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REPORT OF THE SUPERVISORY BOARD OF IMPEL S.A. ON THE SUPERVISION OF THE OPERATIONS OF IMPEL S.A. TOGETHER WITH A BRIEF ASSESSMENT OF THE COMPANY'S SITUATION, TAKING ACCOUNT OF THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS

 

1. OPERATIONS OF THE SUPERVISORY BOARD IN 2013

 

The Supervisory Board of Impel S.A. operates pursuant to the provisions of the Polish Code of Commercial Partnerships and Companies, the Company's Articles of Association, and the Rules of Procedure for the Supervisory Board of Impel S.A. Pursuant to the Articles of Association, the Supervisory Board consists of at least five and not more than nine members. In the fiscal year 2013, as in the previous years, the Supervisory Board consisted of five members. Due to the number of members, the Supervisory Board functions as a whole and no committees have been distinguished within its composition.

 

In 2013, the Supervisory Board of Impel S.A. operated initially with the following composition:
1. Prof. Krzysztof Obłój - Chairman of the Supervisory Board,
2. Dr Andrzej Malinowski - Vice-Chairman of the Supervisory Board,
3. Piotr Pawłowski,
4. Piotr Urbańczyk,
5. Jakub Dzik - Secretary of the Supervisory Board.

 

On 15 May 2013 Mr Jakub Dzik resigned from the Supervisory Board of Impel S.A. On 29 June 2013, the General Shareholders Meeting appointed the Supervisory Board for its ninth term of office, with the following composition:
1. Prof. Krzysztof Obłój - Chairman of the Supervisory Board,
2. Dr Andrzej Malinowski - Vice-Chairman of the Supervisory Board,
3. Piotr Pawłowski,
4. Piotr Urbańczyk,
5. Edward Laufer.

 

In 2013, the Supervisory Board held six meetings and adopted 13 resolutions. The meetings of the Supervisory Board concerned control and supervision over the Company's current activities. The Supervisory Board gave opinions on current and planned activities of the Company on the basis of documents and information submitted by the Management Board. As in previous years, the Supervisory Board's priorities included:
- fulfilment of the statutory obligations of corporate supervision - in particular, assisting the Management Board in market analysis, formulation of a plan for further development, and formulation of strategic objectives of the Management Board,
- analysis of the financial performance and cost structure of Impel S.A. and individual companies of the Impel Group, as well as the results isolated within the composition of the Group, Business Units, and Product Lines.

 

In 2013, the operations of the Supervisory Board included:
- analysis of the market and competition; 
- analysis of customer satisfaction;
- giving opinions on financial plans - the Supervisory Board approved the Financial Plan of the Impel Group for 2013 and conducted a current analysis of its implementation;
- adoption and monitoring of the plan of reorganization and division of Impel S.A. by spinning off the Security unit and its launch on the WSE - the implementation of this plan was suspended in December 2013;
- analysis of the operation of business units and product lines;
- system of management of acquisition processes carried out within Impel S.A.;
- business risks and ways of implementation of key business projects;
- principles of supervision and fulfilment of tasks of the audit committee by the Supervisory Board;
- evaluation of financial statements and reports on operations - the Supervisory Board assessed the financial statements of Impel S.A. and the Impel Group and the Management Board's Reports on operations of the Company and the Group in 2012;
- giving opinion on the matters submitted the General Shareholders Meeting for consideration - the Supervisory Board gave an opinion on the agenda and the draft resolutions of the Ordinary General Meeting of Impel S.A.

 

In addition to the above, the Supervisory Board analysed the Group's guidelines and strategic priorities, the functioning of foreign companies within the Group, potential changes in the law in force affecting the Company's situation as well as the service quality policy and the human resources policy.

 

As part of the functions of the Audit Committee, the Supervisory Board reviewed the outcomes of the operation of the internal control and audit system, supervised the preparation of risk mapping by the Management Board and the management of such risk, selected the auditor and held meetings with the auditor. In December 2013, the Supervisory Board prepared and adopted a document specifying the activities of the Supervisory Board in the role of the Audit Committee.

 

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

 

I. COMPANY'S FINANCIAL SITUATION AND MARKET POSITION

 

In the opinion of the Supervisory Board at the end of 2013 the situation of Impel S.A. and the Impel Group was good. There are no risks to the continuation of the Company's and Group's operations but the net result and the main profitability indicators (assets, equity, and sales) have deteriorated and the Company's debt has increased.

 

COMPANY'S FINANCIAL STANDING:

 

I.1 Operating activities
Revenue from sales and subsidies amounted to PLN 1,602,019,000 and represented 110.4% of revenue in 2012. The Group achieved sales revenue growth of 10.2% compared to the year 2012. Return on sales expressed as the ratio of result on sales to revenue on sales and subsidies remained at a similar level (in 2012 - 3%, in 2013 - 2.95%) which, coupled with sales increase, improved the result on sales by PLN 3,744,000. The Group ended the year 2013 with the result on sales of PLN 47,385,000.

