 8 061 Trade and other receivables 23 773 (20 300) - - (430) 3 043 Employee benefits 13 562 3 702 - - (171) 17 093 Provisions 9 484 (1 399) - (10) (132) 7 943 Other items 1 760 982 - - (1 053) 1 689 Foreign exchange differences - 142 - - - 142 Liabilities and accrued expenses 5 451 37 119 - - - 42 570 Foreign exchange differences - on the level of (719) 1 267 - - 548 the companies' statements Total (53 179) 28 729 - 85 7 935 (16 430)
Dividend paid by the Ciech Group for its shareholders does not have any impact on deferred income tax.
6 Non-current assets held for sale and discontinued operations
Within the Group's strategy of withdrawal from production in the petrochemical industry, Cheman S.A. is committed to perform restructuring and liquidation of the fuel activity, which the entity continued to manage after the Ciech Petrol Sp. z o.o. incorporation. The analysis shows that the fuel activity managed by Cheman S.A. is marked by low profitability on the level of gross margin. It is not enough to cover all the other costs related to its functions, the costs mentioned comprise: costs of sales, maintenance of fuel stations and their resource basis. In 2006 Cheman S.A. sold a fuel station in Jarocin, terminated lease contracts for fuel station in Kalisz, Zduńska Wola, Kleszczów and Szczytniki and the company terminated the logistical and storage activity related to management of fuel warehouse and car accessories. Since the second half of December 2006, Cheman S.A.
103 Consolidated financial statement of the Ciech Group for 2006
handles negotiations related to sales of Domaniew Base. Furthermore, negotiations with MPK Sieradz concerning earlier termination of a long-term lease contract for the petrol station in Sieradz are in progress. The company expects the fuel activity to be fully completed by the end of June 2007.
As at December 31st, 2006 fixed assets assigned for Ośrodek Wypoczynkowy CHEMIK (Recreation Centre) in Sopot, Sanatorium Uzdrowiskowe CHEMIK in Ciechocinek and Production Department T-7300 in ZACHEM S.A. in the total carried value worth PLN 2,327 thousand, were recognized as fixed assets held for sale. Failure to find any grounds to continue the social activity, to which Ośrodek Wypoczynkowy CHEMIK in Sopot and Sanatorium Uzdrowiskowe CHEMIK in Ciechocinek are related, was the cause of their sale. These facilities were obsolete and required large financial expenditure on their renovation. Sale of Production Department T-7300 resulted from low use of manufacturing capacity due to low demand of the market for plastics manufactured in the T-7300 department. Moreover, the department's buildings and equipment were obsolete and required large financial expenditure on their renovation.
Ośrodek Wypoczynkowy CHEMIK in Sopot was sold on January 2nd, 2007 for PLN 9,250 thousand to Mr. Janusz Świątkowski from Kwidzyń. Sanatorium Uzdrowiskowe CHEMIK in Ciechocinek was sold on February 7th, 2007 for PLN 5,183 thousand to multi-trade enterprise MEDICAL – TOURIST Sp. z o.o. from Bydgoszcz. Production Department T- 7300 was sold on February 7th, 2007 for PLN 3,651 thousand to CORTEX CHEMICALS Sp. z o.o. from Tarnów.
As at December 31st, 2005 data of Petrochemia Blachownia S.A. and Alwernia Chrom Sp. z o.o., was recognized in non-current assets held for sale and in liabilities related to non-current assets held for sale.
The table below presents the main items from the group of non-current assets held for sale: in thousands of Polish zloty ASSETS CLASSIFIED AS HELD FOR SALE 31.12.2006 31.12.2005 Property, plant and equipment 2 327 47 851 Perpetual freehold rights - 1 673 Intangible assets - 147 Inventories - 16 527 Trade and other receivables - 12 423 Income tax receivable - 485 Cash and cash equivalents - 5 355 Total 2 327 84 461
The main liabilities arising from non-current assets available for sale have been presented below: in thousands of Polish zloty LIABILITIES CLASSIFIED AS HELD FOR SALE 31.12.2006 31.12.2005 Trade and other payables - 17 490 Liabilities due to credits and loans (long- and short-term) - 3 480 Provisions (long- and short-term) - 373 Deferred tax provision - 1 508 Income tax payable - 3 Total - 22 854
In January 2006 "Alwernia" S.A. sold subsidiary Alwernia Chrom Sp. z o.o. In the statement for 2006 "Alwernia" S.A. showed profit from this transaction in the amount of PLN 400 thousand. Furthermore, CIECH SA sold 100% shares in subsidiary Petrochemia Blachownia S.A. on January 10th, 2006. The consolidated profit from the sale less income tax amounted to PLN 26,409 thousand. With a view to both companies' recognition as non-current assets held for sale as of December 31st, 2005, and recognition of their results for the fourth quarter of 2005 (from the date of being held for sale) as discontinued operations, both companies' results of sales were recognized in the presented consolidated profit and loss account as a result of sales relative to discontinued operations.
104 Consolidated financial statement of the Ciech Group for 2006
In 2005 sale of shares in subsidiary Oczyszczalnia Alwernia Sp. z o.o., with its registered office in Alwernia took place. Income from the sale was PLN 72 thousand. The payment was made in two instalments worth PLN 36 thousand each. Oczyszczalnia Alwernia Sp. z o.o. was not subject to consolidation due to lack of material content to reliably and diligently present the financial status and results of the Ciech Group's operation.
On June 14th, 2005 CIECH SA sold its shares in its subsidiary Polcommerce Ltd based in Budapest (not subject to consolidation) to its subsidiary CIECH POLFA Sp. z o.o. for the price of PLN 203,000 (the profit on this transaction was PLN 0.00)
The main items of the cash flow statement due to discontinued operations were as follows: in thousands of Polish zloty 01.01. - 31.12.2005 01.01. - 31.12.2004 Cash flows from operating activities Profit (loss) for the period (3 927) 21 205
Depreciation 4 174 3 711 Gains / losses on foreign exchange differences 120 (160) Gains / losses on investing activities (2 686) 234 Gains / losses on disposal of current assets (19) - Dividend and interest 129 418 Input income tax 553 5 511 Gains / losses on shares in entities accounted for using the equity - - method Operating profit before changes in current assets and reserves (1 656) 30 919 Changes in receivables 2 285 (4 791) Changes in inventories (5 373) (1 352) Changes in current liabilities 2 136 (1 113) Changes in reserves and employee benefits (560) 1 016 Net cash generated from operations (3 168) 24 679 Interest paid (36) - Income taxes paid (485) (6 140) Other adjustments - 6 140 Gains / losses on disposal of discontinued operations 485 - Net cash from operating activities (3 204) 24 679
Cash flows from investing activities Inflows (in "+") 5 631 2 110 Outflows (in "-") (13 196) (7 707) Net cash used in investing activities (7 565) (5 597)
Cash flows from financing activities Inflows (in "+") 2 500 5 315 Outflows (in "-") (6 173) (16 395) Net cash used in financing activities (3 673) (11 080)
Total net cash flow (14 442) 8 002
Due to inaccessible data resulting from system determinants, cash flows for discontinued operations concerning fuel activity in 2005-2006 have not been shown.
7 Earnings per share
105 Consolidated financial statement of the Ciech Group for 2006
Basic profit per share is calculated by dividing net profit for an accounting year per ordinary shareholders of the parent company by weighted average number of ordinary shares issued in the accounting year.
Diluted profit per share is calculated by dividing net profit for an accounting year per ordinary shareholders of the parent company by the weighted average number of ordinary shares issued in the accounting year along with the weighted average number of ordinary shares, which were issued during exchange of diluted potential ordinary shares into ordinary shares.
The volume of 8,203,984 potential ordinary shares issued February 16th, 2005 on account of listing CIECH SA on the stock exchange, was included upon calculation of the diluted profit per share for 2005.
Data concerning profit and shares that account for the basis to calculate the basic and diluted profit per share has been presented below:
31.12.2006 31.12.2005 in thousands of PLN in thousands of PLN
Net profit (loss) from continued activity for shareholders of parent company 123 511 115 469
Net profit (loss) from discontinued activity for shareholders of parent company 26 598 (3 885) Net profit (loss) for shareholders of parent company, applied to calculate the basic 150 109 111 584 profit per share Net profit (loss) for shareholders of parent company, applied to calculate the diluted 150 109 111 584 profit per share
31.12.2006 31.12.2005 in items in items Weighted average number of ordinary shares issued, applied to calculate the basic profit per 28 000 000 26 882 985 share Impact of dilution: Weighted average number of C-class shares issued - 921 543 Weighted average number of ordinary shares issued, applied to calculate the diluted profit 28 000 000 27 804 528 per share
No transactions took place, concerning ordinary shares or potential ordinary shares in the period between the balance sheet date and the date of the consolidated financial statement preparation. Data concerning calculation of the basic and diluted profit per share from the discontinued operations is shown below:
31.12.2006 31.12.2005 in thousands of PLN in thousands of PLN Net profit (loss) from discontinued activity for ordinary shareholders applied to 26 598 (3 885) calculate the basic profit per share Net profit (loss) from discontinued activity for ordinary shareholders applied to 26 598 (3 885) calculate the diluted profit per share
8 Dividends paid and declared
On April 23rd, 2007 the Supervisory Board of CIECH SA recommended distribution of net profit in 2006 to the General Meeting in line with the proposal submitted by the Management Board of the Company, which provided for payment of PLN 44,800 thousand as a dividend for the shareholders, accounting for PLN 1.60 per one share.
The Ordinary General Meeting of Shareholders of CIECH SA resolved by virtue of resolution no. 8 dated June 14th, 2006 to allot PLN 22,400 thousand from the net profit made by CIECH SA in 2005, to pay the dividend to the Shareholders equal to 0.80 PLN per share. The dividend for 2005 was paid to the Shareholders who were holding the Company's shares on July 4th, 2006. The dividend was paid on August 1st, 2006.
The Ordinary General Meeting of Shareholders of CIECH SA resolved by virtue of resolution no. 9 dated June 29th, 2005 to allot PLN 8,400 thousand from the net profit made by CIECH SA in 2005, to pay the dividend to the Shareholders equal to PLN 0.30 per share. The dividend for 2004 was paid to the Shareholders who were holding the Company's shares on July 15th, 2005. The dividend was paid on August 1st, 2005.
106 Consolidated financial statement of the Ciech Group for 2006
9 Property, plant and equipment
31.12.2006 Buildings, TABLE OF ACTIVITY OF THE FIXED ASSETS structures, and Fixed assets Machinery and Means of Other fixed TOTAL fixed in thousands of Polish zloty Land land- and water under equipment transport assets assets engineering construction facilities a) Gross fixed assets at the beginning of the period 3 439 395 668 522 393 62 402 13 171 56 840 1 053 913 b) Increases (as a result of) 11 599 479 893 578 571 62 731 27 275 196 419 1 356 488 - purchase - 33 3 951 3 112 615 108 878 116 589 - acquisition from investments 352 25 214 94 369 753 2 488 - 123 176 - modernization - 6 754 884 - 13 - 7 651 - disclosures as a result of inventory - - 317 - 41 - 358 - valuation to fair value/market value - 829 - - - - 829 - increase in non-current assets as a result of inclusion of company in - 1 315 1 271 11 103 10 - 13 699 consolidation - recognition of liquidation costs as initial value - - - - - 53 53 - investment expenditure on fixed assets under construction - - - - - 80 981 80 981 - investments in third-party fixed assets - - - - 869 - 869 - acquired on the basis of financial lease agreements - - - - - 387 387 - components handed over - 853 2 179 - - - 3 032 - exchange rate differences - 59 14 4 7 - 84 - expansion of capital group 11 247 444 817 475 454 47 758 23 219 6 120 1 008 615 - other - 19 132 1 13 - 165 c) Decreases (as a result of) 50 3 996 10 788 2 067 1 466 149 725 168 092 - sale - 2 027 657 1 215 98 80 4 077 - liquidation - 1 662 9 641 765 705 - 12 773 - transfer to fixed assets under construction - 129 219 - - - 348 - reclassification to another class - 50 - - 22 149 639 149 711 - donations 31 97 65 5 1 - 199 - reclassification to the off-balance sheet - - 137 - 625 - 762 - exchange rate differences 19 31 26 82 15 - 173 - other - - 43 - - 6 49 d) Gross fixed assets at the end of the period 14 988 871 565 1 090 176 123 066 38 980 103 534 2 242 309
107 Consolidated financial statement of the Ciech Group for 2006
Buildings, TABLE OF ACTIVITY OF THE FIXED ASSETS structures, and Fixed assets Machinery and Means of Other fixed TOTAL fixed in thousands of Polish zloty Land land- and water under equipment transport assets assets engineering construction facilities e) Accumulated amortisation (redemption) at the beginning of 8 106 073 193 354 31 945 9 061 ( 5) 340 436 the period f) Amortisation for the period (due to) 5 294 558 369 351 44 652 19 142 5 727 713 - annual revaluation write-down 5 24 424 57 107 5 648 1 636 - 88 820 - increase in non-current assets as a result of inclusion of company in - 170 275 2 159 8 - 2 612 consolidation - sale of fixed assets - 631 306 709 93 - 1 739 - liquidation of fixed assets - 1 317 8 602 723 653 ( 5) 11 290 - donation of fixed assets - 7 65 5 1 - 78 - reclassification to other category e.g. inventories of fixed assets - 77 84 - 22 - 183 under construction - other (decreases) - 90 13 - - - 103 reclassification to the off-balance sheet - - 137 - 625 - 762 - exchange rate differences - ( 4) ( 16) ( 73) ( 3) - ( 96) - expansion of capital group - 272 141 320 883 38 355 18 963 - 650 342 - other (increases) - ( 51) 309 - ( 68) - 190 g) Accumulated depreciation at the end of the period 13 400 631 562 705 76 597 28 203 - 1 068 149 h) Impairment losses at the beginning of the period 14 5 436 2 521 87 298 663 9 019 Increase (as a result of) - 3 967 6 341 68 - 100 10 476 - making impairment losses charged against financial result - 405 5 261 50 - 100 5 816 - increase of group - 3 562 1 080 18 - - 4 660 Decrease (as a result of) - 971 1 070 - 13 - 2 054 - sale of fixed assets - 150 247 - - - 397 - liquidation of fixed assets - 14 407 - 13 - 434 - reversal of impairment losses - recognized as financial result - 452 416 - - - 868 - disbursement of impairment loss - 345 - - - - 345 - other - 10 - - - - 10 i) Impairment losses at the end of the period 14 8 432 7 792 155 285 763 17 441 j) Net fixed assets at the beginning of the period 3 417 284 159 326 518 30 370 3 812 56 182 704 458 k) Net fixed assets at the end of the period 14 961 462 502 519 679 46 314 10 492 102 771 1 156 719
108 Consolidated financial statement of the Ciech Group for 2006
31.12.2005 Buildings, TABLE OF ACTIVITY OF THE FIXED ASSETS structures, and Fixed assets Machinery and Means of Other fixed TOTAL fixed in thousands of Polish zloty Land land- and water under equipment transport assets assets engineering construction facilities a) Gross fixed assets at the beginning of the period 2 915 393 812 493 544 64 503 15 760 47 469 1 018 003 b) Increases (as a result of) 576 28 006 63 861 6 098 ( 16) 120 912 219 437 - purchase 145 786 5 495 2 818 882 61 126 71 252 - acquisition from investments 416 21 394 34 462 1 726 1 158 - 59 156 - modernization - 8 176 19 262 916 55 - 28 409 - reclassification to other class - (2 470) 4 595 - (2 125) - - - investment expenditure on fixed assets under construction - - - - - 59 760 59 760 - acquired on the basis of financial lease agreements - - - 572 - - 572 - exchange rate differences 15 24 27 66 11 - 143 - expansion of capital group - 96 - - - - 96 - other - - 20 - 3 26 49 c) Decreases (as a result of) 52 26 150 35 012 8 199 2 573 111 541 183 527 - sale - 179 2 949 3 742 405 - 7 275 - liquidation - 2 891 8 234 417 1 078 12 12 632 - transfer to fixed assets under construction - 313 908 - - 102 341 103 562 - donations 52 172 109 55 6 - 394 - transfer to the group of assets held for resale - 22 486 22 678 3 977 1 073 8 978 59 192 - exchange rate differences - 109 20 8 11 - 148 - other - - 114 - - 210 324 d) Gross fixed assets at the end of the period 3 439 395 668 522 393 62 402 13 171 56 840 1 053 913 e) Accumulated amortisation (redemption) at the beginning of the 3 85 151 154 642 32 279 9 385 - 281 460 period f) Amortisation for the period (due to) 5 20 922 38 712 ( 334) ( 324) ( 5) 58 976 - annual revaluation write-down 5 25 709 53 762 5 125 1 810 - 86 411 - sale of fixed assets - 39 1 823 2 954 368 - 5 184 - liquidation of fixed assets - 1 684 7 328 317 1 008 - 10 337 - donation of fixed assets - 7 109 38 6 - 160 - reclassification to other category e.g. inventories of fixed assets under - 82 1 268 - ( 162) - 1 188 109 Consolidated financial statement of the Ciech Group for 2006
Buildings, TABLE OF ACTIVITY OF THE FIXED ASSETS structures, and Fixed assets Machinery and Means of Other fixed TOTAL fixed in thousands of Polish zloty Land land- and water under equipment transport assets assets engineering construction facilities construction
- transfer to the group of assets held for resale - decrease - 2 971 4 427 2 187 914 - 10 499 - exchange rate differences - ( 4) 19 37 ( 5) - 47 - other - - ( 114) - 5 ( 5) ( 114) g) Accumulated depreciation at the end of the period 8 106 073 193 354 31 945 9 061 ( 5) 340 436 h) Impairment losses at the beginning of the period 14 5 943 4 283 204 119 913 11 476 Increase (as a result of) - 712 - - 227 515 1 454 - making impairment losses charged against financial result - 712 - - 227 515 1 454 Decrease (as a result of) - 1 219 1 762 117 48 765 3 911 - sale of fixed assets - 35 271 117 - - 423 - liquidation of fixed assets - 929 663 - 48 - 1 640 - reversal of impairment losses - recognized as financial result - 255 828 - - 292 1 375 - disbursement of impairment loss - - - - - 473 473 i) Impairment losses at the end of the period 14 5 436 2 521 87 298 663 9 019 j) Net fixed assets at the beginning of the period 2 898 302 718 334 619 32 020 6 256 46 556 725 067 k) Net fixed assets at the end of the period 3 417 284 159 326 518 30 370 3 812 56 182 704,458
110 Consolidated financial statement of the Ciech Group for 2006
Ownership interests of sale of property, plant and equipment is presented as follows: in thousands of Polish zloty ON-BALANCE SHEET FIXED ASSETS (OWNERSHIP INTERESTS) 31.12.2006 31.12.2005 a) own fixed assets 1 152 924 700 986 b) leased assets: 3 795 3 472 - financial lease agreements 3 795 3 472 - lease agreements - - - long-term lease agreements - - - other - - Total on-balance sheet fixed assets 1 156 719 704 458
Net carried value of particular groups containing property, plant and equipment used based for financial lease agreements have been presented in the table below: in thousands of Polish zloty PROPERTY, PLANT AND EQUIPMENT USED ON THE BASIS OF 31.12.2006 31.12.2005 FINANCIAL LEASE AGREEMENTS Land and buildings - - Machinery and equipment 614 193 Means of transport 3 081 3 247 Other 100 32 Total 3 795 3 472
In the presented period the Ciech Group received the amount of PLN 693 thousand (PLN 1,188 thousand in the corresponding period) from the third-parties as compensation for impairment of property, plant and equipment.
The companies of the Ciech Group did not make any reassessments of fixed assets in the presented period.
Details of recognized, reversed or disbursed impairment losses on property, plant and equipment have been included in item 13 of the additional information and notes to the consolidated report of the Group. Details of property, plant and equipment pledged as security for liabilities due to credits and loans have been presented in items 24 and 27 of the additional information and notes to the consolidated report of the Group.
In the current period changes in accounting estimations have not been too influential and it is not expected that they will be so in the future periods.
Expenditure on property, plant and equipment under construction incurred in the Ciech Group in 2006 was largely connected with completion of the following investment projects: in thousands of Polish zloty CIECH SA Purchase or modernization of real estate 624 Purchase of machines and equipment 2 251 Purchase of means of transport 118 Other 99
FOSFORY Group Implementation of the CRM IT system 120 Modernisation of Chemikow Quay 50 Replacement of pneumatic transport of ground phosphate rock with mechanical transport 1 467
"Alwernia" S.A. Adaptation of idle system of sodium chromate to produce NPK mixed fertilizers 3 129 Implementation of EKF to manufacture phosphoric table salt 462 Adaptation of idle systems to produce lime saltpetre 330
111 Consolidated financial statement of the Ciech Group for 2006
JANIKOSODA S. A. Modernization of distillation column 3 073 Implementation of ORACLE system 2 590 System to crush limestone 1 702 Modernization of CK TI boilers 3 338 Modernization of process pipelines 1 272 Installation of turbine set with modernization of electric switching station 13 027 Modernization of lime-kilns – Kiln No. 4 4 166 System to produce salt tablets 4 202 Other 16 765
"VITROSILICON" Spółka Akcyjna Construction of warehouse for finished products 4 943 Upgrade of the sodium glass department 692 Modernization of the glass block production department 21 234 Modernization of the Huta Pobiedziska property 25 490 Construction of chimney 2 013 Development of switching system of low voltage 511 Modernization of computer network 793 Other 2 289
SODA MĄTWY Group Project of production of soda in the monohydrate system 34 614 Intensification of baking soda production 4 645 Modernization of packing calcium chloride 1 348 Modernization of RH-DS apparatus 1 378 Purchase and launch of the upgrade of the ERP system 3 186 Modernization of lime-kilns FCH 2 010 Modernization of leisure centres 1 210 Automation and modernization of boiler-room 2 218 Modernization of cable and power network in the plant 1 367 Other 13 327
TOTAL 182 053
No expenditure on fixed assets under construction was recorded in the companies Cheman S.A, DALTRADE PLC, POLSIN PRIVATE LIMITED, CIECH POLFA Sp. z o.o. in 2006.
Contractual commitments for the acquisition of property, plant and equipment were worth PLN 23,910 thousand in 2006 (PLN 18,023 thousand in the corresponding period in 2005).
The table below presents off-balance sheet fixed assets: in thousands of Polish zloty OFF-BALANCE SHEET FIXED ASSETS 31.12.2006 31.12.2005 Leased assets: 182 330 128 074 - land held under perpetual usufruct 57 775 27 869 - operational lease agreement 5 504 6 228 - long-term lease agreement 113 189 90 808 - lease agreement 5 862 3 169
112 Consolidated financial statement of the Ciech Group for 2006
10 Investment property in thousands of Polish zloty INVESTMENT PROPERTY 31.12.2006 31.12.2005 Gross value at the beginning of the period 25 607 31 489 - acquisition as a result of purchase 615 - - increases due to expenses incurred later - 115 - transfer from property, plant and equipment 50 - - liquidation 565 - - extension of the Capital Group composition 4 305 - - reduction of the Capital Group composition - 96 - sale of real estate 2 119 5 802 - exchange rate differences - - - other decreases - 99 - other increases 7 - Gross value at the end of the period 27 900 25 607 Accumulated amortisation and impairment losses at the beginning of the 10 055 11 940 period - depreciation for the period 472 823 - impairment loss 1 568 - - transfer from property, plant and equipment 1 - - sale of real estate 1 075 2 583 - liquidation 495 - - extension of the Capital Group composition 2 935 - - reduction of the Capital Group composition - 26 - other decreases - 99 - other increases 9 - Accumulated amortisation and impairment losses at the end of the period 13 470 10 055
Net value at the beginning of the period 15 552 19 549 Net value at the end of the period 14 430 15 552
The Ciech Group comprises the following investment property:
CIECH SA: - Office building with its infrastructure located in Warsaw at ul. Jasna 12. The entire facility, prior headquarters of CIECH SA, is currently given over to rental. - Land with an investment associated with development of residential and office complex located in Warsaw at ul. Krasińskiego in the corner of ul. Powązkowskiej. - Two petrol stations located in Szczytniki, Mniszków; since 1998 given over to long-term lease. - Warehouse facility complex, located in Dąbrowa Górnicza at ul. Chemiczna.
Zakłady Chemiczne "Alwernia" S.A.: - Production, warehouse and office buildings located on the territory of Zakłady Chemiczne "Alwernia" S.A. in Alwernia, in the past used by the company for its own purposes; presently the company rents them deriving benefit from rent.
S.C. Uzinele Sodice Govora S.A.: - Workers' hotel intended for rental for both employees of S.C. Uzinele Sodice Govora S.A. and third parties. Rental for employees is conducted in line with the market conditions.
113 Consolidated financial statement of the Ciech Group for 2006
Z. Ch. "Organika-Sarzyna" S.A.: - 39 buildings and land located on the territory of Z.Ch. "Organika-Sarzyna" S.A. in the past used by the company for its own purposes, currently rented in order to derive benefits from lease rents. Fair value of investment property in CIECH SA and Zakłady Chemiczne "Alwernia" S.A. was estimated at PLN 45,194 thousand as at December 31st, 2006. S.C. Uzinele Sodice Govora S.A. and Z. Ch. "Organika-Sarzyna” S.A. are establishing fair value of investment property (as at the date of entering the Group it was recognized on the basis of provisional settlement). Accounting value of these assets amounts to PLN 1,370 thousand as at December 31st, 2006.
As of the date of the consolidated financial statement generation, no limitations as to the Ciech Group's management of investment property occurred nor any limitations as to deriving economic benefits from rent or sale of the property in question. Investment property does not account for collateral for liabilities due to credits, loans or transactions.
11 Perpetual freehold rights
The table below includes the value of perpetual freehold rights obtained by the Ciech Group. in thousands of Polish zloty PERPETUAL FREEHOLD RIGHTS 31.12.2006 31.12.2005 Gross value at the beginning of the period 1 143 2 863 Purchase 857 437 Disposal 296 - Extension of the Capital Group 229 - - valuation to fair value (market value) 82 - Other decreases - 15 Transfer to the group of assets held for sale - 2 142 Gross value at the end of the period 2 015 1 143
Accumulated amortisation at the beginning of the period 410 764 Depreciation for the period 39 115 Extension of the Capital Group 25 - Transfer to the group of assets held for sale - 469 Foreign exchange differences - - Other 7 - Accumulated amortisation at the end of the period 481 410
Net value - Opening balance 733 2 099 Net value - Closing balance 1,534 733
Perpetual freehold rights obtained by means of administrative division complies with the criteria of operating leases as agreed in IAS 17 "Leases", and shall not be recognized in the books but presented in an off-balance sheet manner.
114 Consolidated financial statement of the Ciech Group for 2006
12 Intangible assets
31.12.2006 CHANGES IN INTANGIBLE AND LEGAL ASSETS (BY CLASS) Authorisations, patents, licenses etc. Costs of finished Other intangible in thousands of Polish zloty Goodwill including; TOTAL development work and legal assets Computer software a) Gross value of intangible and legal assets at the beginning of the 2 756 36 088 43 401 43 260 2 621 84 866 period b) Increases (as a result of) 16 625 323 052 19 183 18 807 7 242 366 102 - purchase - 323 052 10 561 10 559 (1 667) 331 946 - transfer from research and development work 120 - 200 179 - 320 - acquisition from investments - - 2 299 2 299 6 2 305 - gifts received - - 3 486 3 486 - 3 486 - increase in intangible and legal assets due to merger - - 18 18 - 18 extension of group 16 505 - 2 315 2 115 8 893 27 713 expenditure on intangible assets – work in progress - - 213 60 10 223 - other - - 91 91 - 91 c) Decreases (as a result of) - - 3 855 3 855 - 3 855 - sale - - 639 639 - 639 - liquidation - - 3 150 3 150 - 3 150 - deduction of intangible and legal assets - - 38 38 - 38 - reduction of the group - - 28 28 - 28 d) Gross value of intangible and legal assets at the end of the period 19 381 359 140 58 729 58 212 9 863 447 113 e) Accumulated amortisation at the beginning of the period 2 283 31 473 24 012 23 963 575 58 343 f) Amortisation for the period (due to) 13 214 - 4 997 4 575 9 036 27 247 - annual revaluation write-down 61 - 6 439 6 370 135 6 635 - liquidation - - 3 150 3 150 - 3 150 - sale - - 639 639 - 639 - other (increases) 1 - - - - 1 - expansion of the group 13 152 - 2 412 2 059 8 901 24 465 - other (decreases) - - 37 37 - 37 g) Accumulated depreciation at the end of the period 15 497 31 473 29 009 28 538 9 611 85 590 h) Impairment losses at the beginning of the period 205 4 576 - - 154 4 935 - Increase - - 1 936 1 936 24 1 960 115 Consolidated financial statement of the Ciech Group for 2006
Authorisations, patents, licenses etc. including; - other - - - 1 936 24 24 - making impairment losses charged against financial result - - 1 936 - - 1 936 - Decrease - - - - 77 77 - reversal of impairment losses - recognized as financial result - - - - 77 77 i) Impairment losses at the end of the period 205 4 576 1 936 1 936 101 6 818 j) Net intangible and legal assets at the beginning of the period 268 39 19 389 19 297 1 892 21 588 k) Net value of intangible and legal assets at the end of the period 3 679 323 091 27 784 27 738 151 354 705
31.12.2005
Authorisations, patents, licenses etc. Costs of finished including; Other intangible CHANGES IN INTANGIBLE ASSETS (BY CLASS) development Goodwill TOTAL and legal assets work Computer software a) Gross value of intangible and legal assets at the beginning of the 2 687 36 055 34 745 34 345 1 275 74 762 period b) Increases (as a result of) 69 39 9 685 9 607 1 346 11 139 - purchase - 39 835 757 45 919 - transfer from research and development work 69 - - - - 69 - acquisition from investments - - 8 379 8 379 - 8 379 expenditure on intangible assets – work in progress - - 471 471 1 301 1 772 c) Decreases (as a result of) - 6 1 029 692 - 1 035 - sale - - 1 1 - 1 - liquidation - - 16 16 - 16 - transfer to assets held for resale - 6 973 636 - 979 - other - - 39 39 - 39 d) Gross value of intangible and legal assets at the end of the period 2 756 36 088 43 401 43 260 2 621 84 866 e) Accumulated amortisation at the beginning of the period 2 000 31 473 20 452 20 090 398 54 323 f) Amortisation for the period (due to) 283 - 3 560 3 873 177 4 020 - annual revaluation write-down 283 - 4 448 4 425 177 4 908 - liquidation - - 12 12 - 12 - sale - - 1 1 - 1 - other (increases) ------
- transfer to the group of assets held for resale - decrease - - 832 496 - 832
116 Consolidated financial statement of the Ciech Group for 2006
Authorisations, patents, licenses etc. Costs of finished including; Other intangible CHANGES IN INTANGIBLE ASSETS (BY CLASS) development Goodwill TOTAL and legal assets work Computer software
- other (decreases) - - 43 43 - 43 g) Accumulated depreciation at the end of the period 2 283 31 473 24 012 23 963 575 58 343 h) Impairment losses at the beginning of the period 233 4 576 - - - 4 809
- increase - - - - 154 154
- making impairment losses charged against financial result - - - - 154 154
- decrease 28 - - - - 28
- reversal of impairment losses - recognized as financial result 28 - - - - 28 i) Impairment losses at the end of the period 205 4 576 - - 154 4 935 j) Net intangible and legal assets at the beginning of the period 454 6 14 293 14 255 877 15 630 k) Net value of intangible and legal assets at the end of the period 268 39 19 389 19 297 1 892 21 588
117 Consolidated financial statement of the Ciech Group for 2006
All the intangible assets belong to the Ciech Group. The most meaningful items among the intangible assets in the Ciech Group are as follows: - Oracle Information system with carried value of PLN 16,878 thousand, including CIECH SA – carried value of PLN 5,623 thousand (this item comprises ERP Oracle system with the accounting net value of PLN 4,828 thousand and Oracle system's Upgrade with the accounting net value of PLN 795 thousand), the remaining period of amortisation (for ERP Oracle system is approx. 3 years and for Oracle system's Upgrade is approx. 4.5 years), SODA MĄTWY S.A. – carried value of PLN 8,233 thousand, the remaining period of amortisation is 8 years; Cheman S.A. - carried value of PLN 3,022 thousand, the remaining period of amortisation is 45 months; JANIKOSODA S.A. – carried value of PLN 3,352 thousand, the remaining period of amortisation is 49 months. - Customer Relationship Management (CRM) system with carried value of PLN 1,445 thousand, the remaining period of amortisation is 38 months. - Licence – IFS integrated system with carried value of PLN 1,488 thousand, the remaining period of amortisation is 24 months.
