7835 SKONSOLIDOWANE SPRAWOZDANIE FINANSOWE …...Report From Operations of the Ciech Group In the First Half of 2005 6 1.3 Financial Performance In the first half of 2005, the Ciech

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GENERAL INFORMATION Management Board Ludwik Klinkosz Stefan Rojewski Jerzy Golis Supervisory Board Magdalena Bąkowska Elżbieta Boniuszko Zygmunt Bosiakowski Andrzej Buczak Dariusz Krajowski – Kukiel Edmund Kozak Ireneusz Król Edmund Pietrzak Registered Offices: ul. Powązkowska 46/50 01-728 Warszawa Poland Auditor Deloitte Audyt Sp. z o.o. ul. Piękna 18 00-549 Warszawa Poland

Table of Contents

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TABLE OF CONTENTS:

TUREPORT FROM OPERATIONS OF THE CIECH GROUP IN THE FIRST HALF OF 2005UT.................................... 4 TU1UT TUCURRENT STANDING OF THE CIECH GROUPUT ......................................................................................... 4

TU1.1UT TUCiech Group OverviewUT............................................................................................. 4 TU1.2UT TUThe Ciech Group’s Major Achievements in the First Half of 2005UT.................... 5 TU1.5UT TUFinancial Performance Drivers Of the Ciech Group UT.......................................... 11 TU1.6UT TUAllocation By the Issuer of the Income from Share Issue UT ................................ 12 TU1.7UT TUMajor Research and Development Achievements of the Ciech Group UT ......... 12 TU1.8UT TUEnvironmental Protection UT ...................................................................................... 13 TU1.9UT TUInvesting ActivityUT ..................................................................................................... 14 TU1.10 UT TUChanges In Organisational Linkage, Major Capital InvestmentsUT .................... 16 TU1.12 UT TUCurrent and Projected Financial Standing of the Ciech GroupUT ....................... 17

TU2UT TUGROWTH PROSPECTS FOR THE CIECH GROUPUT................................................................................... 20 TU2.1UT TUMATERIAL RISK FACTORS AND THREATS AND DEGREE OF EXPOSURE UT.................................... 21 TU2.2UT TUGROWTH FORECASTUT ........................................................................................................................... 21 TU3UT TUATTACHMENTSUT.......................................................................................................................................... 22 TU3.1UT TUFIGURES CONCERNING MAIN PRODUCTS, GOODS AND SERVICESUT............................................. 22 TU3.2UT TUMARKET CHANGES UT .............................................................................................................................. 25 TU3.3UT TUCHANGES IN SUPPLY SOURCES OF MANUFACTURING MATERIALS, GOODS, AND SERVICESUT 28 TUAUDITOR’S REPORT UT ........................................................................................................................................... 30 TUREPORT FROM OPERATIONS OF THE CIECH GROUP IN THE FIRST HALF OF 2005UT.................................. 33 TU4UT TUCURRENT STANDING OF THE CIECH GROUPUT ....................................................................................... 33

TU1.2UT TUCiech Group OverviewUT........................................................................................... 33 TU1.2UT TUThe Ciech Group’s Major Achievements in the First Half of 2005UT.................. 34 TU1.5UT TUFinancial Performance Drivers Of the Ciech Group UT.......................................... 40 TU1.6UT TUAllocation By the Issuer of the Income from Share Issue UT ................................ 41 TU1.7UT TUMajor Research and Development Achievements of the Ciech Group UT ......... 41 TU1.8UT TUEnvironmental Protection UT ...................................................................................... 42 TU1.9UT TUInvesting ActivityUT ..................................................................................................... 43 TU1.10 UT TUChanges In Organisational Linkage, Major Capital InvestmentsUT .................... 45 TU1.12 UT TUCurrent and Projected Financial Standing of the Ciech GroupUT ....................... 46

TU5UT TUGROWTH PROSPECTS FOR THE CIECH GROUPUT................................................................................... 49 TU2.1UT TUMATERIAL RISK FACTORS AND THREATS AND DEGREE OF EXPOSURE UT.................................... 50 TU2.2UT TUGROWTH FORECASTUT ........................................................................................................................... 50 TU6UT TUATTACHMENTSUT.......................................................................................................................................... 51 TU3.1UT TUFIGURES CONCERNING MAIN PRODUCTS, GOODS AND SERVICESUT............................................. 51 TU3.2UT TUMARKET CHANGES UT .............................................................................................................................. 54 TU3.3UT TUCHANGES IN SUPPLY SOURCES OF MANUFACTURING MATERIALS, GOODS, AND SERVICESUT 57 TUAUDITOR’S REPORT UT ........................................................................................................................................... 59 TUCONSOLIDATED FINANCIAL STATEMENTS OF THE CIECH GROUP FOR THE FIRST SIX MONTHS OF 2005UT.............................................................................................................................................................................. 62

TU1UT TUGENERAL INFORMATIONUT ......................................................................................................................... 70 TU2UT TUMATERIAL ACCOUNTING PRINCIPLESUT................................................................................................... 70

Table of Contents

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TU3 BUSINESS SEGMENTS UT .................................................................................................................................... 79 TU4UT TUINCOME AND EXPENSES UT.......................................................................................................................... 88 TU5UT TUINCOME TAXUT .............................................................................................................................................. 91 TU6UT TUDISCONTINUED OPERATIONS AND FIXED ASSETS AVAILABLE FOR SALE UT ..................................... 95 TU7 EARNINGS PER SHAREUT.............................................................................................................................. 95 TU8 DIVIDENDS PAID AND DECLAREDUT .............................................................................................................. 96 TU9UT TUPROPERTY, PLANT AND EQUIPMENT UT .................................................................................................... 97 TU10UT TUINVESTMENT PROPERTY UT ....................................................................................................................... 104 TU11 PERPETUAL LEASEHOLD RIGHTS IN LANDUT ............................................................................................. 104 TU12UT TUINTANGIBLE ASSETSUT.............................................................................................................................. 106 TU13UT TUIMPAIRMENT UT ............................................................................................................................................ 111 TU14UT TUGOODWILL IMPAIRMENT TESTUT ............................................................................................................. 114 TU15 INVESTMENTS IN ASSOCIATES UT ................................................................................................................. 114 TU16 BUSINESS COMBINATIONSUT ........................................................................................................................ 115 TU17UT TUNON-CURRENT RECEIVABLESUT .............................................................................................................. 116 TU18 OTHER NON-CURRENT INVESTMENTS UT ..................................................................................................... 116 TU19UT TUINVENTORIESUT........................................................................................................................................... 117 TU20UT TUTRADE AND OTHER RECEIVABLESUT ...................................................................................................... 117 TU21UT TUSHORT-TERM INVESTMENTSUT................................................................................................................. 119 TU22UT TUCASH AND CASH EQUIVALENTS UT .......................................................................................................... 119 TU23UT TUEQUITYUT...................................................................................................................................................... 120 TU24UT TUNON-CURRENT LIABILITIES UT ................................................................................................................... 122 TU25UT TUPROVISIONSUT............................................................................................................................................. 129 TU26UT TUEMPLOYEE BENEFITSUT ............................................................................................................................ 132 TU27UT TUSHORT-TERM DEBT UT ................................................................................................................................ 134 TU28 OFF-BALANCE SHEET ITEMSUT..................................................................................................................... 153 TU29UT TUFINANCIAL LEASESUT ................................................................................................................................ 159 TU30 OPERATING LEASESUT ................................................................................................................................... 159 TU31 RELATED PARTIES UT ...................................................................................................................................... 160 TU32UT TUFINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICYUT ............................................................ 168 TU33UT TUFINANCIAL INSTRUMENTSUT ..................................................................................................................... 168 TU34UT TUPOST-BALANCE SHEET EVENTSUT .......................................................................................................... 174 TU35 RECONCILIATION OF FIGURES PUBLISHED IN COMPLIANCE WITH THE POLISH ACCOUNTING STANDARDS (PAS) RESTATED IN COMPLIANCE WITH THE INTERNATIONAL FINANCIAL REPORTING STANDARDS. UT ..................................................................................................................................................... 174 TU36 RESTATEMENT OF THE FIGURES PRESENTED IN THE SECOND QUARTER OF 2005. UT ...................... 179 TU37UT TUMISCELLANEOUS INFORMATIONUT.......................................................................................................... 182 TU38 STATEMENT BY THE MANAGEMENT BOARDUT .......................................................................................... 183

Report From Operations of the Ciech Group In the First Half of 2005

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REPORT FROM OPERATIONS OF THE CIECH GROUP IN THE FIRST HALF OF 2005

1 CURRENT STANDING OF THE CIECH GROUP

1.1 Ciech Group Overview

The Ciech Group is a group of domestic and foreign manufacturing, distribution, and trade companies operating in the chemical industry. At June 30th, 2005, it comprised 35 business entities, including:

• Ciech SA – the parent (“Parent”)

• 29 subsidiaries, including:

- 22 domestic subsidiaries

- 7 foreign subsidiaries

• 4 domestic associated entities

• 1 foreign associated entity

Ciech SA has a total of 36 affiliated entities, including direct subsidiaries and associates of Ciech SA acting as the parent company, and indirect subsidiaries and associates where Ciech SA’s subsidiaries and associates act as the parent entities When preparing the consolidated financial statements for the first half of 2005, the following companies were taken into account: • full consolidation method:

1. Ciech SA – parent company

2. Przedsiębiorstwo Chemiczne Cheman SA

3. Vitrosilicon SA

4. Ciech Polfa Sp. z o.o.

5. Polsin Pte. Ltd.

6. Daltrade Plc

• equity method:

7. Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Sp. z o.o.

