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THE SUPERVISORY BOARD’S REPORT ON EXERCISING THE SUPERVISION OVER THE OPERATIONS OF IMPEL S.A., INCLUDING A BRIEF ASSESSMENT OF THE COMPANY'S STANDING AND EVALUATION OF THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS, COMPLIANCE AND INTERNAL AUDIT AS WELL AS THE WAY RULES OF THE CORPORATE GOVERNANCE INFORMATION OBLIGATIONS ARE FULFILLED BY THE COMPANY

 

  1. OPERATIONS OF THE SUPERVISORY BOARD IN 2015.

 

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 2015, the Supervisory Board of Impel S.A. operated initially with the following composition:

  1. Professor Krzysztof Obłój – Chairman of the Supervisory Board,
  2. Dr Andrzej Malinowski – Vice-Chairman of the Supervisory Board,
  3. Edward Laufer – Secretary of the Supervisory Board,
  4. Piotr Urbańczyk,
  5. Piotr Pawłowski
  6. Józef Biegaj

 

On 11 August 2015, at the meeting of the Extraordinary General Meeting, the Shareholders holding preferred shares and being present at the GM, pursuant to Art. 385 section 1 of the Polish Code of Commercial Partnerships and Companies and Art. 16 section 2.2a of the Company’s Articles of Association, extended the composition of the Supervisory Board and appointed Mr. Józef Biegaj Member of Impel S.A. Supervisory Board. As at 31 December 2015 and the date of submitting this report, the composition of the Supervisory Board was as follows:

  • Krzysztof Obłój - Chairman of the Supervisory Board,
  • Andrzej Malinowski – Vice-Chairman of the Supervisory Board,
  • Piotr Urbańczyk,
  • Piotr Pawłowski,
  • Edward Laufer,
  • Józef Biegaj.

 

In 2015, on the day the financial statements for 2014 i.e. 25 April 2015 were approved, the mandates of Members of the Supervisory Board of the 9th term of office expired. On 25 April 2015 the Ordinary GM appointed for the 10th joint term of office the same members.

In 2015 the Board held 5 meetings and adopted 15 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:

  • fulfillment 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,
  • support for the Management Board in setting business priorities financial plans and the Group’s strategy – the Supervisory Board approved the Impel Group’s Financial Plan for 2015 and conducted ongoing analysis of its implementation; it also familiarized itself with key priorities and the way the Group’s strategy for 2016-2018 was designed
  • 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 2015, the operations of the Supervisory Board included:

  • analysis of the market and competition in terms of challenges they pose for the performance of the Group’s strategy
  • analysis of key contracts,  quality of service and customer satisfaction;
  • analysis of the main contracts and customers;
  • analysis of the operation of business units and product lines;
  • analysis of the integration of units after the acquisition
  • analysis of implementation of key business projects and investments;
  • analysis of companies which have not reached the assumed results;
  • analysis of the dynamics of business risks
  • policies and costs of sponsoring;
  • communication process and implementation of disclosure obligations resulting from the public nature of Impel S.A.;
  • 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 2014
  • 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 2015 the Supervisory Board appointed its Audit Committee with the following composition:

  • Piotr Urbańczyk – Chairman of the Committee,
  • Edward Laufer – Member of the Committee,
  • Józef Biegaj – Member of the Committee.

 

On 6 February 2015 The Supervisory Board approved the Rules of the Audit Committee, and the Work Plan of the Audit Committee. The Committee recommended the selection of auditor to examine - to examine the financial statements of Impel S.A. and of the Group for 2015-2017 - Ernst&Young Audyt Polska Sp. z o.o. S.K. of Warsaw - and met with the auditor in order to discuss issues related to reviews of the interim (H1 2015) and annual reviews of financial statements for 2014 and 2015. In addition to the above, the Supervisory Board analyzed organization of internal functions: internal control, internal audit, risk of lack of compliance in the Group, and reviewed the process of financial reporting within the Group. The Board analyzed the map of risks for 2015; it checked Impel S.A.’s performance of reporting obligations as a company listed on WSE and met with the Group's persons responsible for preparing financial statements, internal checks and management controlling.

 

Beside the Supervisory Board’s Audit Committee, in 2015 there was no other committee within the body.

