2011 Annual Report Www.neschen.com Y

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y Graphics y Documents y Technical Coatings 2011 Annual Report www.neschen.com Should there be discrepancies between the interpretation of the German and English version of this annual report, the German version shall prevail. 2 2011 Annual Report | Neschen AG Key Figures KEY FIGURES Key figures EUR ’000 IFRS 2009 IFRS 2010 restated1 IFRS 2011 13,125 13,125 13,125 3,655 2,083 786 305 464 638 65,599 62,636 56,948 2009 2010 restated1 2011 Consolidated sales 96,126 98,919 99,246 In Germany 21,793 21,184 20,378 In other countries 74,333 77,735 78,868 Profit/loss from business activities −5,104 −606 −4,054 EBITDA −1,587 2,372 1,111 EBIT −5,104 −606 −4,054 Net income for the year before taxes 7,658 −4,128 −218 Net income for the year after taxes 7,949 −2,944 −1,229 Net income for the year after minority interests 7,884 −3,028 −1,235 Cash flow from operating activities Balance sheet Subscribed capital Equity Capital expenditure on fixed assets Balance sheet total Earnings analysis 1,089 842 487 Earnings per share in EUR 0.60 −0.23 −0.09 Dividend per share in EUR 0.00 0.00 0.00 Employees 2009 2010 2011 457 446 436 Total number of employees as at 31/12/2011 Average number of employees over the year 505 444 442 Personnel expenses in EUR ’000 23,958 20,652 20,707 Sales per employee in EUR ’000 190.3 222.8 224.5 Average sickness absence rate 3.2% 2.8% 2.8% The restatements in financial year 2010 relate to the chapter “Restatement of the reference information in the 2010 consolidated financial statements in accordance with IAS 8“ of the Annual Report (see page 92 ff.). 1 2011 Fixed Assets EUR ’000 Intangible fixed assets Land and buildings Carrying amount Depreciation Capital expenditure 8,406 2,356 77 10,275 904 34 Operating and office equipment, technical equipment, assets under construction and machinery 4,632 1,905 511 Financial assets 1.676 0 16 24,989 5,165 638 Total as at 31/12/2011 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 3 Consolidated Group Unternehmensdarstellung CONSOLIDATED GROUP Neschen AG Bückeburg, Germany 95% 100% 5% Neschen Benelux B.V., Raalte Netherlands Neschen Corporation Elkridge, USA 100% Neschen Americas Corp. Elkridge, USA Production Sales Holding 4 2011 Annual Report | Neschen AG 100% 100% Filmolux S.A.R.L. Bagnolet, France Neschen Coating UK Ltd. Basildon, England 100% 100% Neschen Italia s.r.l. Bagnolo, Italy Neschen UK Ltd. Basildon, England 100% 100% Neschen Austria GmbH Wien, Austria Neschen Kft. Budapest, Hungary 51% HSW Signall s.r.o. Prag, Czech Republic Caution – German version shall prevail! Unternehmensdarstellung Table of Contents TABLE OF CONTENTS 3 4 Key Figures Consolidated Group TO OUR SHAREHOLDERS 6 10 Opening Statement of the Management Board Report of the Supervisory Board COMPANY PROFILE 12 15 18 20 22 24 25 Marketing of Neschen AG in 2011 “Graphics“ Division “Documents“ Division “Technical Coatings“ Division Declaration of Conformity pursuant to Section 161 AktG Investor Relations Executive Boards of Neschen AG CONSOLIDATED FINANCIAL STATEMENTS 76 77 78 79 Balance Sheet Income Statement Statement of Changes in Equity Cash Flow Statement NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 80 Disclosures 127 Auditor’s Report SINGLE-ENTITY FINANCIAL STATEMENTS 128 Neschen AG Balance Sheet (pursuant to HGB) 31 1 134 List of Addresses Publication Details NESCHEN GROUP MANAGEMENT REPORT 26 28 33 38 44 46 47 48 49 50 60 66 67 69 75 I. Summary II. The Company III. Sales Performance IV. Earnings Performance V. Balance Sheet Performance VI. Capital Expenditure VII. Financing VIII. Personnel Development IX. Research and Development X. Opportunities and Risks of Future Development XI. Forecast XII. Events after the Balance Sheet Date XIII. Outlook XIV. Other Mandatory Disclosures pursuant to Section 315 HGB Responsibility Statement Caution – German version shall prevail! 2011 Annual Report | Neschen AG 5 Unternehmensdarstellung THE MANAGEMENT BOARD 6 Dr. Norbert Dieterich Henrik Felbier Stefan Zinn Diplom-Ingenieur, Diplom-Kaufmann, Diplom-Kaufmann, born on 16 October 1948, born on 26 November 1970, born on 17 April 1965, Member of the Member of the Member of the Management Board Management Board Management Board since 2008 since 2012 since 1998 2011 Annual Report | Neschen AG Caution – German version shall prevail! Unternehmensdarstellung To Our Shareholders OPENING STATEMENT OF THE MANAGEMENT BOARD Dear Shareholders, Employees, Customers and Suppliers, 2011 was the third year in a row that was subject to consolidation. While Neschen AG generated slightly reduced sales (EUR −0.7 million), there was a slight improvement in sales for the Group as a whole in 2011 compared with the prior year (EUR +0.3 million). In terms of operating income, Neschen AG continued to improve over the prior year (EUR +0.2 million: HGB earnings after operating activities). The deterioration in the Group’s earnings before interest and taxes (EBIT) is mainly due to impairment losses in the USA and Great Britain. Overall, Neschen was able to improve its liquidity situation significantly and reduce its liabilities to a considerable extent. The Neschen Group thus demonstrated again that it is able to hold its own in operational terms despite a difficult environment. Nevertheless, the Company did not achieve the objective that it set itself for 2011. This was – following the significant non-personnel and personnel cost savings in prior years – to improve operating income on the back of improved margins and sales growth. Competitive pressure in the digital print media, particularly in products with a strong volume component, allowed only a limited improvement in prices, although purchase cost increases were moderate in 2011. The renewed economic slowdown in key sales markets meant that it was not possible to continue the course for growth from 2010 as of June in the reporting year. With a view to strengthening management, the Supervisory Board appointed Henrik Felbier to the Management Board with effect from 1 January 2012, assigning responsibility for finances and restructuring to him. The aim of this measure is to provide a significant increase in company value at the same time as restoring capital servicing capacity. The focus of the Management Board is on restructuring, in addition to numerous activities for improving sales and margin performance. The first measures have already been initiated in the shape of the forthcoming closure of the loss-making operating plant in Basildon (Great Britain). Restructuring activities in the sales subsidiaries, for example in England and the Netherlands, have begun. Likewise, an extensive programme has already been introduced in the USA. A review of the last few years also gives cause to seek to optimize the Neschen’s Group business model: The Group’s positioning itself as a manufacturer and service provider for the graphics industry, with a focus on the digital print market, was unable to fill the considerable capacities in Bückeburg, Elkridge (USA) and Basildon (Great Britain) to a sufficient extent. Concentration on the Group’s own capacities in production and sales geared more strongly to industrial coating will be characteristic of the repositioning over the next few years. The first new coating procedures, initiated since the end of 2011, are likely to grant Neschen a niche position with not inconsiderable competitive advantages. 2011 saw the Group switch to a cost-efficient and technically refined adhesive. This will bring about further cost and competitive advantages from 2012 onwards. At the same time, the Group embarked upon an extensive programme for training alternative suppliers, with a view to enabling refinement and cost reduction in raw materials and semi-finished goods. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 7 To Our Shareholders Unternehmensdarstellung OPENING STATEMENT OF THE MANAGEMENT BOARD Since 2009, Neschen has maintained the capacity utilization of its coating plants during the crisis through basic self-adhesive media, also making strategic use of these products to recruit new customers and to market niche products. Over the next few years, we will increasingly rely on niche applications, a direction that we have already taken to some extent in 2010 and 2011. With this in mind, the product range was already streamlined in the past financial year. From 2010 to 2011, Neschen AG doubled its sales of innovative products under three years old. Their share of total sales is now already just under 10%. Another part of this niche strategy is the Management Board’s clear commitment to positioning Neschen as a manufacturer of especially environmentally friendly products using sustainable processes such as the water-based adhesive formulations. The closure of the plant in Basildon, which was still producing on the basis of solvent-containing adhesives, is consistent with this approach. These responses to hitherto inadequate profitability should significantly improve gross revenue across the Group from 2013 onwards. The restructuring measures cannot be carried out without adjustments to carrying amounts. That is why we are particularly pleased that J.P. Morgan plc, the lending investment bank, has once again demonstrated its commitment as a reliable partner of Neschen AG by waiving interest of EUR 5.5 million, thereby significantly strengthening Neschen AG’s equity basis. Neschen AG, plant II in Bückeburg 8 2011 Annual Report | Neschen AG Caution – German version shall prevail! Unternehmensdarstellung To Our Shareholders OPENING STATEMENT OF THE MANAGEMENT BOARD In addition, at the beginning of 2012, J.P. Morgan already granted a loan extension until 30 June 2013 and an interest deferral for the first quarter of 2012, thereby demonstrating its support for the course of renewal undertaken by Neschen AG and its subsidiaries. A further positive development is that it was possible, over the past year, to conclude numerous legal proceedings that have cost time and resources in the past. Reason is also called for on all sides in 2012 – on this basis, we see good foundations for the future, and we should like to take this opportunity to thank all parties for making their contribution, in this way, to an operationally successful Neschen AG in 2012. The Management Board of Neschen AG cannot be satisfied with the current level of the share price. We are conscious of the fact that shareholders are bearing their share of the reorientation of Neschen AG through the lack of dividend payments and the low share price level. We are equally aware, however, that employees of Neschen AG are doing their best on a daily basis to return the Company to the profitability that was the hallmark of Neschen AG at the end of the 1990s. In view of the anticipated positive prospects for the global economy and the restructuring measures that have already received positive feedback from many sides, we will take this trust seriously. We look forward to receiving the support of shareholders, employees, customers and suppliers also in 2012! Sincerely, your Neschen Management Board Dr Norbert Dieterich Caution – German version shall prevail! Henrik Felbier Stefan Zinn 2011 Annual Report | Neschen AG 9 To Our Shareholders Unternehmensdarstellung REPORT OF THE SUPERVISORY BOARD Dear Shareholder, In financial year 2011, the Supervisory Board of Neschen AG continued to be meticulous in performing the obligations placed upon it by law, articles of association and rules of procedure. It advised the Management Board on managing the Company, continually supervised its work and kept itself abreast of the business performance and situation of Neschen AG, receiving regular and comprehensive information from the Management Board, both verbally and in writing. This information concerned the major interests of the Company, i.e. the business situation and development, return on investment and liquidity position, in particular, as well as short-term and medium-term corporate, financial and personnel planning. The focus of the reporting and the discussions was on adhering to the cost budgets, increasing sales and on ensuring liquidity. All transactions that required the approval of the Supervisory Board were examined, discussed with the Management Board and approved. The Supervisory Board was involved in all decisions of fundamental importance. In the past financial year, there were four meetings of the Supervisory Board chaired by Robert Gärtner, for which the Management Board submitted extensive and informative documentation. All members of the Supervisory Board were present at these meetings. In addition, teleconferences involving all members of the Supervisory Board and the Management Board took place on a regular basis over the entire year. Owing to the size of the Company, no committees were formed. Main focus of consultations In addition to considering the current business development, the Supervisory Board discussed the following focal topics and took the following decisions: q q q q q q q q q Approval of Neschen AG’s 2010 annual financial statements and the 2010 consolidated financial statements Increase in capital in respect of Neschen Austria GmbH, Austria Payment to the capital reserve at Neschen GBC Graphic Films LLC, USA In-depth discussions about the USA business Scenario for closing Neschen Coating UK in 2012 Discussions and resolution adoption in respect of commissioning the restructuring consultancy company Felbier Mall GmbH Resolution in respect of loan waiver of Neschen AG in relation to the US companies Resolution in respect of the appointment of a member of the Management Board with responsibility for finances and restructuring Providing support and advice to the Management Board in relation to the Company’s legal disputes Corporate governance and declaration of conformity It is the Supervisory Board’s conviction that good corporate governance is an essential basis for the Company’s success. The Supervisory Board has therefore been guided in its activities by the recommendations of the German Corporate Governance Code. In particular, the Supervisory Board has also reviewed the efficiency of its own work. Furthermore, the Supervisory Board has addressed amendments to the Corporate Governance Code and discussed in detail corresponding adjustments to the Company’s declaration of conformity. 10 2011 Annual Report | Neschen AG Caution – German version shall prevail! Unternehmensdarstellung To Our Shareholders REPORT OF THE SUPERVISORY BOARD The joint declaration with the Management Board, pursuant to section 161 of the Aktiengesetz (German Stock Corporation Act – AktG), states that Neschen AG complies with the German Corporate Governance Code with few exceptions. For the declaration of conformity and further statements on corporate governance, please refer to the following pages. The declaration is also available on the Company’s website under the “Corporate Governance“ section of “Investor Relations“. Annual and consolidated financial statements The Management Board of the Company has submitted to the Supervisory Board the annual financial statements of Neschen AG, in accordance with the Handelsgesetzbuch (German Commercial Code – HGB), as at 31 December 2011, with a balance sheet total of EUR 33.3 million and a net loss for the year of EUR 0.3 million, together with the management report, and the consolidated financial statements of the Neschen Group, in accordance with IFRS guidelines, as at 31 December 2011, with a balance sheet total of EUR 57 million and a net loss for the year of EUR 1.2 million, together with the group management report. The auditing company, RTC Schütte Treuhand KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Katharinenstraße 5, in 28195 Bremen, elected as auditors by resolution of the General Meeting of 17 June 2011, audited the annual financial statements and management report of Neschen AG, as well as the consolidated financial statements and the group management report for financial year 2011, assigning an unqualified auditor’s report in each case. The audit reports and the documents to be reviewed were submitted to the Supervisory Board in good time. The Supervisory Board reviewed the submitted documents; the auditor participated in the meeting of the Supervisory Board in respect of the review of the documentation, reporting on the main results of the audit. The key elements and results of the audit were discussed at length. The Supervisory Board agreed with the result of the audit conducted by the auditor and approved both the Company’s annual and consolidated financial statements; the annual financial statements of Neschen AG were thereby adopted. According to the results of its own review, there were no objections to the annual financial statements and the management report, or to the consolidated financial statements and the group management report. Thanks to shareholders, Management Board and employees The Supervisory Board wishes to express its thanks to all shareholders, who supported the Company through a difficult phase again this year. The Supervisory Board would also like to thank the Management Board and all employees for their dedication and support in a financial year marked by change and wish all involved every success in the future development of the Company. Bückeburg, in April 2012 Robert Gärtner Chairman of the Supervisory Board of Neschen AG Caution – German version shall prevail! 2011 Annual Report | Neschen AG 11 Company Profile Marketing of Neschen AG in 2011 “Hands-on“: samples, use cases and customer presentations The Marketing Department of Neschen AG further intensified its market and brand offensive. Under the motto of “Ideas for Success“, it developed concepts and tools for helping trade partners and sellers to market their products and services successfully: in the graphics industry, in the library sector and in industrial applications. Neschen AG acts here as a “helping partner“, who highlights new avenues and also provides “concrete“ support in the shape of use cases, videos and customer presentations. 2011 – year of the trade fairs Samples of digital print and laminations Financial year 2011 was marked by numerous appearances at trade fairs and presentations for customers, distributors and other trade partners of Neschen AG. The aim was not only to explain the application of the products, but also to highlight the professional marketing of the solutions for the end customer under the motto of “Ideas for Success“. The presence of Neschen AG at trade fairs at home and abroad: Düsseldorf, Hamburg, Milan, São Paulo, Hong Kong and Shanghai 12 2011 Annual Report | Neschen AG Caution – German version shall prevail! Company Profile Marketing of Neschen AG in 2011 What mattered for all divisions was to present Neschen AG and its services cost-effectively and professionally in the market. In the “Graphics“ division, Euroshop and Viscom in Düsseldorf, Fespa in Hamburg, Shanghai International Advertising and, together with our distributor in Brazil, the relevant graphics industry trade fairs were equipped with their own Neschen stand from headquarters in Bückeburg. In addition, the subsidiaries of Neschen AG in the USA, France, Italy and Great Britain participated in nationally important specialist trade fairs. The “Documents“ division made a special presentation at the German Librarians’ Conference in Berlin; “Technical Coatings“ attended the ICE specialist trade fair in Munich, at which it had its own exhibition stand Sales in Asia and increased export activities were supported by a Neschen customer event in Hong Kong and by a distributors’ conference in Bückeburg. At both these events, it was possible for product concepts and examples of best practice to be discussed intensively. Special flyers for special products and films for clarifying applications The international sales activities necessitated additional support in terms of sales documents and resources for sales representatives. For this reason, new application films and brochures, describing the corresponding use of the Neschen media and providing the sales pitches for the sales process, were prepared. Customers interested in the SEAL and NESCHEN brands can thus view and download numerous videos both at www.neschen.com and on YouTube. Furthermore, trade partners can configure and order individually designed product samples in the web2print process. … and “action“: production of the new application videos Caution – German version shall prevail! 13 Lagebericht Company Profile Unternehmensdarstellung Marketing of Neschen AG in 2011 Social media for Neschen AG? It is not only since last year that everybody has been talking about social media or Web 2.0. The question for Neschen AG, whose focus is on corporate customer sales, is how highly to rate the relevance of social media to the divisions. An eight-week project was therefore conducted in the area of corporate communication. The various virtual markets and network platforms were examined and, in parallel with this, Represented on all important platforms the contact details of Neschen AG input. This ensures that customers and business partners can find Neschen AG in the social media area and participate in the communication and, if their relevance to Neschen AG increases, all platforms will be immediately available. Award for Neschen products For the third time in a row, Neschen AG received an award at Viscom: in 2009, it was for the digital print wallpaper “Erfurt wallpaper CA“, in 2010, for the counter solution Expolinc, which acts as a high-quality transport box for portable display systems, and now in 2011, for the self-adhesive digital print film “solvoprint easy dot 100 PE“. The jury presented the “Viscom Best of 2011 Award“ to Neschen in recognition of the company’s innovative performance in the Large Format Printing/LFP category. Prizes for Neschen AG’s innovative product concepts and solutions 14 2011 Annual Report | Neschen AG Caution – German version shall prevail! Company Profile Unternehmensdarstellung GRAPHICS DIVISION The “Graphics“ division, which has a sales share of around 83% (if the “Technical Coatings” division is excluded; around 88% if it is included) is by far the largest division in the Neschen Group. It includes the production and sales of products for the graphics industry under the two brands NESCHEN and SEAL. The division (excluding “Technical Coatings“) reports a stable sales performance for the past financial year. Sales revenues amounted to EUR 82.9 million, which represents an increase of 0.7% compared with prior-year sales of EUR 82.3 million (following the change to product assignment, previously reported at EUR 81.2 million). It was not possible to continue the positive development of the prior year, in which an increase of more than 4% was achieved. Although comparable growth rates were achieved up to and including May 2011, declining sales revenues had to be absorbed from the summer onwards. Gross margin stood at 38.7%, which, as expected, was lower than in the prior year (39.4%). Shifts in the product mix were the primary cause of the reduction in margin. Particularly the continuing fall in the demand for high-quality protective and mounting films had a negative impact on gross margin. 2011 also saw rises in raw material costs being passed on to customers via an increase in sales prices. Furthermore, changes on the procurement side, particularly the replacement of raw materials, kept the impact of raw material price increases in check. Sales and margin performance resulted in a slight reduction in gross revenue to EUR 33.8 million (prior year: EUR 34.2 million). New media being used on portable banner systems such as a roll-up Caution – German version shall prevail! 2011 Annual Report | Neschen AG 15 Company Profile GRAPHICS DIVISION „Try and Buy” – Aktion Seal 54 EL oder Seal 62 Base 3 Monate ausgiebig testen! Und so funktionierts: Seal 54 EL Testen Sie ganz unverbindlich 3 Monate lang für nur 990 € einen Laminator Seal 54 EL oder für nur 1.690 € eine Seal 62 Base. € Ihre Vorteile im Überblick: 990 Testgebühr Owing to the very positive developments in the first months of the reporting year, a satisfactory increase in sales revenue was achieved in Germany (+6.3%) and in the USA (in local currency +6.4%). There was a decline in the export business, particularly in the countries of Southern Europe, Great Britain, Japan and the Middle East. € 4.750 Listenpreis Schon während der Testphase Geld verdienen! Gratis: 1 Abwickelvorrichtung für großformatige Drucke Gratis: 1 zusätzliche Aufwicklung (Seal 62 Base) Gratis: Erstausstattung an Schutz- und Aufziehfolien Bei Nichtgefallen senden Sie einfach den Laminator inkl. Originalverpackung zurück 3 Die Testgebühr wird bei späterem Kauf angerechnet 3 3 3 3 3 The reporting year was characterized by heterogeneous development. A good start to the year with satisfactory growth rates in many sales regions was followed by a significant fall in demand in all countries from June onwards. We attribute this to the general uncertainty in the markets in respect of the stability of the euro, the creditworthiness of individual countries and the accompanying concerns about a new recession. Our customers soon felt the effects of this in the form of reduced orders. Seal 54 EL Seal 62 Base 1.690 € Seal 62 Base Seal 54 EL Inklusive Installationsund Anwendungsv ideo Testgebühr € 8.427 Listenpreis www.sealgraphics.com Welte GmbH Am Schloss 4 79117 Freiburg Tel.: 0761-696860 Fax: 0761-6968666 eMail: [email protected] www.weltenet.de The past financial year saw the division continuing to press ahead with the marketing of young products from the “Interior Decoration“ area and “Easy to Apply“ series. Digitally printable wallpapers achieved growth rates in the high two-figure range, with the proportion of PVC-free wallpapers continuing to increase. The export successes in a number of Asian countries, in which the wallpaper is also used to open doors for other products, deserve to be emphasized. Within the “Easy to Apply“ series, we market self-adhesive products, which, owing to the adhesive technology used, are very easy to paste and strip, i.e. even untrained persons can do it. Disproportionately high growth rates were also recorded here. Owing to the suitability of these products for large advertising campaigns in the retail trade, Neschen has further developed initial products with a view to offering them as sheet products for UV offset and screen printing. Neschen expects the first sales of these print technologies that it has not used hitherto to be generated in the second quarter of 2012. “Try and Buy“ campaign flyer The two application areas mentioned have contributed to a significant growth in printable inkjet media. Sales in laminating machines also developed positively. They likewise showed growth in the double-digit percentage range. The new entry-level model EL54, to which a further model will be added from 2013 onwards, also contributed to this. There was a considerable decline in sales of colour films. For a number of years, Neschen has been offering a restricted product range, which has been in demand only in a few export markets. Owing to the fall in demand, coupled with the loss of a number of customers, this product series is being discontinued. Stocks are being sold off in the current financial year. Adequate risk provisions for this have been taken in the annual financial statements. The demand for protective and mounting films again declined in the past financial year. This application area, which has almost a one-third share of sales, is very important to the division. Neschen AG media in use: backlit box 16 2011 Annual Report | Neschen AG Caution – German version shall prevail! Company Profile GRAPHICS DIVISION New adhesives, which significantly improve product properties, were therefore designed and specified in the past financial year. Based on this, several sales measures will be carried out in 2012 in order to stop and reverse the downward trend. We do not expect the closure of the production plant in Great Britain to have any significant negative effects on the division in the current financial year. The focus of the sales organization is on marketing the young, innovative inkjet meVersatile: POP-UP SOLUTIONS dia and the new self-adhesive products that have unique selling points. This is to provide the basis for increasing the share of niche products in the medium term from around 75% to over 80% and hence also for improving gross margin. Growth segments like environmentally friendly products, “interior design“ products and printable media for the successful latex ink technology will also make a contribution to this. In the customer area, we further developed relationships with large, Europe-wide commercial enterprises, who market our products under their own name; we will continue this positive development. As far as the current financial year is concerned, we expect to see a stable to slightly increasing development in terms of sales and gross revenue. We expect continuation of the existing cost structure to produce a positive EBIT for the division in 2012. EBIT EBITDA 6,000 120,000 4,000 100,000 2,000 80,000 945 0 82,131 86,890 87,471 2010 2011 60,000 –115 –1,625 –2,000 40,000 –3,178 –4,000 –6,000 –4,850 –5,990 2009 0 2010 2011 Development of “Graphics“ EBIT and EBITDA in EUR ’000 Caution – German version shall prevail! 20,000 2009 Development of “Graphics“ sales in EUR ’000 2011 Annual Report | Neschen AG 17 Company Profile Unternehmensdarstellung DOCUMENTS DIVISION In the reporting year, the “Documents“ division generated sales of EUR 11.8 million (prior year: EUR 12.0 million), which represents a slight decline of EUR 0.2 million (−1.7%). The division thus reports a virtually stable sales performance in 2011. A sales increase in Germany due to the successful expansion of the key account area was offset by a downward trend in the two important export markets of Japan and France. Sales in Japan declined significantly in the second half of the year on account of the natural and environmental disaster. These will normalize again once the temporary crisis situation has been overcome. In France, owing to public sector budget restrictions, demand was slightly down. The focus of the regional expansion embarked upon in prior years is on Asia, Eastern Europe and South America. Particularly in Asia, we were able to bring further business initiation discussions to a successful conclusion. Macroeconomic developments in Japan also give rise to the expectation of growth rates or a return to the normal business volume in the near future. Gross margin was 57.4%, which was slightly lower than in the prior year (57.9%). This was due to the lower sales generated in the two high-margin sales territories of Japan and France. Gross revenue declined, on the back of the sales and margin performance, from EUR 7.0 million in the prior year to EUR 6.8 million in the reporting year. With the cost structure remaining virtually constant, EBIT declined to EUR 0.8 million (prior year: EUR 1.0 million). The EBIT margin achieved was 6.7% (prior year: 8.5%). The Documents products are also suitable for repairing games 18 2011 Annual Report | Neschen AG Caution – German version shall prevail! Unternehmensdarstellung Company Profile DOCUMENTS DIVISION The first product packages for the consumer market (private consumers) were derived from the professional segment and could be tested for use in specialist trade environments. In the meantime, implementation is being carried out as part of a test phase with new sales channels. The extent to which this will be successful cannot be assessed until after the test phase has been completed. One of Neschen AG’s protective films has been specified for use in fully automatic book foliation machines. Neschen anticipates positive synergies here for the following financial years and a good opportunity to increase the consumption of book protection films significantly. On the development and production side, Neschen AG was also able to develop phthalate-free films for book protection, which comply with the restrictive conditions of the REACH regulation. In Scandinavian countries, in particular, use of these films is prescribed, which gives rise to the expectation of a positive sales development. Neschen AG · Documents Bühne frei zur Händlertagung! Sehr geehrter Herr Mustermann, Artisten üben bis zur vollkommenen Perfektion, bis sie in der Premiere das Publikum mit Ihren neuen Fähigkeiten überraschen. Die Neschen AG hat ebenfalls intensiv gearbeitet, um Ihnen in diesem Jahr neue Konzepte und Innovationen zu präsentieren. Wir haben in diesem Jahr für Sie in unserer Unternehmenszentrale ein attraktives Programm geschnürt und laden Sie dazu am 17. und 18. Juni nach Bückeburg/Deutschland ein. Freuen Sie sich auf: z Workshops mit und über Produkte aus dem Hause Neschen z Eine Live-Demo der 1600 Move Kaschiermaschine z Einen Impulsvortrag zum Thema Marketing sowie ein Rahmenprogramm der Extraklasse im Kaiserpalais Bad Oeynhausen. Neben den reichhaltigen Inhalten bleibt natürlich noch Zeit für den Austausch mit den Experten von Neschen, die Ihnen an beiden Tagen zur Seite stehen werden. Melden Sie sich rasch an, wir freuen uns sehr auf Ihre Teilnahme! Freundliche Grüße Gunther Wienzek Stefan Zinn Vertriebsleitung Documents Neschen AG Vorstand Neschen AG Die Veranstaltung ist für Sie kostenfrei – die Neschen AG lädt Sie ein! Bitte füllen Sie das Anmeldeformular aus und faxen Sie es uns zu. an folgende Faxnummer ++49 5722 207-197 oder senden Sie eine E-Mail an [email protected]. Invitation to a customer event Owing to the expansion of export activities outside of Europe, we expect to be able, in the current financial year, to offset the possible slight fall in demand in some European countries and to achieve moderate sales growth again overall. We therefore expect operating income to increase in the current financial year. EBIT EBITDA Documents Archiv 2,000 15,000 1,600 12,000 1.591 1.428 1,200 800 1.225 886 1.020 1,384 12,611 12,029 11,775 9,000 6,000 795 3,000 400 0 0 2009 2010 2011 Development of “Documents“ EBIT and EBITDA in EUR ’000 Caution – German version shall prevail! 