The consolidated financial statements also account for four lower-tier groups of companies:

1. The Petrochemia-Blachownia Group comprising:

- Petrochemia-Blachownia SA – the parent

- Bl-Trans Sp. z o.o.

2. The Fosfory Group comprising:

- Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. – the parent,

- Agrochem Sp. z o.o. Dobre Miasto

- Agrochem Sp. z o.o. Człuchów

3. The SODA MĄTWY Group comprising;

- Inowrocławskie Zakłady Chemiczne SODA MĄTWY SA – the parent

- Elektrociepłownie Kujawskie Sp z o.o.

- Transoda Sp. z o.o.

- Polskie Towarzystwo Ubezpieczeniowe SA (accounted for by the equity method)


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4. The Janikosoda SA Group comprising:

- Janikowskie Zakłady Sodowe Janikosoda SA – the parent

- Polskie Towarzystwo ubezpieczeniowe SA (accounted for by the equity method)

5. The Alwernia Group comprising:

- Alwernia SA – the parent

- Alwernia Chrom Sp z o.o.

The Parent does not have branches (permanent establishments). The Ciech Group’s operations consist in manufacture and sale of its own products, and trading in goods. The trading activity is mainly conducted through Ciech SA and its domestic and foreign trade operations, and the manufacturing activity is conducted through Ciech SA’s manufacturing subsidiaries. The Ciech Group sells chemicals in the Polish market, and is a major contributor to Poland’s foreign trade by dealing in the import and export of chemical industry products. The core goods sold by the Group on the Polish market were: soda ash, ethylbenzene, fertilisers, glass blocks and glass packaging, salt, liquid fuel, sodium tripolyphosphate, plastics, plant protection agents, and various specialised chemicals. The Group’s key export goods included soda ash, isocyanates (TDI), sulphur, epichlorohydrin, polyvinyl chloride, mineral fertilisers, salt, calcium chloride, liquid fuels. The Group’s largest markets are the European Union countries. At 30.06.2005, the composition of Ciech SA’s Management Board was as follows: Ludwik Klinkosz President of the Management Board Jerzy Golis Member of the Management Board Stefan Rojewski Member of the Management Board The commercial representative of the Parent is Mr. Kazimierz Przełomski. At 30.06.2005, the composition of Ciech SA’s Supervisory Board was as follows: Edmund Pietrzak Chairman of the Supervisory Board Elżbieta Boniuszko Deputy Chairman of the Supervisory Board Edmund Kozak Secretary to the Supervisory Board Magdalena Bąkowska Member of the Supervisory Board Zygmunt Bosiakowski Member of the Supervisory Board Andrzej Buczak Member of the Supervisory Board Dariusz Krajowski-Kukiel Member of the Supervisory Board Ireneusz Król Member of the Supervisory Board

1.2 The Ciech Group’s Major Achievements in the First Half of 2005 On February 10th, 2005, a total of 28,000,000 of Ciech SA's shares were introduced for trading on the Warsaw Stock Exchange, including:

− 20,816 A-series bearer shares with a par value of 5 PLN each, − 19,775,200 B-series bearer shares with a par value of 5 PLN each, − 8,203,984 C-series bearer shares with a par value of PLN 5 each.

At 24.00 PLN at issue, the total revenue from the issue of series- C ordinary shares was 192,875,000 including interest. At the close of the first trading day, the price of one Ciech SA share quoted on the Warsaw Stock Exchange reached 28.10 PLN.

• Alwernia SA introduced new products: fodder phosphates and calcium nitrate.


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1.3 Financial Performance In the first half of 2005, the Ciech Group recorded a profit of 57,021,000 PLN, a balance-sheet total of 1,683,382,000 PLN, and a net increase in cash by 28,796,000PLN. The table below presents selected financial figures and the basic financial ratios for the first six months of 2005 and 2004. Table 1. Selected financial information In '000 PLN

Jan - Jun 2005 Jan – Jun

2004 2005/2004 Dynamics

Net income from sales 1 079 186 1 078 738 0.0%Cost of sales 831 991 804 809 3.4%Gross sales profit 247 195 273 929 -9.8%Selling costs 105 872 105 769 0.1%Overhead costs 76 838 78 614 -2.3%Other operating income / expense -11 487 -7 153 60.6%Operating profit 52 998 82 393 -35.7%Financial income / expense 14 321 -12 684 -Share in the profits of subsidiaries 5 244 -3 466 -Income Tax 15 542 15 905 -2.3%Net profit 57 021 50 338 13.3%Net profit of minority shareholders 5 241 4 644 12.9%Net profit attributable to the equity holders of the parent 51 780 45 694 13.3%EBITDA 107 294 131 730 -18.6%

30.06.2005 30.06.2004 2005/2004 Dynamics 31.12.2004 Dynamics: 30th June

2005/ 31.12.2004

Assets 1 683 382 1 567 358 7.4% 1 588 865 5.9%Non-current assets 896 935 891 469 0.6% 892 296 0.5%Current assets: 786 447 675 889 16.4% 696 569 12.9%- inventories 167 615 119 015 40.8% 130 270 28.7% - trade debtors and other receivables 523 292 499 949 4.7% 518 405 0.9% - cash and cash equivalents 65 566 44 020 48.9% 36 144 81.4% Parent's equity 957 347 689 865 38.8% 704 900 35.8%Minority interests 110 058 106 942 2.9% 105 451 4.4%Equity 1 067 405 796 807 34.0% 810 351 31.7%Non-current liabilities 103 271 117 711 -12.3% 121 795 -15.2%Current liabilities 512 706 652 840 -21.5% 656 719 -21.9%

1st half of 2005 1st half of

2004 2005/2004 Dynamics

Net earnings per share 2.01 2.49 -19.3%Net profit margin 4.8% 4.2% 13.3%EBIT% 4.9% 7.6% -35.7%EBITDA % 9.9% 12.2% -18.6%Current ratio 1.53 1.04 48.2%Quick ratio 1.21 0.85 41.5%Total debt ratio 36.6% 49.2% -25.6%Equity to assets ratio 63.4% 50.8% 24.7%

Source: Ciech SA

Calculation principles: net earnings/ share – net earnings per ordinary shareholders of the parent company / weighted average number of ordinary shares in a given period (according to the definition in IAS 33 "Earnings per share”)


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net return – net earnings of the shareholders of the parent company for a given period / net income from sales of products, services, goods and materials for a given period, EBIT% –operating profit for a given period / net income from sales of products, services, goods and materials for a given period, EBITDA% – (operating profit + amortisation for a given period / net income from sales of products, services, goods and materials for a given period, current ratio - current assets at the end of a given period / current liabilities at the end of a given period, quick ratio - current assets less inventories at the end of the period / current liabilities at the end of period, total debt ratio – short and long-term liabilities at the end of period / total assets at the end of period, equity to assets ratio – total equities at the end of period / total assets at the end of period Sales Income The Group's consolidated net income from sales for the first half of 2005 amounted to 1,079,186,000 PLN, similar to the income recorded for the first half of 2004. It should be noted that the first half of 2004 was a special period, in terms of the strong demand for chemical products, and especially farming chemicals (a pre-accession trading rally), and the good EUR/PLN exchange rates (the average EUR/PLN exchange rate in the first six months of 2004 was 4.73, compared to 4.07 in the current year). The half-year income was positively influenced by a growth in the prices of certain chemical products, compared to the corresponding period of 2004, especially noticeable in the soda industry. The domestic market continues to have the largest share in the Group's product and goods sales, while the European Union is the main export market. The geographical proximity and the lack of trade barriers make EU countries natural markets for the Ciech Group. Sales Income Structure The 2005 half-year income by business segment was as follows:

Source: Ciech SA

USoda Segment During the first six months of 2005, the soda segment generated almost 35% of the Group's total sales income. The parent, Ciech SA, plays a key role in the trading operations, managing the sales of the products manufactured by the subsidiaries Soda Mątwy SA and Janikosoda SA. Soda ash is the basic product of the segment, accounting for 74% of the segment sales. The companies of the Group are the only soda manufacturers in Poland. The sales slump recorded in the soda segment compared to the first half of 2004 was caused by reduced internal demand and lower exports profitability (unfavourable exchange rates).

