MANAGEMENT REPORT OF FABRYKA FARB I LAKIERÓW ŚNIE … · 39-102 Lubzina 34 a Ropczycko – S...

MANAGEMENT REPORT OF

FABRYKA FARB I LAKIERÓW ŚNIEŻKA S.A.

in LUBZINA FOR 2010

Fabryka Farb i Lakierów Śnieżka S.A. in Lubzina

Management Report 2010

1. Introduction to the Management Report...................................................... 2

2. Fabryka Farb i Lakierów Śnieżka S.A. – facts and figures ........................4

3. Company’s strategic goals .............................................................................. 5

4. Domestic and industry-wide economic situation in 2010 ............................ 6

5. Paints and varnishes market in 2010............................................................. 9

6. Impact of the economic situation on the Company’s 2010 performance.11

7. Sales and orders on hand.............................................................................. 11

8. Production...................................................................................................... 17

9. Research and development...........................................................................19

10. Supply policy................................................................................................ 19

11. Environmental impact ................................................................................ 20

12. Investments .................................................................................................. 21

13. Employees..................................................................................................... 24

14. Finance ......................................................................................................... 26

15. Basic risks and threats related to operations on the market of paints and varnishes............................................................................................................. 32

16. Declaration on corporate governance ....................................................... 36

17. Additional information ............................................................................... 37

18. Major prizes and awards for Śnieżka in 2010.......................................... 44

19. Corporate Social Responsibility................................................................. 46

20. Śnieżka’s foundation – Your Opportunity ............................................... 47

21. Summary ...................................................................................................... 48

22. Statement by the Management Board....................................................... 50



1. Introduction to the Management Report Name: Fabryka Farb i Lakierów Śnieżka S.A. Office of the Company’s Management Board: 39-102 Lubzina 34 a Ropczycko – Sędziszowski Poviat Podkarpackie Voivodship

Company’s incorporation:

The Company operates on the basis of a Statute passed by the Stockholders’ Meeting, drafted in the form of a Notarial Deed, Repertory A, No. 121/98, complemented by Deed No. 754/98 of 16.02.1998. The entry into the commercial register was performed by the District Court in Rzeszów, 5th Commercial Department, on 17.02.1998, under Commercial Register No. 1818, Section B, whereas the Company’s registration in the National Court Register under number 0000060537 was on 12.11.2001 with the District Court in Rzeszów, 12th Commercial Division of the National Court Register. The Company was registered in the Central Statistical Office and received the Statistical Identification Number (REGON) 690527477, as well as in the records of the tax office and received the Tax Identification Number (NIP) 818-14-33-438. Company’s business: Manufacture of paints, varnishes, solvents, adhesives, putty compounds, resins, trade and finance agency, domestic and international road transport, shipment, manufacture of construction materials, construction, wholesale and retail sale, except for trade in vehicles, manufacture of chemicals and chemical products, scientific research and development, lease, rent, etc.

Branches:

1. Lubzina 34 a

39-102 Lubzina Ropczycko – Sędziszowski Poviat Podkarpackie Voivodship

2. Brzeźnica 18 39-207 Brzeźnica Dębica Poviat Podkarpackie Voivodship

3. Pustków 604 39-205 Pustków Dębica Poviat Podkarpackie Voivodship



4. In the 10 months of 2010, the manufacture of powder paints and varnishes was located in the facilities of PROXIMAL in Bytów. In November 2010, the manufacture of powder paints was relocated to the facilities of the Company’s Branch in Lubzina. Share capital: As at 31 December 2010: PLN 13,550,676 – 13,550,676 stocks of the nominal value of PLN 1. On 21 June 2010, the General Stockholders’ Meeting, based on article 359 of the Commercial Companies Code, redeemed a total of 2,911 series F ordinary bearer equity stocks amounting to PLN 2,911. This redemption was a voluntary redemption. The legal basis for the redemption was § 6, section 8 of the Company’s Statute and articles 359 and 360 of the Commercial Companies Code. The stocks were redeemed by way of decreasing the share capital pursuant to article 455 § 1 of the Commercial Companies Code. The stocks were redeemed on pure profit. 2,911 series D stocks were redeemed at PLN 31.04 each. The share premium of the series F stocks, amounting to PLN 87,446.44, was covered from the supplementary capital. Company’s representation:

Supervisory Board: Stanisław Cymbor – Chairman of the Supervisory Board Jerzy Pater – Vice-Chairman of the Supervisory Board Stanisław Mikrut – Secretary of the Supervisory Board Anna Pater – Member of the Supervisory Board Jakub Bentke – Member of the Supervisory Board Zbigniew Łapiński – Member of the Supervisory Board On 21 June 2010, the Ordinary General Stockholders’ Meeting expanded the Supervisory Board’s composition and appointed Anna Pater as Supervisory Board member. Management Board: Piotr Mikrut – President of the Management Board from 31 March 2004 to the present. In 1995, Piotr Mikrut graduated from the AGH University of Science and Technology in Krakow (Management Faculty) with distinction. He started his professional career as the Manager of the Marketing Division in CHEMAL s.c., which was later transformed into Fabryka Farb i Lakierów Śnieżka S.A. He worked with this company between 1995 and 1997. Since 1997, he fulfilled the function of the President of the Management Board of PPHU 2M Sp. z o.o., in which he was also one of the shareholders. 2M’s business consists in import and distribution of top quality paints manufactured in the United States by United Gilsonite Labolatories under the brands: DRYLOK, ZAR. In 2009, he was honoured with Ernst & Young's Entrepreneur of the Year title. Witold Wa śko – Vice-President of the Management Board from 1 April 2005 to the present. Witold Waśko has university education (MSc in engineering) and he graduated from the Rzeszów University of Technology (specialisation: aeronautics). Witold Waśko also completed a post-graduate programme in accounting and finance at the Małopolska University of Marketing and Management. In 2009, he passed an exam and was awarded the title of a certified auditor. In the course of his professional career, he participated in various



courses, such as: a budgeting course organised by Nord Controling, a financial planning course organised by Pator, a quality management course and an HR management course. Witold Waśko started his professional career as a Technical Consultant with WSK PZL Mielec and later worked as an accountant and IT specialist with P.P.H.U. Chemal s.c. Between 1994 and 1998, he worked as the Finance Director in Fabryka Farb i Lakierów Chemal s.c. Between 1998 and 2003 he worked in the Company as the Economic Director and a Management Board Member. Joanna Wróbel-Lipa – Member of the Management Board from 18 December 2007 to the present. Joanna Wróbel-Lipa has higher education and she graduated from the University of Economics in Katowice (specialisation: Management and Marketing). From June 2003 to October 2004, she participated in a post-graduate programme The Advanced Certificate in Marketing run by the Institute for Business Development. She started her professional career in May 2000 with FFiL ŚNIEŻKA S.A. as a Marketing Specialist. From August 2003 to December 2004, she fulfilled the function of the Marketing Division Manager and from January 2005 to July 2006 she worked as Deputy Trade Director for Marketing. In August 2006, Joanna Wróbel-Lipa became the Trade Director and fulfilled the function of a Proxy. Walentyna Ochab – Member of the Management Board from 18 December 2007 to the present. Walentyna Ochab has university education in economy and she graduated from the Economic Faculty of the Lviv Institute for Commerce and Economy (programme: Trade Economics and Management). Walentyna Ochab’s professional career: 1993-1995 – Social Security Office in Dębica, 1995-1998 – Zakład Tworzyw Sztucznych Erg w Pustkowie S.A., Marketing Specialist, from 1998 to the present – FFiL Śnieżka SA, initially Export Specialist, later Export manager, and from 1 July 2004 Foreign Partnership Director. From 25 August 2004, she has fulfilled the function of a Proxy. In December 2007, she was appointed a Member of the Management Board of FFiL Śnieżka S.A. In 2010, the composition of the Company’s Management Board did not change.

2. Fabryka Farb i Lakierów Śnieżka S.A. – facts and figures

PLN 413,037 thousand >> Sales revenue PLN 42,712 thousand >> Operating profit PLN 35,963 thousand >> Net profit PLN 2.65 >> Earnings per stock 584 people >> Employment as at 31 December 2010 84,650,763 litres/kg >> Products sold



Śnieżka’s 2010 quotations Price 4.01.2010: PLN 40.10 Highest in the year: PLN 43.79 Lowest in the year: PLN 38.65 Price 31.12.10: PLN 43.00

3. Company’s strategic goals

The main assumptions of Śnieżka’s long-term strategy consist in obtaining a leading position on the CEE market of paints and varnishes. The Company puts equal emphasis on continuously obtaining new sales markets for its products. To this end, the Company constantly consolidates its high position in major markets, plans to expand into new markets and pursues active development in new market segments. The Company will continue to enhance the quality of its products, primarily through using innovative technologies. The Company will also expand its offer of products according to the current trends and the needs of demanding Customers. All planned activities are intended to enhance the positive image of the Company as well as its product brands and ultimately contribute to a further substantial increase in the Company’s Stockholder value. In 2010, the Company acted dynamically to ensure top quality of products for its Customers in response to the changing market situation and customer preferences. The company implemented a new vision for managing its product portfolio. Multibranding strategy was adopted, involving the creation of strong groups of brands in the individual market segments. In addition, development measures were pursued, such as increasing the Company’s production capacities and using innovative technologies in the production of certain groups of the Company’s products.

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January February March April May June July August September October November December



The achievement of the above-mentioned strategic objectives and the immensely important continuous development of the sales network for the Company’s products are facilitated by: - establishing and consolidating friendly collaboration with the current domestic Trade Partners, - establishing closer partnerships with foreign counterparties, searching for new contacts in this area of business, - focusing on the development of an international capital group, whose goal is to expand both in geographical and product terms, - developing production, storage and technological capacities to meet the Company’s needs and growth plans. Plans for 2011 and the following years assume a sustainable continuation of already initiated measures and implementations. As regards gaining new markets, the strategy of the Company assumes gradual introduction of its products to distribution channels in new geographical areas. At the moment the Company exports its products mainly to CEE countries (Ukraine, Belarus, Russia, Moldova, Lithuania, Slovakia, Romania and Latvia). It should be emphasised that these markets are characterized by a significant potential in terms of population and economy, combined with significant investment needs, related in particular to infrastructural development. The Company forecasts a continued increase of its share in the current foreign markets. At the same time, the Company will focus on development measures targeted at two groups of Customers: individual customers and contractors. The Company will devote particular attention to consolidating its position and image among professionals. The Company’s expansion policy is linked directly to achieving all of the above objectives. The Company’s main objective in terms of foreign markets is to develop a professional sales network and supply it with the full range of products. The organisation of the production base in new countries requires careful economic planning and an in-depth knowledge of the specific nature of the new markets. It is important to learn about the market conditions, the applicable legal and tax regulations as well as potential requirements and restrictions on the local market. For this reason, the Company uses the invaluable assistance of local Partners, which has proved to be an effective solution. As a result of the recent global events, we are witnessing an economic slowdown on the financial markets. In spite of this fact, the Company’s Management Board guarantees that the adopted measures aimed at achieving the Company’s main objective will be consistently implemented. A harmonious development in line with the adopted strategy will allow the Company to achieve a leading and strong position in a competitive market environment.

4. Domestic and industry-wide economic situation in 2010

Economic situation in 2010 In 2010, Poland’s economic situation – in comparison to the eurozone and countries from our region – was good. Poland was the one EU member to record economic growth. A different response from the Polish economy to the crisis has confirmed that it develops in a sustainable way. In 2010, macroeconomic indicators improved significantly over 2009. Following the tough years of crisis 2008 and 2009, Polish economy slowly started to grow. As a result, after three quarters the GDP was 3.6% higher than in the analogous period in 2009. The main growth



driver continues to be retail consumption, while economic growth is supported by increase in inventory. Consumption expenditures of households grew substantially in the initial 3 quarters of 2010. In addition, as a result of increase in individual consumption and replenishment of the inventory level, domestic demand was the main economic growth factor. This may testify to a further improvement in consumer sentiment as consumers are no longer plagued by the worries of the recent global economic crisis. External demand has lost its role of stimulus to the economy as it contributed less to growth. This was due to a sustained trend of import having higher dynamics than export. According to the initial data of the Central Statistical Office (GUS), in the initial eight months of 2010 the value of export calculated at current prices was EUR 75.0 billion and 20.6% higher compared to 2009. The value of import was EUR 82.4 billion and was lower by 19.8% year-on-year. The negative balance of the sale of goods was EUR 7.4 billion, i.e. EUR 812 lower than between January and August 2009. 2010 inflation measured with CPI was lower than in 2009 and amounted to 2.5%. At the same time, the prices of industrial production sold rose by 1.2% and the prices of construction and assembly production sold remained at a level similar to that from the previous year. 2010 saw an improvement in the job market situation. Following Q3 2010, average employment in the business sector was only 0.2% lower than a year earlier. At the end of September 2010, the number of registered jobless people was 1,813 thousand, while their number increased by 96.7 thousand year-on-year. The unemployment rate recorded in 2010 dropped to 11.5%, returning to the level from Q4 a year earlier. In 2010, there was an increase in gross expenditures on PP&E. Following a 6.4% drop in H1, the Gdańsk Institute for Market Economics estimated the increase in Q3 at 1.3%. From the perspective of Polish economy’s development requirements and maintaining a stable pace of economic growth in the medium term, the growth dynamics of investments appear to be insufficient. The fastest growing sector in 2010 was the industry. Added value grew slightly slower in construction; the Institute estimated the growth at 6.2%. The growth rate in added value in market services was below expectations and can be estimated at 1.4%. In 2010, the FX market saw an appreciation of the Polish currency. This was due to a relatively favourable economic situation in comparison to other European countries and related to the growing interest of foreign investors in the domestic market. In 2010, the profitability ratio was still high, even slightly higher than in 2009 despite the fact that the Polish zloty was stronger than in 2009. The initial worries about the behaviour of foreign bank owners were not confirmed. The banks operating in Poland were capitalised by them. Thanks to a small number of mortgager loans and a relatively low share of bank loans in funding investments in the private sector, the Polish banking sector – and, broadly speaking, the financial sector – was not a crisis-generating factor. In 2010, the loan expansion was restored. Economists forecast 2011 to see a further gradual improvement of the economic situation but no economic boom is to be expected. GDP will continue to grow and at the end of 2011 it should reach a level between 4.0% and 4.5%. A small decrease in recorded unemployment is also forecast along with a slight increase in average nominal remuneration in the national



economy. Capital expenditures on PP&E will grow at approx. 5-8%. A restrictive macroeconomic policy will be another contributor to the expected improvement in the economic situation. A decrease in budget deficit is expected in 2011, which means a tighter fiscal policy.

