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artnet AG — Annual Report 2011
Apr 5, 2012
37_10-k_2012-04-05_4579135e-423a-4a38-83a8-efba7a29bd1c.pdf
Annual Report
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artnet AG Annual Report 2011
Financial Key Figures artnet Group (in TEUR)
| Difference | |||
|---|---|---|---|
| 12/31/2011 | 12/31/2011 | (balance) | |
| Revenue | 13,341 | 13,637 | -2% |
| Profit from operations | (70) | (27) | -159% |
| Earnings before income taxes | (211) | (161) | -31% |
| Net profit | 31 | 153 | -79% |
| Earnings per share (diluted) EUR | 0.01 | 0.03 | -67% |
| Number of shares (diluted) in thousands | 5,553 | 5,556 | 0% |
| Cash flow from operating activities | 402 | 651 | -38% |
| Staff (year end) | 114 | 105 | 6% |
| Cash and cash equivalents | 2,112 | 2,698 | -22% |
| Equity | 4,752 | 4,315 | 10% |
| Total assets | 7,437 | 7,111 | 5% |
Shares artnet AG (EUR)
Inhalt
- 4 Letter to Shareholders
- 6 Core Statement Company Development
- 7 Company Background
- 8 Report of the Supervisory Board
- 9 Corporate Governance Report
- 13 Responsibility Statement artnet Group Management Report 2011
- 23 Financial Statements, as of December 31, 2011 und 2010 artnet AG Consolidated Statements of Financial Position artnet AG Consolidated Statement of Comprehensive Income artnet AG Consolidated Statement of changes in Shareholder's Equity (USD and EUR)
- artnet AG Consolidated Statement of Cash Flows
- 28 Notes to the Consolidated Financial Statements 2011
- 47 Translation of the Independent Auditor's Report
- 48 artnet Authorities, Addresses,
- Investor Relations, artnet Stock Imprint
Hans Neuendorf CEO artnet AG, Berlin
Dear Shareholders,
2011 was the year of the Internet—in many, many ways. The World Wide Web had never before been at the very heart of the world's interests. Let me mention just a few key words: in the world of business, key players were Mark Zuckerberg with Facebook, Sergej Brin and Larry Page with Google or Andrew Mason with Groupon. Their ideas and business models soared to record-breaking heights—both in terms of their valuations and on the stock market. In the world of society and the gossip columns, it was Jack Dorsey with Twitter who re-defined newsfeed. And in the world of politics the focus was on the "Arabian Spring", which would not have been possible without the Internet, caused and driven by people such as Lina Ben Mhenni in Tunisia or Fattah in Egypt, both of whom are now legendary bloggers. Or Julian Assange with Wikileaks, whose platform caused diplomatic earthquakes.
In other words: if we had still needed any more evidence of the strength of the Internet and the opportunities it offers, it certainly provided this in 2011. That is also why my colleagues and I believe that our idea and our business model have been confirmed yet another time. The summer of 2011 provided the final proof that our concept is a winner. On July 21, we recorded a record price of USD 1,322,500 (including purchaser's premium) when Andy Warhol's Flowers was auctioned on artnet's platform. That is the highest price ever recorded for a picture from the Flowers series, and is also the best ever price for one of artnet's Online-Fine-Art auctions.
This sale confirms what we at artnet have known for a long time: art collectors are also prepared to acquire top-quality works of art online. This auction is also symbolic: it had to be Andy Warhol, who epitomizes the commercialization of art, and who said: "If you think about it, department stores are kind of like art museums."
After Warhol, we were able to enjoy additional successes with prominent representatives of contemporary art, including John Chamberlain, Nam June Paik and Yang Shaobin. We will consistently continue this series of auctions with major artists in 2012. Both the number of bidders at auctions and also visitors to our home page recently broke new records. artnet has long been a port of call for professionals and specialists in the art business. Now it is a platform for a broad audience interested in art and artists. As a result, we are opening up not only artnet, but also the entire art market to new target groups. All age groups, all levels of education, and people from all of the world now have access to art—without any fear of contact, resentment or restrictions on access. artnet offers art for everyone.
Fiscal year 2011—I have to say—did not put our business quite as far ahead as we had imagined and hoped for. Both our revenues and earnings are slightly lower than in the previous year. Numerous delays and technical problems and extraordinary costs depressed our operating business last year. In 2011 we recorded revenues of EUR 13,340 million compared to EUR 13,672 million in 2010. Consolidated earnings totaled around EUR 32,000 (USD 44,000) after EUR 153,000 (USD 203,000) in 2010.
Over the past four years, artnet has invested USD 6.2 million in online auctions and indices which will contribute to earnings for the first time in the current year, and we are thus excellently positioned. Our price database is and remains our key USP in the industry. No other company can offer this quality and wide range of figures, data and facts. We will increase transparency once again with the C50 index, which is expected to be presented in May 2012, and we will provide unique valuation material for the art market over a period of 25 years with the best known artists. Coupled with our products artnet Galleries, artnet Advertising and artnet Magazine, we offer an excellent package.
Even our major competitors recognize this fact. In an interview with the Frankfurter Allgemeine Zeitung (FAZ) in February 2012, Tobias Meyer, Director for Contemporary Art with Sotheby's, commented on artnet: "This is one of the most important players shaping the market that there is!" And the media have discovered artnet as the market leader.
This reporting is boosting awareness of the company and is positioning the brand. Well known newspapers and magazines have praised our business model and the success of artnet Auctions in a large number of interview and articles, including the Frankfurter Allgemeine Zeitung, Focus, Manager Magazin Online and the Handelsblatt. That is where you can find one of my quotes, which I am happy to use again here: "It is only a question of time until all of the art trade takes place online!"
Yours sincerely,
Hans Neuendorf
Core Statement
artnet is the international transaction platform for the art market with an integrated information offering. artnet Auctions allows rapid transactions at little cost, the artnet Price Database offers objective price information and artnet Galleries provides a global market overview.
In its 20-year existence, B2B company artnet has also opened up to the B2C business, while it further operates a qualified C2C business on artnet Auctions. This dynamic forms its own cycle. The artnet information services lend artnet Auctions a knowledge advantage. The auction players are potential new buyers in artnet Galleries as well as potential new subscribers to other artnet products. And on artnet Auctions, art collectors can not only buy, they can also sell.
Both among experts and for private collectors, artnet is thus synonymous with efficient online art dealing.
Company Development
artnet AG was formed in 1998 as an information service provider for the art market. It took over Artnet Worldwide Corp., which was formed in New York in 1989 and had moved the artnet Price Database and the artnet Galleries online by the mid-1990s.
artnet has modernized the art business more than any other company. The artnet products provide reliable information and transparent commercial terms for collectors, gallery owners, museums and investors and have developed to become an indispensable tool supporting independent market players. artnet serves private art lovers as well as experts through its artnet Auctions, thereby covering all areas of the art market. Through artnet Auctions, artnet has developed from a pure information service provider to become a transaction platform with an integrated information offering and has further expanded its leading position on the art market.
artnet has gradually built up its information and transaction offering around its first product, the artnet Price Database Fine Art and Design. This was the response to the decentralised art market at the end of the 1980s. At the time it lacked transparency, which was a stumbling block for buyers in particular. The art business had of course always been international, however it was managed locally on a relatively inefficient market by tens of thousands of geographically dispersed art dealers, galleries, auction houses, book publishers, museums and collectors. The artnet Price Database provides these local markets with a global standard of comparison. The artnet Price Database Fine Art and Design lists the auction results of 180,000 artists and designers and adds to them on a continuous basis. Since 2009 the database has been enhanced with the artnet Price Database Decorative Art, which contains the results of international antique auctions. The artnet Price Database records a total of over 5.5 million auction results taken from 550 international auction houses and dating back to 1985.
A further pillar in the artnet business is the product artnet Galleries, which was introduced in 1995. With 2,100 galleries and auction houses, presenting over 37,000 artists and with 173,000 works of art, this product offers the world's most comprehensive overview of art dealing. The gallery network serves dealers and art buyers in equal measure by giving them an overview of the global market, prices and price trends and allowing them to get in contact directly.
artnet created a modern and efficient platform for art dealing in 2008 with artnet Auctions, which has also modernised the auction business thanks to faster processing and lower costs. When offering a work of art on artnet Auctions there is no need to transport, insure or exhibit the work. Nor is there any need to print catalogues. artnet Auctions is available around the clock at artnet.com/auctions. Submitting a lot, bidding and the sale take place in such quick succession that artnet only needs five weeks where conventional auction houses would require five months. Thanks to the resulting cost advantages, through artnet Auctions artnet is able to serve the market segment below USD 10,000, while at the same time also offering lots at much higher prices.
Thanks to the artnet iPhone App, the artnet products are also available via mobile Internet, thereby offering its customers even greater flexibility in the art business. This App allows users on the go access to artnet Auctions, the artnet Magazine in English, German and French and all artists represented in artnet Artists A–Z. The artnet Price Database features are also being made available through the artnet iPhone App in 2011.
The artnet success story has also enabled the company to grow. The company was first listed as artnet. com AG on the Neuer Markt of the Frankfurt Stock Exchange in 1999. artnet.com AG changed its name to artnet AG in 2002 and was traded on the Geregelter Markt (Regulated Market) of the Frankfurt Stock Exchange from October 4, 2002. artnet AG has been listed in the Prime Standard of the Frankfurt Stock Exchange since February 1, 2007, the segment with the highest transparency standards.
An office was opened in London on November 1, 2007, with the formation of artnet UK Ltd., the UK subsidiary of Artnet Worldwide Corp. On July 3, 2008 Artnet Worldwide Corp. formed Paris-based artnet France sarl, which maintains the French artnet website artnet.fr, and the French artnet Magazine. artnet AG and its subsidiaries employ a total of 114 people.
Company Background
artnet.com AG was incorporated under the laws of Germany in 1998. In 1999 Management took the company public on the Neuer Markt of the Frankfurt Stock Exchange. In 2002 artnet.com AG changed its name to artnet AG. On October 4, 2002, artnet AG left the Neuer Markt and was then listed in the General Standard at the Frankfurt Stock Exchange, a segment of the EUregulated Geregelter Markt. Effective February 1, 2007, artnet AG is now listed in the Prime Standard of the Frankfurt Stock Exchange. Its principal holding is its wholly owned subsidiary, Artnet Worldwide Corp., a New York corporation that was founded in 1989. The consolidated financial statements are prepared in accordance with the International Financial Standards (IFRS).
Report of the Supervisory Board
The Supervisory Board performed its duties according to the law and the articles of incorporation during the year under review and supervised the management. In the year 2011 the Supervisory Board held six meetings, with all of the members attending all of the meetings. It received regular, detailed Information throughout the entire year in written and oral reports from the Management Board on the company's situation, the course of its business, and its strategy and important decisions. The quarterly and semiannual reports and the detailed results from the individual segments were discussed with the Management Board. The Management Board discussed issues of fundamental importance for Corporate policy on an ongoing basis with the Supervisory Board. The Supervisory Board has not formed any committees.
The Supervisory Board's meetings focused on revenue and profit growth, the company's liquidity, its major expenditure and human resources policies, international activities and the future position of the individual segments. In addition, economic and technical issues for the individual divisions (artnet Price Database, artnet Auctions, artnet Galleries) were discussed indepth. Issues concerning corporate governance and compliance were also discussed.
The annual financial statements (HGB) and the consolidated financial statements (IFRS) prepared by the Management Board for artnet AG for fiscal year 2011, together with the management report and group management report were audited by the auditing firm Ebner Stolz Mönning Bachem GmbH & Co. KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Hamburg. The Supervisory Board is convinced of the auditor's independence. The auditors came to the conclusion that both the annual financial statements (HGB) and also the consolidated financial statements in accordance with the provisions of IFRS present a true and fair view of the financial position and results of operations for the financial year, and issued an unqualified auditor opinion in each case for the audited financial statements.
The annual financial statements prepared by the Management Board for artnet AG as of December 31, 2011 and the consolidated financial statements for financial year 2011 were presented for review by the Supervisory Board, together with the management reports. After completing their audit, the auditors participated in the Supervisory Board's meeting to discuss the financial statements and reported on the results of their audit. The Supervisory Board concurred with the results of the audit.
The Supervisory Board reviewed the annual financial statements and consolidated financial statements of artnet AG and the associated management reports. Having completed its own in-depth review, no objections were raised by the Supervisory Board.
The Supervisory Board approved the annual financial statements for artnet AG prepared by the Board of Directors in the version audited by Ebner Stolz Mönning Bachem GmbH & Co. KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Hamburg, with a resolution on March 28, 2012. The annual financial statements as of December 31, 2011 are thus adopted. The consolidated financial statements as of December 31, 2011 were also approved by the Supervisory Board by way of a resolution on March 28, 2012.
The Supervisory Board would like to thank the Management Board and all of the company's employees for their work in the past year.
Naples, FL, USA, March 28, 2012
John Hushon Chairman of the Supervisory Board
Corporate Governance Report
artnet attaches great importance to corporate governance. artnet AG complies with the recommendations of the German Corporate Governance Code in the current version dated May 26, 2010 with the exception of the recommendations in No. 3.8 para. 3, No. 4.2.1 sent. 1, No. 5.1.2 para. 2 sent. 3, No. 5.1.3, No. 5.3.1, No. 5.3.2, No. 5.3.3, No. 5.4.1 para. 2 (age limit for members of the Supervisory Board) and No. 5.4.6 para. 2 sentence 1.
The Management Board and Supervisory Boards of artnet AG have adopted the declaration of conformity with the code detailed at the end of this report. It is published online at www.artnet.de/IR.
According to the German Aktiengesetz, artnet AG has a dual-pronged management and control structure, comprising a sole member of the Management Board and the three-person Supervisory Board. Management and control functions are strictly split in the dual management system. It is not legally permissible to simultaneously work for the Management Board and the Supervisory Board. The tasks and responsibilities of these two bodies are clearly legally defined in each case.
The Supervisory Board monitors and advises the Management Board in conducting the business. The Supervisory Board discusses the business growth and forecasts as well as the strategy and its implementation at regular intervals. In addition, the Supervisory Board adopts the annual financial statements and appoints the members of the Management Board. The Supervisory Board has defined approval requirements by the Supervisory Board for transactions of fundamental importance. These include decisions or activities that have a fundamental impact on the company's financial position or results of operations. The Management Board provides the Supervisory Board with regular, up-to-the-minute, comprehensive information on all of the issues of relevance to the company with regard to forecasting, business growth, risks and risk management.
The members of the Supervisory Board are independent in their decision-making and are not subject to instructions or specifications by third parties. In addition, consulting, service and certain other agreements between artnet and the members of its Supervisory Board have to be approved by the Supervisory Board.
According to Item 5.4.1 of the Code, the Supervisory Board shall specify concrete objectives regarding its composition which, whilst considering the specifics of the enterprise, take into account the international activities of the enterprise, potential conflicts of interest, an age limit to be specified for the members of the Supervisory Board and diversity. These concrete objectives shall, in particular, stipulate an appropriate degree of female representation. The concrete objectives of the Supervisory Board and the status of the implementation shall be published in the Corporate Governance Report.
At the meeting on February 7, 2011 and in view of Item 5.4.1 of the Code, the Supervisory Board resolved the following objectives for its composition:
• Consideration of the international activities of the enterprise: The Supervisory Board will pay attention to ensure that the Supervisory Board has a sufficient number of members with many years of international experience or many years' experience in the USA, the country in which the artnet Group performs most of its business activities.
• Avoidance of potential conflicts of interest: Potential conflicts of interest are avoided in the Supervisory Board's election proposals to the General Meeting. The Supervisory Board does not include any former members of the Management Board or managing directors. In addition, when proposing candidates to the General Meeting, attention is paid to ensure that the respective candidate does not hold a management position or a position in the supervisory bodies of competitors, suppliers, lenders or customers, in order to avoid conflicts of interest from the very outset. If any conflicts of interest result during the period of office of a member of the Supervisory Board, the affected member of the Supervisory Board must disclose this to the Supervisory Board, addressed to the Chairman, and if there are material, non-temporary conflicts of interest they must resign from their office.
