Opportunity and risk report
OPPORTUNITY AND RISK MANAGEMENT SYSTEM
SYSTAIC’s opportunity and risk management system is an integral part of its corporate strategy and is geared to ensuring the continued existence of the Company and increasing shareholder value. It is structured in such a way as to identify and monitor significant risks. Group Controlling creates the basis for assessing the effect of identified opportunities and risks on the Company’s net assets, financial position and results of operations. Risk management incorporates all fully consolidated companies of the SYSTAIC Group.
OPPORTUNITIES
Opportunities for SYSTAIC arise from the positioning it has already achieved in the market for roof-integrated solar systems and from the continuous further development of our products, and the advancement of their technological lead. In the Industrial Solutions division, partnerships with project developers and outside investors offer good opportunities for further business expansion, particularly abroad. The solar-integrated greenhouse solutions are currently the solution most enquired about by investors. It is crucial that we maintain our competitive lead here for as long as possible.
Other opportunities are carefully evaluated and those which are not outweighed by opposing risks are exploited accordingly.
RISKS
The occurrence of one or more of the risks described below could have material adverse effects on the net assets, financial position and results of operations of systaic AG. The market price of the Company share could fall significantly as a result of these risks and investors could lose part or all of their invested capital. The risks described below are not the only risks to which systaic AG is exposed. Other risks and uncertainties, of which the Company is currently unaware, could also impair the business operations of systaic AG and have adverse effects on the net assets, financial position and results of operations of systaic AG. The order in which the following risks are listed is no indication of the probability of their occurrence or the scope of their potential economic effects. The range and content of these risk factors is also based on assumptions, which may subsequently prove to be incorrect.
MACROECONOMIC RISKS
The economic slump on the global markets is leading to a substantial decline in new orders in the SYSTAIC Energy Roof Systems and Automotive divisions. Potential financing bottlenecks for investment projects could also result in a reduction in demand in the SYSTAIC Industrial Solutions division. Should the economic and financial measures that have been resolved fail to help gradually restore confidence in the financial markets, there will be a greater risk of a longer-lasting recession.
INDUSTRY-RELATED RISKS
Dependency on general regulatory conditions and government subsidisation of the photovoltaic industry
As a photovoltaic plant manufacturer the SYSTAIC Group is dependent on economic development in the photovoltaic market. The rapid growth in this market over the past few years is attributable to a large extent to general regulatory conditions and subsidisation of photovoltaics in Germany and other countries. Without government subsidisation, power generation from photovoltaics would still be unable to compete, as a general rule, against other forms of power generation. The business activities of the SYSTAIC Group are thus influenced by the continuation of government subsidisation of photovoltaics.
The business activities of the SYSTAIC Group are not only dependent on the continuation of government subsidisation of photovoltaics, however, but also on government assistance for renewable energy sources as a whole; since not only the abolition of the government subsidy regime, but also a reweighting of the subsidisation of individual (renewable) energy sources could have a direct impact on the Company’s business. In Germany, the legal basis for this government support is provided, among other things, by the law prioritising renewable energies, the German Renewable Energy Sources Act (EEG) in its current version dated 25 October 2008. In addition to other regenerative energy sources, this law promotes in particular photovoltaics, which are the focus of the SYSTAIC Group’s business. This support is provided, on the one hand, by the general obligation imposed upon network operators to immediately prioritise the purchase of all available power from renewable energies, and to transfer it and distribute it. This ensures that the solar energy produced in this way is actually purchased. The EEG also contains regulations pertaining to the minimum price for electricity generated from renewable energy sources. This tariff is payable from the time from which the generator produces electricity exclusively from renewable energies for the first time, for a period of 20 years in each case, plus the year of commissioning. Without this government-regulated support of power produced with photovoltaics, this form of power generation would not be able to compete in the foreseeable future in Germany – in the sphere of plants like these, which are connected to a power network (on-grid) – with other grid-connected energy sources.
In Germany, in particular, government subsidisation is currently an essential requirement for the business activities of the SYSTAIC Group.
The feed-in tariffs are to be substantially reduced on 1 July 2010. To date, there is no guarantee that the efficiency of photovoltaics can be improved through improved performance and reduced production costs to such an extent as to compensate for the reduction in the feed-in tariffs.
There is nothing in place to protect the continued existence of the subsidisation of solar energy. A decline in political support and the financial implications this would have could have a negative impact on demand in Germany. This could endanger the continued existence of the SYSTAIC Group.
Other European countries (e.g. Italy, Spain, Portugal, France, Greece) also have political systems for promoting photovoltaics. Restrictions or even termination of political subsidisation in these countries could also impact demand and endanger the existence of the SYSTAIC Group.
