5 Development and Situation of SinnerSchrader AG
SinnerSchrader AG is the managing holding company of the SinnerSchrader Group. Its business activities mainly comprise guiding and controlling the operating Group companies and financing them, administering and controlling Group liquidity, managing the German tax integration, providing and administering the infrastructures jointly used by the Group companies, in particular the office space, centrally providing administrative services and performing central Group tasks, such as investor relations work.
There are direct or indirect profit and loss transfer agreements between SinnerSchrader AG and the German subsidiaries, SinnerSchrader Deutschland GmbH, SinnerSchrader Neue Informatik GmbH, SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH. This means that the profits and losses from operating business are also reflected in the individual result of the AG for the relevant year of the report, in each case as income from transfers of profits or as expenditure from transfers of losses.
With respect to the provision of infrastructure and the central provision of administrative services, SinnerSchrader AG is in a direct business relationship with the German subsidiaries; it charges them for the services rendered and earns its own revenue from this.
The annual result of the AG, determined according to German accounting principles, amounted to € 5.6 million in the 2004/2005 financial year, following an annual loss of around € –0.45 million in the previous year. This considerable leap in profits is primarily due to two particular factors:
- » The evaluation of the participation value for SinnerSchrader Deutschland GmbH, which comprises the entire operating business as the parent company of SinnerSchrader Neue Informatik GmbH, SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH and its own business activities, resulted in a value of € 11.5 million as of 31 August 2005 in comparison to a valuation of € 8.0 million from the balance sheet as of 31 August 2004. The increase in value is associated with the marked improvement in profitability in the year of the report and the business prospects for the years ahead as well as the adjustment to the discount interest rate to be used for evaluation, which has become necessary because of the permanently low interest levels. Against the background of an original participation value of € 24.8 million, there was a requirement to reinstate original values as of 31 August 2005 according to German accounting principles, with the result that the € 3.5 million increase in value was posted so that it affected the result. The profit was indicated in the other operating income. In the previous year, the evaluation of SinnerSchrader Deutschland GmbH did not give rise to a change in the participation value, meaning that there was no corresponding contribution to profit in the previous year.
- » In the 2004/2005 financial year SinnerSchrader AG sold 455,235 of 605,600 treasury stock shares that were on hand as of 31 August 2004 for an average price of € 3.68 on the stock exchange and 19,018 treasury stock shares at a price of € 2.76 to staff within the framework of option exercises. The sold shares were capitalised at a price of € 1.53, meaning that the sale or issue of treasury stock brought in income in the amount of around € 1 million, which is also listed under other operating income. In the 2003/2004 financial year, the exercise of employee options generated income of only just under € 0.01 million.
Above and beyond these two factors, the positive developments of the Group companies’ operating business and own cost-saving efforts were reflected in the AG’s income statement. On the one hand, the completed offsetting of central services implemented on 1 April 2004 introduced with the reorganisation of the Group had an impact on a whole financial year for the first time and thus allowed the AG revenues of € 1.6 million in 2003/2004 from providing these services to rise by € 0.7 million to € 2.3 million in 2004/2005. On the other hand, the income from profit and loss transfers rose by a good € 1 million from € 0.8 million to € 1.8 million in the year of the report due to the improvement in the profitability situation in the subsidiaries.
The positive income factors were also supplemented by improvements on the cost side. In all of the cost items – material costs, personnel costs, depreciation and other operational expenses – the levels in the 2004/2005 financial year were below those of the previous year. Overall, this resulted in a contribution of just under € 0.45 million to improving the profit.
The only negative effect in the development of earnings was the clear reduction in the profit from investing the liquidity reserve and from financing the subsidiaries: in the 2004/2005 financial year the total earnings amounted to € 0.2 million, € 0.1 million of which came from the sale of securities in the other operating income, € 0.1 million from other interest and interest-related income and, in return, € 0.02 million from interest and similar expenditure. In the previous year, earnings had been € 0.8 million. The fall is largely due to the reduction of the liquidity reserve through the capital repayment to the shareholders in early November 2004 in the amount of € 20.8 million and also the further weakening of the interest level.
The profit from ordinary business activity amounted to € 5.6 million in total. As key elements of the profit, such as income from participation appreciation and from the sale of treasury stock, were non-taxable income, the taxable elements were covered by the existing tax losses brought forward, meaning that no income tax was incurred in the 2004/2005 financial year.
An amount of € 5.1 million from the annual profit of € 5.6 million was posted in the other revenue reserves in the amount permitted under Article 58 paras 2 and 2a of the German Stock Corporation Act (“Aktiengesetz”) in conjunction with the Statutes of SinnerSchrader AG. The remaining amount of € 0.5 million was carried forward to a new account.
Thanks to the annual profit, the equity has risen again significantly from € 15.5 million on 31 August 2004 to € 21.1 million on 31 August 2005, after having been reduced by € 20.8 million in the previous year because of the decision concerning the capital repayment to the shareholders.
In addition to the allocation of the other revenue reserves according to Article 58 of the German Stock Corporation Act, they have increased by an amount of € 0.75 million following the sale of treasury stock; the reserve for treasury stock had to be reduced by this amount. The withdrawal from the reserve for treasury stock resulted in the allocation of this amount in the revenue reserves because the reserve for treasury stock was originally formed by buying shares to the detriment of other revenue reserves.
The liabilities side of the balance sheet also changed with payment of the liability of € 20.8 million to shareholders. After expiry of the statutory waiting time, the amount of the capital repayment decided by the Annual General Meeting could be paid out in November 2004. Furthermore, the other reserves were reduced by more than half to € 0.8 million as of 31 August 2005. Unlike in the US-GAAP report, the amounts for costs on vacant rented property at the Hamburg location already reserved in the previous years and for the costs of notice on the said rental contract were used or became liabilities after issuing the notice.
The development of the assets was dominated by the appreciation of the shares in affiliated companies from € 8.0 million to € 11.5 million and by the € 17.5 million fall in the liquidity reserve, comprising credits with banks and other marketable securities.
The shares in affiliated companies include the participation in SinnerSchrader Deutschland GmbH and the two foreign subsidiaries SinnerSchrader UK Ltd. and SinnerSchrader Benelux BV. Whereas with respect to SinnerSchrader Deutschland GmbH there was a need to reinstate the original value because of the development of domestic business, the foreign subsidiaries had no operating business, as in the previous year, and are thus still evaluated at zero.
With respect to the liquidity reserve, the outflow of funds to shareholders was partially compensated for by the inflow of funds from the business activities of the AG, from the subsidiaries’ profit and loss transfer obligations and from the investment of liquidity, the sale of treasury stock (around € 1.7 million) and a tax rebate (around € 0.45 million). In total, the AG had a liquidity reserve in the amount of € 8.4 million on 31 August 2005.
The equity ratio of SinnerSchrader AG was just under 94 % on 31 August 2005.