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• 1 General Foundations and Business Activities of the Company
• 2 Explanations on the Change in Accounting from US-GAAP to IFRS
• 3 Presentation of the Main Evaluation and Balancing Methods
• 4 Segment Reporting
• 5 Information on the Balance Sheet
• 6 Elements of the Statements of Operations
• 7 Share-based Compensation
• 8 Related Party Transactions
• 9 Major Events after the Balance Sheet Date
• 10 Supplementary Information Required by the German Commercial Code

The Annual Financial Statements of SinnerSchrader Aktiengesellschaft (“SinnerSchrader AG” or “Company”) have been compiled in accordance with the regulations of the German Commercial Code and the German Stock Corporation Act. The Company is considered to be a large company limited by shares within the meaning of Article 267 of the German Commercial Code.

On 19 July 2002, EU Regulation No. 1606/2002 of the European Parliament and of the Council on the Application of International Accounting Standards was passed. According to this, all publicly traded companies are required to prepare their consolidated
accounts using IFRS for financial years that start after 1 January 2005.

The 2005/2006 financial year from 1 September 2005 to 31 August 2006 is the first year in which SinnerSchrader has had to prepare its Consolidated Financial Statements under IFRS in accordance with the EU Regulation. In the past, the Consolidated Financial Statements were prepared according to US-GAAP. Since IFRS requires comparative figures, the 2004/2005 financial year also has to be shown according to IFRS retrospectively. 1 September 2004 is therefore deemed to be the date of transition from US-GAAP to IFRS. IFRS 1 “First-time Adoption of International Financial Reporting Standards” specifies the methodology of the change. According to this, an opening balance sheet is to be drawn up for the date of transition. In this connection, the regulations in force on the balance sheet date of the first IFRS report are decisive for the preparation of the opening balance sheet. For SinnerSchrader, this date was 31 August 2006.

All necessary adjustments to the balancing and evaluation methods must be made retrospectively. The resultant differences between the entries of assets and liabilities in the balance sheet of 31 August 2004 under US-GAAP and those on 1 September 2004 under IFRS had to be offset against the revenue reserves with a neutral effect on profit. A reduction in assets or increase in liabilities resulting from the use of IFRS led to a reduction in shareholders’ equity, and an increase in assets or reduction in liabilities led to in an increase in shareholders’ equity.

The level of knowledge and awareness that was the basis of the preparation of the reports for the 2004/2005 financial year was decisive for drawing up the opening balance sheet as of 1 September 2004 and determining the comparative figures for the 2004/2005 financial year. Improved findings that were received after the day of issue of the relevant audit certificate only had to be taken into account in the subsequent financial year.

When changing over the opening balance sheet as of 1 September 2004 and the financial report for the 2004/2005 financial year, the following differences between accounting according to IFRS and US-GAAP had an effect for SinnerSchrader:» Share-based CompensationAccording to IFRS 2 “Share-based Payment”, share-based compensation must be recorded with an effect on income. In this connection, the proportion of the market value on the issue date that is applicable to the period of the report should be entered in the statements of operations as personnel costs. These costs shall be formed in the relevant corresponding amount in the shareholders’ equity. IFRS 2 is to be used for the first time in reporting periods that start on or after 1 January 2005. When using it for the first time, it is essential to ensure that the regulations of IFRS 2 are applied retrospectively to share-based compensations issued after 7 November 2002 for which the waiting period had not yet expired as of 1 January 2005. Under US-GAAP, SinnerSchrader had the option, until 31 August 2005, of entering share-based compensation plans on the balance sheet at their internal value in accordance with Accounting Principles Board Opinion (“APB”) No. 25 and to present the effect of the market-value approach on the income as pro-forma information in the Notes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123. From 1 September 2005, SFAS No. 123 (R) was to be applied to SinnerSchrader according to US-GAAP, and the expenses for employee options were to be treated with an effect on income. The required prospective use of SFAS No. 123 (R) starting in the first reporting quarter of 2005/2006 applied proportionately to all employee options for which the waiting period had not expired at the start of the reporting period. When preparing the opening balance sheet as of 1 September 2004 according to IFRS, the use of IFRS 2 resulted in additional personnel expenses in the amount of € 8,122, which increased the loss carry-forwards as of 1 September 2004. According to IFRS 2, an item known as “Reserve for Share-based Compensation” had to be formed as a balancing position in the shareholders’ equity.» Reporting Deferred TaxesDeferred taxes must be reported as long-term balance sheet items according to IFRS. Under US-GAAP, a distinction had to be made between long-term and short-term deferred taxes within the items for deferred taxes.» Reporting Usage Rights for SoftwareUnder IFRS, usage rights for software have to be reported as intangible assets. Under US-GAAP, Sinner-Schrader had subsumed them under tangible assets.

