MANAGEMENT REPORT OF FABRYKA FARB I LAKIERÓW “ ŚNIE …€¦ · 39-102 Lubzina 34 a Ropczycko-Sędziszowski Poviat Podkarpackie Voivodship Company’s incorporation: The Company

MANAGEMENT REPORT OF

FABRYKA FARB I LAKIERÓW “ ŚNIEŻKA” S.A.

in LUBZINA FOR 2009

Fabryka Farb i Lakierów Śnieżka S.A. in Lubzina

Management Report for 2009 Page 2

1. Introduction to the Management Report .................................................. 3

2. Company’s strategic objectives .................................................................. 5

3. Economic situation in Poland and in the industry in 2009...................... 6

4. Paints and varnishes market in 2009......................................................... 8

5. Impact of the economic situation on the Company’s performance in 2009 ............................................................................................................... 9

6. Sales and orders on hand............................................................................ 9

7. Production .................................................................................................. 14

8. Research and development ....................................................................... 15

9. Supply policy .............................................................................................. 15

10. Use of the environment ............................................................................. 16

11. Investments................................................................................................. 17

2. Investment activities in 2009 were aimed at:.............................................. 18

12. Employees................................................................................................... 19

13. Finances ...................................................................................................... 21

14. Basic risks and threats related to operation on the market of paints and varnishes ..................................................................................................... 28

15. Declaration on corporate governance...................................................... 32

16. Notes............................................................................................................ 33

17. Summary .................................................................................................... 43



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

Company’s incorporation:

The Company operates based on the Articles of Association passed by the Meeting of Shareholders drafted in the form of a notarial deed, Repertory A, No. 121/98, supplemented with Deed No. 754/98 of 16.02.1998. The entry into the commercial register was made by the District Court in Rzeszów, 5th Economic Division, on 17.02.1998 under Commercial Register No. 1818, Section B, whereas the Company’s registration in the National Court Register under number 0000060537 took place on 12.11.2001 in the District Court in Rzeszów, 12th Economic 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 receiving the Tax Identification Number (NIP) 818-14-33-438. Company’s business: Manufacture of paints, varnishes, solvents, adhesives, fillers, 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. On 1 August 2009, FFiL Śnieżka S.A. took over production of powder paints and varnishes from Fabryka Farb i Lakierów Proszkowych PROXIMAL in Bytów. Production of powder paints and varnishes takes place at the facility of PROXIMAL in Bytów at ul. Leśna 5, Pomorskie Voivodship.



Share capital: Pursuant to art. 359 of the CCC, on 25 June 2009 the General Meeting of Shareholders redeemed C and F-series bearer shares in the total number of 296,413 for the amount of PLN 296,413, i.e.

� 20,000 C-series bearer shares, � 276,413 F-series bearer shares.

This redemption was voluntary. The legal grounds for the redemption was § 6, para. 8 of the Company’s Articles of Association and art. 359 and 360 of the CCC. The shares were redeemed by way of decreasing the share capital pursuant to art. 455 § 1 of the CCC. The shares were redeemed from the net profit. 296,413 C and F-series shares were redeemed at PLN 24.85 per share. The share premium of C and F-series shares amounting to PLN 7,069,450.05 was covered from supplementary capital. At the same time, pursuant to art. 360 of the CCC and resolution no. 8/2009 adopted by the Ordinary General Meeting of Shareholders on 25 June 2009 on the redemption of treasury shares, the General Meeting of Shareholders decreased the Company’s share capital from PLN 13,850,000 to PLN 13,553,587, i.e. by PLN 296,413. The fact of decreasing the share capital results from the Company’s acquisition of C and F-series treasury shares for the purpose of their redemption pursuant to Resolution No. 4/2008 of the Extraordinary General Meeting of Shareholders of Fabryka Farb i Lakierów „ŚNIEŻKA”S.A. based in Lubzina, adopted on 17 March 2008 on giving consent to the Company’s Managing Board for the acquisition of treasury shares for the purpose of their redemption. At the same time, the General Meeting of Shareholders authorised the Company’s Managing Board to acquire treasury shares for the purpose of their redemption under conditions and according to the procedure defined in the resolution (“Buyback of treasury shares”) and to take all measures necessary to acquire the Company’s shares. The Company shall purchase treasury shares under the following conditions:

a) the total number of shares purchased shall not exceed 10% of all the Company’s shares, i.e. 1,355,358 shares,

b) shares shall be purchased on the Warsaw Stock Exchange and outside the regulated market,

c) the amount of funds for the buyback of treasury shares shall not be higher than PLN 53,000,000.

The Managing Board was authorised to purchase treasury shares for the period of 18 months from the date of passing this resolution; however, not longer than until the moment of exhausting the resources allotted for the purchase of treasury shares. The date for starting and completing the purchase of treasury shares shall be specified by the Managing Board and announced to the public. The funds for the purchase of treasury shares shall be allocated from the Company’s own resources. Each acquisition of treasury shares of the value of more than PLN 100,000 requires a consent of the Company’s Supervisory Board with the maximum of one vote against. The price for which the Company shall purchase treasury shares cannot be the higher between the price of the last independent trade and the highest current independent bid on the WSE.



Bearing in mind the Company’s interest, the Company’s Managing Board may terminate the purchase of treasury shares before the above-mentioned date or give up share purchasing.

After 25 June 2009 and by the end of December 2009 further 2,911 shares were purchased for PLN 90,371.83 for the purpose of their redemption. Company’s representation:

Supervisory Board:

� Stanisław Cymbor – Chairman � Jerzy Pater – Vice-Chairman � Jakub Bentke – Member � Zbigniew Łapiński – Member � Stanisław Mikrut – Secretary

In 2009 the composition of the Company’s Supervisory Board did not change. Managing Board: Piotr Mikrut – President of the Managing Board since 31 March 2004 to date. Witold Waśko – Vice-President of the Managing Board since 1 April 2005 to date. Joanna Wróbel-Lipa – Member of the Managing Board since 18 December 2007 to date. Walentyna Ochab – Member of the Managing Board since 18 December 2007 to date. In 2009 the composition of the Company’s Managing Board did not change. 2. Company’s strategic objectives The long-term development strategy for Śnieżka provides for taking a leading position on the CEE market of paints and varnishes, while acquiring some new markets for the Company products. To this end, the Company is planning activities leading to the consolidation of its current position in major markets, expansion into new markets as well as marking its presence and development in new market segments. The Company intends to continue its efforts aimed at product quality improvements by means of innovative solutions, and to expand its range of products in accordance with customer needs and market trends. These activities are intended to enhance the positive image of the Company as well as its product brands, and ultimately contribute to further increase in the Company’s value for its shareholders. In 2009 the Company continued its activities aimed at providing its customers with high quality products, taking into account the changing market conditions and consumer preferences. The Company developed and started preparations to implement a new vision of Śnieżka's portfolio management which will be based on the multi-brand strategy consisting of creating brands for groups of products which are strong in individual segments. These activities included e.g. increasing the Company’s production capacity and introducing a number of innovations in selected groups of products. The accomplishment of the afore-mentioned goals and the gradual development of the sales network have been made possible thanks to the following:



- closer cooperation with the current domestic Business Partners and developing good relations with them,

- closer cooperation with foreign contractors, - development of an international capital group, whose goal is to expand both in terms of

territory and products, - developing production base, storage and technological facilities to meet the Company’s

needs and growth plans.

Plans for 2010 and the following years provide for continuation of previously initiated measures. As regards gaining new markets, the Company’s strategy provides for gradual introduction of its products to distribution channels in new geographic areas. At present, the Company sells its products mainly to Central and Eastern European countries (Ukraine, Belarus, Russia, Moldova, Lithuania, Slovakia, Romania, and Latvia). We have to stress 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 further increase of its share in the current markets.

At the same time the Company intends to focus on two customer groups: retail customers and contractors, with particular emphasis on measures which serve strengthening its position and image in the second group.

Implementation of these objectives is directly linked to Śnieżka’s policy regarding expansion of the Capital Group. The Company’s priority objective is to create and develop a professional network of dealers on foreign markets and supply such a network with a complete range of the Company’s products. Locating production facilities in new countries requires a number of economic calculations as well as a thorough insight into the nature of the new markets, conditions for operating therein, their specific legal and tax regulations and possible local requirements and restrictions. For this reason the Company uses the assistance and support of local partners, which has proved to be an effective and efficient solution. Despite the economic slowdown caused by the recent events on the global financial markets, the Company’s Managing Board is of the opinion that the Company will consistently pursue its pre-defined strategic objectives. Their accomplishment will allow the Company to develop towards a leading position in a competitive market. 3. Economic situation in Poland and in the industry in 2009

Economic situation in 2009 2009 was undoubtedly one of the most difficult tests for the Polish enterprises. Events observed at the end of 2008 on the global markets upset the world economy. The Polish economy fell in Q4 2008, then was in stagnation during H1 2009 and started to revive in Q3 2009 owing to signals from the world economy. Despite deflation in the Eurozone, the CPI inflation in Poland remained at a raised level. Its rate slightly decreased in Q3 2009 to 3.6% y/y due to lower prices of energy and food. An upward trend in consumer prices of industrial goods and fuels was in contrast due to a weaker PLN exchange rate on an annual basis and increasing prices of crude oil. Despite a gradual acceleration in the economy,



the demand pressure remained at a very high level. The gradual strengthening of PLN had also a positive impact on a decrease in price dynamics y/y. In 2009 the CPI inflation rate was 3.5%. The forecast rate for 2010 is 2.1%. In Q3 2009 the conditions on the labour market were still deteriorating due to poor dynamics in economic growth; however, the scale of this phenomenon was less than expected. This shows the great flexibility of the labour market. There were also positive signals. Due to these tendencies, forecasts for the dynamics of average payroll, actual payroll included, unemployment and employment rate were revised positively. In 2009 it was anticipated that employment acc. to the LFS (Labour Force Survey) during the whole 2009 would be higher on average compared to 2008, despite an expected decrease in the last quarter of the surveyed year. To a large extent an increase in unemployment is justified by the increased economic activity of people, which is surprising at the time of an economic recession. It is very difficult to explicitly point to the causes of this phenomenon e.g. professional activation policy or more difficult access to early retirement. At the end of 2010, the rate of registered unemployment is forecasted at 13% and the unemployment rate acc. to the LFS (Labour Force Survey) will be then 9-10%. Unemployment will be going up by mid 2010 (when the GDP growth exceeds 3% y/y). According to experts, in 2010 the revival will consolidate and the GDP will rise by 3.2%. The driving forces will be: export sales thanks to a global revival, including in the EU plus public investments in the infrastructure. Private expenditure on fixed assets will be falling still, but a better climate will facilitate its growth, although difficult access to loans will be a barrier. Private consumption will rise at a moderate rate as it has been so far, because unemployment will be rising still and the companies will be still reducing their production costs.