Situation on the construction market in 2010

Poland’s construction sector was the only one in the Visegrad Group not to break down as a result of the global economic crisis, but it only witnessed a stagnation. Only in the early months of 2010 was there a decrease in production dynamics of construction businesses, bringing to light the tough situation faced by this industry. Following three quarters of 2010, construction and assembly production in the group of businesses with more than 9 employees decreased by 1.5% compared to an analogous period a year earlier. In spite of improving sentiment on the real property market, the condition of this sector in Q1 and Q2 2010 still took its toll on the result, with unfavourable weather events, such as lower temperatures in Q1 and the flood in Q2, effectively hampering the activity of construction businesses. The decrease in the sales of the construction and assembly production in the analysed period occurred in businesses which erect buildings (by 2.3%) as well as civil and water engineering structures (by 2.2%). A slight increase was recorded in specialised construction businesses (by 1.5% year-on-year). The prices of construction and assembly production dropped by 0.2% over the year. The sector’s negative price dynamics, observed from the beginning of the year onwards, were largely due to a limitation on the activities of construction companies in relation to unfavourable weather conditions in the early two quarters of 2010. The overall business climate in the construction industry is still assessed negatively, in spite of a slight improvement over December a year earlier. In December 2010, the overall business climate in the construction industry was rated with -8. 14% of businesses signalled an improvement, while 22% a deterioration. Other businesses considered that their situation remained unchanged. The greatest difficulties are faced by businesses struggling with weather conditions (this limitation was the most significant one to grow in importance over the year), employment costs and market competition. Insufficient demand is the barrier to see the most significant decrease in importance over the year. From the perspective of a manufacturer of paints and varnishes, the situation in the finishing and interior outfitting industry is important. According to the data published for 2010, 25 thousand less apartments were delivered for use than in 2009, i.e. a drop by approx. 16%. Developers once again introduce a global price cut for apartments because the demand continues to fall and schemes such as “Rodzina na swoim” (state-subsidised mortgage loans) fail because tighter criteria of state funding are introduced. According to the data of the Central Statistical Office, over the twelve months of 2010, the construction of 158,064 apartments was started, i.e. a 10.6% increase over 2009, and construction permits for 174,929 apartments were issued, i.e. a 2.2% decrease. The greatest share (51.9%) in the increase in new housing resources was attributable to individual investors. In spite of this fact, in 2010 they constructed 2.1% less apartments than a year earlier and obtained fewer construction permits. A substantial share in the overall number of apartments delivered for use was also



attributable to developers, who delivered 53,225 apartments (i.e. 39.2% of the overall number of apartments delivered). The number of apartments delivered by developers is significant but lower by 26.4% than a year earlier. Over the twelve months of 2010, this group of investors started the construction of 63,015 apartments, i.e. 42.2% more than in 2009. The number of apartments for which construction permits were obtained increased as well to 68,581, i.e. by 8.2%. Apartments not delivered for use in 2010 will be delivered in the subsequent years, which is a good forecast for the paints and varnishes market. Over the twelve-month period of 2010, housing cooperatives delivered 29.1% fewer apartments than a year earlier. The number of construction permits obtained by housing cooperatives decreased by 5.0%. Over the twelve-month period of 2010, other investors (municipal, social, rent and corporate construction industries) delivered a total of 6,919 apartments, i.e. 18.1% fewer than a year earlier. In spite of the tough market conditions, the sentiment among construction companies is optimistic. Construction businesses forecast that the sector’s growth rate in 2011 will be slightly higher than in 2010. In addition, large companies will attempt to get a head start by launching new and large housing projects, mainly in the economy sector. Smaller developers will slowly unfreeze subsequent investment stages halted in 2009 and will search for free market niches in the overall housing industry, which will positively affect the paints and varnishes market in Poland.

5. Paints and varnishes market in 2010

Market size

Significant manufacturers on the paints and varnishes market are companies employing more than 49 people. According to certain estimates, smaller businesses (employing 10-49 people) manufacture 10-15% of all paints and varnishes. Production in companies employing over 49 people decreased to approx. 912 thousand tons (a drop by nearly 15% over 2009). In the recent years, there has been a rapid increase in production in the paints and varnish market. However, the crisis and the weakened economic growth did not go unnoticed in this sector. It is estimated that in 2010 the market of paints and varnishes was worth around 2 PLN billion. The current average consumption of paint per person in Poland is 10 litres, while in Eastern European Countries it amounts to approx. 7 litres. EU’s annual consumption is approx. 15-16 litres. Therefore, FFIL Śnieżka SA forecasts a dynamic increase in the consumption of paints and varnishes in the market on which it operates and estimates that the size of this market will grow over the coming years. At present, Śnieżka is the only company in the industry to be listed at the Warsaw Stock Exchange (2003) and the only one not controlled by foreign investors. According to estimates, Śnieżka ranks high domestically in decorative products in quantity terms (16%). The Company is strongest in the emulsion products segment. The Company also has a strong market position in Ukraine and Belarus, where – in some assortments – it overtook other paint manufacturers. In the near future, this should result in strengthening the competitive advantage in the promising markets of these countries, which have been targeted for investment and intensive marketing expansion.



FFiL Śnieżka S.A.‘s % share in the domestic paint market Śnieżka’s main competitors in Poland, apart from PPG (brands: Dekoral, Dekoral Professional, Domalux, Drewnochron and Cieszynka) and Akzo Nobel (brands: Nobiles, Sadolin, Dulux and Hammerite) include Tikkurila (brands: Tikkurila, Beckers and Jedynka). According to estimates, these four companies control a total of 55-60% of the market. The Company’s brand is also strong on the Ukrainian, Belarusian and Moldovan markets, where it faces strong competition from the same paint and varnish manufacturers as in Western Europe which are pursuing their own expansion policies there. The parent company thinks positively about development opportunities in the market of paints and varnishes in these markets. There are approx. 50 manufacturers on the Ukrainian market (including approx. 10 major players). The structure of the market in terms of volume is as follows: 70-75% accounts for domestic production and 25-30% for imported products. In 2010, approx. 85% of Śnieżka’s sales in terms of volume and value were accounted for by three product groups: phthalic products, wood products and Colorex. In 2010, the Company recorded an 11% drop in sales in comparison to the previous year. The largest manufacturers of paints and varnishes in Ukraine are: Śnieżka – Ukraina, ZIP, MGF and ELAKS. Despite the significant drop in sales in volume terms, Śnieżka still ranks top among its competitors. Although the crisis has not been without consequences for the Ukrainian construction market, the Company plans to maintain its leading position in the coming years and forecasts further growth of Śnieżka-Ukraina‘s share in paint manufacturing. Due to the continued government housing scheme, the Belarusian construction market has not been strongly affected by the economic crisis felt on other European markets. This allowed Śnieżka to record sales dynamics of 97% compared to 2009. Belarusian market in 2010 had also the largest share in the Company’s export. Decoration and finishing products, such as emulsion paints, putty compounds and phthalic products, have the largest sales share in Belarus. The most popular industry enterprises in Romania are: POLICOLOR, FABRYO, KOBER and DEUTEK, supplying a total of approx. 80% of the Romanian paints and varnishes market. There has been an increase in competition on the Polish paints and varnishes market recently. As a result, market activity of Polish manufacturers increased along with the interest of international players from the industry in the Polish market. Businesses competed over prices, quality and diversification of the market offer. As far as the production of paints and varnishes is concerned, technological progress and innovative products are decisive for

FFiL Śnieżka S.A16%

others84%



retaining a strong position on the market. The demand for environment-friendly paints and varnishes and products with quality certificates continues to grow markedly. Domestic manufacturers beef up their offer to have a competitive edge over imported products. Analysts forecast that the present market trends will persist and the 2011 production of paints and coating materials will grow in terms of volume and value. Judging from the volume of investments started in the previous year, the number of apartments scheduled for completion as well as intensive preparation for Euro 2010, the market will likely grow in the years to come.

6. Impact of the economic situation on the Company’s 2010 performance

The external factor with the greatest impact on the Company’s situation in 2010 was the pessimistic sentiment related to the economic situation and sentiment on the construction market. A higher-than-expected weakening of the economic situation and an increase in the value of zloty in 2010 had a negative effect on the Company’s performance. An important factor affecting the Company’s 2010 performance consisted in unfavourable weather conditions. Low temperatures in Q1 and floods in Q2 resulted in a decrease in sales and contributed to a general downscaling of purchases planned by Customers. In spite of the unfavourable conditions and other market turmoil in 2010, the Company generated good financial results and recorded sales dynamics of 101%. The Company’s financial performance on foreign markets is also satisfactory. Although the economic situation significantly affected the Company’s 2010 performance, a rational finance policy resulted in good financial results.

7. Sales and orders on hand

Development of the product offer 2010 saw important changes in the organisation of the Company’s product portfolio. The introduction of new brands, along with the restructuring of the existing portfolio, is part of a long-term strategy of building competent and strongly autonomous brands. With multibranding, the Company managed to offer product groups with a specific area of application, various positioning and targeted at various market segments, which facilitates reaching the target customer. In H1, the Company launched the sale of a thermal insulation system under the new brand FOVEO TECH. At the same time, the product and colour offer in this group expanded and the necessary changes were introduced to product recipes. The new brand image, combined with a modified offer, reached professionals, such as construction companies, architecture offices and contractors, more effectively. Another new brand offered for sale in the discussed period is VIDARON, including wood protection and decoration products. The brand’s portfolio includes three product lines: for specialist wood protection, for protection and decoration, and for decoration. With this approach, the offer meets the needs of amateurs, hobbyists and professionals alike; all who seek safe products with high quality. In 2010, the sale under BESTON professional brand was launched, including top quality silicones, various adhesives and foams, all intended to be used for construction, renovation and finishing work. The offer is targeted at construction businesses and individual users.



In addition to the launch of sales under new brands, the existing offer was expanded. The key product of the ŚNIEŻKA brand – emulsion in ready-to-use colours BARWY NATURY – was introduced in 2010 in a square packaging and in a new, more appealing graphical design. In addition, the range of colours was expanded with 10 new colours. The new colours complement the existing colour range and are in line with the trends presented at international trade shows. The latest offer BARWY NATURY allows for easy combination of only the trendiest colours. The offer of the MAGNAT brand was expanded in 2010 as well. The colour offer of latex emulsion paint MAGNAT was expanded with 5 new colours, reflecting aesthetic trends in a globalised world, such as transculturalism and individualised approach to decoration. The offer of wall emulsion paints in ready-to-use colours is complemented with MAGNAT colouring system bases. In the discussed period, the sale of latex emulsion base was launched in satin gloss variant, which, in addition to a subtle decorative effect, ensures better utilitarian properties of the surface. The assortment was also expanded in the line of MAGNAT STYLE wall decorations. The existing collection of eight decoration systems was expanded with five more: Samum – product imitating the structure of sand carried over by hot, desert wind on the wall, Lime Stucco – product imitating polished stone with subtle hues, Intonaco – giving a structure of fine-grained plaster to surfaces, Concrete – imitating natural, “raw” construction concrete, and Metallico – a perfect imitation of an opalescent metallic effect. The expanded offer of wall decoration systems allows the user to create unique spaces with varied aesthetic effects. To ensure brand diversity, the Company complemented the MAGNAT brand with self-adhesive, velour wall decorations. They allow the user to create original effects in a simple way and complement the wall decoration offer MAGNAT STYLE. Sales dynamics In 2010, FFiL Śnieżka S.A. generated PLN 413 million worth of sales, which represents

100.3% growth dynamics in comparison to 2009.

FFiL Śnieżka SA’s 2010-2009 sales growth dynamics

Revenue on sale of products

Other revenue Revenue on sale of goods

Revenue on sale of materials

99%

119%

102%

107%



Sales of FFiL Śnieżka S.A. in value terms (thousands of PLN) by product groups

Item 2010 2009 change

Decorative products 285 283 286 367 - 1 084 Putty compounds 37 596 40 423 - 2 827 Other products 3 630 1 900 1 730 Goods 58 260 57 145 1 115 Other revenue 5 284 4 448 836 Materials 22 984 21 575 1 409 Total sales 413 037 411 859 1 178 In 2010, over 90% of the Company’s total sales comprised three groups: sale of decoration products (69%), merchandise (14%) and putty compounds (9%).

