annual report - bavaria industries · 55 i. bavaria industriekapital ag – company profile 55 ii....

Responsibility. Openness. Continuous Improvement.

ANNUAL REPORT

Group key figures[in EUR million] 2005 2006 2007 2008 2009

Group

Profit and Loss

Group turnover 132.5 332.6 409.7 485.4 403.6

EBITDA (before dissolution of negative goodwill) -3.4 32.2 29.1 37.3 -12.4

Group net result 8.5 31.5 5.2 23.2 3.6

thereof dissolution of negative goodwill 16.5 19.2 8.9 13.1 48.7

Balance sheet in EUR million

Equity 18.1 61.2 58.6 58.5 43.5

Total assets 100.0 232.4 277.4 321.7 342.1

Fixed assets 21.6 56.1 82.2 104.5 111.9

Cash flow in EUR million

Cash flow from current operations -1.6 15.5 -4.8 38.2 16.6

Cash flow from capital expenditure 2.0 -0.7 9.7 -13.2 -3.7

Cash flow from financing 0.7 9.7 -11.2 -20.3 -12.7

Cash and cash equivalents (without treasury stock) 24.1 53.6 55.5 62.9 76.2

Holding Company (AG)

Profit and Loss

Turnover 1.0 2.0 3.1 3.7 4.5

EBITDA 2.5 13.8 22.8 13.6 7.6

Net result 2.1 13.8 23.2 13.9 8.2

Balance sheet in EUR million

Equity 4.2 28.8 45.4 37.5 26.0

Total assets 4.7 31.1 48.1 40.1 35.8

Fixed assets 0.4 0.5 0.9 1.3 1.3


Cash flow from current operations -0.7 9.2 3.8 13.7 6.9

Cash flow from capital expenditure -0.1 -2.1 12.3 5.1 -0.1

Cash flow from financing 2.0 10.8 -8.5 -21.4 -20.2


Total of operating portfolio companies

Profit and Loss

Turnover 132.5 332.6 409.7 485.4 403.6

EBITDA -10.8 20.7 18.2 18.1 -5.8

Net result -13.3 6.0 -13.4 -7.7 -36.0


Cash flow from current operations -0.9 6.3 -8.6 24.5 9.7

Cash flow from capital expenditure 2.1 1.4 -2.6 -18.3 -3.6

Cash flow from financing -1.3 -1.1 -2.7 1.1 7.5


Deal sizeSales [in EUR million]

current portfolio companies sold portfolio companies

300

250

200

150

100

50

02004 2005 2006 2007 2008 2009 2010

K+S Gruppe

Hering

Hamba

L & E

Neef IT

Alma

P & CSteeltech

R + E

SwissTex

Elfotec Gruppe

ALMECinkl. Rifometal

Teksid Gruppe(Poitou, Cléon)

Xenterio

Hunsfos

OSNY

tech-FORM

ADG

Inasa

Sabinanigo

Faral

Group cash and cash equivalents (year-end)

cash and cash equivalents (not including treasury stock)

payments/disbursements shareholders

[in EUR million]

15.0

24.1

53.655.5

62.9

76.2

2.0

9.8

-8.5

-21.4 -20.2

2004 2005 2006 2007 2008 2009

Content 4 Letter from the Executive Board 9 Introduction of the organs 10 Report of the Supervisory Board 12 The BAVARIA share 13 Corporate Gevernance – Statement of Compliance for 2010 14 Corporate Governance – Report 18 BAVARIA Industriekapital AG – Who we are 20 Case Studies 21 Case Study 1 – Langbein & Engelbracht 22 Case Study 2 – Kienle + Spiess Gruppe 23 Case Study 3 – SwissTex Winterthur AG 24 Case Study 4 – Faral Group

25 Group Management Report

26 I. General environment and operations 26 1. Overall economic environment and market 27 2. The BAVARIA business model 28 3. Performance of the Company 30 II. Shareholding portfolio 30 1. Series Manufacturers 33 2. Plant Engineering & Construction 35 3. Business Services 38 III. Asset, financial and profit position of the Group 40 IV. Interdependencies 40 V. Significant events after the reporting date, Future risks and opportunities 40 VI. Future risks and opportunities 43 VII. General forecast

45 Consolidated Financial Statements

47 Consolidated profit and loss account for 2009 48 Consolidated balance sheet as of 31 December 2009 50 Consolidated statement of changes in equity 51 Consolidated statement of cash flows

53 Notes to the consolidated financial statements 55 I. BAVARIA Industriekapital AG – Company profile 55 II. Scope of consolidation 56 III. Reporting date for the Consolidated Group Annual Report 57 IV. Consolidation principles 58 V. Accounting and valuation methods 60 VI. Notes to the Balance Sheet 71 VII. Notes to the consolidated profit & loss statement 74 VIII. Reporting by segment 76 IX. Miscellaneous information 78 X. Schedule of shareholdings

80 Auditor‘s statement

81 Imprint

4 5Letter from the Executive Board Letter from the Executive Board

Letter from the Executive Board

Dear Shareholders:

Fiscal year 2009 was a disappointing one for BAVARIA Industriekapital AG, with consolidated Group turnover declining year-on-year by EUR 81 million to EUR 404 million (-17%). If we exclude the companies newly consolidated in 2009, the drop in turnover was actually as high as -31%. Thus, the Group’s consolidated surplus (net profit) fell by EUR 11.8 million to EUR 11.4 million (-51%). The aggregate operating result from the Group’s going investee companies before depreciation and amortisation (EBITDA) fell from EUR 18.1 million to minus EUR 5.8 million. Only 4 of our investee companies ended 2009 in the black, achieving an aggregate operating result of EUR 7.2 million. The total loss booked by the remaining 7 investee companies amounted to minus EUR 13.0 million.

It would be overly simplistic to attribute this dramatic drop in performance to the sales crisis alone. After all, most of our portfolio companies have actively reduced their expenses, adjusting their fixed costs to reduced turnover. In the case of two of our investee companies, however, we must own up to fact that we acted too late in implementing the necessary change of management. The following overview of the change in Group performance shows that our results were steadily improving until 2008; starting in Q4 2008, they began to deteriorate in the wake of insufficient reduction of fixed costs:

In % 2005 2006 2007 2008 2009

Aggregate operating result 100% 100% 100% 100% 100%

Other operating revenues 5% 5% 3% 3% 3%

Material expense -61% -59% -61% -60% -56%

Personnel expense -38% -26% -25% -26% -33%

Other costs -15% -13% -15% -13% -18%

EBITDA -8% 7% 3% 4% -3%

Depreciation/write offs -3% -4% -3% -4% -6%

EBIT -11% 2% 0% 0% -9%

Taxes -2% -1% -1% -2% 0%

Dissolution of negative goodwill 13% 6% 2% 3% 12%

Other significant consolidation effects &

shareholding disposals 5% 3% 4% 4% 0%

Extraordinary result 1% -1% -4% 0% -2%

Annual surplus (net profit) 7% 9% 1% 5% 1%

In this context, we regard operating result and cash flow (for the holding company as well as the investee companies) as two key indicators of the success of our restructuring measures. The consolidated Group result, on the other hand, is influenced to a great degree by non-cash items such as deconsolidations and the dissolution of negative goodwill.

The extraordinary result for 2009 includes restructuring expenses of EUR 5.4 million (prior year: EUR 1.9 million), which we allocated to two of our investee companies to cover possible claims under re-dundancy/social compensation plans. As a rule, however, our restructuring expenses (e.g. severance payments) are part of our ongoing operations and are thus included in the normal operating result.

In 2009, the aggregate annual loss of our going investee companies climbed by EUR 28.3 million to EUR 36.0 million. During the same period, the annual surplus of the holding company (AG) de-creased by EUR 5.7 million to EUR 8.2 million. The 2009 consolidated Group profit was positive on balance thanks to consolidation bookings of EUR 31.4 million. This still represented a decline in relation to the prior year, however (from EUR 23.2 million to EUR 3.6 million). The following overview shows how the consolidated Group result was derived from the annual net profit of the individual subsidiaries:

Aggregate annual surplus/loss – subsidiariesAnnual surplus/loss – holding co.Consolidation bookings

[in EUR millions]

-50 -40 -30 -20 -10 0 10 20 30 40 50 60

2009318-36Σ 3,6

20081714-8Σ 23,2

Our recommendation to the General Shareholder’s Meeting will be for a dividend payout of EUR 1.25/share or EUR 8 million in total. This means that almost all of the AG/holding company’s an-nual surplus would be distributed to shareholders. The table below shows the trend of dividends paid as well as the annual surplus of the holding company (AG) over the past 5 years:

2005 2006 2007 2008 2009

In EUR millions

Annual surplus 2.1 13.8 23.2 13.9 8.2

Dividends 2.2 6.6 19.2 19.7 7.7

Per share:

Annual surplus 0.42 (1) 2.09 (1) 3.50 2.17 1.29

Dividends 0.33 (1) 1.00 (1) 3.00 3.15 1.25

Number of shares 1,705,000 2,205,000 6,615,000 6,394,500 6,394,500(1) figures adjusted for the share split in 2007

We have set ourselves the goal of boosting the value of BAVARIA shares by repurchasing tre-asury stock. Thus, we have reduced the number of outstanding shares from 6.6 million to 6.4 million since 2007. As of 31 March 2010, an additional 221,136 treasury shares were held by the AG/holding company. In the wake of our initial public offering, we had opted to give BAVARIA managers a particularly strong incentive to perform by offering stock options at the expense of our shareholders. Since then, our thinking has changed, however, and we have reacquired all the outstanding options granted to our present or former employees. In order to keep motivating our management to perform at peak levels, we have developed an alternative incentive plan: BAVARIA managers can now participate in the growth of our investee companies by acquiring shares/virtual ownership interests in said companies on favourable terms. These shares also entail the risk of loss, however.

6 7

The second key indicator of our success is the change in liquid funds, which include marketable securities. Not included in this figure were BAVARIA shares held as treasury stock in the amount of EUR 1.8 million (prior year: EUR 1.3 million). In 2009, liquid funds rose by EUR 13 million to EUR 76 million by year’s end – a highly satisfactory trend. During the same period, bank liabilities rose by EUR 11 million to EUR 20 million. This means that net liquidity underwent a year-on-year increase of EUR 3 million to EUR 57 million. At roughly 26% of liquid funds, our debt ratio is ex-ceptionally low in comparison to other companies. Despite our operating losses, we were able to invest EUR 13.6 million in property, plant and equipment (investment ratio of 3.5%). These investments were financed primarily from the reduc-tion in our investee companies’ working capital in the wake of declining turnover. Also in 2009, a total of EUR 20.2 million was allocated to share buybacks and dividend distributions.If we break down our operating performance by individual segments, we see that the sharpest decline occurred in the Series Manufacturers segment, which also has the highest share of fixed costs. While we had still been able to book an operating profit of EUR 18.4 million in the prior year, the 2009 result was a loss of EUR 3.1 million. This EUR 21.5 million drop in the operating result was the result of turnover declining by EUR 69 million down to EUR 259 million (-21%).The Plant Engineering & Construction segment, by contrast, has a significantly more flexible cost structure since its activities tend to be project-based. Here, the operating result took a relatively small dip of EUR 2.2 million to end at 0.4 million, despite the fact that turnover plummeted by EUR 26 million down to EUR 48 million (-35%).Thanks to the initial consolidation of the Hunsfos company, turnover in our Business Services segment rose by EUR 13 million to EUR 96 million. This segment’s operating loss remained practically unchanged at EUR -3.1 million (prior year: EUR 3.0 million).

The table below summarises our 3 segments’ operating performance over the past 5 years:

EBITDA in EUR millions 2005 2006 2007 2008 2009

Series Manufacturers -12.7 11.6 17.3 18.4 -3.1

Plant Engineering & Construction 2.8 9.8 3.3 2.6 0.4

Business Services -0.9 -0.7 -2.4 -3.0 -3.1

Total -10.8 20.7 18.2 18.1 -5.8

AG (holding company) 2.5 13.8 22.8 13.6 7.6

Consolidation bookings 21.5 16.9 -3.0 18.6 34.5

Group result 13.1 51.4 38.0 50.4 36.3

A quarter-by-quarter breakdown of our segments’ operating performance shows that our cost-cutting measures are gradually having an impact:

EBITDA in EUR millions Q1 Q2 Q3 Q4 Total

Series Manufacturers -3.3 0.1 2.0 -1.9 -3.1

Plant Construction -1.4 -1.1 0.2 2.7 0.4

Business Services -0.2 -0.8 -1.4 -0.8 -3.1

Total -4.9 -1.9 0.8 0.1 -5.8

We fully expect the positive trend of H2 2009 to continue into 2010. We also expect that most of our investee companies will be able to achieve operating profits, thanks to the measures already taken to

cut fixed costs. Insofar as turnover rises again in 2010 – as it is forecast to do – this will only help to boost the operating profits ultimately achieved. Meanwhile, our restructuring of the companies newly acquired in 2009 (Osny, tech-FORM, Austria Druckguss and the 2 Spanish aluminium foil producers) is off to a promising start. After booking aggregate operating losses of EUR 3.7 million in 2009, these companies are expected to make a net positive contribution to the bottom line in 2010.A few general remarks: Our business consists of two main lines: company restructuring and asset management. We are always on the lookout for CEOs who manage a company as if it were their own, taking business decisions from the vantage point of view of a proprietor. Since we must often come to grips with heavy operative losses right after an acquisition, our initial expenditure of time and effort is very high. It takes time for the takeover company’s workforce to grow accustomed to the heightened accountability that is essential to the success of a mid-sized firm. We place particular emphasis on acquiring subsidiaries whose management has been neglected by their former corporate parent, and whose operations have had a purely manufacturing charac-ter (e.g. our plants in Spain, Norway and Italy). We then give these investee companies additional responsibility for turnover and profits. Once we have conducted an initial management assessment and implemented our tried-and-tes-ted “BAVARIA Operating System”, we expect our investee companies to be able to operate with a high degree of independence over the long term. A key to our success is that, once we have re-structured an investee company, we interfere as little as possible with its subsequent operations.As our investee companies become healthy and profitable, our role increasingly becomes that of an asset manager, one whose main task consists in deciding on the allocation of available liquid funds. This not only includes setting the investment ratio, but above all deciding whether to acqui-re additional (also profitable) lines of business, with the existing investee company serving as an integration platform. As a rule, we do not plan the resale of investee companies in advance. Rather, we see ourselves as a long-term investor, one who prefers to reap dividends than having to manage gains on disposal in a time deposit account. While the operating results of our investee companies are an indicator of our successful restructuring activities and a valuation benchmark for our investment portfolio, the annual surplus of the holding company (AG) reflects our success in managing our assets. In recent years, successful restructurings in the industrial sector were significantly facilitated by a favourable environment of rising order volumes, as the following chart illustrates (based on data from the VDMA/German Systems Engineering Association):

Order intake German engineering industry Index adjusted for price changes, based on turnover 2005 = 100

foreign orders

160

120

140

100

70

150

110

80

130

90

60

2002 2003 2004 2005 2006 2007 2008 2009

Letter from the Executive Board Letter from the Executive Board

8 9

Introduction of the organs

Executive Board

Reimar Scholz (CEO)Year of birth 1965Dipl.-Kfm., MBA (INSEAD, Fontainebleau)Mr. Scholz is the CEO and founder of BAVARIA Industriekapital AG. Previous employers included Deloitte & Touche, Treuhandanstalt and General Electric. He later served as CFO for two IT com-panies, one of which, Articon Integralis AG, he helped take public and through acquisitions evolve into a European market leader for IT services.

Harald Ender (COO)Year of birth 1952Dipl.-Ing., Dipl.-Kfm.Harald Ender is the COO for BAVARIA Industriekapital AG. After completing his studies at RWTH-Aachen in 1978, Mr. Ender has almost exclusively worked within the automotive supplier industry, serving as CEO, COO, vice-president and president in the last 17 years. He was respon-sible for reorganising and restructuring several companies, utilising Lean Management methods. Mr. Ender has reorganised for example Paulmann & Crone GmbH for BAVARIA.

Supervisory Board

Dr. Matthias Heisse, Attorney, MunichChairman of the Supervisory BoardCo-founder and managing partner of the corporate law firm Heisse Kursawe Eversheds

Dr. Gernot Eisinger, Businessman, MunichMember of the Supervisory BoardCo-founder and managing partner of Afinum, a medium-sized holding company, and prior to that partner of Triumph-Adler AG as well as managing director of TA Spezialbauholding

Dr. Harald Linné, Businessman, MunichMember of the Supervisory BoardManaging Partner of Atreus GmbH and previously Managing Partner of Boyden Interim Management

Introduction of the organs

From 2003 to middle of 2008, order volume rose by a total of 400%. By contrast, there was a drop of 36% in 2009 alone! It goes without saying that restructuring is much easier when a company’s order backlog is rising. We doubt that such a golden 7-year period will reoccur anytime soon. This will make any long-term restructuring activities significantly more challenging.

On the other hand, we have managed to build up an 8-year track record of selecting and success-fully reorganising over 20 different companies. This experience will stand us in good stead as we strive to sustain our success in this new environment. The personal visit paid us by the French ambassador as well as our meetings with government officials in Zaragoza, Spain and Milan, Italy are proof positive that our restructuring intervention is increasingly valued and in demand, bringing as it does the preservation of imperilled jobs.

BAVARIA Industriekapital AG is a majority-family-owned company and therefore makes its invest-ments on the basis of a long-term horizon. Our confidence in the future profitability of BAVARIA is reflected in the extensive purchases of Company shares by the Executive Board (in 2008 and 2009) as well as the ongoing buyback of own shares by the Company itself.

Our social commitment is borne out by our high training ratio (6.2% in Germany alone) as well as by our five-figure donation to Ashoka, a charitable association that supports social entrepreneur-ship worldwide. One example is the current initiative by Mr. Stenger to support a private school in Munich that helps parentless immigrant children earn their secondary education certificate.

We would to like to assure all of our shareholders and business partners that we are extremely confident about the future success of BAVARIA Industriekapital AG, the adverse economic clima-te notwithstanding. Current opportunities to acquire new investee companies on favourable terms make us especially optimistic.

We would like to thank you for the trust you have placed in our firm. If you have any proposals, suggestions for improvement or leads for new acquisitions, please do not hesitate to share them with us.

