1997 Managing Board Report of MOSTOSTAL GDANSK SA

Ladies and Gentlemen,

Qualitative changes that were very significant for the development of the Company took place in 1997 in Mostostal Gdańsk S.A. Through an acquisition of shares of two companies and a transition of crane services from Mostostal Gdańsk S.A. to MG Żuraw Sp. z o.o. (former MHS Heavysped Sp. z o.o.) a capital group was created. The two controlled companies mentioned above are: MG Probud S.A. and MG Stal S.A. MG Probud S.A., previously called Gdyńskie Przedsiębiorstwo Budownictwa Przemysłowego S.A., is a general building enterprise with many years of history, well-known in the building services market of Northern Poland. MG Stal S.A. previously called Kolejowe Zakłady Konstrukcji Stalowych i Urządzeń Dźwigowych S.A. from Białystok, is a manufacturer of steel products known in Poland. Zakład Usług Budowlanych Sp. z o.o. (Building Services Enterprise Ltd) from Świecie is the last and the smallest part of the group. The individual companies complement each other as well as the leading Company of MOSTOSTAL GDAŃSK S.A. General Contracting Office, a significantly independent unit, was created in order to skilfully effect building projects and supervise multi-branch contracts. Such an organisational structure enables offering more and more complex services of increasing value.

Creation of a capital group was one of the tasks of the shares issue that took place last summer. In our opinion capital investments are the most effective was of increasing the competitiveness of MOSTOSTAL GDAŃSK S.A. resulting in an increase of the Company’s value.

Considering economic results presented in the attached documents as well as the qualitative and quantitative changes conducted in 1997, it was another year of an effective performance of the dynamic development strategy. Judging by the 52% accumulation of the share price we believe that the strategy received acceptance of the investors and the shareholders. MOSTOSTAL GDAŃSK S.A.’s shares were among the most profitable investments among all the shares quoted at the Warsaw Stock Exchange in 1997.

Lech Walczak
 

The Company ended 1997 with full success as regards the performance of economic and financial tasks that had been planned. External conditions, i.e. favourable market situation in industrial engineering as well as internal conditions based on rational economy, high qualification of the employees, innovation and market orientation of the Company fostered the success.

The sales plan (115 million zl) and the investment plan (24 million zl) were fully effected. An issue of shares was also successful (income of 24.5 million zl) significantly increasing resources for the development of the Company (see “The shares issue income expenditure”).

The planned balance profit figure of 3.8 million zl was exceeded and reached 4.5 million zl which constitutes 204.3% increase when compared with 1996.

There was a sound increase of return on sales when compared with 1996 – profit margin increased from 12.2% to 14.3%. Total economic activity showed gross return of 5.8% (3.9% in 1996) and net return was 3.9% (2.3% in 1996. Those results derived from the increase of the value of turnover (24%) as well as from the decrease in production costs (-0.7%) and decrease of costs of financing the working capital (decrease of inventories by nearly 50%). Positive economic relations as regards work efficiency and an average salary had also influenced the results. An average gross salary for the whole 1997 was 1,530.50 zl and increased by 20.2% when compared with 1996 and with simultaneous increase of productivity by 27%.

The increase of return on fixed assets was at 3.2% (from 12.1% to 15.3%) and an increase of return on equity was at 1.4% (from 11.6% to 13.0%). The noteworthy increase of those basic indicators of the economic effectiveness took place despite the fact that the Company’s equity doubled in a very short period (II^nd half of 1997, by 220% as the result of the issue of shares) as well as the Company’s fixed assets doubled (by 207% as the result of material and financial investments).

The book value of one share as at December 12, 1997 increased by 60% in comparison with 1996 (from 7.70 zl to 12.30 zl) and net profit per share (including the new issue) increased by 38%.

Important economic decisions made in 1997 concerning the further development of the Company and the creation of a capital group contributed to significant changes in the structure of the capital. Financial capital constituted 18% of total fixed assets as at December 31, 1997 (0.5% in 1996) and will be increasing in the future. This is a result of the acquisition, in the 4^th quarter of 1997, of two economic bodies in order to increase the Company’s potential to provide complex services. Economic effects of the investments are expected to take place already in the first year of consolidated activitie.