Details on recognized, reversed or disbursed impairment losses on intangible assets have been included in item 13 of the additional information and notes to the consolidated report. Intangible assets do not account for collateral for liabilities. The Ciech Group did not make any reassessments of the intangible assets in the presented periods.
In the current period changes in accounting estimations have not been too influential and it is not expected that they will be so in the future periods.
The amount of contractual commitments to purchase intangible assets in future is estimated at PLN 849 thousand (PLN 5,518 thousand in the corresponding period in 2005).
The Ciech Group does not hold other intangible assets with indefinite useful lives, except for its goodwill. Details of impairment losses recognized in the consolidated financial statement on goodwill have been presented in item 14 of the additional information and notes to the consolidated report.
Development work and research Development work and research conducted by the Ciech Group aim for growth of economic potential and mainly concern modernization of technological processes, decrease of production or optimisation of technical and technological parameters.
Detailed information on the most significant achievements within the field of research and development has been included in the Report on the activity of the management Board in item 16.
Intangible assets made within one's own scope The tables below present the particulars of intangible assets made within its own scope.
Intangible assets made within one's own scope for the period 01.01-31.12.2006 in thousands of PLN Gross value as at 01.01.2006 1 216 Incurred expenses 120 Deduction of intangible assets - Gross value as at 31.12.2006 1 336
Redemption - value at the beginning of the period 831 Redemption for the period 33 Redemption at the end of the period 864
Impairment loss at the beginning of the period 205 Impairment loss at the end of the period -
Net value as at 31.12.2006 205
Intangible assets made within one's own scope for the period 01.01-31.12.2005 in thousands of PLN Gross value as at 01.01.2005 1 147 Incurred expenses 69 Gross value as at 31.12.2005 1 216
Redemption - value at the beginning of the period (745)
118 Consolidated financial statement of the Ciech Group for 2006
Intangible assets made within one's own scope for the period 01.01-31.12.2005 in thousands of PLN Redemption for the period (86) Redemption at the end of the period (831)
Impairment loss at the beginning of the period (233) Impairment loss – change in the period 28
Impairment loss at the end of the period (205)
Net value as at 31.12.2005 180
13 Impairment loss
The table below contains information on recognized, reversed or disbursed impairment losses on particular assets. in thousands of Polish zloty IMPAIRMENT LOSSES 31.12.2006 31.12.2005 Intangible assets a) as at the beginning of the period 4 935 4 809 b) creation 1 960 154 c) reversed 77 28 g) as at the end of the period 6 818 4 935
Property, plant and equipment a) as at the beginning of the period 9 019 11 476 b) creation 5 816 1 454 c) reversed 868 1 375 d) disbursement 1 186 2 536 e) change in the group's composition 4 660 - f) as at the end of the period 17 441 9 019
3. Long-term receivables a) as at the beginning of the period - - b) change in the group's composition 1 256 - f) as at the end of the period 1 256 -
4. Investment property a) as at the beginning of the period - - b) creation 1 568 - f) as at the end of the period 1 568 - Long-term investment and investments in entities measured using the equity method a) as at the beginning of the period 15 387 8 026 b) creation 232 8 505 c) reversed 401 1 232 d) disbursement 78 15 e) exchange rate differences ( 3) 103 f) change in the group's composition 707 - f) as at the end of the period 15 844 15 387
Inventories a) as at the beginning of the period 4 976 5 183 b) creation 2 482 3 956 c) reversed 1 428 1 880 d) disbursement 546 2 283
119 Consolidated financial statement of the Ciech Group for 2006
IMPAIRMENT LOSSES 31.12.2006 31.12.2005 e) change in the group's composition 5 762 - f) as at the end of the period 11 246 4 976
Short-term receivables a) as at the beginning of the period 98 442 110 089 b) creation 15 372 9 175 c) reversed 5 771 6 675 d) disbursement 4 932 13 492 e) exchange rate differences - 523 f) change in the group's composition 27 569 - g) transfer to the group of assets held for sale - 1 178 f) as at the end of the period 130 680 98 442
Short-term investments a) as at the beginning of the period 2 992 3 542 d) disbursement - 550 f) as at the end of the period 2 992 2 992
As at 31.12.2006
The revaluation write-downs on intangible assets were established with regard to failure to use the IT licence.
Revaluation write-downs on property, plant and equipment were established in relation to fixed assets that lost their economic useful life after new investment has been submitted for use. Reversal of revaluation write-downs on property, plant and equipment was caused by re-use of fixed assets. Disbursement of revaluation write-downs on property, plant and equipment was prompted by liquidation and use and sale of fixed assets.
Establishment of revaluation write-downs on investment property took place with respect to valuation to fair value.
Establishment of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was affected mainly due to weak financial standing of the companies and low equities confirmed by the DCF analysis. Reversal of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was made due to valuation of the company. Disbursement of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was cause by liquidation of the company.
Establishment of revaluation write-downs on inventories was made with regard to impairment loss due to damage and on hard to sell inventory, as well as on inventory whose value exceeds a possible to obtain net sales price. Reversal of revaluation write-downs on inventories ensues from their wear and tear or sale. Disbursement of revaluation write-downs on inventories took place due to liquidation of inventories.
Revaluation write-downs on short-term receivables were recognized for composition proceedings, disputes, interest, overdue and hard to recover receivables, as well as receivables from companies put in liquidation. Reversal of revaluation write-downs on short-term receivables was effected by repayment of receivables. Revaluation write-downs on trade receivables were disbursed after a write-off of receivables in relation to inefficient enforcement and to the companies' bankruptcy, on the receivables of which the impairment loss was raised.
120 Consolidated financial statement of the Ciech Group for 2006
As at December 31st, 2005
The revaluation write-downs on intangible assets were established with regard to lack of possibilities to use the purchased technology and resale of ownership rights. Reversal of revaluation write-downs on intangible assets ensues from re-using effects of development work.
Revaluation write-downs on property, plant and equipment were established in relation to fixed assets of social activity, which did not bring any economic benefits, to the risk of discontinuation of the investment and to unused assets intended for liquidation. Reversal of revaluation write-downs on property, plant and equipment was caused by re-use of fixed assets. Disbursement of revaluation write-downs on property, plant and equipment was prompted by liquidation and use of fixed assets and failure to settle expenditure.
Establishment of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was effected mainly due to weak financial standing of the companies and low equities confirmed by the DCF analysis. Reversal of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was made due to valuation of the company quoted on the Warsaw Stock Exchange. Disbursement of revaluation write-downs on long-term investments and investments in the entities measured using the equity method was cause by the liquidation of the company.
Establishment of revaluation write-downs on inventories was made with regard to revaluation of inventories lingering for 1 to 3 years and hard to sell inventories. Reversal of revaluation write-downs on inventories was prompted by their sale. Disbursement of revaluation write-downs on inventories took place due to liquidation of inventories.
Revaluation write-downs on short-term receivables were recognized for composition proceedings, disputes, interest and overdue receivables. Revaluation write-downs on short-term receivables were reversed due to repayment of receivables, finalisation of bankruptcy/liquidation, settlement of the composition, and writing off the debt. Revaluation write-downs on trade receivables were disbursed after a write-off of receivables.
Revaluation write-downs on short-term investments were disbursed on account of sale of the company.
14 Measurement of impairment losses on goodwill
As of December 31st, 2006 goodwill arose due to settlement of the new companies' acquisitions and was allocated in the following cash-generating entities:
Soda Agro-Chemical Organic in thousands of Polish zloty Total Segment Segment Segment.
S.C. Uzinele Sodice Govora S.A. 194 660 - - 194 660 Z. Ch. "Organika-Sarzyna” S.A. - 64 196 64 196 128 392 Total 194 660 64 196 64 196 323 052
The goodwill that arose was allocated to particular segments based on the income share of particular segments in total income of all companies mentioned earlier. Income from sales recorded by S.C. Uzinele Sodice Govora S.A. is generated in 90% in the soda segment. In case of Z.Ch. "Organika-Sarzyna" S.A., total income is generated mostly by the two main business segments – agrochemical segment (sales of plant protection agents) and organic segment (sales of resins and plastics). Both segments enjoy approx. 50% share in income from the sale of this company.
It is noteworthy that the provisional settlement, provided for by IFRS 3, is applicable for both companies. Currently fair value of particular assets, liabilities and contingent liabilities acquired is being established. Upon application of the measurements' results to the consolidated financial statement, the goodwill presented above will be subject to change. Upon finalisation of provisional settlement tests will be held concerning impairment of goodwill arose due to acquisition of both companies.
From the date of switching to the International Financial Reporting Standards, from January 1st, 2004, goodwill is not depreciated. Goodwill recognized in the consolidated financial statement is subject to annual tests for impairment. Such tests are also taken at the moment of occurring premises point to such impairment.
121 Consolidated financial statement of the Ciech Group for 2006
On January 1st, 2004 tests for impairment were conducted and revealed necessity to make impairment losses on goodwill of Cheman S.A. and "Alwernia" S.A. Goodwill that arose due to acquisition of shares of Cheman S.A. and "Alwernia" S.A. was assigned to the following cash-generating entities: 1. soda segment 2. organic segment 3. petrochemical segment 4. inorganic segment The recoverable amount of goodwill from each entity generating cash has been agreed based on fair value less sales costs.
Soda Organic Petrochemical Inorganic in thousands of Polish zloty Segment Segment Segment Segment Recoverable amount 3 049 4 484 5 022 67 668
useful value 2 689 3 955 4 429 61 008 fair value 3 049 4 484 5 022 67 667 Balance sheet value including goodwill 3 563 5 241 5 869 70 126 Impairment loss 514 757 847 2 458
Total impairment loss amounted to PLN 4,576 thousand.
15 Investments in associates
CIECH SA holds 45.19% indirect share in Polskie Towarzystwo Ubezpieczeniowe SA (PTU S.A.), however, indirect interest in total number of votes at the General Meeting of Shareholders amounts to 45.89%. This company is measured using the equity method on the level of lower-tier groups – of JANIKOSODA Group (22.71% direct share in PTU S.A.) and SODA MĄTWY Group (22.71% direct share in PTU SA). Pursuant to § 24 section 4 of the Articles of Association of PTU S.A., the General Meeting of PTU S.A. adopts resolutions with a 3/4 majority, unless the commercial code of companies agrees more strict conditions of resolution adoption. Pursuant to § 17 section 1 of the Articles of Association of PTU S.A., the supervisory Board of PTU S.A. comprises seven to nine members. Pursuant to § 17 section 3 of the Articles of Association of PTU S.A., acting jointly, the Companies are entitled to designate three members of the Supervisory Board of PTU S.A. In order to become a member of the Supervisory Board of PTU S.A., persons designated by the Companies must be appointed by the General Meeting. Pursuant to § 19 of the Articles of Association of PTU S.A., acting jointly, the Companies appoint the Chairperson of the Supervisory Board. Pursuant to § 13 section 1 of the Articles of Association of PTU S.A., the Management Board of PTU S.A. comprises three to seven members. Pursuant to § 13 section 2 of the Articles of Association of PTU S.A., acting jointly, the Companies are entitled to recommend to the Supervisory Board one candidate for a member of the PTU S.A. Management Board. With a view to the situation taking place in PTU S.A. associated with blocking general meetings by one shareholder, the Management Board of CIECH SA takes the view that there has been no formal change whatsoever which would make room for the statement that soda companies no longer have significant influence on PTU S.A. With reference to the above, as the Management Board believes, the Company still has significant influence on PTU S.A. within the context of IAS 28. Undoubtedly, the Company indirectly holds over 40% share capital of PTU S.A., what is more no amendments to the Articles of Association of PTU S.A., influencing the CIECH SA's position in PTU S.A., were made, thereby one may assume the Company exerts significant influence on PTU S.A. in the same manner as compared to the previous periods.
122 Consolidated financial statement of the Ciech Group for 2006
The table below presents condensed information on investments in PTU S.A.:
Polskie Towarzystwo Ubezpieczeniowe SA 31.12.2006 31.12.2005 Share (45.19% at the end of 2006; 45.19% at the end of 2005) in the balance in thousands PLN. in thousands PLN. sheet of the entity Intangible assets 4 495 2 272 Investment 284 898 99 640 Accounts receivable 67 951 28 186 Other components of assets 4 837 3 258 Accruals and deferred income 51 906 16 559 Investment property - 1 537 Total assets 414 087 151 452
Equity 83 498 33 878 Technical and insurance reserves 318 307 122 891 Reinsurers' share in technical and insurance reserves (negative value) (88 587) (41 086) Estimated recourses and recoveries (negative value) (2 547) (915) Other reserves 6 590 3 071 Other liabilities and special funds 42 738 15 736 Accruals and deferred income 54 088 17 886 Total liabilities 414 087 151 452
Polskie Towarzystwo Ubezpieczeniowe SA 01.01-31.12.2006 01.01-31.12.2005 Share (45.19% at the end of 2006; 45.19% at the end of 2005) in the balance in thousands PLN. in thousands PLN. sheet of the entity Technical result of non-life insurance or technical result of life insurance (7 281) (3 564) Income from investments 18 147 16 300 Unrealised profit from investments 521 31 Costs of investment activity 1 165 8 832 Unrealised loss in investments 192 33 Income from net investments upon consideration of expenses, moved from 1 607 664 the technical account for non-life insurance Other operating income 672 2 140 Other operating expenses (1 066) (2 767) Profit (loss) on operating activity 8 029 2 610 Gross profit (loss) 8 029 2 610 Income tax (1 984) (679) Net profit (loss) 6 045 3 289
Until December 31st, 2006, CIECH SA held a 50% direct share in Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. providing international services related to transport of liquid chemicals. ZACHEM S.A. was the other shareholder of the company. After acquisition of 80% shares in December 2006 and issue of the put option for the remaining 20% shares of ZACHEM S.A., CIECH SA became the owner of 50% shares in Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. By December 31st, 2006, Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. has been measured in the consolidated financial statement using the equity method, on December 31st, 2006, however, the company switched to full consolidation method with respect to the change in the degree of control over the company.
123 Consolidated financial statement of the Ciech Group for 2006
The table below presents condensed information on investments in Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o. on December 31st, 2005:
Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o. o. 31.12.2005 Share (50%) in the balance sheet of the entity. in thousands of PLN Non-current assets 3 943 Current assets 960 Long-term liabilities (597) Short-term liabilities (1 251) Net assets 3 057
Share (50%) in income and profit of the entity: in thousands of PLN Sales revenues 5 040 Prime cost of sales (4 538) Other operating income 106 Administrative expenses (379) Other operating expenses (62) Net finance income (costs) (76) Profit before tax 91 Debits due to income tax (25) Net profit (loss) 66
Balance sheet value of investments in 3 057 Przedsiębiorstwo Transportowo – Usługowe TRANSCLEAN Sp. z o. o.
Balance sheet value of investments in associates measured using the equity method is estimated at:
▪ on December 31st, 2006: - Polskie Towarzystwo Ubezpieczeniowe S.A. PLN 42,220 thousand
▪ on December 31st, 2005: - Przedsiębiorstwo Transportowo – Usługowe TRANSCLEAN Sp. z o. o. PLN 3,057 thousand - Polskie Towarzystwo Ubezpieczeniowe S.A. PLN 36,374 thousand
All the entities mentioned are the companies not quoted on the stock exchange, therefore there are no quoted fair values published for these investments. Balance sheet dates and reporting periods of the associates are identical to the ones in the Group; balance sheet date is December 31st and reporting period covers the period from January 1st to December 31st.
When selecting entities for consolidation, the Management Board of the parent company applied the principle of relevance (as per the IFRS objectives) to their financial figures for compliance with the requirement of fair and reliable presentation of the financial standing and profit of the Group.
Sales revenues and Undertakings not Balance sheet total Liabilities income from Net profit / (loss) accounted for using of the undertaking financing activities (in thousands of (PLN ‘000) the equity method (PLN ‘000) (PLN ‘000) PLN) CIECH SA Suomen Unipol Oy 51 207 13 520 10 148 692 ORGANIKA - SARZYNA Group Zakłady Chemiczne "Silikony Polskie" Spółka z ograniczoną 17 091 20 979 1 566 306 odpowiedzialnością "Komunalna Biologiczna Oczyszczalnia 2 591 14 917 687 33 Ścieków –
124 Consolidated financial statement of the Ciech Group for 2006
Sales revenues and Undertakings not Balance sheet total Liabilities income from Net profit / (loss) accounted for using of the undertaking financing activities (in thousands of (PLN ‘000) the equity method (PLN ‘000) (PLN ‘000) PLN) Spółka z ograniczoną odpowiedzialnością" "Bud- Org" Sp. z o.o. 2 954 1 285 492 157 "Gumokor- Organika" Sp. z o.o. 1 141 628 155 32 "ORGANIKA – PROJEKT" Sp. z o.o. 615 243 91 (10) "DREWREM- ORGANIKA" Sp. z o.o. 935 225 151 (7) "EL- CHEM" Sp. z o.o. 10 728 4 630 2 889 89 "WOD-REM" Sp. z o.o. 6 616 2 639 821 177 "NS Automatyka" Sp. z o.o. 4 042 2 104 659 44 ZACHEM Group "BUDPUR" Spółka z ograniczoną 2 703 867 549 61 odpowiedzialnością Przedsiębiorstwo Transportowo Spedycyjne "TRANSCHEM" 4 562 1 720 1 411 29 Spółka z ograniczoną odpowiedzialnością Przedsiębiorstwo "CARGO" Spółka z ograniczoną 3 438 3 715 848 (375) odpowiedzialnością Zakład Remontowo- Produkcyjny "Metalpur" 4 509 1 306 661 79 Spółka z ograniczoną odpowiedzialnością Natura Chemical Products Sp. z o.o. 30 553 11 931 6 973 123 S.C. Uzinele Sodice Govora S.A. Govcrest International SRL 39 658 25 237 10 581 (243) Total value 183 343 105 946 38 682 1 187
Impairment Equity as at Shares of Total losses on 31.12.2006 Undertakings not CIECH SA's Acquisition CIECH SA in number of the attributable to accounted for using the direct cost company votes at the acquisition the Ciech equity method shareholding (direct + General cost Group in the entity indirect). Meeting (thousand (thousand (thousand PLN) PLN) PLN) CIECH SA Suomen Unipol Oy 15.00% 24.78% 24.78% 132 - 883 ORGANIKA SARZYNA
Group Zakłady Chemiczne "Silikony Polskie" Spółka z - 30.00% 40.00% 5 209 - 5 723 ograniczoną odpowiedzialnością "Komunalna Biologiczna Oczyszczalnia Ścieków - - 56.62% 40.00% 8 358 - 8 057 Spółka z ograniczoną odpowiedzialnością" "Bud-Org" Sp. z o.o. - 16.87% 20.00% 43 - 128 "Gumokor- Organika" Sp. z - 21.77% 20.00% 16 - 103 o.o. "ORGANIKA-PROJEKT" - 16.51% 19.60% 18 - 33 Sp. z o.o.
125 Consolidated financial statement of the Ciech Group for 2006
Impairment Equity as at Shares of Total losses on 31.12.2006 Undertakings not CIECH SA's Acquisition CIECH SA in number of the attributable to accounted for using the direct cost company votes at the acquisition the Ciech equity method shareholding (direct + General cost Group in the entity indirect). Meeting (thousand (thousand (thousand PLN) PLN) PLN) "DREWREM-ORGANIKA" - 16.80% 19.20% 8 - 12 Sp. z o.o. "EL- CHEM" Sp. z o.o. - 18.40% 19.78% 92 - 320 "WOD_REM" Sp. z o.o. - 19.03% 19.94% 146 - 346 "NS Automatyka" Sp. z - 21.61% 17.95% 115 - 312 o.o. ZACHEM Group "BUDPUR" Spółka z ograniczona - 27.73% 22.18% 63 - 88 odpowiedzialnością Przedsiębiorstwo Transportowo Spedycyjne "TRANSCHEM" Spółka z - 27.81% 22.25% 89 54 77 ograniczoną odpowiedzialnością Przedsiębiorstwo "CARGO" Spółka z - 24.48% 19.58% 28 - 286 ograniczoną odpowiedzialnością Zakład Remontowo- Produkcyjny "Metalpur" - 24.51% 19.61% 26 - 187 Spółka z ograniczoną odpowiedzialnością Natural Chemical Products - 44.03% 35.23% 214 - 2 168 Sp. z o. o. S.C. Uzinele Sodice
Govora S.A. Govcrest International SRL - 38.78% 38.78% 210 - 1 189 Total value - - - 14 766 54 19 912
In 2006 and in the corresponding period, no limitations occurred in the Ciech Group as to the associates' capacity to transfer funds to the significant investor CIECH SA in the form of e.g. dividend or loan repayments.
16 Business mergers – initial settlement established on provisional basis
In the forth quarter of 2006 CIECH SA acquired majority share parcels of the following companies:
– on November 30th, 2006 acquisition of 93.14% shares of S.C. Uzinele Sodice Govora S.A. took place. – on December 20th, 2006 acquisition of 80% shares took place and put options were issued on the remaining 20% shares of ZACHEM S.A. – on December 20th, 2006 acquisition of 80% shares took place and put options were issued on the remaining 20% shares of Z.Ch. "Organika-Sarzyna" S.A.
In line with the records of IFRS 3 "Business Combinations" item 61, CIECH SA, not knowing the fair values of acquired assets and liabilities of the companies, resolved to apply the initial settlement established on a provisional basis. The reason for the application of the provisional settlement was acquisition of the companies that took place shortly before the balance sheet date, thus the short period of time disabled the finalisation of valuation of fair value before the date of the consolidated financial statement for 2006 was approved. The provisional settlement was conducted on the basis of the accounting value of assets and liabilities of the acquired entities. After the valuation to fair value is over and ready to be included in the consolidated financial statement, all the necessary adjustments (in line with IFRS 3 item 62) ensuing from new valuation, which will also have influence on the calculated goodwill or on surplus of the net assets acquired over the cost of business combinations, will be made retrospectively.
In case of ZACHEM S.A. and Z.Ch. "Organika-Sarzyna" S.A., CIECH SA submitted a non-cancellable offer to the State Treasury on acquisition of these companies' shares (put option) belonging to the State Treasury and in addition the Company committed to purchase shares issued free of charge to the entitled persons according to article 36 of the Act of August 30th, 1996 on Commercialisation and Privatisation of State Enterprises. Pursuant to IAS 32 "Financial Instruments: disclosure and presentation", in case a parent company is obliged to purchase
126 Consolidated financial statement of the Ciech Group for 2006
shares of its subsidiaries from minority shareholders, the obligation of financial liability recognition arises at the moment of put option issue regardless of likelihood of the option realisation. The financial liability shall be recognized in the current amount of future payment for the shares in relation to the realisation of the option issued. Furthermore, due to the close relationship between the put option issue and acquisition of 80% shares, recognition of these transactions as combined transactions, being a part of the subsidiaries' acquisition and application of IFRS 3 "Business Combinations", is justified. In line with the abovementioned approach, the presented consolidated financial statement was prepared under the assumption that CIECH SA acquired 100% shares of ZACHEM S.A. and 100% shares of Z.Ch. "Organika-Sarzyna" S.A. Liability resulting from the put options issued, which doubled the cost of merger, was also recognized in the consolidated financial statement.
After conducting analysis of financial data of the entities acquired for the period from the acquisition date to the balance sheet date, the data was found not to have much influence on the consolidated profit and loss account for 2006 and on the calculated goodwill or on surplus of the net assets acquired over the cost of business combinations. Therefore, in case of all the companies mentioned above, settlement of the acquisition in the consolidated financial statement of the Ciech Group was executed as of December 31st, 2006. The table below comprises the financial data of the acquired entities for the period from the acquisition date to the balance sheet date:
S.C. Uzinele Sodice Govora S.A. In PLN ’000 result for the period 30.11 - 31.12.2006 (5 774) equity as at 31.12.2006 (166 282) result / equity 3.5% total assets as at 31.12.2006 146 960 result / total assets 3.9% goodwill 194 660 result / goodwill 3.0%
ZACHEM Group In PLN ’000 result for the period 20.12 - 31.12.2006* 535 equity as at 31.12.2006 83 884 result / equity 0.6% total assets as at 31.12.2006 371 268 result / total assets 0.1% surplus of the acquiree's net assets over the merger cost 1 333 result / surplus of the acquiree's net assets over the merger cost 40.1%
Z.Ch. "Organika-Sarzyna" S.A. In PLN ’000 result for the period 20.12 - 31.12.2006* (1 497) equity as at 31.12.2006 168 076 result / equity 0.9% total assets as at 31.12.2006 258 682 result / total assets 0.6% goodwill 128 392 result / goodwill 1.2% * individual figures of ZACHEM S.A.
127 Consolidated financial statement of the Ciech Group for 2006
1. S.C. Uzinele Sodice Govora S.A.
On November 30th, 2006 CIECH SA and a Romanian government agency - AVAS - signed an annex to the privatisation agreement finalising the purchase of the majority interest in the soda manufacturing plant S.C. Uzinele Sodice Govora S.A. The annex signed, additional agreements became effective. The agreements guarantee CIECH SA the ownership right to 93.14% shares in this company (number of votes at the General Meeting is also 93.14%).
The accounting value of the acquired assets and liabilities of S.C. Uzinele Sodice Govora S.A. on December 31st, 2006 (date of merger settlement) is as follows:
Value recognized at the moment of S.C. Uzinele Sodice Govora S.A. merger = Accounting value Property, plant and equipment 48 287 Intangible Assets 5
Investment property 41
Other long-term investments 402
Total non-current assets 48 735
Current assets Inventories 9 667 Trade and other receivables 82 192 Cash and cash equivalents 6 367 Total current assets 98 226
T o t a l A s s e t s 146 960
Borrowings and other debt instruments (77 466)
Employee benefits (6 968) Provisions (other long-term) (44 107) Other long-term liabilities (1 092) Deferred tax provision (49) Total non-current liabilities (129 681)
Trade and other payables (172 143)
Provisions (short-term employee-benefit and other provisions) (11 418)
Total current liabilities (183 561)
Total liabilities (313 242)
Net asset value (166 282) Acquiree's net asset value (154 875) Goodwill arising due to take-over 194 660
Merger costs of S.C. Uzinele Sodice Govora S.A.
Purchase price 39 785 Net cash acquired with entity 6 367 Cash paid (39 087) Inflows of net cash 32 720
Goodwill that arose due to provisional settlement amounts to RON 170,112 thousand which translates into PLN 194,660 thousand. Information on allocation of the goodwill to particular cash-generating segments has been provided in item 14 of the additional information and notes.
128 Consolidated financial statement of the Ciech Group for 2006
The statement below presents the results of S.C. Uzinele Sodice Govora S.A. recorded in 2006:
01.01-31.12.2006 S.C. Uzinele Sodice Govora S.A. (in thousands of PLN) sales income 137 700 financial result (76 180)
2. ZACHEM Group
On December 20th, 2006 CIECH SA purchased from Nafta Polska S.A. 80% share parcel in ZACHEM S.A. Furthermore, pursuant to the contract on acquisition of shares in ZACHEM S.A., CIECH SA made a non- cancellable offer to the State Treasury concerning acquisition of all shares (put option) belonging to the State Treasury from the date of the offer submission by the end of its validity. As at December 31st, 2006 the State Treasury holds 740,000 shares in ZACHEM S.A., accounting for 5% capital, this quantity may be enlarged by shares which will remain the property of the State Treasury after issue of shares to the entitled employees, in accordance with article 36 of the Act of August 30th, 1996 on Commercialisation and Privatisation of State Enterprises. The option is valid for 10 years; however, acceptance of the purchase offer may take place at the earliest 180 days after the date of purchasing 80% shares in ZACHEM S.A., which is on June 20th, 2007. The price of the offer realisation is subject to revaluation for the first 36 months from the date of the offer submission. The share price agreed in the contract on purchase of 80% shares in ZACHEM S.A. is the basis for revaluation, while revaluation rate is calculated as the arithmetic mean of interest rates as per year for two-month credits in PLN in the Warsaw interbank market (WIBOR 12M).
In addition, pursuant to § 13 of Appendix No. 14 to the contract on purchase of 80% shares in ZACHEM S.A, CIECH SA committed to purchase shares issued free of charge to the entitled persons according to article 36 of the Act of August 30th, 1996 on Commercialisation and Privatisation of State Enterprises. Request for purchase of shares may be submitted within 60 days after the second, the third and the fourth anniversary of CIECH SA's purchase of shares in ZACHEM S.A. The entitled persons will hold maximum 2,220,000 shares in ZACHEM S.A. The guaranteed price for purchasing the shares is 75% price agreed in the contract on purchase of 80% shares in ZACHEM S.A and is subject to revaluation.