Śnieżka’s largest customers in 2010 – domestic sales (in alphabetic order)

• AB BECHCICKI Wrocław • BENMAR Białystok • CHEMAL Dębica • CHEMIK HB Sp. z o.o. Spółka Komandytowa • FARBUD Lublin • HEBAN Kraków • LEROY MERLIN • MRÓZ CHEMAL Rzeszów • SEWERA Katowice • ZACISZE Warszawa

The Company signed trade agreements with its largest customers, laying down the terms of selling products and the terms of trade cooperation. ŚNIEŻKA’S brand outlets

Materials6% Other revenue

1%

Goods14%

Other products1%

Putty compounds9% Decorative products

69%



2010 brought consolidation for the strong brand ŚNIEŻKA BARWY NATURY in the outlets. This was achieved thanks to the concept of alleys, i.e. several specially designed racks dedicated to this brand. The excellent merchandising effect of this project encouraged us to prepare similar displays for the brands MAGNAT and VIDARON. These measures contribute to a better presentation of the brand and products at the outlet. We conduct these projects in the top outlets to increase the effectiveness of operations. Export Sales

The Company’s export sales were primarily affected by the economic situation on the main export markets, in particular the construction market, and the development of production in the assortment groups in Śnieżka Group’s Companies. FFiL Śnieżka S.A.‘s 2010 export sales were higher compared to the last year by 2.4% and amounted to PLN 89.7 million. The export of products and goods reached the level of PLN 70.8 million. Largest share in the sales of products and goods: phthalic products, with sales of PLN 23.5 million, emulsion products, with sales of PLN 15.9 million and putty compounds, with sales of PLN 12.5 million.

Share of groups of goods and products in export sales The dominant markets for the export of products and goods were the Ukrainian and Belarusian markets with 68% share. The individual countries’ share in export sales was significantly affected by the development of production in foreign related companies. The growth in Ukrainian production of emulsion, acrylic products and putty compounds resulted in direct export to Ukraine being lower than to Belarus.

Phthalic products33%

Emulsion products22%

Other5%

Acrylic products2%

Wood products6%

Colorex14%

Putty compounds18%



Share of individual countries in export sales Belarus The highest export share in 2010 was attributable to sales to the Belarusian market, amounting to PLN 27.8 million. Sales dynamics compared to the previous year equalled 96%. This result is satisfying, given the significant increase in Belarusian production by Śnieżka Belpol. Decoration and finishing products, such as emulsion paints, putty compounds and phthalic products, have the largest sales share in Belarus.

Share of groups of assortment in sales of products and goods to Belarus

Belarus39%

Other3%

Romania5%

Russia12%

Moldova12%

Ukraine29%



Other3% Acrylic products

4%

Colorex6%

Putty compounds41%



Belarusian construction market has not experienced the downturn related to the global crisis because government housing schemes were continued. The real property market was not developed to the level seen in other countries, which meant that certain phenomena, such as price overestimation, overinvestment and market overheating, did not occur. A major barrier to exporters is the government’s policy to favour local manufacturers. Ukraine 2010 sales value was PLN 20.3 million, which means an 11% drop over 2009. In 2010, approx. 85% of sales in terms of volume and value were accounted for by three product groups: phthalic products, wood products and Colorex. The decrease in sales was due to changes in the product structure of the order portfolio. A sales drop was recorded in groups of products manufactured by Śnieżka Ukraina. The subsidiary switched from import to the sale of own products in the groups of emulsion products, putty compounds and phthalic products. An important factor in the sales decrease was that the construction market has been hardest hit by the crisis and still continues along a downward trend. Renovations account for approx. 70% of the Ukrainian construction market, while new developments account for 30%. The economic crisis translated into waning interest in renovations and new investments. The downturn affected all kinds of construction activities; in housing and utilitarian construction it accounted for 15.1%. More than a half of construction works were attributed to Kiev (24.4%) and Donetsk Oblast, Kharkiv Oblast and Dnipropetrovsk Oblast. Moldova 2010 sales value was PLN 8.6 million, which means 115% dynamics over 2009. In 2010, approx. 78% of sales were accounted for by emulsion and phthalic products.

Share of groups of products and goods in sales to Moldovan market

Colorex8%

Acrylic products1%



Wood products5%

Other5%

Putty compounds3%



In 2010, Moldova was in a very tough economic situation. It was hard hit by the global economic crisis. Many sectors of the economy, including the construction market, continued to function with the support of illegal migrants working in EU countries. Russia FFiL Śnieżka S.A.‘s 2010 export sales were PLN 8.6 million; compared to the last year, sales increased by 43%. Phthalic products had the largest sales share. Romania 2010 sales to the Romanian market amounted to PLN 3.3 million, representing 87% sales dynamics compared to the previous year. The sales level was significantly affected by Romania’s economic situation. At present, Romania is undergoing a major economic and financial crisis. GDP in 2010 dropped by another 2%. The paints market, similar to construction, shrank by more than 20%. It is difficult to assess how long the recession will persist but it is now clear that it will take several years to overcome all of its consequences.

8. Production

The assortment of products and goods offered by the company can be categorised into five groups:

• water-soluble paints, • solvent paints, • powder paints, • putty compounds, • other, including: impregnants, adhesives, thermal insulation system, industrial paints.

FFiL Śnieżka S.A.’s production operations are run in four manufacturing branches at neighbouring locations: Brzeźnica, Pustków and Lubzina. P-1 branch in Brzeźnica is a division for water-soluble paints, impregnants and ready-to-use putty compounds. Its main profile is the already mentioned production of ready-to-use putty compound, whose manufacture set the development direction by emphasising innovative interior finishing technologies. In addition, the facility manufactures more than 220 assortment items of high quality products. State-of-the-art technologies make the products safe and environment-friendly. Manufacturing facilities include equalisation units, putty compound mixing units and equalisation units for water-soluble varnishes. Product distribution and the package filling line are automated. Our professional packaging facilities are fitted with automatic cap feeders, cap fitting units and label printers. P-2 branch is located in Brzeźnica and is the most advanced branch in terms of process and technology, fitted with fully automatic facilities for dosing production raw materials and packaging finished products. Care for improving the quality of products, optimisation of costs and reducing the emissions of harmful substances into the natural environment are the focus of the manufacturing process. The branch manufactures oil, phthalic, nitro products, solvent adhesives, impregnants and chlorine rubber paints. The P-2 branch is equipped with dissolvers for pigment compounds, with storage hoppers located above them. In the grinder hall, there are ball grinders which prepare semi-finished products for the equalisation units. The division is fitted with a range of mixing units and storage vessels. It operates the largest



and longest paint distribution line. A system of belt conveyers, packaging and labelling units is highly complex and precise. P-3 branch in Pustków. It focuses on mass production of white emulsion paint, loose putty compound and a full range of thermal insulation products. The branch operates equalisation units for manufacturing emulsion paint and dissolvers for mixing the pigment compound. The emulsion production and raw material dosage process uses overhead lifts, screw conveyers, automatic water and resin dosage units. The use of automatic units and robots facilitating production allows for achieving extraordinarily high production outputs. Particular attention should be given to the line for emulsion paints and loose putty compound. Modern distributing units in the distribution line for emulsion paint, along with robots for receiving products, has taken a lot of the burden from the employees, while increasing the quantity of palletised products by more than ten per cent. The production of loose putty compounds takes place on a fully automated manufacturing line. Production raw materials are transported from three high-capacity storage vessels by means of conveyers. The line also includes a modern mixing unit with an automatic four-station distribution unit. The Lubzina-based P-4 Branch manufactures coloured emulsion paints, which are widely known on the market and enjoy the reputation of high-quality paints. The products are manufactured in a wide range of colours and are intended for interior or exterior application. The most recognisable products manufactured by the P-4 Branch are: MAGNAT, ŚNIEŻKA BARWY NATURY, KUCHNIA-ŁAZIENKA, Farby Fasadowe (Façade Paints) and Farby Silikatowe (Silicate Paints). These products are manufactured in dissolvers with cooling jackets and equalisation units with a modern design of the mixing system. Automatic dosage of water, resin and certain pigment compounds and colorants significantly facilitates and accelerates production processes. At the same time, it allows for archiving the dosed raw materials. Products are packaged using a semi-automatic package filling units, a stickering unit, a cap fitting unit and a product labelling printer. The distribution process involves only laying a package on the belt conveyer and collecting it from the final belt. All the other actions are automatic. One of the latest products manufactured in Lubzina are powder paints. Powder paints are environment-friendly products, they do not contain organic solvents and when applied, according to manufacturers and distributors, they do not release any substances. They are also considered to be some of the best products for modern and environment-friendly coating solutions. The Lubzina Branch operates two lines for manufacturing powder paints, including state-of-the-art extrusion units, mixing units, grinders and sifters. Modern and comprehensive facilities translate into year-by-year increase in production and work efficiency, improving working conditions and quality and ensuring adequate quality of the manufactured products.

The paints and varnishes market is characterised by strong seasonal variations. Therefore, it is vital that the Company uses its production capacities in a flexible manner by simply moving them within the assortment groups. Continuous improvement of the effectiveness and working conditions is a result of the implemented investments and the progressing automation of the production processes. In order to adjust the production cycle to international standards, the Quality Assurance System ISO 9001 was implemented in 1999. Annual audits conducted by auditors from KEMA, a certification agency, confirm that the standards of planning and implementing the



processes linked to meeting the production requirements comply with the applicable standards. The high quality of products is also confirmed by the generated sales results and a very low complaint rate, not exceeding 0.02%.

9. Research and development In 2010, the Company carried out a wide range of R&D works aimed at developing new products and continuous improvement of the quality of the already manufactured products. As part of these works, the Company works closely with numerous laboratories of concerns and suppliers of production raw materials as well as with independent science and research institutes. Given Śnieżka group’s structure, the Company also supervises products manufactured by subsidiaries in Poland, Ukraine and Belarus. These activities are aimed at:

- ensuring high quality products, - reducing raw material costs, - protecting the environment.

The good quality of the parameters of the Company’s products was confirmed by the Building Research Institute (ITB), which issues technical approvals and certificates for new products, as well as by the Gliwice branch of the Institute for Plastics and Paints Industry (IPTiF) and the Wood Technology Institute (ITD) in Poznań, both of the latter carrying out tests on Śnieżka’s products that cannot be carried out in the in-house laboratory for lack of specialised equipment. If necessary, samples of the company’s products are tested in laboratories of the foreign partners of the Company. Śnieżka systematically invests in high technologies and innovative solutions, and attaches great importance to the quality of its products. Tangible proof of the Company’s commitment is that in December 2007 the Quality Control Laboratory of FFiL Śnieżka SA received the accreditation of the Polish Centre for Accreditation (PCA), which confirms the top standard of the Laboratory's services and works. Śnieżka is currently the only Polish manufacturing company in the industry with an accredited quality control laboratory.

10. Supply policy

The Company’s supply policy was aimed at satisfying all of Śnieżka’s needs with regard to the supply of raw materials and technical materials necessary for the operation of the plant. One important element of the purchasing policy was to establish stable relations with suppliers. This being said, the Company still looks for new suppliers, both at home and abroad, to diversify its supply sources, reduce costs and supply time. The purchasing policy is focused on achieving benefits in the form of lower purchasing costs, while ensuring high quality and continuity of supplies. The Company signed supply agreements which specify the terms of cooperation with all of its large suppliers of raw materials and semi-finished products.



Main suppliers in 2010

Group Supplier

Fillers Mikrogram Orzesze, Piotrowice Zawichost, Omya Poland, Warsaw,

Titanium white Z.Ch. Police, Huntsman Tioxide, England, Du-Pont Belgium, Precolor – Czech Republic

Gypsum Nowy Ląd Niwnice, BPB Formula

Resins and dispersion agents

Spolchemia Sokolov, Synthos Oświęcim, LERG- Pustków, Dow Chemicals, Poland, Warsaw, Donauchem Poznań, Chemolak Smolice, Cortex Chemicals Tarnów, Bayer, MITSUI&CO

Solvents Brenntag Kędzierzyn-Koźle, Solvent Płock, ZAK Kędzierzyn –Koźle, Neste, Poland, Warsaw

Defoaming agents Krahn Poznań, Byk-Chemie, Germany, Byk Cera Holandia, Keyser &Mackey Łódź, Elementis Specialites, Germany

Thickening agents Herkules, Poland, Warsaw, Shin Etsu SE Tyloze GMBH, Germany, Dow Chemicals, Poland, Warsaw

Pigments

Plast-bud Pustków, Standard Lublin, Zachem Bydgoszcz, Ferrocolor Częstochowa, ABC Kolor Piotrków Trybunalski, Precolor, Czech Republic, Syntesia

Poisons Bayer Lanxess, Warsaw, Thor, Germany

Packaging

Jokey Plastik Kędzierzyn Koźle, PTS Grzyb Straszęcin, Replast A.Szkotak Dębica, PTS-Klabacha Pustków, Opakofarb Włocławek, Can-Pack, Plast System Rzeszów, Obal-Vogel&Noot, Slovakia

11. Environmental impact

Environmental Protection Aspects are a part of the factory’s quality management system and one of the main goals of the Management Board’s policy, with particular attention and support being devoted to pro-environment actions. The company adopted the strategy of continuously improving the quality of its products, while minimising the use of technologies that pose a threat to the natural environment or semi-finished products based on hazardous substances. The whole production of the Factory is divided into three locations: Plant in Brzeźnica, Pustków and Lubzina, and their environmental impact is substantial. It includes the following:

- emission of pollutants into the air – in the analysed year, a decrease in VOC emissions of 2% to 33% was recorded,

- disposal of water and rain water, after pre-treatment, into the soil – the defined background values were not exceeded, i.e. substances and oil-derived hydrocarbons, ether extract and overall suspension,

- waste production – all production waste and accompanying waste was delivered to disposal, reuse or processing, excluding storage, to businesses competent in this area,



- packaging and waste packaging management as part of fulfilling the obligations under the respective act – in the analysed year, the obligation to recycle and recover packaging introduced to the market was fulfilled through recovery organisation, with the use of own waste packaging at the level of a few per cent.

