reduction initiatives and based on modified conditions … · 2014. 2. 18. · page 04 / 05 aero...
TRANSCRIPT
AERO Vodochody a.s.Annual Report 2005
AERO Vodochody a.s. U Leti‰tû 374
250 70 Odolena Voda, Dolínek
Czech Republic
Tel.: +420 255 761 111
Fax: +420 255 762 111
E-mail: [email protected]
http://www.aero.cz
VZ_2005_AN_obalka 31.5.2006 14:55 Str. 1
/ S-76C+ / New York City / USA /
IN THE YEAR 2005 AND FOR THE YEARS TO
COME, THROUGH A NUMBER OF COST
REDUCTION INITIATIVES AND BASED ON
MODIFIED CONDITIONS OF THE SUPPLY
CONTRACT WITH SIKORSKY AIRCRAFT
CORPORATION, WE SUCCEEDED
IN ACHIEVING ADEQUATE PROFITABILITY
OF THE KEY AEROSTRUCTURES
PROGRAM - THE PRODUCTION OF
PRACTICALLY COMPLETE S-76 HELICOPTER.
VZ_2005_AN_obalka 31.5.2006 14:55 Str. 2
AERO Vodochody a.s.Annual Report 2005
Contents
Presentation Part05 Who We Are
07 2005 – Key Events
09 Foreword of the President
11 Company Bodies and Management
13 Company Profile
15 Report on Business Activities of the
Company in the Year 2005
25 Supervisory Board’s Statement
27 Auditor's Report
Financial Part30 Financial Statements
37 Notes To the Financial Statements
61 Report on Relations between Related Entities
64 Organization Structure
65 Abbreviations
66 Contacts
VZ_2005_AN 31.5.2006 14:59 Str. 1
AERO VODOCHODY A.S. HAS ADVANCED
QUALITY TECHNOLOGICAL BASE
COMPRISING ALL WORKPLACES
AND SERVICES NECESSARY FOR
DEVELOPMENT, PRODUCTION, SALES
AND SUPPORT OF SMALL TO
MEDIUM-SIZE AIRCRAFT
AS WELL AS DELIVERIES OF HIGHER
ASSEMBLIES IN AEROSTRUCTURES.
VZ_2005_AN 31.5.2006 14:59 Str. 2
AERO Vodochody a.s.Presentation Part
VZ_2005_AN 31.5.2006 14:59 Str. 3
/ L-159A / Weapon Tests / Czech Republic /
AERO VODOCHODY A.S. IS A HOLDER OF ALL
RELEVANT CERTIFICATES OF THE COMPANY
AS A WHOLE AS WELL AS PARTIAL
PROCESSES FOR DEVELOPMENT
AND PRODUCTION, MAINTENANCE
AND TRAINING OF PERSONNEL FOR
BOTH CIVIL AND MILITARY AIRCRAFT
TECHNOLOGY ACCORDING TO VALID
INTERNATIONAL STANDARDS. ADVANCED
SYSTEM OF PRODUCTION CONTROL MRPII
AND SHARING OF THE COMPANY’S DATA
IS FULLY COMPATIBLE WITH LEADING
AEROSPACE COMPANIES.
1
VZ_2005_AN 31.5.2006 14:59 Str. 4
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Who We Are
Page 04 / 05
AERO Vodochody a.s. is the largest Czech defense compa-ny and the largest Czech manufacturer of aircraft tech-nology. The Company's main advantage is its advanced qua-lity technological base comprising all workplaces and servic-es necessary for development, production, sales and support ofsmall to medium-size aircraft as well as deliveries of higherassemblies in aerostructures.
AERO Vodochody a.s. is a holder of all relevant certifi-cates of the Company as a whole as well as partial processesfor development and production, maintenance and training ofpersonnel for both civil and military aircraft technologyaccording to valid international standards. Advanced systemof production control MRPII and sharing of the Company’sdata is fully compatible with leading aerospace companies.
AERO Vodochody a.s. employs 1,654 highly qualifiedemployees capable of sophisticated international cooperationwith foreign partners in aerospace production and of workwith foreign documentation with leading aerospace companiesin Europe, America and Asia.
AERO Vodochody a.s. has extraordinary experience indevelopment and production of aircraft technology, whichis documented by the fact that it has produced over 11,000aircraft units of different types during its more than 85-year-long history. AERO Vodochody a.s. is the largest jet trainingaircraft producer in the world. In the last 50 years, it has pro-duced more than 6,500 units of such aircraft, which repre-sents approximately two thirds of the worldwide production inthis category.
AERO Vodochody a.s. has a very attractive location in theproximity of the Capital of Prague; the total area of landcovers 2,631,000 m2 (production area 108,632 m2).The areaoccupies the Vodochody private international airfield, whichcan also be used for commercial purposes.
WHO WE ARE
VZ_2005_AN 31.5.2006 14:59 Str. 5
2
/ Ae270 / Engineering Hangar / AERO Vodochody a.s. / Tests of Indirect Lightning Effects /
AERO VODOCHODY A.S. MAINTAINED CURRENT
AND ACQUIRED NEW SMALLER
AEROSTRUCTURES ORDERS, E.G. FOR EADS
OR MT AEROSPACE. ENGINEERING WORK
CONTINUED IN KEY PROJECTS OF Ae270
AND L-159 TO MAINTAIN THEIR POTENTIAL
ALSO IN THE FUTURE.
VZ_2005_AN 31.5.2006 14:59 Str. 6
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Key Events
Page 06 / 07
2005 – KEY EVENTS
February• Upgraded S-76C++ version introduced• Ae270 flight characteristics verification completed• Ae270 certification tests launched• L-159 demonstrated at AVEX 2005, Egypt
April• Participation at AEROEXPO 2005, Mexico• Ae270 certification tests completed;
FAA certification team arrived• Participation at LAAD, Brazil
May• IDET NEWS Prize in Aerospace Technologies
- Training Systems for "L-159B Ground Based Training System" awarded
• Contract for F/A-18E/F gun bay door (2006-2010) concluded
• Participation at AMD 2005 Manila, Philippines• Contracts on overhauls and after-guarantee
services for Tunisian L-59s concluded• L-159 212th Squadron at Squadron Exchange, Belgium
June• Participation at Paris Air Show, France• L-159 212th Squadron at Clean Hunter, Germany• Ordinary accounting and consolidated balance sheet
for 2004 approved by Ordinary General Meeting of Shareholders
• First contract with EADS on sub-assemblies for Airbus A320 / A340
• First aircraft painting contract for external customer
July• Authorization awarded for evaluation and verification
of conformity of military aircraft technology products by Czech Ministry of Defense
• Government Resolution No. 985 on AERO privatization
August• 8 L-39ZO units with extended service life handed to
Hungarian Air Force• Participation at Keczkemét Air Show, Hungary• Certification awarded for maintenance training, class
Technician - airframe, engine, and Technician - avionics by ÚCL / CAA
• Participation at Radom Air Show, Poland• Participation at MSPO Kielce, Poland• L-159 212th Squadron at NATO Air Meet, Norway
September• Quality control system certificate awarded according to
AS 9100, Rev. B by Lloyd’s Register Quality Assurance• Preparation of production of formed parts
for the ARIANE 5 for MT Aerospace commenced• L-159 demonstrated at Archangel Airshow, Greece• Airborne data server AirMIS integrated into L-159B• VS-2 ejection seat upgraded version tests commenced• Last 25th overhauled L-39ZA handed over
to Royal Thai Air Force
October• Serial production of new S-76C++ version commenced • Two in-flight ejections of upgraded VS-2 ejection seat • First purchase order from the French company Aircelle• Contract on technical support for L-39 overhauls
in Algeria concluded
November• Participation at Defense 2005,Thailand• Participation at C + D, Hungary• Payment of bonds issued - USD 215 million, incl. interests• Participation at Dubai Air Show, United Arab Emirates• L-159B Simulator development completed• Privatization of AERO commenced
December• Agreement on follow-on support service
for L-159s and L-39s owned by Czech Ministry of Defense concluded
• Type Certificate for Ae270 awarded by EASA• 2nd group of Czech Air Force L-159 bulletins completed
VZ_2005_AN 31.5.2006 14:59 Str. 7
3
/ Petr Klime‰ / Chairman of the Board of Directors and President of the Company /
VZ_2005_AN 31.5.2006 14:59 Str. 8
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Foreword of the President
Page 08 / 09
FOREWORD OF THE PRESIDENT
Dear shareholders, dear business partners,dear sympathizers of aircraft industry,
Let me inform you about main events in AERO Vodochody a.s. inthe year 2005. Main efforts of the Board of Directors in the year2005 were focused on stabilization of economy and maintenanceof the AERO Vodochody a.s. current potential, although wereached historically the lowest revenues in last ten years.
AERO Vodochody a.s. continues maintaining functionality of itsdevelopment and production workplaces and it continuouslymaintains all relevant certificates for the field of both civil andmilitary aircraft technology. In August 2005, we confirmed theAS/EN 9100 and ISO 9001:2000 certificates awarded by theLRQA Company.We obtained new approvals for maintenance ofcivil aircraft technology and training of maintenance personnel,which will significantly help to valorize the capabilities and skillsof the Company. For example, we will be able to use them in thenewly prepared aerostructures projects and in commercialdevelopment of the Vodochody private international airfield.
AERO Vodochody a.s. maintained current and acquired newsmaller aerostructures orders, e.g. for EADS or MT Aerospace.Engineering work continued in key projects of Ae270 andL-159 to maintain their potential also in the future. We suc-ceeded in assuring financial stability of AERO Vodochody a.s.,namely financial restructuring of debts originating from the1990s, which should have been paid out of business cases re-venue on the basis of the former strategic partner’s businessplan. Specifically, on November 15, 2005, the issue of AEROVodochody a.s. bonds was paid from the state budget, and sub-sequently this obligation was transferred from the Ministry ofFinance of the Czech Republic to the Company shareholder,the Czech Consolidation Agency.
In the year 2005 and for the years to come, through a numberof cost reduction initiatives and based on modified conditions ofthe supply contract with Sikorsky Aircraft Corporation, we suc-ceeded in achieving adequate profitability of the key aerostruc-tures program - the production of practically complete S-76helicopter.
After approximately eight years of effort, which was complicat-ed by initial under-estimation and wrong control of the project,together with aircraft configuration changes "on the run", wesucceeded in acquiring the Type Certificate for the Ae270 smallcivil transportation aircraft, both from the European AgencyEASA and the American Administration FAA. This opened theway to bring these aircraft onto markets, to obtain operationalexperience and to continue in this project.
However, we did not succeed yet in acquiring further sales con-tract for the L-159 aircraft, but in the year 2005 - after alonger period of time - the AERO Military Program concludedseveral significant contracts. First of all, we acquired the 25-year contract on follow-on support of the L-159 and L-39 fleetowned by the Ministry of Defense of the Czech Republic. Wesigned several contracts in the field of overhauls and spareparts deliveries for the L-39 / L-59 aircraft, e.g. with Tunisia,Thailand, Vietnam, etc. Several business negotiations, also withcompletely new entities interested in our services, are continu-ously running and seem to be promising for the future.
In the year 2005, we acquired new contracts for deliveries inthe field of aerostructures, which I believe are of strategicimportance. The largest European manufacturers have beentesting us so far, waiting, however, I believe that after the priva-tization of the Company is finished, the projects will developdynamically.
On July 22, 2005, the Government of the Czech Republic decidedby its Resolution No. 985 to announce the public tender for thesale of AERO Vodochody a.s. shares together with the claim ofthe Czech Consolidation Agency towards AERO. In the secondhalf of the year 2005, a number of stabilization and preparationsteps for privatization were taken, concluded by data room prepa-ration.The shares of the Company under the control of the Stateby the company Letka, a.s. were transferred to the CzechConsolidation Agency, thus being concentrated to one single pa-ckage in the amount of 99.97 % of the basic capital to be sold.
Despite relatively high loss shown for the year 2005, we suc-ceeded in maintaining the overall potential of AERO Vodochodya.s. and preparing the Company the best way possible for theentry of a new strategic owner.
Petr Klime‰Chairman of the Board of Directors and President of the Company
VZ_2005_AN 31.5.2006 14:59 Str. 9
4Changes during the Year 2005:
Ale‰ Pe‰lAuthorized to Manage the Section of Realization of Contracts until February 23, 2005
Jifií BulantDirector - Information Technologies until June 30, 2005Director - Services Division from July 1, 2005 until July 14, 2005
Antonín Jakub‰ePresident until July 14, 2005
Petr Klime‰Vice-president - Finance until July 14, 2005President from July 14, 2005
Olga SvûdínkováDirector - Human Resources until July 14, 2005
Zdenûk S˘koraAuthorized to Manage the Civil Programuntil August 31, 2005
Josef KadlecAuthorized to Manage the Section of Realization of Contracts from February 24, 2005 until September 20, 2005Vice-president - Realization of Contracts from September 20, 2005
Jana SlimáãkováAuthorized to Manage the Financial Section from July 15, 2005 until September 20, 2005
SoÀa BrãákováAuthorized to Control the Section of Human Resources from July 15, 2005 until September 20, 2005
Václav Mi‰kovsk˘Vice-president - Military Aircraft Marketing and Sales from March 18, 2005
Zdenûk Vran˘Director - Services Division from July 14, 2005
Josef ·onsk˘Vice-president - Civil Program from September 20, 2005
TomበUvíraVice-president - Finance from September 20, 2005
Miroslava SchichováDirector - Human Resources from September 20, 2005
Changes during the Year 2005:
Vice-chairmen:Zdenûk S˘kora until July 14, 2005Zdenûk Stuchlík from July 14, 2005
Members:Jifií Fiala until January 13, 2005Olga Svûdínková until July 14, 2005Jan ·techr from July 14, 2005Zdenûk Vran˘ from November 24, 2005
Changes during the Year 2005:
Chairmen:Václav Srba until June 29, 2005Milo‰ Kebrdle from June 29, 2005
Vice-chairmen:Jaromír Hejda until June 27, 2005Václav Srba from June 29, 2005
Members:Jindfiich Ploch until June 29, 2005Martin Prachafi until August 18, 2005Petr Goldmann from June 29, 2005Martin Bûlãík from August 18, 2005
/ L-39 / General Overhauls / RTAF Base / Thailand /
VZ_2005_AN 31.5.2006 14:59 Str. 10
Presentation Part / Company Bodies and Management
Page 10 / 11
Top Managementto December 31, 2005
Petr Klime‰President
TomበUvíraVice-president - Finance
Josef KadlecVice-president - Realization of Contracts
Zdenûk StuchlíkVice-president - Military Program
Václav Mi‰kovsk˘Vice-president - Military Aircraft Marketing and Sales
Josef ·onsk ,̆ Ph.D.Vice-president - Civil Program
Monika VajnerováVice-president - Aerostructures Program
Zdenûk Bire‰Director - Quality Assurance
Jifií FialaDirector - Engineering
Miroslava SchichováDirector - Human Resources
Zdenûk Vran˘Director - Services Division
Board of Directorsto December 31, 2005
Chairman:Petr Klime‰President AERO Vodochody a.s.
Vice-chairman:Zdenûk StuchlíkVice-president - Military Program AERO Vodochody a.s.
Members:Jan ·techrProject Manager AERO Vodochody a.s.
Jan VachekProject Manager AERO Vodochody a.s.
Zdenûk Vran˘Director – Services Division AERO Vodochody a.s.
Supervisory Boardto December 31, 2005
Chairman:Milo‰ KebrdleCzech Gas Association
Vice-chairman:Václav SrbaMinistry of Industry and Trade of the Czech Republic
Members:Martin BûlãíkMinistry of Defense of the Czech Republic
Jan Bor˘sekAERO Vodochody a.s.
Ale‰ CincibusMinistry of Industry and Trade of the Czech Republic
Ján DzvoníkNational Property Fund of the Czech Republic
Petr GoldmannCzech Consolidation Agency
Jaromír KvapilAERO Vodochody a.s.
Ivan PekárekAERO Vodochody a.s.
COMPANY BODIES AND MANAGEMENT
AERO Vodochody a.s.
Annual Report 2005
VZ_2005_AN 31.5.2006 14:59 Str. 11
/ L- 159B / Flight Demonstration / Dubai Air Show / UAE /
5AERO VODOCHODY A.S. HAS A VERY
ATTRACTIVE LOCATION IN THE PROXIMITY
OF THE CAPITAL OF PRAGUE; THE TOTAL AREA
OF LAND COVERS 2,631,000 M2 (PRODUCTION
AREA 108,632 M2). THE AREA OCCUPIES
THE VODOCHODY PRIVATE INTERNATIONAL
AIRFIELD, WHICH CAN ALSO BE USED
FOR COMMERCIAL PURPOSES.
VZ_2005_AN 31.5.2006 14:59 Str. 12
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Company Profile
Page 12 / 13
COMPANY PROFILE
The joint stock company AERO Vodochody a.s., following thetradition of the company "AERO, továrna létadel" ("AERO,Airplane Factory"), established on February 25, 1919, wasestablished on December 19, 1990. On January 2, 1991, theCompany was registered in the Commercial Register at theMunicipal Court in Prague, Section B, File No. 449.
