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2.4 Changes in the scope of consolidation and structure of PZU Group

2.4.1. Changes in the scope of consolidation of investment funds

Information about the application of IFRS 10 from 1 January 2014 are presented in Note 5.1.2.1.

The assumptions made by PZU Group upon consolidation of investment funds have been presented in Note 6.1.1.

Due to the fact that PZU Group lost control over a sub-fund PZU Energia Medycyna Ekologia, the consolidation was ceased from 1 April 2014. It resulted in a reduction of cash balance of PZU Group by PLN 16,108 thousand (in “decrease in cash inflows due to changes in the scope of consolidation” line in the consolidated cash flow statement. After ceasing the consolidation of the investment fund, the participation units are recognised in consolidated financial statements instead of the assets and liabilities of the investment fund.

2.4.2. Acquisition of shares in EMC Instytut Medyczny SA

On 23 December 2013, PZU FIZ AN BIS 2 entered into a contract providing for the acquisition of 948,370 newly issued shares in EMC Instytut Medyczny SA (“EMC”) with the nominal value of PLN 4.00 per share and the issue price of PLN 19.50 per share. The total purchase price for the new shares amounted to PLN 18,493 thousand.

On 14 March 2014 the capital increase of EMC was registered, as a result of the issuance of 3,692,310 shares with a nominal value of PLN 4.00 per share and the issue price of PLN 19.50 per share. In accordance with the above mentioned final contract, PZU FIZ AN BIS 2 acquired 948,370 shares (constituting 25.685% of new issue). As a result of the capital increase, PZU FIZ AN BIS 2 has a total of 3,435,638 shares representing 28.58% of the share capital, which entitles it to 25.41% of votes at the General Meeting of Shareholders of EMC.

2.4.3. Increase of the capital share in Armatura Kraków SA

As at 31 December 2013, PZU FIZ AN BIS 2 had a total of 75,125,538 shares representing 92.75% of the share capital of Armatura Kraków SA and 92.75% of votes at the General Meeting of Shareholders.

As a result of shares squeeze-out, on 23 January 2014 PZU FIZ AN BIS 2 acquired 5,517,888 shares in Armatura Kraków SA. As a result of this transaction, PZU FIZ AN BIS 2 held the total of 80,643,426 shares representing 99.56% of the share capital of Armatura Kraków SA and 99.56% of votes at the General Meeting of Shareholders.

Through transactions settled on 3 March 2014 and 14 March 2014, PZU FIZ AN BIS 2 purchased 298,399 and 58,175 shares, respectively. As a result of these transactions, PZU FIZ AN BIS 2 had a total of 81,000,000 shares representing 100% of the share capital of Armatura Kraków SA, which entitled it to 100% of votes at the General Meeting of Shareholders.

On 9 January 2014, a request concerning the granting of authorization to restore shares of Armatura Kraków SA to a document form, i.e. the abolition of their dematerialization, was submitted to the Polish Financial Supervision Authority (“PFSA”). The PFSA agreed to dematerialize the shares on 18 February 2014. Pursuant to this decision, as at 10 March Armatura Kraków SA ceased to be subject to the obligations arising from the Act of 29 July 2005 on Public offering, conditions governing the introduction of financial instruments to organized trading, and public companies (Journal of Laws of 2013, 1382).

2.4.4. Combinations of entities under common control

On 21 November 2014, the General Meeting of Shareholders of Armatoora SA adopted a decision on the legal merger of Armatoora SA (the acquirer) and Armadimp SA (the acquiree). The sole shareholder of both companies was Armatura Kraków SA. The acquisition took place by transferring all assets of the acquiree to the acquirer in exchange for shares in the acquirer issued to the shareholder of the acquiree (Armatura Kraków SA).

On 28 November 2014 the General Meeting of Shareholders of Armatura Kraków SA adopted a decision on the legal merger of Armatura Kraków SA (the acquirer) with Armagor SA (the acquiree), whose sole shareholder was Armatura Kraków SA. The acquisition took place by transferring all the assets of the acquiree to the acquirer.

Both mergers were registered in the National Court Register on 31 December 2014.

Given the nature of the transactions (combinations of entities under common control) they had no impact on the consolidated financial statements.

