REPORT ON THE OPERATIONS. OF FABRYKA FARB i LAKIERÓW ŚNIEŻKA S.A. WITH ITS REGISTERED OFFICE IN LUBZINA FOR 2012

Transcription

1 REPORT ON THE OPERATIONS OF FABRYKA FARB i LAKIERÓW ŚNIEŻKA S.A. WITH ITS REGISTERED OFFICE IN LUBZINA FOR 2012

2 Contents 1. Basic information about FFiL Śnieżka S.A. with its registered office in Lubzina Fabryka Farb i Lakierów Śnieżka S.A. facts and figures Organisational or capital ties Domestic and foreign investments Changes in the principles of managing the enterprise and Śnieżka Capital Group Remunerations of managerial and supervisory persons Agreements concluded with managerial persons providing for compensation in the case of resignation or dismissal from the position occupied without a valid reason or if their dismissal or resignation results from a merger or acquisition of the Company Number and nominal value of the Company's shares as well as shares in related parties of the Company held by managerial and supervisory persons Purchase of equity shares Agreements concerning potential changes in the shareholder structure Employee share scheme Rules of drawing up the annual financial statements Description FFiL Śnieżka S.A. activities Company s strategic goals Discussion of economic and financial results Economic and financial situation Assessment of factors and atypical events influencing the result Basic products, goods services Target markets Sources of supply Significant agreements for the Company's activities Significant transactions with related parties concluded on non arm's length standard Conclusion and termination of loan and borrowing agreements Borrowings and sureties granted; borrowings, sureties and guarantees received Managing financial resources Evaluation of the capacity to perform investment objectives Inflows from issues of securities Differences between financial results disclosed in the annual report and projections for the relevant year published earlier Other information Risk and threat factors Material factors for the growth of the Company's enterprise Major research and development achievements Issues regarding the natural environment Employment Entity authorised to audit financial statements Company's branches Page 2

3 3.8. Events having a material influence on the Company's activities Pending proceedings Declaration on applying corporate governance standards Set of corporate governance rules in use Waived corporate governance rules Major characteristics of systems of internal control and risk management applicable to the process of preparation of financial statements and consolidated financial statements Large Shareholders as of the date of publishing these statements Shareholders with special controlling rights Restrictions on exercising the voting rights Restrictions on the transfer of security ownership Rules for appointing and dismissing managerial and supervisory staff, and establishing and revoking their rights Amendments to the Articles of Association of the Company Procedures and basic rights of the General Meeting, description of the rights of Shareholders and ways of their exercising Personal composition of managing bodies and their committees, changes, description of operation Corporate Social Responsibility Major awards and distinctions granted to Śnieżka in Conclusion Contact details: Attachment A: Methodology of calculating ratios presented in the report Attachment B: List of tables, graphs Page 3

4 1. Basic information about FFiL Śnieżka S.A. with its registered office in Lubzina 1.1. Fabryka Farb i Lakierów Śnieżka S.A. facts and figures Fabryka Farb i Lakierów Śnieżka S.A.achieved very good sales results in 2012 and an increase in profits, compared to the same period last year: revenues of FFiL Śnieżka S.A. for 2012 amounted to PLN million, which is a 13.3 % increase compared to the equivalent period last year, the operating profit amounted to PLN 25.6 million (a 214.5% increase compared to 2011), the net profit for the entire 2012 amounted to PLN 21.5 million (a 1,085.5% increase compared to 2011). Table 1. Statement of synthetic data concerning FFiL Śnieżka S.A. for Statement of comprehensive income Dynamics Sales revenues million zloty % Sales profit million zloty % EBITDA million zloty % Pre-tax profit million zloty ,309% Net profit million zloty ,185% Statement of financial position Balance sheet total million zloty % Non-current assets million zloty % Current assets million zloty % Equity million zloty % Liabilities and provisions million zloty % Financial ratios Earnings per share (EPS) zloty ,185% Dividend per share (DPS) declared or paid zloty % Price/Earnings (P/E) year-end % Current ratio year-end % Quick ratio year-end % Return on assets (ROA) % 7% 1% 1,225% Return on equity (ROE) % 12% 1% 1,335% Debt rate % 51% 45% 113% Sustainability of the financing structure % 64% 55% 115% Production results Production of paints and varnishes million l/kg % Other data Market value of the Company's shares at the end of million zloty % the period Tangible investments million zloty % Capital investments million zloty % Headcount persons % Page 4

5 1.2. Organisational or capital ties The Capital Group and capital ties as of 31 December Capital Group Hadrokor Sp. z o.o. in Włocławek 51.09% shares Śnieżka Ukraina Sp. z o.o. in Yavoriv 82.52% shares Fabryka Farb i Lakierów Proszkowych Proximal Sp. z o.o. in Lubzina 100% shares Śnieżka Sp. z o.o. in Wistowa 100% shares (0% directly, 100% indirectly) TM Investment Sp z o.o. in Brzeźnica 100% shares (directly 0.003%, indirectly %) Śnieżka-BelPol Sp z o.o. in Zhodino near Minsk - 99% shares IP Solutions Sp. z o.o. in Brzeźnica 100% shares Capital ties PLASTBUD Sp z o.o. in Pustków 10.07% shares Cooperation with related parties and members of the Capital Group: Śnieżka Ukraina Sp. z o.o. in Yavoriv is a producer of paints and compounds in Ukraine and the main distributor of FFiL Śnieżka S.A. products. Its products are sold under the Śnieżka brand. It has a considerable output potential and its own network of customers, Śnieżka Sp. z o.o. in Wistowa the Company's production assets and operating activity have been transferred to Śnieżka Ukraina Sp. z o.o. in Yavoriv. The company is being prepared to start the liquidation process. Hadrokor Sp. z o.o. in Włocławek is a producer of high quality anti-corrosive products sold under a private brand and the Śnieżka brand, complementing its range of products. It has its own manufacturing capacities, technology, highly experienced staff and its own market, Page 5

