Annual Report on the Supervisory Board's Operation, Including the Supervisory Board's Assessment of its Performance and Internal Audit and Risk Management Systems in 2010

 

BRIEF ASSESSMENT OF THE COMPANY'S SITUATION, TAKING ACCOUNT OF THE INTERNAL AUDIT AND RISK MANAGEMENT SYSTEMS

 

 

I. COMPANY'S FINANCIAL SITUATION AND MARKET POSITION

 

The Supervisory Board gave its favourable assessment of Impel SA's and the Impel Group's situation as at the end of 2010. The Company's financial situation is good and there are no risks to the continuation of the Company's and its Group's operations.

 

The Group is focused on the development of complementary outsourcing services by taking over an ever wider range of clients' business processes - thus extending gradually the areas of its operation. The Group enjoys a stable position on the market, and is a market leader as far as its core products are concerned.

 

Areas of the Impel Group's operation in 2010:

 

I.1 Capital transactions

In 2010 the Group acquired 100% of shares in PHU MIX - EC Sp. z o.o. A new target group for further acquisitions is formed by large industrial companies, rendering services which coincide with the Group's product range, and entities which provide services complementary to the Group's offer.

 

I.2 Innovative activity

A modern management system, operating on the basis of the Integrated IT System implemented in 2009, and a platform for monitoring the provision of services - Contact Centre - represent the elements of the Group's competitive advantage. The implemented systems made it possible to improve the quality of service and by way of increasing the management efficiency they contributed to the improvement in the Group's profitability.

 

I.3 Operating activities

Despite significant competitive pressure and growing consumer requirements regarding the quality of service, in 2010 the Group increased its turnover by 7.5% compared to 2009. There was also a significant increase in profitability. EBIT totalled PLN 64,834,000 surpassing the result achieved in the previous year by PLN 16,146,000 (i.e. 33.2%). Its increase can be attributed to the activities aimed at optimisation of operating processes (including economies of scale resulting from centralised purchasing, developed and improved service subcontracting system, making use of the Integrated IT System), improvement in the performance of the structures representing indirect costs for the organisation as well as to selective approach to new contracts and renegotiations of the existing contracts,  in order to optimise the scope of their implementation.

 

The net result amounted to PLN 52,738,000 and was higher than that recorded in 2009 by PLN 19,230,000 (i.e. 57.4%). Such dynamic increase resulted from improvement in the operating result, decrease in margins of working capital loans and provision of mechanisms for income tax optimisation.

 

The Group's financing structure is safe. Equity capital dominates in the balance sheet structure. As at December 31^st 2010 the Group disclosed positive net working capital.  

 

I.4 Dividend

On July 30^th 2010 Impel SA paid dividend of PLN 1.5 per share, totalling PLN 18,227,193. The payment of dividend did not have any adverse effect on the Group's liquidity.

 

II. INTERNAL AUDIT SYSTEM

 

II.1 K Internal audit.

In the Impel Group there functions a system of internal regulations comprising applicable acts (including procedures, instructions or regulations) governing the Group's operation. The observance of internal regulations is monitored by superiors, as part of their functional supervision, and by the Ownership Supervision and Investor Relations Office. The audits are conducted on the basis of annual internal audit plans approved by the Management Board of Impel SA and ad hoc at the request of the Director of the Ownership Supervision and Investor Relations Office.

 

Current expenditure control is facilitated by the Integrated IT System that enables tracking of costs at every level of their origination, from placing an order to the results of the entire Group. It also unifies the reporting system in all Group entities.

 

Periodical audits of the operation of the above-mentioned system are carried out in order to utilise it in a better way for the purposes of internal audit.

 

II.2 Preparation of financial statements.

Books of accounts of the Group's respective undertakings are kept by the Accounting Centre operating within Impel Accounting sp. z o.o., which renders accounting and bookkeeping services for Impel SA and all other Group's undertakings. The company also provides services for clients outside the Group, including companies listed on the Stock Exchange. The Impel Group's books of accounts are kept in accordance with the uniform accounting principles and binding law, i.e. IFRS/IAS, internal procedures for provision of the service, and accounting principles adopted by the Group.

 

In financial reporting one of the basic elements of control over the process of drawing up and ensuring correctness of published financial statements is their verification by an independent external auditor. Interim and annual financial statements of the Group's companies are assessed by a statutory auditor. The statements for the year 2010 of the Group's major companies were audited by PricewaterhouseCoopers sp. z o.o.

 

The Impel Group's structure includes Accounting Audyt Partner sp. z o.o. s.k. which exercises supervision over the implementation of the Group's tax strategy and its modification to adapt it to the current needs, carries out tax audits in order to verify tax risks which may occur within the Group, exercises supervision over the implementation of the transfer prices policy in the Group and takes other actions arising from the above-mentioned strategy.

 

III. RISK MANAGEMENT SYSTEM

 

The Corporate Management Board (Management Board of Impel SA) is responsible for managing risk relevant for the Impel Group, whereas at the level of Business Units such responsibility is assumed by their respective Management Boards. As part of building the Impel Group's strategy the following main areas of risk were diagnosed:

 

III.1 Commercial risk - including a threat of selling contracts with too low margins, which would not ensure a satisfactory profitability. The Vice-President of the Management Board responsible for Commercial Issues deals with monitoring of this area and takes relevant steps.

