DIRECTORS’ REPORT ON THE OPERATIONS OF THE BEST … · registered office, in Gdańsk, Sopot, Warsaw or other place specified in the notice of the General Meeting. The Annual General

Gdynia, March 22nd 2018

DIRECTORS’ REPORT ON THE OPERATIONS OF THE BEST GROUP AND BEST S.A.

IN 2017

COMPANY OVERVIEW ............................................... 5

SUMMARY OF PERFORMANCE IN 2017 ................................................... 4

OPERATING AND FINANCIAL REVIEW ........................... 7

THE GROUP’S BUSINESS AND DEVELOPMENT DIRECTIONS .............. 17

MATERIAL RISK FACTORS AND THREATS .......................................... 27

CORPORATE GOVERNANCE .......................................... 33

CONTENTS

I.

II.

III.

IV.

V.

1.1. GROUP STRUCTURE ...................................... 5

1.2. CHANGES IN GROUP’S STRUCTURE IN 2017 ....................................................... 6

1.3. CHANGES IN KEY MANAGEMENT POLICIES OF BEST S.A. AND THE BEST GROUP ............... 6

2.1. KEY PRODUCTS, SERVICES, MARKETS AND SOURCES OF SUPPLY ............................. 7

2.1.1. Investing activities ............................................................. 72.1.2. Debt management ............................................................ 8

2.2. MARKETS AND SOURCES OF SUPPLY, INCLUDING CUSTOMERS OR SUPPLIERS WITH AT LEAST 10% SHARE IN REVENUE ....... 8

2.3. ANALYSIS OF SELECTED FINANCIAL DATA .......................................... 8

2.3.1. Structure of operating income ........................................... 82.3.2. Structure of operating expenses ........................................ 102.3.3. Financial results ................................................................. 112.3.4. Assets, equity and liabilities ............................................. 122.3.5. Cash flows (direct method) .............................................. 132.3.6. Financial instruments ........................................................ 142.3.7. Information material to the assessment of the staffing

levels, assets, financial condition and financial results, or changes in any of the foregoing, and information material to the assessment of the Company’s ability to meet its obligations ...................................................... 14

2.3.8. Significant events after the reporting date ....................... 162.3.9. Position of the Management Board of BEST S.A.

on the feasibility of meeting any previously published forecasts for 2017 .............................................................. 16

3.1. MATERIAL AGREEMENTS ............................... 17

3.1.1. Significant agreements material to the Group’s business, including shareholder agreements, insurance, partnership or cooperation agreements ........................... 17

3.1.2. Non-arm’s length related-party transactions ...................173.1.3. New and terminated loan or credit facility agreements ... 173.1.4. Bonds ................................................................................. 173.1.5. Loans granted .................................................................... 183.1.6. Sureties and guarantees provided ..................................... 183.1.7. Agreement with the auditor .............................................. 183.1.8. R&D achievements ............................................................. 193.1.9. Sponsorship, charitable giving and similar initiatives ...... 19

3.2. GROWTH PROSPECTS ................................... 20

3.2.1. Polish debt trading market ................................................ 203.2.2. Italian debt trading market ............................................... 233.2.3. Financing of debt purchase transactions .......................... 243.2.3.1. Transaction structure.......................................................... 243.2.3.2. Operations .......................................................................... 25

3.3. COURT, ADMINISTRATIVE AND ARBITRATION PROCEEDINGS WITH A VALUE EXCEEDING 10% OF THE COMPANY’S EQUITY ................... 26

5.1. CORPORATE GOVERNANCE CODE APPLICABLE TO THE COMPANY .......................................... 33

5.2. SCOPE OF NON-COMPLIANCE WITH THE CORPORATE GOVERNANCE PRINCIPLES .... 33

5.3. SHAREHOLDING STRUCTURE ......................... 34

5.3.1. List of shareholders holding directly or indirectly major holdings of shares (at least 5% of total voting rights in the Company) ........................................................ 34

5.3.2. Holders of any securities conferring special control powers, and description of those powers ........................... 35

5.3.3. Any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the Company’s cooperation, the financial rights attaching to securities are separated from the holding of securities ............................................. 35

5.3.4. Restrictions on transferability of ownership rights to the Company’s securities ................................................. 35

REMUNERATION POLICIES .................................................. 42

DIRECTORS’ REPORT ON THE OPERATIONS OF BEST S.A. ............................................ 44

VI.

VII.

5.4. OPERATION OF THE GENERAL MEETING AND ITS KEY POWERS; SHAREHOLDERS’ RIGHTS AND THE MANNER OF EXERCISING THOSE RIGHTS, INCLUDING IN PARTICULAR THE PRINCIPLES STIPULATED IN THE RULES OF PROCEDURE FOR THE GENERAL MEETING ........................... 35

5.4.1. Operation of the General Meeting and its key powers ....... 355.4.2. Shareholders’ rights and the manner of exercising

those rights .......................................................................... 36

5.5. GOVERNING BODIES ...................................... 37

5.5.1. Composition of the Company’s management, supervisory and administrative bodies and of their committees; changes in their composition occurring during the financial year ................................................................. 37

5.5.1.1. Management Board ............................................................. 375.5.1.2. Supervisory Board ................................................................ 375.5.1.3. Audit Committee ................................................................. 375.5.1.4. Remuneration Committee ................................................... 375.5.2. Holdings of Company shares by the management

and supervisory personnel .................................................. 38

5.6. RULES GOVERNING APPOINTMENT AND REMOVAL OF THE MANAGEMENT STAFF. POWERS OF THE MANAGEMENT STAFF, INCLUDING IN PARTICULAR THE AUTHORITY TO RESOLVE TO ISSUE OR BUY BACK SHARES.... 38

5.7. ACTIVITIES OF THE COMPANY’S MANAGEMENT, SUPERVISORY OR ADMINISTRATIVE BODIES AND OF THEIR COMMITTEES ........................... 39

5.7.1. Operation of the Management Board ................................. 395.7.2. Operation of the Supervisory Board .................................... 395.7.3. Operation of the Supervisory Board committees ............... 40

5.8. RULES GOVERNING AMENDMENTS TO THE ARTICLES OF ASSOCIATION .................. 40

5.9. DIVERSITY POLICY ........................................ 41

5.10. KEY FEATURES OF THE COMPANY’S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS, WITH REFERENCE TO THE PROCESS OF PREPARATION OF SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTS ................................................. 41

5.11. NON-FINANCIAL STATEMENT ......................... 42

6.1. REMUNERATION SYSTEM .............................. 42

6.1.1. Remuneration .................................................................... 426.1.2. Share-based incentive schemes ........................................ 436.1.3. Phantom Share Incentive Scheme ..................................... 43

6.2. SIGNIFICANT AMENDMENTS OF THE REMUNERATION POLICY IN THE LAST FINANCIAL YEAR .......................................... 43

6.3. AGREEMENTS BETWEEN THE COMPANY AND ITS MANAGEMENT PERSONNEL PROVIDING FOR COMPENSATION IN THE EVENT OF RESIGNATION OR DISMISSAL ......... 43

6.4. ASSESSMENT OF THE REMUNERATION POLICY IN TERMS OF ACHIEVEMENT OF ITS GOALS, IN PARTICULAR LONG-TERM SHAREHOLDER VALUE CREATION AND THE COMPANY’S STABILITY ........................... 43

7.1. ANALYSIS OF SELECTED SEPARATE FINANCIAL DATA .......................................... 44

7.1.1. Structure of operating income ........................................... 447.1.2. Structure of operating expenses ....................................... 447.1.3. Financial performance figures .......................................... 457.1.4. Assets, equity and liabilities ............................................. 457.1.5. Cash flows (indirect method) ........................................... 46

7.2. INFORMATION MATERIAL TO THE ASSESSMENT OF THE STAFFING LEVELS, ASSETS, FINANCIAL CONDITION AND FINANCIAL RESULTS, OR CHANGES IN ANY OF THE FOREGOING, AND INFORMATION MATERIAL TO THE ASSESSMENT OF THE COMPANY’S ABILITY TO MEET ITS OBLIGATIONS ............................ 47

BEST S.A.Directors’ Report on the operations of BEST S.A. and its Group in 2017

4

32% increase in debt recoveries by the Group

26% y/y increase in full cash EBITDA

34% y/y increase in the value of the Group’s debt portfolio

Debt ratio at 1.56

Launch of operations in Italy

Record-high portfolio investments, in excess of PLN 300m

Third public bond issue programme, worth PLN 350m

PLN 250m private placement of bonds

PLN 19m issue of BEST shares

Over PLN 303m raised to fund new investments

Key financial data 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Investments in debt portfolios 300,8 258,3 42,5 16%

Fair value of debt portfolios attributable to the Group

965,5 721,2 244,3 34%

Debt recoveries attributable to the Group 238,3 180,0 58,3 32%

Full cash EBITDA 186,8 148,2 38,6 26%

Debt ratio 1,56 1,35 0,21 15%

SUMMARY OF PERFORMANCE IN 2017

KEY DEVELOPMENTS IN 2017

Debt recoveries attributable to the Group

Investments in debt portfolios

full cash EBITDA

PLN 238.3m

PLN 300.8m

PLN 186.8m


5

COMPANY OVERVIEWI.

1.1. GROUP STRUCTURE

BEST S.A. (“BEST”, the “Company”, the “Issuer”) is the parent of the BEST Group (the “Group”, “GK BEST”). The Company was incorporated by a notarial deed on April 12th 1994. The registered office of BEST is located in Gdynia. The Company is entered in the Register of Businesses maintained by the District Court Gdańsk-Północ in Gdańsk, 8th Commercial Division of the National Court Register, under KRS No. 0000017158. The Tax Identification Number (NIP) assigned to the Issuer is 585-00-11-412. BEST is listed on the official market of the Warsaw Stock Exchange and its shares are traded in the continuous trading

system. BEST conducts its principal business, i.e. management of receivables of securitisation funds, under a licence granted by the Polish Financial Supervision Authority.

The graph below presents the structure of the BEST Group and our ownership interests in a jointly-controlled entity and an associate as at December 31st 2017.

* jointly-controlled entity, not a Group member within the meaning of IFRS** associate, not a Group member within the meaning of IFRS

0,30%

33,04%

51%

90%

50%

26,98%

73,02%

BEST TFI S.A.Kancelaria Radcy Prawnego

Rybszleger sp. k

KREDYT INKASO S.A.**

BEST Nieruchomości sp. z o.o.

BEST Capital Italy S.r.l.

BEST Capital FIZAN

BEST S.A.

BEST III NSFIZ*

BEST I NSFIZ

BEST II NSFIZ

BEST IV NSFIZ

100%

99,70%

100%

100%

100%


6

Name Registered office Principal activity

BEST TFI S.A. (the “Management Company”) Gdynia, Poland creation and management of investment funds

BEST Capital FIZAN Gdynia, Poland investing cash in securities, money market instruments and other rights in property as specified in the Articles of Association

BEST I NSFIZ Gdynia, Poland investing cash in securitised debt portfolios

BEST II NSFIZ Gdynia, Poland investing cash in securitised debt portfolios

BEST IV NSFIZ Gdynia, Poland investing cash in securitised debt portfolios

BEST Capital Italy S.r.l. Milan, Italy investing in debt portfolios

BEST Nieruchomości Sp. z o.o. Gdynia, Poland management of investment property and property used as collateral in securitisation funds

Kancelaria Radcy Prawnego Rybszleger sp.k. Gdynia, Poland legal services

BEST III NSFIZ* Gdynia, Poland investing cash in securitised debt portfolios

Kredyt Inkaso S.A.** Warsaw other financial services

The BEST Group prepares consolidated financial statements, comprising financial statements of the above subsidiaries, and the effect of changes in the Group’s ownership interests in BEST III NSFIZ and Kredyt Inkaso S.A. as a jointly-controlled entity and an associate, respectively.

In 2017, the key management policies of BEST and the BEST Group did not change.

1.2. CHANGES IN GROUP’S STRUCTURE IN 2017

1.3. CHANGES IN KEY MANAGEMENT POLICIES OF BEST S.A. AND THE BEST GROUP

* jointly-controlled entity, not a Group member within the meaning of IFRS ** associate, not a Group member within the meaning of IFRS

For more information, see Note 5.1 to the consolidated financial statements.

For details on changes in the Group’s structure in 2017, see Note 5.1 to the consolidated financial statements.


7

Name Group’s share in

portfolios

Number of debts

(thousand)

Nominal amount of

debts (PLNbn)

BEST I NSFIZ 100% 521,0 5,8

BEST II NSFIZ 100% 488,1 4,5

BEST IV NSFIZ 100% 230,9 0,9

BEST III NSFIZ 50% 392,3 3,5

BEST Capital Italy 100% 39,2 1,2

OPERATING AND FINANCIAL REVIEWII.

2.1. KEY PRODUCTS, SERVICES, MARKETS AND SOURCES OF SUPPLY

2.1.1. Investing activities

We invest in non-performing retail, corporate and mortgage debt portfolios. As at December 31st 2017, the nominal amount of debts purchased and managed by us in Poland was approximately PLN 14.7bn. Debts are held by four investment funds managed by BEST TFI. In 2017, we launched activities in Italy and purchased our first debt portfolios on the market through a special purpose vehicle. As at December 31st 2017, the nominal amount of debt portfolios purchased on the Italian market was PLN 1.2bn.

As we also acquire mortgage-backed debts, in justified cases enforcement against such collateral will end in seizing the property in exchange for the debt. In view of a complex legal environment, poor efficiency of authorities or debtor’s practices, seizure of real property during the enforcement process is often the only way to effectively dispose of such property. This way, we have come into possession of several properties, and therefore we may be involved in commercialisation of such properties in cooperation with reputable partners having a proven track record in this area.

Total nominal amount of debt under management

PLN 14.7bn

ERC of managers’ portfolios

PLN 2,252m


8

2.1.2. Debt management

Debt portfolios under management (Poland) 2017

Number of debts in portfolios under management (millions) 1,6

Nominal amount of managed portfolios (PLNbn) 14,7

Fair value of portfolios under management (PLNm) 1 002,6

ERC* of portfolios under management (PLNm) 2 251,7

up to 1 year 313,9

1 to 5 years 1 133,2

over 5 years 804,6

Although we invest in debt portfolios on Polish and Italian markets, we are now managing only Polish portfolios on our own. These portfolios are held by Polish securitisation funds. We classify non-performing debts as retail, corporate and mortgage debts. Each type of debt requires a different approach. Retail debts are managed in bulk, as they comprise a large number of relatively small claims. Corporate and mortgage debts, on the other hand, are managed on a case-by-case basis because every case requires a thorough legal analysis, and there are fewer claims although their balances are high. The management of such debts involves tailor-made strategies based on financial and legal restructuring.

* estimated remaining collections from portfolios of funds under management

2.2. MARKETS AND SOURCES OF SUPPLY, INCLUDING CUSTOMERS OR SUPPLIERS WITH AT LEAST 10% SHARE IN REVENUE

We entered the Italian market in 2017, but we did not recognise any significant revenue from our Italian business for that period. Revenue generated in Poland accounted for more than 98% of total income. Our business is not substantially cyclical or seasonal. As in the previous year, our operating income structure was dominated by income from investments in debt portfolios, which accounted for almost 90% of total operating income. The only external customer whose share in our total sales by value exceeds 10% is BEST III NSFIZ, our jointly-controlled entity.

