Company profi le

Key Figures

Presentation of the Picanol Group 3

70 years in the lead with innovative technology (36-06) 3Customer-oriented organization 3International network 6Worldwide activities 8Product range 10Organizational diagram 13Board of Directors and Management Committee 14

Report by the Board of Directors 17

Letter to the Shareholders 18Main events 20OEM Business activities report 2370 years: History of the Picanol weaving machines 27Weaving Machines activities report 30Innovation Council 3370 years: Social life of the Picanol Group 34Human Resources 36Information Technology 38Corporate Governance 40 Consolidated f inancial statements 61

Defi nitions 62Annual accounts 63Notes to the consolidated fi nancial statements 67

Statutory f inancial statements of Picanol NV 115

Report by the Auditor 118

Information for the Shareholders 121

Shares and listing 121 Dividend 123 Useful information 125

Addresses 126Glossary 128

C O N T E N T S

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The mission of the Picanol Group is to create

sustainable growth and productivity, by

developing, producing and marketing rapier and

airjet weaving machines and related products and

services for the textile industry worldwide, and by

marketing its own competencies and technological

spin-offs developed in-house, to customers inside

and outside the textile industry.

A new organization was implemented at the be-

ginning of 2006, with increased emphasis on the

weaving machine activities together with devel-

opment of the OEM business. This new market-

oriented organization enables the group to man-

age and support a number of core activities in an

integrated way at group level, and to react quickly

to market requirements and opportunities. The

group has two core divisions aimed at its target

markets:

• The OEM Business division develops, produces

and sells high-tech components, services and

mechatronic system solutions for Original

Equipment Manufacturers both for the textile

industry and for other sectors.

• The Weaving Machines division carries out de-

velopment, production and marketing of high-

tech weaving machines, together with services

for the after-market provided to customers in

the textile industry.

P R E S E N TAT I O N O F T H E P I C A N O L G R O U P

70 YEARS IN THE LEAD WITH INNOVATIVE TECH-NOLOGY

The Picanol Group celebrated its 70th birthday

on 22 September 2006.

Over the space of seven decades the Picanol

Group has developed from a traditional buil-

der of weaving machines to a worldwide sup-

plier of global solutions for the textile and

other industries. 70 years in the lead, thanks

to innovative technology, during which the

Picanol Group has played a pioneering role

worldwide in development and production of

high-tech weaving machines.

70YEARS

CUSTOMER-ORIENTED ORGANIZATION

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OEM Business

• Manufacturing covers the foundry activities

of Proferro and the Group’s machining activi-

ties in Ieper, Belgium.

• Mechatronics is made up of PsiControl

Mechatronics (Ieper, Belgium), PsiControl

Mechatronics srl (Brasov, Romania), the

mechatronics department of Picanol (SIP),

Textile Machinery (Suzhou, China) and

Melotte (Zonhoven, Belgium). It offers a full

range of mechatronic and electronic solutions.

PsiControl Mechatronics forms the heart

of Mechatronics. It concentrates on design,

development and production of electronic and

mechatronic systems such as switchboards and

switched reluctance motors, both for the Picanol

weaving machines and for original equipment

manufacturers (OEMs). For example,

PsiControl Mechatronics develops among

others the central control, motors, drives and

user interface for Picanol weaving machines.

It also offers a full range of services including

R&D, prototyping, procurement, production

and repair of printed circuit boards.

Melotte for its part specializes in production of

very high grade metal parts for use in production

processes and as machine components. The

Melotte products fi nd application in a very wide

range of industries including electronics, the

automotive industry, chemicals and aerospace.

The activities are characterized by very small

production series, complex shapes, high

precision and special materials and coatings.

• GTP Accessories covers all the companies in

the Picanol Group that specifi cally develop and

produce accessories for weaving machines.

Specifi cally, it is responsible for developing,

producing and marketing textile accessories

such as weaving frames, reeds, heddles and

nozzles (main and relay nozzles). These prod-

ucts are sold to OEMs by OEM Business; they

are also sold to weaving mills directly by Weav-

ing Machines and indirectly through agents.

The GTP Accessories activities are subdivided

into three product groups:

- Frames, heddles and dropwires: these

weaving accessories are sold under the Steel

Heddle brand and are produced by Steel

Heddle (which legally forms part of GTP

Greenville in the USA) and by Verbrugge

(Ieper, Belgium).

T E X T I L E A N D N O N - T E X T I L E O E M ’ S

O E M B U S I N E S S

Manufacturing

Mechatronics & Accessories

5

- Reeds: all reeds are sold under the Burcklé

quality label and produced by Burcklé

(Bourbach-le-Bas, France) and Lhenry

(Saint-Romain-la-Motte, France). Burcklé

also produces airjet reedwires and sells them

itself to reedshops, both inside and outside

the Picanol Group.

- Jet insertion: Te Strake Textile (Deurne,

Netherlands) develops and produces insertion

technology for airjet weaving machines. The

product range includes among other things

main and relay nozzles, valves and sensors.

Weaving machines

• Marketing, Sales & Services covers the

activities of the Weaving Machines CRTs and

After Market Sales & Services. The Weaving

Machines CRTs (customer relations teams)

are responsible for marketing, sales and

servicing of weaving machines. After Market

Sales & Services for its part comprises all the

more frequent sales of services (preventive

maintenance programs, training courses,

service calls and repairs) and products (spare

parts and accessories) to weaving mills. These

two sales processes support one another, as

a larger installed base of weaving machines

boosts sales of industrial consumables and

services; conversely the latter stimulate sales

of weaving machines.

• Technology & Operations is responsible for

design, integrated development and assembly

of airjet and rapier weaving machines, and for

purchasing of parts (from within the group

and from outside companies). The weaving

machines are produced in Ieper (Belgium),

Suzhou (China) and Günne (Germany).

In addition to the two core divisions there are two

corporate support departments:

Finance & Administration provides support for

the rest of the group in Finance & Administration,

Information Technology and Legal Affairs.

Human Resources & General Services covers

Human Resources, Corporate Communication,

General Services, Environment, Health & Safety,

World Class Manufacturing & Total Quality Man-

agement and Facilities & Central Sourcing.

T E X T I L E C U S T O M E R S

W E AV I N G M A C H I N E S

Technology & Operations

Marketing, Sales & Services

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INTERNATIONAL NETWORK Situation on 31/12/2006

LEGEND

R – Research & Development

P – Production

M – Marketing

S – Service

EUROPE

B e l g i u m

Picanol (Ieper): headquarters + R/P/M/S

Proferro (Ieper): P/M/S

Verbrugge (Ieper): R/P/M/S

PsiControl Mechatronics (Ieper): R/P/M/S

Melotte (Zonhoven): R/P/M/S

G e r m a n y

Günne (Möhnesee-Günne): R/P/S

F r a n c e

Burcklé (Bourbach-le-Bas): P/M/S

Lhenry (Saint-Romain-la-Motte): P/M/S

I t a l y

GTP Milano: M/S

N e t h e r l a n d s

Te Strake Textile (Deurne): R/P/M/S

R o m a n i a

PsiControl Mechatronics srl (Brasov): R/P

Tu r k e y

GTP Istanbul: P/M/S

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PASIA

I n d i a

New Delhi, Mumbai and Coimbatore: perma-

nent sales & services agency

I n d o n e s i a

GTP Bandung: M/S

P a k i s t a n

Lahore: permanent sales & services agency

P e o p l e ’ s R e p u b l i c o f C h i n a

Picanol SIP (Suzhou Industrial Park)Textile

Machinery: R/P/M/S

Picanol (Suzhou) Trading Company: M/S

Picanol Bejing Representative Offi ce M

Picanol Guangzhou Representative Offi ce M

Picanol Shanghai Representative Offi ce M

AMERICAS

B r a z i l

GTP São Paulo: P/M/S

M e x i c o

GTP Mexico: P/M/S

U S A

GTP Greenville: R/P/M/S

The Picanol Group is also represented by one or more agents in all countries with a signifi cant textile market.

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EUROPE

B e l g i u m

Picanol as the parent company is also the admin-

istrative headquarters of the Picanol Group, based

in Ieper. The core activities are carried out here.

These include production of the OMNIplus 800

and GamMax weaving machines (the latter is due

to be replaced by the OptiMax in the course of

2007).

Proferro comprises the foundry and machining ac-

tivities of the group.

PsiControl Mechatronics develops and produces

mechatronic systems for Picanol weaving ma-

chines and for original equipment manufacturers.

THE EARLY YEARS

The company was founded as the

‘Vansteenkiste Company to Promote

Industrialization of Flax Fiber Production,

Foundry and Workshops’ in 1928. The

Steverlynck family was represented on the

Board of Directors when the company was

fi rst set up, with Baldewijn Steverlynck (1893-

1976) as chairman. This marked the entry

of the Steverlynck family into the industrial

development of the Ieper region, in which

it played a leading role throughout the 20th

century. But the Vansteenkiste company did

not have an easy time, as competitors soon

tried to copy its machines. Furthermore, a

few years later the fl ax industry suffered a

worldwide downturn. Vansteenkiste

managed to survive by building various

other types of machine.

70YEARS

ACTIVITIES AND BRANCHES WORLDWIDE

9

Verbrugge develops and produces weaving acces-

sories such as frames, heddles and dropwires.

Melotte specializes in production of very high-

precision metal parts for use in production pro-

cesses and as machine components.

G e r m a n y

Günne develops and produces the TERRYplus

800 and OMNIplus 800 TC weaving machines.

F r a n c e

Burcklé and Lhenry produce reeds.

I t a l y

GTP Milano sells weaving machines, spare parts

and accessories.

N e t h e r l a n d s

Te Strake Textile is a competence center for

nozzles and sensors. It also focuses on R&D for

breakthrough projects in the fi eld of air insertion.

R o m a n i a

PsiControl Mechatronics srl concentrates on cable

assembly, PCB assembly (THT and SMD) and

product engineering.

Tu r k e y

GTP Istanbul sells weaving machines, parts and

accessories, and also produces reeds.

ASIA

I n d o n e s i a

Through GTP Bandung the group provides Pica-

nol parts, accessories and services for the Indone-

sian textile market.

P e o p l e ’ s R e p u b l i c o f C h i n a

Picanol SIP (Suzhou Industrial Park) Textile Ma-

chinery produces GTXplus and OMNIjet weaving

machines, and also makes and sells mechatronics

parts. Picanol (Suzhou) Trading Company for its

part supplies aftermarket products and services

for weaving mills in China. The Picanol Group

also has representative offi ces in Beijing, Guang-

zhou and Shanghai.

AMERICAS

B r a z i l

GTP São Paulo sells Picanol weaving machines,

parts and accessories to the South American tex-

tile industry, and also produces reeds.

M e x i c o

GTP Mexico sells parts and accessories, and also

produces reeds.

U S A

GTP Greenville (Steel Heddle) develops and pro-

duces accessories that are used in the weaving

industry all over the world. GTP Greenville also

takes care of service and sales of Picanol weaving

machines and parts in the USA.

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1. Manufacturing

Proferro produces cast iron parts for Picanol weaving

machines and parts for among other things agricultural

machinery and compressors. When it comes to mechani-

cal fi nishing, the group has facilities both for prototyping

and for series production using a very wide range of tech-

nologies including CNC machining, gear cutting, grind-

ing, thermal treatment and welding.

2. Mechatronics

P s i C o n t r o l M e c h a t r o n i c s

The products made by PsiControl Mechatronics include

machine controllers, man-machine interfaces, actuators

and switched reluctance motors.

M e l o t t e

Melotte specializes in production of high-precision metal

parts for use in production processes, machine compo-

nents, dies and prototypes.

3. GTP Accessories

S t e e l H e d d l e

Steel Heddle produces frames, heddles, drop wires and

reeds.

B u r c k l é

Burcklé produces weaving reeds.

Te S t r a k e Te x t i l e

Te Strake Textile for its part produces nozzles and

sensors for airjet weaving machines. It also acts as a

competence center for nozzles and sensors and as an

R&D center for air insertion

PRODUCT RANGE: OEM BUSINESS

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P1. Weaving machines

O p t i M a x ( n e w i n 2 0 0 7 )

Rapier weaving machine for the higher segments

and niche applications, including technical tex-

tiles. This machine offers the greatest versatility,

and is produced in Ieper.

O M N I p l u s 8 0 0

Airjet weaving machine for the higher segments,

combining high versatility with maximum pro-

duction speeds. This machine is also produced in

Ieper.

O M N I p l u s 8 0 0 T C ( n e w i n 2 0 0 6 )

Airjet machine specially equipped for weaving tire

cord, a technical fabric used for making vehicle

tires. This machine is based on the OMNIplus 800

series and is fi nished in Günne (Germany).

T E R R Y p l u s 8 0 0 ( n e w i n 2 0 0 6 )

Airjet machine specially designed for weaving

terry cloth. This machine is produced in Günne.

G T X p l u s

Rapier weaving machine with universal applica-

tion for the middle segment of the market, pro-

duced in Suzhou (China).

O M N I j e t ( n e w i n 2 0 0 6 )

Airjet weaving machine for the middle segment of

the market, produced in Suzhou (China).

PRODUCT RANGE: WEAVING MACHINES

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THE 1930S

Despite every effort, the Vansteenkiste

company was no longer viable by the mid-

1930s, and so Baldewijn Steverlynck called

on the Spaniard Juan Picañol, who had fl ed

to Flanders from the civil war in Spain. Juan

had invented a revolutionary weaving loom

at his father’s engineering works in Sabadell,

Catalonia. In 1935 he was ready with his design

for an automatic weaving machine, but still

needed a partner to put his plans into effect.

With no end to the worldwide depression in

sight, the Flemish machine builders and the

Catalonian inventor began negotiations. These

led to the formation of Weefautomaten Picañol

NV on 22 September 1936, marking the

birth of the Picañol company.

However, Juan Picañol’s modernized looms

did not live up to expectations. Baldewijn

Steverlynck brought his brother Karel into

the business, and he in turn called on Jaimé

Picañol (Juan’s younger brother) to lead

the development work. Jaimé successfully

launched the Omnium on the market, laying

the basis for the later success of the still young

company.

70YEARS

2. After Market Sales & Services

With its technical support packages, After Market

Sales & Services makes textile know-how

available to customers, enabling them to achieve

better quality, higher output or greater production

fl exibility. It also offers full training programs

tailored to the operational requirements of the

customer. As well as carrying out training at the

customer’s location it has a fully equipped training

center in Ieper, and training centers in Greenville

and Suzhou.

The Picanol Group also sells spare parts for

weaving machines, and in addition it develops

and sells upgrade kits that enable customers to

equip their machines with the latest technology.

Weaving accessories are sold through the same

sales channels.

ORGANIZATIONAL CHART OF THE GROUP - Situation on 31/12/2006

P I C A N O L N V

GTP SAO PAULO

GTP MEXICO

GTP GREENVILLE

99,99%

99,99%

100%

PROFERRO

PSI-CONTROL MECHATRONICS

MILLENTEX

MELOTTE

TE STRAKE TEXTILE

VERBRUGGE

GEREEDSCH. MELOTTE

GÜNNE GMBH & CO, KG

GÜNNE GMBH

BURCKLÉ

LHENRY

GTP MILANO

BCN LAMINADOS

GTP ISTANBUL

99,99%

99,90%

0,01%

99,99%

99,96%

100%

100%

100%

100%

100%

100%

99,75%

0,10%100%

0,01%

49,69%50,31%

0,04%

98%2%

PICANOL (SUZHOU) TRADING CO. 100%

P(SIP)T 100%

GTP BANDUNG 99%

CHANGES IN THE COURSE OF 2006

Amtech: soldPicanol Korea: sold

Picanol Overseas: wound upPSI-Control: wound up

PsiControl Mechatronics (Romania): set upPicanol (Suzhou) Trading Co. Ltd: set up

GTP Shanghai: wound upBCN Laminados: wound up

PTS and PST: integrated in P(SIP)T

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PSI-CONTROL MECHATRONICS (ROM)

100%

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BOARD OF DIRECTORS AND MANAGEMENT COMMITTEESituation on 31/12/2006

Honorary chairmanMr. Emmanuel Steverlynck

Board of Directors

Chairman Mr. Luc Van Nevel, permanent representative of The Marble BVBA (1)*

Chairman of the Appointments & Remuneration Committee

Directors Mr. Chris Dewulf, permanent representative of Christulf BVBA (3)*

President & CEO

Mr. Filiep Libeert, permanent representative of LMC NV (2)*

Member of the Nomination & Remuneration Committee

Mr. François Meysman, permanent representative of M.O.S.T. BVBA (2)*

Member of the Audit Committee

Mr. Patrick Steverlynck (3)* (as of May 2006)

Mr. Johan Tack, permanent representative of TACAN BVBA (2)*

Chairman of the Audit Committee

Baron Hugo Vandamme, permanent representative of HRV NV (2)*

Vice President,Member of the Nomination & Remuneration Committee

Mr. Paul Vandekerckhove, permanent representative of Buraco NV (1)* (as of 22 May 2006)

Member of the Nomination & Remuneration CommitteeMember of the Audit Committee

Mr. Joos Waelkens (1) Member of the Audit Committee

* Appointed until the AGM of 2008

(1) Non-executive director (2) Non-executive, independent director (3) Executive director

Secretary of the Board, Mr. Jurgen Couvreur, Vice-President Finance & Administration

Management Committee

• Mr. Chris Dewulf*, President & CEO

• Mr. Jurgen Couvreur, Vice-President Finance & Administration

• Mrs. Cathy Defoor, Vice-President Manufacturing

• Mr. Stefaan Dewulf*, Vice-President Mechatronics & Accessories

• Mr. Jan Laga*, Vice-President Marketing, Sales & Services

• Mr. Geert Ostyn, Vice-President Technology & Operations

• Mr. Dirk Verly, Vice-President Human Resources & General Services

* under the form of a company (see page 45, Corporate Governance)

AuditorDeloitte Bedrijfsrevisoren represented by Mr. William Blomme and Mr. Kurt Dehoorne, appointed until

the AGM of 2009.

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THE WAR YEARS

The Omnium was a triumph over the many

mechanical problems that had dogged the ini-

tial years, and appeared on the market as a mature

design. In just a few years the company achieved

an annual production of 120 machines, and by the

outbreak of World War II the level had risen to

one machine per day.

But the war conditions put a spoke in the wheels.

Raw materials became scarce due to the exactions

of the German occupiers, and output plummeted.

Exports could only be kept alive by bartering for

food, with weaving machines being exchanged

for fi sh products from Denmark and sardines or

oranges from Spain and Portugal. After the war

these export machines were the company’s fi rst

foreign references and helped considerably to

establish Picañol’s name around the world. The

German occupiers asked Picañol to do casting

and forming work for artillery munitions. Pica-

ñol refused, confi ning itself to machining smaller

shafts for the electric motors of German subma-

rines. The employees had to struggle through this

diffi cult period as best they could. Those who did

heavy physical labor were given special

ration stamps for additional food, and after a

time the Picañol employees gained a reputation as

people with a capacity for hard work.

In late 1946 the management decided to set up the

foundry once more. With the new shock forming

machines it was possible to mold the sand under

pressure and break it out quickly after casting. In

1948 the foundry was equipped with a new labo-

ratory for mechanical, metallurgical and chemical

research. During this period Picañol became one

of the fi rst companies to use synthetic sand for its

foundry molds.

70YEARS

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R E P O R T B Y T H E B O A R D O F D I R E C TO R S

THE 1950S

In 1951 Picañol presented its new President

weaving machine to the public at the ITMA exhi-

bition in Lille. This machine was such a success

that the Picañol management decided to expand

production and to appoint representatives in other

countries. A network of agents was gradually built

up, extending to South America and the Far East.

Meanwhile, production of the President created

employment for hundreds of people in Picañol’s

home region. The number of personnel expanded

from 200 in 1945 to 700 in 1952.

The foundry too was modernized. In the course

of 1954 the company acquired a low-noise mold

making machine and a new mold production

line. Four years later the smelting furnaces were

equipped with a cooling system on the outside

wall. In 1958 Picañol unveiled a new version

of the President at Expo 58, the world fair held

in Brussels that year. However, the world textile

industry was experiencing a downturn at the time

and the market remained fl at, so Picañol went in

search of new sales territories. Among others it

made an agreement with the Saco-Lowell com-

pany, which represented Picañol in the USA and

Canada. In 1960 the Omnium went out of pro-

duction, leaving only the President in a series of

smaller types. From the end of the Second World

War until 1955 Picañol had sold more than 8,000

Omniums. By the beginning of the 1960s Picañol

had a wide range of weaving looms for weaving

spun yarns, and the Picañol looms were increas-

ingly able to handle synthetic materials.

70YEARS

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Dear shareholder,

2006 was a particularly busy year for the Picanol

Group, in which moreover we returned to opera-

tional profi tability. The turnover was up by nearly

3.5% compared with 2005, and the group made a

consolidated net result of 5.57 million euros com-

pared to a loss of 4.72 million euros.

The weaving machine business in which the Pica-

nol Group operates developed positively in 2006

in terms of volume. World demand rose during the

fi rst nine months of 2006, spurred on especially by

large purchases in China. The market slackened

slightly in the fourth quarter, and the prospects for

the beginning of 2007 are a little more modest.

However, prices and margins remained under

heavy pressure, due among other things to compe-

tition from Japanese manufacturers in particular,

who benefi ted from the weak yen. The Picanol

Group has opted resolutely not just for turnover

but for turnover and margin. Signifi cantly in

this respect, we were able to maintain and even

strengthen our position in market segments with

higher added value.

The further shift by the textile industry toward the

East also put heavy pressure on sales of services,

spare parts and accessories. Points that demanded

special attention were the new, small-scale com-

petitors in low wage countries, and a different parts

policy pursued by the new textile manufacturers.

To deal with this we took various initiatives in 2006

to protect our sales volume and our margin.

Our OEM Business pursued a differentiated pol-

icy in 2006. The foundry activities (Proferro) ex-

perienced strong growth in tonnage, thanks both

to Picanol and to other customers. The strategy of

focusing on engineered casting solutions clearly

bore fruit. In the fi eld of mechanical fi nishing

(Bumac), particular efforts were made to get back

into profi tability, win new customers and raise ef-

fi ciency. All this should yield positive results in

2007.

Our Mechatronic activities experienced further

growth in 2006. The start-up of PsiControl in Ro-

mania helped to strengthen our competitiveness,

and also permitted further growth in our product

portfolio.

The Picanol Group celebrated its 70th birthday

in 2006. In the past few decades our group has

developed from a traditional weaving machine

builder to a global supplier of total solutions for

the textile industry and other sectors. A signifi cant

theme throughout our successful history has been

our continual focus on innovation. In 1971 we in-

troduced the world’s fi rst ever electronically-con-

trolled weaving machine, and we were also the

fi rst weaving machine manufacturer in the world

to obtain ISO 9001 certifi cation. Thanks to our

policy of innovation we were able to surprise the

market again and again with new, high-tech weav-

ing machines, from the Omnium in 1936 to our

latest fl agship, the OptiMax in 2007.

Technological innovation was and is crucial to the

future success of the Picanol Group, and so we

once again confi rm our determination to plough

back 5% of our annual turnover into research

and development of high-tech products with high

added value. In line with this ambition we intro-

duced three new weaving machines in 2006: the

OMNIjet, the OMNIplus 800 TireCord and TER-

RYplus 800. And in another move we set up our

own Innovation Council in 2006. This new um-

brella organization will stimulate the development

of innovation and enable us to use innovation as a

strategic lever for the group.

LETTER TO THE SHAREHOLDERS

At our headquarters in Ieper, Belgium, we began

the physical and administrative merging of the

PsiControl Mechatronics activities on the one

hand and the weaving machine business on the

other. These are now located together in a new

production and offi ce building on the industrial

site in K. Steverlyncklaan. In the meantime, the

revamped production line for Verbrugge has been

built up and fi nished. In China, an entirely new

assembly plant went into production (at Suzhou

Industrial Park), and all the Chinese activities that

had previously been spread out were brought to-

gether at this site.

Given the results achieved in 2006, we aim to re-

turn to our tradition of paying out an annual divi-

dend. The Board of Directors therefore proposes

to the Annual General Meeting to pay out a gross

dividend of 0.32 euros per share.

OutlookIn the future the Board of Directors, the Manage-

ment Committee and the personnel will continue

their efforts to further develop the group. The ex-

tent to which we succeed in this will largely de-

pend on our fl exibility and our preparedness to

seize the opportunities that the world offers us.

The further expansion of our activities abroad will

undoubtedly contribute to the continued develop-

ment of the group.

The Picanol Group takes into account that the de-

mand for weaving machines could be somewhat

lower in 2007 than in 2006 and that the competi-

tive pressure on prices and margins will stay high

in the textile market. The exchange rate trend of

the yen will remain extremely important in this.

The Picanol Group is aiming at further growth

and an improvement in its market share in seg-

ments with higher added value, among others by

reinforcing its physical presence in the market and

by focusing on expanding its textile technology

range for Picanol weaving machines. In addition

building on its activities for third parties by con-

tinuing to market technology outside the group

will remain an important cornerstone in the strate-

gy. Rounding off the full revamping process of the

product portfolio is also planned in 2007, begin-

ning of 2008. In March 2007 the Picanol Group

started the launch of its latest rapier machine for

the top segment, the OptiMax. In this context the

Picanol Group will continue to make increasing

efforts towards reinforcing its market position in

the strategic markets and the further growth of its

OEM Business, while continuing to focus on an

improved cost structure.

The Picanol Group looks to 2007 full of confi -

dence, strong in the conviction that the members

of personnel who made possible the excellent re-

sults in 2006 are fully motivated to achieve the

objectives for 2007. The basis of our growth de-

pends more than ever on the efforts, dedication

and motivation of all our members of personnel

around the world; it is thanks to them that the

Picanol Group has been able to develop over the

past 70 years into the company that it is today. The

Board of Directors would also like to thank all the

stakeholders for the confi dence that they show in

our group.

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L u c V a n N e v e l

ChairmanC h r i s D e w u l f

President & CEO

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MAIN EVENTS

In 2006

Our entire stake in the Chinese subsidiary Amtech,

a 50/50 joint venture with BMT NV, was sold off

to the latter with effect from 1 January 2006, due

to differences in strategic directions.

