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1 Company report Germany 12 June 2006 DEWB 10 vvdsvdvsdy 06/09/2006 Buy (vs Not rated) Financial Services A member of European Securities Network May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Feb 06 Mar 06 Apr 06 May 06 Jun 06 DEWB Source: Datastream Benchmark rebased to stock price Price EUR 2.81 Target Price EUR 3.53 EUR 3.53 Accounting Standard/Since IFRS/2005 Reuters/Bloom berg EFFG.DE/EFF GY (EUR) 12/04 12/05 12/06e 12/07e 12/08e Sales (m) EBITDA (m) (3.3) EBIT (m) (13.2) Net profit (reported) (m) (13.2) Net debt/(cash) (m) 47 9 (1) (5) (14) EPS (adj.) (0.92) CFPS (1.06) BVPS DPS Int. cover(ebitda/fin. int) 6.6 (23.7) (20.4) (5.3) (19.7) EV/EBITDA nm EV/EBIT nm P/E (adj.) nm nm Dividend yield (%) ROCE (%) Shareholders: Jenoptik AG 23%; Share price on 09/06/2006 (EUR) 2.81 Target price (EUR) 3.53 Market capitalisation (EURm) 43.0 No. of shares (m) 15.2 Free float 76.9% Daily avg. no. trad. sh. 12 mth 98,800 Daily avg. trad. vol. 12 mth (m) 0.47 Price high 12 mth (EUR) 9.09 Price low 12 mth (EUR) 2.81 Abs. perf. 1 mth -17.1% Abs. perf. 3 mth -22.2% Abs. perf. 12 mth -40.2% DJ Stoxx or EuroStoxx 50 No EPS CAGR 49.8% Ready to rumble again Benefiting from the German VC market recovery equinet Institutional Services AG Gräfstraße Frankfurt am Main Tel: Fax: Return to profitability: After three years of heavy losses DEWB returned to profitability in fiscal year 2005 using cash inflows arising from investment sales to significantly reduce liabilities. This puts the company in a financially stable position ready to realize new investment objectives. Recovery of the German VC market: The investment sector has for the most part now seen an end to the years of battling for survival, restructuring and licking its wounds. Hence financially stable and well structured Venture Capital companies like DEWB are likely to report positive news in the coming quarters. KSW Microtec as exit candidate: One of the most valuable investments in DEWB s portfolio is KSW Microtec, a developer of passive and active smart labels for the use in the food industry, logistics and medical technology. In view of the excellent progress on the operational front and its exceptional market position, we consider this company as an attractive candidate for an exit for the second half of this year, which would undoubtedly give a boost to DEWB s share price. Approx. 26% upside potential: Based on our sum of the parts model we derive a fair value per share of EUR Hence we change our rating to BUY. Marcus Pratsch Marcus.Pratsch@equinet-ag.de

2 CONTENTS Investment Case...3 S.W.O.T. - Analysis...4 Company profile...5 Business model...5 Track Record...5 Investment strategy...6 Investment criteria...6 Investment Portfolio...7 Portfolio characteristics...8 Optic/ Optic-related technologies/ Sensor Systems...9 Biotechnology...11 Information Technologies...14 Valuation...16 Calculation of the fair value for the shareholders equity...16 Financials Financials Q Trends in the German Venture Capital Market...20 Development of the German Venture Capital Market in Outlook Venture Capital Market Optical technologies...23 Outlook Strategy...25 Possible changes in the investment portfolio in Long-term scenario: Investments and exits until FY Financials...27 Ownership Structure...28 Upcoming Corporate Events Calendar...29 DEWB: Summary tables...30 Recommendation system...35 Page 2

3 Investment Case DEWB AG (Deutsche Effecten- und Wechsel-Beteiligungsgesellschaft AG) is a bank independent venture capital/private equity company located in Jena, one of Europe s most important centres for photonics. In long-term view DEWB proved to be one of the most profitable German investment companies and has invested in over 50 companies since After three years of restructuring, DEWB returned to profitability in fiscal year Fixed costs were significantly reduced and the value of the portfolio increased. Therefore new investments were of secondary importance. Hence the company concentrated on the development of promising business models in its existing portfolio. DEWB finished fiscal year 2005 with a positive result despite the burden of depreciation and restructuring costs. The company used cash inflows arising from investment sales to significantly reduce liabilities. Furthermore DEWB could improve its liquidity position putting the company in a financially stable position ready to realise new investment objectives. The future focus of DEWB will be investing in the growth markets of optics, opticrelated technologies and sensor systems. As a result of its high level of expertise regarding exits, the restructured investment portfolio as well as the decision to concentrate on one growth sector in the future, we believe that DEWB is emerging stronger from the consolidation in the German investment business and should benefit to a disproportionately high extent from the improving market environment. Hence, we expect positive results in FY 2006 and a higher-than-average Internal Rate of Return (IRR) in the near future. From our point of view the pearls of the investment portfolio are KSW Microtec (29.7%) as well as NOXXON Pharma (61.7%). We believe that this year KSW Microtec will either be sold to a strategic investor as a trade sale or be the subject of a possible IPO bringing DEWB a significant book gain. According to our sum of the parts calculation the current theoretical fair value of DEWB s shareholders equity is approximately EUR 60m or approximately EUR 3.93 per share. Taking into account a conglomerate discount of 10% gives our target price of EUR We are therefore changing our rating to BUY. Page 3