Among the main subjects of enterprise of AERO Vodochody a.s.belong particularly development, production, testing, overhauls& upgrades of military training and combat aircraft, aircraftparts and tooling, development and production of multi-roletransportation aircraft, cooperation in helicopter production,foreign trade with military material, operating a private inter-national airfield and air services.
The capital of AERO Vodochody a.s. registered in the CommercialRegister is CZK 2,691,774,732.The Company business address is:Odolena Voda-Dolínek, U Leti‰tû 374, 250 70, Czech Republic.
AERO Vodochody a.s. is controlled according to the Germanmodel. The General Meeting of Shareholders of the Companyelects a total of six members into the nine-member SupervisoryBoard (the remaining three positions are reserved for the re-presentatives of employees of the Company). The SupervisoryBoard assigns a five-member Board of Directors.The Board ofDirectors nominates the President of the Company.
AERO Vodochody a.s. has three main business units: MilitaryProgram, Civil Program and Aerostructures Division.
The Military Program is focused on development and produc-tion of the L-159 family of advanced light combat and trainingaircraft being currently the most modern serial production air-craft in its category worldwide.The L-159 family consists of thesingle-seat Advanced Light Combat Aircraft – the L-159A –and the two-seat Advanced Training and Light Combat Aircraft– the L-159B. Both aircraft versions make an integral part ofthe "L-159 Combat & Training System", which also comprisesof integrated logistic support, ground based training system(including the L-159B Full Mission Simulator), and missionplanning and debriefing equipment. Moreover, the Companyprovides overhauls, maintenance and upgrades (including ser-vice life extension) of earlier produced L-39 and L-59 jet trai-ning and combat aircraft.
The Civil Program is focused on development and final produc-tion of the Ae270 single engine turboprop, based on the IBISAerospace Joint Venture Agreement between AERO Vodochodya.s. and Aerospace Industrial Development Corporation (AIDC),concluded in the year 1997. This aircraft obtained the TypeCertification of EASA and FAA at the end of 2005 / beginningof 2006, and the Company currently acquires first operating
experience related to this aircraft. At the same time, preparato-ry work on the new Ae270B version is in progress.
The Aerostructures Division produces the complete S-76Chelicopter, excluding dynamic parts and final customization ofthe interior for Sikorsky Aircraft Corporation (SAC).This medi-um category helicopter is primarily used in the V.I.P. version, forair rescue services, for transportation of employees and materi-al to oil platforms. The Aerostructures Division closely cooper-ates with Boeing St. Louis (deliveries of gun bay door assem-blies for the F/A-18E/F aircraft), BAE Systems (detail partand subassembly kits for the B767 aircraft fixed leading edge),and Vought Aircraft Industries (deliveries of parts for theBoeing B747 aircraft).
Shareholders’ Structure On June 10, 2004, the Extraordinary Meeting of Shareholdersof AERO Vodochody a.s. approved to decrease the registeredcapital by CZK 150,930 (by the value of the shares owned bythe Company itself) from CZK 2,691,925,662 to CZK2,691,774,732.This decrease was registered by a resolution ofthe Municipal Court in Prague on January 31, 2005, and cameto legal force on February 14, 2005.
The majority shareholder of AERO Vodochody a.s. is the CzechState with the total share of 99.96808 %. To February 15,2005, the State held this share through the special-purposeorganization of the National Property Fund of the CzechRepublic - Letka, a.s., (53.31055 %) and the CzechConsolidation Agency (46.65753 %). On December 19, 2005,Letka, a.s., transferred based on the contract on compensatedconveyance the whole of its share to the Czech ConsolidationAgency (99.96808 %). The remaining 0.03192 % of sharesare owned by AERO HOLDING a.s., in liquidation.
Shareholders' Structure to January 1, 2006:
Shareholder CZK %
Czech Consolidation Agency 99,96808
AERO HOLDING a.s., in liquidation 0,03192
Total 2.691.774.732 100
Czech Consolidation Agency
99,96808 %
AERO HOLDING a.s.
0,03192 %
VZ_2005_AN 31.5.2006 14:59 Str. 13
/ L-159B / Cockpit Detail /
6AERO VODOCHODY A.S. EMPLOYS
1,654 HIGHLY QUALIFIED EMPLOYEES
CAPABLE OF SOPHISTICATED
INTERNATIONAL COOPERATION WITH
FOREIGN PARTNERS IN AEROSPACE
PRODUCTION AND OF WORK WITH FOREIGN
DOCUMENTATION WITH LEADING
AEROSPACE COMPANIES IN EUROPE,
AMERICA AND ASIA.
VZ_2005_AN 31.5.2006 14:59 Str. 14
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Report on Business Activities
Page 14 / 15
REPORT ON BUSINESS ACTIVITIES OF THE COMPANY IN THE YEAR 2005
Financial and General Situation of the CompanyIn the year 2005, the financial situation of AERO Vodochodya.s. was influenced mainly by production and sales of theS-76C+ and S-76C++ civil helicopter and further by thebiggest drop of revenues (the smallest order coverage) resul-ting in the lowest generation of value added in last sevenyears, and also by extraordinary receipts and expendituresrelated to payment of the principal and interest part of thebonds issued.
Property Structure and Financing ResourcesTotal assets (net value) of AERO Vodochody a.s. decreased inthe year 2005 compared to the year 2004 by CZK 1,166million to the amount of 4,536 million. The most significantitem of the assets was represented by the current assets in theamount of CZK 3,505 million (i.e. 78 % of the total netassets) formed mainly by inventory (CZK 1,922 million) andshort-term financial assets (CZK 1,029 million). Compared tothe year 2004, the current assets were decreased by CZK1,015 million. Fixed assets in the amount of CZK 976 millionrepresented 22 % of the assets of AERO Vodochody a.s.Compared to the year 2004, their net book value decreased byCZK 181 million (annual depreciation of property and disposalof property from records of AERO Vodochody a.s. especiallydue to the sales of Company flats to Prague Real EstateAdministration and to 2000 Housing Association).
In the year 2005, the inventory registered increase by 15 %compared to the year 2005, especially due to stock reservescreated in advance to ensure production in the year 2006related to increasing volume of orders, which further influ-enced higher volume of work in progress of final products. On
the contrary, the short-term financial assets fell to CZK 1,029million (by 57 %) in the year 2005 compared to the year2004, which was caused mainly by ordinary payment of theprincipal and interests of bonds issued in November 2005 andby AERO Vodochody a.s. operational costs financing withoutusing foreign sources, esp. credits.
The amount of equity on the side of total equity and liabilitieswas influenced mainly by negative economic results of the pre-vious years. In the years 2001 through 2004, AEROVodochody a.s. reached positive economic results and the ne-gative equity was thus decreasing. In the year 2005, the nega-tive economic result was caused mainly by the influence ofexchange rates related to payment of the bonds issued and fur-ther by development costs.This caused the increase of the neg-ative value of equity. A significant change occurred in the year2005 in the items of liabilities. Compared to previous period,the volume of the bonds issued dropped to zero due to theirpayment. At the same time, however, the amount of long-termliabilities increased to CZK 10,266 million (existing obligationof AERO Vodochody a.s. towards the Ministry of Finance ofthe Czech Republic resulting from the agreements solving thepayment of the Revolving Credit from 2004 was increased bythe obligation of the Company towards the Ministry of Financeof the Czech Republic due to the payment of the bonds issuedin the amount of CZK 4,575 million and by the interests in theamount of CZK 143 million). The total obligation towards theMinistry of Finance of the Czech Republic reached the amountof CZK 10,266 million and according to the GovernmentResolution No. 985 from July 20, 2005 was transferred to theCzech Consolidation Agency on December 22, 2005.
Inventory (mil. CZK)
6,157
5,197
4,094
2,171
1,673
1,922
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2000 2001 2002 2003 2004 2005
Export (mil. CZK)
357 315
1,096
1,627
1,745
2,164
0
500
1,000
1,500
2,000
2,500
2000 2001 2002 2003 2004 2005
VZ_2005_AN 31.5.2006 14:59 Str. 15
In the year 2005, AERO Vodochody a.s. had one source offinancing: Issued bonds in the amount of USD 200 million,which the Company re-paid on November 15 from the sourcesprovided by the Ministry of Finance of the Czech Republicbased on the Resolution No. 129 of the Government of theCzech Republic of February 11, 2004.
The total indebtedness of AERO Vodochody a.s. (measured bythe ratio of liabilities and total assets) thus increased duringthe year 2005 compared to the previous period by 54 percen-tage points to 242 %. The total liquidity (current assets toshort-term liabilities) decreased, compared to the year 2004,by 138 percentage points, from 642 % to 504 % respective-ly - calculated without the liability towards the CzechConsolidation Agency, resulting from the anticipated non-monetary settlement in the year 2006 according to theGovernment Resolution No. 262 from March 15, 2006.
Revenue from SaleThe revenue of AERO Vodochody a.s. reached the amount ofCZK 2,415 million in the year 2005, 90 % of which was re-alized abroad. The total revenue of the year 2005 was distri-buted the following way: revenue from own products 85 %,revenue from services provided 6 %, and revenue from sale ofgoods 9 %.
Export reached the volume of CZK 2,164 million in the year2005, i.e. it increased by 24 % compared to the year 2004,especially thanks to higher physical volume of deliveries andthanks to achievement of better pricing conditions of theAerostructures Division. Production of S-76C+ (S-76C++respectively) helicopters contributed to export by 87 %, over-hauls of the L-39 / L-59 aircraft for business cases ofThailand / Tunisia contributed by 9 %.
Profit or Loss (mil. CZK)
-1,500
-1,000
-500
0
500
1,000
-970
2000
684
2001
760
2002
313
2003
295
2004
-1,377
2005
Revenue (mil. CZK)
7,637
12,026
6,897
5,782
3,765
2,415
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000 2001 2002 2003 2004 2005
VZ_2005_AN 31.5.2006 14:59 Str. 16
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Report on Business Activities
Page 16 / 17
Profit from OperationsAERO Vodochody a.s. finished the year 2005 by an operatingresult in the amount of CZK minus 413 million, which wascaused mainly by development costs, which should be va-lorized in the near future, especially the L-159 project (con-version of four L-159A aircraft units to two-seat version andcontinuation of development work on the L-159B aircraft)and the Ae270 project (preparation of development upgradeof Ae270 to B version). Operating economic result was at thesame time negatively influenced by postponement of conclu-sion of the contract on follow-on support service of theL-159A and L-39 fleet between AERO Vodochody a.s. and theMinistry of Defense of the Czech Republic not until the end ofthe year 2005 (the plan assumed faster conclusion of theagreement and sooner startup of related services).
The total loss of the Company for the year 2005 in theamount of minus CZK 1,377 million was negatively influencedmainly by the negative financial result both due to interestsfrom bonds, which were paid in the year 2005, and due tostrengthening of the exchange rate of USD towards CZK dur-ing the year, which showed its negative influence in themoment of payment of bonds in USD.
PRODUCTION PROGRAMS
Military ProgramDeliveries of logistics resulting from the Contract of Purchasefor the L-159 aircraft for the Czech Air Force were comple-ted in the year 2005. Support of these aircraft continued inthe domestic operation of the Czech Air Force and also ininternational military exercises of NATO countries, where L-159 aircraft repeatedly reach extraordinary positive rating.
The most significant success of the Military Program in theyear 2005 was the conclusion of long-term GeneralAgreement for support of the L-159 aircraft in service withthe Czech Air Force (known as the FOSS - Follow-On ServiceSupport). This Agreement contains except for the main partsalso a number of stabilization elements related to assuranceof sufficient technical, organizational and personal structuresof the AERO Military Program for quality assurance of ope-ration of the L-159 fleet. The FOSS, which is valid until theyear 2029, is followed by further partial contracts concludedgradually during the year 2006 to support the operation of theoperational base, repairs and maintenance of the aircraft,spare parts deliveries, storage of surplus L-159 aircraft units,and preparation of the main prescribed revisions of the aircraft and modernization of the systems. One of the follow-on contracts comprises a conversion of four single-seat L-159As to double control aircraft.
Operating Revenues * (mil. CZK)
8,692
11,485
7,306
5,299
3,800
2,772
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000 2001 2002 2003 2004 2005
* Contains the revenues from sales of finished products and services, revenues from sales ofgoods, change of inventory produced internally, revenues from sale of material and fixed assetsand other operating revenues.
Operating Profit or Loss (mil. CZK)
-1,500
-1,000
-500
0
500
1,000
1,500
582
2000
944
2001
-1,027
2002
-499
2003
655
2004
-413
2005
VZ_2005_AN 31.5.2006 14:59 Str. 17
In the year 2005, AERO Vodochody a.s. continued in develop-ment of its marketing and commercial activities focusedmainly on sales of the L-159B aircraft. With this aim, corre-sponding forms of marketing oriented to specific requirementsof specific customers were used in individual territories, withthe support of local representative offices of the CzechRepublic, Ministry of Foreign Affairs of the Czech Republic,and Ministry of Trade and Industry of the Czech Republic.AERO Vodochody a.s. closely coordinates its marketingefforts aiming to sales of surplus L-159A aircraft of the Armyof the Czech Republic with the Ministry of Defense of theCzech Republic (owner of the aircraft).
In the year 2005, AERO Vodochody a.s. presented theMilitary Program at a total of 13 international air shows andexhibitions. Active demonstrations used mainly the L-159Bprototype. Also the L-159A aircraft in service with the CzechAir Force were presented at several shows. However, throughintensive negotiations with Algeria, Nigeria, Columbia,Hungary, Malaysia, Poland, Greece, Thailand and other coun-tries on possibilities of L-159B and L-159A delivery, therewas no success in closing of any specific contract on delive-ries of the aircraft abroad. One of the persisting unfavorablefactors is the prepared privatization of the Company, whichacted in a number of cases as a reason to wait also in case ofotherwise promising business negotiations.
In the field of logistics and overhauls (OVHL) of the L-39 andL-59 aircraft, AERO Vodochody a.s. continued mainly in theactivities aimed to maintain and improve its position on themarket. A satisfied operator of the L-39 aircraft is perceivedas a potential future entity concerned in the L-159 aircraft.New contracts were concluded for OVHL in Algeria andTunisia, service life extension in Bulgaria and Hungary, anddeliveries of spare parts to Thailand, Bangladesh, Ethiopia,Hungary, Baltic States and to other countries.
In the year 2005, AERO Vodochody a.s. completed in accor-dance with the schedule the contract for OVHL of 25 L-39ZAaircraft units of the Royal Thai Air Force. Contracted OVHLof the L-59T aircraft units in Tunisia were completed and anew contract was signed on OVHL of further three TunisianL-59T aircraft units in the production plant of the Companywith the option to perform OVHL of further three aircraftunits in the year 2006. Realization of repairs of the first threeaircraft was significantly commenced in the year 2005 inadvance compared to contractual terms. The Company conti-nued in deliveries of material and services for the L-39ZA aircraft in Algeria and in commercial assistance in developing a repair plant there to perform follow-on orders. AEROVodochody a.s. as the original manufacturer performed spe-cialized work operations to extend technical service life ofeight L-39ZO aircraft units for Hungary.
Negotiations were opened with other customers on deliveriesof repairs / overhauls, spare parts or upgraded second-handaircraft. New customers were presented with product portfo-lio of the Company and received complex offers.
Revenue per Employee (mil. CZK)
3.70
5.70
3.02
2.63
2.18
1.49
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2000 2001 2002 2003 2004 2005
Profit or Loss per Employee (mil. CZK)
-0.47
0.32 0.33
0.140.17
-0.85
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
2000 2001 2002 2003 2004 2005
VZ_2005_AN 31.5.2006 14:59 Str. 18
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Report on Business Activities
Page 18 / 19
Military Program Engineering WorkAERO Vodochody a.s. continued in the commenced construc-tion of the second prototype of L-159B S/N 6074 intendedfor foreign markets preferring alternative avionics.The secondprototype should significantly increase opportunities of the L-159B on the world market, decrease the risk from possibleloss or damage of the sole Company prototype, and enable sig-nificant reduction of terms for realization of deliveries ofthese aircraft to final customers.
In the year 2005, studies and engineering work were per-formed for other two-seat versions of the L-159 aircraft withthe so-called "eastern" systems. The objective of these activi-ties is to offer performance and utility equivalent of the L-159aircraft for markets with political or economic limitation con-cerning utilization of components of U.S. origin. Another pro-ject was focused on a demilitarized civil training version of theL-159 aircraft.
The second stage of the L-159B Simulator, which makes anintegral part of the "L-159 Combat and Training System", wasperformed in the year 2005 in cooperation with the companyE-COM Slavkov u Brna, granted by the Ministry of Trade andIndustry of the Czech Republic.The L-159B Simulator result-ing design is highly attractive as to price and is supported bystate-of-the-art elements available in this branch and also byelements uniquely developed in the Czech Republic. The pre-sented prototype of the L-159B Simulator (Full Mission ca-tegory) was awarded with the IDET News Golden PrestigiousPrize at the International Exhibition IDET 2005 in Brno,Czech Republic.
Within the framework of other grants of the Ministry ofIndustry and Trade of the Czech Republic to support scientificand research work and in accordance with the task specificationof the user – the Czech Air Force, next successful stage of theupgraded VS-2 ejection seat was performed in the year 2005.
Three possible levels of L-39 upgrades were prepared andupdated and are offered to operators in accordance with thecustomers’ interests in extending technical service life of theseaircraft.