Table 1a shows the transfer of the balance sheet as of 31 August 2004 according to US-GAAP to the opening balance sheet as of 1 September 2004 under IFRS:

The transfer of the consolidated shareholders’ capital as of 31 August 2004 according to US-GAAP to consolidated shareholders’ capital in the opening balance sheet of 1 September 2004 under IFRS is as follows:

The Consolidated Financial Statements of the SinnerSchrader Group were prepared according to International Financial Reporting Standards (“IFRS”) and take account of all the rules of these standards and the interpretations of the IFRIC which were in force as of 31 August 2006. They refer to the financial years covering 1 September 2005 to 31 August 2006 (“2005/2006”) and from 1 September 2004 to 31 August 2005 (“2004/2005”) as well as the reporting dates of 31 August 2006 and 31 August 2005.» New Accounting PrinciplesSinnerSchrader AG did not prematurely use the following standards and IFRIC interpretations, which had already been published but which had not gone into effect:IFRS 7 “Financial instruments: Disclosures” is only mandatory from financial years starting on or after 1 January 2007, and it was not taken into account in the preparation of this report. SinnerSchrader AG does not intend to prematurely apply this standard. The use of IFRS 7 is expected to lead only to add-itional disclosures in the Consolidated Financial Statements with no impact on the inclusion or evaluation of financial instruments.Changes to the information on capital resulting from IAS 1 “Presentation of Financial Statements”, which is only mandatory from financial years starting after 1 January 2007, were also not taken into account. SinnerSchrader AG does not intend to prematurely apply the changes resulting from this standard. The use of the changes in IAS 1 is expected to lead only to additional disclosures in the Consolidated Financial Statements.Other standards have also been approved, the use of which has no major impact on SinnerSchrader.

The Consolidated Financial Statements comprise the individual Financial Statements of SinnerSchrader AG and all direct and indirect subsidiaries in which the AG has a majority interest and over which it has de facto control. In the Consolidated Financial Statements for the 2005/2006 and 2004/2005 financial years, the consolidation group comprised SinnerSchrader Deutschland GmbH, SinnerSchrader UK Ltd. and SinnerSchrader Benelux BV alongside SinnerSchrader AG, as well as the indirect subsidiaries SinnerSchrader Neue Informatik GmbH, SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH.

All transactions and balances within the group between affiliated companies were eliminated. The Consolidated Financial Statements were prepared on the basis of the Individual Financial Statements of the above-mentioned consolidated companies, which are compiled according to the relevant local accounting regulations, in particular the regulations of the German Commercial Code, with any necessary adjustments being made to IFRS.

For the Consolidated Financial Statements, the same balancing and evaluation principles are used as a basis for the same business incidents and events under similar conditions. The financial statements of all of the companies included in the consolidation group are prepared on the reporting date of the parent company. This is the same as the group reporting date.

The currency of the report is the euro (€). Figures are cited in full euro amounts.

The relevant national currency is used as the functional currency of the foreign subsidiaries outside the euro zone (the group of European countries that have introduced the euro as their currency). The financial statements of these foreign subsidiaries are converted into euros, with the assets and liabilities being converted at the conversion rate of the balance sheet date, and with the sales revenues, costs of sales revenues and expenditure being converted at the average rate for the financial year in question. The accumulated currency profits and currency losses from foreign currency conversion for the financial statements are identified in a separate balancing item in the shareholders’ equity. Currency profits and losses from foreign currency transactions are treated with an effect on income.

Drawing up Consolidated Financial Statements according to IFRS requires the management to make estimates and assumptions that have an influence on the values posted for assets and liabilities, on the information on contingent claims and contingent liabilities on the balance sheet date and on the posted revenue and expenses for the period covered by the report. The actual results may deviate from these estimates. The primary estimates relate to the use of the percentage-of-completion method and the inclusion of accrued expenses.