4 S.W.O.T. - Analysis Strengths Strengths High experience in venture capital and investment management Good track record on new investments and sales of investments Balanced portfolio provides for regular share sales EUR 12.6m in freely available funds provide DEWB with good flexibility for new investments Broad know-how and extensive experience in the area of optoelectronics Weaknesses Weaknesses High biotech exposure Heavy loss of shareholder confidence during the last 2-3 years Opportunities Threats Opportunities Focussing on the growth sector of optoelectronics should provide for high added-value potential for the individual investments Located in Jena, one of Germany's most successful high-tech regions and one of Europe s most important centres for photonics The Venture Capital market has again improved during the last months. This should make investments in the portfolio more attractive and improve the opportunities for realising exits Thanks to a re-established solid liquidity situation DEWB has the necessary flexibility to react quickly to attractive new investments Significantly improved free float (76.92%) increases attractiveness for institutional investors Threats Highly volatile business model in general Risk of value adjustments on investments Exit risks Possible downturn of the Venture Capital market. Page 4

5 Company profile DEWB is a bank independent venture capital/private equity company located in Jena, one of Europe s most important centres for photonics. In long-term view DEWB proved to be one of the most profitable German investment companies and has invested in over 50 companies since Since 2000, 26 companies have been sold with a transaction volume amounting to EUR 236m. Currently the company is invested in 13 companies. Business model Investing in promising technology companies Key points of DEWB s active ownership approach Clear geographic focus on Germanspeaking region DEWB is an Evergreen Fund investor Optical technologies as future key driver DEWB s business model is to invest in technology companies in advanced early stage as well as in expansion phase financing. Generally the volume of single investments is between EUR 2m and EUR 7m. In this context DEWB pursues the "active ownership" approach in order to speed up corporate growth and continually increase the value of portfolio companies. Active ownership by DEWB is essentially founded on four key points: Active support for the portfolio company in converting its technology into a product and launching this successfully on the market; Positioning the portfolio company as an attractive investment; Training and coaching for the portfolio company's management; Actively realising corporate mergers (merger management) in order to speed up the company's growth. In this regard, great importance is attached to a clear geographic focus for ensuring productive and efficient cooperation. Hence, DEWB's investments are solely concentrated on the German-speaking region. Generally DEWB sells these investments at a profit after holding them from three to seven years consequently generating a higher than average return for its shareholders. In this regard, the company is a so-called Evergreen Fund investor meaning that cash inflows from share sales are used by DEWB for new investments. In the future investments will be concentrated on optical and associated technologies which are considered to be the main innovation drivers in the next years. Track Record Excellent track record regarding investments and exits In top quartile of all European investment companies DEWB is active in the Venture Capital investment business since the end of 1997 generating revenues of approximately EUR 398m from sales of share holdings, capital repayments and interest payments. Around EUR 339m has been invested in 52 holdings since then. On average DEWB has generated proceeds of around EUR 50m p.a. through corporate transactions, with an average portfolio volume of approximately EUR 93m. Since 2000, 26 companies have been sold with a transaction volume of EUR 236m using all main exit channels like IPOs, trade sales and buy-backs. In fiscal year 2005 DEWB successfully concluded two international transactions. Since it started in the investment business DEWB has achieved an Internal Rate of Return (IRR) of 18.1%. This puts DEWB in the top quartile of all European investment companies which are members of the European Private Equity and Venture Capital Association (EVCA). DEWB is therefore one of the leading European venture capital companies. Page 5

6 Tough years for European venture capital companies Return to rising IRRs Nevertheless the IRR for the last five years ( ) has been negative ( : 2.0%). This is mainly due to the collapse of the New Economy followed by weak economic activity in the years 2001 to Furthermore, some investments failed to meet the ambitious targets stated in their business plans. In addition purchase prices for Venture Capital investments were at a historically high level between 1999 and 2001, causing adjustments over the subsequent years. The cost burdens mentioned above should now be rectified and hence DEWB expects a return to rising IRRs which should reach approximately 20% in mediumterm. Investment strategy Key points of investment strategy The core features of DEWB s investment strategy are represented by the following key points: High-intensity-advice and exertion of significant influence: DEWB attaches great importance to close communication with the individual portfolio investments and is also very actively engaged in providing advice for the companies. Hence an investment manager normally does not take care of more than 3-5 companies. Clear geographical focus: The focus of DEWB's investments is on the Germanspeaking region. Jena, one of Germany's most successful high-tech regions and one of Europe s most important centres for photonics, provides a promising environment for new business. Investment volume up to max EUR 7m: DEWB invests up to EUR 2m (acquisition value) in companies in early stage and a maximum of EUR 7m (acquisition value) in more mature companies. The market value of the investment could be significantly higher due to the value increase of a successful company. Clear rules on exit modalities: Where possible, right from the start of the investment DEWB negotiates contractual arrangements for the exit stage. According to its own statements, over the last 3-4 years in particular DEWB has been able to exploit its strong position as the lender with regard to exit modalities. Investment criteria Additional criteria for potential portfolio companies Apart from belonging to the promising optoelectronics sector there are various additional criteria a potential portfolio company should meet in the future: Industrial experience and commercial expertise on the part of the management. Technology and/or product must possess clear unique selling points and be capable of protection through intellectual property rights or already be patented. The financial plan must be sound and based on thoroughly researched market data. The sales plan must provide plausible evidence of the development of significant market potential and hold the promise of higher-than-average growth. Page 6

