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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 2017.

 

  1. Legal basis and composition of the Supervisory Board.

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.

 

On 25 April 2015, the General Shareholders’ Meeting established the number of Members for the next 10th term to be six persons and appointed the said Members:

 

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

 

On 9 June 2017, Mr Krzysztof Obłój, Chairman of the Supervisory Board and Mr Edward Laufer, Member of the Supervisory Board, resigned from their function in the Supervisory Board of Impel S.A.

On 9 June 2017, the General Shareholders’ Meeting of Impel S.A. appointed Professor Stefan Forlicz as the Chairman of the Supervisory Board and Ms Danuta Czajka as a Member of the Supervisory Board.

On 16 October 2017, Ms Danuta Czajka resigned from her function of Impel S.A. Supervisory Board Member.

On 16 November 2017, the Extraordinary Shareholders’ Meeting of Impel S.A. appointed Professor Andrzej Kaleta as a Member of the Supervisory Board.

 

As of 31 December 2017 and as of the date of this report, the Supervisory Board of Impel S.A. operated with the following composition:

 

  • Professor Stefan Forlicz – Chairman of the Supervisory Board,
  • Dr Andrzej Malinowski – Vice-Chairman of the Supervisory Board,
  • Józef Biegaj,
  • Professor Andrzej Kaleta
  • Piotr Pawłowski,
  • Piotr Urbańczyk.

 

 

 

 

  1. Operations of the Supervisory Board.

 

In 2017, the Board held 6 meetings and adopted 28 resolutions. The meetings of the Supervisory Board were focused on 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,
  • support for the Management Board in setting business priorities and financial plans – the Supervisory Board reviewed Impel Group’s Budgetary Plan for 2017 and conducted ongoing analysis of its implementation;
  • analysis of financial performance and cost structure of Impel S.A. and individual companies of Impel Group, as well as the results isolated within the composition of the Group, Business Areas, and Product Groups.

 

In 2017, the operations of the Supervisory Board related to:

  • cybersecuirty of Impel Group,
  • HR Policy of Impel Group:
  • organisational structure of Impel Group,
  • legal amendment relevant to Impel Group,
  • market situation
  • risks,
  • financial results.

The Supervisory Board approved and reapproved the Rules of Procedure for the Management Board of Impel S.A., and the Board also adopted Policies and Procedures concerning selection of auditing company and services not related to audit provided by the auditing company, required by the Law of 11 May 2017 on independent auditors, auditing companies and public supervision. The Supervisory Board approved the amended Rules of Procedure for the Audit Committee.

Pursuant to Article 382.3 of the Polish Code of Commercial Partnerships and Companies, the Supervisory Board audited the financial statements and the Directors' Report on the operations of Impel S.A. and of Impel Group for 2016 and assessed the Management Board's proposal concerning the distribution of profit for the year 2016.

 

In 2017, the Audit Committee operated as part of the Supervisory Board. As of 31 December 2017 and as of the date of this report, the Audit Committee had the following composition:

 

  • Piotr Urbańczyk – Chairman of the Committee,
  • Józef Biegaj - Member of the Committee,
  • Stefan Forlicz – Member of the Committee.

 

In 2017, the Audit Committee:

  • met several times with the Independent Auditor of the Group, Ernst&Young Audyt Polska Sp. z o.o. S. K., with its registered office in Warsaw, to discuss the process and results of audit of the financial statements: results of the semi-annual review of the report for the 1st half year 2017 and results of examination of the financial statements for 2017.
  • met with the Group's persons responsible for internal audit, preparing financial statements, reporting obligation as a company listed on WSE,
  • analysed financial statements, selected procedures, documents and presentations of the Company,
  • reviewed Independent Auditor's Report on the Audit of the Financial Statements of Impel S.A. and Consolidated Financial Statements of Impel Group,
  • reviewed additional Independent Auditor’s Report prepared for the Audit Committee as of the date of the opinion.
  • prepared Report on the Supervisory Board’s Audit Committee’ operation in 2016.
  • prepared (as required by Article 130.1.5-7 of the Law of 11 May 2017 on independent auditors, auditing companies and public supervision) the following policies and procedures:
  1. Policy of selecting auditing company for audit.
  2. Policy of providing legally accepted services not related to audit by the auditing company, by entities related to the auditing company or  by a member of the auditing company's network.
  3. Procedure of selecting the auditing company.

 

SELF-ASSESSMENT OF THE SUPERVISORY BOARD AND OPINION ON INDEPENDANCE OF ITS MEMBERS

 

While meeting, the Board conducts informal self-assessments, having internal discussions and exchanging opinions with the Management Board. In 2017, the Board performed non formal assessment, focusing on issues related to scope of supervision and support offered to the Management Board in the process of restructuring.