Yours sincerely,

Reimar Scholz Harald EnderSpokesman of the Executive Board Member of the Executive Board, Operations

Letter from the Executive Board

10 11

Report of the Supervisory BoardFor the fiscal year from 1 January to 31 December 2009

During the past fiscal year, the Supervisory Board both advised and monitored the Executive Board, while also fulfilling the tasks incumbent upon it under the law as well the Articles of Association and corporate governance principles of the Company – specifically in connection with key matters such as the changing legal and adjudicative environment. Thus, the Supervisory Board satisfied itself that proper procedures were followed by management, while supervising the work of the Executive Board on a regular basis and providing advice and support where needed.During the reporting period, a total of 5 Supervisory Board meetings were held, namely on the following dates: 28 January 2009, 27 March 2009, 29 May 2009, 18 September 2009 and 11 December 2009. The Supervisory Board also adopted certain resolutions outside of these mee-tings by means of various remote and/or electronic voting procedures. In addition, the Supervisory Board was involved in regular and intensive exchanges of information, ideas and concerns with the Executive Board Members above and beyond the scope of regular Supervisory Board meetings. This specifically included working conferences in which both the Chairman and the other Members discussed matters of key importance with the Executive Board.Thus, the Supervisory Board has called upon the Executive Board to provide regular oral and/or written reports on the status and performance of the Company. This has invariably included a detailed, monthly written report from the Executive Board focusing on the Company’s financing/risk management, the performance of its investee companies, and the progress of its ongoing acquisi-tions. This reporting protocol, which was implemented in the previous reporting year, is subject to ongoing enhancement with regard to both form and content, in order to ensure its conformity at all times with the specific requirements of suitable and proper risk management.In addition, the Supervisory Board examined and evaluated the fundamental issues resulting from the aforementioned reporting, such as: the Company’s corporate and commercial policies, its busi-ness strategy, as well as its financial performance and profitability, while specifically allowing for key developments in the market and competitive environment. Also examined in detail were transactions of material importance for the Company. Once the necessary measures had been identified and evaluated at length by both the Executive Board and Supervisory Board, the Supervisory Board gave its approval for said measures (insofar as such approval was mandated) on the basis of decis-ional guidelines from the Executive Board and by means of a duly adopted resolution.

1. Focal points of Supervisory Board meetings

In fiscal year 2009, the agenda of the Supervisory Board meetings included the following key topics: The business performance and growth of both the Corporate Group as well as the Stock Cor-poration (AG); budget planning and controlling; the status of the various acquisitions/financial participations, with a special focus on the deal flow. Fundamental issues associated with Company policies, such as the implementation of the early-risk-detection system already adopted and the structuring of deal-making procedures, with a spe-cial emphasis on ensuring adequate compliance/corporate governance and personnel growth. Key topics of current interest: e.g. the strategic orientation of BAVARIA Industriekapital AG, the optimisation of its business growth, organisation, management and public relations, as well as the implementation/enhancement of suitable compensation structures, namely on the basis of short and long-term incentives.

2. Annual reports /Group reports, audit of the accounts, corporate governance

The Company’s accounting procedures, Annual Report, Consolidated Group Report and Group Management Report were audited by RP Richter GmbH Wirtschaftsprüfungsgesellschaft, a Munich- based public auditing firm selected for this purpose by the General Shareholders’ Meeting. The auditors provided the Supervisory Board with a signed Declaration of Impartiality in accordance with Section 7.2.1 of the Corporate Governance Codex. The areas of emphasis for the audit were defined in advance and discussed at length. All of the audits have culminated in an unqualified opi-nion by the Company auditors.

During its meeting of 26 March 2010, which was also attended by the Company auditors, the Super-visory Board reviewed and officially accepted the results of the various audit reports. Based upon its own review of the audit reports, the Supervisory Board had no objections to the Annual Report, the Consolidated Group Report or the Consolidated Group Management Report, nor to the Executive Board’s recommended allocation of the balance sheet profit.On 26 March 2010, the Supervisory Board accordingly approved the BAVARIA Industriekapital AG Annual Report and Consolidated Group Report as prepared by the Executive Board for fiscal year 2009, as well as the Executive Board’s proposed profit allocation.The external auditors audited the Dependent Company Report prepared by the Executive Board and gave the following unqualified audit opinion: ”Based on the results of our statutory audit and our professional judgement, we hereby confirm that: 1)The information presented in the report is correct. 2) The amounts paid by the Company in connection with the legal transactions presented in the re-port were not inappropriately high.” Following its own review of the 2009 Dependent Company Re-port, the Supervisory Board gave its assent to the findings of the auditors and had no objections to the declaration made by the Executive Board in the final section of the Dependent Company Report.The Supervisory Board is committed to the ongoing enhancement of the Company’s corporate governance principles. Thus, the Company strives to implement all the stipulations of every appli-cable codex – even if only a voluntary basis – unless there are material objections for not doing so in individual cases. This also applies to the Efficiency Assessment undertaken by the Supervisory Board itself.In this past fiscal year 2009, there were no conflicts of interests on the part of Supervisory Board members to report. Mentionable, however, are the consulting services provided to the Company by the Supervisory Board Chairman’s law firm: This activity was specifically authorised by a resolution of the Supervisory Board (with the Chairman duly abstaining). All Supervisory Board members took part in the meetings of the Supervisory Board. (In a single instance, there was an excused absence by one of the Supervisory Board members; no resolutions were adopted at this particular meeting, however.) Given its small number of members, the Supervisory Board did not form any committees.

3. Personnel matters

In fiscal year 2009, Mr. Bernard Jan Wendeln left the Company’s Supervisory Board. The General Shareholders’ Meeting of 29 May 2009 elected Dr. Harald Linné as a new member of the Super-visory Board. The Supervisory Board Chairman continues to be Dr. Matthias Heisse. The Deputy Chairman is Dr. Gernot Eisinger. In fiscal year 2009, there were no membership changes in the Company’s Executive Board.

4. General Shareholders’ Meeting of BAVARIA Industriekapital AG in fiscal year 2009

The official General Shareholders’ Meeting of BAVARIA Industriekapital AG took place on 29 May 2009. The resolutions adopted included: 1) A dividend payout of EUR 3.15/share to the sharehol-ders out of the balance sheet profit. 2) Empowerment of the Executive Board to repurchase own shares for the account of the Company. 3) An amendment to the Company’s Articles of Association.

After this especially challenging fiscal year 2009, the Supervisory Board would like to thank the members of the Executive Board, the entire workforce of the BAVARIA Industriekapital AG Group, as well as the labour representatives for their motivation and hard work. The Board is confident that with their help, the Company can look with confidence to the new fiscal year.

Munich, on 26 March 2010

On behalf of the Supervisory Board:

Dr. Matthias Heisse- Chairman -

Report of the Supervisory Board Report of the Supervisory Board

12 13

The BAVARIA shareThe share price – not counting the dividend payout of EUR 3.15/share – rose by 5.6% last year, closing 2009 at 9.80 EUR. During the same period, the German S DAX index advanced by 25.7%. BAVARIA management used this weak spell to continue buying back company shares. Thus, an additional 54,418 shares were repurchased during the past fiscal year, leaving BAVARIA Industriekapital AG in possession of 193,876 own shares by year’s end. This represents 3% of the total share volume of 6.4 million shares.

The dividend for 2009 amounted to EUR 3.15/share. Since BAVARIA’s initial public offering, EUR 52.3 million has flowed back to shareholders in the form of dividends and share repurchases. By contrast, revenues from the initial public offering itself (in 2006) were only about EUR 12.0 million. An investor purchasing shares for EUR 100 at the issue price of EUR 8.67/share on 26 January 2006 would have earned a total return (including dividends) of EUR 198 by the end of 2009. The same amount invested into the S-DAX, however, would now be worth only EUR 85.

Number of shares 6,394,500 shares.

Type of shares Individual bearer shares.

Authorised capital EUR 6,394,500

Voting rights Each share confers one voting right.

WKN 260555

ISIN DE0002605557

Stock exchange code B8A

Stock exchange segment Entry Standard

Fiscal year Equivalent to the calendar year.

Accounting presentation As per German Commercial Code (HGB)

Designated Sponsor Equinet AG

Announcements Elektronischer Bundesanzeiger (Electronic Federal Gazette)

Top share price in 2009 (13 May 09) EUR 15.32

Lowest share price in 2009 (16 Mar 09) EUR 7.86

Closing price (30 Dec 09) EUR 9.80

Market capitalisation (30 Dec 09) EUR 62.67 Mio.

Earnings Holding per share EUR 1.29 (for fiscal year 2009)

Dividend per share EUR 1.25 (for fiscal year 2009)

Statement of Compliance for 2010BAVARIA Industriekapital AG puts great emphasis on sound corporate governance rules.

Although the Company is not exchange-listed and is thus is not obligated to comply, the Executive Board and Supervisory Board of BAVARIA Industriekapital AG hereby declare that the Company has complied, and continues to comply, with the recommendations of the “German Corporate Governance Codex” government commission (as published by the Federal Ministry of Justice in the official part of the Electronic Federal Bulletin of 18 June, 2009), subject to the following exceptions:

Executive Board

The disclosure of individual Executive Board salaries called for under Item 4.2.4 of the Codex was not implemented. In the judgement of BAVARIA Industriekapital AG, such a disclosure would infringe upon personal privacy rights/laws. Thus, the final decision in this matter has been left up to the individual Executive Board Member concerned.

Supervisory Board and committees

In deviation from Item 5.1.2 of the Codex, there is presently no need for additional, long-term succession planning for the Executive Board, given its present age structure. This is also why no upper age limit for Executive Board members has thus far been established.

In deviation from Items 5.3.1, 5.3.2 and 5.3.3 of the Codex, the Supervisory Board of the Company does not form committees, since the size of the Company and of the Board make this impossible and/or impractical at the present time.

Accounting

In deviation from the recommendation in Item 7.1.1, the Company has opted to continue preparing its accounts pursuant to the German Commercial Code (HGB) rather than IFRS regulations. This because the required changeover would be unlikely to generate added value, especially given the time and expense it would entail.


Reimar Scholz Harald Ender Dr. Matthias HeisseThe Executive Board The Supervisory Board

Corporate Gevernance – Statement of Compliance for 2010The BAVARIA share

14 15

Corporate Governance – ReportBAVARIA Industriekapital AG almost fully compliant with stringent German Standards

Pursuant to Item 3.10 of the current German Corporate Governance Codex, the Executive Board and Supervisory Board of BAVARIA Industriekapital AG report regularly on corporate gover-nance. This reporting occurs on a voluntary basis, since § 161 of the German Stock Corporation Act (AktG) has no binding applicability for BAVARIA Industriekapital AG, by virtue of the fact that the Company is Entry-Standard-listed rather than exchange-listed.

2009 Statement of Compliance

According to the Statement of Compliance released by BAVARIA Industriekapital AG for 2009, the Company complied fully with the German Corporate Governance Codex except for only a few deviations, which are spelled out below:

Executive Board

In deviation from Item 4.2.1 of the Codex, the Executive Board did not always consist of more than one person during the reporting year. This was due to personnel turnover. Since 1 Septem-ber 2008, however, BAVARIA Industriekapital AG has once again had a two-member Executive Board.

The disclosure of individual Executive Board salaries called for under Item 4.2.4 of the Codex was not implemented. In the judgement of BAVARIA Industriekapital AG, such a disclosure would infringe upon personal privacy rights. Thus, the final decision in this matter has been left up to the individual Executive Board Member concerned.

Supervisory Board and committees

In deviation from Item 5.1.2 of the Codex, there is presently no need for additional, long-term succession planning for the Executive Board, given its present age structure. This is also why no upper age limit for Executive Board members has thus far been established.

In deviation from Items 5.3.1, 5.3.2 and 5.3.3 of the Codex, the Supervisory Board of the Com-pany does not form committees, since the size of the Company and of the Board make this impossible and/or impractical at the present time.

Accounting

In deviation from the recommendation in Item 7.1.1, the Company has opted to continue prepa-ring its accounts pursuant to the German Commercial Code (HGB) rather than IFRS regulations. This is because the required changeover would be unlikely to generate added value, especially given the time and expense it would entail.

Executive Board and Supervisory Board

The Executive Board manages the Company under its own responsibility. In the process, the Board is obligated to pursue the best interests of the Company while striving for sustained growth in the Company value. The Executive Board of BAVARIA Industriekapital AG currently consists of two persons. The Supervisory Board has established rules of procedure for the Executive Board which govern the division of duties among its members as well as it collaboration with the Supervi-sory Board. On a regular and timely basis, the Executive Board must make comprehensive reports to the Supervisory Board with regard to all matters of importance to the Company, including plan-ning, business performance/development, the prevailing risk environment and risk management.

The Supervisory Board advises and monitors the Executive Board in its management of the Com-pany. Pursuant to the Articles of Association, the Supervisory Board consists of three members.

The Supervisory Board reviews BAVARIA Industriekapital AG’s quarterly accounts and also re-views and approves its annual report and consolidated Group report. The process of collabora-tion between the Executive Board and Supervisory Boards is set forth in detail in the respective rules and procedures of each board. These also specify which Executive Board activities require Supervisory Board approval. In addition, the Supervisory Board’s rules of procedure spell out its particular duties.

The Executive Board and Supervisory Board collaborate closely and on the basis of trust in order to promote the best interests of the Company. All material business events and/or transactions are dealt with jointly. Members of the Executive Board or Supervisory Board must disclose any conflicts of interest to the Supervisory Board.

Shareholders and General Shareholders’ Meeting

Our shareholders receive regular updates on the Company’s business development as well as its assets, financial position and profitability through our annual and quarterly reports. These are released pursuant to a financial calendar accessible on our internet homepage: www.baikap.de.

The annual General Shareholders’ Meeting is organised and conducted so as to ensure that all shareholders are informed promptly, comprehensively and effectively before and during the mee-ting, while facilitating the exercise of their rights. Thus, we also provide our shareholders with the usual services associated with the granting of a power of attorney and/or voting instructions in connection with the General Shareholders’ Meeting.

The last General Shareholders’ Meeting of BAVARIA Industriekapital AG took place on 29 May 2009. The next official General Shareholders’ Meeting has been scheduled for 11 June 2010. Specific allowance will be made for the new ARUG requirements, insofar as they are applicable to BAVARIA Industriekapital AG.

Compensation report

Transparent compensation structures for the Supervisory BoardGPursuant to § 12, Para. 2 of the Company’s Articles of Association, the General Shareholders’ Meeting sets the amount of remuneration, if any, payable to the members of the Supervisory Board. Accordingly, the fixed payment currently amounts to EUR 10,000 per annum plus appli-cable VAT. Remuneration for the Chairman of the Supervisory Board is twice this amount.

The performance-based remuneration of the members of the Supervisory Board as provided for in Item 5.4.7, Para 2, of the Corporate Governance Codex is granted in the form of convertible debentures. In accordance with the resolution of the General Shareholders’ Meeting of 5 Septem-ber 2006, the Executive Board was authorised to grant a total of 16,500 convertible debentures (after the share split: 49,500 units) to the Supervisory Board. These convertible debentures were allotted and taken up in full (in December 2006); each convertible debenture entitles the holder to subscribe to one BAVARIA share.

The conversion price corresponds to a specific average price at the time of allotment. The conver-sion rights may be exercised no earlier than two years after issuance of the convertible debenture (“minimum waiting period”). The minimum waiting period expires on the first anniversary of the issue date. Conversion does not depend on the attainment of additional performance goals.In aggregate, the Supervisory Board received remuneration of EUR 40,000 during the past fiscal year, allocated as follows (while allowing for the turnover in Board membership during the year as well as applicable VAT):

Dr. Matthias Heisse (Chairman): EUR 20,000Dr. Gernot Eisinger: EUR 10,000Dr. Harald Linné: EUR 5,833 Bernard Jan Wendeln: EUR 4,167

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In addition, the members of the Supervisory Board received the following additional payments in connection with consulting agreements during the last fiscal year:

EUR 144,659.18 (net) to the Munich-based legal firm of Heisse, Kursawe, Eversheds for legal advisory services rendered.

Executive Board compensationThe remuneration of the members of the Executive Board includes both fixed and variable compo-nents. During the past fiscal year, said remuneration amounted to a total of EUR 777,247.96. Of this, EUR 602,247.95 was fixed and EUR 175,000.00 EUR was performance-based. The perfor-mance-based payments (about 23% of total remuneration) are essentially contingent on individual and Company-related objectives. Furthermore, each Board Member has the opportunity to earn a share-based bonus under a Company profit-sharing scheme.

Information on stock-option programmes

Under the existing stock-option programme, the issuance of stock options was possible until 31 December 2009. Although stock options were granted in the past, this was effectively discontinu-ed in recent years. Thus, there are no more exercisable stock options in circulation at this time. A corresponding cancellation of Contingent Capital I (by amendment to the Articles of Association) has been approved by the Supervisory Board.

Ownership of shares in BAVARIA Industriekapital AG by the Executive Board and Supervi-sory Board

Holdings of Company shares by members of the board and/or Supervisory Board must be disc-losed individually insofar these amount to more than 1% of the Company’s issued shares (whether the shares are held directly or indirectly).

As of 31 December 2009 and 31 December 2008, the members of the Executive Board BAVA-RIA Industriekapital AG owned the following direct or indirect shareholdings:

Executive Board Member As of 31 Dec 2009 (No. of shares)

As of 31 Dec 2008 (No. of shares)

Reimar Scholz 4,251,964 4,239,485

Harald Ender 95,500 92,500

As of 31 Dec 2009, the members of the Supervisory Board held a total of 0 shares out of the Company’s issued capital (prior year: 15,000 shares).

Insurance for members of the Executive Board and Supervisory Board

BAVARIA Industriekapital AG has taken out financial loss coverage (D&O liability insurance) for the members of the Supervisory Board and the Executive Board of the Company with an appro-priate retention amount.

Transparent communication

In order to ensure maximum possible transparency, we aim to provide all target groups with the same information at the same time. Thus, both institutional and private investors can obtain timely information on recent developments at the Group via the Internet. All press releases as well as the Company’s Articles of Association are published on our website.

Accounting and auditing of the annual accounts

Thanks to its risk/opportunity management system, BAVARIA Industriekapital AG is able to sys-tematically identify and assess risks and opportunities, while taking appropriate measures in res-

ponse. The system is continuously enhanced by the Company.

The Company has appointed RP Richter GmbH Wirtschaftsprüfungsgesellschaft, Munich as its external auditor for fiscal year 2009. The auditors are obligated to promptly notify the Chairman of the Supervisory Board of any grounds for disqualification or appearance of partiality that emerge during the audit. The auditor will also promptly report any discoveries or events that turn up during the audit, insofar as they have a material impact on the duties of the Supervisory Board. In addi-tion, the auditors will notify the Supervisory Board if they discover any facts during the audit that contravene the Statement of Compliance issued by the Executive Board and Supervisory Board pursuant to § 161 of the Stock Corporation Act (AktG).

