The HOCHDORF Group prepares its consolidated financial statements in compliance with all existing guidelines of Swiss GAAP FER (Swiss accounting and reporting recommendations) and the provisions of Swiss law. The consolidated annual financial statements reflect the actual status of the Group’s asset, financial and revenue position. The consolidated annual financial statements are based on the principle of historical purchase cost or production cost or current values and based on the annual financial statements for the Group companies as at 31 December 2019, prepared according to uniform principles. The consolidated financial statements are prepared in Swiss francs (CHF).

The consolidated annual financial statements of the HOCHDORF Group comprise the annual financial statements of the HOCHDORF Holding Ltd holding company as well as all subsidiaries in which there is a capital-relevant and vote-relevant majority or where control over the financial and business policy is exercised through contractual agreement. Shareholdings with 20% to 50% of the voting rights are accounted for using the equity method. Financial statements or reconciliations with Swiss GAAP FER are used to determine the proportionate equity. The consolidated individual financial statements for the companies are adapted to the standard Group structure and evaluation regulations and entered in accordance with the full consolidation method. 100% of the assets and liabilities as well as expenses and revenues are included in the consolidated annual financial statement and all inter-company transactions are eliminated. Significant interim profits within the Group are considered in this elimination.

The share of the minority shareholders in the company’s own share capital and results is shown separately in the Group balance sheet and income statement.

For capital consolidation, assets and liabilities on holdings are evaluated at the time of the takeover according to standard Group principles (purchase method). Any remaining surplus/shortfall (goodwill/badwill) of this revaluation is offset against equity. Companies sold during the year are excluded from the consolidated financial statements from the date of sale. If shares in fully consolidated companies or companies accounted for using the equity method are sold, the difference between the disposal proceeds and the proportionate carrying amount, including goodwill/badwill, is recognised as a gain or loss on the income statement.

The consolidated cash flow statement is generated on the basis of the consolidated balance sheet and income statement.

The annual accounts of consolidated companies in foreign currencies are converted as follows: current assets, fixed assets and external capital at end-of-year exchange rates (period end exchange rate); equity at historical exchange rates. The income statement and the cash flow statement are converted at average annual rates. The conversion differences incurred are recognised in equity without affecting net income. The foreign currency items included in the individual financial statements of the consolidated companies are converted as follows: foreign currency transactions at the exchange rate of the transaction day (current exchange rate); at the end of the year, foreign currency balances are converted at the end-of-year exchange rate (period end exchange rate) and affect net income. The resulting exchange rate differences are shown in the income statements.

The accumulated translation differences for the translation of the annual financial statements and intercompany loans recorded in equity for a foreign company are derecognised when the company is sold and recognised in the income statement as part of the gain or loss on disposal.

Cash and cash equivalents form the basis for the presentation of the cash flow statement. Cash flow from operating activities is calculated using the indirect method.

1. Sold as of 30.06.2019
2. Purchase as of 01.01.2019
3. Sold as of 06.12.2019, closing 13.12.2019

The accounting is carried out based on the assumption of the continuation of operational activities. Assets are measured at cost taking into account the necessary value adjustments. Liabilities are recognised at nominal value. All identifiable loss risks and depreciations are offset by value adjustments or deferrals. Expense and income items are accrued periodically.

Cash and cash equivalents include cash and deposits on postal and bank accounts, as well as short-term time deposits with a remaining time of less than three months. They are recognised at their nominal value. Securities are measured at the market value on the balance sheet date. The remaining securities are balanced at acquisition value or at a lower market value.

Receivables are measured at nominal value less value adjustments. Identifiable individual risks are taken into account with appropriate value adjustments. Indications for possible impairment are given if payment is delayed, the customer is experiencing financial difficulties or recapitalisation or bankruptcy is likely. The value adjustments for doubtful accounts receivable are established based upon the difference between the nominal value of accounts receivable and the estimated net collectible amount. The amount of the respective estimated loss is recognised in the income statement within the item «Specific valuation adjustment on accounts receivables». As soon as a receivable becomes uncollectable it is written off and charged against the item «Accounts receivable losses». For this purpose, the following value adjustment approaches are applied, which can be deviated from in justified cases:

Raw materials, operational materials and auxiliary materials are measured at the lower of cost or market. Semi-finished and finished products are measured at production cost, including the direct material and production unit costs as well as material costs and production overheads. Appropriate value adjustments are undertaken for goods with a low rate of inventory turnover.