Soda35%

Agrichemical15%Petrochemical

15%

Inorganic12%

Organic9%

Other 7%

Silicates and glassproducts5%

Pharmaceutical2%


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UAgrochemical Segment The agrochemical segment accounted for 15% of the Group's total sales in the first half of 2005. It is the home segment of the parent company, Ciech SA, which exports fertilisers and imports base stock for fertiliser manufacture, and of the subsidiary Fosfory Sp. z o.o. which manufactures fertilisers and sells them on the domestic market. The key income-generating products here are fertilisers, which account for over 84% of the segment's income. The sales increase in the segment compared to the first half of 2004 was thanks to Ciech SA increasing their fertiliser exports following acquisition of additional stock from Polish suppliers, and their imports of base stock for fertiliser manufacture. Domestic fertiliser sales managed by the subsidiary Fosfory Sp z o.o. decreased compared to the first half of 2004 due to the shorter fertilisation periods resulting from extended periods of snow cover in the fields. UPetrochemical Segment The petrochemical segment accounted for 15% of the Group's total sales in the first half of 2005. The key product here is ethylbenzene, accounting for 44% of the segment income. The main entities operating here are Ciech SA and Petrochemia Blachownia SA, and, to a limited extent Cheman SA. The lower segment income resulted from the reduced outputs of Petrochemia Blachownia, which limited its ethylbenzene volumes to mitigate the effects of unfavourable selling prices, and Ciech SA's gradual withdrawal from the liquid fuels market. UInorganic Segment The inorganic segment accounted for 12% of Group’s total income in the first half of 2005. The main manufacturer in the segment is the subsidiary Alwernia SA, which manufactures phosphorus and chromium, compounds. The company uses the trading services of Ciech SA to import base stock and sell certain products. The main product in the segment is sodium tripolyphosphate, generating 39% of its total income. The segment sales were similar to the half-year sales recorded in 2004. But the product distribution in the segment is gradually changing, with focus being shifted from chromium compounds to the other inorganic products manufactured in that segment. UOrganic Segment The organic segment accounted for 9% of Group's total sales in the first half of 2005. The key player in that segment is Ciech SA, which renders exports agency services, usually on a consignment basis. The main products of the segment are plastics, which account for 50% of the total segment income. Other major contributors to the segment revenues are epichlorohydrin and isocyanates (TDI); throughout the first half of 2005, Ciech SA exported those products on a consignment basis. The year-on-year drop in the segment's half-year sales was due to certain changes in payment arrangements (switch to consignment sales in 2005), and due to Ciech SA withdrawing from nonylphenol exports, and reducing the epichlorohydin export volumes. USilicates and Glass The segment of silicates and glass accounted for 5% of the Group's sales in the first half of 2005. The main manufacturer in this segment is the subsidiary Vitrosilicon SA, which manufactures silicates, glass blocks, and glass lanterns. Vitrosilicon SA is the only manufacturer of glass blocks in Poland. The largest contributors to the segment income for the first half of 2005 were glass blocks and lanterns, which accounted for approx. 51% of the segment's income. Silicates are mainly sold for export, usually via Ciech SA. The increase in the segment's sales compared to the first half of 2004 resulted from bigger sales recorded for the entire product range, brought about by favourable market developments and higher demand.


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The figure below shows the Group's sales income distribution by leading products.

Figure 1. Sales income distribution by leading products

Source: Ciech SA UGross Sales Profit The consolidated gross sales profit for the first half of 2005 was 247,195,000 PLN, which was about 10% less than generated in the corresponding period of 2004. The gross sales profit recorded for the first six months of 2005 was mainly impacted by the disadvantageous trends on the currency market (the average EUR/PLN exchange rate in the first half of 2005 was 4.07 compared to 4.72 in the first half of 2004), and the higher costs of the base stock used in manufacture. The increase in base-stock prices was compensated by reducing the base-stock usage and changing the soda-product prices at the beginning of 2005. UOperating Profit (EBIT) In the first half of 2005, the operating profit amounted to 52,998,000 PLN. This means a year-on-year decrease of approximately 36%. The decline was due to: (a) lower gross sales profit (by 26,734,000 PLN) and (b) higher loss on other operating activity (by 4,334,000 PLN – mainly after creation of loss reserves and revaluation of receivables). The drop in EBIT was also partly due to a 1,776,000 PLN reduction in the general management costs, and the operational excellence programmes aimed at reducing the use of base stock and streamlining the expenditure. The financial impact of those programmes in the first half of 2005 was estimated at 8 million PLN. UNet Profit The consolidated net profit for the first half of 2005 was 57,021,000 PLN. The net profit for the shareholders of the Parent was 51,780,000 PLN. The net profit margin was 4.8% (4.2% the year before). The share of minority interests in the net profit was 5,241,000 PLN. As in the previous year, the core business was the main source of profit (gross sales profit less cost of sales and general management costs). The net profit was also owed to the positive balance of financial income and expenses in the amount of 14,321,000 PLN. The profit achieved on

Other 36%

Soda ash25%

Fertilisers12%

Benzene and ethylbenzene8%

Sodium bicarbonate2%

Sodium tripolyphosphate5%

Pharmaceuticals2%

Sulphur2%

Salt4%

Plastics4%


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financing activities resulted mainly from the sale of shares of Ciech SA by the Group entities in a public offering (the profit on the transaction was 17,815,000 PLN). The net profit was affected by the loss of the subsidiary Cheman SA (7.5 million PLN). The table below shows the key business operations shaping the profit, and the comparative figures for the first half of 2004. Table 2. Financial performance by type of business operations (‘000 PLN)

1st half of 2005 1st half of

2004 2005/2004 Dynamics

1. Profit on operating activities 52 998 82 393 -35.7%2. Balance of income from and expense on financing activities 14 321 -12 684 -3. Share in the profits of subsidiaries accounted for by the equity method

5 244 -3 466 -

4. Income tax 15 542 15 905 -2.3%5. Net profit (1+2+3-4) 57 021 50 338 13.3%6. Net profit attributable to minority interests 5 241 4 644 12.9%7. Profit for the shareholders of the parent (5-6) 51 780 45 694 13.3%

Source: Ciech SA

Balance Sheet UEquity The consolidated equity of the Ciech Group's Parent at the end of the first half of 2005 was 957,347,000 PLN, which was 267,482,000 PLN more than in the preceding year. The key equity driver were the proceeds from the issue of shares in the amount of 192,347,000 PLN, and the net profit of 51,780,000 PLN generated for the Parent’s shareholders in the first half of 2005. UNon-Current Assets At June 30th, 2005, the Group's non-current assets accounted for 53% of the balance-sheet total, at 896,935,000 PLN. Their share in the total assets decreased compared to the preceding year, even though fixed assets increased by 5,466,000 PLN. The reason was the high rate of increase in the current assets. Non-current assets comprised mainly property, plant, and equipment, which accounted for about 89% of the total non-current assets. UCurrent Assets At June 30th, 2005, the Group's current assets accounted for 47% of the total assets. Current assets comprised mainly: (a) trade and other receivables – 66.5% of current assets, (b) inventories – 21% of current assets (c) cash and cash equivalents – 8%. Compared to the balance at 30.06.2004, current assets increased by 16%, owing to increases in: (a) the inventories (by 48,600,000 PLN), (b) trade and other receivables (by 23,343,000 PLN), (c) short-term investments (by 19,473,000 PLN) and (d) cash and cash equivalents (by 21,546,000 PLN). The increase in inventories resulted mainly from the import of a larger batch of phosphorus stock to take advantage of the temporary price cuts and the good dollar exchange rates (Fosfory, Alwernia). The increase in short-term investments and cash was owed to the proceeds from the issue of shares in February 2005. UConsolidated Debt The total short- and long-term liabilities of the Ciech Group as at June 30th, 2005, reached 615,977,000 PLN, which was 20% less than at June 30th, 2004. Long-term liabilities accounted for 17% of the total liabilities. They were 14,440,000 PLN less than at June 30th, 2004. Short-term liabilities decreased by PLN 140,134,000 PLN compared to June 30th, 2004, owing to bank loan repayments. Bank liabilities accounted for 28%, and trade and other liabilities accounted for 67% of the total short-term liabilities. Net debt as at June 30th, 2005 (comprising bank loans, other loans, and other financial liabilities less cash) amounted to 113,091,000 PLN (260,667,000 PLN in the preceding year). Such a big net debt reduction resulted from repayment of part of the current loans, and a simultaneous increase in cash (mainly with the gains from the public issue of shares). This also led to a drop in the Group's debt ratio (calculated as the ratio of net debt to the balance-sheet total) from 16.6% at June 30th, 2004 to 6.7%. Financial leverage (the ratio of net debt to net debt plus equity) as at June 30th, 2005 was 9.6% compared to 24.6% in the preceding year.