2009 2010 2011 Development of “Documents“ sales in EUR ’000 2011 Annual Report | Neschen AG 19 Company Profile TECHNICAL COATINGS DIVISION Consolidated sales in the “Technical Coatings“ division amounted to EUR 4.5 million in the reporting year, which means that it was at the level achieved in the prior year (EUR 4.6 million). In the face of declining sales in England and stagnating sales revenues in the USA, Neschen AG was still able to increase sales by EUR 0.2 million, from EUR 3.3 million to EUR 3.5 million, due to new customers as well as new products. This is equivalent to growth of 6%. In the Operation Films product area, supply of the German market was switched from supply via dealers to direct supply of customers. Further sales possibilities for this product group were successfully created in Turkey. In addition to the local Turkish market, our customers there also have operations in North Africa and in the Near East. By having our own exhibition stand at the ICE specialist trade fair in Munich and making increased trade fair visits, we opened up further contacts to potential new customers. y Graphics y Documents y Technical Coatings Several promising product developments, which we are driving forward together with our customers, are currently in the project pipeline. These include two products (self-adhesive film, adhesive tape), which are at the qualification stage for the automotive /component supplier industry. filmolux med® Inzisionsfolien Further promising projects are being developed. Neschen AG Hans-Neschen-Strasse 1 D-31675 Bückeburg Phone ++49 5722 20 70 [email protected] www.neschen.com Printed in Germany 08/2010 20 2011 Annual Report | Neschen AG www.neschen.com Caution – German version shall prevail! Company Profile These include, for example: q Development of an inkjet coating for labels q Development of an improved adhesive system for the office and label area q Development of a composite film for automatic wrapping of books q Qualifying an adhesive system for the food industry The market exists, as does a growing demand for innovative coating services. By increasing our attendance at trade fairs and by approaching potential customers directly, we intend to participate more actively in this market. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 21 Company Profile DECLARATION OF CONFORMITY PURSUANT TO SECTION 161 OF THE AKTIENGESETZ Management Board and Supervisory Board hereby update the declaration of conformity, dated 18 April 2011, as follows: Management Board and Supervisory Board of Neschen AG declare that the recommendations of the Government Commission of the German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the Electronic Federal Gazette in the version of 26 May 2010 (published in the Electronic Federal Gazette on 2 July 2010) have been and are being fully complied with, with the exception of the divergences mentioned below: q Corporate governance report (pursuant to item 3.10 of the Code) Owing to the detailed statements regarding corporate governance in the management report, the Management Board and Supervisory Board of Neschen AG have not prepared an additional corporate governance report. q Chair or spokesperson for the Management Board (pursuant to item 4.2.1 of the Code) The Management Board, which has consisted of three members since 1 January 2012, does not have a chairman or spokesperson. The Board members have sole responsibility for their department and manage matters reserved for the overall Management Board conjointly. The corporate strategy of Neschen AG is developed in close consultation between Board members. The Management Board does not work in spatial separation, but is active at the same location. Furthermore, there are rules of procedure governing collaboration in the Management Board. Against this background, the Supervisory Board of Neschen AG considers it unnecessary to appoint a chairman or spokesperson for the Management Board. q Variable components of the remuneration for the Management Board (pursuant to item 4.2.3 of the Code Owing to the economic situation that prevailed when Dr Norbert Dieterich was appointed to the Management Board, his remuneration does not contain any variable components. The remuneration of Mr Stefan Zinn and that of Mr Henrik Felbier comprise fixed and variable components, but the latter do not include an assessment basis over several years. Against the background of the continuing economic difficulties with which the Company has been beset for a long time, this has been waived. q Remuneration report (pursuant to item 4.2.5 of the Code) As remuneration is already presented in accordance with statutory provisions (sections 285, no. 9, 314(1), no. 6, 315(2), no. 4 of the HGB), no disclosure of the ancillary services rendered by the Company is made in the remuneration report. In the absence of a corporate governance report, the remuneration of members of the Management Board is disclosed in the management report. 22 2011 Annual Report | Neschen AG Caution – German version shall prevail! Company Profile DECLARATION OF CONFORMITY PURSUANT TO SECTION 161 OF THE AKTIENGESETZ q Definition of an age limit (pursuant to item 5.1.2 and 5.4.1 of the Code, respectively) No age limit has been defined either for Management Board members or for members of the Supervisory Board. Management Board and Supervisory Board regard a general limit of this kind to be both inappropriate and discriminatory. Furthermore, the Company intends to maintain the necessary flexibility in personnel decisions by not applying an age limit. q Formation of committees (pursuant to item 5.3.1 – 5.3.5 of the Code) Due to its small size, the Supervisory Board dispenses with the formation of committees with specialist qualifications, which also applies to the formation of an audit and a nomination committee. The Supervisory Board of Neschen AG consists of three people, who have the necessary knowledge and specialist experience to ensure effective Supervisory Board work even without forming committees. q Remuneration of the Supervisory Board (pursuant to item 5.4.6 of the Code) Members of the Supervisory Board do not receive performance-related remuneration. The Company takes the view that performance-related remuneration is not suitable for fostering the monitoring activity of the Supervisory Board. In the absence of a corporate governance report, the remuneration of members of the Supervisory Board is disclosed in the management report. q Publication of the annual financial statements (pursuant to item 7.1.2 of the Code) The period of 90 days recommended for the publication of the consolidated financial statements is not observed due to the required consolidation of the Group figures. Bückeburg, 30 April 2012 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 23 Company Profile INVESTOR RELATIONS Neschen AG has overcome the impact of the global financial and economic crisis and has been able to stabilize sales and cost levels to a large extent and continue to improve its liquidity position. Driven by the restructuring measures that will be undertaken over the next few years to improve all revenue key figures, the Company can again look to the future with optimism. By overhauling and optimizing its organization and cost structure and by continually adapting to the constantly changing market realities, the Company was able to make further improvements in terms of cost structure and liquidity position in 2011. These improvement activities were, however, marred again by the temporary collapse of a number of markets in particular regions, due, for example, to natural disasters like the seaquake in Japan and the revolutionary desire for freedom in the Middle East. Similarly, the general uncertainty in the euro zone and the Company-internal risks associated with legal proceedings, with, for example, the main shareholder, Vermögensverwaltung Erben Dr. Karl Goldschmidt GmbH, with GSK – Gesellschaft zur Sicherung von schriftlichem Kulturgut mbH, the purchaser of the “Archive Centre“ division, and with Rolf W. Zinn, the former Management Board and Supervisory Board member, have not helped to increase confidence in the Neschen share. This is reflected in the price development of the Neschen share. At the beginning of financial year 2011, for example, the shares were quoted on the Frankfurt Stock Exchange at EUR 0.37, rising to EUR 0.75 towards the end of the second quarter before levelling off at EUR 0.25 by the end of the year. As at the end of the year, the shares were quoted at EUR 0.17. In the first quarter of 2011, the share price continued at a level of around EUR 0.20. The heavy share price fluctuations are due to the share’s low market liquidity. Given this constellation, even small share sales can have a massive short-term effect on price. The improved, but still generally difficult company situation meant that no active measures to maintain the share price and increase trading volume have been taken over the past few years. The Management Board is currently focusing on the restructuring endeavours, which will bring about further improvement in the Company’s operating earnings figures. This is the prerequisite for investment of capacities and financial resources in an active investor relations programme. 24 2011 Annual Report | Neschen AG Caution – German version shall prevail! Company Profile Shareholding situation (as at 31 March 2012): q Vermögensverwaltung Erben Dr. Karl Goldschmidt GmbH q Aldermanbury Investment Limited q Värde Investment Partners, L.L.P. q Oliver Zinn q Stefan Zinn 25.10 % 14.96 % 14.96 % 10.48 % 9.06 % Average stock exchange trading per month: q Frankfurt Stock Exchange q XETRA q German Stock Exchanges Market capitalization (as at December 2011): 3,860 shares 714 shares 4,150 shares EUR 2.2 million Stock exchange symbols q WKN q ISIN q Bloomberg q Reuters Stock exchange segment: 502130 DE0005021307 NSN: GR NSNG.DE Official market (General standard) EXECUTIVE BOARDS OF NESCHEN AG Management Board of Neschen AG q Stefan Zinn, Dipl.-Kaufmann, Bückeburg q Dr. Norbert Dieterich, Dipl.-Ingenieur, Hannover q Henrik Felbier, Dipl.-Kaufmann, Hamburg Supervisory Board of Neschen AG q Robert Gärtner, Industrial manager, Schliersee – Chairman of the Supervisory Board – q Joachim Koolmann, Banking business manager, London – Deputy Chairman of the Supervisory Board – q Bernd Capellen, Business manager, Haan Caution – German version shall prevail! 2011 Annual Report | Neschen AG 25 Neschen Group Management Report Unternehmensdarstellung NESCHEN GROUP MANAGEMENT REPORT I. SUMMARY On the back of the positive performance in Germany, by the US company and in the export area, the Neschen Group generated growth of 4% in the first few months of 2011. This trend was marred by the slight fall in demand in exports in the second quarter but, at EUR 51.4 million as at 30 June 2011, was still 2.6% above the prior-year period (EUR 50.1 million). The increasing political and economic concerns, fuelled by fears about the stability of the euro, resulted in clear restraint in the area of advertising expenditure as of June in the reporting year and had a significant impact on the segments served by Neschen. In particular, the core countries of Europe that are important to Neschen were affected by this development. This influenced the extremely good growth rates achieved thus far in many countries and product areas. Based on this influence, a slight decline of 2% to EUR 47.9 million (prior year: EUR 48.9 million) had to be accepted. For the entire 2011 financial year, the Neschen Group therefore reports sales of EUR 99.2 million, which is virtually at the prior-year level (EUR 98.9 million). This is equivalent to a slight increase of 0.3%. The continuing trend towards “economy“ products and decline in high-margin sales of Neschen Coating UK had a negative impact on gross margin, which fell from 41.6% in 2010 to 40.9%. The Neschen Group’s personnel expenses, at EUR 20.7 million, were at prior-year levels, as the Neschen Group’s staffing levels in 2011, which stood at 442 employees on average, were only slightly below the prior-year level. However, this figure declined further in the course of the reporting year, ending at 436 employees as at 31 December 2011. Apart from trainees that will be taken on, there are no plans for any significant amount of new appointments in 2012, but the number of employees will be further reduced as a result of the closure of Neschen Coating UK. Non-personnel costs rose from EUR 19.3 million in 2010 to EUR 20.1 million in 2011. This figure reflects the additionally recognized provisions of EUR 0.6 million for the closure of Neschen Coating UK. It contains the planned costs for the contractual obligation to reinstate the building and the additional restructuring consultancy costs. The planned closure of the Neschen Coating UK site not only triggered the provision effect in non-personnel costs, but also increased the cost of write-downs by EUR 0.8 million. In addition, it was necessary to write down EUR 1.5 million of the US Company’s intangible fixed assets. EBIT was severely affected by the above-mentioned special effects from write-downs and provisions. It declined by EUR 3.5 Mio. to EUR −4.1 million, following the EUR −0.6 million achieved in the prior year. Adjusted for the special effects in 2011, EBIT in the reporting year amounts to EUR −1.2 million. EBITDA declined in the same period from EUR 2.3 million to EUR 1.1 million. 26 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Unternehmensdarstellung Management Report I. SUMMARY The Neschen Group reports a net loss after taxes of EUR 1.2 million (prior year: net loss for the financial year of EUR 2.9 million). The slightly negative earnings are due to four main effects, some of which have been mentioned above. A positive influence is provided by the reversal of the debtor warrant in the amount of EUR 6.7 million, which was almost able to neutralize the negative influence of the additional write-downs of intangible fixed assets in the amount of EUR 2.3 million, the change in deferred taxes in the amount of EUR −0.9 million and the additional provisions of EUR 0.6 million based on the closure of Neschen Coating UK. Adjusted for this effect, earnings after taxes amounted to a net loss of EUR 4.1 million (prior year: EUR 2.9 million). The past financial year saw Neschen AG continue to forge ahead with activities for developing new products. The issue of sustainability and the use of environmentally friendly technologies and products are becoming more and more important. PVC-free products, environmentally friendly adhesive systems and coatings will therefore play a key role in future design of the product range. Neschen is marketing a complete product series of polypropylene films for laminating and lining applications. It is continuing to develop its range of PVC-free inkjet media. The Erfurt wallpaper, coated by Neschen, in conjunction with latex print technology, is, in terms of environmental protection criteria, already a technically leading product, which is being increasingly used in exhibition stand construction and room design. The Company therefore expects moderate growth of around 1.5% with an improvement in gross margin in the current financial year. As a result of the optimization measures initiated by the consultancy company Felbier Mall and as a result of the closure of the Neschen Coating UK site, the Neschen Group therefore expects to see further improvement in all earnings key figures and positive operating income (EBIT). The Company does not expect to have positive earnings after taxes until refinancing has been carried out, accompanied by a reduction in financing expenses. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 27 Neschen Group Management Report II. THE COMPANY Uniform Strategy The Neschen Group acts according to a long-term strategy and an end-to-end company philosophy. This enables it to demonstrate continuity and reliability amidst ever-faster changing market conditions. The strategic orientation includes development of the niche markets within the “Graphics“, “Documents“ and “Technical Coatings“ divisions. The “Graphics“ and “Documents" divisions are characterized by a comprehensive product range of in-house production and trading goods, orientation to core competences in production and marketing and international market presence. Within this strategy, the Company’s actions are determined by the following principles: q Manufacture of all products to the highest quality standards, with continual quality control procedures q Rapid availability of products by means of efficient logistics and the Company’s own foreign subsidiaries or local dealers q Marketing of mutually compatible product systems for the customer’s corresponding application areas q Ongoing development and marketing of new products q Continual improvement of manufacturing processes, raw materials used and the finished products in terms of environmental compatibility and sustainability 28 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report II. THE COMPANY Divisions The Neschen Group is a leading international enterprise for modern self-adhesive products and high-quality coated media for a wide range of applications. With a worldwide sales network, the workforce of 442 employees on average generated annual sales of approximately EUR 99.2 million in 2011. In order to significantly increase the sales and attractiveness of the Company, which has its base in Bückeburg, new products, modern marketing techniques and the identification of new market segments must continually breathe new life into the three divisions of Neschen AG. The divisions of the Neschen Group are divided into the following three lines of business: “Graphics“, “Documents“ and “Technical Coatings“. Within these divisions, Neschen pursues a strategy of establishing niche positions with high-quality products and customer-oriented system solutions. The “Graphics“ division also manufactures volume products, providing they are important in terms of strategic positioning with regard to customers. The production process for manufacturing self-adhesive products is carried out on the same machines and systems using identical coating technology and similar raw materials in all three divisions. In Germany, products under the NESCHEN brand are sold directly to processing companies. The same sales channel is used by the Company’s subsidiaries in Europe. Neschen is also developing separate B2B sales channels, such as the specialist trade (also under the SEAL brand), or OEM partners and, in the “Technical Coatings“ division, also via direct customer contact to industrial purchasers. Environmentally friendly products, e.g. those for which PVC is not used, are becoming increasingly important in all divisions. Neschen offers an extensive range of PVC-free films and has been using solvent-free adhesives and silicone systems for decades. Neschen has met all European norms and standards, such as “Reach“, for a number of years, and it has also complied with FSC (Forest Stewardship Council) principles. The “Graphics“ and “Documents“ divisions have outstanding unique selling points in their markets, occupying a leading market position in many countries. Due to its unique product range, innovative system solutions and concentration on the abovementioned divisions, it is scarcely possible to make a direct comparison between Neschen as an overall company and any of its competitors. Any such comparison can only be made on the basis of individual product groups within these two divisions. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 29 Neschen Group Management Report II. THE COMPANY “Graphics“ – printable media and picture protection for every application The comprehensive product range of the “Graphics“ division extends from finishing, protective and mounting films through to printable media, which can be used with the latest digital printing techniques for avant-garde architecture, decorations and advertising. Neschen acts as the first port of call for print service providers and for architects, designers, photographers, interior decorators, exhibition stand constructors and advertising studios. On the basis of new products, such as wallpapers and textiles printable in the LFP process, the Bückeburg company also offers a comprehensive range for the individual design of interiors. While the consumers of Neschen products up to now have mainly included printing houses and advertising agencies, Neschen is now appealing specifically to interior designers and fitters with its new "Interior Design" range. Neschen is thereby opening up a new market with new target groups, in addition to the advertising sector. The “Graphics“ division includes the NESCHEN and SEAL brands. The standard range comprises: q Printable materials with up to 5 m printing width for professional inkjet printersr q Self-adhesive mounting and protective films and corresponding processing machinery q Special protective varnishes for large-format graphics, including the corresponding processing machinery q Transportable presentation systems for large-format graphics These products are used, for example, in vehicle, city and façade advertising, in sporting and cultural events, in exhibition stand construction and at the point of sale. As part of its “one-stop shopping“ strategy, Neschen complements its core range of self-adhesive products, inkjet media and processing machinery with trading goods to round off its offering. These focus on mutually compatible product systems designed to increase production reliability and customer benefits. 30 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report II. THE COMPANY “Documents“ – protection and repair of books The protection, repair and care of books by means of adhesive films is another central division. The Neschen one-stop solutions for archives and libraries enable stocks to be preserved at the best possible value for money. The core range of the “Documents“ division consists of: q q Self-adhesive protective and stiffening films Self-adhesive repair and binding tapes As part of Neschen’s “one-stop shopping“ strategy, the range in this division is also complemented by a comprehensive selection of accessories and processing products. These materials are deployed by professional users in the library and archive domain. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 31 Neschen Group Management Report II. THE COMPANY “Technical Coatings“ – individual solutions for individual customers Based on more than 40 years’ experience in special coating processes, Neschen offers industrial customers from all sectors highly individualized technical solutions in the area of coated, webshaped materials. These range from self-adhesive products for the packaging industry, surface finishing for the furniture industry through to applications in the clinical-medical sector. The “Technical Coatings“ division develops and produces customer-specific solutions and special products. The range of offerings also includes toll and special coatings. This division is founded on decades of know-how and state-of-the-art production facilities in the Neschen Group, using not only water-based dispersion adhesives, but also siliconization in subareas. The “Technical Coatings“ division is an essential part of Neschen’s long-term strategic orientation. It has been managed as an independent division since 2005 and is assigned to the “Graphics“ segment in segment reporting (sales share < 10%). 32 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report III. SALES PERFORMANCE For financial year 2011, the Neschen Group reports sales of EUR 99.2 million, which puts it at the prior-year level (EUR 98.9 million). This is equivalent to a slight increase of 0.3%. Sales performance over the last few years in EUR millions Sales revenues in % compared with the prior year Revenues adjusted for the Archive Centre in % compared with the prior year 2008 2009 2010 2011 119.5 96.1 98.9 99.2 −4.4% −19.6% 2.9% 0.3% 116.8 94.7 98.9 99.2 −6.6% −18.9% 4.4% 0.3% The first few months initially continued the positive sales performance from the second quarter of 2010 onwards, with sales increasing in Germany, in the US company and in exports. The growth was driven by virtually all product groups. From June 2011 onwards, demand fell significantly. Sales as at 30 June 2011 stood at EUR 51.4 million and hence only 2.6% above sales of the reference period (EUR 50.1 million). The fall in demand from June onwards in the reporting year went hand in hand with a slowing down of the overall economy, triggered by fears about the solvency of Greece and a number of other countries and hence the stability of the euro. This led to politicians, institutions, companies and consumers having major worries about another bank crisis and global recession. Extremely good growth rates achieved thus far in several countries were undermined by the very negative development in the well-known crisis countries. The second half of the year saw a demandrelated slump in sales to EUR 47.9 million (prior year: EUR 48.9 million), equivalent to a fall of 2%. The marginal increase in sales of 0.3% for the entire year does not therefore represent a satisfactory performance. What is positive is that it was possible to keep gross margin almost at the prior-year level despite strong competitive pressure in the second half of the year (41.1%; prior year: 41.6%). It was possible to pass raw material price increases that arose in 2010 on to customers. Sales by region in EUR millions 2009 2010 2011 Var. from PY Var. in % from PY Germany* 19.5 19.2 20.4 1.2 6.3% Europe 50.8 52.9 53,0 0.1 0.2% USA 21.0 21.2 21,0 −0.2 −0.9% 4.8 5.6 4,8 −0.8 −14.3% 96.1 98.9 99.2 0.3 0.3% 79.7% 80.6% 79.4% Other regions Total sales Export share * Sales in Germany in 2009 and 2010 adjusted for German exporters Caution – German version shall prevail! 2011 Annual Report | Neschen AG 33 Neschen Group Management Report III. SALES PERFORMANCE Quarterly growth in comparison with the prior year Quarterly growth in comparison with prior year: 2010 Group Germany USA −2.9% −19.3% 4.9% Quarter II 7.3% −6.0% 3.2% Quarter III 6.4% 9.7% 3.9% Quarter IV 6.4% 11.6% 11.7% Group Germany USA Quarter I 4.0% 20.3% 13.4% Quarter II 1.2% 8.3% 14.4% Quarter III −2.6% −2.9% 6.9% Quarter IV −1.4% −1.1% −8.2% Quarter I Quarterly growth in comparison with prior year: 2011 The sales performance of the sales regions in the course of the individual quarters is characteristic of financial year 2011. The second half of the year shows a uniform deterioration and significant reduction in demand. “Graphics“ division The “Graphics“ division shows a stable sales performance in the reporting year. Sales including the “Technical Coatings“ division contained in segment reporting amount to EUR 87.4 million (prior year: EUR 86.9 million). The Graphics area was able to increase sales revenues slightly from the reported EUR 82.3 million to EUR 82.9 million, which is equivalent to growth of 0.7%. It was unable to achieve the sales increase that it had targeted despite the good successes achieved in a number of countries and product areas. The statements in respect of developments in Germany and in the export trade apply particularly to this division, which represents around 83% of total sales. The Graphics division, with its focal areas of digital printing, exhibition stand construction, advertising banners and large-format graphics, which is sensitive to cyclical influences, felt the effects of the renewed uncertainties on the global markets. Furthermore, the natural disaster and the nuclear accident in Japan, as well as the "Arab Spring", caused market demand from these countries to fall. Neschen AG’s domestic business achieved sales growth of 6.3% compared with the prior year. Both the direct business and dealer business contributed to this. Performance in exports varied. Some of the sales revenues fell significantly in Southern Europe, Great Britain and Asia (particularly Japan, due to the natural and nuclear reactor disaster), while good growth rates were generated in the USA and in Northern Europe. 34 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report III. SALES PERFORMANCE Sales performance in the USA was almost satisfactory. In local currency, the American subsidiary achieved a 6.4% sales increase to USD 30.3 million (prior year: 28.5 million); in euro, the growth was only 1.5% due to the exchange rate. The product groups within the “Graphics“ division performed differently, as expected. As was also the case in prior years, sales of protective and mounting films declined due to changes in customers’ manufacturing process. The “Inkjet“ area recorded good growth, accompanied by an improvement in sales margin. The growth is attributable to the successful marketing of high-quality media in the “Interior Design“ area and to the new, easy-to-process self-adhesive products from the “Easy to Apply“ family. 2009 had seen implementation of the strategy of also increasing the sales of specialities and niche products via the sale of volume products (simple printable self-adhesive films). In the reporting year, sales of low-margin volume products were only slightly expanded. Owing to the successful implementation of the strategy and Neschen’s improved positioning as an inkjet manufacturer, high-quality inkjet media for niche applications achieved disproportionately good growth. The Company expects this trend to continue and these products’ share of overall business to continue to rise. It is therefore vitally important for the Company to acquire market share with innovative inkjet media, which it succeeded in doing in the reporting year. The prospects in this regard are also positive in the current year. This includes the “Interior Design“ product range, which includes the intensive marketing of products for the interior design of showrooms, in gastronomy and in the hotel area, with a focus on digitally printable wallpapers. The most important product group, the Erfurt PVC-free fleece wallpapers, coated by Neschen, again recorded high growth rates. Within the “Easy to Apply“ product series, Neschen produces and markets self-adhesive products, which, once they have been printed, are very easy to apply and peel off again. These are mainly used in short-term advertising and at events and do not require specialists to install. These products generated significant sales growth in 2011. Neschen extended its range with these adhesive technologies in the past financial year and expects further innovations and active marketing by customers in the current financial year. A further focus was the continuing expansion of printable media for UV print technology and latex ink technology. Both print technologies are very much in vogue and are increasingly replacing solvent-based ink systems in customers’ purchases. Neschen is particularly well positioned in the area of latex ink systems, having a wide product range, with a great deal of know-how and services. The issue of sustainability and the use of environmentally friendly technologies and products are becoming more and more important. PVC-free products, environmentally friendly adhesive systems and coatings will therefore play a key role in future design of the product range. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 35 Neschen Group Management Report III. SALES PERFORMANCE Neschen is marketing a complete product series of polypropylene films for laminating and lining applications. It is continuing to develop its range of PVC-free inkjet media. The Erfurt wallpaper, coated by Neschen, in conjunction with latex print technology, is, in terms of environmental protection criteria, already a technically leading product, which is being increasingly used in exhibition stand construction and room design. Sales in the area of laminating machines recorded pleasing growth in the reporting year. The Company expects demand to continue to rise in the current financial year. A number of technical innovations as well as the development of the dealer network are contributing to this. Owing to the persistent fall in sales of colour films, the Company will cease production and sales in the current financial year. This product group is no longer part of the core business. Neschen was represented on the European market only by a very restricted product range. Only EUR 0.5 million (prior year: EUR 1.1 million) was generated in the reporting year. “Documents“ division The “Documents“ division reports a decline in sales from EUR 12.0 million in the prior year to EUR 11.8 million in the reporting year and hence a virtually stable sales performance. Sales revenues fell slightly by EUR 0.2 million (−1.7%). A sales increase in Germany was offset by a downward trend in two very important export markets. In Japan, sales fell significantly in the second half of the year. These will normalize again once the temporary crisis situation has been overcome. In France, owing to public sector budget restrictions, demand was slightly down. Initial activities undertaken in 2010 with a view to making Neschen products also accessible to consumers / private customers in the domestic market were continued. To do this, the Company is modifying existing products from the “Documents“ range and designing a marketing concept with new, consumer-oriented packaging. In the meantime, implementation is being carried out as part of a test phase with new sales channels. The extent to which this will be successful cannot be assessed until after the test phase has been completed. The division continued to forge ahead with the expansion of export activities. This represents an extremely protracted process, as trade partners abroad first need to win the relevant public sector budgets. Groundwork will need to be performed here, as self-adhesive book protection is still unknown in many countries. The focus of these activities is on the markets of Asia, South America and the Near and Middle East. 36 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report III. SALES PERFORMANCE “Technical Coatings“ division Sales in the "Technical Coatings" division, at EUR 4.5 million, were slightly below the prior-year level (EUR 4.6 million). In the face of declining sales in England and stagnating sales revenues in the USA, Neschen AG was still able to increase sales by EUR 0.2 million, from EUR 3.3 million to EUR 3.5 million, due to new customers as well as new products. This is equivalent to growth of 6%. In the "Operation Films" product area, supply of the German market was switched from supply via dealers to direct supply of customers. Further sales possibilities for this product group were successfully created in Turkey. In addition to the local Turkish market, our customers there also have operations in North Africa and in the Near East. By having our own exhibition stand at the ICE specialist trade fair in Munich and making increased trade fair visits, we opened up further contacts to potential new customers. We are also currently qualifying two products for the component supplier industry of the automotive sector. Sales performance by division Sales performance by division Division in EUR millions 2009 2010 2011 “Graphics“ 77.9 82.3 82.9 “Documents“ 14.0 12.0 11.8 – excluding the Archive Centre 12.6 12.0 11.8 “Technical Coatings“ Total sales 4.2 4.6 4.5 96.1 98.9 99.2 (The reclassification of a new product group from 2010 causes a shift in sales for 2010 in the intercompany area. This has no impact whatsoever on gross revenue or on the prior years.) Caution – German version shall prevail! 2011 Annual Report | Neschen AG 37 Neschen Group Management Report IV. EARNINGS PERFORMANCE The Neschen Group reports a net loss after taxes of EUR 1.2 million for the past financial year (net loss in the prior year: EUR 2.9 million). The negative earnings are due to four major effects. A positive influence is provided by the reversal of provisions for the debtor warrant in the amount of EUR 6.7 million, which was almost able to completely neutralize the negative influence of the additional write-downs of intangible fixed assets in the amount of EUR 2.3 million, the change in deferred taxes in the amount of EUR −0.9 million and the additional provisions of EUR 0.6 million based on the closure of Neschen Coating UK. Adjusted for this effect, earnings after taxes in 2011 amounted to a net loss of EUR 4.1 million (prior year: EUR 2.9 million). EBIT, too, was affected by the above-mentioned special effects from write-downs and provisions. It declined by EUR 3.5 Mio. to EUR −4.1 million, following the EUR −0.6 million achieved in the prior year. Adjusted for the above-mentioned special effects, EBIT in the reporting year amounts to EUR −1.2 million. EBITDA declined in the same period from EUR 2.3 million to EUR 1.1 million. As a result of the optimization measures initiated by the consultancy company Felbier Mall and as a result of the closure of the Neschen Coating UK site, the Neschen Group plans to achieve positive earnings in 2012. While sales in the reporting year increased slightly by EUR 0.3 million to EUR 99.2 million (+0.3%), gross margin declined by 0.7 percentage points compared with the prior year, falling from 41.6% to 40.9%. The smaller gross margin in the face of sales that remained almost the same reduced gross revenue from EUR 41.1 million in 2010 to EUR 40.6 million in 2011. This was mainly due to the decline in high-margin sales from “protective and mounting films“ and the unbroken trend towards “economy“ products and their increased share of sales. The accompanying strategy of increasing speciality sales in the “slipstream“ of these products was successfully implemented with initial successes. Furthermore, increases in the price of virtually all raw materials (films, textiles, papers, chemicals) and changes to the product mix also had an impact on the margin. It was possible to pass most of the raw material price increases that occurred in the reporting year on to customers. The retention of the reduction in the weekly working hours without compensatory payments, suspending pay increases and extensive reductions in the 13th monthly salary at Neschen AG kept the Neschen Group’s personnel expenses at the prior-year level at EUR 20.7 million. An increase in wages and salaries is planned at Neschen AG in 2012, but this will be absorbed by the reduction in the workforce in Great Britain. Other operating expenses increased from EUR 19.3 million in 2010 to EUR 20.1 million in 2011. This is a reflection of the provisions of EUR 0.6 million additionally recognized for the closure of the Neschen Coating UK site and the additional costs of the restructuring consultancy provided by Felbier Mall. The cost structure in the operating area (non-personnel and personnel costs) is at a low level compared with that of similar companies in the industry. Depreciation and write-downs of tangible fixed assets amounted to EUR 2.8 million in 2011 (prior year: EUR 3.0 million). Additional write-downs of intangible fixed assets in the amount of EUR 2.3 million were charged. This involved amortization and write-downs of goodwill in the US company Neschen Corp. in the amount of EUR 1,508 thousand and, based on the impending closure of Neschen Coating UK, of its proportionate goodwill in technical SEAL know-how in the amount of EUR 827 thousand. 38 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report IV. EARNINGS PERFORMANCE In line with the general interest rate trend, financing expense (without debtor warrant interest cost) declined slightly compared with the prior year to EUR 2.6 million (prior year: EUR 3.0 million). The financial liability for the debtor warrant arranged with J.P. Morgan Bank plc was reduced proportionately. This gave rise in 2011 to revenue of EUR 6.7 million which was not recognized as income. Earnings analysis in EUR millions 2010 (restated) 2011 Difference 98.9 99.2 0.3 0.0 −0.1 −0.1 Sales Changes in inventory Total operating revenue 98.9 99.1 0.2 Cost of materials 57.8 58.6 0.8 Gross revenue 41.1 40.5 −0.6 1.2 1,3 0.1 Personnel expenses Other operating income 20.7 20,7 0.0 Other operating expenses 19.3 20,0 0.7 EBITDA 2.3 1.1 −1.2 Write-downs 3.0 5.2 2.2 EBIT −0.6 −4.1 −3.5 Net financial income/expense −3.5 3.8 7.3 EBT −4.1 −0.2 3.8 1.2 −1.0 2.2 −2.9 −1.2 1.7 Tax income/expense Earnings Earnings performance of Neschen AG in accordance with HGB Neschen AG reports a loss of EUR 0.3 million (prior year: EUR −1.6 million) in its HGB single-entity financial statements for the past financial year. The result from ordinary activities (EBIT) amounts to EUR −2.5 million and is hence EUR 1.8 million lower than in the prior year. Neschen AG’s earnings in 2011 include, however, numerous (one-off) special effects, which ought to be eliminated for the purposes of interpreting the earnings and comparability of the figures with prior years. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 39 Neschen Group Management Report IV. EARNINGS PERFORMANCE (Earnings performance of Neschen AG in accordance with HGB) in EUR millions Earnings 2010 2011 1.6 0.3 Closure of Basildon site – Amortization and write-downs of intangible assets – 0.6 – Depreciation, amortization and write-downs of fixed assets – 0.5 – Provision for building reinstatement costs – 0.6 – Provision for financing gap – 0.2 – Assumption of debt from Neschen Benelux B.V. – – – Waiver by J. P. Morgan Bank plc – 5.5 2.1 – – 3.1 – Deferred taxes in accordance with BilMoG 0.5 1.0 Earnings without special effects 0.0 0.2 Assumption of debt / waiver Valuation allowances – Valuation allowances on loans – Valuation allowances in respect of trade receivables Taxes At its regular meeting in January 2012, the Supervisory Board of Neschen AG resolved to close the Basildon site at the end of June 2012. By way of precaution, the lease on the building was already terminated in December 2011 to 25 December 2012 in compliance with the contract. In view of the guarantee that Neschen AG provided in this lease for all reinstatement costs and ongoing lease obligations, a provision of EUR 0.8 million was recognized. Added to this, there is the write-down of the English machinery in Neschen AG’s books and the amortization of a goodwill item for existing technical know-how in the amount of EUR 1.1 million. As described in detail in Chapter VII, “Financing“, J.P. Morgan Bank plc has granted Neschen AG a waiver of unpaid, reinvested interest amounting to EUR 5.5 with effect from 31 December 2011. To this end, Neschen AG assumed this interest liability from the finance holding company Neschen Benelux B.V. in advance in the form of a debt assumption declaration, charging it directly to equity. Despite the positive sales performance of the American subsidiaries Neschen Corp. / Neschen Americas Corp. in 2010, there is great uncertainty regarding the future development of the American market and the further development of the American subsidiary. The earnings forecasts continue to be negative without an extensive restructuring programme, and current capital requirements are not insignificant. This year, trade receivables from the American subsidiaries had to be written off in Neschen AG’s annual financial statements (EUR −3.1 million). In accordance with IDW RE HFA 6, the carrying amount for “Deferred tax assets“ was adjusted in the reporting year due to a remeasurement of the current account. The change occurred in the light of an adjustment of the tax assessment bases for the forecast period becoming necessary for the measurement of loss carryforwards. This meant that, in the first-time application of the Bilanzrechtsmodernisierungsgesetz (Accounting Law Modernization Act – BilMoG) as at 1 January 2012, an increase in revenue reserves in relation to deferred tax assets from the previous figure of EUR 1.4 million to EUR 2.4 million had to be recognized. This adjustment of EUR 1.0 million was recognized in income in the reporting year. 40 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report IV. EARNINGS PERFORMANCE In terms of Neschen AG’s operating income, the two financial years of 2010 and 2011 are largely comparable. The decline in sales of EUR 0.7 million is due to the weak second half of the year, with EUR 0.4 million resulting from intercompany business (switching from in-house production in Basildon to overall more cost-effective local procurement possibilities, particularly in the USA). Neschen AG maintained the gross margin ratio in comparison with the prior year (2011: 38.3%; 2010: 38.4%). It was able to pass the raw material price increases on to customers through a price rise in the autumn. The trend towards economy products was also unbroken in the reporting year, and their share of sales is constantly on the increase. Sales of the "Easyprint" products were increased by around 3% to EUR 5.4 million, with an improved margin. Other operating income, personnel and non-personnel costs and interest showed no significant difference from the prior year. Given a stable cost structure in operating income (EBIT), the loss of gross revenue (triggered by the decline in sales compared with the prior year) was more than offset by the decline in ongoing write-downs of fixed assets (EUR −0.6 million after deduction of impairment losses). Owing to the low level of investing activities over the past few years, practically all Neschen AG’s coating plants have been written down to a small residual value in the HGB single-entity financial statements. In view of the planned capacity utilization over the next few years and the very good technical condition of the coating plants, replacement investments are not required. The trend towards reducing ongoing write-downs of fixed assets will continue. If the slight increase in the proportion of taxes from operating activities is additionally taken into account, Neschen AG was, without consideration of the above-mentioned special effects, able to achieve "adjusted" earnings of EUR 0.2 million. If the special effects are taken into account, Neschen AG was able to report a profit of EUR 0.7 million. Earnings performance of European sales companies The European sales companies closed financial year 2011 with very different earnings. The companies in France, Italy and the Czech Republic continued to hold their own, achieving positive earnings. Filmolux S.A.R.L. in France generated operating income (EBIT) of EUR 270 thousand, Neschen Italia in Italy EBIT of EUR 87 thousand and HSW Signall s.r.o. in the Czech Republic EBIT of EUR 53 thousand. The two companies in Great Britain suffered high losses from operating activities. Including provisions of EUR 600 thousand in respect of closure, earnings of the production unit Neschen Coating UK Ltd showed a loss from operating activities of EUR 2.0 million, while the operating loss in the sales company Neschen UK Ltd amounted to EUR 391 thousand, based on reduced sales due to the competitive situation in Great Britain and exchange rate performance. Earnings performance of US companies There was no improvement in earnings generated by activities in the USA, which stood at the prior-year level. The continuing high growth in sales in 2011, which stood at 6.4% in local currency (USD), was relativized again by the movement in the exchange rate from USD to EUR. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 41 Neschen Group Management Report IV. EARNINGS PERFORMANCE Sales in the reporting year amounted to EUR 21.8 million and hence 1.4% above the prior-year period (EUR 21.5 million). However, there was a slight deterioration of 0.3 percentage points in gross margin compared with the prior year. 2011 income statement for segments in EUR millions Graphics* Documents Total Sales 87.5 11.8 99.2 Changes in inventory and other own work capitalized −0.1 0.0 −0.1 Total operating revenue Cost of materials Gross revenue Personnel expenses Other income 87.4 11.8 99.2 −53.5 −5.0 −58.6 33.8 6.8 40.6 −17.8 −2.9 −20.7 1.2 0.1 1.3 −17.4 −2.7 −20.1 −0.1 1.2 1.1 Write-downs −4.7 −0.4 −5.2 EBIT −4.9 0.8 −4.1 Other expenses EBITDA 3.9 Net financial income/expense Income taxes −1.0 Net income for the year after minority interests −1.2 2010 income statement for segments in EUR millions Sales Changes in inventory and other own work capitalized Total operating revenue Graphics* Documents Total 86.9 12.0 98.9 0.0 0.0 0.0 86.9 12.0 99.0 −52.8 −5.1 −57.8 34.2 7.0 41.1 −17.7 −3.0 −20.7 1.2 0.1 1.2 −16.7 −2.6 −19.4 0.9 1.4 2.4 Write-downs −2.6 −0.4 −3.0 EBIT −1.6 1.0 −0.6 Cost of materials Gross revenue Personnel expenses Other income Other expenses EBITDA Net financial income/expense Income taxes −3.5 1.2 Minority interests −0.1 Net income for the year after minority interests −3.0 “Graphics“ division including “Technical Coatings“ 42 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report IV. EARNINGS PERFORMANCE Personnel and non-personnel expenses met budget expectations, falling short of the prior-year level. Driven by under-utilization and amortization and write-downs of intangible assets, the investment income of the joint venture Neschen GBC Graphic Films (50% investment) had a massive negative impact on the earnings of the US company. As a result of an agreement with the second JV partner, a new method for allocating the costs of the joint venture, which improves the investment income in the Neschen Group’s favour, will be applied in 2012. “Graphics“ division The “Graphics“ division reports a stable sales performance in the reporting year. Sales including the “Technical Coatings“ division contained in segment reporting amount to EUR 87.4 million (prior year: EUR 86.9 million). The graphics area was able to increase sales revenues slightly from the reported EUR 82.3 million to EUR 82.9 million, which is equivalent to growth of 0.7%. Despite some good successes in a number of countries and product areas, this division was unable to achieve the targeted sales and margin increase. Due to the continuing increase in the share of "economy" products and due to increased price pressure on a number of markets, gross margin for this division was slightly down in 2011. Owing to the lack of gross revenue compared with the prior year and the EUR 0.6 million increase in non-personnel expenses due to the provisions for the closure of the Neschen Coating UK site, EBITDA declined by EUR 1.0 million to EUR −0.1 million from 2010 to 2011. EBIT was additionally affected by the amortization and write-downs of intangible fixed assets in the USA (EUR 1.5 million) and in Neschen AG (EUR 0.8 million) and fell from EUR −1.7 million to EUR −4.9 million. Adjusted for the special effects in the area of provisions and write-downs, negative EBIT of EUR 2.0 million was generated, which, driven by the lack of gross revenue, was EUR 0.3 million down on that of the prior year. “Documents“ division One of the factors that influenced this division’s earnings performance was the seaquake in Japan. The division recorded a decline in sales of EUR 168 thousand, which had an impact on EBIT. However, there are initial signs of recovery in this sales market. Despite public sector budget cuts, further share of sales was kept stable. This meant that the positive EBIT witnessed a slight fall of EUR 0.3 million to EUR 0.8 million. Personnel and non-personnel costs stood at the prior-year level, so that the “Documents“ division continued to work with satisfactory earnings. EBITDA fell from EUR 1.5 million in 2010 to EUR 1.2 million in the past financial year. Company control through value-oriented management Our integrated controlling concept enables us to control the activities of all Group divisions. It helps us to identify the operational and strategic gaps between the actual state and a target aspiration at an early stage and to take suitable measures. EBIT is the main indicator for our value-oriented management. It is calculated from earnings before interest and taxes. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 43 Neschen Group Management Report V. BALANCE SHEET PERFORMANCE The Neschen Group’s balance sheet total as at 31 December 2011 declined by EUR 6.6 million to EUR 56.9 million (−10.4%) compared with the prior year. Balance sheet performance in EUR millions 2010 (restated) 2011 Difference Change Fixed assets 30.4 25.0 −5.4 −17.9% Current assets 30.4 30.0 −0.3 −1.1% – of which inventories 13.2 13.3 0.1 0.9% – of which trade receivables 11.2 11.1 −0.1 −1.0% – of which other receivables 3.8 2.7 −1.0 −28.7% Deferred tax assets 2.7 1.9 −0.8 −30.1% Total assets 63.5 56.9 −6.6 −10.4% Equity 2.1 0.8 −1.4 −67.1% Provisions 1.8 2.6 0.7 39.2% Liabilities 59.6 53.5 −6.0 −10.1% – of which trade payables 8.7 9.1 0.4 4.5% – of which other current liabilities 7.9 8.4 0.5 6.7% – of which other non-current liabilities 8.5 1.6 −6.9 −81.2% 63.5 56.9 −6.6 −10.4% Total liabilities The main reasons for the changes in individual balance sheet items can be summarized as follows: q The small investment of EUR 0.6 million coupled with scheduled write-downs of EUR 2.8 million resulted in further reduction of fixed assets by around EUR 2.2 million. In addition, due to the planned closure of Neschen Coating UK, a proportionate amount of EUR 827 thousand was written down, at Neschen AG, on technical know-how for the production of SEAL products, as were intangible fixed assets of EUR 1,508 thousand at Neschen Corp. in the USA. q As valuation allowances remained virtually unchanged, inventories were at the prior-year level, at EUR 13.3 million. q Despite a slight increase in sales, it was possible to lower trade receivables by EUR 0.1 million to EUR 11.1 million. q Other receivables declined by EUR 1.1 million, as refunds in the same amount made, in the prior year, by the Dutch tax authorities to the financial holding Neschen Benelux B.V. had had a commensurate positive effect. q In view of Neschen AG’s loss carryforwards, whose recoverability was secured by means of a tax planning calculation for the years from 2012 to 2015, and the temporary differences between carrying amounts in the financial statements and the tax accounts, deferred tax assets of EUR 1.9 million (EUR −0.8 million compared with the prior year) have been recognized. 44 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report V. BALANCE SHEET PERFORMANCE The recoverability of the recognized deferred taxes on loss carryforwards is derived from a tax planning calculation for the years from 2012 to 2015. The tax planning is based on corporate planning for the following four years. Management expects realization to be possible following implementation of the measures taken. One of the main measures is the closure of the production site in Basildon, Great Britain. Machinery that was written off in the reporting year and will hence cause no further costs in future was supplied for production purposes here. In future, the focus will be on utilization of the plant in Bückeburg. Other measures such as the shortened depreciation of plant I at the Bückeburg site, product mix adjustments and improved use of existing resources have also been included in corporate planning. q The Neschen Group’s equity declined by EUR 1.4 million to EUR 0.7 million as at 31 December 2011. The equity ratio fell accordingly to 1.2% (prior year: 3.3%). q Provisions at EUR 2.6 million, based on termination of the lease by Neschen Coating UK, include an amount of EUR 0.6 million for the reinstatement obligations that are expected to arise here. q As the Neschen Group was able, as in the prior year, to provide full settlement of all payment obligations to service providers and suppliers, trade payables were constant at EUR 9.1 million. (EUR +0.4 million). q Non-current liabilities include exclusively shareholder loans and the financial liability from the debtor warrant to J.P. Morgan Bank plc. q Current liabilities include interest of EUR 5.5 million, deferred by J.P. Morgan Bank plc. Owing to the positive effect on equity caused, among other things, by the partial reversal of the financial liabilities arising from the debtor warrant to J.P. Morgan Bank plc, contained in non-current liabilities, and by the increase in liquid funds at the end of 2011, the Company’s economic position has further improved. In addition, further measures for improving working capital will be taken in the following years. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 45 Neschen Group Management Report VI. CAPITAL EXPENDITURE There was no need for the Neschen Group to commit to major capital expenditure in financial year 2011. The annual total of EUR 0.6 million invested in property, plant and equipment, focusing on replacement investments and investments for purposes of quality assurance, was 50% (EUR 187 thousand) higher than in 2010. The main outlay was on IT projects, setting up a CRM (Customer Relationship Management) system and the purchase of a powerful microscope for the Research and Development area. The remainder is divided between smaller expenditure on manufacturing and coating in Bückeburg and in the USA. The breakdown of capital expenditure is as follows: Capital expenditure in EUR ’000 Intangible assets Property, plant and equipment Financial assets Total 46 2011 Annual Report | Neschen AG 2009 2010 2011 11 81 77 294 374 561 0 9 0 305 464 638 Caution – German version shall prevail! Neschen Group Management Report VII. FINANCING The corporate group is mainly financed via the financing holding company Neschen Benelux B.V., Raalte. This company is refinanced by means of a senior loan in the amount of EUR 30.8 million granted by J.P. Morgan Bank plc, Dublin / Ireland. J.P. Morgan made this loan available without restriction in the reporting year. The communication dated 17 April 2012 has suspended the originally agreed covenants until the end of 2012. Interest is charged at standard bank rates (Euribor plus 3.5%). In the reporting year, the interest was deferred in order to strengthen the Company’s liquidity. With these contractually agreed measures and concessions, the financer J.P. Morgan has clearly demonstrated its support for the Company. The Company assumes that J.P. Morgan will also continue to provide helpful support to the Company in future and that, when the conditions for the compensation payments occur, payment terms acceptable to the Company can be agreed. Furthermore, the Neschen Group has, via its financial holding company Neschen Benelux B.V. (previously Neschen International B.V.), requested an extension of the senior loan of EUR 30.8 million beyond 30 April 2012. On 17 April 2012, J.P. Morgan Bank plc gave its consent to the loan being extended until 30 June 2013. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 47 Neschen Group Management Report VIII. PERSONNEL DEVELOPMENT The number of employees declined from 446 as at 31 December 2010 to 436 as at 31 December 2011. This drop was due to personnel measures in the USA brought about by optimization of the Sales division. Owing to long periods of notice, the personnel adjustment could not take effect until June 2011. Employee numbers at Neschen AG remained virtually constant at 217, as appointments here were made only to replace departing employees. The average sickness absence rate in the Neschen Group stood at 2.8% in the reporting period (prior year: 2.8%) and therefore once again clearly below the 5.55% average for the chemicals industry in Germany. Despite the slight fall in the number of employees, per capita performance scarcely increased from EUR 223 thousand in 2010 to EUR 225 thousand in 2011. Neschen expects the optimization measures in the product portfolio to bring about further improvement in per capita performance in financial year 2012, as it plans to increase sales slightly with a decreasing number of employees. Country 2009 2010 2011 Germany 245 211 214 USA 70 60 58 TEUR MA France 62 60 58 240 800 Great Britain 43 42 39 230 700 Czech Republic 42 40 40 220 600 Netherlands 17 9 9 210 500 Austria 7 7 8 200 400 Italy 8 8 10 190 300 Spain 5 1 0 180 200 Hungary 3 3 3 170 100 China 3 3 3 160 0 505 444 442 Total Average number of employees over the year 48 2011 Annual Report | Neschen AG Sales per employee (in EUR ’000) Employees (average) 2004 2005 2006 2007 2008 2009 2010 2011 Sales performance per employee Caution – German version shall prevail! Neschen Group Management Report IX. RESEARCH AND DEVELOPMENT As a research and development strategy is, by nature, long-term, there were no major changes compared with the prior year. Group R&D costs rose by EUR 40 thousand in the USA, while they remained constant in Basildon and Bückeburg. The increased costs in the USA were due to the development work for “Technical Coatings“ projects. Other focal points were: 1) Development of a new adhesive for protective and mounting films and for double-sided adhesive tapes. It was possible to achieve the following positive results here: a) Improvement of quality in terms of brilliance, consistency of structure, better resistance to humidity b) Cost reduction (approx. EUR 250 thousand p.a.) c) Replacement of three different adhesives, leading to shortening of changeover and cleaning times as well as a reduction in waste quantities 2) Double-sided adhesive tape for the medical area (complements our OP film) 3) Dot (“easy dot“) coating for UV-offset and screen printing sheets 4) Environmentally friendly, "green" products. From the point of view of sustainability, there are starting points for adapting our products to new market requirements a) We have developed a phthalate-free film for the book protection sector b) Replacement of PVC films by alternative materials 5) Development of an inkjet coating for water-based inks The research project conducted by the Fraunhofer Institut on the subject of “using a VUV excimer lamp for activating polymers for bonding“ was completed. The final report will be prepared in 2012 and there is likely to be a follow-on project. The Research and Development area also houses quality management. Requalification in accordance with ISO 9001:2008 was successfully concluded for the Group here. R&D costs by company in EUR ’000 Neschen AG 2008 2009 2010 2011 1,428 883 793 795 Neschen Coating UK Ltd. 51 68 71 69 Neschen Americas Corp. 195 76 84 124 1,674 1,027 948 988 Total Caution – German version shall prevail! 2011 Annual Report | Neschen AG 49 Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT At the Neschen Group, one of the daily challenges is to identify business opportunities and risks and deal with them accordingly. They may have a significant impact on the assets, liabilities, financial position and profit or loss of the Company. A. Opportunities report The Company’s major opportunities lie in expanding the business activities of the three existing divisions: “Graphics“, “Documents“ and “Technical Coatings“. In order to identify market opportunities, Neschen AG has therefore created an international product management team, which is directed from head office and analyzes, and reports on, all changes in the markets and customer requirements. Product management is the main link between marketing and sales, research and development, purchasing and production. Product management also initiates and controls changes to the product range. The graphics area (“Graphics“ division) witnessed the successful completion of a number of important product developments in both 2009 and 2010. The repercussions of the financial market crisis made it very difficult to place new products. As financial year 2011 progressed, these products met with an increasingly positive response from customers. These products include digitally printable media, particularly wallpapers, easy-to-remove printable PVC films (“easy dot“), textiles printable in UV and dye-sub methods, and laminates that are used in so-called composite panels. Furthermore, a new laminating machine (54 EL) was launched at the end of 2010. This machine enables Neschen to address the market for basic entry-level models, which has been previously served by Asian and Italian competitors. The “Interior Design” application area continues to offer opportunities. This refers to the design of interior areas using digitally printable media, such as textiles and wallpapers. The successes in the sale of digital print wallpapers confirm the market trend. Neschen sees itself as a trendsetter and market leader in this segment and will continue the intensive marketing measures and the sales focus for these product series. Customers are increasingly discovering that a new area of application is available to them here and are making use of these opportunities. For example, Neschen was able to implement a number of impressive projects in 2011, which sent out a signal to the market. 2011 witnessed a successful continuation, but no significant expansion, of the strategy of offering simple and inexpensive self-adhesive and printable films in market segments which Neschen has served for a number of years. What must be considered positive is the implementation of the guiding principle of increasing the sales of niche products with higher margins in the “slipstream“ of these “economy” products. For example, sales of niche products were increased in both domestic and export business over the past financial year. Neschen will increase sales activities in the emerging countries. In the current boom, the demand for high-quality products for the advertising and exhibition stand construction sectors is also increasing there. 50 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT These markets have been dominated up to now by Asian manufacturers in the low-price segment, at a significantly lower level of quality. Neschen intends to benefit from the trend towards improved quality and is planning additional measures and events for these sales regions in the current financial year. The “Documents“ division has very good sales opportunities, in the medium term, outside the traditional sales regions. These include, in particular, the Eastern European and Asian countries. The dependency of our local sales partners on public-sector budgets means that a long lead time is required and immediate sales successes are not therefore expected. Neschen sees good opportunities for growth in the “Technical Coatings“ division. Neschen has a very small or even zero market share in the market segments addressed. The successfully completed product developments in the areas of medical adhesives and new durable adhesive systems provide the basis for future expansion of these business activities. Increasing coating volumes mean that substantial opportunities are opening up in the area of production and raw material procurement. The increase in batch sizes in production results in smaller set-up components and improved efficiency. Volume products in the graphics area and the orders in the “Technical Coatings“ area are increasingly making a contribution to this. Increasing volumes also improve the starting point in negotiations, with suppliers, on raw material prices. B. Risk report and disclosures pursuant to section 315 of the HGB, unless they have already been mentioned in the corporate governance declaration pursuant to section 289a of the HGB In conjunction with the Supervisory Board, the Management Board has defined principles and guidelines in the form of a risk management system with a view to being able to identify risks at an early stage and take countermeasures in good time. The possibility of identifying and adequately analyzing risks is an important factor in corporate governance. In combination with the internal monitoring system, developments that might endanger the Company’s continued existence can be identified at an early stage and countermeasures initiated. Neschen AG’s risk management system makes use of the organizational and reporting structure existing in the Company. The core elements of Neschen AG’s risk management system are as follows: q Central Risk Management Officer q General intra-departmental and overarching reporting structure of the Company q Risk reporting at Group and individual company level The main risks are regularly identified, monitored and continually reported within this risk management system. Where possible, risks are quantified and assigned a likelihood of occurrence. Potential risks are regularly reported to the Management Board and those directly responsible, who agree countermeasures. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 51 Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Macroeconomic risks The Neschen Group, as an internationally active Company, may be exposed to risk factors arising from the macroeconomic environment. This applies, in particular, to “Graphics“, the division with the highest sales, which supplies products for the graphics industry and advertising applications and is therefore heavily reliant on the economic situation. The effects of the persisting uncertainties on the financial markets in respect of the stability of individual national economies cannot be predicted with sufficient reliability. However, all economic institutes expect there to be moderate growth in 2012. Despite the positive macroeconomic environment in most countries, elements of uncertainty remain, including, for example, the solvency of individual countries or developments on raw material markets. It is not just price development, but also the availability of raw materials that is relevant here. Macroeconomic developments will affect demand for products, while developments on the raw material markets will have an impact on ability to make the products available in a timely and market-specific manner. Furthermore, potential risks include external events, which may lead to increasing raw material and energy costs, rising financing costs due to increases in base interest rates and delayed supplier services. Sector and sales risks Neschen counters economic development risks with innovative products, a very broad customer base and a strong regional expansion of sales activities. Due to high competitive pressure, implementing the required sales prices also poses a risk. The global economic crisis led to a significant reduction in demand throughout the sector in 2008 and 2009. A general pick-up trend started from 2010 onwards, but slumped in the second half of 2011. There is still a risk of individual countries like Spain, Greece and Portugal remaining longer in a recessive phase and the demand for Neschen products remaining at a lower level or continuing to fall. Developments in the USA with its high national debt and its high unemployment also pose a risk in terms of demand for graphics products. These sector risks could have a negative impact on the assets, liabilities, financial position and profit or loss of the Company. The latest developments in printing technology mean that protective films are used only for specific purposes. Double-sided adhesive products are increasingly being rendered unnecessary, as customers print directly on panels, textiles, and self-adhesive media. If Neschen cannot offset this trend by growth in the area of inkjet media, this might also have a negative impact on the assets, liabilities, financial position and profit or loss of the Company. 52 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Currency risks The Company’s international orientation gives rise to foreign currency risks, particularly in the case of the exchange rate of the euro to the US dollar and the euro to the British pound. To minimize currency risks, Neschen AG endeavours to conduct all sales and purchasing transactions in euro wherever possible. Hedge transactions are not generally carried out. The possibility that a fall in value of the US currency or the euro will have an impact on the Company’s earnings power cannot be ruled out. Notwithstanding the balance in the flow of goods aimed for within the Neschen Group, there is a risk, due to the fact that a number of sales markets use the US dollar as a reference currency, that the Company will not be able to pass on price increases in individual markets, will become uncompetitive or have to make major price concessions to maintain its market share. Interest rate risks Interest rate hedges have not been concluded. Possible interest rate increases could have a negative impact on the assets, liabilities, financial position and profit or loss of the Company. In the event of a 0.5% increase in interest rate levels, the Group’s interest expense would increase by around EUR 0.2 million. The main part of the Neschen Group’s refinancing is covered by means of a variable interest loan from J.P. Morgan Bank plc. The bank waived the interest accrued in 2011 and deferred in prior years. Financing risks As part of the refinancing and waiver agreement, entered into in 2007, between J.P. Morgan Bank plc (formerly Bear Stearns Bank plc) and Neschen Benelux B.V. (formerly Neschen International B.V.) as the borrower and Neschen AG as the jointly liable party, a covenant agreement was made such that any failure to comply therewith grants the financing bank, in principle, an extraordinary right to terminate the loan agreements. This covenant agreement is a contractually agreed key figure system involving the Neschen Group’s key financial data based on agreed medium-term sales, income and liquidity planning, which is subjected to quarterly review. The Company has entered into an agreement with J.P. Morgan Bank plc, under which the lender, up to and including 31 December 2012, has waived its right to termination of the loan due to failure to comply with the covenants. Irrespective of the further development of the key figures, the Company expects the debt lender to continue to provide helpful support to it. The Company has entered into an agreement with J.P. Morgan Bank plc, under which the lender, up to and including 31 December 2012, has waived its right to termination of the loan due to failure to comply with the covenants. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 53 Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Irrespective of the further development of the key figures, the Company expects the debt lender to continue to provide helpful support to it. If, at the end of the above-mentioned period in 2012, the loan is unexpectedly terminated due to a breach of the covenant, the continued existence of the Company will be put at risk. Furthermore, the Neschen Group, via its financial holding company, Neschen Benelux B.V., has requested an extension of the EUR 30.8 million senior loan beyond 30 April 2012. On 17 April 2012, the financing bank J.P. Morgan Bank plc gave its consent to the extension of the loan until 30 June 2013. Joint liability risks Neschen Benelux B.V. (formerly Neschen International B.V.) is the borrower and collateral provider 1 in respect of the loan from J.P. Morgan Bank plc in the amount of EUR 30.8 million plus deferred interest. Neschen AG is the jointly liable partner and collateral provider 2 in respect of this loan agreement. There is a risk that Neschen AG, in the event of the insolvency of Neschen Benelux B.V. (formerly Neschen International B.V.) will need to be liable for the entire loan sum including interest, a risk that could endanger the future of the Company as a going concern. This could happen if Neschen Benelux B.V. (formerly Neschen International B.V.) does not have sufficient financial returns available from the subsidiaries. Liquidity risks The Company’s liquidity position continued to improve in the reporting year, due to a positive EBITDA allied to low capital expenditure and stringent working capital management. The utilization of supplier credits has been reduced, particularly in the case of Neschen AG. Credit insurers’ assignment of limits has not changed significantly compared with the prior year. Sufficient insurance cover is in place for our main suppliers. If suppliers were to employ more restrictive practices with regard to payment targets, this could have a long-term negative impact on Neschen’s financial position. The credit insurer’s cancellation or reduction of insurance cover for individual customers increases the risk of loss in the event of defaulted receivables, on the one hand, and restricts the volume of receivables which can Neschen AG can refinance in the short term through a factoring agreement with Eurofactor AG, Munich, on the other. The Company’s liquidity position very much depends on sales performance, available inventories, customer payment behaviour and suppliers’ borrowing capacity. A further significant sales slump could worsen the liquidity position and put the Company’s continued existence at risk. There are currently no signs of a sales risk of this kind. 54 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Further support for the Group’s liquidity position was provided by the fact that J.P. Morgan Bank plc continued, in 2011 as in prior years, to defer interest on the loans that it had granted and waived this interest in accordance with an agreement that took effect from 31 December 2011. Interest was also deferred for the first quarter of 2012. A corresponding agreement with J.P. Morgan Bank plc is in place. Measurement risks The Neschen Group’s fixed assets as at 31 December 2011 recognize intangible assets of EUR 8.4 million, which comprise licences and industrial property rights, as well as goodwill. An impairment test is used to provide annual evidence of the recoverability of these intangible assets. There is a risk that a negative business performance would require remeasurement of these intangible assets to the detriment of earnings. This could have a negative impact on the assets, liabilities, financial position and profit or loss of the Company. Tax risks J.P. Morgan Bank plc waived loan receivables in 2009. This is described in detail in section VII (Financing and Capital Measures) of the 2009 annual financial statements. This waiver may give rise to tax risks at Neschen AG (and Neschen Benelux B.V.), which could have a negative impact on the assets, liabilities, financial position and profit or loss of the Company. In 2011, Neschen AG recognized deferred tax assets for tax loss carryforwards and temporary differences between carrying amounts in the financial statements and the tax accounts in the amount of EUR 2.0 million. The amount was calculated on the basis of medium-term corporate planning. If this corporate planning cannot be implemented, there is a risk that (some of) the deferred tax assets may need to be written off. IT risks IT risks include the potential failure of networks or the falsification or destruction of data due to operating or programming errors and external influences. The Neschen Group counters these risks by investing continually in hardware and software and by using virus scanners, firewall systems as well as physical and logical access controls. Data is backed up regularly. The likelihood of the Company incurring substantial damage from the IT area is estimated to be small. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 55 Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Personnel risks Personnel risks primarily comprise the turnover of employees in key positions, such as in the areas of research and development, procurement, finances, product management and sales. The likelihood of this occurring is currently small. Legal risks The operating business involves legal risks, particularly with regard to the sale of laminating machines and the assurance of warranties. Warranty and liability claims may, in principle, be incurred due to defective goods and services. Neschen AG counters this risk by providing intensive quality control, on the one hand, and by limiting warranty and liability obligations, on the other. To this end, Neschen’s General Terms and Conditions of Business are regularly amended in line with the current legal situation. In addition, product-specific arrangements are made. Below is a brief summary of legal proceedings that are currently ongoing or were concluded in 2011: (1) On 5 February 2009, Neschen AG terminated the contract, with the commissioned mechanical engineering company, for the development and production of a system for deacidification and stabilization of books and bound archive material on the grounds of ongoing schedule delays and the non-fulfilment of the warranted service. The mechanical engineering company subsequently filed claims for damages against Neschen AG, suing it for EUR 788 thousand plus interest. Neschen AG, for its part, considers that it has claims for damages against the engineering company. In its order to hear evidence dated 2 March 2010, the District Court ordered, inter alia, clarification, by an expert, of the question whether the system that was actually supplied was functional at all. In November 2011, an inspection appointment with the expert appointed by the court took place. The expert opinion has been available to the Company since January 2012. In the view of the Company and according to comments obtained from other experts, the statements in the expert opinion are incomplete, erroneous and, moreover, biased. The Company has outlined the defects in the expert opinion to the court and made evidence of this and the defectiveness of the machine available. A court decision on the next steps in the proceedings is expected in the second quarter of 2012. (2) On 11 June 2010, GSK Gesellschaft zur Sicherung von schriftlichem Kulturgut mbH, headquartered in Pulheim / Brauweiler, sued Neschen AG for payment of compensation in the amount of EUR 208 thousand. In a counterclaim of 15 November 2010, Neschen AG objected to a setoff of EUR 45 thousand, instituting, for its part, judicial proceedings for the amount of EUR 57 thousand. This amount involves reimbursements of costs arising from the purchase agreement in respect of the Archive Centre activities. In other respects, GSK is of the view that Neschen AG has not performed subservices arising from the purchase contract in respect of the Archive Centre activities. The Company is filing a defence against this suit. A first-instance ruling is expected in 2012. 56 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT (3) In connection with the sale of the Archive Centre activities, a former supplier has filed claims against GSK on account of the infringement of a patent or utility model for all individual sheet deacidification machinery. Neschen AG has intervened in the proceedings as a third-party intervenor by way of defence against GSK’s possible rights of recourse. In the summer of 2011, Neschen AG agreed to an out-of-court settlement, in which the Company undertook to make a payment of EUR 110 thousand to the supplier in return for GSK being given unrestricted use of the patent. The patent destruction action filed as a defence measure in this legal dispute was withdrawn in the course of the settlement. GSK let it be known through its legal counsel at the end of 2011 that it was not satisfied with the outcome of the settlement. It has announced its intention to file an action for a declaratory judgement in relation to further rights, which it claims it acquired through the purchase agreement dated 16 June 2009. Neschen AG considers these claims to be unwarranted and will defend itself against them in the event of an action. (4) In view of the accusations made, at the General Meeting of the Company on 7 December 2009, by the shareholder Vermögensverwaltung Erben Dr. Karl Goldschmidt GmbH, Essen, in respect of the sale of the “Archive Centre“ area, the Supervisory Board engaged the law firm Salans LLP, Berlin, to conduct a special audit pursuant to section 111(2) sentence 2 of the AktG. The aim of this audit was to examine the sale of the “Archive Centre“ area to GSK Gesellschaft zur Sicherung von schriftlichem Kulturgut mbH, headquartered in Pulheim/Brauweiler, and the legal and business relationships that Neschen AG and its subsidiaries maintained with members of the Zinn family in the period between 2007 and 2009. An executive summary of the final audit report was published on the Company’s website on 19 May 2010. The audit report concludes that the “Archive Centre“ area was sold “at arm’s length“ by Neschen AG to GSK Gesellschaft zur Sicherung von schriftlichem Kulturgut mbH, Brauweiler, and that the purchase price was not unreasonably low. The report provides no basis for any claims against current executive board members of the Company. However, the audit report concludes that there are several claims against Mr Rolf W. Zinn. These comprise: q Claim to reimbursement of the broker’s commission for the sale of the “Archive Centre” area in the amount of EUR 25 thousand q Claim to return of all remuneration payments for consultancy activities from 2007 to 2009 in the total amount of EUR 121 thousand; the claim is based on the fact that the consultancy contracts have formal defects or were not concluded in accordance with formal require- ments q Claim to reimbursement of overpaid Supervisory Board remuneration totalling EUR 16 thousand Neschen AG is asserting these claims by way of counterclaim (the starting point is proceedings in respect of outstanding Supervisory Board remuneration – see below) with the District Court of Bückeburg. In these proceedings, Neschen AG is also demanding that Mr Rolf W. Zinn provide proportionate reimbursement of the costs of the special audit conducted. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 57 Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT Mr Rolf W. Zinn, the former Management Board and Supervisory Board member, has brought an action against Neschen AG for payment of Supervisory Board remuneration totalling EUR 16 thousand. The Company has declared set-off against this claim with the claims established in the course of the special audit. In its ruling of 28 March 2012, the District Court of Bückeburg completely dismissed the substance of Mr Rolf W. Zinn’s action, awarding him only a small amount of interest of around EUR 190.00. Upon Neschen AG’s counterclaim, Mr Rolf W. Zinn was ordered to pay around EUR 45 thousand plus interest to Neschen AG. In particular, the Company was awarded – the asserted claim to repayment of the incentive – the asserted claim to repayment of overpaid fixed Supervisory Board remuneration – the asserted claim to repayment of overpaid variable Supervisory Board remuneration (attendance fees) – the asserted claims in connection with omitted tax deductions pursuant to section 50a of the EStG, and a claim to compensation for paid taxes and a claim to exemption for as yet unpaid taxes The claims to repayment of consultancy remuneration and to (pro rata) reimbursement of costs of the voluntary special audit in 2009/2010 which the Company continued to pursue were, however, dismissed. The ruling is not final; the reasons given by the court for rejecting the two aforementioned claims are currently being analyzed. (5) With a petition dated 24 May 2011, Neschen AG bought another action before the District Court of Bückeburg against Mr Rolf W. Zinn, demanding a payment of EUR 78 thousand from him on account of illicit return of contributions. A first-instance ruling is expected towards the end of 2012. (6) In July 2010, the shareholder Vermögensverwaltung Erben Dr. Karl Goldschmidt GmbH, Essen, petitioned the District Court of Hannover to appoint a special auditor pursuant to section 142(2) of the AktG. It is demanding that a special audit be conducted in respect of issues that have already been examined in the course of the special audit that has taken place, its justification being that, in its view, several issues are to be regarded as unresolved or insufficiently resolved. The Company’s executive boards have decided to mount a legal defence against this petition, as it relates to matters that have been fully examined in the special audit report prepared by Salans LLP. The proceedings are pending at the District Court of Hannover. Proceedings have been suspended since 23 February 2011, at the request of both parties. No resumption is expected at present. (7) In January 2011, Mr François Morax, Zürich, Switzerland, filed an action for payment of loan interest in the amount of EUR 12,562.63 with the District Court of Bückeburg. Referring to the prevailing legal opinion on this matter (no highest-court case law was available), the special audit report prepared by the law firm Salans LLP stated that the Company ought not to have 58 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report X. OPPORTUNITIES AND RISKS OF FUTURE DEVELOPMENT paid interest on this loan in the period from July to October 2008, resulting in a claim for return of the interest paid in this period. However, the District Court of Bückeburg subscribed to a minority opinion in the underlying point of law and ordered Neschen AG to pay the interest for which an action had been brought. Purely out of economic considerations and in the light of an unchanged assessment of the legal position, Neschen AG did not appeal against the decision of 15 September 2011. The Company has paid to Mr Morax and to VVG all loan interest relating to the period of undercapitalization. Neschen AG has recognized provisions totalling EUR 340 thousand to cover all current or impending legal disputes. Procurement risks Risks in procurement can be caused by failures of suppliers, supplier-side quality problems and price increases. Global economic growth and, in particular, the emerging countries’ demand for raw materials have led to price increases and extended procurement times. These vary greatly, depending on raw material. In individual sectors, delivery times extend to several months in the face of double-digit percentage price increases and only very short fixed price periods. Neschen AG counters these risks by means of the most accurate sales planning possible, standardization of raw materials and close cooperation with its suppliers. For individual raw materials, there are currently risks in terms of adequate and timely material supplies for production. This can cause delays in production or even losses of production, which, in turn, can result in impairment of the assets, liabilities, financial position and profit or loss of the Company. Production risks In the area of in-house production, risks are minimized by a Neschen-specific quality assurance and quality management system. Production key figures are used to identify potential risks at an early stage and to initiate suitable countermeasures. As in any production business, fluctuations in quality caused by the use of defective raw materials, machine faults or human error cannot be ruled out. Overall risk Like any internationally active company, Neschen faces not only numerous opportunities, but also a wide variety of risks. According to information and knowledge currently available, the Company is not aware of any further significant risk-laden matters above and beyond those specified which constitute a further major risk to the Company’s development and continued existence. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 59 Neschen Group Management Report XI. FORECAST Macroeconomic situation a) Developments in 2011 The first few months of 2011 saw the global economy being able to continue the high growth rates of the prior year. In March 2011, the Institut für Weltwirtschaft (IfW) expected world production to increase by 4.3% in the reporting year. This meant that it was significantly increasing its forecast from December 2010 (3.6%). In the spring, however, the dynamic growth was already expected to slow down in the second half of the year and in 2012 (forecast: 3.9%). The sharp dip that took hold from the summer of the reporting year onwards was, however, not forecast to this extent. The considerable turmoil on the financial markets, triggered by the debt problems of a number of countries and the persistent euro crisis, meant that the mood of companies had deteriorated significantly. The problems on the financial markets increasingly began to encroach upon the real economy. In September, the IfW only expected growth of 3.8% for 2011 and 3.5% for 2012. Overall, an extremely disparate picture emerges both in the course of 2011 and in the forecasts for 2012. The developing and emerging countries reported high growth rates in 2011 (China 8.0%, India 8.5%, Russia 4.0%, Latin America 5.0%) and were thus the driving forces behind the global economy. Germany, in particular, benefited greatly from the demand for export goods (cars, mechanical engineering) and therefore also generated a rise in demand for consumer goods in the domestic market in the course of the year. The leading institutions expect gross domestic product in Germany to increase by 2.9 % in 2011. The Southern European countries of Spain, Italy, Portugal and Greece are suffering from the consequences of high national debt, the (renewed) financial market crisis and the euro crisis with repercussions on the banking sector, property market and, due to government savings programmes, also private demand. The OECD (as at November) expects GDP in the euro zone to rise by 1.6 % in 2011. In the last few months, all leading economic institutions and also the German federal government have lowered their forecasts for 2012. In November/December 2011, leading institutions expected most industrialized countries to witness only very moderate economic growth and the emerging countries to see a significant reduction in growth rates in 2012. Stagnation is expected in the euro zone. Global economic vitality weakened in the second half of 2011. In particular, growth in the developing and emerging countries, which had been very strong in the spring, slowed down appreciably. Most national economies in the euro zone were on the verge of a recession in the third and fourth quarters of the reporting year. Owing to the Graphics division’s majority share (around 80%), Neschen AG’s business performance is influenced to a large extent by the general economic situation. Experience shows that, in any economic deterioration, companies’ advertising budgets are very quickly reduced. The advertising market is regarded as “early cyclical“. Although the “Documents“ division is not subject to short-term economic fluctuations, its high share of customers from the public sector means that it depends on public purse budgets. 60 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XI. FORECAST Forecast change in GDP in selected countries and regions1 USA Japan 2011 2012 2013 1.7% 2.0% 2.5% −0.3% 2.0% 1.6% Euro zone 1.6% 0.2% 1.4% Germany 3.0% 0.6% 1.9% France 1.6% 0.3% 1.4% Great Britain 0.9% 0.5% 1.8% Spain 0.7% 0.3% 1.3% OECD countries overall 1.9% 1.6% 2.3% China 9.3% 8.5% 9.5% India 7.7% 7.2% 8.2% Brazil 3.4% 3.2% 3.9% Russia 4.0% 4.1% 4.1% b) Outlook for 2012/2013 According to the leading forecast institutes, the global economy will enter into a phase of moderate expansion following a phase of strong growth in 2010 (“bounce back“ from the recession in 2009). Growth in the global economy will slow down from 3.8% in 2011 to an expected 3.4% in 2012. Medium-term forecasts continue to be basically positive, anticipating economic growth also in 2012. Economic performance in the euro zone is stagnant in 2012, but return to growth is expected for 2013. Only Germany maintains a positive performance. According to most recent assessments, growth of at least 0.5% in BIP can be expected in 2012 and a strong economic upturn in 2013. Economic performance in the countries affected by high national debt like Spain, Greece and Portugal will continue to be very weak. Forecast change in GDP in selected countries and regions compared with the prior year2 1 2 2011 2012 2013 USA 1.7% 2.0% 2.1% Euro zone 1.4% -0.2% 1.1% Germany 3.0% 0.7% 1.9% France 1.7% 0.3% 1.1% Great Britain 0.8% 0.4% 1.3% Spain 0.7% -8.0% 0.5% China 9.2% 8.0% 8.0% East Asia 4.4% 5.0% 5.2% India 7.1% 7.0% 8.0% Russia 4.0% 4.0% 3.5% Entire global economy 3.8% 3.4% 3.9% Source: OECD Economic Outlook, November 2011 – www.OECD.org Source: ifW – Weltkonjunktur im Frühjahr 2012 (Global Economy in the Spring of 2012) – 14 /03 /2012 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 61 Neschen Group Management Report XI. FORECAST c) Macroeconomic opportunities and risks Opportunities q The most recent measures taken by politicians and issuing banks work, national bankrupt- cies can be prevented, and investors’ confidence in the financial markets slowly returns q The emerging countries can continue their economic growth at a high level (even if lower than in 2011) q US consumption remains stable, and the USA can therefore continue to achieve positive growth in GDP despite the difficult conditions (stagnating property market, high national debt, relatively high unemployment) q The banking sector stabilizes, the euro remains stable at the current level and the interest rate level low q Owing to the above-mentioned scenarios, Germany and the euro zone as a whole return to sound economic growth Risks q q q q q Owing, in particular, to the expiry of stimulus packages and high national debt, the USA experiences stagnation or recession, which drags the global economy down The critical countries in Europe do not get their national deficit and their banking system under control, and the risks of national bankruptcies increase again Economic growth in the emerging countries falls rapidly (triggered, for example, by a property crisis in China) The steep increase in the price of raw materials and the lack of important base materials have a negative impact on growth The global economy falls into a recession Neschen’s starting position Even economic research institutions find it difficult to assess economic developments in the sales markets that are important to Neschen. Owing to the high dependence of advertising markets on GDP performance and the short order lead times, there are economic dependencies on the markets. The focus of the sales organization in terms of exports is being geared to the countries with good growth potential. Customers in the graphics industry are unsettled. Following a good sales performance in 2010 and up to the summer of 2011, demand in the summer months and in autumn slumped abruptly and significantly. A survey of German customers revealed that, while most expect to see lowlevel growth in sales in 2012, uncertainty is high. According to an as yet unpublished study by Zenith Optimedia, global advertising expenditure in 2012 is set to rise by 4.7% to USD 486 billion3. The study reveals that two of the factors driving growth will be major television events in 2012 and catch-up demand in Japan. The study also reveals that the 2009 crisis had taught customers that a heavy reduction in advertising expenditure leads to losses of market share4 62 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XI. FORECAST Zenith Optimedia expects the German advertising industry to experience growth of 2.2% in 2012. In the past financial year, growth was around 2.7%.5 The cited forecasts have only limited applicability to Neschen and can provide no more than an indication of the market environment, as the advertising market comprises all advertising media (e.g. TV, print, Internet, radio), while the markets served by Neschen make up only a fraction thereof and may be subject to other factors. In the “Outdoor Advertising“ segment (which shows a good match with Neschen products), Germany is expected to see growth of 2.1% in 2012 (2011: 1.85%). The “Documents“ division will be affected by public-sector budget cuts in 2012. The savings programmes introduced by governments, some of which are drastic, will also affect library budgets. Existing public-sector customers can therefore be expected to have reduced budgets available for book protection in 2012. This will particularly affect domestic business and the supply of our French subsidiary. The trend towards low-cost products will also be reinforced. The focus will therefore be on cut-throat competition in the established markets, expansion of new sales markets (Asia, South America) and development of the end consumer market. Neschen’s starting position for 2012 must be described as challenging. What is crucial here is not only the economic environment, but also the situation of the Company itself. This was sustainably improved in 2011 despite the disappointing sales performance. For example, innovativeness was strengthened, and new products are experiencing a very positive market response. Neschen was still able to attract important customers and expand export activities. With regard to 2012, the challenges that the Group faces are therefore a difficult, partly recessive market environment in the sales regions most important to Neschen and coping with the closure of coating in Great Britain, which will tie up liquid funds and management capacities. The focus will also be on further stabilization of the US business. Restructuring programme The Neschen Group succeeded in generating sustainable operating profit (EBITDA) in 2010 and 2011 following the difficult crisis year in 2009. The aim of the restructuring programme that was adopted at the end of 2011 is to strengthen profitability in a sustainable manner for the purposes of medium-term restoration of capital servicing and investment capacity. In 2012, a slight increase in sales and operating income is expected for the Group, while a slight decline in sales and earnings with a simultaneous increase in margin is expected for the AG. This already shows the emphases of the restructuring programme: switch in business models for the performance-weak foreign subsidiaries and a “margin before sales“ paradigm shift for all activities in Germany and for all sales subsidiaries. Source: Handelsblatt 05/12/2011 – reference to Zenith Optimedia Source: Handelsblatt 05/12/2011 – reference to Zenith Optimedia Source: Handelsblatt 05/12/2011 – reference to Zenith Optimedia 6 Source: Zenith Optimedia – Advertising Expenditure Forecasts – July 2011 3 4 5 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 63 Neschen Group Management Report XI. FORECAST The Supervisory Board had already engaged the Hamburg consultancy company, Felbier Mall GmbH, in October 2011 to analyze and develop the restructuring programme. To ensure a rapid and sustainable implementation, Mr Henrik Felbier was appointed to the Management Board with effect from 1 January 2012, being assigned responsibility for finances and restructuring. The member of the Management Board whose previous responsibilities included finances is now focusing on marketing and sales. The restructuring programme content will be implemented in two phases a) Consolidation The companies in the USA (Neschen Corporation Elkridge, Neschen Americas Corp., Elkridge and Neschen GBC Graphic Films) and in England (Neschen Coating UK Ltd. and Neschen UK Ltd.) came into the Neschen Group in 2001 as a result of the purchase of the SEAL brand from the American Hunt Corporation. Despite numerous site measures and extensive management programmes, the Company never quite managed to integrate the production sites optimally into the Neschen Group. In addition to production, both countries operate sales companies that have sustainably growing sales, but whose sales growth has not hitherto been such as to absorb the losses. The resolution of Neschen AG’s Supervisory Board, adopted on 30 January 2012, to close production in Basildon set the first milestone only four weeks after commencement of the restructuring programme. The extensive phase-out production orders in Basildon meant that it was possible to minimize the cost and liquidity effects from the closure activities on the Group. The closure of the production, which is based on solvent-containing coatings, also follows the Neschen Group’s strategy of relying on environmentally friendly processes (“green“ products). At the beginning of 2012, the loss-making production in the USA was likewise significantly reduced in its loss allocation expected for 2012 by means of a new agreement with the joint venture partner Acco in respect of utilization and cost sharing. On the other hand, the proportion of mechanical engineering activities (laminating machines of the “SEAL“ and “NESCHEN“ brands) is highly profitable. Restructuring is similarly focusing on the growing sales activities of Neschen Americas and the utilization of the plants of the joint venture GBC. After the impressive cost reduction programme in 2009 and 2010, further cost-saving programmes in administration and processes as well as in material costs have been drawn up for 2012, which will go hand in hand with programmes for reducing working capital in the Group. 