Shareholders letter. Dear shareholders,

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2 Shareholders letter Dear shareholders, VBH successfully completed the first financial year following its financial restructure. We succeeded in increasing sales both nationally and internationally, despite an economic dead wind. The earnings situation was improved significantly and, as the cost leaders in our industry, we are now excellently positioned and have thus impressively confirmed our position as the leading European company in the hardware industry. We are once again enjoying success and have the potential to continue this growth on the basis of our own strength. Domestic sales have developed positively Business within Germany developed particularly well. Despite a further decline of market in the window sector, we achieved significant sales growth, thus reaching and partially exceeding our self-imposed goals. Operations in Germany are once again working profitably and we will do our utmost so that this remains the case. Our success on the German market was hard work, which we achieved through our good product ranges and our consistent sales control. The managerial control of the company is achieving what we expected it to achieve. Our partnerships with our suppliers are developing better than ever before. Together we succeeded in serving the significantly decreased German market professionally and, what is more, profitably. New business ideas of VBH have proved their worth on the market We are constantly improving the basis of the successful co-operation with our customers, by consistently developing our business model further.»making life easier for our customers!«even in times when the economy was slow, this was a goal that we drove ahead. It is and will remain the actual driver of VBH s success.»web-shop VBH 24«,»Scanner technology«,»edi«and»edifakt«have since become useful systems to customers and suppliers in a highly technical and modern VBH hardware world that are used more and more intensively. Customers can obtain information by interacting with a knowledge database. Virtual in-house exhibitions on the internet are part of VBH s daily business. On top of that, VBH offers its customers innovative platforms on which these can perform their own marketing and present themselves on their respective markets. 7

3 International business still clearly profitable Although we continually experience minor saturation trends on individual international markets, our profitable international business once again was a stable pillar in Our committed Managing Directors operate with great business awareness. With their largely self-financed businesses they achieved considerable sales returns on their local, worldwide markets. We will push this development ahead by continuing to invest in up and coming, profitable markets and regions. Here the focus is, in particular, on the Middle East and Asian regions. However, even on the Balkans we can still see markets into which VBH could profitably expand, following the increased political opening of these countries. Employees enjoy and will continue to enjoy our support The heart of our worldwide operations is still in Germany, which is why we intensified the sales-based training of our German staff in the past financial year. Our company s claim of employing the best staff available in the industry, which we have incorporated as a strategic guideline, has had a positive and motivating effect on work throughout the company. This staff policy is supported by a performance-based remuneration system, which was rapidly established within the company and well accepted. The Board of Management and the management circle at VBH consider themselves incorporated in the guidelines of staff development and are working at achieving the goals they imposed on themselves in the course of a Future workshop long-term, by VBH is thus competitive on the global market and holds the management potential necessary to grow on further markets. Strengthening further business development VBH will continue to growth in the current 2006 financial year and we will do our utmost to transfer this VBH in-house economy to our international markets. It is our goal to extend the market share of VBH on the markets of the respective countries, irrespective of their economic development. The claim towards our organisation is clearly defined: on principle, we want to perform better than the markets of the countries we are active in. To achieve this goal we are increasingly developing VBH Holding AG to become a Management Holding. The pure financing function of the Holding will be supplemented by the employment of excellently trained managers who will introduce their knowledge into the worldwide cycle of our Group. VBH will hold its position as cost leader on the German hardware market and will adjust to the corresponding market situation, by focusing on the future. Esco Metallbausysteme GmbH will continue to prove its strength as performance leader on the metal construction and building market. Abroad we will continue our growth on profitable markets and ensure a quick return on the capital we invested. VBH is thus continuing down its path of strength VBH Holding AG Annual Report 2005

4 Shareholders letter with new services and product ideas at both a national and an international level. The profitability of the company is gradually being improved. We are sure that the capital market will reward this medium to long term. Thank you for your confidence in our work! Stuttgart, March 2006 Rainer Hribar Jürgen Kassel

5 Report of the Supervisory Board During the year under review the Supervisory Board of VBH Holding AG continually monitored the work of the Board of Management and provided advice, where required. Throughout the 2005 financial year, the Board of Management kept the Supervisory Board comprehensively informed with the aid of written and oral reports of the situation and development of the company and the Group. The reports in particular covered the development of sales and earnings, liquidity planning of the company and the Group, important business transactions and the implementation of corporate planning. In its five meetings held throughout the year, the Supervisory Board discussed the reports of the Board of Management and provided the Board of Management with intensive consultation on corporate policy issues, the development of business and the further development of the company. In addition, a strategy workshop on the long-term positioning of VBH was held with the Board of Management and the management circle of VBH. Reporting by the Board of Management also focused on the further development of the Group, following the implementation of the financial restructure and the capital increase against cash contribution of up to EUR 3,317,767, resolved by the Annual General Meeting in the 2005 financial year, which was exercised in full. In addition to this, the focus of the Board of Management s reporting was on market, sales and earnings development and its discussion by the Supervisory Board. The audits of the Supervisory Board during the Supervisory Board meetings related in particular to the following issues: In the Supervisory Board meeting on the balance sheet, held 12 April 2005, the focus was on the audit of the annual financial statements, the Group financial statements and the joint management report for the AG and the Group. In the process, the Supervisory Board put numerous questions to the personally attending auditor and discussed these in detail with the auditor, apart from its own original auditing activities in the context of preparing the Supervisory Board meeting on the balance sheet. In its meeting on 18 June 2005, the audit activities of the Supervisory Board related in particular to the acquisition of the remaining 35% of shares in Soged Holding S.p.A., Bologna, Italy and the evaluation of the opportunities for the disposal of SEG Bauelemente GmbH. In its meeting on 22 September 2006, the Supervisory Board reviewed the sale of its shares in SEG Bauelemente GmbH. In its meeting on 22 December 2005, the Supervisory Board focused its review and auditing activities on the corporate planning presented in respect of the 2006 financial year. The Supervisory Board discussed the planning as well as its inherent opportunities and risks extensively with the Board of Management. The Supervisory Board also audited the respective monthly reports. These monthly status reports to the Supervisory Board contain information on sales, the earnings situation of the Group by segments, per month and accumulated, including target/actual/previous year deviations. It also depicts the liquidity and financial situation and all current credit lines. Business transactions that required the agreement of the Supervisory Board and were of particular importance were discussed with the Board of Management in detail and approved. On the basis of the reports and the information provided by the Board of Management, the Supervisory Board was able to form a picture of the adequacy of business management. The Supervisory Board also made sure that the requirements of the risk management system of the company and the Group are met.

6 Report of the Supervisory Board The Chairman of the Supervisory Board was also in constant close contact with the company outside the joint Supervisory Board meetings and had the Board of Management inform him of the current development, the business situation and important individual transactions. In its meeting held on 6 April 2006, the Audit Committee formed within the Supervisory Board prepared the resolution of the Supervisory Board on the determination of the annual financial statements and the approval of the Group financial statements as per 31 December Other committees do not exist. All risks discernible from the view of the Board of Management and the Supervisory Board were discussed. The risk management system was subjected to an intensive audit by the auditor, who confirmed that the Board of Management had met the requirements of section 91 subsection 2 German Stock Corporation Act and installed a control system, which is suitable to recognise developments that threaten the continued existence of the company and the Group at an early stage. The Supervisory Board has dealt with the further development of corporate governance at VBH Holding AG. The current version of the German Corporate Governance Code was incorporated into the audit. In accordance with section 161 German Stock Corporation Act, the Board of Management and the Supervisory Board have issued an updated Declaration of Compliance and published this on the internet. The annual financial statements as per 31 December 2005, the Group financial statements as per 31 December 2005, the management reports of VBH Holding AG and of the Group, including their accounting, were audited by the auditing firm Rödl & Partner GmbH, Nuremberg, and given an unqualified audit opinion. The Group financial statements were, for the first time, drawn up in accordance with the rules of the IFRS. A transition to the former HGB (German Commercial Code) Group financial statements was explained in detail by the Board of Management and the auditor. The auditor provided every member of the Supervisory Board with a copy of the audit report. The auditor participated in the balance sheet meeting and explained the audit report in great detail. The Supervisory Board reviewed the annual financial statements, the Group financial statements and the management reports of the Board of Management for the AG and the Group as well as the proposal by the Board of Management in respect of the appropriation of unappropriated profits. Following the final result of its audit, the Supervisory Board has no objections and concurs with the result of the audit of the annual financial statements, the Group financial statements and the management reports for the AG and the Group obtained by the auditor. The Supervisory Board has approved the annual financial statements drawn up by the Board of Management; the annual financial statements are thus adopted. The Supervisory Board approved the Group financial statements. The Supervisory Board concurs with the Board of Management s proposal in respect of the appropriation of unappropriated profits. The Supervisory Board wishes to thank the Board of Management and all employees for their work in the past financial year. Korntal-Münchingen, April 2006 Prof Dr Brun-Hagen Hennerkes Chairman of the Supervisory Board

7 Corporate Governance Declarations of Compliance of the Board of Management and the Supervisory Board in respect of the German Corporate Governance Code in accordance with section 161 German Stock Corporation Act Since its last Declaration of Compliance dated April 2005, which related to the German Corporate Governance Code in the version of 21 May 2003, VBH Holding AG (VBH) has complied with all recommendations of the»government committee German Corporate Governance Code«of the above mentioned version as well as the version of 2 June 2005, with the following divergences in the 2005 financial year and will continue to comply with the recommendations of the»government committee German Corporate Governance Code«with the exception of the following divergences: 3.8. The D&O insurance concluded by VBH in respect of the members of the Board of Management and Supervisory Board does not include any deductible due to the fact that it is a group insurance policy, which also comprises a number of employees nationally and internationally Due to the appointment of two Board of Management members to the Board of Management of VBH there is no Chairperson or Spokesperson of the Board of Management. The Board of Management has nominated an informal Spokesperson Currently, no opportunities to limit (cap) extraordinary, unforeseeable developments in respect of variable remuneration components with longterm incentives and risk features exist, due to the ambitious goal, which targets a relative performance objective (improved development of the VBH share against the SDAX). Subsection 3 is not applied, with regard to the publication on the internet presence of the company, as a remuneration report will be contained in the Group annex from the 2005 financial year onwards, which will be part of the Annual Report published on the homepage An individualisation of the remuneration of the Board of Management members in the annex of the Group financial statements is effected for the first time in the 2005 financial year So far, no age limit has been determined in respect of the members of the Board of Management, due to the age structure of the Board of Management. This is, however, being considered So far, no age limit has been determined in respect of the members of the Supervisory Board, due to the age structure of the Supervisory Board. This is, however, being considered ( in the version of the Code dated 21 May 2003) Membership in committees is not taken into consideration in the remuneration of the members of the Supervisory Board, due to the fact that only one committee exists. The payment of the members of the Supervisory Board is stated in the Articles of Association of the company. Therefore, no further disclosure and individualisation is scheduled The adjustment of the interim report and the Group financial statements to international accounting standards (IFRS) will be effected by 31 December 2005, in accordance with the legally required time limits From the 2006 financial year onwards, VBH is targeting the publication of the audited Group financial statements within 90 days following the end of the

8 Corporate Governance financial year and the interim report within 45 days following the end of the half year Due to VBH s unique position within the industry, the results of the group companies of the past financial year are not provided. Korntal-Münchingen, 6 April 2006 VBH Holding AG On behalf of the Board of Management: Jürgen Kassel Rainer Hribar On behalf of the Supervisory Board: Prof Dr Brun-Hagen Hennerkes

9 Corporate Governance Report The Board of Management and the Supervisory Board provide the following report on Corporate Governance, in accordance with subsection 3.10 of the German Governance Code: VBH is oriented on the national and international standards of responsible business management, which integrates all areas of the company comprehensively. 1. Declaration of Compliance on 6 April 2006 On 6 April 2006 the Board of Management and the Supervisory Board issued the Declaration of Compliance in accordance with section 161 of the German Stock Corporation Act. All divergences from the recommendations of the German Corporate Governance Code in the version of 2 June 2005 were stated and explained. 2. Service for shareholders Important dates and information for our shareholders are published on the internet presence of VBH. All information on Annual Reports and ad-hoc disclosures relevant to the Annual General Meeting are available for downloading. On the basis of the Act on Corporate Integrity and Modernisation of the Right to Appeal (UMAG), which came into effect on 1 November 2005, we have converted the registration and legitimation procedure for the next Annual General Meeting to the internationally used»record-date«. As a result of this simplification, the 21st day before the Annual General Meeting shall in future be considered the qualifying date with regard to the registration of the shareholders for the Annual General Meeting. 3. Co-operation of Board of Management and Supervisory Board The Board of Management and the Supervisory Board of VBH co-operate closely to achieve a sustained increase of corporate value. The Board of Management provides regular and timely reporting to the Supervisory Board on all relevant business management and planning issues as well as on the company s strategic orientation and risk situation. The company has concluded liability insurance in respect of property damage (D&O) without deductible on behalf of the members of the Board of Management and the Supervisory Board. There were no conflicts of interest between members of the Board of Management and the Supervisory Board, which have to be reported to the Supervisory Board immediately. 5. Supervisory Board The appointment to the Supervisory Board of independent, technically qualified members guarantees an efficient Supervisory Board activity. The terms of office of the current Supervisory Board members will end on expiry of the Annual General Meeting that is to pass resolutions on the 2007 financial year, i.e. in As Chairperson of the Audit Committee, Mr Jürgen Bockstette, has longstanding, extensive experience as a former Managing Director and member of the Board of Management of various medium-sized businesses and therefore holds special knowledge and experience in the application of accounting principles and internal control procedures. 6. Risk management system The risk management system of VBH is being audited by the auditors and is capable of informing the management of VBH of risks or undesirable developments at an early stage. Details can be found in the risk report.

