Download pdf - ANNUAL REPORT 2016 OF THE VIPAP GROUP · 2019. 12. 13. · Dušan Van ěk, Franc Kukovi čič and Zoran Župevc Employees 450 (31 December 2016) Sales in 2016 193,147 tonnes of paper

25 MARCH 2017

ANNUAL REPORT 2016

OF THE VIPAP GROUP

Annual Report of Vipap Videm Krško d.d. for 2016

TABLE OF CONTENTS

I. INTRODUCTION ..................................................................................................................... 3 1. EXPLANATION BY THE MANAGEMENT BOARD ABOUT THE OPERATONS OF THE VIPAP GROUP ........................................................................................................................................................................ 4 2. PRESENTATION OF THE VIPAP GROUP ....................................................................................................... 5 3. KEY ACHIEVEMENTS OF THE VIPAP GROUP ............................................................................................ 9 4. SIGNIFICANT EVENTS IN 2016 ....................................................................................................................... 10 5. RISK MANAGEMENT........................................................................................................................................ 13 6. VISION AND MISSION ...................................................................................................................................... 15 7. CORPORATE GOVERNANCE STATEMENT OF THE VIPAP GROUP ................................................... 16

II. BUSINESS REPORT ............................................................................................................. 21 1. PERFORMANCE ANALYSIS OF THE VIPAP GROUP................................................................................ 22 2. PRODUCTION ..................................................................................................................................................... 29 3. SALES .................................................................................................................................................................... 41 4. PURCHASING...................................................................................................................................................... 45 5. RESEARCH & DEVELOPMENT ...................................................................................................................... 47 6. INVESTMENT ACTIVITIES ............................................................................................................................. 48 7. EMPLOYEES ....................................................................................................................................................... 50 8. EXPECTATIONS FOR 2017 ............................................................................................................................... 54

III. SUSTAINABLE DEVELOPMENT REPORT .................................................................. 55 1. INTRODUCTION ................................................................................................................................................ 56 2. ENVIRONMENTAL POLICY - BUSINESS EXCELLENCE ......................................................................... 56 3. RESPONSIBILITY TOWARDS THE NATURAL ENVIRONMENT ........................................................... 64 4. RESPONSIBILITY TOWARDS THE INTERNAL AND BROADER SOCIAL COMMUNITY ................ 68

IV. FINANCIAL REPORT OF THE VIPAP GROUP ........................................................... 70 1. FINANCIAL STATEMENTS .............................................................................................................................. 71

1.1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 ................. 71 1.2. CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016 ...................................................................................................... 73 1.3. CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD FROM 1 January 2016 TO 31 DECEMBER 2016 ................................................................................................................................................. 74 1.4. CONCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2016 ......................................... 75 1.5. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2015 ................................................. 76

2. APPENDIX H TO THE CONSOLIDATED FINANCIAL STATEMENTS ................................................... 77 2.1. REPORTING ENTITY ................................................................................................................................... 77 2.2. BASIS OF PREPARATION ........................................................................................................................... 77 2.3. BASIS OF MEASUREMENT ........................................................................................................................ 80 2.4. FUNCTIONAL AND PRESENTATION CURRENCY ................................................................................. 80 2.5. USE OF ESTIMATES AND JUDGEMENTS ................................................................................................ 80 2.6. FINANCIAL YEAR ....................................................................................................................................... 81 2.7. CONSOLIDATION BASIS ............................................................................................................................ 81 2.7.1. Scope and procedures regarding consolidation of financial statements ....................................................... 81 2.7.2. The summary of eliminations and adjustments in the consolidation process for 2016 ................................ 83 2.8. FOREIGN CURRENCY ................................................................................................................................. 83 2.9. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES....................................................................... 84 2.10. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .......................................................... 88

3. INDEPENDENT AUDITOR'S REPORT ......................................................................................................... 108

Annual Report of the VIPAP GROUP for 2016

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I. INTRODUCTION


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1. EXPLANATION BY THE MANAGEMENT BOARD ABOUT THE OPERATONS

OF THE VIPAP GROUP

The year 2016 was again a demanding one for the Company as regards adjusting to the market situation in the area of graphic and publication papers, which have a negative growth trend. The Company faced the challenge of increasing its competitiveness and improving its operating results by increasing the production of wrapping packaging papers. However, their share is too small to compensate for poorer profitability of graphic papers. The volume of operations and revenues dropped by 2%, mostly due to decreased production efficiency. Urgent investments that would substantially improve the volume of operations and production efficiency were again postponed this year due to the lack of financial resources. The Company could thus only improve its profitability by restructuring production and sales and implementing measures relating to organisation of work and streamlining of operations. As concerns marketing, the Company mostly focused on nearby markets, which are the most profitable ones for us. We increased significantly the volume of sales in Italy, Hungary, Austria, Germany and Romania and decreased sales in overseas countries and Turkey. We also built a new network of customers for wrapping packaging papers, with whom we are enhancing cooperation also for the development of new paper types for other purposes. Particularly in the last quarter, joint activities of the production and sales departments increased with the purpose of adjusting our product range to the present and future requirements of customers. Besides consumer papers, which includes newsprint, the future market strategy anticipates a higher volume of niche and special types of papers, also for use in other industries (e.g. in construction). Operating results for 2016 were from the viewpoint of production costs significantly affected by the increase in prices of waste paper, which accounts for the biggest share in the structure. The 7-percent growth in prices, i.e. EUR 10 per tonne, increased production costs by EUR 2.1 million. The trends for waste paper are increasingly influenced by the changing demand of packaging manufacturers, which is growing rapidly. The Company cannot influence this aspect. However, through increased working capital we could influence lower prices by restructuring purchasing markets. Nevertheless, the Company managed to achieve savings of EUR 1.4 million in the area of fibres and chemicals and EUR 773 thousand of fixed costs by implementing the measures of the programme for improving operations. As investments were limited to the most urgent interventions for continuing production at the demand of creditor banks, the amount of EUR 1.1 million was mostly allocated to major maintenance and repairs. Despite the numerous limitations imposed by the banks and other creditors, to which the Company was adjusting for most of the year, the highest priority of business objectives was to motivate, nurture and develop employees, mostly through education and trainings (Paper Industry Academy). At the end of the year, we reached an agreement with banks and other lenders and signed the Joint Sale Restructuring Agreement for continuing process of selling the Company and bank receivables, which will be implemented in the following year and which presents an opportunity to the Company to find a strategic partner for further development. The operating results of the related companies Levas Krško d.o.o. – disabled enterprise (profit of EUR 38.5 thousand) and Vipap Vertriebs und Handels GmbH Austria – trading company (profit of EUR 11 thousand), which perform their activities in relation to the operations of the controlling company, were positive and satisfactory for the controlling company Vipap Videm Krško d.d..

Company's Management Board


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2. PRESENTATION OF THE VIPAP GROUP

The VIPAP Group consists of the controlling company Vipap Videm Krško d.d. and related companies: Levas Krško d.o.o., ZEL-EN d.o.o., Vipap Vertriebs und Handels GmbH and ENOVIP d.o.o.. Related parties transactions are multi-tier.

Name Country

Type of relation

% of relation

Vipap Vertriebs und Handels GmbH

AT Direct equity 100.00

Levas Krško d.o.o. SLO Direct equity 84.31 (15.69 own stakes)

ZEL-EN d.o.o. ENOVIP d.o.o.

SLO SLO

Direct equity Direct equity

11.38 16.00

All related parties are liable to corporate income tax. Related companies are not exempt from tax under ZDDPO (Corporate Income Tax Act) and do not pay tax at a lower legally applicable rate (Economic Zones Act). They are related parties without more favourable tax position. Ownership structure of the VIPAP Group:

100% stake

11.38% stake

16%

owned by VIPAP, 84% owned by

ZEL-EN

Vipap

Vertriebs und

Handels

GmbH

3.5% treasury shares

MINISTRY OF FINANCE OF THE CZECH REPUBLIC

VIPAP VIDEM KRŠKO D.D.

controlling company

Levas Krško d.o.o.

84.31% stake

96.5% stake

ZEL-EN d.o.o.

ENOVIP d.o.o.

15.69% treasury shares


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The controlling company Vipap Videm Krško d.d. in brief

Company name Abbreviated company name

VIPAP VIDEM KRŠKO proizvodnja papirja in vlaknin d.d. (VIPAP VIDEM KRŠKO Production of Paper and Fibres Plc.) VIPAP VIDEM KRŠKO d.d.

Registered office Tovarniška ulica 18

Activity

Production of paper and fibres

Ownership

Ministry of Finance of the Czech Republic

Share capital

EUR 78,387,660

Total assets EUR 105,399,643

Nominal value of share Number of outstanding shares

EUR 41.70 1,814,007

Company identification number

SI 23087226

Company registration number President of the Management Board

5971101 Jožica Stegne

Other members of the Management Board

Ladislav Kristančič and Danijel Oštir

Chairman of the Supervisory Board

David Rais

Other members of the Supervisory Board

Dušan Vaněk, Franc Kukovičič and Zoran Župevc

Employees

450 (31 December 2016)

Sales in 2016

193,147 tonnes of paper

Paper production in 2016 195,502 tonnes of paper

Fibre production in 2016 169,918 tonnes of deinked pulp (DIP) and 22,567 tonnes of groundwood (TGW)

Subsidiaries

Levas Krško d.o.o. and Vipap Vertriebs und Handels GmbH

Related companies

ZEL-EN d.o.o. and ENOVIP d.o.o.

Telephone

+386 (0)7 48 11 100

Fax

+386 (0)7 49 21 115

E-mail

[email protected]

Website http://www.vipap.si


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The parent company Vipap Videm Krško d.d., is entered in the Companies Register under registration number 1/0398300 with the District Court of Krško. Its majority owner is the Ministry of Finance of the Czech Republic, holding a 96.5-percent share, whilst the remaining 3.5-percent share is represented by the Company’s treasury shares. The Company's principal activity is paper production (newsprint, publication and wrapping packaging papers) and fibre production (deinked pulp and groundwood). Based on the criteria as at the annual balance sheet date for the last two consecutive financial years, the number of employees and net sales revenues, the Company is classified as a large company. At the end of the year, the Vipap Group had 450 employees, of whom the parent company Vipap Videm Krško d.d. had 346. The bodies of the Company are: the Shareholders’ Meeting, the Supervisory Board and the Management Board. As of October 2016, the three-member Management Board is led by Jožica Stegne. The related company Levas Krško d.o.o. in brief


LEVAS zaposlovanje in usposabljanje invalidov Krško d.o.o. (LEVAS, Employment and Training of the Disabled, Krško, Ltd.) LEVAS Krško d.o.o.

Registered office Tovarniška ul. 18

Activity

Production of wood packaging and disabled enterprise

Ownership

84% Vipap Videm Krško d.d. 16% Levas – own stake

Organisational form Limited liability company

Levas Krško d.o.o. is a disabled enterprise. The activity of the company is very broad, comprising both production and service activities. Its basic line of business is the production of wood packaging. This includes the production and drying of pallets. The service activity includes security, carpentry and metal workshop, car repair workshop, electrical/mechanical services, and other services. At the end of the year, the company had 102 employees, of whom 53 holding the status of a disabled person (52%). The bodies of the company are: the Shareholders’ Meeting, the Supervisory Board and the Management Board. The three-member Supervisory Board is managed by Jožica Stegne, and the Management Board comprises a single member, i.e. Roman Ganc. The related company Vipap Vertriebs und Handels GmbH in brief

Company name


Registered office Josef Huber Strasse 6, Ternitz

Activity

Wholesale and retail trade

Ownership

100% Vipap Videm Krško d.d.


Vipap Vertriebs und Handels GmbH is an Austrian-based trading company. It sells our end products on the markets of Hungary, Italy and Austria. It also supplies the Company waste paper


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from these markets. The company is run by Ladislav Kristančič acting as Managing Director. At present, it employs 2 people, both on a half-time basis. The related company ZEL-EN d.o.o. in brief


ZEL-EN, razvojni center energetike d.o.o. (ZEL-EN, Energy Development Centre, Ltd.) ZEL-EN d.o.o.

Registered office Vrbina 18

Activity

Research and development in other fields of natural science and technology

Ownership

11.38% Vipap Videm Krško d.d.


ZEL-EN is a development centre for renewable and sustainable energy, boasting a very high technology-development capacity in the field of renewable and sustainable energy in the Posavje region and in a wider area in Slovenia. The partners of ZEL-EN established a consortium with the aim of strategic cooperation in a joint partner project ZEL-EN. The principal activity of the company is development and research in energy, production support, holding activity as (co)owner of potential spin-offs and training. The company is managed by the Managing Director Domen Zorko. At the end of 2016, the business unit Vipap Zel-en employed 2 people on a permanent basis.


ENOVIP, trajnostna energetika in gradnja, d.o.o. ENOVIP d.o.o.

Registered office Tovarniška 18

Activity

Other engineering activities and technical consultancy

Ownership

16% Vipap Videm Krško d.d.


ENOVIP was founded as a spin-off from ZEL-EN d.o.o. Its members are ZEL-EN, holding 84%, and VIPAP VIDEM KRŠKO d.d., holding 16%. The company's headquarters and business premises are on the business premises of VIPAP. The company is managed by the Managing Director Breda Ogorevc. At the end of the year, the Vipap Group (with related companies) had 450 employees. There are 24 people employed through an employment agency.


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3. KEY ACHIEVEMENTS OF THE VIPAP GROUP

Real. 2013

Real. 2014

Real. 2015

Real. 2016

INDEX 16/15

Financial data

Net sales revenues (in EUR thousand) 97,170 94,496 91,604 89,951 98

Operating profit/loss (in EUR thousand) -1,520 -1,171 -4,045 -4,047 100

Profit or loss for the period (in EUR thousand) -3,772 -12,225 -5,935 -5,739 97

Investment activities

Capex (in EUR thousand) 2,076 3,706 1,695 2,805 165

Performance indicators

Value added 17,259 18,748 14,232 13,263 93

Value added per employee (in EUR thousand) 36 39 31 29 94

Revenues per employee (in EUR thousand) 204 199 201 200 100

EBITDA (in EUR thousand) 5,794 6,123 3,151 2,658 84

Sales data

Quantity of paper sold (in tonnes) 194,046 188,994 198,938 193,147 97

Quantity of pallets sold (in pieces) 170,257 170,891 153,754 167,646 109

Production data

Quantity of paper produced (in tonnes) 193,364 193,948 197,745 195,502 99

Quantity of deinked pulp production (in tonnes) 169,439 171,350 172,802 169,918 98

Quantity of groundwood production (in tonnes) 18,837 21,013 23,042 22,567 98

Quantity of pallets produced (in pieces) 167,465 166,088 156,549 167,800 107

Data on employees

No. of employees (as at 31 December) 477 476 456 450 99


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4. SIGNIFICANT EVENTS IN 2016

February Test production of the new paper Vip Flex 88 as the first product from the category of the so-called white 100% recycled papers. Arrangements on increased supplies of newsprint to the Hungarian market. March Appointment of Stefan Eibl-Török as the new President of the Management Board and the Managing Director of the Company. Successful defence of the Vipap GmbH FSC trading system; the control evaluation was performed by the assessor from Bureau Veritas. Conclusion of new deals on nearby markets enabled us to reject less profitable deals in Turkey.

May Test production of the new product Sava Green Offset and MFC. June Successful defence of the FSC CoC management system of Vipap Videm Krško d.d.; the control evaluation was performed by the assessors from Bureau Veritas. On 28 June 2016, the General Meeting of Shareholders of the company Vipap Videm Krško d.d. was convened, with the following agenda:

1. Opening, establishing presence and quorum, and election and appointment of the working bodies of the General Meeting

2. Acknowledgement of the 2015 Annual Report 3. Appointment of the auditor (UHY Revizija in svetovanje d.o.o, Ljubljana) 4. Any other business

July Successful regular evaluation of the production of energy products and VIPELEX, MULEX and VIŽELEX products with the Slovenian technical approval STS-09/0065. The regular evaluation was performed by external assessor from the Slovenian National Building and Civil Engineering Institute (ZAG).


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August Successful conclusion of the regular annual overhaul of the controlling company Vipap Videm Krško d.d.. The company Levas concluded the first phase of expanding production premises. September On 2 September 2016, the General Meeting of Shareholders of the company Vipap Videm Krško d.d. was convened, with the following agenda:

1. Opening, establishing presence and quorum, and election and appointment of the working bodies of the General Meeting

2. Recall and appointment of a member of the Supervisory Board Tomaš Šabatka was recalled as a member and Chairman and Petr Blažek was recalled as a member and Vice-Chairman of the Supervisory Board. Dušan Vaněk was appointed a member of the Supervisory Board.

3. Any other business Initiation of the project “Paper Industry Academy” in cooperation with the Pulp and Paper Institute; this is a 86-hour training programme covering the entire paper production process and is intended for employees of the Company. The Input Control and Ecology Laboratory is an accredited testing laboratory under the SIST EN ISO/IEC 17025:2005 standard for the scope of activities stated in the accreditation document LP-71. On 13 September 2016, the Slovenian Accreditation carried out the regular periodic evaluation of the management system. The evaluation was successful. October At the Supervisory Board meeting, Stefan Eibl-Török was recalled as the President of the Management Board and the Managing Director; Jožica Stegne was appointed for the position. Based on their statements of resignation, Darinka Matijevič and Dragan Kranjc were recalled as members of the Management Board. Danijel Oštir was appointed as a new member of the Management Board and he represents the Company together with the President Jožica Stegne. The traditional meeting with sales agents took place at the Terme Čatež Spa. At the meeting, which was attended by 15 agents from 10 countries, we presented the situation of the Company and our future orientations and thoroughly discussed the sales plan for 2017. Test production of new products SavaPrint Cream and SavaPrint Yellow from the category of graphic offset papers in cream and yellow shades. Successful presentation of the extended FSC CoC system for purchasing non-certified wood CW (Controlled Wood) with risk assessment, in line with the FSC-STD-40-005 v2-1 standard. The extended evaluation was performed by external assessors from Bureau Veritas.


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November Implementation of the international meeting of the Slovenian paper industry (the 20th Day of the Slovenian Paper Industry and the 43th International Annual Symposium of DITP), which is organised by the Chamber of Commerce and Industry of Slovenia - Paper and Paper Converting Industry Association, and the Pulp and Paper Engineers and Technicians Association of Slovenia (DITP). This year's meeting was organised under the title “Paper – Always an Exciting Story”. December Conclusion of negotiations with banks and creditors in relation to debt restructuring. Signing of the agreement between the creditor banks and the owner as the grounds for further activities of looking for a strategic partner.


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5. RISK MANAGEMENT

The controlling company has adopted the Rules on Financial Management and Operational Risk Management. Risk management comprises establishment, measurement and evaluation, and monitoring of risks, including reporting on risks which the Company is or could be exposed to in its operations. The Company is aware of the fact that the risk management area is one of the fundamental areas each company has to develop constantly. The company Vipap defined the most crucial and probable risks. The objective of risk management is to anticipate the risks, to detect them in a timely manner and react properly. We divided the risks into two main groups: operational risks and financial risks, which are presented in the continuation. Operational risks Market risks Vipap Videm Krško d.d. is selling products worldwide. As a result, it is exposed to various market risks. Fast responses to the changes in operating conditions and adjustment of sales and marketing activities remain the Company's key competitive advantages. We continuously monitor the situation on the global market of paper industry. The Company has been organising the market conference for its business partners for a number of years. The conference was organised also in 2016; all with the aim of keeping up with the market needs and requirements as promptly as possible. The Company’s sales strategy is being constantly aligned with the latest market findings. Market risks are strongly mitigated by flexible production and own high quality human capital potential. In addition to the risks related to specific market environment and economy, of which the risk arising from exchange rate fluctuations is the predominant one, our sales focus on the risk arising from the operations with individual customers, in particular the risk of their insolvency and bankruptcy, payment deadline-related risk and other risks due to default on contracts. The Company is managing financial risks by insuring receivables with SID, selling products based on advance payments and collateral instruments (bank guarantee) obtained from customers. The risks arising on the purchasing market result from insufficient supply of raw materials (wood and waste paper) during the winter, when logging reduces and when the collection of waste paper is more difficult. We have avoided this quantity-related risk by fostering long-term partnerships based on competitive conditions and by ensuring adequate stock in case of any supply halts. The risk arising from raw material price fluctuations is managed by forward buying (energy sources) and long-term contracts (other raw materials). Development-related risks The Company cannot exist without development. The Vipap Group is constantly faced with the risk that product development process will not end successfully. The risks in this area, which are technological and technical, are mitigated by a team of development technologists who are continuously working on developing new own products based on recycled fibres. In 2016, we placed the most emphasis on developing wrapping packaging papers and other types of special papers to be used also in other industries, mostly in the construction and automotive industries. We reduce the above risks by modernising processes, introducing modern technologies and adapting to customer requirements in early development stages. We are facing the risk of insufficient quality of new products, the risk of insufficient orders and quantities as well as non-profitability of new products. The risk of unsatisfactory quality is being resolved in the Development and Technology Department and through laboratory work in cooperation with the production sector and the Pulp and Paper Institute from Ljubljana. Of crucial importance in this


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process is the supervision of investment effects, warranting continuous cooperation of the economic and technical department. Risks associated with environmental protection Environmental management has been one of the major tasks of the Company. We are using modern technology and technical measures to mitigate the negative environmental impacts. We plan, monitor and supervise the impact of activities and emissions of substances and energy in the environment (the so-called monitoring of the state of the environment), implementing the necessary measures and reporting as required under the Environment Protection Act. The likelihood of extraordinary events is also reduced by preventive measures. Our Company contributes to the preservation of the environment by carefully managed environmental policy. Risks associated with environmental protection are mainly the risks of ecological disasters or accidents that could negatively impact the environment, and the risks of paying fines for non-compliance with the regulations and standards in the field of environmental protection. Such risks are always present and must therefore be anticipated and managed. The Company has thus set up an ecological service which employs experienced technologists engaging in the analysis of ecological parameters and efficient resolving of ecological problems as well as ensuring compliance with the applicable laws. Financial risks Foreign exchange risk Foreign exchange risks do not directly influence the operations of the Company, since most incoming and outgoing cash flows are euro-denominated. The prices of raw materials are mainly set in EUR, with the exception of coal, the price of which is in USD. A fixed EUR/USD exchange rate has been agreed with the coal supplier for every coal shipment by sea. Interest rate risk As the banks and other lenders decided to sell its receivables from the Company in 2016, we did not secure the interest rate on loans because they are to be sold in the future. Liquidity risk The Company is managing the risk of inability to settle its current liabilities by short-term and long-term cash management. Short-term planning is based on daily, weekly and monthly cash flow planning. The year 2016 was demanding in terms of liquidity, similarly as in previous years. The Company operates with negative working capital, which can result in risks related to supplies of raw materials and materials. All major suppliers have agreed-upon schedules for settlement of liabilities, which ensures uninterrupted supply. In 2016, the moratorium on loan repayment agreed with the banks was still in place, whilst interest was paid.