6 Śnieżka BelPol Sp. z o.o. in Zhodino near Minsk is a manufacturer of compounds, paints and varnishes in Belarus. Its products are sold under the Śnieżka brand. It has its own network of wholesale and retail customers, IP Solutions Sp. z o.o. in Brzeźnica in 2011, the Company's business consisted in the management of trademarks. Currently the Company holds a majority interest in TM Investment Sp. z o.o. TM Investment Sp. z o.o. in Brzeźnica the Company s business is licensing the use of trademarks to related companies within the Capital Group. The company creates new trademarks and development strategies for groups of products, Fabryka Farb i Lakierów Proszkowych Proximal Sp. z o.o. Grupa Śnieżka, based in Brzeźnica the company s business involves the lease of real property; the partnership between Proximal Sp. z o.o. and the Parent Company involves the lease of a part of the real property for the Parent Company's needs. Partnerships with entities related by equity also involved: Plastbud Sp. z o.o. in Pustków, producing Colorex colouring compounds and colorants for Śnieżka s colouring systems. In addition, it is a supplier of certain raw materials and products Domestic and foreign investments On 5 March 2012, FFiL Śnieżka S.A. purchased 12% of interests in its subsidiary Śnieżka - BelPol Sp. z o.o., with its registered office in Zhodino (Belarus). Those interests were purchased from the current shareholder Mr Anatolij Szeleg for USD 150,000 (an equivalent of PLN 470,325 at the exchange rate of the National Bank of Poland of 5 March 2012). The purchase of the assets was funded from the Issuer s own funds. At the same time FFiL Śnieżka S.A. disposed of 1% of interests held in the company Śnieżka-BelPol Sp. z o.o. to Mr Anatolij Niewmierżycki for USD 12,500 (an equivalent of PLN 39, at the exchange rate of the National Bank of Poland of 5 March 2012). As a result of the said transactions, the ownership structure of interests in Śnieżka - BelPol Sp. z o.o. is as follows: FFiL Śnieżka S.A %, Anatolij Niewmierżycki 1.00%. On 17 April 2012, the Ordinary Meeting of Shareholders of Śnieżka - Ukraina Sp. z o.o. in Yavoriv, Ukraine, approved the liquidation of Śnieżka Sp. z o.o., with its registered office in Wistowa, Kalush region, Ivano-Frankivsk Voivodeship in Ukraine. On 18 April 2012, FFiL Śnieżka S.A. purchased 1.25% of interests in its subsidiary Śnieżka Ukraina Sp. z o.o. in Yavoriv, Ukraine. Those interests were purchased from the current shareholder Ms Elwira L. Gołod for USD 234,375 (an equivalent of PLN 747,703 at the exchange rate of the National Bank of Poland of 18 April 2012). The selling price of those interests was determined by way of negotiations. The purchase of the assets was funded from the Issuer s own funds. As a result of this transaction, the ownership structure of interests in Śnieżka Ukraina Sp. z o.o. in Yavoriv is as follows: FFiL Śnieżka S.A %, other shareholders 17.48%. On 6 July 2012, the share capital of the Issuer's subsidiary Śnieżka Romania S.R.L with its registered office in Savinesti, Romania, was increased from RON 863,950 to RON 2,218,250 (in words: two million, two hundred eighteen thousand, two hundred and fifty new Romanian leu); This way the company's share capital increased by RON 1,354,300 (in words: one million, three hundred fifty-four thousand, three hundred new Romanian leu), i.e. by 580 (five hundred and eighty) shares valued at RON 2,335 Page 6

7 (in words: two thousand three hundred and thirty-five new Romanian leu) each. Following the increase, the share capital is divided into 950 (nine hundred and fifty) interests, RON 2,335 each (in words: two thousand three hundred and thirty-five new Romanian leu) each. Interests in the increased share capital of Śnieżka Romania S.R.L were acquired by FFiL Śnieżka S.A., comprising 580 (five hundred and eighty) shares, RON 2,335 each (in words: two thousand, three hundred and thirty-free new Romanian leu) each, i.e. for the total amount of RON 1,354,300 (in words: one million, three hundred fifty-four thousand, three hundred new Romanian leu), paying for interests in the increased share capital by converting the claims due to FFiL Śnieżka S.A. from Śnieżka Romania S.R.L on account of unpaid loans and unsettled trade receivables by RON 1,354,300 (in words: one million, three hundred fifty-four thousand, three hundred new Romanian leu). The remaining Shareholders did not participate in the mentioned increase. The share capital increase was registered in the respective register court on 21 August As a result of the share capital increase, the shareholder structure of Śnieżka Romania S.R.L after registration was as follows: - FFiL Śnieżka S.A shares with the total value of RON 2,045,460, accounting for 92.21% of the Company's shares, - Andrei Zamfirescu - 37 shares with the total value of RON 86,395, accounting for 3.895% of the Company's shares, - Viorica Baston: 37 shares with the total value of RON 86,395, accounting for 3.895% of the Company's shares. On 19 November 2012 FFiL Śnieżka S.A. disposed of 92.12% shares of the Issuer's subsidiary Śnieżka Romania S.R.L with its registered office in Savinesti, Romania. 876 (eight hundred and seventy-six) shares were sold to GAMMA Sp. z o.o. with its registered office in Jasło for RON (eight hundred and seventy-six Romanian leu) (an equivalent of PLN at the exchange rate of the National Bank of Poland as of the invoice issuance date). The value of shares was determined on the basis of a valuation drawn up by authorised Romanian entity Eval Consulting S.R.L. (certificate number F10/0259), which had valued the company's shares negatively at RON - 96,844 (minus ninety-six thousand, eight hundred and forty-four leu). As a result of the said transaction FFiL Śnieżka S.A. does not hold any shares in Śnieżka Romania S.R.L with its registered office in Savinesti, Romania. As of the day of preparing the report, the disposal of shares was not registered in the respective register court Changes in the principles of managing the enterprise and Śnieżka Capital Group In 2012 FFiL Śnieżka S.A. increased its equity interest in the subsidiary Śnieżka - BelPol Sp. z o.o. operating in Belarus from 88% to 99% of interests. The change made it easier to manage this company and increased the participation in the profits generated by it. Year 2012 also saw changes in managing the Śnieżka Capital Group consisting in disposing of the distribution company Śnieżka Romania S.R.L. According to an earlier decision concerning the Romanian market, currently goods are exported to Romania directly from FFiL Śnieżka S.A. from Poland to distributors, which helped reduce costs related to the presence of Śnieżka on that market Remunerations of managerial and supervisory persons Page 7

