Report of the Management Board on operations of AB S.A. for the financial year 2012/2013. covering the period from to

Transcription

1 Report of the Management Board on operations of AB S.A. for the financial year 2012/2013 covering the period from to Wrocław, 18 September 2013

2 TABLE OF CONTENTS I) INTRODUCTION...4 II) BASIC INFORMATION ON AB S.A Basic details Bodies of the Company Management Board Supervisory Board Shareholding structure... 5 III) KEY ECONOMIC AND FINANCIAL DATA Material events affecting the business of the Company Economic condition of the Company Sales revenues Profit on sales Profitability Assets Equity and liabilities Liquidity. Turnover ratios Cash flows The Company s financial results for q4 of the financial year 2012/ IV) NATURAL ENVIRONMENT ASPECTS V) EMPLOYMENT INFORMATION VI) CORPORATE GOVERNANCE RULES VII) MAJOR RISK FACTORS RELATED TO THE BUSINESS OF THE COMPANY Risk of impact of macroeconomic situation on the results of the Company Risk related to strong competition Risk of modified legal regulations and their interpretation and application Interest rate risk FX risk Risk related to dependence on key suppliers Risk related to dependence on key buyers Risk related to seasonal sales Risk related to inventories and receivables Risk related to funding structure Risk related to investment processes Risk related to shareholding structure Risk related to loss of key employees of the Company VIII) PROCEEDINGS PENDING IN COURTS, ARBITRATION BODIES OR PUBLIC ADMINISTRATION BODIES IX) BASIC GOODS AND SERVICES X) SALES MARKETS Domestic vs. foreign markets Supply sources Main customers XI) MAJOR CONTRACTS CONCLUDED BY AB S.A XII) ORGANISATIONAL OR CAPITAL RELATIONS OF THE COMPANY WITH OTHER ENTITIES p a g e

3 XIII) MATERIAL TRANSACTIONS CONCLUDED BY THE COMPANY OR ITS SUBSIDIARY ON NON-MARKET TERMS WITH RELATED ENTITIES XIV) CONCLUDED AND TERMINATED LOAN AGREEMENTS XV) LOANS GRANTED XVI) SURETIES AND GUARANTEES GRANTED AND RECEIVED XVII) PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS XVIII) ISSUED CAPITAL DESCRIPTION OF THE COMPANY S ALLOCATION OF INFLOWS FROM ISSUED CAPITAL UP TO THE DATE OF THE COMPANY S REPORT ON OPERATIONS XIX) DIFFERENCES BETWEEN FINANCIAL RESULTS DISCLOSED IN THE ANNUAL REPORT AND PREVIOUSLY PUBLISHED PROJECTED RESULTS XX) ASSESSMENT OF THE MANAGEMENT OF FINANCIAL RESOURCES WITH JUSTIFICATION XXI) ASSESSMENT OF THE COMPANY S ABILITY TO ACHIEVE INVESTMENT GOALS, INCLUDING CAPITAL INVESTMENTS, COMPARED TO THE AMOUNT OF AVAILABLE FUNDS XXII) NON-TYPICAL FACTORS AND EVENTS AFFECTING THE RESULT OF OPERATIONS IN THE FINANCIAL YEAR XXIII) CHARACTERISTICS OF EXTERNAL AND INTERNAL FACTORS MATERIAL TO COMPANY S DEVELOPMENT AND DEVELOPMENT PROSPECTS OF THE COMPANY XXIV) CHANGES TO KEY RULES OF BUSINESS MANAGEMENT OF THE ISSUER AND ITS CAPITAL GROUP XXV) CONTRACTS BETWEEN THE ISSUER AND MANAGING PERSONS PROVIDING FOR COMPENSATION IF THEY RESIGN OR ARE DISMISSED FROM THEIR POSITION WITHOUT VALID REASON OR WHEN SUCH RESIGNATION OT DISMISSAL RESULTS FROM MERGER OF THE ISSUER BY TAKE-OVER XXVI) THE VALUE OF SALARIES, REWARDS OR BENEFITS, INCLUDING RESULTING FROM XXVII) 41 INCENTIVE OR BONUS PROGRAMMES BASED ON THE ISSUER S CAPITAL XXVIII) NUMBER AND NOMINAL VALUE OF ALL SHARES OF THE ISSUER XXIX) INFORMATION ON CONTRACTS KNOWN TO THE ISSUER (ALSO AFTER THE BALANCE SHEET DATE) AS A RESULT OF WHICH CHANGES MAY OCCUR TO THE SHAREHOLDING OR BOND HOLDING STRUCTURE XXX) INFORMATION ON CONTROL SYSTEM OF EMPLOYEE SHARE SCHEMES XXXI) INFORMATION ON ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS Details of the entity authorised to review financial statements Date of the contract for the review Remuneration of the entity authorised to review the financial statements p a g e

4 I) INTRODUCTION The report of the Management Board on Operations of AB S.A. covering the period from 01 July 2012 to 30 June 2013 was made in compliance with the Regulation of the Ministry of Finance of 19 February 2009 on current and periodical disclosure by issuers of securities and conditions to recognise as equivalent the information that is required by the law in Non-Member States (Journal of Laws No. 33, item 259, as amended). II) BASIC INFORMATION ON AB S.A. 1. BASIC DETAILS AB S.A. was established with Notary Deed of 24 September 1998 and entered in the National Court Register maintained for Wrocław-Fabryczna, VI Commercial Department of the National Court Register under number KRS The Company was issued statistical number REGON The company s registered office is in Wrocław, ul. Kościerzyńska 32, Wrocław. According to its Articles of Association, the key business objects of the company include trade and services. AB S.A. is the top parent company in the Capital Group. 2. BODIES OF THE COMPANY 2.1 Management Board The Management Board of AB S.A. as at 30 June 2013 was composed as follows: Mr. Andrzej Przybyło President of the Management Board Mr.Krzysztof Kucharski Member of the Management Board Director for Corporate and Legal Matters Mr.Zbigniew Mądry Member of the Management Board, Commercial Director Mr.Grzegorz Ochędzan Member of the Management Board, Financial Director In the reporting period, up to the publication hereof, the composition of the Management Board did not change. 2.2 Supervisory Board As at 30 June 2013 the Supervisory Board of AB S.A. was composed as follows: Ms. Iwona Przybyło 4 p a g e

5 Mr.Jacek Łapiński Mr.Jan Łapiński Mr.Radosław Kiełbasiński Mr.Andrzej Bator Ms. Katarzyna Jażdrzyk In the reporting period, up to the publication hereof, the composition of the Supervisory Board did not change. 3. SHAREHOLDING STRUCTURE Shareholders holding as at 30 June 2013 over 5% of the total number of votes in the general meeting of shareholders of AB S.A. As at Number of shares Shareholding structure by the number of shares Number of votes Shareholding structure by the number of votes Andrzej Przybyło % % Iwona Przybyło % % Aviva Otwarty Fundusz Emerytalny Aviva BZ WBK % % Aviva Investors Poland S.A % % ING OFE % % PKO BP OFE % % Other % % Total % % In the period between the disclosure of the report for Q3 of the financial year and the publication of the annual report there were no changes in the holding of major packets or the number of votes at the General Meeting of Shareholders. III) KEY ECONOMIC AND FINANCIAL DATA The financial year 2012/13 of AB S.A. was characterised by considerable nearly 40%. sales growth and strong pressure on prices. The Company s EBITDA amounted to PLN 52,448 K, operating result to PLN 27,038 K, gross profit to PLN 33,133 K, and net profit to PLN 29,238 K. In the financial year analysed the Company undertook actions aimed at improving its profitability, resulting in an increase in the profitability of net profit in Q4 2012/13 by 10% compared to Q4 2011/12 and a double increase quarter over quarter, from PLN 2,562 K to PLN 4,082 K. The positive dynamics is owed to the implementation of AB Online a new sales e-platform, development of a low-cost e-commerce channel, growth in the TB own brand segment, introduction of comprehensive logistic services to the offer, optimisation of the inventory turnover, significant shortening of the cash conversion cycle, decreasing interest costs, and increasing margins on export sales. 5 p a g e