 

Based on the definition of independence referred to in Art.129.3 of the Law of 11 May 2017 on independent auditors, auditing companies and public supervision, after Mr Stefan Forlicz and Mr Andrzej Kaleta were appointed as, respectively, the Chairman and a member of the Supervisory Board of Impel S.A., there are three independent members in the Board, including the Chairman of the Supervisory Board (Stefan Forlicz) and the Chairman of the Audit Committee (Mr Piotr Urbańczyk). The other members of the Board are not independent based on the above criteria, being related to the Company’s shareholding (Mr Józef Biegaj), and in case of other members – due to the fact that they have performed their functions in the Board for more than 12 years (Mr Andrzej Malinowski and Mr Piotr Pawłowski).

 

Dependent Members of the Supervisory Board of Impel S.A. appointed for by the Ordinary GM, despite non-compliance with formal criteria of independence, are in their opinion independent and supervise the transparency of the Company’s operations, proper protection of the interest of its shareholders and performance of 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 2017, the situation of Impel S.A. and Impel Group was positive. There are no risks as a going concern for the Company or its Group. Both the Supervisory Board and the Management underline that from a business point of view, 2017 was a challenging year due to increased labour costs (the biggest legal reform since 1989), minimal hourly rate introduced as of 1 January 2017 for all civil-law contracts (amounting to PLN 13/hour). Therefore, the Company had to valorise prices of services provided by Impel Group’s companies by more than 30% comparing to prices in 2016. Business environment is still very complicated and  unstable. The financial result also decreased due to terminated contracts for which new prices could not be agreed on. Moreover, business supervising bodies are observed to be more active than before. Frequency and direction of changing law and business environment make it hard to predict how recipients and contractors will react in new and demanding circumstances and require flexible strategy and constant adaptation. Impel Group is going to develop by increasing portfolio of highly specialist services and using modern technologies in response to client's actual needs.

 

COMPANY’S FINANCIAL SITUATION:

 

Operating activities

Revenue from sales and subsidies of Impel Group amounted to PLN 2,255,930 thousand and was higher by PLN 189,301 thousand, i.e. by 8.39% as compared to 2016. The result on sales amounted to PLN 36,673 thousand despite the changes in 2017 related to increased labour costs due to minimal hourly rate on civil-law contracts and increased minimal salaries. Profitability on sales expressed as the ratio of the result on sales to revenues from sales and subsidies decreased from 1.93% in 2016 to 1.63% in 2017.

Other operating revenues amounted to PLN 20,800 thousand and increased by PLN 1,054 thousand, i.e. by 5.06% as compared to 2016, while other operating expenses significantly increased by PLN 3,034 thousand, i.e. from 17,794 thousand in 2016 to PLN 20,828 thousand. Such economic relations caused deterioration of the result on operating activities by PLN 5,271 thousand as compared to 2016. The effect of other operating activities decreased the result which at the operating level totalled PLN 36,645 thousand.

 

Net result

Financial activity decreased the financial result by PLN 15,525 thousand, i.e. by PLN 426 thousand more compared to 2016. The gross result, taking into account the financial activity, amounted to PLN 21,120 thousand. This result was subject to income tax of PLN 7,562 thousand. Impel Group ended the year 2017 with the net result of PLN 13,714 thousand, a decrease by PLN 10,998 thousand comparing to 2016. Net profit per the Dominant Undertaking shareholder amounted to: PLN 9,672 thousand.

 

Taking into account the lower net profit and concurrent increased revenue, the Supervisory Board notices the need for ongoing monitoring of profitability and cost levels and structure so that the Group does not lose its ability to generate stable positive financial results. 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 2017, the operations of the Group resulted in an increase in net cash by PLN o 6,897 thousand. Net cash flows from operating activity totalled PLN 86,784 thousand and were higher as compared to 2016 by PLN 58,330 thousand. Investing activities caused a reduction in cash by PLN 26,120 thousand, PLN 230 thousand less as compared to 2016, when the activity had totalled PLN 26,350 thousand. In 2017, financial activities decreased cash by PLN 52,666 thousand. The contracted loans and credits provided PLN 76,251 thousand. At the same time, expenditures amounted to: PLN 128,917 thousand, in particular credits and loans of PLN 95,169 thousand were paid and interest and leasing agreement obligations of PLN 22,551 thousand were paid.

