POLNORD SA CAPITAL GROUP

Transcription

1 POLNORD SA CAPITAL GROUP CONSOLIDATED REPORT FROM 1 JANUARY 2013 TO 31 DECEMBER 2013 GDYNIA, 21 MARCH 2014

2 THE CONSOLIDATED REPORT 2013 INCLUDED: A. LETTER OF PRESIDENT B. MANAGEMENT REPORT ON ACTIVITIES OF POLNORD SA CAPITAL GROUP FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013 C. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS D. STATEMENT OF THE MANAGEMENT BOARD OF CONSOLIDATED FINANCIAL STATEMENT FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013 E. STATEMENT OF THE MANAGEMENT BOARD ON THE ENTITY AUTHORISED TO AUDIT FINANCIAL STATEMENTS F. INDEPENDENT AUDITOR S OPINION OF THE OF THE CONSOLIDATED FINANCIAL STATEMENT FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013 G. INDEPENDENT AUDITOR S REPORT OF THE CONSOLIDATED FINANCIAL STATEMENT FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013

3 LETTER OF PRESIDENT 3 A. LETTER OF PRESIDENT

4 LETTER OF PRESIDENT 4 Dear Sirs and Madams, On behalf of the Management Board of Polnord SA and myself I present the Consolidated Annual Report of the for the year This document is directed to our shareholders, bondholders, capital and financial market participants and to other stakeholders, including in particular the Customers and employees. The Polnord Capital Group concentrates its business on the Polish property development market. The market is strongly connected with the economic situation in our country. In Q2 2013, after five quarters of downward trend, the economic growth rate stopped decelerating in Poland, which indicates that in 2013 the macroeconomic situation became stabilised. Low interest rates were among the factors which stimulated the housing market. Notwithstanding the mortgage loans cost cuts, a strong outflow of capital from low-interest deposits to the real estate market was observed. These trends resulted in slowing down the five-year declining trend in prices of apartments, and there are many reasons to believe that the trend will reverse with the prices starting to grow. For the Polnord Capital Group, 2013 was a year of many changes, challenges and successes. Starting at the beginning of 2013, each consecutive quarter brought significant increase in sales. The fourth quarter ended with the record net result of 401 apartments sold. The sales during the entire 2013 amounted to 1,094 apartments, which is the third result on the market among the listed companies. In comparison, in apartments were sold. As at the end of 2013, the Polnord Capital Group was implementing 10 multi-stage residential projects comprising 1,600 apartments with 85 thousand sq. m of unit usable area (UUA). In 2013, the Group commenced construction of 934 units with the total area of approx. 47 thousand sq. m. The recently commenced development projects are located mainly in Gdańsk ( Dwa Tarasy ) and Ząbki near Warsaw ( Neptun ), and the third stage of the Warsaw investment ( Śródmieście Wilanów ), as well as the next stage of the investment in Olsztyn ( Osiedle Tęczowy Las ). Moreover, through the acquisition of 50% of shares in Semeko Aquasfera Sp. z o.o., Polnord Group participated in realization of the Aquasfera project in Reda near Gdynia. In 2013, the Polnord Capital Group generated net profit in the amount of PLN thousand, and its sales revenues reached the level of PLN thousand. Revenues were generated mainly by the 852 units handed over for use, constructed within the housing projects located in Warsaw, Tricity, Wrocław and Szczecin. As at , the Group offer included 1,316 premises. In 2014, the Group plans to launch 16 investments. 12 constitute subsequent phases of the projects already being implemented, while the other 4 are investment projects initiated, by Polnord itself or with partners, in new attractive locations in Warsaw, Tricity and Wrocław. The projects to be launched may potentially expand the offer by at least 2,200 premises with their total usable area of approx. 123 thousand sq. m was a year of continued actions aiming at optimising the effectiveness of the Group s organisational structure and at reducing indebtedness. The results of these efforts are mirrored in the systematic decrease in selling, general and administrative costs, and the Group s indebtedness level. Aiming at further material cost-cutting we also endeavour to realise the assets which do not belong to the core business activity of the Group or to its adopted strategy. An important element, which has a positive effect on our financial result and cash position, is the pursuit of compensations due to the Group from the Capital City of Warsaw for the land designated for construction of public roads and for takeover by the relevant enterprise of the infrastructure constructed within the Miasteczko Wilanów area in Warsaw.

5 LETTER OF PRESIDENT 5 I would like to use this opportunity to thank all the Employees and Associates of the Polnord Capital Group, whose engagement and professionalism made it possible to achieve good results in the past year. I would like to thank our shareholders, bondholders, and business partners we appreciate your trust and look forward to fruitful cooperation in the current year. Please be assured that we will make all efforts to continue building a leadership position on the housing market, and to maximize the value of the Company, in the interests of its shareholders. Yours faithfully, Piotr Wesołowski President of the Management Board Polnord SA

6 Directors Report for B. MANAGEMENT REPORT ON ACTIVITIES OF POLNORD SA CAPITAL GROUP FOR THE PERIOD FROM JANUARY 1 ST 2013 TO DECEMBER 31 ST 2013