Income on sales of goods and products in 1997 amounted to 115.6 million zl. It generally comprised three types of activity:

• building and assembly (assembly of structures and machinery) – 100.4 million zl i.e. 86.8% of total income
• industrial (production of steel structures) – 7.0 million zl i.e. 6.1% of total income
• services (equipment, transport, workshop, laboratory, designing services and others) – 8.2 million zl i.e. 7.1% of total income

• as a general contractor for the amount of 18.3 million zl
• as a direct contractor for the amount of 67.2 million zl
• as a subcontractor for the amount of 21.9 million zl

Contracts entered into by Mostostal Gdansk S.A. are of individual character and are elaborated with reference to the needs and requirements of particular customers. Effected investment projects are frequently unique. The main principle behind the distribution of products and services offered by the Company is the principle of addressing an offer of co-operation to an identified client. It is often backed up by many years of personal contacts of the management of the Company and also by trust from major and financially balanced investors. Market requirements and growing competition make contractors decrease their prices, improve the warranty conditions and increase the standard of the effected work utilising acquired certifications and qualifications. In order to find clients the Company participates in tenders and bidding auctions organised by investors. The Company also participates in domestic and foreign branch fairs which provides the possibility to present the Company itself as well as its production offer.

In 1997 Mostostal Gdansk S.A. drew up and placed over 300 offers with domestic and foreign investors and entered into approximately 100 contracts. According to assumed strategy the Company is aiming for getting a significant position in the domestic market and increasing its participation in foreign markets. The task is effected through complete service provided for the investors that covers activities that may take place at all stages of investment performance as well as through the provision of services as a general contractor.

The creation of a capital group has significantly influenced the extension of the range of products and services being offered and subsequently the participation in the investment market. When effecting investment tasks the Company co-operates with clients of many years that are huge industrial plants. We currently provide services for clients that mainly represent three branches of industry: oil refining and petrochemical, marine economy and industrial engineering.

The participation of the branches mentioned above in the value of sales in 1997 constituted 93% including (considering main sites and their value of sales):

- Oil refining – 51%

PERN (oil tanks) 31,212 thousand zl

Rafineria Gdanska S.A. (technological installations) 18,670 thousand zl

- Marine economy infrastructure – 25%

Danyard (superstructures) 12,011 thousand zl

Kvaerner (oil rigs) 9,846 thousand zl

- Industrial engineering – 17%

Minimal Torun (shopping hall) 6,127 thousand zl

SKT Sopot (sports hall) 2,870 thousand zl

Sales to the remaining branches of industry such as power engineering, environment protection, engineered structures, professional services and others amounted to 7%.

The Company participates in the work of trade organisations (Polska Izba Konstrukcji Stalowych - Polish Steel Structures Chamber of which Mostostal Gdansk S.A. is one of the founding members and Izba Gospodarcza Energetyki i Ochrony Orodowiska – Economic Chamber Of Power Engineering And Environment Protection) and also national and regional economic organisations (Ogólnopolska Izba Gospodarcza Spó3ek Pracowniczych – All-Poland Economic Chamber Of Employees’ Companies, Gdanski Klub Biznesu – Gdansk Business Club

In 1997 the Company entered into many trade contracts the most significant of which are:

As at December 31, 1997, the Company was employing 1026 persons. Average employment in 1997 was 1021 persons and was lower by 3.6% when compared with the previous year.

72% of all employees were employed as workers. The remaining part of non-workers were engineers and technicians (66%), economists and accountants (29%), administration employees (5%). 47% of the employees have a degree.

Following the model of previous years the employees of the Company participated in various seminars, training, workshops and professional training. On average, in 1997 each employee participated in at least one training or a seminar and over ten people either initiated or were continuing higher education or post-graduate studies.

In 1997 the Company arranged with Wielkopolski Bank Kredytowy S.A. the following credits:
 

Credit	Amount	Interest	Repayment date	Collateral
Long-term	4,432,783.60	WIBOR+0.4%	2002.04.30	Pledge of movables, transfer of receivables from insurance policies
Short-term	8,000,000.00	WIBOR+0.4%	1998.01.30	Pledge of movables, transfer of receivables
Short-term	2,000,000.00	WIBOR+0.7%	1997.08.30	Transfer of receivables from the contract with Rafineria Gdańska S.A.