Our suppliers were mainly postal and telecommunications operators as well as IT companies, but none of them had a share exceeding 10% of our revenue. We are not significantly dependent on any of the suppliers. Nevertheless, we pursue a policy of diversification of providers for services that are important to our operating processes.

Our operating income is derived mainly from investments in own receivables. In 2017, they accounted for 76% of total income. We also generate income from holding shares in BEST III NSFIZ (50%) and from managing the fund and its receivables. It accounted for 18% of the total income. The third source of

income are returns from the investment in Kredyt Inkaso, accounting for 2% of the total income.

2.3. ANALYSIS OF SELECTED FINANCIAL DATA

2.3.1. Structure of operating income

Operating income 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Operating income from core activities, including: 191.667 209.104 (17.437) (8)%

Investments in debt portfolios 176.210 189.679 (13.469) (7)%

BEST III NSFIZ management income 14.862 16.977 (2.115) (12)%

Other 595 2.448 (1.853) (76)%

Other income 6.906 1.174 5.732 >100%

Total 198.573 210.278 (11.705) (6)%


9

Income from investments in debt portfolios in 2017 was PLN 176.2m, having decreased by 7% from 2016. The main component of this item is income from recoveries and valuation of debt portfolios. Its amount depends on the total amount of recoveries, as well as changes in the carrying amount of debt portfolios. We are pleased with the continued growth of recoveries (48% y/y), as discussed below, however the revaluation of debt portfolios is also noteworthy. It amounted to PLN -44.4m in 2017, which means that the

natural decline in the carrying amount of portfolios exceeded any potential upward revaluations. Significantly more revaluations occurred in 2016, when the amount of this item was PLN +15.7m. The absence of upward revaluations of debt also resulted in lower returns on the share in BEST III NSFIZ. On the other hand, driven by strong recoveries, investment income increased year on year and, importantly, it is much more cash-based.

The strongest growth was recorded for recoveries of own receivables, at PLN 195.1m in 2017, an increase of PLN 63.3m (48%) y/y. Recoveries attributable to the Group, which include half of the recoveries attributable to BEST III NSFIZ, were PLN 238.3m (32%), having increased by PLN 58.4m (32%) y/y.

For a few years, BEST III NSFIZ has not made any new investments, which results in a natural decline in the stream of recoveries from one period to another.

Debt repayments 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

own receivables 195.084 131.745 63.339 48%

receivables of BEST III NSFIZ (50%) 43.253 48.240 (4.987) (10)%

debt recoveries attributable to the Group 238.337 179.985 58.352 32%

Investments in debt portfolios 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Income from recoveries and valuation of debts 150.677 147.416 3.261 2%

income from recoveries 195.084 131.745 63.339 48%

revaluation of debts (44.407) 15.671 (60.078) >(100)%

Gains from ownership interest in BEST III NSFIZ 21.187 38.411 (17.224) (45)%

Gains from ownership interest in Kredyt Inkaso S.A. 4.346 3.852 494 13%

Total 176.210 189.679 (13.469) (7)%

in operating income

Debt recoveries attributable to the

Group

Almost

PLN 199mPLN 238mIncrease in recoveries from

own portfolios

48%


10

The increasing amount of recoveries partially results from investments made in recent periods. In 2017, we invested in excess of PLN 300m, with a stronger focus on portfolio diversification. Although we had purchased portfolios almost exclusively from the banking sector, in 2017 a vast majority of investments were made in debt originating outside the banking sector, mainly from telecoms

and lending companies. In 2017, we established our presence in Italy and purchased our first debt portfolios on the market. Continuous improvements in the debt management process and investments in technological solutions also make an important contribution to the increase in recoveries.

Investments in debt portfolios 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

banking 58.362 191.325 (132.963) (69)%

other 242.466 67.013 175.453 >100%

Total, including: 300.828 258.338 42.490 16%

Polish market 246.186 258.338 (12.152) (5)%

Italian market 54.642 0 54.642 -

“We executed a few transactions in Italy in 2017 and we would like the country to become another major market for our business. The performance of the Italian portfolios over the recent months has been very satisfactory. It should be noted that we have a carefully selected and experienced team of experts in Italy, which helps us better understand the intricacies of the local market and make more informed investment decisions. The latter are made prudently, relying on a thorough performance analysis. We may choose not to close any transactions that do not offer good prospects and fail to live up to our high standards. At the same time, we have built a substantial transaction pipeline, which will allow us to maintain the expected growth rate in the region. In December 2017, the BEST Group purchased a debt portfolio from ICCREA banking group with a total nominal amount of EUR 128m,” – said Krzysztof Borusowski, President of the Management Board of BEST S.A.

2.3.2. Structure of operating expenses

Operating expenses 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Salaries with overheads 41.965 33.559 8.406 25%

Taxes and charges 33.209 20.749 12.460 60%

Services 23.897 14.097 9.800 70%

Depreciation and amortisation expense 5.239 4.106 1.133 28%

Other 2.907 4.185 (1.278) (31)%

Total 107.217 76.696 30.521 40%

Our operating expenses in 2017 were PLN 107.2m, having increased by PLN 30.5m (40%) y/y. Obviously, the increase was mainly due to our growing business scale and the resulting rise in labour costs, which totalled PLN 42.0m, having increased by PLN 8.4m (25%) y/y. The number of employees at the Group increased considerably in 2017, from 510 at the end of 2016 to 569 at the end of 2017. Ahead of the planned legislative changes involving reduction of the statute of limitations period for claims confirmed by an instrument

permitting enforcement from 10 to 6 years, we incurred significant costs to proceed with cases that would become time-barred upon the entry into force of the amendments. The increase affected the amount of Taxes and charges. 2017 also marked the beginning of our international expansion. When establishing our presence in Italy, we incurred costs to establish appropriate structures for purchasing debt portfolios on the local market.


11

2.3.3. Financial results

Profit/loss 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Operating income, including: 198.573 210.278 (11.705) (6)%

income from recoveries 195.084 131.745 63.339 48%

revaluation of debts (44.407) 15.671 (60.078) >(100)%

Operating expenses 107.217 76.696 30.521 40%

Operating profit 91.356 133.582 (42.226) (32)%

Full cash EBITDA 186.831 148.249 38.582 26%

net finance costs, including: 35.296 93.814 (58.518) (62)%

revaluation of investment in Kredyt Inkaso S.A. 0 69.253 (69.253) -

borrowing costs 35.638 25.171 10.467 42%

Profit before tax 56.060 39.768 16.292 41%

Income tax 1.008 997 11 1%

Net profit (loss) 55.052 38.771 16.281 42%

In 2017, operating profit totalled PLN 91.4m, which represented a decrease by 32% y/y despite growing recoveries. There were no material revaluations of debt portfolios, and therefore the revaluation of debts was negative at PLN -44.4m. Our net result was also significantly affected by borrowing costs since a large portion of our investments was financed with debt. Although the debt service expense totalled PLN 35.6m, having increased by PLN 10.5m (42%) relative to the previous year, overall finance costs were considerably lower than in 2016. As a result, we earned a net profit of PLN 55.1m, an increase of 42% y/y.

in full cash EBITDA

Almost

Net profit

PLN 187m

PLN 55.1m


12

2.3.4. Assets, equity and liabilities

Assets in decreasing order of liquidity 2017(PLNm)

%share

2016(PLNm)

%share

Assets, including:

purchased debt 866.453 69,5% 611.111 67,5%

holdings in jointly-controlled entities 100.981 8,1% 111.951 12,4%

holdings in associates 109.007 8,7% 106.703 11,8%

cash 91.208 7,3% 22.045 2,4%

other 78.269 6,3% 53.055 5,9%

Total 1.245.918 100,0% 904.865 100,0%

Purchased debt remains the key item in the structure of our assets, representing almost 70% of total assets at the end of 2017. Its carrying amount was PLN 866.5m, having risen by PLN 255.3m y/y. The increase was mainly attributable to investments in debt portfolios made in 2017.

Another important asset item is Holdings in jointly-controlled entities (BEST III NSFIZ certificates), which accounted for 8% of total assets, or PLN 101.0m. The value of investment certificates held declined by almost PLN 11m y/y, driven by consistent distributions of surplus funds to fund participants.

Holdings in associates (shares of Kredyt Inkaso) are similar in value terms, representing almost 9% of total assets at PLN 109.0m and having increased by PLN 2.3m y/y, driven by the rising net asset value of Kredyt Inkaso.

Other assets account for 6.3% of total assets and comprise mainly property, plant and equipment, intangible assets, investment properties and receivables.

As at December 31st 2017, our assets totalled over PLN 1.2bn, having increased by PLN 341.1m (38%) y/y.

Fair value of debt

in total assets

More than

Over

PLN 866m

PLN 1.2bn


13

Equity and liabilities 2017(PLNm)

%share

2016(PLNm)

%share

Liabilities, including: 816.145 65,5% 548.638 60,6%

financial liabilities 760.015 61,0% 503.949 55,7%

liabilities under purchases of debt portfolios 38.879 3,1% 28.497 3,1%

Equity, including: 429.773 34,5% 356.227 39,4%

share capital 23.127 1,9% 22.328 2,5%

retained earnings 345.539 27,7% 290.896 32,1%

Total 1.245.918 100,0% 904.865 100,0%

74% of our expenditure on debt portfolios in 2017 was financed with bond issues and bank loans. This drove the financial liabilities to PLN 760m, marking an increase by PLN 256.1m y/y. Despite the growth, the net debt to equity ratio

was 1.56 and remained significantly lower than the maximum acceptable to BEST bondholders.

Cash Flow 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change%

Net cash from operating activities, including: (165.814) (117.763) (48.051) 41%

debt recoveries (BEST I NSFIZ, BEST II NSFIZ, BEST IV NSFIZ, BEST Capital Italy) 195.084 131.745 63.339 48%

salaries and profit-taking from BEST III NSFIZ 47.237 41.554 5.683 14%

investments in debt portfolios (290.452) (229.164) (61.288) 27%

court and enforcement fees paid (47.280) (23.912) (23.368) 98%

operating expenditure (75.431) (51.344) (24.087) 47%

other net items 5.028 13.358 (8.330) (62)%

Net cash from investing activities, including: (4.027) (17.295) 13.268 (77)%

acquisition of intangible assets and property, plant and equipment (4.150) (17.282) 13.132 (76)%

other items 123 (13) 136 >(100)%

Net cash from financing activities, including: 238.836 113.909 124.927 >100%

bond issue 237.462 174.497 62.965 36%

borrowings (other than bonds) 46.982 49.000 (2.018) (4)%

issue of shares 19.096 36.496 (17.400) (48)%

service of bonds (42.577) (104.956) 62.379 (59)%

borrowing and lease costs (other than service of bonds) (21.638) (40.670) 19.032 (47)%

other items (489) (458) (31) 7%

Total movements in cash 68.995 (21.149) 90.144 >(100)%

Effect of exchange rate fluctuations on cash held 168 0 168 -

Cash at beginning of period 22.045 43.194 (21.149) (49)%

Cash at end of period 91.208 22.045 69.163 >100%

2.3.5. Cash flows (direct method)


14

In 2017, we collected over PLN 195m in recoveries from purchased debt portfolios, which is over PLN 63m more than in 2016. Due to our business model, the expenditure incurred on debt portfolios is classified as operating costs, which usually translates into negative operating cash flows. In 2017, the expenditure on purchase of debt portfolios was record-high, at PLN 290m, having increased by PLN 61m on the previous year. Due to the changes in applicable laws and regulations (see above), we also expended PLN 47.3m on filing of claims, and PLN 75.4m on operating expenses, in total almost PLN 47.5m more than in 2016.

In 2017, we spent PLN 4.2m on intangible assets and property, plant and equipment. The expenditure was much less than in 2016, when we were developing our new operating system. As of 2017, expenditure related to SIGMA has been charged to operating expenses. Capital expenditure in 2017 comprised spending on equipment for new workplaces as well as development of technologies and security solutions.

In the reporting period, we raised a total of PLN 284.4m through bond issues and contracted credit facilities, and over PLN 19m through issue of shares. As a result, despite PLN 64.2m total debt service expenses, we were able to invest record-high amounts in purchase of debt portfolios.

Financial instruments 2017(PLNm)

2016(PLNm)

Assets measured at fair value through profit or loss – purchased debt portfolios 866.453 611.111

Receivables 27.978 9.635

Cash and cash equivalents 91.208 22.045

Total financial assets 985.639 642.791

Trade payables 46.194 34.370

Interest payable 760.015 503.949

Total financial liabilities 806.209 538.319

2.3.6. Financial instruments

2.3.7. Information material to the assessment of the staffing levels, assets, financial condition and financial results, or changes in any of the foregoing, and information material to the assessment of the Company’s ability to meet its obligations

Last year, we invested a record-high amount of PLN 300m in debt portfolios with a total nominal value of PLN 2.6bn. Given very high prices of bank portfolios, the majority of our purchases were non-banking debts, mainly claims from telecoms and lending companies. We have also expanded our activities by entering the Italian market, where we acquired first debt portfolios with a total nominal amount of PLN 1.2bn. As a consequence, in 2017 the headcount across the Group increased. As at the end of 2017, we employed 569 staff, compared with 510 at the end of 2016. 2017 saw important legislative

changes involving, among other things, reduction of the statute of limitations period for claims confirmed by an instrument permitting enforcement from 10 to 6 years. In the reporting period we also established a new investment fund – BEST IV NSFIZ, dedicated to investing in debt claims on the Polish market.

For a detailed description of the impact of material events on the staffing, assets, financial condition and financial results, see “Analysis of selected financial data”.

For detailed information on the Group’s financial instruments and related risks, see Note 5.20 to the consolidated financial statements for 2017.


15

Financial liquidity

The table below presents the difference between total assets maturing and total liabilities due in the given period, referred to as the liquidity gap. A positive gap indicates that surplus cash is maintained.

(PLNm) up to 1 year 1–3 years 3–5 years over5 years

unallocated Total

ASSETS 309.709 313.477 219.923 246.632 156.177 1.245.918

cash 91.208 0 0 0 0 91.208

receivables 27.918 71 0 0 0 27.989

acquired claims 160.168 279.235 200.973 226.077 0 866.453

investment in BEST III NSFIZ 27.448 34.028 18.950 20.555 0 100.981

investment in Kredyt Inkaso S.A. 0 0 0 0 109.007 109.007

other 2.967 143 0 0 47.170 50.280

LIABILITIES 282.741 277.021 253.592 0 2.791 816.145

financial liabilities, including: 230.293 276.130 253.592 0 0 760.015

shareholder loans 31.505 0 0 0 0 31.505

other 52.448 891 0 0 2.791 56.130

LIQUIDITY GAP 26.968 36.456 (33.669) 246.632 - -

LIQUIDITY GAP cumulatively 26.968 63.424 29.755 276.387 - -

The reason for negative liquidity gap expected over the next 3–5 years are several series of bonds maturing in this period. However, free cash generated in previous periods guarantees repayment of these liabilities.

cash EBITDA

full cash EBITDA 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

full cash EBITDA 186.831 148.249 38.582 26%

In 2017, full cash EBITDA, including our jointly-controlled entities and associates (pro rata to the Group’s share in their net assets), was PLN 186.8m, having increased by 26% y/y.