• Definition of an age limit: The Supervisory Board considers a provision of this nature to be inappropriate because general age limits would unduly limit the shareholders' discretionary powers when selecting members of the Supervisory Board.
• Consideration of diversity: The Supervisory Board's diversity is reflected in the various professional careers and activities of the members of the Supervisory Board. Female candidates must be given suitable consideration if they hold the same qualifications and are equally suitable. The Supervisory Board aims to have at least one female candidate proposed for election at the next Supervisory Board election in 2014.
The implementation status for the objectives detailed above regarding the composition of the Supervisory Board is as follows: The objectives with regard to "Consideration of the international activities of the enterprise" and "avoidance of potential conflicts of interest" have been put in place. The Supervisory Board is not pursuing the objective of "Defining an age limit"; as a result, together with the Management Board, it has declared that it will not follow this recommendation. The Supervisory Board believes that it has implemented the objective of "Consideration of diversity" to a great extent. However, there are not any female members of the Supervisory Board at present; as a result this objective has not yet been implemented.
The Management Board is in responsible for the company's management. It must follow the company's interests and undertakes to increase the sustained enterprise value. It is responsible for the company's strategic orientation in agreement with the Supervisory Board. The Management Board cooperates closely with the Supervisory Board.
The Management Board ensures that statutory provisions are upheld and that there is suitable risk management and risk control at the company.
During the past financial year, members of the company's Management Board and Supervisory Board or other executives who regularly have access to the company's insider information and who are authorized to make material entrepreneurial decisions, and certain persons closely related to these persons, made the following purchases or sales of at least EUR 5,000 during the calendar year:
| Trade date | July 11, 2011 |
|---|---|
| Name | Hannes von Goesseln |
| Function | Member of the Supervisory Board |
| Name of financial instrument | Shares |
| ISIN | DE 006909500 |
| Type of transaction | Purchase |
| Number | 1,780 |
| Price | EUR 4.662 |
| Trade date | November 10, 2011 |
| Name | Hannes von Goesseln |
| Function | Member of the Supervisory Board |
| Name of financial instrument | Shares |
| ISIN | DE 000A1K0375 |
| Type of transaction | Purchase |
| Number | 27 |
| Price | EUR 3.67 |
| Trade date | 11. November 2011 |
| Name | Hannes von Goesseln |
| Function | Member of the Supervisory Board |
| Name of financial instrument | Shares |
| ISIN | DE 000A1K0375 |
| Type of transaction | Purchase |
| Number | 1,000 |
| Price | EUR 3.599 |
On March 13, 2012, the Management Board and Super visory Board held 1.513.689 or 26,99 % of the shares or financial instruments based thereupon.
| Members of the Management Board | ||||||
|---|---|---|---|---|---|---|
| Galerie Neuendorf AG | 1,461,635 shares | |||||
| Supervisory Board | ||||||
| John Hushon | 52,054 shares |
The company's 2009 stock option plan comprises 560,000 ordinary shares with a theoretical value of EUR 1.00 per share. Subscription rights for up to 30,000 shares can be issued to the members of the company's Management Board, subscription rights for up to 240,000 shares to members of the management of affiliated companies, subscription rights for up to 10,000 shares to employees of the company, and subscription rights for up to 280,000 shares to employees of affiliated companies.
The price to be paid for one share of artnet when exercising the subscription rights corresponds to the average closing price of shares of the company in XETRA trading on the regulated market (Prime Standard) of Deutsche Börse AG, or, if this price has not been determined, in on-floor trading during the ten stock market days prior to the respective allocation date for the subscription rights. The exercise price corresponds to at least the proportionate amount of the subscribed shares to the share capital. The options may not be exercised for a period of two years. In order for the subscription rights to be exercised, the closing price of shares of artnet AG in XETRA trading on the regulated market (Prime Standard) of Deutsche Börse AG in the period between the subscription rights being issued and exercised is at least 10% higher than the exercise price on at least one stock market day during the term of the subscription rights. Options may only be exercised in groups of at least 1,000 options.
artnet AG reports to its shareholders four times each financial year on business growth and on the group companies' financial position and results of operations. The Annual General Meeting is held during the first eight months of each financial year. The General Meeting resolves on issues including the appropriation of profits, the ratification of the Management and Supervisory Boards and the election of the auditor. Changes to the articles of incorporation and capitalization activities are resolved exclusively by the General Meeting.
The Management Board and Supervisory Board resolved the following declaration within the meaning of Section 161 of the AktG:
• that the recommendations of the Government Commission of the "German Corporate Governance Code" as amended on May 26, 2010 – published in the electronic Federal Gazette (elektronischer Bundesanzeiger) on July 2, 2010 – are generally complied with. The following recommendations are not applied:
- No. 3.8 para. 3 "A similar deductible must be agreed upon in any D&O policy for the Supervisory Board."
artnet AG does not believe that the due care and diligence that the members of its Supervisory Board exercise in discharging their duties could be increased further by agreeing a deductible. For this reason, artnet AG does not intend to change existing D&O insurance policies that do not provide for such a deductible.
- No. 4.2.1 sent. 1 "The Management Board shall be comprised of several persons and have a Chairman or Spokesman."
Since its constitution, the Management Board of artnet AG has comprised one person. By contrast, the management of the subsidiary Artnet Worldwide Corp. in New York, which is largely responsible for operations within the Group, comprises several persons. Given the relatively low management effort and expense at artnet AG and to avoid unnecessary expenditure, the Company currently does not see any need to increase the size of its Management Board.
- No. 5.1.2 para. 2 sent. 3 "An age limit for members of the Management Board shall be specified."
artnet AG considers a provision of this nature to be inappropriate because general age limits would unduly limit the Supervisory Board's discretionary powers when selecting members of the Management Board.
- No. 5.1.3 "The Supervisory Board shall issue Terms of Reference."
The Supervisory Board of artnet AG comprises only three members. Previous experience of the cooperation of these members shows that Terms of Reference are not necessary.
- No. 5.3.1, No. 5.3.2, and No. 5.3.3: In these sections, the Code recommends that the Supervisory Board form committees, an Audit Committee and a Nomination Committee.
As the Supervisory Board of artnet AG comprises only three members, it does not make sense to
form committees. The tasks envisaged for the Audit Committee and the Nomination Committee are undertaken jointly by the Supervisory Board as a whole.
- No. 5.4.1 para 2: " The Supervisory Board shall specify concrete objectives regarding its composition which, whilst considering the specifics of the enterprise, take into account ... an age limit to be specified for the members of the Supervisory Board …."
artnet AG considers a provision of this nature to be inappropriate because general age limits would unduly limit the shareholders' discretionary powers when selecting members of the Supervisory Board.
- No. 5.4.6 para. 2 sent. 1: "Members of the Supervisory Board shall receive fixed as well as performance-related compensation."
The articles of incorporation of artnet AG do not provide for performance-related compensation for the members of the Supervisory Board. Following a lengthy debate, the Management Board and the Supervisory Board reached the conclusion that performance-related compensation of Supervisory Board members is not consistent with the duties of the Supervisory Board, whose primary objective is to oversee the Management Board.
• The Management Board and the Supervisory Board of artnet AG hereby declare that the recommendations of the Government Commission of the "German Corporate Governance Code" as amended on May 26, 2010 – published in the electronic Federal Gazette (elektronischer Bundesanzeiger) on July 2, 2010 – have generally been complied with since the last Declaration of Conformity dated December 30, 2010. The recommendations from No. 3.8 para. 3, No. 4.2.1 sent. 1, No. 5.1.2 para. 2 sent. 3, No. 5.1.3, No. 5.3.1, No. 5.3.2, No. 5.3.3, No. 5.4.1 para. 2 and No. 5.4.6 para. 2 sent. 1 were not applied.
Berlin, December 2, 2011
The Board of Director The Supervisory Board"
This remuneration report is geared to the Code's recommendations. It summarizes the principles that are applied when defining remuneration for artnet AG's Management Board and discusses the amount and structure of the income of the Management Board. In addition, it also describes the principles behind and amount of remuneration for the Supervisory Board. In addition, the remuneration report also includes information which is also a component of the notes to the consolidated financial statements within the meaning of Section 314 of the HGB and the group management report within the meaning of Section 315 of the HGB and thus the audit by the auditors of the consolidated financial statements.
The Supervisory Board is responsible for defining the remuneration of the Management Board. Remuneration for the Management Board of artnet AG is defined based on the company's size and activities, its economic and financial position and the amount and structure of management board remuneration at comparable companies in Germany and abroad. The remuneration is measured such that it is competitive on the international market for highly qualified managers and that it provides an incentive for successful work. In financial year 2012, the remuneration of the Management Board comprises fixed basic remuneration, a short-term incentive and a long-term variable incentive.
The individual key items of the Management Board remuneration are as follows:
Fixed basic remuneration: The fixed basic remuneration is paid monthly as a salary.
Short-term variable incentive: In addition to the fixed basic remuneration, the Management Board receives a short-term variable remuneration component. The amount of the variable bonus is at the company's discretion, which is represented by the Supervisory Board. The following rules apply when determining the short-term incentive: In the event that the company's financial result in the previous financial year roughly corresponds to the budget, the short-term incentive corresponds to half of the fixed basic remuneration. In the event that the target is less than 100% met, but more than 80% met, the company should reduce the
short-term incentive. If the target is 80% met or less, the short-term incentive is not paid. If the target is exceeded, the short-term incentive is to be increased. The short-term incentive is capped at 150% of the fixed basic remuneration.
Long-term variable incentive: The long-term incentive is based on the growth in the cash and cash equivalents in the consolidated cash flow statement in U.S. dollars in the period from January 1, 2010 and December 31, 2012. When determining the change in cash and cash equivalents, the difference between the amount of the cash and cash equivalents in the consolidated cash flow statement as of December 31, 2012 and those in the consolidated cash flow statement as of January 1, 2010 applies. If the target is 100% met, the long-term incentive totals 30% of the fixed basic remuneration. In the event that the target is less than 100% met, but more than 50% met, the company should reduce the long-term incentive proportionately. If the target is 50% met or less, the long-term incentive is not paid. If the target is exceeded, the long-term incentive is to be increased proportionately. The long-term incentive is capped at 90% of the fixed basic remuneration. Advance payments are made for the long-term incentive in 2011 and 2012 depending on the changes in cash and cash equivalents. Increasing or decreasing the amount of the advance payments by up to 20% is at the company's discretion. In the event of overpayment, the Management Board must replay the excess amount.
The company provides the Management Board with a company car (upper range), which can also be used privately. Income tax payable on the non-cash benefits from this use of the car is borne by the Management Board.
The General Meeting on July 14, 2010 approved the remuneration system described above for remuneration for the member of the Management Board.
In financial year 2011 the fixed cash remuneration for the sole member of the Management Board Hans Neuendorf totaled EUR 563.302 including the non-cash benefits from the private use of his company car and the short-term incentive of EUR 155.000 The company has not made an advance payment for the long-term incentive.
In the event of premature termination of the employment relationship, the contract for the member of the Management Board do not contain any express promise of a severance payment. A severance payment may, however, ensue from a severance agreement concluded on an individual basis.
The General Meeting defines the Supervisory Board's remuneration based on a proposal by the Board of Directors and Supervisory Board. This is regulated by the articles of incorporation.
Remuneration for members of the Supervisory Board is based on the company's size, the Supervisory Board members' tasks and responsibilities and on the company's economic situation and performance.
Members of the Supervisory Board receive fixed remuneration each year. In financial year 2011 the remuneration of the Chairman of the Supervisory Board totaled EUR 45,000, of the Deputy Chairman EUR 37,750 and of the third member of the Supervisory Board EUR 22,500.
March 13, 2012
artnet AG
The Board of Director The Supervisory Board
Responsibility Statement
To the best of knowledge, and in accordance with the applicable reporting principles, the following consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the artnet Group. The Group Management Report includes a fair review of the development and performance of the business, as well as, the position of the Group, along with a description of the principal opportunities and risks attributed to the expected Group development.
Berlin, March 28, 2012
The CEO Hans Neuendorf
Group Management Report 2011
1 Economic Environment
2011 marked the fourth consecutive year of lackluster global economic growth. Most European countries continued to be plagued by the sovereign debt crises which disrupted international financial markets. Growth in the major developing countries has slowed, and late signs of recovery in the United States are mixed at best.
The market for premium Fine Art has looked increasingly attractive as a legitimate alternative to conventional investments. As a result the secondary market in high end art at auction and in large galleries has continued to perform in 2011 driven by speculative investment in a small number of mainly contemporary artists.
Art collectors, however, have remained cautious and sales for the majority of artists have continued to slow down. Many galleries are having a hard time and are looking to cut back expenses and reduce activities.
2 Business Organization, Strategy, and Development
artnet AG is a holding company listed on the "Regulierter Markt" in the Prime Standard segment at the Frankfurt Stock Exchange. artnet AG's principal holding is its wholly-owned subsidiary, Artnet Worldwide Corporation, a New York corporation founded in 1989. artnet AG ("the Company") and Artnet Worldwide Corporation ("Artnet Corp.," collectively, "the artnet Group" or "the Group") operate under the trade name "artnet."
Artnet Corp. has two wholly-owned subsidiaries: artnet UK Ltd. and artnet France sarl. artnet UK Ltd. provides sales and client support in the United Kingdom. artnet France sarl maintains the content of the French artnet domain under www.artnet.fr, where it publishes an online magazine in French; it also conducts sales and provides customer service in France.
With a 2011 average of 1.8 million monthly unique visitors on its three domains artnet.com, artnet.de, and artnet.fr, artnet offers the world's most comprehensive art market overview, enabling collectors and art professionals to better navigate the art market by providing timely information about artwork values, artists, their galleries, price developments, exhibitions, news, and reviews.
As of December 31, 2011, artnet Galleries represents over 2,000 of the world's most prestigious art galleries and auction houses on five continents. Members of artnet Galleries are indexed by specialty and location, and represent an aggregate 172,000 works in inventory from 35,000 artists. Besides all forms of contemporary, modern, and classic Fine Art, artnet Galleries also offers Decorative Art and Design objects from the 1st century BC to the present.
The artnet Price Database is an updated archive of over 6.4 million illustrated auction records from over 550 of the world's top auction houses, giving price transparency to an otherwise secretive market. Subscribers to the artnet Price Database Fine Art and Design and the artnet Price Database Decorative Art receive access to upcoming auction information, current results, and auction results dating back to 1985, and with that, the most up-to-date and impartial appraisal value for artworks they would like to buy or sell. The artnet Price Database is widely subscribed by appraisers, dealers, auctioneers, financiers, as well as private and government institutions, including the IRS and the FBI. Most importantly, it provides an illustrated "blue book" for private collectors with which to appraise the works they own, and measure opportunities at upcoming auctions or on the dealer market. Dealers and auctioneers also use comparable sales from the artnet Price Database to support the valuation and sale of important works of art.
A derivative of the artnet Price Database is the artnet Market Alert, which informs subscribers by email when artworks by their favorite artists come up at auction, or when they are offered by any of the artnet Galleries members or on artnet Auctions.
With artnet Auctions, artnet has become a business-tocustomer transaction platform with an integrated information resource. The main advantages for buyers and sellers on artnet Auctions are the attractive pricing and the fast turnaround, which can be finalized in a few weeks, compared to the six months or a year required by the brick-and-mortar art auctioneers. artnet Auctions routinely sees works by blue-chip Modern and Contemporary artists sell in the five- and six-figure range.
artnet Monographs is an online art library developed in close collaboration with artists, estates, foundations, and galleries. This growing resource of Modern and Contemporary artists' monographs features comprehensive artwork selections and 142 biographies and can be viewed free of charge on the artnet website.
The artnet management takes a goal-oriented approach to managing and monitoring the strategic objectives for the Group. Once a year the Supervisory Board and the directors set specific goals for revenue, operating results, product development, and product launches. In 2011 the Group achieved its goal of growing the artnet Auctions revenue to over EUR 2,000,000 or 7% growth (USD 2,900,000 or 12% growth in USD).