Prevention of conflicts of interest

Private business dealings or outside employment by members of the Executive Board must be promptly disclosed to the Supervisory Board; if applicable, such dealings/employment must be duly authorised before being undertaken. The Supervisory Board must report any conflicts of interests and their consequences to the General Shareholders’ Meeting. In the year under review, there were no conflicts of interest to report on the part of either the Executive Board or the Su-pervisory Board.

Corporate Governance – Report Corporate Governance – Report

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BAVARIA Industriekapital AG – Who we areFounded in 2003, BAVARIA Industriekapital AG is a fast-growing industrial holding company. Currently, its portfolio comprises 13 going companies employing a total of roughly 3,000 people. The shares of BAVARIA Industriekapital AG are exchange-listed, which ensures broad control and strengthens our competitive position.

Our business strategy is to acquire revenue-poor/unprofitable mid-sized companies and turn them around by means of comprehensive and sustained restructuring. In the process, we back up our investee companies as a strong partner. A key part of our strategy is to spin off those activities which are merely peripheral to the investee company’s core business. Running these activities on a standalone basis then allows us to identify new growth potential. The application of our in-house “BAVARIA Operating System” enables us to improve revenue streams, heighten competitiveness and introduce stringent cash management. By fully involving the investee company’s workforce along the way, we are able to draw on their skills and experience to help achieve the turnaround. Meanwhile, our team of specialist provides on-site support for management, thus further ensuring the success of our restructuring.

Before being acquired by BAVARIA Industriekapital AG, the investee company is often faced with the inevitable shutdown of its operations. Once we take over the reins, however, we quickly put the company back on course to profitability. Although restructuring frequently includes personnel adjustments, we are almost always able to ramp the workforce back up over the medium term. This is because we set great store in the potential and initiative of human resources when it comes to securing lasting company success.

None of our investee companies has had to take on additional debt due to being acquired by BA-VARIA Industriekapital AG. Our business model is oriented towards achieving positive operating results in our investee companies. This also includes making required investments.

Our investee companies: The type of company we look forTarget sectors: manufacturing or industrial services.Annual turnover: At least EUR 50 million.Opportunity to acquire a majority stake, preferably 100%.Identifiable improvement potentials.

Going forward, we intend to continue acquiring companies without having to compromise our standards. Steady growth and improved operating results form a solid basis for success, both for the investee company as well as for BAVARIA Industriekapital AG.

Our mission statement: We stand behind and beside our companiesWe pursue our objectives in a sustainable fashion and with a long-term perspective, in order to create company value while also safeguarding jobs. Integrity, trust and responsibility play a key role in this context. We stand beside our investee companies as a strong partner.

Responsibility: We are committed to creating value and sustainabilityWe are conscious of the heavy responsibility we take on when we acquire a distressed company. We are ready to take tough decisions while respecting the interests of all stakeholders, and we remain accountable for these decisions. Moreover, we have developed our own risk management system for the early identification of critical events that could endanger the survival of the investee company.

Integrity: Joining together to achieve a common goalFor us, integrity means ethical conduct, a commitment to honest dealings and a reliable work ethic. We not only live up to these standards ourselves, but expect them from our partners as well. Thus, mutual trust forms the basis for a collaborative effort to restore our investee companies to profitability. This is how we make our restructuring successful and credible.

Performance: We set high benchmarks – beginning with ourselvesWe set objectives which we aim to achieve not only through our own efforts but also via the performance of the investee company’s management and workforce. We work with a clear focus on achieving positive operating results and on reaping the rewards of our success. In order to effectively assess and improve the situation in our investee companies, we work together closely with both management and employees when to it comes to formulating and implementing our demanding targets.

Teamwork – We are always open to constructive dialogCommunication and cooperation in a team setting are key prerequisites for innovation and creati-vity. Teamwork is not just a question of leadership style, however; it is a critical factor in motivating the workforce and in preparing them to tackle new challenges and tasks.

A win/win situation: We want everyone to come out ahead!We only acquire companies with clear improvement potential. Active management of our financial participation allows us to boost revenues and profits. Even before an acquisition is finalised, our Best-Practice Team is busy developing a concrete action plan that will then be promptly imple-mented in cooperation with management. Since our own management stands to profit from the success of our turnaround companies, we are able to effectively position our executives as “ent-repreneurs”. Ultimately, our track record speaks for itself!

A win/win situation: We take over companies that have generally been making losses for years and bring them back into the black in short order, while securing the jobs of the affected work-force. Since our acquisition involves the spin-off of unprofitable, peripheral activities, it allows the company’s former owners to once again concentrate on their core business. In other words, BA-VARIA Industriekapital AG comes in as a long-term investor in the company. We also participate successfully in sectors that tend to be avoided by financial investors with quick exit strategies, e.g. plant construction firms or companies particularly susceptible to the business cycle.

Charitable activities

EXIT DeutschlandBAVARIA Industriekapital AG is an active supporter of the charitable organisation EXIT (www.exit-deutschland.de), which helps those caught in the Neo-Nazi subculture to leave their old life behind and turn over a new leaf. Just like BAVARIA Industriekapital AG, the EXIT Organisation strives to improve future perspectives and to make itself available at all times as a trusted go-to partner. This common approach and the desire to make a positive difference in society are what make BAVA-RIA an enthusiastic sponsor of EXIT. So long as EXIT does not receive government subsidies, its social work is dependent on the generous contributions of those who support its mission.

ASHOKA – Innovators for the PublicWe are also proud to support the Ashoka organisation (www.ashoka.org), which specialises in in-vesting philanthropic risk capital in socially beneficial projects. Since 1980, Ashoka has identified social entrepreneurs – both men and women – in almost 70 countries and has supported them in solving social problems with innovative concepts. Ashoka provides these entrepreneurs with assistance, advice and access to support networks, enabling them to spread their innovations far and wide. In addition, Ashoka mentors youth from underprivileged families in accordance with their individual talents. This is particularly important to us, since we consider it highly unfair that, even in Germany, a child’s chances for good schooling and a solid professional future are highly dependent on the educational level of his or her parents.

BAVARIA Industriekapital AG – Who we are BAVARIA Industriekapital AG – Who we are

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About the future.About change and sustainability.About us.

INSIGHTSA rapidly changing world calls for solutions.Management competence / innovation. Lean management / creativity. For us, this is no contradiction!

Change is a constant, everywhere and all times. It is part and parcel of our business. Globali-sation, new markets, cutting-edge technologies, novel products, shifting markets – a complex environment indeed. We are aware of both the pitfalls as well as the opportunities. By carefully analysing the smallest detail of the overall business process, we are able to assess and shape the future of our investee companies, while putting them squarely back on the path to success!

How BAVARIA Industriekapital makes the future happen. 4 business examples.

Case Studies

Case Study 1 – Langbein & Engelbracht

Green engineering: creating improvements for customers “Our customers are clearly benefiting from our ‘Visionary Energy Concept’. By optimising the energy flow in the production plant and by offering innovative products and solutions, we are able to create huge cost savings.”Dr. Peter Engelmann, Managing Director of Langbein & Engelbracht

Langbein & Engelbracht specialises in the engineering of plant/equipment for processing/envi-ronmental technology. The company’s comprehensive service includes the delivery and assembly of complete engineering solutions. The firm prepares and builds plant/equipment for the paper and automotive industry (surface treatments) as well as other sectors (exhaust cleaning systems).

128 employees, of which 75 are engineers and designers. Branch locations in Bochum, Germany/Shanghai, China/Chicago, USA. EUR 27 million in turnover for 2009. A subsidiary of BAVARIA Industriekapital AG since May 2004. www.l-e.de

The “Visionary Energy Concept”: Less is moreAll over the world, sustainability has become a megatrend of our times, whether in terms of pro-tecting the global climate, optimising energy generation, saving energy costs or improving water provision. These are precisely the areas where Langbein & Engelbracht focuses its research and development, so as to remain ahead of the curve with solutions for tomorrow. For years now, L&E has established a track record of offering its customer intelligent and profitable solutions for ener-gy generation and savings.

Example: EUR 800,000 in annual cost savingsPutting heat generated in paper/cardboard factories to profitable use

Large volumes of low temperature/waste-heat flows usually leave a plant without being used. By exploiting these waste heat flows through thermal optimisation, we can improve energy consump-tion and temperature control within the water cycle. This in turn boosts productivity and helps maintain the threshold temperatures for waste water.

The use of waste heat from paper/cardboard factories to reduce the energy consumed during pro-duction is an innovative growth area. The corresponding equipment, conceived and delivered by L&E, is able to save 4 tonnes of primary steam per hour, for total annual savings of EUR 800,000. Thus, L&E’s equipment is able to recoup its full investment cost in the same year of installation. No wonder L&E’s energy-saving solutions make it a go-to partner of choice all over the world!

Case Studies

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Case Study 2 – Kienle + Spiess Group

Sustainable implementation of lean, efficient and rapid processes“Since being acquired by BAVARIA Industriekapital, we at the Kienle + Spiess Group have seen lean management put into practice at all our operating locations. In addition, implementation of the ‘Bavaria Operating System’ has made continual process improvement possible. And the newly established profit centres have contributed to more transparency, accountability and cost con-sciousness.”Wolfgang Werheid, Managing Director of Kienle + Spiess GmbH

The Kienle + Spiess Group (K+S) is one of Europe’s leading providers of stamped/die-cast com-ponents for the construction of electrical motors and generators.

1,150 employees. 45,000 m2 production area. 4 production locations. EUR 143 million in turnover for 2009. Since June 2006, Kienle + Spiess has been a subsidiary of BAVARIA Industriekapital AG. www.kienle-spiess.de

How K+S moves automobilesKienle + Spiess boasts 75 years of technical know-how and experience in stamping and die casting. Our emphasis on innovation across all segments of our company, coupled with our close coopera-tion with our customers, suppliers and business partners, are what allow us to offer viable solutions for the future. Thus, we are consistently setting new benchmarks in the development of electrical motors. Examples include our components for hybrid motors or our patented Glulock® technology, which allows us to boost a motor’s electrical output. When it comes to this growth market, we have relationships with practically all of the well-known automobile makers. Thanks to K+S rotors and sta-tors, moreover, the energy that will drive the electric vehicles of the future is already being generated by wind turbines that operate practically maintenance-free, even far out in the North Sea.

Example: 90% reduction in delivery timesHow K+S keeps the economy humming.

Technical facilities can break down at any time, even despite intensive upkeep. When a defective motor shuts down an entire complex process, this can be a particularly costly headache. It goes without saying that a rapid replacement delivery is in the best interest of the customer. However, preparing a die-cutting tool, bringing it to the die cutter and producing the needed component can takes weeks – much too long for the customer!This is why K+S has invested in sophisticated manufacturing cells built around laser-cutters. By means of preset program steps, the laser is able to cut the contours that would normally be crea-ted by a die-cutting tool mounted in a die cutter. Customising and inputting the required program steps can be done directly and without any lead time, thus allowing the needed components to be produced on short notice. In other words, it works just like a die cutter, but much more rapidly and without complex tools. The result of this flexible shortcut: After only a short interruption, the customer is able to resume his production cycle.Just one more example of how K+S tackles customer problems and offers exciting solutions!

Case Studies

Case Study 3 – SwissTex Winterthur AG

When the competition eyes our products…“We win over our customers with innovative, resilient processes, tried and tested components plus outstanding service.”André Lienert, Managing Director of SwissTex Winterthur AG

SwissTex is a globally active manufacturer of components for textile machines as well as a supplier of systems for bulked continuous filaments (BCF) and technical and industrial yarns (T&I). The core competence of SwissTex includes the development of processes and components, their construction and installation at the customer’s location, as well as the enhancement of existing systems, including their maintenance.

61 employees Company headquarters in Winterthur, Germany, with a demonstration/testing centre for BCF/TCI

prototype equipment. Sales office in Shanghai, China. EUR 14 million in turnover for 2009. A subsidiary of BAVARIA Industriekapital AG since December 2006. www.swisstex.ch

Like Swiss clockwork Thanks to many years of improving our machines to meet customer needs, our engineers have by now honed them to perfection. Cutting-edge manufacturing, high-grade surface coatings, ex-pertise in the required procedures and experienced personnel – these are the key prerequisites for creating reliable products. In servicing our customers, our “Swiss precision” ensures process consistency. This in turn guarantees that the customer receives a premium product with which he will be able to produce merchandise of reliable quality year after year.

Example: 4.6 tonnes of top-quality yarn per dayA box that spins like crazy

Our BCF technology may be concealed in a deceptively small box, but it still has a huge impact, since it allows for the production of above-average-grade filament yarn. Thus, an array of conse-cutive process steps produces the yarn required for top-quality carpeting of the type destined for the car, home or office. Up to six threads can be processed simultaneously in a single run, which translates into an output of up to 4.6 tonnes of premium yarn per spinning bay. What better proof of our innovative capacity!

Case Studies

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Case Study 4 – Faral Group

FARALActively managing change rather than simply reacting“Our motivated and dedicated employees, our clear and coherent target-setting, along with our strict process/cost management have been the key to the company’s successful turnaround. We not only involve our employees in the continuous improvement process; we make sure they become its driving force.”Biago Sisinni, General Manager of Faral S.P.A.

In 1966, Faral S.p.A. became the first company to market heaters made of aluminium. Today, the company’s product range comprises aluminium radiators in a variety of models, sizes and colours. Consistently setting new standards, Faral is a global brand leader in its industry.

Domiciled in Campogalliano (Modena/Italy, Orgiano/Italy, Carmaux/France) 176 employees. 40,000 m2 production facility. 3 plants: 1 foundry plus 2 assembly/varnishing plants. EUR 25 million in turnover for 2009. Since May 2008, a subsidiary of BAVARIA Industriekapital AG. www.faral.com

Faster, warmer, lighterFARAL heaters feature an exceptionally low thermal inertia, i.e. they radiate heat into the environment at a faster rate. This avoids long pre-heating times and makes FARAL heaters ideally compatible with the most up-to-date and efficient heat generation/regulation systems. Thanks to their excellent thermal diffusion, FARAL aluminium radiators also run at low flow temperatures and save energy. This makes them optimally suited for use in long-distance heating systems, which generally work with comparatively low flow temperatures. These advantages, coupled with a contemporary design and light, aluminium construction, are what set FARAL heaters apart from the competition.

Example: Despite the economic crisis, EBITDA rises by 8 pointsContinuous improvement, Italian style

In order to recover FARAL’s market position, we had to significantly improve our delivery capacity and our customer satisfaction. Achieving these objectives required key modifications in produc-tion, administration and logistics. These modifications, in turn, could not have been successfully implemented if the company workforce had not shown openness to change and contributed their wide-ranging experience with regard to products and processes. Many of these changes were derived from the “Toyota Production System”, e.g. “SMED” activities (one-minute rigging/instal-lation), “KanBan” (internal management of logistical processes via the use of cards or packing crates) “5S” (orderliness, standardisation, cleanliness, etc.) or the “Pull Principle” (input materials are requisitioned by the downstream production steps).

Reducing merchandise inventories while at the same time improving delivery capacity has ena-bled us, among other things, to repay the credit obligations in place before the sale to BAVARIA Industriekapital AG. Despite the general economic crisis, we were able to improve EBITDA by eight points, while achieving turnover of EUR 25 million. This has only heightened FARAL’s deter-mination to stick to its new path!

Case Studies

EACH INDIVIDUAL COUNTS

GROUP mANAGEmENT REPORT

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I. General environment and operations1. Overall economic environment and market

Following the worst recession since the end of WWII, the global economy is in the midst of a modest recovery. However, this recovery seems highly likely to become sluggish over the medium term. The deep recession was triggered above all by highly dramatic collapse of world trade in early 2009, which affected practically every country on the globe. Thus, world-wide output took a significant hit: -1.1%. By the middle of 2009, the global economy began to stabilise again. Despite the improved outlook, the global recovery is likely to be quite weak in 2010.

In Germany as well, the worldwide slump in demand in early 2009 resulted in a historically unpre-cedented decline in both exports as well as investment in capital goods. Despite the slight impro-vement in the second half of the year, overall economic output declined by an annual average rate of 5.0%. The recovery in 2010 will be moderate, in any case, with a forecast GDP growth rate of 1.6%.

With their strong focus on export-oriented industrial products, the investee companies in our port-folios were particularly hard hit by the slump in foreign demand. Based on data from the VMDA trade association, the German mechanical engineering sector grew by a record 400% from 2003 to 2008, only to shrink by 38% in 2009. As a rule, industrial production is subject to economic cycles. Many companies refused to make allowance for this during the boom years, basing their future planning on steadily growing demand.

Even though we had factored in a roughly 30% safety margin in our 2009 budget, we were caught off guard by the drastic drop in turnover. This was reflected in the increase of our average person-nel expense ratio, for example, which rose to 33% in 2009 (2008: 26%). In the second half of the year, our cost-cutting programmes finally began to have an effect, so that the personnel ratio fell from 35% in H1 to 31% in H2.

Group management Report – General environment and operations

2. The BAVARIA business model

BAVARIA’s business model encompasses the acquisition, restructuring, rehabilitation and even-tual resale of distressed companies. In the course of our restructuring measures, we deploy our own team of specialists to actively support the investee company’s management team.

Our acquisition criteria, which are reviewed on an ongoing basis, are currently as follows:

Target industries: manufacturing or industrial services. Turnover: at least EUR 50 million. Mode of investment: acquisition of a majority stake, preferably 100%.The target company must have discernable improvement potential.

Group management Report – General environment and operations

28 29

3. Performance of the Company

BAVARIA Industriekapital AG is the parent company of the BAVARIA Group, and is directly or indirectly involved in all of the Group’s business activities. In fiscal year 2009, BAVARIA Indus-triekapital AG derived its financing almost entirely from its own equity capital (as in the prior year).

As of December 31, 2009, the Company’s equity capital had fallen to EUR 26.0 million (prior year: EUR 37.5 million), primarily due to a dividend distribution of EUR 19.7 million to the shareholders.

One of the benchmarks we use to measure our performance is the net change in BAVARIA Industriekapital’s financial resources fund:

2009 net change in the Group’s financial resource fund (in EUR millions)

Cash flow from operations 2009 2008

Annual surplus 8.2 13.9

Increase / decrease in provisions 7.0 -0.1

Gains on disposal of financial assets -2.4 0.0

Change in receivables and other assets -6.0 -0.1

Change in payables and other liabilities 0.1 0.0

6.9 13.7

Cash flow from investment activities

Follow-on inflows from receivables associated with the sale of consolidated companies

0.0 5.5

Inflows from the sale of consolidated companies and other business units

0.1 0.0

Outflows from the acquisition of consolidated companies and other business units

-0.1 -0.1

Outflows from investments in financial assets -0.1 -0.3

-0.1 5.1

Cash flow from financing activities

Outflows for shareholder distributions -19.7 -19.2

Outflows for the repurchase of own shares -0.5 -2.2

-20.2 -21.4

Changes in the cash balance of the financial resource fund -13.4 -2.6

Financial resource fund at the start of the period 24.2 26.8

Financial resource fund at the end of the period 1) 10.8 24.2

1) The financial resources fund comprises cash and cash equivalents as well as short-term securities included in working capital, with the exception of own shares.