Full cash EBITDA = EBITDA - income from recoveries and debt valuation + receivables repayments

Financial debt

As at December 31st 2017, the Group’s financial debt ratio (net financial debt to equity) was 1.56 and increased relative to previous periods due to as the Group financed a significant portion of its investments in debt portfolios with proceeds from bond issues. However, the ratio did not differ materially

from debt ratios of other debt collection companies, and the maximum value accepted by our bondholders is 2.50. The table below presents our competitors’ debt ratios. Ratios for several companies as at end of Q3 2017 due to unavailability of more up-to-date information.


16

Profitability

Our strong EBIT margin makes us stand out against competition. Ratios for several companies as at end of Q3 2017 due to unavailability of more up-to-date information.

To sum up, we maintain financial liquidity and the ability to meet our financial obligations when due, and we are among the most profitable companies in the sector. Given the current financial condition of the Group and its growth prospects, we believe that our results will continue to improve.

Entity and reporting period BEST Get Back Kredyt Inkaso*

KRUK GPM - Vindexus

Fast Finance

2017 Q3 2017 2017 2017 Q3 2017 Q3 2017

Operating profit margin* 48% 48% 44% 40% 36% 32%

Gross margin 29% 28% 15% 32% 31% 33%

Net margin 29% 34% 14% 28% 29% 26%

Company and reporting date Get Back Kredyt Inkaso

BEST Kruk GPM- Vindexus

Fast Finance

As at Sep 2017 Dec 2017 Dec 2017 Dec 2017 Sep 2017 Sep 2017

Interest payable 1.781.223 522.042 760.015 1.897.223 92.867 28.048

Cash 47.939 76.152 91.208 173.284 32.662 184

Net debt 1.733.284 445.890 668.807 1.723.939 60.205 27.864

Consolidated equity 566.730 274.319 429.773 1.460.522 156.599 76.016

Debt ratio 3,06 1,63 1,56 1,18 0,38 0,37

Operating profit margin = operating profit (loss)/operating income Gross margin = profit (loss) before tax/operating income Net margin = net profit (loss)/operating income

2.3.8. Significant events after the reporting date

2.3.9. Position of the Management Board of BEST S.A. on the feasibility of meeting any previously published forecasts for 2017

For detailed information on events subsequent to the reporting date, see Note 5.25 to the consolidated financial statements.

We did not publish any forecasts for 2017.

For more information, see Note 5.25 to the consolidated financial statements

* Kredyt Inkaso uses a different financial year. Q3 2017 data relate to the period April 1st–December 31st 2017


17

3.1.2. Non-arm’s length related-party transactions

3.1.3. New and terminated loan or credit facility agreements

3.1.4. Bonds

For information on agreements related to equity investments, see section 1 in “Changes in the Group’s structure in 2017”.

For information on agreements related to loans and issue of bonds, see sections below.

In the reporting period, neither BEST nor any of the BEST Group companies entered into any non-arm’s length related-party transactions which would be individually or collectively material.

THE GROUP’S BUSINESS AND DEVELOPMENT DIRECTIONSIII.

3.1. MATERIAL AGREEMENTS

3.1.1. Significant agreements material to the Group’s business, including shareholder agreements, insurance, partnership or cooperation agreements

In March 2016, BEST, BEST Capital FIZAN, BEST I NSFIZ and BEST II NSFIZ, acting jointly as borrowers, executed with Bank Zachodni WBK S.A. a credit facility agreement for up to PLN 24m. As at the reporting date, the outstanding amount of the facility was PLN 18.8m. In accordance with the original terms of the agreement, the facility should have been repaid by March 31st 2018. After the reporting date, an amendment to the agreement was signed, whereby the facility limit was increased to PLN 50m, and the repayment date was extended to February 28th 2022.

In July 2016, BEST II NSFIZ executed a credit facility agreement with ING Bank Śląski S.A. for up to PLN 25m. Pursuant to the agreement, as of April 2017, the facility amount was increased to PLN 50m. By December 31st 2017, BEST II NSFIZ used PLN 45.9m of the facility amount.

In April 2017, BEST S.A. executed with BPI Bank Polskich Inwestycji S.A. a credit facility agreement for up to PLN 18m. On December 14th 2017, an amendment to the agreement was signed, and the repayment date was extended to March 30th 2018.

Further, in 2017 we executed a revolving facility agreement with Bank BGŻ BNP Paribas S.A. to finance or refinance debt portfolios purchases on the Polish market. The maximum amount available under the facility is PLN 50m. As at the date of this report, we have not drawn any amounts under the facility.

In June 2017, we successfully closed the second public bond issue programme with a total nominal value of PLN 200m. In October 2017, we set up the third public bond issue programme (the “Programme”) with a total nominal value of PLN 350m as well as a private bond programme (“Private Placement”) worth PLN 250m.

In 2017, under its Public Bond Programmes, BEST issued four series of bonds (R2, R3, R4 and I) with an aggregate nominal value of PLN 205.8m, and one

series (X1) under the Private Placement, with a value of PLN 32.6m as at the issue date. The proceeds were used in line with their intended purpose, i.e. to finance debt purchases. In 2017, we redeemed bonds worth PLN 10m, issued by BEST II NSFIZ in previous periods.

The table below presents the Group’s bonds issued and outstanding as at December 31st 2017.

For more information, see Section 1


18

Series Nominal value (PLN ‘000)

Nominal interest Issue date Maturity date Type of issue

C* 20.000 WIBOR 6M + 4,30 % 17.01.2014 17.01.2018 private placement

K1 45.000 WIBOR 3M + 3,80 % 30.04.2014 30.04.2018 public issue

K2 50.000 6,00 % 30.10.2014 30.10.2018 public issue



L1 60.000 WIBOR 3M + 3,60 % 28.08.2015 28.08.2020 public issue

0 6.770 WIBOR 3M + 3,10 % 30.12.2015 18.12.2018 private placement

P 4.655 WIBOR 3M + 3,50 % 27.01.2016 27.07.2020 private placement



Q1 20.000 WIBOR 3M + 3,40 % 30.06.2016 26.01.2021 private placement

Q2 10.000 WIBOR 3M + 3,40 % 29.07.2016 01.03.2021 private placement

R1 50.000 WIBOR 3M + 3,30 % 10.11.2016 20.04.2021 public issue



X1** 31.532 EURIBOR 3M + 3,30 % 08.06.2017 08.12.2020 private placement


T1 55.776 WIBOR 3M + 3,40 % 12.12.2017 14.09.2022 public issue

Razem 648.733

* Issued by BEST II NSFIZ. ** Issued in EUR, amount translated at the exchange rate quoted for the reporting date.

3.1.5. Loans granted

3.1.6. Sureties and guarantees provided

3.1.7. Agreement with the auditor

In 2017, neither BEST nor any company of the BEST Group granted any loans or terminated any loan agreements with a value equal to 10% or more of the Group’s equity.

In March 2016, BEST Capital FIZAN, BEST Capital FIZAN, BEST I NSFIZ and BEST II NSFIZ, acting jointly as borrowers, entered into a revolving credit facility agreement with Bank Zachodni WBK S.A. for up to PLN 24m. The bank’s claims under the credit facility are secured with blank promissory notes issued by each

borrower, with the blank promissory notes issued by BEST Capital FIZAN, BEST I NSFIZ, and BEST II NSFIZ guaranteed by BEST.

On June 13th 2017, we signed an agreement for financial audit services and other assurance services with Deloitte Polska spółka z ograniczoną odpowiedzialnością sp.k. of Warsaw (the “Auditor”) . The agreement covers the audit and review of the Group’s separate and consolidated financial statements for the reporting periods ending December 31st 2017, December 31st 2018, and December 31st 2019. Moreover, on October 18th 2017 we signed an

agreement with the Auditor for the provision of services relating to a bond issue (“Comfort Letters”). The Auditor’s fee is disclosed in Note 5.23 to the consolidated financial statements for the 12 months ended December 31st 2017.


19

3.1.8. R&D achievements

3.1.9. Sponsorship, charitable giving and similar initiatives

In December 2016, we completed the work on implementing SIGMA – an innovative and advanced proprietary CRM system for comprehensive debt management. The new system supports, inter alia, data digitalisation, optimisation and automation of business processes, developing new debt collection strategies, defining new, personalised debt collection/repayment forms, and multi-channel contact with customers. The benefits

of the implementation, apart from the obvious technological advancement of our business, include the possibility of handling any number of cases in multiple currencies, new integration opportunities, and running new product campaigns with even greater openness towards the customer and availability of services. These efforts helped us deliver a new quality and strong potential for dynamic growth, undeniably giving us a competitive advantage in this area.

DBEST’s objectives behind its sponsorship activities focus on the financial and economic education of the market, as well as on the creation and promotion of ethical standards in the debt collection industry, while promoting BEST as a professional and trustworthy business partner.

With these goals in mind, last year we engaged in the following projects:The European Financial Congress (with BEST acting as a Partner) – an

open project to propose and support initiatives promoting financial security and stability of Poland and the European Union. The Congress brings together practical debates from business, science and political circles, held as part of specialist seminars and congresses. The topics currently covered by the project include security and development of the EU financial markets, challenges facing capital market development, company value management, and sustainable infrastructure financing. The European Financial Congress, held annually, is a summary of the EFC’s work and efforts undertaken in a given year, serves as an inspiration and sets directions and goals for future actions.

The EFC Academy (with BEST acting as the exclusive Strategic Partner) – this initiative, addressed to students and young graduates, is aimed at

creating a debate platform for young people to talk about their future, ideas and problems when they take the first step on their path of professional development. The Academy supports the search for important values, exchange of views and experience. Krzysztof Borusowski, President of the BEST Management Board, was the guest of one of the meetings held as part of the ‘Meet the Leader’ series.

‘Verba Veritatis’ – a competition organised by the Conference of Financial Companies and the Kozminski University in Warsaw to promote ethical standards, granting awards for the best paper on business ethics. BEST has engaged as a Partner of the competition.

The Elbląg Days, with BEST acting as a Sponsor of the event.

In the coming years, we plan to engage in both nationwide and local projects related to promotion of business ethics and financial education, in initiatives undertaken by local communities in Elbląg and the Gdańsk-Gdynia-Sopot metropolitan area, as well as in activities undertaken by local authorities for local communities. We are also working on a proprietary programme in financial education, finance planning and household budget management for young and senior citizens.

Our growth efforts are inextricably linked with assuming greater responsibility. We are aware of our role in both internal and external environment, which is why in our day-to-day operations we hold on to the concept of corporate social responsibility (CSR).

The objectives of BEST’s corporate philanthropy policy include supporting the education of local communities (including our customers), especially children and teenagers at risk of social exclusion. Our efforts are designed to ensure equal opportunities, take down social and educational barriers, and support entrepreneurship and aspiration to independence. We are pursuing these goals through direct financial support and donations, as well as through employee volunteering projects.

With these objectives in mind, in 2017 we offered support to:Special Purpose School and Education Centre in Elbląg – we provided

a cash donation to build a special sensory playground on the school’s premises, intended for its pupils.

Stowarzyszenie Radość Serca (Joy-At-Heart Association) of Elbląg – we made a cash donation to renovate the flat of a single mother under the care of the Association. We also organised a Christmas present collection and prepared gifts of toys, school materials and sweets for each child at the Children’s Home in Elbląg supported by the Association.

the Familia Association of Gdynia, which takes care of children from dysfunctional families, received from us a donation to finance the summer holidays of the children the Association looks after.

The directions and objectives of our sponsorship policy and corporate philanthropy are consistent with our key responsibility areas, defined on the basis of the PN-ISO 26000 standard.

Sponsorship activities

Corporate philanthropy


20

Szlachetna Paczka (the Noble Gift) initiative – we supported a family from Gdańsk by providing them with the necessary household appliances, clothing and food, which significantly helped the mother (the head of the family) to fulfil her household duties and take care of the family’s needs while continuing the occupational education which she had just started.

a family from Elbląg – on initiative of our employees, we organised a charity collection for a family who lost everything in a fire in mid-December 2017.

In the coming years, we intend to continue our CSR efforts and to maximise our impact on sustainable development. Our primary focus will remain on local initiatives – we would like to strengthen our reputation of a good neighbour and maintain good relations with local communities. We will continue our support for the Joy-at-Heart Association in Elbląg and the Familia Association in Gdynia as we undertook to provide regular help to the people under the care of these organisations. As part of volunteering projects, our employees can themselves propose welfare institutions or objectives which they will jointly support, with full commitment to these projects from the Management Board.

3.2. GROWTH PROSPECTS

For 18 years, we have been operating on the debt trading market in Poland and recently we entered the Italian market. We invest in non-performing debt portfolios, primarily bank loans, but also claims originating from other market segments.

In Poland, we conduct our business through securitisation funds, in accordance with the Act on Investment Funds and Management of Alternative Investment Funds of May 27th 2004. The funds are managed by the Management Company from the BEST Group. These activities are conducted on the basis of authorisation issued by the PFSA and are supervised by the PFSA.

In Italy, we pursue our business through a securitisation company. As provided for in the Securitisation Law of April 30th 1999, the company is part of the transaction structure set out under Italian law for the purposes of securitisation programmes and is managed by an entity holding a relevant banking licence.

The main drivers of our business growth are:

supply of non-performing debt portfolios;access to financing, borrowing costs;operational efficiency;stability of the legal environment.

The supply of non-performing bank loans, i.e. the amount of loans offered for sale by banks, depends on a number of factors. These include: market conditions and the resultant ability of borrowers to repay debt on time, profitability of banks, banking regulations, consolidation processes in the banking sector, as well as banks’ internal policies, effectiveness of the scoring systems used by banks, and the scale of lending activity. In other market segments, supply seems to depend more on internal policies of debt originators rather than on external factors (regulatory regime, legislation, etc.).

3.2.1. Polish debt trading market

Lending tends to grow in correlation with the nominal GDP growth (assuming a stable loan portfolio quality).

Chart 1.Lending growth

14%

12%

10%

8%

6%

4%

2%

0%4Q

20102Q

20112Q

20132Q

20152Q

20172Q

20122Q

20142Q

20164Q

20114Q

20134Q

20154Q

20174Q

20124Q

20144Q

2016

Source: Polish Financial Supervision Authority.

Lending growth (y/y) GDP (y/y)


21

Growth in lending has been observed across all segments since late 2012. The stable uptrend in lending to households and corporates has been supported by GDP growth, improved labour market conditions, record-low interest rates and stable portfolio quality. The lending growth rate shown above would be even faster if effects of the recent appreciation of the złoty were factored in.

As some bank loans are denominated in foreign currencies, their value expressed in the złoty decreases as the Polish currency appreciates.

In the fourth quarter of 2017, the carrying amount of loans to non-financial sector in Poland was PLN 1,045bn, only slightly down on the prior quarter and up 3.2% y/y. Non-performing loans were PLN 70.8m in the reporting period. In comparison, the value of debt purchase transactions in Poland in 2017 is estimated by the Group at PLN 7.8bn, or 11% of that amount.