In the year 2005, several partial development tasks wereaimed to increase utility features of the Company’s final pro-ducts, upgrades of systems and preparation of other productsand services, which will be requested by the L-39, L-59 and L-159 operators in the near future.
Civil ProgramThe year 2005 was very successful for the Civil Program andfor the Ae270 small transportation aircraft project. At thebeginning of the year, development tests of the Ae270 aircraftwere completed and the stage of final certification tests wascommenced. On December 12, 2005, the Civil AviationAdministration of the Czech Republic (ÚCL) issued the FinalReport and the aircraft received the Type Certificate fromEASA. Subsequently, on February 24, 2006, the TypeCertificate for the Ae270 aircraft was issued by the FAA, USA.
During the year 2005, AERO Vodochody a.s. started efforts toobtain all approvals necessary to ensure operation of serialcivil aircraft, among others the approval for type training ofground personnel and pilots and approval for maintenance ofthe Ae270 aircraft. It can be assumed that the necessaryapprovals will be obtained in the first half of the year 2006,and will be followed by commencement of commercial opera-tion of the first two Ae270 serial aircraft units.
Investment plan for continuation of the development of theAe270 aircraft Version B was prepared in cooperation withIBIS Aerospace Ltd. and AIDC. A new investor is expected toenter the project during the year 2006.
VZ_2005_AN 31.5.2006 14:59 Str. 19
Aerostructures DivisionThe key aerostructures program was - in the year 2005 as wellas in previous years - the production of the Sikorsky S-76 heli-copters (Version C+ and C++) for Sikorsky AircraftCorporation (SAC), which represented the key part of thewhole revenue of the Division and of the entire Company in theyear 2005. The remaining contribution to revenue of theAerostructures Division was formed by deliveries for BAESystems, Vought Aircraft Industries, Boeing and EADSAugsburg.
The influence of newly contracted conditions with SAC wasfully shown in the economy of the Aerostructures Division, andthe S-76C program showed adequate operating profit in theyear 2005. Year to year increase of the S-76C program pro-duction volume compared to the year 2004 reached tens ofpercent (AERO Vodochody a.s. is not allowed to publish theaccurate data), and according to SAC marketing outlook, thistrend can also be expected in the years to come. In the year2005, AERO Vodochody a.s. flexibly adjusted its productioncapacity and delivered all helicopters within the schedulerequired by the customer.
In the second half of the year 2005, SAC completed develop-ment modifications related to installation of a new engine andsince the fourth quarter of the year 2005, the Company star-ted to deliver the upgraded S-76C++ version of the helicopter.AERO Vodochody a.s. intensively cooperated in incorporatingnumerous development changes to production.
Deliveries of gun bay door for the F/A-18 E/F aircraft for theU.S. Boeing St. Louis continued in the year 2005. TheCompany confirmed its position of supplier in a new tender fordeliveries from the year 2006 to 2010. Deliveries of leadingedge sub-assemblies for the Boeing 767 for the British com-pany BAE Systems continued, however, they were negativelyinfluenced by worldwide decrease of demand for this type ofaircraft. AERO Vodochody a.s. received the last three ordersfor parts for the Boeing 747 aircraft from the U.S. companyVought Aircraft Industries in the year 2005. Due to small volume of deliveries for Vought, the contract, which expired inthe year 2005, was not prolonged.
Significant aerostructures success in the year 2005 was re-presented by concluding the general agreement with EADSAugsburg, which the Company considers the first step toincorporation into the supply chain for the European giantEADS / Airbus. Deliveries of sub-assemblies for the Airbus A320and A340 aircraft represented the first business cases.
The objective of the Aerostructures Division for the years tocome is to maintain the set standard in on-time and qualitydeliveries to customers and consequential control of costsensuring profitability of the programs, in the field of market-ing to continue intensive work on the market of aerostructureswith the objective to acquire new complex orders with highrate of value added.
Average Number of Employees *
0
500
1,000
1,500
2,000
2,500
2,066
2000
2,110
2001
2,281
2002
2,196
2003
1,731
2004
1,618
2005
Operating Profit or Loss per Employee (mil. CZK)
0.28
0.45
-0.45
-0.23
0.38
-0.26
-0.50
-0.40
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
2000 2001 2002 2003 2004 2005
* Non-adjusted number of employees.
VZ_2005_AN 31.5.2006 14:59 Str. 20
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Report on Business Activities
Page 20 / 21
Other productionOther production consists mainly of parts, sub-assemblies andtools for production programs of AERO Vodochody a.s. In theyear 2005, the Company registered increased demand forparts and assemblies manufacture from external producers,which, however, due to the privatization being prepared,focused mainly on test orders with lower revenues.
In the year 2005, the Company production capabilities wereextended by machining of titanium and by technologies ofgrinding of aluminum and titanium. Certifications of theswaging workplace and the workplace for realization of pneu-matic pressure tests were completed. Extensive reconstruc-tion of the galvanization line started in the year 2005, whichwill from the year 2006 increase the extent of surface treat-ments provided by cadmium plating of high strength parts,cadmium plating of stainless steel and pickling of titanium,and it will fulfill strict environmental regulations.
During the year 2005, AERO Vodochody a.s. went through re-certification of the Quality Management System. Within theframework of the re-certification, the validity was extended tofulfillment of requirements of the ISO 9001:2000 (generalstandard) and AS 9100, Revision B (standard for quality sys-tems in aviation). Within the framework of the re-certifica-tion, the process model of the Company quality systemchanged and the first stage of re-construction of the qualitysystem control documentation was performed.
Since the conclusion of the re-certification, AERO Vodochodya.s. has been listed in the prestigious OASIS internationaldatabase, which enlists all companies in the world certifiedaccording to AS 9100. Thus the Company was ranked amongverified manufacturers of aircraft technology on the worldlevel and increased its potential to acquire further orders inthe field of aircraft technology production.
Investment developmentThe total amount of investments of AERO Vodochody a.s. inthe year 2005 reached about CZK 78 million. The Companydoes not invest on the level of annual depreciation, it only per-forms necessary investments resulting from legal require-ments, especially environmental and in the field of work safe-ty, and furthermore development investments with definitefuture profit potential.
The biggest investment, which started in the year 2004 andwas completed in the year 2005, was the re-construction ofthe aircraft paint-shop in the Hall H2. Costs for this project,which will enable the Company to acquire new orders in thefield of "executive" painting and to cover the needs of own pro-duction programs, reached CZK 15 million. At the same time,also the surrounding area of the Hall H2 was reconstructed.
A new outlet from the hall was built for the needs of theSikorsky program, including a handling platform, and a lighthall to shower helicopters in the winter period was delivered.Total costs of these investments reached approximately CZK2.5 million and they were requested by increased productionof this program. Consolidation of internal area was performedin the storage of H38, including delivery of new shelves, mo-dification of floors, and new handling means for transportationof material were delivered. Total costs of this investment wereCZK 6 million.
The investment to modernize the workshop for "Installation ofCanopies and Seats" started in the year 2005 (budget CZK2.8 million), and was completed at the beginning of the year2006. Reconstruction of the galvanization shop started(budget CZK 15 million), and should be completed during thefirst quarter of the year 2006. This investment will enable toconcentrate innovated chemical processes of the Company toone space and to fulfill requirements of environmental regula-tions at the same time. In the field of information technolo-gies, especially upgrades and maintenance of current softwaresystems, acquisitions of further licenses for the Catia soft-ware, including necessary hardware in the amount of CZK 2.5million, were invested. Investments were focused also on modernization of the machine park in the Hall H59, where themilling center MCV 1000A for five-axial machining was pur-chased for the price of CZK 7.2 million (put in operation atthe beginning of the year 2006).
VZ_2005_AN 31.5.2006 14:59 Str. 21
Human Resources in the Year 2005In the field of human resources management, the year 2005was focused mainly on assuring necessary qualified personnelfor all production programs of the Company. No significant orre-structuring changes occurred during the year.The re-calcu-lated average number of employees for the year 2005 was1,618 employees.The total number of employees to December31, 2005, reached 1,654 employees.
The biggest share of employees still belongs to the personnelat the age of 41 - 60. However, the number of employees upto the age of 30 increased and forms already 20 % of theaverage number of employees - mostly in the AerostructuresDivision. On the contrary, employees above the age of 60mainly work in the engineering section.
Currently, the number of employees in the Company is stabi-lized. Thanks to high loyalty and unity with the employer andthanks to interesting production programs of the Company,also the fluctuation of longtime employees was very low.Qualification structure significantly increases by occupyingvacancies.
Average salary in the Company developed in accordance withthe principles for remuneration resulting from collective nego-tiations and decision of the Board of Directors. The averagemonthly salary reached the amount of CZK 26,783. Year toyear average salary in the Company increased by 4.1 %,which was (except for the negotiated increase of basicsalaries) caused also by occupying vacancies with higher qua-lified employees with higher education and due to the influenceof labor market in the region.
Also in the year 2005, the Company considered continuouseducation of employees as very important. The main goals inthe plan of development of employees were further increase ofprofessional level, improvement of managerial skills and com-munication, and improvement of language skills. For workers'professions, special schooling and training courses wereorganized, specified by legal regulations with respect to thespecific character of the Company’s activities. Total costsspent on education and development of employees made CZK4,914 thousand. A total of 8,170 hours of training was re-alized, and attended by a total of 3,977 employees.
31-40
22%
up to 30
20%
41-50
26%
51-60
27%
above 61
5%Skilled
41%
University
15%
Elementary 41%
Postgradual 0%
Secondary + Advanced
Training 40%
Age Structure of Employees to December 31, 2005
Qualification Structure of Employeesto December 31, 2005
VZ_2005_AN 31.5.2006 14:59 Str. 22
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Report on Business Activities
Page 22 / 23
Development of Manpower It is an objective of AERO Vodochody a.s. in the developmentof manpower to continue increasing the level of education andqualification potential of its employees.
Manager education project for managing employees of theCompany and foremen will continue to improve the quality ofactivities of AERO Vodochody a.s. in accordance with strate-gic objectives in the medium-term prospectus and with respectto necessary modern approach to development of employees.The objective of the project is to start up a change of compe-tencies of the employees through creation of platforms foreducation, share of knowledge and teamwork on key prioritiesof the Company. Besides specific specialized education andtraining, language training of employees and educationfocused on certification of professions will further continue.For the purpose of career growth and stabilization of keyemployees of the Company, the "Prospective Program" will beintroduced as a tool for identification, stabilization, careergrowth, development and preparation of young perspectiveemployees to occupy managerial positions within the frame-work of the Company from internal sources.
Board of Directors together with the management ofAERO Vodochody a.s. managed to ensure the followingpositive trends in the year 2005:
Realize stabilization measures, which secured current poten-tial of the Company (all workplaces, processes and functionsfor production and development of military and civil aircrafttechnology, and all international certificates), representingcontributions for the Company also in the future:
• Commencement of the L-159 conversion project (positiveinfluence in the year 2007);
• Providing follow-on support to the L-159 aircraft, inclu-ding spare parts deliveries (positive influence in the year2007);
• Continuation of development work in the L-159B project(construction of Prototype II);
• Ae270 Type Certification by EASA;• Profitability of the S-76C Program and its production rise;• Gaining further new references for the Aerostructures
Division;• Complete preparation of due diligence and privatization;• Settlement of payment of the bonds issued to the Company
(paid mainly from the sources of the Ministry of Finance ofthe Czech Republic).
The positive trends mentioned, however, could not preventfrom showing high loss and significant drop of revenues forthe year 2005, when the Company reached the lowest volumeof revenues in last ten years.
24%
16%
33%
6%
7%4%
0%
8%2%
13%
12%
13%
22%
33%
0%
8%
3%
Share of Trained Employees in Individual Spheres
Costs of IndividualTraining Spheres
Work ratify
Cooperation - customer standard
Computer
Quality
L-159, Ae270, S-76
Languages
Managers
PDP
Others
Work ratify
Cooperation - customer standard
Computer
Quality
L-159, Ae270, S-76
Languages
Managers
PDP
Others
VZ_2005_AN 31.5.2006 14:59 Str. 23
7IN 2005, AERO VODOCHODY A.S. ACQUIRED
A 25-YEAR CONTRACT ON FOLLOW-ON SUPPORT
OF THE L-159 AND L-39 FLEET OWNED BY
THE MINISTRY OF DEFENSE OF THE CZECH
REPUBLIC. WE SIGNED SEVERAL CONTRACTS
IN THE SPHERE OF GENERAL OVERHAULS AND
SPARE PARTS DELIVERY FOR L-39/L-59
AIRCRAFT.
/ L-39 / Breitling Jet Team / France /
VZ_2005_AN 31.5.2006 14:59 Str. 24
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Supervisory Board’s Statement
Page 24 / 25
In compliance with § 198 of the Commercial Code, the Super-visory Board reviewed AERO’s 2005 Financial Statement andAERO’s 2005 Consolidated Financial Statement.
Having reviewed the Financial Statement and the ConsolidatedFinancial Statement, and having acquainted itself with relevant auditor reports, the Supervisory Board recommendedon its May 18, 2006 meeting the Financial Statement and theConsolidated Financial Statement to be approved by theShareholders Meeting.
The Supervisory Board also recommended the ShareholdersMeting to approve the proposal of the Board of Directors for2005 debt settlement. Loss incurred in 2005 in the amount ofCZK 1.377,000 thousand will be transferred in the balance ofthe Company to the side of liabilities as loss outstanding frompast years.
Milo‰ Kebrdle In Prague, May 18, 2006Chairman of the Supervisory Board
SUPERVISORY BOARD’S STATEMENT
VZ_2005_AN 31.5.2006 14:59 Str. 25
8IN 2005, AERO VODOCHODY A.S. SUCCEEDED
IN ACQUIRING THE EASA TYPE
CERTIFICATE FOR THE Ae270 SMALL
CIVIL TRANSPORTATION AIRCRAFT,
WHICH OPENED THE WAY TO BRING
THESE AIRCRAFT ONTO MARKETS, TO
OBTAIN OPERATIONAL EXPERIENCE
AND TO ALSO CONTINUE IN THIS PROJECT.
/ Ae270 / Production Hall / AERO Vodochody a.s. /
VZ_2005_AN 31.5.2006 14:59 Str. 26
AERO Vodochody a.s.
Annual Report 2005
Presentation Part / Auditor’s Report
Page 26 / 27
AUDITOR’S REPORT
To the Shareholders of AERO Vodochody a.s.:
We have audited the financial statements of AERO Vodochodya.s. (“the Company”) as at 31 December 2005 presented inthe annual report of the Company on pages 30 – 60 and ouraudit report dated 26 April 2006 stated the following:
We have audited the financial statements of AERO Vodochodya.s. as at 31 December 2005. These financial statements arethe responsibility of the Company's management. Our respon-sibility is to express an opinion on these financial statementsbased on our audit.
We conducted our audit in accordance with the Act onAuditors, International Standards on Auditing and implemen-tation guidance of the Chamber of Auditors of the CzechRepublic. Those Standards require that we plan and performthe audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluat-ing the overall financial statement presentation.We believe thatour audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present, in all materi-al respects, a true and fair view of the assets, liabilities, equi-ty and financial position of AERO Vodochody a.s. as at 31December 2005 and the financial results for the year thenended in accordance with accounting principles generallyaccepted in the Czech Republic.
Without qualifying our opinion, we draw your attention toNote 23 of the financial statements. As discussed in Note 23,the Company has significant accumulated losses from priorperiods, significant loss for 2005 and negative equity of CZK6,425,046 thousand. As at 31 December 2005, the Companyhas a liability to âeská konsolidaãní agentura in the totalamount of CZK 10,265,842 thousand, which is repayablewithin five years. The first payment of CZK 2,100,798 thou-sand is due as at 31 January 2007. As the Company has notconcluded any significant sales contracts for its key products(e.g. L-159 aircraft and Ae270 aircraft), it is highly probablethat the Company will not be able to settle all its liabilitiesand meet all its obligations within the period of 12 monthsfrom the date of the financial statements without a significantsupport of its majority shareholder (which support wasdeclared in writing – see Note 25 of the financial statements).The Company is in the middle of a privatization process whichwas, based on the decision of the Czech Government dated 15March 2006, temporarily put on hold until 19 July 2006.Management of the Company can estimate neither the resultnor the completion date of the privatization process nor theintentions of the future majority shareholder. The continuedfuture operations of the Company are dependent on the suc-cess of the privatization process and on the business strategyof the future majority shareholder. The accompanying finan-cial statements have been prepared assuming that theCompany will continue as a going concern and do not includeany adjustments that might result from the outcome of thisuncertainty.
We have also audited the prior year financial statements as of31 December 2004 and 2003 of AERO Vodochody a.s. andissued an unqualified report thereon dated 15 April 2005 and 10 April 2004, respectively. Our report included an emphasisof matter paragraph relating to the ability of the Company tocontinue as a going concern.
VZ_2005_AN 31.5.2006 14:59 Str. 27
We have also audited the consistency of the annual reportwith the above-mentioned financial statements. The manage-ment of AERO Vodochody a.s. is responsible for the accuracyof the annual report. Our responsibility is to express, based onour audit, an opinion on the consistency of the annual reportwith the financial statements.