The rates used in determining value adjustments are as follows for raw, auxiliary and operating materials:

There are no calculated value adjustments if additional acquisitions of the same raw material are made in the reporting period.

For semi-finished and finished products:

he value adjustments calculated in this way are adjusted accordingly for normal saleability or longer shelf life. Apart from this, inventories whose realisable disposal value are lower than the purchase or manufacturing cost (PMC) are adjusted in value according to the «lower of cost or market» principle. The current market price on the sales market is assumed when defining the realisable disposal value. The typical sales deductions, sales expenses and any administrative expenses still to be incurred have to be deducted and the reimbursements of customs calculated.

The consumption is measured in accordance with the first-expiry-date-first-out principle, meaning products with the shortest expiry date are sold first.

Interim profits on internal Group inventories are eliminated if significant.

Discounts (in the sense of markdowns) granted by suppliers are entered as acquisition price reductions.

Accruals and deferrals are recognised at their nominal value.

A check is made on each balance sheet date to see if assets are impaired in value. The check is based on events or indicators that show that an overvaluation of the book value may be possible. A loss from value impairment is posted with an effect on net income if the book value of an asset exceeds the recoverable amount. A recoverable amount is the higher of the net market value and the utility value.

Tangible assets are measured at the acquisition cost less economically necessary depreciation. If there are indications of impairment, a DCF valuation is performed at the appropriate level of the cash-generating unit. Permanent impairments are taken into account. Depreciation is calculated on a straight line basis from the purchase value. All acquisitions over a value of CHF 5,000 are deemed investments. Projects in progress are capitalised as current investment projects and are not depreciated. Interests on assets under construction are not capitalised. Fixed assets are written down over the following useful lives.

Assets from finance leases are capitalised and the relevant leasing liabilities are posted as a liability. With amortisations, the interest is charged directly to the financial expenditure. Expenses for operating leasing are charged directly to the income statement.

Financial assets include long-term held securities, deferred tax assets as well as assets from pension funds and employer contribution reserves and long-term receivables from third parties. Securities are measured at purchase value less the economically necessary value adjustments.

Intangible assets include software, patents, licences and brand values. These are recognised at the lower of purchase cost or utility value. They are depreciated over their economic service life on a straight line basis.

Own shares are recognised as a deduction from equity at cost. Profits and losses from transactions with own shares are recognised in capital reserves without affecting net income.

The hybrid bond is a perpetual subordinated bond. The hybrid bond has its first call date after five-and-a-half years. This is the first possible call date in the case of the bond for HOCHDORF. If this is not exercised, the amount of interest payable increases (step-up of 2.5%). The hybrid bond is classified for the most part as equity. The issuing costs were deducted from the issue price. The obligations for the interest payable are discounted for the first five-and-a-half years (first call date) from the issue date. The conditions for the syndicated loan provide a basis of comparison for the interest rate. The discounted interest obligations are shown under short-term and long-term financial liabilities in accordance with their maturities. The interest payable is offset against the corresponding financial liabilities. Only the accrued interest of the relevant business year is recognised in interest expenses.

The mandatory convertible bond is a bond that does not give the bondholder any voting rights. The bond will be converted into shares of HOCHDORF Holding Ltd as a mandatory requirement at the latest at the end of its term on 30 March 2020. The mandatory convertible bond is classified for the most part as equity. The issuing costs are recognised in equity via the capital reserves. The obligations for the interest payable are discounted from the issue date. The conditions for the syndicated loan provide a basis of comparison for the interest rate. The discounted interest obligations are shown under short-term and long-term financial liabilities in accordance with their maturities. The interest payable is offset against the corresponding financial liabilities. Only the accrued interest of the relevant business year is recognised in interest expenses.

Liabilities are measured at the nominal amount. Short-term external capital includes liabilities with due dates of less than 12 months and short-term accrual items. Long-term liabilities include financing with a runtime of more than a year.

The calculation of the provisions requires assumptions on the probability, amount and time of an outflow of cash. If an outflow of cash is likely and a reliable estimate is possible, a provision is reported.

The revenue taxes payable on taxable profits for the individual companies are accrued. Likewise, the incurred capital taxes are accrued. Valuation of deferred taxes occurs in line with the tax rates that are actually expected in meeting future tax liability or in the realisation of future receivables (liability method). There are no negative valuation differences that could lead to tax assets. Clearable tax credits from carried forward losses are capitalised if it is likely that they might be realised in the future by sufficient taxable profits. Capital taxes are posted in the operating expenses.

