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Consolidated Annual Report of Agrokor Group for 2016

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Consolidated Annual Report of Agrokor Group for 2016 Agrokor Group Consolidated Annual Report of Agrokor Group for 2016 Agrokor Group MANAGEMENT REPORT The Management report gives an overview of the business operations of the parent company Agrokor d.d. and its subsidiaries (jointly: “the Agrokor Group” or “the Group”) and together with the Consolidated Financial Statements forms the Consolidated Annual Report of Agrokor Group for 2016. The Group operates through its two business groups: Business Group Food and Business Group Retail. A detailed review of these activities and future developments is set out later in this report. As at 31 December 2016, the Group employed 58,317 employees, of which 28,365 were in Croatia. The Management Board of Agrokor d.d. during 2016 and until their release from duty on 10 April 2017, as a result of the appointment of the Extraordinary Commissioner, consisted of the following members: Ivica Todorić, President; Ante Todorić, Deputy President;Ivan Crnjac, Executive Vice President for Finance, Strategy and Capital Markets; Mislav Galić, Executive Vice President for the Food Business Group; Hrvoje Balent, Executive Vice President for Central Purchasing and Services; Darko Knez, Executive Vice President for the Retail Business Group (until 16 August 2016) and Ivica Sertić, Executive Vice President for Markets, Sales and Logistics. The Supervisory Board of Agrokor d.d. during 2016 and until their release from duty on 10 April 2017, as a result of the appointment of the Extraordinary Commissioner, consisted of the following members: Ivan Todorić, Chairman; Ljerka Puljić, Deputy Chairman; Damir Kuštrak, Member; Tomislav Lučić, Member and Tatjana Rukavina, Member. On 7 April 2017, the Management Board of Agrokor, led by the President of the Management Board, filed for the opening of the extraordinary administration procedure in accordance with the Law on extraordinary administration proceeding in companies of systemic importance for the Republic of Croatia (Official Gazette no 31/17, “Law”). On 10 April 2017, the Zagreb Commercial Court issued a Decision to initiate the Extraordinary Administration Procedure over Agrokor and its affiliated and controlled companies (together 77 companies in Croatia). The court appointed Mr. Ante Ramljak as Extraordinary Commissioner for Agrokor which took over the functions of Agrokor corporate bodies, including the management of Agrokor. The Extraordinary Administration effects, among other, are the prohibition of initiating litigation, enforcement and other proceedings during and until termination of the Extraordinary Administration. Creditors’ claims incurred before the Extraordinary Administration opening, are subject to filing and settlement. Following the appointment of the Extraordinary Commissioner it has been determined that Agrokor Management Board did not maintain adequate governance standards customary for a Company of this size, such as having regular and documented Management Board sessions. The Extraordinary Commisisioner found no records or minutes of MB meetings being held. Agrokor Group Structure An overview of the subsidiaries is disclosed in Note 3 and an overview of the associates is disclosed in Note 14. Overview of business operations in 2016 During 2016, the Group made significant efforts to meet its obligations to creditors. However, due to both a reduction in revenues which was compensated for by an equivalent reduction in operating costs and the Group's very substantial debt burden the Group's liquidity position was very much restricted. As a consequence of this, during 2016, the Group devoted much of its attention to providing sufficient liquidity to servicing outstanding liabilities, which resulted in a significant increase in financial expenses on its substantial accumulated debt structure. 1 Agrokor Group Furthermore, as a result of increased external competition which reduced retail market share and some negative trends in the market price in certain segments in which the Group competes, sales revenues reduced to HRK 42.5 billion from HRK 45.7 billion while pre-tax loss increased from HRK 3.2 billion (restated figure) to HRK 11.2 billion. The biggest drivers of the increased loss in 2016 were:- 1) a significant increase in operating expenses due to impairment charges on both property, plnat and equipment and intangible assets; 2) changes in the fair value of financial instruments and 3) recognition of previously unreported operating and financial expenses. These circumstances, as well as restatements described in Note 2, ultimately led to an unsustainable level of indebtedness, leading to cash flow insolvency in certain of the Group’s businesses which led to the opening of the Extraordinary