Consolidated Annual Report for the
Business Year 2007

1 Business and general conditions

The company

Over the last 15 years, GFKL Financial Services AG (GFKL), founded in 1992, has developed into a leading provider of independent leasing and collection services. The product range is rounded off by technological services provided by the Software and Systems divisions. Via its operating subsidiaries, GFKL is therefore able to assist clients in financing investments, organizing processes and implementing measures for safeguarding liquidity during every phase of the business process.

Business activities in the Credit sector (leasing and factoring) comprise the financing and realization of movable investment goods in the micro, small and mid-ticket segments, project finance, and the securitization of receivables portfolios on the capital and money markets. The credit business is rounded off by the provision of insurance-related services. As a factor, the company also acquires cash receivables from goods deliveries and services. GFKL is represented by subsidiaries in the Credit sector in Germany, the Netherlands, England and Spain.

The Collection sector is divided into a banking and non-banking segment. The banking segment takes charge of the assessment, acquisition and realization of non-performing loans (NPL), both as a servicer for third parties and on its own account. In this context, the company services both collateralized loans and unsecured consumer loans. Further to the German market, business activities in the NPL segment also cover Spain and Portugal. The services provided by the collection companies in the non-banking segment cover a wide range of receivables classes: from bulk business with small amounts in the insurance and telecommunications sectors to processing current receivables from commerce, trade and industry.

The Software division is responsible for the development and distribution of software and internet applications for the insurance sector, credit and receivables management for financial service providers, dunning procedures in and out of court for major creditors and medium-sized companies, and enforcement proceedings for public bodies.

The services provided by the Systems segment cover the entire value chain for the leasing and lifecycle management of IT systems: financing solutions, installation, maintenance, repairs and the exchange and remarketing of IT systems.

The Group’s own process and financing expertise and the wide range of services provided by its business sectors enable GFKL to develop innovative products and services with which the company can actively accompany the process of change in the German financial services industry. This is marked by the growing significance of alternative forms of financing (for example leasing and factoring), the growing trend on the part of financial service providers towards outsourcing completely or partly processes, and deteriorating payment behavior in business with private and corporate customers, all of which require increasing professionalism as regards receivables management.

All products and services along the value chain are marketed individually. At the same time, GFKL utilizes cross-selling effects within the Group and combines individual products and services to create comprehensive solutions. With its very good positioning in individual markets alongside the combination of various segments, GFKL’s business model also limits concentration risks.

Legal foundations

Along with the holding company GFKL Financial Services AG, the GFKL Group consists of 52 fully consolidated subsidiaries and second-tier subsidiaries. Moreover, GFKL Financial Services AG participates directly or indirectly in six associated companies, and also has one other holding.

The Credit division comprises the wholly-owned subsidiaries Universal Leasing GmbH, ADA Financial Services GmbH & Co. KG (formerly RCU Leasing GmbH & Co. KG), ADA Financial Services Verwaltungsgesellschaft mbH (formerly RCU Leasing Verwaltungsgesellschaft mbH), SBL Mobilien GmbH, Proceed Securitization Services GmbH, Universal Factoring GmbH, debifact Factoring GmbH & Co. KG (formerly debifact.Debitoren-Factoring GmbH & Co. KG) and Universal Assekuranzservice GmbH (formerly Universal Vermietungs GmbH). In addition, the company holds 100% of shares in Universal Leasing Benelux B.V., Eindhoven (Netherlands), and Universal Leasing Ltd., Watford (England), as well as in Universal Asset Trading Ltd., Watford, and Admiral Leasing plc, Manchester (England), as wholly-owned subsidiaries of Universal Leasing Ltd. Moreover, Universal Leasing Ltd. acquired all shares in the Hanover Financial Group Ltd., London (England), with effect from March 1, 2007. GFKL Financial Services AG holds 80% of Universal Lease Iberia S.A., Seville (Spain).

The subsidiaries in the Collection sector are Proceed Portfolio Services GmbH, Sirius Inkasso GmbH, Domnowski Inkasso GmbH (formerly Domnowski Debitorenmanagement GmbH), Proceed Collection Services GmbH (formerly Hansen & Schucht Debitorenmanagement GmbH), Zyklop Inkasso Deutschland GmbH, INKASSO BECKER WUPPERTAL GmbH & Co. KG (formerly Inkasso Becker Wuppertal Dieter Becker GmbH & Co. KG). GFKL Financial Services AG holds 50% of Domusvenda Holding, SGPS, S.A., Lisbon (Portugal). With effect from April 2, 2007, the company acquired 95% of shares in Multigestión Portfolio S.L., Madrid (Spain). This company is the sole shareholder in the operative subsidiaries Multigestión Cartera 2004 S.A., Madrid, Multigestión Iberia S.A., Madrid, and Corfisa Financial Services S.A., Madrid.