» Intangible AssetsIntangible assets are evaluated on receipt at their procurement or manufacturing cost. They are identified if it is probable that the future economic benefit to be assigned to the assets will flow into the company and if the procurement or manufacturing costs of the assets can be reliably assessed. After being initially reported, intangible assets are evaluated at their procurement or manufacturing costs minus the accumulated regular depreciation and the accumulated costs for the decrease in value. The depreciation of intangible assets is linear, in accordance with the usage period. The depreciation period and method are reviewed annually at the end of each financial year.Costs for the procurement of software should be activated under intangible assets if they are not to be considered a component of the associated hardware. Currently, SinnerSchrader posts only purchased software under intangible assets. Depreciation for this is linear over an estimated usage period of three years. The costs that are incurred to reinstate or maintain the future economic benefit that a company can expect from the originally assessed performance of existing software should be recorded as an expense.» Tangible AssetsAccording to International Accounting Standard (“IAS”) 16, tangible assets are to be posted as an asset if it is probable that the future economic benefit associated with them will flow into the company and if the procurement or manufacturing costs of the assets can be reliably assessed. The tangible assets shall be evaluated at their procurement and manufacturing costs minus accumulated regular and non-scheduled depreciation. The procurement and manufacturing costs of tangible assets consists of the purchase price, import duties and other non-reimbursable taxes, as well as all directly assignable costs that are incurred to make the asset operational. Reductions in the purchase price, such as rebates, bonuses and discounts, are subtracted from the purchase price. Subsequently incurred costs, such as maintenance and repair costs, are recorded with an effect on expenses in the year in which they are incurred. If such costs demonstrably lead to an increase in the future economic benefit resulting from the use of the asset and above the original volume of performance, the costs shall be posted as subsequent procurement and manufacturing costs.The property and equipment of SinnerSchrader comprises company and business equipment, computer hardware and leasehold improvements. Depreciation is linear. A usage period of three years is usually assumed for computer hardware, four to eight years for other electronic and electrical devices and equipment, six years for cars and eight to thirteen years for office furniture. Improvements to rented premises are depreciated over the estimated usage period of the improvements or the residual term to the end of the tenancy, if this is shorter. The cost of depreciation is included in the costs of sales revenue and operating expenses. The costs of repair and maintenance work are recorded with an effect on expenses.In the event of the sale or decommissioning of tangible asset items, the relevant procurement or manufacturing costs and the accumulated depreciation are debited, and any profit or loss is posted in the statements of operations as other revenue or other expenses.» Reductions in Value of Fixed AssetsThe posted value of assets is reviewed if there are signs of a non-scheduled reduction in value. If the posted value of an asset exceeds its achievable amount, a non-scheduled depreciation is undertaken in accordance with IAS. The achievable amount is the net sale price or commercial value, whichever is higher. The net sale price is the amount that can be achieved from a sale under standard market conditions; commercial value is the cash value of the expected income from further use of the asset and the sale value at the end of the usage period. The commercial value is determined individually for every asset or for the individual unit generating funds. If the reasons for the non-scheduled depreciation no longer exist, the original value is reinstated.In the 2005/2006 and 2004/2005 financial years, there were no signs of a reduction in value of the intangible or tangible assets.

According to IAS 39, financial instruments are to be posted for the first time with their procurement costs corresponding to the current value of the benefit in kind. Transaction costs are included in the first evaluation. Purchases and sales of financial instruments should be posted as of the trading day. With respect to the subsequent evaluation, a distinction is made between various categories of financial instruments, including financial instruments held for trading purposes, financial instruments to be held until they are finally due, credits and accounts receivable handed out by the company and financial instruments available for sale.Financial instruments with fixed or ascertainable payments and a fixed term which the company intends to hold until they are finally due, excluding credits and claims submitted by the company, are classified as financial instruments to be held until they are finally due.All other financial instruments, excluding credits and claims submitted by the company, are classified as financial assets available for sale.Financial instruments held for trading purposes and financial assets available for sale are evaluated at their current value without deduction of transaction costs in the subsequent evaluation. The current values usually arise from reporting date prices on financial markets. Gains and losses from the evaluation at the current value of financial instruments held for trading purposes shall be reported with an effect on income. Gains and losses from the evaluation of the current value of financial instruments available for sale shall be recorded directly in the shareholders’ equity with a neutral effect on income until the financial instrument is sold, withdrawn or otherwise dispatched, or as soon as a permanent value reduction has been identified for the financial instrument. Gains and losses recorded directly in the shareholders’ equity are posted in “Changes in shareholders’ equity not affecting net income”.Financial instruments to be held until they are finally due shall be appraised at their continued procurement costs using the effective interest method.Financial instruments to be held until they are finally due with a remaining term of up to 12 months are posted in the current assets. Financial assets available for sale are posted in the current assets if the company is planning to sell them in the next 12 months.A financial asset is debited if the company loses authority over the contractual rights of which the financial asset is comprised. A financial liability is debited if the obligation upon which this liability is based is fulfilled, terminated or deleted. With respect to classification, securities are the financial instruments relevant to SinnerSchrader. As of 31 August 2006, these securities comprise commercial papers with original periods of seven days to one month and shares in money market funds. The commercial papers were classified as financial instruments to be held until they are finally due and were posted to the balance sheet with their continued procurement costs accordingly as of 31 August 2006. The shares in money market funds were classified as available for sale and entered on the balance sheet accordingly. As of 31 August 2005, the securities comprised shares in money market funds, which were classified as available for sale. As of both reporting dates, the interest risks resulting from the financial instruments used by SinnerSchrader were negligible due to the short remaining term or duration.