After deduction of the dividend distribution and outlays for the repurchase of own shares, the financial resource fund of BAVARIA Industriekapital AG increased by EUR 6.8 million in 2009 (prior year: EUR 17.1 million).

Performance of the shareholding portfolio

In 2009, the portfolio was expanded with the successful acquisition of 5 new investee companies and/or company groups. These acquisitions exclusively involved companies from the manufac-turing sector and were allocated to our Series Manufacturers and Business Services segments.

During the reporting year, the key assets and liabilities of the French company Fonderie du Poitou Aluminium SAS (FDPA) were sold off as part of an asset deal, so that FDPA is no longer part of the shareholding portfolio.

The reporting year’s main purchases were the following: OSNY Pharma SAS, Osny/France (Osny Pharma), Austria Druckguss GmbH & Co. KG, Gleisdorf/Austria (ADG KG), Tech-FORM SAS, Auxi-le-Château/France (Tech-FORM), plus 2 Spanish companies – Laminados Sabiñánigo S.L., Sabiñánigo/Spain (Sabiñánigo) and INASA Foil S.A., Irurtzun/Spain (Inasa).

For details on the individual companies, please see Section III (“Shareholding Portfolio”).

Dividend distributions and share buybacks by BAVARIA Industriekapital AG

Pursuant to a resolution of the General Shareholders’ Meeting of 29 May 2009, a dividend of EUR 3.15/share was paid out for fiscal year 2008. For fiscal year 2009, the Executive Board plans to recommend a dividend of EUR 1.25/share to the General Shareholders’ Meeting, for a total pay-out of EUR 8.0 million (prior year: EUR 19.7 million).

The following share volumes were repurchased over the course of the past fiscal year (as of 31 Dec 2009): 11,528 shares for EUR 0.1 million (as authorised by the General Shareholders’ Mee-ting of 20 June 2008) as well as 42,890 shares for EUR 0.4 million (as authorised by the General Shareholders’ Meeting of 29 June 2009).

Group management Report – General environment and operations Group management Report – General environment and operations

30 31Group management Report – Shareholding Portfolio Group management Report – Shareholding Portfolio

II. Shareholding Portfolio1. Series Manufacturers

Series Manufacturers

Plant Engineering & Construction

Business Services

Sales Revenues (in EUR thousands)

In 2009, the Series Manufacturers segment accounted for EUR 259.3 million (prior year: EUR 327.9 million) or 64% (prior year: 68%) of the BAVARIA Group’s sales revenue. In the reporting year, the companies Austria Druckguss and Tech-FORM were added to the BAVARIA portfolio; both were consolidated for the first time in June 2009. As of 31 December 2009, the FDPA company had effectively been removed from the portfolio, since its key assets and liabilities had been sold off.

Trends in the automotive industry

Demand for all types of motors is dependent on the economic trend in the main customer sec-tors, such as drive and control technology, power plant technology or automotive/industrial tech-nology.

In the drive and control technology sector as a whole, order volume underwent a 57% year-on-year decline from January to September 2009. On the other hand, the order volume data from Q4 2009 suggest that the trend is now forming a bottom and is stabilising somewhat. For 2009 overall, the drive and control technology sector expects a drop in turnover of about 40%. Given the historic low hit in 2009, we could well see a plus of up to 10% in 2010. In early 2009, the automotive industry was mired in its worst crisis since 1945. Almost con-currently with the collapse of US investment banking firm Lehman Brothers in September 2008 and the subsequent global crisis, the automotive markets embarked on a downward slide of unprecedented extent and rapidity, one which could not fail to impact many other sectors as well. Thus, the worldwide drop-off in demand was sharper and deeper than that of any previous recession. As 2009 progressed, the international automobile market ended up performing better than expected, however.

Segment turnover and earnings

At EUR 259.3 million, 2009 sales revenues were about 21% lower than in the prior year. If we factor out the new acquisitions during the fiscal year to arrive at a comparison portfolio, we see that turnover was actually about 27% below the prior year – a clear reflection of the impact of the economic crisis. The segment’s EBITDA of EUR -3.1 million was also significantly lower than in 2008 (EUR 18.4 million). This markedly worse result was primarily attributable to lower turnover volumes, which in turn had a disproportionate impact on the operating bottom line, given the high fixed costs typical for this sector.

On the other hand, all of our Series Manufacturers companies have adjusted their structures to this lower turnover environment during the course of the year and have managed to bring their current operating EBITDA back into the black or at least to the break-even point. Moreover, many of the measures taken will affect the bottom line with a certain time lag, so that we expect to see a significantly improved result in 2010, especially given this year’s low baseline.

Investments, depreciation and personnel changes

In the past fiscal year, our investee companies managed to invest roughly EUR 12.0 million in plant and equipment (prior year: EUR 15.4 million), despite the sharp drop-off in their operational business. This was not sufficient to fully offset annual depreciation of EUR 16.9 million (prior year: EUR 14.3 million), however. As a rule, we carefully evaluate and review all investments, in order to allow for the reduced volume of business. The bulk of the investments (EUR 10.3 million) were made within the Kienle + Spiess Group, the largest item being the construction of a new warehouse for roughly EUR 4.4 million.

Given the slump in turnover and the cost-cutting that became necessary as a result, the total workforce employed by the companies we already held in this segment shrank from 2,103 to 1,858 persons. If we factor in our new acquisitions during 2009, however, the total workforce in the segment actually rose from 2,103 to 2,105 people.

Outlook for 2010 and beyond

Now that our investee companies have adjusted to the changed market conditions, it is apparent that they are now on a far more solid footing than most of their competitors – especially since they have not been saddled with additional debt by BAVARIA. We will be sure to exploit this solid foun-dation going forward, so as to further strengthen and expand our portfolio companies’ position. We are planning so-called “add-on” acquisitions, for example, in order to supplement our existing companies geographically and/or technologically, thus giving them a broader base. Any further uptick in the economy, moreover, will serve to raise turnover and significantly improve profitability, given the structural streamlining we have already implemented.

96,203259,291

48,052

32 33

2. Plant Engineering & Construction



Business Services


In 2009, the Plant Engineering & Construction booked EUR 48.1 million in turnover revenue (prior year: EUR 73.9 million), or roughly 12% (prior year: 15%) of the turnover revenue of the entire BAVARIA Group. As before, this segmental portfolio consists of 3 companies.

Trends in the Plant Engineering & Construction sector

When it came to the tendering of major new plant-construction projects, the international markets were characterised by noticeable restraint. During 2009 as a whole, orders in the Plant Enginee-ring & Construction sector fell by a whopping 38% (according to the German VDMA trade associ-ation), a historically unprecedented crash. In the process, manufacturers of textile-machines were hit with especially sharp declines in order volume.


Sales revenues were EUR 48.1 million in 2009, or about 35% lower than in the prior year. Order volume, on the other hand, an especially key indicator for this segment, began to recover signi-ficantly in Q4 2009, closing the year at EUR 59.1 million (prior year: EUR 68.8 million). At EUR 0.4 million, EBITDA for the segment lagged behind the EUR 2.6 million achieved in 2009. This drop in earnings was mainly due to the negative market trend for textile-machinery manufacturing. However, the flexible reaction of our investee companies to changing market conditions was able to cushion the impact here as well, so that the effect on earnings was comparatively marginal.


Due to increasingly flexible manufacturing processes, Plant Engineering & Construction is a high-ly labour-intensive segment with a small volume of fixed assets. A total of EUR 0.2 million were invested in 2009 (prior year: EUR 0.4 million), while depreciation amounted to EUR 0.5 million (prior year: EUR 0.5 million).

With 272 employees, the segment’s total workforce remained nearly the same in 2009 as in 2008 (295).


At the end of 2009, order volume amounted to roughly EUR 30.2 million. The recovery in order volume that took hold Q4 2009 triggered a veritable flood of new orders for some plant/equip-ment builders in the first weeks of 2010 – up to ten times the historical average for this time of year! While our builders streamlined their resources during the crisis, they did not neglect the area of technical innovation; this is why we are now in a position to continue offering our customers technically sophisticated and fined-tuned solutions.

96,203259,291

48,052

Portfolio companies

As of 31 December 2009, the Series Manufacturers segment comprised the following 4 com-panies:

a) Kienle+Spiess Group

Date of acquisition June 2006Managing Director Wolfgang WerheidLegal domicile Sachsenheim/Germany, Bilston/UK, Tokod/Hungary

The Kienle+Spiess Group is the leading European provider of stamped and die-cast components for electrical machinery and generators. Since 1935, the company has been known for the stam-ping and packing of rotor and stator laminations and all types of electrical drives. The main plant at Vaihingen/Sachsenheim has been in existence since the 1960s. In addition, Kienle+Spiess also has branch operations in the UK and Hungary.

b) Faral Group

Date of acquisition May 2008Managing Director Giovanni Fregnan, Biagio SisinniLegal domicile Modena/Italy and Carmaux/France

Faral S.p.A. was established in 1966 in Campogalliano (Modena/Italy), and became the first com-pany to sell radiators made of aluminium (the “Tropical” line). Faral supplies the European market via 3 plants: a foundry and 2 varnishing/assembly works. Since October 2008, the Faral Group also has a branch location in France.

c) Tech-FORM

Date of acquisition June 2009Managing Director Jérôme Della SiegaLegal domicile Auxi-le-Château/France

Formerly known as ThyssenKrupp Sofedit Auxi-le-Château, the Tech-FORM company was foun-ded in 1917 in Auxi-le-Château, 200 km north of Paris. With its expertise in metal forming pro-cesses such as stamping and flow forming, tech-FORM specializes in the development and ma-nufacturing of steel and aluminium pulleys, torsional vibration dampers and gearbox components for automotive applications. Thanks to investments in development and testing equipment, Tech-Form is able to design and produce top-quality, competitively priced components tailored to the technical requirements of its customers (mainly in the automotive sector).

d) Austria Druckguss

Date of acquisition May 2009Managing Director Alexander SchröflLegal domicile Gleisdorf / Austria

ADG KG is a provider of complex, die-casting components, as well as machining services. The components’ weight ranges from a few grams to as much as 3 kilos. A wide variety of aluminium alloys are used, with some allowing for up to 8% distension. By collaborating with partners in low-wage countries, the company will be able to better meet customer needs in the near future. Solid expertise in stamping and chipping processes, coupled with outstanding project management and the ability to produce cost effectively: these are the advantages that ADG KG can pass on to its customers.

Group management Report – Shareholding Portfolio Group management Report – Shareholding Portfolio

34 35

This has been clearly reflected in the dramatic rise in order inflow, which only underscores the reality that technical enhancement is key for plant/equipment builders when it comes to creating market demand. Thus, we intend to continue down this path. If needed, we will further round out the portfolios of our plant/equipment makers through acquisitions. An added positive is that our plant/equipment builders are already active in areas that are experiencing dynamic growth across the world, such as:

Environmental protection.Energy savings. Textiles (especially in emerging economies, which need to catch up with investment).

We therefore believe the growth prospects of our Plant Engineering & Construction companies continue to be excellent.

Portfolio Companies

As of 31 December, the Plant Engineering & Construction segment comprised the following 3 companies in 2009:

a) Langbein & Engelbracht

Date of acquisition May 2004Managing Director Dr. Peter EngelmannLegal domicile Bochum, Germany

With branches in Bochum/Germany and Shanghai/ China, Langbein & Engelbracht GmbH (L&E) is a globally operating machine-construction company focusing on paper, surface technology and process technology. Boasting a long tradition, the company develops, produces and installs custo-mised systems for leading manufacturers in the following industries: automotives, chemicals, paper, synthetics, packaging, wood processing and waste incineration.

b) SwissTex

Date of acquisition December 2006Managing Director Hans Peter Locher, André LienertLegal domicile Winterthur/Switzerland

Based in Winterthur/Switzerland, SwissTex AG develops, manufactures and distributes systems for the production of technical and industrial yarns (T&I) and bulk continuous filaments (BCF).

c) Hering

Date of acquisition January 2004Managing Director Dr. Peter EngelmannLegal domicile Gunzenhausen

Hering AG, a well-established name in the heat-exchanger sector, has been a leading internatio-nal supplier of oil-purification systems for many years. This systems-construction company deve-lops and manufactures equipment such as heat exchangers, ventilators, dryers and vacuum units. Hering supplies well-known manufacturers in the following industries: chemicals, foodstuffs, envi-ronmental protection and cooling technology.

3. Business Services



Business Services


In 2009, the Business Services segment earned turnover revenue of EUR 96.2 million (prior year: EUR 83.2 million), or roughly 24% (prior year: 17%) of the total turnover revenue of the BAVARIA Group. During the fiscal year, 3 new companies were added to the Business Services segment: Osny Pharma (acquired in March 2009) plus the 2 Spanish aluminium-foil makers Sabiñánigo and Inasa (acquired in December 2009).

Trends in the Business Services Sector

Our portfolio company Xenterio experienced a significant loss of turnover due to insourcing by its key customers. On the other hand, we were able to implement drastic cost-cutting, which enabled us to mitigate the original losses by 75%, despite the fact that turnover had declined to one third of its previous amount. Generating additional turnover is thus of vital importance to Xenterio and will be its primary objective in 2010.


At EUR 96.2 million, sales revenues were about 16% higher than the prior year. This increase was primarily due to the contribution of the Hunsfos Fabrikker company (turnover of EUR 38.5 million), which was consolidated for the first time on 31 December 2008 (i.e. as of January 2009). While the overall segment result of EUR -1.0 was a significant improvement over the prior year’s loss of EUR -7.2 million, this included extraordinary gains of EUR 7.4 million. If we exclude this extraordi-nary effect, we arrive at a 2009 segment result of only EUR -8.4 million.


Depreciation amounted to EUR 4.0 million (prior year: EUR 1.8 million), while investments for the year amounted to EUR 1.4 million (prior year: EUR 1.5 million). Since extensive capacity replace-ment/expansion investments had already been made in 2008, a far smaller scope of investment was required in the reporting year.

In the wake of our new acquisitions, the segment’s total workforce increased from 538 in 2008 to 618 in 2009.


Generating additional turnover will be a key focus for all the companies in the Business Services segment in 2010 and subsequent years. Osny Pharma has yet to undergo restructuring in early 2010, but will then be well positioned going forward. All the other portfolio companies in this segment have performed well, managing to stabilise their turnover and earnings. In future, we will jointly tackle certain new markets beyond paper and aluminium foil.

96,203

259,291

48,052


36 37

Portfolio companies

As of 31 December 2009, our Business Services segment comprised 5 companies:

a) Xenterio

Date of acquisition January 2008Managing Director Hans Joachim HermannLegal domicile Offenburg, Germany

Xenterio traces its origins back to the 1960s, and the establishment of the now defunct AEG-Telefunken. As a so-called provider of “EMS” (Electronic Manufacturing Services), Xenterio offers a wide range of partnership options in the field of electronics manufacturing. The firm’s core business consists of the production and rigging of network systems for the telecommunications market. The company’s services range from industrialisation (through mass production) to after-sales services.

b) Hunsfos

Date of acquisition December 2008Managing Director Jan-Tore Vale, Mark GoosemanLegal domicile Vennesla / Norway

The Hunsfos Fabrikker paper mill was established in Vennesla, Southern Norway in 1886. Today, Hunsfos’ entire product range is made using sustainable, environmentally friendly cellulose pulp. This not only conforms to BAVARIA’s environmental standards but also helps Hunsfos adapt to customer/end-user requirements. The firm’s 3 most important business segments are unvarni-shed speciality paper, “high white” solid fibreboard lamination, and so-called “transfer paper” for the textile industry.

Hunsfos boasts an annual production capacity of 58,000 tons, all of which is earmarked for ex-port. While its main sales market is Europe, Hunsfos also supplies customers in Asia as well North and South America.

c) Osny Pharma

Date of acquisition March 2009Managing Director Sean HigginsLegal domicile Osny / France

Osny Pharma produces medications administered orally or in the form of sprays. As a “Contract Research Organisation” (CRO), Osny Pharma participates in all phases of synthetic development of active agents, including official certification and manufacture of the finished pharmaceutical product. Thus, Osny Pharma’s customers benefit from its smooth and reliable one-stop service and experience in all phases of synthesis, right up to the certification phase. Osny Pharma also offers the made-to-order development of pharmaceutical agents on a laboratory or pilotplant sca-le, as well as pharmaceutical analysis.

d) Sabiñánigo

Date of acquisition December 2009Managing Director Francisco Ruba AlamañacLegal domicile Sabiñánigo / Spain

The Sabiñánigo aluminium-foil factory was established in 1927 in Sabiñánigo, Huesca (Spain), 120 km north of Zaragoza. Able to look back on an eventful history, the operation today produces high-grade aluminium foil used in packing solutions for the foodstuffs, cosmetics and pharmaceu-tical industries. The plant’s flexible approach to production and stringent service orientation allow Sabiñánigo to keep pace with fast-changing customer requirements. Sabiñánigo has a production capacity of about 22,500 tonnes of foil. The plant’s products are marketed primarily in Central Europe and Spain.

e) Inasa

Date of acquisition December 2009Managing Director Miguel LizarragaLegal domicile Irurtzun / Spain

The Inasa aluminium foil factory was originally established as a cable works in 1957 in Irurtzun (near Pamplona). In 1968, the plant began producing aluminium foil, switching over to the “conti-nuous casting” process in 1980. Inasa’s foil products are used not only in the kitchen, but also in sophisticated construction solutions, high-grade packaging for beverages, foods and cosmetics, as well as in a range of technical goods.


38 39

III. Asset, financial and profit position of the GroupIn fiscal year 2009, the turnover of the BAVARIA Group sank to EUR 403.6 million after EUR 485.4 million in the prior year. This trend was mainly due to the protracted global economic crisis. The main contribution to total turnover once again came from the Kienle+Spiess Group (EUR 143.2 million).

