Chairman’s Letter
Asset and Capital Structure
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Management Report
Asset and Capital Structure
Total assets increased by €19.2 billion compared with December 31, 2005, to €55.9 billion, mainly because of the acquisition of Schering AG, Berlin, Germany. Explanations concerning the full consolidation of Schering are provided in Note [7.2] to the consolidated financial statements. The data relating to the Schering AG purchase price allocation are preliminary.
| Bayer Group Summary Balance Sheets | Dec. 31, 2005 | Dec. 31, 2006 | Change |
| € million | € million | % | |
| Noncurrent assets | 20,130 | 35,897 | +78.3 |
| Current assets | 16,592 | 17,069 | +2.9 |
| Assets held for sale and discontinued operations | 0 | 2,925 | - |
| Total current assets | 16,592 | 19,994 | +20.5 |
| Total assets | 36,722 | 55,891 | +52.2 |
| Stockholders’ equity | 11,157 | 12,851 | +15.2 |
| Noncurrent liabilities | 16,495 | 27,525 | +66.9 |
| Current liabilities | 9,070 | 14,667 | +61.7 |
| Liabilities directly related to assets held for sale and discontinued operations | 0 | 848 | - |
| Total current liabilities | 9,070 | 15,515 | +71.1 |
| Liabilities | 25,565 | 43,040 | +68.4 |
| Total stockholders’ equity and liabilities | 36,722 | 55,891 | +52.2 |
Noncurrent assets rose by €15.8 billion to €35.9 billion. They include €11.6 billion in acquired and amortized intangible assets of Schering AG, consisting mainly of production related rights and know-how. Noncurrent assets also included goodwill of €5.7 billion as of December 31, 2006 resulting from the Schering AG acquisition.
Current assets of continuing operations rose by €0.5 billion from the previous year, to €17.1 billion, largely because of the trade accounts receivable, inventories, and cash and cash equivalents added by the Schering AG acquisition. Current assets were diminished by the presentation of Diagnostics, H.C. Starck and Wolff Walsrode as discontinued operations. These businesses are no longer reflected in the individual balance sheet items as in the prior year, but instead are recognized under “Assets held for sale and discontinued operations” and the corresponding liability item.
Stockholders’ equity expanded by €1.7 billion to €12.9 billion. The dividend payment (including reimbursements of capital gains tax) diminished stockholders’ equity by €0.5 billion, and negative currency effects led to a reduction of €0.7 billion, while Group net income contributed €1.7 billion and the issuance of new shares added €1.2 billion. This capital increase brought the capital stock of Bayer AG to €2.0 billion. The equity ratio (equity coverage of total assets) for 2006 thus stood at 23.0 percent on December 31, 2006 (2005: 30.4 percent). Taking into account our portfolio changes, we expect the equity ratio to be back at around 30 percent at year end 2007.
Liabilities grew by €17.5 billion compared with December 31, 2005, to €43.0 billion. Current and noncurrent financial liabilities rose by €10.8 billion, mainly due to the financing of the Schering AG acquisition. Despite the inclusion of Schering’s pension commitments, provisions for pensions were down by €0.6 billion to €6.5 billion in light of actuarial changes recognized directly in stockholders’ equity.
Current assets of continuing operations rose by €0.5 billion from the previous year, to €17.1 billion, largely because of the trade accounts receivable, inventories, and cash and cash equivalents added by the Schering AG acquisition. Current assets were diminished by the presentation of Diagnostics, H.C. Starck and Wolff Walsrode as discontinued operations. These businesses are no longer reflected in the individual balance sheet items as in the prior year, but instead are recognized under “Assets held for sale and discontinued operations” and the corresponding liability item.
