report of the board of directors for the financial … · amalgamation merger between zaharul...

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AGRANA ROMANIA SA

COMPANY MANAGED IN TWO-TIER SYSTEM Single Business Registration Number 2083757, registered with the Trade Register Office under no. J40/4411/2008

REPORT OF THE BOARD OF DIRECTORS FOR THE FINANCIAL YEAR

STARTED ON 1 MARCH 2016 AND ENDED ON 28 FEBRUARY 2017

1. DESCRIPTION OF THE COMPANY The company Agrana Romania S.A. has operated under this name since 7 March 2005, following the amalgamation merger between Zaharul Romanesc S.A. Buzau, as absorbing company, and Danubiana Roman S.A. and Agrana Romania Holding and Trading Company SRL Bucharest, as absorbed companies.

The company Agrana Romania S.A. is a joint-stock company incorporated in accordance with the Romanian law, managed in the two-tier system, with its registered headquarters in Bucharest, 1st District, 178-180 Straulesti St., registered with the Trade Register Office under no. J40/4411/10.03.2008.

Agrana Zucker GmbH is the majority shareholder, holding 98.40 % of the entire share capital.

The Company’s shareholding structure is described herein below: Share capital Number of shares Value/share Interest

Shareholders RON RON/share

%

Agrana Zucker GMBH 79,625,373 796,253,730 0.10 98.40

AAAS 585,686.50 5,856,865 0.10 0.72%

Other 707,974.3 7,079,743 0.10 0.88%

TOTAL 80,919,033.80 809,190,338 0.10 100

The Company is a member of Agrana Group. The consolidated annual financial statements are prepared at the level of the parent company, i.e. AGRANA Beteiligungs AG, the holding entity which owns most securities in Agrana Zucker GMBH, the majority shareholder of Agrana Romania SA, having its registered headquarters at 1 Friedrich-Wilhelm-Raiffeisen-Platz, Vienna, Austria. These consolidated annual financial statements are public and may be accessed on the parent company’s website: www.agrana.com. The Company’s shares are listed on the Bucharest Stock Exchange, the Alternative trading system AeRO, under the BETA symbol.

[Illegible signature]

Translated from Romanian

http://www.agrana.com/

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The Company’s financial statements for the financial year ended 28 February 2017 are public and available on the Company's website: agrana.ro, Section Shareholder Information.

The Company’s management was made in a two-tier system, by means of Board of Directors and Supervisory Board. The members of the Supervisory Board in the period ranging between 1 March 2016 and 28 February 2017 was as follows: Martin Doppler (1 March 2016-28 February 2017) Andreas Schroeckenstein (1 March 2016-28 February 2017) Roman Knotzer (1 March 2016-28 February 2017) The members of the Supervisory Board are appointed for a period of 4 years.

In the period ranging between 01 March 2016 and 28 February 2017, the Board of Directors was formed as follows:

01.03.2016-28.08.2016:

Iulia Gabriela Petrea – Chairwoman;

Catalin Adrian Limbidis;

Madalina Andreea Roman;

29.08.2016-13.11.2016:



Adriana Manuela Vasii;

14.11.2016-31.01.2017:



Patrick Leamy;

01.02.2017-28.02.2017:


Emilian Dobrescu;

Patrick Leamy;

On 28 February 2017, the Company owned shares in the following affiliated entities:

9,900 shares in Agrana Buzau S.R.L., representing RON 99,000, respectively 99% of the share capital;

9,900 shares in Agrana Tandarei S.R.L., representing RON 99,000, respectively 99% of the share capital;

99 shares in Agrana Agro S.R.L Roman, representing RON 990, respectively 99% of the share capital.

Pursuant to the provisions contained in the Order of the Minister of Public Finance No 1802/2014, as subsequently amended and supplemented, the Company has the legal obligation to prepare consolidated financial statements.


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2. GENERAL RESULTS

The company Agrana Romania S.A.’s main object of activity consists of the manufacturing and trading of sugar and derivative products. 2.1. PRODUCTION OBTAINED

During the financial year ranging between 1 March 2016 and 28 February 2017, AGRANA ROMANIA SA achieved, in its own name, in its factories or from processing agreements concluded with third parties and affiliates, an amount of 193,061 tons of white sugar. The machinery and premises necessary for primary manufacturing in the Buzau factory were rented to Agrana Buzau SRL, the latter using them in order to refine 97,037 tons of brown sugar. The company processed, in its own name or for affiliates and third parties, in the Roman factory, an amount of 45,255 tons of brown sugar and 390,150 tons of sugar beets. In reliance upon a processing agreement for sugar beet roots entered into between Agrana Romania SA and VIRO TVORNICA ŠEDERA d.d, and Agrana Romania SA and SLADORANA DOO respectively, the company processed in the Roman factory an amount of 207,450 tons of sugar beets, obtaining 30,000 tons of white sugar “in addition to the quota” for the above-mentioned company. In accordance with processing agreements for sugar beet roots signed in October 2016, the company Agrana Zucker GmbH processed (in its factories in Austria) for AGRANA ROMANIA S.A. an amount of 228,436 tons of sugar beets, obtaining 35,000 tons of white sugar “in addition to the quota”. 2.2. INVESTMENTS/ OVERHAULS