Situation on the construction market in 2009

2009 was to be at least a problematic year for the construction industry. However, it turned out that, against the forecasts of international institutions, the Polish economy and similar the construction sector managed well. Despite the fact that the construction industry was to be the most exposed to crisis, businesses from this sector managed to weather the crisis and the forecasts are becoming increasingly optimistic. Gdańsk Institute for Market Economics claims that the construction sector, at the beginning of the crisis indicated as one of the most exposed to its effects, was not affected as expected.

The research of the Central Statistical Office shows that the ratio of the economic situation in the construction industry is still negative at -8 points, which nevertheless is a huge jump compared to -30 points several months ago, however the situation in this industry is evaluated by the industry as improving. The largest enterprises, with employment exceeding two hundred and fifty people, had positive opinions of the situation in the sector in August (+ 6 points). It was not that optimistic with small enterprises with the employment of max. 10 people where negative opinions prevailed (-16).

The most difficult barrier for construction companies was visible competition on the market, which was indicated by as many as 6 out of 10 companies surveyed.



Every second entrepreneur in the sector claims that employment costs and insufficient demand are problematic. And the significance of the last factor grew most compared to the situation from the last year (49.3% of opinions this year compared to 20.5% last year).

From the point of view of a manufacturer of paints, the situation in the sector of interior finishing and furnishings is of particular importance. Here, growing unemployment is a problem, despite the fact that it is less than was expected. Higher unemployment translates into less income for people, which means less money for finishing flats or houses. On the other hand, the growing number of major public utility investments is a chance for their finishing and furnishing. The current loan policy of banks is also a threat to the growth in the sector of construction and interior furnishing, since it limits the level of funds available both to businesses and people.

4. Paints and varnishes market in 2009

Market size

Over the recent years, the Polish paints and varnishes industry has been characterized by considerable dynamics in production growth. However, the economic weakening during the last year as well as a slowdown in the construction industry coupled with the slump in the financial markets, had an undoubted impact on the market of paints and varnishes in Poland. It is estimated that in 2009 the market of paints and varnishes was worth around PLN 3 billion. The current average consumption of paints and varnishes per inhabitant in Poland (approx. 9.5 litres), when compared to that of other EU countries (15 litres per inhabitant) or of the USA (20 litres per inhabitant), allows for the assumption that this market will grow further over the next years. Manufacturers of paints and varnishes. Market segmentation. The largest businesses in the industry (except Śnieżka) are controlled by foreign investors from the industry. Recently, the global industry of paint and varnish manufacturers has witnessed mergers and acquisitions of the largest industry players. Following the acquisition of the ICI group by Akzo Nobel (in Poland: Akzo Nobel Coatings Sp. z o.o), the SigmaKalon group was acquired by an American concern PPG. Since January 2009, SigmaKalon Deco Polska Sp. z o.o. has operated on the Polish market as PPG Deco Polska Sp. z o.o. According to the estimates, Śnieżka ranks first in Poland in the field of decorative products in terms of quantity (17%).



Śnieżka is best established in the segment of emulsion products, where it shares the top position with its biggest competitor PPG Deco Polska. Śnieżka’s major competition in Poland, except those already mentioned, are Akzo Nobel (Nobiles, Sadolin, Dulux, and Hammerite brands) and PPG (Dekoral, Dekoral Professional, Domalux, Drewnochron, and Cieszynka brands) and Tikkurila (Tikkurila, Beckers, Polifarb Dębica and Jedynka brands). As the estimates show, these four entities in total control approx. 55-60% of the market. Approx. 20-25% of paints sold in Poland are imported. Śnieżka is currently the only company in the industry which is listed on the Warsaw Stock Exchange.

5. Impact of the economic situation on the Company’s performance in 2009 The external factor with the greatest impact on the Company’s situation in 2009 involved pessimistic feelings related to the situation on the construction market. The economic downturn was not as severe as expected, however together with a decrease in the value of PLN in H1 of 2009 it had a negative impact on the Company’s results. The Polish economy rushed into 2010. The rate of growth of the gross GDP in Q4 2009 reached approx. 3%. However, further development of the situation in H2 2010 is a big question mark. Whether the Polish economy keeps a high rate of economic growth from the end of the year will depend mostly on the situation abroad. As much as processes taking place in the national economy may instil optimism, we should be concerned about the second wave of a global slowdown. 6. Sales and orders on hand Development of the market offer

Udział FFiL Śnieżka SA w rynku wyrobów dekoracyjnych w ujęciu ilościowym (dane szacunkowe FFiL Śnieżka S.A.)

inni83%

FFiL Śnieżka S.A17%

FFiL “ Śnieżka” S.A.’s share in the market of decorative products by volume (estimates of FFiL “ Śnieżka” S.A.)

FFiL Śnieżka S.A. 17%

others 83%



With the aim to achieve a significant position on the market, the Company continues to improve what it offers, as demonstrated by the regular changes in the portfolio. Innovative technological solutions such as Teflon surface protector or nanotechnology allow us to offer high quality products, contributing to their improved competitiveness. The Company makes efforts to have the good quality of its products proved by independent research centres. The tests performed show that surfaces painted with the products for protection and decoration of wood containing Teflon surface protector show improved durability and resistance to external factors. Thus, as of the 2009 season the Company introduced a 6-year guarantee for surfaces painted with its protective and decorative impregnate, protective wood stain and protective and decorative lazure, as well as a 7-year guarantee for ŚNIEŻKA Na Rdzę which also contains Teflon surface protector. In 2009 the decisions were also taken regarding changes to be made in the quantitative structure of the Company’s brands. We started works leading to the introduction of new groups of products offered under individual brands. This is a long-term strategy for building reliable brands with strong autonomy. The application of a multiple brand strategy will allow us to offer groups of products with a specifically defined field of application, which have various positionings and are addressed to various market segments, which will facilitate reaching a target customer. As a result, the 2010 season will feature new brands: VIDARON for wood protection and decoration products, FOVEO TECH for the insulation system and BESTON for silicones and foams. As regards the ŚNIEŻKA brand, several changes were prepared in the product offer for the 2009 season. We expanded the colour range of the flagship product the Barwy Natury emulsion paint, by introducing 6 new colours adapted to the current trends. We also modified the formula of the base for the Perfekt wall emulsion paint by adding Teflon surface protector. This ensures even better protection of walls against dirt and stains and makes it easier to keep them clean. As part of extending the portfolio of the ŚNIEŻKA brand, we introduced a base for the Kuchnia-Łazienka wall emulsion paint, which can be coloured in any of 100 colours of choice, and Acry-Putz Flex putty with elastic fibres. In the 2009 season the portfolio of the MAGNAT brand was also expanded. The possibility of colouring the latex emulsion paint for walls through the MAGNAT colouring system is a significant expansion in the range of services offered. The system of more than 1600 colours developed for the Company’s purposes offers a possibility of satisfying the various tastes of customers as regards colours. The expanded range of colours available is also an opportunity of increasing the brand's share in the investment market. The new season also features a modified offer of the MAGNAT interior emulsion paint in ready-made colours. 7 new colours have been introduced which refer to the most popular trends presented at the design fairs. A more complete collection of colours gives the possibility of creating attractive combinations of colours and decorating interiors according to individual needs and modern styles. The range of MAGNAT emulsion products is complemented with the latex priming paint introduced in 2009 which, together with the latex emulsion, constitutes a complete system for painting interior walls. With the aim to create a complete range of the MAGNAT brand in the field of interior decoration, we have decided to introduce a collection of self-adhesive velour wall decorations. This is an expansion of the already existing collection of paint templates and offers consumers new methods for interior decoration. The offer comprises 30 various motifs, each of them in 3 attractive colours, which allow for creating original interiors.



We are also successively expanding the offer of the line of wall decorations MAGNAT Style. In the 2009 season it was expanded with four new products: Grassi – an addition to the Venetian Clay, Pergameno – a spatial structure with the texture of crumpled paper, Quarzo –paint creating a surface with the sand texture and the Velluto acrylic paint, delicately imitating velvet. The offer development shall enable effective competition both on the market of individual customers as well as contractors and architects. In order to ensure comfort of work of users, we have expanded the offer with professional painting tools for painting, varnishing and decorating. As regards industrial articles, i.e. FLAMESORBER fire-protective paints and PROXIMAL powder paints, works were conducted to develop the offer (new goods and surface finishing) and to streamline the technical support. High quality innovative products are one of the key tasks for the Company. What is of great importance here is adapting their formulas to meet existing EU standards regarding the content of volatile organic compounds (VOC). As part of these measures, intensive R&D work is being conducted in order to adapt the formulas of the products offered to the existing EU directives. Sales dynamics In 2009 FFiL Śnieżka S.A. generated PLN 412 million worth of sales, which represents

103.2% growth dynamics in comparison to 2008.

Sales of FFiL Śnieżka SA in terms of value (thousands of PLN) by product groups

Item 2009 2008 change

Revenues from sales of products 328,691 320,696 7,995

Other revenues 4,448 3,823 625 Revenues from sales of goods 57,145 57,576 -431

Revenues from sales of materials 21,575 16,857 4,718

Total sales 411,859 398,952 12,907

.



Item 2009 2008 Dynamics Decorative products 286,367 279,265 102.5%

Putty compounds 40,423 41,431 97.6% Goods 57,145 57,576 99.3% Other products 1,900 - 0.0%

Other revenues 4,448 3,823 116.4%

Materials 21,575 16,857 128.0% Total sales 411,859 398,952 103.2%

In 2009 approx. 70% of the total sales accounted for decorative products, approx. 14% for

merchandise and approx. 10% for putty compounds. A new group of powder paints also

appeared.