The BAVARIA Group is on a solid financial footing, as reflected in a financial resources fund (in-cluding short-term securities) totalling EUR 76.2 million (prior year: EUR 62.9 million) and bank debt of EUR 19.6 million (prior year: EUR 8.8 million). The net cash balance of the BAVARIA Group rose from EUR 54.1 million in 2008 to EUR 56.6 million in fiscal year (+EUR 2.5 million). The increase in net financial resources was mainly driven by changes in the scope of consolidati-on (increase of EUR 8.9 million).

The result before extraordinary expenses, depreciation & amortisation, financial result and taxes (EBITDA), which had amounted to EUR 50.4 million in fiscal year 2008, declined to EUR 36.3 million in fiscal year 2009 (including the reversal of negative goodwill). The 2009 Group surplus amounted to EUR 3.6 million, compared to EUR 23.2 million in the prior year. A particularly large contribution to the annual surplus of the prior year had come from the deconsolidation of ALMEC S.p.A. (EUR 19.0 million). In the current year, the Group surplus was particularly impacted by the formation of provisions for litigation costs in the amount of EUR 8.4 million.

Below are the main effects of consolidation on the annual Group surplus for both the present and prior reporting year:

[in EUR Mio.] 2009 2008

Negative variances from capital consolidation (negative goodwill) 48.7 13.1

Gains from deconsolidation 0.0 19.1

Losses from deconsolidation -0.2 -0.5

Amortisation of goodwill -0.9 -1.1

Gains/losses from debt consolidation 0.1 -0.5

47.7 30.1

For a complete overview of debit and credit variances from capital consolidation, please see the Notes

Group management Report – Asset, financial and profit position of the Group

Balance sheet ratios

The Group’s balance sheet total rose from 321.7 million in fiscal year 2008 to EUR 342.1 million in fiscal year 2009.

Assets

Fixed assets of EUR 111.9 million (prior year: 104.5 million) accounted for 32.8% (prior year: 32.5%) of the balance sheet total. Fixed assets consisted mainly of commercial land and buildings in the amount of EUR 35.6 million (prior year: EUR 33.8 million) as well as machinery and equip-ment in the amount of EUR 56.0 million (prior year: EUR 53.3 million).

Also included on the asset side are financial resources, consisting of cash and cash equivalents plus short-term securities, in the amount of EUR 76.2 million (prior year: EUR 62.9 million). Thus, financial resources represented about 22.2% of the BAVARIA Group’s balance sheet total (prior year: 19.6%).

Equity and Liabilities

The Group’s equity capital (including negative goodwill from capital consolidation) fell from EUR 128.1 million to EUR 114.7 million.

As of 31 December 2009, pension provisions amounted to EUR 65.7 million (prior year: EUR 59.1 million).

Financial liabilities amounted to EUR 19.6 million (prior year: EUR 8.8 million) in 2009. EUR 2.7 million in bank liabilities was added during the reporting year as a result of the initial consolidation of the new portfolio companies. Moreover, one of the Kienle + Spiess Group’s subsidiaries took out an additional investment loan (to finance a new company building), of which EUR 8.4 million was still outstanding at year’s end (prior year: EUR 3.3 million).

For a detailed statement of the BAVARIA Group’s cashflows and number of employees, please see the Notes.

Group management Report – Asset, financial and profit position of the Group

40 41

IV. InterdependenciesBAVARIA Industriekapital AG is majority-owned by AS Vermögensverwaltungs GmbH, Gräfelfing. We have therefore prepared a “Report on Relationships with Affiliated Companies”, as required under § 312 of the German Stock Company Act (AktG). This report concludes with the following affidavit: “In conclusion we hereby declare that, to the best of our present knowledge, BAVARIA Industriekapital AG, as well as all of its subsidiaries that conduct business under the law, received adequate (arm’s-length) consideration in return for every legal transaction”.

V. Significant events after the reporting dateThere are no such significant events to report.

VI. Future risks and opportunitiesThe future business performance of the BAVARIA Group is subject to risks and opportunities closely associated with the Group’s business model. The BAVARIA Group’s risk management is geared toward minimising risks while evaluating potential earnings and the risks they entail. As a rule, we do not conclude profit-transfer agreements, nor do we grant sureties or guarantees on behalf of our subsidiaries. Thus, any losses or write-downs by individual subsidiaries generally do not have a financial impact on the holding level. In order to promptly anticipate a potential crisis at any of its investee companies, BAVARIA collects and analyses a slew of key data from its subsidiaries on a monthly basis.

Risks and opportunities of company acquisition

When it comes to identifying and acquiring turnaround companies, BAVARIA’s specialised acqui-sition team can draw on many years of experience as well as an extensive support network. Thus, BAVARIA is well poised to exploit a wealth of entrepreneurial opportunities. Admittedly, the poten-tial returns of investing in “companies with improvement potential“ makes this a highly competitive market sector. However, BAVARIA’s credibility as an experienced and successful restructuring expert gives us a competitive edge over our rivals, many of whom are less versed in the legalities and other technical ins and outs of this niche business.

Risks and opportunities of company disposal

Due to changes in the general business environment, the resale of an investee company can sometimes prove difficult. The present financial crisis, whose impact is still being felt, is likely to make company resales and possible exit strategies (e.g. stock market floatation) more complica-ted and/or less profitable. Thus, we cannot exclude negative effects on the assets, finances and profitability of the Group. Nonetheless, our long experience and our well-established BAVARIA network will allow us to maximise the resale opportunities available to us.

Risks and opportunities of restructuring distressed companies

In certain cases, BAVARIA may acquire a stake in a company whose restructuring proves to be more challenging than originally expected. In such a case, one cannot exclude that the takeover company will ultimately become insolvent, due to its difficult point of departure and/or a premature acquisition decision by BAVARIA. Insofar as the restructuring were to prove unsuccessful, there is always the risk that the capital and effort invested – specifically the purchase price paid and any residual claims – may be lost.

Group management Report – Interdependencies, Significant events after the reporting date, Future risks and opportunities

Fluctuations in price and volume on capital and commodity markets can also have a negative impact on the assets, finances and profits of the various BAVARIA Group companies. We counter such risks on the individual company level by continually monitoring a number of early-warning indicators and reacting promptly. Moreover, the BAVARIA Executive Board maintains close contact with the managers of each investee company in its portfolio.

The Executive Board also receives a monthly report from each company and is often represented on a company’s Supervisory Board and/or advisory committee. Nonetheless, this does not exclude the risk that our management information system may fail to ascertain important data, or may ascertain such data in an erroneous or untimely fashion. This in turn can lead to incorrect decisions.

Although the shareholdings of the BAVARIA Group run a wide gamut of industries, thus ensuring risk diversification, unfavourable business cycles may exert a negative impact on the assets, finances and profits of the Group.

Group-level default risk for BAVARIA Industriekapital AG

One of the cornerstones of BAVARIA’s investment strategy is to limit the risk of loss as far as possible by means of contractual provisions and safeguards. For instance, the Group generally refrains from concluding internal profit-transfer agreements. As in the past, the Executive Board of BAVARIA will also avoid assuming liability on behalf of subsidiaries, except in exceptional cases and even then only to a limited degree. The main risk faced by BAVARIA involves quantifying the time and expense required to rehabilitate a given investee company. Insofar as this estimate is inaccurate, there is the corollary risk that the investee company may become insolvent. This risk is monitored on a continual basis.

Personnel risk

The successful acquisition, rehabilitation and resale of companies requires a great deal of specia-lised know-how and managerial experience. To implement its business model, BAVARIA must ensu-re that it has sufficient qualified personnel at its disposal. Due to our proven track record, we gene-rally receive a surfeit of applications from highly qualified candidates for each job vacancy. Among the factors that make us an attractive employer: 1) Our careful and selective personnel recrui ting process. 2) The substantial independence that we grant our on-site restructuring managers. 3) Our competitive, performance-based compensation package. Deploying only the most competent ma-nagers is one of the key success factors of BAVARIA’s business model.

Other personnel risks at Group level (i.e. for BAVARIA Industriekapital AG) are those associated with the performance and conduct of individual key managers. Thus, we are steadily expanding our management team to offset this risk.

Financing, interest rate and currency risks

From the standpoint of BAVARIA’s management, the future performance of the Group also de-pends in large part on risks associated with currencies, interest rates and financing, since these can have a marked influence on the Group’s assets, finances and profits. Generally speaking, the various companies of the BAVARIA Group provide their own financing via equity capital. External debt is assumed only on a case-by-case basis. Given the present fi-nancial and economic crisis, refinancing may prove difficult for individual investee companies, so that it may no longer be possible to obtain financing without a surety guarantee from the Holding Company.

Nonetheless, the risks associated with a spike in interest rates or with a delay in obtaining credit will have a relatively minor effect on the BAVARIA Group, especially in comparison to traditional private equity funds, whose business model relies heavily on external financing.

Group management Report – Future risks and opportunities

42 43

Since the BAVARIA Group operates mainly in the Eurozone, currency-related risks are deemed to be relatively low as well.

Tax-related risks

We continually monitor the tax-related risks that the BAVARIA business model gives rise to. Due to the fact that income from shareholdings held by corporations is generally tax exempt, BAVARIA falls into a low tax bracket. The foregoing is based on the assumption that § 8b of the German Corporate Tax Act (KStG) is applicable to BAVARIA.

Risk management system

The BAVARIA Executive Board has instituted an early-warning system to identify any risks that may pose a significant danger to the Company. A corresponding risk report is updated once every six months. The subsidiaries of the Holding Company (AG) are not covered by the formal risk-management system, however.

Group management Report – Future risks and opportunities

VII. General forecastOn the one hand, the future success of BAVARIA Industriekapital AG depends on the perfor-mance of its existing portfolio of companies. On the other hand, this will also be strongly influ-enced by future acquisitions and disposals. On the strength of its present portfolio, BAVARIA Industriekapital AG was able to begin the year 2010 on a positive note. For a detailed discussion of the outlook for individual portfolio segments, please see Section III (“Shareholding Portfolio”).

Looking ahead at 2010, we do not expect to see a significant recovery in demand. Thus, we will be focusing on making further cuts in our fixed costs. On the other hand, we are optimistic about our chances of winning additional market share. A key advantage in this context is that the entire BAVARIA Group is almost totally free of bank debt, placing it on far more solid footing than most competitors. We intend to be very restrained in our investment activities, giving them the green light only insofar as they can be justified by further increase in demand.

Although our industry is becoming more and more competitive, BAVARIA is likely to continue deri-ving a key portion of its growth from new acquisitions, especially in the German-speaking parts of Europe. Our track record of successfully restructured companies speaks for itself in this regard. This means that we will continue to strive for 3 to 4 new acquisitions per year in 2010 and beyond, insofar as we can find companies that are realistically valued. In selecting our acquisition targets, we will tend to favour high quality and larger size.

Besides focussing on our traditional core business of taking over distressed companies with turnaround potential (EBIT margin below 3%) we also intend to grow by ramping up our on-going “add-on” acquisitions, thus supplementing our existing investee companies. Western Europe re-mains a critical and attractive growth market for BAVARIA. Even when it comes to difficult issues such as deciding on personnel cutbacks, we have demonstrated our ability to achieve coopera-tion on the part of unions and works councils. This, along with share prices, will ensure that we will find plenty of buying opportunities.

Despite the current financial and economic crisis, BAVARIA is in a position to maintain its existing portfolio of investee companies over the mid-to-long term. Since we are presently not under any pressure to sell off our portfolio, it is difficult to estimate when the next profitable disposals will occur.

Given these background conditions, it is impossible to make a specific forecast of the BAVARIA Group’s future turnover and profitability. However, on the strength of our existing portfolio and a successful start to fiscal year 2010, we the Executive Board expect the coming years to be profita-ble ones for BAVARIA Industriekapital AG, now that all the prerequisites for success are in place.


The Executive Board

Reimar Scholz Harald Ender

Group management Report – General forecast


CONSOLIDATED FINANCIAL STATEmENTS

46 47

Consolidated profit and loss account for 2009 [EUR] 2009 2008

1. Sales 403,599,811.15 485,376,755.61

2. Increase or reduction of inventories in finished and non-finished products

-12,250,428.66 -6,587,589.53

3. Other own work capitalised 1,358,391.47 1,677,730.19

4. Other operating income 61,286,054.07 47,090,928.52

5. Cost of materials

a) Raw materials, supplies and merchandise for resale

-187,778,539.29 -265,258,504.42

b) Purchased services -32,496,325.80 -23,506,910.46

-220,274,865.09 -288,765,414.88

6. Personnel costs

a) Wages and salaries -97,080,099.76 -95,711,128.87

b) Social insurance and other social charges and benefits

-31,358,678.56 -28,629,251.16

-128,438,778.32 -124,340,380.03

7. Depreciation

a) on intangible and tangible fixed assets

-20,874,890.30 -15,796,279.19

b) on group level -914,292,06 -1,111,936.57

-21,789,182.36 -16,908,215.76

8. Other operating expenses -69,009,723.87 -64,066,621.91

9. Dividends from associated companies

0.00 6,080.00

10. Other interest and similar income 844,024.42 2,126,569.79

11. Depreciation on financial assets and on marketable securities of the current assets

0.00 -26,810.59

12. Interest and similar expenses -1,332,707.93 -1,149,648.69

13. Profit on ordinary operations 13,992,594.88 34,433,382.72

14. Extraordinary income 20,079,003.97 0.00

15. Extraordinary expenses -29,605,351.60 -1,983,253.95

16. Extraordinary result -9,526,347.63 -1,983,253.95

17. Tax on income and earnings 1,471,035.64 -7,228,214.71

18. Other taxes -2,300,100.61 -2,000,647.14

19. Total taxes -829,064.97 -9,228,861.85

20. Net income 3,637,182.28 23,221,266.92

21. Net profit carried forward from previous year

21,467,187.06 20,644,186.95

22. Withdrawal from earned surplus 0.00 1,701,297.60

23. Appropriation to earned surplus -528,185.94 -1,298,052.75

24. Income from capital decrease 0.00 220,500.00

25. Appropriation to capital reserve 0.00 -220,500.00

26. Withdrawal of treasury stock 0.00 -2,615,754.36

27. Profit relating to other shareholders

-201,045.92 -518,688.20

28. Consolidated profit 24,375,137.48 41,134,256.16

48 49

Consolidated balance sheet as of 31 December 2009Assets [EUR] 31.12.2009 31.12.2008

A. FIXED ASSETS

I. Intangible assets

1. Patents, trademarks, licenses and similar rights

2,442,680.74 1,087,160.34

2. Goodwill 6,258,474.68 7,210,394.61

8,701,155.42 8,297,554.95

II. Property, plant & equipment

1. Land, leasehold rights and buildings incl. buildings on leased land

35,632,711.26 33,755,955.25

2. Machinery and equipment 56,046,993.21 53,282,417.78

3. Other equipment, plant and office equipment

3,500,053.65 3,692,998.56

4. Advance payments and construction in-progress

7,997,955.13 5,439,931.42

103,177,713.25 96,171,303.01

III. Financial assets

1. Shareholding in affiliated companies

310.00 1,560.65

2. Investments 17,563.24 36,685.79

3. Long-term securities 229.74 0.00

4. Other loans 1.00 1.00

18,103.98 38,247.44

111,896,972.65 104,507,105.40

B. CURRENT ASSETS

I. Inventories

1. Raw materials and supplies 22,667,630.56 34,900,560.94

2. Work-in-progress 22,714,226.56 18,311,663.78

3. Finished products and merchandise

17,387,963.58 21,361,168.16

4. Advanced payments 458,231.01 495,054.30

63,228,051.71 75,068,447.18

II. Account receivables and other assets

1. Receivables from trade 65,452,124.58 65,014,129.00

2. Receivables from group companies

56,218.30 65,944.86

3. Other assets 21,816,439.81 11,940,742.59

87,324,782.69 77,020,816.45

III. Marketable securities

1. Treasury stock 1.826.238,69 1,298,052.75

2. Other marketable securities 5.846.495,25 5,933,516.63

7,672,733.94 7,231,569.38

IV. Cash and cash equivalents 70,358,541.50 56,981,230.65

228,584,109.84 216,302,063.66

C. PREPAID EXPENSES 1,596,466.65 936,222.13

TOTAL ASSETS 342,077,549.14 321,745,391.19

Equity and Liabilities [EUR] 31.12.2009 31.12.2008

A. EQUITY

I. Subscribed capital 6,394,500.00 6,394,500.00

II. Capital reserve 8,605,500.00 8,605,500.00

III. Revenue reserve 1,831,738.69 1,303,552.75

1. Restricted reserve 5,500.00 5,500.00

2. Reserve for treasury stock 1,826,238.69 1,298,052.75

IV. Consolidated profit 24,375,137.48 41,134,256.16

V. Offsetting item for holdings of other shareholders

1,292,706.24 1,088,367.56

VI. Difference from currency translation

1,020,609.41 -6,074.46

43,520,191.82 58,520,102.01

B. DIFFERENCE FROM CONSOLIDATION OF CAPITAL

71,213,390.24 69,603,494.91

C. ACCRUALS

1. Accruals for pensions and similar commitments

65,699,074.49 59,096,875.45

2. Tax reserve 3,987,821.91 8,980,460.26

3. Other accruals 48,565,805.01 36,727,458.54

118,252,701.41 104,804,794.25

D. LIABILITIES

1. Debt due to banks 19,592,583.82 8,775,303.49

2. Advanced payments received on orders

6,945,228.30 5,032,537.57

3. Trade payables 59,498,886.56 58,863,736.26

4. Payables to affiliated companies

0.00 92,000.00

5. Other liabilities 16,121,833.46 13,675,301.92

102,158,532.14 86,438,879.24

E. DEFERRED INCOME 6,932,733.53 2,378,120.78

TOTAL EQUITY AND LIABILITIES 342,077,549.14 321,745,391.19

50 51

Consolidated statement of changes in equity[EUR thousands] Share

numbers in circula-

tion

Sub-scribed capital

Capital reserve

Earned surplus

Difference from currency

translation

Offsetting item for

holdings of other share-

holders

Conso-lidated

profit

Group equity

1 January 2008 6,615,000 6,615 8,385 1,707 269 1,815 39,827 58,618

Net income 2008 23,221 23,221

Dividend payouts -19,183 -19,183

Capital decrease -220,500 -220 220 0

Withdrawal of treasury stock

-2,616 -2,616

Withdrawal from earned surplus

-1,701 1,701 0

Appropriation to the earned surplus

1,298 -1,298 0

Foreign currency differences

-275 0 -275

Shares of other partners

-727 -518 -1,245

31 December 2008 6,394,500 6,395 8,605 1,304 -6 1,088 41,134 58,520

Net income 2009 3,637 3,637

Dividend payouts -19,667 -19,667

Capital decrease 0

Appropriation to the earned surplus

528 -528 0

Foreign currency differences

1,026 1,026

Shares of other partners

205 -201 4

31 December 2009 6,394,500 6,395 8,605 1,832 1,020 1,293 24,375 43,520

Consolidated statement of cash flows[EUR thousands] 2009 2008

Consolidated net income ahead of extraordinary item 13,163 25,204

Earnings proportions of minority shareholders without payment-effective portions

189 7

Depreciation on fixed assets 21,789 16,908

Gains on sales of assets 131 -68

Changes in accruals -1,669 -2,488

Dissolution of differences from the capital consolidation -48,682 -13,094

Income from the final consolidation of group companies 0 -19,066

Other payment-ineffective changes -1,479 574

Gross cash flow -16,558 7,977

Change in inventories 29,429 16,793

Change in receivables, other assets and rest of the assets 18,817 21,398

Change in liabilities and rest of total equities & liabilities -18,504 -7,979

Proceeds from extraordinary items 3,420 0

Cash flow from current operations 16,604 38,189

Payments for capital expenditure into the intangible and tangible fixed assets

-13,572 -17,302

Currency differences in fixed assets -1,355 1,831

Payments from disposals of items ofintangible and tangible fixed assets 11,301 957

Payments from disposals of items of the financial assets 0 5,599

Payments for capital expenditure into the financial assets -93 -4,237

Cash flow from capital expenditure activities -3,719 -13,152

Payments for the purchase of own shares -500 -2,239

Payouts to shareholders -19,667 -19,184

Payouts to minority shareholders -186 -132

Pledging of cash and cash equivalents -512 0

Proceeds from borrowing of financial liabilities 8,116 3,854

Repayments of financial liabilities 0 -2,591

Cash flow from financing activities -12,749 -20,292

Payment-effective change of the cash and cash equivalents 136 4,745

Net funds addition from change in scope of consolidation 11,615 3,092

Currency differences 1,027 -418

Cash and cash equivalents at start of the period 62,765 55,346

Cash and cash equivalents as of 31 December 75,543 62,765

Composition of cash and cash equivalents [TEUR] 31.12.2009 31.12.2008

Cash-in-hand, balances with banks 70,359 56,981

Less cash at bank as deposit -662 -150

Short-term marketable securities 5,846 5,934

75,543 62,765


NOTES TO THE CONSOLIDATED FINANCIAL STATEmENTS

54 55

I. BAVARIA Industriekapital AG – Company profileBAVARIA Industriekapital AG was established on 3 April 2002. The Company is legally domiciled in Munich, Germany, and has been entered into the trade register of the Munich District Court since 8 August 2002 (Section B: No.143 858). The initial public offering of the Company’s shares (ISIN DE0002605557) took place on 26 January 2006 within the Entry Standard (Open Market) segment of the Frankfurt Stock Exchange.