In January 2006 the Picanol Group set up a new

subsidiary of PsiControl Mechatronics (the former

Protronic) in Romania, and Picanol Korea was

sold to an agent. Picanol Overseas (Singapore)

for its part was wound up.

In the production plant at K. Steverlyncklaan in

Ieper, the Picanol Group began a new construction

project in March 2006 with the aim of bringing

the Verbrugge, PsiControl Mechatronics and the

R&D activities together at a single location in

Ieper.

During the fi rst half of 2006 the Picanol Group

introduced two new weaving machines. The

OMNIplus 800 TC (tire cord weaving machine)

was launched on the market in March. It was

followed in May by the OMNIjet airjet machine

for the mid-segment of the textile market.

In accordance with the settlement agreement

between family shareholders, Mr. Paul

Vandekerckhove and Mr. Patrick Steverlynck

were appointed as directors at the extraordinary

general meeting of shareholders on 22 May

2006.

PsiControl Mechatronics started up a freshly-built

production line in the new Romanian subsidiary

in Risnov (Brasov) in June.

In September, the Picanol Group put its new

Chinese production plant in Suzhou into operation.

Also in September the Picanol Group introduced

the TERRYplus 800. As its name implies, this

airjet weaving machine based on the OMNIplus

800 is designed for weaving terry cloth.

To mark the 70th anniversary of Picanol a festival

was held for all members of staff in Belgium, at

the plant in K. Steverlyncklaan.

At the end of September the Picanol Group

sold the assets of its Spanish subsidiary BCN

Laminados, specialized in production of reed

wire, after which the company was wound up.

Finally, in November GTP Shanghai moved its

activities to the new site in Suzhou.

Events after the balance sheet closing date

On 1 January 2007, Findar BVBA represented by

Mr. Stefaan Haspeslagh was co-opted as a new di-

rector to replace Mr. Joos Waelkens.

An agreement between Mr. Jan Coene and Pasma

NV dated 10 October 2004 provides that a sum

of 3.577 million euros must be reimbursed to

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Picanol NV by 31October 2007. This amount

corresponds to the professional withholding tax

paid on the sign-up premium received by Mr. Jan

Coene in 2002. At the end of December 2004 Mr.

Coene had already reimbursed the net part of the

sign-up premium, corresponding to an amount of

2.9 million euros.

In the course of March 2007, the tax authorities

granted a tax exemption in respect of this

professional withholding tax and will soon

be repaying the amount of the professional

withholding tax to Mr. Jan Coene. This repayment

will be used to settle Picanol’s outstanding claims

against Mr. Jan Coene. Mr. Jan Coene will also be

paying the interest due in respect of the outstanding

claim for repayment of the sign-up premium.

In order to obtain repayment of the professional

withholding tax, Picanol NV accepted inclusion

of the sign-up premium paid to Mr. Jan Coene

in the corporate income tax base for the 2003

assessment year and a detaxation of an identical

sum in the 2005 assessment year. If the sign-up

premium had not been paid in 2002, then Picanol

NV would indeed have had to pay corporate

income tax in the 2003 assessment year on the

total amount at a 40.17% corporate income tax

rate, whereas it has now deducted the sum of the

sign-up premium as an operating cost. Although

the claim against Mr. Jan Coene had been

included in the 2004 tax assessment base for an

amount corresponding to the amount of the sign-

up premium, the corporate income tax rate had

decreased to 33.99% at that time. The fi scal cost

of this arrangement for Picanol NV is estimated

at 643,000 euros, being the difference in the tax

rates of 2002 (40.17%) and 2004 (33.99%).

THE 1960S

The demand for weaving machines

gradually began to exceed supply. An

average of 140 machines per week

was no longer suffi cient to meet all

the orders that were coming in, and

so it was decided to move to another

location. In the spring of 1961 the

company built an impressive assem-

bly hall in the new industrial area,

enabling 25 machines per day to emerge from

the assembly line. In 1962 the company invested

in setting up its own foundry, in a daring initia-

tive. Picañol opted for the most modern casting

technique at that time, namely the high-pressure

method. By November 1966 a fi fth of the cast iron

output was being produced in the new foundry.

In 1966 Picañol went public, becoming listed on

the Brussels stock exchange. Mean-

while, it concentrated more and

more on overseas markets, aiming

not only at North America but also

at developing countries.

In 1963 Picañol scored a fi rst in the

history of the Belgian textile indus-

try when it sent a special President

to the USA by airfreight. Thanks to

good collaboration between Picañol

and the Pan-Am airline the new ma-

chine was delivered within three weeks of being

ordered, instead of several months as would nor-

mally have been the case. Picanol of America was

set up in 1966 with responsibility for the activities

in the USA and Canada, considerably strength-

ening the company’s position there. Later this

subsidiary moved to Greenville, the center of the

American textile industry.

70YEARS

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World Class Manufacturing

The aim of World Class Manufacturing (WCM)

is to make the Picanol Group a world class com-

pany through continually improving processes

and eliminating losses, with the involvement of

all members of personnel. For this purpose the

Picanol Group works with seven core groups on

themes such as cost development, continuous

improvement, self management, planned mainte-

nance, total quality, training and health, safety and

the environment.

In 2006 further investments were made in contin-

ued development and implementation of WCM.

Within each department, special attention was

paid toward developing and monitoring key

performance indicators for QCDISME (Quality

– Cost – Delivery – Improvement – Safety – Mo-

rale - Environment). The core groups also fo-

cused mainly on further development of a number

of projects that had been introduced previously.

There are also various annual management audits,

enabling management to follow the implementa-

tion of WCM on the workfl oor, together with a

two-day seminar for all production managers.

WCM was developed further internationally too

in 2006. The fi ve-step methodology (selecting,

structuring, cleaning, standardizing and maintain-

ing) was implemented at Te Strake Textile and

GTP Greenville. In China, the WCM know-how

acquired in Ieper was applied to the setting up of

the production hall as part of the new construc-

tion project in Suzhou. The various projects in the

subsidiaries are supervised from Ieper by a WCM

coordinator. To complement the WCM approach,

the Picanol Group will introduce a World Class

Selling program for the Weaving Machines CRT

department in 2007, aimed at more structured

management of sales based on relevant indicators.

Total Quality Management

Quality is something that concerns all subsidiaries

and employees in the Picanol Group, all over the

world. At its Ieper headquarters the Picanol Group

has a team of internal ISO 9001 auditors who

form a crucial link in the group’s quality process.

Each year several internal audits are carried out in

order to continuously improve the quality system.

In 2006 particular attention was paid to renewal of

Proferro ISO 9001 certifi cation. Integration of the

Proferro and Picanol quality assurance systems is

on the agenda for 2007. As well as updating the

procedures and documents, special attention will

be paid here also the process-oriented approach.

The main aim will be to make the quality assur-

ance system an even more user-friendly tool.

ACTIVITIES REPORT OF THE OEM BUSINESS

Manufacturing

Proferro experienced a strong growth in tonnage

in 2006, producing 22,148 tonnes of cast iron, a

rise of 21% compared with the 18,134 tonnes in

2005. This increase is mainly due to various new

products for new and existing customers, and

to the higher demand by the weaving machine

division. To further expand our presence on the

market, the Proferro sales team acquired several

new members. Also in the course of 2006 new

mold boxes were put into use, with a positive

impact on quality and productivity. To hedge

against the volatile raw material prices, Proferro

took various initiatives in 2006 to guarantee the

availability and market pricing of raw materials.

On the mechanical processing side, meanwhile,

the necessary process modifi cations were made to

improve the quality and productivity.

The Manufacturing strategy of focusing on

engineered casting solutions with its foundry and

mechanical fi nishing processes is clearly bearing

fruit. By combining foundry work with mechanical

fi nishing, assembly and co-design, Manufacturing

is able to react fl exibly to the rising demand

for technically more diffi cult, specialized parts

with high added value. In line with this policy,

Manufacturing will increase its sales efforts in

2007, so as to further expand its presence on the

market and do more work for outside customers. In

the meantime, raising the competitive position of

Manufacturing remains an absolute priority. This

will be done by making further improvements to

productivity and quality, as part of the World Class

Manufacturing program, and by making critical

choices of fi nishing activities. In 2007, new

investments are planned in among other things a

deburring system and additional casting machines

(in the foundry), various milling machines,

measurement equipment and extensions to some

important workstations for mechanical fi nishing.

Mechatronics

In 2006, Protronic changed its name to PsiControl

Mechatronics. The new name refl ects the ambi-

tions of PsiControl Mechatronics to acquire a

leading position in the fi eld of mechatronics. To

expand its activities for outside customers in a

more targeted, proactive way, the sales network

was enlarged in 2006. In 2006 PsiControl Mecha-

tronics was also present at various European trade

fairs such as Actuator (Germany), Midest (France)

and Electronica (Germany).

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Since Mechatronics is a core competency for the

weaving machine business, a start was made in

2006 on physically and administratively combin-

ing the activities of PsiControl Mechatronics (R&D

and production) with the weaving machine busi-

ness in a new building beside the Ieper production

site. As well as cost savings and synergy advantag-

es, grouping the activities together in this way will

also promote an integrated approach toward devel-

opment of machines, mechatronics, spare parts and

accessories. The R&D organization for its part was

given a more customer-oriented focus with the set-

ting up of Customer Focus Teams (CFTs).

At the beginning of 2006 PsiControl Mechatronics

set up a new subsidiary in Romania, PsiControl

Mechatronics srl, in order to further strengthen

the competitiveness of the Mechatronics activities

and consolidate the growing project portfolio.

PsiControl Mechatronics srl concentrates on

cable assembly, PCB assembly (THT and SMD)

and product engineering. The latter activity will

eventually be expanded in Romania. Setting up

production in this country is an important step

toward acquiring a stronger position in the market

for mechatronics, and contributes to improving the

competitive position of PsiControl Mechatronics.

In the meantime, PsiControl is pressing ahead

with World Class Manufacturing projects,

improvements to productivity and savings in

procurement.

Within Chinese Picanol (SIP) Textile Machinery,

the mechatronics division concentrates on

purchase and production of mechatronic parts

for Picanol weaving machines and for PsiControl

Mechatronics. Products purchased or assembled

locally include switched reluctance and stepper

motors, aluminum cooling fi ns and control

boxes. In the course of 2006, assembly of fi lling

detectors for Te Strake Textile was transferred to

the mechatronics division in China. In 2007 the

mechatronics activities in Suzhou will be further

expanded, with the focus on local production and

engineering of mechatronics parts, mainly for

existing customers within the Picanol Group.

After 2005, Melotte experienced a positive year

once more in 2006, with the investments made in

2005 beginning to show strong returns. In 2006 its

activities were further extended internationally in

a number of niche markets, with its organization

being adapted correspondingly.

O u t l o o k

To support the continued expansion of PsiControl

Mechatronics and provide every opportunity for

growth in China and Romania, the Mechatronics

organization will be split up in 2007 into different

teams, focusing on the one hand on worldwide ac-

tivities such as sales, sourcing, R&D and product

management and on the other on the local produc-

tion activities in Ieper, China and Romania. In the

meantime PsiControl Mechatronics will continue

to concentrate on improving its cost competitive-

ness, by among other things making operational

improvements to its processes as part of the World

Class Manufacturing program and developing

global sourcing. Investments are planned for 2007

in among other things new inspection and test sys-

tems (Ieper) and in test, insertion and assembly

equipment (Romania).

Finally, in 2007 Melotte will continue to position

itself as a cost-competitive producer and supplier

with a strong focus on niche markets. It will also

work further toward introduction of innovative

production techniques, for which the necessary

investments will be made.

GTP Accessories

As a consequence of the further migration of the

textile industry to low wage countries in the East,

sales of accessories also came under pressure in

2006. Accordingly, the necessary efforts were

made to react to this and to make the Accessories

activities better armed to face the future.

In 2006, Verbrugge introduced the HybridPower

158 frame under the Steel Heddle brand name.

This new, hybrid frame with its modular design

is reinforced with carbon fi ber. It currently offers

what is indisputably the best price/performance

ratio for demanding airjet weaving applications.

At the same time Verbrugge began partial auto-

mation of its weaving frame production in Ieper.

With this automation project Verbrugge aims to

further raise its quality and productivity, and to

assure its prospects in terms of a stronger com-

petitive position and higher volume fl exibility.

At the end of 2006 Verbrugge’s frame activities

moved into the new building at the production

site in Ieper. The further automation of the frame

production process will be completed in the fi rst

half of 2007. Also in 2006, Verbrugge made a

large number of improvements in productivity

and logistics as part of the World Class Manu-

facturing program. In 2007 it will continue to

position itself within the group as a competence

center for high-performance, cost-competitive

frames.

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GTP Greenville (Steel Heddle) had a diffi cult

year in 2006, in view of the lower demand for

non-tempered heddles and the pressure on prices

caused mainly by the weak yen. At the same

time, the price pressure on the local reed market

remained very high. However, improvements to

productivity were achieved as part of the World

Class Manufacturing program. In 2007, GTP

Greenville will further develop into a competence

center for heddles, drop wires and niche frames,

and will continue to focus on improvements to

quality and the logistics processes, and on reducing

the complexity of the products. Preparations

are being made to introduce new products and

production processes in 2007.

In the fi eld of reed production, the Spanish

subsidiary BCN Laminados was wound up at the

end of September 2006; in view of the limited

number of reed shops within the group, it was

no longer strategically necessary to have an

internal supplier of reeds. Despite the diffi cult

situation on the French aftermarket, Burcklé for

its part managed to turn in a fairly good result in

2006, thanks among other things to the positive

development of its international sales of reed

wire. In 2007, the activities of Burcklé and Lhenry

will be more closely coordinated, while Burcklé

will further expand its international activities, by

among other things collaborating with partners.

In the fi eld of airjet insertion, Te Strake Textile was

further developed in 2006 into a competence center

for nozzles and sensors, and as a knowledge center

for air insertion. In 2006 the assembly of fi lling

stop motions was transferred to the mechatronics

division in China. However, Te Strake Textile

remains active in development of these stop

motions. In 2007, further attention will be paid

to making improvements in technical support for

the local sales teams, further developing into a

competence center for weaving machine sensors,

and sales of nozzles on the aftermarket.

In 2007 GTP Accessories will continue to aim

at sustainable expansion of its market share, by

collaborating more closely with After Market

Sales & Services and by further extending its

own sales channels for the OEM Business. There

will also be new product launches and further

improvements to productivity by Steel Heddle,

Verbrugge and Te Strake Textile as part of World

Class Manufacturing.

Thanks to its policy of innovation, the Picanol

Group has managed to surprise the market time

and time again with new high-tech weaving ma-

chines, from the Omnium in 1936 to its latest fl ag-

ship model, the OptiMax in 2007, thus reinforcing

its position among the world leaders.

1936The fi rst Picañol weaving machine, a fl ying shut-

tle machine in which a new spool core can be in-

serted into the fl ying shuttle without stopping, is

named the Omnium.

1940 Picañol builds one Omnium weaving machine per

day. This machine has a weaving width of 188 cm

and is able to achieve a speed of 140 picks per

minute.

1951 The big breakthrough comes when Picañol

introduces the President weaving machine at

the ITMA textile trade fair in Lille. More than

160,000 of these machines are ultimately sold,

establishing Picañol’s name in the weaving

industry worldwide. A President machine with a

weaving width of 188 cm achieves speeds of up to

180 picks per minute. Later, Picañol also develops

the less expensive Diplomat for lighter yarns.

1971 At the ITMA exhibition in Paris, Picañol surprises

the textile industry with the MDC, the world’s fi rst

electronically controlled fl ying shuttle machine.

MDC stands for Mono Disc Control, referring

to the electromagnetically controlled clutch-and-

brake unit which makes it possible to increase the

speed of this 188 cm machine to 220 picks per

minute. The MDC is also the fi rst weaving ma-

chine with pushbuttons instead of levers.

1975 Picañol introduces the PGW at ITMA Milan. The

PGW (Picanol Gripper Weaving machine) is the

fi rst shuttleless machine to apply the recently-

developed gripper insertion technology to an

existing design. This technology makes it easy

to weave different fi lling yarns (colors) into the

fabric, opening up new sectors such as wool and

upholstery weaving in which Picanol did not

previously specialize. The machine achieves a

production speed of 230 picks per minute.

1980 The revolutionary PAT weaving machine is

developed, and is presented for the fi rst time

at the ATME trade fair in Greenville. The

PAT (Picanol Air Tronic) uses air insertion

technology, and is the result of Picañol’s heavy

investment in R&D. The PAT surprises the

textile world because its air insertion nozzles are

controlled electronically instead of mechanically.

It also features an opto-electronically controlled

prewinder, whose principle is still used today.

With the PAT, Picañol heads the list of the

world’s great weaving machine manufacturers.

A PAT machine with a weaving width of 190 cm

initially achieves a speed of 600 picks per minute.

Further improvements eventually increase the

speed to 800 PPM.

1983 Picanol scores another big breakthrough at ITMA

Milan: the world’s fi rst microprocessor-controlled

rapier weaving machine. The GTM Grip Tronic

Machine, the successor to the PGW, represents a

new era in electronic control of weaving machines.

The fi rst GTM machines with their weaving width

of 190 cm achieve a speed of 360 PPM, eventually

rising to 500 PPM.

70 YEARS OF INNOVATION: THE HISTORY OF PICANOL WEAVING MACHINES

70YEARS

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1985The microprocessor-controlled PAT is also pre-

sented at ATME Greenville. Bidirectional control

between a central computer and the microproces-

sors on both types of machine (PAT and GTM) is

also demonstrated.

1992 Picanol introduces a new generation of airjet

weaving machines: the versatile Omni and its

simpler variant, the Delta. Both are equipped with

Picanol’s unique QSC (Quick Style Change) sys-

tem, making it possible for a single person to carry

out a complete style change in under 30 minutes.

The Omni (190 type) achieves a speed of 1000

PPM, the Delta 800 PPM.

1997 Picanol introduces the successful Gamma, a

rapier weaving machine of an entirely new

concept, powered by a direct drive switched

reluctance motor. This super motor is named the

Sumo (because it is able to shift a large weight

very quickly). The application of this technology

represents a new milestone in the electronic control

of weaving machines, as the machine speed can be

varied during the weaving process. The Gamma is

also equipped with the QSC (Quick Style Change)

system. A type 190 Gamma achieves a speed of

600 PPM.

2000 The OMNIplus airjet machine is introduced as the

successor to the Omni, again using direct drive

switched reluctance technology. Further applica-

tion of electrical drives (for cloth batching and

selvedge units) permits even more fl exible pro-

duction. A type 190 OMNIplus machine achieves

a speed of 1100 PPM.

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2002 In November of this year, the Picanol group intro-

duces its new GamMax rapier weaving machine.

The GamMax not only represents the know-how

of the group but also incorporates the experience

gained with the Gamma during the past fi ve years.

The new 160 type achieves a speed of 650 PPM.

2004In April of this year, Picanol introduces the Olym-

pica and GamMax for weaving glass fi ber.

2005 In April one year later, the group launches its new

OMNIplus 800 airjet weaving machine. With this

machine, the Picanol Group sets the new standard

for effi cient airjet weaving. The OMNIplus 800

is distinguished by its modular concept, enabling

the machine to be quickly extended or adapted

in response to new market opportunities. All the

components are optimized for hitherto unheard-

of industrial speeds, minimum maintenance and

maximum profi tability.

2006Since technological innovation is crucial for fu-

ture success, the Picanol Group extends its prod-

uct range with several new airjet weaving ma-

chines: the OMNIplus 800 TC, the OMNIjet and

the TERRYplus 800.

2007Picanol introduces the OptiMax, the latest stan-

dard-setter for rapier weaving.

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WEAVING MACHINE ACTIVITY REPORT

Market review

The world market for new weaving machines for

the industrial production of textiles is estimated

at 80,000 to 100,000 units per year on an an-

nual basis (1). Of this number some 20% to 30%

of machines are based on waterjet technology.

The remaining share of the market is accounted

for mainly by airjet and rapier machines, and to a

declining degree by fl ying shuttle machines.

Finally, there is still a small market for projectile

weaving machines. The Picanol Group manufactures

airjet and rapier weaving machines exclusively.

Flying shuttle and simple rapier weaving

machines are nowadays mainly produced in coun-

tries such as China and India, where they are

sold at the bottom end of the market, estimated

at 30,000 machines annually. The Picanol Group

aims at the remaining market, namely the middle

and top segments for airjet and rapier machines.

This technologically advanced market represents

an annual volume of around 30,000 to 45,000

machines annually.

At its Ieper plant in Belgium the Picanol Group

produces weaving machines for the higher seg-

ments and for niche applications. In Suzhou (Chi-

na) it produces weaving machines for the middle

segment of the market. The German plant focuses

on niche products such as machines for weaving

terry or tire cord.

Important uses for textiles are apparel (e.g. denim

and shirting); household applications (sheets, ta-

ble cloths, curtains and upholstery); and technical

textiles (airbag, sun awnings, coating cloth, tent-

cloth, sailcloth, glass fi ber materials, Kevlar and

tire cord). The Picanol Group sells its machines

to weaving mills that produce various textile

applications around the world. There are signifi -

cant fl uctuations from year to year, not only in

the total number of machines sold but also in the

geographic mix and the mix within the various

textile segments.

(1) Based on our own analysis of fi gures from the International Textile Manufacturers Federation (ITMF), customs statistics and our own market research.

The weaving machine market in which the Picanol

Group operates developed positively in 2006 in

terms of volume, as expected. Demand for weav-

ing machines throughout the world rose steadily

during the fi rst nine months of 2006, driven by the

continuing high consumption in China, but then

slackened off in the fourth quarter. The large de-

mand for weaving machines was infl uenced by

among other things the abolition of quotas for

textile and clothing products, which last year pro-

duced its full impact on the international textile

industry; world trade in these products was com-

pletely deregulated on 1 January 2005 under the

terms of the Agreement on Textiles and Clothing

within the WTO. This agreement phases out all

the quantitative limitations on exports of textiles

and clothing from a number of developing coun-

tries to the leading industrialized countries. How-

ever, the rising local demand in China probably

also played a role.

Despite all this, in 2006 the Picanol Group still

had to battle with heavy pressure on prices and

margins, mainly due to competition in the mar-

ket for airjet machines, in particular from Japan,

a trend that was exacerbated by the further fall in

the value of the yen against the euro in the course

of 2006. On the other hand, Picanol was able to

maintain and indeed strengthen its position in

market segments with higher added value. Picanol

managed to increase its share of the world market

for rapier machines, thanks among other things to

the excellent technical performance of its models.

In 2006 the Picanol Group introduced three new

weaving machines. The OMNIplus 800 TC (tire

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cord weaving machine) was launched on the

market in March. It was followed in May by the

OMNIjet. This machine is aimed at the growing

mid-segment of the airjet market. It is sold mainly

in Asia but also in Europe and Latin America.

Then in September the Picanol Group launched the

TERRYplus 800. This airjet machine, based on the

OMNIplus 800, is specially designed for weaving

terry cloth. In developing these new machines,

particular attention was paid to performance,

energy consumption and user-friendliness, putting

the group even farther ahead of the competition.

The weaving machines were received with great

acclaim worldwide on the occasion of their market

launch. The Picanol Group also displayed these

machines in 2006 at various international textile

exhibitions such as Kortex (Korea), ITM Istanbul

(Turkey), Cinte Techtextil (Russia), CITME

Beijing (People’s Republic of China) and ATME

Atlanta (USA).

As a consequence of the further migration of

the textile industry to low wage countries in the

East, sales of services, parts and accessories also

came under pressure in 2006. To deal with this

development, various initiatives were taken to

counteract the resulting negative effect on sales.

For example, local sales teams were reinforced,

new services were offered, and the product range

was expanded in line with the higher performance

of the new weaving machines.

Also in 2006, a completely new assembly plant

was put into operation in Suzhou, China. The

Group invested in new infrastructure to centralize

its Chinese activities at a single location. GTP

Shanghai moved to this new site at the end of

2006.

As part of the World Class Manufacturing program,

lasting improvements in quality and productivity

were achieved in the various assembly plants.

Finally, 2006 also saw investments in new IT

platforms for engineering, logistics and assembly,

to serve all the production plants around the

world.

Outlook

The group expects in general that demand for

weaving machines could be somewhat lower in

2007 than in 2006. The Picanol Group foresees that

the competitive pressure on prices and margins in

the textile market will continue, due among other

things to the continuing trend in the value of the

yen. The Picanol Group aims to achieve further

growth and improve its market share in segments

with higher added value, by among other things

reinforcing its physical presence in the market,

extending its product portfolio and focusing on

extending the textile handling capabilities of

the Picanol weaving machines. In the fi eld of

technology, Picanol is determined to remain the

trendsetter in both airjet and rapier machines,

and will distinguish itself in terms of energy

consumption, performance and user-friendliness.

Development of aftermarket activities continues

to be another important pillar of the group’s

strategy, with the focus on achieving an even

stronger presence in the market. When it comes

to product development, special attention will

be paid to design for quality, fl exibility and cost-

effectiveness, along with further development of

World Class Manufacturing. Particular emphasis

will be placed on optimizing the worldwide

processes and improving the fl ow of information.

For this purpose the R&D and procurement

activities will be brought together physically

and administratively with the weaving machine

production and test facilities in Ieper. The R&D

activities of PsiControl Mechatronics will also

move to the new building in Ieper, thus permitting

a more integrated approach to R&D projects

for weaving machines. In line with the group’s

ambition to introduce a new or improved machine

each year, a number of new products will be

launched on the market in 2007 in those segments

where further growth is expected.

INNOVATION COUNCIL

In 2006 the Picanol Group set up its own Inno-

vation Council. With this new umbrella

organization, the Picanol Group aims not only to

stimulate the day-to-day development activities but

also to promote and strengthen the internal culture

of innovation, as a strategic lever for the group.

Innovation is crucial for the future growth of the

Picanol Group. The core tasks of the Innovation

Council are therefore to map out an innovation

policy, to stimulate innovation by setting up an

innovation platform, to identify and evaluate

innovation projects, and to propose suitable

projects to the Management Committee. In this

way, it should be possible to convert worthwhile

ideas into a concrete business plan, development

project or investment plan. In addition the

Innovation Council coordinates networking

with other parties that are active in innovation,

and ensures effi cient exchange of information

internally and externally. The Innovation Council

devotes attention to innovation in various areas

such as new materials, production processes,

technologies, business models and marketing the

current competencies outside the usual markets.

