OTHER DISCLOSURES

35   CREDIT FACILITIES AND SECURITY PROVIDED

We manage the major credit facilities centrally. They are partly long-term non-bank borrowings and partly credit facilities arranged with three Dutch financial institutions and one Scottish financial institution. The latter facilities are lines of credit for short-term and medium-term borrowings. The main credit condition provisions of the various institutions are similar to each other and to those applying to non-bank borrowings.
At year-end 2011, we comfortably satisfied these conditions.

At 31 December 2011 Mediq had issued bank guarantees on behalf of third parties for an amount of € 13.5 million (2010: € 9.0 million). Of this,
€ 7.0 million are bank guarantees in respect of legal disputes (2010: € 7.0 million).

36   RIGHTS AND COMMITMENTS NOT SHOWN IN THE BALANCE SHEET

OPERATING LEASE AND RENTAL COMMITMENTS

The commitments not shown in the balance sheet amounted to € 169 million at 31 December 2011 (at 31 December 2010: € 176 million) and can be broken down as follows:

Operating lease charges totalling € 6.6 million (2010: € 5.9 million) and rental commitments of € 33.8 million (2010: € 30.0 million) were taken to profit or loss in the financial year.

Despite the new acquisitions in 2011 the total commitments not shown in the balance sheet decreased by € 7 million compared to 2010. The decrease is a result of the yearly expirations of rental commitments and, on the other hand, limited new rental and lease agreements.

CONTINGENT LIABILITIES

Mediq is involved in a number of legal cases and ongoing disputes or potential legal proceedings. Where necessary, sufficient provisions have been formed for legal issues (see note 32 for more information). Based on a review of these issues, the Management Board considers that further additions are not necessary.

General guarantees within the meaning of Section 403 of Book 2 of the Dutch Civil Code have been issued by Mediq NV on behalf of virtually all its group companies established in the Netherlands, except for group companies that we do not wholly own, specifically a number of pharmacies in Pharmacies Netherlands.

37   RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

GENERAL

In the implementation of our strategy we target average long-term growth in net earnings per share of 8% per year. In addition, we set a financial target for return on average capital employed (based on the operating result) of at least 15% before tax. We aim to distribute around 35% of the net result as dividend.

No significant changes in terms of capital management were effected in the year under review. An enabling condition in our policy is a healthy financing structure that maintains a balance between adequate solvency, the leverage of loan capital and sufficient available funding. We aim to continue to be rated by the market as ‘investment grade’, as this provides us with comparatively low financing costs as well as flexibility in implementing our growth strategy. Our balance sheet and cash flow are strong. This enables us to continue to grow through acquisitions.

As a result of its activities, Mediq is exposed to various financial risks. We apply a group-wide treasury policy for adequate management of our cash flows and financing flows and the financial risks relating to them, including (re)financing risks, currency risks and interest rate risks.

In addition, price risks are relevant for the group. The fee systems for pharmaceuticals and medical products in the various countries are complex. Prices are determined to a significant extent by the government and insurers. The section ‘System of fees and reimbursements’ in the directors’ report provides an overview of the key legislation, regulations and payers in the most relevant countries in this context.

A summary is provided below of the main financial risks relating to our objectives, categorised as liquidity risks, currency risks, interest rate risks and credit risks. We also state how we manage these risks.

LIQUIDITY RISK

Liquidity risk is the risk that Mediq is unable at the required time to meet its financial obligations. Liquidity management is based on the principle that sufficient liquidity is maintained in the form of credit facilities or cash and cash equivalents to meet the obligations in both normal and exceptional circumstances. Cash flows are forecasted within the group on a regular basis and the extent is determined to which the group has sufficient liquidity for the operating activities while maintaining sufficient credit facilities (headroom).

Our total credit facilities, comprising long-term borrowings from institutional investors and medium-term and current bank facilities, amounted to
€ 430 million as at 31 December 2011 (2010: € 432 million), with headroom of € 88 million under the committed facilities at year-end 2011
(2010: € 115 million). The company therefore has credit facilities that are sufficient for the existing and expected credit requirements of the group.