7 Investment Portfolio Naturally, the investment portfolio forms the heart of any investment company. Unfortunately, it s also often a black box for outsiders. DEWB is also quite reticent about making concrete statements on the individual companies. This is no doubt unavoidable to a partial extent for business policy and legal reasons but it also means that investors in DEWB have to put additional good faith in the statements made by the DEWB management. Currently DEWB s investment portfolio comprises 13 companies 92% invested in mature companies Currently DEWB holds investments in 13 companies in the areas of optics/opticalrelated technologies/sensor systems, biotechnology and IT. Including listed securities and receivables in the investment business, these investments were valued at EUR 45.8m as of March 31, 2006 (December 31, 2005: EUR 52.4m). From our point of view DEWB has a well balanced portfolio by sector and phase. This should provide for regular share sales. There is a well-stocked exit pipeline as more mature companies alone account for approximately 92% of the invested capital. DEWB Portfolio (as of March 31, 2006) Financing phase Company Sector Share (%) Listed investment holdings SMSC Inc. Optics / Optical-related/ Sensor systems 1.2 MediGene AG Biotechnology 0.3 Expansion phase KSW Microtec AG Optics / Optical-related/ Sensor systems 29.7 OLPE Jena GmbH Optics / Optical-related/ Sensor systems 44.8 EPIDAUROS Biotechnologie AG Biotechnology 81.3 Integrated Genomics Inc. Biotechnology 75.2 NOXXON Pharma AG Biotechnology flow AG IT 65.7 itac Software AG IT 9.7 Early stage µ-sen Mikrosystemtechnik GmbH Optics / Optical-related/ Sensor systems 40.2 SensorDynamics AG Optics / Optical-related/ Sensor systems 9.8 Sloning BioTechnology GmbH Biotechnology 14.3 IVISTAR Kommunikationssysteme AG IT 29.3 Source: DEWB, equinet Page 7

8 Portfolio characteristics Focussing on expansion financing Financing phase As of March 31, 2006 mature companies in the expansion phase and listed securities amount to approximately 92% of the invested capital, with early-stage investments accounting for around 8% of the invested capital. Hence, the main focus of the current DEWB portfolio lies clearly on expansion financing. Invested capital by financing phase (%) Listed securities 12% Early stage 8% Expansion phase 80% Sector Source: DEWB, equinet Large proportion of biotech companies IT plays only a minor role High expertise in optics and sensor systems Specialising in optical and associated technologies in the future Exit from biotech and IT companies in the next 3 years Since fiscal year 2003 the share of the capital invested in biotechnology investments has grown from 36% to 53%. This large proportion of the portfolio is due to the significant demand for capital from biotech companies. Furthermore the length of time the investment is held is typically longer than in other sectors. As planned the share taken by IT has continued to fall since DEWB has not taken on any new commitments in these areas. With 28% investments in optics/optical-related technologies/ sensor systems has remained constant at around 30% but are expected to increase significantly in the next years due to DEWB s high technological expertise, broad know-how and distinctive network in this area. Hence, DEWB will be the only listed German Venture Capital company specialising in optical and associated technologies. Investments will be made in promising growth companies from the German-speaking region, which develop innovative solutions along the photonics chain. By concentrating on these segments DEWB is putting its faith in long-term growth areas in which Germany plays a leading international role The existing biotechnology and IT investments will continue to receive support for their growth, with the aim being to bring these to the exit stage over the next three years Page 8

9 Invested capital by technologies (%) IT and other 19% Optics / Optical technologies/ Sensor system 28% Biotechnology 53% Source: DEWB, equinet Optic/ Optic-related technologies/ Sensor Systems Worldwide photonics market is expected to grow by 16% p.a. up to 2013 Five portfolio companies Producer of diagnostic and condition monitoring systems Automated inspection of wind power systems Share of 40.2% Optical technologies, which are amongst the fastest growing key technologies, are defined as the totality of all physical, chemical and biological technologies for the generation, amplification, manipulation, transmission, measurement and utilisation of light. According to estimates by the University of Arizona the worldwide market for photonics is expected to grow by 16% p.a. up to Hence, DEWB will mainly focus on optical technologies and sensor systems in the future. Currently DEWB holds investments in five portfolio companies of this segment, with SMSC being the only listed one. µ-sen GmbH µ-sen produces diagnostic and condition monitoring systems mainly used for plant maintenance in the fields of wind energy. The key expertise of the company lies in the field of mechanical vibration measurement. µ-sen uses this technology for the proactive condition monitoring of machinery and equipment as well as for process monitoring. In addition µ-sen offers self-developed modular-designed diagnostic software and various services like on-site training and instruction for the client s personnel. The core products of µ-sen are the Omega-Guard Condition Monitoring System in conjunction with the Omega-Expert Analysis System. Omega-Guard provides for the automated inspection of e.g. wind power systems to determine whether the machinery is operating smoothly. The condition of the key components is monitored simultaneously and, by contrast to random sample analyses, continually inspected for wear, tear and breakage. Constantly comparing the figures against reference values enables potential faults to be identified at an early stage the necessary measures can be immediately initiated. This helps to avoid downtime and reduces the time needed for the procurement of replacement parts. As of March 31, 2006 DEWB held 40.2% of the shares of µ-sen. Global leader in the development of smart intelligent labels KSW Microtec AG KSW Microtec is a global leader in the development and manufacturing of smart intelligent labels and inlays leveraging on an extensive know how in its proprietary adhesive Flip Chip technology, high-end wafer technology and low cost manufacturing technologies. KSW s RFID inlays can be converted into a diversity of formats supporting applications such as access control (ski passes, event Page 9