The Innovation Council is distinguished from

other innovation initiatives within the group by

concentrating on innovation processes apart from

product strategy, WCM or sourcing. Innovations

or suggestions concerning these activities are

still passed on within the organization, but the

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Innovation Council concentrates specifi cally on

projects that lie farther away from the group’s

own business, or that pose greater uncertainty.

The Innovation Council assesses the feasibility of

such projects, for which it has its own operating

budget.

The Innovation Board is made up of a fi xed core

of permanent members, who can also call on ad-

hoc experts for assessing and examining particu-

lar projects. The Innovation Council meets every

two weeks, and reports to the Management Com-

mittee every two months.

Ever since the early days, the Picanol Group has

been convinced that people cannot stand alone:

without solidarity and conscientious collaboration,

the chances of success are nil. Karel Steverlynck,

the founder of the company, always promoted this

viewpoint. He was concerned for social life in and

around his factory, and at his initiative various as-

sociations were set up which still exist today and

are supported by the Picanol Group.

Particularly in the years since the Second World

War, a considerable amount of fi nancial support

has been given to social organizations and sports

clubs. Many sports and cultural associations have

been set up at the initiative of the Picanol Group

itself, partly inspired by Karel’s soccer and athlet-

ics activities during his youth. The company soc-

cer team WAP Sport was set up on 9 November

1943. Its founding charter states that its objects are

“... in addition to physical and moral education, to

provide decent amusement and to raise funds in

support of sick and injured employees with long-

term work disablement.” Among the many other

sports initiatives was the inauguration of the bas-

ketball court at Kruisstraat on 1 May 1960, there-

by giving the company team somewhere to play

70 years of social l i fe

its home matches. The Bernard Steverlynck Hall

also caters for the sporting needs of local young-

sters. This being Belgium, attention was paid not

only to ball sports but also to cycling. On the oc-

casion of the St. Eligius festival in 1962 the fi rst

cycle race reserved to members of personnel was

introduced.

The “1st Bernard Steverlynck Grand Prix” pigeon

racing championship was inaugurated in 1962, as

part of the celebrations to mark the 1000th anni-

versary of Ieper. This competition was held for the

44th time in 2006. With support from the Social

Fund, the Festival Committee sets up many activi-

ties on behalf of company personnel. The annual

Ieper Review that draws full crowds each year has

its origins in Picanol. The company also contrib-

utes in the fi eld of music. The Picañol Harmonie

was set up in 1947, and was latter joined by the

majorettes and the hunting horn corps.

The Festival Committee, whose members include

representatives of employees and employers, or-

ganizes various activities throughout the year, in-

cluding minority sports such as rifl e shooting and

trout fi shing. For the very young there is the annual

St. Martin’s Festival, which was revived in 2002

and is becoming ever more popular. Young artists

too are catered for, at the traditional Bernard Ste-

verlynck Art Circle competition. Then there are

charity activities such as sponsored cycling for the

cancer charity Kom Op Tegen Kanker.

Many other cultural associations have their ori-

gins in the company, including Picamera and

Yprentis. The annual St. Eligius festival for re-

tired employees enjoys growing success, enabling

many former members of personnel to see their

old workmates again.

The range of social activities supported by the

company continues to expand: there is the bird

fanciers’ club, the pigeon fanciers’ club, the annu-

al cycling excursion, the motorbike rally and the

chess tournament, as well as various ball sports

such as basketball, volleyball and soccer.

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HUMAN RESOURCES

The Picanol Group employs 2,336 people

worldwide (fi gure on 31 December 2006),

including 1,528 in Belgium, 258 in China and

259 in the USA.

In 2006, solutions were worked out and

agreements made in consultation between

both sides of industry, in connection with the

automation of a signifi cant part of the Verbrugge

production activities and the move of PsiControl

Mechatronics to the production site in Ieper.

Also in 2006, Human Resources devoted the

necessary attention to supporting the move of the

Shanghai activities to Suzhou, and to the setting

up of PsiControl Mechatronics srl in Romania.

In China, further steps were taken toward

professionalization of the local HR management.

In 2006, Human Resources switched over to an

external IT solution for its personnel and payroll

administration, combined with a worldwide

HR reporting system. A new, worldwide job

classifi cation system for employees was also

implemented, based on an internationally

recognized system. The aim of this classifi cation

is to draw up a consistent internal ranking for all

jobs, using a modern weighting method tuned

to the needs of present-day management. In this

way the system forms the basis for a fair and

transparent remuneration policy and external

benchmarking. As well as modernization per

se, this affords opportunities for international

mobility and job mobility within the group.

As part of the effort to recruit new employees,

further investments were made in the Young

Engineers Program (YEP) in 2006. With this

intensive practical training program in Belgium

and other countries, Picanol aims to attract young,

talented engineers. Last year Human Resources

invested further in the Picanol Academy, which

offers training courses and study opportunities for

Picanol Group employees. In this connection the

emphasis is shifting from open training courses to

more specifi c, narrowly targeted courses aimed at

building up future-oriented skills. As well as on-

the-job training the group pays a great deal attention

to “network learning” in collaboration with other

companies, the educational establishment and the

government.

Priorities for 2007 include further development

of an international personnel policy, with regular

HR audits in all the group’s sites around the

world. In 2007, Human Resources will also

revise its existing competency model and invest

further in developing a talent management policy,

with a view to among other things meeting the

expectations of the new generation of employees.

In this connection Human Resources will pay

particular attention to career coaching and career

management, HR planning, personal development

plans and development centers. In addition, Human

Resources will set up a number of initiatives

aimed at promoting internal job mobility. The

aim is not only to promote employability and

personal development, but also to build up a pool

of resources from which future recruiting needs

can be met.

Human Resources will also take initiatives to

stimulate the innovative power of the organization,

in support of more technically oriented projects

and the Innovation Council that was set up in

2006.

Environment, health & safety

In 2006 efforts focused on among other things

reducing waste and waste-related costs, and on

energy-saving measures including compressed

air consumption and heat recuperation from

the cupola furnace. In 2006 Te Strake Textile

successfully renewed its ISO 14001 certifi cation,

a standard that lays down the requirements for

an environmental management system. In 2007

the group will concentrate further on energy-

saving measures for lighting, economical water

management and reducing waste costs still more.

The health and safety of employees is a top

priority for the Picanol Group, along with

ergonomics, accident prevention and protection

on the factory fl oor. Numerous safety issues are

considered and solved each year in consultation

with the Committee for Accident Prevention,

Protection and Well-being at Work. One of the

main foundations is the voluntary collaboration

of many employees, including fi rst-aiders,

emergency teams, internal fi refi ghting teams

and safety monitors, who annually provide the

necessary training in each department. Last year,

the Committee organized information campaigns

on dangerous substances and preparations, drugs

and alcohol, fi re prevention and internal transport.

Following the introduction of the new law against

smoking at work which came into effect on 1

January 2006, all the Picanol Group’s working

areas in Ieper were declared smoke-free zones,

and sessions were organized to help people give

up smoking. Also in 2006, risk analyses were

carried out in connection with noise and vibration.

Subjects that will be dealt with in 2007 include

lifting gear and personal health and safety. In

addition, risk analyses will be carried out in among

others the assembly and smelting areas.

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INFORMATION TECHNOLOGY

2006 was a hinge year, in which the IT strategy

fi rst outlined in 2004 was fi nally implemented

in all cycles throughout the organization, and so

became a practical reality for everyone. This will

enable the total IT costs to be compressed from

2007 onwards, and the IT environment will be-

come better supported and more stable.

IT vision

The Information Technology objective is to stan-

dardize all current applications and platforms in

a consistent way. In the past, the prevalence of

highly-customized applications developed in-

house, along with the differences in the underly-

ing infrastructure, made maintenance, support and

development of our products particularly diffi cult.

Moreover, system stability is crucial to assure

continuity of the business.

Priority

In view of the above, the Picanol Group follows

a deliberate strategy of continual improvement,

standardization and simplifi cation of its process-

es, so as to reduce complexity and compress costs.

As part of this strategy, the Picanol Group’s main-

frame was taken out of operation in 2006, with the

26,000 programs on the mainframe being ported

to a Windows platform. The remaining 1,500 pro-

grams, mainly relating to product confi guration

and development, were transferred to a new, mini-

mainframe with an external supplier. This change-

over is the most important step toward the gradual

build-down of the IT costs from 2007 onwards,

with suffi cient guarantees for the operational se-

curity of the systems.

Business architecture

The new architecture, with the transformation from

a mainframe to a Windows platform, was techno-

logically necessary in the fi rst place because of

the outdated systems and the need for uniformity

and stability. Simultaneously with this, a move

was made to standardize the business processes,

in consultation with the business managers. With

the implementation of standard software packages

and the phased defi nition and introduction of best

practices, the Picanol Group aims to reduce com-

plexity and so make additional cost savings.

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Applications architecture

In practical terms, four main fi elds of application

have been defi ned:

• Supply Chain (procurement, stock control,

production and plant maintenance): these busi-

ness cycles have been linked to one another

through implementation of Microsoft Dynam-

ics Axapta ERP.

• Sales: in 2006 the sales confi gurator was port-

ed to the Sofon package and linked to the new

ERP system.

• Product Life Cycle (confi guration of weaving

machines): all processes related to product de-

velopment and confi guration have been trans-

ferred to a new mini-mainframe at Volvo IT for

the next three years.

• HRM: these processes have been taken off the

mainframe and transferred to Manager V, with

linkage to the ERP package.

Multi-vendor outsourcing

Along with consistent implementation of the

strategy, 2006 was also the year in which the Pica-

nol Group opted for a multi-vendor outsourcing

policy, in order to achieve a structural reduction

in costs and raise the quality of the IT infrastruc-

ture.

With the conversion from a mainframe environ-

ment to a server platform, we will be extremely

dependent on these servers in the future. To hedge

against this, a three-year agreement was made

with the external partner Dolmen, which will

provide the hardware along with monitoring and

support.

The connections between the various servers is

just as critical, as is the security of all the transac-

tions, and so these have been guaranteed for the

next three years by Belgacom. Finally, the end

user equipment is supported externally by HP.

Outlook

In the coming years IT will mainly work toward

further roll-out of ERP in the other production

plants, in China, Germany and the USA. In the

meantime, analysis for a new CRM application

has begun, and the product confi gurator will be

modernized.

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CORPORATE GOVERNANCE

As required by the Corporate Governance Code,

this chapter describes the corporate governance

policy during fi nancial year 2006, and states the

main principles and provisions of the Code from

which the Picanol Group deviates, giving rea-

sons.

For the general operations of the Board of Direc-

tors, the Subcommittee of the Board of Directors

and the Management Committee as far as they

relate to corporate governance policy, readers are

referred to the Corporate Governance Charter on

the website www.picanolgroup.com.

I . Board of directors

C O M P O S I T I O N O F T H E B O A R D O F

D I R E C T O R S

For the full membership of the Board of Direc-

tors, see page 14.

At the extraordinary general meeting of share-

holders on 22 May 2006, two new directors were

appointed on the nomination of the Board of Di-

rectors, namely Mr. Patrick Steverlynck and Bu-

raco NV, the latter being represented by Mr. Paul

Vandekerkhove. Mr. Patrick Steverlynck was for-

merly Chairman and CEO, and has acquired wide

commercial experience as a member of the Execu-

tive Committee of the Picanol Group, thus giving

him valuable industrial expertise. Mr. Paul Vande-

kerckhove* comes from a legal background, and

has experience as a director with among others

Cobeca NV, Meli NV, Alcomel NV, Wildescreen

Partners NV and Alcopro NV. He is currently a

director of the Cecan NV holding company and

chairman of Cecan Invest NV.

Mr. Joos Waelkens retired as a director at the end

of 2006. He is succeeded by Findar BVBA, rep-

resented by Mr. Stefaan Haspeslagh, who was co-

opted by the Board as a new director. His term of

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offi ce runs until the next Annual General Meeting,

which will be asked to confi rm his appointment.

Accordingly, since 22 May 2006 the Board of Di-

rectors consists of nine members, seven of them

non-executive directors. Four of the directors are

independent in the sense of art. 524 of the Com-

pany Code, as required by the Corporate Gover-

nance Charter of the Picanol Group.

Under the guidance of the Chairman the directors

assessed the operation of the Board of Directors in

order to ensure that it functions effi ciently.

A C T I V I T I E S O F T H E B O A R D D U R I N G

T H E PA S T F I N A N C I A L Y E A R

The Board of Directors met eight times in 2006,

with practically full attendance each time. Apolo-

gies for absence were received from Baron Hugo

Vandamme on 13 March, and from Mr. Filiep Lib-

eert on 7 December 2006. A telephone meeting of

the Board was held on 23 March 2006 by Messrs.

Luc Van Nevel*, Johan Tack* (representing Frank

Meysman*), Baron Hugo Vandamme* and Joos

Waelkens (representing Filiep Libeert*). There

was full attendance at all other meetings.

In addition to carrying out the duties required by

law and the Articles of Association, the Board of

Directors dealt with the following matters in 2006:

– Nomination of the new directors at the Gen-

eral Meeting of Shareholders and co-opting of

Mr. Stefaan Haspeslagh*;

– Appointment of the new members of the

Management Committee, and setting their

remuneration;

THE 1970S

At the ITMA exhibition in Paris in 1971,

Picañol surprised the textile industry with

the MDC, the world’s fi rst electronically con-

trolled fl ying shuttle machine. Rising sales of

weaving machines meant that Picañol was do-

ing well. Sales continued to expand in the Far

East while the western European economy

entered a slack period. Research and develop-

ment started to play an increasingly important

role. In 1973 a new type of weaving machine

entered production: the Diplomat, an inexpen-

sive machine for weaving standard, light fab-

rics. But the end of the fl ying shuttle era was

in sight. In 1975 the company presented its

President PGW rapier weaving machine at the

textile fair in Milan.

The company invested heavily between 1973

and 1977, with heavy emphasis on more ratio-

nal production thanks to modernization of the

manufacturing facilities. It also put an effort

into purchasing land and building new facili-

ties in order to become more centralized and

work on a larger scale. The fi rst spade of soil

for construction of the new core-making work-

shop was dug in 1975. June 1976 saw the move

from the “old” to the “new” foundry. Mean-

while, Picañol continued to invest in R&D, tak-

ing on several new engineers. The premises at

Zonnebeekseweeg in Ieper also came into use

during this period.

70YEARS

(*) representing a company

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– Appointment of Mr. Paul Vandekerckhove*

as member of the Audit Committee and of the

Nomination & Remuneration Committee;

– Appointment of the company auditors.

– The monthly reporting, the quarterly updates,

the half-year fi gures, the annual accounts, the

annual report and the AGM;

– The 2007 budget and the 2007-2009 strategic

plan;

– The reports of the Audit Committee and the

Nomination & Remuneration Committees;

– The progress and assessment of the business

activities;

– The setting up of a Romanian subsidiary;

– The important investment projects, such as

the OptiMax crossbeam (for Proferro) and the

new SMD line for the Romanian subsidiary;

– R&D and product strategy;

– Yen hedging strategy;

– Structuring of notional interest deduction;

– The status of carrying out the recommenda-

tions of the CEO exit review, and supervis-

ing the implementation of the fi ndings agree-

ment;

– Discussion and approval of a settlement

agreement between the company, Deminor

International CVBA, Peter Weinreb, Olivier

Goldberg, Victor Levy and the Wingole civil

company, and a shareholding agreement be-

tween Pasma NV/Sofi nes NV, the sharehold-

ers who are members of the Buraco group (as

defi ned therein) and the Company.

.

I I . Subcommittees of the board of directors

C O M P O S I T I O N

With reference to the provisions of the Corporate

Governance Charter, the arrangements under the

shareholder agreement concerning Picanol NV

between the parties Pasma NV/Sofi nes BV, Bu-

raco Group and Picanol dated 23 March 2006, the

Board Meeting held on 28 August 2006 confi rmed

the appointment of Mr. Paul Vandekerckhove*

as a member of the Audit Committee and of the

Nomination & Remuneration Committee.

This appointment was examined for conformity

with the Picanol Corporate Governance Charter,

which in turn is based on the recommendations

of the Lippens Code. It was determined that the

appointment was in conformity with the Charter,

both for the Appointments & Remuneration Com-

mittee and for the Audit Committee, since:

– as regards the composition of the Appoint-

ments & Remuneration Committee, the Chair-

man of the Board will act as an independent

director once more as of April 2008, since his

interim appointment as non-independent di-

rector was only temporary;

– as regards the Audit Committee, in case of a

tie the casting vote lies with the Chairman,

who is an independent director;

– the current membership of the Board of Direc-

tors, and thus of the subcommittees, is limited

in time, and all the directors’ terms of offi ce

expire at the same time, which permits a rear-

rangement to be made at that moment in accor-

dance with the Corporate Governance Charter.

A U D I T C O M M I T T E E

The members of the Audit Committee are Messrs.

Johan Tack*, Frank Meysman*, Joos Waelkens

and – with effect from 28 August 2006 – Paul

Vandekerckhove*.

The Audit Committee met three times in 2006,

with all the members being present.

Special attention was paid to:

– the half-yearly and annual results;

– the notional interest deduction;

– reporting on the internal audit, the audit ap-

proach and the 2006 audit scope;

– yen hedging;

– update of the CEO exit review;

– IT audit fi ndings and 2006 audit approach;

– insurance strategy.

After each meeting the Audit Committee reported

through its chairman Johan Tack* to the Board of

Directors about the above-mentioned matters, and

gave its advice with a view to decisions by the

Board.

N O M I N AT I O N & R E M U N E R AT I O N

C O M M I T T E E

The members of the Appointments & Remunera-

tions Committee are Messrs. Luc Van Nevel,

Filiep Libeert, Baron Hugo Vandamme and – with

effect from 28 August 2006 – Paul Vandekerck-

hove*.

The Committee met three times during the report

year, with apologies for absence being received

from Mr. Filiep Libeert* on two occasions. The

following subjects were discussed, among others:

– the management incentive plan: assessment

of 2005 and drawing up of a plan for 2006;

– the remuneration of the Management Com-

mittee, and the appointment of new members;

– nominations and resignations of directors.

The chairman of the Nomination & Remuneration

Committee reported on these matters to the Board

of Directors after the meeting, and gave its advice

with a view to decisions by the Board.

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THE 1980S

In 1980 Picañol introduced the revolution-

ary PAT airjet weaving machine. That same

year the ZF hall was set up at K. Steverlynck-

laan, as a result of an investment in a produc-

tion hall for automatic machining of gearbox-

es for the Germany company Zahnradfabrik

Friedrichshafen. In 1983 Picañol launched a

successor to the PGW machine, the GTM. A

new assembly line was built in Ieper to meet

the rising demand quickly and effi ciently. In

1984 a Total Quality Control program was

introduced, with new production equipment

including sophisticated CNC machines be-

ing used to meet the demand for high quality.

1985 brought heavy investments in production

capacity to keep pace with the brisk demand.

The company built a new, 4,000 m2 pro-

duction hall for all the CNC machining centers,

along with storage facilities for spare parts.

In 1987 the company changed the spelling of

its name from Picañol to Picanol, and built

the Picanol Service Center in Shanghai. Also

during that year, modifi cations were made to

the production facilities in Ieper. The company

split the production division into two smaller

units, with similar workpieces being grouped

together and fi nished in a specialized produc-

tion cell. In 1988 Picanol acquired a stake in

Melotte, specialized in production of mechani-

cal parts. That same year it built its last fl ying

shuttle machine, which was shipped to Indo-

nesia. In 1989 the foundry division was split

off from the other activities and made into a

separate company, Proferro NV. Also in 1989

Picanol took a stake in what was then Protron-

ic (now PsiControl Mechatronics).

70YEARS

I I I . Management committee and day-to-day management

The Management Committee is made up as fol-

lows (since 17 March 2006):

– Christulf BVBA, represented by Mr. Chris

Dewulf, President & CEO;

– Consilium BVBA, represented by Mr. Stefaan

Dewulf, Vice-President Mechatronics & Ac-

cessories;

– Jurgen Couvreur, Vice-President Finance &

Administration;

– Cathy Defoor, Vice-President Manufacturing;

– Jan Laga BVBA, represented by Mr. Jan Laga,

Vice-President Marketing, Sales & Services

– Geert Ostyn, Vice-President Technology &

Operations;

– Dirk Verly, Vice-President Human Resources

& General Services.

IV. Remuneration

N O N - E X E C U T I V E D I R E C T O R S

– The remuneration for non-executive directors

is made up of an amount that depends on at-

tendance at Board meetings (2,000 euros per

Board meeting per director) and at meetings

of the subcommittees (2,000 euros per com-

mittee meeting per director, with the excep-

tion of the Chairman of the Audit Committee,

whose remuneration is 3,000 euros per com-

mittee meeting). In addition there is a fi xed

annual remuneration of 20,000 euros per di-

rector. Exceptionally, the Board granted a

farewell remuneration of 10,000 euros to Mr.

Joos Waelkens, on his resignation as director.

– The fi xed remuneration for the Chairman of

the Board is 7,500 euros per month. He does

not receive any other remuneration such as

attendance fees for meetings of the Board of

Directors or the subcommittees that he chairs.

– The remuneration granted to Mr. Joos

Waelkens as director of Proferro NV in 2006

was 23,000 euros.

– This results as follows:

Mr. Filiep Libeert 34,000 eurosMr. Frank Meysman 40,000 eurosMr. Johan Tack 45,000 eurosBaron Hugo Vandamme 40,000 eurosMr. Joos Waelkens 75,000 eurosMr. Paul Vandekerckhove 26,500 eurosMr. Luc Van Nevel 90,000 euros

E X E C U T I V E D I R E C T O R S

President & CEO

Mr. Chris Dewulf* received a basic remunera-

tion of 459,000 euros for the offi ce of President &

CEO in 2006. In addition an amount of 62,545.80

euros was granted for insurance premiums and a

company car. A variable remuneration of 229,000

euros was paid for services rendered in 2006.

Other executive director

The remuneration granted to Mr. Patrick Ste-

verlynck since his appointment as director on

22 March 2006 amounts to 280,658.66 euros.

This amount does not include the remuneration

of 33,139.73 USD received from GTP Greenville.

No other remuneration such as attendance fees

for Board meetings or variable remuneration was

paid.

Management committee

– The total cost of the basic remuneration for

members of the Management Committee

(with the exception of the President & CEO)

in 2006 amounted to 1,275,627.39 euros. This

amount includes insurance premiums and

company cars.

– A variable remuneration of 442,082 euros was

paid for services rendered in 2006.

– There are no current share option plans or

warrant plans.

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VI. Auditors’ remuneration

The auditors received an amount of 157,000 euros

for performance of their audit tasks at Picanol NV

in 2006. During the course of 2006, the following

additional tasks were carried out:

– other audit tasks: 5,150 euros

– tax advice: 52,470 euros

VII . Shareholder structure and agreements, and certif icate holder agreements

No disclosures were received in the course of

2006. The shareholder structure of Picanol NV is

therefore as follows (situation on 7 March 2007):

– Stichting Administratiekantoor Picanol, Her-

engracht 420 1017 BZ Amsterdam (Nether-

lands): 2,950,217 shares, or 50.0036%

– Buraco NV, Jan De Trochstraat 151, 1703

Schepdaal (Belgium): 457,000 shares, or 7.75%

– Three private individuals (each holding less

than 5%) acting in concert as Gevolmachtigde

BVBA Vincent Busschaert Keizerslaan 3, 1000

Brussels (Belgium): 379,043 shares, or 6.42%

The company is not aware of the existence of any

agreements between its shareholders on the one

hand and certifi cate holders on the other, or be-

tween the certifi cate holders themselves, with

the exception of the shareholders’ agreement

mentioned under X below.

VII I . Whistle-blowing procedure

In accordance with internal policies implemented

previously (rules of conduct that apply worldwide,

governing relations between employees on the one

hand and shareholders, customers, suppliers, fel-

low employees, the press and society on the other),

a new “whistle-blowing” procedure was also intro-

duced. This procedure forms part of a wider policy

on company ethics, and provides a way for em-

ployees to report suspicions about something they

think is not right within the company, either to a

manager or to someone in a position of confi dence.

The procedure covers not only the rights and obli-

gations of employees who report their misgivings,

but also the duties of the Picanol Group regarding

how to deal with such reports.

IX. Insider trading and market r igging

The Trading Regulations lay down the condi-

tions under which shares in the company can be

acquired or disposed of by directors and key em-

ployees, in compliance with the relevant legisla-

tion. No notifi cation of such operations was re-

ceived during fi nancial year 2006.

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IX. Application of art icles 523 and 524 of the Company Code

B o a r d m e e t i n g o f 2 3 M a r c h 2 0 0 6

Prior to the Board consultations on these agenda

points, Mr. Luc Van Nevel, the permanent rep-

resentative of The Marble BVBA, informed the

Board of a shareholding confl ict of interests in

the sense of art. 523 of the Company Code, be-

tween the latter company and Picanol NV.

Mr. Luc Van Nevel explained that there might

be a confl ict of interests since the settlement

agreement covers among other things a minor-

ity claim that was made on 2 March 2005 by

Deminor International CVBA, Peter Weinreb,

Olivier Goldberg and Victor Levy against The

Marble BVBA, and against all former directors

of Picanol NV; under the terms of the settlement

agreement, the shareholders who entered the mi-

nority claim have to waive their claims against

The Marble BVBA.

With regard to the shareholders’ agreement,

the confl ict of interests lies in the fact that the

members of the Buraco group waive their claims

against among others The Marble BVBA con-

cerning the disputes that arose between the par-

ties to this agreement concerning the sharehold-

ership and the management of Picanol NV.

In this connection it is in the interests of The

Marble BVBA for Picanol NV to approve both

agreements, at least in principle, including the

implications for Picanol NV in terms of share-

holding law.

The Marble BVBA has informed all directors of

Picanol NV about this confl ict of interests, and

will also inform the Auditor.

The Marble BVBA, in the person of Mr. Luc Van

Nevel, then withdrew from the discussion, and so

did not take any further part in the deliberations

or the voting about the points on the agenda. The

Board decided that the rest of the meeting should

be chaired by HRV NV, represented by Baron

Hugo Vandamme.

