POLNORD SA ANNUAL REPORT FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

Transcription

1 POLNORD SA ANNUAL REPORT FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 CONTAINING FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS GDYNIA, 21 MARCH 2017

2 2 THE ANNUAL REPORT INCLUDES: A. Letter from the President of the Management Board B. MANAGEMENT BOARD REPORT ON ACTIVITIES OF POLNORD SA FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 C. FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS D. STATEMENT OF THE MANAGEMENT BOARD ON THE RELIABILITY OF THE ANNUAL FINANCIAL STATEMENTS OF POLNORD SA FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 E. STATEMENT OF THE MANAGEMENT BOARD ON THE ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS F. OPINION AND REPORT OF THE CERTIFIED AUDITOR FROM THE REVIEW OF THE FINANCIAL STATEMENTS OF POLNORD SA FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

3 3 A. LETTER FROM THE PRESIDENT OF THE MANAGEMENT BOARD

4 4 Dear Sirs and Madams, On behalf of the Management Board of, I present to you the Consolidated Annual Report of Polnord Capital Group for This was the first stage of implementation of the Group s Strategy for At the outset, I feel confident to note that the structure of the financial results achieved and the current shape of our organizational activities may be considered as a confirmation of the rationality and effectiveness of the Strategy. In 2016, Capital Group generated PLN 176,745 thousand of revenue. Gross profit on sales amounted to PLN 44,280 thousand. Sales of residential and commercial premises at the level of 92.8% constitutes the main source of the Group s revenues. In the period from 1 January to 31 December 2016, the Group companies sold net 1024 units (data weighted with Polnord share in the individual Group companies). The Group launched 11 investments within which 962 premises will be built in attractive locations in Warsaw, Tricity, Olsztyn, Szczecin and Wroclaw, with a total usable area of over 54,550 sq m. The activities of Polnord Capital Group were encouraged by the market environment. The year 2016 was a good time for the housing market, especially in the most important urban agglomerations. In Warsaw, Wroclaw, Tricity, Łódź, Cracow and Poznan a total of 62 thousand premises were sold, which is a significant increase as compared to the year 2015 (by over 19%) and very serious in comparison to the year 2014 (by 44%). The dynamically growing sales with relatively small change in the offer volume, best represent a significant increase in demand, stimulated, among others, by low interest rates or investments in apartments for rent. There are indications that positive market tendencies will continue in The Polnord Capital Group is currently working to launch and sell new projects, with further optimization of the Group's operating costs and adjustment of its structure and processes to new challenges. We have been consistently implementing the Strategy adopted by the Management Board of in the resolution of 21 March The Strategy assumes concentration of activity in the dynamically developing urban agglomerations, especially in Warsaw and Tricity, increase in profitability by introducing new investment projects, and rational debt reduction by The ambitious, but resulting from rationally defined premise, goal of the Strategy is to achieve in 2019 revenues at the level exceeding PLN 500 million and annual sales in the amount not lower than 1,500 units. Moreover, the Company's intention is to return to paying dividends, starting with the results for The stable position of Polnord Capital Group could be achieved thanks to its competent, fully involved Employees, whom I would like to thank for their effort in building the Company's value. I thank the Shareholders and Customers for their trust, and the Members of the Supervisory Board for their support in the crucial time for our organization. Today, we celebrate the 40th anniversary of the Company, emphasizing the value of tradition, quality, good practices and lasting relationships as the leading Polish developer, Polnord. Dariusz Krawczyk President of the Management Board

5 5 B. MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE POLNORD SA FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

6 6 TABLE OF CONTENTS I COMPANY INFORMATION 8 1 INTRODUCTION 8 2 MARKET ENVIRONMENT 9 3 POLNORD SA CAPITAL GROUP STRATEGY 11 4 SELECTED FINANCIAL AND OPERATIONAL DATA 11 5 DIVIDEND POLICY 12 6 COMPOSITION OF THE POLNORD CAPITAL GROUP SA 12 7 GOVERNING BODIES OF THE COMPANY 15 8 REMUNERATION AND CASH AWARDS PAID, DUE TO THE MANAGEMENT AND SUPERVISORY BOARD OF THE COMPANY 20 9 SHAREHOLDERS HOLDING AT LEAST 5% OF THE TOTAL NUMBER OF VOTES AT THE GENERAL MEETING OF THE COMPANY 21 II ACTIVITIES OF THE CAPITAL GROUP 25 1 MAIN PRODUCTS, GOODS, SERVICES AND MAIN SALES MARKETS 25 2 THE GROUP S DEPENDENCE ON PROVIDERS AND RECIPIENTS 25 III FINANCIAL DATA 26 1 PROFIT AND LOSS ACCOUNT 26 2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 27 3 COMMENTARY TO THE FINANCIAL STATEMENTS 28 4 DIFFERENCES BETWEEN FINANCIAL RESULTS AND A RECENTLY PUBLISHED FORECAST 28 5 FACTORS AND EVENTS, ESPECIALLY THOSE OF A NON-TYPICAL CHARACTER, THAT HAD A SIGNIFICANT IMPACT ON THE FINANCIAL RESULTS 29 6 ASSESSMENT OF THE POSSIBILITIES TO CARRY OUT INVESTMENT PLANS BŁĄD! NIE ZDEFINIOWANO ZAKŁADKI.29 IV NOTES AND EXPLANATIONS 29 1 OTHER IMPORTANT EVENTS IN LITIGATIONS PENDING BEFORE COURT, RELEVANT ARBITRATION AUTHORITIES, OR PUBLIC ADMINISTRATIONAL AUTHORITIES 31 3 ISSUE OF SECURITIES 37 4 INDEBTEDNESS OF POLNORD SA 38 5 INFORMATION ON THE CONCLUSION BY POLNORD SA OR ITS SUBSIDIARY OF ONE OR MORE TRANSACTIONS WITH RELATED PARTIES, IF THEY ARE INDIVIDUALLY OR JOINTLY SIGNIFICANT, AND IF THEY ARE NOT ARM'S-LENGTH TRANSACTIONS 39 6 INFORMATION ON LOAN OR BORROWING GUARANTEES OR SURETIES GRANTED BY POLNORD SA AND ITS SUBSIDIARIES TO ONE ENTITY IF THE TOTAL VALUE OF THE EXISTING GUARANTEES OR SURETIES REACHES AT LEAST 10% OF THE EQUITY OF POLNORD SA 39 7 INFORMATION ON CONTRACTED AND TERMINATED LOAN AGREEMENTS 39 8 ACHIEVEMENTS IN THE FIELD OF RESEARCH AND DEVELOPMENT 40 9 INFORMATION ON THE PURCHASE OF OWN SHARES INFORMATION ON DEPARTMENTS INFORMATION ON FINANCIAL INSTRUMENTS FACTORS WHICH WILL INFLUENCE COMPANY S FINANCIAL PERFORMANCE FOR AT LEAST THE UPCOMING QUARTER OTHER RISK FACTORS AND THREATS EVENTS OCCURRING AFTER THE BALANCE SHEET DATE, NOT INCLUDED IN THIS REPORT, THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE FINANCIAL RESULTS 42 V STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE RULES OF CORPORATE GOVERNANCE BY WHICH THE COMPANY IS BOUND AND THE LOCATION WHERE THE TEXT OF THE SET OF RULES IS AVAILABLE TO THE PUBLIC 43

7 7 2. INFORMATION ON THE EXTENT TO WHICH THE COMPANY DIVERGED FROM THE RULES OF CORPORATE GOVERNANCE, SPECIFICATION OF SUCH PROVISIONS AND REASONS FOR NON-COMPLIANCE OPERATION OF THE GENERAL MEETING AND ITS ESSENTIAL RIGHTS, RIGHTS OF THE SHAREHOLDERS AND THE MODE OF EXERCISING THESE RIGHTS COMPOSITION, CHANGES IN THE PERIOD AND PRINCIPLES OF OPERATION OF THE COMPANY'S MANAGING AND SUPERVISORY BODIES AND THEIR COMMITTEES DESCRIPTION OF THE MAIN CHARACTERISTICS OF THE COMPANY'S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE PROCESS OF PREPARING FINANCIAL STATEMENTS SHAREHOLDERS HOLDING, DIRECTLY OR INDIRECTLY THROUGH SUBSIDIARIES, SIGNIFICANT BLOCKS OF SHARES HOLDERS OF SECURITIES VESTED WITH SPECIAL RIGHTS OF CONTROL LIMITATIONS REGARDING THE RIGHT TO VOTE, SUCH AS A RESTRICTED RIGHT TO VOTE BY HOLDERS OF A SPECIFIC SHARE OR NUMBER OF VOTES, TIME RESTRICTIONS ON THE RIGHT TO VOTE OR PROVISIONS UNDER WHICH, IN COOPERATION WITH THE COMPANY, CAPITAL RIGHTS LINKED TO SECURITIES ARE SEPARATED FROM THE HOLDING OF SECURITIES RESTRICTIONS ON THE TRANSFER OF THE OWNERSHIP TITLE TO THE COMPANY'S SECURITIES RULES FOR AMENDING THE COMPANY'S ARTICLES OF ASSOCIATION 56

8 8 I COMPANY INFORMATION Unless the context indicates otherwise, the terms Company,, Polnord, Parent Company or other terms with similar meanings and their grammatical forms shall mean, while the terms: Group, Capital Group, Polnord Capital Group or other terms with similar meanings and their grammatical forms shall mean the Capital Group composed of and entities subject to consolidation. The term Report shall refer to this Annual report of for the period from to , and Director s Report applies to the Report of the Management Board on activities of the Group for the period from to Financial statements mean the Financial statements of covering the period from to On , the District Court Gdańsk Północ in Gdańsk, VIII Commercial Division of the National Court Register issued the decision on entering as of into the register of entrepreneurs of the National Court Register the merger of (the Acquiring Company ) with the following wholly-owned companies: Polnord Marketing Sp. z o.o. with its registered office in Gdynia and 10 H Sp. z o.o. with its registered office in Gdynia (the "Target Companies ). In connection with the merger of with Polnord Marketing Sp. z o.o. and 10H Sp. z o.o. through transfer of all assets of the Target Companies to the Acquiring Company (merger by acquisition), separate financial statements include comparative data, so called "aggregated data" defined in such a way as if the merger had taken place at the beginning of the previous financial year. The merger took place using the pooling of interest method. Share of Polnord SA in the capitals of the absorbed companies was 100%. The main objective of the merger was to simplify the organizational structure of the Polnord Capital Group and, consequently, to improve efficiency of the management of the Group s operations and to reduce general and administrative expenses. Moreover, the Financial statements include financial data of and recognize financial assets, revenues and expenses of Finanse SJ for the financial year ended and the period from to , as well as relevant comparative data as at and for the period from to , and as at Change in the presentation in the financial statements of took place in According to the analysis of the contribution in kind in the form of assets (loans granted) by to Finanse SJ in terms of their recognition pursuant to IAS 39 (20), at the time of transferring the assets did not lose control of those assets. Therefore, those loans and rewards attached to them should continue to be presented in the financial statements of. Finanse SJ became a part of the Polnord Capital Group in The company Finanse SJ acts as a funding centre for the Polnord Capital Group, i.e. grants loans to the Group companies and optimizes cash flows among them. To obtain the comprehensive view of the activities of Polnord SA, the present Report should be analyzed together with the Consolidated Annual Report for INTRODUCTION is one of the most experienced companies on the construction and real estate development market in Poland. It was established in 1977 as a general contractor of exported construction services. In 1988, it assumed the name of Polnord. In 1999, the Company's shares were floated on the Warsaw Stock Exchange s main market. Currently, the Company is listed in swig 80 and WIG-Deweloperzy indices. Since 2007, the core business of Polnord Group has been the implementation of development projects through special purpose vehicles established by Polnord with or without partners. Polnord Group operates in Warsaw, Tricity, Olsztyn, Szczecin, Łódź and Wrocław. is a founding member of the Polish Association of Developers whose purpose is to promote a code of good practices in the customer developer relations. Year after year since 2000, has held the Developer s

9 9 Certificate which is awarded by the Polish Association of Developers and confirms the Company s professionalism and guarantees its integrity in acting for the benefit of the customer. Polnord Group has one of the largest land reserves among Polish developers, consisting of attractive real properties located in the largest Polish cities (inter alia, Warsaw, Tricity, Łódź and Szczecin). In the recent years, employing its longstanding experience, Polnord, through the wholly owned subsidiaries, has completed its residential projects in the following locations: Warsaw: Polnord Group is one of the developers implementing construction of a new district of Warsaw ( Miasteczko Wilanów ), where approximately thousand residents are expected to settle. This is one of the most prestigious and demanding investment projects executed in Poland, recognised by the Urban Land Institute in 2010 as one of the five best investments in the world. So far, on the area of Miasteczko Wilanów, Polnord Group has implemented, among others, the following residential projects: Królewskie Przedmieście in Aleja Rzeczypospolitej (443 units), Kryształ Wilanowa in Klimczaka St (95 units), Śródmieście Wilanów build. A, C, D and build. F in Kazachska St (645 units in total); Ząbki near Warsaw: Neptun I (Stage I) (109 units); Neptun I (Stage II) (105 units); Sopot: Sopocka Rezydencja (162 apartments); Gdańsk: Ostoja Myśliwska (242 units); 2 Potoki Stage I-IV (576 units); Dwa Tarasy Stage I (162 units), Stage II (172 units); Gdynia: Brama Sopocka I (54 units); Olsztyn: Osiedle Tęczowy Las build. 1-5 (436 units) and build. 6 (149 units); Łódź: City Park Stage I-III (235 units); City Park Stage IV build. A5 (94 units); Szczecin: Ku Słońcu Stage I, II (build. 1,2) (539 units); Polnord is also responsible for the implementation of the office complex Wilanów Office Park, within which two modern office buildings of the total area of 17,290 sq m were built. At the end of 2016, Polnord, through its wholly owned subsidiaries and jointly controlled companies, was in the process of implementation of 20 housing projects, presented in Table 8, within which 1,947 apartments will be built, with a total usable area of over 104,000 sq m. In the period from to , the Polnord Capital Group companies (based on preliminary and reservation agreements) sold net: a) 1242 units (data not weighted with Polnord share in the individual Group companies), b) 1024 units (data weighted with Polnord share in the individual Group companies). The number of units, that have been recognized in the financial result of the Group for the period from 1 January 2016 to 31 December 2016, amounted to 843 units (data weighted with Polnord s share in the individual Group companies). In 2016, the Group launched 11 investments in total, 10 of which constitute successive stages of already implemented projects. New projects will be implemented in attractive locations in Warsaw, Tricity, Olsztyn, Szczecin and Wrocław. Projects launched in 2016 created the potential to extend the offer by 960 units with a total usable area of nearly 54,550 sq m (data weighted with Polnord share). 2 MARKET ENVIRONMENT The year 2016 was a good year for the housing market in Warsaw, Cracow, Wroclaw, Tricity and Poznań. During the whole year, nearly 62 thousand units were sold, which is an increase of over 19% in comparison to the previous year 2015 and of 44% in comparison to Moreover, in 2016, the number of premises introduced to sale amounted to 65 thousand, which constitutes an increase of over 25% as compared to 2015, while in comparison to 2014 it is an increase of over 36%.

10 10 The factors that stimulated demand on the real estate market were: (i) low interest rates (of mortgage loans and term deposits), (ii) stable prices of units, (iii) offer tailored to the needs of buyers, (iv) escrow accounts providing sense of security to buyers, (v) investments in apartments for rent, (vi) exhaustion of subsidies for 2016 under the MdM programme. Figure 1. NBP reference rate in the period from to [%] 2,6 2,4 2,2 2 1,8 1,6Source: NBP 1,4 1,2 1 VII IX XI I III V VII IX XI I III V VII IX XI Source: NBP In the fourth quarter of 2016, in the six cities with the highest volume of turnover, nearly 19 thousand apartments were introduced to sale, 67% more than in the same quarter of the previous year. In total, in 2016 more than 65 thousand new units appeared in these markets, that is 25% more than in The offer at the end of the quarter increased by nearly 1500 units and amounted to 52.7 thousand units. In most cities, there were minor changes when it comes to the volume of the offer. Compared with the end of the previous year, the offer increased slightly in all these locations with the exception of Wroclaw. Relatively small changes in the offer, with dynamically growing sales, observed since more than two years, represent a significant increase in demand. Figure 2. Number of flats sold on the primary market in Warsaw, Tricity, Cracow, Wrocław, Poznań, and Łódź in the period from 2014 to In the near future, the following factors will have the greatest influence on the market: [thousand] [thousand] , Sold in a quarter Offer at the end of a quarter - availability of subsidies under the MDM programme, - attractiveness of investment purchases resulting from the level of interest rates. The year 2017, as long as there will be no surprises for the real estate market, should be characterized by high supply, stable demand and growing offer. The rise in inflation will translate into an increase in interest rates. On the one hand, bank loans will become more expensive, and, even as compared to previous years, they will be more difficult to get for people who do not have resources for own contribution, on the Source: REAS other - higher interest rates on deposits can cause a reduction in the scale of investment purchases. This phenomenon is expected to be especially visible in two-three year time horizon. Source: Rynek Mieszkaniowy w Polsce IV kwartał, REAS

11 11 3 POLNORD SA CAPITAL GROUP STRATEGY On , the Management Board of passed a resolution on the adoption and implementation of the Polnord Capital Group s strategy for ( Strategy ). According to the adopted document, the strategic objective is to increase the value of the Polnord Capital Group. The objective will be achieved primarily through: Capital Group Strategy HIGHER PROFITABILITY OF BUSINESS 1) increasing profitability of the business obtained on the basis of launching new development investments, at the level of profitability of not lower than net 18%, 2) concentrating the operations in large cities (Warsaw and Tricity) 3) reducing debt, in a rational way, and, ultimately, reducing the costs of external debt service. The Strategy aims at generating in 2019 revenues at a level exceeding PLN 500 million, and annual sale of premises, weighted with Polnord s share, in the amount of not less than 1,500 units annually (1,024 units in 2016). RATIONAL DEBT REDUCION POLNORD SA RETURN TO PAYMENT OF DIVIDENDS FROM 2018 FOCUS OF THE OPERATIONS IN LARGE CITIES The Company also intends to return to paying dividends starting from The Strategy indicates the objective which will determine the actions to be taken by the Management Board in the next 3 years, and presents instruments for its implementation. The Management Board of Polnord conducts an ongoing analysis of the market environment and in the case of significant changes in macroeconomic conditions, it allows for the Strategy to be updated. 4 SELECTED FINANCIAL AND OPERATIONAL DATA Table 1. Selected separate financial and operational data PROFIT AND LOSS ACCOUNT [000'PLN] [000'EUR] Revenue on sales Gross profit (loss) on sales Gross operating profit (loss) (37 708) (39 697) (8 618) (9 485) Gross profit (loss) (46 808) ( ) (10 697) (30 576) Net profit (loss) on continued operations (37 835) ( ) (8 647) (28 249) Net profit (loss) (37 835) ( ) (8 647) (28 285) BALANCE SHEET Equity Long-term liabilities Short-term liabilities Fixed assets Current assets (including those classified as held for sale) Total assets

12 12 5 DIVIDEND POLICY As far as the dividend policy is concerned, the Management Board applies the principle of making payments that take account of the Company s earnings and financial position. The Company intends to pay regular dividends starting from When making proposals concerning the possibility of dividend payout, the Management Board takes into account the need to ensure that the Company has the liquidity and capital necessary for business development. In the financial years , the Company did not pay dividends due to the decision to keep funds for investments and business development in the Company and to secure financial liquidity. 6 COMPOSITION OF THE POLNORD CAPITAL GROUP SA Composition of the Polnord Capital Group includes as the parent company and companies subject to consolidation. The duration of the Company and companies comprising the Group as at is indefinite. Full name (company name) Registered office POLNORD Spółka Akcyjna Gdynia, ul. Śląska 35/37 Number in the National Court Registered (KRS) Tax identification Number (NIP) Statistical Identification Number (REGON) Registered share capital PKD (Polish Classification of Business Activities) Website 65,386,254 PLN (paid in full) 6810 Z buying and selling of own real estate INFORMATION ON THE ISSUER S ORGANIZATIONAL OR CAPITAL LINKS WITH OTHER PARTIES AND DETERMINATION OF ITS MAIN DOMESTIC AND FOREIGN INVESTMENTS (SECURITIES, FINANCIAL INSTRUMENTS, INTANGIBLE ASSETS AND REAL PROPERTY), INCLUDING CAPITAL INVESTMENTS MADE OUTSIDE ITS GROUP OF RELATED PARTIES, AND THE DESCRIPTION OF METHODS OF THEIR FINANCING.

13 13 The diagram presented below illustrates the structure of organizational and capital links of as at Structure of Capital Group

14 14 IDENTIFICATION OF THE EFFECTS OF CHANGES IN THE STRUCTURE OF THE CAPITAL GROUP, INCLUDING THOSE RESULTING FROM MERGERS OF BUSINESSES, ACQUISITIONS OR DISPOSALS OF THE COMPANY S CAPITAL GROUP ENTITIES, LONG-TERM INVESTMENTS, DIVISION, RESTRUCTURING AND DISCONTINUATION OF ACTIVITY In the period from to , the following changes occurred the structure of organizational and capital links: Entity name Polnord Inwestycje Spółka z ograniczoną odpowiedzialnością Łódź City Park Sp.k Stacja Kazimierz Spółka z ograniczoną odpowiedzialnością S.K.A. Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością Polnord Haffnera 1 Sp. z o.o. Polnord Haffnera 2 Sp. z o.o. in organisation Polnord Haffnera 3 Sp. z o.o. in organisation Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością SK Polnord Gdańsk Dolne Miasto Sp. z o.o. Description of the event Transformation of a limited liability company into a limited partnership; joining the limited partnership as a limited partner On , the District Court Gdańsk Północ in Gdańsk, VIII Commercial Division issued the decision on the transformation of Polnord Łódź City Park Sp. z o.o. into a limited partnership under the name Polnord Inwestycje spółka z ograniczoną odpowiedzialnością Łódź City Park Spółka komandytowa. The partners are: as a limited partner and Polnord Inwestycje Sp. z o.o. as a general partner. Registration of share capital decrease On , the District Court for the capital city of Warsaw, XIII Commercial Division of the National Court Register issued the decision on registering the decrease in the share capital of the company to the amount of PLN 50,000.00, i.e. from the amount of PLN 10,133, to the amount of PLN 50, as a result of redemption of all series C shares in the number of acquired by the Company from shareholders for redemption. Acquisition of shares On , acquired from MS Waryński Development SA 50 shares (constituting 50% of a share capital) of Stacja Kazimierz III Sp. z o.o. with its registered office in Warsaw. Formation of a company On , the company was founded; the sole shareholder is. On , the District Court Gdańsk Północ in Gdańsk, VIII Commercial Division issued the decision on registering the Company. Formation of a company On , the company was founded; the sole shareholder is. Formation of a company On , the company was founded; the sole shareholder is. Registration of a company On , the company Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością SK was registered. is a limited partner and made cash contribution of PLN 25,000. Its share corresponds to the value of the contribution actually made. Decision on registration of a company On , the District Court Gdańsk-Północ in Gdańsk, VIII Commercial Division issued a decision on registration of the Company. The only shareholder is. The following changes took place after the balance sheet date:

15 15 Entity name Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością SK Haffnera Apart Sp. z o.o Haffnera Park Sp. z o.o. Description of the event On , the District Court for the capital city of Warsaw, XIII Commercial Division of the National Court Register issued the decision on the transformation of the company into a limited partnership. is a limited partner. On , the District Court Gdańsk-Północ in Gdańsk, VIII Commercial Division issued a decision on registration of the Company. The only shareholder is. On , the District Court Gdańsk-Północ in Gdańsk, VIII Commercial Division issued a decision on registration of the Company. The only shareholder is. As at , the percentage of voting rights held by Polnord in the subsidiaries, jointly controlled entities and in associates corresponds to the percentage held by Polnord in the share capitals of those entities., CHANGES IN THE PRINCIPLES OF MANAGING THE COMPANY AND THE CAPITAL GROUP In 2016, there were no significant changes introduced into the methods of managing the Company and the Capital Group, except for those mentioned above. 7 GOVERNING BODIES OF THE COMPANY Management Board of As at , the Company's Management Board was composed of: According to the Company's Articles of Association, the Company s Management Board may be composed of 2 to 6 members, appointed for a joint three-year term of office. MANAGEMENT BOARD Dariusz Krawczyk President of the Management Board Jerzy Kamiński Member of the Management Board Jerzy Kotkowski Member of the Management Board The current term of office of the Management Board commenced on During the period from the balance sheet date till the date of the present Report, no changes were introduced in the composition of the Company s Management Board. Short description of the Members of the Management Board: Dariusz Krawczyk Graduate of the Warsaw School of Economics and the Warsaw University of Technology, licensed securities broker. In the years , Secondary Market Director at the Capital Operations Centre of Bank Handlowy S.A. For the next two years he served as the President of the Board of the brokerage firm Expandia Finance Polska S.A., part of an international financial holding. In the years , he managed investment activity as Capital Investments Director

16 16 of the 4 th National Investment Fund Progress S.A. and subsequently as Investment Banking Department Director at PKO BP where he managed an investment portfolio worth approximately PLN 1 billion, while exercising owner supervision over the Group s companies. In the following years he worked in the petrochemical sector as Director of the Owner Supervision Department of PKN ORLEN S.A. and Member of the Management Board of Nafta Polska S.A. At that time, he was responsible for, among others, the preparation and implementation of the strategy of the Capital Group in its subsidiaries, and the development of a detailed plan of the third stage of privatisation of PKN ORLEN. Between 2002 and 2003, as Director of the Capital Investments Department of PSE S.A., he prepared the strategy and managed the group s restructuring process. In the years , he served as President of PSE-Centrum Sp. z o.o. and Member of the Board of the Holding of the PSE S.A. Group. In 2005, he joined the Synthos Group, taking over the post of President of Synthos S.A. and President of Energetyka Dwory S.A. Under his leadership, the company recorded a spectacular increase in its value, significantly improved its financial effectiveness and achieved the highest financial results in its history. Subsequently, in the years , as President of the Board of CIECH S.A. he managed the preparation and implementation of the Group s restructuring programme, resulting in a substantial improvement in the company s effectiveness and an increase in its value (from PLN to PLN per share). From , Mr. Dariusz Krawczyk is President of the Management Board of. He is also a Member of the Supervisory Board of the company Fadesa Polnord Polska Sp. z o.o.. Jerzy Kamiński Doctor of Economics. Received his doctorate at the Poznań University of Economics. Licensed securities broker. Graduate of the Department of Civil Engineering at the Poznań University of Technology. Completed a course of postgraduate studies in Law for economists. In the years , he worked in the trade sector, initially as sales director at Piakol and then as the owner of the Jerzy Kamiński Handel Międzynarodowy company. In the years , he served as Senior Analyst at the Department of Capital Investments of Bank Inicjatyw Gospodarczych S.A., Director of the Department of Supervision and Privatisation of Foreign Trade Units at the Ministry of International Economic Cooperation, as well as Director of the Department of Capital Investments of Kulczyk Holding S.A. Between 1998 and 2002, he worked at the Warta Group, initially as Deputy Director of the Department of Capital Development of TUiR Warta S.A. and then President of the Board of Warta Nieruchomości Sp. z o.o. and Warta Hotels Development Sp. z o.o. At that time, he created a system of subsidiaries of TUiR Warta S.A. and built a network of 60 branches of TUiR Warta S.A. all over Poland in just one year. He also engineered the signing of a contract with Starwood Ltd. for the construction of three Sheraton Hotels and three office buildings for the branches of TUiR Warta S.A. and other tenants. Subsequently, he took over as President of the Board of Lubelskie Przedsiębiorstwo Budownictwa Ogólnego S.A. and remained in this post until In 2004, he joined Skanska Property Poland Sp. z o.o., first as Project Manager, Regional Director in Southern Poland and then as Member of the Board and Development Director. From 2010 till the second half of December 2015, he served as Development Director at HB Reavis Polska Sp. z o.o. where he secured the building permits and occupancy permits for Polish investment projects of HB Reavis Polska and also led the process of creating the company s strategy and structure. From , Mr. Jerzy Kamiński is Member of the Management Board of. He is also Deputy Chairman of the Supervisory Board of Korporacja Budowlana Dom SA, Chairman of the Supervisory Board of Korporacja Budowlana Dom Sp. z.o.o. and Member of the Supervisory Board of Fadesa Polnord Polska Sp. z o.o.. Jerzy Kotkowski Graduate of Management Studies at the Warsaw School of Economics. Licensed investment adviser. He began his professional career at the Capital Operations Centre of Bank Handlowy w Warszawie S.A. In the years , he worked at the Department of Capital Funds of the Ministry of the State Treasury. From there, he moved to PKO BP S.A., to the post of Investment Specialist. In the years , he occupied the following positions: Member of the Board for Finances at Park Wodny Sopot Sp. z o.o., Member of the Board and Finance and Operations Director at Zakłady Elektrotechniki Motoryzacyjnej ZELMOT S.A., as well as Vice-president of the Board of Huta Szkła Gospodarczego Irena S.A. and Huta Szkła Kryształowego Violetta S.A. where he managed both the finances and the restructuring processes. Subsequently, he also occupied the post of Member of the Board at Barista Sp. z o.o. operating The Hard Rock Cafe in

17 17 Warsaw and Kraków. Between 2005 and 2012, President of the Board of VIS Investments Sp. z o.o. Spółka Komandytowo-Akcyjna, where he was responsible for managing a capital group with assets of PLN 300 million, shaping the financial and investment policy, as well as for capital investments and management of a securities portfolio in the public market. In the meantime, he also served as President of the Board of Zachodni Narodowy Fundusz Inwestycyjny S.A. From 2012 till the second half of December 2015, he was the President of the Board of Kolejowe Przedsiębiorstwo Turystyczno-Wypoczynkowe Natura Tour Sp. z o.o. from the PKP Group. From February 2015 till the second half of December 2015, he was the President of the Board of Wars SA responsible for, among others, the restructuring of the firm and the implementation of a remedial and savings programme. From , Mr. Jerzy Kotkowski is Member of the Management Board of. He also acts as Vice-President of the Management Board of Semeko Aquasfera Sp. z.o.o. and Member of the Supervisory Board of Fadesa Polnord Polska Sp. z o.o.. Supervisory Board On , the 25 th General Shareholders Meeting of the Company (the GSM ) appointed a Supervisory Board for a new three-year joint term of office. As at , the Company's Supervisory Board was composed of: Czcibor Dawid Chairman of the Supervisory Board Jerzy Bartosiewicz Vice Chairman of the Supervisory Board Agata Gola Member of the Supervisory Board Łukasz Adamczyk Member of the Supervisory Board Julia Walicka - Ostachowska Member of the Supervisory Board Marek Dietl Member of the Supervisory Board Maciej Stradomski Member of the Supervisory Board Mr. Łukasz Adamczyk, Mr. Jerzy Bartosiewicz, Mr. Marek Dietl, Mr. Maciej Stradomski and Mrs. Julia Walicka Ostachowska made statements about meeting the independence criteria, in line with 13 (5) of the Company s Articles of Association - independence criteria referred to in Appendix II to the Guideline of the European Commission of 15 February 2005 on the role of non-executive directors or supervisory directors of listed companies and a (supervisory) Board Committee. In the period from to , the following changes in the composition of the Supervisory Board took place: Date Description Name and Surname Expiry of the term of office of the Supervisory Board Appointment of members of the Supervisory Board for a new term of office Agata Gola; Jerzy Bartosiewicz; Łukasz Adamczyk; Marek Dietl; Dawid Czcibor; Maciej Stradomski; Julia Walicka - Ostachowska The Supervisory Board may be composed of 5 to 7 members The current three-year term of office of the Supervisory Board of Polnord commenced on In the period from the balance sheet date of this Report, there were no changes in the composition of the Supervisory Board. Short characteristics of the Supervisory Board Members: Czcibor Dawid Chairman of the Supervisory Board He holds an MBA degree of the University of Chicago Booth School of Business and a Master s degree in Economics of the Warsaw School of Economics. Since 1994, associated with the capital market. In he worked successively