Stockholders’ equity expanded by €1.7 billion to €12.9 billion. The dividend payment (including reimbursements of capital gains tax) diminished stockholders’ equity by €0.5 billion, and negative currency effects led to a reduction of €0.7 billion, while Group net income contributed €1.7 billion and the issuance of new shares added €1.2 billion. This capital increase brought the capital stock of Bayer AG to €2.0 billion. The equity ratio (equity coverage of total assets) for 2006 thus stood at 23.0 percent on December 31, 2006 (2005: 30.4 percent). Taking into account our portfolio changes, we expect the equity ratio to be back at around 30 percent at year end 2007.
Liabilities grew by €17.5 billion compared with December 31, 2005, to €43.0 billion. Current and noncurrent financial liabilities rose by €10.8 billion, mainly due to the financing of the Schering AG acquisition. Despite the inclusion of Schering’s pension commitments, provisions for pensions were down by €0.6 billion to €6.5 billion in light of actuarial changes recognized directly in stockholders’ equity.
| Balance Sheet and Financial Ratios | 2005 | 2006 | ||
| Cost of sales ratio (%) | Cost of goods sold | 54.3 | 52.8 | |
| Net sales | ||||
| R&D expense ratio (%) | Research and development expenses | 7.0 | 7.9 | |
| Net sales | ||||
| Inventory turnover | Cost of goods sold | 2.4 | 2.5 | |
| Inventories | ||||
| Receivables turnover | Net sales | 4.7 | 5.0 | |
| Trade accounts receivable | ||||
| EBIT margin before special items (%) | EBIT before special items | 12.3 | 12.0 | |
| Net sales | ||||
| EBITDA margin before special items (%) | EBITDA before special items | 18.6 | 19.3 | |
| Net sales | ||||
| Asset intensity (%) | Property, plant and equipment + intangible assets | 43.6 | 62.1 | |
| Total assets (continuing operations)1 | ||||
| D&A/capex ratio (%) | Depreciation and amortization | 126.5 | 100.1 | |
| Capital expenditures | ||||
| Liability structure2 (%) | Current liabilities | 35.5 | 36.0 | |
| Liabilities | ||||
| Gearing (%) | Net debt + pension provisions | 1.1 | 1.9 | |
| Stockholders’ equity | ||||
| Equity ratio2 (%) | Stockholders’ equity | 30.4 | 23.0 | |
| Total assets | ||||
| Return on stockholders’ equity2 (%) | Income after taxes | 14.4 | 14.1 | |
| Average stockholders’ equity | ||||
| Return on assets (%) | Income before taxes and interest expense | 8.8 | 7.7 | |
| Average total assets for the year based on segment table | ||||
2005 figures restated
1 Total assets (continuing operations) = noncurrent and current assets minus the balance sheet item “assets held for sale and discontinued operations”
2 Ratio refers to the total of continuing and discontinued operations
1 Total assets (continuing operations) = noncurrent and current assets minus the balance sheet item “assets held for sale and discontinued operations”
2 Ratio refers to the total of continuing and discontinued operations
The capital stock of Bayer AG amounts to €1,956,715,315.20 and is divided into 764,341,920 no-par bearer shares. Each share confers one voting right.
We have received the following notifications of direct and indirect holdings of shares in Bayer AG that exceed 10 percent of the capital stock:
The Capital Group Companies, Inc., U.S.A., has notified us pursuant to Section 21, Paragraph 1 of the German Securities Trading Act (WpHG) that the proportion of voting rights it holds in our company exceeded the 10 percent threshold on September 19, 2006, that since that date it has held 10.0179 percent of the voting rights and that all of these voting rights are attributable to it pursuant to Section 22, Paragraph 1, Sentence 1, No. 6 in conjunction with Section 22, Paragraph 1, Sentence 2 and Sentence 3 of the German Securities Trading Act. Further, the Capital Research and Management Company, U.S.A., which according to our information is a subsidiary of The Capital Group Companies, Inc., has notified us that the proportion of voting rights it holds in our company exceeded the 10 percent threshold on November 8, 2006, that since that date it has held 10.0852 percent of the voting rights, and that all of these voting rights are attributable to it pursuant to Section 22, Paragraph 1, Sentence 1, No. 6 of the German Securities Trading Act.