 

The other operating activity reduced the results to PLN 40,179,000. In 2013, the result on the other operating activity was worse by PLN 4,020,000 in relation to 2012. The deterioration of the result was caused by additional costs compared to the year 2012 due to write-downs of goodwill and additional expenditure related to adjustments in public and legal settlements from prior years.

 

I.2 Net result
Financial activity resulted in a loss of PLN 14,476,000. This loss was higher by PLN 2,503,000 in relation to the year 2012. The financial expenses increased due to rising costs of debt service, among others as a result of financing of acquisitions and the debt of the acquired companies.
The gross result, taking into account the financial activity, amounted to PLN 25,703,000. This result was subject to income tax of PLN 8,305,000. The Impel Group ended the year 2013 with the net result of PLN 17,229,000.

 

In the opinion of the Supervisory Board, the results achieved in 2013 despite the worsening economic relations should be considered as positive. However, the Supervisory Board notices the need for ongoing monitoring of profitability and cost structure so that the Group does not lose its ability to generate positive financial results due to conduct of core activity at very low profitability with additional rising other operating and financial expenses. In particular, the Supervisory Board advised the Management Board to prioritise improvement of margins on contracts in the year 2014 and to avoid accepting contracts that were becoming virtually unprofitable as a result of price wars in the various market segments (especially the segments dominated by public tenders).

 

I.3 Financial cash flows and liquidity
In 2013, the operations of the Group resulted in an increase in net cash by PLN 6,042,000. In comparison with 2012 the structure of cash flows changed. Cash flows from operating activity improved significantly and totalled PLN 47,561,000 as compared to PLN 41,309,000 recorded in 2011. Capital expenditure was lowered by PLN 22,465,000.

 

Investing activities were associated with the expenditure on the acquisition of intangible assets and property, plant and equipment. These activities caused a reduction in cash by PLN 40,592,000.

 

On balance, the financial activities did not contribute additional funds to the Group. The contracted loans provided PLN 68,385,000. However, financial expenditure associated with repayment of loans and interest, lease obligations and payment of dividends was higher by PLN 927,000. The current liquidity ratio decreased in relation to 2012, from 1.2 to 1.1, remaining at the still satisfactory level (the level of inventory is low). The Group pays its current liabilities without any problems.

 

I.4 Balance sheet structure
The share of equity in financing of total assets is decreasing. At the end of 2013 it amounted to 35%. Despite the falling share of equity in financing, the structure of the balance sheet at the end of 2013 was correct. Non-current assets were fully financed with non-current components of the financing structure such as equity, reserve funds and non-current liabilities. Working capital, expressed as the difference between current assets and current liabilities, was positive (PLN 50,931,000 as at 31 December 2013).

 

I.5 Dividend
On 5 August 2013 Impel S.A. paid the dividend of PLN 1.5 per share, in the total of PLN 19,297,765.50. The payment of dividend did not have any adverse impact on the Group's liquidity.

 

 

COMPANY'S MARKET SITUATION:

 

The Impel Group is a leading provider of services for institutions and enterprises, the only one listed on the Warsaw Stock Exchange. In the year 2013, the Group achieved the sales targets at a level higher by about USD 145 million compared to the year 2012. The Group achieved the higher sales growth mainly thanks to acquisitions in the years 2012-2013, which provided about PLN 106 million of said sales. Giving the priority to an increase in sales, accompanied by fierce market competition and customer price reduction pressure, coupled with additional costs indicated above, resulted however in poorer financial results in relation to 2012, as both EBIT and the net result in 2013 were lower than the figures recorded in 2012.

 

II. INTERNAL CONTROL SYSTEM

 

II.1 Internal control
The system of internal control is based primarily on supervision performed by superiors in accordance with the organizational structure of the group. Depending on the business decisions to be taken, their type, and value, the decision-taking level of the organizational structure increases.

 

The control is strengthened by SAP, an integrated IT system that, on the one hand, blocks the possibility of undertaking an obligation at a wrong management level and, on the other hand, gives information necessary for effective management in the form of periodic management reports about the realization of revenue and expenses at each management level, from team leaders to the management board of Impel S.A.

 

II.2 Preparation of financial statements
The system of internal control and its effectiveness in the process of preparation of financial statements is the responsibility of the Corporate Management Board (the Management Board of Impel S.A.).

 

In the process of financial reporting the Company's effective internal audit and risk management systems operate by way of:
- rules set down in the Impel Group's internal procedures and the scope of reporting, accountability in respect of drawing up periodical reports and financial statements, including assurance of their quality and correctness, approval and publication;
- regular reviews of the published financial statements by an auditor.

 

With respect to financial reporting, one of the primary elements of control of the process of drawing up and the correctness of the published financial statements is their verification by an independent external auditor. Semi-annual and annual reports of the Group's undertakings are subject to evaluation by an auditor. The financial statements of the Group's major undertakings for the year 2013 were audited by Ernst&Young Audyt Polska Sp. z o.o. S.K. based in Warsaw.