18 18 in: Powszechny Bank Kredytowy as a dealer in the equity market, Westfund Polska as an investment analyst, JPMorgan Securities as an Equity Trader, AIG PTE as an Equity Portfolio Manager and as a Vice-President / Market Maker at Dresdner Kleinwort Benson. In , Department Director of Bank Handlowy responsible, among others, for products of Treasury and Private Banking. From 2008 to 2010, Vice-President of TMS Brokers. President of the Management Board of Noble Securities in From 2015 to 04/2016 the Member of the Board for Business Development in Altus TFI SA., while currently he serves as advisor to the Board of Altus TFI SA. Since October 2015, Chairman of the Supervisory Board of. Jerzy Bartosiewicz Vice Chairman of the Supervisory Board A graduate of the University of Łódź, stockbroker. Over the period he worked in Bank Handlowy successively as a Broker, Deputy Director and Director. Former head of the team establishing the Investment Fund Association of Bank Handlowy, and then Chairman of its Supervisory Board. Member of the team establishing the Open Pension Fund of Bank Handlowy and PKO BP, and then member of the Supervisory Board; Member of the team responsible for privatisation of Bank Handlowy. From 1998 to 2000, Vice-President of the Management Board of Powszechny Zakład Ubezpieczeń na Życie S.A. After that he was an Advisor to the Management Board of NFI im. E. Kwiatkowskiego S.A., Cresco Financial Advizors and Browary Polskie Brok-Strzelec where, in , he was the Finance Director. From 2004 to 2008, Advisor to the Management Board of Finco Group SA, Bydgoska Fabryka Narzędzi Befana - Vis Sp. z o.o. From 2004 to 2011, a Member of the Management Board and Managing Partner in 4Fin Corporate Finance. In the years advisor to the Management Board of LST Capital SA. From 2012, he was the Investment Manager in Krajowy Fundusz Kapitałowy SA. Chairman of the supervisory bodies of Skyline Venture Fund and Impera Seed Fund, Member of the Supervisory Board of GPV I Fund, Member of the Investment Committee of Helix Ventures Partners FIZ, Member of the Investment Committee of Venture Capital Satus FIZ, Member of the Investment Committee of Skyline Venture Fund, Member of the Investment Committee of Internet Venture FIZ Fund, Member of the Investment Committee of IMPERA Seed Fund, Vice-Chairman of the Supervisory Board of and Member of the Audit Committee of. Łukasz Adamczyk Member of the Supervisory Board A graduate of the Faculty of Law and Administration at Warsaw University, European Law School, Faculty of Law and Administration at the University of Maastricht, PhD studies at the Department of Financial Law at Warsaw University. A scholar of the Max Planck Institute in Munich (Department of Tax Law), and, in , a scholar of the Institute of Austrian and International Tax Law at Vienna University of Economics. In 2008 he worked in the Department of European VAT case-law, Department of VAT in Ministry of Finance, since 2010 he has been a tax advisor. Participation in the governing bodies of companies - as President of the Board: Black Swan Sp. z o.o, Gordon Gekko Sp. z o.o., Krajowe Centrum Finansowe S.A., Krajowe Centrum Poręczeń S.A., Projekt 81 Sp. z o.o. and as general partner in Łukasz Adamczyk Doradca Podatkowy S.K.A. and Łukasz Adamczyk Doradca Podatkowy Usługi Doradcze S.K.A.; Member of the Supervisory Board of. Marek Dietl Member of the Supervisory Board A graduate of the Warsaw School of Economics, he received a Ph.D. degree in economics at the Institute of Economics of the Polish Academy of Sciences (PAN). An assistant professor in the Department of Economics WSE. He completed scientific internships at the University of Essex and the University of Glasgow. He occupied managerial positions in Krajowy Fundusz Kapitałowy SA and Simon-Kucher & Partners. He was a member of supervisory boards of the companies: Atende SA, BSC Drukarnia Opakowań SA, Midven SA, Techmex SA and over ten unlisted companies, including three venture capital funds and institutions responsible for the implementation of economic policy: Bank Gospodarstwa Krajowego and the Polish Agency for Enterprise Development. In he was a social advisor to three successive Presidents of the Energy Regulatory Office. In he was a mediator in the arbitration court at the Polish Financial Supervisory Authority, and at present, he is a social economic advisor to the President of the

19 19 Republic of Poland, an expert and board member of the Sobieski Institute and the Business Centre Club; Member of the Supervisory Board of. Agata Gola Member of the Supervisory Board A graduate of the Faculty of Economics at Cracow University of Economics and the School of Business at the University of Stockholm; completed postgraduate studies in the field of corporate financial management at the Warsaw School of Economics, holds a Certified Commercial Investment Member issued by the CCIM Institute in Chicago. An Economist with over 15 years of experience in corporate banking; i.e. from 2001 she worked in BNP Paribas Bank Polska SA in the Department of Corporate Client, then in Bank BPH SA, and from 2005 in Nordea Bank Polska SA - as a Senior Relationship Manager, and then Deputy Director of the Corporate Banking Department and Director of Real Estate Finance Department. Since 2011 she has been associated with the commercial and housing real estate market. Currently she works in PKO BP SA, where she supervises the Section of the Real Estate Financing in the Strategic Customer Department - Construction and Real Estate Financing; Member of the Supervisory Board of and Member of the Audit Committee of. Julia Walicka - Ostachowska Member of the Supervisory Board A graduate of the Warsaw University, Institute of Applied Social Sciences (Master s Degree in Sociology) and the Department of Law and Administration (Master s Degree in Law). Moreover, a graduate of the Bonn University and the School of English and European Law at the Warsaw University. Since 2012, she has been a general counsel. Since April 2008, she works at Hogan Lovells (Warsaw) LLP (Sp. Partnerska) Branch in Poland - Corporate Department, Section of Labour and Corporate Law; Member of the Supervisory Board of Maciej Stradomski Member of the Supervisory Board A graduate of the Faculty of Management at the University of Economics in Poznań, as well as post-graduate studies in the field of real estate management at the University of Economics in Poznań. Doctor and professor at the University of Economics in Poznań. Since 1996, connected with the financial sector, succesively in: W. Frąckowiak i Partnerzy Wielkopolska Grupa Konsultingowa, Bank Handlowy, as well as W. Frąckowiak Partnerzy Konsulting - today F5 Konsulting Sp. z o.o. In 2004, he was appointed Chief Financial Officer of Eteron Sp. z o.o.; President of the Management Board of DMP Finanse Sp. z o.o. in and of Eteron Investment Sp. z o.o. in Currently, the Member of the Management Board of Eteron Sp. z o.o. and CMT Advisory Sp. z o.o. Moreover, the Member of the Supervisory Boards of public and non-public companies: Mostostal Słupca S.A., Wydawnictwo Kurpisz S.A., Woodwaste S.A., Via Polonia S.A., Rafako S.A., Makrum S.A. and ; Member of the Audit Committee of INFORMATION ON SHARES OR RIGHTS FOR SHARES (OPTIONS) OF POLNORD SA HELD BY MEMBERS OF THE MANAGEMENT AND SUPERVISORY BODIES OF POLNORD SA According to the Company s knowledge the members of the management bodies of Polnord listed below held the following numbers of the Company s shares: Table 2. Company shares held by members of the Management Board and Supervisory Board as at Name Function Number of shares Dariusz Krawczyk President of the Management Board 150,000 Jerzy Kotkowski Member of the Management Board 826 According to the Company s knowledge, the members of the supervisory bodies of Polnord did not hold the Company s shares.

20 20 After the balance sheet date there were no changes in the number of shares held by Members of the Management Board and Supervisory Board. AGREEMENTS CONCLUDED BY AND BETWEEN THE COMPANY AND MANAGEMENT STAFF WHICH STIPULATE A COMPENSATION IN THE EVENT OF THEIR RESIGNATION OR DISMISSAL FROM THE OCCUPIED POSITION Benefits payable to members of the Management Board of the Company, in connection with the termination of employment, are specified in individual employment contracts concluded with Members of the Management Board. In accordance with the employment contracts with the Management Board members, in each case of termination of the employment contract signed with the Management Board Member by the Company, the Company is obliged to pay compensation: - in the case of the President of the Management Board Mr. Dariusz Krawczyk the amount of the nine-month basic gross salary, - in the case of Members of the Management Board: Mr. Jerzy Kamiński and Mr. Jerzy Kotkowski the amount of the six-month basic gross salary. During the period of the employment contract and the period of six months from the date of termination of the employment contract signed with the Management Board Members, each of them is obliged to refrain from any activity competitive to the Company. Due to the binding prohibition of competition after the expiry of the employment contract, Members of the Management Board are entitled to compensation amounting to 80% of the monthly gross salary, payable monthly. 8 REMUNERATION AND CASH AWARDS PAID, DUE TO THE MANAGEMENT AND SUPERVISORY BOARD OF THE COMPANY Remuneration of the Management Board of Total remuneration together with the awards of particular Members of the Company s Management Board in 2016 (paid and due) amounted to PLN 3,485.9 thousand. Table 3. Remuneration of the Management Board of Description Gross remunerations with awards [PLN 000] Gross remunerations under other titles (medical care, company car) [PLN 000] Evaluation of subscription warrants [PLN 000] Remuneration under functions performed in the governing bodies of subordinated entities Total gross remuneration [PLN 000] Dariusz Krawczyk President of the Board* Jerzy Kamiński Member of the Board Jerzy Kotkowski Member of the Board Total *President of the Board appointed from Remuneration of the Supervisory Board of

21 21 Total amount of the remuneration paid and due to the Members of the Company s Supervisory Board by in the period from to amounted to PLN thousand. Table 4. Remuneration of the Supervisory Board of Specification Gross remunerations [PLN 000] Łukasz Adamczyk * Jerzy Bartosiewicz 66.0 Czcibor Dawid 66.0 Marek Ditel * Marcin Dukaczewski ** 21.0 Agata Gola * Artur Jędrzejewski ** 27.0 Bartłomiej Kędzior ** 21.0 Mariusz Kozłowski ** 21.0 Maciej Stradomski 54.0 Julia Walicka-Ostachowska * Total * appointed to the Supervisory Board of on *dismissed from the Supervisory Board of on SHAREHOLDERS HOLDING AT LEAST 5% OF THE TOTAL NUMBER OF VOTES AT THE GENERAL MEETING OF THE COMPANY According to the Company s knowledge, as at , the following shareholders held shares of vested with at least 5% of votes at the General Meeting of the Company: Table 5. Shareholding of as at * Shareholder Number of Nominal value of % of shares/votes shares [PLN] capital/votes Nationale-Nederlanden Otwarty Fundusz Emerytalny 2,428,258 4,856, % Powszechna Kasa Oszczędności Bank Polski SA 2,345,893 4,691, % Bank Gospodarstwa Krajowego 2,086,890 4,173, % Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) 1,818,437 3,636, % Briarwood Capital Partners LP 1,634,941 3,269, % Others shareholders in total 22,378,708 44,757, % Total 32,693,127 65,386, % * according to the information provided to the Company by Shareholders pursuant to art. 69 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading and Public Companies; In the period from to , the following changes took place in the Company s Shareholding. Date of notification to the Company Name of the notifier Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds Description of the event Exceeding the threshold of 5 % in the total number of votes in Polnord The 5% threshold in the total number of votes in Polnord was exceeded as a result of the settlement, on 31 March 2016, of acquisition of 187,215 Company shares in regular trading

22 22 managed by TFI PZU SA) at the Warsaw Stock Exchange on 29 March 2016 (which was reported to the Company on 4 April 2016). Before the event causing the obligation of notification, investment funds managed by TFI PZU SA held a total of 1,631,222 shares, constituting % of the share capital of the Company, vested with 1,631,222 votes, which constituted % in the total number of votes in the Company. After the change, investment funds managed by TFI PZU SA hold a total of 1,818,437 shares, constituting % of the share capital of the Company, vested with 1,818,437 votes, which constitutes % in the total number of votes in the Company. Decrease of share in the total number of votes in Polnord by Briarwood Capital Partners LP On received from Briarwood Capital Partners LP ( BCP ) a notification about the reduction in share in the voting rights at the general meeting of the Company to 5% Briarwood Capital Partners LP Nationale-Nederlanden Otwarty Fundusz Emerytalny ALTUS Towarzystwo Funduszy Inwestycyjnych SA (investment funds managed by ALTUS TFI SA) The change resulted from selling, by an open market sale, 5,450 shares of the Company within the regulated trading market of Warsaw Stock Exchange on Prior to the change, BCP owned 1,640,391 shares, which constituted 5.02% of share in the Company s share capital and 5.02% of share in the voting rights at the general meeting. Following the change of share, BCP owns 1,634,941 shares which constitute 5.00% of share in the Company s share capital and 5.00% of share in the voting rights at the general meeting of the Company. Exceeding the threshold of 5% in the total number of votes in Polnord by Nationale- Nederlanden Open Pension Fund On 17 June 2016 received from Nationale-Nederlanden Open Pension Fund (the Fund ) a notification on exceeding the threshold of 5% in the total number of votes in Polnord by the Fund. The 5% threshold in the total number of votes in Polnord was exceeded as a result of the purchase of Polnord shares in transactions executed on the Warsaw Stock Exchange, settled on 14 June Before the acquisition, the Fund held 1,628,199 shares constituting 4.98% of the Company s share capital, vested with votes, which constituted 4.98% in the total number of votes in Polnord. As at 17 June 2016, the securities account of the Fund shows 2,428,258 shares constituting 7.43% of the Company s share capital, vested with votes, which constitute 7.43% in the total number of votes in Polnord. Decrease in the ownership of shares of the Company below the 5% threshold in the total number of votes in the Compnay Decrease of share in the total number of votes resulted from the settlement, on 19 December 2016, of disposal of 302,439 Company shares in regular trading. Prior to change of share, investment funds managed by ALTUS TFI held a total of 1,678,038 shares, constituting 5.13% of the share capital of the Company, vested with 1,678,038 votes, which constituted 5.13% in the total number of votes in the Company. After the change, investment funds managed by ALTUS TFI hold a total of 1,375,599 shares, constituting 4.21% of the share capital of the Company, vested with 1,375,599 votes, which constitutes 4.21% in the total number of votes in the Company.

23 23 Shareholding of as at % 7.18%6.38% 68.45% 5.56% 5.00% Nationale-Nederlanden Otwarty Fundusz Emerytalny Powszechna Kasa Oszczędności Bank Polski SA Bank Gospodarstwa Krajowego Towarzystwo Funduszy Inwestycyjnych PZU SA (fundusz inwestycyjne zarządzane przez TFI PZU SA) Briarwood Capital Partners LP Other shareholders in total After the balance sheet date, the following changes took place in the Company s Shareholding: Date of notification to the Company Name of the notifier Description of the event Exceeding the threshold of 5% in the total number of votes in Polnord The total number of votes in the Company was increased as a result of acquisition transaction of Polnord shares on , settled on Aegon Powszechne Towarzystwo Emerytalne SA Prior to change of share, Fund held a total of 1,629,095 shares, constituting 4.98% of the share capital of the Company, which constituted 4.98% in the total number of votes in the Company. According to the state for , the Fund held 2,499,850 shares, constituting 7.65% of the share capital of the Company, which constituted 7.65% in the total number of votes in the Company Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) Exceeding the threshold of 10% in the total number of votes in Polnord The total number of votes in the Company was increased as a result of the settlement, on , of acquisition of 420,000 Polnord shares in regular trading at the Warsaw Stock Exchange on Prior to change of share, Funds TFI PZU held a total of 3,267,508 shares, constituting 9.99% of the share capital of the Company and 9.99% of the total number of votes in the Company. According to the state for , Funds TFI PZU hold a total of 3,687,508 shares, constituting % of the share capital of the Company and % in the total number of votes in the Company.

24 24 Shareholding of as at % 11.28% 7.65% 7.43% 7.18% 5.00% 6.38% Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) Aegon Powszechne Towarzystwo Emerytalne SA Nationale-Nederlanden Otwarty Fundusz Emerytalny Powszechna Kasa Oszczędności Bank Polski SA Bank Gospodarstwa Krajowego Briarwood Capital Partners LP Other shareholders in total INFORMATION CONCERNING AGREEMENTS KNOWN TO THE COMPANY WHICH MAY, IN THE FUTURE, CHANGE THE PROPORTION OF SHARES HELD BY THE CURRENT SHAREHOLDERS AND BONDHOLDERS Not applicable. INFORMATION CONCERNING CONTROL SYSTEM OF THE EMPLOYEE SHARE PROGRAMME On the Company s Supervisory Board adopted a resolution on the application of the Regulations on Management Options Programme ( MO Regulations ). The MO Regulations were adopted pursuant to Resolution No. 1/2013 and Resolution No. 2/2013 of the Extraordinary General Meeting of Shareholders of Polnord held on on conditional increase of the Company s share capital excluding the preemptive rights of the current shareholders and on the issue of subscription warrants excluding the preemptive rights of the current shareholders ( MO Programme ). The MO Programme is directed at the Management Board of the Company and at employees and associates of key importance for implementing the Company s strategy ( Entitled Individuals ). The MO Programme provides for the issue of no more than 350 thousand subscription warrants for no consideration, issued in three tranches ( Warrants ). Each Warrant entitles to subscription of one Share. The Share issue price for all Warrants amounts to PLN A total of 336,800 A, B and C series warrants have been issued and delivered within the MO Programme. Two Entitled Individuals subscribed a total of 60,100 series S ordinary bearer shares of the Company with a nominal value of PLN 2.00 each. The Entitled Individual could exercise the right to subscribe the Shares no later than , so the MO Programme expired.

25 25 II ACTIVITIES OF THE CAPITAL GROUP 1 MAIN PRODUCTS, GOODS, SERVICES AND MAIN SALES MARKETS In 2016, the Company achieved revenue from sales of PLN 39,682 thousand. Services of investment project management constituting 83.5% are the main source of the Company s revenue. The split of revenues of the Capital Group by its sources is presented below: Table 6. revenue by source Source of revenue Sales [PLN 000] Share [%] Sales [PLN 000] Share [%] Services of investment project management % % Sales of land plots, apartments % % Other % % Total % % In 2016, Polnord operated mainly in Poland, therefore the revenue generated in Poland constituted 100% of the income from sales. Polnord operates in the field of construction and apartments sales through special purpose companies appointed independently or with partners. Detailed information about sales of the Polnord Capital Group is included in the consolidated report of the Polnord Capital Group. 2 THE GROUP S DEPENDENCE ON PROVIDERS AND RECIPIENTS The services of investment project management, provided by the Company to the Polnord Capital Group companies under the agreements for the above mentioned services concluded with the companies, constitute the most significant item of Polnord s revenue. Recipients of services In the reporting period, regarding the revenue generated by Polnord: from the services of investment project management, the wholly owned subsidiaries of Polnord were the major recipients. from the sale of land, the SPV Polnord Apartamenty Sp. z o.o. was the major recipient; Providers of services Due to the nature of the business, there is no concentration of benefits to the Company within a single entity or a limited group of providers.

26 26 III FINANCIAL DATA 1 PROFIT AND LOSS ACCOUNT Table 7. Profit and Loss Account Specification [000'PLN] For the period from to For the period from to Sales revenue Revenue from sales of products, goods and materials from related parties Revenue from sale of services from related parties Lease revenue from related parties Cost of sale ( 14483) ( 49883) Gross profit (loss) on sales Result on sale of investment property Revaluation of investment property ( 4068) ( 15771) Selling costs ( 6217) ( 7236) General administrative expenses ( 29128) ( 22381) Other operating revenue Other operating expenses ( 24688) ( 24891) Gross operating profit (loss) ( 37708) ( 39697) Financial revenue Financial expenses ( 50967) ( ) Result on sale / occasional acquisition of subsidiary Gross profit (loss) ( 46808) ( ) Income tax Net profit (loss) on continued operations ( 37835) ( ) Net profit (loss) on discontinued operations 0 ( 152) Net profit (loss) for the financial year ( 37835) ( )

27 27 2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Table 8. Statement of financial position Specification [000'PLN] As at As at ASSETS Fixed assets Tangible fixed assets Investment property Intangible assets Investments in associates measured with equity method Loans granted Long-term receivables Other financial assets Deferred tax assets Current assets (excluding assets classified as held for sale) Inventories Trade and other receivables Loans granted Receivables due to VAT, other taxes, customs duties, insurance and other Income tax receivables Prepayments and accrued income Cash and cash equivalents Assets classified as held for sale Current assets (including those classified as held for sale) TOTAL ASSETS

28 28 Table 9. Statement of financial position Specification [000'PLN] As at As at LIABILITIES Equity Share capital Share premium Own shares 0 Foreign exchange differences on translation of a foreign operation 0 Other reserve capitals Retained profits/uncovered losses ( ) ( ) Total equity Long-term liabilities Interest-bearing bank loans and borrowings Provisions Other liabilities Deferred income tax provision 0 Short-term liabilities (excluding libilities directly related to assets classified as held for sale) Trade and other liabilities Current long-term portion of bank loans and borrowings 3146 Short-term revolving loans 0 0 Short-term loans and borrowings Liabilities due to VAT, other taxes, customs duties, insurance and other Income tax liabilities 0 Other financial liabilities Accruals and deferred income Advance payments received Provisions Liabilities directly related to assets classified as held for sale Total liabilities TOTAL EQUITY AND LIABILITIES COMMENTARY TO THE FINANCIAL STATEMENTS When analyzing this report and the results generated in 2016, it is important to bear in mind that in December 2015 the Management Board of made a comprehensive review of assets, development projects implemented by the Capital Group and litigations, which resulted in the introduction of adjustments to the statements, concerning previous years, thus the results are not comparable. 4 DIFFERENCES BETWEEN FINANCIAL RESULTS AND A RECENTLY PUBLISHED FORECAST The Capital Group did not publish a forecast of its 2016 results.

29 29 5 FACTORS AND EVENTS, ESPECIALLY THOSE OF A NON-TYPICAL CHARACTER, THAT HAD A SIGNIFICANT IMPACT ON THE FINANCIAL RESULTS In the period from to , there were no factors or events (especially those of a non-typical character) which would have had an impact on the reported financial results. 6 ASSESSMENT OF THE POSSIBILITIES TO CARRY OUT INVESTMENT PLANS and the Group companies focus their activities on operations connected with the land bank held by the Group, as well as on the acquisition of attractive plots of land to be used for development projects. The Company intends to continue to finance its business activity and the activity of special purpose vehicles from its own funds, bank loans and issuance of debt securities, striving to adjust maturities of loans and debt securities to the period of project implementation. The proceeds raised this way facilitate the implementation of the Capital Group s investment projects. IV NOTES AND EXPLANATIONS 1 OTHER IMPORTANT EVENTS IN 2016 PUBLIC BOND ISSUE PROGRAMME In the period from to , the Company did not launch a public bond issue programme. SIGNIFICANT AGREEMENTS Agreements for the implementation of housing projects Conclusion, on , of an agreement between Śródmieście Wilanów Sp. z o.o. with its registered office in Gdynia and Budimex SA with its registered office in Warsaw ("Budimex") - as General Contractor. The contract covers the construction of multi-family residential buildings with underground garage in Warsaw, Wilanów district. As part of this investment, 2 buildings will be built, i.e. A2 and A3 with a total of 228 units. Conclusion, on , of annexes to contracts for implementation of housing projects with Korporacja Budowlana Dom Sp. z o.o.. The annexes changed the formula of the contracts from Investor s Representative to General Contractor, and thus remuneration of KB Dom was limited to remuneration for general contracting works. Modification of the existing organization of the investment process resulted in a reduction in the total value of contracts from PLN million to approx. PLN million. The highest value agreement, as amended in this respect by the annex of , is the agreement of concluded between Polnord Warszawa Ząbki - Neptun Sp. z o.o. (a wholly owned subsidiary of Polnord) and KB Dom for the implementation of a housing project in Ząbki near Warsaw. The annex limited the range of responsibilities and the remuneration due to KB Dom to the remuneration for general contracting works, estimated at net amount of PLN 37,545,969. Other terms of the contract remain unchanged. Conclusion, on , of an agreement between Polnord Szczecin ku Słońcu Sp. z o.o. with its registered office in Gdynia and Corlux Sp. z o.o. - as General Contractor. The contract covers the construction of building No. 5 in Szczecin. As part of this investment the building will have 154 premises. Conclusion, on , of an agreement between Polnord Olsztyn Tęczowy Las Sp. z o.o. with its registered office in Gdynia and Korporacja Budowlana Dom Sp. z o.o. - as General Contractor. The contract covers the construction of building No. 8 in Olsztyn. As part of this investment the building will have 87 premises.

30 30 Agreements for bonds issues On , the Company issued 20,000 (twenty thousand) unsecured series O bearer bonds, in uncertified form, with a nominal value of PLN 1, (one thousand) each, and with a total nominal value of PLN 20,000, (twenty million) (the Bonds ). The final maturity for the Bonds is due on 27 July 2019, and they may be redeemed prior to maturity by the Company. The Bonds shall bear interest at the rate equal to 3M WIBOR plus margin for each interest period. The interest shall be payable in arrears, in quarterly periods. The proceeds raised as a result of the Bonds issue will be used by the Company to finance the Issuer s new investments and to refinance the existing debt. on , 20,024 two-year unsecured series MB2 ordinary bearer bonds (the "Bonds"), with a total nominal value of PLN 20,024,000.00, were allocated. All the Bonds were subscribed and paid up. The Bonds shall bear interest at the rate equal to 6M WIBOR plus margin for each interest period. The interest shall be payable every six months. The Company will be able to purchase at least 50% of the Bonds at any interest payment date falling after a period of one year from the date of the Bonds issue. On the Central Securities Depository of Poland (KDPW) decided to register 20,024 bearer BM2 series bonds of the Company, with a nominal value of PLN 1,000 each and maturing on , issued on the basis of the Board s resolution of , to the securities depository and marked them with the code PLPOLND on , the Company issued (thirty thousand) series NS4 bearer bonds, with a nominal value of PLN (one thousand) each, with a total nominal value of PLN (thirty million). The interest rate for the Bonds shall be variable and equal to 3M WIBOR plus margin for each interest period. The interest shall be payable every 3 months. The Bonds can be redeemed in the period of 36 months from the issue date, subject to the cases of early redemption. The Company will have the right to the early redemption of the Bonds. The purpose of the Bonds issue is to raise funds for the implementation of development investments and partial refinancing of the existing debt of the Company. The bonds shall be issued as unsecured. After the issue date, a joint mortgage shall be established on the properties of the Issuer. On , the Company issued (twenty thousand) series NS5 bearer bonds, with a nominal value of PLN 1, (one thousand) each, with a total nominal value of PLN (twenty million). The interest rate for the Bonds shall be variable and equal to 6M WIBOR plus margin for each interest period. The interest shall be payable every 6 months. The Bonds can be redeemed in the period of 36 months from the issue date, subject to the cases of early redemption. The Company will have the right to the early redemption of the Bonds. The purpose of the Bonds issue is to raise funds for the implementation of development investments and partial refinancing of the existing debt of the Company. The bonds shall be issued as unsecured. After the issue date, a joint mortgage shall be established on the properties of the Company. On , the Company issued 6,799 series NS6 bearer bonds, with a nominal value of PLN (one thousand) each, with a total nominal value of PLN 6,799, The interest rate for the Bonds shall be variable and equal to 3M WIBOR plus margin for each interest period. The interest shall be payable every 3 months. The Bonds can be redeemed in the period of 36 months from the issue date, subject to the cases of early redemption. The Company will have the right to the early redemption of the Bonds. The purpose of the Bonds issue is to raise funds for the implementation of development investments and partial refinancing of the existing debt of the Company. The bonds shall be issued as unsecured. Agreement with the entity authorized to audit financial statements On , the Supervisory Board of Polnord adopted a resolution on the appointment of Deloitte Polska Sp. z o.o. Sp. k. with its registered office in Warsaw at Jana Pawła II 19 str. ( Deloitte ) as the entity authorized to review the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group

31 31 for the first half of 2016 and to audit the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for The Deloitte company is listed in the register of entities authorized to audit financial statements maintained by the National Chamber of Statutory Auditors under No. 73. On , the Company entered into an agreement with Deloitte for audit services in the scope mentioned above. The total remuneration for the above services amounts to PLN 150,000 net. Moreover, the remuneration for the audit of the annual separate financial statements of subsidiaries amounts to PLN 96,000. The Company used the services of Deloitte whose cost amounted to PLN 8,000. Polnord did not use tax advisory services. On , the Supervisory Board of Polnord adopted a resolution on the appointment of Deloitte Polska Sp. z o.o. Sp. k. with its registered office in Warsaw at Jana Pawła II 19 str. ( Deloitte ) as the entity authorized to review the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for the first half of 2015 and to audit the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for 2015.The Deloitte company is listed in the register of entities authorized to audit financial statements maintained by the National Chamber of Statutory Auditors under No. 73. On , the Company entered into an agreement with Deloitte for audit services in the scope mentioned above. The total remuneration for the above services amounts to PLN 142,000 net. Moreover, the remuneration for the audit of the annual separate financial statements of subsidiaries amounts to PLN 80,000. In 2015, the Company used the services of Deloitte, regarding preparation of a standard model of financial statements, whose cost amounted to PLN 30,000. Polnord did not use tax advisory services. ORDINARY GENERAL MEETING OF THE COMPANY Ordinary General Meeting On , the Ordinary General Meeting of the Company adopted resolutions on the following matters: approval of the Management Board s report on the operations of the Company in 2015 and approval of the Company s consolidated financial statements for the financial year 2015, approval of the Supervisory Board s report on the operations in 2015 together with an assessment of the Company's standing, covering the net loss for the financial year 2015, granting a vote of acceptance to members of the Company s governing bodies confirming the discharge of their duties in 2015, establishing the number of members and appointment of the Company s Supervisory Board for a new joint term of office, introduction of amendments to the Company s Articles of Association and adopting the uniform text of the Company s Articles of Association. More details are presented in the current report No. 29/2016 of LITIGATIONS PENDING BEFORE COURT, RELEVANT ARBITRATION AUTHORITIES, OR PUBLIC ADMINISTRATIONAL AUTHORITIES The following are the most important proceedings related to the receivables, conducted by or its subsidiaries. In the reporting period, i.e. from to there were no material changes in the current proceedings, whose total value constituted at least 10% of the Company's equity. On 25 October 2016 the Company

32 32 filed a claim against Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji in the capital city of Warsaw SA ( MPWiK ) and the Capital City of Warsaw ("the City of Warsaw") for: 1. obliging MPWiK or the City of Warsaw to make a declaration of will concerning the take-over of equipment of the rainwater drainage system (SOWD), built during construction of the investment "Miasteczko Wilanów" in Warsaw, 2. adjudging, jointly and severally from MPWiK and the City of Warsaw, the gross amount of approx. PLN 52 million, with statutory interest from the date of filing the suit to the date of payment, for which the take-over of SOWD equipment is to take place, for the benefit of the Company. The lawsuit concerns the total value of construction works and additional costs that were necessary to build SOWD equipment. The calculated value amounts to approx. PLN 52 million gross.