Accounts receivable are posted at their nominal value minus appropriate value corrections. The value of the claims is regularly checked on an individual basis. Value corrections are formed in the case of identifiable individual risks.

Services provided from fixed-price projects, which were realised according to the percentage-of-completion (“POC”) method in accordance with their degree of completion but which had not yet been billed, are posted with a proportion of the total payment agreed for the fixed-price project, i.e. including the profit margin, as unbilled revenue, with any deposits that may have been made for the project being offset.

Other assets are entered on the balance sheet at their nominal value or the achievable amount, whichever is lower.

Liquid funds comprise cash on hand, bank credits available on a daily basis and fixed deposits with a remaining period of less than three months. They are posted at their nominal value.

Securities with a period of less than three months and shares in money market funds qualify as currency equivalents. As of 31 August 2006 and 31 August 2005, all securities were thus to be classified as currency equivalents. 

The statement of cash flows is prepared using the indirect method according to IAS 7. The financial funds whose change is reflected in the statement of cash flows comprise cash and cash equivalents. Value adjustments for the securities in the cash equivalents which have a neutral effect on income are posted in the statement of cash flows together with the exchange-rate-related change in the cash under “Net effect of rate changes on cash and cash equivalents”.

Trade accounts payable and other liabilities are posted at their nominal value.

According to IAS 37, other accrued expenses are formed for legal and actual obligations that were incurred economically by the reporting date if it is probable that fulfilment of the obligation will lead to Group funds being depleted and if a reliable estimate of the level of the obligation can be made. Accrued expenses are reviewed on every balance sheet date and adjusted to the best estimate in each case. The amount of the accrued expenses corresponds to the current value of the expenses probably needed to fulfil the obligation. The other accrued expenses take account of all recognisable obligations vis-à-vis third parties in accordance with IAS 37.

Under IAS 32, treasury stock is posted at its acquisition costs as a deducted item within the shareholders’ equity.

Under IAS 12, deferred tax claims or liabilities are to be posted in the balance sheet under IFRS if there are differences between the posted values of assets and liabilities in the balance sheet under IFRS and those in the tax balance sheet which reverse in future years (“temporary differences”). Furthermore, deferred tax claims must also be formed for the future use of tax loss carry-forwards. Deferred tax claims and liabilities are to be determined on the basis of the liability method. The deferred tax claims and liabilities from temporary differences must be determined separately for every tax subject. Tax claims should be posted only if or to the extent in which they are countered by tax liabilities or in which their realisation can be classified as probable through future taxable profits. Tax claims and liabilities are posted in balanced form for a tax subject. Balancing between different tax subjects is not permitted.For the evaluation of the temporary differences or loss carry-forwards, the tax rates valid on the balance sheet date or, for a future reversal of temporary differences, the tax rates which have become legally effective on the balance sheet date shall be used.Deferred tax expenditures or revenues shall be directly offset in the shareholders’ equity if they relate to differences that do not have an impact on the statements of operations, such as evaluation changes to financial assets available for sale.