8 Table 2. Remuneration of Members of the Company's Management Board for 2012 (data in thousand zloty) Remuneration and Income in subsidiaries bonuses Piotr Mikrut Witold Waśko Joanna Wróbel-Lipa Total 1, Table 3. Remuneration of Members of the Company's Supervisory Board for 2012 (data in thousand zloty) Remuneration and Income in subsidiaries bonuses Stanisław Cymbor Zbigniew Łapiński Stanisław Mikrut Dariusz Orłowski Anna Pater Jerzy Pater Total 1, As of 31 December 2012, managerial and supervisory persons do not have any debts with respect to the Company on account of borrowings granted Agreements concluded with managerial persons providing for compensation in the case of resignation or dismissal from the position occupied without a valid reason or if their dismissal or resignation results from a merger or acquisition of the Company The Company concludes standard employment agreements with managerial persons that do not provide for any special compensations in the case of resignation or dismissal of such persons. No additional compensation is paid out either in the case of dismissal due to a merger or an acquisition Number and nominal value of the Company's shares as well as shares in related parties of the Company held by managerial and supervisory persons Managerial and supervisory persons do not hold shares in related parties. Number of the Issuer's shares held by managerial and supervisory persons as of 31 December 2012 Managerial persons Piotr Mikrut - 1,254,166 shares with the nominal value of PLN 1,254,166 Witold Waśko shares with the nominal value of PLN 198 Page 8

9 Supervisory persons Jerzy Pater - 2,541,667 shares with the nominal value of PLN 2,541,667, of which directly 166,667 shares with the nominal value of PLN 166,667. Stanisław Cymbor - 2,541,667 shares with the nominal value of PLN 2,541,667, of which directly 166,667 shares with the nominal value of PLN 166,667. Stanisław Mikrut - 33,333 shares with the nominal value of PLN 33, Purchase of equity shares In 2012, FFiL Śnieżka S.A. purchased 932,898 equity shares for redemption, at PLN per share, plus commission on the purchase of WSE shares in the amount of PLN 46 thousand, for the total amount of PLN 28,966 thousand. The Company plans to redeem these shares during the nearest General Meeting of Shareholders. The Extraordinary General Meeting of Shareholders held on 2 April 2012 expressed its consent for the Management Board to purchase up to 1,570,620 equity shares for redemption. The maximum share purchase price was set at PLN 34 per share and the maximum amount for the repurchase at PLN 53,500,000. The repurchase was to be completed by 31 December In this period, the Company did not issue any equity securities Agreements concerning potential changes in the shareholder structure To the best knowledge of the Company's Management Board, there are no agreements that would lead to changes in the shareholder structure of FFiL Śnieżka S.A. Redemption of equity shares purchased by the Company in 2012 will only result in changes in percentage shares held by the Shareholders Employee share scheme There were no employee share schemes at the Company in Rules of drawing up the annual financial statements Financial statements are drawn up on the basis of the International Accounting Standards, the International Financial Reporting Standards, interpretations related thereto published as regulations of the European Commission, the Accounting Act (in the area not regulated by the IAS) as well as internal procedures concerning the preparation of interim reports submitted to the Warsaw Stock Exchange. The financial statements for 2012 were drawn up in accordance with the IFRS on the assumption that the Company would continue in operation for the foreseeable future. 2. Description FFiL Śnieżka S.A. activities 2.1. Company s strategic goals The main objective of the long-term development strategy of FFiL Śnieżka S.A. for the following years is to achieve the leading position in the sector of decorative paints in the Central and Eastern Europe, particularly in the markets of Poland, Ukraine and Belarus, Moldavia and Russia. The Company will strive to realise this objective by continuing to care Page 9

