Warsaw, 30 th August 2013

POLIMEX-MOSTOSTAL CAPITAL GROUP DIRECTORS' REPORT ON THE GROUP’S OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2013 Warsaw, 30th August 2013. This a ...
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POLIMEX-MOSTOSTAL CAPITAL GROUP

DIRECTORS' REPORT ON THE GROUP’S OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2013

Warsaw, 30th August 2013.

This a translation of the document originally issued in the Polish language

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Contents

1. Economic activities of Polimex-Mostostal Capital Group.......................................... 5 1.1. Revenues and their structure ................................................................................................ 7 1.2. Main products and services ................................................................................................... 8 1.3. Trade areas and sources of supply ....................................................................................... 9 1.4. Information on significant transactions concluded by the Issuer or its subsidiary with related party otherwise than under market conditions ............................................................................ 10 1.5. Investments – plant, property and equipment and intangible assets .................................... 10 1.6. Equity investments .............................................................................................................. 11 1.6.1. Changes in investment portfolio .................................................................................... 11 1.6.2. Investment plans ........................................................................................................... 12 1.6.3. Assessment of feasibility of investment tasks, including equity investments as against internal assets, including changes in financing structure for these operations ......................... 12 1.7. Information on contracts significant for operations of the Issuer’s Capital Group ................. 13

2. Review of operating and financial position ............................................................... 14 2.1. Results ................................................................................................................................ 14 2.2. Assets amount and structure ............................................................................................... 17 2.3. Liabilities amount and structure ........................................................................................... 19 2.4. Liquidity ............................................................................................................................... 20 2.5. Ratio analysis ...................................................................................................................... 21 2.6. Information on loans, borrowings drawn and issued debentures ......................................... 22 2.7. Information on granted guarantees and borrowings............................................................. 26 2.8. Information on contract performance bonds and bid bonds ................................................. 28 2.9. Description of external and internal factors significant for development of the Issuer’s Capital Group as well as business development perspectives, including elements of market strategy ... 31 2.10. Description of significant financial issues having an effect on assessment of Company’s ability to continue its current business activity. ........................................................................... 36 2.11. Clarification of differences among financial performance given in annual report and previous forecasts of financial performance for a given year ...................................................... 36 2.12. Basis of preparation of financial statements ...................................................................... 37 2

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

2.13. Information on dividend paid (or proposed) ....................................................................... 37

3. Risk management in the Issuer’s Capital Group ...................................................... 37 3.1. Description of significant risk factors and threats ................................................................. 37 3.2. Information of financial instruments in the scope of interest rate and currency risk as well as adopted by the entity objectives and methods of financial risk management .............................. 42 3.3. Insurance contracts ............................................................................................................. 43 3.4. Description of basic features of internal audit and risk management system applied in the Issuer’s Capital Group with regards to preparation of financial statements and consolidated financial statements ................................................................................................................... 45

4. Organisation of the Issuer’s Capital Group............................................................... 47 4.1. Structure of the Capital Group ............................................................................................. 47 4.2. Information on key entities of the Capital Group .................................................................. 48 4.3. Employment ........................................................................................................................ 50 4.4. Changes in composition of management and supervisory authorities of the parent and their committees, basis of appointment and dismissal of executives as well as rights of management, in particular to taking decision on issue or redemption of shares ................................................ 55 4.5. Value of remuneration for executives and senior employees ............................................... 59

5. Shareholding................................................................................................................ 59 5.1. Total number and nominal value of all shares of Polimex-Mostostal S.A. owned by executives and senior employees............................................................................................... 59 5.2. Shareholders having directly or indirectly by subsidiaries at least 5% of total vote at the General Meeting of Polimex-Mostostal S.A. ............................................................................... 60 5.3. Information on contracts acknowledged by the Issuer (including concluded after the statement of financial position date) and that may change future proportions in shares owned by the current shareholders and bondholders ................................................................................. 60 5.4. List of holders of all securities granting special controlling rights with regards to the parent with their description .................................................................................................................. 61 5.5. Acquisition of treasury shares, in particular definition of acquisition purpose, number and nominal value, and part of represented share capital, acquisition prices as well as selling prices in case of disposal...................................................................................................................... 61

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

5.6. Limitation in transfer of ownership rights to securities and limitations in the scope of execution of voting rights arising from shares in the parent ........................................................ 61 5.7. Employees shares scheme controlling system .................................................................... 62 5.8. Indication of proceedings pending before court, arbitration procedure authority or public administration authority, which total amount constitutes at least 10% of Issuer’s equity ............. 62

6. Environmental protection ........................................................................................... 64 7. Information on entity with which the Issuer has concluded a contract for audit of financial statements ........................................................................................................ 65 8. Other significant events in the 1st half of 2013 having impact on operations of the Issuer’s Capital Group .................................................................................................... 65 9. Events significant for operations of the Issuer’s Capital Group that occurred after 30 June 2013 and to the preparation of the financial statements ............................... 67

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

1. Economic activities of Polimex-Mostostal Capital Group Polimex-Mostostal S.A. is an engineering and construction company, which has been present on the market since 1945. In the reporting period the Issuer together with the companies forming the Capital Group continued its business activities as before. As a general contractor it rendered services in the power engineering, chemical, petrorefinery, environment protection and industrial as well as infrastructure and general construction sectors. It mounted comprehensive industrial buildings, modernised existing processing lines and offered servicing of production machinery. Construction activity comprised such areas as execution of large investments in the scope of road, railroad and general construction both with reference to public utility buildings as well as office, warehouse and commercial spaces. Owing to a considerable production capacity and the modern machinery park, the Issuer's Group maintained the position of a leading and respected producer and exporter of steel structures and products, including platform gratings. In the reporting period, the Issuer also rendered services in the scope of top-notch corrosion protection mostly using a hot dip galvanization method. Outside Poland, the Issuer's Group remained active in foreign markets mostly in the European Union member states and in Ukraine, selling there a considerable portion of produced steel structures and products and performing construction and erection services. The core activity of the Issuer remains rendering services in the form of general contracting, while the structure of the investment portfolio has been undergoing consistent changes. Execution of large and extremely large investment projects for the needs of industry becomes more and more important. In the reporting period the Capital Group conducted activity in five operating segments: power engineering and chemistry, general construction, infrastructure construction, production and service. In power engineering the Group specialises in comprehensive execution of facilities for professional, industrial and municipal energy sector. The Group installs power blocks, including boilers for supercritical parameters and constructs accompanying buildings such as combustion gas cleaning plants, water treatment plants or fuel delivery and slag collection installations. It also renders overhaul, modernisation and maintenance services for all types of power engineering machineries. Group’s partners include European and world industry leaders such as Siemens, Alstom, Doosan, Babcock, Hitachi, Lurgi, Foster Wheeler, Metso and Vattenfall. In chemical sector the Group offers general contracting of production facilities for chemical plants and refineries, biofuel plants and of infrastructure for transfer and storage of gas and liquid fuels. Additionally, it renders services in the scope of delivery and assembly of specialist production systems and delivers all types of containers, pipelines, processing furnaces and similar equipment. It specialises in overhauls of processing lines at plants while at the same time they conduct their business activity, which requires imposing a specific technology regime. The Issuer’s operations in the scope of environment protection are also included in the chemistry segment. The offer for environment protection sector covers construction and extension of comprehensive sewage treatment plants and municipal and industrial waste treatment plants. Polimex-Mostostal manufactures a wide range of products for domestic and foreign customers. Steel structures for the sectors of power engineering, petro chemistry, metallurgy, mining industry, communications, roads and for the construction of halls, shopping centres, sports facilities and public utility buildings are manufactured. The offer includes a wide range of superstructures and covers for large-size structure and industrial construction, elements for 5

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

bridges, flyovers and footbridges. Additionally, Group companies offer delivery of pressure pipelines for transportation of liquid fuel, whereas the Issuer specialises in the production of platform gratings, shelving systems and elements of construction formworks. The Company owns modern technologies in the scope of production and erection of large-size steel structures used while mounting office buildings, retail centres, warehouses and sports facilities. Moreover, it delivers and assembles steel structures for the needs of industry, in the first place for power engineering and chemistry. Activities of the Group in the scope of infrastructure construction cover execution of road and railroad contracts together with complete technical infrastructure. Construction of roads and motorways is carried out by Polimex-Mostostal S.A. whereas railroad works are carried out by Torpol S.A. A significant portion of deliveries comes from own production plants, which was described above in the presentation of the production segment. High value contracts are usually performed on a consortium basis. In the general construction industry the Group's operations focus on mounting various types of public utility and commercial buildings. The offer of Polimex-Mostostal also includes design and delivery of facilities constructed based on steel structures. The main method of execution is a turnkey project both in the capacity of the general constructor and an investment manager and general contractor or a developer. Polimex-Mostostal offers execution of large and complex facilities as well as specialist works in collaboration with other entities of the Group and on consortium basis with trusted consortium members. The service segment offers comprehensive construction and modernisation services for production facilities and systems for chemical plants, refineries, petrorefineries and power engineering plants. The scope of services is as follows: prefabrication and assembly of refinery furnaces, delivery and assembly of steel structures, storage containers and processing pipelines, corrosion protection, production of apparatus (e.g. reactors, boilers, distillation columns), constructional and assembly works in industrial facilities, overhauls and maintenance of various branch industrial plants with the use of the cutting-edge technology. Moreover, a comprehensive scope of services concerning design, modernization of systems of boiler rooms, gas or oil heat and power plants and other industrial installations is offered. The financial position of the Issuer remained tense in the 1st half of 2013. To improve the situation the Company consistently implemented operating restructuring aimed at a considerable reduction of costs of functioning and at a significant improvement in contract management. The process of employment optimization aimed at adjusting the level and structure of employment to the current economic position of the Capital Group was continued. The collective redundancies procedure was carried out, which covered employees employed in different locations and on different positions, in particular a considerable group of employees holding non-production, directorial and managerial positions. A controlling unit dedicated to analyses and verification of long-term contract budgets, which reports directly to the Board, was established. Its tasks include: coordination and implementation of a uniform project management process within the Company; day-to-day verification and improvement of the planning model and making uniform reporting procedures referring to contracts being performed; holding regular reviews of the status of key long-term contracts; verification of material completion of the key projects with reference to their percentage of completion; independent verification of submitted bids. Additionally, the internal control function was strengthened with a team controlling execution of project budgets and application of required procedures. 6

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

In the 1st half of 2013 works on the reconstruction of the organizational structure were continued. The new transparent structure has the task of supporting more effectively the activity of the Company in the strategic segments. The Company is in the course of making changes at the system level and in the scope of defining reports in available IT tools so as to enable day-to-day co-ordination and verification of the implementation of the plan. Under the Company restructuring programme resulting from the provisions of the restructuring agreement signed with creditors from December last year till the date of preparation of this report the sale of non-core assets of the Capital Group has been carried out, in particular: - the company of EnergomontaŜ-Północ Gdynia together with the port real property in Gdynia, where the company conducts its activity, was sold, - the transaction to sell ZREW, the transformer production plant, with the registered office in Łódź was completed, - Fabryka Kotłów Sefako S.A. was sold, - the sale of two corrosion protection plants located in Częstochowa and Dębica was finalized. Moreover, actions aimed at disposal of over 50 real properties owned by PolimexMostostal, which have a significant developer potential, are taken.

1.1. Revenues and their structure In the period of 1st half of 2013, Polimex-Mostostal Capital Group reported sales revenue in the amount of PLN 1,139,188 thousand (a decrease of 46.3% as against comparative data for the period of 1st half 2012). The volume of the Group’s sales in the 1st half 2013 was affected by: (i) unfavourable weather conditions caused by lengthening winter season resulting in no possibility to perform construction and erection works in this period, (ii) deterioration of general business situation in construction, (iii) delays in completion of power engineering contracts (power engineering works did not enter the income generating stage), (iv) reduction of orders in the scope of industry services connected with plant maintenance, repairs and maintenance, emergency works, overhaul and modernization works, assembly of steam and water boilers and condensation, heat and industrial turbines together with ancillary machinery as well as with regulation of industrial automation systems. In the period of 1st half 2013 the operating segments of the Issuer’s Capital Group contributed to sales as follows: PLN thousands

Segment

Change 1st half 2013 / 1st half 2012

1st half 2013

1st half 2012

value

share

value

share

Production

-29.3%

298 126

26.2%

421 924

19.9%

General Construction

-79.9%

109 363

9.6%

545 306

25.7%

Power Engineering and Chemistry

-44.3%

253 787

22.3%

455 423

21.5%

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 Infrastructure Construction

-18.9%

297 407

26.1%

366 709

17.3%

Service

-49.6%

165 251

14.5%

327 886

15.4%

Other operations

186.5%

15 254

1.3%

5 324

0.3%

Total revenue from sales

-46.3%

1 139 188

100.0%

2 122 572

100.0%

The largest share in sales was attributed to Production Segment – 26.2% (a decrease in sales of 29.3% as against comparative data for 1st half of 2012; after eliminating revenue from sales generated by EPN Gdynia, Zakład Transportu and Coifer Impex a decrease of 12.4%), Infrastructure Construction – 26.1% (a decrease in sales of 18.9% as against comparative data for 1st half of 2012), then to Power Engineering and Chemistry – 22.3% (a decrease in sales of 44.3% as against comparative data for 1st half of 2012; after eliminating revenue from sales generated by the Sefako Capital Group a decrease of 25.3%), Service – 14.5% (a decrease in sales of 49.6% as against comparative data for 1st half of 2012) and to General Construction – 9.6% (a decrease in sales of 79.9% as against comparative data for 1st half of 2012).

Operating segments of Polimex-Mostostal Group Revenue from sales in PLN thousands 2 500 000 Other operations

2 000 000

Service

1 500 000

Infrastructure Construction Power Engineering and Chemistry General Construction Production

1 000 000 500 000 0 1st half 2013

1st half 2012

1.2. Main products and services In the 1st half of 2013 as a result of sale of organised parts of enterprises and several subsidiaries the scope of activity of the Polimex-Mostostal Group shrank as compared to the previous period and in the main ranges it included: • • • • • •

preparation of preproject studies and analyses and of project initial and working documentation; comprehensive services for investment process, completion of deliveries of equipment and industrial installations; general contracting of industrial facilities and public utility buildings, roads and railroads; assembly of special equipment, in particular for chemical and power engineering industry; continuous and full-scale servicing of industrial plants; manufacturing of steel structures for the needs of industrial construction mainly for power engineering and petrochemical industry; 8

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013









production, delivery and erection of steel structures used while mounting shopping centres, warehouse halls, sports facilities and public utility buildings, petrol stations and warehouse terminals; the Group executes orders using its own typical technical solutions or according to customers’ individual projects; production and delivery of welded and pressed platform grates of MOSTOSTAL type together with fixing elements, which ensure quick and safe assembly; grates are used in production plants as a component of platforms for servicing production lines and of circulation paths at pipelines and containers; they are also used as pavements at footbridges and bridges, as duct covers, protection of manhole frames and as stair steps; production and delivery of shelving systems, pallets and containers for transportation of various types of products and a wide range of construction accessories including construction props used to mount floor slabs; services in the scope of corrosion protection of steel structures by means of: − hot (dip) galvanizing, − Duplex system (galvanising + hydrodynamic painting), − hydrodynamic painting.

1.3. Trade areas and sources of supply The value and geographic structure of Polimex-Mostostal Group’s sales in the period of 1st half 2013 were as follows: PLN thousands

Market

Change 1st half 2013 / 1st half 2012

1st half 2013

1st half 2012

value

share

value

share

Domestic

-42.5%

772 571

67.8%

1 344 495

63.3%

Foreign

-52.9%

366 617

32.2%

778 077

36.7%

Total revenue from sales

-46.3%

1 139 188

100.0%

2 122 572

100.0%

As compared to the period of 1st half 2012 there was observed a similar breakdown of sales by domestic and foreign ones. The domestic market, where 67.8% of total revenue from sales was generated, was the main market for Polimex-Mostostal S.A. Group in the period of 1st half 2013.

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Geographic segments of Polimex-Mostostal Group Revenue from sales in PLN thousands 2 500 000 2 000 000

Foreign

1 500 000

Domestic

1 000 000 500 000 0

1st half 2013

1st half 2012

The key customers of the parent company in the first half of 2013 were: the General Directorate for National Roads and Motorways, ENEA Wytwarzanie S.A., Polski Koncern Naftowy ORLEN S.A., Stadion w Zabrzu Sp. z o.o., Wartsila Finland Oy Power Plants – Finland, PGE Górnictwo i Energetyka S.A., Saipem S.p.A – Italy, the City Commune of Gdańsk, TAURON Wytwarzanie S.A., Brista 2 KB – Sweden, the City Commune of Tychy. The key suppliers of the parent company in the first half of 2013 were: Energoprojekt Katowice S.A., Drozapol-Profil S.A., Przedsiębiorstwo Robót InŜynieryjnych PRInŜ-1, Bobrek Sp. J., Glencore International AG – Switzerland, Daewoo International Corporation, ThyssenKrupp Energostal S.A., Izomar Sweden Filial c/o – Sweden, Gazomet Sp. z o.o., Energop Sp. z o.o., Metalplast Stolarka Sp. z o.o., Salzgitter Mannesmansnn Stahlhandel. The key customers of Torpol capital group in the first half of 2013 were: PKP Polskie Linie Kolejowe S.A., Trakcja-Tiltra S.A. and the Administration for Roads and Transport with the registered office in Łódź. The key suppliers of Torpol capital group in the first half of 2013 were: ALUSTA S.A., Thales Polska Sp. z o.o., PKP Energetyka S.A., Przedsiębiorstwo Robót Komunikacyjnych w Lublinie, EXPOL S.A., Vossioh COGIFER POLSKA S.A., Przedsiębiorstwo Handlowo-Usługowe ELEKTROTEL-BUD Robert Mąka i Nordkam Sp. z o.o.

1.4. Information on significant transactions concluded by the Issuer or its subsidiary with related party otherwise than under market conditions According to information acknowledged by the Issuer, transactions concluded in the first half of 2013 by the Issuer and its subsidiaries with related entities were concluded on condition equivalent to the ones which are applied for transactions concluded on market conditions, and their nature and terms resulted from operating activity.

1.5. Investments – plant, property and equipment and intangible assets In the first half of 2013, capital expenses of the Capital Group for property, plant and equipment and intangibles assets reached the level of PLN 14,074 thousand. The majority was fixed assets under construction (37.6%) and expenditure on plant and machinery (32.3%).

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 1st half 2013

PLN thousands

Investment in property, plant and equipment

Value

Share

Land and buildings

1 628

11.6%

Plant and equipment

4 551

32.3%

Motor vehicles

1 165

8.3%

458

3.3%

Fixed assets under construction incl. advance payments

5 293

37.6%

Total

13 095

93.0%

979

7.0%

14 074

100.0%

Other fixed assets

Investment in intangible assets Total property, plant and equipment and intangible assets

1.6. Equity investments 1.6.1. Changes in investment portfolio The list of changes in the Issuer’s investment portfolio in the reporting period is as follows: •

On 31.01.2013 all conditions precedent specified in the conditional agreement to sell the shares of Fabryka Kotłów Sefako S.A. with the registered office in Sędziszów concluded on 24.10.2012 between the Issuer and MARS Closed Investment Fund with the registered office in Warsaw, managed and represented by MS Towarzystwo Funduszy Inwestycyjnych S.A. with the registered office in Warsaw were jointly met. The Issuer received the amount of PLN 49.1 million for the block of shares constituting 95.97% of capital and votes in General Meetings of Sefako S.A. MS Towarzystwo Funduszy Inwestycyjnych S.A. is a dependent company of the Agency for Development of Industry, and the Agency holds 22.49% of the Issuer’s capital. After completing the transaction the Issuer does not hold any Sefako shares. For details see Current Report No. 13/2013 of 31.01.2013.



On 07.03.2013 all conditions precedent specified in the conditional agreement to sell the shares of EnergomontaŜ-Północ Gdynia Sp. z o.o. with the registered office in Gdynia concluded on 24.10.2012 between the Issuer and MARS Closed Investment Fund with the registered office in Warsaw, managed and represented by MS Towarzystwo Funduszy Inwestycyjnych S.A. with the registered office in Warsaw were jointly met. The Issuer received the amount of PLN 41.2 million for the block of shares constituting 99.99% of the capital and votes in Meetings of Shareholders of EnergomontaŜ-Północ Gdynia Sp. z o.o. MS Towarzystwo Funduszy Inwestycyjnych S.A. is a dependent company of the Agency for Development of Industry, and the Agency holds 22.49% of the Issuer’s capital. After completing the transaction the Issuer does not hold any shares in EnergomontaŜ-Północ Gdynia. For details see current report No. 30/2013 of 08.03.2013.



On 05.04.2013 the Issuer concluded with Mr Tomasz KoŜuchowski a contract to sell the entirety of shares held in Zakład Transportu – Grupa Kapitałowa Polimex Sp. z o.o. for the total price of PLN 1,700 thousand. Before the transaction the Issuer held 100% of capital of the company.