The statements below include assumptions adopted to estimate the current value of liability:
Put options - the State Treasury Volume of shares held by the State Treasury 740 000 items Price per share 5.79 PLN Value of shares held by the State Treasury 4 285 thousands of PLN
Upon calculation of the liability value, it was assumed the State Treasury would present the shares for buyout in the last revaluation period (after 3 years), meaning at the latest by December 20th, 2009. Valuation as at December 31st, 2006 is carried out by nominal value, while increase in realisation price of the put option, resulting from the passage of time, is treated as the cost of financing.
PUT options - employees Volume of shares held by employees 1 665 000 items Price per share 5.79 PLN Nominal value of parcel held by employees 9 640 thousands of PLN Discount ratio adopted 0.9215 Current value of liability 8 884 thousands of PLN
Upon calculation of the liability value, it was assumed that due to the lack of the price revaluation, employees would present the shares for buyout on the first date available, namely on December 20th, 2008.
With regard to ZACHEM S.A. holding its fully consolidated subsidiaries (ZACHEM UCR Sp. z o.o. and ZACHEM Barwniki Sp. z o.o.), consolidated data of the ZACHEM Group was adopted to settle the merger upon preparation of the consolidated financial statement.
The accounting value of the acquired assets and liabilities of the ZACHEM Group on December 31st, 2006 (date of the merger settlement) is as follows:
129 Consolidated financial statement of the Ciech Group for 2006
Value recognized at ZACHEM Group the moment of merger = Accounting value
Property, plant and equipment 224 858 Intangible Assets 43
Investment property -
Other long-term investments 4 479
Deferred tax assets 10 264
Total non-current assets 239 644
Current assets - Inventories 28 534 Income tax receivable 244 Trade and other receivables 86 348 Cash and cash equivalents 14 171 Current assets available for sale 2 327
Total current assets 131 624
T o t a l A s s e t s 371 268
Borrowings and other debt instruments (75 222)
Employee benefits (11 242) Provisions (other long-term) (19 959) Other long-term liabilities - Deferred tax provision - Total non-current liabilities (106 423)
Borrowings and other debt instruments (24 323)
Trade and other payables (137 244) Income tax payable (2 063)
Provisions (short-term employee-benefit and other (17 331) provisions)
Total current liabilities (180 961)
Total liabilities (287 384)
Net asset value 83 884 Surplus of the acquiree's net assets over the merger 1 333 cost
Merger cost of the ZACHEM Group:
Purchase price 82 550 Costs incurred due to takeover of 80% shares 69 382 PUT options (the State Treasury) 5% 4 285 PUT options (Employees) 15% 8 884
Net cash acquired with entity 14 171 Cash paid (69 383) Inflows of net cash (55 212)
130 Consolidated financial statement of the Ciech Group for 2006
Surplus of the acquiree's net assets over the merger cost in the amount of PLN 1,333 thousand due to (a) provisional settlement applied on December 31st, 2006 and (b) put options issued for which the realisation date is not known, has not been recognized in the profit and loss account but shown in the consolidated balance sheet in the long-term liabilities item.
The statement below presents the results of the ZACHEM Group recorded in 2006:
01.01-31.12.2006 ZACHEM Group (in thousands of PLN) sales income 760 582 financial result 44 209
3. Z.Ch. "Organika-Sarzyna” S.A.
On December 20th, 2006 CIECH SA purchased from Nafta Polska S.A. 80% share parcel in Z.Ch. Organika- Sarzyna S.A. Furthermore, pursuant to the contract, CIECH SA made a non-cancellable offer to the State Treasury on acquisition of all shares (put option) belonging to the State Treasury from the date of the offer submission by the end of its validity. As at December 31st, 2006 the State Treasury holds 424,500 shares in Z.Ch. "Organika-Sarzyna" S.A., accounting for 5% capital, this quantity may be enlarged by shares which will remain the property of the State Treasury after issue of shares to the entitled employees, in accordance with article 36 of the Act of August 30th, 1996 on Commercialisation and Privatisation of State Enterprises. The option is valid for 10 years; however, acceptance of the purchase offer may take place at the earliest of 180 days after the date of purchasing 80% shares in Z.Ch. "Organika-Sarzyna" S.A. that is on June 20th, 2007. Price of the offer realisation is subject to revaluation for the first 36 months from the date of the offer submission. The share price agreed in the contract on purchase of 80% shares in Z.Ch. "Organika-Sarzyna" SA is the basis for revaluation, while revaluation rate is calculated as the arithmetic mean of interest rates as per year for two-month credits in PLN in the Warsaw interbank market (WIBOR 12M).
In addition, pursuant to provisions of Chapter 10, Appendix No. 13 to the contract on purchase of 80% shares in Z.Ch. "Organika-Sarzyna" S.A, CIECH SA committed to purchase shares issued free of charge to the entitled persons according to article 36 of the Act of August 30th, 1996 on Commercialisation and Privatisation of State Enterprises. The request for purchase of shares may be submitted after statutory restrictions cease to apply between April 1st and 30th of each year. The entitled persons will hold maximum 1,273,500 shares in Z.Ch. "Organika-Sarzyna" S.A. The guaranteed price for purchasing the shares is:
after April 30th, 2008 PLN 20 per one share, after April 30th, 2009 PLN 23 per one share, after April 30th, 2010 PLN 26 per one share, after April 30th, 2011 PLN 29 per one share, after April 30th, 2012 PLN 32 per one share, after April 30th, 2013 PLN 35 per one share.
The statements below include assumptions adopted to estimate the current value of liability:
Put options - the State Treasury Volume of shares held by the State Treasury 424 500 items Price per share 36.00 PLN Thousands Value of shares held by the State Treasury 15 282 of PLN
Upon calculation of the liability value, it was assumed the State Treasury would present the shares for buyout in the last revaluation period (after 3 years) meaning at the latest by December 20th, 2009. Valuation as at December 31st, 2006 is carried out by nominal value, while increase in realisation price of the put option, resulting from the passage of time, is treated as the cost of financing.
PUT options - employees Volume of shares held by employees 1 273 500 items Price per share 35.00 PLN Thousands Nominal value of parcel held by employees 44 573 of PLN Adopted discount rate 0.7840
131 Consolidated financial statement of the Ciech Group for 2006
Thousands Current value of liability 34 943 of PLN
Upon calculation of the liability value, it was assumed that due to the price revaluation between April 30th, 2008 and April 30th, 2013, employees would present the shares for buyout after the date of the final revaluation (namely at PLN 35 per share).
The accounting value of the acquired assets and liabilities of Z.Ch. "Organika-Sarzyna" S.A. on December 31st, 2006 (date of merger settlement) is as follows:
Value recognized at the Z.Ch. "Organika-Sarzyna" S.A. moment of merger = Accounting value
Property, plant and equipment 74 227 Intangible Assets 3 441
Investment property 1 329
Other long-term investments 21 005
Deferred tax assets 5 391
Total non-current assets 105 393
Current assets Inventories 60 083 Trade and other receivables 58 787 Cash and cash equivalents 34 419 Total current assets 153 289
T o t a l A s s e t s 258 682
Employee benefits (8 370) Provisions (other long-term) (20 669) Total non-current liabilities (29 039)
Trade and other payables (55 555) Income tax payable (1 899)
Provisions (short-term employee-benefit and other provisions) (4 113)
Total current liabilities (61 567)
Total liabilities (90 606)
Net asset value 168 076 Goodwill arising due to take-over 128 392
Merger costs of Z.Ch. "Organika-Sarzyna" S.A.
Purchase price 296 469
Costs incurred due to takeover of 80% shares 246 244 PUT options (the State Treasury) 5% 15 282 PUT options (Employees) 15% 34 943
Net cash acquired with entity 34 419 Cash paid (245 322) Inflows of net cash (210 903)
132 Consolidated financial statement of the Ciech Group for 2006
Goodwill that arose due to provisional settlement amounts to PLN 128,392 thousand. Information on allocation of the goodwill to particular cash-generating segments has been provided in item 14 of the additional information and notes.
The statement below presents the results of the Z.Ch. "Organika-Sarzyna" S.A. recorded in 2006:
01.01 - 31.12.2006 Z.Ch. "Organika-Sarzyna" S.A. (in thousands of PLN) sales income 427 321 financial result 25 419
17 Long-term receivables in thousands of Polish zloty LONG-TERM RECEIVABLES 31.12.2006 31.12.2005 a) from affiliates - - b) from other undertakings (as a result of) 37 166 - hire purchase of fixed assets 32 39 - lease (deposits) 5 10 - IT services - 117 Net long-term receivables 37 166 c) revaluation write-downs on receivables 1 256 - Gross long-term receivables 1 293 166
18 Other long-term investments in thousands of Polish zloty LONG-TERM FINANCIAL ASSETS 31.12.2006 31.12.2005 a) in subsidiaries not covered by the consolidation and partially-owned 28 115 20 829 subsidiaries and associates not measured using the equity method shares and stocks 28 115 20 829 b) in other undertakings 11 349 4 923 shares and stocks 11 053 4 923 other securities (by type) 192 - - investment certificates 192 - - other long-term financial assets (by type) 104 - - bank deposits 33 - - other 71 - Total long-term financial assets 39 464 25 752
Details of recognized, reversed or disbursed impairment losses on other long-term investments have been included in item 13 of the additional information and notes to the consolidated report. Particulars of security established on liabilities due to credits and loans, set on long-term financial assets have been presented in item 24 and 27 of the additional information and notes to the consolidated report.
133 Consolidated financial statement of the Ciech Group for 2006
19 Inventories in thousands of Polish zloty INVENTORIES 31.12.2006 31.12.2005 a) Materials (carried value) 107 596 53 293 b) Intermediate products and production in progress (carried value) 27 066 8 983 c) Finished products (carried value) 73 793 29 596 d) Goods (carried value) 34 724 40 578 Total inventories 243 179 132 450
Inventories at fair value less distribution costs 243 179 132 450 Restricted inventories (pledges) 40 600 65 282
Inventories recognized as expenses in 2006 amounted to PLN 2,574,907 thousand (in the corresponding period PLN 2,594,594 thousand); this amount does not include any consolidation adjustments subject to elimination of intragroup turnover.
Details of recognized, reversed or disbursed impairment losses on inventories have been disclosed in item 13 of the additional information and notes to the consolidated report.
Details of pledges established on inventories in order to secure the liabilities due to credits and loans have been included in item 24 and 27 of the additional information and notes to the consolidated report.
20 Trade receivables and other receivables
in thousands of Polish zloty SHORT-TERM RECEIVABLES 31.12.2006 31.12.2005 a) from affiliates 15 739 5 525 a1) for deliveries and services, falling due 15 737 5 218 - to 12 months (net value) 15 737 5 218 a2) other receivables 2 307 - a2.1.1.) other receivables 2 307 b) receivables from other entities 681 130 488 066 b1)- for deliveries and services, falling due 568 185 408 438 - to 12 months (net value) 568 185 408 438 b2.1) other receivables (net value) 14 158 14 127 - other (net) 2 816 6 314 - net advances on inventories 2 499 1 464 - net advances on fixed assets 8 463 6 349 - net advances on intangible assets 380 - b2.2) prepayments, including: 13 732 2 557 - rent - 104 - insurance 1 538 1 672 - unbilled costs due to services partially received but not billed 189 13 - costs of purchase 75 76 - taxes and charges 64 94 - VAT 9 319 - - third-party services 1 284 331 - advertising and marketing 108 41 - subscriptions 114 102 - interest on credits and loans payable in advance - 32 - write-off for special funds (the Employee Benefit Fund) - - - bank commissions 972 -
134 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM RECEIVABLES 31.12.2006 31.12.2005 - other 69 92 b3) due to subsidies, customs duties, social insurance and health insurance, as 85 055 62 944 well as other benefits (net value) Net short-term receivables in total 696 869 493 591
Revaluation write-down on receivables 130 680 98 442 Total gross short-term receivables 827 549 592 033
Impairment losses for receivables from affiliates amounted to: • PLN 278 thousand as of December 31st, 2006 • PLN 384 thousand as of December 31st, 2005
in thousands of Polish zloty PAST DUE TRADE RECEIVABLES – BY RECEIVABLES PAST DUE: 31.12.2006 31.12.2005 a) up to 1 month 65 577 53 615 b) over 1 month to 3 months 19 453 37 299 c) over 3 months to 6 months 7 273 7 628 d) over 6 months to 1 year 16 030 5 129 e) over 1 year 64 111 52 255 Total past due gross trade receivables 172 444 155 926 f) past due revaluation write-downs on trade receivables 76 274 56 015 Total past due net trade receivables 96 170 99 911 in thousands of Polish zloty DISPUTABLE RECEIVABLES (LONG- AND SHORT-TERM) 31.12.2006 31.12.2005 a) for deliveries, works and services, including: 11 897 1 615 - receivables for which no revaluation write-downs have been made 85 96 - receivables not recognized as "receivables pursued in court proceedings" 9 598 - b) other 161 1 085 Total 12 058 2 700
Terms of transactions with affiliates have been presented in item 31.4 of the additional information and notes to the consolidated report.
In trade contracts concluded by the Ciech Group there are different times to payment of trade and service receivables applied depending on a type of transaction, nature of market and trade terms. The most frequent times to payment are 14, 30, 60 and 90 days.
21 Short-term investments in thousands of Polish zloty SHORT-TERM INVESTMENTS 31.12.2006 31.12.2005 a) in subsidiaries - - b) in jointly controlled entities - - c) in associated entities - - d) in a significant investor - - e) in the parent company - - f) in other entities 614 269 - granted loans - 12 - other short-term financial assets (by type) 614 257 - derivatives 614 257 - receivables due to lease - - - other - -
135 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM INVESTMENTS 31.12.2006 31.12.2005 Net short-term financial assets in total 614 269
- impairment losses on short-term financial assets 2 992 2 992 Gross short-term financial assets in total 3 606 3 261
22 Cash and cash equivalents in thousands of Polish zloty CASH AND CASH EQUIVALENTS 31.12.2006 31.12.2005 Bank accounts (current accounts) 102 442 42 083 Short-term deposits 30 678 58 713 Cash in hand 500 420 Other cash (margin deposits) 13 833 - Cash and cash equivalents as disclosed in the balance sheet 147 453 101 216
Overdraft facility 14 311 12 976 Cash reclassified as non-current assets held for sale - 5 355 Cash and cash equivalents as disclosed in the cash flow statement 133 142 93 595
Cash as disclosed in the cash-flow statement at the end of December 2005 amounted to PLN 93,595 thousand and was higher by PLN 5,355 thousand than cash disclosed in the balance sheet on the account of PETROCHEMIA BLACHOWNIA Group being held for sale.
23 Capital
Called up initial capital
Called up initial capital 31.12.2006 31.12.2005 in items A series ordinary bearer shares, nominal value PLN 5 each 20 816 20 816 B series ordinary bearer shares, nominal value PLN 5 each 19 775 200 19 775 200 C series ordinary bearer shares, nominal value PLN 5 each 8 203 984 8 203 984
Total 28 000 000 28 000 000
On February 16th, 2005 called up initial share capital was increased to PLN 41,019 thousand as a result of issue of 8,203,984 new ordinary shares (C series) with nominal value PLN 5 each. Shares of all series are ordinary shares and no additional rights, preferences nor restrictions, concerning dividend allocation and return of capital, are assigned for them.
Ordinary shares - issued and fully paid in items in thousands PLN. As at January 1st, 2005 19 796 016 123 096 Ordinary shares issued on February 16th, 2005 8 203 984 41 019 As at December 31st, 2005 28 000 000 164 115 As at December 31st, 2006 28 000 000 164 115
Pursuant to IAS 29 "Financial Reporting in Hyperinflationary Economies" as at the date of switching into the International Financial Reporting Standards, that is on January 1st, 2004 called up initial of the parent company CIECH SA was restated due to hyperinflation in 1989-1996. The hyperinflationary adjustment decreased retained earnings. Equity remains unchanged.
The table below presents the hyperinflationary adjustment calculation:
136 Consolidated financial statement of the Ciech Group for 2006
Called up initial capital Called up initial capital Period Inflation rate after conversion in thousands of PLN in thousands of PLN 1989 106 3.511 370 1990 370 6.858 2 540 1991 2 540 1.703 4 326 1992 4 326 1.430 6 186 1993 6 186 1.353 8 370 1994 8 370 1.322 11 065 1995 11 065 1.278 14 141 January 1996 14 141 1.034 14 622 February 1996 14 622 1.015 14 842 March 1996 14 842 1.015 15 064 April 1996 15 064 1.022 15 396 May 1996 15 396 1.014 15 611 21.05.1996 issue of B series ordinary shares from capital reserve 98 876 June 1996 114 487 1.010 115 632 July 1996 115 632 0.999 115 516 August 1996 115 516 1.005 116 094 September 1996 116 094 1.019 118 300 October 1996 118 300 1.014 119 956 November 1996 119 956 1.013 121 515 December 1996 121 515 1.013 123 095 01.01.2004 123 095 30.06.2004 123 095 31.12.2004 123 095 16.02.2005 issue of C ordinary shares 41 020 31.12.2005 164 115 31.12.2006 164 115
Called up initial capital as at 31/12/2006 after reassessment 164 115 Called up initial capital as at 31/12/2006 before reassessment 140 001
Hyperinflationary adjustment 24 114
Share premium reserve Share premium reserve arose as a result of surplus recorded upon C series share premium.
Treasury shares Treasury shares are disclosed (as an negative amount) in the item of capital held by the parent company or consolidated subsidiaries.
As at December 31st, 2006 Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna held 95,100 shares of the parent company CIECH SA worth in total PLN 6,124 thousand.
As at December 31st, 2005 treasury shares did not occur.
137 Consolidated financial statement of the Ciech Group for 2006
Other reserve capital In the table below the balances of other reserve capital, containing the following items, have been shown: in thousands of Polish zloty OTHER RESERVE CAPITAL (BY PURPOSE) 31.12.2006 31.12.2005 Trade risk fund 3 330 3 330 Fund for acquisition of soda companies 15 200 15 200 Consolidation adjustments ( 266) ( 266) Fund for investments in social centre 250 250 Development fund compliant with the restructuring plan 60 169 60 169 Other reserve capital 78 683 78 683
Foreign exchange differences arising from translation of foreign entities Balance in this capital item is adjusted by exchange rate differences ensuing from conversion of financial statements of foreign subordinate companies such as POLSIN PRIVATE LIMITED, DALTRADE PLC, and S.C. Uzinele Sodice Govora S.A.
Minority interest S.C. Uzinele Sodce Govora S.A. as at December 31st, 2006 showed negative equities. Minority shareholders are not obliged to cover losses for the company. Surplus of losses concerning minority interests over their share in equity was charged against majority interests in the consolidated financial statement.
24 Long-term liabilities - credits and loans and other debt instruments in thousands of Polish zloty LONG-TERM LIABILITIES 31.12.2006 31.12.2005 a) to affiliates - - b) to jointly controlled entities - - c) to associates - - d) to significant investor - - e) to parent company - - b) to other entities 385 381 49 305 - credits and loans 315 644 48 262 - other financial liabilities, including: 2 553 1 043 - liabilities due to financial lease 1 219 1 043 - unsettled surplus of net acquired assets over the cost of merger (provisional 1 334 - settlement)* - other 67 184 - - subsidies 2 700 - - liabilities due to put option* 63 393 - - other 1 091 - TOTAL 385 381 49 305 * detailed information concerning these items have been presented in item 16 of the additional information and notes to the consolidated report in thousands of Polish zloty LONG-TERM LIABILITIES FALLING DUE AFTER THE BALANCE SHEET DATE 31.12.2006 31.12.2005 a) over 1 year to 3 years 165 152 40 220 b) over 3 years to 5 years 66 502 9 085 c) over 5 years 153 727 - Total 385 381 49 305
138 The report on the activity of Ciech Group for 2006
139 Consolidated financial statement of the Ciech Group for 2006
140 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS
LONG-TERM LIABILITIES – CREDITS AND LOANS
Company name Registered Credit/loan amount as per Outstanding credit/loan and form of Interest terms Repayment date Collateral Offices contract amount - long-term portion incorporation
in thousands of in thousands 31.12.2006 currency currency PLN of PLN
FOSFORY Group Agreement on Assignment of Rights from Insurance Policy - PLN 5,000 thousand; Assignment of debt - 80% debt ceded to the Bank according to the terms of global ING Bank Śląski 1M WIBOR + assignment contracts; Registered pledge - 80% Katowice 18 266 PLN 18 266 PLN 31.12.2010 S.A. bank margin pledged inventories according to the Registered Pledge Contract; Declaration on submission to enforcement to the amount of PLN 60,000 thousand including the execution clause until June 30th, 2011 Total FOSFORY
Group 18 266 PLN 18 266 PLN SODA MĄTWY S.A. Joint ordinary real estate mortgage in the amount of PLN 40,000 thousand, joint capped mortgage up to the amount of PLN 10,000 thousand, assignment of trade receivables worth PLN 3M WIBOR + CitiBank Handlowy Bydgoszcz 40 000 PLN 18 852 PLN 31.01.2011 15,000 thousand, seizure of chattels of individual bank margin identity, created as a result of project completion, in the amount of PLN 42,964 thousand, with assignment of rights from insurance policy, declaration of support issued by CIECH SA.
Total SODA 40 000 PLN 18 852 PLN MĄTWY S.A. JANIKOSODA S. A.
Borrower's statement on submission to execution Warsaw, ul. to 150% credit; power of attorney to the Bank Polska Kasa 1M WIBOR + Grzybowska 15 000 PLN 10 588 PLN 31.12.2009 borrower's bank account; assignment of debt Opieki S.A. bank margin 53/57 from the borrower's recipients in the amount equal to 150% credit
141 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS
Company name Registered Credit/loan amount as per Outstanding credit/loan and form of Interest terms Repayment date Collateral Offices contract amount - long-term portion incorporation
in thousands of in thousands 31.12.2006 currency currency PLN of PLN
Total JANIKOSODA 15 000 10 588 S.A.
"VITROSILICON"
Spółka Akcyjna
Mortgage in Niechorze, assignment of debt, 1M EURIBOR + BOŚ S.A. O/Poznań 16 769 4036 EUR 4 233 1105 EUR 16.11.2009 blank bills of exchange, suretyship of bank margin JANIKOSODA S.A. in Janikowo.
Seizure of LAROX water filter, LAROX peristaltic pump, seizure of reactor to manufacture sodium 1M WIBOR + 1 440 PLN 558 PLN 03.06.2009 glass, seizure of machines and equipment, bank margin authorization for the account in Bank Millenium, Bank Millennium Zielona declaration on submission to enforcement. S.A. Góra
Variable-interest- Blank bill of exchange, authorisation to manage rates based on the bank accounts in BOŚ SA, registered pledge rediscount rate on BOŚ S.A. O/Poznań 3 500 PLN 2 333 PLN 15.12.2010 on warehouse inventories consisting of finished bills of exchange, products - glass blocks. Assignment of debt, no less than 3% ordinary real estate mortgage in Żary. annually
o/ Zielona 1M WIBOR + Blank bill of exchange, registered pledge on BRE Bank SA 4 000 PLN 2 254 PLN 03.11.2009 Góra bank margin inventories, registered pledge on fixed assets.
Joint capped mortgage with the top priority with assignment of rights from insurance policy, registered pledge on machines and equipment 1M WIBOR + Fortis Bank SA Warsaw 9 000 PLN 7 345 PLN 27.12.2012 purchased by the borrower for the capital in bank margin question, along with assignment of rights from insurance policy, agreement on subordination to this credit by CIECH SA.
142 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS
Company name Registered Credit/loan amount as per Outstanding credit/loan and form of Interest terms Repayment date Collateral Offices contract amount - long-term portion incorporation
in thousands of in thousands 31.12.2006 currency currency PLN of PLN
Joint capped mortgage with the top priority with assignment of rights from insurance policy, registered pledge on fixed assets purchased Bank Millennium 1M WIBOR + o/Warszawa 9 000 PLN 7 375 PLN 27.12.2012 within the investment along with assignment of S.A. bank margin rights from insurance policy, declaration on submission to enforcement, authorization of the borrower for the bank account.
Registered pledge on the subject of the credit, registered pledge on fixed assets, ordinary real Bank Millennium O/Zielona 1M WIBOR + 16 500 PLN 12 693 PLN 03.12.2012 estate mortgage in Iłowa, power of attorney for S.A. Góra bank margin the bank account in Bank Millennium, declaration on submission to enforcement.
Total "VITROSILICON" Spółka Akcyjna 60 209 PLN 36 791 PLN CIECH SA 31.12.2009 Assignment of debt under trade contracts worth Warsaw, ul. 3M EURIBOR + regularly at the PLN 123,238 thousand, declaration on Bank Pekao SA Grzybowska 33 126 8 000 EUR 12 260 3200 EUR bank margin end of each submission to enforcement, authorisation for the 80/82 quarter bank to manage the accounts.
Warsaw, ul. Registered pledge on shares of Janikowskie 3M WIBOR + Bank Pekao SA Grzybowska 216 000 PLN 193 703 PLN 14.12.2014 Zakłady Sodowe JANIKOSODA S.A. with the bank margin 80/82 nominal value of PLN 40,349 thousand.
Total CIECH S.A. 249 126 PLN 205 963 PLN ZACHEM S.A.
143 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS
Company name Registered Credit/loan amount as per Outstanding credit/loan and form of Interest terms Repayment date Collateral Offices contract amount - long-term portion incorporation
in thousands of in thousands 31.12.2006 currency currency PLN of PLN Capped mortgage up to the amount of EUR 45,000 thousand on real estate situated in Bydgoszcz at ul. Wojska Polskiego 65, KW (Land and Mortgage Register) 63606; registered pledge on the processing line upgraded as a result of investment with assignment of rights from insurance contracts on the entire processing line to manufacture TDI (PLN 140.2 million); assignment of rights to damages resulting from 3M EURORIBOR insurance contracts on property assigned to the Pekao S.A. Warsaw 122293 EUR 31 031 22371 EUR 5 839 2008 + bank margin KW 63606; statement of ZACHEM S.A. on voluntary subjection to execution to the amount of PLN 200 thousand; assignment of debt under trade contracts: contract No. 14/2006 assignment of debt (CIECH SA); contract No. 15/2006 assignment of debt (BORGHI), contract on assignment of debt No. 13/CKK 2006 ("General Assignment"); authorisations of ZACHEM S.A. to manage the bank accounts in the First Branch of Polska Kasa Opieki S.A. in Bydgoszcz. Wojewódzki blank bill of exchange guaranteed by: - Fundusz Ochrony Przedsiębiorstwo Transportowo - Usługowe Środowiska i 0.7 rediscount TRANSCLEAN Sp. z o.o. in Bydgoszcz; - Gospodarki Wodnej rate on bills of Toruń 3278 PLN 2595 PLN 30.09.2012 PETRO- Mechanika Sp. z o.o. w Płocku; - (Voivodship Fund of exchange valid on assignment of debt (contract on assignment of Environmental the date of signing debt of 06.10.2006) from: Zachem Barwniki Sp. z Protection and o.o. and Pianol Styła Sj Water Management)
Total ZACHEM S.A. 125 571 24 966
TRANSCLEAN SP. Z O.O.
144 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS
Company name Registered Credit/loan amount as per Outstanding credit/loan and form of Interest terms Repayment date Collateral Offices contract amount - long-term portion incorporation
in thousands of in thousands 31.12.2006 currency currency PLN of PLN borrower grants a non-cancellable power of attorney for the Bank to settle any debt and claims of the Bank, resulting from the Contract, charged against the borrower's current account and other borrower's accounts. Registered pledge on the subject of the investment – vehicles co-financed from the credit granted (3 truck-tractors, 3 tank containers to transport chemicals and 3 pieces of chassis) with assignment of rights from Own Damage Motor Warszawa, Raiffeisen Bank 1M WIBOR + Vehicle Insurance contract. Oddział w 1 236 PLN 218 PLN 30.08.2008 Polska S.A. bank margin borrower is obliged to enter into their accounts Bydgoszczy held in the Bank no less than 50% of the turnover resulting from their business activities. borrower is obliged to present a confirmation issued by the Insurance Company on acknowledgement of assignment of rights from Own Damage Motor Vehicle Insurance contract within 7 days from conclusion of the Agreement on Assignment of Rights from Insurance Contract.
Total TRANSCLEAN Sp. z o.o. 1 236 218
TOTAL 494 408 315 644
Company name Outstanding Registered Credit/loan amount Repayment and form of credit/loan amount - Interest terms* Collateral Offices as per contract date incorporation long-term portion
in in 31.12.2005 thousands currency thousands currency of PLN of PLN FOSFORY Group
145 Consolidated financial statement of the Ciech Group for 2006
Company name Outstanding Registered Credit/loan amount Repayment and form of credit/loan amount - Interest terms* Collateral Offices as per contract date incorporation long-term portion
in in 31.12.2005 thousands currency thousands currency of PLN of PLN Registered Pledge Contract (establishes hedging on any debt for the Bank, pledge on inventories), hedges up to maximum PLN 30,000 ING Bank Śląski 1M WIBOR + Katowice 18 545 PLN 18 545 PLN 12.2010 thousand; Global Assignment Contracts; Agreement on Assignment of SA bank margin Rights from Insurance Policy; declaration on submission to enforcement to the amount of PLN 60 thousand Total FOSFORY Group 18 545 PLN 18 545 PLN SODA MĄTWY Group Joint ordinary real estate mortgage, joint capped mortgage, assignment 3M WIBOR + CitiBank Handlowy Bydgoszcz 40 000 PLN 1 817 PLN of trade receivables, seizure of chattels with assignment of rights from bank margin insurance policy. Total SODA MĄTWY Group 40 000 PLN 1 817 PLN "VITROSILICON"
Spółka Akcyjna 4 036 1 682 1M EURIBOR + Mortgage in Niechorze, assignment of debt, blank bills of exchange, BOŚ SA O/Poznań 16 769 6 490 11.2009 EUR EUR bank margin suretyship of JANIKOSODA S.A. in Janikowo.
Registered pledge on glass-furnace in Żary, blank bill of exchange, power Bank Millennium O/Zielona 3M WIBOR + 3 200 PLN 800 PLN 10.2007 of attorney to manage the accounts in Bank Millennium, declaration on SA Góra bank margin submission to enforcement.