The main investment/overhaul projects initiated/ completed during the financial year ended on 28 February 2017, in view of improving the efficiency of the Company’s business and complying with the applicable environmental regulations, consisted of:

Upgrading the condensate recovery system in the Buzau factory This project consisted of replacing the old Niessner condensate tanks, dating from 1968, which no longer complied with the provisions related to the safety of the operations and no longer followed the norms requested by the State Inspection for Control of Boilers, Pressure Vessels and Hoisting (ISCIR), by installing a three-compartment condensate tank and the corresponding piping system and automation equipment. This increases safety as all the operations are carried out through a process automation system, and some of the other benefits brought by this upgrade include reducing heat losses and maintenance costs.

Conditioning silo no. 1 in the Buzau factory Within the Buzau factory, a new system has been built in order to blow air conditioning in a controlled manner into the sugar that has been recently stored in the silo, which also allows for automatic control of moisture and temperature in the storage space. By means of this technical solution, the quality level of the product has increased, as it prevents sugar bulbs from forming within the silos), which cuts most of the sugar reprocessing costs.


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Reinforcing the structure of the bagging tower in the Buzau factory Consolidation works were carried out so as to comply with the requirements of the existing regulations regarding earthquake-resistant buildings, and consisted of improving the foundations of the buildings on site, their supporting frames, pillars and low-bearing beams, walls, as specified in the specialised documentation.

Carrying on upgrading works on the silos of the Roman factory By installing the air conditioning pipe and duct system for silo no. 2, storage conditions of sugar were improved in this cell, because of better control over moisture and temperature.

Upgrading steam tank no. 2 in the Roman factory The project, developed in particular with a view to complying with environmental requirements, consisted of repairs on the boiling pipe system, changing the fittings, installing low exhaust burners and remaking the automatic control over the entire assembly.

Purchasing agricultural equipment within the Roman factory - purchasing a Ropa Maus front-end loader, an equipment that feeds sugar beet roots to operating

machineries and provides optimum pre-cleaning conditions; - purchasing a sprayer that provides optimum spraying performance during the application stage; - purchasing machinery for pesticide application, an equipment needed in order to apply calcium

carbonate resulting from beet processing to obtain sugar.

Conditioning silo no. 1 within the Agrana sugar factory in Roman This investment project has considerably improved sugar storage conditions, as it has allowed for a better control over temperature and moisture. 2.3. TURNOVER During the financial year ranging between 1 March 2016 and 28 February 2017, the Company achieved a turnover of RON 801,372,602. Its composition, as well as the structure of white sugar sales through distribution channels, as absolute values and as percentage, are given herein below.

Indicator UoM 01.03.2015 -

29.02.2016 01.03.2016 -

28.02.2017

1. Total sugar sales tons 372,880 287,310

2. (Net) turnover, out of which: RON 918,965,204 801,372,601

- White sugar sales RON 791,732,773 723,661,940

- Sale of byproducts and other merchandise RON 61,775,448 43,308,543

- Sales of various products and services RON 65,456,984 34,402,118


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Sales of white sugar 01.03.2016-28 .02.2017 Value RON %

Domestic, out of which: 609,923,606 84.28%

-Retail 432,308,860 59.74%

-Industry 171,308,358 23.67%

-Other 6,306,388 0.87%

Intra-community sales/sales in the territory of other Member States 60,846,225 8.41%

Export 52,892,109 7.31%

3. FINANCIAL INFORMATION

3.1. Financial indicators

The financial indicators achieved by AGRANA ROMANIA SA in the financial year which ended on 28 February 2017, are illustrated herein below:

RON 01.03.2015-29.02.2016 01.03.2016-28.02.2017

Turnover 918,965,204 801,372,601

Operating revenues 893,682,285 899,512,302

Operating expenses 893,833,270 934,810,518

Operating profit/loss (150,985) (35,298,216)

Financial revenues 6,357,957 7,091,815

Financial expenses 14,545,960 16,321,054

Financial loss (8,188,003) (9,229,239)

Total revenues 900,040,242 906,604,117

Total expenses 908,379,230 951,131,572

Gross gain (8,338,988) (44,527,455)

Corporate tax - -

Net gain (8,338,988) (44,527,455)

For the period comprised between 1 March 2016 and 28 February 2017, the Company incurred an operating loss of RON 35,298,216. By comparing the values referred to above with the operating loss amounting to RON 150,985, incurred during the financial year ended on 29 February 2016, a negative development may be noticed in the performance of the Company’s operating business, the operating profit being affected by the provision of RON 63,065,821, representing additional payment liabilities set by the National Agency for Fiscal Administration (NAFA) following the completion of the general tax investigation and communication of the tax investigation report and the tax assessment on 4 April 2017, administrative actions in respect of which the Company has drafted a current report in accordance with the provisions of the capital market legislation. Excluding this provision, the operating result would have amounted to an operating profit of RON 27,767,605, a positive evolution which is owed both to the endeavours used by the Company’s management in decreasing manufacturing and structural costs, as well as to favourable developments in the sugar market.