2.4.5. Business combinations

Business combination transactions are accounted for using the acquisition method in accordance with IFRS 3 “Business Combinations”. Among others, this requires identifying the acquirer, determining the acquisition date, recognizing and measuring acquired the identifiable assets acquired, liabilities assumed measured at fair value as at the acquisition date and any non-controlling interest in the acquiree, as well as recognising and measuring goodwill.

Detailed accounting policies concerning the settlement of the acquisition transactions are presented in Note 5.4.

Acquisition of insurance companies (AAS Balta, Link4, Lietuvos Draudimas AB as well as the Estonian branch of Codan Forsikring A/S) is part of the development strategy pursued by PZU Group, with international expansion and strengthening the position of PZU in Poland at its core. The goodwill recognised in the consolidated financial statements is an outcome of the planned achievement of value added resulting from synergy in the area of operations, IT solutions, and offer for Clients. A strong position that the acquired companies hold on the local markets is another argument that makes up the goodwill recognised. Moreover, in the case of Link4, as a result of using two brands in Poland, it is planned to attract new Clients and upsale the exisiting ones.

Acquisition of entities rendering health care services (CM Medica, Prof-Med, SU Krystynka, Elvita, Proelmed) is connected to the development of the PZU Group’s activity in the field of health insurance.

2.4.5.1. Acquisition of shares of AAS Balta

On the basis of the share purchase agreement signed on 17 April 2014, PZU acquired from Royal & Sun Insurance plc, limited liability company incorporated in England and Wales with registered office in West Sussex, United Kingdom (“RSA”), 4,651,825 ordinary shares in the company AAS Balta that represent 99.995% of share capital of AAS Balta and 99.995% of votes at the General Meeting of Shareholders of AAS Balta (“AAS Balta Shares”) with a nominal value of 1.00 LVL each.

The acquisition of the shares of AAS Balta was conditional upon the fulfilment of the following conditions precedent:

  • obtaining the decision of the Financial and Capital Markets Commission of the Republic of Latvia regarding the acquisition of AAS Balta’s shares in accordance with the relevant provisions of the Latvian law (including the no objection statement);
  • obtaining the approval of European Commission’s anti-thrust commission or a Latvian anti-thrust authority (depending on which one of the bodies would be appropriate in this case);
  • obtaining the approval of the Ukrainian anti-trust authority.

Closing of the acquisition of AAS Balta and obtaining control took place on 30 June 2014 and since that day AAS Balta has been consolidated. The payment for the shares of AAS Balta made on the date of closing the transaction amounted to PLN 49,172 thousand (in accordance with the NBP’s (National Bank of Poland) exchange rate from the day preceding the date of the transaction – PLN 204,202 thousand).

On 19 November 2014, the final settlement of the transaction was prepared. As a result, the purchase price of shares in AAS Balta was reduced by EUR 812 thousand. The final purchase price amounted to EUR 48,360 thousand (PLN 200,776 thousand).

Purchase price allocation for AAS Balta

During the calculation of goodwill, the carrying amounts of assets and liabilities of AAS Balta have been remeasured to fair value and new intangible assets have been identified that had not been hitherto recognised by the company.

Fair value of the acquired assets as at the acquisition date Provisional settlement (in thousands EUR) Adjustment Final settlement (in thousands EUR)
Intangible assets 2,914 - 2,914
Property, plant and equipment 2,923 - 2,923
Financial assets 35,309 - 35,309
Receivables 10,429 - 10,429
Reinsurers’ share in technical provisions 6,973 - 6,973
Deferred tax assets 982 - 982
Other assets 4,520 - 4,520
New intangible assets identified during the acquisition, including: 30,094 - 30,094
- trademark 8,600 - 8,600
- customer relations 14,193 - 14,193
- broker relations 1,107 - 1,107
- present value of future profits 6,194 - 6,194
Total assets 94,144 - 94,144
Technical provisions 46,270 - 46,270
Liabilities 8,488 - 8,488
Non-controlling interest 2 - 2
Share in fair value of the acquired net assets 39,384 - 39,384
Fair value of consideration transferred – in cash 49,172 -812 48,360
Calculated goodwill 9,788 -812 8,976

The goodwill will not be subject to tax deduction.