10 Corporate Governance Report 7. Communication and transparency Our corporate communication renders all VBH-related information available via our websites, to keep all target groups informed of press releases and ad-hoc disclosures, Annual Reports and other important information simultaneously. In addition, the requirements in accordance with section 15 a Securities Trading Act (WpHG) on»directors dealings«were met. The Board of Management and the Supervisory Board of VBH, as well as other employees in executive positions must disclose all transactions with shares or derivatives of the company relating to shares. In 2005, VBH Holding AG was advised that the Board of Management members Jürgen Kassel and Rainer Hribar had co-subscribed to the capital increase in 2005 and had purchased a total of 41,640 shares from this. The details on shareholdings are listed in the annex. The assignments of the Board of Management and Supervisory Board members are also listed in the annex. 8. Auditor The auditing firm, Dr Rödl und Partner, Nuremberg, was requested by the Chairman of the Audit Committee to immediately report all circumstances relating to the responsibilities of the Supervisory Board regarding important determinations or events, occurring during the audit, if these cannot be directly removed. 9. Share option plan As per the resolution of the Annual General Meeting held 24 May 2004, up to 1,200,000 subscription rights in respect of up to 1,200,000 no-par voting bearer shares (no-par shares) of VBH Holding can be issued. Option rights may only be issued to members of the Board of Management of VBH Holding AG, Managing Directors of national and international group companies and executives of the company as well as of national and international group companies. Members of the Board of Management of VBH Holding AG will, at most, receive a total of up to 50% of the option rights, while members of the management of group companies will receive, at most, 10% of the option rights. Executives of VBH Holding and group companies shall at most receive a total of up to 40% of the option rights. Overall, 1,080,000 share options were issued by 31 December 2005, of which 600,000 were issued to members of the Board of Management, 60,000 to Managing Directors of group companies and 420,000 to current and former executives. A condition for the exercise of option rights is the fact that the relative development of the value of the company s share is better between the day of issue of the options and the respective exercise date than the development of value of the SDAX or another index that takes the place of the SDAX. A third of the options granted can, at the earliest, be exercised two years (»two-year waiting period«) after the issue date. A further third can, at the earliest, be exercised three years after the issue date and the remaining third can, at the earliest, be exercised four years after the respective issue date.

11 To execute the share option plan, the equity capital of the company was conditionally increased by EUR 1,200,000 through the issue of up to 1,200,000 nopar ordinary voting shares (no-par shares). The conditional capital was entered into the Commercial Register on 3 June The auxiliary condition of the relative development of value against the SDAX, which would authorise the exercise of the option, has so far not occurred. Arithmetically, the valuation of the options determined amounts to zero. The report on the remuneration of the corporate bodies is enclosed in the details listed in the annex. Korntal-Münchingen, 6 April 2006 VBH Holding AG On behalf of the Board of Management: Jürgen Kassel Rainer Hribar On behalf of the Supervisory Board: Prof Dr Brun-Hagen Hennerkes VBH Holding AG Annual Report 2005

12 Group management report 2005 of VBH Holding AG Previous year s values in brackets Diagrams and tables were inserted in the context of the management report to improve comprehension Overall economic environment and industry development Western Europe Economic growth in Western Europe increased by only 1.5% (PY: 2.3%) in 2005 compared to the previous year. The first half year, in particular, developed weakly. The economy did not experience a tangible upturn before Q3 and was primarily driven by an increase in foreign demand. It was additionally supported by the slight devaluation of the euro and an increase in investments. The unemployment rate in Western Europe dropped from 8.1% in the previous year to 7.9%. At 2.1%, the rate of inflation slightly exceeded the value of the previous year (PY: 2.0%). Corporate insolvencies dropped from 150,312 businesses in 2005 to 147,239. The leader in corporate insolvencies is France with 42,874, followed by Germany, with 37,900 insolvencies. Eastern Europe In Eastern Europe the economic growth forecast for 2005 averaged 4.0% (PY: 5.0%). Rates of inflation are continuing to decline or constant in almost all Eastern European countries. Only in the Baltic states of Estonia, Latvia and Lithuania was a rise of inflation recorded. Unemployment rates remained high in 2005, despite the strong surge in economic growth. The average rate of unemployment was 13.4% (PY: 14.2%) in Eastern Europe. The highest unemployment rate was recorded in Poland, at 17.7% (PY: 19%). The number of corporate insolvencies in Eastern Europe dropped by 1.2% and affected 18,293 (PY: 18,518) companies. Economy and economic activity in Germany German gross domestic product rose 0.9% (PY: 1.6%) in This growth results, on the one hand, from the repeated increase of net exports of 0.7% (PY: 1.1%) and, on the other hand, from the increase of domestic use of 0.2% (PY: 0.5%). Consumption expenditure of private households dropped 0.1% (PY: 0.0%) against the previous year. Gross fixed capital formation rose by 0.2% (PY: 0.5%). In the year under review the rate of savings climbed to 10.6% (PY: 10.5%). In Germany, 37,900 businesses filed for insolvency in 2005, 3.5% less than in the previous year. Construction industry The downwards trend in building investments, which was kicked off in 1995 also continued in In 2005 building investments totalled EUR billion (in real terms: EUR billion) and dropped by 3.6% over the previous year (in real terms) despite the upturn of the economy.

13 Management report Gross domestic product and building investments (Index 1995 = 100) Gross domestic product Building investments Year In the»residential building«sector, building investments dropped 3.7% against the previous year and 2.8% in the»commercial construction«sector. The»Public construction«sector experienced the greatest decline, at a rate of 5.0% against the previous year. It is to be expected that building investments will drop by approx. a further EUR 4 billion in 2006, so that another decline of 2% over the previous year s volume will occur. The downturn of building investments in 2005 also affected those employed in the construction industry. The number of persons employed in the construction industry once again dropped against the previous year. Overall, an average of 2,138,000 (PY: 2,251,000) people were employed in the construction industry in This corresponds to a decline of 5.0% (PY: 2.6%). The number of insolvencies in the construction industry dropped to approx companies in Building permits and completed buildings The cost volume of permitted residential buildings currently amounts to EUR 52.1 billion, including November The permit volume thus lagged the volume of the previous year by almost EUR 6 billion or 10.3%. With regard to residential buildings, building permits declined by 14.4%. The drop in non-residential building permits amounted to 3.2%. The volume of total completed buildings up to and including November 2005 lagged the volume of the previous year by 13%, at EUR 24.8 billion. In the projection for 2005 the number of completed buildings so far results in an overall volume of approx. 241,500 apartments. Compared with 2004, this represents a decline of 36,500 residential units. Residential building In the year under review, investments in residential buildings reduced much more strongly than in the two preceding years. While the gap to the corresponding previous year was EUR 1.3 billion in 2003 or EUR 1.9 billion in 2004, this figure was EUR 4.5 billion in The unfavourable development of investments in

14 Development in residential building Germany Building permits Completed buildings Year residential building is set to continue in The insecurity of private households with regard to income and the abolition of the allowance for the construction of owner-occupied homes will impact demand. However, the increase of value-added tax proposed for 2007, may induce potential builders to bring forward construction measures into These decisions will, though, not result in a turnaround for the residential building industry. Against the previous year, the number of permits for residential building projects dropped by 35,000, to 234,000. This corresponds to a 12.9% decline. At the same time, the cost volume of permitted apartments in the period from January up to and including November 2005 declined by EUR 5.3 billion in absolute terms and by 14.4% in relative terms. The anticipated recovery to the end of 2005, due to the final abolition of the allowance for the construction of owner-occupied homes, lagged expectations. The number of buildings completed dropped by 12.4% compared to the previous year and thus declined by a volume of EUR 2.2 billion. The number of apartments completed in 2005 again dropped significantly, due to the decline of building permits, which occurred in Commercial construction In the commercial construction sector, building investments dropped 2.8% over the previous year. The number of permits issued in respect of commercial construction was 3.2% lower than in the previous year. In 2005, the number of completed buildings declined by 14.1%. In commercial construction it is becoming obvious that even if companies are enjoying good production and sales prospects, this will generally not result in new positions and thus to extension investments including construction measures. Construction measures due to a change in use of commercial buildings are likely, however, the demand thus triggered will most likely be largely met by installation businesses. A stabilisation or recovery of commercial construction is thus more likely in the area of civil engineering. VBH Holding AG Annual Report 2005

15 Management report Public construction The greatest decline of all construction sectors was experienced by public construction in 2005, with a decline of 5.0%. Investments relating to public construction are unlikely to result in excessive expectations, despite a stabilisation or even a slight rise of tax revenues. The still high new indebtedness of the regional administrative bodies and the tremendous debts of public authorities do not allow for the award of extensive construction contracts. Windows market Europe The development of the European windows market must be viewed from different angles. According to a study of the InterConnection Consulting Group dated 12 November 2005, the region Germany and Austria is, on a European comparison, still the largest sales market with regard to volume, however, due to the weak development of the German market it will lose further ground until 2007 and was already overtaken by the UK and Ireland in A positive development is discernible in Spain, Portugal and the Benelux countries. According to a current analysis of the InterConnection Consulting Group, the windows market in the Baltic states is enjoying a brisk development. In Europe, plastic window frames are still the most important group of materials, with a market share of more than 35%. Aluminium window frames are still strongly represented with a share of almost 30% on the European market. Timber window frames hold a share of 25% of the entire market. Combination timber-aluminium window frames displayed the most dynamic development in recent years, with an average growth rate of 6.3%. They have been forecast to achieve a market share of 10% in On a Europe-wide comparison, renovations still play a greater role, at 56%, than new building projects. When comparing the individual regions, significant differences do, however, become apparent. Spain and Portugal, in particular, have proven to be the»world champions«in new building projects. Germany According to a joint press release issued by the four leading industry associations, namely the Federal Association Plate Glass, Professional Association Locks and Fittings Industry, Association of the plastics processing industry and Association of window and façade manufacturers, the descent of the German windows market continued unabated in Compared to 2004, it declined by 7.8% in However, the descent is to slow down to 1.6% in Compared to its peak of 25.5 million windows in 1995, only 12.6 million windows were sold in 2004 and a mere 11.6 million in Some 11.5 million windows are expected to be sold in In residential construction the decline was 10.0%, a decline of 3.1% is expected for Initial rays of hope can be seen in the non-residential construction sector, which decreased by 3.3% in 2005 and is expected to grow by 1.2% in 2006.