Pursuant to Section 84, Paragraph 1 of the German Stock Corporation Act (AktG), the members of the Board of Management are appointed and dismissed by the Supervisory Board. Since Bayer AG falls within the scope of the German Codetermination Act (MitbestG), the appointment or dismissal of members of the Board of Management requires a majority of two-thirds of the votes of the members of the Supervisory Board. If no such majority is achieved on the first ballot, the appointment may be approved on a second ballot by a simple majority of the votes of the members of the Supervisory Board pursuant to Section 31, Paragraph 3 of the Codetermination Act. If the required majority is still not achieved, a third ballot is held. Here again, a simple majority of the votes suffices, but in this ballot the Chairman of the Supervisory Board has two votes pursuant to Section 31, Paragraph 4 of the Codetermination Act.
Under Section 6, Paragraph 1 of the Articles of Incorporation of Bayer AG, the Board of Management must comprise at least two members. If further members are appointed to the Board of Management, under Section 84, Paragraph 2 of the German Stock Corporation Act or Section 6, Paragraph 1 of the Articles of Incorporation, the Supervisory Board may appoint one member to be Chairman of the Board of Management.
Pursuant to Section 179, Paragraph 1 of the German Stock Corporation Act, amendments to the Articles of Incorporation require a resolution of the Stockholders’ Meeting. Pursuant to Section 179, Paragraph 2, this resolution must be passed by a majority of three-quarters of the voting capital represented at the meeting, unless the Articles of Incorporation provide for a different majority. However, where an amendment relates to a change in the object of the company, the Articles of Incorporation may only specify a larger majority. Section 17, Paragraph 2 of the Articles of Incorporation of Bayer AG utilizes the scope for deviation pursuant to Section 179, Paragraph 2 of the German Stock Corporation Act and provides that resolutions may be passed by a simple majority of the votes or, where a capital majority is required, by a simple majority of the capital.
The Annual Stockholders’ Meeting of Bayer AG on April 28, 2006 resolved to revoke the existing Authorized Capital and create new Authorized Capital (Authorized Capital I and Authorized Capital II) and adopted the necessary amendments to the Articles of Incorporation. With the approval of the Supervisory Board and until April 27, 2011, the Board of Management may use the Authorized Capital I to increase the capital stock by up to a total of €465 million. The issue of new shares may take place in exchange for cash and/or contributions in kind, but capital increases in exchange for contributions in kind may not exceed a total of €370 million. If the Authorized Capital I is used to issue shares in return for cash contributions, stockholders must be granted subscription rights. With the approval of the Supervisory Board and until April 27, 2011, the Board of Management is also authorized to increase the capital by up to €186 million in one or more installments by issuing shares out of the Authorized Capital II in exchange for cash contributions. The stockholders must be granted subscription rights. However, the Board of Management is authorized, with the approval of the Supervisory Board, to exclude subscription rights for stockholders provided the capital increase out of the Authorized Capital II does not exceed 10 percent of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised. Following the capital increase on July 6, 2006, the Authorized Capital II is currently €98.960 million.
Conditional capital of €186.88 million, corresponding to 73,000,000 shares, exists to service the conversion rights under a mandatory convertible bond issued by Bayer Capital Corporation B.V. on April 6, 2006. Further, the Annual Stockholders’ Meeting on April 28, 2006 authorized the Board of Management to purchase and sell company shares representing up to 10 percent of the capital stock. This authorization expires on October 27, 2007.
Material agreements entered into by Bayer AG which are subject to the condition precedent of a change of control include, firstly, the agreement of March 23, 2006 establishing a €7 billion syndicated credit facility for Bayer AG. This agreement contains provisions entitling the banks participating in the syndication to terminate the agreement in the event of a change of control and demand repayment of any outstanding sums.