Derivative financial instruments are used to hedge risks in currencies, interest rates and commodities. The booking of derivative financial instruments depends on the hedged underlying transaction. Derivatives to hedge the changes in the value of an already reported underlying transaction are reported in accordance with the same valuation principles that are used for the hedged underlying transaction. Instruments for hedging future cash flows are not reported on the balance sheet, but rather disclosed in the "Notes to the financial statements" until the recognition of the future cash flow. When the future transaction or sale of the derivative occurs, the current value of the derivative financial instrument is reported and simultaneously recognised with the recognition of the hedged cash flow on the income statement.

HOCHDORF Holding Ltd’s pension liabilities and those of its subsidiaries in Switzerland are set out in the completely autonomous HOCHDORF Group pension fund. The pension scheme includes a defined contribution in accordance with Swiss GAAP FER 16. The costs resulting from the employee pension are charged to the income statement for the appropriate period. The actual economic effects of pension plans on the company are calculated on the balance sheet date. An economic benefit is carried as an asset if it is used for the company’s future pension expenses. A financial obligation is shown as a liability if the requirements for the creation of a provision are met.

Employees and former employees of foreign companies receive different employee pension payments or old-age pensions corresponding to the legal requirements applicable in the countries where they are paid out.

Net sales include the receipt of economic benefits from the sale of goods and services within the scope of ordinary business activity during the reporting period. Reductions in revenue such as discounts, rebates and other price reductions as well as duties paid to third parties such as fees and any value-added taxes must be deducted from reported net sales. All inter-group turnover is eliminated in the consolidation process.

Turnover is booked when a Group company has transferred the definitive benefits and risks that are associated with ownership of the sold products and the power of disposal to the customer, and the ability to collect the receivables resulting from such is adequately secured. Turnover from the provision of services is reported in the accounting period in which the service was provided. The consideration of reductions in revenue for customers takes place in the same period as the turnover that caused these reductions in revenue in accordance with the terms and conditions of the order. The HOCHDORF Group does not have any brokerage transactions or business events with multiple, separate components.

Research and development costs are charged in full to the income statement. These costs are included in the items «Personnel expenses» and «Remaining operating costs».

Contingent liabilities are valued on the balance sheet date. A provision is formed if a cash outflow is likely without a useful cash inflow.

Business relationships with related parties are conducted at arm's length. Related parties (natural or judicial) are defined as any party directly or indirectly able to exercise significant influence over financial or operating decisions of the organisations. Organisations that are controlled directly or indirectly by related parties are also considered to be related.

The sale of HOCHDORF South Africa Ltd took place on 30.06.2019. The sale of Pharmalys Laboratories SA, Pharmalys Tunisie S.à.r.l. and Pharmalys Africa S.à.r.l. took place on 06.12.2019 with closing on 13.12.2019. These sales lead to corresponding changes in the individual balance sheet items. The acquisition of 56.47% of Thur Milch Ring AG took place on 01.01.2019. The values are therefore only somewhat comparable with the previous year overall.

The valuation of cash and cash equivalents is at nominal value and comprises the following:

Diversification means there is no concentration of credit risk with regard to accounts receivable. The other receivables mainly result from credit from welfare institutions and from government bodies (VAT, Directorate General of Customs). Other receivables from related parties include the majority of payments still outstanding due to the sale of Pharmalys Laboratories SA, Pharmalys Tunisie S.à.r.l. and Pharmalys Africa S.à.r.l.

The value adjustment for inventories primarily includes the depreciation of the warehouse due to the damage in Sulgen and customer-specific value adjustments.

The accrued income is comprised of revenues not yet received as well as costs paid in advance. The reduction compared to the prior year primarily results from the completed «Schoggi Law» payments.