Chart 2.Carrying amount of loans to non-financial sector

Source: Polish Financial Supervision Authority

1 200

1 000

800

600

400

200

0

10%

8%

6%

4%

2%

0%

4Q20

10

2Q20

11

2Q20

12

2Q20

13

2Q20

15

2Q20

14

2Q20

16

2Q20

17

4Q20

17

1Q20

11

1Q20

12

1Q20

13

1Q20

15

1Q20

14

1Q20

16

1Q20

17

3Q20

17

3Q20

11

3Q20

12

3Q20

13

3Q20

15

3Q20

14

3Q20

16

4Q20

11

4Q20

12

4Q20

13

4Q20

15

4Q20

14

4Q20

16

Non-performing loans (bn) Performing loans (bn) Share of non-performing loans (%)

Chart 3.Absorption of the NPL supply in Poland

80

60

40

20

0

2012 2013 2014 2015 2016 2017

64

8

63

8

65

7

64

8

64

8

60

13

Source: Polish Financial Supervision Authority, in-house analysis.

Transaction value in Poland (PLNbn)

Unabsorbed NPL supply in Poland (PLNbn)


22

Large corporates

SMEs

Other household loans

Household consumer loans

Housing loans

Large corporates

SMEs

Other household loans

Household consumer loans

Housing loans

Chart 4.Breakdown of loans and interest on NPLs

Source: Polish Financial Supervision Authority2010 2017

0% 0%10% 5%20% 10%30% 15%40% 50% 20%

13% 9%15% 6%

18% 15%20% 10%

11% 8%11% 10%

19% 17%16% 11%

38% 2%38% 3%

The Polish debt trading market is mature but remains attractive due to its size, with market competition growing stronger. Competition affects the prices of debt portfolios offered for purchase. According to the Group’s estimates, in 2017 the average prices paid by debt purchasers were approximately 13% of the nominal amount of the acquired portfolios. The volume of bank debt stayed broadly flat year on year.

Chart 5.Average transaction prices and nominal amount of unsecured retail non-performing bank debt

Source: In-house analysis.

14

12

10

8

6

4

2

0

30%

25%

20%

15%

10%

5%

0%2012 2013 2014 2015 2016 2017

Nominal amount (PLNbn) Average price (% of nominal amount)

12%9%

14%17%

12% 13%

The share of impaired loans fell in the large and medium-sized corporate loan portfolios and household consumer loan portfolios. The value of the portfolio of housing loans and other loans to households slightly increased. Minor shifts in loans to non-financial sector have occurred since 2010. Housing loans remain the largest component, with the steepest decline reported for household

consumer loans, an important market segment from our perspective, which fell from 19% in 2010 to 16%. The share of NPLs in total household consumer loans was 11% in the fourth quarter of 2017, and remained the largest of any other segment despite the considerable decline seen since 2010.


23

400

350

300

250

200

150

100

50

0

The banking sector in Italy is almost ten times larger than in Poland. According to the European Banking Federation, at the end of 2016 the assets of the Italian banking sector were EUR 3,925 trillion, while those of the Polish banking sector amounted to only EUR 405,8 billion. The Italian debt market is also

proportionately larger. Its potential results not only from its sheer size, but also from a larger share of non-performing loans in 2008-H1 2017, it increased from 4.9% to nearly 20%. The underlying cause was the difficult economic situation in Italy.

In H1 2017, NPLs amounted to ca. EUR 300bn, almost the same as the total value of assets of the Polish banking sector.

Chart 6.Share of NPLs in Italian banking system

Chart 7.Breakdown of NPLs in the Italian banking sector

Source: The Italian NPL market, PwC, December 2017.

Source: The Italian NPL market, PwC, December 2017.

3.2.2. Italian debt trading market

2008 20132009 20142010 20152011 2016 H20172012

NPL ratio (%)

Bad debt (EURbn)

Bad debt ratio (%)

Unlikely to pay (EURbn) Past due (EURbn)

4,9%7,8%

3,5%2,5%4,6%

6,3% 7,5%9,8%

11,8% 12,9% 13,0% 12,5%9,3%

11,3%14,3%

17,8%

21,0% 22,0% 21,1% 19,7%

20122008 20132009 20142010 20152011 2016 H2017

200 190200184

156125

1077859

42

117104

127131

109

9174

6657

33

76

1412

1821

1312

16

9


24

An over four-fold growth in gross NPLs significantly impacted the profitability of Italian banks and prompted action to improve the stability of the banking sector and its performance.

The turbulence in the Italian banking sector prompted the Italian government and the European Central Bank to take actions aimed at stabilising the situation. As a result of these measures, Italian banks are offloading non-performing loans from their balance sheets. This drives market growth, with debt portfolios likely to be sold at attractive prices due to ample supply.

Chart 8.Absorption of the NPL supply in Italy

400

350

300

250

200

150

100

50

0

2012 2013 2014 2015 2016 2017

Transaction value in Italy (EURbn)

Unabsorbed NPL supply in Italy (EURbn)

232

5

279

4

317

10

322

19

290 237

3464

Source: The Italian NPL market, PwC, December 2017, in-house analysis.

We finance our investments with internally generated funds, but given the scale of the investments, we also need to carry out private and public bond issues. Most of the bond series are traded on the Catalyst market. We seek to extend the maturity periods and spread the redemption dates evenly. From

2010, when we started to issue bonds, to the end of 2017 we raised over PLN 1bn in bond issue proceeds, of which PLN 364m has already been repaid. We have also obtained credit facilities from several banks.

3.2.3. Financing of debt purchase transactions

Total until Dec 31 2017 (PLNm)

Issue Repayment Outstanding amount

BEST Group 903 253 650

Entities outside the BEST Group, managed by BEST TFI 111 111 0

Total 1 014 364 650

For several years, non-performing debt portfolios in Poland have been sold mainly to securitisation funds, which are a type of investment fund. A fund is managed by an fund management company (TFI), while debt collection is usually performed by a specialised debt collector with appropriate infrastructure and relevant authorisation from the PFSA. Bank receivables are sold to securitisation funds because the selling bank has certain tax benefits only when the portfolio buyer is a securitisation fund. On the other hand, a securitisation fund created under the Act on Investment Funds also enjoys

certain legal and tax benefits. By the end of 2016, the fund as such was exempt from corporate income tax, and since January 2017 certain types of its activities have been exempt from corporate income tax.

As at December 31st 2017, the Group’s management company managed four securitisation funds: BEST I NSFIZ, BEST II NSFIZ, BEST III NSFIZ, BEST IV NSFIZ, with a total asset value of PLN 1.1bn.

3.2.3.1. Transaction structure


25

Due to its huge scale, costs, and sensitivity of debt collection, the process of portfolio management requires perfectly organised operations, using advanced ICT solutions and based on high standards of security. In order to ensure the highest returns on investment in debts, we use advanced collection strategies based on customer segmentation and behavioural models that enable us to adjust our product offering as best as we can to the financial situation of the debtor. We have implemented an advanced customer intelligence process using external databases, and we use a variety of contact channels. We rely on advanced statistical models which help us to decide whether particular cases should be resolved in or out of court.

In 2016, we completed the work on an proprietary operating system able to support a strong growth in the scale of the Group’s business. Based on advanced technologies, the system has a significant positive impact on the efficiency, effectiveness and security of our business processes. It is a fully scalable tool that supports quick implementation of new products and business strategies, thus helping us to build a competitive advantage. We use the activity-based

costing method, which enables us to manage operating costs in a conscious and safe manner. We constantly monitor and analyse our activities using QlikView, a modern business intelligence tool based on which we have developed an advanced system for presenting management information. The Group’s business security is ensured by a business continuity management system, regular internal and external audits, as well as an operational process monitoring team that uses a state-of-the-art system to record all screen and audio activity.

We have an experienced and competent team to manage and service various types and categories of debt (including under loans, insurance products, and telecommunication and utility services) due from individuals, SMEs, and large enterprises, as well as mortgage-backed debts or debts secured with movable assets. We use a systemic approach to process and project management based on Lean, Kaizen, Lean Startup, Agile PM and SixSigma methodologies. Our team includes highly qualified experts in data analysis, reporting and controlling, who have instilled an analytical culture in our operations.

In 2017, launched operations on the Italian market. To be able to purchase debt on that market, we established a special purpose vehicle which is subject to Italian securitisation laws. Portfolio purchases are financed with security issues

acquired by investors – BEST Group companies. Debt collection is performed by specialised Italian debt collection companies, holding relevant authorisations issued by Bank of Italy.

3.2.3.2. Operations

As at Dec 31 2017 Established in Asset value (PLNm)

NAV (PLNm)

NAV per investment certificate

(zł)

BEST I NSFIZ 2005 407 399 15,69

BEST II NSFIZ 2008 325 258 5,74

BEST III NSFIZ 2011 209 202 7,57

BEST IV NSFIZ 2017 152 85 1,14

Total 1 093 944 -


26

In August 2016, BEST S.A. received a notice from Kredyt Inkaso S.A. demanding payment of PLN 60.7m as compensation for the damage suffered by Kredyt Inkaso S.A. as a result of termination by Trigon and Agio funds of portfolio management agreements signed with Kredyt Inkaso S.A. On September 27th 2016, BEST S.A. received a copy of the suit for payment brought by Kredyt Inkaso S.A. against BEST S.A. and Mr Krzysztof Borusowski, sued as joint and several obligors. In the suit, Kredyt Inkaso S.A. demands the award of PLN 60.7m with statutory default interest accruing from the date of filing the suit until the date of payment, and reimbursement of the costs of proceedings, according to the prescribed norms. On October 18th 2016, BEST S.A. filed with the court a response to the suit for payment, demanding dismissal of the action in its entirety and awarding the costs of the proceedings, including costs of legal representation, against Kredyt Inkaso S.A., according to the prescribed norms. In the statement of reasons, BEST S.A. presented in detail its position regarding each of the claims made by Kredyt Inkaso S.A. in the suit for payment, and presented evidence supporting its own claims. In particular, BEST S.A. stated that the suit did not present any grounds for liability for damages (as to both existence and amount of damage) or any proof that the damage was actually caused by the defendants’ actions. On December 28th 2016, Kredyt Inkaso S.A.

submitted another process letter containing evidence, which, due to a breach of the civil law procedures, was dismissed returned by the court. Evidentiary proceedings are under way. The case has been assigned court docket No. III C1088/16.

Other than the above, the Company and its subsidiaries are not involved in any court, arbitration or administrative proceedings concerning debts or liabilities of BEST or its subsidiaries, with a unit value equal to 10% or more of the Company’s or the Group’s equity.

Our business model is based on purchases of non-performing debt portfolios by securitisation funds, followed by debt collection and recovery both in and out of court. Due to the nature of our activities, we are party to numerous legal proceedings. As at December 31st 2017, the total amount of debt we were seeking to recover was approximately PLN 1.1bn. Assets subject to court proceedings were acquired by us for prices significantly lower than the nominal amount of claims, and the risk of failing to collect the receivables was accounted for in the valuation of the debt portfolios.

3.3. COURT, ADMINISTRATIVE AND ARBITRATION PROCEEDINGS WITH A VALUE EXCEEDING 10% OF THE COMPANY’S EQUITY


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The key risks identified in the Group’s business are:

Market risk

Market risk is related to the economic situation in Poland, which affects debtors’ ability to repay debt. An economic downturn may result in slower economic growth, higher unemployment, lower demand, and drop in real income, thus adversely affecting debtors’ financial condition. Such events may also have an adverse effect on the ability of individuals and businesses to settle their liabilities. The situation on the labour market is particularly important as it may have a direct effect on the effectiveness of debt collection processes, revenue and profitability of investments. On the other hand, a period of economic distress is a good time to invest in debt portfolios, which at such time are supplied to the market in greater amounts.

Our bonds and bank borrowings bear interest at variable WIBOR rates, set separately for each interest period. Market uncertainty and rising inflation may lead to an increase in these rates and, consequently, to higher financing costs. Changes in interest rates may also result in significant changes in the value of financial instruments carried in the funds’ investment portfolios, and thus may affect the value of investment certificates held by the Group.

Some of the claims we hold (mortgage loans and receivables related to our foreign operations) may be denominated in foreign currencies. Currently, we are present on the Polish and Italian markets. We do not rule out entering other foreign markets. Adverse fluctuations in exchange rates of the foreign currencies in which our receivables are denominated may have a negative impact on our financial performance as a result of foreign exchange losses and a decline in the fair value of debt portfolios.

Risk of deterioration of debtors’ financial condition

Our assets may be invested in debt claims towards natural persons, legal persons or unincorporated organisations. Our revenue therefore depends on the financial standing of those debtors, which in turn depends on macroeconomic factors, such as wages, unemployment rate, inflation rate, interest rates or disposable income.

Another factor having a bearing on debtors’ ability to meet their financial obligations is the financial system and appropriate assessment of creditworthiness. Excessively loose policies followed by financial institutions in this respect may result in exacerbation of debtors’ financial distress as they contract new obligations eventually leading to their long-term liquidity loss. On the other hand, too rigid lending policies restrict access to additional sources of funding, which may make it harder for debtors to repay their current liabilities.

The probability that debt can be recovered also depends on the structure of the debt, its type and characteristics. The possibility that there may be privileged institutions among creditors (e.g. the Social Insurance Institution or the Tax

Office) or that some of the debt may have senior status (e.g. child support) increases the risk of a debtor being unable to meet their obligations towards other creditors, impairing the effectiveness of any enforcement measures taken by them against the debtor.

Risk associated with changes in laws and their interpretation

The legal environment in which our Group operates and the regulations governing debt collection are of major importance for the debt management process. Any adverse changes in this respect, in particular with respect to enforcement of claims in electronic writ-of-payment procedures, activities of court bailiffs, amounts free from bailiff seizures, court fees or default interest, may have a negative bearing on our revenue and the profitability of our business and the efficiency of the debt collection process, or may significantly impair our ability to conducting debt collection activities.

Material changes in this respect include the Act amending certain acts to facilitate debt collection, dated April 7th 2017 (Dz.U. of 2017, item 933), which amended the Act on access to business information and exchange of business data of April 9th 2010 (Dz.U. of 2014 – item 1015 and 1188, of 2015 – item 396, of 2016 – item 1948, and of 2017 – item 819); the latter regulates, among other things, the maximum delinquency period of claims after which it will not be possible to provide business information concerning a consumer debtor, or after which any business information provided must be removed by the credit office, imposes on a creditor providing business information a number of additional responsibilities, including to requirement to state whether the debtor considers the claim to be time barred; the obligation to instruct the debtor that the debtor may lodge an objection against the transfer of the information directly with the creditor; or the obligation to instruct the debtor of the debtor’s right to lodge an objection with the creditor before the relevant entry is made or after it has been made – directly with the credit office.

These amendments entered into force on November 13th 2017.

