annual report 2008 we magnetise the world

annual report 2008 we magnetise the world

Copies of the Dutch and the English versions of this annual report are available from: Kendrion N.V. Utrechtseweg 33 3704 HA Zeist P.O. Box 931 3700 AX Zeist The Netherlands Telephone +31 (0)30 699 72 50 Fax +31 (0)30 695 11 65 E-mail info@kendrion.com www.kendrion.com Registered in Zeist, Netherlands This annual report is a translation of the official document published in Dutch. For matters of interpretation, reference will be made to the Dutch document. A digital version of this report is available on the corporate website (www.kendrion.com) along with other publications such as press releases and presentations. Kendrion N.V. Euronext code 0000383511 Fondscode 38351 ISIN code 0000383511 Chamber of Commerce 30113646

Contents 2 Profile 3 Preface 4 Kendrion at a glance 4 Key figures 7 Mission, strategy and financial objectives 9 Information on Kendrion N.V. shares 12 Report of the Supervisory Board 12 Members of the Supervisory Board 13 Report of the Supervisory Board 16 Report of the Board 16 Members of the Board 17 Highlights 18 Organisational structure 20 Objectives 22 Social Responsibility 23 Human resources 27 Risks and risk management 38 Financial review 46 Developments in each business unit 46 Industrial Magnetic Systems 49 Industrial Drive Systems 50 Passenger Car Systems 51 Commercial Vehicle Systems 53 Corporate governance 58 Outlook for the future 59 Financial statements 111 Other information 111 Auditor s report 112 Profit appropriation 112 Post-balance sheet events 113 Principal subsidiaries 116 Five-year overview 117 Glossary >> 1

Profile kendrion n.v. develops, manufactures and markets high-quality electromagnetic systems and components. Kendrion s activities are performed in four business units: Industrial Magnetic Systems, Industrial Drive Systems, Passenger Car Systems and Commercial Vehicle Systems. kendrion has leading positions in a number of business-to-business niche markets. The company has approximately 1,400 employees worldwide, and achieves annual revenue of about EUR 200 million. Germany is Kendrion s main home market, although other countries are growing in significance. Kendrion activities kendrion develops and manufactures electromagnetic components for industry. Kendrion s electromagnets are used all over the world in products such as lifts, door locking systems, industrial robots, medical equipment, electrical switchbox systems, diesel engines and airconditioning systems. Kendrion continues to expand its field of operations, for example by the recent takeover of Tri-Tech LLC, a company manufacturing electromagnetic components for beverage dispensers. Kendrion s major customers include Siemens, Daimler, Continental, Bosch, ZF, Evobus, Hyundai and Yutong. Kendrion N.V. Revenue about EUR 200 million About 1,400 employees Industrial Magnetic Systems Industrial Drive Systems Passenger Car Systems Commercial Vehicle Systems >> 2 annual report 2008

Preface To all our shareholders and other stakeholders, The year 2008 was an extraordinary year. Revenue generated in the first six months was more or less in line with budget, with a favourable economic climate in the major home markets. Later in the year the economic tidings became increasingly unfavourable, and the financial and economic crisis also had a major impact on the company s operations. Nevertheless, during the course of 2008 Kendrion was able to take a number of important steps within the scope of its strategy focused acceleration. The achievement of an increased focus in the operations was once again assigned priority in 2008. Kendrion endeavours to be a leading international company that uses its existing know-how, innovative capabilities and commercial strengths to offer solutions to the company s industrial customers, whereby the objective is to achieve excellent returns and to have an explicit focus and a clear profile. Kendrion s strategy has resulted in the imposition of increasingly stringent requirements on the quality of the management and on the ability to undertake major investments. This strategy also includes having internationally active sales and engineering staffs and a global manufacturing presence. The requirements this strategy imposes on Kendrion s electromagnetic operations and the opportunities offered by the strategy gave cause to the decision Kendrion took in mid-2008 to investigate the opportunities for the sale of its distribution operations organised under the Distribution Services division. At the end of the year this resulted in the sale of Servico, in Belgium, to Robert Bosch GmbH, in Germany, and the sale of the Vink Group to Edmundson Distribution Limited in the UK. The shares in Vink will be transferred in February 2009. The pursued focus was hereby achieved. Kendrion s position as the market leader in electromagnetic systems and components must result in vigorous organic growth. Kendrion was highly successful in achieving this objective during the first six months of 2008, when organic growth amounted to 13%, although during the course of the year the rapidly deteriorating economic conditions imposed great pressure on the company s growth. In 2008 Kendrion succeeded in acquiring major new projects and customers in virtually all fields of the company s operations: the Industrial Magnetic Systems business unit was awarded new contracts in the energy sector, the Passenger Car Systems business unit succeeded in further expanding its position in common rail diesel technology, and the Commercial Vehicle Systems business unit increased its global bus-manufacturer clientele. The satisfying improvement of the results in the first six months of the year was followed by a deterioration of the results during the second half year. On balance, the operating result from the electromagnetic operations declined by 7% in 2008. The development in the results of the Distribution Services operations, which have now been sold, was even more disappointing: the result came under particularly great pressure in the fourth quarter of the year. During the fourth quarter the necessary cost reductions were implemented in all fields of operations. Working capital management once again received a great deal of attention in 2008, and a good free cash flow was achieved. In addition, the debt level decreased following the completion of the sale of Servico in 2008. Kendrion s financial position will obviously improve even further on the completion of the sale of the Vink Group in February 2009. The agreements reached with the banks create more scope for the company s further growth in the coming years. The further risk management measures Kendrion implemented in 2008 have resulted in an even better insight into and improved reliability of the operations and the financial reporting. As has become customary in recent years, in 2008 Kendrion once again prepared a Mid-term Plan (2009-2011), Niche market leadership in difficult times. Self-evidently, the title of this plan refers to the difficult and unpredictable market conditions at the beginning of 2009. The plan stipulates that Kendrion, as a focused company in spite of these difficult conditions shall deploy its powerful financial position to make every effort to improve its position relative to the competition. Kendrion shall seek targeted acquisitions for a number of business units. Extremely stringent requirements will be imposed on takeover candidates. Kendrion is gratified that, in spite of the difficult market conditions, the company is nevertheless in a position to pay a dividend for 2008. The efforts made by the company s employees have enabled Kendrion to make major steps in its development in 2008 and build up a powerful position for the coming years. The company s level of ambition remains high: Kendrion s core businesses are worth expanding further during the coming years, even though this will be accompanied by painful restructuring measures at some operating companies. Consequently I welcome this opportunity more than ever, especially in today s difficult times to thank Kendrion s employees, management and other stakeholders for their contribution to the development of our company in 2008. We shall jointly strive further in 2009, an undoubtedly difficult year. Piet Veenema, CEO >> 3

Kendrion at a glance Key figures >> Key figures 1 Continued operations: Kendrion Electromagnetic and holding companies, exclusive of Vink UK and Ireland. 2 Total Invested capital is tangible fixed assets, intangible assets and current assets less the current tax liabilities, trade, payables and other payables. 3 2007 inclusive of Linnig Antriebstechnik Group on a pro-forma basis. These figures have not been audited. 4 2008 inclusive of Vink s net interestbearing debt in assets and liabilities specified as held for sale. 5 EBITA 2008 continued operations/invested capital 2008 after the deduction of Vink (invested capital in assets and liabilities specified as held for sale). 6 Normalised net profit from continued operations. 7 Before cash flow relating to acquisitions and sale of operations. EUR million, unless otherwise stated 2008 3 2007 Net profit 12.9 3.7 Continued operations 1 Revenue 204.2 196.2 Organic growth 3.6% 15.1% Operating result before amortisation (EBITA) 14.3 15.1 Operating result before depreciation and amortisation (EBITDA) 21.6 22.4 Net investments 13.5 11.5 Depreciation and amortisation 8.3 7.3 Balance sheet positions Total equity 93.5 88.8 Net interest-bearing debt 4 75.3 85.2 Share information Outstanding shares at year-end (x 1,000) 10,288 10,288 Net result per share 1.25 0.35 Main key figures Solvency (total equity/balance sheet total) 33.3% 29.3% Net interest-bearing debt 4 /equity (gearing) 0.8 1.0 Main key figures on pro-forma basis Working capital in % of revenue 1, 3 (pro forma) 11.6% 13.6% Net interest-bearing debt 4 /operating result before depreciation (EBITDA) 3 (pro forma) 2.4 2.2 Operating result 3 /net finance charges (pro forma) 3.2 3.8 EBITA/invested capital 2, 3, 5 (ROI) (pro forma) 12.4% 16.1% EBITA/invested capital 2, 3, 5 ex goodwill (ROI) (pro forma) 17.6% 20.8% EUR million, unless otherwise stated Target Actual Organic growth of continued operations > 5% per year 3.6% Return on invested capital 2 > 17.5% 12.4% Solvency at least 30% 33.3% Ratio of interest-bearing debt and EBITDA < 3.00 2.4 Free cash flow 7 healthy free cash flow in relation to organic growth in % of net profit 46% Dividend distribution 30% of net profit > due to sale of Distribution Services 6 >> 4 annual report 2008

EUR million Revenue by region 1 Depreciation/investments 1 1 Continued operations: Kendrion Electromagnetic and holding companies excluding Vink UK 204.2 180 150 120 90 196.2 150 120 90 8.3 13.5 12 10 8 6.6 6 10.3 8 6 and Vink Ireland. 60 60 Outside Europe 4 4 2 Before cash flow 30 30 Other European countries 2 2 Depreciation relating to EU member states Investments acquisitions and sale 2008 2007 2008 2007 of operations. Free cash flow 2 Number of employees in FTEs and absolute numbers 1 1,439 1,475 1,525 1,501 1,400 3.7 3 1,200 1,000 2 800 1 600 Temporary employees 400 Temporary contract 1 1.5 200 Permanent employment FTEs 2008 2007 2008 2007 kendrion at a glance >> 5

Industrial Drive Systems Efficient A car production line is the example of efficiency and precision. Holding magnets are indispensable for the production robots to work at the right spot with exact timing. 15:58 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Eisenach, Germany Hundreds of new cars leave the production line every day. 11 10 9 8 7 6 5 4 3 2 1 0 GMT + 1

Kendrion at a glance Mission, strategy and financial objectives >> Mission Kendrion is committed to being a leading international company that uses its existing know-how, innovative capabilities and commercial strengths to provide solutions to the company s industrial customers. In doing so Kendrion intends to be a transparent, flexible and reliable company where entrepreneurial eal is combined with clear profit targets. Kendrion seeks to further strengthen its position as a fast-growing high-tech company. >> Strategy Kendrion s policy is focused on the creation of sustainable added value and the achievement of an appealing return on investment for the company as a whole. This is based on a powerful focus on a number of selected operations and on profitable growth achieved both organic as well as by acquisition. Kendrion intends to build up and expand its leading European market positions in selected niche markets in terms of revenue and added value. Kendrion utilises its existing know-how, innovative capacity and commercial strengths to offer solutions to a wide range of customers, whereby the company shall focus on the further expansion of the fields of applications for electromagnetic systems and components. In addition, Kendrion intends to evolve from a player on the European market into a global player. Kendrion is characterised by its transparency, flexibility and local entrepreneurship, whereby the company is driven by challenging but realistic targets. In addition, Kendrion intends to be and remain a company that appeals to its employees, customers and shareholders. Kendrion is aware of the importance of its social responsibility, and for this reason the social and environmental standards governing all processes are continually being made more stringent. Kendrion s spearheads are: Niche market leadership in selected business-to- business markets; Organic growth in the current operations; Utilisation of synergy in and between the business units; Balanced geographical spread of the operations; Targeted acquisitions; Enhancement of the innovative capacity. Niche market leadership in selected business-to-business markets Kendrion endeavours to achieve niche market leadership in selected business-to-business markets. Niche markets are small markets, whereby small relates not so much to revenue or volume as to a limited number of suppliers in the sense of quality (technology and innovation). Kendrion intends to acquire a leading position in the niche markets that offer appealing margins and which are governed by relatively high barriers to entry (know-how, investments). Kendrion s products and services have the following features: The products and services are of an innovative and technical nature; All products and services are customised, dedicated to the supplier or customer; The contribution may be minor, but is essential to the customers finished products; The number of customers (or suppliers) is limited but there are long-term relationships; The market for a specific product or service offers the company an opportunity to hold a leading position in that market. Organic growth in the current operations Kendrion endeavours to achieve organic growth in its operations in terms of the revenue, volume and result. This can be achieved by having powerful market positions, the further expansion of the company s highgrade engineering and test facilities, and the provision of excellent logistics concepts. Top priority is assigned to the provision of first-rate service. Utilisation of synergy in and between the business units Kendrion s four business units differ from each other, and operate in different markets. Kendrion endeavours to achieve optimum synergy in and between the business units by measures including joining forces in marketing and sales and achieving economies of scale in production, purchasing and support services such as HR, Finance, and IT. A balanced geographical spread of the operations Kendrion intends to safeguard stable results by avoiding a dependency on one geographical market. Kendrion endeavours to achieve a balanced geographical spread of its operations, whereby priority is assigned to covering kendrion at a glance >> 7

the most relevant European markets. Nevertheless, the importance of countries in Eastern Europe and outside Europe shall continue to increase. Eastern Europe offers opportunities in terms of production locations and markets, as is illustrated by the 2008 start-up of the Kendrion Binder Magnete s.r.l. operating company in Romania. The Far East and USA are becoming more important, although for the time being they are only modest in the context of Kendrion. Targeted acquisitions Kendrion endeavours to acquire companies that enhance its leading positions (both in terms of its markets and the geographical spread of its operations). These acquisitions are pursued, in particular for the industrial business units. Enhancement of the innovative capacity Globalisation and technological developments are increasing the competitive pressure. Kendrion is aware that the company will be unable to achieve and retain its planned growth and attractive market positions without permanent improvements to its operations and its knowledge of the markets and customers. This will in turn require USPs and innovation. >> Financial objectives Annual organic growth in revenue of at least 10%; Growth of the company, inclusive of acquisitions, to a revenue of about EUR 350 million within the next two to three years; Return on investment (ROI) inclusive of goodwill of more than 17.5%; Payment terms and stock levels at each operation in line with the market, taking account of local variations; A healthy free cash flow for each business unit, given the organic growth achieved by each business unit; Solvency ratio of about 30%; Interest-bearing debt/ebitda of lower than 3.0; Dividend distribution of at least 30% of the net profit, unless dictated otherwise by long-term investments and/or acquisitions and/or exceptional circumstances. >> Important events (content of press releases) 4 April 2008 Kendrion completed the takeover of the Linnig Antriebstechnik Group on 29 November 2007. Kendrion also acquired the remaining 49% of the shares in the Group s Mexican subsidiary, Linnig de México, S.A. de C.V., from the Mexican shareholders on 3 April 2008. 14 May 2008 As per 14 May 2008 Vink has agreed to sell its plastic distribution business in the UK and Ireland to Robert Horne Group Ltd. in the UK and Robert Horne Paper Ltd. in Ireland. The business in the UK and Ireland generated revenue of about EUR 9 million in 2007, with in total 25 employees, and was loss making. 26 August 2008 On 25 August 2008 Kendrion reached agreement with the owners of Tri-Tech LLC on the takeover of the company. Tri-Tech LLC, in Mishawaka (Indiana, the USA), generates revenue of about USD 5 million. The company, which has about 35 employees, is focused on the development and manufacture of electromagnetic components for soft drink dispensers. 26 November 2008 On 25 November 2008 Kendrion reached agreement with Edmundson Distribution Limited, the UK, and Claessen ELGB N.V. on the sale of its Distribution Services operations. The Distribution Services operations comprise the Vink Group, which shall be sold to Edmundson Distribution Limited, and Servico, which will be sold to Claessen ELGB N.V. The transaction is conditional on approval by the shareholders of Kendrion N.V. An Extraordinary General Meeting of Shareholders will take place on 12 December 2008, in which their approval will be requested. The transaction is also subject to approval by the European Competition Authorities and the banks. Furthermore, the Servico transaction is conditional on the approval of its major supplier, Robert Bosch GmbH. This supplier can also exercise a pre-emptive right to buy Servico (within three weeks). 12 December 2008 The shareholders of Kendrion N.V. have granted approval for the aforementioned transaction at the Extraordinary General Meeting of Shareholders. The banks have meanwhile also approved the sale. 18 December 2008 On 17 December 2008 Servico s major supplier, Robert Bosch, announced that it would exercise its aforementioned pre-emptive right to buy Servico. Kendrion shall sell Servico to Robert Bosch GmbH. The sale was completed on 22 December 2008. 12 February 2009 The European Competition Authority s approval for the sale of the Vink Group to Edmundson Distribution Limited was received on 5 February 2009. The sale was completed on 12 February 2009. >> 8 annual report 2008

Kendrion at a glance Information on Kendrion N.V. shares >> Share capital Kendrion s issued share capital remained unchanged in the 2008 financial year. The authorised share capital amounts to EUR 80,000,000, comprised of 40,000,000 ordinary shares with a nominal value of EUR 2.00. On 31 December 2008 10,287,624 shares had been issued. On balance sheet date the company owned 15,232 shares, required to cover the current share plans. Movements in the share price from 2 January 2008 to 13 February 2009 Kendrion N.V. share ASCX 50 Index 25 AEX AMX Kendrion s shares are listed on NYSE Euronext s Amsterdam market. 0 25 50 75 >> 2008 >> 2009 Ordinary shares entitled to dividend Repurchased shares Total number of issued shares Movements in the number of outstanding shares At 1 January 2008 10,280,834 6,790 10,287,624 Repurchased 15,000 15,000 Delivered repurchased shares 6,558 6,558 At 31 December 2008 10,272,392 15,232 10,287,624 1 Restated to reflect reverse split in April 2007. Other information In EUR, unless otherwise stated 2008 2007 2006 1 Number of shares x 1,000 at 31 December 10,288 10,288 10,288 Market capitalisation at 31 December, EUR million 74.1 185.2 196.5 Highest price in the financial year 18.17 22.90 20.50 Lowest price in the financial year 5.80 16.77 14.90 Price on 31 December 7.20 18.00 19.10 Average daily ordinary share volume 6,979 18,894 24,064 Result per share 1.25 0.35 1.39 Price earnings ratio 5.76 14.17 13.74 kendrion at a glance >> 9

>> Major shareholders Pursuant to the Financial Supervision Act Kendrion is aware, on the basis of the information in the registers of the Dutch Authority for the Financial Markets (AFM), that the following shareholders possessed an interest of more than 5% on 31 December 2008: Shareholder Date of report New NIB Ltd. 13.76% 18 December 2006 ING Groep N.V. 12.72% 1 November 2006 Dr. T. Tettamanti 8.48% 1 November 2006 Aviva Plc 7.58% 1 November 2006 Driessen Beleggingen B.V. 5.38% 1 November 2006 Darlin N.V. 5.09% 1 November 2006 Janivo Participaties II B.V. 5.09% 1 November 2006 Navitas B.V. 5.01% 28 November 2006 Total 63.11% It is possible that during the course of 2008 changes in the sie of these interests have occurred which fall within the disclosure thresholds as stipulated in the Financial Supervision Act, and that these consequently have not needed to be disclosed to the AFM. On 9 January 2009 Driessen Beleggingen B.V. (now Florijn Investments B.V.) transferred its shares in Kendrion N.V. to Menor Investments B.V., a company affiliated with Florijn Investments B.V. At the time the interest amounted to 7.92%. >> Dividend Kendrion s dividend policy takes account of both the interests of the shareholders and the expected further development of the company. Pursuant to this policy at least 30% of the net profit is distributed among the shareholders, subject to the proviso that the solvency ratio is retained at a level of at least 30% and unless dictated otherwise by investments, acquisitions or exceptional circumstances. In the medium to long-term Kendrion s reserve and dividend policies are also designed to enable the company, in part within the scope of the current strategy, to grow whilst retaining a healthy solvency ratio. An extraordinary item in the coming years concerns the current proceedings following the fine that the European Commission imposed on Kendrion in 2005 for the alleged involvement of one of Kendrion s former subsidiaries in illegal price-fixing agreements, and the bank guarantee of EUR 40 million Kendrion issued to the European Commission in connection with this fine. Pursuant to the current credit agreement with the banks the calculations of covenants take account of an increasing portion of this bank guarantee, such to ensure that the company retains its healthy position should the Court of First Instance unexpectedly rule against Kendrion. At first the Court of First Instance was expected to issue its ruling in 2009. However, the Court of First Instance recently announced that it is unable to provide any further clarity on the date of its ruling. Kendrion shall submit a proposal to its shareholders for the payment of a cash dividend of EUR 10 million for the 2008 financial year, taking account of the book profit generated by the sale of the Vink Group in February 2009. Kendrion has been limited to the EUR 10 million dividend in 2009 by the banks as a condition for granting the required approval for the sale of Distribution Services. Kendrion regrets that the banks have stipulated this condition. The number of outstanding ordinary shares entitled to dividend at 31 December 2008 was 10,272,392, and consequently the cash dividend amounts to EUR 0.97 per ordinary share with a nominal value of EUR 2.00. >> Financial calendar Tuesday 24 February 2009 Publication of the annual results 2008 Monday 6 April 2009 General Meeting of Shareholders Tuesday 5 May 2009 Publication of the results for the first quarter of 2009 Tuesday 25 August 2009 Publication of the results for the first six months of 2009 Tuesday 10 November 2009 Publication of the results for the third quarter of 2009 Thursday 25 February 2010 Publication of the annual results 2009 Wednesday 7 April 2010 General Meeting of Shareholders >> 10 annual report 2008

>> Voting by proxy Pursuant to Kendrion s Articles of Association shareholders can be represented by proxy at meetings of shareholders. Shareholders who are unable to attend the General Meeting of Shareholders can request proxy forms from the company. These are issued free of charge. >> Participation A share plan for the Directors of the operating companies was introduced in 2005. This plan provides for the issue of shares in Kendrion as payment in kind. After the General Meeting of Shareholders each year the number of shares to be awarded to individual Directors of the operating companies in that year is determined by the Supervisory Board, such on the basis of the Board s recommendations. 2,700 shares were awarded pursuant to this plan in 2008. The plan does not extend to the Board. A long-term incentive (LTI) has been in place for the Board for the period 2005-2007. This entails Kendrion, depending on the extent to which a number of predetermined targets have been achieved, delivering a maximum of 2,113 shares, on the basis of an at-target performance, over 2009 to the Board members as payment in kind. With respect to the past three year period, 3,377 shares have been issued to the members of the Board. For information about the shares issued to the Executive Board members, refer to page 110. A comprehensive description of the LTI is included in the remuneration policy section on page 55 and following. >> Investor relations Kendrion attaches great importance to appropriate communications with financial stakeholders and other interested parties such as investors, capital providers and analysts to provide them with a good insight into the developments at Kendrion. Price-sensitive information is disclosed in public announcements. Transparency should lead to healthy pricing, and must support sufficient liquidity. >> Analysts The following stock exchange analysts actively monitor the Kendrion share: Fortis Bank (Nederland) N.V. René Verhoef Keijser Capital N.V. Nico van Geest Rabo Securities N.V. Frank Claassen SNS Securities N.V. Frank van Wijk Theodoor Gilissen Bankiers N.V. Tom Muller Kendrion N.V. Telephone: +31 (0)30 699 72 50 Fax: +31 (0)30 695 11 65 E-mail: info@kendrion.com More information about the Kendrion share is available from Kendrion s (renewed) website: www.kendrion.com. An overview of the shares owned by the Executive Board members is included on pages 109 and 110 of this Report. >> Regulations to prevent insider trading Kendrion has implemented internal regulations to prevent insider trading. These regulations govern the Supervisory Board, Board, Business Unit Managers and their Controllers, and a number of other employees. In addition, the Board and the Supervisory Board are governed by restrictions on trading in other listed companies. Kendrion has designated a number of consultants affiliated with the company as insiders. Kendrion s Compliance Officer is entrusted with the supervision of compliance with the regulations. kendrion at a glance >> 11

Report of the Supervisory Board Members of the Supervisory Board 1 S.J. van Kesteren (67) Mr Van Kesteren is the Chairman of the Supervisory Board. In 2005 the General Meeting of Shareholders appointed Mr Van Kesteren for a four-year term until 2009. The company shall propose that Mr Van Kesteren be reappointed until 2013. Mr Van Kesteren is Chairman of the Supervisory Board of Koninklijke Nedschroef Holding B.V. and a member of the Board of YOFC in Wuhan, China. Formerly he was Chairman of the Board of Draka Holding N.V. and member of the Advisory Board of ABN AMRO N.V. Mr Van Kesteren is a Dutch national. Shares held: 0 2 M.E.P. Sanders (55) Ms Sanders was appointed a member of the Supervisory Board during the General Meeting of Shareholders held in April 2005 for a three-year term until 2008. In 2008 the General Meeting of Shareholders reappointed Ms Sanders for a fouryear term until 2012. Ms Sanders is Chairman of the Supervisory Board of Solar Total B.V. and Hoens Broadcast Facilities B.V. and Chairman of the Advisory Board of Difrax Beheer B.V. and RLC Contax B.V. Ms Sanders is also member of the Advisory Board of De Hoge Dennen B.V. and member of the Board of Supervision of Altrecht N.V. and the ROC Leiden. In addition, Ms Sanders is Director of the investment company Matchem B.V. Ms Sanders is a Dutch national. Shares held: 0 3 R.L. de Bakker (58) Mr De Bakker was appointed a member of the Supervisory Board during the Extraordinary General Meeting of Shareholders held in June 2005 for a two-year term until 2007. In 2007 Mr De Bakker was reappointed for a four-year term until 2011. Mr De Bakker is Chairman of the Supervisory Board of SPIE Nederland B.V., member of the Supervisory Board of Tele2 Netherlands Holding N.V. (formerly Versatel Telecom International N.V.), member of the Supervisory Board of SPIE Benelux S.A. and member of the Supervisory Board of WCC B.V. He is also a member of the Board of a number of investment companies based in the Netherlands and a member of the Board of Stichting Continuïteit Tom-Tom, Chairman of the Board of Supervision of Stichting Raamwerk, Vice-Chairman of the Supervisory Board of Supervision of Stichting Laurens and member of the Board of Supervision of Stichting WoonCompas. He was formerly a member of the Board and Chief Financial Officer of ASM International N.V. Mr De Bakker is a Dutch national. Shares held: 0 >> 12 1 2 3 annual report 2008

Report of the Supervisory Board 1 In 2008 the Board comprised the two Executive Directors. >> Annual Report Pursuant to Article 31 of Kendrion N.V. s Articles of Association we hereby present to you the Annual Report for 2008 prepared by the Board 1 ). The Annual Report includes the financial statements audited by KPMG Accountants N.V. The auditor s unqualified report is enclosed on pages 111 and 112 of this Report. The Supervisory Board has discussed the Annual Report for 2008 and the preparation of the Report extensively with the Board during meetings attended by the auditor. These discussions have convinced us that the Annual Report complies with the transparency requirements, and we are of the opinion that it constitutes a good basis for the accountability the Supervisory Board gives for its supervision and advice during the year under review. The Supervisory Board recommends that the General Meeting of Shareholders to be held on 6 April 2009 adopts these financial statements and the proposed dividend distribution, and discharges the Executive Board and Supervisory Board of responsibility in respect of their respective management and supervision. >> Composition of the Supervisory Board and Board Pursuant to the Articles of Association the Supervisory Board must be comprised of at least three members. The current Supervisory Board is comprised of three members who comply with best practice provision III.3.4 of the Dutch Corporate Governance Code (stipulating the maximum number of Supervisory Boards of Dutch listed companies of which an individual may be a member). A study to be carried out in 2009 shall review whether it would be advisable to expand the Supervisory Board to include a fourth member with German nationality. The Supervisory Board s profile has been published on Kendrion s website. The membership of the Supervisory Board and the Executive Board remained unchanged during the year under review. In accordance with the rotation schedule, in 2009 Mr Van Kesteren shall be recommended for reappointment as Chairman of the Supervisory Board for a four-year term. >> Supervision The Supervisory Board met with the Board on twelve occasions. These meetings reviewed a number of permanent items on the agenda which included the company s strategy, the results of and developments within the business units and Kendrion as an entirety, corporate governance, the independence of and (re)appointment of the auditor, the auditor s findings and recommendations, the business units policy and business plans, the financing, fiscal position, risk management, PR, IR, as well as management development. A number of meetings were convened specifically to define the focused acceleration strategy in more detail, inclusive of the sales process relating to Distribution Services and the acquisition policy. Two meetings of the Supervisory Board not attended by the Board discussed the performance of the Supervisory Board and its members, the performance of the Board and its members and an evaluation of the remuneration policy governing the Board. These meetings also reviewed the requirements for the profile, composition and competence of the Supervisory Board. The Supervisory Board also held consultations with the external auditor, in part attended by the Board. The Supervisory Board is of the opinion that the Supervisory Board complies with the independence requirements stipulated by the Dutch Corporate Governance Code. In addition to these formal meetings, the Chairman of the Supervisory Board also held regular informal discussions with the CEO. Consultations between a number of members of the Supervisory Board and the CFO also took place prior to the publication of the halfyear and annual figures. The Supervisory Board also paid working visits to Kendrion Binder Magnete in Villingen (Germany) and Kendrion Linnig Antriebstechnik GmbH in Markdorf (Germany), acquired at the end of 2007. With the exception of two meetings, all meetings were attended by all members of the Supervisory Board. Kendrion s strategy is focused on market leadership in selected business-to-business niche markets, organic growth of the strategic operations, utilisation of synergy and, in 2008, the achievement of a further increase in the focus of the operations. report of the supervisory board >> 13