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The profit/loss generated by the Company’s financial activity (28 February 2017: loss of RON 9,229,239) also includes a net gain amounting to RON 259,580 corresponding to the financial instruments used by the company. On 28 February 2017, the Company contracted by means of the affiliated company Agrana Group Services GMBH, derivatives of the forward contract types, in reliance upon the EUR/RON exchange rate. In accordance with the agreement, the Company undertook to purchase in May 2017 the amount of EUR 43,994,021 in exchange for RON 199,704,526. The fair value of such financial instruments on 28 February 2017 is RON 199,339,122. During the financial year ended on 28 February 2017, the Company incurred a net loss amounting to RON 44,527,455 (RON 8,339,988 for the financial year ended on 29 February 2016), and the level of cumulated losses on 28 February 2017 was RON 158,527,467 (RON 149,546,764 on 29 February 2016) and net current debts amounting to RON 85,996,986 (RON 173,962,434 on 29 February 2016). On 28 February 2017, the net assets of the Company, representing the difference between the total assets and the total debts thereof, amounted to RON 33,853,440, decreased to less than half of the subscribed share capital, namely RON 40.459,517. The Company management forecasts aim at turning the business thereof profitable in the medium term. At this moment, the Company depends, primarily, on the continuous support provided by the majority shareholder, by means of the credits facilities granted. The Company relies on financial support from its majority shareholder to be able to continue its business in the foreseeable future. Upon the completion of the procedures for subscription/increase of the share capital, the result was approved by the decision of the Board of Directors of 16.08.2016, whereby the following were laid down:

Increasing the Company’s share capital by RON 66,464,819, representing a contribution in cash, in this case from RON 14,454,215 to RON 80,919,034. The new share capital of the Company, amounting up to RON 80,919,034 is divided into 809,190,338 shares, each with a nominal value of 0.1 RON/share;

Following the completion of the underwriting process, Agrana Zucker GmbH, an Austrian company based in Vienna, 1 Friedrich-Wilhelm-Raiffeisen-Platz, 1020, registered under number FN 51,929t, owns 796,253,730 shares with a total nominal value of RON 79,625,373, representing 98.4013% of the share capital of the Company.

The separate financial statements were drafted based on the principle of business continuity, which implies that the Company will continue to carry out its business in the foreseeable future. In order to assess the scope of this assumption, the Company management undertakes an analysis of the forecasts concerning future cash inflows. Based on this analysis, the management of the Company considers that the Company will be able to continue to carry out its business in the foreseeable future, and, therefore, which means that the application of the continuity principle of business when drafting the Company’s financial statements is perfectly justified. In the period immediately following the approval of the financial statements for the financial year ranging between 1 March 2016 and 28 February 2017, the management of the Company will perform an analysis in order to identify the optimal solution for restoring the net asset thereof in accordance with the relevant legal provisions and will convene forthwith the General Meeting of Shareholders, to whom it shall submit the financial report of the Company and its proposal to restore the net asset of the Company. [Illegible signature]

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3.2. Analysis of receivables and debts

On 28 February 2017, the status of the Company’s debts and receivables was illustrated as follows: RECEIVABLES

DEBTS

RON

29.02.2016

28.02.2017 Payment time frame

Under 1 year Over 1 year

Total, din care: 471,403,411 449,498,561 449,498,561 -

1. Advance payments collected for orders 464,949 948,382 948,382 -

2. Business debts, out of which: 16,564,171 34,873,072 34,873,072 -

Domestic suppliers 15,079,845 23,655,327 23,655,327 -

Foreign suppliers 1,484,326 11,217,745 11,217,745 -

3. Amounts payable to affiliated entities 445,969,043 407,802,625 407,802,625 -

Loans from affiliated entities 407,033,131 332,621,009 332,621,009 -

Business debts to affiliated entities 38,935,912 75,181,616 75,181,616 -

4. Other debts, including fiscal debts and other debts for social insurance 8,405,248 5,874,482 5,874,482 -


RON

29.02.2016

28.02.2017 Liquidity time frame

under 1 year over 1 year

Total, out of which: 96,902,191 70,652,577 70,652,577 -

1. Business receivables, out of which: 65,069,362 41,126,210 41,126,210 -

- Third party clients 81,430,023 57,533,064 57,533,064 - - Adjustments relating to depreciation of third party receivables

-16,360,661

-16,406,854 -16,406,854 -

2. Other receivables, out of which

20,132,154

16,103,336

16,103,336 -

- Other third party receivables

20,132,154

16,103,336

16,103,336 - - Adjustments relating to depreciation of sundry debtors - - - - 3. Amounts to collect from affiliates

11,700,675 13,423,031

13,423,031 -

- Business receivables

11,700,675 13,423,031

13,423,031 -

- Other receivables from affiliated entities - - - - - Adjustments relating to receivables from affiliated entities - - - -

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3.3. Financial resources

The financial resources necessary for the manufacturing activity were provided from the sales of sugar, molasses, sugar confectionery, services, but also from loans. The Company implemented, by means of the affiliate company Agrana Group Services Gmbh, a liquidity management program of the “payment factory” type, the main components/characteristics thereof being as follows: In-house bank; Management of domestic and foreign payments by means of the SAP integrated IT system; Electronic authorization of payment packs in accordance with the rules set forth through the

approval matrix; Performing currency exchanges and derivative transactions relying on the exchange rate; Financing, by means of in-house bank and credit facilities dated 14 June 2003 (revolving type,

multicurrency credit facility, amounting to EUR 55,000,000, shared with Agrana Buzau SRL, Agrana Tandarei SRL and Agrana Agro SRL) and 30 September 2004 (revolving type, multicurrency credit facility, amounting to EUR 20,000,000), both granted by Agrana Group Services Gmbh.