We conducted our audit in accordance with InternationalStandards on Auditing and the related implementation guid-ance issued by the Chamber of Auditors of the Czech Republic.Those standards require that we plan and perform the audit toobtain reasonable assurance as to whether the informationpresented in the annual report that describes the facts reflect-ed in the financial statements is consistent, in all materialrespect, with the financial statements. We have checked that the accounting information presented in the annual report onpages 4 – 26 is consistent with that contained in the auditedfinancial statements as at 31 December 2005. Our work asauditors was confined to checking the annual report with theaforementioned scope and did not include a review of anyinformation other than that drawn from the audited account-ing records of the Company.We believe that our audit providesa reasonable basis for our opinion.
Based on our audit, the accounting information presented inthe annual report is consistent, in all material respects, withthe above-mentioned financial statements.
In addition, we have reviewed the accuracy of the informationcontained in the report on related parties of AERO Vodochodya.s. for the year ended 31 December 2005 presented in theannual report of the Company on pages 61 - 63.The manage-ment of AERO Vodochody a.s. is responsible for the prepara-tion of the report on related parties. Our responsibility is toissue a report based on our review.
We conducted our review in accordance with applicableInternational Standards on Auditing and the related imple-mentation guidance issued by the Chamber of Auditors of theCzech Republic.Those standards require that we plan and per-form the review to obtain moderate assurance as to whether the report on related parties is free from material misstate-ment. The review is limited primarily to enquiries of companypersonnel, to analytical procedures applied to financial dataand to examining, on a test basis, the accuracy of information,and thus provides less assurance than an audit. We have notperformed an audit and, accordingly, we do not express anaudit opinion.
Based on our review, nothing has come to our attention thatcauses us to believe that the report on related parties ofAERO Vodochody a.s. for the year ended 31 December 2005is materially misstated.
Ernst & Young Audit & Advisory, s.r.o., ãlen koncernuLicense No. 401
Magdalena SouãekAuditor, License No. 1291
18 May 2006Prague, Czech Republic
VZ_2005_AN 31.5.2006 14:59 Str. 28
AERO Vodochody a.s.Financial Part
VZ_2005_AN 31.5.2006 14:59 Str. 29
BALANCE SHEET AS AT 31 DECEMBER 2005, 2004 AND 2003
2005 2004 2003
Gross Provisions Net Net Net
TOTAL ASSETS 8 339 611 (3 803 337) 4 536 274 5 702 300 5 304 787
A. STOCK SUBSCRIPTION RECEIVABLE
B. FIXED ASSETS 3 094 121 (2 117 805) 976 316 1 157 197 1 278 966
B. I. Intangible assets 228 594 (215 610) 12 984 6 540 7 818
B. I. 1 Foundation and organization expenses – – – – –
2 Research and development – – – – –
3 Software 172 030 (165 655) 6 375 6 031 7 365
4 Patents, royalties and similar rights 49 955 (49 955) – – –
5 Goodwill – – – – –
6 Other intangible assets 4 707 – 4 707 – –
7 Intangible assets in progress 1 902 – 1 902 509 453
8 Advances granted for intangible assets – – – – –
B. II. Tangible assets 2 359 390 (1 561 701) 797 689 882 972 988 552
B. II. 1 Land 93 147 – 93 147 94 211 94 250
2 Constructions 944 870 (446 945) 497 925 546 233 565 074
3 Separate movable items and groups of movable items 1 279 974 (1 107 761) 172 213 218 644 314 286
4 Perennial crops – – – – –
5 Livestock – – – – –
6 Other tangible assets 5 875 (5 756) 119 196 772
7 Tangible assets in progress 19 338 (1 239) 18 099 21 043 9 188
8 Advances granted for tangible assets 16 186 – 16 186 2 645 4 982
9 Gain or loss on revaluation of acquired property – – – – –
B. III. Financial investments 506 137 (340 494) 165 643 267 685 282 596
B. III. 1 Subsidiaries 504 937 (339 394) 165 543 267 441 282 352
2 Associates 1 100 (1 100) – – –
3 Other long-term securities and interests 100 – 100 244 244
4 Loans to subsidiaries and associates – – – – –
5 Other long-term investments – – – – –
6 Long-term investments in progress – – – – –
7 Advances granted for long-term investments – – – – –
C. CURRENT ASSETS 5 190 389 (1 685 532) 3 504 857 4 520 032 3 563 882
C. I. Inventory 3 591 963 (1 670 235) 1 921 728 1 672 512 2 170 943
C. I. 1 Materials 2 228 939 (1 056 688) 1 172 251 1 073 142 1 244 263
2 Work in progress and semi-finished production 1 271 560 (582 588) 688 972 537 760 783 389
3 Finished products – – – – –
4 Livestock – – – – –
5 Goods 14 894 (2 995) 11 899 10 879 15 034
6 Advances granted for inventory 76 570 (27 964) 48 606 50 731 128 257
C. II. Long-term receivables – – – – –
FINANCIAL STATEMENTS
VZ_2005_AN 31.5.2006 14:59 Str. 30
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Financial Statements
Page 30 / 31
2005 2004 2003
Gross Provisions Net Net Net
C. II. 1 Trade receivables
2 Receivables to group companies with majority control – – – – –
3 Receivables to group companies with control of 20% - 50% – – – – –
4 Receivables from partners, co-operative members and participants in association – – – – –
5 Long-term advances granted – – – – –
6 Unbilled revenue – – – – –
7 Other receivables – – – – –
8 Deferred tax asset – – – – –
C. III. Short-term receivables 569 297 (15 297) 554 000 464 122 1 031 773
C. III. 1 Trade receivables 527 738 (13 477) 514 261 406 581 865 388
2 Receivables to group companies with majority control – – – 2 500 –
3 Receivables to group companies with control of 20% - 50% – – – – –
4 Receivables from partners,co-operative members and participants in association – – – – –
5 Social security and health insurance – – – – –
6 Due from government - tax receivables 23 614 – 23 614 9 256 1 279
7 Short-term advances granted 8 241 – 8 241 9 259 2 117
8 Unbilled revenue – – – – –
9 Other receivables 9 704 (1 820) 7 884 36 526 162 989
C. IV. Short-term financial assets 1 029 129 – 1 029 129 2 383 398 361 166
C. IV. 1 Cash 7 282 – 7 282 8 045 8 866
2 Bank accounts 687 961 – 687 961 2 375 353 243 586
3 Short-term securities and interests 333 886 – 333 886 – 108 714
4 Short-term financial assets in progress – – – – –
D. OTHER ASSETS - TEMPORARY ACCOUNTS OF ASSETS 55 101 – 55 101 25 071 461 939
D. I. Accrued assets and deferred liabilities 55 101 – 55 101 25 071 461 939
D. I. 1 Prepaid expenses 12 260 – 12 260 24 482 69 775
2 Prepaid expenses (specific-purpose expenses) – – – – 326
3 Unbilled revenue 42 841 – 42 841 589 391 838
VZ_2005_AN 31.5.2006 14:59 Str. 31
2005 2004 2003
TOTAL EQUITY & LIABILITIES 4 536 274 5 702 300 5 304 787
A. EQUITY (6 425 046) (5 068 051) (5 342 245)
A. I. Basic capital 2 691 775 2 691 775 2 691 775
A. I. 1 Registered capital 2 691 775 2 691 926 2 691 926
2 Own shares and own ownership interests (-) – (151) (151)
3 Changes in basic capital – – –
A. II. Capital funds (89 535) (109 542) (89 217)
A II. 1 Share premium (agio) – – –
2 Other capital funds 25 882 25 882 25 882
3 Gain or loss on revaluation of assets and liabilities (115 417) (135 424) (115 099)
4 Gain or loss on revaluation of company transformations – – –
A III. Reserve funds and other funds created from profit 216 251 201 519 186 025
A III. 1 Legal reserve fund 199 743 185 009 169 345
2 Statutory and other funds 16 508 16 510 16 680
A. IV. Profit (loss) for the previous years (7 866 537) (8 146 492) (8 444 109)
IV. 1 Retained earnings for the previous years 377 377 377
2 Accumulated loss of previous years (7 866 914) (8 146 869) (8 444 486)
A. V. Profit (loss) for the year (+ / -) (1 377 000) 294 689 313 281
B. LIABILITIES 10 961 320 10 725 014 10 597 991
B. I. Reserves 243 358 324 375 1 452 631
B. I. 1 Reserves created under special legislation – – –
2 Reserve for pensions and similar obligations – – –
3 Reserve for corporate income tax – – –
4 Other reserves 243 358 324 375 1 452 631
B. II. Long-term liabilities 10 265 842 – 5 134 782
B. II. 1 Trade payables – – –
2 Liabilities to group companies with majority control 10 265 842 – –
3 Liabilities to group companies with control of 20% - 50% – – –
4 Liabilities to partners, co-operative members and participants in association – – –
5 Advances received – – –
6 Bonds payable – – 5 130 800
7 Notes payable – – –
8 Unbilled deliveries – – –
9 Other liabilities – – 3 982
10 Deferred tax liability – – –
VZ_2005_AN 31.5.2006 14:59 Str. 32
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Financial Statements
Page 32 / 33
2005 2004 2003
B. III. Current liabilities 452 120 10 400 639 2 753 532
B. III. 1 Trade payables 274 150 168 771 360 545
2 Liabilities to group companies with majority control – – –
3 Liabilities to group companies with control of 20% - 50% – – –
4 Liabilities to partners, co-operative members and participants in association – – –
5 Liabilities to employees 31 956 2 741 6 463
6 Liabilities arising from social security and health insurance 20 689 19 420 22 494
7 Due to government – taxes and subsidies 11 356 6 218 2 095 505
8 Advances received 36 536 35 685 43 838
9 Bonds payable – 4 473 000 –
10 Unbilled deliveries 60 444 112 933 177 151
11 Other liabilities 16 989 5 581 871 47 536
B. IV. Bank loans and borrowings – – 1 257 046
B. IV. 1 Long-term bank loans – – –
2 Short-term bank loans – – 1 257 046
3 Borrowings – – –
C. OTHER LIABILITIES - TEMPORARY ACCOUNTS OF LIABILITIES – 45 337 49 041
C. I. Accrued liabilities and deferred assets – 45 337 49 041
C. I. 1 Accruals – 42 102 49 041
2 Deferred income – 3 235 –
VZ_2005_AN 31.5.2006 14:59 Str. 33
INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
2005 2004 2003
I. 1 Revenue from sale of goods 209 393 640 848 1 511 543
A. 2 Cost of goods sold 131 863 303 624 767 807
+ Gross margin 77 530 337 224 743 736
II. Production 2 386 966 3 055 148 3 701 271
II. 1 Revenue from sale of finished products and services 2 205 260 3 124 149 4 270 007
2 Change in inventory produced internally 167 888 (88 454) (612 548)
3 Own work capitalized 13 818 19 453 43 812
B. Production related consumption 2 108 339 2 119 613 3 218 726
B. 1 Consumption of material and energy 1 736 157 1 742 186 2 674 816
B. 2 Services 372 182 377 427 543 910
+ Value added 356 157 1 272 759 1 226 281
C. Personnel expenses 717 340 746 036 855 096
C. 1 Wages and salaries 520 024 546 682 624 178
C. 2 Bonuses to members of company or cooperation bodies 2 350 1 160 1 540
C. 3 Social security and health insurance 187 233 190 189 219 962
C. 4 Other social costs 7 733 8 005 9 416
D. 1 Taxes and charges 8 757 6 002 6 539
E. 1 Amortization and depreciation of intangible and tangible fixed assets 124 220 162 324 153 771
III. Revenue from sale of intangible and tangible fixed assets and materials 138 229 15 936 69 033
III. 1 Revenues from sale of intangible and tangible fixed assets 127 595 5 070 29 700
2 Revenue from sale of materials 10 634 10 866 39 333
F. Net book value of intangible and tangible fixed assets and materials sold 33 719 8 977 33 508
F. 1 Net book value of intangible and tangible fixed assets sold 28 484 477 2 374
F. 2 Materials sold 5 235 8 500 31 134
G. 1 Change in reserves and provisions relating to operations and in prepaid expenses (specific-purpose expenses) (68 830) (1 084 097) 698 339
IV. 1 Other operating revenues 37 315 88 527 17 144
H. 2 Other operating expenses 129 678 882 991 63 760
V. 1 Transfer of operating revenues – – –
I. 2 Transfer of operating expenses – – –
* Profit or loss on operating activities (413 183) 654 989 (498 555)
VI. 1 Revenue from sale of securities and interests 204 – –
J. 2 Securities and interests sold 144 – –
VII. Income from financial investments – – –
VII. 1 Income from subsidiaries and associates – – –
2 Income from other long-term securities and interests – – –
3 Income from other financial investments – – –
VIII. 1 Income from short-term financial assets 1 317 563 4
VZ_2005_AN 31.5.2006 14:59 Str. 34
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Financial Statements
Page 34 / 35
2005 2004 2003
K. 2 Expenses related to financial assets – – –
IX. 1 Gain on revaluation of securities and derivatives – – –
L. 2 Loss on revaluation of securities and derivatives – – –
M. 1 Change in reserves and provisions relating to financial activities 152 039 (14 800) 119 394
X. 1 Interest income 53 014 30 858 9 378
N. 2 Interest expense 422 911 382 579 467 783
XI. 1 Other finance income 409 279 1 029 098 2 119 068
O. 2 Other finance cost 847 320 1 052 212 836 700
XII. 1 Transfer of finance income – – –
P. 2 Transfer of finance cost – – –
* Profit or loss on financial activities (958 600) (359 472) 704 573
Q. Tax on profit or loss on ordinary activities – – –
Q. 1 - due – – –
Q. 2 - deferred – – –
** Profit or loss on ordinary activies after taxation (1 371 783) 295 517 206 018
XIII. 1 Extraordinary gains 59 412 2 219 119 977
R. 2 Extraordinary losses 64 629 3 047 12 714
S. 1 Tax on extraordinary profit or loss – – –
S. 1 - due – – –
S. 2 - deferred – – –
* Extraordinary profit or loss (5 217) (828) 107 263
T. 1 Transfer of share of profit or loss to partners (+/-) – – –
*** Profit or loss for the year (+/-) (1 377 000) 294 689 313 281
**** Profit or loss before taxation (1 377 000) 294 689 313 281
VZ_2005_AN 31.5.2006 14:59 Str. 35
CASH FLOW STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
2005 2004 2003
Cash flows from operating activities
Z. Profit or loss on ordinary activities before taxation (+/-) (1 371 783) 295 517 206 018
A. 1. Adjustments to reconcile profit or loss to net cash provided by or used in operating activities 487 390 (1 223 217) 511 156
A. 1. 1. Depreciation and amortization of fixed assets,write-off of receivables and adjustment to acquired property 128 322 162 324 153 771
A. 1. 2. Change in provisions 164 257 28 722 411 931
A. 1. 3. Change in reserves (81 017) (1 128 256) 346 351
A. 1. 4. Foreign exchange differences 5 102 (633 135) (831 976)
A. 1. 5. (Gain)/Loss on disposal of fixed assets (99 171) (4 593) (27 326)
A. 1. 6. Interest expense and interest income 369 897 351 721 458 405
A. 1. 7. Other non-cash movements (e.g. revaluation at fair value to profit or loss, dividends received) – – –
A* Net cash from operating activities before taxation,changes in working capital and extraordinary items (884 393) (927 700) 717 174
A. 2. Change in non-cash components of working capital 566 748 9 745 410 (759 154)
A. 2. 1. Change in inventory (328 746) 447 969 1 712 917
A. 2. 2. Change in trade receivables (16 148) 431 794 1 352 127
A. 2. 3. Change in other receivables and in prepaid expenses and unbilled revenue (14 255) 547 616 1 935 237
A. 2. 4. Change in trade payables 95 460 (183 258) 34 208
A. 2. 5. Change in other payables, short-term loans and in accruals and deferred income 830 437 8 501 289 (5 793 643)
A** Net cash from operating activities before taxation,interest paid and extraordinary items (317 645) 8 817 710 (41 980)
A. 3. 1. Interest paid (319 863) (390 891) (485 084)
A. 4. 1. Tax paid – – –
A. 5. 1. Gains and losses on extraordinary items 32 280 (828) 107 263
A*** Net cash provided by (used in) operating activities (605 228) 8 425 991 (419 801)
Cash flows from investing activities
B. 1. 1. Purchase of fixed assets (105 060) (45 359) (81 182)
B. 2. 1. Proceeds from sale of fixed assets 127 799 5 070 29 700
B. 3. 1. Loans granted 2 500 (2 500) –
B. 4. 1. Interest received 53 014 30 858 9 378
B. 5. 1. Dividends received – – –
B*** Net cash provided by (used in) investing activities 78 253 (11 931) (42 104)
Cash flows from financing activities
C. 1. 1. Change in long-term liabilities and long-term, resp. short-tem, loans (827 294) (6 391 828) (65 000)
C. 2. 1. Effect of changes in basic capital on cash – – –
C. 2. 2. Dividends or profit sharing paid – – –
C. 2. 3. Effect of other changes in basic capital on cash – – –
C*** Net cash provided by (used in) financing activities (827 294) (6 391 828) (65 000)
F. Net increase (decrease) in cash (1 354 269) 2 022 232 (526 905)
P. Cash and cash equivalents at beginning of year 2 383 398 361 166 888 071
R. Cash and cash equivalents at end of year 1 029 129 2 383 398 361 166
VZ_2005_AN 31.5.2006 14:59 Str. 36
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 36 / 37
1. DESCRIPTION OF THE COMPANY
AERO Vodochody a.s. (“the Company”) is a joint stock company incorporated on 2 January 1991 in the Czech Republic.The registered office of the Company is located in Odolena Voda, Dolínek, U Leti‰tû 374, 250 70, Czech Republic. The Company’sidentification number is 00010545.The Company is involved in development, production and modernization of military training andcombat jets, development and production of transportation aircraft, cooperation in production of helicopters, foreign trading of military products, air transportation and other aircraft connected work. In 2005 the Company made the following changes to theCommercial Register – decrease of the basic capital by the amount of own shares, changes in shareholders structure and changesin the business activities of the Company.