BAVARIA Industriekapital AG is an industrial holding company whose business model comprises the acquisition, restructuring and rehabilitation of distressed firms. Thus, BAVARIA does not limit itself to merely holding and managing its shareholdings, in contrast to traditional holding com-panies. Rather, BAVARIA pursues three objectives simultaneously: cutting costs, tapping new sources of turnover and saving imperilled jobs wherever possible.

The firm sets great store in the initiative of the investee company’s workforce when it comes to boosting innovation and preventing all forms of waste, such as excessive reject rates or unne-cessary delays in the production process. After all, a company must exhibit sustained profitability before it can offer secure workplaces. The firm works proactively to restructure its investee com-panies, while deploying its own in-house team of specialists to advise and support management on site.

II. Scope of consolidationBesides the parent Company (BAVARIA Industriekapital AG), the Group’s consolidated annual report comprises those affiliates in which BAVARIA directly or indirectly controls a majority of voting rights and/or over which it otherwise exercises centralised control.

The various affiliated companies included in BAVARIA Industriekapital AG’s Consolidated Group Annual Report are listed in the “Schedule of Shareholdings”. A total of 6 companies (essentially shell entities without active operations) were excluded from the consolidated statements due to their negligible importance. Teksid Germany GmbH (Heilbronn, Germany) Elfotec AG (Mönchalt-dorf, Switzerland) and Elfotec Ltd. (Annacotty, Ireland) were excluded from the Consolidated Group Annual Report, as per § 296 Para. 1, No. 1 of the German Commercial Code (HGB), due to the fact that these companies are presently being unwound and/or liquidated.

The BAVARIA Group of consolidated companies is subject to continual change, so that a year-on-year comparison of Consolidated Group Annual Reports is sometimes problematic. Due to the differing business activities of the various consolidated companies, the specific items of the Con-solidated Group Balance Sheet and Profit/Loss Statement will tend to fluctuate from year to year.Below is a summary of the changes in the scope of consolidation (group of consolidated compa-nies) in relation to the Consolidated Group Annual Report of 31 December 2008, along with key annual performance data for each respective company:

Osny Pharma SAS, Osny/France (Osny Pharma) as well as Osny Pharma Holding SAS, Osny/France (Osny Holding) were acquired in March 2009 and initially consolidated as of 31 March 2009. The equity capital and balance sheet total included in the first consolidation amounted, respectively, to EUR 20.1 million and EUR 0.1 million for Osny Pharma and EUR 0.9 million and EUR 0.9 million for Osny Holding. In 2009, the consolidated annual loss from these companies totalled EUR -1.3 million.

Notes to the consolidated financial statements – BAVARIA Industriekapital AG – Company profile, Scope of consolidation

56 57

Tech-FORM SAS, Auxi-le-Château/France (Tech-FORM) was acquired in June 2009 and initi-ally consolidated as of 30 June 2009. The equity capital and balance sheet total included in the first consolidation amounted to EUR 10.0 million and EUR 2.0 million, respectively. The consolidated annual loss for 2009 for this firm amounted to EUR -0.1 million.

Austria Druckguss GmbH & Co. KG, Gleisdorf/Austria (ADG KG) as well as Austria Druckguss Verwaltungs GmbH, Gleisdorf/Austria (ADG GmbH) were acquired on June 2009 and initially consolidated as of 30 June 2009. The equity capital and balance sheet total included in the first consolidation amounted to EUR 14.3 million and EUR 5.5 million, respectively, for ADG KG, and EUR 0 million and EUR 0 million, respectively, for ADG GmbH. In 2009, the consolidated annual loss from these firms amounted to EUR -2.4 million.

Laminados Sabiñánigo S.L. (Sabiñánigo) in Sabiñánigo/Spain (near Huesca) was acquired in December 2009 and initially consolidated as of 31 December 2009. The initially consolidated balance sheet total and equity capital were EUR 17.0 million and EUR 4.3 million, respectively.

NASA Foil S.A. (Inasa) in Irurtzun/Spain (near Pamplona) was acquired in December 2009 and initially consolidated as of 31 December 2009. The initially consolidated balance sheet total and equity capital were EUR 40.0 million and EUR 27.4 million, respectively.

III. Reporting date for the Consolidated Group Annual ReportThe key reporting date for the Consolidated Group Annual Report is 31 December 2009, which is also the reporting date of the parent company, BAVARIA Industriekapital AG.

BAVARIA’s fiscal year corresponds to that of its key operating subsidiaries. Insofar as a sub-sidiary experiences an event with a significant financial impact between the reporting date and the date of preparation of this Consolidated Annual Report, said event is reported in the Consolidated Group Annual Report.

Notes to the consolidated financial statements – Reporting date for the Consolidated Group Annual Report

IV. Consolidation principles1. Principles of financial reporting

The Annual Report of BAVARIA Industriekapital AG (as of 31 Dec 2009) was prepared in compli-ance with the German Commercial Code (HGB) and the German Stock Corporation Act (AktG). The annual reports of the individual subsidiaries were prepared as per the guidelines of §§ 238 et seq. HGB, and specifically comply with the stipulations for incorporated companies set forth under §§ 264 et seq. HGB, as well as with the provisions of the German Stock Corporation Act.

The present Consolidated Group Annual Report was prepared as per §§ 290 et seq. of the Ger-man Commercial Code (HGB).

Some of the items whose disclosure on the Balance Sheet and/or Profit & Loss Statement is mandated by law have been presented in summary form. The respective itemisation or explanatory notes can be found in the Notes.

The Group Profit & Loss Statement was prepared using the Total Cost Method.

2. Consolidation procedures

Method of capital consolidation § 301, Para. 1, Line 2, No.1 of the German Commercial Code (HGB) provides for alternative me-thods of capital consolidation for purposes of financial reporting. Accordingly, the Company has opted to use the Book Value Method, and thus reports its shareholdings in the various consolida-ted companies at acquisition value (as per § 301, Para. 2 HGB).

Any resulting debit variances that cannot be otherwise allocated are capitalised on the Group balance sheet and amortised over a useful life of 10 years.

Depending on their nature, credit variances resulting from capital consolidation are included on the Group Balance Sheet either under equity capital or external capital (debt).

Other consolidation proceduresThe following subsidiary-specific items were eliminated in the course of consolidation: receiva-bles, liabilities, sales revenues, miscellaneous expenses, miscellaneous income, interest income and associated expenses, as well as interim Group results. All significant consolidation procedu-res with an effect on income are subject to tax accrual and deferral, insofar as the variance in taxes payable is expected to be offset in subsequent fiscal years.

Notes to the consolidated financial statements – Consolidation principles

58 59

V. Accounting and valuation methodsAs a rule, the individual financial statements of the companies included in the BAVARIA Industrie-kapital AG Consolidated Group Annual Report were prepared in accordance with the uniform accounting and valuation principles set forth below:

Valuations are generally made under the assumption of ongoing company operations (going con-cern principle) as per § 252, Para. 1, No. 2 of the German Commercial Code (HGB).

Intangible assets that have been purchased against payment are capitalised at acquisition cost minus scheduled linear amortisation. As a rule, their useful life is assumed to be 3 - 5 years, but company goodwill is amortised over a life of 10 years.

Tangible assets (PP&E) are capitalised at acquisition cost and are depreciated linearly over their useful life. Tangible assets with a net worth of up to EUR 150 are fully depreciated in the year of acquisition. Financial assets are valued at acquisition cost or marked down to fair market value (if applicable) as of the reporting date. Financial assets are valued at acquisition cost and/or marked down to fair market value(if necessary).

Inventories are valued at acquisition/manufacturing cost and/or marked down to fair market value (if necessary), while allowing for reasonable administrative costs.

Receivables and miscellaneous assets are reported at face value minus a one-off allowance for general default risk. Doubtful receivables are subject to individual valuation. Receivables denomi-nated in foreign currencies are valued at the transaction exchange rate or marked down to their fair market value (if necessary) as of the reporting date.

Securities are valued at acquisition cost and/or marked down to fair market value (if necessary).

Liquid assets are reported at face value. Amounts denominated in foreign currencies are valued at the exchange rate prevailing on the reporting date, insofar as this does not generate any unre-alised gains.

Pension provisions have been formed to cover contractually binding pension claims. The most recent actuarial tables published by Prof. Dr. Klaus Heubeck were used as the basis for calcula-ting the amount of these provisions. The actuarial interest rate applied was 5.25%.

Tax provisions and miscellaneous provisions were formed in accordance with the customary professional due diligence, while taking into account all identifiable risks and potential obligations (even when not clearly definable). Tax reserves were calculated under the assumption that § 8b of the German Corporate Tax Act (KStG) is applicable to BAVARIA Industriekapital AG.

Liabilities are reported at their repayment amount. Liabilities denominated in foreign currencies are reported at the transaction rate or at a lower asking price (if applicable) as of the reporting date.

Notes to the consolidated financial statements – Accounting and valuation methods

Currency translations

The functional currency used by the group parent, BAVARIA Industriekapital AG, is the euro (EUR).

Insofar as the annual reports of individual subsidiaries are denominated in foreign currencies, all amounts are restated using the Functional Currency Method.

All balance sheet items of foreign companies included in the consolidated Group were converted into EUR using the average exchange rate on the reporting date – with the exception of equity capital (subscribed capital, reserves, profit/loss carried forward), which was restated using past exchange rates. Variances in equity capital due to currency translations (i.e. because of year-by-year fluctuations in exchange rates) were posted under “equity capital variances from currency translation”, with no effect on income.

Revenues and expenses were restated using the average annual exchange rate. The annual result from the restated Profit & Loss statement was transferred to the balance sheet and the variance was posted under “equity capital variance from currency translation” without affecting income. In 2009, currency conversion variances of EUR 1,026 thousand were allocated to equity capital in an income-neutral manner.

Cashflow Statement

The financial resources fund consists of the cash balances, bank deposits/credits and short-term securities that make up working capital, with the exception of the Company’s own shares. Since the treatment of Company shares is not yet finalised, we have opted to err on the side of conser-vatism and have excluded them from the financial resources fund in this year’s report.

Also excluded from the financial resources fund are certain bank balances of the Company in the amount of EUR 662 thousand (prior year: EUR 150 thousand), since these are subject to third-party liens.

Notes to the consolidated financial statements – Accounting and valuation methods

60 61

VI. Notes to the Balance SheetFixed assets

The development of fixed assets during 2009 is shown below:

Acquisiton and manufacturing costs

[EUR thousands] 01 Jan 2009

Additions Disposals Reclassi-fication

Currency translati-

ons

Changes in scope of consolida-

tion

31 Dec 2009


1. Patents, trademarks, licenses & similar rights 2,150 364 7 824 -1 1,057 4,388

2. Goodwill 15,227 0 38 0 0 0 15,189

17,377 364 44 824 -1 1,057 19,577

II. Fixed assets

1. Land and buildings 44,795 4,730 8,290 -50 140 8,357 49,681

2. Technical plant and machinery 75,135 4,196 11,597 5,627 1,329 18,349 93,038

3. Other equipment, office and plant furnishings 8,309 1,044 374 42 25 465 9,511

4. Advance payments/ construction in progress 5,440 3,238 1,312 -6,442 -8 7,097 8,012

133,679 13,208 21,574 -824 1,485 34,268 160,242

III. Financial investments

1. Shareholdings in affiliated companies 2 0 1 0 0 0 0

2. Investments 37 0 25 0 4 2 18

38 0 27 0 4 2 18

151,094 13,572 21,644 0 1,488 35,327 179,837

Notes to the consolidated financial statements – Notes to the Balance Sheet

Depreciation Book values

[EUR thousands] 01 Jan 2009

Addi-tions

Disposals Currency translati-

ons

Changes in scope

of conso-lidation

31 Dec 2009

31 Dec 2009

31 Dec 2008


1. Patents, trademarks, ´ licenses & similar rights 1,063 880 0 2 0 1,945 2,443 1,087

2. Goodwill 8,017 914 0 0 0 8,931 6,258 7,210

9,079 1,794 0 2 0 10,876 8,701 8,298

II. Fixed assets

1. Land and buildings 11,039 3,003 0 6 0 14,048 35,633 33,756

2. Technical plant and machinery 21,852 15,411 395 123 0 36,991 56,047 53,282

3. Other equipment, office and plant furnishings 4,616 1,567 174 3 0 6,001 3,500 3,693

4. Advance payments/ construction in progress 0 14 0 0 0 14 7,998 5,440

37,507 19,995 569 132 0 57,064 103,178 96,171

III. Financial investments

1. Shareholdings in affiliated companies 0 0 0 0 0 0 0 2

2. Investments 0 0 0 0 0 0 18 37

0 0 0 0 0 0 18 38

46,587 21,789 569 134 0 67,940 111,897 104,507

Notes to the consolidated financial statements – Notes to the Balance Sheet

62 63

Intangible assets

Consolidated goodwill for the Group changed as follows during the fiscal year (in EUR thou-sands):

2009 2008

Increase Decrease Amortised Book value Increase Decrease Amortised Book value

0 38 914 6,258 2,624 1,154 1,112 7,210

As of 31 December 2009, the Group’s consolidated goodwill was essentially attributable to the companies of the Kienle +Spiess Group (EUR 5,756 thousand) and Hering AG (EUR 385 thousand). The remaining average amortisation period for consolidated goodwill is about 6 - 7 years.

The useful life of goodwill is a uniform period of 10 years, while the useful life of industrial property rights and licenses is 3 to 5 years. Useful life is determined on the basis of the expected period of actual use. All intangible assets are depreciated linearly.

Tangible assets (PP&E)

The useful life is 3 to 10 years for fixtures and furnishings and 8 to 20 years for technical equip-ment and machinery, depending on their exact commercial use. Buildings are depreciated accor-ding to the stipulations of the German tax code.

Financial assets

The item “shareholdings in affiliated companies” includes non-consolidated holdings valued at ac-quisition price minus any necessary markdowns to fair value

Geographic distribution

The geographic distribution of fixed assets was as follows:

31 December 2009[EUR thousands]

Germany European Union Europe (non-EU) Asia Total

Intangible assets 2,849 5,722 21 110 8,701

Tangible assets 19,694 75,029 8,423 32 103,178

Financial assets 10 8 0 0 18

Total fixed assets 22,553 80,759 8,444 142 111,897

31 December 2008[EUR thousands]

Germany European Union Europe (non-EU) Asia Total

Intangible assets 3,445 4,692 31 130 8,298

Tangible assets 22,234 73,395 501 41 96,171

Financial assets 11 27 0 0 38

Total fixed assets 25,690 78,114 532 171 104,507

Working capital

(Not including securities, cash balances, or bank deposits/credits)

[EUR thousands] 31 Dec 2009 31 Dec 2008

Raw materials and supplies 22,668 34,900

Work in progress 22,714 18,312

Finished goods and merchandise 17,388 21,361

Downpayments made 458 495

Trade receivables 65,452 65,014

Receivables from affiliated companies 56 66

Other assets 21,816 11,941

150,552 152,089

“Other assets” include EUR 8,775 thousand in receivables from tax authorities.

“Trade receivables” include accounts receivable with a remaining time to maturity of more than one year totalling EUR 576 thousand. “Other assets” include assets with a remaining time to ma-turity of more than one year totalling EUR 1,293 thousand.

Equity capital

During the reporting year, equity capital declined by EUR 7,250 thousand to EUR 43,520 thousand.


Subscribed capital 6,395 6,395

Capital reserve 8,605 8,605

Retained earnings 1,832 1,304

Variance from currency translations 1,020 -6

Adjustment for minority shareholders 1,293 1,088

Group balance sheet profit 24,375 41,134

Equity capital 43,520 58,520

The Group balance sheet profit of EUR 24,375 thousand includes profits carried forward from the prior year in the amount of EUR 21,467 thousand.

Subscribed capital

Subscribed capital amounted to EUR 6,394,500. Subscribed capital has been fully paid in and con-sists of 6,394,500 no-par shares with a calculated nominal value of EUR 1.00 per share.