We assess that in 2016 the liquidity risk was suitably managed, owing to appropriate agreement with banks and suppliers. Of all the financial risks, the Company is most exposed to the liquidity risk.


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6. VISION AND MISSION

The vision of the Vipap Group is to preserve and further develop the position of the leading manufacturer of newsprint, graphic and wrapping packaging papers from recycled fibres on the markets of the South-eastern Europe, other European markets and European nearby markets. The production of paper of higher quality and price is based on integrated production of fibres from waste paper and mechanical processing of wood with own personnel. With comprehensive offer and range of papers, quality of products, quality services and quality work in all business functions, the Company will ensure growth and economic performance. With the emphasis on environmentally friendly production technology, sustainable development and promotion of innovative work in this area, the Company will ensure development and preservation of the natural environment. Sustainable development of automated and ecologically adapted production processes and use of renewable sources of raw materials enable the Company to produce nature-friendly papers from recycled fibres and groundwood. The basic mission of the Vipap Group is to produce and market paper on recycled and wood-pulp basis. We have years of experience, exploit new know-how and are focused on quality. In the future, we will continue trying to respond quickly and adjust to the desires of our customers. We will put special emphasis on optimal use of production technologies, efficient use of internal and external sources of the Company, development and marketing of innovative products that are acceptable in terms of energy consumption, environmental impact and quality. All of the above will enable us to improve the Company’s competitive advantage (flexibility and quick response to the market situation), which will be reflected in the satisfaction of employees, business partners and owners. The Company’s vision and mission are achieved through the implementation of quality policy and pursuit of the Company’s goals. Its complex operating goal is reflected in ensuring growth of sales in terms of value and increased profitability, with the basic economic guideline being the balance of all production capacities, together with the achievement of maximum total contribution margin. The Company implements individual operating policies (quality policy, financial policy, sales and purchasing policy, energy policy, and other) with the aim of achieving individual operating goals specified in its operational strategy and its annual plans or economic operating plans. The management and all employees are committed to consistently implementing and fulfilling the requirements and expectations of customers, the legislation and regulations, system standards, good business practice and continuous improvement of processes, products, services and the management system. Through balanced operations and the goals set we wish to increase the satisfaction of customers, employees, owners and the wider social community. All employees have been included in the efforts to secure quality so as to implement the policy set. By planned and coordinated work we endeavour to always perform services well, in due time and at competitive prices.


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7. CORPORATE GOVERNANCE STATEMENT OF THE VIPAP GROUP

In compliance with the provisions from the 5th paragraph of Article 70 of the Companies Act (ZGD-1), the company Vipap Videm Krško d.d. hereby provides its statement on corporate governance. This statement refers to the period from 1 January to 31 December 2016. The Management Board of the company Vipap Videm Krško d.d. declares that the Annual Report of Vipap Videm Krško d.d. for 2016, including the Corporate Governance Statement, has been compiled and published in compliance with the Companies Act (ZGD-1), the Slovenian Accounting Standards and the implementing regulations issued on the basis of these. The corporate governance principles of Vipap Videm Krško d.d. are based on valid regulations in the Republic of Slovenia, the Company's internal acts, and established good business practice. The Company is managed according to a two-tier system, in which the Company is managed by the Management Board, whose work is supervised by the Supervisory Board. As the company Vipap Videm Krško d.d. has not adopted its own corporate governance code, it refers in this Statement to the Corporate Governance Code for Unlisted Companies, which was issued in May 2016 by the Chamber of Commerce and Industry of Slovenia, the Ministry of Economic Development and Technology and the Slovenian Directors’ Association (hereinafter also referred to as the “Code”), which is available on the internet at https://www.gzs.si/mediji/Novice/ArticleId/52673/dobra-praksa-korporativnega-upravljanja-za-vec-tujih-investicij-objavljen-kodeks-upravljanja-za-nejavne-druzbe. Below we provide explanations in relation to the provisions of the Code that the company Vipap Videm Krško d.d. does not comply with fully: • Item 2.4: The Company does not have its Articles of Association on its website in a user-

friendly format enabling normal reading and text search. The Articles of Association are publicly available at the website of the Agency of the Republic of Slovenia for Public and Legal Records and Services (AJPES). The Articles of Association are being prepared as anticipated by the Code in 2017.

• Item 2.9: The Company does not have the Rules of Procedure for its bodies published on its website. The Rules of Procedure are being prepared as anticipated by the Code in 2017.

• Item 9.2: The Company does not have a training programme for members of the supervisory body.

• Item 11.3.5: The Company does not have an internal audit department established.

Main characteristics of internal control and risk management systems in relation to the financial reporting procedure: The Company applies through the internal controls system in a planned and systematic manner the procedures and methods that enable accurate, reliable and comprehensive data and information and accurate and fair preparation of financial statements, prevent and detect errors in the system and ensure compliance with acts and other regulations and the Company’s internal acts. Accounting controls include reconciliation of balances in the books of account with actual balances, transaction execution checks and updating of accounting records based on the principles of truthfulness, independence and professionalism.


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Risks related to the financial statements are managed through directing and supervising the implementation of activities of the Company’s accounting department and through audit of the financial statements by authorised auditors. The sole shareholder possesses no control rights not arising from the legislation in force. The Company does not have voting rights limited in any way. The rules on the appointment and replacement of members of the management bodies and amendments to the Articles of Association are defined by the Company’s Articles of Association and the Companies Act. As at 31 December 2016, no explicit authorisation for the management to acquire own stakes was valid. The Company has the following bodies:

• General Meeting of Shareholders • Supervisory Board • Management Board

General Meeting of Shareholders Pursuant to the provisions of the Companies Act, the General Meeting of Shareholders is the highest body of the Company. At the General Meeting, the shareholders exercise their will directly and adopt fundamental and statutory decisions. The General Meeting adopts decisions regarding the following:

• adoption of the annual report, • use of accumulated profit, • appointment and recall of members of the Supervisory Board, • granting of discharge to members of the management or supervisory bodies, • amendments to the Articles of Association, • measures to increase and decrease the Company’s capital, • winding-up of the Company and status transformation, • appointment of the auditor, and • other matters, if so stipulated by law or the Articles of Association.

The General Meeting of Shareholders is responsible for adopting the annual report only if the Supervisory Board has not approved it or if the Management Board and the Supervisory Board propose that the decision on the adoption of the annual report be made by the General Meeting of Shareholders. As a rule, the Management Board submits the proposal for the convocation of the General Meeting once a year. The Company's Supervisory Board According to Article 282 of the Companies Act (ZGD-1), the Supervisory Board is obliged to verify each year the annual report of the Company and the proposal for the use of accumulated profit, which are submitted to the Supervisory Board by the Management Board. The Supervisory Board is obliged to indicate in the report in what way and to what extent it supervised the Company's management during the year, and adopt a position regarding the independent auditor's report. At the end of its report, it must state whether, after final examination, it has any comments


18

concerning the annual report and whether it confirms the annual report. If the Supervisory Board approves the Company's annual report, the report is endorsed. The work of the Supervisory Board is presented in detail in the Report on the Method and the Results of Examining the Annual Report of Vipap Videm Krško d.d. The Supervisory Board of the company Vipap Videm Krško d.d. has the following members: Shareholders' representatives: David Rais – Chairman of the Supervisory Board Dušan Vaněk – member Employees' representatives: Franc Kukovičič – member Zoran Župevc – member The Company's Management Board Until March 2016, the Management Board was chaired by the Vice-President of the Management Board, Jožica Stegne. On 16 March 2016, Stefan Eibl-Török started presiding over the Management Board and in October he was dismissed from the position. As of then, the Management Board has been chaired by Jožica Stegne as the President. The current Management Board has three members and is appointed by the Supervisory Board. The Company's Management Board: Jožica Stegne - President of the Management Board (as of 18 October 2016) Ladislav Kristančič - member Danijel Oštir - member The Management Board manages the Company and adopts business decisions independently and directly. It meets at least twice a month. Its principal task is the coordination of opinions, the unanimous adoption of decisions, and voting only in exceptional cases. The Management Board carries out its tasks in accordance with the law and the Company's Articles of Association. The term of office of the members of the Management Board is five years, with the possibility of re-appointment. Pursuant to organisational rules and the Rules of Procedure of the Management Board, the members of the Management Board also have operational tasks in the area of managing, implementing and organising work, which enables direct cooperation between the Management Board and other management levels. MANAGEMENT BODIES OF THE COMPANY Levas Krško d.o.o.: The Supervisory Board of the company Levas Krško d.o.o. has the following members: Shareholders' representatives: Jožica Stegne - Chairman of the Supervisory Board Employees’ representatives of Vipap Videm Krško d.d.: Darinka Matijevič - member Jože Kolman - member


19

The company's Management Board: The President of the Management Board and the Managing Director is Roman Ganc. MANAGEMENT BODIES OF THE COMPANY Vipap Vertriebs und Handels GmbH: The company is run by Ladislav Kristančič acting as Managing Director. MANAGEMENT BODIES OF THE COMPANY ENOVIP d.o.o.: The company is managed by the Managing Director Breda Ogorevc. MANAGEMENT BODIES OF THE COMPANY Zel-en d.o.o.: The company is run by Domen Zorko acting as Manager - Director and the committee of managers of business units.

vovcak

Stamp


21

II. BUSINESS REPORT


22

1. PERFORMANCE ANALYSIS OF THE VIPAP GROUP

OPERATING RESULTS We closed the year 2016 with a loss of EUR 5.7 million.

The situation on the newsprint market improved somewhat in 2016, which was reflected in the price level by 3%. However, the prices of waste paper, which rose by 7%, had a negative impact on our results, significantly deteriorating our position in terms of operating costs, which consequently rose by EUR 2.1 million. The 2-percent decrease in the volume of operations arising from poorer production efficiency due to unrealised urgent investments led to lower sales and related revenues. In 2016, the Company was also implementing the programme for improving operational performance and achieved within this framework a decrease in variable and fixed costs in the amount of EUR 2.2 million. Besides the streamlining measures, a lot of effort was invested in securing adequate liquidity, boosting production efficiency, raising the quality of the Company's products and developing new types of paper. The loss of the controlling company Vipap Videm Krško d.d. equalled EUR 5.789 million, whilst the company Levas generated profit of EUR 39 thousand and the company Vipap GmbH profit of EUR 11 thousand. Net profit/loss for the period, by year In EUR thousand 2013 2014 2015 2016

Operating profit/loss for the period -3,772 -12,225 -5,935 -5,739

-3.772

-12.225

-5.935 -5.739

-14.000

-12.000

-10.000

-8.000

-6.000

-4.000

-2.000

0

2013 2014 2015 2016

00

0 E

UR

2013 2014 2015 2016


23

REVENUES FROM THE SALE OF PRODUCTS

We generated EUR 90 million in net revenues or EUR 1.6 million less than the year before. Generated revenues of the Vipap Group totalling EUR 90 million are 1.8% lower as compared to the year before. The reason for not achieving higher revenues lies in lower quantities of paper sold. Changes in prices on the market of graphic papers were in 2016 more favourable as in 2015, when they reached the bottom, but still far from prices from previous years. The average selling price rose by EUR 7 per tonne. As concerns the sales structure, the share of packaging papers increased, whilst the share of graphic papers stayed at the same level. The category of papers with higher value added includes publication and wrapping packaging papers, which account for a 19-percent share in sales revenues. Net revenues per year and revenues per employee In EUR thousand 2013 2014 2015 2016

Net sales revenues 97,170 94,496 91,604 89,951

Revenues per employee 204 199 201 200

97.170

94.496

91.60489.951

80.000

82.000

84.000

86.000

88.000

90.000

92.000

94.000

96.000

98.000

100.000

2013 2014 2015 2016

00

0 E

UR

2013 2014 2015 2016


24

OPERATING EXPENSES In 2016, the costs of goods, material and services stood at EUR 76.8 million or EUR 937

thousand more than the year before. Operating costs rose by 1.2% or EUR 937 thousand as compared to the year before. The increase resulted from a different paper production structure (more publication and wrapping packaging paper than newsprint) and the increase in the prices of waste paper of EUR 10 per tonne as compared to the year before. In 2016, variable costs totalled EUR 342 per tonne, which is EUR 11 per tonne more than the year before. The bulk in the structure of operating expenses is the cost of waste paper used totalling EUR 33 million or 43%, followed by chemicals and other auxiliary means in the amount of EUR 8.6 million (11.3%), electricity from the network in the amount of EUR 8.4 million (11%), fuel (coal, gas, oil) in the amount of EUR 6.3 million (8.3%) and grinding wood in the amount of EUR 3.5 million (4.6%). Changes in operating expenses

In EUR thousand 2013 2014 2015 2016

Historical cost of goods, materials and services sold 78,440 76,989 75,825 76,761

78.440

76.989

75.82576.761

300

350

400

450

500

550

600

70.000

71.000

72.000

73.000

74.000

75.000

76.000

77.000

78.000

79.000

2013 2014 2015 2016

00

0/t

00

0 E

UR

Cost of goods, materials and services sold


25

INVESTMENTS

In 2016, EUR 1.1 million was allocated to investments. In 2016, the controlling company made no major investments in assets, as it predominantly focused on rationalisation of the production process by introducing minor improvements and on major maintenance with a view to optimise technological lines in paper and fibre production, and treatment plants. The company Vipap GmbH made no investments in 2016, whilst the company Levas d.o.o. invested EUR 34 thousand in equipment, thus concluding the first phase of expanding its production capacities. Investment value by year

In EUR thousand 2013 2014 2015 2016

Investment value 2,136 2,661 774 1,136

2.136

2.661

774

1.136

0

500

1.000

1.500

2.000

2.500

3.000

2013 2014 2015 2016

00

0 E

UR


26

FINANCIAL EXPENSES FOR FINANCIAL AND OPERATING LIABILITIES In 2016, financial expenses for financial and operating liabilities totalled EUR 2 million or EUR

266 thousand less than the year before. Financial expenses include interest expenses for raised loans in the amount of EUR 1.4 million, interest for loans raised from related parties totalling EUR 500 thousand and other financial expenses of EUR 100 thousand. Financing expenses by year

In EUR thousand 2013 2014 2015 2016

Financial expenses 2,673 2,780 2,276 2,010

2.6732.780

2.275

2.010

0

500

1.000

1.500

2.000

2.500

3.000

2013 2014 2015 2016

00

0 E

UR


27

Financial indebtedness of the Group by year In line with the agreement with creditor banks, moratorium on loan principal repayment was in place in 2016. There was also no additional borrowing from banks in 2016. Financial indebtedness increased by EUR 136 thousand as compared to the year before, due to increased liabilities of Vipap GmbH to the factoring company.

In EUR thousand 2013 2014 2015 2016

Financial indebtedness 38,054 34,702 36,286 36,422

INDICATORS The indicators reflect this year's performance – they have deteriorated compared to the year

before. The financial indicators of return are negative, i.e. return on equity (ROE) equalling -13.2 % and return on assets (ROA) of -5.3%. EBITDA for 2016 at the level of EUR 2,658 thousand is the lowest in the last four years. Trend in selected indicators: ROA, ROE and EBITDA 2013 2014 2015 2016

Return on equity in % -5.7 -22.2 -12.1 -13.2

Return on assets in % -2.9 -10.1 -5.2 -5.3

EBITDA in EUR thousand 5,794 6,123 3,151 2,658

38.054

34.702

36.286 36.422

33.000

34.000

35.000

36.000

37.000

38.000

39.000

2013 2014 2015 2016

00

0 E

UR


28

Value added per employee Lower value added per employee is a consequence of poorer operating results. 2013 2014 2015 2016

Value added in EUR thousand 17,259 18,748 14,232 13,263

Value added per employee in EUR thousand 36 39 31 29

5.7946.123

3.151

2.658

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

2013 2014 2015 2016

%

00

0 E

UR

EBITDA in EUR thousand Return on equity in % Return on assets in %

17.259

18.748

14.23213.263

0

5

10

15

20

25

30

35

40

45

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

20.000

2013 2014 2015 2016

EU

R/e

mp

loy

ee

00

0 E

UR

Value added in EUR thousand Value added per employee in EUR thousand


29

2. PRODUCTION

In the VIPAP Group, two companies carry out production activities – Vipap Videm Krško d.d. and the disabled enterprise Levas d.o.o.. The principal activity of the company VIPAP VIDEM KRŠKO d.d. is paper and fibre production and paper and cardboard production and trade. The Company is one of the largest paper production companies in Slovenia and ranks among the major newsprint manufacturers in SE Europe. The Company is producing newsprint, improved newsprint, publication and wrapping packaging papers.

Production of paper and fibres

in t Realisation

2014 Realisation

2015 Realisation

2016 INDEX 16/15

Paper production in tonnes 193,948 197,745 195,502 99

Fibre production in tonnes 192,363 195,844 192,485 98

Total 386,311 393,589 387,987 99

386.311

393.589

387.987

150.000 200.000 250.000 300.000 350.000 400.000 450.000

REAL 2014

REAL 2015

REAL 2016

t


30

We produced 195,502 tonnes of paper in 2016, which is 2,243 tonnes less than in the year before (decrease of 1%). We also produced 192,485 tonnes of fibres in 2016, which is 3,359 tonnes less than in the year before (decrease of 2%). The level of integration of fibre and paper production in 2016 achieved 98%. This allowed us to make maximum use of the production capacity based on recycled fibres.

2009 2010 2011 2012 2013 2014 2015 2016

Integration rate in % 93 94 93 95 97 99 99 98

In 2016, paper and fibre production was relatively continuous, but we did experience some technical and technological problems. Most unplanned downtime occurred on PM1 due to issues with drives. Issues arose on PM2 with the emergency shut-down system and there were also issues on QCS. Nothing noteworthy occurred on PM3; there was a longer downtime due to changing the bearing on the front cylinder and changing the pump for sealing water. There was a longer downtime in the deinking plant due to problems on the screw press. In total, production was down for 3,649 hours, which is 9% more compared to the year before. Despite this, total efficiency of paper machines 1 and 3 rose by 1 percentage point as compared to 2015 and total efficiency of paper machine 2 stayed at the same level. A production drop was only recorded in August, when the regular annual overhaul took place. In this period, production was down for about 5 days. Besides the regular overhaul of machinery, we also made minor improvements providing the basis for uninterrupted functioning and reducing downtime over the following months. Even though all the measures in the production were aimed at stable production, quality issues arose during the year, causing cancellation of certain orders and an increase in complaints from 0.8 EUR/t to 1.1 EUR/t.

84

86

88

90

92

94

96

98

100

2008 2009 2010 2011 2012 2013 2014 2015 2016

%


31

PAPER PRODUCTION Paper was produced on all three paper machines. The market is currently characterised by the demand for lower grammage and production is adjusted accordingly, but at the expense of lower time utilisation of paper machines. On paper machine 1, we produced newsprint and improved newsprint and publication and wrapping packaging papers of different grammage, whiteness, shade and purpose of use. On paper machines 2 and 3 we produced exclusively newsprint of varying grammage, with increasing share of papers with lower grammage of 40 and 42.5 g/m2, which unfortunately affects production quantities. All types of paper produced, with their application and characteristics, are presented in the tables below.