6 1. MATERIAL EVENTS AFFECTING THE BUSINESS OF THE COMPANY The financial year analysed was characterised by deteriorating macroeconomic conditions in Poland, stemming partly from the continuing global economic crisis. In the period under report the GDP growth in Poland dropped from 1.3% in Q1 2012/13 (July-September 2012) to 0.5% in Q3 2012/13 (January-March 2013). In H2 2012/13 (January-June 2013) the average GDP growth rate amounted to 0.7%. The growth was triggered mainly by export sales. Throughout 2012 and in the first half of 2013 internal demand weakened, which was a consequence of Poles decreasing purchasing power. Despite rising salaries, the actual purchasing potential dropped due to the inflation level reported at that time. Stagnation on the consumer credit market observed since autumn 2012 continued. Both consumers and entrepreneurs refrained from purchasing credited despite slower inflation growth, interest rate cuts and gradual liberation of the criteria for granting loans. This was due to the lack of perspectives of economic growth acceleration and general concerns for the global recession. As a result, the sales plan set by the Company was achieved with lower margins and significantly increased sales volumes in all markets where the Company is present. In the Management Board s opinion, considering the exceptionally challenging market conditions, ending the financial year with an impressive increase in sales and maintaining the profit at a level similar to the previous year by AB S.A. is even more satisfactory. The growth of revenues resulted from sustainable development in all operating segments, both in the country and abroad, and a double digit increase in sales in key sales channels and most product lines. Profit generation at a satisfactory level was possible thanks to high cost discipline SGA costs reached a very low level of 1.4% and development of sales channels enabling generation of higher margins. Reversal of the GDP dynamics from negative to positive in Q (+0.8%), consumption growth (+0.8%) and the historic low interest rates indicate that the general macroeconomic situation in Poland should continue to improve. Economists predict that this trend will prevail in the next few quarters, which will be reflected in the Company s performance. According to analysts estimates, the IT market in Poland recorded a 1-3% growth. In this context, the 39% sales increase reported by AB S.A. can be deemed a success. The increase was triggered, among other things, by a several hundred percent increase in demand for mobile devices (smart phones, tablets). The segment largely affected sales in 2012/13, however, due to the business model of AB S.A. providing for the broadest possible range of products, it was just one of the growth factors. Another important fact is 23% increase in sales in the corporate reseller channel (the largest integrators, multinational corporations). This was the consequence of continuous increase of exposure in the enterprise sector. In the recent years the Company s department dedicated to that customer group recorded double digit increases year over year. In the Management Board s opinion, this will be one of key segments in the nearest future as it gives a possibility to generate satisfactory margins, by offering small and medium partners (integrators) additional services such as training, references, financial and logistic support. The Management Board has already started work to develop a separate product line dedicated to that customer group. 6 p a g e

7 At the same time the Company intensely expanded sales in the e-commerce channel through AB s commercial partners and in the retail channel through the Alsen franchise network. The number of e-stores on AB s platform grew in the financial year by 83%. The number of Alsen partner outlets rose by 11% year over year, while the whole franchise network reported 17.6% increase in sales. In line of the adopted strategy, AB S.A. keeps on expanding its portfolio with new segments other than IT. In the last financial year the Company intensified its expansion in the large electrical and home-wars sector and LED lighting sector. In the opinion of the Management Board, both markets show a great potential for development in the upcoming years. The efforts resulted in signing distribution agreements, among others, with Candy Hoover, Bosch or FagorMastercook. One of the key elements of AB S.A. s business model is effective management of working capital. In the period analysed, the Company succeeded in reducing the level of interest costs compared to revenues, from 0.51% to 0.36%. This was possible, inter alia, thanks to the longest in the last 11 years series of interest rate cuts, as a result of which from November 2012 the rate reached the level of 2.5% (the reference rate). Economists expect the interest rates to remain at the current lowest in history level until 2014, which will have a positive impact when it comes to reduction of the financial costs generated by the Company. In 2012/13 AB S.A. reinforced its leading position in the market, maintaining at the same time the lowest in the industry cost base and optimum debt level, guaranteeing it dynamic and sustainable growth with low risk. 2. ECONOMIC CONDITION OF THE COMPANY AB S.A. is one of the largest and most dynamically developing IT distributors in Poland. This is confirmed, inter alia, with the volume of sales revenues. Similarly to previous reporting periods, the key factors for AB S.A. s economic condition included: increased sales revenues, extension of the portfolio of offered goods and services, safe policy of FX risk management, optimised management of working capital, consolidated market position as a leader in the CEE region, overall macroeconomic and international situation. 7 p a g e

8 2.1 Sales revenues Profit on sales In the analysed financial year AB S.A. generated sales exceeding PLN 3.7 B, translating into the highest ever, 39% increase compared to the previous year. Achievement of such good results was possible thanks to the Company s constant expansion of its sales offer. The growth of sales revenues was followed by proportional increase in operating costs. Such a high volume of sales in permanently difficult economic environment was possible thanks to continuous extension of the range of products and close cooperation with business partners supported by AB also from the business side. Gross profit on sales in the analysed period exceeded PLN 92 M. At the same time, the gross margin on sales amounted to 2.5%. 8 p a g e

9 The Company generated net profit of PLN 29.2 M. The high level of risk was generated thanks to increased sales, extension of the Company s range of products and continuation of measures aimed at optimising the costs of sales. On 30 December 2010 AB S.A. won a dispute with Raiffeisen Bank Polska S.A as a result of which the amount of PLN 7,499,590 with interest was refunded to the Company, thus increasing the profit of the year 2010/2011. Therefore, all the values for that period were additionally adjusted for the impact of one-off events. The adjusted numbers are marked with (*). * Net profit adjusted for one-off items connected with the dispute with Raiffeisen Bank Polska. In the analysed financial year, efforts were made to maintain a low share of overheads and sales costs in revenues. These measures resulted in the SGA ratio reaching the historic level of 1.4%. In the Management Board s opinion, this is the basic measure of effectiveness of a distribution company, presenting an adequate level of limiting expenses. 9 p a g e

10 2.2 Profitability In the period under report the return on operating activities oscillated at 0.72%. Net return on sales amounted to This downward trend follows from the continuing difficult situation on the IT market in Poland. According to analysts estimates, the IT market in Poland recorded only a 1-3% growth. To retain its strong position in the market despite the decreasing demand, the Company is forced to reduce the margins on sales. Revenue growth would also help cover the margin difference with dropping selling prices, and it allows the Company to generate margin amount similar to the previous year and retain the result on operations on a similar level yoy. 10 p a g e

11 * Return on operating assets adjusted for one-off items connected with the dispute with Raiffeisen Bank Polska. * Return on business assets adjusted for one-off items connected with the dispute with Raiffeisen Bank Polska. In the year 2012/2013 the Company recorded a slight decrease in the return on equity (ROE) compared to the corresponding period, from 11.7% to 9.3%. The decrease was triggered by the increase in the Company s equity. The return on assets (ROA) decreased, reaching in the reporting period 3.8% compared to 4.4% in the reference period. The ratio decrease was mainly due to the quicker rate of asset value decrease, mostly owed to the decrease in the value of the inventories as at 30 June 2013 compared to the net profit growth rate. Optimising the value of the inventories helps the Company reduce the financing costs of goods. 11 p a g e

12 * ROE adjusted for one-off items connected with the dispute with Raiffeisen Bank Polska. * ROA adjusted for one-off items connected with the dispute with Raiffeisen Bank Polska. 2.3 Assets As at 30 June 2013, the value of the Company s assets amounted to PLN 776,769 K, slightly dropping (by 1%) compared to the previous year. The structure of fixed and working assets practically remained unchanged. Working assets accounted for 77% of total assets, while fixed assets for 23%. 12 p a g e

13 When analysing the structure of working assets, the lower share of inventories in working assets should be noted. Their share is 42.8% (drop by 6.4 percentage points compared to the year 2011/2012). The share of receivables in the structure of working assets increased compared to the reference year by 6.4 percentage points. 13 p a g e

14 2.4 Equity and liabilities There were no significant changes in the structure of liabilities in 2012/2013. The Company slightly increased the share of equity in financing of assets (30.7% compared to 37.1% in the previous financial year), thus the share of total liabilities in the Company s liabilities decreased by 7.5 percentage point. The Company has a stable structure of financing sources. Worth noting is the fact that the value of short-terms liabilities as at 30 June 2013 substantially decreased, compared to the reference period. This is another evidence that the Company applies a rational working capital management policy, which positively contributes to reduction in interest costs in the financial year. 14 p a g e

15 In the period under report, the Company, another year in a row, improved the fixed assets financing ratio, which reached the level of 1.8 (1.6 in the previous year). Such result means that fixed assets also partially cover the value of the Company s working assets. The increasing value of the ratio translates into investors greater confidence in their investments in the Company. 15 p a g e