Similarly, the €2.3 billion mandatory convertible bond issued by Bayer Capital Corporation B.V. on April 6, 2006, which is secured by a subordinated guarantee from Bayer AG, also contains a change of control clause. Under Section 6.5 of the conditions of issue, in the event of a takeover offer pursuant to Section 29, Paragraph 1 of the German Securities Acquisition and Takeover Act (WpÜG) or a mandatory offer, bondholders shall be entitled to exercise their conversion rights. If they do so, they will receive Bayer AG shares in accordance with the applicable conversion ratio.
Finally, the terms of the €3 billion in notes issued by Bayer AG in 2006 under its multicurrency Euro Medium Term Note program also contain a change of control clause. Holders of these notes have the right to demand the redemption of their notes by Bayer AG in the event of a change of control if Bayer AG’s credit rating is downgraded within 120 days after such change of control becomes effective.
The following arrangements have been made for the members of the Board of Management of Bayer AG in the event of a takeover offer:
In the event of a change of control and termination of a Board of Management member’s service contract within 12 months thereafter – whether by mutual consent, through expiration of the contract or through its voluntary termination by the member in certain circumstances, such as a change in strategy – the member would receive a monthly bridging allowance amounting to 80 percent of his last monthly fixed salary for a period of 60 months, not counting any period for which he is released from his duties on full pay. His pension entitlement is based on the final target pension level. If this has not already been reached by the date of the change of control, his pension entitlement will be supplemented up to this level.
There are no comparable arrangements for employees.
We have received the following notifications of direct and indirect holdings of shares in Bayer AG that exceed 10 percent of the capital stock:
The Capital Group Companies, Inc., U.S.A., has notified us pursuant to Section 21, Paragraph 1 of the German Securities Trading Act (WpHG) that the proportion of voting rights it holds in our company exceeded the 10 percent threshold on September 19, 2006, that since that date it has held 10.0179 percent of the voting rights and that all of these voting rights are attributable to it pursuant to Section 22, Paragraph 1, Sentence 1, No. 6 in conjunction with Section 22, Paragraph 1, Sentence 2 and Sentence 3 of the German Securities Trading Act. Further, the Capital Research and Management Company, U.S.A., which according to our information is a subsidiary of The Capital Group Companies, Inc., has notified us that the proportion of voting rights it holds in our company exceeded the 10 percent threshold on November 8, 2006, that since that date it has held 10.0852 percent of the voting rights, and that all of these voting rights are attributable to it pursuant to Section 22, Paragraph 1, Sentence 1, No. 6 of the German Securities Trading Act.
Pursuant to Section 84, Paragraph 1 of the German Stock Corporation Act (AktG), the members of the Board of Management are appointed and dismissed by the Supervisory Board. Since Bayer AG falls within the scope of the German Codetermination Act (MitbestG), the appointment or dismissal of members of the Board of Management requires a majority of two-thirds of the votes of the members of the Supervisory Board. If no such majority is achieved on the first ballot, the appointment may be approved on a second ballot by a simple majority of the votes of the members of the Supervisory Board pursuant to Section 31, Paragraph 3 of the Codetermination Act. If the required majority is still not achieved, a third ballot is held. Here again, a simple majority of the votes suffices, but in this ballot the Chairman of the Supervisory Board has two votes pursuant to Section 31, Paragraph 4 of the Codetermination Act.
Under Section 6, Paragraph 1 of the Articles of Incorporation of Bayer AG, the Board of Management must comprise at least two members. If further members are appointed to the Board of Management, under Section 84, Paragraph 2 of the German Stock Corporation Act or Section 6, Paragraph 1 of the Articles of Incorporation, the Supervisory Board may appoint one member to be Chairman of the Board of Management.