Paper grade Application Printing technique Grammage g/m2 Environmental care

PUBLICATION PAPERS

VIPRINT

graphic, coated, machine finished, matt

periodicals, magazines, catalogues, picture books

multi-colour and black&white heat-set offset print, sheet-fed print

54/57/60/70/80/90 EU Ecolabel SI/011/03 FSC® C117321

VIPRESS graphic, coated, machine finished, matt

periodical newspapers, magazines, catalogues multi-colour and black&white standard and waterless cold-set offset print

54/57/60/70/80 EU Ecolabel SI/011/02 FSC® C117321

VIMAG graphic, coated, calendered, semi gloss



52/54/57/60/70/80/90 EU Ecolabel SI/011/04 FSC® C117321

VIMAX graphic, coated, slightly calendered, silky

periodicals, package leaflets/instructions, magazines, catalogues


54/57/60/70/80/90 EU Ecolabel SI/011/05 FSC® C117321

VIPCO graphic, surface treated, machine finished, matt

photocopying, laser/inkjet printing; notebooks, writing pads, (continuous) forms, envelopes; books, brochures

digital print, offset print, sheet-fed print

55/60/70/80 EU Ecolabel SI/011/01 FSC® C117321

VIPCO WB graphic, surface treated, machine finished, matt

photocopying, laser/inkjet printing; notebooks, writing pads, (continuous) forms, envelopes; books, brochures

digital print, offset print, sheet-fed print

55/60/70/80 FSC® C117321


33

VIBULK bulky, graphic paper

publications and books, cash register rolls

black&white and multi-colour cold-set and heat-set offset print and digital printing technique;

50/60/70/80 g/m2 FSC® C117321

AlphaPress PP R graphic-publication, pigmented, machine finished

periodicals, magazines, catalogues and other promotional material and colour books

multi-colour and black&white heat-set offset print, for digital and sheet-fed print

45/48.8/52/57/60/70; 80 g/m2

FSC® C117321

OmegaPress R graphic-publication, natural, machine finished paper

periodicals, magazines, catalogues and other promotional material and colour books

multi-colour and black&white heat-set and cold-set offset and digital printing; also for sheet-fed printing

45/48.8/52/57/60/70; 80 g/m2

FSC® C117321

SAVA PRINT CREAM R

toned, surface-treated, offset machine finished paper of higher smoothness

periodicals, books, magazines, catalogues and other promotional material, colour books and office paper


55/60/70; 80 g/m2 FSC® C117321

SAVA GREEN OFFSET R

graphic-publication, surface-treated, machine finished paper

periodicals, books, magazines, catalogues and other promotional material and colour books


50/55/60/65/70/80 g/m2

SAVA GREEN MFC R

graphic-publication, coated, machine finished paper

periodicals, books, magazines, catalogues and other promotional material and colour books


52/55/60/65/70/80/90 g/m2


34


WRAPPING PACKAGING PAPERS VIPACK R

wrapping packaging

bags/sacks and various wrapping material flexo and offset printing

70/80 FSC® C117321

VIPACK W R

wrapping packaging


70/80 FSC® C117321

VIPACK C R

wrapping packaging


70/80 FSC® C117321

VIP FLEX 60

wrapping packaging, printing

wrapping and packaging (laminates, tablecloths, tablemats, towels, board, wrapping paper, pattern paper, sacks, etc.)

flexo and offset printing

36/38/40/42,5/45/48,8/52/60/70

FSC® C117321

VIP FLEX 60 H




36/38/40/42.5/45/48.8/52/60/70

FSC® C117321

VIP FLEX 70




36/38/40/42.5/45/48.8/52/60/70

FSC® C117321

VIP FLEX 70 H




36/38/40/42.5/45/48.8/52/60/70

FSC® C117321

VIP FLEX 76




36/40/42/45/48/52/60/70/80

FSC® C117321

VIP FLEX 76 H




36/40/42/45/48/52/60/70/80

FSC® C117321

VIP FLEX 80




36/40/42/45/48/52/60/70/80

FSC® C117321


35

VIP FLEX 80 H




36/40/42/45/48/52/60/70/80

FSC® C117321

VIP FLEX 88 R

wrapping packaging, made of 100% recycled fibres

wrapping and packaging (laminates, tablecloths, tablemats, towels, board, wrapping paper, protection paper, sacks, etc.)


36/40/42/45/48/52/60/70/80

FSC® C117321

VIP FLEX 88 H R

wrapping packaging, made of 100% recycled fibres

wrapping and packaging (laminates, tablecloths, tablemats, towels, board, wrapping paper, protection paper, sacks, etc.)


36/40/42/45/48/52/60/70/80

FSC® C117321

VIP KRAFT R

wrapping packaging, one-side calendered

wrapping and packaging (laminates, tablecloths, tablemats, board, wrapping paper, pattern paper, sacks, etc.)


36/40/42.5/45/48.8/52/55/60/70/80

FSC® C117321

VIFLEX 80 Mag R

wrapping packaging, graphic, coated, calendered, semi gloss

wrapping and packaging (tablecloths, tablemats, laminates, gift wrapping)


52/54/57/60/70/80/90 FSC® C117321

VIFLEX 80H Mag R

wrapping packaging, graphic, coated, calendered, semi gloss

wrapping and packaging (tablecloths, tablemats, laminates, gift wrapping)


52/54/57/60/70/80/90 FSC® C117321

VIFLEX 80

wrapping packaging, graphic, coated, machine finished, matt

wrapping and packaging (bags, laminates, tablecloths, tablemats)


54/57/60/70/80/90 FSC® C117321

VIFLEX 80 H

wrapping packaging, graphic, coated, machine finished, matt



54/57/60/70/80/90 FSC® C117321

VIFLEX 80 W

wrapping packaging



36/40/42/45/48.8/52/60/70/80

FSC® C117321


36

- for contact with food, certificates valid for 2 years


NEWSPRINT

SOF newsprint, machine finished

newspapers, periodicals, pocket edition books black&white and multi-colour cold-set and heat-set offset print

42.5/45/48.8/52 FSC® C117321

SOF F high quality newsprint

newspapers, periodicals, supplements, inserts, advertising material

black&white and multi-colour heat-set offset print and flexo print

45/48.8/52 FSC® C117321

SOF DP newsprint, machine finished

newspapers and periodicals multi-colour digital and offset technique

45/48.8/52 FSC® C117321

LIBNA PRINT improved newsprint

newspapers, periodicals, advertising material, pocket books

multi-colour and black&white heat-set and cold-set offset print, sheet-fed print

45/48.8/52/55/60/70/80

FSC® C117321

LIBNA PRINT H printing paper, improved newsprint

for office and school supplies: (writing pads, notebooks, workbooks), for newspapers, periodicals, advertising materials and books

black&white and multi-colour heat-set and cold-set offset printing; also for sheet-fed printing

48.8/52/55/60/70/80 FSC® C117321

LIBNA SG SC improved newsprint, calendered, semi gloss



48.8/52/54/56/60/70/80

FSC® C117321

R - development product


Paper machine 1: We produced 58,327 tonnes of paper on paper machine 1, which is 928 tonnes more as compared to the year before. The quantity of publication paper produced equalled 19,863 tonnes and of wrapping packaging paper 10,718 tonnes, exceeding the 2015 production figures. The production of improved newsprint of 5,966 tonnes and newsprint SOF of 21,808 tonnes dropped by 2,600 tonnes, which is in compliance with the goal set. Paper machine 2: We produced 68,256 tonnes on paper machine 2, which is 1,832 tonnes less than the year before. This is a consequence of the increasing share of newsprint of lower grammage from 24% in 2015 to 33% in 2016, which reduces the paper machine productivity. Paper machine 3: Production on paper machine 3 equalled 68,919 tonnes, 1,339 tonnes less than in the year before. The reason for the decrease in production is the same as for PM2, namely the production of newsprint of lower grammage is increasing, with the share of these papers already 46% (as compared to 28% in 2015).

Paper production by paper machine

in t Realisation

2014 Realisation

2015 Realisation

2016 INDEX 16/15

Paper machine 1 59,439 57,399 58,327 102

Paper machine 2 66,393 70,088 68,256 97

Paper machine 3 68,116 70,258 68,919 98

Total 193,948 197,745 195,502 99

59.439

66.393 68.116

57.399

70.088 70.258

58.327

68.256 68.919

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

Paper machine 1 Paper machine 2 Paper machine 3

t

REAL 2014 REAL 2015 REAL 2016


38

Structure of paper production by year

in t 2014 2015 2016 INDEX 16/15

Newsprint and improved newsprint 168,339 170,715 164,949 97

Publication paper 22,642 18,489 19,836 107

Wrapping packaging paper 2,967 8,541 10,717 125

Total 193,948 197,745 195,502 99

168.339

22.642

2.967

193.948

170.715

18.489

8.541

197.745

164.949

19.836

10.718

195.502

0 50.000 100.000 150.000 200.000 250.000

Newsprint paper

Publishing paper

Production wraping&packaging paper

Together

t

2016 2015


39

FIBRE PRODUCTION We produced 192,485 tonnes of fibre, which is by 2% less when compared to the year before. Lower fibre production does not result only from lower paper production and a different structure, but also from increased use of fillers in paper production, cutting specific fibre use, both deinked pulp and groundwood. This was one of the measures for improved production in 2016.

Fibre production in tonnes

in t Realisation

2014 Realisation

2015 Realisation

2016 INDEX 16/15

Deinked pulp 171,350 172,802 169,918 98

Tgw 21,013 23,042 22,567 98

Total 192,363 195,844 192,485 98

171.350172.802

169.918

21.013

23.04222.567

15.000

16.000

17.000

18.000

19.000

20.000

21.000

22.000

23.000

24.000

130.000

135.000

140.000

145.000

150.000

155.000

160.000

165.000

170.000

175.000


t

Deinked Pulp Tgw


40

PRODUCTION IN THE LEVAS DISABLED COMPANY In 2016, an increase in the production of wood packaging was recorded again after several years of downturn, mostly for the segment of standard pallets, whilst the production activity for other segments stagnated as compared to the year before.

in t Realisation

2014 Realisation

2015 Realisation

2016 INDEX 16/15

Epal pallets 129,877 105,657 115,918 110

Non-standard pallets 16,770 32,720 31,805 97

Chipboard pallets 19,441 18,172 20,077 110

Total 166,088 156,549 167,800 107

129.877

105.657

115.918

16.770

32.720 31.805

19.441 18.172 20.077

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000


Epal Pallets Non-standard Pallets Chipboard Pallets


41

3. SALES In 2016, we sold 193,147 tonnes of paper. Of this, as much as 85% was newsprint and improved newsprint. Compared to the year before, we preserved the sales level of publication papers and increased sales for wrapping packaging papers. Sales of newsprint and improved newsprint dropped by almost 7 thousand tonnes.

QUANTITY OF PAPER SOLD – VIPAP VIDEM KRŠKO d.d.

Quantity of paper sold

in t Realisation

2014 % Realisation

2015 % Realisation

2016 % INDEX 16/15

Newsprint 157,924 84 165,026 83 158,876 82 96

Improved newsprint 7,115 4 7,116 4 6,358 3 89

Publication paper 21,681 11 18,087 9 18,172 9 100

Wrapping packaging paper 2,274 1 8,709 4 9,741 5 112

Total 188,994 100 198,938 100 193,147 100 97

157.924165.026

158.876

7.115 7.116 6.358

21.681 18.087 18.172

2.2748.709 9.741

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000


Newsprint

paper

Improved

newsprint

paper

Publishing

paper

Wraping&pa

ckaging

paper


42

Publication papers (production on PM1): Publication papers are produced on paper machine 1. In 2016, we sold 18,172 tonnes of these papers, which is approximately the same as in the previous year. The principal product from the range of publication papers is Vimag in the form of reels. We sold as much as 7,269 tonnes of this paper in 2016. Other publication papers include: Vipress, Vipress NN, Vimax, Vipco, Alphapress PP, Sava Green Offset and MFC, SavaPrint Yellow and SavaPrint Cream. Improved newsprint (production on PM1): Improved newsprint is produced on paper machine 1. We sold the total of 6,358 tonnes, which is 758 tonnes less than in the year before. These papers account for 3% of total sales. They include Libna Print, Libna SGSC, Libna Print H and Omega Press. This segment of papers is one of our responses to the market situation arising from the downgrading effect. Newsprint (PM1, PM2 and PM3): The production of newsprint has been on the down side due to the market situation. In 2016, we sold the total of 158,876 tonnes, which is 6 thousand tonnes less than in the year before. Paper was produced on all three paper machines. This group includes SOF (standard grammage), SOF 42.5, SOF F and SOF DP. Wrapping packaging paper (PM1) This is a relatively new production programme, which was developed in 2013. In the same year we started trial marketing and already in 2014 recorded sales of 2,274 tonnes. In 2016, the sales of this product rose to 9,741 tonnes. The main product in this group is VIP FLEX 60, of which we sold 4,123 tonnes. Other wrapping packaging papers include: VIP FLEX 70, VIP FLEX 76, VIP FLEX 80, VIFLEX 80, VIP FLEX 88, VIP KRAFT. We produce these papers in a wide range of grammage and whiteness. These papers gained the ISEGA certificate for direct contact with dry food. PAPER FINISHING - FORMATS In 2016, we sold 6,836 tonnes of paper in sheets, which is by 2,000 tonnes or 23% less as compared to the year before. The biggest share is that of Viprint with 5,710 tonnes or 84%. Besides own paper, we cut additional 2,510 tonnes of paper from the factory Radeče papir nova.


43

PAPER SALES BY MARKET - VIPAP VIDEM KRŠKO d.d.

Export accounts for 91% of total sales. Our key markets in 2016 were Italy (23%) and Hungary (10%), the share of which grew significantly, followed by Germany (9%) , Slovenia (9%) and Serbia (9%). In 2016, we completely suspended sales to Turkey due to less favourable prices. The Croatian, Romanian and Bulgarian markets had approximately the same share as in the year before.

0 5 10 15 20 25

Italy

Germany

Slovenia

Serbia

Hungary

Other

Bulgaria

Romania

Croatia

Austria

Bosnia and Herzegovina

Czech republic

Macedonia

Turkey

%

2016 2015


44

PAPER SALES - VIPAP VERTRIEBS und HANDELS GmbH Vipap GmbH is an Austrian-based company, which sells paper of the controlling company Vipap Videm Krško d.d. mostly to the Hungarian and Italian markets, at the same time supplying the controlling company waste paper from these markets.

in t Realisation

2014 % Realisation

2015 % Realisation

2016 % INDEX 16/15

Newsprint 15,931 90 16,461 92 24,645 93 150

Improved newsprint 41 0 26 0 106 0 408

Publication paper 1,694 10 1,110 6 1,038 4 93

Wrapping packaging paper 5 0 322 2 789 3 245

Total 17,671 100 17,919 100 26,578 100 148

SALES OF THE COMPANY LEVAS The company Levas generates the biggest share of its sales revenues from sales of wood packaging (54%). The leading product in the sales structure is the EUR Epal pallet, followed by chipboard pallets and non-standard pallets. Apart from pallets, the company is also selling cut wood, window profiles, glued wood and other carpentry products. Besides revenues from sales of wood packaging, the company is also generating revenues from services, such as:

- property security services - services of carpentry, central and car repair workshop and services of mechanical

processing and product finishing.

in pieces Realisation

2014 % Realisation

2015 % Realisation

2016 % INDEX 16/15

Epal pallets 133,921 78 104,911 68 116,676 70 111

Chipboard pallets 19,441 11 18,172 12 20,065 12 110

Non-standard pallets 17,529 10 30,671 20 30,905 18 101

Total 170,891 100 153,754 100 167,646 100 109


45

4. PURCHASING

PURCHASING OF THE CONTROLLING COMPANY VIPAP VIDEM KRŠKO D.D. The prices of the most important raw materials of waste paper and electricity were in 2016 significantly higher as compared to 2015. The prices of waste paper started increasing in the second half of the year. On the average, it was higher by EUR 10 per tonne, which translates into EUR 2.1 million higher costs at the annual level. The price of electricity was in 2016 higher by 4%. As opposed to this, the prices of pulp dropped by almost 10%. The prices of wood and chemicals were stable throughout the year. In 2016, we purchased 2,936 tonnes of sulphate pulp of conifers, 338 tonnes of sulphate pulp of deciduous trees, 211,763 tonnes of all types of waste paper and 54,796 m3of grinding wood. Purchasing for the production of paper and fibres and own electricity together with investments amounted to EUR 73 million in 2016. Total purchasing value rose by EUR 2.0 million as compared to the year before, due to higher prices of waste paper, chemicals and investments.

Fibres, recovered

paper, wood

52%

Chemicals

12%

Spare parts

5%

Energy

19%

Machine clothing

2%

Packaging

3%

Investments

2%

Other material

5%


46

Imports account for 61% of total purchasing.

PURCHASING OF THE COMPANY LEVAS KRŠKO D.O.O. The basic raw material of the company Levas Krško d.o.o. is wood, namely cut wood and logs. Cut wood is the principal raw material for making wood packaging as we shorten the production process in this way. Logs are mostly used for making packaging of special quality demanded by customers. The prices of cut wood and logs stayed at the same level in 2016 as compared to the year before.

Import; 61

Domestic market; 39


47

5. RESEARCH & DEVELOPMENT

The research and development activity is carried out in the technology and development department. Project implementation and product development are carried out in the form of project management through which the members of other functions in the Company become involved in a project. Areas of R&D activities: 1. Development of new products and modification/adjustment of the existing production

programme to new market requirements/conditions. 2. Development of new and optimisation of the existing technological procedures and processes,

defining of new boundary conditions for managing technological processes of waste water treatment, production of energy products, fibres and paper, and participation in the technological problems involved in the Company's production processes of a greater scope.

3. Optimisation of operating costs and production costs. 4. Definition of alternative raw materials, auxiliary means, chemicals and materials in the

technological process of the production of energy products, fibres and paper. 5. Development investment activities. 6. Upgrading the Company’s existing computer system “Paper Quality Control” with the module

“Usages”.

Through ZEL-EN, the Company is cooperating in the NMP project (Using the Potential of Biomass for the Development of Advanced Materials and Bio-Based Products), in which the Company’s R&D programme is included for the following areas: 1. development of nanocellulose from fibres of mechanical cellulose of TGW, DIP and sludge

already produced by the Company, 2. introduction of biotechnology into technological regulations governing waste water treatment, 3. development of advanced materials/smart papers, and 4. development of advanced materials/products from alternative raw materials and innovative

systems for their energy utilisation. In 2016, new products were developed in the framework of the so-called white programme (Vip Flex 88 and 88H), intended for processing into table settings and cloths, laminates, cardboard packaging, sacks, paper towels and similar. New products of yellow and cream colour shades (SavaPrint Cream and SavaPrint Yellow) were also developed in the scope of the graphic publication programme.


48

6. INVESTMENT ACTIVITIES

INVESTMENTS OF THE CONTROLLING COMPANY VIPAP VIDEM KRŠKO D.D. There was EUR 1,030,000 tentatively planned for investment activities and EUR 700,000 for major maintenance for 2016. The substance of investments planned for 2016 was again distinctively selective and mostly related to efficient energy use, material losses and establishment of the control visualisation system for manufacturing defects on PM1. The Company also has in place the system for minor improvements, which includes minor technological and technical production improvements, and a major maintenance system of bigger scope.

Investments by year in EUR thousand

1997/2010 2011 2012 2013 2014 2015 2016

Environmental investments 86,224 45 64 22 508 0 110

Technological investments 56,711 1,175 1,235 1,938 2,005 731 992

Total 142,935 1,220 1,299 1,960 2,513 731 1,102

Investments in 2016 in EUR thousand

REALISATION 2016

Environmental investments 110

- noise regulation 14

- pressure sorting machine with automatic reject system PM1 96

Technological investments 992

- energy plant modernisation 54

- error detection WBM/cameras PM1 82

- processing for fibre optimisation 27

- processing for paper production optimisation 55

- major maintenance 737

- other (warehouses, software, licences) 37

INVESTMENT TOTAL 1,102


49

INVESTMENTS OF THE COMPANY LEVAS In 2016, the first phase of expanding the business premises intended for sorting of waste paper was concluded. Investments in machinery equalled EUR 33,785, namely for package saw - cross-cut sawing machine and press for edge gluing panels. A major investment was also made for modernising the video surveillance system in the security department. The company also utilised public funds for investments in the amount of EUR 65,032.97 in compliance with Article 34 of the Commission Regulation (EU) no. 651/2014.


50

7. EMPLOYEES

On the last day of 2016, the Vipap Group had 450 employees, of whom:

- Vipap Videm Krško d.d. 346, - Levas d.o.o. 102 and - Vipap Vertriebs und Handels GmbH 2 employees.

EMPLOYEES OF THE COMPANY VIPAP VIDEM KRŠKO D.D. At the end of the year, the company had 346 employees. Of these, two employees are employed with the parent company Vipap only partially for 5% of working time and with the related company ZEL-EN d.o.o. for the remaining working time. Of the total, 341 employees were employed on a permanent basis and 5 under fixed-term contracts. The number of employees hired through the employment agency (Kariera d.o.o.) equals 24 (20 in paper production, 1 in the energy area, 1 in marketing, 1 in the controlling department and 1 at the management level). 19 employees left the Company and 13 new employees were recruited. The reasons for 19 employees leaving the Company were as follows:

• 8 employees retired, • 6 employees terminated employment relationship by agreement, • 1 employees switched to another employer, • 3 employees were employed for a fixed term, • 1 employee - other.

Changes in the number of employees (as at 31 December):

The Company does not implement the diversity policy in relation to representation in management or supervisory bodies in terms of, for example, gender, age or education.

445

411

389 382 375 374

352 346

200

250

300

350

400

450

500

2009 2010 2011 2012 2013 2014 2015 2016

no

. o

f e

mp

loy

ee


51

Labour productivity by year in tonnes/employee Labour productivity reached 565t/employee in 2016, 0.5% up on 2015 and as much as 34% more than in 2009.

t/employee Employee structure The existing HR structure stayed at a level similar to the one from the year before. The average employee age is 48 years, with almost half employees over 50 years of age. At the end of the year, we employed 18 occupationally disabled workers, which is 1 more than the year before. The Company must employ 6% of disabled workers, which is why it has concluded an agreement with Levas Krško d.o.o. to ensure compliance with the disabled hiring quota by replacement according to the Act Regulating the Training and Employment of Disabled Persons. Employees' professional qualifications are similar as the year before. 61% employees have educational levels IV and V (secondary school of 3 and 4 years). Employees with educational levels VI or VII (higher education programme and bachelor’s degree) account for 19%. Absence from work (absenteeism) In 2016, sick leave of all employees rose slightly from 5.7 to 5.8%, which is a consequence of the aging employee structure at the Company level. The share of sick leave up to 30 and over 30 days also increased, whilst absenteeism due to injuries at work dropped (from 259 to 50 hours per year). Health and safety at work We recorded 6 injuries, which is almost half less than in the year before. The frequency of injuries at work also dropped (from 2.9 to 1.4%). The number of working days lost decreased drastically. This positive trend is the result of a more consistent implementation of all measures related to safety at work.