The Board of Directors took note of the draft set-

tlement agreement (hereinafter referred to as the

“Settlement Agreement” between Picanol NV,

Deminor International CVBA, Peter Weinreb,

Olivier Goldberg, Victor Levy and the Wingole

civil company (hereinafter referred to as the “De-

minor Parties”) and a draft settlement agreement

between Picanol NV, Pasma NV/Sofi nes NV and

the shareholders who are members of the Buraco

Group (hereinafter referred to as the “Sharehold-

ers’ Agreement”).

The legal advisor to Picanol NV explained that

this Settlement Agreement, along with the Share-

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holders’ Agreement, is the result of discussions

during the previous weeks between Picanol NV

and the shareholders represented by Deminor

on the one hand, and the shareholders grouped

around Buraco NV on the other. Such discus-

sions had been necessary since among other

things Deminor had made new claims against

Picanol NV in February concerning certain deci-

sions by the Board in the past (see the letter from

Deminor to Picanol NV dated 24 February 2006,

as discussed at the Board meeting of 13 March

2006). These discussions were aimed at achiev-

ing an all-embracing, fi nal settlement with the

shareholders concerned, regarding the persistent

disputes about the management of the company.

Under the terms of the Settlement Agreement,

the Deminor Parties acknowledge the need to

put an end to the disputes concerning matters in

the past, in the interests of Picanol NV and the

further growth and development of the company,

and they further waive all their claims related to

these matters. The Deminor Parties further rec-

ognize and unanimously approve the settlement

agreements made by Picanol NV in March 2005

with Messrs. Jan Coene, Herwig Bamelis, Em-

manuel Steverlynck, Patrick Steverlynck, Michel

Steverlynck, Yves Steverlynck and Jean-Pierre

Fafra-Baltes, albeit with application of art. 565

para. 2 of the Company Code.

For the rest, Picanol NV undertakes to ensure

that the necessary control mechanisms within the

Board of Directors are approved and applied, so

as in future to avoid any abuses or irregularities

that might have occurred in the past.

Under the terms of the Shareholders’ Agreement,

Mr. Paul Vanderkerkhove will be nominated as

director of Picanol NV and member of the Ap-

pointments & Remuneration Committee by the

group of shareholders around Buraco NV, who

represent around 20% of the shares and whose

members belong to the branch of the family re-

lated to the late Bernard Steverlynck. The Board

further determined that the shareholders con-

cerned will also nominate the former chairman,

Patrick Steverlynck, representing the Emmanuel

Steverlynck branch, to join the Board once more.

The Shareholders’ Agreement also states that a

dividend policy will be resumed as soon as Pica-

nol is back in profi t. Furthermore, Picanol NV

agrees that if the minority shareholders wish to

sell their shares at any moment, the company

will lend its assistance. Lastly, the Shareholders’

Agreement includes a once-and-for-all settle-

ment between Picanol NV, Pasma NV and So-

fi nes NV and the Buraco group.

The Board of Directors then considered the con-

sequences for the company of both agreements,

in terms of shareholding law.

Concerning the shareholding law consequences

of the Settlement Agreement, the Board deter-

mined that the agreement provides for the pay-

ment by Picanol NV of an amount of 500,000

euros plus VAT to the Deminor Parties, for the

costs incurred by them in exercising their rights

as shareholders. The Deminor Parties declare and

recognize that they have made suffi cient agree-

ments among themselves as to the sharing of this

amount, and that they will not make any claims in

this respect against Picanol NV and/or its direc-

tors. However, since the Settlement Agreement

also provides for the approval by the Deminor

Parties of the settlement agreement made be-

tween Yves Steverlynck and Patrick Steverlynck,

in addition to the amounts already received an

amount of 240,000 euros which was previously

held in an escrow account will be released in fa-

vor of Picanol NV. The net cost to Picanol NV

of the Settlement Agreement therefore comes to

260,000 euros.

Also under the terms of the Settlement Agree-

ment, Picanol NV waives its rights against the

Deminor Parties. However, this does not have

any direct consequences for the company in

terms of shareholding rights.

As regards the shareholding law consequences

for Picanol NV of the Shareholders’ Agree-

ment, the Board noted that this agreement speci-

fi es among other things that the costs incurred

by the Buraco group in exercising its rights as a

shareholder, amounting to 700,000 euros, will be

borne by Picanol NV and repaid to the Buraco

group. The payment will be made by bank trans-

fer to the third-party account held by Modrika-

men BVBA, which will take responsibility for

sharing out this amount between the members of

the Buraco group, in accordance with the agree-

ments made by them about this.

For the rest, the Board considered that the com-

mitment for Picanol NV to lend its collaboration

to the minority shareholders in selling off their

shares, should they wish to do so at any point

in the future, did not have any immediate conse-

quences for the company in terms of sharehold-

ing law.

After examining the content of both agreements

and their shareholding law consequences for the

company, the Board then discussed the appropri-

ateness of both agreements.

From these discussions it emerged that the Board

fully supported the need and the desirability of

the proposed settlement. The Board is convinced

that in view of the far-reaching reforms that have

been carried out during the past two years, the

company can once more concentrate on its core

activities and the creation of added value. Ac-

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cording to the Board, there can be no justifi cation

for the company continuing to be hindered in fu-

ture or incurring costs for disputes about certain

decisions in the past, given the results already

achieved by the reforms and the measures taken

by the company to avoid a repetition of the facts

that let to them.

Based on the discussions the Board further de-

termined that the actions of the Deminor Parties

(including the introduction of a minority action

in front of Ieper Commercial Court on 2 March

2005 under the terms of art. 562 of the Company

Code) and the Buraco group have made an impor-

tant contribution toward the reform of the com-

pany. In particular, the Board determined that the

initiatives and actions of the Deminor Parties and

of the Buraco group have permitted and helped

the company to recover large amounts paid by

the company to certain directors in the past. The

Board recalled in this connection that since Oc-

tober 2004 the company has already recovered

an amount of around 5,000,000 euros, and that

the company is still entitled to receive a further

repayment of around 3,570,000 euros on 31 Oc-

tober 2007. Furthermore, the members of the

former management, acting under pressure from

initiatives by the Deminor Parties and the Buraco

group, have waived their share options, which by

itself resulted in a cost saving of 1.41 million or

3.28 million euros (depending on whether or not

the costs of the associated group insurance policy

are included in the calculation). A detailed list of

the amounts recovered was attached to the min-

utes as an appendix.

Also as a result of these agreements, a defi nitive

end can be put to the disputes that arose in the

past concerning certain decisions and policy op-

tions. This will permit the company to complete

a diffi cult period of reforms and to concentrate

fully once more on its commercial activities. In

this light, the Board considered that the costs of

1,200,000 euros were fully justifi ed in the inter-

ests of the company, since among other things

under the terms of the agreement an amount of

240,000 euros that had been held in an escrow

account and so had not yet been included in the

result could now be released in favor of the com-

pany. The net costs to Picanol NV of the agree-

ments therefore come to 960,000 euros.

The Board considered that spreading these costs

among all shareholders was justifi ed, since all

shareholders benefi ted from the company re-

forms, and since – given the amounts already

recovered – it was in their interest to have a fi -

nal settlement of all the previous disputes, and to

avoid any additional costs for them.

The directors representing LMC NV and M.O.S.T

BVBA at the meeting declared that these two

companies had asked them to note that, from the

corporate governance point of view, it would be

appropriate for this proposed assumption of the

costs by the company to be put to the AGM. The

other Board members agreed in principle with

this observation, and decided that the agreement

should be reported and communicated on to the

AGM in the most transparent way, all the more

so because a signifi cant number of sharehold-

ers – who together make a majority at the AGM

– are party to the agreement.

The Board considered that both the Settlement

Agreement and the Shareholder Agreement, and

the all-embracing settlement proposed in them,

are justifi ed in the interests of the company.

After these discussions, the Board of Directors

unanimously agreed to approve both agree-

ments.

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B o a r d m e e t i n g o f 1 3 F e b r u a r y 2 0 0 7

Prior to the deliberation, Mr. Patrick Steverlynck

informed the Board of Directors of the fact that

with respect to the agenda, he had a possible

confl ict of interest of a proprietary nature in the

sense of article 523 of the Company Code.

Mr. Steverlynck explained that the confl ict of

interest consists in the fact that the proposal

for approval between the Company and the tax

authorities, and the associated settlement with Mr.

Jan Coene, can have an impact on the obligations

committed by himself and by the company

controlled by him, Pasma NV, with respect to the

Company pursuant to the mediation settlement

agreement that was signed on 10 October 2004

between Mr. Jan Coene and Pasma NV («the

Mediation Settlement Agreement»).

The resolution on the agenda after all relates to

the reimbursement to the Company of the gross

part of the sign-up premium that the Company

paid to Mr. Jan Coene in 2002. In this respect,

the Mediation Settlement Agreement stipulates

that Mr. Jan Coene would submit a request to

the Federal Public Service Finances for offi cial

dispensation concerning the income tax paid on

the sign-up premium. Mr. Jan Coene in principle

is only required to repay the gross part of the sign-

up premium after the income tax, pursuant to the

request for offi cial exemption, has been repaid to

him by the tax authorities, on the understanding

that the repayment of the gross part of the sign-

up must take place in any case no later than 31

October 2007, regardless the outcome of the

request for offi cial exemption.

Should the Federal Public Service Finances,

for whatever reason, only reimburse a part of

the gross part of the sign-up premium, Pasma

NV has committed itself, together with Mr. Jan

Coene, each for one half, to pay to Picanol NV the

amount not repaid by the Federal Public Service

Finances. Mr. Patrick Steverlynck is guarantor for

compliance by Pasma NV with this agreement.

Mr. Patrick Steverlynck thus in principle has an

interest in the Company approving the present

settlement, including the proprietary implications

thereof for the Company, since this settlement

could substantially limit his repayment obligation

pursuant to the Mediation Settlement Agreement.

The Chairman determined that all directors of the

Company were notifi ed of the confl ict of interest,

and will inform the statutory auditor concerning

this.

Mr. Steverlynck then withdrew from the discussion

and left the meeting room. Consequently, he

did not take part in the deliberation and the vote

concerning the agenda.

The Board of Directors is of the opinion that the

resolutions do not need to be subjected to the

procedure of article 524 of the Company Code. The

Board of Directors after all notes that the net cost

of the resolution for the Company is 745,878.76

euros (more specifi cally 642,863 euros as a result

of the difference in tax rates, and 156,061 euros

for discontinuation of collection less the interest

rate due to tax deductibility), which is less than

1% of the consolidated net assets of the Company

(consolidated net assets as of 31 December 2005:

78.8 million euros). Pursuant to article 524 §1,

third section, 2°, there is then no reason to apply

the procedure of article 524 of the Company Code

with respect to the resolution on the agenda. The

Chairman established that the meeting was validly

convened, was validly composed and was able

to validly deliberate and decide concerning the

agenda items set forth in the convocation notice.

The Chairman then opened the debate concerning

the agenda:

1. Explanation of the factual background and

content of the global agreement

By way of introduction, the Chairman explained

the nature and the factual background of the reso-

lution that was being presented to the Board of Di-

rectors, of which two parts can be distinguished

a. Settlement with the tax authorities

The Chairman reminded the meeting that in the

Mediation Settlement Agreement of 10 October

2004, Mr. Jan Coene agreed to repay to Picanol

the sign-up premium that he received from Picanol

in 2002, for an amount of 6,562,972.20 euros. The

net part of the sign-up premium, an amount of

2,986,140.60 euros, was repaid to Picanol before

31 December 2004, pursuant to the Mediation

Settlement Agreement.

However, for the difference between the gross and

the net amounts, i.e. an amount of 3,576,831.60

euros (hereinafter the «Amount»), the Mediation

Settlement Agreement established that Mr.

Jan Coene would submit a request for offi cial

exemption of the income tax assessment for tax

year 2003, income from 2002. Mr. Jan Coene

has agreed that when the Federal Public Service

Finances deposits the Amount to Mr. Jan Coene,

he will forward the Amount to Picanol NV.

The Mediation Settlement Agreement further

establishes that, concerning the part of the Amount

not reimbursed by the Federal Public Service

Finances, Mr. Jan Coene or Pasma NV, each for

half, would be responsible for the repayment of

the balance to the Company. According to the

Mediation Settlement Agreement, in any case

the Amount must be reimbursed to the Company

before 31 October 2007, regardless of the outcome

of the request for offi cial exemption.

With a view toward this repayment, at the end

of 2004 Mr. Jan Coene fi led a request for offi cial

exemption with the Regional Department of

Bruges, in accordance with the Mediation

Settlement Agreement. The Company has

followed the processing of this request carefully

and closely. Due to the magnitude of the claims

of the Company with respect to Mr. Jan Coene

and Pasma NV, it was deemed irresponsible for

the Company to simply remain detached from

the exemption procedure. After all, if this request

for offi cial exemption has a favourable outcome,

this would accelerate and simplify the repayment

to the Company of the gross part of the sign-up

premium by Mr. Jan Coene, and if necessary

Pasma NV.

After exhaustive meetings, in the end the Regional

Department appeared to be prepared to grant

the request for offi cial exemption only on the

following conditions:

1. Picanol agrees to an increase of the taxable

basis for tax year 2003 (income from 2002) for

the amount of the sign-up premium.

2. Picanol agrees to a reduction of the taxable

basis for tax year 2005 (income from 2004) for

the same amount.

3. Picanol pays the additional corporate tax that

would be owed due to the difference between

the corporate tax rate for revenue year 2002

and revenue year 2004, and the increase due to

insuffi cient prepayments.

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As explained below, the corporate tax thus owed

would cost the Company a net amount of 642,863

euros.

Pursuant to the conditions described above, the tax

authorities were prepared to repay Mr. Jan Coene

the amount of the income tax to be exempted

pursuant to the request, after Picanol had paid

this additional corporate tax. With respect to this

settlement, a draft agreement was submitted to the

Company by the tax authorities.

At the request of the Chairman, the lawyers then,

based upon a summarising presentation, provided

further explanation on the steps that were

taken with a view toward obtaining an offi cial

exemption and the position that was taken by the

tax authorities. The Chairman and the lawyers for

the Company also answered the questions asked

in this regard by the directors.

b. Settlement with Mr. Jan Coene

The Chairman then explained that the settlement

with the tax authorities drafted for this purpose

was an opportunity to secure the effective

reimbursement of the gross part of the sign-up

premium, insofar as Mr. Jan Coene would agree

to request that the amount to be deposited to him

by the tax authorities would be paid directly to the

Company (if necessary via the third party account

of his lawyer).

As a result of contacts that took place in this regard

with Mr. Jan Coene at the end of 2006, Mr. Jan

Coene, in the context of a general settlement of all

discussion points still open between the Company

and Mr. Jan Coene, was fi nally prepared to agree

with such a direct payment.

This global settlement can be summarised as

follows:

1. Mr. Jan Coene acknowledges that each amount

that the Federal Public Service Finances would

award him pursuant to offi cial exemption for

withholding tax/income tax and moratorium

interest for a total amount of 3,576,831.60

euros must be repaid to Picanol. Mr. Jan

Coene would give the competent collector of

direct taxes an irrevocable order to repay the

complete amount of withholding tax/income

tax and moratorium interest to the third

party account of his lawyer. The latter would

immediately deposit this amount to the third

party account of the lawyer for the Company.

Should on the occasion of the granting of the

above-mentioned request, Mr. Jan Coene not

be refunded moratorium interest, he would

transfer half of the amount corresponding to

the part of the withholding tax/income tax that

was not refunded by the tax authorities to the

third party account of his lawyer within 7 days

after a fi nal and conclusive ruling was made

that no moratorium interest would be owed on

the exempt withholding tax / income tax by the

Federal Public Service Finances. The lawyer for

Mr. Jan Coene would then immediately transfer

this amount to the above-mentioned third party

account of the lawyer for the Company. As long

as this balance is not repaid, interest continues

to be owed on this amount.

2. Mr. Jan Coene will deposit the overdue interest

for the period up to and including 31 October

2006 resulting from the Mediation Settlement

Agreement (53,652.47 euros) to the third party

account of his lawyer and also agrees to pay

interest at an annual interest rate of 3% on half

of the amount of 3,576,831.60 euros for the

period beginning 1 November 2006 until the

value date of payment of the aforementioned

amount. Mr. Jan Coene will pay this interest

within fi ve working days after the notifi cation

of the ruling to grant the request for offi cial

exemption.

3. Picanol waives its claims with respect to the

repayment of the VAT deduction rejected by the

tax authorities with respect to the invoices of

Adequate Advice and Synergy for an amount of

156,060.84 euros.

4. Picanol acknowledges that it should have paid

withholding tax for an amount of 52,626.85 euros

with respect to a non-competition remuneration

that was owed Mr. Jan Coene pursuant to an

out-of-court settlement with Mr. Jan Coene of

16 March 2005.

The Chairman explained that the settlement under

item 1 goes back to the Mediation Settlement

Agreement between Mr. Jan Coene and Pasma

NV. This establishes that if the tax authorities

were not to agree to the payment of moratorium

interest, the difference between the amount

that should be repaid pursuant to the Mediation

Settlement Agreement on the one hand, and the

amount of income tax that would be reimbursed

by the tax authorities to Mr. Jan Coene pursuant

to offi cial exemption on the other hand, would

be repaid in equal halves by Mr. Jan Coene and

Pasma NV (this amount can be estimated at no

more than 130,040 euros),

2. Nature of the transaction

The chairman explained that the Board of Directors

must decide whether the Company is prepared (i)

with a view toward the effi cient collection of the

amounts still owed by Mr. Jan Coene, to accept

the settlement outlined above in order to effect an

offi cial exemption on the part of Mr. Jan Coene,

and within the framework thereof among others

to bear an estimated net cost of 642,863 euros

due to additional corporate tax, and (ii) to take

cognisance of the agreement between Mr. Jan

Coene and Pasma NV that an amount of at most

130,040 euros would be subject to the rule of split

charges described above.

3. Proprietary consequences for the Company

The Board of Directors then investigated the

proprietary consequences of both schemes for the

Company.

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As can be seen in the calculation below, the net

cost for the Company of the settlement with the

tax authorities can reasonably be estimated at

642,863 euros:

1. Tax year 2003 (Income from 2002): rejection of fi scal deduction of sign-up premium (undervaluation of

assets)

Additional corporate tax: 40.17% of 6,562,972.20: 2,636,346 euros

Increase insuffi cient prepayments: 9% of 2,636,346: 237,271 euros

Fiscal cost : 2,873,617 euros (A)

2. Tax year 2005 (Income from 2004): increased tax loss by 6,562,972.20 €

Fiscal savings at moment of effective adjustment for loss

33.99% of 6,562,972.20 euros 2,230,754 euros (B)

Net cost for Picanol: (A) – (B) 642,863 euros

With a view toward a global settlement with Mr.

Jan Coene, Picanol confi rms that it will no longer

insist on the repayment by Mr. Jan Coene of the

VAT deduction rejected by the tax authorities

with respect to the invoices of Adequate Advice

and Synergy for an amount of 156,060.84 euros,

for which a claim was made in 2006. Now that

a waiver is being made with a view toward

securing the collection of the balance of the sign-

up premium owed by Mr. Jan Coene, the waiver

of this action in principle can be deducted in the

corporate tax. The net cost of this waiver can then

be estimated at 103.015.76 euros.

Within the framework of this agreement, Picanol

also confi rms that it should have paid withholding

tax for an amount of 52,626.85 euros with respect

to a non-competition remuneration that was owed

Mr. Jan Coene due to an out-of-court settlement

with Mr. Jan Coene of 16 March 2005. The

corresponding amount was already booked in

2006 and the confi rmation of this payment within

the framework of the agreement with Mr. Jan

Coene then has no fi nancial consequences for the

Company.

The resolution thus represents an amount that can

be estimated at 745,878.76 euros.

4. Resolution and justifi cation

After the investigation of the proprietary effects

of the proposed resolution for the Company, the

Board of Directors discussed the appropriateness

of the settlement sketched above.

From this discussion it appears that the Board of

Directors is of the opinion that, if the Company

were to accept the statement of agreement of the

tax authorities and the associated global agreement

with Mr. Coene, this would considerably

simplify the collection of the amounts still owed

the Company by Mr. Jan Coene and possibly

Pasma NV pursuant to the Mediation Settlement

Agreement, and substantially increase the chances

for actual and complete collection thereof.

In this, the Board of Directors assumes that the

settlement with Mr. Coene implies that an amount

estimated at 3,446,873 euros (possibly even more

if the tax authorities would pay moratorium interest

on the amounts to be repaid to Mr. Jan Coene)

would be directly deposited to the Company by

the tax authorities. This means that at least 96% of

the amounts still owed would be immediately and

with certainty collected, without the Company

being dependent on any further intervention or

collaboration on the part of Mr. Coene and/or

Pasma NV, and without being required to take

specifi c actions with respect to these parties.

If the Company were to reject the conditions for

the offi cial exemption, and thus the amount of in-

come tax paid on the sign-up premium were not

to be refunded to Mr. Jan Coene, the Company

would be required to recover the entire amounts

from Mr. Jan Coene and Pasma NV. Apart from

the question whether the parties involved are ca-

pable of honouring their repayment obligations

with respect to the Company if the tax authorities

were not to reimburse the income tax paid on the

sign-up premium, based on the information the

Board of Directors has at its disposal, it is dubious

to say the least whether Mr. Jan Coene, and if nec-

essary Pasma NV, would be prepared in this case

to repay the amounts owed at their own initiative.

The Company in principle has various means at

its disposal to force execution if necessary of the

outstanding payment obligations with respect to

the Company (including prejudgement and/or

executory attachment). Nevertheless, the Board

of Directors, taking a realistic and pragmatic

approach, believes that it is very unclear whether

such steps would lead to these amounts actually

being collected in the end.

The Board of Directors also believes that it cannot

be denied that compulsory collection in any case

would be awkward and would require prolonged

and intensive follow-up on the part of the

Company, which in itself would imply substantial

costs.

There is also the risk that a legal initiative would

again expose the Company to negative publicity

with respect to certain decisions taken in the

past. The Board of Directors believes that this

cannot be justifi ed in the light of the results that

the Company has achieved within the framework

of its reorganisation in the most recent years and

the far-reaching measures that the Company has

taken to prevent a repetition of the facts that led

to them.

The Board of Directors thus judges that it is

desirable for the Company to cooperate in order

to arrive at an offi cial exemption. An agreement

with the tax authorities allows actual collection in

the short term of at least 96% of the amounts still

owed. The Board of Directors believes that it has

no reasonable, reliable indications at its disposal

to allow it to assume that the owed amounts

could be recovered to the same extent based on

the Mediation Settlement Agreement. In view of

the fact that there is a real risk that the amounts

owed might not be (entirely) recovered, the Board

of Directors judges that acceptance of the fi scal

correction requested by the tax authorities and

the associated net fi scal cost for the Company

of (an estimated) 642,863 euros, this being the

difference in the tax rate for 2002 (40.17%) and

2004 (33.99%), is justifi ed.

Based on similar considerations, the Board of

Directors believes that the Company would also

be served by reaching a settlement with Mr.

Coene in which the tax authorities would pay

the amounts owed him pursuant to an offi cial

exemption directly to the third party account of

his lawyer, who would then transfer this repaid

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amount to the third party account of the Company

lawyer. Such a procedure means it is almost

certain that actual repayment of the gross part

of the sign-up premium would be secured in the

short term, and incidents with respect to payment

and collection risks would be further reduced and

even eliminated.

With respect to the terms and conditions of the

proposed settlement with Mr. Coene, the Board of

Directors fi rst of all points out that account must

be taken of the fact that the settlement foresees

that Mr. Jan Coene will pay the overdue interest

(53,652.47 euros) due pursuant to the Mediation

Settlement Agreement, for which the Company

has repeatedly been forced to serve notice of

default to Mr. Coene, within fi ve working days

following notifi cation by the tax authorities of the

decision to grant the request for offi cial exemption.

The payment of the interest owed after this is also

secured in a similar way.

Concerning the waiver of the legal claim with

respect to the wrongly deducted VAT, the

Board of Directors believes that, in view of the

actions already taken to recover this amount,

payment of this amount could only be obtained

via legal means. In this regard, it is not certain

whether this amount can actually be recovered,

in view of the fact that differences of opinion are

possible concerning the appropriateness of the

repayment to the tax authorities of the deducted

VAT amount. Within the framework of a global

agreement concerning the amounts outstanding,

the estimated maximum net cost of 103,015.76

euros associated with this part of the settlement

is then also justifi able according to the Board

of Directors. The payment of withholding tax

on the non-competition remuneration that was

paid to Mr. Jan Coene for that matter also risks

becoming the object of protracted disputes, with

the considerable costs that these would entail.

For the rest, the Board of Directors takes

cognisance of the fact that Mr. Jan Coene and

Pasma NV have mutually agreed, to the extent

that moratorium interest would not be paid or

would not be owed by the tax authorities on the

amount that would be repaid to Mr. Jan Coene

pursuant the offi cial exemption, to repay, each

for one half, the balance of at most 130,040

euros (corresponding to the difference between

the amount required to be repaid pursuant to the

Mediation Settlement Agreement on the one hand,

and the amount of income tax that would be repaid

to Mr. Jan Coene by the tax authorities pursuant

to the offi cial exemption on the other hand). The

Board of Directors notes that this settlement has

no impact on the extent to which the gross part of

the sign-up premium will be repaid.

The Board of Directors thus also believes that

the conditions for the offi cial exemption and the

agreement with the tax authorities, as well as the

proposed global settlement with Mr. Jan Coene,

are justifi ed in the light of the interests of the

Company. The Board of Directors believes that

the distribution of the associated costs over all

shareholders is justifi ed, since all shareholders

have an interest in the actual collection of the

gross part of the sign-up premium in the short

term and a maximum limitation of the payment

and collection risks attached to this.

The Board of Directors is convinced that, in view

of the thoroughgoing reorganisation work that

has been realised over the last three years and the

amounts that have already been recovered within

this framework, the proposed settlement will

allow the Company to further concentrate on its

core activities and on the creation of shareholder

value.