A long-term credit was taken up for the purchase of two GROVE cranes. Short-term credits were borrowed to finance current activity of the Company.

Moreover a medium-term investment credit amounting to 495,000.00 was taken up for the purchase of property in Gdańsk and the credit repayment date is in March 1998.

All credits are being repaid in accordance with the conditions of credit agreements. The short-term credit of 2,000,000.00 was repaid with the proceeds from the issue of shares and the remaining credits are being repaid with the income from current activity of the Company.
 

In 1997 the Company possessed temporary money surplus from the proceeds from the issue of shares.

In the period from August to December 1997, in connection with consistent investment policy, proceeds from the issue were short-term deposited with banks in the form of bank deposits, invested in treasury bonds and commercial bonds. The amounts deposited were of 2 to 15 million zl, and the total net profit on the interest amounted to 0.7 million zl.
 

Mostostal Gdańsk S.A. obtained 24.5 million zl in July, 1997 as a result of the public issue of 1,400,000 shares (share issue price = 17.50 zl).

The main project behind the issue was an accrual of resources to finance strategic capital investments connected with the creation of a group that would have larger production capabilities.

Investment projects presented in the prospectus and their execution are the following:

(in millions zl)
 

Item		Investment projects in the prospectus	Execution			Notes no.
			31.12.97	30.04.98*
I	Total income	18.2 – 30.8	24.5	24.5		x
II	Total expenditures including:	ca 20.8 – 21.3	15.2	19.5
1	Total issue costs	1.3 – 1.8	1.6	1.6		x
2	Equity investments including:	14.5	4.9	9.2		x
	- general construction company	x	2.0	2.5		1)
	- steel construction manufacturer	x	1.5	5.3		2)
	- quay	x	-	-		3)
	- others	x	1.4	1.4		4)
3	Tangible assets including:	2.0	4.6	4.6		5)
	- cranes	2.0	4.6	4.6
4	Working capital investment	3.0	4.1	4.1		x
III	Remaining expenditures for ‘98	x	9.3	5.0		6)

* events that took place before completing the report

Notes

1. 60% of the shares of Gdyńskie Przedsiębiorstwo Budownictwa Przemysłowego S.A. in Gdynia was bought from National Investment Funds (leading NFI-3) for 2.0 million zl. Raising of capital by 1.5 million zl took place in April 1998 and Mostostal Gdańsk S.A. acquired 100% of the raised capital increasing its participation in the share capital up to 81%. 1/3 of the amount, by which the capital was raised (0.5 million zl), was financed from the 1997 issue.

2. 70% of shares of Kolejowe Zakłady Konstrukcji Stalowych I Urządzeń Dźwigowych S.A. in Białystok was bought for 1.5 million zl. In 1998 Mostostal Gdańsk increased its participation in the share capital of the company up to 79% through the accrual of 100% of the shares from raising the company capital (by 3.8 million zl). Raising of the company’s capital was totally financed by the proceeds from the issue.

3. The purchase of quay has not been finalised, yet. The matter is being negotiated with proprietors (temporary lease agreements have been signed). This is going to be major investment in 1998 which will exceed 5 million zl.

4. The share capital of Mostostal Gdańsk S.A. controlled MHS Heavysped Sp. z .o.o. (called MG Żuraw Sp. z .o.o. since December 31, 1997) was increased from 100,000 zl up to 3,500,000 zl. The amount of 1,350,000 zl was covered for in cash from the 1997 issue and the remaining 2,050,000 zl came in the form of evaluated tangible assets.

5. The purchase of self propelled cranes of high lifting capacity was co-financed with the proceeds from the issue more than planned as a result of profitability analysis of the amounts generated on capital investments. Four self propelled cranes of 200 tonnes, 130 tonnes, 80 tonnes and 70 tonnes lifting capacity were bought from Grove company, Germany.

6. The remaining financial resources for the distribution in 1998 amount to approximately 5 million zl and will be part of working capital until the negotiations concerning quay are finalised.
 
 
 
 
 

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