16 The total debt ratio of the Company as at 30 June 2013 also considerably improved compared to the year 2011/2012. Its value as at the end of the period under report is indicative of the Company s rational management of financial sources. 2.5 Liquidity. Turnover ratios With each year the Company has been improving its ability to pay its current liabilities, which is confirmed by constantly rising current and quick liquidity ratios. They remain at a safe level. The value of the current liquidity ratio increased by 8.2% compared to the previous year, while the value of the quick liquidity ratio rose by 14%. The turnover rations calculated as at 30 June 2013 improved as well, compared to the values presented as at 30 June The turnover inventory ratio amounted to 25 days, i.e. it shortened by 12 days compared to the corresponding period. The receivables turnover ratio was significantly extended, by 10 days, as was the case with the cycle of collecting receivables, which shortened from 43 days as at 30 June 2012 to 33 days as at 30 June The above changes had a considerable impact on the length of the working capital cycle which amounted to 25 days in the analysed year, while as at 30 June 2012 it amounted to 35 days. 16 p a g e

17 Methodology of ratio calculation: Current liquidity: Working assets / short-term liabilities Quick liquidity: (Working assets inventories) / short-term liabilities Inventory turnover: (Inventories / Sales revenues) x 365 Receivables turnover: (Receivables / Sales revenues) x 365 Payables turnover: (Trade payables / Sales revenues) x Cash flows In the financial year 2012/2013 the Company generated positive cash flows from operations, exceeding PLN 33 M. This proves high effectiveness of the business. Despite high growth dynamics, the Company generates cash from operations. Positive cash flows from investments are, as each year, connected with dividend obtained from the Company s subsidiary. Negative cash flow from financing activities result from substantial decrease in the bank loan balance as at 30 June 2013 compared to their value as at 30 June p a g e

18 3. THE COMPANY S FINANCIAL RESULTS FOR Q4 OF THE FINANCIAL YEAR 2012/2013 This report is prepared in a mode accepted in the Regulation of the Minister of Finance of 19 February 2009 on current and periodical disclosure by issuers of securities and conditions to recognise as equivalent the information that is required by the law in Non-Member States Journal of Laws, No. 33, item 259, as amended), i.e. audited annual report published within 80 days from the balance sheet date, without publishing a report for Q4 of the financial year. To supplement the information on the Company s performance in the last quarter, below are presented the results for Q4 of the financial year 2012/13. To maintain comparability, the data for Q4 of the reference year were calculated in the same manner as data for Q4 2012/2013, that is annual results minus the results for the first three quarters of the year. PROFIT AND LOSS ACCOUNT Q4 2011/2012 Q4 2012/2013 I. Net revenues from the sale of products, goods and materials, of which: II. Costs of sold products, goods, materials, of which: III. Gross profit (loss) on sale IV. Costs of sale V. Overheads VI. Profit / (loss) on sales IX. Profit / (loss) on operations XII. Profit / (loss) on business operations XIV. Gross profit (loss) XV. Income tax XVI. Other obligatory profit decrease (loss increase) 0 0 XVII. Share in net profit/loss of subsidiary entities consolidated with equity rights 0 0 XVIII. Net profit (loss) p a g e

19 In the Management Board s opinion, Q4 2012/13 was very successful. AB S.A. recorded an exceptionally high 43% sales growth dynamics year over year. At the same time, net profit increased by nearly 60%, which the Management Board considers a great success. The considerable increase in sales resulted from the growing customer base and partner base, product and geographic expansion, and product portfolio diversification with products outside the IT distribution area. The significant improvement with respect to net profit is one of the first effects of the consistently implemented profitability improvement strategy. The Company intensified its actions in the low-cost sales channel Enterprise and the enterprise segment, allowing for generation of satisfactory margins. On the cost side, the historic low level of SGA is worth noting, which dropped in Q4 to 1.4%. The reduction of the cost base was partly due to the exceptionally low interest rates at that time. This allowed AB S.A. to reduce the interest costs by 25% compared to Q4 2011/2012. Other material factors included the improving general macroeconomic situation in Poland, inter alia, reversal of the GDP dynamics from negative to positive in Q (+0.8%), consumption growth (+0.8%) and the lowest interest rates in history. These circumstances suggest that the macro environment in Poland is going to improve. Economists predict that this trend will prevail in the next few quarters, which will be reflected in the Company s performance. EBITDA in Q4 2012/2013 shows a positive growing trend, exceeding PLN 9.4 M, which means a 10% increase compared to Q4 2011/2012. The ratio growth was caused by an increase in sales, which was possible thanks to actions taken by the Company aimed at acquiring even larger share in the market and constant diversification of products. At the same time, the Company manages to maintain strict cost policy. All the actions are positively reflected in the EBITDA result. 19 p a g e

20 +10% *to eliminate the impact of FX rate differences on the Company s performance, EBITDA, as a gross financial result, is increased by depreciation and interest costs. 20 p a g e

21 IV) NATURAL ENVIRONMENT ASPECTS AB S.A, being an industry leader, apart from purely business actions for many years have focused on environmental initiatives, contributing to limitation of the harmful impact of industry on the environment. Pro-environmental initiatives connected with the implementation of new technologies, expansion and modernisation of the existing infrastructure and available tools are treated by both the Management Board and all employees of the Company as one of the Company s priorities in the long-term as well as in everyday activities. The implementation in 2009 of the Integrated Management System in compliance with the requirements of PN EN ISO 9001/14001 was part of this strategy. AB S.A. received also the Certificate of the General Directorate for Environmental Protection as it complied with the requirements of the Regulation of the European Parliament and of the Council on the voluntary participation by organisations in a Community eco-management and audit scheme (EMAS). The eco-management and audit scheme (EMAS) is an instrument within the European Union confirming a constant improvement of eco-efficiency (environmental) in organisations. In its environmental declarations AB obliged to: avoid causing pollution; set objectives and tasks relating to environmental aspects; accomplish objectives and tasks aimed at constant improvement of the effects of environmental protection; abide by environmental protection law. Furthermore, AB S.A. undertook to ensure a high environmental awareness among their employees, and provide its customers with the possibility to collect waste electrical and electronic equipment (WEEE) free of charge. AB S.A. s environmental initiatives are mainly focused on the reduction of utilities and fuel consumption, rational management of packaging waste and other waste produced at the Company. V) EMPLOYMENT INFORMATION In the financial year 2012/13 the average number of people employed at AB S.A. rose by 10%. This was due to the expansion of the Company s activities and diversification of its offer with new segments. The employment growth did not have a material impact on the costs generated by the Company. Thanks to the sustainable HR policy, the turnover of staff, especially at higher positions, is very low. Each employee is given the possibility to develop his or her competences and achieve professional ambitions. VI) CORPORATE GOVERNANCE RULES AB S.A. is obliged to comply with a set of corporate governance rules called the Code of Best Practice for WSE Listed Companies adopted by the Supervisory Board of the Warsaw Stock Exchange on 4 July The full text (consolidated after inclusion of amendments) is publicly available at the Warsaw Stock Exchange website in the Corporate Governance Rules section 21 p a g e

22 VII) MAJOR RISK FACTORS RELATED TO THE BUSINESS OF THE COMPANY The risks to which the Company is exposed are related to its environment (the risk of macroeconomic situation, risk related to strong competition, risk of modifications to the legal environment and interpretation and application of regulations) and the nature of its business (FX risk, risk related to concentration of main suppliers and buyers, risk of seasonal sales related to inventories and receivables, to investment processes, shareholding structure, loss of key employees of the Company). Macroeconomic situation, strong market competition and FX risk have material impact on the Company s business. The impact of each risk factor and the activities undertaken by the Company in order to mitigate the risk are specified below. 1. RISK OF IMPACT OF MACROECONOMIC SITUATION ON THE RESULTS OF THE COMPANY Consumption level in the economy is subject to economic growth rate and perception of the current and future revenues of households and profit by companies. The revenues and profit affect the purchase volume of IT products. As a result, sales in the sector are largely affected by the economic situation. The GDP growth so far has implied growing sales in the market. Reversal of the positive growing trends resulted in decreasing consumer spending, of which: for IT products which resulted in decreased revenues. In order to mitigate the negative effect of the market situation, the Company undertakes a number of activities to expand its commercial offer. Additionally, the Company continues a strict cost policy. 2. RISK RELATED TO STRONG COMPETITION AB S.A. operates is a highly competitive sector. The high level of competition combined with a growing market saturation may result in decreased margins and adversely affect the generated revenues and profit. As an additional risk factor the Management Board sees a possibility that the Company s suppliers expend their sales channels by new distributors which may also have an adverse effect on the financial results. Additionally, an aggressive sales policy by the largest competitors in the Polish market may have an adverse effect on the financial results. 3. RISK OF MODIFIED LEGAL REGULATIONS AND THEIR INTERPRETATION AND APPLICATION The changing legal regulations and different interpretations, in particular with respect to tax regulations, regulations affecting business activity, labour and social insurance law or regulations related to securities, may result in negative effects for the Company. Changes in interpretation of tax related regulations are especially frequent and hazardous. There is no uniformity in the practice of tax authorities and jurisdiction with reference to taxes. A different interpretation by a tax authority of tax regulations from the one applied by the Company may imply a deteriorated financial situation which will adversely affect the results and development prospects. The risk of changes to the legal requirements further includes the occurrence of unfavourable decisions for the Company in pending or potential court or administrative proceedings. 22 p a g e