Kendrion intends to create and expand a logical group of mutually-reinforcing operations. Within this context Kendrion sold the operations of Vink Plastics Ltd. (UK) and Vink Plastics (Ireland) Ltd. (Ireland) during the year under review, subsequently disposed of the Distribution Services operations in their entirety, acquired the remaining 49% of the shares in Linnig de México, S.A. de CV, and acquired Tri-Tech LLC. In doing so, the company has strengthened and further increased the focus of Kendrion s operations. The financial results and developments (including the associated press releases) were discussed in detail during the meetings held prior to the publication of the quarterly, half-year and annual figures. The company s external auditor attended the meeting at which the annual figures were discussed. The internal risk management and control systems received a great deal of attention. The internal control system for financial reporting once again took further shape during the course of 2008. More information is given in the risk management section on pages 27 and following of this Report. During two meetings information was received on the results from the tests on the risk control system, and the progress and further improvements was discussed. The Supervisory Board closely monitors the developments relating to the fine imposed by the European Commission for the alleged infringement of Article 81, paragraph 1, of the EC Treaty by a former Kendrion subsidiary. It is not clear when more information will be made available about the outcome of the appeal proceedings brought before the Court of First Instance. In the absence of new relevant information the provision formed for this fine in 2005 remains unchanged. >> Committees The Supervisory Board is of the opinion that the sie of the company and the membership of the Supervisory Board are such that it would not currently be opportune to set up specific committees such as an Audit and Remuneration Committee. These duties are performed jointly by the members of the Supervisory Board, whereby the responsibilities are distributed on the basis of individual expertise. Within this context Mr De Bakker fulfils the role of financial expert in the sense of the Corporate Governance Code. >> Corporate Governance Code Both the Supervisory Board and the Board comply with the conflicts of interest rules laid down in the Corporate Governance Code. No transactions took place in which conflicts of interest on the part of the members of the Board or the Supervisory Board played a role. The prevailing regulations governing the ownership of and transactions in the own company s stock offer the necessary safeguards, and supplementary regulations govern transactions in companies as referred to in the addendum to the insider trading regulations applicable to the members of the Board and Supervisory Board. The Supervisory Board took note of the amendments to the Corporate Governance Code presented on 10 December 2008 with interest, and endorses the general objective of and background to the amendments. Kendrion complies with a substantial proportion of the amended provisions. In 2009 the Supervisory Board and the Board shall form an opinion on the manner in which Kendrion can incorporate the other amendments to the Code in Kendrion s structure. >> Remuneration The Supervisory Board determines the remuneration for the individual members of the Executive Board in accordance with the remuneration policy approved by the General Meeting of Shareholders in 2005 and, subsequent to a number of amendments, approved by the General Meeting of Shareholders in 2008. A specification of the remuneration for the Executive Board and the Supervisory Board is enclosed in the notes to the financial statements (page 109). The Supervisory Board has received confirmation from the auditor that the figures on which the bonus for the Executive Board is based are derived from the audited financial statements, and that the calculation of the bonus has been audited. >> Remuneration policy The remuneration policy is designed to offer such remuneration that it is possible to attract managers qualified to manage an international company of the nature and character of Kendrion. The policy is thereby challenging such that it motivates managers and, on good performance, retains them for the longer term. The amount, design and composition of the remuneration package are such that the package supports Kendrion s short and long-term objectives. During the year under review a specific scheme was adopted as a consequence of Kendrion s focused acceleration strategy. >> 14 annual report 2008

The Supervisory Board periodically benchmarks the remuneration package against information supplied by external experts to verify that it is in line with the company s objectives and the market. The package is of a performance-oriented design, whereby the results are used to determine a variable income that is of a challenging level but is not excessive. A further explanation of the remuneration policy is provided on pages 55 and following. >> Share plan A share plan for the Directors of the operating companies was introduced in 2005. This plan provides for the allocation of shares in Kendrion as payment in kind. After the General Meeting of Shareholders in each year the number of shares awarded to individual Directors of the operating companies in that year is determined by the Supervisory Board, on the basis of the Executive Board s recommendations. 2,700 shares were awarded pursuant to this plan in 2008. The plan does not extend to the Executive Board. >> Dividend proposal A resolution shall be submitted to the General Meeting of Shareholders on 6 April 2009 proposing the payment of a cash dividend of EUR 0.97 per share entitled to dividend, to be charged to the share premium reserve. More information is given in the Dividend section on page 10. The members of the Supervisory Board have signed the financial statements to comply with their statutory obligation pursuant to Article 2:101, paragraph 2, of the Netherlands Civil Code. The Supervisory Board thanks the Board and all Kendrion employees for their contribution and efforts in 2008. Supervisory Board S.J. van Kesteren, Chairman M.E.P. Sanders R.L. de Bakker Zeist, 23 February 2009 >> Profit appropriation The profit for the reporting year attributable to the shareholders in the company amounts to EUR 12.8 million, and will be transferred to the other reserves. report of the supervisory board >> 15

Report of the Board Members of the Board Kendrion N.V. is the holding company of eighteen operating companies around the world. >> Board 2 P. Veenema * (53) Position: Chief Executive Officer Nationality: Dutch Joined Kendrion: 1993 Appointment to current position: 2003 Other offices: member of the Supervisory Board of Helvoet Holding B.V. 1 E. Ris * (50) Position: Chief Financial Officer Nationality: Dutch Joined Kendrion: 2001 Appointment to current position: 2004 New term: 2008-2012 Other offices: member of the Supervisory Board of Dekker Beheermaatschappij Krabbendam B.V. (from 1 January 2009) and member of the Board of Supervision of Zaans Medisch Centrum (from 1 February 2009) 3 H. Freitag (58) Position: Chief Operating Officer Nationality: German Joined Kendrion: 1978 Appointment to current position: 1 January 2009 * Executive Board 1 2 3 >> 16 annual report 2008

Report of the Board Highlights Highlights of 2008 Realisation of a focused company with an explicit profile; Organic growth of 3.6% * ; EBITA EUR 14.3 million * ; Investments of EUR 13.5 million with a depreciation level of EUR 8.3 million * ; Working capital decreased by EUR 3 million (from 13.6% of revenue to 11.6%) * ; Free cash flow (after investments) of EUR 3.7 million * ; Excellent first year for Linnig Antriebstechnik Group (Commercial Vehicle Systems business unit) as a part of Kendrion; Purchase of Tri-Tech LLC in Mishawaka (Indiana, the USA); Sale of Distribution Services with a net book profit of almost EUR 13 million **, of which EUR 2.8 million net was realised in 2008; EUR 10 million ** net shall be realised in the first quarter of 2009 (after the closing of the sale of the Vink Group); Strong financial position, the sale of the Vink Group shall decrease the net debt by EUR 72 million in February 2009; Cost-reduction measures in the fourth quarter of 2008 as a consequence of the economic crisis. * ** The above figures relate solely to the continued operations. Situation at 31 December 2008. report of the board >> 17

Report of the Board Organisational structure In 2009 Kendrion is, following the steps taken in 2008, a strongly focused company with one main objective: the development, manufacture and sales of high-grade electromagnetic components and systems. The operations are divided into four business units, namely: Industrial Magnetic Systems, focused on the development and manufacture of electromagnetic actuators for industrial applications; Industrial Drive Systems, focused on the development and manufacture of electromagnetic brakes and clutches; Passenger Car Systems, focused on the development and manufacture of electromagnetic components and systems for the automotive industry; Commercial Vehicle Systems, focused on the development and manufacture of components and complete cooling systems for coaches, trucks and special vehicles. Kendrion s Board performs a coordinating role in the development of strategy, and is responsible for the acquisition policy. A number of central tasks are entrusted to Kendrion Group Services, such as financing and cash management, reporting and controlling, taxation, corporate communication and investor relations, facility management, insurance, IT, human resource management, legal affairs, and corporate governance. More information about the business units is provided in the Annual Report on pages 46 and following, with comprehensive details on their profiles, targets and strategy, the developments in their markets, and their prospects. Each business unit has a number of operating companies in various geographical locations. The organisation has implemented a decentralised structure to promote the company s decisiveness. The individual business units are directed towards a shared strategy and collaboration between the Business Unit Managers and the Directors of the individual operating companies in a wide range of fields, such as engineering, project management, purchasing, production strategy, marketing and sales. The business units share best practices. Kendrion strongly encourages motivated local entrepreneurship. Short lines of communication enable managers to respond rapidly and adequately to new developments at their customers or in local markets. offering customers from the north pole to the south pole optimum service.we magnetise the world with our products, expertise and individual attraction. we magnetise the world beverley hamer administration assistant kendrion binder (uk) ltd. united kingdom >> 18 annual report 2008

Industrial Drive Systems Handy At first sight an ordinary revolving door. However, this door begins to rotate at the right moment and then brakes in time thanks to the electromagnetic actuators incorporated in the power transmission and braking systems. 15:58 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Ostrava, Cech Republic The application of modern entrance systems in a historic city. 11 10 9 8 7 6 5 4 3 2 1 0 GMT + 1

Report of the Board Objectives >> Kendrion s objectives in 2008 Further increase in the focus on the operations and their growth ( focused acceleration ); Growth and improvement of the results; Optimum integration of the Linnig Antriebstechnik Group (acquired at the end of 2007) in the Kendrion organisation; Investigation of the feasibility of the sale of Distribution Services; Realisation of strategic acquisitions in selected operations; Enhancement of the innovative capacity; Further improvement of cash management in combination with targeted investments; Further implementation of risk management. In general, it can be concluded that the objectives have been achieved, or progress has been made in their achievement. Further increase in the focus on the operations and their growth ( focused acceleration ) Kendrion s objective was to further enhance its profile in 2008, thereby enabling the company to focus on a selected number of operations with the objective of achieving market leadership and profitable positions. Kendrion achieved this objective in 2008, in particular due to the sale of Distribution Services. Growth and improvement of the results The electromagnetic operations developed largely according to plan during the first three quarters of 2008 and the company was first affected by the financial and economic crisis in the fourth quarter. All business units succeeded in acquiring new projects and customers. The organisation was stable in 2008, and a number of sections could be further enhanced. The company s target is to achieve further growth in the niche markets in which Kendrion is currently a successful player. The available market and competition analyses provide Kendrion a good insight into the major developments in the market and the niche markets in which the company is active. During the past years the market grew by about 5 to 10%. Kendrion is growing faster than the market, although this development was substantially reduced in the third quarter and, in particular, the fourth quarter. Kendrion possesses the management and the organisation required to achieve its ambitious growth targets. The results in the majority of countries in which Distribution Services (or the Vink Group) is active and the market leader did not exhibit an improvement in comparison with the previous financial year. The economic downturn in the Scandinavian countries resulted in greater pressure being imposed on the operations in those countries compared with the operations in the other West-European countries. The development of the operations in the Netherlands, France and Germany fell short of earlier forecasts. The development of the operations in Belgium and the East-European countries was favourable. Servico once again achieved an excellent performance in 2008. Optimum integration of the Linnig Antriebstechnik Group (acquired at the end of 2007) in the Kendrion organisation The Linnig Antriebstechnik Group (now active as the Commercial Vehicle Systems business unit) was acquired at the end of 2007. The integration of the Linnig Group in 2008 was optimal. The management of the foreign operations was enhanced, work began on the utilisation of the synergy with Kendrion s other business units, the management information system was modified and engineering succeeded in the development of new innovative products. Investigation of the feasibility of the sale of Distribution Services The investigation of the feasibility of the sale of Distribution Services began in the second quarter of 2008. The sale of these operations was announced on 26 November 2008. The Vink Group was sold to Edmundson Distribution Limited (UK), and the Belgian Servico company was sold to Robert Bosch GmbH. The sale resulted in a net book profit of about EUR 13 million, of which EUR 10 million net will be realised in the first quarter of 2009. Realisation of strategic acquisitions in selected operations The sale of Distribution Services greatly enhanced Kendrion s financial position, and Kendrion now possesses ample opportunities for acquisitions. However, the deterioration of the economic conditions during the course of 2008 has given cause to more restraint in further acquisitions. Virtually all the potential acquisition candidates are family companies, and the acquisition processes then often take a great deal of time. >> 20 annual report 2008

Acquisitions are, in particular, being sought for the industrial operations. Within this scope Tri-Tech LLC, in Mishawaka, Indiana, the USA, was acquired in August 2008. Enhancement of the innovative capacity Globalisation and technological developments are increasing the competitive pressure. Kendrion is aware that the company will be unable to achieve and retain its planned growth and attractive market positions without permanent improvements in its operations and its knowledge of the markets and customers. This will in turn require USPs and innovation. During the past year the efforts made in this area resulted in a further broadening of the operations. The Passenger Car Systems business unit was able to achieve a number of technological motormanagement innovations, and Industrial Magnetic Systems succeeded in marketing a number of existing products in an innovative manner. Commercial Vehicle Systems introduced a number of even more advanced engine-cooling control systems. Industrial Drive Systems, in conclusion, introduced a number of new innovations within its existing product range. Examples are mentioned at various places in this Annual Report. The Business Unit Managers specify the targets for the coming years, and the individual operating companies use these targets to prepare their Mid-term Plans. The Business Unit Managers then use these individual plans to prepare an overall plan for their business unit. The Board subsequently processes the results in Kendrion s Mid-term Plan, and tests the plan against the objectives defined by the Board. The Mid-term Plan serves as a touchstone for the strategy pursued by the management at local and business-unit level, and for their responsibilities. The company can then determine, at an early stage, whether it meets and, even more importantly continues to meet its targets. This enables Kendrion to give a timely response to significantly changing market conditions, as is currently the case. Further improvement of cash management in combination with targeted investments Kendrion implemented effective cross border cash pools several years ago. The development of the free cash flow at each business unit and company is followed closely, and where necessary an active policy is executed to ensure that sufficient free cash flows are generated. Progress was once again achieved in 2008, although with the deterioration of economic conditions this did not result in a further reduction of stock levels in the fourth quarter of 2008. In view of the current economic situation this issue will remain high on the agenda in the coming years. The investments made in 2008 were largely focused on new projects for the future. Further implementation of risk management Further implementation and testing of the control and management systems on financial reporting developed by the company continued in 2008. Risk management is now an integral element of Kendrion s operations. Mid-term Plan Kendrion s current operations place the company in a good position to increase its revenues and profitability. In order to support the development in the short-term emphasis will be placed on operational excellence and the strength to accelerate. In order to achieve its long-term objectives, Kendrion undertakes mid-term planning. This mid-term planning is updated annually to provide an insight into the company s medium-term direction. report of the board >> 21

Report of the Board Social Responsibility >> Code of Conduct Kendrion has implemented a Code of Conduct in its organisation that applies to all Kendrion staff. The principles and best practices established in this Code reflect the main values that need to guide Kendrion s staff in the performance of their duties, and the actions they need to take in a variety of circumstances and situations. The core themes include the market position, authorities, corporate social responsibility, accountability in general, and the obligation for due care for safety and health, the environment, and social interests. Kendrion stimulates compliance with the Code of Conduct by continually bringing the Code to the attention of (new) managers and staff. >> Whistleblower s charter The Whistleblower s charter offers the employees of Kendrion companies an opportunity to report irregularities or suspicions of irregularities to the management without jeopardising their (legal) position. No irregularities were reported during 2008. >> Environment and quality Kendrion endeavours to reduce waste and make efficient use of energy, and encourages the company s employees to make continual organisational and technical improvements to environmental procedures. During the design phase and technical planning Kendrion takes due account of the consequences for the environment and living environment. This relates not only to the reduction of harmful emissions and the achievement of a lower environmental impact, but also to the retention of the company s good reputation. As a company Kendrion bears a social responsibility that necessitates attention to environmental issues when assessing processes. our high-grade technology makes the world a little more attractive to everyone. Involvement, both now and in the future, is of great importance to the individual Kendrion companies and the enterprise as a whole. The quality, environmental management and safety systems are usually combined in one system that forms the basis for the implementation of many projects. Virtually all Kendrion s operating companies comply with the most stringent quality and safety requirements. Kendrion s environmental management systems comply with the ISO 14001 standard. >> Other social involvement Social responsibility is integrated in all Kendrion s operations. Kendrion wants to be a company of which all stakeholders can be proud, in particular of the company s social and ethical principles and the manner in which these principles are implemented in everyday practice. The primary objectives of social responsibility are always realistic and feasible. Corporate Social Responsibility (CSR) Entrepreneurship at Kendrion revolves round more than just money. CSR is high on the agenda. CSR is not a hype: it will continually exert an influence on Kendrion s (local) entrepreneurship. For Kendrion, CSR is conducting business with consideration for climate effects and energy sources, with a feeling for people and the environment, and on the basis of a responsibility for the chain in which the company operates. This new form of entrepreneurship pivots on the creation of multiple value and consequently not just Profit, but also People and Planet. Transparency and chain responsibility are important issues for Kendrion: what is the origin of your materials, and what is their destination? CSR also creates opportunities for Kendrion for new, innovative products for new markets and for this reason the theme plays a continuously increasing role within Kendrion, both because the staff assign increasing importance to CSR, and also because customers wish to conduct business with companies that attach great importance to corporate social responsibility. we magnetise the world l. araceli hernande o. sales manager linnig de méxico, s.a. de c.v. mexico >> 22 annual report 2008

Industrial Magnetic Systems 15:58 Faultless More than 400 rotary solenoids and electromagnetic systems with solenoids ensure that the addresses are read, and that the post is sorted by postal code and address at lightning speed. + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Rotterdam, the Netherlands Sorting the post stopped being manual work a long time ago. 11 10 9 8 7 6 5 4 3 2 1 0 GMT + 1 Photo: Siemens AG Report of the Board Human resources >> Personnel Kendrion is a decentralised organisation comprised of four business units. Responsibilities are assigned as low as possible within the organisation, and local entrepreneurship is encouraged. Short lines of communication enable managers to respond rapidly and adequately to new developments at their customers or in local markets. This in turn results in high levels of creativity and involvement at the local companies, as well as ample challenges and feasibilities for the development for the local management. In so doing, local entrepreneurship offers flexibility and opportunities. In addition, internationalisation offers opportunities to enter new markets, opportunities that can be utilised only with an international attitude. Kendrion also encourages innovation and improvement. During the course of 2008 Company Awards were presented to the most innovative Kendrion company and the Kendrion company showing the greatest improvement. Passenger Car Systems, in Villingen, Germany, won the Award for the most innovative company. Vink Hungary (a member of the Distribution Services division, which has since been sold) won the Award for the company showing the greatest improvement. report of the board >> 23

Kendrion s HR policy is also decentralised, and local management bears the responsibility for the local HR policy within the specified guidelines. A number of duties are coordinated by the HR Officer at a central level. These duties primarily relate to the (senior) management, a group of about one hundred managers. New employees to be recruited by the company are selected on the basis of a number of core competences. The quality of the management is assured by internal and external training programmes, and solely highly-trained managers are recruited. Kendrion takes many initiatives to promote itself as an appealing employer in the region, such as open days for schoolchildren, family days, and the provision of traineeships. Kendrion also organises fairly regular meetings for its retired employees. Kendrion attaches importance to the creation of diversity in nationalities and cultures: this diversity promotes intercultural experience, which is highly compatible with the current internationalisation trend. >> Bond with the employees Kendrion s success is determined by the quality of both the company s organisation and employees. An explicit strategy and, on the basis of the strategy, feasible and challenging targets, open and honest labour relations and short lines of communications create a strong bond between Kendrion and its employees. Kendrion s Board and the Business Unit Managers devote a great deal of attention to the communication of the strategy, the plans of action resulting from the strategy, and the details of and progress in the plans. This ensures that the employees are provided with a clear insight into what is expected of them, and consequently are able to make an active contribution to the achievement of growth. Many operating companies have implemented careerdevelopment and training programmes designed to improve their staff s knowledge and skills. The staff receives guidance in forms such as annual job appraisal respect for our customers, passion for our products, and discipline: the ingredients that ensure that our customers are increasingly attracted to us. we magnetise the world giseli de sousa trauola quality system analyst linnig brasil acoplamentos ltda. brail and performance interviews. Kendrion s Link corporate magaine, for all staff, is published on several occasions a year. As from 2009 this magaine, renamed Magnetised, will be published three times a year. >> Number of employees Kendrion has approximately 1,400 employees in eight European countries and China, Mexico, Brail and the USA. People make Kendrion, and consequently Kendrion invests in the development of the knowledge and skills of its employees. Kendrion promotes inspirational exchanges of experience and collaboration between the various business units and operating companies. >> Remuneration Kendrion offers its employees good terms of employment that are in line with the market and are always assessed against local benchmarks. A new bonus scheme for the management was introduced in 2006. This system is based on explicit agreements between each manager and the Business Unit Manager. The variable remuneration is linked to the achievement of the company, business unit, operating company and individual performance targets. Kendrion has implemented a share plan for selected managers. >> Innovation An insight into the quality of the company s Human Resources (HR) is at least as important as the insight into Kendrion s financial health, since figures and results are the product of human action. The HR audit was developed in the spring of 2007. Competences, knowledge and experience, as well as the manner in which Kendrion deploys its employees, contribute to the company s continuity and decisiveness. The HR audit, an element of the regular audits, is used to obtain an insight at an operating company at a given point in time and provide information about a number of HR indicators. The audit provides an insight into both hard HR indicators and somewhat softer issues. The audit, which has already proven its worth, has been found to constitute a uniform and objective instrument that measures quality and which provides a clear insight into opportunities for developments in the HR field. An HR audit is conducted at two to three operating companies each year. In addition, as from 2008 quarterly HR key figures are reported for the entire company. Understanding of the influence of the human factor on the organisation s performance results in an increasingly strategic HRM policy, and offers scope for specific modification. >> 24 annual report 2008

Industrial Drive Systems Impressive Electromagnetic actuators control the power transmissions, lifting and braking systems of the powerful cranes that move millions of containers every year at the world s largest port. 11 10 9 8 7 6 5 4 3 2 Marine Terminal Hong Kong, China The entrance to one of the world s most important economies. 1 0 GMT 22:58 + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 >> Management development Kendrion s ambition is to achieve niche market leadership in business-to-business markets by organic growth and strategic acquisitions, and consequently the quality of the management is both important to and characteristic of Kendrion. Good management is of essential importance to the future, and for this reason Kendrion assigns high priority to management development. The corporate management-development programme is supported by the Kendrion Executive Programme, a customised, international modular teaching programme in which the company collaborates with the Rotterdam School of Management. The subjects covered by the programme are communications and leadership, sales and marketing, strategy, production and logistics, HR and project management. A further group of managers will begin this programme, which will be provided with a new format this year. The programme also constitutes an important platform for exchanges of experience between the (senior) management, and for the further expansion of collaboration between the various operating companies. Every year a group of non-financial managers follow a course in finance. This course, which is also customised, covers issues of importance to Kendrion, such as risk management, purchasing, production, sales, investments and planning and control. In addition, the various business units have implemented training programmes at all levels in the organisation. Kendrion s management development endeavours to find an appropriate equilibrium between the transfer of internal knowledge and the recruitment of external knowledge. A professional organisation of the nature of Kendrion must ensure for continuity, and consequently needs to devote continual attention to the question as to who is to be succeeded by who and when, and what is required to ensure that the succession is a success. Obviously, the converse is also the case: Kendrion wishes to help people fulfil their ambitions: people are the most important factor, and Kendrion intends to invest in their future. In the future Kendrion needs a group of managers with a well-developed vision of strategy and internationalisation. Kendrion endeavours to retain high potential managers and interest them in filling vacant positions. The report of the board >> 25

development of the managers is followed by means such as annual performance appraisal interviews, when the managers targets and duties are reviewed and the managers receive feedback on their performance. In addition, the managers take part in an individual development assessment. >> Social policy (CSR) Kendrion is and wishes to remain a conscientious and reputable company. Kendrion intends to be a versatile and flexible company for its employees, a company where pleasure in entrepreneurship is combined with result targets. Kendrion s social policy is designed to enable the company to achieve its targets and offer its staff at all levels opportunities to develop and further themselves. Kendrion s HR policy endeavours to ensure that the composition of the company s personnel, inclusive of the lower and middle management, reflects the geographical spread of Kendrion s operations. Personnel: key figures 2008 2007 Number of women in permanent employment 525 543 Number of men in permanent employment 694 621 Number of employees with a temporary contract 208 259 Total number of employees at 31 December 1,427 1,423 Number of temporary employees 48 102 Number of permanent and temporary employees at 31 December (FTE) 1,439 1,501 Number of direct employees 726 764 Number of indirect employees 701 659 Number of full-time employees 1,352 1,337 Number of part-time employees 75 86 Average age of women 40.0 38.5 Average age of men 38.8 38.4 Average age of all employees 39.5 38.4 Average number of years service 9.6 10.6 Average rate of absenteeism per employee (%) 3.9 3.7 Influx percentage per quarter (%) 4.8 7.7 Departure percentage per quarter (%) 5.1 4.4 Wage costs per FTE (EUR) 40,353 39,022 Training costs (as a % of wage costs) 0.75 1.1 >> 26 annual report 2008

Report of the Board Risks and risk management Kendrion promotes local entrepreneurship at its companies and, logically, offers scope to exercise the associated discretionary powers. Kendrion actively conveys the essential need to maintain a healthy equilibrium between the entrepreneurial spirit and the extent to which risks are accepted. Adequate risk management is an integral element of good business practice. When risks are made visible Kendrion s managers can implement adequate measures in their everyday management that offer them optimum control of the risks. Kendrion s risk management is not intended to eliminate all risks entirely. Kendrion s objective is to adopt the carefully-considered approach to business risks required to minimise surprises. Kendrion has a responsibility to put internal control and procedures into place and tests to verify their adequate performance. The local management is expected to be fully aware of the operating risks and the necessity for internal control procedures. Kendrion has devoted structural attention to the optimisation of the risk management and control system since 2005 as part of the day-to-day decision makings. Kendrion s organisation of risk management varies for each focal point and can, if necessary or so required, rapidly be tightened. A structured approach to financial reporting risks and the organisation of workshops to map strategic and operating risks are both standard practices of risk management. The specific attention directed to the consequences of the financial crisis in the second half of 2008 is one example of the necessary tightening of risk management. Kendrion s risks identified by the aforementioned workshops and arising from the current financial risks are discussed below. This review extends to a selection of the major risk factors, and is not exhaustive. An insight into the sensitivity of Kendrion s financial statements to some of the risks referred to below is provided in Section 14 of the financial statements. >> Risks associated with the current economic crisis The current economic crisis requires special attention to a number of issues. The major risks and Kendrion s response to those risks are listed below. All companies are logically confronted with business risks during the pursuit of their operations. Kendrion s policy is focused on mitigating the risks or, when possible and sensible, hedging the risks without losing sight of the company s entrepreneurship. The Board wishes to emphasise that risk management and control systems no matter how professional they may be can neither offer absolute guarantees that the company s objectives shall be achieved nor entirely prevent material errors, loss, fraud, or violations of laws or regulations. Customers Customers are also undoubtedly detrimentally influenced by the economic crisis. The risk of irrecoverable debts is increasing. Kendrion has not applied for trade credit insurance, and restricts the risk of irrecoverable debts by devoting increased attention to: the customers financial strength; the amount of the credit limit granted to each customer; (non) delivery on exceeding the credit limit, or the aging of accounts receivable; the timely receipt of outstanding accounts receivable. harnessing invisible, almost magical forces. that s really fascinating for an engineer! we magnetise the world harald burkart head of development kendrion binder magnete gmbh germany It should be noted that Kendrion is continually investigating whether the current economic crisis gives cause to the need to apply for trade credit insurance, whereby the premiums that would need to be paid and the cover are weighed against the risks. Customers may endeavour to push their reduced profitability back up the supply chain. This can, in particular, occur in the operations of the Passenger Car Systems business unit (about 30% of Kendrion s revenue) and the Commercial Vehicle Systems business report of the board >> 27

unit. The question is then whether these business units can withstand the pressure and, if they are unable to do so, the extent to which the price pressure can be passed on to their suppliers. Within this context it should be noted that the current contraction of the car industry does not automatically imply the same degree of contraction in Kendrion s operations: this is due to the number of new projects that will also start up in 2009. The order intake is currently fluctuating tremendously, which complicates the production planning. Costreduction measures such as working time reduction in Germany are implemented on the basis of the best possible estimation of the order volume. As a consequence it is possible that specific cost-reduction measures cannot be implemented efficiently, either in whole or in part. Suppliers Suppliers may also be detrimentally influenced by the economic crisis. This gives rise to the risk of orders either no longer being delivered or not being delivered in time. Kendrion devotes increased attention to the financial strength of its suppliers, in particular the suppliers of critical raw materials and components. When there are doubts about the financial position of a supplier then the company endeavours, where possible, to approach alternative suppliers. Kendrion may decide to maintain increased stock levels of critical raw materials and components to limit the risk of Kendrion being unable to make deliveries to its customers. Cost-reduction measures and reaching the critical limit Any reduction of the number of permanent jobs will be preceded by a critical assessment which reviews whether the core of the company remains intact, thereby ensuring that Kendrion can continue to deliver orders with the required quality and reliability when times improve, and can continue to pursue the company s strategy of nichemarket leadership. Flexibility of the organisation Kendrion has for some years devoted attention to the need for the maximum possible flexibility of the organisation, both by purchasing many components rather than manufacturing them in-house, and by deploying temporary workers and employees with contracts for a definite period of time. Investments All requests for capital expenditure of more than EUR 50,000 are submitted to Kendrion s Board for approval. This regulation was introduced in 2003. In view of the economic conditions all companies and, ultimately, the Board, will critically review requisitions for capital expenditure. Financial position Following the definitive sale of the Distribution Services division Kendrion has a very strong financial position, with a solvency ratio of more than 60% and limited bank debts (about EUR 10 million). Kendrion also complies with its covenants by an ample margin. Kendrion has a banking consortium of four Dutch banks since the beginning of 2006. The Dutch financial sector is also suffering greatly from the economic crisis, as became apparent during the negotiations on approval for the divestment of the Distribution Services division. Kendrion, notwithstanding a substantial improvement in its risk profile, has to pay an increased margin, is allowed to pay only a dividend of maximum of EUR 10 million, was compelled to conclude an extra interest cover covenant, and was required to furnish more information. It should be noted that a prolonged economic crisis can result in less favourable financing conditions and/or increased costs. Acquisitions Kendrion intends to further enhance its market position by acquisitions. The company shall take great care in pursuing this strategy, on the one hand in view of the agreements in the covenants concluded earlier, and on the other hand by paying purchase prices that are appropriate in view of the current economic downturn. Times of economic crisis also offer companies like Kendrion new opportunities. >> Financial risks In times of economic crisis additional attention is devoted to risk management towards financing, interest-rate and currency exposure. Financing risks Kendrion endeavours to maintain a financial position and a debt to EBITDA ratio that is compatible with the nature and risk profile of the company. Kendrion strives to maintain a solvency ratio of at least 30% and a net debt of a maximum of three times the twelve-month EBITDA. Within the context of financial risks Kendrion has ensured that financing of the company will continue to be safeguarded, in the event of a ruling against the company in its appeal against the fine imposed by the EU Competition Authority, by maintaining a higher solvency ratio and a lower maximum net debt/ebitda ratio until such time as the definitive ruling is given. Interest-rate risks The majority of the financing raised by the company is of the form of variable interest-rate loans. These variable >> 28 annual report 2008