Risk of a possible drop in prices of conventional energy sources influencing the demand for photovoltaic plants and thus for associated products and services
The current strong demand for photovoltaic plants is partly attributable to hikes in conventional energy prices in the past. The higher the price of energy generated from conventional energy sources, the more financially appealing the alternative generation of energy from photovoltaics seems. Conversely, a drop in the market prices of conventional energy sources, such as crude oil or natural gas, or a cut in electricity prices, could make energy generation from photovoltaics seem like the less attractive option economically, which could lead to a decline in the demand for photovoltaics. Such a decline in demand could result in considerable price pressure on photovoltaic products and reduce the market sales volume. A fall in the prices of conventional energy sources could have material adverse effects on the business and thus, among other things, on the net assets, financial position and results of operations of the SYSTAIC Group and, hence, systaic AG.
Power generation from other renewable energy sources could impact photovoltaics
Power generation from photovoltaics currently competes to some extent, and could, in future, find itself competing even more fiercely with other methods to generate power from other renewable energy sources, such as wind power, biomass or geothermal energy. These other methods could exert a strong competitive pressure on photovoltaics if technological advances make them more economical, or if they receive stronger regulatory support for political reasons. This could impair the further growth of the photovoltaic industry and could also lead to a decline in demand for photovoltaic products.
RISKS ASSOCIATED WITH THE COMPANY’S STRATEGY
Risks associated with expansion of activities in the SYSTAIC Energy Roof Systems division
The SYSTAIC Group made significant losses with low sales volumes in its SYSTAIC Energy Roof Systems division in the past financial year.
As part of its strategic objectives the SYSTAIC Group plans to expand its activities in the SYSTAIC Energy Roof Systems division and increase the share of total revenue this division generates, and improve the earnings situation. The SYSTAIC Group needs to take a number of measures in order to achieve this strategic objective. These measures include plans to expand the distribution activities for the energy roof system.
No assurance can be given, however, that the intensification of distribution activities will lead to an increase in the share of total revenue and the earnings situation of the Energy Roof Systems division or that the distribution activities will heighten interest and attract more attention to the energy roof system and thus enable the achievement of the strategic objective being pursued within the scope of planning.
The financial and other costs of implementing this strategic objective may be substantial and could also be in vain, if the energy roof system does not appeal to customers.
Dependency on individual customers leads in particular to risks of sales losses and bad debt
Revenue in the SYSTAIC Industrial Solutions division is generated with just a few customers, since revenue here comes from a small number of large-scale projects. At the present time, there are two investors involved. Then there is the fact that customers are often financial investors who purchase solar power plants through special-purpose companies, which do not have their own assets and, accordingly, have a limited credit history, without other group companies of the investor assuming joint liability.
The receivables from the projects in Italy are all due from project development companies within the group of a customer of the SYSTAIC Group. The companies within this group have not always fulfilled terms of payment on time in the past. The receivables from this group total around € 96.5 million. These receivables are not secured to a large extent. As the receivables are generally based on payments from the planning and installation of large-scale projects, we believe that the debtors have valuable assets. The long-term business relationship is very solid and there have been no major disruptions to date in this period. Nevertheless, systaic AG cannot overlook the overall economic situation of the debtors and the group of the customer, and at least the short-term ability to settle liabilities does not seem to be assured, due to liquid assets being tied up in the various projects. Given the apparent lack of other debts that largely exists among the debtors, as well as the various assets that are available from finished projects and projects in progress, the SYSTAIC Group assumes that the respective debtors will be able to pay off their liabilities in the next few months; however, the possibility cannot be ruled out that this might take longer than anticipated, or that payments may not be made. A payment plan has been agreed with the customer, which foresees payment of the outstanding accounts between April and August 2010 at the latest.
The SYSTAIC Group has just one customer in its Automotive division: Webasto AG. The SYSTAIC Group and Webasto AG have concluded a general supply agreement, which does not, however, specify any purchase obligations. During the time that Webasto AG is a partner of systaic AG, and for a period of two years thereafter, the SYSTAIC Group is not permitted to supply competitors of Webasto AG in the transport sector. No assurance can be given that Webasto AG will purchase the expected quantity of solar modules for the automotive industry from the SYSTAIC Group. In financial year 2009, revenue of € 6,318 thousand was generated with Webasto AG, which corresponds to around 3% of total revenue (2009: € 218 million). Insolvency or a cessation of business activities on the part of Webasto AG would have a material adverse effect on the revenue of the SYSTAIC Automotive division.