10 for the needs observed on the local markets. Promoting the growth of sales in the modern distribution channels will be important for achieving this leading position in the domestic and East European markets of paints and varnishes. The development strategy of FFiL Śnieżka S.A. provides for a particularly intensive activity in the following three areas: increased participation of the products delivered by the Company in the modern distribution channel, i.e. DIY retailer chains, both in Poland and in Ukraine and Russia, further construction and extension of the chain of Śnieżka showrooms and partner stores in Poland and on key foreign markets, capital investments relating to potential acquisitions in Central and Eastern Europe. Moreover, the Company intends to increase its potential by expanding to new markets and developing its brand portfolio: Śnieżka, Magnat, Vidaron, Foveo - Tech, Beston, Proximal. As part of its strategy, the Company is interested not only in organic growth, but also in an increase in capital investments. Among the Company's objectives is the development of longlasting and amicable relations both with its business partners, employees, shareholders as well as with its clients. The Company intends to continue to support its business partners with information, marketing and training activities, thus showing that close cooperation strengthens the Company's goodwill. The Management Board of FFiL Śnieżka S.A. confirms that the goals defined will be performed as consistently as they have been so far. Balanced growth, inscribed in the strategy, will allow the Company to achieve a leading position on key markets Discussion of economic and financial results Table 4. Basic components of the statement of comprehensive income (thousand zloty) 2012 return ratio 2011 return ratio change on 2011 change rate Sales revenues 473, ,728 55, % Cost of goods sold 328, ,052 28, % Gross profit (loss) on sales 145, % 118, % 26, % Selling costs 75,983 65,413 10, % General and administrative expenses 42,517 38,842 3, % Other operating income (606) 57% Other operating costs 1,857 7,704 (5,847) 24% Operating profit (loss) 25, % 8, % 17, % Financial income 5,904 5, % Financial expenses 4,920 11,197 (6,277) 44% Profit (loss) before tax 26, % 2, % 24,514 1,309% Income tax 5, ,845 2,353% Net profit (loss) 21, % 1, % 19,669 1,185% EBITDA (EBIT + depreciation) 39,075 20,913 18, % In 2012 the sales revenues amounted to PLN million, which means an increase by PLN 55.4 million on the previous year. Sales revenues comprise mainly revenues from the sales of products. In 2012 their share in the structure of revenues reached 81.5% and as a result the dynamics of the increase of sales of products reached 116.3%, which means an increase by PLN 55 million in comparison with The other part of revenues (18.5%) is generated by sales of goods, materials and services. Sales on the domestic market prevails in the sales structure while export accounts for 22% of sales. Page 10

11 Graph 1. Sales structure by countries in 2012 (in value terms) Russia, 3% Moldova, 2% Belarus, 6% Ukraine, 10% Other countries, 1% Poland, 78% In 2012 water-based products were the biggest category in sales of products in value terms as they generated 55% of sales. Solvents were the next category with a 39% share while other goods accounted for 6% of sales. In comparison with the previous year the product sales volume grew by 5%. A sales analysis shows that the value of water-based goods sold amounted to PLN 210 million in 2012 and was 18% higher than in the previous year. Sales of solvents amounted to PLN 146 million and was 17% higher than in the previous year while sales of other goods amounted to PLN 24 million, up by 11%. Sales of goods amounted to PLN 60 million, a 3% increase in comparison with the previous year. Sales of materials amounted to PLN 27 million, a 1% decrease in comparison with the previous year, while other sales (services) amounted to PLN 5.4 million, a 16% decrease on the previous year. A comparison of sales of goods and products in comparison with the previous year in particular groups is as follows: quantitative sales of water-based products amounted to 48 million litres, a 4% increase on the previous year, while sales of solvents amounted to 12.8 million litres, which gives a 99% dynamics. Sales of other goods amounted to 19.8 million l/kg, a 13% increase in comparison with the previous year. However, in quantity terms sales of goods rose to 7.7 million l/kg, a 21% increase on the preceding year. The Issuer does not publish data regarding quantitative sales of materials and services due to the diversity of measurement units applied (tonnes, litres, pieces) and low significance of this sales, which does not constitute the core business of the Issuer. The amount of operating costs was under a decisive influence of the costs of products, goods and materials sold: in 2012 they represented 73% of total costs. In 2012 dynamics of the cost of manufacturing products, goods and materials sold stood at 110% in comparison with As for the dynamics of manufacturing costs, it was lower by 3% than the dynamics of revenues from sales, which lead to an increase of the return on sales by 2.3%. This resulted mainly from lower prices of raw materials and more favourable foreign exchange rates. A 16% increase of selling costs and a 9% increase of general expenses in comparison with the previous year are a result of the strategy adopted by the Company in this respect. In 2012 total costs by type increased by PLN 38 million, mainly due to: a 9% increase of the cost of raw materials due to an increase of the sales volume, Page 11

12 a 14% increase of employee benefits: in this respect a change in the rules of remuneration depending on the results achieved was the most important, a 17.7% increase of outsourced services mainly due to an increase of transport services (sales increase) and marketing activities, a 17% increase of royalties and licences paid (the policy changed in this respect in comparison with previous years). Graph 2. Structure of costs by type in 2012 costs of employee benefits; 10.4% outsourced services; 11.9% taxes and charges; 0.4% Other; 6.6% Depreciation; 3.5% consumption of materials; 67.3% Due to a decrease of other operating expenses in comparison with 2011, in 2012 the operating profit amounted to PLN 25.6 million as compared with PLN 8.1 million in 2011, which means an increase by PLN 17.4 million on The balance of financial transactions was positive in 2012 and it increased the operating profit by PLN 0.9 million while a year earlier this balance amounted to minus PLN 6.1 million. Financial revenues included revenues from dividends, which in 2012 amounted to PLN 2.0 million; this results from the strategy of paying out dividends from subsidiaries recording profits. At the same time, from subsidiaries that are in an initial growth stage the Company receives interest on borrowings financing to a certain degree the operations of those subsidiaries. In 2012 financial expenses decreased by PLN 6.3 million on 2011, mainly due to a more favourable result on foreign exchange differences. Page 12