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C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 0 0 6

I. Definit ions 62

I I . Financial statements 63

II.1. Consolidated income statement 63

II.2. Consolidated balance sheet 64

II.3. Consolidated cash fl ow statement 65

II.4. Statement of changes in shareholders’ equity 66

III. Notes to the Consolidated Financial Statements for the year ending

31 December 2006 67

III.1. Summary of the valuation rules 67

III.2. Changes in accounting principles applied 78

III.3. Changes in scope of consolidation 78

III.4. Segment information 79

III.5. Income statement 85

III.6. Balance sheet 92

III.7. Miscellaneous 111

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I . D E F I N I T I O N S

Associated companies Companies in which Picanol has a signifi cant infl uence and which are accounted for under the equity method.

Shareholders’ equity Shareholders’ equity, including minority interests, for the calculation of ratios.

Joint ventures Entities under joint control and which are consolidated proportionately.

Net assets Net liabilities + shareholders’ equity

EBITDA EBIT + depreciation and impairment of assets+ adjustments write-offs on inventories and trade receivables + adjustments other provisions.

Subsidiaries Entities under the control of Picanol and fully consolidated

Working capital Inventories + trade receivables – trade payables – down payments received – remuneration and social security contributions – taxation at source on remuneration.

Gross margin Sales – cost of sales

Export fi nance Bank loans to refi nance credit granted to our customers, with as security bills of exchange or promissory notes accepted by our customers.

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I I . F I N A N C I A L S TAT E M E N T S

The consolidated fi nancial statements have been approved for publication by the Board of Directors on 19 March 2007.

I I .1. CONSOLIDATED INCOME STATEMENT

PICANOL GROUP (in ‘000 euros) NOTES (*) 31/12/2006 31/12/2005

Sales III.4. 410,260 396,302

Cost of sales -343,693 -340,445

GROSS PROFIT 66,567 55,857

Gross profi t % on sales 16,2% 14,1% (**)

General and administrative expenses -36,528 -39,188

Sales and marketing expenses -21,025 -21,085

Other operating income III.5.1. 3,697 2,082

Other operating expenses III.5.2. -2,866 0

OPERATING RESULT III.5.3. 9,845 -2,334

Net fi nancing expenses III.5.4. -619 -1,169

Other fi nancial income III.5.4. 528 1,423

Other fi nancial expenses III.5.4. -951 -1,060

PROFIT OR LOSS BEFORE TAXES 8,803 -3,140

Income taxes III.5.5. -3,236 -1,577

PROFIT OR LOSS 5,568 -4,717

SHARE OF MINORITY INTERESTS -1 1

SHARE OF THE GROUP IN PROFIT OR LOSS 5,569 -4,716 (*) the accompanying notes are an integral part of this income statement. (**) A re-allocation of head-offi ce costs amounting to 6.9 million euros from the beginning of 2006 led to an adjustment

of the gross profi t on 31/12/2005, in order to make a comparison possible.

EARNINGS PER SHARE

PICANOL GROUP (in ‘000 euros) NOTES 31/12/2006 31/12/2005

Earnings per share (basic) III.5.7. 0.94 -0.80

Earnings per share (after dilution) III.5.8. 0.94 -0.80

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I I .2. CONSOLIDATED BALANCE SHEET

PICANOL GROUP (in ‘000 euros) NOTES (*) 31/12/2006 31/12/2005

FIXED ASSETS 94,476 118,635

Intangible assets III.6.1. 8,610 10,858

Goodwill III.6.2. 1,492 1,920

Tangible fi xed assets III.6.3. & III.6.4. 59,267 63,237

Other fi nancial fi xed assets III.6.6. 103 103

Receivables more than one year III.6.7. 22,230 39,717

Deferred tax III.5.5. 2,774 2,800

CURRENT ASSETS 161,384 166,071

Inventories and contracts in progress III.6.8. 61,178 58,020

Trade receivables III.6.9. 69,265 76,890

Other receivables III.6.9. 14,456 13,027

Cash and cash equivalents III.6.10. 16,485 18,134

TOTAL ASSETS 255,860 284,706

SHAREHOLDERS’ EQUITY II.4. 82,719 78,899

Capital III.6.11. 7,400 7,400

Share premiums III.6.12. 1,332 1,332

Reserves 74,354 68,785

Translation differences -368 1,379

Minority interests 1 3

NON-CURRENT LIABILITIES 50,447 67,762

Pension and similar liabilities III.6.13. 6,485 7,109

Provisions III.6.14. 1,459 2,075

Deferred tax III.5.5. 9,073 7,584

Interest-bearing fi nancial borrowings III.6.15. 33,430 50,994

Financial leasing III.6.17. 11,640 13,498

Credit institutions III.6.15. 21,790 37,495

Other liabilities III.6.16. 0 0

CURRENT LIABILITIES 122,694 138,045

Pensions and similar liabilities III.6.13. 1,035 1,201

Provisions III.6.14. 3,487 3,050

Interest-bearing fi nancial borrowings III.6.15. 23,928 35,511

Trade payables III.6.19. 60,940 64,556

Taxes payable III.6.19. 2,518 3,431

Other liabilities III.6.19. 30,786 30,296

TOTAL LIABILITIES 255,860 284,706

(*) The accompanying notes are an integral part of this balance sheet.

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I I .3. CONSOLIDATED CASH FLOW STATEMENT

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Operating result 9,845 -2,334

Depreciation on intangible and tangible fi xed assets 14,112 15,656

Impairment of assets 1,025 0

Write-offs on assets 704 717

Changes in provisions 546 -4,734

Profi t/loss on disposals of assets 0 -12

Income from associates 0 0

Gross operating cash fl ow 26,231 9,293

Changes in working capital 15,783 26,415

Operating cash fl ow 42,014 35,709

Income taxes -3,236 -1,577

Net operating cash fl ow 38,778 34,132

Interest received 2,552 2,647

Acquisitions in intangible fi xed assets -1,464 -2,619

Acquisitions in tangible fi xed assets -9,538 -10,369

Revenue from the sale of intangible fi xed assets 32 1,864

Revenue from the sale of tangible fi xed assets 1,805 75

Net cash fl ow from investment operations -6,613 -8,402

Interest paid -3,171 -3,817

Dividends paid 0 -1,475

Increase/ (Decrease) of export fi nance -15,045 -13,500

Acquisitions of interest-bearing fi nancial borrowings 280 5,663

Repayments of interest-bearing fi nancial borrowings -14,380 -8,685

Cash fl ow from fi nance operations -32,317 -21,813

Effect of exchange rate changes -1,497 1,717

Adjustments to cash and cash equivalents -1,649 5,634

Net cash position at opening balance 18,134 12,500

Net cash position at closing balance 16,485 18,134

-1,649 5,634

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I I .4. STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

For the year ending 2006

PICANOL GROUP (in ‘000 euros)

At the end of the preceding period 7,400 1,332 68,785 1,379 78,896 3 78,899

Changes in scope of consolidation 0 0 0 0 0 -1 -1

Changes in applied accounting principles

0 0 0 0 0 0 0

Result over the reporting period 0 0 5,569 0 5,569 -1 5,568

Dividends 0 0 0 0 0 0 0

Translation differences 0 0 0 -1,747 -1,747 0 -1,747

Other 0 0 0 0 0 0 0

At the end of the reporting period 7,400 1,332 74,354 -368 82,718 1 82,719

For the year ending 2005

PICANOL GROUP(in ‘000 euros)

At the end of the preceding period 7,400 1,332 74,760 -889 82,603 132 82,735

Changes in scope of consolidation 0 0 0 0 0 -128 -128

Changes in applied accounting principles

0 0 0 0 0 0 0

Result over the reporting period 0 0 -4,716 0 -4,716 -1 -4,717

Dividends 0 0 -1,475 0 -1,475 0 -1,475

Translation differences 0 0 0 2,268 2,268 0 2,268

Other 0 0 216 0 216 0 216

At the end of the reporting period 7,400 1,332 68,785 1,379 78,896 3 78,899

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I I I . N O T E S TO T H E C O N S O L I D AT E D

F I N A N C I A L S TAT E M E N T S O F T H E Y E A R

E N D I N G 3 1 D E C E M B E R 2 0 0 6

I I I .1. SUMMARY OF THE VALUATION RULES

I I I .1.1. Statement of compliance – principles for the compilation of the f inancial statements

Since 1 January 2005, the consolidated fi nancial statements of the Picanol Group have been compiled in

accordance with the International Financial Reporting Standards (IFRS), as drawn up by the International

Accounting Standards Board (IASB) and the Interpretations issued by the Standing Interpretation Commit-

tee of the IASB and approved by the European Union.

I I I .1.2. General principles

B a s i s f o r p r e s e n t a t i o n

The consolidated fi nancial statements are expressed in thousands of euros. They have been compiled on the

basis of the historical cost convention.

The valuation rules, with the exception of IAS 32/39 (fi nancial instruments), IFRS 3 (business combina-

tions) and the ‘bandwidth’ approach as laid down in IAS19 (personnel benefi ts), have consistently been

applied to the year 2006, and also to the previous fi nancial year and the opening balance on the date of

transition to IFRS.

The following new standards and interpretations, already issued on the date of approval of this annual re-

port, but not yet in effect, were not applied by the Picanol Group for the year 2006:

• IFRS 7 Financial instruments: Disclosures; in effect for the fi nancial year that starts per 1 January 2007

• IFRS 8 Operating segments; in effect for the fi nancial year that starts per 1 January 2009

• IFRIC 7 Applying the Restatement Approach under IAS29; in effect for the fi nancial year that starts after

1 March 2006

• IFRIC 8 Scope of IFRS 2; in effect for the fi nancial year that starts after 1 May 2006

• IFRIC 9 Reassessment of Embedded Derivatives; in effect for the fi nancial year that starts after 1 June

2006

• IFRIC 10 Interim Financial Reporting and Impairment; in effect for the fi nancial year that starts after 1

November 2006

• IFRIC 11 IFRS 2 Group and Treasury Share Transactions; in effect for the fi nancial year that starts after

1 March 2007

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• IFRIC 7 Service Concession Arrangements; in effect for the fi nancial year that starts per 1 January 2008

According to a fi rst estimation, the application of IFRS 7 and IFRS 8 will only infl uence the notes of the

Picanol Group. The application of the above mentioned standards and interpretations will have no material

infl uence on the fi nancial statements of the Picanol Group.

F o r e i g n c u r r e n c y

The presentation currency of the Picanol Group is the euro.

Transactions denominated in foreign currencies are accounted for at the exchange rates prevailing at the

date of the transaction. At each balance sheet date, any monetary assets and liabilities that are expressed in

foreign currency, will be translated at the closing rate.

Any non-monetary assets and liabilities carried at fair value and denominated in a foreign currency , will be

translated at the rate of exchange applicable at the time when their fair value was determined. Any profi ts

and losses which result from these transactions will be recognized in the income statement. However, if

these are deferred, they will be recognized in the shareholders’ equity.

Assets and liabilities of the group’s foreign operations are translated at the closing rate. Profi ts and losses

are translated at the average exchange rate over the period. Any currency exchange differences resulting

from this will be recognized in shareholders’ equity, under the heading “Translation differences”. Upon

disposal of the foreign operation, currency exchange differences accumulated in equity will be recognized

in the income statement.

C o n s o l i d a t i o n p r i n c i p l e s

Subsidiaries

The consolidated fi nancial statements enclose all subsidiaries where the group has acquired control. Control

means that Picanol NV has the power to control the fi nancial and operational policy of the entity in order to

benefi t from its activities. Such control is supposed to exist when Picanol NV, either directly or indirectly,

holds over 50% of the voting rights of the entity. The existence and effect of potential voting rights, practi-

cable or convertible at that time, are taken into consideration when evaluating if the group has the power to

control the fi nancial and operational strategy of another entity.

Subsidiaries are those companies in which Picanol NV holds, either directly or indirectly, more than 50%

of the voting rights or in which Picanol NV can exert, either directly or indirectly, a deciding infl uence on

the policy.

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Acquisitions of subsidiaries are accounted for on the basis of the take-over method.

The cost of a business combination is valued at the total fair value on the date of the exchange, of assets

handed over, liabilities entered into or taken over, and the shareholders’ equity instruments issued by the

acquirer, plus any costs directly attributable to the business combination. The identifi able assets, liabilities

and contingent liabilities of the acquirer which comply with the admission criteria of IFRS 3 Business

Combinations are recognized at the fair value on the date of take-over with the exception of the fi xed assets

(or groups of assets disposed of) classifi ed as held for sale in accordance with IFRS 5 Fixed assets held for

resale and discontinued operations. Each minority interest in the acquirer will be recognized against the

minority share of the net fair value of the identifi able assets, liabilities and contingent liabilities.

The fi nancial statements of the subsidiaries are recognized in the consolidation scope from the moment that

Picanol NV acquires control until the date on which this control ceases.

The fi nancial statements of the subsidiaries bear the same reporting date as that of the parent company.

These fi nancial statements are compiled on the basis of uniform principles for fi nancial reporting for com-

parable transactions and other events in similar circumstances. Balances and transactions, profi ts and losses

within the group are totally eliminated.

Associated Companies

Associated companies are companies in which Picanol NV exercises signifi cant infl uence. Signifi cant in-

fl uence is the power to participate in the fi nancial and operating policy decisions of the shareholding, but

does not entail control or joint control over the relevant policy. Unless stated otherwise, signifi cant control

is presumed when an investor holds, either directly or indirectly, 20% or more of the voting rights of the

shareholding.

These enterprises are accounted for under the equity method from the moment this signifi cant infl uence

is acquired until the date it ceases. If the group share in the loss exceeds the book value of the associated

company, the book value will be reduced to zero and further losses will no longer be charged, except to the

extent which the group has entered into obligations with respect to this enterprise.

Joint ventures

A joint venture is a contractual agreement in which two or more parties enter into a business activity over

which they have joint control. Entities over which the group exercises joint control are recognized on the

basis of the proportional consolidation method. All of the assets, liabilities, profi ts and losses of the entities

under joint control are added entry by entry to comparable entries in the fi nancial statements. The applica-

tion of proportional consolidation ceases on the date on which the group ceases to have joint control.

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I I I .1.3. BALANCE SHEET

I n t a n g i b l e a s s e t s

Intangible assets are valued at cost less the accumulated depreciation and incidental impairment losses.

Internally generated intangible assets

Research expenditures are recognized as a loss in the income statement at the time when the expenditure

is incurred.

Internally generated intangible assets resulting from the development of the group are only recognized if

they meet the following criteria:

• An identifi able asset has been created.

• It is probable that the created asset will generate economic benefi ts that will fl ow to the entity.

• The development cost of the asset can be measured reliably.

From the moment a weaving machine is launched onto the market, the capitalized development costs are

depreciated on a straight-line basis over a period of 5 years. This is in line with the average lifecycle of a

weaving machine.

Separately acquired intangible assets

• Patents and Licenses

The costs of acquired patents and licenses are depreciated on a straight-line basis over their useful life, with

a maximum useful life of 5 years.

• Computer software

External and internal costs directly linked to the purchase of or to the installation of business software ap-

plications for ERP, Supply Chain, CRM, etc. are capitalized as intangible assets. These are depreciated on

a straight-line basis over their useful life, which is equivalent to 5 years.

G o o d w i l l

Goodwill is the difference between the cost of a business combination and the interest of the Picanol Group

in the net fair value of the identifi able asset, liabilities, and contingent liabilities. Goodwill is measured at

cost less any incidental accumulated impairment losses.

The cash generating unit to which goodwill is accounted is checked every year on impairment, and each

time when there is an indication that the unit has experienced impairment comparing the book value of a

unit with the realizable value. If the realizable value is lower than the book value, the impairment will be

recognized in the book value of the unit’s added goodwill and further in the other assets of the unit in direct

proportion to the book value of each asset in the unit. A special impairment recorded in goodwill, can not

be reversed later on.

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If the interest of the Picanol Group in the recognized net fair value of the identifi able assets, liabilities, and

contingent liabilities, exceeds the cost of the business combination, then:

(a) The identifi cation and the valuation of the identifi able assets , liabilities and contingent liabilities of the

acquirer and the cost valuation of the business combination will be assesses; and

(b) Any incidental surplus remaining after that assessment will immediately be recognized in the income

statement.

Ta n g i b l e f i x e d a s s e t s

Tangible fi xed assets are recognized in the balance sheet at the historical cost of acquisition less the accu-

mulated depreciation and any incidental impairment. The historical cost of acquisition includes the actual

purchase price plus any incidental costs incurred to bring the asset to its working condition and location for

it intended use.

Borrowing costs are not capitalized.

Any subsequent costs associated with tangible fi xed assets are generally immediately expensed within the

period in which they occur. Such costs are only capitalized if it can be demonstrated that the economic

benefi ts generated by this expenditure will be higher than their initial estimated performance standard, and

that the cost of the asset can be measured reliably.

Depreciation is calculated on a straight-line basis as follows:

• Buildings 20 years

• Equipment, plant and machinery 10 years

• Melting furnace 15 years

• Tooling, moulds 5 years

• Offi ce furniture 10 years

• Offi ce and computer equipment 4 years

• Vehicles 5 years

• Internal transport equipment 10 years

The residual value and the useful life of an asset are reviewed at least at the end of each fi nancial year and

if the expectations differ from previous estimates, adjustments are processed as an adjustment in estimate

in accordance with IAS 8 Principles of fi nancial reporting, changes in estimates and errors.71

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L e a s e a g r e e m e n t s

Financial lease

Lease agreements are classifi ed as fi nancial leases if the group substantially bears all the risks and rewards

associated with the agreement. Tangible fi xed assets acquired by means of a fi nancial lease are recognized

in the balance sheet at:

- The fair value of the leased asset, or if lower,

- The discounted value of the minimum lease payments, as stipulated at the start of the lease agreement.

The corresponding liability with the lessor is presented in the balance sheet as a fi nancial liability.

Lease payments are partly presented as fi nance costs and partly as settlement of the outstanding liability, so

that a constant interest charge in comparison with the outstanding capital is created over the full term.

The depreciation rules for assets acquired in form of a fi nancial lease are consistent with those for assets

acquired as property. If there is any uncertainty as to whether the company will own the asset at the end of

the lease, then the asset must be written off in full over the lease period or over the useful life should this

be shorter.

Operating lease

All lease agreements not classifi ed as fi nancial leases are operational leases. Payments made under an oper-

ating lease contract are expensed on a straight-line basis over the term of the agreement. Benefi ts received

or which will be received at the end or at the renewal of an operating lease will also be recognized on a

straight-line basis as a reduction of the rental costs over the lease term.

I m p a i r m e n t o f t a n g i b l e a n d i n t a n g i b l e a s s e t s

The assets of the Picanol Group, other than the inventories, the deferred tax assets, the personnel benefi ts

and fi nancial instruments, are reviewed for impairment, if there are indications that the carrying amount of

an asset or a cash generating unit might possibly not be recovered.

If the carrying amount of an asset or a cash generating unit exceeds its realizable value, an impairment loss

will be recognized in the income statement.

The realizable value of an asset or of a cash generating unit is equal to the highest fair value minus the costs

to sell and value in use of the asset or of a cash generating unit, whereby the fair value is equal to the amount

that can be obtained from its sale in a transaction between knowledgeable, willing, and independent parties,

and of which the going concern value corresponds with the discounted value of the estimated future cash

fl ows which would be expected to fl ow from the asset or a cash generating unit.

Impairment losses recognized in previous fi nancial years are offset in the income statement if there are any

indications that a previously recognized impairment of an asset no longer exists or has decreased. Impair-

ment losses on goodwill are not reversed.

A v a i l a b l e - f o r - s a l e f i x e d a s s e t s

Fixed assets or groups of assets that are being disposed of, are classifi ed as available for sale if their carrying

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amount will primarily be realized in a sale transaction and not through its continued use. This only applies

when the assets (or the group of assets being disposed of) are immediately available for sale in their present

condition and if the sale is highly probable. A sale is only considered as highly probable if the appropriate

management level has committed itself to a plan to sell the asset.

Fixed assets or group of assets which are being disposed of, are valued at the lower of carrying amount of

fair value minus the sales costs.

B o r r o w i n g c o s t s

All borrowing costs are expensed in the period in which they are incurred.

I n v e n t o r i e s

Inventories are valued at the lower of cost or market value. The realizable value is the estimated sale price

within the operational framework less the estimated costs for completion and the costs that are necessary

to achieve the sale.

The Picanol Group uses an inventory valuation method which approaches the FIFO method.

The cost of the inventory includes all the purchase costs, conversion costs, and any other costs necessary to

bring the inventory to their present location condition.

M i n o r i t y i n t e r e s t s

Minority interests are a share in the profi t or the loss and the net assets of a subsidiary which are attributable

to the equity interests which are not held directly via subsidiaries by the parent company.

At the time of acquisition, the minority interest is initially recognized at the minority share of the fair value

of the identifi able assets, liabilities and contingent liabilities of the acquirer on the date of the acquisition.

This will later also include the minority share of the profi ts or losses.

P e n s i o n s a n d s i m i l a r l i a b i l i t i e s

The group primarily has defi ned contribution plans as well as defi ned benefi t plans in Picanol NV and

Proferro NV.

Defi ned contribution plans

The contribution liabilities to the defi ned contribution plans are expensed by the group in the income state-

ment within the relevant period.

Defi ned benefi t plans

For defi ned benefi t plans the pension liability of the fi nancial year has to be calculated on the basis of the

‘projected unit method’.

The amount recognized as a net liability of a defi ned benefi t plan is the net total of the following amounts:

(a) the discounted value of the gross liability in respect of defi ned benefi t plans at the balance sheet date;

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(b) plus any actuarial gains (less any actuarial losses) that have not been recognized as a result of the ap-

plication of the ‘corridor’ approach

(c) less any unrecognized pension costs of past service;

(d) less the fair value at the balance sheet date of possible investment funds, from which the liabilities must

be directly settled.

The corridor approach entails that the actuarial gains and losses which, at the end of the previous reporting

period, exceeded the largest amount of 10% of the discounted value of the gross liability in respect of the

defi ned benefi t rights on that date and 10% of the fair value of the investments funds on that date, are rec-

ognized in the income statement over the expected average remaining service lifes of the plan participants

involved.

The discounted value of the gross liability in respect of defi ned benefi t plans is calculated by discounting

the gross liabilities at a discount rate which is based on the market yield of high quality company bonds at

the balance sheet date.

A provision for current early retirements is recognized as a liability and as charge if the entity has demon-

strably committed itself to either:

(a) the termination of the employment of an employee or a group of employees prior to the normal pension

date; or

(b) the settlement of redundancy payments as a result of an offer made to the employees to encourage vol-

untary redundancy.

If redundancy payments are due only 12 months at least after the balance sheet date, they will be discounted.

If an offer is made to encourage voluntary redundancy, the valuation of the redundancy payments will be

based on the number of employees who are expected to accept the offer.

No provision has been made for this in view to the fact that the Picanol Group does not have to provide any

constructive liability for future early retirement.

P r o v i s i o n s

Provisions are recognized at the balance sheet date if the group has a present obligation (enforceable by

law or constructive) due to a past event, and if it is probable that this liability will lead to a future outfl ow

of resources which in themselves hold economic benefi ts, when the liability will be settled, and if a reliable

estimate can be made of the amount of the obligation.

Provisions are recognized at the best estimate of the expenditure required to settle the existing obligation

at the balance sheet date.

Provision for warranty cost

A provision for warranty cost will be made for products under warranty. This is made on the basis of histori-

cal data related to repairs and returned goods.

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Provision for restructuring

A provision for restructuring will only be made if the group has drawn up a detailed and formal restructur-

ing program and if the expectation is being created with the relevant parties that the group will be imple-

menting the restructuring program, either by the group already having started its implementation, or by

having informed the relevant parties of its main features prior to the balance sheet date.

F i n a n c i a l i n s t r u m e n t s

From 1 January 2005:

Financial assets and fi nancial liabilities are recognized on the balance sheet of the group when the group

becomes party to the contractual provisions of the fi nancial instrument concerned.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair

value cannot be reliably measured.

After the initial valuation, these are valued at cost less any incidental impairment losses.

Available-for-sale fi nancial assets

At initial recognition, available-for-sale fi nancial assets are recognized at fair value plus any transaction

costs directly attributable to their acquisition. Following their initial recognition, these assets are valued at

fair value without any deduction of incidental transaction costs incurred by the sale or any other form of

disposal. Any profi t or loss generated by these assets is immediately recognized in the shareholders’ equity

with the exception of impairment losses and foreign currency gains or losses until the fi nancial asset is

derecognized. Henceforth, any cumulative gain or loss previously recognized through shareholders’ equity

is recognized through profi t or loss.

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by the group are classifi ed in accordance with the eco-

nomic reality of the contractual agreement and with the defi nitions of a fi nancial liability and shareholders’

equity instruments.

Equity instruments

Equity instruments issued by the company are recognized in accordance with the amounts received, minus

any direct issue costs.

Bank loans

Interest-bearing bank loans and fi xed advances are recognized on the basis of the amounts received, less

any direct issue costs. Financial charges, including premiums payable upon settlement or redemption and

direct issue costs, are recognized proportionally through the income statement in accordance with the ef-

fective interest method and are added to the recognized amount of the instrument to the degree that they are

not settled in the relevant period.

Derivatives

Picanol NV has foreign currency hedges in the form of forward contracts, partly as fair value hedge and

partly as cash fl ow hedge.

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Fair value hedges protect against foreign currency risks incurred by exchange rate fl uctuations in the fair

value of recognized assets and liabilities. The profi t and loss from both the revaluation of the hedging in-

strument (e.g. forward contracts) and the revaluation of their hedged assets and liabilities are immediately

recognized through the income statement.

Cash fl ow hedges protect against any incidental variation in cash fl ow which (i) is attributable to a particular

risk associated with a recognized asset or liability or a highly probable expected future transaction and (ii)

which could have an impact on the profi t or loss. The share of profi t or loss on the hedge instrument which

has been established as an effective hedge will immediately be recognized in the shareholders’ equity and

the non-effective share of the profi t or loss on the hedge instrument will be recognized through the income

statement.