Passenger Car Systems Advanced Car doors are locked and unlocked automatically. In addition, solenoids and electromagnetic valves control the car s machinery including the gearbox, the engine s fuel system, and automatic transmission. 8:58 5 4 3 2 1 Monterey, Mexico A boon for the weekly shopping. 0 GMT + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 11 10 9 8 7 6

interest rates can fluctuate and detrimentally influence the results. In 2008 Kendrion hedged the majority of the interest-rate sensitivity by means of current interest rate swap contracts. If the average market rate of interest for 2008 had been 1 percent point higher or lower, whereby the other variables remained constant, then profit before income tax would have been EUR 0.1 million lower or higher respectively. Kendrion terminated the majority of the interest rate swap contracts running at 31 December 2007 during the course of 2008 in view of the anticipated lower debt financing following the sale of Distribution Services. If the average interest market rate for 2008 had been 1 percent point higher or lower then equity would have been EUR 0.2 million higher or lower respectively due to the movement in the market value of the interest rate swaps still outstanding on 31 December 2008. In 2009 the impact of fluctuating market rates of interest will be limited due to the relatively low interest-bearing debt following the sale of Distribution Services. Kendrion has hedged the majority of the interest-rate sensitivity in 2009 by means of current interest rate swap contracts. Fluctuations in the level of interest rates can also affect the assets of pension funds and result in higher pension costs and contributions. The majority of Kendrion s pension schemes are defined contribution pension schemes, and the company is endeavouring to convert defined benefit pension schemes into defined contribution pension schemes. Exchange rate risk The majority of Kendrion s revenue, costs, assets and liabilities are denominated in euros. In 2008 approximately 10% of the consolidated revenue was generated in currencies other than the euro. In addition, about 30% of the book value of the assets was held outside the euro one. The current projects are expected to result in a slight increase in the proportion of revenue generated in non-euro currencies. Whenever feasible and profitable, revenue and costs are realised in the same currency. A mismatch is an issue in certain instances. devising innovative uses of electromagnetic actuators in applications that had never been thought of before. that s my major challenge. we magnetise the world josef porta operations manager kendrion binder magnete gmbh austria The most important currency for the operating result apart from the euro is the Cech krone, whereby on balance Kendrion is a net payer of Cech krones. If the Cech krone had been an average of 10% stronger or weaker during 2008, whereby the other variables remained constant, then profit before income tax would have been EUR 0.2 million lower or higher respectively. The Cech krone was the most important currency for the currency translation differences on the monetary assets and liabilities at balance sheet date. If the Cech krone had been 10% stronger or weaker at 31 December 2008 then profit before taxation would have been EUR 0.1 million lower or higher respectively. Pursuant to the management s policy all substantive sensitivities to currency fluctuations are hedged with currency derivatives. Group companies with substantive sensitivities to currency fluctuations must hedge these sensitivities with the central Treasury, which then makes arrangements for the derivatives by entering into back-toback transactions with counterparties. Future transactions pursuant to existing projects are hedged with derivatives for a maximum of two years, whereby Kendrion makes use of forward exchange contracts and, in part, currency options to limit the risk of overhedging at lower volumes. At present this relates solely to the group company in the Cech Republic. In addition, loans to group companies in currencies other than the euro are hedged at a central level using currency swaps. At balance sheet date Kendrion had not hedged any net investments in its subsidiaries outside the euro one. However, in principle significant acquisitions and local debts are financed in the local currency, as a result of which this financing constitutes a natural hedge against exchange rate risks. Although Kendrion hedges substantive sensitivities to interest rate and currency fluctuations, some sensitivities will always remain. Moreover, the measures implemented to hedge sensitivities result in additional financing or operating costs. >> Strategic risks Sensitivity to cyclical trends In normal conditions Kendrion is slightly sensible to cyclical trends affecting sales of electromagnetic components to industrial customers, and more sensitive to fluctuations in the conditions in the car and bus segment. Kendrion feels the effects of cyclical movements after a time lag dependent on the market that is served. Kendrion s strategy of operating in niche markets limits the effects of cyclical downturn, but cannot eliminate them entirely. Cyclical downturns result in lower volumes, however, Kendrion has concluded long-term contracts with major customers. >> 30 annual report 2008

Market developments/competition Kendrion is a technically-driven company with a leading position in the European market. The barriers to entry to specific markets are substantial due to the high levels of technological knowledge and investments that are required. Kendrion s competitors are often smaller family companies focused on a specific segment. In 2008 approximately 30% of the revenue from electromagnetic components and systems was generated by the automotive market, a market characterised by competition and, consequently, pressure on prices. As a result, and notwithstanding the companies good market positions, customers endeavour to pass this pricing pressure back up the supply chain. Acquisitions Kendrion s strategy is focused on organic growth and growth by means of acquisitions. The risks associated with acquisitions are greater than those associated with organic growth. Kendrion endeavours to obviate these risks by performing comprehensive due diligence processes (encompassing operational, financial, fiscal and legal issues), obtaining guarantees and, where relevant, arranging for external market analyses and carrying out a meticulous assessment of the management and personnel of the acquisition candidate. In addition, Kendrion prepares and implements post-acquisition programmes. Commodity markets Kendrion s results can be detrimentally influenced by the reduced availability of raw materials and fluctuations in the price of raw materials due, for example, to the increasing or decreasing price of fossil fuels. Selfevidently, Kendrion endeavours to minimise the effects of price fluctuations on the company s results. The degree to which this is feasible depends on the contractual clauses and the market. In addition, a time lag is usual. Kendrion s main raw material in this respect is copper. During the extreme price increases that could not be passed on to customers at the same tempo Kendrion either fixed purchase prices for a specific period or entered into hedging transactions to limit the risk of price increases. Consequently the current low prices of raw materials do not have a one-to-one effect on the results. >> Operational risks Project management Adequate project management is essential if new products are to enter the production phase with success, and the risks associated with inadequate project management can exert a significant effect on the results. In addition to project management, this definition also extends to greenfield operation and acquisitions. The progress in the organisation at new locations and recent acquisitions is reported at a number of management levels, thereby ensuring continual attention and, where relevant, implementation of the necessary measures. Quality High-quality finished products and just-in-time deliveries are core values for production companies, and failure to meet these criteria can result in damage to the company s reputation or financial loss. The operating companies core competence relates to the use of adequate production planning, and to the use of specific performance indicators for quality and just-in-time deliveries. In addition, virtually all Kendrion companies have been awarded ISO certification, and customers regularly conduct audits. Technology and innovation Kendrion imposes stringent requirements on the finished product. Customers request the company to develop products complying with specific functional requirements that can, on occasion, come close to the limits of the technologically achievable. Project teams and the requisite disciplines assess the feasibility, since an incorrect estimation of the technical feasibility can result in the (potential) customer s loss of confidence. Moreover, the available capacities are scarce and the successful completion of projects is of great importance. For this reason the company is also confronted with the risk that our engineers succeed in developing a technologicallyacceptable solution, but that the customer nevertheless decides not to proceed with the approach. Kendrion adequate a number of patents for its operations, although it is impossible to state with certainty that patents provide sufficient protection from third-party infringements. In general, the majority of the development costs are borne by the customer. ICT The major ICT risks include the risk of interruptions, loss of data, and unauthorised access to data. ICT is of importance to Kendrion, both in terms of the risks and business support. Kendrion has implemented a corporate IT policy: Kendrion s CFO bears the overall responsibility. The corporate IT policy extends to issues including: the arrangements for IT decision-making and what can be decided at which level (central or local); the manner in which IT systems are to be implemented; the arrangements for the sourcing of IT products and services for the business units and their operating companies; the requirements to be met by the IT organisation in serving the users; report of the board >> 31

Industrial Magnetic Systems Secure Soft drinks, coffee or milkshakes: electromagnetic valves ensure that the vending machine always dispenses the correct volume into your cup or glass. 11:58 2 1 0 GMT Recife, Brail A fast lunch can also be enjoyable. + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 11 10 9 8 7 6 5 4 3 the measures that need to be implemented to mitigate risk, such as access security (programmes, equipment backup and recovery, change-management procedures, etc.). Supplementary backup solutions were implemented in 2008. The implementation of new software, server and network systems can generate interruption risks which in turn give cause to major consequential risks (the loss of orders, customers, or the company s reputation). Such implementations must be performed applying bestpractice guidelines and procedures. These including the following: an adequate governance structure throughout the entire project; a thorough preparation; the balanced selection of suppliers; a milestone planning; audits for important go/no-go decisions. Human resources Kendrion s strategy is focused on niche-market leadership and the simultaneous achievement of organic growth. Following a period in which the company devoted a great deal of attention to the recruitment of qualified management Kendrion is fully aware of the great importance of retaining the key officers required to enhance the company s market position. For this reason Kendrion assigns a high priority to management development, and programmes have been implemented to develop the skills and knowledge of managers at various levels in the company (more information is given on pages 24 and 25). Product liability Claims under product liability can have a detrimental influence on Kendrion s operations and operating results due to the resultant damage to the company s reputation. Kendrion has taken out liability insurance at group level for its operating companies to reduce the financial risks arising from possible claims under product liability. The >> 32 annual report 2008

amount of the cover and the other conditions are comparable to those of other companies in Kendrion s industries. Environment The nature of Kendrion s operations and business are such that they give cause to limited environmental risks. Most Kendrion companies have been awarded ISO-14001 certification. This certification also includes international environmental standards. Industrial accidents Kendrion devotes a great deal of attention to the prevention of industrial accidents at its operating companies. In addition, Kendrion above all wishes to be a good employer. There have been virtually no industrial accidents to date. However, Kendrion is aware that the materialisation of a risk of this nature would not only affect all those involved, but would also be detrimental to the reputation of the company in question and the image of the relevant operations in the market. Kendrion s companies make active use of quality systems designed to improve the processes. Virtually all companies have been awarded ISO certification, and possess the relevant safety certificates. >> Financial reporting risks Payment transaction risks Kendrion has imposed payment transaction procedures and segregation of duties guidelines on all operating companies. Kendrion monitors compliance with these guidelines. Inventory risks Inventories need to be maintained for the operations. However, inventories are subject to fluctuations in value and, consequently, can cause fluctuations in the results. Losses can be incurred, in particular on customer specific and obsolete stock. The Kendrion Group Reporting Manual lays down stringent guidelines for monthly stock valuation and monitoring. Tax risks Kendrion operates in twelve countries, with companies that possess a high degree of autonomy. In most countries the responsibility for accurate tax returns has been assigned to the local management. Kendrion carries out an annual inventory, at corporate level and in close collaboration with renowned international tax consultants, to assess whether fiscal developments could have an effect on the company s subsidiaries. During the period leading up to the sale of Distribution Services vendor due diligence was conducted at most of the Vink companies which extended to issues such as various taxes including corporation tax, wages tax and turnover tax, etc. The matters warranting attention revealed by this vendor due diligence included transfer pricing issues and, at a single local level, incorrect VAT tax returns for foreign deliveries or wage tax issues. This in turn resulted in the implementation of measures designed to mitigate the risk of additional tax assessments to the greatest possible extent. In one instance though this was not possible, but the question is whether the risk will materialise. Customer specific machines A number of Kendrion s operating companies carry customer specific machines for customers on their balance sheets that are used to manufacture orders for those customers. Kendrion s results could be adversely influenced by the loss of one of these customers when no setoff arrangement is in place. However, in most instances a solution for any impairment, where relevant, is found via contractual clauses or consultations with the customer. correct and timely deliveries have an almost magical effect on our customers. we magnetise the world lucie hejdova logistics assistant/procurement kendrion binder magnety s.r.o. cech republic Management systems The Board is responsible for the internal risk management and control systems, and for the optimum management of the strategic, operational, financial and reporting risks confronting Kendrion. The internal risk management and control systems extend to issues including policy-making, processes, duties, influencing conduct and other aspects of the organisation that jointly provide for the achievement of targets and the prevention or timely identification of potentially material errors, loss, fraud, or infringement of legislation and regulations. The risk management process is based on the generally-accepted COSO Enterprise Risk Management framework. The structured risk management system introduced by the company was given further shape in 2008. Kendrion employs a framework that reveals the various elements of risk management and the relationship between the elements. Kendrion s objective is to avoid duplication within separate systems whenever possible. Links are made, when this is worthwhile, between systems where report of the board >> 33

they interact. This is illustrated in Figure 1, which shows a diagram of Kendrion s management framework. The factors that determine the quality of the management framework are integrity, business ethics and the staff s expertise, the management style and the manner in which authorities and responsibilities are delegated and monitored by the management, but also the deployment and development of the staff, and the manner in which the aforementioned factors are directed. Letters of Representation are submitted once a quarter, in a bottom-up procedure, to the operating company Directors and Controllers, and to the Business Unit Managers and their Controllers. Each officer is required to sign the letters to confirm to their managers that the information and financial information they have reported is correct and complete. In 2007, the Letters of Representation were rendered more stringent and more compatible with the new risk-management guidelines. During the year under review the major elements and foundations of Kendrion s internal risk management and control systems were: Code of Conduct Kendrion introduced a Code of Conduct governing all Kendrion employees in 2005. This Code of Conduct lays down Kendrion s objectives and ethical values, and also devotes specific attention to codes of conduct relating to competition rules. The Code of Conduct has been distributed within the company and published on the website. Whistleblower s charter The Whistleblower s charter was introduced throughout the entire company in 2005. This charter protects employees who report potential infringements of code of conduct rules, policy or procedures. No use was made of the charter in 2008. Regulations to prevent insider trading Kendrion has implemented regulations to prevent insider trading which are designed to make a contribution to the prevention of employee infringement of the prevailing insider-trading and market-abuse regulations. More details about these regulations are disclosed on page 11. Rules and Regulations and Letters of Representation Kendrion employs Rules and Regulations and Letters of Representation. The Rules and Regulations constitute a code of conduct governing all Kendrion Directors. The Group Reporting Manual Kendrion has implemented a Group Reporting Manual governing all operating companies to provide for correct financial reporting. The Manual is continually updated. To this end the company has implemented measures including the formation of the Kendrion Group Reporting Committee, with representatives from the operating companies. Planning and control cycle An insight into the Kendrion concern s performance is obtained from the monthly reports of the current figures submitted by all the operating companies. In the summer of each year Kendrion prepares a Mid-term Plan with a three-year planning horion. This plan provides an insight into the strategic course of the companies and business units. The Mid-term Plan is accompanied by a more detailed annual budget to provide a precise management tool. The budget is also used to reach short-term agreements with managers. A complete forecast prepared each quarter offers an insight into financial expectations until the end of the year, and updates the budget. The Board and the Board s control and audit team devote a great deal of attention to the assessment and follow up of all report cycles. When necessary, special audits are conducted to review specific issues in more depth. Consultations on the progress, development of key performance indicators and variations from long-term targets are held at various levels in the organisation. 1 Management framework for the continual risk-control process 1 Strategic and business-risk management Risk-inventory workshops, including sales/marketing, purchasing, financing, legal, and HRM 2 Financial reporting risk management 3 Operational risk management Quality systems, safety, health and environment 4 Compliance & Regulation Information & communication Monitoring Control activities Risk assessment Control environment 1 2 4 3 >> 34 annual report 2008

Commercial Vehicle Systems Travelling comfort Buses have become safer, more comfortable and economical thanks to the systems with electromagnetic clutches that absorb the vibrations in the power transmission, control the airco, and increase the efficiency of the engine cooling. 14:58 + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Tenerife, Canary Islands A bus journey is a pleasure trip, even in the most inhospitable regions. 11 10 9 8 7 6 5 4 3 2 1 0 GMT Monthly reports and meetings Regular discussions in the monthly meetings between the Board and the Business Unit Managers and similar reviews within the business units address the internal risk management system. Each business unit submits a comprehensive written report at least once a quarter which provides details about the financial and operational situation and the status of any current claims and proceedings, where relevant. These reports include an estimate of the possible financial consequences of each of the claims. >> Risk management areas Strategic and business-risk management Workshops organised during the year under review once again devoted attention to strategic and business risk management. These workshops evaluated the risks and measures, and discussed mitigating measures for the short and medium term. Operational risk management Kendrion s companies make active use of quality systems designed to improve the processes. Virtually all companies have been awarded ISO certification, and possess the relevant safety certificates. Compliance & regulation Kendrion must comply with the local legislation and regulations in all countries in which the company is active. The responsibility for compliance rests with the local management. Transactions and affairs that could be of influence on the legal structure of the Kendrion group companies, and material claims, should be addressed at concern level. Kendrion obtains advice from external legal experts to acquire timely information about the latest developments in the legislation and regulations, inclusive of the applicable stock exchange regulations. Kendrion has also taken out liability insurance at corporate level to protect the companies and their Directors from possible claims. Internal audits conducted from time to time at the operating companies investigate issues including compliance with local legislation and regulations. report of the board >> 35

Financial reporting risk management The structured management of financial reporting risks has been one of the regular tasks of the Controllers of the largest Kendrion companies since 2008, thereby officially completing the Airbag project that was started in 2006 with the objective of achieving the necessary integration within the organisation. In principle, the control measures are integrated in the various company processes. The local Controllers supervise compliance. In addition, guidelines have been drawn up for the Controllers stipulating the monthly close processes and the minimum procedures to be performed. Kendrion has developed a special test programme for an independent assessment of the companies control processes. Kendrion has opted for a design whereby the scope of the programme encompasses those companies that jointly account for approx. 80% of the value of the relevant reporting cycles. The reporting cycles Kendrion has implemented for its operating companies are revenue and accounts receivable, purchase and accounts payable, inventories, fixed assets, and human resources. In addition, twice a year a team comprised of Kendrion N.V. Controllers, Controllers from the business units and contracted qualified auditors test all the internal control measures at the operating companies involved in this test programme to assess their performance. Kendrion carries out these tests using a method that both safeguards independence and implies a form of management development for the local Controllers: the local Controllers do not test their own operating companies. The first test programmes were carried out within the context of the aforementioned Airbag project in 2007. These revealed, in particular, shortcomings in the user rights for ICT systems: these were not in accordance with the defined segregation of duties, as reported in the Annual Report 2007. In addition, the tests revealed that recently-acquired companies were in need of specific support. Results from and shortcomings in the test programme In general, the results from the tests carried out in 2008 were more than satisfactory. The procedures need to be tightened up in some areas, in particular with respect to the (further) segregation of duties, super users of ICT systems and evidenced authorisations. As a result of staff changes in the control department and an early reorganisation one company was not tested, and another company was only partially tested. The Linnig Antriebstechnik Group, acquired at the end of 2007, was included in the test programme in 2008. A erobase test was carried at the largest Linnig company in Germany during the first six months of 2008. The results were satisfactory: the majority of the points for improvement related to the segregation of duties in the ICT systems and the structural recording and authorisation of control duties. Many of the shortcomings revealed in the test had been remedied by the beginning of 2009. Taking also into account the findings of the local external auditors communicated in the management letters and during the final audits, Kendrion is satisfied with the company s structural approach to financial reporting risks. In view of the above the Board is of the opinion that the design of the internal risk management and control systems is sufficient to provide a reasonable degree of assurance that the financial reporting contains no material inaccuracies, such with due regard for the aforementioned shortcomings during the year under review. The companies falling within the scope were once again tested twice in 2008. Kendrion s objective is to organise the management of the financial reporting process in the most effective and efficient possible manner. The tests carried out in the first six months of 2008 were less penetrative due to a lack of resources, and as a consequence a number of test scripts examining the issues in greater depth were added at the end of 2008. These supplementary scripts relate in particular, to the duties involved in the revenue and accounts receivable, purchase and accounts payable, and human resources cycles. >> 36 annual report 2008

Industrial Magnetic Systems Relaxation An enjoyable paintball game possible solely thanks to the electromagnetic valves that control the operation of the gun. 9:58 4 3 2 1 0 GMT Myrtle Beach, USA Relaxation after a strenuous working day. + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 11 10 9 8 7 6 5

Report of the Board Financial review >> Highlights Sale of Distribution Services At the time of the publication of its figures for the first six months of 2008 Kendrion announced that it was investigating the feasibility of the sale of the Distribution Services operations (comprised of the Vink Group and Servico, in Belgium) at a price in line with the market. Although the operations of the Vink Group and Servico are totally different and, consequently, the companies are active in different markets it was decided to approach the parties with a package deal. The total selling price of the shares (on a debt-free basis) amounted to EUR 94 million, and the entire sales transaction proceeds yields more than EUR 80 million in cash. Purchase of 49% of Linnig de México, S.A. de C.V. Op 4 April 2008 Kendrion acquired the remaining interest (49%) and, in so doing, has acquired complete control of the Linnig operations in Mexico. In 2008 this company generated revenue equivalent to EUR 2 million, and has more than 20 employees. On 25 November 2008 Kendrion reached agreement with Edmundson Distribution Limited and Claessen ELGB N.V. on the sale of the Vink Group and Servico. Edmundson Distribution Limited is the holding company of companies including Amari Plastics, a major plastics distributor in the UK. An Extraordinary General Meeting of Shareholders held on 12 December 2008 approved the sale of Distribution Services. Approval from the European Competition Authority was required for the sale of the Vink Group. This approval was granted on 5 February 2009, and the shares in the Vink Group were transferred on 12 February 2009. The transaction result will be realised in 2009, and amounts to about EUR 10 million (on the basis of the position at 31 December 2008) after the deduction of impaired deferred tax assets and costs. The sale of Servico to Claessen still needed prior approval from Robert Bosch; moreover, Robert Bosch had a contractual pre-emptive right to buy Servico under the same conditions and for the same price. On 18 December Kendrion announced that Robert Bosch would exercise its pre-emptive right. The shares in Servico were transferred on 22 December 2008. The transaction result for Servico amounted to EUR 9.2 million, and is recognised as such in 2008. working globally on innovations and improvements. that really attracts attention! we magnetise the world mónica cristina palacín bernad administrative assistant kendrion binder componentes, s.l. spain Purchase of Tri-Tech LLC On 25 August 2008 Kendrion acquired the shares in Tri-Tech (Mishawaka, Indiana, USA). The company generates revenue of about USD 5 million, has 35 employees, and develops and manufactures electromagnetic components and valves for, in particular, beverage dispensers. The takeover of the company is in part intended to provide a base to serve the US market. This includes a project for post sorting machine electromagnetic actuators for Siemens USA/US Postal. Developments, including the economic crisis During the first six months of 2008 the electromagnetic operations achieved a 13% organic growth in revenue, and benefited from the then good market conditions. The acquired Linnig Antriebstechnik Group (now a member of the Commercial Vehicle Systems business unit) made a good contribution to this growth. During the third quarter organic growth still amounted to 6%, whereby the industrial operations achieved no more than 2% due to the declining demand from customers in the textile market and energy sector. The operations for the mechanical engineering and automotive industries exhibited good growth, the latter due to new projects. However, it gradually became clear that the credit crisis would also leave its mark on other sectors. The order book exhibited a substantial deterioration in the fourth quarter, and revenue fell by more than 14% compared to the same quarter in 2007. This was evident in virtually all business units. November, in particular usually a good month for revenue fell far short of expectations. Distribution Services achieved organic growth of 4% in the first six months, but then experienced a 3% decline in revenue in as early as the third quarter. This was particularly evident in the Vink signs & graphics and >> 38 annual report 2008

* Management estimate. Unaudited figures construction segments, whilst the industrial segment was still developing favourably. In the fourth quarter revenue declined by more than 10%, whereby the Scandinavian countries exhibited particularly marked signs of a recession: on average, the revenue from these countries fell by 17%. Conversely, Finland, Belgium and the small East European companies held up well. Servico exhibited an anti-cyclic performance, and achieved organic growth of more than 20% during 2008. Since the banking consortium s permission was required for the sale of Distribution Services Kendrion has also been inconvenienced by the rigid attitude of the Dutch banks. On the completion of the sale Kendrion has virtually no bank debts, has an excellent financial position, and has considerably improved the company s risk profile. Nevertheless, the banking consortium deemed it necessary to impose an additional covenant and additional obligations to provide information on Kendrion, increase the margin, and limit Kendrion s dividend payment in 2009 over 2008 to a maximum of EUR 10 million. Financial results The financial statements show the operating result for 2008 exclusive of Distribution Services was EUR 11 million. This includes a number of items relating to the divestment of Distribution Services, namely the contribution to the management fees, part of the selling costs and the loss pursuant to the sale of the operations in the UK and Ireland, which amounts on balance to EUR 2 million and results in a normalised operating result of EUR 13 million. The operating result before amortisation (EBITA), as a consequence of the valuation of the intangible assets of the Linnig Antriebstechnik Group and Tri-Tech LLC at acquisition date, amounted to EUR 14.3 million. The operational results from Distribution Services and the book profit on Servico were classified as results from discontinued operations, and amounted in total to EUR 7.8 million. A more detailed specification is provided on page 97 of the financial statements. This EUR 7.8 million constitutes EUR 1.4 million loss on operating activities after taxation and a EUR 9.2 million book profit on the sale of Servico. The loss on operating activities is after the deduction of the management fee and exclusive of the loss of Vink UK and Ireland, total net effect EUR 0.5 million. The sale of Distribution Services has also resulted in a EUR 5 million impairment on the goodwill and carrying amount of Vink Germany, since the purchase price of the shares was negative: this in connection with the 2008 loss situation for the German Vink operations. This amount is processed in the result from operating activities after taxation, of EUR 1.4 million loss. When this shift is taken into account, the EUR 7.8 million is in fact comprised of the net profit (operational) of EUR 3.6 million and part of the total book profit of EUR 4.2 million from the sale of Distribution Services. The operating result of EUR 4.9 million after these adjustments then amounts to EUR 9.4 million. Kendrion s operating result (see earlier in this section) also recognises the selling costs for Distribution Services in 2008 that can be allocated to the transaction result. When this is taken into account then the situation is as follows: EUR million Net book result (2008 portion) relating to the sale of Distribution Services: Book profit on the sale of Servico 9.2 Impairment on goodwill and participation Vink Germany and the 2008 selling costs of Distribution Services 6.4 Net book result 2.8 Normalisation of results * The normalised results for 2008 after the sale of Distribution Services are as follows: EUR million Operating result before amortisation (EBITA) 15.6 Amortisation charges 1.3 Operating result 14.3 Net finance costs 2.5 Taxes 3.8 Normalised net profit 8.0 The operating result before amortisation (EBITA) of EUR 15.6 million takes account of a decline in the cost base following the sale of Distribution Services. The calculation of the net finance expense takes account of lower interest-bearing debts. Conversely, the interest income from the intercompany financing of Vink has ceased to exist. The tax burden is calculated as 32%. This is higher than the tax burden in the income statement for 2008 (25.5%) due to the elimination of the possibility to compensate tax losses carried forward with taxable profit in the Netherlands: following the sale of Distribution Services Kendrion no longer has any operations generating taxable profit in the Netherlands. report of the board >> 39

Revenue EUR million 2008 2007 1 Organic growth 2 Industrial Magnetic Systems 57.7 56.8 Industrial Drive Systems 33.8 32.5 4.0% Passenger Car Systems 67.6 67.7 Commercial Vehicle Systems 45.1 39.2 15.1% Total 204.2 196.2 3.6% 1 Linnig Antriebstechnik Group is included for the entire year. 2 Excluding the acquisition of Tri-Tech LLC under Industrial Magnetic Systems. Revenue The revenues for 2008 amounted to EUR 207.4 million (2007: EUR 168.9 million), of which EUR 3.2 million related to the divested operations of Vink in the UK and Ireland (2007: EUR 8.4 million), and EUR 204.2 million (2007: EUR 160.5 million) on the electromagnetic operations, whereby the Linnig Antriebstechnik Group has been included effective December 2007. The revenues from the continued operations amounted to EUR 204.2 million, and can be broken down between the four business units as follows: Added value The added value for 2008 amounted to EUR 105.9 million compared to EUR 83.1 million for 2007. This large increase was due, in particular, to the acquisition of the Linnig Antriebstechnik Group at the end of 2007. The added value expressed in terms of a percentage of revenue increased from 48.9% for 2007 to 50.8% for 2008, due to payments of compensation for lower volumes and engineering contributions to new projects made by the customers of the Passenger Car Systems business unit. The added value expressed in terms of a percentage of revenue was stable for the other three business units. Revenue by business unit 33% Passenger Car Systems Commercial Vehicle Systems 22% Industrial Magnetic Systems 28% Staff costs and other operating expenses Staff costs increased from EUR 48.6 million to EUR 61.0 million in 2008. After adjusting for the acquisition effects of the Linnig Antriebstechnik Group and Tri-Tech LLC, the increase amounted to EUR 1.4 million, about 3%. The measures implemented in the last quarter to reduce the staff costs in line with the decline in revenue are not visible as absolute amounts in these figures. However, it should be noted that the increase in staff costs was considerably higher during the first six months of the year. 17% Industrial Drive Systems Revenue by region 1 Other European North and South Cech Republic countries America China Austria The other costs increased by EUR 7.5 million, of which EUR 4 million was due to the newly-acquired companies, in particular the Linnig Antriebstechnik Group. The consultancy costs also increased, primarily related to a part of the selling costs arising from the sale of Distribution Services and to the costs arising from the greenfield operation in Romania. The book loss on the sale of Vink UK and Ireland is also recognised in this item. Germany >> 40 annual report 2008