Insolvency, a cessation of business or financial difficulties at even just one of the above-mentioned customers would have a material adverse effect on the SYSTAIC Group's business.
Risks of international business operations
The Company intends to develop and expand its business in other EU member states and win customers for photovoltaic plants in other European countries. The expansion of the SYSTAIC Group's business operations into other geographical regions could be adversely affected by a number of factors, such as general political, economic, legal and tax conditions, unexpected changes in regulatory conditions and tariffs, recessions, limited protection of intellectual property, difficulties with filling and managing positions at foreign subsidiaries, or government subsidisation of competitor companies. In addition, national or international competitors may be in a position to better satisfy demand for photovoltaic plants, since they benefit from better production facilities and market outlets, due to their greater familiarity with the local conditions and markets. The development of new markets could also lead to start-up losses. Such factors could complicate the expansion of the Company’s business operations in these regions or make it impossible, which could have an adverse effect on the planned growth and thus on the general business and net assets, financial position and results of operations of the SYSTAIC Group and, hence, systaic AG.
Risks of rapid technological change
The solar energy industry is characterised by dynamic technological change. The photovoltaics market, in particular, is influenced by a continuous improvement and advancement of the system technology, as well as constantly changing customer demands.
The business success of the SYSTAIC Group therefore depends, among other things, on having to invest in fulfilling these constantly growing technological demands and in further developing its service offering. The success of the SYSTAIC Group will in future significantly depend on its ability to continuously improve the service offering of the SYSTAIC Group and to launch or purchase new products and services at the right time, in order to be able to keep up with the rapid technological change and react to the needs and requirements of the market. No assurance can be given that the SYSTAIC Group will be able to cope with these demands.
There is a particular risk of competitors of the SYSTAIC Group purchasing the know-how in greenhouse plants, launching similar products, especially products such as the SYSTAIC energy roof system, making improvements to existing service and product ranges, or announcing or launching new services or products with new functionalities. These may be less expensive than the products and services offered by the SYSTAIC Group or may be based on new technologies or changed customer requirements, and may thus supersede the existing service offering of the SYSTAIC Group, or they may represent cheaper alternatives to the existing services offered by the SYSTAIC Group and may be able to achieve higher efficiencies and performance levels. This could lead to the existing service offering of the SYSTAIC Group becoming outdated and no longer marketable.
In addition, competitors could secure exclusive property rights to the newly developed technologies and thus impair the competitive position of the SYSTAIC Group.
This constant technological change and continuous further development require a considerable amount of know-how, qualified specialists and development expenditure. No assurance can be given that the necessary resources needed to stay abreast of technological change and advancement will be sufficiently available. Furthermore, the challenges brought about by such rapid technological change could lead to changes in the current product structure of the SYSTAIC Group, should the demand for the services offered by the SYSTAIC Group decrease or cease completely.
The Company is also unable to give any assurance that the services offered by the SYSTAIC Group, particularly in its SYSTAIC Energy Roof Systems and SYSTAIC Automotive divisions, will not be squeezed out of the market by other technologies which the SYSTAIC Group has no access to or could only gain access to by investing a substantial amount of time and money.
There is also a risk of investments in new procedures, technologies, products and services proving later to be bad investments, because development projects turn out to be unfeasible or they fail to deliver commercially useful results, rendering the financial costs associated with the development pointless.
Risks of infringements or loss of intellectual property belonging to SYSTAIC
The SYSTAIC Group relies on the protection of its know-how, intellectual property rights and rights of use. No assurance can be given that it will be possible to effectively defend all rights necessary for the continued operation and development of the Energy Roof Systems division of the SYSTAIC Group in future. A considerable portion of the special features of the SYSTAIC energy roof system are not protected by intellectual property rights. The same applies for the construction of large-scale projects on greenhouses. This means that imitations are possible; if personnel with the relevant know-how were to move to competitors, this would facilitate imitations.
No assurance can be given that third parties will not develop similar products or similar know-how without infringing upon the property rights of the SYSTAIC Group: in the area of greenhouse systems, this is even likely to happen.
No assurance can be given, however, that the agreements concluded by the Company to protect its know-how and intellectual property will be adequate.