Wyroby dekoracyjne69.7%

Masy szpachlowe9.8%

Towary13.7%

Pozostałe wyroby0.5%Pozostałe przychody

1.1%

Materiały5.2%

102%

116% 99% 128%

Przychody zesprzedaży wyrobów

Pozostałe przychody Przychody zesprzedaży towarów

Przychody zesprzedaży materiałów

Dynamika wzrostu sprzedaży w FFiL Śnieżka SA 2009-2008Dynamics of sales increase at FFiL Śnieżka SA 2009-2008

Other revenues Revenues from sales of products

Revenues from sales of goods

Revenues from sales of materials

Decorative products 69.7%

Materials 5.2%

Other revenues 1.1%Other products 0.5%

Goods 13.7%

Putty compounds 9.8%



Export sales

The share of export sales in the total sales in 2009 was 21.3%. The dynamics of export sales was at 94.1% compared to 2008. The increase in sales referred mainly to the domestic market (6.4%) with a simultaneous decrease in export sales (by -5.9%). The most significant decrease in export sales in 2009 was recorded in Ukraine, and the greatest dynamics was recorded for the Romanian and Belarusian markets.

Źródło: Tłumaczenie: Sprzedaż Krajowa w tys zł Domestic sales in thousands of PLN Sprzedaż Eksportowa w tys zł Export sales in thousands of PLN The diagram below presents share in percent of export sales by individual countries. Sales to

324 241305 802

87 618 93 150

Sprzedaż Krajowa w tys zł Sprzedaż Eksportowa w tys zł

2009 2008

Udział poszczególnych krajów w sprzeda ży eksportowej

Białoruś34.1%

Ukraina42.5%

Rosja 6.9%

Mołdawia8.5%

Węgry1.5%

Poz. kraje1.5%

Poz. kraje UE0.1%

Rumunia4.9%

Export sales (thousands of PLN) Domestic sales (thousands of PLN)

Share of individual country in export sales

Belarus 34.1%

Russia 6.9%

Moldova 8.5%

Hungary 1.5%

Romania 4.9% Other EU countries 0.1% Other countries

1.5%

Ukraine 42.5%



Śnieżka’s largest customers in 2009 in domestic sales • CHEMIK POZNAŃ • BENMAR BIAŁYSTOK • LEROY MERLIN • AB BECHCICKI WROCŁAW • SEWERA KATOWICE • ZACISZE WARSZAWA • CHEMAL DĘBICA • MRÓZ CHEMAL RZESZÓW

The Company signed trade agreements with all its largest customers, laying down the terms of selling products and the terms of cooperation. ŚNIEŻKA brand outlets 2009 confirmed the trend which had been developing on the market for a few years. A strong verification of minor outlets and a dynamic growth of mega stores can be noticed. We can observe the growing majority of large sales outlets where the customers can choose from a wide range of products. In 2009 in stores operating under the name of Śnieżka Kolor Centrum, the position of MAGNAT, a brand relatively young on the market, consolidated, and the brand's share in the market is increasing. Extending the offer with the new effects of Magnat Style and marketing innovative brand expositors were decisive factors. At the end of 2009 the Company operated 115 stands and 205 associated outlets. 7. Production The production of Śnieżka is located in four production divisions and in Zakład Produkcji Farb Proszkowych in Bytów:

• water-soluble paints division (P1), located at the Brzeźnica branch, manufacturing emulsion, water-based and acrylic products as well as water-based adhesives, impregnates and ready-to-use putty,

• solvent paints division (P2), located at the Brzeźnica branch, manufacturing phthalate, oil, and nitro products as well as solvent adhesives, impregnates and chlorine rubber paints,

• division (P3), located at the Pustków branch, manufacturing primarily putty products, emulsion paints and thermal insulation products,

• division (P4), located at the Lubzina branch, mainly manufacturing coloured emulsion products,

• Zakład Produkcji Farb i Lakierów Proszkowych in Bytów is a producer of powder paints and varnishes.

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 simple moving them within the groups of products. 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. The currently binding management system is ISO 9001:2008 issued by KEMA Quality B.V. Annual audits conducted by an auditor 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%. 8. Research and development In 2009 the Company carried out a wide range of R&D works aimed at: • adapting the products to the requirements of the EU laws - it was connected with the necessity to limit the contents of volatile organic compounds (VOC) in ready made products as from 1 January 2010 the 2nd stage of the Resolution of the Minister of Economy and Labour dated 20 October 2005 (Official Journal 216, item 1826) came into force; this Resolution is based on Directive 2004/42/CE of the European Parliament and of the Council of 21 April 2004 on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain paints and varnishes and vehicle refinishing products and the amending Directive 1999/13/EC (Official Journal of EC L 143 of 30.04.2004), • introduction of new technologies in other water based and solvent based products (Teflon® surface protector, nanotechnology), • constant improvement of qualitative parameters of products, production ecology and economics. These activities are aimed at:

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

The good quality of the parameters of Śnieżka’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 which cannot be carried out in the in-house laboratory due to the lack of specialised equipment. If necessary, samples of products are tested in laboratories of Śnieżka’s foreign partners.

Śnieżka systematically invests in modern 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). It confirms the highest 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. 9. Supply policy

The Company’s supply policy was aimed at satisfying all of Śnieżka’ needs with regard to the supply of raw materials and technical materials necessary for proper operation. One important element of the purchasing policy was to establish stable relations with suppliers. This being



said, the Company is still looking for new suppliers, both 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 major suppliers of raw materials and semi-finished products. Main suppliers in 2009

Group

Supplier

Fillers Mikrogram Orzesze, Piotrowice Zawichost, Omya Polska Warszawa,

Titanium white Z.Ch. Police, Huntsman Tioxide Anglia, Du-Pont Belgia, Precolor - Czechy

Gypsum Nowy Ląd Niwnice, BPB Formula Resins and

dispersion agents Spolchemia Sokolov, Synthos Oświęcim, Plastland Pustków, ERG- Pustków, Dow Chemicals Polska Warszawa, Donauchem Poznań, Chemolak Smolice, Cortex Chemicals Tarnów

Solvents Brenntag Kędzierzyn-Koźle, Solvent Płock, ZAK Kędzierzyn –Koźle, Neste Polska Warszawa

Defoaming agents Chimex Warszawa, Byk-Chemie Niemcy, Keyser &Mackey Łódź, Elementis Specialites Niemcy

Thickening agents

Herkules Polska Warszawa, Shin Etsu SE Tyloze GMBH Niemcy, Dow Chemicals Polska Warszawa

Pigments Plast-bud Pustków, Standard Lublin, Zachem Bydgoszcz, Ferrocolor Częstochowa, ABC Kolor Piotrków Trybunalski, Precolor Czechy

Poisons Bayer Lanxess Warszawa, Ciech-Warszawa

Packaging

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

10. Use of the environment Due to the character of business pursued, the industry in which Śnieżka operates is classified in the chemical group qualifying the business as “possibly having a considerable impact on the environment" directly related to the use of natural environment in its numerous scopes. Considering the above, the Company's Managing Board assumed the so called ‘clean production rule’ implemented by way of reducing to the minimum of technologies which may pose a threat to the environment, and moderate use of semi-finished products based on substances hazardous to health and environment. Regulation of all aspects of using the environment has been specified in special licences, known as sector decisions approved by competent authorities and environmental protection divisions. These include a permit for the acceptable emission of volatile substances into the atmosphere, production of waste and



permits required by the Water Law Act for disposal of rainwater. Detailed provisions of these decisions are provided for in specific standards and thresholds. In 2009 the scope of using the environment corresponded to the measures applied in the previous year. The results of surveys regarding rainwater, soil, emitted air were within the limits of acceptable standards according to legal regulations and conditions specified in these decisions. Correct use of the environment and counteracting serious industrial failures are confirmed with the results of an inspection of a national environmental protection authority conducted in August and September 2009, which found no negligence based on a field visit and inspection of the documentation. We should also stress that the production of ready-made products is based on more ecological raw materials, with lower content of hazardous substances, and in production processes the following is applied: air-tight sealing of process lines, air filtration when dosing loose raw materials for the production process. We also reduced the amount of waste produced as regards a production unit, as well as eliminated high-volatile solvent substances from formulas and replaced them with environmentally friendly substances. 11. Investments

Capital investments in 2009 On 16 April 2009 FFiL Śnieżka S.A. purchased 220 shares in Fabryka Farb i Lakierów Proszkowych PROXIMAL Spółka z o.o. based in Bytów (that is 3.55% of the total of the Company’s shares) from their previous owner Mr. Andrzej Kin for PLN 141,719. On 13 May 2009 the District Court Gdańsk-Północ in Gdańsk, 8th Economic Division of the National Court Register registered the acquisition of these shares. Construction and purchase of new fixed assets in 2009: In 2009 the total expenditure for fixed assets and intangible assets amounted to PLN 23,442 thousand. 1. Directions of investments implemented in 2007-2009 are presented in the diagram below (data provided in thousands of PLN).

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2. Investment activities in 2009 were aimed at:

� satisfying the market demand for the products of FFiL “ Śnieżka” S.A., � extending the range of products, � enhancing product quality, � streamlining storage and distribution of products to wholesale and retail markets, � enhancing customer service, � increasing the efficiency of production facilities by automating manufacturing

processes, � purchasing fixed assets and land for the Company’s future development, � adjusting the Company’s operations to the domestic and European legislation

introduced, � protecting the natural environment by limiting the emission of pollutants into the

atmosphere and limiting soil contamination, � improving the certainty of the Company’s power supply.