1 Operating result from continued operations EUR million 2008 2007 Operating result according to financial statements 11.0 9.8 Effect of Linnig Antriebstechnik Group 5.6 Plus: amortisation charges for intangible assets 1.3 0.7 Minus: on-charged management fee to Distribution Services 1.0 1.4 Loss on Vink UK and Ireland and selling costs in 2008 for sale of Distribution Services 3.0 0.4 Operating result from continued operations before amortisation (EBITA) 14.3 15.1 Operating result The operating result 1 is not comparable as such. The above table gives a accurate view of the operating result from the continued operations. The operating result of the Industrial Magnetic Systems business unit came under pressure in 2008 due to problems with new projects at the Austrian plant. The increase in the operating result during the first three quarters was nullified by the decline in revenue in the fourth quarter. The Industrial Drive Systems and Commercial Vehicle Systems business units closed 2008 with a slightly improved operating result compared to 2007. The operating result of the Passenger Car Systems business unit was slightly lower than in 2007, due in full to the fourth quarter. Until then the business unit had exhibited a good improvement. Net finance costs In 2008 the net finance costs amounted to EUR 4.1 million (2007: EUR 3.8 million). This relates to the net finance costs incurred for the continued operations. The result from the discontinued operations includes the net financing costs for Distribution Services. The overall situation is then as follows: The overall net finance costs have remained unchanged. The costs were impacted by the higher margin paid on the junior facility of EUR 20 million and by the higher amortised external advice costs for refinancing (total of EUR 0.5 million); conversely, equal gains were obtained from the lower interest-bearing debts and exchange differences. The net finance costs for Distribution Services includes about EUR 1 million extra intercompany financing charges compared to 2007, which are included as income for the continued operations. Consequently the net finance costs for continued operations are more than EUR 1 million higher than 2007, due to the higher financing needs of some companies resulting from the advance financing of the start-up costs and exchange differences. Despite the sharp drop in the market rate of interest in the last months of the year, the market rates of interest (EURIBOR) of relevance to Kendrion during 2008 were on average 0.35% higher than in 2007. Since Kendrion had hedged the majority of the interest-rate sensitivity with interest rate swaps this increase had virtually no effect on the interest expenses. In advance of the (possible) sale of Distribution Services Kendrion has, during the course of the year, reconciled the current swap contracts with the possibly significantly lower future interest-bearing debt exposure. As a result Kendrion has realised a positive market value of the derivate contracts of EUR 0.3 million. In total, the swap contracts made a positive contribution of approximately EUR 0.8 million in 2008. * This relates to the effect of the sale of Automotive Metals and the purchase of Linnig Antriebstechnik Group in December 2007, i.e. as though both transactions had taken place on 1 January 2007. EUR million 2008 2007 Net finance costs of continued operations 4.1 3.8 Net finance costs of Distribution Services 3.1 2.2 Subtotal 7.2 6.0 Purchase and sale effect * 0.0 1.2 Total 7.2 7.2 report of the board >> 41

Industrial Magnetic Systems Assurance Hospital equipment may never fail. Dialysis and monitoring equipment would be unable to carry out its important work without solenoids and electromagnetic valves. 15:58 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Lin, Austria Modern monitoring equipment saves lives every day. 11 10 9 8 7 6 5 4 3 2 1 0 GMT + 1 Taxes The tax burden shown by the income statement amounted to 25.5% over 2008; this relates to the tax burden on the continued operations. The tax burden would, inclusive of Distribution Services and taking account of EUR 6.4 million non-deductable charges, have amounted to 33%. On the one hand the difference in tax burden is due to the relatively high results in countries with a high tax burden (in particular, Belgium) and, on the other hand, the taxable losses in Vink countries such as France, the UK, Ireland and Switerland where no tax credit is taken into account. Balance sheet and working capital developments The balance sheet at 31 December 2008 cannot be compared as such with the position at 31 December 2007. On the one hand, the assets and liabilities of the Vink Group were classified as held for sale at the end of 2008 and the assets and liabilities of Servico were eliminated from the balance sheet position at the end of 2008 following the sale at the end of December 2008, and on the other hand the acquisition of the US Tri-Tech LLC company by Kendrion. The most important movements are highlighted below as these are not immediately apparent from the balance sheet due to the reclassification of the assets and liabilities of the Vink Group. The balance sheet total decreased by almost EUR 23 million compared to the end of 2007. On the one hand, on the acquisition of Tri-Tech the balance sheet total increased by EUR 8 million due to the purchased goodwill and intangible assets; on the other hand, the investments exceeded depreciation by more than EUR 5 million. The sale of Servico reduced the assets by EUR 7 million; the write-down of the goodwill and participation value of Vink Germany resulted in a further EUR 5 million decrease. The accounts receivable, in particular, decreased by EUR 18 million due to the improvement in credit management at the Vink Group and the decline in revenue during the fourth quarter. Trade payables decreased by EUR 10 million, which also resulted in a decrease in the interest- >> 42 annual report 2008

* Management estimate. Unaudited figures bearing debts from EUR 85 million to EUR 75 million. The effect on the interest-bearing debts from acquisitions and divestments (the earnout for Linnig over 2007, Tri-Tech and Servico respectively) was about ero. The working capital for the continued operations expressed as a percentage of revenues decreased from 13.6% to 11.6% at 31 December 2008. This decrease was, in particular, due to the Commercial Vehicle Systems business unit, which implemented good improvements in the stock and credit management in 2008. Passenger Car Systems has succeeded in bringing its accounts receivable to a more acceptable level. The Industrial Magnetic Systems business unit can achieve further improvements in the stock management. More than EUR 16 million was invested during the financial year. Investments in the electromagnetic operations amounted to EUR 13.5 million, of which EUR 6 million was invested in projects in Germany and Austria for common rail technology products and EUR 2 million in other projects in the Cech Republic and Austria, primarily for the Passenger Car Systems business unit. Distribution Services invested EUR 3 million in equipment including processing machinery, cutting equipment, warehouse and office equipment in Norway and Sweden due to the move to new locations. Vink Norway disposed of its premises in the third quarter of 2008 (effect EUR 0.9 million). At the end of 2008 equity was adversely impacted by currency translation differences and changes in the hedge reserve. The hedge reserve has fallen by EUR 1.7 million as compared to the end of 2007 due to declines in the fair value of the financial instruments that are used to hedge the cash flow and, as such, are effective. The currency translation differences arose as result of the decline, in particular, of the Norwegian krone and Swedish krone towards the end of 2008. This has in turn resulted in a decrease in the participation values and purchased goodwill (Essåplast) on translation into euros. The total negative effect amounted to approx EUR 1.5 million. Pro-forma balance sheet after the sale of the Vink Group at 31 December 2008 * The sale of the Vink Group, to be completed in February 2009, has resulted in a fundamental change to the balance sheet. The following condensed pro-forma balance sheet shows the situation that would have prevailed at 31 December 2008 had the Vink Group been sold as per that date: EUR million Total non-current assets 103.9 Total current assets 54.7 Cash 3.7 Total assets 162.3 Total equity 103.5 Total non-current liabilities 11.5 Bank debts 13.3 Total current liabilities 34.0 Total equity and liabilities 162.3 The pro-forma net interest-bearing debts would have amounted to EUR 10 million at the end of 2008, and the solvency ratio to more than 60%. Financial position The solvency ratio at 31 December 2008 was 33.3% (31 December 2007: 29.3%). The ratio of interest-bearing debt to operating result and depreciation was 2.4 (inclusive of Vink). On 31 December 2008 Kendrion complied with the covenants with the banking consortium by an ample margin. Kendrion and the banking consortium have reached agreement on a number of new financing conditions negotiated in connection with the sale of Distribution Services which come into force in mid-february 2009 (immediately after the Vink transaction is closed). The major conditions are: EUR 30 million committed revolving credit facility for working capital until 23 November 2010; EUR 20 million junior facility until 23 November 2009; EUR 50 million standby acquisition facility until 23 November 2009; a supplementary interest rate covenant on a quarterly basis (the current covenant is on a twelve-month rolling basis); a margin increase by 50 base points; a non-recurring dividend payment of EUR 10 million is allowed in 2009 (normally 30% of the net profit). At 31 December 2008 Kendrion still had approximately EUR 1.5 million of non-current receivables from companies sold in 2003 and 2004. report of the board >> 43

Cash flow and financing In 2008 the free cash flow for the continued operations, exclusive of the disposal of Servico and the acquisition of Tri-Tech LLC, USA and the 49% interest in Linnig de México, amounted to EUR 3.7 million. Investments exceeded depreciation by EUR 5 million, so that the operations and the management of the working capital yielded almost EUR 9 million. The free cash flow for Vink over 2008 amounted to EUR 9.2 million, so that the operations jointly generated a free cash flow of EUR 12.9 million. The net interest-bearing debt amounted to EUR 75.3 million at 31 December 2008 compared to EUR 85.2 million at the end of 2007. After the disposal of the Vink Group the pro-forma net interest-bearing debt would have amounted to just EUR 10 million at the end of 2008. Contingent liabilities The following changes have taken place since 31 December 2007: The complainant in the two patent cases against the now divested Kendrion SKA for which Kendrion acted as guarantor on the sale of the Automotive Metals operations has withdrawn the claim, such that each party bears its own legal expenses (effect in 2008 EUR 0.1 million). In so doing, the legal proceedings have been annulled and the issue has lapsed. The external company, Binder Italy, has brought a claim before the court in Milan for an amount of EUR 1.1 million on account of the alleged wrongful termination of a distributor s contract. On the basis of the legal advice received, Kendrion regards the risk as low. The other issues stated at the end of 2007 are still applicable. This relates to the fine imposed by the European Commission and potential claim against Vink UK, which if upheld will be covered by Kendrion s insurers. More detailed information is disclosed on page 94 of the financial statements. Directors declaration The Executive Board is responsible for the preparation of the financial statements and the annual report in accordance with the Dutch law and the International Financing Reporting Standards (IFRS). As prescribed in Article 5-25c of the Financial Supervision Act, and with due regard for the above, the Executive Board declares that to its knowledge (i) the financial statements give a true and fair view of the assets, liabilities, financial position and profit of Kendrion N.V. and the companies jointly included in the consolidation; (ii) the annual report gives a true and fair view of the situation at balance sheet date, the situation during the financial year at Kendrion N.V. and the companies affiliated with Kendrion whose figures are incorporated in the financial statements, and (iii) that the annual report describes the significant risks which Kendrion faces. The members of the Executive Board have signed the financial statements to comply with their statutory obligation pursuant to Article 2:101, paragraph 2 of the Netherlands Civil Code and Article 5-25 C, paragraph 2, under C, of the Financial Supervision Act. >> 44 annual report 2008

Industrial Magnetic Systems Enjoyment Solenoids are indispensable even in concert halls. Solenoids control the systems that blow air through the organ pipes. 14:58 Bristol, United Kingdom Pleasure while playing + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 11 10 9 8 7 6 5 4 3 2 1 0 GMT

Report of the Board Developments in each business unit Industrial Magnetic Systems >> Profile The Industrial Magnetic Systems business unit develops and manufactures electromagnetic systems for industrial applications including mechanical engineering, energy distribution, process automation, doors and safety technology, medical equipment and the beverages industry. Both the group of customers and range of applications are extremely diverse. The business unit s products make use of the most advanced technology and comply with the most stringent reliability and precision requirements. The activities of Industrial Magnetic Systems are subdivided into two core competences: projects with customised products in large volumes; modified products and services. The business unit s head office is in Donaueschingen (Germany), and the business unit has production facilities in Germany, Austria, Spain, the USA (where Tri-Tech LLC was taken over in 2008) and China. In addition, the business unit has sales organisations in the UK and Switerland. The other major European markets are covered by sales partners and distributors. >> Objectives and strategy Industrial Magnetic Systems continues to expand its position from a player on the European market to a global player in specific submarkets, whereby the business unit s objectives are to achieve powerful organic growth and excellent returns. Industrial Magnetic Systems develops new project activities in its markets by means of relationships with customers operating on a global scale or possessing powerful positions in local submarkets. In addition, we at kendrion use sophisticated methods to magnetise our production. we magnetise the world ken wiecorek production supervisor tri-tech llc usa Industrial Magnetic Systems project activities have enabled the business unit to expand its operations in the provision of modified products and services. These operations offer less risky opportunities to generate revenue, certainly in more difficult economic times. During the coming years the business unit will focus on three key markets, installation engineering in buildings, process automation and energy distribution, the markets where the most important developments are forecast in the global industry. >> Situation in 2008 Germany remains the most important market for Industrial Magnetic Systems and there are no signs that this will change within the near future. The continual growth in revenue achieved in 2007 was matched in the first six months of 2008. However, in as early as the second quarter Industrial Magnetic Systems was confronted with a major downturn in the global textile industry which not only had evident consequences for the business unit s Chinese operations, but which also affected its European factories. During the last quarter of 2008 the effects of the general economic situation became clear in the form of a significant shortening of the order books of the business unit s customers. This gave cause to the implementation of cost-reduction measures, in particular at the Austrian operating company. For this reason Industrial Magnetic Systems has continued with the improvement of its production processes and factory efficiencies. The business unit has also devoted a great deal of attention to the expansion of its engineering department. >> Market and market position As in the past, Industrial Magnetic Systems major market is Germany, with its advanced market-leading mechanical engineering and automation industries. This is followed by the energy sector, which has exhibited excellent growth figures in recent years and shall continue to grow in importance in the future. Additional attention was devoted to the development of the markets in France, Italy, the UK and Sweden. Industrial Magnetic Systems Chinese operations focus on customers and product applications with a great need of technical know-how, product quality and reliability: the cheap segment of the market receives less attention. >> 46 annual report 2008

The beverage industry is the most important market segment for the business unit s US operating company, which is the clear market leader in this segment. Expansions to other niche markets are currently in preparation. >> Outlook for 2009 The uncertainty due to the current turbulence of the global economy makes it very difficult to provide a meaningful forecast for 2009. The business unit has formulated four main points to cope with the current situation: expansion of the engineering and sales operations, concentration on smaller but nevertheless strategically-important customers, increased attention for the generation of revenue in the shorter term; support for the market activities in the form of an excellence programme in the factories, with explicit targets for quality improvements and the increased reliability of deliveries; focus on a flexible organisation with a rapid response, so that new developments that take place in 2009 can be addressed quickly; control of and reduction of the costs, depending on the economic developments. report of the board >> 47

Industrial Drive Systems Freedom Enjoying the freedom offered by skiing or a great mountain ramble. Comfort, safety and speed: the ski lifts can do their work thanks to the electromagnetic brakes that regulate the lifting systems, determine the speed and control the braking systems. 15:58 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Zermatt, Wallis, Switerland One of Europe s most attractive ski pistes. 11 10 9 8 7 6 5 4 3 2 1 0 GMT + 1

Report of the Board Developments in each business unit Industrial Drive Systems >> Profile The Industrial Drive Systems business unit develops and manufactures electromagnetic brakes and clutches for industrial drive systems that accelerate, retard, position, hold and secure movable drive components and loads. The primary applications for the business unit s products are robotics and process-automation technology, machine construction and production machines, machine control and lift technology. The business unit s head office and a production location are at Villingen (Germany). Other locations include the production plant at Eibiswald (Austria) and the sales organisation in Bradford (UK). The other major European markets are covered by sales partners and distributors. >> Objectives and strategy Industrial Drive Systems has further enhanced its position as European market leader in permanent magnet brake technology. The business unit s objectives are to achieve powerful organic growth and excellent returns. Industrial Drive Systems develops new project activities in its markets by means of relationships with customers operating on a global scale or possessing powerful positions in local submarkets. In addition, this business unit is also expanding its operations in the fields of applications of service on the basis of the project activities. During the coming years the business unit will focus on two key markets, namely process automation and the generation of sustainable energy, the markets where the most important developments are forecast in the global industry. >> Situation in 2008 2008, in analogy with 2007, was a successful year in which the business unit maintained its continual growth. During the last quarter of 2008 the effects of the general economic situation became clear in the form of a significant shortening of the order books of the business unit s customers, and for this reason the business unit continued to improve its production processes and also invested in new production equipment. The business unit once again devoted a great deal of attention to the expansion of its engineering capacity and has also developed a new product line that will be launched on the market in 2009. >> Market and market position Germany, with its advanced market-leading mechanical engineering and automation industries, remains Industrial Drive Systems major market. The business unit is European market leader in the permanent magnet spring brakes. Additional attention is being devoted to the enhancement of the spring-pressure brake operations, whereby Kendrion intends to play the role of problem-solver for specific customer needs and questions and, in so doing, distinguish the company from the market for standard products. Industrial Drive Systems is still a niche player in the USA and China, nevertheless, the business unit has succeeded in achieving remarkable growth figures in Asia during the past two years. It is hoped that this achievement can be repeated in the coming years. The operations in the USA will be expanded energetically via the new Kendrion factory in Mishawaka, Indiana. The increasing use of technology for the generation of sustainable energy, a global trend, opens an attractive new segment of the market to the business unit. Industrial Drive Systems possesses the technology required to develop suitable products for this segment. A number of new projects have already been initiated and Kendrion expects the first results in 2009. >> Outlook for 2009 The uncertainty due to the current turbulence of the global economy makes it very difficult to provide a meaningful forecast for 2009. The business unit has formulated four main points to cope with the current situation: expansion of the engineering and sales operations, concentration on smaller but nevertheless strategically-important customers, increased attention for the generation of revenue in the shorter term; support for the market activities in the form of an excellence programme in the factories, with explicit targets for quality improvements and the increased reliability of deliveries; focus on a flexible organisation with a rapid response, so that new developments that take place in 2009 can be addressed quickly; control of and reduction of the costs, depending on the economic developments. report of the board >> 49

Report of the Board Developments in each business unit Passenger Car Systems >> Profile The Passenger Car Systems business unit develops electromagnetic components for applications in the automotive industry. The business unit has production facilities in Germany, Austria, the Cech Republic, Romania and China. All products are developed and designed in accordance with the customer s specific needs, whereby great emphasis is placed on performance and reliability. Kendrion has been awarded ISO/TS 16949 certification, and supports environmentally-aware working methods in accordance with ISO 14001. >> Objectives and strategy Passenger Car Systems is continually expanding its market position by obtaining new customer orders. The business unit s objectives are to achieve acceptable organic growth and returns. The business unit s operations are conducted on the basis of an explicit strategy which addresses niche markets by offering them innovative technological solutions in the fields of switching solenoids (on/off or proportional), braking systems and advanced valve technology. The highlyreliable production processes are in part carried out in clean-room conditions, and are virtually entirely or partly automated, depending on the annual production volume. Passenger Car Systems complies with the stringent quality standards by the use of end-of-line control units for complete systems or individual functions. >> Situation in 2008 Revenue developed in accordance with the budget during the first six months of 2008. In the last quarters, in particular, Passenger Car Systems was confronted with a major downturn in revenue from the OEMs (Original Equipment Manufacturers). The general situation in the helping to convey the magical power of an international top company. we magnetise the world wilma stuiver executive secretary kendrion n.v. the netherlands European automotive industry deteriorated rapidly during the course of the year, although not as drastically as in the USA. Passenger Car Systems is focused almost exclusively on the European car industry. This business unit also has a strong market position in hydraulic solenoids for agricultural vehicles, which are manufactured by the factory in the Cech Republic. In general, Passenger Car Systems operations have been realised as planned, one element of which relates to the completion and launch of new product lines. New products are introduced in the fields of common rail applications, bodies and motor management. Moreover the transfer of the product lines to factories all over the world has been completed, and Passenger Car Systems can now serve its customers anywhere in the world. The plans for the construction of the expansion of the factory in the Cech Republic have been completed, and other European factories have been equipped with additional clean-room facilities for new production lines. >> Market and market position The international automotive market can be divided into three regions, Europe, the USA and Asia. The business unit s largest market is Europe and, within that market, Germany. From a global perspective the business unit s major customers are Daimler, Continental, Robert Bosch, Delphi Europe and ZF. Customers can count on Passenger Car Systems as a development partner, with active project teams, in-depth technical knowledge and access to development, test and production facilities. Growth in the European electromagnetic-component market is driven by new applications, and in this sense the market developments in 2008 were in view of the newlyacquired projects favourable to Passenger Car Systems. >> Outlook for 2009 Passenger Car Systems shall continue to provide its services to its customers, and shall seek new opportunities to expand its electromagnetic component operations. However, as a result of the current economic downturn the business unit shall need to exhibit the necessary flexibility in every area of its operations if it is to achieve its targets. In the longer term Passenger Car Systems expects to be able to benefit from the introduction of new projects on the market, in particular projects in the field of common rail diesel technology. However, in the short term the market will come under great pressure, which will give cause to the need for further changes to the organisation. >> 50 annual report 2008

Report of the Board Developments in each business unit Commercial Vehicle Systems >> Profile The Commercial Vehicle Systems business unit is comprised of the Linnig Antriebstechnik Group, which was taken over at the end of 2007. The business unit develops and manufactures components and complete cooling systems for buses, trucks and special vehicles. These include fan clutches for engine cooling, compressor clutches for vehicle air-conditioning, vibration dampers for crankshaft applications, fan clutches with angle gear for cooling, pneumatic and hydraulic clutches, brakes and belt tensioners. The business unit s customers are comprised of all major OEMs in the bus market and all first-line suppliers of airconditioning systems. In addition, Commercial Vehicle Systems also supplies products to manufacturers of refuse collection vehicles, agricultural vehicles, railway vehicles, and specialised vehicles such as piste bullies for the preparation of ski pistes. Commercial Vehicle Systems head office is in Markdorf (Germany), together with the production, R&D, sales and accounting departments. The business unit s subsidiaries with production, R&D and sales departments are located in Atlanta (USA), Mexicaltingo (Mexico), São Paulo (Brail) and Nanjing (China). Commercial Vehicle Systems has a global network of partners for distribution and service. The business unit s products contribute to the reduction of the fuel consumption of commercial vehicles, and to lowering their harmful emissions. This contribution has resulted in the steady growth of the operations during the past years. Pursuant to its corporate philosophy devising attractive and suitable solutions for our customers. we magnetise the world josef emp head of engineering & production kendrion binder magnet ag switerland Commercial Vehicle Systems intends to solve the technical problems of its customers by fulfilling the role of a specialist in the reduction of fuel consumption using solutions based on electromagnetic components. >> Objectives and strategy The business unit s strategy of supplying customers all over the world and conducting business with all existing OEMs in Asia, the USA and Europe has resulted in Commercial Vehicle Systems steady growth during the past ten years. The objective is to ensure that the business unit evolves from a local niche player into a global company, which entails Kendrion s intention to set the standards for quality and speed in R&D. The targets specify excellent organic growth and returns. >> Situation in 2008 2008 was, once again, a record year for Commercial Vehicle Systems. Two-thirds of the revenue was generated by exports. Substantial growth was achieved in North and South America as well as in Asia. Kendrion will also devote more attention to the margins, which are coming under pressure due to the discounts for OEMs and the product piracy problems in Asia, where patented products are copied. >> Market and market position The international market for components for engine cooling systems and air-conditioning can be divided into three regions, namely Europe, the USA and Asia. Kendrion is the European market leader in compressor and fan clutches. The company encounters technical competition in the motor-cooling segment from companies which offer solutions that do not make use of electromagnetic components. However, the requirements imposed on engine cooling and the reduction of emissions are becoming increasingly stringent, and Kendrion is convinced that the company is in the position required to expand its share of the market. Although Commercial Vehicle Systems is still a niche player in the USA and South America, the business unit has implemented an ambitious strategy which has enabled it to achieve steady growth. The situation in Asia is also conducive to growth, and Kendrion is working on new projects with a large number of new customers in the region. report of the board >> 51

Convenient Counting and sorting the correct number of notes possible only with (rotary) solenoids. Industrial Magnetic Systems 11 10 9 8 7 6 5 4 3 16:58 2 1 0 + 1 GMT + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 Bucharest, Romania Sufficient opportunities to withdraw cash from the wall. >> Outlook for 2009 Although 2008 was a successful year for Commercial Vehicle Systems, the global economic recession complicates forecasts for the developments in 2009. At the beginning of 2009 the European bus sector has not yet suffered greatly from the economic crisis. Kendrion is in a position to implement any measures that may be required very quickly. However, the Asian truck market is encountering much greater difficulties, as is the bus market. Commercial Vehicle Systems will introduce a large number of innovations at trade fairs all over the world (for example Shanghai (China), Mumbai (India) and Courtrai (Belgium)). From a strategic perspective India and Eastern Europe are extremely attractive markets for the achievement of new growth, and Kendrion is endeavouring to initiate new sales operations in these countries. In its endeavours to achieve further growth, Commercial Vehicle Systems is also focusing on the truck market. >> 52 annual report 2008

Report of the Board Corporate governance Every year Kendrion states the outlines of the company s corporate governance structure in the Annual Report, and submits all substantial changes to the structure to the General Meeting of Shareholders for discussion. The corporate governance theme was once again discussed during the 2008 General Meeting of Shareholders. Information about corporate governance and the rules and regulations is available at Kendrion s (renewed) website (www.kendrion.com), under Corporate Governance. This section and the Information on Kendrion N.V. shares section incorporate the information referred to in Article 1 of the Decree of 5 April 2006 for the implementation of Article 10 of the EU Takeover Directive. >> Corporate governance structure Kendrion N.V. is a public limited liability company under Dutch law, with its registered offices in Zeist, the Netherlands. The company s authorised share capital is divided into 40,000,000 ordinary shares with a nominal value of EUR 2.00. At year-end 2008 10,287,624 ordinary shares had been issued, of which 15,232 shares are held by the company. These own shares have been purchased in the past for the purposes of the long-term incentive (LTI) programme and the share plan for the senior management. Kendrion s shares are listed on NYSE Euronext s Amsterdam market. The company s Articles of Association include what is referred to a creeping control provision that is similar to the statutory provisions. A shareholder acquiring 20% of the shares or votes is under the obligation to disclose this to the company with immediate effect. Shareholders governed by compulsory disclosure may cast a number of votes at a General Meeting of Shareholders of at most the number disclosed to the company on day before the day of the publication of the notice convening the relevant meeting. In the absence of a disclosure the number of votes that can be cast is limited to a maximum of the disclosure limit. The Executive Board can grant exemption from the voting right limit. A shareholder acquiring more than 30% of the shares or votes is under the obligation to make an immediate bid for the other issued shares. The bid must be submitted in accordance with the then prevailing statutory regulations. The Executive Board can issue a notice suspending the meeting and voting rights from the time a party is under the obligation to make a bid until the time the party declares the bid unconditional (or is not required to do so because fewer than 66 2 3% of the voting rights have been tendered). A resolution to amend the Articles of Association can be passed by the General Meeting of Shareholders solely on the proposal of the Executive Board as approved by the Supervisory Board. Resolutions of this nature can be passed by an absolute majority of the votes cast at the General Meeting of Shareholders. Amendments to the Articles of Association are also governed by a number of procedural regulations specified in more detail in the company s Articles of Association. >> General Meeting of Shareholders Votes representing shares can be cast at the General Meeting of Shareholders either personally or by proxy. No restrictions are imposed on these proxies, which can be granted to the company or independent third parties. Each share grants an entitlement to one vote. All resolutions adopted by the General Meeting of Shareholders are passed by an absolute majority of the votes cast, unless the law or the Articles of Association prescribe a larger majority. Shareholders individually or jointly representing at least one percent of the issued share capital (or individually or jointly representing at least EUR 50 million of the issued share capital) are entitled to submit a request to the Executive Board or Supervisory Board for the inclusion of items on the agenda of the General Meeting of Shareholders. A request of this nature shall be granted provided that weighty interests of the company do not dictate otherwise, and that the request is submitted in writing to the CEO or the Chairman of the Supervisory Board at least sixty days before the date of the General Meeting of Shareholders. Resolutions relating to items placed on the agenda in this manner can be passed by an absolute majority of the votes cast that represent at least one-third of the issued share capital. In the event that an absolute majority supports the resolution but this majority does not represent one third of the issued share capital then in a new meeting to be convened the resolution can be passed by an absolute majority of the votes independent of the represented issued share capital (unless the law prescribes a larger majority or a quorum). report of the board >> 53

47 shareholders representing 71.5% of the total issued share capital attended or were represented at the regular General Meeting of Shareholders held in the year under review on 7 April 2008. 28 shareholders representing 53.7% of the total issued share capital attended or were represented at the Extraordinary General Meeting of Shareholders held on 12 December 2008 to obtain permission for the sale of the Distribution Services operations. >> Board Kendrion is managed by a Board comprised of three members, of whom two are Executive Directors, and supervised by the Supervisory Board. The Executive Board possesses the powers that the law or the Articles of Association have not assigned to the Supervisory Board or the General Meeting of Shareholders. The Executive Board has adopted regulations governing the Board s procedures and decision-making. These regulations have been approved by the Supervisory Board. The members of the Executive Board are appointed by the General Meeting of Shareholders on the recommendation of the Supervisory Board. Each member of the Executive Board can be dismissed by the General Meeting of Shareholders at any time. The General Meeting of Shareholders can pass a resolution for dismissal on the proposal of the Supervisory Board by an absolute majority of the votes cast. The General Meeting of Shareholders can pass a resolution for dismissal other than on the proposal of the Supervisory Board solely by an absolute majority of the votes cast that represents at least one-third of the issued share capital. The Board is supplemented by an Executive Committee, which is not mandated under the Articles of Association, which is comprised of the Board and the Business Unit Managers. The Executive Committee is a consultative body and the Board always has the deciding vote. The Executive Board has the authority, with the approval of the Supervisory Board, to decide to issue shares in the period until 7 October 2009. This authority relates to a maximum of 10% of the issued share capital at the time of issue. In addition, the Executive Board has the authority to arrange for the company to acquire shares in its capital. This authority relates to a maximum of 10% of the issued share capital, and runs until 7 October 2009. Each year, the Executive Board places a request to be granted the authority for the issue and purchase of shares referred to above on the agenda of the General Meeting of Shareholders. >> Supervisory Board The company has a Supervisory Board comprised of three members. The members of the Supervisory Board are appointed by the General Meeting of Shareholders on the recommendation of the Supervisory Board. The Supervisory Board has adopted regulations and a profile of the Supervisory Board. The Supervisory Board elects a Chairman from amongst its members. The members of the Supervisory Board step down by rotation pursuant to a schedule adopted by the Supervisory Board. Members of the Supervisory Board who step down can be reappointed. These reappointments take account of the manner in which the candidate performed his or her duties as a member of the Supervisory Board. Each member of the Supervisory Board can be dismissed by the General Meeting of Shareholders at any time in a resolution passed by an absolute majority of the votes cast. Resolutions for dismissal not on the proposal of the Supervisory Board are passed solely by an absolute majority of the votes cast that represents at least onethird of the issued share capital. The Supervisory Board s duty is to supervise the management of the Executive Board and the general developments within the concern and its affiliated companies, and to advise the Executive Board. Since the Supervisory Board is comprised of fewer than four members the Board has not currently instituted any separate committees. The Supervisory Board is designated as the body that performs the duties the law has conferred on the audit committee. Meetings of the Supervisory Board are usually attended by the Board. creativity and innovation: the magical forces that make the impossible possible! A study to be carried out in 2009 shall review whether it would be advisable to expand the Supervisory Board to include a fourth member, with German nationality. we magnetise the world mitea efrimov managing director kendrion binder magnete s.r.l. romania >> 54 annual report 2008