The extent of the risk that the ratios agreed with lenders are exceeded is regularly determined. With the present net debt position of € 278.3 million, the ratios for interest cover and debt cover are respectively 13.9 and 1.7. This is comfortably within the limits agreed with the various lenders of a minimum interest cover of 5.0 and a maximum debt cover of 3.5. These agreed limits are the same for the main lenders.

A 10% fall in our operating result (defined for this purpose as operating result before depreciation of property, plant and equipment and amortisation of intangible assets and impairments) would reduce interest cover by 1.4 points, at unchanged interest rates on interest-bearing debt. The agreed minimum interest cover of 5.0 would only be reached if the operating result fell by more than 64%. A 10% fall in our operating result would increase debt cover by 0.2 points. The agreed maximum debt cover of 3.5 would be reached if the operating result fell by more than 52%.

The expected cash flows of the financial obligations as at 31 December 2011, including estimated interest payments, are as follows:

The expected cash flows for borrowings from institutional investors and the borrowings from banks are reported together with the interest rate swaps and combined currency-interest rate swaps. These interest rate swaps and combined currency-interest rate swaps exactly match the repayment amounts and interest payment dates on the hedged positions. Therefore the carrying amount of the borrowings from institutional investors in this summary includes the combined currency-interest rate swaps and the carrying amount of the borrowings from banks includes the interest rate swaps. This presentation does justice to the fact that on balance, as a result of the cash flow hedges, we pay fixed interest on the loans. The other derivatives, which are forward currency contracts, all expire within a period of one year.

CURRENCY RISKS

Mediq is subject to currency risks on sales, purchases and loans denominated in currencies other than the functional currency of the Mediq entity concerned. Currency risks relate mainly to the US dollar, the Polish zloty and the Swedish krona.

Our policy is aimed at systematic hedging of currency risks arising from trade transactions or loans in currencies other than the own currency of the group company concerned, often by means of forward currency transactions. We do not hedge translation risks. We regard our positions in other countries (in this case outside the euro area) as strategic and assume that over the longer term, currency fluctuations will on balance have a neutral effect.

The currency exposure within the group from trade activities is very limited. Cash flows arising from the operation of forward currency contracts match as far as possible but offset those of the hedged position. No hedge accounting is applied for these derivatives.

Within the combined currency and interest rate swap, changes in the fair value concerning the currency component of the derivative on the one hand and the hedged position on the other are reciprocally neutralised in full.

The sensitivity of the operating result of 2011 in respect of the currency risk of our positions outside the euro area to a 10% change in the exchange rate of the euro is € 1.7 million. Gains or losses on forward currency contracts offset the currency risk from purchasing contracts in foreign currencies. The currency risk in respect of net result of 2011 amounts to € 0.8 million.

INTEREST RATE RISKS

We use various financial instruments within the group to manage interest rate risks. In the Netherlands, the cash flows of the group companies were already centralised by the use of cash pools. In 2010 the foreign group companies introduced this as well to reduce the capital required from operating activities and the related interest expense.
The risk policy is aimed at limiting the short-term impact of interest rate fluctuations on results and at locking in the interest rate for the long term. In principle, hedge accounting is applied for interest rate swaps (cash flow hedging). To avoid exposure to market fluctuations, variable interest rates are swapped into fixed rate contracts.

The schedule of repayments and interest payments of the hedge position is taken fully into account for interest rate swaps used to prevent interest rate risks. As a result the hedge is prospectively effective. We apply hedge accounting to all interest rate swaps. The hedges were all effective in both 2011 and in 2010.

On the basis of the financing position as at year-end 2011, we estimate that an increase or decrease of 1 percentage point in the euro money market interest rates will have an effect of approximately € 0.3 million on net finance costs. Fluctuations in long-term interest rates had a limited direct effect on the result in 2011, as the interest rate terms are fixed for the remaining maturity of virtually all existing medium and long-term borrowings.