On 11 December 2012 the Board of Directors of Zakład Instalacyjno-Budowlany Turbud Sp. z o.o. with the registered office in Płock submitted a proposal to declare liquidation bankruptcy in 11

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

the District Court for the city of Płock, 5th Economic Department in Płock. The Issuer owns 100% of the company’s shares. The Issuer wrote off in its books the amount equal to 100% of the value of the shares. On 18 April 2013 the Court issued a decision to reject the proposal due to the fact that the assets of the company would not cover the cost of bankruptcy proceedings. On 20 May 2013 the Extraordinary Meeting of Shareholders of Turbud Sp. z o.o. adopted a resolution to put the company into liquidation and appointed a liquidator. •

On 22 April 2013 the Board of Directors of Coifer Impex SRL with the registered office in Bucharest, Romania filed a request to open a bankruptcy procedure with reorganization option at the Civil Court in Bucharest. The court issued a decision to open the procedure on 29 April 2013. The Issuer owns 100% of the company’s shares.



On 27 May 2010 the Extraordinary General Meeting of Porty S.A adopted a resolution on putting the company into liquidation. On 9 May 2013 the Gdańsk-Północ District Court in Gdańsk decided to delete the company from the National Court Register. The Issuer held 40% of shares of Porty S.A.



On 20 May 2013 the General Meeting of Shareholders of Polimex-Cekop Development Sp. z o. o. adopted a resolution to open liquidation of the company as of 31 May 2013 and appointed a liquidator. The Issuer holds 100% of shares of the company.



On 27 June 2013 the General Meeting of Shareholders of Polimex-Sices Polska Sp. z o. o. adopted a resolution to open liquidation of the company as of 1 July 2013 and appointed liquidators. The Issuer holds 50% of shares of the company.

In the 1st half 2013 the Issuer’s total proceeds on account of disposal of stocks and shares in companies amounted to PLN 31,687.4 thousand. The amount given above does not include advance payments received towards the transactions in 2012. In the presented period the Issuer did not acquire any stocks or shares in companies. 1.6.2. Investment plans In line with the provisions of the Agreement on Regulations of Debt Servicing concluded on 21.12.2012, the Company was obliged to limit its capital expenditure planned to incur in 2013 to the amount of PLN 25.0 million. The planned amount is sufficient to cover necessary expenses connected with the needs of contracts being performed by the Company, including the contract for the benefit of the Kozienice Power Plant. Whereas the amount of expenditure to restitutive investments, modernisation and development was limited to the necessary minimum. The total amount of planned expenses is less than amortization and depreciation. Among the Issuer’s subsidiaries, which were in the Capital Group in the 1st half of 2013, one should notice the implementation of a multiannual plan of Torpol S.A. in the scope of purchasing specialist equipment to perform rail works (a track tamping machine) and to perform earthworks. Own funds (approx. 1/3 of expenditure) and finance lease were adopted as funding sources. Additionally, in the 1st half of 2013 Grande Meccanica SpA (Italy) completed the construction of production machinery located in the quay in the Civitavecchia sea port. 1.6.3. Assessment of feasibility of investment tasks, including equity investments as against internal assets, including changes in financing structure for these operations The Issuer assesses financing of its investment plans in 2013 as fully realistic on condition that an appropriate amount of own funds is generated. 12

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

1.7. Information on contracts significant for operations of the Issuer’s Capital Group The following are significant performance contracts concluded by Polimex-Mostostal S.A. in the first half of 2013: •

Signing on 03.06.2013 of the subcontracting contract with Babcock-Hitachi Kabushiki Kaisha S.A. branch in Poland to perform construction and assembly works at the construction of the combustion gas desulphurisation system (IOS IV) at the Kozienice Power Plant for Enea Wytwarzanie S.A. The value of the contract amounts to PLN 78.6 million (gross).



Signing on 23.05.2013 by the consortium of the following companies: Polimex-Mostostal S.A. (the consortium leader) and Tulcon S.A. with the registered office in Ostrzeszów the contract with KGHM Polska Miedź S.A to perform construction and assembly works under the task Pyrometallurgy Modernisation Programme – Arrangement of a Suspension Roaster in Głogów Copperworks. The estimated value of the contract is PLN 75.0 million, of which 55% is attributable to the Issuer.

The key performance contracts concluded by the Issuer’s subsidiaries in 2013 include: •

Torpol S.A.: −

On 06.03.2013 the consortium of the following companies: Torpol S.A. (the consortium leader, the Issuer’s subsidiary) and Przedsiębiorstwo Usług Technicznych INTERCOR Sp. z o.o. and POZBUD T&R S.A. concluded with PKP Polskie Koleje Państwowe S.A. a contract to “Design and perform construction works under Improving quality of transportation by improving the technical condition of no. 143 rail road in the Kalety – Kluczbork section” project. The value of works amounts to PLN 367.5 million (gross), of which approx.65% is the share of Torpol S.A. The Issuer informed of concluding the contract in current report No. 28/2013 of 06.03.2013.



On 08.03.2013 Torpol S.A. concluded the contract for design, delivery and assembly together with commissioning of telecommunication facilities under the contract to Design and perform construction works for the Modernisation of E75 Rail Baltica Warsaw-Białystok – Lithuanian border, stage 1, Warsaw Rembertów – Zielonka – Tłuszcz section. The remuneration amounts to PLN 45.1 million (gross). The Issuer informed of concluding the contract in current report No. 32/2013 of 08.03.2013.

Taking the decision to perform the contract signed on 15.02.2012 by the consortium of the following companies RAFAKO S.A. as the consortium leader, Polimex-Mostostal S.A. and Mostostal Warszawa S.A. to perform the investment task under the name of “The construction of power blocks No. 5 and 6 in PGE Elektrownia Opole S.A.” (the Contract) will be of key importance for the Issuer’s operations. The value of contracted works is PLN 11,558.3 million (gross) of which about 42% is attributed to Polimex-Mostostal S.A. Detailed information on the above-mentioned Contract is included in Issuer’s current report No. 8/2012 of 15.02.2012. On 16.05.2013 companies forming the Consortium concluded with PGE Elektrownia Opole S.A. (currently PGE Górnictwo i Energetyka Konwencjonalna S.A. – the Ordering Party) an annex to the Contract under which, in connection with the decision made by the Ordering Party to close the investment task, the parties agreed on principles used to settle the advance payment received from the Ordering Party in view of the reimbursement of cost of preparation works incurred by the Consortium and extended the deadline specifying the ordering Party ability to issue a notice of intention to release the notice to proceed this project by 15.08.2013, of which the Issue informed in current report No. 64/2013 of 16.05.2013. On 13.08.2013 members of the Consortium concluded with the ordering Party another 13

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

annex to the contract in which the parties agreed that the additional condition of releasing notice to proceed works is arranging and implementing terms and conditions regulating relationships between the Ordering Party, the Consortium and/or subcontractor and Powszechna Kasa Oszczędności Bank Polski S.A. in the scope of financing regulations, terms and conditions for securing payment and issuing the contract performance bond. Moreover, it was agreed that the Ordering Party may release the notice to proceed by 15.02.2014 and the notice may be released not earlier than 120 days of the date of issuing by the Ordering Party a notice of the intended release of the notice to proceed. At the same time the Ordering Party informed that it is planning to issue an appropriate notice on 15.12.2013 on condition that all terms and conditions specified in the Contract to issue the above mentioned document are fulfilled. On the same date the ordering Party, the Consortium, PKO Bank Polski S.A. and Alstom Power sp. z o.o. signed an unbinding letter of intent to specify the terms and conditions for Alstom to join the execution of the project and determine the scope of necessary changes in the project documentation. The Issuer informed of both events in current reports No. 111/2013 and 112/2013 of 13.08.2013. The description of other significant contracts and events which occurred in the 1st half of 2013 is presented in the sections of this Report that follow.

2. Review of operating and financial position 2.1. Results In the period of 1st half 2013, net loss attributable to equity holders of the parent amounted to PLN 96,182 thousand (an improvement in results of over 50.2% as against comparative data for the period of 1st half of 2012). Loss from continuing operations amounted to PLN 45,028 thousand (an improvement of 73.9% as against comparative data for the 1st half of 2012). The result of the Group from continuing activity in the 1st half 2013 was affected by: (i) releasing the actuarial provision for jubilee bonuses and retirement benefits, (ii) disposal of a dry dock real property in Gdynia and of Galvanising Plant in Częstochowa as an organized part of enterprise as part of the divestment programme. A reduction of administrative expenses (a decrease of 18.9% as against comparative data for the 1st half 2012, which is the effect of activity of the Board of Directors in the scope of operating restructuring and the resulting simplification of organizational structure and a significant reduction of costs of Group’s functioning) had a favourable effect on result from continuing activity. The EBITDA value amounted to minus PLN 9,193 thousand (an improvement of 92.5% as against comparative data for the 1st half of 2012). In the scope of significant factors having influence on financial results and position of the Company and the Group the following ones should be mentioned: (i) decided deterioration of the general position and conditions for activities of entities operating in the so-called construction industry, (ii) difficult relationships, often of dispute or claim nature, with the main customers for the contracts executed by the Company in the Road and Railroad segment, first of all with the General Directorate for National Roads and Motorways. While executing the road contracts, the Company performed a significant scope of additional works, for which as at the statement of financial position date the Company failed to obtain a satisfactory and appropriate for the scope of works remuneration, (iii) significant deterioration in the last year of position in the scope of cash flows relating to the performance of road contracts, (iv) economic slowdown and expected possible macroeconomic weakening in Poland in the nearest future. 14

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The results of the Group in the period of 1st half of 2013 are presented below:

1st half 2013

1st half 2012

1 139 188

2 122 572

-46.3%

-1 135 341

-2 193 890

-48.2%

3 847

-71 318

-105.4%

63 943

11 789

442.4%

Selling costs

-13 344

-15 903

-16.1%

Administrative expenses

-60 552

-74 685

-18.9%

Other operating expenses

-38 922

-22 733

71.2%

Profit / loss from continuing operations

-45 028

-172 850

-73.9%

24 126

5 167

366.9%

-84 099

-58 781

43.1%

2 037

974

109.1%

-102 964

-225 490

-54.3%

6 816

33 377

-79.6%

Net profit/(loss)

-96 148

-192 113

-50.0%

Net profit / loss attributable to shareholders of the parent company

-96 182

-193 033

-50.2%

-9 193

-123 068

-92.5%

PLN thousands Revenue Cost of sales Gross profit / (loss) Other operating income

Finance income Finance costs Share of associate's profit Gross profit/(loss) Income tax

EBITDA

Change

Financial results of Polimex Mostostal Group in PLN thousands

1st half 2013

2 500 000

1st half 2012

2 122 572

2 000 000 1 500 000

1 139 188

1 000 000 500 000

3 847

0 -71 318

-500 000 Revenue from sales

Gross profit/ loss

-45 028

-172 850

Profit / loss from continuing activity

-96 182

-193 033

Net profit/ loss attrib. to equity holders of the parent

-9 193

-123 068

EBITDA

Achieved results show that in the period of 1st half of 2013 Polimex-Mostostal Capital Group reported financial results better than the ones in the comparative period of the previous year. In the opinion of the Issuer achieving a lasting improvement of the results will be possible in the future periods.

15

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

In the period of 1st half 2013, Polimex-Mostostal S.A. generated sales revenue in the amount of PLN 844,303 thousand (a decrease of 48.6% as against comparative data for the period of 1st half of 2012). The volume of sales in the 1st half 2013 was affected by: (i) unfavourable weather conditions caused by lengthening winter season resulting in no possibility to perform construction and erection works in this season, (ii) deterioration of general business situation in construction, (iii) delays in completion of power engineering contracts (power engineering works did not enter the income generating stage), (iv) reduction of orders in the scope of industry services connected with plant maintenance, repairs and maintenance, emergency works, overhaul and modernization works, assembly of steam and water boilers and condensation, heat and industrial turbines together with ancillary machinery as well as with regulation of industrial automation systems. In the period of 1st half 2013 net loss amounted to PLN 12,266 thousand (a decrease of loss of 95.3% as against comparative data for the period of 1st half of 2012). Loss from continuing operations amounted to PLN 46,411 thousand (a decrease of loss of 75.8% as against comparative data for the 1st half of 2012). The result from continuing activity in the 1st half 2013 was affected by: (i) releasing the actuarial provision for jubilee bonuses and retirement benefits, (ii) disposal of a dry dock real property in Gdynia and of Galvanising Plant in Częstochowa as an organized part of enterprise as part of the divestment programme. EBITDA value amounted to PLN -21,485 thousand (a decrease of loss of 86.3% as against comparative data for the 1st half of 2012). The results of the Polimex-Mostostal S.A. in the period of 1st half of 2013 are presented below:

1st half 2013

1st half 2012

844 303

1 643 832

-48.6%

-870 849

-1 785 702

-51.2%

-26 546

-141 870

-81.3%

Other operating income

34 455

8 884

287.8%

Selling costs

-9 940

-12 361

-19.6%

-39 349

-33 700

16.8%

-5 031

-12 729

-60.5%

-46 411

-191 776

-75.8%

76 894

6 235

1133.3%

Finance costs

-50 727

-111 269

-54.4%

Gross profit/(loss)

-20 244

-296 810

-93.2%

7 978

35 311

-77.4%

Net profit/(loss)

-12 266

-261 499

-95.3%

EBITDA

-21 485

-157 304

-86.3%

PLN thousands Revenue Cost of sales Gross profit / (loss)

Administrative expenses Other operating expenses Profit / loss from continuing operations Finance income

Income tax

Change

16

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Financial results of Polimex Mostostal S.A. in PLN thousands 1st half 2013 2 000 000 1 500 000

1st half 2012

1 643 832 844 303

1 000 000 500 000 0 -26 546

-500 000 Revenue from sales

-141 870

Gross profit/ loss

-46 411

-21 485

-12 266 -191 776

Profit / loss from continuing activity

-261 499 Net profit / loss

-157 304 EBITDA

Generated results show that in 1st half of 2013 Polimex-Mostostal S.A. reported results higher than in the analogous period of the previous year. The main reasons for better performance were as follows: •

Gain on completing the sale of shares of Fabryka Kotłów Sefako S.A. and EnergomontaŜPółnoc Gdynia, together with port real estate in Gdynia.



Implementation of correction actions which are aimed at regaining financial stability in the Company, which still is in a difficult economic position. An important issue is reduction of costs of functioning of the Company,



Conducted operating restructuring aimed at simplification of the organizational structure and reduction of costs of the Company’s functioning. A reduction of employment, which is to be adjusted to the current economic position of the Company, also contributed significantly. In the 2nd quarter 2013 as a result of the implemented personnel restructuring process, average employment in the company decreased by 26.2% as compared to the previous year.

2.2. Assets amount and structure As at 30.06.2013, the statement of financial position total of Polimex-Mostostal Capital Group amounted to PLN 3,270,545 thousand (a decrease of 15.1% as against comparative data as at 31.12.2012). As at 30.06.2013 non-current assets amounted to PLN 1,479,781 thousand (a decrease of 4.1% as against comparative data as at 31.12.2012), and current assets amounted to PLN 1,757,066 thousand (a decrease of 4.7% as against comparative data as at 31.12.2012). Property, plant and equipment were the largest item in fixed assets structure constituting 19.9% of total assets. Trade and other receivables constituting 34.3% of total assets were the largest item of current assets. PLN thousands Non-current assets Property, plant and equipment Investment property

30.06.2013

% of assets

31.12.2012

% of assets

1 479 781

45.2%

1 543 624

40.1%

650 436

19.9%

708 242

18.4%

45 540

1.4%

21 280

0.6%

17

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 Goodwill on consolidation

282 694

8.6%

282 694

7.3%

Intangible assets

15 051

0.5%

16 891

0.4%

Investments in associates accounted for using the equity method

17 628

0.5%

16 737

0.4%

216 072

6.6%

274 214

7.1%

43 598

1.3%

31 195

0.8%

2 716

0.1%

3 190

0.1%

206 046

6.3%

189 181

4.9%

1 757 066

53.7%

1 843 772

47.9%

290 027

8.9%

308 355

8.0%

1 122 619

34.3%

1 163 154

30.2%

317

0.0%

950

0.0%

16 422

0.5%

14 307

0.4%

230 002

7.0%

260 920

6.8%

Financial assets

97 679

3.0%

96 086

2.5%

Available for sale non-current assets

33 698

1.0%

463 007

12.0%

3 270 545

100.0%

3 850 403

100.0%

Financial assets Non-current receivables Non-current prepaid expenses Deferred tax assets Current assets Inventories Trade and other receivables Income tax receivables Prepaid expenses Cash and cash equivalents

TOTAL ASSETS

The statement of financial position total of the Parent Company as at 30.06.2013 amounted to PLN 2,348,578 thousand (a decrease of 11.6% as against comparative data as at 31.12.2012). As at 30.06.2013 non-current assets amounted to PLN 1,107,321 thousand (a decrease of 4.5% as against comparative data as at 31.12.2012), and current assets amounted to PLN 1,207,993 thousand (a decrease of 10.0% as against comparative data as at 31.12.2012). Property, plant and equipment were the largest item in fixed assets structure constituting 19.3% of total assets. Trade and other receivables i.e. 34.9% of total assets were the largest item of current assets.

PLN thousands Non-current assets

30.06.2013

% of assets

31.12.2012

% of assets

1 107 321

47.1%

1 159 761

43.6%

453 694

19.3%

475 885

17.9%

Investment property

14 833

0.6%

14 833

0.6%

Intangible assets

12 043

0.5%

13 175

0.5%

Financial assets

398 949

17.0%

457 467

17.2%

38 828

1.7%

25 124

0.9%

188 974

8.0%

173 277

6.5%

1 207 993

51.4%

1 342 748

50.5%

Inventories

141 357

6.0%

161 169

6.1%

Trade and other receivables

818 721

34.9%

854 448

32.2%

8 987

0.4%

7 643

0.3%

Property, plant and equipment

Non-current receivables Deferred tax assets Current assets

Prepaid expenses

18

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 Cash and cash equivalents Financial assets

97 351

4.1%

162 235

6.1%

141 577

6.0%

157 253

5.9%

33 264

1.5%

154 467

5.9%

2 348 578

100.0%

2 656 976

100.0%

Available for sale long-term assets TOTAL ASSETS

2.3. Liabilities amount and structure Equity attributable to equity holders of the parent as at 30.06.2013 amounted to PLN 433,506 thousand (a decrease of 9.2% as against comparable data at 31.12.2012), and liabilities amounted to PLN 2,837,766 thousand (a decrease of 15.8% as against comparable data at 31.12.2012). The share premium, constituting 35.7% of total equity and liabilities, was the largest item in equity structure. Current liabilities constituting 73.1% of total liabilities and equity were the largest item of liabilities. 30.06.2013

% of equity and liabilities

31.12.2012

% of equity and liabilities

433 506

13.3%

477 288

12.4%

53 359

1.6%

20 846

0.5%

1 168 224

35.7%

738 237

19.2%

-3 445

-0.1%

-7 839

-0.2%

618 552

18.9%

618 552

16.1%

0.0%

412 500

10.7%

-85 254

-2.6%

-85 254

-2.2%

32 086

1.0%

32 086

0.8%

27

0.0%

1 893

0.0%

-1 350 043

-41.3%

-1 253 733

-32.6%

-727

0.0%

4 114

0.1%

432 779

13.2%

481 402

12.5%

2 837 766

86.8%

3 369 001

87.5%

446 319

13.6%

1 175 570

30.5%

Interest bearing long-term bank loans and borrowings

42 494

1.3%

486 330

12.6%

Long-term debentures

0

0.0%

143 874

3.7%

2 391 447

73.1%

1 974 747

51.3%

148 266

4.5%

0

0.0%

755 780

23.1%

179 234

4.7%

0

0,0%

218 684

5.7%

3 270 545

100.0%

3 850 403

100.0%

PLN thousands Equity attributable to equity holders of the parent Issued capital Share premium Translation of a foreign operation Supplementary capital Unregistered share issue Other capital Reserve capital Revaluation reserve Retained earnings Non-controlling interests Total equity Liabilities Non-current liabilities, of which:

Current liabilities, of which: Short-term debentures Current portion of interest-bearing bank loans and borrowings Liabilities relating to non-current assets available for sale TOTAL EQUITY AND LIABILITIES

19

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Equity of the Parent as at 30.06.2013 amounted to PLN 51,673 thousand (an increase of 270.7% as against comparative data as at 31.12.2012), and liabilities amounted to PLN 2,296,905 thousand (a decrease of 13.1% as against comparative data as at 31.12.2012). The share premium, constituting 49.7% of total equity and liabilities, was the largest item in equity structure. Current liabilities i.e. 82.7% of total liabilities and equity were the largest item of liabilities. 30.06.2013

PLN thousands

% of equity and liabilities

31.12.2012

% of equity and liabilities

Equity

51 673

2.2%

13 939

0.5%

Issued capital

53 359

2.3%

20 846

0.8%

1 168 224

49.7%

738 237

27.8%

0

0.0%

412 500

15.5%

618 552

26.3%

618 552

23.3%

-444 924

-18.9%

-444 924

-16.7%

32 086

1.4%

32 086

1.2%

27

0.0%

27

0.0%

-1 375 651

-58.6%

-1 363 385

-51.3%

2 296 905

97.8%

2 643 037

99.5%

Share premium Unregistered share issue Supplementary capital Other capital Reserve capital Revaluation reserve Retained earnings / Accumulated losses Liabilities Non-current liabilities, of which:

354 593

15.1%

1 098 620

41.3%

Interest bearing long-term bank loans and borrowings

8 732

0.4%

466 912

17.6%

Long-term debentures

0

0.0%

143 874

5.4%

1 942 312

82.7%

1 544 417

58.1%

Short-term debentures

148 266

6.3%

0

0.0%

Current portion of interest-bearing bank loans and borrowings

630 705

26.9%

30 981

1.2%

2 348 578

100.0%

2 656 976

100.0%

Current liabilities, of which:

TOTAL EQUITY AND LIABILITIES

2.4. Liquidity In the period of 1st half 2013 as in the comparative period there was a net decrease in cash and cash equivalents. Cash and cash equivalents of the Group as at the end of the 1st half 2013 amounted to PLN 230,002 thousand. It should be noted that cash and cash equivalents do not comprise the amount of advance payment received by the Issuer in connection with the “Kozienice” contract, which constitutes a security for the contract performance bond. It will be released to the Company with the advancement of the stage of completion of the contract, the cash deposit will be transformed into a bank guarantee and the released amounts will increase the balance of cash. At present the above mentioned advance payment is recognised in financial assets item. Net cash from operating activity, mostly due to the decrease of the level of trade payables amounted to PLN -310,479 thousand. Net cash from investing activities amounted to PLN 100,769 thousand, and net cash from financing activities amounted to PLN 178,792 thousand.