Capital expenditure in 2009 was mainly used to reorganize fields which hampered the Company’s operation or limited its capacity to satisfy a market demand. It was necessary to continue to improve customer service, as the market is becoming increasingly competitive and the customers more demanding. Therefore, it was necessary to reorganize warehouse management by creating sufficient storage space to meet modern storage and product distribution standards. The changing market trends required us to adapt the production lines to meet new needs, and to develop our production capacity. Efficient management of our business is also supported by a constantly updated IT system. The implemented IT programmes allow us to track events in the Company on a regular basis and react quickly and effectively. Thus, it became easier to optimise the Company’s production costs, material management and overall costs. When implementing every investment, special care is taken to meet project-specific environmental protection requirements and comply with both domestic and the EU legal regulations. Projects that involve environmental protection include limiting the emission of pollutants into the atmosphere, pre-treating rain water in mud and fat separators as well as sealing off production processes to limit dispersed emissions. As far as the investment process is concerned, substantial expenditure is 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 have allowed us to create research conditions that ensure efficient development of new products, R&D projects and effective monitoring of products and raw materials. In subsequent years the basic directions of investments will be similar to these from 2009. Investment projects were and will be implemented based on developed and approved investment plans. All potential changes in the implementation of the approved plans resulted from the Company’s day-to-day needs or changing conditions in its external environment. Once analysed, these changes were implemented after being approved by the Company’s Managing Board and Supervisory Board. Investment tasks in 2010 will be performed according to the approved technical and financial plan. They will be mainly carried out as orders performed by specialised contractors. The Company’s own technical facilities will be mainly used for current production needs and petty modernisation works as well as for individual production. 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 occasionally change work organisation in production teams and teams distributing products to customers. We should add that the carried out and planned investment tasks and the investment policy applied allowed us to consolidate the position of FFiL „Śnieżka” S.A. as a leader among domestic manufacturers and exporters of paints and varnishes. FFiL „Śnieżka” S.A. also successfully operates on Eastern markets, where it has robust production plants and sales agencies which successfully apply the Company’s reliable investment policy allowing them for dynamic growth. Preparations are also under way to implement investment tasks in the southern market (in Romania). The stage of preparation of the investments in terms of legal and technical procedures allows for the assumption that their implementation should be undisrupted. 12. Employees Number, age and occupational structure of the employees The Company’s HR policy is linked to its strategic goals: it aims at a rational growth of employment with minor changes to the organisational structure and progressing automation of production works. In 2009 the Company’s employment increased from 564 (at 31.12.2008) to 593 people at the end of 2009. This is linked to the Company’s development, which in turn translates into, among other things, growing sales revenues. Average employment during the whole 2009 was 581 people (excluding the Managing Board), and it was varied in individual months: it started to increase from March and then it decreased again in September. This is primarily linked to the seasonal nature of the paints and varnishes industry and affects mainly production and warehouse personnel. Similar to the previous years, 2009 experienced an actual increase in average remuneration across the Company. Work efficiency

Item 2009 2008 % Sales of products, in thousands of PLN 328,690.6 320,696.1 102.5% Average annual employment (excluding the Managing Board)

580.9 593.5 97.9%

including direct labour 180.3 199.0 90.6% Overall efficiency in terms of sales value 565.8 540.3 104.7% Efficiency per 1 worker 1,823.4 1,611.5 113.1% Human resources are one of the most important factors contributing to the Company’s success. Our goals provide for employing direct production personnel with vocational and secondary education as well as raising the qualifications of the already employed white-collars. The Company’s structure is dominated by personnel with the secondary and vocational education, which is related to the manufacturing character of the Company's business. The tendency for raising qualifications by the employees is appearing, thus an increase in the number of employees with higher education. This tendency should continue in the years to follow.



The Company’s staff is dominated by people between 31 and 40, which confirms the experience plus mental and physical capacity of the personnel. The Company pays considerable attention to raising the employees’ qualifications. Every year the Company prepares a training plan according to which employees attend various forms of developing their professional skills, such as conferences, seminars, courses and in-house training sessions. In 2009, 269 employees attended 117 training sessions, which means that on average more than every second employee was subject to some form of training. In 2010 we plan to continue measures aimed at raising qualifications by the employees. 0

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Personnel costs of the Company’s employees go up systematically. This is related to increased remuneration, increased co-financing of various forms of leisure, allowances for employees having financial difficulties, co-financing of cultural and educational plus sports and recreation activities, as well as supporting other activities compliant with the regulations of the Company Social Benefits Fund (ZFŚS). The Regulations (ZFŚS) constitute the basis for managing the funds. Employees and members of their families are eligible for support from ZFŚS. Health and safety at work (BHP), environmental studies and occupational healthcare Health and safety at work at Fabryka Farb i Lakierów Śnieżka S.A. is subject of constant care of the Company's management. In 2009, the accident frequency rate at the Company decreased by 50%. As part of technical work safety at the Company, analysis of the occupational risk for all job positions has been updated. In January and September 2009, a survey of the work environment factors for selected job positions was done. An important element of this survey was to confirm the fact of eliminating exceeded NDS (maximum concentration level) for the operator of a disintegrating machine at Division P-2 at the grinder hall, for the manufacture of chlorinated rubber. This allowed us to eliminate the necessity of rotary operation of this position by the staff working there. At the same time, based on the survey, a significant decrease in the emission of chemical factors (in the breathing zone) at the bottling centre of drewkorn impregnate was confirmed. This was possible thanks to the purchase and assembly of a specialist and suitable bottling machine. In 2009, as part of modernising workplaces, we also installed a production robot, palletizer for bags with loose putty compound at Division P-3. By doing so, we got rid of a nuisance related to excessive energy expenditure when manually palleting bags with loose putty compound. These measures contributed to improved working conditions of the employees. 13. Finances Assets and assets financing in thousands of PLN.

Assets 31 December 2009 Structure 31 December

2008 Structure Balance of changes

Rate of changes

A. Non-current assets 149,673 52% 141,817 46% 7,856 106% Intangible assets 1,201 0% 1,237 0% -36 90%

Property, plant and equipment 113,174 39% 97,533 32% 15,641 116%

Long-term receivables 40 0% 978 0% -938 4%

Long-term investments 34,234 12% 40,807 13% -6,573 84%

Long-term prepayments 1,023 0% 1,262 0% -239 81% B. Current assets 140,139 48% 165,363 54% -25,225 85% Inventory 48,334 17% 42,910 14% 5,424 113%

Short-term receivables 78,478 27% 112,362 37% -33,884 70%

Short-term investments 13,414 5% 10,091 3% 3,323 133%

Non-current assets classified as C. held for sale 73 0% 73 0% 0 100% Total assets 289,972 100% 307,253 100% -17,281 94% In 2009 the balance sheet total decreased by PLN 17,281 thousand, with a change rate of 94%. Dynamics of growth in non-current assets was at 106%. The major item of the non-



current assets was the property, plant and equipment; their value increased in comparison to 2008 by PLN 15,641 thousand. An over 6% increase in non-current assets is a result of implementing an investment programme. The expenditure for the purchase and construction of fixed assets amounted to PLN 25,082 thousand in 2009, i.e. almost 2.7 times more than the depreciation costs. Expenditure on long-term investments was in 2009 less than a year before and the growth dynamics was 84% which was a decrease by PLN 6,573 thousand. Current assets decreased by 15%, whereas an item which affected such a state of affairs was short-term receivables whose dynamics is 70% compared to the corresponding period in the previous year. A favourable level of receivables compared to the previous year results from effective monitoring in this field. The largest items constituting 80% of the total receivables are insured by EULER HERMES. An increase was observed in inventory by 13% and in short-term investments by 33%. An increase in the inventory results e.g. from the purchase of current assets from Fabryka Farb i Lakierów Proszkowych PROXIMAL in Bytów, and an increase in short-term investments is an effect of granting short-term loans to affiliates. Coverage of assets

Equity and liabilities 31 December

2009 Structure 31 December 2008 Structure Balance of

changes Rate of changes

A. Equity (own funds) 182,260 63% 168,566 55% 13,694 108%

Primary capital (fund) 13,554 5% 13,850 5% -296 98%

Treasury shares (stock) (negative figure) -89 0% -3,433 -1% 3,344 3%

Supplementary capital (fund) 131,998 46% 118,938 39% 13,060 111%

Profit (loss) from previous years 4 0% 0 4 Net profit (loss) 36,793 13% 39,211 13% -2,418 94% B. Liabilities and provisions 107,711 37% 138,687 45% -30,976 78%

Provisions for liabilities 5,094 2% 4,988 2% 106 102%

Long-term liabilities 0 0% 45 0% -45 0%

Short-term liabilities 102,315 35% 133,589 43% -31,274 77%

Accruals 303 0% 65 0% 238 467% Total liabilities 289,972 100% 307,253 100% -17,281 94%

In 2009 the value of equity increased by PLN 13,694 thousand. This was affected by:

- an increase in supplementary capital by PLN 13 million resulting from profit distribution for 2008 amounting to PLN 20 million and redemption of shares purchased amounting to PLN 7 million,

- buyout of treasury shares for the purpose of their redemption amounting to PLN 4 million.

Liabilities and provisions for liabilities showed a 78 % change rate. The largest item in this group of liabilities involved short-term liabilities. Their value decreased by PLN 31,274 thousand and their structure is as follows: - trade liabilities – an increase by PLN 1,030 thousand,

- other liabilities (taxes, social insurance and remunerations) – a decrease by PLN 3,283 thousand.

The loan level in the reporting period decreased by PLN 29,022 thousand. The average level calculated based on balances at the end of each month of 2009 was PLN 89.8 million and



exceeded the average loan level in 2008 by PLN 3.6 million. In 2009, the average loan commitment increased mainly due to a growth of current assets not financed by the increased liabilities. The collateral of loan agreements usually involves fixed assets, inventories and assignments of receivables. A leading bank used by the Company in this scope is PKO BP S.A. In addition, the Company concluded loan agreements with Raiffeisen Bank Polska S.A., Pekao S.A., Citibank S.A., Fortis Bank S.A. and Podkarpacki Bank Spółdzielczy. Interest on the loans is calculated according to WIBOR plus the bank’s margin. Costs of loan service in 2009 charged the Company’s financial performance at PLN 2.9 million while a year earlier these were at PLN 4.7 million. Decreased interest costs result from lower debt, especially in H2. The Company’s total debt at 31.12.2009 includes an FX loan in USD for the amount of USD 15.3 million, which serves to secure the equity of subsidiaries in Ukraine and Belarus. Financial situation Financial liquidity ratios 1

Item 2009 2008

Current ratio 1.37 1.24 Quick ratio 0.90 0.92 Receivables cycle in days of turnover* 108 107 Inventory cycle in days of turnover* 58 57 Liabilities cycle in days of turnover* 59 59

In 2009 the Company had no problems with the current repayment of its debt. The static analysis of the Company’s liquidity as 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. The receivables cycle increased by 1 day. Average trade receivables are higher by 3.8% compared to the previous year. Considering increasing sales dynamics and increasing competition on the market of paints and varnishes which often leads to extended payment dates, this result should be considered as good. Inventory turnover is similar to the previous year, since an increase is only 1 day due to an increasing number of groups of products plus use of extended warehousing base, and purchase of the current assets referred to above. In its strategy, the Company provides for financing its needs predominantly with the debt and equity. Concluded loan agreements more than secure the Company’s planned needs. Abbreviated cash flow statement (in thousands of PLN)

Item 2009 2008

1 The ratios for the cycles were calculated based on average values of receivables, inventories and liabilities from 13 periods (OB + 12 months of 2009)2 average values calculated based on 13 periods (OB + 12 months of 2009)