>> Code of conduct and the whistleblower s charter The code of conduct and whistleblower s charter are available for inspection on the website. The whistleblower s charter offers the employees of Kendrion companies an opportunity to report irregularities or suspicions of irregularities to the management without jeopardising their legal position. Corporate governance structure in the light of the Dutch Corporate Governance Code The provisions of the Corporate Governance Code of 2003, are applicable to Kendrion. Kendrion has applied virtually all principles and provisions to the extent that they are applicable laid down in the Code. The company reserves the right, both now and in the future, not to apply the occasional best-practice provision, whereby the company shall always comply with the principle formulated in the Code that the company shall explain why it has not applied the best-practice provision. For example, the company will not be able to breach existing agreements at will. It should be noted that the Code also states that agreements of this nature should be respected. The provisions of the Corporate Governance Code that have not been applied are listed below. ii.1.1 A Management Board member is appointed for a maximum period of four years. This provision is not in line with the contractual situation of the current CEO. Kendrion respects this contractual situation. ii.2.8 The maximum remuneration in the event of dismissal is one year s salary. This provision is not in line with the contractual situation of the current CEO (two years). Kendrion respects this contractual situation. iv.3.1 All investor relations meetings shall be announced in advance, and provisions shall be made for all shareholders to follow these meetings in real time. Kendrion announces all press conferences and analyst meetings in advance. Kendrion is of the opinion that webcasting these meetings is not necessary. Unannounced meetings with individual analysts are also held. No price-sensitive information is disclosed during these meetings. organisation. Kendrion shall place the Section of the Annual Report 2009 reviewing the outlines of the corporate governance structure and compliance with the amended Code as a separate item on the agenda of the General Meeting of Shareholders to be held in 2010. Agreements in the meaning of Article 1.j. of the Decree of 5 April 2006 for the implementation of Article 10 of the EU Takeover Directive (change of control) Kendrion has a credit facility at its disposal which has been concluded with a Dutch consortium of banks. An explanation of this facility is enclosed on page 83 of the financial statements. The credit facility incorporates what is referred to as a change of control provision. Once a party acquires more than half the company s issued share capital or voting rights then the company is governed by a repayment commitment. As a rule the company does not conclude new agreements; these are concluded by the operating companies. Agreements concluded, for example, with leasing companies can also incorporate change of control provisions. >> Severance pay The contract of employment with the current CEO grants the officer entitlement to severance pay equal to the compensation for involuntary dismissal in the event that the contract of employment is terminated after a change of control. The provision in the current CFO s contract of employment entitles the officer to severance pay comprised of one year s salary following a change of control. >> Remuneration policy Kendrion s current remuneration policy was discussed at and adopted by the General Meeting of Shareholders in 2005 and 2008. Kendrion s Supervisory Board is comprised of fewer than four members, and consequently a separate remuneration committee has not been instituted. The remuneration report lays down the policy for the remuneration of the Executive Board and the Supervisory Board. Information about the remuneration received by the individual members of the Executive Board and the Supervisory Board is enclosed in the financial statements (pages 109 and 110). The Corporate Governance Code was amended on 10 December 2008, and the amended Code will come into force as from the 2009 financial year. Kendrion is in agreement with the general objective of and background to the amendments. Kendrion already complies with a substantial proportion of the amended or supplementary provisions. During the course of 2009 the Board and the Supervisory Board shall review the best approach to the incorporation of the amended Code within Kendrion s The policy relating to the remuneration received by the members of the Executive Board is focused on the allocation of remuneration of an amount and structure such that qualified and expert executives can be recruited. The policy is also challenging to an extent such that it also motivates the members of the Executive Board and, when they exhibit an appropriate performance, can retain them in the longer term. The Supervisory Board specifies the remuneration for the individual members on report of the board >> 55

the basis of their performance and results as compared to the agreed performance criteria. In addition to a fixed component, the remuneration package also includes a variable component to promote the creation of value in the medium to long term. In line with the amended Code, the Supervisory Board possesses discretionary powers for the adjustment of the total remuneration should the variable remuneration system result in unreasonable and inequitable remuneration. In addition, the variable component of the remuneration must be refunded should it transpire that this was unjustifiably awarded on the basis of incorrect financial information. The Supervisory Board periodically tests the package to verify that it is in line with the company s objectives and the market on the basis of information supplied by external experts. The last test took place at the end of 2007. The current remuneration policy provides for a fixed component and two variable components, as well as a pension scheme and a number of secondary conditions of employment. The fixed remuneration is in line with the policy explained above, and during the year under review the fixed component was adjusted solely pursuant to the indexation provision of the remuneration policy. One of the two variable components is related to the short term, and the other to the long term. Both are intended to promote the Board members attention to the growth of the company and the value of the share. The variable component of the remuneration relating to the short term is normally comprised of a bonus of an amount dependent on the extent to which the performance criteria have been fulfilled. The majority of these targets are quantitative (such as the net profit and cash flow) and the remainder are qualitative. The targets are specified for each full year prior to the beginning of the relevant financial year. The precise targets are not disclosed since the company is of the opinion that the disclosure of the (relevant) performance criteria is undesirable from the perspective of the competition and the company s position in the market. In addition, the publication of the performance criteria is at variance with the management of the external expectations, such with the knowledge that there is a simultaneous internal need for incentives for the members of the Executive Board in the form of challenging targets. The Supervisory Board makes annual assessments of the extent to which the performance criteria specified for the relevant year have been fulfilled. The Executive Board shall allocate 50% of the short-term bonus for 2008, after taxation, to the purchase of Kendrion shares. In view of the economic conditions it is proposed that the short-term cash bonus for 2009 be relinquished. The short-term bonus scheme has been supplemented with a long-term incentive (LTI) scheme since 2005. The LTI was redefined in 2008. Kendrion s objective was to achieve a further focus in the company s operations, and in view of this strategy a modified incentive plan was introduced for the period from 2008 to 2010 inclusive that would replace the then existing LTI scheme. This incentive scheme rewards the Executive Board with a non-recurrent amount in cash rather than shares when a sufficient focus has been achieved in the company s operations within a maximum period of three years. The performance shall be assessed on the basis of the realisation of long-term shareholder value (the movement in Kendrion s TSR compared to the AScX), and on the performance of the Executive Board during this period. The amount pursuant to this non-recurrent incentive is limited to a maximum of 150% of the fixed remuneration. The bonus for at-target performance shall amount to 75% of the fixed remuneration, comparable with the former LTI scheme. The Supervisory Board shall determine the actual remuneration on the basis of the focus bonus after the completion of the sale of the Vink Group. A proposal shall be submitted to the General Meeting of Shareholders recommending the conversion of this remuneration into a deferred pay out scheme in which the members of the Executive Board acquire shares three years after determination of the focus bonus by the Supervisory Board, such without further conditions. The number of shares shall be determined immediately after the General Meeting of Shareholders on the basis of the amount of the net bonus and the then prevailing closing stock price. It is proposed that solely a bonus in shares be applicable to 2009, whereby the members of the Executive Board shall be awarded an amount in shares. With an at-target performance this amount in shares shall be equal to 40% of the gross salary of the CEO and 35% of the gross salary of the CFO, with a maximum of 50% of the gross annual salary. The shares shall need to be held for a minimum of five years, unless the officer s contract of employment is terminated earlier. The performance shall once again be assessed on the basis of the realisation of shareholder value (the movement in Kendrion s TSR compared to the AScX), and on the performance of the Executive Board during the 2009 financial year. A new LTI scheme based on specific recommendations from the Frijns Committee shall be submitted to the shareholders in 2010. >> 56 annual report 2008

Pursuant to the policy, the company bears the cost of the pension contributions of the members of the Executive Board to a maximum of 20% of the pensionable salary. The pensionable age is 65. No schemes have been agreed for the (voluntary) early retirement of the members of the Executive Board. The company does not grant loans, advances or guarantees to the members of the Executive Board. No extraordinary remuneration was paid to the members or former members of the Board in the year under review. The former LTI scheme introduced in 2005 remains in force during the 2007-2009 period. This scheme specifies a bonus for at-target performance amounting to a maximum of 30% of the fixed income of both the CEO and CFO. The remuneration received by the members of the Supervisory Board is comprised of a fixed remuneration that is independent of the results, such whereby a distinction is made between the remuneration received by the Chairman and the other members of the Supervisory Board. Pursuant to this distinction the remuneration received by the Chairman is about one-third higher than the remuneration received by the other members. The remuneration received by the members of the Supervisory Board was set by the General Meeting of Shareholders in 2005 and has not been adjusted after this date. report of the board >> 57

Report of the Board Outlook for the future At the beginning of 2009 there is great deal of uncertainty about the global economic developments in 2009 and the following years, in particular due to the credit crisis and the economic crisis. It is not possible to estimate either how long this crisis will last or the severity of the consequences. Self-evidently, this crisis also has major consequences for Kendrion s revenue and results. Investments in 2009 will be of about the same level as depreciation. Many projects in which substantial amounts have been invested in the past years will result in further growth in revenue only in the coming years. Self-evidently, in these difficult economic times Kendion s management of the working capital and generation of free cash flow will become even more important than it has been in the past. Kendrion s risk profile has been sharpened significantly during the past years. As from the beginning of 2009 Kendrion is focused exclusively on the development, manufacture and sales of electromagnetic components. With this increased focus Kendrion s strong financial position constitutes an important basis for future developments. Kendrion s operations are based almost exclusively on long-term business relationships with customers and suppliers. However, since the current economic crisis can affect all market players Kendrion will need to follow the developments at these market players closely and implement any measures that may be required. Kendrion has already implemented measures in the fourth quarter of 2008, as well as in January 2009, designed to reduce the company s cost levels. Pursuant to one of these measures the salary of 50 managers, including the Board and the Supervisory Board, has been reduced by 10% for the period in which the reduced working time schemes are in force. Further measures shall be implemented in 2009 should these be necessary. Selfevidently, Kendrion shall endeavour to implement those measures that do not jeopardise the development of the company s strong market positions during the coming years. In spite of or perhaps, especially in these difficult economic times Kendrion shall also continue to endeavour to strengthen existing market positions by means of acquisitions, since the possibility cannot be excluded that companies which exhibit an excellent performance in normal times nevertheless get into difficulties caused by the economic crisis. However, and most importantly, any potential acquisition candidates shall be subjected to an even more critical analysis. In view of the current economic developments and the prevailing uncertainties it is impossible to provide an accurate forecast for the development of Kendrion s result in 2009. Zeist, 23 February 2009 The Executive Board P. Veenema E. Ris more customers, and become number one in asia. that s our magnetic force! we magnetise the world ronghu li supply chain manager kendrion binder magnetic (suhou) co. ltd. china >> 58 annual report 2008

Financial statements Contents 60 Consolidated balance sheet as at 31 December 61 Consolidated income statement 62 Consolidated statement of recognised income and expense 63 Consolidated statement of cash flows 64 Notes to the consolidated financial statements 76 Property, plant and equipment 77 Intangible assets 78 Other investments, derivatives 78 Deferred tax assets and liabilities 80 Inventories 80 Trade and other receivables 81 Cash and cash equivalents 81 Equity 82 Earnings per share 83 Loans and borrowings 84 Employee benefits 86 Provisions 86 Trade and other payables 86 Financial instruments 93 Operating lease agreements 94 Capital commitments 94 Contingent liabilities 94 Segment reporting 96 Discontinued operations 98 Business combinations 99 Other operating income 99 Staff costs 99 Other operating expenses 100 Net finance costs 100 Income tax 100 Reconciliation with the effective tax rate 100 Related parties 101 Accounting estimates and judgements by management 102 Assets classified as held for sale 103 Liabilities classified as held for sale 103 Post-balance sheet events 104 Company balance sheet as at 31 December 105 Company income statement 106 Notes to the company financial statements >> 59

Consolidated balance sheet as at 31 December Note EUR million 2008 2007 >> Assets 1 Property, plant and equipment 46.7 57.5 2 Intangible assets 43.3 49.2 3 Other investments, including derivatives 1.3 3.8 4 Deferred tax assets 15.2 21.0 Total non-current assets 106.5 131.5 5 Inventories 30.3 69.2 Current tax assets 0.7 2.1 6 Trade and other receivables 24.1 90.7 7 Cash and cash equivalents 3.7 9.6 29 Assets classified as held for sale 115.2 Total current assets 174.0 171.6 Total assets 280.5 303.1 >> Equity and liabilities 8/9 Equity Share capital 20.6 20.6 Share premium 71.3 75.2 Reserves (11.4) (11.2) Retained earnings 12.8 3.6 Total equity attributable to equity holders of the company 93.3 88.2 Minority interest 0.2 0.6 Total equity 93.5 88.8 Liabilities 10 Loans and borrowings 20.8 87.1 11 Employee benefits 6.6 7.7 Government grants received in advance 0.1 12 Provisions 2.6 3.0 4 Deferred tax liabilities 3.7 4.9 Total non-current liabilities 33.7 102.8 7 Bank overdraft 13.3 7.5 10 Loans and borrowings 51.7 0.2 Current tax liabilities 1.5 3.8 13 Trade and other payables 31.2 100.0 30 Liabilities classified as held for sale 55.6 Total current liabilities 153.3 111.5 Total liabilities 187.0 214.3 Total equity and liabilities 280.5 303.1 >> 60 annual report 2008

Consolidated income statement Note EUR million 2008 2007* Revenue 207.4 168.9 21 Other operating income 0.9 1.1 208.3 170.0 Changes in inventories of finished goods and work in progress (1.5) (0.4) Raw materials and subcontracted work 103.9 87.3 22 Staff costs 61.0 48.6 Depreciation and amortisation 8.3 6.6 15, 23 Other operating expenses 25.6 18.1 Results before net finance costs 11.0 9.8 Finance income 0.2 0.1 Finance expense (4.3) (3.9) 24 Net finance costs (4.1) (3.8) Profit before income tax 6.9 6.0 25, 26 Income tax expense (1.8) 0.4 Profit from continuing operations 5.1 6.4 19 Result on sale of discontinued operations (net of income tax) 7.8 (2.7) Profit for the period 12.9 3.7 Attributable to: Equity holders of the company 12.8 3.6 Minority interest 0.1 0.1 Profit for the period 12.9 3.7 9 Basic earnings per share (EUR) 1.25 0.35 9 Diluted earnings per share (EUR) 1.25 0.35 Basic earnings per share continuing operations (EUR) 0.50 0.62 Diluted earnings per share continuing operations (EUR) 0.50 0.62 * Restated for comparison reasons (as stated in note b of the Notes). financial statements >> 61

Consolidated statement of recognised income and expense EUR million 2008 2007 Currency translation differences for non-euro one operations (1.5) (0.3) Currency translation differences on sale of Automotive Metals 0.6 Net changes in fair value of cash flow hedges transferred to the income statement (1.9) 0.6 Other (0.2) Income and expense recognised directly in equity (3.6) 0.9 Profit for the period 12.9 3.7 Total recognised income and expense for the period 9.3 4.6 Attributable to: Equity holders of the company 9.2 4.5 Minority interest 0.1 0.1 Total recognised income and expense for the period 9.3 4.6 >> 62 annual report 2008

Consolidated statement of cash flows Note EUR million 2008 2007 1 1 Restated for comparison reasons (as stated in note b of the Notes). 2 Cash excluding Distribution Services. Cash flows from operating activities Profit for the period 12.9 3.7 Adjustments for: Net finance costs 4.1 3.8 Income tax expense 1.8 (0.4) Result on discontinued operations (7.8) 2.7 Depreciation of property, plant and equipment 7.0 5.2 Amortisation of intangible assets 1.3 1.4 19.3 16.4 Change in trade and other receivables 9.8 (6.0) Change in inventories (0.2) (1.0) Change in trade and other payables (6.9) 4.1 Change in provisions 0.1 (0.1) 22.1 13.4 Interest paid (3.1) (3.3) Tax paid (1.9) (1.2) Cash flows from operating activities 17.1 8.9 Cash flows from investing activities 19 Disposal of subsidiary, net of cash disposed of 12.9 31.4 20 Acquisition of subsidiary, net of cash acquired (11.9) (38.3) Investments in property, plant and equipment (18.0) (14.1) Disinvestment of property, plant and equipment 4.8 4.3 Investments in intangible assets (0.3) (0.5) (Dis)investments of other investments 0.1 (0.1) Net cash from investing activities (12.4) (17.3) Free cash flow 4.7 (8.4) Cash flows from financing activities Income borrowings (non-current) 40.0 Repayment of borrowings (non-current) (44.2) (27.3) Income borrowings (current) 51.7 Repayment of borrowings (non-current) (4.5) Dividend (3.9) Net cash from financing activities 3.6 (8.2) Net cash from operating activities of discontinued operations 12.0 25.0 Net cash from investing activities of discontinued operations (2.6) (9.8) Net cash from financing activities of discontinued operations (29.4) (12.6) Total cash flow of discontinued operations (20.0) 2.6 Change in cash and cash equivalents (11.7) 2.3 Effect of exchange rate fluctuations on cash held (0.0) 0.1 (11.7) 2.4 Cash and cash equivalents as at 1 January 2.1 (3.7) 7 Cash and cash equivalents as at 31 December (9.6) (1.3) (11.7) 2.4 2 financial statements >> 63

Notes to the consolidated financial statements >> Significant accounting policies Kendrion N.V. is domiciled in the Netherlands. The Company s registered office is Utrechtseweg 33, 3704 HA Zeist. The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the Group ). The Group is primarily involved in the design, manufacture and sale of high-quality electromagnetic systems and components. The consolidated financial statements were authorised for issue by the Executive Board on 23 February 2009. (a) >> Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations of the standards adopted by the International Accounting Standards Board (IASB) and endorsed by the EU (hereinafter referred to as EU-IFRS) on 31 December 2008. The company financial statements are part of the 2008 financial statements of Kendrion N.V. With regard to the company income statement of Kendrion N.V., the Company has made use of the option provided by Section 402 of Book 2 of the Netherlands Civil Code. (b) >> Basis of measurement The financial statements are presented in millions of euros, the euro also being the company s functional currency. The financial statements have been prepared on a historical cost basis except that: derivative financial instruments are stated at fair value; liabilities arising from cash-settled share-based payments arrangements are stated at fair value. The methods used to measure the fair values are discussed further in Note 14. The preparation of the financial statements in conformity with EU-IFRS requires the Executive Board to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are considered reasonable in the circumstances, the results of which form the basis of making the judgements about carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Changes in estimation methods and the impact thereof are outlined in the notes to the relevant item. >> 64 annual report 2008

Judgements made by the Executive Board in the application of EU-IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are included in the following notes: Note 20 business combinations Note 2 measurement of the recoverable amount of cash-generating units containing goodwill Note 4 utilisation of deferred tax assets Note 11 measurement of defined benefit obligations Note 12 provisions Note 17 contingent liabilities Note 14 valuation of financial instruments The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by the Group entities. Certain comparative amounts have been reclassified to match the presentation in the current financial year. In addition, the comparative income statement has been revised such that an operation that was classified as held for sale during the course of the current accounting period has also been presented as though it had been treated as such from the beginning of the comparative period (as stated in Note 19). In connection with the sale of Distribution Services (with the Vink Group being classified as held for sale at the end of 2008 since the transaction was closed in February 2009) a consistent form of presentation has been applied for the result from operations classified as held for sale in the income statement as it was for the result from discontinued operations in the 2007 financial year. This form of presentation promotes the comparability of and insight into the financial statements. (c) (i) >> Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The shares of third parties in shareholders equity and results are stated separately. The accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the Group. (ii) Composition of the Group 2008 In 2008 the 51% participating interest in Linnig de México S.A. de C.V. was expanded from 51% to 100%. On 25 August 2008 Kendrion reached agreement with the owners of Tri-Tech LLC for the acquisition of all shares in this company. On 22 December 2008 Kendrion sold all shares in Servico NV to Robert Bosch GmbH. 2007 On 1 October 2007 Kendrion acquired the activities of KDI Plastiques (division Distribution Services). No shares were acquired in this transaction, but certain assets were purchased and staff were taken over. On 29 November 2007 a 100% interest was acquired in Linnig Antriebstechnik Group. On 21 December 2007 the entire Automotive Metals activity was sold. financial statements >> 65

(iii) Transactions eliminated on consolidation Intragroup balances and transactions, as well as any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted entities are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (d) (i) >> Foreign currency Foreign currency transactions Transactions expressed in non-euro one currencies are translated into euros at exchange rates at the date of the transaction. Monetary assets and liabilities denominated in non-euro one currencies at the reporting date are translated into euros at the exchange rate at that date. Non-monetary assets and liabilities denominated in currencies that are measured at historical cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in the non-euro one currencies are measured at fair value and are translated in euros against the exchange rates which were valid at the dates that the fair values were set. Currency differences arising on translation are recognised in the income statement, except for differences arising on the translation of a loan designated as a hedge of the net investment in a non-euro one operation or qualifying cash flow hedges which are recognised directly in equity. (ii) Non-euro one operations The assets and liabilities of non-euro one operations, including goodwill and fair value adjustments arising on the moment of acquisition, are translated into euros at exchange rates at the reporting date. The income and expenses of non-euro one operations are translated into euros at rates approximating the exchange rates at the date of the transaction. Foreign currency differences are recognised directly in a separate component of equity. On the partial or complete sale of a foreign operation the related amount is transferred from the translation reserve to the income statement. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a non-euro one operation, of which the settlement is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a non-euro one operation and are recognised directly in equity in the translation reserve. (iii) Net investment in non-euro one operations Foreign currency differences arising on the translation of a financial liability designated as a hedge of a net investment in a non-euro one operation are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in the income statement. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is transferred to the income statement. >> 66 annual report 2008

(e) (i) >> Property, plant and equipment Owned assets Items of property, plant and equipment are measured at cost or assumed cost less accumulated depreciation (see below) and accumulated impairment losses (see accounting policy i). The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and reinstating the site on which they are located, and a reasonable proportion of production overheads. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items. (ii) Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Owner-occupied property acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation (see below) and impairment losses (see accounting policy i). (iii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised as a charge in the income statement as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful life of each component of property, plant and equipment. Land is not depreciated. Depreciation methods, useful lives and residual values are reviewed annually. (v) Recognition of transaction results Gains and losses on the disposal of property, plant and equipment are accounted for in other operating income. (f) (i) >> Intangible assets Goodwill All business combinations are accounted for by the purchase method. Goodwill represents amounts arising on the acquisition of investments in subsidiaries, equity-accounted investments and joint ventures. In respect of business combinations that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. Goodwill is carried at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment (see accounting policy i). Negative goodwill arising on an acquisition is recognised directly in the income statement. financial statements >> 67

(ii) Research and development Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding is recognised in the income statement as an expense as incurred. (iii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and accumulated impairment losses (see accounting policy i). (iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (v) Amortisation Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of the intangible assets unless such lives are indefinite. Goodwill and other intangible assets with an indefinite useful life are systematically tested for impairment at each reporting date. Other intangible assets are amortised from the date they are available for use. (g) (i) >> Financial instruments and other investments Financial instruments Non-derivative financial instruments Non-derivative financial instruments comprise trade and other receivables, recognised interest bearing loans and borrowings, trade and other payables, cash and cash equivalents, and other non-derivative financial instruments. Non-derivative financial instruments are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. Trade and other receivables Trade and other receivables are carried at amortised cost less impairment losses (see accounting policy i). Recognised interest-bearing loans and borrowings After initial recognition, interest-bearing loans and borrowings are carried at amortised cost with any difference between the initial carrying amount and the redemption amount based on the effective interest method taken to the income statement over the term of the loans. Trade and other payables Trade and other payables are carried at amortised cost. Cash and cash equivalents Cash and cash equivalents comprise cash and bank balances and other call deposits payable on demand. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents in the statement of cash flows and are measured at face value. Other non-derivative financial instruments These concern subordinated loans granted to third parties. Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. >> 68 annual report 2008

Derivative financial instruments The Group holds derivative financial instruments to hedge its foreign currency, commodity and interest-rate risk exposures. Derivatives are initially measured at fair value, with attributable transaction costs recognised in the income statement when incurred. Subsequent to initial recognition, derivatives are carried at fair value. Any changes are taken to the income statement, unless the instruments are designated as cash flow hedges. Changes in the fair value of a derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes are recognised in the income statement. If the hedging instrument no longer meets the criteria for a cash flow hedge, expires or is sold, then hedge accounting is discontinued prospectively. The cumulative result previously included in equity is recognised in the income statement unless it is expected that the original hedged transaction will still take place. When the hedged position is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to the income statement in the same period that the hedged position or transaction is recognised in the income statement. (h) >> Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs to sell. The cost of inventories of the Group is based on the weighted average cost and includes expenditure incurred in acquiring the inventories and bringing them to their current location and condition. The cost of inventories includes an appropriate share of overheads based on normal operating capacity. The cost of inventories of Distribution Services in 2007 is based on the first-in/first-out principle (fifo). (i) (i) >> Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised as a charge in the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in the income statement. financial statements >> 69

(ii) Non-financial assets The carrying amounts of the Group s non-financial assets, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit ). For the purpose of impairment testing, the goodwill acquired in a business combination is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. (iii) Reversal of impairment losses An impairment in respect of a receivable carried at amortised cost is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. Impairment losses in respect of goodwill are not reversed. Impairment losses in respect of other assets are reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Reversals of impairment losses are recognised in the income statement. (iv) Calculation of recoverable amount The recoverable amount of the Group s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed on initial recognition of these financial assets). Receivables with a short remaining term are not discounted. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. >> 70 annual report 2008

(j) (i) >> Share capital Repurchase of own shares (treasury shares) When own shares recognised as equity are repurchased, the amount of the consideration paid, including directly attributable costs and net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to or from other reserves. (ii) Dividends The holders of ordinary shares are entitled to receive dividends as determined from time to time by the General Meeting of Shareholders. The Executive Board has the authority to decide, with the approval of the Supervisory Board, what portion of the profit will be allocated for dividend distribution. If applicable the declared but not yet paid dividends are recognised as a liability. (k) (i) >> Employee benefits Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the income statement when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments will occur. (ii) Defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognised past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AAA credit-rated bonds that have maturity dates approximating the terms of the Group s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the total of any unrecognised past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available to the Group if it is realisable during the life of the plan, or on settlement of the plan liabilities. (iii) Long-term service benefits The Group s net obligation in respect of long-term service benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method, discounted to its present value and net of the fair value of any related assets. The discount rate is the yield as at the balance sheet date on AAA-credit rated bonds that have maturity dates approximating the terms of the Group s obligations. Any actuarial gains and losses are recognised in the income statement in the period in which they arise. Actuarial results in excess of the so called corridor (10% of the higher of the pension liabilities or the fair value of the pension fund assets) are amortised over the remaining average term of service. financial statements >> 71

(iv) Share option scheme and Long-Term Incentive programme (LTI) The Company has a Long-Term Incentive programme for the Board that enables them to acquire rights to shares (right to acquire shares discontinued effective 2010). The scheme offers the possibility for the members, for the first time after 2007, to qualify for a given number of shares annually provided certain individually formulated targets, which are partly qualitative and partly quantitative, are met. The number of shares will depend on the extent to which the targets have been achieved after three years and the extent to which the member has invested past bonuses in the Company. The Company s obligation will be calculated with reference to: the number of shares purchased with bonuses; the fair value of the amount payable to the employee three years after the date of purchase of shares with bonuses; the fair value as at the allocation date and spread over the period until the member is unconditionally entitled to payment. The value of the obligation is determined on each balance sheet date and on the settlement date. (l) >> Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event and it is probable that settlement of the obligation will involve an outflow of funds. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (m) (i) >> Revenue Goods sold and services rendered Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. No revenues are recognised if there are significant uncertainties about the collectability of the consideration due, the associated costs on the possible return of goods and also when there is no continuing management involvement with the goods, and the amount of revenue cannot be measured reliably. The transfer of risks and rewards varies depending on the terms of the individual sales contract. (ii) Government grants Unconditional government grants are recognised in the income statement as operating income when they become receivable. Other government grants are recognised in the balance sheet initially as deferred income when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as revenue in the income statement in the same periods in which the expenses are incurred. Grants for the cost of an asset that compensate the Group are recognised in the income statement as other operating income over the useful life of the asset. (n) (i) >> Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (ii) Finance lease payments Minimum lease payments are apportioned between the finance expense and the reduction in the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. >> 72 annual report 2008

(iii) Net finance costs Finance income comprises interest income on funds invested, dividend income, changes in the fair value of financial assets recognised at fair value in the income statement and gains on hedging instruments that are recognised in income statement. Interest income is recognised as it accrues in the income statement, using the effective interest method. Dividend income is recognised in the income statement on the date that the Group s right to receive payment is established. Finance expenses comprise interest expense on borrowings, accrued interest on provisions, changes in the fair value of financial assets carried at fair value when changes in valuation are recognised in the the income statement, impairment losses recognised on financial assets, and losses on hedging instruments that are recognised in the income statement. All borrowing costs are recognised in the income statement using the effective interest method. Foreign currency gains and losses are reported on a net basis. (o) >> Income tax Income tax for the year comprises current and deferred tax. Income tax is recognised in the income statement unless it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using applicable tax rates enacted or substantially enacted as at the balance sheet date, and any adjustment to tax calculated in respect of previous years. Deferred tax liability is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the asset can be applied. Deferred tax assets are reduced where it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. financial statements >> 73