33 33 Table 10. Claims filed to the Court Road compensatory receivables from the Capital City of Warsaw Tort damages from the Capital City of Warsaw and State Treasury Compensation for 10 hectares of land allocated for public roads Compensation for water and sewage infrastructure from MPWiK Date of submission Claim amount Case status PLN 27 million PLN million Case pending (value of the claim increases over time) Legal - administrative proceeding pending Date of submission Claim amount Case status Value of assets in Consolidated financial statements PLN 27 million (recognised in Contingent assets) PLN million (recognised in Contingent assets) Value of assets in Consolidated financial statements Claim for compensation for non-contractual use of the water and sewage infrastructure in Miasteczko Wilanów ( ) PLN 20.1 million* Case pending (value of the claim increases over time) - Claim for take-over, for remuneration, of the water and sewage infrastructure in Miasteczko Wilanów PLN 57.3 million* Case pending PLN million, including: PLN 69.7 million receivables PLN 34.6 million inventory Claim for take-over, for remuneration, of the rain water sewage system in Miasteczko Wilanów ca. PLN 52 million Case pending * The amount of the principal claim does not include statutory interest

34 34 Description of significant pending proceedings: Claim against Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji for the take-over of equipment On filed to the District Court in Warsaw, 16th Commercial Division a claim against Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji in the capital city of Warsaw SA with its registered office in Warsaw ( MPWiK ) for the take-over, for remuneration, of a part of the water and sewage network, constructed during the investment of Miasteczko Wilanów in Warsaw. The Company demands a substituting declaration of will and a gross payment of PLN 57.3 million ("Remuneration") to. The remuneration amount consists of the value of equipment, all costs of construction and related costs of construction (excluding operating costs) incurred in relation to the investment, using the indexation based on the indicators used in construction. Legal basis for the petition: Article 49 (2) of the Civil Code and Article 31 of the Act of 7 June 2001 on public water supply and waste water drainage ("the Act"). The proceedings for the take-over, for remuneration, of a part of the water and sewage network, constructed during the investment of Miasteczko Wilanów in Warsaw is pending. The date of next hearing is scheduled for 11 April Proceeding for payment of compensation from the State Treasury tort claim with regard to the issuance of unlawful decisions On , filed a claim to the Court in Warsaw against the Capital City of Warsaw ("the City") and the State Treasury (the the Masovia Voivodeship") for indemnity of the damage incurred by the Company as a result of unlawful decisions on refusal to pay indemnity for public roads in Wilanów issued by administrative authorities (in the first instance - President of the Capital City of Warsaw and in the second instance - the Masovia Voivodeship). Since 2009, Polnord has been in the dispute with the City regarding the indemnity for the take-over by the City of ownership of land plots allocated for public roads in Miasteczko Wilanów in Warsaw. The President of the Capital City of Warsaw and the Voivode of the Masovia Voivodeship issued in decisions refusing to pay indemnities due to the Company for a total of 16 hectares of land. As a result of an appeal filed by the Company, in the judgement of the Provincial Administrative Court declared the invalidity of administrative decisions and clearly stated that the claims of Polnord for indemnities for the land allocated for public roads are fully justified under Article 98 (3) of the Real Property Management Act. The decision issued by the Provincial Administrative Court was upheld by the Supreme Administrative Court on On , the Company requested for a pre-trial settlement, however it did not take place. On , filed a lawsuit in which it claims a compensation of PLN 123 million, which, in the course of the proceedings, was corrected on the basis of the opinion of an expert appointed by the court for the amount of PLN 27 million (calculated as at ) - however, before the first hearing, the Company withdrew a lawsuit against the City, because after bringing the action, the Supreme Court issued a judgement, which indicated that the responsibility for the unlawful decisions should only be borne by the authority issuing the final decision, i.e. the second instance authority. Due to the nature of the claim the above amount has been increasing by interest. The initiation of court proceedings is connected with the pursuit by the Company of claims related to blatant and obvious delay by the City in determining and paying indemnities. The Company is convinced that its claims are justified

35 35 and makes efforts to satisfy them as soon as practicable. The Company has made many attempts to reach a compromise with the City, but they were futile. Deadline for the next hearing was set for 6 April Proceeding against the Capital City of Warsaw for payment of compensation for the expiry of the right of perpetual usufruct of plots dedicated for roads - the so-called 10 H claim On , through its special purpose vehicle Surplus Sp. z o.o. SKA with its registered office in Warsaw (a wholly owned subsidiary of Polnord), Polnord submitted a motion to Mayor of the Capital City of Warsaw, pursuant to the provision of Article 98 (1) and (3) of the Real Property Management Act, for undertaking negotiations on determination and payment of indemnities for plots located in the district of Wilanów in Warsaw totaling 10 hectares, allocated for public roads ("the Plots"). The total amount of the indemnity was estimated as PLN million in compliance with the valuation adopted in the appraisal report prepared by a certified property appraiser. Plots were allocated under valid administrative decisions related to the allocation for public roads, as a result of which the ownership of the plots was assigned to the Capital City of Warsaw ("City"), in compliance with Article 98 (1) of the Real Property Management Act which is confirmed in the following judgements of: (i) the Provincial Administrative Court in Warsaw dated and (ii) the Supreme Administrative Court dated , issued in similar cases, applicable to the factual situation. The plots were listed in the preliminary donation agreement dated , as amended, and in the donation agreement dated ; nevertheless, due to the earlier transfer under the ownership law to the City under the provision of Article 98 (1) of the Real Property Management Act, these agreements had no legal effect, as the City had already been entitled to the plots ex lege. This point of view stems directly from the above-mentioned judgments of the Provincial Administrative Court in Warsaw and the Supreme Administrative Court, according to which the ownership of plots was transferred to the City the moment the separation decisions became valid. At the same time it should be pointed out that a lack of legal effect of the above-mentioned donation agreements does not affect the City's indemnity obligation defined in the provision of Article 98 (3) of the Real Property Management Act. Surplus Sp. z o.o. SKA is entitled to file the motion as the claim for payment of compensation was filed to Surplus Sp. z o.o. SKA by Polnord and PD Development Sp. z o.o. under the resolution of the General Shareholders Meeting dated An increase in the share capital of Surplus Sp. z o.o. SKA was effected under a valid decision of the District Court for the Capital City of Warsaw of In connection with Surplus Sp. z o.o. SKA receiving the letter from the Office of the Capital City of Warsaw containing a refusal to initiate negotiations pursuant to the motion of Surplus Sp. z o.o. SKA of , on Surplus Sp. z o.o. SKA filed a motion for issuing a decision on granting the indemnity for the expiry of the perpetual usufruct rights to the President of the Capital City of Warsaw. On , Surplus Sp. z o.o. SKA sold the above receivable from the City to 10 H Sp. z o.o. with its registered office in Gdynia (wholly owned by ) which is due to participate in the proceedings initiated by Surplus Sp. z o.o. SKA. Polnord filed a complaint about lengthiness of the proceedings and handling of the case in an untimely manner. On , the Mayor of the capital city of Warsaw issued a decision refusing to pay indemnities for the expired right of perpetual usufruct of land. These decisions were upheld, after consideration of appeals of the Company, by the Governor of Masovia Voivodeship. On , merged with the company 10 H Sp. o.o. Provincial Administrative Court in Warsaw in its judgments of: and repealed all the negative decisions released by the Mayor of the capital city of Warsaw and the Governor of Masovia Voivodeship. The Court decided that the refusal to pay compensation was not justified, because the compensation should be, in fact, paid to.

36 36 The judgments are not final - the Company awaits recognition of cassation appeals filed by the Agricultural Property Agency by the Supreme Administrative Court. Case for indemnity arising from non-contractual use of water and sewage system equipment in Miasteczko Wilanów On , the Company filed a claim against MPWiK in the capital city of Warsaw for the payment of PLN 11.8 million as remuneration for the non-contractual use of water and sewage system equipment in Miasteczko Wilanów. The case concerns one of many claims related to the construction of water and sewage system (water pipes, waste water and storm sewage system) which should have been taken over by MPWiK into ownership. Moreover, expanded the range of its claim by the amount of PLN 8.3 million. The current claim amounts to PLN 20.1 million. The case is pending, the Company maintains its position. On 3 November 2016, the Court announced a judgement, in which it adjudged from MPWiK remuneration for use of this equipment, which was transferred to MPWiK within less than 3 years before filing of the claim, i.e. after 25 April 2009, and dismissed the remaining part of the case. The Court found that the claims are, for the most part, time barred. On 23 December 2016, the Company appealed against the judgment in the part rejecting the claim. The defendant appealed against the judgment in the part ordering payment of remuneration for use of this equipment by MPWiK, which was transferred to MPWiK within less than 3 years before filing of the claim, i.e. after 25 April 2009, however, the copy has not yet been delivered to the claimant. Both appeals were transferred to the Court of Appeal in Warsaw. Legal action regarding issuance of a declaration of will and a payment for the rainwater drainage system ( SOWD ) On 25 October 2016, filed a lawsuit against MPWiK SA in the Capital City of Warsaw and the Capital City of Warsaw in the District Court in Warsaw. The lawsuit concerns the take-over, for consideration, of property right of the equipment of the rainwater drainage system (SOWD) by the municipal company or the City of Warsaw, which was built by Polnord in Miasteczko Wilanów, and a claim for payment. The amount of Polnord claims reaches approx. PLN 52 million gross. SOWD was designed and built in Miasteczko Wilanów, together with other investments implemented in this area from the own funds of Prokom Investment SA, which in the agreement of 1 June 2008 commissioned to continue the works already started. At the same time, committed to Prokom Investments SA to bear the costs of maintenance and operation of SOWD and financing any works regarding SOWD. The SOWD system has been use by all housing investments operating in the so-called Miasteczko Wilanów (approx. 30 Housing Communities), Medicover Hospital, Temple of Divine Providence, the building of Wilanow District Office of the City of Warsaw and others. According to the "Act on collective water supply and discharge of wastewater" SOWD should therefore be taken over, for consideration, by the responsible local authority - in this case by MPWiK or the Capital City of Warsaw. The Company is currently waiting for the date of the first hearing. The dispute with ANR for the payment of an increased annual fee for perpetual usufruct The Group Companies are the defendant in litigation brought by the ANR, related to agreements for the right of perpetual usufruct of land in Warsaw's Wilanów. These disputes arose as a result of the terminations by the ANR of annual fees towards former perpetual usufructuaries in 2003 and towards the Group Companies in 2007 and The ANR, without waiting for the outcome of the update proceedings, filed lawsuits for payment - in the period from 1 January 2016 to 31 December 2016, the ANR brought 39 actions against the Group Companies concerning payment for

37 37 the total amount of PLN 58,008,007 with statutory interest, whereas some actions for the total amount of PLN 13,493,053 with statutory interest are related to the demand by the ANR to pay annual fees for the properties, whose perpetual usufruct - in the opinion of the Group Companies - expired pursuant to Article 98 (1) of the Property Management Act, and therefore the actions are undue. The Group believes that the terminations were ineffective. However, the Group, based on the analyses of external advisors, created provisions for liabilities connected with these disputes in the amount equal to the difference between the amount of the revised annual fee and the applicable fee until 2007 together with interest. As at , the established provisions amounted to PLN 55,630 thousand for the principal amount and PLN 34,306 thousand for interest, which means an increase by PLN 4,680 thousand and PLN 3,943 thousand respectively, in comparison to the balance as at ISSUE OF SECURITIES Issue of shares In the period from to , Entitled Individuals, referred to in the current report No. 53/2015 dated , made statements on the acquisition of a total of 60,100 series S ordinary bearer shares of the Company, as part of the conditional share capital increase under Resolution No. 1/2013 of the Extraordinary General Meeting of the Company of On , the Central Securities Depository of Poland ( KDPW ) registered 60,100 series S ordinary bearer shares of the Company, with the nominal value of PLN 2.00 each, marked with the code PLPOLND00019, and thus the share capital of the Company increased to the amount of PLN 65,386,254. The number of all the shares issued by the Company amounts to 32,693,127. After the registration of the above mentioned shares in KDPW, starting from , 32,688,727 Company shares have been quoted in the exchange trading system. Issue of bonds In the period from to , Polnord issued bonds with a total nominal value of PLN 96,823 thousand. Issue of bonds in the period from to Redemption date Date of maturity Total nominal value of bonds [PLN 000] Issuing agent ,000 Upper Finance ,024 mbank SA ,000 Noble Securities ,000 Noble Securities ,799 Noble Securities Total 96,823 Redemption of bonds In the period from to , the Company redeemed bonds with a total nominal value of PLN 39,564 thousand. Redemption of bonds in the period from to Redemption date Date of maturity Total nominal value of bonds [PLN 000] Issuing agent ,450 mbank SA ,500 SGB Bank

38 * ,114 Noble Securities ,500 mbank SA Total 39,564 *Early redemption of part of NS2 bonds 4 INDEBTEDNESS OF POLNORD SA As at , the amount of the liabilities: under issued bonds together with the repayment schedule was as follows: Table 11. Indebtedness under bonds issued by Issue date Underwriter Debt as at Redemption/ issue in 1-4Q 2016 Debt as at Bonds redemption schedule (nominal value) [mpln] Maturity Nominal value [mpln] mbank SGB Bank mbank Noble mbank mbank Noble Noble mbank mbank UpperFinance SGB Bank Noble Noble Noble Razem * *the amount does not include interest on bonds and accrued commission expenses under loans taken out (excluding interest) by and the wholly owned subsidiaries together with the repayment schedule was as follows:

39 39 Table 12. Specification of loans taken out by and its wholly owned subsidiaries Borrower Bank Type Current limit [mpln] Debt as at without interest [mpln] Schedule of capital repayment (current debt) [mpln] from 2019 Final repayment date BOŚ SA revolving Getin Noble Bank SA overdraft Debt The gross debt indicated in a balance sheet prepared as at amounted to PLN million, while the net debt amounted to PLN million. 5 INFORMATION ON THE CONCLUSION BY POLNORD SA OR ITS SUBSIDIARY OF ONE OR MORE TRANSACTIONS WITH RELATED PARTIES, IF THEY ARE INDIVIDUALLY OR JOINTLY SIGNIFICANT, AND IF THEY ARE NOT ARM'S-LENGTH TRANSACTIONS In the reporting period, there were no transactions other than arm s-length transactions. 6 INFORMATION ON LOAN OR BORROWING GUARANTEES OR SURETIES GRANTED BY POLNORD SA AND ITS SUBSIDIARIES TO ONE ENTITY IF THE TOTAL VALUE OF THE EXISTING GUARANTEES OR SURETIES REACHES AT LEAST 10% OF THE EQUITY OF POLNORD SA As at , the total value of active sureties granted by Polnord for the credit commitments of subsidiaries (Wilanów Office Park - Budynek B1 Sp. z o.o., Wilanów Office Park - Budynek. B3 Sp. z o.o., Polnord Warszawa Ząbki Neptun Sp. z o.o.) concerning their operational activity amounted to PLN 93,998 thousand. As at , had no active sureties granted to entities other than subsidiaries. The wholly owned subsidiaries of Polnord, as at , also had no active sureties granted to entities other than the subsidiaries of Polnord. The amount of active sureties as at sanctioned by the Group companies, i.e.: Polnord Łódź City Park Sp. z o.o., Polnord Gdynia Brama Sopocka Sp. z o.o., Polnord Szczecin Ku Słońcu Sp. z o.o., Polnord Gdańsk Dwa Tarasy Sp. z o.o., Polnord Olsztyn Tęczowy Las Sp. z o.o., Polnord Sopot II Sp. z o.o. for the loan commitments of totalled PLN 20,300 thousand, Finanse Spółka Jawna for the loan commitments of Wilanów Office Park - bud. B1 Sp. z o.o. totalled PLN 15,000 thousand. Polnord provides Group companies with sureties, and the Group companies provide Polnord and other Group companies with sureties securing the repayment of credit obligations related to financing development projects. However, due to the low likelihood of the outflow of funds resulting from the need to meet the commitment, the Group pursuant to IAS 37 does not reveal such contingent liabilities in off-balance sheet items. 7 INFORMATION ON CONTRACTED AND TERMINATED LOAN AGREEMENTS Finanse Spółka Jawna acts as a funding centre for the Capital Group, i.e. grants loans to the Polnord Capital Group companies and optimizes cash flows among them. The table below presents the loan agreements concluded in 2016 which are not subject to consolidation exclusions:

40 40 Lender Borrower Agreement signed on Annex in 2016 signed on Contractual repayment date Total amount of loan [PLN 000] Interest rate Receivables as at [PLN 000] Finanse Semeko Aquasfera Sp. z Spółka Jawna o.o Fixed 4344 Finanse Stacja Kazimierz Sp. z o.o. Spółka Jawna Fixed 43 Finanse Stacja Kazimierz II Sp. z Spółka Jawna o.o. S.K.A Fixed 0 Finanse Stacja Kazimierz II Sp. z Spółka Jawna o.o. S.K.A Fixed 0 Finanse Semeko Aquasfera Sp. z Spółka Jawna o.o Fixed 202 Finanse Stacja Kazimierz II Sp. z Spółka Jawna o.o. S.K.A Fixed 0 Finanse Stacja Kazimierz II Sp. z Spółka Jawna o.o. S.K.A Fixed 569 Finanse Stacja Kazimierz II Sp. z Spółka Jawna o.o. S.K.A Fixed 307 Finanse Stacja Kazimierz III Sp. z Spółka Jawna o.o. SK * Fixed 0 Stacja Kazimierz Sp. z o.o. SKA Fixed 3061 * loan taken up after the balance sweet date i.e. after Both in 2016 and in the period from the balance sheet date to the date of this Report, no loan agreement were terminated. 8 ACHIEVEMENTS IN THE FIELD OF RESEARCH AND DEVELOPMENT companies do not carry out research and development activities. 9 INFORMATION ON THE PURCHASE OF OWN SHARES In the period from the beginning of the year to , the Company did not purchase any own shares, nor does it hold any own shares. 10 INFORMATION ON DEPARTMENTS do not have any departments. 11 INFORMATION ON FINANCIAL INSTRUMENTS The main financial instruments used by the Company include bank loans and bonds. The main objective of these financial instruments is to obtain funds for the Group operations. The Group has also other financial instruments, such as trade receivables and liabilities, which arise directly in the course of its business operations, and cash. The Group does not enter into transactions involving derivatives. 12 FACTORS WHICH WILL INFLUENCE COMPANY S FINANCIAL PERFORMANCE FOR AT LEAST THE UPCOMING QUARTER The key factors which may affect the Company's financial standing in successive periods include: success of the Capital Group s strategy; timely, in line with the schedule and budget, completion of development projects and timely hand-over for use;

41 41 handing over of ready apartments (the Group recognizes revenue from sales of premises after transferring risks and benefits to clients, which always takes place not earlier than after handing over of a particular housing project for use i.e. after construction works are finished, on the basis of the handover certificate or after signing of a notarial deed); achievement of sales objectives and the intended price levels; the economic condition of the residential market, including prices of apartments; availability of external sources of financing for development companies and interest rates levels; banks policies on granting mortgage loans to natural persons, level of own contribution; the Act on the protection of the rights of buyers of residential units or single-family houses Property Development Act ; amendments to legal provisions which may affect the demand on the market of products offered by the Company; obtaining required administrative decisions within statutory time limits; government policy in terms of the change in providing support to the housing sector focused on ownership towards the housing sector focused on lease; objectives and price limits of the government programme Mieszkanie dla Młodych. 13 OTHER RISK FACTORS AND THREATS Factors with potentially negative effect on the business activity of the Company include: the banking sector s policy towards property development companies The volume of loans granted and availability of external sources of financing for development companies significantly influences the number of projects launched., acquiring funds from the bond issue, has been trying to neutralize the risk connected with the availability of bank loans. However, the change in banks' credit policy and the risk that the next possible bond issues of the Company could not take place may contribute to a reduction in the scale of projects implemented. Not without significance for the Group's activity is the level of costs related to financial debt service, the possible increase in interest rates could have negative impact on the results achieved. the banking sector s mortgage loan policy towards natural persons The recommendations issued by the Polish Financial Supervision Authority in recent years have significantly affected the mortgage loan market. Recommendations S II and S III introduced stricter requirements for borrowers. The purpose of Recommendation T is to improve the quality of risk management in banks and to prevent borrowers from taking on excessive debt. Recommendation T set the credit worthiness level by defining, among other things, the relation between loan installments and monthly income as the indicator of the maximum loan amount. Recommendation S II influences how banks calculate their customers credit worthiness by limiting the amount of the available loans, in particular foreign currency loans. Recommendation S III introduced a mandatory 5% deposit starting from , which is ultimately expected to reach 20% in At the same time, banks cannot grant loans indexed or denominated in foreign currencies, and the maximum repayment period may not exceed 35 years. These regulations, as well as any other which may be issued in the future, could limit access to mortgage loans which may contribute to a decrease in the effective demand for flats. prices of flats The main factor which guarantees a successful completion of an investment is the sale of completed development projects (flats, houses) at the planned price, ensuring the expected margin for the developer. There is a risk that the Group may not sell all of the completed investments for the planned prices. possible loss of qualified subcontractors The Group companies implementing development projects do not carry out construction activities, but cooperate with general contractors. Deterioration of the financial situation in the construction industry can lead to the collapse of some companies. These phenomena cause limitations in the availability of services, and thus can cause the growth of the costs of the Company s operations.

42 42 acquiring land for prospective property development projects When acquiring land for new investments, it cannot be ruled out that the implementation of projects may be delayed or land preparation costs may increase. This may lead to an investment being less profitable than originally expected. instability of the tax system One of the characteristics of the tax system is its instability. Tax regulations change very frequently. In addition, tax authorities use both the tax regulations as well as tax interpretations issued by other authorities or court rulings. Such interpretations or judgments of other revenue authorities or courts are often inconsistent in terms of rulings and are subject to changes depending on when and where a given decision was interpreted or issued. Therefore, the Company may be obliged to pay significant amounts of extra tax, interest or fines. obtaining adequate administrative permits To run a successful business in the property development industry, permits, decisions or administrative approvals required for implementing construction projects must be obtained. There is a risk that the absence or withdrawal of adequate administrative permits during the implementation of a project may negatively affect the capacity to implement or complete property development projects. macroeconomic factors A slowdown of the economic growth, stagnation of remunerations and increase in the effective tax rate as well as a deterioration of the situation on the labour market, limitations of the government programmes supporting acquisition of new flats may all translate into a deterioration of the public sentiment and, therefore, on the purchasing power of the society, leading to a drop in demand for the products offered by the Group. 14 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE, NOT INCLUDED IN THIS REPORT, THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE FINANCIAL RESULTS The following events occurred after the balance sheet date: On , Stacja Kazimierz sp. z o.o. SKA was transformed into a limited partnership. is a limited partner. On , the Management Board decided to liquidate the representative office in Moscow. In the opinion of the Management Board, taking into account the ongoing process of winding up of the Company's operations in Russia, because of the limited possibilities of continuing investments and implementing new investments, as well as the current economic situation in this area, maintaining the representative office in Moscow is impractical and economically unreasonable. The Company, in accordance with the adopted strategy, intends to develop the development projects and new investments in large cities in the country. On , an allocation of 14,743 3-year NS7 series ordinary bearer bonds with a total nominal value of PLN 14,743, was made. On , the Company received a notification from Aegon Powszechne Towarzystwo Emerytalne SA with headquarters in Warsaw, acting on behalf of the Aegon Otwarty Fundusz Emerytalny, regarding the fact of increasing above the threshold of 5% in the total number of votes in the Company by the Fund. The total number of votes in the Company was increased as a result of acquisition transaction of the Company shares on , settled on Prior to change of share, the Fund held a total of 1,629,095 shares, constituting 4.98% of the share capital of the Company, and 4.98% in the total number of votes in the Company. According to the state as at , the Fund held 2,499,850 shares, constituting 7.65% of the share capital of the Company, and 7.65% in the total number of votes in the Company.

43 43 On , the Company received a notification from Towarzystwo Funduszy Inwestycyjnych PZU SA with headquarters in Warsaw, acting on behalf of the investment funds managed by itself, regarding the fact of increasing above the threshold of 10% in the total number of votes in the Company by the Funds TFI PZU. The 10% threshold in the total number of votes in the Company was exceeded as a result of the settlement, on , of acquisition of 420,000 Company s shares in regular trading on Prior to change of share, Funds TFI PZU held a total of 3,267,508 shares, constituting 9.99% of the share capital of the Company, and 9.99% of the total number of votes in the Company. According to the state as at , Funds TFI PZU hold a total of 3,687,508 shares, constituting % of the share capital of the Company, and % in the total number of votes in the Company. V STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE 1. RULES OF CORPORATE GOVERNANCE BY WHICH THE COMPANY IS BOUND AND THE LOCATION WHERE THE TEXT OF THE SET OF RULES IS AVAILABLE TO THE PUBLIC In 2016, the Company applied the recommendations and rules included in the document Code of Best Practice for WSE Listed Companies The text of the corporate governance rules is publicly available on the website which is the official website of the Warsaw Stock Exchange, and discusses the rules of corporate governance for the listed companies. 2. INFORMATION ON THE EXTENT TO WHICH THE COMPANY DIVERGED FROM THE RULES OF CORPORATE GOVERNANCE, SPECIFICATION OF SUCH PROVISIONS AND REASONS FOR NON-COMPLIANCE In 2016, the Company fully applied most of the rules contained in the Code of Best Practice for WSE Listed Companies 2016, except for the following rules, which are not applied consistently or temporarily or which are applied to a limited extent: I.Z.1.3. division of tasks and responsibilities between the board members drawn up in accordance with the II.Z.1 principle The principle is not applied. Comment: Currently, the Management Board of the Company consists of 3 Board Members. The new President of the Management Board of the Company was appointed to the Management Board with effect from 1 February The chart presenting the division of duties and responsibilities among the Board Members has been drawn up in accordance with the principle II.Z.1. I.Z.1.7. information on the company's strategy and its financial results published by the company The principle is not applied. Comment: The Company published the new Strategy. I.Z financial projections - if the company decided to publish them - published during at least the last five years, along with information about the extent of their implementation The principle does not apply to the company. Comment: The company did not decide to publish financial projections. I.Z.1.15 information containing the description of the company's diversity policy in relation to the company s governing bodies and its key managers; the description should take into account such elements of the diversity policy, gender, course of education, age, work experience, and indicate the objectives of the diversity policies used and the manner of its implementation during a reporting period; if the company has not developed and implemented the diversity policy, it publishes on its website an explanation for the decision The principle is not applied.

44 44 Comment: Currently, the Company has not adopted the diversity policy applicable to the company s governing bodies and its key managers. When selecting the Members of the Management Board, the Members of the Supervisory Board and key managers, the most important are such criteria as knowledge, experience, skills and abilities needed to perform particular functions and occupy positions in the Company. The Company does not rule out the establishment of detailed principles of the diversity policy in the future. I.Z.1.16 information on the planned transmission of general meetings - no later than 7 days before the date of the general meeting The principle is not applied. Comment: I.Z.1.16 principle and the related I.Z.1.20 principle and the IV.Z.2 principle - The Company currently has no plans regarding transmission of general meetings in real time; recording of general meetings in the form of audio or video files and placing them on the website has not been planned by the Company as well. According to the Company, due to the current shareholding structure, as well as the provisions of the Articles of Association providing for the possibility of conducting general meetings both at the Company's headquarters as well as in Warsaw, the interests of all shareholders are sufficiently protected. Documentation and the course of previous general meetings provide transparency of the Company and the applicable rules of participation in general meetings allow for proper and effective implementation of the rights arising from shares. Moreover, the application of the above mentioned principles would also be connected with the necessity to incur additional costs by the Company. The content of adopted resolutions is published immediately in the form of current reports. The company, however, does not rule out the application of the above mentioned principles in the future. I.Z.1.20 Recording of general meetings in the form of audio or video files The principle is not applied. Comment: I.Z.1.20 principle and the related I.Z.1.16 principle and the IV.Z.2 principle - The Company currently has no plans regarding transmission of general meetings in real time; recording of general meetings in the form of audio or video files and placing them on the website is not planned by the Company as well. According to the Company, due to the current shareholding structure, as well as the provisions of the Articles of Association providing for the possibility of conducting general meetings both at the Company's headquarters as well as in Warsaw, the interests of all shareholders are sufficiently protected. Documentation and the course of previous general meetings provide transparency of the Company and the applicable rules of participation in general meetings allow for proper and effective implementation of the rights arising from shares. Moreover, the application of the above mentioned principles would also be connected with the necessity to incur additional costs by the Company. The content of adopted resolutions is published immediately in the form of current reports. The company, however, does not rule out the application of the above mentioned principles in the future. II.R.3. Acting as the board member is the main area of the professional activity of a board member. Additional professional activity of a board member may not lead to such a commitment of time and effort to adversely affect the proper performance of their function in the company. In particular, a board member should not be a member of the boards of other entities, if the time to perform the functions in other entities prevents proper performance of duties in the company. The principle is not applied. Comment: carries out its activities in the scope of implementation of development projects through special purpose vehicles established by, independently or with partners. II.Z.I Internal division of responsibilities for different areas of the company's operations between board members should be formulated clearly and transparently, and the scheme of the division should be available on the company's website. The principle is not applied. Comment: Currently, the Management Board of the Company consists of 3 Board Members. The new President of the Management Board of the Company was appointed to the Management Board with effect from 1 February The

45 45 chart presenting the division of duties and responsibilities among the Board Members has been drawn up in accordance with the principle II.Z.1. II.Z.2. Participation of board members of the company in management boards or supervisory boards of companies outside the capital group of the company requires the consent of the supervisory board The principle is not applied. Comment: Internal regulations currently applicable in the Company and the agreements with the Management Board Members do not contain these restrictions. III.R.1. The company distinguishes the organizational units responsible for the performance of tasks in the individual systems or functions within its structure, unless distinguishing organizational units is not justified because of the size or type of business carried out by the company The principle is not applied. Comment: This principle is applied to a limited extent. The Company has not distinguished the organizational units responsible for the performance of tasks in the individual systems or functions within its structure, however, within the current organizational structure, the above mentioned tasks are performed within each of the organizational divisions. III.Z.2. Subject to the III.Z.3 principle, those responsible for risk management, internal audit and compliance report directly to the President or another member of the board, and also have the opportunity of reporting directly to the supervisory board or audit committee. The principle is not applied. Comment: This principle is applied to a limited extent. The Company does not have separate units responsible for risk management, internal audit or compliance; the persons responsible for these functions have not been designated as well. However, within the current organizational structure, the above mentioned tasks are performed within each of the organizational divisions. III.Z. 3 With regard to a person in charge of the internal audit and other persons responsible for carrying out its tasks, the principles of independence set out in the universally recognized international standards of professional practice of internal audit are applicable. The principle is not applied. Comment: This principle is applied to a limited extent. The Company does not have separate units responsible for risk management, internal audit or compliance; the persons responsible for these functions have not been designated as well. However, within the current organizational structure, the above mentioned tasks are performed within each of the organizational divisions. IV.R.2. If justified due to the shareholding structure or reported expectations of shareholders to the company, if the company is able to provide the technical infrastructure necessary for the smooth conduct of a general meeting by means of electronic communication, it should enable shareholders participation in a general meeting by means of such measures, in particular through: 1) transmission of general meetings in real time, 2) real-time bilateral communication where shareholders may take the floor during a General Meeting from a location other than the General Meeting, 3) Exercise of the voting right, in person or by proxy, in the course of the General Meeting. The principle is not applied. Comment: This principle is applied to a limited extent. In the opinion of the Management Board, the above rule is not applied due to the logistical complications and the risks, both technical and legal, to the proper and efficient conduct of general meetings, in particular real risk of such technical disturbances which could prevent continuous, bilateral communication with shareholders located in places other than the meeting room. The Company believes that the currently applicable rules of participation in general meetings allow for proper and effective implementation of the rights arising from shares and sufficiently protect the interests of all shareholders, including minority shareholders. In