In 2012, artnet will continue to focus on the growth of artnet Auctions with a continued emphasis on selling higher-value lots and reaching a larger audience, including geographically.
Additionally, artnet plans to launch the full version of artnet Analytics in the second quarter of 2012. artnet Analytics is a sophisticated suite of art indices and customized analytics reports. The new product has already received remarked attention from premier financial services, art advisory services, and insurance companies.
The Group also believes that the overall globalization of the art market and increased use of the Internet for art information and purchases present unique opportunities. As global trade expands and the number of multinational companies grows, artnet is positioned to leverage this trend through its online platform, which is available in three languages and accessible through the Internet in all countries worldwide. Additionally, artnet is exploring the possibility of a Mandarin language website.
During the year ended December 31, 2011 the Company's revenue decreased by 2% in EUR (increased by 2.5% in USD) to EUR 13,341,000 (USD 18,560,000), from EUR 13,673,000 (USD 18,109,000) in 2010.
artnet Galleries, the artnet Price Database, and artnet Auctions generate approximately 87% of the artnet revenue. Widely subscribed, and information-based, the artnet Price Database provides reliable, up-to-theminute price information, while artnet Galleries signals the availability of inventory at galleries and auction houses worldwide. artnet Auctions allows transactions in real time with inventory sourced primarily from gallery members and dealers. While it is a relatively new product, producing only 16% of artnet gross revenues, it is the fastest growing segment with revenue increasing by 7% in EUR (12% in USD) to EUR 2,080, 000 (USD 2,894,000) for the year ended December 31, 2011, from EUR 1,951,000 (USD 2,584,000) in the same period in 2010.
artnet Auctions revenue growth was driven by higher volume and higher average price per lot: USD 6,034 in 2011 up from USD 5,300 in 2010. As the price of the lots goes up, the average buyer's and seller's premiums go down: the average for 2011 was 19% vs. 21% in the same period in 2010.
artnet Galleries revenue was lower by EUR (291,000) or (6%) (USD (60,000) or (1%)). Number of gallery memberships in 2011 went down by 130 as compared to the same period in 2010. The Group implemented a new pricing offer in the third quarter of 2011 which will produce effects in 2012.
artnet Price Database revenue decreased by EUR (292,000) or (6%) (USD (73,000) or (1%)).
artnet Advertising revenue increased in EUR by 8% (in USD by 14%).
3 Results of Operations, Financial Position, and Net Assets
Loss from operations increased by EUR 42,000 (USD 61,000) to EUR (70,000) (USD (97,000)) from EUR (27,000) (USD (36,000)) in the same period in 2010. The revenue for the period decreased by EUR (332,000) (but increased by USD 450,000) despite the increase in artnet Auctions revenue due to lower revenue from artnet Galleries and the artnet Price Database. The Group incurred further costs due to developing artnet Auctions and to increasing website capability and security. Development costs for artnet Analytics for the amount of EUR 632,000 (USD 880,000) were capitalized. Increase in overheads is driven by legal fees related to employee disputes which are now settled.
Net profit decreased by EUR (121,000) (USD (159,000)) to EUR 31,000 (USD 44,000) in 2011 from EUR 153,000 (USD 203,000) in 2010. The decrease is driven by higher loss from operations partially offset by the capitalization of deferred tax assets at Artnet Worldwide Corp. for EUR 302,000 (USD 418,000). Other income/expense in the amount of EUR (125,000) (USD (174,000)) primarily results from currency exchange rate differences. Diluted earnings per share were EUR 0.01 (USD 0.01) compared to EUR 0.03 (USD 0.04) in the same period in 2010.
Currency conversion in the consolidated statement of comprehensive income is based on the average exchange rate for the period ending December 31, 2011 and 2010, respectively. For the year ended 2011, the average rate was 0.719 EUR/USD compared to 0.755 EUR/USD for the year ended 2010. This represents a 5% decrease in the average currency rate. Currency conversion for the balance sheet is based on the exchange rate at the end of the period. As of December 31, 2011, the rate was 0.772 EUR/USD compared to 0.755 EUR/USD on December 31, 2010, representing a 2% increase.
artnet is subject to exchange rate fluctuations because it invoices in euros, US dollars, and British pounds, but conducts most of its business in the United States. The Group works to reduce its exposure to exchange rate differences using the natural hedge stemming from billing European customers in euros and British customers in British pounds, and paying local vendors in the same currency.
Group operating cash flow was EUR 402,000 in 2011 as compared to EUR 651,000 in 2010. Operating cash flow was negatively impacted due to a lower net profit as compared to the prior year. In addition, in November 2011, artnet had to pay the security deposit and first monthly rent for the lease starting April 1, 2012 for new office location of Artnet Worldwide Corp. for a total impact of EUR (281,000).
Group investing cash flow was EUR (855,000) in 2011 as compared to EUR (172,000) in 2010. Investing cash flow is affected by investment in new products such as the capitalization of EUR (633,000) for artnetAnalytics, as well as a EUR (136,000) down-payment for office furniture for Artnet Corp.
The cash flow for financing activities was EUR (172,000) in 2011 and EUR (132,000) in 2010. The amounts represent payments towards finance leases.
In total, the cash balance decreased from EUR 2,698,000 (USD 3,575,000) on December 31, 2010 to EUR 2,112,000 (USD 2,736,000) on December 31, 2011.
The cash investment policy for the Group is conservative and based on short-term investments. This policy allows all cash to be liquid and available. Based on the average outstanding shares of 5,552,986, liquidity per share was EUR 0.38 (USD 0.49) on December31, 2011 compared to EUR 0.49 (USD 0.64) on December 31, 2010.
The balance sheet total was EUR 7,437,000 (USD 9,631,000) on December 31, 2011 compared to EUR 7,111,000 (USD 9,424,000) on December 31, 2010, representing an increase of 5% (2% in USD).
Trade accounts receivable decreased by EUR 190,000 (USD 281,000) to EUR 941,000, (USD 1,218,000).
Fixed assets increased by EUR 419,000 (USD 498,000) to EUR 1,899,000 (USD 2,459,000). The Group's fixed assets are primarily in USD. The increase is driven primarily by the capitalization of development costs for artnet Analytics for EUR 632,000 (USD 880,000) and new office furniture EUR 136,000 (USD 189,000) only partially offset by continued depreciation and amortization.
Total current liabilities decreased by EUR (66,000) (USD (1,167,000)) from EUR 2,700,000 (USD 3,578,000) on December 31, 2010 to EUR 2,634,000 (USD 3,411,000). Long-term liabilities also decreased by EUR (46,000) (USD (63,000)) to EUR 50,000 (USD 66,000), despite a new finance lease entered in March 2011 to purchase hardware and software for the network infrastructure, due to lower long-term liability from finance leases signed in prior years.
artnet Group's consolidated equity was EUR 4,752,000 (USD 6,154,000) on December 31, 2011 compared to EUR 4,315,000 (USD 5,718,000) on December 31, 2010. The artnet Price Database is an intangible asset that has been developed by gathering auction information over the last 20 years. This valuable asset to the Group has not been attributed full earnings recognition on the balance sheet due to accounting rules. Balance sheet assets would be substantially increased if this recognition were allowed by law.
As of December 31, 2011 there were 114 full-time employees vs. 105 in the previous year. Additionally, the
Group employed 18 part-time employees in 2011 vs. 13 in the previous year and 11 sales and other consultants vs. 13 in 2010.
Personnel costs were EUR 7,020,000 (USD 9,766,000) compared to EUR 6,835,000 (USD 9,052,000) in 2010. The increase is primarily the result of an increase in artnetAuctions, content management, and product development staff as compared to 2010
The artnet website is the foundation for all of our products. It is crucial to stay updated with current technology and to develop new products that enhance the user experience. Our developers use code based on Microsoft technology enabling them to adapt current applications to changing customer requirements. In 2010, the team launched the artnet iPhone App, which allows access on the go to artnet Auctions, artnet Artists A–Z, artnet Price Database, and the three artnet Magazines. In 2011, attention shifted to homepage redesign, artnet Auctions page enhancement, and, last but not least, artnet Analytics development, which was capitalized.
4 Disclosure of Takeover Provisions (Reporting in Accordance with § 315 Par. 4 of the German Commercial Code)
The fully-paid capital stock of artnet AG remains unchanged at EUR 5,631,067 on December 31, 2011 and is divided into 5,631,067 no-par value individual bearer shares with a calculated value of euro 1.00 each. On September 26, 2011, the 5,631,067 ordinary shares of the company were traded on the stock exchanges as registered shares for the first time.
Voting limits or limits regarding the assignment of these shares do not exist.
Holdings which exceed 10% of the voting rights in artnet AG are held by:
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- Galerie Neuendorf AG, Berlin, Germany, with 25,96 %
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- Artis Capital Management LLC, San Francisco, CA, USA, with 15,13 %
There are no shareholders with privileges.
Any employee with holdings in artnet AG is obliged to exercise their control rights in a direct manner.
Members of the Executive Board are appointed and dismissed in accordance with §§ 84, 85 of the German Stock Corporation Act. Amendments to the Articles of Association shall be made in accordance with §§ 133, 179 of the Stock Corporation Act.
The Shareholders' Meeting of artnet AG on July 15, 2009 authorized the Management Board, with the approval of the Supervisory Board, to increase the capital stock by up to EUR 2,800,000.00 before July 14, 2014 through the issue of 2,800,000 new no-par value bearer shares in exchange for cash contributions or contributions in kind (Authorized Capital 2009/I). In 2011 and 2010 no common shares were issued under this Authorized Capital.
The Shareholders' Meeting on July 15, 2009 conditionally increased the capital stock by EUR 560,000 through the issue of up to 560,000 new no-par value bearer shares to members of the Company's Management Board and members of the management of affiliated entities as well as to employees of artnet AG or its subsidiaries (Conditional Capital2009/I). The conditional capital increase serves to grant options to members of the Management Board of artnet AG, members of management of affiliated companies (§ 15 of the German Stock Corporation Act), employees of artnet AG, and employees of affiliated companies, which the Shareholders' Meeting on July 15, 2009 authorized the Management Board to issue.
The new shares shall carry dividend rights from the beginning of the fiscal year in which they are created through the exercise of subscription rights. The conditional capital increase will only be implemented to the extent that the subscription rights are exercised.
The entry of the amendments of the articles of incorporation in the Company's commercial register, as required for the effectiveness of these resolutions by the Shareholders' Meeting, took place on February 2, 2010. The Shareholders' Meeting of artnet AG on July 14, 2010 authorized the Management Board, with the approval of the Supervisory Board, to acquire its own shares until the end of July 13, 2015 up to a 10% stake in current share capital. At no point may the acquired shares, together with other own shares owned by the company or attributable to the company under Articles 71 a et seq. AktG (German Stock Corporation Act), constitute more than 10% of the share capital. The time limit applies only to acquiring—and not holding—the shares.
5 Declaration of conformity with the German Corporate Governance Code of section 161 AktG
The actual Declaration of Compliance with the German Corporate Governance Code is available on the company´s website, at www.artnet.com.
5 Remuneration Report
This remuneration report is geared to the recommendations of the German Corporate Governance Code. It summarizes the principles that are applied when defining remuneration for artnet AG's Management Board and discusses the amount and structure of the income of the Management Board. In addition, it also describes the principles behind and the amount of remuneration for the Supervisory Board. In addition, the remuneration report also includes information, which is also a component of the notes to the consolidated financial statements within the meaning of Section 314 of the HGB and the group management report within the meaning of Section 315 of the HGB.
The Supervisory Board is responsible for defining the remuneration of the Management Board. Remuneration for the Management Board of artnet AG is defined based on the company's size and activities, its economic and financial position, and the amount and structure of management board remuneration at comparable companies in Germany and abroad. The remuneration is measured so that it is competitive on the international market for highly qualified managers and that it provides an incentive for successful work. In the fiscal year 2011, the remuneration of the Management Board comprises fixed basic remuneration, a short-term incentive, and a long-term variable incentive.
The individual key items of the Management Board remuneration are as follows:
Fixed basic remuneration: The fixed basic remuneration is paid monthly as a salary.
Short-term variable incentive: In addition to the fixed basic remuneration, the Management Board receives a short-term variable remuneration component. The amount of the variable bonus is at the company's discretion, which is represented by the Supervisory Board. The following rules apply when determining the short-term incentive: in the event that the company's financial result in the previous fiscal year roughly corresponds to the budget, the short-term incentive corresponds to half of the fixed basic remuneration. In the event that the target is less than 100% met, but more than 80% met, the company should reduce the shortterm incentive. If the target is 80% met or less, the short-term incentive is not paid. If the target is exceeded, the short-term incentive is to be increased. The short-term incentive is capped at 150% of the fixed basic remuneration.
Long-term variable incentive: The long-term variable incentive is based on the growth in the cash and cash equivalents in the consolidated cash flow statement in US dollars in the period from January 1, 2010 to December 31, 2012. When determining the change in cash and cash equivalents, the difference between the amount of the cash and cash equivalents in the consolidated cash flow statement as of December 31, 2012 and those in the consolidated cash flow statement as of January 1, 2010 applies. If the target is 100% met, the long-term variable incentive totals 30% of the fixed basic remuneration. In the event that the target is less than 100% met, but more than 50% met, the company should reduce the long-term variable incentive proportionately. If the target is 50% met or less, the longterm incentive is not paid. If the target is exceeded, the long-term variable incentive is to be increased proportionately. The long-term incentive is capped at 90% of the fixed basic remuneration. Advance payments are made for the long-term variable incentive in 2010 and 2012 depending on the changes in cash and cash equivalents. Increasing or decreasing the amount of the advance payments by up to 20% is at the company's discretion. In the event of overpayment, the Management Board must repay the excess amount.
The company provides the Management Board with a company car (upper range), which can also be used
privately. Income tax payable on the non-cash benefits from this use of the car is borne by the Management Board.
In the fiscal year 2011, the fixed cash remuneration for the sole member of the Management Board Hans Neuendorf totaled EUR 408,302.00 including the noncash benefits from the private use of his company car and the short-term incentive of EUR 155,000.00.
In the event of premature termination of the employment relationship, the contract for the member of the Management Board does not contain any express promise of a severance payment. A severance payment may, however, ensue from a severance agreement concluded on an individual basis.
The General Meeting defines the Supervisory Board's remuneration based on a proposal by the Management and Supervisory Boards. This is regulated by the articles of incorporation and, for the fiscal year 2011, also by the resolution by the General Meeting held on July 13, 2011.
Remuneration for members of the Supervisory Board is based on the company's size, the Supervisory Board members' tasks and responsibilities, and the company's economic situation and performance.
Members of the Supervisory Board receive fixed remuneration each year. The chairman of the Supervisory Board receives EUR 45,000, the deputy chairman receives EUR 33,750, and the third member of the Supervisory Board receives EUR 22,500.
6 Risk Report Reporting in Accordance with § 315, Par. 2 Nos. 2 and 5 of the German Commercial Code
The Management Board has set up an internal control system for the organizational, technical, and commercial workflows in the Group. A key component is the segregation of duties, which aims to ensure that executory (e.g., sales), booking (e.g., financial accounting), and administrative (e.g., IT administration) activities do not stem from a single source.The four eyes principle ensures that no major process goes uncontrolled.
The artnet Group has implemented a risk management system in order to identify and monitor the Group's operating and financial risks and decrease the impact of unexpected events. The major elements of the risk management system are:
1) The financial systems in which both the progress and the actual results of the operations are monitored and reported on a monthly basis
2) The IT infrastructure systems that support the website
3) The project management system that tracks the progress of technology projects
4) The website traffic tracking system that tracks key areas of website traffic
The risk management system ensures that critical information is reported directly to the Group's management.
The artnet Group uses a predominantly spreadsheetbased management and control system to measure, monitor, and control business growth and risks. This system is mostly based on data from financial accounting. The existing risks are documented and assigned to responsibility levels within the artnet Group as part of a risk inventory and the resulting risk management system. This shows that the existing risk potential is observed in good time and, if possible, suitable activities to limit risks are put in place.The risk management system includes regular internal reporting on the course of business and current market developments and customer relationships as well as a uniform group forecasting and budgeting process, which deals with factors including operational risks and changes in the business environment. This process is supported by regular analyses of the market and competition.