Other important changes in the legal framework include novation of the Act on retirement and disability pensions from the Social Insurance Fund (Dz.U. of 2016, item 2036) of October 21st 2016, effective from July 1st 2017, which increased – from 60% to 75% – the portion of old-age or disability pension that cannot be seized as part of debt enforcement. We have taken the legal changes described above into account in our operations, however, as at the date of this report we are not able to identify their overall effect on the Group and its business. Provisionally it may be estimated that their effect will not be material.There are certain planned laws that may come into force after the date of the financial statements, which will affect the Group’s business. These include the draft Act amending the Civil Code and certain other acts (Draft No. 2216), which provides for shortening of the basic debt prescription periods (to six years instead of ten) while retaining the regulation that claims concerning periodic payments and debt that arose in connection with business activities prescribe after three years, and introducing a new method of calculation of the lapse of

MATERIAL RISK FACTORS AND THREATSIV.


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the prescription period. Some of the most important changes are proposed in the draft Act on bailiffs (Draft No. 1582), which is to supersede the currently applicable Act on bailiffs and debt enforcement of August 29th 1997 (i.e. of June 9th 2017, as amended). The draft Act proposes further changes to the territorial competence of court bailiffs by strengthening the restrictions on the possibility for bailiffs to take cases from outside their district – a bailiff will be able to take cases only from the appeals area in which the bailiff operates (rather than from the entire country as it is currently the case), and further curbing the number of cases a bailiff may take (down to 2,500 cases, or – if certain effectiveness and delinquency ratios are met – to 5,000 cases). Another draft act associated with the planned legislation described above is the draft Act on bailiff costs (Draft No. 1581), which provides for a number of changes to the types and amounts of debt enforcement fees, with a subdivision into proportional and fixed fees, also reflecting the type of overdue performance being enforced by a bailiff.

Another piece of legislation with considerable implications for the Group’s business is Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27th 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (Text with EEA relevance), which comes into force as of May 25th 2018, along with the draft Personal Data Protection Act currently processed by the Polish Parliament, which is to ensure effective transposition of the GDPR into the Polish law. An additional assumption underlying these planned regulations is to provide Polish citizens with tools to more effectively enforce protection of their personal data, including by accelerating proceedings in any cases concerning violations. The new Act is to supersede the currently binding Act on personal data protection of June 13th 2016 (Dz.U. of 2016, item 922, as amended). The new Act introduces a number of new regulations in the area of personal data protection, and also imposes new obligations on data controllers with respect to protection of the data.

Our Group monitors the legislative process on an ongoing basis with respect to all the laws having implications for our business, and particularly those mentioned above, as we are aware of the need to adapt our activities to the dynamically changing legal environment.

However, as at the date of this report, the overall impact of these regulations on the business of our Group cannot be identified, especially that the legislative work on the draft acts continues and therefore there is no certainty as to what solutions will ultimately be adopted. Preliminarily these changes – if implemented as they are proposed at the present stage of the legislative process – can be expected to have a material bearing on the business of our Group.

Risk associated with the processing of data, including in particular personal data

Our operations involve processing of data. We have in place appropriate technical and organisational solutions and we make every effort to ensure that any data covered by the secrecy obligation – including in particular personal data – is properly protected and processed in compliance with the applicable laws. The IT systems we use to process the data are equipped with protections against

unauthorised access and data loss. The risk that documents or information may be provided to unauthorised third parties is restricted through the technical and organisational solutions in place, including relevant internal regulations. Nevertheless, a potential risk exists that personal data may be made available in an unlawful manner, or taken out of our offices due to wilful misconduct or negligence by persons or entities with whom we collaborate. In the event of any breach of personal data protection laws, including in particular unlawful disclosure of personal data, we may face criminal or administrative sanctions. Unauthorised disclosure of personal data may also result in claims being raised against us for violation of personal rights, which would harm our reputation and image.

Risk associated with conducting operations in a licensed business

The management of securitisation funds’ debt portfolios is governed by a vast range of regulations and subject to numerous requirements, and may only be conducted based on a licence obtained from the PFSA.

As a holder of a licence to manage debt portfolios of securitisation funds, BEST must meet a number of organisational and legal requirements. In the event of any failure to comply with these requirements, the PFSA may revoke the licence.

On the other hand, if a fund’s performance or the manner of provision of services to or of managing the fund are negatively evaluated by the fund investors, they could seek to change their debt portfolio manager.

Risk associated with violation of collective consumer interests

Our activities are supervised, among other authorities, by the Office of Competition and Consumer Protection (UOKiK). We comply with all the applicable competition and consumer protection laws and regulations. However, there exists a risk that our activities may in certain areas be interpreted as violating collective consumer interests. If the President of UOKiK determines that we are violating collective consumer interests, e.g. by using illegal clauses, we may be admonished to cease such practices and fines can be imposed on us. Notwithstanding that, there is a potential risk of group action being taken by consumers. These risks, if materialised, could have an adverse effect on our performance.

Risk associated with loss of experienced management staff or key employees

Qualified and experienced staff are essential to ensure continuity the Group’s business. Loss of experienced management staff or key employees may have an adverse effect on the pace and scope of implementation of the Group’s business objectives.

Bearing that in mind, we are constantly making efforts to ensure that all key and valuable employees are always interested in working with us. We take care that they are offered engaging and highly satisfying tasks, we ensure proper internal communication, and maintain a transparent periodic performance assessment


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system. We also offer various personal development tools, including training courses, career paths, and the Job Rotation programme, allowing employees to enhance their skills and broaden their experience.

Our bonus systems are regularly evaluated and we are working to optimise our entire remuneration system, with a particular focus on Top Talents and employees in key positions.

Risk of failure of the ICT infrastructure used by the Group

Any long lasting disruption in the operation of ICT hardware may halt or significantly limit our business processes. Any such disruption could have a material bearing on our financial performance and, in extreme situations, even affect our business continuity.

To mitigate this risk, we have invested in best-of-class devices providing emergency power supply, and electronic data recording equipment. These measures will help minimise any potential losses that could be caused in the event of a technology failure. We have implemented a business continuity management system consistent with the British BS25999 standard. We have in place solutions and procedures to enable us to come up with such a response in an emergency situation that will allow us to keep up our core business processes at a minimum acceptable level.

In order to diversify the risk of loss of business continuity due to a failure of telecommunication lines or other technical malfunction, our operations rely on support from two independent data centres, in Gdynia and in Elbląg.

Transfer pricing risk

BEST enters into transactions with its related parties. Such transactions may be subject to audit by tax authorities to verify whether they are entered into on an arm’s length basis. There is a risk that as a result of any such audit the terms of any related-party transactions may be challenged by the tax authorities and, as a consequence, additional tax liabilities may be imposed on us.

Risk of negative PR

Our activities often involve enforced collection of debt from natural or legal persons that find themselves in financial distress or in difficult personal circumstances. If no amicable arrangement can be found, some of those persons may resort to creating negative PR against our Company. The risk of publication of negative or untrue statements may also affect our competitors.

Such negative PR, further repeated by the media, may have a direct adverse effect on the perception of our credibility by our investors, clients and trading partners, which may translate into lower demand for products from our clients and, consequently, impair our financial performance.

Risk associated with the quality the debt portfolios we purchase

If recoverability of the debt under our management proves to be lower than initially assumed, our revenues and investment returns will be lower than expected. We monitor the economic environment and parameters of the portfolios under our management on an ongoing basis to ensure that we are able to react in time to any warning signals. With regular valuations of debt portfolios, carried out by experienced and independent specialists, we obtain a picture of the changes in fair value of the individual portfolios as they unfold.

Risk associated with acquisition of investment certificates of securitisation funds

Acquiring investment certificates of securitisation funds involves the need to accept the risk inherent in investment funds’ business. Securitisation funds, by investing in certain assets, seek to achieve their investment objective. The funds do not warrant that this objective will be achieved and, despite exercising due care, may not achieve the target return on investment, which may indirectly reduce our revenue.

At this stage, the key risk associated with the acquisition of investment certificates is the risk related to the valuation of debt portfolios in which the fund invests. To mitigate this risk, we draw on our previous experience and on the empirical models based on that experience, which are adapted to the changing environment, taking into account recognised estimation methods.

Risk of our debt being accelerated

The terms and conditions of our bonds and the terms and conditions of our borrowings include the list of circumstances which, if materialised, may trigger acceleration of our debt. These circumstances include in particular: declaration of bankruptcy or initiation of bankruptcy proceedings, seizure of material assets, delay in repayment of financial liabilities, payment of dividend, buyback of own shares for cancellation, loss of effectiveness or value of provided collateral, grant of a significant loan, guarantee or surety to third parties. None of the above events had occurred by the date of this report. Furthermore, we are required to maintain certain levels of financial ratios. The financial ratios as at December 31st 2017 are presented below.


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Item As atDec 31 2017

Full Net Financial Debt 811.929

Investment Surplus 76.474

Full cash EBITDA (12 months) 186.831

(Full Net Financial Debt less Investment Surplus)/ Full Cash EBITDA

permitted value 400%

current value* 394%

Net financial debt/equity

(Full Net Financial Debt less Investment Surplus)/ Full Cash EBITDA

Item As atDec 31 2017

Financial debt 760.015

Cash and cash equivalents 91.208

Net financial debt 668.807

Equity 429.773

(Net financial debt/equity)

permitted value 2,50

current value 1,56

* Includes data of a jointly-controlled entity and of an associate (sourced from the financial statements as at December 31st 2017), pro rata to the ownership interests held

Creditors may demand early repayment be made in the case of a one-off exceedance of the permitted value as at the end of any quarter of the financial year.

Creditors may demand early repayment to be made in the case of an exceedance of the permitted value as at the end of two consecutive quarters of the financial year.


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Full EBITDA means the Group’s EBITDA plus depreciation and amortisation and net finance costs of Non-Controlled Entities (calculated pro rata to the Group’s interest in net assets of those entities).

Full Cash EBITDA means a Full EBITDA less revenue from the Group’s purchased debt portfolios and debt portfolios of the Non-Controlled Entities (calculated pro rata to the Group’s interest in net assets of those entities) plus recoveries from the Group’s purchased debt portfolios and from debt portfolios of the Non-Controlled Entities (calculated pro rata to the Group’s interest in net assets of those entities).

A Non-Controlled Entity means an entity in which the Group holds a non-controlling interest.

An Investment Surplus means the positive difference between expenditure on debt portfolio purchases less proceeds from sale of debt portfolios in period T

o and expenditure on debt portfolio purchases less proceeds from sale of debt

portfolios in period T-1

, provided that: T

0 – means the 12 months ended on the date on which the ratio is tested

T-1

– means the 12 months preceding T0

Full Net Financial Debt means the Group’s Net Financial Debt plus Net Financial Debt of the Non-Controlled Entities (calculated pro rata to the Group’s interest in net assets of those entities).

Financial Debt means any obligation to pay or return funds arising in connection with any of the following:(a) borrowings;(b) amounts accumulated by discounting promissory notes or issuing bonds,

promissory notes and debentures;(c) transactions in derivative instruments;(d) lease liabilities;(e) cancellable shares; or(f) sureties, guarantees or similar security provided by the Company to third

parties, or other obligations which entail payment of interest or other consideration for the use of capital.

Net Financial Debt means Financial Debt less:(a) cash and cash equivalents;(b) a Group member’s Financial Debt in connection with which the Company

has provided a surety, guarantee or similar security, and(c) sureties, guarantees or similar security provided by the Company to

non-Group investment funds managed by BEST Towarzystwo Funduszy Inwestycyjnych S.A. in connection with acquisition by the investment funds of debt portfolios or rights to receive benefits under debt portfolios.

Below is presented the nominal amount of liabilities under bonds and bank borrowings exposed to the risk of acceleration in the case of exceeding the abovementioned permitted debt ratios as at December 31st 2017:

Net Financial Debt/Equity

(Full Net Financial Debt less

Investment Surplus)/Full cash EBITDA

Nominal amount of interest-bearing financial liabilities 697.152 60.000


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Risk of administrative penalties being imposed by the PFSA

Pursuant to the Act on public offering, conditions governing the introduction of financial instruments to organised trading, and on public companies of July 29th 2005 (consolidated text: Dz.U. of 2013, item 1382), if a public company fails to perform or improperly performs the obligations laid down by the law, in particular if it fails to comply with the disclosure requirements, the PFSA may issue a decision to delist such company’s securities from the regulated market for a definite or indefinite period, or impose a fine, or apply both these sanctions jointly. The maximum amount of the fine depends on the nature of a breach. In the event of a failure to issue interim reports, the maximum penalty may be as high as the higher of PLN 5m or the equivalent of 5% of the total annual revenue reported in the most recent audited financial statements for a financial year. In the event of non-compliance with the obligations related to inside information, described in Art.17.1 and Art.17.4–8 of MAR, the maximum penalty is PLN 10.4m or, if higher, the equivalent of 2% of the total annual revenue reported in the most recent audited full-year financial statements. Although BEST exercises due care and diligence in the performance of its obligations, there can be no assurance that any of the conditions which constituting a basis for imposition of these administrative sanctions on the Company by the PFSA will not occur in the future. Imposition of penalties by the PFSA may compromise the Company’s reputation and adversely affect its perception among customers and investors.

Risk related to equity investments in other entities

To expand the scale of our business, we engage in acquisition-of-control processes, acquisition of securities issued by other entities, or mergers with other entities, including with those operating in the same industry. In recent years, we have made equity investments in BEST I NSFIZ and BEST II NSFIZ funds, as well as Kredyt Inkaso. Each such transaction is a complex and lengthy process. Such investments may involve a risk that, despite exercising due care, performing appropriate analyses and due diligence processes, the Group may fail to identify all material risks, may experience difficulties in integrating the acquired organisation, or that expected synergies may not occur. As a result, the Group may not derive benefits in the planned amount or may derive them later than initially expected, which may adversely affect returns on the investment. There can be no assurance that a transaction will prove successful, the time required for its completion may be considerably longer, and the expected return on investment may not be achieved. Additionally, the Company’s investments are subject to periodic reviews and if certain indications of impairment are identified, impairment losses may need to be recognised.

Risk related to Kredyt Inkaso S.A.

In 2015, we made an indirect investment in debt portfolios by acquiring 32.99% of Kredyt Inkaso shares with a view to incorporating the company’s potential and building shareholder value. The aggregate cost of the acquisition was PLN 171.3m, i.e. approximately PLN 40.14 per share. Shortly after the acquisition, we commenced the process of merging BEST with Kredyt Inkaso, as a result of which BEST’s debt claims, other assets and liabilities as disclosed in the statement of financial position would be increased by the corresponding amounts disclosed so far in the financial statements of Kredyt Inkaso. However, the transaction proved unsuccessful as, in January 2016, Kredyt Inkaso terminated a cooperation agreement, citing its inability to determine the share exchange ratio. Termination of the agreement and further actions taken by Kredyt Inkaso revealed a conflict of interest among shareholders of that company. In August 2016, WPEF VI Holding V.B.V., a subsidiary of Waterland Private Equity Investments (“Waterland”), announced a tender offer for Kredyt Inkaso shares and acquired 61.16% of shares in that company for a price not higher than PLN 25 per share. Afterwards, in July 2017, we announced a tender offer for 33.01% of Kredyt Inkaso shares, as a result of which we acquired 6,094 shares in Kredyt Inkaso S.A. in late August 2017. Those shares, including the previously held ones, confer to us 33.04% of the share capital and total voting rights in Kredyt Inkaso S.A. Total impairment losses on the investment in Kredyt Inkaso, recognised in 2016, were PLN 69m. In our opinion, the carrying amount of the investment reflects its recoverable amount. However, we cannot rule out the need to recognise further impairment losses in the future.