Ordinary real estate mortgage in Żary (temporary hedging), Ordinary real Bank Millennium O/Zielona 1M WIBOR + 16 500 PLN 2 083 PLN 12.2012 estate mortgage in Iłowa, power of attorney to manage the accounts in SA Góra bank margin Bank Millennium, declaration on submission to enforcement. Total "VITROSILICON" Spółka Akcyjna 36 469 PLN 9 373 PLN CIECH SA Warsaw, ul. 8 000 4 800 3M EURIBOR + Bank Pekao SA Grzybowska 33 126 18 527 12.2009 EUR EUR bank margin Pledge on shares of JANIKOSODA S.A., assignment of debt, 80/82 authorisation to the account, declaration on submission to enforcement.
Total CIECH S.A. 33 126 PLN 18 527 PLN
TOTAL 128 140 48 262
* Bank margins have been set in line with the market terms, except for margins mentioned in the table below.
146 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LIABILITIES – CREDITS AND LOANS DISCLOSED AS LIABILITIES ARISING FROM NON-CURRENT ASSETS AVAILABLE FOR SALE
Company name Outstanding Registered Credit/loan amount Repayment and form of credit/loan amount - Interest terms* Collateral Offices as per contract date incorporation long-term portion
in in 31.12.2005 thousands currency thousands currency of PLN of PLN PETROCHEMIA BLACHOWNIA Group Kędzierzyn 1M WIBOR + Bill of exchange for PLN 15 thousand, avals to PLN 300 thousand, PKO BP 315 PLN 187 PLN 2009 Koźle bank margin registered pledges on the subjects, assignment of debt from insurance contracts on the subjects of the investment for PLN 660 thousand. Total PETROCHEMIA BLACHOWNIA Group 315 PLN 187 PLN * Bank margins have been set in line with the market terms, except for margins mentioned in the table below.
147 Consolidated financial statement of the Ciech Group for 2006
LONG-TERM LOAN REPAYMENT SCHEDULE
Credits (in thousands of PLN) Total 1 to 2 years 2 to 5 years over 5 years 31.12.2006 Currency - interest type and amount CIECH SA EUR, 3M EURIBOR + bank margin 12 260 6 130 6 130 - 3M WIBOR + bank margin 193 703 22 297 66 890 104 516 FOSFORY Group PLN; in current account; 1M WIBOR + bank margin 18 266 11 500 6 766 - SODA MĄTWY S.A. PLN - Special-purpose credit in CitiBank Handlowy - 3M 18 852 8 500 10 352 - WIBOR + bank margin JANIKOSODA S. A. PEKAO S.A.; PLN - 1M WIBOR + bank margin 10 588 10 588 - - “VITROSILICON” Spółka Akcyjna BOŚ S.A., EUR, investment loan, 1M EURIBOR + bank 4 233 2 209 2 024 - margin Bank Millennium S.A., PLN, investment loan, 1M WIBOR + 7 375 1 500 4 500 1 375 bank margin Bank Millennium S.A., PLN, investment loan, 1M WIBOR + 558 432 126 - bank margin BOŚ S.A., investment loan, variable-interest-rates based on rediscount rate on bills of exchange, interest rate of the credit 2 333 778 1 555 - is 0.4 of rediscount rate on bills of exchange, no less than 3% annually BRE Bank, PLN, investment loan, 1M WIBOR + bank margin 2 254 1 200 1 054 - Bank Millennium S.A., PLN, investment loan, 1M WIBOR + 12 693 2 538 7 614 2 541 bank margin Fortis Bank S.A., PLN, investment loan, 1M WIBOR + bank 7 345 1 500 4 500 1 345 margin ZACHEM S.A. WIOŚ; loan, 0.7 rediscount rate on bills of exchange valid on - 2 595 1 092 1 503 the date of signing Pekao S.A.; credit; 3M EURORIBOR + bank margin 22 371 22 371 - - Przedsiębiorstwo Transportowo – Usługowe
TRANSCLEAN Sp. z o.o. Raiffeisen Bank Polska S.A., credit 1M WIBOR + bank margin 218 218 - - Total 315 644 92 853 113 014 109 777
Credits (in thousands of PLN) Total 1 to 2 years 2 to 5 years over 5 years 31.12.2005 Currency - interest type and amount CIECH SA EUR, special-purpose credit, Bank Pekso SA, 3M EURIBOR 18 527 12 351 6176 - + bank margin FOSFORY Group PLN; in account; ING Bank Śląski, 1M WIBOR + bank margin 18 545 11 500 7045 - SODA MĄTWY Group PLN - Special-purpose credit in CitiBank Handlowy - 3M 1 817 1 817 - - WIBOR + bank margin "VITROSILICON" Spółka Akcyjna EUR, investment loan, BOŚ S.A, 1M EURIBOR + bank 6 490 2 225 4265 - margin PLN, investment loan, Bank Millennium SA, 3M WIBOR + 800 800 - - bank margin PLN, investment loan, Bank Millennium SA, 1M WIBOR + 2 083 2 083 - - bank margin Total 48 262 30 776 17 486 -
148 Consolidated financial statement of the Ciech Group for 2006
Credits (in thousands of PLN) – disclosed as liabilities connected with fixed assets held for sale Total 1 to 2 years 2 to 5 years over 5 years 31.12.2005 Currency - interest type and amount Petrochemia Blachownia Group PLN – credit, PKO BP, 1M + bank margin 187 187 - -
25 Provisions in thousands of Polish zloty CHANGES IN OTHER LONG-TERM RESERVES (BY TITLE) 31.12.2006 31.12.2005 a) as at the beginning of the period 21 609 22 645 - other liabilities 7 089 7 327 - provision for environmental protection 14 520 15 318 b) increases (as a result of) 86 570 1 011 - other liabilities - 524 - provision for environmental protection 1 835 91 - reclassification from short-term provisions - 396 - increase of group 84 735 - c) disbursement 738 853 - provision for environmental protection 738 853 d) reversal 3 506 1 194 - other liabilities 239 762 - reclassification into short-term provisions 3 267 - - provision for environmental protection - 432 e) as at the end of the period 103 935 21 609
- provision for liabilities towards the State Treasury 44 107 - - other liabilities 5 822 7 089 - provision for environmental protection 54 006 14 520 in thousands of Polish zloty CHANGES IN OTHER SHORT-TERM RESERVES (BY TITLES) 31.12.2006 31.12.2005 a) as at the beginning of the period 26 904 23 584 - provision for restructuring 4 471 1 255 - provision for damages 17 615 15 413 - provision for liabilities 1 042 2 344 - due to environmental control 3 110 3 469 - provision for bonus 64 517 - provision raised for retirement costs of fixed assets 550 550 - provision raised for stocktaking gaps 52 - - other - 36 b) increases (as a result of) 37 154 16 424 - provision for damages 1 219 9 474 - provision for liabilities 16 912 - provision for restructuring 161 3 863 - reclassification from long-term provisions 3 267 - - due to environmental control 1 597 1 599 - provision for bonus 84 137 - provision raised for retirement costs of fixed assets 240 387 - provision raised for stocktaking gaps - 52
149 Consolidated financial statement of the Ciech Group for 2006
CHANGES IN OTHER SHORT-TERM RESERVES (BY TITLES) 31.12.2006 31.12.2005 - increase of group 30 464 - - other 106 - c) disbursement 2 218 5 681 - outflows for provisions for damages - 2 060 - outflows for provisions for liabilities - 1 229 - outflows for provisions for restructuring 190 647 - due to environmental control 1 535 1 259 - provision for bonus 64 99 - provision raised for retirement costs of fixed assets 377 387 - provision raised for stocktaking gaps 52 - d) reversal 4 169 7 423 - provision for damages - 5 207 - provision for liabilities 1 000 985 - provision for restructuring 2 965 - - due to environmental control 156 303 - transfer to the group of fixed assets held for sale - 5 - reclassification to long-term provisions - 396 - provision for bonus 48 491 - other - 36 e) as at the end of the period 57 671 26 904
- provision for damages 19 882 17 615 - provision for liabilities 12 033 1 042 - provision for restructuring 1 477 4 471 - due to environmental control 12 388 3 110 - provision for bonus 10 114 64 - provision raised for retirement costs of fixed assets 1 671 550 - provision raised for stocktaking gaps - 52 - other 106 -
CIECH SA
Provisions for court proceedings On December 31st, 2006 the provision is estimated at PLN 17,500 thousand in the books of the parent company (disclosed in item "provisions for damages"). The provision is associated with a potential claim (principal with interest liabilities), due to the court proceedings depicted in item 28.1.1 of the consolidated financial statement.
Janikosoda SA
Provision for reclamation of sediment ponds with soda-residue lime Provisions for reclamation of sediment ponds with soda-residue lime have been recognized in the amount of PLN 1,269 thousand in the report of JANIKOSODA S.A. Reclamation of the ponds will be executed by 2008. Reclamation has been set for the ponds currently in use, after 40 years of exploitation. The provision was calculated based on remuneration paid to a company presently in charge of the reclamation process and on other contracts whose values was discounted on the basis of the current interest rates.
Additionally, a short-term provision was raised for environmental protection worth PLN 595 thousand, as well as provision for penalties due to noise, estimated at PLN 18 thousand, provision for retirement costs of fixed assets for PLN 240 thousand, provision for bank interest on investment loan in the amount of PLN 3 thousand, were raised.
150 Consolidated financial statement of the Ciech Group for 2006
SODA MĄTWY Group
Provision for the costs of land reclamation Provision for the costs of land reclamation was recognized in the report of the Soda Mątwy Group, calculated in line with the expenditure planned for 2018 according to the expected inflation rate: 3% by 2010 and 2% after 2010 adjusted by the 6% discount by 2009 and 5% after 2010. Outflows due to it until 2018 will be estimated between PLN 1,100 thousand and 1,600 thousand. The provision recognized in the report amounts to PLN 13,254 thousand, including PLN 1,144 thousand accounting for a short-term provision. The provision was calculated based on estimation of the expected expenditure intended for it. Due to long-term policies particular expenditure may be delayed in time. There is a risk associated with changes in pricing of particular categories of services purchased by the company for these purposes.
"Alwernia" S.A.
Provision for environmental protection "Alwernia" S.A. shows the following provisions related to environmental protection in its statement: - provision for purification of infiltrates in the amount of PLN 6,054 thousand (the provision also includes costs of water purification from dump). The provision was raised for 40 years and is settled successively in the amount of the expenses incurred, - provision for reclamation of dump estimated at PLN 1,325 thousand. The provision was made for the costs of shutting down a waste disposal site in line with the initial estimate. Deadline for the shutting is at the end of the first half of 2007, and afterwards the reclamation process will be started, - provision for costs of construction of new plots in the amount of PLN 2,726 thousand, which is the amount of the expected costs. Date of completion is provided for the end of the first half of 2007, - provision for utilisation of magnesium sludge in the amount of PLN 243 thousand.
Provision raised for retirement costs of unused fixed assets The company created a provision worth PLN 173 thousand, which accounts for the amount of the expected retirement costs, the completion date is provided for 2007.
Furthermore, a provision for damages due to earlier termination of contract was made in the amount of PLN 103 thousand.
Z.Ch. "Organika- Sarzyna" S.A.
Provision for damages The provision covers claims pursued through court proceedings by a partner in the amount of PLN 34 thousand, as well as potential liability in the amount of PLN 1,014 thousand that may arise out of unfavourable judgement decision on interpretation of the tax law application, issued by the Tax Office Director in Rzeszów.
Provision for environmental protection On the territory of Z.Ch. "Organika-Sarzyna" S.A. pollution of underground waters and soil environment occur due to the activities handled in the past. On the basis of the expertise ensuing from results of the soil and water environmental monitoring or research and analysis conducted with participation of specialists, the company still does not have any deep insight into the degree and size of environmental damage, including of the underground waters in the quaternary acquiferious and soil layer. Therefore, pollution coming from the source, or from the systems exploited in the past, has been identified as well as pollution areas of underground waters and soil. Full analysis of soil and water environment in the region of Z.Ch. "Organika-Sarzyna" S.A. will be made under "Ecological review of soil and water environment", which will be evolved by November 30th, 2007 according to decision of October 19th, 2006 issued by the Podkarpackie Governor.
The ecological review will comprise: ● indication of particular sources of pollution in water-bearing levels and determination of their precise location and influence on environmental pollution, ● preparation of evidence on the soil pollution based on large-scale research of soil and determination of its scale, ● assessment of efficiency of the existing activities, ● analysis of the scale of the soil and water environmental pollution, ● analysis of directions of changes in the pollution concentrations, ● action plan to restore the environment to the right condition and deadlines for completion of the actions planned.
The review will cover description of the identified scale of the pollution to the soil and water environment. The review will include the "Schedule of reclamation tasks in soil and water environment and their cost in 2007 – 2010 and in the following years (until 2015). It is expected that the Podkarpackie Governor will issue a decision taken
151 Consolidated financial statement of the Ciech Group for 2006
based on the ecological review results and the reclamation schedule, determining the terms of restoring the soil and water environment to the right condition along with deadlines of the actions planned.
Summing up, the provision raised for reclamation of the soil and water environment on the territory of the Plants, for waste disposal site and storage reservoir covers all damage, except for the issues disclosed above, and the necessity to restore natural environment resulting from the current decisions and expertise of the Company Management Board as at December 31st, 2006. Cost estimation for the reclamation provision has been made based on the "Material and financial project intended for implementation of full reclamation of soil in the existing areas or in other areas identified upon complex research on sources of pollution, as well as implementation of underground water reclamation on the territory of Z.Ch. "Organika-Sarzyna" S.A.", compiled by a team of geologists with participation of the Polish Geological Institute specialists in November 2006, the project contains certain areas of restrictions which made it impossible to fully and precisely establish the level of these provisions.
As at December 31st, 2006 total amount of the provisions raised for reclamation within environmental protection is as follows:
- provision for costs connected with reclamation of storage reservoir for cooling water in the amount of PLN 916 thousand, the provision was calculated on the basis of an investment cost estimate, it is a short-term provision, the reservoir reclamation is planned for 2007 - provision for costs connected with reclamation of waste disposal site in the amount of PLN 909 thousand, the costs were calculated based on tender cost estimate of reclamation work, it is a long- term provision. Reclamation, discounted by the 2% inflation rate, is planned for 2012. - provision for costs connected with reclamation of water and soil in the amount of PLN 21,387 thousand, the costs cover a short-term provision for PLN 1,627 thousand and a long-term provision for PLN 19,760 thousand. These provisions were estimated based on the material and financial project together with the work schedule for 2007-2015 for expenses expected to be incurred and discounted by the 3% inflation rate by 2010 and 2% by 2011.
ZACHEM Group
Provision for privatisation bonus The provision for privatisation bonus results from the social benefits package signed by CIECH SA on the date of share purchase and amounts to PLN 10,078 thousand.
Provision for retirement costs of fixed assets The provision is calculated as the rate per one metre of demolishing a building multiplied by the number of metres - date of economic benefit inflow is expected for 2007. The provision estimates at PLN 1,258 thousand.
Provision for environment reclamation The ZACHEM Group did not hold a complete specification of all environmental damage on the date of the 2006 consolidated financial statement execution. Preparation of documentation of this type requires complex research and thereby more time and considerable financial resources. ZACHEM S.A. initiated efforts directed at gaining insight into the degree and scale of environmental damage, determining the following courses of action:
- preparation of geological research projects and their approval by the President of Bydgoszcz, - research to determine the degree and scale of soil or underground water pollution, preparation of geological documentation to be presented to the President of Bydgoszcz, - preparation of a line of reasons to reclaim the area or purify underground waters in the regions subject to research, based on the research results, - development of technical and economic assumptions for reclamation of the relevant areas and development and presentation of the material documentation on reclamation, for approval by the President of Bydgoszcz.
The company plans to commission particular research stages to specialised institutions / companies. The work completion is expected to take place in the forth quarter of 2007. On the basis of the abovementioned issues, the following actions will be feasible:
- evaluation of necessary repairs of all damage identified, - preparation of reasonable cost estimates for assignments, - execution of the action plans, - specification of costs divided into assignments and years, - reasonable estimation of a provision for reclamation, including the time value of money.
Furthermore, ZACHEM S.A. commissioned to an external company, execution of a report intended for identification of the main environmental damage. The report was conducted on the basis of materials and expertise of the ZACHEM S.A. employees, review of the WIOŚ minutes and administrative decisions, thus upon
152 Consolidated financial statement of the Ciech Group for 2006
identification of all possible environmental damage analysed upon the report preparation. The report comprises certain restrictions, which made it impossible to fully and reasonably establish the size of provision for reclamation. The company raised a provision for reclamation estimated at PLN 23,521 thousand and an asset due to deferred income tax on these provisions worth PLN 4,469 thousand.
To the best of the knowledge acquired on the date of the 2006 financial statement preparation, not all areas affected by environmental damage were identified and thereby the reclamation costs were not reliably estimated. The provision established, accounts for an approximate estimation of future liabilities identified on the date of statement preparation.
S.C. Uzinele Sodice Govora S.A.
Provision for liabilities towards the State Treasury As a result of privatisation S.C. Uzinele Sodice Govora S.A., Begacom, AVAS (National Privatisation Agency) and Narodowa Izba Ochrony Zdrowia (National Chamber of Healthcare) signed the "Joint orders" allowing the changing of the liabilities repayment schedule and to charge outstanding premium for social insurance and penalties and interest once certain requirements are met by the end of 2008. A long-term provision has been raised for these liabilities in the amount of PLN 44,107 thousand.
Other reserves This item covers provisions for penalty interest due to liabilities in delay or unpaid liabilities towards suppliers and other provisions for risks and expenses.
Cheman S.A.
Provision related to the corrective action plan An estimated provision has been made in Cheman S.A. for withdrawal from the fuel sector (potential contractual penalties - long-term lease contract on the petrol station) in the amount of PLN 1,477 thousand.
In Cheman S.A. a provision for liabilities has been created in the amount of PLN 26 thousand.
Provisions for court proceedings of the entire Ciech Group have been disclosed in item 28.1.1 and 28.1.2. of the consolidated statement.
The provisions' values are estimated figures and may be subject to change during their actual realisation.
26 Employee Benefits in thousands of Polish zloty CHANGES IN LONG-TERM RESERVE FOR RETIREMENT BENEFITS AND 31.12.2006 31.12.2005 OTHER EMPLOYEE BENEFITS (BY TITLES) a) as at the beginning of the period 25 821 24 097 - provision for pensions and longevity bonuses 25 821 24 097 b) increases (as a result of) 31 702 3 153 - provision for pensions and longevity bonuses 3 889 3 128 - reclassification from short-term provision 3 25 - increase of group 27 810 - c) disbursement - - d) reversal 2 021 1 429 - provision for pensions and longevity bonuses, 1 171 577 - reclassification into short-term provisions 850 555 - transfer to the group of fixed assets held for sale - 297 e) as at the end of the period 55 502 25 821
- provision for pensions and longevity bonuses 55 502 25 821 in thousands of Polish zloty CHANGES IN LONG-TERM RESERVE FOR RETIREMENT BENEFITS AND 31.12.2006 31.12.2005 OTHER EMPLOYEE BENEFITS (BY TITLES) a) as at the beginning of the period 3 755 2 937 - provision for pensions and longevity bonuses 3 755 2 937
153 Consolidated financial statement of the Ciech Group for 2006
CHANGES IN LONG-TERM RESERVE FOR RETIREMENT BENEFITS AND 31.12.2006 31.12.2005 OTHER EMPLOYEE BENEFITS (BY TITLES) b) increases (as a result of) 5 741 3 255 - provision for pensions and longevity bonuses, 2 299 2 700 - increase of group 2 592 - - reclassification from long-term provision 850 555 c) disbursement 2 044 1 509 - provision for pensions and longevity bonuses, 402 1 509 - payment of benefits 1 642 - d) reversal 110 928 - provision for pensions and longevity bonuses, 107 831 - transfer to the group of fixed assets held for sale - 72 - reclassification to long-term provision 3 25 e) as at the end of the period 7 342 3 755
- provision for pensions and longevity bonuses 7 342 3 755
Provisions for employee benefits include provisions for longevity bonuses and retirement bonuses. Measurement of employee benefits is made on the basis of actuarial valuations. An annual rate of financial discount has been adopted in the following amount in order to calculate the current value of future liabilities due to employee benefits: • for employee benefits whose payment date takes place before the expected date of Poland joining the EURO area, weighted-average profitability of the State Treasury bonds with the buyout date after 5 years has been applied. The average equals 5.0%, • for employee benefits whose payment date takes place after the expected date of Poland joining the EURO area, weighted-average profitability of long-term bonds denominated in EURO has been applied. The average equals 4.0%.
Employee turnover ratio is determined based on the historical data adjusted by the employment restructuring plans. In the Ciech Group there are after-employment employee share plans, retirement benefit plans and other benefit plans conducted. Particulars of the employee benefits for key management have been disclosed in item 31.6 of the additional information and notes to the consolidated report of the Ciech Group.
27 Short-term liabilities
in thousands of Polish zloty SHORT-TERM BORROWINGS AND OTHER DEBT INSTRUMENTS 31.12.2006 31.12.2005 a) to subsidiaries - - b) to jointly controlled entities - - c) to associates - - d) to significant investor - - e) to parent company - - f) to other entities 276 368 124 190 - credits and loans, including: 276 368 124 190 - long-term credits and loans payable 42 168 19 538 TOTAL 276 368 124 190
154 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN "Alwernia" S.A. Pledge on inventories in the amount of PLN 11 million, assignment of debt, mortgage of PLN BRE Bank SA Warsaw 1,341 thousand on property, plant and equipment, blank bill of exchange; Letter of 7000 PLN 6665 PLN WIBOR + bank margin 21.11.2007 comfort by CIECH S.A. Bill of exchange, assignment of debt, BRE Bank SA Warsaw assignment of insurance policy; Letter of 5000 PLN 5000 PLN WIBOR + bank margin comfort by CIECH S.A. ING Bank Śląski Katowice Pledge on inventories, assignment of debt, 10000 PLN 7335 PLN WIBOR + bank margin assignment of insurance policy
Total "Alwernia" S.A. 22000 PLN 19000 PLN Cheman S.A.
Blank bill of exchange guaranteed by CIECH SA to PLN 4,000 thousand, power of attorney Bank Pekao S.A Warsaw 4 000 PLN 3 185 PLN 1M WIBOR + bank margin 31.07.2007 for the bank account in Pekao S.A., power of attorney for the bank account of CIECH SA in Pekao S.A.
Blank bill of exchange guaranteed by CIECH SA to PLN 3,750 thousand. Registered pledge O/N WIBOR + bank Kredyt Bank S.A Warsaw 4 100 PLN 2 657 PLN 31.08.2007 on inventories of trade goods located in the margin Distribution Centre in Poznań along with assignment of insurance policy
Blank bill of exchange guaranteed by CIECH SA to PLN 4,500 thousand. Registered pledge O/N WIBOR + bank Kredyt Bank S.A Warsaw 4 900 PLN 4 900 PLN 31.08.2007 on inventories of trade goods located in the margin warehouse in Warsaw at ul. Jagiellońska 3. Declaration on submission to enforcement.
Total Cheman S.A. 13 000 PLN 10 742 PLN FOSFORY Group
155 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN Agreement on Assignment of Rights from Insurance Policy - PLN 5,000 thousand; Assignment of debt - 80% debt ceded to the Bank according to the terms of global assignment contracts; Registered pledge - ING Bank Sląski S.A. Katowice 50 000 PLN 2 656 PLN 1M WIBOR + bank margin 31.12.2010 80% pledged inventories according to the Registered Pledge Contract; Declaration on submission to enforcement to the amount of PLN 60,000 thousand including the execution clause until 2011 Blank bill of exchange with a blank bill of exchange agreement issued by GZNF "Fosfory" Sp. z o.o., joint capped mortgage to PLN 11,000 thousand on immovable property located in Gdańsk at the Kaszubski Channel and at ul. Ku Ujściu -KW 97755, KW 67051, KW 60385 and in Gdańsk at ul. Kujawska 2 BRE Bank S.A. Warsaw 10 000 PLN 8 749 PLN 1M WIBOR + bank margin 30.03.2007 and Kujawska 5A, 6, 7 - KW 36 with assignment of rights from insurance policy on immovable property, agreement on seizure of fixed assets - value PLN 16,959 thousand, declaration on submission to enforcement to PLN 11,000 thousand including the execution clause until 20.03.2008.
Blank bill of exchange guaranteed by Fosfory with a blank bill of exchange agreement, assignment of debt, declaration on submission BRE Bank S.A. Gdańsk 1 500 PLN 553 PLN 1M WIBOR + bank margin 29.06.2007 to enforcement to PLN 2,000 thousand including the execution clause until 30.09.2009.
156 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN Joint ordinary real estate mortgage to PLN 4,500 thousand, joint capped mortgage on immovable property located in Człuchów at ul. Mickiewicza -KW 8881, KW 13592 in perpetual usufruct by Fosfory with the ownership right to buildings and on immovable property located in Głędowo - KW 9039 to BRE Bank S.A. Gdańsk 4 500 PLN 4 500 PLN 1M WIBOR + bank margin 29.06.2007 PLN 100 thousand; blank bill of exchange guaranteed by GZNF "Fosfory" Sp. z o.o. with a blank bill of exchange agreement, assignment of debt, declaration on submission to enforcement to PLN 5,000 thousand including the execution clause until 29.06.2008. Blank bill of exchange with a blank bill of exchange agreement and declaration on submission to enforcement to PLN 15,918 thousand; non-cancellable authorization to the account; joint capped mortgage up to the amount of PLN 3,400 thousand on immovable property situated in Gdańsk at ul. Kujawska - KW 63657, KW 71229, KW 60410 with assignment of rights from insurance policy on Bank Millennium Warsaw 6 367 PLN 6 368 PLN 1M WIBOR + bank margin 20.12.2007 the immovable property in question; Capped mortgage up to the amount of PLN 4,100 thousand on immovable property located in Gdańsk at ul. Ku Ujściu 45 - KW 40476 with assignment of rights from insurance policy on the immovable property in question; Declaration on submission to enforcement to the amount of PLN 15,918 thousand including the execution clause until 27.04.2009.
157 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN
Capped mortgage to PLN 6,300 thousand on immovable property situated in Gdańsk at ul. Kujawska 2, covered by KW 36, assignment of rights from insurance policy on the immovable property in question at least to the amount of the mortgage entry, namely to PLN 6,300 thousand; blank bill of exchange with a blank bill of exchange agreement; clause of debits PKO BP S.A. Warsaw 5 000 PLN 4 946 PLN 1M WIBOR + bank margin 26.10.2007 from current account. Declaration on submission to enforcement of payments to PLN 10,000 thousand including the execution clause until 29.09.2008; declaration of the drawer of bills of exchange on submission to enforcement to PLN 10,000 thousand including the execution clause until 29.09.2008.
blank bill of exchange with a blank bill of exchange agreement to the amount not exceeding PLN 6,000 thousand; authorization to the account; Capped mortgage to PLN 6,000 thousand on immovable property situated in Gdańsk at ul. Nordea Bank Polska S.A. Warsaw 5 000 PLN 4 974 PLN 1M WIBOR + bank margin 29.09.2007 Kujawska - KW 36 assignment of rights from insurance policy on the immovable property in question; Declaration on submission to enforcement to the amount of PLN 6,000 thousand including the execution clause until 30.09.2009. Total FOSFORY Group 82 367 PLN 32 746 PLN JANIKOSODA S. A. clause of cash debits from current account in case of failure to repay, assignment of rights PKO BP SA Bydgoszcz 10 000 PLN 123 PLN 1M WIBOR + bank margin 07.08.2008 from trade contracts concerning sales of vacuum pan salt
158 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN Borrower's statement on submission to execution to 150% credit; power of attorney to Bank Polska Kasa Opieki Warsaw, ul. Grzybowska 53/57 15 000 PLN 4 412 PLN 1M WIBOR + bank margin 31.12.2009 the borrower's bank account; assignment of S.A. debt from the borrower's recipients in the amount equal to 150% credit
Total JANIKOSODA S.A. 25 000 PLN 4 535 PLN
CIECH POLFA Sp. z o.o. BRE BANK S.A. Oddział Inflow onto the account, blank bill of Warsaw 2 900 PLN 2 900 PLN 1M WIBOR + bank margin 14.02.2007 Regionalny w Warszawie exchange.
BRE BANK S.A. Oddział 1M WIBOR + bank margin Inflow onto the account, blank bill of Warsaw 1 100 PLN 1 100 PLN 30.03.2007 Regionalny w Warszawie exchange.
BRE BANK S.A. Oddział 1M WIBOR + bank margin Inflow onto the account, blank bill of Warsaw 1 500 PLN 1 500 PLN 6.03.2007 Regionalny w Warszawie exchange.
BRE BANK S.A. Oddział 1M WIBOR + bank margin Inflow onto the account, blank bill of Warsaw 2 000 PLN - PLN 26.04.2007 Regionany w Warszawie exchange.
Total CIECH POLFA Sp. z o.o. 7500 PLN 5500 PLN SODA MĄTWY S.A. Joint ordinary real estate mortgage in the amount of PLN 40,000 thousand, joint capped mortgage up to the amount of PLN 10,000 thousand, assignment of trade receivables CitiBank Handlowy Bydgoszcz 40 000 PLN 9 375 PLN 3M WIBOR + bank margin 31.10.2007 worth PLN 15,000 thousand, seizure of chattels of individual identity, created as a result of project completion, with assignment of rights from insurance policy, declaration of support issued by CIECH SA.
Total SODA MĄTWY S.A. 40 000 PLN 9 375 PLN "VITROSILICON" Spółka Akcyjna
159 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN Mortgage in Niechorze, assignment of debt, 1M EURIBOR + bank BOŚ S.A. O/Poznań 16 769 4036 EUR 2 233 583 EUR 16.11.2009 blank bills of exchange, suretyship of margin JANIKOSODA S.A. in Janikowo.
Bills of exchange, registered pledge on inventories with assignment of rights from Bank Millennium S.A. O/Zielona Góra 5 000 PLN 670 PLN 1M WIBOR + bank margin 27.12.2006 insurance policy, power of attorney to manage the accounts in Bank Millennium, declaration on submission to enforcement.