13 Graph 3. Financial ratios General debt Sustainability of the financing structure The ratios were calculated in accordance with the methodology presented in Attachment A. An increase in loans lead to an increase of the debt ratio. Moreover, sustainability of the financing structure improved due to an increase of non-current liabilities in the structure of financing sources. In 2012 the net profit recorded by FFiL Śnieżka S.A. was PLN 19.7 million higher in comparison with This resulted from higher return ratios as well as a change in the sales policy of Śnieżka on the domestic market, whereby more focus was placed on reselling products to end customers. Net return reached 4.5% and was higher by 4.1 percentage points in comparison with the previous period. In 2013 the Company intends to continue increasing its return on sales and improve negative trends outlined above if necessary. Graph 4. Return ratios The ratios were calculated in accordance with the methodology presented in Attachment A. The increase of the net profit results in improving the return on assets (ROA) and the return on equity (ROE). Page 13

14 Graph 5. Liquidity ratios Current ratio Quick ratio The ratios were calculated in accordance with the methodology presented in Attachment A. Liquidity ratios constitute the relation of current assets or a more liquid part thereof to current liabilities. An increase of cash had the biggest influence on the increase of liquidity ratios, hence their considerable improvement in comparison with The Company's operations may be described with the following capital market ratios: Table 5. Capital market ratios Share price at the end of the period Market value of the Company* share market price x number of shares 512,174, ,866,257.6 P/E (annualised profit) market price of 1 share/profit per 1 share P/BW market price of 1 share/book value of 1 share * number of shares - at the end of ,550,676 shares. Number of shares to calculate the ratio in ,550,676 shares, and in 2012 the diluted number of shares - 13,002,662 shares In 2012 capital market ratios were heavily influenced by a high net profit recorded by the Company in comparison with 2011 and an increase of share prices at the end of Table 6. Cash flows (thousand zloty) Net cash from operating activities 60,980 28,339 Net cash used in investing activities (19,152) (12,705) Net cash from financing activities (31,114) (25,594) Net increase (decrease) in cash and cash equivalents 10,714 (9,960) An analysis of cash flows shows that the Company generates higher cash flows from operating activities. This resulted from a 28% decrease of current receivables. In comparison with the previous year, the balance cash used in investing activities was influenced by higher expenditures on investments. In 2012 cash from operating activities rose by PLN 5.5 million due to a buy-back of equity shares for redemption and an increased balance of loans in comparison with the previous year. The dividend paid out decreased by PLN 6.8 million compared to As a result of the above events, cash increased by PLN 10.7 million in Page 14

15 2.3. Economic and financial situation As of 31 December 2012 the balance sheet total amounted to PLN million, which means a decrease by PLN 10.3 million on the previous year. Table 7. Non-current and current assets (thousand zloty) 2012 structure 2011 structure balance of dynamics changes 2011 Non-current assets 169,663 55% 159,618 50% 10, % Intangible assets 1,320 0% 1,166 0% % Property, plant and equipment 131,089 43% 116,507 37% 14, % Long-term investment property 12,756 4% 13,287 4% (531) 96% Other long-term financial assets 22,162 7% 27,793 9% (5,631) 80% Non-current receivables 2,336 1% 865 0% 1, % Deferred income tax assets - 0% - 0% - Current assets 138,209 45% 158,595 50% (20,386) 87% Inventory 61,252 20% 67,992 21% (6,740) 90% Current trade receivables 50,616 16% 69,918 22% (19,302) 72% Current income tax receivables 3,617 1% 6,631 2% (3,014) 55% Other current receivables 6,613 2% 8,246 3% (1,633) 80% Other short-term assets 3,232 1% 3,643 1% (411) 89% Cash and cash equivalents 12,879 4% 2,165 1% 10, % Non-current assets held for sale 102 0% 102 0% - 100% Total assets 307, % 318, % (10,341) 97% The most significant changes in the main items of assets in 2012 are as follows: Current assets - carrying value amounts to PLN million. Current assets decreased by PLN 20.4 million to the level of 2011, mainly due to a decrease of current trade receivables by PLN 19.3 million. This is an effect of improved collection of receivables, which resulted from applying receivables insurance and evaluating creditworthiness of contractors on a regular basis, especially those to which merchant credit had been granted. Another item having a significant influence on the amount of current assets is cash the amount of which increased at the end of 2012 by PLN 10.7 million in comparison with the previous year. Inventory management improved and as a result at the end of 2012 inventory amounted to PLN 61.2 million, so it was lower by PLN 6.7 million in comparison with the end of Income tax receivables decreased by PLN 3 million as the gross result in 2012 increased by PLN 24.5 million in comparison with the previous year and the income tax overpayment from 2011 was consumed in Other current receivables decreased by PLN 1.6 million in comparison with the previous year, mainly as a result of a lower balance of VAT receivables. Other short-term financial assets decreased by PLN 411 thousand due to a decrease in current borrowings. Non-current assets - the carrying value amounts to PLN million, PLN 10 million more than in the corresponding period of last year, i.e. a 6% increase. Property, plant and equipment has a significant position in non-current assets; their value amounted to PLN million at the end of It rose by PLN 14.5 million mainly due to the value of investments performed, in this scope outlays amounted to PLN 28.2 million in 2012 and were PLN 6.5 million higher compared to Other long-term financial assets with the carrying value of PLN 22.2 million decreased by PLN 5.6 million, mainly due to a decrease in non-current borrowings granted. Non-current receivables (the carrying value of PLN 2.3 million) increased by PLN 1.4 million, mainly due to an increase of lease receivables. Long-term investment properties decreased by PLN 531 thousand due to a write- Page 15

