Contents

1.Subject of the business activity of the Apator Group

2.Description of the Apator Group structure

2.1. Composition of the Apator Group as of December 31, 2014

2.2. Consolidated entities

2.3. Changes in the basic management principles of the Issuer and its Capital Group and changes in the composition of the Apator Group in 2014

3.Statement of the Management Board on the entity authorized to audit the financial statements

4.Statement of the Management Board of Apator SA on preparation of the financial statements and the Management Report

5.Description of the basic economic and financial figures

5.1. Assessment of factors and unusual events affecting the financial results in 2013 and the following years

5.2. The most important successes and failures of the Issuer in the fiscal year

5.2.1. Basic trends in the economy and the tempo of economic growth

5.2.2. Operating branches of Apator

5.2.3. Sales analysis and structure

5.3. Financial results

5.4. Financial standing analysis

5.5. Employment

5.6. Assessment of investments capacity

5.7. Prospectus and development factors for the business activity

5.7.1. Development factors

5.7.2. Risk and threats factors

6.Purchase process, supply sources

7.7. Assessment of financial resources management

8.Borrowings

8.1. Information on drawn and terminated borrowing agreements in the fiscal year

8.2. Information on granted loans in the current fiscal year

9.Information on granted and received warranties and guarantees in the relevant fiscal year

10.Agreements concluded by the company and the members of the Management Board

11.Stocks and shares held by the members of the Management Board and Supervisory Board of Apator SA

11.1. Supervisory Board

11.2. Management Board and Proxies

12.Proceedings in progress before the court, entity competent for the arbitrage proceeding or public administration entity

13.Information on transactions concluded on terms and conditions other than arm’s length principle

14.Information on agreements concluded, which are significant for the Issuer’s business activity

14.1. Agreements between shareholders

14.2. Trade agreements

14.3. Cooperation agreements

14.4. Insurance agreements

15.Description of the structure of the main capital deposits or main capital investments made within the Apator Group in 2013

16.Information on issuance of securities

17.Information on agreements which may result from change of the proportion of the shares held by the present shareholders

18.Employee programs control system

19.The performance of the forecast of the consolidated financial results in 2014

20.

Appendix: Statement on applying the corporate governance principles

1.List of Apator SA shareholders holding, directly or indirectly, the significant block of shares

1.1. Description of the basic features of the internal control and risk management, in relation to the process of preparing financial statements and consolidated financial statements

1.2. Specification of the holders of any securities giving special control rights, including their description.

1.3. Limitations to the execution of voting rights

1.4. Indication of any limitations regarding the transfer of the ownership rights of Apator SA shares

1.5. Description of the rules for appointing and recalling the members of the managing bodies and their rights, in particular the right to make a decision regarding the issuance or buy-out of shares

1.5.1. General Meeting

1.5.2. Supervisory Board

1.5.3. Management Board

1.6. Description of the changes to the Articles of Association of Apator SA

1.7. General Meeting operation principles

1.8. The composition of the managing and supervising bodies of Apator SA, along with its changes during the last fiscal year and a description of its activity

1.8.1. Management structure of Apator SA as of December 31, 2014:

1.8.2. Supervisory Board

1.8.3. The Auditing Committee of the Supervisory Board of Apator SA

1.8.4. Management Board

Signatures

  1. Subject of the business activity of the Apator Group

The business activity of the Companies of the Apator group is focusedon the following segments:

  • Metering- business lines: water and heat metering, electric energy metering, gas metering,
  • Power grid automation: business lines: ICT switchgear and control and monitoring systems,
  • Other non-core- business lines: control gear and mining equipment.

The classification of the business line to segment of the Apator Group changed in the consolidated annual results of the Apator Group for 2014 (and comparative version of 2013): ICT line moved from metering segment to power grid automation. This change is a result of better fitting of the business nature of this line to the segment definition and the direction of its further growth according to the strategic assumptions of the Apator Group.

  1. Description of the Apator Group structure
  2. Composition of the Apator Group as of December 31, 2014

The parent entity of the Apator Group is the company Apator SA.The diagram below presents the chart flow of the Apator Group as of December 31, 2014.