 

Balance sheet structure

The share of equity in financing of total assets increased at the end of 2017 (from 32.57% to 33.05%). Non-current assets were fully financed with non-current components of the financing structure such as equity, reserve funds and non-current liabilities. Share of current assets in asset structure increased compared to non-current assets.

 

In 2017, 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 91,115  thousand as at 31 December 2017.

 

In 2017, the net debt decreased by PLN 25.9 thousand, i.e. 11.15%. It is a positive result given the rise of sales and subsidies by 8.39%.

 

In 2017, Impel Group met banking covenants, including the covenant equity/balance sheet total amounting to 33.2% and the covenant net debt/EBITDA amounting to 3.0.

 

Dividends

In 2017, the Management Board decided to recommend the Supervisory Board and the Ordinary General Meeting of the Company not to pay any dividend from 2017 profit. While deciding whether to pay dividends or not, the Management Board takes into consideration the current financial situation of the Company and its Group, including their ability to keep sufficient financial liquidity, as well as its development plans. The Supervisory Board supports the position of the Management Board.

 

COMPANY'S MARKET SITUATION:

 

The Company operates on a very competitive and demanding market of services which has entered the most turbulent phase for years, both in business and public sectors. Many legal regulations are being concurrently and significantly modified, in particular those regarding minimal rates, minimal salaries, employment contracts and public tenders. As a result, current contracts with most of the contractors and employment conditions must be changed. Due to increased prices of external services, some entities start to use insourcing, other still seek for the least expensive vendors, offering rates lower than legally acceptable in public tenders. At the same time, controls increased in number and intensity.  Many controls are related to VAT calculation, labour law and employment contracts used in the past. Neither criteria nor scope of such controls applied by the controlling authorities are clearly specified. This applies to all business entities, in particular those operating on a large scale, who use temporary labour force and temporary contracts.

The Group tries to proactively react to those risks and challenges by putting in place and implementing the restructuring project which changes the way business areas and product groups cooperate. The Group implements strategic projects, undertakes revalorisation activities (related to amended provisions on increased remuneration rates and charging civil law contracts with  Impel Group has always operated with flexibility and has been always keen to evolve, but it seems that never before was the Group forced to implement so many changes at a time, requiring from managers the highest expertise and full focus.

 

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 within the organizational structure gets higher and higher. The quality of control is strengthened by SAP, an integrated IT system.

 

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

 

The internal control system includes:

  • system of internal directives and acts,
  • Procedures for giving authorizations within the Management of Impel S.A.
  • Procedures for acceptance of financial expenses,
  • Systems of management registration
  • Accounting procedures and procedures of preparing financial statements,
  • system of conducting internal control procedures.

 

The process of managing user authorizations and the roles within authorizations in SAP in Impel Group is provided for in the procedure “Managing user authorizations in SAP". The procedure relates to all Group’s companies using the System in their operations.

The procedure is supervised by IT Director of IG.

 

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 Management Board of Impel S.A.

 

In the process of financial reporting, 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 assuring correctness of the published financial statements is their verification by an independent external auditor. Semi-annual and annual reports of the Group’s companies are subject to evaluation by an auditor. The financial statements of the Group’s major companies for the year 207 were audited by Ernst&Young Audyt Polska Sp. z o.o. S.K. based in Warsaw.

 

The books of accounts are kept in SAP System, based on coherent accounting principles adopted by Impel Group as part of its accounting policy and International Accounting Standards (IAS). When preparing financial statements, a uniform tool format is used , also for calculating taxes (CIT and VAT). Reporting packets are verified by auditors examining the Group’s companies. Financial statements of the Group’s companies are prepared by their chief accountants and consolidated financial statements by SSC Director responsible for reports and analyses (the person responsible for keeping consolidated accounts). Reporting packets are verified by auditors examining the Group’s companies.

 

3. Risk management system

 

The Management Board of Impel S.A. is responsible for managing risk relevant for Impel Group, whereas at the level of Business Areas such responsibility is assumed by a Board Member - Operational Director of IG and his Managing Directors of Business Areas: FM, DS. & BPO and IS. As part of building Impel Group’s strategy, the following main areas of risks were diagnosed. These areas generally have not changed as compared to the previous years.

 

Commercial risk – including a threat of concluding contracts with too low margins without satisfactory profitability.