1. The Group holds available, undeveloped parcels of land that are part of the developed land.
2. The current investment projects are plants under construction.
3. New acquisitions are posted with project numbers under «current investment projects» as inward movements. After the start of operations, there is a transfer posting from the «current investment projects» account to the appropriate fixed asset account. A decision is taken about which purchase costs are capitalised or posted to the income statement.
4. In the context of the purchase of Bimbosan AG and the sale of the HOCHDORF Baltic Milk UAB holding.
5. In the context of the sale of the Thur Milch Ring AG holding and the sale of the holding in HOCHDORF South Africa Pty (Ltd), Pharmalys Laboratories SA, Pharmalys Tunisie S.à.r.l. and Pharmalys Africa S.à.r.l.
6. Remaining depreciation and dismantling costs of plants that will be shut down in Hochdorf in 2020 (Niro 2 and 3 as well as wheat germ) and impairment on the fixed assets of Uckermärker Milch GmbH, Zifru Trockenprodukte GmbH and Snapz Foods AG, as these companies will be sold or liquidated.

The deferred tax assets result from existing carried forward losses in the tax balance sheet. For the companies Uckermärker Milch GmbH and Zifru Trockenprodukte GmbH, no tax assets were capitalised on the 2019 losses. In the case of HOCHDORF Holding Ltd and HOCHDORF Swiss Nutrition Ltd, no deferred tax assets were formed on the loss carried forward, as it is not certain that they can be offset against future profits within the statutory period. In addition, the tax assets still available in the previous year at HOCHDORF Swiss Nutrition Ltd and Snapz Foods AG were released. With the adoption of the tax reform, the tax rates have been adjusted accordingly (see explanatory remarks in point 23).

If the deferred tax assets were fully capitalised, including the losses carried forward at HOCHDORF Holding Ltd and HOCHDORF Swiss Nutrition Ltd, there would be a deferred tax asset of TCHF 32,653 for federal tax and a deferred tax asset of TCHF 15,015 for cantonal tax.

The posting of interest from employer contribution reserves through pension plans appears as a credit in the financial revenues. Interest of 2.25% (previous year 2.25%) was calculated on the employer contribution reserves in 2019. Since 01.05.2019, employer contributions are no longer paid to the pension fund, but offset against the employer contribution reserves.

8. Intangible assets ¹⁾

1. Intangible assets only cover acquired assets. Own brand names and licenses are not evaluated and not balanced on the balance sheet date.
2. Depreciation of the residual value of the Snapz brand and impairment at Uckermärker Milch GmbH and Zifru Trockenprodukte GmbH due to the planned sale of the companies in 2020.

1. Including discounted interest amounts from the convertible bond and the hybrid bond for 2020; see explanatory remarks in point 15. The discounting amounts for the mandatory convertible bond were adjusted accordingly due to the conversions already effected for a nominal value of CHF 98,595,000.
2. Tranche B of the syndicated loan is to be amortised by CHF 6 million by 31.12.2020.

1. Decrease due to deconsolidation of the Pharmalys companies and lower commission settlements with Phamena FZE in Dubai.
2. The largest items under short-term liabilities are advance payments for customers and payments to the Swiss Milk Sector Organisation (BOM) for the fund contributions from milk suppliers collected in December. In contrast to previous years, the new «Schoggi Law» allowed billing at the end of the business year.

The deferred income mainly comprises accruals in the context of reimbursements and commissions («Schoggi Law») as well as invoices not yet received for goods receipts and other supplier services (power, water, transport). In contrast to previous years, the new «Schoggi Law» allowed billing at the end of the business year.

1. Loan commitment to a former shareholder of Marbacher Ölmühle GmbH.
2. Including discounted interest amounts from the hybrid bond for 2021 and subsequent years; see explanatory remarks in point 15.

The financial liabilities are recorded and valued at the nominal value.

1. In the context of the purchase of the holding in Bimbosan AG and the sale of the holding in HOCHDORF Baltic Milk UAB.
2. In the context of the purchase of the holding in Thur Milch Ring AG and the sale of the holding in HOCHDORF South Africa Pty (Ltd), Pharmalys Laboratories SA, Pharmalys Tunisie S.à.r.l. and Pharmalys Africa S.à.r.l.
3. Provisions formed in connection with the restructuring and for outstanding legal cases.

The share capital of HOCHDORF Holding Ltd of CHF 17,583,690 is higher by a nominal CHF 3,236,090 as of 31 December.2019. The increase results from the conversion of a nominal CHF 98,595,000 of the mandatory convertible bond. It is divided into 1,758,369 registered shares at a nominal value of CHF 10 each (2018: 1,434,760 registered shares).