Shareholders of the Company holding 10 % or greater interest in the Company’s basic capital are as follows:
âeská konsolidaãní agentura 99.97 %
In 2004 the capital interest of Boeing âeská, s.r.o. has been terminated and the Company was controlled only by Czech sharehold-ers.This decision was ratified by the Government of the Czech Republic.The controlling shareholder of the Company was Letka, a.s.Based on the agreement concluded on 19 December 2005 between âeská konsolidaãní agentura and Letka, a.s., 53.31 % of theCompany’s shares were transferred to âeská konsolidaãní agentura.
The Company is not included in the consolidated group of âeská konsolidaãní agentura.
Members of statutory and supervisory bodies at 31 December 2005 were as follows:
Board of DirectorsChairman: Ing. Petr Klime‰Vice-chairman: Ing. Zdenûk StuchlíkMember: Ing. Jan VachekMember: Ing. Jan ·techrMember: Ing. Zdenûk Vran˘
Supervisory BoardChairman: Ing. Milo‰ KebrdleVice-chairman: Ing. Václav SrbaMember: Ing. Ale‰ CincibusMember: Ing. Ján DzvoníkMember: Jaromír KvapilMember: Jan Bor˘sekMember: Ivan PekárekMember: Ing. Petr GoldmannMember: Ing. Martin Bûlãík
Ing. Jifií Fiala resigned on his own request from the Board of Directors as at 13 January 2005. Ing. Jaromír Hejda resigned on hisown request from the Supervisory Board as at 27 June 2005.
The General Meeting held on 29 June 2005 recalled Doc. Ing. Jindfiich Ploch, CSc from his membership in the Supervisory Board.Ing. Milo‰ Kebrdle and Ing. Petr Goldmann were nominated as new members of the Supervisory Board.
Ing.Václav Srba resigned on his own request from the position of the Supervisory Board Chairman.The Supervisory Board Meetingheld on 29 June 2005 nominated Ing. Milo‰ Kebrdle as a new Chairman of the Supervisory Board and Ing. Václav Srba as a newVice-chairman of the Supervisory Board.
The Supervisory Board Meeting held on 14 July 2005 recalled Ing. Zdenûk S˘kora and Ing. Olga Svûdínková from their membershipsin the Board of Directors. Ing. Zdenûk Stuchlík and Ing. Jan ·techr were nominated as new Members of the Board of Directors.
NOTES TO THE FINANCIALSTATEMENTS
VZ_2005_AN 31.5.2006 14:59 Str. 37
The Supervisory Board Meeting held on 14 July 2005 nominated Ing. Zdenûk Stuchlík as a new Vice-chairman of the Board ofDirectors.
Bc. Martin Prachafi resigned on his own request from the Supervisory Board on 18 August 2005. Ing. Martin Bûlãík was nominatedas a new temporary Member of the Supervisory Board until the next General Meeting.
The Supervisory Board Meeting held on 24 November 2005 nominated Ing. Zdenûk Vran˘ as a new Member of the Board ofDirectors.
Activity of the Operational Committee was terminated as at 6 December 2004 as a result of acceptance of the new Articles ofAssociation of the Company.
2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS
The accompanying financial statements were prepared in accordance with the Czech Act on Accounting and the related guidelinesas applicable for 2005, 2004 and 2003.
Explanation Added for Translation into English
These financial statements are presented on the basis of accounting principles and standards generally accepted in the CzechRepublic. Certain accounting practices applied by the Company that conform with generally accepted accounting principles andstandards in the Czech Republic may not conform with generally accepted accounting principles in other countries.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied by the Company in preparing the 2005, 2004 and 2003 financial statements are as follows:
a) Intangible Fixed Assets
Intangible fixed assets are valued at their acquisition cost and related expenses.
Intangible fixed assets with cost exceeding CZK 60 thousand are amortized over their estimated useful lives. Small intangible fixedassets (with a cost of less than CZK 60 thousand) are expensed and carried only in a subsidiary ledger.
b) Tangible Fixed Assets
Purchased tangible fixed assets with cost exceeding CZK 40 thousand are recorded at their acquisition cost that consists of purchase price, freight, customs duties and other related costs. Internally developed tangible fixed assets are recorded at their accumulated cost that consists of direct material, labor costs and production overhead. Interest and other financial expensesincurred in the construction of tangible fixed assets are also capitalized.
The costs of technical improvements are capitalized. Repairs and maintenance expenses are expensed as incurred.
VZ_2005_AN 31.5.2006 14:59 Str. 38
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 38 / 39
Depreciation
Depreciation is calculated based on acquisition cost and the estimated useful life of the related asset. The estimated useful livesare as follows:
Years
Buildings, halls and constructions 30 – 45
Machinery and equipment 4 – 15
Vehicles 4 – 15
Furniture and fixtures 4 – 15
Other fixed assets 4 – 8
c) Financial Assets
Short-term financial assets consist of liquid valuables, cash in hand and at bank, held-for-trading securities and held-to-maturitydebt securities falling due within one year.
Long-term financial assets consist particularly of ownership interests.
Held-for-trading securities are securities that are held for the purpose of effecting transactions in the market in order to generateprofit from the price variances in the short-run which, however, will not exceed one year.
Held-to-maturity securities are securities with a defined maturity that the Company intends and is able to hold to maturity.
Interests and securities are valued at their acquisition cost, which includes the purchase price and direct costs related to the acquisition, e.g. fees and commissions paid to agents and stock exchanges. In respect of debt securities, interest income isrecorded observing the matching and accrual principles. Accrued interest income is included in the relevant securities account.
As at 31 December, the individual components of financial assets are revalued using the following method:
• Held-for-trading securities are revalued to fair value; the change in the fair value is charged or recognized to income, as appropriate.
• Ownership interests constituting dominant or significant influence are valued at acquisition cost. Foreign currency revaluation amounts are recorded in equity through revaluation of assets and liabilities.
• Held-to-maturity securities and interests are adjusted for the difference between the acquisition cost without coupon and the nominal value; the difference is recognized as a revenue or an expense under accrual accounting.
The fair value is the market value that is published by the relevant domestic or foreign stock exchange; or, if the market value is not available from a public market, it is a valuation amount given in a qualified estimate or in a certified expert’s opinion.
If there is a decrease in the carrying value of long-term financial assets that are not revalued at the balance sheet date, the differenceis considered a temporary diminution in value and is recorded as a provision.
VZ_2005_AN 31.5.2006 14:59 Str. 39
d) Inventory
Purchased inventory is stated at actual cost being determined by the weighted average method. Costs of purchased inventory includeacquisition related costs (freight, customs, commission, etc.).
Finished goods and work-in-progress are valued at standard cost. Costs of internally produced inventory include direct materialand labor costs and production overheads. Production overhead costs include indirect wages and social and health insurance, ener-gy, repairs, telecommunication costs, depreciation and other production services and materials and are allocated based on directlabor hours.
In case of significant difference between standard costs and actual costs the finished goods and work-in-progress held as at 31 December are revalued to the actual costs.
e) Receivables
Both long- and short-term receivables are carried at their realizable value after provision for doubtful accounts. Additions to theprovision account are charged to income.
f) Equity
The basic capital of the Company is stated at the amount recorded in the Commercial Register maintained by the Municipal Court.Any increase or decrease in the basic capital made pursuant to the decision of the General Meeting which was not entered in theCommercial Register as at the financial statements date is recorded through changes in basic capital. Contributions in excess ofbasic capital are recorded as share premium. Other capital funds are created according to articles of association of the Company.
In accordance with the Commercial Code, the Company creates a legal reserve fund from profit.
In the first year in which profit is generated, a joint-stock company should allocate 20 % of profit after tax (however, not morethan 10 % of basic capital) to the legal reserve fund. In subsequent years, the reserve fund is allocated 5 % of profit after taxuntil the fund reaches 20 % of basic capital. These funds can only be used to offset losses.
g) DerivativesDerivatives are initially measured at acquisition cost. Derivatives are reflected in other short-term payables in the accompanyingbalance sheet.
Derivatives are classified as derivatives held for trading or hedging derivatives.
Derivatives are revalued to fair value as at the balance sheet date. Changes in the fair value of derivatives held for trading arereported in earnings. Changes in the fair value of derivatives designated as fair value hedges are also recognized in earnings,together with the change in the fair value of the hedged item attributable to the risk being hedged. Changes in the fair value ofderivatives designated as cash flow hedges are taken to equity and reflected in the balance sheet through gain or loss on revalua-tion of assets and liabilities. Any ineffective portion of the hedge is reported in earnings.
h) Foreign Currency Transactions
Assets and liabilities whose acquisition or production costs were denominated in foreign currencies are translated into Czech crownsat the exchange rate existing as at the transaction date, and on the balance sheet date monetary assets and liabilities are adjustedto the exchange rates as published by the Czech National Bank as at 31 December.
Realized and unrealized exchange rate gains and losses are charged or credited, as appropriate, to income for the year.
i) Recognition of Revenues and Expenses
Revenues and expenses are recognized on an accrual basis, that is, they are recognized in the periods in which the actual flow ofthe related goods or services occurs, regardless of when the related monetary flow arises.
VZ_2005_AN 31.5.2006 14:59 Str. 40
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 40 / 41
The Company recognizes as an expense any additions to reserves for or provisions against risks, losses or physical damage that areknown as at the financial statements date.
Profit from long-term business contracts is accounted for at the moment of completion and invoicing, as specified in the contracts.
j) Income Tax
The corporate income tax expense is calculated based on the statutory tax rate and book income before taxes, increased ordecreased by the appropriate permanent and temporary differences (e.g. non-deductible reserves and provisions, entertainmentexpenses, differences between book and tax depreciation, etc.).
The deferred tax position reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for corporate income tax purposes, taking into consideration the period ofrealization.
k) Subsidies
In 2005, the Company received subsidies from the Ministry of Industry and Trade of the Czech Republic of CZK 5,520 thousand,which were accounted for as other operating revenues. Received subsidies are recorded in separate accounts.This treatment enablesthe Company to closely monitor subsidies’ receipt and utilization.
4. FIXED ASSETS
a) Intangible Fixed Assets (in CZK thousands)
COST
At beginning Additions Disposals Transfers At endof year of year
Software 166,050 – – 5,980 172,030
Patents, rights and royalties 49,955 – – – 49,955
Other intangibles – 8,372 (3,665) – 4,707
Intangibles in progress 509 7,373 – (5,980) 1,902
2005 Total 216,514 15,745 (3,665) – 228,594
2004 Total 212,303 4,211 – – 216,514
2003 Total 209,003 3,300 – – 212,303
ACCUMULATED AMORTIZATION
At beginning Amortization At end Net bookof year during year of year value
Software (160,019) (5,636) (165,655) 6,375
Patents, rights and royalties (49,955) – (49,955) –
Other intangibles – – – 4,707
Intangibles in progress – – – 1,902
2005 Total (209,974) (5,636) (215,610) 12,984
2004 Total (204,485) (5,489) (209,974) 6,540
2003 Total (186,435) (18,050) (204,485) 7,818
Patents, rights and royalties are amortized over their useful lives as specified in the relevant contracts.
VZ_2005_AN 31.5.2006 14:59 Str. 41
Other intangibles represent greenhouse gas emissions allowances (“allowances”). In compliance with the Decree of the Governmentof the Czech Republic of 20 July 2005 on the National Allocation Plan, the Company was issued free of charge allowances constituting the right to emit 13,306 thousand tones of gas emissions in 2005.These allowances were valued at their replacementcost totaling CZK 8,372 thousand.
In connection with the movements of the allowance account during 2005, the following amounts were charged against or recognized into income (in CZK thousands):
Allowances Other Other Other value operating operating liabilities
revenues expenses
Free of charge allocation of allowances 8,372 – – (8,372)
Usage of allowances against the amount of gas emissions measured in 2005 (3,665) 3,665 (3,665) 3,665
Total as at 31 December 2005 4,707 3,665 (3,665) (4,707)
The total value of small intangible fixed assets not reflected in the accompanying balance sheet was CZK 5,233 thousand, CZK5,181 thousand and CZK 4,696 thousand at acquisition cost as at 31 December 2005, 2004 and 2003, respectively.
As at 31 December 2005 intangible fixed assets at acquisition cost in the amount of CZK 173,190 thousand are fully amortized.
b) Tangible Fixed Assets (in CZK thousands)
COST
At beginning Additions Disposals Transfers At end of year of year
Land 94,211 – (1,064) – 93,147
Constructions 981,392 – (48,523) 12,001 944,870
Machinery and equipment 1,193,278 – (41,281) 33,841 1,185,838
Vehicles 75,676 – (4,167) 5,345 76,854
Furniture and fixtures 17,343 – (61) – 17,282
Other tangibles 5,875 – – – 5,875
Tangibles in progress 21,223 51,055 (1,753) (51,187) 19,338
Advances for tangibles 2,645 19,998 (6,457) – 16,186
2005 Total 2,391,643 71,053 (103,306) – 2,359,390
2004 Total 2,393,198 63,457 (65,012) – 2,391,643
2003 Total 2,327,486 116,271 (50,559) – 2,393,198
VZ_2005_AN 31.5.2006 14:59 Str. 42
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 42 / 43
ACCUMULATED DEPRECIATION
At beginning Depreciation Cost of Disposals At end Provisions Net bookof year sales or of year value
liquidation
Land – – – – – – 93,147
Constructions (435,159) (33,303) (28,051) 49,568 (446,945) – 497,925
Machinery and equipment (984,636) (80,662) (21) 41,281 (1,024,038) – 161,800
Vehicles (68,809) (3,395) (392) 4,167 (68,429) – 8,425
Furniture and fixtures (14,208) (1,147) – 61 (15,294) – 1,988
Other tangibles (5,679) (77) – – (5,756) – 119
Tangibles in progress – – – – – (1,239) 18,099
Advances for tangibles – – – – – – 16,186
2005 Total (1,508,491) (118,584) (28,464) 95,077 (1,560,462) (1,239) 797,689
2004 Total (1,404,156) (145,600) (11,692) 52,957 (1,508,491) (180) 882,972
2003 Total (1,307,124) (135,721) (2,173) 40,862 (1,404,156) (490) 988,552
The total value of small tangible fixed assets, which are not reflected in the accompanying balance sheet, was CZK 467,695 thousand, CZK 456,009 thousand and CZK 409,954 thousand at acquisition cost as at 31 December 2005, 2004 and 2003,respectively.
As at 31 December 2005 tangible fixed assets at acquisition cost in the amount of CZK 873,685 thousand are fully depreciated.
The Company adjusted the carrying value of certain intangible assets for diminution in value through a provision charged againstincome (see Note 7).
As at 31 December 2005, 2004 and 2003, a part of the buildings with a cost of CZK 37,373 thousand CZK 85,896 thousand andCZK 81,026 thousand, respectively, and with a net book value of CZK 17,684 thousand, CZK 46,844 thousand and CZK 49,695thousand, respectively, located mostly outside the Company’s production plant were used in particular as flats, recreational facilities and warehouse in Kralupy nad Vltavou. Flats with a cost of CZK 48,523 thousand and with a net book value of CZK27,027 thousand were sold in 2005.
c) Financial Investments (in CZK thousands)
Summary of changes in financial investments:
Balance as at Disposals Revaluation Balance as at Additions Disposals Revaluation Balance as at31/ 12/ 2003 31/ 12/ 2004 31/ 12/ 2005
Subsidiaries 484,507 (110) (29,601) 454,796 30,134 – 20,007 504,937
Associates 1,100 – – 1,100 – – – 1,100
Other securities and deposits 244 – – 244 – (144) – 100
Provisions (203,255) 14,800 – (188,455) (152,039) – – (340,494)
Total 282,596 14,690 (29,601) 267,685 (121,905) (144) 20,007 165,643
Provisions comprise primarily a provision for the financial investment in IBIS Aerospace Limited that reflects all the risks associated with this project. The Company established a provision in the amount of CZK 1,100 thousand for the financial investment in Letov, a.s., against the assets of which a bankruptcy order was filed on 2 February 1998.
VZ_2005_AN 31.5.2006 14:59 Str. 43
In 1997, the Company founded a joint venture IBIS Aerospace Limited together with Aerospace Industrial DevelopmentCorporation,Taiwan (AIDC), for the purpose of completing the development and production of the Ae270 aircraft.The contributioncomprised aircraft development results with a cost of CZK 173,425 thousand, which, however, was valued at USD 23,000 thousands (CZK 796,628 thousands). Under the deed of foundation, the Company contributed an additional USD 2,000 thousands(CZK 70,760 thousand), USD 2,000 thousand (CZK 76,968 thousand) and USD 5,000 thousand (CZK 188,981 thousand) in1999, 2000 and 2001, respectively.