23 4. INTEREST RATE RISK The Group has to resort to external funding sources due to the operational cycle of distribution enterprises where the time to sell inventories and collect receivables is in excess of the payment cycle. An increase in base rates may result in a decreased profitability of the Company. 5. FX RISK International producers of IT and consumer electronic goods are the main suppliers to the Company. Settlements with those suppliers are largely made in foreign currencies (EUR or USD). At the same time, sales are concentrated mainly on the domestic market and are made in PLN. Despite the fact that AB S.A. pursues an active policy of FX risk management, using forward transactions, there is FX risk related to trade payables to the Company s suppliers. The volatility of EUR and USD rates makes the Company operate in a market of high FX risk. To reduce the impact of FX rate difference on AB S.A. s results, in 2011 the Company started applying cash flow hedge accounting, not resigning from the so far applied currency risk hedging policy. 6. RISK RELATED TO DEPENDENCE ON KEY SUPPLIERS AB S.A. has been collaborating with the world s leaders in IT solutions. The risk related to dependence on key suppliers is related to their major shares in supplies to the Company. Loss of one of the largest suppliers could in a short term reduce sales results in specific product groups and adversely affect the financial result generated by the Company. 7. RISK RELATED TO DEPENDENCE ON KEY BUYERS The Company has a diversified portfolio of buyers. However, some of the customers may be interested in shortening the supply chain. Large retail networks may e.g. try to be supplied directly by producers without using distributors such as AB S.A. Small and medium-sized retail buyers may try to combine their purchase potential in order to obtain more attractive delivery terms. This, in turn, may generate a risk of losing certain customers which may adversely affect sales volumes and the financial result generated by the Company. AB S.A. mitigates the risk of dependence on largest buyers by supporting the development of a retail network of digital technology equipment managed by Alsen Marketing Sp. z o.o. 8. RISK RELATED TO SEASONAL SALES The sales volume by the Company similarly to the other entities operating in the IT sector is subject to seasonal demand fluctuations. The demand is usually highest in the last calendar quarter when the sales may account for as much as 30% of the annual sales. As a result, an accurate assessment of the Company and estimation of results for a financial year is difficult on the basis of quarterly results. 23 p a g e

24 9. RISK RELATED TO INVENTORIES AND RECEIVABLES Trade receivables, similarly as in the previous year, account for 40% of AB S.A. s total assets. The high level is due to the nature of the trade activities performed by the Company. The Company sells to its buyers under a granted credit limit with a specified payment term. Each credit limit is set individually on the basis of obtained financial data, personal or material collateral received and subject to methods to verify creditworthiness that are available in the market. The condition of each customer is closely monitored and if any signals occur that would pose a hazard to payment of receivables, collection activities are initiated forthwith. Despite monitoring of receivables and a good system to assess creditworthiness, there still may be insolvency risk by single counterparties and as a result the Company may suffer financial loss. In order to mitigate the risk, the Company has concluded an agreement with Atradius Credit Insurance Polska covering the insurance of trade receivables. Under the agreement, domestic receivables of the Company are subject to insurance cover. This largely mitigates the risk of loss due to insolvency or protracted payments for sold goods. As at 30 June 2013, insured receivables accounted for over 96% of all trade receivables. 10. RISK RELATED TO FUNDING STRUCTURE The Company uses external funding sources in the form of bank loans, mainly short-term working capital loans to finance current operations of the Company. In April 2013 the Company extended a working capital loan at Kredyt Bank S.A. for another year, and also extended loan agreements with BPH S.A. with the final repayment date on , and with PEKAO S.A. with expiry date on RISK RELATED TO INVESTMENT PROCESSES Apart from replacement purchases, in the financial year 2013/2014 the Company plans to finance its associated company, B2B IT Sp. z o.o., as part of the investment implemented in Magnice. Investment decisions made by the Company are always developed in detail in business plans and cash-flow projections in order to mitigate the risk of loss of liquidity or of interference with the regular investment activities. 12. RISK RELATED TO SHAREHOLDING STRUCTURE After the Public Offering, Ms. Iwona Przybyło and Mr. Andrzej Przybyło hold 31.84% of the overall number of votes at General Meetings which ensures a significant level of control over the Company and a major impact on the operations and strategic decisions concerning the development of the Company. Additionally, pursuant to art. 12.4a of the Company s Articles of Association, Ms. Iwona Przybyło and Mr. Andrzej Przybyło are entitled to nominate and dismiss one member of the Supervisory Board. 24 p a g e

25 13. RISK RELATED TO LOSS OF KEY EMPLOYEES OF THE COMPANY Development prospects of AB S.A. are largely subject to stable employment of highly qualified staff and management. In case of fast expansion, it is also important to have possibilities to acquire additional employees with an appropriate level of experience and know-how. There is a risk of reduced efficiency of distribution in case of loss of key employees. Under such circumstances, it is impossible to ensure that new persons with appropriate qualifications can be found in a short time or that may be related to major costs. VIII) PROCEEDINGS PENDING IN COURTS, ARBITRATION BODIES OR PUBLIC ADMINISTRATION BODIES AB S.A. is subject to no proceedings pending in court, arbitration body or public administration body concerning liabilities or receivables exceeding 10% of equity. IX) BASIC GOODS AND SERVICES The core business of AB is distribution of IT equipment, components, accessories and peripheral devices. At the same time, the Company for a few quarters has stepped up its activities related to the diversification of its product portfolio adding products outside the new technologies segment. It is worth noting that AB is the only broadline distributor of laptops, ipods and ipads by Apple one of the world s most prestigious brands. AB gradually expands the sales of household appliances and audio/video devices as well as LED lighting. In the Management Board s opinion both product groups have a large potential. In the financial year analysed the Company signed several new distribution agreements, also in new areas of activities, e.g. with Samsung (LED lighting), Bosch or FagorMastercook. AB S.A. offers also comprehensive logistic services, trainings and full service for online stores. In the financial year 2012/2013, similarly as in the previous year, IT products had the largest share in the sales 57.8% - (71.7% in the previous year), consumer electronics 39.4% compared to 25.3% a year before. The share of other products in sales generated by the Company amounted to 2.8%, i.e., a 0.2% decrease compared with the previous year. X) SALES MARKETS 1. DOMESTIC VS. FOREIGN MARKETS In the analysed year Poland remained AB S.A. s main sales market. The Company also sold its products in the Czech and Slovakian markets, using the synergy effect achieved in the Group with the Czech subsidiary AT Computers a.s. At the same time, an increase in sales was observed in other foreign markets where the Company had been developing its sales structures. In the nearest future the Management Board is going to analyse the possibility of establishing outlets in countries showing the greatest sales potential. 25 p a g e

26 2. SUPPLY SOURCES AB S.A. collaborates with most of the leading suppliers of IT solutions and with many entities offering software and other goods outside the Company s core business. In this way the Company provides its partners with access to hundreds of thousands of state-of-the art products. As at the end of June 2013 the Company has been selling 463 brands and from 385 suppliers. The largest suppliers, whose share in sales revenues exceeded 10%, were HP Europe BV (13%) and Samsung Electronics Polska (11%). None of the Company s other suppliers had a share in deliveries in 2012/2013 exceeding 10%. The close cooperation with the first supplier results from the producer's dominant position on the IT equipment market (printers, PCs, servers, notebooks). The significant position of the second supplier is related to the producer s strong presence on the market of notebooks and mobile phones. At the same time, each of the products supplied by these companies can be supplied by products of other manufacturers. In the financial year nearly 400 suppliers supplied goods to the Company. Such a large dispersion allows the Company to be independent from individual vendors, thus ensuring safety of the business. Such a large dispersion allows the Company to be independent from individual vendors, thus ensuring safety of the business. 3. MAIN CUSTOMERS AB S.A. s sales are made up of tens of thousands of transactions per month, executed with nearly 7,000 customers. Such a highly fragmented customer structure requires a high organisational effectiveness on the one hand, and on the other hand, it ensures a sales flow and business stability, resulting from independence from individual entities. Most customers account for less than 1% of the total sales generated by AB S.A. In the year 2012/2013 there were no customers whose sales exceeded the level of 10% per customer. XI) MAJOR CONTRACTS CONCLUDED BY AB S.A. AB S.A. assesses the importance of concluded contracts applying two following criteria: - the criterion of 10% share in equity for contracts the conclusion of which has a considerable impact on the value of assets and liabilities (book values); - the criterion of 10% in the value of revenues for the last four quarters of the financial year for contracts which have a considerable impact on generated revenues and costs for the period (mainly refers to distribution agreements). According to the above criteria, in the period covered by the report the Company was a party to the following major contracts: Agreement of 1 March 2000 concluded with Intel Polska Development Inc. with its registered office in Santa Clara (USA) The subject of the agreement is the distribution of products, services and software of Intel Polska Development Inc. Intel Polska Development Inc. is obliged to provide AB S.A. with technical 26 p a g e