16 Windows market in Germany Germany Year With regard to the different frame materials for windows, no product group was able to gain shares over the previous year. Plastic window frames declined by 8.3% in 2005, however, with a market share of 55% they are still the dominant type of frame. The volume for timber window frames reduced by 9.1%, as a result of which timber window frames hold a market share of 20%. Combination timber-aluminium windows experienced a decline of 8.1% but still hold a share of 5% on the overall market. Demand for aluminium window frames decreased by 4.7% from 2004 to Despite this fact, the share of aluminium window frames on the overall market rose slightly, from 19% to 20%. A dramatic improvement of overall construction activities is not foreseeable. However, the modernisation market is opening up opportunities. With its plans for an energy-based renovation of buildings, the Federal Government has set the right points in the 2005 coalition agreement. The energy passport, together with the high power prices will initiate a change on the market and return the focus to windows. Share on the entire market Plastic Aluminium Timber Timber-aluminium Year VBH Holding AG Annual Report 2005

17 Management report The renovation of windows through the replacement of either the window frame or the glass, which is profitable in respect of more than two thirds of all windows of buildings, is now also subsidised as an individual measure in the context of energybased renovation of residential buildings. This contributes to our hopes for a turnaround on the windows market. Overview of the development of VBH in the 2005 financial year Starting with the 2005 financial year, VBH will effect its reporting in accordance with IFRS guidelines, as the HGB (German Commercial Code) requires capital market oriented companies to do. The report for the previous year, which is utilised for comparison, was also drawn up in accordance with the IFRS principles. We will only comment the figures of the previous year that were reported in accordance with IFRS. In 2005, VBH developed considerably more strongly than the market, particularly in Germany. Global sales rose by 6.9%, from EUR million to EUR million, resulting in a new sales record. Once again foreign sales with an increase of 11.6%, from EUR million to EUR million contributed significantly. Thus, 51.1% of Group sales are now achieved abroad. According to IFRS, EBIT amounted to EUR 24.4 million (PY: EUR 16.0). Net earnings in the VBH Group amounted to EUR 9.8 million after EUR 53.3 million in the previous year, while earnings of EUR 53.8 million were reported in respect of the previous year due to the capital model and the resultant extraordinary financial earnings as well as the amendment of the circle of consolidation. Organisational structure and sales area The circle of consolidation of the Group was extended by the companies VBH Latvia SIA, (Latvia), VBH Naisus d.o.o., (Serbia), CDA Dell Adriatico S.r.l. (Italy) and EVG Bauprofil-System Entwicklungs- und Vermarktungsgesellschaft m.b.h. in Austria. In Italy, the shares held in Soged Holding, Bologna were stocked up to 100%. In addition, further shares in sub-subsidiaries were acquired (CDA Forli, CDA Dell Adriatico,VBH Vilnius). Due to the conversion to IFRS, the circle of consolidation was retroactively adjusted to 1 January In the circle of consolidation of the companies, SEG Bauelemente GmbH, Hockenheim, was allocated to the segment Germany, as discontinued activity. With effect of 1 January 2006, it was sold to an Austrian investor. In Italy, the companies CDA Friuli and CDA Lucca were disposed of. During the current financial year, outside the circle of consolidation, the Group disposed of its majority participation in the unconsolidated company Profitherm GmbH, Rositz and in the South American company Ventec, Argentina.

18 New companies were founded in Bulgaria, Montenegro and Croatia, on the basis of the additional liquidity derived from the 2005 capital increase, which was fully subscribed to. The Board of Management of VBH Holding AG still consists of the two members Rainer Hribar und Jürgen Kassel. These are, at the same time, the Managing Directors of VBH Deutschland GmbH. The extended executive circle of VBH Deutschland GmbH consists of five members. The corporate guidelines defined in 2003 and described in the Annual Report still apply and are continuously measured on the basis of monthly ratios and compared to the planned figures. Any deviations are explained and corrected by applying the required measures. The company is thus controlled in accordance with clearly defined business management principles. Business development by segment Following the conversion to IFRS, VBH is now structured as follows: Germany Western Europe Eastern Europe Corporate Service Germany This segment comprises VBH Deutschland GmbH, SEG-Tortec GmbH und esco Metallbausysteme GmbH Sales of the German segment, including the discontinued operations of SEG-Tortec GmbH, which was disposed of as per 1 January 2006, rose from EUR million in the previous year to EUR million in 2005, which represents an increase of 2.1%. VBH Deutschland GmbH, which developed significantly better on the clearly declining market (approx. 7% decline), achieved a major share. In 2005, sales of VBH Deutschland GmbH rose by approx. 3.5%, a significant increase against This development is due to the company s nation-wide presence, its reacquisition of customers and its focus on new, profitable ranges. In the 2005 financial year, VBH Deutschland GmbH achieved sales of EUR million after EUR million in the previous year. Sales due to direct exports were approximately at the level of the previous year and totalled EUR 24.7 million (EUR 24.5 million). VBH Holding AG Annual Report 2005

19 Management report 2005 was once again characterised by the insolvencies of some major customers in the industry. Thanks to its consistent and stringent receivables management, VBH remained largely unaffected by major damage. The total business-related earnings effect in connection with the collection of critical receivables was reduced even further, to a value of approx. 0.3% in relation to sales (PY: 0.8%). VBH Deutschland GmbH s EBIT again improved significantly and is now only slightly negative. The optimally designed logistics system of VBH Deutschland GmbH resulted in a further significant increase of store turnover and thus to a reduction of inventory assets from EUR 28.8 million to EUR 24.4 million. The receivables portfolio rose from EUR 15.6 million to EUR 20.3 million, due to higher sales and, in particular, due to the dissolution of the asset-backed securitisation financing. The provisions in respect of further adaptation measures, formed in the previous year, were fully utilised, as planned. At the same time additional, non-recurring restructuring expenses for further structural adjustments of the German organisation as well as book losses incurred in the context of the disposal of participations impacted earnings by a total of EUR 3.5 million (PY: EUR 4.2 million). The balance sheet of this segment is further characterised by the loss carryforwards of VBH Deutschland GmbH from previous years totalling EUR million. The loss of this company not covered by equity now amounts to EUR 41.5 million. Important value-added processes within the meaning of the strategic orientation of VBH, e.g. in the form of an electronic link to suppliers, were pushed ahead. At the same time, more than 400 customers are now directly linked to our merchandise management system via the VBH system»logos«. esco Metallbausysteme GmbH was able to assert itself on a once again difficult market in It achieved a year-on-year sales growth of 1.8%. In association with an increase of margin and a simultaneous optimisation of costs, as well as a lower interest charge, operative earnings, adjusted for restructuring expenses rose significantly, by EUR 0.6 million. SEG-Tortec GmbH was sold to an Austrian producer of fire doors, with effect of 1 January This company was not directly integrated into VBH s core structure as a business and services group and contributed negatively to the segment result through a continued decline in sales of 27.6% year-on-year and through a high loss of EUR 1.6 million.

20 EBIT of the»germany«segment amounted to EUR 0.2 million after EUR 8.7 million in the previous year. Overall, an average of 980 (PY: 956) staff were employed through the year. Through the further cutback of staff in 2005, the number of employees in the segment amounted to 948 at the end of the year. EBIT of the continued operations in the Germany segment amounted to EUR 1.0 million. Foreign subsidiaries VBH consistently continued its strategic growth in profitable foreign markets. Sales rose by 11.6% to EUR million (PY: EUR million). The share of sales achieved by companies acting directly abroad thus amounted to approx. 51.1% (PY: 48.9%) of Group sales. Including the direct exports of the German companies, the foreign and export share of the VBH Group amounts to approx. 55% (PY: 53%). EBT of the consolidated foreign subsidiaries dropped slightly, by 3.3%, and totalled EUR 26.4 million (PY: EUR 27.3 million), sales return before taxes was 7.5% (PY: 8.6%). This decline is primarily due to the Polish and UK markets, which declined significantly compared to previous years. However, all foreign subsidiaries included in the circle of consolidation achieved operative profits and most succeeded in improving upon their prior year results. EURmillion Sales proceeds Group National/International National International Year Western Europe The Western European companies significantly increased sales in 2005, by 4.9% to EUR million (PY: EUR million). Particularly high rates of increase in respect of sales and earnings were achieved by the companies in the Netherlands, Italy and Spain. Good results are repeatedly achieved by the countries in which particularly close sales partnerships exist with our key suppliers. Declines were VBH Holding AG Annual Report 2005

21 Management report recorded in the UK where the market decreased 12-15%. This resulted in a decline of sales and earnings of our UK-based company, which could not be fully compensated for by the remaining Western European companies. EBT remained at about the level of the previous year and dropped by 1.6% to EUR 10.3 million (PY: EUR 10.5 million). Eastern Europe VBH increased sales on the Eastern European growth markets by 17.8%, to EUR million (PY: EUR million). Clear double-digit sales and earnings growth was achieved by the companies in Russia, Kazakhstan, Slovenia, the Ukraine, the Baltic states and in Romania. Costs in these countries increased in line with sales, the sales margin declined slightly, thus reflecting the growth of competition in these states. The Polish market is becoming increasingly stable, following the significant declines in 2004; sales, however, again dropped by approx. 5.3% against the prior year. In 2005, the EBT of all Eastern European countries amounted to EUR 16.1 million (PY: EUR 16.8 million). Yield before taxes amounted to 8.3%, after 10.3% in the previous year. Corporate Services The»Corporate Services«segment comprises all non-operating companies, namely VBH Holding AG as parent company, VBH International in the Netherlands and a sale and lease back real estate company, which must be fully consolidated due to IFRS regulations. EBT of the segment amounted to EUR 0.6 million (PY: EUR 19.4 million). In 2004 this result was characterised by extraordinary earnings from the capital model. In the year under review the financial result of VBH Holding AG was positively impacted by the inflow from the capital increase effected in June 2005, through the issue of 3.3 million no-par shares at an issue price of EUR 2.5. Thanks to a voluntary rating procedure that VBH Holding AG executed in 2005, the loan granting banks could be convinced that VBH was more stable, which resulted in a slight downwards adjustment of interest. VBH Holding AG has issued VBH Deutschland GmbH with a waiver of interest, similar to This reduced the net interest loss of VBH Deutschland GmbH and thus resulted in a corporate restructuring contribution while VBH Holding AG incurred an interest debit.

22 Restructuring charges were formed at VBH Holding AG for a value adjustment in respect of a loan to a subsidiary currently under construction. In the course of the end-of-year accounting work the valuations of VBH Holding AG were subjected to an annual impairment test. Value adjustments were not required. Group Investments The investment volume in intangible assets totalled EUR 0.5 million. The Group invested EUR 6.0 million in tangible assets in the year under review. Due to the overall economic situation, urgently required replacement investments were effected primarily. The largest individual investment in 2005 was the construction of a store and administration building in St Petersburg, Russia, costing EUR 1.8 million. EUR million Investments/Depreciation - Group Investments 10 Depreciation Year Earnings situation Group sales rose by 6.9%, from EUR million to EUR million. The cost of materials ratio within the Group increased slightly and amounted to almost 77.5% of total sales (PY:76.6%) in The gross margin declined slightly, by 3.9% and dropped from 23.4% in the previous year to 22.7%. Personnel expenditure in the Group rose 3.3%, from EUR 71.7 million to EUR 74.1 million in absolute terms, due to the strong growth of our companies in Eastern Europe, however, in relation to sales, it dropped significantly, from 11.1% to 10.7%. VBH Holding AG Annual Report 2005

23 Management report Concise profit and loss statement of the VBH Group Group 2004 Discontinued operations 2004 Continued operations 2004 Group 2005 Discontinued operations 2005 Continued operations 2005 Continued operations Year-on-year change 1. Sales proceeds 648,458 10, , ,408 7, , % 2. Overall performance 662,079 11, , ,781 9, ,153 8% 3. EBITDA 20, ,570 33,077 1,254 34,331 67% 4. EBIT 15, ,585 24,395 1,264 25,659 65% 5. Financial result 41, ,589 9, , EBT 57, ,174 14,781 1,610 16,391 71% 7. Net income/loss for the year 53, ,234 9,824 1,610 11,434 79% Depreciation within the Group rose from EUR 5.0 million in the previous year to EUR 8.7 million in the year under review. The rise is due to the depreciation of a no longer valuable goodwill of a company to be consolidated. A value adjustment of the same amount formed was listed at other earnings. Furthermore, the investments in tangible assets are at the level of the previous year, thus reflecting the slowdown in investments due to the limited resources. Further adjustments to the organisational structure in Germany undertaken in 2005 resulted in relief in respect of the other operating expenses. These dropped from EUR 65 million in 2004 to EUR 63.1 million, year-on-year. Other operating expenses now only amount to 9.1% (PY: 10.0%) of sales. EBITDA totals EUR 33.1 million, after EUR 21.0 million in the previous year. EBITDA adjusted for restructuring expenses amounts to EUR 37.2 million, after EUR 28.9 million in the previous year, thus recording an increase of EUR 8.3 million, as an improvement of operative business. The Group financial result declined from EUR 41.3 million to EUR 9.6 million and is characterised by the capital model executed in the previous year as well as additional effects of the consolidation. After adjustment of these financial earnings, the financial result of EUR 12.5 million improved to EUR 9.6 million.