By purchase agreement on August 30, 2007, the company acquired 48% each of HFI Finanz- und Investitions-Beratungsgesellschaft Hamm mbH, Hamm, and VR Inkasso Leasing & Consulting GmbH, Hamm (formerly Anlage-Rent Leasing & Consulting GmbH).

ABIT AG belongs to the Software segment. With effect from February 1, 2007, GFKL acquired all shares in GENEVA-ID GmbH, Hamburg (formerly ID Innovative Datenverarbeitung GmbH, Kevelaer). Pursuant to an agreement dated August 20, 2007, Wiese + Partner Unternehmensberatung GmbH, Wiese + Partner Software GmbH and Wiese + Partner Management Consulting GmbH, all in Hamburg, merged with GENEVA-ID GmbH as the receiving company. The merger became effective on being entered into GENEVA-ID GmbH’s commercial register on November 6, 2007. The merger was effected retrospectively as of January 1, 2007. The merger made has program service GmbH, Hamburg, a wholly-owned subsidiary of GENEVA-ID GmbH. Since carrying out the merger, GFKL Financial Services AG holds 75% of shares in GENEVA-ID GmbH; Wiese Consulting GmbH holds the remaining 25%. On August 20, 2007, GFKL and Wiese Consulting GmbH also concluded an option agreement concerning the acquisition of all of Wiese Consulting GmbH’s shares in GENEVA-ID GmbH by GFKL. According to this agreement, Wiese Consulting GmbH is entitled to tender up to 20% of its shares in GENEVA-ID GmbH (corresponding to 5% of the capital stock) to GFKL for sale from the time the option agreement is signed; the remaining shares may be tendered during the period from January 1, 2010 to December 31, 2012. Should Wiese Consulting GmbH not exercise its option to sell or only exercise it in part, GFKL will be entitled to acquire all shares in GENEVA-ID GmbH held by Wiese Consulting GmbH by purchase during the period from February 1, 2013 to December 31, 2014.

The Systems sector incorporates ADA – Das SystemHaus GmbH and Proceed Asset Trading GmbH.

Since January 1, 2007, GFKL Financial Services AG and the following companies comprise a taxable entity subject to trade tax and corporation tax on the basis of control and profit and loss transfer agreements: Proceed Portfolio Services GmbH, Sirius Inkasso GmbH, Proceed Securitization Services GmbH, Zyklop Inkasso Deutschland GmbH. Control and profit and loss transfer agreements relating to trade tax and corporation tax were concluded with Proceed Collection Services GmbH, Domnowski Inkasso GmbH and ABIT AG back in 2006; these are still valid. Moreover, control and profit and loss transfer agreements effective under commercial law existed with SBL Mobilien GmbH and Proceed Asset Trading GmbH during 2007; however, these expired at the close of December 31, 2007.

Shareholder structure

As of December 31, 2007, FI Equity Partners B.V., a wholly-owned subsidiary of ABN AMRO N.V., and MLQ Investors L.P., an indirect 100% subsidiary of the Goldman Sachs Group Inc., held 23.44% and 23.25% of shares in GFKL Financial Services AG respectively. The ERGO Versicherungsgruppe AG holds an indirect share of 15.88% via a 100% holding in ERGO companies VICTORIA Versicherung AG and Hamburg-Mannheimer Sachversicherungs AG. WestLB AG, Düsseldorf/Münster, also holds 4.67% of the share capital. 2.09% is held by GFKL Financial Services AG as own shares. These shares were tendered for sale to GFKL Financial Services AG by former shareholders in ABIT AG as part of the merger of ABIT AG with GFKL Financial Services AG. As part of its merger agreement with ABIT AG, GFKL Financial Services AG undertook to offer all former shareholders in ABIT AG the option of selling back their GFKL shares acquired during the merger. The remaining shares are spread between institutional and private investors, members of the Executive and Supervisory Boards and employees.

General economic conditions

Business in the euro zone continued to develop positively during 2007. The gross domestic product in the Euro-13 was 2.7% up on the previous year. This trend was reflected by the German economy, which recorded a growth rate of 2.5% in 2007. Strong foreign trade activities and lively domestic demand both contributed to developments in Germany. During the reporting period, the real economy therefore remained largely unaffected by the so-called subprime crisis, triggered on the money markets by a general reassessment of risks associated with securitized subprime mortgages in the US. In some phases of the period under review, the crisis caused a shortage of liquid funds in the banking system and made refinancing instruments more expensive.

The German leasing sector also profited from the real economy’s resistance to the subprime crisis and the ongoing weakness of the dollar. Initial estimates show that equipment investments in the economy as a whole rose by approximately 8% to € 216 billion as a result of high capacity utilization in the German economy. At the same time, the proportion of leasing-financed movables investments – the leasing ratio – rose to 23.3% (previous year 22.5%). As a result, the absolute movables leasing volume rose by just under 12% to € 50.3 billion in 2007 (previous year € 44.9 billion). Thus the leasing market once again recorded a dynamic growth stronger than the growth rates in the economy as a whole.