 

SELF-ASSESSMENT OF THE SUPERVISORY BOARD

 

The Board while meeting conducts informal self-assessments, making internal discussions and exchanging opinions with the Management Board. Also in 2015 it used formal system of self-assessment which focuses on two aspects: general functioning of the Board as the body - evaluating if the Members sufficient knowledge and competence, build common agenda, whether the roles of the Management Board are clearly defined and if the Board independent enough from the Management Board in its opinions, and whether the Board focuses on strategic issues and is effective in recognizing and analyzing risks and factors affecting efficiency and results. It also assesses if it effectively supports creation and implementation of personnel policy. It checks the effectiveness of the Supervisory Board meetings (preparation of the Members, the way discussions are conducted, quality of materials it receives, preparation of the sitting as well as effectiveness of its decisions and influence). The Board assessed its efficiency on the scale 1 to 7, based on questionnaire of 15 questions and decided to act in the areas it regarded as requiring more engagement. One of the priorities will be more effective support for the Management Board in creation and implementation of effective personnel policy.

 

OPINION ON INDEPENDENCE OF MEMBERS OF THE SUPERVISORY BOARD

 

Assessment of independence of Members of the Supervisory Board is a real challenge since it does not only concern purely formal issues. Formally, according to criteria of independence of supervisory board members as referred to in Attachment 2 to Guideline of the European Commission 2005/162/WE dated 15 February 2005 concerning the role of non-executive directors or members of supervisory boards of listed companies or (supervisory) board committees, no Member of the current Board is independent. Non-compliance with criteria of independence by two Members of the Board includes their connection with the Company due to its shareholding structure, and in the case of the remaining four members it results from the fact that they perform their duties in the Board for more than three successive terms.

 

Members of the Supervisory Board of Impel S.A. appointed for 10th term by the Ordinary GM on 25 April 2015, despite non-compliance with criteria of independence of supervisory board members as referred to in Attachment 2 above, are in their opinion independent and supervise the transparency of the Company’s operations and proper protection of the interest of its shareholders. The appointed Members of the board through their competence and experience ensure effective performance of supervisory activities in the Company.

 

  1. BRIEF ASSESSMENT OF THE COMPANY’S SITUATION, TAKING ACCOUNT OF THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS, COMPLIANCE AND INTERNAL AUDIT FUNCTION.

 

1. COMPANY’S FINANCIAL SITUATION AND MARKET POSITION

 

In the opinion of the Supervisory Board at the end of 2015 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. However the Board and the Management Board indicate that from the business view the year 2016 and possibly 2017 will be tougher for all players on the outsourcing services market due to amendments law regarding e.g. increase in minimum wage, hourly rates and the conditions of public tenders. Frequency and direction of the changes make it difficult to predict how customers and provider will adapt to the new and tough economic conditions. This will require the Group to pursue a very flexible strategy. 

 

COMPANY’S FINANCIAL SITUATION:

 

Operating activities

 

Revenue from sales and subsidies amounted to PLN  1,851,317,000 and was higher by PLN  131,202,000, i.e. by 7.6% as compared to 2014. The result on sales amounted to PLN  49,546,000 and despite the changes which took place in 2015 concerning the amount of subsidies to remunerations of persons with disabilities and the increase in minimum wages, it maintained its level similar to the previous years.

 

Profitability on sales expressed as the ratio of the result on sales to revenues from sales and subsidies decreased from 2.78% in 2014 to 2.68% in 2015.

 

Other operating revenues amounted to PLN  26,759,000 and increased by PLN  3,273,000, i.e. by 14% as compared to 2014, while other operating expenses significantly increased by PLN 10,096,000 i.e. from 18,152,000 in 2014 to PLN 28,248,000. Such economic relations caused the deterioration of the result on operating activities by PLN 5,052,000 as compared to 2014. The main reason for the decrease was the write-offs totalling PLN 15,917.

The effect of other operating  activities worsened the result which at the operating level totalled PLN 48,057,000.

 

Net result

Financial activity decreased the financial result by PLN 14,708,000, i.e. by PLN 1,632,000 more compared to 2014. The gross result, taking into account the financial activity, amounted to PLN 33,349,000. This result was subject to income tax of PLN 8,507,000. The Impel Group ended the year 2015 with the net result of PLN 24,712,000, by 20% lower than in 2014 due to costs of renegotiations  and newly introduced Social Security tax from civil employment agreements. 