During the financial year, conversions with a nominal value of CHF 98,595,000 took place for the mandatory convertible bond issued in 2017 with a nominal value of CHF 218.49 million. The outstanding nominal amount therefore reduced to CHF 119,895,000; duration from 30.3.2017 – 30.3.2020; interest rate of 3.5% for the entire term; conversion price CHF 304.67; securities number 35,275,641; ISIN CH0352756412; conversion period: 3 January 2018 up to and including 13 March 2020 (last trading day on the SIX).

The mandatory convertible bond is classified for the most part as equity. It is split into an equity component and a liabilities component. The liabilities component includes all future bond interest payments. They were discounted on the issue date of 30 March 2017 at an interest rate of 1%. This interest rate corresponds to the syndicated loan's margin at the time. As of 31 December 2019, these amounts were adjusted due to the conversion. Of the whole bond amount of CHF 218.49 million, CHF 133,285 million were effectively interest bearing from 30 March 2017 to 30 March 2018. From 1 April 2018, interest will be charged on the full bond amount. The effective interest payments will be drawn from the corresponding financial liabilities and will not be charged to income. Only the accrued interest of the relevant business year is recognised in interest costs.

HOCHDORF Holding Ltd has contingent capital of CHF 3,937,710 for the creation of 393,771 registered shares to service the mandatory convertible bond.

Likewise in 2017 (payment 21.12) HOCHDORF Holding Ltd issued a public hybrid bond with a nominal value of CHF 125 million, net CHF 124.17 million. It is a perpetual subordinated bond which pays interest with a coupon rate of 2.5%. The hybrid bond has its first call date after five-and-a-half years (21 June 2023). If this is not exercised, the amount of interest payable increases (step-up). Securities number 39,164,798; ISIN CH0391647986.

The hybrid bond is classified for the most part as equity due to its properties. It is split into an equity component and a liabilities component. The liabilities component includes all future bond interest payments up to the first call date. These were discounted on the issue date of 21 December 2017 at an interest rate of 1%. This interest rate corresponds to the syndicated loan's margin at the time. The effective interest payments will be drawn from the corresponding financial liabilities and will not be charged to income. Only the accrued interest of the relevant business year is recognised in interest costs.

A liabilities component is used on the grounds that the interest payments, which can, in principle, be delayed have to be paid up to and including 30 March 2020, according to the issue prospectus. This is because the interest payments for the hybrid bond cannot be suspended as long as interest is paid for the mandatory convertible bond (compulsory events), which will be the case until the bond matures on 30 March 2020. In addition, it can be assumed on the basis of the dividend policy of HOCHDORF Holding Ltd that no interest payments will be delayed until the first call date as a result of dividend payments.

The following explanatory remarks are given to supplement the income statement, structured in accordance with the total cost of expenditure method (production income statement). The income statement items include the values of Thur Milch Ring AG for the first time in 2019 (from 1 January 2019). 2019 includes the values of HOCHDORF South Africa Pty (Ltd) until 31 June 2019 as it was sold at the end of June 2019. The values of Pharmalys Laboratories SA, Pharmalys Tunisie S.à.r.l. and Pharmalys Africa S.à.r.l. which were sold as of 13 December 2019, are included until 30 November 2019. A direct comparison with the prior year is only therefore of limited value.

Net sales include provisions for possible losses of receivables and for claims totalling CHF 48.1 million. The actual net sales of products sold is higher by this amount. In comparison with the previous year, the provisions must be offset accordingly.

The remaining turnover comprises deliveries to customers who export the goods and where the destination country is not separately recorded.

As a result of possible competitive disadvantages compared to non-listed and large listed competitors, customers and suppliers, presentation of the segment results was waived, pursuant to Swiss GAAP FER 31/8. The Swiss milk market is small and tightly knit with few key companies and providers. The supplier side (milk producers) is organised within several milk producer organisations. On the processing side, the market is dominated by the cheese dairies and four large dairies. On the customer side, the chocolate industry segment is predominant, likewise with just a few large producers. In the area of infant formula (based on milk), only one other firm produces infant formula for the Swiss and international market, apart from the HOCHDORF Group.

Various other operating income includes the renting of office and production space as well as private shares from employees for the use of vehicles as larger positions.

The external properties refer to a building lease at Rothenburg fuel depot as well as an owner's association parking level at Hochdorf station.