Risk associated with operating in foreign markets

In 2017, we launched our operations in Italy. As we expand our business by entering foreign markets, our financial performance may depend on the macroeconomic conditions prevailing on those markets, and may also depend on the operational efficiency of our local partners (including debt management companies). These factors may also entail risks associated with our potential lack of experience in conducting business in the new environment, including with respect to economic, legal and cultural areas as well as human relations. Additionally, through expanding operations we increase our exposure to foreign exchange risk. Thus, the rate of return on investments made on other markets may be significantly different than expected.


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CORPORATE GOVERNANCEV.

5.1. CORPORATE GOVERNANCE CODE APPLICABLE TO THE COMPANY

5.2. SCOPE OF NON-COMPLIANCE WITH THE CORPORATE GOVERNANCE PRINCIPLES

Since January 1st 2016, BEST has been subject to the ‘Code of Best Practice for WSE Listed Companies 2016’, the most recent version of which was adopted on October 13th 2015 by Resolution No. 26/1413/2015 of the WSE

Supervisory Board. The Code is available on the Warsaw Stock Exchange’s corporate governance website at https://www.gpw.pl/pub/GPW/files/PDF/GPW_1015_17_D0BRE_PRAKTYKI_v2.pdf

This section is a statement of compliance with corporate governance principles and contains all the information required under Par. 91.5.4 of the Regulation of

the Minister of Finance on current and periodic information.

In Current Report No. 1/2016 of January 5th 2016, we published a report on non-compliance with three detailed principles set forth in the ‘Code of Best Practice for WSE Listed Companies 2016’:

I.Z.1.15. A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation, information about the company’s diversity policy applicable to the company’s governing bodies and key managers; the description should cover the following elements of the diversity policy: gender, education, age, professional experience, and specify the goals of the diversity policy and its implementation in the reporting period; where the company has not drafted and implemented a diversity policy, it should publish the explanation of its decision on its website.

REASONS FOR NON-COMPLIANCE: The Company has not formulated and does not operate a formalised diversity policy for its governing bodies and key management, given the stable composition of its Management Board and a small number of key managerial positions where changes are infrequent. The composition of the Supervisory Board is determined by the General Meeting – when appointing a Supervisory Board member, the GM takes into consideration primarily the education and professional experience of a candidate. Despite having no formalised document in this respect, the Company adheres to the principles of diversity and promotes it whenever it has an opportunity to do so. Examples include composition of the Company’s Management and Supervisory Boards, which include persons of various educational backgrounds, professional experience, age and gender.

I.Z.1.20. A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation, an audio or video recording of a general meeting.

REASONS FOR NON-COMPLIANCE: Given the Company’s current shareholding structure and considering that no relevant request has been made by the shareholders, the Company decided not to make an audio or video recording of its general meetings.

Remuneration

VI.Z.2. To tie the remuneration of members of the management board and key managers to the company’s long-term business and financial goals, the period between the allocation of options or other instruments linked to the company’s shares under the incentive scheme and their exercisability should be no less than two years.

REASONS FOR NON-COMPLIANCE: The Company operates an incentive scheme for members of the Company’s Management Board for 2015–2018. In each year of the scheme, eligible persons may be allotted subscription warrants convertible to shares. The last tranche of warrants will be allotted until mid-2019. After twelve months from that date, the entitled persons may demand that the warrants allotted to them be converted into shares. Therefore, the period between the allotment of warrants and their exercise may be shorter than two years. However, the Company would like to note that the period between the allotment of warrants under the first tranche and their exercise is more than three years.

Additionally, in line with principle I.Z.1.13 we published on BEST’s website at http://www.best.com.pl/files/36/GPW_DP_PL.pdf a document entitled ‘Information on the Company’s compliance with the recommendations and principles set forth in the Code of Best Practice for WSE Listed Companies 2016’ in which BEST has also identified the principles and recommendations that are not applicable to the Company, along with relevant explanations.

I.Z.1.10. A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation: financial projections, if the company has decided to publish them, published at least in the last 5 years, including information about the degree of their implementation.

The Company’s comment: Considering its shareholding structure, the Company has not decided to publish any financial forecasts. Should this decision change, the Management Board will make a relevant announcement in a current report, in accordance with separate regulations.


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5.3. SHAREHOLDING STRUCTURE

5.3.1. List of shareholders holding directly or indirectly major holdings of shares (at least 5% of total voting rights in the Company)

Shareholders holding, directly or indirectly, at least 5% of total voting rights within the meaning of Art. 4 of the Act on public offering, conditions governing

the introduction of financial instruments to organised trading, and public companies (Dz.U. No. 184, item 1539):

IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through:1) real-life broadcasts of the general meeting;2) real-time bilateral communication where shareholders may take the floor

during a general meeting from a location other than the general meeting;3) exercise of the right to vote during a general meeting either in person or

through a plenipotentiary.

The Company’s comment: The Company does not apply this principle as it is not justified by the shareholding structure (currently almost 95% of the Company’s shares are held by the President and Vice President of the Company’s Management Board), and the other shareholders have not informed the Company about their expectations in this respect. Should either of the factors described above change, the Company will consider applying this principle.

IV.R.3. Where securities issued by a company are traded in different countries (or in different markets) and in different legal systems, the company should strive to ensure that corporate events related to the acquisition of rights by shareholders take place on the same dates in all the countries where such securities are traded.

The Company’s comment: The securities issued by the Company are not traded in different countries (or markets) or in different legal systems.

General Meeting, shareholder relations

IV.Z.2. If justified by the structure of shareholders, companies should ensure publicly available real-time broadcasts of general meetings.

The Company’s comment: The Company does not apply this principle as it is not justified by the shareholding structure (currently almost 97% of the Company’s shares are held by the President and Vice President of the Company’s Management Board), and the other shareholders have not informed the Company about their expectations in this respect. Should either of the factors described above change, the Company will consider applying this principle.

Furthermore, at recommendation III.Z.1, BEST put a comment on its implementation in the Company:

III.R.1. The company’s structure should include separate units responsible for the tasks within its systems or functions, unless the separation of such units is not justified by the size or type of the company’s activity.

The Company’s comment: The Company has set up an internal audit unit within its structures. The compliance function is in part managed by third parties, including the law firm which provides legal services to the Company. The Company does not have a unit responsible for the risk management system – this function is fulfilled by the Management Board, therefore establishing such a unit would be unnecessary.

Shareholder Number of shares held % ownership interest Number of voting rights attached to

shares held

% of total voting rights

Krzysztof Borusowski 18.467.240 80,24% 25.187.240 84,71%

Marek Kucner 3.249.353 14,12% 3.249.353 10,93%


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5.3.2. Holders of any securities conferring special control powers, and description of those powers

5.3.3. Any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the Company’s cooperation, the financial rights attaching to securities are separated from the holding of securities

BEST has not issued any securities conferring special control powers.

To the best of the Management Board’s knowledge, securities issued by BEST are not limited in respect of their voting rights. Furthermore, the Management Board of BEST is not aware of any systems whereby, with the Company’s

cooperation, the financial rights attaching to the securities are separated from the holding of securities.

5.3.4. Restrictions on transferability of ownership rights to the Company’s securities

The Management Board is not aware of any restrictions on transferability of ownership of any securities issued by BEST other than the subscription warrants issued under Resolution No. 2 of the Extraordinary General Meeting of November 16th 2015, Resolution No. 7 of the Extraordinary General Meeting of March 25th 2016 and Resolution No. 5 of the Extraordinary General Meeting of October 27th 2016.

Resolution No. 2 of the Extraordinary General Meeting of BEST S.A. of November 16th 2015 concerned (i) issue of Series A subscription warrants incorporating the rights to subscribe for Series C shares, (ii) a conditional share capital increase, (iii) waiver of pre-emptive rights to acquire Series A subscription warrants and pre-emptive rights to acquire Series C shares, (iv) authorisation for the Company’s governing bodies; it was amended by Resolution No. 6 of the Extraordinary General Meeting of BEST S.A. of March 25th 2016 amending the resolution concerning (i) issue of Series A subscription warrants incorporating the rights to subscribe for Series C shares, (ii) a conditional share capital increase, (iii) waiver of pre-emptive rights to acquire Series A subscription warrants and pre-emptive rights to acquire Series C shares, (iv) authorisation for the Company’s governing bodies; Resolution No. 7 of the Extraordinary General Meeting of BEST S.A. of March 25th 2016 concerned (i) issue of Series B subscription warrants incorporating the rights to acquired Series E shares, (ii) a conditional share capital increase, (iii) waiver of pre-emptive rights to

acquire Series B subscription warrants and pre-emptive rights to acquire Series E shares, (iv) authorisation for the Company’s governing bodies, and (v) amendment of the Company’s Articles of Association; Resolution No. 5 of the Extraordinary General Meeting of BEST S.A. of October 27th 2016 concerned (i) issue of Series C subscription warrants incorporating the rights to acquired Series F shares, (ii) a conditional share capital increase, (iii) waiver of pre-emptive rights to acquire Series C subscription warrants and pre-emptive rights to acquire Series F shares, (iv) authorisation for the Company’s governing bodies; these subscription warrants may not be transferred to third parties, i.e. any parties other than the Company, but they may be inherited.

The restrictions on transferability of the warrants are related to the purpose of their issue, which was to implement Resolution No. 1 of the Extraordinary General Meeting of November 16th 2015 approving the 2015–2018 Incentive Scheme for members of the Company’s Management Board, subsequently amended by Resolution No. 5 of the Extraordinary General Meeting of BEST S.A. of March 25th 2016 to amend the resolution approving the 2015–2018 Incentive Scheme for members of the Company’s Management Board and Resolution No. 4 of the Extraordinary General Meeting of BEST S.A. of October 27th 2016 approving the 2016–2018 (Share-Based) Incentive Scheme II for a member of the Company’s Management Board.

General Meetings are convened by the Management Board as Annual General Meetings or Extraordinary General Meetings. The Supervisory Board may convene an Annual General Meeting if the Management Board fails to do so within the prescribed time limit, and may convene an Extraordinary General Meeting whenever they think fit. General Meetings are held at the Company’s registered office, in Gdańsk, Sopot, Warsaw or other place specified in the notice of the General Meeting. The Annual General Meeting must be held by June 30th of each year.

Extraordinary General Meetings are convened by the Company’s Management Board:a) on its own initiative;b) at the request of the Supervisory Board;c) at the request of Shareholders holding jointly at least one-twentieth of the

share capital.

An Extraordinary General Meeting may also be convened by Shareholders holding at least half of the share capital or voting rights. In such a case, the Shareholders appoint the Chairperson of the meeting.

5.4. OPERATION OF THE GENERAL MEETING AND ITS KEY POWERS; SHAREHOLDERS’ RIGHTS AND THE MANNER OF EXERCISING THOSE RIGHTS, INCLUDING IN PARTICULAR THE PRINCIPLES STIPULATED IN THE RULES OF PROCEDURE FOR THE GENERAL MEETING

5.4.1. Operation of the General Meeting and its key powers


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BEST S.A. shares give shareholders certain economic rights including, without limitation:a) right to dividends, i.e. the right to receive a share of the Company’s profit

disclosed in the audited financial statements and approved by the General Meeting for distribution to shareholders (Art. 347 of the Commercial Companies Code). Profits are distributed pro rata to the number of shares held. The Company’s Articles of Association do not provide for any preference with respect to dividends, which means that the same amount of dividend is paid on each share;

b) right to subscribe for new shares pro rata to the number of shares held (pre-emptive right);

c) right to a share in the assets remaining after the claims of the Company’s creditors have been satisfied or secured in the event of the Company’s liquidation (Art. 474 of the Commercial Companies Code); the Company’s Articles of Association do not provide for any preference with respect to distribution of liquidated assets.

BEST S.A. shares give shareholders certain corporate rights including, without limitation:a) right to participate in the General Meeting (Art. 412 of the Commercial

Companies Code) and to exercise voting rights at the General Meeting (Art. 411.1 of the Commercial Companies Code);

b) right to request that an Extraordinary General Meeting be convened and that specified matters be placed on the agenda, afforded to shareholders holding at least one-twentieth of the Company’s share capital (Art. 400.1 of the Commercial Companies Code);

c) right to challenge General Meeting resolutions;d) right to request that the Supervisory Board be appointed by block voting;e) right to receive information about the Company in the manner and scope

prescribed by applicable laws;f) right to receive a depositary certificate issued to the holder’s name by the

entity keeping the holder’s securities account in accordance with the laws and regulations governing trade in financial instruments, and the right to receive a certificate issued to the holder’s name confirming the holder’s right to participate in the General Meeting;

g) right to request copies of the Directors’ Report on the Company’s operations, financial statements, Supervisory Board’s report and auditor’s report, to be delivered no later than 15 days prior to the date of the General Meeting (Art. 395.4 of the Commercial Companies Code);

h) right to inspect the list of shareholders entitled to participate in the General Meeting at the Management Board offices and to request a copy of the list against reimbursement of costs (Art. 407.1 and Art. 407.11 of the Commercial Companies Code) or to request that the list be sent to them by electronic mail free of charge;

i) right to request copies of proposals on matters included in the agenda, to be delivered one week prior to the date of the General Meeting (Art. 407.2 of the Commercial Companies Code);

j) right to request that the attendance list be reviewed during the General Meeting by a committee appointed specifically for that purpose and consisting of at least three members. The request may be submitted by shareholders holding one-tenth of the share capital represented at the General Meeting. The requesting shareholders may appoint one member of the committee (Art. 410.2 of the Commercial Companies Code);

k) right to inspect the minute book and request copies of resolutions certified by the Management Board (Art. 421.2 of the Commercial Companies Code);

l) right to bring an action seeking to redress damage inflicted on the Company, in accordance with Art. 486 and Art. 487 of the Commercial Companies Code, where the Company has failed to bring such action within one year from the date of revealing the act that caused the damage;

m) right to inspect documents and request to be provided with copies of the documents referred to in Art. 505.1 of the Commercial Companies Code (applies to mergers), Art. 540.1 of the Commercial Companies Code (applies to the Company’s demerger) and Art. 561.1 of the Commercial Companies Code (applies to a change of the Company’s legal form) at the Company’s offices free of charge;

n) right to inspect the share register and request a copy of the register against reimbursement of costs (Art. 341.7 of the Commercial Companies Code);

o) right to request that a specific matter relating to the incorporation of the Company or the management of its affairs be examined by an auditor (special purpose auditor) at the cost of the Company (Art. 84 of the Public Offering Act).

5.4.2. Shareholders’ rights and the manner of exercising those rights

The General Meeting has exclusive powers to:a) review and approve the Directors’ Report on the Company’s operations and

the financial statements for the previous financial year;b) pass resolutions on allocation of profit or coverage of loss;c) grant discharge to members of the Company’s governing bodies in respect

of their performance of duties;d) amend and adopt a consolidated text of the Company’s Articles of

Association; e) make decisions concerning claims for redress of any damage inflicted on

formation of the Company, or in the management or supervision of the Company;

f) dispose of or lease the Company’s business or its organised part or create limited property rights in the Company’s business or its organised part;

g) increase or reduce the Company’s share capital;h) issue convertible or senior bonds;

i) cancel shares and define the terms of share cancellation; j) merge, demerge or liquidate the Company, appoint the liquidators and select the liquidation procedure;

k) appoint and remove members of the Supervisory Board; l) determine the rules of remuneration for members of the Supervisory Board.