CREDIT RISKS

Credit risk is the risk of financial loss if a customer or counterparty in a financial instrument fails to meet its contractual obligations. The risk for Mediq arises mainly from trade receivables, for which credit concentration is limited however. Our wholesaling activities in the pharmaceutical and institutional markets have a large number of customers and accordingly there is no concentration of credit risk. A total of some 31% (2010: 38%) of trade receivables relate to these activities.

Trade receivables at our pharmacies and direct activities in the Netherlands often relate to receivables from healthcare insurers. Deliveries from our pharmacies in Poland are often settled in cash. The receivables due from the five largest healthcare insurers in the Netherlands account for 22% (2010: 27%) of the trade receivables. The largest party has a share of 8%. These healthcare insurers are subject to supervision by the Dutch Central Bank. We consider the credit risk with these parties to be limited.

The maximum credit risk is equal to the carrying amount of each financial instrument on the balance sheet and relates to the following items:

The group limits its credit risk exposure on financial instruments by setting credit limits for each counterparty and concluding contracts only with respected parties. The position at the balance sheet date is a good reflection of the positions in the past financial year.
Security has been provided by the borrowers for the majority of the loans issued. The majority of security provided consists in pledges of shares of the second rank. In addition the borrowers have provided security in the form of entries in the mortgage register in the second rank. The fair value of this security cannot be sufficient reliably estimated. No security has been provided for a portion of the loans granted to customers and the customer supply commitments.

In terms of risk management for trade receivables outstanding the analysis of Days of Sales Outstanding (DSO) is an important measure of items outstanding. In the past year average DSO amounted to 37.2 days (2010: 36.9 days). The analysis of the DSO is a standard performance indicator in the monthly results to be reported by group companies. These provide the most senior management with a continuous insight into the relative capital tied up in, and the velocity of, debtors.

FINANCIAL INSTRUMENTS BY CATEGORY

The table below sets out the carrying amount of the various financial instruments by category as at the balance sheet date.

Of the financial instruments listed above, investments and derivatives are measured at fair value. Cash and cash equivalents are likewise carried at fair value. The other items are measured at fair value on initial recognition only and subsequently at amortised cost. See the accounting policies for further details. 

METHOD FOR FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

We use a three-level fair value hierarchy:

• Level 1: fair value is determined by reference to quoted prices in active markets for identical assets and liabilities.
• Level 2: fair value is determined on the basis of other inputs than quoted prices that are observable (direct and indirect sources).
• Level 3: fair value is determined on the basis of inputs that are not based on observable market data.

Level 1
The financial asset at fair value through profit or loss is measured by reference to quoted prices in an active market. At the end of 2011 and 2010 Mediq had no assets in this category.

Level 2
As there are no external market prices on which to base the value of receivables, borrowings and commitments relating to derivatives, their fair value is determined from generally accepted valuation models. The value determined in this way is equal to the price at which the derivative can be sold in a transparent market. We set the values regularly in consultation with accepted external market parties.

We calculate the fair value of the interest rate swaps as the present value of the future cash flows from the derivative, using discount rates in line with the interest rate curve based on the risk free yields (i.e. the zero coupon curve) at the balance sheet date. For the valuation of forward currency contracts, the future cash flows in the contract currency are discounted at a rate based on the term and contract currency. The present value at the balance sheet date in the contract currency is translated at the closing exchange rate ruling on the same day. In the combined currency and interest rate swaps, all interest rate effects, including differences between the forward and closing exchange rates, are allocated to the interest rate swap. As a result, the currency swap in the combined currency and interest rate swaps is valued at the closing exchange rate ruling on the balance sheet date.

The fair value of all currency and interest rate swaps is reviewed independently based on the specific characteristics of the contracts concluded. The review did not indicate any reason to adjust the fair value calculated by the group.

Level 3
Financial instruments carried at fair value determined by reference to input that is not based on observable market data do not apply to Mediq.