The interest rate is of 1M EURIBOR + 1.75% per year for credit balances denominated in EUR. The balance of financial debts contracted from affiliated entities on 28 February 2017 (and 29 February 2018) is detailed herein below: The financial debts towards affiliated companies are detailed in the notes to the separate financial statements.

Credit facilities contracted from credit institutions On 28 February 2017, the Company benefited from the following credit facilities contracted from credit institutions:

Credit facility to issue bank letters of guarantee/letters of credit, shared with Agrana Buzau SRL and Agrana Tandarei SRL, granted by UniCredit Bank SA, totaling EUR 5,000,000, facility secured by means of movable mortgage created over current bank account opened with the bank. The facility expires on 15 November 2021.


28.02.2017 29.02.2016

Balance in the transaction currency

Currency Balance in RON Balance in the transaction currency

Currency Balance in RON

Loan in RON 82,143,401 RON 82,143,401 82,123,542 RON 82,123,542

Loan in EUR 55,464,483 EUR 250,477,607 72,699,720 EUR 324,909,589

Total 332,621,008 407,033,131

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On 28 February 2017, based on the counter-guarantees issued by Unicredit Bank Austria AG, the following bank letters of guarantee are issued out of the facility held by AGRANA Beteiligungs AG in this credit institution, at the orders of Agrana Romania S.A. by Unicredit Tiriac Bank S.A.:

Guarantee Number Date of issuance

Beneficiary Amount Currency Expiry date

Amendment 2 to 00888-020180276 25/09/2015 01/11/2016 APIA 6,542,642 RON 31/01/2018

Amendment 2 00888-02-0282291 01/11/2016 APIA 8,143,724 RON 31/01/2019

Credit facility to issue bank letters of guarantee/letters of credit, granted by Raiffeisen Bank Romania, shared with Agrana Buzau SRL and Agrana Tandarei SRL, totaling EUR 5,000,000, facility secured by means of movable mortgage created over current bank account opened with the bank. The facility expires on 30 April 2021. On 28 February 2017, in reliance upon the above-mentioned facility, the following bank letters of guarantee are issued:

Guarantee Number Date of issuance

Beneficiary Amount Currency Expiry date

Amendment 1 to GI/60905 20/10/2016 APIA 21,386 RON 31/03/2018

GI/62134 13/12/2016 DORNESTI CUSTOMS OFFICE 6,650,000 RON 30/04/2017

GI/62278 28/12/2016 GALATI CUSTOMS OFFICE 530,000 RON 31/03/2017

Amendment 1 to GI/62279 28.12.2017 27/01/2017 DORNESTI CUSTOMS OFFICE 4,530,000 RON 31/03/2017

During the current financial year (01.03.2016-28.02.2017), the Company has no longer extended the credit facility for the financing of work capital by bank overdraft, contracted from Raiffeisen Bank S.A., totaling RON 10,000,000. Moreover, during the financial year ended on 28 February 2017, the Company amended the contractual terms of the credit facility contracted from Unicredit Bank S.A. for the purpose of removing the overdraft, the use of cash being no longer possible. The facility may be used to issue bank letters of guarantee/letters of credit, and the value of the facility has decreased to EUR 5,000,000.

All credit facilities contracted by the Company from credit institutions are secured by corporate letters issued by Agrana Beteiligungs AG.

4. EXPECTED DEVELOPMENT OF THE COMPANY

The main medium-term goal of the Company’s management consists of achieving positive operating gains. In order to reach that goal, it is intended to maintain the current market share, to best use the company’s own manufacturing facilities in Buzau and Roman, and also to carry on the structural costs reducing policy. The company will continue to channel, in the following years, significant financial resources to investments meant to increase the efficiency of production, to improve the quality of products and environmental protection. AGRANA ROMANIA SA aims to continue to be an active supporter of local sugar beet growing, by providing both high-quality inputs, and know-how to Romanian farmers. The financial year 2017 will bring major changes in the European sugar market and, of course, in the Romanian market, by means of the liberalisation of the sugar market within the Community. In this context, Agrana Romania has budgeted overall sales of more than 271,931 tons of sugar, aiming to


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supply both clients acting on the Romanian market and affiliated and third-party undertakings conducting their business in other EU or non-EU countries. The operational gain budgeted for the financial year 2017/2018 is + EUR 4.2 million. In 2017/18, Agrana Romania planned to refine 2137,000 tons of brown sugar and to process an amount of minimum 438,000 tons of sugar beets. The investment budget for the following 12 months amounts to EUR 2.4 million, priority being taken by projects envisaging compliance with the relevant environmental regulations (e.g.: upgrading wastewater treatment channels in the Roman factory), improving the quality of the end product (e.g.: conditioning the silo cell in the Buzau factory, investing in packaging activity carried out within both factories) and modernising the agricultural sector by acquiring new equipment.