421

479

519 522 516 519

562 565

100

150

200

250

300

350

400

450

500

550

600

2009 2010 2011 2012 2013 2014 2015 2016


52

We conducted 152 periodical occupational medical examinations for employees and some initial examinations for newly recruited staff. In the period from 1 June to 30 October activities were being carried out within the framework of the project “Health for the Posavje Region – Promotion of Health at Work Place”:

- Training of employees by health promoters - Workshops for stress management - Workshops for a healthy spine - Promotion of healthy work and practical consultations of our production employees with

representatives of occupational medicine.

Fire safety There were 9 incipient fires in 2016, which is 5 less than in the previous year. We have a contract with the Professional fire brigade, which is a few hundred metres away from the Company. In 2016, the fire fighters recorded 38 fire alarms. Employee training In 2016, we allocated EUR 34 thousand to employee training, which is almost three times as much as in the year before. In September, we started implementing the project “Paper Industry Academy” in cooperation with the Pulp and Paper Institute. This involves a 86-hour training programme of 11 modules covering the entire paper production process. Participants will in this way obtain the basic paper industry knowledge as well as specific knowledge for managing individual process phases. Types of training - seminars, symposiums, courses in the amount of EUR 34,013, - mandatory practical training: EUR 602 - mentorship bonus: EUR 129

16 18 11 11 11 6 420 34 24 18 15 17 4

156

589

435

561

397

65 54

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 2017

Number of injuries

Number of

dangerous

occurrences

Lost working days


53

Total training hours equalled 2171. 144 employees attended it, which accounts for an average of 15 hours per participant. In 2016, we enabled mandatory practical training to 7 secondary school students. During the summer, 6 university students were working in paper production (student work). Salaries In 2016, the average gross salary in the Company totalled EUR 1,621 or 2 % more than the year before, when the respective figure was EUR 1,589. The average salary in Slovenia for 2016 amounted to EUR 1,578 and to EUR 1,780 for the industry. Annual leave allowance of EUR 920 gross was paid in two parts, in May and June. In December, the Company paid Christmas bonus of EUR 165 gross. Compared to 2015, the number of overtime hours (4,956) dropped by 7%. EMPLOYEES OF THE COMPANY LEVAS KRŠKO D.O.O. As at 31 December 2016, the company Levas Krško d.o.o. had 102 employees, of whom 53 disabled, which accounts for a 51.96% share of all employees. On the average, the company employed 100 employees in 2016, of whom on the average 52 disabled. As the share of disabled employees exceeds 50%, we enabled also for future operations the exemption from payment of higher contributions from and on salaries for all employees of the disabled company. In 2016, 7 employees left the company, mostly due to retirement, and we hired 10 new employees, of whom 5 disabled. We successfully implemented the project of work test for 2 persons in cooperation with the Employment Service of the RS and employed 1; we started the three-month training at the workplace, which continues in the year ahead. In cooperation with CRI, we also implemented occupational rehabilitation with 1 person, whom we also employed after the rehabilitation. Similarly to previous years, the disabled educational structure (as at last day of the year) did not change substantially; the company still employs the most disabled with educational levels III and IV (lower vocational education of 2 years and secondary school of 3 years; 49.1%) and 37.7% of employees with educational levels I and II (unfinished primary school and primary school). The majority, i.e. 57.1%, of non-disabled employees also has educational levels III and IV, followed by level V (secondary school of 4 years) and levels I and II. Statistically, the average employee age of the company decreased last year, due to employment of a younger person. Nonetheless, the average employee age of the company is still high, in particular because of the natural aging process, due to which the employees move to higher age groups, as well as the need to hire disabled persons, whose most representative group on the labour market is rather old, and reassignment of employees from the parent company, to whom the parent company does not offer a job in line with the limitations on occurrence of disability. The aging structure of employees, in particular the disabled, results in decreased productivity and flexibility, more annual vacation and sickness leave.


54

8. EXPECTATIONS FOR 2017

For 2017, we plan increased production and sales volume for papers with higher value added, i.e. publication and wrapping packaging papers, and higher total production efficiency through less unplanned downtime and less reject. In terms of operational performance, the Company’s main priority will be the activities for development marketing, which strongly connect production and sales through objectives, and implementation of the programme for improving operations, which will include a range of measures for optimised management of variable and fixed operating costs. The planned sales volume is 198 thousand tonnes of paper, which is by 2% more as compared to the year before. The production plan anticipates 197 thousand tonnes of papers, 169 thousand tonnes of deinked pulp and 22 thousand tonnes of groundwood. We also plan to increase the average net selling price by 3%, mostly due to the changed sales structure with a higher share of publication and wrapping packaging papers. Further, we anticipate to sell more new products, such as Sava Green Offset and Vip Kraft, through which we will decrease the share of newsprint on PM1, which is currently the most important operational objective. The trend of lower grammage persists for newsprint, but we do expect a minimum increase in net selling prices of 2%. For 2017, we plan sales revenues to increase by 4% and EBITDA by 3 percentage points. Better financial results also depend on the realisation of urgent investments and obtainment of badly needed working capital. At the end of last year, negotiations regarding debt restructuring with banks and lenders were finally concluded; the agreement signed by the banks and the owner thus represents the grounds for further activities of looking for a strategic partner or at least starting the process of selling receivables of creditor banks and the owner of shares.


55

III. SUSTAINABLE DEVELOPMENT

REPORT


56

1. INTRODUCTION

Caring for the natural and social environment is the foundation of our operations and the basis of long-term sustainable orientation of Vipap Videm Krško d.d. Sustainable operations are a reality. Besides focusing on the production of predominantly recycled papers, we constantly optimise all technological processes and thus reduce the burden on the environment. We see to good cooperation with employees and the broader social environment that we operate in. Only thus we will ensure sustainable operations and balanced further development.

2. ENVIRONMENTAL POLICY - BUSINESS EXCELLENCE

Monitoring the status of the environment or emissions of substances and energy and the strategy of improving the status of the environment and preventing or reducing environmental impacts are part of the long-term and medium-term development strategy of the Company as well as of annual and operational plans; this is carried out in all business functions with a special emphasis on the processes that represent greater sources of pollution. Development activities are focused on the introduction of the best available techniques (BAT) both in technological and environmental area. In the business area of environment management, the past three years were characterised by the following events:

A. Amendment to the environmental permit; on 5 October 2016 we submitted the documentation for amended environmental permit ex officio. On 26 January 2017, the environmental inspection reviewed plants and devices; the conclusion of the amendment procedure for the environmental permit is expected in the first half of February 2017. On 26 January 2015, we obtained the decree on the amendment to the environmental permit referring to a higher quantity of waste paper recovered/sorted according to the R12 procedure. Already on 22 November 2013, we significantly amended and expanded the integral environmental permit evidencing the Company's compliance with the requirements imposed by the environmental legislation regarding all environmental elements.

B. Environment -friendly products; on 26 November 2012, we obtained and extended the EU Ecolabel for 5 products that meet the requirements and the ecological criteria of the EU regulation for copying and graphic paper (Commission Decision 2011/333/EU). In June 2015, ARSO renewed the ECOLABEL certificate until 31 December 2018.

C. Responsible and sustainable management of wood and wood products; on 3 October 2014, we obtained the FSC CoC Certificate for the entire production of graphic, publication, newsprint and wrapping packaging papers that fulfil the requirements of the FSC CoC series standards. On 7 June 2016, we successfully passed the control evaluation under the FSC CoC system; on 26 October 2016, we passed the extended evaluation of the FSC CoC system for purchasing non-certified wood CW (Controlled Wood) with risk assessment, in line with the FSC-STD-40-005 v2-1 standard.

D. Environmentally friendly company; the Company constructed a waste treatment plant also for treating municipal waste waters of the town of Krško; the Company also has its own accredited laboratory, which in September 2016 successfully passed the SA re-evaluation.

E. Energy efficiency of the Company


57

A. Environmental legislation, permits and environmental taxes In the area of industrial pollution, the EU adopted in November 2010 the Directive 2010/75/EU on industrial emissions – IED, which replaced the so-called IPPC Directive. The IED Directive has not yet been transposed into the Slovenian legislation; however, the Company has integrated the guidelines and goals of the IED Directive in the preparation of the development and investment programme – RIP 2017A, EIA studies, the applications for amendment to the environmental permit and the formulation of the Transitional plan for the large combustion plants K4 and K6. The above development, investment and environmental documentation was prepared in the second half of 2012 and submitted to the Environmental Agency of the Republic of Slovenia (ARSO). Due to the amendments to the environmental legislation, mainly in the area of emissions into air, nature protection and protection areas, we appropriately supplemented the environmental documentation and the environmental impact assessment study and successfully completed the related administrative procedure for amending the environmental permit on 22 November 2013 by obtaining the Decision on the Amendments to the Environmental Permit no. 35406-58/2012-23 and by acquiring the environmental approval. The procedure for amending the integral environmental permit was carried out in the second half of 2014 and successfully completed on 26 January 2015, when we obtained the Decision on the Amendments to the Environmental Permit no. 35406-66/2014-3. In September 2016, ARSO started the procedure for amending the environmental permit ex officio. On 5 October 2016, we submitted the documentation for amended environmental permit ex officio for combustion plants K4, K6 and K5; Waste Management Programme, Hazardous Substances Measures and Management and RHS (relevant hazardous substances). On 26 January 2017, the environmental inspection reviewed plants and devices; the conclusion of the amendment procedure for the environmental permit is expected in the first half of February 2017. We plan, monitor and supervise the impact of activities and emissions of substances and energy in the environment (the so-called monitoring of the state of the environment), implementing the necessary measures and reporting as required under the Environment Protection Act (ZVO) and the implementing regulations. From the environmental aspect we are obligated to have important permits, which are stated below, for the operation of devices for the integrated production of fibres and paper in the plant in Krško. In December 2009, the Company obtained the environmental permit no. 35407-106/2006-33, which proves that its operations are compliant with the requirements of the environmental legislation and other regulations, applicable at the local, national and the EU level. The permit was issued for 10 years. In December 2011, the Company received the Decision on the Amendments to the Environmental Permit no. 35407-44/2011-4 for processing residuals from combustion plants into construction products. In November 2013, the Company obtained the Decision on the Amendments to the Environmental Permit no. 35406-58/2012-23 and the Environmental Approval for increasing production capacity for producing recycled fibres, reconstructing PM1, PM2, PM3 by increasing the production of coated papers on PM1, warehouse capacities for hazardous substances, the capacities for processing non-hazardous waste according to procedures R1, R3, R5, R12, in respect of the operation of:

� industrial plants for the production of fibres from wood and other fibre materials with the capacity of 773 t/day: DIP: 578 t/day, TGW: 195 t/day;

� industrial devices for the production of paper with the capacity of 860 t/day; PM1 300 t/day, PM2 and PM3 each 280 t/day;

� combustion plans with total thermal input power 127.75 MW: K4: 56 MW, K5: 11.08 MW, K6: 60.67 MW;


58

� other technologically related devices and facilities needed for the operation of the said industrial devices: waste treatment plant (180000 PE), preparation of process water, warehouses for raw materials, energy products, chemicals and other materials, product storages, etc.

In January 2015, the Company obtained the Decision on the Amendments to the Environmental Permit no. 35406-66/2014-3 referring to waste paper recovery/sorting at the automatic sorting line of mixed waste paper of the company Kostak according to the R12 procedure. The obtainment of the environmental permit is a proof and a confirmation that the Company has set up a responsible environmental management system and at the same time its responsibility to meet the requirements of the permit, the legislation and the regulations, and to constantly improve its management in all environmental aspects: water, air, waste management, radiation, handling of dangerous substances, efficient use of water, energy, raw materials and natural resources. On 30 December 2014, the Company also renewed the Permit for greenhouse gas emissions no. 35485-27/2014-3 for sub-devices for fibre and paper production. In the second half of 2011, the Company submitted all the relevant technical bases for determining the quota for free emission coupons for 2013-2020. The Company obtained a partial water permit no. 35536-46/2006-8 for capturing water from the Sava river and its own wells, which was renewed in 2012; in February 2013, the Company was granted the water right to use water and partial water permit no. 355536-42/2012-8 for a period of 30 years. B. Environment-friendly products - EU Ecolabel Because of the requirements of the customers, particularly those from the EU, the Company decided to obtain the EU ecolabel for certain products. Already in 2006, the Company acquired for 3 products the "EU Flower" (daisy) and, according to the new environmental criteria, ARSO issued in November 2012 the Decision no. 35400-225/2012-11 on EU Ecolabel for 5 products. VIPCO, VIPRESS, VIPRINT, VIMAG and VIMAX fulfil all environmental criteria for the group of products of copying and graphic papers defined in Commission Decision 2011/333/EU for the award of the EU Ecolabel regarding emissions to water and air (COD, P, S, NOX, AOX, CO2), energy consumption (TE and EE), sustainable forest and fibres management, the use and handling of hazardous chemicals, waste management, fitness for use, information on the packaging and information appearing on the Ecolabel, so the said products were awarded the EU Ecolabel. Environmental criteria for photocopying and graphic papers were extended in June 2015, which is why ARSO also awarded us a new ECOLABEL certificate for 5 products, which is valid until 31 December 2018.


59

Specifications of products with the EU Ecolabel

Product Fibre composition Intended use EU code

Production location

EU Ecolabel

VIPCO

• photocopying; • digital printing; • printing of books and brochures, etc.; • printing of periodicals and promotional materials; • multi-colour and black&white offset print;

SI/011/01 Krško, SLO

VIPRESS

VIPRINT

VIMAG

VIMAX

• printing of periodicals and promotion materials; • printing of catalogues, children’s books, colouring books; • sheet-fed print; multi-colour and black&white heat-set offset print (VIPRESS in cold set)

SI/011/02 SI/011/03 SI/011/04 SI/011/05 Krško, SLO

Lesovina;

20%

Celuloza;

16%

recikl.

vlakna;

64%

Lesovina;

18%

Celuloza;

17%

recikl.

vlakna;

65%

SI/011/04

SI/011/02

SI/011/03

SI/011/05


60

C. Responsible and sustainable management of wood and wood products - FSC Certificate Based on demands and expectations of customers from the EU market, the Company set up in the first half of 2013 a management, handling and tracking system in the entire chain of sustainable management of wood and wood products according to the requirements of the FSC CoC series standards: FSC-STD-40-004 version 2.1., FSC-STD-40-005 version 2.1, FSC-STD-40-007 version 2.0. The certification evaluation was performed by assessors from Bureau Veritas on 11 June 2013. The Company obtained for all products the certificate no. BV-COC-117321 dated 10 June 2013, which proves that products are certified FSC Mix. The control evaluation of the FSC CoC system was performed by assessors from Bureau Veritas on 9 June 2014. The Company expanded the FSC Mix certification also to wrapping packaging papers. The extended certificate no. BV-COC-117321 was issued on 3 October 2014. The annual control evaluation of the FSC CoC system was carried out by Bureau Veritas assessors on 8 June 2015 and 7 June 2016. The extended evaluation of the FSC CoC system for purchasing non-certified wood CW (Controlled Wood) with risk assessment from Slovenia and Hungary, according to standard FSC-STD-40-005 v2-1, was performed by Bureau Veritas assessors on 26 October 2016.


61

D. Environmentally friendly company In August 2009 we started treating the waste waters of Krško and the surrounding areas at the central waste water treatment plant. In 2016, more than 98% of municipal waste waters of Krško with its surroundings were treated at the central waste water treatment plant VIPAP. The Company has its own accredited laboratory. The Input Control and Ecology Laboratory is an accredited testing laboratory under the SIST EN ISO/IEC 17025:2005 standard for the scope of activities stated in the accreditation document LP-71. On 13 September 2016, the Slovenian Accreditation made an assessment visit and reviewed the management system. The external SA assessment was positive. Since 2014, 21 products/types of wrapping packaging paper have been certified as suitable for direct contact with food. Certification services were ordered from an Italian laboratory ECOL STUDIO (requirements of the Italian market) and the German institute ISEGA. Our wrapping packaging papers are for the most part suitable as packaging papers for direct contact with dry food and food types that are washed, peeled or shelled, except for VIP KRAFT, which is also suitable for aqueous and fatty food.


62

The Slovenian National Building and Civil Engineering Institute (ZAG) has been carrying out since 2015 assessments of the production of energy products and assessment of composites MULEX VIPELEX and VIŽELEX - in compliance with the Slovenian technical approval STS-09/0065 and the control plan NK-STS-09/0065. The certification/initial evaluation under the +1 system was performed by the ZAG professional assessor on 30 July 2015 and the regular/control evaluation was performed on 28 July 2016. E. Energy efficiency of the Company Ensuring high-level energy efficiency is an ongoing task of the company Vipap Videm Krško d.d., embedded in the Company’s Development and Investment Programme and measures for improving operations. Areas of action:

• Purchasing of primary energy products (fuel, electricity);

• Production of secondary energy products (steam, own electricity, water, compressed air);

• Careful use of energy products;

• Shutting down process water between production lines with the aim of raising the process temperature curve and reducing the quantity of waste water and thermal energy consumption;

• Reprocessing, minor improvements, optimisation of individual sets, investments.

Measures implemented with effects noted in 2016:

• We successfully leased electricity for 2017 at the HU PXE energy exchange; the average price will be lower by EUR 6.5/MWh (as compared to 2016). With the annual consumption

of 150 GWh, we will achieve savings of EUR 975,000.

• We acted as tertiary reserve for the electricity power network; the income from constant stand-by and activation reached EUR 25,600.

• In June, we managed to cut the price of biomass by EUR 2 per tonne, thus saving EUR 14,000.

• We set up monitoring for the compressed air system (EMEO).

• We built in automatic reject system on paper machine 1 (8/2016), which will enable annual savings of EUR 98,000 due to decreased use of fibre, fillers and electricity.

• We optimised revolutions of vacuum pumps on paper machine 1, saving 40 kW of power (EUR 13,600).

• On the K4 boiler we built in frequency-controlled pump for the preparation of boiler water, which consumes less electricity, saving EUR 3,200.

• On the K5 boiler we performed test incineration of reject; the results were positive, so we will introduce permanent incineration following the environmental investment.


63

• At the Slorest restaurant, electric heater for hot sanitary water is built in (electricity paid by Slorest); we thus abolished steam heating, saving EUR 3,700 at the annual level.

• Within the scope of closing process water with a view to reducing the consumption of fresh water, increasing the process temperature and thus reducing the consumption of steam for maintaining target circuit temperature, we carried out the following activities:

o Automation of P82 for pumping clean filtrate of PM1 in the clean filtrate accumulation system;

o Automation of the water level “loop 1” and “loop 2” in the DIP process; o Automation of water closing for PM and TGW; o Returning cooling water of PM1.

The activities carried out helped lower specific water use by 1.3 m3/t net integrated, which means EUR 14,600 per year lower costs of water. Positive impact was also recorded in

terms of decreased temperature shocks, mostly in the winter and spring time. Total effect: lower steam consumption by 0.03 t steam/t DIP, equalling EUR 74,500 per year.