10 tickets, identification), transport (baggage tags), payment solutions (credit cards) and logistic, manufaction and retail applications. More efficient and secure logistic systems First producer of smart labels equipped with temperature sensors Expertise in Flip Chip assembly Share of 29.7% Precisions assembly provider Internal engineering team as competitive advantage Share of 44.8% RFID based smart intelligent labels are extremely thin and intelligent data carriers in label form. Thanks to these labels data can be decentrally transmitted to a scanning device, without visual contact and with a high storage capacity. This provides for the reliable identification of a wide range of objects, allowing a more efficient and secure logistic system. KSW develops and manufactures a broad range of standard and customer specific Passive HF (13.56 MHz) and UHF (868, 915 and 950 MHz) RFID inlays based on a diversity of microchips provided by major chip manufacturers either for small or for high production volumes. KSW s strong research and development capability allowed the development of the Smart Active Label (SAL). KSW is the first producer of TempSens and VarioSens SAL s, which, equipped with temperature sensors and a paperthin battery allowing to record temperatures at defined time intervals. These products are particularly well suited for temperature tracking during the transportation of environmentally sensitive goods such as perishable food, drugs and blood conserves. The SAL allows recording the development of the absolute temperature as well as all levels above or below the set temperature, together with the corresponding time intervals. So after length transportation a decision can be made on whether the goods are still suitable for use. KSW additionally offers related mikro packaging and post-fab wafer processing services such as wafer bumping, grinding and dicing as well as testing and evaluation services for new microchips. This activity guarantees the continuity and constant evolution of KSW s know-how and expertise in the Flip Chip assembly process as base of RFID inlay production. As of March 31, 2006 DEWB held 29.7% of the shares of KSW Microtec. OLPE Jena GmbH The Mechatronic company OLPE Jena GmbH was founded in July 1999 by a Management Buy-Out from JENOPTIK Automatisierungstechnik GmbH. The company has specialised as a precisions assembly provider for complete manufacture of highly complex sub-assemblies and devices. Amongst the many products OLPE has to offer are handling systems for X-Ray machines, spectral analysis systems, electronical locking cylinders and inspection robots. The assets of OLPE GmbH are the high qualifications and experience of the more than 40 people strong workforce in the areas of fine mechanics, engineering and electronics manufacturing. OLPE distinguishes itself from their competitors through their internal Engineering team, which undertakes development finalisation and conducts product optimisation for their customers. As of March 31, 2006 DEWB held 44.8% of the shares of OLPE Jena GmbH. Developer of sensor systems Serving the need of the automotive industry for intricate microsensor systems SensorDynamics AG SensorDynamics AG focuses on the development and production of sensor interfaces for automotive, aerospace and industrial applications. The company's large product range includes all fields of microsensorics, from complete sensor systems to micro-electro-mechanical modules. Due to the rapid growth in the use of electronic components in motor vehicles and the increasing demand of miniaturisation of sensor systems automobile manufacturers require their suppliers to deliver complete sensor systems performing more and more system functions such as measurement, signal processing, calibration auto-testing, data transmission and interface control. Page 10

11 Hence, SensorDynamics AG develops and manufactures intricate micro-sensor systems predominantly for automotive key accounts. Cooperating with companies being in the top echelon of their fields worldwide Working on the next sensor generation Share of 9.8% SensorDynamics acts as general contractor and cooperates closely with worldleading suppliers of IPs, semiconductor, packaging, and testing technologies. The company has selected its cooperation partners from companies in the top echelon of their fields worldwide. Advanced Semiconductor Engineering Korea, Taiwan Semiconductor Manufacturing Company and ST Microelectronics, are major technology and cooperation partners. In close cooperation with the Fraunhofer-Gesellschaft in Germany the company is working on the next generation of sensor elements for vehicle stabilisation and navigation. As of March 31, 2006 DEWB AG held 9.8% of the shares of SensorDynamics. Global supplier of semiconductor solutions Holding leadership positions in selected markets Broad wellknown customer base Share of 1.2% SMSC SMSC is a global supplier of semiconductor solutions that distribute video, sound, photos and data in the home, automobile, office and factory pursuing a fabless business model. Working closely with industry leading customers in the Mobile & Desktop PC, Consumer Electronics & Infotainment, and Industrial markets, the company develops semi-custom and application specific standard products (ASSPs) that allow users to access or transfer their digital assets with convenience and speed. The Company has developed leadership positions in its select markets by providing application specific solutions such as mixed-signal PC system controllers, non-pci Ethernet, ARCNET, MOST, USB2.0 and other high speed serial communications. The product portfolio includes USB2.0 hubs, card readers and mass storage devices, Input/Output (I/O), Ethernet and embedded networking devices, and in-vehicle networks optimized to deliver entertainment and navigation content. SMSC sells its ICs worldwide and counts almost all the leading PC and PC motherboard manufacturers as customers for its input/output (I/O) ICs. SMSC's I/O circuits reside on the motherboards of PC products made by Dell, IBM, Intel, Hewlett-Packard and most other major PC manufacturers. Customers of SMSC's non-pc products include companies such as Sharp, Lucent, Scientific Atlanta, Panasonic, LG, Melco, D-Link, Brother and Leadtek. As of March 31, 2006 DEWB held 1.2% of the shares of SMSC. Biotechnology Largest proportion of DEWB s portfolio We expect that possible exits should be realised at a good price Five portfolio companies The Biotech sector represents the largest proportion of DEWB s portfolio due to the significant demand for capital from biotech companies in the last years. Furthermore the length of time the investment is held is typically longer than in other sectors. The overall outlook for investing in Europe's biotechnology sector remains from our point of view favourable for 2006 and Investment flows into the industry have recovered and hit a new high in fiscal year Hence, we are sure that the biotech companies in DEWB s portfolio will gain in attractiveness. As DEWB plans to decrease its engagement in biotech companies in the future we are confident that possible exits should be realised at a good price. Currently DEWB holds investments in five portfolio companies of this segment, with MediGene being the only listed one. Page 11