In 2010, Fabryka Farb i Lakierów Śnieżka S.A. fulfilled the obligation to calculate and make the environmental impact payment in relation to the emission of gas and dust into the air and the emission of waste water into the soil, based on the respective lists sent to the Marshal’s Office and the Inspectorate for Environmental Protection in Rzeszów. The Factory’s production business has the respective sector-specific permits defining the environmental impact and approved by all State Administration Authorities, as required by the law. Self-tests are performed to fulfil some of the conditions for correct operation of the Plants. In 2010, waste water disposed of into the soil, VOC emissions as well as soil and water environment were analysed and tested. The results of these analyses have not revealed any values in excess of the thresholds adopted for the emitted substances. Fabryka Farb i Lakierów Śnieżka S.A. constantly works together with Polish State Supervisory Bodies, such as the Voivodship Inspectorate for Environmental Protection, Marshal's Office of Podkarpackie Voivodship, Poviat Starost Office, Gmina Office and National Fire Service and complies with the requests and recommendations of these bodies. The correctness of operations in terms of the environmental impact and counteracting major industrial faults as well as REACH and ADR compliance is confirmed by the audits conducted by external Inspectors of State Bodies in the Company in March and April of 2010.

12. Investments

Capital expenditures in 2010

On 5 March 2010, FFiL Śnieżka S.A. purchased 1.34% shares in Śnieżka-Ukraina Sp. z o.o. with registered office in Yavoriv for 1,065,200.00 (in words: one million, sixty-five thousand and two hundred) Ukrainian hryvnias. After this purchase, FFiL Śnieżka S.A. holds a 81.27% share in the Subsidiary’s share capital. The mentioned transaction was registered in the respective Commercial Register on 11 March 2010.

On 14 June 2010, FFiL Śnieżka S.A. sold 1,350 shares in Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. – Grupa Śnieżka with registered office in Bytów for PLN 1,500,012 (in words: one million, five hundred thousand and twelve). The purchaser was PROXIMAL Sp. z o.o. in Bytów, which purchased these shares to redeem them in accordance with the provisions of the Act of 15 September 2000 – Commercial Companies Code. On 16 November 2010, the sale and redemption were recorded by the District Court Gdańsk – Północ, 8th Commercial Division of the National Court Register.

IP SOLUTIONS Sp. z o.o., with registered office in Brzeźnica, was registered on 21 December 2010 in the District Court in Rzeszów, 12th Commercial Division of the National Court Register, under KRS number 0000373783. FFiL Śnieżka S.A. holds a 100% share in the company’s share capital.

TM INVESTMENT Sp. z o.o., with registered office in Brzeźnica, was registered on 22 December 2010 in the District Court in Rzeszów, 12th Commercial Division of the National Court Register, under KRS number 0000373430. The Company’s shareholders are: IP



SOLUTIONS Sp. z o.o. – 95% share, and FFiL Śnieżka S.A., holding a 5% share in the company’s share capital.

On 22 December 2010, the share capital was increased in IP SOLUTIONS Sp. z o.o. by PLN 100,000 (one hundred thousand zloty), i.e. by 2,000 (two thousand) shares of PLN 50 (fifty zloty) each, to the total amount of PLN 105,000.00 (one hundred and five thousand zloty) by way of the acquisition by Fabryka Farb i Lakierów Śnieżka S.A. of 2,000 shares in the increased capital of IP SOLUTIONS Sp. z o.o. in exchange for a non-cash contribution with a total value of PLN 159,200,000, including rights to the following groups of trademarks:

The surplus of PLN 159,100,000 (in words: one hundred and fifty-nine million, one hundred thousand zloty) over the nominal value of the shares acquired by the Company was posted as the supplementary capital of IP SOLUTIONS Sp. z o.o. Construction and purchase of new PP&E in 2010: In 2010, the total expenditures for PP&E and intangible assets amounted to PLN 25.4 million. 1. Investments in the course of execution and those completed in 2010 can be categorised as follows:

� Expansion of warehouse space with equipment, � Expansion of production capacities and adaptation of process lines to new products,

replacement and modernisation of machinery along with production buildings, � Modernisation and expansion of the Company’s infrastructure – roads and sites,

sewer system, modernisation of electric power supply, phone network, water, gas and IT installations in the Company’s Branches, etc.,

� Other – means of transport, information and advertising boards, technical security, analyses and studies for development and current operations, monitoring and research support facilities.

2. Purpose of investment measures:

� Satisfy the growing market demand for the products of FFiL Śnieżka S.A., � Extending the range of products, � Enhancing product quality, � Improving the warehousing system and distribution of goods on the wholesale and

retail markets, � Better Customer service,

Beston 500 000Foveo Tech 1 700 000Magnat 8 000 000Śnieżka 53 000 000Śnieżka Acryl Putz 21 000 000Śnieżka Barwy Natury 16 000 000Śnieżka Eko 22 000 000Śnieżka Supermal 28 000 000Vidaron 9 000 000



� Increasing the efficiency of production facilities by automating the production processes,

� Purchasing PP&E and land for the future development of the Company, � Adjusting the Company’s activity to the introduced national and European law, � Protecting natural environment through limiting the emission of harmful substances

into the atmosphere and limiting soil pollution, � Improving the security of the Company’s power supply.

Investment directions for 2009-2010 and plan for 2011 5

28

1

8 2

13

3 32

0

11

39

8

12

18

3

6 52

5

1 5

07

92

9

3 11

8

5 2

56

3 8

96

8 63

2

Rozbudowa Rozbudowa, Rozbudowa, Pozostałe Expansion of

warehouse space with facilities

Expansion and modernisation of

production facilities

Expansion and modernisation of the company’s infrastructure

Other

2010 performance in thousands of PLN

2009 performance in thousands of PLN

2011 plan in thousands of PLN

Capital expenditures in 2010 were mainly used to reorganise processes which hampered the Company’s operation or limited its capacity to satisfy a market demand. Therefore, emphasis was put on improving Customer service, as the market is becoming increasingly competitive, through continued reorganisation of warehouse management. Sufficient warehouse space was ensured to meet modern storage and product distribution standards. The changing market trends required us to adapt the production lines to meet new requirements and develop our production capacity. Efficient management of our business is also supported by a modernised IT system. When implementing every investment, special care is taken to meet project-specific environment protection requirements and comply with domestic and EU legal regulations. Projects that involve environment protection include limiting the emission of pollutants into the atmosphere, pre-treating process water in as well as sealing off production processes to limit dispersed emissions. As far as the production process is concerned, substantial expenditures are made to modernise production facilities and automate production processes. This results in enhanced product quality, higher output and repeatability of product parameters as well as optimised manufacturing costs. Systematic investments in R&D and



monitoring facilities allowed us to create research conditions that ensure efficient development of products, R&D projects and more effective monitoring of products and raw materials. In the next few years, the main directions of investment will be retained, i.e.:

• Modernisation of production lines, • Modernisation of storage management and the distribution of products, • Adjusting the Company’s infrastructure to changing requirements, • Developing IT facilities in the Company, • Introducing new products.

Taking into consideration the Company’s current production capacities, it can be stated that a potential failure to carry out some of the planned investment tasks will not significantly affect the Company’s operations. This may result in the need to change work organisation in production teams and teams distributing products to customers. Preparations are underway for investment tasks on the southern market – in Romania. The preparation of the investments in terms of legal and technical aspects allows for the assumption that the execution of the investment plan will be unobstructed.

13. Employees

Number, age and professional structure of the employees The Company’s personnel policy is linked to its strategic goals: it aims at a rational growth of employment through changing organisation and structures, introducing new procedures and consistently automating production processes, supported by employee training. The Company's 2010 employment dropped slightly from 593, as at 31.12.2009, to 584 employees at the end of 2010, due to lower demand on the paints market and the ongoing automation of work. 2010 average employment was 604.7 employees (excluding the Management Bard), and in individual months it varied: it started to increase from March and then it decreased in September. This is primarily linked to the seasonal nature of the paints and varnishes industry and affects mainly production and warehouse personnel. Similarly to the previous years, 2010 experienced an increase in the average remuneration in the Company.

Item 2010 2009 dynamics % Sale of products, in thousand PLN 326 509 328 691 99.3% Average annual employment (excluding the Management Board)

605 581 104.1%

Including direct labour 180 180 99.7% Overall efficiency in terms of sales value

540

566

95.4% Efficiency per 1 labourer 1 817 1 823 99.7%

The potential of our personnel is one of the most important factors contributing to the Company’s success. Our goals include employing direct production personnel with vocational and secondary education as well as raising the qualifications of employed white-collar workers. In the Company’s structure, employees with secondary and vocational education prevail, which is linked to the production-oriented nature of the Company’s business. There is a tendency for personnel to raise their qualifications. Therefore, there are more people with a university degree. This trend is likely to continue over the following years.



Education structure 2009-2010

6%

26%

42%

25%

4%

27%

42%

26%

2009 2010

primary education

vocational education

secondary education

university education

In terms of the age structure of the Company’s employees, 31 to 40 year olds predominate, which indicates that the personnel are experienced as well as mentally and physically fit. Human resources are an important element in each business. Therefore, the Company puts special emphasis on raising the qualifications of its personnel. Training programmes are intended to improve qualifications and skills on previous positions, and to develop skills necessary for prospective tasks to adjust to the changing economic environment, mainly driven by the fast technological progress. As it was the case in previous years, employees participated in various forms of training: university programmes, conferences, seminars, internal and external training. In 2010, a total of 301 employees participated in 74 open training courses and 23 in closed training courses.

Training courses from 2009 to 2010

117 102

269 301

2009 2010

Number of training

courses Number of participants



The purpose of the training policy for 2011 is to foster further growth of employees, with particular stress on quality management skills, developing know-how and skills in environmental protection as well as language skills. The personnel costs of the Company’s employees continue to increase systematically. This is linked to an increase in remuneration, subsidising various forms of holiday, providing help to employees in a tough financial situation, subsidising culture, education and sport activities as well as supporting other activities, according to the code of the Enterprise Social Benefits Fund (ESBF). Social funds are managed according to the code of the Enterprise Social Benefits Fund (ESBF). Employees and their families are authorised to benefit from the ESBF. OSH, environmental studies and employee health protection The Company’s management takes special care in ensuring good health and safety at work conditions at Fabryka Farb i Lakierów Śnieżka S.A. In 2010, the number of heavy accidents decreased significantly in the Company, while the frequency of accidents increased. In September and November 2010, the Company conducted a study of work environment factors on selected positions. The results of the study, included in the record of factors that are harmful to health, are the basis for the Factory personnel’s measures to improve working conditions on selected positions. As part of modernisation of working areas, in 2010, Branch P-3 delivered a production line for loose putty compound, sealing off the working area for the dosage of Culminal at the loose putty compound mixing station. Two manufacturing robots for receiving emulsion paint in high-capacity containers were purchased and installed, eliminating the inconvenience linked to the excessive energy expenditure of employees. These measures contributed to improving the working conditions of the employees.

14. Finance Assets and asset funding, in thousands of PLN

Assets 2010 Structure 2009 Structure Balance of changes Dynamics

Fixed assets 162 852 45% 149 673 41% 13 179 109% Intangible assets 1 828 1% 1 201 0% 627 152% Property, plant and equipment 108 736 30% 96 184 27% 12 552 113% Long-term investment real property 16 460 5% 16 990 5% (530) 97% Other long-term financial assets 34 179 9% 34 234 9% (55) 100% Long-term receivables 23 0% 41 0% (18) 56% Deferred income tax assets 1 626 0% 1 023 0% 603 159%

Current assets 199 379 55% 140 226 39% 59 153 142% Inventory 52 413 14% 48 334 13% 4 079 108% Short-term trade receivables 92 810 26% 75 084 21% 17 726 124% Receivables due to the current portion of income tax 2 461 1% - 0% 2 461 Other short-term receivables 34 926 10% 3 394 1% 31 532 1029% Other short-term financial assets 4 596 1% 9 818 3% (5 222) 47% Cash and cash equivalents 12 173 3% 3 596 1% 8 577 339% Fixed assets held for sale - 0% 73 0% (73) 0%

Total assets 362 231 100% 289 972 80% 72 259 125%

In 2010, the balance sheet total increased by PLN 72,259 thousand, representing 125% dynamics. Fixed assets increased by 9%. The major item of fixed assets was PP&E. Its value increased in comparison to 2009 by PLN 12.5 million. An over 9% increase in PP&E is a result of implementing the investment programme. The expenditures for the purchase and construction of PP&E and intangible assets amounted to PLN 25.4 million in 2010, i.e. almost 2.3 as much



as the depreciation costs. Long-term capex in 2010 was lower than a year earlier, with growth dynamics of 25%, i.e. decrease by PLN 1,998 thousand. Current assets increased by 42%, mainly affected by other short-term receivables, which increased over the comparative period of the previous year by PLN 31.6 million. This item includes the receivables from IP SOLUTIONS. Trade receivables in comparison to the previous year increased by 24%. Major items making up 80% of overall receivables are insured by EULER HERMES. Inventory increased by 8% and short-term investments increased by 25%. The increase in inventory is due to strategic purchasing to secure against increased prices of raw materials, while the increase in short-term investments is due to an PLN 8.6 million increase in cash. Coverage of assets