Currently, the Vice-President of the Management Board - Commercial Director of IG is responsible for monitoring this area and taking relevant steps. 0}

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 the contract. Monitoring and minimising this type of risk is the responsibility of the Vice-Presidents of the Management Boards of IG. 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 Impel Group’s operation and development and the safe liquidity ratios. Monitoring and counteracting of this type of risk is assigned to the Vice-President of the Management Board – Financial Director of IG as part of a centralised position in the Finance Office. Based on current market data and situation of the financial market, the credit cost is estimated to prepare the financial plan for a given period and short-term prognoses. The risk of losing or lowering financial liquidity is monitored with the tool for periodical establishment of liquidity (for all operational units and levels), taking into account payment terms for trade receivables/liabilities, investments and financial assets. Moreover, appropriate structure of balance sheet in Impel Group is checked, limiting the risk of deterioration in creditworthiness if required banking indicators are not met. Short-term planning of cash flow, ongoing control of indicators, monitoring of interest rates allow the company to identify negative variations and to take corrective steps.

 

Tax risk – the Group has a business entity Business Tax Professionals sp. z o.o. Sp. k. which conducts fiscal audits to verify tax risks of the Group, supervises policy of transfer prices in the Group, and take other actions to keep to risk strategies. The whole area is supervised by the Vice-President of the Management Board responsible for Finance of Impel S.A.

 

Risk inherent in human resources management – the area is managed by Vice-President – HR Director of IG. The risk related to this area relates mainly to 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.

 

Legal risk – changes in the legal environment, in particular with regard to costs of labour and their 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 Investment Committee operates in Impel S.A., which analyses significant investments and provides advice on them.

 

 

The Group operates on the basis of the budget prepared by the Management Board of the company. The budget for each subsequent year is approved annually by the Management Board of Impel S.A. 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, supervised by the Vice-President of the Management Board responsible for Finance of IG, 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 on an ongoing basis. Moreover, risks are periodically analysed at meetings of the Management Board of Impel S.A. and discussed at meetings of the Supervisory Board of Impel S.A.

 

The Supervisory Board assessed the Company’s situation as difficult, but stable in terms of its financial conditions. The biggest financial challenge is the need to revalorise contracts due to constantly increasing costs labour and related increased debt of the Company. 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 Legal 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 participates in all material processes relating to the Group’s operations.

 

The rules of procedure of Impel Group are included in acts of internal law. The system is supervised by the President of the Management Board. Regulations governing the functioning of the entire Group and its units are issued as part of organisation of the Group. The regulations are prepared by the Organization Department. The President of the Management Board and directors of the Company issue the regulations depending on the scope and competence. The acts include: directives, rules, procedures and circular letters.

 

 

  1. ASSESSMENT OF REPORTING OBLIGATIONS OF THE COMPANY

In 2017, the Company timely provided periodical reports which were prepared according to accounting rules and applicable laws. The Company also prepared current reports which informed correctly about major corporate and business events. In particular, following the entry into force of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation - MAR) on 3 July 2016, the Company developed internal rules, ie. Regulations concerning confidential data management and access protection and reporting obligations in Impel Group.

 

In 2017, 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  Company disclosed a report of the new Best Practice and published on its website www.impel.pl, fulfilling rule I.Z.1.13, the current observance of recommendations and rules included in DPSN.

 

The Supervisory Board read the statement concerning observance of corporate governance included in the Annual Report of Impel S.A. for 2016 and the comments of the Company relating to the current observance of recommendations and rules included in DPSN. The Supervisory Board finds the Company in reliable and full compliance with the reporting obligations concerning their application of corporate governance rules.

  1. AUDIT

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 2017,
  • Directors’ report on the operations of Impel S.A. for the fiscal year 2017,
  • consolidated financial statements of Impel Group for the fiscal year 2017,
  • Directors’ report on the operations of the Group for the fiscal year 2017,
  • Management Board’s recommendation for the non-payment of dividend from profit for the fiscal year 2017.

 

The above-mentioned financial statements for 2016 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, were the main analytical material assessed by the Supervisory Board. Hence, 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 2017 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 Impel Group for the fiscal year 2017.

 

The Supervisory Board also analysed Directors’ reports on the operations of Impel S.A. and Impel Group for the fiscal year 2017. The Board concluded that those reports reliably present economic operations, and allow them to asses financial situation of the Company and the group.

The Supervisory Board adopts separate resolutions regarding audit of the reports.

 

 

  1. DISTRIBUTION OF PROFIT.

The Supervisory Board reviewed the Management Board’s recommendation not to pay any dividend for 2017 and taking into account the Management Board’s explanation, the Board approves the Management’s proposal to not to distribute profit for 2017.

 

Taking into account the Supervisory Board’ opinion on the situation of the Company, the Supervisory Board requests the Shareholders’ Meeting to acknowledge the fulfilment of duties by the Management Board’ members in the financial year 2017.