12 Global provider of clinical genotyping services Drugs which are adapted to the gene profile of the individual patient Avoiding side effects Share of 81.3% EPIDAUROS Biotechnologie AG EPIDAUROS is a leading global provider of clinical genotyping services with a portfolio of more than 1500 validated pharmacogenetic assays. Services include amongst others clinical genotyping, pharmacogenetic consultancy, contract research, DNA sample banking and the licensing out of patents in the field of pharmacogenetics. EPIDAUROS analyses the influence of the individual human gene profile on the effect of drugs in order to ensure more efficient and more reliable development of and treatment with drugs. The aim is to create tailor-made drugs which are adapted to the gene profile of the individual patient. During the actual pre-clinical phase of the drug development the gene typing tests developed by EPIDAUROS help in the pharmaco-genetic characterisation of active agents and consequently in the assessment of their likelihood of success. During the clinical testing phase patients can be specifically selected on the basis of their genetic make-up with the help of the gene typing tests developed by EPIDAUROS. This will enable patients to avoid being given a specific drug which either has no effect on them or produces side effects. As of March 31, 2006 DEWB held 81.3% of the shares of EPIDAUROS. Bioinformatics products and services for the life science industry Capturing, querying and visualizing sequenced genomes Combining patternbased analysis with comparative genomics High expertise in bioinformatics skills Well-known customer base Share of 75.2% Integrated Genomics Inc. Integrated Genomics develops bioinformatics products and services for the life science industry. The Company's focus is microbial genomics and its industrial and medical applications and has developed a unique platform technology for the functional genome analysis which is carried out using bio information tools. The integrated approach starts with the high-throughput sequencing of genes and covers the function determination using its own and public databases, through to the metabolic optimisation of micro-organisms and medical searches for active agents. The ERGO genome analysis and discovery system provides a systems-biology informatics system centred on comparative genomics to capture, query and visualize sequenced genomes. The multidisciplinary research team at Integrated Genomics has developed computational and functional genomics tools for an indepth understanding of microbial genomes, including those of filamentous fungi. The ERGO suite is an integration of biological data from genomics, biochemistry, high-throughput expression profiling, genetics and peer-reviewed journals to achieve a comprehensive analysis of genes and genomes. ERGO combines pattern-based analysis with comparative genomics by visualizing genes within the context of regulation, expression profiling, phylogenetic clusters, fusion events, networked cellular pathways and chromosomal neighbourhoods of other functionally related genes. Integrated Genomics is using ERGO as the core technology in a series of products and services that the company sells. The Company has incorporated not only bioinformatics skills but also high throughput DNA sequencing, genomic annotation, metabolic mapping, biochemistry, microbiology, and gene expression analysis in all aspects of its business. Some of the most important customers are amongst others BASF, Danone, Chr. Hansen and Rocky Mountain Laboratories. As of March 31, 2006 DEWB held 75.2% of the shares of Integrated Genomics. Page 12