7 Directors Report for SPIS TREŚCI I. COMPANY INFORMATION INTRODUCTION 9 2 MARKET ENVIROMENT 10 3 POLNORD SA CAPITAL GROUP STRATEGY 11 4 SUMMARY OF ACTIVITIES IN 2013 STRATEGY IMPLEMENTATION 11 5 DIVIDENT POLICY 14 6 COMPOSITION OF THE POLNORD CAPITAL GROUP SA 15 7 GOVERNING BODIES OF THE COMPANY 21 8 REMUNERATION AND CASH AWARDS PAID, DUE TO THE MANAGEMENT AND SUPERVISORY BOARD OF THE COMPANY 26 9 SHAREHOLDERS HOLDING AT LEAST 5% OF THE TOTAL NUMBER OF VOTES AT THE GENERAL MEETING OF THE COMPANY 28 II. ACTIVITIES OF THE CAPITAL GROUP MAIN PRODUCTS, GOODS AND SERVICES 34 2 MAIN SALES MARKET 34 3 THE GROUP S DEPENDENCE ON PROVIDERS AND RECIPIENTS 34 4 OPERATIONAL ACTIVITIES OF THE GROUP 35 5 DEVELOPMENT PROJECTS INCLUDED IN THE INCOME STATEMENT (INCLUDING COMPETED PROJECTS) 38 III. FINANCIAL DATA CONSOLIDATED PROFIT AND LOSS ACCOUNT - COMMENT 40 2 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) - COMMENTS 42 3 FACTORS AND EVENTS, ESPECIALLY THOSE OF A NON-TYPICAL CHARACTER, THAT HAD AN IMPACT ON THE PROFIT/LOSS OF THE COMPANY 48 4 DIFFERENCES BETWEEN FINANCIAL RESULTS AND A RECENTLY PUBLISHED FORECAST 48 5 ASSESMENT OF ABILITY TO FULFIL INVESTMENT PLANS 48 IV. OTHER NOTES AND EXPLANATIONS OTHER SIGNIFICANT EVENTS IN 2013: 49 2 LITIGATIONS PENDING BEFORE COURT, RELEVANT ARBITRATION AUTHORITIES, OR PUBLIC ADMINISTRATION AUTHORITIES54 3 THE INFORMATION ON THE CONCLUSION BY POLNORD SA OR ITS SUBSIDIARY OF ONE OR MORE TRANSACTIONS WITH RELATED PARTIES, IF THEY ARE MATERIAL, INDIVIDUALLY OR JOINTLY, AND IF THEY ARE NOT ARM'S-LENGTH TRANSACTIONS ISSUES OF SECURITIES USE OF INFLOWS FROM THE ISSUE 57 5 INDEBTEDNESS OF THE CAPITAL GROUP 59 6 INFORMATION ON GRANTED/RECEIVED SURETIES AND GUARANTEES 60 7 INFORMATION ON CONTRACTED AND TERMINATED LOAN AGREEMENTS 61 8 INFORMATION ON CONTRACTED, GRANTED AND TERMINATED LOAN AGREEMENTS 62 9 IMPORTANT RISK FACTORS AND THREATS EVENTS OCCURRING AFTER THE BALANCE SHEET DATE NOT INCLUDED IN THIS REPORT, THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE FINANCIAL RESULTS 65 V. STATEMENT IN THE APPLICATION OF CORPORATE GOVERNANCE RULES OF CORPORATE GOVERNANCE BY WHICH THE COMPANY IS BOUND AND THE PUBLICLY ACCESSIBLE LOCATION OF THE TEXT 66 2 INFORMATION ON THE EXTENT TO WHICH THE COMPANY DIVERGED FROM THE RULES OF CORPORATE GOVERNANCE, SPECIFICATION OF SUCH PROVISIONS AND EXPLANATION FOR NOT APPLYING THEM 66

8 Directors Report for OPERATION OF THE GENERAL MEETING AND ITS ESSENTIAL RIGHTS, RIGHTS OF THE SHAREHOLDERS AND THE MODE OF EXERCISING THESE RIGHTS 68 4 COMPOSITION, RULES FOR CHANGING THE COMPOSITION AND OPERATION OF THE COMPANY'S MANAGING AND SUPERVISORY BODIES AND THEIR COMMITTEES 69 5 DESCRIPTION OF THE MAIN CHARACTERISTICS OF THE COMPANY'S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE PROCESS OF PREPARING FINANCIAL STATEMENTS 74 6 SHAREHOLDERS HOLDING, DIRECTLY OR INDIRECTLY THROUGH SUBSIDIARIES, SIGNIFICANT STAKES OF SHARES 75 7 HOLDERS OF SECURITIES VESTED WITH SPECIAL RIGHTS OF CONTROL 77 8 LIMITATIONS REGARDING THE RIGHT TO VOTE, SUCH AS A RESTRICTED RIGHT TO VOTE BY HOLDERS OF A SPECIFIC SHARE OR NUMBER OF VOTES, TIME RESTRICTIONS ON THE RIGHT TO VOTE OR PROVISIONS UNDER WHICH, IN COOPERATION WITH THE COMPANY, CAPITAL RIGHTS LINKED TO SECURITIES ARE SEPARATED FROM THE HOLDING OF SECURITIES 77 9 RESTRICTIONS ON THE TRANSFER OF THE OWNERSHIP TITLE TO THE COMPANY'S SECURITIES RULES FOR AMENDING THE COMPANY'S STATUTE 78