46 46 addition, application of the above mentioned rule would be connected with the necessity to incur additional costs by the Company. IV.R.3. Where securities issued by a company are traded in different countries (or in different markets) and in different legal systems, the company should strive to ensure that corporate events related to the acquisition of rights by shareholders take place on the same dates in all the countries where such securities are traded. The principle does not apply to the company. Comment: Securities issued by are listed only in the domestic market. IV.Z.2. If justified due to the shareholding structure of the company, the company provides a widely accessible transmission of general meetings in real time The principle is not applied. Comment: IV.Z.2 principle and the related I.Z.1.16 principle and the I.Z.1.20 principle - The Company currently has no plans regarding transmission of general meetings in real time; recording of general meetings in the form of audio or video files and placing them on the website is not planned by the Company as well. According to the Company, due to the current shareholding structure, as well as the provisions of the Articles of Association providing for the possibility of conducting general meetings both at the Company's headquarters as well as in Warsaw, the interests of all shareholders are sufficiently protected. Documentation and the course of previous general meetings provide transparency of the Company and the applicable rules of participation in general meetings allow for proper and effective implementation of the rights arising from shares. Moreover, the application of the above mentioned principles would also be connected with the necessity to incur additional costs by the Company. The content of adopted resolutions is published immediately in the form of current reports. The company, however, does not rule out the application of the above mentioned principles in the future. V.R.1 Member of the management board or supervisory board should avoid taking up professional or non-professional activity that could lead to a conflict of interest or adversely affect his reputation as a member of the company s governing body, and, in the case of a conflict of interest, they should immediately reveal it. The principle is not applied. Comment: Currently, the Company has not adopted internal regulations in relation to members of the management or supervisory board specifying the criteria and circumstances that could cause a conflict of interest, as well as procedures to prevent conflicts of interest. The Company will review the existing practices and does not rule out the possibility of implementing appropriate internal regulations in the future. V.Z.6. The Company determines the criteria and circumstances in the internal regulations that can result to a conflict of interest in the company, as well as the rules of conduct in the face of conflict of interest or the possibility of its occurrence. Internal regulations of the company take into account, inter alia, how to prevent, identify and solve conflicts of interest, as well as rules of excluding a member of the management or supervisory board from participation in dealing with matters covered by or at risk of conflict of interest. The principle is not applied. Comment: Currently, the Company has not adopted internal regulations specifying the criteria and circumstances that could cause a conflict of interest in the company, as well as rules of conduct in the face of conflict of interests or the possibility of its occurrence. The Company will review the existing practices and does not rule out the possibility of implementing appropriate internal regulations in the future. VI.R.1. The remuneration of board members and key managers should result from the adopted remuneration policy The principle is not applied. Comment: This recommendation is not applied by the Company in whole, because there are no regulations regarding the remuneration policy for members of governing bodies. Remuneration of Members of the Management Board is

47 47 determined by the Company s Supervisory Board. The Supervisory Board Members receive a monthly lump sum remuneration, the amount of which is adopted by the general meeting of the Company. VI.R.3. If there is remuneration committee in the supervisory board, the II.Z.7 principle applies in terms of its operation. The principle is not applied. Comment: There is no remuneration committee in the Supervisory Board of the Company. VI.Z.1. Incentive scheme should be designed in such a way so that it determines the level of remuneration of the board members of the company and its key managers based on the real, long-term financial situation of the company as well as long-term growth in value for shareholders and stability of the company s operations. The principle does not apply to the company. Comment: The incentive scheme was introduced by the Company in 2013 and is currently completed in the scope of issuing subscription warrants to entitled individuals pursuant to the Regulations adopted by the Supervisory Board of the Company. VI.Z.2. To link the remuneration of board members and key managers with long-term business and financial objectives of the company, the period between the allocation of options or other instruments linked to shares of the company under the incentive program and the possibility of their implementation should be a minimum of 2 years. The principle does not apply to the company. Comment: The incentive scheme was introduced by the Company in 2013 and is currently completed in the scope of issuing subscription warrants to entitled individuals pursuant to the Regulations adopted by the Supervisory Board of the Company. The right to acquire series S shares could be exercised by an entitled individual not later than until VI.Z.4. The Company, in the report on its operations, presents a statement on the remuneration policy, including at least: 1) general information about the remuneration system adopted by the company, 2) information on the conditions and amount of remuneration of each of the board members, broken down into fixed and variable components of remuneration, indicating the key parameters determining the variable remuneration components and principles of severance payments and other payments due to termination of employment, orders, or other legal relationship of a similar nature - separately for the company and each entity within the capital group, 3) information on non-financial remuneration components that individual board members and key managers are entitled to, 4) indication of significant changes, which in the past financial year occurred in the remuneration policy, or information about their absence, 5) assessment of the functioning of the remuneration policy for the realization of its objectives, in particular longterm growth in value for shareholder and stability of the company. The principle is not applied. Comment: This recommendation is not applied by the Company in whole, because there are no regulations regarding the remuneration policy for members of governing bodies. Remuneration of Members of the Management Board is determined by the Company s Supervisory Board. The Supervisory Board Members receive a monthly lump sum remuneration, the amount of which is adopted by the general meeting of the Company. 3. OPERATION OF THE GENERAL MEETING AND ITS ESSENTIAL RIGHTS, RIGHTS OF THE SHAREHOLDERS AND THE MODE OF EXERCISING THESE RIGHTS The General Meeting may be ordinary or extraordinary. As the Company's governing body, it operates according to the mode and procedures defined in the provisions of the Commercial Companies Code, Articles of Association, the Company's rules of corporate governance and the provisions of the Rules and Regulations of the General Meeting,

48 48 adopted by way of Resolution No. 1/2010 of the 24th Extraordinary General Meeting of of , amended by Resolution No. 3/2013 of the 29th Extraordinary General Meeting of of The responsibilities of the General Meeting include: examining and approving the Company's management reports and financial statements, distributing profits and covering losses and allocating resources to the supplementary and reserve fund, granting discharge from liability for the fulfilment of their duties to the members of the Supervisory Board and the Management Board, appointing and dismissing Supervisory Board members, increasing or decreasing the share capital, amending the Company's Articles of Association, dissolution or liquidation of the Company, examining and deciding on requests submitted by the Supervisory Board, adopting the Rules and Regulations of the General Meeting, any other business stipulated by the provisions of the Commercial Companies Code. The Ordinary General Meeting takes place in the Company's registered office or in Warsaw and is convened by the Company's Management Board not later than six months after the end of each financial year, or by the Company's Supervisory Board, if the Management Board does not convene the Extraordinary General Meeting within the said term. Participation in the General Meeting is only possible for persons who are the Company's shareholders 16 days before the date of the General Meeting ( the Record Date ), provided that the shareholders provide the entity maintaining their securities account with a request for issuing a personal certificate regarding the right to participate in the General Meeting in the period between the announcement of convening the General Meeting and the first weekday following the Record Date, as well as shareholders whose shares, in the form of a document, are submitted in the Company's registered office not later than on the day of registering participation in the General Meeting and are not collected before the end of that day. Members of the Company's Management Board and Supervisory Board who are not shareholders may attend the General Meeting but do not have the right to take the floor. At the invitation of the Company's Management Board or Supervisory Board, other persons may participate in the meeting. The Company's Extraordinary General Meeting is convened, when required, by the Management Board, on its own initiative, or at the request of shareholders representing at least 1/20 of the share capital. The Extraordinary General Meeting may be also convened by: The Supervisory Board, if it deems it advisable, and by shareholders representing at least half of the share capital or at least half of the total votes in the Company. The General Meeting has a quorum irrespectively of the number of the represented shares, unless the provisions of the Commercial Companies Code stipulate otherwise. Resolutions are passed by an absolute majority of valid votes, unless the provisions of the Commercial Companies Code stipulate otherwise. The vote may take place using the traditional method, voting cards or using a computer system for casting and counting votes. The General Meeting is opened by the Chairman of the Supervisory Board or a person authorised by the Chairman, who immediately orders that a Chairman of the Meeting is appointed. After signing and checking the attendance list, the Chairman of the Meeting confirms that the General Meeting has been convened correctly and that it has a quorum, and presents the agenda, which is then subject to vote. The Chairman of the Meeting presides over the meeting according to the adopted agenda, universally binding provisions, the Company's Articles of Association, the adopted rules of corporate governance and the Rules and Regulations of General Meetings of. Without the consent of the General Meeting, the Chairman does not have the right to remove or change the sequence of any items on the agenda. The General Meeting may pass a resolution on cancelling specific items from the agenda, and on changing the sequence of items on the agenda, except for removing an item included in the agenda at the request of a shareholder.

49 49 During the General Meeting, the speakers may address only the issues included in the agenda and currently discussed. Every shareholder has the right to ask questions on every issue included in the agenda. The members of the Management Board and the Supervisory Board are obliged to provide answers and explanations to the asked questions, if it is relevant for the assessment of an issue on the agenda. A request regarding formal issues can be submitted by every shareholder. In formal issues, the Chairman of the Meeting allows the participants to speak out of order. Requests regarding formal issues mean requests regarding the procedure of the meeting and of the vote. The General Meeting adopts resolutions concerning issues included in the agenda, after voting. The vote is open, subject to the relevant provisions of the Articles of Association and the Commercial Companies Code. Resolutions adopted by the General Meetings are published on the website. 4. COMPOSITION, CHANGES IN THE PERIOD AND PRINCIPLES OF OPERATION OF THE COMPANY'S MANAGING AND SUPERVISORY BODIES AND THEIR COMMITTEES Supervisory Board of the Company On , the 25 th General Shareholders Meeting of the Company (the GSM ) appointed a Supervisory Board for a new three-year joint term of office. As at , the Company's Supervisory Board was composed of: Czcibor Dawid Chairman of the Supervisory Board Jerzy Bartosiewicz Vice Chairman of the Supervisory Board Łukasz Adamczyk Member of the Supervisory Board Marek Dietl Member of the Supervisory Board Agata Gola Member of the Supervisory Board Julia Walicka - Ostachowska Member of the Supervisory Board Maciej Stradomski Member of the Supervisory Board Mr. Łukasz Adamczyk, Mr. Jerzy Bartosiewicz, Mr. Marek Dietl, Mr. Maciej Stradomski and Mrs. Julia Walicka Ostachowska made statements about meeting the independence criteria, in line with 13 (5) of the Company s Articles of Association - independence criteria referred to in Appendix II to the Guideline of the European Commission of 15 February 2005 on the role of non-executive directors or supervisory directors of listed companies and a (supervisory) Board Committee. In the period from to , the following changes in the composition of the Supervisory Board took place: Date Description Name and Surname Expiry of the term of office of the Supervisory Board Appointment of members of the Supervisory Board for a new term of office Agata Gola; Jerzy Bartosiewicz; Łukasz Adamczyk; Marek Dielt; Dawid Czcibor; Maciej Stradomski; Julia Walicka - Ostachowska The Supervisory Board may be composed of 5 to 7 members The current three-year term of office of the Supervisory Board of Polnord commenced on In the period from the balance sheet date of this Report, there were no changes in the composition of the Supervisory Board.

50 50 Principles of operation of the Supervisory Board According to the Company s Articles of Association, the Supervisory Board consists of no less than 5 and not more than 7 members, appointed by the General Meeting, whose term of office is three years. In the case of resignation of any member of the Supervisory Board, the Management Board shall promptly convene the General Meeting in order to appoint in its place a new member of the Supervisory Board in accordance with the principles set out above. Actions undertaken by the Supervisory Board shall be valid provided that the Supervisory Board consists of at least 5 persons. The Supervisory Board operates under the provisions of the Commercial Companies Code, the provisions of the Company's Articles of Association and the Rules and Regulations of the Supervisory Board, which specifies its organisation and activities, and according to the Code of Best Practice for WSE Listed Companies. The Supervisory Board supervises the Company in all areas of its operation. The Supervisory Board passes resolutions or issues statements on matters within its scope of competence, according to the Company's Articles of Association and under the procedure stipulated by the provisions of the Articles of Association or the applicable legal regulations. The Supervisory Board holds its meetings regularly during the year. In addition, according to Article 388(3) of the Commercial Companies Code and 17(2) and (3) of the Company's Articles of Association, the Supervisory Board passes resolutions by way of a correspondence vote (in writing) or using means of direct telecommunication. The Management Board provides the Supervisory Board with exhaustive information on all important matters regarding the Company's operation. Audit Committee As at , the Audit Committee was composed of: Jerzy Bartosiewicz; Agata Gola; Maciej Stradomski. Mr. Jerzy Bartosiewicz and Mr. Maciej Stradomski are the members of the Audit Committee who meet the independence criteria and additional requirements specified in the Code of Best Practice for WSE Listed Companies In 2016, the composition of the Audit Committee changed as follows: Date Opis zdarzenia Imię i Nazwisko Dismissal from the Audit Committee Artur Jędrzejewski Within the scope of responsibilities of the Committee are advisory and consultancy tasks in the area of competence of the Supervisory Board, in relation to the fields, as described below, in which the Company and to the extent permitted by the law the Polnord Capital Group operates: financial reporting process, financial planning annual and quarterly, implementation of financial plans submitted to the Supervisory Board, examination of financial statements by the statutory auditor, system for internal and external control, including internal audit system for risk management.

51 51 The scope of responsibilities of the Audit Committee can include other tasks ordered by the Supervisory Board. Management Board of As at , the Company's Management Board was composed of: MANAGEMENT BOARD Dariusz Krawczyk President of the Management Board Jerzy Kamiński Member of the Management Boardu Jerzy Kotkowski Member of the Management Board According to the Company's Articles of Association, the Company s Management Board can be composed of two to six members, appointed for a joint three-year term of office. The current three-year term of office of the Board began on In the period from the balance sheet date to the date of this Report, there were no changes in the Management Board. Principles of operation of the Management Board, including principles for appointing and dismissing management staff, and the rights of management staff The Company's Management Board operates based on the provisions of the Commercial Companies Code, the provisions of the Company's Articles of Association and the Code of Best Practice for WSE Listed Companies. The Management Board is the Company's executive body; it manages the Company and represents it before third parties. All members of the Management Board are obliged and entitled to jointly manage the Company's affairs. The Management Board has the right to make all decisions that are not reserved for other bodies of the Company. The Management Board is obliged to manage the Company's assets and affairs with due diligence required in business, to observe the law, the provisions of the Company's Articles of Association and the resolutions adopted by the General Meeting and the Supervisory Board, as part of their responsibilities. The rules for appointing the Company's Management Board are specified in Article 368(3) and (4) of the Commercial Companies Code and (10)(2) of the Company's Articles of Association. The Management Board may be appointed from among the shareholders or include other people. The Supervisory Board appoints the President of the Management Board and, at his request, other members of the Management Board. The mandate of a member of the Management Board expires, at the latest, on the day on which the General Meeting approves the financial statements for the last full financial year in which they performed the duties of a member of the Management Board. According to the Company's Articles of Association, the Management Board may be composed of two to six members, appointed for a joint three-year term of office. The number of Management Board members is specified by the Supervisory Board. During the meeting held on , the Company's Supervisory Board appointed the Management Board for another joint three-year term of office.

52 52 Representations and signing on behalf of the Company require joint action by two members of the Management Board or joint action of a member of the Management Board and a proxy. Resolutions of the Management Board are adopted by an absolute majority of votes. In the case of a tied vote, the President of the Management Board has the decisive vote. A member of the Management Board, pursuant to Article 370(1) of the Commercial Companies Code and 10(5) of the Company s Articles of Association, may be dismissed or suspended by the Supervisory Board at any time for valid reasons. The right to decide about the share issue or redemption of shares is regulated by the provisions of the Commercial Companies Code and Company s Articles of Association. 5. DESCRIPTION OF THE MAIN CHARACTERISTICS OF THE COMPANY'S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE PROCESS OF PREPARING FINANCIAL STATEMENTS To ensure reliability of the produced financial statements, the Company has implemented an internal control and risk management system, and continues to develop it. This system includes the following areas: Accounting, Reporting and consolidation, Controlling, Financial forecasts and analyses. As part of the internal control and risk management system, the Company has implemented a number of organisational solutions and procedures by introducing corporate standards that ensure the effectiveness of control, identification and elimination of risks. These solutions include: Organisational and financial separation of property development projects by establishing special purpose vehicles; Standardising the Accounting Policy, reporting principles and accounting records in the Capital Group; Using an organised financial reporting model for internal and external requirements; Clear designation of duties and responsibilities of financial staff, middle and senior management; Regular and formal verification of budget assumptions and financial forecasts; Having the financial statements reviewed and audited by a statutory auditor; Creation of the department of internal control and ownership supervision within the Capital Group s structure. The preparation of financial statements and current management reporting of the Company is the responsibility of highly qualified employees of the financial and accounting department. By creating the opportunity to participate in specialist training and higher education, the Company ensures that its employees constantly improve their qualifications, are familiar with the latest requirements imposed by external regulations, as well as solutions and tools used in the general area of finance. In the process of preparing its financial statements, the Company uses dedicated IT tools which allow for constant monitoring of accounting operations and controlling calculations. The main IT systems used in the Capital Group include: Integrated IT system for recording transactions according to the accounting policy adopted by the Company (Asseco Softlab ERP); Electronic circulation log for purchase invoices; Calculation package for property development investments, including the budget of an investment (revenue, costs and cash flow) and its performance; Consolidation package for preparing the Capital Group's financial statements.

53 53 From the perspective of minimising the risk of an error and the reliability of the produced financial statements, the Company's Controlling Department plays a key role in the Capital Group; in cooperation with the Company's middle and senior management staff and governing bodies of the Capital Group's companies, it verifies, reconciles and consolidates basic financial data regarding the Capital Group's property development investments. The reporting system developed is a tool which allows the Company's Management Board to regularly obtain information supporting the decision-making process regarding the executed property development projects and key business areas, and to identify risks which should be disclosed in the financial statements. It includes cyclical reports on costs, sales and stages of completion of individual projects. According to the applicable laws, the Company's financial statements are reviewed or audited by an independent statutory auditor who is confirmed to have high qualifications. The independent statutory auditor is selected by the Company's Supervisory Board, based on an authorisation of the General Meeting. 6. SHAREHOLDERS HOLDING, DIRECTLY OR INDIRECTLY THROUGH SUBSIDIARIES, SIGNIFICANT BLOCKS OF SHARES According to the Company s knowledge, as at , the following shareholders held shares of vested with at least 5% of votes at the General Meeting of the Company: Shareholding of as at * Shareholder Number of Nominal value of % of shares/votes shares [PLN] capital/votes Nationale-Nederlanden Otwarty Fundusz Emerytalny 2,428,258 4,856, % Powszechna Kasa Oszczędności Bank Polski SA 2,345,893 4,691, % Bank Gospodarstwa Krajowego 2,086,890 4,173, % Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) 1,818,437 3,636, % Briarwood Capital Partners LP 1,634,941 3,269, % Others shareholders in total 22,378,708 44,757, % Total 32,693,127 65,386, % * according to the information provided to the Company by Shareholders pursuant to art. 69 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading and Public Companies; In the period from to , the following changes took place in the Company s Shareholding. Date of notification to the Company Name of the notifier Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) Description of the event Exceeding the threshold of 5 % in the total number of votes The 5% threshold in the total number of votes in Polnord was exceeded as a result of the settlement, on 31 March 2016, of acquisition of 187,215 Company shares in regular trading at the Warsaw Stock Exchange on 29 March 2016 (which was reported to the Company on 4 April 2016). Before the event causing the obligation of notification, investment funds managed by TFI PZU SA held a total of 1,631,222 shares, constituting % of the share capital of the Company, vested with 1,631,222 votes, which constituted % in the total number of votes in the Company. After the change, investment funds managed by TFI PZU SA hold a total of 1,818,437 shares, constituting % of the share capital of the Company, vested with 1,818,437 votes, which constitutes % in the total number of votes in the Company.

54 Briarwood Capital Partners LP Nationale-Nederlanden Otwarty Fundusz Emerytalny ALTUS Towarzystwo Funduszy Inwestycyjnych SA (investment funds managed by ALTUS TFI SA) Decrease of share in the total number of votes in Polnord by Briarwood Capital Partners LP On received from Briarwood Capital Partners LP ( BCP ) a notification about the reduction in share in the voting rights at the general meeting of the Company to 5%. The change resulted from selling, by an open market sale, 5,450 shares of the Company within the regulated trading market of Warsaw Stock Exchange on Prior to the change, BCP owned 1,640,391 shares, which constituted 5.02% of share in the Company s share capital and 5.02% of share in the voting rights at the general meeting. Following the change of share, BCP owns 1,634,941 shares which constitute 5.00% of share in the Company s share capital and 5.00% of share in the voting rights at the general meeting of the Company. Exceeding the threshold of 5% in the total number of votes in Polnord by Nationale- Nederlanden Open Pension Fund On 17 June 2016 received from Nationale-Nederlanden Open Pension Fund (the Fund ) a notification on exceeding the threshold of 5% in the total number of votes in Polnord by the Fund. The 5% threshold in the total number of votes in Polnord was exceeded as a result of the purchase of Polnord shares in transactions executed on the Warsaw Stock Exchange, settled on 14 June Before the acquisition, the Fund held 1,628,199 shares constituting 4.98% of the Company s share capital, vested with votes, which constituted 4.98% in the total number of votes in Polnord. As at 17 June 2016, the securities account of the Fund shows 2,428,258 shares constituting 7.43% of the Company s share capital, vested with votes, which constitute 7.43% in the total number of votes in Polnord. Decrease in the ownership of shares of the Company below the 5% threshold in the total number of votes in the Compnay Decrease of share in the total number of votes resulted from the settlement, on 19 December 2016, of disposal of 302,439 Company shares in regular trading. Prior to change of share, investment funds managed by ALTUS TFI held a total of 1,678,038 shares, constituting 5.13% of the share capital of the Company, vested with 1,678,038 votes, which constituted 5.13% in the total number of votes in the Company. After the change, investment funds managed by ALTUS TFI hold a total of 1,375,599 shares, constituting 4.21% of the share capital of the Company, vested with 1,375,599 votes, which constitutes 4.21% in the total number of votes in the Company. After the balance sheet date, the following changes took place in the Company s Shareholding: Date of notification to the Company Name of the notifier Description of the event Exceeding the threshold of 5% in the total number of votes in Polnord The total number of votes in the Company was increased as a result of acquisition transaction of Polnord shares on , settled on Aegon Powszechne Towarzystwo Emerytalne SA Prior to change of share, Fund held a total of 1,629,095 shares, constituting 4.98% of the share capital of the Company, which constituted 4.98% in the total number of votes in the Company. According to the state for , the Fund held 2,499,850 shares, constituting 7.65% of the share capital of the Company, which constituted 7.65% in the total number of votes in the Company.

55 Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) Exceeding the threshold of 10% in the total number of votes in Polnord The total number of votes in the Company was increased as a result of the settlement, on , of acquisition of 420,000 Polnord shares in regular trading at the Warsaw Stock Exchange on Prior to change of share, Funds TFI PZU held a total of 3,267,508 shares, constituting 9,99% of the total number of votes in the Company. According to the state for , Funds TFI PZU hold a total of 3,687,508 shares, constituting % of the share capital of the Company, which constitutes % in the total number of votes in the Company. 7. HOLDERS OF SECURITIES VESTED WITH SPECIAL RIGHTS OF CONTROL The Company did not issue any securities vested with special rights to control the Company. 8. LIMITATIONS REGARDING THE RIGHT TO VOTE, SUCH AS A RESTRICTED RIGHT TO VOTE BY HOLDERS OF A SPECIFIC SHARE OR NUMBER OF VOTES, TIME RESTRICTIONS ON THE RIGHT TO VOTE OR PROVISIONS UNDER WHICH, IN COOPERATION WITH THE COMPANY, CAPITAL RIGHTS LINKED TO SECURITIES ARE SEPARATED FROM THE HOLDING OF SECURITIES In the Company, there are no limitations regarding the right to vote, such as a restricted right to vote by holders of a specific share or number of votes, time restrictions on the right to vote or provisions under which, in cooperation with the Company, capital rights linked to securities are separated from the holding of securities. 9. RESTRICTIONS ON THE TRANSFER OF THE OWNERSHIP TITLE TO THE COMPANY'S SECURITIES According to Article 337 of the Commercial Companies Code, in connection with 8(1) of the Company's Articles of Association, the Company's shares may be transferred without any limitations. The only limitations introduced by the Company on the transfer of the ownership title to the Company's securities involve the subscription warrants issued under the Management Options Programme. According to the provisions of Resolution No. 2/2013 of the 28 th Extraordinary General Meeting (EGM) of of on the issue of subscription warrants without the pre-emptive right for the existing shareholders, the subscription warrants are nontransferable. The Company did not introduce any restrictions on exercising the right of vote.

56 RULES FOR AMENDING THE COMPANY'S ARTICLES OF ASSOCIATION The Company's Articles of Association is amended according to Article of the Commercial Companies Code and 22(1)(6) of the Company's Articles of Association, by way of a resolution of the Company's General Meeting. At least 26 days before the Company's General Meeting is held, the Company's Management Board, in the announcement on convening the General Meeting pursuant to Article of the Commercial Companies Code, presents the text of the draft amendments to the Company s Articles of Association and the existing provisions to be amended, pursuant to Article of the Commercial Companies Code. In addition, after the Company's General Meeting adopts the amendments to the Articles of Association, every amendment, in order to be valid, must be entered into the register of entrepreneurs of the National Court Register maintained by the court competent for the Company's registered office; this entry is made at the request submitted, according to Article of the Commercial Companies Code, by the Management Board not later than three months after the day when the General Meeting adopted the resolution. Once registered, every amendment to the Company's Articles of Association is published in the Polish Official Gazette (Monitor Sądowy i Gospodarczy). Dariusz Krawczyk Jerzy Kamiński Jerzy Kotkowski President of the Board Member of the Board Member of the Board

57 Financial statements for C. FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

58 Financial statements for TABLE OF CONTENTS C. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS 57 I. PROFIT AND LOSS ACCOUNT II. STATEMENT OF COMPREHENSIVE INCOME III. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) IV. CASH FLOW STATEMENT V. STATEMENT OF CHANGES IN EQUITY VI. NOTES AND EXPLANATIONS GENERAL INFORMATION COMPOSITION OF THE POLNORD CAPITAL GROUP APPROVAL OF THE FINANCIAL STATEMENTS MATERIAL VALUES BASED ON PROFESSIONAL JUDGEMENT AND ESTIMATES BASIS FOR PREPARING THE SEPARATE FINANCIAL STATEMENTS CHANGES IN THE APPLIED ACCOUNTING PRINCIPLES CHANGES IN ESTIMATES IMPORTANT ACCOUNTING PRINCIPLES INFORMATION ON BUSINESS SEGMENTS REVENUES AND EXPENSES EMPLOYEE BENEFIT COSTS INCOME TAX SOCIAL ASSETS AND SOCIAL BENEFITS FUND LIABILITIES EARNINGS PER SHARE OTHER COMPREHENSIVE INCOME DIVIDENDS PAID PROPERTY, PLANT AND EQUIPMENT INVESTMENT PROPERTIES INTANGIBLE ASSETS INVESTMENTS IN ASSOCIATES AND JOINT-VENTURES MEASURED WITH EQUITY METHOD OTHER (LONG-TERM) FINANCIAL ASSETSTES LOANS GRANTED LONG-TERM RECEIVABLES INVENTORY TRADE AND OTHER RECEIVABLES CASH AND CASH EQUIVALENTS ASSETS HELD FOR SALE SHARE CAPITAL AND AND SUPPLEMENTARY/ RESERVE CAPITAL INTEREST-BEARING BANK LOANS, BORROWINGS AND BONDS EMPLOYEE BENEFITS PROVISIONS 114

59 Financial statements for TRADE AND OTHER (SHORT-TERM) LIABILITIES LEASE LIABILITIES INVESTMENT LIABILITIES COURT PROCEEDINGS CONTINGENT LIABILITIES AND ASSETS GUARANTEES AND SURETIES INFORMATION ABOUT RELATED PARTIES FINANCIAL INSTRUMENTS OBJECTIVES AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT CAPITAL RISK EMPLOYMENT STRUCTURE AUDITOR S REMUNERATION EVENTS AFTER THE BALANCE SHEET DATE 132 D. STATEMENT OF THE MANAGEMENT BOARD ON THE RELIABILITY OF THE ANNUAL FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER E. STATEMENT OF THE MANAGEMENT BOARD ON THE ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS F. OPINION AND REPORT OF THE CERTIFIED AUDITOR ON THE REVIEW OF THE FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER

60 Financial statements for I. PROFIT AND LOSS ACCOUNT for the period from to Specification [000' PLN] Note For the period from to For the period from to Sales revenue Revenue from sales of products, goods and materials from related parties Revenue from sale of services from related parties Lease revenue from related parties Cost of product sold 10.2 ( 14483) ( 49883) Gross profit (loss) on sales Sales of investment property Revaluation of investment property 10.4 ( 4068) ( 15771) Selling costs ( 6217) ( 7236) General administrative expenses ( 29128) ( 22381) Other operating revenue Other operating expenses 10.6 ( 24688) ( 24891) Gross operating profit (loss) ( 37708) ( 39697) Financial revenue Financial expenses 10.8 ( 50967) ( ) Profit (loss) on disposal of a subsidiary 10.9 Gross profit (loss) ( 46808) ( ) Income tax Net profit (loss) on continued operations ( 37835) ( ) Net profit (loss) on discontinued operations 0 ( 152) Net profit /(loss) for the financial year ( 37835) ( ) Weighted average number of ordinary shares for the period Diluted weighted average number of ordinary shares for the period Net profit (loss) per ordinary share (PLN) 14 ( 1.16) ( 3.63) Net profit (loss) on continued operations per ordinary share (PLN) 14 ( 1.16) ( 3.62) Diluted net profit (loss) per ordinary share (PLN) 14 ( 1.16) ( 3.59) Diluted net profit (loss) on continued operations per ordinary share (PLN) 14 ( 1.16) ( 3.59)

61 Financial statements for II. STATEMENT OF COMPREHENSIVE INCOME for the period from to Specification [000' PLN] For the period from to For the period from to Net profit (loss) on continued operations for the period ( ) ( ) Net profit (loss) on discontinued operations for the period 0 ( 152) Net profit / (loss) for the financial year ( ) ( ) Other comprehensive income: Items that may be reclassified to profit or loss in the future: ( 787) 203 Valuation of financial assets available for sale ( 787) Other Income tax on components of other comprehensive income ( 3 047) Items that will not be reclassified to profit or loss in the future: Revaluation of employee benefit liabilities Other comprehensive income ( 787) 203 Comprehensive income for the period ( ) ( )

62 Financial statements for III. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) as at Specification [000'PLN] Note As at As at ASSETS Fixed assets Tangible fixed assets Investment property Intangible assets Investments in subsidiaries, jointly-controlled subsidiaries and associates Loans granted Long-term receivables Other financial assets Deferred tax assets Current assets (excluding assets classified as held for sale) Inventories Trade and other receivables Receivables due to VAT, other taxes, customs duties, insurance and other Income tax receivables 3183 Prepayments Cash and cash equivalents Loans granted Assets classified as held for sale Current assets (including those classified as held for sale) TOTAL ASSETS

63 Financial statements for STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) CONT. as at Specification [000'PLN] Note As at As at LIABILITIES Equity Share capital Share premium Own shares 0 Foreign exchange differences on translation of a foreign operation 0 Other reserve capitals Retained profits/uncovered losses ( ) ( ) Total equity Long-term liabilities Interest-bearing bank loans and borrowings Provisions Other liabilities Deferred income tax provision Short-term liabilities (excluding libilities directly related to assets classified as held for sale) Trade and other liabilities Current long-term portion of bank loans and borrowings Short-term loans and borrowings Liabilities due to VAT, other taxes, customs duties, insurance and other Other financial liabilities 184 Accruals Advance payments received Provisions Liabilities directly related to assets classified as held for sale Total liabilities TOTAL EQUITY AND LIABILITIES

64 Financial statements for IV. CASH FLOW STATEMENT for the period from to Specification [000'PLN] For the period from to For the period from to Cash flows from operating activities Gross profit/(loss) ( ) ( ) Adjustments: Depreciation and amortisation Net interest and dividends Profit/(loss) on investing activities ( 17042) (Increase)/decrease in receivables ( 39415) (Increase)/decrease in inventories ( 483) Increase/(decrease) in short-term liabilities excluding loans and borrowings ( 6107) ( 5380) Change in prepayments and accruals Change in provisions Income tax paid Other ( 23) Net cash generated by operating activities ( 633) 741 Cash flows from investing activities Inflows Sales of tangible fixed assets and intangible assets Sale of investment properties Sales of financial assets 5042 Dividends received Interest received Repayment of loans granted Outflows ( 73259) ( 72304) Purchase of tangible fixed assets and intangible assets ( 763) ( 1389) Purchase of financial assets ( 129) ( 2249) Loans granted ( 72367) ( 68667) Net cash used in investing activities Cash flows from financing activities Inflows Inflows from issuance of shares 541 Inflows from loans/borrowings taken out Inflows from issuance of bonds Outflows ( 66367) ( ) Repayment of loans/borrowings ( 7304) ( 44625) Interest paid ( 19501) ( 30428) Redemption of bonds ( 39561) ( ) Net cash generated by financing activities ( 94395) Net increase/decrease in cash and cash equivalents ( 17915) Net foreign exchange gains/losses 6629 Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period, of which Restricted cash 44 44

65 Financial statements for V. STATEMENT OF CHANGES IN EQUITY For the period from to Attributable to shareholders of the parent company Specification [000' PLN] Share capital Share premium Other reserve capitals Retained profits/uncovered (losses) Total As at ( ) Result of the period ( ) ( ) Other comprehensive income Total comprehensive income for a financial year 204 ( ) ( ) Share issue Share issue costs Result carried forward from previous period ( 18868) Prior years errors correction Management Option scheme As at ( ) As at ( ) Result of the period ( ) ( ) Other comprehensive income ( 787) ( 787) Total comprehensive income for a financial year ( 787) ( ) ( ) Share issue Share issue costs ( 37) ( 37) Result carried forward from previous period ( ) ( 7 101) Prior years errors correction Management Option scheme As at ( )

66 Financial statements for VI. NOTES AND EXPLANATIONS 1. GENERAL INFORMATION The financial statements have been prepared for the financial year ended and cover the period from to , and contain relevant comparative data as at and for the period from to The core business of consists in purchase and sale of residential property. executes development projects, mainly using special purpose vehicles set up by its own or with partners. The financial statements of include financial data of and financial assets, revenues and expenses of Finanse SJ for the financial year ended and the period from to , as well as relevant comparative data as at and for the period from to Change in the presentation in the financial statements of took place in According to the analysis of the contribution in kind in the form of assets (loans granted) by to Finanse SJ in terms of their recognition pursuant to IAS 39 (20), at the time of transferring the assets Polnord SA did not lose control of those assets. Therefore, those loans and rewards attached to them should continue to be presented in the financial statements of. Finanse SJ became a part of the Polnord Capital Group in To obtain the comprehensive view of the activities of, the present Report should be analyzed together with the Consolidated Annual Report for Parent Company primary data are presented below: Full name (company name) POLNORD Spółka Akcyjna Registered office Gdynia, ul. Śląska 35/37 Number in the National Court Registered (KRS) Tax identification Number (NIP) Statistical Identification Number (REGON) Registered share capital 65,386,254 PLN (fully paid up) PKD (Polish Classification of Business Activities) Website 6810 Z buying and selling of own real estate The duration of the Company as at is indefinite. 2. COMPOSITION OF THE POLNORD CAPITAL GROUP is the parent company of Group. Detailed information about subsidiaries, jointly controlled entities and associates, as at , is presented below.