27 training materials, sales aids, data sheets and information regarding the use of products, software and services. AB S.A. is obliged to provide relevant translation thereof subject to the assessment and approval by Intel Polska Development Inc. Intel Polska Development Inc. is entitled to modify, at any time, without the obligation to notify and without bearing responsibility, the documents related to the agreement and concerning sales terms and conditions, practices and rules applied in relations between the parties thereto and distribution prices for the Counterparty's products. Product resale prices specified by Intel Polska Development Inc. in The Distributor s Price List shall be treated as guidelines only, and AB S.A. has the right to set its own resale prices and terms of sale. Should Intel Polska Development Inc. introduce any changes as to the form, usability or function of products resulting in stocked goods being unsellable, in the opinion of Intel Polska Development Inc., Intel Polska Development Inc. shall repurchase such goods at the net price paid by AB S.A., and the Company shall have thirty days to return the products. The agreement was concluded for a specified period of one year and can be extended each year for another period of one year unless either party informs the other at least 30 days prior to the scheduled date of the agreement extension about its intent not to extend the agreement (reservation of the termination condition). The agreement may be terminated by either party after the lapse of at least 60 days from the notification of the other party in any time and for whatever reason or without a reason, and without bearing any responsibility. The agreement may be terminated by either party after the lapse of 30 days from notification of the other party in the case of: gross breach of the terms of the agreement by the other party, change of the regulator or owner of the other company, if either party goes bankrupt or becomes insolvent or otherwise is unable to pay its liabilities. The agreement may be terminated by Intel Polska Development Inc. without notice in particular in the case of: gross breach of legal or contractual obligations by AB S.A., especially if AB S.A. sold fake or differently marked Intel Polska Development Inc. processors, any negligence of AB S.A. which grossly affects the interests of Intel Polska Development Inc., in particular unlawful disclosure of information held by Intel Polska Development Inc. or trade secrets. In January 2006, as a result of reorganisation, Intel Polska Development Inc. was replaced with Intel Corporation (UK) Ltd. Agreement of 6 October 2003, concluded with Hewlett-Packard Polska Sp. z o.o. with its registered office in Warsaw The subject of the agreement is the designation of AB S.A. an authorised partner of CDP (Channel Development Partner). AB S.A. shall have the possibility, subject to the consent of Hewlett- Packard Polska Sp. z o.o. and compliance with its standards, to use the trademarks of Hewlett- Packard Polska Sp. z o.o. AB S.A. shall not use or register any trademark that is in conflict with the trademarks concerned. The agreement was concluded for an indefinite period of time. AB S.A. is 27 p a g e

28 entitled to terminate the agreement at any time. Hewlett-Packard Polska Sp. z o.o. may terminate the agreement if AB S.A. breaches the provisions thereof and fails to remedy the resulting damage, subject to a 30-day notice period, and should Hewlett-Packard Polska Sp. z o.o. amend the terms of all such agreements, with a 60-day notice period. Either party may terminate the agreement with an immediate effect in the event of insolvency or instigation of bankruptcy proceedings against the other party. Trade agreement of 2 January 2006 concluded with Media Saturn Holding Polska Sp. z o.o. (previously Media Markt Sp. z o.o.) with its registered office in Warsaw and Media Markt Polska Sp. z o.o. Bielsko Biała Sp.k., Media Markt Polska Sp. z o.o. Bydgoszcz Sp.k., Media Markt Polska Sp. z o.o. Chorzów Sp.k., Media Markt Polska Sp. z o.o. Czeladź Sp.k., Media Markt Polska Sp. z o.o. Częstochowa Sp.k., Media Markt Polska Sp. z o.o. Gdańsk I Sp.k., Media Markt Polska Sp. z o.o. Katowice I Sp.k., Media Markt Polska Sp. z o.o. Kielce Sp.k., Media Markt Polska Sp. z o.o. Kraków I Sp.k., Media Markt Polska Sp. z o.o. Łódź I Sp.k., Media Markt Polska Sp. z o.o. Łódź II Sp.k., Media Markt Polska Sp. z o.o. Lublin Sp.k., Media Markt Polska Sp. z o.o. Warszawa I Sp.k., Media Markt Polska Sp. z o.o. Olsztyn Sp.k., Media Markt Polska Sp. z o.o. Opole Sp.k., Media Markt Polska Sp. z o.o. Poznań I Sp.k., Media Markt Polska Sp. z o.o. Poznań II Sp.k., Media Markt Polska Sp. z o.o. Radom Sp.k., Media Markt Polska Sp. z o.o. Rybnik Sp.k., Media Markt Polska Sp. z o.o. Rzeszów Sp.k., Media Markt Polska Sp. z o.o. Szczecin Sp.k., Media Markt Polska Sp. z o.o. Toruń Sp.k., Media Markt Polska Sp. z o.o. Warszawa II Sp.k., Media Markt Polska Sp. z o.o. Warszawa III Sp.k., Media Markt Polska Sp. z o.o. Warszawa IV Sp.k., Media Markt Polska Sp. z o.o. Wrocław I Sp.k., Media Markt Polska Sp. z o.o. Wrocław II Sp.k., Media Markt Polska Sp. z o.o. Zabrze Sp.k., Saturn Planet Sp. z o.o. Warszawa Sp.k. oraz Saturn Planet Sp. z o.o. Warszawa II Sp.k., Saturn Planet Sp. z o.o. Katowice I Sp.k. with their registered offices in Warsaw (Customers) The agreement defines the terms and conditions of trade cooperation involving the whole range of products provided to the customers by AB S.A. The customers are entitled, in amounts specified in the said agreement, to: a conditional quarterly bonus, payable subject to achieving or exceeding in a quarter a specified sales volume, a bonus for an increase in sales, and a conditional annual bonus, payable subject to achieving or exceeding in a calendar year a a specified sales volume. The agreement was concluded for an indefinite period of time, subject to the right to negotiate trade conditions applicable in the subsequent calendar year. Should the term conditions for the next calendar failed to be agreed, either party is entitled to terminate the said agreement with a 14-day notice period. Marketing agreement of 2 January 2006 concluded with Media Saturn Holding Polska Sp. z o.o. (previously Media Markt Sp. z o.o.) with its registered office in Warsaw and Media Markt Polska Sp. z o.o. Bielsko Biała Sp.k, Media Markt Polska Sp. z o.o. Bydgoszcz Sp.k., Media Markt Polska Sp. z o.o. Chorzów Sp.k., Media Markt Polska Sp. z o.o. Czeladź Sp.k., Media Markt Polska Sp. z o.o. Częstochowa Sp.k., Media Markt Polska Sp. z o.o. Gdańsk I Sp.k., Media Markt Polska Sp. z o.o. Katowice I Sp.k., Media Markt Polska Sp. z o.o. Kielce Sp.k., Media Markt Polska Sp. z o.o. Kraków I Sp.k., Media Markt Polska Sp. z o.o. Łódź I Sp.k., Media Markt Polska Sp. z o.o. Łódź II Sp.k., Media 28 p a g e