If the hedging of an expected future transaction leads to the recognition of a non-fi nancial asset or a non-

fi nancial liability, or if an expected future transaction concerning a non-fi nancial asset or non-fi nancial

liability becomes a fi rm undertaking for which administrative processing of fair value hedge transactions is

applied, then the entity will take the following action:

• The entity transfers the associated profi ts or losses recognized in the shareholders’ equity to the income

statement in the same period or periods in which the acquired asset or the liability entered into has an

impact on the profi t and loss. However, if an entity expects that (part of) the profi t which is directly rec-

ognized in the shareholders’ equity , will no longer be realizable in one or several future periods, then the

entity must transfer the expected non-realizable amount to profi t and loss.

• The entity transfers the associated profi ts and losses which are recognized in the shareholders’ equity in

order to recognize these in initial cost or another book value of the asset or liability.

Financial instruments are not used at all for speculative purposes. The Picanol Group does not have any

other kind of fi nancial instruments.

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I I I .1.4. Revenue

G e n e r a l

Revenue is valued at the fair value of the consideration receivable.

Sale of goods

Revenue from the sale of goods is recognized when all the following criteria are met:

(a) the company has transferred all the substantial risks and rewards associated with ownership of the goods

to the buyer;

(b) the company retains neither continuing managerial involvement to the degree usually associated with

ownership nor effective control over the goods sold.

(c) the amount of revenue can be measured reliably.

(d) it is probable that the economic benefi ts associated with the transaction will fl ow to the company

(e) the costs already incurred or still to be incurred relating to the transaction can be measured reliably.

Rendering of services

If the result of a transaction involving the rendering of services can be measured reliably, the revenue as-

sociated with those services has to be recognized in direct proportion to the services rendered at the balance

sheet date.

Interest income from loans and export fi nance

Interest is recognized in accordance with the effective interest method (IAS39)

Dividends

Dividends are recognized when the shareholders’ right to receive the payment is established.

I n c o m e t a x e s

The tax expense of the period represents the sum of the current tax expense and deferred tax expense. The

current tax expense is based on the taxable profi t of the fi nancial year. Taxable profi t differs from the net

profi t as stated in the income statement because it excludes income or expenditure that is taxable or deduct-

ible in other years, and it further excludes components which are never taxable or deductible. The current

tax of the Picanol Group is calculated using tax rates enacted or substantively enacted at the balance sheet

date.

Deferred taxes are taxes payable or recoverable on the differences between the carrying amount of assets

and liabilities in the fi nancial statements and the corresponding tax bases used in the calculation of taxable

profi t, and these are recognized on the basis of the balance sheet liability method.

Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax

assets are recognized to the extent that it is probable that taxable profi ts will be available against which

deductible temporary differences can be utilized. Such assets and liabilities are not recognized when the

temporary differences originate from goodwill (or negative goodwill) or from the initial recognition of an

asset or of a liability in a transaction that is not a business combination, and which at the time of the transac-

tion, affects neither the accounting profi t not the taxable profi t or loss (taxable loss).

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Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiar-

ies, interests in joint ventures and associated companies, except when the Picanol Group is able to control

the reversal of the temporary difference and when it is probable that the temporary difference will not

reverse in the foreseeable future.

The carrying amount of the deferred tax assets is reviewed at each balance sheet and reduced to the extent

that is no longer probable that suffi cient taxable profi t will be available to allow all or part of the tax assets

to be recovered.

Deferred taxes are calculated at the tax rates which will probably be applied to the period in which the li-

ability is settled or the assets are realized. Deferred taxation will be debited or credited in the income state-

ment, except if it relates to components which are directly debited or credited in shareholders’ equity, in

which case the deferred taxes will also be recognized in shareholders’ equity.

Deferred tax assets and liabilities are recognized if they relate to income tax levied by the same tax author-

ity and if the group has the intention to settle its current tax assets and liabilities on a net basis.

I I I .2. CHANGES IN ACCOUNTING PRINCIPLES APPLIED

There were no changes in accounting principles applied in fi nancial year 2006 in comparison with fi nancial

year 2005.

I I I .3. CHANGES IN SCOPE OF CONSOLIDATION

The Picanol Group consolidation scope was modifi ed in 2006 as a result of the settlement of the companies

Picanol Overseas and the Swedish joint-venture Psi-Control. The settlement of these companies was initi-

ated and completed in 2006. Formerly, the company Picanol Overseas was integrally entered in the consoli-

dation of the Picanol Group, whereas the company Psi-Control was consolidated proportionally.

The companies Amtech and Picanol Korea were sold in 2006. Picanol Korea was before integrally entered

in the consolidation, whereas Amtech was consolidated proportionally.

During the fi nancial year 2005, the above mentioned companies had a contribution of the consolidated

net assets of -0.38 million euros, in the consolidated total assets of 1.94 million euro, in the consolidated

turnover for an amount of 1.89 million euros and an impact on the consolidated net result of -0.23 million

euros. On the contrary, these companies contribute in 2006 in the consolidated net assets for an amount of

0.10 million euros, in the consolidated total assets of 0.11 million euros, in the consolidated turnover for an

amount of 0.26 million euros and in the net-result of -0.74 million euros.

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On the other hand, the consolidation scope changed because of the establishment of the Romanian company

PsiControl Mechatronics Romania Srl and the Chinese company Picanol (Suzhou) Trading Co. Ltd in 2006,

both a 100% participation.

The companies Picanol (Suzhou) Textile Machinery and Picanol Tex-Machinery Systems merged in 2006

into the company Picanol SIP (Suzhou Industrial Park) Textile Machinery, where these companies each

represent a 100% participation. These new companies have no impact on the consolidated fi nancial state-

ments of 2006.

Finally , the settlement of BCN Laminados was initiated, which had no infl uence in 2006 on the scope of

consolidation.

I I I .4. SEGMENT INFORMATION

I I I .4.1. Business segments

The group consists of two main divisions – OEM Business and Weaving Machines – and the Head Offi ce.

Please refer to the fi rst section of this annual report for more details concerning these divisions, which

form the primary segments of the group. Sales between segments take place in accordance with the general

market conditions.

Segment information about these divisions is presented below.

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F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)

External sales 76,383 333,877 410,260

Inter-segment sales 88,037 891 -88,928 0

TOTAL SALES 164,421 334,767 -88,928 410,260

Segment profi t or loss 1,747 30,039 -21,942 9,845

OPERATING PROFIT 9,845

Financial result -1,042

PROFIT OR LOSS BEFORE TAXES 8,803

Income taxes -3,236

PROFIT OR LOSS AFTER TAXES 5,568

Share of Minority Interests -1

SHARE OF THE GROUP 5,569

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PICANOL GROUP (in ‘000 euros)

External sales 67,732 328,570 396,302

Inter-segment sales 63,891 -623 -63,268 0

TOTAL SALES 131,623 327,947 -63,268 396,302

Segment profi t or loss -1,952 18,765 -19,147 -2,334

OPERATING PROFIT -2,334

Financial result -806

PROFIT OR LOSS BEFORE TAXES -3,140

Income taxes -1,577

PROFIT OR LOSS AFTER TAXES -4,717

Share of Minority interests -1

SHARE OF THE GROUP -4,716

F o r t h e y e a r e n d i n g 2 0 0 5

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The increase of the total group operating profi t was caused, on the one hand, by an increase of the operating

profi t of the OEM Business segment (3.7 million euros), and by an increase of the operating profi t of the

segment Weaving Machines (11.3 million euros). On the other hand, the operating result of corporate has

decreased by 2.8 million euros.

The increase in the segment profi t within OEM Business is mainly caused by an increase in the profi t of

Manufacturing, which during 2005 had to deal with productivity problems.

The increase in the segment profi t within Weaving Machines is mainly caused by, on the one hand, an in-

crease in realizable margins through the effect of a product mix and, on the other hand, through effi ciency

improvements within the assembly department.

The increase in the segment loss of corporate is mainly caused by non-allocated other company costs in

2006 for an amount of 0.7 million euros against non-allocated other company costs in 2005 for 2.2 million

euros.

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Other information

F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)OEM

BusinessWeaving

Machines CorporateConsoli-

dated

Depreciation and amortization 7,808 2,877 3,427 14,112

Impairment losses recognized in profi t or loss 428 597 0 1,025

EBITDA 10,387 34,206 -18,395 26,199

Acquisitions 2,498 5,402 3,102 11,002

Restructuring 0 0 0 0

F o r t h e y e a r e n d i n g 2 0 0 5

PICANOL GROUP (in ‘000 euros)OEM

BusinessWeaving

Machines CorporateConsoli-

dated

Depreciation and amortization 4,984 8,094 2,578 15,656

Impairment losses recognized in profi t or loss 0 0 0 0

EBITDA 3,394 28,413 -17,403 14,404

Acquisitions 4,054 7,300 1,634 12,988

Restructuring 0 0 0 0

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Balance sheet

F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)OEM

BusinessWeaving

Machines EliminatiesConsoli-

dated

Segment assets 87,093 147,369 -25,061 209,401

Non-allocated assets 46,460

TOTAL CONSOLIDATED ASSETS 255,860

Segment liabilities 45,338 69,375 -25,061 89,653

Non-allocated liabilities 166,207

TOTAL CONSOLIDATED LIABILITIES 255,860

F o r t h e y e a r e n d i n g 2 0 0 5

PICANOL GROUP (in ‘000 euros)OEM

BusinessWeaving

Machines EliminatiesConsoli-

dated

Segment assets (*) 92,060 172,098 -30,775 233,383

Non-allocated assets 51,322

TOTAL CONSOLIDATED ASSETS 284,706

Segment liabilities (*) 47,052 91,206 -30,775 107,482

Non-allocated liabilities 177,224

TOTAL CONSOLIDATED LIABILITIES 284,706

(*) The segment assets and segment liabilities of OEM Business and Weaving Machines in 2005 were adjusted in order to make a comparison with 2006 possible.

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N o n - r e c u r r e n t e l e m e n t s p e r s e g m e n t

PICANOL GROUP (in ‘000 euros)OEM

BusinessWeaving

Machines CorporateConsoli–

dated

2006

Impairment -428 -597 0 -1,025

Restructuring costs 0 0 0 0

Other 155 2,430 -729 1,856

TOTAL -273 1,833 -729 831

2005

Impairment 0 0 0 0

Restructuring costs 0 0 0 0

Other 55 -175 2,201 2,082

TOTAL 55 -175 2,201 2,082

The non-recurrent elements are discussed in detail in Par. III.5.1. “other operating income” and III.5.2. “other operating expenses”.

I I I .4.2. Geographical segments

The group’s activities can mainly be divided between, on the one hand, Europe, America & Africa, and Far

& Middle East on the other hand.

The table below provides an analysis of the sales and fi xed assets of the Picanol Group according to the

geographical market.

S a l e s

PICANOL GROUP (in ‘000 euros) 2006 2005

Europe, America and Africa 158,393 144,825

Far & Middle East 251,867 251,477

TOTAL 410,260 396,302

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I n t a n g i b l e a s s e t s – t a n g i b l e f i x e d a s s e t s

PICANOL GROUP (in ‘000 euros) Net book value Acquisitions

2006 2005 2006 2005

Europe, America and Africa 63,191 71,636 7,717 11,447

Far & Middle East 4,686 2,459 3,285 1,541

TOTAL 67,877 74,095 11,002 12,988

I I I .5 INCOME STATEMENT

I I I .5.1. Other operating income

PICANOL GROUP (in ‘000 euros) 2006 2005

Reversal of impairment losses 0 0

Other 3,697 2,082

TOTAL 3,697 2,082

The other operating income of 2006 primarily comprises revenue resulting from capital gain realized on the

sale of the building of the Chinese subsidiary PST (2.2 million euros), a surplus value realized on the sale

of the building of PsiControl Mechatronics (0.3 million euros) and received repayments within Picanol NV

(0.2 million euros).

The other operating income of 2005 primarily comprises revenue from repayments of the former president

& CEO and some members of the Board of Directors (1.7 million euros) and reversing of restructuring

provisions (0.4 million euros)

Overview of other operating income of sold or settled companies:

(in ‘000 euros) 2006

Amtech -138

Picanol Korea 138

PSI-Control -54

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I I I .5.2. Other operating expenses

PICANOL GROUP (in ‘000 euros) 2006 2005

Addition of impairment losses 1,025 0

Restructuring costs 92 0

Other 1,749 0

TOTAL 2,866 0

I m p a i r m e n t

Based on assumptions made regarding impairment, the Board of Directors has studied and evaluated the

carrying amount (i) intangible assets, (ii) the goodwill and (iii) the tangible fi xed assets. Except for BCN

Laminados (cf. infra) the Board of Directors has evaluated that no additional impairment losses should be

recognized.

In 2006 an impairment loss was recognized on the remaining consolidation goodwill of the company BCN

Laminados (0.4 million euros), because the settlement of this company was initiated in 2006.

In addition, an impairment was recognized on a license acquired for the development of a new machine

platform (0.5 million euros) and capitalized development costs regarding this platform (0.06 million euros).

The development of this machine was stopped during 2006.

O t h e r

The other operating expenses of 2006 primarily comprise payments made by Picanol NV to minority share-

holders according to the settlement agreements of March 2006 (1.2 million euros).

I I I .5.3. Operating result

PICANOL GROUP (in ‘000 euros) 2006 2005

Sales 410,260 396,302

Purchases and changes in inventories -212,032 -205,325

Amortization, depreciation and impairment -14,112 -15,656

Amounts written off on inventories & receivables -704 -717

Other goods and services -75,908 -80,928

Personnel costs -98,757 -97,727

Provisions 267 -365

Other operating income 3,697 2,082

Other operating expenses -2,866 0

TOTAL OPERATING RESULT 9,845 -2,334

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The evolution of purchases and changes in inventories followed the evolution of the turnover in 2006 in

comparison to 2005. The turnover increased by 3.5% compared to 2005, whereas the purchases and com-

modities increased by 3.3%. This sales increase in relation to cost of materials partly explains the increase

in gross margin experienced by the Picanol Group in 2006.

The total decrease of 5.0 million euros in other goods and services and in personnel costs is mainly resulting

from major savings in overhead costs in 2006. These are partly compensated by an increase in personnel

costs compared to 2005 by 1.0 million euro.

I I I .5.4. Financial result

PICANOL GROUP (in ‘000 euros) 2006 2005

Interest on export fi nance -1,544 -1,642

Interest on other loans -859 -1,409

Interest on fi nancial leases -768 -765

Total borrowing costs -3,171 -3,817

Interest income from bank deposits 589 379

Interest income from fi nancial receivables 1,963 2,269

Total interest income on fi nancial receivables and cash 2,552 2,647

Interest income/(charges) -619 -1,169

Exchange rates differences 292 1,423

Profi t or loss on fi nancial instruments 237 0

Other fi nancial income 528 1,423

Exchange rate differences -951 -692

Loss on revaluation of fi nancial instruments 0 -368

Other fi nancial expenses -951 -1,060

FINANCIAL RESULT -1,041 -807

In 2006, the consolidated interest expenses decreased by 0.6 million euros compared to 2005, primarily the

result of a substantial repayment of loans in Picanol NV during 2006.

The negative evolution of the exchange rate of the USD and RMB against the EUR in 2006 resulted in a

decrease of the other fi nancial result by 0.8 million euros in relation to 2005.

The unrealized profi t on fi nancial instruments relates to foreign currency hedges in the form of forward

contracts within Picanol NV. These primarily relate to forward sales contracts, whereby USD and the JPY,

to a lesser degree, are sold forward. The forward contracts, for which there is no underlying balance sheet

position, are treated as cash fl ow hedges. These positions are recognized in view of orders placed but not

yet invoiced.

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I I I .5.5. Income taxes

I N C O M E TA X E X P E N S E

Recognized in the income statement

PICANOL GROUP (in ‘000 euros) 2006 2005

Current tax

TOTAL -1,828 -5,584

Deferred tax:

(Under)/ over provided in previous year 0 -220

Recognition and reversal of temporary differences 1,208 1,326

Utilization of previous years’ losses -2,790 -263

Deferred tax on current year’s losses 174 3,164

TOTAL -1,409 4,007

TOTAL INCOME TAXES -3,236 -1,577

Effective tax rate reconciliation

PICANOL GROUP (in ‘000 euros) 2006 % 2005 %

Profi t before tax and before income from associates 8,803 -3,140

Tax at the applicable tax rate of 33.99% -2,992 33.99% 1,067 33.99%

Tax effects of non-deductible expenses

Non-deductible depreciation on goodwill and intangible assets -146 1.66% 0 0.00%

Non-tax-deductible expenses -1,435 16.30% -2,149 -68.44%

Other 50 -0.57% -78 -2.48%

Tax effects of tax-exempt revenues

Non-taxable dividends received from non-consolidated entities 0 0.00% 0 0.00%

Non-taxable fi nancial and other income 0 0.00% 0 0.00%

Other 771 -8.75% -297 -9.46%

Deferred tax effect resulting from a change in tax rates -153 1.74% -11 -0.36%

Tax effects of corrections to deferred and current tax, concerning previous periods 359 -4.08% -335 -10.67%

Effects of different tax rates of group entities in other jurisdictions 499 -5.67% 122 3.87%

Tax effect of utilization of tax losses not previously recognized 0 0.00% 160 5.08%

Valuation allowance on deferred tax assets -190 2.16% -55 -1.75%

Tax expense and effective tax rate for the period -3,236 36.76% -1,577 -50.22%

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Deferred tax income/ (expenses) recognized directly in shareholders’equity

PICANOL GROUP (in ‘000 euros) 2006 2005

On effective portion of changes in fair value per 01/01/2005 0 0

TOTAL 0 0

D E F E R R E D TA X

Recognized deferred tax

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Deferred

tax assetsDeferred

tax liabilitiesDeferred

tax assetsDeferred

tax liabilities

Intangible assets 0 -1,512 56 -1,516

Tangible fi xed assets 133 -7,781 275 -9,118

Inventories 587 -810 580 -576

Other assets 82 -68 0 -32

Employee benefi ts 678 0 799 -4

Other provisions 1,080 0 454 0

Other liabilities 236 -265 197 -90

Tax losses carry-forward/tax credits 1,655 0 4,266 0

Other adjustments 0 -314 13 -69

TOTAL 4,451 -10,750 6,640 -11,405

Valuation allowance 0 0 -19 0

Set-off (*) -1,677 1,677 -3,821 3,821

TOTAL (As stated in the balance sheet) 2,774 -9,073 2,800 -7,584

(*) In accordance with IAS 12 (Income Tax), deferred tax assets and deferred tax liabilities should, under certain conditions, be offset against each other.

The deferred tax adjustment as per 31/12/2006 in relation to the end of 2005 is primarily due to :

• A realized tax profi t of Picanol NV in 2006, resulting in the total reversal of the deferred tax for an amount

of 1.81 million euros. These deferred tax assets were originally recognized per 31/12/2005 as the result of

the tax loss of Picanol NV in 2005.

• Realized tax profi ts of mainly Proferro NV and Verbrugge NV in 2006, resulting in the reversal of the

deferred tax assets in 2006 for a total amount of 0.98 million euro.

The Picanol Group no longer holds joint ventures in 2006, compared to 2005 where they had an impact of

0.01 million euros on the consolidated deferred tax assets.

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Non-recognized tax loss carry-forward, classifi ed by due date:

PICANOL GROUP (in ‘000 euros) 2006 2005

Within 1 year 0 0

Within 2 years 0 0

Within 3 years 0 0

Within 4 years 0 0

Within 5 years or more 246 0

Without time limit 1,168 612

Deferred tax assets with valuation allowance, relate to the following elements as at closing date fi nancial

year 2006:

PICANOL GROUP (in ‘000 euros)Gross

amount

Total deferred tax

assets

Recognized deferred tax

assets

Non-recognized

deferred tax assets

Tax loss carry-forward 1,414 481 0 481

Inventories 0 0 0 0

Other temporary differences 0 0 0 0

TOTAL 1,414 481 0 481

Deferred tax liabilities not recognized by the group and relating to the following elements as at 31 december

2006:

No liabilities or assets were recognized for temporary differences relating to undistributed earnings of sub-

sidiaries and joint ventures because the group is in control of the reversal of the temporary differences and

it is probable that such differences will not reverse in the foreseeable future.

I I I .5.6. Dividends

Amounts recognized as distribution to shareholders in the reporting period:

No dividend was distributed for the fi nancial year 2005.

The Board of Directors will propose, at the Annual General Meeting of 18 April 2007, to distribute a gross

dividend of 0.32 euros per share for the fi nancial year 2006.

The proposed dividend is to be approved by the shareholders at the Annual General Meeting and is not

incorporated as a liability in this annual report.

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I I I .5.7. Basic earnings per share

From continuing and discontinued operations

The calculation of the basic and diluted earnings per share is based on the following data:

PICANOL GROUP (in ‘000 euros) 2006 2005

Net profi t or loss over the period 5,569 -4,716

Net profi t or loss from continuing operations 5,569 -4,716

2006 2005

(number of shares)

Ordinary shares per 01/01 5,900,000 5,900,000

Ordinary shares per 31/12 5,900,000 5,900,000

Weighted average number of outstanding ordinary shares 5,900,000 5,900,000

2006 2005

(in euros)

Basic earnings per share 0.94 -0.80

Basic earnings per share from continuing operations 0.94 -0.80

I I I .5.8. Diluted earnings per share

The diluted earnings per share of the Picanol Group are equivalent to the basic earnings per share, both for

the fi nancial year 2006 and 2005.

PICANOL GROUP (in ‘000 euros) 2006 2005

Profi t or loss over the period 5,569 -4,716

Profi t or loss attributable to the ordinary shareholders of the company 5,569 -4,716

Weighted average number of outstanding ordinary 5,900,000 5,900,000

Weighted average number of shares for the diluted earnings per share 5,900,000 5,900,000

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(in ‘000 euros) 2006 2005

Diluted earnings per share 0.94 -0.80

Diluted earnings per share from continuing operations 0.94 -0.80

I I I .6. BALANCE SHEET

I I I .6.1. Intangible assets

F o r t h e y e a r e n d i n g 2 0 0 6 :

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period

Gross book value 4,360 16,670 0 0 0 21,030

Accumulated depreciation -627 -9,116 0 0 0 -9,743

Accumulated impairment 0 -429 0 0 0 -429

Net book value 3,733 7,125 0 0 0 10,858

Movements during the reporting period

Acquisitions 869 596 0 0 0 1,464

Expensed depreciation -553 -2,495 0 0 0 -3,048

Impairment -64 -533 0 0 0 -597

Sales and scrapped 0 -32 0 0 0 -32

Transfers 0 0 0 0 0 0

Exchange rate differences 0 -35 0 0 0 -35

At the end of the reporting period 252 -2,500 0 0 0 -2,248

Gross book value 5,229 16,042 0 0 0 21,271

Accumulated depreciation -1,180 -10,884 0 0 0 -12,063

Accumulated impairment -64 -533 0 0 0 -597

Net book value 3,985 4,625 0 0 0 8,610

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The acquisitions of the total intangible fi xed assets within the Picanol Group in 2006 are primarily a result

of on the one hand the further capitalization of the development costs within Picanol NV and the acquisition

of software, also within Picanol NV, on the other hand.

The acquisitions of 2006 comprise ‘internally generated intangible assets’ for an amount of 0.9 million eu-

ros. ‘Internally generated intangible assets’ comprises all the capitalized development costs within Picanol

NV.

The total net book value of the intangible assets at 31 December 2006 primarily consists of the following

components:

• Capitalized development costs of Picanol NV for a net book value of 4.0 million euros. These develop-

ment costs are depreciated over a period of 5 years.

• Know-how acquired with the acquisition of Te Strake Textile amounting to a net book value of 0.9 million

euros. This know-how has a residual period of one year.

• Capitalized software within Picanol NV, including a capitalized ERP package, amounting to a total net

book value of 3.2 million euros at 31 December 2006. This ERP package was primarily capitalized during

the fi nancial year 2005 and 2006 and is depreciated over a period of fi ve years.

The total effect of the development costs recognized in the 2006 income statement amounts to net 0.3 mil-

lion euros.

Impairment loss, recorded in the IFRS opening balance sheet on the total net book value of the right of

the company PST in China to use the ground, was reversed in 2006 for an amount of 0.43 million euros,

because the PST building on this ground was sold by this company in 2006.

An impairment loss was recorded for a license, originally bought by Picanol NV for use on a machine of

which the development was stopped defi nitively in 2006. This impairment loss amounts to 0.5 million

euros. In addition, an impairment loss is recorded for the capitalized development costs for this machinery

platform for an amount of 0.06 million euros.

The depreciation of the intangible fi xed assets is recognized under the depreciation heading, partly as a

component of the cost of sales, and partly under the general and administrative costs, whereas the impair-

ment losses are recognized in the other operating income/expenses.

As per 31 December 2006, the intangible assets consisted of a pledge on a trade fund within Verbrugge NV

for an amount of 2 million euros. At the end of 2006, the intangible assets did not comprise any contractual

commitments.

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F o r t h e y e a r e n d i n g 2 0 0 5 :

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period

Gross book value 3,283 18,999 0 0 0 22,282

Accumulated depreciation -84 -8,254 0 0 0 -8,338

Accumulated impairment 0 -429 0 0 0 -429

Net book value 3,199 10,316 0 0 0 13,515

Movements during the reporting period

Acquisitions 1,077 1,542 0 0 0 2,619

Expensed depreciation -543 -2,902 0 0 0 -3,445

Impairment 0 0 0 0 0 0

Sales and scrapped 0 -1,864 0 0 0 -1,864

Transfers 0 0 0 0 0 0

Exchange rate differences 0 33 0 0 0 33

At the end of the reporting period 534 -3,191 0 0 0 -2,657

Gross book value 4,360 16,670 0 0 0 21,030

Accumulated depreciation -627 -9,116 0 0 0 -9,743

Accumulated impairment 0 -429 0 0 0 -429

Net book value 3,733 7,125 0 0 0 10,858

Intangible assets which comply with the recognition criteria of IAS 38 – Intangible assets are recognized

to the extent that future economic benefi ts are probable. If the realizable value of the intangible assets (i.e.

the higher of its fair value less the costs to sell and the present value of the future cash fl ows expected from

the continuing use of these assets and their disposal) is less than the carrying amount, then an impairment

loss will be recognized in accordance with IAS 36 – Impairment of assets.