Pursuant to Section 179, Paragraph 1 of the German Stock Corporation Act, amendments to the Articles of Incorporation require a resolution of the Stockholders’ Meeting. Pursuant to Section 179, Paragraph 2, this resolution must be passed by a majority of three-quarters of the voting capital represented at the meeting, unless the Articles of Incorporation provide for a different majority. However, where an amendment relates to a change in the object of the company, the Articles of Incorporation may only specify a larger majority. Section 17, Paragraph 2 of the Articles of Incorporation of Bayer AG utilizes the scope for deviation pursuant to Section 179, Paragraph 2 of the German Stock Corporation Act and provides that resolutions may be passed by a simple majority of the votes or, where a capital majority is required, by a simple majority of the capital.
The Annual Stockholders’ Meeting of Bayer AG on April 28, 2006 resolved to revoke the existing Authorized Capital and create new Authorized Capital (Authorized Capital I and Authorized Capital II) and adopted the necessary amendments to the Articles of Incorporation. With the approval of the Supervisory Board and until April 27, 2011, the Board of Management may use the Authorized Capital I to increase the capital stock by up to a total of €465 million. The issue of new shares may take place in exchange for cash and/or contributions in kind, but capital increases in exchange for contributions in kind may not exceed a total of €370 million. If the Authorized Capital I is used to issue shares in return for cash contributions, stockholders must be granted subscription rights. With the approval of the Supervisory Board and until April 27, 2011, the Board of Management is also authorized to increase the capital by up to €186 million in one or more installments by issuing shares out of the Authorized Capital II in exchange for cash contributions. The stockholders must be granted subscription rights. However, the Board of Management is authorized, with the approval of the Supervisory Board, to exclude subscription rights for stockholders provided the capital increase out of the Authorized Capital II does not exceed 10 percent of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised. Following the capital increase on July 6, 2006, the Authorized Capital II is currently €98.960 million.
Conditional capital of €186.88 million, corresponding to 73,000,000 shares, exists to service the conversion rights under a mandatory convertible bond issued by Bayer Capital Corporation B.V. on April 6, 2006. Further, the Annual Stockholders’ Meeting on April 28, 2006 authorized the Board of Management to purchase and sell company shares representing up to 10 percent of the capital stock. This authorization expires on October 27, 2007.
Material agreements entered into by Bayer AG which are subject to the condition precedent of a change of control include, firstly, the agreement of March 23, 2006 establishing a €7 billion syndicated credit facility for Bayer AG. This agreement contains provisions entitling the banks participating in the syndication to terminate the agreement in the event of a change of control and demand repayment of any outstanding sums.
Similarly, the €2.3 billion mandatory convertible bond issued by Bayer Capital Corporation B.V. on April 6, 2006, which is secured by a subordinated guarantee from Bayer AG, also contains a change of control clause. Under Section 6.5 of the conditions of issue, in the event of a takeover offer pursuant to Section 29, Paragraph 1 of the German Securities Acquisition and Takeover Act (WpÜG) or a mandatory offer, bondholders shall be entitled to exercise their conversion rights. If they do so, they will receive Bayer AG shares in accordance with the applicable conversion ratio.
Finally, the terms of the €3 billion in notes issued by Bayer AG in 2006 under its multicurrency Euro Medium Term Note program also contain a change of control clause. Holders of these notes have the right to demand the redemption of their notes by Bayer AG in the event of a change of control if Bayer AG’s credit rating is downgraded within 120 days after such change of control becomes effective.
The following arrangements have been made for the members of the Board of Management of Bayer AG in the event of a takeover offer:
In the event of a change of control and termination of a Board of Management member’s service contract within 12 months thereafter – whether by mutual consent, through expiration of the contract or through its voluntary termination by the member in certain circumstances, such as a change in strategy – the member would receive a monthly bridging allowance amounting to 80 percent of his last monthly fixed salary for a period of 60 months, not counting any period for which he is released from his duties on full pay. His pension entitlement is based on the final target pension level. If this has not already been reached by the date of the change of control, his pension entitlement will be supplemented up to this level.
There are no comparable arrangements for employees.
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