24 The reasons for this are a further positive development of earnings strength and repayment opportunities of loans to banks, the capital increase undertaken in the summer of 2005 and in the reduction of the interest rates of our banks. The Group s tax burden amounted to EUR 4.9 million (PY: EUR 4.0 million). Deferred taxes were formed on the loss carryforwards of the Group. Consolidated net earnings totalled EUR 9.8 million, after EUR 53.3 million in the previous year. Discontinued operations As per the sales agreement and contract of assignment of 12 September 2005, 100% of the business shares of SEG-Tortec GmbH, Hockenheim were disposed of. The material transfer of the company was effected on 1 January The sale was the result of the VBH Group s focus on its core competence as a business group. The segment of SEG-Tortec that primarily deals with the installation and implementation of fire doors in the facilities area was partly in competition with VBH s own customers. The fully consolidated company is listed in the report as a discontinued Group activity. The continued operations were presented separately in the profit and loss statement in accordance with IFRS; the previous year was correspondingly adjusted. Accordingly, the following sustained results were obtained in respect of the continued Group operations: Group sales rose from EUR million in 2004, by 7.5%, to EUR million. In the year under review, EBIT rose 65%, from EUR 15.6 million to EUR 25.7 million. The loss incurred by the discontinued company amounted to EUR 1.6 million and largely resulted from projects that had been scheduled for completion in 2005 of which the completion date was deferred to 2006 and high expenses relating to value adjustments on receivables. The effect plays an insignificant role in respect of the individual items of the assets and liabilities in the consolidated balance sheet. The assets of the discontinued operations total EUR 5.2 million. Financial and assets situation The balance sheet total within the Group rose by EUR 25.5 million, from EUR million to EUR million. The primary reason for this is the extension of the circle of consolidation and the growth within the Group. VBH Holding AG Annual Report 2005

25 Management report Assets Assets increased by EUR 5.5 million, from EUR 58.9 million to EUR 64.5 million. Investments in assets were primarily made in respect of replacement investments in respect of the store and operating equipment. The remaining long-term assets increased due to deferred tax claims. Short-term assets increased from EUR million to EUR million, by EUR 17.6 million, of which EUR 7.6 million related to the increase in inventory assets and EUR 9.2 to the increase in receivables and other assets. The increase of receivables can primarily be assigned to the abolition of ABS financing in Germany (share in 2004: EUR 8.8 million) and the extension of business activities within Germany and Eastern Europe. Despite the extension of sales, inventories rose only weakly. Thus the speed of stock turnover has again increased, year-on-year. Abbreviated balance sheet of the VBH Group in accordance with IFRS Assets 31 Dec Dec 2004 EUR TEU A. Long-term assets I. Intangible assets 29,265 25,843 II. Tangible assets 33,742 31,557 III. Financial assets 1,464 1,532 IV. Other long-term assets 7,538 5,167 Total long-term assets 72,009 64,099 B. Short-term assets I. Inventories 96,661 89,038 II. Receivables and other assets 125, ,473 III. Securities IV. Cash, Deposits with financial institutions and cheques 9,875 8,613 V. Prepaid expenses 734 1,347 Total short-term assets 233, ,616 Total assets 305, ,715

26 Liabilities Equity within the Group totals EUR 49.8 million, after EUR 26.9 million in the previous year. The equity ratio of the Group rose to 16.3%, after 9.6% in the previous year. Long-term liabilities rose from EUR 74.0 million to EUR 79.9 million. These include, in particular, all pension obligations and long-term liabilities to financial institutions as well as the convertible profit-sharing certificates, up to a volume of EUR 50 million. All convertible profit-sharing privileges are still in circulation. No conversions have so far been effected. Short-term liabilities towards financial institutions dropped by EUR 14.6 million, from EUR 97.9 million to EUR 83.3 million, despite the rise in sales volume and the resultant need for interim financing. The capital increase effected in June 2005 resulted in an inflow of liquidity of EUR 8.3 million that was used for the financing of foreign activities. The positive cash flow within the Group and the dividend payments of the group companies contributed to a further reduction of the amounts due to banks. The trade payables within the Group rose by EUR 7.4 million, from EUR 46.1 million to EUR 53.5 million due to the sales increase. Liabilities 31 Dec Dec 2004 A. Equity I. Share capital 36,496 33,178 II. Capital reserve 5, III. Earnings reserves 2,987 12,743 IV. Consolidated net income/loss for the year 3,218 1,896 V. Minority interests 8,316 4,269 VI. Treasury stock Total equity 49,812 26,806 B. Long-term liabilities Total long-term liabilities 79,926 74,008 C. Short-term liabilities I. Provisions 15,991 16,360 II. Amounts due to banks 83,335 97,919 III. Trade payables 53,498 46,149 IV. Other liabilities 22,651 18,473 V. Deferred income 734 1,347 Total short-term liabilities 175, ,901 Total liabilities 305, ,715

27 Management report Liquidity Liquidity planning was consistently continued. The actual development did not deviate significantly from planning. The credit line made available by commercial banks was sufficient in The repayment of the ABS financing program was fully made from the credit lines provided by the banks. No new loans had to be taken from domestic banks. Dividend payments were collected as scheduled. The banks will continue to grant VBH the restricted credit line agreed. The Board of Management is anticipating that these means will continue to be available throughout The VBH share Master data: The equity capital of the company totals EUR 36,495,447 and is divided up into 36,495,447 no-par shares of an arithmetical nominal value of EUR In addition, EUR 50 million in convertible profit-sharing certificates with a term to 2014 were issued. Share price development January 05 December 05 Index (01 Jan 2005 = 100) VBH share S-Dax DAX

28 The shares are listed in the General Standard segment of the Frankfurt and Stuttgart stock exchanges. Share SIN ISIN Symbol Existing share DE VBH Convertible profit-sharing certificates A0CASN DE000A0CASN9 VBH9 Following the Annual General Meeting in 2005, Clearstream Banking AG merged the previous securities identification numbers (SIN) A0AYYG, A0AYYK and to the uniform SIN Sales of the VBH share underwent a revival in the second half of the year, particularly through the capital increase of 3.3 million shares; the stock exchange thus once again paid more attention to the VBH share. The highest value of the existing share at the Frankfurt stock exchange was listed in January 2005, at EUR The price subsequently dropped towards the middle of the year, most likely also due to the capital measures published for In the second half of the year the share price became increasingly stable and developed an upwards trend towards the year end. The lowest value was briefly recorded in November, at EUR The closing price at year-end was EUR The Board of Management is expecting the price to continue its upwards trend, on the basis of the figures presented, and that it will offer all shareholders perspectives long term. VBH s treasury stock remained unchanged year-on-year and amounted to 128,504 shares at the end of Dividend policy Unfortunately, even in 2005 the company was unable to distribute dividends to shareholders. The Board of Management and Supervisory Board wish to apologise to the shareholders and hope they can appreciate that the focus is still on the strengthening of VBH Holding AG s equity. At the same time, the company must form sufficient reserves for the repayment of the convertible profit-sharing certificates. Employees In Germany, staff numbers were again streamlined due to the sluggish development in the first half year. On an annual average, the Germany segment employed 980 (PY: 956) staff. At the year end the Germany segment employed 948 staff. The number of staff employed by Corporate Services remained unchanged at 14. VBH Holding AG Annual Report 2005

29 Management report Quantity Persons employed at annual average Group* Germany Abroad Year * within circle of consolidation Due primarily to extended business activities, the company employed 72 more persons abroad. The number of staff abroad totals 1,159 (PY: 1,087). Of these, 437 were employed within Western Europe and 722 within Eastern Europe. The number of staff within the Group rose by 96 employees, to 2,153, due to business growth and the extension of the circle of consolidation. The number of trainees and apprentices in the Group amounted to 77, against 76 in the previous year. In Germany, VBH once again invested in quality training for its sales staff, by providing extensive sales training. At this point the Board of Management and Supervisory Board wish to thank all employees of the VBH Group for their high level of commitment nationally and internationally; this represents a major contribution towards a continued positive development. Share option plan VBH expects the share option program for executives of the Group and its companies to provide a major contribution to the increase of corporate value. As per the resolution of the Annual General Meeting, the Board of Management was, on 24 May 2004, authorised to issue up to 600,000 subscription rights for up to 600,000 ordinary voting no-par shares (no-par shares) of VBH Holding AG, until 24 May 2009, with the approval of the Supervisory Board. The Supervisory Board was authorised to issue up to 600,000 subscription rights for up to 600,000 ordinary voting no-par shares (no-par shares) of VBH Holding AG, until 24 May Subscription rights may only be issued to members of the Board of Management of VBH Holding AG, Managing Directors of national and international group companies and executives of the company and national and international group companies. Members of the Board of Management of VBH Holding AG shall, at most, receive up to 50% of the subscription rights, members of the management of group companies shall, at most, receive up to 10% of subscription rights.

30 Executives of VBH Holding AG and group companies shall, at most, receive up to 40% of the subscription rights. Overall, 1,080,000 share options had been issued as per 31 December 2005; 600,000 to the Board of Management, 60,000 to Managing Directors of group companies and 420,000 to executives. The condition for the exercise of option rights is the fact that the relative development of the value of the company s share is better between the day of issue of the options and the respective exercise date than the development of value of the SDAX or another index that takes the place of the SDAX. A third of the options granted can, at the earliest, be exercised two years (»two-year waiting period«) after the issue date. A further third can, at the earliest, be exercised three years after the issue date and the remaining third can, at the earliest, be exercised four years after the respective issue date. To execute the share option plan, the equity capital of the company was conditionally increased by EUR 1,200,000 through the issue of up to 1,200,000 nopar ordinary voting shares (no-par shares). The conditional capital was entered into the Commercial Register on 3 June Risk reporting Risk management system Risk reporting is incorporated into a regular monthly reporting system of the group companies and into an ad hoc system within the Group. This comprises all relevant control and reporting processes of the Group, including corporate planning. The proximity in respect of the management of the participation companies is further supported by an extensive international participation controlling within the VBH Holding AG, in order to guarantee an even more intensive and timely early recognition system, even on foreign markets. Thus VBH can quickly obtain information on the earnings strength of every individual corporate unit even on these markets, and rapidly implement these as sales and earnings securing measures. Internal audit On behalf of the Board of Management, centralised Group controlling executes audits in respect of the following issues: Observance of guidelines, approval limits and Group organisation instructions VBH Holding AG Annual Report 2005

31 Management report Securing of assets and ensuring an appropriate earnings development Audit of the organisation and processes for regularity and efficiency Monitoring of the regularity and timely functioning of the risk management system Continuous reporting Germany The building industry in Germany is still declining and represents a planning risk to the VBH Group. Planning insecurity, which is partly due to overall political issues, is unfortunately continuing beyond 2005, although other more positive signals are perceptible. VBH must always rapidly and flexibly adjust to these market conditions in Germany. There is a legitimate hope that VBH can benefit from further market adjustments, however, the volume of the market overall is also declining. The range is continuously investigated for profitability and continually adjusted. Despite this, it cannot be excluded due to new technological developments and trends, that items are created in the storage area with a slow turnaround. The same applies to receivables management, which is consistently pursued. The continued high rate of insolvencies and resultant rate of deductible of the loan insurance company can, however, lead to higher absolute charges. Due to the continued decline of the German market, reductions in margin are recorded in some ranges. The Board of Management is trying to improve this situation through better coordination in procurement. At the same time, the push for a targeted sale of ranges with strong returns is counteracting this situation, to reinforce the overall absolute gross income. Liquidity and foreign exchange risks As presented above, VBH has access to restricted credit lines. Detailed liquidity planning and thus adherence to these lines forms part of the operative standard of the company. Foreign exchange risks with an effect on liquidity exist within VBH Holding, through the dividend payments of its subsidiaries. Where possible, these are individually furnished with tools to hedge the foreign exchange risk. The time and contents of the payment of dividends is agreed with the companies on the basis of liquidity planning.