Notes to the consolidated financial statements – Notes to the Balance Sheet Notes to the consolidated financial statements – Notes to the Balance Sheet

64 65

Authorised capital (2005/I)

At the joint suggestion of the Executive Board and Supervisory Board, the General Shareholders’ Meeting of 10 November 2005 authorised the Executive Board (with Supervisory Board approval) to increase the Company’s equity capital by up to EUR 1,102,500 through one or more new issues of no-par, bearer shares in return for cash or in-kind contributions, at any time until 09 November 2010.

Authorised capital (2008/ I)

By resolution of the General Shareholders’ Meeting of 20 June 2008 (subsequently approved by the Supervisory Board), the Executive Board is authorised to increase equity capital by up to EUR 2,094,750 through one or more issues of shares (Authorised Capital 2008/I) at any time until 19 June 2013. The shareholders’ subscriptions rights may be waived insofar as any of the following apply:

The issue price is not significantly below the concurrently determined stock-exchange price of the shares, and the equity increase resulting from in-kind contributions does not exceed 10% of equity capital (at the time of issue).

Equity capital is to be increased by in-kind contributions for the purpose of acquiring one or more companies.

A waiver of the shareholders’ subscription rights is required in order to exercise convertible-bond rights, convertible profit-sharing rights or options.

A waiver of the shareholder’s rights is required to even out odd-lot amounts.

Contingent capital

Contingent capital (2005) – stock options for employees

As proposed by the Executive Board and Supervisory Board, the General Shareholders’ Meeting of 20 December 2005 agreed to a contingent increase in the Company’s equity capital of up to EUR 511,500, via the issue of up to 511,500 no-par bearer shares (Contingent Capital 2005). This contingent capital increase will be implemented only insofar as all the associated option rights have been issued by 31 December 2009 and exercised by 31 December 2013 (i.e. 4 years after expiry of the issuing deadline).

The contingent capital increase involves an employee profit-sharing plan and the shareholders’ legal subscription rights will be waived in this context. Accordingly, § 4 of the Company’s Articles of As-sociation was amended via the incorporation of a new paragraph.

Option beneficiaries

At any time until 31 December 2009, the Company is entitled to issue option certificates for up to 511,500 shares in one or more instalments. Said option certificates are to be allotted as follows: options for up to 127,950 shares to members of the Executive Board; options for up to 127,950 sha-res to managers of affiliated companies; options for up to 127,800 shares to key employees of the Company; options for up to 127,800 shares to other employees of the Company and/or its affiliates.

Issuing period

The aforementioned options may be distributed to the respective beneficiary (in one or more instal-ments) only within a predefined issuing window, which begins on the 12th stock-exchange trading day after a General Shareholders’ Meeting (or release of an annual or quarterly report), and ends 10 stock-exchange trading days thereafter. The life of an option is 4 years, calculated from the end of the issuing window in which it was distributed.

Exercise price per individual share

Each option (certificate) entitles the holder to 1 individual bear share. This option right is subject to specific terms and conditions set forth by the Executive Board (with Supervisory Board approval). Insofar as the options are held by members of the Executive Board, the associated rights will be subject to specific terms and conditions set forth by the Supervisory Board.

Option certificates may only be exercised in lots of at least 50. At present, no options have been granted to present or former members of the Executive Board. Since all of the issued stock options have now lapsed and are no longer exercisable, the Supervisory Board plans to adopt a correspon-ding amendment to the BAVARIA Articles of Association with regard to contingent capital. This is to be done on the basis of the general authorisation granted under § 11 of the Articles.

Contingent capital (2006/I) – convertible bonds for members of the Supervisory Board

At the recommendation of the Executive Board and Supervisory Board, the General Sharehol-ders’ Meeting of 05 September 2006 agreed to a contingent increase in the Company’s equity capital of up to EUR 49,500 through the issue of up to 49,500 no-par bearer shares (Contingent Capital 2006/I). This contingent capital increase will be implemented only insofar as the associ-ated convertible bonds are issued and the embedded options to convert said bonds to no-par shares are exercised. The shareholders’ legal subscription rights have been waived.

In December 2006, convertible bonds in the amount of EUR 49,500 were issued to members of the Company’s Supervisory Board at a minimum issue amount of EUR 0.33 per bond and a calculated nominal value of EUR 1.00 per bond. The members of the Supervisory Board exercised their conversion options fully and all convertible bonds were officially issued as of 31 December 2006 in accordance with the conversion conditions set forth on that date. As per said conditions, the conversion price was set at EUR 21.70 per bond.

Each convertible bond comes with an embedded option allowing its conversion into a single in-dividual share in the Company. A convertible bond must be held for at least two years before the option to convert can be exercised (minimum holding period). Thus, the minimum holding period expired on 31 December 2008. The life of the convertible bonds begins on the day of issuance and ends five years later, i.e. on 31 December 2011.


66 67

Capital reserve

As of the reporting date, the capital reserve amounted to EUR 8,605,500 (as in the prior year.)

Reserve for own shares

By resolution of the General Shareholders’ Meeting on 29 May 2009, the Company was autho-rised to repurchase its own shares in accordance with § 71 Para. 1, No. 8 of the German Stock Corporation Act (AktG). Thus, shares amounting to up to 10% of the Company’s equity capital (at the time of repurchase) may be repurchased until 28 December 2010. This authorisation may be exercised once or more than once, in whole or in part. The new authorisation to repurchase own shares supersedes the previous authorisation adopted by the General Shareholders’ Meeting on 20 June 2008. Moreover, the following additional terms apply:

The Company may not use the authorisation to trade in its own shares.

The Executive Board is entitled (subject to Supervisory Board approval) to reissue the shares repurchased under this authorisation on foreign stock exchanges where Company shares have previously not been listed.

The Executive Board is entitled (subject to Supervisory Board approval) to offer the shares repurchased under this authorisation to third parties in the context of company mergers, acqui-sitions or financial participations.

The Executive Board is entitled (subject to Supervisory Board approval) to offer Company sha-res (for purchase) to persons who have had, or still have, an employment relationship with the Company or with an “affiliated company” as defined under §§ 15 et seq. of the German Stock Corporation Act (AktG), or to grant and/or transfer Company shares to the aforementioned per-sons, subject to a blocking period of no less than one year.

The Executive Board is entitled (subject to Supervisory Board approval) to retire the shares repurchased under this authorisation without a specific resolution from a General Sharehol-ders’ Meeting. Such shares can also be subtracted from the Company’s equity capital in an expedited procedure without reducing capital, namely by adjusting the prorata, calculated no-minal value of the remaining no-par shares to the Company’s equity capital. All or some of the repurchased shares may be retired. The right to retire shares may be exercised more than once.

As of 31 December 2009, the Company had repurchased 150,986 own shares (prior year: 139,458 own shares) pursuant to the authorisation granted by the General Shareholders’ Mee-ting of 20 June 2008, as well as 42,890 own shares to the authorisation granted by the General Shareholders’ Meeting of 29 May 2009. These repurchased shares amount to a total of EUR 193,876, or 3.00% of equity capital.

Share repurchases in 2009 as per the General Shareholders’ Meeting of 20 June 2008

Date Repurchased shares (units)

Share of equity capital

(in %)

Average price

Total market price

(in EUR)

Cumulative no. of

shares

Cumulativeshare of equity

capital

Jan 09 2,343 0.04% 8.93 20,912.73 2,343 0.04%

Feb 09 3,008 0.05% 8.73 26,274.23 5,351 0.09%

Mar 09 6,177 0.10% 8.57 52,926.36 11,528 0.19%

Share repurchases in 2009 as per the General Shareholders’ Meeting of 29 May 2009

Date Repurchased shares (units)

Share of equity capital

(in %)

Average price

Total market price

(in EUR)

Cumulative no. of

shares

Cumulativeshare of equity

capital

Oct 09 7,151 0.11% 9.90 70,777.50 7,151 0.11%

Nov 09 9,718 0.15% 9.74 94,664.56 16,869 0.26%

Dec 09 26,021 0.41% 9.01 234,320.77 42,890 0.67%

A reserve for the repurchase of own shares was formed as per § 272, Para. 4, of the German Commercial Code (HGB). During the reporting year, the reserve fund changed as follows:

EUR thousands

Reserve for own shares as of 31 Dec 2008 1,298

Formation of a reserve for own shares 528

Reserve for own shares as of 31 Dec 2009 1,826

Variance arising from capital consolidation

A negative variance from capital consolidation (e.g. negative goodwill) shown as of the reporting date will be dissolved in subsequent years in accordance with its origin and allocated to income.

In fiscal years 2008 and 2009, this item changed as follows (in EUR thousands):

2009 2008

Increase Reversal Deconso-lidation

Bookvalue Increase Reversal Deconso-lidation

Bookvalue

50.292 48.682 0 71.213 51.214 13.094 -856 69.603

Negative goodwill arises when a company is acquired at a price below the book value of its equity capital (as per the balance sheet). Once the investee company has been restructured and rehabilitated, any negative goodwill is reversed in the Consolidated Group Annual Report and applied towards income (insofar as additional miscellaneous expenses or losses are expected).

Insofar as the negative goodwill is not associated with expected future miscellaneous expenses or losses, it is reversed as follows (with a corresponding effect on income):

a) The portion of negative goodwill that does not exceed the current market value of the acquired non-monetary assets of the investee company is recognised in regular instalments based on the (weighted) average, remaining useful life of the depreciable assets acquired.

b) The portion of negative goodwill that exceeds the current market value of the acquired non- monetary assets of the investee company is recognised as income during the initial consoli-dation.

Thus, the negative goodwill of EUR 32.2 million arising from the initial consolidation of Fonderie du Poitou Aluminium SAS, Ingrandes-sur-Vienne, France (FDPA) will be amortised over the remai-ning useful life of the company’s depreciable fixed assets (about 12 years) as per Letter a) above. Given that all of FDPA’s significant assets and liabilities had been sold off as of 31 December 2009, the remaining EUR 28.7 million in negative goodwill that was still on the books as of 31 December 2008 has been completely eliminated. The reversal of negative goodwill is reflected in the Group’s Consolidated Profit & Loss Statement under “other operating income”.


68 69

The increase in negative goodwill during the reporting year resulted mainly from the initial conso-lidation of Osny Pharma, ADG KG, Sabiñánigo and Inasa.

Provisions


Pension provisions 65,699 59,097

Tax provisions 3,988 8,981

Other provisions 48,566 36,727

118,253 104,805

In order to adjust the tax payable amounts from the individual annual reports to the Group result, a deferred tax asset in the amount of EUR 221 thousand was posted, which was then combined with the deferred taxes from the individual balance sheets.

Other accruals mainly involved personnel-related obligations (EUR 19,526 thousand), process risks (EUR 9,177 thousand), outstanding invoices (EUR 5,267 thousand) warranty obligations (EUR 2,101 thousand), earnings reductions (EUR 1,197 thousand) and restructuring measures (EUR 3,737 thousand).

As of 31 December 2009, there was a shortfall of EUR 425 thousand (prior year: EUR 453 thousand) in the coverage of provisions for pensions and similar obligations. This was due to the Company’s decision to treat previous pension commitments as deferred items, as permitted un-der Article 28 of the Introductory Act to the German Commercial Code (EGHGB).

Liabilities


Liabilities to banks 19,593 8,775

Advance payments received for orders 6,945 5,033

Trade liabilities 59,499 58,864

Liabilities to affiliated companies 0 92

Other liabilities 16,122 13,675

102,159 86,439

The term structure of liabilities is summarised below:

31 Dec 2009 [EUR thousands] < 1 Jahre 1-5 Jahre > 5 Jahre Gesamt

Liabilities to banks 12,965 3,430 3,198 19,593

Advance payments received for orders 6,945 0 0 6,945

Trade liabilities 59,498 1 0 59,499

Liabilities to affiliated companies 0 0 0 0

Other liabilities 11,657 3,953 512 16,122

91,065 7,384 3,710 102,159

Liens on real property in the aggregate amount of EUR 34,679 thousand were granted to various secured third parties, mainly as sureties for loans and lines of credit. However, the bulk of these credit facilities had not yet been drawn down by the reporting date.

31 Dec 2008 [EUR thousands] < 1 Jahre 1-5 Jahre > 5 Jahre Gesamt

Liabilities to banks 2,815 1,486 4,474 8,775

Advance payments received for orders 5,033 0 0 5,033

Trade liabilities 58,864 0 0 58,864

Liabilities to affiliated companies 92 0 0 92

Other liabilities 7,298 5,399 978 13,675

74,102 6,885 5,452 86,439

Liability obligations

Assumption of a guarantee for the benefit of SIG Plastics

BAVARIA Industriekapital AG has assumed a directly enforceable guarantee for the benefit of SIG Plastics to cover the liability of Bavaria Maschinenbauholding AG vis-à-vis SIG Plastics in connection with a rental agreement.

The guarantee is limited to an amount of EUR 650 thousand. Moreover, it covers all claims (rental payments as well as damages) only insofar as these become due before the fixed expiry of the rental agreement on 28 February 2007 and are asserted in writing by 31 December 2010.

Under agreements concluded on 6 and 13 February 2006, BAVARIA assumed a directly enforcea-ble guarantee for the benefit of SIG Plastics Holding GmbH (Waldshut-Tiengen, Germany) to cover the liability of Bavaria Maschinenbauholding AG (Munich, Germany) vis-à-vis SIG Plastics Holding GmbH with regard to any rental payments and damages which SIG Plastics Holding GmbH may in future be entitled to claim against Hamba Filltec GmbH & Co. KG (Neunkirchen, Germany) on the grounds of breach of a rental contract (improper handover of the rented property).

Transfer of a security interest to Zürich Versicherung

In order to secure all existing and future claims (including time-limited or contingent ones) that Zürich Versicherung may be entitled to assert against Hering AG (Gunzenhausen), BAVARIA In-dustriekapital AG signed all its rights to a specific bank account over to Zürich Versicherung. This account currently has a credit balance of EUR 162 thousand.

Deposit of a security for the benefit of Zürcher Kantonalbank (ZKB)

Under an agreement dated 18 May 2009, BAVARIA pledged all present or future securities and credit balances held by ZKB or deposited elsewhere under the name of ZKB. This pledge was intended to secure the claims of ZKB against SwissTex AG, Winterthur (Swiss-Tex). As of 31 De-cember 2009, the pledge covered bank balances in the amount CHF 750 thousand (about EUR 500 thousand). These funds are to be freed up again in January 2010.

Guarantee for the benefit of Banco Bilbao Vizcaya Agentaria S.A., Huesca/Spain

Under an agreement dated 15 December 2009, BAVARIA assumed an indefinite guarantee for the benefit of Banco Bilbao to cover the obligations of Sabiñánigo up to a maximum amount of EUR 174 thousand.

Guarantee for the benefit of Dresdner Bank

Under an agreement dated 29 January 2010, BAVARIA assumed an indefinite, directly enforceable guarantee for the benefit of Dresdner Bank to cover the obligations of R+E Automationstechnik GmbH, Fellbach (R+E) in connection with a credit facility of EUR 300 thousand.


70 71

Pending legal disputes

In certain cases, BAVARIA may find itself involved in judicial and/or extrajudicial disputes in con-nection with the sale of investee companies. These disputes may result in a refunding of portions of the sales price (or other amounts) as well as payment of damages. To cover such eventualities, BAVARIA forms provisions whenever an obligation vis-à-vis a third party is deemed to be more than 50% probable and the associated expense can be reliably estimated. As of 31 December 2009, BAVARIA management has assessed the total potential liability associated with all known legal disputes at roughly EUR 0.6 million. The probability that these obligations will actually arise was deemed to be very low, however, so that no corresponding provision was formed.

Financial obligations

Total financial obligations arising from purchase commitments and long-term rental/leasing agree-ments with fixed durations amounted to EUR 17,574 thousand (prior year: EUR 23,058 thousand).

The term structure of these financial obligations can be summarised as follows:


Term

< 1 year 14,573 19,807

1 - 5 years 2,161 2,294

> 5 years 840 957

Total 17,574 23,058

EUR 13.699 million of these financial obligations was attributable to purchase commitments ari-sing from the order backlogs of individual Group companies (prior year: EUR 18.788 million).

Other sureties

Outlays/downpayments for sureties totalled EUR 28.410 million.

Auditors’ fees

During the reporting year, the following fees were paid to public auditors for audits, consultations and other services:

[EUR thousands] Total Domestic Of which Group auditors

Term

Fee for audit of the 2009 financial statements 188 120

Fees for other audits in 2009 35 0

Fees for tax consulting in 2009 86 47

Fee for other auditor services in 2009 149 148

Total 458 315

Transactions excluded from the balance sheet

Factoring

Six subsidiaries of the BAVARIA Group use factoring as a financing tool. The total scope of such factoring amounts to roughly EUR 40 million. Most of the factoring agreements in question involve bonafide open factoring, whereby the factoring partner assumes the entire default risk.

Sale/leaseback transactions

Two subsidiaries of the BAVARIA Group have made use of sale-and-leaseback transactions as a financing tool: In 2000 and 2007, these subsidiaries sold off certain operating buildings for a total sales price of EUR 17.0 million and EUR 2.2 million, respectively (3 buildings in all). At the same time, long-term leasing agreements were concluded for said buildings, the minimum rental period being 15 years or 10 years, respectively. The resulting total obligation is included in “other financial obligations”, insofar as it is not otherwise shown on the balance sheet.

VII. Notes on the consolidated profit & loss statementSales revenues

Sales revenues from the initial and final consolidation of companies are only recognised on a pro-rata basis (starting with the initial consolidation date and/or ending on the deconsolidation date).

The turnover of the BAVARIA Group can be broken down by sales region:


Germany 165,071 204,689

European Union 197,259 217,934

Europe, other 10,849 10,186

North America 5,929 7,953

Asia 1,636 2,829

Africa 947 255

Other 21,909 41,531

403,600 485,377

Other operating revenues

Other operating revenues be broken down as follows:


Gains from the reversal of negative goodwill 48,682 13,094

Gains from currency translations 5,196 5,061

Gains from the reversal of provisions 3,525 1,545

Gains from abatement of liabilities 889 0

Gains from value adjustments 633 2,743

Gains from debt consolidation 251 130

Gains on the disposal of fixed assets 83 167

Gains from deconsolidation of shareholdings in affiliated companies

1 19,067

Miscellaneous 2,026 5,284

61,286 47,091

Gains from the reversal of negative goodwill resulted from the extraordinary reversal of negative goodwill in connection with the FDPA asset deal (EUR 28.7 million), as well as from the ordinary reversal of negative goodwill in the wake of the ongoing restructuring of the Group’s remaining investee companies.