Operating management is directly responsible for the early recognition, control, and communication of risks. As a result the artnet Group can react as quickly and extensively as possible to risks that may potentially occur. In so doing, risk policy is geared towards pursuing sustainable growth and creating economic value while avoiding managing inappropriate risks. The Group has identified the following key risks:
External Risks
artnet is affected by fluctuations in the art market. The art market is influenced by conditions in the domestic and global economies. It is unclear how they will affect the art market in the near future.
Operating Risks
Any interruption in the function of the website could reduce current revenues and profits of artnet, and possibly reduce those in the future. Frequent or persistent interruptions in service could cause current or potential users to believe that the Group's systems are unreliable. This could adversely affect the corporate image and reputation of artnet. These interruptions increase the burden on the IT Department, which, in turn, delays the introduction of new features and services. Although the Group's systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, and other disasters. The artnet website servers are located in a secured facility.
The future success of artnet will depend on the Group's ability to adapt to rapidly changing technologies and evolving industry standards. The Group plans to continue to improve the performance, features, and reliability of the website, as well as launch new products benefiting current and potential customers of artnet. The Group observes market trends and focuses on product development. To this end, artnet has expanded its development team in the past years. These increases in staffing will allow artnet to meet the growing demands of its customers, as well as, increase growth potential with new product launches.
Traffic is important to the artnet website. A decrease in traffic would significantly impact sales for all product lines. artnet monitors traffic on a daily, weekly, and monthly basis in order to ensure traffic is within expectations. Additionally, in order to increase traffic, the Group requires a greater financial commitment to advertising and marketing. To the extent possible, artnet monitors the increased traffic and website product sales against costs in order to minimize spending risk.
Legal Risks
artnet protects itself through the trademark of the artnet name in the Group's key market areas in particular, the United States, Germany, France, and the European Union. Trademark infringements are costly and are subject to reviews from national authorities, which could result in a negative outcome for the Group. Additionally, the Group must defend itself against copyright and other legal claims, which could also result in a negative outcome for the Group.
artnet stores customer data in compliance with all current laws and regulations. However, if a third party were to succeed in bypassing the artnet security measures and obtain customer information, artnet could be liable for any damages incurred.
Financial Risks
artnet conducts a portion of its business outside the United States, thereby facing exposure to adverse movements in currency exchange rates. As exchange rates vary, net sales and other operating costs, when calculated, may differ substantially from expectations. artnet does not currently hedge against such currency risks, however, the group companies accept payments from clients and pay vendors using euros and British pounds. This aids in reducing the foreign currency exchange risk.
With the exception of adverse currency fluctuations, the artnet Group currently faces no other significant financial risks.
artnet has no significant concentration of credit risk because the exposure is averaged over a large number of customers including individuals and entities dealing in the Fine Art market. Nevertheless, the economic downturn worldwide could negatively influence the solvency of the Group's customers, leading to an increase in the average credit period or at worst, leading to an increase in customer default. This would negatively affect the Group's earnings, as well as its financial position. artnet tries to counter such risks by agreeing upfront payments with customers whenever this is possible.
artnet has no significant interest bearing debt and has a sufficient amount of cash at its disposition so that
the Group faces no material liquidity or interest risk. Due to the relatively small financial risks in the business, artnet has not used any derivative financial instruments to further hedge or control these risks.
Other Risks
The market for skilled and motivated managers is highly competitive. The relatively small size of artnet makes it vulnerable to the negative impact of the loss of a key employee. The Group's performance can be affected by such a loss. artnet counters such personnel risks by offering a stock option incentive plan to its key employees, as well as, a shared knowledge system within departments.
There is the possibility that the above list does not outline all risks to which artnet is exposed. Unrecognized and unreported risks could arise causing negative effects on business performance. The Group continues to monitor its environment and review the effectiveness of the risk management systems. Despite continuous adjustments to the risk management system, it is not possible to entirely quantify the probability of risks occurring or their financial impact.
8 Subsequent Events
No reportable events of significant importance have occurred after the balance sheet date.
9. Outlook
Despite the current climate of uncertainty in global financial markets, we feel that artnet is positioned to benefit from increased interest and confidence in art as an asset. Furthermore we believe that the adoption of online trading and confidence resuming in the US market, which accounts for nearly 60% of artnet revenues, will lift all segments of the Company's business and aid us in our planned expansion into new markets.
Recent auction house sales activity as well as the growing number of art fairs would support that Fine Art is rapidly gaining acceptance as a viable alternative asset class, particularly at the higher end of the market. artnet Auctions and artnet Analytics position the Company to gain significantly from the recent developments in the market's interest in Fine Art as an asset, and its need for superior sources of market data on price developments.
artnet Auctions remains the Group's most significant short- and long-term growth opportunity as we continue to push for higher value lots, both from dealers and private collectors. Reinforced marketing and public relations initiatives, including social media, will help artnet Auctions reach a broader audience and achieve profitability.
Additionally, after four years of continuous development of new products and upgrading the Company's web presence, development costs are expected to drop in 2012, contributing to a positive bottom-line growth. We assume to be able to continue this trend in 2013.
Berlin, March 28, 2012
The CEO
Hans Neuendorf
Financial Statements as of December 31, 2011 and 2010
artnet AG Consolidated Statement of Financial Position
As of December 31, 2011 and Dezember 31, 2010
| 12/31/2011 | 12/31/2010 | 12/31/2011 | 12/31/2010 | ||
|---|---|---|---|---|---|
| Consolidated | Consolidated | Consolidated | Consolidated | ||
| Notes | USD | USD | EUR | EUR | |
| Current Assets | |||||
| Cash and cash equivalents | |||||
| Liquide Mittel | 3 | 2,735,520 | 3,575,208 | 2,112,368 | 2,697,852 |
| Accounts receivable-net | 4 | 1,217,973 | 1,498,519 | 940,519 | 1,130,782 |
| Prepaids and other current assets | 5 | 676,248 | 601,324 | 522,199 | 453,759 |
| Total current assets | 4,629,741 | 5,675,051 | 3,575,086 | 4,282,393 | |
| Noncurrent Assets | |||||
| Property and Equipment | 6 | 792,402 | 941,838 | 611,893 | 710,711 |
| Intangible assets | 7 | 1,666,614 | 1,019,034 | 1,286,959 | 768,963 |
| Security deposit | 634,498 | 298,468 | 489,959 | 225,224 | |
| Deferred tax asset | 8 | 1,907,577 | 1,489,129 | 1,473,031 | 1,123,697 |
| Total noncurrent assets | 5,001,091 | 3,748,469 | 3,861,842 | 2,828,595 | |
| Total Assets | 9,630,832 | 9,423,520 | 7,436,928 | 7,110,988 | |
| Liabilities and Shareholder's Equity | |||||
| Current Liabilities | |||||
| Accounts payable | 9 | 504,209 | 425,236 | 389,350 | 320,883 |
| Accrued expenses and other liabilities | 10 | 1,038,247 | 1,301,710 | 801,734 | 982,270 |
| Finance Lease obligation | 11 | 129,308 | 201,197 | 99,852 | 151,823 |
| Deferred revenue | 12 | 1,739,108 | 1,649,360 | 1,342,939 | 1,244,607 |
| Total Current Liabilities | 3,410,872 | 3,577,503 | 2,633,875 | 2,699,583 | |
| Long Term Liabilities | |||||
| Long term portion of Finance lease | 11 | 65,557 | 128,384 | 50,623 | 96,879 |
| Total Liabilities | 3,476,429 | 3,705,887 | 2,684,498 | 2,796,462 | |
| Shareholder's Equity | |||||
| Common Stock | 13 | 5,941,512 | 5,941,512 | 5,631,067 | 5,631,067 |
| Treasury stock | 13 | (269,241) | (269,241) | (264,425) | (264,425) |
| Additional paid-in capital | 52,061,314 | 51,833,659 | 50,723,480 | 50,559,842 | |
| Accumulated deficit | (51,827,976) | (52,030,497) | (51,514,219) | (51,667,124) | |
| Current net profit | 43,786 | 202,521 | 31,475 | 152,905 | |
| Foreign currency translation | 205,008 | 39,679 | 145,052 | (97,739) | |
| Total Shareholder's Equity | 6,154,403 | 5,717,633 | 4,752,430 | 4,314,526 | |
| Total Liabilities and Shareholder's Equity | 9,630,832 | 9,423,520 | 7,436,928 | 7,110,988 |
artnet AG Consolidated Statement of Comprehensive Income
For the Twelve Months Ended December 31, 2011 and 2010
| 01/01– 12/31/2011 |
01/01– 12/31/2010 |
01/01– 12/31/2011 |
01/01– 12/31/2010 |
||
|---|---|---|---|---|---|
| Notes | Consolidated USD |
Consolidated USD |
Consolidated EUR |
Consolidated EUR |
|
| Revenue | |||||
| artnet Galleries | 6,796,184 | 6,856,163 | 4,885,097 | 5,176,403 | |
| artnet Price Database | 6,532,334 | 6,605,582 | 4,695,442 | 4,987,215 | |
| artnet Auctions | 2,893,515 | 2,584,373 | 2,079,859 | 1,951,202 | |
| artnet Advertising | 2,204,624 | 1,935,324 | 1,584,684 | 1,461,170 | |
| artnet Magazine | 132,977 | 127,935 | 95,584 | 96,591 | |
| Total reveue | 22 | 18,559,634 | 18,109,377 | 13,340,666 | 13,672,581 |
| Cost of Sales | 8,256,840 | 7,845,265 | 5,935,017 | 5,923,175 | |
| Gross profit | 10,302,794 | 10,264,112 | 7,405,649 | 7,749,406 | |
| Other operating expenses | |||||
| Selling and marketing | 2,566,816 | 2,771,749 | 1,845,027 | 2,092,670 | |
| General and administrative | 5,182,702 | 4,570,013 | 3,725,326 | 3,450,360 | |
| Product development | 2,422,411 | 2,820,202 | 1,741,229 | 2,129,253 | |
| Non-cash compensation | 16 | 227,655 | 138,195 | 163,638 | 104,337 |
| Total other operating expenses | 10,399,584 | 10,300,159 | 7,475,220 | 7,776,620 | |
| Profit from operations | 20 | (96,790) | (36,047) | (69,571) | (27,214) |
| Interest expense | 20 | (23,775) | (13,414) | (17,089) | (10,128) |
| Interest income | 20 | 381 | 92,664 | 274 | 69,962 |
| Other income/(expense) | 20 | (173,751) | (256,176) | (124,892) | (193,413) |
| Profit prior to tax provision | (293,935) | (212,973) | (211,278) | (160,793) | |
| Income taxes | 8 | 337,721 | 415,494 | 242,753 | 313,698 |
| Income from continuing operations | 43,786 | 202,521 | 31,475 | 152,905 | |
| Net profit | 19 | 43,786 | 202,521 | 31,475 | 152,905 |
| Other comprehensive income | |||||
| Exchange differences on translating foreign operations |
165,329 | 124,177 | 242,791 | 392,447 | |
| Total comprehensive income | 209,115 | 326,698 | 274,266 | 545,352 | |
| Net profit per basic share | 19 | 0.01 | 0.04 | 0.01 | 0.03 |
| Net profit per diluted sharet | 19 | 0.01 | 0.04 | 0.01 | 0.03 |
| Weighted average shares | |||||
| Basic | 19 | 5,552,986 | 5,552,986 | 5,552,986 | 5,552,986 |
| Diluted | 19 | 5,556,986 | 5,552,986 | 5,556,986 | 5,552,986 |
artnet AG Consolidated Statement of Changes in Shareholders Equity (USD)
For the Twelve Months Ended December 31, 2011 and 2010
| Common stock | Additional | Foreign | |||||
|---|---|---|---|---|---|---|---|
| Shares | paid-in | Treasury | Accumulated | currency | |||
| issued | Amount | capital | stock | deficit | translation | Total | |
| Balance December 31, 2009 | 5,631,067 | 5,941,512 | 51,695,464 | (269,241) | (52,030,497) | (84,498) | 5,252,740 |
| Total comprehensive income | 202,521 | 124,177 | 326,698 | ||||
| Non-cash compensation | 138,195 | 138,195 | |||||
| Balance December 31, 2010 | 5,631,067 | 5,941,512 | 51,833,659 | (269,241) | (51,827,976) | 39,679 | 5,717,633 |
| Balance December 31, 2010 | 5,631,067 | 5,941,512 | 51,833,659 | (269,241) | (51,827,976) | 39,679 | 5,717,633 |
| Total comprehensive income | 43,786 | 165,329 | 209,115 | ||||
| Non-cash compensation | 227,655 | 227,655 | |||||
| Balance December 31, 2011 | 5,631,067 | 5,941,512 | 52,061,314 | (269,241) | (51,784,190) | 205,008 | 6,154,403 |
artnet AG Consolidated Statement of Changes in Shareholder's Equity (EUR)
For the Twelve Months Ended December 31, 2011 and 2010
| Common stock | Additional | Foreign | |||||
|---|---|---|---|---|---|---|---|
| Shares | paid-in | Treasury | Accumulated | currency | |||
| issued | Amount | capital | stock | deficit | translation | Total | |
| Balance December 31, 2009 | 5,631,067 | 5,631,067 | 50,455,505 | (264,425) | (51,667,124) | (490,186) | 3,664,837 |
| Total comprehensive income | (467,151) | (81,784) | (548,935) | ||||
| Vergütungen aus Aktienoptionen | 14,145 | 14,145 | |||||
| Balance December 31, 2010 | 5,631,067 | 5,631,067 | 50,559,842 | (264,425) | (51,514,219) | (97,739) | 4,314,526 |
| Balance December 31, 2010 | 5,631,067 | 5,631,067 | 50,559,842 | (264,425) | (51,514,219) | (97,739) | 4,314,526 |
| Total comprehensive income | 31,475 | 242,791 | 274,266 | ||||
| Non-cash compensation | 163,638 | 163,638 | |||||
| Balance December 31, 2011 | 5,631,067 | 5,631,067 | 50,723,480 | (264,425) | (51,482,744) | 145,052 | 4,752,430 |
artnet AG Consolidated Statement of Cash Flows
For the Twelve Months Ended December 31, 2011 and 2010
| 01/01– 12/31/2011 |
01/01– 12/31/2010 |
01/01– 12/31/2011 |
01/01– 12/31/2010 |
||
|---|---|---|---|---|---|
| Notes | Consolidated USD |
Consolidated USD |
Consolidated EUR |
Consolidated EUR |
|
| Cash Flows from Operating Activities | |||||
| Net Profit | 19 | 43,786 | 202,521 | 31,475 | 152,905 |
| Adjustments to reconcile net profit to net cash provided by (used in) operating activities: |
|||||
| Depreciation and amortization | 20 | 812,453 | 1,103,661 | 583,992 | 833,264 |
| Provision for doubtful accounts | 4 | 108,354 | 156,267 | 77,885 | 117,982 |
| Deferred Tax Provision | 8 | (389,491) | (100,464) | (302,312) | (75,850) |
| Non-cash compensation | 16 | 227,655 | 138,195 | 163,638 | 104,337 |
| Other non-cash transactions | 28,043 | 186,518 | 22,273 | 88,869 | |
| Changes in operating assets and liabilities: | |||||
| Accounts receivable | 172,192 | (306,155) | 123,772 | (231,147) | |
| Prepaid and other current assets | (74,925) | 212 | (68,440) | 160 | |
| Security deposits | (336,030) | (68) | (241,538) | (51) | |
| Accounts payable | 78,973 | 130,176 | 56,766 | 98,283 | |
| Accrued expenses and tax liabilities | (158,258) | (581,732) | (115,150) | (415,752) | |
| Deferred Revenue | 89,747 | (28,909) | 69,302 | (21,826) | |
| Total Adjustments | 558,713 | 697,701 | 370,188 | 498,269 | |
| Net Cash (Used in)/Provided by Operating Activities |
602,499 | 900,222 | 401,663 | 651,174 | |
| Cash Flows from Investiting Activities | |||||
| Purchase of property and equipment | (263,559) | (92,393) | (189,446) | (69,833) | |
| Purchase and development of | |||||
| intangible assets | (926,269) | (135,851) | (665,803) | (102,568) | |
| Net Cash Used in Investing Activities | (1,189,828) | (228,244) | (855,249) | (172,401) | |
| Cash Flows from Financing Activities | |||||
| Repayment of financial lease | 6, 11 | (239,919) | (174,648) | (172,454) | (131,783) |
| Net Cash Used in Financing Activities | (239,919) | (174,648) | (172,454) | (131,783) | |
| Effects of exchange rate changes on cash | (12,440) | (62,341) | 40,556 | 159,931 | |
| Net (Decrease)/Increase in Cash and Cash | |||||
| Equivalents | (839,688) | 434,989 | (585,484) | 506,921 | |
| Cash—Beginning | 3,575,208 | 3,140,219 | 2,697,852 | 2,190,931 | |
| Cash—Ending | 2,735,520 | 3,575,208 | 2,112,368 | 2,697,852 | |
| Supplemental Disclosures of Cash Flow Information |
|||||
| Income taxes paid | (72,743) | (48,230) | (52,287) | (36,414) | |
| Interest paid | (22,662) | (13,414) | (16,290) | (10,128) |
Interest received 292 647 210 488
Notes to the Consolidated Financial Statements 2011
1 Corporate Information and Statement of Compliance
artnet AG (hereinafter referred to as "artnet AG" or "the Company") is a publicly traded corporation headquartered in Berlin, Germany. The address of its registered office is Oranienstraße 164, 10969 Berlin, Germany. artnet AG was incorporated under the laws of Germany in 1998.
artnet AG holds 100% of the shares in Artnet Worldwide Corporation ("Artnet Corp."), which is located in New York, NY, USA. Artnet Corp. holds 100% of the shares in artnet UK Ltd. and artnet France sarl. artnet AG and Artnet Corp. together with the latter's wholly-owned subsidiaries are referred to as "the artnet Group" or "the Group."