After the reporting period

  • On February 26, 2015, the subsidiary Apator Metrix SA entered into the agreement on acquisition of other 50% shares of George Wilson Industries Ltd.(GWi).Thus Apator Metrix SA holds 100% shares in GWi;
  • On April 1, 2015, the subsidiary Apator Powogaz SA acquired 100% shares in the Danish company MiitorsApS.
  • Consolidated entities

The consolidated entities are presented in the item 1.4 of the Annual Consolidated Financial Statements for 2014 of the Apator Group (Annual Report RS-2014)

2.3.Changes in the basic management principles of the Issuer and its Capital Group and changes in the composition of the Apator Group in 2014

1)Apator SA- changes in the management principles:

On May 6, 2014,The Supervisory Board of Apator SA decided to appoint Mr Piotr Nowak as the Member of the Management Board- Financial Director as of July 1, 2014.Increasing the number of the members of the Management Board is an effect of the Group strategy for 2014-2019.Member of the Management Board- Financial Director is responsible for the integration of financial areas inthe Apator Group, growth of effectiveness in management of finance and looking for the sources to increase in value of the capital group.

In 2014, Financial Directorrestructured the financial division, appointed the new organizational units- the Controlling Division and commenced the Finance Committeecomposed of the chief accountants of the Apator Group companies.The Committee meets once per month.The Committee is responsible for finance activity coordination, information exchange, cooperation and common initiatives.

From July 1, 2014,the composition of the Management Board of Apator SA was as follows:

  • Andrzej Szostak- President of the Management Board
  • Tomasz Habryka- Member of the Management Board
  • Jerzy Kuś- Member of the Management Board
  • Piotr Nowak- Member of the Management Board.

After the end of the period, i.e. on February 1, 2015, Tomasz Habryka held a position of the President of the Management Board of Apator Elkomtech SA.In connection with the above, after the transfer of the business duties, on March 31, 2015 Mr Tomasz Habryka resigned from the function of the Member of the Management Board of Apator SA.From April 1, 2015,the Management Board of Apator SA is composed of three persons.

2)Apator Elkomtech SA- shares acquisition agreement

On April 1, 2014, Apator SA acquired 100% shares of Elkomtech SA with the registered office in Łódź, which is this a leading, Polish supplier of IT systems of SCADA class and compatible telemechanics equipment, securities and many other grid equipment for the dispersed systems, assuring the wireless controlling and supervising of the energy power grid in the field of voltage.

The shares purchase price amounted to PLN 98.4 M, whereas Apator SA acquired also the cash amounting to PLN 7.8 M.The acquisition of Apator Elkomtechwas financed by the long-term credit.

The acquisition is a result of the Apator Group development strategy, which in the power grid automation assumes:

Comprehensive service of customers of power engineering segment in the scope of in the field of technical infrastructure management systems and smart systems,

Offering the comprehensive tool to whole power grid automation at all voltage levels.

On January 2 M.6, 2014 the company registered the change of the name into Apator Elkomtech SA.

3)Apator Rector sp. z o. o.– shares acquisition:

On June 30, 2014,.Apator SA acquired 30% of shares of the subsidiary Apator Rector Sp. z o.o. amounting to PLN 17.9 M.The transfer of property rights took place on July 1, 2014.Currently, Apator SA holds 100% shares in Apator Rector Sp. z o.o.

The acquisition of the aforementioned shares was made on the conditions of the investment agreement of December 30, 2010 between Apator SA and two natural persons.

4)Apator GmbH- share capital increase:

On January 31, 2014 the share capital was increased in subsidiary - Apator GmbH (Germany) from EUR 50 000 to EUR 70000.

5)FAPPafal SA- decrease of the share capital, company restructuring:

On February 12, 2014 Apator SA sold FAPPafal SA 111 k its shares at PLN 2997 k.The purchase price amounted to PLN 2897 k.These shares, along with the other shares bought in 2013, were redeemed in Q4 2014.

The restructuring process FAPPafal SA has been lasting and resulted of transfer of the manufacturing of electronic electric energy meters to Apator SA, located in the Pomeranian Special Economic Zone.

From Q2 2015, the activity of FAPPafal SA is concentrated on manufacturing of inductive electricity meters and rendering the service related to the electric energy meters.