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The current ratio, calculated as the ratio of total current assets to total short-term liabilities, amounted to 1.53, showing a significant improvement in liquidity compared to the same period of the previous year, when that ratio stood at 1.04. UCash Flows Net cash flows in the first half of 2005 amounted to 28,796,000 PLN. Net cash from operating activities was 1,311,000 PLN. The key cash driver, in addition to the net profit plus amortisation, was movements in current assets: (a) decrease in liabilities (-64,480,000 PLN) and (b) increase in inventories (-35,844,000 PLN). The balance of inflows and outflows from investing activities was a negative figure, and amounted to 45,658,000 PLN. The most important half-year expenditure included expenses on fixed assets by the manufacturing companies, and expenses connected with the investing activity of Ciech SA after obtaining the funds from the issue of shares. The largest investment income was earned on the sale of Ciech SA's shares by the Ciech Group companies. The main sources of growth in cash were the cash flows from financing activities, the balance of which was 73,143,000 PLN. The inflows came mainly from the issue of shares, and a large part of those inflows was used to repay current loans. Cash as disclosed in the cash-flow statement at the end of June 2005 totalled PLN 65,566,000 PLN. 1.4 Seasonal or Cyclical Patterns in the Operations of the Ciech Group Ciech SA's trading activity involves many chemicals that are used as raw materials. The raw-material markets are characterised by high cyclicality, prompted by the volatility of the world economies. The market prices of such oil-derivative products as benzene, toluene, ethylbenzene are most heavily affected by market cyclicality. The differences in the prices of those products range from 50% to over 100% over several years (3-5-year periods). In case of inorganic chemicals (soda ash, soda-based products, mixed and phosphate fertilisers), the differences in market prices are lower, even immaterial. Income from the sales of goods and materials and income from the sales of products and services is not characterised by cyclicality or seasonality. This is because there is a large number of product ranges (several thousand types of goods and products) which complement each other in terms of the sales they generate in the different periods, and level each other out when factored in the total income. Seasonality has a relatively small impact on the Group's overall sales, as it overlaps with other factors, which include: impact of global prices and market cycles exchange rate fluctuations delays and rescheduling of large deliveries the subcontractors' manufacturing schedules downtime maintenance and operating breaks at manufacturing plants, capacity increases by the manufacturing affiliates.

The Ciech Group's level of income and financial performance depends, largely, on the general standing of the economy. Cyclical fluctuations in income and profit are especially noticeable in the organic segment, which is marked by high-demand cycles. Because almost half of the Group's revenues are from sales of inorganic chemical products to stable markets, the fluctuations in revenues and profit are relatively small. The sales levels recorded in the consecutive quarters are usually similar. Additional factors include: stable sales structure large share of product supply by the Group's manufacturing entities small share of finished products sales to end customers and the resulting low sensitivity to changes in demand. large share of loyal customers in the total sales (high rate of customer loyalty) diversity of the operations, and of the export markets and domestic markets.

So, the sales are characterised by high cyclicality and an even spread of sales throughout the year.

1.5 Financial Performance Drivers Of the Ciech Group In the first half of 2005, one of the key macroeconomic drivers that continued to boost the Ciech Group's operations was Poland's new membership in the European Union, which rallied the domestic market and chemicals exports and facilitated the trade exchange between Poland and the EU (e.g. no customs clearance), Positive factors


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• Good prospects for improvement in Poland’s farming industry, and the resulting increase in demand for agrochemicals in this economic sector

• Continued uptrend in the European glass industry (main buyer of soda ash) • Improvement of the situation in the construction industry, which is an indirect recipient of many chemical

products (long-expected increase in construction and assembly sales) • Continuous upswing in the artificial fertiliser industry (especially with respect to mixed and phosphate

fertilisers: growing outputs, exports volumes, and export prices) • Sale of Ciech SA's shares by the subsidiaries

Negative factors

• High volatility of the chemicals market – rapid changes in price levels and relations • High base-stock prices:

(i) Enduring high prices of coke (considerably higher than in the first half of the previous year) resulting in high costs of soda ash production. (ii) Higher phosphorus prices (iii) Supply shortage and high prices of potassium salt (iv) Supply shortage and higher prices of benzol

• Continuously high PLN exchange rates (especially the PLN/EUR rate) which affect exports profitability • Stagnation with respect to production and sales in the whole chemical industry (dynamics close to 0% in

comparison with the high base – very good results in the previous year) • Substantial decrease in prices of the main plastics on the domestic market during the 1st half of 2005 • Enhancement of production capacity by Alwernia's competitors, leading to an increased supply and

lower mark-ups • Difficulties facing the Polish fertiliser market due to shorter fertiliser spreading periods • A sharp drop in cereal prices and the lack of market for cereal sales, leading to the shortage of funds in

the Polish agricultural sector

1.6 Allocation By the Issuer of the Income from Share Issue Agro-chemical segment. The construction of the feed phosphate system in Alwernia has been completed. At

Fosfory, the construction of the system is in progress. The stage of basic project work has been completed. The system is expected to be ready in October 2005. Total expenditure on the systems at both companies was PLN 11,368,000 PLN. On July 8th, 2005, the parent purchased 128,000 shares in ZCh Police SA at the issue price of 10.30

Segment of silicates and glass products. The glass block production section is being modernised. The

subsidiary Vitrosilicon SA started to implement an environment-friendly technology for production of glass blocks. The modernisation will be finished in May 2006, and will allow doubling the output from 3.5 million to 7 million blocks. The value of the investment is 17,988,000 PLN

Petrochemical segment. The construction of the BT fraction extractive distillation system is in progress. The

project is at the stage of technical design and preparation of the construction site. That investment will enable a substantial improvement in the purity of benzene and toluene, providing an opportunity to look for new chemical synthesis markets in Poland and abroad. The expenditure of the project will amount to about 35 million PLN. Completion is scheduled for the 2nd quarter 2006

Organic segment. The company submitted a bid for the purchase of majority stakes in ZCh Zachem and

ZCh Organika Sarzyna Soda segment. One of the soda manufacturing plants started to build a monohydrate system to launch

production of heavy "monohydrate" soda, which has better physical properties compared to the soda currently manufactured by the Ciech Group, and which will better meet the customer expectations. The monohydrate system project will enable the Ciech Group to strengthen the market position. The investment is planned to be completed by the end of the first quarter 2007. The estimated cost of construction of the monohydrate system is about 47.2 million PLN. In addition, the company is awaiting a decision of the State Treasury concerning repurchase of small stakes in the soda companies

1.7 Major Research and Development Achievements of the Ciech Group

Development and production launch of fodder phosphates containing 10 – 15 % of sludge II from concentration of EKF solutions at Alwernia SA


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The laboratories developed formulas for winning fodder phosphates containing 10 to 15 % of sludge, the by-product of pentasodium triphosphate production, from extractive phosphoric acid. It was proven that the resulting mono- and dicalcium fodder phosphates comply with all applicable requirements, both in terms of their composition, and of the impurities content. The method involving the over-15 % phosphorus derived from the sludge was implemented on a commercial scale for dicalcium fodder phosphate

Development of a method for repulping post-neutralisation sludge from pentasodium triphosphate production on the basis of extractive phosphoric acid at Alwernia SA. The laboratories developed a formula for obtaining sodium phosphates from post-neutralisation sludge and from concentration, to reduce P2O5 and sodium losses during pentasodium triphosphate production on the basis of extractive phosphoric acid. The tests were also carried out in a semi-technical scale, showing the potential for washing ca. 25-30% of P2O5 and 30-35 % of sodium iodine. Implementation of so-called repulping was proved highly profitable, and will be launched on a commercial scale. The ultimate result will be P2O5 loss reduction from the current 18-20% to 10-12%

Development and implementation of a liquid calcium nitrate production system at Alwernia SA The laboratories developed a method for producing liquid calcium nitrate on the basis of nitric acid, a by-product of the "NITRON” SA technology, and hydrated lime. Tests were also conducted on a commercial scale to obtain liquid nitrogenous fertiliser which meets all EC requirements for fertilisers. Sample batches of several tonnes were given to customers for evaluation

Research work at the sediment ponds and the surrounding areas of Janikosoda SA. The research involved measurement of the degree of pollution of underground waters, the stability of the embankments, and the environmental impact of reclamation of the closed-down soda ash sediment dumps. Reclamation work was continued on the sediment ponds by applying a new technology using ash and sewage sediment. Research is underway with regard to the condition of the soil-forming layer being created, and the emerging flora

Research work at the sediment ponds and the surrounding areas of Soda Mątwy SA. The main research in the first half of 2005, covered such topics as reclamation of sediment pond embankments, increasing the cooling capacity for clear sewage drained to the Vistula, reduction of ammonia use and emissions, potential uses of process heat and waste heat, disposal of eluate from the Raw Soda system centrifuges, possibilities to replace the direct-dryer heating system at the Calcium Chloride unit, reduction of post-drying gas impurities at the Calcium Chloride unit, improvement of the flow rate of soda – anti-caking agent, launch of sodium percarbonate production, soda waste disposal – production of sorbents, fillers, and fertilisers, production of high-purity products.