Net operating cash 65,699 32,147

Net investment cash -15,987 -11,892

Net financial cash -50,995 -19,791 Total net cash flows -1,283 464

Cash flow analysis shows that the Company generates higher operating cash flows. This was due to a high net profit and decreased trade receivables by PLN 33 million. An increase in investment expenditure as compared to the previous year, concerned mostly increased expenditure on non-current assets. In 2009 an increase was also recorded in financial expenditure due to the large amount of loans repaid (PLN 24.9 million) and a 20% increase in dividend paid. As a result cash also decreased by PLN 702 thousand. Income Statement of comprehensive income in thousands of PLN Classification of expenses by function 2009 profitabilit

y 2008 profitability change rate of changes

Continued operations

Sales revenues 411,859 398,952 12,908 103% Prime cost of sales 282,237 268,011 14,226 105% Gross profit (loss) on sales 129,623 31% 130,941 33% -1,318 99%

Selling costs 53,043 52,096 946 102%

General administrative costs 34,857 29,763 5,094 117%

Other operating revenues 3,290 1,475 1,815 223%

Other operating costs 3,704 3,485 219 106% Operating profit (loss) 41 309 10% 47 071 12% -5,763 88%

Financial revenues 7,236 6,493 743 111% Financial costs 2,953 4,935 -1,982 60% Profit (loss) before tax 45,591 11% 48,629 12% -3,038 94%

Income tax 8,798 9,419 -621 93% Net profit (loss) on continued operations 36,793 9% 39,211 10% -2,417 94%

0 0 0

Comprehensive income for the period, of which for: 36 793 39,211 -2,417 94%

- shareholders of the parent 0 0 0

0 0 0 Net profit (loss), of which for: 36 793 9% 39,211 10% -2,417 94%

- shareholders of the parent 36,793 39,211 -2,417 94%

Net profit (loss) per share: PLN/share PLN/share PLN/share

on continued operations

- basic 2.71 2.83 -0.12

- diluted 2.71 2.83 -0.12

Sales revenues The total net sales revenues in 2009 amounted to PLN 412 million, which represents a 3% increase in comparison to the previous year. The sales revenues primarily include revenues from sales of products. Their share in the structure of revenues reached in 2009 79.8% i.e. similar to the previous year. They show upward sales growth dynamics; in 2009 this amounted to 2.5%, which represents an increase by PLN 8 million in comparison to 2008. The remaining share of revenues (20.2%) comes from sales of goods and materials as well as from other sales. In 2009 the manufacturing cost of products sold increased by 4.9%. The dynamics for manufacturing costs was higher than the dynamics of revenues from sales of these products



by 2.4% due to major fluctuations in exchange rates of currencies, in particular in H1 2009, which translated into an increase in prices of raw materials used for production. Operating profit/loss Operating profit in 2009 was at PLN 41.3 million compared to PLN 47 million in 2008. In 2009 the Company recorded 88% dynamics in operating profit and as a result the Company’s operating profitability decreased by 1.8%. This was affected by general administrative costs higher by 17% due to the purchase of assets in FFP in Bytów and property in Biała Podlaska, which increased the administrative costs. Financial profit/loss The balance of financial transactions in 2009 was positive and increased the operating profit/loss by PLN 4.3 million, while in the previous year the balance was PLN 1.6 million. Financial revenues included revenues from dividends, whose value in 2009 amounted to PLN 2.8 million. This is a result of the strategy to pay 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 operation. Financial costs in 2009 decreased compared to 2008 by PLN 2 million. This was mostly related to a smaller use of loans and that is why debt ratios presented below confirm this fact. The balance of exchange rate differences was positive and amounted to 2.2 million, while in the previous year it was PLN 264 thousand.

Debt ratios Content 2009 2008

Overall debt (long-term liabilities + short-term liabilities) / balance sheet total

35% 43% Equity to assets ratio (equity + provisions) / total assets

65% 56% Profit to interest ratio (gross profit + interest) / interest 16.44 11.41 Equity to non-current assets ratio (equity + provisions) / non-current assets

125% 122% balance sheet rule of thumb (equity) / non-current assets 122% 119% Net profit The Company generated a net profit smaller by 6% compared to 2008. This was mostly due to a 1.3% smaller sales margin. Net profitability amounted to 8.93% and was 0.9 p.p. smaller than the previous period. In 2009 the Company intends to increase return on sales and retain all positive tendencies outlined above whose effects may be observed in the Statement of Comprehensive Income.



Comparison of overall sales and net profit trends between 2006 and 2009 Assets profitability ratios2

Item 2009 2008 EBITDA 12.3% 13.7%

Return on operating activities 10.0% 11.8%

Net return 8.9% 9.8%

Return on equity (ROE) 20.9% 26.1%

Earnings per share (EPS) 2.71 2.83

Return on capital employed ROCE 23.5% 31.2%

Return on assets (ROA) 11.0% 12.8%

At the end of 2009, the Company’s equity exceeded by 32.6 million the Company's non-current assets and compared to the previous year they increased by PLN 5.8 million. 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 such a situation is mostly the increase in average assets and average current assets. On the other hand, the decreased return on equity is due to a lower net profit, which is nevertheless satisfying taking into account the difficult market operating conditions in 2009. At the end of the period analysed, the level of demand for net working capital was PLN 22 million smaller. The financial plan for 2010 assumes a growth of the balance sheet total by 9.2% as a result of an increase in the Company’s assets. The planned net profit will be used to finance investments and current assets. The remaining portion will be used to pay the dividend.

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In 2009, the Company intends to implement its financing strategy involving financing non-current 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 timely performance 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 2010. The Company’s own funds and the signed agreements with banks ensure secure financing of the investments planned for 2010. Equity market ratios 2009 2008 Stock price at the end of period 39.98 25.7 Company’s market value 541,872,408 355,945,000 P/E (annualised profit) 14.8 9.1

P/BV 2.97 1.91 Śnieżka became a listed company in 2003. In 2009 the Company’s stock price, after a significant decrease in 2008, soared and was at PLN 39.98 by the end of the year. At 31.12.2009, the Company’s goodwill amounted to PLN 542 million. P/E ratio at the end of 2009 was 14.8 and P/BV 2.97. This indicates that investor's opinions on the Company's profit/loss and its growth perspectives improve. This is also confirmed with the diagram of Śnieżka's price during the whole 2009, presented below.

Fulfilment of results forecasts previously published for 2009 against the actual results generated. The Managing Board of FFiL Śnieżka S.A. did not publish any forecasts for 2009 regarding sales revenues and financial results.



14. Basic risks and threats related to operation 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 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 2009 the Polish economic results were relatively satisfactory, taking account of earlier forecasts related to the crisis in international markets. According to the preliminary estimates of the Central Statistical Office (GUS) the Gross Domestic Product (PKB) increased in 2009 by 1.7% on an annual basis compared to 5.0% in 2008. Gross added value in the industry increased by 1.1%. (compared to 6.6%), in the construction industry increased by 4.7% (compared to 9.1%), and in the sector of market services by 2.5%. (compared to 5.3%). Domestic demand decreased by 0.9% (compared to a 5.5% increase), total consumption increased by 2.0% (compared to 6.3%), and individual consumption by 2.3% (compared to 5.9%). Similar to the global scale, positive signs are accompanied by negative phenomena:

- unfavourable changes occur in the structure of labour: more people make use of retirement benefits, less people of working age appear. People with higher education constitute a considerable percentage of labour-related migration. Relatively low rates of registered unemployment are misleading in this situation (they do not reflect real threats);

- anti-crisis measures of the government and the NBP to a limited extent translate into accessibility of loans to the non-financial sector, including R&D (this affects in particular small and medium-sized enterprises);

- a field of significant risk is the strategy for management of public debt; - the near perspective of election years 2010-2011 maintains uncertainty.

Inflation in December 2009 was 3.5% (acc. to GUS), however in the opinion of analysts it will slow down over the next few months. Competition risk The level of competition in the paints and varnishes industry in Poland is still very high. The market is divided among individual participants, and significant shares in market are held only by several companies – apart from FFiL Śnieżka S.A. these are leading world paint manufacturing concerns, e.g. Akzo Nobel and PPG. The most important element in building and maintaining the long-term competitive advantage is development of strong brands of manufacturers the awareness of which influences the purchasing decisions of final consumers, and pro-selling measures which shape the marketing strategy, determine development and growth in sales in individual distribution channels, i.e. on the traditional and DIY markets. In 2009, similar to previous years, the Company conducted intensive advertising campaigns for their leading brands and actively shaped the sales policy, which at the time of crisis on the construction market had a considerable impact on the sales results generated, and were very good in terms of the whole industry.



Construction market risk The construction sector in which the Company operates is very strongly dependent on the situation in the construction industry as a whole. Last year was a period of reacting to the crisis on international markets. Despite pessimistic forecasts, the construction market in Poland was not that much affected by the crisis and did not experience an actual economic slump, and the forecasts are becoming increasingly optimistic. The most difficult barriers for construction companies include visible competition on the market, employment costs and insufficient demand. The factors which may hinder development of the industry also include the loan policy of banks. Distribution channel risk. A major portion of the Company's sales takes place based on the traditional distribution model i.e. via wholesalers of construction products and independent retail outlets. The traditional sales system is particularly effective in reaching a significant part of final customers living in small towns. However, the fact there is a growing network of DIY stores on the market of paints and finishing materials in Poland is of some importance. We estimate that more than 1/3 of people purchasing paints are customers of construction hypermarkets. The Company is currently cooperating with the majority of the DIY networks operating on the Polish market and in this channel it records the highest increases in sales. For certain, the crisis on the financial market in Poland last year, similar to other industries, had an impact on the financial standing of entities cooperating with the Company as regards distribution and caused changes in selected fields of rules of cooperation, e.g. in payment policy. Risks and threats related to the control of debt The Company monitors the inflow of due amounts on an ongoing basis via a recognised Law Office. Thanks to this, despite greater risk related to control of receivables in H2 2009, the Company still considered it to be insignificant. If the Customer delays payment of an established threshold amount, suspending deliveries of the Company’s products is a standard. Another factor that mobilises contractors is 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 operates other forms of collateral for receivables which additionally influence the commercial loan limit established by Hermes. The policy for monitoring risk and threats related to control of debt as adopted by the Company brings notable benefits and will certainly be continued in the years to come. FX risk A significant role in the operation of FFiL Śnieżka S.A. is FX risk. The Company imports raw materials used for production, mainly from Western Europe, and thus holds liabilities denominated in EUR. On the other hand, it exports its goods to the countries of Eastern