Risks arising from the existing internal organisation and its adaptation to current and planned growth
The growth and expansion of the SYSTAIC Group’s business requires – in addition to an expansion of production and distribution capacities – the development and further development of an appropriate internal organisation that is fitting for this growth and which includes risk monitoring, accounting, controlling and management structures that enable, among other things, early recognition of undesirable trends and risks. In the past, SYSTAIC has not always succeeded in achieving this further development of its internal organisation on time or efficiently. There is therefore a need for action right now, which the Company is now taking. Such an improvement in the internal organisation requires financial and human resources, however, and brings with it the risk of undesirable trends developing. The present internal organisation could give rise to risks for the SYSTAIC Group. It is therefore important, particularly following the divestiture of Enerparc AG, to continue driving the project development business successfully. An improvement is necessary in the organisation here, which suffered due to the outsourcing of project development to third parties. In the past financial year, it was not possible, due to finance-related activities, among other things, to eliminate these problems in their entirety and close the gaps that had developed. If the SYSTAIC Group fails to sufficiently expand its internal operational and organisational structure, this could result in undesirable trends or entrepreneurial or administrative failures, which could have material adverse effects on the net assets, financial position and results of operations of the SYSTAIC Group.
Risks associated with capacity utilisation
The SYSTAIC Group produces the units of energy it requires to build SYSTAIC Energy Roofs itself, provided these are used for photovoltaics and not solar thermal energy. To this end, the SYSTAIC Group has built an automated production facility with a capacity of around 40 MWp in Landsberg. This production facility was commissioned in the second half of 2008. In January 2010, reduced working hours had to be imposed for this production plant. No assurance can be given that it will be possible to utilise the existing capacities in full in future, due to a lack of new orders or due to a prefinancing requirement for production.
A lack of production capacity utilisation could lead to extraordinary write-downs, which could have adverse effects on the Company's earnings. In the Company’s estimation, these production plants conform to the current technical standard. Nevertheless, the SYSTAIC Group may be forced to make investments to upgrade the production facility to meet the demands of current technological advancement, in order to provide the market with the expected quality and quantity of products. If SYSTAIC were to be unable to do this, this could impair its competitive position.
Project risks
The SYSTAIC Group's project development business carries the usual risks encountered by a general contractor. Firstly, the SYSTAIC Group carries out preliminary work within the scope of its project development business, which will not be compensated in the event of a project being cancelled. This work might be internal services, but may also relate to the procurement of external services.
The project development business also gives rise to warranty risks. To a significant degree, the SYSTAIC Group must also set up guarantees and warranties for this for the many different stages of the projects, most of which must be financed or provided by banks. If SYSTAIC fails to obtain adequate guarantees from banks at normal market conditions, SYSTAIC may be rejected as a contractor for large-scale projects.
The execution of relevant large-scale projects, such as is the focus of the SYSTAIC Group's business, is associated with significant risks, due to the high pre-financing requirement. A higher than planned financing requirement could jeopardise the planned completion of the projects and lead to liquidity bottlenecks. Particularly in the Italian photovoltaic projects, a delay in completion could result in significant losses in sales and earnings, given the forthcoming change in general legal conditions due at the end of 2010. Furthermore, a higher financing requirement or a delay in the projects (also for other reasons) could lead to breaches of the agreed terms of financing agreements, particularly covenants, or to an inability to repay borrowed capital when due.
The SYSTAIC Group provided a significant amount of advance financing for projects in Italy. This has resulted in the SYSTAIC Group having to assume a significant amount of financing beyond that originally agreed with its creditors and the suppliers and having to extend the payment terms. If the income from these projects is not received with the first half of financial year 2010 as planned, this could endanger the existence of the SYSTAIC Group. This income is only guaranteed once the projects have been completed from the third-party side and successfully sold by the agent to an end-investor.
The SYSTAIC Group's planning for financial year 2010 is mainly based on the execution of large-scale projects in Italy. In particular the largest of these projects has not been commissioned to date. The SYSTAIC Group has nevertheless already made substantial investments in this project and the planning for the year is based mainly on the implementation of this project. In order to be able to ensure the timely implementation of this project, its execution may have to begin before the contracting project development company has secured its financing and thus the security of payment of the order volume to the SYSTAIC Group. If the SYSTAIC Group does not receive the final commission for this project or the payments of the customer from the project are not made or were to be significantly reduced, this would jeopardise the continued existence of the SYSTAIC Group.
PERFORMANCE-RELATED RISKS
Competition risks
The SYSTAIC Group competes in its various business fields with other suppliers. The growing competition in the area of photovoltaic plants and services could result, in particular, in price reductions, lower sales revenues and profit margins, and in an inability to expand, as well as a potential loss of market share for the SYSTAIC Group. Current and potential competitors include companies with, in some cases, substantial financial, technical and human resources at their disposal and a large market share. New competitors, particularly former suppliers of the Company, or affluent corporate groups with international operations could enter the market and quickly gain significant market shares.