Registered pledge on glass-furnace in Żary, blank bill of exchange, power of attorney to Bank Millennium S.A. O/Zielona Góra 3 200 PLN 800 PLN 3M WIBOR + bank margin 25.10.2007 manage the accounts in Bank Millennium, declaration on submission to enforcement. Seizure of LAROX water filter, LAROX peristaltic pump, seizure of reactor to manufacture sodium glass, seizure of Bank Millennium S.A. O/Zielona Góra 1 440 PLN 432 PLN 1M WIBOR + bank margin 03.06.2009 machines and equipment, authorization to the account in Bank Millenium, declaration on submission to enforcement. Registered pledge on the subject of the credit, registered pledge on fixed assets, ordinary Bank Millennium S.A. O/Zielona Góra 16 500 PLN 2 538 PLN 1M WIBOR + bank margin 03.12.2012 real estate mortgage in Iłowa, power of attorney for the bank account in Bank Millennium, declaration on submission to enforcement. Bill of exchange, authorisation to manage the Variable-interest-rates bank accounts in BOŚ S.A., registered pledge based on rediscount rate BOŚ S.A. O/Poznań 3 500 PLN 786 PLN 15.12.2010 on warehouse inventories consisting of on bills of exchange, no finished products - glass blocks, assignment of less than 3% annually debt, ordinary mortgage in Żary.
Fortis Bank S.A. Warsaw 7 000 PLN - PLN 1M WIBOR + bank margin 06.12.2007 Blank bill of exchange.
BRE Bank S.A. O/Zielona Góra 2 500 PLN 561 PLN 1M WIBOR + bank margin 30.10.2007 Blank bill of exchange.
160 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN
Blank bill of exchange, registered pledge on BRE Bank S.A. O/Zielona Góra 7 000 PLN 5 200 PLN 1M WIBOR + bank margin 31.10.2007 inventories
Joint capped mortgage with the top priority with assignment of rights from insurance Fortis Bank S.A. Warsaw 9 000 PLN 1 500 PLN 1M WIBOR + bank margin 27.12.2012 policy, registered pledge on machines and equipment purchased by the borrower for the capital in question, along with assignment of rights from insurance policy, agreement on subordination to this credit by CIECH SA. Joint capped mortgage with the top priority with assignment of rights from insurance policy, registered pledge on fixed assets purchased within the investment along with Bank Millenium SA o/Warszawa 9 000 PLN 1 500 PLN 1M WIBOR + bank margin 27.12.2012 assignment of rights from insurance policy, declaration on submission to enforcement, authorization of the borrower for the bank account.
Blank bill of exchange, registered pledge on BRE Bank S.A. O/Zielona Góra 4 000 PLN 1 200 PLN 1M WIBOR + bank margin 03.11.2009 inventories, registered pledge on fixed assets
Declaration on submission to enforcement, Bank Pekao S.A. Warsaw 5 000 PLN 3 359 PLN 1M WIBOR + bank margin 30.11.2007 power of attorney for the bank account in Pekao S.A., global assignment of debt.
Total "VITROSILICON" Spółka Akcyjna 89 909 PLN 20 779 PLN CIECH SA Assignment of debt under trade contracts 1 600 3M EURIBOR + bank worth PLN 123,238 thousand, declaration on Bank Pekao S.A. ul. Grzybowska 80/82 33 126 8 000 EUR 6 130 31.12.2009 EUR margin submission to enforcement, authorisation for the bank to manage the accounts.
14.12.2014 Registered pledge on shares of Janikowskie Bank Pekao S.A. ul. Grzybowska 80/82 216 000 PLN 22 676 PLN 3M WIBOR + bank margin regularly at the Zakłady Sodowe JANIKOSODA S.A. with the end of each nominal value of PLN 40,349 thousand.
161 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN quarter
Blank bill of exchange, unconfirmed global BRE Bank S.A. ul. Królewska 12 20 000 PLN 11 093 PLN 1M WIBOR + bank margin 19.02.2007 assignment of debt
Blank bill of exchange, declaration on Fortis Bank Polska S.A. ul. Postępu 15 30 000 PLN 28 184 PLN 1M WIBOR + bank margin 10.08.2007 submission to enforcement
Prolonged Blank bill of exchange, declaration on ING Bank Śląski S.A. Plac Trzech Krzyży 10/14 30 000 PLN 29 613 PLN 1M WIBOR + bank margin automatically submission to enforcement every month
Declaration on submission to enforcement, Bank Millenium S.A. Al. Jerozolimskie 123a 30 000 PLN 24 448 PLN 1M WIBOR + bank margin 03.05.2007 authorisation to the account
Declaration on submission to enforcement to Bank Handlowy SA ul. Senatorska 16 35 000 PLN 26 328 PLN 1M WIBOR + bank margin 01.09.2007 the amount of PLN 42,000 thousand
Total CIECH S.A. 394 126 148 472
ZACHEM S.A. Capped mortgage up to the amount of EUR 45,000 thousand on real estate situated in Bydgoszcz at ul. Wojska Polskiego 65, KW (Land and Mortgage Register) 63606; registered pledge on the processing line upgraded as a result of investment with assignment of rights from insurance contracts EUR 31 EUR 3M EURORIBOR + bank on the entire processing line to manufacture Pekao S.A. Warsaw 122 293 23 777 2007 031 5839 margin TDI (PLN 140.2 million); assignment of rights to damage resulting from insurance contracts on property assigned to the KW 63606; statement of ZACHEM S.A. on voluntary subjection to execution to the amount of PLN 200 thousand; assignment of debt under trade contracts: contract No. 14/2006 assignment of debt (CIECH SA); contract No. 15/2006
162 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN assignment of debt (Borghi), contract on assignment of debt No. 13/CKK 2006 ("general assignment"); authorisations of ZACHEM S.A. to manage the bank accounts in the First Branch of Polska Kasa Opieki S.A. in Bydgoszcz.
blank bill of exchange guaranteed by 0.7 rediscount rate on bills Transclean Sp. z o.o. in Bydgoszcz, WIOŚ Toruń 3 278 PLN 546 PLN of exchange valid on the Petromechanika Sp. z o.o. in Płock, date of signing assignment of debt from Zachem Barwniki Sp. z o. o and Pianpol Styła Sj 2007 Total ZACHEM S.A. 125 571 24 323 Przedsiębiorstwo Transportowo – Usługowe TRANSCLEAN Sp. z o.o. Borrower grants a non-cancellable power of attorney for the Bank to settle any debt and claims of the Bank, resulting from the Contract, charged against the borrower's current account and other borrower's accounts. Registered pledge on the subject of the investment – vehicles co-financed from the Warszawa, Oddział w Raiffeisen Bank Polska S.A. 1 236 PLN 436 PLN 1M WIBOR + bank margin 31.12.2007 credit granted (3 truck-tractors, 3 tank Bydgoszczy containers to transport chemicals and 3 pieces of chassis) with assignment of rights from Own Damage Motor Vehicle Insurance contract. Borrower is obliged to enter into their accounts held in the Bank no less than 50% turnover resulting from their business activities. borrower is obliged to present a confirmation issued by the Insurance Company on
163 Consolidated financial statement of the Ciech Group for 2006
SHORT-TERM LIABILITIES – CREDITS AND LOANS
Company name and form Credit/loan amount as Outstanding Repayment Registered Offices Interest terms Collateral of incorporation per contract credit/loan amount date
in in 31.12.2006 thousands currency thousands currency of PLN of PLN acknowledgement of assignment of rights from Own Damage Motor Vehicle Insurance contract within 7 days from conclusion of the Agreement on Assignment of Rights from Insurance Contract
Inflows onto the account; these inflows cannot be ceded to others Blank bill of exchange drew by the Borrower with the blank bill of exchange agreement Authorisation to manage the bank account in BZ WBK Authorisation to manage the bank account in BRE BANK Registered pledge on 3 truck-tractors and 2 cistern semitrailers Assignment of rights to insurance policy on the Warszawa, Oddział w Bank Zachodni WBK S.A. 1 577 PLN 460 PLN 1M WIBOR + bank margin 31.12.2007 truck-tractors and semitrailers mentioned Bydgoszczy Seizure of 4 truck-tractors and 3 cistern semitrailers by the time the registered pledge is established Assignment of rights to insurance policy on the seized truck-tractors and semitrailers mentioned by the time the registered pledge is established Registered pledge on 2 truck-tractors and 2 cistern semitrailers.
Total TRANSCLEAN Sp. z o.o. 2 813 896
TOTAL 802 286 276 368
164 Consolidated financial statement of the Ciech Group for 2006
* Bank margins have been set in line with the market terms, except for margins mentioned in the table below.
165 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN "Alwernia" S.A. Pledge on inventories, assignment of debt, BRE Bank SA Cracow 7 000 PLN 6 685 PLN WIBOR + bank margin mortgage to PLN 1,341 thousand, blank bill of exchange. Blank bill of BRE Bank SA Cracow 5 000 PLN 5 000 PLN WIBOR + bank margin exchange, assignment of debt. Assignment of Benckiser debt, BRE Bank SA Cracow 5 500 PLN 3 500 PLN WIBOR + bank margin assignment of debt, seizure on inventories. Pledge on ING Bank Śląski SA Katowice 10 000 PLN 10 117 PLN WIBOR + bank margin inventories, assignment of debt. Raiffeisen SA Cracow PLN 3 PLN credit card Total "Alwernia" S.A. 27 500 PLN 25 305 PLN
Cheman S.A. Registered pledge on inventories, blank bill of exchange to PLN 6,000 thousand, power of attorney Bank Pekao S.A Warsaw 6 000 PLN 5 996 PLN 1M WIBOR + bank margin for the bank account, assignment of rights from insurance policy on inventories. Mortgage on real estate in Domaniewo, Jarocin Kredyt Bank S.A Warsaw 6 500 PLN 6 500 PLN 1M WIBOR + bank margin and Maciszewice, blank bill of exchange to PLN 3,750 thousand. Mortgage on real estate in Domaniewo, Jarocin Kredyt Bank S.A Warsaw 4 100 PLN 2 076 PLN 1M WIBOR + bank margin and Maciszewice, blank bill of exchange to PLN 3,750 thousand. Total Cheman S.A. 16 600 PLN 14 572 PLN FOSFORY Group Agreement on Assignment of Rights from Insurance Policy – PLN 5,000 thousand assignment of debt - ING Bank Śląski SA Katowice 50 000 PLN 8 538 PLN 1M WIBOR + bank margin 80% debt ceded to the Bank pursuant to the global assignment contracts; registered pledge - 80% pledged inventories
166 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN according to the Registered Pledge Contract declaration on submission to enforcement to PLN 60,000 thousand Blank bill of exchange with the blank bill of exchange agreement drawn by GZNF "FOSFORY" Joint capped mortgage to PLN 11,000 thousand immovable property located in Gdańsk at the Kaszubski Channel and at ul. BRE Bank SA Gdańsk 10 000 PLN 8 778 PLN 1M WIBOR + bank margin Ku Ujściu -KW 97755, KW 67051, KW 60385 and in Gdańsk at ul. Kujawska 2 and Kujawska 5A, 6, 7 - KW 36 with assignment of rights from insurance policy on immovable property agreement on seizure of fixed assets - value PLN 16,959 thousand Blank bill of BRE Bank SA Gdańsk 1 500 PLN 558 PLN 1M WIBOR + bank margin exchange assignment of debt Ordinary real estate mortgage in the total amount of PLN 4,500 thousand and capped mortgage up to the amount of BRE Bank SA Gdańsk 4 500 PLN 4 500 PLN 1M WIBOR + bank margin PLN100 thousand and entered to KW 8861, KW 13592, KW 9039 blank bill of exchange. assignment of debt Blank bill of exchange with a blank bill of exchange agreement and declaration on submission to enforcement to PLN Bank Millennium 15,918 thousand; Gdańsk 6 367 PLN 6 367 PLN 1M WIBOR + bank margin SA non-cancellable authorization to the account; joint capped mortgage up to the amount of PLN 3,400 thousand on immovable property situated in Gdańsk
167 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN at ul. Kujawska - KW 63657, KW 71229, KW 60410 with assignment of rights from insurance policy on the immovable property in question; capped mortgage up to the amount of PLN 4,100 thousand on immovable property located in Gdańsk at ul. Ku Ujściu 45 - KW 40476 with assignment of rights from insurance policy on the immovable property in question; Capped mortgage to PLN 6,300 thousand on immovable property situated in Gdańsk at ul. Kujawska 2, covered by KW 36 assignment of rights from insurance policy on the immovable property in question at least to the amount of the mortgage entry, namely to PLN 6,300 thousand; Blank bill of PKO BP SA Gdynia 5 000 PLN 4 922 PLN 1M WIBOR + bank margin exchange drew to the bill of exchange sum of PLN 5,000 thousand; clause of debits from current account. declaration on submission to enforcement of payments to PLN 10,000 thousand; declaration of the drawer of bills of exchange on submission to enforcement to PLN 10,000 thousand; Blank bill of exchange with a blank bill of exchange agreement to the amount not Nordea Bank Gdynia 5 000 PLN 4 969 PLN 1M WIBOR + bank margin exceeding PLN Polska SA 6,000 thousand; authorization to the account; capped mortgage to PLN 6,000 thousand on
168 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN immovable property situated in Gdańsk at ul. Kujawska - KW 36 assignment of rights from insurance policy on the immovable property in question; Total FOSFORY Group 82 367 PLN 38 632 PLN JANIKOSODA S.
A. Guarantee of BH 0.3 rediscount rate valid SA Bydgoszcz, WFOŚ Toruń 187 PLN 23 PLN on 1.01 of a given year, which is hedged by however no less than 6% a fixed asset worth PLN 345 thousand. Clause of cash debits from current account in case of failure to repay, seizure of fixed assets to the value of PLN 25,148 thousand, PKO BP SA Bydgoszcz 15 000 PLN 12 147 PLN 1M WIBOR + bank margin assignment of rights from trade contracts, - borrower's statement on submission to execution due to payments - comfort letter by Ciech Total JANIKOSODA S.A. 15 187 PLN 12 170 PLN CIECH POLFA Sp. z o.o. Surety by CIECH Bank Handlowy w 981 300 USD 981 300 USD 1M LIBOR + bank margin S.A., contract on Warszawie SA assignment. Surety by CIECH Bank Handlowy w T/N WIBOR + bank 1 000 PLN 766 PLN S.A., contract on Warszawie SA margin assignment. BRE BANK SA Contract on Oddział Regionalny 2 000 PLN 771 PLN 1M WIBOR + bank margin assignment. w Warszawie
Total CIECH POLFA Sp. z o.o. 3 981 PLN 2 518 PLN SODA MĄTWY
Group Joint ordinary real CitiBank Handlowy estate mortgage Bydgoszcz 5 850 PLN 1 955 PLN 3M WIBOR + bank margin SA plus seizure of chattels. Surety by CIECH 0.65% rediscount rate on PLN Loan by NFOŚ S.A. plus guarantee Warsaw 16 674 PLN 1 512 PLN bills of exchange, no less and GW by CitiBank than 7% Handlowy. Joint ordinary real estate mortgage, joint capped mortgage, CitiBank Handlowy assignment of trade Bydgoszcz 40 000 PLN 3 000 PLN 3M WIBOR + bank margin SA receivables. Seizure of chattels with assignment of rights from insurance policy.
169 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN Total SODA MĄTWY Group 62 524 PLN 6 467 PLN "VITROSILICON"
Spółka Akcyjna Seizure of inventories of 1M LIBOR + bank margin finished products, CitiBank Handlowy 11 45 for a credit in EUR, 1M O/Poznań 4 763 - PLN movements on the SA EUR WIBOR + bank margin for bank account, a credit in PLN inflows for the bank accounts. Mortgage in Niechorze, assignment of debt, 4 036 1M EURIBOR + bank blank bills of BOŚ SA O/Poznań 16 769 2 264 586 EUR EUR margin exchange, suretyship of JANIKOSODA S.A. in Janikowo. Capped mortgage in Żary, bills of exchange, registered pledge on inventories with 1M WIBOR + bank margin assignment of rights Bank Millennium O/Zielona for a credit in PLN, 1M from insurance 5 000 PLN - PLN SA Góra EURIBOR + bank margin policy, power of for a credit in EUR attorney to manage the accounts in Bank Millennium, declaration on submission to enforcement. Registered pledge on glass-furnace in Żary, blank bill of exchange, power of Bank Millennium O/Zielona attorney to manage 3 200 PLN 960 PLN 3M WIBOR + bank margin SA Góra the accounts in Bank Millennium SA, declaration on submission to enforcement. Seizure of LAROX water-glass filter, LAROX peristaltic pump, seizure of machines and equipment, Bank Millennium O/Zielona 1 440 PLN 325 PLN 1M WIBOR + bank margin authorizations to SA Góra manage the accounts in Bank Millennium SA, declaration on submission to enforcement. Ordinary real estate mortgage in Żary (temporary hedging), ordinary real estate mortgage in Iłowa, Bank Millennium O/Zielona 16 500 PLN 1 269 PLN 1M WIBOR + bank margin power of attorney to SA Góra manage the accounts in Bank Millennium SA, declaration on submission to enforcement.
170 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN Bill of exchange, authorisation to manage the bank accounts in BOŚ SA, registered Variable-interest-rates pledge on based on rediscount rate warehouse BOŚ SA O/Poznań 3 500 PLN - PLN on bills of exchange, no inventories less than 3% annually consisting of finished products - glass blocks, assignment of debt, ordinary mortgage in Żary. 1M WIBOR + bank margin for a credit in PLN, 1M Blank bill of Fortis Bank SA O/Wrocław 7 000 PLN 4 657 PLN EURIBOR + bank margin exchange. for a credit in EUR O/Zielona Blank bill of BRE Bank SA 2 500 PLN 6 PLN 1M WIBOR + bank margin Góra exchange. 1M WIBOR + bank margin for a credit in PLN, 1M O/Zielona LIBOR + bank margin for Blank bill of BRE Bank SA 2 500 PLN - PLN Góra a credit in USD, 1M exchange. EURIBOR + bank margin for a credit in EUR Declaration on submission to enforcement, power Bank Pekao SA Warsaw 5 000 PLN - PLN 1M WIBOR + bank margin of attorney for the bank account in Pekao SA, global assignment of debt. Total "VITROSILICON" Spółka Akcyjna 68 172 PLN 9 481 PLN CIECH SA Pledge on shares of JANIKOSODA S.A., ul. assignment of debt, 8 000 1 600 3M EURIBOR + bank Bank Pekao SA Grzybowska 33 126 6 175 authorisation to the EUR EUR margin 53/57 account, declaration on submission to enforcement. Pledge on shares of JANIKOSODA S.A., ul. assignment of debt, 3 000 1 000 3M EURIBOR + bank Bank Pekao SA Grzybowska 12 544 3 860 authorisation to the EUR EUR margin 53/57 account, declaration on submission to enforcement. Pledge on shares of "Alwernia" S.A., ul. authorisation to the Bank Pekao SA Grzybowska 50 000 PLN 5 000 PLN 1M WIBOR + bank margin account, declaration 53/57 on submission to enforcement. Authorization to the CitiBank Handlowy ul. Traugutta account, declaration 35 000 PLN 5 PLN 1M WIBOR + bank margin SA 7/9 on submission to enforcement. Global assignment from international Al. contracts, technical limit without Bank Millenium SA Jerozolimskie - - 5 1.4 EUR authorization to the costs 123a account, declaration on submission to enforcement. Total CIECH S.A. 130 670 15 045
171 Consolidated financial statement of the Ciech Group for 2006
Company name Registered Credit/loan amount Outstanding and form of Interest terms* Collateral Offices as per contract credit/loan amount incorporation in in 31.12.2005 thousands currency thousands currency of PLN of PLN TOTAL 409 816 124 190 * Bank margins have been set in line with the market terms, except for margins mentioned in the table below.
SHORT-TERM LIABILITIES – CREDITS AND LOANS DISCLOSED AS LIABILITIES ARISING FROM NON- CURRENT ASSETS AVAILABLE FOR SALE
Company name Credit/loan Outstanding Registered and form of amount as credit/loan Interest terms* Collateral Offices incorporation per contract amount
in in thou thou curren curren 31.12.2005 sand sand cy cy s of s of PLN PLN PETROCHEMIA BLACHOWNIA
Group Bill of exchange for PLN 15 thousand, avals to PLN 300 thousand, registered pledges on the subjects, assignment PKO BP SA Kędzierzyn Koźle 315 PLN 67 PLN 1M WIBOR + bank margin of debt from insurance contracts on the subjects of the investment for PLN 660 thousand. Assignment of debt from ING Bank Śląski SA Kędzierzyn Koźle 2 500 PLN 2 500 PLN F.CH. Dwory S.A. Total PETROCHEMIA BLACHOWNIA Group 2815 PLN 2567 PLN * – bank margins have been set in line with the market terms.
172 Consolidated financial statement of the Ciech Group for 2006
Terms of transactions with affiliates have been presented in item 31.4 of the additional information and notes to the consolidated statement. Trade liabilities are not interest-bearing. In trade contracts concluded by the Ciech Group there are different times to payment of trade and service liabilities applied depending on a type of transaction, nature of market and trade terms. The most frequent times to payment are 14, 30, 60 and 90 days. in thousands of Polish zloty OTHER FINANCIAL, TRADE AND OTHER SHORT-TERM LIABILITIES 31.12.2006 31.12.2005 a) to subsidiaries 2 801 2 943 other financial liabilities, including: - - trade liabilities falling due: 1 622 2 810 - up to 12 months 1 622 2 810 other (by type) 1 179 133 - investment liabilities 8 6 - liabilities due to fixed asset acquisition 1 171 - - other - 127 b) to jointly controlled entities - - other financial liabilities, including: - - trade liabilities falling due: - - other (by type) - - c) to associates 8 670 958 other financial liabilities, including: - - trade liabilities falling due: 8 670 958 d) to significant investor - - e) to parent company - - f) to other entities 636 886 304 099 other financial liabilities, including: 8 920 14 387 - liabilities due to financial instruments 1 262 2 054 - liabilities due to financial lease 995 1 201 - liabilities due to factoring 5 683 11 118 - repayment of financial liability towards the Town Office 908 - - other 72 14 trade liabilities falling due: 469 398 208 529 - up to 12 months 463 519 206 980 - advances on deliveries 5 614 737 - bill of exchange liabilities (payment in the form of bills of exchange) 265 812 other (by type) 158 568 81 183 - licenses and concessions 1 244 - - liability due to environmental protection 8 484 11 920 - investment liabilities 35 515 20 397 - due to customs duties and social insurance 36 371 21 039 - liabilities due to remuneration 14 164 4 004 - product fee 24 - - liabilities due to dividend 828 - - reserve for leaves 7 206 2 175 - provision for bonuses for employees 18 674 6 535 - liabilities due to future deliveries 4 100 168 - deposits 335 244 - other accrued expenses 13 615 11 429 - deductions from the payroll 601 135 - liabilities towards employees 522 67
173 Consolidated financial statement of the Ciech Group for 2006
OTHER FINANCIAL, TRADE AND OTHER SHORT-TERM LIABILITIES 31.12.2006 31.12.2005 - tax - excise duty 954 276 - other taxes 9 409 - - subsidies 300 - - other 6 222 2 794 g) Special funds 572 6 329 TOTAL 648 929 314 329
28 Off-balance sheet items
28.1.1 Ciech SA
Liabilities of CIECH SA (domestic and foreign) claimed in court or arbitration proceedings as at December 31st, 2006.
Action by Petro Carbo Chem Aktiengesellschaft (PCC)
PCC AG filed an action in 2000, claiming compensation in the amount of PLN 21,364,000 and EUR 13,861.45 (equivalent to PLN 54,000) for failing to fulfil the agreement to transfer the shares of Petrochemia Blachownia S.A. as stipulated in the preliminary contract of 09.07.1999. On 27.05.2003, the Circuit Court in Warsaw issued a preliminary judgment in favour of PCC AG (stating that PCC AG’s claim was well founded), without specifically determining the amount of the damage. CIECH SA appealed against the preliminary judgment on 19.09.2003, on the grounds that the preliminary judgment was issued based on erroneous legal findings of fact and infringement of the substantive law by assuming that it had been the intention of the parties to enter into an agreement. During a hearing held on 12.08.2004, the Appeals Court upheld the Circuit Court’s preliminary judgment, confirming that PCC’s claims were justified, without stating the amount of damages, which will be subject to further proceedings. In November 2004, CIECH SA filed another appeal, on the grounds of infringement of the substantive law due to its incorrect interpretation and application, and violation by the Appeals Court of the principle of free assessment of evidence as defined in the EU directives. On April 19th, 2005, Ciech SA received a final decision of the Supreme Court dismissing its appeal. Because the appeal was dismissed, the case returned before the District Court that continued the proceedings by determining the amount of damages owing to PCC AG. The claimant extended its claim by statutory interest due to the lost dividend for the years 1999 and 2000.
On 10.11.2005 the District Court judged against PCC.
PCC AG appealed on 1.03.2006 against the District Court judgement to the Appeals Court in Warsaw filing for a change in the appealed judgment and to allow the claim in full. PCC AG demands the amount of PLN 30,591,919.96 and EURO 13,861.44 (equivalent of PLN 54 thousand) as an indemnification for the lost dividend for 1999 and for the lost profit related to the value growth of Petrochemia Blachownia S.A. There was no mention in the appeal concerning payment of interest for delays. On April 18th, 2006 CIECH SA answered the appeal filing for its full dismissal sustaining the existing line of defence. On February 8th, 2007 a hearing was held before the Appeals Court. The parties' attorneys maintained their respective claims; after hearing the both parties the Court closed the proceedings.
On February 22nd, 2007 the Appeals Court in Warsaw dismissed the judgement by the District Court and transferred the case for another investigation, leaving the decision on the appeal proceedings costs to be taken by the District Court. The justification by the Appeals Court stated that the court of first instance should have investigated what the intentions of the parties to the preliminary contract were once they included the provision providing for the situation where in case of failure of the parties to reach an agreement on all relevant conditions of the contract, CIECH SA was committed to return only the advance payment of PLN 500 thousand without interest within 30 days from the date of subscription of Petrochemia Blachownia S.A.'s shares to CIECH SA. Furthermore, the court of first instance should have determined whether the amounts demanded by the claimant within an indemnification for claims, remain in causality with the circumstances of failure to perform the preliminary contract. The case is pending.
174 Consolidated financial statement of the Ciech Group for 2006
Action by Comexport
In September 2003 Comexport (Brazil) filed an action with the Court of Arbitration at the International Chamber of Commerce in Paris, claiming damages for failure to complete sulphur deliveries to Brazil in the period from 1996 to 1999. The sued parties were CIECH SA and the sulphur mines in Tarnobrzeg and Grzybów. The current claim is for USD 3,872,943 (equivalent of PLN 11,254 thousand), and statutory interest according to Polish law, calculated from 16.09.2003, which as at 31.03.2007 constituted the amount of PLN 4,878 thousand. In addition, Comexport demanded return of the cost of court proceedings and the cost of legal service in the amount of 204,436.26 EURO (equivalent of PLN 791 thousand). The principal claim amount comprises Comexport's lost profits on contractual quantities not delivered to Brazilian customers, losses from overstated freight costs, etc. In November 2003, CIECH SA answered the claim by filing for dismissal of Comexport’s action, on the grounds of the force majeure certificates evidencing that the mines were closed down as part of restructuring of the sulphur industry, that the action has lapsed, and that the claim for damages is not supported by sufficient evidence. The Court of Arbitration appointed one Arbitrator to investigate into the dispute. The arbitrator determined the schedule for further proceedings. Each party filed two detailed pleadings supported by evidence. On April 22nd, 2005, a hearing was held before the Court of Arbitration at the International Chamber of Commerce in Paris, attended by the representatives and attorneys of Comexport and CIECH SA. The sued sulphur mines in Tarnobrzeg and Grzybów did not participate in the arbitration procedure, nor did they appoint any attorneys. CIECH SA filed for Comexport's claim to be dismissed and for refund of the court fees, sustaining its allegations as described in the pleadings and the accompanying documentation. Comexport also sustained its pleadings. After closing of the proceedings, the arbitration proceedings ended. On October 27th, 2005 CIECH SA received a court judgement, according to which all three defendants: CIECH SA and sulphur mines in Grzybów and Tarnobrzeg, will jointly and severally pay the amount of USD 2,474,166 (equivalent of PLN 7,189 thousand) and the interest of 5% from September 17th, 2003, amounting as at 31.03.2007 to USD 438 thousand (equivalent of PLN 1,273 thousand) and USD 123 thousand (equivalent of PLN 357 thousand) as the cost of court proceedings. The awarded amount constitutes the lost profit moved for by Comexport. On November 18th, 2005 CIECH SA issued an announcing complaint to the Appeal Court in Paris concerning the reversal of the Arbitration Court judgement decision. CIECH SA filed the complaint with a statement of reasons on March 22nd, 2006. Subject of the complaint is a breach of rules by an arbitrator in an arbitration case (Adversarial principle) by citing the Polish Supreme Court judgement decision of 1973 on the relevant issue concerning interruption of the operation of a time limit without prior permission to allow the parties to voice their opinions about the issue. In the view of the law office representing CIECH SA, the judgement decision of 1973 cited by the arbitrator does not apply to the arbitration proceedings. Comexport on July 21st, 2006 answered the claim issued by CIECH SA filing for its dismissal. Each party filed two pleadings. Currently, the parties have finished exchange of the pleadings. A hearing before the Appeals Court is established in May 2007.
Action by Enapharm
In June 2004, the Liquidator for Enapharm in Algeria filed a claim for USD 372,085.72 (equivalent of PLN 1,081 thousand) in damages concerning deliveries of expired medications by CIECH SA between 1985 and 1991. According to the claimant, CIECH SA did not replace expired medications that the claimant had not sold, in violation of the contract between the parties. CIECH SA claims that it was exempt from the replacement provision, in light of the claimant failing to make the payments due from its sales of the medications in the Algerian market. The claimant verified its claim based on opinion of an expert appointed to assess whether the amount of the claimed damages is well-founded. The opinion is not binding until it is approved or dismissed by the Court. The case is pending before an Algerian court. A local attorney, supervised by a well-respected Paris law firm, represents CIECH SA. Currently, the parties await another hearing date. The case is pending.
Employee claims
One case is currently pending against CIECH SA, filed by its former employee terminated due to no fault of their own. The employee is demanding to be restored to work. The projections as to the result of those suits are good.
A reserve for the mentioned liabilities in the amount of PLN 17,500 thousand PLN has been established in CIECH SA.
175 Consolidated financial statement of the Ciech Group for 2006
CIECH SA's (domestic and international) debt
Amounts receivable claimed in courts or courts of arbitration
CIECH SA filed seven suits against its trade debtors for the total of PLN 767 thousand. The projections are good. The Company established a revaluation write-down on the above-mentioned amount.