16 down realigning their value. However, fixed assets available for sale remained at an unchanged level compared to the previous year (PLN 102 thousand). As a result of the above events, all assets utilisation ratios increased when compared with revenues from sales. Graph 6. Ratios of effective utilisation of assets global assets turnover ratio non-current assets turnover ratio current assets turnover ratio liquid assets turnover ratio The ratios were calculated in accordance with the methodology presented in Attachment A. Sources of financing assets In 2012 equity constituted an important source of financing assets and its share in the balance sheet total stood at 49%. In 2012 FFiL Śnieżka S.A. also used additional financing in the form of bank loans and borrowings, which rose by PLN 14.9 million compared to Their average amount calculated on the basis of balances as of the end of each month of 2012 totalled at PLN 113 million and was PLN 15 million higher than the average amount of loans in In 2012 the average credit exposure rose mainly due to an increase of current assets not financed with an increase of liabilities and due to an increase of investment expenses. Loan agreements are usually secured with fixed assets, inventory and assignments of receivables. PKO BP S.A. is the leading bank whose services are used by FFiL Śnieżka S.A. in this scope. Moreover, the Company has loan agreements with ING Bank Śląski, Pekao S.A., DNB NORD, Citibank S.A. and Podkarpacki Bank Spółdzielczy. Credit interest is calculated according to the WIBOR rate plus the bank's margin. In 2012 costs of servicing loans and borrowings charged the financial result to the amount of PLN 4.7 million, i.e. PLN 1 million more than in the previous year. The total debt of the Company as of 31 December 2012 includes a currency loan in the USD amounting to USD 13.4 million, which is used to secure the equity of the subsidiaries in Ukraine and Belarus. Table 8. Sources of financing assets (thousand zloty) 2012 structure 2011 structure balance of changes dynamics 2011 Equity 149,390 49% 173,862 55% (24,472) 86% Share capital 13,551 4% 13,551 4% - 100% Called-up supplementary capital (28,920) -9% - (28,920) Supplementary capital 143,278 47% 158,499 50% (15,221) 90% Undistributed financial result 21,481 7% 1,812 1% 19,669 1,185% Page 16

17 Liabilities 158,584 51% 144,453 45% 14, % Non-current liabilities 47,418 15% 2,498 1% 44,920 1,898% Non-current loans and borrowings 42,998 14% - 0% 42,998 Other non-current liabilities 384 0% 163 0% % Deferred tax provision 2,876 1% 1,465 0% 1, % Provisions for liabilities on account of employee benefits 1,160 0% 870 0% % Current liabilities 111,166 36% 141,955 45% (30,789) 78% Current loans and borrowings 66,876 22% 95,005 30% (28,129) 70% Trade liabilities 37,956 12% 42,906 13% (4,950) 88% Current income tax liabilities - 0% - 0% - Other current liabilities 5,766 2% 3,629 1% 2, % Current provisions 243 0% 220 0% % Accruals 325 0% 195 0% % Total liabilities and capitals 307, % 318, % (10,341) 97% Material changes were observed in the following items of capitals and liabilities. Equity, carrying amount of PLN million, a decrease by PLN 24.5 million. The buy-back of equity shares for PLN 28.9 million in 2012 was an important item affecting the amount of equity. A decision on redemption in this case is to be made by the General Meeting. Another item having a significant influence on the amount of equity is a decrease of the supplementary capital by PLN 15.2 million mainly due to the payment of dividend (PLN 17 million) for The remaining amount of the dividend paid out (PLN 1.8 million) was covered from the profit. The net result for 2012 in the amount of PLN 21.5 million increased the amount of equity to a considerable degree, as by PLN 19.7 million. Liabilities, carrying value PLN million, an increase by PLN 14.1 million. Liabilities rose mainly due to an increase of liabilities on account of (non-current and current) loans and borrowings. This is related to an increase of investment expenditures and a decrease of lending in suppliers. Trade liabilities, the carrying value of PLN 38.0 million, decreased by PLN 4.8 million for this reason. Other current liabilities increased by PLN 2.1 million, mainly due to an increase of VAT liabilities. A decrease of equity due to a buy-back of shares caused a decrease of all non-current and current assets cover ratios. The constant equity to non-current assets ratio was the only ratio to have increased in comparison with Page 17

18 Graph 7. Ratios of financing assets Equity to assets ratio Equity to noncurrent assets ratio Constant equity to non-current assets ratio Current liabilities to current assets ratio The ratios were calculated in accordance with the methodology presented in Attachment A. Anticipated financial situation The financial plan for 2013 provides for a similar amount of the balance sheet total. The net profit planned is to be earmarked for financing investments and current assets, and in the remaining part for dividend payout. In 2013 FFiL Śnieżka S.A. intends to perform a strategy consisting in financing non-current assets with equity while current assets will be financed with liabilities towards suppliers and interest debt. The Company performs its obligations on a regular basis and it cannot see any material threats to its capacity to perform its obligations in a timely manner in the future due to substantial creditworthiness reserve. FFiL Śnieżka S.A. does not have and does not expect to have any problems with financing its investment plans, including capital investments, in Own funds of the Company and agreements signed with banks allow for safe financing of investment plans envisaged for Assessment of factors and atypical events influencing the result Macroeconomic situation Poland is the key market for FFiL Śnieżka S.A., therefore, the country's macroeconomic situation influences the results achieved as the economic slowdown does not help generate a demand for the Company's products. The construction market increased slightly in 2012, however, it is expected to shrink in 2013, mainly due to numerous bankruptcies of construction companies, including the biggest ones, and suspension of work, especially in infrastructure projects. Decreased demand is also attributable to difficulties in obtaining mortgage and consumer loans. Similarly, the unstable situation on economic and financial markets also affects consumers' willingness to make capital expenditures and to spend money on renovations. Page 18