Launch of production of a new-generation environment-friendly non-organic binding agent for iron- and non-ferrous metal alloy casting at Vitrosilicon SA A project is underway to launch production of sodium water glass modified with organic additives, based on the products already in place. The new binder will be used in cast-iron and cast-steel foundries, and partly also (a new advancement) in non-ferrous metal alloy foundries producing moulding sand casts. It will be recommended for use in mould production and, largely, also in all types of casting cores. The successful application of sample batches in commercial foundries shows that the modified water glass can be widely used in the non-ferrous metal casting industry.

Lithium Silicate Production Growth Vitrosilicon SA continues its efforts to develop a lithium silicate production technology. The research is very advanced, and the results breed patent hopes. The lithium-modified potassium and sodium water glass obtain during the research was applied in the coated electrode industry where a high degree of arc ionisation is required during welding. The commercial application was successful.

1.8 Environmental Protection In the first half of 2005, the manufacturing plants of the Ciech Group continued to operate in accordance with the applicable laws and administrative decisions obtained. The Group pursues an environmental policy aimed at minimising the negative impact of the manufacturing operations on the natural environment. All manufacturing companies hold the quality management certificates ISO 9001:2000, and most of them (except for Boruta–Kolor and GZNF Fosfory) hold the environmental management certificates ISO 14001:1996. Two members of the Ciech Group hold the work safety management certificates OHSAS 18001:1999; they are Petrochemia Blachownia and Vitrosilicon. The certificates mean that the certifying bodies conduct periodical audits in order to confirm compliance with the quality and environmental norms, as well as adherence to the management rules as required by the relevant norms. All the manufacturing companies of Ciech Group want to minimise environmental impact by constantly modernising their technologies and equipment and ensuring compliance with EU requirements. One of the most important recent efforts to that end was implementation of the requirement to obtain integrated licenses. Most of the companies have already submitted their applications for integrated licenses to the relevant administrative bodies and are awaiting decisions, and Zakłady Chemiczne Alwernia S.A., Petrochemia Blachownia SA and Vitrosilicon SA (Żary plant) have already received their integrated licenses. In addition, the manufacturing companies began to look into the effects of implementation of the draft REACH regulation.


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Alwernia SA is working to adapt its storage area to the applicable regulations on waste segregation and storage. A project for the redevelopment and singling out of new quarters in the production waste storage area is being developed. The company also obtained an integrated licence for production of fodder phosphates. Fosfory Sp. z o.o. modernised their DOYLE's scrubbers by adding another absorption fluid circulation. Soda Mątwy SA built embankments around the emergency cooling ponds, a redundant gas cleaning system, modernised the intermediate pumping station and the water and sewage system, modernised the calcium product system devices, modernised the Calcium Chloride apparatus and equipment, and reclaimed the settling pond slopes.

1.9 Investing Activity

1.9.1 Investments In The First Half Of 2005 Total capital expenditure at the Ciech Group in the first half of 2005 amounted to 53,600,000 PLN. Total capital expenditure at Alwernia SA in the first half of 2005 amounted to 4,509,000 PLN. The projects included:

• Expansion of the EKF-based orthophosphate system • Launch of production of liquid and crystalline calcium nitrate • Fodder phosphate production system • Modernisation of the phosphorus storage facilities • Launch of by-product-based fertiliser production

Total capital expenditure at the Blachownia Group in the first half of 2005 amounted to 5,900,000 PLN. Most of that amount was expended on the construction of an extractive distillation system and an R2 tank to increase the storage capacity. Total capital expenditure at Fosfory Sp z o.o. in the first half of 2005 amounted to 7,642,000 PLN. The projects included:

• Construction of a fodder phosphate system • Modernisation of the Nabrzeże Chemików wharf • Construction of a phosphoric acid terminal • Modernisation of the sulphuric acid system • Modernisation of the fertiliser system – switch to waste-free fertiliser production • Replacement of pneumatic transport of ground phosphate rock with motor transport.

Total capital expenditure at Alwernia SA in the first half of 2005 amounted to 14,700,000 PLN. The following were completed and put into operation in the first half of 2005:

• Two process gas compressors • A new dense soda ash screening system • Modernised dense soda ash loading system • Constant monitoring of chimney emissions

Total capital expenditure at Soda Mątwy SA in the first half of 2005 amounted to 14,588,000 PLN. The projects included:

• Production of monohydrate soda, • Alternative water supply in the plant, • Boosted production of sodium bicarbonate, • Replacement of a preliminary dust concentration decanter, • Bicarbonate centrifuging, • Modernisation of the plant’s cabling and power network, • Modernisation of control and measurement systems, • Automation and modernisation of the boiler room, • Modernisation of the RH-DS apparatus, • Modernisation of TBS turbo compressors, • Modernisation of the Calcium Chloride apparatus and equipment, • Modernisation of the carbonating towers, • Modernisation of the FCH lime kilns,


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• Limestone crushing, • Purchase and implementation of a new version of the ERP system.

Total capital expenditure at Vitrosilicon SA in the first half of 2005 amounted to 1,198,000 PLN. The projects included:

• Boiler room modernisation at the Iłowa plant • Purchase of vehicles • Modernisation of the computer network • 5,000,000 were paid as an advance toward refractory materials which were used to build a furnace, and

toward delivery of technology equipment for the glass brick production unit.

1.9.2 Investment Plans For the Next 12 Months The Ciech Group plans to allocate 207,500,000 PLN on capital expenditure in 2005. That amount includes mainly Ciech SA's capital expenditure, and expenditure on construction of production systems at the subsidiaries. Alwernia SA is planning to complete the following projects by the end of the year:

• EKF system • Modernisation of the dust extraction point • Fodder phosphate system • Calcium nitrate production system

Environmental projects will also be launched in the first half of 2006, including a fertiliser production system (super phosphate, nitrate and potassium sulphate) based on production waste, and redevelopment of the waste storage area Blachownia SA is planning to continue to build an extractive distillation system and to buy a parcel of land from Ciech SA which houses stocking tanks for the benzol processing system. Fosfory Sp. z o.o. is planning the following projects:

• Construction of a fodder phosphate system. • Modernisation of the Nabrzeże Chemików wharf to be able to service ships carrying liquid cargo. • Construction of a Phosphoric Acid Terminal: construction of a new, and adaptation of the existing

phosphoric acid tanks, construction of a phosphoric acid loading station • Construction of a phosphoric acid storage tank for the purposes of fertiliser production, later to be used

in the discontinuation of waste phosphogypsum production stored in Wiślinki. • Modernisation of the sulphuric acid system. As Poland is now part of the European Union, the Sulphuric

Acid Production Plant has to comply with the standards and requirements of the BAT (Best Available Techniques) for sulphuric acid production. The warehouse facilities for sulphuric acid will also be enlarged.

• Modernisation of the fertiliser system to make it capable to produce new types of compound fertilisers at zero or minimum waste. The fertilisers will be enriched with calcium, sodium, and sulphur.

• Replacement of pneumatic transport of ground phosphate rock with motor transport. Generation of compressed air, the bulk of which is used to transport ground phosphate rock in the production shops, requires a lot of power. Ground phosphate rock transport using compressed air causes emissions to the atmosphere, even despite the filtering devices.

Major investments aimed at increasing the effectiveness of the production processes of Janikosoda SA planned for the next 12 months include:

• Modernisation of the limekiln charge preparation system (anthracite) • Limestone crushing system

Soda Mątwy's investments will mainly focus on the monohydrate soda production system. Vitrosilicon's major investments in the next 12 months will include:

• Modernisation of the glass block production unit. • Construction of new finished-product warehouses • Expansion of the sodium water glass production unit and of the water glass warehouse • Construction of a glass lantern-paining unit • Construction of an experimental amorphous silicate unit • Purchase of a numerically controlled machine tool • Relocation and modernisation of the plant laboratory


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1.10 Changes In Organisational Linkage, Major Capital Investments

1.10.1 Capital investments and divestments in the first half of 2005, financing In the first half of 2005, Ciech SA continued its investment and divestment activities started in the preceding year in accordance with the overall Ciech Group growth strategy, by consolidating its shareholding stakes and streamlining the Group's organisation, and preparing for equity investments using the income from the issue of shares. On 6th June 2005, Ciech SA, IZCh Soda Mątwy SA, and JZS Janikosoda SA acquired 100% shares and

votes in Vitrosilicon SA because of a forced buyout of minority interests. The total value of the transaction was 64,800,000 PLN. Ciech holds a 60.4% stake in Vitrosilicon SA, Janikosoda SA holds a 19.80% stake, and Soda Mątwy SA holds a 19.80% stake.

By way of an agreement signed on June 16th, 2005, Ciech SA its whole stake in Polcommerce Kft of

Budapest to Ciech-Polfa Sp. z o.o. for the amount of 203,000 PLN. Polcommerce Kft. operates mainly in the pharmaceutical sector. The transaction was a consequence Ciech SA spinning off its pharmaceutical business as a separate unit, Ciech Polfa Sp. z o.o., and transferring the part of the sales network dealing with the pharmaceutical industry to Ciech Polfa Sp. z o.o.

