Annual Report 2006
GfK Group: www.gfk.com
Notes to the consolidated balance sheet
Assets
Intangible assets
The movement in intangible assets is shown in the table below.
The additions to other intangible assets amounting to EUR 20,842 thousand (2005: EUR 14,776 thousand) comprise internally generated assets worth EUR 14,748 thousand (2005: EUR 8,151 thousand).
Goodwill
The allocation of goodwill to cash-generating units is shown in the table below.
An impairment test is carried out at least once a year to determine whether and to which extent existing goodwill is to be impaired. No impairment adjustment was required as a result of the impairment tests for 2005 and 2006. There were therefore no impairment expenses for either financial year.
Other intangible assets
The breakdown of other intangible assets is shown in the table below.
The item Software includes software developed internally totaling EUR 22,224 thousand (2005: EUR 13,022 thousand).
Expenses for research activities are recorded as expenses for the reporting period. Development costs which did not result in a capitalizable intangible asset are also recorded as expenses.
Panel set-up costs only have a limited useful life if the panel was created for a specific, fixed-term client order. Capitalized panel set-up costs amounting to EUR 2,892 thousand (2005: EUR 2,571 thousand) have an unlimited useful life.
Brands which have been identified and capitalized as part of the purchase price allocation, also have an unlimited useful life, as they are established brands with a high degree of brand recognition.
The recoverability of panel set-up costs and brands with an unlimited useful life was reviewed as part of an impairment test. This indicated the need for the impairment adjustment indicated below.
The amortization and impairment expenses charged on intangible assets are included in the following items on the income statement:
Impairment expenses total EUR 5,632 thousand (2005: EUR 7,641 thousand). EUR 3,176 thousand relate to impairment losses on brands. Impairments on surveys of EUR 2,327 thousand are also included. In both cases the impairment adjustment was required, because the brands and surveys acquired as part of company acquisitions were replaced by the GfK brand and GfK products. In order to assess the recoverable value, the higher of the fair value less costs to sell and value in use is determined and compared with the carrying value. The impairment is recognized in the income statement under other operating expenses.
Intangible assets of major importance are shown in the table below.
The above table shows the sum total of all intangible assets with an individual value of more than EUR 5 million.
The major portion of goodwill refers to NOP World companies. The useful life of goodwill is indefinite and it is not subject to scheduled amortization.
Software mainly involves the internally developed StarTrack analysis and production system in the Retail and Technology division with a remaining useful life of seven years. It also comprises the Evogenius software, which is being developed for the Media division and whose remaining useful life is five years.
The surveys, customer relations and brands stem primarily from the purchase price allocation as part of the acquisition of NOP World. The remaining useful life for the surveys is ten years. The customer relations are written down over a period of 12 to 20 years at an individually determined customer churn rate of between 7.5% and 15%. Brands have an unlimited useful life and are not subject to scheduled amortization. The allocation of brands to the divisions is shown in the table below.
Tangible assets
The movement in tangible assets is shown in the table below.
A land charge has been entered on a piece of land with company buildings in Nuremberg with a carrying value of EUR 7,024 thousand (2005: EUR 9,992 thousand) for the granting of a loan by a bank. The carrying value of the secured liability was EUR 3,265 thousand (2005: EUR 3,942 thousand) as of the reporting date.
Leasing
The GfK Group leases office premises and business equipment under long-term lease agreements. As a rule, the lease install-ments consist of a minimum lease payment plus a contingent lease payment whose level is governed by the level of use of the leased assets. In cases in which the GfK Group bears the risks and opportunities arising from the use of the leased assets to a substantial extent, these are capitalized (finance lease). Otherwise the lease installments are carried as an expense (operating lease).
Operating lease
The payments listed in the table below under operating lease agreements were carried as expenses:
The future minimum lease payments under non-terminable agreements are
due as of December 31, 2006 as shown in the table below.
The main operating leases in the GfK Group involve leases on land and buildings, some with options to extend the lease. They have differing future expiry dates.
Finance lease
The carrying values of capitalized leased items as of December 31, 2006 are shown in the table below.
The determination of the present value and due date of future minimum lease payments as of December 31, 2006 is shown in the table below.
