Chairman's report on the Baltic Group

Dear Shareholders,

It hardly seems possible that a year has passed since my last report to you, the shareholders of the Baltic Group. As chairman, it is my task to make a fair assessment of the performance of the group and its three subsidiaries, AS Estonia, SIA Latvia and UAB Lithuania, and to make a prediction of the likely developments in 1999.

As you know, the strategy of the Group as a whole is to merge our operations piece-by-piece with our former competitors, the EU Group. This is a painful process but absolutely vital if we wish to stay competitive in the global market. The main problem for the whole Group in 1999 is to ensure that the financial difficulties of the Baltic Group's former shareholder, the Russia Group, do not adversely affect our operations. The Russia Group remains an important customer of all three of our group companies and I can assure you that the board is working hard to maintain our existing contacts with them while, at the same time, finding new customers.

As I predicted last year, it has not been an easy 12 months for our hitherto best performing subsidiary, AS Estonia. Looking at the situation positively, despite tightening financial circumstances, the company has remained broadly on the right track.

Sad to report, AS Estonia's banking division, once seen as a shining star in the market, has lost some of its luster this year. The most important thing, however, has been to maintain the company's progress towards its early merger with the EU Group and I am pleased to report that we have done this.

SIA Latvia has had a mixed year. It started very badly, with seemingly one problem after another. In particular there was the inability of the board to decide who should be the chief executive, and there were problems in the company's relationship with the Russia Group. Our public relations department must take some of the blame for this, as the company's situation was never really as bad as both the EU Group and Russia Group tried to make out. Fortunately, the subsidiary finished the year strongly, with the EU Group changing its assessment of the company after a site visit in October.

Going forward into 1999, the new chief executive of SIA Latvia, Mr. Kristopans, has to prove that he is capable of keeping his argumentative board in place. If he has to resign and make way for yet another new chief executive, the smooth running of the company will certainly not be made any easier.

UAB Lithuania started the year very well, continuing the strong performance reported in the second half of 1997. In particular, the banking division performed outstandingly and the production division also produced strong growth.

The second half of the year has seen concerns growing, mainly due to the difficulties of quantifying the effect of the financial crisis in the Russia Group.

The board, led by chief executive Mr. Vagnorius, believes that UAB Lithuania will certainly grow less strongly in 1999 than previously predicted, but overall does not see any special danger to the continued overall health of the company.

Finally, as chairman of the whole group, I am sad to report that once again, the group companies did not always coordinate their activities with each other during the year. UAB Lithuania even began operating on a different time schedule from the other two subsidiaries, much to the irritation of its staff. While this makes group management more difficult, it is on the other hand proof that our companies have independence of thought and action and the freedom to manage things in their own way.

With best wishes for a merry Christmas and a happy and prosperous new year,

The Chairman, Baltic Group