20

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

For the Parent Company in the period of 1st half 2013 as in the comparative period there was a net decrease in cash and cash equivalents. Cash and cash equivalents of the Company as at the end of the 1st half 2013 amounted to PLN 97,351 thousand. It should be noted that cash and cash equivalents do not comprise the amount of advance payment received by the Issuer in connection with the “Kozienice” contract, which constitutes a security for the contract performance bond. It will be released to the Company with the advancement of the stage of completion of the contract, the cash deposit will be transformed into a bank guarantee and the released amounts will increase the balance of cash. At present the above mentioned advance payment is recognised in financial assets item. Net cash from operating activities amounted to PLN -336,398 thousand mostly due to a decrease in trade payables. Net cash from investing activities amounted to PLN 102,652 thousand and net cash from financing activities was PLN 168,862 thousand.

2.5. Ratio analysis The current and quick liquidity ratios of the Polimex-Mostostal Capital Group were as presented below. An increase of EBITDA margin is the result of generating a lower loss from continuing activity. Nowadays the major objectives of the Group include improving liquidity by means of disposal of developer’s assets and divestment, which should result in the end in a considerable improvement of the situation and in the decrease of interest debt. Ratios

30.06.2013 31.12.2012

Current liquidity ratio (current assets : current liabilities)

0.7

0.9

Quick ratio((current assets less inventories less prepaid expenses) : current liabilities)

0.6

0.8

86.8%

87.5%

Debt ratio ((total equity and liabilities less equity) : total assets)

30.06.2013 30.06.2012 Net profit margin (net profit attributable to equity holders of the parent : revenue from sales)

-8.4%

-9.1%

EBITDA margin (EBITDA : revenue from sales)

-0.8%

-5.8%

-0.07

-0.37

Depreciation / Amortisation

35 835

49 782

EBITDA

-9 193

-123 068

Earnings per share (net profit attributable to equity holders of the parent : weighted average number of shares)

As at the statement of financial position date Polimex-Mostostal S.A. maintained financial liquidity. Current and quick liquidity ratios were at the level of 0.6 and 0.5 respectively. An increase in EBITDA margin and net profit margin was the result of a lower loss from continuing operations and lower net loss as against comparative period. Nowadays the major objectives of the Company include improving liquidity by means of disposal of developer’s assets and divestment, which should result in the end in the decrease of interest debt.

21

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 Ratios

30.06.2013 31.12.2012

Current liquidity ratio (current assets : current liabilities)

0.6

0.9

Quick ratio((current assets less inventories less prepaid expenses) : current liabilities)

0.5

0.8

97.8%

99.5%

Debt ratio ((total equity and liabilities less equity) : total assets)

30.06.2013 30.06.2012 Net profit margin (net profit attributable to equity holders of the parent : revenue from sales)

-1.5%

-15.9%

EBITDA margin (EBITDA : revenue from sales)

-2.5%

-9.6%

-0.01

-0.50

24 926

34 472

-21 485

-157 304

Earnings per ordinary share (net profit : weighted average number of shares) Depreciation / Amortisation EBITDA

2.6. Information on loans, borrowings drawn and issued debentures The total debt of the Capital Group as at the end of June 2013 amounted to PLN 942.1 million, of which: debt arising from loans and borrowings drawn PLN 798.2 million, arising from issued debentures PLN 143.9 million (the value of principal after a conversion; the entry into the National Court Register was made on 22.01.2013). Debt of the parent company amounted to PLN 783.3 million of which PLN 143.9 million on account of issued debentures (the value of principal; an entry was made to the National Court Register on 22.01.2013). The key crediting banks in the first six months of 2013 were:  

for the parent company: PKO BP S.A., PEKAO S.A., Bank Ochrony Środowiska S.A. and Bank Zachodni WBK S.A. (former Kredyt Bank S.A.), for Group companies: PKO BP S.A., Bank Ochrony Środowiska S.A., Bank Millennium S.A., Alior Bank S.A. and Bank Zachodni WBK S.A.

As at 30.06.2013, the following loans and borrowings were to be repaid at the earliest taken out by:  Centrum Projektowe Polimex-Mostostal Sp. z o.o. (PLN 5.4 million, the repayment date 30.06.2013, a bank overdraft taken out at Bank Millennium S.A.),  Torpol S.A. (the limit of PLN 5.0 million, repayable on 30.06.2013, bank overdraft taken out at PEKAO S.A.),  Stalfa Sp. z o.o. (PLN 0.7 million, the repayment date - 31.07.2013, a bank overdraft taken out at PEKAO S.A.), The above mentioned credit facilities have been renegotiated. As at the date of publication of this report the repayment dates of the above mentioned loans are as follow: Centrum Projektowe Polimex-Mostostal Sp. z o.o. the repayment of the loan extended by 31.08.2013; Torpol S.A. concluded an annex stipulating the repayment in instalments by 31.07.2014; Stalfa Sp. z o.o. concluded an annex stipulating the repayment in instalments by 31.12.2013. At present investment loans are of the longest repayment dates:  

the loan at Orzesko-Knurowski BS for Centrum Projektowe Polimex-Mostostal Sp. z o.o. in the amount of PLN 14.0 million – repayable on 18.12.2023, the loan at Intensa Sanpaolo in the amount of EUR 3.3 million for SC Coifer Impex srl – repayable on 08.12.2017,

22

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013



the loan at PKO BP S.A. in the amount of EUR 2.3 million for Energop Sp. z o.o. repayable by 20.06.2016. On 25 March 2013 Annex No. 1 was signed to the Agreement on Regulations of Debt Servicing of 21 December 2012 concluded by Polimex-Mostostal S.A., Banks: PKO BP S.A., PEKAO S.A., Bank Millennium S.A., Bank Zachodni WBK S.A. (former Kredyt Bank S.A.), BOŚ S.A., Guarantors: Polimex-Development Kraków Sp. z o.o., Polimex-Mostostal Development Sp. z o.o., BR Development Sp. z o.o. and Debenture Holders. As at the date of preparation of this report annex to the above mentioned Agreement was concluded. The original terms and conditions of the Agreement were described in Note 7.1 to the Financial Statements of Polimex-Mostostal S.A. for the year ended 31 December 2012 and amendments in Note 3 to the Financial Statements of Polimex-Mostostal S.A. for the six months ended 30 June 2013. Moreover, in order to improve the financing structure the divestment process started in 2011, which includes the disposal of a portion of financial and developer’s assets, was continued. At the same time the restructuring process for the Group, which is aimed at the further reduction of costs of operations of business units and at the improvement of their efficiency, is conducted.

As at the end of June 2013, the balance of loans and borrowings drawn by Polimex-Mostostal S.A. (excluding the Debenture Issue Scheme and consolidation) amounted to PLN 639.4 million, of which bank loans were PLN 630.7 million and loans drawn were PLN 8.7 million (including interest accrued but not payable). The loan contracts listed below were regulated under the above mentioned Agreement on Regulations of Debt Servicing as further amended concluded by Polimex-Mostostal S.A. : the loan granted by PKO BP S.A. converted to a loan in PLN with the limit set at PLN 7.29 million, -

the loan granted by PKO BP S.A. with the limit set at the amount utilized as at 24.07.2012 i.e. PLN 5.78 million,

-

the loan granted by PKO BP S.A. with the limit set at PLN 21.5 million,

-

the loan granted by Bank Ochrony Środowiska S.A. with the limit set at the amount utilized as at 24.07.2012 i.e. PLN 47.93 million,

-

the loan granted by Bank Zachodni WBK S.A. (former Kredyt Bank S.A.) with the limit set at PLN 40.0 million

-

the loan granted by PEKOA S.A. with the limit set at PLN 200.0 million,

-

the contract for revolving credit facility in the credit account in the amount of PLN 36.0 million to prefinance the refund of VAT by the Tax Authority the Company is entitled to.

-

the loan granted by PKO BP S.A. converted to PLN in portion originally denominated in foreign currency with the limit set at PLN 93.44 million, the loan granted by PKO BP S.A. with the limit set at the amount utilized as at 24.07.2012 i.e. PLN 0.05 million, the loan granted by PKO BP S.A. with the limit set at the amount utilized as at 24.07.2012 i.e. PLN 199.99 million.

-

The term and conditions of crediting were described in Section 2.6 of the Directors’ Report on the Operations of Polimex-Mostostal S.A. for the year ended 31 December 2012 and in Notes 7.1 and 14.2 to the Financial Statements of Polimex-Mostostal S.A. for the year ended 31 December 2012. Debt, as at 30 June 2013, under granted credit limits was presented in Note 17 to the Financial

23

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Statements of Polimex-Mostostal S.A. for the six months ended 30 June 2013 (Interest bearing bank loans and borrowings). Moreover, in the first six months of 2013 the following loans were repaid: -

the loan under multipurpose multicurrency loan contract (the original amount of the loan was PLN 47.0 million with option of using it in form of a guarantee facility up to the total amount not exceeding PLN 47.0 million) granted by BPH S.A. whose repayment was set at 04.03.2013 according to the settlement concluded by the parties on 27.07.2012.

-

the loan under the loan facility made available by ING Bank Śląski S.A. in the amount of PLN 200.0 million which may be used in form of a loan up to PLN 30.0 million whose repayment was set at 28.02.2013 according to the settlement relating to performance of obligations concluded by the parties on 24.07.2012.

-

working capital facility in the amount of PLN 20.0 million granted by Bank Millennium S.A. and finally repayable on 19.04.2013.

In the first half of 2013 Polimex-Mostostal S.A. concluded with Polimex Venture Development Sp. z o.o. (former EnergomontaŜ-Nieruchomości Sp. z o.o.) the contract of a loan in the amount of PLN 1.2 million repayable on 01.01.2017. Moreover, the Company used loans drawn out in years preceding the reporting period in the following companies: Depolma GmbH, Polimex Hotele Sp. z o.o. and Polimex-Cekop Development Sp. z o.o., which were described in detail in the Directors’ Report for the Company’s Operations for the year ended 31 December 2012 in section 2.6 Information on loans, borrowings drawn and issued debentures. In the first half of 2013 no new factoring contracts were concluded. As at 30.06.2013 two contracts concluded with Bank Millennium S.A. remain to be settled, which are in force by the date of repayment of debt they finance i.e.: −

the factoring contract of 18.07.2011 valid until the date of repayment of debt financed by the Bank under this contract i.e. until 31.03.2015, - the amount to be repaid PLN 6.1 million,



the factoring contract of 29.09.2011 valid until the date of repayment of debt financed by the Bank under this contract i.e. until 31.05.2014, - the amount to be repaid PLN 5.8 million.

The total obligation arising from debentures issued by Polimex-Mostostal S.A. as at 30.06.2013 amounts to PLN 148.3 million (the amount of principal i.e. not including accrued interest). As at 31.12.2012 the amount of debt on this account amounted to PLN 143.9 million. Change in debt level in the first half of 2013 was the result of settling an understanding with one of debenture holders. In line with the Agreement on Regulations of Debt Servicing of 21.12.2012 as further amended interest on debenture debt shall be accrued quarterly. Payment of interest for 1st and 2nd interest period shall be made in 12 equal instalments starting from July 2013 to May 2014. Interest for 3rd and further interest periods shall be paid at the end of each interest period. The repayment of the nominal of the liability arising from debentures will be in quarterly instalments starting from 30 June 2015 to 31 December 2016.

24

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Capital Group Companies in majority renegotiated financial terms and conditions (including margins and commissions) and additionally secured current loan contracts (concluded before 01.01.2013). A portion of the loans was repaid, also a number of new contracts was concluded (the balances of the utilisation of loans are presented in the Financial Statements of Polimex-Mostostal Capital Group for the 6 month period ended 30 June 2013). Below are presented the most significant amendments to terms and conditions of repayment and amounts of credit limits introduced to contracts after 01.01.2013 and before the publication of this report. 

Polimex-Development Kraków Sp. z o.o. signed annexes to two investor’s loans in the amount of PLN 30.4 million and PLN 10.0 million concluded with PKO BP S.A. extending final repayment period until 31.12.2013.



Torpol S.A. signed annexes to: the contract for revolving credit facility in credit account with Alior Bank S.A. increasing the limit from PLN 10.0 million to PLN 23.0 million (increasing the credit limit in return for decreasing the guarantee limit to refinance the repayment of a portion of a loan at BZ WBK S.A.) and extending the life of the contract by 19.06.2014; the contracts with BOŚ S.A., i.e. to the contract for a bank overdraft (PLN 2.0 million) extending the repayment by 31.12.2013, to the working capital facility contract amending the purpose of crediting (financing the task called „Improving quality of transportation by improving the technical condition of no. 143 rail road in the Kalety – Kluczbork section”), increasing the amount from PLN 4.0 million to PLN 12.0 million and extending the repayment by 10.10.2014; to the contract for bank overdraft at BZ WBK S.A. extending the crediting period by 31.05.2014 and decreasing the amount of loan from PLN 25.0 million to PLN 12.5 million as of 11.04.2013, and then introducing repayment in instalment in the amount of PLN 1.0 million monthly; to the contract for credit limit at DnB Nord Polska S.A. extending the crediting period by 30.06.2014 and increasing the sublimit overdraft from NOK 15.0 million to NOK 17.0 million; to the contract for bank overdraft at Bank Millennium S.A. (the limit of PLN 13.0 million) extending the limit by 15.12.2013, and then in the decreased amount of PLN 11.0 million by 15.01.2014; to the contract for bank overdraft (PLN 5.0 million) at PEKAO S.A. amending the principles of repayment in such a manner that the loan shall be repaid to the amount of PLN 3.0 million by 02.09.2013 and in this amount it shall be available by 31.07.2014.



Centrum Projektowe Polimex-Mostostal Sp. z o.o. signed an annex to the contract for a bank overdraft concluded with Bank Millennium S.A. (PLN 5.4 million) among other things extending the repayment by 30.06.2013. As at the date of preparation of this report the Company concluded the annex stipulating the repayment of the loan by 31.08.2013.



WBP Zabrze Sp. z o.o. signed an annex to the Contract for bank overdraft with OrzeskoKnurowski Bank Spółdzielczy among other things extending the validity by 30.06.2014 and decreasing the available limit from PLN 3.0 million to PLN 2.3 million as of 01.07.2013.



ZUT Sp. z o.o. signed with PEKAO S.A. an annex to the contract for bank overdraft (PLN 1.0 million) amending the principles of repayment in such a manner that the loan shall be repaid in monthly instalments specified by the Bank, with the final repayment on 31.01.2014.

 Stalfa Sp. z o.o. signed an annex to the contract for bank overdraft (PLN 6.7 million) with Bank Zachodni WBK S.A. (former Kredyt Bank S.A.). Under the concluded annex the security on the loan was strengthened and the repayment was shifted to 28.02.2014. Moreover, the Company concluded annexes to loan contracts signed with Alior Bank S.A. extending the repayment of loans in the amount of PLN 7.0 million by 25.04.2014, in the amount of PLN 2.0 million by 28.02.2014. The investment loan at Bank Zachodni WBK S.A. 25

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

in the amount of PLN 2.3 million was repaid in line with the terms and conditions of the contract. As at the date of preparation of this report the Company concluded with PEKAO S.A. an annex to the contract for loan in the amount of PLN 0.7 million which stipulates repayment in instalments by 31.12.2013. 

Energop Sp. z o.o. concluded a new investment loan contract with Bank PKO BP S.A. with the limit of PLN 2.3 million. The contract replaced prior financing granted by RBS Bank Polska S.A. The loan may be utilised by 05.07.2013 and the repayment was set at 20.06.2016. (the rate of interest was determined based on EURIBOR 3M plus margin).



In May this year SC Coifer Impex srl breeched the loan contract concluded with Unicredit Tiriac Bank S.A. (EUR 4.47 million) As a result the Bank requested the Company to make an early payment of the loan and then submitted a claim under the counter guarantee granted by Polimex-Mostostal S.A. which was the security to pay obligations by a Subsidiary (Current Report No. 63/2013 of 15.05.2013).  Modułowe Systemy Specjalistyczne Sp. z o.o. (former Moduł System Serwis Sp. z o.o.) signed an annex to the contract for bank overdraft with ING Bank Śląski S.A. setting among other things new principles of repaying the loan (the repayment of the granted limit of PLN 1.0 million in tranches of PLN 0.1 million each starting from 01.07.2013) and extending the repayment by 31.12.2013 and an annex to the loan contract with Raiffeisen Bank Polska S.A. setting among other things new principles of repaying the loan (the repayment of remaining balance of approx. PLN 1.0 million in tranches of PLN 0.03 million each starting from December 2012) and extending the repayment by 31.12.2013. The weighted average margin for loans of Polimex-Mostostal S.A. and the Polimex-Mostostal Group as at 30.06.2013 as against the comparative period of the last year was presented in the Financial Statements of Polimex-Mostostal S.A. for the period of 6 months ended 30 June 2013 (Note 17 Interest bearing bank loans and borrowings) and in the Financial Statements of the Polimex-Mostostal Group for the 6 months ended 30 June 2013 (Note 20 Interest bearing bank loans and borrowings).

2.7. Information on granted guarantees and borrowings In the first six months of 2013 Polimex-Mostostal S.A. did not grant any new loans to Group Companies. In the reporting period the following annexes to the previously concluded loan contracts were signed:  to the contract of 29.04.2010 granting Polimex-Mostostal Ukraine a loan in the amount of USD 1.0 million for partial financing of investment process in galvanising plant in Zhytomyr. Under the concluded annexes the repayment date was postponed until 31.12.2014.  to the Contract of 27.01.2011 granting Polimex-Mostostal Ukraine a loan in the amount of USD 7.05 million for partial financing of investment process in galvanising plant in Zhytomyr. Under the concluded annex the repayment date was postponed until 31.12.2014.  to the Contract of 30.08.2010 granting Polimex-Mostostal Ukraine a loan in the amount of USD 1.75 million for partial financing of investment process in galvanising plant in Zhytomyr. Under the concluded annex the repayment date was postponed until 31.12.2014.  to the contract of 06.12.2010 granting Polimex-Mostostal Ukraine a loan in the amount of USD 0.3 million for partial financing of investment process in galvanising plant in Zhytomyr. Under the concluded annex the repayment date was postponed until 31.12.2014.  to the Contract of 29.01.2010 granting Modułowe Systemy Specjalistyczne Sp. z o.o. (former Moduł System Serwis Sp. z o.o.) a loan in the amount of PLN 1.0 million. Under the concluded

26

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

annex the repayment was subordinated to the repayment of the loan concluded by the company with Raiffeisen Bank Polska S.A. Moreover, the contracts concluded before 01.01.2013 continue in full force and effect. At the end of June 2013 the total amount of loans paid out by Polimex-Mostostal S.A. equalled PLN 55.1 million (excluding accrued undue interest), of which PLN 22.7 million of developer loans (excluding accrued undue interest). Under the Agreement on Regulations of Debt Servicing concluded on 21 December 2012 as further amended Polimex-Mostostal S.A. may extend a loan granted before the conclusion of the above mentioned agreement and grant new loans up to PLN 23.0 million. The amount of guarantees granted by Polimex-Mostostal S.A. as at 30.06.2013 was PLN 241.6 million, of which for Capital Group companies it was PLN 182.4 million. EnergomontaŜ-Północ Gdynia Sp. z o.o. is the largest beneficiary of guarantees delivered, Polimex-Mostostal S.A. granted guarantees for Bank Millennium S.A. for drawn loan and granted guarantee facilities, which amounted in total to PLN 45.6 million. In connection with completing on 07.03.2013 the contract to sell the above mentioned company the procedures to release guarantees are pending. The second largest beneficiary of guarantees is Torpol S.A., for which as at the end of June 2013 Polimex-Mostostal S.A. granted guarantees in the total amount of PLN 36.7 million for BZ WBK S.A., DnB Nord Polska S.A. on account of loan contracts and for PZU S.A., BGś S.A., PEKAO S.A. on account of guarantee facilities. Apart from the companies mentioned above, Polimex-Mostostal S.A. delivered guarantees for repayment of loans and guarantee liabilities/bill payables/ payment liabilities drawn by: PRInŜ-1 Sp. z o.o. (PLN 20.1 million), Centrum Projektowe Polimex-Mostostal Sp. z o.o. (PLN 20.7 million), Turbud Sp. z o.o. (PLN 0.8 million), WBP Zabrze Sp. z o.o. (PLN 5.3 million), PXM ProjektPołudnie Sp. z o.o. (PLN 0.8 million), Stalfa Sp. z o.o. (PLN 10.4 million), Grande Meccanica SpA (PLN 39.6 million i.e. EUR 9.2 million), SC Coifer Impex srl (PLN 14.5 million i.e. EUR 9.6 million), PPU Elektra Sp. z o.o. (PLN 5.2 million), Modułowe Systemy Specjalistyczne Sp. z o.o. (PLN 2.6 million), Energop Sp. z o.o. (PLN 24.8 million) with the reservation that as of 01.07.2013 the guaranteed product was closed and the guarantee was released by the guarantee beneficiary (RBS Bank (Polska) S.A.), Tchervonograd Metal Structure Plant (PLN 0.2 million), ZUT Sp. z o.o. (PLN 0.8 million) and Sefako S.A. (PLN 12.9 million) the sale of which was completed on 31.01.2013 and the guarantee is valid by the time the guaranteed loan product expires.