67 Financial statements for Structure of the Capital Group Registered Nominal value of % of Consolidation Company name office shares held [PLN] capital/votes method Polnord Szczecin Ku Słońcu Sp. z o.o. Gdynia 50, % Full Polnord Łódź City Park Sp. z o.o. Gdynia 100, % Full Polnord Apartamenty Sp. z o.o. Gdynia 1,050, % Full Polnord Sopot II Sp. z o.o.**** Gdynia 100, % Full Polnord Olsztyn Tęczowy Las Sp. z o.o. Gdynia 5,000, % Full Polnord Warszawa Ząbki Neptun Sp. z o.o. Gdynia 50, % Full Śródmieście Wilanów Sp. z o.o. Gdynia 50, % Full Wilanów office park budynek B1 Sp. z o.o. Gdynia 8,582, % Full Wilanów office park budynek B3 Sp. z o.o. Gdynia 700, % Full Polnord Inwestycje Sp. z o.o. Gdynia 50, % Full Polnord Inwestycje Sp. z o.o. Spółka jawna Gdynia contributions 100% Full Polnord Gdańsk Dwa Tarasy Sp. z o.o. Gdynia 5, % Full Polnord Gdynia Brama Sopocka Sp. z o.o. Gdynia 5, % Full Finanse Spółka jawna Gdynia contributions 100% Full SPV 1 Sp. z o.o. Gdynia 5, % Full Stroj-Dom ZSA Saratov (Russia) 99, % Full Polnord Haffnera 1 Sp. z o.o. Gdańsk 5, % Full Polnord Haffnera 2 Sp. z o.o.** Gdańsk 5, % Full Polnord Haffnera 3 Sp. z o.o. *** Gdańsk 5, % Full Polnord Gdańsk Dolne Miasto Sp.z o.o. Gdańsk 5, % Full Hydrosspol Sp. z o.o. in liquidation Gdańsk 15,000 30% Not included Stacja Kazimierz I Sp. z o.o. Warsaw 2,500 50% Equity method Stacja Kazimierz I Sp. z o.o. SKA Warsaw 25,000 50% Equity method Stacja Kazimierz Sp. z o.o. Warsaw 2,500 50% Equity method Stacja Kazimierz Sp. z o.o. SKA Warsaw 25,0005,041,500 50% Equity method Stacja Kazimierz II Sp. z o.o. Warsaw 2,500 50% Equity method Stacja Kazimierz II Sp. z o.o. SKA Warsaw 25,000 50% Equity method Stacja Kazimierz III Sp. z o.o. Warsaw 2,500 50% Equity method Stacja Kazimierz III Sp. z o.o. SK Warsaw 12,500 50% Equity method Semeko Aquasfera Sp. z o.o. Gdynia 10,000,000 50% Equity method Fadesa Polnord Polska Sp. z o.o. Warsaw 12,250,000 49% Equity method FPP Powsin Sp. z o.o.* Warsaw 2,474,500 49% Equity method Osiedle Innova Sp. z o.o.* Warsaw 3,454,500 49% Equity method FPP Osiedle Moderno Sp. z o.o.* Warsaw 1,472,450 49% Equity method Korporacja Budowlana Dom SA Kartoszyno 50,387, % Equity method * joint control through Fadesa Polnord Polska Sp. z o.o ** On the Company registered as Haffnera Park sp. z o.o. *** On the Company registered as Haffnera Apart sp. z o.o. **** joint control through Polnord Inwestycje Sp. z o.o. As at , the Polnord share in the overall number of votes in subsidiaries, jointly-controlled entities and associates is equal to the Company s share in these companies capitals. Changes in capital relations of with other entities that occurred in 2016 are described in detail in the table below:

68 Financial statements for Changes in organizational and capital links of the Polnord Capital Group Entity name Polnord Inwestycje Spółka z ograniczoną odpowiedzialnością Łódź City Park Sp.k Description of the event Transformation of a limited liability company into a limited partnership; joining the limited partnership as a limited partner On , the District Court Gdańsk Północ in Gdańsk, VIII Commercial Division issued the decision on the transformation of Polnord Łódź City Park Sp. z o.o. into a limited partnership under the name Polnord Inwestycje spółka z ograniczoną odpowiedzialnością Łódź City Park Spółka komandytowa. The partners are: as a limited partner and Polnord Inwestycje Sp. z o.o. as a general partner. Registration of share capital decrease Stacja Kazimierz Spółka z ograniczoną odpowiedzialnością S.K.A. Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością On , the District Court for the capital city of Warsaw, XIII Commercial Division of the National Court Register issued the decision on registering the decrease in the share capital of the company to the amount of PLN 50,000.00, i.e. from the amount of PLN 10,133, to the amount of PLN 50, as a result of redemption of all series C shares in the number of acquired by the Company from shareholders for redemption. Acquisition of shares On , acquired from MS Waryński Development SA 50 shares (constituting 50% of a share capital) of Stacja Kazimierz III Sp. z o.o. with its registered office in Warsaw. Formation of a company Polnord Haffnera 1 Sp. z o.o Polnord Haffnera 2 Sp. z o.o Polnord Haffnera 3 Sp. z o.o Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością SK Polnord Gdańsk Dolne Miasto Sp. z o.o. On , the company was founded; the sole shareholder is. On , the District Court Gdańsk Północ in Gdańsk, VIII Commercial Division issued the decision on registering the Company. Formation of a company On , the company was founded; the sole shareholder is. Formation of a company On , the company was founded; the sole shareholder is. Registration of a company On , the company Stacja Kazimierz III Spółka z ograniczoną odpowiedzialnością SK was registered. is a limited partner and made cash contribution of PLN 25,000. Its share corresponds to the value of the contribution actually made. Decision on registration of a company On , the District Court Gdańsk-Północ in Gdańsk, VIII Commercial Division issued a decision on registration of the Company. The only shareholder is. 3. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements have been approved for publication by the Management Board on

69 Financial statements for MATERIAL VALUES BASED ON PROFESSIONAL JUDGEMENT AND ESTIMATES 4.1 Professional judgement In the process of applying accounting principles (policy) to the issues described below, the most significant aspect, besides accounting estimates, was the professional judgment of the management, which influences the values presented in the financial statements, including additional explanatory notes. The estimates are based on the best knowledge of the Management Board regarding the current and future activities and events in specific areas. Detailed information on the assumptions are disclosed in the respective notes to these financial statements. 4.2 Important estimates and assumptions Estimates and judgements are constantly verified. They result from previous experience and other factors, including forecasts related to future events which seem justified in a given situation Recognition of the assets transferred to subsidiary In the 2014, the Company conducted a comprehensive analysis of regulations in the International Financial Reporting Standards, and related interpretations issued in the form of regulations of the European Commission (the "IFRS") for recognition of financial revenues generated during the year by Finanse SJ in the POLNORD SA separate financial statements. To determine whether the Company should present the assets on the balance sheet, the Company made an analysis of the extent to which it retains and transfers the risks and rewards of ownership of the financial assets (loans) contributed in kind by to Finance SJ (formerly Surplus Sp. z o.o. Domitus SJ, further referred to as SPV) in accordance with the conditions set out in IAS 39. This standard indicates that "the entity derecognize a financial asset in the balance sheet when, and only when: (a) the contractual rights to the cash flows from the financial asset expire; or (b) it transfers the financial asset as set out in paragraphs 18 and 19 and the transfer qualifies for derecognition in accordance with paragraph 20. (IAS 39.17) In the analysed case the contractual rights to the cash flows do not expire (borrowers must continue to repay the loans). Therefore, the Company analysed the conditions for transfer of the asset, which are applicable because the following criterion from IAS has been met: The entity transfers the financial asset only when (...) it transfers the contractual rights to receive the cash flows from the financial asset (...). In order to determine whether the entity should retain the assets in the balance sheet, the Company has analysed to which extent the entity transferred and retained the risks and rewards of ownership of the particular assets pursuant to the conditions in IAS 39.20, which has been analysed in details below: If the entity transfers the financial asset (see par. 18), the entity has to assess to what extent it retains the risks and rewards of ownership of the asset: a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, then the entity must derecognise the financial asset, exclude it from the balance sheet and recognise separately as assets or liabilities any rights and obligations created or retained as a result of the transfer, The above does not give grounds to conclude that Polnord S.A. has transferred substantially all risks and rewards, because loan repayments although through SPV are to ultimately finance the repayment of financial liabilities of In case of the borrower s failure to repay loans, Polnord SA will have fewer chances for repayment of bonds. Therefore, retains (to some extent) both rewards and risks.

70 Financial statements for In our opinion, the condition from IAS The entity retains substantially all the risks and rewards of ownership of the financial asset, if its exposure to the variability in the present value of the future net cash flows does not significantly change as a result of the transfer (e.g. because the entity has sold the monetary asset being a subject of the agreement on repurchase for the fixed price or the sales price increased by the lender s margin). has not been met (see item (b) ). b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity continues to recognise the financial asset, It cannot be concluded that has retained substantially all the risks and rewards. If SPV does not generate a positive financial result and does not have sufficient funds, will not be able to disburse funds from SPV (in the form of profit distribution/advance payments towards anticipated profit distribution or loans granted by SPV to ). The payment schedule will also change (the amounts and dates of disbursements of funds from SPV will not be the same as in case of cash flows from loans). c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, then the entity determines whether it has retained control of the financial asset, In the case concerned: In our opinion, neither retained nor transferred substantially all the risks and rewards, therefore it is necessary to conduct an analysis of control. According to IAS the entity retains control (see par. 20c) of the transferred asset depending upon whether the transferee has the ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control. In view of the above, it is necessary to assess (in)dependence of SPV from. Considering that: holds 99% shares in SPV The compositions of the Management Boards of and SPV overlap in 66%. intends to settle liabilities arising from bonds with funds obtained from the amounts of loan repayments to SPV (however, this intent has not been formally confirmed in the financial plan). it is possible to conclude that SPV has no ability to independently, unilaterally sell the loans (obtained from Polnord S.A.) to an unrelated third party. In such a case has retained control and, as a consequence pursuant to IAS it must continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see par. 30). On the basis of the conducted analysis and the interpretation of IAS 39, the Company concluded that Polnord SA Finanse SJ has no ability to independently, unilaterally sell the loans (obtained from ) to an unrelated third party. In such a case has retained control and, as a consequence pursuant to IAS it must continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see par. 30). Therefore, the loans covered by the analysis should be maintained in the balance sheet of It also means that should recognise, on a current basis, financial revenue from interest accrued on those loans. On the basis of this analysis, the Company recognized in its financial statements the following positions:

71 Financial statements for Item Value as at [000' PLN] Value as at [000' PLN] Loans granted - long-term 297, ,462 Loans granted - short-term 22,889 96,164 Profits retained ( ) ( ) Other long-term liabilities 383, ,685 Accordingly, the Company shows the above mentioned financial assets in the separate financial statements of Moment of revenue recognition The Company has adopted the following assumptions about the recognition of revenue from sale of apartments - revenue is recognized upon the transfer of control and risks. Transfer of control and significant risks and rewards, due to ownership, occurs as of the date of conclusion of a sale agreement in the form of a notarial deed. However, it is possible to recignise the result on sale of the premises earlier, where the moment of recognition of the revenue and the corresponding cost is the date of the handing over of premises to buyers, which follows the fulfillment of the following conditions: 1. Binding occupancy permit obtained for the premises; 2. Signing of the handing over protocol of the premises (without significant reservations, i.e. if necessary, removal of faults is / will be possible in a relatively short period of time, involving small financial outlays) in accordance with the preliminary agreement concluded; 3. Receiving the full price of the apartment from the buyer; 4. On the basis of the preliminary agreement, all the risks associated with the real estate are transferred to the buyer upon handing over of the premises; 5. The seller ceases to be permanently engaged in the management of sold flats. This condition do not have to be met for separate parking spaces in the shared garage; 6. The customer, on the basis of the documents referred to in point 1 and 2, may start using the premises; 7. Upon signing the handing over protocol (point 2), the client is obliged to bear any costs of ownership / usage of the premises and has the right to any significant benefits, such as the ability to use the premises, making adaptations, etc.; 8. There is no significant risk of withdrawal from the agreement and return of funds paid after signing the handing over protocol (point 2). This condition is not fulfilled in the case, if in the last four quarters, the total value of contracts that were terminated after signing the handing over protocol exceededs 5% of the total value of all units delivered during this period together with the handing over protocols; 9. The seller/developer is not required to meet any other important conditions in accordance with the agreement, except for the conclusion of the final sale agreement. The parties intend to conclude a final agreement and transfer a real estate in the form of a notarial deed Estimates The Company prepares estimates and makes assumptions for its future business. The estimates and assumptions which involve a significant risk of major adjustments in the carrying value of assets and liabilities in the next financial year are presented below:

72 Financial statements for Estimate of receivables revaluation allowances (Note 7) The level of receivables revaluation allowances is set up based on the expected risk related to the receivables and on the established collaterals which influence how effectively debt can be recovered. Estimates connected with recognition of deferred tax assets in accordance with IAS 12 (Note 12) Deferred tax assets are measured using the tax rates that will be applied at the moment of the anticipated utilization of the asset, on the basis of the tax laws that were in effect at the balance sheet date. The Company recognizes an item of deferred tax assets based on the assumption that future taxable income will allow for its utilization. Deterioration of tax results in the future could make this assumption unjustified. Tax losses constitute, among others, the basis for the recognized deferred tax asset. The Management Board has been reviewing the probability of utilisation of deferred tax assets on the basis of tax budgets as well as plans for their implementation, taking into account the net effect of the reversal of deferred tax assets and liabilities. Based on projections prepared by the Company regarding the fact of obtaining tax revenue in the following years, it is considered that there is no risk of deferred tax asset utilization recognized in these consolidated financial statements. Estimate of potential costs related to tax and court proceedings against the Company (Note 35) At the balance sheet date, the Company is the plaintiff and the defendant in a number of court proceedings. While preparing the financial statements, the opportunities and risks associated with such proceedings are assessed each time and according to the results of such analyzes, the Company establishes provisions for potential losses. However, it cannot be excluded, that a court or a fiscal authority makes a judgment or decision different than expected by the company and the created provisions may prove insufficient; The fair value of investment property (Note 18), is mainly established by an independent professional real property appraiser. Such valuation depends on the adoption of certain assumptions based on the professional judgment of the Management Board of the Company. These assumptions concern, inter alia, the choice of the model adopted for valuation or the comparable data used. The Management Board verifies the valuation of the property by comparing it to information on similar transactions on the market and other information about the realisable prices of the verified investment property. 5. BASIS FOR PREPARING THE SEPARATE FINANCIAL STATEMENTS These Financial statements have been prepared in line with the historical cost principle, except for investment property and financial assets available for sale, which are measured at fair value. Except for the above items, the statements do not contain any items that according to the principles adopted by the Company would be measured with another method. The accounting principles (policy) used when preparing these Financial statements for the financial year ended are consistent with the accounting principles applied to the Financial statements for the financial year ended , except for changes in IAS/IFRS described below. The Financial statements are presented in thousands of Polish zlotys, unless indicated otherwise. The Financial statements have been prepared based on the going concern assumption of the Company in the foreseeable future. Therefore, as at the day of approving these Financial statements for publication, there are no circumstances threatening the Company s going concern status.

73 Financial statements for Compliance declaration These financial statements have been prepared in compliance with the applicable International Financial Reporting Standards (IFRS), as adopted by the EU. The IFRS include standards and interpretations approved by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC). In these financial statements, the Company has applied all International Financial Reporting Standards effective as of as well as standards which came into effect before The Company has analysed new standards and interpretations and amendments to the existing standards and interpretations. Changes in standards and interpretations, except for the necessary new disclosures, do not affect the financial results presented in this report. Changed resulting from amendments to IFRS: The following amendments to existing standards and interpretations issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the first time in the financial statements of the Company for 2016: Amendments to IFRS 11 Joint Arrangements Accounting for Acquisitions of Interests in Joint Operations, Amendments to IAS 1 "Presentation of Financial Statements" - Disclosure Initiative. The aim of the published amendment is to clarify the concept of materiality and to clarify that if an entity considers that the information is irrelevant, then it should not be disclosed even if such disclosure is generally required by another IFRS, Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets - Clarification of Acceptable Methods of Depreciation and Amortisation, Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture - Agriculture: Bearer Plants, Amendments to IAS 19 Employee Benefits - Defined benefit plans: Employee Contributions, Amendments to IAS 27 Separate Financial Statements enabling application of the equity method as one of optional methods of recognizing investments in subsidiaries, jointly controlled entities and associates in the separate financial statements, Amendments resulting from the review of IFRSs amending 7 standards. The amendments include changes in presentation, recognition and valuation and include terminology and editorial changes, Amendments to IFRS 10, IFRS 12, IAS 28 concerning the exclusion from consolidation of investment entities - effective for annual periods beginning on or after 1 January 2016 Amendments to various standards Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 5, IFRS 7, IFRS 19 and IAS 34) The above-mentioned amendments to existing standards and interpretations did not have a material effect on the Company's financial statements for Amendments to existing standards issued by IASB but not entered into force While approving the financial statements, the Company has not applied the following amendments to the existing standards, which were issued by IASB and endorsed for use in EU, but not entered into force yet:

74 Financial statements for IFRS 9 Financial Instruments replaces IAS 39. The standard introduces one model with only two classifications of financial assets: measured at fair value and measured at amortized cost. IFRS 9 introduces a new model for determining revaluation allowances - model of expected credit losses. The key change is the requirement imposed on entities to present the effects of changes in their own credit risk in other comprehensive income on account of financial liabilities to be measured at fair value through the financial result. The standard is effective for annual periods beginning on or after 1 January 2018, IFRS 15 Contracts with Customers - effective for annual periods beginning on or after 1 January The principles set out in IFRS 15 will apply to all contracts resulting in revenues. The fundamental principle of the new standard is to recognize revenue at the time of transfer of goods or services to the client, in the amount of the transaction price. Any goods or services sold in bundles, that can be distinguished as separate obligation within the bundle, should be recognized separately, moreover, any discounts and rebates regarding transaction price should be, in principle, allocated to the particular performance obligation. When the amount of income is variable, according to the new standard, variables amounts are classified as revenue, if there is a high probability that in the future there will be no reversal of the recognition of income in result of revaluation. In addition, in accordance with IFRS 15, costs incurred to acquire and secure a contract with a customer must be activated and deferred for a period of consumption of the benefits of this contract, Clarifications to IFRS 15 Revenue from Contracts with Customers effective for annual periods beginning on or after 1 January The Clarifications specify some of the requirements of the standard and bring further simplification to the transitional provisions in order to reduce the complexity and costs associated with the first application of the standard. Clarifications have not been approved by the EU yet. Amendments to IAS 12 concerning recognition of deferred tax assets for unrealised losses - effective for annual periods beginning on or after 1 January Ammendments have not been approved by the EU yet. Amendments to IAS 7 Statement of Cash Flows constituting part of the project Disclosure Initiative according to which entities should disclose additional information on the changes in liabilities financing activities, including changes in cash and non-cash changes - effective for annual periods beginning on or after 1 January Ammendments have not been approved by the EU yet. Amendments to IFRS 2 Share-based Payment, which introduce additional guidance concerning the classification and valuation of share-based transactions - effective for annual periods beginning on or after 1 January Ammendments have not been approved by the EU yet. Amendments to IFRS 4: Application of IRFS 9 Financial Instruments with IRFS 4 Insurance Contracts - effective for annual periods beginning on or after 1 January Ammendments have not been approved by the EU yet. Amendments resulting from the review of IFRS concerning 4 standards: IFRS 1, IFRS 12, IAS 28 - effective for annual periods beginning on or after 1 January Ammendments have not been approved by the EU yet. IFRIC 22 Foreign Currency Transactions and Advance Consideration. Interpretation is effective for annual periods beginning on or after 1 January Interpretation has not been approved by the EU yet. Amendments to IAS 40 Investment Property, specifying the rules for the transfer of real estate property to or from investment property. Ammendments have not been approved by the EU yet., IFRS 16 Lease" - effective for annual periods beginning on or after 1 January The new standard establishes rules for the recognition, measurement, presentation and disclosures relating to the lease. All leasing transactions result in obtaining the lessee's right to use the assets and liabilities arising from the obligation of payment. Thus, IFRS 16 removes the classification of operating lease and finance

75 Financial statements for lease in accordance with IAS 17, and introduces one model for the accounting treatment of leases by the lessee. The lessee will be required to recognise: (a) assets and liabilities for all lease transactions concluded for a period of over 12 months, except when the asset is of low value; and (b) depreciation of leased assets separately from interest on the lease liability in the statements of results. IFRS 16, in significant part, repeats the regulations of IAS 17 concerning the accounting treatment of leases by the lessor. As a result, the lessor maintains the classification broken down into operating lease and finance lease, and differentiates accounting treatment. This standard has not yet been approved by the EU. IFRS 14 Regulatory Deferral Accounts - effective for annual periods beginning on or after 1 January This standard has not yet been approved by the EU. Amendments to IFRS 10 and IAS 28 Sales or transfers of assets between the investor and the associate or joint venture - date of entry into force has been postponed for an indefinite time. Ammendments have not been approved by the EU yet. The Company estimates that the above-mentioned standards, interpretations and amendments to the standards would have no material impact on the consolidated financial statements if applied by the Company as at the balance sheet date, except for the impact of changes to IFRS 9, IFRS 15 and IFRS 16, which, due to the date of entry into use, from periods beginning after , have not yet been analyzed by the Company Currency for measurements and the financial statements Items included in the financial statements of individual companies of the Company are measured in the currency of the main business environment in which a given company operates (functional currency). The parent company s functional and presentation currency is the Polish zloty (PLN). The reporting currency of the Company s financial statements is the Polish zloty (PLN). Exchange rates used for the balance sheet valuation purposes Currency USD EUR RUB Exchange rates used for the purposes of valuation of profit and loss account items Currency USD EUR RUB

76 Financial statements for Note Selected financial data SELECTED FINANCIAL DATA SEPARATE FINANCIAL STATEMENTS [000'PLN] [000'EUR] PROFIT AND LOSS ACCOUNT Revenue on sales Gross profit (loss) on sales Gross operating profit (loss) ( 37708) ( 39697) ( 8618) ( 9485) Gross profit (loss) ( 46808) ( ) ( 10697) ( 30576) Net profit (loss) on continued operations ( 37835) ( ) ( 8647) ( 28249) Net profit (loss) for the financial year ( 37835) ( ) ( 8647) ( 28285) BALANCE SHEET Equity Long-term liabilities Short-term liabilities Fixed assets Current assets Assets classified as held for sale Total assets CHANGES IN THE APPLIED ACCOUNTING PRINCIPLES In the reporting period, there were no changes to the accounting principles. 7. CHANGES IN ESTIMATES In the analyzed period there was a significant change in estimates. The total value of write-downs for loans and shares made by the Company amounted to PLN 19,958 thousand. The Company recognized additional write-downs for long-term receivables in the amount of PLN 4,690 thousand. The Company has established provisions for possible liabilities toward the Agricultural Property Agency, based on legal opinions. In 2015, the Company received a legal opinion indicating the change in the factual state for some of the contentious cases and increased the provision taking into account new circumstances. The change in the value of the provision, compared to 2015, amounted to PLN 8,624 thousand (disclosed in Note 31). As a result of the tax audit, the Company established a provision for potential tax liabilities of PLN 15,374 thousand (disclosed in Note 31). 8. IMPORTANT ACCOUNTING PRINCIPLES The Company s financial year is the calendar year, i.e. the period from 1 January to 31 December. The Company s accounting books are maintained at the registered office of in Gdynia, at Śląska 35/37 street.

77 Financial statements for Principles for measuring investments in subsidiaries, jointly-controlled entities and associates The Company measures investments in subsidiaries, jointly-controlled subsidiaries and associates based on the historic purchase price, less impairment losses Translation of foreign currency items Transactions denominated in currencies other than the Polish zloty are converted into the Polish zloty at the exchange rate applicable on the day preceding the transaction date. As at the balance sheet date, monetary assets and liabilities denominated in currencies other than the Polish zloty are converted into the Polish zloty at the average exchange rate, applicable as at the end of the reporting period, for a given currency, announced by the National Bank of Poland. Foreign exchange differences arising from the translation are recognised under financial revenues (expenses) or, in the situations specified by the accounting principles (policy), they are capitalised in the value of the assets, accordingly. Non-monetary assets and liabilities recognised according to the historical cost in a foreign currency are disclosed at the historical cost from the day of transaction Tangible fixed assets (property, plant and equipment) Property, plant and equipment are fixed assets: held by an entity to be used in supply of goods and services or for administrative purposes, and expected to be used during a period of time longer than one year, in relation to which it is probable that an entity will obtain future economic benefits related to the assets, the purchase price or manufacturing cost of the asset can be reliably measured. PP&E is measured at the purchase price or the manufacturing cost, less depreciation allowances and impairment losses. As at the day of adopting the IFRS, i.e , the Company measured its PP&E at fair value adopted as costs as at that day. Straight-line depreciation allowances have been adopted to allocate the initial value of PP&E or the restated value to the period corresponding to the estimated economic life of PP&E, which is reflected by the business entity s use of economic benefits from a PP&E item. The depreciation method, depreciation rate and residual values are reviewed at least at the end of each financial year. Any changes resulting from verification are recognized as a change in estimates. Tangible fixed assets are tested for impairment whenever there are indications of possible impairment. The depreciation allowance is recognized in profit or loss under the cost category corresponding to a given fixed asset. The economic lives of PP&E in the Capital Group are as follows: buildings, premises, civil and maritime engineering structures years plant and machinery 2-25 years means of transport 3-10 years other PP&E 2-10 years The Company does not depreciate land. An item of PP&E may be removed from the statement of financial position after its disposal or when there are no expected economic benefits resulting from continued use of the asset. Any profits or losses arising from derecognition of the asset from the statement of financial position are recognized in the result of the period in which such derecognition has taken place.