Since 2001, the Company has continued test flights of the Ae270 aircraft. During the development stage the Company adjustedtechnical requirements of the plane in order to be competitive and compatible with the latest market trends. Meeting of theserequirements resulted to the installation of additional technical equipment. In 2002, the Company decided to suspend the developmentof the aircraft Ae270P and to continue with the development of an aircraft equipped with a more powerful engine (P&W PT6-66).Prototype enhanced with this engine was successfully tested on 25 February 2003. In 2003 and 2004, the development of the aircraft continued and in December 2005 and February 2006 the Company obtained certification from the European AviationSafety Agency (EASA) and from the American Federal Aviation Autority (FAA), respectively. In spite of significant concentrationof production and development capacities during the final stage of development, the original certification schedule was not met,mainly due to following:
• Several technical problems arose during the development stage. Some of the originally proposed technical solutions were found as unsuitable and had to be changed.
• The Company was continuously reflecting changing marketing requirements, the implementation of which increased competitiveness of the plane on the market, but also increased time and costs investments in the development.
• Sufficient support of the project was not declared by the Company during the initial stage of development due to concurrence with the production of L-159A aircraft for the Ministry of Defense of the Czech Republic.
During the testing phase, the Company identified that several technical parameters of the plane are low-tech and far behind the cur-rent market’s requirements. It was decided that simultaneously with the production of this plane in the current version the Companybegins with the preparation for the development of a new upgraded version, which would meet all current market requirements.A proposal for changes significantly increasing the plane’s performance (e.g. cruising speed, effective loading and flying range) hasbeen developed and a related investment plan was approved by IBIS Aerospace Limited in 2005. This approved investment planwas used as a basis for gaining a new contribution to the project from the Ministry of Economy of Taiwan. As at 12 January 2006additional contribution to the project was recommended by ministerial committee for final approval to the Minister of Economy.Should the additional contribution be approved, the development works will start in the second half of 2006.
IBIS Aerospace Limited, the exclusive dealer of the Ae270 plane, has received several orders for the plane. In 2006 the Companyplans to produce two planes in the current version. Subsequent production of the Ae270 plane in the current version is uncertainas a result of the development of the upgraded version.
There is no assurance that IBIS Aerospace Limited will be successful in the development, production and sale of planes Ae270 andthat cash flows from the sales will cover the development, production and marketing costs spent on this project. The Company established a provision for the financial investment in IBIS Aerospace Limited of CZK 339,394 thousand, which represents the difference between the gross book value of this investment and its estimated net realizable value.
VZ_2005_AN 31.5.2006 14:59 Str. 44
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 44 / 45
Subsidiaries and associates as at 31 December 2005 were as follows (in CZK thousands):
Name Technometra IBIS Aerospace Letov, a.s.Radotín, a.s. Limited in bankruptcy
Location Prague 5 British Virgin Islands Prague 9
Percentage of ownership 100 50 42.6
Total assets 250,683 1,333,653 –
Shareholders’ equity 227,324 1,292,821 –
Basic capital and capital funds 219,426 1,573,632 –
Funds created from profit 5,862 – –
Retained earnings 15,183 (253,295) –
Loss of current year (13,147) (27,517) –
Acquisition cost 110,220 394,717 1,100
Nominal value of share/interest 219,426 786,816 –
Intrinsic value of share/interest 227,324 646,410 –
Provision – (339,394) (1,100)
The financial information about Technometra Radotín, a.s. was obtained from the financial statements audited by a local auditcompany, which issued an unqualified opinion on these financial statements. Financial statements of IBIS Aerospace Limited were
audited by KPMG.They issued an unqualified opinion on these financial statements with an emphasis of matter paragraph relatingto the ability of this company to continue as a going concern entity, which is dependent on obtaining financial resources from a newinvestor.
Subsidiaries and associates as at 31 December 2004 were as follows (in CZK thousands):
Name Technometra IBIS Aerospace Letov, a.s.Radotín, a.s. Limited in bankruptcy
Location Prague 5 British Virgin Islands Prague 9
Percentage of ownership 100 50 42.6
Total assets 539,464 1,237,710 –
Shareholders’ equity 210,336 1,225,995 –
Basic capital and capital funds 189,291 1,431,360 –
Funds created from profit 5,862 – –
Retained earnings 99,500 (175,408) –
Loss of current year (84,317) (29,958) –
Acquisition cost 80,086 374,710 1,100
Nominal value of share/interest 189,291 715,680 –
Intrinsic value of share/interest 210,336 612,997 –
Provision – (187,355) (1,100)
The financial information about these companies was obtained from the companies’ individual audited financial statements, exceptof Letov, a.s., in bankruptcy, which provided no financial information.
VZ_2005_AN 31.5.2006 14:59 Str. 45
Subsidiaries and associates as at 31 December 2003 were as follows (in CZK thousand):
Name Technometra IBIS Aerospace Letov, a.s. Soukromé SOURadotín, a.s. Limited in bancruptcy Vodochody, s.r.o.
in liquidation
Location Prague 5 British Virgin Islands Prague 9 Odolena Voda
Percentage of ownership 100 50 42.6 100
Total assets 668,635 1,489,599 – 101
Shareholders’ equity 294,653 1,440,653 – 101
Basic capital and capital funds 189,291 1,641,856 – 100
Funds created from profit 4,707 – – 50
Retained earnings 77,554 (145,745) – 1,792
Profit/loss of current year 23,101 (55,458) – (1,841)
Acquisition cost 80,086 404,311 1,100 110
Nominal value of share/interest 189,291 820,928 – 100
Intrinsic value of share/interest 294,653 720,326 – 101
Provision – (202,155) (1,100) –
The financial information about these companies was obtained from the companies’ individual unaudited financial statements,except of Technometra Radotín, a.s., and IBIS Aerospace Limited, which were audited.
Loans to subsidiaries and associates as at 31 December were as follows (in CZK thousands):
Company Terms/Conditions 2005 2004 2003
Technometra Radotín, a.s. Due on 12/2004;Interest rate 7.06 % – 2,500 –
Other securities and deposits of the Company as at 31 December were as follows (in CZK thousands):
2005 2004 2003
Number Market Income Number Market Income Number Market Incomeof shares/ value of shares/ value of shares/ value
Nominal Nominal Nominalvalue value value
Aero Trade, a.s. 10/20 Not available 25 10/20 Not available 25 10/10 Not available 25
Aeromedia, a.s. – – – 12/10 Not available – 12/10 Not available –
5. INVENTORY
Obsolete, defective or slow-moving inventory has been reduced to net realizable value by a provision account.The provision is determinedby management based on an inventory aging analysis and the analysis of its future usability. The provision for project Ae270 was determined as the difference between the gross value of inventories and the value of usable and realizable material (see Note 7).
Provisions are established primarily against material and work-in-progress relating to projects Ae270 a L-159 and against materi-al not assigned to individual projects.
VZ_2005_AN 31.5.2006 14:59 Str. 46
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 46 / 47
Provisions for individual projects as at 31 December 2005 are as follows (in CZK thousands):
Provisions to: Material Work-in-progress, semi-finished products and goods
Ae270 264,088 521,870
L-159 319,977 58,205
L-39, L-59 341,497 1,979
Project Sikorsky 44,238 –
Not-assigned material 55,544 186
Other inventory 31,344 348
Goods – 2,995
Total 1,056,688 585,583
Work-in-progress as at 31 December 2005 consists mainly of project Sikorsky (CZK 433,516 thousand), civil project Ae270 (CZK473,624 thousand) and military project L-159 (CZK 45,088 thousand).
Advance payments for purchases of material in the amount of CZK 76,570 thousand as at 31 December 2005 relate mostly to project Sikorsky.
6. RECEIVABLES
Provisions against outstanding receivables that are considered doubtful were charged to income based on their analysis and theLaw on Reserves in 2005, 2004 and 2003, respectively (see Note 7).
Receivables overdue for more than 180 days totaled CZK 24,045 thousand, CZK 22,495 thousand and CZK 37,968 thousand at31 December 2005, 2004 and 2003, respectively.
In addition, the Company wrote off irrecoverable receivables of CZK 4,102 thousand, CZK 711 thousand and CZK 13,165 thousand in 2005, 2004 and 2003, respectively, due to cancellation of bankruptcy proceedings, unsatisfying the claims in bankruptcyproceedings, etc.
As at 31 December 2005, 2004 and 2003, respectively the Company had no long-term receivables.
Receivables from related parties (see Note 21).
VZ_2005_AN 31.5.2006 14:59 Str. 47
7. PROVISIONS
Provisions reflect a temporary diminution in value of assets (see Notes 4, 5 and 6).
Changes in the provision accounts (in CZK thousands):
Provisions against Balance as at Additions Deductions Balance as at Additions Deductions Balance as at
31/ 12/ 2003 31/ 12/ 2004 31/ 12/ 2005
Tangible fixed assets 490 – (310) 180 1,059 – 1,239
Financial assets 203,255 – (14,800) 188,455 152,039 – 340,494
Inventory 1,512,280 405,582 (355,120) 1,562,742 439,675 (360,146) 1,642,271
Advances for inventory 52,712 5,757 – 58,469 6,531 (37,036) 27,964
Receivables – statutory 1,533 2,077 (249) 3,361 4 (1,039) 2,326
Receivables – other 64,047 32,209 (46,424) 49,832 5,632 (42,493) 12,971
Statutory provisions are created in compliance with the Law on Reserves and are tax deductible.
8.FINANCIAL ASSETS
As at 31 December the Company had the following restricted balances (in CZK thousands):
2005 2004 2003
Currency Amount Amount Amount Amount Amount Amountin foreign (in CZK in foreign (in CZK in foreign (in CZKcurrency thousands) currency thousands) currency thousands)
(in thousands) (in thousands) (in thousands)
âeská národní banka USD 1,619 39,808 1,594 35,658 1,596 40,931
âSOB, a.s. CZK – – – 65,510 – 65,510
Deutsche Bank AG Praha USD 2,948 72,486 35,891 802,721 2,958 75,882
Deutsche Bank AG Praha USD – – – 1,052 – –
âeská spofiitelna, a.s. USD 975 23,973 390 8,722 – –
âeská spofiitelna, a.s. CZK – 5,596 – 5,000 – –
Commerzbank AG Praha USD 812 19,958 812 18,154 860 22,059
Standard Chartered Bank London USD – – 124 2,781 275 7,063
Total – 161,826 – 939,598 – 211,445
Financial assets deposited in restricted accounts represent a security for financial transactions with banks (contracts for futurepurchase of foreign currency, letters of credit, etc.) and guarantees granted by the banks (see Note 14). As at 31 December 2004,cash of CZK 745,671 thousand was deposited in a restricted account in Deutsche Bank for repayment of bonds.
VZ_2005_AN 31.5.2006 14:59 Str. 48
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 48 / 49
As at 31 December 2005, the Company held two deposit bills of exchange in the nominal values of CZK 31,000 thousand and USD6,190 thousand (CZK 152,219 thousand) due on 2 January 2006. Accrued interest relating to these bills of exchange amountedto CZK 9 thousand.
As at 31 December 2003, the Company held two deposit bills of exchange in the nominal values CZK 94,600 thousand and USD550 thousand (CZK 14,114 thousand) due on 2 January 2004. Accrued interest relating to these bills of exchange amounted toCZK 4 thousand.
The Company holds short-term investment in the mutual fund CONSEQ whose market value as at 31 December is CZK 150,667thousand.
Short-term securities of the Company as at 31 December were as follows (in CZK thousands):
2005
Number of deposits (pieces) Market value Income
Mutual Fund CONSEQ 1,425,893 150,667 667
9.OTHER ASSETS
Prepaid expenses include in particular accrued insurance fees and overhead costs. These expenses are being charged to income asthe relevant costs are incurred.
As at 31 December 2004 and 2003, respectively, prepaid expenses included in particular expenses related to Eurobonds issue andaccrued insurance fees.
Unbilled revenues include in particular unbilled sale of services to a Tunisian partner and supply of heat that will be billed in 2006.Revenues are credited to income in the year in which they were earned.
Unbilled revenues as at 31 December 2003 included in particular unbilled revenues from sales of the L-159 aircraft.
VZ_2005_AN 31.5.2006 14:59 Str. 49
10. EQUITY
The basic capital of the Company is comprised of 887,366 registered shares in materialized form, with a nominal value of CZK 2, and of 2,690,000 registered shares in materialized form, with a stated value of CZK 1,000 which are fully subscribed and paid.Other capital funds consist of the fund balance after the financial restructuring made in previous years. Other funds from profitwere created for an issue of employee shares (however this issue has been abandoned) and social fund.
In 2005, the basic capital was reduced by 75,465 pieces of own shares in the amount of CZK 151 thousand.
The movements in the capital accounts during 2005, 2004 and 2003 were as follows (in CZK thousands):
Balance as at Increase Decrease Balance as at Increase Decrease Balance as at31/ 12/ 2003 31/ 12/ 2004 31/ 12/ 2005
Number of shares 962,831 / 2 – – 962,831 / 2 – (75,465) / 2 887,366 / 2/ nominal value in CZK 2,690,000 – – 2,690,000 – 2,690,000
/ 1,000 / 1,000 / 1,000
Basic capital 2,691,926 – – 2,691,926 – (151) 2,691,775
Own shares (151) – – (151) 151 – –
Other capital funds 25,882 – – 25,882 – – 25,882
Differences arising from revaluation of assets and liabilities (115,099) – (20,325) (135,424) 20,007 – (115,417)
Legal reserve fund 169,345 15,664 – 185,009 14,734 – 199,743
Other funds 16,680 – (170) 16,510 – (2) 16,508
The differences arising on the revaluation of assets and liabilities as at 31 December consist of (in CZK thousands):
Amount at Amount at Amount at 31/ 12/ 2005 31/ 12/ 2004 31/ 12/ 2003
Revaluation of investment in IBIS Aerospace Limited (effect of foreign exchange currency rate) – see Note 4c (115,417) (135,424) (105,823)
Fair value of the forward foreign currency agreements – – (9,276)
Total (115,417) (135,424) (115,099)
The Annual General Meeting held on 29 June 2005, 30 June 2004 and 23 July 2003 approved the following distribution of theprofit for 2004, 2003 and 2002, respectively (in CZK thousands):
Profit for 2004 294,689 Profit for 2003 313,281 Profit for 2002 759,996
Allocation to – Allocation to – Allocation to –
Legal reserve fund (14,734) Legal reserve fund (15,664) Legal reserve fund (38,000)
Other funds – Other funds – Other funds (5,000)
Cover of accumulated losses 279,955 Cover of accumulated losses 297,617 Cover of accumulated losses 716,996
Retained earnings Retained earnings Retained earnings for the previous years for the previous years for the previous yearsas at 31/ 12/ 2004 377 as at 31/ 12/ 2003 377 as at 31/ 12/ 2002 377
Accumulated loss Accumulated loss Accumulated lossof previous years of previous years of previous yearsas at 31/ 12/ 2004 (7,866,914) as at 31/ 12/ 2003 (8,146,869) as at 31/ 12/ 2002 (8,444,486)
VZ_2005_AN 31.5.2006 14:59 Str. 50
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 50 / 51
11. RESERVES
Reserves Balance as at Increase Decrease Balance as at Increase Decrease Balance as at31/ 12/ 2003 31/ 12/ 2004 31/ 12/ 2005
Penalties for late payments 23 – (23) – 964 – 964
Warranty service costs L-159 567,000 8,100 (301,736) 273,364 – (156,760) 116,604
Warranty service costs (PAMCO) 2,141 – (2,141) – – – –
Overhaul Tunis – – – – 1,143 – 1,143
Contract Ae270 – – – – 45,557 – 45,557
Orders Technometra – – – – 21,374 – 21,374
Contractual penalty for late supplies 768,000 – (768,000) – – – –
Bonuses to employees 42,142 7,731 (42,142) 7,731 8,027 (7,731) 8,027
Reserve for Sikorsky guarantees 61,069 – (26,925) 34,144 16,357 (3,092) 47,409
Reserve for repairs of fixed assets 8,000 – (8,000) – – – –
Reserve for foreign service Thailand – 4,880 – 4,880 – (3,000) 1,880
Other reserves 4,256 – – 4,256 – (3,856) 400
Total 1,452,631 20,711 (1,148,967) 324,375 93,422 (174,439) 243,358
Contractual penalty for late supplies
In 1997, the Company signed a contract for the delivery of 72 aircrafts L-159 to the Ministry of Defense of the Czech Republic.The agreed deliveries were delayed and the Company established a reserve for the potential penalty resulting from those delays andfor other related expenses. In 2004, according to the Agreement about the conciliation and settlement signed with the Ministry ofDefense of the Czech Republic, the Company paid CZK 768,070 thousand for overpayment of the purchase price, contractual penal-ties and interest on overdue payment and, consequently, the respective reserve has been released.
In 2005, the Company established a reserve for penalty related to delays with the finalization of the overhauls for Thailand andBangladesh.
Reserve for guarantee repairs of Sikorsky
The Company established a reserve in the amount of estimated costs related to expected warranty repairs.