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3. RESPONSIBILITY TOWARDS THE NATURAL ENVIRONMENT

Our impacts on the narrow and broader natural environment are monitored through measurements. We are constantly adapting to the environmental legislation and operate in line with the international environmental standards. The monthly analysis comprises the following environmental indicators: A. Specific use of energy and water B. Specific waste water discharge C. Specific air emissions from the Company D. Specific quantities of recovered and removed waste

A. Specific use of energy and water In recent years, the Company has been implementing measures aimed at efficient use of raw material, energy products and water, which have a positive impact demonstrated by gradual decrease in the consumption of industrial water and steam, whilst electricity consumption is increasing. Specific use of energy products and water in the integrated production of fibre and paper

Unit of measurement 2012 2013 2014 2015 2016

Process water m3/t g.p. 18.2 20 19.4 18.2 17.9

Steam GJ/t g.p. 4.77 4.97 4.99 4.764 4.704

Electricity kWh/t g.p. 862 870 907 898 905

0

5

10

15

20

25

2012 2013 2014 2015 2016

830

840

850

860

870

880

890

900

910

920

Teh. Water Steam Electricity


65

B. Specific waste water discharge The indicators of specific waste water discharge show that the Company has been maintaining the level from recent years. Specific waste water load in the integrated production of fibre and paper

Parameter Unit of measurement 2012 2013 2014 2015 2016

Suspended solids kg/t g.p. 0.14 0.15 0.12 0.11 0.09

COD kgO2/t g.p. 1.6 1.8 1.7 1.6 1.5

BOD5 kgO2/t g.p. 0.08 0.10 0.09 0.10 0.09

Waste water m3/t g.p. 16.5 18.5 18.3 18.0 17.1

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1,80

2,00

2012 2013 2014 2015 2016

10,0

12,0

14,0

16,0

18,0

20,0

suspended solids COD

BOD5 Waste water


66

C. Specific air emissions Over the recent years, the Company has reduced its specific emissions into air. It can be said that we are maintaining a suitable level of air emissions. By taking actions aimed at efficient use of energy and increasing the share of renewable energy sources, the Company reduces greenhouse gas emissions and fossil CO2 emissions. C. Specific air emissions

Unit of measurement 2012 2013 2014 2015 2016

Sulphur dioxide kgSO2/t g.p. 0.392 0.425 0.422 0.367 0.291

Nitrogen oxides kg NO2/t g.p. 0.991 0.944 0.935 0.880 0.970

Carbon dioxide kg CO2/t g.p. 409.56 444.54 435.24 392.35 362.24

0,000

0,200

0,400

0,600

0,800

1,000

1,200

2012 2013 2014 2015 2016

0

50

100

150

200

250

300

350

400

450

500

Sulpher dioxide nitrogen oxide Carbon dioxide


67

D. Specific quantities of the Company's recovered and removed waste The Company plans waste management carefully and separates waste at source, but the quantities of waste have been growing due to poorer quality of waste paper for recycling. In 2016 we managed to process also the waste stock from 2015. Specific quantities of recovered and removed waste

Units 2012 2013 2014 2015 2016

R - recovered waste kg s.s./t g.p. 297 367 344 387 411

D - removed waste kg s.s./t g.p. 24 10 17 9 8

Waste produced kg s.s./t g.p. 321 371 373 390 397

0

50

100

150

200

250

300

350

400

450

2012 2013 2014 2015 2016

kg/t

R-Waste Recovery D-Waste Disposal


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4. RESPONSIBILITY TOWARDS THE INTERNAL AND BROADER SOCIAL

COMMUNITY

The social responsibility of Vipap Videm Krško d.d. is a mandatory and integral part of the progress to more competitive performance. We realise that the internal and broader social responsibility is becoming an increasingly important element of efficient performance of the Company and therefore its existence. 1. Internal social responsibility – employee well-being In the scope of an innovative activity, employees receive awards for innovative ideas. The Company drafted the Regulation on Industrial Property Rights Arising from Employment Relationship, and Reporting Innovations and Minor Improvements already in 2005. The third item of this Regulation specifies the procedures for rewarding innovators. The Regulation is constantly updated. Employees receive long-service awards for 10, 20, 30 and 40 years of service with the Company. We conducted 152 periodical occupational medical examinations. The Company pays for employees' second pension pillar at Moja naložba. Employees can also spend their vacation in two company holiday facilities in Nerezine. A hot meal and free water in a visible place are provided at the Company's headquarters. For a number of years, the Company has had a contract with the medical centre Aristotel d.o.o., where all employees can get a free flu shot. We encourage employee training and education. In 2016, we initiated the “Paper Industry Academy” project in cooperation with the Pulp and Paper Institute. The 86-hour training programme of 11 modules covers the entire paper production process. Training was attended by 23 employees from the Company and 1 person from the company Radeče papir nova. The Company is aware that it is necessary to adopt all measures to prevent, eliminate and manage the instances of violence, harassment and mobbing at workplace that could jeopardise employee health. As a result, two important documents on occupational health were issued in 2013:

- Instructions Prohibiting Work Under the Influence of Alcohol, Drugs or Other Illegal Substances; and - Prohibition, Elimination and Managing of Violence, Harassment and Mobbing at Workplace.

In the period from 1 June to 30 October 2016 we carried out activities within the framework of the project “Health for the Posavje Region – Promotion of Health at Work Place”. The Promotion of Health at Workplace Project was in 2016 financially supported by the Health Insurance Institute of Slovenia.


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The implementation of this project helped reduce the number of accidents at work as we have 50% less injuries as compared to previous years, resulting in significantly less absence from work due to injuries (as much as 80% less). 2. Wider social responsibility

In 2016, we organised 7 tours of the plant, mostly on the request of primary and high schools and the Faculty of Arts of Ljubljana. We regularly inform the wider and local public about all important projects implemented in the Company with a potential impact on the environment (example: possible short-term increase in noise), even though we consistently comply with all legal regulations. We cooperate with primary and secondary schools as well as faculties by providing donations, mandatory practical training as well as by taking part in various ecological projects. In 2016, we welcomed 7 secondary school students for mandatory practical training and 6 university students were working during the summer (student work). The Company is aware of the fact that environment should be managed responsibly and that all environmental regulations have to be complied with. In this respect we have very good cooperation with the Municipality of Krško for treatment of the town waste waters. More than 90% of municipal waste water of Krško and the surrounding areas is treated by out waste water treatment plants.


70

IV. FINANCIAL REPORT OF THE

VIPAP GROUP


71

1. FINANCIAL STATEMENTS

1.1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016

in EUR

Note

31 December

2016

31 December

2015 1 January

2015

ASSETS 108,097,013 113,298,112 120,922,571

A. Long-term assets 87,170,986 90,878,691 97,095,403 I. Intangible fixed assets and long-term deferred expenses and accrued revenues 1 1,113,180 920,086 878,348

1. Long-term property rights 159,983 239,326 217,588

4. Long-term deferred development costs 953,197 680,760 660,760

II. Property, plant and equipment 2 82,122,584 86,022,255 94,913,160

1. Land and buildings 27,328,972 28,064,291 31,605,135

a) Land 8,453,232 8,453,232 9,818,072

b) Buildings 18,875,740 19,611,059 21,787,063

2. Plant and machinery 52,131,656 56,763,653 61,656,183

3. Other plant and equipment 2,409,068 937,894 1,459,151

4. Property, plant and equipment being acquired 252,888 256,417 192,691 a) Property, plant and equipment under construction and manufacture 252,888 256,417 192,691

b) Advances for property, plant and equipment 0 0 0

III. Investment property 2,818,000 2,818,000 0

IV. Long-term financial assets 3 470,600 544,400 512,284

1. Long-term financial assets, excluding loans 470,600 544,400 512,284 a) Shares and participating interests in companies within the Group 153,200 153,200 153,200

b) Other shares and stakes 317,400 391,200 359,084

VI. Deferred tax assets 4 646,622 573,950 791,611

B. Short-term assets 20,314,994 21,799,442 23,155,790

I. Assets (disposal groups) available for sale 0 0 0

II. Inventories 5 9,836,984 10,683,151 11,407,183

1. Material 5,396,480 6,951,147 6,547,458

2. Work-in-progress 556,767 217,459 286,222

3. Products and merchandise 3,803,059 3,474,919 4,511,271

4. Advances for inventories 80,678 39,626 62,232

IV. Short-term operating receivables 6 10,284,296 10,440,239 11,595,893

1. Short-term operating receivables due from the Group companies 0 0 0

2. Short-term operating trade receivables 9,161,343 8,899,987 9,983,734

3. Short-term operating receivables due from others 1,122,953 1,540,252 1,612,159

V. Cash 7 193,714 676,052 152,714

C. Short-term deferred costs and accrued revenues 8 611,033 619,979 671,378


72

in EUR

Note

31 December

2016

31 December

2015 1 January

2015

EQUITY AND LIABILITIES 108,097,013 113,298,112 120,922,571

A. Equity 9 43,328,904 49,211,762 55,115,171

I. Called-up capital 78,387,660 78,387,660 78,387,660

1. Share capital 78,387,660 78,387,660 78,387,660

II. Capital reserves 55,004 55,004 55,004

III. Revenue reserves 108,540 108,540 108,540

1. Legal reserves 96,744 96,744 96,744

2. Reserves for treasury shares and own stakes 3,557,093 3,557,093 3,557,093

3. Treasury shares and own stakes (as a deductible item) -3,557,093 -3,557,093 -3,557,093

4. Other revenue reserves 11,796 11,796 11,796

IV. Revaluation reserves 2,845,082 2,915,331

2,911,244

V. Fair value reserves 213,365 286,431 258,945

VI. Retained net profit/loss -38,280,747 -32,541,204 -26,606,222

VII. Minority shareholder equity 0 0 0

B. Provisions and long-term accrued expenses and deferred revenues 10 1,255,590 1,372,830 1,596,074

1. Provisions for pensions and similar liabilities 766,068 811,389 885,556

2. Other provisions 10,320 12,684 21,073

3. Long-term accrued expenses and deferred revenues 479,202 548,757 689,445

C. Long-term liabilities 31,834,280 30,178,345 33,773,421

I. Long-term financial liabilities 11 31,135,393 29,540,278 33,118,746

1. Long-term financial liabilities to Group companies 10,844,195 8,991,417 8,787,994

2. Long-term financial liabilities to banks 20,288,566 20,541,129 24,330,752

4. Other long-term financial liabilities 2,632 7,732 0

III. Deferred tax liabilities 698,887 638,067 654,675

D. Short-term liabilities 30,820,989 31,512,942 29,653,080

II. Short-term financial liabilities 12 5,286,609 6,745,945 1,583,582

1. Short-term financial liabilities to Group companies 0 1,849,865 0

2. Short-term financial liabilities to banks 5,076,945 4,691,081 1,537,668

4. Other short-term financial liabilities 209,664 204,999 45,914

III. Short-term operating liabilities 25,534,380 24,766,997 28,069,498

1. Short-term operating liabilities to the Group companies 0 0 0

2. Short-term trade payables 13 23,834,763 23,049,658 26,010,349

4. Short-term operating liabilities from advances 169,917 177,815 173,733

5. Other short-term operating liabilities 14 1,529,700 1,539,524 1,885,416

0 0 0

E. Short-term accrued expenses and deferred revenues 15 857,250 1,022,233 784,825

Note: Financial statements must be interpreted together with the relevant notes presented under Item 2.10. Notes to the consolidated financial statements.


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1.2. CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016

in EUR

Notes 2016 2015

1. Net sales revenues 16 89,950,984 91,603,883

2. Change in inventories of products and work-in-progress 668,629 -1,101,526

4. Other operating revenue (including revaluation operating revenue) 17 742,332 912,076

5. Costs of goods, materials and services 76,761,426 75,824,679

a) Cost of goods and materials sold and cost of materials used 66,925,339 65,466,165

b) Costs of services 18 9,836,087 10,358,514

6. Labour costs 19 10,491,978 10,807,289

a) Costs of salaries and wages 7,845,425 7,786,733

b) Social security costs 1,371,650 1,386,972

c) Other labour costs 1,274,903 1,633,584

7. Write-offs 6,818,468 7,470,190

a) Amortisation and depreciation 6,705,039 7,195,780

b) Revaluation operating expenses for intangible fixed assets and property, plant and equipment 3,205 3,284

c) Revaluation operating expenses for current assets 110,224 271,126

8. Other operating expenses 20 1,337,260 1,357,427

Operating profit/loss -4,047,187 -4,045,152

9. Financial revenues from participating shares 15,900 15,000

c) Financial revenues from shares in other companies 15,900 15,000

10. Financial revenues from loans granted 0 0

a) Financial revenues from loans granted to Group companies 0 0

11. Financial revenues from operating receivables 21 45,293 96,218

b) Financial revenues from operating receivables due from others 45,293 96,218

12. Financial expenses from impairments and write-offs of financial assets 0 1,484

13. Financial expenses for financial liabilities 22 1,893,550 2,119,640

a) Financial expenses for loans received from Group companies 494,806 607,171

b) Financial expenses for loans received from banks 1,390,902 1,472,635

d) Financial expenses for other financial liabilities 7,842 39,834

14. Financial expenses for operating liabilities 23 116,702 155,767

Financial expenses for operating liabilities to the Group companies 0 0

b) Financial expenses for liabilities to suppliers and bills payable 114,101 131,133

c) Financial expenses for other operating liabilities 2,601 24,634

Net profit/loss from ordinary activities -5,996,246 -6,210,825

15. Other income 24 198,668 361,727

16. Other expenses 12,195 66,343

Operating profit/loss from extraordinary activities 186,473 295,384

17. Corporate income tax 25 -3,834 -5,053

18. Deferred taxes 74,352 -14,074

19. Net profit/loss for the period -5,739,255 -5,934,568

of which the Group -5,739,255 -5,934,568

of which minority shareholders 0 0

20. Change in revaluation reserve from revaluation of property, plant and equipment -70,249 4,087

21. Change in fair value reserves -66,742 27,886

22. Other elements of comprehensive income -6,612 -814

23. Total comprehensive income for the year -5,882,858 -5,903,409

of which the Group -5,882,858 -5,903,409

of which minority shareholders 0 0



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1.3. CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD FROM 1 January 2016 TO 31 DECEMBER 2016

in EUR 2016 2015 A. Cash flows from operating activities

a) Items of income statement 2,900,735 3,380,056

Net profit/loss for the year -5,739,255 -5,934,568

Adjustments for:

Amortisation and depreciation 6,705,039 7,195,780

Impairments and write-offs of fixed assets 0 0

Gains/Loss on the disposal of fixed assets -28,878 -9,860

Net financial debt 1,877,649 2,106,124

Income tax including deferred taxes -70,518 19,127

Corporate income tax paid -5,053 -6,542

Other revaluations and adjustments 161,751 9,995

b) Changes in net current assets (and deferred and accrued items, provisions and deferred tax assets and liabilities) of balance sheet operating items -726,905 -369,853

Opening less closing operating receivables 63,194 947,030

Opening less closing deferred costs and accrued revenues -192,958 -18,029

Opening less closing deferred tax assets -72,672 12,121

Opening less closing assets (disposal groups) available for sale 0 0

Opening less closing inventories -733,149 664,045

Closing less opening operating liabilities 485,660 -2,005,578

Closing less opening accrued expenses and deferred revenues, and provisions -277,336 28,604

Closing less opening deferred tax liabilities 356 1,954

c) Net cash from/used in operating activities (a + b) 2,173,830 3,010,203

B. Cash flows from investing activities

a) Cash receipts from investing activities 64,967 70,840

Receipts from interest and participation in profit relating to investing activities 15,900 15,000

Cash receipts from disposal of property, plant and equipment 49,067 55,840

b) Cash disbursements for investing activities -968,466 -1,649,339

Cash disbursements for acquisition of intangible assets -23,986 -998

Cash disbursements for acquisition of items of property, plant and equipment -944,480 -1,648,341

Cash disbursements for acquisition of long-term financial assets 0 0

c) Net receipts from investment activity or net disbursements for investment activity (a + b) -903,499 -1,578,499

C. Cash flows from financing activities

a) Cash receipts from financing activities 8,090,603 1,947,429

Cash receipts from paid-in capital 0 0

Cash receipts from increase in long-term financial liabilities 0 63,296

Cash receipts from increase in short-term financial liabilities 8,090,603 1,884,133

b) Cash disbursements for financing activities -9,843,272 -2,855,795

Interest paid on financing activities -1,888,884 -2,122,020

Cash repayments of equity 0 0

Repayments of long-term financial liabilities 0 0

Repayments of short-term financial liabilities -7,954,388 -733,775

c) Net receipts from financing activity or net disbursements for financing activity (a + b) -1,752,669 -908,366

D. Final balance of cash 193,714 676,052

x) Net cash flows for the period (sum of Ac, Bc and Cc) -482,338 523,338

y) Opening balance of cash 676,052 152,714



75

1.4. CONCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2016

in EUR

Share capital Legal Reserves for Treasury Other Retained Capital Revaluation Fair value reserves Total

reserves own stakes shares revenue reserves net profit or loss reserves reserves

A.1. Balance as at 31 December 2015 78,387,660 96,744 3,557,093 -3,557,093 11,796 -32,541,204 55,004 2,915,331 286,431 49,211,762

a) Retrospective restatement 0

b) Retrospective adjustments 0

A.2. Balance as at 1 January 2016 78,387,660 96,744 3,557,093 -3,557,093 11,796 -32,541,204 55,004 2,915,331 286,431 49,211,762

B.1. Changes in equity - transactions with owners

a) Subscription of called-up share capital 0 0 0 0 0 0 0 0 0 0

(capital payment) b) Subscription of uncalled share capital 0 0 0 0 0 0 0 0 0 0

c) Call-up of subscribed share capital 0 0 0 0 0 0 0 0 0 0

d) Entry of additional payments of equity capital 0 0 0 0 0 0 0 0 0 0

e) Purchase of treasury shares and own stakes 0 0 0 0 0 0 0 0 0 0

i) Other changes in equity 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0

B.2. Total comprehensive income for the reporting period

a) Net profit/loss for the year 0 0 0 0 0 -5,739,255 0 0 0 -5,739,255 c) Change in revaluation reserve from revaluation of property, plant and equipment 0 0 0 0 0 0 0 -70,249 0 -70,249

d) Change in fair value reserves 0 0 0 0 0 0 0 0 -66,742 -66,742

e) Other elements of total comprehensive income 0 0 0 0 0 0 0 0 -6,612 -6,612

0 0 0 0 0 -5,739,255 0 -70,249 -73,354 -5,882,858

B.3. Changes in equity

a) Allocation of remaining net profit of the comparative reporting period to other equity components 0 0 0 0 0 0 0 0 0 0

b) Other changes in equity 0 0 0 0 0 -288 0 0 288 0

0 0 0 0 0 -288 0 0 288 0

C. Balance as at 31 December 2016 78,387,660 96,744 3,557,093 -3,557,093 11,796 -38,280,747 55,004 2,845,082 213,365 43,328,904

Deferred development costs 953,197

ACCUMULATED PROFIT/LOSS -38,280,747 -39,233,944



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1.5. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2015 in EUR

Share capital Legal

reserves

Reserves for own stakes

Treasury shares

Other revenue reserves

Retained net profit/loss

Capital reserves

Revaluation reserves

Fair value reserves Total

A.2. Balance as at 1 January 2015 78,387,660 96,744 3,557,093 -

3,557,093 11,796 -26,606,222 55,004 2,911,244 258,945 55,115,171

B.1. Changes in equity - transactions with owners 0

a) Subscription of called-up share capital 0 0 0 0 0 0 0 0 0 0

(capital payment) 0

b) Subscription of uncalled share capital 0 0 0 0 0 0 0 0 0 0

c) Call-up of subscribed share capital 0 0 0 0 0 0 0 0 0 0

d) Entry of additional payments of equity capital 0 0 0 0 0 0 0 0 0 0

e) Purchase of treasury shares and own stakes 0 0 0 0 0 0 0 0 0 0

j) Other changes in equity 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0

B.2. Total comprehensive income for the reporting period

a) Net profit/loss for the financial year 0 0 0 0 0 -5,934,568 0 0 0 -5,934,568 c) Change in revaluation reserve from revaluation of property, plant and equipment 0 0 0 0 0 0 0 4,087 0 4,087

d) Change in fair value reserves 0 0 0 0 0 0 0 0 27,886 27,886

e) Other elements of total comprehensive income 0 0 0 0 0 0 0 0 -814 -814

0 0 0 0 0 -5,934,568 0 4,087 27,072 -5,903,409

B.3. Changes in equity

a) Allocation of remaining net profit of the comparative reporting period to other equity components 0 0 0 0 0 0 0 0 0 0

b) Other changes in equity 0 0 0 0 0 -414 0 0 414 0

0 0 0 0 0 -414 0 0 414 0

C. Balance as at 31 December 2015 78,387,660 96,744 3,557,093 -

3,557,093 11,796 -32,541,204 55,004 2,915,331 286,431 49,211,762

ACCUMULATED PROFIT/LOSS -32,541,204 -32,541,204



77

2. APPENDIX H TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.1. REPORTING ENTITY Vipap Videm Krško d.d. is a public limited company based at Tovarniška 18, Krško. The consolidated financial statements of the Group for the year ended 31 December 2016 include the Company and its subsidiaries (hereinafter referred to as the Vipap Group or the Group). The subsidiaries included in consolidation are: - Vipap Vertriebs und Handels GmbH based in Ternitz, Austria; - Levas Krško d.o.o. based in Krško.

The details about the subsidiaries are given in the business report within the Annual Report of the Group. The Group's principal activity is paper and fibre production. As at 31 December 2016, the Vipap Group had 450 employees.