9 Directors Report for 2013 Chapter I 9 I. COMPANY INFORMATION Unless the context indicates otherwise, the terms Company, Polnord SA, Polnord, Parent Company or other terms with similar meanings and their grammatical forms shall mean Polnord SA, while the terms: Group, Capital Group, POLNORD Capital Group or other terms with similar meanings and their grammatical forms shall mean the Capital Group composed of Polnord SA and entities subject to consolidation. The term Report refers to this Consolidated Annual Report for 2013, and Directors Report applies to the Report of the Management Board on the business operations of the for the period from to , and Consolidated Financial Statements means the consolidated financial statements of the Polnord SA Capital Group for the period from to INTRODUCTION Polnord SA is one of the most experienced companies on the construction and developer market in Poland. It was established in 1977 as a construction export general contractor. In 1988, it was named Polnord. In 1999, the Company's shares were introduced to trading on the Warsaw Stock Exchange main market. The Company is currently listed in swig 80 and WIG-Deweloperzy indices. Since 2007, the core business of Polnord Group has been development and sale of residential and commercial properties. Polnord implements development projects through special purpose vehicles, which are established without or with partners. Polnord Group operates mainly on the Polish market (especially in Warsaw, Tricity, Szczecin, Łódź and Wrocław), and to a smaller and smaller extent on the Russian market. The Company's objective is to maximize the value of the Company, in the interests of its shareholders, by building a leadership position on the housing market. According to the Polnord Group strategy adopted in late 2012, the group is firmly committed to increasing the volume of housing sales by focusing on the segment of residential real estate in the most absorbent and fast-growing markets in Poland - Warsaw and Tricity. Polnord SA is a founding member of the Polish Association of Developers with its purpose being promoting a code of good practices in the customer developer relations. Polnord SA holds the Developer s Certificate continuously since 2000 which is awarded by the Polish Association of Developers and confirms the Company s professionalism as well as guarantees its integrity in acting for the benefit of a customer. Polnord Group has one of the largest land reserves among Polish developers, allowing at present to carry out projects with usable area of nearly 1 million sq. m. Employing the experience and know-how from the investing and developing activities, Polnord has completed its projects in Warsaw (housing estates: Dobry Dom and Śródmieście Wilanów at ul. Kazachska, as well as Królewskie Przedmieście at Aleja Rzeczypospolitej on Pola Wilanowskie), in Łódź (City Park complex at ul. Żeligowskiego), in Gdańsk (housing estates: Ostoja Myśliwska at Morena and 2 Potoki at ul. Czermińskiego/Przywidzka), in Sopot (Sopocka Rezydencja at ul. Łokietka), in Olsztyn (Osiedle Tęczowy Las) in Szczecin (Ku Słońcu at ul. Kazimierska). Moreover, for several years it also successfully implements its investments in commercial premises sector, managing Wilanów Office Park project in Warsaw.

10 Directors Report for 2013 Chapter I 10 2 MARKET ENVIRONMENT The situation on the Polish real estate development market was steadily improving since the beginning of The factors stimulating demand on the housing market include historically low interest rates and relatively low real estate prices. The level of interest rates translated into a higher creditworthiness of individuals connected with lower costs of debt servicing. Furthermore, since the beginning of 2013, a strong outflow of capital from low-interest deposits to, among other things, the real estate market, was observed. At the beginning of 2013 the downward trend in flats prices slowed down. Figure 1. NBP reference rate in The activity of flats buyers significantly increased in the middle of the year. Significant impact on demand resulted from the information on Recommendation S III entering into force since 2014, accompanied by noticeable decreases in prices. In accordance with the new provisions of the Recommendation the mortgage loans financing 100% of the real property price disappeared from the banks offers. The minimum own contribution required since the beginning of the new year amounts to 5%. Source: NBP In 2014, the housing market, especially in the segment of popular flats, will be affected by the Mieszkanie dla Młodych government support programme. In 2004 the government will earmark PLN 600 million for subsidies to own contribution, which will to some extent mitigate the consequences of the recommendation S III entering into force at the same time and will increase the creditworthiness of buyers taking advantage of this programme in real terms. Figure 2. Number of flats sold on the primary market in Warsaw, Tricity, Crocow, Wrocław, Poznań, and Łódź from the first quarter of 2011 to the fourth quarter of 2013 (in thousands) The fund for a flat for rent will be the second programme of a significant importance to the real estate market. The programme, prepared by the government in cooperation with Bank Gospodarstwa Krajowego, provides for an investment of PLN 5 billion in order to purchase real properties for rent. The fund s portfolio will eventually include 20 thousand flats, including entire buildings that the funds plans to purchase from developers. Works are underway on the final shape of the programme but according to the announcements a purchase of the first properties is expected as early as in the first half of Source: REAS

11 Directors Report for 2013 Chapter I 11 3 POLNORD SA CAPITAL GROUP STRATEGY Polnord s objective is to maximise the value of the Company, in the interests of its Shareholders, by building a leadership position on the housing market and optimising the operating activities. The Company s strategy adopted at the end of 2012 is based on four pillars. Significant increase in the volume of units sold The Group's strategic objective is to achieve annual sales in excess of 1,500 units already in To achieve this goal a dynamic extension of the offer is necessary. The Group plans to launch the implementation of 16 new development projects or consecutive phases of the already implemented projects by the end of 2014, which will increase the Group's offer by approximately 2,200 flats. At the same time, Polnord is constantly looking for new investment opportunities that will enable an increase in sales. The Company is preparing to buy land in prime locations, e.g. in Warsaw and Tricity, and is starting new, high-margin investments in cooperation with its business partners Diagram 1. Strategy Focus of activities on the housing market Polnord focuses its activities on housing projects on the Polish market, particularly in Warsaw and Tricity and their suburbs. These are very absorbent and fast-growing markets which enable profitable development investments. The vast experience of the Company and its knowledge of local markets is a competitive advantage of Polnord. Reduction of selling, general and administrative expenses In 2013, the Company continued to reduce operating costs, in particular selling, general and administrative expenses. The Group's objective was to reduce in 2013 the selling, general and administrative expenses by approximately 17-20% compared to 2012, and in subsequent years to stabilise them at approximately PLN 28 million per year (excluding expenses of Fadesa Polnord Poland and its subsidiaries). Debt reduction The strategic objective of the Polnord Management Board is to considerably reduce the Group s indebtness. Funds for the debt reduction will come primarily from the sale of non-operating assets that are not used in the principal operations of the Company and from compensations received. Polnord plans to reduce net consolidated debt by 1/3 as compared to net debt as of , i.e. to the amount of approximately PLN 425 million by the end of It means that in 2014 Polnord plans to reduce the Group s debt about PLN 100 million, as net debt as at amount PLN 537 million. 4 SUMMARY OF ACTIVITIES IN 2013 STRATEGY IMPLEMENTATION Focus of activities on the housing market and increase in the volume of units sold As at the end of 2013, the Polnord Capital Group was implementing 10 multi-stage residential projects comprising 1,600 units with the total usable area of 85 thousand sq. m of unit usable area (UUA). By the end of 2013, the Group commenced construction of 934 units with the total area of approx. 47 thousand sq. m developed as part of investments in Warsaw, Tricity, Wrocław and Olsztyn. Under IFRS, sales revenues are recognized in profit or loss at the time of the handover of the premises, which does not fully reflect the Group s activity in the reporting period. In order to present the results of the Group s