Guarantee repairs L-159
Reserve for guarantee repairs of fighters L-159 was established to cover expected amount of the repairs of the 72 aircraft sold tothe Army of the Czech Republic. During 2004 the guarantee period of 50 airplanes has terminated. As the actual expenses of theprovided repairs were lower than expected, the remaining part of the reserve was adjusted to cover the cost expected for repairs ofthe remaining 22 aircraft based on actual costs incurred as at 31 December 2004.
During 2005 the guarantee period of 18 aircraft has terminated and the appropriate portion of reserve was reduced. As at 31December 2005, the reserve for guarantee repairs was established to cover expected amount of the repairs of 4 aircraft and tocover expected amount of claims relating to the aircraft components.
Reserves for Ae270 and orders Technometra
The Company does not plan to produce a significant quantity of planes Ae270 in the current version. Accordingly, the managementof the Company established a reserve of CZK 45,557 thousand and CZK 21,374 thousand for fixed contracts and placed ordersfor material to be purchased from third parties and from related party Technometra Radotín, a.s., respectively, which will not be used.
VZ_2005_AN 31.5.2006 14:59 Str. 51
12. LONG-TERM LIABILITIES
The Company had the following bonds payable and other long-term payables as at 31 December (in CZK thousands):
Terms/Conditions 2005 2004 2003
Bonds payable Maturity 17/ 11/ 2005Interest rate7.5 % – 4,473,000 5,130,800
Government development grant, Development of L-159 and Ae270 interest-free Maturity 12/2005 – 3,982 8,182
Payable to âeská konsolidaãní agentura Maturity 31/ 1/ 2011Interest rate 140 % of discount rate 5,684,328 – –
Payable to âeská konsolidaãní agentura Maturity 15/ 12/ 2010 Interest rate 140 % of discount rate 4,581,514 – –
Total 10,265,842 4,476,982 5,138,982
Less current portion – (4,476,982) (4,200)
Total 10,265,842 – 5,134,782
Based on the Government resolution in 2004 the Company canceled the syndicate revolving loan contract. Before the cancellation,the Company utilized the state guarantee and drew a loan in the amount of USD 210 million. USD 125 million of the total amountwas used for repayment of loans from Deutsche Bank Luxembourg S.A. USD 32 million of the remaining amount, which wasdeposited on the current account, was determined for repayment of the Eurobonds in November 2005; remaining USD 53 millionwas put aside to cover operating activities of the Company. As at 31 December 2004 the total liability to the Ministry of Financeof the Czech Republic resulting from the utilization of the state guarantee in the amount of CZK 5,547,517 thousand is reportedas Other short-term liability (see Note 13). The Company did not have a valid contract specifying the detailed conditions of repayment and expected this payable will be capitalized.
In December 2005, the Company and the Ministry of Finance of the Czech Republic concluded agreements specifying the interest,maturities and other conditions related to the payable that emerged as a result of utilization of the state guarantees. The totalamount of the outstanding payable including interest is repayable in five consecutive annual payments. The first payment of CZK2,100,798 thousand is due as at 31 January 2007.The total amount of outstanding payable (including interest) as at 31 December2005 is CZK 10,265,842 thousand. According to the agreement concluded as at 22 December 2005 by âeská konsolidaãní agentura and the Ministry of Finance of the Czech Republic, the whole liability was transferred to âeská konsolidaãní agentura asa new creditor of the Company.
VZ_2005_AN 31.5.2006 14:59 Str. 52
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 52 / 53
13. CURRENT LIABILITIES
As at 31 December 2005, 2004 and 2003 the Company had overdue short-term liabilities totaling CZK 75,094 thousand, CZK56,495 thousand, CZK 217,883 thousand, respectively.
Other short-term liabilities as at 31 December 2005 consist mainly of negative fair values of open derivatives (see Note 16). As at31 December 2004 short-term liabilities consist mainly of a liability to the state resulting from the execution of the state guaranteefor a syndicated revolving loan (see Note 12)
Unbilled deliveries include primarily material received and they are recorded in the period in which they relate.
Payables to related parties (see Note 21).
14. BANK LOANS
2005 2004 2003
Bank Terms/ Total limit Amount Amount Amount Amount Amount AmountConditions (in USD in foreign in CZK in foreign in CZK in foreign in CZK
thousands) currency thousands currency thousands currency thousands
Deutsche Bank Luxemburg S.A. 2004 300,000 – – – – 49,000 1,257,046
Total – – – – – – 1,257,046
Less current portion – – – – – – (1,257,046)
Long-term portion – – – – – – –
As at 15 December 2005, the Company signed two loan agreements with âeská exportní banka, a.s. with a total available creditlimit of USD 65 million. These funds can be used only for financing of the Sikorsky program and will be secured by pledged receivables and rights resulting from the general agreement with Sikorsky Aircraft Corporation.
Interest expense relating to bank loans and bonds in 2005, 2004 and 2003, respectively, was CZK 479,698 thousand, CZK 382,579thousand and CZK 467,783 thousand. The Company has not capitalized interest into the acquisition price of fixed assets in 2005,2004 and 2003.
As at 31 December 2005, the Company was provided with the following bank guarantees (in CZK thousands):
Bank Guarantee Term Amount
âeská národní banka - performing letter of guarantee 09/91 – 06/06 30,821
- performing letter of guarantee 09/91 – 06/06 1,579
âeská spofiitelna, a.s. - letter of credit 07/04 – not specified 5,000
- payment guarantee 05/05 – not specified 14,384
- performing letter of guarantee 05/05 – not specified 4,795
- payment guarantee 05/05 – not specified 4,795
Commerzbank AG - performing letter of guarantee 12/02 – not specified 13,800
Deutsche bank AG - performing letter of guarantee 05/05 – 03/06 2,987
- payment guarantee 06/04 – 01/07 36,882
- performing letter of guarantee 05/05 – 03/06 296
- letter of credit until 03/06 5,913
- performing letter of guarantee 11/05 – 05/06 267
- letter of credit 12/05 – 03/06 753
Total 122,272
As at 31 December 2005, 2004 and 2003 the Company secured received bank guarantees by cash deposited in restricted bankaccounts of CZK 161,826 thousand, CZK 193,927 thousand and CZK 211,445 thousand, respectively (see Note 8).
VZ_2005_AN 31.5.2006 14:59 Str. 53
15. OTHER LIABILITIES
In 2004 and 2003, accruals include particularly interest on issued bonds and bank loans and are being charged to income in theperiod to which they relate.
16. DERIVATIVES
The Company has concluded several derivative contracts that are classified as held for trading. As at 31 December 2005, the derivatives were revalued at fair value, with the negative fair values of derivatives being included in other payables (see Note 13).
The following table summarizes nominal and fair values of outstanding derivatives held for trading as at 31 December:
2005
(in CZK thousand) Contractual/ Nominal value Fair value
Currency contracts 224,284 (8,734)
Total derivatives held for trading 224,284 (8,734)
Losses from derivatives in 2005 and 2004 were CZK 72,223 thousand and CZK 26,329 thousand, respectively. Gains from derivatives in 2005 and 2004 were CZK 5,216 thousand and CZK 7,996 thousand, respectively.
17. INCOME TAX
The Company can carry forward tax losses generated in the period 1998 - 2000 for up to seven years and tax losses generatedsince 2004 for up to five years. The remaining tax loss carry-forward, the benefit of which has not been recognized in the accompanying financial statements and will be carried forward, amounted to CZK 2,539,437 thousand as at 31 December 2005(out of which tax loss for 2005 amounts to CZK 1,092,683 thousand).
The Company quantified deferred taxes as follows (in CZK thousands):
2005 2004 2003
Deferred tax items Deferred tax Deferred tax Deferred tax Deferred tax Deferred tax Deferred tax asset liability asset liability asset liability
Difference between net book value of fixed assets for accounting and tax purposes – (11,165) – (3,837) – (2,046)
Other temporary differences:
Provision against receivables 9,911 – 25,992 – 22,027 –
Provision against inventory 394,145 – 375,058 – 375,598 –
Provision against fixed assets 297 – 43 – 118 –
Reserves 58,406 – 77,850 – 348,392 –
Tax loss of previous years 609,465 – 508,327 – 626,298 –
Total 1,072,224 (11,165) 987,270 (3,837) 1,372,433 (2,046)
Net 1,061,059 – 983,433 – 1,370,387 –
The Company has not recorded a deferred tax asset on the basis that its recovery is uncertain.
VZ_2005_AN 31.5.2006 14:59 Str. 54
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 54 / 55
18. COMMITMENTS AND CONTINGENCIES
The Company has a contractual relationship with mediators and records liabilities to them upon the completion of sales contracts.Pursuant to the sale contract, the Company undertakes to pay the mediator a part of the income realized. It is not possible to assessthe amount until contract completion.
Under the standard terms of its sales contracts, the Company has a responsibility to make spare parts available for a period between10-15 years after the date of sale.
As at 8 December 2005, the Company concluded with the Ministry of Defense of the Czech Republic a general agreement for afterwarranty support for aircraft L-159 and L-39. According to this agreement, in the period until January 2029, the Company isobliged to provide services, maintenance and spare parts for planes already owned by the Czech Army, and to assist during their modernization. In cases of significant breaches of the contractual terms or in case of withdrawal from the contract, the Ministryof Defense of the Czech Republic is entitled to claim a penalty and potential additional compensation from the Company.
Pursuant to the government resolution of April 1998, the Government of the Czech Republic guaranteed, through the Ministry ofFinance of the Czech Republic, the financing of the development and production project for the L-159 aircraft and the restructuringof the loans, in the total amount of USD 967 million (CZK 35,062 million). In 2004, the state guarantees for bank loans were exercised and in 2005 the guarantees for Eurobonds were exercised.
The main production orders are realized on the basis of long-term contracts with suppliers. As at 31 December 2005, 2004 and2003 the commitments arising from contracts concluded with suppliers in connection with supplies for the project Sikorsky totaledCZK 1,996,773 thousand, CZK 1,022,354 thousand and CZK 1,330,918 thousand, respectively.These contracts, as a rule, includea provision stipulating the amount of compensation that the Company is obliged to pay if it fails to fulfill contractual obligationsor if it withdraws from the contract. In addition, the suppliers do not accept responsibility for possible subsequent damage causedby an accident.
The Company might be required to settle additional liabilities resulting from the effect of the planned privatization process (e.g. changeof control) on its strategic contractual relationships with Sikorsky Aircraft Corporation and AIDC/Aerospace Industrial DevelopmentCorporation.The management of the Company cannot reliably quantify an amount of these contingent liabilities as at 31 December 2005.
The Company has concluded a liability insurance for its own aviation activity, accident insurance of aircraft and insurance for damages caused by faulty products. The Company has concluded a combined insurance limit in the amount of USD 250,000 thousand for one and all insured accidents arising during the insurance period worldwide. The insurance covers the major risksemerging from the Company’s aeronautical operations.
The Company records in off-balance sheet evidence fixed assets of IBIS Aerospace Limited in the amount of CZK 19,725 thousand.
In 1998, the Company together with GEO s. r. o. conducted an environmental audit, the result of which was, inter alia,a quantification of investments required for making the production ecofriendly and for remedy of environmental damage. The costestimate totals CZK 248,375 thousand. Based on the Contract for repayment of costs incurred in the settlement of environmentalliabilities concluded between the Company and the National Property Fund of the Czech Republic on 12 August 1998, the NationalProperty Fund (currently the Ministry of Finance of the Czech Republic) should cover those costs of the Company which are rea-sonably incurred up to CZK 2,691,926 thousand, which exceeds the estimate.
VZ_2005_AN 31.5.2006 14:59 Str. 55
19.REVENUES
The breakdown of the Company's revenues from current activities is as follows (in CZK thousands):
2005 2004 2003
Domestic Foreign Domestic Foreign Domestic Foreign
Aviation production 215,232 2,164,339 1,942,525 1,745,347 4,123,393 1,609,351
Non-aviation production 35,082 – 77,125 – 31,551 –
IBIS Aerospace Limited – – – – – 17,255
Total revenues 250,314 2,164,339 2,019,650 1,745,347 4,154,944 1,626,606
In 2005, the revenues of the company are concentrated primarily with three main customers in the aviation industry, i.e. SikorskyAircraft Corporation, the Ministry of Defense of Tunis and Royal Thai Air Force.
20. PERSONNEL AND RELATED EXPENSES
The breakdown of personnel expenses is as follows (in CZK thousands):
2005 2004 2003
Total Members of Total Members of Total Members ofpersonnel managerial personnel managerial personnel managerial
bodies bodies bodies
Average number of employees 1,618 83 1,733 81 2,197 88
Salaries and wages 520,024 74,108 546,682 77,321 624,178 76,920
Social security and health insurance 187,233 25,938 190,189 27,360 219,962 26,863
Social cost 7,733 889 8,005 842 9,416 967
Total personnel expenses 714,990 100,935 744,876 105,523 853,556 104,750
The members and former members of statutory and supervisory bodies received total bonuses and other remuneration of CZK 2,350thousand, CZK 1,160 thousand and CZK 1,540 thousand in 2005, 2004 and 2003, respectively.
21.RELATED PARTY INFORMATION
âeská konsolidaãní agentura, state institution and the majority shareholder of the Company own shares in other companies that theCompany has insignificant trading and other activities with. These companies and also ministries and other state institutions andauthorities are not considered to be related parties for purposes of these financial statements.
No loans, guarantees and other benefits were granted to members of statutory bodies in 2005, 2004 and 2003 and they do not holdany shares of the Company.
In 1999, the Company concluded a liability insurance for damages caused by the Board of Directors, Supervisory Board and theOperation Committee of the Company. The purpose of this insurance is to provide insurance coverage to members of the Board ofDirectors, Supervisory Board and former Operation Committee members of the Company with respect to the potential personalresponsibilities related to their positions. The insurance limit is CZK 200,000 thousand per one covered event and all such eventsduring the relevant year worldwide.
Employee benefits for certain members of statutory bodies consist of the use of cars also for private purposes.
VZ_2005_AN 31.5.2006 14:59 Str. 56
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 56 / 57
Loans to subsidiaries as at 31 December were as follows (in CZK thousands):
Company 2005 2004 2003
Technometra Radotín, a.s. – 2,500 –
Advances provided to related parties (Technometra Radotín, a.s.) as at 31 December 2005, 2004 and 2003 amounted to CZK6,513 thousand, CZK 30,135 thousand and CZK 38,690 thousand. The Company sells products to related parties in the ordinarycourse of business. Sales volume was CZK 1,279 thousand, CZK 4,276 thousand and CZK 55,791 thousand in 2005, 2004 and2003, respectively.
Short-term receivables from related parties as at 31 December were as follows (in CZK thousands):
Related party 2005 2004 2003
Technometra Radotín, a.s. 116 121 151
Soukromé SOU Vodochody, s.r.o. in liquidation – – 548
Letov, a.s. in bankrupcy – 1,014 1,014
Boeing âeská, s.r.o. – – 525
IBIS Aerospace Limited 113 123 30,224
Total 229 1,258 32,462
The Company purchases products and receives services from related parties in the ordinary course of business. In 2005, 2004 and2003, respectively, purchases amounted to CZK 23,867 thousand, CZK 38,199 thousand, and CZK 125,750 thousand, respectively.
Short-term liabilities to related parties as at 31 December were as follows (in CZK thousands):
Related party 2005 2004 2003
Technometra Radotín, a.s. 11,976 – 426
Boeing âeská, s.r.o. – – 245
Total 11,976 – 671
Long-term liabilities to related parties as at 31 December were as folows (in CZK thousands):
Related party Terms/Due dates 2005
âeská konsolidaãní agentura 15/ 12/ 2010 4,581,514
âeská konsolidaãní agentura 31/ 1/ 2011 5,684,328
Total 10,265,842
Long-term payables to âeská konsolidaãní agentura resulted from the agreement concluded on 15 December 2005 specifying interest, maturity and other conditions related to payables which emerged as a result of utilization of the state guarantees. TheCompany agreed with the former creditor (i.e. the Ministry of Finance of the Czech Republic) that interest will be applied retrospectively since the debt origination in 2004. Interest expense relating to 2004 and 2005 amounts to CZK 58,283 thousandand CZK 84,836 thousand, respectively.
VZ_2005_AN 31.5.2006 14:59 Str. 57
22. RESEARCH AND DEVELOPMENT COSTS
Research and development costs of CZK 325,291 thousand, (of which CZK 156,350 thousand of development costs for militaryprojects and CZK 142,629 thousand for civil projects), CZK 242,018 thousand and CZK 433,109 thousand in 2005, 2004 and2003, respectively, were charged to income as incurred.
23. FUTURE OF THE COMPANY
The Company’s production portfolio consists of three main production programs. The military program is comprised of the project L-159A and L-159B and the general repairs projects of previous types of fighters. The civil program is engaged in development and production of the multi-purpose transport aircraft Ae270.The program of the aerospace cooperation is focusedmainly on production of the S-76C+ helicopter for the American company Sikorsky and the cooperation with other worldwideimportant aerospace producers.
The Company has no contracts for the sales of the L-159 aircraft. The only one contractual partner of the production programL-159 is the Ministry of Defense of the Czech Republic. As at 8 December 2005 the Company has concluded with the Ministry ofFinance of the Czech Republic a general agreement for after warranty support for the aircraft. According to this contract in the period until January 2029 the Company is obliged to provide services, maintenance and spare parts for planes already ownedby the Czech Army and to assist during their modernization. Since the beginning of the production of the L-159 aircraft,the Company sold 72 planes to the one and only customer (i.e. to the Ministry of Defense of the Czech Republic).