The realizable value of a cash generating unit is equivalent to the highest fair value less the sales costs and

the operating value of the asset or cash generating unit, whereby the fair value is equal to the amount that

can be achieved from its sale at arm’s length, and for which the operating value is equal to the discounted

value of the estimated future cash fl ows which are expected to fl ow from the asset or cash generating unit.

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I I I .6.2. Goodwil l

PICANOL GROUP (in ‘000 euros) 2006 2005

At the end of the previous reporting period

Net book value 1,920 1,920

Movements during the reporting period

Acquisitions and changes to the consolidation scope 0 0

Impairment -428 0

Disposals and scrapped 0 0

Mergers and assets deals 0 0

Exchange rate differences 0 0

At the end of the reporting period -428 0

Net book value 1,492 1,920

The impairment loss recorded on the goodwill during the fi nancial year 2006 is the result of the initiation of

the liquidation of the group company BCN Laminados, resulting in a depreciation of the remaining good-

will consolidation on this partnership of 0.43 million euros.

The carrying amount of goodwill acquired in a business combination must be allocated on a reasonable

and consistent basis to each cash generating unit or smallest group of cash generating units in accordance

with IAS 36.

The realizable value of a cash generating unit is defi ned on the basis of the operating value. To calculate the

operating value, cash fl ow prognoses are used which are based on fi nancial budgets and projections over a

period of eight years. These projections comprise extrapolations based on the most justifi able percentage of

growth which must not exceed the average percentage of long-term growth for the sector in which the cash

generating unit is active, which in real terms is between 2 and 5%.

The management bases its assumptions on past performances and on its forecasts for future years. The dis-

count rate applied is based on the market interest rate (3.7% over a period of 5 years), and takes into account

a risk factor, which varies between 1.5% and 6% depending on the country.95

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I I I .6.3. Tangible f ixed assets

F o r t h e y e a r e n d i n g 2 0 0 6 :

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period

Gross value 36,909 175,905 11,867 1,283 1,003 226,967

Accumulated depreciation -9,507 -145,216 -7,848 -239 0 -162,810

Accumulated impairment -863 -57 0 0 0 -920

Net book value 26,539 30,632 4,019 1,044 1,003 63,237

Movements during the reporting period

Changes in the consolidation scope 0 0 0 0 0 0

Acquisitions 4,800 3,328 705 22 683 9,538

Expensed depreciations -1,727 -7,962 -1,622 -84 0 -11,395

Impairment 0 0 0 0 0 0

Sales and scrapped -586 -647 -190 0 -49 -1,473

Transfers 612 563 -29 68 -1,214 0

Exchange rate differences -74 -322 -102 -87 -52 -637

3,024 -5,040 -1,238 -82 -632 -3,969

At the end of the reporting period

Gross value 39,760 177,308 11,014 1,236 371 229,689

Accumulated depreciation -10,197 -151,717 -8,233 -274 0 -170,421

Accumulated impairment 0 0 0 0 0 0

Net book value 29,563 25,590 2,781 962 371 59,267

The total acquisitions of tangible fi xed assets amount to 9.5 million euros in comparison with 10.4 million

euros during the previous reporting period.

The acquisitions of 2006 comprise principally the construction of the new production plant for PsiControl

Mechatronics and Verbrugge for an amount of 2.1 million euros and the construction of the new building in

China for an amount of 2.7 million euros.

The sales and scrapped part of 2006 comprises principally the sale of the former production building of Psi-

Control Mechatronics with a net book value of 0.65 million euros and the sale of the tangible fi xed assets of

the joint-venture Amtech with a net book value of 0.22 million euro.

The decrease in the total net book value of the tangible fi xed assets is the result of a higher level of deprecia-

tion during the fi nancial year in relation to the acquisitions.

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The impairment loss, recorded in the IFRS opening balance on the total net book value of the former build-

ing of the partnership PST in China, was reversed in 2006 for 0.77 million euros because this building was

sold in 2006.

The impairment loss on machinery and equipment in the IFRS opening balance refers to the Chinese sub-

sidiary Amtech. This company was sold in 2006.

No additional impairment losses were recognized during the fi nancial year 2006.

The tangible fi xed assets do not comprise any ‘internally generated’ assets at 31 December 2006.

At 31 December 2006, the tangible fi xed assets comprise the pledge for 99% of the shares of Millentex NV

to the value of a loan of 2.6 million euros in USD.

At the end of 2006, the tangible fi xed assets do not comprise any contractual commitments.

F o r t h e y e a r e n d i n g 2 0 0 6 :

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period

Gross value 36,927 167,428 10,918 583 455 216,311

Accumulated depreciation -7,931 -136,699 -6,524 -67 0 -151,221

Accumulated impairment -863 -57 0 0 0 -920

Net book value 28,133 30,672 4,394 516 455 64,170

Movements during the reporting period

Changes in the consolidation scope 0 0 0 0 0 0

Acquisitions 134 7,645 867 250 1,473 10,369

Expensed depreciations -1,617 -8,892 -1,679 -145 0 -12,333

Impairment 0 0 0 0 0 0

Sales and scrapped -1 118 -42 0 0 75

Transfers -128 520 300 331 -1,023 0

Exchange rate differences 18 569 179 92 98 956

-1,594 -40 -375 528 548 -933

At the end of the reporting period

Gross value 36,909 175,905 11,867 1,283 1,003 226,967

Accumulated depreciation -9,507 -145,216 -7,848 -239 0 -162,810

Accumulated impairment -863 -57 0 0 0 -920

Net book value 26,539 30,632 4,019 1,044 1,003 63,237

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For the measurement of tangible assets, the principles relating to impairment of assets of IAS 36 and to use-

ful life of signifi cant components of assets of IAS 16 apply. For certain assets, such as land and buildings,

the fair value is used as the deferred cost (IFRS 1).

The reassessment of the useful life of certain asset components is based upon an industrial survey con-

fi rmed by the economic reality and the experience of peers reporting under IFRS.

The valuation of tangible fi xed assets in accordance with the principles of IAS 36 is carried out by the same

method as that for the intangible fi xed assets (III.6.1.).

I I I .6.4. Assets under f inancial lease

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Land and buildings - Gross value 9,858 9,858

Land and buildings - Depreciation -2,136 -1,643

Land and buildings - Total 7,722 8,215

Plant, equipment and machinery - Gross value 6,595 6,655

Plant, equipment and machinery - Depreciation -957 -708

Plant, equipment and machinery - Total 5,639 5,947

Furniture and vehicles - Gross value 2,613 2,613

Furniture and vehicles - Depreciation -1,723 -983

Furniture and vehicles - Total 890 1,630

Intangible assets - Gross value 177 177

Intangible assets - Depreciation -74 -38

Intangible assets - Total 104 139

Total assets under fi nancial lease 14,355 15,931

The assets under fi nance lease included in ‘land and buildings’ mainly consist of the fi nance lease of the

administration building of Picanol NV.

The assets under fi nancial lease placed in ‘Plant, equipment and machinery’ include primarily the produc-

tion line of Proferro NV and an automation line of Verbrugge NV.

Furniture and vehicles comprise principally hardware of Picanol NV under fi nance lease.

No considerable fi nancial lease-contracts were recorded during the fi nancial year 2006.

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I I I .6.5. Subsidiaries, joint ventures and associated companies

2006 Shareholding %

2006 2005

1. FULLY CONSOLIDATED ENTITIES

Belgium

Proferro NV Ter Waarde 50 , 8900 Ieper 99.99% 99.99%

PsiControl Mechatronics NV Rozendaalstraat 53 , 8900 Ieper 100.00% 100.00%

Verbrugge NV Ter Waarde 50 , 8900 Ieper 100.00% 100.00%

Millentex NV Ter Waarde 50 , 8900 Ieper 100.00% 100.00%

Melotte NV Industrieweg 2019 , 3520 Zonhoven 100.00% 100.00%

Gereedschapsmakerij Melotte NV Industrieweg 2019 , 3520 Zonhoven 100.00% 100.00%

France

Burckle et Cie SAS Rue de Bourbach-le-haut 9 , 68290 Bourbach-Le-Bas 100.00% 100.00%

Etablissements Lhenry SAS Zone Industrielle Le Temple , 42640 St Romain La Motte 100.00% 100.00%

Netherlands

Te Strake Textile BV Dr. H. Van Doorneweg 26 , 5753 PM Deurne 100.00% 100.00%

Germany

Günne Webmaschinenfabrik GmbH & CO, KG Möhnestrasse 2 , 59519 Möhnesee-Günne 100.00% 100.00%

Günne Webmaschinenfabrik GmbH Möhnestrasse 2 , 59519 Möhnesee-Günne 100.00% 100.00%

Spain

BCN Laminados SL Apartado de Correos no. 35 , 08430 La Roca del Vallés 100.00% 100.00%

Italy

GTP Milano Srl Via Archimede 31 , 20041 Agrate Brianza (Milano) 100.00% 100.00%

Turkey

GTP Istanbul Merkez Mah., Yildirim Bayazid Cad. 179/2 99.75% 99.75%

34197 Yenibosna - Istanbul

Romania

PsiControl Mechatronics Srl Campului Street 1, 505400 Rasnov, Brasov county 100.00% 0.00%

People’s Republic of China

Picanol (Suzhou Ind. Park) Textile Machinery Co. Ltd Fengting Road/ Songzhuan Road, SIP, Suzhou 100.00% 100.00%

GTP Shanghai 30 A, Aidu Road, Waigaoqiao FTZ, Shanghai 100.00% 100.00%

Picanol (Suzhou) Trading Co. Ltd Fengting Avenue/ Songzhuan Road, SIP, Suzhou 100.00% 0.00%

South Korea

Picanol Korea Co. Ltd 1120-10 , Joongri-Dong , Seo-Gu , Daegu 0.00% 100.00%

Indonesia

PT GTP Bandung Jl. Moh. Toha KM 5.3 , 56 40261 Bandung 99.00% 99.00%

Singapore

Picanol Overseas PTE Ltd Raffl es Place 20 17-00 , 048620 Singapore 0.00% 100.00%

USA

GTP Greenville Inc 1801 Rutherford Road , Greenville S.C. 29609 100.00% 100.00%

Mexico

GTP Mexico SA de CV Avena No 475 Col. Granjas Mexico , 08400 Mexico D.F. 99.99% 99.99%

Brazil

GTP São Paulo Rua do Tecelão 310 , 13478-721 Americana SP 100.00% 99.99%

2. PROPORTIONALLY CONSOLIDATED ENTITIES

Sweden

PSI-Control AB Ostergradsgatan 12 , 43153 Moelndal 0.00% 50.00%

People’s Republic of China

Amtech Precision Machinery (Suzhou) CO LTD Youxin Lu 18 , 215007 Suzhou , Jiangsu Province 0.00% 50.00%

3. NON-CONSOLIDATED ENTITIES

Belgium

Symatex CVBA A. Reyerslaan 80 , 1030 Brussel 34.00% 34.00%

Bedrijvencentrum Westhoek Industrielaan , 8900 Ieper 12.82% 12.82%

99

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I I I .6.6. Other f inancial investments

PICANOL GROUP (in ‘000 euros) 2006 2005

Fair value at the end of the previous reporting period 103 103

Movements during the reporting period

Changes in the consolidation scope 0 0

Acquisitions 0 0

Sales and disposals 0 0

Reductions in fair value 0 0

Exchange rate differences 0 0

Fair value at the end of the reporting period 103 103

This heading contains all the non-consolidated investments, which are also non-listed entities. The fair

value equals the historical cost corrected for durable impairment losses.

No movements took place in the other fi nancial investments during the fi nancial years 2006 and 2005.

I I I .6.7. Non-current receivables

PICANOL GROUP(in ‘000 euros)

31/12/2006 31/12/2005

Interest-BearingTrading

ReceivablesGuaran-

tees

Interest-Bearing

otherReceivables

Interest-BearingTrading

ReceivablesGuaran-

tees

Interest-Bearing

otherReceivables

At the end of the previous reporting period

Gross value 35,835 305 3,577 48,440 319 3,577

Accumulated amounts written off 0 0 0 0 0 0

Net book value 35,835 305 3,577 48,440 319 3,577

Movements during the reporting period

Changes in the consolidation scope 0 0 0 0 0 0

Acquisitions 5,747 50 0 10,546 0 0

Discount effect 0 0 0 0 0 0

Reimbursement 0 -56 0 0 -14 0

Write-off 0 0 0 0 0 0

Write-back 0 0 0 0 0 0

Transfers -19,678 0 -3,577 -22,675 0 0

Exchange rate differences 27 0 0 -476 0 0

Other 0 0 0 0 0 0

At the end of the reporting period

Gross value 21,931 299 0 35,835 305 3,577

Accumulated amounts written off 0 0 0 0

Net book value 21,931 299 0 35,835 305 3,577

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The interest-bearing trade receivables consist fully of the export fi nancing recognized by Picanol NV. The

fair value of this export fi nancing approaches the net book value, due to the fact that these receivables are

insured and are also interest-bearing at a market interest rate. These long-term receivables primarily con-

cern the following countries: Turkey, Brazil, Mexico, Poland and Egypt.

In 2005, the acquisitions of interest-bearing other receivables consisted of a long-term receivable on the

former President & CEO for an amount of 3.58 million euros. This amount falls due in October 2007. As a

consequence this was transferred from the long-term to the short-term receivables in 2006.

I I I .6.8. Inventories

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Raw materials and auxiliaries Gross value 45,383 44,323

Raw materials and auxiliaries Amounts written off -12,892 -12,161

Raw materials and auxiliaries 32,491 32,162

Goods in progress Gross value 15,773 17,439

Goods in progress Amounts written off -657 -2,097

Goods in progress 15,117 15,342

Finished goods Gross value 15,538 10,943

Finished goods Amounts written off -2,187 -641

Finished goods 13,352 10,302

Trade goods Gross value 0 0

Trade goods Amounts written off 0 0

Trade goods 0 0

Down payments Gross value 220 214

Down payments Amounts written off 0 0

Down payments 220 214

Contracts in progress Gross value 0 0

Contracts in progress Amounts written off 0 0

Contracts in progress 0 0

Total inventories 61,178 58,020

The increase of the amount written off in the consolidated inventories by 3.2 million euros is mainly due to

an increase in the inventories of fi nished machines at 31 December 2006 in comparison with 2005 which is

the result of a timing difference.

The increase of inventories written off recognized in the income statement over 2006 amounts to 0.8 mil-

lion euros.

At 31 December 3006, the inventories are not subjected to any pledges as security for any liabilities.

At the end of 2006, the Picanol Group has no contractual commitments relating to existing inventories.

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I I I .6.9. Trade receivables and other receivables

Trade receivables at the balance sheet date consist of the amounts to be received from the sale of goods and

the supply of services to the value of 69.3 million euros (2005: 76.9 million euros).

An allowance has been created for irrecoverable amounts from the sale of goods to the value of 8.3 million

euros (2005: 7.5 million euros). This allowance has been determined on the basis of past experience with

respect to non-payment.

Other receivables, at the end of 2006, consist mainly of a receivable on the former President & CEO for 3.8

million euros which falls due in October 2007 and a VAT receivable of 3.5 million euros at Picanol NV.

In addition, the other receivables comprise a multitude of smaller amounts in the other group companies.

The other receivables at 31/12/2005 (13 million euros) consist mainly of a VAT receivable of 5.7 million

euros and 3.2 million euros of prepaid income taxes as a result of a special tax levy with regard to a stock

option plan.

C r e d i t R i s k

The main current fi nancial assets of the group consist of cash and cash equivalents, trade receivables and

other receivables, and inventories, which represent the group’s maximum exposure to the credit risk associ-

ated with fi nancial assets.

The group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the bal-

ance sheet are not of allowances for doubtful debtors, estimated by the management of the group on the

basis of prior experience and their assessment of the current economic environment.

The credit risk on cash is limited, as the counterparties are banks, with high credit ratings assigned by in-

ternational credit-rating agencies.

I I I .6.10. Cash and cash equivalents

Cash and cash equivalents comprise cash retained by the group and short-term bank deposits with an origi-

nal maternity of maximum 3 months. The carrying amount of these assets is approximately equivalent to

their fair value:

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Short-term bank deposits – for maximum 3 months 0 0

Cash at bank and in hand 16,485 18,134

Total cash and cash equivalents 16,485 18,134

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I I I .6.11. Share capital

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Issued shares

5 900 000 ordinary shares without nominal value 7,400 7,400

Fully paid-up shares

5 900 000 ordinary shares without nominal value 7,400 7,400

I I I .6.12. Share premium

PICANOL GROUP (in ‘000 euros)

Balance at 31 December 2004 1,332

Premium on the issue of shareholders’ equity in 2005 0

Expenses on the issue of shareholders’ equity in 2005 0

Balance at 31 December 2005 1,332

Premium on the issue of shareholders’ equity in 2006 0

Expenses on the issue of shareholders’ equity in 2006 0

Balance at 31 December 2006 1,332

I I I .6.13. Pensions and similar l iabil i t ies

P E N S I O N P L A N S

Various entities within the Picanol Group operate defi ned benefi t plans and/or defi ned contribution plans.

The defi ned benefi t plans which typically provide retirement benefi ts related to remuneration and service

are only included in Belgian entities. These plans are insured.

D E F I N E D C O N T R I B U T I O N P L A N S – P R O V I S I O N S F O R D E F I N E D C O N T R I B U T I O N

P L A N S

The amounts contributed by the Picanol Group to the defi ned contribution plans:

PICANOL GROUP (in ‘000 euros) 2006 2005

Paid contributions 754 903

In 2005 and 2006, the premium payments only consist of recurrent amounts.

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D E F I N E D B E N E F I T P L A N S – P R O V I S I O N S F O R D E F I N E D B E N E F I T P L A N S

Reconciliation between the defi ned provision for employee benefi ts and net liability for defi ned benefi t

plans:

PICANOL GROUP (in ‘000 euros) 2006

Balance

Provisions – employee benefi ts – long-term 6,485

Provisions – employee benefi ts – short-term 1,035

Defi ned provisions not restored according to IAS19 891

Net liability for defi ned benefi t plans 6,629

The amounts recognized in the balance sheet in respect of the defi ned benefi t plans:

PICANOL GROUP (in ‘000 euros) 2006 2005

Defi ned benefi t obligations – funded plans 5,489 7,074

Fair value of plan assets -4,285 -5,359

Defi cit for funded plans 1,204 1,715

Defi ned benefi t obligations – unfunded plans 6,197 6,706

Unrecognized actuarial profi ts and losses -773 -1,081

Net liability at balance sheet date 6,629 7,340

Recorded in the balance sheet

Net liability at balance sheet date 6,629 7,340

The amounts recognized in the income statement in respect of the defi ned benefi t plans:

PICANOL GROUP (in ‘000 euros) 2006 2005

Current service charges 255 333

Interest charges 519 513

Expected return on plan assets -213 -205

Amortization of the actuarial losses (profi ts) 494 619

Losses (profi ts) on liability reductions -1,057

Losses (profi ts) on liability settlements 748

Net periodic pension charge 746 1,260

The actual return on plan assets in the current period 233 133

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Changes in the benefi t obligations:

PICANOL GROUP (in ‘000 euros) 2006 2005

Benefi t obligations at the beginning of the fi nancial year 13,780 13,096

Current service charges 255 333

Interest charges 519 513

Contribution of the participators 55 49

Actuarial (losses)/profi ts 239 1,109

Paid benefi t obligations -1,197 -1,309

Paid premiums -28 -11

Liability reductions of the plan -1,074 0

Liability liquidations of the plan -862 0

Benefi t obligations at the end of the fi nancial year 11,686 13,780

Changes in the fair value of plan assets:

PICANOL GROUP (in ‘000 euros) 2006 2005

Fair value of plan assets at the beginning of the fi nancial year 5,359 4,934

Expected return on plan assets 213 224

Actuarial (profi ts)/losses on plan assets 20 -91

Employer contributions 1,456 1,563

Member contributions 55 49

Paid benefi t obligations -1,197 -1,309

Paid premiums -28 -11

Liability liquidations of the plan -1,594 0

Fair value of plan assets at the end of the fi nancial year 4,285 5,359

The main actuarial assumptions used at the balance sheet date (weighted averages):

PICANOL GROUP 31/12/2006 31/12/2005

Discount rate 4.50% 4.00%

Expected return on plan assets 4.50% 4.00%

Estimated rate of salary increases 2.88% - 7.03% 2.88% - 7.03%

Defi ned - benefi t obligations

PICANOL GROUP (in ‘000 euros) 2006 2005

Defi ned – benefi t obligations – funded plans 5,489 7,074

Fair value of plan assets 4,285 5,359

Defi cit for funded plans 1,204 1,715

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I I I .6.14. Provisions

F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period 2,608 1,321 93 996 106 5,125

Movements during the reporting period

Increases 2,747 80 92 120 79 3,117

Utilizations -2,152 0 -75 -400 -6 -2,633

Write-backs -252 0 0 -366 -45 -663

Transfers 0 0 0 0 0 0

Exchange rate differences 0 0 0 0 0 0

At the end of the reporting period 2,951 1,401 110 350 134 4,946

Non-current provisions 10 1,401 18 0 29 1,459

Current provisions 2,941 0 92 350 105 3,487

Total 2,951 1,401 110 350 134 4,946

The provisions for product warranties primarily relate to warranties associated with the sale of weaving

looms. The provisions are calculated on the basis of historical costs of product warranties linked to the sup-

ply of goods and services. This provision is recalculated annually on the basis of actual costs incurred in

the previous fi nancial year.

The provision for environmental risks only covers pollution risks associated with land located in Belgium.

The change in the provision for litigations in 2006 comprises the provision created for the dissolution of

an agency contract and the reversal of a provision, that is no longer necessary, with reference to a patent

case.

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F o r t h e y e a r e n d i n g 2 0 0 5

PICANOL GROUP (in ‘000 euros)

At the end of the previous reporting period 2,717 1,300 669 496 10 5,192

Movements during the reporting period

Increases 2,202 21 86 500 106 2,916

Utilizations -2,311 0 -236 0 -10 -2,557

Write-backs 0 0 -426 0 0 -426

Transfers 0 0 0 0 0 0

Exchange rate differences 0 0 0 0 0 0

At the end of the reporting period 2,608 1,321 93 996 106 5,125

Non-current provisions 239 1,321 19 496 0 2,075

Current provisions 2,369 0 74 500 106 3,050

Total 2,608 1,321 93 996 106 5,125

I I I .6.15. Interest-bearing borrowings

F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)

Finance leases 2,091 5,261 6,378 11,640

Credit institutions 2,950 3,129 0 3,129

Export fi nance 18,123 18,661 0 18,661

Other loans 0 0 0 0

Total interest-bearing borrowings more than 1 year 23,163 27,051 6,378 33,430

Credit institutions 765

Total interest-bearing borrowings for maximum 1 year 765

Total short-term 23,928

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F o r t h e y e a r e n d i n g 2 0 0 5

PICANOL GROUP (in ‘000 euros)

Finance leases 2,150 6,676 6,822 13,498

Credit institutions 4,385 6,625 6 6,631

Export fi nance 20,966 30,865 0 30,865

Total interest-bearing borrowings more than 1 year 27,501 44,166 6,828 50,994

Credit institutions 8,010

Total interest-bearing borrowings for maximum 1 year 8,010

Total short-term 35,511

The group’s interest-bearing loans amount to 57.4 million euros as compared with 86.5 million euros at the

end of 2005.

The decrease in the interest-bearing loans in relation to 2005 is mainly due to a decrease in export fi nancing.

This was due to less new export fi nances being taken out, compared to export fi nances being reimbursed

during the fi nancial year 2006. In addition, a considerable part of the interest-bearing loans due within one

year were not renewed in 2006 and were refunded to the credit institutions.

The export fi nances due after one year were entered into at a fi xed rate. The outstanding balance entered

into was 89.5% in euros and 10.5% in USD. Their average remaining term at 31 December 2006 was 27

months for the loan in euros, and 23 months for the loan in USD.

The other interest-bearing loans due after one year are at a fi xed rate. The interest rate charge of these loans

varies from 4.6% to 4.7% per annum in euros, and from 6.8 % per annum in USD. At 31 December 2006,

34.3% of the loans entered into were in euros and 65.7% in USD.

The majority of the interest-bearing borrowings of the group are entered into and managed centrally by

Picanol NV.

The fi nance debts comprise a loan of 3.7 million USD by GTP Greenville Inc., a 100% subsidiary of Pica-

nol NV. The loan is subjected to the next “debt covenants” on the level of GTP Greenville:

a). Senior funded debt to EBITDA ratio: not more than 3.25 to 1.00 till 31/12/2004 and decreasing after-

wards;

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6I I I .6.16. Other amounts payable

F o r t h e y e a r e n d i n g 2 0 0 6

PICANOL GROUP (in ‘000 euros)

Duewithin the year

Due between1 and 5 years

Total

Customer deposits 0 0 0

Other amounts payable 0 0 0

Total other amounts payable 0 0 0

At the end of the fi nancial year 2006 the Picanol Group had no other amounts payable.

I I I .6.17. Obligations under f inance lease

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2006 31/12/2005 31/12/2005

Lease payments due within the year 2,671 2,091 2,780 2,150

Between 1 and 5 years 6,889 5,261 8,515 6,676

After 5 years 8,147 6,378 8,915 6,822

Total lease payments 17,707 13,731 20,210 15,648

Future fi nancial charges -3,976 0 -4,562 0

Present value of the lease obligations 13,731 13,731 15,648 15,648

Less payments due within the year -2,091 -2,150

Payments due after 1 year 11,640 13,498

The consolidated fi nancial leases primarily relate to the offi ce building of Picanol NV, the plant and equip-

ment of Proferro NV and Verbrugge NV, and the hardware and software of Picanol NV. The total interest

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b). Tangible net worth: not less than 9,000,000 USD;

c). Capital expenditures: not more than 1,200,000 USD;

d). Cash fl ow coverage ratio: not less than 1 to 1 till 30/09/2004 and decreasing afterwards;

e). Limitation on debt: no further amounts payable;

f). Dividends and management fees: not more than 2,000,000 USD;

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I I I .6.18. Derivative f inancial instruments

The Picanol Group manages a portfolio of derivatives in order to cover risks relating to exchange rate dif-

ferences resulting from operating and fi nancial activities. It is the company policy not to engage in specula-

tive or leveraged transactions or to hold or issue derivatives for trading purposes.