64 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XI. FORECAST b) Growth Neschen is a production company for the coating of web-shaped materials. Neschen has demonstrated this sustainably across all sales industries in the 123 years of its existence. As there has been very little staff turnover, specialist knowledge has been built up in production over the years. This specialist knowledge enables processes like double-sided adhesive coating or zone coating to be carried out on the Company’s machinery – a clear competitive advantage over other manufacturers. In the years between 2001 and 2011, three production sites with machinery of various technologies were available for this in Bückeburg, Basildon and in the USA. Although the concentration of sales units on customers in digital image processing gave rise to an extensive product portfolio with an in-house manufacturing percentage of 62%, this has not hitherto sufficed to fully utilize the production capacities in a graphics market characterized by overcapacity. Despite reducing its production capacity through the plant closure in Basildon, Neschen will restore profitability only if it is increasingly perceived as a manufacturer of coatings whose brand is at home in the graphics industry as one of several markets. This is also necessary to reduce the strong cyclical dependence of the demand for graphics applications (mostly advertising industry). Neschen will therefore invest more in future in its own pre-product development in the coating and adhesive technology areas and open up the reduced production capacities (Bückeburg and USA) more to other sectors and cooperation partners. In terms of production technology, the plants have competitive advantages that go far beyond applications in the graphics industry. Neschen will therefore focus more on margin growth than on sales growth, which necessitates stronger independence from competition-intensive mass products (“commodities“). This paradigm shift constitutes the challenge of the next few years. It must be supported by all areas of the corporate group and requires increasing management resources. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 65 Neschen Group Management Report XII. EVENTS AFTER THE BALANCE SHEET DATE In the first two months of the current financial year, sales at EUR 15.8 million were 2.2% above the prior-year period and 3.6% above budget. This is mainly due to a positive performance at Neschen AG. Gross margin amounts to 42.2%, which puts it slightly behind the prior-year level and below budget. Personnel costs were above budget, as not all personnel measures have been implemented yet. Non-personnel costs were below budget. As gross revenue increased by EUR 0.1 million compared with the prior year and there was a slight rise of EUR 0.2 million in personnel and non-personnel costs, EBIT was virtually identical to the prior year. EBIT amounted to EUR −0.1 million (prior year: EUR −0.1 million), with improved earnings after taxes amounting to EUR −0.5 million (prior year: EUR −0.7 million). The Neschen Group’s earnings and key figures for January and February 2012 (cumulative): Sales Gross revenue Personnel costs Non-personnel costs EBIT Earnings after taxes EUR EUR EUR EUR EUR EUR 15.8 million 6.8 million 3.5 million 2.9 million −0.1 million −0.5 million – – – – – – Prior year: Prior year: Prior year: Prior year: Prior year: Prior year: EUR 15.5 million EUR 6.7 million EUR 3.5 million EUR 2.7 million EUR −0.1 million EUR −0.7 million Other significant events in the reporting period Mr Henrik Felbier was appointed as a member of the Management Board with responsibility for finances, with effect from 1 January 2012. The Supervisory Board adopted the resolution to close the Neschen Coating UK site on 30 January 2012. With effect from 31 December 2011, J.P. Morgan Bank plc, Dublin/Ireland, waived the interest of EUR 5.5 million that had been deferred until 31 December 2011. On 24 April 2012, we were informed that, due to process engineering changes in its production process, one of the major customers of our subsidiary Neschen Americas Corp. was expected to significantly reduce or discontinue purchase of our products from the third quarter of the current financial year. The proportion of the American company’s sales affected by this decision is in the order of around 3% of its annual sales. The company is working on measures for compensation. No other significant events occurred in the reporting period. 66 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XIII. OUTLOOK The Neschen Group expects to stop the negative sales trends of the last two quarters of the prior year and to obtain a slight growth in sales in the current financial year. The expected sales figure in the order of EUR 100 million includes both positive effects from the closure of the Basildon production site in the form of customer stock replenishment and negative effects due to the discontinuation of product series. Individual sales markets are also expected to perform very differently in the current financial year. The southern countries in Europe are unlikely to experience any growth due to their poor overall economic situation. This applies both to the “Documents“ division, which depends on public sector budgets, and to the “Graphics“ division, which follows general economic trends. In the other export regions like the USA, Asia, Eastern Europe and Northern Europe, a positive sales performance is expected. The same applies to domestic sales. This is conditional upon a stable economic development at the current level in these regions. Activities will focus on bringing about an improvement in gross margin through a wide variety of individual measures. These include gearing sales activities and marketing to high-margin niche products, entering new market segments with innovative products such as sheet products for UV offset and screen printing and expanding into new export markets. Sales activities will place a particular focus on the latest innovative inkjet media and products from the “Easy to apply“ family. General trends like individualization and the use of sustainable, environmentally friendly raw materials will play a central role here. Owing to the new adhesive formulation for protective and mounting films, which results in improved product properties, various sales measures will be carried out with a view to acquiring market share in what is a very important segment for Neschen. In terms of exports, the Neschen Group will step up measures to extend its presence and sales in growth markets like Asia, South America and the Middle East by acquiring new dealers. The young products from the “Interior Design“ and “Easy to apply“ areas will provide the basis for this, as Neschen has unique selling points in these product areas and can hence set itself apart from the strong Asian competition in these regions. The Company is also carrying out ongoing optimizations in raw material purchase, particularly through the use of new films and formulations, which also result in improved product properties. Neschen expects the measures taken in sales and purchasing to bring about an improvement in gross margin. With regard to personnel costs, the anticipated moderate increases in the context of the collectively agreed pay rises will be offset by staff cutbacks at the coating site in Great Britain such that no major changes over the prior year are expected in this area. Non-personnel costs will be lower due to the special effects with regard to the closure of the Basildon production site that arose in 2011. The same applies to depreciation, which is being reduced according to schedule and was negatively affected in 2011 by impairment losses due to the closure of production in England. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 67 Neschen Group Management Report XIII. OUTLOOK Providing the economic situation remains stable and the US subsidiary achieves its target plan, the Neschen Group expects to see positive operating income in the current financial year. Earnings after taxes will again be negative. A return to the profit zone is expected from financial year 2013 onwards. Explanations in respect of the closure of Neschen Coating UK Ltd., Basildon, England At a meeting dated 30 January 2012, the Supervisory Board of Neschen AG resolved to close the plant in Basildon. Unlike the Bückeburg plant, in which only water-based coatings are processed, Basildon concentrated not only on hotmelt products and water-based coatings, but also on solvent-containing coating technology. In Basildon, around 30 employees manufactured self-adhesive products mainly for intercompany deliveries to Neschen AG and Neschen Corp. USA. Neschen had acquired the UK production plant following the takeover of Seal in 2001. From the outset, the production facility contributed very little to the Group’s production volume. The 2008/2009 economic crisis meant that utilization of the UK coating plant deteriorated progressively. An earlier plant closure would not have been economically viable due to contractual agreements. As a result of the low coating volume, Neschen Coating UK has been making a loss for years and, at an operating loss (EBITDA) of EUR 1.9 million, had a significant impact on Group earnings. Adjusted for special effects like closure costs, the contribution to earnings was EUR −1.3 million at EBITDA level. The closure costs in 2011 and 2012 have been estimated at around EUR 1 million (cash transaction) or EUR 1.3 million (recognized in the balance sheet). The main cost drivers of the closure are the social compensation plan and the reinstatement obligations. There are funds to cover both as things stand now. 68 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XIV. OTHER MANDATORY DISCLOSURES PURSUANT TO SECTION 315 OF THE HGB Section 315 of the HGB states that the management report must give a true and fair view of the development and performance of the business and the position of the corporation. Neschen AG believes that the preceding pages have presented the legally required “balanced and comprehensive analysis of the company’s business performance and position corresponding to the scope and complexity of its business activities“. A. Remuneration report Section 315(2) no 4 of the HGB stipulates that the main features of the company’s remuneration system must be presented in the management report. The following remuneration report summarizes the principles that apply to determining remuneration for the Management Board of Neschen AG and explains the amount and structure of the Management Board’s income. The report also describes the principles and amount of remuneration for the Supervisory Board. The report follows recommendations of the German Corporate Governance Code and contains disclosures, which under the requirements of German commercial law, extended by the Vorstandsvergütungs-Offenlegungsgesetz (Act on the Disclosure of Management Board Remuneration – VorstOG), must form part of the notes or the management report. a) Remuneration of the Management Board The Supervisory Board is responsible for determining the Management Board’s remuneration. The remuneration of members of the Management Board of Neschen AG is determined on the basis of the size and global orientation of the Company, its economic and financial position and the amount and structure of Management Board remuneration at comparable companies. The tasks that the relevant Management Board member undertakes are also taken into account. The remuneration consists of a fixed annual salary and a variable bonus. What is known as an annual target income is defined for the fixed remuneration and bonus. The target income is reviewed regularly at intervals of between two and three years, based on an analysis of the income paid by comparable companies to members of their management. Management Board remuneration consists of the following main components: q q A fixed remuneration, which is paid on a monthly basis in the form of a salary. A variable bonus, which depends on the achievement of specific financial and performance objectives fixed by the Supervisory Board at the beginning of the financial year. Owing to the economic situation that obtained at the time Dr N. Dieterich joined the Company, his contract does not include any variable bonus Members of the Management Board are not granted share-based payments or pension commitments. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 69 Neschen Group Management Report XIV. OTHER MANDATORY DISCLOSURES PURSUANT TO SECTION 315 OF THE HGB b) Remuneration of the Supervisory Board The remuneration of members of the Supervisory Board of Neschen AG is determined on the basis of the size and global orientation of the Company, its economic and financial position and the amount and structure of Supervisory Board remuneration at comparable companies. The tasks that the relevant Supervisory Board member undertakes are also taken into account. In accordance with Neschen AG’s articles of association, as amended on 9 December 2009, every member of the Supervisory Board receives a fixed remuneration per financial year, in addition to reimbursement of his expenses. The fixed remuneration of the Chairman is 1.5 times that of every other member of the Supervisory Board. Every member also receives a variable remuneration, which is determined on the basis of participation at meetings of the Supervisory Board or its committees, which take place at the headquarters of the Company. In accordance with the resolution of the General Meeting of 21 June 2007, the fixed part of the remuneration is EUR 24 thousand per annum for each member of the Supervisory Board and EUR 36 thousand per annum for the Chairman, with the variable part being EUR 1,500 per day for each meeting of the Supervisory Board. Members of the Supervisory Board are not granted share-based payments or pension commitments. c) Summary Pursuant to section 314 no.1(6) of the HGB and the German Corporate Governance Code (items 4.2.4 and 5.4.8), the remuneration of the Management Board and the Supervisory Board in the financial year must be disclosed; this remuneration was as follows: Management Board and Supervisory Board Remuneration in EUR ’000 Fixed Salary Variable Component Reimbursement of Expenses Consultancy Total Total 2011 2011 2011 2011 2011 2010 245 0 0 0 245 245 Management Board Mr S. Zinn Dr N. Dieterich 267 0 0 0 267 267 Total 512 0 0 0 512 512 Supervisory Board Mr R. Gärtner 36 6 8 0 50 40 Mr J. Koolmann 24 8 3 0 34 26 Mr B. Capellen 24 9 2 0 35 25 Total 84 23 13 0 119 91 The Management Board of Neschen AG was entitled only to its fixed salary in financial year 2011. The remuneration for 2011 contained neither variable performance–related components nor components with long-term incentive effect. 70 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XIV. OTHER MANDATORY DISCLOSURES PURSUANT TO SECTION 315 OF THE HGB Attendance fees for the Supervisory Board are reported under “Variable components“. “Consultancy“ contains consultancy services provided by members of the Supervisory Board. In financial year 2011, no consultancy services were provided by members of the Supervisory Board. In financial year 2011, no advances or pension commitments were granted to members of the Management Board or the Supervisory Board. In 2008, the former Supervisory Board member Rolf W. Zinn received a loan from Neschen AG in the amount of EUR 78 thousand. B. Other disclosures Section 315(4) of the HGB requires stock corporations and limited partnerships that service an organized market within the meaning of section 2(7) of the Wertpapiererwerbs- und Übernahmegesetz (German Securities Acquisition and Takeover Act - WpÜG) to make the following disclosures: q Product safety and environmental protection The concept of product safety and environmental protection is valued very highly at Neschen AG. It is already embedded in the quality managementsystem guidelines, which are audited and certified on a regular basis in accordance with DIN ISO 9001:2008. These guidelines state, for example: “Our quality objectives include the use of methods and processes that are in line with the state of the art and comply with standards, regulations and statutory provisions.“ Since 1 June 2008, REACH, the regulation on chemicals, has been applicable law in the whole of the European Union (EU). REACH is the acronym for “Registration, Evaluation, Authorization and Restriction of Chemicals“. The objective of REACH is to protect human health and the environment against risks that may emanate from chemical substances. Neschen AG has implemented all REACH specifications and checks whether its suppliers comply with REACH, also having this certified accordingly. Neschen makes sure that its production processes use natural resources sparingly. Through corresponding production planning, we ensure that raw materials and energy are conserved and production-related wastes reduced. In respect of the concept of sustainability, Neschen AG ensures that only those masking papers that comply with FSC (Forest Stewardship Council) principles are used. FSC was founded in 1993 and is a non-governmental, not-for-profit organization that campaigns for environmentally compatible, socially acceptable and economically sustainable use of the world’s forests. For this reason, FSC has defined minimum ecological and social standards that must be observed in the management of forests. Independent auditors annually check that every forest owner complies with these FSC standards. Only after a successful audit can an owner stamp his wood with the FSC seal and market it accordingly. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 71 Neschen Group Management Report XIV. OTHER MANDATORY DISCLOSURES PURSUANT TO SECTION 315 OF THE HGB Additional checks are carried out during further processing to ensure that FSC wood is not impermissibly mixed with non-certified woods and incorrectly labelled. The FSC seal thus enables consumers to see that wood from responsible and sustainable forest management has been used for the manufacture of the product in question. At Neschen, paper suppliers are audited accordingly. q Composition of subscribed capital The subscribed capital of EUR 13.125 million is divided into 13.125 million no-par-value shares, each having a notional EUR 1.00 share of the share capital. There are no further share types. q Restrictions relating to voting rights or share transfer There are no restrictions relating to voting rights or share transfer known to the Company. q Direct or indirect equity interests exceeding 10% of the voting rights (reference date: 31 December 2011) Vermögensverwaltung Erben Dr. Karl Goldschmidt GmbH (VVG) 25.10 %* Aldermanbury Investments Limited 14.96 %* Värde Investment Partners, L.L.P. 14.96 %* Oliver Zinn 10.48 %* * According to the number registered at the General Meeting of 17 June 2011 q Holders of shares with special rights conferring controlling authority; the special rights must be described There are no shares with special rights. q Type of voting right control if employees hold an equity interest and do not exercise their control rights directly Employees holding an equity interest may exercise their voting rights directly. q Statutory provisions and regulations in the articles of association in respect of the appointment and dismissal of members of the Management Board and in respect of amendment of the articles Pursuant to Article 5(1) of the articles of association of Neschen AG, the Management Board consists of at least two members, who are appointed, and whose number is determined, by the Supervisory Board. 72 2011 Annual Report | Neschen AG Caution – German version shall prevail! Neschen Group Management Report XIV. OTHER MANDATORY DISCLOSURES PURSUANT TO SECTION 315 OF THE HGB The appointment is made in accordance with section 84(1) of the AktG for a maximum of five years; reappointment or extension of the term of office for a maximum period of five years at a time is permissible. Amendments to the articles of association are made in accordance with section 179(2) of the AktG by resolution of the General Meeting and require a majority of at least three quarters of the share capital represented in the resolution. q Authorization of the Management Board particularly with regard to the possibility of issuing or repurchasing shares No authorization for issuing new shares or repurchasing treasury shares is specified in the articles of association. q Essential agreements of the Company subject to the condition of a change of control as a result of a takeover bid and the resulting effects; this disclosure may be omitted if it is likely to cause the Company substantial disadvantage; the duty to provide disclosures in accordance with other statutory regulations remains unaffected Under an agreement of 8 June 2009 between Neschen AG and Aldermanbury Investments Ltd, a compensation payment of EUR 20.0 million will become due (Change of Control clause) if the Neschen Group is taken over and/ or achieves certain revenue key figures. For further explanations, see section VII “Financing and Capital Measures“ in the 2009 Annual Report. q Compensation agreements by the Company with Management Board members or employees relating to takeover bids No such compensation agreement exists. Disclosures on the organization of the accounting system pursuant to section 315(2) no. 5 of the HGB Following an extensive global reorganization of Neschen AG over the last few years, the Company is now characterized by a clear and understandable structure under company law. In addition to Neschen AG, the consolidated group comprises only ten companies which are included in the consolidated financial statements according to the rules of full consolidation and one company that is consolidated in accordance with the equity method. The accounting process in the Neschen Group is organized along decentralized lines, i.e. the Group companies are responsible for preparing their own single-entity financial statements in accordance with country-specific regulations. In so doing, the individual companies use different accounting programs, which, however, mainly involve standard software (SAP, MFG-Pro), which has been adapted to country-specific and company-specific conditions. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 73 Neschen Group Management Report XIV. Sonstige Pflichtangaben gemäSS § 315 HGB Standardized business transactions which arise on a regular basis and in large quantities, such as invoicing and inventory management, are also processed using IT-supported systems connected via interfaces to the accounting systems. This enables the potential for error in the accounting process to be minimized. Process flows and internal controls in the accounting process are carried out on the basis of an organizational handbook, through application of the “dual control principle“ and through the regular execution of plausibility controls. Within the Neschen Group, internal monthly reporting is derived from accounting. In addition to the timely posting of current business transactions, cause-specific and period-specific accruals and deferrals and cost allocations, for, say, trademark rights and patents are used to create the prerequisites for informative accounting. Accordingly, internal monitoring of the accounting process is an integral part of the control system. On the one hand, the accounting process is monitored externally by means of the auditors’ annual audit of the annual financial statements. To ensure a uniform audit standard within the Neschen Group, the Group auditors define uniform guidelines in writing in consultation with the Company. On the other hand, the internal reporting system and the internal control systems, particularly in the area of the accounting process, are subjected to regular audits by external specialists in order to continually further develop the processes. The Management Board of Neschen AG is involved in the evaluation of the outcomes of these audits. To prepare the consolidated financial statements, the Group companies transfer their respective single-entity financial statements to the Group standard chart of accounts and combine them with further supplementary information into a reporting package. This standardized reporting package is uniformly laid down by Neschen AG for all Group companies and is used not only in the context of annual financial statements, but also in monthly reporting. C. Corporate governance declaration pursuant to section 289a of the HGB Listed companies must, pursuant to section 289a of the HGB, issue a corporate governance declaration, whose content is defined by this provision. Accordingly, the Management Board of Neschen AG has issued a declaration, which is permanently accessible at www.neschen.de. 74 2011 Annual Report | Neschen AG Caution – German version shall prevail! RESPONSIBILITY STATEMENT Responsibility statement pursuant to section 315(1), sentence 6 of the HGB To the best of our knowledge, and in accordance with the applicable accounting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Bückeburg, 23 April 2012 Neschen AG Dr Norbert Dieterich Henrik Felbier Stefan Zinn Management Board Management Board Management Board Caution – German version shall prevail! 2011 Annual Report | Neschen AG 75 Consolidated Financial Statements CONSOLIDATED BALANCE SHEET Consolidated Balance Sheet as at 31 December 2011 in EUR ’000 Notes 31/12/2011 31/12/2010 restated Assets Intangible assets (1) 8,406 10,713 Property, plant and equipment (2) 14,907 17,249 Financial assets according to equity method (3) 857 632 Other financial assets (4) 819 1,830 Deferred tax assets (5) 1,915 2,738 26,904 33,162 (6) 13,346 13,222 Non-current assets Inventories Trade receivables (7) 11,120 11,231 Other receivables and financial assets (8) 2,679 3,758 Liquid funds (9) 2,899 2,168 Current assets 30,044 30,379 Balance sheet total 56,948 63,541 Notes 31/12/2011 31/12/2010 restated (10) 13,125 13,125 0 0 −3,284 −3,286 −10,166 −8,931 −325 908 (11) 1,111 1,175 786 2,083 Provisions for pensions (12) 360 339 Non-current provisions (13) 350 415 in EUR ’000 Liabilities Subscribed capital Capital reserve Currency translation reserve Net accumulated loss Equity before minority interests Minority interests Equity (5) 7 23 Non-current financial debt Deferred tax liabilities (14) 0 30,725 Other non-current financial liabilities (16) 1,590 8,468 2,307 39,970 Non-current debt 76 Income tax liabilities (26) 171 134 Current provisions (13) 1,745 1,082 Current financial debt (14) 34,229 3,685 Trade payables (15) 9,089 8,698 Other current liabilities (16) 8,621 7,889 Current debt 53,855 21,488 Balance sheet total 56,948 63,541 2011 Annual Report | Neschen AG Caution – German version shall prevail! Consolidated Financial Statements CONSOLIDATED INCOME STATEMENT Consolidated income statement for the period from 1 January to 31 December in EUR ’000 Notes 2011 2010 restated Sales (17) 99,246 98,919 Changes in inventories and other own work Capitalized (18) −94 40 Other operating income (19) 1,300 1,238 Cost of materials (20) −58,557 −57,819 Personnel expenses (21) −20,707 −20,652 Write-downs (22) −5,165 −2,978 Other operating expenses (23) −20,077 −19,354 −4,054 −606 Profit (loss) from operating activities Profit (loss) from equity investments (24) −955 −389 Financing income (25) 6,886 233 Financing expenses (25) −2,095 −3,366 −218 −4,128 (26) −1,011 1,184 −1,229 −2,944 Profit (loss) before taxes Income tax Net income for the year −6 −84 Income after minority interests Minority interests (27) −1,235 −3,028 Loss carried forward from the prior year −8,931 −5,903 −10,166 −8,931 Net accumulated loss Group comprehensive income analysis for the period from 1 January to 31 December 2011 in EUR ’000 Consolidated income after minority interests Currency differences offset by equity 2011 2010 −1,235 −3,028 5 779 Of which minority share −3 −109 Comprehensive income −1,233 −2,358 2011 2010 Net income for the year attributable to the parent company −1,235,376.09 −3,027,874.74 Number of bearer shares (as at the end of the financial year) 13,125,000 13,125,000 −0.09 −0.23 13,125,000 13,125,000 −0.09 −0.23 Earnings per share in EUR Earnings per share (EPS) (undiluted) Weighted average number of bearer shares in circulation during the reporting period Earnings per share (diluted = undiluted) There were no diluting circumstances either in the reporting period or in the prior year. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 77 Consolidated Financial Statements STATEMENT OF CHANGES IN EQUITY Statement of changes in equity for 2011 in EUR ’000 Subscribed capital Notes As at 01/01/2011 restated Capital increase/ deconsolidation Net income for the year Currency translation Dividends AS at 31/12/2011 (10) 13,125 0 0 0 0 13,125 0 0 0 0 0 0 Capital reserve Currency translation reserve −3,286 0 0 2 0 −3,284 Net accumulated loss −8,931 0 −1,235 0 0 −10,166 908 0 −1,235 2 0 −325 Equity before minority interests 1,175 0 6 3 −73 1,111 Total equity Minority interests (11) 2,083 0 −1,229 5 −73 786 Equity ratio 3.3 % 1.4 % Statement of changes in equity for 2010 in EUR ’000 Notes As at 01/01/2010 restated Capital increase/ deconsolidation Net income for the year Currency translation Dividends As at 31/12/2010 restated (10) 13,125 0 0 0 0 13,125 0 0 0 0 0 0 Currency translation reserve −3,956 0 0 670 0 −3,286 Net accumulated loss −5,903 0 −3,028 0 0 −8,931 3,266 0 −3,028 670 0 908 Subscribed capital Capital reserve Equity before minority interests Minority interests 78 982 0 84 109 0 1,175 Total equity 4,248 0 −2,944 779 0 2,083 Equity ratio 6.5% 2011 Annual Report | Neschen AG (11) 3.3% Caution – German version shall prevail! Consolidated Financial Statements CASH FLOW STATEMENT Cash flow statement in EUR ’000 2011 2010 −218 − 4,128 −/+ Taxes paid / taxes refunded −197 311 +/− Write-downs / reversals of write-downs of fixed assets 5,165 2,978 + Financing expenses with no effects from refinancing 2,095 2,582 − Income from measurement of debtor warranty + Expenses from refinancing − Interest paid + Interest received Net income for the year before income taxes −6,778 0 0 784 −747 −997 108 233 +/− Increase / decrease in non-current provisions − 44 −43 −/+ Profit / loss from the disposal of fixed assets −35 24 +/− Exchange rate-related revaluations of fixed assets −158 −511 −/+ Increase / decrease in inventories −124 159 111 250 −/+ Increase / decrease in trade receivables −/+ Increase / decrease in other assets 1,079 1,085 +/− Increase / decrease in current provisions 663 263 +/− Increase / decrease in trade payables 391 1,336 +/− Increase / decrease in other liabilities −823 −812 487 842 +/− Proceeds from asset disposals 1,136 503 − −638 − 464 Net cash provided by/net cash used in operating activities Payments made for capital expenditure on fixed assets Net cash provided by/net cash used in investing activities − Payments made for the repayment of loans − Payments made to minority shareholders Net cash provided by/net cash used in financing activities 498 39 −181 −508 −73 0 −254 −508 731 373 = Net change in cash and cash equivalents + Cash and cash equivalents at the beginning of the period 2,168 1,795 Cash and cash equivalents at the end of the period 2,899 2,168 Cash and cash equivalents consist exclusively of liquid funds. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 79 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A. General Company Disclosures For decades, the Neschen Group has been the market leader in the “Graphics“ and “Documents“ segments. Focusing on core competences and specific sales markets in niche areas is a central component of the current and future company strategy. The production process for manufacturing self-adhesive products is based, in both divisions, on the same machinery and systems using comparable coating technology and similar product designs. The products of both divisions are marketed by direct sales in Germany and by Neschen subsidiaries in Europe, but otherwise by independent sales channels such as the specialist trade and strategic partners. Neschen offers a complete product range for both divisions consisting of self-adhesive products and trading goods. All common adhesive systems are used, such as those based on aqueous dispersions, as well as solvent and hot-melt adhesives. The coating systems are set up for new applications and processes, such as the coating of films with special varnishes. This overall orientation clearly differentiates the Company from its competitors. The Group parent company is Neschen AG, Hans-Neschen-Straße 1, 31675 Bückeburg, Germany, entered in the Stadthagen Commercial Register in Department B under the number 2057. The shares of Neschen AG are quoted on the official market (Frankfurt, Hannover), on the open market (Berlin, Düsseldorf, Hamburg, Stuttgart), and in the electronic stock exchange trading system (Xetra). Shareholding disclosures are included in Neschen AG’s annual financial statements and can be viewed in the Electronic Federal Gazette. B. General Financial Statement Disclosures Neschen AG is the parent company and prepared the Neschen Group’s consolidated financial statements for 2011 in accordance with the International Financial Reporting Standards (IFRS), the International Accounting Standards Board (IASB), London, and the Interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the EU. New and amended standards and new interpretations which apply to reporting periods beginning on or after 1 January 2011 and whose application is mandatory in 2011: 80 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Amendments to existing standards and interpretations to International Financial Reporting Standards (IFRIC) Standard/Interpretation IAS 24 Mandatory application Related Party Disclosures 1 January 2011 IAS 32 Classification of Rights Issues 1 January 2011 IFRS 1 Limited Exemption from Comparative Disclosures for First-Time Adopters 1 January 2011 IFRIC 15 Agreements for the Construction of Real Estate 1 January 2010 IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction 1 January 2011 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 January 2011 The first-time adoption of these regulations did not cause any major impact on the assets, liabilities, financial position and profit or loss or cash flows of the Neschen Group. Interpretations and amendments to published standards whose application is not yet mandatory Standard/Interpretation IAS 1 IAS 12 Mandatory application Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income 1 January 2013 Deferred Taxes – Recovery of Underlying Assets 1 January 2012 IAS 19 Employee Benefits 1 January 2013 IAS 27 Separate Financial Statements 1 January 2013 IAS 28 Investments in Associates 1 January 2013 IAS 32 Financial Instruments: Offsetting Financial Assets and Financial Liabilities 1 January 2014 IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters 1 January 2012 Disclosures of Transfers of Financial Assets 1 January 2012 IFRS 7 IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities 1 January 2013 IFRS 9 Financial Instruments: Classification and Measurement 1 January 2015 IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 11 Joint Arrangements 1 January 2013 IFRS 12 Disclosures of Interests in Other Entities 1 January 2013 IFRS 13 Fair Value Measurement 1 January 2013 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 1 January 2013 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 81 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Neschen AG has not yet applied these amendments in these financial statements. The Company will comply with all applicable standards as they become mandatory. It is not yet possible to give a definitive assessment of the future impact of applying the standards. The prior-year figures are based on Neschen AG’s audited consolidated financial statements. The financial year of Neschen AG and its subsidiaries included in the consolidated financial statements is the same as the calendar year. The Management Board plans to release the consolidated financial statements for publication after the meeting of the Supervisory Board on 26 April 2012. For better clarity and informativeness, individual items are aggregated in the income statement and in the balance sheet. These items are shown separately and explained in the notes. The income statement has been prepared according to the nature of expense method. Unless otherwise indicated, all amounts are given in thousands of euro (EUR ’000). The going concern principle was assumed when preparing the consolidated financial statements. This assumption may be particularly affected by market risks (involving foreign currency and interest rate risks), credit risks and liquidity risks. For further explanations, see the Section entitled “Financial Instruments and Financial Risk Management” and the risk report contained in the management report. The consolidated financial statements are based on the historical cost method, restricted by the measurement at fair value through profit or loss of financial assets and financial liabilities (including derivative financial instruments) and are prepared in accordance with the consolidation and accounting policies presented below. C. Disclosures on Consolidated Group and Consolidation Procedures I. Consolidated group All major companies over which Neschen AG has an indirect or direct controlling influence (control concept) have been included in the consolidated financial statements. Control within the meaning of IAS 27 “Consolidated and Separate Financial Statements“ refers to the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. A company is included in the consolidated financial statements from the time at which it is possible to exercise control over it in accordance with the “control concept“. The inclusion ends when this possibility no longer exists. In addition to Neschen AG, the consolidated financial statements include 10 (prior year: 10) foreign companies as part of full consolidation. 82 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The joint venture Neschen GBC Graphic Films LLC is included in the consolidated financial statements using the equity method in accordance with IAS 31 “Interests in Joint Ventures”. In the case of investments that are measured at equity, cost is updated annually by the changes in equity corresponding to the capital share. All other equity investments in which the Neschen Group has no controlling influence on financial or business policies, or which, alone and in their totality, are of secondary importance to assets, liabilities and profit or loss due to their suspended or only minor business activities are recognized at fair value in accordance with IAS 39. If no permissible fair value can be determined, the investments are recognized at amortized cost. Three companies were not consolidated in financial year 2011 for reasons of materiality (prior year: three companies). As of 30 December 2009, Neschen International B.V., headquartered in Raalte (Netherlands), Neschen Benelux B.V., headquartered in Breda (Netherlands), and Neschen Nederland Holding B.V. were merged into Neschen International B.V. The company’s headquarters were transferred to Bückeburg. On 5 January 2010, the company was renamed Neschen Benelux B.V., with a permanent establishment in Raalte (Netherlands). The following subsidiaries are included in the consolidated annual financial statements (full consolidation): Subsidiaries Company Headquarters Neschen AG Bückeburg, Germany Neschen Benelux B.V. Raalte, Netherlands Filmolux S.A.R.L. Neschen Austria GmbH Subscribed capital Investment EUR ’000 % 13,125 Parent company 3,400 100.0 Bagnolet, France 920 100.0 Vienna, Austria 302 100.0 Neschen UK Ltd. Basildon, Great Britain 143* 100.0 Neschen Coating UK Ltd. Basildon, Great Britain 2,031* 100.0 Neschen Italia s.r.l. Bagnolo, Italy 51 100.0 HSW Signall s.r.o. Prague, Czech Republic 39* 51.0 Neschen Kft. Budapest, Hungary 93* 100.0 Neschen Corporation Elkridge, Maryland/USA 2* 100.0 * Translation into EUR at the closing rate on 31/12 /2011 Associates include Filmolux Co. Ltd., Tokyo, Japan (27.3% equity investment) and Neschen Portugal S.A., Mem Martins, Portugal (25% equity investment) Caution – German version shall prevail! 2011 Annual Report | Neschen AG 83 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS II. Consolidation procedures The financial statements of the domestic and foreign Group companies included in the consolidation are prepared in accordance with IAS 27 “Consolidated and Separate Financial Statements“ using uniform accounting policies. . Capital is consolidated according to the purchase method. This method stipulates that, in the case of a remeasurement for business combinations, all hidden reserves and unrealized losses of the company acquired should be disclosed and all identifiable intangible assets reported separately. An asset-side difference arising after the purchase price allocation is capitalized as goodwill. In the event of acquisition of fewer than 100% of shares, the acquisition values of an investment are offset against the pro-rata fair values of the acquired assets and liabilities. Minority interests are reported in equity in the amount of the remaining fair values. The differences contained in the carrying amounts of the investments in joint ventures are determined according to the same principles. All receivables and payables, sales revenues, expenses and income, as well as intercompany profits and losses which stem from intra-group deliveries to fixed assets and inventories, are eliminated in the consolidated financial statements. Intra-group deliveries are made either on the basis of market prices or on the basis of transfer prices. Deferred taxes are recognized for consolidation adjustments recognized in profit or loss in accordance with IAS 12 “Income Taxes". D. Foreign Currency Translation Disclosures The annual financial statements, including the hidden reserves and losses of the Group companies disclosed in the context of the purchase method, and the goodwill that has arisen from the capital consolidation are translated into euro using the concept of functional currency in accordance with IAS 21 ”Effects of Changes in Foreign Exchange Rates“. The functional currency is the currency in which a foreign company mainly generates and expends its cash. As the functional currency of all Group companies is the relevant national currency, assets and liabilities are translated at closing rates, and expenses and income at average annual rates. The difference that arises compared with the closing rates is reported separately under equity in the “Currency translation reserve” column and has no effect on net income for the year. Foreign currency receivables and payables are measured at the closing rate and the resulting translation differences recognized in profit or loss. As an exception, exchange differences resulting from non-current intra-group monetary items are recognized directly in equity. In the financial year, exchange rate gains of EUR 5 thousand (prior year: losses of EUR 779 thousand) were therefore offset directly in equity. 84 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following exchange rates were used as a basis for translating the main currencies within the Group: Closing rates Average rates 2011 2010 2011 2010 EUR EUR EUR EUR 1 US dollar (USD) 0.772917 0.752899 0.718384 0.753522 1 British pound (GBP) 1.194458 1.158749 1.152334 1.165172 1 Hungarian forint (HUF) 0.003197 0.003577 0.003579 0.003631 1 Czech koruna (CZK) 0.038740 0.039720 0.040672 0.039630 E. Estimates and Assumptions Preparation of the consolidated financial statements requires estimates to be carried out and assumptions made. These have an effect on the amounts indicated for assets, liabilities, and contingent liabilities on the balance sheet date as well as the disclosure of income and expenses in the reporting period. The actual amounts may differ from these estimates. The estimates and the assumptions on which they are based undergo continual review. Adjustments in respect of the estimates relevant to reporting are taken into account in the period in which the change is made, providing the change relates to this period alone. Any change that affects both the reporting period and subsequent periods is taken into account in the period in which the change is made and in subsequent periods. F. Balance Sheet Disclosures I. Main accounting policies Intangible assets Intangible assets are carried at cost on initial recognition. In the following periods, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. All intangible assets have a finite useful life and are amortized on a straight-line basis over their economic useful lives (4 to 10 years), being tested for possible impairment if there are indications that the intangible asset might be impaired. Gains or losses from the de-recognition of intangible assets are measured as the difference between the net disposal proceeds and the carrying amount of the asset and recognized in profit or loss in the period in which the asset is de-recognized. The residual values, useful lives and amortization methods are reviewed at the end of every financial year and adjusted where required. There was no need for adjustment in the financial year. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 85 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Goodwill No business combinations were carried out in the current financial year. Previous business combinations have been accounted for by applying the purchase method. The goodwill acquired is measured at cost less accumulated impairment losses. For the purpose of the impairment test, the goodwill acquired in a business combination is assigned, from the acquisition date, to the entity’s cash-generating units which are to benefit from the synergies of the business combination. This applies irrespective of whether other assets or liabilities of the acquired entity are assigned to these cash-generating units. Property, plant and equipment Items of property, plant and equipment that are used in business operations for more than a year are measured at cost less scheduled depreciation in accordance with IAS 16. The cost of self-constructed items includes both direct costs and allocable overhead costs. Financing costs are not capitalized as part of purchase cost or production cost. Investment subsidies and investment grants are recognized by reducing the cost of the corresponding asset by the amount of the subsidy. Items of property, plant and equipment are depreciated exclusively on a straight-line basis. Scheduled depreciation is based, throughout the Group, on the following economic useful lives: The residual useful lives of the items of property, plant and equipment are reviewed on an annual basis. If there are indications of an impairment and if the recoverable amount is below the amortized cost, an impairment loss is recognized on the items of property, plant and equipment. As soon as the reasons for the impairment losses cease to exist, they are reversed accordingly. Economic useful life (in years) Intangible assets 4 –10 Goodwill indefinite Business premises, exterior facilities 10 – 50 Machinery and equipment 6 – 20 Operating and office equipment 6 –12 Impairment of non-financial assets On each balance sheet date, an assessment is made as to whether there is any indication that an asset might be impaired. If such indications exist or if an annual impairment test is required, the recoverable amount of the asset in question is estimated. An asset’s recoverable amount is the higher of the asset’s or a cash-generating unit’s fair value less costs to sell and its value in use. The recoverable amount must be determined for each individual asset, unless an asset does not generate any cash flows that are largely independent of those of other assets or other groups of assets. If an asset’s carrying amount exceeds its recoverable amount, the asset is deemed to be impaired and written down to its recoverable amount. In order to calculate value in use, expected future cash flows are discounted to their net present value using a pre-tax discount rate which reflects current market expectations of the interest effect and the specific risks of the asset. To measure fair value, information available at the time of measurement is used. Impairment losses of continuing operations are recognized in profit or loss. 86 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For assets apart from goodwill, a review is conducted, on each balance sheet date, to assess whether there is any indication that a previously recognized impairment loss has ceased to exist or has reduced. If such indications exist, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if, since recognition of the last impairment loss, there has been a change in the estimates used to determine the recoverable amount. If this is the case, the asset’s carrying amount is increased to its recoverable amount. This amount, however, must not exceed the carrying amount that would have been determined after taking account of scheduled write-downs if no impairment loss had been recognized on the asset in the previous years. A reversal of impairment losses is recognized in profit or loss for the period. Goodwill is always reviewed for impairment once a year, irrespective of whether there is any indication of impairment. The impairment is determined by calculating the recoverable amount of the cash-generating unit to which the goodwill has been allocated. If the cash-generating unit’s recoverable amount is less than its carrying amount, an impairment loss is recognized. Any impairment loss recorded for the goodwill must not be reversed in the following reporting periods. Goodwill undergoes an annual impairment test on 31 December of each financial year. Inventories Inventories are recognized at the lower of cost or net realizable value. Cost includes both directly allocable costs and manufacturing and material overheads, write-downs and a proportionate part of productionrelated general administrative costs. Fixed overheads are recognized on the basis of normal utilization of production plants. Cost does not include financing costs. The costs of unused production capacities (idle cost) are disclosed under expenses in the income statement. Valuation allowances are recognized on inventories as soon as cost exceeds the expected net disposal proceeds. FIFO is the sequence of consumption method used across the Neschen Group. Borrowing costs Borrowing costs are recognized as an expense in the period in which they are incurred. They are not capitalized as part of cost Receivables and other assets Trade receivables are classified as “Loans and Receivables“ in accordance with IAS 39 “Financial Instruments: Recognition and Measurement“ and recognized at cost. These are subsequently measured at amortized cost using the effective interest method less impairments. An impairment of trade receivables is recognized if there is objective evidence that the Group will not be able to collect all the amounts due. A debtor’s significant financial difficulties or increased probability that a borrower will enter into insolvency or another re-organization procedure are deemed to be indicators of the existence of an impairment. The impairment amount is the difference between the carrying amount of the expected cash flows, discounted using the original effective interest rate. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 87 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The asset’s carrying amount is reduced by recognition of an impairment account. The loss is recorded under “Other operating expenses“ in the income statement. If a receivable has become uncollectable, it is de-recognized against the impairment account for trade receivables. Subsequent payment receipts for previously de-recognized amounts are recognized in the income statement. In addition to the required specific valuation allowances, the identifiable risks arising from the general credit risk are taken into account by recognizing consolidated specific valuation allowances. All other receivables and assets are recognized at cost. Leases The economic ownership of leased assets must be assigned to the lessee in accordance with IAS 17 “Leases“ if the lessee bears all the main risks and rewards associated with the asset (finance lease). All other leases are classified as operating leases. If economic ownership is to be attributed to Neschen Group companies, the leased asset is capitalized at fair value or the lower net present value of the lease instalments at the time of contract formation. Scheduled depreciation is carried out, in line with comparable acquired items of property, plant and equipment, over the item’s useful life or the term of the lease where this is shorter. Payment obligations resulting from future lease instalments are carried as liabilities. Factoring Factoring has been used as a financing instrument in the Neschen Group since 2002. It is currently in use at Neschen AG (Bückeburg) and at Neschen UK Ltd (Basildon). The factor in Germany is Eurofactor AG, while in England it is Eurofactor UK Ltd. The factored receivables are covered by credit insurance. A financial asset is de-recognized if it has been transferred and the transfer qualifies for de-recognition. A transfer requires that the Group either (a) has transferred the contractual rights to cash flows from a financial asset or (b) retains the contractual rights to receive cash flows, while transferring a contractual obligation to pay the cash flows to a third party. After a transfer, the Group reviews the extent to which the risks and rewards incident to ownership of the financial asset have been retained. If all risks and rewards have essentially been retained, the financial asset continues to be recognized. If all risks and rewards have essentially been transferred, the financial asset is de-recognized. If all risks and rewards are essentially neither retained nor transferred, the Group examines whether it has retained power of disposition over the financial asset. If the Group has not retained power of disposition, the asset is de-recognized. If the Group has retained power of disposition, the financial asset must continue to be recognized to the extent of the continuing involvement. Factoring in the Neschen Group results in complete de-recognition of the transferred receivables, as all risks and rewards have essentially been transferred to Eurofactor AG. 88 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Factoring volume (calculated on the basis of the charges invoiced): Factoring volume 2011 2010 Neschen AG in EUR millions 31.7 37.2 Neschen UK Ltd. in GBP millions 0.9 1.0 Liquid funds Liquid funds comprise cash in hand, cheques, and immediately available bank deposits with original terms of up to three months. Income taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, taxation authorities. Current taxes relating to items recognized directly in equity are likewise recognized directly in equity. Deferred tax assets and liabilities are recognized for temporary differences between the carrying amounts of the tax base and those in the IFRS balance sheet. Deferred tax assets also include claims for tax reductions resulting from the anticipated use of existing tax loss carryforwards in subsequent years, the realization of which is deemed sufficiently probable. Deferred tax assets are recognized for all taxable temporary differences, with the exception of the deferred tax liability arising from the initial recognition of goodwill. Deferred taxes are calculated on the basis of tax rates expected to apply in accordance with the legal situation prevailing at the time of realization (reversal of tax deferrals). Deferred taxes relating to items recognized directly in equity are likewise recognized directly in equity. Deferred tax assets and liabilities are not discounted; the carrying amounts of the reported assets and liabilities are regularly reviewed and adjusted, where necessary. Deferred tax assets and liabilities are offset against one another if the Company has an actionable claim to set off current tax assets against current tax liabilities and the latter are levied by the same taxation authority. Provisions Pension provisions for the company pension scheme are measured according to the Projected Unit Credit Method stipulated by IAS 19 “Employee Benefits“. This benefit/years of service method takes into account not only pensions and earned pension rights known on the balance sheet date, but also expected future increases in salaries and pensions. Any differences arising at year-end (known as actuarial gains or losses) between the expected pension obligations thus calculated and the present value of the benefit obligation are immediately recognized in net profit or loss. The interest component of the addition to provisions contained in pension expenses is reported as interest cost in financial income/expense. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 89 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Other provisions are recognized if there are legal or constructive obligations to third parties that are based on past business transactions or events and will probably (i.e. there are more indications for than against) result in outflows of net assets that can be reliably determined. They are recognized at the anticipated settlement amount allowing for all identifiable risks involved. The settlement amount with the highest probability of occurrence is assumed. In order to cover any costs incurred for cases of complaint, for example for replacement deliveries or repairs in the warranty period, warranty provisions have been recognized based on empirical data. Financial liabilities On initial recognition, financial liabilities are carried at fair value less transaction costs. In subsequent periods, they are measured at amortized cost unless they are assigned to the category “Financial liabilities measured at fair value through profit or loss“; any difference between the amount paid out (less transaction costs) and the amount repaid is recorded in the income statement over the term of the loan using the effective interest method. Loan liabilities are classified as current liabilities if the Group does not have the unconditional right to defer repayment to a point in time at least twelve months after the balance sheet date. Trade payables Current liabilities are reported at their repayment or settlement amount. Non-current liabilities are recognized at amortized cost. The amortized cost is calculated by discounting the repayment amount using the effective interest method. Derivative financial instruments Derivative financial instruments are initially measured at the fair value attributable to them on the day on which the contract is formed. Subsequently, they are also measured at the fair value applicable on the relevant balance sheet date, as they have not been classified as hedging instruments. Interbank conditions or stock exchange prices are used to measure derivative financial instruments; the bid and offer prices on the balance sheet date are used here. If no stock exchange prices are used, the fair value is calculated by means of recognized financial models. Each of the fair values recognized corresponds to the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. 90 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Sales and revenue realization Revenue comprises the fair value of the received or anticipated consideration for the sale of goods and services within ordinary activities. Revenue from the sale of goods is recognized on delivery and after risk transfer. Interest income is accrued in accordance with the outstanding loan amount. Dividend income from financial investments is recognized when the shareholder’s legal entitlement to payment arises. Research and development costs Research costs are not allowed to be capitalized. They are recognized as an expense in the period in which they are incurred. Development costs can be capitalized if all recognition criteria stipulated by IAS 38 “Intangible Assets” have been fulfilled, the research phase can be clearly separated from the development phase and costs incurred can be allocated to individual project phases without overlap. Restatement in accordance with IAS 8 In the context of preparing the 2011 consolidated financial statements, the following restatements were carried out in accordance with IAS 8 (“Accounting Policies, Changes in Accounting Estimates and Errors“): In Neschen AG’s tax planning, an adjustment to the tax measurement bases was required for the measurement of loss carryforwards for the forecast period. The corresponding adjustment gave rise to an increase in deferred tax assets on loss carryforwards for the prior year. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 91 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Restatement in accordance with IAS 8 in EUR ’000 2010 before restatements Restatements 31/12/2010 restated Assets Intangible assets 10,713 0 10,713 Property, plant and equipment 17,249 0 17,249 632 0 632 1,830 0 1,830 Deferred tax assets 1,833 905 2,738 Non-current assets 32,257 905 33,162 Inventories 13,222 0 13,222 Trade receivables Joint venture according to equity method Other financial assets 11,231 0 11,231 Other receivables and financial assets 3,758 0 3,758 Liquid funds 2,168 0 2,168 Current assets 30,379 0 30,379 Balance sheet total 62,636 905 63,541 in EUR ’000 2010 before restatements Restatements 31/12/2010 restated Liabilities Subscribed capital 13,125 0 13,125 0 0 0 Currency translation reserve −3,286 0 −3,286 Net accumulated loss −9,836 905 −8,931 3 905 908 Capital reserve Equity before minority interests Minority interests 1,175 Equity 1,178 905 2,083 Provisions for pensions 339 0 339 Non-current provisions 415 0 415 Deferred tax liabilities 23 0 23 30,725 0 30,725 8,468 0 8,468 39,970 0 39,970 Non-current financial debt Other non-current financial liabilities Non-current debt Income tax liabilities 92 1,175 134 0 134 Current provisions 1,082 0 1,082 Current financial debt 3,685 0 3,685 Trade payables 8,698 0 8,698 Other current liabilities 7,889 0 7,889 Current debt 21,488 0 21,488 Balance sheet total 62,636 905 63,541 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Consolidated income statement for the period from 1 January to 31 December 2010 in EUR ’000 Sales Changes in inventories and other own work Capitalized Other operating income 2010 before restatements Restatements 98,919 31/12/2010 restated 98,919 40 40 1,238 0 1,238 Cost of materials −57,819 0 −57,819 Personnel expenses −20,652 0 −20,652 −2,978 0 −2,978 −19,354 0 −19,354 Write-downs Other operating expenses Profit (loss) from operating activities −606 0 −606 Profit (loss) from equity investments −389 0 −389 233 0 233 Financing income Financing expenses −3,366 0 −3,366 Profit (loss) before taxes − 4,128 0 − 4,128 872 312 1,184 −3,256 0 −2,944 −84 0 −84 Income after minority interests −3,340 0 −3,028 Loss carried forward from the prior year −6,496 593 −5,903 Net accumulated loss −9,836 905 −8,931 Income tax Net income for the year Minority interests Caution – German version shall prevail! 