Liabilities 2010 Structure 2009 Structure Balance

of changes

Dynamics

Equity 195 806 54% 182 260 50% 13 546 107% Share capital 13 551 4% 13 554 4% (3) 100% Supplementary capital 146 282 40% 131 998 36% 14 284 111% Revaluation reserve - 0% - 0% - Equity stocks/shares - 0% (89) 0% 89 0% Reserve capital - 0% - 0% - Retained earnings 35 973 10% 36 797 10% (824) 98%

Liabilities 166 425 46% 107 712 30% 58 713 155% Long-term liabilities 5 230 1% 4 849 1% 381 108%

Long-term loans and borrowings - 0% - 0% - Other long-term financial liabilities - 0% - 0% - Other long-term liabilities - 0% - 0% - Deferred income tax reserve 4 354 1% 4 178 1% 176 104% Provisions for liabilities against employee benefits

876 0% 671 0% 205 131%

Other long-term provisions - 0% - 0% - Short-term liabilities 161 195 45% 102 863 28% 58 332 157%

Short-term loans and borrowings 85 033 23% 66 427 18% 18 606 128% Other short-term financial liabilities - 0% 44 0% (44) 0% Trade liabilities 40 008 11% 30 961 9% 9 047 129% Liabilities due to income tax currently payable - 0% 1 277 0% (1 277) 0% Other short-term liabilities 35 601 10% 3 606 1% 31 995 987% Short-term provisions 272 0% 245 0% 27 111% Accruals 281 0% 303 0% (22) 93% Liabilities related to fixed assets classified as held for sale

- 0% - 0% -

Total liabilities and capital 362 231 100% 289 972 80% 72 259 125%

In 2010, the value of equity increased by PLN 13.5 million. This was affected by:

- PLN 14.3 million increase in supplementary capital due to distribution of 2009 profit of PLN 14.4 million and redemption of the purchased stocks amounting to PLN 7 million,

- purchase of equity stocks for redemption in the amount of PLN 89 thousand. Liabilities have shown 55% dynamics. The major item in this group of liabilities was short-term liabilities. Their value increased by PLN 58 million and their structure is as follows:

- trade liabilities, increase by PLN 9 million, - other liabilities (taxes, social security and remunerations), increase by PLN 30.7

million. Similarly to due tax amounts, the significant increase in tax liabilities was affected by VAT liability on the purchase of shares in IP SOLUTIONS.

The loan level in the reporting period increased by PLN 18.6 million. The average level calculated based on balances at the end of each month of 2010 was PLN 85.2 million and was



lower than the average loan level in 2009 by PLN 4.6 million. In 2010, the average loan level increased mainly due to the growth of current assets not financed by increased liabilities. The collateral of loan agreements usually involves fixed assets, inventories and assignments of receivables. The main bank that serves the Company in this respect is PKO BP S.A. In addition, the Company has signed loan agreements with ING Bank Śląski, Pekao S.A., Citibank S.A. and Podkarpacki Bank Spółdzielczy. Interest on the loans is calculated according to WIBOR plus the bank’s margin. Loan funding costs in 2010 decreased the financial result by PLN 2.9 million, which is similar to the last year's level. A similar level of interest costs is due to a decrease in average debt. As at 31.12.2010, the company’s total debt includes a foreign currency loan in USD to the amount of USD 19.9 million, which serves to secure the equities of subsidiaries in Ukraine and Belarus. Financial situation Financial liquidity ratios1

Item 2010 2009 Current liquidity ratio current assets / short-term liabilities 1.2 1.4

Quick liquidity ratio current assets-inventory / current liabilities 0.9 0.9

Loan position ratio sales receivables / purchase liabilities 2.3 2.4

Debtor days average receivables / sales x T 94 108

Inventory days* average inventories / (value of materials and goods sold + manufacturing cost of products sold) x T

69 58

Creditor days average trade liabilities / (value of goods and materials sold + manufacturing cost of products

sold) x T

59 59

In 2010, the Company had no problems with the current repayment of its debt. The static analysis of the company’s liquidity at the end of the period shows that the Company’s financial position is sound. This is confirmed by liquidity ratios remaining within the safe range. Average trade receivables were lower than the last year’s level by 13%. Given the growth of sales and the increasing competition on the paints and varnishes market, which often results in longer dates of payment, this result is sound. Compared to the previous year, the inventory days ratio is higher (11 days), which is due to increase in the quantity of assortment and the use of expanded storage capacities and the purchase of current assets referred to before. The Company’s strategy involves funding its own needs predominantly by incurring debt and by means of equity. The signed loan agreements more than secure the Company’s planned needs. Abbreviated cash flow statement (in thousand PLN)

Item 2 010 2009 Net operating cash 29 218 65 698 Net cash used in investing activities -15 458 -15 986 Net cash from financing activities -5 194 -50 996 Net increase (decrease) in cash and cash equivalents 8 566 -1 284

1 The ratios for the cycles were calculated based on average values of receivables, inventories and liabilities from 13 periods (OB + 12 months of 2010)



Cash flow analysis shows that the Company generates lower operating flows. This is due to the PLN 51.7 million increase in short-term receivables. The increase of expenditures on investments is similar to the last year's level and was mainly related to higher expenditures on fixed assets. 2010 recorded PLN 46 million decrease in expenditures on financial activity due to a 28% increase in loan level. Dividend paid decreased by PLN 2.5 million over 2009. As a result of these events, 2010 cash increased by PLN 8.5 million. Income situation Statement of comprehensive income in thousands of PLN

Classification by function 2010 Profitability 2009 Profitability Change Rate of changes

Continued operations Sales revenue 413 037 411 859 1 178 100% Cost of sales 280 208 282 237 (2 029) 99% Gross profit (loss) on sales 132 829 32% 129 622 31% 3 207 102%

Selling costs 52 300 53 043 (743) 99% General administrative costs 38 795 34 857 3 938 111% Other operating revenue 4 785 3 290 1 495 145% Other operating expenses 3 807 3 704 103 103%

Profit (loss) on operating activities 42 712 10% 41 308 10% 1 404 103% Financial revenue 6 892 7 236 (344) 95% Financial costs 7 869 2 953 4 916 266%

Profit (loss) before tax 41 735 10% 45 591 11% (3 856) 92% Income tax 5 772 8 798 (3 026) 66%

Net profit (loss) on continued operations 35 963 36 793 (830) 98% Discontinued operations -

Net loss on discontinued operations - - - Net profit (loss) 35 963 9% 36 793 9% (830) 98% Comprehensive income for the period, of which for:

35 963 36 793 (830) 98%

- stockholders of the parent company 35 963 36 793 (830) 98% Net profit (loss), of which for: 35 963 36 793 (830) 98% - stockholders of the parent company 35 963 36 793 (830) 98%

Sales revenue The total net sales revenue in 2010 amounted to PLN 413 million, which represents a PLN 1.1 million increase in comparison to the previous year. The sales income primarily includes income from the sale of products. Their share in 2010 revenue structure was 79.1%, which is similar to the previous year’s level. As a result, the growth dynamics in product sales were 99%, representing a PLN 1 million decrease over 2009. The remaining share of revenue (20.9%) comes from the sale of goods and materials as well as from other sales. The change dynamics of the manufacturing costs of products sold were 98.6% in 2010. The manufacturing costs dynamics were 1% lower than the income dynamics from the sale of these products, which translated into increase in sales profitability. Operating profit/loss In 2010, the operating profit amounted to PLN 42.7 million, in comparison to PLN 41.3 million in 2009. The Company recorded 103% operating profit dynamics in 2010 but the operating profitability decreased by 1%. This was due to an 11% increase in general administrative expenses.



Result on financial activities The 2010 balance of financial operations was negative and it decreased the operating result by PLN 1 million, while in the previous year the balance was PLN 4.2 million. Financial revenue included revenue from dividends, whose value in 2010 amounted to PLN 4.2 million. This is a result of the strategy to disburse dividends from subsidiaries that generated a profit. The Company also receives an interest on the borrowings granted to subsidiaries in the early stages of development to partially finance their growth. 2010 financial expenses increased over 2009 by PLN 4.9 million, as confirmed by the debt ratios below. This was mainly the result of a charge on the shares in Śnieżka Wistowa in the amount of PLN 3.5 million. The balance of FX differences was negative and amounted to PLN 1.4 million; a year earlier it was positive and amounted to PLN 2.2 million. Debt ratios

Item 2010 2009 Overall debt (long-term liabilities + short-term liabilities) / balance

sheet total 44% 35%

Equity to assets ratio (equity + provisions) / total assets 56% 65% For BPH (>50) equity / total assets 54% 63% Profit to interest ratio (gross profit + interest) / interest 15 16 Equity to fixed assets ratio (equity + provisions) / fixed assets 124% 125% Balance sheet rule of thumb (equity) / fixed assets 120% 122% Share of loans in balance sheet total short-term loans / balance sheet total 23% 23% Net profit The Company’s net profit was lower than the profit generated in 2009 by 2%. This was mainly a result of a decrease in operating profit caused by a negative result on financial activity. Net profitability amounted to 8.71% and was lower than that of the previous period by 0.2 percentage point. In 2011, the Company intends to increase sales profitability and maintain all positive trends described above, whose effects can be observed in the Statement of Comprehensive Income.

Comparison of operating profit and net profit trends from 2008 to 2010, in thousands of PLN

41

30

9

36

79

3

41

30

9

36

79

3

42

71

2

35

96

3

2008 2009 2010



Assets profitability ratios 2

Item 2010 2009

EBITDA Profitability operating profit + amortisation/depreciation / net sales 12% 12%

Operating profitability operating profit / net sales 10% 10%

Net profitability net profit / net sales 9% 9%

Return on equity (ROE) net profit / average equity balance 19% 22%

Earnings per stock (EPS) net earnings / number of stocks* 2.7 2.7

Return on capital employed (ROCE) EBIT / capital 22% 25%

Return on assets (ROA) net profit / average assets balance 11% 11%

At the end of 2010, the Company’s equity exceeded its fixed assets by PLN 33 million, representing a PLN 440 thousand increase compared to the previous year. The analysis of the profitability ratios of assets and equity as well as turnover ratios clearly indicate their stability in the Company. The reason for this is primarily an increase in average assets and average current assets. The decrease in return on equity is caused by a lower net profit, which is still a satisfying result given the tough market situation in 2010. At the end of the analysed period, the demand for net working capital was lower by PLN 6 million. The 2011 financial plan assumes a similar balance sheet total. The planned net profit will be used to finance investments and current assets. The remaining portion will be used to disburse the dividend. In 2011, the Company intends to implement its financing strategy involving financing fixed assets by equity, whereas current assets will be financed by liabilities due to suppliers and interest-bearing debt. The Company settles its liabilities on a regular basis and sees no significant threats to its punctual settlement of liabilities in the future, as it has a great credit standing. The Company has no problems in financing its investments, including capital investments, and does not forecast any such difficulties in 2011. The Company’s own funds and the signed agreements with banks ensure secure financing of the investments planned for 2011. Equity market ratios

Item 2010 2009

Stock price at the end of period 43.0 39.98

Company’s market value* stock market price x number of stocks 582 679 068 541 872 408

P/E (annualised profit) market price per stock / profit per stock 16.2 14.7

P/BV market price per stock / book value per stock 2.98 2.69

* - The number of stocks in December 2009 was 13,553,587. At the end of 2010, there were 13,550,676 stocks. From 21 June 2010 to 31 December 2010, no stocks were purchased for redemption.

Śnieżka joined the group of companies listed on the stock exchange in 2003. In 2010, the Company’s stock price was PLN 43. As at 31.12.2010, the Company’s value amounted to PLN 583 million. The P/E ratio at the end of 2010 amounted to 16.2, whereas the P/BV was 2.98. This indicates that investors are more positive in their assessment of the Company’s results and its development perspectives.

2 Average figures calculated based on 13 periods (OB + 12 months of 2010)



Fulfilment of results forecast previously published for 2010 against the results generated. The Management Board of FFiL Śnieżka S.A. did not publish any forecasts for 2010 regarding sales revenue and financial results.

15. Basic risks and threats related to operations on the market of paints and varnishes

Risk related to the macroeconomic situation in Poland

The macroeconomic results of the Polish economy and its growth rate have a material influence on the purchasing power of Polish consumers as regards the Company’s products, tendency to embark on new projects and carrying out repairs by retail customers. They are basically related to the GDP growth and interest rates. In spite of the crisis, the situation of the Polish economy was good in the previous year. Macroeconomic indicators improved over 2009 levels. After three quarters of 2010, the GDP was 3.6% higher than in the analogous period in 2009. Consumption expenditures of households grew as well, which may testify to a further improvement in consumer sentiment as consumers are no longer plagued by the worries of the recent global economic crisis. 2010 also saw an improvement in the job market situation. For a production company, an improvement of the economic situation translates directly into the market’s capacity to absorb more of its products. The increase in construction investments and demand for construction sector services significantly affect the sales potential of the Company’s products. The forecast increase in GDP and further improvement of the economic situation in the following year should be positive for the sector where the Company operates. We forecast 2011 to be much better than the last year.

Competition risk

The level of competition in the paints and varnishes industry in Poland is still very high, the market is concentrated and its major part is still in the hands of a few companies. One most important element in building a competitive advantage is to make use of the power of the held brands and to further strengthen their position, mostly with promotional and advertising activities. Similarly to its competitors, Śnieżka continues to expand its promotional and marketing activities year by year. It is still the brand that plays a significant role while making purchase decisions; that is why further actions of competitive companies, focusing mainly on promoting their own brands, should be expected. The economic crisis has not resulted in a major downscaling of promotional efforts. The main market players compete not only in terms of promotions and marketing but also in the area of the offered products. For this reason, the Company is committed to the quality of its products and uses innovative technologies to be able to meet the needs of the most demanding Customers.