No assurance can be given that the Company will be able to hold its own in the current or stronger competition anticipated in the future. Competitors may also be in a position to react faster than the Company to new or changing market conditions, conduct more extensive and more cost-intensive marketing campaigns, pursue a more aggressive pricing policy, and offer customers more favourable conditions than the Company. In particular, competitors could copy the SYSTAIC Group’s product and/or business model in its SYSTAIC Energy Roof Systems division or Automotive division, resulting in the SYSTAIC Group losing what it considers to be its unique selling points. Furthermore, no assurance can be given that competitors will not develop and market products or services which are superior to the product and services offered by the Company or which achieve a greater market acceptance.
No assurance can be given that competitors will not gain control over the Company's suppliers, which would have a negative impact on the Company's supplier relationships.
Risks from accounting methods
In terms of the valuation of large-scale projects, revenue is recognised pursuant to the percentage of completion method (IAS 11), according to the project's progress and the time the project is sold. Delays in the progress of projects or the sale of projects lead to shifts in revenue and earnings.
FINANCIAL RISKS
Liquidity risks
The SYSTAIC Group has been in a tense liquidity situation since the beginning of the financial crisis in the second half of 2008, particularly due to its large-scale project development business. The SYSTAIC Group has already once had to take out bridge financing from its banks at the beginning of 2009 and is currently negotiating further bridge financing with its banks, as well as the (further) deferral of liabilities with banks and other creditors. If the Group fails to obtain this bridge financing and if, at the same time, customer receivables which are already overdue or for which payment at the due date is doubtful cannot be realised in the short term, this would jeopardise the existence of the SYSTAIC Group. In addition, no assurance can be given that the SYSTAIC Group will not be encumbered with a tense liquidity situation in future and will again require bridge financing. The frequent occurrence of these difficulties could make it increasingly difficult to obtain such financing. Even if the bridge financing currently being negotiated were to be granted, this would not eliminate the liquidity risk, since the repayment of the bridge financing depends on the income from the projects in Sardinia being received as planned. In addition, the SYSTAIC Group requires lines of credit to implement additional large-scale projects planned in Italy, in particular to provide avals for advance payments. In the past financial year, systaic AG was not always able to comply with agreed covenants for financing. It cannot be ruled out that it may not be possible to adhere to covenants in future and that banks may take this as an opportunity to call loans in early or cancel them or to make negative decisions with regard to extending loans or granting new lines of credit.
The Company's financial development over the past two financial years, particularly the circumstances described above, have also caused banks and business partners to lose some confidence in the financial strength and payment reliability of the SYSTAIC Group. This could have an adverse effect on future business relationships and has, for example, already led to shorter credit periods with suppliers and to the reduction of existing loan commitments. For information on the liquidity risks in the project development business, please refer to the description in the relevant section on the project development business.
Currency risks
The SYSTAIC Group generated a significant portion of its revenue abroad in financial year 2009, but invoiced all its sales in euros. Purchases were also transacted in euros. It cannot be ruled out that sales or purchases might be invoiced in other currencies in future, however. In this event, the Company would be exposed to a risk of currency fluctuation.
Tax risks
The SYSTAIC Group is exposed to tax risks to the extent that tax assessments and external audits may lead to arrears payments or taxation laws may result in unfavourable amendments.
Tax assessments and external audits in the area of corporate income tax, trade tax and value-added tax have not been conducted within the SYSTAIC Group to date, with the exception of a special VAT audit conducted at systaic AG, nor are any pending as of the date of this report. The tax returns for the assessment periods 2008 and 2009 have not yet been submitted by systaic AG or the other companies of the SYSTAIC Group. In the past, the legal periods for submitting tax returns were not observed in a number of cases. In the Company’s opinion, the tax returns prepared together with the accountants for the SYSTAIC Group and submitted were complete and correct. Nevertheless, there is a risk that the tax authorities may take a different view of some of the information provided, which could result in significant tax arrears payments for the SYSTAIC Group. This could be the case, for example, if, in the opinion of the tax authorities, significant performance relationships with shareholders or persons related to these shareholders and with subsidiaries were not billed in the past at normal market conditions or the documentation required according to tax regulations cannot be adequately provided.
In financial year 2008, systaic Deutschland GmbH was merged with systaic AG retrospectively as of 31 December 2007. It cannot be ruled out that this may have resulted in the loss of tax loss carryforwards and the current losses incurred by systaic AG in 2008 up until 26 June 2008, meaning that these may no longer be offset against taxable profits. This could result in a higher tax burden and future tax arrears payments for the SYSTAIC Group, which could also have a negative impact on cash flow.