32 It cannot be excluded that our participation companies experience foreign exchange risks due to a boost of the euro and the associated increase in price of the goods. VBH attempts to pass on such currency-related fluctuations on all markets. However, negative effects on the trading margins achieved cannot be fully excluded. Procurement market risks From our point of view only few procurement market risks are currently discernible. Price increases of raw materials, in respect of the materials made of steel or aluminium, for example, can usually be passed on to the market. VBH is organised so that it can largely compensate this risk via alternative procurement sources globally. Legal risks The Group is currently not involved in any court or appeal proceedings, which could have a significant affect on the overall situation of the company. Sufficient provisions are formed in respect of warranty claims in the individual company accounts of the VBH companies. Sales market and overall risk VBH s business strategy is oriented on sustained and profitable growth. To open up interesting markets, characterised by a high volume of renovation, by itself, it requires sufficient capital that must be supplied by banks, suppliers and, if necessary, even by the capital market. As in the previous year, the Board of Management has kept banks and loan insurance companies regularly and comprehensively informed through active reporting, which enables a sufficiently safe basis for an estimate of loan commitment. As a result of the capital measures that were undertaken, the absolute level of amounts due to banks was reduced considerably, however, the voluntary rating effected by VBH in 2005 has so far not resulted in a significant reduction of interest rate. In 2006 the Board of Management will again have a rating performed by a rating company, with the objective of achieving lower interest rates No individual risks to the company as a going concern, either in respect of individual companies or the Group are currently discernible, due to its widespread international activities. Specific economic risks can in future not be excluded for individual country-based companies. The Supervisory Board was informed in a timely manner via monthly reporting and provided support to the Board of Management, in particular in respect of all issues relating to the capital model implemented. VBH Holding AG Annual Report 2005

33 Management report In the context of his annual audit activities, the auditor assesses whether the Board of Management has taken the measures it must take and, in particular, whether it has implemented a system of control so that any developments that may threaten the company as a going concern are recognised early. Events after the end of the financial year No events occurred, even after expiry of the 2005 financial year, which were of particular significance to the representation of the Group s risk situation and could have led to a different result. Corporate Governance Corporate Governance comprises the management and monitoring of the entire company including all business policies, organisational and strategic guidelines and their targeted implementation and the control of the basic business processes. The Board of Management and Supervisory Board welcome the Corporate Governance Code. With few exceptions, VBH Holding AG corresponds with the Corporate Governance Code of the version dated 2 June The joint Declaration of Compliance is represented in the Annual Report and published on the internet presence of VBH Holding at Outlook, opportunities and trends There has been a change of mood in Germany. The expectations towards the development of Germany s economy are higher in 2006 than they have been in the past 10 years. However, it should not be overlooked that there is continued insecurity in respect of the severely impacted building industry. Window production in Germany will continue to decline slightly year-on-year according to experts. The number of insolvencies among our German customers will remain high, due to a supply overhang. Against this background, VBH is orienting its work on its own corporate economy, which is based on the acquisition of solvent customers and interesting spending power areas. In addition, sales training is being consistently continued, in accordance with the corporate guidelines. Our planning does not include special effects such as the introduction of tax deductible tradesmen s invoices or a pre-emptive effect in 2006 due to the increase of value-added tax resolved for 2007, but can be viewed as opportunities for VBH. The cost structure is continually adjusted to the changing market. All customer loyalty schemes such as the logistics system»logos«and»vbh24 SHOP«are pushed ahead and for many customers now represent an indispensable part of

34 business. These tools ensure that VBH still holds the decisive lead in the industry. Their goal is the more efficient design of logistical and commercial processes between customers and VBH and between VBH and suppliers, electronically. International business achieves sustained and stable sales and earnings figures and represents an important earnings and sales pillar to VBH, even though major European markets have come to a halt or are even experiencing a decline. On the markets that have come to a point of saturation, we will ensure the profitability of our companies through cost measures at a high level. On international markets, longterm strategy agreements are concluded with important suppliers. Many of our established international companies are already capable of financing their business in the respective country from their own cash flow. In the first two months of the 2006 financial year, a sales increase of approx. 8.2% year-on-year was achieved at Group level. Even VBH Deutschland GmbH had a good start to the new financial year, with sales growth of approx. 8%. VBH will quickly and appropriately adjust to changing market conditions. It is its goal to achieve a positive EBT in the Germany segment in Internationally, the first two months were also positive. Here, sales growth of 9.8% was achieved. In 2006 again, we are pursuing the goal, on these markets, to extend and improve absolute earnings. In so doing, markets with declining sales and margin developments should be compensated for by opening up new markets. This Group Management Report contains future-oriented statements that are based on assumptions and estimates of management. Although we assume the expectations of these forward-looking statements to be realistic, we cannot guarantee that the expectations will prove to be correct. The assumptions can bear risks and insecurities, which may lead to the fact that the actual results deviate significantly from the forward-looking statements. These factors include: changes in the economic and business environment, foreign exchange and interest rate fluctuations, a lack of acceptance of new services and products of our suppliers as well as a change in the business strategy and loan granting policy of the commercial banks. VBH Holding AG Annual Report 2005

35 1

36

37 3

38

39 5

40 Consolidated financial statements of VBH Holding AG as per 31 December 2005 Notes to the consolidated financial statements for the 2005 financial year I. General information and presentation of the consolidated financial statements VBH HOLDING AKTIENGESELLSCHAFT (»VBH«or»company«in brief) is registered with the Stuttgart Local Court as HRB The company is headquartered in Korntal- Münchingen. The shares of the company are listed in the General Standard segment of the Deutsche Börse and are traded on the official market of the Frankfurt and Stuttgart stock exchanges. The purpose of the Group is, in particular, the purchase and sale of hardware, furniture fittings, tools, machines, construction elements, system parts and associated items as well as the production and sale of special fittings. These consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) were drawn up in euro, as the Group s transactions are based on this currency. The structure of the consolidated profit and loss statement corresponds with the total cost format. For reasons of clarity of the presentation, items in the consolidated balance sheet and the consolidated profit and loss statement are summarised and subsequently explained separately. The tabular presentation of items in the consolidated balance sheet and the consolidated profit and loss statement are provided in the notes in thousand euro (). Minor deviations are due to rounding. The structure of the consolidated balance sheet is effected in accordance with maturity. On passing the provision by the European Parliament and the Council of Ministers of the European Union on the application of international accounting standards on 6 June 2002, all capital market oriented companies must draw up their consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) in respect of financial years commencing after 31 December These consolidated financial statements of VBH as per 31 December 2005, including the information of the previous year, were drawn up due to the initial application of the International Financial Reporting Standards (IFRS) in accordance with the regulations of IFRS 1, published on 19 June The term IFRS also comprises the still valid International Accounting Standards (IAS). The consolidated financial statements were drawn up in accordance with the principles of the going concern principle, on the basis of historic costs and time values. All binding IFRS or IAS regulations and interpretations of the International Financial Reporting Interpretation Committee (IFRIC) or Standing Interpretations Committee (SIC) for the 2005 financial year were observed. Standards with an application date after the balance sheet date were not prematurely corresponded with. In the year under review there were no effects from the premature application of standards on the assets, financial and earnings situation of the Group. The consolidated financial statements were supplemented by a Group Management Report and additional explanations, required in accordance with HGB (German Commercial Code) or AktG (German Stock Corporation Act).

41 Consolidated financial statements II. Initial application of the IFRS Material differences The decisive differences to the financial statements in accordance with HGB, presented previously, lie in the following points: For the purpose of structuring the consolidated balance sheet in accordance with IFRS, a difference was made between short-term and long-term assets and liabilities. Long-term assets or liabilities are items with a term of more than a year. Deferred taxes are listed as long-term assets or liabilities, respectively. Foreign exchange claims and liabilities are valued at the rate applicable on the balance sheet date. The imparity principle is not applied. The valuation of the pension provisions is effected in accordance with the projected unit credit method, taking into consideration future forecast salary developments. Direct and indirect pension obligations are taken into account in the calculation. Goodwill is activated in accordance with IFRS and its intrinsic value tested at least once annually (impairment test). The scheduled depreciation of goodwill or offsetting with equity, possible in accordance with the German Commercial Code is not possible in accordance with IFRS for acquisitions during the year under review. In accordance with IAS 39, financial tools must be recorded on the balance sheet and valued at depreciated acquisition cost or market value. With finance lease agreements, the reporting as assets of asset values and the reporting as liabilities of the lease obligation is effected in accordance with IAS 17 In accordance with HGB, deferred taxes must be determined in respect of all differences between the tax and the consolidated balance sheet that are restricted in time, if these have an effect on earnings. In accordance with IAS 12, an obligation exists to determine deferred taxes with regard to all temporary differences between the tax valuations and the valuations of the consolidated balance sheet. Insofar as temporary differences were created with no effect on earnings, IFRS provides for the fact that the respective deferred taxes must also be formed with no effect on earnings. In accordance with IFRS, special purpose entities must be consolidated differently to the provisions of the German Commercial Code. Reconciliation of the result for the 2004 financial year In the context of the initial conversion from HGB to IFRS, the accounting differences between HGB and IFRS have been represented in an alternative consolidated profit and loss statement. The following reconciliation of the Group result for the 2004 financial year from HGB to IFRS was drawn up in accordance with IFRS 1: Significant changes to the individual items of the consolidated profit and loss statement between HGB and accounting according to IFRS resulted from the extended circle of consolidation (VBH Naisus, Serbia; VBH Latvia, Latvia; EVG Bauprofil- System Entwicklungsu. Vermarktungsgesellschaft mbh, Austria; Gedalia Grundstücksverwaltungsgesellschaft mbh & Co., Germany), the abolition of regular depreciation for goodwill of 1,514, the redemption of a value adjustment of 5,000 against a consolidated company through the extension of the circle of consolidation and deferred taxes of 2,301. VBH Holding AG Annual Report 2005

42 VBH Holding Aktiengesellschaft, Korntal-Münchingen Effect of the conversion to IFRS on the consolidated profit and loss statement HGB Effect IFRS 2004 of 2004 Conversion 1. Sales proceeds 643,630 4, , Reduction of the stock of finished products and work in progress Other operating income 13, , Total operating performance 657,345 4, , Material expenditure -494,111-2, , Wages and salaries -70, , Other operating expenses (incl. miscellaneous taxes IFRS) -60,905-4,112-65, Restructuring expenses 0-7,930-7, Earnings before interest, taxes and depreciation (EBITDA) 31,472-10,501 20, Depreciation -6,515 1,514-5, Earnings before interest and taxes (EBIT) 24,957-8,987 15, Income from participations Interest and similar income 1, , Deprecation of financial assets and marketable securities Interest and similar expenses -12,676-1,034-13, Expenses from transfers of losses 17. Financial income from restructuring/capitalisation model 0 53,824 53,824 Financial result -12,144 53,432 41, Profit and loss on ordinary activities HGB 12, Result out of restructuring 40,894-40, Earnings before taxes (EBT) 53,707 3,551 57, Income tax expenses and miscellaneous taxes (HGB only) -6, , Deferred taxes 0 2,301 2, Earnings after taxes (EAT) 47,134 6,129 53,263 Reconciliation of Group equity as per 1 January 2004 and 31 December 2004 In the context of the initial conversion from HGB to IFRS, the differences in accounting between HGB and IFRS were recorded in equity, without an effect on earnings. The following reconciliation of equity as per 1 January 2004 or 31 December 2004 from HGB to IFRS was drawn up in accordance with IFRS 1: Group equity reconciliation statement in EQUITY HGB group -38, ,507.6 Expansion circle of consolidation -10, ,371.2 assets Write-off receivables 0.0 5,000.0 Write-off goodwill 0.0 2,705.7 Pension provisions -1, ,961.2 Other provisions Deferred taxes on credit side ,636.0 Treasury stock , ,702.4 EQUITY IFRS group -50, ,805.2