(p) (q) (r) (s) >> Discontinued operations A discontinued operation is a component of the Group s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation had been discontinued from the start of the comparative period. >> Segment reporting A segment is a distinguishable component of the Group that is engaged in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segment information is presented in respect of the Group s business and geographical segments. >> Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic earnings per share is calculated by dividing profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the reporting period. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilative potential ordinary shares. >> New standards and interpretations not yet applied A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2008, and have not been applied in preparing these consolidated financial statements: IFRS 8 Operating Segments introduces the management approach to segment reporting. IFRS 8, which becomes mandatory for the Group s 2009 consolidated financial statements, will require a change in the presentation and disclosure of segment information based on the internal reports regularly reviewed by the Group in order to assess each segment s performance and to allocate resources to them. Currently the Group presents segment information in respect of its business and geographical segments (see Note 18). The Group has not yet determined the potential effect of the amendment. Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Group s 2009 consolidated financial statements and will constitute a change in accounting policy for the Group. In accordance with the transitional provisions, the Group will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. Therefore there will be no impact on prior periods in the Group s 2009 consolidated financial statements. The change is not expected to have a material effect on the consolidated financial statements. IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13, which becomes mandatory for the Group s 2009 consolidated financial statements, is not expected to have any impact on the consolidated financial statements. >> 74 annual report 2008

Revised IAS 1 Presentation of Financial Statements (2007) introduces the term total comprehensive income, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statement of comprehensive income. Revised IAS 1, which becomes mandatory for the Group s 2009 financial statements, is not expected to have any impact on the presentation of the consolidated financial statements. The Group already provides total comprehensive income in one single statement. Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation requires puttable instruments, and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classified as equity if certain conditions are met. The amendments, which become mandatory for the Group s 2009 consolidated financial statements, with retrospective application required, are not expected to have any impact on the consolidated financial statements. Revised IFRS 3 Business Combinations (2008) incorporates the following changes that are likely to be relevant to the Group s operations: The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations. Contingent consideration will be measured at fair value, with subsequent changes therein recognised in profit or loss. Transaction costs, other than share and debt issue costs, will be expensed as incurred. Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognised in the income statement. Any non-controlling (minority) interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis. Revised IFRS 3, which becomes mandatory for the Group s 2010 consolidated financial statements, will be applied prospectively and therefore there will be no impact on prior periods in the Group s 2010 consolidated financial statements. Amended IAS 27 Consolidated and Separate Financial Statements (2008) requires accounting for changes in ownership interests by the Group in a subsidiary, while maintaining control, to be recognised as an equity transaction. When the Group loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognised in the income statement. The amendments to IAS 27, which become mandatory for the Group s 2010 consolidated financial statements, are not expected to have a significant impact on the consolidated financial statements. Amendment to IFRS 2 Share-based Payment Vesting Conditions and Cancellations clarifies the definition of vesting conditions, introduces the concept of non-vesting conditions, requires non-vesting conditions to be reflected in grantdate fair value and provides the accounting treatment for non-vesting conditions and cancellations. The amendments to IFRS 2 will become mandatory for the Group s 2009 consolidated financial statements, with retrospective application. The Group has not yet determined the potential effect of the amendment. financial statements >> 75

1 >> Property, plant and equipment EUR million Land and buildings Plant and equipment Other fixed assets Under construction Total Cost Balance as at 1 January 2007 58.0 80.9 33.5 4.5 176.9 Acquired through business combinations 4.6 1.8 0.6 0.2 7.2 Acquired other 2.7 5.9 3.2 8.1 19.9 Disposals (1.3) (5.9) (7.0) (0.7) (14.9) Classified as assets held for sale (17.2) (24.5) (2.4) (0.4) (44.5) Finalised investment projects 1.2 2.7 (3.9) Currency translation differences (0.3) (0.3) 0.1 (0.1) (0.6) Balance as at 31 December 2007 47.7 60.6 28.0 7.7 144.0 Balance as at 1 January 2008 47.7 60.6 28.0 7.7 144.0 Acquired through business combinations 0.1 0.1 0.2 Acquired, other 2.4 6.8 3.1 8.9 21.2 Disposals (1.2) (2.4) (1.6) (4.3) (9.5) Classified as assets held for sale (15.4) (24.5) (7.6) (0.2) (47.7) Sale of group companies (2.5) (1.1) (0.3) (3.9) Currency translation differences (0.2) 0.1 (0.1) (0.2) Balance as at 31 December 2008 30.8 39.6 21.6 12.1 104.1 Depreciation and impairment losses Balance as at 1 January 2007 26.2 54.2 27.3 107.7 Depreciation for the year 2.2 7.4 2.7 12.3 Disposals (4.1) (6.9) (11.0) Classified as assets held for sale (5.1) (15.5) (1.9) (22.5) Balance as at 31 December 2007 23.3 42.0 21.2 86.5 Balance as at 1 January 2008 23.3 42.0 21.2 86.5 Depreciation for the year 1.6 5.4 2.6 9.6 Disposals (0.4) (1.9) (1.2) (3.5) Classified as assets held for sale (9.1) (17.9) (6.4) (33.4) Sale of group companies (0.8) (0.7) (0.3) (1.8) Balance as at 31 December 2008 14.6 26.9 15.9 57.4 Carrying amounts As at 1 January 2007 31.8 26.7 6.2 4.5 69.2 As at 31 December 2007 24.4 18.6 6.8 7.7 57.5 As at 1 January 2008 24.4 18.6 6.8 7.7 57.5 As at 31 December 2008 16.2 12.7 5.7 12.1 46.7 Translation differences are calculated on the carrying amount and reflected in the related item in the cost. The estimated useful life is as follows: Buildings Plant and equipment Other fixed assets 10 30 years 5 10 years 3 7 years >> 76 annual report 2008

2 >> Intangible assets EUR million Goodwill Software Other Total Cost Balance as at 1 January 2007 13.5 6.1 19.6 Acquired through business combinations 27.8 0.1 6.6 34.5 Acquired, other 1.0 0.6 1.6 Disposals (1.3) (0.1) (1.4) Currency translation differences (0.2) (0.2) Balance as at 31 December 2007 39.8 7.1 7.2 54.1 Balance as at 1 January 2008 39.8 7.1 7.2 54.1 Acquired through business combinations 6.2 2.0 8.2 Acquired, other 0.9 0.2 1.1 Currency translation differences (0.6) (0.6) Classified as assets held for sale (11.2) (5.7) (0.1) (17.0) Sale of group companies (0.1) (0.1) Balance as at 31 December 2008 34.2 2.2 9.3 45.7 Amortisation and impairment losses Balance as at 1 January 2007 3.5 3.5 Amortisation for the year 1.3 0.1 1.4 Disposals Balance as at 31 December 2007 4.8 0.1 4.9 Balance as at 1 January 2008 4.8 0.1 4.9 Amortisation for the year 1.3 1.0 2.3 Impairment loss 4.2 4.2 Disposals Classified as assets held for sale (4.2) (4.8) (9.0) Sale of group companies 0.0 0.0 Balance as at 31 December 2008 1.3 1.1 2.4 Carrying amounts As at 1 January 2007 13.5 2.6 16.1 As at 31 December 2007 39.8 2.3 7.1 49.2 As at 1 January 2008 39.8 2.3 7.1 49.2 As at 31 December 2008 34.2 0.9 8.2 43.3 Amortisation and impairment loss Amortisation is recognised in the following items in the income statement: EUR million 2008 2007 Depreciation and amortisation of intangible and tangible fixed assets 8.3 6.6 The estimated useful life of software is between three and five years. The estimated life of other intangible assets is approximately between eight and ten years. In connection with the acquisition of Tri-Tech LLC, amounts of EUR 0.9 million for technology, EUR 0.8 million for the customer base and EUR 0.3 million for the trade name and orderbook have been recognised and presented in other. financial statements >> 77

Impairment testing for cash-generating units containing goodwill EUR million 31-12-2008 31-12-2007 Linnig Antriebstechnik Group, including Linnig de México 27.7 27.4 Tri-Tech LLC 6.5 Distribution Services, classified as assets held for sale, has goodwill with a carrying value of EUR 7.0 million (2007: EUR 12.4 million). The decrease compared to 2007 is largely due to the goodwill impairment at one entity as explained in Note 29, assets classified as held for sale. Main assumptions and method of quantification: Kendrion recognises its intangible assets in accordance with IAS 38 and IFRS 3. In accordance with IAS 36, Kendrion performed an impairment test on the capitalised goodwill in Germany, the USA, and Sweden. The test was based on future cash flows to which the greater part of the goodwill specifically applied. The valuation was based on the discounted cash flow method, assuming an indefinite life. The cash flows for the short term were based on the relevant Mid-term Plans and budgets, which were drawn up locally. After this period, a residual value was calculated on the basis of the results in the last year of relevant forecasts, abstracted from growth. The forecasts took no account of tax considerations, i.e. were based on pre-tax cash flow. The discount rate (WACC) was also pre-tax. In accordance with IAS 36.44, expansion investments were excluded from the calculations. The expected growth in cash flows as a result of these expansion investments was also excluded. A stable situation was assumed for the residual value period, with no further increase in value. The cash flows were discounted at a pre-tax WACC between 13% and 16%. Kendrion has not processed any impairment of goodwill in this accounting period other than the goodwill impairment at an entity in Germany that is a member of the Vink Group. The calculated recoverable amount was higher than the carrying amount of the goodwill, with the exception of the aforementioned entity. Sensitivity testing of a number of variables did not alter the basic assumptions and did not suggest revision of the recoverable amounts for the other entities at which goodwill was recognised. More information is given in Note 19, discontinued operations. 3 >> Other investments, derivatives Other investments include subordinated vendor loans totalling EUR 1.5 million. These loans were granted in the past in connection with the sale of certain business units. Also included in other investments is the fair value of the interest-rate derivative contracts, amounting to minus EUR 0.6 million, and other receivables falling due after more than one year (EUR 0.4 million). 4 >> Deferred tax assets and liabilities Kendrion has recognised deferred tax assets for tax loss carry-forwards in Germany in the balance sheet. The assets classified as held for sale also include deferred tax assets in the Netherlands and Sweden. The deferred tax assets in each country are explained below: Germany Final assessments have been submitted for the German intermediate holding up to and including 2005, and for the German operating companies up to and including 2007. These years are still open for potential tax audits. At 31 December 2008 the tax loss carry-forwards amounted to EUR 27 million ( Gewerbesteuer ) and EUR 55 million ( Körperschaftsteuer ). These are recognised in full, resulting in deferred tax assets of EUR 12.6 million. >> 78 annual report 2008

Netherlands Final assessments have been submitted for the Dutch tax group up to and including 2004. Within the scope of the sale of the Vink Group Kendrion has, with the approval of the tax authorities, converted losses of more than EUR 15 million into tax depreciable goodwill. This will enable the Vink Group to reduce the tax burden in the Netherlands in the future. The Vink Group has recognised deferred tax assets of EUR 4 million at 31 December 2008. These deferred tax assets will be sold to Edmundson Distribution Limited on the sale of the Vink Group. In the event Edmundson Distribution Limited, as the buyer of the Vink Group, is able to apply part or all of this tax depreciable goodwill towards the reduction of the taxable profit, Kendrion shall then receive an additional compensation. At 31 December 2008 the remaining tax loss carry-forwards in the Dutch tax group amounted to EUR 8 million, resulting in deferred tax assets of EUR 2 million. On the sale of the Vink Group these deferred tax assets shall be de-recognised and charged to the 2009 financial year, since Kendrion will then no longer have any Dutch operations and, consequently no future taxable profits. Sweden The tax loss carry-forwards at 31 December 2008 amount to SEK 63 million (EUR 5.8 million), of which EUR 3 million are recognised, resulting in deferred tax assets of EUR 0.8 million. These deferred tax assets will be sold to Edmundson Distribution Limited on the sale of the Vink Group. Deferred tax assets and liabilities included in the balance sheet The deferred tax assets and liabilities can be specified as follows: EUR million Assets Liabilities Net 2008 2007 2008 2007 2008 2007 Property, plant and equipment 0.3 0.6 1.5 (0.3) (1.5) Intangible assets (0.0) 0.0 1.8 2.5 (1.8) (2.5) Inventories (0.1) 0.1 0.1 0.3 (0.2) (0.2) Employee benefits 0.1 0.1 0.1 (0.0) 0.1 Provisions 0.2 0.2 0.5 0.2 (0.3) Other items 0.0 1.7 0.6 0.4 (0.6) 1.3 Tax value of recognised loss carry-forwards 14.7 18.9 14.7 18.9 Deferred tax assets/liabilities 15.2 21.0 3.7 4.9 11.5 16.1 The deferred tax assets relate almost entirely to recognised tax loss carry-forwards. The deferred tax liabilities relate almost entirely to temporary differences between carrying amount and tax base of property, plant and equipment and intangible assets. These have a relatively long term, at least over five years. financial statements >> 79

1 Effect assets and liabilities classified as held for sale. Movements in temporary differences during the financial year Net, EUR million As at 1 January Effect acquisitions 1 Recognised in income 2008 2007 As at 31 December As at 1 January Effect acquisitions and deconsolidations Recognised in income As at 31 December Property, plant and equipment (1.5) 1.4 (0.2) (0.3) (3.2) 0.8 0.9 (1.5) Intangible assets (2.5) (0.9) 0.2 1.4 (1.8) (2.0) (0.5) (2.5) Inventories (0.2) 0.0 (0.0) (0.2) (0.3) (0.2) 0.3 (0.2) Employee benefits 0.1 (0.0) (0.1) (0.0) 0.2 (0.1) 0.1 Provisions (0.0) (0.3) (0.3) 0.2 0.0 (0.2) Other items 1.3 (3.9) 2.0 (0.6) (0.3) 0.3 1.3 1.3 Tax value of loss carry-forwards used 18.9 (0.8) (3.4) 14.7 20.5 1.1 (2.7) 18.9 16.1 (0.9) (3.1) (0.6) 11.5 17.1 0.0 (1.0) 16.1 In 2008, the net amount presented as tax in the income statement was negative (2008: EUR 0.6 million; 2007: EUR 1.0 million). In 2008 a net tax credit, was recognised directly in equity as a consequence of the hedging reserve amounting to EUR 0.5 million (2007: EUR 0.1 million). Unrecognised deferred tax assets Deferred tax assets per 31 December 2008 of approximately EUR 13.8 million (2007: EUR 12.8 million) have not been recognised in a number of countries including China, France, Sweden and Switerland. The majority of these relate to the Vink Group, and subsequent to the sale of the Vink Group will no longer be available for compensation to Kendrion. 5 >> Inventories EUR million 2008 2007 Raw materials, consumables, technical materials and packing materials 13.0 12.9 Work in progress 8.4 9.8 Finished goods 8.4 7.5 Goods for resale 0.5 39.0 30.3 69.2 The inventories are presented after accounting for a provision for obsolescence amounting to EUR 3.4 million (2007: EUR 4.8 million). In 2008 the amount of the write down to net realisable value of the inventories was EUR 0.2 million (2007: EUR 0.2 million). 6 >> Trade and other receivables EUR million 2008 2007 Trade receivables 18.6 77.1 Other taxes and social security 0.4 0.9 Other receivables 1.3 6.5 Prepayments 3.8 6.2 24.1 90.7 The credit and currency risks associated with trade and other receivables are disclosed in Note 14. >> 80 annual report 2008

7 >> Cash and cash equivalents EUR million 2008 2007 Bank balances 3.7 9.6 Bank overdrafts (13.3) (7.5) Cash and cash equivalents in the statement of cash flows (9.6) 2.1 The bank balances are freely available. The interest-rate risk for the Group and a sensitivity analysis for financial assets and liabilities are disclosed in Note 14. 8 >> Equity Summary of movements in equity EUR million Share capital Share premium Translation reserve Hedge reserve Reserve for own share Other reserves Retained earnings Total Minority interests Total equity Balance as at 1 January 2007 20.6 75.2 0.2 (2.0) (24.7) 14.3 83.6 0.2 83.8 Appropiation of retained earnings 14.3 (14.3) Repurchased own shares 0.1 0.1 0.1 Acquired minority interest 0.3 0.3 Other 1.8 (1.8) Total recognised income and expenses for 2007 0.3 0.6 3.6 4.5 0.1 4.6 Balance as at 31 December 2007 20.6 75.2 0.3 0.8 (0.1) (12.2) 3.6 88.2 0.6 88.8 Balance as at 1 January 2008 20.6 75.2 0.3 0.8 (0.1) (12.2) 3.6 88.2 0.6 88.8 Appropiation of retained earnings 3.6 (3.6) Repurchased own shares (0.2) (0.2) (0.2) Acquired minority interest (0.5) (0.5) Dividend payment (3.9) (3.9) (3.9) Total recognised income and expenses for 2008 (1.5) (1.9) (0.2) 12.8 9.2 0.1 9.3 Balance as at 31 December 2008 20.6 71.3 (1.2) (1.1) (0.3) (8.8) 12.8 93.3 0.2 93.5 Capital and share premium Ordinary shares The authorised share capital consists of: EUR million 2008 2007 40,000,000 ordinary shares of EUR 2.00 80.0 80.0 Balance as at 1 January: 10,287,624 ordinary shares 20.6 20.6 Balance as at 31 December: 10,287,624 ordinary shares 20.6 20.6 Share premium EUR million 2008 2007 Balance as at 1 January 75.2 75.2 Dividend payment (3.9) Balance as at 1 December 71.3 75.2 Kendrion has declared and paid a dividend of EUR 0.38 per ordinary share (total EUR 3.9 million). Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of associates in the non-euro one and exchange differences related to the translation of a financial liability designated as a hedge of a net investment in non-euro one subsidiaries. Gains and losses relating to the translation risk are recognised in equity. The build-up of the cumulative figure commenced on 1 January 2004. financial statements >> 81

Hedge reserve The hedge reserve comprises the effective share of the cumulative net movement in the fair value of cash flow hedging instruments relating to hedged transactions that have not yet been executed. Reserve for own shares The reserve for Kendrion s own shares comprises the cost of the Kendrion N.V. shares which are held by the Company for the Long-Term Incentive programme and the share option scheme for Directors of operating companies. As at 31 December 2008, Kendrion held 15,232 of its own shares (2007: 6,790). See also Note 27. Other reserves Other reserves are all the reserves other than those shown separately and comprise primarily of the accumulated, undistributed profits from previous financial years. Retained earnings In 2008, the result for 2007 was fully included in other reserves. Retained earnings in the 2008 financial statements consequently consists solely of the result for 2008. Restrictions Certain subsidiaries are restricted, either by law or by the provisions of their Articles of Association, in the extent to which they may distribute equity. These restrictions amounted to EUR 2.4 million as at 31 December 2008 (2007: EUR 3.1 million). Minority interests Kendrion has one non 100%-subsidiary that is fully consolidated. That is Kendrion Binder Magnete Vertriebsgesellschaft mbh (Austria). For the interest that is not held by Kendrion, an amount is included in equity and results. 9 >> Earnings per share Basic earnings per share The calculation of the basic earnings per share as at 31 December 2008 is based on the profit of EUR 12.8 million (2007: EUR 3.6 million) attributable to the holders of ordinary shares and the weighted average number of shares in issue during the year: 10,295,000 (2007: 10,292,000). EUR million 2008 2007 Net profit attributable to ordinary shareholders 12.8 3.6 Weighted average number of ordinary shares In thousands of shares 2008 2007 Issued ordinary shares as at 1 January 10,287 10,287 Effect of own shares repurchased 8 5 Weighted average number of ordinary shares 10,295 10,292 Basic earnings per share (EUR) 1.25 0.35 Diluted earnings per share The calculation of the diluted earnings per share as at 31 December 2008 is based on the profit of EUR 12.8 million (2007: EUR 3.6 million) attributable to the holders of ordinary shares and the weighted average number of shares in issue during the year: 10,295,000 (2007: 10,292,000). EUR million 2008 2007 Net profit attributable to ordinary shareholders 12.8 3.6 Effect of dilution Net profit attributable to ordinary shareholders (diluted) 12.8 3.6 >> 82 annual report 2008

Weighted average numbers of ordinary shares (diluted) In thousands of shares 2008 2007 Weighted average numbers of ordinary shares per 31 December 10,295 10,292 Weighted average numbers of ordinary shares per 31 December (diluted) 10,295 10,292 Diluted earnings per share (EUR) 1.25 0.35 Earnings per share for continuing operations The earnings per share for continuing operations in 2008 and 2007 have been calculated using the same figures as for the calculation of the basic earnings per share, except that this is based on the profit from continuing operations after the deduction of the minority interest of EUR 5.0 million (2007: EUR 6.3 million). 10 >> Loans and borrowings These notes contain information on the contractual provisions of the Group s interest-bearing loans and borrowings, which are carried at amortised cost price. For further information on the interest rate, currency and liquidity risks borne by Kendrion, see Note 14. EUR million 2008 2007 Non-currents liabilities Secured bank loans 20.0 85.0 Financial lease liabilities 0.2 2.1 Other loans 0.6 20.8 87.1 EUR million 2008 2007 Current liabilities Repayable within one year 0.2 Interest-bearing debts to credit institutions 51.7 51.7 0.2 Financing conditions As at 31 December 2008, Kendrion had the following credit lines available: EUR 140 million committed revolving credit facility with a consortium of banks, the commitment running until 23 November 2010; EUR 20 million junior facility with a consortium of banks. The facility is committed until 23 November 2009; EUR 40 million in the form of a guarantee facility with a consortium of banks. The commitment on this facility is committed until 14 March 2011. This facility was provided in connection with the fine imposed by the European Commission, against which Kendrion has appealed; EUR 4.4 million in other facilities, including finance leases. As at 31 December 2008, the total unutilised amount of the facilities was over EUR 65 million. Banking consortium credit facility Under the terms of the credit facility contract with the banking consortium, Kendrion agreed to a number of financial covenants concerning interest-bearing debt/ebitda (debt cover), solvency ratio and interest coverage. The junior facility amounting to EUR 20 million is treated as equity, not as debt, for ratio purposes. In addition, an increasing proportion of the EU bank guarantee (in connection with the fine), including accrued interest, is treated as interest-bearing debt in the calculation of debt cover (rising to 50% as at 31 December 2009) and has been deducted from equity in calculating the solvency ratio (rising to 75% as at 31 December 2009). In addition, 50% of amongst others goodwill has been deducted from equity when calculating the solvency ratio. The required covenants are tested each quarter. As at year-end 2008, the covenanted ratios were satisfied in all cases. Security provided In connection with the consortium facility, Kendrion has provided security in the form of pledges of shares of a number of individual Group companies and pledges of intercompany receivables. financial statements >> 83

Interest-rate sensitivity The interest payable on Kendrion s interest-bearing borrowings is mainly at rates fixed for three months or shorter periods. Kendrion has hedged the resulting interest-rate risk by contracting derivative financial instruments. Reference is made to page 90 for further details. Finance lease liabilities The finance lease liabilities are payable as follows: EUR million 2008 2007 Minimum lease payments Interest Principal Minimum lease payments 1 year 0.1 0.1 0.3 (0.1) 0.2 1 5 years 0.1 0.1 1.1 (0.4) 0.7 5 years 1.7 (0.3) 1.4 0.2 0.2 3.1 (0.8) 2.3 Interest Principal The finance lease liabilities relate to machinery. According to the provisions of the lease contracts, no conditional lease payments are due. 11 >> Employee benefits EUR million 2008 2007 Present value of unfunded obligations 3.7 3.5 Present value of funded obligations 8.3 7.7 Fair value of plan assets (5.3) (5.4) Present value of net obligations 6.7 5.8 Unrecognised actuarial gains and losses (1.0) (0.2) Classified as assets held for sale (0.4) Recognised liability for defined-benefit obligations (see below) 5.3 5.6 Liability for long-service leave and anniversaries 2.1 2.0 Classified as assets held for sale (0.8) Total employee benefits 6.6 7.6 Employee benefits classified as other investments 0.1 Employee benefits classified as liabilities (6.6) (7.7) Total employee benefits (6.6) (7.6) Movements in net liability for defined benefit obligations recognised in the balance sheet EUR million 2008 2007 Recognised net liability for defined-benefit obligations as at 1 January 5.6 5.4 Expense recognised in the income statement 0.9 0.4 Benefits paid by the plan (0.5) (0.5) Other movements (0.3) (0.5) Acquired through business combinations 2.0 Deconsolidation / classified as held for sale (0.4) (1.2) Recognised net liability for defined-benefit obligations as at 31 December 5.3 5.6 >> 84 annual report 2008

Movement in plan assets EUR million 2008 2007 Fair value of plan assets as at 1 January (5.4) (6.0) Contributions paid employer (0.4) (0.2) Contributions paid participants (0.1) (0.1) Payments made 0.5 0.5 Expected return on plan assets (0.3) (0.3) Other movements 0.4 0.7 Fair value of plan assets as at 31 December (5.3) (5.4) Expense recognised in the income statement regarding defined benefit arrangements EUR million 2008 2007 Current service costs 0.5 0.3 Interest on obligation 0.4 0.4 Expected return on plan assets (0.3) (0.3) 0.6 0.4 Effective return on plan assets 0.2 0.2 The cost related to the defined benefit pension arrangements are processed in the following income statement items. EUR million 2008 2007 Pension costs 0.6 0.4 There were no actuarial gains or losses processed directly in equity. Principal actuarial assumptions (expressed as weighted averages) 2008 2007 Discount rate as at 31 December 5.3% 5.2% Expected return on plan assets as at 31 December 4.8% 4.3% Future salary increases 2.3% 2.4% Future pension increases 1.9% 1.9% Historical information 2008 2007 2006 2005 Net liability for defined-benefit obligations 12.0 11.2 11.8 25.1 Fair value of plan assets 5.3 5.4 6.0 15.1 Deficit in plan 6.7 5.8 5.8 10.0 Actuarial calculations of employee benefits have not been materially influenced by amendments based on historical experience and by variable assumptions. Composition plan assets 2008 2007 Bonds 2.0 1.8 Equity 1.2 1.3 Real estate 0.8 0.7 Government loans 0.6 0.9 Other 0.7 0.7 Total 5.3 5.4 financial statements >> 85

Liabilities arising from employee benefits The pension plans consist of both defined contribution plans and defined benefit plans. In the case of defined contribution plans, the contribution is charged to the year to which it relates. With defined benefit plans, benefit obligations are calculated using the projected unit credit method. Actuarial gains and losses falling outside the so-called corridor (10% of the higher of the benefit obligations and fair value of the plan assets) are amortised over the remaining average years of service. Calculations are made by qualified actuaries. The pension liability shown on the balance sheet is the present value of the defined benefit obligation as at the balance sheet date minus the fair value of the plan assets as at the balance sheet date plus or minus unallocated actuarial gains and losses. The discount rate used to calculate the defined benefit obligation is based on the yield on AAA-rated corporate bonds in Europe. The greater part of the defined benefit obligation as at year-end 2008 relates to pension arrangements in Germany. The organisation administers the plan in-house and is fully liable for the benefit obligations. A small portion is reinsured. Liabilities arising from employee benefits also include liabilities relating to long-service leave, termination of employment and service anniversaries. 12 >> Provisions EUR million Other 2008 2007 Balance as at 1 January 3.0 3.5 Provisions formed during the year 0.1 0.2 Provisions applied during the year (0.2) (0.1) Transferred to liabilities during the year (0.6) Sale of group companies (0.3) Balance as at 31 December 2.6 3.0 Non-current part 2.6 3.0 Current part 2.6 3.0 This item includes a provision of EUR 2.3 million relating to the fine imposed by the European Commission. Kendrion lodged an appeal against the fine in 2006. A ruling is not expected before 2009 (see Note 17). 13 >> Trade and other payables EUR million 2008 2007 Trade payables 18.7 67.9 Other taxes and social security contributions 1.1 5.5 Non-trade payables and accrued expenses 11.4 26.6 31.2 100.0 14 >> Financial instruments Kendrion is exposed to credit, liquidity and market risks (interest-rate risk, price risk and exchange rate risk), in the course of its normal business. This section of the notes provides information on the exposure of Kendrion to each of the above risks, the objectives, policies and procedures of Kendrion for managing and measuring these risks and the Group s capital management. These consolidated financial statements also include more detailed quantified notes. The Board has ultimate responsibility for the organisation and control of Kendrion s risk management framework. To this end, the Board has a Treasury Committee with responsibility for the development and monitoring of Kendrion s risk management policy. >> 86 annual report 2008

Kendrion s risk policy is designed to identify and analyse the risks faced by Kendrion, to put in place appropriate risk limits and control measures and to monitor the risks and compliance with the limits. The risk management policy and systems are regularly evaluated and where necessary adapted to changes in market conditions and Kendrion s activities. The Board of Kendrion supervises compliance with the risk management policy and procedures of the Group. Credit risk Credit risk is the risk of financial loss for Kendrion if a client or a counterparty to a financial instrument fails to meet its contractual obligations. Credit risks ensue mainly from receivables from clients and derivative transactions entered into with banks, as well as from loans granted in the past in connection with the sale of businesses. The credit risk within the Group is monitored continuously. Kendrion does not require collateral for trade and other receivables and financial assets. As part of the formulated credit policy, the creditworthiness of every new major client is assessed before the payment and delivery terms are offered. If available, external credit ratings are included in this assessment. Kendrion recognises impairment provisions of an amount equal to the estimated losses on trade and other receivables and other investments. The main component of this provision comprises specific provisions for losses on individual accounts of material significance. Additionally, there is a general bad debt provision based on historical payment data for comparable financial assets. Exposure to credit risk The carrying amount of the financial assets represents the maximum credit risk. The maximum credit risk on the reporting date was as follows: EUR million Carrying amount 2008 2007 Cash and cash equivalents 3.7 9.6 Interest rate swap contracts 1.0 Commodity swap contracts 0.1 Issued loans 1.5 1.5 Trade and other receivables 24.8 92.8 Total 30.0 105.0 Impairment losses Aged analysis of the trade receivables 2008 2007 Gross Provision Gross Provision Within the term of payment 11.9 57.5 0 30 days due 5.1 14.7 31 60 days due 0.7 2.5 60 days due 1.1 (0.2) 4.5 (2.1) Total trade receivables 18.8 (0.2) 79.2 (2.1) The provision for trade receivables is used to absorb impairment losses, unless Kendrion is certain that collection of the amount owed is impossible, in which case the amount is treated as a bad debt and written off against the financial asset in question. financial statements >> 87