On March 11th, 2005, the General Assembly of Zach-Ciech Sp. z o.o. resolved to initiate liquidation of the

company. Alwernia SA sold their shares in the subsidiary Oczyszczalnia Alwernia and 95,100 shares of Ciech SA at 24

PLN per share. Petrochemia-Blachownia SA sold 236,878 shares of Ciech SA at 24 PLN per share.

Fosfory Sp z o.o. sold 190,208 shares of Ciech SA at 24 PLN per share.

Janikosoda SA sold 440,260 shares of Ciech SA through a public offering at 24 PLN per share.

Soda Mątwy sold 335,924 shares of Ciech SA through a public offering at 24 PLN per share.

1.10.2 Equity Investment and Divestment Plans For the Next 12 Months The investments and divestments planned for the next 12 months will be carried out in line with the adopted growth strategy designed to increase the Group's value. Efforts are underway to acquire new equity investment projects, both in Poland and abroad. The purpose of those efforts is to take over domestic and foreign manufacturers of selected chemical products, thereby reinforcing the Ciech Group’s standing in its current markets and providing opportunities for development of the Group’s operations in other segments. The Ciech Group will complete the following as part of the projects scheduled for the next 12 months:

• continue to buy shares in soda companies, with the ultimate aim of acquiring a 100% stake in the share capitals of IZCh Soda Mątwy SA and IZCh Janikosoda SA. The privatisation agreements of both companies provide that Ciech SA has the right to purchase both blocks of shares for approximately 40 million PLN.

• continue the process of pre-investment analyses of soda manufacturing companies in Central and Eastern Europe.

• take part in the privatisation of chemical companies in Poland.

1.11 Securities issues at Ciech


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The share capital was increased by 41,020,000 PLN on February 15th, 2005, following issue of C shares with a nominal value of 5 PLN each. No share redemptions occurred in the period concerned. On March 22nd, 2005, CIECH SA redeemed its previously issued commercial papers with a par value of 15,000,000 PLN at the maturity date Within the first half of 2005 ended on June 30th, 2005, the Company did not issue any debt securities, including bonds, promissory notes, or short-term debt securities.

1.12 Current and Projected Financial Standing of the Ciech Group The assessment of how well the Group's financial resources are managed was based on a financial-ratio analysis, including profitability ratios, liquidity ratios, asset turnover ratios, and debt ratios. It is the Group's key objective to maintain full liquidity. The Ciech Group is fully capable of meeting all of its financial obligations. The decision-making procedures applied to purchases of both base stock, and auxiliary materials and services, provide that the best possible financial terms should always be negotiated, with particular emphasis on the payment deadlines. The same rule applies to sales, where additional care is exercised to determine the partner's reliability, the degree of certainty as to recoverability of the payments receivable, and, where necessary, to apply execution measures.

Ciech Group's profitability analysis In the first half of 2005, even though demand for chemical products was lower and the currency exchange rates were unfavourable (the zloty was strong against other currencies, causing lower exports profitability), the sales income remained similar to the income recorded in the same period of 2004. This was possible because prices of certain chemical products increased compared to the first six months of 2004, which was especially evident in the soda sector. The half-year on half-year profitability slump was mainly caused by: (a) currency exchange trends disadvantageous for exporters and (b) higher prices of the base stock used by the Group to manufacture its products. The tables below show the main figures concerning financial performance and profitability:

Table 3. Consolidated profitability ratios for the Ciech Group

Specification 1st half of 2005 1st half of 2004

Net sales income 1 079 186 1 078 738Sales profit 64 485 89 546Operating profit 52 998 82 393Net profit 57 021 50 338Return on sales (%) 5.98% 8.30%Return on operating activity (%) 4.91% 7.64%Return on Sales (%) 5.28% 4.67%Return on Assets (%) 3.39% 3.21%Return on Equity (%) 4.85% 5.73%

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 / assets as at the period-end, return on equity (ROE) – net profit of the equity holders of the parent/ equity as at the period-end.

Liquidity of the Ciech Group Ciech SA’s financial liquidity position in the first half of 2005 improved considerably, and the liquidity ratios met the recommended safety standards. The most important driver of the improvement in liquidity was the issue of shares. Thanks to the cash earned from the issue, the amount of short-term financial assets increased, while the level of short-term debt decreased. The key liquidity ratios are shown in the table below:


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Table 4. Liquidity ratios for the Ciech Group


Current ratio 1.53 1.04Quick ratio 1.21 0.85

Source: Ciech SA

Calculation principles: current ratio – the ratio of current assets to 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 current assets less inventories to 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 for the Ciech Group The demand for current assets at the end of June 2005 amounted to 325,500,000 PLN, and had increased by 43% within 12 months. This was mainly due to: (a) larger inventories and (b) higher trade receivables. Table 5. Working Capital of the Ciech Group ('000 PLN). Specification 30.06.2005 30.06.2004 1. Current assets 786 447 675 8892. Cash and other short-term investments 91 604 50 5853. Adjusted current assets (1-2) 694 843 625 3044. Short-term liabilities 512 706 652 8405. Short-term loans and other financial liabilities 143 363 255 3746. Adjusted short-term debt (4-5) 369 343 397 4667. Working capital (1-4) 273 741 23 0498. Working assets demand (3-6) 325 500 227 8389. Net cash balance (7-8) -51 759 -204 789

Source: Ciech SA

The high amounts of the Ciech Group's trade receivables and payables against the disclosed income are driven by the type of sales (consignment) conducted as part of the trading operations of the Parent. The cash conversion period was extended by 20 days in the first half of 2005 compared to the first half of 2004, mainly as a result of a reduction in the trade payables (leading to the liabilities turnover period being 9 days shorter) accompanied by an increase in the inventories (the inventory turnover period is 8 days longer).


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Table 6. Turnover cycles for Group's main working capital items (days)


Inventory turnover 30 22Trade receivables turnover 71 68Trade payables turnover 39 48Operating cycle 101 90Cash conversion cycle 62 42

Source: Ciech SA

Calculation principles: inventory turnover – the ratio of inventories at the period-end to the operating cost for the period, multiplied by the number of days in the period, receivables turnover – the ratio of trade receivables at the period-end to the net sales income for the period, multiplied by the number of days in the period, payables turnover – the ratio of trade payables at the period-end to the operating costs for the period, multiplied by the number of days in the period, operating cycle - total inventory turnover and trade receivables turnover days cash conversion cycle – the difference between the operating cycle and the trade payables turnover cycle

Ciech Group's Debt At the end of the first half of 2005, the Ciech Group's debt was at a safe level, lower than the year before. Total liabilities were equal to ca. 37% of the assets. The high ratio of equity to assets indicates that external financing can be increased in the future. Such financing will support the Group in carrying out its strategic tasks, and in particular in acquiring new operations. The table below shows the key debt ratios. Table 7. Debt Ratios for the Ciech Group


Total debt ratio 36.6% 49.2%Long-term debt ratio 6.1% 7.5%Debt to equity ratio 57.7% 96.7%Equity to assets ratio 63.4% 50.8%

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.

1.13 Assessment Of Investment Project Feasibility Against the Status Of the Resources In Place, Taking Into Consideration Possible Changes In the Financing Structure.

Most of the capital expenditure planned will be covered from the Group's own funds allocated from amortisation gains and profit. Soda Mątwy started to build a monohydrate soda production system in the first half of 2005. The construction will be largely financed with a long-term loan taken out with Bank Handlowy. The loan agreement is currently negotiated, and the desired terms will be 40,000,000 PLN granted for 5.5 years, payable in instalments until January 2011. Vitrosilicon will finance 20% of its projects alone, and 80% with bank loans. The financing structure may change, depending on whether the Company is granted funds by the Ministry of Economy as part of the "Assistance for


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Businesses Making New Investments" Programme. The grant from the Programme would be allocated to repay the loan earlier. With regard to acquisitions, the Group can finance most of the expenses with a long-term bank loan. The Group is not planning to finance its capital expenditure with securities issues.

1.14 Material Events That Impacted Or Are Likely To Impact the Company’s Operations and Financial Results

• Launch of privatisation of the 6 largest state-owned chemical companies, which will lead to substantial

changes on the domestic chemical market. Ciech SA intends to become involved in the privatisation of selected companies.

• The changes with regard to the ownership structure of the petrochemical industry in Central Europe (Orlen-Unipetrol), as well as the planned launch of new systems for manufacture of polyethylene and polypropylene in the third quarter this year in Płock (Basell Orlen Polyolefins), will change the situation on the market, and Ciech SA will have to adapt to the new conditions.

• Extension of the validity period of duty-free import quotas on potassium chloride from Eastern European countries until April 2006 will make it possible to maintain the competitive edge of that material, which Ciech SA imports to the Polish market.

