Elektroporcelan Louny a.s. - Annual report 1997

Company Director´s Introductory Speech

Dear Shareholders,

If 1994 is remembered as the year in which the joint stock company was established, 1995 as the year in which part of our shares were privatised using the voucher method and 1996 as the year in which the privatisation process was completed and certification to ISO 9OO1 achieved, then 1997 will certainly be remembered as a year in which important decisions on development and environmental investments were taken and the leading shareholder SPG a.s. Praha strengthened its position.

Following the completion of the privatisation process in 1996 the stabilised Board of Directors, consisting largely of representatives of the majority shareholder, was able to take decisions about the company´s development on a more long-term basis. The most important decisions affecting the company´s future are:

a) the decision to expand production in the Merklín plant by about 30%

b) the decision to speed up the installation of an environmentally friendly heating system in the Louny plant

c) the decision to establish a modern information technology system.

Timetables for the implementation of all three projects were drawn up and their progress closely monitored by both the Board and the Supervisory Committee. It is an encouraging sign that all three projects were slightly ahead of schedule in 1997, paving the way for the early completion of the development project at Merklín and the environmental project at Louny in 1998.

Despite a decrease in demand on the domestic market, in 1997 the company managed to achieve sales comparable to those of 1996 largely thanks to an increase in exports of over 18 million CZK, which represents a year-on increase of 13%. In 1997 the company once again achieved an increase in productivity and, thanks to a responsible and prudent approach to managing its financial resources, it had no liabilities which had exceeded their maturity date.

I believe that the decisions taken by the company Board in 1997 and implemented in the course of 1997 and 1998 will significantly strengthen the business activities of a.s. EPL in the years to come.

Ing. Jaroslav T U R E K, Managing Director and Vice Chairman of the Board of Directors

Basic economic data development 1994 - 1997

Basic economic data graphs 1994 - 1997

Personnel policy, training and education

As part of the company´s personnel strategy the following three main aims for 1997 were set out in the "Personnel and Social Plan". As in 1996, one of the aims was to increase the proportion of workers involved directly in production. The second aim was to introduce an effective motivation and salary programme aimed at rationalising work, evaluating the employees and stabilising the workforce. A further aim was to improve the company´s corporate culture by developing the channels of communication at all levels within the company and promoting both individual creativity and team work.

In order to fufill those aims, a programme of reorganisation and rationalisation of both work and the workforce was drawn up in 1997. It was aimed mainly at reducing the number of unproductive, auxiliary and administrative staff. The programme was divided into two main stages. The first stage, which was carried out in the second half of 1997, was the gradual reorganisation of work activities and resulted in a gradual reduction in the numbers of auxiliary and administrative staff. The second stage involved rationalisation through the introduction of technology to replace employees. Unproductive work was thereby eliminated. The first two stages were followed in the first quarter of 1998 by further streamlining of the workforce. The process is to be completed by June 1998.

The consistent application of the personnel policy in 1997 led to a reduction in the rate of turnover in the workforce of 7%, thereby further stabilising the company´s workforce.

Business

Despite a considerable decrease in domestic demand (a fall of over 11% compared with 1996), the company managed to maintain its level of income, and, thanks largely to increased exports to countries with advanced market economies. EPL strengthened its position in Germany, Italy, Great Britain and Austria.

Despite ever stronger competition in the Czech Republic and Slovakia, the company has maintained its dominant position as a supplier for outdoor electricity mains up to 110 kV and in the field of railway electrification.

In order to ensure successful development in the future, the company has decided to increase its product range, thereby meeting even more of the needs of its present and future customers and laying the foundations for further growth.

ISO 9001 Certification

January 1997 marked the beginning of the company´s second year of operating according to the quality control standards of ESN EN ISO 9001 with its certification issued by TUV CERT valid to 1999. The audit carried out in January 1997 by the RW TUV auditors confirmed that the system was functioning effectively in accordance with ESN EN ISO 9001.