Guarantees Kendrion s policy is to issue financial guarantees only to wholly-owned subsidiaries. At year-end 2008 guarantees had been issued to the following companies (the so-called 403-verklaring ): Vink Holding B.V., Baarn; Vink Kunststoffen B.V., Didam; VT Plastics B.V., Oud Gastel; Combattant Holding B.V., Zeist; Kendrion Finance B.V., Zeist. Effective the date of the completion of the sale of the Vink Group (12 February 2009), the so-called 403-statements issued with respect to Vink Holding B.V., Vink Kunststoffen B.V. and VT Plastics B.V. were withdrawn. Liquidity risk The liquidity risk is the risk that Kendrion will not be able to meet its financial obligations at the required time. The principle of liquidity risk management is that sufficient liquidity is maintained in the form of unused (committed) credit facilities or cash to meet present and future financial obligations in normal and difficult circumstances. On the balance sheet date, Kendrion had EUR 65 million available within its existing credit facility. The contractual terms of the financial obligations, including the estimated interest payments, are set out below. 31 December 2008 EUR million Carrying amount Contractual cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Non-derivative financial liabilities Bank loans 71.7 (95.9) (5.6) (21.4) (68.9) Finance lease liabilities 0.2 (0.2) (0.1) (0.1) Bank overdrafts 13.3 (13.3) (13.3) Other debt 0.6 (0.7) (0.7) Trade and other payables 31.5 (31.5) (31.5) Derivative financial liabilities Interest rate swap contracts 0.6 (0.6) (0.2) (0.2) (0.2) Forward exchange contracts 1.2 (1.2) (0.5) (0.3) (0.4) Total 119.1 (143.4) (52.4) (22.0) (69.5) (0.7) 31 December 2007 EUR million Carrying amount Contractual cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Non-derivative financial liabilities Bank loans 85.0 (100.3) (2.6) (2.6) (5.2) (89.9) Finance lease liabilities 2.3 (3.1) (0.2) (0.2) (0.3) (0.7) (1.7) Bank overdrafts 7.5 (7.7) (7.7) Trade and other payables 103.8 (103.8) (103.8) Derivative financial liabilities Interest rate swap contracts (1.0) 1.2 0.3 0.2 0.2 0.5 Commodity swap contracts (0.1) 0.0 0.0 Total 197.2 (213.7) (114.0) (2.6) (5.3) (90.1) (1.7) Within the scope of the company s risk management Kendrion has hedged the currency and interest-rate risks with derivatives, whereby the hedges have been designated as cash flow hedges. The following table lists the value of these derivatives at balance sheet date, and when the derivatives will influence the income and the cash flow. >> 88 annual report 2008

Cash flow hedges (in cash flow statement) 2008 EUR million Carrying amount Expected cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Interest rate swap contracts Assets Liabilities (0.6) (0.6) (0.2) (0.2) (0.2) Forward exchange contracts Assets Liabilities (1.0) (1.0) (0.3) (0.3) (0.4) Total (1.6) (1.6) (0.5) (0.5) (0.6) 2007 EUR million Carrying amount Expected cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Interest rate swap contracts Assets 1.0 1.2 0.3 0.2 0.2 0.5 Liabilities Forward exchange contracts Assets Liabilities Total 1.0 1.2 0.3 0.2 0.2 0.5 Cash flow hedges (in income statement) 2008 EUR million Carrying amount Expected cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Interest rate swap contracts Assets Liabilities (0.5) (0.5) (0.2) (0.1) (0.2) Forward exchange contracts Assets Liabilities (1.0) (1.0) (0.3) (0.3) (0.4) Total (1.5) (1.5) (0.5) (0.4) (0.6) 2007 EUR million Carrying amount Expected cash flows 0 6 months 6 12 months 1 2 years 2 5 years 5 years Interest rate swap contracts Assets 1.0 1.2 0.3 0.2 0.2 0.5 Liabilities Forward exchange contracts Assets Liabilities Total 1.0 1.2 0.3 0.2 0.2 0.5 The effectiveness of the hedge relationship is tested during the year, and any potential ineffectiveness is immediately recognised in the income statement. financial statements >> 89

Market risk Market risk is the risk that Kendrion s income will be adversely affected by changes in market prices, such as exchange rates, interest rates and commodity prices. Management of the market risk is intended to keep the market risk position within acceptable limits. Derivatives are used to manage the market risk. Such transactions take place within the framework adopted by the Board. In general, Kendrion uses hedge accounting to manage volatility in the income statement. Interest-rate risk Drawn-down loans at variable interest rates are exposed to the risk of changes in cash flows due to interest-rate movements. Kendrion s policy is to have between 50% and 85% of the interest-rate risk on borrowings based on a fixed interest rate. Kendrion has contracted euro-denominated interest-rate swaps in order to optimise exposure to fixed and variable interest rates in line with Kendrion policy. As at 31 December 2008, Kendrion had interest-rate swaps with a contracted amount of EUR 23 million. The remaining terms range from three months (EUR 8 million) to two years (EUR 15 million). Kendrion classifies interest-rate swaps as cash flow hedges. Taking into account the expected realisation of the proceeds from the sale of the Vink Group in the first quarter of 2009, a 1 percentage point increase in the interest rate across the yield curve at 1 January will not result in a material increase in the interest expenses in 2009 (less than EUR 0.1 million). Income from interest-rate swaps is hereby taken into account and there is the assumption that other circumstances will remain unchanged. The following table shows the interest rates prevailing as at the balance sheet date for interest-bearing financial assets and liabilities. 2008 2007 Currency Nominal interest Year of redemption Fair value Carrying amount Fair value Carrying amount Senior bank loans Various EURIBOR + 1.15% 2010 47.5 47.5 60.8 60.8 Senior bank loan EUR 3.65% 2009 4.2 4.2 4.2 4.2 Junior bank loan EUR EURIBOR + 3.25% 2009 20.0 20.0 20.0 20.0 Bank overdrafts Various LIBOR + 1.15% 2010 13.3 13.3 7.5 7.5 Finance lease liabilities EUR 5.20% 0.2 0.2 2.3 2.3 Other debts Various Various 0.6 0.6 Total interest-bearing debt 85.8 85.8 94.8 94.8 Sensitivity analysis for fixed interest instruments Financial assets and liabilities with a fixed interest rate are not recognised at fair value through processing the value changes in the income statement. Kendrion also designates derivatives (interest-rate swaps) as cash flow hedges, not as fair value hedges. For this reason, a movement in interest rates on the balance sheet date has no influence on the result. If the interest-rate rises or falls across the yield curve by 1 percentage point as at 1 January 2009, the fair value of the interest-rate swaps will go up or down accordingly by EUR 0.3 million. Since these are cash flow hedges, the movement in fair value is recognised in an equity reserve. >> 90 annual report 2008

Exchange rate risk Kendrion is exposed to exchange rate risks on sales, purchases and loans expressed in currencies other than the euro. The Kendrion companies are primarily financed in their own currency. The majority of the revenue and costs of the Kendrion companies are realised in the euro one. The company in the Cech Republic is an exception, where Kendrion is, on balance, a net payer of Cech krones. This exchange rate risk is hedged with derivatives. The exchange rate risk policy and the sensitivities of the operating result are discussed in the financial risks section in the Annual Report. The fair value of the forward exchange rate contracts to hedge anticipated transactions was on balance EUR 1.2 million negative at 31 December 2008. A 10 percentage point appreciation of the euro against the currencies listed below would have lowered shareholders equity at 31 December 2008 and the result for 2008 as shown in the following table. The same analysis was performed at 31 December 2007. A 10 percentage point depreciation of the euro against the same currencies would have had the opposite effect. 31 December 2008 Equity Result US dollar 0.5 Cech krone 1.2 0.1 Swiss franc 0.1 31 December 2007 Equity Result US dollar 0.1 Cech krone 0.5 Swiss franc 0.8 Principal exchange rates during the reporting period were as follows: Applicable currency rates Value of EUR 1 As at 31 December 2008 As at 31 December 2007 Average over 2008 Danish krone 7.4506 7.4583 7.4560 Norwegian krone 9.7500 7.9580 8.2317 Swedish krone 10.8700 9.4415 9.6461 Pound sterling 0.9525 0.7334 0.7944 Swiss franc 1.4850 1.6547 1.5826 Cech krone 26.8752 26.6280 25.1300 Hungarian forint 266.6667 253.7300 250.6894 Chinese yuan 9.5612 10.6955 10.1660 US dollar 1.3917 1.4721 1.4652 Mexican peso 19.2334 16.0732 16.3412 Brailian real 3.2653 2.6099 2.6444 Romanian ley 4.0225 3.6077 3.6806 Capital management The policy of the Board is aimed at maintaining a strong capital gearing in order to retain the confidence of investors, creditors and the markets and safeguard the future development of the business activities. The Board monitors the return on equity, which is defined by Kendrion as the net operating result divided by shareholders equity, excluding minority interests. The Executive Board also monitors the level of dividend distributed to ordinary shareholders. The Board seeks to strike a balance between a higher return that would be achievable with a higher level of borrowed capital on the one hand and the benefits and security of sound capital gearing on the other. No changes were made to Kendrion s capital management system in the reporting period. financial statements >> 91

Apart from the capital requirements required by law, neither the company nor its subsidiaries are subject to any externally imposed capital requirements, with the exception of the covenants with the banks as explained on page 83. Fair values Measurement of fair value Several of Kendrion s accounting policies, as well as the information supply by Kendrion, require the fair value of both financial and non-financial assets and liabilities to be determined. For valuation and information supply, the fair value is measured using the following methods. Where applicable, more detailed information on the basis of the fair value measurement is disclosed in the specific notes on the asset or liability in question. The principal methods and assumptions used in estimating the fair value of financial instruments included in the summary are given below. Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market value. The market value of property is the estimated amount for which the property in question could be exchanged on the valuation date between a buyer and seller in an arm s length transaction in which both parties have acted knowledgeably, prudently and without compulsion. The market value of other items of property, plant and equipment is based on the quoted market prices of comparable assets and goods. Intangible assets The fair value of patents and trademarks acquired as part of a business combination is measured on the basis of the discounted estimated royalties which have been avoided through ownership of the patent or trademark. The fair value of customer relationships acquired in a business combination is based on the excess earnings method over multiple periods, valuating the asset in question by deducting a real return on all other assets which in total create the related cash flows. The fair value of other intangible assets is based on the expected discounted value of the cash flow from the use and ultimate sale of the assets. Financial lease liabilities The fair value is estimated on the basis of the present value of future cash flows, discounted at the interest rate for lease contracts of a similar kind. The estimated fair value reflects movements in interest rates. Inventories The fair value of inventories acquired as part of a business combination is determined on the basis of the estimated selling price as part of the normal business operations, less the estimated costs of completion and the selling costs, plus a reasonable profit margin which reflects the completion and sales effort. Trade and other receivables/trade and other payables The face value of receivables and liabilities falling due within one year is regarded as a reflection of their fair value. The fair value of all other receivables and liabilities is measured on the basis of present value. Interest-bearing loans The fair value is calculated on the basis of the present value of future repayments of principal and interest at the prevailing market rate of interest, augmented by the currently applicable credit mark-up. Derivatives The fair value of forward exchange contracts is based on the present value of the contractual cash flows for the remaining term based on a risk-free interest rate. Figures provided by banks are used for determining the fair value of interest-rate swaps. The reasonableness of these figures is verified using techniques based on the present value of cash flows based on the conditions and term of the contract and using the market interest rate for a comparable instrument as at the valuation date. >> 92 annual report 2008

Non-derivative financial liabilities The fair value of non-derivative financial liabilities is determined for information supply and is based on the present value of future repayments of principal and interest, discounted at a risk-free rate based on the credit worthiness of the counter party on the reporting date. The market interest rate for finance leases is determined on the basis of comparable lease contracts. The following table shows the fair values and carrying amounts of the financial instruments. EUR million 2008 2007 Carrying amount Carrying amount Carrying amount Carrying amount Trade and other receivables 24.1 24.1 90.7 90.7 Receivables 1.8 1.8 2.6 2.5 Cash and cash equivalents 3.6 3.6 9.6 9.6 Interest derivatives (0.6) (0.6) 1.0 1.0 Commodity derivatives 0.1 0.1 Secured bank loans (71.7) (71.7) (85.0) (85.0) Other debts (0.6) (0.6) Finance lease liabilities (0.2) (0.2) (2.3) (2.2) Bank overdraft (13.3) (13.3) (7.5) (7.5) Trade and other payables (31.5) (31.5) (100.0) (100.0) Forward exchange contracts (1.2) (1.2) Unrecognised gains/ (losses) Interest rate used in measuring fair value The interest rate used for discounting estimated cash flows, where applicable, is based on the swap curve as at 31 December, augmented by the prevailing credit mark-up, and is as follows: 2008 2007 Derivatives 3.75% 4 5% Leases 3.75% 6 7% 15 >> Operating lease agreements Lease contracts in which the company acts as lessee The sums payable on non-redeemable operating lease and rental contracts are as follows: EUR million 2008 2007 1 year 1.8 1.8 1 5 years 4.0 3.2 5 years 2.9 4.0 8.7 9.0 In the 2008 financial year a charge of EUR 0.7 million was recognised in the income statement in respect of operating leases (2007: EUR 0.9 million) based on continuing activities. The operating lease contracts are mostly related to buildings. financial statements >> 93

16 >> Capital commitments During the year ended 31 December 2008, the Group signed purchase contracts for fixed assets totalling EUR 2.9 million (2007: EUR 4.2 million). 17 >> Contingent liabilities Guarantees and lawsuits as at 31 December 2008 On 30 November 2005, the European Commission imposed a fine on Kendrion amounting to EUR 34 million for the alleged infringement of competition law by the company s former subsidiary Fardem Packaging B.V. On the basis of the known facts and circumstances together with legal counsel taken at the time, Kendrion formed a provision of EUR 2.3 million as at 31 December 2005 in respect of the fine imposed on Fardem Packaging B.V. and other entities, for which Kendrion has given a guarantee. Kendrion lodged an appeal against the fine in 2006. The European Commission filed a rejoinder in early 2007. No developments have taken place since then. The Court of First Instance can provide no further information about the date on which a hearing can be held or a ruling can be expected. Kendrion SKA GmbH & Co. KG (now called Gnotec SKA GmbH & Co. KG) was involved in a number of legal proceedings with a competitor that claimed that Gnotec SKA was guilty of the infringement of the competitor s patent rights. Gnotec SKA, a member of the Automotive Metals division, was sold at the end of 2007. In the Share Purchase Agreement Kendrion indemnified the buyer against any costs and damages that could result from the legal proceedings. On the basis of the facts and circumstances, as well as legal advice sought, no provision had been formed. During one of the appeal cases in November 2008 Gnotec SKA and the competitor reached a settlement. This settlement requires the competitor to drop the claims against Gnotec SKA and for each party to bear the cost of their legal expenses. Pursuant to the aforementioned indemnification Kendrion has reimbursed Gnotec SKA for the net costs. Vink Plastics Ltd. (UK) supplied semi-finished products to a customer in 2002 and 2003, which were processed by that customer and sold on to a number of foreign parties. Via the insurance company of the customer, Vink Plastics has received a claim end 2006 in respect of defects in the products supplied amounting to approximately GBP 360,000. This potential claim has following the sale of the operations of Vink Plastics Ltd (UK) in 2008 remained with the legal entity that was not included in the sale. In November 2008 Vink Plastics received further substantiation of the potential claim. Vink Plastics is investigating the legitimacy thereof. Although there is as yet no clarity with respect to the possible liability Vink Plastics has taken legal measures to safeguard a potential claim against Vink Plastics supplier. Vink Plastics product liability insurer will cover any loss that may be incurred. Consequently a provision has not been formed. Kendrion Binder Magnete GmbH (Germany) has been summoned to appear before the court of Milan, Italy, by the Italian company Binder Magnete s.r.l., not part of Kendrion, in connection with Kendrion Binder Magnete GmbH s termination of the distribution contract between the parties. Binder Magnete s.r.l. claims compensation of EUR 1,250,000. On the basis of the facts and circumstances currently known, as well as the legal advice that has been sought, a provision of EUR 60,000 has been formed. It is not known when the court will give a ruling. 18 >> Segment reporting Segmented information is presented on Kendrion s business segments and geographical segments. The primary segmentation by business segments reflects the Kendrion s management structure and internal formal reporting structure. The prices of transactions between segments are on an arm s length basis. Segment results, assets and liabilities include items which are directly attributable or can reasonably be allocated to a segment. Unallocated items consist mainly of income-generating assets and revenues, interest-bearing loans, borrowings and expenses and general business assets and expenses. >> 94 annual report 2008

Segment capital expenditure is the total costs incurred in the year under review in acquiring assets for the segment which are expected to be used for more than one reporting period. Business segments EUR million Kendrion Electromagnetic Distribution Services Discontinued 2008 2007 2008 2007 Revenue from transactions with third parties 204.2 160.4 335.3 332.1 Operating profit 16.3 12.2 4.9 11.9 Segment assets 112.5 114.6 115.2 129.1 Segment liabilities 79.0 53.1 55.6 89.7 Cash flow from operating activities 26.7 11.2 11.9 12.0 Cash flow from investing activities (14.1) (9.6) (2.7) (8.0) Cash flow from financing activities (2.5) 3.8 (29.4) (1.2) Net investments 13.5 14.6 3.4 5.2 1 Combined figures excluding Distribution Services holding companies for the calculations of consolidated and total figures. 2 Total figures including Distribution Services and Distribution Services holding companies. 3 Consolidated figures excluding Distribution Services and Distribution Services holding companies. 4 As previously reported in the annual report 2007. Business segments EUR million Combined/ Total2 Consolidated3 other/holding1 2008 2007 2008 2007 2008 2007 Revenue from transactions with third parties 3.2 8.5 542.7 501.0 207.4 168.9 Operating profit (5.3) (2.4) 15.9 21.7 11.0 9.8 Net finance costs (7.2) (6.0) (4.1) (3.8) Income tax expense (5.0) (2.6) (1.8) 0.4 Gain (loss) on discontinued operations (net of income tax) 9.2 (9.5) Profit for period 12.9 3.7 5.1 6.4 Segment assets 52.8 59.3 280.5 303.1 165.3 303.1 Segment liabilities 52.5 71.5 187.1 214.3 131.5 214.3 Cash flow from operating activities (5.4) (0.4) 33.2 22.8 17.1 8.9 Cash flow from investing activities 1.9 (7.8) (14.9) (25.4) (12.4) (17.3) Cash flow from financing activities 6.3 4.3 (25.6) 7.0 3.6 (8.2) Net investments 0.5 15.7 20.3 13.5 15.1 4 4 financial statements >> 95

Geographical segments based on physical location of Kendrion operating companies EUR million EU countries Other European countries 2008 2007 2008 2007 2008 2007 2008 2007 Revenue from transactions with third parties 495.7 465.0 30.5 30.5 16.5 5.5 542.7 501.0 Segment assets 251.8 284.0 10.0 12.6 18.7 6.5 280.5 303.1 Net investments 15.5 19.6 (0.4) 0.1 0.6 0.6 15.7 20.3 Outside Europe Total 1 Consolidated figures excluding Distribution Services and Distribution Services holding companies. Geographical segments based on physical location of Kendrion operating companies (continuing operations) EUR million EU countries Other European countries Outside Europe Consolidated1 2008 2007 2008 2007 2008 2007 2008 2007 Revenue from transactions with third parties 185.5 157.5 5.5 5.9 16.5 5.5 207.4 168.9 Segment assets 144.5 284.0 2.2 12.6 18.7 6.5 165.3 303.1 Net investments 12.9 14.5 0.0 0.6 0.6 13.5 15.1 1 Consolidated figures excluding Distribution Services and Distribution Services holding companies. Sales segmented by customer location EUR million Kendrion Electromagnetic Distribution Services Combined/ other/holding Total Consolidated1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 Netherlands 2.8 2.9 53.9 56.6 56.7 59.5 2.8 2.9 Germany 129.5 113.9 46.2 47.9 175.7 161.8 129.5 113.9 Belgium 1.2 0.5 77.5 69.3 78.7 69.8 1.2 0.5 Scandinavia 3.6 2.4 100.2 78.8 103.8 81.2 3.6 2.4 Other EU countries 28.0 21.2 44.9 68.4 3.2 8.5 76.1 98.1 31.2 29.7 Other countries 39.1 19.5 12.6 11.1 51.7 30.6 39.1 19.5 Total 204.2 160.4 335.3 332.1 3.2 8.5 542.7 501.0 207.4 168.9 19 >> Discontinued operations In 2008 in line with Kendrion s focused acceleration strategy a decision was taken to investigate the feasibility of divesting the Distribution Services division. The division comprised the Vink Group and Servico NV. When the definitive decision to sell Distribution Services was taken, the operations were designated as discontinued operations. On 25 November 2008 Kendrion reached definitive agreement with British company Edmundson Distribution Limited (UK) on the sale of the Vink Group. In 2008 the Vink Group had revenues of approx. EUR 300 million and an operating result of approx. EUR 5 million. The Vink Group has offices in Sweden, Norway, Finland, Denmark, Germany, the Netherlands, Belgium, France, Switerland, the Cech Republic and Hungary, and has about 1,050 employees. The sale was completed on 12 February 2009. The group of assets and liabilities of the Vink Group to be divested were classified as held for sale. The sales value of the transaction is EUR 81 million, and the sales proceeds from the transaction amounted to approximately EUR 74 million. In 2008 the transaction resulted in an impairment loss for Kendrion amounting to EUR 5.0 million (recognised in the discontinued operations, Note 19) and costs of EUR 1.4 million recognised in the other operating expenses (recognised in the other operating expenses, Note 23). In 2009, following the realisation of the transaction with Edmundson Distribution Limited, Kendrion expects a result from discontinued operations of approximately EUR 10 million on the basis of the position at 31 December 2008. On 17 December 2008 Kendrion reached definitive agreement with Robert Bosch GmbH (Germany) on the sale of Servico NV. In 2008 Servico had revenues of EUR 34 million and an operating result of approx. EUR 3 million. Servico is based in Belgium and has 87 employees. The divestment of Servico has been fully recognised in 2008. The transaction resulted in a book profit for Kendrion on discontinued operations of EUR 9.2 million in 2008. >> 96 annual report 2008

The comparative figures in the income statement and statement of cash flows have been restated to disclose the discontinued operations separately. The results from the discontinued operations relating to the Vink Group and Servico for 2008 and 2007 are as follows (the book loss on Automotive Metals is also processed in 2007): Discontinued operations EUR million 2008 2007 Revenue (from transactions with third parties) 335.3 332.1 Other operating income 3.7 3.7 Expenses (325.5) (320.4) Depreciation (3.6) (3.5) Impairment loss (5.0) Results from operating activities before finance costs 4.9 11.9 Net finance costs (3.1) (2.1) Results from operating activites, net of net finance costs 1.8 9.8 Income tax expense (3.2) (3.0) Results from operating activites, net of income tax (1.4) 6.8 Book profit on sale of shares of discontinued operations 9.2 (9.5) Income tax expense on sale of shares of discontinued operations Earnings (loss) for the year 7.8 (2.7) Basic earnings (loss) per share (EUR) 0.76 (0.26) Diluted earnings (loss) per share (EUR) 0.76 (0.26) Effects of the disposals of individual assets and liabilities of Kendrion EUR million 2008 Property, plant and equipment 2.1 Intangible assets 0.1 Other investments, including derivatives Deferred tax assets 0.1 Inventories 3.6 Current tax assets 0.4 Trade and other receivables 2.6 Cash and cash equivalent 0.6 Total non-current liabilities (2.2) Current tax liabilities (0.1) Trade and other payables (3.9) Net assets and liabilities 3.3 Payment received in cash 13.5 Cash disposed of (0.6) Payment received in cash, net of cash disposed of 12.9 financial statements >> 97

20 >> Business combinations 2008 In 2008 the participating interest in Linnig de México S.A. de C.V. at Mexicaltingo, Mexico, was expanded from 51% to 100%, and hereby goodwill of EUR 0.2 million was recognised. Linnig de México generates annual revenue of approximately EUR 2 million and has about 25 employees. Kendrion had already acquired 51% of the shares during the acquisition of the Linnig Antriebstechnik Group at the end of 2007. On 25 August 2008 Kendrion reached agreement with the owners of Tri-Tech LLC for the acquisition of all shares in this company. Tri-Tech is focused, in particular, on the development and manufacture of electromagnetic components for soft drinks dispensers. The company generates revenue of approx. EUR 3.5 million and has about 35 employees. Tri-Tech is based in Mishawaka (Indiana), USA. The Board estimates that if the acquisition of Tri-Tech had taken place on 1 January 2008 the consolidated income would have amounted to approx. EUR 210 million and the consolidated profit for 2008 would have amounted to EUR 13.1 million. In determining these amounts the Board has assumed that the same fair value adjustments as were made on the acquisition date would apply if the acquisition had taken place on 1 January 2008. The acquisition of Linnig de México would not have had any effect on the consolidated income in view of the majority interest already held prior to the acquisition in 2008. The effect of Linnig de México on the consolidated profit for 2008 is negligible. 2007 Goodwill amounting to EUR 0.5 million was paid on the acquisition of the operations of KDI Plastiques on 1 October 2007. This acquisition resulted in a net cash outflow of EUR 1.4 million. The fair value adjustments of the inventories and property, plant and equipment were not material. The company is active in the sale of plastic semi-finished goods and generates annual revenue of approx. EUR 7 million, and has 14 employees. On 29 November 2007 Kendrion reached agreement with the owners of Linnig Antriebstechnik GmbH in Germany on the acquisition of the entire share capital of that company. The Linnig Antriebstechnik Group is a global supplier of electromagnetic clutch systems for engine cooling and air-conditioning systems in buses, especially in the luxury segment, as well as for special vehicles. The company has revenues of approx. EUR 40 million and employs a total of some 200 staff. Its headquarters are located in Markdorf (Germany), and the company also operates smaller sites in Mexico, the USA, Brail and China. 1 Not restated for comparison purposes. The Board estimates that if both acquisitions (of Linnig and KDI) had taken place on 1 January 2007, the consolidated income would have amounted to approx. EUR 540 million 1, while the consolidated profit for the reporting period would have amounted to EUR 5.7 million 1. In determining these amounts the Board has assumed that the same fair value adjustments as were made on the acquisition date would apply if the acquisition had taken place on 1 January 2007. Acquisition accounting of subsidiary Tri-Tech LLC EUR million Carrying amount prior to acquisition Fair value adjustment Recognised carrying amount on acquisition 2 The additional (legal) costs amounted approximately EUR 0.3 million. Property, plant and equipment 0.1 0.1 0.2 Intangible assets 0.0 2.0 2.0 Inventories 0.1 0.1 Trade and other receivables 0.4 0.4 Cash and cash equivalent 0.0 0.0 Deferred tax liabilities 0.9 0.9 Trade and other payables 0.2 0.2 Net identifiable assets and liabilities 0.4 1.3 1.7 Goodwill on acquisition 6.2 Purchase price paid including costs 2 6.9 Future outflow of cash resources (earn out in 2009, 2010 and 2011) 1.0 Net outflow of cash resources 6.9 >> 98 annual report 2008

EUR million Purchase price including costs Earn out Goodwill on acquisition Assets Liabilities Fair value on acquisition date (100%) Revenue in 2008 (since acquisition) Operating result (since acquisition Tri-Tech LLC 6.9 1.0 6.2 2.8 1.1 1.7 1.0 0.2 Identifiable assets, liabilities and contingent liabilities were recognised on acquisition to the extent that the fair value could be reliably measured, in the case of assets, where it was probable that the future economic benefits would flow to the acquiring entity and, in the case of liabilities, where it was probable that the settlement thereof would result in an outflow of resources. For this purpose, the carrying amounts prior to acquisition were measured on the basis of the applicable IFRSs immediately preceding the actual acquisition. The recognised carrying amounts of the assets, liabilities and contingent liabilities on acquisition date concern the estimated fair value. The goodwill recognised in connection with the acquisition mainly reflects the expertise and technical and other capabilities of the employees of the companies taken over and the synergistic gains that are expected to flow from the integration of the companies into the existing activities of Kendrion. 21 >> Other operating income EUR million 2008 2007 Release of unused provisions 0.1 Net gain on disposal of property, plant and equipment 0.1 0.4 Other 0.8 0.6 0.9 1.1 22 >> Staff costs EUR million 2008 2007 Wages and salaries 52.8 42.4 Social security charge 7.6 5.8 Pension costs 0.6 0.4 61.0 48.6 Number of fixed and temporary employees as at 31 December (fte) 1,439 1,501 23 >> Other operating expenses EUR million 2008 2007 Lease expenses 0.7 0.9 Increase in provision for doubtful debts 0.1 0.1 Premises costs 4.1 3.1 Maintenance expenses 2.4 2.1 Transport expenses 1.5 1.8 Consultancy expenses 3.5 2.6 Sales and promotion expenses 1.4 1.0 Car, travel and representation costs 2.6 2.0 Expenses of disposal Distribution Services 1.4 Other 7.9 4.5 25.6 18.1 financial statements >> 99

24 >> Net finance costs EUR million 2008 2007 Interest income 0.1 Net exchange gain 0.2 Financial expenses 0.2 0.1 Interest expenses (4.3) (3.9) Net exchange loss Financial expensens (4.3) (3.9) Net financing costs (4.1) (3.8) 25 >> Income tax Recognised in the income statement EUR million 2008 2007 Current tax charge on year under review (1.8) 0.4 Adjustments for prior years Total corporation tax expenses in the income statement (1.8) 0.4 The tax charge for 2008 does not include any significant incidentals. 26 >> Reconciliation with the effective tax rate Reconciliation with tax rate Reconciliation with effective rate EUR million 2008 2007 2008 2007 Profit before income tax 6.9 6.0 Income tax expense at local corporation tax rate 25.5% 25.5% 1.8 1.5 Revenues exempt of income tax 0.0% 0.0% 0.0 0.0 As non deductible reprimanded expenses 0.0% 0.0% 0.0 0.0 Effect of change in temporary differences (8.7)% (5.0)% (0.6) (0.3) Effect of tax losses utilised 0.0% (21.7)% 0.0 (1.3) Effect of change in tax rates 0.0% (51.7)% 0.0 (3.1) Current year losses for which no deferred tax asset was recognised 4.3% 0.0% 0.3 0.0 Other movements 4.4% 45.0% 0.3 2.7 Under/over ( ) provision in previous years 0.0% 1.7% 0.0 0.1 25.5% (6.2)% 1.8 (0.4) As a result of the rounding off of amounts the tax burden shown on the face of the income statement is 26.1%. 27 >> Related parties Identity of related parties A related-party relationship exists between Kendrion and its subsidiaries, their managers and executives. Kendrion has a number of agreements with its subsidiaries relating to the charging of central costs to and from the divisions, including management, development, information technology and marketing costs, as well as agreements in respect of Group financing. Internal supplies also take place within the divisions. Intercompany transactions are effected at market prices. For a list of the principal subsidiaries and associates please refer to page 113. >> 100 annual report 2008