78 Financial statements for Commenced investments involve PP&E under construction or assembly, which is disclosed at the purchase price or the manufacturing cost. PP&E under construction is not subject to depreciation until construction is completed and a PP&E item is handed over for use Impairment of non-financial assets As at every balance sheet date, the Company verifies whether there are any circumstances indicating impairment of any item of the assets. When such circumstances are identified or when an annual impairment test needs to be conducted, the Company s estimates the recoverable value of a given asset or the cashgenerating unit to which a given asset belongs. The recoverable value of the asset or the cash-generating unit is the higher of two amounts: the fair value less costs to sell and the value in use. For the purposes of impairment analysis, assets are grouped at the lowest possible level at which separately identifiable cash flows occur (cash-generating units). A cash-generating unit is the smallest identifiable group of assets generating cash inflows largely independent from cash inflows from other assets or groups of assets. For the estimation of the value in use, the projected cash flows are discounted to their present value using a discount rate before taxation that reflects current market estimation of the time value of money and the risk typical for a given asset. If the carrying amount of an asset is higher than its recoverable amount, impairment occurs and a write-down it made up to the determined recoverable amount. Write-downs related to impairment of assets used in continued operations are recognized in the expense categories which correspond to the function of the asset whose impairment has been established Borrowing costs Borrowing costs are recognised as costs at the time they are incurred, except for costs which can be directly assigned to the acquisition, construction or manufacture of an asset. In this situation, they are capitalised as a portion of the purchase price or the manufacturing costs of such asset, if it is probable that they will bring economic benefits to a business entity in the future and on the condition that the purchase price or the manufacturing cost can be reliably determined Investment property Investment property is real property (land, building or a part of a building, or both) that is owned or leased under finance lease and regarded as a source of revenue from rent or a real property held due to the increase in the property s value, or both; investment property is not used for manufacturing, supply of goods, provision of services or administrative activity and is not designated for sale as part of regular business of a company. Investment properties upon initial recognition are valued at purchase price or manufacturing cost, taking into account the costs of the transaction. After an initial recognition of a property, the company uses the model of measurement at fair value and measures all investment properties at fair value, except when the company is not able to credibly and regularly determine the fair value of investment property. Profit or loss on changes in the fair value of investment property is recognised in the profit and loss account in the period in which such changes occur Intangible assets Intangible assets include identifiable non-monetary assets without physical substance, such as acquired, classified as fixed assets, property rights suitable for business use, with the expected economic utilisation period longer than one year, intended to be used for own needs. Intangible assets purchased in a separate transaction are initially measured at the purchase price or at the manufacturing cost. The purchase price of intangible assets purchased by way of a business combination is

79 Financial statements for equal to the fair value of the business as at the day of combination. After the initial recognition, intangible assets are disclosed at the purchase price or the manufacturing cost, less amortisation and impairment losses. Expenditures on internally generated intangible assets, except for capitalised expenditures on development work, are not capitalised and are recognised in the costs of the period in which they were incurred. The Company verifies whether the useful life of intangible assets is definite or indefinite. Intangible assets with a limited useful life are amortised over their useful lives and tested for impairment each time when there are indications of impairment. The useful life and amortisation method of intangible assets with a limited useful life are verified at least at the end of every financial year. Changes in the expected useful life or the expected consumption of economic benefits from an asset are recognised by changing the useful life or the amortisation method correspondingly, and are regarded as changes in estimated values. The amortisation allowance for intangible assets with a limited useful life is recognised in the profit and loss account under the item which corresponds to the function of a given intangible asset. As at the balance sheet date, the Company does not hold any intangible assets with indefinite useful life. The useful lives and amortisation method are verified at the end of each financial period, and the results of changes in estimates are settled prospectively. Profits or losses on the cancellation of intangible assets from the balance sheet are measured according to the difference between proceeds from net sale and the carrying value of a given asset, and are recognised in the profit and loss account at the time when the asset is derecognised from the books Shares and stocks in subsidiaries Shares and stocks in subsidiaries are recognized at purchase price less possible impairment losses. The need for write-down for impairment is assessed in accordance with IAS 36 Impairment of assets, by comparing the carrying value with the higher of the two: fair value less costs of disposal and value in use Financial assets and financial liabilities Financial assets are classified into the following categories: Financial assets held to maturity, Financial assets measured at fair value through the financial result, Loans and receivables, Financial assets available for sale. Financial assets held to maturity are investments with specified or identifiable return and a fixed maturity which the Company intends to and can hold until maturity and which are quoted on the active market. Financial assets held to maturity are measured at the amortised cost, using the effective interest rate method. Financial assets held to maturity are classified as long-term assets, if they mature within more than 12 months from the balance sheet date. Financial assets purchased to generate profit through short-term price variations are classified as financial instruments measured at the fair value through the financial result. Financial instruments measured at the fair value through the financial result are measured at the fair value in consideration of their market value as at the balance sheet date. Changes in the value of these financial instruments are accounted for in financial revenues or expenses. Financial assets measured at the fair value through the financial result are classified under current assets. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on the active market. They are included in current assets, provided their maturity does not exceed 12

80 Financial statements for months after the balance sheet date. Loans and receivables with maturity exceeding 12 months from the balance sheet date are classified as fixed assets. Loans and receivables are recognized at amortized cost. All other financial assets, not classified as derivatives, are financial assets available for sale. Financial assets available for sale are recognized at fair value, without deducting transaction costs, taking into account their market value as at the balance sheet date. In the absence of quotations on the active market and the inability to reliably determine their fair value using alternative methods, financial assets available for sale are valued at the purchase price adjusted by impairment allowance. Positive and negative differences between the fair value and the acquisition cost, net of deferred tax, of assets available for sale (if the market price is determinable on the regulated active market or whose fair value may be estimated by some other reliable method), are reflected in the revaluation reserve through other comprehensive income. The purchase and sale of financial assets is recognised as at the day of transaction. When initially recognised, they are measured at the purchase price, i.e. at the fair value, including transaction costs. A financial asset is removed from the balance sheet when the Company loses control over contractual rights attached to the given financial instrument; which usually takes place when the instrument is sold or when all cash flows attributable to the instrument are transferred to an independent third party. Financial liabilities are classified as: liabilities measured at fair value through profit or loss, other financial liabilities. The category of financial liabilities measured at fair value through profit or loss includes financial liabilities held for trading or those designated as measured at fair value through profit or loss. Financial liability is classified as held for trading if: it was incurred primarily fot the purpose of repurchasing in a short term; constitutes part of a specific financial instruments portfolio that the entity manages together in accordance with a current actual pattern of generating short-term profit; or is a derivative is not classified and not operating as hedge. Financial liability other than held for trading may be classified as measured in WSE upon initial recognition if: such classification eliminates or significantly reduces a measurement or recognition inconsistency that would arise in other conditions; or the financial asset belongs to a group of financial assets or liabilities, or both of these groups managed, and its results are measured at fair value in accordance with a documented risk management strategy or investments of the entity in which information about the grouping of assets is provided internally; or it conctitues part of a contract containing one or more embedded derivatives, and IAS 39 permits classification of the entire contract as measured at fair value through profit or loss. Financial liabilities measured at fair value through profit or loss are recognised in the fair value and all revaluation profits or losses are recognised in the financial result. Profit or loss recognised in the financial result includes all interest paid on financial liabilities and is disclosed under other financial revenues or costs.

81 Financial statements for After initial recognition, other financial liabilities (including loans and borrowings, trade and other liabilities), are measured at cost amortised using the effective interest rate method. The effective interest rate method is the manner of calculating amortised cost of a financial liability and allocating interest cost to the relevant period. The effective interest rate is an exact discount rate of estimated future cash inflows (including all paid or received fees and items constituting an integral part of the effective interest rate, transaction costs and other premiums or discounts) in the period of forecast useful life of a financial liability or, if necessary, in a shorter period, to the net balance sheet value at initial recognition Impairment of financial assets As at every balance sheet date, the Company verifies whether there are objective indications of impairment of a financial asset or a group of financial assets Financial assets measured at amortised cost If there are objective indications that a loss has been incurred due to the impairment of loans and receivables measured at amortised cost, the amount of impairment loss equals the difference between the carrying value of a financial asset and the current value of the estimated future cash flows (except for future losses due to unrecovered receivables, not yet incurred), discounted using the original effective interest rate (i.e. interest rate determined at initial recognition). The carrying value of an asset is reduced and the loss is recognised in the profit and loss account. First, the Company verifies whether there are objective indications of impairment of financial assets which are individually material, and indications of impairment of financial assets which individually immaterial. If the analysis shows that there are no objective indications of impairment of an individually tested financial asset, irrespectively whether the asset is material or not, the Company includes such asset in the group of financial assets with similar loan risk characteristics and tests them all for impairment. Assets tested individually for impairment, assets for which an impairment loss has been recognised and for which it is decided that the impairment loss will not change are not taken into consideration when testing the whole group of assets for impairment. If, in the following period, the impairment loss decreases and the decrease can be objectively associated with an event that occurred after the impairment loss was recognised, the recognised impairment loss is reversed. A subsequent reversal of the impairment loss is recognised in the profit and loss account to the extent to which, as at the day of reversal, the carrying value of an asset does not exceed its amortised cost Financial assets recognised at purchase price If there are objective indications of impairment of an unlisted equity instrument that is not disclosed at fair value because its fair value cannot be credibly determined, or if there are objective indications of impairment of a derivative that is linked to and has to be settled by delivery of such unlisted equity instrument, the amount of the impairment loss is determined as the difference between the carrying value of a financial asset and the current value of the estimated future cash flows discounted using the current market rate rate of return for similar financial assets. Impairment loss on financial capital assets measured at purchase price once recognized is not reversed Financial assets available for sale If there are objective indications of impairment of a financial asset available for sale, the difference between the purchase price of such asset (less any capital repayments and amortisation/depreciation) and its current fair value, less any impairment losses recognised in the profit and loss account, is derecognised from equity and transferred to the profit and loss account. The reversal of the impairment loss on equity instruments classified

82 Financial statements for as available for sale cannot be recognised in the profit and loss account. If, in the subsequent period, the fair value of a debt instrument available for sale increases and such increase can be objectively associated with an event that occurred after the recognition of the impairment loss in the profit and loss account, the amount of the reversed impairment loss is recognised in the profit and loss account Inventory Inventory includes goods purchased and intended for resale, such as goods purchased by the entity for resale, or land and other real property for resale. Inventory also includes finished products already manufactured or in the process of being manufactured by the company, along with materials and raw materials to be used for manufacturing. Materials and goods are measured at the purchase price or at net realisable value, depending on which one is lower. The value of land intended for development projects is increased by external funding costs and, proportionally, by project supervision costs borne by the Parent Company. In particular, inventory includes: land for property development, finished residential units and parking places, which are finished goods, together with the value of the land, expenditures on manufacturing residential structures and parking places, which constitute work in progress with together with the value of the land Trade and other receivables Trade receivables are recognised and disclosed according to the originally invoiced amounts, taking account of an allowance for doubtful debt. A receivables allowance is estimated when the collection of a certain amount of receivables is no longer probable. The allowance is recognised in the profit and loss account at the time when un-recoverability is confirmed. If the influence of time value of money is significant, the value of receivables is established by discounting projected cash flows to the current value, using a gross interest rate that reflects the current market assessments of the time value of money. If discounting is used, the increase in receivables over time is recognised as financial revenue Cash and cash equivalents Cash and short-term deposits disclosed in the balance sheet include cash at bank and cash in hand as well as short-term deposits whose original maturity does not exceed three months. The cash and cash equivalents balance disclosed in the consolidated cash flow statement includes the above-mentioned cash and cash equivalents Prepayments Prepayments are recognized in the amount of incurred, reliably determined expenses that relate to future periods and that will generate future economic benefits to the entity. Prepayments may be written off according to the lapse of time or the amount of benefits. The time and manner of settlement is justified by the nature of settled costs, taking into account the prudence principle. At the end of the reporting period, the Company verifies prepayments in order to check whether the degree of

83 Financial statements for certainty as to achieving economic benefits by the entity after the current accounting period is sufficient for a given item to be recognized as an asset Share Capital Share capital in the consolidated financial statements is disclosed in the amount specified in the Articles of Association and entered in the court register of the Company Interest-bearing bank loans, borrowings and debt securities Upon initial recognition, all bank loans, borrowings and debt securities are recognised at their purchase price which is equal to the fair value of cash received, less costs connected with obtaining a loan or a borrowing. After the initial recognition, interest-bearing loans, borrowings and debt securities are measured according to their amortised cost, using the effective interest rate method. When establishing the amortised cost, costs related to obtaining a loan or a borrowing and any discounts or bonuses obtained when a liability is settled are taken into consideration. Profits and losses are recognised in the profit and loss account at the time when a liability is derecognised from the balance sheet Trade and other liabilities Short-term trade liabilities are reported at the amounts payable. Other financial liabilities include liabilities due to payroll and purchase of fixed assets, which are measured at the amount payable. If the effect of time value of money is material, the value of liabilities is determined by discounting the projected future cash flows to their present value using a gross discount rate that reflects current market estimates of the time value of money. If the discounting method has been applied, changes in liabilities due to the passage of time is recognized as financial costs Provisions Provisions are created, when the Company is bound by an obligation (by law or custom) due to past events, and when it is probable that the fulfilment of this obligation will result in an outflow of economic benefits and the liability can be credibly estimated. If the Company expects that the costs included in a provision will be reimbursed, for example under an insurance agreement, the reimbursement is recognised as a separate asset, but only when it is certain that the reimbursement will actually take place. The costs of a provision are disclosed in the profit or loss of a period at costs depending on circumstances accompanying future liabilities. If the influence of time value of money is significant, the amount of the provision is established by discounting forecast cash flows to the current value, using a gross interest rate that reflects the current market assessments of the time value of money and the potential risk related to a liability. If discounting is used, the increase in the provision over time is recognised as under financial expenses Retirement gratuities According to IAS 19, retirement gratuities are defined benefit plans after the employment period. The calculated liabilities are equal to discounted payments to be made in the future, taking account of the turnover of staff, and they relate to the period until the balance sheet date. Demographic information and information on the turnover of staff is based on historic data Share-based payments The entity recognises goods or services received or purchased under share-based payment transactions at the time when it receives such goods or services. At the same time, it recognises the corresponding increase in equity, if the goods or services are received under a share-based payment transaction settled in equity

84 Financial statements for instruments, or liability, if the goods or services are purchased under a share-based payment transaction settled in cash. If the goods or services received or purchased under a share-based payment transaction do not qualify for recognition under assets, the entity recognises them as costs Lease The Company as a lessee Finance lease agreements which encumber the Company with all risk and all benefits from holding the subject of lease are recognised in the balance sheet as at the day when the lease starts according to one of the two values, whichever is lower: fair value of a PP&E item that is the subject of lease or current value of minimum lease fees. Lease fees are allocated to financial costs and decrease of lease liabilities balance to obtain a constant interest rate on the liability that remains to be repaid. Financial costs are recognised directly in the profit and loss account. PP&E used under finance lease agreements is depreciated for one of the two periods, whichever is shorter: estimated useful life of PP&E or lease period. Lease agreements under which the lessor retains essentially all risks and all benefits from holding the subject of lease are classified as operating lease agreements. Operating lease fees are recognised as costs in the profit and loss account for the duration of the lease, using the straight-line method Revenue from sale Revenue is recognised in the probable amount of the Company s economic benefits related to a given transaction and when the revenue can be credibly measured. Revenue is recognised after deducting the value added tax (VAT) and discounts. The criteria presented below also apply to recognising revenue Sale of services, products and goods Revenue from the sale of goods is recognised, when material risk and benefits from the ownership title to goods and products rest with the purchaser and when revenue can be credibly measured. In terms of development contracts, the Company recognizes revenue (and corresponding expense) from the agreement at the moment of transfering control and significant risks and benefits of ownership to the buyer. Transfer of control and significant risks and benefits of ownership of the object of sale (flat) takes place at the latest from the date of concluding the sale agreement in the form of a notarial deed. The Group has adopted the possibility to recognise a result on the development agreements at the date of delivering the premises with the handover protocol, provided that other terms and conditions are fulfilled by the parties including, in particular, the receipt of the full price for the apartment from the buyer, and the parties intend to conclude a final agreement and transfer the real estate in the form of a notarial deed. Borrowing costs incurred to finance investments which can be directly allocated to work in progress, in particular to the purchase of land and construction services, are capitalised as a portion of manufacturing cost of work in progress/portion of the land purchase price. Financial costs incurred in the reasonable period necessary to prepare land to fulfil a property development contract increase the land purchase price. Financial costs incurred during the implementation of a property development undertaking constitute a part of the manufacturing cost Interest Interest revenue is recognised gradually, as it is accrued (taking account of the effective interest rate, which is the rate discounting prospective cash proceeds for the expected life of financial instruments) in relation to the net carrying value of a financial asset.

85 Financial statements for Dividends Dividends are recognised at the time when the shareholders rights to receive them are established Rent revenue Revenue from renting out investment property is recognised using the straight-line method over the rental period in relation to open contracts Cost of sale Cost of sale includes: the cost of manufacturing products and services rendered, incurred during the reporting period, the value of goods and materials sold at purchase prices, establishing revaluation allowances for tangible fixed assets, intangible assets, inventories and receivables all costs of sales, general and administrative expenses incurred in the reporting period. Manufacturing costs, that are directly attributable to revenues generated by the Company, influence the financial result for the period in which the revenues were recognised. Manufacturing costs, that can only be assigned indirectly to revenues or other benefits acquired by the Company, influence the financial result in the part, which relates to a given reporting period, ensuring that they match revenues or other economic benefits Other operating revenues and expenses Other operating revenues and expenses include, in particular, items related to: disposal of tangible fixed assets, intangible assets; creation and reversal of provisions, apart from provisions connected with financial operations or charged in operating costs; transferring or acquiring, also by way of donation, assets, free of charge, including cash; compensation, penalties and other expenses not related to normal activity Financial revenues and expenses Financial revenues and expenses include in particular revenues and expenses relating to: revenue from share in the profits of other entities, mainly dividends; interest; disposal of financial assets; revaluation of financial instruments, except for financial assets available for sale, whose revaluation results are recognized in other comprehensive income; changes in provisions related to the approaching incurrence of the expense ( unwinding of discount effect); exchange differences resulting from operations performed during the reporting period and the valuation of assets and liabilities at the end of the reporting period, except for exchange differences recognized in the initial value of the fixed asset; other items related to financial activities.

86 Financial statements for Taxes Current tax Income tax recognized in the result of a period includes the actual tax charge for a given reporting period determined by the Company in accordance with the provisions of the corporate income tax law, possible tax settlement adjustments for previous years and a change in the deferred tax asset and deferred tax provisions settled with the profit of loss of the period. Current tax liabilities and receivables for the current period and the previous periods are measured at the amounts projected to be paid to tax authorities (subject to reimbursement from tax authorities), using tax rates and regulations which were legally or factually applicable as at the balance sheet date Deferred tax For the purpose of financial reporting, deferred tax is established with the method of balance sheet liabilities in relation to all temporary differences, as at the balance sheet date, between the taxable value of assets and liabilities and their carrying value disclosed in the financial statements. The deferred tax provision is recognised in relation to all positive temporary differences: except when the deferred tax provision is established as a result of an initial recognition of goodwill or initial recognition of an asset or a liability, in a transaction that is not a business combination and, at the time when the transaction is concluded, does not affect the gross financial result or the taxable income or the tax loss, and in the event of positive temporary differences from investments in subsidiaries or associates and interests in joint ventures - except when the dates of reversing temporary differences are controlled by an investor and when it is probable that the temporary differences will not be reversed in the foreseeable future. Deferred tax assets are recognised in relation to all negative temporary differences as well as unused tax assets and unused tax losses brought forward, in the amount of the probable taxable income, allowing for the use of the said differences, assets and losses: except when the deferred tax assets related to negative temporary differences are established as a result of an initial recognition of an asset or a liability in a transaction that is not a business combination and, at the time when the transaction is concluded, they do not affect the gross financial result or the taxable income or the tax loss, and in the event of negative temporary differences due to investment in subsidiaries or associates and interests in joint ventures, the deferred tax asset is recognised in the balance sheet only in the amount corresponding to the probability that, in the foreseeable future, the said temporary differences will be reversed and taxable income will be generated, allowing for the deduction of the negative temporary differences. The carrying value of a deferred income tax asset is verified as at each balance sheet date and is decreased in proportion to the improbability that a taxable income will be enough to realise the deferred tax asset fully or in part. The non-recognised deferred income tax asset is measured again on every balance sheet date and is recognised up to the amount reflecting the probability that taxable income will be generated in the future, allowing for the recovery of this asset. Deferred income tax assets and deferred income tax provisions are measured using tax rates which are expected to apply when an asset is settled or a provision is released, based on the tax rates (and tax

87 Financial statements for regulations) applicable as at the balance sheet date or tax rates and regulations which are certain to apply on the balance sheet date. Income tax related to items recognised directly in equity is recognised in equity rather than in the profit and loss account. The Company compensates deferred income tax assets and deferred income tax provisions only when it holds an enforceable legal title to compensate receivables and current tax provisions, and the deferred income tax is related to the same tax payer and the same tax authority Value added tax Revenues, costs and assets are recognised after deducting the value added tax, except: when the value added tax paid when purchasing assets or services cannot be recovered from tax authorities; it is recognised as a portion of the purchase price of an asset or as a portion of a cost item, and receivables and liabilities disclosed in consideration of the value added tax. The net value added tax that is recoverable or payable to tax authorities is recognised in the balance sheet as a portion of receivables or liabilities Net earnings per share The net earnings per share for every period are calculated by dividing the net profit for a given period by the average weighted number of shares in a given reporting period. Since 2007, the Company has presented diluted earnings/losses per share because of the existence during various reporting periods of potentially diluting ordinary shares in connection with Management Option Scheme and convertible bonds Cash flow statement The cash flow statement is prepared using the indirect method. 9. INFORMATION ON BUSINESS SEGMENTS The Company does not distinguish operating segments at the separate financial statements level. Operating segments have been listed at the level of the Polnord Capital Group in the consolidated financial statements for 2016.

88 Financial statements for REVENUES AND EXPENSES Operating revenues Operating revenue For the period from to For the period from to Specification [000' PLN] Sale of residential apartments Sale of plots of land Rent Project management Other Total operating revenues In 2016, the Company concluded one-off sales with a value exceeding 10% of operating revenues the sales of two real estate properties to a subsidiary in the amount of PLN 6,223 thousand. A material item of revenues in 2016 includes services provided to subsidiaries, involving the management of projects run by the Group companies. The above-mentioned revenue amounted to PLN 29,686 thousand Operating expenses Operating expenses For the period from to For the period from to Specification [000' PLN] Depreciation/Amortisation Consumption of materials and energy Third-party services Taxes and charges Payroll Social security and other benefits Other costs by type Total costs by type Movement in products, prepayments and accruals ( 3705) ( 20618) Own work capitalised 0 Selling costs (negative value) ( 6217) ( 7236) General administrative expenses (negative value) ( 29128) ( 22381) Manufacturing costs of products sold Value of materials sold Cost of sale In 2016, the Company was not dependent on a single supplier of services, materials and goods Depreciation of property, plant and equipment and amortization of intangible assets, revaluation allowances recognised in the consolidated profit and loss account The Company recognizes depreciation costs in general and administrative expenses. In 2016 and 2015, the Company did not recognize a revaluation allowance of fixed assets and intangible assets Revaluation of investment property The result from the revaluation of investment property was PLN (4,068) thousand in Changes and the fair value of investment property held by the Company are presented in Note 18.

89 Financial statements for Other operating revenues Other operating revenues Specification [000' PLN] For the period from to For the period from to Total release of provisions, including: for liabilities including Agricultural Property Agency Other, including: compensations other Total other operating revenues Other operating expenses Other operating expenses For the period from to For the period from to Specification [000' PLN] Total provisions established, including: revaluation of receivables perpetual usufruct fees and property tax provision for VAT liability 9880 Other, including: costs of disputes unrecoverable receivables fees for perpetual usefruct and property tax other Total other operating expenses Financial revenues Financial revenues For the period from to For the period from to Specification [000' PLN] Revenue from bank and commercial interest Investment revenue (interest on loans) Positive FX differences 1868 Revaluation of financial instruments Dividends received Total financial revenues In accordance with International Financial Reporting Standards ("IFRS"), the Management Board of, as at 31 December 2016, conducted a review of possible indications of impairment and an impairment test carried out of the value of shares in a joint venture in Fadesa Group by comparing the carrying value of assets to its value in use based on the discounted cash flow method. The analysis was based on the expected discounted cash flows of Fades Group over 5 years. When preparing estimates of future cash flows, the Management Board took into consideration the following factors, whose values were established on the basis of their professional judgment: a) Discount rate (Corresponding to the forecasted weighted average cost of capital (WACC)) 9.27% b) Future results of Fadesa Group

90 Financial statements for In the valuation model, the Management Board used a five-year budget planning, while the residual value was not taken into account because Fadesa Group was set up to execute specific development projects and will not continue to operate after the project are completed. On the basis of this analysis, the Company reversed an impairment allowance of this investment, increasing its value by PLN 11,000 thousand Financial costs Financial costs Specification [000' PLN] For the period from to For the period from to Interest on bank loans, borrowings and bonds Interest on other liabilities Financial costs of finance lease agreements 17 Negative FX differences Bank commissions and commissions on bank guarantees 431 Provision for interst of legal dispute with Agricultural Property Agency Interest from debt 509 Written-off receivables for the financial assets sold Revaluation write-downs on the value of loans Other Total financial expenses The Company did not capitalize any borrowing costs in the period covered by the statements Result on disposal of a subsidiary In 2016, there were no sales and acquisitions of a subsidiary. On , Polnord Inwestycje Sp. z o.o. sold to 990 shares with a total nominal value of PLN 99, in the company Polnord Łódź City Park Sp. o.o., which represents 99% of shares in the share capital of Polnord Łódź City Park Sp. o.o. (transformed in 2016 to Polnord Inwestycje Sp. z o.o. Łódź City Park SK), for a price of PLN 99, EMPLOYEE BENEFIT COSTS Employee benefit costs For the period from to For the period from to Specification [000' PLN] Short-term employee benefits Remuneration Surcharges on remuneration Total INCOME TAX The main components of the tax burden for the period ended and for the comparative period ended are as follows:

91 Financial statements for Income tax Specification [000'PLN] For the period from to For the period from to Main items of the tax burden Profit and loss account: Income tax currently payable Burden due to income tax currently payable - - Adjustments regarding current income tax brought forward Deferred income tax Due to occurrence and reversal of temporary differences Tax burden disclosed in the profit and loss account Statement of changes in equity: Deferred income tax Valuation of financial assets available for sale - ( 3047) Tax burden disclosed in equity - ( 3 047) In 2016, the Company recognized a tax receivable from the Tax Office amounting to PLN 3,183 thousand (relating to the control proceedings in respect of income tax liabilities for the year 1999). The receivables include the principal amount of PLN 602 thousand and interest in the amount of PLN 2,581 thousand. The reconciliation of income tax on the gross financial result before tax, according to the statutory tax rate, and income tax calculated according to the Group s effective tax rate for the periods ending on and is as follows:

92 Financial statements for Reconciliation of income tax on the gross financial result before tax, according to the statutory tax rate, and income tax calculated according to the effective tax rate: For the period from to For the period from to Specification [000' PLN] Pre-tax gross profit/(loss) on continued operations ( ) ( ) Pre-tax gross profit/(loss) ( ) ( ) Tax according to the 19% statutory tax rate applicable in Poland ( 8893) ( 24314) Adjustments regarding current income tax brought forward ( 3183) Non-deductible costs Non-taxable revenue ( 2262) ( 3137) Other ( 2773) ( 2120) Tax according to the effective tax rate ( 8973) ( 9738) Income tax (burden) disclosed in the profit and loss account Total The regulations on the value added tax, corporate income tax, or social security contributions are often amended, and thus, as a result, sometimes there is no reference to established regulations or legal precedents. The applicable regulations are inconsistent, resulting in ambiguous interpretations of tax regulations by national authorities and enterprises. Tax settlements and other (e.g. customs or foreign currencies settlements) may be subject to inspection by administrative bodies authorised to impose high penalties and fines, and any additional taxation liabilities calculated as a result must be paid together with high interest. For this reason, tax risk in the countries in which the entity operates is significantly higher than in countries with a better developed tax culture. Tax settlements may be subject to an audit. As a result, the amounts disclosed in the financial statements may change later after they are finally determined by tax authorities. Starting from 15 July 2016, changes have been introduced to the Tax Code to take account of the provisions of the General Anti-Avoidance Rules ( GAAR ). The purpose of the GAAR is to prevent the formation and exploitation of artificial legal schemes created in order to avoid payment of tax in Poland. The GAAR defines tax avoidance as an operation whose main purpose is to obtain a tax advantage, contrary, in given circumstances, to the object and purpose of the provisions of the Tax Act. According to the GAAR, such operation may not result in obtaining a tax advantage if it was artificial. Any occurrence of (i) unjustified division of a transaction into several steps, (ii) involvement of intermediaries, despite the absence of economic or commercial justification, (iii) elements that offset or cancel out one another, and (iv) other actions with a similar effect to those mentioned above, may be treated as a premise of an artificial operations that are subject to the GAAR provisions. The new regulations will require a significantly higher degree of judgment when assessing the tax implications of individual transactions. GAAR clause should be applied to transactions made after its entry into force and to transactions that were carried out before the entry into force of the GAAR clause, but for which, after the date of entry into force of the clause, benefits have been or are still obtained. The implementation of these regulations will enable the Polish tax authorities to question the legal arrangements and agreements applied by taxpayers, such as restructuring and reorganization of the group.

93 Financial statements for Deferred income tax Deferred income tax results from the following items: Deferred income tax Balance Sheet As at As at Specification [000' PLN] Deferred income tax provision Foreign exchange differences 4 3 Accrued interest outstanding Measurement of property development contracts Taxable revenue in subsequent periods PP&E under finance lease 119 Valuation of real property Other Gross deferred income tax provision Deferred tax assets Provision for costs Foreign exchange differences Accrued interest outstanding Losses deductible from future taxable revenue Finance lease liabilities 107 Valuation of real property 9146 Provision for retirement gratuities Unrealised margin Asset valuation Difference between accounting depreciation and tax depreciation Gross deferred tax assets Deferred tax net Assets/Provision Deferred income tax Profit and Loss Account Specification [000' PLN] For the period from to For the period from to Deferred income tax provision Foreign exchange differences 1 1 Accrued interest outstanding ( 30) ( 1158) Measurement of property development contracts 0 Taxable revenue in subsequent periods 0 PP&E under finance lease 119 Valuation of real property ( 274) ( 4818) Other 0 ( 1481) Gross deferred income tax provision ( 184) ( 7456) Deferred tax assets Provision for costs Foreign exchange differences ( 135) 36 Accrued interest outstanding 276 ( 798) Losses deductible from future taxable revenue ( 474) ( 2369) Finance lease liabilities 107 Valuation of real property 9146 ( 10196) Provision for retirement gratuities 4 ( 15) Unrealised margin 0 Asset valuation ( 5154) 5854 Difference between accounting depreciation and tax depreciation ( 975) 1727 Gross deferred tax assets ( 765) Deferred income tax burden ( 5 790) ( 6 692)

94 Financial statements for SOCIAL ASSETS AND SOCIAL BENEFITS FUND LIABILITIES The Act of 4 March 1994 on the Company Social Benefits Fund, as amended, stipulates that businesses employing more than 20 full-time employees must establish the Company Social Benefits Fund. The Company has established this fund and makes periodic allowances in the amount of the minimum allowance. The purpose of the Fund is to subsidise the Company's activity related to employee benefits, borrowings granted to the employees and other social costs. The Company offsets the Fund's assets with its liabilities towards the Fund, as these assets are not separate assets of the Company, the Company only administers them. The following table presents composition and nature of assets, liabilities and costs of the Fund. Social assets and Social Benefits Fund liabilities As at As at Specification [000'PLN] Borrowings granted to employees 1 5 Cash 3 6 Liabilities under the Fund ( 4) ( 11) Balance after compensation -1 Allowances for the Fund in the financial period EARNINGS PER SHARE Basic earnings per share are calculated by dividing net profit for the period, allocated to ordinary shareholders of the Company, by the weighted average number of the issued ordinary shares over the period. Diluted earnings per share are calculated by dividing net profit for the period, allocated to ordinary shareholders of the Company (after deducting interest on redeemable preference shares convertible to ordinary shares) by the weighted average number of the issued ordinary shares over the period (adjusted for dilutive options and dilutive redeemable preference shares convertible to ordinary shares). In 2016, there were no new issues of convertible bonds. Detailed description of options per share is presented in Note The data on profit and shares used for calculating earnings per share are presented below: Earnings per share - basic Specification [000'PLN] For the period from to For the period from to Net profit (loss) for the period ( 37835) ( ) Net profit (loss) on discontinued operations for the period 0 ( 152) Net profit (loss) on continued operations for the period ( 37835) ( ) Average weighted number of ordinary shares for the period Net earnings (losses) per ordinary share (PLN) ( 1.16) ( 3.63) Net profit (loss) on discontinued operations, per ordinary share (PLN) 0.00 ( 0.00) Net profit (loss) on continued operations, per ordinary share (PLN) ( 1.16) ( 3.62)

95 Financial statements for Diluted earnings per share For the period from to For the period from to Net profit (loss) for the period ( 37835) ( ) Net profit (loss) on discontinued operations for the period 0 ( 152) Net profit (loss) on continued operations for the period ( 37835) ( ) Interest on convertible bonds Net profit (loss) for the period used to calculate diluted earnings per share ( 37835) ( ) Net profit (loss) on discontinued operations, for the period used to calculate diluted earnings per share 0 ( 152) Net profit (loss) on continued operations, for the period used to calculate diluted earnings per share ( 37835) ( ) Dilution effect: Share options Convertible bonds Average weighted diluted number of ordinary shares for the period Net diluted earnings (losses) per ordinary share (PLN) ( 1.16) ( 3.59) Net diluted profit (loss) on discontinued operations, per ordinary share (PLN) 0.00 ( 0.00) Net diluted profit (loss) on continued operations, per ordinary share (PLN) ( 1.16) ( 3.59) 15. OTHER COMPREHENSIVE INCOME Disclosure of income tax amounts related to every item of other comprehensive income For the period from to For the period from to Pre-tax Income tax Post-tax Pre-tax Income tax Post-tax Specification [000'PLN] Valuation of financial assets available for sale ( 787) 0 ( 787) ( 3 047) 203 Other Other comprehensive income ( 787) 0 ( 787) ( 3 047) DIVIDENDS PAID No dividends were paid in The Board will recommend to cover the losses of the Company for 2016 from supplementary capital from share premium.