Europe (Ukraine, Belarus, Moldova, and Russia) where settlements are made 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 favourable scenario for the Company is the EUR/USD rate as low as possible which reduces costs of raw materials and maximizes export inflows. At the Company the FX risk is systematically analysed. Currently, the Company is using an FX loan in USD amounting to USD 15.3 million which is to secure the capital held in subsidiaries in Ukraine and Belarus and minimize unfavourable exchange rate differences from export inflows. In 2009 the Company did not apply, and currently does not conclude, any collateral in the form of derivatives such as options, forward, futures and swap contracts. Due to a 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 this interest rate due to the lower LIBOR USD in comparison with WIBOR. Risk of the Company’s involvement in Ukraine and other Eastern European markets The severe economic crisis in Eastern Europe had a material impact on export sales in 2009. Recession in this region was higher than the 5 % GDP forecasted by the European Bank for Reconstruction and Development. Much worse predictions referred in particular to Ukraine and Russia. The decrease in the GDP in Ukraine in 2009 was 25%. Macroeconomic results of the Ukrainian economy and the rate of its development have a significant influence on the construction market which is of key importance for the Company since it generates demand for the substantial part of the Company’s products. It is the construction industry that recorded the greatest decrease rate, of 50%. The decrease in consumer purchasing power in relation to the Company’s products, reduction of new investments and the level of renovations by retail purchasers are significantly connected with the GDP decrease, irregular hryvnia devaluation and the level of interest rates. Due to the unstable political situation in Ukraine we should not expect that the economic situation in the country will radically improve. That is why in the months to come we should expect unfavourable phenomena such as a decrease in the purchasing power of people and in demand, as well as the risk of significant inflation or devaluation of hryvnia compared to other currencies, to continue. Risk connected with changes in the Polish tax system Pursuing economic activity in Poland is becoming increasingly risky with the constantly changing tax and customs regulations. Since Poland’s accession to the European Union, entrepreneurs operating in Poland have been obliged to have knowledge of not only domestic but also EU regulations. We should note that the implementation of the Community law, whose standards put a relatively greater emphasis on the economic sense of economic operations rather than on their legal structure, influences the interpretation of the tax law in Poland. Polish regulations lack numerous solutions that in practice may determine the location of investments in Poland or concluding transactions with Polish entities as parties. In a number of cases, the new regulations are not clear to Polish entrepreneurs, and as reality shows, also to the tax authorities who frequently present contradictory interpretations in key issues. In addition, numerous binding regulations are not clear and precise enough. On frequent occasions one explicit interpretation is lacking and interpretations of tax regulations are subject to frequent changes. We should also stress that tax authorities have the possibility of verifying the correctness of tax returns which specify the value of the tax liability, within 5 years from the



end of the year when the tax payment date expired. Assuming an interpretation of tax regulations by the tax authorities which is different from the interpretation which constitutes the basis for calculating the tax liability by the taxpayer, may have a material negative impact on the Company’s financial standing. Risk of increase of raw material prices At present, the greatest risk of increase in raw material prices is a significant change in exchange rates of currencies. Both EUR and USD have considerably weakened during the last few months, which has had a positive impact on the prices of imported raw materials. One more threat related to the increased prices of raw materials for the production of paints and varnishes is an increase in the prices of energy and gas. An increase in the prices of gas and energy will certainly result in a proportional increase in the prices of products with major producers of chemical raw materials and others. The third risk is the necessity to limit the number of deliveries in case of an unexpected increase in demand. However, in the last periods the Company has had no problems with access to all necessary raw materials and limited deliveries in case of an unexpected increase in demand (mostly imported) are not that visible and do not pose a material threat.

Risk of default in planned investments

Investment tasks planned to be implemented in 2010 have been included in the plan of investments for 2010 approved by the Supervisory Board. The main investment tasks connected with the development of production capacity, improvement of warehouse economics and goods distribution, development of the Company's infrastructure and tasks related to environmental protection are feasible and should be fully implemented. The potential failure to implement some investment tasks resulting mostly from the Company’s changing development policy as well as the changing 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 worse financial performance At the end of 2009, the Office of Competition and Consumer Protection (UOKiK) issued a decision on imposing a fine on FFiL Śnieżka SA and its distributors. The amount of fine published in the communication of the Office of Competition and Consumer Protection refers to several dozen companies operating on the construction market. The fine imposed on Fabryka Farb i Lakierów Śnieżka SA only amounts to approx. PLN 850 thousand, which accounts for only 0.16% of the revenues of the Śnieżka Group. This is not a significant amount that could materially affect the Company’s ongoing operations. In addition, its payment has been suspended until the end of the case (appeal proceedings estimated to last for 2-3 years). The Śnieżka Managing Board would like to stress that it definitely disagrees with the decision of the Office of Competition and Consumer Protection. Śnieżka never participated or participates in price fixing with wholesalers purchasing of its products. In the course of the proceedings, Śnieżka submitted to UOKiK, partially at the request of the Office and partially out of their own initiative, extensive evidence material which in the Company’s opinion explicitly proves that there was no price fixing between FFiL Śnieżka SA and its customers.



In the opinion of the Company’s Managing Board, the decision of UOKiK is the result of a biased interpretation of contractual provisions and was issued in breach of the law. We would like to stress that Śnieżka always has been and remains fair and loyal in its operation, while making every effort to win the trust and respect of its customers, business partners and shareholders, as well as employees and the local community. Price fixing of which UOKiK accuses the Company is categorically in conflict with the operating standards specified by the Company. The decision of UOKiK is not legally valid. Śnieżka and its distributors have already filed an appeal at the Court of Competition and Consumer Protection. We expect that the Court will finally solve the case and will verify the Office decision in favour of the Company, which will make it possible to clear the Company’s reputation as a manufacturer and a business partner. 15. Declaration on corporate governance

1. Fabryka Farb i Lakierów Śnieżka S.A. is governed by a set of corporate governance rules as defined in a document entitled “Good Practice of the Companies Quoted on the Warsaw Stock Exchange”, that constitutes an annex to resolution no. 12/1170/2007 of the Board of the Warsaw Stock Exchange S.A. of 4 July 2007. Corporate governance rules are available at www.corp-gov.gpw.pl.

2. In 2009 the issuer did not withdraw from observing any of the rules. As of 1 January 2009 the Company has operated a website in the English language version covering an indicated scope of information.

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, a 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 shares have been presented in chapter 16 of this Report.

5. Shareholders with special control powers include: pursuant to the issuer’s articles of association, series A shares authorise to the appointment of a Member of the Supervisory Board in such a way that each 25,000 shares authorise to appoint 1 Member of the Supervisory Board. At the date of this Report, holders of series A shares included:

• Stanisław Cymbor 33,334 series A shares

• Jerzy Pater 33,333 series A shares

• Stanisław Mikrut 33,333 series A shares

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



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

8. Rules for appointing and dismissing managers, and their scope of powers: pursuant to the articles of association, the Supervisory Board appoints the President of the Managing Board and at their request other members of the Managing Board, and dismisses individual Board members. The decision to issue or redeem shares requires the consent of the General Meeting of Shareholders.

9. Any changes in the Company's articles or deed of association require the consent of the General Meeting of Shareholders.

10. The manner of operation of the General Meeting of Shareholders has been defined in the Regulations of the General Meeting of Shareholders available at the issuer's website. Rights of the shareholders and the manner of their execution have been described in the Company's Articles of Association.

The composition and changes in the composition of the issuer’s managing and supervisory bodies have been described in part 1 of this Report. As of the beginning of 2009 the issuer’s Supervisory Board performs the functions of the Audit Committee. 16. Notes Total number and par value of the Issuer’s stocks (shares) and stocks and shares in the Issuer’s affiliates owned by managers and supervisors (separately for each person) at 31 December 2009. The number of the Issuer’s shares held by managers and supervisors: Managers Piotr Mikrut – 1,254,166 shares of a par value of PLN 1,254,166 (unchanged) Witold Waśko – 198 shares of a par value of PLN 198 (unchanged) Walentyna Ochab – 615 shares of a par value of PLN 615 (unchanged) Supervisors Jerzy Pater – 2,541,667 shares of a par value of PLN 2,541,667, including directly 166,667 shares of a par value of PLN 166,667.

Stanisław Cymbor – 2,541,667 shares of a par value of PLN 2,541,667, including directly 166,667 shares of a par value of PLN 166,667. Stanisław Mikrut – 33,333 shares of a par value of PLN 33,333. Identification of shareholders holding, directly or indirectly through their subsidiaries, at least 5% of the total votes at the General Meeting of Shareholders of Fabryka Farb i



Lakierów “ Śnieżka” S.A. at 31 December 2009, including the number of shares 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 Meeting of Shareholders. Entities (shareholders) 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 Meeting of Shareholders:

Shareholder

Number of shares held

Share in the share capital (%)

Number of votes

Share in the total votes at the General Meeting

of Shareholders (%)

Jerzy Pater* 2,541,667 of which directly

166,667

18.75

1.23

3,208,335

833,335

20.63

5.36 Stanisław Cymbor** 2,541,667

of which directly 166,667

18.75

1.23

3,208,335

833,335

20.63

5.36 Piotr Mikrut directly

1,254,166

9.25

1,787,498

11.49 Rafał Mikrut directly

1,254,167 9.25

1,254,167

8.06

*Jerzy Pater holds the Issuer’s shares indirectly via “PPHU Elżbieta i Jerzy Pater” Sp. z o.o. (“PPHU Elżbieta i Jerzy Pater” Sp. z o.o. holds 2,375,000 shares of the Issuer, giving the holder a 17.52% share in the share capital and a 15.27% share in the total votes at the General Meeting of Shareholders) **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 a 17.52% share in the share capital and a 15.27% share in the total votes at the General Meeting of Shareholders) In the course of 2009 the following changes in the ownership structure of significant blocks of the Issuer’s shares occurred in the period following the submission of the previous quarterly report: As a result of transferring on 11 August 2009 shares of FFiL Śnieżka S.A. by 2M Sp. z o.o. for the benefit of Mr. Stanisław Mikrut, Mr. Rafał Mikrut held directly 660,367 shares, which constituted a 4.77% share in share capital and gave the right to 660,367 votes, i.e. a 4.17 % share in the total number of votes. Before the disposal Mr. Rafał Mikrut held the total of 1,254,167 shares (directly 660,367 shares, and indirectly 593,800 shares through 2M Sp. z o.o.), totally constituting a 9.06% share in the share capital, giving the right to 1,254,167 votes, i.e. a 7.91% share in the total number of votes. As a result of donation of 593,800 shares of FFiL Śnieżka S.A. on 22 September 2009 made by Mr. Stanisław Mikrut for the benefit of Mr. Rafał Mikrut, Mr. Rafał Mikrut currently holds directly 1,254,167 shares, which constitutes a 9.25% share in the share capital and gives the right to 1,254,167 votes, i.e. a 8.06 % share in the total number of votes. Before the acquisition Mr. Rafał Mikrut directly held 660,367 shares constituting in total a 4.87% share in the share capital, giving the right to 660,367 votes, i.e. a 4.25 % share in the total number of votes.