19 Situation in the sector of paints and varnishes According to the estimates of FFiL Śnieżka S.A., the paint market in Poland in 2012 did not change in terms of volume. On the main export markets of the Company, i.e. in Ukraine and Belarus, the situation was similar to that in Poland. Renovations remain the most significant market segment for the Company as they generate 80% of sales revenues; the remaining part of products are sold on the market of new flats and houses. Due to potential growth of the use of paints by Polish consumers, FFiL Śnieżka S.A. intends to continue increasing its share in the domestic market. As the current use of paints per one person on the markets in the countries of Eastern Europe is considerably lower than in Poland and the countries of Western Europe, the Company perceives opportunities of dynamic growth of sales on key export markets Basic products, goods services Development of the product offer FFiL Śnieżka S.A. focuses its activities on producing and selling securing and decorative coatings. The Company's portfolio comprises high-quality products to secure, finish and decorate various types of surface. Every year the Company enriches its portfolio with new products in order to meet the requirements of the most demanding customers. Several new products were prepared and released also in A new range of ready-to-use colourful satin paints was introduced to the Company's offer. A new collection of ready-to-use colourful wall emulsions with the Teflon surface protector addition was prepared for the Ukrainian and Belarusian markets. As a result of modification of the formula and offer of Śnieżka Kuchniałazienka (Kitchen-Bathroom), a new version of this product with an addition of silver was introduced in two alternative finishes: matt and satin as well as and in new colours. During the period discussed new products under the brand Acryl - Putz were also released on the market: levelling mortar, Renova gypsum and Light repair adhesive. The range of products in the Foveo-Tech heat insulation systems changed as well. Research and development efforts yielded recipes for silicate and silicone paints and plaster and for acrylic paints and plaster, which are the only products in the Polish market to use the Teflon surface protector technology. This innovation also helped improve use properties of the surfaces covered, which show excellent resistance to any type of dirt. A successful launch of heat insulation systems using the Teflon surface protector technology allows the Company to predict growing sales of these products in the years to come. In the reporting period the Company worked on extending the product offer in the scope of Proximal powder paints. Research and development resulted in new formulas for polyester paints, for which the Company obtained the Qualicoat certificate. The activities carried out by FFiL Śnieżka S.A. in the discussed period mainly focused on implementing the new corporate identity of the Śnieżka brand. The concept prepared is a confirmation of ongoing positive changes in the image of the brand. Designing the new logo, the current achievements of the brand were retained while the communication of the values represented by the brand was improved. A change of the logo of the Śnieżka brand also lead to a modification of the layout of packaging which the Company implements systematically. Page 19

20 Marketing activities in 2012 To promote the sales of the Company's brands, several advertising campaigns were prepared for The key campaign introduced a new collection of satin paints to the market. An advertising spot in 30" and 10" versions was created as part of marketing measures, emphasising functional and emotional benefits offered by the collection. Television was the main medium of the campaign, complemented by the press, radio and Internet activity. Advertising support was planned for other brands from the Company's portfolio. New radio advertisements were prepared for the Vidaron brand as a continuation of marketing communication in earlier years. Advertisements in the main radio stations and local stations underline the unique benefit of the brand: the Teflon surface protector and the 6-year guarantee. These measures were complemented by advertisements in the press and the Internet. Marketing measures for the Vidaron brand were also implemented in the Ukrainian, Belarusian and Moldavian markets. The Magnat brand received advertising support in the discussed period as well. Presence in three types of media was planned for the 2012 season: radio, press and the Internet. "Find the courage to create a unique interior with Magnat paints. Come to the magic world of Magnat paints and see what will happen" this is the main communication of the campaign. The creations prepared are consistent with the principal idea of the brand: "Magnat. Magic of elegant paints." The campaign was intended to emphasise that Magnat paints, inspired by colours of gems, allow the customer to create unique interiors and to experience the richness of colours. The new communication also emphasised a unique attribute of the paints: single-coat application. During the reporting period advertising measures also promoted the Acryl-Putz brand. An original and creative concept of "Gładkościan" (SmoothWall) was used in radio and press advertising. Additionally, the campaign was backed up by promotional materials available in points of sale. The Internet was also used as part of the advertising measures, including industry-specific Internet forums. An important part of the 2012 plans was the implementation of the new operating concept for Retail Shops and Branded Outlets. The new sales and merchandising concept significantly promoted the sales of the Company's products, at the same time communicating the brands at points of sale more effectively. During the reporting period activities were carried out in 165 outlets, of which 55 Brand Showrooms and 110 Brand Stores Target markets Poland is the main target market for the goods produced by FFiL Śnieżka S.A. and the value of the domestic decorative paint and varnish market is estimated at approx. PLN 2 billion. Average use of paints per one person amounts to approx. 10 litres and it is considerably lower than in the countries of Western Europe. The Company estimates that it has an approx. 16% share in the domestic decorative paint and varnish market (by value), with a particularly strong position in the segment of emulsion paints. On the Polish market FFiL Śnieżka S.A. sells its products through traditional (wholesale - retail shops) and modern (market chains) distribution channels and to a certain extent directly to customers. DIY retail chains are a dynamically growing distribution channel, however, 2012 proved a difficult period for them as some chains decided to close less profitable stores while others recorded considerably lower dynamics of opening new stores in comparison with previous years. Problems affecting the modern distribution channel did not have a negative impact on the turnover of the Company with DIY chains, to the contrary, 2012 ended with considerable resale dynamics in this distribution channel. Chains operating on the Polish market also began to broaden the scope of their business with online sales and they intensified activities to gain clients from the B2B sector. At the same Page 20