Transactions with managers in key positions The remuneration of the Board is as follows: EUR thousand 2008 2007 Total remuneration 1,202 1,304 Pension and other expenses 137 134 1,339 1,438 The total remuneration is included in staff costs (see Note 22). The company has a Long-Term Incentive programme (LTI) for the members of the Board which enables them to acquire rights to shares. Commencing after 2007, the members qualify for a given number of shares annually, provided certain individually formulated targets, which are partly qualitative and partly quantitative, are met. The number of shares will depend on the extent to which the targets have been achieved after three years and the extent to which the member has invested past bonuses in the Company. Shares are allocated definitively if the former Executive Committee member still holds the same or a similar position three years after conditional allocation. An obligation of EUR 0.1 million has been recognised in this regard (2007: EUR 0.2 million). In 2008, the charge to the income statement was EUR 0.1 million (2007: EUR 0.1 million). The members of the Board have an entitlement to a total of 4,108 shares over the period 2005-2007. The performance of these Executive Committee members was on target, and the shares purchased by the Board members in 2005 from the short-term bonus were delivered to them following the General Meeting of Shareholders on 7 April 2008. The foregoing scheme has not been continued in 2008. A new scheme came into force effective the 2008 financial year. In view of Kendrion s strategy of further increasing the focus of the operations, a modified Long-Term Incentive plan was introduced to replace the former LTI plan. This incentive plan rewards the Executive Board members by paying a one-off amount in cash rather than in shares, provided sufficient focus has been brought to the activities of the company over a (maximum) period of three years. Performance will be judged on the basis of the realisation of long-term shareholder value, as well as on the basis of the performance of the Executive Board members during this period. The amount payable under this one-off Long-Term Incentive plan can not exceed 150% of the fixed remuneration. In event of at-target performance, the payment will amount to 75% of the fixed annual remuneration comparable to the LTI programme ruling through to 2007 over three years. A proposal will be submitted to the General Meeting of Shareholders recommending the conversion of this remuneration into a deferred pay out scheme in which the Executive Board members receive shares over three years after the determination, without further conditions. The number of shares shall be determined immediately after the General Meeting of Shareholders on the basis of the amount of the net bonus and the then prevailing closing stock price. 28 >> Accounting estimates and judgements by management The Board discussed the selection and disclosure of the critical accounting policies for financial reporting and estimates as well as the application of these policies and estimates with the Supervisory Board. In preparing the financial statements, the management is required under IFRS to make various judgements, estimates and assumptions which affect the implementation of policy and the amounts disclosed in relation to assets, liabilities, income and expenses. The estimates and assumptions are based on experience and factors deemed reasonable in the circumstances. Estimates and assumptions are constantly reappraised. Changes in the accounting estimates used are reflected in the period in which the estimate is changed if the change affects only that period or in the period in which the estimate is changed and in future periods if the change affects both the reporting period and future periods. Estimated impairment of goodwill Kendrion tests annually whether the goodwill is subject to any impairment, in conformity with the accounting policy disclosed in Note i. The impairment model applied is the discounted cash flow method (value determination on the basis of the discounted value of the expected cash flows) applying a weighted average cost of capital (pre-tax WACC) of between 13% and 16%. The use of estimates is essential for making this calculation. financial statements >> 101

Pensions Since the pension arrangements involve long-term obligations and uncertainties, it is necessary to make assumptions in order to estimate the amount that Kendrion needs to invest to fund its pension obligations. Actuaries calculate the obligation for defined benefit plans partly on the basis of information provided by the Board, such as future pay rises, the return on plan assets, mortality tables and the probable extent to which pension scheme members will leave the scheme because they have reached retirement age, become incapacitated or left the company. Tax Kendrion is taxable in many jurisdictions. 29 (19) >> Assets classified as held for sale On 25 November 2008 Kendrion reached definitive agreement with British company Edmundson Distribution Limited (UK) on the sale of the Vink Group. In view of Kendrion s focused acceleration strategy, it was decided to investigate the feasibility of the divestment of the Distribution Services division, of which the Vink Group forms a part. The sale was completed on 12 February 2009. The sales value of the transaction is EUR 81 million. At 31 December 2008 the group of assets to be divested comprised assets of EUR 115.2 million less liabilities of EUR 55.6 million. In 2008 an impairment loss of EUR 5.0 million was recognised as a result of the revaluation of the group of assets to be divested to the book value or lower fair value. The recoverable amount of the participating interest in the Germany region as specified in the Share Purchase Agreement concluded with Edmundson is lower than the book value of the recognised goodwill and the participation value. This has resulted in an impairment loss on the recognised goodwill of EUR 4.2 million and an impairment loss on the participating interest of EUR 0.8 million. The recognition of both items in the result for 2008 leads to a higher book profit for the entire transaction in 2009. The accounting principles for the valuation of assets classified as held for sale are identical to the accounting principles applied for the consolidated EU-IFRS financial statements. For a general discussion of assets, refer to the notes to the consolidated financial statements. Assets classified as held for sale EUR million 2008 Property, plant and equipment 13.9 Intangible assets 8.1 Other investments, including derivatives 1.2 Deferred tax assets 4.9 Total non-current assets 28.1 Inventories 35.0 Current tax assets 0.6 Trade and other receivables 44.5 Cash and cash equivalent 7.0 Total current assets 87.1 Total assets 115.2 As a result of the impairment losses of EUR 5 million referred to in Note 19 it is not possible to reconcile the statement of movements in the tangible fixed and intangible assets (Notes 1 and 2). The exceptional impairment loss to the extent relating to the shares (EUR 0.8 million) has been assigned pro rata over the assets classified as held for sale. >> 102 annual report 2008

30 (19) >> Liabiities classified as held for sale The accounting principles for the valuation of liabilities classified as held for sale are identical to the accounting principles applied for the consolidated EU-IFRS financial statements. For a general discussion of liabilities, refer to the notes to the consolidated financial statements. Liabilities classified as held for sale EUR million 2008 Loans and other non-current borrowings 0.3 Employee benefits 1.2 Provisions 0.0 Deferred tax liabilities 1.8 Total non-current liabilities 3.3 Current tax liabilities 1.1 Trade and other payables 51.2 Total current liabilities 52.3 Total liabilities 55.6 31 >> Post-balance sheet events Approval for the proposed sale of the Vink Group was granted by the European Competition Authority after balance sheet date, and the transaction was completed on 12 February 2009 with a profit of approximately EUR 10 million on the basis of the position at 31 December 2008. The buyer was informed of operating claims or potential operating claims against the companies in the Vink Group known at the time of the sale of the Vink Group. Pursuant to the Share Purchase Agreement the buyer shall bear any loss incurred from such potential claims by the relevant Vink company or the buyer. Representations and warranties normal for transactions of this magnitude are included in the Share Purchase Agreements. As is customary for transactions of this nature, Kendrion represents and warrants on potential fiscal claims arising from the period prior to the sale. Kendrion and the banking consortium have reached agreement on a number of new financing conditions negotiated in connection with the sale of Distribution Services which come into force in mid-february 2009 (immediately after the Vink transaction is closed). The major conditions are: EUR 30 million committed revolving credit facility for working capital until 23 November 2010; EUR 20 million junior facility until 23 November 2009; EUR 50 million standby acquisition facility until 23 November 2009; A supplementary interest rate covenant on a quarterly basis (the current covenant is on a twelve-month rolling basis); A margin increase by 50 base points; A non-recurring dividend payment of EUR 10 million is allowed in 2009 (normally 30% of the net profit). financial statements >> 103

Company balance sheet as at 31 December (before profit appropriation) Note EUR million 2008 2007 Fixed assets Property, plant and equipment 0.1 0.2 Intangible assets 0.2 0.1 1.3 Financial assets 129.3 123.8 Total non-current assets 129.6 124.1 Current assets 1.4 Receivables 0.2 0.6 Cash and cash equivalents 0.0 0.0 Total current assets 0.2 0.6 Total assets 129.8 124.7 1.5 Equity Share capital 20.6 20.6 Share premium 71.3 75.2 Reserves (11.4) (11.2) Retained earnings 12.8 3.6 Total equity 93.3 88.2 1.6 Provisions 2.3 2.6 1.7 Loans and borrowings (current) 34.2 33.9 Total equity and liabilities 129.8 124.7 >> 104 annual report 2008

Company income statement Note EUR million 2008 2007 1.11 Share in results of Group companies after tax 21.1 4.8 Other results after tax (8.3) (1.2) Net profit 12.8 3.6 financial statements >> 105

Notes to the company financial statements 1 >> Notes to the company financial statements 1.1 General The company financial statements are part of the 2008 financial statements of Kendrion N.V. With regard to the company income statement of Kendrion N.V., the company has made use of the option provided by Section 402 of Book 2 of the Netherlands Civil Code. 1.2 Principles of valuation of assets and liabilities and determination of results In selecting the principles of valuation of assets and liabilities and determination of results employed in the company financial statements, Kendrion N.V. has made use of the option provided by Section 362, subsection 8, of Book 2 of the Netherlands Civil Code. Consequently, the principles of valuation of assets and liabilities and determination of results (the accounting policies ) employed in the company financial statements of Kendrion N.V. are identical to those employed in the consolidated EU-IFRS financial statements. Interests in entities in which Kendrion has significant influence are measured using the equity method. The consolidated EU-IFRS financial statements have been prepared in accordance with the standards adopted by the International Accounting Standards Board as endorsed for use in the European Union (hereinafter referred to as EU-IFRS ). These policies are discussed on pages 64-75. The share in the results of Group companies relates to Kendrion N.V. s share in the results of those companies. Results on transactions whereby assets and liabilities have been transferred between Kendrion N.V. and its subsidiaries and between subsidiaries have not been recognised to the extent they can be considered unrealised. 1.3 Financial fixed assets EUR million Interest in Group companies Loans to Group companies Deferred tax Carrying amount as at 1 January 88.9 29.2 5.7 123.8 116.4 Results of Group companies 21.1 21.1 4.8 Translation differences 0.2 Movements in loans and borrowings (8.4) (8.4) 1.0 Movements in deferred tax assets (3.6) (3.6) 0.7 Other movements (3.6) (3.6) 0.7 Carrying amount as at 31 December 106.4 20.8 2.1 129.3 123.8 Total 2008 Total 2007 The main part of the loans to group companies has a duration of over one year. The investments in the principal subsidiaries and associates are disclosed on page 113 of the annual report. 1.4 Receivables EUR million 2008 2007 Receivables from group companies 0.2 Prepayments and accrued income 0.2 0.4 0.2 0.6 >> 106 annual report 2008

1.5 Equity EUR million Share capital Share Translation premium reserve Hedge reserve Reserve Statutory for own reserve for shares participations Other reserves Retained earnings Total 2008 Total 2007 Balance as at 1 January 20.6 75.2 0.3 0.8 (0.1) 3.1 (15.3) 3.6 88.2 83.6 Appropriation of retained earnings 3.6 (3.6) Dividend payment (3.9) (3.9) Repurchased own shares (0.2) (0.2) Sale of repurchased own shares 0.1 Other (1.5) (1.9) (0.7) 0.5 (3.6) Total recognised income and expenses 12.8 12.8 4.5 Balance as at 31 December 20.6 71.3 (1.2) (1.1) (0.3) 2.4 (11.2) 12.8 93.3 88.2 1.5.1 Share capital The authorised capital of Kendrion N.V. amounts to EUR 80 million, divided into 40 million ordinary shares of EUR 2.00, of which 10,287,624 ordinary shares have been issued. 1.5.2 Share premium The share premium represents revenue from shares issued at more than their nominal value (issued above par). The issued and paid share capital, including share premium, is fiscally acknowledged capital. 1.5.3 Translation reserve This statutory reserve comprises exchange differences resulting from the conversion of foreign currencies (including group loans to foreign entities). On the sale of a Group company, the accumulated translation differences relating to it are transferred to the income statement and accounted for in the transaction result. 1.5.4 Hedge reserve The hedge reserve comprises the effective share of the cumulative net movement in the fair value of cash-flow hedging instruments relating to hedged transactions that have not yet been executed. 1.5.5 Reserves for own shares The reserve for Kendrion s own shares comprises the cost of the Kendrion shares which are held by the company for the Long-Term Incentive programme and the share scheme for Directors of operating companies. As at 31 December 2008, Kendrion held 15,232 of its own shares (2007: 6,790). 1.5.6 Statutory reserve for participations This reserve represents the undistributed profits of subsidiaries the free distribution of which the company cannot procure. The statutory reserve for participations arises as a result of participations being valued by the equity method and is shown as the share in the undistributed results of the subsidiaries since they were first valued using the equity method. The amount of any dividend from these subsidiaries to which there is an entitlement on adoption of the financial statements is deducted from this reserve. 1.5.7 Other reserves Other reserves are all the reserves other than those shown separately and comprise primarily the cumulative, undistributed profits from previous financial years. 1.5.8 Retained earnings In 2008, the full result for 2007 was included in other reserves. Retained earnings consequently consists solely of the result for 2008. financial statements >> 107

1.6 Provisions EUR million 2008 2007 Deferred tax liabilities 0.3 Other provisions 2.3 2.3 2.3 2.6 The provisions include a provision of EUR 2.3 million relating to the fine imposed by the European Commission. 1.7 Loans and borrowings (current) EUR million 2008 2007 Debts to credit institutions 0.2 0.3 Debts to suppliers and trade payables 1.0 0.2 Debts to Group companies 32.6 31.1 Other debts 0.4 2.3 34.2 33.9 1.8 Financial instruments See section 14 of the notes to the consolidated financial statements for details on financial instruments. 1.9 Staff costs EUR million 2008 2007 Wages and salaries 1.6 1.7 Social security charge 0.1 0.1 Pension costs 0.1 0.1 1.8 1.9 Kendrion N.V. has only defined contribution plans for its employees. Kendrion N.V. had 11 employees (FTEs) as at year-end 2008 (2007: 12). 1.10 Commitments not appearing on the balance sheet 1.10.1 Joint and several liability and guarantees The Company and its Group companies have issued guarantees mainly in the context of the financing by financial institutions, and shares have also been pledged in certain cases. The company has issued declarations of joint and several liability, as referred to in Section 403 of Book 2 of the Netherlands Civil Code, in respect of most of the Dutch subsidiaries included in the consolidation. A bank guarantee has been issued for an amount of EUR 40 million with a duration of five years. This guarantee relates to the fine of EUR 34 million imposed by the European Commission at the end of 2005 in relation to alleged price-fixing by a former subsidiary (see also section 17 of the notes to the consolidated balance sheet). 1.10.2 Tax group Kendrion N.V. and its Dutch subsidiaries form a tax group for corporation tax purposes; according to the standard terms, each of the companies is jointly and severally liable for corporation tax payable by all the members of the tax group. 1.11 Share in results of Group companies This relates to Kendrion N.V. s share in the results of its associates, of which EUR 21.1 million (2007: EUR 4.8 million) relates to Group companies. >> 108 annual report 2008

Fees to the auditor With reference to Section 2:382a of the Netherlands Civil Code, the following fees have been charged by KPMG Accountants to the Company, its subsidiaries and other consolidated entities: EUR thousand 2008 2007 KPMG Other KPMG Accountants member firms N.V. and affiliates Total KPMG KPMG Accountants N.V. Other KPMG network Audit of financial statements 208 414 622 208 490 698 Other assurance services 44 37 81 60 42 102 Tax advisory services 74 74 57 57 Other non-audit services 88 88 237 237 252 613 865 268 826 1,094 Total KPMG 1.12 Remuneration of and share ownership by the Executive Board members and Supervisory Board Remuneration of the Executive Board members The remuneration of current and former Executive Board members charged to Kendrion N.V. and Group companies, including pension expenses as referred to in Section 383, subsection 1, of Book 2 of the Netherlands Civil Code, amounted to EUR 918,400 (2007: EUR 1,109,800). This remuneration is specified as follows: EUR thousand 2008 2007 P. Veenema E. Ris Total P. Veenema E. Ris Total Fixed remuneration 362.5 271.0 633.5 352.0 263.0 615.0 Variable remuneration: current 73.0 54.0 127.0 171.0 119.0 290.0 non-current 22.5 16.9 39.4 50.0 39.0 89.0 Total remuneration 458.0 341.9 799.9 573.0 421.0 994.0 Pension and other expenses 64.6 53.9 118.5 64.0 51.8 115.8 522.6 395.8 918.4 637.0 472.8 1,109.8 The decision of the Executive Board members, taken in view of the current economic crisis, to waive part of the short-term bonus to which they are entitled is processed in the above amounts. The variable remuneration for 2008 includes the shares to be distributed to Messrs P. Veenema and E. Ris (1,351 and 1,013 respectively) in the context of the LTI programme. The variable remuneration and shares will be distributed after the General Meeting of Shareholders. Remuneration of the Supervisory Board The total remuneration of current and former Supervisory Board members in 2008 amounts to EUR 85,000 (2007: EUR 85,000). This remuneration is specified as follows: EUR thousand 2008 2007 Current Supervisory Board Members: S.J. van Kesteren 35 35 M.E.P. Sanders 25 25 R.L. de Bakker 25 25 85 85 No loans, advances or related guarantees have been given to the current Board or Supervisory Board members. financial statements >> 109

Share ownership by the Executive Board and the Supervisory Board 31 December 2008 31 December 2007 Executive Board P. Veenema: 7,044 5,382 E. Ris: 4,067 2,775 Supervisory Board Zeist. 23 February 2009 Executive Board Supervisory Board P. Veenema S.J. van Kesteren E. Ris M.E.P. Sanders R.L. de Bakker >> 110 annual report 2008

Other information To: the General Meeting of Shareholders >> Auditor s report Report on the financial statements We have audited the accompanying financial statements 2008, taken up on pages 59 through 110, of Kendrion N.V., Zeist. The financial statements consist of the consolidated financial statements and the company financial statements. The consolidated financial statements comprise the consolidated balance sheet as at 31 December 2008, profit and loss account, statement of recognied income and expense and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. The company financial statements comprise the company balance sheet as at 31 December 2008, the company profit and loss account for the year then ended and the notes. Management s responsibility Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the Report of the Board in accordance with Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Kendrion N.V. as at 31 December 2008, and of its result and its cash flow for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code. financial statements >> 111

Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Kendrion N.V. as at 31 December 2008, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirement under 2:393 sub 5 part f of the Netherlands Civil Code, we report, to the extent of our competence, that the Report of the Board is consistent with the financial statements as required by 2:391 sub 4 of the Netherlands Civil Code. Utrecht, 23 February 2009 KPMG ACCOUNTANTS N.V. D. Luthra RA >> Profit appropriation Provisions regarding the appropriation of profit (summary of article 34 of the Articles of Association) Pursuant to article 34, the Executive Board shall have the authority to decide, subject to the approval of the Supervisory Board, what portion of the profit the positive balance on the income statement is to be appropriated to reserves. The remaining profit shall be at the disposal of the General Meeting of Shareholders. The Executive Board shall, subject to the approval of the Supervisory Board, submit a proposal concerning the dividend on ordinary shares. Appropriation of net profit EUR million Net profit 12.8 The General Meeting of Shareholders will be invited to distribute dividend totalling EUR 10.0 million charged to the share premium reserve. The net profit of EUR 12.8 million will be added to other reserves. Post-balance sheet events The post-balance sheet events are discussed in Note 31 of the consolidated financial statements. >> 112 annual report 2008

Principal subsidiaries as at 31 December 2008 Industrial Magnetic Systems (Norman Graf) Kendrion Magnettechnik GmbH, Donaueschingen, Germany Norman Graf Kendrion Magnettechnik GmbH, Engelswies, Germany Gerhard Subek Kendrion Binder Magnete GmbH, Eibiswald, Austria Hannes Kloos Kendrion Binder Componentes sl, Cuarte de Huerva, Spain Klaus Strefling Kendrion Binder Magnetic (Suhou) Co. Ltd, Suhou, P.R. China Jürgen Weisshaar Tri-Tech LLC, Mishawaka, Indiana, USA Dale O Chap/Bill Everett Kendrion Binder Magnet AG, Hausen am Albis, Switerland Edgar Bruhin Kendrion Binder Magnete Vertriebsgesellschaft mbh, Lin, Austria (51%) 1 Erich Holinger Industrial Drive Systems (Norman Graf) Kendrion Binder Magnete GmbH, Villingen-Schwenningen, Germany Norman Graf Kendrion Binder Magnete (UK) Ltd, Bradford, United Kingdom Peter McShane Kendrion Binder Magnete GmbH, Eibiswald, Austria Hannes Kloos Passenger Car Systems (Bernd Gundelsweiler) Kendrion Binder Magnete GmbH, Villingen- Schwenningen, Germany Bernd Gundelsweiler Kendrion Binder Magnete GmbH, Eibiswald, Austria Henry Müller Kendrion Binder Magnety s.r.o, Prostejov, Cech Republic Jir i Hy bl Kendrion Binder Magnetic (Suhou) Co. Ltd, Suhou, P.R. China Edward Zhu Kendrion Binder Magnete s.r.l., Rădău ti, Romania Artur Daneliuc Commercial Vehicle Systems (Uwe Spörl) Kendrion Linnig GmbH, Markdorf, Germany Linnig Brasil Acoplamentos Ltda., Louveira, Brail Linnig Corporation, Tucker, USA Linnig de México, S.A. de C.V., Mexicaltingo, Mexico Linnig Drive Tech. (Nanjing) Co. Ltd., Nanjing, P.R. China >> Distribution Services Vink-Group (Janhein Pieterse) Uwe Spörl Klaus Mertens Jürgen Häberle Alexander Bley Liangchen Lu Northern Europe (Walter Blunck) Vink Norway AS, Oslo, Norway Bjørn Haakenstad Nilsen Vink Essåplast Group AB, Gotenburg, Sweden Roberth Wittenbrandt Vink Finland Oy, Kerava, Finland Reijo Asikainen Vink Eastern Trading Oy, Kerava, Finland Reijo Asikainen Vink AS, Randers, Denmark Walter Blunck Central Europe (Janhein Pieterse) Vink Kunststoffen B.V., Didam, Netherlands Vink Kunststoffe GmbH, Emmerich am Rhein, Germany VT Plastics B.V., Oud Gastel, Netherlands Vink AG, Dietikon, Switerland Eastern Europa (Janhein Pieterse) Vink Plast Kft, Budapest, Hungary Vink Plasty s.r.o, Brno, Cech Republic Western Europe (Eric Muys) Vink France SAS, Louvres, France Vink NV, Heist op den Berg, Belgium Michiel Nijhout Ralf Höllmann Francis Aarts Marcel Isler Péter Pástor Roman Kandler Nicolas Pomeau Eric Muys 1 Fully consolidated. The minority interest is shown separately on the balance sheet and the income statement. A complete list of all subsidiaries and associates can be obtained from the Chamber of Commerce in Utrecht (number 30113646) and from the offices of the Company. Principal holding companies Combattant Holding B.V., Zeist, Netherlands Kendrion Finance B.V., Zeist, Netherlands Kendrion Holding Germany GmbH, Emmerich am Rhein, Germany Vink Holding B.V., Baarn, Netherlands Vink Nordic Holding AS, Randers, Denmark principal subsidiaries >> 113

Europe >> 114 annual report 2008

Rest of the world Industrial Magnetic Systems Industrial Drive Systems Passenger Car Systems Commercial Vehicle Systems Subsidiaries Partners Kendrion N.V. Kendrion N.V. Revenue about EUR 200 million About 1,400 employees Industrial Magnetic Systems Industrial Drive Systems Passenger Car Systems Commercial Vehicle Systems locations >> 115

Five-year summary EUR million 2008 2007 2006 2005 2004 1 The reader should be aware that Kendrion went through a lot of changes since 2003; divestments took place including results on disposals, which does not give a clear insight in the comparability between the years. 2 Relates to inventories, receivables minus non-interest bearing debt. 3 2007 including Linnig Antriebstechnik Group. Pro froma. Unaudited. 4 2008 including Distribution Services. 5 Pro forma. Unaudited. 6 2008 including net interest-bearing debt Vink in assets and liabilities classified as held for sale. 7 Before cash flow acquisitions and disposals. >> Kendrion N.V. consolidated 1 Income statement conform financial statements Revenue 207.4 501.0 568.5 531.0 499.0 Organic growth 3.6% 7.0% 5.6% 7.3% 5.8% Operating result (EBIT) 11.0 21.8 25.1 20.7 0.3 Depreciation 8.3 10.1 13.5 14.3 21.9 Operating result before depreciation (EBITDA) 19.3 31.9 38.6 35.0 22.2 Profit for the period 12.9 3.7 14.3 17.5 (12.9) Balance sheet as per 31 December conform financial statements Total assets 280.5 303.1 291.5 255.7 305.2 Total equity 93.5 88.8 83.8 69.1 57.0 Net interest-bearing debt 6 75.3 85.2 87.5 75.5 121.2 Working capital 2 22.4 63.2 75.8 65.2 73.2 Invested capital 177.4 174.5 167.2 146.2 171.2 Cash flow conform financial statements Net cash from operating activities 21.3 23.8 13.1 27.4 9.0 Net investments 13.5 16.2 11.5 13.2 17.0 Free cash flow 7 3.7 7.6 1.6 14.2 (8.0) Ratios pro forma Solvency 33.3% 29.3% 28.7% 26.9% 18.1% Net interest-bearing debt 6 /EBITDA 3, 4 (debt cover) 2.4 2.2 2.3 2.1 2.6 Net interest-bearing debt 6 /equity (gearing) 0.8 1.0 1.0 1.1 2.2 EBIT 3 /net finance costs (interest cover) 4, 5 3.2 3.8 4.1 3.5 1.8 Working capital 2 in % of revenue 3 11.6% 11.8% 13.3% 12.3% 14.7% Market capitalisation (in millions) as at 31 December 74.1 185.2 196.3 153.2 115.1 Net interest-bearing debt as at 31 December 6 75.3 85.2 87.5 75.5 121.2 Theoretic value of the organisation (Enterprise value) 5 149.4 270.4 283.8 228.7 236.3 Number of permanent employees per 31 December (fte) 4 2,414 2,493 2,749 2,579 2,821 >> 116 annual report 2008

Glossary Cash pool Agreement with a bank whereby positive and negative balances in different bank accounts of different entities are added together for the purpose of calculating the interest rate and available credit line. Code of Conduct A set of behavioural rules and standards which broadly reflects the values that should guide all employees, for example in relation to doing business responsibly, safety, health and the environment. Compliance Officer The Kendrion employee who is charged with supervising compliance with the regulations to prevent insider trading. Corporate governance The management of the business, the supervision of that management, the rendering of account thereon and the way in which stakeholders can influence decisions. COSO Enterprise Risk Management Framework Risk management framework based on the system proposed by the Committee of Sponsoring Organiations of the Treadway Commission (COSO) (see www.coso.org). Creeping control clause Clause in the law and the Articles of Association of Kendrion N.V. which stipulates that if a shareholder: (i) acquires 20% of the shares or votes, that shareholder must notify the company thereof immediately; (ii) acquires 30% of the shares or votes, that shareholder is obliged to table a bid immediately for the remaining shares. Defined contribution scheme Pension scheme where the employer pays agreed contributions to a fund or insurance company and no obligation arises for the employer to pay supplementary contributions in the event of a shortfall in the fund or insurance company. Derivatives Derivative financial products which do not represent a direct cash value; they include options, forward exchange contracts and swap contracts. ERP system Enterprise Resource Planning: a system which supports all the business processes within an organisation, such as purchasing, sales and accounting, with data being exchanged between departments. Fair value The current value. For assets or liabilities for which there is an active market, this is generally the market value. Greenfield operation The start-up of a new activity, usually in a new location, which is not based on an acquisition. In reality this is organic growth. Hedging The covering of financial risks, usually relating to (undesirable) movements in market interest rates, exchange rates and raw material prices. IFRS International Financial Reporting Standards, also referred to as IAS (International Accounting Standards). With effect from 2005, all listed companies in the European Union must comply with these new accounting rules. Natural hedge Natural hedges arise where financial risks are neutralised without the use of derivative financial products, for example where currency risks relating to income in dollars are hedged by simultaneous dollar expenditure. Norminalisation Figures from which exceptional effects have been eliminated in order to improve comparability and transparency. Number of employees (FTEs) Number of employees stated in full-time equivalents. Organic (sales) growth Growth in revenue after eliminating the effects of acquisitions and disposal of activities. Return on investment (ROI) The result before amortisation, interest and tax as a percentage of the average invested capital. Return on sales (ROS) The result before interest and tax as a percentage of revenue. Rolling 12-monthly continuous. Solvency ratio The ratio of total equity to the balance sheet total. Translation risk Translation risk: a change in the value of an asset or liability of a subsidiary as a result of movements in the (non-euro) exchange rate. TSR Total shareholders return. Defined benefit scheme A pension scheme where the employee is promised a pension the level of which depends on their age, salary and years of service. The commitment carried in the balance sheet is the cash value of the projected pension benefits on the balance sheet date, less the fair market value of fund investments. Interest rate swap Derivative financial product whereby an agreement is reached with a counterparty (bank) to exchange specific interest payments on a predetermined underlying amount during a predetermined period. A variable interest rate (e.g. threemonth EURIBOR) is usually swapped for a fixed interest rate. Mid-Term Plan A plan for the medium term (three years) which is drawn up by Kendrion annually to facilitate the management and control of its organisation in the short to medium term. glossary >> 117

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Kendrion N.V. Utrechtseweg 33 3704 HA Zeist P.O. Box 931 3700 AX Zeist The Netherlands Telephone +31 (0)30 699 72 50 Fax +31 (0)30 695 11 65 E-mail info@kendrion.com www.kendrion.com >> 120 annual report 2008

Kendrion N.V. Utrechtseweg 33 3704 HA Zeist P.O. Box 931 3700 AX Zeist The Netherlands Telephone +31 (0)30 699 72 50 Fax +31 (0)30 695 11 65 E-mail info@kendrion.com www.kendrion.com