12 Directors Report for 2013 Chapter I 12 activity in 2013 and in Q table 1 below was prepared, showing the impact of the agreements signed in 2013 separately for Q on the result and operating cash flows that will be recognized in the financial statements at the time of handover of the units. Reduction of selling, general and administrative expenses Irrespective of the intensification of sales activities, the Group continues activities aimed at the reduction of its selling, general and administrative expenses which in 2013 amounted to PLN 34,705 thousand, a decrease of 28% compared to the last year with PLN 48,175 thousand in It is the lowest level of selling, general and administrative expenses since Debt reduction In 2013 gross interest debt decreased by PLN 112,929 thousand, while net interest debt decreased by PLN 98,721 thousand. The charts below show the dynamics of the selected financial and operational data.

13 Directors Report for 2013 Chapter I 13 Table 1. Expected operating income and planned direct margin on sales from units sold on 2013 Investment Q 2013 number 1) of premises sold revenues 2) direct margin on sales 2) * direct cost allocated to land 2) ** net operating income 2) *** number 1) of premises sold revenues 2) direct margin on sales 2) * direct cost allocated to land 2) ** net operating income 2) *** [units] [PLN 000] [PLN 000] [PLN 000] [PLN 000] [units] [PLN 000] [PLN 000] [PLN 000] [PLN 000] Królewskie Przedmieście Investment sold out Dobry Dom Investment sold out Śródmieście Wilanów (build. A) Śródmieście Wilanów (build. C) Śródmieście Wilanów (build. D) Neptun Ostoja Myśliwska Apartamenty Albatros Potoki I Potoki II Potoki III Sopocka Rezydencja Dwa Tarasy I Aquasfera Osiedle Tęczowy Las (build. 4) Osiedle Tęczowy Las (build. 5) Osiedle Tęczowy Las (build. 6) Ku Słońcu I Ku Słońcu II (build. 2) Ku Słońcu II (build. 1) City Park Ostoja Wilanów Osiedle Innova TOTAL ) Data not weighted with Polnord s share 2) Data weighted with Polnord s share * direct margin on sales calculated as revenue from sales reduced by costs of land, design and workmanship (excluding financial costs) ** as at the balance sheet date, the land is owned by the Group. The investment implementation will allow return on investment *** net income calculated as revenue from sales contracts, reduced by direct costs and increased by the value of the land The above figures represent estimates to the Management Board s best knowledge at the date of this Report.

14 Directors Report for 2013 Chapter I 14 Figure 3. Selected financial and operational data Net profit and gross sales profitablilty Net sales of units [kpln] ,1% ,4% 13,3% 19,4%* ,2% ,0%* ,4% 4,5% Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 25% 20% 15% 10% 5% 0% [units] [units] * corrected by a write-down for inventories, that does not affect development projects Net sales Polnord Other (Rosja, Aquasfera) Quarterly net sales Fadesa Selling, general and administrative expenses Net interest debt 5 DIVIDENT POLICY As far as the dividend policy is concerned, the Management Board applies the principle of making payments in proportion to the amount of generated profit and to the financial position of the Company. The Company intends to pay regular dividends in the future. When making proposals concerning the possibility of dividend payout, the Management Board takes into account the need to ensure to the Company the liquidity and capital necessary for business development. As at the date of the Report, the Issuer's Management Board does not plan to recommend the payment of dividend for the years This situation may change, if the Group obtains significant inflows in the form of compensation from the Capital City of Warsaw and MPWiK described in Chapter IV, item 2. of the Directors Report. In the last two financial years, the Company did not declare and did not pay dividends due to the decision to keep in the Company funds for investments and business development and to secure liquidity due to the slowdown on the real estate market. On the Company's Ordinary General Meeting, by way of resolution No 5/2013, decided to fully allocate Polnord SA 2012 net profit to supplementary capital.

15 Directors Report for 2013 Chapter I 15 6 COMPOSITION OF THE POLNORD CAPITAL GROUP SA Composition of the Polnord Capital Group SA includes Polnord SA as the parent company and companies subject to consolidation. The Group s financial statements were prepared for the financial year ended and cover the period from to , and they contain relevant comparative data as at and for the period from to The duration of the Parent Company and companies comprising the Group as at is indefinite. Table 2. Basic Company data Full name (company name) POLNORD Spółka Akcyjna Registered office Gdynia, ul. Śląska 35/37 Number in the National Court Registered (KRS) Tax identification Number (NIP) Statistical Identification Number (REGON) Registered share capital PKD (Polish Classification of Business Activities) Website PLN (paid in full) 6810 Z buying and selling of own real estate Detailed information on subsidiaries, mutually dependent entities and associates in the Group as at are presented in Chapter VI, item 2 of the Consolidated Financial Statements. The diagram presented below illustrates the structure of organizational and capital links of Polnord as at