43 Consolidated financial statements Material differences in the equity of the opening balance sheet as per 1 January 2004 between HGB and accounting in accordance with IFRS resulted from the extended circle of consolidation (VBH Naisus, Serbia; VBH Latvia, Latvia; EVG Bauprofil-System Entwicklungsu. Vermarktungsgesellschaft mbh, Austria; Gedalia Grundstücksverwaltungsgesellschaft mbh & Co., Germany) of 10,088, adjustments in pension provisions in accordance with IFRS calculation criteria of 1,892, the valuation of deferred tax assets of 391 and the report of own shares of 257. Material differences in equity between HGB and IFRS accounting as per 31 December 2004 resulted from the change of the circle of consolidation, presented above, depreciation of fixed assets, adjustments of pension provisions in accordance with the IFRS calculation criteria, the valuation of deferred tax assets of 2,636 and the report of own shares. In addition, the extension of the circle of consolidation and the redemption of the value adjustment against a consolidated company resulted in the appreciation of a loan granted and of goodwill. Explanation of material adjustments in the Cash flow statement The conversion of accounting from HGB to IFRS resulted in adjustments in respect of investments in tangible fixed assets as, according to IFRS, no transfers of profits from the sale of investments to provisions are permitted in accordance with section 6b EStG (Income Tax Act). Furthermore, differences resulted from the amendment of the basis of assessment for depreciation. The provisions formed for interest relating to the convertible profit-sharing certificates of 2,250 was reported in 2005 as a major business transaction with no effect on payments. III. Summary of material accounting and valuation principles The material accounting and valuation methods used in drawing up these consolidated financial statements are presented in the following text. Insofar as no conflicting information is provided, the methods described were consistently applied to the reporting periods represented. Circle and methods of consolidation Subsidiaries are all companies (including special purpose entities) in respect of which the Group exercises its control over the finance and business policies; regularly supported by a share in voting rights of more than 50%. In assessing whether such a control exists, the existence and effect of potential voting rights, that can currently be exercised or converted, are taken into account, where necessary. Subsidiaries are, on principle, incorporated into the consolidated financial statements (full consolidation) from the date onwards, on which control of the company was transferred to the Group. They are deconsolidated on the date on which this control ends. The accounting of subsidiaries acquired is effected on the basis of the purchase method. The acquisition cost of the purchase corresponds with the respective current market value of the assets, the equity tools spent and the liability generated or taken over at the time of the transaction (»Date of Exchange«) plus the costs that can be directly allocated to the purchase. Any assets, liabilities and contingent liabilities identified in the VBH Holding AG Annual Report 2005

44 course of a company merger are - during initial consolidation - valued at their respective current market value on the date of purchase, irrespective of the volume of minority shares in existence. The positive difference between the acquisition cost of the purchase and the share of the Group in the net assets to be valued at the respective current market value is reported as goodwill. If the acquisition cost is lower than the net assets valued at the respective current market value of the subsidiary purchased, the difference is recorded directly in the consolidated profit and loss statement, after further examination. The shares of the minority shareholders are reported at their corresponding share in the assets and liabilities that are valued at the respective current market value. The results of the subsidiaries acquired or disposed of in the course of the year are incorporated in the consolidated profit and loss statement in accordance with their date of acquisition or disposal. Transactions within the Group, account balances and unrealised profits or losses from transactions between group companies are eliminated. Unrealised losses are also eliminated, unless the transaction indicates a reduction in value of the transferred asset. Insofar as the fixed assets and inventories contain assets from deliveries within the Group, corresponding interim profits are also eliminated. The annual financial statements of the companies included in the consolidated financial statements are drawn up or reconciled in line with IFRS, in accordance with uniform accounting and valuation principles. The accounting and valuation methods of subsidiaries were, insofar as required, amended to guarantee uniform accounting across the Group. Any shares in the consolidated equity and in the consolidated annual result that relate to minority shareholders are reported separately from the shares relating to the parent company. The consolidated financial statements as per 31 December 2005 include the company and all subsidiaries in which the company holds the majority of voting rights, either directly or indirectly, or in respect of which the company exerts a dominating influence. Overall, the consolidated financial statements include VBH Holding AG itself, four domestic countries and 47 foreign companies. A consolidation of further group companies was not effected as these are, all in all, of minor importance to the Group. It is the first time the following companies were included in the consolidated financial statements in accordance with IFRS: Capital share date of first consolidation VBH Naisus, Serbia 95% VBH Latvia, Latvia, 90% EVG Bauprofil-System Entwicklungs- u. Vermarktungsgesellschaft mbh, Austria* 50% Gedalia Grundstücksverwaltungsges. mbh & Co, Germany 100% *since %.

45 Consolidated financial statements As a result of the provisions of IFRS 1, the companies were integrated into the circle of consolidation on the date of initial consolidation. The 2004 Group figures were supplemented by these companies on the basis of a full consolidation. EVG Bauprofil-System Entwicklungsu. Vermarktungsgesellschaft mbh is a company prior to registration, in respect of which a group company exerts a major influence on the business activities of the company. Gedalia Grundstücksverwaltungsges. mbh & Co is a special purpose entity within the Group. Further changes to the circle of consolidation in 2005 new capital share Miscellaneous SOGED Holding S.p.a., Italy 100% acquisition of stock 35% C.D.A. ForliS.r.l., Italy 76% indirect acquisition of stock 23% C.D.A. Dell' AdriaticoS.r.l., Italy 60% indirect acquisition of stock 43% UAB VBH Vilnius, Lithuania 100% acquisition of stock 5% Overall, acquisition costs of 3,824 arose in respect of the purchase of the participations. Discontinued operations As per the sales and assignment agreement of 12 September 2005, 100% of the shares in SEG-Tortec GmbH, Hockenheim (previously SEG Bauelemente GmbH) were disposed of. The material transfer of the company was effected on 1 January The fully consolidated company is reported as a discontinued activity within the Group. The discontinued area had the following effects on the segment results of the Germany segment, structured by continued and discontinued operations: Discontinued Continued Segment Operations Operations Germany Sales proceeds external 7, , ,963 Sales proceeds group 37 4,041 4,078 Total operating performance 9, , ,592 Earnings before financial result (EBIT) -1,263 1, Net profit/loss before transfer of losses* -1, ,466 Assets 6,682 97, ,719 Liabilities 5, , ,335 Employees * A control and profit transfer agreement existed between the parent company VBH DeutschlandGmbH and SEG- Tortec GmbH. The negative result from the cash flow of the current business activities of discontinued operations totalled 1,601. VBH Holding AG Annual Report 2005

46 The assets of the discontinued operations are structured as follows: Long-term assets and fixed assets 52 Short-term inventories and work in progress 2,227 Short-term trade receivables 4,340 thereof amounts due from group companies 1,588 Other short-term assets 38 Cash equivalents 25 The liabilities are structured as follows: Short-term provisions 243 Short-term trade payables 367 Short-term advance payments received 1,463 Other short-term liabilities 3,412 Short-term accrued and deferred items 5 Sales of participations Shares (84%) in the Italian sub-subsidiary CDA Friuli, Palmanov, were disposed of as per 1 January The effects of the deconsolidation on the Group are insignificant and will not be presented in detail. In addition, on 1 August 2005, the VBH Group disposed of a 73.66% participation in Profitherm GmbH, Rositz, held via VBH Deutschland GmbH, by disposing of these to the minotiry shareholder as per the sales agreement dated 26 August The Argentinian participation in Ventec Argentinia S.A. (45%), Argentina, was sold to a co-partner. The shares in C.D.A. Lucca s.r.l. (70%), Italy, were also disposed of. Segment reporting In segment reporting, segments are delimited by geographic allocation. At the same time, these reflect the operational responsibilities of the Group s management structure and are regularly monitored by management to assess the economic situation of the Group as a whole and as a sub-group. The segments represent the segments that are primarily required to report in accordance with IAS 14 (»Segment Reporting«). A business segment is a group of assets and business activities that are different from other segments due to their risks and opportunities. Segment reporting lists segments that are structured according to the main geographic activities (primary segmentation). Segment reporting is effected in co-operation with the balance sheet item and valuation methods of the underlying IFRS consolidated financial statements. Intersegment consolidation was performed. Realisation of earnings and expenses Sales proceeds are valued at the respective time value of the return service received or to be received and represent the amounts that can be achieved in respect of goods and services in the usual course of business. All discounts, value-added tax and other reductions of proceeds in connection with sales must be deducted from this amount. The sale of

47 Consolidated financial statements goods is recorded together with the delivery and the transfer of ownership. Interest income is delimited on an accrual basis, taking into consideration the outstanding amount of the loan and the applicable rate of interest. The applicable rate of interest is precisely the interest rate at which the estimated future cash flows are discounted over the term of the financial asset on the net book value of the asset. Dividend earnings from financial investments are recorded on generation of the partner s legal claim for payment. Pension costs Pension costs include service costs and, where applicable, past service costs. The interest expense from the pension obligations is also included in personnel expenditure. Actuarial gains or losses are only taken into consideration as having an effect on earnings if their balance exceeds 10% of the cash value of the gross pension obligation in the previous reporting period. Income tax Income tax expenditure represents the total current tax expenditure and the deferred taxes. Current tax expenditure is determined on the basis of the taxable income for the year. In accordance with the profit and loss statement the taxable income differs from the net income for the year before income tax, as it excludes expenses and earnings that are not taxable or tax deductible in later years. The Group s obligation in respect of the current tax expenditure is calculated on the basis of the current tax rates or the rates of taxation that have been announced to be in force on the balance sheet date. Deferred taxes are the anticipated tax burdens or reliefs from the differences of the book values of assets and liabilities in the annual financial statements and the valuations used in the calculation of the taxable income. In so doing, the balance-sheet oriented liability method is used. Deferred tax liabilities are generally recorded for all taxable temporary differences and deferred tax claims insofar as it is likely that taxable profits are available in respect of which the deductible temporary differences can be used. Deferred taxes are not reported if the temporary difference is derived from goodwill or from the initial recording (with the exclusion of company mergers) of other assets and liabilities resulting from events that affect neither the taxable income nor the net income for the year. A consolidated tax rate of 24.0% was used in calculating the deferred taxes on the basis of the differences described. Active deferred taxes with a tax rate of 40% were formed in respect of loss carryforwards, which can most likely be utilised over a period of five years. The book value of the deferred tax claims is examined every year on the reporting date and reduced if it is no longer likely that sufficient taxable income is available to realise the claim fully or partly. Deferred taxes are determined on the basis of the tax rates that are anticipated to apply on the date the liability is met or the asset value is realised. Deferred taxes are generally recorded as affecting the current period result, except in respect of items that are directly booked in equity capital. VBH Holding AG Annual Report 2005

48 Patents, licences (incl. software) and trademarks Acquired patents, licences and trademarks are recorded at their historic purchase and production cost. They have a specific effective life and are valued at their purchase and production cost minus cumulative depreciation. Insofar as there are signs of depreciation, the scheduled depreciable intangible assets are subjected to an impairment test and, if necessary, depreciated to the amount achievable within the meaning of IAS 36. Depreciation is effected by means of the straight-line method over an estimated effective life, which was uniformly defined for the following intangible assets. These largely consist of software and ERP software, which is depreciated over a period of three years. Goodwill The goodwill accruing in the context of the consolidation represents the positive difference of acquisition costs of a corporate purchase via the share of the Group in the applicable acquisition costs of the identifiable assets and liabilities of a subsidiary or jointly managed company at the time of purchase. Goodwill and intangible assets with an indefinite term of use do not undergo scheduled depreciation in accordance with IFRS 3 or IAS 38. They are instead subjected to an annual impairment test in accordance with IAS 36 and, if a corresponding indication is given, also to an impairment test during the year, and, if necessary, depreciated to the amount achievable (»Impairment-only approach«). For the purpose of the impairment test, goodwill is distributed to cash generating units, i.e. to every single company. Every impairment in value is immediately recorded as having an effect on earnings. No revaluation is performed at a later date. When disposing of a subsidiary or jointly managed company, the applicable amount of goodwill is included in the determination of the profit or loss from the disposal. Tangible assets All tangible assets are valued at their acquisition and production cost, minus depreciation. Acquisition and production costs include the expenses that can be directly allocated to the acquisition. Subsequent acquisition/production costs are only recorded as a share of the acquisition and production costs of the asset or if clear as a separate asset, if it is likely that the Group will derive a future economic benefit from this and that the costs of the asset can be reliably determined. All other repairs and maintenance work are recorded as expenses in the profit and loss statement in the financial year in which they accrued. Properties do not undergo scheduled depreciation. Depreciation is largely effected in accordance with the straight-line method, while acquisition costs are depreciated at their residual book value over the anticipated useful life of the assets: Storage buildings Administrative buildings Residential buildings Operating facilities Machines Machinery and equipment Furniture and fixtures years 33 years 50 years years years 4 11 years 3 13 years