Under the Standstill Agreement concluded on 24 July 2012 and the Agreement on Regulations of Debt Servicing concluded on 21 December 2012 as further amended Polimex-Mostostal S.A. may extend granted guarantees without increasing their amount. The exception is guarantees for subsidiaries held for sale, where the guarantees may be extended only in the period before the disposal of the company. Within the Capital Group one new loan was granted. The beneficiary of the loan is PolimexMostostal S.A. The loan was described in Section 2.6.

27

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

As at the end of June 2013, weighted average margins for loans granted by Polimex-Mostostal S.A. to Group companies amounted to: - for loans in Polish zloty: WIBOR 1M + 2.37 p.p.; - for loans in Polish zloty: WIBOR 3M + 2.04 p.p.; - for loans in foreign currency: interest based a fixed interest rate or on EURIBOR 1M + 3.00 p.p. At the same time, loans granted by Polimex-Mostostal S.A. increase the amount of debt of Capital Group companies arising from contracted loans and borrowings mentioned in section 2.6.

2.8. Information on contract performance bonds and bid bonds On 21.12.2012 the Contract was signed between Polimex-Mostostal S.A. and the banks: PKO BP S.A. (Credit Facility Agent), PEKAO S.A., Millennium S.A., Kredyt Bank S.A. (currently BZ WBK S.A.) and BOŚ SA (Lenders) for a new guarantee facility and an attached revolving loan (NGF) regulating the rules of issuing guarantees within the new guarantee facility for contracts concluded after the date of signing the Agreement on Regulations of Debt Servicing of 21 December 2012 as further amended. In the first six months of 2013 the Company did not conclude any new contracts relating to making available new guarantee facilities and did not sign any annexes to the guarantee facility contracts existing before executing the ARDS and NGF. The collaboration with banks and insurance companies did not change significantly as compared to the second half of 2012. As of the date of concluding the Standstill Agreement i.e. 24.07.2012 the commitment of the banks on account of bonds was set the level of existing bonds (all bank guarantees issued and valid as at 24.07.2012). The expiry of guarantees after this date does not result in renewing the guarantee limit and the banks are not obliged to grant new guarantees, increase their amounts or extend the validity period of existing guarantees. Each Company’s request in this cope could be individually analysed and accepted. Despite major impediments some guarantees, the most crucial ones concerning infrastructure construction sector (construction of motorways) such as guarantees issued by PEKAO S.A. for the contract to construct A1 Motorway, Stryków-Tuszyn Section and for the contracts for construction of A4 Motorway Rzeszów-Jarosław section, were extended. As at 30.06.2013 the total amount of guarantees issued by the company was PLN 1,205.4 million, of which bank guarantees PLN 1,099.1 million and insurance guarantees PLN 106.3 million. At the same time the value of guarantees issued on request of Group Companies (including PolimexMostostal S.A.) amounted to PLN 1,485.9 million, of which bank guarantees were PLN 1,260.8 million and insurance guarantees were PLN 225.1 million, respectively. In the first six months of 2013 among Group companies the largest number of guarantees and bonds was delivered upon request of: Torpol S.A. (PLN 260.3 million) and Grande Meccanica SpA (translated into PLN approx. PLN 6.9 million). In line with the provisions of the Agreement of NGF the Guarantee Issuer who is the Original Issuer of the Guarantee and any entity who shall become the Guarantee Issuer granted to the company a revolving type guarantee facility based on which Guarantees may be issued. Bank PKO BP S.A. who is the credit agent, security agent and guarantee issuer may issue guarantees after receiving consent from other lending banks. By the end of the first six months of 2013 the company practically did not use the NGF except for two bid bonds for the total amount of PLN 5.0 million for the benefit of PGE Górnictwo i Energetyka Konwencjonalna S.A. and PGNiG Termika S.A

28

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The key banks servicing Polimex-Mostostal S.A. in the scope of guarantees remain: PKO BP S.A. (PLN 601.5 million), PEKAO S.A. (PLN 116.4 million) and Bank Millennium S.A. (PLN 59.7 million). Among issuers of insurance guarantees, the largest commitment in issued bonds is still attributed to TUiR Warta S.A. (PLN 39.1 million) and STU Ergo Hestia S.A. (PLN 45.7 million). In the first six months of 2013 the Company received information on claims under bank guarantees issued on its request of which the Company informed in current reports. In line with the provisions of the ARDS the banks assumed an obligation to spread out the repayment of paid out amounts into 12 equal instalments starting from the first day of a calendar month falling after the month when the guaranteeing bank informed the company on receiving a claim. As at 2013-06-30 the amount of approx. PLN 25.9 million remains to be repaid as part of the claims listed below. − In June this year Polimex-Mostostal S.A. was requested by the Bank Gospodarki śywnościowej S.A. to repay a claim under the contract performance bond issued on the benefit of the Świecie Commune. In connection with early termination of the contract PolimexMostostal S.A. submitted an application at the Bank not to make the subject payment (in the opinion of the Company the claim is groundless) (Current Report No. 84/2013 of 13.06.2013)



In May this year Polimex-Mostostal S.A. was requested by RBS Bank (Polska) S.A. to repay a claim in connection with an issued counter guarantee. The counter guarantee secures the contract performance bond for the warranty period issued on request of SC Coifer Impex srl (the beneficiary of the bond was Nusco Tower srl). The amount of the claim amounted to EUR 1.5 million (Current Report No. 71/2013 of 29.05.2013).



SC Coifer Impex srl breeched the loan contract concluded with Unicredit Tiriac Bank S.A. (EUR 4.47 million) As a result the Bank requested the Company to make an early payment of the loan and then submitted a claim under the counter guarantee granted by PolimexMostostal S.A. which was the security to pay obligations by a Subsidiary (Current Report No. 63/2013 of 15.05.2013). In March this year Polimex-Mostostal S.A. was requested by RBS Bank (Polska) S.A. to repay a claim under the contract performance bond for warranty period issued on the benefit of the Consortium leader i.e. Hitachi Ltd Power System Company. The claim of the Consortium Leader was the result of the Ordering party i.e. Enea Wytwarzanie S.A. making a claim under the guarantee issued by the Consortium Leader (Current Report No. 40/2013 of 27.03.3013).



As at the date of preparation of this report another annex was concluded to the ARDS under which banks being parties to the ARDS declared among other things taking action to issue on request of the Company, irrespective of the occurrence and continuation of the breech of the ARDS, under the NGF guarantees in the total amount of not less than PLN 15.0 million and more than PLN 30.0 million which issuing will enable the Company to demand reimbursement of guarantee deposits retained by ordering parties to secure obligations of the Company arising from performed contracts. If the above mentioned guarantees are not issued by the banks being parties to the ARDS by 31 July 2013, the interest, which creditors being parties to the ARDS agreed to spread out under the above mentioned annex, shall be fully payable on 1 August 2013. By 31 July 2013 the banks being parties to the NGF issued the above mentioned guarantees for the total amount of PLN 15.0 million as a result the condition arising from the annex was met and the creditors being parties to the agreement gave their consent to spread out interest on financial liabilities of the company (Current Report No. 96/2013 of 4 July 2013, No. 97/2013 of 5 July 2013 and No. 106/2013 of 1 August 2013).

29

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

In the analysed period of the first six months of 2013 within the Polimex-Mostostal Capital Group subsidiaries continued collaboration under the guarantee limits granted by banks and insurance companies before 01.01.2013 (for details of concluded contracts/ annexes see Section 2.8 of the Directors’ Report on the Operations of the Polimex-Mostostal Group for the year ended 31 December 2012), annexes were concluded to some of the contracts, still certain contracts were not extended due to the conducted restructuring process. Major amendments to guarantee limits of the Subsidiaries are presented below: Torpol S.A. concluded annexes: − to the contract for credit limit at Bank DnB Nord Polska S.A. increasing the sublimit for bank guarantees from NOK 35.0 million to NOK 38.0 million and extending the availability of the sublimit by 30.06.2014; − to the contract for guarantee facility at Bank Ochrony Środowiska decreasing its amount from PLN 20.0 million to PL 10.0 million and changing its purpose to a special purpose facility for “Improving quality of transportation by improving the technical condition of no. 143 rail road in the Kalety – Kluczbork section” project (validity of the guarantee 03.06.2018). − to the contract for guarantee type products at Alior Bank S.A. decreasing its amount from PLN 17.0 million to PLN 4 million (the balance increased the credit limit the Company has at this Bank). Furthermore, the Company concluded new contracts:

− with STU Ergo Hestia S.A. a new contract of collaboration in the scope of granting insurance guarantees with the limit of PLN 14.0 million valid by 31.12.2013. − with Generali TU S.A. the frame contract to grant contractual bonds within a revolving limit of PLN 20.0 million available by 31.12.2013. PxM Projekt Południe Sp. z o.o. concluded a new contract for guarantee facility (in the scope of bid bonds) with TU InterRisk S.A. with the limit of PLN 0.7 million and valid by 16.04.2014. From January to June 2013 guarantee limits of the following companies: WBP Zabrze Sp. z o.o. at Gothaer TU S.A. (PLN 2.7 million), Energop Sp. z o.o. at RBS Bank (Polska) S.A. (the sublimit of PLN 10 million) and at Bank DNB Nord Polska S.A. (the sublimit within the limit for PolimexMostostal S.A. and EnergomontaŜ-Północ Gdynia Sp. z o.o.) and Torpol S.A. at Bank Millennium S.A. (PLN 5.0 million) were not extended and are valid by the time the last active guarantee under the limits expires. The main banks and insurance companies servicing the Group companies in the scope of guarantees are: PEKAO S.A. (PxM Projekt Południe Sp. z o.o., Turbud Sp. z o.o., Torpol S.A.), BZ WBK S.A. (Torpol S.A.), DnB Nord Polska S.A. (Torpol S.A.) and PZU S.A. (Torpol S.A.), TUiR WARTA S.A. (Torpol S.A.).

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

2.9. Description of external and internal factors significant for development of the Issuer’s Capital Group as well as business development perspectives, including elements of market strategy In the opinion of the Board of Directors of the Company the following factors and trends affect significantly the performance of the Capital Group in the presented period or it is forecasted that they will have a significant effect on its performance in the future: -

The level of capital expenditure on the Polish market and on the markets of other European Union states; regulatory environment; changes of exchange rates; seasonality; participation in the execution of large investment projects in the Polish power engineering sector; the value of the held backlog; restructuring of operating activity and conducted divestment measures.

The level of capital expenditure The Capital Group conducts its activity mostly in Poland, where the significant portion of revenue is generated from the performance of construction and assembly contracts and from production activity targeted at construction. In terms of industry, the most important is rendering services for power engineering, refinery and chemical sectors and in the scope of industrial construction. Additionally, the Group performs large orders in the general construction, road and railroad sectors. The revenue of the Capital Group depends on the level of capital expenditure in the above mentioned sectors and these in turn are directly dependent on the macroeconomic situation in Poland. Maintaining the growth of the GDP and industrial production in Poland in real terms, proper use of the EU funds and improvement of the condition of economies of the EU member states, as key importers of services, will affect the increase of demand for products of the Capital Group and in the opinion of the Board of Directors the development of individual industries will differ in the near future. It is expected that there will be a long-term growth of the level of capital expenditure on modernisation (reconstruction) of the existing production capacity and the construction of a new one. The increase in capital expenditure will be accompanied by modernisation of distribution networks (power transfer), development of renewable power engineering and of environmentallyfriendly construction tightly linked with power engineering (e.g. incineration plants, combustion gas desulphurisation systems). The projected increase in energy prices in the long run is to ensure profitability of the investments for investors. Moreover, aiming at the reduction of production costs, power engineering plants will commission performing overhaul and maintenance works to a larger extent to external companies. As a result the construction and overhaul market for companies such as Polimex-Mostostal, which has been specializing in mounting new power blocks and overhauls of the existing ones, will grow. Adjusting the offer to current needs of the market, in particular in the scope of specialist works and services, and forming strategic alliances with smaller subcontractors and suppliers of specialist technology should enable the Issuer to use the opportunities created by the development of professional power engineering and heat and power plants located in production and municipal plants. 31

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Contrary to the power engineering sector, one should expect continuous low level of investment in new production capacity in the refinery sector, at least in the domestic market. On the other hand, there should be growth of demand for modernization of logistic raw material and fuel infrastructure. In the long run extraction of shale gas offers an opportunity for additional large investments in Poland. The demand for services in the scope of maintenance of production systems should remain stable. The Issuer has much experience of delivering and assembling fuel and liquid product containers together with accompanying infrastructure. For many years it has also performer overhauls and modernisations of refinery and petrorefinery systems. The Board is planning to keep its current position at home and at the same time to increase exports to the EU states. Additionally, it intends to extend the current offer in the scope of delivery and assembly of process systems, which now comprise systems for production of hydrogen and oxygen, by new systems and pressure apparatuses. As a result of excessive competition in the large span construction there was a dramatic decrease of margins, in particular in the scope of general construction works. To gain higher margins, the Issuer intends to develop its competence in the scope of specialist industrial construction and gain a competitive advantage by means of strategic alliances with partners assuring access to new specialist technologies. It is also planned to increase exports of services. Observed high level of expenditure on railroad construction should be maintained at least in the next years as the railroad reconstruction is widely promoted and financially supported by the European Union. This trend is accompanied by the development of tram tracks and high-speed city railway. Torpol S.A., the Issuer’s subsidiary, will strive to increase its share in this developing market. To a large extent the Issuer is committed to road construction especially in the construction of motorways and expressways. The terms and conditions of concluded contracts have and will have a significant effect on the Issuer’s financial results in the next several years. The Board of the Company believes that a further growth of GDP in Poland and a general development of the Polish economy will affect the demand for construction and assembly services in Poland, and this in turn will have a favourable effect on the activity and operating results of the Capital Group. In particular the Company can see an opportunity for development in investments for power engineering sector, which may level off a decrease in other construction segments. However, a significant slowdown of GDP growth in Poland and the slowdown of the development of the Polish economy could have a negative effect on the activity and operating results of the Capital Group. Regulatory environment The activity if the Company was affected, and in the opinion of the Company it will be still affected by regulations stipulated in for example the Construction Law, Public Procurement Law, the Act of 28 June 2012 on repayment of certain unsatisfied claims of entrepreneurs arising from the execution of public procurements, the European Law and international conventions. Moreover, the activity if the Capital Group was affected, and as the Company believes will be still affected, by tax regulations, interpretations and recommendations issued by public administration authorities as well as issued individual administrative decisions or the ones which will be issued by such authorities on matters relating to the activity conducted by the Group.

32

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Changes of exchange rates EUR/PLN exchange rate has a significant effect on the performance of the Company and of the Capital Group. The main reason for this situation is the fact that the reporting currency is PLN, whereas: -

a significant portion of revenue from sales (from ¼ to 1/3 depending on the period) is generated in foreign currencies (mainly the EUR); appreciation of PLN as compared to these currencies has a negative effect on the Company’s performance as the value of foreign currency revenue expressed in the reporting currency decreases; if there is depreciation of the domestic currency, the Company reports a positive effect of this situation; fluctuations of exchange rates have an effect on revaluation of transactions relating to the above sales which is reflected in financial costs/income of the Company as foreign exchange translation differences;

-

The Company holds shares and interests in foreign entities; appreciation of PLN as compared to foreign currencies has a negative effect on the performance of the Company because the value of these assets expressed in the reporting currency decreases; if there is depreciation of the domestic currency, the Company reports a positive effect of this situation;

The main method of hedging against foreign exchange risk applied by the Issuer’s Capital Group companies remains natural hedging i.e. hedging foreign currency risk by entering into transactions which generate costs in the same currency as the revenue currency. If it is not possible to hedge foreign currency risk with natural hedging in the expected scope, the companies, if they have open treasury limits, may apply foreign exchange hedges based on using derivative instruments related to the foreign currency market. Seasonality Operations of the companies forming the Capital Group, similarly to the majority of companies from construction-assembly sector, is characterized by the seasonality of generated revenue caused by: (i) unfavourable weather conditions in the winter season, which make it impossible to perform certain construction and assembly works in that period; (ii) concentration of investment and modernization works performed by most customers in the spring, summer and autumn season; (iii) customers planning investment cycles in a way that they are completed before the year end and (iv) concentration of overhaul and modernization works in heat and power plants in the summer months. The above mentioned factors result in the Company's sales being the lowest in the 1st quarter and the highest in the 4th quarter. The Company undertakes activities aimed at reducing the seasonality of sales. These are first of all rendering services for these branches of industry which are not affected by seasonality or are affected to the smaller extent and exports of construction services to countries situated in different climatic zones. Participation in the execution of large investment projects in the Polish power engineering sector. The Issuer participates in two consortia established to perform the currently largest investment projects in the national power engineering sector. 33

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

On 21 September 2012 a contract was concluded with ENEA Group for the construction of a power block at Kozienice Power Plant of a gross electrical power of 1075 MWe. The contract is performed by the consortium of the following companies: Hitachi Power Europe GmbH (the consortium leader) and the Company. The value of the contract amounts to PLN 6,279.6 million gross, of which 42.7% is attributable to the Company. The Consortium took over the construction site on 2 October 2012. Works connected with the construction site establishment were performed, whereas on 21 January 2013 the basic project was handed over by the consortium to the ordering party. Execution of construction works was commenced. On 15 February 2012 the consortium comprising the following companies: Rafako S.A. (the consortium leader), Polimex-Mostostal and Mostostal Warszawa S.A. concluded the largest contract in the history of the Polish energy sector for the execution of the investment task relating to the construction of No. 5 and No. 6 power blocks at PGE Elektrownia Opole S.A. The value of contracted works amounts to approx. PLN 11,558.3 million gross, of which 41.8% is attributable to the Company. The contract for design services was signed by: Energoprojekt-Katowice S.A., Centrum Projektowe Polimex-Mostostal sp. z o.o. and Rafako Engineering sp. z o.o. On 16 May 2013 companies forming the Consortium concluded with PGE Elektrownia Opole S.A. (currently PGE Górnictwo i Energetyka Konwencjonalna S.A. Opole Branch – the Ordering Party) an annex to the Contract under which, in connection with the decision made by the Ordering Party to close the investment task, the parties agreed on principles used to settle the advance payment received from the Ordering Party in view of the reimbursement of cost of preparation works incurred by the Consortium and extended the deadline specifying the ordering Party ability to issue a notice of intention to release the notice to proceed this project by 15 August 2013. On 13 August 2013 members of the Consortium concluded with the ordering Party another annex to the contract in which the parties agreed that the additional condition of releasing notice to proceed works is arranging and implementing terms and conditions regulating relationships between the Ordering Party, the Consortium and/or subcontractor and Powszechna Kasa Oszczędności Bank Polski S.A. in the scope of financing regulations, terms and conditions for securing payment and issuing the contract performance bond. Moreover, it was agreed that the Ordering Party may release the notice to proceed by 15 February 2014 and the notice may be released not earlier than 120 days of the date of issuing by the Ordering Party a notice of the intended release of the notice to proceed. At the same time the Ordering Party informed that it is planning to issue an appropriate notice on 15 December 2013 on condition that all terms and conditions specified in the Contract to issue the above mentioned document are fulfilled. On the same date the ordering Party, the Consortium, PKO Bank Polski S.A. and Alstom Power sp. z o.o. signed an unbinding letter of intent to specify the terms and conditions for Alstom to join the execution of the project and determine the scope of necessary changes in the project documentation. The subject projects are crucial in view of financial results of the Company in the next several years. The value of the held backlog The backlog of the Capital Group decreased by sales attributable to consortium members but including the execution of the contract for the Opole Power Plant in the amount of PLN 3.9 billion, amounts to PLN 11.0 billion, of which PLN 10.9 billion is concluded contracts and PLN 0.1 billion contracts in the final stage of negotiations. The current backlog for individual years is as follows: 2013 – PLN 1.5 billion and in its entirety relates to concluded contracts; 2014 – PLN 3.3 billion (concluded contracts PLN 3.2 billion, contracts in the final stage of negotiations PLN 0.1 billion); 2015 – PLN 3.1 billion and in its entirety relates to concluded contracts; in the next years PLN 3.1 34

