ZAKŁADY AZOTOWE W TARNOWIE MOŚCICACH S.A. Management report on the operations of Zakłady Azotowe w Tarnowie Mościcach S.A. for the 12 months ended 31 December 2011 CONTENTS 1. KEY INFORMATION

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ZAKŁADY AZOTOWE W TARNOWIE MOŚCICACH S.A. Management report on the operations of Zakłady Azotowe w Tarnowie Mościcach S.A. for the 12 months ended 31 December 2011 CONTENTS 1. KEY INFORMATION Company organisation Description of changes in Company structure Information on the Company s organisational and equity links Information on branches (facilities) operated by the Company Information concerning employment COMPANY MANAGEMENT PRINCIPLES Azoty Tarnów organisational chart Changes in key Company management principles Significant organisational changes INFORMATION ON THE COMPANY S SHARES AND OTHER SECURITIES AND SIGNIFICANT SHAREHOLDERS Total number and nominal value of Company shares, their ownership by the Company s supervisory and management personnel and such persons' shares in the Company s related entities Information on agreements known to the Company which may result in a change in share ownership by existing shareholders and bondholders Information on employee share ownership programme control systems Own shares held by the Company, Group companies and persons acting on behalf thereof Use of proceeds from share issues Key data concerning Azoty Tarnów shares CHARACTERISTICS OF COMPANY OPERATIONS Information on principal products, goods for resale and services Information on sales markets and on supply sources for raw materials, goods for resale and services Major domestic and foreign investments Major equity investments Significant agreements Significant transactions with related parties Significant R&D developments Information concerning environmental issues Significant events CURRENT FINANCIAL SITUATION AND ASSET POSITION OF THE COMPANY Significant events having considerable impact on the operations and financial results of the Company Key economic and financial figures Financial performance Financial results by business segment Expenses by nature Description of asset and liability structure Financial ratios Profitability Liquidity Inventory, receivables and payables turnover Debt Explanation of differences between the actual and estimated financial results for Financial resources and asset management Assessment of the capacity to achieve investment objectives, including capital expenditures, in relation to the available capital, with consideration to potential alterations in the financing structure for these operations Page 2 of 97 5.8. Information on credit and loan agreements executed and terminated during the financial year Information on loans granted Information on guarantees and sureties granted and received Description of significant off balance sheet items Financial instruments Anticipated financial standing of the Company RISKS, THREATS AND PROSPECTS FOR COMPANY DEVELOPMENT Significant risk factors and threats Description of external and internal factors having a significant impact on Company operations and development External factors Internal factors Development prospects with consideration to market strategy ENTITY AUTHORISED TO AUDIT THE FINANCIAL STATEMENTS COURT PROCEEDINGS AUTHORITIES OF THE COMPANY Value of remuneration and additional benefits Agreements executed between the Company and management personnel providing for compensation in the event of their resignation or dismissal from the position held without valid cause or if their dismissal or redundancy occurs as a result of a merger DECLARATION ON APPLICATION OF CORPORATE GOVERNANCE Indication of the corporate governance principles to which the Company is subject together with the location where the text concerning such principles is publically available Scope in which the Company diverged from the corporate governance principles, indication of such principals and explanation of the reasons for such divergence Internal control and risk management features Shareholding structure Special control authorisations of holders of securities Indication of any voting restrictions Indication of any limitations concerning transfer of securities ownership Description of principles concerning the appointment and dismissal of management personnel and their entitlements, in particular the right to take decisions on the issue or buy back of shares Description of the principles for amending the Company s articles of association General Meeting means of operation Composition, alteration and description of the operations of management and supervisory bodies LIST OF TABLES Page 3 of 97 1. KEY INFORMATION 1.1. Company organisation Management report on the operations of Zakłady Azotowe w Tarnowie Mościcach S.A. Name: Zakłady Azotowe w Tarnowie Mościcach Spółka Akcyjna Trading name: Azoty Tarnów Registered office: Tarnów, ul. Eugeniusza Kwiatkowskiego 8 Duration: Indefinite The Company was entered into the register of companies of the National Court Register (entry no. KRS ) on 28 December 2001 pursuant to a ruling of the District Court for Krakow Śródmieście in Krakow, XII Commercial Division of the National Court Register, of 28 December The objectives adopted in the 2012 plan are in line with the development strategy and provide the Company continuous growth capacity. During 2011 the Company s approved product and market strategy and its core business, presented below, did not change in any significant aspect and their continuation is anticipated next year. Currently, the most significant products supplied by the Company to the Polish and foreign markets include polyamide 6, nitrate fertilisers and polyoxymethylene (POM). The Company s status as the largest manufacturer, employer, investor and taxpayer means that it plays a significant role in the material and socioeconomic development of the entire region. In connection with this the Company is viewed by the local community not just as an industrial facility but as a partner in solving a myriad of social problems. Field of operations and main products The objects of Zakłady Azotowe w Tarnowie Mościcach S.A. are: 1. Manufacture and trade in the following product groups: caprolactam (an intermediate for the manufacture of polyamide 6, with ammonium sulphate produced as a by product), sold in the following forms: liquid crystalline engineering plastics: polyamide 6 polyoxymethylene modified plastics mineral fertilisers calcium ammonium nitrate ammonium nitrate saletrosan ammonium sulphate 2. Generation, transmission and distribution of electricity 3. Production and distribution of heat 4. Drawing and treatment of water Page 4 of 97 1.2. Description of changes in Company structure On 12 August 2011 an amendment to the Company's articles of association was registered concerning an increase in issued share capital within authorised share capital (specified more precisely through the Management Board's declaration of 1 August 2011) and the increase in the Company's share capital from PLN to PLN through issue of ordinary series C bearer shares of a nominal value of PLN 5 each was registered. Registration of series C shares in the securities deposit took place on 30 August On 13 January 2012 an Extraordinary General Meeting of Shareholders of Zakłady Azotowe w Tarnowie Mościcach S.A. took place. Shareholders decided to introduce amendments to the Company s Articles of Association. The resolutions voted through concern amendment to provisions specifying the number of Management Board members. The articles of association had previously provided for the possibility to appoint between 2 and 5 persons to the Management Board. The new resolutions create the option for between 1 and 6 members to be appointed to the Management Board. At the same time, the changes made to the articles of association permit the Company to be represented by a single person Information on the Company s organisational and equity links Shareholding structure as at 31 December 2011 presentation of shareholders directly or indirectly holding at least 5% of voting rights at the Company s General Meeting. Shareholder Number of shares % of share capital Number of voting rights % of voting rights State Treasury of Poland ING OFE Aviva OFE Aviva BZ WBK PZU S.A. (including PZU Życie S.A.) Generali OFE Other Total Indication of the holders of all securities carrying special controlling entitlements in relation to the Company Pursuant to the provisions of 16, sec. 2 of the company's articles of association, the State Treasury of Poland as shareholder is entitled to an individual authorisation to appoint and dismiss one member of the Supervisory Board. Furthermore, in accordance with the provisions of 43, sec. 1 point 4 of the Company s articles of association, the General Meeting summons the Management Board of the Company at the written request of the State Treasury of Poland as shareholder, irrespective of the share in share capital, submitted at least one month before the proposed date of the General Meeting. 45 sec. 4 of the company's articles of association governing the inclusion by shareholders of specific issues in the agenda of the next General Meeting, it is stated that a shareholder or shareholders representing at least one tenth of share capital may request the inclusion of specific issues in the agenda of the next General Meeting. This entitlement is also held by the State Treasury of Poland as shareholder, irrespective of its share in share capital. Page 5 of 97 Table 1 Azoty Tarnów's stake in the share capital of subsidiaries as at 31 December 2011 (in currency units) Share capital % of shares directly Company name Registered office / address attributable ATT Polymers GmbH Forster Straße 72D Guben EUR Germany KOLTAR Sp. z o.o. ul. Kwiatkowskiego Tarnów PLN ZAK S.A. ul. Mostowa 30 A PO Box 163 PLN Kędzierzyn Koźle Z.Ch. Police S.A. ul. Kuźnicka Police PLN PKCh Sp. z o.o. ul. Kwiatkowskiego Tarnów PLN At the beginning of 2012 the Company received a letter from ISARIOS Industriekapital AG concerning