The Company and other companies of the SYSTAIC Group have tax loss carryforwards. It cannot be ruled out that these may cease to exist, in full or in part, in the future, or that they may only be usable to a limited extent. This is particularly the case according to Section 8c of German Corporation Tax Law (Körperschaftsteuergesetz, KStG), if, due to the many capital or reorganisation measures already carried out and/or to be carried out in the future, there is a change of control of more than 25%.
The Company has a high level of borrowings. The resulting expenses from financing activities may, in principle, only be immediately offset against taxes up to the amount of € 3 million, and only up to 30% of the definitive profit before interest expenses and interest income and regular depreciation and amortisation (taxable EBITDA in the sense of Section 4h German Income Tax Act (Einkommenssteuergesetz, EStG) in conjunction with Section 8a KStG). Non-deductible interest expenses must be carried forward and may, within certain restrictions, be offset against taxes in subsequent tax assessment periods. There is a risk that this interest carryforward may be lost under the requirements of Section 8c KStG. This may lead to a higher tax burden.
systaic AG assumes that it can be classed for VAT purposes as an entrepreneur for the entire period of its existence. It cannot be ruled out that systaic AG’s classification as an entrepreneur may not be recognised, at least in part, until entry in the commercial register of the merger of systaic Deutschland GmbH with systaic AG, with the result that (at least part of) the VAT paid up until this point may not be deducted as input tax.
Due to the fact that imports and exports account for a large share of the SYSTAIC Group's business, there is an increased risk that the very formal customs and VAT regulations, particularly those pertaining to documented evidence of imports and exports, may not have been adhered to. This may result in a significant tax burden.
In the past, the SYSTAIC Group has not always made its tax payments on time; significant tax payments due have already been outstanding for some time at the Spanish subsidiary. This leads to additional cost burdens due to consultancy costs, interest and late payment penalties. In addition, no assurance can be given that corresponding (automatic) extensions will continue to be granted in future or that tax liabilities will not be called in at short notice.
Risks arising from the term of existing credit agreements
The SYSTAIC Group is heavily engaged in the project development business and requires the customary project financing for this. Working capital is also financed with borrowings. In view of the short-term nature of the respective projects, the SYSTAIC Group mainly takes out short-term lines of credit for this purpose. As has happened in the past, some of these lines of credit may not be extended or may be cancelled in future without the SYSTAIC Group being able to find the necessary replacement financing at short notice.
Risks from reduced financing options for solar products and increased financing costs for customers
Generally speaking, grid-connected photovoltaic plants are mainly financed with borrowed capital. The historically low interest rate at present and the resulting low borrowing costs have had a positive influence on the profitability of photovoltaic plants, and have thus contributed significantly to the growth in demand for them. An increase in interest rates, which would lead to higher borrowing costs, would reduce the profitability of photovoltaic plants and thus impact demand. It has also become generally much more difficult for customers to obtain financing in some cases, also because banks are demanding higher and higher amounts of equity. This makes it less attractive, more difficult or even impossible for many customers to assume a planned source of financing.
Risks from obligations to Group companies or their creditors
systaic AG or individual subsidiaries may be obliged vis-à-vis (other) subsidiaries, their creditors or fellow partners to pay a loss adjustment or fulfil other compensatory measures, insofar as certain measures that are unfavourable for the subsidiaries are or were taken. systaic AG could also be obliged to furnish subsidiaries with sufficient financial resources. This is due, on the one hand, to the fact that systaic AG has issued some subsidiaries with letters of responsibility or has assumed letters of credit or joint liabilities towards subsidiary creditors. The possibility cannot be ruled out that these various financing commitments may give rise to considerable payment obligations for systaic AG vis-à-vis individual or a number of subsidiaries.
RISKS OF SECURITIES
Uncertainty about the performance and liquidity of the new shares
The development of share prices on the regulated market (Prime Standard) gives no indication of how shares will perform in the future. The Company cannot predict the extent to which investor interest in its shares will lead to the development of trade or how liquid such trade could become. In certain circumstances, investors may not be in a position to resell the new shares at a higher price than their purchase price, or they may not be able to resell them at all.
PERSONNEL RISKS
Dependency on certain key personalities and the ability to retain qualified external and internal personnel
The future success of the SYSTAIC Group is significantly influenced by the activities of a number of key personalities. These include in particular the members of the Executive Board and the members of senior management, as well as a number of technical experts. The loss at short notice of one of these key personalities could have an adverse effect on the general business and the net assets, financial position and results of operations of the SYSTAIC Group and thus systaic AG.