Construction market risk

Despite the fact that the economic crisis did not affect this sector to the expected extent, this has been a tough year for the construction industry. The greatest difficulties are faced by



businesses struggling with weather conditions (this limitation was the most significant one to grow in importance over the year), employment costs and market competition. Insufficient demand is the barrier to see the most significant decrease in importance over the year. In spite of the tough market situation in the construction sector, 2011 forecasts are optimistic. It is estimated that large companies will execute large housing projects, while smaller developers will slowly continue to execute the individual investment phases and will search for free market niches in the overall housing industry, which will positively affect the paints and varnishes market in Poland. Distribution channel risk 2010 Sales by the Company were mostly based on a traditional distribution model (plant – wholesaler – shops – construction companies – final customer). In 2010, strong competition between the construction market manufacturers, also in terms of distribution channels, has created a situation where businesses to struggle to win individual process links. DIY stores, where the Company's range of products is broadening, hold a stronger position on the market of paints and varnishes. Last year, the Company continued business cooperation with Leroy Merlin, OBI, MGI Polska Sp. z o.o. (owner of the BricoMarche chain), Nomi and Praktiker chains. The partnership with various distribution channels (both traditional and innovative ones, such as DIY) is aimed at diversifying the distribution channels and minimising the risk related to excessive dependence on one distribution channel. Risks and threats related to the control of debt This threat is decisively affected by the lack of funds in final customers and consumers, high costs of running business and, consequently, lower profit and margin on paint products. The Company constantly monitors punctual payments from customers. Therefore, the Company estimates this risk to be small. If the Customer delays payment of an established threshold amount, suspending deliveries of the Company’s products is a standard procedure. Another factor that motivates contractors is the insuring of amounts receivable at T.U. Euler Hermes. The insurance covers all significant domestic customers, i.e. customers with a turnover exceeding PLN 100 thousand. The Company also holds other forms of securing receivables, which additionally influence the trade loan limit established by Hermes. In most situations, our main Customers are secured with bills of exchange and mortgages on real property. This security is each time verified by the insurer because it is used as a basis for specifying the trade loan limit. In addition, the Company successfully applies an additional bonus for making earlier payments. These measures are very effective, which is confirmed by the absence of new debt recovery proceedings in 2010 or the write-off of receivables which would have occurred in the mentioned period. The Company’s policy for monitoring risk and threats related to the control of debt brings notable benefits and will be continued in the years to come. FX risk A significant role in the activity of FFiL Śnieżka S.A. is played by exchange rate risk. The Company imports raw materials used for production mainly from the Western Europe; thus, it is the holder of liabilities nominated in EUR. On the other hand, the Company exports its products to the countries of Eastern Europe (Ukraine, Belarus, Moldova, Russia), in which



settlements are made mainly in USD. Consequently, the Company is exposed to the risk resulting from the change of the EUR/USD exchange rate and the relation of both currencies to the Polish zloty. The most advantageous scenario for the Company is the EUR/USD rate as low as possible which decreases the costs of raw materials and maximizes export inflows. The company constantly analyses FX risk for FFiL Śnieżka S.A. At present, the company uses a foreign currency loan in USD amounting to USD 15.3 million, which secures the held capital in subsidiaries in Ukraine and Belarus and minimises disadvantageous foreign exchange differences on export proceeds. In 2010, the company did not conclude hedging transactions in the form of derivatives, such as options, forward, future or swap contracts, and is not using such practice at the moment. Due to the high level of financing with bank loans the Company is also exposed to the interest rate risk. Using a loan denominated in USD makes it possible to decrease interest rate due to the lower LIBOR USD in comparison with WIBOR. Risk of the Company’s engagement in Ukraine and other Eastern European markets The main foreign trade countries – Ukraine, Russian, Belarus and Moldova – are characterised by a high political risk and periodic currency and customs restrictions. The situation seems to be most serious in Ukraine. With a developed black economy in 2010, GDP grew 4.1% over 2009, when it decreased by 14%. Following the breakdown and 50% shrinkage of the construction sector in 2009, there was another drop in construction works by 5.4%. Expenditures on finishing works dropped below the overall market trend by 9.8%. The retail sales sector has recorded a 7.8% increase compared to 2009 sales. 2010 transactions in this sector were mainly made in western and central Ukraine. The payment reliability of Ukrainian businesses decreased significantly. Construction and trade in construction materials were high risk businesses. Belarus is the only country in the region which has suffered to the least extent, due to its isolation from financial markets. Belarus is the last centrally managed European economy. Belarusian counterparties are reliable in the repayment of their debt. Any delays in payment mainly result from temporary financial liquidity problems and not from reluctance to repay debt. A serious problem for many Belarusian entrepreneurs is the limited access to sources of funding. The basic risk related to transactions in Belarus is the political risk. Other risk factors include high insolvency risk due to lack of transparency in the market, reduced liquidity of the state financial sector, the state's dominant role in the economy (politicised decisions), slow privatisation and reduced state capital expenditures in the context of rising price of crude oil. A major risk factor is Belarus’ dependence on Russia, which significantly affects the directions and growth rate of Belarusian economy. Russia’s economic environment for private business is approaching European standards. However, it continues to suffer poor transparency. Black economy and undisclosed sources of funding still play an important role in the economy. There are no mechanisms in place to prevent unreliable entrepreneurs from running business. There are difficulties in conducting court and debt recovery proceedings. To minimise commercial and political risk, the company uses an insurance instrument for commercial transactions offered by KUKE S.A. The insurance covers risks relating to insolvency of counterparties (commercial risk) and the export risk related to a given country (political risk).



Risk related to changes in the Polish tax system Tax risk is a specific type of business risk. Identification, analysis and minimising this risk should be key elements of managing a company to protect the tax payer from overdue tax, interest, penalty fees and other fiscal sanctions. Tax risk is affected by external factors, unstable and inconsistence tax laws, varying tax law interpretations and court decisions, fiscalism of tax authorities, as well as internal factors of the company, such as lack of properly qualified staff for tax settlements, absence of formalised and precise tax procedures and correctly structured tax functions in IT systems. There are a number of inconsistencies between the interpretations of the Minister of Finance and decisions of administrative courts, resulting in the inability to foresee tax consequences for specific transactions. There is a need for constant monitoring of changes in tax regulations and to respond to them quickly through adjusting internal tax procedures. Tax authorities’ interpretations of tax regulations may differ from the tax base calculated by the tax payer and materially affect the company’s financial situation. Therefore, the company may be forced to abandon profitable undertakings to ensure safety in terms of compliance with tax regulations. Risk of the increase of raw material prices Significant risk is visible in supplies: a) unfavourable price changes (in particular, the purchase of raw materials related to the price of crude oil), b) FX risk (this risk occurs at the time of a significant increase in exchange rates), c) limitations on the volume of supplies (due to unexpected increase in demand). To summarise all of the above risks, 2010 was a tough year in terms of the availability of raw materials and raw material prices. This is confirmed by the varying prices of raw materials and problems in their availability over the last year. The increase in the prices of raw materials in individual sectors over the last 12 months varied from 5 to 30%. Raw materials experiencing a significant increase in prices are whites, phthalic resins, styrene-acrylic dispersion agents, plastic and metal packaging. One positive development is that the strengthening of the domestic currency positively affects the prices of imported raw materials. Crude oil prices also seem to have stabilised recently. Risk of default in planned investments Investment tasks planned to be implemented in 2011 have been included in the plan of investments for 2011 approved by the Supervisory Board. Major investment tasks related to increasing production capacity, improving and streamlining of the inventory management and distribution of products, extending the Company's infrastructure as well as environmental protection related tasks are realisable and should be fully implemented. The potential failure to complete some investment tasks resulting mostly from a changing corporate development strategy as well as market situation and the Company's environment, bears no risk of limited production capacity, lower quality of products or problems in the Company's operation.



Other risks of the Company’s poorer financial performance As a result of the transfer of trademarks as a contribution to the subsidiary IP SOLUTIONS, in 2011 and in the following years, the Parent Company will be charged with licence fees, whose 2011 planned level is PLN 11,783 thousand. The fees will decrease the Company’s separate financial result but will not affect Śnieżka Capital Group’s consolidated result. The Company’s 2011 financial performance may be affected by a court ruling on the Company’s appeal against the decision of the Office of Competition and Consumer Protection of 28 December 2009 regarding anti-monopoly proceedings against Fabryka Farb i Lakierów Śnieżka S.A. in Lubzina, as a result of which the Office imposed a PLN 854.5 thousand fine on Fabryka Farb i Lakierów Śnieżka S.A..

16. Declaration on corporate governance

1. Fabryka Farb i Lakierów Śnieżka S.A. is governed by a set of corporate governance rules as defined in the document “Code of Best Practice for WSE Listed Companies”, that constitutes an attachment to resolution no. 17/1249/2010 of the Board of the Warsaw Stock Exchange of 19 May 2010. Corporate governance rules are available at www.corp-gov.gpw.pl.

2. The issuer did not abandon any of the practices in 2010. In connection with expanding the composition of the Company’s Supervisory Board to 6 people, an Audit Committee was appointed in the Company.

3. Major characteristics of the issuer’s enterprise as regards systems of internal control and risk management applicable to the process of preparation of financial statements and consolidated financial statements are as follows: The process of preparation of financial statements is based on the International Accounting Standards, International Financial Reporting Standards, related interpretations published as regulations of the European Commission, Accounting Act (as regards the issues not regulated by the IAS) and internal procedures for preparation of interim stock exchange reports. As regards internal control in the Company, the position of an internal auditor was created, and the companies from the Capital Group are supervised by the Corporate Governance Office.

4. Holders of significant blocks of stocks have been presented in chapter 17 of this Report.

5. Stockholders with special control powers include: pursuant to the statute, series A stocks authorise to the appointment of a Member of the Supervisory Board in such a way that each 25,000 stocks authorise to appoint 1 Member of the Supervisory Board. As at the date of this Report, holders of series A stocks included:

Stanisław Cymbor 33,334 series A stocks

Jerzy Pater 33,334 series A stocks

Stanisław Mikrut 33,333 series A stocks

6. No limitations in the execution of the voting rights exist at the Company.

7. Limitations on the transfer of rights to the issuer’s securities are attributable to the holders of registered preference stocks in FFiL Śnieżka S.A. Any disposal of such registered preference stocks or their conversion to bearer stocks requires a prior offer to buy stocks made



to all holders of series A stocks by the stockholder interested in their disposal or conversion to bearer stocks.

8. Rules for appointing and dismissing managers, and their scope of powers within the Company: pursuant to the statute, the Supervisory Board appoints the President of the Management Board and, at his/her request, other members of the Management Board, and dismisses individual Board members. The decision to issue or redeem stocks requires the consent of the General Stockholders’ Meeting.

9. Any amendments to the Company's statute or articles of association require the consent of the General Stockholders’ Meeting.

10. The manner of operation of the General Stockholders’ Meeting has been defined in the Regulations of the General Stockholders’ Meeting available at the issuer's website. Rights of the stockholders and the manner of their execution have been described in the Company's Statute.

The composition and changes in the composition of the issuer’s managing and supervisory bodies have been described in part 1 of this Report.

17. Additional information

Total number and par value of the Issuer’s stocks (shares) and stocks and shares in the Issuer’s related parties owned by managers and supervisors (separately for each person) as at 31 December 2010 The number of the Issuer’s stocks held by managers and supervisors: Managers Piotr Mikrut – 1,254,166 stocks of a par value of PLN 1,254,166 (unchanged) Witold Waśko – 198 stocks of a par value of PLN 198 (unchanged) Walentyna Ochab – 615 stocks of a par value of PLN 615 (unchanged) Supervisors Jerzy Pater – 2,541,667 stocks of a par value PLN 2,541,667, including directly 166,667 stocks of a par value PLN 166,667.