The other receivables, borrowings and commitments are carried at amortised cost. The fair value of the long-term liabilities is some € 2.0 million higher than the carrying amount. This difference is due to a lower market rate of interest, linked to the agreed terms, than the contractually agreed interest rate. The fair values of the other items do not differ materially from their carrying amounts.

38   RELATED PARTY TRANSACTIONS

The following related parties of the group can be distinguished: subsidiaries, associates, the members of the Management Board and the members of the Supervisory Board.

The remuneration of the Management Board and the Supervisory Board can be broken down as follows: 

Further details of the remuneration are set out below:

REMUNERATION OF MEMBERS OF THE MANAGEMENT BOARD
 

The total remuneration of the members of the Management Board, special compensation and the contributions under the pension plans amounted to € 2.1 million (2010: € 2.0 million).

REMUNERATION OF MEMBERS OF THE SUPERVISORY BOARD
 

One of the members of the Supervisory Board, Mrs M.J.M. van Weelden-Hulshof, is a customer of the group in her capacity as a community pharmacist.

The remuneration report provides details of the remuneration policy for members of the Management Board and members of the Supervisory Board. No shares were awarded for 2011 to the members of the Management Board as part of the remuneration system.

The members of the Supervisory Board of Mediq held a total of 75,050 shares in Mediq as at 31 December 2011 (31 December 2010: 75,050). The number of shares held by present members of the Management Board at 31 December 2011 totalled 95,778 (31 December 2010: 72,778).

The numbers of shares per member of the Management Board and the blocked shares held by former members of the Management Board
at year-end 2011 were as follows:

*    Relates only to the number blocked for former members.

It has been agreed with the members of the Management Board that they will build up share interests in Mediq amounting to twice their fixed annual salary over the next years. Mr van Gelder increased his share interest in 2011 by 17,000 shares from 49,778 shares to 66,778 shares.
Mr Janssen increased his share interest in 2011 by 6,000 shares from 23,000 shares to 29,000 shares.

Mr van Gelder is a member of the Supervisory Board of Maxeda, with which an agreement has been signed for the joint purchasing of non-trading goods. Maxeda receives a reasonable and arm’s length fee for services rendered in this respect. Mr van Gelder receives no compensation whatsoever in connection with this agreement.

Other related party transactions 

The transactions with these related parties are at arm’s length.

STICHTING SAMENWERKING APOTHEKERS OPG

Stichting Samenwerking Apothekers OPG (‘Foundation’) was established in 1992 under a different name when Mediq was listed on the stock exchange. The member pharmacists at the time donated part of the reserves in Mediq to the Foundation in the form of Mediq securities. The object of the Foundation was to support projects benefiting the pharmacy profession in the Netherlands. This includes professional practice, in particular, increasing the quality and effectiveness of the pharmacy business. Mediq was beneficiary in some of these projects and received a total of € 1.1 million in the first half year of 2011 related to the settlement of previous commitments. No donations were received in 2010.

Up to 28 July the Board of the Foundation consisted of three independent pharmacists, one of whom was the chairman, and three members appointed by Mediq. In the event of a tied vote, the chairman had the casting vote. Until this date the Foundation operated independently of Mediq, which had no control over the Foundation’s policy. Following consultation between the SSAO, Mediq and the tax authorities regarding the distributions by the SSAO, it was decided to change the relationship between SSAO and Mediq. As a result the remaining assets and liabilities of SSAO were transferred to Mediq and Mediq has consolidated the SSAO as of 28 July. The SSAO was liquidated in September 2011.

39   EVENTS AFTER THE BALANCE SHEET DATE

ACQUISITION OF DIABETESWERELD

On 2 January 2012 Mediq acquired Multicare B.V. (trade name ‘Diabeteswereld’) in the Netherlands. Mediq bought 100% of the shares.

Diabeteswereld has 5 employees and is a specialised supplier of medical devices for diabetic patients. This acquisition is relatively limited in terms of size and has no material impact on the group’s sales, the result and assets and liabilities.