2.2. BASIS OF PREPARATION 2.2.1. Statement of compliance The Companies Act (ZGD-1), Article 54(10) and (11), stipulates that in Slovenia, the financial statements shall be compiled according to the International Financial Reporting Standards (hereinafter the IFRS) by banks, insurance companies and the companies subject to consolidation (compiling consolidated financial statements). Accordingly, the Vipap Group in 2016 for the first time prepared consolidated financial statements according to the IFRS as endorsed by the EU, and in line with the interpretations (IFRIC) adopted by the International Accounting Standards Board (IASB) . The consolidated financial statements were also prepared in line with the provisions of the Slovenian Companies Act (ZGD). 2.2.2. Changes in accounting policies In 2016, the Vipap Group made a transition to the IFRS when preparing the financial statements. It adopted the IASB and IFRIC standards and interpretations. The start of application of these standards does not have a significant impact on the financial statements, so the Group made no retrospective adjustments or restatements. Thus, the Group's accounting policies remained unchanged from last year. The date of transition to the IFRS is 1 January 2015. 2.2.3. New standards and interpretations adopted but not yet effective IFRS 9 Financial Instruments In July 2014, the International Accounting Standards Board published the final version of the IFRS 9 Financial Instruments that includes the requirements of all individual phases of the project of IAS 9 novation and supersedes the IAS 39 Financial Instruments: Recognition and Measurement


78

and all previous versions of the IFRS 9. The new standard introduces new requirements regarding the classification and measurement of financial assets and liabilities, recognition of their impairments and hedge accounting. The revised IFRS 9 is effective for annual periods starting on or after 1 January 2018. Earlier application is permitted. Retrospective application of the revised standard is mandatory, but the data compared need not be disclosed. Early application of the previous versions of IFRS 9 published in the years 2009, 2010 and 2013 was permitted under the condition that the company carried out migration to the IFRS at any time in the period before 1 February 2015. The standard has not yet been endorsed by the European Union. The adoption of the revised IFRS 9 will affect the classification and measurement of financial assets of the Group, but not the classification and measurement of its financial liabilities. IFRS 14, Regulatory Deferral Accounts IFRS 14 is not mandatory and allows companies, upon first application of the International Financial Reporting Standards, to continue to account, to a high degree, for regulatory deferral account balances in accordance with its previous GAAP. The entities that opt for the application of the new standard have to present regulatory deferral account balances separately in the statement of financial position, whereas in the income statement and the statement of other comprehensive income specific disclosures are required. The standard requires entities to disclose the characteristics of regulation and risks associated with it as well as its impact on the financial statements. IFRS 14 is effective for annual periods starting on or after 1 January 2016. The standard has not yet been endorsed by the European Union. The Group foresees that the amendment will have no material impact on the financial statements. Amendments for standards and interpretations adopted in the 2011-2013 period Amendments to standards applicable for periods starting on 1 July 2014. The Group does not expect the amendments to the standards to have a significant impact on its consolidated/separate financial statements. Improvements to standards include: Amendments to IFRS 11, Joint Arrangements: Accounting for Acquisitions of Interests Pursuant to amendments to IFRS 11, a company that is a party to a joint arrangement, when accounting for an acquisition of interest in a joint operation in which the activity constitutes a business, must apply the relevant accounting principles of IFRS 3 applying to accounting for business combinations. The amendments further clarify that a company may not re-measure its existing interest upon the acquisition of additional interests in a jointly controlled company as long as joint operation exists. Moreover, the Board included in IFRS 11 exceptions specifying that amendments do not apply to cases when parties to a joint arrangement (including the reporting entity) are controlled by the same parent. The amendments apply to accounting for both the initial acquisition of an interest in a joint operation and the acquisition of an additional interest in a joint operation. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments to the standard have not yet been endorsed by the European Union. The Group does not expect the amendments to the standard IFRS 11 to have an impact on its consolidated/separate financial statements. IFRS 15 Revenue from Contracts with Customers In May 2014, the International Accounting Standards Board published IFRS 15, introducing a five-step model for recognition of revenue from contracts with customers. According to IFRS 15, a company recognises revenue in an amount that reflects the consideration to which the company expects to be entitled in exchange for the goods or services. The accounting principles under IFRS 15 thus provide a more structured approach to measurement and recognition of revenues. The new standard applies to all companies and supersedes the existing requirements of the International


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Financial Reporting Standards regarding the recognition of revenue. Full application of the new standard applies to all annual periods beginning on or after 1 January 2017, and the companies are obliged to use the adapted form of the standard retrospectively. Earlier application is permitted. The standard has not yet been endorsed by the European Union. The Group is examining the impact of the new standard and will apply it upon entry into force. Amended IAS 16 and IAS 38, Acceptable methods of depreciation and amortisation With these amendments, the Board clarifies the accounting principles under IAS 16 and IAS 38, specifying that revenues reflect a pattern of economic benefits generated by a company by an activity (of which an asset is a part) and not economic benefits used by a company by using an asset. In view of the above, property, plant and equipment cannot be depreciated by a depreciation method that is based on revenue, but such a method may be, in very limited circumstances, used for accounting for amortisation of intangible assets. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments to the standard have not yet been endorsed by the European Union. The Group does not expect the amendments to the standard to have an impact on its consolidated financial statements, because it is not using the revenue-based depreciation method for current assets. Amendments to IAS 16 and IAS 41, Agriculture: Bearer Plants Amendments to the standards modify the requirements for accounting biological assets that meet the definition of a 'bearer plant'. In line with these amendments, biological assets that meet the definition of a 'bearer plant' have been brought from the scope of IAS 41 into the scope of IAS 16. In line with the requirements under IAS 16, a company shall, subsequent to initial recognition of bearer plants, measure them at accumulated cost (before maturity) or at revaluation (after maturity). In addition, amendments to IAS 16 and IAS 41 require that the agriculture produced from bearer plants is measured at fair value less costs to sell according to IAS 41. Government grants for bearer plants shall be accounted for under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. The amendments applying to annual periods beginning on or after 1 January 2016 shall be applied retrospectively. Earlier application is permitted. The amendments to the standard have not yet been endorsed by the European Union. The Group does not expect the amendments to the standard to have an impact on its consolidated/separate financial statements, because its assets do not include bearer plants. IAS 40, Investment Property Definition of ancillary services under IAS 40 makes a distinction between investment property and owner-occupied property (i.e. property, plant and equipment). The amendment clarifies that when determining if the deal represents a purchase of an asset or a business combination, a company shall take into account the definition of ancillary services as proposed by IFRS 3 and not IAS 40. The amendment must be applied prospectively. Amendments to IAS 27, Equity Method in Separate Financial Statements The amendments to IAS 27 allow companies to account for investments in subsidiaries, joint ventures and associates using the equity method in their separate financial statements. The companies already preparing their financial statements according to the International Financial Reporting Standards and opting for transition to the equity method in their separate financial statements will have to retroactively apply the amendments to IAS 27. Upon the first application of International Financial Reporting Standards, the companies opting for the equity method in their separate financial statements will have to apply this method on the day of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments to the standard have not yet been endorsed by the


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European Union. The Group does not expect the amendments to the standard to have a significant impact on its consolidated financial statements.

2.3. BASIS OF MEASUREMENT The consolidated financial statements are prepared on the historical cost basis, except that the following assets and liabilities are stated at their fair value: - Investment property; - Available-for-sale financial assets

2.4. FUNCTIONAL AND PRESENTATION CURRENCY The financial statements contained in this report are presented in euros (EUR) without cents, which is the functional currency of the Group. Due to the rounding of amounts, minor and insignificant discrepancies may exist in the tables.

2.5. USE OF ESTIMATES AND JUDGEMENTS The preparation of financial statements requires management to make judgements and estimates based on the assumptions used and reviewed, affecting the disclosed amounts of assets, liabilities, revenues and expenses. The formation of estimates and the related assumptions and uncertainties are disclosed in notes to the relevant items. The estimates, judgements and assumptions are regularly reviewed. Since estimates are subject to subjective judgement and some degree of uncertainty, subsequent actual results may differ from the estimates. Changes in accounting estimates, judgements and assumptions are recognised in the period in which the estimates were changed if the change affects only that period, or in the period of change and in future periods if the change affects future periods. Estimates and assumptions are mainly used when making the following judgements:

• Estimate of the life of depreciable/amortisable assets (notes 1 and 2 under Item 2.10) In accounting for property, plant and equipment and intangible assets, the management is required to determine the estimate of the useful life. The useful life of an asset is determined on the basis of past experience with similar assets, the anticipated technological evolution and changes in a wider economic environment. The Vipap Group annually checks the estimated useful lives.

• Investment property valuation (note 2 under Item 2.10) The Vipap Group states investment property based on the appraisal of a court-certified expert in construction. The investment property possessed by the Group is thus stated at fair value.

• Value adjustments of doubtful receivables (note 6 under Item 2.10) The Group makes value adjustments of short-term trade receivables using the experience method. Credit worthiness of customers is assessed by means of market information related to customers. The assessment also depends on general economic situation in the country and abroad.

• Assessment of the likelihood of utilisation of deferred tax assets (note 4 under Item 2.10) The restatement of actual and deferred taxes requires a management judgement. Deferred tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. The Vipap Group does not calculate deferred tax asset for tax loss, as it estimates that in the foreseeable future no taxable profit will be available against which the deductible temporary


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differences could be utilised. In tax accounting, the Group has set up internal controls and outsourced tax consultants, who have proven to be adequate in past tax audits.

• Net realisable value of inventories (note 5) Inventory of material is carried at actual cost. The cost includes the purchase price, import duties and direct costs of acquisition. The average price method is applied to the use of inventories. The inventory of material is examined once a year, and if certain material inventory has not changed for five years, it is transferred to spare parts and depreciated to come close to the realisable market value. The work-in-progress inventory and the inventory of end products are valued at production prices. Once a year the net realisable value of these inventories is checked. If the value is lower than the production price, inventory is impaired.

• Provisions (note 10) The Group establishes severance payments and long-service awards relying on an actuarial account that is based on the assumptions and estimates applicable at the time the calculation is made, which may change in the future. This particularly refers to determining the discount rate, the estimate of employee fluctuation, and the salary increase estimate.

2.6. FINANCIAL YEAR The financial year of the Vipap Group is equal to the calendar year, starting on 1 January 2016 and ending on 31 December 2016.

2.7. CONSOLIDATION BASIS The consolidated financial statements have been compiled using the financial statements of Vipap Videm Krško d.d. and its subsidiaries as at 31 December 2016. The financial statements of the subsidiaries have been prepared for the same reporting period as those of the parent company and by applying the same accounting policies. If different accounting policies are applied, the subsidiaries prepare the necessary adjustments of their financial statements, which serve as the basis for compiling the consolidated financial statements. The subsidiaries are those companies that are directly or indirectly controlled by Vipap Videm Krško d.d. Control exists when Vipap has the power to govern the financial and operating policies of a company so as to obtain benefits from its activities. The consolidated financial statements have been prepared by excluding all transactions, balances and unrealised gains from related-party transactions.

2.7.1. Scope and procedures regarding consolidation of financial statements

The selection of the consolidation method depends on the impact which the controlling company has over a Group company. In the case of Vipap Videm Krško d.d. and its subsidiaries, full consolidation is carried out.


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Full consolidation is a method of combining the financial statements of the controlling enterprise and its subsidiaries on a line by line basis by adding together like items of assets, liabilities (debts), equity capital, revenues and expenses. The consolidated financial statements are the financial statements of the Group presented as those of a single company. Due to the above the following procedures are necessary:

- equity consolidation (elimination of financial asset of the controlling company in equity capital of the subsidiary and the proportion of the subsidiary's equity and related accounted differences);

- elimination of intragroup receivables and liabilities; - elimination of intragroup revenues and expenses; - elimination of unrealised net gains and losses resulting from intragroup transactions; - disclosure of minority interest in equity and net profit; - adjustment of taxes and their deferral (deferred taxes).

In preparation of consolidated financial statements uniform accounting policies shall be used. That means that the parent company has to organise and implement uniform principles in all accounting departments of subsidiaries, along with uniform valuation of assets and liabilities items, and issue special instructions for keeping bookkeeping records that represent the basis of consolidation. Financial investments in subsidiaries abroad are carried at cost in foreign currency, which is for the purpose of consolidation translated into EUR at the exchange rate applying on the day of transaction. Assets and liabilities expressed in foreign currencies are translated into the local currency at the reference exchange rate of the ECB from the Bank of Slovenia's exchange rate table on the day the consolidated financial statements are compiled. In 2015, Ekopa d.o.o., which was 100% owned by Vipap Videm Krško d.d., was wound down. The consolidated financial statements of Vipap Videm Krško d.d. include the following two companies:

Name Country

Type of connection

% of connection


AUT Direct equity 100.00

Levas Krško d.o.o. SLO Direct equity 100.00 If revenues or assets of a subsidiary exceed the threshold value (5 %) of revenues or assets of the controlling company, the conditions for the inclusion of the subsidiary in the consolidated statements are met. The consolidated financial statements of the Group are available at the registered office of the parent company Vipap Videm Krško d.d., Krško.


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2.7.2. The summary of eliminations and adjustments in the consolidation process for 2016

2016 2015

Item

Net sales revenues 19,748,791 16,037,145

Cost of goods and materials sold and cost of materials used -18,289,474 -14,581,002

Costs of services -1,459,317 -1,456,143

Labour costs Deferred taxes Financial expenses from impairments and write-offs of financial assets -86,917

Net profit/loss for the period 0 -86,917

Assets -1,600,132 -1,660,896

Land and buildings Investment property Long-term financial investments in Group companies -260,265 -260,264

Deferred tax assets Short-term intra-group trade receivables -1,339,867 -1,400,632

Equity and liabilities -1,600,132 -1,660,896

Capital of the Group -286,157 -283,531

Minority shareholder equity Provisions and long-term accrued expenses and deferred revenues Deferred tax liabilities 25,892 23,267

Short-term operating liabilities to group companies -1,339,867 -1,400,632

2.8. FOREIGN CURRENCY Transactions in foreign currencies are translated into the respective functional currencies of the Group companies at the exchange rate applying at the day of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Exchange rate gains or losses are the differences between the amortised cost in the functional currency at the start of the period, adjusted by the amount of effective interest and payments in the period, and the amortised cost in the foreign currency at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date when the fair value was determined. Exchange rate gains or losses are recognised in the income statement, which does not apply to differences arising from the translation of equity instruments classified as available for sale, non-financial obligations used for hedging or cash flow hedges, which are recognised directly in equity.


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2.9. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property, plant and equipment: Tangible fixed assets (property, plant and equipment) owned by Group companies that meet recognition conditions are initially recognised at historical cost. This comprises the purchase price, import duties and non-refundable purchase taxes, demolition costs, the costs that can be directly ascribed to them for making them fit for their intended use, and the costs of testing whether the asset is functioning properly. Property, plant and equipment are activated when they are made ready for use. Their value is verified upon each compilation of final accounts and the fixed asset is impaired, if necessary. Following recognition, the cost method is used as the method of valuation, with the exception of land. Property, plant and equipment are depreciated individually using a straight-line method. Costs incurred subsequently on a fixed asset increase its cost when they increase its future economic benefits in excess of the future economic benefits originally estimated. Land is recognised using the revaluation model at fair value on the day of revaluation. After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably, and for the measurement of which after recognition the Company has chosen the revaluation model, is carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Land is revalued every 3 to 5 years or more often, if there are signs of impairment. The fair value of land is measured on the basis of market value determined by a certified valuer in a way established under the International Valuation Standards. When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs should be revalued. If an asset’s carrying amount is increased as a result of a revaluation, the increase is credited directly in other comprehensive income under the heading of revaluation reserve. However, the increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. If the carrying amount of an asset decreases due to revaluation, the decrease is recognised directly in other comprehensive income under the heading of revaluation reserve to the extent of any credit balance existing in the revaluation reserve in respect of that asset and any subsequent decrease is recognised in the income statement. The revaluation reserve included in equity in respect of land is transferred to retained earnings when the asset is derecognised. This may involve transferring the whole of the revaluation reserve when the asset is retired or disposed of. However, some of the reserve may be transferred as the asset is used by the Company. The transfer from revaluation reserve to retained earnings is not made through the income statement. In 2006 (31 August 2006), Vipap Videm Krško d.d. carried out an appraisal of fixed assets of the chemical pulp production which was discontinued for environmental reasons. These fixed assets are disclosed in the balance sheet under property, plant and equipment. They are assessed at fair value (selling price less costs of sales). The last impairment was carried out in 2008.


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Intangible fixed assets: An intangible asset is defined as identifiable non-monetary asset without physical substance. It is valued at historical cost, including import duties and purchase taxes. Following recognition, the historical cost method is used as the method of valuation. Intangible assets are amortised using a straight-line method. Intangible fixed assets include emission coupons and deferred nanotechnology development costs. Amortisation and depreciation: Depreciation of property, plant and equipment and amortisation of intangible fixed assets are calculated individually using the straight-line method. Depreciation of an item of property, plant and equipment begins on the first day of the following month after it has become available for use. The value is verified upon each compilation of year-end accounts and the asset is impaired, if necessary. Investment property: Investment property is property held to earn rentals or for capital appreciation or both. Investment property is valued at fair value. Financial assets: Financial assets are investments in the capital of other companies. Financial investments in capital are initially valued at cost, whilst any subsequent valuations are based on fair value. The fair value of available-for-sale financial assets measured at fair value is based on market value. In our estimate there are no significant differences between the fair value and the carrying amount of financial instruments not stated at fair value. Since most receivables, liabilities and loans are of short-term nature, their fair values do not differ significantly from book values. The fair value of cash assets, current assets and loans received is calculated based on future cash flows discounted to market price. Material and merchandise inventories: Inventory items of material and merchandise are initially recognised at the actual cost, which comprises the purchase price, import duties and other non-refundable purchase taxes, and the direct costs of procurement. Purchase price is reduced by the amount of discounts. The average price method is used to value the use of inventories. Inventories of material and merchandise are revalued to account for impairment if their carrying amount exceeds their market or net realisable value. Inventory units of products or work-in-progress are valued by production costs, namely: all variable costs, all fixed costs of cost centres in which products are manufactured as well as all costs of other production cost centres. Receivables: Receivables of all types are initially recognised at amounts recorded in the relevant documents under the assumption that the amounts owed will also be paid. Receivables are initially recognised on the basis of an issued invoice. Receivables are revalued for impairment if their carrying amount exceeds their fair value (i.e. the recoverable amount). Receivables are revalued to eliminate impairment if their fair value or the recoverable amount exceeds their carrying amount. Value


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adjustments of receivables are made individually. Receivables denominated in a foreign currency are valued in the financial statements according to the reference exchange rate of the ECB from the Bank of Slovenia's exchange rate table on the balance sheet date. Exchange rate differences represent ordinary financial revenues or expenses. The amount of receivables for deferred taxes with justification of recognition is also disclosed. Deferred tax assets: The Company records deferred tax assets from the formation of provisions for expected costs, which will only be recognised for tax purposes when the provisions are used for that purpose. The Company calculates deferred taxes only for significant amounts (severance payments, long-service awards, value adjustments of receivables, and those arising from assets available for sale). The Company expects taxable profits in the future. Cash: Cash is disclosed by components and automatic overdraft on current accounts held with banks. It comprises euro and other currency balances on bank accounts, euro and other currency petty cash balances and the balances of short-term deposits with banks. Cash in hand consists of cash, book money and cash in transit. The carrying amount of an item of cash assets is the same as its initial nominal value under the underlying document. Short-term accruals and deferrals: Short-term accruals and deferrals are receivables and other assets and liabilities expected to arise within one year; their incurrence is probable, whereas their amount is reliably estimated. Deferred costs (expenses) and accrued revenues include short-term deferred costs (expenses) and short-term accrued revenues.

Equity: Total equity as a liability to owners comprises called-up capital, revenue reserves, revaluation reserve in respect of land and retained net profit/loss. Revenue reserves comprise reserves for treasury shares and treasury shares. Provisions and long-term accrued expenses and deferred revenues: Provisions and long-term accrued expenses and deferred revenues comprise provisions for pensions and similar liabilities, other provisions and long-term accrued expenses and deferred revenues. They are formed for short-term liabilities arising from past events involving obligations, for which the settlement period is not definitely set, where the amount can be reliably measured. They may be treated as debts in a wider sense since they differ from liabilities to owners. Long-term accrued expenses and deferred revenues comprise deferred revenues expected to cover estimated costs or expenses in a period of more than one year. The purpose of provisions is to accumulate amounts in the form of accrued costs or expenses that will be available in the future to cover incurred costs or expenses. Liabilities: Long-term liabilities comprise long-term financial liabilities. They are recognised in association with the financing of own funds that must be settled or repaid, particularly in cash, over a period of more than one year. Long-term financial liabilities to Group companies comprise long-term loans from a sister company abroad raised in 2013 and 2014. Long-term financial liabilities to banks comprise loans raised by borrowers with creditors. Long-term liabilities are disclosed in the balance sheet as amounts recorded in the relevant documents under the assumption that the creditors will require their repayment. They are measured using the effective interest rate method.


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Long-term foreign debt is converted to domestic currency at the reference exchange rate of the ECB from the Bank of Slovenia's exchange rate table as of the last day of the year.

Short-term liabilities include short-term financial liabilities to banks, short-term financial liabilities to Group companies and short-term operating liabilities. Short-term financial liabilities are loans raised with creditors, the settlement of which is expected within one year. Short-term operating liabilities are liabilities that fall due within a period not exceeding one year. Short-term operating liabilities comprise operating liabilities to suppliers, liabilities to employees for work performed, short-term liabilities to financiers relating to interest and similar items, short-term tax liabilities to the state, including calculated value added tax, and short-term liabilities arising from the distribution of profits. A special type of short-term operating liabilities are liabilities to suppliers for advances and short-term securities received. They are disclosed at amounts recorded in relevant documents (invoices, credit notes, contracts). Short-term accrued expenses and deferred revenues: Short-term accrued expenses and deferred revenues comprise accrued costs or expenses and deferred revenues which are carried separately and classified into categories. They are recognised in the balance sheet if it is probable that as the result of them economic benefits will decrease in the future and if their amount can be measured reliably. Revenues (Income): Revenues are increases in economic benefits during the accounting period in the form of increases in assets or decreases in liabilities. They affect the amount of capital through profit or loss. Revenues are classified into operating revenue, financial revenue (finance income) and other revenue. Operating revenues and financial revenues are considered ordinary revenues. Revenues are recognised if increases in economic benefits are associated with increases in assets and the increases can be measured reliably. Revenues are recognised together with the receivables arising from a sale, i.e. when the seller of goods has transferred to the buyer all rights and risks of ownership. The revenues arising from the sale of products and material are measured based on the selling prices stated in invoices and other documents, less discounts approved when the sale is made or subsequently. Potential cash discounts also reduce sales revenues. Other operating revenues include subsidies, grants and revenues from the sale of waste. Revaluation operating revenues are profits arising from the sale of fixed assets reduced by value adjustments of operating receivables arising from the elimination of impairments and write-offs of operating liabilities. Financial revenues from operating receivables are revenues from accrued interests and exchange rate gains. Other revenues are compensations received arising from recognised damage to fixed assets. Expenses: Expenses are reductions of economic benefits during the accounting period in the form of decreases in assets or increases in liabilities, which affect the amount of capital through profit or loss. Expenses are classified as operating expenses, financial expenses (finance expenses) and other expenses. Operating expenses and financial expenses are ordinary expenses. Cost of goods, materials and services include the historical cost of goods and materials sold, cost of materials used and costs of services. Labour costs include wages and salaries, costs of social security and other labour costs. Write-offs include the costs of amortisation/depreciation, revaluation operating expenses for intangible and tangible fixed assets (property, plant and equipment) and revaluation operating expenses for working capital. Other operating expenses include expenses for environmental protection and bonuses paid to pupils and students. Financial expenses arising from


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financial liabilities include interest on loans and exchange rate losses related to foreign currency debt. Financial expenses from operating liabilities include interest on liabilities and expenses from the revaluation of debt and receivables. Other expenses include fines and compensations. Fair value hierarchy: The following hierarchy was applied in recognition and disclosure of fair value of financial instruments using the valuation technique:

1. category: determining the fair value by reference to quoted price in an active market;

2. category: other techniques of determining fair value using assumptions with significant impact on fair value, consistent with observable current market transactions involving identical instruments, either directly or indirectly;

3. category: other techniques of determining fair value using assumptions with significant

impact on fair value, not consistent with observable current market transactions involving identical instruments.