There is currently a high demand for qualified specialists to develop and distribute solar systems and communicate the accompanying information. Accordingly, there is a strong demand for specialists in these areas and the search for new employees is difficult for the entire industry. The restructuring process currently underway and a resulting feeling of uncertainty among employees could lead to the departure of employees, including key personalities.
IT RISKS
The information technologies used by the companies of the SYSTAIC Group are regularly inspected to ensure that they are processing IT-assisted business processes securely. The SYSTAIC Group takes information security very seriously; the systems are therefore upgraded and monitored on an ongoing basis. Failure of IT systems may lead to work stoppages and thus reduce the Company's productivity. In order to minimise the risks of such IT failures, the majority of the Company's IT infrastructure was relocated to a data centre in Frankfurt in 2008, to ensure a high standard of data availability. In the SYSTAIC Group's opinion, it has also taken the necessary measures to ensure data protection and security. Nevertheless, breaches cannot be completely ruled out. As experience at other companies has shown, this can lead – beyond the direct damage actually caused – to a loss of reputation among employees or customers.
LEGAL RISKS
Risks of SYSTAIC breaching third-party intellectual property rights
The possibility cannot be ruled out that the SYSTAIC Group may infringe upon patents or other third-party industrial property rights, since competitors also patent their inventions and obtain other industrial property right protection. Defending such claims could result in considerable costs for the SYSTAIC Group. This could have a material adverse effect on its net assets, financial position and results of operations. If the SYSTAIC Group were to infringe upon third-party industrial property rights, the Group would be prevented from using the protected technologies in the countries in which property rights were granted. This applies irrespective of whether the SYSTAIC Group has previously used these technologies in other countries in a permissible way, and, for reasons of secrecy, for instance, refrained from obtaining industrial property right protection.
In these cases, the SYSTAIC Group may be banned from manufacturing or marketing products, and it may be forced to purchase licenses or alter its production processes. The SYSTAIC Group may also be exposed to liability for damages. In addition, competitors of the Company could impose a ban on the production or distribution of such products in countries where preferential patent protection or other industrial property right protection exists in favour of these competitors. Furthermore, the SYSTAIC Group may depend on being able to utilise third-party technologies by purchasing licenses, which would mean paying the relevant costs. There is no guarantee, however, that the Company will obtain sufficient licenses in future to ensure its business success or that it will obtain these at acceptable conditions.
Risks due to product defects and warranties granted, in particular performance guarantees and tax guarantees from the project business
The services offered by the SYSTAIC Group, particularly the planning of solar energy plants, and the products it offers could be flawed. As the Company issues warranties for its products and services, it is exposed to warranty risks. Flaws in products or services could, among other things, cause damage to the customer’s property and – if they arise during an early phase of the market launch of the SYSTAIC energy roof system, which can happen with a new product launch – could also prevent or delay the establishment of this product on the market. The risk increases due to the potential for a series of related claims as a result of the new production method. In the event of a series of related claims, the SYSTAIC Group may be forced to assume the costs of exchange or recall campaigns. Such measures could also result in the spread of negative information about the SYSTAIC Group and its products, which could impair the market acceptance of the photovoltaic plants. No assurance can be given, therefore, that the SYSTAIC Group will not be exposed to substantial warranty and/or damages claims in future. Appropriate provisions are set up for this in the SYSTAIC Energy Roof Systems division, based on the selling prices of the products. However, these provisions may still prove to be insufficient to cover the respective claims.
The warranties issued by suppliers fall significantly short of the warranties issued to customers. Recourse to suppliers will therefore only be possible in the fewest of cases. In addition, the Company is dependent on the creditworthiness of its suppliers in the event of warranty recourse; if the respective supplier is not sufficiently creditworthy, this may result in defaults on any recourse claims by the SYSTAIC Group.
Furthermore, the SYSTAIC Group often outsources services to be rendered, in particular plant installation, and hires subcontractors to complete such tasks. If product defects or deficiencies arise, for which the subcontractors are responsible, there is no guarantee that the SYSTAIC Group will be able to take recourse to the subcontractor. Even if recourse claims do exist, these may only cover part of the damage; there is also no guarantee that it will be possible to enforce such claims.
Warranties and guarantees
The SYSTAIC Group grants customers who conclude and pay for a service and warranty agreement with the SYSTAIC Group a 24-year power output warranty for the SYSTAIC energy roof systems it supplies. The reference value for the warranty is based on a specific calculation of the expected minimum output of the installed systems at the defined location. It cannot be ruled out that the SYSTAIC Group may be faced with claims from these warranties, if, for example, the SYSTAIC energy roof system fails to yield the expected output for technical reasons, or it generates less electricity due to weather conditions, or the calculations prove to be incorrect. The SYSTAIC Group will set up provisions in future for any claims related to the power output warranties; these could prove to be inadequate, however.