5. OTHER INFORMATION

5.1. RISK MANAGEMENT

During its business, the Company faces credit risk, currency risk, liquidity risk, interest rate risk and market risk.

a. Credit risk The company faces credit risk attached to its business receivables. The Company’s policy is that all clients intending to conduct business relations under crediting conditions shall be subject to verification. Furthermore, receivable balances are permanently monitored, in such a manner that the Company’s exposure to the risk of other non-collectable receivables is as low as practicably possible.

b. Currency risk The company conducts transactions and has loans in another currency than the functional currency (RON). The company uses financial instruments in order to limit its exposure to currency exchange variations.

c. Liquidity risk Prudential management of the liquidity risk involves the maintenance of sufficient cash and available credit facilities. Given the particulars of its activity, the Company aims to have flexibility in its financing capabilities, by maintaining a credit facility available to finance its operating activities.

d. Interest rate risk The Company’s exposure to the risk of changes in the interest rate mainly refers to loans carrying variable interest which the Company has in progress.

e. Market risk Sugar and isoglucose market in the European Union will witness significant changes by the cancellation of the manufacturing system under national quota arrangements, which has been in place since the 1970s, the market year comprised between October 2016 and September 2017 being the last year in the current system. One first effect entailed by the cancellation of the manufacturing system under national quota arrangements could consist of increased competition on the European Union market, with the current production excess (sugar in addition to the quota) being placed in free movement and traded in the EU after 30 September 2017.


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A second immediate potential effect will consist of the European Union being turned in net white sugar exporter, as the European manufacturers have the capacity and the resources to regain the markets lost in 2006 further to OMC’s decision to limit EU exports. A third probable effect consists of reinforcing / concentrating the production in several multi-national companies, to the detriment of small players, with low business diversification and no financial power. As it already is a market with production shortage, but excess processing capabilities, Romania partially felt the effects of a competitive market, the restructuring of this sector resulting in only three large manufacturers currently existing on the market, all of which are members of strong European groups (AGRANA/ Pfeiffer&Langen/ TEREOS). The fourth local manufacturer, Bod Sugar Factory (Fabrica de Zahar Bod), owned by a Romanian investor, is currently undergoing insolvency, and it is uncertain whether it will continue its processing/ trading business. Restructuring of this sector also created opportunities for world sugar traders, who attempted, in the past years, to enter the Romanian market. Their current market share is however low, market entry, logistics (transfer) or local processing costs being major barriers for spectacular growth or severely impacting the local market. Further on, the Romanian market sugar is below the European average, both in terms of consumption, and in terms of diversity of products. As the purchase power grows, we estimate that the local outlet market will also develop. Pressing campaigns to decrease sugar consumption, with a view to fighting against obesity had little effect on the consumption of sugar in Romania, both at household, and at industrial level. Significant replacement costs and similar effects of sugar substitutes on obesity have led to a decrease in the effects of sugar demonization campaigns. At the same time, together with the quota arrangements, the minimum guaranteed price, for sugar beet, will also disappear with immediate effects in low-yield growing areas. In Romania, these effects on sugar beet growing have been compensated by agricultural subsidies – in the financial year 2015-2020, sugar beet growing in Romania benefiting from the largest coupled subsidies in the European Community (more than EUR 600 per hectare). The Company’s management constantly monitors the environment in which the Company is currently operating and considers that, by means of the strategies which are being implemented, it will be able to cope with the challenges and trends in the sugar market.

5.2. COMPLIANCE WITH THE ACCOUNTING LAW

The financial statements have been drawn up in accordance with Accounting Law No 82/1991, republished 2008, as amended and supplemented, with the provisions contained in the accounting regulations approved by Order of the Minister of Public Finance No 1802/2014, as subsequently amended and supplemented, and with the provisions of Order of the Minister of Public Finance No 4160/2015 on the preparation of annual financial statements by entities having opted for a financial year different from a calendar year, in accordance with Article 27 paragraph (3) of Accounting Law No 82/1991 republished 2008, as subsequently amended and supplemented. Items have been posted in the accounting records in compliance with the Accounting Law, in reliance upon supporting documents, in line with general chart of accounts.


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Accounting registers have been used in compliance with their intended purpose, allowing at to identify and control the accounting operations performed at any time. Entries, exits and transfers between raw material warehouses, materials, inventory items and finished products have been made in the accounting records in reliance upon the primary documents stipulated in the Accounting Law. Acceptance tickets have been draw up in reliance upon verifying the assets from the quantitative

and qualitative perspective, under the strict supervision of acceptance commissions, in accordance with internal decisions;

Materials have been released from stocks in reliance upon supporting documents prepared by the persons in charge with each manufacturing sector or department;

The production achieved was handed over to warehouses in reliance upon manufacturing reports, weighing notes and with the approval of the Quality Technical Control (CTC);

Sales were performed with immediate preparation of waybills for the goods, followed by fiscal invoices, within the periods stipulated by law.