49 Consolidated financial statements The residual book values and economic useful lives are investigated every balance sheet date and adjusted where necessary. If the book value of an asset exceeds the estimated amount it could achieve, the latter value is immediately used in depreciation. Profits and losses from the disposal of assets are determined as the difference between the disposal proceeds and the book value and recorded as income. Impairment in value of assets/financial assets Assets with an indefinite useful life are not subjected to scheduled depreciation; they are annually investigated in respect of an impairment in value. Assets that are subject to scheduled depreciation are investigated for an impairment in value if corresponding events or changes in circumstances prove that the book value may no longer be achievable. A loss caused by an impairment in value is recorded at the level of the book value exceeding the achievable amount. The achievable amount is the higher amount from the applicable time value of the asset minus disposal costs and the utility value. For the impairment test, assets are pooled at the lowest level at which cash flows can be separately identified (cash generating unit). Lease relationships Lease relationships are classified as»finance leasing«if, through the lease conditions, virtually all opportunities and risks associated with the property are transferred to the lessee. All other lease relationships are classified as»operating leasing«. Fixed assets that were rented or leased, and the economic property of which is held by the respective group company (»Finance Lease«), are reported as group assets with their applicable time values or with the cash value of the minimum lease payments, if this is lower. The corresponding liabilities toward the lessor are shown on the balance sheet as obligations from finance leasing at amounts due to other finance providers. The lease payments are distributed to interest expenses and to the repayment of the lease commitment so that a constant rate of interest is achieved in respect of the remaining commitment. Lease payments with an operating leasing relationship are recorded as expenses in the profit and loss statement, linear over the term of the lease relationship. An important finance lease agreement within the Group exists in respect of a storage and office building in Cologne that is utilised by VBH. Financial instruments Disposable values The shares in group companies and participations listed in the category «available for sale», can all be disposed of, without exception. These are valued at their applicable time value, if this time value can be reliably determined. Any changes of applicable time values are taken into consideration in equity, without an affect on income. If there are indications for a permanent impairment in value, an impairment test is performed and the resultant depreciation is recorded as income. The shares in group companies and participations are investments in equity instruments in respect of which no price is listed on active markets. VBH Holding AG Annual Report 2005

50 As these are largely companies that are currently being set up, valuation is effected at amortised cost. An impairment loss determined on the basis of an impairment test is recorded as income. Trading portfolio The securities listed as short-term assets are held for trading purposes, classified and valued correspondingly. All acquisitions and disposals of financial assets are reported on the trading day, i.e. the date on which the Group commits itself to buy or sell the asset. They are taken out of the books if the rights to payments from the investment have expired or are transferred and the Group has transferred all material risks and opportunities associated with the property. On every balance sheet date an investigation is performed as to whether objective criteria exist in respect of an impairment in value of a financial asset or a group of financial assets. If securities of the category»financial assets available for sale«are disposed of or impaired, the adjustments of the respective time value accumulated in equity are recorded with an effect on the operating result as profits or losses from financial assets in the profit and loss statement. Inventories Inventories are valued at the lower value of acquisition or production costs and net realisable value. In accordance with the Group guidelines, inventories are valued in accordance with the FIFO method or the weighted average method minus value adjustments for uncommon products or stock. Trade receivables Trade receivables are initially reported at the respective time value and subsequently at amortised cost, minus impairments in value. An impairment in value of trade receivables is recorded if there are objective indications that the amounts of the claims due cannot be fully collected. The level of the impairment in value is measured as the difference between the book value of the claim and the cash value of the estimated future cash flows from this claim. The impairment in value is recorded as affecting the current operating result. Insofar as the reasons for value adjustments undertaken in previous periods no longer apply, corresponding appreciations in value are effected. Derivative financial instruments and hedge accounting The financing of the Group holds inherent financial risks due to interest rate fluctuations. The Group utilises interest rate swaps to hedge against these risks. The Group does not utilise derivative financial instruments for speculative purposes. The utilisation of financial derivatives is regulated by corporate guidelines that have been approved by the Board of Management. These guidelines contain clear regulations on how to deal with derivative financial instruments. As the regulations of hedge accounting were not applied in the year under review, changes of the applicable time value of derivative financial instruments are recorded on their inclusion in the profit and loss statement.

51 Consolidated financial statements In the year under review VBH Holding AG utilised derivative financial instruments to secure interest rate positions in the context of its operations. The instruments were two interest rate swaps. The original interest rate swap dated 17 February 1998 over a nominal amount of EUR 7.7 million served to secure the interest rate risk from the amounts due to banks. As the level of interest developed correspondingly negative in the course of time, this interest rate swap resulted in a negative market value of The risk was recorded in the context of provisions. The interest rate swap of 4 August 2005 over a nominal amount of EUR 7.7 million was scheduled by VBH Holding AG as a transaction to offset the original interest rate swap. In the past and in the current financial year the interest rate swap generated only positive cash flows. According to current knowledge this will not result in future risks or charges. Due to a unilateral right of termination agreed with one of the financing banks in 2006, no positive time value could be taken into consideration. Receivables and other assets Receivables and other assets are initially reported at the respective time value and subsequently at amortised cost minus impairments in value. These largely comprise bonus payments due from suppliers, creditors with a debit balance, other loans and receivables as well as amounts under settlement and have a remaining term to maturity of less than a year. Cash and deposits with financial institutions Cash comprises cash on hand and sight deposits. Equity Ordinary shares are classified as equity. Costs that can be directly allocated to the issue of new shares or options are reported net in equity, after taxes, as deduction from the issuing proceeds. Costs that can be directly allocated to the issue of new shares or options or costs that are directly linked with the acquisition of a company are included in the acquisition costs of the respective company acquisition, as part of the return service for the acquisition. If VBH or a group company acquire shares in VBH s equity (treasury shares or own shares), the value of the paid return service, including directly allocatable additional costs (net after taxes) is deducted from the equity due to the shareholders of the company, until the shares are redeemed, re-issued or re-sold. If such shares are subsequently re-issued or re-sold, the return service received is reported, net after deduction of directly allocatable additional transaction costs and associated income taxes, in the equity due to the shareholders of the company. Provisions Provisions are formed if the Group has a current legal or factual obligation resulting from a past event or if it is likely (»More likely than not«) that the settlement of the obligation will impact assets, and the level of provisions could be reliably determined. The valuation of the provisions is effected with the probable value of utilisation. Long-term provisions are discounted, if the effect is significant. VBH Holding AG Annual Report 2005

52 Employee benefits Pension liabilities The VBH Group operates exclusively with performance-based pension plans. With performance-based pension plans, the costs for the provision of the service are determined using the projected unit credit method, while an actuarial valuation is performed on every balance sheet day. The actuarial valuation of pension provisions for the company pension plan is effected in accordance with the projected unit credit method described in IAS 19 (»Employee Benefits«). In the context of this projected unit credit method, both the pensions and acquired entitlements known on the balance sheet date and the anticipated increase of salaries and pensions in the future are taken into consideration. Any differences (so called actuarial gains or losses) between the pension liabilities determined on a regular basis and the actual projected unit credit method at the end of the year, are only reported if they exceed a bandwidth of 10% of the scope of the liability. In this case they will from the following year onwards be distributed over the average residual period of service of the entitled staff and recorded as earnings or expenses. Within the financial result, the share of interest due to the increase of the provisions is shown as interest expense. Other provisions for pensions and similar obligations are formed on the basis of actuarial reports in accordance with IAS 19. The basis for the pension entitlements is a collective agreement dated 18 February 1981 for a circle of pre-retireees, who entered into an employment relationship with VBH Deutschland GmbH or its legal predecessor, VBH Holding AG and esco GmbH, up to 1 March In accordance with the supplement dated 22 February 1996, this company pension plan was concluded for employees recruited after 29 February In addition, individual agreements exist. Profit sharing and bonus plans The Group carries provisions for bonus payments and profit sharing as a liability in cases in which a contractual obligation exists or in which a factual obligation exists due to past business practices. Foreign currencies Functional currency and reporting currency The annual financial statements of all companies incorporated into the circle of consolidation are drawn up in euro or reconciled to euro. The euro represents both the functional and the reporting currency of VBH. Transactions and balances Foreign currency transactions are translated to the functional currency using the exchange rates of the date of transaction. Profits and losses resulting from the fulfilment of such transactions and from the translation at the rate applicable on the reporting date of monetary assets and liabilities managed in foreign currencies, are reported in the profit and loss statement.

53 Consolidated financial statements The exchange rates used were the following: Country Currency Rate on reporting date Average annual rate United Kingdom GBP 0,6870 0,6840 Moldova MDL 15, ,6327 Slovenia SIT 239, ,5167 Poland PLN 3,8686 4,0321 Estonia EEK 15, ,6472 Latvia LVL 0,6967 0,6960 Lithuania LTL 3,4528 3,4528 Czech Republic CZK 28, ,767 Hungary HUF 252, ,0626 Russian Federation RUB 33, ,1578 Serbia CSD 85, ,4324 Romania ROL 3,6800 3,6229 Ukraine UAH 5,9860 6,3182 Belarus BYR 2.555, ,5000 Kazakhstan KZT 158, ,0925 The portfolio of currency translation differences (offsetting items from currency translation) in equity, with no effect on the operating results, is as follows: Positive allocation from currency translation Group Dec Dec 2004 Negative allocation from currency translation Konzern 993 Currency translation within the Group results in differences, which affect the consolidated profit and loss statement as follows: Income from currency translation, Group Expenses from currency translation, Group Legal disputes and claims for damages If individual legal disputes or claims for damages within the Group result in facts which must be reported, these have been sufficiently taken into account through the formation of corresponding provisions in the individual financial statements of the group companies. The Group is not aware of any material risks. Liabilities Trade payables Trade payables are, on principle, reported at the repayment amount. VBH Holding AG Annual Report 2005

54 Loans The net loan proceeds of interest-bearing bank loans are reported, minus the directly allocatable issuing costs. The effective interest rate method is applied in the context of the follow-up valuation if the historical acquisition costs deviate from the repayment amount. Bonds In the course of a capital model executed in 2004, convertible profit-sharing certificates amounting to EUR 50,000,000 of a nominal amount of EUR 5 each and a term to 2014 were generated from liabilities in respect of loan repayment claims of financing banks. These can be converted into up to 10,000,000 shares at a ratio of 5:1. The convertible profit-sharing certificates are managed under the securities identification number WKN A0CASN. The conditions applicable to the convertible profit-sharing certificates can be viewed at whenever required. Lease commitments The financial liabilities from financing lease relationships are carried as liabilities together with the cash value of future lease instalments and will, in the following periods, be reduced by the redemption share of the lease instalments. Positions with a residual term of up to a year were reported as short-term positions; longterm positions have a residual term to maturity of more than one year. Other liabilities Other liabilities were reported at their repayment amounts. The applicable time value largely corresponds with the book value. Contingent liabilities Contingent liabilities are not reported. A contingent liability exists if the existence of a current, legal or factual obligation and the outflow of resources is only possible, but not likely. In this case an event is considered likely if there are more points in favour of the occurrence of the event than against it. Contingent liabilities are, however, listed in the Notes if the possibility of an outflow of resources entailing an economic benefit is not unlikely. Contingent claims are also not reported. However, they are listed in the Notes if the inflow of economic benefit is likely. Estimates in reporting and in valuation When drawing up the consolidated financial statements, estimates and assumptions must be made to a certain degree on the level and statement of the assets and liabilities, the earnings and expenses as well as the contingent liabilities of the year under review, reported. They largely relate to the assessment of the intrinsic value of assets, the uniform determination within the Group of economic useful lives of tangible fixed assets and the reporting and valuation of provisions. The assumptions and estimates are based on premises, which again are based on the most up-to-date level of knowledge. With regard to the anticipated future business development, this was in particular based on the sales