13 Expert in Spiegelmer Technology Treating inflammatory diseases, chronic pain and migraine, oncology and metabolic disorders Transition from a technology to a drug development company Strategic alliance with Pfizer Share of 61.7% NOXXON Pharma AG NOXXON Pharma AG is an independent biopharmaceutical company focusing on the development of innovative pharmaceutical products based on its unique proprietary Spiegelmer Technology. A Spiegelmer is a mirror-image oligonucleotide that can bind to pharmacologically relevant target molecules conceptually similar to an antibody that recognizes an antigen. Using its innovative and patented enabling technology NOXXON develops highly specific drugs for different medical fields of application. These contain activities amongst others in the fields of the treating inflammatory diseases, chronic pain and migraine, oncology and metabolic disorders. It was shown at animal models that Spiegelmers do not initiate any kind of immunity reactions and that Spiegelmers are not toxic. Likewise NOXXON already gave the proof of concept for the Spiegelmers at an in vivo animal model. Currently NOXXON is pursuing its transition from a technology to a drug development company. In the medium term, NOXXON wants to become a partially integrated bio-pharmaceutical company and wants to offer complete development from a single source together with identification and design of medication.the company's business approach comprises partnerships with pharmaceutical companies as well as the in-house development of its own products through Phase II clinical trials. In March 2006 NOXXON entered into a strategic alliance with Pfizer Inc. Pfizer obtained an exclusive license for NOXXON s pre-clinical anti-ghrelin compound NOX-B11 and will develop this Spiegelmer for the treatment of obesity. In addition, NOXXON and Pfizer entered into a strategic drug discovery alliance under the terms which NOXXON will develop novel Spiegelmer therapeutics for disease indications of Pfizer's interest, while Pfizer assumes all responsibility for clinical development and commercialization. As of March 31, 2006 DEWB held 61.7% of the shares of NOXXON Pharma. Biotech start up Novel way of synthesising DNA molecules Dominant player in today s gene synthesis market Sloning BioTechnology GmbH Sloning BioTechnology GmbH is a Biotech start up company which has developed a novel way of synthesising DNA molecules. This means that companies in the pharmaceutical, chemicals and biotechnology sectors that previously carried out the manufacture process (cloning) on a manual basis, a basic technology in the process of the development of drugs, will now be able to speed up their manufacture process by around ten times through Sloning and, as a result, achieve savings in costs. Purely research driven in the past, the company now sets out to rig an industrial-style production platform and to seriously start serving customers. Sloning's proprietary innovation consists of a novel way of producing synthetic DNA constructs. Instead of ligating oligonucleotides specifically designed and synthesised for a given gene construct, the company relies on a library of standardised building blocks that can be combined to any desired sequence by means of a series of standardised reaction steps. Such a level of standardisation allows for the process to be fully automated, yielding an unequalled level of throughput and cost effectiveness. The building blocks' double stranded structure makes for a stable and reliable synthesis process, whatever sequence one wishes to construct. This will enable the company not only to become the dominant player in today's gene synthesis market, but to attract scientists today relying on in-house molecular cloning Oligonucleotides that form a defined secondary structure are used as raw material for the synthesis process. These molecules can be categorized into two different types. The anchors provide the variable sequence that make up the desired DNA and the splinkers are the starters onto which the anchors transfer their variable Page 13

14 sequence. Essential for the synthesis process is the internal recognition site for an outside cutter. To allow the synthesis of any gene sequence, the required number of different building can be simply calculated and sums up to All building blocks together represent the library that is stored in large quantity. Share of 14.3% As of March 31, 2006 DEWB held 14.3% of the shares of Sloning BioTechnology. First German biotech company with a drug on the market Eligard as the company s mainstay of sales Further drug candidate is currently in the approval procedure Share of 0.3% MediGene AG MediGene is the first German biotech company with a drug on the market. The company has the most mature drug development pipeline in the German biotech industry and possesses innovative platform technologies. MediGene's core competence lies in research and development of novel approaches for the treatment of various tumor diseases. Thus MediGene focuses on indications of high medical need and economic opportunities. MediGene's first drug on the market, Eligard, is the company's mainstay of sales. Eligard has been approved in 24 European countries and was launched in 12 countries by now. In Europe, Eligard is being promoted and marketed by MediGene's partner Astellas Pharma (previously Yamanouchi). MediGene's revenues from Eligard are made up of two elements: royalties on the sales of Eligard, as well as milestone payments, such as approval and market launch in specific European countries. MediGene, on the other hand, makes license fee payments for Eligard to QLT (previously Atrix Laboratories). In 2001, MediGene acquired the pan-european marketing rights for Eligard from Atrix and successfully took the product through the approval procedures for Germany. Eligard will remain MediGene's mainstay of sales in the coming years. Revenues will continuously increase as a result of the market launch of the drug in another 14 countries in A further drug candidate has successfully completed all phases of clinical development and is currently in the approval procedure. In addition, MediGene has several drugs in various phases of clinical development. MediGene possesses proprietary technologies for drug discovery and development that not only feed our own product pipeline, but are also made available for collaborative partnerships. The revenue from the sale of marketed drugs will help finance further research and development projects, and will advance the company to profitability. As of March 31, 2006 DEWB held 0.3% of the shares of MediGene. Information Technologies No new future commitments Consulting and software Simplifying total logistical network planning As planned the share taken by IT will continue to fall in the future since DEWB has not taken on any new commitments in these areas. 4flow AG 4flow offers consulting services and software within the field of logistics and supply chain management. The software developed by 4flow facilitates the initial integration of planning, control and accounting for complex supply chains in industry. Innovative, Internet based supply chain solutions from 4flow simplify total logistical network planning for industrial clients. The results are faster transport flows, improved response capability to breakdowns, increased supply reliability, marked savings in costs and minimisation of expenditure for planning. Page 14