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

billion and in its entirety relates to concluded contracts. The backlog was specified based on sales generated by 30 June 2013. Restructuring of operating activity The programme of correcting the financial and economic position of the Company adopted by the Board of Directors assumes restructuring of operating activity, which is based on three main objectives: (i) reduction of fixed costs by means of group redundancies and by making economies arising from centralization of purchasing; (ii) change of functioning of acquisition of new contracts by concentration on high margin projects; (iii) concentration on core activity of the Company by strengthening competence in the following areas: Power Engineering, Petrochemistry, Industrial Construction and Railroad Construction. Conducted operating restructuring is aimed at simplification of the structure and reduction of costs of the Group’s functioning. The reduction of employment, described in more detail in Section 4.3 of this report, has also a significant effect One of the key elements of the restructuring programme of the company resulting from the provisions of the Restructuring Agreement concluded with the creditors is divestment. Conducted divestment measures were discussed in more detail in another subsection of this section. Additionally, measures aimed at improvement of the budgeting and reporting process itself and at standardization of contract planning are continued. Within the Company a controlling unit was established dedicated to analyses and verification of long-term contract budgets reporting directly to the Board of Directors. Its tasks include: coordination and implementation of a uniform project management process within the Company; day-to-day verification and improvement of the planning model and making uniform reporting procedures referring to contracts being performed; holding regular reviews of the status of key long-term contracts; verification of material completion of the key projects with reference to their cost completion; independent verification of submitted bids. The Company is in the course of making changes at the system level and in the scope of defining reports in available IT tools so as to enable day-to-day co-ordination and verification of the implementation of the plan. Additionally, the internal control function was strengthened with a team controlling execution of project budgets and application of required procedures. Works on restructuring of the operating activity are supposed to finish in 2013 and the full economic results are to be expected starting from 2014. By the end of May 2015 reduction of costs on account of restructuring of operating activity should amount to at least PLN 300 million. Conducted divestment activity To improve the liquidity, the Company decided to divest subsidiaries and a portion of assets of the enterprises of the Company, which are not closely related to its core activity. Till the date of preparation of this report, under the divestment process, the following major transactions were concluded: −

On 24 October 2012 the Issuer concluded with MARS Closed Investment Fund a conditional agreement to sell all interest held by the Issuer in EnergomontaŜ-Północ Gdynia Sp. z o.o. and the shares of Fabryka Kotłów Sefako S.A. Both transactions were completed in January and March 2013. For more information see Section 1.6.1 of this report (Changes in the investment portfolio).

35

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013



On 08 December 2012 the Issuer concluded with Tomasz KoŜuchowski the contract to sell the entirety of shares held in Zakład Transportu – Grupa Kapitałowa Polimex Sp. z o.o.



On 21 December 2012 the Issuer concluded with ZREW TRASFORMATORY sp. z o.o. a contract to sell an organized part of an enterprise of Zakład ZREW Transformatory. The transaction is described in more detail in Section 8 of the report for 2012.



On 31 January the Issuer concluded with the company of Mars Fundusz Inwestycyjny Zamknięty to contract to sell all shares held by the Company in Fabryka Kotłów Sefako S.A.



On 07 March 2013 the agreement concluded between the Issuer and MARS Finance 1 sp. z o.o. to sell three real properties located in Gdynia, used by EnergomontaŜ-Północ Gdynia Sp. z o.o., was completed. For more information see Section 8 of this report (Other significant events in the 1st half of 2013 having impact on operations of the Issuer’s Capital Group).



On 17 June 2013 the contract between the Issuer and Ocynkownia Śląsk Sp. zo.o. to sell an organized part of enterprises i.e. Corrosion Protection Plant Częstochowa Branch was finalised. For more information see Section 8 of this report (Other significant events in the 1st half of 2013 having impact on operations of the Issuer’s Capital Group).



On 07 August 2013 the Issuer concluded with Weldon Sp. z o.o. the contract to sell an organized part of enterprise i.e. Corrosion Protection Plant Dębica Branch. For more information see Section 8 of this report (Other significant events in the 1st half of 2013 having impact on operations of the Issuer’s Capital Group).

Polimex-Mostostal has also put for sale over 50 real properties whose common feature is their significant developer’s potential. Real property for sale includes real property and investment land located in Warsaw, Katowice and Krakow. The Company received its first proceeds from the transactions of selling assets in the 4th quarter 2012. By the end of 2015 the total proceeds from divestment should exceed PLN 600 million.

2.10. Description of significant financial issues having an effect on assessment of Company’s ability to continue its current business activity. The Board of Directors describes the economic position of the Company as difficult. Debt was restructured and other provisions arising from the Agreement on Regulations of Debt Servicing concluded with the Financing Banks and Debenture Holders are performed. In the opinion of the Board of Directors taken measures give grounds to state that the position of the Company will gradually improve despite the fact that there are circumstances indicating a threat for the Company to continue as a going concern, in particular in the next 12 months of preparation of this report. Thus the interim condensed financial statements have been prepared on the assumption that the Company will continue as going concern in the foreseeable future. The assessment of the financial position of the Issuer is presented in Note 4 to the interim consolidated financial statements (Basis of preparation of the consolidated financial statements).

2.11. Clarification of differences among financial performance given in annual report and previous forecasts of financial performance for a given year The forecasts regarding financial performance of both Polimex-Mostostal S.A. and of Polimex-Mostostal Capital Group in 2013 were not published.

36

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

2.12. Basis of preparation of financial statements Principles of preparation of the statements are presented in additional explanatory notes to the interim condensed financial statements.

2.13. Information on dividend paid (or proposed) In 2012 the Company generated a loss. Additionally, in line with the provisions of the Agreement on Regulations of Debt Servicing the Company was obliged not to pay any dividend without receiving prior consent from the creditors.

3. Risk management in the Issuer’s Capital Group 3.1. Description of significant risk factors and threats The activity conducted by the Company and the Capital Group is exposed to a number of risks relating both to macroeconomic situation and negative internal occurrences. In the first six months of 2013 external events connected with longer than expected the crisis in the construction sector as well as still existing financial restrictions on financing companies operating in this sector such as limitations put by banks on availability of loans and contract performance bonds had a significant effect on the operations of the Company and of the Capital Group. Conditions arising from major agreements signed with the Financial Creditors in 2012 i.e. the Agreement on Regulations of Debt Servicing of 21.12.2012 as further amended and the Agreement of New Guarantee Facility of 21.12.2012 has a significant effect on the operations of the Company. The Company continued analyses conducted in collaboration with external consultants and carried on correction measures and implementation of new procedures for verification of tender risks and analysis of risk in projects being performed. Material external risks identified by the Parent Company and the Group Companies include: Macroeconomic and political risks; •

risks delaying the development of industries in which the Company operates, both by hindering the investment process and by failure to implement fully investment assumptions, resignation from the implementation of investment programmes in crisis stricken sectors or due to the change in the concept in the scope of investment,



dependence of financing of investment undertakings at home by the majority of banks operating on the domestic market on the assessment of the country economic risk, growth prospects for individual industries and sectors as well as individual business entities from the point of view of foreign decision making centres.

Internal risks identified by the Polimex-Mostostal Capital Group entities include: 1) strategic risks such as risks arising from the change of the strategy: a) implementation of financial and economic planes; b) maintaining and building the order portfolio and ensuring the execution of multiannual construction contracts, c) lack of competitive balance; 2) operating risks; a) change of demand for specialist services, b) fluctuations of prices in main commodity markets, c) valuation of construction and assembly services, 37

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

3) financial risks: a) liquidity (credit) b) interest rate, c) foreign currency risk, d) risk of no new bank and insurance guarantees From the point of view of the strategy material risks include the possibility of losing: • multiannual contracts crucial for the development of the Company and the Capital Group; • reducing/losing the possibility to execute public procurement contracts, • losing the trust of key business partners. To counteract the materialisation of these risks is the main objective of the activity of the Board of Directors of the Company which is conducting talks with ordering parties, consortium partners and banks. These risks are managed at the highest level of Company’s authorities. Operating risks, a significant risk in this scope is related to the valuation and execution of construction, service contracts and production and the risk of contractual penalties which is attached to these contracts. Management of the risk relating to valuation and execution of contracts, which is accumulated at the basis of the whole Capital Group, requires proper functioning of information flow channels in the vertical system, uniform procedures for the verification of budgets and cost discipline during the execution of projects. As at the date of preparation of this report the Company implemented procedures such as uniform control procedures for tender activity and for planning and settling long-term contracts within segments and the entire Group. The Company is also implementing additional uniform tools supporting the process of budgeting and of day-to-day cost control due to a particular sensitivity of data in time of crisis in the construction sector. In connection with the implementation of power engineering contracts, managing operating risk is the key task at each level and at every stage of execution and supervision of proper performance of these contracts. The ability of the Company to timely execute contracts significantly worsened in the reporting period due to a cumulated high level of demand for financing of works in these contracts with existing problems with financial liquidity and the market situation in the construction sector. To diminish the effects of materialized threats, the negotiations are conducted with the ordering parties, decisions are made as to take legal action. Risk of change of demand for specialist services of corrosion protection – galvanizing and painting of steel structures in Polimex-Mostostal S.A. Trends observed in construction indicate an increasing interest in hot dip galvanising services. It is confirmed by a systematic several per cent increase of year-to-year sale that is why the risk of change in demand may be estimated as average. Service prices depend on the quotations of zinc prices on the London Exchange - the material which is the main cost generating factor for this scope of activity. In its contracts with customers for 2013 the Company applied the principle of amending prices depending on the changes of zinc market prices. The level of this risk and its effect on the Company’s results are measured as average. Raw materials price risk. Economical effectiveness of production of the company depends to a large extent on fluctuations in prices of raw materials, mainly steel, aggregates and tarmac. Employment of high class specialists on market analysis is the basic factor mitigating this type of risk. Moreover, the company has implemented procedure for centralised purchasing (economies of scale, feasibility of negotiating lower purchase price). The implemented procedures were not able to eliminate to a desired extent the negative effect of rising prices of raw materials and materials in

38

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

multiannual contracts, in particular in road contracts concluded 2-3 years earlier and based on fixed prices. Delivery contracts were renegotiated to a positive effect. In this scope it is necessary to make procedural changes in the attitude of main investors to the option of applying price indexation to multiannual contracts, as well as to specify the limit of risk acceptable by the Company, at the level adequate to the ability to cover costs of the loss of the entire margin planned for the project. Risk of losing assets: The Company uses to a large extent insurance products available on the market, both property insurance (including in the first place liability insurance, business liability insurance, professional indemnity insurance [designer, architect and construction engineer insurance], D&O insurance policy and property against random events and against theft and burglary insurance, electronic equipment insurance, insurance of property in transport) as well as construction/erection insurance policies arranged under general agreements and individual policies arranged for contracts being performed. All companies used motor insurance in the scope of thirdparty liability insurance, comprehensive motor insurance, theft insurance and accident insurance both under general (fleet) agreements as well as based on individual policies. The costs of transferring insurable risks are being analysed, together with terms and conditions of contract insurance required by customers. The risk in this scope is to a large extent transferred outside the Company, and the costs are included in the costs of execution of contracts. The level of risk in this scope is measures as low. Risk of losing resources due to using debt security established on Company’s assets. The risk of creditors making security constitutes a significant risk from the point of view of possibility to conduct business activity by the Company when there are payment gridlocks and the crisis in the construction sector, which puts pressure on using security even if it is not justified by the terms and conditions of contracts. The risk to a large extent could unable due and proper execution of agreements and contracts, which would lead to escalation of contractual sanctions such as imposing contractual penalties, hiring replacement contractors on the expense of the Company to the termination of contracts through the fault of the Company. Financial risk: Liquidity risk. In the opinion of the Company this is the risk which is running very high. In the present situation managing this risk is the most important concern of the Board. Maintaining liquidity in the nearest future requires involvement in projects ensuring neutral and positive cash flows. The risk requires constant monitoring and analyses both in short and in long term. Owing to the execution of the Agreement with the Financial Creditors on 21.12.2012 the repayment of loans was shifted to the period from 30.06.2015 to 31.12.2017. Nevertheless, the Agreement on Regulations of Debt Servicing imposes on the Company a number of obligations in particular the obligations to: (i) make timely payments to Creditors; (ii) generate specified proceeds on account of disposal of Company’s assets as part of divestment process; (iii) reduce operating costs to the level specified in the Agreement on Regulations of Debt Servicing; (iv) restructure past due trade liabilities; (v) maintain financial ratios at the level specified in the Agreement on Regulations of Debt Servicing; and (vi) not undertake a number of actions without a prior consent of the Creditors. Failure of the Company to fulfil obligations arising from the Agreement on Regulations of Debt Servicing may lead to Creditors terminating it with an immediate effect, which in turn will result in demanding immediate payment of all financial liabilities of the Company towards the Financing Banks and Debenture Holders. 39

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

A high level of debt of the Company and the Group may have significant consequences, in particular it may affect: (i) limited ability or no ability of the Company and of the Group to acquire additional financing from financial institutions for example in the form of loans or bank guarantees; (ii) slowdown of the operations of the Company and of the Group due to a considerable decrease in availability of loans and shortening terms of payment or demanding prepayments by business partners; (iii) necessity to allot a considerable portion of cash flows from operating activity to repayment of principal (for the Company starting from 2015) and interests, which means that these cash flows will not always be available to use as financing of the Group’s operations or of capital expenditure; (iv) limited flexibility of the Group while planning or responding to changes in its activity, competitive environment and in the markets, where it operates; and (v) unfavourable market position of the Group as compared to its competitors who have lower credit commitment. Signing with Financial Creditors the Agreement on Regulations of Debt Servicing constitutes a mechanism minimizing financial risks including default risk. Nevertheless, this Agreement contains a number of obligations, which the Company should fulfil in the term of the Agreement, for example in the scope of achieving financial and economic ratios, and the obligation of the Company not to undertake certain activities without consent of all or appropriate majority of the Creditors including for example the obligation not to incur additional financial liabilities which may create new risks such as the risk of excessive lengthening of the decision-making process. Contract performance bond risk. At the stage of submitting tenders, especially in procedures conducted in accordance with the regulations of the Public Procurement Law it is necessary to submit a bid security, so far the Company has met this requirement using bank and insurance bid bonds. Concluding the contract, the Company often acting as a key contractor, is obliged to deliver a performance bond, which amounts on average to approx. 10% of a contract value. Recently due to the crisis on the construction market at home, the banks/ insurance companies are not interested in increasing guarantee commitment in construction companies. On 21.12.2012 the Company signed the Agreement of New Guarantee Facility with the Financing Banks under which it may request issuing guarantees up to the total amount of the limit PLN 201 million. The condition to issue a guarantee under the New Guarantee Facility is having the project approved by experts such as an external consultant and the Financing Banks and receiving consent from contract partners to assign debt from contracts being performed to the Banks. For most project no consent to assign debt, in particular in the scope of construction works projects, is a major impediment to use this facility. Ensuring the possibility to issue bid bonds or contract performance bonds was one the key risk factors deciding on the ability to acquire new contracts in the first six months of 2013. The risk in this scope was mitigated by agreeing on guarantees shared with partners, subcontractors and suppliers. If it is not possible to submit security in form of bank guarantees, the Company arranges securities in form of guarantee deposits. Establishing this trend has a negative effect on liquidity of the Company. Reduced availability of bank and insurance guarantees in light of the code provisions on the obligation to submit the guarantee of payment for construction works constitutes an additional risk factor at each stage of execution of construction contracts. Lack of timely execution of absolutely binding regulations in the subject matter may result in the suspension of work progress including the termination of contracts through the fault of the Company.

40

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Trade credit risk related to trade receivables is mitigated by diversification of customers and individual approach to each customer in terms of assessment of its credibility (both legal and economic). Additionally, credit risk is mitigated by: •



for foreign customers: −

trade receivables insurance,



obtaining securities of receivables in form of letters of credit, guarantees and sureties;

for domestic customers: −

obtaining hedging of receivables in form of bank guarantees and insurance bonds,



securing receivables in form of sureties, temporary ownership title transfers, registered pledge, mortgage, promissory notes due to limited availability of bank guarantees.

Despite constant monitoring of risk and conducting negotiations with business partners to extend terms of payments, the Company failed to reduce the high level of this risk due to the following circumstances: • pressure from the suppliers of strategic materials for infrastructure projects to shorten to the maximum terms of payment or to secure payments with expensive financial instruments (bank guarantees, letters of credit); • bankruptcies in the construction sector including bankruptcies of consortium partners, subcontractors and subsidiaries. • no insurance limits for credit risk and the guarantee limits by the insurance companies, • lack of understandings relating to the settlement of additional works and to the increase of prices of materials in significant infrastructure contracts, • unwillingness of banks to finance projects in the construction sector, The manner of managing financial risk and negative consequences of the loss of material resources was discussed in sub-sections below (3.2 and 3.3). Moreover, the following risks are monitored on regular basis on the level of the Board: • creation of order portfolio and performance of long standing investment contracts, • amount of off-statement of financial position liabilities arising from hedges on construction contract performance, • changes of the demand for specialist services of corrosion protection, including galvanizing and painting of steel structures, • situation on professional labour market. Qualified labour loss risk. The Polish labour market situation significantly determines activities of the home market companies operating in construction and assembly industries. The crisis and a series of bankruptcies in the construction sector increase the supply of personnel on the market. Still there are deficit specialisations, which shortage may limit the execution capacity of the Company and of the Capital Group. The crisis situation in the construction sector makes it also necessary to immediately reduce costs, including labour costs, which in long-term may lead to difficulties in acquiring essential highly qualified specialist for the execution of power engineering contracts. As part of the operating restructuring and implementation of the cost reduction policy the 41

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Company introduced group redundancy procedures which covered 1,079 persons in the first six months of 2013 and another 145 persons will be transferred to a new employer in connection with a planned transaction to dispose of the Galvanising Plant in Dębica. Additionally, there is a risk of the loss of qualified experienced employees who may leave the Company in connection with no sense of stability of employment and desire to look for a job which brings higher remuneration. If new projects are acquired, the Company may find it difficult to hire new qualified staff who will have appropriate know-how, experience and qualifications or hiring such staff may involve temporary increase of labour costs. It may slow down the implementation of the strategy and limit the options to perform new specialist projects. Moreover, the shortage of employees having appropriate qualifications may have an unfavourable effect on the capability of the Company and the Group to effectively manage the implementation of its strategy and its operations. The Company terminated the Company Collective Labour Agreement and trade unions initiated a collective dispute procedure. The parties are conducting talks on among other things concluding a new collective agreement and further redundancies. There is a threat of a strike. Temporary disruption or even stoppage of works performed by the Company may affect the timely performance of the Company’s obligations to its business partners.

3.2. Information of financial instruments in the scope of interest rate and currency risk as well as adopted by the entity objectives and methods of financial risk management Financial performance of Polimex-Mostostal Group may fluctuate due to change in market factors, in particular quotations of raw material prices, foreign currency exchange rates and interest rates. The Group managing the risk it is exposed to mitigates fluctuation of future cash flows and potential economic losses arising from events having negative impact upon the financial performance. Interest rate risk. The Group has cash in bank accounts and liabilities arising from bank loans and debentures issued. They are based on the floating interest rate. The companies monitor the situation on the financial market, analyse trends and prognoses in the scope of reference market rates in order to decide, in a proper moment, to conclude within available limits contracts hedging them against the unbeneficial increase of costs of interest on loans. Currency risk. Cash flows of Polimex-Mostostal Capital Group companies are characterised by relatively significant sensitivity to changes in exchange rates, which arise from the fact that revenues are derived in foreign currencies, including mainly the euro. In the reporting period these entities were, apart from Polimex-Mostostal S.A., in particular: Torpol S.A. and StalFa Sp. z o.o. To minimise the negative effect of exchange risk on results of operations, the companies apply mostly natural hedging. If they have open treasury limits, it is also possible to utilize foreign exchange derivative instruments available on the market under the risk management strategies implemented by these entities. Based on accounting policies applied to the method of recording financial instruments, two groups of companies can be distinguished: •



companies which have document risk management strategy and implemented hedge accounting policies; at the statement of financial position date this group includes PolimexMostostal S.A. and Torpol S.A.; companies not applying hedge accounting.