In order to check the appropriate posting in the accounting books of the operations performed, a trial balance was drawn up every month. Documented and actual stocks have been checked, by comparison between the analytical trial balances and the synthetic trial balance. Internal management accounting provided the collection and distribution of expenses depending on their intended purposes, more specifically, into cost centers/internal orders/products, making sure that the manufacturing costs and general costs are accurately monitored. Inventory was performed in observance of the regulations issued by the Ministry of Finance and contained in Order No 2861/2009 and went through the following stages:

Physical inventory of material and money assets by numbering, weighing, appraising on the status of stocks and merchantability;

Confirmation of the balances from the main clients and suppliers;

Confirmation of the balances held in banking institutions, both in terms of available funds, and loans in progress;

Inventory and re-analysis of provisions for risks and expenses. Upon inventory, the aim was to harmonize the factual reality with the accounting records.

5.3. ENVIRONMENTAL ISSUES

Romania is currently going through a period of fast harmonization of its environmental laws with the applicable legislation in force in the European Economic Community. On 29 February 2016, the Company incurred no debts relating to anticipated costs, including statutory and consultancy taxes, surveys, designing and implementation of remedy plans relating to environmental concerns.

5.4. ACTIVITIES IN THE RESEARCH AND DEVELOPMENT FIELD

The Company is currently involved in the development of a project coordinated by the National Research-Development Institute for Potatoes and Sugar Beet of Brasov, having as its object “Researches for determining the content of sugar and molasses substances of the plant remaining further to replacing the removal of sugar beet leaves by defoliation (scraping)”. The main researching goals refer to:

The identification of methods and solutions to replace removal of sugar beet leaves by defoliation (scraping);

Determining the most efficient methods to decrease the percentage of impurities upon harvesting; [Illegible signature]

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Decreasing soil fertility loss by decreasing the amount of fertile soil and vegetal remains carried together with the sugar beets;

Optimizing sugar beet harvesting and transport processes to the factory.

5.5. Taxation

All amounts payable to the State budget for taxes and levies have been paid or posted in the accounting balance date. The Romanian taxation system is undergoing a process of consolidation and harmonization with the European laws, and there may be different interpretations by authorities in relation to the tax laws, which may give rise to additional taxes, levies and penalties. If the State authorities identify any breaches of the Romanian legal provisions, they may determine, as the case may be: confiscation of the relevant amounts, imposition of additional tax liabilities, the enforcement of fines, charging delay penalties (calculated on the payment amounts actually remaining). Therefore, fiscal penalties deriving as a result of infringement to legal provisions may reach significant amounts payable to the State. Starting from 19 November 2012, in accordance with the Certificate of Fiscal Inspection issued by the Bucharest General Directorate for the Management of Large Tax-Payers, Agrana Romania SA is subject to a general tax investigation for the period ranging between 01 January 2006 and 31 December 2011. The general tax investigation mainly focused on the following taxes: Tax liability Period investigated Corporate tax 01.01.2006-31.12.2011 Income tax for non-resident taxpayers 01.01.2007-31.12.2011 Excise tax 01.01.2010-31.12.2011 Monthly VAT 01.01.2007-31.12.2011 Employer liability for national insurance contributions 01.01.2007-31.12.2011 Employee liability for national insurance contributions 01.01.2007-31.12.2011 Work injury liability for national insurance contributions

01.01.2007-31.12.2011

Employer liability for unemployment taxes 01.01.2007-31.12.2011 Employee liability for unemployment taxes 01.01.2007-31.12.2011 Guarantee fund 01.01.2007-31.12.2011 Employer liability for health insurance contributions 01.01.2007-31.12.2011 Employee liability for health insurance contributions 01.01.2007-31.12.2011 Salary output 01.01.2007-31.12.2011 Duties/ taxes for medically-impaired individuals 01.01.2007-31.12.2011

At the date of drafting this Report, the investigation has been completed, the Company being notified of the Tax Investigation Report F-MC 92/31.03.2017 and the Tax Assessment F-MC155/ 31.03.2017. We note that among the annexes of the above-mentioned tax investigation report there are two other reports drawn up under Article 108 of Government Ordinance 92/2003 concerning the Fiscal Procedure Code. Up to the moment when this report was drawn up, no other official document was communicated to the Company with respect to the previously-mentioned reports. By means of the Tax Investigation Report F-MC 92/31.03.2017 and the Tax Assessment F-MC155/31.03.2017 mentioned above, it has been laid down that the company is required to pay the amount of RON 95,859,063, out of which: RON 44,512,150 - principal amount owed, RON 44,661,092 - interests/ late payment addition/penalties and RON 6,676,821 – penalty payments. The Company has submitted a notification under Article 4 of GEO no. 44/2015 on granting certain tax facilities, as subsequently amended and supplemented ("GEO 44/2015"), in conjunction with Article 3