15 First integrated standardized software for the planning of logistics Well-known customer base Share of 65.7% 4flow vista is the first integrated standardized software for the planning of logistics. It automates the recurring time-consuming activities of designing and planning logistic structures and processes. Some important applications of 4flow vista are amongst other the planning of the complete logistics network inbound and outbound, including production site allocation, the planning of processes and resources to identify the inbound and outbound processes with minimum costs taking capacity constraints into account as well as the evaluation of total costs to select the most competitive suppliers. 4flow primarily offers its products to companies in the automotive and consumer goods industry, trading companies as well as logistics service providers. Main customers are amongst others Johnson Controls, MAN, Magna Steyr Fahrzeugtechnik, BMW, Laxness and E-Plus. As of March 31, 2006 DEWB held 65.7% of the shares of 4flow. itac Software GmbH First standardized solution fully implemented in Java Online management of production processes Well-known customer base Share of 9.7% Founded out of BOSCH Group, itac software AG produces standard software and supplies MES (Manufacturing Execution System) solutions with an emphasis on traceability for discrete manufacturing. The itac MES Suite is the first solution fully implemented in Java guaranteeing the highest possible standardization level in the market. itac Software permits the online management of production processes - just-intime from every place worldwide and without additional investment in the network Infrastructure of the enterprise. The software enables each individual component to be traced back to its origin from the goods inward stage of the individual parts through to the despatch of the finished products. An electronic product passport creates a record of when the product was manufactured, which components were used, which production resources were utilised and the results of the quality testing. Hence, from a MES perspective, itac provides maximum performance, flexibility and security in the management of quality, resources and production. Customers like Bosch, Siemens, VDO are leading manufacturers in OEM and supplier industries in sectors such as automotive, electronics, and medical devices. As of March 31, 2006 DEWB held 9.7% of the shares of itac. IVISTAR Kommunikationssysteme AG Developer of innovative communication systems Unique references Share of 29.3% IVISTAR Kommunikationssysteme AG specialises in the development, launch and sale of innovative communication systems. The emphasis is on IPbased communication solutions for home automation and building management as well as for intelligent integration of communication networks. IVISTAR obtained unique references, e.g, with network solutions within the Berlin representative office of Deutsche Telekom AG and the establishment of the infrastructure of the worldwide first IP-networked Grand Media Hotel in Ljubljana. As of March 31, 2006 DEWB held 29.3% of the shares of Ivistar. Page 15

16 Valuation In reaching a valuation for DEWB we will concentrate on looking at the sum of the parts (S-O-P). In view of the enormously high risks in estimating the DEWB P&L, as well as the absence of any meaningful peer group, we will not be considering the option of deriving a fair share price based on valuation multipliers. In view of the difficulty in forecasting future income and cash flows we have also decided not to examine the option of a discounted cash flow. Calculation of the fair value for the shareholders equity Assumptions for calculating the fair value In order to reach a fair value for the shareholders equity a number of assumptions will obviously have to be drawn. The main steps in the procedure and the assumptions are described below: The company has published the itemisation of the total book value into the three individual areas of early stage financing, expansion financing and listed investments, with a basis for valuations having been provided for these individual areas. We have applied a 35% discount to the book value for the valuation of the early stage financing investments as these companies tend to still be in a digital phase. In other words, the potential risk of a total write-off is still very high. We have combined the companies from the expansion financing area with the exception of the two pearls in the portfolio, KSW Microtec and NOXXON Pharma. We have assumed that all the necessary value adjustments have been made to these companies over the last two years. Since DEWB never shows its book values at more than the acquisition costs, some investments in well-run companies are likely to contain hidden reserves. Therefore in our calculation we have assumed hidden reserves totalling 12% of the book value of all investments in expansion financing with the exclusion of KSW Microtec and NOXXON Pharma. This is likely to be a cautious assessment of the valuation. In our valuation summary we have assumed a market value of EUR 52.5m for the shareholders equity of KSW Microtec and EUR 28.5m for NOXXON Pharma. We have valued the shareholdings in listed companies at the stock exchange prices as of March 31, Other assets amount to approximately EUR 1.6m, deferred taxes to EUR 2.2m and cash in hands to EUR 12.6m. Provisions and liabilities were included in the calculation at book values. Page 16

17 Calculation of fair value On the basis of all these assumptions the calculation of the fair value for the shareholders equity is as follows: Sum of the parts valuation of DEWB (March 31, 2006) Book value of the investment portfolio 45.8 of which early stage 8.0% 3.7 of which expansion financing 79.0% 36.2 of which listed investments 12.0% 5.5 Book value early stage 3.7./. Risk discount of early stage 35.0% 1.3 Market value early stage 2.4 Book value of expansion financing 36.2./. Book value of KSW and NOXXON (estimated) 15.0 Book value expansion financing excl. KSW and Noxxon 21.2 Hidden reserves as % of book value (estimated) 12.0% 2.5 Market value expansion financing excl. KSW and Noxxon 23.7 Potential market value of KSW shareholder's equity (estimated) 52.5 DEWB shareholding 29.7% Potential market value of NOXXON shareholder's equity (estimated) 28.5 DEWB shareholding 61.7% Market value of DEWB shareholding in KSW and NOXXON 33.2 Market cap. MediGene (as of March 31, 2006) DEWB shareholding in MediGene 0.3% 0.5 Market cap. SMSC (as of March 31, 2006) DEWB shareholding in SMSC 1.2% 5.5 Market value of listed investments 6.0 Market value of the investment portfolio 65.3 Market value of other assets 1.6 Cash in hand 12.6 Deferred Tax assets 2.2 Market value of assets 81.7./. Provisions 1.4./. Financial liabilities 20.5 Liabilities excl. Shareholer's equity 21.9 Market value assets - liabilities excl. Shareholder's equity 59.8 Current Share Price of DEWB EUR 2.81 No. of shares outstanding (m) 15.2 Current market capitalisation of DEWB 42.8 Calculated upside potential before holding discount 39.7% Holding discount 10.00% Calculated upside potential after holding discount 25.7% Fair share price after holding discount 3.53 Page 17