2.10. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2016 2015

1. Intangible assets in EUR 1,113,180 920,086

Property Deferred expenses Emissions coupons Total

rights of development

1. Cost Balance as at 1 January 2016 211,980 680,760 193,518 1,086,258

Increase 24,701 272,437 295,673 592,811

Decrease -59,770 0 -366,205 -425,975 Balance as at 31 December 2016 176,911 953,197 122,986 1,253,094

2. Value adjustment Balance as at 1 January 2016 -166,172 0 0 -166,172 Amortisation and depreciation -33,462 0 0 -33,462

Decrease 59,720 0 0 59,720 Balance as at 31 December 2016 -139,914 0 0 -139,914

3. Carrying amount Balance as at 1 January 2016 45,808 680,760 193,518 920,086 Balance as at 31 December 2016 36,997 953,197 122,986 1,113,180


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Intangible fixed assets of Vipap Videm Krško d.d. comprise software (EUR 35,921), deferred development costs (EUR 953,197) and emission coupons (EUR 122,986). As at 31 December 2016, the Company had no liabilities arising from the purchases of intangible assets. The amortisation rate for software is 20%. These assets are not pledged as collateral, nor do they have any ownership restrictions. Deferred development costs partly refer to biotechnology (amortisation rate of 33.3%) and development in the field of energy and waste removal (10% amortisation rate). In 2016, the Company bought 39,200 emission coupons to fulfil its obligations for the year (EUR 218,189 at the average price of EUR 5.13). It received 67,809 emission coupons from the state. Based on the calculation of obligations for 2016, the Company assessed delivery of 110,000 emission coupons and will by the end of April 2017 discharge its liabilities. Levas Krško d.o.o. disclosed computer applications in the amount of EUR 906 and graphic image worth EUR 170 under intangible fixed assets. The annual amortisation rate is 10% for intangible assets and 50% for software applications acquired after 2010. Vipap GmbH has no intangible fixed assets.

2. Property, plant and equipment and investment property The following depreciation rates were used (in %): - buildings, construction facilities 1.3 - 5.0 - prefabricated facilities 2.0 - 5.0

- landscaping 3.3 - equipment 4.0 - 25.0 - computers, computer equipment 10.0 - 50.0

- vehicles 10.0 - 20.0


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2016 2015

Property, plant and equipment in EUR 82,122,584 86,022,255

Item Land Buildings Equipment

Equipment under

construction, manufacturing

Advance payments Total

1. Cost Opening balance as at 1 January 2016 8,453,232 34,061,731 150,647,717 256,417 0 193,419,097

Increases 0 80,868 2,561,149 1,180,417 0 3,822,434

Decrease 0 123,386 -1,117,157 -1,183,946 0 -2,177,717 Transfer of short-term AFS assets 0 0 0 0 0 0 Balance as at 31 December 2016 8,453,232 34,265,985 152,091,709 252,888 0 195,063,814

2. Value adjustment Opening balance as at 1 January 2016 0 -14,450,672 -92,946,170 0 0 -107,396,842

Increases - depreciation -939,573 -5,718,158 0 0 -6,657,731

Additions – new purchases 0 0 0 0 0 0 Impairments of existing fixed assets 0 0 0 0 0 0 Transfer of short-term AFS assets 0 0 0 0 0 0

Decrease 0 0 1,113,343 0 0 1,113,343 Balance as at 31 December 2016 0 -15,390,245 -97,550,985 0 0 -112,941,230

3. Carrying amount Balance as at 1 January 2016 8,453,232 19,611,059 57,701,547 256,417 0 86,022,255 Balance as at 31 December 2016 8,453,232 18,875,740 54,540,724 252,888 0 82,122,584

As at 31 December 2016, Vipap Videm Krško d.d. disclosed EUR 4,400,942 of long-term loans for the acquisition of fixed assets. Fixed assets in the amount of EUR 54,200,956 were pledged as collateral for long-term and short-term financial liabilities (Item 11.12) and bank bonds. Other increases in fixed assets of equipment are modernisations of the existing fixed assets. The Company has some redundant facilities on stock, in which cellulose was produced until 2006. As at 31 December 2016, the Company discloses the remaining equipment worth EUR 2.418 under equipment. The last land appraisal was carried out in 2011. The appraisal was made by the company BIRO PNS, Rostohar Vladimir s.p. (company reference No. 19-0713/95). Rostohar Vladimir is a certified appraiser and a sworn court expert for the field of construction, registered with the Basic Court of Novo mesto since 1991 under registration No. 14/91. The appraisal report was prepared in compliance with the international standards and principles for property valuation (IVS). The difference between cost and the higher estimated fair value is disclosed under value of land and revaluation surplus. Levas d.o.o. disclosed property, plant and equipment of EUR 873,750 (EUR 316,139 buildings, EUR 347,381 equipment, EUR 175,030 investments in progress and EUR 35,200 of equipment being acquired). As at 31 December 2016, the company had a liability from finance lease of Heli diesel forklift in the amount of EUR 7,732. The Land Register owner of buildings held in possession by Levas Krško d.o.o., with a carrying amount of EUR 340,637, is the controlling


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company Vipap. These buildings are mortgaged to the benefit of financial creditors of the controlling company. Vipap GmbH disclosed in its books of account EUR 4,691 of property, plant and equipment. 2016 2015

Investment property in EUR 2,818,000 2,818,000

Upon the winding down of the subsidiary Ekopa d.o.o., Vipap Videm Krško d.d. transformed its asset into investment property. The value of the investment property (land in Cadastral Municipality Stara vas, covering 15,809 m2 and premises covering 22,678 m2) was on the basis of certification of value dated 31 March 2015 appraised at market value at EUR 2,818,000 (Rostohar Vladimir, court appraiser specialised in construction industry). The appraisal report was prepared in compliance with the international standards and principles for property valuation (IVS). 2016 2015

3. Long-term financial assets in EUR 470,600 544,400

Balance as at 1 January

2016

Value adjustment

as at 1 January

2016

Decrease in value

adjustment

Increase in value

adjustment

Value adjustment

as at 31 December

2016

Acquisition of

investment

Carrying amount 31

December 2016

Zel-en Krško (11.38%) 152,000 0 0 0 0 0 152,000

Enovip d.o.o. (16%) 1,200 0 0 1,200

Krka d.o.o. 391,200 -73,800 317,400

Total shares 544,400 0 0 0 -73,800 0 470,600

The registered office of Levas Krško d.o.o. is Tovarniška 18, Krško. In 2016, the Company posted EUR 38,533 of net profit before distribution. The amount of equity capital in the balance sheet as at 31 December 2016 was EUR 868,360, net sales revenues amounted to EUR 2,908,520, and the value of assets totalled EUR 2,016,908. In 2010, the company acquired Vipap Vertriebs und Handels GmbH. The Company's activities include selling our paper and also purchasing recovered paper. In 2016, the Company generated EUR 18,801,593 of revenues and ended the year with a profit of EUR 11,329. Its equity capital as at 31 December 2015 equalled EUR 103,907. In 2011, the Company established together with 13 partners the Development Centre for Renewable and Sustainable Energy (ZEL-EN) with registered office in Krško, in which it holds a 11.38-percent share. In 2014, Vipap Videm Krško d.d. together with Zel-en founded the company ENOVIP, trajnostna energetika in gradnja, d.o.o. based in Krško. The Company's share in the newly founded company is 16%. The company Vipap Videm Krško d.d. included in its consolidated financial statements the statements of the subsidiaries Vipap Vertriebs und Handels GmbH and Levas Krško d.o.o.


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If revenues or assets of a subsidiary exceed the threshold value (5 %) of revenues or assets of the controlling company, the conditions for the inclusion of the subsidiary in the consolidated statements are met. 2016 2015

4. Deferred tax assets in EUR 646,622 573,950

1 January

2016 decrease increase 31 December

2016 Severance payments 61,256 2,426 63,682 Long-service awards 13,551 602 0 12,949 Devaluation of non-current assets held-for-sale 55,452 6,524 61,976 Formation of value adjustments of receivables 443,691 64,324 508,015 Unused tax loss 0 0 0

TOTAL receivables 573,950 602 73,274 646,622 Severance payments 14,230 1,665 15,895 Long-service awards 3,568 15 3,583 Revaluation of financial assets -59,183 -7,059 -52,124 Actuarial gains/losses 434 4 694 1,124 Revaluation of land -573,949 -67,523 -641,472 Revaluation of land in consolidation -23,167 -2,726 -25,893

TOTAL liabilities -638,067 -7,055 -67,875 -698,887 NET liabilities -64,117 -6,453 5,399 -52,265

According to new tax legislation, deferred tax assets of Vipap Videm Krško d.d. and Levas d.o.o. were calculated using a 19% tax rate. Taking into account the current tax legislation and the Company's operating strategy for the following 5 years, there is no convincing evidence that the Company would have sufficient taxable profit in the future to utilise the tax loss, which is why no deferred taxes were calculated as a result. Vipap Vertriebs und Handels GmbH has no deferred tax assets.


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2016 2015 5. Inventories in EUR 9,836,984 10,683,151

Inventory type

Balance as at 31 December

2016 Inventory surpluses

Inventory deficits

Impaired value due to

change in quality

Impaired value to marketable

value

Material 5,392,822 26 25 0 0

Small tools 3,658 0 0 0 0

Work-in-progress 556,767 0 4,592 0 56

Products 3,799,940 0 1,978 0 93,335

Merchandise 3,119 0 0 0 0

Advances for inventories 80,678 0 0 0 0

Total 9,836,984 26 6,595 0 93,391 Significant inventories of materials of Vipap Videm Krško d.d. include: recovered paper (EUR 1,452,776), wood (EUR 538,681), cellulose (EUR 77,032), maintenance material (EUR 671,304), spare parts (EUR 564,582), machinery (EUR 674,438), energy products (EUR 388,219), chemicals (EUR 525,110), packaging material (EUR 215,858), and other (EUR 135,487). Inventories of work-in-progress comprise paper reels ready to be cut into sheets (EUR 434,450) and paper intended for re-processing (EUR 122,318). The inventories of products comprise inventories of paper in reels (EUR 3,278,114) and inventories of paper in sheets (EUR 479,480). As at 31 December 2016, the Company impaired inventories of finished products in the amount of EUR 93,391, as their production price was higher than the selling price. As at 31 December 2016, EUR 2,000,000 of raw materials and finished products were pledged for short-term financial liabilities. Significant inventories of materials of Levas d.o.o. include: round wood (EUR 96,627), cut timber (EUR 29,394), nails and staples (EUR 10,481), and other material (EUR 12,833). Inventory of products amounted to EUR 42,346, and the inventory of goods in storage to EUR 1,628. Inventories are not pledged and the book value is not higher than net realisable value. Vipap Vertriebs und Handels GmbH has no inventory of material and products. 6. Short-term operating receivables in EUR 2016 2015 10,284,296 10,440,239

Balance as at 31

December 2016

Collateralised

receivables

Receivables

without collateral

Outstanding receivables

Maturity up to 1 year

Maturity of over 1

year

Value adjustment as at 1 January

2016

Reduced

adjustment

Increased

adjustment

Value adjustment

as at 31 December

2016

Carrying amount as

at 31 December

2016

Short-term operating trade receivables 13,327,504 7,561,853 5,765,651 7,061,539 2,053,147 4,212,818 -4,177,776 120,551 -108,836 -4,166,061 9,161,343 Short-term operating receivables from others 1,122,953 0 1,122,953 1,122,953 0 0 0 0 0 0 1,122,953

Total 14,450,457 7,561,853 6,888,604 8,184,492 2,053,147 4,212,818 -4,177,776 120,551 -108,836 -4,166,061 10,284,296

Vipap Videm Krško d.d. has EUR 7,167,377 receivables pledged as collateral for loans. As at 31 December 2016, receivables in the amount of EUR 6,065,023 were secured with SID banka. The Company discloses in its books of account receivables from other customer of EUR 11,601,127


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and value adjustment thereof in the amount of EUR 4,144,325. Outstanding receivables equal EUR 5,779,776. The receivables of Levas d.o.o. due from some major customers in the amount of EUR 77,437 are insured with SID banka. The company discloses receivables of EUR 245,186 and value adjustment thereof in the amount of EUR 6,307. Outstanding receivables equal EUR 202,293. Vipap GmbH has secured receivables in the amount of EUR 1,419,293. Its receivables total EUR 1,481,191 and value adjustments EUR 15,429. Outstanding receivables equal EUR 1,078,470. 2016 2015

7. Cash in EUR 193,714 676,052

2016 2015

Cash on hand 703 569

Transaction accounts 103,011 585,483

Short-term deposits 90,000 90,000

Total 193,714 676,052

Cash as at 31 December 2016 comprises: Vipap Videm Krško d.d. EUR 123,707, Levas d.o.o. EUR 3,391 and Vipap GmbH EUR 66,616. 2016 2015

8. Short-term accrued revenues and deferred expenses in EUR 611,033 619,979

Type of deferral Balance as at 1 January 2016 Establishment Disbursement

Balance as at 31 December 2016

Deferred expenses 546,834 7,743,656 -7,765,030 525,460

Accrued revenues 73,145 24,042 -11,614 85,573

Total 619,979 7,767,698 -7,776,644 611,033

Short-term deferred expenses of Vipap Videm Krško d.d. are: short-term deferred receivables from the state arising from VAT (EUR 501,679) and short-term deferred expenses (EUR 5,574). Short-term accrued revenues comprise the amount relating to volume discounts for purchased raw materials and material for 2016 (EUR 85,573). Volume discounts will be granted upon the payment of all liabilities arising from the purchases for 2016. Short-term deferred expenses of Levas d.o.o. comprise deferred receivables from the state arising from VAT in the amount of EUR 10,077, while the remaining EUR 271 is accounted for by costs referring to 2017. In its books of account Vipap GmbH states short-term deferred expenses of EUR 7,859. These expenses relate to 2017.


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2016 2015

9. Equity in EUR 43,328,904 49,211,762 Share capital of the Company comprises 1,879,800 shares with a nominal value of EUR 41.70 each. The shares are freely transferable and carry one vote each at the General Meeting of Shareholders, which takes decisions with 100% of voting rights present. On 4 September 2008, the General Meeting of Shareholders decided that the Company’s nominal shares are to be converted into no-par value shares in the following way: each share with the nominal value of SIT 1,000 or EUR 4.17 after conversion is replaced by one no-par value share. No-par value shares are merged on the basis of a 10:1 ratio. One no-par value share is worth EUR 41.70. Treasury shares are valued at cost, which is EUR 54.065. The share capital of the Company totals EUR 78,387,660 and is divided into 1,879,800 no-par value shares. The difference in the value of EUR 55,004 resulting from the conversion of share capital was allocated to capital reserves.

A. NET PROFIT FOR THE YEAR

B. NET LOSS FOR THE YEAR -5,739,255

C. RETAINED NET PROFIT D. NET LOSS BROUGHT FORWARD -32,541,492

- Covered net loss brought forward from previous year 0

E. DECREASE IN CAPITAL RESERVES 0

F. DECREASE IN REVENUE RESERVES 0

- Decrease in other revenue reserves 0

- Decrease in legal reserves 0

- Decrease in capital reserves 0

G. INCREASE IN REVENUE RESERVES 0

- Increase in legal reserves 0

- Increase in reserves for own stakes 0

- Increase in statutory reserves 0

- Increase in other revenue reserves 0

H. LONG-TERM DEFERRED DEVELOPMENT COSTS -953,197

I. ACCUMULATED PROFIT I. ACCUMULATED LOSS -39,233,944


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2016 2015 10. Provisions and long-term accrued expenses and deferred revenues in EUR

1,255,590

1,372,830

Provisions

Balance as at 1 January

2016 Establishment Disbursement

Balance as at 31

December 2016

Provisions for severance payments upon retirement 636,841 23,148 -47,751 612,238

Provisions for long-service awards 174,548 1,373 -22,091 153,830

Total 811,389 24,521 -69,842 766,068

Provisions for the costs of building decommissioning 7,511 0 0 7,511

Long-term accrued expenses and deferred revenues 420,427 601,010 -653,675 367,762

Long-term deferred revenues 133,503 0 -19,254 114,249

Total: 561,441 601,010 -672,929 489,522

Grand total: 1,372,830 625,531 -742,771 1,255,590

Vipap Videm Krško d.d. disclosed EUR 559,369 of provisions for severance payments and long-service awards. The most recent actuary calculation of provisions for severance payments and long-service awards of employees was performed in 2014. Actuary calculations of provisions for severance payments at retirement and long-service awards were provided by the company APIS, Andrej Šalamun s.p. Ljubljana, certified actuary, pursuant to SAS 10 and IAS 19. The calculation was made on 31 December 2014. The actuarial calculation of provisions for long-service awards was made on the basis of the service period with the last employer (change). The provisions for severance payments were established in line with the minimum conditions for old-age pension eligibility under the ZPIZ-2. Upon retiring, the employees are entitled to severance pay in the amount of two average monthly salaries in the Republic of Slovenia for the previous three months or in the amount of two average monthly salaries of the employee in the last three months, whichever is more favourable for the employee. The growth in salary and employee fluctuation are estimated at 2% (up to 35 years – 5%; 35–45 years – 3% and over 45 years – 2.5%). The estimated nominal long-term interest rate is 3.1%. Provisions have been calculated only for full time employees. In 2016, the Company reversed EUR 6,198 of unnecessary provisions (EUR 4,438 for severance payments and EUR 1,760 for long-service awards) and used EUR 43,186 of provisions (EUR 27,430 for severance payments and EUR 15,756 for long-service awards). Provisions for the cost of building decommissioning (EUR 7,511) include the planned costs of building decommissioning at the former chemical pulp mill. The facility is being rehabilitated gradually. In 2009 we established additional provisions arising from the planned cost of rehabilitation of these facilities in 2010. In 2011, provisions were decreased due to removed buildings and in 2012 due to sale. Long-term accrued expenses and deferred revenues (EUR 2,024) decreased by the disposal of emission coupons for 2015 (123,365 coupons) and increased by 69,143 (emission coupons acquired based on decision). Emission coupons acquired based on the decision of the Ministry of Agriculture and Environment of the Republic of Slovenia (no. 35489-5/2014-2) are stated in books of account at EUR 1. Provisions for long-term deferred revenues (EUR 114,249) decreased by the accrued depreciation of donated fixed assets.


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In its books of account Levas d.o.o. discloses provisions of EUR 567,965 (EUR 205,036 for severance payments and long-service awards and EUR 362,929 of long-term accrued expenses and deferred revenues). Long-term accrued expenses and deferred revenues include state aid received in the form of assigned contributions, which the company employing disabled people makes upon salary account. In its books of account Vipap GmbH discloses provisions of EUR 4,472, of which EUR 1,663 for severance payments and long-service awards and EUR 2,809 of other provisions.

2016 2015 11. Long-term financial liabilities in EUR 31,135,393 29,540,278

Creditor


2016 Outstanding Short-term

maturity Long-term

maturity Date of final

maturity Interest rate

Domestic bank 731,250 731,250 22,239 709,011 31/12/2020 3-month Euribor +

4.95%

Domestic bank 2,939,995 2,939,995 89,414 2,850,581 31/12/2020 3-month Euribor +

4.95%


6.10%


4.95%


4.95%


6.10%


6.10%


6.10%


6.10%


6.10%


1.50%


1.50%


4.95%


4.95%

Domestic bank 1,000,000 1,000,000 30,413 969,587 31/12/2020 3-month Euribor +

4.95%

Total 21,177,133 21,177,133 888,567 20,288,566

Loan from a foreign Group company 1,000,000 1,000,000 0 1,000,000 31/12/2020

3-month Pribor + 3.40%

Loan from a foreign Group company 7,993,782 7,993,782 0 7,993,782 31/12/2020

3-month Pribor + 3.85%

Loan from a foreign Group company 1,850,413 1,850,413 0 1,850,413 31/12/2020 0

Other short-term financial liabilities 212,296 212,296 209,664 2,632

Total 32,233,624 32,233,624 1,098,231 31,135,393

The fair value of loans raised by Vipap Videm Krško d.d. is equal to their carrying amount. Long-term loans (including the portion falling due in 2017 in the amount of EUR 888,567) total EUR 21,177,133. As at 31 December 2016, long-term loans to Group companies totalled EUR 10,844,195. Interest rates differ and are stated in the table. Loans to Group companies in relation


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to financial position of the Company within the meaning of Article 498 of the ZGD-1 are treated as long-term liabilities. Other short-term financial liabilities of Vipap Videm Krško d.d. comprise the liabilities to a factor company and the liabilities of Levas d.o.o. to the lessor, falling due in 2017 and later. Long-term financial liabilities to banks and Group companies are collateralised by means of pledged fixed assets, trade receivables and pledged inventories of raw materials and end products.