Notes to the consolidated financial statements – Notes to the Balance Sheet Notes to the consolidated financial statements – Notes to the consolidated profit & loss statement

72 73

Materials expense

In fiscal year 2009, materials expense amounted to EUR 220,275 thousand (prior year: EUR 288,765 thousand).

Personnel expense

Personnel expense increased over the prior year, mainly due to the acquisition of the compa nies Osny Pharma (153 employees, personnel costs of EUR 7,695 thousand), Tech-FORM (169 employees, personnel costs of EUR 2,905 thousand) and ADG KG (208 employees, personnel costs of EUR 5,123 thousand).


Wages and salaries 97,080 95,711

Social contributions and pension costs Of which: EUR 6,810 thousand for pensions (prior year: EUR 5,847 thousand)

31,359 28,629

128,439 124,340

Depreciation

No extraordinary depreciation was taken during the fiscal year.

Other operating expenses


Third-party services, insurance and premiums 9,073 8,628

Allocations to provisions for process risks 8,400 568

Repair and maintenance 8,376 9,049

Packing and freight 8,102 7,205

Rentals and leasing 4,946 5,844

Losses from currency translation 4,935 6,938

IT expense 3,167 1,938

Management consulting costs 2,940 1,898

Travel and lodging 2,306 2,293

Commissions 2,215 1,978

Administrative costs 1,676 4,748

Miscellaneous personal costs 1,540 1,161

Cost of temporary personnel 1,442 3,856

Bad receivables 343 561

Value adjustments 277 251

Losses from deconsolidation 226 532

Losses from debt consolidation 124 643

Miscellaneous 8,922 5,976

69,010 64,067

The item “miscellaneous operating expense”, which amounted to EUR 8,922 thousand in 2008 (prior year: EUR 5,976 thousand), consists of sundry operating expenses incurred at the individu-al company level, such as: accounting and auditing costs, notary services, court costs, attorney

Notes to the consolidated financial statements – Notes to the consolidated profit & loss statement

fees, personnel recruiting expenses, costs of continuing education/training, Supervisory Board and/or Advisory Board compensation, etc.

Income from shareholdings

Income from affiliated companies amounted to EUR 0 (prior year: EUR 6 thousand).

Net interest income


Interest income and similar revenueOf which: from affiliated companies: EUR 17 thousand (prior year: EUR 35 thousand)

844 2,127

Interest expense and similar costsOf which: to affiliated companies: EUR 0 (prior year: EUR 1 thousand)

-1,333 -1,150

-489 977

In 2009, interest expense was attributable mainly to FDPA, Hunsfos Fabrikker AS (Hunsfos) as well as the Kienle+Spiess Group.

Extraordinary results

The extraordinary result was mainly derived from the asset deal involving FDPA, as well as from the formation of provisions for social insurance schemes and/or collective labour agreements in connection with the restructuring of investee companies.

Taxes on income

Income tax expense includes income tax payable as well as deferred taxes.

A deferred tax item is created to reflect the tax effects of temporary variances between the result reported on the tax statement and the one reported on the balance sheet. However, this does not include variances whose effect is not expected to be offset in the foreseeable future. Deferred taxes arising from temporary variances may be reported in the annual report of the individual taxpaying company as well as in the Consolidated Group Annual Report (in the context of valuation and con-solidation measures).

Notes to the consolidated financial statements – Notes to the consolidated profit & loss statement

74 75

VIII. Reporting by segmentSeries Manufacturers

The “Series Manufacturers” segment comprises companies involved in the serial manufacture of components, e.g. automotive parts suppliers. The firms in this segment are as follows:

In 2009: the Kienle+Spiess Group, FDPA, Faral S.p.A. and Faral SAS (Faral Group), Tech-FORM as well as ADG KG.

In 2008: the Kienle+Spiess Group, FDPA as well as the Faral Group.


The “Plant Engineering & Construction” segment comprises all companies involved in the const-ruction and engineering of plant and machinery, specifically:

In 2009: Hering, Langbein & Engelbracht and SwissTex. In 2008: Hering, Langbein & Engelbracht and SwissTex.

Business Services

The “Business Services” segment comprises all operating companies that do business in other industries:

In 2009: Xenterio, Hunsfos, Osny Pharma, Sabiñánigo as well as Inasa. In 2008: NEEF IT, Xenterio as well as Hunsfos.

The “Others” segment mainly consists of the BAVARIA Group’s non-operating holdings and inte-rim holdings. The after-tax surplus for each segment is reported as the “segment result”. Transac-tions between the various segments are priced according to the “arm’s-length principle”.

The following Segment Report was prepared on basis of the guidelines of the German Financial Reporting Guidelines DRS3:

31.12.2009 [in EUR thousands]

Series Manufac-

turers

Plant Engi-neering &

Construction

Business Services

Others Consolidation Group

Sales

with external third parties 259,290 48,052 96,203 10 0 403,555

with group companies 1 0 0 4,529 -4,485 45

Profit and Loss Statement

Segment net income -34,704 -302 -1,043 8,337 31,349 3,637

Depreciation included therein 16,851 549 4,019 21 349 21,789

Interest result included therein -847 -90 -743 1,191 0 -489

Taxes included therein 810 460 498 640 -1,579 829

Other non-cash items -11,341 792 5,792 26 45,846 41,115

Income/loss from holdings in consolidated companies 0 0 0 11,070 -11,070 0

Balance Sheet

Total assets 165,382 33,163 132,628 37,605 -26,700 342,078

Investments in fixed assets 11,960 239 1,361 12 0 13,572

Provision, accruals and liabilities 143,827 23,530 88,347 10,891 -39,251 227,344

Employees 2,105 272 618 8 0 3,003

Notes to the consolidated financial statements – Reporting by segment

31.12.2008 [in EUR thousands]

Series Manufac-

turers

Plant Engi-neering &

Construction

Business Services

Others Consolidation Group

Sales

with external third parties 327,907 73,859 83,173 0 0 484,939

with group companies 12 0 0 3,776 -3,350 438

Profit and Loss Statement

Segment net income -1,658 1,183 -7,175 14,143 16,728 23,221

Depreciation included therein 14,318 533 1,766 48 270 16,935

Interest result included therein -545 -42 -425 1,997 -8 977

Taxes included therein 5,238 858 49 1,505 1,579 9,229

Other non-cash items 1,527 297 -2,032 1,428 30,047 31,267

Income/loss from holdings in consolidated companies 0 0 0 11,963 -11,957 6

Balance Sheet

Total assets 198,458 28,869 68,331 43,824 -17,737 321,745

Investments in fixed assets 15,395 405 1,469 33 2,624 19,926

Provision, accruals and liabilities 138,862 18,924 56,855 2,710 -23,729 193,622

Employees 2,103 295 538 8 0 2,944

Arriving at the consolidated Group figures

2009 segment result

The 2009 consolidated column contains the following key items: reversal of negative goodwill (EUR 48.7 million); losses from deconsolidation (EUR 0.2 million); reversals of value adjustments allocated between segments, of company resales and of dividend distributions (EUR -18.5 mil-lion); taxes (EUR 1.6 million); amortisation of goodwill, insofar as it is not allocated to a specific segment (EUR -0.3 million).

2009 depreciation/amortisation

The 2009 consolidated column includes amortisation of goodwill, insofar as it is not allocated to a specific segment (EUR 0.3 million).

Other non-cash items in 2009

The 2009 consolidated column includes the following salient non-cash items: reversal of negative goodwill (EUR 48.7 million) as well as losses from deconsolidation (EUR 0.2 million). Also inclu-ded are the formation/reversal of value adjustments and reversals of provisions, insofar as these arose on the company level.

Segment assets and liabilities in 2009

The key asset/liability items in the 2009 consolidated column were reversals of receivables and liabilities between segments. In 2009, segment assets were attributable almost entirely to Ger-many and the rest of the European Union. For a regional breakdown of assets, please see our comments to fixed assets.

2008 segment result

The 2008 consolidated column contains the following key items: gains/losses from deconsolida-tion (EUR 18.5 million), reversals of value adjustments allocated between segments and dividend

Notes to the consolidated financial statements – Reporting by segment

76 77

distributions (EUR -11.7 million), reversal of negative goodwill (EUR 13.1 million), taxes (EUR -1.6 million), as well as amortisation of goodwill, insofar as it is not allocated to a specific segment (EUR -0.3 million).

2008 depreciation/amortisation

The 2009 consolidated column includes amortisation of goodwill, insofar as it is not allocated to a specific segment.

Other non-cash items in 2008

The 2008 consolidated column includes the following salient non-cash items: reversal of negati-ve goodwill (EUR 13.1 million) as well as gains/losses from deconsolidation (EUR 18.5 million). The Serial Production/Automotive and Business Services segments also include an extraordinary result of EUR 2.0 million, due to the required formation of a provision for a social insurance plan. Also included are the formation/reversal of value adjustments and reversals of provisions, insofar as these arose on the company level.

Segment assets and liabilities in 2008

The key asset/liability items in the 2008 consolidated column were reversals of receivables and liabilities between segments. In 2008, segment assets were attributable almost entirely to Ger-many and the rest of the European Union. For a regional breakdown of assets, please see our comments to fixed assets.

IX. miscellaneous informationExecutive Board and Supervisory Board

Executive Board

Reimar Scholz, Dipl. Kaufmann, GautingHead of Acquisitions (Executive Board Spokesman)

Harald Ender, Dipl.-Ingenieur, Dipl. Kaufmann, Landsberg Head of Operations (Executive Board Member)

Insofar as only one Executive Board Member has been appointed, he/she is entitled to act as sole representative of the Company. Insofar as more than one have been appointed, any two Executive Board Members may jointly represent the company.

Reimar Scholz is entitled to act as sole representative.

Harald Ender is entitled to represent the company in tandem with another Executive Board Mem-ber or a fully authorised agent (Prokurist).

The Members of the Executive Board have been released from the restrictions of § 181 of the German Civil Code (BGB).

Supervisory Board

Dr. Matthias Heisse, Rechtsanwalt, Munich(Chairman)

Dr. Gernot Eisinger, Kaufmann, Munich(Deputy Chairman)

Dr. Harald Linné, Kaufmann, Munich(as of 29 May 2009)

Bernard Jan Wendeln, Kaufmann, Munich(until 29 May 2009)

Total remuneration of the Supervisory Board and Executive Board as well as former members of these bodies

Remuneration of Supervisory Board Members amounted to EUR 40 thousand (prior year: EUR 40 thousand), of which EUR 0 went to former Supervisory Board Members (prior year: EUR 0).

During the reporting year, the Company paid fees of EUR 144 thousand (prior year: EUR 88 thousand) to the law firm of Heisse Kursawe Eversheds, of which Dr. Heisse is a partner. This occurred in the context of a separate consulting agreement as required by § 114 of the German Stock Corporation Act (AktG).

Total remuneration received by Executive Board Members in 2009 amounted to EUR 777 thou-sand (prior year: EUR 639 thousand).

Employees

The total workforce of the companies included in the scope of consolidation as of 31 December 2009 amounted to 3,003 employees (prior year: 2,944 employees). The chart below shows a breakdown of the BAVARIA Group’s workforce for the past two years:

2009 2008

Industrial workers 2,116 2,188

Employees 803 664

Trainees 84 92

3,003 2,944

Relations with affiliated persons/entities

Although BAVARIA has customary business dealings with affiliated but not consolidated subsidi-aries, the transactions with these companies are negligible in scope. Moreover, they arise in the course of normal operations and are performed under arm’s-length conditions.

None of the companies of the Group has engaged in significant business transactions with mem-bers of BAVARIA’s Executive Board or Supervisory Board, or with persons belonging to their respective families.

Notes to the consolidated financial statements – miscellaneous informationNotes to the consolidated financial statements – Reporting by segment, miscellaneous information

78 79

X. Schedule of shareholdings[Thousands of local currency] Currency Share of equity

in %direct indirect

Equity Net income

Group parent company

BAVARIA Industriekapital AG, Munich 26,044 8,243

Companies included in the consolidation

Executive Consulting AG, Munich EUR 100.00 33 14

Hering Wärmetauscher Holding AG, Munich EUR 62.59 49 0

Hering AG, Gunzenhausen EUR 59.28 1,972 178

nevira Vermögensverwaltung AG, Munich (previously Neef IT Solutions AG, Karlsruhe) EUR 78.00 -268 0

BAVARIA Maschinenbau Holding II AG, Munich EUR 88.75 45 -10

Langbein & Engelbracht GmbH, Bochum EUR 83.43 6,738 1,224

Langbein & Engelbracht Industrial Eng.&. Co., Shanghai/ China CNY 83.43 -4,327 -2,001

Verwaltungsgesellschaft 0906 GmbH, Munich EUR 100.00 17 6

Blitz 05-316 GmbH & Co. KG, Munich EUR 100.00 55 -27

R&E Automationstechnik GmbH, Fellbach-Schmiden (1) EUR 50.00 -212 -232

Kienle + Spiess GmbH, Sachsenheim EUR 99.74 14,537 -6,830

Kienle + Spiess Hungary Kft, Tokod/ Hungary HUF 99.74 2,026,578 -1,200,107

Wardstorm Ltd., Ellesmere Port/ UK GBP 99.74 7,114 0

Sankey Laminations Ltd., Ellesmere Port/ UK GBP 99.74 2,490 -151

G.L. Scott & Co. Ltd., Ellesmere Port/ UK GBP 99.74 0 0

Bavariaring 0906 GmbH, Munich EUR 100.00 10,876 10,881

SwissTex Winterthur AG, Winterthur/ Switzerland CHF 100.00 2,031 -2,256

Bavaria Chemicals GmbH, Munich EUR 75.00 23 0

Bavaria Maschinenbau Ltd., Valletta/ Malta (1) EUR 100.00 0 0

Elfotec AG, Mönchaltdorf/ Switzerland (in clearing) (1) CHF 75.00 – –

Elfotec Ltd., Annacotty/ Irland (in clearing) (1) EUR 75.00 – –

baikap Holding 010607 GmbH, Munich EUR 100.00 103 -21

baikap Holding 020607 GmbH, Munich EUR 100.00 1,497 1,472

EMS Holding Bavaria GmbH, Munich(previously baikap Holding 030807 GmbH) EUR 100.00 20 -5

Pharma Holding Bavaria GmbH, Munich(previously baikap Holding 040807 GmbH) EUR 100.00 133 109

Fonderies Aluminium de France SAS, Paris/ France EUR 100.00 1,208 11,379

Fonderie Aluminium de Cléon SAS, Cléon/ France (1) EUR 100.00 – –

Fonderie du Poitou Aluminium SAS, Ingrandes sur Vienne/ France EUR 100.00 -176 -16,648

Teksid Deutschland GmbH, Heilbronn (in clearing) (1) EUR 100.00 – –

Xenterio GmbH, Offenburg EUR 100.00 3,082 -3,366

FARAL S.p.A., Modena/ Italy EUR 100.00 14,338 -3,148

K+S Holding GmbH & Co. KG, Munich EUR 94.80 1 -164

Notes to the consolidated financial statements – Schedule of shareholdingsNotes to the consolidated financial statements – Schedule of shareholdings

[Thousands of local currency] Currency Share of equityin %

direct indirect

Equity Net income

Kienle + Spiess Logisztikai, Tokod/ Hungary HUF 99.74 23,788 -3,630

FARAL France SAS, Carmaux/ France EUR 100.00 -1,072 -377

Hunsfos Fabrikker AS, Vennesla/ Norway NOK 100.00 84,781 32,190

Die-Cast Holding Bavaria GmbH, Munich(previously baikap Holding 051108 GmbH) EUR 100.00 24 -1




OSNY Pharma SAS, Osny / France EUR 100.00 -1,246 -1,342

OSNY Pharma Holding SAS, Osny/ France EUR 100.00 846 -14

Tech-FORM SAS, Auxi-Le-Château/ France EUR 100.00 1,876 -134

Austria Druckguss GmbH & Co KG, Gleisdorf/ Austria EUR 100.00 3,023 -2,432

Austria Druckguss Verwaltungs GmbH, Gleisdorf/ Austria EUR 100.00 17 -2



Laminados Sabiñánigo S.L., Sabiñánigo, Huesca/ Spain EUR 100.00 4,298 0

INASA Foil S.A., Irurtzun near Pamplona/ Spain EUR 100.00 27,389 0

(1) not consolidated pursuant to § 296 HGB

Affiliations of the Group

BAVARIA is included in the consolidated financial statements of AS Vermögensverwaltungs GmH, Gräfelfing. These are available at the parent’s legal domicile (in Gräfelfing).

Profit distribution/recommended dividend

In 2009, BAVARIA paid out dividends of EUR 19,667,069.10.

At the upcoming General Shareholders’ Meeting, the Executive Board and Supervisory Board of BAVARIA will recommend a dividend distribution of EUR 1.25 per share out of the Company’s balance sheet profit for fiscal year 2009 (EUR 9,212,504.83), with the remaining profit to be carried forward.

Munich, 22 March 2010The Executive Board

Reimar Scholz Harald Ender

80

Auditor‘s statementWe have audited the consolidated financial statements prepared by BAVARIA Industriekapital AG – consisting of the balance sheet, profit and loss account, statement of cash flows, statement of changes in equity as well as notes – and the management report for the fiscal year from 1 January to 31 December 2009. The preparation of the consolidated financial statements and the group management report as in accordance with German commercial law is the responsibility of the Executive Board of the Company. It is our responsibility on the basis of our audit to express an opinion on the consolidated financial statements and the group management report.

We conducted our audit of the consolidated financial statements in accordance with § 317 of the German Commercial Code (HGB) and the generally accepted auditing standards issued by the German Auditors‘ Institute (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 German principles of proper accounting and in the group management report are detected with reaso-nable 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 deter-mination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, 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 those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Executive Board, 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 did not give rise to any objections.

In our opinion, based on the findings of our the audit, the consolidated financial statements comply with the legal requirements and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with German principles of proper accounting. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.

Munich, March 23, 2010

RP RICHTER GmbHWirtschaftsprüfungsgesellschaft

Frank Stahl Claudia WeinholdWirtschaftsprüfer Wirtschaftsprüfer

ImprintIssuerBAVARIA Industriekapital AGBavariaring 2480336 Munich

Tel.: +49 (0)89 72 98 967 0 Fax: +49 (0)89 72 98 967 [email protected]

Editorial BoardBAVARIA Industriekapital AGSvea StrohmHead of [email protected]

BAVARIA Industriekapital AGBavariaring 2480336 München

Tel.: +49 (0) 89 7 29 89 67 - 0Fax: +49 (0) 89 7 29 89 67 - 10

E-mail: [email protected]: www.baikap.de

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