The Ae270 project has not kept up with the original schedule according to which the first plane should have been sold in 2001.Certification of the Ae270 was completed in 2005 (all required tests of the basic certification program). In December 2005 andFebruary 2006 the Company obtained certification from the European Aviation Safety Agency (EASA) and from the AmericanFederal Aviation Autority (FAA), respectively. The Company is involved in negotiations with its Taiwanese partner AerospaceIndustrial Development Corporation about attracting a new investor to the joint venture company IBIS Aerospace Limited andabout the subsequent development of an upgraded version of the Ae270 aircraft. Additional investment to IBIS Aerospace Limitedhas to be approved by the Ministry of Economy of Taiwan. As at 12 January 2006, additional contribution to the project was recommended by the ministerial committee for final approval of the Minister of Economy. Should the additional contribution beapproved, the development works will start in the second half of 2006. There is no assurance that IBIS Aerospace Limited will besuccessful in the development, production and sale of planes Ae270 and that cash flows from sales will cover development,production and marketing costs spent on this project.
Production of helicopters Sikorsky had a growing trend. Based on the already received orders for next year, the Company expectsan increase of the production in 2006.The management sees an opportunity in the cooperation with the European business concernEADS.
As at 31 December 2005 the Company has negative equity in the total amount of CZK 6,425,046 thousand and accumulated losses (including the loss of 2005) in the total amount of CZK 9,243,914 thousand. Pursuant to the Commercial Code, a compa-ny whose accumulated losses exceed one-half of its basic capital should file for bankruptcy or take measures to reduce the loss.These measures (including privatization, restructuring of the equity and share capital increase) were approved in the past by theGeneral Meetings but have not been sufficient to reverse the Company’s negative equity position as at 31 December 2005.
VZ_2005_AN 31.5.2006 14:59 Str. 58
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Notes to the Financial Statements
Page 58 / 59
As a result of the execution of state guarantees for the Eurobonds and the syndicated revolving loan, the Company has a significantpayable to the Ministry of Finance of the Czech Republic. In December 2005, the Company and the Ministry of Finance of the CzechRepublic concluded agreements specifying the interest, maturity and other conditions related to this payable. The total amount ofthe outstanding payable (including interest) is repayable in five consecutive annual payments. The first payment in the amount ofCZK 2,100,798 thousand is due as at 31 January 2007.The total amount of the outstanding liability (including interest) as at 31December 2005 is CZK 10,265,842 thousand. In accordance with the agreement concluded as at 22 December 2005 betweenâeská konsolidaãní agentura and the Ministry of Finance of the Czech Republic, the whole payable was transferred to âeská konsolidaãní agentura. Should the situation remain unchanged, the Company will not be able to repay these payables from futureoperating cash flows. The initial intention of the Government from 2004 to capitalize this payable of the Company and by thus tostabilize the financial position of the Company has proved to be unrealistic. The newly designed alternative entails the concurrentsale of the state's interest in the Company and its state receivable to a single party through âeská konsolidaãní agentura.The privatization process commenced in 2005 and was planed to be finalized in 2006. As a result of the Government’s decisiondated 15 March 2006 the privatization of the Company was temporarily put on hold.
The ability of the Company to continue as a going concern is contingent on the development of the above described facts,especially on the Government’s decision relating to the privatization process and on the Government’s attitude in solving theCompany’sliability to âeská konsolidaãní agentura. The financial statements were prepared based on the assumption that theCompany will continue as a going concern in the subsequent year; therefore, they contain no adjustments that might be requiredowing to this uncertainty.
24. SIGNIFICANT ITEMS OF THE INCOME STATEMENT
In January 2004, the Company issued, in accordance with paragraph 4 of the Contract for deliveries of L-159 an invoice to theMinistry of Defense of the Czech Republic in the amount of CZK 1,839,640 thousand.This invoice related to the 5th phase - paymentfor 2004. In 2004, CZK 1,254,087 thousand of this amount was credited to revenues. In addition, in February 2004, the Companydelivered and invoiced the last L-159 aircraft to the Ministry of Defense of the Czech Republic.
On 11 January 2004 the arbitration between the Czech Republic (by force of the Ministry of Defense of the Czech republic) andthe Company ended up with the decision that the Company is obliged to pay CZK 1,185,043 thousand as unwarranted benefit plusCZK 216,536 thousand as contractual penalty for late deliveries of aircraft in 1999 and 2000. The original claim of the CzechRepublic in the arbitration was CZK 1,328,833 thousand. After this decision, the Company entered into negotiation with theMinistry of Defense of the Czech Republic which resulted in an Agreement about conciliation and settlement signed on 10 March2004. By this agreement both parties reached a final solution of the case, according to which the Company paid the followingamounts to the Ministry of Defense of the Czech Republic, which are recorded as other operating expense in 2004:
Amount in CZK thousands
Overpayment of selling price 148,000
Contractual penalty for late deliveries 573,828
Penalty interest 15,494
Arbitration expenses 30,678
Total 768,000
VZ_2005_AN 31.5.2006 14:59 Str. 59
In 2005, 2004 and 2003 other finance income consists mainly of foreign currency gain.
In 2005, 2004 and 2003 other finance cost consists mainly of foreign currency loss and loss from derivatives.
Extraordinary revenues for 2005 include in particular bonus received from Honeywell, which relates to engines purchased in previous years.
Extraordinary revenues for 2003 included in particular reversal of liabilities from unbilled supplies of CZK 85,391 thousand.
Extraordinary expenses for 2005 include in particular interest from debt payable to âeská konsolidaãní agentura which relates to2004. The interest was retrospectively agreed with the Ministry of Finance of the Czech Republic in the agreement concluded on15 December 2005.
Extraordinary expenses for 2004 and 2003, respectively, include mainly corrections of prior periods.
25. SUBSEQUENT EVENTS
The tender for the buyer of the majority interest in the Company, that is currently held by âeská konsolidaãní agentura, began in2005. As a result of the Government’s decision dated 15 March 2006 the privatization of the Company was temporarily put on holduntil 19 July 2006. There are six interested parties in the privatization process. After the Government’s decision the Companyapplied a cost saving plan to be able to continue in its operations.
In February 2006, the Company concluded two contracts for supplies of spare parts and temporary storage of redundant aircraftL-159A with the Ministry of Defense of the Czech Republic.
On 24 February 2006, the Federal Aviation Administration issued the certificate for the Ae270 aircraft. In March 2006, theCompany received “the certification of manufacturing organization” for the production of these planes.
In April 2006, the Company received a letter of support from âeská konsolidaãní agentura, in which its majority shareholderexpresses intention to continue in the privatization process and confirms it will not file the parent Company for bankruptcy. In addition âeská konsolidaãní agentura confirms its readiness for the negotiations to postpone the maturity of its receivable from theparent Company (see Note 12).
26. STATEMENT OF CASH FLOWS (SEE SCHEDULE 1)
The cash flow statement was prepared under the indirect method. The Company did not consider any cash equivalents.
27. STATEMENT OF CHANGES IN EQUITY (SEE NOTE 10)
VZ_2005_AN 31.5.2006 14:59 Str. 60
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Report on Relations between Related Entities
Page 60 / 61
Report by the Board of Directors of AERO Vodochody a.s. according to provisions of § 66a Code No. 513/1991,Commercial Code, as amended.
Section I.
Controlled Entity:AERO Vodochody a.s.with its business address at 250 70 Odolena Voda, Dolínek, ul. U Leti‰tû 374Identification No.: 00010545, registered in the Commercial Register maintained by the Municipal Court in Prague,Section B, File 449(further referred to as “Company”)
Controlling Entity:LETKA a.s.with its business address at 120 00 Praha 2, Ra‰ínovo nábfieÏí 42Identification No.: 25134132, registered in the Commercial Register maintained by the Municipal Court in Prague,Section B, File 4759(further referred to as “LETKA, a.s.”)
Czech Consolidation Agencywith its business address at 170 06 Praha 7, Janovského 438/2Identification No.: 70109966, registered in the Commercial Register maintained by the Municipal Court in Prague,Section A, File 45993(further referred to as “CCA”)
Related Entities:AERO Vodochody a.s.; LETKA, a.s.; Czech Consolidation Agency; Aeronautical Research and Test Institute, a.s.; Explosia a.s.
Section II.Relations between Related Entities
Method of ControlUntil December 18, 2005, LETKA, a.s., possessed the shares of the Company, which corresponded to 53.31 % share on votingrights resulting from the equity in the Company; LETKA, a.s. thus controlled the Company by course of the provisions of § 66a,Article 3 Letter a) of the Commercial Code.
Until December 18, 2005, CCA possessed the shares of the Company, which corresponded to 46.65 % share of the voting rightsand since December 19, 2005, CCA possesses the shares of the Company in the total value of CZK 2.690.915.518, which corresponds to 99.96808 % share of the voting rights resulting from the equity in the Company; CCA thus controls the Companyby course of the provisions of § 66a, Article 3 Letter a) of the Commercial Code.
Section III.Determination Period
This report has been prepared by course of the provisions of § 66a, Article 9 for the last accounting period, i.e. for the period fromJanuary 1, 2005 until December 31, 2005.
REPORT ON RELATIONS BETWEEN RELATED ENTITIES
VZ_2005_AN 31.5.2006 14:59 Str. 61
Section IV.Contracts and Agreements Concluded between Related Entities
In the last accounting period, i.e. in the period from January 1, 2005 until December 31, 2005, December 18, 2005 respectively,when LETKA, a.s. controlled the Company, there were no contracts signed between related entities.
In the last accounting period, i.e. in the period from January 1, 2005 until December 31, 2005, when CCA controlled the Company,the following contracts were signed between related entities:
Aeronautical Research and Test Institutewith its business address at 190 00 Praha 9, Beranov˘ch 130Identification No.: 70109966, registered in the Commercial Register maintained by the Municipal Court in Prague,Section B, File 446.
Contract Contract Contract Contract Provider’s Gained DetrimentConclusion Number Duration Name Performance Performance
March 22, 2000 4/1100/2000 Ad Infinitum Contract on non-residential Price Non-residential None amended by Amendment premises rental, for services premises No. 1 from April 1, 2000, service provision and rental rentalAmendment No. 2 from and movable assets October 17, 2000 and rentalAmendment No. 3 from July 23, 2004
July 19, 2004, OV6040073 Fixed-term Contract on part of Cooperation Part of None amended the FT-TA/026 project in the project financial on April 18, 2005 solution and financial resources
resources transfer
December 7, 2004 RNP/68/04 Fixed-term Contract Project Project Noneon the results solution solution of the MPO âR results resultsNo. FF-P2/030 project solution
January 7, 2005 3/OZK/2005 Fixed-term Contract for work Price for work Work None
April 20, 2005 OV6050045 Fixed-term Contract on part of Cooperation Part of financial None the MPO âR No. FF-P2/030 in the project resourcesproject solution and financial resources transfer
July 12, 2005 OV6050034 Fixed-term Contract on part of Cooperation Part of financial Nonethe MPO âR No. FD-K3/008 in the project resources project solution and financial resources transfer
September 2, 2005 RNP/46/05 Fixed-term Contract on part of Part of financial Cooperation None the MPO âR No. FD-K3/012 resources in the projectproject solution and financialresources transfer
September 2, 2005 RNP/45/05 Fixed-term Contract on part of Part of financial Cooperation None the MPO âR No. FD-K3/ resources in the project project solution and financialresources transfer
VZ_2005_AN 31.5.2006 14:59 Str. 62
Financial Part / Report on Relations between Related Entities
Page 62 / 63
AERO Vodochody a.s.
Annual Report 2005
Explosia a.s.with its business address at 532 17 Pardubice - SemtínIdentification No.: 25291581, registered in the Commercial Register maintained by the Regional Court in Hradec Králové,Section B, File 1828
Contract Contract Contract Contract Provider’s Gained DetrimentConclusion Number Duration Name Performance Performance
December 14, 2004 200407260/OZVO Single-phase Contract of Purchase Purchase Price Goods None
December 21, 2004 200407440/OZVO Single-phase Contract of Purchase Purchase Price Goods None
January 28, 2005 200500564/OZVO Single-phase Contract of Purchase Purchase Price Goods None
April 5, 2005 200501725/OZVO Single-phase Contract of Purchase Purchase Price Goods None
June 14, 2005 200503441/OZVO Single-phase Contract for Work Price for Work Work None
June 22, 2005 200503648/OZVO Single-phase Contract for Work Price for Work Work None
June 27, 2005 200503725/OZVO Single-phase Contract of Purchase Purchase Price Goods None
July 13, 2005 200504043/OZVO Single-phase Contract of Purchase Purchase Price Goods None
September 15, 2005 OZVO/140/2005 Single-phase Contract for Work Price for Work Work None
November 10, 2005 OZVO/171/05 Single-phase Contract of Purchase Purchase Price Goods None
December 14, 2005 200507790/OZVO Single-phase Contract of Purchase Purchase Price Goods None
Section V.Other Legal Acts between Related Entities
No other legal acts are known to the Company, which would be done in behalf of LETKA, a.s. and CCA. On November 24, 2005,CCA announced the public tender on the entity, on which, according to the conditions of the contract on sale of shares and assign-ment of claims or in other similar contract or contracts, shares of the Company will be transferred and claims in the Company willbe assigned against payment. In connection with the above mentioned, on December 21, 2005, Non-disclosure Agreement wassigned between the Company, CCA and Deloitte Czech Republic B.V. and Salans, v.o.s.
Section VI.All Other Measures between Related Entities
No other measures are known to the Controlled Entity, which would be adopted or realized in behalf of LETKA, a.s. and CCA,excluding public information provision, possibly information on the basis of the law necessary for fulfillment of obligations as provided by the law.
Section VII.Conclusion
The Board of Directors of AERO Vodochody a.s. states that it exerted careful managerial management to find out the circle ofrelated entities for the purpose of this report, especially by asking LETKA, a.s. and Czech Consolidation Agency on the circle ofentities, which are controlled by this entity.
The Board of Directors of AERO Vodochody a.s. proclaims that according to its knowledge the pecuniary fulfillment, considerationsrespectively, which were provided based on the above mentioned relations between related entities, was in common amount.
This Report was presented for review to the Supervisory Board and to the auditor, who will perform the audit of the financial statement by course of a special code.
In Odolena Voda March 21, 2006
Petr Klime‰ Jan VachekChairman, Board of Directors Member, Board of DirectorsAERO Vodochody a.s. AERO Vodochody a.s.
VZ_2005_AN 31.5.2006 14:59 Str. 63
ORGANIZATION STRUCTURE
President of the Company
Military Program
Civil Program
Aerostructures Division
Marketing and Sales of Military Aircraft
Financial Department
Engineering Department
Quality Assurance Department
Human Resources Department
Operations Department
Services Division
VZ_2005_AN 31.5.2006 14:59 Str. 64
AERO Vodochody a.s.
Annual Report 2005
Financial Part / Organization Structure and Abbreviations
Page 64 / 65
AERO / AV – AERO Vodochody a.s.AIDC – Aerospace Industrial Development Corporation, TaiwanCAA / ÚCL – Civil Aviation Administration of the Czech RepublicCCA / âKA – Czech Consolidation AgencyEASA – European Aviation Safety AgencyEADS – European Aeronautic Defence and Space CompanyFAA – Federal Aviation AdministrationIN – Identification NumberLRQU – Lloyd´s Register Quality AssuranceOVHL – OverhaulsNATO – North Atlantic Treaty OrganisationR.O.C. – Republic of China / TaiwanSAC – Sikorsky Aircraft CorporationS / N – Serial Number
ABBREVIATIONS
VZ_2005_AN 31.5.2006 14:59 Str. 65
AERO Vodochody a.s.U Leti‰tû 374
250 70 Odolena voda, Dolínek
Czech Republic
Tel: +420 255 761 111
Fax: +420 255 762 111
E-mail: [email protected]
http://www.aero.cz
IN: 00010545
TAX IN: CZ00010545
CONTACTS
VZ_2005_AN 31.5.2006 14:59 Str. 66
/ S-76C+ / New York City / USA /
IN THE YEAR 2005 AND FOR THE YEARS TO
COME, THROUGH A NUMBER OF COST
REDUCTION INITIATIVES AND BASED ON
MODIFIED CONDITIONS OF THE SUPPLY
CONTRACT WITH SIKORSKY AIRCRAFT
CORPORATION, WE SUCCEEDED
IN ACHIEVING ADEQUATE PROFITABILITY
OF THE KEY AEROSTRUCTURES
PROGRAM - THE PRODUCTION OF
PRACTICALLY COMPLETE S-76 HELICOPTER.
VZ_2005_AN_obalka 31.5.2006 14:55 Str. 2
AERO Vodochody a.s.Annual Report 2005
AERO Vodochody a.s. U Leti‰tû 374
250 70 Odolena Voda, Dolínek
Czech Republic
Tel.: +420 255 761 111
Fax: +420 255 762 111
E-mail: [email protected]
http://www.aero.cz
VZ_2005_AN_obalka 31.5.2006 14:55 Str. 1