2016 2015

12. Short-term financial liabilities in EUR 5,286,609 6,754,945

Creditor Balance as at 31 December 2016 Outstanding

Date of final maturity Interest rate (%)

Domestic bank 1,653,900 1,653,900 10/01/2021 3-month Euribor + 3.95%

Domestic bank 1,580,000 1,580,000 14/01/2021 3-month Euribor + 4.95%

Foreign bank 954,478 954,478 Short-term portion of long-term loans 888,567 888,567

Other short-term financial liabilities 204,564 204,564

Short-term liabilities to lessor 5,100 5,100

Total 5,286,609 5,286,609

Short-term financial liabilities of Vipap Videm Krško d.d. to banks are collateralised by means of pledged fixed assets, trade receivables and pledged inventories of raw materials and finished products. The fair value of loans raised is equal to their carrying amount. The short-term portion of loans received stands at EUR 4,122,467. The short-term portion of other financial liabilities is EUR 204,564. They comprise liabilities to a factor company. Levas d.o.o. discloses in its books of account a short-term financial liability to the lessor in the amount of EUR 5,100. Vipap GmbH discloses in its books of account a short-term liability to a factor bank in the amount of EUR 954,478.

2016 2015

13. Short-term operating liabilities to suppliers in EUR 23,834,763 23,049,658

- in Slovenia 15,557,259 14,146,829

- abroad 8,171,018 8,845,891

- uncharged goods and services 106,486 56,938

Total 23,834,763 23,049,658

As at 31 December 2016, Vipap Videm Krško d.d. had liabilities due in Slovenia in the amount of EUR 5,298,712 and outstanding liabilities in the amount of EUR 8,994,492. In the structure of liabilities abroad, EUR 3,378,267 were due and EUR 4,790,225 were outstanding.


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The Company has the following operating liabilities to related companies: Levas Krško d.o.o. (EUR 365,622) and Vipap Vertriebs und Handels GmbH (EUR 731,084), disclosed under liabilities to Group companies. Levas d.o.o. discloses EUR 342,043 of liabilities to suppliers in Slovenia, EUR 2,527 of liabilities to suppliers abroad. Its past due liabilities total EUR 26,091, whereas others are outstanding in the amount of EUR 318,479. Vipap GmbH discloses EUR 922,013 of liabilities to suppliers, of which all outstanding.

2016 2015 14. Other short-term operating liabilities in EUR 1,529,700 1,539,524

In Vipap Videm Krško d.d. other short-term operating liabilities equalling EUR 1,328,002 comprise liabilities for interest (EUR 310,564), liabilities for salaries 12/2016 (EUR 383,107) and the related liabilities for contributions arising from salaries (EUR 133,026), liabilities for employer contributions (EUR 96,907), payroll tax liabilities (EUR 77,401), liabilities for other employment earnings (EUR 44,013), VAT liabilities payable in January 2017 (EUR 180,958), and other liabilities (EUR 102,026). Levas d.o.o. discloses other short-term operating liabilities in the amount of EUR 118,813: liabilities for salaries (EUR 78,005), liabilities for contributions arising from salaries (EUR 1,415), payroll tax liabilities (EUR 9,166 EUR), liabilities for other employment earnings (EUR 12,170), VAT liabilities payable (EUR 12,449), and other liabilities (EUR 5,608). The books of account of Vipap GmbH disclose EUR 82,885 of other short-term operating liabilities. 2016 2015

15. Short-term accrued expenses and deferred revenues in EUR 857,250 1,022,233

Type of deferral Balance as at 1

January 2016 Establishment Disbursement


2016

Accrued expenses 788,285 1,237,631 1,412,130 613,787

Short-term deferred revenues 233,947 20,584 11,069 243,463

Total 1,022,233 1,258,215 1,423,198 857,250

Short-term accrued expenses and deferred revenues comprise costs that will arise as liabilities in 2017 or for which we will receive assessment decisions in 2017. Vipap Videm Krško d.d. records the following short-term accrued expenses and deferred revenues: unused annual leave for 2016 (EUR 287,787), calculated liability to the Customs Administration of the Republic of Slovenia arising from polluted water for 2016 (EUR 53,605), calculated liabilities for CO2 emission for 2016 in the amount of EUR 218,829 and liabilities arising from unresolved complaints (EUR 4,043), and other (EUR 8,098). Short-term deferred revenues comprise interest charged to customers in relation to which revenue is recognised upon payment (EUR 237,264). Levas d.o.o. records the following short-term accrued expenses and deferred revenues: unused annual leave for 2016 (EUR 40,011), short-term accrued overheads (EUR 1,414 EUR) and short-term deferred revenues from SID compensation in the amount of EUR 6,198.


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2016 2015

16. Net sales revenues in EUR 89,950,984 91,603,883

Italy 20,268,761 18,586,436 Austria 7,275,170 4,437,318 Slovenia 10,661,047 12,322,383 Turkey 900,616 7,784,609 Germany 8,011,629 7,768,734 Serbia 7,467,587 7,298,485 Great Britain 5,916,913 4,723,168 Croatia 5,922,622 4,690,344 Bulgaria 3,292,488 3,838,733 Bosnia and Herzegovina 2,265,317 2,200,677 Slovakia 1,060,476 1,447,835 Macedonia 1,347,265 1,701,939 Montenegro 1,127,521 1,287,261 Switzerland 394,751 1,160,114 Romania 666,229 925,484 Greece 948,416 871,015 Albania 763,524 868,418 Czech Republic 730,308 639,810 Malta 602,394 634,983 France 216,928 630,899 Singapore 0 473,550 Kosovo 443,694 436,920 The Netherlands 28,221 89,037 Belgium 85,983 28,290 Poland 36,956 42,073 Hungary 7,971,095 5,708,424 Sweden 496,835 0 Other countries 88,173 59,839 Other 960,065 947,105 Total 89,950,984 91,603,883

Breakdown of revenues by business area 2016 2015 Sales of paper 88,990,919 90,656,778 Other 960,065 947,105

Total 89,950,984 91,603,883

2016 2015 17. Other operating income in EUR 742,332 912,076

Other operating income of Vipap Videm Krško d.d. comprises income from release of provisions (EUR 24,024), other income associated with products (EUR 72,920), income from sale of fixed assets (EUR 28,721), and revaluation operating income arising from bad and doubtful debt settled (EUR 47,048). At Levas d.o.o., other operating income mainly includes the assigned contributions used under Article 61 of the Vocational Rehabilitation and Employment of Disabled Persons Act (ZZRZI)


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(EUR 397,248), subsidies of the Fund of the Republic of Slovenia for the Promotion of Employment of Disabled Persons (EUR 28,682 EUR), the use of ceded assets for depreciation of fixed assets (EUR 106,744), and other (EUR 3,909). Vipap GmbH discloses EUR 33,036 of other operating income in its books of account (value adjustments of receivables). 2016 2015 18. Costs of services in EUR 9,836,087 10,358,514

Cost of transport services 3,437,982 4,171,550

Costs of fixed asset maintenance 1,806,312 1,755,381

Costs of payment transactions, banking services and insurance 657,174 719,128

Cost of intellectual and personal services 513,885 484,255

Contract-based work, author's contracts, session fees 642,046 404,357

Rents 456,643 462,283

Costs of trade fairs, advertising and entertainment 25,047 22,815

Costs of services arising from production and provision of services 329,237 94,101

Reimbursement of employee work-related costs 42,111 30,999

Costs of auditing the annual report 19,740 24,780

Costs of other services 1,905,910 2,188,865

Total 9,836,087 10,358,514

Following the elimination of intragroup expenses of companies subject to consolidation, Vipap Videm Krško d.d. posted EUR 8,696,679 of costs of services, while the respective figure of Levas d.o.o. was EUR 187,028 and of Vipap GmbH EUR 952,380. 2016 2015 19. Labour costs in EUR 10,491,978 10,807,289

Costs of salaries and wages 7,373,851 7,314,034

Pension insurance costs 786,288 796,312

Cost of other social insurance 590,311 606,649

Other labour costs 1,741,528 2,090,294

In Vipap Videm Krško d.d. labour costs amounted to EUR 8,717,806, in Levas d.o.o. to EUR 1,682,905 and in Vipap GmbH to EUR 91,267. 2016 2015 20. Other operating expenses in EUR 1,337,260 1,357,427

Other operating expenses of Vipap Videm Krško d.d. include: environment protection expenses (EUR 802,017), building land use fee (EUR 481,070), bonuses to secondary school and university students in practical training (EUR 10,975), contributions and membership fees (EUR 27,938), and other expenses (EUR 10,041). Other operating expenses of Levas d.o.o. comprise membership fees of EUR 3,349, building land use fee in the amount of EUR 903, and other (EUR 967). Vipap GmbH has no operating expenses.


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2016 2015 21. Financial revenues from operating receivables in EUR 45,293 96,218

Foreign exchange gains 8,870 56,232

Interest income 36,423 39,986

Total 45,293 96,218

Financial revenue from operating receivables of Vipap Videm Krško d.d., Levas d.o.o. and Vipap GmbH totals EUR 23,322, EUR 1,779 and EUR 20,192 respectively.

2016 2015 22. Financial expenses for financial liabilities in EUR 1,893,550 2,119,640

At Vipap Videm Krško d.d., this item comprises interest on loans (EUR 1,804,947), exchange rate differences arising from long-term financial liabilities (EUR 3,129) and exchange rate differences from other financial liabilities (EUR 7,400). Levas d.o.o. discloses EUR 442 and Vipap GmbH EUR 77,632 of financial expenses for financial liabilities.

2016 2015 23. Financial expenses for operating liabilities in EUR 116,702 155,767

At Vipap Videm Krško d.d., this item comprises interest on operating liabilities (EUR 104,830) and exchange rate differences from receivables and liabilities (EUR 7,775). Levas d.o.o. discloses EUR 4,097 of financial expenses for operating liabilities.

2016 2015 24. Other income in EUR 198,668 361,727

At Vipap Videm Krško d.d. the item includes: damages received (EUR 146,783), subsidies (EUR 50,000), and other (EUR 11). Levas d.o.o. discloses other income in the amount of EUR 1,874. 25. Corporate income tax in EUR

In 2016, Vipap Videm Krško d.d. recorded a tax loss of EUR 5,619,390, whilst Levas Krško d.o.o. recorded neither tax profit nor tax loss. In the statement of comprehensive income for 2016 Vipap GmbH discloses EUR 3,834 of corporate income tax.


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26. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to providing maximum liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company's reputation. The time line of maturity of liabilities, loans and receivables of the Group is presented below. The amounts represent contract values without interest.

Maturity of liabilities:

Year 2016 Overdue up to 3

months 3-12

months 1-5 years over 5 years

Total in EUR

Financial liabilities 0 204,564 5,082,045 31,135,393 0 36,422,002

Trade payables 8,209,721 15,437,017 188,025 0 0 23,834,763

Other operating liabilities 0 1,699,617 0 0 0 1,699,617

Total 8,209,721 17,341,198 5,270,070 31,135,393 0 61,956,382

Loan maturity


months 3-12


Total in EUR

Total loans 0 0 5,076,945 31,132,761 0 36,209,706

Maturity of trade receivables


months 3-12


Total in EUR

Short-term operating trade receivables 2,100,805 7,060,538 0 0 0 9,161,343

27. Credit risk Credit risk represents the risk of default on receivables of the Group due from its customers. The Group has established suitable controls and procedures to manage this significant risk, for instance proper monitoring of outstanding receivables and a timely response to past due receivables. The Sales Department at Vipap Videm Krško d.d. examines overdue receivables at a meeting held every Monday. These receivables are also examined at regular monthly meetings of the Controlling. The largest exposure to credit risk stems from operating receivables. The age structure of financial assets and of cash and cash equivalents is presented below.


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Year 2016 Outstanding up to 3

months 3-12 months 1-5

years over 5 years Total in EUR

Trade receivables 7,303,699 1,527,015 299,446 31,183 0 9,161,343

Receivables from others 1,122,953 0 0 0 0 1,122,953

Cash and cash equivalents 193,714 0 0 0 0 193,714

Total 8,620,366 1,527,015 299,446 31,183 0 10,478,010

28. Foreign exchange risk

Foreign exchange risk is a financial risk, representing the risk of financial loss due to the change in the value of a currency when compared to another currency. The ratio between the value of two currencies is called an exchange rate. Most exposed to foreign exchange risk are import and export companies that do business with countries with a different currency. If the exchange rate changes during the conduct of business and is less favourable upon payment than the one at the time the deal was struck, the company might suffer financial loss. The receivables and liabilities of the company presented below in various currencies indicate that the Group is not exposed to foreign exchange risk even though it operates on foreign markets.

Year 2016 Value in EUR

Trade receivables in EUR 9,161,343

Trade receivables in USD 0

Trade receivables - other 0

Purchasing


Trade payables in EUR 23,831,299

Trade payables in USD 383

Trade payables - other 3,081

Lending


Loan obligations in EUR 26,365,511

Loan obligations in CZK 9,844,195

29. Classification of financial instruments at fair value The only financial instrument recorded by the Group is a long-term investment in the purchase of shares of Krka Novo mesto d.d. in the amount of EUR 317,400. The financial investment is classified as available-for-sale financial asset. It is an investment classified and measured at fair value through equity. At the end of 2016, the investment in the purchase of shares of Krka Novo mesto d.d. was restated to market value and the restatement was recorded as an increase in fair value reserve. An increase in deferred tax liabilities was recognised at the same time.


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Assets measured at fair value 2016 2015

Available-for-sale financial assets (1. category

- Equity securities 317,400 391,200

30. Costs by functional group in EUR

Vipap Videm Krško d.d. 2016 2015

Production costs of products and services sold 84,352,755 84,956,431

Change in the value of inventories 667,013 -1,107,563

Cost of goods and materials sold 9,786 3,008

Selling cost 3,490,745 4,745,691

General and administrative costs 4,357,697 4,243,357

Total 92,877,996 92,840,924

Levas d.o.o. 2016 2015

Production costs of products and services sold 3,135,640 3,157,906

Change in the value of inventories 1,616 6,037

Cost of goods and materials sold 6,340 33,398

General and administrative costs, and selling costs 280,087 270,350

Total 3,423,683 3,467,691

Vipap Vertriebs und Handels GmbH 2016 2015

Production costs of products and services sold 0 0

Cost of goods and materials sold 17,679,568 14,083,365

General and administrative costs, and selling costs 1,062,457 808,317

Total 18,742,025 14,891,682


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31. Indicators

31 December 2016

31 December

2015

Equity financing rate equity / liabilities 0.40 0.43

Long-term financing rate capital + long-term liabilities (including long-

term provisions) / liabilities 0.71 0.71

Operating fixed assets rate fixed assets / assets 0.76 0.78

Long-term investment rate

fixed assets + long-term financial assets + investment property + long-term

operating receivables) / assets 0.80 0.80

Equity to operating fixed assets ratio capital / fixed assets 0.53 0.57

Acid test ratio liquid assets / short-term loans 0.01 0.02

Quick ratio (liquid assets + short-term receivables +

short-term financial assets) / short-term debt 0.30 0.35

Current ratio current assets / short-term liabilities 0.66 0.71

Operating efficiency ratio operating revenues / operating expenses 0.96 0.96

Net return on equity net profit – income tax / average capital -0.13 -0.11

Net return on share capital net profit for the financial year / average

share capital -0.07 -0.08

Earnings per share earnings / weighted average no. of shares

outstanding in the year -3.16 -3.27

Diluted earnings per share

earnings adjusted for the effects of potential shares / weighted average no. of shares

outstanding in the year -3.16 -3.27

32. Contingent liabilities According to its policy and financial capacity, the Group provides financial guarantees only to wholly-owned subsidiaries. Vipap Videm Krško d.d. guarantees for the liabilities of Vipap Vertriebs und Handels GmbH to Factorbank AG in the amount of EUR 2 million. The liability to the bank as at 31 December 2016 was EUR 954,478.


107

33. Significant events after the end of the 2016 financial year On 30 January 2017, the General Meeting of Vipap Videm Krško d.d. adopted a resolution on decrease in the Company's share capital. The share capital of the Company in the amount of EUR 78,387,660 decreased by EUR 32,690,449.46 to EUR 45,697,210.54. The share capital was decreased to cover the loss from previous years totalling EUR 32,842,197.13. Krško, 25 March 2017 President of the Management Board: Jožica Stegne

vovcak

Stamp


108

3. INDEPENDENT AUDITOR'S REPORT

UHUv-Revizija in svetovanje d.o.g.Revizijska druiba / Certified Auditors

INDEPENDENT AUDITOR'S REPORT

To the Shareholders ofvrPAP vtDEM rnSro o.a.Kriko. Slovenia

UHY Revizija in svetovanje d.o.o.Vurnikova ulica 21 000 Ljubljana, Slovenijatel.: +386 1 300 00 40fax: +386 1 300 00 50e-mail: [email protected]

OpinionWe have audited the accompanying consolidated financial statements of the company VIPAP VIDEM

KRSKO d.d. and its subsidiaries which comprise the consolidated statement of financial position as at

December 31 ,2016, and the consolidated statement of comprehensive income, consolidated statement of

changes in shareholder's equity and consolidated statement of cash flows for the year then ended, and a

summary of significant accounting policies and other explanatory information. We have also reviewed the

business report.

In our opinion, the consolidated financial statements present fairly, in all material respect, the consolrdated

financial position of the company VIPAP VIDEM KRSKO d.d. and its subsidiaries as at December 31,

2016, and its consolidated financial performance and its consolidated cash flows for the year then ended

in accordance with /nfernational Financtal Reporting Standards, as adopted by EU

Emphasis of MatterTo enable the users of financial statements getting the full picture of the company's business performance

and its financial positions together with the related uncertainties. we draw attention to the following

notestothefinancialstatements: |V.2.10(4,11,12,13,26,31,33), aswellastotheexplanatorynotesinthe business report under 1.1, 1.5 and ll.B. These notes specify the balance sheet's horizontal financial

structure, the ageing structure of accounts payable, analysis of business performance in current year,

liquidity risk management and the management's plans for the company's future operations. The short-

term liabilities significantly exceed the current assets of the company. The solvency of the company

importantly depends on the possibility of further frnancial arrangements with financial creditors regarding

the restructurrng of loans and the necessary restructuring of the company's operations in cooperation with

a strategic partner. In case of failure implementing the necessary changes, the situation may arouse doubts

about the ability of the company to continue operating as a going concern. Our opinion is not modified in

rtrsntrct nf these matters.

Other mattersThe company's annual report does not reveal information relating to the remuneration of members of

management and supervisory body in the manner prescribed by the fifth paragraph 294th article of the

Companies Act.

Basis for OpinionWe conducted our audit in accordance with International Standards on Auditing (lSAs). Our responsibilities

under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial

Statements section of our report. We are independent of the Company in accordance with the

lnternational Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA

Code) together with the ethical requirements that are relevant to our audit of the financial statements in

Slovenia and we have fulfilled our other ethical responsibilities in accordance wrth these requirements and

the IESBA Code.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour oprnron.

register revizijskih druib: RD A-073/05

al' katerikoli drugktan ne odgovarja za storitve drugih clanov.

Other InformationManagement is responsible for the other information. The other information comprises the business report

which is integral part of annual report of the company VIPAPVIDEM KRSKO d.d. and its subsidiaries,but does not include the financial statements and our auditor's report thereon. Our opinion on thefinancral statements does not cover the other information and we do not express any form of assurance

conclusion thereon.In connection with our audit of the financial statements, our responsibility is to read the other informationand, in doing so, consider whether the other information is materially inconsistent with the financial

statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. lf,based on the work we have performed, we conclude that there is a material misstatement of this otherinformation, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the FinancialStatementsManagement is responsible for the preparation and fair presentation of the financial statements in

accordance with /nfernational Financial Reporting Standards, as adopted by EU, and for such internal

control as management determines is necessary to enable the preparation of financial statements that are

free f rom material misstatement, whether due to f raud or error,In preparing the financial statements, management is responsible for assessing the Company's ability tocontinue as a going concern, disclosing, as applicable, matters related to going concern and using thegoing concern basis of accounting unless management either intends to liquidate the Company or tocease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditor's Responsibilities for the Audit of the FinancialStatementsOur objectives are to obtain reasonable assurance about whether the financial statements as a whole are

free from material misstatement, whether due to fraud or error, and to issue an auditor's report thatincludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with lSAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,

they could reasonably be expected to influence the economic decisions of users taken on the basis ofthese financial statements.

As part of an audit in accordance with lSAs, we exercise professional ludgment and maintain professional

skepticism throughout the audit. We also:. ldentify and assess the risks of material misstatement of the financial statements, whether due to fraud

or error, design and perform audit procedures responsive to those risks, and obtain audit evidence thatl- -,,++l-i^^+ ^^,1 -^r) )u,,!,s,rr orru oppfopriate to provide a basis for our opinion. The risk of not detecting a material

misstatement resulting from fraud is higher than far one resulting from error, as fraud may involve

collusion. forgery, intentional omissions, misrepresentations, or the override of internal control.. Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Company's internal control.. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.. Conclude on the appropriateness of management's use of the going concern basis of accounting and,

based on the audit evidence obtained, whether a material uncertainty exists related to events or

conditions that may cast significant doubt on the Company's ability to continue as a going concern. lf

we conclude that a material uncertainty exists, we are required to draw attention in our auditor'sreport to the related disclosures in the financial statements or, if such disclosures are inadequate, tomodifv our ooinion. Our conclusions are based on the audit evidence obtained up to the date of our

UllU l",Yi:'f ,' I .:Y:I,?Y" "je d' o'o

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auditor's report. However, future events or conditions may cause the Company to cease to contlnue as

a gorng concern.Evaluate the overall presentation, structure and content of the financial statements, including the

disclosures, and whether the financial statements represent the underlying transactions and events in a

manner that achieves fair oresentation.We communicate with those charged with governance regarding, among other matters, the planned

scope and timing of the audit and significant audit findings, including any significant deficienctes in

internal control that we identifv durinq our audit.

UHY Revizija in svetovanje d.o.o.

Franci ZgajnarCertified Auditor

€.-'\ )llLjubljana, April 5, 2017

UHU l"";i,'iii,' 2 :y:"l?"Y" nj e d' o' o'

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