administration process in accordance with the Law. Note that during the preparation of the annual financial statements a number of restatements of Group financial statements for previous years (as set out in Note 2) have been made. Key events in 2017 On 10th April 2017, Agrokor d.d, together with its affiliated and controlled companies entered the Extraordinary Administration Procedure (“Extraordinary Administration”) in accordance with the Law. Per the Extraordinary Administration, the court appointed Extraordinary Administrator took over the functions of the Companies corporate bodies, including the management of the Group. The effect of the Extraordinary Administration, among other things, is a prohibition on initiating litigation, enforcement and other proceedings during and until termination of the Extraordinary Administration. Creditors’ claims arising before the commencement of the Extraordinary Administration, are subject to a legally prescribed filing and agreement process. The Extraordinary Administration rules regulate the payment of claims during the Extraordinary Administration. An interim Creditors Council was established, which receives reports on the state of the Company and its affiliated and controlled companies, and has the power to authorize certain proposed transactions of the Extraordinary Administrator as prescribed by the Law. After the publication and confirmation of claims incurred before the Extraordinary Administration commencement, a permanent Creditors Council will be established, which will participate in the preparation of a settlement proposal. Under the Extraordinary Administration, a single settlement proposal will ultimately be presented to creditors’ for voting, encompassing Agrokor d.d and its affiliated and controlled companies and their creditors, providing for the settlement of claims and the restructuring of the Group. The Extraordinary Administration will terminate upon final delivery of the matters set out in the settlement plan. This year the Group’s retail businesses have been severely hampered by an inability to purchase goods and services as a result of the significant problems detailed above in relation to available liquidity which the Group faced in the first half of the year. On 13 April 2017 Agrokor signed a loan agreement as a borrower with Zagrebačka banka d.d., Privredna banka Zagreb d.d., Erste&Staiermerkische bank d.d. and Raiffeisenbank Austria d.d. as loan providers. The total loan amount was EUR 80,000,000. The loan has since been repaid in full from the proceeds of the loan concluded on 8 June 2017. On 8 June 2017 the Company signed a loan agreement as a borrower with various investors as loan providers. The total loan amount is up to EUR 1,060,000,000. The loan has a super-priority status as provided for in the Law and allows for the refinancing of debt incurred prior to entering into the extraordinary administration applying a 1:1 ratio between new money and refinanced debt. After the drawdown of the new financing in June and beyond, the situation began to stabilize, and the trends and operating metrics of the key operating companies started to return to previous levels. Although inventory levels have also been stabilized, negotiations with certain suppliers continue to be challenging. 2 Agrokor Group Companies from the food business group have continued to realize solid operating results in 2017. After the new financing was successfully completed in June 2017, the key focus was on increasing inventories in order to prepare companies for the summer season – their most important sales period, as stock levels had dropped significantly below prior year levels. The improvement in the working capital position of all the companies in the food group over the summer period led to a better operating result compared to the comparative period in 2016. Revenues in the agricultural part of the Food group business are primarily dependent on crop yield and market prices, and these indicators differ from one company to another. Each of the companies recorded successful harvests with record yields, particularly wheat, and purchases from all subcontractors (with regular payment of due amounts) has continued successfully. The new financing has stabilized the business and improved relations with suppliers and customers and enabled stabilization of sales. All Group companies continue to develop and implement cost optimization and restructuring measures with the aim of further improving business performance in 2017 and beyond. Expected future Group Development The greatest impact on the Group's future development will be the delivery of an appropriate Settlement plan within the framework of the Extraordinary Administration Proceedings. To the best of Management’s knowledge, based on currently available information, a successful conclusion and delivery of
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