 

The books of accounts of the Group's respective undertakings are kept by the Accounting Centre operating within Impel Business Solutions Sp. z o.o., which renders accounting and bookkeeping services for Impel S.A. and other Group's undertakings. As part of the Centre there operate respective accounting departments responsible for making settlements for the companies belonging to respective Business Units. The rule of double checking of posted business transactions and the uniform accounting procedures used for the posting of identical business transactions were also introduced. The books of accounts of the Impel Group's undertakings are kept in accordance with the uniform accounting principles (accounting policy) based on IFRS, internal procedures for provision of the service, and accounting principles adopted by the Impel Group.

 

III. RISK MANAGEMENT SYSTEM

 

The Corporate Management Board (Management Board of Impel S.A.) 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 the monitoring of this area and takes relevant steps. In connection with the adopted strategic priorities for the Group's development in the years 2013-2015, the Group wants to continue the high rate of sales growth and, concurrently, to improve the profitability through synergies, new technologies and new markets, including foreign markets.

 

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 during the execution of a contract. The monitoring and reduction of this type of risk is the responsibility of the President of the Management Board at the level of Impel S.A., 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 the safe liquidity ratios. The monitoring and counteracting of this type of risk are assigned to the Vice-President of the Management Board responsible for Finance. At the level of Impel S.A. 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. The 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. The 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 - the Group has a business entity specializing in providing financial advisory services. Tax advisors carry out periodic tax reviews, train the economic staff of the Group, and give opinions on important and unusual business transactions. This area is supervised by the Vice-President of the Management Board responsible for Finance.

 

III.5 Risk inherent in human resources management - the area is managed by HR Directors of Impel S.A. and Business Units subordinated directly to the appropriate members of the Management Board. The risk related to this area concerns mainly the acquisition and maintenance of employees and their development, under doubled pressure conditions. On one hand, the minimum wages and pay expectations are increasing, and on the other hand the company has to maintain the strictest pay discipline, as personnel expenses are the main costs, and the pressure to reduce prices for services does not relent.

 

III.6 Legal risk - changes in the legal environment, in particular with regard to effective costs of labour, have a significant impact on the functioning of the Group. The Legal Department monitors legislative changes informing in advance other - in particular operational - departments of the possible changes of the applicable laws in order to prepare for such changes.

 

III.7 Investment risk - including threats related to the investment process and acquisitions. The Vice-President of the Management Board of Impel S.A. responsible for Business Development takes care of minimising risk in this area. In addition, in Impel S.A. 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 of Impel S.A. responsible for Business Development. The budget for each subsequent year is approved annually by the Management Board of Impel S.A. 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 system 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. The identification, analysis, and assessment of strategic risks are periodically discussed at meetings of the Management Board of Impel S.A. and at meetings of the Supervisory Board of Impel S.A.

 

Taking into account the actions taken by the Management Board in 2013 and the prospects of Impel S.A. for 2014 the Supervisory Board assessed the Company's situation as good and stable in terms of its financial conditions. The Supervisory Board gave its favourable assessment of the internal control and risk management systems implemented in the Company. In the Supervisory Board's opinion the system takes account of all identifiable and predictable risks significant for the Company.

 

3. CONCLUSION

 

Acting pursuant to the provisions of Art. 382.3 of the Polish Code of Commercial Partnerships and Companies and the Company's Articles of Association, the Supervisory Board analyzed and assessed the following documents in respect of their compliance with the books and documents and the factual circumstances:
- financial statements of Impel S.A. for the fiscal year 2013, including the statutory auditor's opinion and report,
- Directors' report on the operations of Impel S.A. for the fiscal year 2013,
- consolidated financial statements of the Impel Group for the fiscal year 2013, including the statutory
auditor's opinion and report,
- Directors' report on the operations of Impel S.A. for the fiscal year 2013,
- Management Board's recommendation for the distribution of profit for the fiscal year 2013.

 

The above-mentioned financial statements for 2013 were audited by Ernst&Young Audyt Polska Sp. z o.o. S.K. based in Warsaw. The reports on the audit and the statutory auditors' opinions, forming the synthesis thereof, were the main analytical material assessed by the Supervisory Board.
Thence, accepting the findings and assessments contained in the listed source materials and considering them as competent and exhaustive, the Supervisory Board stated that the financial statements for 2013 were drawn up, in all their material aspects, in compliance with the provisions of law in force, accounting principles and standards and factual circumstances disclosed in the books. The Supervisory Board recommends to the General Shareholders Meeting to approve the financial statements of Impel S.A. and the Impel Group for the fiscal year 2013.

 

The Supervisory Board analyzed also the Directors' reports on the operations of Impel S.A. and the Impel Group for the fiscal year 2013. The Supervisory Board found out that the reports presented the business activities in a reliable manner and provided the basis for assessing the financial and asset position of the Company and its Group.

 

The Supervisory Board put forward a motion to the General Shareholders Meeting to acknowledge to the members of the Company's Management Board the performance of their duties in the accounting year 2013.

 

Concurrently, the Supervisory Board recommends to the General Shareholders Meeting to approve the resolution concerning the distribution of profit of Impel S.A. for 2013 and its exclusive allocation to capital reserves of Impel S.A.