42

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Companies applying hedge accounting present hedge derivative instruments they hold at fair value and taking into account the changes in this value: • •

in portion recognised as an effective hedge – directly in other comprehensive income, - in portion recognised as ineffective – in the income statement.

Companies not applying hedge accounting recognise changes in fair value of derivative instruments directly in the income statement. The main method of hedging against foreign exchange risk applied by Polimex-Mostostal Capital Group companies remains natural hedging i.e. hedging foreign currency risk by entering into transactions which generate costs in the same currency as the revenue currency. If it is not possible to hedge foreign currency risk with natural hedging in the expected scope, the companies, if they have open treasury limits, may apply foreign exchange hedges based on using derivative instruments related to the foreign currency market. These may be in particular the following instruments: • forward future contracts, • PUT/CALL currency options (acquired options); • option structures constructed with PUT and CALL options, in particular the so called „zerocost” symmetric currency corridors built with PUT and CALL options. It is the Group's policy to negotiate the terms of hedging derivative instruments to match the terms of the hedged item so as to maximise hedge effectiveness. The Group Companies monitor the market situation on regular basis and confront hedging transactions they hold with projected exposure to foreign currency risk. On 21 December 2012 the Agreement on Regulation of Debt Servicing was concluded, whose provisions did not provide for the possibility of using foreign currency derivative instruments as available credit products. The Company will continue talks with banks on granting treasury limits allowing to manage foreign exchange risk more effectively.

3.3. Insurance contracts In the first six months of 2013 the Group continued to use to a large extent insurance products available on the market, both property insurance (including in the first place liability insurance, business liability insurance, professional indemnity insurance [designer, architect and construction engineer insurance], D&O insurance policy and property against random events and against theft and burglary insurance, electronic equipment insurance, insurance of property in transport, insurance of plant and machinery) as well as construction and erection insurance policies arranged under general agreements and individual policies allotted to specified contracts. Moreover, Group Companies use motor insurance in the scope of third-party liability insurance, comprehensive motor insurance, theft insurance and accident insurance both under general (fleet) agreements as well as based on individual policies. Both Polimex-Mostostal S.A. and some companies of Polimex-Mostostal Group also purchased medical expenses and personal accident insurance policies for their employees employed on construction sites at home and abroad. As some insurance policies expire as of 31.12.2012 the Company purchased the following policies for 2013:  professional indemnity of designer, architect and construction engineer insurance policy (basic policy) with the guarantee amount of PLN 10 million (consortium of HDI Asekuracja/Allianz/Generali). The policy is valid for 1 year by 31.12.2013;

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

 professional indemnity of designer, architect and construction engineer insurance policy (consortium of Warta/Hestia) – “oversize” policy with the liability limit of PLN 10 million per event without the limit of events. The policy valid by 31.12.2013 was issued by STU Ergo Hestia S.A.;  property in national and international transport (cargo) insurance policy at AIG Europe Limited

Branch in Poland. The policy was concluded for the period of one year and is currently valid by 31.12.2013. In the remaining scope of operations the Company has policies purchased in 2012 which are described in detail in the Directors’ Report on the Operations for 2012. These are the following policies: -

business operations insurance and property owned in the basic scope and with the guarantee amount of PLN 10 million;

-

business operations insurance and property ownership insurance exceeding the scope of the “basic” policy (“oversized” policy) with the liability limit of PLN 90 million per event without the limit of events;

-

special purpose (individual) third part liability policies issued on request of investors for individual high-value contracts;

-

a third party liability insurance policy based on English law for contracts executed in the territory of Great Britain with the sum insured of GBP 5 million;

-

Directors and Officers (D&O) liability insurance policy issued by Dual Corporate Risks Limited with the sum insured of PLN 60 million;

-

construction/assembly works insurance policy against all types of risk covering contracts worth up to PLN 300 million and with the execution period of up to 48 months (a two-year policy for the period from 01.01.2012 to 31.12.2013). Special purpose (individual) policies are issued for contracts with execution period exceeding 48 months or value of more than 300 million.

-

insurance policy for property against random events, property against theft and burglary, including cash in hand in transport, electronic equipment against all risks, machinery against all risks with the Consortium of WARTA/Hestia;

-

compulsory insurance policy of employees delegated or directed to work outside the borders of Poland under accident insurance policy issued by AXA TUiR S.A.;

-

group personal accident insurance policy for employees working on domestic construction sites under the policy with AXA TUiR S.A.;

-

compulsory liability insurance for entities authorized to provide bookkeeping services (PZU S.A. policy)

-

the general contract for motor insurance (fleet insurance) signed with TUiR Warta S.A. valid by 20.04.2013 in the scope of third party liability insurance automatically renewed for another insurance year and valid by 20.04.2014 in the scope of comprehensive motor insurance, theft insurance and accident insurance (a two-year contract). Under the terms and conditions of this policy the vehicles of EnergomontaŜ Północ Technika Spawalnicza, Laboratorium sp. z o.o. and Energop sp. z o.o., the subsidiaries, are also insured.

44

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

In the first six months of 2013 the Capital Group companies utilised the same type of insurance. The type of concluded insurance policies and their description is presented in Directors’ Report for the Operations for 2012. In the first six months of 2013 Polimex-Mostostal S.A. and the Group companies continued collaboration in the scope of insurance policies with the following insurance companies: Warta, AXA, Generali, PZU, Hestia, Compensa, HDI Asekuracja (currently Warta), Gothaer (former PTU), Allianz, InterRisk, AIG Europe, Chartis Europe, Lloyds, Dual Corporate Risks, Groupama, AXA SpA.

3.4. Description of basic features of internal audit and risk management system applied in the Issuer’s Capital Group with regards to preparation of financial statements and consolidated financial statements Polimex-Mostostal S.A. prepares its financial statements and consolidated financial statements based on legal regulations in force and internal regulations. To ensure the correctness and fairness of the books of accounts of Polimex-Mostostal S.A. and Group companies and to generate high quality financial data based on them, the scope was determined and the policies of financial reporting were adopted based on International Financial Reporting Standards and other regulations, as well as the series of internal procedures was implemented in the system of internal control. The system of internal control and of risk management in the financial statement preparation process, whose objective is to ensure effective and efficient control and identification and elimination of potential risks is composed of two major components: • •

functional control performed by managers of individual organizational units and by other employees within their entrusted duties; institutional control performed by internal control units whose objective is examination of practical application of effective procedures,

and related effective regulations on the financial statement preparation process are based in particular on: • • • •

• •

Organisational Regulations of the Company; Documentation on adopted accounting principles; Policy and Procedures of Risk Management; Regulations and procedures relating to fulfilment of reporting obligations arising from acts regulating trading in Polimex-Mostostal S.A. securities in the regulated market and secondary legislation for the above mentioned acts which specify the scope of reporting as well as principles and split of duties concerning preparation of financial statements; Document Circulation Schemes; Scopes of rights and obligations of employees.

The Financial Director and the Board of Directors of Polimex-Mostostal S.A. are responsible for the correctness of the adopted and applied accounting policies. The Chief Accountant and the Department of Reporting and Companies Service are responsible for the organisation of work relating to the preparation of financial statements.

45

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The entire process of preparation and publication of financial statements is conducted based on the formalised schedule of work drafted in agreement with the Finance Director and the Chief Accountant. The financial statements verified by the Finance Director are approved by the Board of Directors. The Supervisory Board in line with §38.1 of the Articles of Association of the Company assesses financial statements and appoints the Audit Committee which is an advisory and opinion forming body. The objective of the Audit Committee is supporting the Supervisory Board in exercising financial control and providing the Supervisory Board with reliable information and opinions enabling making effective decisions in the scope of financial reporting, internal control and risk management as well as ensuring independence and objectivity of the entity authorized to audit financial statements. The entity being a certified auditor is appointed by means of an offering procedure out of the group of reputable audit companies, which guarantee high quality of services and required independence. The main element of the control and risk management with regard to the process of preparation of financial statements is the control exercised by the units of internal audit and of internal control. At Polimex-Mostostal S.A. there is internal auditing operating based on „Regulations of the internal auditing" approved by the Board of Directors of the Company and prepared in accordance with International Standards for the Professional Practice of Internal Auditing. As a result of the internal audit carried out in 2013 risks of examined processes were identified and analysed as well as adequacy and efficiency of control mechanisms were assessed. Risk management is carried out by means of identification and assessment of risk areas and at the same time by undertaking and defining measures aimed at their mitigation or entire elimination in the following areas: • • • • •

Organisation and management; Strategy and its implementation; Operating activity; Support functions; Environment.

The Group Companies adopt their own internal procedures in the scope of control systems and the assessment of risks arising from their operations. Internal control in the entities of the Group operates based on the regulations approved by the Boards of Directors of the Companies. In the majority of companies the internal control is of institutional nature i.e. it is performed by a separate organisational unit. The companies regulate the internal control system on their own depending on the scope of their operations and the needs of the board. Polimex-Mostostal S.A. also takes action to cover the Group companies with the internal auditing and control. Summing up, the system of internal control and risk management covering the entire operations of the Polimex-Mostostal Group is aimed at supporting decision-making processes, which contribute to ensuring effective and efficient operations, reliability of financial reporting and compliance with commonly binding legislation and internal regulations.

46

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

4. Organisation of the Issuer’s Capital Group 4.1. Structure of the Capital Group The chart below presents the organisational structure of the Issuer’s Capital Group, including subsidiaries and associates, as at 30.06.2013. The chart does not present companies in liquidation or discontinuing operations.

Polimex-Mostostal S.A. Domestic companies

Share

Torpol S.A.

100.00%

StalFa Sp. z o.o. Energop Sp. z o.o. *)

100.00% 99.99%

PRInŜ-1 Sp. z o.o. Polimex-Mostostal ZUT Sp. z o.o. Przeds. Produkcyjno-Usługow e Elektra Sp. z o.o. EnergomontaŜ-Pólnoc - Technika Spaw alnicza i Lab. Sp. z o.o. *)

91.06% 100.00% 100.00% 99.96%

Modułow e Systemy Specjalistyczne Sp. z o.o. Centrum Projektow e Polimex-Mostostal Sp. z o.o.

100.00% 99.57%

PxM Projekt Południe Sp. z o.o.

100.00%

WBP Zabrze Sp. z o.o. Pracow nia Wodno-Chemiczna Ekonomia Sp. z o.o.

99.97% 100.00%

Polimex-Development Kraków Sp. z o.o.

100.00%

Polimex-Hotele Sp. z o.o. Polimex-Mostostal Development Sp. z o.o.

100.00% 100.00%

Zarząd Majątkiem Górczewska Sp. z o.o.

100.00%

Polimex Venture Development Sp. z o.o. Sinopol Trade Center Sp. z o.o

100.00% 50.00%

Polimex-Sices Polska Sp. z o.o.

50.00%

EnergomontaŜ-Północ Bełchatów Sp. z o.o. Laboratorium Ochrony Środow iska Pracy Sp. z o.o.

32.82% 27.50%

*) Polimex-Mostostal holds 100% of capital directly and through a subsidiary.

Foreign companies Czerw onogradzki ZKM (Ukraine)

99.61%

Depolma GmbH (Germany)

100.00%

EnergomontaŜ Magyarorszag (Hungary) Grande Meccanica SpA (Italy)

100.00% 100.00%

Polimex-Mostostal Wschód (Russia)

100.00%

Polimex-Mostostal Ukraina (Ukraine) NafIndustriemontage GmbH (Germany)

100.00% 100.00%

47

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

4.2. Information on key entities of the Capital Group In the first six months of 2013 the key entities of the Capital Group are: •

Torpol S.A. Torpol with the registered office in Poznań, initially a limited liability company, has been operating since 1999. On 02.01.2012 Torpol was transformed into a joint stock company. The company offers full-scale construction of railway routes and stations, as well as tramways and traction. The Company specialises in execution of large contracts for example it is participating in the construction of Łódź Fabryczna Complex and E75 Rail Baltica rail road. The company runs capital group. The conducted investment plan allows for gradual widening of the scope of works executed by own means.



StalFa Sp. z o.o. The company was established in 1995 on the initiative of Mostostal Siedlce S.A. The principal scope of StalFa Sp. z o.o. operations is related to manufacturing of light steel structures, telecommunication towers, palettes, grid containers and casing components. The production covers also deliveries for agriculture and forestry.



Energop Sp. z o.o. The company was established in 2003 on the initiative of EnergomontaŜ-Północ S.A. The main activity of the company is manufacturing of pressure pipelines for the transportation of liquids mostly fuels. The company’s offer also includes manufacturing of steel structures, containers, silos, chimneys and air and exhaust ducts. Together with EnergomontaŜ Północ Technika Spawalnicza i Laboratorium, a subsidiary, the Issuer holds 100% of share capital in the Energop company.



PRInŜ -1 Sp. z o.o. The present form of PRInŜ-1 company is the effect of acquisition of PRInŜ-9 in October 2008. The company’s offer covers construction of roads and all types of routes, including lighting and accessory infrastructure. The company closely co-operates with the Road Construction Division (since 01.01.2013 the Segment of Infrastructure Construction), operating in the structures of Polimex-Mostostal S.A.



Polimex-Mostostal ZUT Sp. z o.o. The company was established in 1998 as part of overhaul department of Mostostal Siedlce S.A. Until 2008, it operated under the name Mostostal Siedlce Zakład Usług Technicznych Sp. z o.o. The company deals with overhauls of machines, equipment, apparatus and power tools, and covers also production of spare parts, maintenance, reviews, keeping documentation, distribution of electricity, thermal energy, water, industrial gases, rendering of technical advisory services, preparation of expertise, rental of machines, equipment and apparatus.



Przedsiębiorstwo Produkcyjno-Usługowe Elektra Sp. z o.o. The company was established in 1988. It deals with the construction of high and medium voltage overhead power lines, medium and low voltage buried power lines, supply of transformer stations, construction of overhead and buried power lines of road lightning and corrosion protection of steel structures. In July 2013 the company submitted a petition to declare liquidation bankruptcy at the District Court in Zielona Góra 5th Economic Department. 48

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013



EnergomontaŜ Północ-Technika Spawalnicza i Laboratorium” Sp. z o.o. The history of the company dates back to 1953. The main activity of the company is conducting of all types of tests relating to electrical and gas welding technology. Together with Energop, a subsidiary, the Issuer holds 100 % of company’s share capital. Apart from the laboratory mentioned above, the Issuer has equity links (27.5% of share capital) with Laboratorium Ochrony Środowiska Pracy Sp. z o.o. (Laboratory of Protection of Work Environment) that provides services in the scope described in the business name of the company.



Modułowe Systemy Specjalistyczne Sp. z o.o. The company was established in 2001 on the initiative of Naftoremont and operated under the business name of Moduł System Serwis Sp. z o.o. The company, which has its registered office in Płock, is one of the largest national companies dealing with modular construction and steel frame construction for the purpose of housing and public buildings (e.g. kindergartens). Additionally, the company sells and rents various types of containers.



Design companies Design teams operate both, within organisation structures of particular companies of the Capital Group, and as independent design offices. Organisation and technical systems facilitating creation of integrated design centre focusing on needs of the Capital Group is under development. The following design offices operate as companies: −

Centrum Projektowe Polimex Mostostal Sp. z o.o. with the registered office in Gliwice,



PXM Projekt Południe Sp. z o.o. with the registered office in Kraków,



WBP Zabrze Sp. z o.o. with the registered office in Zabrze,



Pracownia Wodno-Chemiczna Ekonomia Sp. z o.o. with the registered office in BielskoBiała.

The above mentioned companies provide services for the following industries: power engineering, chemical, road construction and general construction. •

Developer companies The developer companies that are within Polimex-Mostostal Capital Group deal with mounting of housing buildings, sale of flats and with real estate administration. In the Capital Group there are the following developer’s companies: − Polimex-Development Kraków Sp. z o.o., − Polimex-Hotele Sp. z o.o., − Polimex-Mostostal Development Sp. z o.o., − Zarząd Majątkiem Górczewska Sp. z o.o., − Polimex Venture Development Sp. z o.o. (former EnergomontaŜ-Nieruchomości Sp. z o.o.). Apart from the first in the list above, all other companies have their registered offices in Warsaw.

49

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Apart from the mentioned above companies registered in Poland, in the composition of the Capital Group there are foreign companies which offer in the countries of their registration their own products or services or the ones produced by the Issuer’s Group. The companies having its own capacity include: •

Grande Meccanica SpA The company has its registered office in Narni (Italy). It provides services for the benefit of refinery sector. In the first six months of 2013 the programme of the extension of the company’s manufacturing capacity in the sea port in Civitavecchia was completed.



Tchervonograd MSP The registered office of the company is in Tchervonograd (Ukraine). The company conducts business activity in the scope of manufacturing of steel structures and metal products, mostly platform gratings.



Polimex-Mostostal Ukraina SAZ The registered office of the company is in Zhytomyr, Ukraine. The company conducts activity in the scope of construction and erection works.

The following companies act as trade agents: •

Polimex-Mostostal Wschód (Russia)



Depolma GmbH and Naf Industriemontage GmbH (Germany)



EnergomontaŜ Magyarorszag (Hungary)

The Issuer also holds 50% interest in Sinopol Trade Center Sp. z o.o., the company registered under the Polish law, whose operations are oriented towards the Chinese market and in PolimexSices Polska Sp. z o.o. which after having completed works for performance of which it was established was put in liquidation in July 2013. Out of the companies in which the Issuer holds a share of less than 50% in equity, EnergomontaŜ Północ Bełchatów Sp. z o.o. should be mentioned, whose main area of activity is a local mine and power plant.

4.3. Employment Polimex-Mostostal S.A. is one of the largest construction groups in Poland and one of the largest employers in the industry. It offers opportunities of employment and professional development to engineers and construction experts. It offers interesting and promising work at numerous ingenious projects – the Company has performed contracts of national importance for key Polish investors. It also completed numerous contracts for foreign ordering parties. Employment In the first six months of 2013 there was a decrease in employment in the Polimex-Mostostal Company of 27.19% as against average employment in the previous year. The average employment in the first six months of 2013 expressed as full time equivalents was 22.41% lower than the average employment in 2012. Over two years average number of full time equivalents decreased from 9,889.09 in 2011 to 9,456.73 in 2012, and in the first six months of 2013 it amounted to 7,337.84.

50

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Decrease of average employment in FTE in 2011-2013 in the Polimex-Mostostal Company with detailed st decrease in employment in the 1 half 2013 by months average employment compared to incrementally as incrementally as period in Full Time previous period compared to 2011 compared to 2012 Equivalents (FTE) 2011 9,889.09 2012

9,456.73

-4.37%

-4.37%

-

01.2013

7,849.07

-17.00%

-20.63%

-17.00%

02.2013

7,600.32

-3.17%

-23.14%

-19.63%

03.2013

7,466.07

-1.77%

-24.50%

-21.05%

04.2013

7,161.45

-4.08%

-27.58%

-24.27%

05.2013

7,064.70

-1.35%

-28.56%

-25.29%

06.2013

6,885.45

-2.54%

-30.37%

-27.19%

01-06.2013

7,337.84

-

25.80%

-22.41%

The decrease of employment in the Company in the first six months of 2013 was the result of continuation of the implemented strategy of employment optimisation after the incorporation of seven subsidiaries in 2011, structural changes such as the liquidation of the logistics division, the disposal of Transformers Division Łódź branch (former Z16, Service Segment) and the decision made by the Board of Directors in July 2012 concerning employment restructuring by means of group redundancies in all areas of the Company distinguished in the new segment structure introduced as of 1 January 2013 i.e. General Construction, Infrastructure Construction, Production, Power Engineering and Chemistry, Service and Back Office Operations. The decision concerning necessary employment reduction was caused in particular by: (i)

(ii) (iii)

a decrease in number of contracts performed by segments and low profitability of completed orders due to increasing prices of raw materials and services and a decrease in margins on new contracts as well as difficulties in acquiring new orders because of the crisis in the general and road construction sector; difficult economic and financial position of the Company caused by the necessity of servicing debt to banks, debenture holders and other creditors of the Company; the change of organizational structure introduced with the resolution of the Board of Directors of 4 July 2012 consisting in formation of five segments in place of existing divisions and the need to adjust employment to the organizational changes.