18 Market cap 31% below theoretic fair value 10% holding discount on theoretic fair value DEWB share has 21% upside potential According to our calculation the current market capitalisation of DEWB is approx. 40% below the theoretic fair value. Account must also be taken of the discounts for the holding structure as well as to the minimal transparency in the individual investments. In view of the good track record with exits, the higher than average IRR on the investment portfolio in the past, the successful restructuring measures and the well mixed portfolio structure, we see a maximum discount of 10% on the theoretic fair value as being justified. This means that the DEWB share still has an upside potential of around 26%. As a result of our share analysis we therefore rate the DEWB share as a BUY. Financials 2005 Sales of Holdings EUR 37.5m from sales of holdings Two exits in 2005 During fiscal year 2005 DEWB generated EUR 37.5m from sales of holdings. The largest proportion of this figure came from the sale of a 17.5% stake in OASIS SiliconSystems Holding, a developer of integrated circuits that enable networking of multimedia devices for automotive infotainment applications. This exit generated a turnover of approximately USD 30m, obtained in the form of 86% cash and 14% SMSC-shares (equivalent to around. 243,000 SMSC shares) In another trade sale DEWB sold its stake in Dyomics GmbH to an American biotechnology company. Share sales and investments (EUR m) 78,0 Share sales Investments 39,0 0, e 2007e 2008e Source: DEWB, equinet EBIT / Earnings after tax / EPS Investment transactions vs. adjustments to book values Return to positive EBIT After deduction of procurement and transaction costs, DEWB achieved a result from investment transactions of EUR 13.5m. This result was hit by value adjustments to investment book values in the sum of EUR 11.2m. In fiscal year 2005 all reductions in value had to be shown as affecting the results as these related to reorganisation situations or definable reductions in future cash flows. EBIT for fiscal year 2005 amounted to EUR 1.9m compared to EUR -13.2m in the previous year. Page 18

19 Return to positive profit after three years Hence despite significant restructuring costs DEWB achieved positive profit after taxes amounting to EUR 1.1m (FY 2004: EUR -13.2m) for the first time after three years of continual losses. EPS amounted to EUR 0.07 (FY 2004: EUR -0.92) Significant reduction of liabilities Reduction of financial liabilities by more than 80% During fiscal year 2005 DEWB used operating cash flow arising from investment sales mainly to repay bank loans in the sum of EUR 16m reducing liabilities to banks to EUR 19.6m (FY 2004: EUR 35.6m). Financial liabilities were reduced overall by more than 80% to EUR 9.3m. The Equity Ratio increased from 42% to 60%. Improved liquidity Significantly improved liquidity DEWB could significantly improve its liquidity position reaching EUR 10.5m after EUR 3.6m in fiscal year Financials Q Sales of Holdings EUR 6.1m from sales of holdings Sale of shares in MediGene Sale of unique m.o.d.e. In the first quarter of fiscal year 2006 DEWB generated EUR 6.1m from the sale of shares in MediGene and of unique m.o.d.e. (Q1 2005: EUR 24.9m). Shares in MediGene worth EUR 3.1m were sold over the stock market expecting a significant rise in value after MediGene s announcement of a marketing partnership for Polyphenon-E used in the treatment of genital warts. Income of EUR 3m was generated by the sale of unique m.o.d.e., a developer of diode laser systems with microoptic beam shaping for applications in medical, printing and measuring technologies. The company was acquired by the Jenoptik Group. EBIT / Earnings after tax/ EPS Financial result improved by 70% compared to Q Gross earnings for the first quarter of fiscal year 2006 amounted to EUR 1.5m (Q1 2005: EUR 8.4m), EBIT to EUR 1.1m (Q1 2005: EUR 6.5m). As a result of the marked fall in debt the financial result improved by approx. 70% in comparison to the first quarter As a result of the realisation of deferred taxes, a tax income of EUR 0.2m was generated. Hence, Earnings after tax came in at EUR 1.2m (Q1 2005: EUR 6.1m) corresponding with EPS of EUR 0.08 (Q1 2005: EUR 0.40). Page 19

20 Trends in the German Venture Capital Market Development of the German Venture Capital Market in 2005 Fall in level of investments in 2005 German businesses belong to the most innovative Venture capital investments increased by 18% The German Venture Capital market was characterised by a fall in the level of investments in fiscal year 2005 mainly due to a reduction in the number of major buy-outs. Funds of the investment companies were primarily investing in their existing portfolios. What must be noted is that the German venture capital industry s malaise is not due to a lack of innovation. According to WIPO German businesses are among the most innovative companies in the world and have filed 14,870 patents in 2004 which is equal to 12.4% of all patents filed world wide. All in all members of the Federal Association of German Capital Investment Companies invested EUR 3.0bn, a 20% drop compared to fiscal year Venture capital investments covering seed, start-up, expansion, bridge, turnaround and replacement capital financing, faced an increase of approximately 18% compared to previous year level. Development of gross investments by BVK members (EUR bn) Buy-outs Venture Capital Source: BVK, DEWB, equinet Mature companies were preferred Realised exits increased by 25% Increased significance of IPO s Preference was predominantly given to mature companies. In fiscal year 2005 later phases of financing accounted for 75%, whereas start-up financing made up 23% and seed financing 1%. Exits realised by members of the Federal Association of German Capital Investment Companies in fiscal year 2005 amounted to EUR 1.9bn, an increased of more than 25% (Fiscal year 2004: EUR 1.5bn). Although their share of approximately 6% of the total exit volume is still insignificant IPOs gained increased significance. Page 20