16 Directors Report for 2013 Chapter I 16 POLNORD SA Polnord Szczecin Ku Słońcu Sp. z o.o. (formerly Polnord Szczecin I Sp. z o.o.) 100% shares Polnord Łódź City Park Sp. z o.o. (formerly Polnord Łódź II Sp. z o.o.) 100% shares Polnord Sopot II Sp. z o.o. 100% shares 100% shares Fadesa Polnord Polska Sp. z o.o. Stacja Kazimierz Sp. z o.o. 49% shares 50% shares Polnord Olsztyn Tęczowy Las Sp. z o.o. (formerly Osiedle Tęczowy Las Polnord Spółka Akcyjna SKA) 100% shares Polnord Warszawa-Ząbki Neptun Sp. z o.o. (formerly Polnord Wilanów B2 Sp. z o.o.) 100% shares Polnord Gdańsk Dwa Tarasy Sp. z o.o. 100% shares Śródmieście Wilanów Sp. z o.o. (formerly Polnord Warszawa - Wilanów I Sp. z o.o.) 100% shares SURPLUS Sp. z o.o. (formerly Skarbiec Nieruchomości 3 Sp. z o.o.) 100% shares SURPLUS Sp. z o.o. SKA (formerly Skarbiec Nieruchomości 3 Sp. z o.o. SKA) 100% shares Stacja Kazimierz Sp. z o.o. SKA 50% shares Stacja Kazimierz I Sp. z o.o. 50% shares Stacja Kazimierz I Sp. z o.o. SKA 50% shares Semeko Aquasfera Sp. z o.o. 50% shares Polnord Marketing Sp. z o.o. 100% shares Stroj Dom ZSA (Rosja) 100% shares 10 H Sp. z o.o. 100% shares Polnord - Apartamenty Sp. z o.o. 100% shares Hydrosspol Sp. z o.o. w likwidacji 30% shares SURPLUS Sp. z o.o. Domitus SKA FPP Powsin Sp. z o.o. 100% shares Osiedle Innova Sp. z o.o. 100% shares FPP Osiedle Moderno Sp. z o.o. 100% shares Wilanów Office Park - budynek B1 Sp. z o.o. (formerly Polnord Warszawa - Wilanów III Sp. z o.o.) 100% shares Wilanów Office Park - budynek B3 Sp. z o.o. (formerly Polnord Warszawa - Wilanów IV Sp. z o.o.) 100% shares Consolideted using the full method Conolidated using the proportional method Not included in the consolidation Consolidated using the equity method Polnord Gdynia Brama Sopocka Sp. z o.o. 100% shares Moreover, Polnord has 1,757,295 shares in the share capital of Korporacja Budowlana Dom SA, corresponding to 1,757,295 votes, representing 17.70% of the share capital of Korporacja Budowlana Dom SA and 17.70% of the total voting rights in the general meeting of shareholders of Korporacja Budowlana Dom SA. A detailed description of the rules for preparing the consolidated financial statements is presented in chapter VI item 5 of the Consolidated Financial Statements, in section Additional Notes and Explanations.

17 Directors Report for 2013 Chapter I 17 Identification of the effects of changes in the structure of the Capital Group, including those resulting from mergers of businesses, acquisitions or disposals of the Company s Capital Group entities, long-term investments, division, restructuring and discontinuation of activity In 2013, there were the following changes in equity and organisational relations of Polnord: Entity name Description of the event Polnord subsidies and Registration of merger of companies On , in the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register the merger of Polnord (the Acquirer ) with the following companies, wholly owned subsidiaries: Polnord - Łódź I Sp. z o.o. with its registered office in Gdynia, Polnord- Łódź III sp. z o.o. with its registered office in Gdynia, Polnord Nieruchomości Inwestycyjne Sp. z o.o. with its registered office in Gdynia, and PD Development sp. z o.o. with its registered office in Gdynia (the Acquired Companies ). The merger took place pursuant to Art. 492(1)(1) of the Commercial Companies Code, by transferring all assets of the Acquired Companies to the Acquirer (merger by acquisition) without increasing the share capital of the Acquirer. The merger of companies was accounted for in Polnord SA books of accounts under the acquisition method. The share of Polnord SA in the capital of all absorbed companies amounted to 100%. Registration of the capital increase Surplus Sp. z o.o. SKA On an increase in the share capital of Surplus Sp. z o.o. SKA from an amount of PLN 15 million to PLN 16 million i.e. the amount of PLN 1 million through the issuance of 1 thousand shares with a nominal value of PLN 1 thousand each and an issue value of PLN 100 thousand each was registered by the District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register. The newly issued shares were acquired by Polnord SA in exchange for noncash contributions. Shareholders exercise rights to shares with a total nominal value of PLN 6,001 thousand. The remaining shares are own shares of Surplus Sp. z o.o. SKA purchased for their redemption. Registration of the new company Polnord Gdańsk Dwa Tarasy Sp. z o.o. On , Polnord Gdańsk Dwa Tarasy Sp. z o.o. with its registered office in Gdynia was established, with its share capital of PLN 5 thousand (100 shares of PLN 50 each). All shares were acquired and overlaid with a cash contribution by Polnord. The company was registered on in the Register of Entrepreneurs of the National Court Register by the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register Registration of the new company Stacja Kazimierz I Sp. z o.o. On Stacja Kazimierz I Sp. z o.o. with its registered office in Warsaw was registered by the District Court for the Capital City of Warsaw in Warsaw 13th Commercial Division of the National Court Register, with its share capital of PLN 5 thousand (100 shares of PLN 50 each). 50 shares with a total value of PLN 2.5 thousand were taken and overlaid with a cash contribution by Polnord SA; the remaining 50 shares with a total value of PLN 2.5 thousand were taken by MS Waryński Development SA.