1997 saw the successful extension of the quality control system to the product plant at Merklín, in line with the decision taken by company management in the third quarter of 1996. The aim was to carry out a certification audit at the Merklín plant at the beginning of 1998 at the same time as the second verification audit at the Louny plant. The quality control system implemented at Merklín followed the same logic of the system used at Louny. Many features were kept, including centralised management and the structure of documented procedures, the centralised development of new products and the centralised management of internal audits and corrective measures. The introduction of the quality control system culminated with the initial audit of the Merklín plant carried out on 18.12.1997. The initial audit confirmed that the plant was ready for the extension of the quality control system although, at the same time, it revealed certain deficiencies which had to be eliminated before the extension audit could be carried out.

The functioning of the quality control system was evaluated by management throughout 1997 on the basis of internal inspections and, at the end of the year, its functioning and effectiveness were evaluated in a combined assessment of all 20 chapters and on the basis of its fufillment of the aims of quality control.

On the basis of that inspection the company´s management concluded in 1997 that the system was functioning and effective.

Economy and Finances

In 1997 the joint stock company made a net profit of 5 463 thousand CZK. This result was boosted by the change in the exchange rate of the Czech crown during the year and a change in the method of evaluating stocks of own production. However, compared with 1996 the stated result was adversely affected by a drop in demand from domestic investors, while annual turnover was maintained at the 1996 level thanks to an increase in exports. Other negative factors were the negative sales balance and residual value of the flats in Merklín, including a gas-fired heating unit, and the creation of reserves to cover loses from currency fluctuation expected in 1998.

Throughout 1997 the company maintained financial stability and paid all its liabilities to its commercial partners within the agreed period. Changes in the level of receivables followed a normal pattern. The company funded its investments from its own finances (which were boosted by the sale of accommodation units, a reduction in material stocks and a reduction in the total of receivables) combined with a long-term investment loan to finance the expansion of the production of high tension casing insulators at the Merklín plant.

Investments and Repairs

In 1997 total investments came to 50.2 million CZK, of which 24.5 million CZK were invested in the Louny production plant and 25.7 million CZK in the Merklín production plant. One of the most important, expensive and technically complex investments is the conversion to gas of the heating system in the Louny plant. In 1997 10.5 million CZK were invested in that project. The existing coal-fired boiler, which no longer complies with environmental regulations, will be taken out of service during the first half of 1998. The new modern heating system will reduce the cost of heating despite the rise in the cost of fuel. A similar modern heating system is being installed in the Merklín plant.

The company´s largest and most significant investment is the construction of a new plant at Merklín to produce very high tension insulators. The projected cost is 54,5 million CZK. Part of the preparation area has been been built on and a complex reconstruction of the hall which used to contain the old fourteen-chamber furnace has been undertaken. The most important piece of technical equipment in the new plant will be a wagon-chamber furnace with a capacity of 36 m3. The furnace will be supplied by the prestigious German company Eisenmann. The new facility will come into service in the third quarter of 1998. It will enable Merklín to increase its production by more than 25 million CZK a year.

In 1997 31.2 million CZK were spent on repairs and maintenance at the company´s two production plants, of which 12.2 million CZK were spent on repairs carried out by outside contractors and 19 million CZK on repairs carried out by the company. Among the most important repair projects were the work carried out on the dispatch building including the heating system, roof repairs, repairs to furnace wagons, repairs to the floors in the production halls and the repair of the transformer station.

Quality Control

In 1997 our product range continued its trend towards a far greater number of technically complex products aimed mainly at the western market. This development entails higher standards of quality for the products in question. In order to improve quality a series of technical and technological measures were introduced at both the Louny and the Merklín plants during 1997. In order to reduce the number of the main type of "iron" defects at Louny the platforms by the filter presses in the material preparation area were reconstructed, the paints in the glazing area were replaced and all sources of iron were removed from the transport routes etc.