2011 Annual Report | Neschen AG 93 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS II. Assets Non-current assets · movement of fixed assets in 2011 in EUR ’000 Intangible assets Property, plant & equipment Financial assets Total 15,101 50,529 2,462 68,093 125 130 87 342 Cost As at 01/01/2011 Currency translation Additions 77 545 86 708 Disposals −1,118 −292 −959 −2,369 Reclassifications 6 6 0 0 As at 31/12/2011 14,191 50,906 1,676 66,774 4,387 33,280 0 37,668 68 116 0 184 Additions 2,356 2,809 0 5,165 Disposals −1.027 −206 0 −1,233 Reclassifications 0 0 0 0 As at 31/12/2011 5,784 35,999 0 41,784 Carrying amount as at 31/12/2011 8,406 14,907 1,676 24,990 Write-downs As at 01/01/2011 Currency translation Non-current assets · movement of fixed assets in 2010 in EUR ’000 Intangible assets Property, plant & equipment Financial assets Total 14,855 50,309 2,605 67,769 338 322 190 850 Cost As at 01/01/2010 Currency translation Additions 81 374 74 529 Disposals −89 −546 −407 −1,042 Reclassifications −84 70 0 −14 As at 31/12/2010 15,101 50,529 2,462 68,093 4,227 30,662 0 34,889 Write-downs As at 01/01/2010 Currency translation 93 247 0 339 Additions 144 2,834 0 2,978 Disposals −76 − 463 0 −539 0 1 0 1 4,387 33,280 0 37,668 10,713 17,249 2,462 30,425 Reclassifications As at 31/12/2010 Carrying amount as at 31/12/2010 94 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Intangible assets Intangible assets in 2011 Goodwil Trademark rights Concessions/ industrial property rights 10,519 2,086 2,496 15.101 29 40 56 125 Additions 0 0 77 77 Disposals −1,103 0 −15 −1,118 Reclassifications 0 0 6 6 As at 31/12/2011 9,445 2,126 2.620 14,191 2,302 0 2.085 4,387 0 28 40 68 Additions 1,852 316 188 2,356 Disposals −1,025 0 −2 −1,027 0 0 0 0 in EUR ’000 Total Cost As at 01/01/2011 Currency translation Write-downs As at 01/01/2011 Currency translation Reversals of write-downs Reclassifications 0 0 0 0 As at 31/12/2011 3,129 344 2.311 5,784 Carrying amount 31/12/2011 6,316 1,782 309 8,406 Goodwill Trademark rights Concessions/ industrial property rights Total 10,442 1,976 2,437 14,855 77 110 152 338 Additions 0 0 81 81 Disposals 0 0 − 89 − 89 Reclassifications 0 0 − 84 − 84 As at 31/12/2010 10,519 2,086 2,496 15,101 2,302 0 1,925 4,227 Currency translation 0 0 93 93 Additions 0 0 144 144 Disposals 0 0 −76 −76 Reversals of write-downs 0 0 0 0 Reclassifications 0 0 0 0 As at 31/12/2010 2,302 0 2,085 4,387 Carrying amount 31/12/2010 8,217 2,086 411 10,713 Intangible assets in 2010 in EUR ’000 Cost As at 01/01/2011 Currency translation Write-downs As at 01/01/2010 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 95 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Goodwill is assigned to the Group’s identifiable cash-generating units (CGUs) according to country of activity and division. All goodwill refers exclusively to the “Graphics“ segment. Goodwill is verified by impairment tests according to the DCF method and has an unlimited useful life. The basis for determining the value in use in the impairment tests is provided by the companies’ multi-year planning (three to four years). The planning premises are adjusted to the current state of knowledge in each case, with both reasonable assumptions regarding macroeconomic trends and historical developments being taken into account. A sustainable growth rate of 1% is assumed as the rate of increase for the years outside the planning horizon. The expected cash flows are discounted according to the changes in interest rate anticipated per country, taking into account the base interest rate and the relevant market risk premium for each country, the risk markup and a markup factor calculated for each country. In terms of the goodwill taken into account within the Group, this gives rise to discount rates of 8.1% for Germany, 10.9% for the Czech Republic and 8.0% for the USA. Summary of the distribution of goodwill by region: Goodwill by region in EUR ’000 Germany Czech Republic USA Total 2011 2010 5,411 6,238 905 905 0 1,074 6,316 8,217 The goodwill in the USA relates to the American companies. The impairment test resulted in an unscheduled write-down of EUR 1,074 thousand. A significant deterioration in the assumptions made might result in a valuation allowance. Currently, management does not reasonably expect the parameters to deteriorate significantly. Concessions and industrial property rights Additions mainly relate to software licences. Trademark rights The figures mainly refer to property and trademark rights (EUR 1,782 thousand, prior year: EUR 2,086 thousand), recognized in the USA. These trademark rights have an indefinite useful life. In the assessment of management, the US trademark rights of the SEAL brand are essential to continuation of the business. An impairment loss to fair value has been recognized. No restrictions are planned in the foreseeable future. As at the balance sheet date, goodwill and brand names exist as intangible assets with an indefinite useful life. The intention is to use the brand names for an unlimited period of time. Research and development costs In the area of research and development, costs of EUR 988 thousand (prior year: EUR 948 thousand) were recognized as an expense. Neither Neschen AG nor Neschen Americas Corp. capitalized development costs. 96 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (2) Property, plant and equipment Property, plant and equipment in 2011 in EUR ’000 Land and buildings Technical equipment and machinery Operating and office equipment Assets under construction Total Cost 19,034 23,126 8,337 32 50,529 Currency translation As at 01/01/2011 18 32 80 0 130 Additions 34 247 255 9 545 Disposals 0 −93 −198 −1 −292 Reclassifications 0 0 0 −6 −6 As at 31/12/2011 19,086 23,312 8,474 34 50,906 7,894 18,243 7,118 25 33,280 13 27 76 0 116 Write-downs As at 01/01/2011 Currency translation Additions 904 1.567 338 0 2,809 Disposals 0 −31 −175 0 −206 Reversals of write-downs 0 0 0 0 0 Reclassifications 0 0 0 0 0 As at 31/12/2011 8,811 19,806 7,357 25 35,999 10,275 3,506 1,117 9 14,907 Carrying amount as at 31/12/2011 Property, plant and equipment in 2010 in EUR ’000 Land and buildings Technical equipment and machinery Operating and office equipment Assets under construction Total Cost 18,944 22,981 8,354 30 50,309 Currency translation As at 01/01/2011 51 86 185 0 322 Additions 39 114 219 2 374 Disposals 0 −55 − 491 0 −546 Reclassifications 0 0 70 0 70 As at 31/12/2010 19,034 23,126 8,337 32 50,529 6,967 16,622 7,048 25 30,662 20 62 165 0 247 907 1,574 353 0 2,834 Write-downs As at 01/01/2010 Currency translation Additions Disposals 0 −15 − 448 0 − 463 Reversals of write-downs 0 0 0 0 0 Reclassifications 0 0 1 0 1 7,894 18,243 7,118 25 33,280 11,140 4,883 1,219 7 17,249 As at 31/12/2010 Carrying amount as at 31/12/2010 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 97 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Technical equipment and machinery Additions to technical equipment and machinery mainly relate to conversions and enhancements of production machinery.. Operating and office equipment Additions to operating and office equipment are mainly in the IT area, e.g. to replace servers, PCs and printers. They also include capital expenditure on building maintenance, storage facilities, testing and measuring equipment. Assets under construction No major assets are currently being constructed or developed. (3) Financial assets accounted for using the equity method The Neschen Group holds 50.0% of Neschen GBC Graphic Films LLC, Elkridge, USA. Financial assets accounted for using the equity method in EUR ’000 2011 As at 01/01 2010 632 948 −955 −389 Capital increase 870 0 Reclassification 269 0 41 73 857 632 Share of loss/profit Currency translation As at 31/12 Joint venture key figures using the equity method in EUR ’000 Sales 2010 Neschen share 3,227 3,302 Net income for the year −381 −389 Non-current assets 1,257 2,259 527 676 1,783 2,935 58 570 1,201 1,922 Current assets Total assets Equity Non-current borrowing Current borrowing Total capital 98 2011 Neschen share 2011 Annual Report | Neschen AG 525 443 1,783 2,935 Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (4) Other financial assets a) Equity investments Equity investments in EUR ’000 31/12/2011 31/12/2010 Neschen Service GmbH, Bückeburg 50 50 Filmolux Co. Ltd., Tokio, Japan 43 43 Neschen Portugal S.A., Mem Martins, Portugal 16 16 109 109 2011 2010 684 1.709 Total b) Loans Loans in EUR ’000 Loans to investees Other loans 25 12 As at 31/12 709 1,721 2011 2010 2,738 1,812 There were no valuation allowances on financial assets. (5) Deferred taxes Changes in deferred income taxes were as follows: Changes in deferred tax assets in EUR ’000 As at 01/01 Income/expense in the income statement − 823 926 As at 31/12 1,915 2,738 2011 2010 23 69 −16 − 46 7 23 Changes in deferred tax liabilities in EUR ’000 As at 01/01/ Income/expense in the income statement As at 31/12 Deferred taxes arise from temporary differences between carrying amounts in the financial statements and the tax accounts, from the expected future use of tax loss carryforwards and from consolidation adjustments at Group level. Neschen AG’s single-entity financial statements as at 31 December 2011 capitalized, according to the gross presentation, deferred taxes of EUR 4,020 thousand (prior year: (EUR 4,536 thousand) on existing tax loss carryforwards. Deferred tax liabilities of EUR 2,522 thousand (prior year: EUR 2,219 thousand) are the result of temporary measurement differences at Neschen AG. The recoverability of the surplus of deferred tax assets in the amount of EUR 1,498 thousand (prior year: EUR 2,317 thousand) is derived from a tax planning calculation for the years from 2012 to 2015. The tax planning is based on corporate planning for the following four years. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 99 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Management expects realization to be possible following implementation of the measures taken. One of the main measures is the closure of the production site in Basildon, Great Britain. Machinery that was written off in the reporting year and will hence cause no further costs in future was supplied for production purposes here. In future, the focus will be on utilization of the plant in Bückeburg. Other measures such as the shortened depreciation of plant I at the Bückeburg site, product mix adjustments and improved use of existing resources have also been included in corporate planning. The Group did not capitalize deferred taxes on tax loss carryforwards in the amount of EUR 22,215 thousand, as there can be no assumption of a realization within the current planning horizon. The other Group companies recognize deferred tax assets to the extent that deferred tax liabilities exist in the relevant company and taxable income can be anticipated for the relevant company in future. Current assets (6) Inventories Inventories in EUR ’000 31/12/2011 31/12/2010 Raw materials, consumables and supplies 2,307 2,468 Work in progress 1,547 1,582 Finished goods and merchandise 9,239 8,939 Prepayments Total 253 233 13,346 13,222 Inventories contain valuation allowances of EUR 993 thousand (prior year: EUR 1,089 thousand). (7) Trade receivables Trade receivables in EUR ’000 31/12/2011 Trade receivables 31/12/2010 12,096 12,478 −976 −1,246 11,120 11,231 2011 2010 1,246 1,189 8 14 583 321 − 803 −196 Reversal of unused impairment −58 −82 Closing balance at 31/12 976 1,246 Valuation allowances Total Changes in valuation allowances in EUR ’000 Opening balance as at 1 January Currency translation Addition to impairment of receivables Receivables written down as uncollectable in the reporting year 100 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Age structure analysis Age structure analysis for 2011 in EUR ’000 Carrying amount Of which neither overdue nor impaired 11,120 7,847 Overdue, but not impaired < 31 days 30–60 days 61–90 days > 90 days 1,640 661 220 1,727 As at 31/12/2011 Recognized assets Trade receivables Receivables from long-term investees and investors 496 496 0 0 0 0 Other loans 709 709 0 0 0 0 1,019 1,019 0 0 0 0 13,344 10,071 1,640 661 220 1,727 Other current assets Total Without consideration of other taxes and prepaid expenses Age structure analysis for 2010 in EUR ’000 Carrying amount Of which neither overdue nor impaired 11,231 7,931 Overdue, but not impaired < 31 days 30–60 days 61–90 days > 90 days 1,629 487 26 326 As at 31/12/2011 Recognized assets Trade receivables Receivables from long-term investees and investors 713 713 0 0 0 0 Other loans 1,721 1,721 0 0 0 0 Other current assets 1,895 1,895 0 0 0 0 15,560 12,260 1,629 487 26 326 Total Without consideration of other taxes and prepaid expenses Caution – German version shall prevail! 2011 Annual Report | Neschen AG 101 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (8) Other receivables and financial assets Other receivables and financial assets in EUR ’000 Receivables from long-term investees and investors Other current receivables Prepaid expenses Total 31/12/2011 31/ 12/2010 496 713 1,323 2,261 860 784 2,679 3,758 Other assets Other assets (EUR 1,322 thousand, prior year: EUR 2,261 thousand) mainly consist of receivables from factoring companies (EUR 320 thousand, prior year: EUR 1,028 thousand) and receivables from other taxes (EUR 298 thousand, prior year: EUR 56 thousand). Prepaid expenses Prepaid expenses contain rent and lease prepayments, as well as other prepayments due within one year. Contingent assets There are contingent assets in the amount of EUR 213 thousand from an action against Mr Rolf W. Zinn. (9) Liquid funds Liquid funds comprise cash in hand, cheques and bank balances if they are available within three months. Cash and cash equivalents are not subject to any restrictions on disposal. III. Liabilities (10) Subscribed capital The share capital on the reporting date is EUR 13,125 thousand and is divided into 13,125,000 no-par-value shares. There are no other share classes. In financial year 2007, the Company’s share capital was increased by EUR 4,375 thousand to EUR 13,125 thousand. The capital increase was entered into the Commercial Register at Stadthagen District Court on 15 June 2007. The share capital is fully paid-up. The premium of EUR 437,500.00 was transferred to the capital reserve and partially offset. The costs of the capital increase were offset against the premium. (11) Minority interests Minority interests relate to HSW Signall s.r.o., Prague (Czech Republic). 102 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (12) Provisions for pensions Pension obligations are recognized for Filmolux Sarl, Bagnolet, France, and Neschen Italia s.r.l, Bagnolo, Italy. The obligation in both cases consists of a non-recurring payment to employees on entering into retirement. Provisions for pensions in EUR ’000 31/12/2011 31/12/2010 360 339 0 0 21 19 31/12/2011 31/12/2010 31/12/2009 Present value of the obligations 360 339 320 Recognized provision 360 339 320 Recognized provision Pension payments Expense in the income statement The provision amount in the balance sheet is calculated as follows: Calculated provision amount in the balance sheet in EUR ’000 The changes in the defined benefit obligation in the financial year were as follows: Entwicklung der leistungsorientierten Verpflichtung in EUR ’000 31/12/2011 31/12/2010 339 320 3 1 18 18 360 339 31/12/2011 31/12/2010 3 1 Interest cost 18 18 Total amount recognized in expense 21 19 2011 2010 5.5% 5.5% Beginning of the year Current service cost Interest cost End of the year The following amounts were recognized in the income statement: Amounts recognized in the income statement in EUR ’000 Current service cost The following main actuarial assumptions were made: Main actuarial assumptions Discount rate Inflation rate Future salary increases Future pension increases Caution – German version shall prevail! ---------- Normal for the country ---------2.5% 2.5% --- None, as non-recurring payment --- 2011 Annual Report | Neschen AG 103 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (13) Provisions Non-current provisions in EUR ’000 Warranties Partial retirement Opening balance as at 01/01/2011 Use Reversal Addition Closing balance as at 31/12/2011 224 71 0 75 228 45 45 0 0 0 Severance payment 146 24 0 0 122 Total 415 140 0 75 350 Current provisions Opening balance as at 01/01/2011 Use Reversal Addition Closing balance as at 31/12/2011 Warranties 225 71 0 75 229 Litigation costs 605 100 165 0 340 Performance-related remuneration 172 172 0 210 210 0 0 0 597 597 80 201 104 595 369 1,082 545 269 1,477 1,745 in EUR ’000 Restructuring Other Total In order to cover any costs incurred for cases of warranty, such as for replacement deliveries or repairs in the warranty period, warranty provisions have been recognized based on empirical data. Provisions for litigation costs were recognized for a legal dispute at Neschen AG with a former supplier and in the context of a patent-related issue. Owing to statutory requirements, provisions for severance payments are recognized at Neschen Austria GmbH, Vienna. Severance payments are non-recurring payments to employees, which, under Austrian law, become due on termination of the employment relationship. The provisions for performance-related remuneration to employees were recognized on the basis of outstanding payments resulting from the 2011 (contractual) annual agreements. (14) Financial liabilities There are non-current financial liabilities to J.P. Morgan Bank plc, formerly Bear Stearns plc. Financial liabilities in EUR ’000 Due within < 1 year Due within 1–5 years Total 31/12/2011 31/12/2010 34,229 3,685 0 30,725 34,229 34,410 There are current financial liabilities to various banks in France, Italy, Austria and the USA as well as to J.P. Morgan Bank plc (EUR 30,800 thousand). 104 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Securities The following securities are being provided to the security pool: Security pool leader: J.P. Morgan Bank plc, Dublin/Ireland, formerly Bear Stearns Bank plc, London/Great Britain Borrower and collateral provider 1: Neschen International B.V., Raalte/Netherlands, new company name: Neschen Benelux B.V. Jointly liable partner and collateral provider 2: Neschen AG, Bückeburg q q q q Security transfer agreement (April/May 2007) Security pool agreement (01/10/2007) Addenda to the security transfer agreement (August 2010) Extension letter from J.P. Morgan Bank plc, Dublin /Ireland, dated 21 March 2011 q Land charges in the amount of EUR 40 thousand for collective encumbrance of the following properties: a) Property at Hans-Neschen-Str. 1, 31675 Bückeburg (buildings and open area, Müsingen district, plot 5, plot section 8/8). Entered in the land registry of Bückeburg District Court (Müsingen district, sheet 205) b) ) Property at Windmühlenstraße 6, 31675 Bückeburg (buildings and open area, Bückeburg district, plot 24, plot section 52/562). Entered in the land registry of Bückeburg District Court (Müsingen district, sheet 2672). The carrying amount for both plots of land including buildings amounts to EUR 9,202 thousand. q Assignment as collateral of machines at the Bückeburg site, providing they are not accessories or major components of the operating equipment in Bückeburg (carrying amount: EUR 2,965 thousand) q Assignment as collateral of all warehouses at Hans-Neschen-Str. 1, Windmühlenstr. 6 in Bückeburg and external warehouses at Rhenus forwarding agency, Hans-Böckler-Str. 127 in Minden (carrying amount: EUR 7,115 thousand) q Pledging of trademark rights, patents and licences (carrying amount: EUR 2,090 thousand) q Assignment of payment claims against Eurofactor AG, Munich, including the claims ceded to the factoring company from trade credit insurance policies taken out (carrying amount: EUR 320 thousand) q Global cession of outstanding accounts not purchased by Eurofactor AG, Munich (carrying amount: EUR 1,319 thousand) q Pledging of business interests in the following European subsidiaries: Filmolux S.A.R.L., Paris /France, Neschen Italia s.r.l., Bagnolo /Italy, Neschen Benelux B.V., Raalte /Netherlands, Neschen Coating UK Ltd., Basildon /Great Britain, Neschen UK Ltd., Basildon /Great Britain, HSW Signall s.r.o., Prague /Czech Republic. The pledging of some of the European subsidiaries has not yet been implemented in formal legal terms. q Collateralization of the parent company of the US subgroup (Neschen Corp.) through provision of guarantees by all US companies with the exception of Neschen GBC Graphic Films LLC. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 105 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (15) Trade payables Trade accounts are payable exclusively to third parties. (16) Other non-current and current liabilities Other non-current and current liabilities 31/12/2011 in EUR ’000 Liabilities to personnel Shareholder loans Interest liabilities Debtor warrant 31/12/2010 Non-current Current Non-current Current 0 433 0 264 1,050 47 1,150 45 0 5,524 0 4,252 540 0 7,318 0 Advances received 0 45 0 43 Liabilities to other long-term investees and investors 0 68 0 435 Liabilities from other taxes 0 831 0 671 Social security liabilities 0 389 0 345 Other financial liabilities 0 680 0 680 Other liabilities 0 605 0 1,154 1,590 8,621 8,468 7,889 Total Vermögensverwaltung Erben Dr. K. Goldschmidt (VVG) and Mrs Jutta Zinn have granted Neschen AG shareholder loans in the amount of EUR 1,050 thousand (VVG EUR 375 thousand, Jutta Zinn EUR 675 thousand), with a currently unspecified term. The average interest rate in 2011 was 4.88% (prior year: 4.24%) and is reviewed on a monthly basis. With effect from 1 July 2008, the loan from Ms Jutta Zinn in the amount of EUR 675 thousand was transferred to Mr François Morax, Switzerland. Mrs Jutta Zinn has also granted Neschen AG a profit-participating loan in the amount of EUR 200 thousand. This loan did not attract interest in the reporting year. With effect from 1 July 2008, the loan in the amount of EUR 200 thousand was transferred to Mr François Morax, Switzerland. EUR 100 thousand was waived, based on an out-of-court settlement with Mr Rolf W. Zinn in respect of a tax repayment. Financial derivatives The Neschen Group does not currently have any derivative financial instruments. 106 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Maturity analysis The maturity analysis of financial liabilities within the scope of IFRS 7 based on undiscounted cash flows is as follows: Maturity analysis for 2011 in EUR ’000 Up to one year 1–2 years 2–5 years 5–20 years Over 20 years As at 31/12/2011 33,173 4,631 238 1,113 13,200 Trade payables Financial liabilities 9,089 0 0 0 0 Other liabilities 7.790 0 0 0 0 50.052 4.631 238 1.113 13.200 Total Maturity analysis for 2010 in EUR ’000 Up to one year 1–2 years 2–5 years 5–20years Over 20 years Financial liabilities 2,543 33,403 5,138 7,813 0 Trade payables 8,698 0 0 0 0 As at 31/12/2010 Other liabilities Total 7,218 0 0 0 0 18,458 33,403 5,138 7,813 0 F. Income Statement Disclosures General Sales in EUR ’000 2011 2010 100,252 99,837 Sales allowances −1,006 −918 Net sales 99,246 98,919 Gross sales (17) Sales Sales performance by segment and region is presented under “Segment reporting“. (18) Changes in inventory and other own work capitalized Changes in inventory and other own work capitalized in EUR ’000 2011 2010 Changes in inventory −94 40 Other own work capitalized Total Caution – German version shall prevail! 0 0 −94 40 2011 Annual Report | Neschen AG 107 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (19) Other operating income Other operating income in EUR ’000 2011 2010 Customer training courses 318 294 Income from customs authority refund 207 0 Exchange rate gains 206 379 Income from the reversal of provisions 165 149 Private vehicle use 112 112 59 23 Income from recoveries of de-recognized receivables Income from asset disposals 48 13 Insurance refunds 23 14 162 254 1,300 1,238 2011 2010 56,499 55,618 2,057 2,201 58,557 57,819 Other Total (20) Cost of materials Cost of materials in EUR ’000 Cost of raw materials, consumables and supplies and of purchased merchandise Purchased services Total (21) Personnel expenses Personnel expenses in EUR ’000 2011 2010 Salaries 12,161 12,174 Wages 4,463 4,469 Social security contributions 4,083 4,009 20,707 20,652 2011 2010 Production/logistics 197 195 Sales /marketing 132 131 Administration 92 95 Research and development/quality management 21 23 442 444 Total Number of employees (annual average) Area Total Government grants In 2011, Neschen AG received no government grants. 108 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (22) Write-downs Write-downs in EUR ’000 2011 2010 2,831 2,978 0 0 Write-downs of goodwill 2,335 0 Total 5,165 2,978 Scheduled write-downs Write-downs of equity investments 2011 saw write-downs being charged on goodwill in the US company Neschen Corp. in the amount of EUR 1,508 thousand and, based on the imminent closure of Neschen Coating UK, on its proportionate goodwill in SEAL technical know-how in the amount of EUR 827 thousand. (23) Other operating expenses Other operating expenses in EUR ’000 2011 2010 Freight costs 4,118 4,113 Rents, leases 3,281 3,343 Legal and consultancy costs 2,019 1,790 Insurance policies 1,276 1,399 Advertising costs 1,228 1,214 Travel expenses 1,126 1,190 Maintenance 1,016 1,060 Commission 976 922 Office material 695 698 Provision for closure NCUK (reinstatement costs) 597 0 Cleaning 591 637 Valuation allowances 583 549 Other taxes 390 394 Exchange rate losses 328 436 Costs of continuing training 158 93 13 37 Losses from asset disposals Other 1,683 1,475 Total 20,077 19,353 (24) Net income from equity investments Income from investments (EUR −955 thousand; prior year: EUR −389 thousand) relates to the share of losses/profits of EUR −381 thousand (50%) of the joint venture Neschen GBC Graphic Films LLC, Elkridge, USA, and adjustments for the prior years (EUR −454 thousand).) Caution – German version shall prevail! 2011 Annual Report | Neschen AG 109 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (25) Financing income and expenses Financing income in EUR ’000 2011 2010 Valuation of the debtor warrant 6,778 0 108 233 6,886 233 Interest income Total Valuation of the debtor warrant was based on the anticipated performance of the Group over the next few years, given the overall conditions existing on the balance sheet date. The debtor warrant was valued at EUR 540 thousand as of the balance sheet date of 31 December 2011. The reversal of the financial liability for the debtor warrant gave rise in 2011 to revenue of EUR 6,778 thousand which was not recognized as income. Financing expenses in EUR ’000 Accrued interest 2011 2010 1,273 1,424 Factoring 486 529 Bank interest paid 219 357 Accrued charges 75 161 Charges 42 42 Payment of settlement of derivative fractional amounts 0 69 Debtor warrant 0 784 2,095 3,366 Total The total interest expense including factoring amounted to EUR 1,978 thousand (prior year: EUR 2,310 thousand). (26) Taxes Income taxes in EUR ’000 2011 2010 restated Current taxes 204 −304 Deferred taxes 807 −880 1,011 −1,184 Total Germany 818 −768 Abroad 193 − 416 1,011 −1,184 Total Income taxes relate to payments and liabilities in respect of foreign subsidiaries. 110 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following overview provides a reconciliation between the anticipated tax expense or income, which is derived from applying the Group tax rate to earnings before income taxes, and the actual income tax expense incurred in the reporting year. The Group tax rate stands at 30%, the same as the company tax rate in Germany. Breakdown of reported tax expense/income in EUR ’000 2011 2010 restated −218 −4,128 30.0% 30.0% Expected tax expense −65 −1,238 Different foreign tax rates −36 −69 0 − 461 Valuation allowance on deferred taxes in prior years 822 −768 Tax effects due to losses for which no deferred taxes were recognized 2,001 1,288 Earnings before income taxes Neschen AG’s income tax rate (including trade tax) Tax reductions/increases in prior years Tax effects due to tax-free income and other Items −5,353 0 −12 64 1,011 −1,184 − 463.9% 28.7% Other effects Reported tax expense or tax income (–) Tax ratio Assignment of deferred taxes 31/12/2011 in EUR ’000 Asset Intangible assets 31/12/2010 Liability Asset Liability 912 946 0 1,186 Property, plant and equipment 0 1,194 0 1,149 Financial assets 0 0 0 0 147 0 152 0 0 0 0 0 84 0 120 0 Inventories (HGB measurement restated) Receivables, other assets Provisions Liabilities Loss carryforwards Other Total Netting Balance sheet items Caution – German version shall prevail! 0 7 0 23 2,826 0 4,715 0 86 0 86 0 4,055 2,147 5,073 2,358 −2,140 −2,140 −2,335 −2,335 1,915 7 2,738 23 2011 Annual Report | Neschen AG 111 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (27) Minority interest Neschen AG holds a 51% equity investment in HSW Signall s.r.o., Prague, Czech Republic via Neschen Benelux B.V. (formerly Neschen International B.V.). HSW Signall s.r.o. accounts for a minority interest of EUR 6 thousand (prior year: EUR 84 thousand). H. Other Disclosures I. Segment reporting The following segment information was prepared in accordance with IFRS 8 “Operating Segments“. IFRS 8 requires individual annual financial statement data to be presented separately according to operating segment and region. The Group accounting principles have been observed in this presentation. Business segments The activities of Neschen AG (and also the Neschen Group) are divided into the “Graphics“ and “Documents“ segments. The “Graphics“ division markets a wide range of products, including finishing, protective and mounting films as well as printable media, under the two brands, NESCHEN and SEAL. The standard range comprises: q q q q q Printable materials with up to 5 m printing width for professional inkjet printers Self-adhesive mounting and protective films and corresponding processing machinery Special protective varnishes for large-format graphics, including the corresponding processing machinery Self-adhesive films for lettering and decoration Transportable presentation systems for large-format graphics The “Technical Coatings“ division is included in the “Graphics“ segment due to its low sales volume. It develops and sells customer-specific solutions and special products, as well as toll and special coatings. The “Documents“ division sells the classical product range for book protection, book care and book repair and, until June 2009, the services of the Archive Centre. The core range of the “Documents“ division consists of: q q Self-adhesive protective and stiffening films Self-adhesive repair and binding tapes In general, both segments make joint use of the resources available in production and administration. Areas that can be directly allocated to the segments include sales, cost of materials, particular assets, finished goods and merchandise, as well as parts of personnel costs. Other items are allocated depending on sales or share of production or on other items already assigned. Great care has been taken to delimit the items correctly. 112 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following values in terms of the number of “segment employees“ and the amount of “segment capital expenditure“ can be derived from this analysis: Average number of employees over the year Number 2011 2010 381 383 61 61 442 444 Segments: Graphics Documents Total Capital expenditure on property, plant and equipment and intangible assets in EUR ’000 2011 2010 591 450 Segments: Graphics Documents Total Caution – German version shall prevail! 47 14 638 464 2011 Annual Report | Neschen AG 113 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2011 income statement in EUR ’000 Graphics Documents Total 87,471 11,775 99,246 Sales Changes in inventory and other own work capitalized −92 −2 −94 87,379 11,773 99,152 −53,548 −5,009 −58,557 Total operating revenue Cost of materials 33,831 6,764 40,595 −17,776 −2,931 −20,707 1,220 79 1,299 −17,390 −2,687 −20,077 −115 1,225 1,110 Write-downs −4,735 −430 −5,165 EBIT −4,850 795 −4,055 Gross revenue Personnel expenses Other income Other expenses EBITDA Net financial income/expense 3,837 Income taxes −1,011 Minority interests −6 Net income for the year after minority interests −1,235 2010 income statement in EUR ’000 Sales Changes in inventory and other own work capitalized Total operating revenue Cost of materials Gross revenue Personnel expenses Other income Other expenses EBITDA Graphics Documents Total 86,890 12,029 98,919 39 1 40 86,929 12,030 98,959 −52,750 −5,068 −57,818 34,178 6,962 41,140 −17,681 −2,971 −20,652 1,153 85 1,238 −16,705 −2,648 −19,354 944 1,428 2,372 Write-downs −2,570 −408 −2,978 EBIT −1,626 1,020 −606 Net financial income/expense Income taxes Minority interests Net income for the year after minority interests −3,522 1,184 −84 −3,028 The reclassification of a new product group from 2010 causes a shift in sales of EUR 1.1 million in the intercompany area for 2010. This has no impact on any income statement items from gross revenue onwards. The joint venture Neschen GBC Graphic Films Ltd., Elkridge, USA, comes under the “Graphics“ segment. In 2011, the joint venture realized pro rata losses (50%) in the amount of EUR 955 thousand (prior-year loss: EUR 389 thousand). 114 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Balance sheet as at 31/12/2011 in EUR ’000 Graphics Documents Total 8,022 384 8,406 11,750 3,157 14,907 1,647 29 1,676 Inventories 11,932 1,414 13,346 Trade receivables 10,132 988 11,120 2,188 491 2,679 45,671 6,463 52,134 Intangible assets Property, plant and equipment Financial assets Other assets Segment assets Other assets 4,814 Assets balance sheet total 56,948 Provisions 1,922 533 2,455 Trade payables 8,340 749 9,089 Other liabilities Segment liabilities 9,304 367 9,671 19,566 1,649 21,215 Equity 786 Other liabilities 34,947 Liabilities balance sheet total 56,948 Balance sheet as at 31/12/2010 in EUR ’000 Graphics Documents Total Intangible assets 10,296 417 10,713 Property, plant and equipment 13,681 3,568 17,249 2,429 33 2,462 Inventories 11,798 1,424 13,222 Trade receivables 10,248 983 11,231 Financial assets Other assets Segment assets 3,074 684 3,758 51,526 7,109 58,635 Other assets 4,906 Assets balance sheet total 63,541 Provisions 1,366 470 1,836 Trade payables 7,937 761 8,698 Other liabilities Segment liabilities Equity 9,432 391 9,823 18,735 1,622 20,357 2,083 Other liabilities 41,101 Liabilities balance sheet total 63,541 Caution – German version shall prevail! 