SinnerSchrader provides services of various kinds that are treated differently with respect to revenue recognition. In principle, SinnerSchrader realises revenue only if the service was performed according to the underlying contractual agreements and the risk has been transferred to the recipient of the service or the purchaser, if it is probable that the economic benefit from the business will flow into the company and if the level of sales revenue can be reliably determined. The revenues are posted in net form, without turnover tax, discounts, customer bonuses or rebates. They contain reimbursable expenses, such as travel expenses, if the customer has been invoiced for them and has paid them.» Project and Consultancy ServicesProject and consultancy services are billed either according to actual expenditure or on the basis of a fixed price. The revenues from projects on a fixed-price basis are entered on the balance sheet according to the progress achieved using the POC method according to IAS 11.22 ff. In this connection, progress is determined as a proportion of the person-hours already spent in relation to the expected person-hours for the project as a whole. To cover imminent losses from not yet completed projects, accrued expenses are formed on the basis of an individual consideration of the project at the expense of the period in which such a loss is probable. Revenues within the scope of contracts based on actual expense are generally posted monthly according to the expenditure incurred to provide the service.Revenues realised on the basis of the POC method but as yet unbilled are posted as unbilled revenues in the balance sheet. Amounts billed to and paid by customers that exceed the scope of the recognised revenues are posted as deposits received.» Media ServicesSinnerSchrader performs services for its customers for planning and implementing advertising campaigns on the Internet (media services). In the context of implementing advertising campaigns, SinnerSchrader buys advertising space at its own expense. The costs for buying advertising space (media costs) are passed on to customers in the course of billing for the media services, as is a fixed payment or a payment calculated in relation to the actual media costs. In principle, revenues for media services are realised with or after the appearance of the advertising. In this connection, the entire amount to be charged to the customer is recorded as gross revenue, and the amount reduced by the media costs that have been passed on to customers comprises the net revenue. Realised revenues that have not yet been billed are posted in the balance sheet as unbilled services, reduced by deposits received for the advertising campaigns and including deposits paid for purchasing advertising space as part of advertising campaigns.» Operating ServicesSinnerSchrader performs operating services for its customers, which in particular also include the 24-hour monitoring and management of Internet applications with an on-call service. Payment for these services usually comprises a fixed monthly service fee plus variable, performance-related components, and customers are billed for them on a monthly or quarterly basis. If the IT system managed by SinnerSchrader is operated in SinnerSchrader’s own computer centre, fixed usage fees are charged monthly.» Sale of Hardware and SoftwareIn addition to other services, SinnerSchrader supplies its customers with hardware and standard software on request that SinnerSchrader itself buys on the market. The revenue from this is realised after billing or after the transfer of risk.

In principle, SinnerSchrader takes the expenditure for advertising and promotional campaigns into account in the marketing costs in the statements of operations at the time the expenditure is incurred. In the 2005/2006 and 2004/2005 financial years, these expenses amounted to € 178,177 and € 95,229 respectively.

Expenditure for research and development is recorded as an expense in the period in which it is incurred. Development costs that can be activated are an exception if they completely meet the criteria according to IAS 38.57.

In 2005/2006, research and development costs in the amount of € 61,275 were recorded as an expense, in comparison to € 131,795 in 2004/2005. In both years, the criteria for the activation of the research and development costs according to IAS 38.57 were not met.

Leasing payments should be recorded in a linear fashion as an expense in the statements of operations over the term of the leasing contract if they are incurred within an operating leasing relationship where all risks remain with the lessor.

SinnerSchrader has concluded only operating leasing contracts. They mainly concern automobiles made available as company cars.

IFRS 2 calls for the costs resulting from the issue of employee options to be entered in the balance sheet on the basis of their current value with an effect on income. In this connection, the market value of the option on the issue date should be distributed over the waiting period for exercising the option and then proportionately entered in the statements of operations as personnel costs for the relevant period. The costs are recorded against the shareholders’ equity in the reserve for share-based compensation.

As of 31 August 2006, there were two share option plans at SinnerSchrader; their structure and effects on the statements of operations will be described in more detail in 7.1.

In agreement with IAS 14, SinnerSchrader primarily divides its business into three segments by services: Interactive Software, Interactive Marketing and Interactive Services.

In the Interactive Software segment, SinnerSchrader concentrates on the development, implementation and servicing of custom-made interactive software. SinnerSchrader Neue Informatik GmbH is assigned to this segment. Business with
consulting, creative and implementation services for the establishment and management of brands and for marketing and advertising activities on the Internet and in other digital channels are brought together in the Interactive Marketing segment. SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH are assigned to this segment. SinnerSchrader bundles three areas that provide specialised services to support the management of existing transaction-oriented websites for its customers in the Interactive Services segment.
These services include the planning and implementation of online advertising campaigns, the technical servicing of the hardware and software of interactive IT systems as well as the statistical evaluation of data on the user behaviour of visitors to websites. These areas are managed together in SinnerSchrader Deutschland GmbH.