2.4.5.2. Acquisition of shares of Link4

On the basis of the share purchase agreement signed on 17 April 2014, PZU acquired from RSA 111,354,305 registered shares in the company Link4 that represent 100% of share capital of Link4 and 100% of votes at the General Meeting of Shareholders of Link4 (“Link4 Shares”) with a nominal value of PLN 1.00 each.
The acquisition of the shares of Link4 was conditional upon the fulfilment of the following conditions precedent:

  • approval of PFSA;
  • obtaining the approval of European Commission’s anti-trust commission or the Polish Office for Competition and Consumer Protection (depending on which one of the bodies would be appropriate in this case), including the no objection statement;
  • approval of the PFSA for the repayment of the subordinate loan agreement between InTouch Insurance Group B.V. and Link4 as at 4 March 2009 with further amendments;
  • obtaining the approval of the Ukrainian anti-trust authority.

Closing of the acquisition of Link4 and obtaining control took place on 15 September 2014 and since that day Link4 has been consolidated. The payment for the shares of Link4 made on the date of closing the transaction amounted to EUR 93,886 thousand (in accordance with the NBP’s exchange rate from the day preceding the date of the transaction – PLN 393,917 thousand). The ultimate purchase price will be determined following the final settlement prepared by PZU and approved by RSA.

As at 31 December 2014, no final settlement of the transaction has been prepared (no final acquisition price has been set). Therefore, the below purchase price allocation for Link4 is of a provisional nature.

Provisional purchase price allocation for Link4

The settlement of the acquisition of shares of Link4 was accounted for on the basis of accounting data of the company prepared as at 31 August 2014. There were no significant differences in the accounting data between 31 August 2014 and 15 September 2014 (the acquisition date).

During the calculation of goodwill, the carrying amounts of assets and liabilities of AAS Balta have been remeasured to fair value and new intangible assets have been identified that had not been hitherto recognised by the company.

Fair value of the acquired assets as at the acquisition date Provisional settlement (in thousands PLN)
Intangible assets 8,552
Property, plant and equipment 10,698
Financial assets 476,439
Receivables 65,354
Reinsurers’ share in technical provisions 28,961
Other assets 26,634
New intangible assets identified during the acquisition, including: 117,266
- trademark 50,000
- present value of future profits 67,266
Total assets 733,904
Technical provisions 493,973
Liabilities 82,827
Share in fair value of the acquired net assets 157,104
Fair value of consideration transferred – in cash 393,917
Calculated goodwill 236,813

The goodwill will not be subject to tax deduction.

2.4.5.3. Acquisition of shares of Lietuvos Draudimas AB

Pursuant to the share purchase agreement signed on 17 April 2014, Lietuvos Draudimas AB PZU acquired from RSA 805,432 ordinary registered shares in the company Lietuvos Draudimas AB that represent 99.977% of share capital ofLietuvos Draudimas AB (“Lietuvos Draudimas AB Shares”) and 99.977% of votes at the General Meeting of Shareholders of Lietuvos Draudimas AB with a nominal value of LTL 50.00 each.

The acquisition of the shares of Lietuvos Draudimas AB was conditional upon the fulfilment of the following conditions precedent:

  • obtaining the decision of the Bank of Lithuania in accordance with the relevant provisions of the Lithuanian law (including the no objection statement);
  • obtaining the approval of European Commission’s anti-thrust commission or a Lithuanian anti-thrust authority (depending on which authority would be appropriate in this case); the anti-thrust approval should be unconditional or contain terms acceptable to PZU; on 9 October 2014, PZU received information about granting the approval in question. The approval was issued on the condition that PZU sells its business related to motor own damage insurance and residential insurance to a third party entity within a specified period. The business intended for sale includes the rights and obligations arising from PZU Lietuva’s insurance: motor own damage and household insurance as at the date of the decision, as well as tangible assets and contracts concluded by PZU Lietuva in connection with the aforementioned types of insurance;
  • obtaining the approval of the Ukrainian anti-trust authority.

Closing of the acquisition of Lietuvos Draudimas AB and obtaining control took place on 31 October 2014 and since that day Lietuvos Draudimas AB has been consolidated. The payment for the shares of Lietuvos Draudimas AB made on the date of closing the transaction amounted to EUR 191,012 thousand (in accordance with the NBP’s exchange rate from the day preceding the date of the transaction – PLN 807,598 thousand).