UNYLON AG's potential alleged claims against the purchaser of UNYLON Polymers GmbH, headquartered in Guben, currently trading as ATT Polymers GmbH (hereinafter ATT Polymers ). The letter stated that in August 2011 ISARIOS Industrielkapital AG (hereinafter ISARIOS ) became the owner of unspecified claims due to UNYLON AG against Azoty Tarnów connected with the acquisition of UNYLON Polymers GmbH. Acting on behalf of ISARIOS, Christian Schennstedt indicated that non specified judicial proceedings are on going at appeals level concerning the invalidity of a resolution. No specific claims were outlined in these letters, nor were specific demands made of Azoty Tarnów. Also Azoty Tarnów is not and has never been a party to any judicial or arbitration proceedings in which any claims were raised in relation to the Company concerning the ATT Polymers share acquisition transaction. Azoty Tarnów is aware that proceedings are in progress between UNYLON AG shareholders and the company concerning questions raised by some shareholders with regard to the procedural correctness of the general meeting of shareholders of UNYLON AG on 23 December 2009, where consent was expressed to the acquisition of shares in ATT Polymers by Azoty Tarnów. One of the Unylon AG shareholders is consistently contesting challenges as to the correctness of the resolution of 23 December 2009, and the courts are in agreement with this view, issuing rulings upholding the resolution of 23 December It should be borne in mind that firstly the consent of the general meeting of shareholders for execution of the transaction was one of the conditions which Azoty Tarnów could waive, which despite the existence of the resolution of 23 December 2009 the Company took the precaution to do, and secondly that the management board of UNYLON AG declared during the ATT Polymers sale that ATT was not UNYLON AG's only asset, and thus legally the consent of the general meeting is not a necessary (legal) condition for the validity of the transaction. Consultation with lawyers has also confirmed that the contract for acquisition of shares in ATT Polymers is valid and that there are no current circumstances which could impact on its validity. The invalidation of the contract through questioning the resolution of 23 December 2009 is thus exclusively theoretical in nature and the associated risk is low. The Company also holds minority interests in 13 entities. Page 6 of 97 Table 2 Azoty Tarnów's stake in the share capital of minority interests as at 31 December 2011 % of share Company name capital Tarnowskie Wodociągi Sp. z o.o Tarnowski Klaster Przemysłowy S.A Tarnowska Agencja Rozwoju Regionalnego S.A Francusko Polskie Przedsiębiorstwo Instalacji Przemysłowych POLSNIG Sp. z o.o Centrum Naukowo Produkcyjne Materiałów Elektronicznych CEMAT'70 S.A INWESTSTAR S.A Zakłady Włókien Chemicznych WISTOM S.A. w Upadłości 9.83 Zakłady Tworzyw Sztucznych PRONIT S.A. w Upadłości 0.28 LEN S.A. w Likwidacji Tłocznia Metali PRESSTA S.A. w Upadłości Likwidacyjnej Wytwórnia Silników PZL MIELEC Sp. z o.o. w Upadłości 0.12 Południowe Zakłady Przemysłu Skórzanego Chełmek S.A. w Upadłości Likwidacyjnej 0.03 Konsorcjum Rozwoju Eksploatacji Majątku Trwałego EKSPLOSYSTEM Sp. z o.o Information on branches (facilities) operated by the Company The Company does not operate non local branches or facilities Information concerning employment Table 3 Employment level at Azoty Tarnów Employee group As at 31 December 2011 As at 31 December 2010 blue collar employees white collar employees Total Table 4 Average annual employment level Azoty Tarnów and employment level as at the end of 2011 Employee group Average employment Employment at year end blue collar employees white collar employees Total Table 5 Average monthly salary at the Company as at the end of 2011 white collar employees blue collar employees Total Average monthly salary [PLN] Page 7 of 97 Table 6 Employee rotation in the period 1 January 2011 to 31 December Number of new workers 43 Number of workers made redundant 69 Total 112 Table 7 Employment level by organisational unit Organisational unit Employment level as at 31 December 2011 Plastics Centre 638 Fertiliser Centre 418 Cogeneration Centre 255 Research and Analysis Centre 196 Catalyst Production 37 Other 517 Total Table 8 Employment by education Year Total employment Higher Secondary Vocational Basic In comparison to the previous year the number of employees with basic and vocational education decreased. The number of employees with secondary and higher education, however, increased. Table 9 Employment by length of service Year up to 5 years 6 10 years years above 20 years (8.39%) (4.90%) (27.17%) (59.54%) (7.08%) (5.17%) (29.66%) (58.09%) In comparison to the previous year the number of employees with the highest and lowest length of service increased. The 6 10 and groups decreased. Company HR situation Principles relating to salaries and bonuses for Company employees are governed by the collective labour agreement, which entered into