Valuation of deferred taxes occurs in line with the tax rates that are actually expected in meeting future tax liability or in the realisation of future receivables (liability method). The tax rate is 12.3% for companies exclusively based in the canton of Lucerne; it is 13.26% for HOCHDORF Swiss Nutrition Ltd with its production in the Thurgau canton. 15% was applied to the subsidiary in Welschenrohr; 25% was also applied to the subsidiaries in Germany and Uruguay. Due to the announced sales of Uckermärker Milch GmbH, Zifru Trockenprodukte GmbH and Snapz Foods AG, an impairment loss was recognised on the assets of these companies as a result of the expected low sales price, whereby the deferred tax provisions for both Uckermärker and Zifru were completely reversed.

For HOCHDORF Holding Ltd and HOCHDORF Swiss Nutrition Ltd, no active tax credit was formed on the loss carried forward, as there is no guarantee they can be offset against future profits within seven years. In connection with the corporate tax reform, HOCHDORF Holding Ltd will lose its holding privilege as of 1 January 2020 and will be taxed like the other Swiss companies. The loss recorded in 2019 can be carried forward for federal tax, but not for cantonal and municipal taxes. If the possible deferred tax assets for HOCHDORF Holding Ltd (at a tax rate of 8.5%) and for HOCHDORF Swiss Nutrition Ltd were offset, and taking into account the maximum possible capitalisation for the other companies, the weighted average tax rate would be 9.77%. (Previous year 16.4%.)

Capital taxes are reported separately in operating costs. 2018 and years before have been definitively assessed for the Swiss companies. The companies abroad have been provisionally assessed.

To determine the net profit per share, the net profit due to the HOCHDORF Group shareholders is divided by the average number of outstanding shares. Own shares held are not included in the calculation of the average outstanding shares. The weighted average number of shares is a result of the total of all transactions in the reporting year and additions due to the creation of new registered shares from the conversion of the convertible bond.

1. The dilution is calculated from the mandatory convertible loan of CHF 218.49 million and the conversion price CHF 304.67, from which a maximum of 717,136 new shares are generated. The conversion period runs from 3 January 2018 up to and including 13 March 2020. As of 31 December 2019 a nominal amount of CHF 119,895,000 is still outstanding after the conversions already amounting to CHF 98,595,000.
2. In this case only the accrued interest on the liabilities component for the current business year is taken into account in interest costs. The actual interest payments are offset against the liabilities component of the discounted interest payments, as described in point 15.
3. There is no dilution effect due to the negative company result.

In 2019, the Board of Directors decided that the Board of Directors’ fees are to be paid in full in cash. In the case of Group Management, 30% of the variable remuneration is paid out in the form of HOCHDORF Holding Ltd shares. They are allocated at the volume-weighted average price of all transactions on the SIX on the day before allocation.

The unrecognised leasing debts are for the leasing contracts for plant, cars and operating equipment.

The liabilities from the pension fund relate to the premiums invoice for the month of December, which had not yet been paid as at the balance sheet date.

On 1 January 2019, HOCHDORF Holding Ltd acquired 56.47% of the shares in Thur Milch Ring AG, based in Ermatingen, Canton Thurgau, in connection with the strategic development of the Dairy Ingredients division, thus gaining control over the company. The company is a milk purchasing company for affiliated farmers in the canton of Thurgau.

The acquired net assets are as follows:

In accordance with the Group guidelines, goodwill of TCHF 13 was offset against equity. The purchase price was paid in cash.

On 30 June 2019 HOCHDORF Holding Ltd sold its 90% share of HOCHDORF South Africa (PTY) Ltd located in Cape Town (South Africa) as part of the streamlining of the Cereals & Ingredients division, and thus relinquished control.

The composition of the net assets sold was as follows:

When the company was newly founded in May 2015, no goodwill arose which, according to our guidelines, would have had to be recognised in equity. The sale resulted in a positive value adjustment totalling CHF 468 thousand, of which CHF 447 thousand was posted through EBIT and CHF 21 thousand was posted through exchange rate gains. With this sale, the HOCHDORF Group is implementing part of the strategic decision to dissolve the Cereals & Ingredients division.

In 2018, the company generated net sales of CHF 341 thousand, with an EBIT of CHF –243 thousand. In the half-year report as of 30 June 2019, net sales of CHF 188 thousand were generated with an EBIT of CHF –53 thousand and a net profit of CHF 151 thousand, which resulted from a partial waiver of the loan of CHF 389 thousand granted by HOCHDORF Holding Ltd.