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 2009 in thousands of PLN Company’s Managing Board

Remuneration Dividend paid Total Remuneration in affiliates

Managers

2009 2008 2009 2008 2009 2008 2009 2008 Piotr Mikrut 447.7 424.1 1,693.1 1,269.6 2,140.8 1,693.7 - - Witold Waśko

405.8 371.5 0.3 0.2 406.1 371.7 24.2 -

Joanna Wróbel-Lipa

266.7 237.6 - - 266.7 237.6 - -

Walentyna Ochab

256.8 220.8 0.8 0.7 257.6 221.5 - -

Total 1,377.0 1,254.0 1,694.2 1,270.5 3,071.2 2,524.5 24.2 - Supervisory Board


Managers

2009 2008 2009 2008 2009 2008 2009 2008 Jakub Bentke 148.9 147.8 - - 148.9 147.8 - - Stanisław Cymbor

335.1 332.6 421.1 343.9 756.2 676.5 16.0 24.0

Zbigniew Łapiński

148.9 147.8 - - 148.9 147.8 - -

Stanisław Mikrut

335.1 332.6 241.1 193.9 576.2 526.5 4.0 12.0

Jerzy Pater 335.1 332.6 421.1 343.9 756.2 676.5 17.7 15.0 Total 1,303.1 1,293.4 1,083.3 881.7 2,386.4 2,175.1 37.7 51.0 Remuneration payable in 2009 in thousands of PLN Company’s Managing Board Managers Remuneration Dividend paid Total Remuneration in

affiliates



2009 2008 2009 2008 2009 2008 2009 2008 Piotr Mikrut 422.8 417.2 1,693.1 1,269.6 2,115.9 1,686.8 - - Witold Wa śko 388.8 365.5 0.3 0.2 389.1 365.7 24.2 - Joanna Wróbel-Lipa

280.9 238.5 - - 280.9 238.5 - -

Walentyna Ochab

243.2 231.9 0.8 0.7 244.0 232.6 - -

Total 1,335.7 1,253.1 1,694.2 1,270.5 3,029.9 2,523.6 24.2 - Supervisory Board


Managers

2009 2008 2009 2008 2009 2008 2009 2008 Jakub Bentke

148.9 148.9 - - 148.9 148.9 - -

Stanisław Cymbor

335.1 335.1 421.1 343.9 756.2 679.0 16.0 24.0

Zbigniew Łapiński

148.9 148.9 - - 148.9 148.9 - -

Stanisław Mikrut

335.1 335.1 241.1 193.9 576.2 529.0 4.0 12.0

Jerzy Pater 335.1 335.1 421.1 343.9 756.2 679.0 17.7 15.0

Total 1,303.1 1,303.1 1,083.3 881.7 2,386.4 2,184.8 37.7 51.0 At 31.12.2009 the managers and supervisors have no loan liabilities to the Company. Capital Group and capital relations The Śnieżka Capital Group is composed of:

• Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. – Grupa Śnieżka in Bytów wholly owned.

• FARBUD Sp. z o.o. in Lublin – 80.93% of shares • ŚNIEŻKA UKRAINA Sp. z o.o. in Yavoriv – 79.93% of shares • ŚNIEŻKA Sp. z o.o. in Vistova, Ukraine – wholly owned (directly a 74% share and

indirectly a 26% share via Śnieżka Ukraina Sp. z o.o.) • HADROKOR Sp. z o.o. in Włocławek – 51.09% of shares • Śnieżka - BELPOL Sp. z o.o. in Zhodino near Minsk - 88% of shares • SNIEZKA ROMANIA Sp. z o.o. in Savinesti, Romania – 80% of shares.

Capital relations also refer to:

• Plastbud Sp. z o.o. in Pustków – 10.07% of shares

Until 29 June 2009 an affiliated and consolidated company was also Przetwórstwo Tworzyw Sztucznych Krzystyniak & Klabacha Sp. z o.o. in Pustków, in which Śnieżka S.A. held 10.01% of shares. On 29 June 2009 FFiL Śnieżka S.A. sold all the 1,480 shares of this company for the amount of PLN 900,000. The purchaser was Przetwórstwo Tworzyw Sztucznych Krzystyniak & Klabacha Sp. z o.o. in Pustków, which purchased these shares with the purpose of their redemption in accordance with the provisions of the Act of 15 September 2000 – Code of Commercial Companies.



On 5 March 2010 FFiL Śnieżka S.A. purchased 1.34% of shares in ”Śnieżka-Ukraina” Sp. z o.o. based 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 an 81.27% share in the subsidiary’s share capital. Cooperation with affiliates and members of the Capital Group:

• FARBUD Sp. z o.o. is one of the major wholesalers and distributors of Śnieżka 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.

• Śnieżka Sp. z o.o. in Vistova is one of the producers of solvent paints in Ukraine and a distributor of FFiL Śnieżka S.A. products in Brzeźnica. Its products are sold under the Śnieżka brand. It shows an increasing output potential.

• 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 Hadrokor products to Śnieżka’s range of products supplemented it with new important items not offered by Śnieżka and made it possible to extend the group of customers with industrial customers.

• Śnieżka - BELPOL Sp. z o.o. in Zhodino near Minsk is one of producers of putty, paints and varnishes 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 Savinesti, Romania – distributor of Śnieżka products on the Romanian market.

• Until 31 July 2009 Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. – Grupa Śnieżka based in Bytów manufactured and sold powder paints and varnishes under the PROXIMAL brand. As of 3 August 2009 the operating activity in the area of powder paints was transferred to FFiL „Śnieżka” S.A. by way of selling to the parent company of the majority of the Company’s assets for the total of PLN 4,854.2 thousand. The subject matter of the issuer's purchase involved fixed assets, equipment and inventory. At the moment, the cooperation with Fabryka Farb i Lakierów Proszkowych PROXIMAL Sp. z o.o. consists of lease of real estate.

Cooperation with affiliates related by capital also covers Plastbud Sp. z o.o. in Pustków which is a producer of colorex for the Śnieżka colouring systems and a distributor of some raw materials and goods.

Affiliates with mutual trading in 2009 exceeding the equivalent of EUR 500,000 in thousands of PLN

Item Sales Purchasing

Plastbud Sp. z o.o. 730 25,772 Śnieżka Ukraina Sp. z o.o. Yavoriv 38,307 179



FARBUD Sp. z o.o. 10,438 133 FFiLP PROXIMAL Sp. z o.o. 187 5,401 PTS Krzystyniak&Klabacha 902 3,032 HADROKOR Sp. z o.o. 1,427 12,632 Śnieżka-BEL-POL Sp. z o.o. 4,708 0 Śnieżka Romania SRL 4,372 0

The Company did not conclude any transactions with affiliates, other than arm’s length transactions. Loans granted 1. On 31 December 2009 an annex was signed to a loan agreement dated 29 January 2004 concluded with HADROKOR Sp. z o.o. in Włocławek, pursuant to which the loan repayment date was changed. Loan amount: PLN 600,000. Debt at 31.12.2009 amounts to PLN 600,000. Loan repayment date: by 31.12.2010. 2. On 29 May 2009 an annex was signed to a loan agreement dated 17 June 2008 concluded with Śnieżka Spółka z o.o. based in Vistova, pursuant to which the loan repayment date was changed. Loan amount: USD 235,000. At 31.12.2009, the debt amounted to USD 235 thousand. Loan repayment date: by 31.12.2010. 3. Loan agreements concluded with Śnieżka Romania SRL based in Savinesti: - On 19 February 2007 a loan agreement was concluded with Śnieżka Romania SRL based in Savinesti, for EUR 100,000 up to 19.02.2008. On 14 January 2008 an annex to this agreement was signed pursuant to which the loan was increased to EUR 200,000 and the repayment date extended to 13 January 2009. On 13 January 2009 an annex was signed pursuant to which the repayment date was extended to 31.12.2009 and then on 31.12.2009 another annex was signed extending the repayment date by 31.12.2010. At 31.12.2009 the debt amounted to EUR 157,000. - On 1 February 2008 another loan agreement was concluded with Śnieżka Romania SRL for PLN 1,000,000 with the repayment date by 31 January 2009. On 13 January 2009 an annex was signed to this agreement pursuant to which the loan repayment date was extended by 31.12.2009, and then on 31.12.2009 another annex was signed pursuant to which the loan repayment date was extended by 31.12.2010. At 31.12.2009 the debt amounted to PLN 825,000. - On 30 April 2009 the third loan agreement was concluded for PLN 700,000. The repayment date is 30.04.2010. At 31.12.2009 the debt amounted to PLN 700,000. 4. On 15 October 2007 a loan agreement was concluded between FFiL Śnieżka S.A. (lender) and its subsidiary Śnieżka-Ukraina Sp. z o.o. in Yavoriv (borrower), with the loan to be used as a contribution to the borrower's current assets. The loan amounts to USD 3 million, which equals PLN 7.84 million according to the average exchange rate of the NBP at the agreement conclusion date. The loan was granted as a revolving facility with the possibility of taking multiple loans by 14 October 2010. At 31.12.2009, the debt amounted to USD 2,000,000.



5. On 16 August 2005 a loan agreement was concluded with BAWA Sp. z o.o. for PLN 1,000,000 to be repaid by 31 March 2008. PLN 500,000 were disbursed in July 2007 and the remaining PLN 500,000 in February 2008. On 12 February 2008 an annex was signed pursuant to which the repayment date was extended to 31 March 2011. At 31.12.2009 the debt amounted to PLN 1,000,000. 6. On 18 August 2008 a loan agreement was concluded with Diana Sp. z o.o. based in Podwołoczysko (Ukraine), amounting to USD 700,000 to be repaid by 21 July 2011. At 31.12.2009 the debt amounted to USD 700,000. Guarantees and sureties granted by Śnieżka At 31.12.2009, 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 to Bank Handlowy w Warszawie S.A. against a surety for the

Paylink agreement for PLN 9,694.3 thousand.