force on 24 June This agreement covers all Azoty Tarnów employees with the exception of Management Board members, the Chief Financial Officer and personnel employed on the basis of management contracts. A bonus system is in force within the Company. The principles for awarding bonuses in 2011 were specified in Appendix no. 5 to the collective labour agreement and the regulations on award of bonuses. The basis for pay out of bonuses was the Company generating net profit during quarterly periods. In 2011 a total of PLN was paid out under bonuses. In 2011 there was a PLN 40 increase in overtime for work in continual shifts up to PLN 450/month and for double shift work up to PLN 240/month. Page 8 of 97 In 2011 basic pay per employee increased by an average of PLN 300. Events having an impact on the Company s HR situation on 12 August 2011 Additional Protocol no. 15 to the Collective Labour Agreement for employees of Azoty Tarnów was executed, amending the basic pay table, the job description table and table of qualification requirements; on 28 November 2011 Additional Protocol no. 16 to the Collective Labour Agreement for employees of Azoty Tarnów was executed, amending the regulations for pay out of annual bonuses; on 14 December 2011 an agreement was executed between the employer and trade unions concerning working time in 2012; in 2011 cooperation was continued with the Business University relating to education for Company employees on bachelor s courses in chemical and process engineering. Under this project, 21 employees continued bachelor s studies at the Business University; in December an agreement was executed with the Provincial Labour Office in Krakow for the project Competent Staff Guaranteed Success , co financed from the EFS. Total grant: PLN Project duration: 1 January December 2013 Social situation within the Company There were no group redundancies in The employer did not have any collective disputes with trade unions. Page 9 of 97 2. COMPANY MANAGEMENT PRINCIPLES 2.1. Azoty Tarnów organisational chart Management report on the operations of Zakłady Azotowe w Tarnowie Mościcach S.A. Source: Own data Page 10 of 97 2.2. Changes in key Company management principles A consolidated text of the Labour Regulations was implemented on 31 March On 11 April 2011 a consolidated text of the Organisational Regulations was introduced, covering the previous regulations and organisational changes (merger of the Caprolactam Centre with the Plastics Centre) and separation of the Catalyst Plant from the Fertiliser Centre with direct subordination to the Company s Management Board. On 1 May 2011 telecommunications infrastructure operations and functions were transferred from Azoty Tarnów to Automatyka Sp. z o.o. These included performance of maintenance works, repair works, diagnostic works and provision of technical services protecting the technical efficiency, continuity of operations and operational reliability of telecom installations and equipment. On 6 May 2011 a Credit Risk Management Procedure was implemented at the Company. Direct sales of plastics to end customers commenced on 9 May 2011 at the Plastics Centre. On 9 June 2011 a document entitled Zakłady Azotowe w Tarnowie Mościcach Group Accounting Principles (Policy) was approved and adopted for use within the Azoty Tarnów Group. On 9 June 2011 a document entitled Zakłady Azotowe w Tarnowie Mościcach Group Accounting Principles (Policy) was approved and adopted for use within Azoty Tarnów. In order to introduce unified principles for the recording, storage and processing of contract data, a Central Contract Register was introduced within the Azoty Tarnów Group on 30 December Changes in management principles which occurred at the beginning of the current year: On 18 January 2012 the Principles for Executing Agreements for the Supply of Energy Services and Commodities within the Azoty Tarnów Group was introduced. The Principles for Corporate Governance in IT was implemented on 23 January This provides detailed regulation and describes the role of the IT Steering Committee, the principles for strategic planning in IT, the principles of IT management, the principles of cooperation in implementing application and infrastructure projects and in providing fixed IT services. It also regulates the principles for use of information resources, arrangement of network infrastructure modernisation and IT hardware and software purchasing policy. In accordance with the Personal Data Protection Act of 29 August 1997 (Polish Journal of Laws of 2002, no. 101, item 926, consolidated text as amended) and the Ordinance of the Minister of the Interior and Administration of 29 April 2004 on documenting the processing of personal data and the technical and organisational conditions to which IT equipment and systems used for the processing of personal data should correspond (Polish Journal of Laws of 2004, no. 100, item 1024), an Information Security Policy for the Zakłady Azotowe
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