With respect to reporting on the basis of the geographical assignment of revenue, which is secondary to SinnerSchrader, SinnerSchrader assigns revenues to those countries from which the sale was initiated. Thus, in the 2005/2006 and 2004/2005 financial years, all revenues were assigned to Germany.

Table 2a shows the segment information for the 2005/2006 financial year and for the balance sheet date of 31 August 2006, whereas the comparative data from the previous year can be seen in Table 2b:

Accounting for the individual segments follows the accounting principles that are also used in the Group. Administrative costs incurred by SinnerSchrader AG are charged to the operative segments if they can be assigned. Costs that can not be assigned are not distributed to the segments. These are mainly costs for original holding tasks, such as investor relations work, as well as costs resulting from overcapacity in the office at the Hamburg location that was rented by SinnerSchrader AG. Transactions between reporting segments are executed as among external third parties and posted accordingly.

Table 2c explains the transfer of the total of the segment income to the earnings before tax in the Group for the 2005/2006 and 2004/2005 financial years:

The development of the fixed assets in the 2005/2006 and 2004/2005 financial years is shown in Tables 3a and 3b:

Both in the 2005/2006 and the 2004/2005 financial years, deferred tax assets had to be posted in the Group because of differences in the postings for assets and liabilities according to IFRS and according to the relevant tax regulations, as well as because of tax loss carry-forwards. 6.5 contains more details on this.

As of 31 August 2006 and 31 August 2005, ongoing fixed-price projects were activated as unbilled revenues with an amount of € 410,649 and € 170,404 respectively. In this connection, deposits received for the projects in the amount of € 103,726 and € 26,688 respectively were deducted from the POC evaluation of the projects totalling € 514,375 and € 197,092.

The tax reimbursement claims as of 31 August 2006 and 31 August 2005 in the amount of € 125,920 and € 178,274 respectively are mainly paid tax collected at source on capital and interest earnings upon which SinnerSchrader has a claim for reimbursement vis-à-vis the Tax authorities due to existing loss carry-forwards. In the 2005/2006 and 2004/2005 financial years, € 73,163 and € 52,757 respectively were paid in withholding tax.

Table 4 lists the other current assets and prepaid expenses as of 31 August 2006 and 31 August 2005:

Table 5 shows the total of marketable securities and the unrealised profits and losses they accounted for as of 31 August 2006 and 31 August 2005 respectively:

Money market funds and qualified dividend instruments similar to the money market were classified as available for sale, and commercial papers from industrial emitters were classified as to be kept until they are finally due. According to IAS 39, the money market funds were posted at their market value as of 31 August 2006 and 31 August 2005 respectively, with unrealised profits or unrealised losses being directly recorded in shareholders’ equity, taking the tax effect into account, under the item “Changes to shareholders’ equity not affecting net income”. Commercial papers are securities that were acquired at a discount and fully repaid after the expiry of a fixed term. As of the balance sheet date of 31 August 2006, they were recorded at their acquisition costs which were continued according to the effective interest method.

On 31 August 2006, all securities had a residual term of less than three months or were not subject to any binding contractual term.