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of Order no. 3831/2015 approving the Procedure for the application of the provisions of GEO 44/2015 ("Procedure for the application of EGO 44/2015"), expressed its intention to benefit from the provisions of GEO 44/2015, respectively to benefit from the cancellation of the accessory liabilities payment referred to in Article 2, par. (2) of the Procedure for the application of GEO 44/2015. At the date of this report, the corresponding decision to postpone the payment of tax duties until the settlement application for cancellation of the amounts corresponding to the relevant percentages of accessory liabilities under the provisions of OUG 44/2015 for the amount of RON 32,784,242, whereas Agrana Romania has made the payment of RON 63,065,821 to the state budget. On 04 May 2017, Agrana Romania filed a notice against the tax assessment and tax investigation report issued by the General Directorate for the Management of Large Tax-Payers (DGAMC), and shall make use of all available legal remedies laid down for this purpose. For prudential reasons, the Company's management ordered an analysis of the possible implications of the above-mentioned general tax investigation during the period subsequent to the control (from 01 January 2012 to 28 February 2017). Following this analysis, the Company has implemented a series of measures which aimed at reducing the fiscal risks in certain areas of the company's perating business. The Company believes that it has paid in time and in full all taxes, levies, penalties and penalizing interest, insofar as necessary.

5.6. INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE FINANCIAL REPORTING PROCESS Between 1 March 2016 and 28 February 2017, the Board of Directors held operative meetings every month, aimed at examining the management and financial status of the Company and, as the case may be, at making decisions with regard to the issues arising from day-to-day work. As of July 2016, these meetings were held twice a month, to the extent possible. The internal control is provided by persons in the Company’s management, individuals holding full rights to supervise and check all economic and financial operations of the Company, the manner in which the employees fulfill their duties, as stipulated by the job descriptions, compliance with the legal provisions on labor safety and environmental protection, etc. Any misconduct identified which could result in economic, financial, property or other consequences incurred by the Company shall be reported directly to the members of the Board of Directors at the time of its identification. As regards the management of risks relating to the process of financial reporting, the Board of Directors has the following goals:

That there is a clear identification of responsibilities corresponding to each individual involved in the financial reporting process (through the provisions laid down in the job descriptions), respectively a separation of duties as regards the performance of operations among employees, so that approving, inspection and registering duties are assigned to different individuals;

That internal procedures are in place in respect of posting in the accounting records and inspection of financial and accounting operations, determining the information circuit and inspections over them, to ensure fast, accurate and full centralization of financial information;

That an accounting policy manual is used, drawn up in accordance with the requirements of the laws in force, approved by the Board of Directors;

Recruitment of personnel holding an appropriate skill level, depending on the Company’s needs, and that a continuous training plan is in place, allowing to update their knowledge in the field of accounting and taxation laws;


15

That there is a clearly defined calendar and process relating to the preparation of accounting and financial information compliant with the reporting requirements, and appropriate verification and approval thereof by the Board of Directors, in order to be made public.

5.7. Assessing the activity of Board members

The activity of Board members will be assessed by the General Meeting of Shareholders, upon the verification of the management conducted by the Board members for the financial year comprised between 01 March 2016 and 28 February 2016. Remuneration of Board members

The value of the remuneration payable to the Company’s management officers was approved by the General Meeting of Shareholders in accordance with the provisions of Article 15318 of Law No 31/1990, as subsequently amended. During the financial year comprised between 01 March 2016 and 28 February 2017, the value of total gross remuneration (including bonuses) paid by AGRANA ROMANIA SA to the members of the Board of Directors for the services provided by the latter in favour of the Company amounted to RON 2,245,839. During the financial year comprised between 01 March 2016 and 28 February 2017, the members of the Board of Directors benefited from performance bonuses reaching a total gross amount of RON 368,529. Please note that the performance bonus and the value thereof are conditional upon reaching certain cumulative and individual performance markers, representative for the Company’s results and performance:

financial markers: operational profit/loss, net profit/loss, net financial debts, rate of return on invested capital, etc.;

non-financial performance markers: sale and/ or production volumes; purchase and/or manufacturing costs; processing yield for raw materials, etc.;

Cumulative and individual performance goals are decided every year for the members of the Board of Directors.

5.8. SUBSEQUENT EVENTS

On the preparation date of this report, the Company’s Board of Directors is not aware of other events subsequent to the date of the accounting balance which could entail a significant impact and should be mentioned in these financial statements.

6. CORPORATE GOVERNANCE PRINCIPLES

In accordance with the Corporate Governance Principles for AeRO, in force starting from 04 January 2016, this report has attached the first corporate governance statement relating to the financial year started on 01 March 2016 and ended on 28 February 2017.

Illegible signature Illegible signature

Chairwoman of the Board of Directors Member of the Board of Directors

Gabriela Petrea Patrick Leamy

Applied official stamp of Agrana Romania S.A. 24.05.2017

Annex to Board of Director’s Report: STATEMENT ON THE CORPORATE GOVERNANCE OF AGRANA ROMANIA SA

16

Provisions of the Code Complie

s

Does not comply

or partially

complies

Reason for non-compliance

A.1. The company should have an internal regulation of the

Board which includes terms of reference for the Board and

the key management functions of the company. The

management of conflict of interests at the Board level should

also be presented in the Board’s regulation.