The Group's business is to provide art collectors, galleries, publishers, auction houses, and art enthusiasts with a website where individuals can research artists and art prices, find artworks that are currently available at art galleries around the world, view art-related news, and buy and sell art on artnet Auctions, a special platform for transactions.
Applying § 315a of the German Commercial Code (HGB), accompanying consolidated financial statements as of December 31 2011 comprising parent and subsidiary companies were prepared in accordance with the International Financial Reporting Standards (IFRS) and its interpretations of the International Accounting Standards Board (IASB), effective within the European Union.
The consolidated financial statements were authorized for issuance by the CEO on March 28, 2012.
2 Summary of Significant Accounting Policies
Basis of Accounting and Reporting Currency
Amounts included in the consolidated financial statements and notes to the consolidated financial statements are stated as required by German law in euros (EUR), unless otherwise noted. The reporting currency is euro.
Due to rounding, amounts presented may not add up precisely.
The currency of the primary economic environment in which artnet operates is US dollar. For convenience purposes, especially of our US investors, the consolidated statement of financial position, statement of comprehensive income, cash flow statement, and statement of changes in equity are also presented in US dollars.
The consolidated financial statements have been prepared on a historical cost basis. The balance sheet date is December 31, 2011. The principal accounting policies adopted are set out below.
With regard to the adjustment of cost of sales and selling and marketing expenses in 2010 within the segment reporting as a result of the reallocation of the segments we refer to Number 21 within the Notes.
Basis of Consolidation and Consolidated Companies
The consolidated financial statements include the legal parent company, artnet AG, its wholly owned subsidiary Artnet Corp., as well as the subsidiaries of this company. Control is achieved where the company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
On February 23, 1999 artnet AG entered into a transaction with Artnet Corp., which was treated as a recapitalization of Artnet Corp., with Artnet Corp. as the acquirer of artnet AG (reverse acquisition). The Company accounted for the business combination of artnet AG and Artnet Corp. as a reverse acquisition in accordance with IFRS 3.
On November 1, 2007, Artnet Corp. established artnet UK Ltd., which is a wholly owned subsidiary of Artnet Corp. artnet UK Ltd. conducts sales and provides customer support for Artnet Corp. in the United Kingdom.
On July 3, 2008, Artnet Corp. established artnet France sarl, which is a wholly owned subsidiary of Artnet Corp. artnet France sarl publishes a magazine online in French, conducts sales, and provides customer service for Artnet Corp. in France.
All significant inter-company transactions, balances, income, and expenses are eliminated in full on consolidation.
Reporting Period
The consolidated financial statements were prepared for the reporting period from January 1 through December 31, 2011. The financial year for all Group companies coincides with the calendar year.
Revenue Recognition
Revenue for services is recognized when services are rendered, the amount of revenue can be measured reliably and collection of the related receivable is reasonably assured. Revenue for contracts where service has not yet been provided are deferred and recorded as revenue when the service is performed.
Revenue is measured at the fair value of the consideration received or receivable and represents amounts for services provided in the normal course of business, net of discounts, and other sales-related taxes.
Financial Assets
The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held to maturity, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. The Group's financial assets are cash and cash equivalents, accounts receivable, and rent
security deposits. These financial assets are classified under the category "Loans and Receivables."
Cash and Cash Equivalents
The Company considers all highly liquid investments with less than three-month maturity from the date of acquisition to be cash equivalents. Cash and cash equivalents are measured at cost.
Accounts Receivable
Accounts receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable include credit card transactions which have settled but cash has not yet been received. The accounts receivable balance is shown net of allowance for doubtful accounts. The allowance for doubtful accounts involves significant management judgment and review of individual receivables based on individual customer credit worthiness, current economic trends, and analysis of historical bad debts on a portfolio basis. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are valued at historical cost less accumulated depreciation. The artnet Group computes depreciation and amortization using the straight-line method. Computer equipment, furniture and fixtures, and office equipment are depreciated over an estimated useful life of three to seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or its estimated useful life, which is up to ten years. Maintenance expenses that neither enhance the value of an asset nor prolong the useful life are expensed as incurred.
Intangible Assets including Website Development Costs
Intangible assets are comprised of purchased software and website development costs. Intangible assets are recorded at historical cost and amortized on a straight-line basis over their estimated useful life of mostly three years. All intangible assets have a finite useful life. Costs related to the research, planning, and post implementation phases of the Group's websites, such as minor enhancements and maintenance, development efforts are expensed as incurred. Direct costs incurred in the development phase are capitalized, if:
- The product or process is technically and commercially feasible
- There is a market for the result of the website development
- The attributable expenditure can be measured reliably
- The Group has sufficient resources to complete development
The market condition is substantiated as only expenditures related to those development projects are capitalized that are expected to generate future revenues.
Impairment
The Group reviews property plant and equipment and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, tangible, intangible assets, and intangible assets not yet available for use are subject to an annual impairment test. Recoverability of assets is measured by the comparison of the carrying amount of the asset to the recoverable amount, which is the higher of the asset's value in use and its fair value less costs to sell. Where the asset does not generate cash flows that are independent from other assets, the impairment test is not performed at an individual asset level; instead, it is performed at the level of the cashgenerating unit to which the asset belongs. If the recoverable amount of the cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately. The asset's value in use, either at an independent level or a cash-generating unit level, is measured by discounting the asset's estimated future cash flows. If there is an indication that the reasons which caused the impairment loss no longer exist, the Group will assess the need to reverse all or a portion of the impairment not to exceed the original carrying amount.
Income Taxes and Deferred Taxes
The current tax expense is based on the results for the year of the individual consolidated company as adjusted for items, which are non-taxable or non-deductible. It is calculated using rates that have been enacted as at the balance sheet date.
Deferred taxes are recognized under the asset and liability method in respect of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences and tax loss or tax credit carryforwards can be utilized.
Deferred tax assets and liabilities are measured using enacted or substantially enacted statutory tax rates for the years in which the differences are expected to reverse.
Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which the deductible temporary differences, unused tax losses, and unused tax credits can be utilized.
The recognition of deferred tax assets on tax loss carryforwards is based on a projected budget of three years.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Foreign Currency Translation and Transactions
The currency of the primary economic environment in which the artnet Group operates is US dollar, which is the functional currency of the operating subsidiary Artnet Corp. Transactions in currencies other than the US dollar are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Gains and losses from foreign currency transactions are recognized as other income/expense.
On consolidation, the assets and liabilities of the Group's operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. The accumulated gains and losses resulting from translation are recorded as a separate component of the group equity.
Currency exchange rates significant to the artnet Group are the translation of US dollar (USD) to euro (EUR) and of US dollar to British pound (GBP). The following exchange rates have been used for the currency translation in the years presented:
| USD to EUR | USD to GBP | ||||
|---|---|---|---|---|---|
| 12/31/ 2011 |
12/31/ 2010 |
12/31/ 12011 |
12/31/ 2010 |
||
| Current Rate Year End |
.772 | .755 | .647 | .647 | |
| Average Rate for the Year |
.719 | .755 | .623 | .648 |
Financial Liabilities
The artnet Group measures financial liabilities at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Provisions
Provisions are recognized when the Group has a present obligation as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are recognized at present value by discounting the expected future cash flow at a pretax rate that reflects current market assessments of the time value of money. Within consolidated financial statements 2011 no provisions are disclosed.
Leasing
Group as Lessee
Assets held under finance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation.
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to achieve a constant rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they occur.
Operating lease payments are recognized as an expense in the statement of comprehensive income on a straight-line basis over the term of the lease. Benefits received and receivable as an incentive to enter into an operating lease are spread on a straight-line basis over the lease term.
Group as Lessor
Rental income from operating leases is recognized in the consolidated statement of comprehensive income on a straightline basis over the term of the lease.
Retirement Benefit Costs
Artnet Corp. offers a defined contribution benefit plan, which qualifies under Section 401(k) of the Internal Revenue Code. Payments made by Artnet Corp. are charged as an expense.
Share Based Payments
artnet AG provided equity settled share based payments to executive management and to certain employees of Artnet Corp. The equity settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date less the fair value of any consideration received at grant date is expensed over the vesting period based on the estimated amount of shares that will eventually vest. The fair value of the equity settled share based payments is measured using the Binomial model.
Treasury Stock
Company-held shares are reported at cost in a separate equity line-item.
New or Revised Standards and Interpretations
The Group has not applied any Standard or Interpretation for the first time in the fiscal year 2011 leading to any changes.
The following new or revised standards and interpretations which became mandatory in the fiscal year 2011 did not have any or any significant impact on the consolidated financial statements of the company.
| Standards (IFRS) or Interpretations (IFRIC) | Compulsory application in the EU |
Adoption by EU Commission |
|
|---|---|---|---|
| IAS 24* | Related party disclosures | 01/01/2011 | 07/19/2010 |
| IAS 32* | Classification of subscription rights | 02/01/2010 | 12/23/2009 |
| IFRS 1* | Limited exemption from comparative IFRS 7 disclosures for first time adopters |
07/01/2010 | 06/30/2010 |
| Improvements to IFRS (2010) | 01/01/2010 | 02/18/2011 | |
| IFRIC 14* Prepayments of a minimum funding requirement | 01/01/2010 | 07/19/2010 | |
| IFRIC 19 | Extinguishing financial liabilities with equity | 07/01/2010 | 07/23/2010 |
* Amendments
New or Revised Standards and Interpretations not yet Applied
The following standards, interpretations, and amendments which are not yet mandatory as of December 31, 2011 or have even not been endorsed by the EU have not been applied. Unless otherwise stated, the Group does not assume that the application of these standards will have a significant impact on the presentation of the consolidated financial statements.
| Standards (IFRS) or Interpretations (IFRIC) | Compulsory application in the EU |
Adoption by EU Commission |
|
|---|---|---|---|
| IFRS 9 | Financial instruments | 01/01/2015 | |
| IFRS 10 | Consolidated financial statements | 01/01/2013 | |
| IFRS 11 | Joint arrangements | 01/01/2013 | |
| IFRS 12 | Disclosure of interests in other entities | 01/01/2013 | |
| IFRS 13 | Fair value measurement | 01/01/2013 | |
| IFRIC 20 | Stripping costs in the production phase of a surface mine |
01/01/2013 | |
| IFRS 7* | Financial instruments: disclosure, transfer of financial assets |
07/01/2011 | 11/22/2011 |
| IAS 1* | Presentation of item of other comprehensive income |
07/01/2012 | |
| IAS 12* | Deferred tax, recovery of underlying assets | 01/01/2012 | |
| IAS 19* | Employee benefits | 01/01/2013 | |
| IAS 27* | Consolidated and separate financial statements | 01/01/2013 | |
| IAS 28* | Investments in associates | 01/01/2013 | |
| IFRS 1* | First time adoption | 07/01/2011 | |
* Amendments
Use of Estimates
The preparation of the consolidated financial statements in accordance with IFRS necessitates estimates and assumptions that influence assets and liabilities, income and expenses, as well as information in the notes to the financial statements. Actual results and developments may differ from those estimates and assumptions.
Estimates made by management that have a significant effect on the consolidated financial statements include the recognition of deferred tax assets and of development costs, the measurement of provisions and accruals, the useful lives of noncurrent assets, and the assessment of bad debt provisions on accounts receivable.
3 Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and bank balances. Cash and bank balances are stated at fair value.
Restricted cash amounts to EUR 5,197 and EUR 12,247 as of December 31, 2011 and 2010.
4 Accounts Receivable
et accounts receivable consist of the following:
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| EUR | EUR | |
| Gross Accounts Receivable | 1,200,697 | 1,390,148 |
| Less: Allowance for Doubtful | ||
| Accounts | (260,178) | (259,366)) |
| Net Accounts Receivable | 940,519 | 1,130,782 |
The average credit period for the accounts receivable is 28 days similarly to 2010. All accounts receivable are due within one year.
There is no concentration of credit risk with respect to accounts receivable, as the Group has a large number of relatively small customers. Trade receivables are rated at fair value.
Aging of past due but not impaired:
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| EUR | EUR | |
| Overdue but not Impaired Receivables |
||
| Between 0 and 60 days | 797,547 | 907,854 |
| Carrying Amounts of Impaired Receivables |
||
| Overdue between 61 and 90 days | 46,985 | 86,402 |
| Overdue more than 90 days | 95,987 | 136,527 |
| 142,972 | 222,928 | |
| Net Accounts Receivable | 940,519 | 1,130,782 |
The allowance for doubtful accounts is the Group's best estimate of the amount of probable credit losses in the Group companies' existing accounts receivable. Accounts receivable past due less than 60 days are not provided for. Accounts receivable past due more than 60 days are provided for on a grading scale based on the age of the individual receivable with allowances
between 10% and 90% of nominal value. The Group does not hold any collateral for accounts receivable balances.
The movements in the allowance for doubtful accounts were as follows:
| Year ended 12/31/2011 |
Year ended 12/31/2010 |
|
|---|---|---|
| EUR | EUR | |
| Balance at the Beginning of the Year | 259,366 | 206,205 |
| Bad Debt Expense of the Year | 77,885 | 117,982 |
| Amounts Written Off as Uncollectible | (90,446) | (79,662) |
| Exchange Differences | 13,373 | 14,840 |
| alance at the End of the Year | 260,178 | 259,366 |
Receivables are denominated in the following currencies:
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| EUR | EUR | |
| USD | 787,270 | 997,528 |
| EUR | 145,131 | 278,604 |
| GBP | 268,297 | 114,016 |
| Gross Accounts Receivable | 1,200,697 | 1,390,148 |
5 Prepaids and other Current Assets
Other current assets consist primarily of VAT (Value Added Tax) refund claims amounting EUR 320,877 (EUR 354,314 in 2010) of prepaid amounts for software contracts, amounting EUR 32,548 in 2011 (EUR 32,410 in 2010), and of prepaid rent for Artnet Corp.'s new office location in New York for EUR 53,339.