Employment optimisation measures have been continued since the beginning of 2013. In January this year the Board of Directors decided on 5th stage of group redundancies and then in April 2013 on another 6th stage of the group redundancies. On 26 April 2013 the Company informed trade unions and Employment Agencies of the intention to terminate employment relationships with 1,194 employees in total as part of group redundancies in all segments and back office operations. After having exhausted consultations with trade unions and in light of no understanding concerning group redundancies, with Instruction No. 12/13 of 8 May 2013 the Regulations on termination of employment relationships due to reasons not attributable to employees of Polimex-Mostostal S.A. were introduced. By the end of the 1st half of the year the number of persons intended to be made redundant in the 6th stage of redundancies was reduced to 854 persons in connection with the 51

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

decision to sell the branch of the production plant in Rudnik upon the San River (approx. 350 employees). By the end of June 2013 termination notices were handed in to 154 persons and then after making arrangements with the trade unions the Company suspended handing in termination notices and at the beginning of July 2013 the Voluntary Redundancy Scheme was announced. At the same time in June 2013 the Board of Directors commenced works on distinguishing key areas of the Company’s operations and on changing the organizational structure which is aimed at focusing on the distinguished areas. These arrangements will be implemented in the second half of 2013. One of the components of the implementation of these measures was the disposal of the Galvanising Plant in Częstochowa (part of the Production Segment) in June 2013 and at the same time 145 employees were transferred to a new employer under Article 23 of the Labour Code. As a result of taken measures in the period from 1 January to 30 June 2013 the employment in the Company decreased by 963 FTE which is illustrated in the chart below.

Decrease in FTE in Polimex-Mostostal S.A. 2011-2013

9 889.09

12-2011

9 456.73

12-2012

2011 2012

7 849.07

1-2013

period

01.2013

7 600.32

2-2013

02.2013 03.2013

7 466.07

3-2013

04.2013

7 161.45

4-2013

05.2013

7 064.70

5-2013

06.2013

6 885.45

6-2013

5 000

6 000

7 000

8 000

9 000

10 000

average employment

Changes of average employment in FTE of the Company and of the Group Companies are presented in the table and in the chart below.

Year

Employment

2011

14 038.00

Change as compared to the previous period -

2012

13 575.21

-3.30%

-3.30%

2013

9 653.25

-28.89%

-31.23%

Incremental change -

52

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Decrease in FTE in the Polimex-Mostostal S.A. Group from 2011 to 06.2013

period

2011

14038

2012

13575.21

2013

9653.25 0

2000

4000

6000

8000

10000

12000

14000

16000

average employment

The breakdown of the average employment in FTE in the Polimex-Mostostal S.A. Capital Group in the first six months of 2013 by structure is presented in the table and in the chart below. The average employment in FTE in the Polimex-Mostostal Capital Group in 2013 by structure. Breakdown

Employment

Other

Percentage share 39.71

0.41%

908.38

9.41%

Production

8 705.16

90.18%

Total

9 653.25

100.00%

Back Office

Average employment in FTE in the Polimex-Mostostal S.A. Capital Group in the 1st half 2013 by structure as percentage

0.39% 9.16%

90.45%

Other Back Office Production

53

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Incentive schemes, trainings and development To increase efficiency and quality of work and compliance with the requirements of the Polish law and internal regulations of Polimex-Mostostal S.A. in the scope of health and safety in the 1st half of 2013 2,848 employees were trained as part of the following trainings: − in the scope of health and safety and fire protection on worker, administration and office, engineering and technical positions, for employers and persons managing employees 1,938 employees were trained, of which 141 employees with the use of e-learning. − in the scope of trainings improving know-how concerning changing regulations 69 employees were trained, − in the scope of specialist trainings after which employees obtain qualifications to perform work on a specific position 810 employees were trained, − continuation by the Gdansk Foundation for Management Development of the Executive MBA programme for the managers of Polimex-Mostostal S.A. for 23 employees of the Company. Collaboration with higher education facilities, internships and practical trainings Polimex-Mostostal S.A. organised internship for engineers-to-be addressed to students who completed 4th year of studies and graduates of higher education facilities with not more than one year work experience. Internships were held in Company’s plants or on contracts throughout Poland. For high school students practical trainings for welders were organised after which the best participants could apply for a position in the Company. Due to the location of its main activities the Company tightened collaboration with the Warsaw Technical University, the Silesian University of Technology, the Gliwice Institute of Technology and AGH University of Science and Technology as well as with Collegium Mazovia. Social activity and health care The Company conducts social activity for the benefit of its employees which is specified in the Regulations of Employee Benefits. It covers among other things co-financing of holidays, financial aids and housing loans. Apart from benefits arising from the Regulations of the Company Employee Benefit Fund, Polimex-Mostostal offers its employees the opportunity to join private medical health care scheme and co-financing sporting activities. Additionally, the employer gives its employees the opportunity to subscribe at their own expense to voluntary life insurance policies negotiated with PZU S.A. So far there is a dozen of versions of insurance policies. However, in the second half of this year the number of policies will be limited to 4 as part of the reduction of costs of servicing the policies, there will be four versions of insurance available and the number of persons servicing the policies will be reduced. Matters connected with relationship with trade unions, the Company Collective Labour Agreement The Company Collective Labour Agreement of 30 November 2012 was terminated by the Company with the notice of 2 April 2013. The period of notice of the agreement ends on 31 July 2013. Its provisions shall be applied by the time a new agreement is concluded yet no longer than by 31 October 2013.

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

In connection with the collective dispute initiated by the trade unions, the Company is conducting talks with the trade unions in the following scope: (i)

repealing Instruction No. 10/2013 of the President of the Board of 12 April 2013 on group redundancies;

(ii) refraining from the intention to make 1,194 employees redundant; (iii) paying out bonuses to office workers (it concerns years 2011-2013), (iv) application of the CCLA until the new Agreement is introduced; (v) payments out of the Employee Benefit Fund. The Company agreed to the first request (i), it repealed the internal regulation and submitted the draft of the CCLA to the trade unions and it also informed about the dates and manner of paying out the bonus for years 2011-2013. As far as the wording of the new collective labour agreement is concerned the Company presented its draft of the CCLA to the trade unions. It limits existing benefits (e.g. jubilee bonuses, retirement and disability packages higher than the ones specified in the Labour Code), the limit for allowed overtime was introduced. The talks will be continued in the second half of 2013.

4.4. Changes in composition of management and supervisory authorities of the parent and their committees, basis of appointment and dismissal of executives as well as rights of management, in particular to taking decision on issue or redemption of shares From the beginning of the reporting period by 29 March 2013 the Board of Directors of Polimex-Mostostal S.A. was composed as follows: • Robert Oppenheim Acting President of the Board, • Aleksander Jonek Vice President of the Board of Directors, • Robert Bednarski Vice President of the Board of Directors. On 21 March 2013 Mr Robert Oppenheim filed a resignation from the position of Acting President of the Board and the Member of the Board of Directors of the Company effective as of 29 March 2013. On 28 March 2013 the Supervisory Board of the Company delegated Mr Dariusz Krawczyk holding the position of the Vice President of the Supervisory Board of Polimex-Mostostal S.A. to temporarily perform duties of the Member of the Board of Directors of Polimex-Mostostal S.A. and to act as the President of the Board in the period by 30 April 2013. Then on 24 April 2013 the Supervisory Board of the Company delegated Mr Dariusz Krawczyk again to temporarily perform duties of the Member of the Board of Directors of Polimex-Mostostal S.A. and to act as the President of the Board in the period by 2 June 2013. On 10 May 2013 the Supervisory Board of the Company dismissed Mr Aleksander Jonek, holding the position of the Vice President of the Board, from the Board of Directors. As a result from 29 March 2013 to 10 May 2013 the composition of the Board of Directors of Polimex-Mostostal S.A. was as follows: • Dariusz Krawczyk delegated to perform the duties of the President of the Board, • Aleksander Jonek Vice President of the Board of Directors, • Robert Bednarski Vice President of the Board of Directors. 55

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

From 10 May 2013 to 2 June 2013 the composition of the Board of Directors of Polimex-Mostostal S.A. was as follows: • Dariusz Krawczyk delegated to perform the duties of the President of the Board, • Robert Bednarski Vice President of the Board of Directors. On 23 April 2013 the Supervisory Board appointed to the composition of the Board of Directors for the position of President of the Board Mr Gregor Sobisch for a three year individual term as of 3 June 2013. On 24 April 2013 the Supervisory Board appointed to the composition of the Board of Directors for the position of Vice President of the Board Ms Joanna Makowiecka for a three year individual term as of 3 June 2013. From 3 June 2013 to 30 June 2013 the composition of the Board of Directors of Polimex-Mostostal S.A. was as follows: • Gregor Sobisch President of the Board of Directors, • Robert Bednarski Vice President of the Board of Directors, • Joanna Makowiecka Vice President of the Board of Directors. On 10 May 2013 the Supervisory Board of the Company appointed to the composition of the Board of Directors for the position of Vice President of the Board Mr Arkadiusz Kropidłowski for a three year individual term as of 1 July 2013. In the period from 1 July 2013 until the date of preparation of this report, the composition of the Board of Directors of Polimex-Mostostal S.A. was as follows: • Gregor Sobisch President of the Board of Directors, • Robert Bednarski Vice President of the Board of Directors, • Arkadiusz Kropidłowski Vice President of the Board of Directors, • Joanna Makowiecka Vice President of the Board of Directors. In line with § 41.1 of the Articles of Association (the uniform text of the Articles of Association was adopted under Resolution No.7 of the Extraordinary Meeting of Shareholders of 15 October 2012, Rep. A No. 14512/2012) and § 1.1 of the Regulations of the Board of Directors, the Company governing body holding all powers in the scope of managing the Company is the Board of Directors acting in all matters not reserved for the sole competence of the General Meeting of Shareholders or the Supervisory Board. The Board of Directors is composed of one or more members, the number being specified by the Supervisory Board. The Board of Directors may be composed of the President of the Board, Vice Presidents of the Board and other members of the Board appointed by the Supervisory Board. The appointment of Vice Presidents and members of the Board of Directors is made after having consultations with the President of the Board. In case of appointing a one-person Board of Directors, the Supervisory Board appoints the President of the Board. Members of the Board may be appointed from among shareholders or other persons. The Board of Directors is appointed for a three-year term of office. In line with the Regulation of the Board of Directors, expiration due to end of office term does not limit the possibility of reappointment for the position of a member of the Board. The Supervisory Board has the right to appoint, dismiss and suspend individual or all members of the Board of Directors for major reasons in performing their activity before the expiry of term of office and to delegate members of the Supervisory Board, for a period of no longer than three 56

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

months, to temporarily perform the duties of members of the Board of Directors who are incapable of performing their duties. In line with the Regulations of the Board of Directors, the loss of a position of a member of the Board of Directors also happens by means of resignation from the position of the member of the Board of Directors or loss of legal capacity and if a member of the Board of Director dies. A member of the Board of Directors may be dismissed or suspended in performing his activity with a resolution of the General Meeting of Shareholders. No entitlement of the Board of Directors or its individual members to make a decision on issue or redemption of shares. In the first half of 2013, meetings of the Board of Directors of Polimex-Mostostal S.A. were held on: 03.01, 14.01, 15.01, 17.01, 22.01, 24.01, 25.01, 29.01, 31.01, 05.02, 15.02, 19.02, 27.02, 12.03, 18.03, 20.03, 21.03, 02.04, 04.04, 10.04, 17.04, 23.04, 26.04, 10.05, 20.05, 22.05, 29.05, 06.06, 18.06, 21.06, 24.06, 27.06. In the above mentioned meetings the Board adopted resolution on matters relating to financial and organisational restructuring of the Company and, among other things, on guaranteeing loans, taking out a loan, making and recalling commercial representations, the draft of amendments to the Regulations of the Board of Directors of the Company, convening a GSM, approval of the financial statements and of the investment plan, termination of the CCLA, group redundancies, disposal of real property and of organized parts of enterprise and specifying an adequate criterion to assess the significance of contracts and of assets to perform information duties of the Company on the regulated market. From the beginning of the reporting period by 15 February 2013 the Supervisory Board of Polimex-Mostostal S.A. was composed as follows: • • • • • • •

Jan Woźniak Artur Jędrzejewski Sebastian Bogusławski Andrzej Bartos Dariusz Formela Dariusz Krawczyk Marek Wierzbowski

Chairman of the Supervisory Board, Vice Chairman of the Supervisory Board, Secretary of the Supervisory Board, Member of the Supervisory Board, Member of the Supervisory Board, Member of the Supervisory Board, Member of the Supervisory Board.

On 15 February 2013 the Extraordinary Meeting of Shareholders of Polimex-Mostostal S.A. adopted resolutions No.3 to No.10 making the following amendments to the composition of the Supervisory Board: − persons dismissed: Jan Woźniak, Sebastian Bogusławski, Andrzej Bartos, Dariusz Formela − persons appointed: Jerzy Góra, Tadeusz Kuczborski, Ryszard Engel, Andrzej Kasperek. In the composition amended with the above mentioned resolutions the Supervisory Board established as follows: • • • • • • •

Jerzy Góra Ryszard Engel Dariusz Krawczyk Artur Jędrzejewski Andrzej Kasperek Tadeusz Kuczborski Marek Wierzbowski

Chairman of the Supervisory Board, Vice Chairman of the Supervisory Board, Vice Chairman of the Supervisory Board, Secretary of the Supervisory Board, Member of the Supervisory Board, Member of the Supervisory Board, Member of the Supervisory Board, 57

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

and in the period from 29 March 2013 to 2 June 2013 Mr Dariusz Krawczyk was delegated to temporarily perform duties of the Member of the Board of Directors of Polimex-Mostostal S.A. and to act as the President of the Board of Directors. On 3 June 2013 the Ordinary Meeting of Shareholders of Polimex-Mostostal S.A. adopted resolutions No.30 to No.36 appointing persons for the composition of the Supervisory Board, 11th term. In the new composition the Supervisory Board established as follows: • Jerzy Góra Chairman of the Supervisory Board, • Ryszard Engel Vice Chairman of the Supervisory Board, • Artur Jędrzejewski Secretary of the Supervisory Board, • Wojciech Barański Member of the Supervisory Board, • Andrzej Kasperek Member of the Supervisory Board, • Dariusz Krawczyk Member of the Supervisory Board, • Tadeusz Kuczborski Member of the Supervisory Board. The Supervisory Board was appointed for the period of common term of office. The mandates of members of the Supervisory Board expire not later than on the date of holding the General Meeting approving the financial statements of the Company for the last complete financial period of the current term of office i.e. for the year 2015. In the structure of the Supervisory Board there are two committees: the Audit Committee and the Remuneration Committee. From the beginning of the reporting period by 15 February 2013 the Audit Committee was composed as follows: • Dariusz Formela Chairman of the Committee • Artur Jędrzejewski Member of the Committee • Jan Woźniak Member of the Committee. In the composition amended with the resolutions of the General Meeting of 15 February 2013 the Supervisory Board appointed the following persons to the Audit Committee: • • •

Tadeusz Kuczborski Artur Jędrzejewski Andrzej Kasperek

Chairman of the Committee Member of the Committee Member of the Committee.

Advising the Supervisory Board on issues regarding proper implementation and supervision over financial reporting processes applied by the Company, effectiveness of internal audit and risk management systems, as well as co-operation with qualified auditors, is the basic objective of the Committee’s operations. Particular rights and obligations of the Committee are given in the Regulations of the Supervisory Board. Tasks of the Committee are executed by submittal to the Supervisory Board requests, opinions and statements related to the scope of its tasks. The Committee operates collectively. From the beginning of the reporting period by 15 February 2012 the Remuneration Committee was composed as follows: • Marek Wierzbowski Chairman of the Committee • Andrzej Bartos Member of the Committee • Dariusz Krawczyk Member of the Committee. In the composition amended with the resolutions of the General Meeting of 15 February 2013 the Supervisory Board appointed the following persons to the Remuneration Committee: • •

Jerzy Góra Ryszard Engel

Chairman of the Committee Member of the Committee 58

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

• •

Dariusz Krawczyk Marek Wierzbowski

Member of the Committee Member of the Committee.

In the composition amended with the resolutions of the General Meeting of 3 June 2013 the Supervisory Board appointed the following persons to the Remuneration Committee: • • • •

Jerzy Góra Wojciech Barański Ryszard Engel Dariusz Krawczyk

Chairman of the Committee Member of the Committee Member of the Committee Member of the Committee.

The main task of the Committee is lending support to the Supervisory Board in terms of execution of its control and supervisory tasks by presenting opinions to the drafts of contracts related to holding the position of a member of the Board of Directors and giving opinion on the proposals of amendments to the remuneration and bonus system for members of the Board of Directors. Particular rights and obligations of the Committee are given in the Regulations of the Supervisory Board. Tasks of the Committee are executed by submittal to the Supervisory Board requests, opinions and statements related to the scope of its tasks. The Committee operates collectively. Till the date of preparation of this Report the compositions of the Supervisory Board as well as of the Audit Committee and the Remuneration Committee did not undergo any further changes. Regulations for appointment and functioning of the Supervisory Board are specified in the Company's Articles of Association. In line with § 34 of the Articles of Association the Supervisory Board comprises at least five members appointed by the General Meeting for the period of common term in office. The number of Supervisory Board members for next terms in office is determined by the General Meeting while making appointments. The Articles of Association also specify that at least a half of the total number of member should be independent persons and give premises which should be fulfilled by an independent member of the Supervisory Board. The Supervisory Board of Polimex-Mostostal S.A. is operating under obligating provisions of law, in particular provisions of the Code of Commercial Companies, Company Articles of Association, internal Regulations and the rules given in “Best practices of WSE listed companies".

4.5. Value of remuneration for executives and senior employees The amount of remuneration of persons managing and supervising was given in Note 28 to the interim condensed consolidated financial statements (Remuneration of the Board of Directors and of the Supervisory Board of the Parent Company).

5. Shareholding 5.1. Total number and nominal value of all shares of Polimex-Mostostal S.A. owned by executives and senior employees As at 30.06.2013 executives/senior employees held the following number of shares of the Issuer: Position held

Current number of shares held

Member of the Supervisory 5,700 bearer shares of nominal value of 0.04 PLN each, 5,700 voting shares at the Company General Meeting. Board Total

5,700 bearer shares of nominal value of 0.04 PLN each, 5,700 voting shares at the Company General Meeting.

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

5.2. Shareholders having directly or indirectly by subsidiaries at least 5% of total vote at the General Meeting of Polimex-Mostostal S.A. Due to the fact that the Company is a public company whose shares are in trading on the prime market of the Warsaw Stock Exchange, the company does not have any detailed information on its current shareholding structure. The table below was prepared based on notifications under Article 69 of the Act of 29.07.2005 on public offering, conditions governing the introduction of financial instruments to organized trading and public companies or published in another manner provided for in the regulations. As at 1.01.2013 the only shareholder holding, in accordance with presented announcements, at least five per cent of total vote in the General Meeting of the Company was ING Open Pension Fund (84,487,729 of shares constituting 16.21% of share capital and votes). As at 01.01.2013 the number of Issuer’s shares of all issues was 521,154,076. On 22 January 2013 series M and N1 shares were registered by the Court. After taking up the new issues of shares by the ADI, ING and Pionier the structure of shareholding was as follows:

Shareholder

No. of shares / votes

% interest in share capital/total votes at GSM

1.

Agencja Rozwoju Przemysłu S.A. (the Agency for Development of Industry)

300,000,001

22.49%

2.

ING Open Pension Fund

185,431,892

13.90%

74,829,384

5.61%

72,162,718

5.41%

773,713,311

58.00%

1,333,974,588

100.00%

Item No.

3.

4.

Pioneer Pekao Investment Management S.A., of which: Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. (Pioneer Pekao S.A. Investment Fund Company) Other shareholders Number of shares of all issues

By 30.06.2013 none of the shareholders did give a notification on change of shareholding. On 23.07.2013 the Issuer received information that as a result of selling the shares of the Company, the total commitment of Pionier Pekao Investment Management S.A. (i.e. together with the shareholding of investment funds whose portfolios are managed by PPIM) decreased from 69,629,384 to 66,637,013 shares which constitutes 4.99% of Company’s share capital. For detailed information see Issuer’s statements No. 101/2013 and 102/2013 of 24.07.2013.

5.3. Information on contracts acknowledged by the Issuer (including concluded after the statement of financial position date) and that may change future proportions in shares owned by the current shareholders and bondholders On 21 December 2012 the Company and its subsidiaries „Polimex-Development” Kraków Sp. z o.o. in Cracow, Polimex-Mostostal Development Sp. z o.o. in Warsaw and BR Development Sp. z o.o. in Cracow concluded with Banks and Debenture Holders the Agreement on Regulations of Debt Servicing (the Agreement). 60

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The Agreement mentioned above specifies, among other things, the principles of participation of signatories of the Agreement in taking up shares issued in line with the resolutions of the Extraordinary Meeting of Shareholders of 15.10.2012 on the issue of series M, N1 and N2 shares. In the reporting period series M and N1 shares were taken up, registered and introduced to the WSE of which the Issuer informed in current reports No. 7/2013 of 28.01.2013, No. 8/2013 of 29.01.2013, No. 9/2013 of 29.01.2013 and No. 91/2013 of 27.06.2013. Till the date of preparation of this report the Issuer did not carry out the public offering of series N2 shares. The issue of Series N2 shares is to be organised in the form of closed subscription conducted as an offering made based on the prospectus. The maximum number of issued shares was set at 96,153,846. Moreover, within the Company there are two incentive schemes for managers of PolimexMostostal S.A. and for presidents of certain subsidiaries. In connection with the implementation of the schemes the share capital of the Company was conditionally increased by issuing not more than 19,060,425 series G shares and not more than 23,217,183 series J shares. The current status of this matter is discussed in section 5.7 of this report (Employees shares scheme controlling system) and in note No. 16 to the interim condensed financial statements. Additionally, the share capital of the Company may be conditionally increased by means of issuing not more than 256,630,422 series O shares. The objective of the conditional increase is granting the right to take up series O shares to holders of subscription warrants issued by the Company under resolution No. 6 of the Extraordinary Meeting of Shareholders of 15.10.2012. The Agency for Development of Industry shall be authorised to take up the subscription warrants. The take-up right may be exercised by 31.12.2014.