 

III.2 Operating risk - including a risk of incurring costs which are higher than those anticipated in calculations for contracts, as a result of e.g. price rises, and related to a large scale of the Group's operating activity. Monitoring and reducing this type of risk is the responsibility of the President of the Management Board at the level of Impel SA, and of respective Presidents at the level of Business Units and Product Lines. The Group operates on the basis of the approved budget. In the course of a year the Management Board analyses current financial results comparing them to the adopted budget, making use of the management reporting employed in the Group.

 

III.3 Financial risk - threats connected, among others, with ensuring the funds for the Impel Group's operation and development and safe liquidity ratios. Monitoring and counteracting this type of risk are assigned to the Vice-President of the Management Board responsible for Financial Issues. At the level of Impel SA the financial functions are performed by a dedicated Financial Centre.

On the basis of the current market information and the situation on the financial market the cost of credit is assessed, taking account of the financial plan for a given period and short-term forecasts. Monitoring of the risk of liquidity loss or imbalance is performed by means of a tool for periodical liquidity planning (for all undertakings and at each level of operation), taking into consideration the due dates/maturity dates of trade receivables/liabilities, investments and financial assets. Furthermore, the proper level of the balance sheet structure in the Impel Group is controlled, thus reducing the risk of losing creditworthiness in the event the required bank ratios are not met. Short-term cash flow planning, ongoing ratio analysis and monitoring of interest rates make it possible to identify quickly any negative deviations and undertake corrective actions.

 

III.4 Tax risk - including the risk connected with transactions concluded between related undertakings. This area is supervised by the Vice-President of the Management Board responsible for Financial Issues.

 

III.5 Risk inherent in human resources management - in recent years related mainly to the situation on the labour market, causing problems with acquiring skilled and unskilled labour and an increase in costs of labour; currently diminishing due to the economic situation and higher unemployment. Management of risk in this area, at the level of Impel SA, remains at the discretion of the Vice-President responsible for Financial Issues, and at the level of Business Units - of their respective HR Directors.

 

III.6 Legal risk - including changes in the Company's legal environment, especially modifications in the provisions regarding employment of the disabled. The Vice-President responsible for Financial Issues is under obligation to monitor changes in the provisions of law and their bearing on the Impel Group's operations.

 

Due to the nature of its operations, the Group pays a lot of attention to monitoring the minimum wage (changes in the regulations regarding its amount) and subsidies (changes in the regulations limiting subsidisation of the disabled). Any legislative changes which lower the level of subsidies as well as minimum wage rises affect the operational effectiveness of the Group. The Group aims to index contract prices and monitors the government's proposals for changes in subsidies on an ongoing basis.

 

In November 2010, following the publication of the Act of October 29^th 2010 on amending the Act on Occupational and Social Rehabilitation and Employment of the Disabled and some other acts, the Management Board of Impel SA estimated the influence exerted by changes in its provisions on the Impel Group's results in 2011. In the Management Board's opinion the new provisions of the Act may result in an actual increase in the Impel Group's expenses in 2011 oscillating between 0.3% and 0.6% in relation to revenue (on the assumption that the current level of employment of the disabled is maintained), as compared to their estimated level at the end of 2010.

 

At present actions are taken to minimise the adverse impact of changes in the provisions of the Act, which will become effective in 2012.

 

III.7 Investment risk - including threats related to the investment process. The Vice-President of the Management Board responsible for Business Development takes care of minimising risk in this area. In addition, in Impel SA there operates an Investment Committee which analyses significant investments and provides advice on them.

 

The Group operates on the basis of the budget prepared under the direction of the Vice-President of the Management Board responsible for Business Development. The budget for each subsequent year is approved annually by the Management Board of Impel SA and presented to the Supervisory Board. In the course of a year the Management Board analyses current financial results by comparing them against the approved budget, using the management reporting adopted in the Company. Upon each calendar month closing, middle-level and senior managers in the economic function, supervised by the Vice-President of the Management Board responsible for Business Development, analyse the Company's financial results in comparison with budget assumptions.

 

The above risks are identified and monitored during the process of development and verification of the Impel Group's strategy. To assess risks, the Group uses risk maps - a graphic representation of risk assessment - on the basis of which it analyses risks and assesses their effects. Identification, analysis, and assessment of strategic risks are periodically discussed at meetings of the Management Board of Impel SA and at meetings of the Supervisory Board of Impel SA.

 

Efforts at improving profitability and increasing revenue in 2010 brought about a positive outcome. This year special attention will be paid to monitoring and counteracting the risks in the aforementioned areas as well as to further efforts aimed at:

- increasing the rate of growth in revenue from sales while maintaining profitability,

- optimisation of direct costs and further optimisation of indirect costs (optimising the structural costs, increase in the Back Office performance efficiency),

- launching new products into the market - BPO (business process outsourcing), trading in merchandise,

- expansion to foreign markets,

- making the most effective use of the functionalities offered by the Integrated IT System.