96 Financial statements for PROPERTY, PLANT AND EQUIPMENT Tangible fixed assets (Property, plant and equipment) from to Land (including perpetual usufruct) Buildings and structures Machines and equipment Means of transport PP&E under construction Other PP&E Total Net value as at Increases ( 60) Purchase Acquisition of fixed assets under finance lease Reclassification 56 ( 60) Other ( 21) Decreases ( 21) ( 814) ( 340) 0 ( 447) ( 1621) Depreciation allowance for the reporting period ( 21) ( 186) ( 340) ( 300) ( 846) Impairment 0 Sale ( 14) ( 14) Reclassification 0 Liquidation ( 614) ( 148) ( 761) Net value as at ( 0) As at Gross value Depreciation and impairment loss ( 29) ( 1 576) ( 78) 0 ( 1 314) ( 2 997) Net value As at Gross value ( 0) Depreciation and impairment loss ( 50) ( 1 762) ( 418) 0 ( 1 614) ( 3 843) Net value ( 0)

97 Financial statements for Tangible fixed assets (Property, plant and equipment) from to Land (including perpetual usufruct) Buildings and structures Machines and equipment Means of transport PP&E under construction Other PP&E Total Specification [000' PLN] Net value as at Increases Purchase Reclassification Decreases ( 10) ( 157) ( 287) 0 ( 178) ( 632) Depreciation allowance for the reporting period ( 10) ( 149) ( 117) ( 172) ( 448) Impairment ( 8) ( 170) ( 6) ( 184) Net value as at As at Gross value Depreciation and impairment loss ( 19) ( 1 447) ( 176) 0 ( 1 175) ( 2 817) Net value As at Gross value Depreciation and impairment loss ( 29) ( 1 576) ( 78) ( 1 314) ( 2 997) Net value

98 Financial statements for The carrying amount of property, plant and equipment used as at under financial lease agreements and lease agreements with purchase option amounted to PLN 625 thousand. As at , the Company did not have any ongoing financial lease agreements. 18. INVESTMENT PROPERTIES Investment property Stan na Stan na Specification [000'PLN] Opening balance Increases Decreases (Sales) ( 13800) Reclassification to inventory ( 48707) ( 15644) Revaluation of investment property to fair value in profit or loss ( 4068) ( 15771) Closing balance For the needs of the report for 2016, the Company, with the help of appraisers, carried out valuations of investment properties. The Company's Management Board verified the valuations received. All investment properties are located in the territory of Poland. The balance sheet valuation of investment properties at fair value is repetitive and is conducted at level 3 of the fair value hierarchy. During the reporting period no movements occurred between the hierarchy levels. The fair value of investment property, the plots of land, was valued using estimation procedures based on comparable transactions and was calculated by independent property appraisers. In estimating the fair value of properties an approach involving best and the most beneficial use of assets was adopted which does not differ from the current use. Specification [000'PLN] Fair value as at Valuation method Plots in Warsaw (Wilanów) Comparative approach Suburban plots (Pomeranian and Masovia Provinces) Suburban plots (Wielkopolskie Province) Comparative approach Comparative approach Input data Price of similar plots Scope (weighted average) ( ) Correction factor* (0.84) Price of similar plots (45.46) Correction factor* (0.67) Price of similar plots (253.76) Correction factor* (1.05) Specification [000'PLN] Fair value as at Valuation method Input data Scope (weighted average) Plots in Warsaw (Wilanów) Comparative approach Price of similar plots (930.38) Correction factor* (0.89) Suburban plots (Pomeranian and Masovia Provinces) Comparative approach Price of similar plots (67.95) Correction factor* (0.90) Suburban plots (Wielkopolskie Province) Comparative approach Price of similar plots (256)

99 Financial statements for Correction factor* (0.95) The correction factor depends on: the location the function according to the local zoning plan the neighbourhood transport accessibility the technical infrastructure Sensitivity analysis of changes of unobservable variables: An increase in the price of similar plots would cause an increase in the fair value of the measured property. An increase in the correction factor would cause an increase in the fair value of the measured property. There is a direct dependency between those variables as they are partly determined by the market. Valuation process The valuation of an investment property is conducted annually as at the balance sheet date on the basis of reports prepared by independent appraisers who have adequate experience and qualifications in the valuation of this type of real estate. These reports are based on market prices of similar property and on the assumptions and valuation models adopted by the appraisers. These assumptions usually depend on the market, as do the average prices of compared property. They are determined on the basis of professional judgement and market observation. Information presented by the appraisers the assumptions and models adopted for valuation are reviewed by the Management Board. This analysis involves the review of changes in the fair value as compared to the previous valuation. The approved report is recognised in the books. Mortgages are established on some of the Company's investment property, securing the repayment of loans and bonds. The carrying value of investment property on which mortgages are established, as at the balance sheet date, amounts to PLN 375,794 thousand, while as at it amounted to PLN 371,243 thousand. The amount of direct operating expenses arising from investment in real estate that did not generate rental income amounted to PLN 1,084 thousand in 2016, and PLN 1,871 thousand in 2015.

100 Financial statements for INTANGIBLE ASSETS Intangible assets from to Patents and licences Computer software Intangible assets under construction Other Total Specification [000'PLN] Net value as at Increases Purchase Reclassification 0 Other Decreases ( 95) ( 234) ( 21) ( 350) Impairment loss Depreciation allowance for the reporting period ( 42) ( 163) ( 21) ( 226) Reclassification ( 53) ( 71) ( 124) Other Net value as at As at Gross value Depreciation and impairment loss ( 158) ( 1 098) ( 97) ( 1 353) Net value As at Gross value Depreciation and impairment loss ( 253) ( 1 332) ( 118) ( 1 703) Net value as at Intangible assets from to Patents and licences Computer software Intangible assets under construction Other Total Net value as at Increases Purchase Decreases ( 40) ( 185) 0 ( 7) ( 232) Impairment loss Amortisation allowance for the reporting period ( 40) ( 185) ( 7) ( 232) Liquidation 0 Net value as at As at Gross value Amortisation and impairment loss ( 117) ( 913) 0 ( 91) ( 1 121) Net value As at Gross value Amortisation and impairment loss ( 158) ( 1 098) ( 97) ( 1 353) Net value As at : patents and licenses were amortised consistently over their economic useful life;

101 Financial statements for computer software was amortised consistently over its economic useful life of up to 5 years; other intangible assets were amortised consistently over their economic useful lives of up to 5 years. 20. INVESTMENTS IN ASSOCIATES AND JOINT-VENTURES MEASURED WITH EQUITY METHOD Details regarding shares and stocks in subsidiaries, jointly controlled entities and joint ventures Details regarding shares and stocks as at the balance sheet date are as follows: As at As at Subsidiary name Cost Revaluation allowance Net value Cost Revaluation allowance Net value Polnord Szczecin Ku Słońcu Sp. z o.o Polnord Inwestycje Sp. z o.o. Łódź City Park SK Polnord Apartamenty Sp. z o.o Polnord Olsztyn Tęczowy Las Sp. z o.o Polnord Warszawa Ząbki Neptun Sp. z o.o Śródmieście Wilanów Sp. z o.o Wilanów Office Park Budynek B1 Sp. z o.o (8586) (8586) Wilanów Office Park Budynek B3 Sp. z o.o Polnord Inwestycje Sp. z o.o Polnord Inwestycje Sp. z o.o. Spółka jawna Polnord Gdańsk Dwa Tarasy Sp. z o.o Polnord Gdynia Brama Sopocka Sp. z o.o Polnord Spółka Akcyjna Finanse Spółka Jawna Stroj-Dom ZSA (20545) (12291) 8254 Fadesa Polnord Polska Sp. z o.o (72590) (83590) Stacja Kazimierz I Sp. z o.o Stacja Kazimierz I Sp. z o.o. S.K.A Stacja Kazimierz Sp. z o.o Stacja Kazimierz Sp. z o.o. S.K.A Stacja Kazimierz II Sp. z o.o Stacja Kazimierz II Sp. z o.o. S.K.A Stacja Kazimierz III Sp. z o.o Stacja Kazimierz III Sp. z o.o. S.K.A POLNORD GDAŃSK DOLNE MIASTO Sp. z o.o POLNORD HAFFNERA 1 Sp. z o.o POLNORD HAFFNERA 2 Sp. z o.o POLNORD HAFFNERA 3 Sp. z o.o Semeko Aquasfera Sp. z o.o SPV1 Sp. z o.o RAZEM (101721) (104467) Details on joint-ventures As at , the Company holds the following significant shares in joint ventures: FADESA POLNORD POLSKA Sp. z o.o. (basic acitivity PKD Z Building works related to erection of residential and non-residential buildings; registered in the District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register; place of business - Aleje Jerozolimskie 94 Str., Warszawa),

102 Financial statements for o o o FPP Powsin Sp. z o.o. (basic acitivity PKD Z Building works related to erection of residential and non-residential buildings; registered in the District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register; place of business - Aleje Jerozolimskie 94 Str., Warszawa), Osiedle Innova Sp. z o.o. (basic acitivity PKD Z Building works related to erection of residential and non-residential buildings; registered in the District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register; place of business - Aleje Jerozolimskie 94 Str., Warszawa), FPP OSIEDLE MODERNO Sp. z o.o. (basic acitivity PKD Z Building works related to erection of residential and non-residential buildings; registered in the District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register; place of business - Aleje Jerozolimskie 94 Str., Warszawa), Semeko Aquasfera Sp. z o.o. (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court Gdańsk - Północ in Gdansk, VIII Commercial Division of the National Court Register; place of business - Tatrzańska 10 Str., Gdynia), Stacja Kazimierz Sp. z o.o. (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz Sp. z o.o. SKA (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz I Sp. z o.o. (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz I Sp. z o.o. SKA (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz II Sp. z o.o. (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz II Sp. z o.o. SKA (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa). Stacja Kazimierz III Sp. z o.o. (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa), Stacja Kazimierz III Sp. z o.o. SK (basic acitivity PKD Z Realization of building projects related to erection of buildings; registered in the District Court for the Capital City of Warsaw, XIII Commercial Division of the National Court Register; place of business - Al. Gen. Wł. Sikorskiego 11, Warszawa).

103 Financial statements for Korporacja Budowlana Dom SA The associates of the Group include the Capital Group Korporacja Budowlana Dom SA (Korporacja Budowlana Dom SA basic acitivity PKD Z Building works related to erection of residential and non-residential buildings; registered in the District Court Gdańsk - Północ in Gdansk, VIII Commercial Division of the National Court Register; place of business - Budowlana 3 Str., Kartoszyno). A company whose main productive asset is the company KB Dom Sp. z o.o. operating as a General Contractor and possessing a production plant manufacturing prefabricates in Kartoszyno (Pomeranian Province). Polnord holds 31.72% of shares in KB Dom SA. Polnord has a significant influence on Korporacja Budowlana Dom SA. Acquisition and sale of businesses Changes that occurred in 2016 with regard to capital relations of with other entities are described in details in Note 2.2 of the Financial statements. 21. OTHER (LONG-TERM) FINANCIAL ASSTES Other financial assets As at As at Specification [000'PLN] Shares/interests in unlisted companies Shares of listed companies Other Total other financial assets At the end of each financial year, the Company measures its shares classified as available for sale to fair value. As at and , the Company performed a valuation of shares of Korporacja Budowlana DOM SA, classified in Category 1 of the fair market value (with quotes WSE). 22. LOANS GRANTED Loans granted As at As at Specification [000'PLN] Total loans granted (net) Write downs on loans Gross loans Loans granted concern loans granted to entities within the Polnord Capital Group. Interest rates on loans are fixed. Impairment loss on loans concern a Russian company and two Polish companies.

104 Financial statements for LONG-TERM RECEIVABLES Long-term receivables As at As at Claim against MPWIK Other Total other long-term receivables INVENTORY Inventory As at As at Specification [000'PLN] Materials (according to the purchase price) Work in progress According to the purchase price/manufacturing cost According to the net realisable value Finished products: According to the purchase price/manufacturing cost According to the net realisable value Goods According to the purchase price/manufacturing cost According to the net realisable value Total inventory, at the lower of the two values: purchase price (manufacturing cost) and net realisable value Gross inventory and revaluation allowance As at As at Materials Gross value Revaluation allowance - - Work in progress Gross value - - Revaluation allowance - - Finished products: Gross value Revaluation allowance - - Goods Gross value Revaluation allowance ( 32910) ( 27847) Total inventory Inventory revaluation allowance As at As at Opening balance revaluation allowance ( 27848) ( 15005) Increase ( 15649) ( 17300) Reversal 103 Utilization 4457 Reclassification Closing balance revaluation allowance ( 32910) ( 27848)

105 Financial statements for In 2016, revaluation allowances were made for inventory in the total amount of PLN 15,649 thousand, while in 2015 it was PLN 17,300 thousand. Reclassification concerned the transfer of land from investment property to inventories. The repayment of the loans received by the Company is secured by collaterals, such as real properties. The carrying value of inventory on which mortgages are established, as at the balance sheet date , amounts to PLN 157,077 thousand while as at it was PLN 155,713 thousand 25. TRADE AND OTHER RECEIVABLES Transactions with related parties are concluded on market terms. Trade and other receivables As at As at Specification [000'PLN] Receivables from related parties, including: Trade receivables Disputed in court 0 - Other 3 Receivables from other entities, including: Trade receivables Disputed in court 0 - Other Budget receivables Total (net) receivables Receivables revaluation allowance Gross receivables In the opinion of the management, there is no additional credit risk above the level defined by the allowance for unrecoverable trade receivables. 26. CASH AND CASH EQUIVALENTS Cash at bank bears variable interest rates. Short-term deposits are made for periods ranging from one day to one month, depending on the Group s current cash requirements, and bear interest according to the interest rates defined for them. Cash and cash equivalents As at As at Specification [000'PLN] Cash in hand and cash in bank Cash in transit 6629 Cash equivalents in the form of share units 2253 Short-term deposits Total

106 Financial statements for Cash and cash equivalents disclosed in the cash flow statement: As at As at Cash in hand and cash in bank Cash in transit 6629 Cash equivalents in the form of share units 2253 Short-term deposits Overdrafts Total Cash in hand and cash in bank allocated to discontinued operations Total cash and cash equivalents disclosed in the cash flow statement Restricted cash constitute the funds on housing escrow accounts and on the social benefits fund. 27. ASSETS HELD FOR SALE The office located in Warsaw, Sikorskiego 11 St., has been classified as assets held for sale. 28. SHARE CAPITAL AND AND SUPPLEMENTARY/ RESERVE CAPITAL Share capital In the period from to , the share capital of increased by PLN under the conditional share capital increase pursuant to Resolution No. 1/2013 of the Extraordinary General Meeting of the Company of As at , the share capital of is divided into 32,693,127 ordinary bearer shares with a nominal value of PLN 2 each. Share capital As at As at Specification [000'PLN] Share capital Series A ordinary shares with a nominal value of PLN 2 each Series B ordinary shares with a nominal value of PLN 2 each Series C ordinary shares with a nominal value of PLN 2 each Series D ordinary shares with a nominal value of PLN 2 each Series E ordinary shares with a nominal value of PLN 2 each Series F ordinary shares with a nominal value of PLN 2 each Series G ordinary shares with a nominal value of PLN 2 each Series I ordinary shares with a nominal value of PLN 2 each Series J ordinary shares with a nominal value of PLN 2 each Series M ordinary shares with a nominal value of PLN 2 each Series L ordinary shares with a nominal value of PLN 2 each Series K ordinary shares with a nominal value of PLN 2 each Series N ordinary shares with a nominal value of PLN 2 each Series O ordinary shares with a nominal value of PLN 2 each Series P ordinary shares with a nominal value of PLN 2 each Series Q ordinary shares with a nominal value of PLN 2 each Series H ordinary shares with a nominal value of PLN 2 each Series R ordinary shares with a nominal value of PLN 2 each Series S ordinary shares with a nominal value of PLN 2 each Total

107 Financial statements for Nominal value of shares All issued shares have a nominal value of PLN 2 and have been fully paid-up. Shareholders rights The shares of all series are vested with identical privilege to dividend and return on capital. Shareholders The Shareholding as at : Shareholding of as at Shareholder Number of shares/votes Nominal value of shares [PLN] % of capital/votes Nationale-Nederlanden Otwarty Fundusz Emerytalny 2,428,258 4,856, % Powszechna Kasa Oszczędności Bank Polski SA 2,345,893 4,691, % Bank Gospodarstwa Krajowego 2,086,890 4,173, % Towarzystwo Funduszy Inwestycyjnych PZU SA (investment funds managed by TFI PZU SA) 1,818,437 3,636, % Briarwood Capital Partners LP 1,634,941 3,269, % Others shareholders in total 22,378,708 44,757, % Total 32,693,127 65,386, % * According to the information provided by shareholders to the Company pursuant to art. 69 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies. Changes in the Company's shareholdings after the balance sheet date until the date of this report are described in the events after the balance sheet date in Note 44.

108 Financial statements for Other reserve capitals Other capital Revaluation reserve Supplementary capital Other reserve capitals Total As at r ( 803) Other net comprehensive income: Revaluation of land and buildings Valuation of financial assets available for sale Other 0 Deferred tax due to above-mentioned adjustments ( 3047) ( 3047) Other Result carried forward from previous period Management Option scheme As at ( 600) As at ( 600) Other net comprehensive income: ( 787) ( 787) Valuation of financial assets available for sale ( 787) ( 787) Deferred tax due to above-mentioned adjustments 0 0 Other ( 7101) 0 ( 7101) Result carried forward from previous period ( 7101) ( 7101) Management Option scheme 0 0 As at ( 1387) Supplementary capital Supplementary capital was created from the share premium, less the share issue costs recognised as a decrease in supplementary capital. In addition, supplementary capital was also created from the statutory allowances for profit generated in previous financial years as well as from surplus from the distribution of profit in excess of the statutory allowance. Share premium is presented in the balance sheet as a separate item.

109 Financial statements for INTEREST-BEARING BANK LOANS, BORROWINGS AND BONDS Interest-bearing bank loans and borrowings Specification [PLN 000'] SHORT-TERM As at As at Liabilities under finance lease and leasehold agreements with purchase option Debt bills and bonds Overdrafts Short-term portion of long-term loans 85 Revolving loans Other loans and borrowings Total short-term loans and borrowings LONG-TERM As at As at Liabilities under finance lease and leasehold agreements with purchase option Bonds Bank loans and borrowings Total long-term loans and borrowings

110 Financial statements for List of loans as at Specification [PLN 000'] As at Company Lending institution Currency loan amount Currency Outstanding amount as at the balance sheet date Current (short-term) portion of loans/borrowings GETIN NOBLE PLN BANK SA BANK OCHRONY ŚRODOWISKA PLN SA Deferred costs ( 749) ( 220) Total Interest rate WIBOR 3M + margin WIBOR 1M + margin Maturity Securities - mortgage on investment property blank bill of exchange - surety - mortgage on inventory blank bill of exchange - surety At Company Lending institution Currency loan amount Currency Outstanding amount as at the balance sheet date Current (short-term) portion of loans/borrowings GETIN NOBLE BANK SA PLN Interest rate Maturity Securities WIBOR 3M + margin mortgage on investment property - blank bill of exchange - surety BANK OCHRONY ŚRODOWISKA SA PLN WIBOR 1M + margin mortgage on inventory - blank bill of exchange - surety Total

111 Financial statements for List of bonds as at Type of bonds Amount of the issued bonds Currency Outstanding amount as at the balance sheet date Current (short-term) outstanding portion (interest) Interest rate Maturity Securities Ordinary bonds NS PLN Ordinary bonds PLN Ordinary bonds PLN Ordinary bonds NS PLN Ordinary bonds NS PLN Public bonds PLN Ordinary bonds MB PLN Ordinary bonds, series O PLN Ordinary bonds, series D PLN Ordinary bonds NS PLN Ordinary bonds NS PLN Ordinary bonds NS PLN Deferred costs Total WIBOR 3M + margin principal amount, interest every quarter WIBOR 6M + margin principal amount, interest every six months WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every quarter WIBOR 3M + margin principal amount, interest every quarter WIBOR 3M + margin principal amount, interest every quarter WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every quarter WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every quarter WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every quarter (3 750) (1 991) Mortgage on investment property and inventory Mortgage on inventory Mortgage on investment property Mortgage on investment property Mortgage on inventory Mortgage on investment property Mortgage on investment property Mortgage on investment property

112 Financial statements for List of bonds as at Type of bonds Amount of the issued bonds Currency Outstanding amount as at the balance sheet date Current (short-term) outstanding portion (interest) Interest rate Maturity Securities Ordinary bonds, series B PLN Ordinary bonds NS PLN Ordinary bonds NS PLN Ordinary bonds NS PLN Ordinary bonds PLN Ordinary bonds PLN Ordinary bonds PLN Ordinary bonds PLN Ordinary bonds, series D PLN Public bonds PLN Deferred costs Total WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every quarter WIBOR 3M + margin principal amount, interest every quarter WIBOR 3M + margin principal amount, interest every quarter WIBOR 6M + margin principal amount, interest every six months WIBOR 6M + margin principal amount, interest every six months WIBOR 6M + margin principal amount, interest every six months WIBOR 6M + margin principal amount, interest every six months WIBOR 6M + margin principal amount, interest every six months WIBOR 3M + margin principal amount, interest every six months (4 345) (2 308) Mortgage on fixed assets Mortgage on investment property and inventory Mortgage on investment property and inventory Mortgage on investment property Mortgage on inventory Mortgage on inventory Mortgage on investment property Mortgage on investment property Mortgage on investment property

113 Opinion and report of the auditor EMPLOYEE BENEFITS Employee share schemes On the Company s Supervisory Board adopted a resolution on the application of the Regulations on Management Options Programme ( MO Regulations ). The MO Regulations were adopted pursuant to Resolution No. 1/2013 and Resolution No. 2/2013 of the Extraordinary General Meeting of Shareholders of Polnord held on on conditional increase of the Company s share capital excluding the preemptive rights of the current shareholders and on the issue of subscription warrants excluding the preemptive rights of the current shareholders ( MO Programme ). The MO Programme is directed at the Management Board of the Company and at employees and associates of key importance for implementing the Company s strategy ( Entitled Individuals ). The MO Programme provides for the issue of no more than 350,000 subscription warrants for no consideration, issued in three tranches ( Warrants ). Each Warrant entitles to subscription of one Share. The Share issue price for all Warrants amounts to PLN A total of 336,800 A, B and C series warrants have been issued and delivered within the MO Programme. Two Entitled Individuals subscribed a total of 60,100 series S ordinary bearer shares of the Company with a nominal value of PLN 2.00 each. The Entitled Individual may exercise the right to subscribe the Shares no later than , so the MO Programme expired. The following table illustrates the number and weighted average exercise prices of shares options under the employee share programme. Employee share schemes From to From to Specification [000'PLN] Number of options WARP in PLN Number of options WARP in PLN Unrealised at the beginning of the period Granted over the period Forfeit over the period Realised over the period (60100) Expired over the period (276700) Unrealised at the end of the period Share options vested at the end of the period had the following prices options: Date of expiry Price in the implementation in PLN Number of options Price in the implementation in PLN Number of options 31/12/ The assumptions for the Black-Scholes-Merton: Expected volatility (%) 18.06% 18.06% Historical volatility (%) 18.06% 18.06% Risk-free interest rate (%) 3.15% 3.15% Expected option maturity (in years) 3 3 Average weighted share price (in PLN) The fair value of 1 warrant

114 Financial statements for Retirement benefits and other post-employment benefits The entity pay retirement gratuities to the employees who retire in the amount specified by the Labour Code or the amount specified by the Company s Remuneration Regulations, depending on which amount is more beneficial for the employee. Therefore, the Company establishes a provision for the current value of the retirement gratuities liability. The amount of this provision and the reconciliation presenting changes in the balance during the financial period are included in the table below. Retirement benefits and other post-employment benefits As at As at Specification [PLN 000 ] Movements in provision for retirement gratuities As at the beginning of the reporting period Cost of present employment 21 (80) Cost of future employment Benefits paid Actuarial gains/losses Actuarial interest As at the end of the reporting period Assumptions adopted by the actuary as at the balance sheet date to calculate the liability: Discount rate (%) 5.93% 5.93% Expected inflation rate (%) 3.50% 3.50% Expected remuneration growth rate (%) 3.50% 3.50% Benefits due to termination of employment In 2016, the Company did not incur costs connected with employment termination. In 2015, employment termination benefits amounted to PLN thousand. 31. PROVISIONS Changes in provisions Provisions Provision for retirement gratuities and similar benefits Provisions for holidays Provisions for interest Provisions for liabilities Provisions for court proceedings Total As at Established during the financial year Used Released ( 723) ( 1 299) ( 2 022) Presentation adjustment As at Short-term Long-term The main item of provisions is attributable to provisions for amounts (liabilities) together with interest owed to the Agricultural Property Agency due to fees for perpetual usufruct of land in Wilanów (Warsaw). The

115 Financial statements for provisions refer to the difference between the amount of the fee changed by the Agricultural Property Agency and the fee in force until 2007, including interest. As at , the balance of provisions for the principal fee was PLN 55,630 thousand (PLN 50,949 thousand as at ) and interest on past due amounts is PLN 34,306 thousand (PLN 30,362 thousand as at ). As part of provisions for liabilities and interest on them, the Group recognized a provision for the potential tax liability resulting from a protocol of tax audit drawn up by the Head of the Gdańsk Tax Office concerning examination of the correctness of the settlement and calculation of tax on goods and services for July The provision for tax liabilities as at amounted to PLN thousand, and interest PLN thousand. Provisions Provision for retirement gratuities and similar benefits Provisions for holidays Provisions for interest Provisions for liabilities Provisions for court proceedings Total As at Established during the financial year Used Released ( 81) ( 483) ( 564) Presentation adjustment As at Short-term Long-term TRADE AND OTHER (SHORT-TERM) LIABILITIES Trade and other (short-term) liabilities As at As at Specification [000'PLN] Trade liabilities Due to related parties Due to other parties Total trade liabilities Liabilities due to taxes, custom duties, social security and other VAT Personal income tax Other Total liabilities due to taxes, custom duties, social security and other Interest liabilities Other liabilities Liabilities due to employee remunerations 8 1 Liabilities due to related parties Liabilities due to joint venture 0 Other liabilities, including: Partial reimbursement of compensation - Reclassification - Other Total other liabilities Accruals due to: Other Total accruals

116 Financial statements for Rules and terms of payment of the above financial liabilities: Transactions with related parties are concluded according to market terms. Trade and other liabilities do not bear interest. The difference between liabilities and receivables due to the value added tax is settled with the competent tax authorities on a monthly basis. 33. LEASE LIABILITIES 33.1.Operating lease liabilities - the Company as a lessee Not applicable as at and Liabilities due to finance lease and leasehold agreements with purchase option The financial lease liabilities as at amounted to PLN 562 thousand. There were no financial lease liabilities as at INVESTMENT LIABILITIES As at , there are no investment liabilities in the Company. 35. COURT PROCEEDINGS Description of significant pending proceedings as at : Claim against Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji for the take-over of equipment On filed to the District Court in Warsaw, 16th Commercial Division a claim against Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji in the capital city of Warsaw SA with its registered office in Warsaw ( MPWiK ) for the take-over, for remuneration, of a part of the water and sewage network, constructed during the investment of Miasteczko Wilanów in Warsaw. The Company demands a substituting declaration of will and a gross payment of PLN 57.3 million ("Remuneration") to. The remuneration amount consists of the value of equipment, all costs of construction and related costs of construction (excluding operating costs) incurred in relation to the investment, using the indexation based on the indicators used in construction. Legal basis for the petition: Article 49 (2) of the Civil Code and Article 31 of the Act of 7 June 2001 on public water supply and waste water drainage ("the Act"). The date of next hearing is scheduled for 11 April The proceedings for the take-over, for remuneration, of a part of the water and sewage network, constructed during the investment of Miasteczko Wilanów in Warsaw is pending. Proceeding for payment of compensation from the State Treasury tort claim with regard to the issuance of unlawful decisions On , filed a claim to the Court in Warsaw against the Capital City of Warsaw ("the City") and the State Treasury (the Voivode of the Masovia Province") for indemnity of the damage incurred by the Company as a result of unlawful decisions on refusal to pay indemnity for public roads in Wilanów issued by

117 Financial statements for administrative authorities (in the first instance - President of the Capital City of Warsaw and in the second instance - the Voivode of the Masovia Province). Since 2009, Polnord has been in the dispute with the City regarding the indemnity for the take-over by the City of ownership of land plots allocated for public roads in Miasteczko Wilanów in Warsaw. The President of the Capital City of Warsaw and the Voivode of the Masovia Province issued in decisions refusing to pay indemnities due to the Company for a total of 16 hectares of land. As a result of an appeal filed by the Company, in the judgement of the Provincial Administrative Court declared the invalidity of administrative decisions and clearly stated that the claims of Polnord for indemnities for the land allocated for public roads are fully justified under Article 98 (3) of the Real Property Management Act. The decision issued by the Provincial Administrative Court was upheld by the Supreme Administrative Court on On , the Company requested for a pre-trial settlement, however it did not take place. On , filed a lawsuit in which it claims a compensation of PLN 123 million, which, in the course of the proceedings, was corrected on the basis of the opinion of an expert appointed by the court for the amount of PLN 27 million (calculated as at ) - however, before the first hearing, the Company withdrew a lawsuit against the City, because after bringing the action, the Supreme Court issued a judgement, which indicated that the responsibility for the unlawful decisions should only be borne by the authority issuing the final decision, i.e. the second instance authority. Due to the nature of the claim the above amount has been increasing by interest. The initiation of court proceedings is connected with the pursuit by the Company of claims related to blatant and obvious delay by the City in determining and paying indemnities. The Company is convinced that its claims are justified and makes efforts to satisfy them as soon as practicable. The Company has made many attempts to reach a compromise with the City, but they were futile. Deadline for the next hearing was set for 6 April Proceeding against the Capital City of Warsaw for payment of compensation for the expiry of the right of perpetual usufruct of plots dedicated for roads - the so-called 10 H claim On , through its special purpose vehicle Surplus Sp. z o.o. SKA with its registered office in Warsaw (a wholly owned subsidiary of Polnord), Polnord submitted a motion to Mayor of the Capital City of Warsaw, pursuant to the provision of Article 98 (1) and (3) of the Real Property Management Act, for undertaking negotiations on determination and payment of indemnities for plots located in the district of Wilanów in Warsaw totalling 10 hectares, allocated for public roads ("the Plots"). The total amount of the indemnity was estimated as PLN million in compliance with the valuation adopted in the appraisal report prepared by a certified property appraiser. Plots were allocated under valid administrative decisions related to the allocation for public roads, as a result of which the ownership of the plots was assigned to the Capital City of Warsaw ("City"), in compliance with Article 98 (1) of the Real Property Management Act which is confirmed in the following judgements of: (i) the Provincial Administrative Court in Warsaw dated and (ii) the Supreme Administrative Court dated , issued in similar cases, applicable to the factual situation. The plots were listed in the preliminary donation agreement dated , as amended, and in the donation agreement dated ; nevertheless, due to the earlier transfer under the ownership law to the City under the provision of Article 98 (1) of the Real Property Management Act, these agreements had no legal effect, as the City had already been entitled to the plots ex lege. This point of view stems directly from the above-mentioned judgments of the Provincial Administrative Court in Warsaw and the Supreme Administrative Court, according to which the ownership of plots was transferred to the City the moment the separation

118 Financial statements for decisions became valid. At the same time it should be pointed out that a lack of legal effect of the abovementioned donation agreements does not affect the City's indemnity obligation defined in the provision of Article 98 (3) of the Real Property Management Act. Surplus Sp. z o.o. SKA is entitled to file the motion as the claim for payment of compensation was filed to Surplus Sp. z o.o. SKA by Polnord and PD Development Sp. z o.o. under the resolution of the General Shareholders Meeting dated An increase in the share capital of Surplus Sp. z o.o. SKA was effected under a valid decision of the District Court for the Capital City of Warsaw of In connection with Surplus Sp. z o.o. SKA receiving the letter from the Office of the Capital City of Warsaw containing a refusal to initiate negotiations pursuant to the motion of Surplus Sp. z o.o. SKA of , on Surplus Sp. z o.o. SKA filed a motion for issuing a decision on granting the indemnity for the expiry of the perpetual usufruct rights to the President of the Capital City of Warsaw. On , Surplus Sp. z o.o. SKA sold the above receivable from the City to 10 H Sp. z o.o. with its registered office in Gdynia (wholly owned by ) which is due to participate in the proceedings initiated by Surplus Sp. z o.o. SKA. Polnord filed a complaint about lengthiness of the proceedings and handling of the case in an untimely manner. On , the Mayor of the capital city of Warsaw issued a decision refusing to pay indemnities for the expired right of perpetual usufruct of land. These decisions were upheld, after consideration of appeals of the Company, by the Governor of Mazowieckie province. On , merged with the company 10 H Sp. o.o. Provincial Administrative Court in Warsaw in its judgments of: and repealed all the negative decisions released by the Mayor of the capital city of Warsaw and the Governor of Mazowieckie province. The Court decided that the refusal to pay compensation was not justified, because the compensation should be, in fact, paid to. The judgments are not final - the Company awaits recognition of cassation appeals filed by the Agricultural Property Agency by the Supreme Administrative Court. Case for indemnity arising from non-contractual use of water and sewage system equipment in Miasteczko Wilanów On , the Company filed a claim against MPWiK in the capital city of Warsaw for the payment of PLN 11.8 million as remuneration for the non-contractual use of water and sewage system equipment in Miasteczko Wilanów. The case concerns one of many claims related to the construction of water and sewage system (water pipes, waste water and storm sewage system) which should have been taken over by MPWiK into ownership. Moreover, expanded the range of its claim by the amount of PLN 8.3 million. The current claim amounts to PLN 20.1 million. The case is pending, the Company maintains its position. On 3 November 2016, the Court announced a judgement, in which it adjudged from MPWiK remuneration for use of this equipment, which was transferred to MPWiK within less than 3 years before filing of the claim, i.e. after 25 April 2009, and dismissed the remaining part of the case. The Court found that the claims are, for the most part, time barred. On 23 December 2016, the Company appealed against the judgment in the part rejecting the claim. The defendant appealed against the judgment in the part ordering payment of remuneration for use of this equipment by MPWiK, which was transferred to MPWiK within less than 3 years before filing of the claim, i.e. after 25 April 2009, however, the copy has not yet been delivered to the claimant. Both appeals were transferred to the Court of Appeal in Warsaw.