55 Consolidated financial statements available at the time of drawing up the consolidated financial statements and the future development of the environment which is implied to be realistic. Due to developments of these framework conditions that deviate from these assumptions and lie outside the sphere of influence of management, the amounts to be derived may deviate from the estaimated values originally anticipated. At the time of drawing up the consolidated financial statements the assumptions and estimates on which these statements are based were not subject to any significant risks, so that it is not to be expected at the current point in time - that the book values of the assets and liabilities listed in the consolidated balance sheet will have to undergo major adjustment in the following year. IV. Risk management The Group is exposed to various financial risks resulting from the operating and financing activities of the Group. The financial risks most relevant to the Group result from interest rate changes as well as the creditworthiness and solvency of the Group s agreement partners. The financial risk management is effected within the Group in accordance with the principles defined by management. These comprise interest, market, credit and liquidity risks. Principles and guidelines also exist in respect of other areas such as liquidity management and the procurement of short-term and long-term loans. The goal of financial risk management is the hedging, where necessary, of the above mentioned risks and thus the delimitation of the negative effects on the profit and loss statement and balance sheet of the Group. Taking into account the principle of the separation of functions, the financial risks to which the Group is exposed are continuously valued, monitored and actively managed by applying several different measures. VBH Holding AG Annual Report 2005

56 V. Notes on the profit and loss statement (1) Sales proceeds/segment reporting On the basis of IFRS guidelines, the organisational structure of VBH was divided into the following primary operational and non-operational segments: Germany Eastern Europe Western Europe Corporate Services Total operating performance The total operating performance of the Group is comprised as follows: Sales proceeds 693, ,458 Reduction of the stock of finished products and work in progress 1, Other operating income 16,695 13,757 Total operating performance 711, ,079 Sales proceeds by segments are structured as follows: Germany 347, ,877 Western Europe 161, ,109 Eastern Europe 192, ,512 Consolidation -8,067-9,040 Group total 693, ,458 Segment reporting For operational reasons, the Group is currently divided into three operating, regional areas: Germany, Western Europe and Eastern Europe. In addition, one non-operational area exists: Corporate Services. These areas form the basis of the primary format of segment reporting while, at the same time, representing the internal control structure of the Group. As the Group does not operate any different business segments, there is no need for a subdivision by business segments. As a business group, which defines and determines its products or services on an individual basis within a specific, economic environment on the respective markets, entering into market-specific requirements and the flexibility of the range is our most important criterion for success. The key ranges on the individual markets and segments are largely the same. The difference lies in market maturity and also depends on political and economic framework conditions in the regions in which the VBH Group is active. These also represent the most important risk criteria for the Group. The VBH Group has already done justice to this development for several years and has, virtually unamended, been reporting on these geographic regions as segments. At the same time these are levels of control for the Board of Management and the Supervisory Board.

57 Consolidated financial statements Segment reporting is represented as follows: 2004 in accordance with IFRS Germany Western Eastern Corporate Consoli- Group in Europe Europe Services dation Sales proceeds external 334, , , ,425 Sales proceeds group 5,481 4,469 12,123 9,040 13,033 Total operating performance 348, , ,362 3,666-12, ,079 Wages and salaries 44,512 16,863 7,749 2,623 71,747 Other operating expenses 34,858 14,318 12,673 2, ,017 Restructuring expenses 9,895 4,807-6,772 7,930 Earnings before financial and participations result, taxes and depreciation (EBITDA) -6,936 13,082 18,200-6,424 3,049 20,971 Depreciation 1,810 1, , ,001 Earnings before financial and participations result and taxes EBIT) -8,747 11,767 17,319-7,445 3,075 15,970 Financial and participations result 42,912-1, ,817-26,676 41,288 Earnings before taxes (EBT) 34,165 10,501 16,820 19,372-23,601 57,258 Earnings after taxes (EAT) 34,110 6,689 14,430 19,389-21,356 53,263 Assets 101,077 87,388 60, , , ,715 Liabilities 134,563 68,593 31, , , ,910 Employees , in accordance with IFRS Germany Western Eastern Corporate Consoli- Group in Europe Europe Services dation Sales proceeds external 342, , , ,876 Sales proceeds group 4,078 4,347 28,174-8,067 28,532 Total operating performance 356, , ,265 5,284-9, ,781 Wages and salaries 44,652 17,358 9,209 2, ,100 Other operating expenses 35,884 14, ,222 4,171-5,017 63,135 Restructuring expenses 3, ,132 Earnings before financial and participations result, taxes and depreciation (EBITDA) 1,507 12,994 17,222-2,269 3,623 33,077 Depreciation 1,735 1,335 1, ,730 8,682 Earnings before financial and participations result and taxes (EBIT) ,659 16,104-3, ,395 Financial and participations result -1,225-1, ,403-9,442 9,614 Earnings before taxes (EBT) -1,452 10,327 16, ,550 14,781 Earnings after taxes (EAT) -1,466 6,949 13, ,632 9,824 Assets 103,719 97,077 75, , , ,213 Liabilities 132,335 76,600 35, , , ,401 Employees ,153 The continued and discontinued activities of the segment Germany are explained in the details contained in the Annex. Due to the low level of investment activities of the business group, no investments were listed in the segments.

58 (2) Other operating income Income from dissolution of provisions 4, Income from dissolutions of value adjustments 4, Income from disposal of fixed assets Other operating income 7,287 8,386 Total other operating income 16,695 13,757 In the year under review, the income from the dissolution of provisions comprises the dissolution of provisions for contingent losses formed in 2004 in the context of a share purchase totalling 3,790. (3) Material expenditure Material expenditure consists virtually exclusively of trade goods. (4) Personnel expenditure Personnel expenditure is comprised as follows: Wages and salaries 61,197 59,228 Social expenditure 12,903 12,519 Total 74,100 71,747 thereof for retirement benefits 1,177 1,209 The interest expenditure included in the expenses for retirement benefits amounted to 307 (PY: 306) in the year under review, current service costs total 533 (PY: 526). As per 31 December 2005, actuarial losses totalling 1,926 (PY: 744) have not been recorded due to the corridor approach in accordance with IAS 19. Any relevant adjustments derived from this approach will be taken into account in future pension reports. The increase in personnel expenditure is largely due to the extended business activities, in particular in Eastern Europe (increase of 69 employees). (5) Depreciation Depreciation on goodwill 3,790 0 Depreciation on tangible assets 4,438 4,344 Depreciation on financial assets Total 8,682 5,001 The change is due to the consolidation of EVG (see participations) and the resultant value adjustment of corporate goodwill of 3,790, due to a binding option agreement to take over shares of the company.

59 Consolidated financial statements (6) Other operating expenses Expenses relating to other periods 8,031 9,467 Administrative expenses 14,646 13,876 Sales expenditure 20,347 18,882 Other expenses 20,112 22,792 Other operating expenses 63,136 65,017 The expenses relating to other periods decreased in the year under review by 1,436 or 15.2% year-on-year; this is largely due to the reduction of loan losses by approx. 1,000 year-on-year. In 2005, total administrative and other expenses dropped 1,910 or 5.2% against the previous year. Sales expenditure increased in 2005 in the course of the sales increase by 1,465 or 7.8% (PY: 6.9%) and thus rose as scheduled. (7) Restructuring expenses In the 2005 financial year, restructuring expenses of 4,132 (PY: 7,930) were incurred. These were largely required for the further adjustment of the German business model to the changed market conditions and in respect of expenses relating to the disposal of subsidiaries. (8) Result from companies valued»at equity«no participations were consolidated «at equity» in the annual financial statements. (9) Financial result Income from participations 1, Interest and similar income 1,011 1,025 Interest and similar expenses 11,212 13,710 Expenses from transfers of losses Financial income from restructuring 0 53,824 Financial result 9,614 41,288 The interest paid in the financial year continued to decline. In so doing, the inflow of EUR 8.3 million in liquid funds through the capital increase of 3,317,767 shares at an issuing price of EUR 2.50 per no-par share and the further reduction of the interest rate level in respect of the group loans granted following the successful restructure was noticeable. In addition, the repayment of the credit line was effected by means of a positive consolidated cash flow. Here the repayment of the ABS programme was fully effected via the credit lines made available by the banks. Holding AG Annual Report 2005 VBH

60 (10) Income tax Income tax is broken down as follows (breakdown in current and deferred taxes) Income tax expense 6,548 6,296 Deferred taxes 1,590 2,301 Income tax 4,958 3,995 As in the previous year, income tax is calculated on the basis of the estimated taxable gains for the financial year. The income tax expense for the year under review comprises 635 as income tax expense in respect of previous years and 190 as income tax expense from the external audit. In accordance with IAS 12.81, the actual tax expense must be compared with the tax expense that would have resulted when using the applicable tax rates on the EBT listed. The overall tax rate of currently 41,9% used, reflects the notional consolidated tax rate of VBH. The tax-related reconciliation calculation from the calculated to the actual tax expense is represented as follows, in respect of the year under review: EBT 14,781 57,257 Calculated rate of income tax in % 41,9 41,0 Anticipated income tax expense 6,193 23,475 Tax exempt earnings/losses ,016 Effects of tax losses Tax additions and deductions Tax payments and refunds previous years and expenses in respect of external audits Income tax 6,548 6,296 Tax rate in % (11) Minority interest in consolidated earnings Minority interests in the net income for the year 2,213 1,932 These largely consist of the minority participations held in the companies in Spain, Italy, Poland, the Czech Republic and Kazakhstan, which succeeded in achieving considerable income for the Group in the year under review.

61 Consolidated financial statements (12) Earnings per share The calculation of the undiluted and diluted earnings per share is based on the following data: in Continued Discontinued Continued Discontinued Operations Operations Operations Operations Net income after minority interest 7,611 51,330 Disontinued Operations 1,610 1, Adjusted earnings after taxes 9,221 1,610 51, Number of shares 36,495,477 36,495,477 33,177,680 33,177,680 Treasury stock 128, , , ,504 Weighted average of Shares in circulation 34,708,060 34,708,060 21,271,336 21,271,336 Earnings per share in undiluted Earnings per Share in fully diluted In calculating the fully diluted earnings, the convertible profit-sharing rights were fully incorporated. The share options were not taken into consideration due to the fact that the conditions for exercise did not occur. The following instruments could have a significant, future diluting effect: Conversion of the convertible profit-sharing certificates to shares at a volume of up to 10,000,000 shares (Conditional capital I), exercise of the share options at a volume of up to 1,200,000 shares (Conditional capital II) and two authorised capital increases of a volume of up to 7,500,000 shares each (Authorised capital I and II). (13) Reconciliation to the net income for the year Group net income 9,824 53,262 Profit/Loss carried forward 3, ,778 Allocation to legal reserves 31 1,153 Allocation to reserves for treasury stock 141 Allocation to other earnings reserves 13,048 11,373 Withdrawal from other earnings reserves 25,438 Income from capital reduction 15,395 Withdrawal from capital reserve 32,416 Minority interest in profit/loss carried forward 1,085 3,629 Minority interest in net income 2,213 1,932 Partition of net income out of first consolidation 7 Currency exchange gains/losses Accumulated profit/loss 3,218 1,896 The transfer to the other earnings reserves is largely the result of the transfer of the net income for the year of VBH Holding AG of 10,287 to the earnings reserves and reinvestments for the strengthening of capital in Western and Eastern Europe VBH Holding AG Annual Report

62 VI. Notes to the consolidated balance sheet Long-term assets (1) Intangible assets The intangible assets comprise licences, industrial property and similar rights as well as goodwill. Licences, industrial property and similar rights are depreciated over their expected economic life, which is three years, on average. To meet the requirements of IFRS 3, in connection with IAS 36, and to define possible impairments in value of goodwill, VBH AG has determined its cash generating units in accordance with internal reporting. An impairment test in accordance with IAS 36 was performed to investigate the intrinsic value. In addition, goodwill is is investigated at least once annually if there are reasons of facts indicating a reduction of book value. The development of intangible assets is shown in the schedule of assets. The addition results from the increase in shares held in SOGED Holding S.p.A (2) Tangible fixed assets The development of tangible fixed assets is shown in the schedule of assets. (3) Financial assets We refer to the schedule of assets with regard to the development of financial assets. The shares in group companies listed are not consolidated in these consolidated financial statements. Consolidated financial statements

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