29 Markt Polska Sp. z o.o. Lublin Sp.k., Media Markt Polska Sp. z o.o. Warszawa I Sp.k., Media Markt Polska Sp. z o.o. Olsztyn Sp.k., Media Markt Polska Sp. z o.o. Opole Sp.k., Media Markt Polska Sp. z o.o. Poznań I Sp.k., Media Markt Polska Sp. z o.o. Poznań II Sp.k., Media Markt Polska Sp. z o.o. Radom Sp.k., Media Markt Polska Sp. z o.o. Rybnik Sp.k., Media Markt Polska Sp. z o.o. Rzeszów Sp.k., Media Markt Polska Sp. z o.o. Szczecin Sp.k., Media Markt Polska Sp. z o.o. Toruń Sp.k., Media Markt Polska Sp. z o.o. Warszawa II Sp.k., Media Markt Polska Sp. z o.o. Warszawa III Sp.k., Media Markt Polska Sp. z o.o. Warszawa IV Sp.k., Media Markt Polska Sp. z o.o. Wrocław I Sp.k., Media Markt Polska Sp. z o.o. Wrocław II Sp.k., Media Markt Polska Sp. z o.o. Zabrze Sp.k., Saturn Planet Sp. z o.o. Warszawa Sp.k. and Saturn Planet Sp. z o.o. Warszawa II Sp.k., Saturn Planet Sp. z o.o. Katowice I Sp.k. with their registered offices in Warsaw (Customers) The subject of the agreement is the terms and conditions and methods of provision of marketing and advertising services to AB S.A. by its customers. Each customer undertook to provide continuous marketing and advertising services during the term of the agreement, comprising in particular prints. The agreement is in force throughout the country, with the parties thereto having the right to conclude regional agreements of a similar nature. The agreement was concluded for an indefinite period of time, subject to the right to negotiate the trade terms to be applicable in the subsequent calendar year. Should the term conditions for the next calendar failed to be agreed, either party is entitled to terminate the said agreement with a 14-day notice period. Agreement of 20 March 2006 concluded with Microsoft Ireland Operations Limited with its registered office in Dublin (Ireland) On the terms set forth in the agreement Microsoft Ireland Operations Limited granted AB S.A. a non-exclusive limited right to order and deliver Microsoft OEM System Builder on the territory of Poland. AB S.A. obtains products under the agreement only for resale. AB. S.A. shall incur costs, expenses and damages in the case of breach of the above obligation. Microsoft Ireland Operations Limited grants a guarantee to end customers, under the terms and conditions as set forth in the guarantee document or guarantee contract with the customer, attached to the product. Microsoft Ireland Operations Limited authorised AB S.A. to use the business name, trade names and trademarks of Microsoft Ireland Operations Limited in order to mark Microsoft Ireland Operations Limited, its technologies and services. The agreement was concluded for a definite period of time and expires on 30 June 2007, however it shall be automatically extended each year. Each party is entitled to terminate the agreement by notice with a 30-day notice period. The agreement may be terminated with immediate effect in the event, inter alia, that the other party announces bankruptcy. Agreement of 1 July 2006 concluded with Microsoft Ireland Operations Ltd. with its registered office in Dublin (Ireland) On the terms set forth in the agreement Microsoft Ireland Operations Ltd. authorised AB S.A. to obtain and distribute licensed software (Full Packaged Product) on the territory of the European 29 p a g e

30 Union and the European Free Trade Association. The agreement was concluded for a definite period of time and expires on 30 June 2007, however it shall be automatically extended each year. Agreement of 1 July 2006 concluded with Microsoft Ireland Operations Ltd. with its registered office in Dublin (Ireland) On the terms set forth in the agreement Microsoft Ireland Operations Ltd. authorised AB S.A. to obtain and distribute the licensed software specified therein on the territory of the European Union and the European Free Trade Association. The agreement was concluded for a definite period of time and expires on 30 June 2007, however it shall be automatically extended each year. Distribution agreement concluded with HTC Corporation with its registered office in Taoyuan City, Taiwan The agreement makes AB S.A. an authorised distributor of HTC products. The subject of the agreement is the distribution of equipment such as: wireless telecommunications devices, PDA, navigation devices and other devices manufactured by HTC. The prices applicable to the Issuer are in accordance with the current price list. The agreement does not provide for any contractual penalties. The agreement shall be automatically extended each year unless either party notifies the other in writing about its intention not to extend the agreement, however not later than 90 days before the expiry date thereof. The parties are entitled to terminate the agreement without notice in the case of bankruptcy or bankruptcy proceedings brought against the other party; with a 30-day notice period, by written notification in the event of (i) violation of the provisions of the agreement or (ii) any changes in the management, ownership or control of the other party; with a 60-day notice period, by written notification if one of the parties decides it is in its interest Distribution agreement of 10 August 2010 concluded with Samsung Electronics Polska Sp. z o.o. with its registered office in Warsaw The subject of the agreement is the specification of the terms and rules of cooperation between AB S.A. and Samsung Electronics Polska Sp. z o.o. in the scope of the purchase of goods, i.e. monitors, notebooks, optical drives, hard discs, printers, operating materials and multi-functional devices. The agreement also stipulates the terms and rules of cooperation regarding advertising and marketing activities performed by AB S.A. with respect to goods purchased thereunder. The agreement was concluded for an indefinite period of time, subject to the right to negotiate each year the trade terms to be applicable in the subsequent calendar year. Each of the parties is entitled to terminate the agreement with a 1-month notice period. 30 p a g e

31 Distribution agreement of 8 September 2011 concluded with Apple Sales International with its registered office in Cork, Ireland. The agreement makes the Issuer an authorised distributor of Mac computers, ipads, ipods and accessories produced by Apple. The subject of the agreement is the sales of Apple products by the Issuer on its own behalf and account, carried out on the territory of the Republic of Poland. The prices applicable to the Issuer are in accordance with the current price list and subject to possible price discounts offered by Apple. The agreement was concluded for a definite period of time and expires on 31 March 2014, with a possibility of extension. Distribution agreement with Acer Slovakia s.r.o. with its registered office in Bratislava The subject of the agreement is the specification of the terms and rules of cooperation between AB S.A. and Acer with respect to the purchase of products such as notebooks, netbooks, ultrabooks and tablets as key goods purchased from the supplier as well as other products such as monitors or projectors. The agreement also stipulates the terms and rules of cooperation regarding advertising and marketing activities performed by AB S.A. with respect to goods purchased thereunder. The agreement may be terminated with a 1-month notice. Dealership agreement with Komputronik S.A. with its registered office in Poznań The subject of the agreement is the commercial cooperation between the Issuer and Komputronik S.A. covering general sales terms for products from the current commercial offer of the Issuer in the territory of Poland. Should Komputronik S.A. fail to collect goods, the Issuer shall be entitled to terminate the agreement and demand contractual penalty. Moreover, AB S.A. maintains continuous trade relations with other global IT producers such as ASUS Technology PTE Ltd. with its registered office in Singapore or LG Electronics Polska with its registered office in Warsaw and others. Trade with these entities is carried out under one-off sales agreements, where the parties specify only the amount of the products ordered and its value, delivery dates and mode, payment terms and guarantee terms. The terms and conditions of such agreements do not materially differ from the terms and conditions commonly applied in agreements of that kind. Other agreements: Insurance agreement of 3 July 2012 covering the insurance of trade receivables (Policy No , 69685) concluded with Atradius Credit Insurance N.V. S.A. Branch in Poland with its registered office in Warsaw Under the agreement, Atradius Credit Insurance NV S.A. indemnified the Company against Insolvency, Protracted Default and Political Risk with respect to sales transactions with deferred payment dates on the terms specified in the policy. 31 p a g e

32 The policy entered into force on 1 July 2012 and shall be valid for another 24 months (after the first 12 months the agreement shall be extended). The policy shall be automatically extended on the same conditions and for the same term unless the Company or the Insurer notify in writing, however not later than one month before the end of the Term of the Policy, about their decision not to extend the policy. Receivables or parts thereof are secured with bank or insurance guarantees and are not part of the concerned insurance coverage. Contractual penalties or interest claimed by AB S.A. from its debtors defaulting with payment are not covered by the agreement. The day when the waiting period, defined separately for each country, expires shall be deemed the date of damage. Failure to notify of the failure to pay receivables in compliance with the agreement shall result in a loss of the right to damages under the protracted damage clause and compensation for future damage. The General Terms of Insurance of Trade Receivables of Atradius Polska form an integral part of the agreement. Factoring agreement of 7 September 2009 concluded with SEB Commercial Finance Sp. z o.o. with its registered office in Warsaw, as amended In accordance with the annex signed on 29 March 2012, the Company s limit amounts to PLN 100 M. The collateral established by the Issuer to the agreement is as follows: blank promissory note issued by the Issuer with a promissory note agreement; power of attorney to the Issuer s bank account by the Factor; assignment of rights under insurance policy covering receivables from indicated counterparties. The factoring agreement was extended with an annex of 30 October 2012 to 31 October 2013 Factoring agreement of 16 May 2012 concluded with Bank Millenium S.A. with its registered office in Warsaw, annexed on 25 March 2013, and Factoring agreement of 25 March 2013 concluded with Bank Millenium S.A. with its registered office in Warsaw In accordance with the annex signed on 25 March 2013, the Company s limit amounts to EUR 10 M. The factoring agreement was extended with an annex of 30 October 2012 to 24 March The agreement concluded on 25 March 2013 is valid from 25 March 2013 to 24 March The Issuer s limit thereunder amounts to PLN 60,000,000. The Issuer s total exposure under both agreements may not exceed PLN 80,000,000. Claims arising from the agreements are secured with: - assignment of the rights under the insurance agreement for receivables in favour of the Factor; - own blank promissory note issued by the Issuer with a promissory note agreement. 32 p a g e