 

Taking into account the actions taken by the Management Board in 2010 and the prospects of Impel SA for 2011 the Supervisory Board assessed the Company's situation as good and stable in terms of its financial conditions. In the accounting year 2010, owing to the consistency in implementing the strategy, the Impel Group achieved the best results ever during 20 years of its presence on the Polish service market.

 

The Supervisory Board gave its favourable assessment of the internal audit and risk management systems implemented in the Company. In the Supervisory Board's opinion the system takes account of all risks significant for the Company.

 

 

REPORT OF THE SUPERVISORY BOARD OF IMPEL SA ON THE SUPERVISION OF THE COMPANY'S OPERATIONS, INCLUDING ASSESSMENT OF THE SUPERVISORY BOARD'S PERFORMANCE, PREPARED IN ACCORDANCE WITH THE BEST PRACTICES OF GPW LISTED COMPANIES IN THE ACCOUNTING YEAR 2010  

 

In 2010 the Supervisory Board of Impel SA operated with the following composition:

1. Prof. Krzysztof Obłój - Chairman of the Supervisory Board,

2. Andrzej Malinowski, Ph.D. - Deputy Chairman of the Supervisory Board,

3. Piotr Pawłowski,

4. Piotr Urbańczyk,

5. Jakub Dzik.

 

For many years now the Supervisory Board of Impel SA has been composed of five persons, which is a solution both economical and justified from an organisational point of view, since it ensures a separate system of supervision over respective Group's companies. The Supervisory Board did not appoint committees from among its members, due to their limited number, and it acts as a whole.

 

In the opening part of the report it is worth mentioning that in 2010 Impel SA celebrated the 20^th anniversary of its operation. As a company Impel SA is a product of economic and political transformation in Poland and looking at the range and scale of its operation, it was a successful transformation.  

 

In 2010 the Supervisory Board held its meetings six times. As in the previous years the Supervisory Board's major priorities included:

- fulfilment of the statutory obligations of corporate supervision - in particular support for the Management Board in market analysis, formulation of a plan for further development, strategic goals for the Management Board members and implementation of a new organisational structure;

- supervision of projects that will result in sustained performance of all companies within the Impel Group;

- analysis of financial results and cost structure of Impel SA and individual companies of the Impel Group.

 

The Supervisory Board accomplished the first objective by way of cooperation on drawing up and acceptance of an ambitious development plan and regular discussion on its implementation. The Supervisory Board expresses its satisfaction with the results achieved by the Group in 2010, as in a very difficult market situation the Group achieved the revenue and financial results (EBIT and net profit) higher than in 2009, outperforming the assumptions adopted in the plan. The second objective and the third objective are interrelated. The implemented SAP system made it possible to streamline the Group's management system to a greater extent. Practically all companies and major product lines recorded an increase in revenue and positive EBIT, which shows that the Group successfully implements the strategy of providing complementary outsourcing services.

 

Apart from the above-mentioned the Supervisory Board analysed the company's assumptions and strategic priorities, strategy for managing the IMPEL brand and quality of service policy and human resources policy.

 

Performing the functions of the audit committee the Supervisory Board:

- reviewed the results of operation of the internal control and internal audit systems;

- supervised the process of mapping the risks by the Management Board and the way of managing such risks;

- reviewed the Company's financial statements;

- held the meetings with the statutory auditor.

 

While assessing the completion of the targets in 2010, the Supervisory Boards concludes that the ambitious plans were accomplished. The Company achieved very good economic results and continues to improve its operations. The process of implementation of the SAP system, which improved the Group's management, ran smoothly. As already mentioned in the previous year's report,  the implementation of that system was a very costly undertaking for the Company and will affect its results in the coming years, but it was necessary given the complexity and the scale of the Company and the competitive challenges it faces.

 

The Supervisory Board also believes that its composition reflects the needs of Impel SA as an organisationally complex Group of companies rendering services, thanks to the diverse competencies of its members. The Supervisory Board has four independent members who are neither employed by the Company nor related to it.

 

Submitting this information the Supervisory Board states that in 2010 it fulfilled its duties, including those resulting from the application of Best Practices. While performing its obligatory activities, the Supervisory Board:

- analysed the Company's materials and financial statements for the accounting year 2010, including the auditor's opinions;

- analysed the Management Board's report and its recommendations concerning the distribution of profit.

 

The Supervisory Board gave positive assessment of the financial statements and Management Board's report on operation of Impel SA and its Group for 2010. Following consultation with the auditor, the Supervisory Board found that in all crucial aspects the documents were prepared in compliance with binding provisions of law, accounting principles and standards, and in line with the actual records in the books. The Management Board's report on operations was recognised by the Supervisory Board as reliable and providing the basis for correct assessment of the Company's and the Group's situation. Therefore, the Supervisory Board recommends to the General Shareholders Meeting to approve the above-mentioned financial statements and to acknowledge to the Members of the Management Board the fulfilment of their duties in the accounting year 2010.