E_mg_GB_03_vorne-29_3_04

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60 External risks Risks arising from the economic environment The leading economic research institutes are predicting that the global economy will bounce back in 2004. The U.S., in particular, is expected to achieve strong growth. In Europe, the eastward enlargement of the EU on May 1 of this year will have a major impact on the performance of the economy. Whereas the recovery of the global economy is likely to provide a fillip for the mg Group, the EU’s eastward enlargement presents both opportunities and risks: although it provides the chance to open up new markets, the accession of further countries could intensify competition. Sectoral risks With its strategic business units (SBUs), the mg Group serves a number of specialized niche markets, each of them subject to differing demand and innovation cycles. Risks specific to certain sectors and regions may thus have an adverse effect on the profits of individual strategic business units, but may have only a limited impact on the results of the Group as a whole. The EU Commission is currently planning to amend all legislation on chemicals, and this will be summarized in its White Book. The legislation under discussion would mean that chemicals that had been on the market for years would be subject to new registration and approval processes. The cost of such registration and approval would be borne by the respective producers and end-users. If this legislation is adopted, European chemical companies would be saddled with additional costs that would damage the competitiveness of the European chemical industry compared to the rest of the world. The mg Group estimates that this would cost its chemicals business tens of millions of euros extra over the first three years after the new laws are implemented. Legal risks The legal action taken by a group of former customers of MG Refining & Marketing alleging a breach of contractual obligations arising from oil transactions in 1993 (Customer Cases II) was settled in 2003. This settlement had no impact on mg’s financial results during the year under review. Furthermore, the application filed by shareholder Dr. Otto Happel for the court to appoint a special auditor pursuant to section 142 of the German Joint Stock Corporation Act (AktG) was withdrawn in the appellate instance by mutual agreement. In connection with the conclusion of the control and profit-transfer agreement between mg technologies ag and GEA AG, an appeal is pending regarding the appropriateness of the exchange offer made to shareholders of GEA AG. In September 1998, an mg Group company won a contract from a young company to work as general contractor on the construction of industrial plant for the recycling of old carpets containing polyamide; it subcontracted a large part of the construction work to another mg Group company. Both Group companies acquired minority shareholdings in the customer at the insistence of the customer’s majority shareholder and the lead bank in the banking syndicate financing the deal. The plant was delivered to the customer on September 10, 2002. Subsequently, the customer’s financial position deteriorated rapidly. In February/March 2003, the shareholders and the banks financing the deal first accused the mg Group companies concerned of having failed to comply with the regulations on post-formation
MANAGEMENT SHARE STRATEGY SPECIAL SECTION MANAGEMENT REPORT FINANCIAL STATEMENTS FURTHER INFORMATION Economic Environment • Situation of the Company • Organization and Structure • Risk Report • Employees • Performance of the Subgroups • Outlook acquisitions stipulated in the German Joint Stock Corporation Act (AktG), as a result of which the contract to construct the plant was null and void. Precautionary attempts to remedy the possible invalidity of the contract for the construction of the plant failed because the majority shareholder and the lead bank refused to give their approval. Proceedings to declare the customer bankrupt were initiated on September 1, 2003. The insolvency administrator is demanding that several mg Group companies repay the fee paid by the customer – amounting to a164.6 million plus sales tax – because the mg Group companies concerned had failed to comply with the regulations on post-formation acquisitions stipulated in the German Joint Stock Corporation Act (AktG), as a result of which the contract to construct the plant was null and void. The insolvency administrator’s application for legal aid was rejected by the regional court in Frankfurt am Main. Since the main creditor then evidently agreed to finance the legal action, this action has now been filed (since the balance sheet date). In accordance with SFAS 5, no provision has been set aside due to the complex nature of this case and the large number of outstanding legal issues. Taxation risks The applicable national tax legislation could affect the usability of NOL carryforwards and thus both the value of the deferred taxes capitalized on them and the current taxation of the mg Group. The usability of U.S. NOL carryforwards could also be restricted by changes in mg’s shareholder structure, since the provision of section 382 of the IRC (Change of Ownership) applies to mg in the U.S. In addition, the parlous state of Germany’s public finances and the ongoing need for reforms continue to create considerable uncertainty about the future shape of the country’s tax legislation. In December 2003, a minimum rate of corporation tax and trade tax was introduced with effect from 2004 as part of the package of laws implemented by the German government to reduce tax breaks. The introduction of this minimum rate of taxation means that the usability of mg’s NOL carryforwards at December 31, 2003 will be delayed. mg technologies ag had already taken account of these foreseeable risks arising from amendments to tax legislation and had modified its structure accordingly by transferring beneficial ownership of business operations. The profits resulting from this transfer of business operations are therefore not affected by the minimum rate of taxation. They were offset in full against existing NOL carryforwards. However, the introduction of the minimum rate of taxation will mean in the future that mg technologies ag will have to pay further income taxes. However, the adoption of this legislation in December 2003 does not mean that the package of tax reforms has been finalized. It remains to be seen how these reforms evolve (e.g. with respect to the broadening of the tax base and possible restrictions on the system under which German companies can file combined tax returns). Internal risks Business-performance risks The mg Group’s Engineering division consists of the subgroups Lurgi, Lurgi Lentjes and Zimmer, which are engaged in industrial plant engineering, as well as GEA, which specializes in the engineering of components and the construction of smaller-scale industrial plant. The industrial plant engineering business frequently handles orders worth in excess of a100 million, while the GEA subgroup generally handles contracts worth up to around a25 million. 61
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