 

In the opinion of the Supervisory Board, the lower net profit and concurrent increased revenue, 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 prioritize improvement of margins on contracts 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 or very high bargaining power of purchasers).

 

Financial cash flows and liquidity

In 2015, the operations of the Group resulted in an increase in net cash by PLN 20,852,000. Cash flows from operating activity totalled PLN 68,979,000 and were higher as compared to 2014. Investing activities caused a reduction in cash by PLN 24125,000 significantly less as compared to 2014, when the activity had totalled PLN 32,119,000. The decrease was primarily affected by higher revenues – an increase of PLN 13,278,000 and capital expenditures lowered by PLN 3,900,000. The structure of capital expenditures significantly decrease.

On balance, in 2015, the financial activities increased cash by PLN 2,638,000. The contracted loans provided PLN 55,760,000. At the same time, PLN 30,440,000 was repaid.

 

 

 

 

Balance sheet structure

The share of equity in financing of total assets decreased. At the end of 2015 it amounted to 37%, in comparison with 2014, when it had amounted 35.2%. Non-current assets were fully financed with non-current components of the financing structure such as equity, reserve funds and non-current liabilities.

In 2015, the company used short-term financing to a greater extent. That situation resulted predominantly from the increased demand for current assets being the result of sales revenue growth.

 

Working capital expressing the difference between current assets and current liabilities is positive and amounts to PLN 65,922,000 as at 31 December 2015.

 

In 2015 the net debt rose by PLN 2,404,000 I.e. 1.3%. It is a positive result given the rise of sales and subsidies.

 

Dividends

According to the decision of the Ordinary General Meeting of 25 April 2015 all net profit for the period from 1 January to 31 December 2014 of PLN 19,785,478.083 was allocated payment of dividend (PLN 19,297,765.50), and the remaining part (PLN 487,712.58) went to the reserve capital.

Pursuant to the Resolution of the Management Board of the Impel S.A. of 7 March 2016 the Management Board recommended the Supervisory Board and the Ordinary GM not to pay the dividend from 2015 profit By its decision the Management Board will not adversely affect the Company's financial position and its ability to continue its further development.

 

COMPANY'S MARKET SITUATION:

 

The Company operates on a very competitive market of services, shaped by three factors: customer pressure to keep relatively low prices in tenders and auctions, low entry barriers enabling the existence of numerous business entities and limited possibilities of sector consolidation; variable legal regulations specifically those concerning  minimum wage, employment contracts and public tenders. The Group tries to proactively react to the challenges by implementing indexation projects (concerning the law amendments with regard to above-mentioned minimum wage rise and Social Security payments), and product innovations aiming at improving the Group’s offer for its customers (The Princessa project implemented together with one the leading consulting companies).

 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 2015, the Group achieved the sales targets at a level higher by about PLN 126 million compared to the year 2014. The Group achieved the higher sales growth mainly thanks to strategic business unit operating the Facility Management.

 

2.  INTERNAL CONTROL SYSTEM

 

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 quality of is strengthened by SAP, an integrated IT system.   

The Management Board is responsible for maintaining effective systems of internal control, internal audit, and risk of lack of compliance in the Group.

The internal control system includes:

  • Procedures for giving authorizations and their management
  • Procedures for acceptance of financial expenses
  • System management registration
  • Procedures for postings

The process of managing user authorizations and the roles within authorizations in SAP in the Impel  Group is provided for in the procedure “Managing user authorizations in SAP. The procedure concerns all Group’s companies using the System in their operations. Performance of the procedure is supervised by the Group’s Administration Director.

 

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 2015 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. The books of accounts are kept in the integrated IT system accounting principles adopted by the Impel Group. When preparing  financial statements, there operates a uniform tool format which also used when calculating taxes (CIT and VAT).The rule of double checking (and sometimes triple)of posted business transactions and the uniform accounting procedures used for the posting of identical business transactions were also introduced. Reporting packets are verified by auditors examining the Group’s companies.

 

3. 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. These areas generally have not changed as compared to the previous years:

 

Commercial risk – including a threat of selling contracts with too low margins, which would not ensure a satisfactory profitability. Currently, the 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 2016, the Group wants to continue the high rate of sales growth and, concurrently, to improve the profitability through synergies, new technologies and new markets.

