GROUP MANAGEMENT REPORT

Financial Situation

Principles and objectives of financial management
Financing measures are undertaken by the central Group Treasury department at HORNBACH-Baumarkt-AG. Such measures also include granting assistance in the form of guarantees and letters of comfort to subsidiaries within the HORNBACH-Baumarkt-AG subgroup. Formal undertakings towards companies outside the HORNBACH-Baumarkt-AG subgroup are provided either by HORNBACH HOLDING AG or by HORNBACH Immobilien AG. The central organization of financial management activities enables the HORNBACH Group to maintain a uniform presence on the financial markets and to provide centralized liquidity management for the overall Group.

The information required for efficient liquidity management is provided by rolling group financial planning encompassing all relevant companies, which is updated on a monthly basis and has a budgeting horizon of twelve months, as well as by short-term financial forecasting which is updated on a daily basis. On the basis of the information available, the financing requirements of individual units within the Group are initially settled using surplus liquidity from other group companies by means of a cash pooling system. Such liquidity bears interest at market rates on the basis of internal group loan agreements.

External financing requirements are covered by taking up loans from banks and on the capital market. Furthermore, DIY store properties are sold to investors upon completion, with their subsequent utilization being secured by rental agreements (sale and leaseback). Efforts are made in this respect to meet the criteria set out in IAS 17 concerning classification as “Operating Leases”.

Financial debt
At the reporting date on February 28, 2009, the net financial debt of the Group amounted to € 499.4 million (2007/2008: € 583.6 million) and was structured as follows:

Permanent improvement in capital base
The inflow of funds from the bond of € 250 million issued by HORNBACH-Baumarkt-AG in November 2004 with a term of ten years and an interest coupon of 6.125 % was used to repay the short-term financing facilities of the HORNBACH-Baumarkt- AG subgroup and to provide additional liquidity for the further growth of the company.

The short-term financial debt (up to 1 year) amounting to € 153.3 million consists of short-term financing facilities at the subgroups HORNBACH-Baumarkt-AG (€ 7.0 million), HORNBACH Immobilien AG (€ 46.0 million) and HORNBACH Baustoff Union GmbH (€ 40.2 million), interest liabilities (€ 8.3 million), liabilities in connection with bills of exchange (€ 0.6m), liabilities relating to derivative financial instruments (€ 5.4 million) and the portion of long-term financing facilities maturing in the short term (€ 45.8 million).

The financing of the Group has been positively affected by structural changes in the committed credit lines. In the 2006/2007 financial year, various bilateral credit lines at HORNBACH-Baumarkt-AG were pooled into a syndicated credit line of € 200.0 million, which has a term of five years and can be extended on two occasions, in each case by a further year. Following the unanimous approval already provided for the first extension option in the 2007/2008 financial year, the second extension possibility was also exercised by all banks involved in the 2008/2009 financial year. The current final maturity date for the credit line is June 26, 2013. The covenants requiring compliance, such as EBITDA to interest expenses, are basically equivalent to the obligations governing the bond issued in 2004 and have been complied with at all times.

At the reporting date on February 28, 2009, the overall HORNBACH HOLDING AG Group had free credit lines, including the syndicated credit line referred to above, of € 429.1 million at customary market conditions (2007/2008: € 466.0 million). In order to provide the maximum possible degree of flexibility, all major group companies have credit lines denominated in their local currencies, in most cases from local banks.

Cash and cash equivalents amounted to € 275.2 million at the reporting date (2007/2008: € 196.0 million). As in the past, liquidity is managed in the form of fixed deposits with maximum investment horizons of three months. Furthermore, following the collapse of Lehman Brothers, the Group set maximum deposit totals per bank to enhance security by spreading liquidity holdings more widely.

The interest cover, net debt/EBITDA, equity ratio and company liquidity (cash and cash equivalents, plus unutilized committed credit lines) are monitored on a monthly basis as part of the company’s internal risk management. Further key figures are calculated on a quarterly basis. Countermeasures are initiated at an early stage in the event of the values falling short of specific target levels.