» Share CapitalAs of 31 August 2006 and 31 August 2005, the share capital of SinnerSchrader AG was € 11,542,764 and was divided into 11,542,764 no-par-value share certificates in the names of the bearers, each with a calculated value of € 1 per share.11,411,417 shares of all issued shares were in circulation on 31 August 2006 and 31 August 2005. The remaining 131,347 shares were held as treasury stock of SinnerSchrader AG.» Authorised CapitalJanuary 2004, the Annual General Meeting authorised the Management Board to increase the share capital of the Company once or repeatedly by issuing new shares up to a total of € 5,770,000 until 15 January 2009 with the approval of the Supervisory Board. This became legally effective upon entry of the decision in the trade register on 13 April 2004.In the 2005/2006 and 2004/2005 financial years, no capital increases were carried out using the authorised capital.» Conditional CapitalAs of 31 August 2006 and 31 August 2005, SinnerSchrader AG had conditional capital in the amount of a total € 750,000 each, which was created in 1999 and 2000 for the issue of stock options to employees. Options were last issued to employees from the conditional capital in the 2005/2006 financial year. In the 2005/2006 and 2004/2005 financial years, 148,200 options and no options respectively were issued. Details on the option programmes and outstanding options are listed in 7.» Reserve for Share-based CompensationThe reserve comprises the accumulated costs from issuing share-based compensation. As of 31 August 2006 and 31 August 2005, the reserve reached a value of € 17,121 and € 9,165 respectively.   » Treasury StockAs of 31 August 2006 and 31 August 2005, the treasury stock amounted to 131,347 shares, which were repurchased via the stock exchange between July 2002 and September 2003 at an average price of € 1.53. They represent 1.14 % of the share capital. Under IFRS, a deducted item in the shareholders’ equity representing acquisition costs has been formed for the treasury stock. » Changes to Shareholders’ Equity with a Neutral Effect on IncomeChanges to shareholders’ equity with a neutral effect on income in the amount of € – 306 (previous year: € 2,141) result from recording unrealised gains or losses from securities that were classified as available for sale, and in the amount of € 25,652 (previous year: € 25,655) from currency conversions which were part of consolidating the companies in the consolidation group that report in foreign currencies.

As of 31 August 2006, the other short-term liabilities and deferred revenues had a remaining term of less than one year and are broken down into the main components listed in Table 7:

SinnerSchrader rents its office premises at the Hamburg and Frankfurt am Main locations as well as company vehicles in the context of rental and operating leasing contracts. The minimum remaining term of the rental contracts for the offices in Hamburg and Frankfurt am Main was 58 and 56 months respectively as of 31 August 2006. The leasing contracts for the company vehicles had a remaining term of between 3 and 26 months on the balance sheet date. In the years ahead, the rental and leasing contracts will result in financial liabilities in the amount shown in Table 8:

In the 2005/2006 financial year, restructuring was completed with the conclusion of the last employment law disputes on the personnel measures and the move into the new office premises in Hamburg. The expenses accrued to the account of the
previous year’s profits were utilised accordingly as of 31 August 2006 or could be dissolved.

New or additional measures were no longer necessary in the 2005/2006 financial year, and the costs posted in the previous year for the measures that were still to be implemented were sufficient, with the result that no further restructuring costs were incurred.

In the 2004/2005 financial year, the accrued expenses and liabilities were upgraded by a total of € 356,275 with an effect on income for restructuring in the field of personnel capacity and for the correction of the empty rented space.

Table 10 summarises the expenditure on restructuring measures in the 2005/2006 and 2004/2005 financial years and the level of the accrued expenses and liabilities for the restructuring measures taken as of 31 August 2006 and 31 August 2005:

Table 11 shows the composition of the other income/expenses:

The financial income is comprised of income from interest, income from the sale of securities and interest expenditure, as shown in Table 12:

Expenditure on interest was largely incurred for the guarantees provided by banks.

The taxes from income and earnings reported in the 2005/2006 and 2004/2005 financial years are made up of current and deferred components, as shown in Table 13a:

As of 31 August 2006 and 31 August 2005, the calculation of deferrals was based on tax loss carry-forwards in Germany, the UK and the Netherlands. In these three countries, the relevant loss carry-forwards could be brought forward without limitation. The extent of the loss carry-forwards and the tax rates used to calculate them are listed in Table 13c:

1) 25 % corporation tax plus 5.5 % solidarity surcharge 

Deferred tax assets may be posted only to the extent that the future realisation of the relevant advantage is sufficiently probable or if they are countered by deferred tax liabilities. Correspondingly, as of 31 August 2006 and 31 August 2005, the values of the tax claims from loss carry-forwards in the UK and the Netherlands were corrected because the operating business in these countries continues to be inactive. The same applies to tax claims from loss carry-forwards prior to the tax consolidation of a domestic subsidiary because here, too, real-isation cannot yet be forecast with sufficient probability.

Furthermore, in the previous year, deferred tax assets above and beyond the level of the deferred tax liabilities were formed for the German group of companies only to the extent that real-isation in the immediately following financial year was estimated to be sufficiently probable because of the still limited profit history after the turnaround. In view of the course of business in the 2005/2006 financial year, as of 31 August 2006 it was to be assumed that it would be possible to realise the deferred tax claims to the full extent in future periods with the result that the deferred tax assets of the German group of companies were to be posted in full.