Bankruptcy proceedings
The total of PLN 13,189 thousand is being claimed in fifty eight domestic bankruptcy proceedings. CIECH SA is claiming USD 689,632 and EURO 448,997 (totalling PLN 3,741 thousand) via international bankruptcy proceedings, with the largest claims being the bankruptcy proceedings for Chemapol – Prague (PLN 1,018 thousand), Euroftal N.V., Belgium (PLN 808 thousand), Petrimex – Bratislava (PLN 654 thousand), WMW – Novosibirsk (PLN 453 thousand). The projections as to the results of the bankruptcy proceedings are not good, as CIECH SA's receivables are not privileged. The Company created a revaluation write-down for all pending proceedings.
Enforcement and composition proceedings
CIECH SA is claiming PLN 9,443 thousand from domestic debtors through thirty enforcement proceedings. The projections as to the results of the execution proceedings are different, depending on the debtors' assets. The amount of 27,116 EURO (equivalent of 105 thousand PLN) is claimed in foreign enforcement proceedings. PLN 22 thousand is claimed in three composition proceedings. The projections are good.
The Company established a 100% write-down on the above-mentioned amounts.
The following exchange rates were adopted for translation of liabilities denominated in foreign currencies: USD rate exchange 2.9058 EURO rate exchange 3.8695
28.1.2 Subsidiaries
SODA MĄTWY Group
No claims (liabilities) were filed against the SODA MĄTWY Group that could affect its business. Amounts receivable claimed in bankruptcy proceedings, in court actions and in enforcement proceedings by SODA MĄTWY S.A. and its subsidiaries amount to PLN 23,405 thousand with the largest claim of PLN 21,814 thousand pending against the company B. Lepiarz for unpaid deliveries of goods in enforcement proceedings. According to SODA MĄTWY S.A. projections are not good. The SODA MĄTWY Group recognized impairment losses against all pending claims.
JANIKOSODA Group
No significant claims (liabilities) were filed against JANIKOSODA S.A. or its subsidiaries that could affect their business.
The JANIKOSODA Group's claims pending in court actions against several dozen trade debtors in relation to its business, total PLN 321 thousand. Debt enforcement proceedings are pending to recover the total of PLN 2,122 thousand, including the largest claim for PLN 2,102 thousand against B.Lepiarz. The amount of PLN 668 thousand is being claimed through bankruptcy proceedings. The SODA MĄTWY Group recognized impairment losses against all pending claims.
176 Consolidated financial statement of the Ciech Group for 2006
"VITROSILICON" Spółka Akcyjna
No claims (liabilities) were filed against the company that could affect its business. The company is claiming the total of PLN 1,352 thousand from debtors for deliveries and services, including the largest claim pursued through enforcement proceedings for PLN 694 thousand, and PLN 594 thousand pursued through bankruptcy proceedings. "VITROSILICON" Spółka Akcyjna recognized impairment losses against all pending claims.
"Alwernia" S.A.
No claims (liabilities) were filed against "Alwernia" S.A. that could affect its business. "Alwernia" S.A. is claiming trade receivables and damages in the total amount of PLN 419 thousand through court actions and enforcement proceedings. The amount of PLN 1,171 thousand was claimed in bankruptcy proceedings. "Alwernia" S.A. recognized impairment losses against all pending claims.
Cheman S.A.
No claims (liabilities) were filed against Cheman S.A that could affect its business. Cheman S.A. filed court cases against several dozen trade debtors for the total of PLN 4,593 thousand, including PLN 2,040 thousand claimed in enforcement proceedings and PLN 1,014 thousand reported for bankruptcy and composition proceedings. Cheman S.A. recognized impairment losses against all pending claims.
FOSFORY Group
No claims (liabilities) were filed against the companies belonging to the FOSFORY Group that could affect its business. The FOSFORY Group is claiming the total of PLN 4,089 thousand in court actions, enforcement and bankruptcy proceedings from several dozens of debtors, with the largest claim of PLN 3.284 thousand reported for bankruptcy and composition proceedings. The FOSFORY Group recognized impairment losses against all pending claims.
CIECH POLFA Sp. z o.o.
No claims (liabilities) were filed against CIECH POLFA Sp. z o. o. that could affect its business. The company is claiming the total of USD 71 thousand (equivalent of PLN 207 thousand) from trade debtors for unpaid deliveries of goods. The company recognized an impairment loss on the proceedings pending.
Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna
No claims (liabilities) were filed against the companies belonging to Z.Ch. "Organika-Sarzyna" S.A. that could affect its business. Z.Ch. "Organika-Sarzyna" S.A. conducts 1 administrative proceedings related to interpretation of the tax laws determining a settlement method for due payments from profit. A reserve for the possible liabilities in the amount of PLN 1,014 thousand has been established. Z.Ch. "Organika-Sarzyna" S.A. is claiming the amount of PLN 8,950 thousand from a dozen domestic companies for liabilities in court actions, bankruptcy, enforcement and composition proceedings. The largest amount of PLN 7,960 thousand is claimed in the bankruptcy and composition proceedings. The Group recognized an impairment loss on the proceedings pending.
ZACHEM Group
13 administrative proceedings and administrative and court proceedings are conducted against the ZACHEM Group for tax liabilities for the real-estate taxes between 1999 and 2002 at the total of PLN 722 thousand.
The ZACHEM Group's claims pending in business lawsuits and enforcement proceedings from a dozen of debtors account in total for PLN 19,462 thousand, with the largest claim being PLN 13,970 thousand in bankruptcy proceedings. The Company raised a revaluation write-down for all pending proceedings.
177 Consolidated financial statement of the Ciech Group for 2006
S.C. Uzinele Sodice Govora S.A.
16 business lawsuits are conducted against S.C. Uzinele Sodice Govora S.A. to satisfy the claim of EUR 3,173 thousand (equivalent of PLN 12,278 thousand), USD 5,844 thousand (equivalent of PLN 16,981 thousand) and RON 6,346 thousand (equivalent of PLN 7,315 thousand). The largest amount is the claim by Indian England N.V., which took the claim over from the BCR Bank against USG covering unpaid credits, loans and interest in the amount of RON 5,857 thousand (equivalent of PLN 6,715 thousand), USD 5,845 thousand (equivalent of PLN 16,984 thousand) and EUR 3,173 thousand (equivalent of PLN 12,277 thousand). USG filed a suit to investigate validity of the contract on assignment of claims from the BCR Bank for Indian England N.V. As collateral against claims of the BCR Bank against USG, CIECH SA issued a deposit in the amount of EUR 10 million, which prevented Indian England N.V. from initiating enforced collection procedures.
Furthermore, S.C. Uzinele Sodice Govora S.A. is claiming the total of RON 469 thousand (equivalent of PLN 541 thousand) from various claim debtors in 13 business lawsuits.
S.C. Uzinele Sodice Govora S.A. recognized an impairment loss of RON 9,151 thousand (equivalent of PLN 10,548 thousand).
Exchange rates were adopted for translation 1 RON = 1.1527 PLN
28.2 Investment obligations
CIECH SA was obliged under the following orders by the Ministry of Privatisation (currently the Ministry of State Treasury), issued following purchase of shares in Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna and Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna between August 29th, 1996 and August 28th, 2006.
Between August 29th, 1996 and August 28th, 2006 Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna incurred investment expenses amounting to USD 84,318 thousand, which accounts for 129.7% required expenses stipulated in the sales contract (total expenses as agreed under the contract for 10 years – USD 65,010 thousand).
Expenditure on investments submitted between August 29th, 1996 and August 28th, 2006 in SODA MĄTWY S.A. were as follows: Pro-environmental assignments for USD 19.47 million Production assignments for USD 13.07 million Modernisation and replacement assignments for USD 51.77 million.
Out of the aforementioned expenditure, the amount of USD 19,476 thousand is assigned for pro-environmental investments, which accounts for 235.5% required expenses stipulated in the sales contract (total expenses on the pro-environmental investments as agreed under the contract for 10 years - USD 8,270 thousand)
Between August 29th, 1996 and August 28th, 2006 Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna incurred investment expenses amounting to USD 74,693 thousand, which accounts for 118% required expenses stipulated in the sales contract (total expenses as agreed under the contract for 10 years – USD 63,490 thousand).
Expenditure on investments submitted between August 29th, 1996 and August 28th, 2006 in JANIKOSODA S.A. were as follows: Pro-environmental assignments for USD 17.27 million Production assignments for USD 13.06 million Modernisation and replacement assignments for USD 33.16 million.
Out of the aforementioned expenditure, the amount of USD 20,872 thousand is assigned for pro-environmental investments, which accounts for 120.8% required expenses stipulated in the sales contract (total expenses on the pro-environmental investments as agreed under the contract for 10 years equals USD 17,270 thousand)
178 Consolidated financial statement of the Ciech Group for 2006
- investment obligations,
Investment obligations Investment obligation Company Investment obligations fulfilled by August 28th, performance 2006 SODA MĄTWY S.A. USD 65.01 million USD 84.32 million 129.7% JANIKOSODA S. A. USD 63.49 million USD 74.69 million 118%
- commitments to invest in environmental protection,
Investment obligations Investment obligation Company Investment obligations fulfilled by August 28th, performance 2006 SODA MĄTWY S.A. USD 8.27 million USD 19.48 million 235.5% JANIKOSODA S. A. USD 17.27 million USD 20.87 million 120.8%
- obligations ensuing from the investment character of the share purchase.
179 Consolidated financial statement of the Ciech Group for 2006
Within 10 years from the agreement date (i.e. until 28th August 2006), CIECH SA was obliged not to vote in favour of decreasing the companies' capital or dissolving the companies. CIECH SA is also obliged to carry out assignments and responsibilities resulting from the share purchase in Z.Ch. "Organika-Sarzyna" S.A., ZACHEM S.A. and S.C. Uzinele Sodice Govora S.A.
No. Title Z. Ch. "Organika-Sarzyna” S.A. ZACHEM S.A.
Execution of the Guaranteed Execution of the Guaranteed Investments in the Company at the total Investments in the Company at the 1 Investing obligations value of PLN 130,000 thousand within 5 total value of PLN 176,120 thousand years from the purchase date. within 5 years from the purchase date.
Payment of the penalty to the Selling Party estimated at 50% difference between the required and realised increases made in the Company within 5 years from the purchase date. In the event of failure to comply with the (1 Constraint P P in the amount of: − At least 107% fixed assets - Payment of the penalty to the Selling CIECH SA will be obliged to pay Party estimated at 50% difference the penalty of PLN 150 thousand, between the required and realised increases made in the Company within − At least 100%, however no more 5 years from the purchase date. than 107% - CIECH SA will be In the event of failure to comply with obliged to pay the penalty of 20% (1 difference between 110% fixed the ConstraintP P CIECH SA will be Contractual penalties for failure to assets of the Company, and the obliged to pay the penalty in the 2 carry out the Guaranteed Company's fixed capital at the end amount of PLN 150 thousand per each Investments of a given reporting period, full percentage point of difference between the fixed capital and the fixed If the Company's fixed capital will assets ratio, determined for a given account for less than 100% fixed reporting period, and the actual amount assets, CIECH SA will be obliged of this ratio. If the difference exceeds to pay the penalty in the amount 10 percentage points, the penalty of the following totals: amounts to PLN 500 thousand per each full percentage point above 10%. 1 100% difference between the fixed capital and 100% fixed assets at the end of the reporting period and 2 20% difference between 110% fixed assets of the Company at the end of a reporting period and the fixed capital at the end of a financial year
Payment of the penalty for the Selling Payment of the penalty for the Selling Contractual penalties for failure to Party in the amount of 50% income Party in the amount of 50% income 3 carry out the obligations to retain from sale of products and services of from sale of products and services of the Core Business of the Company the Company in 2005, however no more the Company in 2005, however no than 50% purchase price. more than 100% of the purchase price.
Payment of the penalty for the Selling Payment of the penalty for the Selling Party in the amount of 100% of the Contractual penalties for Party in the amount of 100% of the value of the share capital was infringement of the ban to decrease value the share capital was decreased, 4 decreased, or in case of the share the Company's share capital and to or in case of the share redemption - in redemption - in the amount of redeem shares the amount of remuneration paid to remuneration paid to shareholders on shareholders on account of redemption. account of redemption.
No. Title Z. Ch. "Organika-Sarzyna” S.A. ZACHEM S.A.
Payment of the penalty for the Selling Payment of the penalty for the Selling Contractual penalties for Party in the amount of 100% product Party in the amount of 100% product 5 infringement of the constraint to sell the sold or charged shares and the the sold or charged shares and the or charge shares share price. share price.
180 Consolidated financial statement of the Ciech Group for 2006
Contractual penalties for Payment of the penalty for the Selling Payment of the penalty for the Selling 6 infringement of the ban to divide or Party in the amount of the purchase Party in the amount of the purchase merge the Company price. price.
Payment of the penalty for the Selling Contractual penalties for Payment of the penalty for the Selling Party in the amount of dividend paid by 7 infringement of the obligation to Party in the amount of 80% dividend the Company to shareholders other retain the profit in the Company. paid by the Company. than the Selling Party.
Payment of the penalty for the Selling Payment of the penalty for the Selling Party in the amount accounting for a Party in the amount accounting for a Liability for infringement of the State product of PLN 30 thousand and product of PLN 30 thousand and Treasury right to appoint one 8 number of days during which the number of days during which the person as a member of the Articles of Association of the Company Articles of Association of the Company Company's Supervisory Board did not contain the relevant entitlement did not contain the relevant entitlement for the State Treasury. for the State Treasury.
Payment of the penalty in the amount: Liability for infringement of the − PLN 1 thousand per each day of Payment of the penalty in the amount 9 obligation to deliver the Purchasing delay for up to 14 days, of PLN 30 thousand per each day of Party's Statement delay. − PLN 50 thousand per each day of delay for more than 14 days,
1) P P The Constraint: a. in case of ZACHEM S.A. will stand for the obligation to continue realisation of the Guaranteed Investments from the date of purchase by the date of submission by CIECH SA of the Purchasing Party's Final Statement, comprising the liabilities' structure composed in such a manner that the fixed capital and fixed assets ratio will reach the amount stipulated under the Contract by relevant deadlines determined in the Contract; b. in case of Z.Ch. "Organika-Sarzyna" S.A. will stand for the obligation to continue realisation of the Guaranteed Investments from the date of purchase by the date of submission of the Purchasing Party's Final Statement, comprising liabilities' structure composed in such a manner that the company's fixed capital will account for at least 110% fixed assets.
Content of the liability under the contract on purchase of shares in Amount of the penalty in the event No. S.C. Uzinele Sodice Govora S.A. of failure to complete the liability
Liability not to propose, not to support and not to decide to change the subject of
activity as stipulated in the Articles of Association. There is a possibility to 10% of the price paid for shares 1 amend the existing subject of activity though. Gaining no less than 70% annual turnover from the company's activity 5% on unrealised difference in turnover 2 accounting for its subject on the date of contract conclusion to the percentage limit of 70% 3 Retaining work places with the hired personnel for 5 years from the date of 5% of the price paid for shares transfer of share ownership Not taking any decisions concerning fusion, division, winding up, dissolution, 4 10% of the price paid for shares voluntary winding up, legal reorganisation and/or declaration of bankruptcy 5 Persuading USG not to sell the assets under annex No. 1.12 without a written Market of the value of the sold asset consent by AVAS Protecting, promoting and banning sale of trademarks, trade names and service 6 10% of the price paid for shares marks, patents and licences belonging to USG 7 Notifying AVAS of changes in address, name, division or fusion of CIECH SA 10% of the price paid for shares Ban on full or partial withdrawal from the acquired shares to the moment all the 8 contractual obligations are carried out without a written consent by the selling invalidation of contract party Necessity to acquire the written consent by AVAS on assignment of privatisation 9 invalidation of contract agreement Ban to use the acquired shares of S.C. Uzinele Sodice Govora S.A. to 10 guarantee other company's own liabilities to the moment all the contractual invalidation of contract obligations are fulfilled
Furthermore, CIECH SA is obliged to fulfil the investment obligations from its own resources in the amount of USD 2.5 million and to provide the free-of-charge know-how within the area of production, technological methods (apart from licences), marketing data, access to market, qualification and project methodology (apart from
181 Consolidated financial statement of the Ciech Group for 2006
licences), methodology within the area of personnel, information systems, economic and financial methodology etc. as far as the binding provisions of Romanian law allow.
28.3 Sureties and guarantees and other off-balance sheet receivables and liabilities
The statement below comprises off-balance sheet items, including guarantees and sureties granted by the Ciech Group to the other entities (outside the Ciech Group). Description of sureties and guarantees granted to affiliates (within the Ciech Group) has been included in table "Sureties and guarantees granted". in thousands of Polish zloty OFF-BALANCE SHEET RECEIVABLES AND LIABILITIES 31.12.2006 31.12.2005 1. Contingent receivables - 1 500 - guarantees and sureties received - 1 500 - other off-balance sheet receivables - - 2. Contingent liabilities 44 255 29 939 - guarantees and sureties granted 41 566 4 719 - other off-balance sheet liabilities 2 689 25 220 3. Other 720 907 - other 720 907 Total off-balance sheet items 44 975 32 346
As at December 31st, 2006 contingent receivables did not occur in the Ciech Capital Group. They decreased by PLN 1,500 thousand in relation to December 31st, 2005, which was caused by the expiry of the customs guarantees obtained by Cheman S.A. from TU Allianz Polska SA.
Contingent liabilities as at December 31st, 2006 amounted to PLN 44,255 thousand, which translates into an increase by PLN 14,316 thousand, as compared to December 31st, 2005. Increase in contingent liabilities due to guarantees and sureties granted, amounted to PLN 36,847 thousand. Other contingent liabilities decreased, as compared to the status at the end of 2005, by PLN 22,531 thousand.
Increase in contingent liabilities due to guarantees and sureties granted, ensues mainly from the guarantees and sureties granted to new Companies of the Ciech Group: Z.Ch. "Organika-Sarzyna" S.A. and ZACHEM S.A. Contingent liabilities due to guarantees and sureties granted (outside the Ciech Group) in the aforesaid companies were estimated at: PLN 40,860 thousand. Furthermore, contingent liabilities due to guarantees granted to SODA MĄTWY S.A. for the amount of PLN 2,314 thousand (including PLN 1,514 thousand guarantee granted by Bank Handlowy due to a loan taken in NFOŚiGW and surety granted to NFOŚiGW due to a loan taken by the Town Office in Inowrocław for the amount of PLN 800 thousand) were subject to expiry. Also in Cheman S.A. contingent liabilities worth PLN 1,800 thousand were subject to expiry (blank bills of exchange accounting for a hedge for the TU Allianz Polska S.A. claims).
Decrease in contingent liabilities in comparison to the end of 2005 is mostly connected with the sale of Petrochemia-Blachownia S.A., which showed the off-balance sheet liabilities in the amount of PLN 25,300 thousand (PLN 25,000 thousand - other contingent liabilities) as at December 31st, 2005. Additionally, at the end of 2006 bills of exchange discounted by "Alwernia" S.A. increased by PLN 178 thousand and amounted to PLN 398 thousand as at December 31st, 2006. Other off-balance sheet liabilities were also affected by the aval drew to the blank bill of exchange by Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna for Zakłady Koksownicze "Zdzieszowice" Sp. z o.o. to hedge any possible claims that may result from the long-term contract on deliveries of coke to the amount of PLN 775 thousand. Furthermore, ZACHEM S.A. showed other off-balance sheet liabilities in the amount of PLN 1,296 thousand at the end of 2006, resulting from liability for interest costs due to delayed payments towards Wodna Kapuściska Company for PLN 647 thousand (the interest was redeemed in the first quarter of 2007 on account of an agreement concluded to repay the arrears) and liability due to the real-estate tax for 2000-2002 in the amount of PLN 649 thousand.
182 Consolidated financial statement of the Ciech Group for 2006
"Other off-balance sheet items" amounted to PLN 720 thousand as at December 31st, 2006 and decreased as compared to December 31st, 2005 by PLN 187 thousand. The decrease was caused by reducing the future lease fees for the car lease in "VITROSILICON" Spółka Akcyjna and in Cheman S.A.
Sureties and guarantees granted within the consolidated entities
Amount of loan covered by surety Affiliation Effective date of Financial terms: surety between CIECH Obligee’s name Principal surety fee due to the company SA and the borrower in currency thousands in ‘000 of PLN CIECH SA
Payment to CIECH SA KREDYT BANK SA 4 500 by 31.08.2007 equal to 1% of the surety Cheman S.A. subsidiary Sieradz Branch value
Payment to CIECH SA KREDYT BANK SA 3 750 by 15.09.2007 equal to 1% of the surety Cheman S.A. Subsidiary Sieradz Branch value
Payment to CIECH SA PKN ORLEN SA 1 200 no fixed term equal to 1% of the surety Cheman S.A. Subsidiary value payment to Ciech SA equal to 1% of the surety BANK PKO SA value (from PLN 2 million) First Branch in 4 000 by 31.07.2007 + PLN 10 thousand on Cheman S.A. Subsidiary Warsaw increase + PLN 4 thousand + PLN 5 thousand on extension
BANK PKO SA First Branch in 500 by 31.07.2007 Cheman S.A. Subsidiary Warsaw
Total CIECH S.A. 13 950 SODA MĄTWY
S.A. ING BSK Leasing TRANSODA 191 by 31.03.2007 none (lease agreement) Indirect subsidiary SA Sp. z o. o. Bank Handlowy in TRANSODA Warsaw 600 by 31.10.2007 none Indirect subsidiary Sp. z o. o. SA Total SODA 791 MĄTWY S.A. JANIKOSODA S.
A. EUR 1 "VITROSILICON" BOŚ Poznań 6 467 by 16.11.2009 no fee Subsidiary 688 Spółka Akcyjna Total 6 467 JANIKOSODA S.A.
Zachem SA
none Wodna Bank Pekso S.A. 18 160 30.07.2008 Kapuściska None Company
183 Consolidated financial statement of the Ciech Group for 2006
Amount of loan covered by surety Affiliation Effective date of Financial terms: surety between CIECH Obligee’s name Principal surety fee due to the company SA and the borrower in currency thousands in ‘000 of PLN
none Wodna Nordea Bank 18 160 30.07.2009 Kapuściska None Company Total ZACHEM 36 320 S.A.
Z.Ch. "Organika-
Sarzyna” S.A. none Town and BOŚ Branch in 7 580 30.06.2008 contingent liability Community of none Rzeszów amounted to PLN 908 Nowa Sarzyna thousand as at 31.12.2006 Total Z.Ch. "Organika- 7 580 Sarzyna” S.A. Total of loans 64 317 guaranteed
Total amount of loans covered by Affiliation surety Effective date Financial terms: surety between CIECH Obligee’s name Principal in of surety fee due to the company S.A. and the currency thousand borrower in ‘000 s of PLN ZACHEM S.A. Wojewódzki Fundusz Ochrony Zdrowia i Gospodarki Wodna Wodnej Toruń 3 632 31.12.2011 - Kapuściska none (Voivodship Fund Company of Healthcare and Water Management in Toruń) Total ZACHEM 3 632 S.A. Total amount of loans covered by 3 632 surety
Amount of total guarantee granted, backed in whole or Affiliation Financial terms: in part Guarantee between CIECH Obligee’s name guarantee fee due to Principal period S.A. the in the company currency thousan Principal in ‘000 ds of PLN CIECH SA Payment to CIECH SA Lokalbanken DKK equal to 1% of the Danske Unipol 514 by 31.12.2006 subsidiary Dania 1000 guarantee value + AS - Dania reimbursement of
184 Consolidated financial statement of the Ciech Group for 2006
Amount of total guarantee granted, backed in whole or Affiliation Financial terms: in part Guarantee between CIECH Obligee’s name guarantee fee due to Principal period S.A. the in the company currency thousan Principal in ‘000 ds of PLN banking costs Total CIECH S.A. 514 JANIKOSODA S.
A. Elektrociepłowni e Kujawskie Kompania 112 000 by 31.12.2007 indirect subsidiary Węglowa SA Spółka z ograniczoną odpowiedzialno ścią Total JANIKOSODA 112 000 S.A. Total amount of guarantees 112 514 granted
The items above do not include third-party claims, which are described in note 28.1.1 and 28.1.2 (off-balance sheet items) of the additional information and notes to the consolidated report.
29 Financial lease
The Ciech Group uses property, plant and equipment (mainly means of transport and various types of machines and equipment) based on financial lease contracts. The contracts provide for a possibility to renew the lease contract, which may take place on the basis of actual, approximate market value of the lease subject and on the basis of specific terms of buying out the fixed assets under lease. The carrying value of the fixed assets under lease amounted in 2006 to PLN 3,795 thousand.
The lease contracts do not include any restrictions concerning dividends, additional debt, or additional lease contracts.
Future minimum lease fees due to these contracts and the current value of minimum lease fees are presented as follows: in thousands of Polish zloty LIABILITIES DUE TO FINANCIAL LEASE AS AT 31.12.2006 Payment interest capital - to 1 year 1 120 125 995 - 1 to 5 years 1 283 64 1 219 - over 5 years - - - Total 2 403 189 2 214 in thousands of Polish zloty LIABILITIES DUE TO FINANCIAL LEASE AS AT 31.12.2005 Payment interest capital - to 1 year 1 365 164 1 201 - 1 to 5 years 1 114 71 1 043 - over 5 years - - - Total 2 479 235 2 244
Sub-lease contracts do not occur in the Ciech Group. None of the Ciech Group's companies is a lessor.
185 Consolidated financial statement of the Ciech Group for 2006
30 Operating lease
Perpetual freehold right as well as property, plant and equipment at a low value are the subject of operating lease in the Ciech Group obtained by means of administrative division according to the accounting principles adopted. The operating lease is a revolving lease that gives a possibility to buy out fixed assets according to an estimated market value at the end of their useful lives. Companies are not obliged to buy out the fixed asset under lease. Terms of contract renewal or possibility to purchase the lease subject have not been provided under the administrative decisions concerning perpetual freehold rights. Indexation of prices may take place on account of revaluation of land.
Total amounts of future minimum lease fees have been disclosed as follows: in thousands of Polish zloty LIABILITIES DUE TO OPERATING LEASE 31.12.2006 31.12.2005 - to 1 year 3 066 3 038 - 1 to 5 years 12 215 12 643 - over 5 years 70 581 73 902 Total 85 862 89 583
Sub-lease contracts do not occur in the Ciech Group. None of the Ciech Group's companies is a lessor.
31 Affiliates
31.1 List of companies covered by the consolidated financial statement of the Group
The consolidated financial statement covers the financial statements of the following lower-tier companies / groups.
st st As at December 31P ,P 2006 As at December 31P ,P 2005 Company name: Registered Offices (total direct and indirect (total direct and indirect share) share) PETROCHEMIA BLACHOWNIA
Group Petrochemia-Blachownia S. A. Kędzierzyn-Koźle - 100.00% Bl-Trans Sp. z o.o. Kędzierzyn-Koźle - 99.87 % SODA MĄTWY Group Inowrocławskie Zakłady Chemiczne Inowrocław 99.77% 99.77% SODA MĄTWY Spółka Akcyjna TRANSODA Spółka z ograniczoną Inowrocław 99.59% 99.72% odpowiedzialnością Elektrociepłownie Kujawskie Spółka z Inowrocław 99.52% 99.52% ograniczoną odpowiedzialnością. Polskie Towarzystwo Ubezpieczeń Warsaw 45.19% 45.19% Spółka Akcyjna JANIKOSODA Group Janikowskie Zakłady Sodowe Janikowo 99.26% 99.26% JANIKOSODA Spółka Akcyjna Polskie Towarzystwo Ubezpieczeń Warsaw 45.19% 45.19% Spółka Akcyjna FOSFORY Group Gdańskie Zakłady Nawozów Fosforowych "FOSFORY" Spółka z Gdańsk 89.03% 89.03% ograniczoną odpowiedzialnością "AGROCHEM" Spółka z ograniczoną Dobre Miasto 89.03% 89.03% odpowiedzialnością – in Dobre Miasto "AGROCHEM” Spółka z ograniczoną Człuchów 89.03% 89.03% odpowiedzialnością – in Człuchów ZACHEM Group Zakłady Chemiczne ZACHEM Spółka Bydgoszcz 80.00% - Akcyjna ZACHEM UCR Spółka z ograniczoną Bydgoszcz 80.00% - odpowiedzialnością ZACHEM Barwniki Spółka z Bydgoszcz 73.33% - ograniczoną odpowiedzialnością
186 Consolidated financial statement of the Ciech Group for 2006
st st As at December 31P ,P 2006 As at December 31P ,P 2005 Company name: Registered Offices (total direct and indirect (total direct and indirect share) share)
Zakłady Chemiczne "Organika- Nowa Sarzyna 80.00% - Sarzyna" Spółka Akcyjna "CIECH POLFA" Spółka z Warsaw 100.00% 100.00% ograniczoną odpowiedzialnością CIECH FINANCE Group CIECH FINANCE Spółka z Warsaw 100.00% 100.00% ograniczoną odpowiedzialnością Przedsiębiorstwo Chemiczne Cheman Warsaw 100.00% 100.00% Spółka Akcyjna ALWERNIA Group Zakłady Chemiczne "Alwernia" Spółka Alwernia 73.75% 73.75% Akcyjna Alwernia Chrom Sp. z o.o. Alwernia - 73.75% S.C. Uzinele Sodice Govora S.A. Romania 93.14% - POLSIN PRIVATE LIMITED Singapore 65.00 % 65.00 % DALTRADE PLC. Great Britain 61.20 % 61.20 % "VITROSILICON" Spółka Akcyjna Iłowa 99.81% 99.81% Przedsiebiorstwo Transportowo- Usługowe TRANSCLEAN Spółka z Bydgoszcz 90.00 %50.00% ograniczoną odpowiedzialnością
In the period presented, a merger of TRANSODA Sp. z o.o. and Jantrans Janikowo Sp. z o.o. was conducted. Before the merger, CIECH SA indirectly controlled both companies (share in TRANSODA Sp. z o.o. - 99.72%, share in Jantrans Janikowo Sp. z o.o. - 99.26%). TRANSODA Sp. z o.o. was consolidated on the level of the SODA MĄTWY Group. Jantrans Janikowo Sp. z o.o. was not consolidated due to irrelevance of its data for the consolidated financial statement. Acquisition of CIECH SA's control over the companies mentioned above, which were not subject to merger, had taken place in the past. The merger only results in full consolidation of Jantrans- Janikowo Sp. z o.o. in the consolidated financial statement of the Ciech Group and does not change anything as far as CIECH SA's control over these companies is involved.
In 2006 and in the corresponding period, no limitations occurred in the Ciech Group as to the subsidiaries' capacity to transfer funds to the parent company CIECH SA in the form of e.g. dividend or loan repayments.