18 Directors Report for 2013 Chapter I 18 Registration of the change in the company s name and transformation Osiedle Tęczowy Las PD Development Sp. z o.o. Spółka Komandytowo- Akcyjna On the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register registered the change of the company's name Osiedle Tęczowy Las PD Development Sp. z o.o. Spółka Komandytowo- Akcyjna into Osiedle Tęczowy Las Polnord Spółka Akcyjna Spółka Komandytowo- Akcyjna as Polnord SA as a successor of PD Development Sp. z o.o. became a general partner in the company. Subsequently, on the District Court for Gdańsk-Północ in Gdańsk, 8th Commercial Division of the National Court Register registered a transformation of Osiedle Tęczowy Las Polnord Spółka Akcyjna Spółka Komandytowo-Akcyjna into Polnord Olsztyn Tęczowy Las Spółka z ograniczoną odpowiedzialnością. The transformation took place in accordance with Art. 556 (2) and Art. 563 of the Commercial Companies Code. Registration of the new company 10 H Sp. z o.o. On , 10 H Sp. z o.o. with its registered office in Gdynia was established, with its share capital of PLN 5 thousand (100 shares of PLN 50 each). All shares were acquired and and overlaid with a cash contribution by Polnord. The company was registered on in the Register of Entrepreneurs of the National Court Register by the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register. Registration of the new company Stacja Kazimierz I Sp. z o.o. Spółka Komandytowo- Akcyjna On Stacja Kazimierz I Sp. z o.o. Spółka Komandytowo-Akcyjna with its registered office in Warsaw was registered by the District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register, with its share capital of PLN 50 thousand (100 shares of PLN 500 each). 50 series B registered shares with a total value of PLN 25 thousand were taken and overlaid with a cash contribution by Polnord SA, the remaining 50 series A registered shares with a total value of PLN 25 thousand were taken by MS Waryński Development SA. Conclusion of the agreement on the sale of shares for redemption Surplus Sp. z o.o. SKA On Surplus Sp. z o.o. SKA performing the preliminary agreement on the sale of shares for redemption of entered into agreement with a Polnord shareholder (successor to PD Development Sp. z o.o.) under which Surplus Sp. z o.o SKA, upon fulfilling the required conditions, purchased on thousand series B own shares with the numbers: 10,018-14,968 with a total nominal value of PLN 4,951 thousand. In accordance with Art.364 (2) of Commercial Companies Code Surplus Sp. z o.o. SKA does not exercise participation rights carried by its own shares. Entering into rights and obligations of the company Surplus Sp. z o.o. On Surplus Sp. z o.o. entered into the rights and obligations of Pompey Sp. z o.o. as general partner of Pompey Sp. z o.o. Domitus SKA with its registered office in Warsaw which has a capital contribution to the company in the amount of PLN 100. Acquisition of shares in the company Polnord SA On , Polnord SA acquired 100% of shares of Pompey Sp. z o.o. Domitus SKA with its registered office in Warsaw, with the total nominal value of PLN 50 thousand.

19 Directors Report for 2013 Chapter I 19 Reduction of the share capital Surplus Sp. z o.o. SKA Pompey Sp. z o.o. Domitus SKA On the Extraordinary General Shareholder's Meeting of Surplus Sp. z o.o. SKA adopted a resolution on redemption of 33 own shares of the series A registered shares with a total nominal value of PLN 33 thousand and shares of the company's own series B registered shares with a total nominal value of PLN 14,917 thousand representing a total of 14,950 own shares with a total nominal value of PLN 14,950 thousand acquired by the Company for redemption from Surplus Sp. z o.o. and Polnord SA. On the Extraordinary General Shareholder's Meeting of Surplus Sp. z o.o. SKA also adopted a resolution on reduction of the share capital from PLN 16 million to PLN 1,050 thousand. Reduction of the share capital was subject to the procedure notifying the creditors of share capital reduction referred to in Art. 456 (1) of the Commercial Companies Code; in accordance with the decision of the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register issued on Registration of changing the name On , a change of the name Pompey Sp. z o.o. Domitus SKA into Surplus Sp. z o.o. Domitus SKA was registered as well as change of its registered office of Warsaw into Gdynia were registered. Registration of the new company Stacja Kazimierz Sp. z o.o. On , the District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register entered Stacja Kazimierz Sp. z o.o., with its registered office in Warsaw, with its share capital in the amount of PLN 5 thousand (100 shares of PLN 50 each) into the register of entrepreneurs of the National Court Register. 50 shares with a total value of PLN 2.5 thousand were taken and overlaid with a cash contribution by Polnord SA; the remaining 50 shares with their total value of PLN 2.5 thousand were taken by MS Waryński Development SA. Registration of the new company Polnord Gdynia Brama Sopocka Sp. z o.o. On , Polnord Gdynia Brama Sopocka Sp. z o.o. with its registered office in Gdynia was established, with its share capital of PLN 5 thousand (100 shares of PLN 50 each). All shares were acquired and overlaid with a cash contribution by Polnord. The company was registered on in the Register of Entrepreneurs of the National Court Register by the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register. Registration of the new company Stacja Kazimierz Sp. z o.o. SKA On , the District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register entered into the register of entrepreneurs of the National Court Register Stacja Kazimierz sp. z o.o. SKA, with its registered office in Warsaw, with its share capital of PLN 50,000 (100 shares of PLN 500 each). 50 series B registered shares with a total value of PLN 25 thousand were taken and overlaid with a cash contribution by Polnord SA, the remaining 50 series A registered shares with a total value of PLN 25 thousand were taken by MS Waryński Development SA.