• Launch of new products by Alwernia (fodder phosphates, fertilisers). • Sale of Alwernia SA's idle fixed assets and transfer of the perpetual lease rights to unused land to the local

(Gmina) authorities. • Alwernia will start to work together with the Fertiliser Institute (Instytut Nawozów Sztucznych) in Puławy to

develop farming fertiliser production technologies. • Fosfory and Alwernia SA will sign a long-term contract for forwarding and quay port services with regard to

phosphoric acid handled at the transhipment terminal. • Application of anthracite in soda production by Janikosoda SA and completion of a project related to dense

soda loading.

2 Growth Prospects for the Ciech Group The growth will be determined by both the rate at which the Group will pursue its growth strategy, and by external factors, which include: large potential for growth in the demand for chemicals in Poland. Use of chemicals in Western Europe is

almost four times higher than in Poland. interest of foreign investors in the Polish chemical industry, competitive edge of Polish chemical products sold on international markets, evidenced with a high export

dynamics. Ciech SA believes that the positive macroeconomic trends and the assumed parameters of the Group's key investment projects will be the driving force for achieving the key strategic targets, including higher operating profitability in the next two to three years. The Ciech Group’s short-term goal is to strengthen its current market position with respect to the core business segments and key product sales. The Ciech Group's range of products comprises many “mature” products (soda ash, vacuum pan salt, sodium bicarbonate) with an established market standing and a stable growth dynamics. The Group plans the following with respect to those products: streamline base-stock purchases and product sales and logistics, modify the manufacturing processes to enhance the operational excellence and reduce the manufacturing

costs, use market niches to place the Group's core portfolio products, acquire cheap base-stock in Eastern European and Asian countries, to reduce the unit costs of production,

With respect to products with higher growth dynamics, (such as glass blocks, lanterns, epoxy resins, benzene, sodium water glass), the Group is planning to increase the sales and market shares of those products. The Ciech Group's long-term efforts will focus on: strengthening the leading position in the core product markets, horizontal concentration of the manufacturing processes (from securing access to cheap base-stock sources

to reaching the end consumer, using own distribution network where economically sound), manufacturing maximally processed products with high-potential application markets, defined as the so-

called “core portfolio.”


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2.1 Material risk Factors And Threats And Degree Of Exposure Situation in the customer industries Ciech SA's largest domestic customers include the chemical industry, the glass manufacturing industry, and the plastics industry. How those industries expand, depends on the general economic situation in Poland. In the first six months of 2005, the industrial output at fixed prices increased by a mere 1.5% (12.3% throughout 2004). It can be expected that the economic downturn forecasted for 2005 (from 5.4% of the GDP in 2004 to ca. 3.5%) will be reflected in lower sales dynamics in the chemical sector. Note, however, that the situation is a result of the so-called high base – an exceptionally good economic performance recorded in the previous year, largely owed to Poland's accession to the EU. On the other hand, recent economic analyses indicate that Poland's economic growth rate will be higher in the second half of 2005. Economic situation in Europe and worldwide The Ciech Group's activities rely largely on chemical product exports, the volume 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 on the global markets, and, consequently Ciech SA's exports performance. Situation in the raw materials market A major portion of the Ciech Group’s turnover is generated from imports of chemical raw materials. The raw-materials markets are characterised by high cyclicality, prompted by fluctuations in the world economies. On the one hand, growing prices of raw materials force the trading agents to lower their mark-ups and lead to lower customer demand. On the other hand, dropping 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. If the stable growth rate and steady prices of chemical raw materials continue, this will benefit the Ciech Group’s imports of chemical raw materials. Large fluctuations in demand and prices caused either by a high economic growth rate, or by an economic slump, will affect Ciech SA’s trade in chemical raw materials. Growing competition in the soda segment The Ciech Group's core products include soda products manufactured by the subsidiaries JZS Janikosoda S.A. and IZCh Soda Mątwy S.A., and sold by Ciech SA. The continuing concentration of production in Europe escalates competition from large, supra-regional chemical corporations that manufacture soda ash. Ciech SA also intends to join the concentration bandwagon by acquiring soda manufacturers. Foreign exchange risk Exports constitute a major share of the Ciech Group's operations. Payments are mostly made in euros. High EUR/PLN exchange rates increase the profitability of product sales in foreign markets. Moreover, high EUR/PLN exchange rates are good for the Group's export sales, which translates into an increase in the overall sales income Exports denominated in USD are much less significant for the Group's performance. The USD exchange rates have no impact on the profit, because they are naturally hedged with similar volumes of USD-denominated imports. Ciech SA, which is the agent managing the international transactions of the other Group members, has the highest exposure to exchange risk. The exchange risk is constantly monitored, and most of the deals are hedged with forward contracts and options strategies.

2.2 Growth Forecast The Ciech Group's growth strategy is aimed at reaching the highest possible company value by creating a strong regional chemical corporation focused on selected market segments covering products with high added value, high growth potential, and complementary in nature.

After the strategic vision is fulfilled, the Group will be transformed to a chemical corporation composed of four separate divisions managing the four key areas of the chemical sector: a soda division, phosphorus division, inorganic division, and organic division. Each division will manage a dedicated product portfolio with parameters guaranteeing an income level for the Group of approximately 700 million Euros per year, and an EBITDA of more than 12%.

Delivery of the growth strategy will involve: – increasing the added value in the soda sector by means of internal consolidation of the soda segment within

the soda division, and through technology investments, – working toward a leading position in the Polish markets of phosphorous fertilisers and products, as well as

compound fertilisers, by expanding the phosphorus division through fixed-asset investments in the


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subsidiaries GZNF Fosfory Sp. z o.o and SCh Alwernia SA, and by equity investments in the phosphorus fertiliser industry.

– expanding the inorganic division on the basis of the subsidiary Vitrosilicon SA, mostly through investments in increasing the production capacity, and also through equity investments,

– increasing the Ciech Group’s role in creating the value chain for organic products by taking over the manufacturing stage of selected products (creation of the organic division) through equity investments aimed at acquiring Polish manufacturers of organic chemicals.

Ultimately, the CIECH Group’s operations will comprise almost exclusively the manufacture of and trade in the products of the so-called “core portfolio,” meeting the predefined added-value requirements. Portfolio streamlining will be carried out on two levels: one the one hand, the share of non-core products and goods in the Ciech Group’s portfolio will be gradually decreasing, and, on the other hand, the portfolio will be enriched with attractive new products that, to date were not part of the trade offering. The streamlining process will find its reflection in strategic decisions concerning the Group’s composition. The Ciech Group will be aiming to take over enterprises (or parts thereof) manufacturing the products identified as "core.” At the same time, the Ciech Group’s member companies will be making their own investments to increase the volumes of core-product manufacturing (organic growth). While gradually abandoning the non-core portfolio, Ciech SA will be making divestments from selected manufacturing and commercial companies which are currently part of the Group. The divestments are necessary, first, to be able to focus on the core business and, second, to gain funds to finance the planned acquisitions and investments. Ciech SA’s trade in non-core low-yield products will also be gradually reduced. The strategy of the Ciech Group will be implemented through specific tasks delegated to the Group members.

3 ATTACHMENTS

3.1 Figures Concerning Main Products, Goods and Services Ciech SA

01.01.2005 - 30.06.2005

Product, product group, or service Quantity in ‘000 tonnes Net sales in

‘000 PLN Percentage

share

Dense soda ash 400.5 209 932.0 25.9% Benzene and ethylbenzene 28.7 81 434.7 10.0% Light soda ash 138.5 76 062.1 9.4% Fertilisers 72.0 51 789.8 6.4% Salt 279.8 47 484.5 5.9% Yellow phosphorus 4.7 38 896,. 4.8% Other - 305 911.1 37.7% TOTAL 811 510.8 100.0%

UAlwernia

01.01.2005 - 30.06.2005

Product, Product Group, or Service Quantity in ‘000 tonnes Net sales Percentage

share Pentasodium triphosphate 19.7 49 384 58.4 Phosphoric acid 6.7 11 857 14.0 Other products - 23 337 27.6 TOTAL 84 578 100.0


23

UBlachownia 01.01.2005 - 30.06.2005


share Ethylbenzene 22.2 61 641 52% Benzene 11.3 30 113 25% Toluene 5.4 10 282 9% Anhydrous ethanol ['000 litres] 4.1 7 722 6% Other - 9 135 8% TOTAL 118 893 100%

UFosfory

01.01.2005 - 30.06.2005

Product, Product Group, or Service Quantity in ‘000 tonnes Net sales in ‘000 PLN

Percentage share

Superphosphates 30.8 21 948.7 19.7% NPKMg Compound Fertilisers (Amofosmag) 26.8 20 755.2 18.6% PKMg Compound Fertilisers (Agrafoska) 17 19 037.0 17.1% NPK Compound Fertilisers (Amofoska) 22.2 18 261.7 16.4% Other - 31 121.6 28.2% TOTAL 111 124.2 100.0%

UJanikosodaU

01.01.05 -30.06.05

Product/Product Group Quantity in tonnes Sales in '000

PLN Share in

total sales Light soda ash 84 352 38 720 22.6% Dense soda ash 194 387 92 203 54.0% Wet vacuum pan salt 167 410 15 406 9.0% Dry vacuum pan salt 109 009 15 867 9.3% Other 3 253 8 427 5.1%