31.2 Scope of core business of the Ciech Group companies
The scope of the subsidiaries' core businesses has been presented below.
Fully-consolidated lower-tier subsidiary Groups:
▪ SODA MĄTWY Group – manufacture of other inorganic basic chemicals, – wholesale of chemical products, – production and distribution of electricity, – transport services of goods shipping.
▪ FOSFORY Group – manufacture of fertilizers and nitrogen compounds, – manufacture of other inorganic chemicals, – manufacture of other organic chemicals, – manufacture of refined petroleum products, – manufacture of plastics, – wholesale of grain, seeds, and animal seeds, – transhipment services based on own transhipment and storage base.
▪ JANIKOSODA Group – production of salt, – manufacture of industrial gas, – manufacture of other inorganic basic chemicals, – manufacture of other chemical products n.e.c.
187 Consolidated financial statement of the Ciech Group for 2006
▪ ZACHEM Group – manufacture of organic and other non-organic chemicals, – manufacture and sales of plastics, – manufacture of plastic plates, sheets, tubes and profiles, – manufacture of dyes and pigments, – manufacture of other general purpose machinery n.e.c.
▪ CIECH FINANCE Group ▪ CIECH FINANCE Spółka z ograniczoną odpowiedzialnością - management of divestment projects connected with unnecessary fixed assets (immovable property) and financial assets (shares of capital companies).
▪ Przedsiębiorstwo Chemiczne Cheman Spółka Akcyjna - wholesale and distribution of solid inorganic and organic chemicals, - wholesale and distribution of materials for household chemicals, - wholesale and distribution of cosmetic and pharmaceutical materials, - wholesale and distribution of builders, pigments, raw materials for paints and varnishes, - wholesale and distribution of food and feed additives, - wholesale and distribution of acids, bases, and other liquid chemicals.
Fully-consolidated entities:
▪ Zakłady Chemiczne "Alwernia" Spółka Akcyjna – manufacture of other inorganic basic chemicals, – manufacture of dyes and pigments, – manufacture of other organic basic chemicals, – manufacture of fertilizers and nitrogen compounds, – manufacture of gypsum, – production of heat (steam and hot water).
▪ "VITROSILICON" Spółka Akcyjna – manufacture of other inorganic basic chemicals, – manufacture of household and technical glassware, – manufacture of plastic packing goods, – manufacture of other plastic products.
▪ "CIECH POLFA" Spółka z ograniczoną odpowiedzialnoscią – wholesale of pharmaceutical goods, – wholesale of chemical products, – wholesale of perfume and cosmetics, – retail sale of medical and orthopaedic goods.
▪ Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna - manufacture of plastics, - manufacture of pesticides and other plant protection agents.
▪ S.C. Uzinele Sodice Govora S.A. – Manufacture of basic and other inorganic chemicals, – Wholesale of chemical products.
▪ POLSIN PRIVATE LIMITED - wholesale and retail sales of a variety of goods in Far East markets.
▪ DALTRADE PLC - distribution and wholesale of chemicals in the UK market.
▪ Przedsiębiorstwo Transportowo–Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością - international transport of liquid chemicals, - tank truck- and rail-tank vehicle wash.
188 Consolidated financial statement of the Ciech Group for 2006
31.3 Basic data for non-consolidated subsidiaries
The account below includes the list of the subsidiaries that were not fully consolidated: As at As at December st December 31P ,P 2006 st 31P ,P 2005 Company name: Registered Offices (total (total indirect and indirect direct share) and direct share) "Chemia.Com S.A." Warsaw 100.00% 100.00% Polcommerce Handel- und Austria 100.00% 100.00% Vertretungssesellschaft m.b.H., Austria CIECH SERVICE Sp. z o.o. Warsaw 100.00% 100.00% "BORUTA-KOLOR" Sp. z o. o. Zgierz 100.00% 100.00% Nordiska Unipol Aktienbolag Sweden 97.78% 97.78% CHEMIEPETROL Aussenhandelsgesellschaft Germany 60.00% 60.00% mit beschrankter Haftung DANSKE UNIPOL A/S Denmark 55.00% 55.00% "InChem Sp. z o.o." Warsaw 100.00% 100.00% CIECH POLFA GROUP Polcommerce Kft., Hungary Hungary 100.00% 100.00% SODA MĄTWY GROUP SODA-MED. Sp. z o.o. Janikowo 99.57 % 99.57 % Jantrans - Janikowo Sp. z o.o. Janikowo - ALWERNIA GROUP "ALWERNIA-FOSFORANY" Alwernia 73.75% 73.75% Limited liability company.* SOC-AL Spółka z ograniczoną odpowiedzialnością Alwernia 69.88% 69.88% ORGANIKA SARZYNA GROUP Zakład Doświadczalny "ORGANIKA" Sp. z o.o. Nowa Sarzyna 51.00% 51.00%
* out of business
The statement below comprises basic financial figures of non-consolidated subsidiaries. Selected financial figures of subsidiaries have been described in item 15 of the additional information and notes to the consolidated statement. When selecting entities for consolidation, the Management Board of the parent company applied the principle of relevance (as per the IFRS objectives) of their financial figures for compliance with the requirement of fair and reliable presentation of the financial standing and profit of the Group. It was assumed that entities whose balance sheet totals and sales revenues as well as income from financing activities are irrelevant compared to the same items recorded by the parent company, and their combined figures are less than 5% of the relevant combined figures (of all subsidiaries of the Ciech Group), were irrelevant for compliance with the requirements of the standards. The table below includes the list of the companies that, pursuant to the aforesaid, have not been consolidated.
Net income from sale of goods Balance Shares of and Net profit sheet total CIECH SA's CIECH SA in materials / loss of the Dependence Non-consolidated CIECH SA's balance company and from in undertaking/ on CIECH S undertakings income (%) sheet total (direct + financing thousands Group** A (%) indirect) activities ** of PLN in thousands in of PLN thousands of PLN "Chemia.com S.A." 100.00% 6 487 159 2 414 0.37% 0.17% Subsidiary Polcommerce Handel- und Vertretungssesellschaft 100.00% 50 879 346 7 565 2.91% 0.55% Subsidiary m.b.H., Austria
189 Consolidated financial statement of the Ciech Group for 2006
Net income from sale of goods Balance Shares of and Net profit sheet total CIECH SA's CIECH SA in materials / loss of the Dependence Non-consolidated CIECH SA's balance company and from in undertaking/ on CIECH S undertakings income (%) sheet total (direct + financing thousands Group** A (%) indirect) activities ** of PLN in thousands in of PLN thousands of PLN CIECH SERVICE Sp. z 100.00% 4 714 9 1 560 0.27% 0.11% Subsidiary o.o. "BORUTA-KOLOR" Sp. z 100.00% 13 317 (1 660) 16 794 0.76% 1.21% Subsidiary o.o. Nordiska Unipol 97.78% 31 594 293 8 769 1.81% 0.63% Subsidiary Aktienbolag CHEMIEPETROL Aussenhandelsgesellschaft 60.00% 38 569 1 804 7 671 2.20 % 0.55% Subsidiary mit beschrankter Haftung DANSKE UNIPOL A/S 55.00% 33 162 416 7 231 1.89% 0.52% Subsidiary "InChem Sp. z o.o.” 100% 3 242 (340) 2 208 0.19% 0.16% Subsidiary CIECH POLFA Group Polcommerce Kft., Indirect 100.00% 2 976 3 1 130 0.17% 0.08% Hungary subsidiary SODA MĄTWY Group Indirect SODA-MED. Sp. z o.o. 99.57 % 1 017 17 2 875 0.06% 0.21% subsidiary ALWERNIA Group "ALWERNIA- FOSFORANY" Spółka z Indirect 73.75% - - 50 0.00% 0.00% ograniczoną subsidiary odpowiedzialnością.* SOC-AL. Spółka z Indirect ograniczoną 69.88% 2 235 16 1 667 0.13% 0.12% subsidiary odpowiedzialnością ORGANIKA SARZYNA
GROUP Z.D. "ORGANIKA" Sp. z Indirect 40.80% 2 765 69 2301 0.16% 0.17% o.o. subsidiary * out of business in thousands of Polish zloty Ciech Group Non-consolidated Total value (without % share undertakings eliminations) In balance sheet totals 62 262 3 696 266 1.68% Net income from sale of goods and products and from 190 956 5 117 783 3.73% financing activities
Pursuant to IAS 24 "Related Party Disclosures", parties related to CIECH SA, which in turn is the company controlled by the State Treasury, are deemed the parties related to the State Treasury as well.
CIECH SA also holds shares in entities where its control has been restricted or lost: − Calanda Polska Sp. z o.o. in liquidation, 95.70% shares/votes held directly by Ciech SA, the company has not been shown in the table above due to data shortage. − ZAO-Polfa Ciech, Russia, in liquidation, 65.00 % shares/votes held directly by Ciech SA. − Polsin-Karbid Sp. z o. o in liquidation, 22.76% shares/votes held by CIECH SA, shares/votes (direct+indirect) via CIECH SA and Polsin Pte.Ltd. − K.Foster&Son Ltd. - lost control, 46.51%, shares/votes held indirectly by CIECH SA through Daltrade Plc − Polfa Nigeria - lost control, no contact with the company, 20% share held directly by CIECH SA. − Zach-Ciech Sp. z o.o. - 35.65% shares/votes held directly by CIECH SA, on 24 January 2006, the District Court in Katowice declared the Company bankrupt. − Zakład Gastronomiczno-Hotelowy „MIREX” Sp. z o.o. – in liquidation, 27%, shares/votes held indirectly by CIECH SA through ZACHEM S.A.
190 Consolidated financial statement of the Ciech Group for 2006
31.4 Totals from transactions with the affiliates
The following table discloses total amounts of transactions with affiliates in the periods presented in the statement:
31.12.2006
Income Purchases from sales Receivables Impairment Income Other of Other Recognized in Payables, of Finance Purchases Finance and loans losses on in thousands of Polish zloty from sales operating products operating the current borrowings, products income of goods costs granted, receivables, of goods income and expenses reporting period etc. and etc. including: services services
CIECH SA 724 711 110 - - 181 401 28 080 93 1 238 175 013 - - 199 642 JANIKOSODA S. A. 124 612 622 - 11 219 10 395 325 499 5 - 9 841 - - 71 082 Cheman S.A. 2 839 27 904 268 413 470 1 244 5 4 650 13 175 - 1 156 “VITROSILICON” Spółka 748 18 342 - 254 - 39 626 - - 10 194 - - 5 239 Akcyjna "Alwernia" S.A. 1 714 58 411 - 317 298 35 889 - 2 054 19 344 - - 5 442 POLSIN PRIVATE LIMITED 227 16 390 - 236 375 23 - - 425 - - 363 GZNF "FOSFORY" Sp.z o.o 1 109 60 406 - 1 423 5 995 4 032 - - 123 - - 820 SODA MĄTWY S.A. 13 780 1 540 805 8 139 139 259 300 726 156 1 154 2 610 - - 76 617 DALTRADE PLC 158 19 961 - 652 - - - - 536 - - - CIECH POLFA Sp.z o.o 768 281 293 775 506 - - - 236 - - 84 Przedsiębiorstwo Transportowo - Usługowe TRANSCLEAN 1 309 ------69 - - 1 374 Sp.z o.o "BORUTA-KOLOR" Sp. z o. o. 168 114 - - 28 - - - 8 - - 53 CHEMIEPETROL Aussenhandelsgesellschaft - - - 505 - 618 - - 0 - - 89 mit beschrankter Haftung "InChem Sp. z o.o.” 2 ------2 - - - CIECH SERVICE Sp. z o.o. 21 - - 24 3 171 - - - 6 - - 307 DANSKE UNIPOL A/S 8 12 975 - 213 24 - - - 1 756 - - 5 Nordiska Unipol Aktienbolag - 29 044 - - 676 - - - 4 600 240 - 239
Polcommerce Handel- und Vertretungssesellschaft m.b.H., 15 12 411 - 193 140 - - - 1 522 - - 73 Austria
Polcommerce Kft. - - - - 72 ------144 "Chemia.Com S.A." 27 - - - 2 164 - - - 28 - - 1 751
191 Consolidated financial statement of the Ciech Group for 2006
Income Purchases from sales Receivables Impairment Income Other of Other Recognized in Payables, of Finance Purchases Finance and loans losses on in thousands of Polish zloty from sales operating products operating the current borrowings, products income of goods costs granted, receivables, of goods income and expenses reporting period etc. and etc. including: services services
"ALWERNIA-FOSFORANY" Spółka z ograniczoną ------odpowiedzialnością. SOC-AL Spółka z ograniczoną ------odpowiedzialnością SODA-MED. Sp. z o.o. 29 - - - 87 - - - 4 - - 69 Suomen Unipol Oy - 22 764 - 81 2 130 - - - 3 273 - - 436 ZACHEM S.A. ------38 67 443 38 38 17 585 Z.Ch. "Organika - Sarzyna" ------3 307 - - 8 248 S.A. S.C. Uzinele Sodice Govora ------76 695 - - - S.A. Z D "ORGANIKA" Sp. z o.o. ------14 - - 19 Z. Ch. "Silikony Polskie" Sp. z ------117 - - - o.o. K. B. O. Ś. Sp. z o.o. ------44 - - 179 Z. R. B. "Organika" Sp. z o.o. ------6 - - 582 Z.U.P. "Gumokor-Organika" Sp. ------10 - - 119 z o.o. Z.P.U. "Organika-Projekt" Sp. z ------3 - - 132 o.o. Z.U.P. "Drewrem-Organika" Sp. ------46 - - 143 z o.o. Z.U.E. "El-Chem" Sp. z o.o. ------14 - - 1 096 Z. of Laws E. "Wod-Rem" Sp. z ------14 - - 1 099 o.o. "NS Automatyka" P.P.H-U Sp. ------32 - - 903 z o.o. Budpur Sp. z o.o. ------Przedsiębiorstwo Cargo Sp. z ------o.o. Przedsiębiorstwo Transportowo ------79 Spedycyjne TRANSCHEM Bydgoski Park Przemysłowy ------Sp. z o.o. Metalpur Sp. z o.o. ------
192 Consolidated financial statement of the Ciech Group for 2006
Income Purchases from sales Receivables Impairment Income Other of Other Recognized in Payables, of Finance Purchases Finance and loans losses on in thousands of Polish zloty from sales operating products operating the current borrowings, products income of goods costs granted, receivables, of goods income and expenses reporting period etc. and etc. including: services services
Govcrest International SRL ------CIECH FINANCE Spółka z ograniczoną ------odpowiedzialnością Natural Chemical Products Sp. ------z o.o. Jantrans - Janikowo Sp. z o.o.(only transactions for the ------first quarter of 2006)
31.12.2005
Income Purchases from Income Receivables Impairment Other of Other Recognized in Payables, sales of from Finance Purchases Finance and loans losses on in thousands of Polish zloty operating products operating the current borrowings, products sales of income of goods costs granted, receivables, income and expenses reporting period etc. and goods etc. including: services services
CIECH SA 866 776 689 4 174 15 243 939 58 904 6 791 575 164 750 - - 57 758 JANIKOSODA S. A. 122 708 383 21 6 695 9 451 334 163 12 24 8 287 - - 74 730 Cheman S.A. 5 084 36 344 6 776 40 1 700 5 - 2 19 165 1 44 242 “VITROSILICON” Spółka 996 16 649 5 984 189 36 251 - 1 660 - - 3 792 Akcyjna "Alwernia" S.A. 953 101 084 - 355 - 22 383 4 5 12 658 - 3 3 462 POLSIN PRIVATE LIMITED 2 1 060 - 258 295 1 999 - 13 - - 219 GZNF "FOSFORY" Sp.z o.o 1 676 62 515 - 1 817 6 033 5 668 - 9 247 - - 1 330 SODA MĄTWY S.A. 12 781 1 399 - 2 148 128 870 312 494 315 - 1 916 - - 77 645 Petrochemia Blachownia S.A. 1 403 52 908 - 2 150 43 144 933 - - 13 113 - - 13 268 DALTRADE PLC 610 21 715 - - 2 - - - 567 - - 1 CIECH POLFA Sp.z o.o 1 143 38 - 290 342 2 - - 223 - - 47 Przedsiębiorstwo Transportowo - Usługowe TRANSCLEAN Sp. 3 992 - - 171 3 992 - - - 730 - - 730 z o.o. Zach - Ciech Sp.z o.o - - - 13 - - - 13 - - - 51 "BORUTA - KOLOR" Sp. z o. o. 688 2 040 - 398 688 2 040 - 176 51 - - -
193 Consolidated financial statement of the Ciech Group for 2006
Income Purchases from Income Receivables Impairment Other of Other Recognized in Payables, sales of from Finance Purchases Finance and loans losses on in thousands of Polish zloty operating products operating the current borrowings, products sales of income of goods costs granted, receivables, income and expenses reporting period etc. and goods etc. including: services services
CHEMIEPETROL Aussenhandelsgesellschaft 818 - - 373 818 - - 332 99 - - 100 mit beschrankter Haftung "InChem Sp. z o.o.” - - - 3 196 - - - 3 196 1 - - 308 CIECH SERVICE Sp. z o.o. 3 329 1 - - 3 329 1 - - 634 - - 1 759 DANSKE UNIPOL A/S 826 7 059 - 222 826 7 059 - 134 1 453 - - 273 Nordiska Unipol Aktienbolag 1 333 224 - - 1 333 224 - - 689 233 233 1 457
Polcommerce Handel- und Vertretungssesellschaft m.b.H., 338 7 660 - - 338 7 660 - - 1 232 - - 211 Austria
Polcommerce Kft. 102 - - 121 102 - - - 84 - - 93 "Chemia.Com S.A." 2 670 - - - 2 670 - - - 457 - - 448 "ALWERNIA - FOSFORANY" Spółka z ograniczoną ------123 odpowiedzialnością. Jantrans - Janikowo Sp. z o.o. 4 076 4 - - 4 076 4 - - 1 616 - - 1 500 SOC-AL Spółka z ograniczoną 1 169 - - - 1 169 - - - 118 - - 117 odpowiedzialnością SODA-MED. Sp. z o.o. 449 - - - 449 - - - 76 - - 70 Calanda Polska Sp. z o.o. ------Polfa Nigeria ------2 545 Suomen Unipol Oy 1 911 25 735 - 63 1 911 25 735 - - 2 772 151 13 227
194 Consolidated financial statement of the Ciech Group for 2006
Transactions with entities of the State Treasury The table below presents transactions of the Ciech Group with affiliates and with the State Treasury, including in particular the figures concerning Kompania Węglowa SA – a significant investor for CIECH SA:
income 31.12.2006 purchases receivables liabilities from sales Entities affiliated with the State Treasury, 56 890 173 779 7 574 60 390 including: Kompania Węglowa SA 67 113 897 - 11 312
income Account 31.12.2005 purchases liabilities from sales receivables Entities affiliated with the State Treasury, 59 923 244 669 7 123 63 810 including: Kompania Węglowa SA - 104 523 - 12 146
Terms of transactions with affiliates Sales in favour of and purchases from affiliates are handled at regular market prices. Outstanding liabilities and receivables are not hedged; they are settled in cash or set-off. Receivables from affiliates were not covered by any guarantees granted or received. Revaluation write-downs on receivables from affiliates have been disclosed in item 13 of the additional information and notes to the consolidated statement.
31.5 Significant agreements concluded between the affiliates:
On February 14th, 2006 contents of appendices 1/2006 and 2/2006 to "The agreement on cooperation regarding the purchase of the products for CIECH SA’s own account as of July 04th, 2000 concluded between CIECH SA and Vitrosilicon S.A." were agreed upon. These appendices regulate the terms of cooperation between CIECH SA and the subsidiary "VITROSILICON" Spółka Akcyjna regarding deliveries of various silicates, carried out on the Polish market through CIECH SA in 2006. Pursuant to appendix 1/2006 purchases are estimated at PLN 37 million, whereas in appendix 2/2006 purchases are worth PLN 5.4 million.
On February 23rd, 2006 two annexes to the agreements concluded on January 20th, 2005 between CIECH SA and subsidiary JANIKOSODA S.A. were initialled. In the first annex, new purchase and sale prices of soda ash, aragonite chalk, carbon dioxide and sodium bicarbonate were set. The value of the transaction will come to approx. PLN 258 million in the current year. In the second annex new prices of vacuum pan salt purchase and sale were settled. Value of the transaction will come to approx. PLN 63 million in the current year.
On February 23rd, 2006 two annexes to the agreements concluded on January 20th, 2006 between CIECH SA and subsidiary SODA MĄTWY S.A. were initialled. In the first annex, new purchase and sale prices of soda ash were established. The value of the transaction will come to approx. PLN 235 million in the current period. In the second annex, new purchase and sale prices of sodium bicarbonate, calcium chloride, precipitated chalk and others were set. Value of the transaction will come to approx. PLN 64 million in the current year.
On March 7th, 2006 the subsidiary Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością signed the annex to the long-term sales contract on coal dust with Kampania Węglowa SA. The annex concerns the purchase of coal-dust in 2006, a basic raw material for Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością. The contract value in 2006 is estimated at PLN 114 million.
On March 15th, 2006 CIECH SA and its subsidiary Cheman SA signed the annex to the contract on long- term sales and distribution of soda products produced by manufacturing plants, such as SODA MĄTWY S.A. and JANIKOSODA S.A. The annex concerns soda product purchases in 2006. The contract value in 2006 is estimated at PLN 24.7 million.
On October 25th, 2006 CIECH SA signed the TDI sales contract of a trade operator with Zakłady Chemiczne ZACHEM Spółka Akcyjna in Bydgoszcz. The contract determines the terms and conditions of sales handled by CIECH SA of all the TDI manufactured in ZACHEM S.A. (except for consumption for own needs) in Poland and abroad. TDI is the main product of Z.Ch. Zachem S.A.; its sales account for nearly 50% of the company's revenue. It is used for the manufacture of polyurethane foams for the furniture industry among
195 Consolidated financial statement of the Ciech Group for 2006
others. Agreement is valid for the period from November 1st, 2006 to December 31st, 2007 and its estimated value in 2007 is PLN 450 million.
On November 29th, 2006 CIECH SA signed an agreement for processing raw materials supplied by CIECH SA into epichlorohydrin and allyl chloride with Zakłady Chemiczne ZACHEM Spółka Akcyjna. The agreement determines the terms and conditions of processing and sales (by CIECH SA) of all the above products manufactured in ZACHEM SA. Agreement is valid for the period from January 1st to December 31st, 2007 and its estimated value in 2007 is PLN 160 million.
On December 28th, 2006 CIECH SA sold 1,880,864 shares in Cheman S.A. at PLN 1, accounting for 100% share capital, to the subsidiary CIECH FINANCE Spółka z ograniczoną odpowiedzialnością. The transaction resulted from the adopted restructuring strategy of Cheman S.A.
31.6 Transactions with key management
Close members of key management families hold 60% shares in the Transport and Service Company, which provides services in favour of the Ciech Group. Value of the services in question amounted in 2006 to PLN 501 thousand. Except for the abovementioned, no relevant transactions were carried out between the Ciech Group entities and the key management members.
Remuneration of key management
Benefits for key management for 01.01. - 31.12.2006 in thousands of PLN 1. short-term employee benefits 20 547 2. short-term benefits – management contract 1 112 3. after-employment benefits 109 4. other long-term benefits - 5. benefits due to termination of employment contract 279 6. payments in the form of treasury shares - Total 22 047
Benefits for key management for 01.01.-31.12.2005 in thousands of PLN 1. short-term employee benefits 17 991 2. after-employment benefits - 3. other long-term benefits 140 4. benefits due to termination of employment contract 444 5. payments in the form of treasury shares - Total 18 575
• 32 Goals and principles of financial risk management
CIECH SA actively manages its operating and financial risks, aiming to optimise its cash flows and maximise its market value. In order to provide a permanent monitoring of risks, the Management Board of CIECH SA appointed the Risk Committee whose task is to implement procedures of the risk management system. The Risk Committee's work resulted in the identification and estimation of operating and financial risks to which the Ciech Group is exposed. Owners of risks, reporting on a periodical basis to the Risk Committee, are held responsible for risk management within the ongoing activity. The Risk Committee selects strategies of management of particular risks and reports on a quarterly basis to the Management Board of CIECH SA on effects of the risk management system operation.
As far as financial risks are considered, the Company is affected by the following risks: - interest rate risk, - foreign exchange risk, - credit risk, - liquidity risk, - price risk (goods), - risk capital.
196 Consolidated financial statement of the Ciech Group for 2006
The above risk categories have been described in detail in item 33 of the additional information and notes to the consolidated report.
33 Financial instruments
Financial assets and liabilities
Except for derivative instruments, the main financial instruments used by the Ciech Group include bank credits, overdraft facility, financial lease contracts and cash as well as short-term deposits. The main aim of these derivatives is to acquire financial resources for the group's business. The Ciech Group also holds other financial assets and liabilities such as trade receivables and liabilities, arising during its operation, as well as shares in non- related entities.
Measurement in thousands of Polish zloty Assets Liabilities method adopted 31.12.2006 31.12.2006 Shares or stocks not listed KH 1 021 - Shares or stocks listed WG 10 032 - Loans granted - short-term ESP - - Loans granted - long-term ESP - - Cash ESP 147 453 - CIRS Transactions WG - 1 180 FX forward transactions WG 23 57 Currency options WG 733 167 Debt securities issued ESP - - Investment fund units WG - - Long-term credits and loans ESP - 315 644 Short-term credits and loans ESP - 276 368 Overdraft facility WG - 14 311 Finance lease liabilities ESP - 2 214 Trade liabilities ESP - 473 811 Trade receivables ESP 583 922 - Financial guarantees granted WG - -
743 184 1 083 752
Measurement in thousands of Polish zloty Assets Liabilities method adopted 31.12.2005 31.12.2005 Shares or stocks not listed KH 169 - Shares or stocks listed WG 4 754 - Loans granted - short-term ESP 12 - Loans granted - long-term ESP - - Cash ESP 101 216 - Swap transactions (CIRS) WG - 1 794 FX forward transactions WG 257 260 Currency options WG - - Debt securities issued ESP - - Investment fund units WG - - Long-term credits and loans ESP - 48 262 Short-term credits and loans ESP - 124 190 Credits - measured at fair value WG - -
197 Consolidated financial statement of the Ciech Group for 2006
Measurement in thousands of Polish zloty Assets Liabilities method adopted 31.12.2005 31.12.2005 Finance lease liabilities ESP - 2 244 Trade liabilities ESP - 210 748 Trade receivables ESP 413 656 - Financial guarantees granted WG - -
520 064 387 498
* WG - fair value method ESP - amortised cost method using effective interest rate KH - historical cost method
Fair value of financial instruments recognized is equal to their carrying value.
Interest rate risk
The Ciech Group is exposed to interest rate risk as a result of its indebtedness. In 2006, the Group concluded no hedging transactions against interest rate risk.
The table below shows the effective interest rates and realisation periods for the Group's income-generating financial assets and interest-bearing borrowings and other debt instruments: in thousands of Polish zloty 31.12.2006
Effectiv to 12 1-2 2-3 3-4 4-5 over 5 Effective interest rates (variable rate) e Value months years years years years years Interest Rate Granted loans 0.0% ------Cash 4.01% 147 453 147 453 - - - - -
CIRS Transactions n/a 1 180 393 217 217 217 136 -
FX forward transactions n/a (34) (34) - - - - -
Currency options n/a 566 566 - - - - - Credits and loans 4.83% 606 323 290 679 92 853 46 993 37 776 28 246 109 776
CIECH POLFA Sp. z o.o. 5.13% 5 500 5 500 - - - - -
4.63% 24 660 14 072 10 588 - - - - JANIKOSODA S. A. SODA MĄTWY Group 5.56% 33 001 14 149 8 500 8 500 1 852 - -
"Alwernia" S.A. 4.88% 19 000 19 000 - - - - -
FOSFORY Group 5.06% 51 012 32 746 11 500 - 6 766 - -
Cheman S.A. 5.57 % 10 742 10 742 - - - - -
"VITROSILICON" Spółka Akcyjna 4.79% 57 570 20 779 10 157 9 520 6 315 5 538 5 261
ZACHEM S.A. 4.20 % 49 289 24 323 23 463 546 546 411 -
CIECH SA 4.81% 354 435 148 472 28 427 28 427 22 297 22 297 104 515
Przedsiębiorstwo Transportowo - 5.41% 1 114 896 218 - - - - Usługowe TRANSCLEAN Sp. z o.o. Trade liabilities n/a 473 811 473 811 - - - - -
198 Consolidated financial statement of the Ciech Group for 2006
in thousands of Polish zloty 31.12.2006
Effectiv to 12 1-2 2-3 3-4 4-5 over 5 Effective interest rates (variable rate) e Value months years years years years years Interest Rate Trade receivables n/a 583 922 583 922 - - - - -
In the Ciech Group loans granted did not occur as at December 31st, 2006.
in thousands of Polish zloty 31.12.2005
Effectiv to 12 1-2 2-3 3-4 4-5 over 5 Effective interest rates (variable rate) e Value months years years years years years Interest Rate Cash 3.94% 101 216 101 216 - - - - - Swap transactions (CIRS) n/a 1 794 219 315 315 315 315 315 FX forward transactions n/a (3) (3) - - - - - Credits and loans 5.15% 175 206 126 757 13 160 14 637 2 107 18 545 - CIECH POLFA Sp. z o.o. 5.60% 2 518 2 518 - - - - - JANIKOSODA S. A. 4.60% 12 170 12 170 - - - - - SODA MĄTWY Group 5.75% 8 284 6 467 1 817 - - - - "Alwernia" S.A. 5.26% 25 305 25 305 - - - - - FOSFORY Group 5.59% 57 177 38 632 - - - 18 545 - Cheman S.A. 5.83% 14 572 14 572 - - - - - "VITROSILICON" Spółka Akcyjna 5.31% 18 854 9 481 5 108 2 225 2 040 - - PETROCHEMIA BLACHOWNIA 5.36% 2 754 2 567 60 60 67 - - Group CIECH SA 3.93% 33 572 15 045 6 175 12 352 - - - Trade liabilities n/a 210 748 210 748 - - - - - Trade receivables n/a 413 656 413 656 - - - - -
in thousands of Polish zloty 31.12.2005
Effectiv to 12 1-2 2-3 3-4 4-5 over 5 Effective interest rates (fixed rate) e Value months years years years years years Interest Rate Granted loans 4.0% 12 12 - - - - -
Description of the Group's exposure to interest rate risk A sensitivity analysis showed that a shift in the market interest rates by one percentage point will not considerably affect the financial result of the Group in 2006 and the future cash flows for 2006.