In the reporting year there were no contingent rents to be recognized as expenses. There were no material sub-lease arrangements under finance leases.
The main finance leases held by the GfK Group are for buildings and part buildings as well as fixtures and fittings.
In April 1992, GfK AG entered into a sale-and-leaseback agreement for part of the office building at Nordwestring 101, Nuremberg, which qualifies as a finance lease. The lease was concluded for 30 years with an original obligation amount of EUR 13,012 thousand. The original lease period ends in March 2012 without right of cancellation, but with the option to acquire the building for EUR 7,533 thousand.
The finance lease liability is EUR 15,045 thousand (2005: EUR 15,233 thousand) of which EUR 2,182 thousand (2005: EUR 1,511 thousand) has a remaining term of under one year.
Investments
Investments in associates
The GfK Group’s investments in associates are shown in the list of shareholdings attached to these Notes as an appendix.
The table below gives a summary of financial information on the key investments in associates which have been valued at equity in the consolidated financial statements.
During the reporting period there were no material pro rata losses on investments in associates.
As in the prior year, the equity valuation was based on financial statements with differing reporting dates for the following associated companies:
- Media Focus (ARGE), Hergiswil, Switzerland (November 30, 2006)
- ORG-GfK Marketing Services (India) Private Limited, Mumbai, India (March 31, 2006)
- Sports Tracking Europe, B.V., Amstelveen, Netherlands (September 30, 2006)
- NPD Intelect, L.L.C., Port Washington, New York, USA (September 30, 2006).
The carrying amount for these investments and the income from associates are not materially affected by including these financial statements with differing reporting dates.
For practical reasons, preparing interim financial statements would not be possible.
Other investments
The breakdown of other investments is shown in the table below.
Participations in affiliated, non-consolidated companies and other participations are reported at amortized cost, as no market prices exist for them and other methods of realistically estimating the fair value are not practicable.
Further information on the GfK Group’s shares in affiliated companies and other participations is provided in the list of shareholdings in the appendix to the Notes.
Trade receivables
Trade receivables break down as shown in the table below.
Impairment expenses amounted to EUR 2,153 thousand (2005: EUR 1,643 thousand). They are shown in the income statement under the item selling and general administrative expenses
Liquid funds
A breakdown of liquid funds is shown in the table below.
Of the liquid funds, EUR 1,054 thousand (2005: EUR 2,551 thousand) are not freely available. The restriction on availability is mainly due to the fact that these liquid funds serve as rental deposits.
Other current assets and deferred items
The other current assets and deferred items break down as shown in the table below.
The increase in derivative financial instruments relates mainly to the acquisition of NOP World in 2005. They are used to hedge interest rate risks and are valued according to the marking-to-market method as of the reporting date. The derivatives reported here are mainly part of a cash flow hedge transaction.
Liabilities
Total equity
Subscribed capital
The subscribed capital of GfK Aktiengesellschaft has increased as a result of stock options being exercised. In the stock option program, in 2006, the holders of option rights from tranches 2001/2006, 2002/2007, 2003/2008 and 2004/2009 were entitled to acquire new no-par shares in GfK AG in the ratio 1:1.2 against submission of the option rights. In 2006, 378,423 options were exercised for the acquisition of 454,103 no-par shares.
As a result of the new shares, the subscribed capital, capital reserve and the number of no-par bearer ordinary shares issued developed as shown in the table below.
The 35,501,795 no-par shares are fully paid-up. Each shareholder is entitled to receive dividends on his shares in accordance with the respective profit distribution resolution. Each share grants one vote at the Annual General Meeting.
Authorized capital
GfK Aktiengesellschaft has authorized capital 2002 and authorized capital 2005 I. By resolution of the Annual General Meeting on June 13, 2002, the Management Board was authorized, with the consent of the Supervisory Board, to increase the capital against cash and/or contributions in kind on one or more occasions by up to a total amount of EUR 21,000 thousand until June 12, 2007 (authorized capital 2002). At the Annual General Meeting on May 24, 2005, the Management Board was authorized, with the consent of the Supervisory Board, to increase the capital against cash and/or contributions in kind on one or more occasions by up to a total amount of EUR 45,867 thousand until May 23, 2010, whereby the shareholders‘ subscription rights may be excluded (authorized capital 2005 I). A part sum of EUR 13,370 thousand has been utilized from the authorized capital 2005 I by the capital increase in 2005 excluding subscription rights. A sum of EUR 32,497 thousand therefore remains from the authorized capital 2005 I.