Stanisław Cymbor – 2,541,667 stocks of a par value PLN 2,541,667, including directly 166,667 stocks of a par value PLN 166,667. Stanisław Mikrut – 33,333 stocks of a par value PLN 33,333. Identification of stockholders holding, directly or indirectly through their subsidiaries, at least 5% of the total votes at the General Stockholders’ Meeting of Fabryka Farb i Lakierów Śnieżka S.A. as at 31 December 2010, including the number of stocks held by such entities, their percentage in the share capital, resulting number of votes and their percentage in the total number of votes at the General Stockholders’ Meeting. Entities (stockholders) holding, directly and indirectly, at least 5% of the Company’s share capital and at least 5% of the total number of votes at the General Stockholders’ Meeting:



Stockholder Number of stocks held Share in the share capital (%)

Number of votes

Share in overall number of votes at the GSM (%)

Jerzy Pater* 2.541.667 of which directly 166.667

18,76 1,23

3.208.335 833.335

20,63 5,36

Stanisław Cymbor** 2.541.667 of which directly 166.667

18,76 1,23

3.208.335 833.335

20,63 5,36

Piotr Mikrut

directly 1.254.166

9,26

1.787.498

11,49

Rafał Mikrut

directly 1.254.167

9,26

1.254.167

8,06

AMPLICO OFE 797 454 5,88 797 454 5,13

*Jerzy Pater holds the Issuer’s stocks indirectly via “PPHU Elżbieta i Jerzy Pater” Sp. z o.o. (“PPHU Elżbieta i Jerzy Pater” Sp. z o.o. holds 2,375,000 stocks of the Issuer, giving the holder 17.53% share in the share capital and 15.27% share in the total votes at the General Stockholders‘ Meeting) **Stanisław Cymbor holds the Issuer’s shares indirectly via “PPHU Iwona i Stanisław Cymbor” Sp. z o.o. (“PPHU Iwona i Stanisław Cymbor” Sp. z o.o. holds 2,375,000 shares of the Issuer, giving the holder 17.53% share in the share capital and 15.27% share in the total votes at the GSM) In 2010, the following changes took place in the ownership structure of the Issuer’s substantial blocks of stocks: The Management Board of FFiL Śnieżka S.A. received information from AMPLICO PTE S.A., dated 12 August 2010, that AMPLICO Otwarty Fundusz Emerytalny (later referred to as “OFE”) exceeded 5% in the overall number of votes in Fabryka Farb i Lakierów Śnieżka S.A. The 5% threshold was exceeded as a result of a transaction of purchase of the Company’s stocks on 6 August 2010. Directly before the change in the share, OFE held 762,789 ordinary bearer stocks of a total of 13,553,587 stocks, which represent 5.63% of the Company's share capital and are vested with 762,789 votes at the General Meeting, representing 4.90% of the overall votes at the Company’s General Meeting. Currently, OFE holds 797,454 ordinary bearer stocks of a total of 13,553,587 stocks, which represent 5.88% of the Company's share capital and are vested with 797,454 votes at the General Meeting, representing 5.13% of the overall votes at the Company’s General Meeting. On 14 March 2011, the Company received information from AMPLICO Powszechne Towarzystwo Emerytalne S.A., dated 11 March 2011, that its AMPLICO Otwarty Fundusz Emerytalny (later referred to as “OFE”) exceeded 10% of the overall number of votes in Fabryka Farb i Lakierów Śnieżka S.A. The 10% threshold was exceeded as a result of a transaction of purchase of the Company’s stocks on 07.03.11. Directly before the change in the share, OFE held 1,540,481 ordinary bearer stocks of a total of 13,550,676 stocks, which represent 11.37% of the Company's share capital and are vested with 1,540,481 votes at the General Meeting, representing 9.90% of the overall votes at the Company’s General Meeting. Currently, OFE holds 1,710,696 ordinary bearer stocks of a total of 13,550,676 stocks, which



represent 12.62% of the Company's share capital and are vested with 1,710,696 votes at the General Meeting, representing 11.00% of the overall votes at the Company’s General Meeting. Total remuneration, awards or benefits (pecuniary, in-kind or any other form) paid or payable for 2009 to the Issuer’s managers and supervisors at the Issuer’s enterprise, irrespective of whether recognised as costs or resulting from profit distribution, and for the issuer being a parent or a significant investor – separate information on the remuneration and awards received for holding positions in the authorities of subsidiaries, jointly controlled entities and associates. Remuneration received in 2010 in thousands PLN Company’s Management Board

Remuneration Dividend paid Total Remuneration in related parties

Managers

2010 2009 2010 2009 2010 2009 2010 2009 Piotr Mikrut 430,0 447,7 2.006,7 1.693,1 2.436,7 2.140,8 - - Witold Waśko

458,6 405,8 0,3 0,3 458,9 406,1 27,9 24,2

Joanna Wróbel-Lipa

317,5 266,7 - - 317,5 266,7 1,2 -

Walentyna Ochab

259,5 256,8 1,0 0,8 260,5 257,6 - -

Total 1.465,6 1.377,0 2.008,0 1694,2 3.473,6 3.071,2 29,1 24,2 Supervisory Board


Managers

2010 2009 2010 2009 2010 2009 2010 2009 Jakub Bentke 164,4 148,9 - - 164,4 148,9 - - Stanisław Cymbor

369,9 335,1 450,6 421,1 820,5 756,2 12,0 16,0

Zbigniew Łapiński

164,4 148,9 - - 164,4 148,9 - -

Stanisław Mikrut

369,9 335,1 237,3 241,1 607,2 576,2 - 4,0

Jerzy Pater 369,9 335,1 450,6 421,1 820,5 756,2 18,0 17,7 Anna Pater 73,7 73,7 Total 1.512,2 1.303,1 1.138,5 1.083,3 2.650,7 2.386,4 30,0 37,7 Remuneration payable in 2010 in thousands of PLN



Company’s Management Board


Managers

2010 2009 2010 2009 2010 2009 2010 2009 Piotr Mikrut 490,5 422,8 2.006,7 1.693,1 2.497,2 2.115,9 - - Witold Wa śko 429,5 388,8 0,3 0,3 429,8 389,1 27,9 24,2 Joanna Wróbel-Lipa

298,0 280,9 - - 298,0 280,9 1,2 -

Walentyna Ochab

267,1 243,2 1,0 0,8 268,1

244,0 - -

Total 1.485,1 1.335,7 2.008,0 1.694,2 3.493,1 3.029,9 29,1 24,2 Supervisory Board


Managers

2010 2009 2010 2009 2010 2009 2010 2009 Jakub Bentke

164,4 148,9 - - 164,4 148,9 - -

Stanisław Cymbor

369,9 335,1 450,6 421,1 820,5 756,2 12,0 16,0

Zbigniew Łapiński

164,4 148,9 - - 164,4 148,9 - -

Stanisław Mikrut

369,9 335,1 237,3 241,1 607,2 576,2 - 4,0

Jerzy Pater 369,9 335,1 450,6 421,1 820,5 756,2 18,0 17,7 Anna Pater 73,7 73,7

Total 1.512,2 1.303,1 1.138,5 1.083,3 2.650,7 2.386,4 30,0 37,7 As at 31.12.10, the managers and supervisors have no borrowing liabilities to the Company. Capital group and equity relations as at 31 December 2010

The Śnieżka Capital Group is composed of:

• FARBUD Sp. z o.o. in Lublin – 80.93% share. • ŚNIEŻKA UKRAINA Sp. z o.o. in Yavoriv – 81.27% share. • ŚNIEŻKA Sp. z o.o. in Wistowa, Ukraine – wholly owned (directly 74% share and

indirectly 26% share via Śnieżka Ukraina Sp. z o.o.). • HADROKOR Sp. z o.o. in Włocławek – 51.09% share. • Śnieżka - BELPOL Sp. z o.o. in Zhodzina near Minsk - 88% share. • SNIEZKA ROMANIA Sp. z o.o. in Savinesti, Romania – 80% share. • IP SOLUTIONS Sp. z o.o. in Brzeźnica – 100% share • Fabryka Farb i Lakierów Proszkowych PROXIMAL Spółka z o.o. – Śnieżka Group

with registered office in Bytów. FFiL Śnieżka S.A. holds 100.00% of shares in this company.

• TM INVESTMENT Sp. z o.o. in Brzeźnica – 100% shares (directly 5%, indirectly 95% of shares held by IP SOLUTIONS Sp. z o.o. in Brzeźnica)



Capital relations also include: • Plastbud Sp. z o.o. in Pustków – 10.07 % of shares

Cooperation with affiliates and members of the Capital Group:

• FARBUD Sp. z o.o. is one of the major wholesalers and distributors of Śnieżka’s products in the Lublin region.

• Śnieżka – Ukraina Sp. z o.o. in Yavoriv is one of the producers of water-based paints in Ukraine and a distributor of FFiL Śnieżka S.A. products in Brzeźnica. Its products are sold under the Śnieżka brand. It has a considerable output potential and its own network of customers.

• In 2010, Śnieżka Sp. z o.o. in Wistowa was one of the manufacturers of solvent paints in Ukraine.

• Hadrokor Sp. z o.o. in Włocławek is a producer of high quality anti-corrosive products sold under its own brand and Śnieżka brand, complementing its range of products. It offers its own output potential, technology, highly experienced staff and its own market. Adding the Hadrokor products to the Śnieżka’s range of products supplemented it with new important items not offered by Śnieżka and made it possible to extend the group of recipients with industrial customers.

• Śnieżka - BELPOL Sp. z o.o. in Zhodzina near Minsk is one of the putty, paint and varnish producers in Belarus. Its products are sold under the Śnieżka brand. It has its own network of wholesale and retail customers.

• ŚNIEŻKA ROMANIA Sp. z o.o. in Săvineşti, Romania – distributor of Śnieżka products on the Romanian market.

• IP SOLUTIONS Sp. z o.o. in Brzeźnica – the Company’s business consists in the management of trademarks for products manufactured and sold by FFiL Śnieżka S.A. and other subsidiaries.

• Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. – Śnieżka Group with registered office in Bytów. Partnership with Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. involves the lease of real property.

• TM INVESTMENT Sp. z o.o. in Brzeźnica – the Company’s business involves financial services.

Partnerships with entities related by capital also involved:

� Plastbud Sp. z o.o. in Pustków – producer of colorex for Śnieżka’s colouring systems. In addition, it is a supplier of certain raw materials and products.



Investor relations The Company operates a website for investor relations at www.inwestor.sniezka.pl in Polish and in English, where you can find all kinds of corporate news, financial information, current and period reports and presentations.

Contact for the investor relations section:

Anna Szymaszek

Phone (014) 680-54-83

Mobile (0507) 143-094

Fax (014) 680-54-14

e-mail: [email protected]

Ryszard Stachnik

Phone (014) 680-54-65

Mobile (0507) 143-189

Fax (014) 680-54-14

e-mail: [email protected] Related entities with mutual trading in 2010 exceeding the equivalent of EUR 500,000 in thousand PLN

Item Sales Purchase

Plastbud Sp. z o.o. 184 24 466 Śnieżka Ukraina Sp. z o.o. Yavoriv 35 862 242 FARBUD Sp. z o.o. 10 670 108 HADROKOR Sp. z o.o. 749 11 364 Śnieżka BEL-POL Sp. z o.o. 5 016 0 Śnieżka Romania SRL 3 497 357

The Company did not conclude any transactions with affiliates, other than arm’s length transactions. Borrowings granted 1. On 31 December 2010, an annex was signed to a borrowing agreement dated 29 January 2004 concluded with HADROKOR Sp. z o.o. in Włocławek, pursuant to which the borrowing repayment date was changed.



Borrowing amount: PLN 600,000. Debt as at 31.12.10 amounts to PLN 600,000. Borrowing repayment date: by 31.12.2011. 2. Borrowing agreements concluded with Śnieżka Romania SRL with registered office in Savinesti: - On 19 February 2007, a borrowing agreement in the amount of EUR 100,000 was concluded for the period ending 19.02.2008. As a result of the annexes to the agreement, its terms were amended and, currently, the borrowing amount is EUR 200,000, to be repaid by 31.12.2011. As at 31.12.2010, the debt amounted to EUR 200,000. - On 1 February 2008, a second borrowing agreement was concluded with Śnieżka Romania SRL, in the amount of PLN 1,000,000, to be repaid by 31 January 2009. As a result of the annexes to this agreement, the repayment date was extended to 31.12.2011. As at 31.12.2010, the debt amounted to PLN 825,000. - On 30 April 2009, a third borrowing agreement was concluded in the amount of PLN 700,000. To be repaid by 30.04.2010. As a result of the annexes to this agreement, the repayment date was extended to 31.12.2011. As at 31.12.2010, the debt amounted to PLN 700,000. 3. On 15 October 2007, a borrowing agreement was concluded between FFiL Śnieżka S.A. and Śnieżka-Ukraina Sp. z o.o. in Yavoriv. The borrowing amounted to USD 3 million. The borrowing was granted as a revolving facility with the option of raising multiple loans by 14 October 2010. The repayment date was extended by an annex to 15.10.2013. As at 31.12.10, the debt amounted to USD 2,000,000. 4. On 16 August 2005, a borrowing agreement was concluded with BAWA Sp. z o.o., in the amount of PLN 1,000,000, to be repaid by 31 march 2008. The borrowing amount of PLN 500,000 was disbursed in July 2007 and the remaining tranche of PLN 500,000 in February 2008. On 12 February 2008, an annex was signed to this agreement, extending the borrowing repayment date to 31 March 2011. As at 31.12.2010, the debt amounted to PLN 1,000,000. 5. On 18 August, 2008, a borrowing agreement was concluded with Diana Sp. based in Podwołoczysko (Ukraine), amounting to USD 700,000, to be repaid by 21 July 2011. The repayment date was extended by an annex to 31.12.2013. As at 31.12.2010, the debt amounted to USD 544,444.40. Guarantees and sureties granted by Śnieżka As of 31.12.10, the sureties granted by Fabryka Farb i Lakierów Śnieżka S.A. are as follows:

� Agreement of surety granted to Benmar Sp. z o.o. based in Białystok, amounting to

PLN 5,000 thousand as collateral for a loan agreement. � Contingent liability towards Bank Handlowy S.A. w Warszawie S.A. due to surety of

a Paylink agreement in the amount of PLN 11,365 thousand. � Agreement of surety granted to Farbud Sp. z o.o. based in Lublin, amounting to PLN

190 thousand blank bills of exchange.

All sureties were granted based on the resolutions of the Management Board of Fabryka Farb i Lakierów Śnieżka S.A. approved by the Supervisory Board.



On 29 March 2011, Fabryka Farb i Lakierów Śnieżka S.A. granted a guarantee to Kopalnia Gipsu i Anhydrytu Nowy Ląd Sp. z o.o. of up to USD 450 thousand due to liabilities of the subsidiary SNIEZKA BEL-POL Sp. z o.o. for gypsum supplies. Loans raised by Śnieżka

Bank Loan amount in thousands

of PLN

Conclusion date

Repayment date Debt as at 31.12.10

in thousands of PLN

Pekao S.A. 30.000 30.06.2006 18.12.2011 23.457 PKO BP 10.000 29.03.2002 19.01.2012 10.000

PKO BP 20.000 22.01.2007 21.01.2012 4.507

Bank BPH SA. 20.000 19.01.2009 17.01.2011 2.126 Bank Handlowy w Warszawie S.A.