119 Financial statements for Legal action regarding issuance of a declaration of will and a payment for the rainwater drainage system ( SOWD ) On 25 October 2016, filed a lawsuit against MPWiK SA in the Capital City of Warsaw and the Capital City of Warsaw in the District Court in Warsaw. The lawsuit concerns the take-over, for consideration, of property right of the equipment of the rainwater drainage system (SOWD) by the municipal company or the City of Warsaw, which was built by Polnord in Miasteczko Wilanów, and a claim for payment. The amount of Polnord claims reaches approx. PLN 52 million gross. SOWD was designed and built in Miasteczko Wilanów from the own funds of Prokom Investment SA, which in the agreement of 1 June 2008 commissioned to continue the works already started. At the same time, committed to Prokom Investments SA to bear the costs of maintenance and operation of SOWD and financing any works regarding SOWD. The SOWD system has been use by all housing investments operating in the so-called Miasteczko Wilanów (approx. 30 Housing Communities), Medicover Hospital, Temple of Divine Providence, the building of Wilanow District Office of the City of Warsaw and others. According to the "Act on collective water supply and discharge of wastewater" SOWD should therefore be taken over, for consideration, by the responsible local authority - in this case by MPWiK or the Capital City of Warsaw. The Company is currently waiting for the date of the first hearing. The dispute with ANR for the payment of an increased annual fee for perpetual usufruct The Group Companies are the defendant in litigation brought by the State Treasury, on whose behalf ANR acts, related to contracts for the transfer of the right of perpetual usufruct of land in Warsaw's Wilanów. These disputes arose as a result of termination by the ANR, in 2007, of perpetual usufruct contracts in respect of the annual fee for perpetual usufruct. The Group believes that the terminations were ineffective. However, the Group, based on the analyses of external advisors, created provisions for liabilities connected with these disputes in the amount equal to the difference between the amount of the revised annual fee and the applicable fee until 2007 together with interest. As at , the provisions established by the Group amounted to PLN 55,630 thousand for the principal amount and PLN 34,306 thousand for interest, which shows an increase by PLN 4,680 thosusand and PLN 3,943 thousand in comparison to the balance as at CONTINGENT LIABILITIES AND ASSETS Contingent liabilities and assets As at As at Specification [000'PLN] Contingent liabilities Repayment of loans guarantees* Total contingent liabilities Contingent assets Compensation claims Tort claims Other contingent receivables Total contingent assets * Polnord grants sureties to secure the repayment of loan commitments taken on by the Group s companies to fund development projects. However, due to the minimal likelihood of money outflow from the Company resulting from the need to meet the commitment, the Company pursuant to IAS 37 does not reveal such contingent liabilities in off-balance sheet items. The detailed description of tort and compensation claims was presented in Note 35.

120 Financial statements for GUARANTEES AND SURETIES a) On the wholly owned subsidiaries of Polnord (Polnord Łódź City Park Sp. z o.o., Polnord Gdynia Brama Sopocka Sp. z o.o., Polnord Szczecin Ku Słońcu Sp. z o.o., Polnord Gdańsk Dwa Tarasy Sp. z o.o., Polnord Olsztyn Tęczowy Las Sp. z o.o., Polnord Sopot II Sp. z o.o.) granted Polnord sureties for the credit commitments under credit facility agreement in the amount of PLN 50 million concluded with Bank Ochrony Środowiska SA. As at , debt under the credit agreement mentioned amounted to PLN 20,300 thousand. b) On , Finanse Spółka Jawna provided a surety for the credit commitments of Wilanow Office Park build. B1 Sp. o.o. to the amount of PLN 15,000 thousand. The total value of active sureties granted in previous years by Polnord for credit liabilities of subsidiaries, as at , in connection with the operating activities, amounted to PLN 93,999 thousand. The amount of active sureties as at sanctioned by the Group companies, i.e.: Polnord Łódź City Park Sp. z o.o., Polnord Gdynia Brama Sopocka Sp. z o.o., Polnord Szczecin Ku Słońcu Sp. z o.o., Polnord Gdańsk Dwa Tarasy Sp. z o.o., Polnord Olsztyn Tęczowy Las Sp. z o.o., Polnord Sopot II Sp. z o.o. for the loan commitments of totalled PLN 27,375 thousand, Finanse Spółka Jawna for the loan commitments of Wilanów Office Park - bud. B1 Sp. z o.o. totalled PLN 15,000 thousand. As at had no active sureties granted to entities other than subsidiaries. The wholly owned subsidiaries of Polnord, as at , also had no active sureties granted to entities other than the subsidiaries of Polnord. Polnord provides Group companies with sureties, and the Group companies provide Polnord and other Group companies with sureties securing the repayment of credit obligations related to financing development projects. However, due to the low likelihood of the outflow of funds resulting from the need to meet the commitment, the Group pursuant to IAS 37 does not reveal such contingent liabilities in off-balance sheet items. As at , has no active sureties granted to entities other than subsidiaries. In 2016, the Company granted and received no guarantees. Specification of active sureties as at Company granting the surety Total amount of the surety [PLN 000] 93,999

121 Financial statements for Specification of sureties granted, received by in 2016 Company receiving the surety Company granting the surety Subject of the surety Amount of the surety according to the debt (as at ) [PLN 000] Period Wilanów Office Park - Budynek B1 Sp. z o.o. Wholly owned subsidiaries of Polnord* Wholly owned subsidiaries of Polnord* Surety of loan in BOŚ SA, PLN 50 million Surety of loan in PKO BP SA SA, PLN 66.1 million 20,300 15, *Comapnies indicated in point a) above Specification of sureties granted and received by Polnord in 2015 is presented in the tables below: Specification of active sureties as at Company granting the surety Total amount of the surety [PLN 000] 104,744 Specification of sureties granted, received by in 2015 Company receiving the surety Wilanów Office Park - Budynek B1 Sp. z o.o. Company granting the surety Wholly owned subsidiaries of Polnord* Wholly owned subsidiaries of Polnord* Subject of the surety Surety of loan in BOŚ SA, PLN 50 million Surety of loan in PKO BP SABOŚ SA, PLN million Amount of the surety according to the debt (as at ) [PLN 000] 27,375 27,37515,000 Period INFORMATION ABOUT RELATED PARTIES Financial transactions with related parties The following tables show the total amounts of transactions with related parties for a given reporting period. Transactions with related parties are concluded on market terms and settled in cash. The Company recognizes revenue from sales to the subsidiaries in the Polnord Capital Group mainly due to Project Management. Financial income includes interest on loans granted and dividends received (2015).

122 Financial statements for Company's transactions with related parties for 2016 Company s subsidiaries Associates Joint ventures in which the entity is a venturer Key management personnel Other related parties TOTAL Specification [000'PLN] PROFIT AND LOSS ACCOUNT, STATEMENT OF COMPREHENSIVE INCOME Sales revenue Other operating revenue 0 Financial revenue Operating expenses 0 Other operating expenses Financial expenses ( 19208) ( 61) ( 19269) TOTAL Company's transactions with related parties for 2015 Company s subsidiaries Associates Joint ventures in which the entity is a venturer Key management personnel Other related parties TOTAL Specification [000'PLN] PROFIT AND LOSS ACCOUNT, STATEMENT OF COMPREHENSIVE INCOME Sales revenue Other operating revenue Financial revenue Operating expenses ( 196) ( 196) Other operating expenses Financial expenses TOTAL Settlements of the Company with related parties as at Company s subsidiaries Associates Joint ventures in which the entity is a venturer Key management personnel Other related parties TOTAL Specification [000'PLN] ASSETS Trade receivables Other financial receivables Loans granted Acquired bonds Other short-term assets TOTAL ASSETS LIABILITIES Issued bonds Loans received Trade liabilities Other financial liabilities 0 TOTAL LIABILITIES

123 Financial statements for Settlements of the Company with related parties as at Company s subsidiaries Associates Joint ventures in which the entity is a venturer Key management personnel Other related parties TOTAL Specification [000'PLN] ASSETS Trade receivables Other financial receivables Loans granted Acquired bonds Other short-term assets TOTAL ASSETS LIABILITIES Issued bonds Loans received Trade liabilities Other financial liabilities TOTAL LIABILITIES Entity with significant influence on the Group As at , a shareholder holding the largest number of shares did not exceed 10% of the share capital of the Company and the total number of votes at the General Meeting of Shareholders. Changes in the shareholding after the balance sheet date have been describen in Note Related parties (personal relations) There were no transactions with related parties that should be disclosed Borrowings granted to members of the Management Board In 2016 and 2015, no borrowings were granted to members of the Management Board Other transactions involving members of the Management Board In 2016 and 2015, there were no transactions in the Group involving members of the Management Board of the Company Remuneration of the Group s senior management Remuneration of the Group s senior management Specification [PLN 000 ] For the period from to For the period from to Short-term employee benefits, including: Share-based payments 275 Other option agreements, additional benefits 17 Total remuneration paid to senior management staff Management Board Supervisory Board Total

124 Financial statements for FINANCIAL INSTRUMENTS The carrying value of categories and classes of financial instruments Financial instruments classes as at Specification [000'PLN] Financial assets held for sale Financial assets measured at fair value through Profit and Loss account Loans and recievables Financial liabilities measured at fair value through Profit and Loss account Financial liabilities measured at amortized cost Out of scope of IAS 39 Long-term loans Long term recievables Trade and other receivables Short-term loans Cash and cash equivalents Other financial assets Financial assets in total Interest-bearing bank loans and borrowings Trade and other liabilities Current long-term portion of bank loans and borrowings Total Other short-term loans and borrowings Financial liabilities in total Financial instruments classes as at Specification [000'PLN] Financial assets held for sale Financial assets measured at fair value through Profit and Loss account Loans and recievables Financial liabilities measured at fair value through Profit and Loss account Financial liabilities measured at amortized cost Out of scope of IAS 39 Total Long-term loans Long term recievables Trade and other receivables Short-term loans Cash and cash equivalents Other financial assets Financial assets in total Interest-bearing bank loans and borrowings Trade and other liabilities Current long-term portion of bank loans and borrowings Other short-term loans and borrowings Financial liabilities in total For the category of financial instruments, which as at the balance sheet date are not measured at fair value, the Company does not disclose the fair value due to the fact that the fair value of these financial instruments as

125 Financial statements for at and as at did not differ significantly from the values presented in the financial statements for the respective periods, for the following reasons: in relation to short-term instruments, the possible discount effect is not significant; the instruments relate to transactions concluded according to market terms. The Company does not disclose the fair value for shares in companies not listed in active markets, classified in the category of financial assets available for sale and assets excluded from the scope of IAS 39. The Company is not able to reliably determine the fair value of shares held in companies not listed in active markets. As at the balance sheet date, shares in the category of financial assets available for sale are measured at cost less impairment losses Fair value hierarchy The levels of the fair value hierarchy for financial instruments measured at fair value as at and , are presented in the table below. Financial instrument classes Specification [000'PLN] As at As at Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets Shares and stocks Description of significant items within the category of financial instruments Financial assets available for sale As at , financial assets available for sale included mainly shares of the companies. Loans and receivables Trade and other receivables have been described in detail in Note 25 of these consolidated financial statements. Loans have been described in Note 22 of these financial statements. Financial assets out of scope of IAS 39 In 2016, financial assets out of scope of IAS 39 did not occur. Financial liabilities measured at amortised cost Credit and loan liabilities and liabilities under issued bonds have been described in detail in Note 29 of these financial statements. Liabilities under the guarantee, factoring and out of scope of IAS 39 In 2016, financial liabilities out of scope of IAS 39 concerned liabilities under finance lease Items of revenue, expenses, profits and losses recognized in the statement of comprehensive income by categories of financial instruments The year ended

126 Financial statements for Items of revenue, expenses, profits and losses recognized in the statement of comprehensive income by categories of financial instruments for 2016 Specification [000' PLN] Financial assets held for sale Financial assets measured at fair value through Profit and Loss account Loans and recievables Financial liabilities measured at fair value through Profit and Loss account Financial liabilities measured at amortized cost Out of scope of IAS 39 Interest revenue/(costs) ( 21020) 7979 Foreign exchange profits/(losses) 0 0 Release/(establishment) of revaluation allowances ( 28994) ( 28994) Dividends received 0 0 Total 5 ( ) ( ) The year ended Items of revenue, expenses, profits and losses recognized in the statement of comprehensive income by categories of financial instruments for 2015 Specification [000' PLN] Financial assets held for sale Financial assets measured at fair value through Profit and Loss account Loans and recievables Financial liabilities measured at fair value through Profit and Loss account Financial liabilities measured at amortized cost Out of scope of IAS 39 Interest revenue/(costs) ( 26183) 386 Foreign exchange profits/(losses) ( 839) ( 839) Release/(establishment) of revaluation allowances ( 90823) ( 90823) Dividends received Total ( ) ( ) ( ) Total Total 40. OBJECTIVES AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT Financial risk management The main financial instruments used by the Company include bank loans, bonds, cash and short-term deposits. The main objective of these financial instruments is obtaining funds for the Company s operations and investing short-term cash surplus. The Company has also other financial instruments, such as trade receivables and liabilities which arise directly in the course of its business operations. The Company does not enter into transactions involving derivatives. The main risks arising from financial instruments to which the Company is exposed as part of its operations include: credit risk; liquidity risk, market risk, including in particular: - interest rate risk, - foreign exchange risk, The Management Board verifies and agrees on the principles of the management of each of the aforementioned risks - these principles are briefly discussed below.

127 Financial statements for Credit risk Credit risk is related to a potential credit event that may materialize in the form of the following factors: the counterparty s insolvency, partial repayment of receivables, a significant delay in payment of receivables or other unforeseen default on contractual terms. The Company regularly monitors the credit risk entailed as part of its operations. Financial assets that are exposed to credit risk concentration are settlements with related parties and trade receivables. Trade receivables, that are presented in the financial statements reduced by the allowance for bad debts, reflect the nature of the Company's activities, which consists in implementation of a relatively small number of contracts with high values. The Company does not secure loan receivables from related parties. In 2016, the Company analyzed the possibility of repayment of these receivables by borrowers and, on that basis, provided a revaluation allowance for these loans in the amount of PLN 11,703 thousand. The Management Board believes that the credit risk to which the Company is exposed has been properly evaluated. It was reflected in the books based on proper allowances on receivables. The maximum exposure to credit risk resulting from the Company's financial assets is equal to the accounting values of these items. Maximum exposure to credit risk As at As at Specification [000'PLN] Loans granted Long term receivables Cash and cash equivalents Trade and other short-term receivables Maximum exposure to credit risk Thanks to the ongoing control of trade receivables, the management board believes that there is no additional significant credit risk exceeding the level established by the revaluation allowance. Most of the sales transactions and the balance of trade receivables concerns related entities in the Polnord Capital Group. Information on transactions with related parties is presented in Note 38.1 of these financial statements. As a result, in the opinion of the management, there is no additional credit risk exceeding the level established by the revaluation allowance for bad debts recognized for trade receivables of the Company. Aging of receivables and revaluation allowance As at , part of financial assets were subject to revaluation allowance. Change in revaluation allowance for these classes of financial instruments is presented in the tables below:

128 Financial statements for Change in revaluation allowances Trade and other receivables Loans granted Long-term receivables Specification [000'PLN] Revaluation allowance as at Increase Reversal ( 54) Utilization Reclassification ( 400) Revaluation allowance as at Value of the item before revaluation allowance Net value (book value) Change in revaluation allowances Trade and other receivables Loans granted Long-term receivables Specification [000'PLN] Revaluation allowance as at Increase Reversal ( 2055) Utilization ( 5972) Revaluation allowance as at Value of the item before revaluation allowance Net value (book value) The Group has no significant receivables, which would be significantly overdue. Thus, particular aging periods of receivables are not preseted due to negligible risk connected with their repayment. Placements, deposits, Cash and cash equivalents With respect to financial assets, the Company's credit risk arises from lack of capability to make payments by the other party and the maximum exposure to this risk is equal to the carrying value of these instruments. The Company manages credit risk related to cash by diversification of banks in which surplus cash is deposited. All entities with which the Company enters into deposit transactions operate in the financial sector. These are banks with high level ratings, which have adequate equity and strong, stable market position Liquidity risk The Company manages liquidity risk by keeping appropriate cash balances and transferable securities, as well as providing the necessary sources of financing such as credit lines. The Company 's objective is to ensure the level of financing that is sufficient from the viewpoint of its activities. The main task in the management of the Company s liquidity risk is planning and periodic reporting of the liquidity of and the main subsidiaries. The Polnord Capital Group monitors liquidity risk using the tools for periodic planning of liquidity, i.e. cash flow projections prepared in terms of its operating, investing and financial activities. The aim of the Polnord Capital Group is to maintain a balance between continuity and flexibility of financing through the use of various sources of financing, such as: overdrafts and investment loans, domestic bonds. Moreover, the Company conducts ongoing monitoring of the fulfillment of covenants contained in financing agreements and their projection in subsequent periods. These actions allow to determine the capacity of the Company to take out loans and provide the ability to settle liabilities in the long term. They also influence the determination of its investment opportunities. The Company pursues an active policy of investing availables funds. This means that the company monitors the financial surpluses and makes

129 Financial statements for projections of future cash flows and on such basis it implements investment strategy towards available funs in pursuit of achieving the objectives of the investment strategy. The data in the table below show the maturity of the Company's financial liabilities by maturity date, based on contractual undiscounted payments. Maturity of financial liabilities as at Amount in the statements Total payments Less than 3 months From 3 to 12 months From 1 to 5 years More than 5 years Specification [000'PLN] Loans and borrowings Bonds issued Trade liabilities and other financial liabilities measured at amortised cost Total Maturity of financial liabilities as at Amount in the statements Total payments Less than 3 months From 3 to 12 months From 1 to 5 years More than 5 years Specification [000'PLN] Loans and borrowings Bonds issued Trade liabilities and other financial liabilities measured at amortised cost Total Market risk Market risk is associated with the possibility of a negative impact on the Company's results because of fluctuations in the fair value of financial instruments or future cash flows connected with them, as a result of changes in market prices. The Company identifies the following types of market risk to which it is exposed: interest rate risk; currency risk For the purposes of the analysis of sensitivity to changes in market risk factors, the Company uses the method of scenario analysis. The Company uses expert scenarios reflecting the subjective assessment regarding the development of the individual market risk factors in the future. The scenarios, presented in the following points of the analysis, aim at analyzing the impact of changes in market risk factors on the Company's financial results. The analysis has covered only those items that meet the definition of financial instruments in accordance with IFRS. In the analysis of sensitivity to interest rate risk, the Company uses a parallel shift of the interest rate curve by the potential possible change in reference interest rates in the period until the date of the next financial statements. For the purposes of the analysis of sensitivity to interest rate risk, average levels of reference interest rates in a given year were used. The scale of potential changes in interest rates was estimated based on the volatilities of implied interest rate options quoted on the interbank market for currencies for which the Company is exposed to interest rate risk at the balance sheet date.

130 Financial statements for For the analysis of sensitivity to changes in interest rates, the effect of changes in risk factors was referred to the value of interest revenue/expenses for financial instruments measured at amortized cost and to fair value at the balance sheet date of financial instruments at floating rate measured at fair value. Potential possible changes in exchange rates are determined in the period to the date of the next financial statements and were calculated on the basis of annual implied volatilities for the currency options quoted on the interbank market for a particular currency pair from the balance sheet date or in the absence of available market quotations on the basis of the historical volatility for the period of one year before the balance sheet date. Subsequent points present the analysis of sensitivity to interest rate risk and currency risk to which the Company is exposed as at the balance sheet date, showing the impact on the financial result of potential possible changes in individual risk factors by classes of financial assets and liabilities Interest rate risk The Company has liabilities due to bank loans for which interest is calculated on the basis of a floating interest rate, and therefore there is a risk of an increase in interest, compared to the moment of conclusion of the agreement. Due to the fact that the Company had, in the reporting period, both assets and liabilities bearing interest at floating rate, which reduced the risk, and the fact of slight fluctuations of interest rates in the past periods, as well as the lack of expected rapid changes in interest rates in subsequent reporting periods, the Company did not apply interest rate hedging as at , deciding that interest rate risk is not significant. Interest rates on bank loans and bonds is included in Note 29. Regardless of the current situation, the Company monitors its exposure to interest rate risk and projections for interest rates and does not preclude the adoption of the precautionary measures in the future. The following tables present the carrying amounts of the Company s financial instruments exposed to interest rate risk, divided by age categories. Other financial instruments of the Company that are not included in the above tables, are non-interest bearing and, therefore are not subject to interest rate risk. Interest rate risk sensitivity analysis The Company identifies the exposure to interest rate (WIBOR) risk. The following tables show the sensitivity of the gross financial result of the Company to changes in interest rates reasonably possible to the occur in the period until the date of the next financial statements, assuming other risk factors remain unchanged. Financial Assets and Liabilities Specification [000'PLN] Carrying value Analysis of sensitivity to interest rate risk as at Value at Risk WIBOR Net financial result PLN PLN WIBOR + 50 pb WIBOR 50 pb Bonds, treasury bills and other debt securities Loans granted ( 84) Cash and cash equivalents Bonds issued ( ) ( 1 673) Loans and borrowings ( ) ( ) ( 102) 102 Overdrafts ( ) ( ) ( 199) 199 Change in gross profit ( 1 456)

131 Financial statements for Financial Assets and Liabilities Specification [000'PLN] Carrying value Analysis of sensitivity to interest rate risk as at Value at Risk WIBOR Net financial result PLN PLN WIBOR + 50 pb WIBOR 50 pb Bonds, treasury bills and other debt securities Loans granted ( 654) Cash and cash equivalents Bonds issued ( ) ( ) ( 1 384) Loans and borrowings ( ) ( ) ( 137) 137 Overdrafts ( ) ( ) ( 147) 147 Change in gross profit ( ) ( 1 014) Currency risk As at 31 December 2016 and 31 December 2015., the Company did not have any significant assets, liabilities and future payments in foreign currencies so the currency risk was negligible Hedge accounting In 2016 and 2015, hedge accounting was not applied by the Company. 41. CAPITAL RISK The main objective of the Company s capital management is to maintain a good credit rating and safe equity ratios in order to support the Company's operations and increase value for its shareholders. The Company manages its capital structure and, in result of changes in economic conditions, it introduces changes. In order to maintain or adjust the capital structure, the Company may create a dividend policy for shareholders, return capital to shareholders or issue new shares. In the period ended and , there were no changes to the objectives, principles and processes in this area. The Company s equity structure covers its debts, including loans (disclosed in Note 29), bonds, loans, cash and cash equivalents, and equity, including shares issued, reserve capitals, retained profit (disclosed in Notes 26 to 28, respectively). The Company monitors the balance of its capitals using the leverage ratio, which is calculated as a relation of net debt to total equity plus net debt. Net debt includes interest-bearing loans and borrowings, trade liabilities and other liabilities, less cash and cash equivalents. Capital management As at As at Specification [000'PLN] Interest-bearing loans and borrowings Trade and other liabilities Cash and cash equivalents (-) ( 86744) ( 32482) Net debt Equity Equity and net debt Leverage ratio 39.6% 33.5%

132 Financial statements for EMPLOYMENT STRUCTURE The Company s employment structure was as follows: Employment structure As at As at Management Board of the Entity 3 2 Finance and Administration Department Development Department Total AUDITOR S REMUNERATION On , the Company s Supervisory Board adopted a resolution on the appointment of Deloitte Polska Sp. z o.o. Sp. k. with its registered office in Warsaw at Jana Pawła II 19 str. ( Deloitte ) as the entity authorized to review the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for the first half of 2016 and to audit the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for The Deloitte company is listed in the register of entities authorized to audit financial statements maintained by the National Chamber of Statutory Auditors under No. 73. On , the Company entered into an agreement with Deloitte for audit services in the scope mentioned above. The total remuneration for the above services amounts to PLN 150,000 net. Moreover, the remuneration for the audit of the annual separate financial statements of subsidiaries amounts to PLN 96,000. The Company used the services of Deloitte whose cost amounted to PLN 8,000. Polnord did not use tax advisory services. On , the Company s Supervisory Board adopted a resolution on the appointment of Deloitte Polska Sp. z o.o. Sp. k. with its registered office in Warsaw at Jana Pawła II 19 str. ( Deloitte ) as the entity authorized to review the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for the first half of 2015 and to audit the separate financial statements of the Company and the consolidated financial statements of the Polnord Capital Group for The Deloitte company is listed in the register of entities authorized to audit financial statements maintained by the National Chamber of Statutory Auditors under No. 73. On , the Company entered into an agreement with Deloitte for audit services in the scope mentioned above. The total remuneration for the above services amounts to PLN 142,000 net. Moreover, the remuneration for the audit of the annual separate financial statements of subsidiaries amounts to PLN 80,000. In 2015, the Company used the services of Deloitte, regarding preparation of a standard model of financial statements, whose cost amounted to PLN 30,000. Polnord did not use tax advisory services. 44. EVENTS AFTER THE BALANCE SHEET DATE The following change occurred after the balance sheet date of until the publication of these consolidated statements: On , Stacja Kazimierz sp. z o.o. SKA was transformed into a limited partnership. is a limited partner.

133 Financial statements for On , the Management Board decided to liquidate the representative office in Moscow. In the opinion of the Management Board, taking into account the ongoing process of winding up of the Company's operations in Russia, because of the limited possibilities of continuing investments and implementing new investments, as well as the current economic situation in this area, maintaining the representative office in Moscow is impractical and economically unreasonable. The Company, in accordance with the adopted strategy, intends to develop the development projects and new investments in large cities in the country. On , an allocation of 14,743 3-year NS7 series ordinary bearer bonds with a total nominal value of PLN 14,743, was made. On , the Company received a notification from Aegon Powszechne Towarzystwo Emerytalne SA with headquarters in Warsaw, acting on behalf of the Aegon Otwarty Fundusz Emerytalny, regarding the fact of increasing above the threshold of 5% in the total number of votes in the Company by the Fund. The total number of votes in the Company was increased as a result of acquisition transaction of the Company shares on , settled on Prior to change of share, the Fund held a total of 1,629,095 shares, constituting 4.98% of the share capital of the Company, and 4.98% in the total number of votes in the Company. According to the state as at , the Fund held 2,499,850 shares, constituting 7.65% of the share capital of the Company, and 7.65% in the total number of votes in the Company. On , the Company received a notification from Towarzystwo Funduszy Inwestycyjnych PZU SA with headquarters in Warsaw, acting on behalf of the investment funds managed by itself, regarding the fact of increasing above the threshold of 10% in the total number of votes in the Company by the Funds TFI PZU. The total number of votes in the Company was increased as a result of the settlement, on , of acquisition of 420,000 Company s shares in regular trading on Prior to change of share, Funds TFI PZU held a total of 3,267,508 shares, constituting 9.99% of the share capital of the Company, and 9.99% of the total number of votes in the Company. According to the state as at , Funds TFI PZU hold a total of 3,687,508 shares, constituting % of the share capital of the Company, and % in the total number of votes in the Company. Gdynia, Dariusz Krawczyk Jerzy Kamiński Jerzy Kotkowski President of the Board Member of the Board Member of the Board Marzena Niedźwiedzka Chief Accountant

134 Statement of the Management Board 134 D. STATEMENT OF THE MANAGEMENT BOARD ON THE RELIABILITY OF THE ANNUAL FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

135 Statement of the Management Board 135 Gdynia, 21 March 2017 STATEMENT Pursuant to 92 section 1 item 5 of the Regulation of the Minister of Finance of 19 February 2009, regarding current and interim information submitted by issuers of securities and the terms governing recognition of information required by the laws of a non-member state as equivalent information, the Management Board of POLNORD SA hereby declares that according to its best knowledge the annual financial statements and comparative data have been prepared in line with the binding accounting principles and give a true, clear and fair view of the asset and financial standing of the Company. The Report on the Activity of the Company contains a true picture of its development, achievements and situation, including a description of basic threats and risks. Dariusz Krawczyk Jerzy Kamiński Jerzy Kotkowski President of the Board Member of the Board Member of the Board

136 Statement of the Management Board 136 E. STATEMENT OF THE MANAGEMENT BOARD ON THE ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS

137 Statement of the Management Board 137 Gdynia, 21 March 2017 STATEMENT Pursuant to 92 section 1 item 6 of the Regulation of the Minister of Finance of 19 February 2009, regarding current and interim information submitted by issuers of securities and the terms governing recognition of information required by the laws of a non-member state as equivalent information, the Management Board of POLNORD SA hereby declares that the entity authorised to audit financial statements, auditing the annual financial statements of the Company has been selected pursuant to the provisions of the law and that the said entity and the statutory auditors who have audited these statements have met the conditions for expressing an impartial and independent opinion about the audited annual financial statements, pursuant to the binding provisions of law and professional standards. Dariusz Krawczyk Jerzy Kamiński Jerzy Kotkowski President of the Board Member of the Board Member of the Board

138 Opinion and report of the auditor 138 F. OPINION AND REPORT OF THE CERTIFIED AUDITOR ON THE REVIEW OF THE FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

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