Picanol NV has foreign currency hedges in the form of forward contracts. These primarily concern forward

sales contracts, whereby the USD and the JPY, to a lesser degree, are sold forward. The fair value of these

forward contracts is recognized in the statutory accounts of Picanol NV to the extent that it relates to exist-

ing balance sheet positions.

Furthermore, the company and the group of companies hold another interest rate swap on the USD loan

entered into by GTP Greenville. The fair market value is recognized in the results.

O v e r v i e w o f f o r w a r d e x c h a n g e c o n t r a c t s a t 3 1 D e c e m b e r 2 0 0 6 ( - = i n c o m e e n + =

c h a r g e ) :

PICANOL GROUP (in ‘000 euros)Notional amount

Fair market value P/L impact

Forward purchase contracts < 6 months 0 0 0

Forward purchase contracts > 6 months 0 0 0

Sub-Total 0 0 0

Forward sales contracts < 6 months 4,286 4,424 -138

Forward sales contracts < 6 months 731 754 -23

Sub-Total 5,017 5,178 -161

Interest Rate Swaps (IRS) 3,000 3,037 -37

Sub-Total 3,000 3,037 -37

TOTAL 8,017 8,215 -198

charges vary between 5.8% and 16.5% per annum. The fair value of the fi nancial leases amounts to 13.7

million euros at the end of 2006 opposite to 15.7 million at 31 December 2005.

The decrease of the fair lease obligations is due to the fact that there were no considerable new lease obliga-

tions recorded during 2006.

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c h a r g e ) :

PICANOL GROUP (in ‘000 euros)Notional amount

Fair market value P/L impact

Forward purchase contracts < 6 months 0 0 0

Forward purchase contracts < 6 months 0 0 0

Sub-Total 0 0 0

Forward sales contracts < 6 months 1,254 1,216 38

Forward sales contracts < 6 months 0 0 0

Sub-Total 1,254 1,216 38

TOTAL 1,254 1,216 38

The adjustment to the fair market value of the fi nancial instruments is recognized in the income statement

under the heading “other fi nancial income and charges”.

I I I .6.19. Trade and other payables

Trade and other payables comprise outstanding amounts for trade purchases and current liabilities.

The decrease in trade and other payables from 3.1 million euros in 2006 as compared with 2005 is due to

a decrease in the trade payables because the other liabilities remained constant compared to 2005 (+ 0.5

million euros).

The decrease in trade payables (- 3.6 million euros) is primarily due to timing differences in submitted pay-

ments at the end of 2006 and 2005.

I I I .7. MISCELLANEOUS

I I I .7.1. Operating lease agreements

PICANOL GROUP (in ‘000 euros) 31/12/2006 31/12/2005

Payments due within the year 2,665 1,795

Between 1 and 5 years 4,836 3,455

After 5 years 100 639

Minimum future lease payments 7,601 5,889

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Operating lease payments represent rentals payable by the group for certain of its industrial and/or offi ce

properties and for some production, logistics and/or administration equipment.

An amount of 2.7 million euros was recognized as a rental cost in the income statement in the fi nancial year

2006, opposite to 1.7 million euros in 2005.

I I I .7.2. Events after the balance sheet date

See annual report page 20. These events have no material impact on the income statement or the sharehold-

ers’ equity of the group.

I I I .7.3. Related party transactions

OPPONENT KIND OF TRANSACTION

BALANCE SHEET POSITION

INCOME STATEMENT

Pasma NV Remuneration 0 -500,107

Yves Steverlynck Remuneration 0 -167,683

Comm. V.A. Berlau Remuneration 0 -240,000

Groep Buraco Settlement 0 -700,000

Mr. Jan Coene Miscellaneous 3,771,010 -31,413

Cimarron Corp. Rent 0 -423,121 USD

The total costs for Pasma NV include company car and a remuneration for Mr. Patrick Steverlynck in GTP

Greenville (54,000 USD).

The costs for Yves Steverlynck include insurance premium, company car and a one-off contribution in the

group insurance.

For other remunerations, see annual report page 45.

I I I .7.4. Remuneration of the management committee

See annual report page 45.

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I I I .7.5. Exchange rates

in euros Average exchange rates Closing exchange rates

ISO 2006 2005 2006 2005

Brazilian Real BRL 0.366106 0.336830 0.354610 0.360881

Swiss Frank CHF 0.634037 0.646036 0.622278 0.643087

Chinese Yuan (Renminbi) CNY 0.099588 0.098703 0.097286 0.105042

Indonesian Roopee (1000) IDR 0.086730 0.082292 0.084431 0.086237

Japanese Yen JPY 0.006808 0.007310 0.006372 0.007194

Mexican Peso MXN 0.072623 0.074338 0.069862 0.079327

Romanian Leu RON 0.284639 0.295508

Turkish Lira TRY 0.555605 0.599986 0.536481 0.628931

US Dollar USD 0.792288 0.807318 0.759301 0.847458

I I I .7.6. Personnel

31/12/2006 31/12/2005

In unitsFully

consolidatedProportionally

consolidated TotalFully

consolidatedProportionally

consolidated Total

Management 17 0 17 22 0 22

White-collars 726 0 726 686 5 691

Blue-collars 1,577 0 1,577 1,633 40 1,673

Average number of personnel employed 2,333 0 2,333 2,286 45 2,331

Average number of personnel employed in Belgium 1,488 0 1,488 1,465 0 1,465

Remuneration and social charges (in ‘000 euros) 98,757 0 98,757 97,649 78 97,727

I I I .7.7. Audit and non-audit services provided by the auditors

Overview of the audit fees and additional services provided to the group by the auditors and the entities as-

sociated to the auditors for the reporting period ended at 31 December 2006 – see annual report page 46.

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I I I .7.8. Contingent assets and l iabil i t ies

The Picanol Group has the following contingent assets and liabilities at 31 December 2006.

Picanol NV is in receipt of a pledge for 99% of Millentex NV shares in return for a loan in USD to the value

of 2.6 million euros.

I I I .7.9. Miscellaneous

E m i s s i o n R i g h t s

In 2005 the Picanol Group was granted emission rights. These rights comprise an immaterial amount,

which is therefore not recognized in the accounting.

In 2006 these emission rights remained negligible.

R i s k F a c t o r s

In accordance with Article 96, 1° of the Company Code, as amended by the Law dated 13 January 2006, the

company has provided a true overview of the development, the results, and the position of the company, as

well as a description of the main risks and uncertainties which it faces.

As a world player, the Picanol Group is faced with geo-political situations in which our customers fi nd

themselves. In addition, our fi nancial competitiveness is highly dependent on structural exchange rate dif-

ferences. Permanent technological development is also vital to safeguard our position as world player in

the sector.

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NVI V. S TAT U TO RY F I N A N C I A L S TAT E M E N T S

P I C A N O L N V

PICANOL NV (in ‘000 euros) 2006 2005

FIXED ASSETS 59,481 61,205

Intangible fi xed assets 2,939 3,746

Tangible fi xed assets 10,788 10,207

Financial fi xed assets 45,754 47,252

CURRENT ASSETS 127,594 148,159

TOTAL ASSETS 187,075 209,364

SHAREHOLDERS’ EQUITY 56,776 54,331

Capital 7,400 7,400

Share premium account 1,332 1,332

Reserves 43,656 43,657

Profi t carried forward 4,387 1,942

Investment grants 0 0

PROVISIONS AND DEFERRED TAXES 7,434 7,598

LIABILITIES 122,864 147,435

Amounts payable after one year 20,047 33,959

Amounts payable within one year plus accrued expenses and deferred income 102,817 113,476

TOTAL LIABILITIES 187,075 209,364

TURNOVER 324,566 302,118

OPERATING PROFIT 6,826 -5,288

FINANCIAL RESULTS -851 138

EXCEPTIONAL RESULTS -1,601 -1,625

TAXES -40 -3,191

PROFIT FOR THE FINANCIAL YEAR 4,334 -9,966

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NOTES TO THE STATUTORY FINANCIAL STATEMENTS

Notes to the balance sheet and income statements of the parent company Picanol NV

The balance sheet total of Picanol NV decreased with 22.3 million euros, from 209.4 million euros at the

end of 2005 to 187.1 million euros at 31 December 2006. This is mainly due to a considerable decrease in

export fi nance compared to 2005.

The turnover of Picanol NV increased by 7.4% in 2006 compared to 2005, from 302.1 million euros to

324.6 million euros. This positive evolution in turnover is mainly caused by an increase in the volume of

machines sold. In absolute value, the gross margin (operating revenue less the value of raw materials and

auxiliaries, services and various goods) increased from 54.4 million euros in 2005 to 69.1 million euros in

absolute value at the end of 2006. The gross margin in comparison to the turnover evolved from 18.0% in

2005 to 21.3% in 2005. This increase of the gross margin was caused on the one hand by an increase of the

realized margins on the weaving machines sold and on the other hand it was caused by the measures taken

to save costs. The operating result climbed by 12.1 million euros to 6.8 million euros at the end of 2006.

The net exceptional costs amounted to 1.6 million euros at the end of 2006, principally as a result of pay-

ments in the context of settlement agreements (1.2 million euros) and a depreciation of the participation

in the company BCN Laminados (0.9 million euros), because the settlement of this entity was started in

2006.

The net book value in associated companies and the receivables on the relevant companies were valued and

ratifi ed by the Board of Directors.

In accordance with Article 96, 1° of the Company Code, as amended by the Law dated 13 January 2006,

the company provides a true and fair overview of the development, the results, and the position of the com-

pany, as well as a description of the main risks and uncertainties which it faces.

As a world player, the Picanol Group is faced with geo-political situations which our customers have to

deal with and which they have to operate. In addition, our fi nancial competitiveness is highly dependent on

structural exchange rate fl uctuations. Permanent technological development is also vital to safeguard our

position as a world player in the sector.

Additional Audit Fees

See annual report page 46.

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NVBranch Offices

Picanol NV operates three branch offi ces: Picanol Beijing Representative Offi ce, Picanol Guangzhou Rep-

resentative Offi ce and Picanol Shanghai Representative Offi ce.

Financial instruments

Picanol NV practices foreign currency hedges through forward contracts. These forward contracts have a

total nominal value of 5.0 million euros, the positive market value of these instruments amounts to 0.2 mil-

lion euros at 31 December 2006. This market value is recognized in the income statement of the company at

31 December 2005 to the extent that it relates to existing balance sheet positions at 31 December 2006. The

forward contracts for which no underlying balance sheet position exists at 31 December 2005 are treated

as cash fl ow hedges. These positions are justifi ed by orders placed but not yet invoiced. For the fi nancial

year 2006, all outstanding forward contracts include cash fl ow hedges. Under no circumstances the use

of derivative instruments takes place for speculative purposes. The company and the group of companies

otherwise have no other form of fi nancial instruments whatsoever.

Confl icts of interest

As legally included in the Company Code and as prescribed in the Corporate governance Charter of the

Board of Directors of Picanol Group, the members of the Board of Directors are expected to inform the

chairman about the agenda items with which they have a direct or indirect confl ict of interest and they shall

not participate in the discussions or the decision-taking process of these items. In accordance with Article

523 Company Code a fi nancial confl ict of interest was drawn up at 23 March 2006 and at 13 February 2007.

For more details we refer to the chapter “Corporate Governance” in this annual report.

Report of the auditor

The statutory auditor has issued an unqualifi ed opinion on the statutory fi nancial statements of Picanol NV.

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R E P O R T B Y T H E A U D I TO R

Statutory auditor ’s report to the shareholders’ meeting on the consolidated f inancial statements for the year ended at 31 December 2006

To the shareholders,

As required by law and the company’s articles of association, we are pleased to report to you on the audit

assignment which you have entrusted to us. This report includes our opinion on the consolidated fi nancial

statements together with the required additional comments and information.

U n q u a l i f i e d a u d i t o p i n i o n o n t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s

We have audited the accompanying consolidated fi nancial statements of PICANOL NV (“the company”)

and its subsidiaries (jointly “the group”), prepared in accordance with International Financial Reporting

Standards as adopted by the European Union and with the legal and regulatory requirements applicable

in Belgium. Those consolidated fi nancial statements comprise the consolidated balance sheet as at 31 De-

cember 2006, the consolidated income statement, the consolidated statement of changes in equity and the

consolidated cash fl ow statement for the year then ended, as well as the summary of signifi cant accounting

policies and other explanatory notes. The consolidated balance sheet shows total assets of 255,860 (000)

euros and a consolidated profi t (group share) for the year then ended of 5,569 (000) euros.

The fi nancial statements of several entities included in the scope of consolidation which represent total

assets of 9,467 (000) euros and total sales of 10,257 (000) euros have been audited by other auditors. Our

opinion on the accompanying consolidated fi nancial statements, insofar as it relates to the amounts contrib-

uted by those entities, is based upon the reports of those other auditors.

The board of directors of the company is responsible for the preparation of the consolidated fi nancial state-

ments. This responsibility includes among other things: designing, implementing and maintaining internal

control relevant to the preparation and fair presentation of consolidated fi nancial statements that are free

from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting

policies, and making accounting estimates that are reasonable in the circumstances.

Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit.

We conducted our audit in accordance with legal requirements and auditing standards applicable in Bel-

gium, as issued by the “Institut des Reviseurs d’Entreprises/Instituut der Bedrijfsrevisoren”. Those stan-

dards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated

fi nancial statements are free from material misstatement.

In accordance with these standards, we have performed procedures to obtain audit evidence about the

amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on our

judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial state-

ments, whether due to fraud or error. In making those risk assessments, we have considered internal control

relevant to the group’s preparation and fair presentation of the consolidated fi nancial statements in order to

design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an

opinion on the effectiveness of the group’s internal control. We have assessed the basis of the accounting

policies used, the reasonableness of accounting estimates made by the company and the presentation of the

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NVconsolidated fi nancial statements, taken as a whole. Finally, the board of directors and responsible offi cers

of the company have replied to all our requests for explanations and information. We believe that the audit

evidence we have obtained, together with the reports of other auditors on which we have relied, provides a

reasonable basis for our opinion.

In our opinion, and based upon the reports of other auditors, the consolidated fi nancial statements give a

true and fair view of the group’s fi nancial position as of 31 December 2006, and of its results and its cash

fl ows for the year then ended, in accordance with International Financial Reporting Standards as adopted

by the EU and with the legal and regulatory requirements applicable in Belgium.

A d d i t i o n a l c o m m e n t s a n d i n f o r m a t i o n

The preparation and the assessment of the information that should be included in the directors’ report on the

consolidated fi nancial statements are the responsibility of the board of directors.

Our responsibility is to include in our report the following additional comments and information which do

not change the scope of our audit opinion on the consolidated fi nancial statements:

• The directors’ report on the consolidated fi nancial statements includes the information required by law

and is in agreement with the consolidated fi nancial statements. However, we are unable to express an

opinion on the description of the principal risks and uncertainties confronting the group, or on the status,

future evolution, or signifi cant infl uence of certain factors on its future development. We can, neverthe-

less, confi rm that the information given is not in obvious contradiction with any information obtained in

the context of our appointment.

• As mentioned in the notes to the fi nancial statements, we wish to draw the attention to:

- In accordance with the settlement agreements concluded on 16 March 2005 and as con-

sequence of the shareholder agreement and settlement agreement concluded on 23 March

2006, the company has accounted for the collected reimbursements under other income and

for the amounts paid under other expenses in the 2006 profi t and loss statement.

- In accordance with the reimbursement agreement dd 10 October 2004, Picanol NV has an

outstanding receivable on Mr. Jan Coene for an amount of 3,576,831.60 euros which is

recorded as short term other account receivable per 31 december 2006. We refer to the sub-

sequent events whereby Picanol NV accepted the taxation in tax year 2003 of the sign-up

premium paid to Mr. Jan Coene and the detaxation of the same amount in tax year 2005 in

order to obtain the repayment of the withholding taxes towards Mr. Jan Coene. The repay-

ment will be used to pay to outstanding receivables Picanol NV has on Mr. Jan Coene.

Brussels, 20 March 2007

The statutory auditor

DELOITTE Bedrijfsrevisoren / Reviseurs d’Entreprises

BV o.v.v.e. CVBA / SC s.f.d. SCRL

Represented by

William Blomme

Kurt Dehoorne

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The Picanol Group has been listed on the Euron-

ext Brussels exchange since 1966 under the code

PIC (ISIN code BE0003807246).

On 31 December 2006 the share capital was rep-

resented by 5,900,000 Picanol shares. During the

course of 2006 there was no change in the number

of shares. As regards the present capital structure,

on 31 December 2006 there were no share op-

tions, warrants or convertable bonds.

The stock exchange capitalisation on 31 Decem-

ber 2006 amounted to 73.28 million euros.

I N F O R M AT I O N F O R S H A R E H O L D E R S

SHARES AND LISTING

THE 1990S

At the beginning of 1990 Picanol pro-

duced a record number of machines and

scored its highest ever sales. But an abrupt

end to this success came in the second half of

the year, due to the downturn in the economy,

the recession in the USA and the Gulf crisis,

with many orders being cancelled and others

postponed. In the next few years more than

150 people left the company. Picanol did not

allow these setbacks to put it off its course,

but instead invested in new assembly lines,

new equipment and assembly robots. R&D too

continued to play an essential role. In

1992 the company introduced a new gen-

eration of weaving machines, the OMNI and

the DELTA.

In 1993 Picanol achieved ISO 9001 certifi ca-

tion, as a guarantee of the quality of its prod-

ucts and services. In the following year the

group expanded further with the setting up

of the joint venture Suzhou Picanol Textile

Machinery Works (STP). Assembly of weav-

ing machines began in China in 1995 with the

GA733, the Chinese version of the GTM-A. In

1997 Picanol introduced the Gamma, an entire-

ly new rapier weaving machine. The German

company Günne Webmaschinenfabrik was

acquired in 1998. The textile sector entered a

new downturn, and Picanol was restructured

as a result, with some 300 people losing their

jobs. In 1999 Picanol acquired the other 40%

of the shares in SPT and set up Picanol Suzhou

Textile Machinery Ltd (PST) as a fully-owned

subsidiary.

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Shareholder ’s diary

Payment of dividend 19 April 2007

Trading update Q1 16 May 2007

Announcement of half-yearly results 29 August 2007

Trading update Q3 24 October 2007

Announcement of annual results 19 March 2008

AGM 16 April 2008

J F M A M J J A S O N D

Stock closing price over 2006 (in euros)

Average daily volume over 2006

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Stock closing price over the last 4 years (in %)

Belgium All Shares Index over the last 4 years (in %)

2003 2004 2005 2006

Stock closing price over 2006 (in %)

Belgium All Shares Index over 2006 (in %)

J F M A M J J A S O N D

DIVIDEND

The dividend policy of the Picanol Group is based

on an annual judgement concerning the return for

shareholders, maintaining a free cashfl ow and op-

portunities for fi nancing further growth. On the

basis of these considerations, the Board proposes

to the Annual General Meeting to pay out a gross

dividend of 0.32 euros per share.

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U S E F U L I N F O R M AT I O N

2000-2006

After the downturn of the late 1990s

Picanol returned to profi t in 2000. The

OMNIplus was introduced as the successor

to the OMNI. In 2000 Picanol acquired a

larger stake in Protronic. A new corporate

organization was introduced, with global,

customer-oriented business units. There

followed a period of national and international

expansion, with a number of takeovers as part

of the strategic expansion of Picanol’s OEM

activities.

The considerable technical know-how that

Picanol has built up over the last decade

can also be applied to related or even totally

different sectors of industry. Consequently,

Picanol reaffi rmed its strategy of expanding

the sale of these technologies to third parties.

This diversifi cation built on the group’s

existing competencies, including knowledge

of and access to the textile markets, and

development and production know-how.

Verbrugge NV in Belgium and Steel Heddle

Inc. in the USA were acquired

in 2001. They were followed in 2002

by Te Strake Textile in the Netherlands and

Lhenry in France. The remaining shares in

Protronic and Melotte were acquired in 2002.

The new GamMax weaving machine was

presented in November 2002. In 2003 among

others Burcklé in France joined the group,

while GTP Bandung was set up in Indonesia,

GTP São Paulo in Brazil and GTP in Mexico.

The Picanol Group was adopted as the

collective name for all the group’s activities.

In 2004 a controversy arose concerning the

remuneration of the former President &

CEO. After a turbulent period Chris Dewulf

was chosen as the new President & CEO of

the Picanol Group in 2005, and a new Board

of Directors was appointed. Also in 2005 the

OMNIplus 800 airjet machine was introduced.

A new organization was implemented at the

beginning of 2006, with the emphasis on the

weaving machine activities and the OEM

business. Work on a new construction project

at K. Steverlyncklaan to house the Verbrugge,

PsiControl Mechatronics and R&D activities

began in March 2006. Meanwhile, more new

machines were introduced: the OMNIjet, the

OMNIplus 800 TC and the TERRYplus 800.

70YEARS

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ADDRESSES

BelgiumPicanol Ter Waarde 508900 IeperTel. +32 57 22 21 11Fax +32 57 22 22 20

Proferro Ter Waarde 508900 IeperTel. +32 57 22 21 11Fax +32 57 22 22 00

Verbrugge K. Steverlyncklaan8900 IeperTel. +32 57 22 28 97Fax +32 57 22 22 55

PsiControl MechatronicsK. Steverlyncklaan8900 IeperTel. +32 57 21 88 33Fax +32 57 21 88 55

Melotte Industrieweg 20193520 ZonhovenTel. +32 11 81 30 25Fax +32 11 81 39 54

BrazilGTP São Paulo Rua do Tecelão, 310 13478-721 Americana SPTel. +55 19 3478 9600Fax +55 19 3478 9608

FranceBurcklé Rue de Bourbach-le-Haut 968290 Bourbach-le-BasTel. +33 3 89 82 8989Fax +33 3 89 82 8359

Lhenry Zone Industrielle Le Temple42640 Saint-Romain-la-MotteTel. +33 4 77 71 31 04Fax +33 4 77 72 36 33

GermanyGünne Möhnestrasse 259519 Möhnesee-GünneTel. +49 29 24 9707 0Fax +49 29 24 9707 77

IndonesiaGTP BandungJl. Moh. Toha Km 5,3 no. 5640261 Bandung West Java Tel. +62 22 521 1865Fax +62 22 520 0591

I talyGTP Milano Via Archimede 3120041 Agrate BrianzaMilanoTel. +39 039 641 15 22Fax +39 039 688 12 47

MexicoGTP Mexico Avena No. 475 Col. Granjas México08400 Mexico DFTel. +52 55 56 57 1740Fax +52 55 56 57 0041

NetherlandsTe Strake Textile Dr. H. Van Doorneweg 26, 5753 PM DeurnePO Box 244 5750 AE DeurneTel. +31 493 326 222Fax +31 493 326 352

People’s Repubic of ChinaPicanol Beijing Representative Offi ceB0811, Hui Bin Offi ce BuildingNo. 8 Beichendong St. Chaoyang DistrictBeijing 100101Tel. +86 10 8498 3189Fax +86 10 8498 1905

Picanol Guangzhou Representative Offi ceRoom 701, Offi ce Tower China HotelLiuhua Lu, Guangzhou 510015Guangdong ProvinceTel. +86 20 86 266110Fax +86 20 86 666040

Picanol Shanghai Representative Offi ceRoom 618, Summit CenterNo 1088 Yan An Road WestShanghai 200052

Picanol SIP (Suzhou Industrial Park) Textile MachineryPicanol (SuZhou) Trading FengTing Road/Songzhuan Road, KuaTang,Suzhou Industrial Park, Suzhou 215122Jiangsu ProvinceTel. +86 512 6287 0688Fax +86 512 6287 0710

RomaniaPsiControl Mechatronics Srl Campului Street 1505400 RasnovBrasov CountyTel: +40-268-230081Fax: +40-268-230015

TurkeyGTP IstanbulMerkez Mah. Yıldırım Bayazıd Cad. No: 179/2 34197 Yenibosna - Istanbul Tel. +90 212 652 99 00Fax +90 212 652 99 30

United StatesGTP Greenville 1801 Rutherford RoadGreenville SC 29609PO Box 1867 Greenville SC 29602Tel. +1 864 288 5475Fax +1 864 987 0972

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GLOSSARY

Aftermarket The market for supplying additional products and services to weaving mills, in addition to the market for the sale of weaving machines (basic or primary market)

Airjet Airjet weaving machine

CFT Customer Focus Team

CNC-machine Computer Numerical Control. This refers to the computer controlled system of the machine tool

CRT Customer Relation Team

Denim Jeans fabric

Drive switched reluctance Switched reluctance motor technology

Drop wire Steel strip which is suspended from the warp thread. When a warp thread breaks, the drop wire drops due to its own weight activating the switch that stops the machine

Frame See weaving frame

Gravity point Foreign branch of the Picanol Group held as a subsidiary

GTP Global Textile Partner

Heddle Each warp thread runs through a heddle. The heddles are mounted in groups on the weaving frame

IAS International Accounting Standards

IFRS International Financial Reporting Standards

Man-machine interface Connection between operator and machine

Mechatronics Combination of mechanic, electronic and software systems

Nozzle Blower for air insertion, ensures the weft thread is inserted via an air jet

OEM Original Equipment Manufacturer, manufacturer of products or components for brand suppliers

PCB Printed circuit boards or printing plate

PST Picanol-Suzhou Textile Machinery Systems

PTS Picanol Tex-Machinery Systems

R&D Research & Development

Rapier Rapier weaving machine

Reed Series of drop wires which moves between the warp thread. The reed beats the weft thread against the weft.

SMD Surface mounted device (mounted directly onto the surface of printed circuit boards)

Terry (towel) Towel fabric

THT Trough-hole-technology, refers to the technology used for electronic components that involves the use of pins on the components that are inserted into holes drilled in printed boards (also called insertion)

Tire cord Fabric used to reinforce car tires

Versatility Property of a weaving machine enabling it to weave different types of fabrics

WCM World Class Manufacturing

Weaving frame The weaving frame or frame moves a warp thread up and down in a weaving machine

Weaving machine Machine on which a fabric is made using two groups of threads. The threads running lengthwise are known as warp threads, those running perpendicular to the warp threads are the weft threads

WTO World Trade Organization