6 Property and Equipment
Changes in property and equipment in the financial years 2011 and 2010 were as follows (see opposite page on top):
Computer and Equipment include servers used under the terms of a finance lease with a carrying amount of EUR 150,475 (EUR 248,702 at 12/31/2010).
Depreciation expense of property plant and equipment is included in Cost of Sales. As of December 31, 2011, the Group had a significant contractual commitment to purchase furniture for the new New York office amounting to EUR 249,555 of which 50% already paid for and capitalized as of 12/31/2011.
7 Intangible Assets
Movements in intangible assets in the financial years 2011 and 2010 were as follows (see opposite page bottom):
| Property and Equipment | ||||
|---|---|---|---|---|
| Equipment | Computers Furniture |
Fixtures and Improvement |
Leasehold Total |
|
| EUR | EUR | EUR | EUR | |
| Cost | ||||
| At December 31, 2009 | 1.129.096 | 320.380 | 113.093 | 1.562.569 |
| Exchange differences | 86.439 | 18.357 | 8.289 | 113.085 |
| Additions | 210.405 | 3.848 | 0 | 214.253 |
| At December 31, 2010 | 1.425.940 | 342.585 | 121.382 | 1.889.907 |
| Exchange Differences | 36.953 | 15.860 | 2.518 | 55.331 |
| Additions | 137.425 | 135.852 | 0 | 273.277 |
| At December 31, 2011 | 1.600.318 | 494.297 | 123.900 | 2.218.515 |
| Depreciation | ||||
| At December 31, 2009 | 559.619 | 90.252 | 69.535 | 719.406 |
| Exchange differences | 32.754 | 5.988 | 5.473 | 44.215 |
| Charge for the Year | 346.557 | 45.392 | 23.626 | 415.575 |
| At December 31, 2010 | 938.930 | 141.632 | 98.634 | 1.179.196 |
| Exchange Differences | 41.962 | 6.632 | 0 | 48.594 |
| Charge for the Year | 320.788 | 41.603 | 16.441 | 378.832 |
| At December 31, 2011 | 1.301.680 | 189.867 | 115.075 | 1.606.622 |
| Net Book Value | ||||
| At December 31, 2010 | 487.010 | 200.953 | 22.748 | 710.711 |
| At December 31, 2011 | 298.638 | 304.430 | 8.825 | 611.893 |
| Intangible Assets | ||||
|---|---|---|---|---|
| Website | ||||
| Development | Software | Total | ||
| EUR | EUR | EUR | ||
| Cost | ||||
| At December 31, 2009 | 2.219.486 | 426.647 | 2.646.133 | |
| Exchange rate differences | 181.801 | 34.777 | 216.578 | |
| Additions | 11.672 | 90.896 | 102.568 | |
| At December 31, 2010 | 2.412.959 | 552.320 | 2.965.279 | |
| Exchange differences | 101.594 | 10.720 | 112.314 | |
| Additions | 632.362 | 38.456 | 670.818 | |
| At December 31, 2011 | 3.146.915 | 601.496 | 3.748.411 | |
| Abschreibungen | ||||
| At December 31, 2009 | 1.294.321 | 349.627 | 1.643.948 | |
| Exchange rate differences | 105.383 | 29.296 | 134.679 | |
| Charge for the year | 302.331 | 115.358 | 417.689 | |
| At December 31, 2010 | 1.702.035 | 494.281 | 2.196.316 | |
| Exchange differences | 51.500 | 8.477 | 59.977 | |
| Charge for the year | 161.155 | 44.004 | 205.159 | |
| At December 31, 2011 | 1.914.690 | 546.762 | 2.461.452 | |
| Net Book Value | ||||
| At December 31, 2010 | 710.924 | 58.039 | 768.963 | |
| At December 31, 2011 | 1.232.225 | 54.734 | 1.286.959 |
As of December 31, 2011, website development costs include "artnet Analytics," which is still in progress and scheduled to fully launch in 2012. The capitalized costs for "artnet Analytics" are EUR 1,210,229 in 2011 as compared to EUR 519,542 in 2010. Internal costs (salaries) and consulting fees have been capitalized in the amount of EUR 632,362 in 2011 and EUR 11,672 in 2010 towards this project. Amortization will begin once the project is launched in 2012.
Amortization expense on intangible assets is included in Cost of Sales. As of December 31, 2011, the Group had no significant contractual commitments for purchases of intangible assets.
8 Taxes and Deferred Taxes
Income Tax Expense/(Benefit)
Income tax expense/(benefit) consists of the following:
| 2011 | 2010 | |
|---|---|---|
| EUR | EUR | |
| Current Income Taxes | ||
| US federal and state corporation and subsidiary tax |
59.559 | 37.278 |
| Tax refund belonging to prior years | 0 | (275.126) |
| Total current income taxes | 59.559 | (237.848) |
| Deferred Taxes | ||
| tax loss carryforwards | (360.014) | (350.889) |
| temporary differences | 57.702 | 275.039 |
| (302.312) | (75.850) | |
| Total Income Taxes | (242.753) | (313.698) |
Due to its tax loss carryforwards, Artnet Corp. only has to pay the alternative minimum corporation tax.
In 2010 artnet AG reversed a prior year income tax expense and corresponding interest expense on an outstanding tax liability as a result of the German government's decisions to not pursue a tax audit for the years 2001 to 2004.
Deferred Tax Asset
At the balance sheet 12/31/2011 date Artnet Corp. has total tax loss carryforwards of EUR 21.0 million (USD 27.2 million) for offset against future profits. As of 12/31/2010 these tax loss carryforwards amounted to EUR 21.9 million (USD 29.0 million). A deferred tax asset of EUR 1,495,253 (12/31/2010: EUR 1,123,697) is recognized in the financial statements for the existing tax loss carryforwards of Artnet Corp. The tax rate used is 43% (43% in 2010) and represents the average income tax rate of Artnet Corp. The subsidiary has generated positive, taxable earnings in the preceding fiscal years and has already utilized part of its tax loss carryforwards. The recognition of deferred
tax assets on tax loss carryforwards is based on a three-year budget. Tax loss carryforwards can be used over a period of 20 years, therefore tax loss carryforwards of Artnet Corp. will begin to expire in 2017 in the amount of EUR 1.1 million (USD 1.6 million). The remaining unused tax loss carryforwards of Artnet Corp. will expire in subsequent years.
artnet AG has in addition tax loss carryforwards in the total amount of EUR 28.7 million for corporate income tax as well as for trade tax (12/31/2010: EUR 28.7 million). Based on the German tax law these tax loss carryforwards cannot be utilized due to the organizational structure of artnet Group.
In total, deferred taxes recognized relate to the following balance sheet items:
| Deferred Tax Assets |
Deferred Tax Assets |
|
|---|---|---|
| 12/31/2011 | 12/31/2010 | |
| EUR | EUR | |
| Tax Loss Carryforwards | 1.495.253 | 1.087.741 |
| Fixed Assets | (188.134) | (173.574) |
| Accounts Receivables | 113.615 | 122.261 |
| Accrued Expenses and Other Liabilities |
52.297 | 87.269 |
| 1.473.031 | 1.123.697 |
Tax Rate Reconciliation
The following table reconciles the expected income tax expense/(income) to the income tax expense presented in the financial statements. The tax rate used of 43% (43% in 2010) is the average income tax rate of the operating Group company Artnet Corp., because Artnet. Corp. generates the taxable income of the Group companies.
| 2011 | 2010 | |
|---|---|---|
| TEUR | TEUR | |
| Loss or profit before income taxes | (211) | (161) |
| Expected income tax expense – Tax rate 43 % |
(91) | (69) |
| Non-deductible expenses and other effects |
(288) | (76) |
| Income tax expense/(income) – prior years |
0 | (275) |
| Reduction of current tax expenses due to benefit arising from US tax loss carryforwards |
(604) | (445) |
| Unused German tax loss carry forwards and tax rate differences |
739 | 551 |
| Income tax expense/(tax income) as presented on the consolidated statement of comprehensive income |
(243) | (314) |
9 Accounts Payable
Accounts payable is principally comprised of amounts outstanding for ongoing costs. The average credit period taken for accounts payable is 30 days. The carrying amount of accounts payable approximates their fair value.
The carrying amount of the Group's payables are denominated in the following currencies.
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| EUR | EUR | |
| EUR | 200.172 | 72.746 |
| USD | 184.552 | 238.934 |
| GBP | 4.726 | 9.203 |
| Total accounts payable | 389.350 | 320.883 |
10 Accruals and other Liabilities
Accruals and other liabilities consist of the following for the years presented:
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| EUR | EUR | |
| Outstanding Invoices | 317.563 | 167.532 |
| Bonus and Termination Payments | 204.717 | 435.290 |
| Accrued Vacation | 149.575 | 120.124 |
| 401(k) Payable | 78.049 | 68.088 |
| Commissions to Sales Representatives |
0 | 80.663 |
| Other | 51.830 | 110.574 |
| Total | 801.734 | 982.270 |
11 Liabilities from Finance Lease
In December 2008, August 2009, September 2009, July 2010, and March 2011, Artnet Corp. entered into three-year finance lease arrangements. At the end of each lease term, Artnet Corp. has a purchase option. Liabilities from finance leasing are recognized at the present value of future lease payments by applying the implicit interest rate of the finance lease arrangement. The leased assets are servers and other computer equipment. The minimum lease payments are reconciled to the present value as follows:
| Total | < 1 Year | > 1–3 Years | |
|---|---|---|---|
| 12/31/2011 | EUR | EUR | EUR |
| Liability | 150.475 | 99.852 | 50.623 |
| Interest | 12.990 | 8.452 | 4.537 |
| Total | 163.465 | 108.304 | 55.161 |
| 12/31/2010 | Summe | < 1 Jahr | > 1–3 Jahre |
|---|---|---|---|
| EUR | EUR | EUR | |
| Liability | 248.702 | 151.823 | 96.879 |
| Interest | 22.148 | 14.378 | 7.770 |
| Total | 270.850 | 166.201 | 104.649 |
Liabilities from finance lease are shown at fair value.
12 Deferred Revenue
Customers pay before year's end for certain contracts in advance of the service provided. The prepaid amounts are recognized as revenue when artnet provides the service. The amount of deferred revenue is EUR 1,342,939 in 2011 and was EUR 1,244,607 in 2010.
13 Share Capital
| 12/31/2011 | 12/31/2010 | |
|---|---|---|
| Authorized ordinary shares at no par value (calculated value |
||
| EUR 1.00 per share) | 5.631.067 | 5.631.067 |
| Issued and fully paid ordinary shares at no par value (calculated |
||
| value EUR 1.00 per share) | 5.552.986 | 5.552.986 |
| Treasury shares at no par value | 78.081 | 78.081 |
artnet AG has one class of registered shares that carry no right to fixed income.
Authorized Capital
The Shareholders' Meeting of artnet AG on July 15, 2009 authorized the Management Board, with the approval of the Supervisory Board, to increase the capital stock by up to EUR 2,800,000 before July 14, 2014 through the issue of 2,800,000 new no-par value shares in exchange for cash contributions or contributions in kind (Authorized Capital 2009/I).
In 2010 and 2009 no common shares were issued under the Authorized Capital 2009/I.
The entry of the amendments of the articles of incorporation in the Company's commercial register, as required for the effectiveness of these resolutions by the Shareholders' Meeting, took place on February 2, 2010.
Conditional Capital
The Shareholders' Meeting on July 15, 2009 conditionally increased the capital stock by EUR 560,000 through the issue of up to 560,000 new no-par value shares to members of the Company's Management Board and members of the management of affiliated entities as well as to employees of artnet AG or its affiliated entities (Conditional Capital 2009/I).
The entry of the amendments of the articles of incorporation in the Company's commercial register, as required for the effectiveness of these resolutions by the Shareholders' Meeting, took place on February 2, 2010.
Treasury Shares
As of December 31, 2011 and 2010 artnet AG held 78,081 of its own shares, representing 1.4% of common stock.
The Shareholders' Meeting of artnet AG on July 14, 2010 authorized the Management Board, with the approval of the Supervisory Board, to acquire its own shares until the end of July 13, 2015 up to a 10% stake in current share capital. At no point may the acquired shares, together with other own shares owned by the company or attributable to the company under Articles 71 et seq. AktG (German Stock Corporation Act), constitute more than 10% of the share capital. The time limit applies only to acquiring—and not holding—the shares.
14 Capital Risk Management
The capital structure of the artnet Group consists of current liabilities and equity attributable to shareholders of the parent, mainly comprising issued capital, additional paid-in capital, and accumulated deficit. In 2011 and 2010, Artnet Corp. entered into various finance lease arrangements, which will require payments over the next three years. Additionally, in 2011, Artnet Corp. entered into an operating lease agreement for new office space which will require payment over the next 11 years. All other business activities are currently financed by the cash balance and the operating cash flows.
Foreign Currency Fluctuations, Credit Risk, and Liquidity Risk
The artnet Group conducts a portion of its business outside the United States, thereby facing exposure to adverse movements in currency exchange rates. As exchange rates vary, net sales and other operating costs, when calculated, may differ substantially from expectations. artnet does not currently hedge against such currency risks, however, the group companies accept payments from clients and pay vendors using euros and British pounds. This aids in reducing the foreign currency exchange risk.
With the exception of adverse currency fluctuations, the artnet Group currently faces no other significant financial risks.
The artnet Group has no significant concentration of credit risk because the exposure is averaged over a large number of customers including individuals and entities dealing in the Fine Art market. Nevertheless, the economic downturn worldwide could negatively influence the solvency of the Group's customers, leading to an increase in the average credit period or at worst, leading to an increase in customer default. This would negatively affect the Group's earnings, as well as its financial position. artnet tries to counter such risks by agreeing upfront payments with customers whenever this is possible.
The artnet Group has no significant interest bearing debt and has a sufficient amount of cash at its disposition so that the Group faces no material liquidity or interest risk.
Due to the relatively small financial risks in the business, artnet has not used any derivative financial instruments to further hedge or control these risks.
15 Financial Instruments and Risks Arising from Financial Instruments
Categories of Financial Instruments
The artnet Group's financial assets are cash and cash equivalents, accounts receivable, and rent security deposits. These financial assets are classified under the category "Loans and Receivables."
The Group's financial liabilities are accounts payable, other liabilities, and liabilities arising from finance leases. Accounts payable and other liabilities are measured at amortised cost. Liabilities arising from finance leases are measured with their present value in accordance with IAS 17.
No financial assets or financial liabilities were designated at fair value through profit or loss.
In the business years 2011 and 2010 the artnet Group has not used any derivative financial instruments.
The following schedule summarizes the categorization of financial instruments with their carrying amounts and fair values:
| Book Value | Fair Value | Book Value | Fair Value | |
|---|---|---|---|---|
| 12/31/2011 | 12/31/2011 | 12/31/2010 | 12/31/2010 | |
| EUR | EUR | EUR | EUR | |
| Financial Assets | ||||
| Cash and Cash Equivalents | 2.112.368 | 2.112.368 | 2.697.852 | 2.697.852 |
| Kredite und Forderungen | ||||
| Accounts Receivable | 940.519 | 940.519 | 1.130.782 | 1.130.782 |
| Security Deposits | 489.959 | 489.959 | 225.224 | 225.224 |
| 1.430.479 | 1.430.479 | 1.356.006 | 1.356.006 | |
| 3.542.847 | 3.542.847 | 4.053.858 | 4.053.858 | |
| Financial Liabilities | ||||
| Liabilities at amortized costs | ||||
| Accounts Payable | 389.350 | 389.350 | 320.883 | 320.883 |
| Other Liabilities | 574.112 | 574.112 | 794.059 | 794.059 |
| 963.462 | 963.462 | 1.114.942 | 1.114.942 | |
| Finance Lease Obligation | 150.475 | 150.475 | 248.702 | 248.702 |
| 1.113.937 | 1.113.937 | 1.363.644 | 1.363.644 | |
The carrying amounts of the financial assets and liabilities approximate their fair values.