As at 31 December 2014, no final settlement of the transaction has been prepared. Therefore, the below purchase price allocation for Lietuvos Draudimas AB is of a provisional nature.

Provisional purchase price allocation for Lietuvos Draudimas AB

During the calculation of goodwill, the carrying amounts of assets and liabilities of Lietuvos Draudimas AB have been remeasured to fair value and new intangible assets have been identified that had not been hitherto recognised by the company.

Fair value of the acquired assets at the time of the acquisition of control Provisional settlement (in thousands EUR)
Intangible assets 4,595
Property, plant and equipment 11,066
Investment property 831
Financial assets 126,116
Receivables 23,454
Reinsurers’ share in technical provisions 2,211
Other assets 7,889
New intangible assets identified during the acquisition, including: 58,700
- trademark 19,400
- customer relations 18,700
- present value of future profits 17,800
- broker relations 2,800
Total assets 234,862
Technical provisions 96,400
Liabilities 31,890
Non-controlling interest 27
Share in fair value of the acquired net assets 106,545
Fair value of consideration transferred – in cash 191,012
Calculated goodwill 84,467

The goodwill will not be subject to tax deduction.

2.4.5.4. Acquisition of shares of the Estonian branch of Codan Forsikring A/S and the agreement on the transfer of insurance portfolio

Pursuant to the agreement signed on 17 April 2014 by and between Codan Forsikring A/S, a company registered in Denmark with its registered office in Frederikberg (“Codan Denmark”) acting as a seller, and PZU Lietuva acting through its UAB DB PZI Lietuva Eesti Filiaal branch registered in the Republic of Estonia acting as a buyer, and PZU acting as a guarantor for the buyer (“Codan Sales Agreement”) PZU Lietuva purchased from Codan Denmark an insurance business run by Codan Denmark through its branch registered in Estonia (“Branch of Codan”).

Closing of the acquisition transaction of the Branch of Codan and obtaining control took place on 31 October 2014. The payment for the Branch of Codan made at the date of transaction closing amounted to EUR 21,409 thousand. The ultimate purchase price will be determined following the final settlement prepared by PZU Lietuva and approved by Codan Denmark.

In addition to the Codan Sales Agreement, PZU Lietuva and Codan Denmark also signed the Portfolio Transfer Agreement – Transfer of the Estonian Insurance Portfolio by Codan Denmark. Pursuant to the said agreement, PZU Lietuva acquired from Codan Denmark the portfolio of all the insurance contracts concluded or accepted by the Branch of Codan as at 31 October 2014.

As at 31 December 2014, no final settlement of the transaction has been drafted (no final acquisition price has been set). Therefore, the below purchase price allocation for the Branch of Codan is of a provisional nature.

Provisional purchase price allocation for the Branch of Codan

During the calculation of goodwill, the carrying amounts of assets and liabilities of the Branch of Codan have been remeasured to fair value and new intangible assets have been identified that had not been hitherto recognised by the company.

Fair value of the acquired assets at the time of the acquisition of control Provisional settlement (in thousands EUR)
Intangible assets 1,843
Property, plant and equipment 114
Receivables 10,526
Other assets 1,926
New intangible assets identified during the acquisition, including: 7,400
- present value of future profits 3,500
- broker relations 2,900
- customer relations 1,000
Total assets 21,809
Technical provisions 22,796
Liabilities 3,957
Share in fair value of the acquired net assets -4,944
Fair value of consideration transferred – in cash 21,409
Calculated goodwill 26,353

2.4.5.5. Acquisition of shares in health care companies

CM Medica

On 8 April 2014 an agreement was signed on the sale of shares of Orlen Medica sp. z o.o. (operating under the name of Centrum Medyczne Medica sp. z o.o. since 4 June 2014), between Polski Koncern Naftowy Orlen SA (“PKN Orlen”), as the seller, and PZU FIZ AN BIS 2, as the acquirer (“The Agreement of Sale of CM Medica Shares”).

Pursuant to the Share Purchase Agreement for CM Medica’s Shares, PZU FIZ AN BIS 2 acquired from PKN Orlen 17,983 shares in CM Medica with the nominal value of PLN 500.00 each, representing 100% of the share capital, which entitles to 100% of votes at the General Meeting of Shareholders. The transfer of shares took place on 9 May 2014.