6)Changes after the reporting period

a) the classification of the business line to segment of Apator Group was changed in the consolidated annual results of the Apator Group for 2014 (and comparative version of 2013): ICT line was moved from metering segment to power grid automation;

b)On February 26, 2015 the subsidiary Apator Metrix SA entered into the agreement on acquisition of other 50% shares of George Wilson Industries Ltd.(GWi) at GBP 5.4 M (PLN 30.6 M); thus Apator Metrix SA is a holder of 100% shares in GWi;

c)On April 1, 2015 the subsidiary Apator Powogaz SA acquired 100% shares in the Danish company MiitorsApS at PLN 25.5 M (EUR 6.2 M)The total price at the enterprise value level amounted to PLN 28.8 M (EUR 7 M) - the difference is a result of refinancing of loans to shareholders and other price adjustment; the company operates in the metering segment and deals with design of modern ultrasound hot and cold water, flow sensors and heat meters.

  1. Statement of the Management Board on the entity authorized to audit the financial statements

The consolidated financial statements were audited by the entity authorized to audit financial statements- KPMG Audyt Spółka z ograniczonąodpowiedzialnością sp. k. with the registered office in Warsaw pursuant to the decision of the Supervisory Board SA of December 12, 2013.This audit was carried out under the agreements of January 7, 2014 on audit and review of interim and annual separate and consolidated financial statements for 2014-2016.

Pursuant to the aforementioned agreements for 2014, the remuneration of the entity authorized is:

  • For the audit of the separate financial statements and review of the consolidated financial statements for the first half of 2014, the remuneration is PLN 46 k net (for the first half of 2013:PLN 46 k);
  • For the audit of the separate financial statements and review of the consolidated financial statements for 2014, the remuneration is PLN 83 k net (for 2013:PLN 69 k).

Moreover, Apator SA bears the cost of travelling, meals and accommodation of the employees performing the audit.This amount cannot exceed PLN 9.5 k net for the audit and review of the interim financial statements and PLN 15 k net for the audit of the separate and consolidated annual financial statements.

In 2014, KPMGAudyt Sp. Z o.o. sp. k did not render any other services for Apator SA.In 2013, the costs of the additional services amounted to PLN 18 k net.

Apator SA has been using the services of KPMG Audytspółka z ograniczonąodpowiedzialnością sp. k., starting with the audit of interim financial statements for 2011.

  1. Statement of the Management Board of Apator SA on preparation of the financial statements and the Management Report

The Management Board of Apator SA, being composed of:

  • Andrzej Szostak- President of the Management Board
  • Piotr Nowak- Member of the Management Board,
  • Jerzy Kuś- Member of the Management Board,

represents that the entity authorized to audit financial statements, KPMG Audyt Spółka z ograniczonąodpowiedzialnością sp. k., which audited the annual consolidated financial statements was selected in compliance with the law.The Supervisory Board of Apator SA elected the entity to audit and review the financial statements on December 12,2013 pursuant to § 20 of the Articles of Association of Apator SA i.e. in a manner that assures its independence to perform its tasks The election of the entity authorized to audit financial statements was performed pursuant to the applicable regulations and professional standards.

KPMG Audyt Spółka z ograniczonąodpowiedzialnościąsp.k.-entered into the register of the entities authorized to audit financial statements with KIBR number 3546, as well as members of its Management Board and statutory auditors carrying out the financial audit for Apator SA and its subsidiaries, meet the requirements of fairness and independency specified in Art.56 of the Act of May 7, 2009 on the Statutory Auditors, Their Self-Governing Organisation and Entities Authorised to Audit Financial Statements and on Public Oversight.

  1. Description of the basic economic and financial figures
  2. Assessment of factors and unusual events affecting the financial results in 2013 and the following years

The acquisition of Elkomtech SA on April 1, 2014 and including this company into consolidation from the Q2 2014 has the significant influence on the financial results of Apator.In 2015 the financial figures of this company will affect the financial results of the Apator Group and grid automation segment.

Other positive factors:

  • good economic situation on the Polish market- market increase in almost all business lines,
  • Improvement of the profitability in the water and heat metering lines, switchgear lines and gas metering line (including the very positive impact of the profit consolidation of GWi UK)
  • Sales increase in the electric energy metering line.