X

A.2. A Board member’s other professional commitments,

including executive and non-executive Board positions in

companies (excluding the company’s subsidiaries) and non-

profit institutions, should be disclosed to the Board before

appointment and during his/her mandate.

X

A.3. Any member of the Board should submit to the Board,

information on any relationship with a shareholder who

holds directly or indirectly shares representing not less than

5% of all voting rights. This obligation concerns any kind

of relationship which may affect the position of the

member on issues decided by the Board.

X

A.4. The annual report should inform on whether an

evaluation of the Board has taken place under the leadership

of the chairman. It should also include the number of the

meetings of the Board.

X

A.5. The procedure regarding the co-operation with the

Authorized Advisor for the period when this co-operation is

requested by Bucharest Stock Exchange.

X

The 12-month period following the admission to

trading for the mandatory maintenance of

contractual relationships with an authorized advisor

(provided for in Chapter II, Article 5, para. 2 (b) (ii)

of Chapter II of the Bucharest Stock Exchange

Code of Corporate Governance), expired on

19.06.2016. Therefore, given that at present, such a

legal obligation no longer subsists,



17

there is no longer any contractual relation what so

ever established between the company and an

authorized advisor, as laid down in the current

report No. 835, issued on 21.06.2016.

B.1. The Board should adopt a policy ensuring that any

transaction of the company with any of its subsidiaries that is

equal to or more than 5% of the net assets of the company as

stated in the latest financial report should be approved by the

Board.

X

B.2. Internal Audit Performance

X

C.1. The company should publish in its annual report a

remuneration report including the total revenues for the Board

members and the CEO for the past financial year and the total

value of any bonus payments or other variable compensations

and also the key assumptions and guidelines for calculating

the above revenues.

X

D.1. In addition to information required by legal

provisions, the corporate website should have a dedicated

Investors Relations section, both in Romanian and English,

with all relevant information of interest for investors,

including:

D.1.1. Principal corporate regulations, in particular the

articles of association and internal regulations of its

governing bodies

X

D.1.2. Professional CVs of the members of its governing

bodies X

D.1.3. Current reports and also periodic reports X

D.1.4. Information related to general meetings of

shareholders: agenda and the materials sustaining the

agenda of the meeting; the resolutions of the general

meetings

X

D.1.5. Information on corporate events, such as payment of

the dividends, or other events leading to the acquisition or

It has not been the case



18

limitation of rights of a shareholder, including the

deadlines and principles of such operations

D.1.6. Other extraordinary information that should to be

provided: the break down/ change/ start of cooperation

with an Authorized Adviser (AA); the signing/ renewal/

termination of agreement with a Market Maker

It has not been the case

D.1.7. The company should have an investor relations

function (IR), and will include on the IR section of the

company’s website the name and contact data of a person

who should be able to provide knowledgeable information

on request.

X

D.2. A company should have adopted a dividend policy of

the company, as a set of directions related to the

distribution of net profit that the company declares to

follow. The dividend policy principles should be published

on the corporate website.

X

Dividend policy has not been developed at this

time, given the negative financial results recorded

by the company in recent years. In case the

company records a constant positive evolution in

the next financial years, meant to ensure the

Company a strong financial position, the Company

will consider the allocation of profit to either

reinvest it either in the payment of dividends, based

on the decision of general meeting of shareholders.

D.3. A company should have adopted a policy with respect

to forecasts, whether it would be distributed or not.

Forecast means the quantified conclusions of studies aimed

at determining the total impact of a list of factors related to

a future period (so called, assumptions). The policy should

provide for the frequency, the period envisaged and content

of forecasts. Forecasts, if published, may only be part of

annual, half-yearly or quarterly reports. The forecast policy

should be published on the corporate website.

X

At the date of drafting this report, the company

didn’t have a policy with respect to forecasts in

place.


D.4. A company should set the date and place of a general

meeting so as to enable the participation of the highest

possible number of shareholders.

X

D.5. The financial reports should include information in X


19

both Romanian and English as regarding the key drivers

influencing the change in sales, operating profit, net profit

and other relevant financial indicators.

D.6. The company should organise at least one

meeting/conference call with analysts and investors each

year. The information presented on these occasions should

be published in the IR section of the website of the

company at the time of the meeting/conference call.

X

In course of being organised

Illegible Signature Illegible Signature

President of the Board of Management Member of the Board of Management

Gabriela Petrea Patrick Leamy

Applied official stamp of Agrana Romania S.A.

24.05.2017

TRANSLATOR

I, ALBU MARIA CAMELIA, sworn translator and interpreter for the foreign language English, with Authorization number 8963 of 22.05.2003 issued by the Ministry of Justice of

Romania, hereby certify this translation to be accurate and true to the original document in Romanian, that the presented text was fully translated, without any omissions, and that,

through the translation, the content and meaning of the document were not distorted.

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