33 AFTER THE BALANCE-SHEET DATE THE COMPANY SIGNED THE FOLLOWING MAJOR CONTRACTS: The Company did not conclude any major contracts after the end of the financial year. XII) ORGANISATIONAL OR CAPITAL RELATIONS OF THE COMPANY WITH OTHER ENTITIES. Pursuant to the agreement of 19 July 2004, a limited liability company under the business name ALSEN Sp. z o.o. with its registered office in Chorzów was established. The company was set up for an unspecified period of time. Originally, AB S.A. held 348 shares which accounted for 59% of the share capital and votes at general meetings of Alsen Sp. z o.o. On 8 May 2008 the company increased its interest in Alsen Sp. z o.o. by another 60 shares. As at 30 June 2010, AB S.A owned 408 shares totalling PLN 204,000, accounting for 69.39% of shares in Alsen Sp. z o.o. On 19 September 2007 the Management Board of AB S.A. signed a purchase agreement for 100% shares in AT Computers Holding a.s., one of the largest ICT companies operating in the Czech Republic and Slovakia. AT Computers Holding a.s. holds 100% shares in the following companies: AT Computers a.s.- a distributor offering software, IT equipment, consumer electronic products and mobile technology devices in the Czech Republic; AT Compus s.r.o. the largest company in the Czech Republic involved in manufacturing of PCs with production capacity of 100,000 PCs annually; Comfor Stores a.s a company managing a network of over 20 retail stores in the Czech Republic; AT Computer s.r.o. a company involved in distribution in the Slovak Republic; 33 p a g e

34 On 30 October 2007 the last conditions precedent to the acquisition were satisfied. Pursuant to the Agreement of 15 January 2009, Alsen Marketing Sp. z o.o. was established, with share capital of 50,000. All shares in the company were acquired by AB S.A. The company s business focuses on marketing activities and wholesale and retail sales of computer equipment and consumer electronic goods. In the AB S.A. Group s structure the company will support Alsen Sp. z o.o. Mr. Zbigniew Mądry was appointed President of the Management Board. On 2 November 2009, a special purpose company B2B IT Sp. z o.o. was established with share capital of PLN 3,000,000 that would be involved in logistics services. On 16 September 2011 icomfor s.r.o. with its registered office in Brno, subsidiary of AT Computers Holding a.s., was established; the company is represented by Mr. Aleš Kilnar and Mr. Stanislav Heža. The share capital of the company amounts to CZK 200,000. As at 30 June 2013, the composition of the AB S.A. Capital Group was as follows: After the balance sheet date on 20 August 2013 a company under the business name of Optimus Sp. z o.o. with its registered office in Wrocław was established. The share capital of the company amounts to PLN 4 M. All shares in the company were acquired by AB S.A. The company s core business is production, repair and sales of consumer electronic goods. XIII) MATERIAL TRANSACTIONS CONCLUDED BY THE COMPANY OR ITS SUBSIDIARY ON NON-MARKET TERMS WITH RELATED ENTITIES In the reporting period there were no transactions between the Issuer and a related entity concluded otherwise than at arm s length. 34 p a g e

35 XIV) CONCLUDED AND TERMINATED LOAN AGREEMENTS Loan agreement No. WR1/Rb/8/99 revolving overdraft facility, concluded with Bank Zachodni WBK S.A. with its registered office in Wrocław on 1 February 1999, annexed on 15 April The Bank granted AB S.A. short-term revolving overdraft facilities in PLN and EUR with a reservation that the total amount of the loan in PLN and EUR cannot exceed the equivalent of PLN 100 M. The funds thereunder shall be allocated for financing the current business activities until 30 April Interest on the loan is based on WIBOR 1M and EURIBOR 1M for EUR plus a bank margin. The collateral to the loan agreement is as follows: registered pledge on inventories of minimum PLN 50 M; blank promissory note issued by the Company; assignment of receivables from buyers of the Company of minimum PLN 35 M; declaration on submission to voluntary execution up to PLN 120 M. The bank may terminate the agreement as specified in the agreement, in particular if AB S.A. breaches specific contractual provisions, e.g. the obligation to maintain its solvency ratio at a specified level. For matters not provided for in the agreement, the provisions of the General Lending Terms at Bank Zachodni WBK S.A. (OWK), attached to the agreement, shall apply. Loan agreement concluded with Bank Polska Kasa Opieki Spółka Akcyjna with its registered office in Warsaw on 29 May 2008, annexed on 8 March Bank Polska Kasa Opieki S.A. granted the Company a credit limit up to equivalent of PLN 106 M. The limit may be used as follows: - Overdraft facility available in three currencies: EUR, USD and PLN, however the limit in EUR is EUR 8,000,000. Limits for other currencies are USD 2,500,000 for a loan in USD and PLN 100,000,000 for a loan in PLN. The total loan amount may not exceed PLN 100,000, The overdraft limit for bank guarantees and letters of credit up to PLN 6,000,000. Interest on the loan is based on WIBOR 1M, EURIBOR SPOT 1M, LIBOR SPOT 1M plus a bank margin. The collateral to the loan is as follows: registered pledge on inventories of minimum PLN 35 M with assignment of rights from insurance policies; assignment of receivables under trade contracts approved by the Bank for minimum PLN 30 M; power of attorney to current accounts of the Company with the Bank; declaration on submission to voluntary execution up to PLN 127,200,000. The final repayment date of the overdraft limits or extension for subsequent periods are as follows: - 15 March 2014 for the overdraft facility, 35 p a g e

36 - 15 March 2015 for the overdraft limit for bank guarantees and letters of credit, however the validity of a guarantee for the amount of PLN 3,000,000 expires after 15 May 2016 For matters not provided for in the agreement, the provisions of the general lending agreement No. 2008/11/DDF of 29 May 2008 shall apply. Multipurpose line agreement with Bank BPH S.A. with its registered office in Kraków of 23 March 2009, annexed on 13 December The Bank granted the Company a multipurpose credit line of PLN 64 M (the loan amount is subject to a borrowing base which depends on the volume of receivables and payables used as collateral to the loan). The facility is split into the following sub-limits: loan sub-limit up to PLN 59.9 M to finance the current operations of the Company, loan sub-limit up to PLN 4 M to cover credit and market risk related to financial market transactions, loan sub-limit up to PLN 100 K for credit cards. The final repayment date of the facility or extension for a subsequent period is 30 November The collateral to the loan is as follows: registered pledge on inventories of the Company up to the amount of PLN 76,800,000 along with assignment of rights under insurance policies; assignment of receivables from indicated counterparties; assignment of rights under insurance policies covering receivables from counterparties whose receivables are used as collateral for the Loan; power of attorney to funds in the Borrower s bank account. declaration on submission to voluntary execution up to PLN 96 M. AGREEMENTS AFTER THE BALANCE SHEET DATE The Company did not conclude any agreements after the end of the financial year. XV) LOANS GRANTED Loans granted are disclosed in the financial statements pt. 4.1 Information on financial instruments and pt p a g e

37 XVI) SURETIES AND GUARANTEES GRANTED AND RECEIVED In order to secure its commercial contracts, the Company has granted its counterparties with bank guarantees for amounts as follows ( 000 units): PLN USD EUR PLN USD EUR Specification of guarantees issued by AB S.A. as at 30 June 2013: XVII) PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS The factoring agreements concluded by the Company with financial institutions do not provide for full factoring. As at the balance sheet date the Management Board does not recognise any liabilities resulting therefrom, and in accordance with the National Accounting Standard No. 6, the probability of cash outflow is insignificant and therefore there is no requirement to disclose such information. XVIII) ISSUED CAPITAL DESCRIPTION OF THE COMPANY S ALLOCATION OF INFLOWS FROM ISSUED CAPITAL UP TO THE DATE OF THE COMPANY S REPORT ON OPERATIONS In the financial year 2012/2013 there were no share issues. 37 p a g e