 

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 and wages 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.

 

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.

 

Tax risk – the Group has a business entity specializing in providing financial advisory services (Accounting Audyt Partner Sp. z o.o.). Tax advisors supervise tax policy of the Group and its modification to current needs. They also conduct fiscal audits to verify tax risks of the Group, policy of transfer prices in the Group, and take other actions to keep to risk policies. The whole area is supervised by the Vice-President of the Management Board responsible for Finance.

 

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. The Board intends to make HR management area one of its priorities in 2016.

 

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.

 

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 minimizing 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 Member of the Management Board of Impel S.A. 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 Member of the Management Board, at the end of each calendar month 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.

 

the Supervisory Board assessed the Company’s situation as 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.

 

4. RISK OF LACK OF COMPLIANCE

 

The Group maintains a legal department (Legal office, a specialized organizational units controlling licensed areas of operation, Organization Department), in charge of monitoring adherence to internal regulations and the law. The Office keeps ongoing monitoring of changes in legal environment and informs the management of changes affecting business operations, along with giving recommendation of steps to be taken. Legal staff participate in all material processes relating to the Group’s operations.

 

The Group’s structure has staff monitoring adherence to specific law procedures in a given area. For example Business Unit 2 (JB2) Security has Office of Control and Security of Licences which regularly monitors compliance with statutory requirements concerning regulations relating to protection of people and property, included in the licence.

The rules of procedure of the Impel Group are included in acts of internal law. The system is supervised by the President of the Management Board. Within the organization of the Group, issued are regulations governing the functioning of the entire Group and its units. The regulations are prepared by the Organization Department. The President of the Management Board (and managing directors of the Company or persons in charge of given areas) issues the regulations depending on the scope and competence. The acts include directives, rules, procedures and circular letters.

 

III. ASSESSMENT OF REPORTING OBLIGATIONS CONCERNING CORPORATE GOVERNMENT RULES

 

Regulations of the Warsaw Stock Exchange and the Regulation of the Minister of Finance on current and periodic information published by issuers of securities and on conditions for recognizing as equivalent the information required by the provisions of law of a non-member state, dated 19 February 2009 (Dz. U. of 2009, No. 33, item 259) define the reporting obligations for Issuers concerning their application of corporate governance rules.

 

In 2015, Impel S.A. observed the corporate governance rules, published in the document entitled “The Code of Best Practice for WSE Listed Companies”, in the meaning of Resolution 19/1307/2012 of the WSE Board dated 21 November 2012, excluding the rules II.1.9a, II.1.14, II.3. and III.9. As of 2016 Impel S.A.  observes the corporate governance rules, published in the document entitled “The Code of Best Practice for WSE Listed Companies at WSE 2016” (DPSN 2016) published in Resolution 26/413/2015 of the WSE Board dated 13 October 2015. The Company disclosed a report of the new Best Pratice and published on its website www.impel.pl  fulfilling rule I.Z.1.13 the current observance of recommendations and rules included DPSN 2016.

 

The Supervisory Board read the statement concerning observance of corporate governance included in Annual Report of Impel S.A. for 2015 and the comments of the Company relating to the current observance of recommendations and rules included DPSN 2016.

The Supervisory Board finds the Company in reliable and full compliance with the reporting obligations concerning their application of corporate governance rules

 

IV.   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 on the basis of the Audit Committee’s report and the auditor's opinion and report 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 2015, including the statutory auditor’s opinion and report,
  • Directors’ report on the operations of Impel S.A. for the fiscal year 2015,
  • consolidated financial statements of the Impel Group for the fiscal year 2015, including the statutory
    auditor's opinion and report,
  • Directors’ report on the operations of the Group for the fiscal year 2015,
  • Management Board’s recommendation for the non-payment of dividend from profit for the fiscal year 2015.

 

The above-mentioned financial statements for 2015 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 2015 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 2015.

 

The Supervisory Board analyzed also the Directors’ reports on the operations of Impel S.A. and the Impel Group for the fiscal year 2015. 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 read the recommendation of the Management Board concerning non-payment of dividend for 2015, and taking into account the explanation of the Management Board to the motion. The Supervisory Board approved the suggestion to keep the 2015 profit in the Company.

 

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 2015.