The SYSTAIC Group also grants its customers certain guarantees in relation to the sale of large solar power plants. These are firstly performance guarantees. If these guarantees fail to be met, this results in a reduction of the purchase price or payment obligations within the scope of maintenance agreements. Tax guarantees are also granted in some cases to the effect that certain, selected structures do not trigger tax disadvantages, such as transfer taxes, for example, or that certain VAT claims do not exist. Specifically: the SYSTAIC Group issued individual tax guarantees in this connection in the past, which could lead to risks of over € 10 million. It is, however, the business practice of the SYSTAIC Group in such cases to first obtain statements from its tax advisors that confirm that the relevant procedure is permitted under tax law; this principle was also followed in practice. In some cases, certain feed-in tariffs are also guaranteed upon the sale of solar power plants; if these feed-in tariffs are revoked by the responsible authorities, this could lead to damages claims and to the reversal of the sale of the plant.
Litigation
The SYSTAIC Group is the defendant in a number of litigation proceedings. One such case of litigation is with a supplier, Q-Cells SE, regarding the validity of obligations under a ten-year supply agreement. In this agreement, the SYSTAIC Group committed itself to purchasing significant volumes of solar cells at prices that are substantially above current market prices. The agreement has a total volume of around € 550 million. The SYSTAIC Group is arguing that the agreement is invalid, particularly for antitrust reasons. Q-Cells SE has sued systaic AG for payment under this agreement for purchase quantities in 2008 and 2009. If the SYSTAIC Group is obliged to purchase the quantities agreed under the contract, this could have a material adverse effect on the Group and could jeopardise its existence.
PROCUREMENT AND PURCHASING RISKS
Dependency on the supplier industry and raw materials
The Company does not manufacture all key plant components for its solar energy systems itself, but purchases these from a small number of suppliers. The Company therefore depends on its suppliers to a certain extent. The sale of photovoltaic plants, currently the focus of the Company's business activities, depends on the availability of these plant components. In principle, the availability of parts and components is guaranteed, although allocations may become necessary during times of peak demand. Due to the current supply surplus, including that of photovoltaic modules, the Company may be able to procure the quantity and quality of materials it needs from suppliers at satisfactory conditions. We therefore assume that the SYSTAIC Group will, at any given time, be able to procure the required solar cells and modules at competitive prices.
OVERALL DESCRIPTION
In view of the liquidity situation, the continued existence of systaic AG is not definitely assured from today's perspective. However, the Executive Board is working with all available resources to control the risks and fundamentally change the risk situation. The future growth of systaic AG and its subsidiaries will depend to a great extent on outstanding receivables being paid, the business to plan and construct solar-integrated greenhouses continuing, and on the demand on the market for the SYSTAIC energy roof increasing.
REPORT ON THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM – DISCLOSURES PURSUANT TO SECTION 315 (2) NO. 5 AND SECTION 289 (5) HGB
The risk regarding the financial reporting consists in the possibility that our annual and interim financial statements may contain misrepresentations which could have a material influence on the decisions of the recipients of these statements. Our accounting-based internal control system (ICS) aims to identify potential sources of error and to contain the resulting risks. This system covers the financial reporting of the entire SYSTAIC Group.
The structure of the accounting-based ICS is based on the organisation of our accounting and financial reporting process. One of the core functions of this process is the management of the entire Group and its operative units. The objectives of systaic AG's Executive Board are taken as a starting point. Based on these and our expectations regarding operative development, we develop our medium-term planning once a year. This planning consists of budget figures for each forthcoming year and target figures for subsequent years. We prepare forecasts for current financial years, which tie in with the budget. The Executive Board of systaic AG and the managing directors of the main subsidiaries convene regularly to evaluate interim and annual financial statements and to update the forecasts.
Bookkeeping is mostly decentralised; occasionally, this function is also performed as a service by the parent company for its subsidiaries. systaic AG assumes responsibility for core tasks relating to the accounting. These mainly include the consolidation of figures. systaic AG is also responsible for tasks relating to payment transactions, financial investments and intercompany invoicing. In some cases, external service providers are engaged for this purpose.
We prepare our financial statements with the help of a Group-wide reporting system, which we also use to prepare our budgets and forecasts. All fully consolidated subsidiaries use this system. It forms the basis of a standardised data reporting process within the Group.
We identify risks for financial reporting on the level of the divisions, based on quantitative, qualitative and procedural criteria. Building on this, minimum requirements for the main processing tasks ensure consistent data retrieval and management.
Updated on 31 March 2010