Under the Agreement of Sale of CM Medica Shares, PZU became the indirect owner of 4,525 shares of the company operating under the name Sanatorium Uzdrowiskowe “Krystynka” sp. z o.o. (“SU Krystynka”) with the nominal value of PLN 500.00 each, representing 98.58% of the share capital and 98.58% of votes at the General Meeting of Shareholders, which is owned by CM Medica.

Since the acquisition date, which is 9 May 2014 CM Medica and SU Krystynka have been consolidated.

Prof-med

On 8 April 2014, an agreement was signed on the sale of shares in Specjalistyczna Przychodnia Przemysłowa “Prof-med” Sp. z o.o. between Anwil SA (“Anwil”), as the seller, and PZU FIZ AN BIS 2, as the acquirer (“Agreement of sale of Prof-med’s Shares”).

Pursuant to the Agreement of Sale of Prof-med’s Shares, PZU FIZ AN BIS 2 acquired from Anwil 136 shares in Prof-med with the nominal value of PLN 500.00 each, representing 96.45% of the share capital, which entitles to 96.45% of votes at the General Meeting of Shareholders. The transfer of shares took place on 12 May 2014. Since the acquisition date, which is 12 May 2014 Prof-med has been consolidated.

Elvita

On 12 August 2014 an agreement of sale of Elvita’s shares was signed between Tauron Dystrybucja SA, Tauron Wytwarzanie SA, Tauron Wydobycie SA (jointly referred to as “Tauron Group”), as the sellers, and PZU FIZ AN BIS 2, as the acquirer ("Agreement of sale of Elvita’s shares”.) The transfer of shares took place on 1 December 2014.

Pursuant to the Agreement of sale of Elvita’s shares, PZU FIZ AN BIS 2 has acquired from Tauron Group 14,984 Elvita’s shares with the nominal value of PLN 500.00 each, representing 98.82% of the share capital, which entitles to 98.82% of votes at the General Meeting of Shareholders.

In addition, PZU became the indirect holder of 57 shares in the company operating under the name of Przedsiębiorstwo Usług Medycznych “Proelmed” sp. z o.o. with the nominal value of PLN 500.00 each, constituting 57.00% of shares in its share capital and granting the right to 57.00% of votes at the General Meeting of Shareholders, owned by Elvita.

Since the acquisition date, which is 1 December 2014 Elvita and Proelmed have been consolidated.

Purchase price allocation for health care companies

Purchase price allocation for these subsidiaries has been prepared on the basis of the data prepared as at 30 April 2014 (CM Medica, SU Krystynka, Prof-Med) and as at 30 November 2014 (Elvita, Proelmed). There were no significant differences in the accounting data between the data based on which the purchase price allocation was finalised and the data as at the respective acquisition dates.

During the calculation of goodwill, the carrying amounts of property, plant and equipment, have been remeasured to fair value and new intangible assets have been identified that had not been hitherto recognised by the companies.

Fair value of the acquired assets at the time of the acquisition of control Final settlement (in thousands PLN)
Intangible assets 381
Property, plant and equipment 32,868
Financial assets 7,420
Receivables 7,949
Deferred tax assets 1,398
Other assets 1,938
New intangible assets identified during the acquisition – customer relations 16,145
Total assets 68,099
Liabilities 15,437
Non-controlling interest 779
Share in fair value of the acquired net assets 51,883
Fair value of consideration transferred – in cash 81,463
Calculated goodwill 29,580

The company’s goodwill will not be subject to tax deduction.

2.4.5.6. Acquisition of shares of PZU Finance AB (publ.)

On 2 June 2014, PZU acquired the shares of PZU Finance AB (publ.) (until 16 June 2014 operating under the name Goldcup 9812 AB) for the amount of SEK 500,000 (PLN 236 thousand), which has been consolidated since that date.

On 3 July 2014 the company issued bonds as described in Note 51.

2.4.5.7. Financial data of the acquired entities

The following table presents financial data of the entities acquired in 2014 and included in the consolidated statement of profit or loss. The data have been prepared in accordance with IFRS and they are for the period in which the companies were controlled by PZU Group.

