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Report of the Supervisory Council of JSC Olainfarm to the General Meeting of Shareholders

on May 11, 2015

Supervisory Council of JSC Olainfarm has read the Consolidated and Parent Company’s Annual reports for 2014, as well as Independent Auditors’ Report about it. In addition, the Council has assessed financial position of the Company and Operations of the Management Board during this financial year and hence produced this Report.

The Council is satisfied that this has been the sixth consecutive year since the Company is demonstrating considerable profitability and sales of the Company continue growing. Although during 2014 serious economic turbulences were experienced by four markets important to the Company, it managed to increase its sales in almost all of them.  It resulted in overall sales of the Company increasing by more than 20%.  We would like to particularly stress Company’s successful cooperation with its Polish partners as well as increasing shipments to the World Health Organization. In both cases Company’s sales during this year have grown by different factors, and, which is particularly important, they contribute to independence from currently unstable markets of CIS countries.

Because of successfully established and growing chain of pharmacies as well as improving operations of Silvanols Ltd., company managed to stabilize its positions on Latvian market even further as Latvia is now very clearly a second most important market for the Company.  Every fifth euro during 2014 was received from Company’s Latvian partners, while every third euro came from sales to EU countries. Since pharmaceutical sector is very seriously regulated, the Supervisory Council regards this as an important achievement for market diversification.

Consolidated profit of the Company in 2014 was 12.2 million euros, while profit of the parent company exceeded 11.4 million euro.  Throughout the year we had reasonable expectations that the Company will be able to meets its profit guidances of 15 and 14 million euros respectively.  However, the rapid devaluation of Russian Ruble versus the Euro at the end of 2014, as well as adverse fluctuations of other currencies generated the total foreign exchange loss of 4.5 million euro, which made the meeting of initial profit targets practically impossible.  The Council has drawn the attention of the Management Board to the fact that this is yet another proof that further diversification of sales markets is of utmost importance for stable development of the company.

Since over the last number of years Company has been undergoing a phase of very significant sales increases, the Council has repeatedly drawn Board’s attention to the necessity to follow carefully if the Company has all the technological capacities necessary for further development.  Council very highly appreciates the work conducted by the Board for modernization of the production and respective raising of funding.  While during the last two years significant improvements have been made to modernize production processes, a lot remains to be done in the near future for improving production infrastructure.  Not only will it significantly improve environmental standards of the Company, but if funded using different sources of support, should also provide considerable economic effect.

Because of the necessity to continue with investments, including investments into production related infrastructure, as well as taking into consideration still unstable situation in sales markets important to the Company, the Council maintains its previously expressed proposal, to abstain from declaring dividends until the profits of 2015 are distributed.  If the situation does not deteriorate, the Council might ask the shareholders to approve dividends from the profit of 2015, with a payout ratio of 17.5%

The Council continues carefully following recent developments in Russia, which remains the main market of the Company.  Although on a numerous occasions, including this Report, the Council has drawn Board’s attention to necessity to diversify Company’s sales markets, in order to reduce dependency on a market as unstable as Russia today, by no means is the Council supporting any reduction of operations or activity in Russia.  Instead, the diversification should be promoted by achieving even bigger sales increases in other countries.  The council still regards an acquisition of similar profile company, whose sales markets are significantly different from Company’s markets as one of the particularly efficient ways for increasing sales diversity. Council invites the Board to put even more effort in considering development of this kind.

Council regards acquisition of 70.88% stake of Silvanols Ltd. and a further increase to nearly 97% an important but insufficient step to better sales market diversity.  In collaboration with Silvanols Ltd. the Company has a very real chance to strengthen its positions domestically, in CIS countries and other countries, where entry with food supplements is easier.

During 2014 the Council of the Company has performed its duties and supervised operations of the Company according to legislation, decisions by the general meetings.  The Council has approved financial statements and overviewed operations of Company’s management.  During the reporting period 25 Council meetings were held.  During these meetings, Board reports, plans, planned and actual budgets were reviewed.  Agenda items of general meetings were pre-approved. Council found no insufficiencies in Boards operations in 2014.  To a large extent the Board has been consulting the Council and has taken into account all previously mentioned and other recommendations of the Council targeted at safe further development of the Company.

The Council would like to take this opportunity to thank the Board, all employees of the Company, its partners for successful operations in 2014, congratulate shareholders with good results and wish a successful, stable and positively challenging 2015 and the further years.

 

Approved by the Council Meeting on May 5, 2015

 

SigitaReport of the Supervisory Council of JSC Olainfarm to the General Meeting of Shareholders