38 XIX) DIFFERENCES BETWEEN FINANCIAL RESULTS DISCLOSED IN THE ANNUAL REPORT AND PREVIOUSLY PUBLISHED PROJECTED RESULTS The Company did not publish any projections. XX) ASSESSMENT OF THE MANAGEMENT OF FINANCIAL RESOURCES WITH JUSTIFICATION IT product distribution model is based on strong involvement of the distributor, which offers material values for the producer. Apart from access to the full spectrum of sales market channels and support for pre- and after-sales services, one of the most crucial roles of the distributor in this model is crediting. The distributor conducts sales largely on the basis of trade credits. Payment terms depend on the customer s credibility, the nature of its activities, sales volumes, and other individually defined parameters. The key role of the distributor is also to maintain the widest possible product offer. In such a model, working capital management is one of the key competences of a major distributor. AB, as a broadline distributor, maintains a positive working capital fulfilling its credit function mentioned above; such characteristics of the business combined with the huge scale of operations determines the amount of receivables, inventories and liabilities, including interest liabilities, in the Company s balance sheet. In addition, the dynamic sales growth observed in the recent years as well as diversification and expansion of the product offer (new distribution agreements) also contribute to an increase in interest debt. Basic financial results, maintaining at optimum levels, reflect AB s very good financial condition and effective management of the Company s finance. The Management Board pays special attention to FX hedging. The nature of its business exposed the Company to material risk relating to currency rate fluctuations, but the hedge accounting implemented by the Company virtually eliminates FX risk. The applied hedging instruments do not generate additional risk related to high volatility of market conditions, such as options or option strategies. The Company has been managing credit risk in a structured and responsible manner. The Company applies restrictive receivables policy, verifies merchant limits granted and insures receivables. Thanks to its credit policy, the Company does not have any problems with collecting overdue receivables. At the same time, a conservative approach to valuation of such assets does not pose a risk of incorrect classification. 38 p a g e

39 XXI) ASSESSMENT OF THE COMPANY S ABILITY TO ACHIEVE INVESTMENT GOALS, INCLUDING CAPITAL INVESTMENTS, COMPARED TO THE AMOUNT OF AVAILABLE FUNDS The capital undertakings planned by the Management Board have fully secured financing sources. The planned outlays are connected with replacement of used elements. At the same time, the Company s total debt level, exceeding 59%, guarantees considerable financial stability. XXII) NON-TYPICAL FACTORS AND EVENTS AFFECTING THE RESULT OF OPERATIONS IN THE FINANCIAL YEAR In the financial year 2012/2013 there were no non-typical events that would affect the result of operations for the financial year. XXIII) CHARACTERISTICS OF EXTERNAL AND INTERNAL FACTORS MATERIAL TO COMPANY S DEVELOPMENT AND DEVELOPMENT PROSPECTS OF THE COMPANY EXTERNAL FACTORS Unstable macroeconomic situation on European markets, caused by the continuing debt crisis Low GDP level, high unemployment rate, decreasing purchasing power and low consumption level in Poland impacted on AB S.A. s business in the analysed period The period January-June 2013 was characterised by improvements in many macroeconomic aspects relevant for the Company (such as retail sales, GDP, PMI). The trend continues in the second half of the year, providing a more positive outlook on the upcoming quarters The series of interest rate cuts started in November 2012, as a result of which they dropped to a historic low level, contributed to a gradual decrease in financing costs in relation revenues. Economists predict that this trend which is positive for AB S.A. will continue until the end of The record low interest rates should within the next year stimulate the consumer credit market, which may translate into AB S.A. s sales growth. Fast technological development Strong competition, resulting in pressure on prices and generated margins Consolidation of the market INTERNAL FACTORS The following internal factors affected the Company s condition and performance in the analysed period. Their influence is going to be visible also in the next financial year: 39 p a g e

40 Maintenance of the largest possible product portfolio as part of the adopted market strategy, aimed at increasing sales and improving partners loyalty Continuous efforts to optimise the management of inventories, working capital and logistics, resulting in operating costs reduction in relation to revenues Simultaneous expansion in multiple sales channels: resellers, e-commerce, large retail networks, public administration, corporate customers, integrators, franchise network, export sales Hedging accounting applied to eliminate currency risk, and effective hedging policy against currency risk Offering additional services to partners (e.g. trainings, certifications, outsourcing of logistic processes, sales platforms, joint marketing initiatives), which allow the Company to obtain their loyalty and generate higher margins The necessity of immediate adjustment to rapidly changing market trends Development of own brands to ensure higher return on sales Maintenance of debt at optimum level (approx. 66% of total assets), ensuring, on the one hand, financial safety, and on the other allowing for stable growth, with dynamically growing scale of operations Strict receivables policy guaranteeing that the Company liquidity will remain at a high level Taking advantage of the Company s leading position on the Polish, Czech and Slovakian markets economies of scale, strong negotiation position Expanding the group of counterparties (new distribution agreements) and commercial partners Diversification of product groups with new categories outside the new technologies segment (such as household appliances and audio/video devices, stationery and operational goods) XXIV) CHANGES TO KEY RULES OF BUSINESS MANAGEMENT OF THE ISSUER AND ITS CAPITAL GROUP During the reporting period there were no material changes to business management rules of AB SA. XXV) CONTRACTS BETWEEN THE ISSUER AND MANAGING PERSONS PROVIDING FOR COMPENSATION IF THEY RESIGN OR ARE DISMISSED FROM THEIR POSITION WITHOUT VALID REASON OR WHEN SUCH RESIGNATION OT DISMISSAL RESULTS FROM MERGER OF THE ISSUER BY TAKE-OVER As at the date hereof no such contracts were concluded. 40 p a g e

41 XXVI) THE VALUE OF SALARIES, REWARDS OR BENEFITS, INCLUDING RESULTING FROM INCENTIVE OR BONUS PROGRAMMES BASED ON THE ISSUER S CAPITAL Bodies of the Company Management Board PLN 000(gross) Andrzej Przybyło Krzysztof Kucharski Zbigniew Mądry Grzegorz Ochędzan Total Supervisory Board PLN 000(gross) Iwona Przybyło Katarzyna Jażdrzyk Andrzej Bator Radosław Kiełbiński Jacek Łapiński Jan Łapiński Total p a g e

42 XXVII) NUMBER AND NOMINAL VALUE OF ALL SHARES OF THE ISSUER Shares held by managing and supervising persons The Issuer s shares or rights to shares held by persons managing and supervising the Issuer s business as at the date when the quarterly report was published 18 September 2013: As at Number of shares Shareholding structure by the number of shares Number of votes Shareholding structure by the number of votes Management Board Andrzej Przybyło % % Krzysztof Kucharski % % Zbigniew Mądry % % Grzegorz Ochędzan % % Supervisory Board Iwona Przybyło % % Jacek Łapiński 0 0 Jan Łapiński 0 0 Radosław Kiełbasiński 0 0 Andrzej Bator 0 0 Katarzyna Jażdrzyk 0 0 Privileged shares 1,313,000 (one million three hundred thirteen thousand) series B registered shares privileged with respect to voting rights by being entitled to two votes at General Meetings. The shares are held by Mr. Andrzej Przybyło Restrictions in exercising rights from shares As at the balance sheet and as the date hereof there were no restrictions in exercising rights from shares. The table below presents specification of issued shares by series: 42 p a g e

43 XXVIII) INFORMATION ON CONTRACTS KNOWN TO THE ISSUER (ALSO AFTER THE BALANCE SHEET DATE) AS A RESULT OF WHICH CHANGES MAY OCCUR TO THE SHAREHOLDING OR BOND HOLDING STRUCTURE The Management Board is not aware of any contracts as specified above. XXIX) INFORMATION ON CONTROL SYSTEM OF EMPLOYEE SHARE SCHEMES The Supervisory Board is entitled to determine the parameters and rules of allotting employees shares pursuant to an authority granted by the General Meeting, the Supervisory Board determines financial parameters for the period and subsequently controls and verifies the way they are implemented. XXX) INFORMATION ON ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS 1. DETAILS OF THE ENTITY AUTHORISED TO REVIEW FINANCIAL STATEMENTS ECA Seredyński i Wspólnicy sp.k. with its registered office in Kraków, ul. Supniewskiego 11, registered in the District Court for Kraków-Śródmieście in Kraków, XI Commercial Division of the National Court Register, under the number KRS maintained by KIBR under No p a g e