2011 Annual Report | Neschen AG 115 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Regions The secondary segmentation level breaks down selected financial information according to geographical markets. Sales in EUR ’000 2011 2010 Germany 20,378 21,184 Rest of Europe 53,006 50,872 USA 21,069 21,171 Other regions Total 4,793 5,692 99,246 98,919 Sales revenues are assigned on the basis of the country in which the customer has its head office. Segment assets in EUR ’000 2011 2010 Germany 27,988 31,522 Rest of Europe 15,330 15,264 USA 8,816 11,849 Total 52,134 58,635 in EUR ’000 2011 2010 Germany 7,144 7,227 10,189 10,869 Assets are allocated according to the head office of the company. Segment liabilities Rest of Europe USA 3,882 2,261 Total 21,215 20,357 in EUR ’000 2011 2010 Germany 286 165 Rest of Europe 109 174 USA 243 125 Total 638 464 Capital expenditure Capital expenditure is assigned according to the head office of the company to which it belongs. 116 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Employees (annual average) Number 2011 2010 Germany 214 211 Rest of Europe 167 170 58 60 3 3 442 444 USA Other regions Total II. Contingent liabilities and other financial obligations Contingencies and contingent liabilities A customer in the USA has filed for damages against Neschen Americas Corp. Neschen Americas Corp. acted only as an intermediary in respect of the product that is the subject of the complaint. Management takes the view that the manufacturer will assume liability. No provision has therefore been recognized. Over and above this, there were no additional contingencies or other contingent liabilities on the balance sheet date. Other financial obligations in 2011 in EUR ’000 Other operating lease obligations Up to 1 year 1–5 years Over 5 years Total 384 500 0 884 Rent and lease obligations 1,571 2,961 0 4,532 Total 1,955 3,461 0 5,416 Other financial obligations in 2010 in EUR ’000 Up to 1 year 1–5 years Over 5 years Total 509 825 0 1.334 Rent and lease obligations 1,758 3,243 2,974 7,974 Total 2,267 4,067 2,974 9,308 Other operating lease obligations Other financial obligations essentially comprise the three items: vehicle leases, IT leases and rent of buildings in the USA. The leases for company vehicles have a term of up to four years, at the end of which period the vehicles are returned to the lessor. The same applies to leased equipment in the IT area (telephone systems, servers, PCs). All other items involve rental agreements. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 117 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS III. Financial instruments and financial risk management Financial instrument disclosures 31/12/2011 in EUR ’000 Measurement Carrying category accor- amount as at ding to IAS 39 31/12/2011 Amortized Fair value cost throug profit or loss Fair value as at 31/12/2011 Assets Liquid funds LaR 2,899 2,899 0 2,899 Trade receivables LaR 11,120 11,120 0 11,120 Other current assets LaR 1,516 1,516 0 1,516 Other financial assets LaR 710 710 0 710 Equity investments AfS 109 0 109 109 Liabilities Trade payables FLAC 9,089 9,089 0 9,089 Current liabilities to banks and current portion of non-current loans FLAC 34,229 34,229 0 34,229 Non-current loans FLAC 0 0 0 0 Other current liabilities FLAC 8,621 8,621 0 8,621 FLAC 1,590 1,590 0 1,590 FLHfT 0 0 0 0 16,245 16,245 0 16,245 Other non-current liabilities Interest rate swap of which aggregated according to measurement categories under IAS 39: Loans and receivables (LaR) Available for sale (AfS) Financial liabilities measured at amortized cost (FLAC) Financial liabilities held for trading (FLHfT) 31/12/2010 in EUR ’000 LaR AfS 109 0 109 109 FLAC 53,529 53,529 0 53,529 FLHfT 0 0 0 0 Amortized Fair value cost throug profit or loss Fair value as at 31/12/2010 Measurement Carrying category accor- amount as at ding to IAS 39 31/12/2010 Assets Liquid funds LaR 2,168 2,168 0 2,168 Trade receivables LaR 11,231 Other current assets LaR 2,608 11,231 0 11,231 2,608 0 2,608 Other financial assets LaR 1,721 Equity investments AfS 109 1,721 0 1,721 0 109 109 Trade payables FLAC 8,698 8,698 0 8,698 Current liabilities to banks and current portion of non-current loans FLAC 3,685 3,685 0 3,685 Non-current loans FLAC 30,725 30,725 0 30,725 Other current liabilities FLAC 7,889 7,889 0 7,889 Other non-current liabilities FLAC 8,468 8,468 0 8,468 FLHfT 0 112 − 112 0 17,728 17,728 0 17,728 Liabilities Interest rate swap of which aggregated according to measurement categories under IAS 39: Loans and receivables (LaR) Available for sale (AfS) Financial liabilities measured at amortized cost (FLAC) Financial liabilities held for trading (FLHfT) 118 2011 Annual Report | Neschen AG LaR AfS 109 0 109 109 FLAC 59,465 59,465 0 59,465 FLHfT 0 0 0 0 Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Due to the short remaining term of “Trade receivables“, “Other receivables and financial assets“ and “Trade payables“, as well as “Other current liabilities“, the carrying amount can be regarded as a realistic estimate of fair value. Equity investments (category AfS) consist entirely of non-listed equity instruments without other market prices. As their fair value cannot be reliably determined, they are measured at cost. Net income by measurement category in 2011 in EUR ’000 From subsequent measurement From interest From disposals Net income At fair value Currency translation Valuation allowance Loans and receivables (LaR) 0 46 −583 70 −803 −1,270 Financial assets held for trading (FAHfT) 0 0 0 0 0 0 Financial Liabilities Measured at Amortised Cost (FLAC) 0 0 0 −1.609 0 −1,609 Total 0 46 −583 −1.539 −803 −2,879 From interest From disposals Net income Net income by measurement category in 2010 in EUR ’000 Loans and Receivables (LaR) Financial Assets Held for Trading (FAHfT) Financial Liabilities Measured at Amortised Cost (FLAC) Total Caution – German version shall prevail! From subsequent measurement At fair value Currency translation Valuation allowance 0 117 −321 66 −214 −352 112 0 0 −69 0 43 0 0 0 −2,768 0 −2,768 112 117 −321 −2,771 −214 −3,077 2011 Annual Report | Neschen AG 119 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Financial risk management Finance risk management The Neschen group is exposed to various financial risks, which are described in detail in the “Opportunities and Risks of Future Development“ section of the management report for Neschen AG. The following paragraphs provide an extract from the management report with regard to financial risks: Currency risks The Company’s international orientation gives rise to foreign currency risks, particularly in the case of the exchange rate of the euro to the US dollar and the euro to the British pound. To minimize currency risks, Neschen AG endeavours to conduct all sales and purchasing transactions in euro wherever possible. Hedge transactions are not generally carried out. The possibility that a fall in value of the US currency or the euro will have an impact on the Company’s earnings power cannot be ruled out. A 10% fall in the value of the US currency would have an earnings impact of around EUR −70 thousand and further impact of around EUR −540 thousand on the currency translation reserve. Notwithstanding the balance in the flow of goods aimed for within the Neschen Group, there is a risk, due to the fact that a number of sales markets use the US dollar as a reference currency, that the Company will not be able to pass on price increases in individual markets, will become uncompetitive or have to make major price concessions to maintain its market share. Interest rate risks Financial instruments with a fixed interest rate do not give rise to interest rate risks. Any changes to the market interest rates for financial instruments with a variable interest rate also have a direct impact on interest payments, forward rate agreements and hence equity. Potential interest rate risks are not currently hedged. Interest rate risks in EUR ’000 Interest rate level 31/12/2011 31/12/2010 + 50 base points − 50 base points + 50 base points − 50 base points −205 205 −210 210 Net interest income The main part of the Neschen Group’s refinancing is covered by means of a variable interest loan from J.P. Morgan Bank plc. The bank deferred the interest accrued in 2011. Financing risks As part of the refinancing and waiver agreement, entered into in 2007, between J.P. Morgan Bank plc (formerly Bear Stearns Bank plc) and Neschen Benelux B.V. (formerly Neschen International B.V.) as the borrower and Neschen AG as the jointly liable party, a covenant agreement was made such that any failure to comply therewith grants the financing bank, in principle, an extraordinary right to terminate the loan agreements. This covenant agreement is a contractually agreed key figure system involving the Neschen Group’s financial data based on agreed medium-term sales, income and liquidity planning, which is subjected to quarterly review. 120 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company has entered into an agreement with J.P. Morgan Bank plc, under which the lender, up to and including 31 December 2012, has waived its right to termination of the loan due to failure to comply with the covenants. Irrespective of the further development of the key figures, the Company expects the debt lender to continue to provide helpful support to it. In the unlikely event that the loan is terminated in 2012 due to a breach of the covenant, the continued existence of the Company will be put at risk. Furthermore, the Neschen Group, via its financial holding company, Neschen Benelux B.V., has requested an extension of the EUR 30.8 million senior loan beyond 30 April 2012. On 17 April 2012, the financing bank J.P. Morgan Bank plc gave its consent to the extension of the loan until 30 June 2013. Liquidity risks The Company’s liquidity position improved in the reporting year, due to a positive EBITDA allied to low capital expenditure and stringent working capital management. The utilization of supplier credits has been reduced, particularly in the case of Neschen AG. Credit insurers’ assignment of limits has not changed significantly compared with the prior year. Sufficient insurance cover is in place for our main suppliers. If suppliers were to employ more restrictive practices with regard to payment targets, this could have a long-term negative impact on Neschen’s financial position. The credit insurer’s cancellation or reduction of insurance cover for individual customers increases the risk of loss in the event of defaulted receivables, on the one hand, and restricts the volume of receivables which Neschen AG can refinance in the short term through a factoring agreement with Eurofactor AG, Munich, on the other. The Company’s liquidity position very much depends on sales performance, available inventories, customer payment behaviour and suppliers’ borrowing capacity. A further significant sales slump could worsen the liquidity position and put the Company’s continued existence at risk. There are currently no signs of a sales risk of this kind. Further support for the Group’s liquidity position was provided by the fact that J.P. Morgan Bank plc continued, in 2011 as in prior years, to defer interest on the loans that it had granted. The Company uses a monthly liquidity planning tool to monitor the risk of a liquidity bottleneck. Interest was also deferred for the first quarter of 2012. A corresponding agreement with J.P. Morgan Bank plc is in place. Capital management The objectives of the Group in terms of capital management are to secure the continuation of the company as a going concern, in order to continue to provide the shareholders with returns and the other interested parties with the benefits to which they are entitled. A further objective is to maintain an optimum capital structure so as to reduce capital costs. The Group manages its capital structure, making adjustments to take account of any change in the economic environment. The equity ratio is used to monitor the capital structure. It is defined as the ratio of total equity to the balance Caution – German version shall prevail! 2011 Annual Report | Neschen AG 121 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Related parties Natural persons or their close family relatives that control the entity subject to reporting requirements or can exercise significant influence over it are also deemed to be related parties. A majority interest in this sense also exists if the natural person, together with the spouse’s voting rights, holds the majority of votes. If the shares and voting rights of the aforementioned individuals are less than 50 percent, a controlling influence may still be deemed to exist if the shares suffice for an effective majority in attendance at the general meeting. q Vermögensverwaltung Erben Dr. K. Goldschmidt (VVG) and Mrs Jutta Zinn have granted Neschen AG shareholder loans of EUR 1,050 thousand (VVG EUR 375 thousand, Jutta Zinn EUR 675 thousand) with a currently unspecified term. The average interest rate in 2010 was 4.24% (prior year: 5.04%) and is reviewed on a monthly basis. With effect from 1 July 2008, the loan from Mrs Jutta Zinn in the amount of EUR 675 thousand was transferred to Mr François Morax, Switzerland. q Mrs Jutta Zinn also granted Neschen AG a profit-participating loan in the amount of EUR 200 thousand. This loan did not attract any interest in the reporting period. With effect from 1 July 2008, the loan from Mrs Jutta Zinn in the amount of EUR 200 thousand was transferred to Mr François Morax, Switzerland. EUR 100 thousand was waived, based on an out-of-court settlement with Mr Rolf W. Zinn in respect of a tax repayment. q The married couple Rolf W. and Jutta Zinn rent the operating building to Filmolux S.a.r.l. via the agency “SCI Zinn“, a French company under civil law. SCI Zinn is wholly owned by Rolf W. Zinn and Jutta Zinn, and the rent for the building is EUR 512 thousand per annum plus service charges. Filmolux S.A.R.L. has also paid a rent deposit of EUR 132 thousand. The rent is standard for the local area. q On 23 February 2011, SCI Zinn brought an action for reimbursement of building damage in the amount of EUR 56 thousand against the architect, the builder and Filmolux S.A.R.L., Paris. With this action, SCI Zinn intends to file for damages arising from improper compliance with the fire protection regulations in connection with the erection of the building. Filmolux, as a lessee, does not see that it has co-responsibility and will mount a defence against the action. q In view of the accusations made, at the General Meeting of the Company on 7 December 2009, by the shareholder VVG in respect of the sale of the “Archive Centre“ area, the Supervisory Board engaged the law firm Salans LLP, Berlin, to conduct a special audit pursuant to section 111(2) sentence 2 of the AktG. The aim of this special audit was to examine the sale of the “Archive Centre“ area to GSK Gesellschaft zur Sicherung von schriftlichem Kulturgut mbH, headquartered in Pulheim/Brauweiler, and the legal and business relationships that Neschen AG and its subsidiaries maintained with members of the Zinn family in the period between 2007 and 2009. q The audit report concluded that there were several claims against Mr Rolf W. Zinn. These comprise: – Claim to reimbursement of the broker’s commission for the sale of the “Archive Centre“ area in the amount of EUR 24,750. – Claim to return of all remuneration payments for consultancy activities from 2007 to 2009 in the total amount of EUR 121 thousand. The claim is based on the fact that the consultancy contracts have formal defects or were not concluded in accordance with formal requirements. – Claim to reimbursement of overpaid Supervisory Board remuneration totalling EUR 15,600. 122 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Neschen AG filed these claims by way of counterclaim (as part of the proceedings in respect of outstanding Supervisory Board remuneration - see below) with the District Court of Bückeburg. In its ruling dated 28 March 2012, the District Court of Bückeburg ordered Mr Rolf W. Zinn to pay around EUR 45,000.00 plus interest to Neschen AG. In particular, the Company was awarded – the asserted claim to repayment of the incentive – the asserted claim to repayment of overpaid fixed Supervisory Board remuneration – the asserted claim to repayment of overpaid variable Supervisory Board remuneration (attendance fees) – the asserted claims in connection with omitted tax deductions pursuant to section 50a of the EStG, and a claim to compensation for paid taxes and a claim to exemption for as yet unpaid taxes The claims to repayment of consultancy remuneration and to (pro rata) reimbursement of costs of the voluntary special audit in 2009/2010 which the Company continued to pursue were, however, dismissed. The ruling is not final; the reasons given by the court for rejecting the two aforementioned claims are currently being analyzed. q Mr Rolf W. Zinn, the former Management Board and Supervisory Board member, has brought an action against Neschen AG for payment of remuneration for Supervisory Board and consultancy activities totalling EUR 16 thousand. The Company has declared set-off against this claim with the claims established in the course of the special audit. In its ruling of 28 March 2012, the District Court of Bückeburg completely dismissed the substance of Mr Rolf W. Zinn’s action, awarding him only a small amount of interest. The ruling is not final. q The consultancy firm Felbier Mall GmbH, based in Hamburg, at which Mr Henrik Felbier (member of the Management Board of Neschen AG since 1 January 2012) is employed as Managing Partner, received a consultancy fee of EUR 120 thousand for restructuring consultancy. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 123 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Related entities The joint venture Neschen GBC Graphic Films LLC in Elkridge, USA, is a production business for graphics products. The joint venture procures silicon paper from Neschen AG and, in return, Neschen Americas Corp obtains finished products from its in-house production. Neschen GBC Graphic Films LLC has received interest-free loans, with unlimited term, from the two joint venture partners. Within the Neschen Group, Neschen Americas Corp. granted the joint venture a loan in the amount of EUR 1,200 thousand (prior year: EUR 1,817 thousand). Neschen GBC Graphic Films LLC, Elkridge, USA in EUR ’000 2011 2010 Goods and services provided 2,197 3,990 Goods received 4,257 4,221 150 498 Receivables Payables Loans The associates Filmolux Co. Ltd., Tokyo, Japan (13.7% equity investment) und Neschen Portugal S.A., Mem Martins, Portugal (25% equity investment) are shown under “Other equity investments“. 186 153 1,200 1,922 Other equity investments in EUR ’000 Goods and services provided 2011 2010 1,215 1,349 Goods received 0 0 496 498 Payables 0 0 Loans 0 0 Receivables IV. Committees and remuneration Members of the Management Board comprise: Stefan Zinn, Dipl.-Kaufmann, Bückeburg Dr Norbert Dieterich, Dipl.-Ingenieur, Hannover Henrik Felbier, Dipl.-Kaufmann, Hamburg (appointed with effect from 1 January 2012) Members of the Supervisory Board comprise: Robert Gärtner, industrial manager, Schliersee – Supervisory Board Chair Joachim Koolmann, banking business manager, London – Deputy Supervisory Board Chair Bernd Capellen, business manager, Haan Mr Robert Gärtner has the following other offices: q INTERSCHALT maritime systems AG, Schenefeld (Management Board Chair) q Gärtner Consulting GmbH, Schenefeld (Managing Partner) q CDI Concepts Development Integration AG, Dortmund (Supervisory Board ) Mr Joachim Koolmann has the following other offices: q Augusta & Co. GmbH, Frankfurt (Managing Director) 124 2011 Annual Report | Neschen AG Caution – German version shall prevail! Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Mr Bernd Capellen has the following other offices: Capellen & Partner GmbH, Haan (Managing Partner) Eifelpark GmbH, Gondorf (Managing Partner) gte Holding AG, Stahnsdorf (Supervisory Board Chair) gte Brandschutz AG, Stahnsdorf (Supervisory Board Chair) gte swiss ag, Zug, Switzerland (Supervisory Board) Liquidator of several subsidiaries of the insolvent Babcock Borsig Group in Oberhausen q q q q q q Dr Norbert Dieterich has the following other offices: q Deutsche Bank AG, Hannover Branch (Advisory Council) q Metechon AG, Munich (Supervisory Board) Herr Henrik Felbier hat folgende weitere Mandate: q Felbier Mall GmbH, Hamburg (Managing Partner) q BGA Höpfingen Treuhand GmbH, Hamburg (Managing Director) Pursuant to section 314 (1) no. 6 of the HGB and the German Corporate Governance Code (items 4.2.4 and 5.4.8), the remuneration of the Management Board and the Supervisory Board in the financial year must be disclosed; this remuneration was as follows: Remuneration of the Management Board and the Supervisory Board Fixed salary Variable components Expense reimbursement Consultancy Total Total 2011 2011 2011 2011 2011 2010 Mr S. Zinn 245 0 0 0 245 245 Dr N. Dieterich 267 0 0 0 267 267 Total 512 0 0 0 512 512 Mr R. Gärtner 36 6 8 0 50 40 Mr J. Koolmann 24 8 3 0 35 26 Mr B. Capellen 24 9 2 0 35 25 Total 84 23 13 0 120 91 in EUR ’000 Management Board Supervisory Board The Management Board of Neschen AG was entitled only to its fixed salary in financial year 2011. The remuneration for 2011 contained neither variable performance-related components nor components with long-term incentive effect. Attendance fees for the Supervisory Board are reported under “Variable components“. “Consultancy“ contains consultancy services provided by members of the Supervisory Board. In financial year 2011, no consultancy services were provided by members of the Supervisory Board. In financial year 2011, no advances or pension commitments were granted to members of the Management Board or the Supervisory Board. The former Supervisory Board member Rolf W. Zinn received a loan from Neschen AG in the amount of EUR 78 thousand. V. Events after the balance sheet date There were no significant events, such as further changes in the company structure, in the reporting period. Caution – German version shall prevail! 2011 Annual Report | Neschen AG 125 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS VI. Declaration in respect of the German Corporate Governance Code (section 161 of the AktG) The Management Board and the Supervisory Board of Neschen AG have issued the declaration of conformity pursuant to section 161 of the AktG. It can be viewed at any time at www.neschen.de. VII. Fee for the audit of the financial statements (disclosure pursuant to section 314(1) no. 9 of the HGB) The fee for the audit of the annual financial statements recognized as expense pursuant to section 319(1) sentences 1 and 2 of the HGB was as follows: Fee for the audits of financial statements in EUR ’000 2011 2010 RTC | Schütte Treuhand KG, Bremen 186 180 Tax consultancy RTC | Schütte Treuhand KG, Bremen 107 5 Total 293 185 Audits of financial statements (consolidated and separate financial statements) The audits of the 2009, 2010 and 2011 financial statements were conducted by RTC | Schütte Treuhand KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Bremen (formerly RTC Treuhand GmbH, Bremen). Bückeburg, 27 April 2012 Neschen AG Dr Norbert Dieterich Management Board 126 2011 Annual Report | Neschen AG Henrik Felbier Management Board Stefan Zinn Management Board Caution – German version shall prevail! AUDITOR’S REPORT We have audited the consolidated financial statements – comprising the balance sheet, comprehensive income analysis, statement of changes in equity, cash flow statement and the notes – and the group management report prepared by Neschen AG, Bückeburg, for the financial year from 1 January to 31 December 2011. The preparation of the consolidated financial statements and the group management report in accordance with IFRSs as adopted by the EU and the supplementary provisions of German commercial law required to be applied under section 315a(1) of the Handelsgesetzbuch (German Commercial Code – HGB) is the responsibility of the Company’s legal representatives. Our responsibility is to express an opinion on the consolidated financial statements and the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with section 317 of the HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting standards and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of the companies included in the consolidated financial statements, the determination of the companies to be included in the consolidated financial statements, the accounting and consolidation principles used, and significant estimates made by the legal representatives, as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs as adopted by the EU and the supplementary provisions of German commercial law required to be applied under section 315a(1) of the HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements, as a whole provides a suitable understanding of the Group’s position and suitably presents the opportunities and risks of future development. Without qualifying this opinion, we draw attention to the statements made by the Management Board of Neschen AG to the effect that the continued existence of the Group companies is threatened by risks which are described in the section of the group management report entitled “Opportunities and Risks of Future Development“. Bremen, 27 April 2012 RTC | Schütte Treuhand GmbH Wirtschaftsprüfungsgesellschaft · Steuerberatungsgesellschaft – Hagedorn – (Public Auditor) Caution – German version shall prevail! – Fruggel – (Public Auditor) 2011 Annual Report | Neschen AG 127 Single-Entity Financial Statements NESCHEN AG BALANCE SHEET Neschen AG balance sheet (in accordance with HGB) Assets Euro 31/12/2011 Euro 31/12/2010 Euro A. Fixed Assets I. Intangible fixed assets 1. 2. Concessions, industrial property rights and similar rights and assets, and licences to such rights and assets 1,804,348.00 2,021,582.00 Goodwill 4,653,217.00 5,785,185.00 6,457,565.00 7,806,767.00 II. Tangible fixed assets 1. Land, land rights and buildings, including buildings on third-party land 2. Technical equipment and machinery 3. Other equipment, operating and office equipment 4. Prepayments and assets under construction 8,027,287.75 8,912,059.75 60,860.00 1,422,453.00 465,741.70 436,795.70 0.00 6,759.38 8,553,889.45 10,778,067.83 III. Financial assets 1. Shares in affiliated companies 2. Loans to affiliated companies 3. Other financial assets 50,000.00 50,000.00 0.00 0.00 150.00 150.00 50,150.00 50,150.00 B. Current Assets I. Inventories 1. Raw materials, consumables and supplies 1,579,760.93 1,795,002.96 2. Work in progress 1,547,560.17 1,570,547.08 3. Finished goods and merchandise 3,806,056.10 3,590,417.10 4. Prepayments 28,594.81 51,128.02 6,961,972.01 7,007,095.16 II. Receivables and other assets 1. Trade receivables 1,505,998.81 1,832,971.75 2. Receivables from affiliated companies 6,028,537.35 7,047,929.77 3. Receivables from other long-term investees and investors 496,110.29 605,672.06 Other assets 476,695.96 4. III. Cash in hand, central bank balances, bank balances and cheques C. 128 Prepaid Expenses D. Deferred Taxes E. Excess of Plan Assets over Post-Employment Benefit Liability 2011 Annual Report | Neschen AG 1,234,542.50 8,507,342.41 10,721,116.08 765,776.88 980,806.39 168,699.97 72,637.51 1,828,015.03 1,850,530.87 50,368.83 0.00 33,343,779.58 39,267,170.84 Caution – German version shall prevail! Single-Entity Financial Statements NESCHEN AG BALANCE SHEET Neschen AG balance sheet (in accordance with HGB) Liabilities Euro 31/12/2011 Euro 31/12/2010 Euro 13,125,000.00 13,125,000.00 2,346,000.88 1,371,610.20 0.00 0.00 −7,109,097.78 −6,843,036.04 8,361,903.10 7,653,574.16 A. Equity I. Subscribed capital II. Capital reserve III. Revenue reserves IV. Net accumulated losses B. Provisions 1. Provisions 2. Other provisions 113,000.00 0.00 2,148,423.21 1,603,363.03 2,261,423.21 1,603,363.03 C. Liabilities 1. Liabilities to banks 2. Trade payables 3. Liabilities to affiliated companies 4. Liabilities to other long-term investees and investors 5. 0.00 0.00 3,550,711.66 4,403,609.70 17,731,546.84 24,174,356.13 300.00 0.00 Other liabilities – of which from taxes EUR 104,880.02 (prior year: EUR 118,416.61) Caution – German version shall prevail! 1,437,894.77 1,432,267.82 22,720,453.27 30,010,233.65 33,343,779.58 39,267,170.84 2011 Annual Report | Neschen AG 129 Single-Entity Financial Statements NESCHEN AG INCOME STATEMENT Consolidated income statement (in accordance with HGB) Euro 1. Sales 2. Decrease/increase in finished goods inventories and work in progress 3. Other operating income 2011 Euro 2010 Euro 54,711,622.00 55,412,194.81 −94,039.91 40,254.91 2,361,622.37 2,285,338.56 33,682,150.43 34,152,384.81 4. Cost of materials a) Cost of raw materials, consumables and supplies, and of purchased merchandise 5. Personnel expenses a) Wages and salaries 9,076,461.46 b) Social security, post-employment and other employee benefit costs 1,680,407.52 9,155,878.92 1,668,552.71 10,756,868.98 10,824,431.63 6. Depreciation, amortization and write-downs a) Amortization and write-downs of intangible fixed assets, depreciation and write-downs of tangible fixed assets 3,796,991.65 3,335,364.69 b) Write-downs of current assets to the extent that they exceed the write-downs that are usual for the corporation 3,109,370.40 0.00 7. Other operating expenses incl. intra-group allocations 8. Income from long-term equity investments 9. Other interest and similar income 6,906,362.05 3,335,364.69 8,135,900.66 8,009,651.83 6.63 6.63 242,201.53 233,305.74 0.00 2,104,096.00 1,578,372.68 1,551,020.19 −3,838,242.18 −2,005,848.50 – of which from affiliated companies EUR 240,436.50 (prior year: EUR 226,654.92) 10. Write-downs of long-term financial assets and securities classified as current assets 11. Interest and similar expense – of which to affiliated companies EUR 1,222,799.67 (prior year: EUR 1,176,798.04) 12. Result from ordinary activities 13. Extraordinary income 14. Extraordinary expense 5,524,353.91 0.00 784,000.00 0.00 15. Extraordinary result 16. Taxes on income 17. Other taxes 18. Net income for the year 130 4,740,353.91 0.00 1,109,906.52 − 478,920.67 58,266.95 69,105.87 1,168,173,47 − 409,814.80 −266,061.74 −1,596,033.70 19. Profit/loss carried forward from prior years − 6,843,036.04 −5,247,002.34 20. Net retained profits/net accumulated losses −7,109,097.78 − 6,843,036.04 2011 Annual Report | Neschen AG Caution – German version shall prevail! List of Addresses LIST OF ADDRESSES NESCHEN AG Hans-Neschen-Straße 1 D-31675 Bückeburg Tel.: ++49 5722 20 70 Fax: ++49 5722 20 71 97 E-Mail: [email protected] England NESCHEN Coating UK Ltd. Watkins Close Burnt Mills Industrial Estate Basildon, Essex SS13 1TL Tel.: ++44 1268 722400 Fax: ++44 1268 725864 E-mail: [email protected] Japan Filmolux Co. Ltd. Akiyama Building 6-10 Nishigoken-Cho Shinjuku-ku, Tokio Tel.: ++81 332 69 04 91 Fax: ++81 332 69 42 09 E-Mail: [email protected] Czech Republic HSW Signall s.r.o. Modranská 25 CZ-143 00 Prag 4 Tel.: ++420 2 41 02 94 11 Fax: ++420 2 41 02 94 99 E-Mail: [email protected] Netherlands NESCHEN Benelux B.V. Heesweg 16A NL 8102 HJ Raalte Tel.: ++31 572 346 015 Fax: ++31 572 346 016 E-Mail: [email protected] Hungary NESCHEN Kft. Arcadia Irodaház Lórántffy Zsuzsanna u. 15/b H-1043 Budapest Tel.: ++36 1 4 77 42 73 Fax: ++36 1 3 33 53 21 E-Mail: [email protected] NESCHEN UK Ltd. Watkins Close Burnt Mills Industrial Estate Basildon, Essex SS13 1TL Tel.: ++44 1268 722 400 Fax: ++44 1268 725 864 E-Mail: [email protected] Austria NESCHEN Austria GmbH Hauptstraße 138 A-1140 Wien Tel.: ++43 1 49 49 96 40 Fax: ++43 1 49 49 96 422 E-Mail: [email protected] USA NESCHEN Americas Corp. 7091 Troy Hill Drive Elkridge, MD 21075 Tel.: ++1 410 3 79 54 00 Fax: ++1 410 5 79 89 60 www.neschenamericas.com France FILMOLUX S.A.R.L. 14, avenue du Professeur A. Lemière F-75020 Paris Tel.: ++33 1 49 20 67 89 Fax: ++33 1 48 58 28 29 E-Mail: [email protected] Portugal NESCHEN Portugal S.A. Estrada de Barrosa, Elospark Edificios 12 e 13 Algueirao P-2725 – 193 Mem Martins Tel.: ++351 219 267 220 Fax: ++351 219 264 986 E-Mail: [email protected] Italy NESCHEN Italia srl Via Leonardo da Vinci Zone Industriale Nord I-26010 Bagnolo Cremasco Tel.: ++39 0373 237 911 Fax: ++39 0373 237 930 E-Mail: [email protected] Caution – German version shall prevail! 2011 Annual Report | Neschen AG 131 FOR YOUR NOTES 132 2011 Annual Report | Neschen AG Caution – German version shall prevail! FOR YOUR NOTES Caution – German version shall prevail! 2011 Annual Report | Neschen AG 133 Publication Details PUBLICATION DETAILS The printed form of this 2011 Annual Report is available in German. PDF versions in German and English are also available for download from the corporate website at www.neschen.de/IR Should you require further information, please contact the following address: Publisher: Neschen AG Hans-Neschen-Straße 1 D-31675 Bückeburg Tel. (++ 49) (0) 57 22 - 2 07-0 Fax (++ 49) (0) 57 22 - 2 07-197 E-Mail: [email protected] Internet: www.neschen.com 134 2011 Annual Report | Neschen AG Caution – German version shall prevail! Caution – German version shall prevail! 2011 Annual Report | Neschen AG 135 Neschen AG Hans-Neschen-Straße 1 D-31675 Bückeburg Tel.: ++49 (0) 57 22-20 70 Fax: ++49 (0) 57 22-20 71 97 E-Mail: [email protected] www.neschen.com