Foreign exchange risk
Foreign exchange risk is an inherent part of commercial transactions denominated in foreign currencies. The Ciech Group, as part of its import and export activity, faces foreign exchange exposure due to a considerable prevalence of export over import activities. Thanks to its internal security procedures, the Company is able to limit its exchange risk to minimum, thereby increasing the stability of its core operations. The Ciech Group consistently enters into hedge transactions to limit the impact of exchange rate fluctuations on its profit.
The Ciech Group companies use natural hedging, by balancing its import and export flows, and utilise derivative instruments to reduce the foreign exchange risk. The transactions used to hedge the cash flows included - Forward contracts, allowing the Company to hedge its cash flows at a fixed exchange rate,
199 Consolidated financial statement of the Ciech Group for 2006
- Parforward – allowing the Company to hedge many cash flows of an inconsiderable value at average exchange rate valid in a given period, - Average Strike Option – allowing the Company to hedge many cash flows carried out in a short period of time, - Currency and interest rate swaps were made to eliminate the impact of foreign exchange risk on valuation of the long-term loans taken by the company.
Credit Risk
The Ciech Group is exposed to credit risk, based on the creditworthiness of its customers. Applying internal procedures for managing the amounts receivable from the customers reduces the risk. Risk assessments are made prior to conclusion of each agreement, and then again periodically, for each supply of goods, in accordance with the binding procedures. A profitability calculation is carried out for each contract, shipment, or shipment batch, taking into account both the potential costs of the trade credit, and the partner’s payment history. The calculations serve as the basis for decisions to conclude the contract or send the goods. A large diversification in recipients receiving the goods sold by the Ciech Group is a significant factor reducing credit risk.
Liquidity risk
Threats as to liquidity in the Ciech Group are monitored on a regular basis. A profitability calculation is carried out for each contract, shipment, or shipment batch, taking into account both the partner’s payment history and their current financial standing. The calculations serve as the basis for decisions to conclude the contract or send the goods. In case of delays in payments another deliveries are being cut down or withheld. Additionally, surplus is located in secure and liquid financial instruments (investment funds on money market) and funds are employed to finance operations within the Group. Investment needs of the Ciech Group are financed from its own funds and from long-term bank credits, repayment dates of which are correlated with the moment when benefits from an investment occur.
Price risk (goods)
A major portion of the Ciech Group's turnover is generated from the import and export of chemical raw materials. The raw-material markets are characterised by high cyclicality, prompted by fluctuations in the world economies. On the one hand, the growing prices of raw materials force the trading agents to lower their mark-ups and weakening demand among recipients. On the other hand, falling prices are usually a sign of declining demand and the onset of an economic slump. Raw materials are impacted by the same trends in the Polish market. Continuation of the stable growth rate and steady prices of chemical raw materials will contribute to improvement of the Ciech Group trading activity. Large fluctuations in demand and prices caused either by high economic growth rate, or by an economic slump, will affect the Ciech Group’s trade in chemical raw materials.
Risk capital
The Group manages the capital to guarantee the entities included in the group that they will be able to further manage their activity, maximising their profitability for stakeholders thanks to optimisation of debt to equity relationship.
Capital structure of the Group covers debt comprising of credits disclosed in note 24 and 27, cash and cash equivalents, as well as capital for shareholders of the parent company, including shares issued, reserve capital and retained earnings included in note 23.
The Committee managing risk in the Group reviews the capital structure on an annual basis. With respect to the committee's recommendations the Group sets the general capital structure against payment of dividend, taking credits in banks and issue of new debt securities.
A general strategy of the Group's operation has not changed since 2005.
200 Consolidated financial statement of the Ciech Group for 2006
Hedge accounting
The Ciech Group does not apply hedge accounting. Application of hedge accounting would not considerably affect the consolidated financial statement of the Group.
34 Events occurring after the balance sheet date
On January 2nd, 2007 ZACHEM S.A. sold Ośrodek Wypoczynkowy CHEMIK in Sopot for PLN 9,250 thousand to Mr. Janusz Świątkowski from Kwidzyń, On February 7th, 2007 ZACHEM S.A. sold Sanatorium Uzdrowiskowe CHEMIK in Ciechocinek for PLN 5,183 thousand to multitrade enterprise MEDICAL – TOURIST Sp. z o.o. from Bydgoszcz. On February 7th, 2007 ZACHEM S.A. sold Production Department T-7300 for PLN 3,651 thousand to CORTEX CHEMICALS Sp. z o.o. from Tarnów. The assets above were recognized in 2006 as held for sale.
On January 8th, 2007 the heat and power station S.C. CET Govora S.A. on the one hand and the soda company S.C. Uzinele Sodice Govora S.A. and CIECH SA on the other hand signed an agreement concerning the restructuring of S.C. Uzinele Sodice Govora S.A.'s debt to CET Govora for energy deliveries. The repayment of the principal of EUR 18 million will take place within 9 years with a 1-year grace period. At the same time CET Govora S.A. undertook to convert the interest debt to the amount of EUR 5.8 million to 7,943,853 shares in S.C. Uzinele Sodice Govora S.A. The signed agreement is a stage of the restructuring of the Romanian soda company.
Pursuant to the Resolution of January 12th, 2007 by the Management Board and pursuant to the Resolution of January 23rd, 2007 by the Supervisory Board, production of cosmetic chalk was shut down in JANIKOSODA S.A.
On January 24th, 2007 CIECH S.A. opened at Bank Pekao SA a bank guarantee to the amount of EUR 18,054,691.92. The guarantee was issued for C.E.T. Govora S.A. in Romania. It was issued to secure the payment of amounts resulting from the purchase of receivables of S.C. Uzinele Sodice Govora S.A.
On February 6th, 2007 the General Shareholders' Meeting of Uzinele Sodice Govora SA (a subsidiary of CIECH SA) adopted the resolution on an increase in the company's share capital by 15,887,706 shares, with a par value of RON 2.5 (1 EUR=3.3678 RON). The heat and power station S.C. CET Govora SA will hold 7,943,853 shares as part of conversion of the interest debt of S.C. Uzinele Sodice Govora S.A. (agreement of January 8th, 2007). The present shareholders, that is AVAS (2.89% shares), CIECH SA (93.14% shares) and others (3.97% shares), according to the right of priority, are entitled to hold 7,943,853 shares after the resolution of GSM becomes final, that is after February 16th, 2007.
The District Court of Warsaw 11th Economic Division - Registry of liens made entries in the registry of liens on shares on January 12th, 2007 and on January 22nd, 2007 (total number of pledged shares 4,134,448) in Janikowskie Zakłady Sodowe JANIKOSODA SA (CIECH SA holds 99.26 % shares in JANIKOSODA S.A.) in favour of Bank Pekao S.A. The established lien secures a loan of PLN 216,000,000 taken on December 13th, 2006 for the purchase of shares in Zakłady Chemiczne "Organika- Sarzyna" Spółka Akcyjna.
On January 15th, 2007 CIECH SA signed the contract with Z.Ch. "POLICE" S.A. on the purchase of fertilisers worth EUR 781,200, intended for the Spanish market. It is another agreement for nitrogenous, two-component and multiple-compound phosphate fertilisers and other chemicals (sodium compounds) concluded with this supplier since May 30th, 2006 until now. The total value of the agreements amounts to PLN 72.4 million.
The Extraordinary General Shareholders' Meeting of CIECH SA adopted on January 31st, 2007 the resolution concerning the enlargement of the Company's Management Board, appointing Mr. Marek Trosiński to the Management Board of CIECH SA.
On February 5th, 2007 the subsidiary Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością signed the annex to the long-term sales contract on coal dust with Kampania Węglowa SA. The annex concerns the purchase of coal-dust in 2007, a basic raw material for Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością.
On February 26th, 2007 CIECH S.A. signed the agreement with its subsidiary S.C. Uzinele Sodice Govora S.A. on restructuring of S.C. Uzinele Sodice Govora S.A.'s debt towards CIECH SA in the amount of EUR 18 million. The repayment will take place within 9 years with a 1-year grace period. The agreement concluded is an effect of the agreement signed on January 8th, 2007 between S.C. CET Govora SA on the one hand and S.C. Uzinele Sodice Govora S.A. and Ciech SA on the other hand, on the restructuring of S.C. Uzinele Sodice Govora S.A.'s debt for energy deliveries.
201 Consolidated financial statement of the Ciech Group for 2006
On February 26th, 2007 CIECH SA received the decision by the District Court for the Capital City of Warsaw, 11th Business Division of February 13th, 2006 on the lien entry in the registry of liens. Registered shares of Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna in the volume of 6,792,000 worth PLN 300 million are the subject of the pledge. The Court's decision results from the Contract on Registered Pledge concluded on December 20th, 2006 that provided for appointment of CIECH SA as the Pledger for Nafta Polska S.A., the Pledgee, of the registered pledge on shares securing payments for contractual penalties in the event of CIECH SA's failure to perform or improper performance of some contractual obligations under the Sales Agreement for shares in Zakłady Chemiczne "Organika-Sarzyna" Spółka Akcyjna.
In JANIKOSODA S.A. an upgrade of the system to produce salt tablets is expected, the salt tableting machine start-up is expected at the beginning of February with a target capacity of 50 thousand tonnes per year.
On March 26th, 2007 CIECH SA acquired 6,062 shares, and on April 27th, 2007 another 366 shares in Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna, which increased share in the company's equity to 99.4%. Furthermore, CIECH SA acquired 15,684 shares in Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna and holds 99.61% of the Company's capital.
On March 27th, 2007 CIECH SA signed contracts on sales of dense soda ash for 2007 with the entities included in the Owens Illinois group with its registered office in One Michael Owens Way Perrysburg (the manufacturer of glass containers). Expected value of deliveries will amount to approx. PLN 78 million.
On April 03rd, 2007 CIECH SA and the subsidiary JANIKOSODA S.A signed the annexes to the contracts concluded on January 20th, 2005. New purchase-sales prices of soda ash, aragonite chalk, carbon dioxide and sodium bicarbonate (annex to contract at the value of ca. PLN 265 million) and vacuum pan salt (annex to contract at the value of ca. PLN 76 million) were set.
On April 03rd, 2007, in cooperation with Office Cherifien des Phosphates (OCP) Morocco CIECH SA approved terms and conditions of the contract on phosphorites import between April 1st, 2007 and March 31st, 2008. The recipients are the subsidiary of CIECH SA - GZNF "FOSFORY" Sp. z o.o. and Z.Ch. Siarkopol Tarnobrzeg. Value of the contract is approx. PLN 37.44 million. The conditions of sulphur sales in 2007 under the 2002 - 2010 long- term contracts were also under discussion with Maroc Phosphore SA belonging to the OCP Group. The value of the contract amounts approx. to PLN 95 million.
On April 10th, 2007, CIECH SA resolved to conclude a contract with Procter & Gamble International Operations S.A. on deliveries of dense soda ash and light soda ash between 2007 -2008. Expected total value of the contract stands approx. at PLN 63 million.
On April 23rd, 2007 the Supervisory Board of CIECH SA recommended distribution of the net profit in 2006 to the General Meeting in line with the proposal submitted by the Management Board of the Company. The Company's net profit for 2006 estimated at PLN 166,738,618.06 will be assigned in the following manner: PLN 44,800,000.00 for a dividend for shareholders (PLN 1.60 per one share), and PLN 121,938,618.06 for the Company's reserve capital.
On April 27th, 2007 the General Assembly of S.C. Uzinele Sodice Govora S.A. resolved to invalidate 7,943,853 unsubscribed shares from the previous issue. Shares from the previous issue will be subscribed only to the heat and power station S.C. CET Govora S.A. as part of the conversion of the interest debt of S.C. Uzinele Sodice Govora S.A. as agreed in the contract of January 8th, 2007.
On the same day the General Assembly of S.C. Uzinele Sodice Govora S.A. resolved to reduce the nominal value from RON 2.5 to RON 0.25. Thereby, the company's share capital will diminish from RON 105,421 thousand to RON 10,542 thousand, while CIECH SA's share will stand at 75.59%.
On April 27th, 2007 the Board of Directors of S.C. Uzinele Sodice Govora S.A. resolved to convert liabilities towards CIECH SA into capital (in the amount of EUR 8 million) and to call the Extraordinary General Meeting of Shareholders on July 10th, 2007 in order to pass a resolution concerning the matter thereof. After conversion of liabilities the CIECH SA's share in the S.C. Uzinele Sodice Govora S.A.'s share capital will return to the current level of 93%.
In 2007 SODA MĄTWY S.A. sold surplus of 105,000 allowances for CO2B ,B resulting from revising the 2005 report and planned surplus in 2006 and 2007. Its subsidiary Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością, whereas sold surplus of 460,000 allowances for CO2B ,B resulting from revising 2005 and 2006 and planned surplus in 2007. These figures have been presented in the tables below.
202 Consolidated financial statement of the Ciech Group for 2006
SODA MĄTWY S.A. 2005 2006 2007 Total Assignment of allowances 97 300 97 300 97 300 291 900 Revised emission for 2005 and planned 63 402 58 000 62 300 183 702 for 2006 and 2007 Surplus of assignment 33 898 39 300 35 000 108 198 Disposal 33 898 39 300 31 802 105 000
EC KUJAWY Sp. z o.o. 2005 2006 2007 Total Assignment of allowances 1 786 500 1 786 500 1 786 500 5 359 500 Revised (used) allowances / planned 1 594 404 1 598 067 1 704 628 4 897 099 Surplus of assignment 192 096 188 433 81 872 462 401 Disposal 192 096 188 433 79 471 460 000
35 Financial standing of the subsidiary Przedsiębiorstwo Chemiczne Cheman S.A.
Cheman S.A. is a subsidiary in which CIECH SA holds 100% shares indirectly. In 2005 the Company recorded low financial results and had problems with financial liquidity. With income from sales amounting to PLN 157,293 thousand its net loss was PLN 10,858 thousand. Many factors influenced the amount of loss recorded. Among the most significant ones was the take-over of Ciech Petrol Sp. z o.o. in the first half of 2004 which recorded losses and its business was noted for its high capital intensity and low profitability.
After fusion, due to attenuation of sales structure (take-over of unprofitable goods) return on sales also deteriorated. Ciech Petrol sp. z o.o. was involved in fuel distribution and retail trade, not too profitable in the last period of the company's operation, which made the company's situation worse. As the project of the Ciech Group's withdrawal from the petrochemical industry was introduced, Cheman S.A. having taken over Ciech Petrol Sp. z o.o. was obliged to conduct restructuring and liquidation of the fuel activity. Until 2004 Cheman S.A. was engaged in integrating the Ciech Petrol Sp. z o.o. activity into its commercial lines and in separating its part intended for shutting down. This process ended in 2005, and then the costs of an ultimate shut-down of the fuel activity were estimated. Costs connected with the restructuring process were recognized in the result in 2005.
Furthermore, Cheman S.A. recorded loss in revenues of high profitability due to operating problems (loss of products, large fluctuation of staff, mistakes in managing sales and supply chain, situation on the foreign exchange market, rapid change in the industry associated with imported goods).
In 2005 an abrupt increase of sales prompted by fusion with Ciech Petrol Sp. z o.o. and take-over of distribution of plastics and reagents from CIECH SA with prolonged payment dates caused an increase in demand for working capital. Problems with recipients making delayed payments and with inefficient debt recovery were also introduced. These factors directly influenced retention of the Company's liquidity on a day-to-day basis.
In the fourth quarter of 2005 the Management Board of Cheman S.A. produced the Corrective Action Plan for 2006-2009. The Corrective Action Plan by Cheman S.A. is based on the following assumptions: - conversion of past due payables towards CIECH SA into a long-term loan in the amount of PLN 9,000 thousand for 5 years and with a 2-year grace period for the principal repayment, with the interest rate set in line with the market conditions, - change in the operation model of the company and adjustment of a new organizational structure to it with a stress on intensification of sales, - change in sales structure by abandoning distribution of unprofitable goods in favour of profitable ones, - increases of sales in the group of soda products, - finalisation of unprofitable fuel activity in 2006, including sale and liquidation of immovable properties associated with the fuel activity, - development of commercial network in selected regions of the country, - improvement of debt recovery procedures, - optimisation of allocation of goods in warehouses and the allocation of warehouses' - reduction of transport costs by shortening the chain of supplies for end customers,
In the first half of 2006 Cheman S.A. recorded the net loss estimated at PLN 5,970 thousand. Unsatisfactory results of the adopted plan induced the Management Board of CIECH SA to make yet another analysis of the course of actions adopted within completion of the restructuring process. The analysis results showed there were
203 Consolidated financial statement of the Ciech Group for 2006
well-founded premises to implement a comprehensive corrective program for Cheman S.A. with particular emphasis on restructuring of the following: - product portfolio, leading to a complete elimination of unprofitable groups of assortment causing depreciation of the Company's value; - property, plant and equipment, aiming to obtain revenues from sales of assets concerning the activity subject to elimination and reduce costs connected with their maintenance; - employment, aiming to increase efficiency of organization and savings in labour costs; - financing methods, leading to provisions of financial liquidity.
Carrying out the program, Cheman S.A. sold the petrol station in Jarocin to an external investor in the fourth quarter of 2006 and signed an initial arrangement concerning sales of an immovable property in Błaszki, the finalisation of which will take place by the end of the first half of 2007. With an intention to support the corrective program CIECH SA acquired an immovable property in Dąbrowa Górnicza from Cheman S.A. in December 2006. Completion of the above steps enabled realisation of another stage of the CIECH SA's strategy depending on sales of shares in Cheman S.A. to CIECH FINANCE Spółka z ograniczoną odpowiedzialnością (the entity dealing with the restructuring processes and divestments in the Ciech Group). In 2007 another analyses will be conducted to decide on further course of actions regarding Cheman S.A. CIECH SA supported the process of financial restructuring in Cheman S.A. by granting in the first half of 2006 two long-term loans totalling at PLN 9,450 thousand. The loans were granted by means of conversion of trade receivables towards CIECH SA. As a result, the Cheman S.A.'s balance sheet structure improved and funds to manage the ongoing trading activity were topped up. In 2006 Cheman S.A. recorded weak financial results: loss in sales amounted to PLN 5,890 thousand with revenues realised in the amount of PLN 138,891 thousand, net loss in turn, was estimated at PLN 9, 617 thousand. Negative financial result of the previous years was the reason why Cheman S.A. recognized the negative equity of PLN 791 thousand at the end of 2006. As at December 31st, 2006 trade receivables of CIECH SA from Cheman S.A. were worth PLN 8,044 thousand and concerned entirely the ongoing settlements. The amount of PLN 7,706 thousand was repaid by the date of the financial statement preparation (March 19th, 2007). In addition, CIECH SA had long-term receivables due to loans granted for PLN 9,450 thousand. CIECH SA also gave a guarantee for credits taken by Cheman S.A to finance the ongoing activity to the value of PLN 13,950 thousand. As at the balance sheet date, degree of using the loan guarantee was lower than the maximum guarantee granted. Taking into account the negative equity of Cheman S.A. and volume of CIECH SA's financial involvement, the latter resolved to make a revaluation write-down on one of the long-term loan granted in the amount of PLN 4,650 thousand. Furthermore, the Management Board of CIECH SA declared to provide a financial support for the next 12 months to the extent allowing for further management of the Cheman S.A. operations within the remaining scope.
36 Statement of business reasons for the purchase of shares in S.C Uzinele Sodice Govora S.A. in Romania
36.1 Issues concerning strategy
With a view to carry out the strategy of growth and concentration on selected product markets in the forth quarter of 2006, CIECH SA took control over the soda plant - S.C. Uzinele Sodice Govora S.A. in Romania. Thanks to successful acquisition, the Ciech Group advanced to be the second best manufacturer of soda ash in Europe with manufacturing capacity of 1.44 million of tonnes annually. Having such a potential of productive powers, the Ciech Group became a leader in the marketplaces of Central Europe and acquired a stronger position against its existing and new clients and in future it is going to record increase in sales and profits from the soda segment.
While taking the decision concerning investments in S.C. Uzinele Sodice Govora S.A. complementarity of the Ciech Group and the Company markets were considered. The Company's offering is a perfect match for supplies of the Ciech Group's customers having their plants in the countries south from Poland. CIECH SA exports dense soda ash mainly to the Scandinavian countries, Czech Republic, Germany, Great Britain and Denmark. The major part of dense soda ash produced by S.C. Uzinele Sodice Govora S.A. is used by the Romanian, Italian, Hungarian and Czech markets. S.C. Uzinele Sodice Govora S.A. is a natural supplement for the Ciech Group of supplies for its existing customers who have their plants located in this part of Europe.
Upon consideration of S.C. Uzinele Sodice Govora S.A. acquisition, CIECH SA was taking into account perspectives for growth and the current market situation in the soda segment in Europe. Increase in soda ash consumption in the Central Europe markets is expected to come to 4.0% - 4.5% annually in the years to come. Large investments planned and currently conducted in the glass industry in the countries of Central and Eastern Europe indicate that glass production will rise, which ensures stable growth in demand for soda in the following years.
CIECH SA purchased 93.14% shares in S.C. Uzinele Sodice Govora S.A. for the total of PLN 39.7 million and currently is carrying out the financial rehabilitation program in the company covering the following steps:
204 Consolidated financial statement of the Ciech Group for 2006
● Issue of deposit in relation to repayment of the acquired debt (EUR 9.8 million), ● Granting three loans to S.C. Uzinele Sodice Govora S.A. for the total sum of EUR 24 million (in 2006 – EUR 20 million, in 2007 – EUR 4 million), including an advance payment for future deliveries of steam from CET Govora (EUR 16 million), ● Conversion of interest for past due liabilities of S.C. Uzinele Sodice Govora S.A. towards CET Govora into increase of capital (EUR 5.6 million), ● Issue of new shares (EUR 8 million), ● Assignment of the CET Govora debt (EUR 18 million) owed by S.C. Uzinele Sodice Govora S.A., covered by additional guarantee – restructuring of debt.
In order to guarantee growth in the company, S.C. Uzinele Sodice Govora S.A., the Ciech Group takes series of steps that will particularly include:
● Completion of the investment program worth approx. EUR 26 million allowing S.C. Uzinele Sodice Govora S.A. to manufacture over 530 thousand tonnes of soda annually starting off in 2009, ● Implementation of best practice in S.C. Uzinele Sodice Govora S.A. regarding organisation of production, technological process, facilities maintenance and modern IT devices, ● Making sales structures of the Soda Division available for the products of S.C. Uzinele Sodice Govora S.A., ● Integration of S.C. Uzinele Sodice Govora S.A. to the lines of the Soda Division which will provide a necessary support for the former to implement the strategy.
36. 2 Program for permanent profitability achievement
At the end of 2006 the Company recorded the net loss in the amount of EUR 18,061 thousand and recognized a negative capital in the amount of EUR 39,194 thousand. Taking into account negative equities, the Management Board of CIECH SA declared to support the company for the following 12 months to the extent allowing for further management of operations. However, strategic conditions of the conducted transaction disclosed above and implementation of the investment program allowing an increase in manufacturing capacity to over 530 tonnes of soda annually guarantees positive results to be achieved by S.C. Uzinele Sodice Govora S.A. in 2009 and in the years to come. Medium-term financial projection shows that in 2009 the Company will achieve a positive net result, EBIT on the level of 2% and EBITDA on 9.4%. As at December 31st, 2006 S.C. Uzinele Sodice Govora S.A. was consolidated using provisional settlement based on book values of particular assets and liabilities. Presently, their fair value is being established. Following finalisation of this task, analyses and tests connected with impairment of particular assets will be made and the work results will be recognized in the consolidated balance sheet of the Ciech Group.
37 Going concern of EC KUJAWY Sp. z o.o.
The consolidated financial statement of the SODA MATWY Group as at the balance sheet date, or on December 31st, 2006 was prepared under the assumption of going concern in the foreseeable future. However, it is noteworthy that by the end of June 2007 a merger is planned of Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna, Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna and Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością. SODA MĄTWY S.A. is expected to be an acquiring company and other companies will be disappearing companies. The merger will take place pursuant to article 492 & 1 item 1 of the Commercial Code of Companies or through transfer of assts from disappearing companies to an acquiring company. The Company will continue its operations within the unchanged form of incorporation and organisational scope. On April 23rd, 2007 the plan of the companies' merger was filed to the District Court in Bydgoszcz.
Even though the balance sheet of the subsidiary Elektrociepłownie Kujawskie Spółka z ograniczoną odpowiedzialnością recognizes negative equity, its financial statement was also prepared under the assumption of going concern in the foreseeable future. Upon execution of the financial statement for 2003, the Company for the first time recognized a provision for employee benefits in the amount of PLN 3,529 thousand, which resulted in a considerable loss brought forward and thereby negative equity. The Company, however, gains profits that are assigned to cover this loss and year in year out this negative value is systematically diminished. As it was practised before, pursuant to article 233 of the Commercial Code of Companies, the Management Board of the Company submitted a motion to the Meeting of Shareholders to pass a resolution on continuation of the Company's operation. On February 12th, 2007 the Management Boards of SODA MĄTWY S.A. and JANIKSODA S.A. decided on continuation of the Company's operation. By the date of issue of the opinion on the consolidated financial statement of the Ciech Group, the General Meeting of EC KUJAWY Sp. z o.o. adopted the relevant resolutions.
205 Consolidated financial statement of the Ciech Group for 2006
38 Going concern of the ZACHEM Group
The financial statement of ZACHEM S.A. shows uncovered loss brought forward, exceeding sum of reserve and supplementary capital and one third of share capital. The Management Board of ZACHEM S.A., pursuant to article 397 of the Commercial Code of Companies, is obliged to call the General Meeting without delay in order to adopt a resolution concerning continuation of the Company's operation. Furthermore, negative equity was recognized in the individual statement of the subsidiary UCR Spółka z o.o. The Management Board of UCR Sp. z o.o. has already taken adequate steps to have the General Meeting pass resolutions regarding continuation of the company's activity and capital contributions. By the date of preparation of the consolidated financial statement of the Ciech Group for 2006 the relevant resolutions have not yet been passed, however, it is CIECH SA's, as the parent company’s, wish that the company continues to operate.
39 Information concerning important events regarding previous years included in the financial statement for the financial year
In the 2006 reporting period, with respect to positive decisions favourable for SODA MĄTWY S.A. and issued by the Head of the Kujawski and Pomorski Tax Office on the binding interpretation of tax laws on classification to tax deductible expenses of loss on the Company's working assets due to the transaction with the Brokerage House Sur5Net in 2005 and costs of development work ineffectively written-off, an adequate adjustment of the CIT - 8 return for 2006 was made. Due to the adjustment made for 2005, an overpayment of corporate income tax arose in the amount of PLN 1,002 thousand, which was recognized in the profit and loss in 2006, was made. The inspection conducted within this scope by the Kujawski and Pomorski Tax Office did not show any irregularities of the CIT - 8 return adjustment for 2005.
40 Other information not mentioned above that could have a considerable impact on the assessment of the financial standing and the financial result of the Ciech Group
ZACHEM S.A. concluded a contract for deliveries of TDA with American company AIRPRODUCTS AND CHEMICALS INC USA in 1997. Deliveries from this Company account for 39% total deliveries to ZACHEM S.A., which signifies the Company is largely dependent on this supplier. The contract will remain in effect until 2013. It includes the necessity to pay a fixed fee (even in case of the contract severance by the time it expires) and a variable fee depending on prices of components used to manufacture TDA. The contract comprises conditions concerning: an option to increase volume of deliveries, option to purchase from other manufacturer, option to obtain reimbursement in case of contract severance or in case of any disturbances in deliveries caused by ZACHEM S.A. The Management Board of ZACHEM S.A. makes attempts at renegotiating conditions of the contract in question.
41 Differences between the consolidated balance sheet as of December 31st, 2006 presented in the report for the first quarter 2007 and the one presented in the annual report for 2006
Since the supervisory board of the ZACHEM Group has not approved its budget plans, justifying a possibility to deduct in future tax losses brought forward, the asset for deferred tax was eliminated from the consolidated financial statement of the ZACHEM Group in correspondence with retained earnings in the amount of PLN 6,600 thousand. This adjustment does not affect consolidated equity of the Ciech Group as at December 31st, 2006 because this adjustment concerns the equity of the ZACHEM Group as at the date of the purchase settlement. Only the asset due to deferred tax and surplus of acquired net assets over the merger costs are subject to change. Implemented changes have been presented below: in thousands of Polish zloty Adjustment of the Adjustment of the consolidated As at 31.12.2006 individual statement of the As at 31.12.2006 disclosed in the statement of Ciech Group disclosed in the Equity report for the Q1 ZACHEM S.A. concerning annual report for of 2007 concerning settlement of 2006 deferred tax ZACHEM S.A. acquisition Share capital 164 115 164 115 Treasury shares (6 124) (6 124) Share premium reserve 151 328 151 328 Equity components relative to assets - - available for sale Revaluation reserve 11 986 11 986
206 Consolidated financial statement of the Ciech Group for 2006
Adjustment of the Adjustment of the consolidated As at 31.12.2006 individual statement of the As at 31.12.2006 disclosed in the statement of Ciech Group disclosed in the Equity report for the Q1 ZACHEM S.A. concerning annual report for of 2007 concerning settlement of 2006 deferred tax ZACHEM S.A. acquisition Other reserve capital 78 683 78 683 Foreign exchange differences arising from (1 082) (1 082) translation of subsidiaries Retained earnings 687 877 (6 600) 6 600 687 877 Equity attributable to equity holders of 1 086 783 (6 600) 6 600 1 086 783 the parent company Minority interest 50 435 50 435 Total equity 1 137 218 (6 600) 6 600 1 137 218
asset due to deferred tax 26 162 (6 600) 19 562 other long-term liabilities 72 545 (4 027) 68 518 trade and other payables 651 501 (2 573) 648 928
207 Consolidated financial statement of the Ciech Group for 2006
STATEMENT OF THE MANAGEMENT BOARD
These consolidated financial statements of the Ciech Group have been approved by the Management Board at the Ciech Group's registered offices on May 11th, 2007.
Warsaw, May 11th, 2007
……………………………...... Mirosław Kochalski – President of the Management Board of CIECH Spółka Akcyjna
………………………………………………………………… Rafał Pasieka – Member of the Management Board of CIECH Spółka Akcyjna
………………………………………………………………… Marek Trosiński - Member of the Management Board of CIECH Spółka Akcyjna
……………………………………………………………….. Wojciech Wardacki – Member of the Management Board of CIECH Spółka Akcyjna
……………………………………………………………….. Kazimierz Przełomski – CFO, Commercial Representative of CIECH Spółka Akcyjna
208