Consolidated statement of profit or loss AAS Balta Link4 Lietuvos Draudimas AB Branch of Codan CM Medica SU Krystynka Prof-Med Elvita Proelmed
Gross written premiums 120,925 138,875 82,724 22,359 - - - - -
Reinsurer’s share in written premiums -3,020 -7,748 -758 -821 - - - - -
Net written premium 117,905 131,127 81,966 21,538 - - - - -
Change in net unearned premiums reserve -8,366 -8,502 -1,810 289 - - - - -
Net earned premiums 109,539 122,625 80,156 21,827 - - - - -
Revenue from commissions and fees - - - - - - - - -
Net investment income -117 5,602 1,768 - 39 2 15 7 2
Net result on realization and impairment losses on investments -21 -1,377 825 - - - -9 -20 -
Net change in the fair value of assets and liabilities measured at fair value 1,638 - - - - - - - -
Other operating income 1,093 1,037 323 66 18,704 3,057 4,093 2,788 524
Claims, benefits and change in technical provisions -83,658 -99,285 -46,274 -20,544 - - - - -
Reinsurers’ share in claims, benefits and change in technical provisions 14,763 2,770 1,399 394 - - - - -
Net claims and benefits -68,895 -96,515 -44,875 -20,150 - - - - -
Change in measurement of investment contracts - - - - - - - - -
Acquisition costs -4,449 1) -2,931 1) -9,459 1) -1,604 1) - - - - -
Administrative expenses -19,811 -13,461 -17,398 -3,816 - - - - -
Other operating costs -38,721 2) -18,187 3) -42,416 4) -3,986 5) -18,272 -2,695 -4,031 -3,118 -660
Operating profit (loss) -19,744 -3,207 -31,076 -7,663 471 364 68 -343 -134
Borrowing costs - -379 -67 - -33 - - -1 -
Share in net profit (loss) of entities measured using the equity method - - - - - - - - -
Gross profit/(loss) -19,744 -3,586 -31,143 -7,663 438 364 68 -344 -134
Income tax                
- current portion - - -71 - -366 -76 -39 104 -
- deferred portion 2,279 5,743 7,168 - 309 -47 22 -37 13
Net profit/(loss) -17,465 2,157 -24,046 -7,663 381 241 51 -277 -121
- profit/(loss) attributable to equity holders of the parent company -17,464 2,157 -24,040 -7,661 381 238 49 -274 -68
- profit/(loss) attributable to non-controlling interest -1 - -6 -2 - 3 2 -3 -53

1) Acquisition costs do not include the change in deferred acquisition costs for which fair value as at the acquisition date equals 0.
2)
Including PLN 31,201 thousand of amortisation of intangible assets acquired on business combination.
3)
Including PLN 14,888 thousand of amortisation of intangible assets acquired on business combination.
4)
Including PLN 36,224 thousand of amortisation of intangible assets acquired on business combination.
5)
Including PLN 3,741 thousand of amortisation of intangible assets acquired on business combination.


2.4.5.8. Consolidated statement of profit and loss, including acquired entities

The following table presents incomes and profits of PZU Group, including the financial data of the acquired subsidiaries calculated as if the acquisition date for all combinations performed throughout the year was the beginning of the financial year.

Consolidated statement of profit and loss, including acquired subsidiaries 1 January – 31 December 2014
Gross written premiums 17,831,969
Reinsurer’s share in written premiums -395,767
Net written premium 17,436,202
Change in net unearned premiums reserve -128,091
Net earned premiums 17,308,111
Revenue from commissions and fees 350,764
Net investment income 1,815,974
Net result on realization and impairment losses on investments 421,207
Net change in the fair value of assets and liabilities measured at fair value 514,866
Other operating income 585,083
Claims, benefits and change in technical provisions -12,258,830
Reinsurers’ share in claims, benefits and change in technical provisions 207,310
Net claims and benefits -12,051,520
Change in measurement of investment contracts -14,031
Acquisition costs -2,299,388
Administrative expenses -1,643,711
Other operating costs -1,090,634
Operating profit 3,896,721
Borrowing costs -220,267
Share in net losses of entities measured using the equity method -1,525
Gross profit 3,674,929
Income tax
- current portion -682,303
- deferred portion -28,244
Net profit 2,964,382

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2.4.6. Establishment of Arm Property sp. z o.o.

Arm Property sp. z o.o. was registered on 26 November 2014. The Company’s equity is PLN 50 thousand and is divided into 1,000 shares, at PLN 50 per share. All shares have been acquired by Armaton SA.