20 Directors Report for 2013 Chapter I 20 Acquisition of shares Polnord SA Polnord- Apartamenty Sp. z o.o. On , Polnord SA acquired from Semeko Grupa Inwestycyjna Sp. z o.o., with its registered office in Gdynia, 50% of shares in the SPV Semeko Aquasfera Sp. z o.o. with its registered office in Gdynia for the price of PLN 10 million. The shares were taken and overlaid with a cash contribution Registration of the capital increase On an increase in the share capital of Polnord-Apartamenty Sp. z o.o. from an amount of PLN 50 thousand to PLN 1,050 thousand was registered by the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register. Registration of the capital increase Surplus Sp. z o.o. Domitus S.K.A. On an increase in the share capital of Surplus Sp. z o.o. Domitus S.K.A. from an amount of PLN 50 thousand to PLN 3,550 thousand was registered by the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register. The following changes took place after the balance sheet date: Entity name Description of the event Transformation of the Company Surplus Sp. z o.o. SKA On the Extraordinary General Shareholder's Meeting of Surplus Sp. z o.o. SKA adopted a resolution on transformation of Surplus Sp. z o.o. SKA into a registered partnership (Polish spółka jawna). The transformation took place on , i.e. at the moment of registering the registered partnership resulting from transformation of Surplus Sp. z o.o. SKA in the District Court for Gdańsk - Północ in Gdańsk, 8th Commercial Division of the National Court Register. Registering the capital increase Polnord Łódź City Park Sp. z o.o. On an increase in the share capital of Polnord Łódź City Park Sp. z o.o. from an amount of PLN 50 thousand to PLN 1,050 thousand was registered by the District Court for the Capital City of Warsaw in Warsaw, 8th Commercial Division of the National Court Register. As at , the percentage of voting rights held by the Group in the subsidiaries, jointly controlled entities and in associates corresponded to the percentage held in the share capital of those entities. Changes in the methods of managing the Company and the Capital Group In 2013 no changes were introduced into the methods of managing the Company and the Capital Group. Companies excluded from consolidation Hydrosspol Sp. z o.o., a company under liquidation which ceased its operation was not included in the consolidated financial statements. The financial data of this company are insignificant from the perspective of the consolidated statements.

21 Directors Report for 2013 Chapter I 21 7 GOVERNING BODIES OF THE COMPANY Management Board As at , the Company's Management Board was composed of: According to the Company's Statute, the Company s Management Board may be composed of 2 to 6 members, appointed for a joint three-year term of office. On , the Company s Supervisory Board appointed the Company s Management Board for another joint three-year term of office which will end on the day of the General Meeting approving the financial statements of the Company for Short description of the Members of the Management Board: Piotr Wesołowski - President of the Management Board He is a graduate of the Gdańsk University of Physical Education. He has been active in the construction industry for over 20 years. In 1991 he established UNI-BUD MARMURY, a company in which he acted as the President of the Management Board. He disposed of the shares in April 2005 followed by establishing WES- BUD Nieruchomości, a developing company in which he acted until taking over the position of the Vice President of the Management Board in Polnord. Since he is the President of the Management Board of the Company and from to he was the Vice President of the Management Board. Tomasz Sznajder - Vice President of the Management Board He graduated from the Faculty of Management and Economics at the Gdańsk University of Technology and he participated in PhD studies at Warsaw School of Economics. Since 2009 he is the CFO in the Company. During he acted as the Managing Director in the production plant in Kwidzyn (producing cardboard packaging) belonging to the large international capital group SCA in Sweden. During he worked as a finance and banking expert and manager including 3 years in the Investment Banking Department in BGŻ SA, dealing with issues of debt securities. Since he is the Vice President of the Management Board of the Company and in the period from to he was a Member of the Management Board. Changes in the composition of the Company's Supervisory Board in 2013: Date Description of the event Name and surname Resignation from the function of the Vice President of the Management Board Granting a commercial proxy to make declaration of intent with one member of the Management Board Andrzej Podgórski Anna Kreft Krystyna Mirecka

22 Directors Report for 2013 Chapter I 22 During the period from the balance sheet date to the date of publication hereof no changes in the composition of the Company's Management Board took place. Supervisory Board As at , the Company's Supervisory Board was composed of: The Supervisory Board is composed of 5 to 7 members. The current three-year term of office of the Supervisory Board began on and will end on the day of the General Meeting approving the financial statements of the Company for Short description of the Members of the Supervisory Board: Andrzej Podgórski He is a graduate of the Faculty of Chemistry at the University of Warsaw, gained a PhD in chemical science. In 1991 he passed the exams required from the members of supervisory boards. During he was scientifically active in Poland, Canada, the U.S. For three years ( ) he worked at the Ministry of Ownership Transformation, initially as an advisor to the Deputy Secretary of State and since 1992 as the Director of the Capital Privatization Department, responsible for major transactions involving the sale of shares in the State Treasury companies. Over the period of he worked in the banking and brokerage sector as a director and Member of the Management Board of Polski Bank Rozwoju SA and the President of the Management Board of Dom Inwestycyjny BRE Bank S.A. Since September 2002 to he was a Member of the Management Board of Prokom Investments SA, responsible for launching and financing projects, mainly in real estate development, as well as capital investment exit strategy. From to he was the Vice President of the Management Board of Polnord SA. He has vast experience in supervisory functions. For eight years ( ) he was the Chairman of the Supervisory Board at Polnord. On the Extraordinary General Meeting appointed Mr. Andrzej Podgórski as a Member of the Supervisory Board and on , during an Extraordinary General Meeting of Shareholders, he was entrusted the position of the Chairman of the Supervisory Board. Piotr Nadolski A graduate of Warsaw School of Economics, specialization in Quantitive Analysis and Information Systems, MA in He was a member of management boards in: Sandfield Capital a venture capital entity as President of the Management Board ( ), V National Investment Fund Victoria SA (Ballinger Capital Group) as President of the Management Board of the national investment fund ( ). He was also the Vice President of the Management Board of FUND.1 National Investment Fund (Ballinger Capital group). Over the period Mr Piotr Nadolski worked as a financial analyst at Warta-Vita SA. Since 2010 he has been a partner at Lighthouse Capital. He has experience in supervisory functions. On , during a General Meeting he was appointed the Vice Chairman of the Supervisory Board.