In 1997 considerable resources were allocated to improving our most important technological operation - firing. In the Louny plant, furnace wagons made of top quality fire-proof materials were installed for the firing of complex insulators and special wagons for the quality firing of fuse tubes were added to the company´s stock. In the Merklín plant a variable system of burners was purchased for the Bickley furnace. This will enable the most technically demanding very high tension insulators to be fired economically and to a high standard.

In order to increase the production capacity and improve the quality of very high tension insulators at Merklín, programme-controlled humidity driers were installed, while at Louny technology enabling the mass production of quality fuse tubes was brought into operation. The steps taken to improve the quality of production in 1997 have created conditions for consistent quality in 1998.

The Environment

Elektroporcelán Louny a.s. fulfills its obligations to respect the ecosystem protective zone in the regions in question. Every year we expend sufficient resources on both running costs and investments to ensure that our production does not damage the environment.

The company handles hazardous waste as permitted by law and, as a major polluter of the atmosphere pays the legally required charges, which are set on the basis of regular measurements of emissions from all sources. It releases waste water in accordance with water management limits and current rules on sewerage.

The total running costs of environmental protection came to 2.69 million CZK in 1997.

The requirement to meet the new stricter legal limits on emissions that come into force in 1999 has led the company to speed up the conversion to gas for heating and the production of heat for technological purposes in the Louny plant, and in 1998 the obsolescent coal boiler will be taken out of service. In the Merklín plant the gradual recultivation of the local waste dump continues and a new waste water outfall has been constructed. In 1997 12 million CZK was expended on these environmental projects.

Company Structure

Company Bodies

Profit and Loss Account (Th. CZK)

Balance Sheet (Th. CZK)

Auditor´s report to the shareholders of Elektorporcelán Louny a.s.

We have audited the financial statements of Elektroporcelán Louny a.s., prepared in accordance with the Act on Accounting and relevant legislation of the Czech Republic ("statutory financial statements"), as of 31 December 1997. In our opinion, the summary balance sheet and profit and loss account, and notes contained on pages 11 to 12 and 15 to 19 of this annual report are consistent with the company´s statutory financial statements as at 31 December 1997.

On 5 May 1998, we issued the following auditor´s report on the company´s statutory financial statements:

"We have audited the accompanying financial statements of Elektroporcelán Louny a.s. for the year ended 31 December 1997. These financial statements are the responsibility of the Company´s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the Act on Auditors and the Chamber of Audiors of the Czech Republic and the auditing standards of the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believed that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the assets, liabilities and equity of Elektroporcelán Louny a.s. as of 31 December 1997 and the results of its operations for the year then ended in accordance with the Act on Accounting and relevant legislation of the Czech Republic.

In Jablonec nad Nisou, 5 May 1998

KPMG Česká republika Audit, spol. s r. o.
Licence number 71

Ondoej Duda
Licence number 12

The Supervisory Committee´s Report

Throughout 1997 the Supervisory Committee of joint stock company Elektroporcelán Louny acted in accordance with company regulations, the Commercial Law Code and the motions passed by the General Meeting.

In the course of exercising its supervisory powers during the accounting year 1997 and in its verification of the final statement of accounts the Supervisory Committee found nothing to cast doubt on the accuracy of the company´s stated results for the year. The final statement of accounts was drawn up in accordance with the legally valid accounting regulations and concurs with the statements in the accounting records. On the basis of the facts stated above and the results of the audit, the Supervisory Committee recommends the General Meeting to approve the final statement of accounts that was drawn up on 31.12.1997.

Of a total net profit for 1997 of 5 463 022.74 CZK a sum of 273 151.14 CZK (5% of stated profit) is to be allocated to the reserve fund in accordance with company regulations.

The remainder totalling 5 189 871.60 CZK is to be left in account no.428 as undistributed profit from previous years.