TOTAL 170 623 100.0% USoda MatwyU

01.01.2005 - 30.06.2005


share Dense soda ash 211 96 925 43.5% Light soda ash 55 25 236 11.3% Sodium bicarbonate 30 18 165 8.1% Calcium chloride 22 11 356 5.1% Other - 71 237 32.0% TOTAL 222 919 100.0%

UVitrosilicon

01.01.2005 - 30.06.2005


Percentage share

Glass lanterns 10.6 17 252 34.9% Sodium water glass 28.2 14 184 28.7% Glass blocks 3.2 7 932 16.1% Sodium water glass 14.2 6 026 12.2% Other - 3 999 8.1%


24

01.01.2005 - 30.06.2005


Percentage share

TOTAL 49 393 100% UCheman

01.01.2005 - 30.06.2005


share Fuel 3.33 18 077 25.18% Soda products 16.58 11 986 16.70% Household chemicals and cosmetics 1.93 6 679 9.30% Products for glassworks 1.79 3 950 5.50% Solvents 1.36 4 611 6.42% Feed additives and standards 4.80 4 024 5.61% Base stock for the petrochemical industry and the chipboard industry 1.64 3 995 5.57% Additives for the food industry 1.40 5 063 7.05% Products for construction chemicals and peroxide 1.96 3 491 4.86% Water treatment products 0.37 1 423 1.98% Auxiliary products 0.11 1 355 1.89% Plastics 1.14 4 907 6.84% Other 0.10 2 221 3.10% TOTAL 71 782 100.00%

UCiech Polfa

01.01.2005 - 30.06.2005

Product, product group, or service Quantity in ‘000 tonnes Net sales Percentage

share Medicines 13.484 55 Pharmaceutical substances 8.043 33 Packaging 2.479 10 Other 504 2 TOTAL 24.510 100.00%


25

3.2 Market Changes

Ciech S.A.'s major customers in the 1st half of 2005 ('000 PLN) 01.01.2005 - 30.06.2005

Domestic Customers Net sales in ‘000

PLN Share Affiliation with Ciech S.A Zakłady Chemiczne Alwernia 67 755 8.35% Subsidiary Dwory S.A. 63 242 7.79% None Fosfory Sp. z o.o. Gdańsk 39 997 4.93% Subsidiary Interore SA 28 373 3.50% None Owens-Ilinois Polska SA 24 490 3.02% None Siarkopol SA Grzybów 23 383 2.88% None Cheman SA 21 795 2.69% Subsidiary Petrochemia Blachownia 19 455 2.40% Subsidiary Borsodchem 18 251 2.25% None Landhandel 16 375 2.02% None Other 488 395 60.18% TOTAL 811 511 100.00%

Alwernia Group's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer

Net sales Share Affiliation with Ciech S.A

Reckitt Benckiser 9 383 11.1% None Procter&Gamble 8 501 10.1% None Ciech SA 8 386 9.9% Other 58 308 68.9% TOTAL 84 578 100.00% Petrochemia Blachownia Group's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer


Ciech SA 79 877 67.2 Other 39 016 32.8 TOTAL 118 893 100% Fosfory Group's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer Net sales in ‘000

PLN. Share Affiliation with Ciech S.A

Agrolok Sp. z o.o. 12 830.6 12 % None Kazgod Sp. z o.o. 11 351.6 10 % None Ciech SA 6 662.5 6%

Other 80 279.5 72% TOTAL 111 124.2 100%


26

Janiksoda SA's customers accounting for more than 10% of the sales ('000 PLN)

01.01.0 -30.06.05 Specification Net sales Share

Affiliation with Ciech S.A

Ciech SA 164.991 96.7% l Other 5 632 3.3% subsidiary

TOTAL 170 623 100.0% Soda Mątwy Group's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer


Ciech SA 158 992 71.3 Janikosoda SA 58 897 26.4 Subsidiary Other 5 030 2.3 TOTAL 222 919 100% Vitrosilicon SA's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer

Net sales (PLN ‘000) Percentage share Affiliation with Ciech S.A

Ciech SA 18176 36.8 Other 31217 63.2 Total 49393 100% Cheman SA's customers accounting for more than 10% of the sales ('000 PLN)

01.01.2005 - 30.06.2005 Customer

Net sales Share Affiliation with CIECH S.A

KWB Adamów 3 657 5.1% none Trend Glass 1 230 1.7% none Agros Nova 1 110 1.5% none Other 65 785 91.7% Total 71 782 100% – Ciech-Polfa Sp. z o.o.'s customers accounting for more than 10% of the sales ('000. PLN)

01.01.2005 - 30.06.2005 Customer Net sales Share Affiliation with Ciech S.A

Polfa Pabianice 5,559 22.70% Erekton (Russia) 2,437 10 % Other 16,514 67.30% Total 24,510 100%

Ciech SA's markets in the 1st half of 2005 ('000 PLN) 01.01.2005 - 30.06.2005

Net sales in ‘000 PLN. Goods Services Poland 476 809 5 532

Exports: 296 333 32 837 -European Union 279 119 5 221 -Other European countries 15 329 896 -Africa 368 24 021 -Asia 836 2 290 -Other 681 404


27

Alwernia Group

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and Services

Poland 3 337 42 399

Exports: 367 38 475 -European Union 367 20 898 -Other European countries - 16 043 -Africa - 347 -Other - 1 187

Petrochemia Blachownia Group

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and Services Poland 1 806 105 968

Exports: - 11 119 -European Union - 9 714 -Other European countries - 1 405

Fosfory Group

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and Services

Poland 14 587 96 537 Janikosoda SA

01.01.05 -30.06.05 Net sales in ‘000 PLN. Goods and Materials Products and Services Poland 231 170 392

Soda Mątwy Group

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and Services Poland 463 222 226 Exports: - 230 -European Union 230 Vitrosilicon SA

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and Services Poland 846 44 960 Exports: 39 3 548 -European Union 39 3 163 -Other European countries - 370 -Asia - 15


28

Cheman SA

01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and

Services Poland 71 045 369 Exports: -European Union 197 -Other European countries 171 -Africa -Asia -Other Ciech Polfa Sp. z o.o. 01.01.2005 - 30.06.2005 Net sales in ‘000 PLN. Goods and Materials Products and

Services Poland 7.035 499

Exports: -European Union 5.089 -Other European countries 9.651 3 -Africa 6 -Asia 2.077 2 -Other 148

3.3 Changes in supply sources of manufacturing materials, goods, and services Ciech SA’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)

01.01.2005 - 30.06.2005 Supplier Net purchase

value Share Affiliation with Ciech

S.A

Soda Mątwy SA 154 953.9 22.3% subsidiary Janikosoda 162 629.8 23.4% subsidiary Petrochemia Blachownia 79 682.3 11.5% subsidiary Other 297 554.5 42.8% Total 694 820.5 100%

Alwernia Group’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)



S.A

Ciech SA 35 579 43.6 Other 46 024 56.4 Total 81 603 100% Petrochemia-Blachownia Group’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)


value Share

Affiliation with Petrochemia-

Blachownia ZAKŁADY KOKSOWNICZE ZDZIESZOWICE SP. Z O.O. 23 116 19.5 None

Ciech SA 19 513 16.5 Other 75 897 64.0


29


value Share

Affiliation with Petrochemia-

Blachownia

Total 118 526 100% Fosfory Group’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)



S.A

Ciech SA 26 333.4 27% Lotos Mazowsze 3 170.5 3% None Zakłady Azotowe PUŁAWY 1 748.6 2% None Janiksoda SA’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)

01.01.05 -30.06.05 Specification Net purchase

value Share Affiliation with

Ciech SA

Elektrociepłownie Kujawskie Sp. z o.o. 57,746 47.86% Indirect subsidiary Ciech SA 9,695 8.04%Jantrans Sp. z o.o. 2.581 2.14%Total 70.022 58.04%

Vitrosilicon SA’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)

01.01.2005 - 30.06.2005 Supplier Net purchase value

('000 PLN). Share Affiliation with Ciech S.A

Ciech SA 8 970 25.5 PGNiG 5 933 16.9 None Other 20 224 57.6 Total 35 127 100% Cheman SA’s suppliers accounting for more than 10% of the total supplies (‘000 PLN)

01.01.2005 - 30.06.2005 Supplier

Net purchase value Share Affiliation with Ciech S.A

Ciech SA 9 444 16.32% Other 48 428 83.68% Total 57 872 100% Ciech-Polfa Sp. z o.o.'s suppliers accounting for more than 10% of the total supplies ('000 PLN)

01.01.2005 - 30.06.2005 Customer Net purchase value share Affiliation with Ciech S.A

Documents

7835 SKONSOLIDOWANE SPRAWOZDANIE FINANSOWE …...Report From Operations of the Ciech Group In the First Half of 2005 6 1.3 Financial Performance In the first half of 2005, the Ciech