Negative factors:

  • Failure to perform the financial plan by ICT line due to delays in performance of the significant contracts and increase of the software manufacture cost,
  • Failure to perform the financial plan by the companies not classified to the core business activity (Apator Mining- crisis in the mining segment, Apator Control- disturbance of the contracts order upon completing of the big project for Arcelor Mittal Poland),
  • A significant decrease of prices and press on margins in the electric energy metering and gas metering lines,
  • Increase of USD exchange rate negatively affecting the materials price increase (electronic and electrotechnics) from the second half of 2014,
  • Conflict Russia- Ukraine and its impact on the economic situation in Russia- Rouble devaluation; import competitiveness decrease visible in switchgear equipment lines.

Other significant events:

  • Adoption of new strategy for 2013-2019,
  • Strategy operationalization – adoption of the initiatives for 2014 in all business lines,
  • Starting the business integration process between ICT, control and monitoring and switchgear lines,
  • Increasing the Management Board of Apator SA by the Financial Director and adoption of the finance department development plan in the Apator Group,
  • Smart systems and solutions development:

Electric energy metering- development of open PRIME technologies (at its own) and OSGP technologies (in collaboration with Echelon/NES).Participation in the consortium performing the Smart City Wrocław Project for Tauron Dystrybucja (along with the option of delivery of app.350 k smart meters in the system, whereas 40% is to be performed by the Apator Group),

gas metering: further development of smart gas meters designated to the Belgium market- submission of tenders for pilot projects,

  • Preparation of the development plan for the German market.
  • The most important successes and failures of the Issuer in the fiscal year

Achievements:

  1. Good financial standing of the Apator Group in 2014:

The Apator Group generated good financial results and completed the financial results forecast.The crucial level of the sales increase of the Apator Group was the consolidation of the results of Apator Elkomtech SA from Q2 2014 and increases in the metering lines: water and heat, gas and electric energy.The high sales to Secure (to Indie with designation to the Great Britain) appear to have replaced the completed big contract for gas meters delivery to Denmark/Holland.A difficult situation on the Russian market negatively affected the results of the Apator Group.The significant improvement of the joint-controlled company GWi (renovations of gas meters in Great Britain) positively affected the increase of profit for the year.

At the end of 2014 the Group held a huge amount of cash:PLN 60102 k (increase by 240% yoy), despite of the long-term credit.The financial standing of the Group is stable.The Group pays its liabilities on time, realizes the planned investments and the Management Board of the parent entity proposed the dividend higher than in the previous year amounting to PLN 0.80 per share.

  1. Development strategy for 2014-2019 and performance in 2014

Strategic goals 2014-2019 / Performance 2014
Change of the business model /
  • Division into segments: metering and grid automation
  • Expansion of the grid automation by control and monitoring systems- acquisition of Elkomtech
  • Business model balancing

Target revenue over PLN 1.5 bn (average annual growth 15.1%) /
  • Revenue:PLN 725 M, increase by 6%

Average annual growth rate EBIDTA within 10% - 15% /
  • EBITDA:PLN 131 M, increase by 23%

Over 60% revenues from foreign markets /
  • Export share:45%- no threat to the goal despite of the unfavourable conditions in Russia

50% EBIDTA from electric energy distribution segment /
  • 36% EBIDTA from electric energy distribution segment

5.2.1.Basic trends in the economy and the tempo of economic growth

5.2.2.Operating branches of Apator

Metering segment- electric energy metering line:

The sold production of energy meters in 2014 increased by 16% (Main Statistical Office).Apator SA and Pafal SA (energy meters line) significantly participated in this increase.This increase referred first to communal meters without communication and is a result of the slow growth of smart meters (no technical specification for Poland).Small tender procedures for smart meters and AMI infrastructure noticed or awarded at the beginning of 2014 are still continued: in Energa (3rd stage of implementation), in Tauron Dystrybucja (Smart City Wrocław Project), in PGE Distribution (supplies of smart meters and concentrators in ŁodźMiasto and Białystok branches) and in Ennea, where the technical consultation has been carried out. Due to the “combined” tender procedure for balancing meters, the risk related to contract award (first Contracting Party) increased.There is still lack of announcement of technical specification prepared for smart meters that the entire metering segment has been waiting for.There is also lack of official schedule for implementation of AMI and smart meters approved in Poland, therefore it has the influence on priorities of R&D and causes the additional uncertainty among potential suppliers.