23 Directors Report for 2013 Chapter I 23 Piotr Chudzik A graduate of the Faculty of Economics at the University of Łódź. Holds MBA diploma from Richard Ivey School of Business, University of Western Ontario, Canada. He has over 20 year of experience in investment banking and corporate finance acquired during his professional career in Poland, CEE and in Canada. Over the period he was a Member of the Management Board at Hambros Central Europe Sp. z o.o. During he was a Vice President at Bankers Trust, Investment Banking Division. He was the Head of Corporate Finance at Deutsche Bank in Warsaw and in London from 1999 to During he was the Managing Director for Central Europe at Nomura International, Investment Banking Division in London and a Member of the Management Board at Nomura Corporate Advisory CEE Sp. z o.o. in Warsaw. He passed the exam for candidates and members of supervisory boards of the entities in which the State Treasury is a shareholder, conducted by the Commission of the Treasury Minister. He has experience in performing supervisory functions. Marcin Dukaczewski He studied International Relations at the Faculty of Journalism and Political Science of the University of Warsaw. Since 2001 he was connected with Prokom Investments SA Capital Group where we participated in the main IT and capital projects within Prokom Software SA as well as in investment and commercial projects implemented by Bioton SA, Petrolinvest SA, Polnord SA and other entities of the Prokom Investments SA Group. He is the Vice President of the Management Board of Prokom Investments SA. He has experience in performing supervisory functions. Maciej Grelowski He has degree a degree in economics. Lecturer of management and corporate governance at universities he also gained his experience as an advisor on corporate matters. Since February 2007 r. he was an advisor to the Management Board at Operator Logistyczny Paliw Płynnych Sp. z o.o. and during he was the President of Polski Instytut Dyrektorów (Polish Institute of Directors). He has experience in performing supervisory functions. Artur Jędrzejewski He graduated from Warsaw School of Economics with MA Diploma in finance and banking. During the period he continued studying at Warsaw School of Economics (PhD studies) specializing in Insurance and Pension Funds. In 2003 he graduated from the University in Minnesota with the Master of Business Administration diploma (WEMBA). He used to be the President of Management Board in the following companies: Carlson Capital Partners Sp. z o.o. ( ) and Gaudi Management SA ( ). Mr Artur Jędrzejewski worked also in Netia Telekom SA as the Business Analysis Director and Budget Officer. During he was the Mergers and Acquisitions Director at BRE Corporate Finance SA. Since 2003 he is the Managing Director at Carlson Private Equity Ltd. with its registered office in the U.K. and since 2010 he is the President of the Management Board at Bouchard & Cie A.G. with its registered office in Switzerland. Artur Jędrzejewski also has vast experience in supervisory functions. Zygmunt Roman He studied law at the University of Gdańsk. He passed judicial exam and the exam for legal counsels. Mr Zygmunt Roman worked as legal counsel at Bank Gdański SA during and in the law office of Cameron McKenna&Co. ( ). In he was a judge at the Warsaw Stock Exchange. In he was the Member of the Supervisory Board in one of the companies in II NFI SA. Since 1996 Mr Zygmunt Roman is a partner at Law Office of Windmill Gąsiewski & Roman. More details are presented in current report No 13/2014 of

24 Directors Report for 2013 Chapter I 24 Changes in the composition of the Company's Supervisory Board in 2013: In 2013, the composition of the Supervisory Board changed as follows: Date Description of the event Name and surname Resignation from the function of a Member of the Supervisory Board Barbara Ratnicka-Kiczka Appointment by the Company's Extraordinary General Meeting as a Member of the Andrzej Podgórski, Piotr Chudzik Supervisory Board Resignation Appointment by the Company's Ordinary General Meeting to the Supervisory Board for a joint three-year term of office Appointment by the Company's Extraordinary General Meeting as a Member of the Supervisory Board Ryszard Krauze, Tomasz Buzuk, Piotr Chudzik, Marcin Dukaczewski, Maciej Grelowski, Andrzej Podgórski, Przemysław Sęczkowski, Andre Spark, Wiesław Walendziak, Piotr Wawrzynowicz Ryszard Krauze from the function of the Supervisory Board Chairman and a Member of the Supervisory Board and Przemysław Sęczkowski, Andre Spark, Wiesław Walendziak, Piotr Wawrzynowicz and Tomasz Buzuk from their positions of members of the Company s Supervisory Board Artur Jędrzejewski, Piotr Nadolski, Zygmunt Roman The following changes took place after the balance sheet date to the date of publishing this Report in the composition of the Supervisory Board of the Company: Date Description of the event Name and surname Dismissal of all the Members of the Supervisory Board The Extraordinary Meeting of Shareholders made changes in the composition of the Supervisory Board of the Company. To enable the appointment of the Supervisory Board of the Company following the mode and principles set forth in 13(2) of the Company s Articles of Association, the Extraordinary General Meeting of Shareholders of the Company changed the composition of the Supervisory Board: Appointing of 3 Members of the Supervisory Board Prokom Investments SA with its registered office in Gdynia, acting pursuant to 13(2)(a) of the Company s Articles of Association, appointed 3 members of the Supervisory Board, i.e.: Piotr Chudzik, Maciej Grelowski, Marcin Dukaczewski, Artur Jędrzejewski, Piotr Nadolski, Andrzej Podgórski, Zygmunt Roman Andrzej Podgórski jako Przewodniczący Rady Nadzorczej, Marcin Dukaczewski, Maciej Grelowskiego