5.4. List of holders of all securities granting special controlling rights with regards to the parent with their description The parent does not have any securities granting special controlling rights over the Company.

5.5. Acquisition of treasury shares, in particular definition of acquisition purpose, number and nominal value, and part of represented share capital, acquisition prices as well as selling prices in case of disposal In the reporting period the parent company did not acquire any treasury shares. Moreover, pursuant to Article 29.17.(b) of the Agreement on Regulations of Debt Servicing the Company shall not, without a prior written consent of an absolute majority of Creditors - as defined in the above mentioned agreement, acquire own shares or announce the own shares buy-back programme in view of the Commission Regulation (EC) No. 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regard exemptions for buy-back programmes and stabilization of financial instruments.

5.6. Limitation in transfer of ownership rights to securities and limitations in the scope of execution of voting rights arising from shares in the parent As far as the Issuer’s shares are concerned, there are no limitations on transfer of ownership rights arising from securities of the Company, nor limitations in the scope of execution of voting rights arising from securities of the Company. There are no provisions separating equity rights from holding of securities. 61

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

5.7. Employees shares scheme controlling system Based on resolutions of the Extraordinary General Meeting of Polimex-Mostostal S.A. of 31.01.2006, option contracts with the President and Members of the Board of Directors, members of management of Polimex-Mostostal S.A. and chairmen of the boards of directors of subsidiaries were concluded under incentive scheme for the years 2006 – 2008 addressed to key members of the Issuer management. Detailed description of the above-mentioned incentive scheme is included in the current report of the Issuer no 9/2006 of 31.01.2006. On 04.07.2008, the Ordinary Meeting of Shareholders of Polimex-Mostostal S.A. adopted Resolution No. 26 on adoption of the company incentive scheme for the years 2009 – 2011, and conditional increase in share capital connected with the scheme and amendments to the PolimexMostostal S.A. statute as well as issue of the Company subscription warrants. Detailed description of the above-mentioned incentive scheme is included in the current report of the Issuer No. 43/2008 of 04.07.2008. As of 30.06.2013 the balance of provision recognised on account of both above mentioned schemes amounts to PLN 32,086 thousand (as at 31.12.2012 – PLN 32,086 thousand). For details see Note No. 19 to the interim condensed consolidated financial statements (Reserve capital).

5.8. Indication of proceedings pending before court, arbitration procedure authority or public administration authority, which total amount constitutes at least 10% of Issuer’s equity The most important litigations pending as at 30 June 2013 whose total amount is equal to at least 10% of the Issuers equity. Cases brought against the Issuer •

The case instigated by NRM b.v.

The dispute which is being heard before the common Court in Rotterdam relating to the termination and settlement of the subcontract concluded on 14 November 2007 between the Issuer and NEM b.v. to assembly the heat and power co-generating plant in Mongstad, Norway. The value of the subject of litigation is approx. EUR 31 million. •

The case instigated by the State Treasury - the President of the Regional Court in Warsaw

The subject of the litigation is demand to pay a contractual penalty on account of delay in rectification of faults under the contract of 29 December 2003 concluded by Mostostal Siedlce S.A. (the predecessor entity of the Issuer). The value of the subject of the litigation is PLN 17,442,671.06. •

The case instigated by the President of the Public Procurement Office

The subject of the litigation is ascertaining that the contract to grant additional procurement for construction of education and sports complex in Kleszczewo is null and void. The defendant is the consortium whose member is the Issuer. The Issuer’s share in the consortium is 97.47%. The value of the subject of the litigation is PLN 10,657,772.54.

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

Cases instigated by the Issuer • The case against the State Treasury – the General Directorate for National Roads and Motorways On 7 May 2012 the Issuer filed against the State Treasury - the GDNRM a suit for payment in which it demands increasing remuneration in connection with a major design change made by the ordering party which resulted in a significant increase of the scope of works. The value of the subject of the litigation amounts to PLN 114,604,498 and the Issuer’s share is 51 %. •

The case against Koksownia Przyjaźń S.A.

The subject matter of the litigation is demand to increase remuneration as a result of increased prices on the market for construction materials and services in the period of performing the modernization of Coal Derivative Production Division as a construction of a complete turn-key facility. With the judgement of 22 May 2012 the Court of Appeal in Katowice dismissed the appeal of the Issuer from the judgement dismissing the action. On 17 August 2012 the Issuer brought a cassation appeal. The appeal was accepted to be considered. The date of the hearing was set at 6 September 2013. The value of the subject of the litigation amounts to PLN 58,114,940 and the Issuer’s share is 65%. • The case against the State Treasury – the General Directorate for National Roads and Motorways On 3 June 2012 the Issuer brought against the State Treasury – the GDNRM a suit to establish legal relationship and for payment. The Issuer demands an increase of remuneration in connection with an increase in prices of liquid fuel and tarmac as part of performing the design and construction of A-2 Stryków-Konotopa motorway in section 394+500 to km 411+465.8. The value of the subject of the litigation amounts to PLN 36,961,661 and the Issuer’s share is 49 %. • The case against the State Treasury – the General Directorate for National Roads and Motorways On 20 May 2013 a suit was filed against the State Treasury – the GDNRM for reimbursement of the contractual penalty together with interest deducted by the GDNRM on account of lack of the Programme Compliant with the Terms and Conditions of the Contracts relating to A-2 Stryków – Konotopa Contract and ascertaining the provisions of the Contract null and void. The value of the subject of the litigation amounts to PLN 29,121,769.00 and the Issuer’s share is 49 %. •

The case against Helical Sośnica Sp. z o.o. and BNP Paribas

On 8 February 2013 the Issuer filed a suit against Helical Sośnica Sp. zo.o. to determine that the defendant is not authorised to demand a contractual penalty for missing deadlines to perform the contract. On 12 March 2013 a suit was filed against BNP Paribas with demand to prohibit payment out of a bank guarantee. The value of the subject of the litigation in the above mentioned suits was determined at PLN 25,442,404.23. At the same time in the litigations mentioned above decisions were issued granting security against Helical Sośnica Sp. z o.o. and against BNP Paribas, respectively. Arbitration procedures with participation of the Issuer As at 30 June 2013 no arbitration procedures were pending whose total value would amount to at least 10% of the Issuer’s equity. Administrative proceedings with participation of the Issuer As at 30 June 2013 no administrative proceedings were pending whose total value would amount to at least 10% of the Issuer’s equity. 63

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

6. Environmental protection Emission of pollution to the air, emission of liquid waste (industrial, sanitary and residual), solid waste and noise are the by-products of Polimex-Mostostal S.A. activities. The company runs its operations under requirements on environment protection binding in Poland. Polimex-Mostostal activity is regulated in particular by the Act of 27.04.2001 Environmental protection law (Journal of Laws of 2008 No. 25, item 150 as further amended) and Act of 14.01.2013 on wastes (Journal of Laws of 08.01.2013). The Company has all necessary permits and environmental decisions required from enterprises by the Polish and Community law, including: • • • • •

integrated permit regarding metal coating systems with charge exceeding 2 tons of raw steel per hour, water-legal permit to dispose of wastes with substances particularly harmful for water environment, permit to emissions to the air generated from painting houses and steel structures welding systems, as well as platform grating production systems, permit to produce waste generated from painting houses, welding and grating production plants, water-legal permit to intake underground waters.

The issues of environment protection are of great importance for the Company (the Company runs the Integrated Management System such as an implemented ISO 14001:2004 standard: Natural Environment Management System) and actions it undertakes are comprehensive and systematised. From 24th to 27th June 2013 the audit was conducted in the Company in the scope of compliance with ISO 14001:2004 standard. The audit confirmed that the Company is managed in accordance with the highest environmental standards and the applied production process guarantees at the same time the protection of the natural environment by among other things reducing the consumption of energy and materials, improvement of waste management and minimization of the emission of pollution. The system shapes the environmental awareness of the staff, guarantees that the environmental regulations are observed, reduces the risk of fines and improves its environmental credibility. In the first half of 2013, Polimex-Mostostal S.A. was not encumbered with any penalties for exceeding of standards defined in natural protection laws. Natural Environment Protection Department of Polimex-Mostostal S.A. is dealing with coordination of actions taken by the Company in the scope of environmental protection. Emission to the air of pollution, emission of liquid waste (industrial, sanitary and residual), solid waste and noise is the by-product of the Issuer’s subsidiaries. The Companies have all necessary permits and environmental decisions required from enterprises by the Polish and Community law: • to generate waste other than hazardous one, • to disposal of rain wastewaters and technological waste, • to emission of gases and industrial dusts from emitters situated in the factories to the air, Certain production companies, in connection with the nature of the conducted activity and location, additionally have the following permits: • for intake of water from drilled wells for and social and technological needs, • for disposal of treated industrial waste and rain water as well as melting snow directly to surface water-courses.

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The subsidiaries of the Issuer have plans for the management of waste other than hazardous one in closed areas adopted in accordance with regulations in force. Coordination of activities in the scope of environment protection in each company is the responsibility of specialist services, whose structure matches the nature of conducted business activity. Current control over level of emissions of particular wastes, reporting on wastes and control over their neutralisation and recovery, control over liquid waste disposal and periodical monitoring of emission of pollution to the air are the main tasks of these services. Emphasis is placed on management of waste in the scope of storing, securing and transferring to recovery to entities which hold a permit to neutralise waste and keeping a correct quantity and quality register in compliance with the regulation of the Minister of the Environment.

7. Information on entity with which the Issuer has concluded a contract for audit of financial statements On 12.07.2013 the contract was concluded with Deloitte Polska Spółka z ograniczoną odpowiedzialnością Sp. k. with the registered office in Warsaw on audit of the financial statements prepared by Polimex-Mostostal S.A. and Polimex-Mostostal Capital Group for 2013 and review of the financial statements prepared by Polimex-Mostostal S.A. and Polimex-Mostostal Capital Group for the first half of 2013. The total remuneration due to for the above mentioned services amounts to PLN 643 thousand (together with the audit of financial statements of the selected Polish and foreign subsidiaries of Polimex-Mostostal S.A.). The entity authorized to audit did not render in 2013 any other services to the Issuer.

8. Other significant events in the 1st half of 2013 having impact on operations of the Issuer’s Capital Group As a supplement to the information given above, the significant events which occurred in 2013 include: •

On 15.02.2013 the Extraordinary General Meeting of Shareholders of the Company adopted resolutions, in which − It dismissed from the composition of the Supervisory Board the following persons: Jan Woźniak, Sebastian Bogusławski, Andrzej Bartos and Dariusz Formela −

It appointed to the composition of the Supervisory Board the following persons: Ryszard Engel, Andrzej Kasperek, Jerzy Góra and Tadeusz Kuczborski.



It gave consent to establish pledges or registered pledges on the enterprise of the Company or its organized part.

The Issuer communicated the complete text of adopted resolutions in current report No. 19/2013 of 15.02.2013. •

On 03.06.2013 the Ordinary General Meeting of Shareholders of the Company adopted resolutions, in which − It approved the Directors’ Reports on the operations of the Company and of the Capital Group and the standalone and consolidated financial statements for the year 2012. − It approved the report of the Supervisory Board for the year 2012. − It decided to set off the loss against future profits of the Company. − It decided on further existence of the Company (in connection with Article 397 of the Code of Commercial Companies). −

It appointed persons for the composition of the Supervisory Board for the new term. 65

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

The Ordinary Meeting of Shareholders adopted resolutions on acknowledgement of fulfilment of duties by the following members of the Board of Directors of the Company: Robert Bednarski and Robert Oppenheim and it did not adopt resolutions on acknowledgement of duties by the following members of the Board of Directors of the Company: Konrad Jaskóła, Aleksander Jonek, Grzegorz Szkopek and Zygmunt Artwik. The Ordinary Meeting of Shareholders adopted resolutions on acknowledgement of fulfilment of duties by the following members of the Supervisory Board: Jacek Kseń, Artur Jędrzejewski, Andrzej Szumański, Mieczysław Puławski, Jan Woźniak, Sebastian Bogusławski, Andrzej Bartos, Dariusz Formela, Dariusz Krawczyk, Paweł DłuŜniewski and Marek Wierzbowski, and it did not adopt a resolution on acknowledgement of fulfilment of duties by Kazimierz Klęk. The text of resolutions adopted in the General Meeting of Shareholders is included in current report No. 78/2013 of 03.06.2013. •

As a result of taking up of a block of series M shares, which took place after the registration by the Court on 22.01.2013, the share of Pioneer Pekao Investment Management S.A. exceeded 5% of Issuer’s capital and the number of shares held by Pionier Pekao Towarzystwo Funduszy Inwestycyjnych S.A. was 72,162,718 which constitutes 5.41% of the Issuer’s capital, whereas the number of shares held by all clients of Pionier Pekao Investment Management S.A. was 74,829,384 which constituted 5.61% of capital. Detailed information on the above-mentioned transactions may be found in Issuer’s current report No. 7/2013 of 28.01.2013.



As a result of taking up a block of series N1 shares, which occurred after the court registered the issue on 22.01.2013, the number of shares held by ING Otwarty Fundusz Emerytalny S.A. increased to 185,431,892, which constitutes 13.9% of the Issuer’s capital. Detailed information on the above-mentioned transaction may be found in Issuer’s current report No. 9/2013 of 30.01.2013.



As a result of taking up a block of series N1 shares, which occurred after the court registered the issue on 22.01.2013, the number of shares held by the Agency for Development of Industry amounted to 300,000,001, which constitutes 22.49% of the Issuer’s capital. Detailed information on the above-mentioned transactions may be found in current report No. 8/2013 of 29.01.2013.



On 13.02.2013 while executing a preliminary contract of 24.10.2012, the Issuer concluded a conditional contract to sell three real properties located in Gdynia together with attached buildings, structures and machinery for the total price of PLN 43.3 million. The buyer of the real property is MARS Finance 1 spółka z o.o. with the registered office in Warsaw, the company 100% dependent on MARS Closed Investment Fund. Conditions precedent for the contract were fulfilled and on 07.03.2013 the transaction was completed. Together with the disposal of the above mentioned real properties a contract was concluded to dispose of chattels located in them for the total amount of PLN 9.9 million gross. More information is included in current report No. 31/2013 of 08.03.2013. The execution of the transactions was one of conditions precedent for performing the contract to purchase the block of shares of EnergomontaŜ-Północ Gdynia Sp. z o.o. mentioned in section 1.6.1 of this report “Changes in the investment portfolio”.



On 06.02.2013 the Issuer submitted to the Polish Financial Supervision Authority a prospectus prepared in connection with a public offering for 96,153,846 ordinary bearer series N2 shares and application for admitting and introducing 521,154,076 pre-emptive rights Series N2 shares, for 96,153,846 rights to series N2 shares, not more than 96,153,846 ordinary bearer series N2 shares, 416,666,666 ordinary bearer series M shares and 396,153,846 ordinary bearer series N1 shares to trading in the prime market of the Warsaw Stock Exchange. Due to existing market conditions affecting adversely the valuation of the Company’s shares, the Issuer decided to suspend the proceedings pending before the Polish Financial Supervision Authority 66

Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

in the scope of approving a part of the prospectus prepared in connection with the planned public offering of series N2 shares. The procedures in the scope of Company’s application for admitting and introducing to trading on the WSE of series M and N1 shares were continued and as a result on 27.06.2013 the Board of Directors of the Warsaw Stock Exchange adopted a resolution on admitting to trading on the primary market run by the WSE of 416,666,666 series M ordinary bearer shares and of 396,153,846 series N1 ordinary bearer shares of which the Issuer informed in current report No. 91/2013 of 27.06.2013. •

On 26.04.2013 the Issuer concluded with Ocynkownia Śląsk Sp. z o.o. with the registered office in Chrzanów a preliminary contract to sell an organized part of enterprise of the Company i.e. Corrosion Protection Plant Częstochowa Branch in Częstochowa. As conditions precedent included in the preliminary contract were met, on 17.06.2013 the sale contract was concluded with the buyer in which the selling price of the Branch was determined at the total amount of PLN 47,885.0 thousand of which the Issuer informed in current report No. 85/2013 of 17.06.2013.



On 21.01.2013 the Company withdrew from the contract with Świecie Commune to perform construction and technological works together with design for the task of “Inter-Commune Complex for the Disposal of Municipal Waste for the poviats of Świecie and Chełmno in Sulnówek”. The value of the contract amounted to PLN 42,435.0 thousand gross. The withdrawal from the contract was the result of failure of the Ordering party to obtain the payment guarantee. For more information see current report No. 4/2013 of 31.01.2013.



On 02.04.2013 the Board of Directors of the Issuer fully terminated on a three month notice the Company Collective Labour Agreement of Polimex-Mostostal S.A effective as of 31.07.2013. On 30.04.2013 the Board of Directors informed the Regional Labour Inspector in Warsaw of initiating a collective dispute procedure by trade union organizations operating at the Issuer’s. On 27.08.2013 an understanding was concluded which resulted in closing the collective dispute.

9. Events significant for operations of the Issuer’s Capital Group that occurred after 30 June 2013 and to the preparation of the financial statements Apart from the events mentioned above, in the period from 1 July 2013 till the date of preparation of this report the following events significant for the operations of the Capital Group occurred: •

On 12.07.2013 Przedsiębiorstwo Produkcyjno-Usługowe Elektra Sp. z o.o. with the registered Office in Zielona Góra submitted a proposal to declare liquidation bankruptcy at the District Court in Zielona Góra 5th Economic Department. The Issuer’s share in the capital of the company is 100%.



On 15.07.2013 the Issuer received information that the creditor of the Company, Energoaparatura S.A., with the registered office in Katowice filed at the District Court for the Capital City of Warsaw in Warsaw – Economic Department for Bankruptcy and Restructuring a petition to declare liquidation bankruptcy of the Issuer. According to the best knowledge of the Company the liability which the petition concerns is not subject to any legal proceedings or it was not confirmed with any enforcement order. On 01.08.2013 the Court issued a decision to discontinue proceedings. The decision is not final.



On 29.07.2013 the Issuer received information that the creditor of the Company, DAAS Sp. z o.o., with the registered office in Bielsko-Biała filed at the District Court for the Capital City of Warsaw in Warsaw – Economic Department for Bankruptcy and Restructuring a petition to declare liquidation bankruptcy of the Issuer. Based on information obtained by the Company it

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Directors’ Report on the Operations of the Polimex-Mostostal Group for the 6 months ended 30 June 2013

appears that the petition was not processed due to the fact that it contained material formal defects. The Company has taken measures aimed at withdrawing the petition by the creditor. •

On 27.08.2013 the Issuer received information that the creditor of the Company, Lighthouse Consultants Sp. z o.o., with the registered office in Warsaw filed at the District Court for the Capital City of Warsaw in Warsaw – Economic Department for Bankruptcy and Restructuring a petition to declare bankruptcy of the Issuer. Based the information obtained by the Company it seems that the liability which the petition concerns was not confirmed with any enforcement order.



On 07.08.2013 the Issuer concluded with Weldon Sp. z o.o. with the registered office in Brzezówka a contract to sell an organized part of enterprise of the Company i.e. Corrosion Protection Plant Dębica Branch in Dębica. The selling price of the Plant is PLN 18,315.4 thousand. The Issuer informed of concluding the transaction in current report No. 109/2013 of 08.08.2013.



By 31.07.2013 the banks being parties to the agreement specifying the terms and conditions of financing the Company issued on request of the Company under the New Guarantee Facility guarantees in the total amount of over PLN 15 million, which will enable the company to apply for reimbursement of guarantee deposits retained by ordering parties to secure Company’s obligations arising from performed contracts of which the Company informed in current report No. 106/2013 of 01.08.2013.



On 31.07.2013 the Board of the Company received information on the Creditors giving their consent to waive their rights arising from the breech of the Agreement specifying the terms and conditions of financing the Company consisting in (i) failure to generate the total proceeds from issue of series N1, N2 and O shares in the total amount of PLN 250 million and (ii) failure of the Company to conclude annexes to selected construction contracts in the period specified by the Creditors i.e. by 31.07.2013. The Company was obliged by the Creditors to perform the above mentioned obligations by 31.08.2013.

The Board of Directors of Polimex-Mostostal S.A.

Gregor Sobisch President of the Board of Directors

Robert Bednarski Vice President of the Board

Arkadiusz Kropidłowski Vice President of the Board

Joanna Makowiecka Vice President of the Board

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