On 6 December 2019 HOCHDORF Holding Ltd sold its 51% share of Pharmalys Laboratories SA located in Hochdorf (Switzerland) as part of the restructuring of the Group, and thus relinquished control.

The composition of the net assets sold was as follows:

When the company was acquired in 2016, goodwill totalling CHF 239,089 thousand arose in connection with the purchase price allocation, which was offset against equity in accordance with our guidelines. The sale «revives» this goodwill, resulting in a negative value adjustment totalling CHF 139,899 thousand, which has a full impact on EBIT. With this sale, the HOCHDORF Group has significantly reduced the business risks in the Baby Care division.

In 2018, the company generated net sales of CHF 77.5 million with an EBIT of CHF 20.5 million. As at 30 November 2019, net sales (after provisions of CHF 32.8 million) amounted to CHF 13.2 million with an EBIT of CHF –41.6 million and a net loss of CHF –41.8 million.

On 6 December 2019 HOCHDORF Holding Ltd sold its 51% share of Pharmalys Tunisie S.à.r.l. located in Sousse (Tunisia) as part of the restructuring of the Group, and thus relinquished control.

The composition of the net assets sold was as follows:

When the company was acquired in 2016, no goodwill arose in connection with the purchase price allocation which, according to our guidelines, would have had to be recognised in equity. The sale resulted in a positive value adjustment totalling CHF 139 thousand, of which CHF 452 thousand was posted through EBIT and CHF –313 thousand was posted through exchange rate losses. With this sale, the HOCHDORF Group has significantly reduced the business risks in the Baby Care division.

In 2018, the company generated net sales of CHF 0 million with an EBIT of CHF –0.3 million. As at 30 November 2019, cumulative net sales of CHF 0 million were generated with an EBIT of CHF –0.2 million and a net loss of CHF –0.3 million.

On 6 December 2019 HOCHDORF Holding Ltd sold its 51% share of Pharmalys Africa S.à.r.l. located in Tunis (Tunisia) as part of the restructuring of the Group, and thus relinquished control.

The composition of the net assets sold was as follows:

When the company was newly founded in November 2016, no goodwill arose which, according to our guidelines, would have had to be recognised in equity. The sale resulted in a negative value adjustment totalling CHF 12 thousand, of which CHF 2 thousand was posted through EBIT and CHF 10 thousand was posted through exchange rate losses. With this sale, the HOCHDORF Group has significantly reduced the business risks in the Baby Care division.

In 2018, the company generated net sales of CHF 1.8 million with an EBIT of CHF 0.05 million. As at 30 November 2019, cumulative net sales of CHF 1.4 million were generated with an EBIT of CHF 0.03 million and a net loss of CHF –9 thousand.

In the second half of 2019, the Board of Directors reviewed the strategic orientation of the HOCHDORF Group and decided to discontinue the Cereals & Ingredients division, which includes the companies Marbacher Ölmühle GmbH, Zifru Trockenprodukte GmbH, Snapz Foods AG and Snapz Foods USA Inc, and to divest the companies and the wheat germ processing business. It was also decided to streamline the Dairy Ingredients division, including the sale of Uckermärker Milch GmbH. The figures for discontinued operations are as follows:

Uckermärker Milch GmbH was fully allocated to the Dairy Ingredients division. The main sales market was the EU and Germany in particular. Due to the forthcoming sale, an impairment loss was recognised on the fixed assets.

The listed subsidiaries were fully allocated to the Cereals & Ingredients division. Main sales markets were Switzerland and the EU, particularly Germany. There were also some sales in the US. Due to the pending sale, an impairment was made on the fixed assets of Zifru Trockenprodukte GmbH and Snapz Foods AG.

This is shown based on a linear depreciation over 5 years (pro rata). The statement of changes in shareholders’ equity shows goodwill as a net position.

The effects of theoretical capitalisation on the income statement and balance sheet are shown in the following table.

The business transactions with related persons and companies are based on standard commercial contracts and conditions. All transactions are reported in the consolidated annual financial statements 2019 and 2018. These cover deliveries of goods and raw materials as well as services to and from related companies.

1. Service costs include the employer contributions for employees, which are settled in the related HOCHDORF Group pension fund.

There are no contingent liabilities.