All sureties were granted based on the resolutions of the Managing Board of Fabryka Farb i Lakierów “Śnieżka” S.A. approved by the Supervisory Board. Loans taken by Śnieżka

Bank Loan amount in in thousands of

PLN

Conclusion date

Repayment date Debt at 31.12.2009

in thousands of PLN

Pekao S.A. 30,000 30.06.2006 18.12.2010 4,618 PKO BP 20,000

(as of 19.01.2010 the loan amounts

to 10,000)

29.03.2002 19.01.2011 7,862

PKO BP 20,000 22.01.2007 21.01.2011 19,250

Bank BPH SA. 20,000 19.01.2009 17.01.11 5,474 Bank Handlowy w Warszawie S.A.

20,000 10.06.2005 25.02.2011 17,432

Podkarpacki Bank Spółdzielczy

500 31.03.2006 31.03.2010 294

ING Bank Śląski SA

12,500 27.04.2009 26.04.2010 11,497

Total 123,000 66,427 Information on the agreement concluded with an entity authorised to audit financial statements On 15 June 2009, the Company concluded an agreement with MOORE STEPHENS Józef Król Sp. z o.o. for auditing the financial statements for 2009 with the following schedule:



- separate half-yearly financial statements by 24 September 2009 - consolidated half-yearly financial statements by 24 August 2009 - separate annual financial statements on the date to be agreed - consolidated annual financial statements on the date to be agreed

The total fee for auditing the financial statements for 2009 amounts to net PLN 70,000 plus 22% VAT, out of which:

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

. The Company did not conclude any other agreements with MOORE STEPHENS Józef Król Sp. z o.o. or pay any remuneration other than for the services indicated. The financial statements for 2008 were audited by MOORE STEPHENS Józef Król Sp. z o.o. based on an agreement dated 27 June 2008. Separate and consolidated annual financial statements were audited and the remuneration for auditing thereof amounted to net PLN 70,000 plus VAT, out of which:

- review of the separate half-yearly financial statements – PLN 15,000 - review of the consolidated half-yearly financial statements – PLN 10,000 - auditing of the separate financial statements – PLN 25,000 - auditing of the consolidated financial statements – PLN 20,000.

. Major prizes and awards for Śnieżka in 2009:

The Company is fully focused on improving the quality of its products and implementing innovative solutions. The effect of such endeavours is the appreciation of our Customers. The proof of it is in the numerous awards, rewards and titles granted.

• Śnieżka as the Big Pearl of the Polish Economy

FFiL Śnieżka S.A. ranked 19, which was very high, in the 7th ranking of Perły Polskiej Gospodarki (Pearls of the Polish Economy), and thereby was also rewarded in the “Perły Duże” (Big Pearls) category. The ranking is an initiative of the English language monthly, Polish Market. Śnieżka was once again appreciated “for the consistent implementation of its corporate policy and strategy and maintaining the leading position among the most dynamic and effective Polish enterprises.” 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 brand is gaining in value



Fabryka Farb i Lakierów Śnieżka S.A. recorded an increase of its brand value by 13% compared to 2008. The latest “Najcenniejsze Polskie Marki” (The Most Valuable Polish Brands) ranking, prepared for the sixth time by Rzeczpospolita daily, showed an increase of the Śnieżka brand value by as much as 13% compared to the previous year, setting it at PLN 124.9 million. This puts the Company in 95th position among all brands in Poland, and confirms that it is by far the best in the paint and varnish industry (for comparison: the Dekoral brand was valued at PLN 75.7 million). According to the ranking, Śnieżka is also among the most popular brands, taking 31st place in the general list, and 1st in the paint and varnish industry! With a very high score in the “Brand awareness” category (19th place among all brands), Śnieżka confirmed good awareness of its brand among consumers. Śnieżka also took good positions in other categories: reference rate (55th), priority of the brand awareness (37th) and perceived value (34th).

• Entrepreneur of the Year 2009

Piotr Mikrut, CEO of Fabryka Farb i Lakierów Śnieżka S.A. was awarded the title of Ernst & Young Przedsiębiorca Roku 2009 (Entrepreneur of the Year 2009). The CEO of Śnieżka was judged to be the best in the “Production” category, and also in the general ranking, beating all the other contestants. The title of Przedsiębiorca Roku 2009 was awarded to Piotr Mikrut by an independent jury chaired by Mr Jan Krzysztof Bielecki. The justification of the verdict was: “for succeeding in the 100-million market in our region, whose importance for Europe continues to grow; for an effective defence of market position in a crisis and for creation of a noticeable brand for a leading manufacturer of paints and varnishes.”

• Premium Brand Giełda 2009

FFiL Śnieżka S.A. found itself among five listed companies honoured with the title of High Reputation Company PremiumBrand 2009. The title is only awarded to entities quoted on the Polish stock exchange whose image, commitment to the principles of economics, transparency and operational reliability as well as expertise of the management contributes to high reputation, thus creating added value and setting trends for others.

• Turbines of the Polish Economy Śnieżka has found itself among the winners of the ranking “Turbiny Polskiej Gospodarki” (Turbines of the Polish Economy). The list prepared by Gazeta Finansowa weekly features the best SMEs, understood as enterprises whose annual balance sheet total does not exceed EUR 50 million. The authors compiled a list of 250 companies, categorizing them according to H1 2009 income. Fabryka Farb i Lakierów Śnieżka S.A., with the income of PLN 271.8 million (H1 2009) ranked third, thus becoming – as the ranking name suggests – one of the major ‘turbines’ of the Polish economy.

• Śnieżka on top in consumer surveys

Fabryka Farb i Lakierów Śnieżka S.A. was the winner of the fifth edition of the program “Consumer’s Laurel” in the “Paints” category and received the Consumer Gold Laurel 2009. The aim of the survey, organized by the Media Partner Group, is to select the brand which is the most highly appreciated by customers. The survey checks the level of popularity



and recognisability of products among the respondents. An additional criterion is voting by consumers and their opinions on individual brands. What is important is that the survey covers all the brands present on the market, and the customers themselves indicate the most known and recognizable ones in a given category. In the survey the Śnieżka brand beat all its rivals in its category.

• Moreover, this year’s competition saw the MAGNAT brand from FFiL Śnieżka S.A. winning the title of “Discovery of the Year 2009”. This title was established 2 years ago and is awarded to new products that have attracted the positive attention of consumers.

• Golden Śnieżka - Śnieżka as one of the leaders of the "Golden Hundred” - the Ranking of the Largest Companies from Podkarpackie.

Śnieżka came twelfth in the latest ranking prepared each year by Gazeta Codzienna Nowiny and a team of specialists from Wyższa Szkoła Zarządzania in Rzeszów (Rzeszów School of Business). Simultaneously, it took 4th place among the Companies of Podkarpackie with the highest stock exchange capitalization at the end of 2008. A hundred companies, the market achievements of which have the most significant influence on the voivodship economy, met the requirements for ranking.

• Premium Brand 2009

Fabryka Farb i Lakierów Śnieżka S.A. was honoured for the fourth time with the title of High Reputation Brand in the Home & Office category. The Premium Brand ranking is prepared based on a survey developed and conducted by a team of specialists from survey companies. The respondents included consumers (16-65 years old) from all over Poland, as well as managers from the 2000 largest Polish companies. The latter also gave points in the category “brand as a business partner”. In total, the respondents in the PremiumBrand survey evaluated 5 key reputation components: references, information in the media, social involvement, company as an employer and as a business partner.

• Śnieżka higher in the ranking of the largest 500 companies

Once again, Fabryka Farb i Lakierów Śnieżka S.A. was assessed as being among Poland’s largest businesses. Śnieżka moved up 48 places in the Top 500 list since the previous year. The Top 500 ranking is prepared each year by Rzeczpospolita, one of the most renowned of Polish dailies. The newspaper develops this ranking based on press information communicated to the editorial staff, surveys including basic financial data as well as financial statements.

• Fabryka Farb i Lakierów Śnieżka S.A. among the best managed companies

FFiL Śnieżka was nominated for the Byki and Niedźwiedzie (Bulls & Bears) awards in the “Best Managed Company in 2008” category. This competition, aimed at selecting the leading capital market companies, was organised by Parkiet daily newspaper for the 15th time. The



authors stressed that this year was marked by the crisis in the background: Last year was marked by slumps in the stock exchanges and a poorer economic situation worldwide (…). Despite that, we managed to find those who were able to control the bear dominating the stock exchanges and handle adversities. As Dariusz Bogdan, Deputy Minister of Economy, stressed when commenting on the competition: ‘we have numerous strong companies which are able to resist difficulties.” In selecting the winners, the jury takes into account: financial performance, profitability, cost policy, competitive advantage over other industry companies, appropriate investments as well as consistent and effective development strategy.

• Śnieżka as a gem on the Polish market

FFiL Śnieżka S.A. achieved the “Large Pearls” category in the 6th annual ranking of the Pearls of the Polish Economy. This 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 once again found itself among the Pearls of the Polish Economy, thereby confirming its stable and strong market position. As the organizers stressed, the title was awarded to FFiL Śnieżka because of its “consistent implementation of its corporate policy and strategy and maintaining its leading position among the most dynamic and effective of Polish enterprises”.

17. Summary The Company’s Managing Board considers the Company's activities implemented in 2009 as positive. These activities contributed to achieving high effectiveness by the Company, and the results achieved in a difficult situation in the market of paints and varnishes, as regards increased sales, performance, market position and, above all, financial standing are compliant with the previous intentions and constitute grounds for the Company’s further development. In 2010, the Company's Managing 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. Managing Board of Fabryka Farb i Lakierów “ Śnieżka” S.A in Lubzina Signatures of Board Members:

1. Piotr Mikrut _______________________

2. Witold Waśko _______________________

3. Joanna Wróbel-Lipa _______________________



4. Walentyna Ochab _______________________

Lubzina, 22 April 2010

MANAGEMENT REPORT OF FABRYKA FARB I LAKIERÓW “ ŚNIE …€¦ · 39-102 Lubzina 34 a Ropczycko-Sędziszowski Poviat Podkarpackie Voivodship Company’s incorporation: The Company

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