Resolutions of the General Meeting are passed with an absolute majority of votes cast unless statutory provisions or the Articles of Association provide otherwise. All shares other than shares with voting preference carry one vote per share at the General Meeting. Series A registered shares carry five votes per share at the General Meeting. Resolutions are voted on in an open ballot. A secret ballot is ordered in cases prescribed by statutory provisions or the Articles of Association, or if at least one Shareholder present or represented at the General Meeting so requests.


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5.5. GOVERNING BODIES

5.5.1. Composition of the Company’s management, supervisory and administrative bodies and of their committees; changes in their composition occurring during the financial year

5.5.1.1. Management Board

During the reporting period and as at the date of this report, the Management Board of BEST S.A. comprised:1. Krzysztof Borusowski President of the Management Board2. Marek Kucner Vice President of the Management Board3. Barbara Rudziks Member of the Management Board4. Jacek Zawadzki Member of the Management Board

The changes on the Supervisory Board of BEST S.A. that occurred during the reporting period and up to the date of this report are set out below.

The composition of the Supervisory Board until May 22nd 2017:1. Sławomir Lachowski Chairman of the Supervisory Board2. Leszek Pawłowicz Deputy Chairman of the Supervisory Board3. Dariusz Filar Member of the Supervisory Board4. Pasquale Policastro Member of the Supervisory Board5. Krzysztof Kaczmarczyk Member of the Supervisory Board6. Mirosław Gronicki Member of the Supervisory Board7. Andrzej Klesyk Member of the Supervisory Board

Sławomir Lachowski, Krzysztof Kaczmarczyk and Pasquale Policastro (who declined to stand for re-election to the Supervisory Board of BEST S.A. on May 17th 2017) were not re-appointed for a new term and their mandates expired on May 22nd 2017. On the same day, the Annual General Meeting of BEST S.A. appointed Karol Żbikowski to the Supervisory Board.

As at the date of this report, the composition of the Company’s Supervisory Board was as follows:1. Andrzej Klesyk Chairman of the Supervisory Board2. Leszek Pawłowicz Deputy Chairman of the Supervisory Board3. Dariusz Filar Member of the Supervisory Board4. Mirosław Gronicki Member of the Supervisory Board5. Karol Żbikowski Member of the Supervisory Board

In the period covered by this report and until its date, the composition of the Audit Committee changed.

Until May 22nd 2017, the composition of the Audit Committee was follows: Dariusz Filar – Chairman of the Committee, Sławomir Lachowski – Member of the Committee, Krzysztof Kaczmarczyk – Member of the Committee and Mirosław Gronicki – Member of the Committee. The mandates of all Supervisory Board members expired on that date and on June 28th 2017 the following new the Audit Committee was appointed:

1. Dariusz Filar Member of the Supervisory Board2. Leszek Pawłowicz Deputy Chairman of the Supervisory Board3. Karol Żbikowski Member of the Supervisory Board

Until the date of this report, the composition of the Audit Committee has not changed.

5.5.1.2. Supervisory Board

5.5.1.3. Audit Committee

In the period covered by this report and until its date, the composition of the Remuneration Committee changed.

Until May 22nd 2017, the Remuneration Committee was composed of: Pasquale Policastro – Chairperson of the Committee, Leszek Pawłowicz – Member of the Committee and Andrzej Klesyk – Member of the Committee.

The mandates of all Supervisory Board members expired on that date and on June 28th 2017 the following new Remuneration Committee was appointed:

1. Andrzej Klesyk Chairman of the Remuneration Committee2. Mirosław Gronicki Member of the Remuneration Committee

5.5.1.4. Remuneration Committee


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As at December 31st 2017, the management personnel held the following interests in the BEST share capital:

5.5.2. Holdings of Company shares by the management and supervisory personnel

Shareholder Number of shares held Ownership interest (held)

Number of voting rights

(held)

Share in total voting rights*

Krzysztof Borusowski 18 467 240 80,24% 25 187 240 84,71%

Marek Kucner 3 249 353 14,12% 3 249 353 10,93%

Barbara Rudziks 89 216 0,39% 89 216 0,30%

The Management Board of BEST is composed of three to six persons appointed and removed by the Supervisory Board in a secret ballot, by an absolute majority of votes cast, for a joint term of office. The Management Board’s term of office is three years. A Management Board member may be removed at any time. The Management Board manages BEST’s activities, adopts resolutions and decisions on all matters not reserved for the General Meeting or the Supervisory Board.

The powers and responsibilities of the Supervisory Board include suspending from duties, for a good reason, any or all members of the Management Board, and delegating Supervisory Board members to temporarily (for a period of up to three months) perform the duties of the Management Board members who have been removed, resigned or cannot perform their duties for any other reason.

The Management Board is authorised to decide to issue shares within the authorised share capital. Pursuant to Art. 7b.1 of the Articles of Association of BEST, the Management Board is authorised, until March 29th 2019, to increase

the share capital by up to PLN 5,000,000.00 (five million złoty, 00/100). The Management Board may exercise this authorisation through one or more share capital increases; the shares so issued may be acquired in exchange for both cash and non-cash contributions. Pursuant to Art. 7b.2 of the Articles of Association of BEST, the Management Board makes decisions on all matters related to the increase in the Company’s share capital within the authorised share capital limit by way of the Management Board’s resolutions. The Management Board’s resolutions on the issue price and delivery of shares in exchange for non-cash contributions require approval by the Supervisory Board. Pursuant to Art.7b.2 of the Articles of Association of BEST, if the Company’s share capital is increased in accordance with Art. 7b.1 the Articles of Association, the Management Board is authorised to disapply the existing shareholders’ pre-emptive rights in whole or in part, subject to the Supervisory Board’s consent. By the date of this report, the Management Board has issued 2,053,609 shares within the authorised share capital.

The Management Board is not authorised to resolve to buy back shares, as this power is reserved for the General Meeting.

According to the information available to BEST, none of the Supervisory Board members holds shares in BEST or the Company’s related entities.

* Within the meaning of Art. 4.17 of the Act on public offering, conditions governing the introduction of financial instruments to organised trading, and on public companies of July 29th 2005 (Dz.U. No. 184, item 1539).

5.6. RULES GOVERNING APPOINTMENT AND REMOVAL OF THE MANAGEMENT STAFF. POWERS OF THE MANAGEMENT STAFF, INCLUDING IN PARTICULAR THE AUTHORITY TO RESOLVE TO ISSUE OR BUY BACK SHARES


39

The Management Board manages the Company’s activities, and adopts resolutions and decisions on all matters not reserved for the General Meeting or the Supervisory Board. Detailed division of competences and responsibilities among the Management Board members, the subject matter of and adoption procedure for the Management Board’s resolutions, as well as the manner of the Board’s operation are defined in the Rules of Procedure for the Management Board. In employment relations, the Management Board represents the employer within the meaning of the Polish Labour Code, in accordance with the laws of general application.

The following matters require a resolution of the Management Board:a) matters falling outside the ordinary course of the Company’s business and

matters whose management is objected to by at least one Management Board member;

b) convening and determining the agenda of the General Meeting if the Management Board is the body convening the General Meeting;

c) putting individual matters on the agenda of the Supervisory Board’s meetings and preparing written proposals to the Supervisory Board;

d) appointing commercial proxies;e) adopting internal regulations if it is not reserved for other governing bodies

of the Company;f) approving financial statements of the Company and the Group, as well

as the Directors’ Report on the Company’s and the Group’s operations in a given financial year;

g) preparing a proposal concerning distribution of profit or coverage of loss;h) setting the dividend payment date, taking into consideration the dates

determined by the General Meeting;i) adopting the Company’s budget for a given year;j) granting consent for procurement of goods or services not provided for in

the budget, where the value of such goods or services exceeds PLN 1,000 (one thousand złoty).

Resolutions of the Management Board are passed with an absolute majority of votes cast, and in the event of a voting tie, the President of the Management Board has the casting vote.

Before the Company executes a significant agreement with a related party, the Management Board requests the Supervisory Board to approve such transaction on a case-by-case basis.

Meetings of the Management Board are held as needed, at the Company’s registered office or another venue specified in the notice convening the Management Board meeting. Each Management Board member may convene a Management Board meeting, with the proviso that all Management Board members must receive the notice convening such meeting at least one day prior to its scheduled date. Each Management Board Member also has the right to convene an ad hoc meeting of the Management Board at any time, with the proviso that consent of all of the other Management Board members is required to validly convene such meeting. Management Board meetings may also be held as teleconferences, provided that all participating members of the Management Board can hear one another.

5.7. ACTIVITIES OF THE COMPANY’S MANAGEMENT, SUPERVISORY OR ADMINISTRATIVE BODIES AND OF THEIR COMMITTEES

5.7.1. Operation of the Management Board

The operation of the Supervisory Board is governed by the Rules of Procedure for the Supervisory Board, adopted on February 21st 2012; the Rules of Procedure are available on the Company’s website in the For Investors/Corporate Governance section.

Supervisory Board resolutions may be validly passed if at least half of all Board members are present at the meeting and all Board members have been notified of the meeting. A notice convening a Supervisory Board meeting is deemed effectively delivered is it was sent to the address indicated by a given Board member for telegrams, telexes, faxes, registered mail or notices in another written form delivered against confirmation of receipt, or was sent via electronic mail to the e-mail address indicated by the member, in each case at least 7 (seven) days prior to the meeting date. In justified cases, the Chairperson of the Supervisory Board may shorten this period to 3 (three) days. Resolutions of the Supervisory Board are passed with an absolute majority of votes cast unless the Articles of Association provide otherwise. In the case of a voting tie, the Chairperson of the Supervisory Board has the casting vote. Meetings of the Supervisory Board are held as needed, at least three times in a financial year, and are convened by the Chairperson of the Board on their own initiative, at the request of the Management Board or at least one Supervisory Board member. A Supervisory Board member may vote on a resolution of the Supervisory

Board in writing through another member of the Supervisory Board. Matters put on the agenda during a meeting of the Supervisory Board may not be voted on in writing. The Supervisory Board may adopt its resolutions by casting a vote in writing or using means of remote communication. A resolution is valid if all Supervisory Board members have been notified of the content of the draft resolution. A Supervisory Board resolution may not be adopted (i) in writing through another member of the Supervisory Board or (ii) by casting a vote using means of remote communication if the resolution concerns:a) election of the Chairperson and Deputy Chairperson of the Supervisory

Board;b) removal or suspension of members of the Management Board.

Supervisory Board members may perform their duties only personally. The Supervisory Board performs its duties collectively, but it may delegate its members to perform certain supervisory activities individually. Members of the Supervisory Board delegated to individually perform a range of supervisory duties on a permanent basis receive separate remuneration, whose amount is determined by the General Meeting (though the General Meeting may delegate these powers to the Supervisory Board). The Supervisory Board adopts its Rules of Procedure defining the organisation and the manner of operation of the Supervisory Board.

5.7.2. Operation of the Supervisory Board


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There are two Supervisory Board committees: the Audit Committee and the Remuneration Committee, which are consultative and advisory bodies.

The Audit Committee provides opinions and advice to the Supervisory Board with respect to the following areas of activity of BEST:1) the financial reporting process, including in particular by: a) giving opinions on the accounting policies applied by the Company and

the rules followed in the preparation of the financial statements; b) reviewing the financial statements, including in terms of the accuracy

and completeness of the information contained therein; c) analysing the audit report prepared by the auditor of the Company’s

financial statements; d) assessing the process of communication of financial information;2) the internal control system, by: a) evaluating the effectiveness of the individual components of the

system, including those that relate to financial reporting and safety of the IT technologies used;

b) analysing any irregularities identified in the internal control system;3) the risk management process, in particular with respect to: a) assessment of effectiveness of risk management by the Management

Board in the area of financial, operational and strategic risks; b) understanding the impact of business risk on the financial statements; c) assessment of the Company’s policies with respect to property

insurance and directors and officers’ liability insurance;4) internal auditing, including in particular by: a) issuing opinions on candidates for the position of head of the

department responsible for internal auditing, requesting the dismissal or giving an opinion on the proposed dismissal of the person holding the position;

b) reviewing and giving opinions on the internal auditing rules and work schedules, analysing internal audit function budgets and structure;

c) periodic assessment of the implementation of audit plans and performance of auditing activities undertaken by the Management Board in response to issues identified by internal audit;

5) auditing of financial statements, including in particular by: a) recommending the qualified auditor to audit the financial statements; b) issuing opinions on the amount of remuneration payable to the

qualified auditor of financial statements; c) assessing the auditor’s independence; d) liaising with the auditor with regard to the auditor’s work methods and

results;

e) issuing opinions as to any additional services provided/to be provided by the qualified auditor engaged by the Company;

f ) investigating any issues that were the reason for cancelling an external auditor’s engagement and issuing recommendations as to the measures that need to be taken.

In addition to performing its duties as defined in the relevant regulations, in 2017 the Audit Committee engaged in the following activities:1) made an assessment of the reported data prior to the publication of each

periodic report;2) met with the auditor and discussed the scope and results of the procedures

carried out as part of the audit of the financial statements for 2016 and 2017, and as part of the review of the financial statements for the first half of 2017;

3) reviewed the information about the non-performing debt trading market and discussed with the Management Board the material risks affecting the Group’s operations;

4) monitored the effectiveness of internal control systems through/by: a) meetings with internal auditors, b) participating in the preparation of the BEST Group audit plan based on

risk analysis, c) providing, when needed, information on audit results, audit

recommendations and the scope of their implementation by BEST, d) reviewing budget performance.

The Remuneration Committee is a consultative and advisory body that supports the Supervisory Board in its work through:1) providing the Supervisory Board with proposals as to rules of remuneration

of Management Board members;2) providing the Supervisory Board with proposals as to remuneration of

individual Management Board members;3) providing the Supervisory Board with proposals as to appropriate types

of contracts to be entered into between the Company and Management Board members;

4) providing the Supervisory Board with proposals as to rules of stock option based incentive schemes or other share-based payment systems.

Both Committees submit annual reports on their activities to the Supervisory Board.

In order to amend the Company’s Articles of Association, a resolution by the General Meeting followed by an entry in relevant register are required. A GM resolution to amend the Articles of Association is passed by a majority

of affirmative votes. Any resolution to amend the Articles of Association which increases shareholders’ obligations or limits personal rights vested in shareholders must be approved by all the shareholders concerned.