The following schedule shows the net result arising from financial assets and liabilities:
| Net Result | Net Result | |
|---|---|---|
| 2011 | 2010 | |
| EUR | EUR | |
| Financial Assets | (134.621) | (214.943) |
| Financial Liabilities | (15.521) | (10.128) |
| Totals | (150.142) | (225.071) |
The components of the net result are interest income and expenses, gains, or losses from exchange rate differences, as well as, bad debt expense for doubtful accounts and write-offs. Credit Risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The financial assets represent the artnet Group's maximum exposure to credit risk.
The artnet Group's credit risk is primarily attributable to its accounts receivable. The amount presented in the balance sheet is net of allowances for doubtful accounts, estimated by management based on the aging of the receivable portfolio as well as customer payment trends.
The artnet Group has no significant concentration of credit risk, with exposure spread over its large number of customers.
Liquidity Risk and Interest Rate Risk
The Group faces no material liquidity risk or interest rate risk. The Group companies face several interest-bearing finance leases in the amount of EUR 150,475 (EUR 248,702 in 2010). The remaining current liabilities and accrued expenses have a remaining term of less than one year.
The gross cash flows arising from financial liabilities are shown in the following schedule:
| 12/31/2011 | Carrying Amount |
Gross Cash Flow |
Gross Cash Flow |
Gross Cash Flow |
|---|---|---|---|---|
| EUR | EUR | EUR | EUR | |
| 12/31/2011 | Total | < 1 Year | > 1 Year | |
| Liabilities at Amortized Costs | 963.462 | 963.462 | 963.462 | 0 |
| Finance Lease Obligation | 150.475 | 163.464 | 108.304 | 55.160 |
| 12/31/2010 | Buchwert | Brutto- Cashflow |
Brutto- Cashflow |
Brutto Cashflow |
|---|---|---|---|---|
| EUR | EUR | EUR | EUR | |
| 12/31/2010 | Summe | < 1 Jahr | > 1 Jahr | |
| Liabilities at Amortized Costs | 1.114.942 | 1.114.942 | 1.114.942 | 0 |
| Finance Lease Obligation | 248.702 | 270.850 | 166.201 | 104.649 |
Market Risks—Foreign Currency Risk
Market risks are mainly relevant in the form of foreign currency exchange risks for the Group companies as most of the revenues are generated in US dollars but a certain amount of the costs of the Group companies have to be paid in euros. The artnet Group controls these currency exchange risks by invoicing its European customers in euros and using these cash payments to fulfill its obligations in the foreign currency. Besides the US dollar–euro exchange rate risk the artnet Group is also exposed to the US dollar–British pound exchange rate risk but on a smaller scale.
The carrying amounts of the Group's monetary assets and monetary liabilities denominated in other currencies as the US dollar at the reporting date are as follows:
| Monetary Assets | Monetary Assets | ||||
|---|---|---|---|---|---|
| Foreign Currency | 12/31/2011 | 12/31/2010 | 12/31/2011 | 12/31/2010 | |
| TEUR | TEUR | TEUR | TEUR | ||
| EUR | 640 | 885 | 200 | 73 | |
| GBP | 482 | 281 | 5 | 9 |
The following table details the Group's sensitivity to a 10% increase and decrease of the US dollar against the euro and the British pound. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where the US dollar strengthens or weakens 10% against the other currency.
| USD to | EUR | EUR | GBP | GBP |
|---|---|---|---|---|
| 12/31/2011 | 12/31/2010 | 12/31/2011 | 12/31/2010 | |
| TEUR | TEUR | TEUR | TEUR | |
| + 10 % | ||||
| Profit/(Loss) | (26) | (40) | (39) | (22) |
| Equity | (14) | (34) | (1) | 0 |
| - 10 % | ||||
| Profit/(Loss) | 32 | 49 | 48 | 27 |
| Equity | 17 | 42 | 1 | 0 |
16 Share Based Payments
Stock Option Plan
Conditional Capital 2009/I serves as the basis for the stock option plan, also resolved by the Shareholders' Meeting on July 15, 2009 (2009 stock option plan), comprising 560,000 shares of common stock with a nominal value of EUR 1.00 each. Of this amount, up to 290,000 shares are available for the granting of options to employees of the Company and affiliated entities; up to 240,000 shares are available for the granting of rights to the members of management of entities affiliated with artnet AG;
and up to 30,000 shares are available for issue to the Management Board.
In the year 2009, corporate management and employees of the subsidiary Artnet Corp. were granted options from the 2009 stock option plan, in return for which they forfeited all previously granted rights that had not expired by the grant date. All options that management and employees forfeited were already vested at the grant date of the new options.
The number of outstanding options changed in the year under report as follows:
| December 31, 2011 | December 31, 2010 | ||||
|---|---|---|---|---|---|
| Weighted Number of Average - Shares Exercise Price |
Number of Shares |
Weighted Average - Exercise Price |
|||
| Outstanding, Beginning of Period | 323.907 | 4,85 | 193.907 | 4,66 | |
| Granted | 130.000 | 5,13 | |||
| Expired | |||||
| Forfeited | |||||
| Outstanding, End of Period | 323.907 | 4,85 | 323.907 | 4,85 | |
| Exercisable, End of Period | 0 | — | 0 | — |
The options outstanding on December 31, 2011 had a weighted average remaining contract term of 8.14 years (December 31, 2010: 9.14 years). The exercise price granted was 5.13 in 2010 and 4.66 in 2009. Of the 323,907 options outstanding, 129,160 were granted to the management of Artnet Corp. in 2010. No options were granted in 2011.
The fair value of the stock options was calculated for the grant date on the basis of the binomial model and the following assumptions:
| Options | ||
|---|---|---|
| Granted 2010 |
Granted 2009 |
|
| Number of Options Granted | 130,000 | 193,907 |
| Share Price on Grant Date (EUR) | 5.03 | 5.02 |
| Weighted Average Exercise Price (EUR) |
5.13 | 4.66 |
| Weighted Average Performance Target (Share Price in EUR) |
5.64 | 5.13 |
| Expected Weighted Average Term of the Options (Years) |
10,00 | 10,00 |
| Risk-Free Interest Rate (%) | 1.27 | 3.40 |
| Expected Average Volatility (%) | 55.00 | 70.00 |
| Expected Dividend Yield (%) | 0.00 | 0.00 |
| Total Fair Value of Options (EUR) | 413,400 | 754,298 |
Expected volatility was determined based on the weekly changes in XETRA share prices. The expected term of the options issued in 2010 and 2009 corresponds to the contractual term of the options. The exercise price corresponds to the average stock exchange quotation of the artnet shares over the last ten bank working days preceding the grant date.
The options can be exercised for the first time at the end of two years beginning at midnight on the option allotment date and then up until the end of their term; they expire ten years after the grant date. Rights may not be exercised in the period from two weeks before the end of the quarter until the end of the first trading day after publication of the quarterly results and also not in the period from two weeks before the end of the fiscal year until the end of the first trading day after publication of the results for the past fiscal year.
The plan also sets out that rights may only be exercised if the closing market price determined before the date of the planned exercise of the option exceeds the exercise price by at least ten percent. If this performance target has been reached on one occasion, the options can be exercised during the exercise periods independently of the further performance of the artnet share price over their term.
EUR 163,638 was spent on share-based payment in the fiscal year 2011 and EUR 104,337 in 2010.
17 Personnel Expenses
The consolidated statement of comprehensive income includes the following personnel expenses for the financial years presented per expense category:
| 2011 | 2010 | |
|---|---|---|
| Personnel expenses | ||
| per cost category | EUR | EUR |
| Cost of Sales | 3.870.243 | 3.088.707 |
| Selling and Marketing | 898.669 | 1.438.232 |
| General Administrative | 1.298.548 | 1.272.249 |
| Product Development | 952.105 | 1.035.373 |
| Total Personnel costs | 7.019.564 | 6.834.561 |
The total personnel costs include social security expenses of EUR 783,285 and EUR 739,017 and 401(k) expenses of EUR 95,211 and EUR 68,466 as of December 31, 2011 and 2010, respectively.
At December 31, 2011 there were 114 full-time employees as compared with 105 in the previous year. Additionally, the Group employed 18 part-time employees in 2011 as compared to 13 in the previous year, and 11 sales and other consultants as compared to 13 in 2010.
The average number of employees in fiscal years 2011 and 2010 was 112 and 105 respectively. The employees were engaged in the following activities:
| 2011 | 2010 | |
|---|---|---|
| Cost of Sales | 84 | 65 |
| Selling and Marketing | 8 | 16 |
| General and Administrative | 9 | 11 |
| Product Development | 11 | 13 |
| Total | 112 | 105 |
18 Defined Contribution Plans
The subsidiary Artnet Corp. has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code of the USA for all qualifying employees. The assets of the plan are held separately from those of Artnet Corp. in funds under control of trustees. Participating employees may contribute up to 100% of their annual salary but not more than statutory limits. Artnet Corp. has a discretionary matching contribution each year. In the years ended December 31, 2011 and 2010, the matching contributions were EUR 95,211 and EUR 68,466, respectively.
19 Earnings per Share
Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding during the year.
Diluted earnings per share are calculated in the same manner as basic earnings per share with the exception that the average number of shares outstanding increases by adding the potential number of shares from stock option conversions.
The calculation of earnings per share is based on the following data:
| 2011 | 2010 | |
|---|---|---|
| EUR | EUR | |
| Numerator (Earnings): | ||
| Net result for the year retained for equity shareholders |
31.475 | 152.905 |
| Denominator (Number of Shares): | ||
| Weighted average number of ordinary shares used to calculate basic earnings per share (issued and fully paid ordinary shares) |
5.552.986 | 5.552.986 |
| Effect of Potential Shares: Stock Options |
0 | 4.000 |
| Weighted average number of ordinary shares used to calculate dilutive earnings per share |
5.552.986 | 5.556.986 |
The average share price in 2011 (EUR 4.81) is less than the weighted average exercise price (EUR 4.85). In consequence, there are no diluted shares.
20 Additional Disclosures to the Statement of Comprehensive Income
Profit from Operations
Profit from Operations has been arrived at after charging:
| 2011 | 2010 | |
|---|---|---|
| EUR | EUR | |
| Depreciation and Amortization | 583.992 | 833.264 |
| Personnel Expenses | 7.019.564 | 6.834.561 |
Amortization of intangible assets was booked in the amount of EUR 205,159 in 2011 and EUR 417,689 in 2010.
Depreciation and amortization are presented in the consolidated statement of comprehensive income as part of cost of sales.
Other Income and Expense
In 2011 the Group recognized expenses from exchange rate differences in the amount of EUR 135,254, write-off of assets (VAT) for EUR 32,218, expenses from prior years for EUR 1,207. In 2010 the Group recognized expenses from exchange rate differences in the amount of EUR 97,449 and VAT payments in the amount of EUR 129,483. The Group also obtained wage continuation by the German government in the amount of EUR 33,519.
Interest Income and Interest Expense
Interest income is interest earned on short term cash investments. In 2010, interest income also included EUR 60,210 related to the reversal of a prior year accrual for interest expense. Interest expense is interest paid for finance lease obligations.
21 Segment Reporting
The Group reports on the operating segments in the same way it reports operating segment information to the Management and Supervisory Board. During the first quarter of 2011, the Group decided to report artnet Magazines as a reportable segment. Previously the French, German, and US magazines were considered primarily a marketing tool supporting the Group's business activities. artnet Magazine direct expenses are now presented in "Cost of Sales."
The new allocation method has been used for both 2010 and 2011 for comparative purposes. Impact of the reclassification from Selling and Marketing expenses into Cost of Sales for 2010 is EUR 975,501 (USD 1,292,054).
The five Group's reportable segments are as follows:
• The artnet Galleries segment provides services to galleries by posting the galleries' available artworks online.
• The artnet Price Database segment includes the artnet Price Database Fine Art and Design and the artnet Price Database Decorative Art sales, with the imageless search as well as sales generated from artnet Market Alert, artnet Market Reports, and artnet Monographs.
• The artnet Advertising segment generates revenue from banners and national advertising on the website.
• The artnet Auctions segment provides an online platform to buy and sell artworks.
• The artnet Magazine segment currently generates advertising revenue, but will be developed into a full-fledged business.
Segment performance is evaluated based on profit or loss before taxes. Not directly attributable expenses are allocated to the reportable segments primarily based on the headcount and revenue for each reportable segment.
A measure of total assets or liabilities for each reportable segment is not provided to the management. Therefore, total assets or liabilities are not disclosed for each reportable segment.
| 2011 | ||||||
|---|---|---|---|---|---|---|
| EUR | Galleries | artnet artnet Price Database |
artnet Auctions |
artnet Advertising |
artnet Magazine |
Total |
| Revenue | 4.885.097 | 4.695.442 | 2.079.859 | 1.584.684 | 95.584 | 13.340.666 |
| Cost of Sales | 1.424.194 | 1.611.046 | 1.668.926 | 438.980 | 791.872 | 5.935.017 |
| Gross Profit | 3.460.903 | 3.084.396 | 410.933 | 1.145.704 | (696.288) | 7.405.649 |
| Other Operating Expenses | ||||||
| Selling and Marketing | 969.141 | 384.146 | 168.579 | 299.796 | 23.365 | 1.845.027 |
| General and Administrative | 1.261.132 | 1.157.878 | 694.406 | 409.101 | 202.809 | 3.725.326 |
| Product Development | 526.594 | 531.101 | 414.214 | 170.569 | 98.750 | 1.741.229 |
| Non Cash Compensation | 50.304 | 54.764 | 32.843 | 16.318 | 9.409 | 163.638 |
| Total other Operating Expenses | 2.807.171 | 2.127.889 | 1.310.043 | 895.784 | 334.333 | 7.475.220 |
| Profit from Operations | 653.733 | 956.507 | (899.110) | 249.920 | (1.030.622) | (69.571) |
| Interest Expense/Interest Income | ||||||
| and Other Income/Expense | (43.561) | (47.424) | (28.442) | (14.131) | (8.149) | (141.707) |
| Profit Before Tax | 610.171 | 909.083 | (927.551) | 235.789 | (1.038.770) | (211.278) |
| Income Taxes | 74.624 | 81.241 | 48.722 | 24.207 | 13.958 | 242.753 |
| Net Profit | 684.795 | 990.324 | (878.829) | 259.996 | (1.024.812) | 31.475 |
| 2010 | ||||||
| EUR | Galleries | artnet artnet Price Database |
artnet Auctions |
artnet Advertising |
artnet Magazine |
Total |
| Revenue | 5.176.402 | 4.987.214 | 1.951.202 | 1.461.170 | 96.593 | 13.672.581 |
| Cost of Sales | 1.742.697 | 1.657.742 | 1.260.303 | 273.806 | 988.626 | 5.923.175 |
| Gross Profit | 3.433.705 | 3.329.472 | 690.898 | 1.187.364 | (892.035) | 7.749.406 |
| Other Operating Expenses | ||||||
| Selling and Marketing | 1.027.113 | 349.166 | 256.223 | 444.099 | 16.070 | 2.092.670 |
| General and Administrative | 1.329.625 | 1.174.324 | 549.250 | 379.893 | 17.268 | 3.450.360 |
| Product Development | 710.398 | 656.307 | 550.351 | 202.971 | 9.226 | 2.129.253 |
| Non Cash Compensation | 39.303 | 36.311 | 16.983 | 11.230 | 510 | 104.337 |
| Total other Operating Expenses | 3.106.440 | 2.216.108 | 1.372.807 | 1.038.192 | 43.074 | 7.776.620 |
| Profit from Operations | 327.265 | 1.113.365 | (681.909) | 149.172 | (935.108) | (27.214) |
| Interest Expense/Interest Income | ||||||
| and Other Income/Expense | (50.318) | (46.487) | (21.743) | (14.377) | (654) | (133.579) |
| Profit Before Tax | 276.947 | 1.066.877 | (703.651) | 134.795 | (935.762) | (160.793) |
| Income Taxes | 118.168 | 109.171 | 51.061 | 33.762 | 1.535 | 313.698 |
| Net Profit | 395.115 | 1.176.048 | (652.590) | 168.558 | (934.227) | 152.905 |
Segments contain primarily the following non-cash transactions:
| 2011 | ||||||
|---|---|---|---|---|---|---|
| EUR | Galleries | artnet artnet Price Database |
artnet Auctions |
artnet Advertising |
artnet Magazine |
Total |
| Depreciation and Amortization | 179.523 | 195.442 | 117.211 | 58.236 | 33.580 | 583.992 |
| Provision for Doubtful Accounts | 23.942 | 26.065 | 15.632 | 7.767 | 4.478 | 77.884 |
| 2010 | ||||||
|---|---|---|---|---|---|---|
| EUR | Galleries | artnet artnet Price Database |
artnet Auctions |
artnet Advertising |
artnet Magazine |
Total |
| Depreciation and Amortization | 313.887 | 289.988 | 135.632 | 89.681 | 4.076 | 833.264 |
| Provision for Doubtful Accounts | 44.444 | 41.059 | 19.204 | 12.698 | 577 | 117.982 |
22 Information about Geographies
The Group's operations are primarily located in the United States, represented by the subsidiary Artnet Worldwide Corp.