On 23 October 2019, the banking consortium extended and adjusted the syndicated loan for HOCHDORF Holding Ltd. The loan has a term until the end of September 2023 and now amounts to a maximum of CHF 178 million. With the sale of Pharmalys Laboratories SA in December 2019 and the associated partial repayment, the limit is reduced to a maximum of CHF 129 million. The interest rate is between 1.0% and 5.5%, depending on the debt factor. As before, key financial indicators are the equity ratio and the debt factor. The financial ratio debt factor is deemed to have been violated as of 30 June 2020 if the adjusted EBITDA for the period from 1 January 2020 to 30 June 2020 is ≤ 0. A debt factor of 6.5x applies as of 31 December 2020, a debt factor of 5.0x as of 30 June and a debt factor of 4.0x as of 31 December. The equity ratio is 30% as of 31 December 2019 and 30 June 2020 and 40% as of 1 July 2020.

The remarks of the Board of Directors on 30.6.2019 stated that at that time there were various uncertainties regarding the continuation of Pharmalys Laboratories SA and the refinancing of the Group. Since then, solutions have been found for both issues.

1. The existing syndicated loan agreement was extended on 23.10.2019. The credit line was supplemented with a new tranche D of CHF 30 million against a reduction of the previous tranche C from CHF 40 million to CHF 10 million. With the sale of Pharmalys Laboratories SA, the credit line was reduced by the elimination of tranche C (CHF 10 million) and the amortisation of tranche B (CHF 39 million) to CHF 129 million.
   
   
2. The shares of Pharmalys Laboratories SA were sold with effect from 13.12.2019 to the co-owner Pharmalys Invest Holding Ltd.

The Board of Directors sees the following uncertainties, which require a special focus in the current financial year:

1. Receivables from Pharmalys Invest Holding AG: payment of the outstanding purchase price instalments from the sale of the shareholdings in the Pharmalys companies in the amount of CHF 60 million in accordance with the contractually agreed payment terms. Additional payment of the outstanding loan in the amount of CHF 4.1 million. 
   
   
2. Compliance with the financial covenants from the credit agreement.

The Board of Directors is of the opinion that sufficient security has been provided by the buyer to secure payment of the purchase price. Hochdorf Holding Ltd has established a directly enforceable guarantee from the owner of Pharmalys Invest Holding AG, Mr Amir Mechria, the rights to the existing and future trademark rights of Pharmalys Laboratories SA, and a lien on 51% of the shares in the same. Should there be a delay in the due payments of the purchase price instalments, the liquidity of the HOCHDORF Group would still be secured. Within the syndicated loan agreement, the Group also has access to more than CHF 25 million (as at: 14.2.2020), which can be used to finance business operations. If the receivable is not paid and the existing collateral cannot be realised, the corresponding write-down would have a negative impact on the equity situation and on HOCHDORF Holding Ltd's compliance with the financial ratios vis-à-vis the banks.

The budget approved by the Board of Directors for the 2020 financial year and the medium-term plan of the HOCHDORF Group show that based on this plan data, compliance with the financial covenants should be ensured throughout the entire planning period (until 2022). The EBITDA covenant of CHF >0 as of 30.6.2020 is not considered a risk, also due to the distribution of profits (HY-1/HY-2) in previous years. The EBITDA covenant of 31.12.2020 depends largely on the achievement of the budget for 2020 and is therefore subject to uncertainties.

The Board of Directors and Group Management believe that a continuation of the HOCHDORF Group can currently be assumed.

After the balance sheet date and until the adoption of the consolidated financial statements by the Board of Directors, no significant events have occurred that could affect the informational value of the 2019 annual financial statements or which must be disclosed here.

On February 18, 2020, Board members Bernhard Merki, Jörg Riboni, Markus Kalberer and Dr Walter Locher declared that they would not be standing for re-election at the Annual General Meeting 2020.

On 26 February 2020, HOCHDORF Holding Ltd sold its 60% share in Uckermärker Milch GmbH. The closing took place on 28 February 2020. The sale resulted in a profit on the disposal of investments of around CHF 3.0 million.

In January 2020, the coronavirus began to spread from China at an increasing rate worldwide. The coronavirus epidemic may affect the business activities of the HOCHDORF Group, whereby the actual impact will depend on the further development and duration of the epidemic and cannot yet be estimated. The Group has introduced appropriate measures to protect its employees, production and products. To this end, a crisis team has been set up to closely monitor developments and decide on appropriate and necessary measures in a timely manner.

The consolidated financial statements were approved in their present form by the Board of Directors at its meeting on 18 March 2020.