5.7.3. Operation of the Supervisory Board committees

5.8. RULES GOVERNING AMENDMENTS TO THE ARTICLES OF ASSOCIATION


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Entity Regulations based on which separate financial statements are prepared

BEST S.A. IFRS as endorsed by the European Union

BEST TFI S.A. IFRS as endorsed by the European Union

BEST Capital FIZAN

Polish Accounting ActRegulation of the Minister of Finance on the accounting policies to be applied by investment funds

BEST I NSFIZ


BEST II NSFIZ


BEST IV NSFIZ


BEST Capital Italy Italian accounting laws and regulations

Kancelaria Radcy Prawnego Rybszleger sp. k. Polish Accounting Act

BEST Nieruchomości sp. z o.o. Polish Accounting Act

The Company has not formulated and does not operate a formalised diversity policy for its governing bodies and key management, given the stable composition of its Management Board and a small number of key managerial positions where changes are infrequent. The composition of the Supervisory Board is determined by the General Meeting – when appointing a Supervisory Board member, the GM takes into consideration primarily the education

and professional experience of a candidate. Despite having no formalised document in this respect, the Company adheres to the principles of diversity and promotes diversity whenever it has an opportunity to do so. Examples include composition of the Company’s Management and Supervisory Boards, which include persons of various educational backgrounds, professional experience, age and gender.

5.9. DIVERSITY POLICY

The Group companies prepare their financial statements in accordance with various accounting policies. For consolidation purposes, financial statements

are restated to comply with the International Financial Reporting Standards (IFRS).

5.10. KEY FEATURES OF THE COMPANY’S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS, WITH REFERENCE TO THE PROCESS OF PREPARATION OF SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTS

Financial statements and consolidated financial statements are prepared in several stages, each ended with a verification and confirmation of data. Material legal, tax, economic and operational risks are monitored on an ongoing basis. Persons responsible for asset management check the completeness, usefulness and impairment of assets. Persons responsible for execution of contracts and persons responsible for court proceedings identify potential risks related to these aspects.

Processing of accounting data is largely automated, which minimises the risk of errors. Financial data and other disclosures for the purposes of financial statements of BEST S.A., BEST TFI, BEST Nieruchomości and Kancelaria Radcy Prawnego are prepared by the Finance and Accounting Division of BEST S.A. based on entries in the general ledger and information received from persons responsible for asset management, execution of contracts, and court proceedings, as well as from management staff of these entities. Financial data and other disclosures for the purposes of financial statements of other Group entities are prepared by entities to which bookkeeping services were outsourced, under the supervision of the Finance and Accounting Division of BEST. Before preparing individual elements of financial statements, employees responsible for these tasks check the conformity of the accounting data with

the facts and verify if transactions in assets are accurately disclosed in the accounting records.

Preparation of the financial statements is overseen by Chief Accountant. Ready financial statements are reviewed and approved by the management boards of individual entities, and in the case of BEST I NSFIZ, BEST II NSFIZ, BEST IV NSFIZ and BEST Capital FIZAN – by the Management Board of BEST TFI. Prior to the approval of the financial statements, the financial data is checked against the assumptions, and discrepancies, if any, are clarified.

Consolidated financial statements are prepared based on separate financial statements. Separate financial statements of the funds and BEST TFI are audited by a third-party auditor. Then, consolidation adjustments are made based on data derived from separate financial statements, and the data is disclosed in the consolidated financial statements.

To ensure transparency of the consolidated financial statements, external audits of all separate financial statements are carried out by the same audit firm.


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REMUNERATION POLICIESVI.

6.1. REMUNERATION SYSTEM

5.11. NON-FINANCIAL STATEMENT

The remuneration of members of the Company’s Management Board comprises a fixed component (defined in the employment contract) and a variable component (Share-Based Incentive Schemes and Phantom Share Incentive

Scheme). Remuneration of the Supervisory Board members is defined by the General Meeting of BEST and is payable for participation in the meetings of the Supervisory Board, its Committees, and in the General Meeting.

We do not prepare a non-financial statement for 2017, as we do not meet the criteria set out in Art. 49b of the Accounting Act.

6.1.1. Remuneration

Management Board 2017(PLNm)

2016(PLNm)

Krzysztof Borusowski 686 682

Marek Kucner 689 682

Barbara Rudziks 651 865

Jacek Zawadzki 706 270

Total 2.732 2.499

Supervisory Board 2017(PLNm)

2016(PLNm)

Sławomir Lachowski 16 44

Leszek Pawłowicz 30 22

Katarzyna Borusowska 0 20

Patrycja Kucner 0 20

Pasquale Policastro 12 37

Dariusz Filar 30 37

Andrzej Klesyk 40 6

Karol Żbikowski 18 0

Mirosław Gronicki 30 12

Krzysztof Kaczmarczyk 12 32

Razema Total 188 230


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6.1.2. Share-based incentive schemes

Measurement of (share-based) incentive schemes 2017(PLNm)

2016(PLNm)





Total 1.977 1.332

For a detailed description of the terms of the Company’s share-based incentive schemes, see Note 5.14 to the consolidated financial statements for 2017.

6.1.3. Phantom Share Incentive Scheme

Measurement of Phantom Share Incentive Scheme 2017(PLNm)

2016(PLNm)





Total 588 1.160

For a detailed description of the terms of the Phantom Share Incentive Scheme, see Note 5.14 to the consolidated financial statements for 2017.

6.2. SIGNIFICANT AMENDMENTS OF THE REMUNERATION POLICY IN THE LAST FINANCIAL YEAR

No agreements were concluded which would provide for payment of compensation to the management personnel in the event of their resignation or dismissal.

6.3. AGREEMENTS BETWEEN THE COMPANY AND ITS MANAGEMENT PERSONNEL PROVIDING FOR COMPENSATION IN THE EVENT OF RESIGNATION OR DISMISSAL

No agreements were concluded which would provide for payment of compensation to the management personnel in the event of their resignation or dismissal.

6.4. ASSESSMENT OF THE REMUNERATION POLICY IN TERMS OF ACHIEVEMENT OF ITS GOALS, IN PARTICULAR LONG-TERM SHAREHOLDER VALUE CREATION AND THE COMPANY’S STABILITY

In the opinion of the Management Board, the remuneration policy ensures achievement of the Group’s objectives.


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DIRECTORS’ REPORT ON THE OPERATIONS OF BEST S.A.VII.

7.1. ANALYSIS OF SELECTED SEPARATE FINANCIAL DATA

7.1.1. Structure of operating income

Pursuant to Art. 55.2a of the Accounting Act and Par. 83.7 of the Regulation of the Minister of Finance on current and periodic information, the Company prepared the Directors’ Report on the Operations of BEST S.A. and the BEST Group in a single document. Other elements which are required to be disclosed

in the Directors’ Report on the Company’s Operations but are not included in Section 7 are identical as those disclosed in the Directors’ Report on the Operations of the BEST Group.

The rules governing measurement of investment in our fund’s investment certificates have a significant bearing on the revenue of BEST S.A. According to these rules, the carrying amount of investment certificates of BEST Capital FIZAN is equal to their acquisition cost (as at December 31st 2017, the carrying amount was PLN 596.6m, even though the fair value was PLN 818.3m).

Therefore, profits from certificates are recognised in revenue only when realised. In 2017, we paid PLN 67.4m in income distribution, an increase of PLN 17.9m (36%) year on year. We earned PLN 43.7m on debt management, which is PLN 7.3m (20%) more than in 2016, the increase being an effect of significantly higher recoveries from our funds.

Operating income 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Income distribution from BEST Capital FIZAN 67.411 49.552 17.859 36%

Debt management 43.681 36.370 7.311 20%

Other 6.490 3.111 3.379 >100%

Total 117.582 89.033 28.549 32%

Operating expenses 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Depreciation and amortisation expense 5.129 3.990 1.139 29%

Services 19.282 11.976 7.306 61%

Salaries with overheads 39.850 31.593 8.257 26%

Taxes and charges 4.849 4.637 212 4%

Other 2.645 3.474 (829) (24)%

Total 71.755 55.670 16.085 29%

7.1.2. Structure of operating expenses

In 2017, operating expenses were PLN 71.8m, having increased by PLN 16.1m (29%) year on year. Given the growth of our business, we are steadily increasing our headcount. Salaries with overheads were PLN 39.9m in 2017, having grown by PLN 8.3m (26%) on 2016. As at the end of December 2017, our headcount increased 12% year on year. The cost of services was

PLN 19.3m (61%), that is PLN 7.3m (61%) more than in 2016. The increase was attributable to the growth of business, but also new initiatives which are expected to further improve our operational efficiency in the future. It should be noted, though, that expenses grow slower than income


45

Profit/loss 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Operating income 117.582 89.033 28.549 32%

Operating expenses 71.755 55.670 16.085 29%

Operating profit 45.827 33.363 12.464 37%

net finance costs, including: 29.416 86.347 (56.931) (66)%

impairment loss on investment in Kredyt Inkaso 0 64.589 (64.589) -

borrowing costs 31.666 22.076 9.590 43%

Profit (loss) before tax 16.411 (52.984) 69.395 >(100)%

income tax 3.569 2.010 1.559 78%

Net profit (loss) 12.842 (54.994) 67.836 >(100)%

Assets 2017(PLNm)

%share

2016(PLNm)

%share

Non-current assets, including: 851.958 94,1% 610.576 97,7%

property, plant and equipment and intangible assets 31.951 3,5% 32.865 5,3%

shares in subsidiaries, jointly-controlled entities and associates 725.461 80,1% 565.936 90,6%

deferred tax assets 2.122 0,2% 7.415 1,2%

investment property 9.670 1,1% 4.112 0,7%

Current assets, including: 53.582 5,9% 14.184 2,3%

cash 43.976 4,9% 10.687 1,7%

receivables under loans and bonds 5.093 0,6% 0 0,0%

trade and other receivables 1.712 0,2% 1.964 0,3%

Total 905.540 100,0% 624.760 100,0%

7.1.3. Financial performance figures

7.1.4. Assets, equity and liabilities

In 2017, operating profit was PLN 45.8m, having increased by PLN 12.5m (37%) year on year, mainly on higher operating income. Our financial performance was also affected by the debt financing of our projects. The

borrowing costs were PLN 31.7m, that is PLN 9.6m (43%) more than a year earlier. As a result, the Parent earned a net of profit of PLN 12.8m.

The Parent’s key assets are shares in subsidiaries and associates (shares and investment certificates), which accounted for more than 80% of total assets at the end of 2017. Shares in subsidiaries, jointly-controlled entities and associates amounted to PLN 725.5m, PLN 159.5m more year on year. The increase was mainly attributable to equity investments made in 2017, i.e. purchase of investment certificates of BEST Capital FIZAN, worth close to PLN 140m.

The second largest item of assets were property, plant and equipment and intangible assets, which increased on the back of investment in technologies and security. The items represented 3.5% of the Company’s assets.

As at December 31st 2017, total assets and total equity and liabilities came at PLN 905.6m, having grown by PLN 280.8m (45%) year on year.


46

Cash Flows 2017(PLNm)

2016(PLNm)

Change(PLNm)

Change %

Net cash from operating activities, including: (93.216) (85.457) (7.759) 9%

profit (loss) before tax 16.411 (52.984) 69.395 >(100)%

movements in investment certificates (139.525) (129.998) (9.527) 7%

interest and profit distributions 30.235 22.077 8.158 37%

impairment of financial assets 0 64.589 (64.589) (100)%

other items (337) 10.859 (11.196) >(100)%

Net cash from investing activities, including: (90.160) (5.085) (85.075) >100%

acquisition of intangible assets and property, plant and equipment (4.084) (17.225) 13.141 (76)%

acquisition of investment fund bonds (87.000) 0 (87.000) -

disposal/cancellation of financial assets 0 11.860 (11.860) -

dividends and other profit distributions received 798 300 498 >100%

other items 126 (20) 146 >(100)%

Net cash from financing activities, including: 216.424 79.899 136.525 >100%

proceeds from issue of share capital 19.096 36.496 (17.400) (48)%

proceeds from issue/redemption of bonds 237.462 103.497 133.965 >100%

proceeds from taking out/repaying borrowings 13.000 (36.500) 49.500 >(100)%

borrowing costs (33.134) (23.594) (9.540) 40%

acquisition of shares in subsidiaries (20.000) 0 (20.000) -

Total movements in cash 33.048 (10.643) 43.691 >(100)%

Effect of exchange rate fluctuations on cash held 241 0 241 -

Cash at beginning of period 10.687 21.330 (10.643) (50)%

Cash at end of period 43.976 10.687 33.289 >100%

Equity and liabilities 2017(PLNm)

%share

2016(PLNm)

%share

Equity, including: 219.769 24,3% 185.867 29,8%

share capital 23.127 2,6% 22.328 3,6%

retained earnings 133.271 14,7% 120.429 19,3%

Liabilities, including: 685.771 75,7% 438.893 70,2%

financial liabilities 674.363 74,5% 425.114 68,0%

Total 905.540 100,0% 624.760 100,0%

7.1.5. Cash flows (indirect method)

Financial liabilities are the largest item of our equity and liabilities. They accounted for 74.5% of total equity and liabilities, having increased by PLN 249.2m year on year as a result of new bond issues. Equity represented 24.3%

of total equity and liabilities. It grew 18% year on year, driven by the earned profit and a PLN 19m worth share issue.


47

Dec 31 2017 Dec 31 2016

Debt ratio (financial liabilities – cash) /equity

2,87 2,23

In 2017, cash flows from operating activities were negative, mainly due to the acquisition of new certificates of BEST Capital FIZAN worth close to PLN 140m.

In 2017, BEST also acquired PLN 87m worth of bonds issued by its securitisation funds to finance purchase of debt portfolios.

Our investments were financed mainly with borrowings and bond issues. Net of the redeemed bonds, proceeds from bond issues exceeded PLN 250m. Through the share issue, we raised a further PLN 19m.

7.2. INFORMATION MATERIAL TO THE ASSESSMENT OF THE STAFFING LEVELS, ASSETS, FINANCIAL CONDITION AND FINANCIAL RESULTS, OR CHANGES IN ANY OF THE FOREGOING, AND INFORMATION MATERIAL TO THE ASSESSMENT OF THE COMPANY’S ABILITY TO MEET ITS OBLIGATIONS

Financial liquidity

Debt

Throughout the reporting period, we maintained our financial liquidity and paid our liabilities when due. The current ratio, based on assets and liabilities as at December 31st 2017, was 0.28.

In accordance with IFRS, financial liabilities are presented as current and non-current, depending on the agreed maturity date, while indefinite or non-controlling interests in investment funds are presented exclusively as non-current assets, even if the cash flows are expected to be generated within the

next twelve months. Thus, the traditionally calculated liquidity ratios do not take into account the planned proceeds from investments that are to be used to pay liabilities incurred to finance the investments.

The Company’s debt ratio was 2.87, having increased year on year, mainly on the issue of new bonds.

A complete picture of our effectiveness and ability to execute the investment plans can only be obtained by analysing the results of the BEST Group.

31 grudnia 2017 31 grudnia 2016

Wskaźnik płynności bieżącej (stan aktywów obrotowych / stan zobowiązań krótkoterminowych)

0,28 0,21

This report was prepared on March 22nd 2018.

Krzysztof Borusowski, President of the Management Board

Barbara Rudziks, Member of the Management Board

Marek Kucner, Vice President of the Management Board

Jacek Zawadzki, Member of the Management Board

UL. ŁUŻYCKA 8A, 81-537 GDYNIATel. +49 58 769 92 99www.best.com.pl

Documents

DIRECTORS’ REPORT ON THE OPERATIONS OF THE BEST … · registered office, in Gdańsk, Sopot, Warsaw or other place specified in the notice of the General Meeting. The Annual General