Contingent capital
In June 1999, the shareholders passed a resolution for a contingent increase of EUR 5,120 thousand in the company’s subscribed capital by issuing up to 2,000,000 new no-par bearer shares. At the Extraordinary General Meeting of September 3, 1999, a resolution was passed to relate profit entitlement to the start of the financial year in which options are exercised. The aim of the contingent capital increase is to grant option rights to the senior management team of the company and its affiliated companies within the meaning of Section 15ff. of the German Stock Corporation Act. Acquiring option rights is contingent on the achievement of a minimum target, to be agreed with each individual entitled person, for their immediate area of responsibility. The number of options available to each entitled person is based on the variable salary component advised to each entitled person in an individual letter, which can be replaced by options in the ratio of 1:2.5 by waiving a portion of the promised bonus. The actual number of options for tranches 1 to 3 results from division of this figure by a factor of 4.5.
The option right can be exercised at the earliest two years after issue and only within the defined exercise windows. The exercise price for tranches 2000/2005 and 2001/2006 was the equivalent of 120% of the average price of GfK shares in the Xetra closing auction on the five trading days prior to the issue of the option rights, or 120% of the price of GfK shares in the Xetra closing auction on the date of issue if this was higher than the aforementioned average price.
In June 2002, the shareholders consented to cancel the existing authorization to grant option rights and approved a new authorization and an increase of the contingent capital by EUR 6,687 thousand.
The option terms resolved apply to tranches 2002/2007, 2003/2008, 2004/2009, 2005/2010 and 2006/2011 and deviate from those of the prior tranches of the program as follows:
Members of the Management Board of GfK AG may hold a maximum of 30% of the option rights being granted (previously 20%).
Options may not be exercised during the 14 days before publication of quarterly, half-yearly, annual or preliminary annual figures. In addition, the company may set further periods at its discretion during which options may not be exercised. For each of the tranches to be issued, the exercise price to acquire a share is the share’s average Xetra price between the respective previous accounts press conference and the Annual General Meeting or, if higher, the price of the share in the Xetra closing auction on the trading day on which the respective tranche is issued, plus a premium of 5%. Trading days are those days on which the Frankfurt Stock Exchange determines a price for the company’s shares.
At the start of 2006, the contingent capital for exercising options amounted to EUR 10,954 thousand, equivalent to 2,577,723 no-par bearer shares. In 2006, the company’s contingent capital reduced by EUR 1,930 thousand through the exercise of options. By resolution of the shareholders in June 2006, the contingent capital was increased by up to EUR 3,400 thousand through the issue of up to 780,000 no-par shares. The company’s contingent share capital amounted to EUR 12,424 thousand as of December 31, 2006. This figure corresponds to 2,903,620 no-par shares.
Stock options
As a result of the capital increase in 2004 out of company funds and the issue of bonus shares in the ratio 5:1, the subscription right in respect of the issued options of tranches 1 to 6 increased from one share to 1.2 shares per option. The exercise prices were adjusted accordingly. As of tranche 7, to which GfK executives were invited to subscribe after the capital increase in 2004, one option again corresponds to the right to subscribe one share.
The development of the stock options issued is shown in the table below.
During financial year 2006, the stock options program involved per-sonnel expenses of EUR 2,287 thousand (2005: EUR 2,597 thousand).
The fair value of the stock options issued by GfK in the years 2000 to 2006 was calculated as of the date of granting on the basis of a Black-Scholes option pricing model, which takes account of the issue terms and conditions. The parameters considered when calculating the fair value and the overall amounts based on it are shown in the table below.
The calculation of volatility is based on historical volatility data for GfK shares (weekly average prices, net of any extraordinary past prices) for the expected term of the options.
The average weighted remaining term for the stock options was 3.2 years as of December 31, 2006 (2005: 3.1 years).
The development in the individual items of equity is shown in the table below.
GfK Annual Report 2006