Key Financial Figures of the HORNBACH HOLDING AG Group

No security in the form of assets has been provided to secure the credit lines or the bond.

Land charges amounting to € 517.6 million had been provided as security for mortgage loans as of February 28, 2009 (2007/2008: € 517.3 million). The value of the financing facilities secured by land charges amounted to € 340.7 million at the reporting date (2007/2008: € 375.5 million).

Since the issue of the bond, external financing facilities at the HORNBACH-Baumarkt-AG subgroup have exclusively taken the form of unsecured loans and the sale of real estate (sale and leaseback). The financing of the HORNBACH Immobilien AG subgroup has also included secured mortgage loans.

In accordance with the company’s internal risk principles, derivative financial instruments are held solely for hedging purposes. The nominal values and valuation of existing derivative financial instruments have been depicted in the disclosures on the consolidated balance sheet in the notes to the financial statements.

Investments totaling € 131.4 million
The HORNBACH HOLDING AG Group invested a total of € 131.4 million in the 2008/2009 financial year (2007/2008: € 202.1 million), primarily in land, buildings, and plant and office equipment for existing DIY megastores with garden centers and for new stores under construction. The funds of € 129.8 million for the cash-effective investments (2007/2008: € 200.8 million) were financed in their entirety from the cash flow from operating activities, which amounted to € 144.3 millio

The decline in investment is due to the fact that four DIY megastores with garden centers were opened in the 2008/2009 financial year, as against five in the previous year.

Around 67 % of total investments were channeled into new real estate, including properties under construction. Around 33 % of total investments mainly involved the replacement and extension of plant and office equipment, as well as intangible assets (primarily IT software).

The most important investment projects related to the DIY megastores with garden centers opened during the 2008/2009 financial year in Bucharest (Romania), Stockholm (Sweden), Biel (Switzerland) and Hamburg, the expansion of the store in Wuppertal, investments in the builders’ merchant business, and the acquisition of land for the Group’s further expansion.

The store in Luxembourg and the stores in Kerkrade and Zaandam (both in the Netherlands) were sold to a real estate company in the period under report and leased back on a long-term basis. As in the past, the sale and leaseback transactions served to release funds to finance the Group’s further growth. Long-term utilization rights were secured, with rental extension and purchase options also being agreed in most cases.

Due mainly to like-for-like sales growth in Germany and abroad, coupled with a slight rise in the gross margin, the inflow of funds from operating activities improved from € 90.1 million in the previous year to € 144.3 million in the 2008/2009 financial year. In addition to the impact of the year-on-year increase in annual net income by € 54.6 million, this development was also the result of reduced net working capital financing requirements (changes in inventories, trade receivables and other assets plus changes in trade payables and other liabilities). Whereas liquid funds of around € 36 million were required to stock up inventories in the previous year, the expansion-related increase in inventories in the year under report could be financed by extending current liabilities.

Cash Flow Statement

The outflow of funds for investment activities reduced from € 154.4 million to € 46.9 million. The reduction in investments by € 71 million to € 129.8 million was countered in this respect by higher receipts from disposals of non-current assets and from the disposal of non-current assets held for sale amounting to € 82.9 million in total (2007/2008: € 46.4 million). Three DIY megastores with garden centers were sold in the context of sale and leaseback transactions in the 2008/2009 financial year, compared with only one in the previous year. Moreover, three Austrian real estate companies were sold, as were other pieces of land not required for operations.

Due to the scheduled repayment of existing financial loans, the outflow of funds for financing activities amounted to € 17.1 million in the 2008/2009 financial year, compared with an outflow of funds for financing activities of € 2.9 million in the previous year. The repayment of long-term financial debt of € 59.9 million was countered by the taking up of new longterm credit facilities of € 25.2 million and short-term credit facilities of € 28.2 million. Financial debt was reduced from € 779.6 million in the previous year to € 774.6 million.

Rating
Since 2004, the creditworthiness of the HORNBACH-Baumarkt- AG Group has been rated as follows by the leading international rating agencies Moody’s Investors Service and Standard & Poor’s:

Both ratings include stable outlooks and were confirmed without amendment by Standard & Poor’s.