The deferred tax assets and liabilities were posted separately for every tax subject for identification on the balance sheet. Of the total deferred tax item, the part that referred to the evaluation of the securities classified as available for sale was to be formed directly against the shareholders’ equity.

The tax expenditure or income identified in the statements of operations deviates from the value that would result from the use of the statutory tax rates on the pre-tax profits. For the financial years ending on 31 August 2006 and 31 August 2005, the statutory tax rate for SinnerSchrader AG was 40.4 % overall. It was made up of the trade tax rate of 19 %, the corporation tax rate of 25 % and the solidarity surcharge of 5.5 % on the corporation tax. When determining the overall rate, it had to be taken into account that the trade tax reduced the income subject to corporation tax (including the solidarity surcharge).


Table 13d explains the difference between the calculated tax expenditure or income on the basis of the statutory tax rate and the tax expenditure or income recorded in the statements of operations for the two financial years 2005/2006 and 2004/2005:

The derivation of the undiluted and diluted earnings per share for the 2005/2006 and 2004/2005 financial years is shown in Table 14:

» SinnerSchrader Stock Option Plan 1999
In October 1999, the Annual General Meeting of SinnerSchrader AG approved the SinnerSchrader Stock Option Plan 1999 (“1999 Plan”), which provides for the granting of stock options to allocate a total of 375,000 shares to the members of the Management Board of SinnerSchrader AG (40,000 options), to the management of the affiliated companies (10,000 options), to all employees of SinnerSchrader AG (55,000 options) as well as to all employees of the affiliated companies (270,000 options) by 8 November 2004.

Options granted under the 1999 Plan have an exercise price of 120 % of the average closing price of the SinnerSchrader share on the Frankfurt Stock Exchange during the ten trading days prior to the allocation date. The options of the 1999 Plan can be exercised in equal instalments of one-third each two, three and four years after allocation at the earliest. They have to be exercised within six years after the allocation date. In the 2005/2006 and 2004/2005 financial years, no options from the 1999 Plan were allocated; no options were exercised either. As of 31 August 2006, a total of 127,909 options from the 1999 Plan were still outstanding with an average exercise price of
€ 14.63.
 

» SinnerSchrader Stock Option Plan 2000
In December 2000, the Annual General Meeting of SinnerSchrader AG approved the SinnerSchrader Stock Option Plan 2000 (“2000 Plan”), which provides for the granting of stock options to allocate a total of 375,000 shares to the members of the Management Board of SinnerSchrader AG (40,000 options), to the management of the affiliated companies (40,000 options), to all employees of SinnerSchrader AG (55,000 options) as well as to all employees of the affiliated companies (240,000 options) by 10 January 2006.

Options granted under the 2000 Plan have an exercise price of 120 % of the average closing price of the SinnerSchrader share on the Frankfurt Stock Exchange during the ten trading days prior to the allocation date. The options of the 2000 Plan can be exercised in equal instalments of one-third each two, three and four years after allocation at the earliest. They have to be exercised within six years after the allocation date. In the 2005/2006 and 2004/2005 financial years, 148,200 and 0 options respectively from the 2000 Plan were newly allocated; 0 and 19,018 options respectively were exercised at an exercise price of € 2.76 per share. As of 31 August 2006, a total of 168,629 options from the 2000 Plan were still outstanding with an average exercise price of € 2.27.

Table 15a shows the parameters used for evaluation of the options newly allocated on 1 January 2006 on the basis of the Black-Scholes model:

The volatility was determined by the closing prices of the last 240 trading days before the date of allocation.

Table 15b summarises the changes in the number of options outstanding from the 1999 Plan and the 2000 Plan in the 2005/2006 and 2004/2005 financial years:

Additional information on all options outstanding from both option programmes on 31 August 2006 is listed in Table 15c:

In the 2005/2006 financial year, an average of 135 people were employed by the SinnerSchrader Group. Of these, 2 employees were members of the Management Board and 6 employees were managing directors of subsidiaries. In the previous year, there was an average of 138 employees in the Group.

Another benefit for every member of the Supervisory Board is the proportionate premium for the economic loss indemnity insurance for bodies of legal persons taken out by the Company.

On 21 November 2005, the Management Board and Supervisory Board submitted the Declaration of Compliance with the Corporate Governance Code required by Article 161 of the German Stock Corporation Act and made it permanently accessible to the shareholders on the Company’s website.

Hamburg, October 2006

Matthias Schrader    Thomas Dyckhoff