20.000 10.06.2005 25.02.2013 18.543

Podkarpacki Bank Spółdzielczy

500 31.03.2006 31.03.2011 368

ING Bank Śląski SA 30.000 27.04.2009 30.06.2011 26.032 Total 130.500 85.033 Information on the agreement concluded with an entity authorised to audit financial statements On 16 June 2010, the Company concluded an agreement with Revision -Rzeszów Józef Król Sp.z o.o. for auditing the financial statements for 2010:

- separate half-yearly statements; - consolidated half-yearly statements; - separate annual statements; - consolidated annual statements.

The completion dates are to be agreed. The total fee for auditing the financial statements for 2010 amounts to net PLN 70,000 plus 22% VAT, including for:

- review of the separate half-yearly financial statements – PLN 15,000 - review of the consolidated half-yearly financial statements – PLN 10,000 - preliminary audit of the financial statements – PLN 5,000 - end audit of the separate financial statements – PLN 20,000 - annual audit of the consolidated financial statements – PLN 20,000.

The Company did not conclude any other agreements with Revision - Rzeszów Józef Król Sp. z o.o. or pay any remuneration other than for the services indicated. The financial statements for 2009 were audited by MOORE STEPHENS Józef Król Sp. z o.o., based on an Agreement dated 15 June 2009, including the audit of separate and consolidated annual financial statements, and the remuneration for the audit amounted to net PLN 70,000 plus VAT, including for:

- review of the separate half-yearly financial statements – PLN 15,000 - review of the consolidated half-yearly financial statements – PLN 10,000



- preliminary audit of the financial statements – PLN 5,000 - end audit of the separate financial statements – PLN 20,000 - auditing of the consolidated financial statements – PLN 20,000.

18. Major prizes and awards for Śnieżka in 2010

2010 has brought Śnieżka recognition for the consistent implementation of its development strategy and for maintaining its leading position among the most dynamic and effective companies in Poland.

Śnieżka’s Strong Image Social projects by FFiL Śnieżka were awarded at the 6th edition of the Strong Image PR contest.

FFiL Śnieżka received two main awards. At a national level, the company was awarded for the execution of the Colourful Fields or the School Premier League project and in the Podkarpackie edition it was honoured for its overall achievements in the field of social activity.

The final of the Strong Image contest, held annually for six years, takes place during one of the largest events in the industry – the Public Relations Congress. The purpose of the contest is to promote activities that, except for their PR standards, are of social significance. The winners are selected from companies notable for their activity in this field. Prizes are awarded by a committee comprised of first-class public relations specialists – practitioners, scientists and representatives of social organisations.

Śnieżka – Polish Flagship Product 2010

Śnieżka was among the prize-winners and, having obtained a very high indication rate (40%), it became the Polish Flagship Product 2010.

During the meeting, the results of a survey by TNS OBOP that determined the Polish products that are the most recommended abroad were announced. The respondents stated which Polish products and brands Poles are proud of, which ones we can show off and which of them are actually used.

The 2nd Polish Product Forum Buy Our Domestic Products was held under the patronage of the Ministry of Economy. The event was organised by the Dajesz Pracę.PL Foundation and the new partner and co-organiser was DEMO Effective Launching.

Śnieżka resistant to crisis

Once again, Fabryka Farb i Lakierów Śnieżka S.A. was among Poland’s largest businesses. It improved its position on the 500 List by 15 positions.

The 500 List is prepared annually by one of the most respected national daily newspapers –Rzeczpospolita. The journalists develop the ranking based on press releases submitted to their editorial office, on surveys including the basic financial data and on financial statements.



Śnieżka – a high reputation brand

FFiL Śnieżka S.A. has confirmed its high reputation once more. In a brand study PremiumBrand 2010, it ranked 6th among all of the awarded brands, which is the highest position among other brands in the industry. PremiumBrand is the only project in Poland certifying the reputation of brands and companies and has been conducted since 2006. The most recent survey was carried out in late April and early May 2010. Its methodology allowed the surveying of brands in terms of 5 reputation-related dimensions: references, media climate, social commitment and the brand as an employer. Złoty Laur Konsumenta for Śnieżka (Consumer's Golden Laurel)

FFiL Śnieżka S.A. was awarded the Consumer’s Golden Laurel 2010 and the Discovery of the Year title for VIDARON brand. In the sixth edition of the Consumer’s Laurel programme, FFiL Śnieżka S.A. once again received the Consumer’s Golden Laurel in the Paints category, defeated all competitors and enjoyed the highest appreciation among customers in the industry. Moreover, this year’s edition of the competition saw the VIDARON brand – which belongs to FFiL Śnieżka S.A. – winning the title Discovery of the Year 2010. The Discovery of the Year title is awarded to new products that have attracted positive attention of consumers. Consumer Laurel is the largest consumer project in the country and is intended to award the most popular products and brands in a few hundred categories each year. Products that enjoy the highest degree of customer recognition are revealed by a nation-wide survey.

Śnieżka’s – a High Reputation Company

Fabryka Farb i Lakierów Śnieżka S.A. won the third edition of the PremiumBrand study for companies listed at the stock exchange. The business environment for the third time acknowledged FFiL Śnieżka S.A.'s high reputation by awarding it the statuette and the PremiumBrand Stock Exchange 2010 certificate. The aim of the PremiumBrand Stock Exchange research is to select companies that enjoy the best reputation among the domestic institutional investors. The title of the High Reputation Company 2010 was awarded based on surveys conducted in a group of institutional investors. The assessment covers those issuers whose stocks are listed at the Warsaw Stock Exchange.

The methodology, prepared by the MAISON Research House, includes examining companies in four dimensions, set in the establishment survey. These are: business orientation, opinions on the management, reliability in business relationships and the image.

Śnieżka – Pearl of the Polish Economy 2010

FFiL Śnieżka S.A. was awarded in the Large Pearls category in the 8th edition of the ranking Pearls of the Polish Economy. The ranking is an initiative of the English-language economic monthly, Polish Market.



Companies considered to be Pearls of the Polish Economy are the most profitable and best performing entities, while their financial standing is subject to expert assessment of the Institute of Economic Sciences (INE) of the Polish Academy of Sciences (PAN).

Śnieżka was awarded for the consistent implementation of its corporate policy and strategy and the leading position among the most dynamic and effective Polish enterprises.

19. Corporate Social Responsibility

FFiL Śnieżka S.A. is very successful on the paints and varnishes market, both domestically and abroad. We believe that no success can truly be enjoyed if it is not shared with others so we try to do this on everyday basis. And is there a better way to share one's success than helping those who need help? This is why Śnieżka actively supports charitable organisations and runs its own social operations. We provide financial and material aid, sponsor various sports, cultural, and educational events and support sports clubs, organisations, and institutions. At the same time, the Company feels committed to ensuring that our Customers, Stockholders and Employees are successful. We know that Śnieżka’s achievements depend on their success. We also care for the environment. We do all we can to prevent our production from damaging the beautiful environment of southern Poland. In 2005, FFiL Śnieżka S.A. established the Your Opportunity Foundation. The Foundation’s mission is to aid talented youth from families of limited means. More information on the Foundation can be found in chapter 20 of FFIL Śnieżka S.A.’s Management Report. Corporate social responsibility of the company also manifests itself in the various social initiatives we undertake. As part of one of them, “Colourful pitches… or school premier league”, FFiL Śnieżka S.A. sponsors the construction of a professional multi-purpose sports field for the poorest schools in Poland. The initiative is intended to popularise sport through an art competition. In 2010, the 4th edition of the initiative took place and the winner was the Primary School in Kaznów. Another project, called “Colourful world of children”, involves artistic interior design using motifs from various children’s stories in order to allay the fear connected with staying in hospital. Walls of hospitals are painted with colourful characters from tales for children: Winnie-the-Pooh, Piglet, Tigger, Nemo, Little Red Riding Hood, Little Mermaid and more. Colourful images are painted on special request by children, who also participate in creating them. FFiL Śnieżka S.A. has also been supporting the Great Orchestra of Christmas Charity. This is very important to us because – as in our own social initiatives – the undertaking is all about helping those whose fate is of immense significance to FFiL Śnieżka S.A. – sick children. Śnieżka supports all who are involved in the development of this initiative. FFiL Śnieżka S.A. also sponsors sports clubs and organisations in a difficult financial situation.



20. Śnieżka’s foundation – Your Opportunity Being one of the largest enterprises in the region, FFiL Śnieżka S.A. makes both an economic and a social impact locally. Mindful of their social responsibilities, the corporate bodies established a foundation which, over the recent years, has become an important non-government organisation in the region. In 2010, Śnieżka's Your Opportunity Foundation earmarked more than PLN 358,000 for its statutory activities, such as promoting education among children and youth, health care and initiatives for the benefit of those affected by chronic illnesses and disabled people. One of the Foundation’s goals is to provide overall aid in education and upbringing of youth. It involves providing financial support for schools, culture centres and sports clubs in the areas of education, culture and sport. In 2010, the Foundation earmarked PLN 76,000 for air to schools, sports clubs and charities. In 2010, the Foundation supported a dozen schools, including primary, secondary, high schools, as well as preschools. It provided financial aid for organising trips and educational excursions, renovation of educational buildings and the purchase of didactic aids. The foundation also supports sports clubs by funding camps, purchase of training equipment, outfits and prizes for competition winners. In addition, the foundation supports all initiatives for promoting culture, and so it provides aid to local culture associations and centres in organising events, such as song shows, poetry and dancing contests as well as music, art and literature workshops. A special initiative of the Foundation is the Scholarship Programme, which is intended to aid talented, studious youth from families of limited means. The programme involves monthly scholarships and social grants. In 2010, the Foundation earmarked PLN 103,000 for this programme. With these funds, it supported 59 scholarship holders, who invest the money in their own development. Another important field of the Foundation's activity is to protect health and aid the chronically ill and disabled people. At present, the Foundation cares for approx. 50 people. They include children and adults with tumours, patients paralysed as a result of accidents and children born with serious defects. In 2010, PLN 164,000 was earmarked to aid the sick and the needy. With this funding, the Foundation’s beneficiaries afford to buy drugs, participate in rehabilitation therapies and programmes and cover the costs of operations. The refund also includes travel costs to the hospital and the costs of accommodation and food for parents who accompany their children in specialist clinics. Śnieżka’s Your Opportunity Foundation can reach so many people thanks to the 2010 donation of PLN 240,000.00 made by the Benefactor, who ensured the premises and the utilities for the Foundation’s operation. The Foundation is also supported by local companies and natural persons by giving 1% of their income tax. As part of the 1% income tax scheme, the Foundation and its beneficiaries managed to collect PLN 211,000, which will be earmarked for the Foundation’s statutory objectives. This significant contribution by institutions and individuals in providing aid testifies to the great social trust enjoyed by the Foundation and to the fact that its aid initiatives are seen and appreciated by the local community.

21. Summary



The Company’s Management Board considers the Company's activities implemented in 2010 as positive. These contributed to better effectiveness, and the results achieved at the time of difficulties on the market of paints and varnishes in sales growth, efficiency, market position, and in particular financial standing are as planned and constitute grounds for the Company's further development. Therefore, the Company’s Management Board intends to request the General Stockholders' Meeting to earmark this amount as dividend to be distributed for the previous year. In 2011, the Company's Management Board will continue the implementation of the Company's strategy aimed at consolidating its market position and improving its performance and market value by meeting the needs of customers.



Management Board of Fabryka Farb i Lakierów Śnieżka S.A. in Lubzina Signatures by the Management Board Members

1. Piotr Mikrut _______________________

2. Witold Waśko _______________________

3. Joanna Wróbel - Lipa _______________________ 4. Walentyna Ochab _______________________

Lubzina, 28 March 2011



Brzeźnica, 28 March 2011

22. Statement by the Management Board The Management Board of FFiL Śnieżka S.A. declares that, to the best of its knowledge, the annual financial statements and the comparable data were prepared in line with the current accounting principles and they reflect the issuer’s economic and financial standing as well as its financial performance in a true, reliable and transparent way. The issuer's management report presents a true picture of the issuer's development, achievements and standing, including the description of basic risks and threats. In addition, the Management Board of FFiL Śnieżka S.A. declares that Revision - Rzeszów Józef Król Sp. z o.o., being an entity authorised to audit annual financial statements, was appointed in line with the legal regulations and that the entity and the auditors of these financial statements fulfilled the conditions to prepare an independent and unbiased opinion on the audited annual financial statements, in line with the binding legal regulations and professional standards. ................................. ................................. ................................... ......................................

Piotr Mikrut Witold Waśko Walentyna Ochab Joanna Wróbel-Lipa President of the MB Vice-President of the

MB Economic Director Member of the MB Foreign Partnership

Director

Member of the MB Sales Director



Telephone and address: Management Board Piotr Mikrut President of the Management Board Phone (014) 680-54-17 Witold Wa śko Vice-President of the Management Board Economic Director Phone (014) 680-54-17 Joanna Wróbel-Lipa Member of the Management Board Sales Director Phone (014) 680-54-81 Walentyna Ochab Member of the Management Board Foreign Partnership Director Phone (014) 680-54-74 Management Board Office Izabela Chmiel Phone (014) 680-54-17 Fax (014) 680-54-28 e-mail: [email protected] Media contact Anna Szymaszek FFiL Śnieżka S.A. Public Relations Specialist Phone (014) 680-54-83 Mobile 0507-143-094 Fax (014) 680-54-14 e-mail:[email protected]

MANAGEMENT REPORT OF FABRYKA FARB I LAKIERÓW ŚNIE … · 39-102 Lubzina 34 a Ropczycko – S...

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