The following table provides an analysis of the Group's revenue by geographical market:
| 2010 | |
|---|---|
| EUR | EUR |
| 7.583.327 | 8.062.606 |
| 5.153.325 | 4.566.475 |
| 604.014 | 1.043.500 |
| 13.340.666 | 13.672.581 |
| 2011 |
Vermögenswerte nach geografischen Regionen
Die folgende Tabelle gliedert die Buchwerte der Vermögenswerte des Konzerns sowie die Zugänge zum Sachanlagevermögen und zu den immateriellen Vermögenswerten nach den geografischen Regionen, in denen sich die Vermögenswerte befinden.
| Carrying Amount of Segment Assets |
to Fixed Assets | ||||
|---|---|---|---|---|---|
| 12/31/2011 | 12/31/2010 | 12/31/2011 | 12/31/2010 | ||
| EUR | EUR | EUR | EUR | ||
| United States | 7.011.424 | 6.461.173 | 925.238 | 294.563 | |
| Germany | 199.000 | 478.237 | 10.719 | 16.156 | |
| United Kingdom | 30.690 | 31.047 | 0 | 0 | |
| France | 195.816 | 140.531 | 8.139 | 6.102 | |
| Total | 7.436.930 | 7.110.988 | 944.096 | 316.821 |
The segment results and liabilities of the Group are not allocated by geographical area, as this is not possible in a meaningful way.
The depreciation and amortization expenses of the Group companies apply to fixed assets in the United States in the amount of EUR 530,670 (EUR 778,353 in 2010), France in the amount of EUR 7,182 (EUR 5,523 in 2010), and to fixed assets in Germany in the amount of EUR 46,139 (EUR 49,388 in 2010).
23 Operating Lease Arrangements and other Commitments
Artnet Corp. leases its New York office facilities under noncancelable operating lease terms that continue up to March 31, 2012. Beginning January 1, 2009 Artnet Corp. subleased parts of its office facilities to a subtenant through March 31, 2012. In 2011 Artnet Corp. entered a new lease for office facilities to start April 1, 2012 through March 31, 2023.
artnet AG leases its Berlin office under a non-cancelable operating lease continuing through November 30, 2013. Starting on June 15, 2008 artnet France sarl leases its Paris office under an operating lease with a minimum term of three years. For the offices in Berlin and Paris, the Group has the option to prolong the lease term by up to six years. artnet UK Ltd. leases its London office under an operate lease which is cancelable at short notice. Future minimum rental payments required as of December 31, 2011 and 2010 are as follows:
| EUR | EUR | |
|---|---|---|
| 12/31/2011 | 12/31/2010 | |
| Lease Payments | ||
| Expiring in less than one year | 633.652 | 579.633 |
| Expiring between two and five years | 2.616.712 | 237.187 |
| Expiring after more than five years | 4.779.501 | 0 |
| 8.029.865 | 816.820 | |
| Proceeds from Sublease | ||
| Expiring in less than one year | 17.224 | 65.536 |
| Expiring between two and five years | 0 | 16.841 |
| Expiring after more than five years | 0 | 0 |
| 17.224 | 82.377 | |
| Total | 8.012.641 | 734.443 |
Rent expenses for the Group offset by proceeds from the sublease amounted to EUR 493,910 and EUR 570,894 for the years ended December 31, 2011 and 2010, respectively. Proceeds from the sublease amounted to EUR 62,394 and EUR 59,249 in 2011 and 2010, respectively.
24 Fees of Statutory Auditor
Auditor's fees and expenses for the audit of the statutory financial statements of the Company and the consolidated financial statements amounted to EUR 54,000 and EUR 55,000 in 2011 and 2010, respectively. In addition, the Company recorded EUR 16,700 in 2011 and EUR 16,150 in 2010 for other services. All fees are recognized as expenses in 2011 and 2010, respectively.
25 Related Party Transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Executive Board
Hans Neuendorf is CEO of artnet AG and a director of Artnet Corp.
In the fiscal years 2011 and 2010, Mr. Neuendorf received the following remuneration from artnet AG:
| 2011 | 2010 | |
|---|---|---|
| EUR | EUR | |
| Fixed Salary | 400.000 | 356.250 |
| Value of Additional Benefits | ||
| (Car Usage) | 8.302 | 8.302 |
| Fixed Remuneration Components | 408.302 | 364.552 |
| Bonus (Variable Compensation) | 155.000 | 155.000 |
| Total | 563.302 | 519.552 |
Mr. Neuendorf, or companies controlled by him, own 1,461,635 shares of artnet AG.
Galerie Neuendorf AG sold artworks though the artnet Auctions platform and paid seller premium fees to Artnet Corp. in the amount of EUR 3,630 in 2011 and EUR 1,397 in 2010.
Supervisory Board
John D. Hushon, Naples/Florida, Chairman Dr. Christian Dohm, Munich, Germany, Vice Chairman (until 12/31/2011)
Hannes von Goesseln, Berlin Germany (until 12/31/2011) Prof. Dr. Walter Rust, Berlin, Germany, Vice Chairman
- (beginning 01/01/2012)
- Dr. Jochen Gutbrod, Meilen, Switzerland (beginning 01/01/2012)
The Supervisory Board members' remuneration in the fiscal years 2011 and 2010 amounted as follows:
| 2011 | 2010 | |
|---|---|---|
| EUR | EUR | |
| John D. Hushon | 45.000 | 40.000 |
| Dr. Christian Dohm | 33.750 | 30.000 |
| Hannes von Goesseln | 22.500 | 20.000 |
| 101.250 | 90.000 |
Mr. Hushon holds 52,054 shares of artnet AG, and Mr. von Goesseln holds 9,000 shares of artnet AG.
Mr. Von Goesseln purchased artworks through the artnet Auctions platform and paid buyer premium fees in the amount of EUR 162 in 2011 to Artnet Corp.
Mr. Dr. Dohm purchased artworks through the artnet Auctions platform and paid buyer premium fees in the amount of EUR 216 in 2011 to Artnet Corp.
The Remuneration Report outlines the principles used for determining the compensation of the Supervisory Board of artnet AG. In addition, the report describes the policies and levels of compensation paid to Supervisory Board members. The Remuneration Report is presented within the Corporate Governance Report, included in this Annual Report for the fiscal year 2011.
Other Related Party Transactions
Jacob Pabst, a related person to Mr. Neuendorf, is working for Artnet Corp. as Chief Information Officer. His salary is EUR 208,645 and EUR 219,868 as of December 31, 2011 and 2010. Additionally, Jacob Pabst has a loan with Artnet Corp. as of December 31, 2011 amounting to EUR 27,027 (excluding interest), which was paid back on February 23, 2012.
Jacob Pabst was given 40,000 stock options on June 10, 2010. The fair value of the stock based compensation amounted to EUR 127,200. In 2011, the expense related to the stock options amounted to EUR 50,350 and is included in the line item non cash compensation. In 2010, the expense related to the stock options amounted to EUR 29,371.
Sophie Neuendorf, a related person to Mr. Neuendorf, is working for artnet AG as Assistant Social Media. Her salary was EUR 20,214 in 2011.
In 2010, Caroline Neuendorf, a related person to Mr. Neuendorf, was paid commissions for the sale of Artist Works Catalogues (now artnet Monographs) in the amount of EUR 3,200.
26 Accounting Estimates and Judgements
The preparation of the Group's consolidated financial statements requires management estimates and assumptions that affect reported amounts and related disclosures. All estimates and assumptions are made to the best of management's knowledge and belief in order to fairly present the Group's financial position and results of operations. Especially the following accounting policies are significantly impacted by management's estimates and judgments.
Deferred Income Taxes
At each balance sheet date, the Group assesses whether the realization of future tax benefits is sufficiently probable to recognize deferred tax assets. This assessment requires the exercise of judgment on the part of the management with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The amount of deferred tax assets could be reduced if projected future taxable profits are lowered.
Capitalized Costs of Website Development
Capitalized website development costs relate to new products which the Company anticipates will produce revenue in the future. These costs include consulting fees and salaries. The revenue projections for these new products are based on management's best estimates, but actual results could vary from projections.
27 Notifications in Accordance with the Securities Trading Act
Notification Regarding Conversion to Registered Shares
On September 26, 2011, the 5,631,067 ordinary shares of the company were traded on the stock exchanges as registered shares for the first time. The conversion also effected a change in ISIN and WKN. The registered shares now have the ISIN DE000A1K0375 (previously: DE0006909500) and the WKN A1K037 (previously: 690950). The ticker symbol changed from AYD to ART.
The conversion into registered shares affects neither the shareholder structure, nor the shareholders' rights, nor the transferability of the shares. The shares can still be bought and sold without any restrictions. Also, the conversion does not impose any additional costs on the shareholders.
Registered shares are a means to facilitate a direct and transparent communication with shareholders. Based on the entries in the share register the company can target its shareholders and inform them about the developments at artnet AG more easily. Moreover, the conversion to registered shares will yield sustainable long-term cost-savings, e. g., through the direct mailing of the invitations to the Annual General Meeting to the Shareholders.
Notification Concerning Transactions by Persons Performing Managerial Responsibilities in Accordance with § 15a of the Securities Trading Act
Pursuant to §15a of the German Securities Trading Act, artnet was notified on July 12, 2011 that Hannes von Goesseln, a Supervisory Board member, purchased 500 shares at EUR 4,695, 500 shares at EUR 4,572, 263 shares at EUR 4,695, 237 shares at EUR 4,695 and 280 shares at EUR 4,731 on July 11, 2011 for an average price of EUR 4.666/share.
Pursuant to §15a of the German Securities Trading Act, artnet was notified on November 12, 2011 that Hannes von Goesseln, a Supervisory Board member, purchased 1,000 shares at EUR 3.599 on November 11,2011 for a total amounted traded of EUR 3,712.60.
Pursuant to §15a of the German Securities Trading Act, artnet was notified on November 16, 2011 that John Hushon, a Supervisory Board member, purchased 1,000 shares at EUR 3.620 on November 9,2011 for a total amounted traded of EUR 3,620.00.
Notifications in Accordance with § 26 of the Securities Trading Act
Artis Partners 2X (Institutional), L.P., San Francisco, CA, USA, informed us that its share of the voting rights in artnet AG exceeded the notification threshold of 3% on October 20, 2010, and that it now holds 3.0004% (168,957) of the total of 5,631,067 voting rights in artnet AG.
Artis Capital Management, L.P., San Francisco, CA, USA, informed us that its share of the voting rights in artnet AG exceeded the notification threshold of 15% on July 13, 2011, and that it now holds 15.13% (851,770) of the total of 5,631,067 voting rights in artnet AG. The total voting rights of 15.13% must be
counted additionally through Artis Partners 2X (Institutional), L.P. and Artis Partner 2X Ltd. (formerly Artis Technology 2X Ltd), among others, in accordance with Section 22 (1), sentence 1, No. 6 WpHG.
Artis Capital Management, Inc., San Francisco, CA, USA, informed us that its share of the voting rights in artnet AG exceeded the notification threshold of 15% on July 13, 2011, and that it now holds 15.13% (851,770) of the total of 5,631,067 voting rights in artnet AG. The total voting rights of 15.13% must be counted additionally through Artis Partners 2X (Institutional), L.P. and Artis Partner 2X Ltd. (formerly Artis Technology 2X Ltd), among others, in accordance with Section 22 (1), sentence 1, No. 6 and Section 22 (1), sentence 2 WpHG.
Mr. Oliver Schmidt, Düsseldorf, Germany, informed us within the meaning of Section 21 (1) of the WpHG on June 14, 2011, that his voting rights in our company fell below the 3% threshold on June 7, 2011, and that on this date he held 2.92% (164,339 voting rights) of the total of 5,631,067 voting rights.
28 Report on Post-Balance Sheet Events
No reportable events of significant importance have occurred after the balance sheet date.
29 Declaration of Conformity with the German Corporate Governance Code in Accordance with Art. 161 of the German Stock Corporation Act
On December 2, 2011, the Executive Board and the Supervisory Board of artnet AG issued the declaration of conformity with the recommendations of the German Corporate Governance Code as amended on May 26, 2010, in accordance with Art. 161 of the Stock Corporation Act (AktG). The declaration is posted on the website of the Company.
Berlin, March 28, 2012
The CEO Hans Neuendorf
English Translation of the Independent Auditor's Report
We have audited the consolidated financial statements prepared by artnet AG, Berlin, comprising the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes to the consolidated financial statements, together with the Group management report for the business year from January 1 to December 31, 2011. The preparation of the consolidated financial statements and group management report in accordance with IFRS as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) German Commercial Code (HGB) are the responsibility of the legal representatives of the Company. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB [Handelsgesetzbuch; "German Commercial Code"] and German generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in the consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the Group management report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs as adopted by the EU and the additional requirements of German Commercial Law pursuant to § 315a (1) HGB and give a true and fair view of the net assets, financial position and results of operations of the Group, in accordance with these requirements. The Group management report is consistent with the consolidated financial statements, as a whole provides a suitable view of the Group's position and suitably presents the opportunities and risks of future development.
Ebner Stolz Mönning Bachem GmbH & Co. KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft
Thomas Götze Elmar Meier
Wirtschaftsprüfer Wirtschaftsprüfer
Hamburg, March 28, 2012
artnet AG
Supervisory Board John Hushon, Chairman Prof. Dr. Walter Rust, Deputy Chairman Dr. Jochen Gutbrod Management Board Hans Neuendorf, CEO
Artnet Worldwide Corporation
Hans Neuendorf, CEO Jacob Pabst, President
artnet France sarl
Hans Neuendorf, Gérant Gina Kehayoff, Directrice Générale
Adresses
artnet AG Oranienstraße 164 10969 Berlin Germany [email protected] Tel. +49 (0)30 209178-0 Fax +49 (0)30 20917829
Artnet Worldwide Corporation 233 Broadway, 26th floor Woolworth Building New York, NY 10007-2600 USA [email protected] Tel. +1 (0)212 4979700 Fax +1 (0)212 4979707
artnet France sarl 5, rue du Chevalier de Saint George 75008 Paris France [email protected] Tel. +33 (0)1 42866710 Fax +33 (0)1 42861016
artnet UK Ltd. Morrell House 98 Curtain Road London EC2A 3AF United Kingdom [email protected] Tel. +44 (0)20 7729 0824 Fax +44 (0)20 7033 9077
Investor Relations
You can find information for investors and the annual financial statements at www.artnet.de/IR.
If you have further queries, please send an e-mail to [email protected] or send your inquiry by mail to one of our offices.
Information on artnet stock
The common stock of artnet AG is traded on the Prime Standard of the Frankfurt Stock Exchange under the symbol "ART". You can find notices of relevant company developments http://www.artnet.com/investor-relations
German securities code number
(WKN) A1K037 ISIN DE000A1K0375
©2012 artnet AG, Berlin
artnet AG Oranienstraße 164 10969 Berlin
Concept and Production Büro Fleischmann Prof. Gerd Fleischmann
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