21 time a new retail chain entered the Polish market, i.e. Jula, offering a complete range of products for DIY enthusiasts and professionals and thus introducing a new retail category, i.e. a multimarket. Apart from the domestic market, two most important export markets for the Company are those of Ukraine and Belarus. In 2012 the Ukrainian paint and varnish market went through a stagnation period, mainly as a result of a difficult macroeconomic situation. This market is estimated at tonnes, in which water-based paints have the biggest share. The Company has a very strong position on the Ukrainian market, outstripping other producers in certain paint categories. Average paint use per one person on this market is estimated at approx. 7 litres. The traditional product sales model predominates on the Ukrainian market, however, the importance of DIY stores grows systematically. This channel was dominated by local entities, i.e. Epicentr and Nowa Linia chains, with a small share of international chains running between 1 and 4 stores on average. FFiL Śnieżka S.A. is also a leader on the Belarussian market, with a particularly strong position in the filler segment. Average paint use per one person in Belarus remains relatively low at approx. 5 litres, which confirms growth prospects for this market. The Company sells its products on the Belarussian market mainly through the traditional channel with a steady increase of distribution through DIY stores. Another important and promising market for the Group is Russia, where the Company focuses its activities on extending and diversifying distribution channels, simultaneously broadening its product offer. The Russian decorative paint and varnish market is estimated at 1,341 thousand tonnes, and the average use amounts to approx. 7 litres per one person. The Company also exports its products to other countries of Central and Eastern Europe, including Moldavia, Kazakhstan, Slovakia and Hungary. In 2012 distribution began on new markets, such as Georgia, Armenia and Kyrgyzstan. The Company has valid agreements determining terms and conditions of business cooperation with all its biggest distributors Sources of supply The objective of the supply policy performed is to meet all the requirements of FFiL Śnieżka S.A. in the scope of supplies of raw materials, technical materials, equipment and services to ensure its proper operation. Assuming that there are several suppliers of the same raw materials, technical materials or equipment, offers are analysed to chose the best one in accordance with procedures applicable at the Company. An important objective of the supply policy is to create stable relations with suppliers, which is at variance with continually looking for new, competitive sources of supply. The Company cooperates closely with its suppliers in order to systematically exchange information about the market situation and analyse cooperation areas that need improvement. The supply sources of the Company and its policy in this scope make it possible to eliminate the risk of overdependency on one supplier. Currently no supplier generates 10% of total sales revenues of the Company Significant agreements for the Company's activities None of the Company's customers or suppliers generated at least 10% of sales revenues of the Company. Page 21

22 2.9. Significant transactions with related parties concluded on non arm's length standard The Company concluded only arm's length transactions with related parties Conclusion and termination of loan and borrowing agreements In 2012, the Company concluded the following addenda and loan agreements: on 11 January 2012 addenda to the loan agreement with the bank DnB NORD Polska S.A., allowing for the use of a loan in the amount of up to PLN 6 million and up to USD 5 million by 17 January 2013, on 17 January, with the bank PKO BP S.A.: addendum to the Working Capital Facility Agreement with variable interest, depending on the currency in which the loan is used, no /1/I/17/20, of 29 March The addendum extends the term of use of the loan in the amount of PLN 10.0 million to 18 January 2013, addendum to Multi-Purpose Credit Limit Agreement no /LW/I/2/2007 of 22 January The addendum extends the term of use of the facility of PLN 20 million to 18 January 2013, addendum to the agreement with Podkarpacki Bank Spółdzielczy, extending the loan in the amount of PLN 1 million to 31 March 2013, addendum to the Multi-Product Agreement with ING Bank Śląski S.A. of 27 April The addendum extends the term for the use of the loan to 30 April 2014 and increases the available loan limit to PLN 36 million. addendum to the Working Capital Facility Agreement with variable interest depending on the currency of the loan no /1/I/17/2002 of 29 March 2002 with Bank PKO BP S.A. The addendum dated 10 April 2012 extends the term of use of the loan to 31 December 2012 and increases the credit limit available for use to PLN 20 million, loan agreement with Bank Handlowy w Warszawie S.A. of 12 April Based on the short term loan agreement of 10 April 2012, the Bank granted a loan in the amount of PLN 10 million to the Company for purposes other than working capital, in particular for investments in the borrower's non-current assets and the repurchase of equity shares, with the following repayment deadlines: PLN 2.5 million by 10 October 2012, PLN 2.5 million by 10 April 2013, PLN 2.5 million by 10 October 2013, PLN 2.5 million by 10 April addenda to loan agreements with the bank DnB NORD Polska S.A. The addenda dated 26 April 2012 provide for the use of a loan amounting up to PLN 19 million and up to USD 4 million by 17 January the addendum to the Credit Facility Agreement with bank Pekao S.A. of 17 December 2012 allows to use the credit facility in the maximum amount of PLN 30 million by 18 December the addendum concluded on 20 November 2012 to the Multi-Product Agreement with ING Bank Śląski S.A. of 27 April 2009 reduces the available loan limit to PLN 16 million from the PLN 36 million. The term for the use of the loan remained unchanged, i.e. until 30 April Page 22