No reliable figures relating to the development of the European leasing market in 2007 were available at the time this report was compiled. However, a summary drawn up by the European leasing industry association disclosed an average annual growth rate in new leasing business of approximately 11% for the years from 1994 to 2006.

As in 2006, the level of debt and insolvencies in Germany developed unevenly: While the positive economic climate caused company insolvencies to fall by 10.4% to 27,490 cases (previous year 30,680), the number of consumer insolvencies rose by a significant 18.3% to 109,330 cases (previous year 92,450). According to a survey published in October 2007, the number of heavily indebted private persons amounted to 7.3 million. In this context, estimates assume that the debt volume in private households lies between € 208 billion and € 271 billion. Of this, outstanding debts amounting to approximately € 22 billion were handed over to collection companies for realization.

According to general estimates, the NPL market, i.e. the sale of non-performing loans to investors and collection specialists, recorded a slight drop in the high-level transaction volume during 2007. With German banks booking non-performing loans amounting to approximately € 150 billion, Germany nonetheless still heads the global list of countries with the highest volume of problem loans. During the first half-year of 2007, the factoring market with the sale of trade receivables recorded a marked growth rate of 25% with a sales volume of just under € 41 billion. In this context, the number of companies utilizing this alternative form of financing rose from 3,970 to 4,440 during this period.

Business development

Highlights

Consolidated revenues up 16.8% to € 1,204.9 million and consolidated earnings before taxes up 21.0% to € 32.0 million.
Continuation of the very positive growth in new leasing business, up 17.5% totally, and expansion of the share of foreign leasing business with growth on all European markets where the company has a presence.
Increase in the volume of non-performing loans serviced to € 11.3 billion (previous year € 7.5 billion). Conclusion of a strategic partnership with BAG Bankaktiengesellschaft.
Expansion of client base as a collection specialist in bulk business with small amounts. Commencement of foreign collection services.
Software and consulting competences for the insurance sector bundled in one subsidiary.

Credit sector

During the business year 2007, GFKL’s leasing business rose markedly from € 726.6 million to € 853.9 million. This corresponds to an increase of 17.5%. This gratifying development was supported by sustained organic growth on the domestic and foreign markets.

In Germany, GFKL booked incoming orders with a volume of € 517.4 million, thus exceeding the previous year’s figure of € 465.9 million by 11.1%. Particularly worth emphasizing in this context is the 13.3% growth in the subsidiary Universal Leasing GmbH’s project finance segment, i.e. in the financing of agreements in excess of € 250k. During the reporting period, the volume of new business in this segment amounted to € 266.0 million (previous year € 234.8 million). During the last business year, 23% of Universal Leasing GmbH’s credit decisions were made using the new software application for automated contract decisions (Automated Credit Information and Decision Application) developed in-house. This also led to a considerable reduction in the time needed to process client inquiries.

Activities in the Netherlands also developed gratifyingly. Here Universal Leasing Benelux B.V. booked a 12.1% increase in the volume of new business, which rose from € 85.9 million to € 96.4 million.

During the business year 2007, England became the GFKL Group’s largest foreign market. The subsidiary Universal Leasing Ltd., founded in 2005, procured new business amounting to € 141.6 million in just its second full business year. Organic growth accounted for € 131.4 million of this amount, corresponding to an increase of 30.3% compared to the previous year (€ 100.8 million). € 10.2 million of the new business came from a company acquisition.

The GFKL Group’s Spanish leasing company developed well during the period under review. The volume of new agreements concluded by subsidiary Universal Lease Iberia S.A. was 33.1% up, increasing significantly from € 74.0 million to € 98.5 million. Nevertheless, the high capital costs in this market mean that the company’s earnings position has not yet come up to GFKL’s expectations.

In all, no less than 39% of the volume of new business generated during 2007 was accounted for by GFKL’s foreign markets (previous year 36%).

Calculated from the total volume of new business generated during the reporting year, the leasing area with the highest volume was truck leasing with a share of 20.7% (€ 177.0 million), followed by passenger vehicles (15.5% or € 132.1 million), production machinery (8.5% or € 72.5 million), superstructures and containers (7.6% or € 65.3 million), and business equipment (7.1% or € 61.0 million).

Universal Factoring GmbH commenced operations at the beginning of 2007; this company specializes in the acquisition of receivables from goods deliveries and services. During the first year, the factoring volume acquired amounted to € 52.6 million. Further to operational developments, the company’s acceptance as the German Factoring Association’s 22^ndmember was also a significant milestone. This is the umbrella organization for Germany’s leading factoring providers, who together cover approximately 95% of the market. Universal Factoring sees its acceptance into the association just a short time after its foundation as a confirmation of the high standards achieved with correspondingly skilled staff and a modern infrastructure.

Collection sector

The high demand for professional collection services continued during the business year 2007. As the fourth-largest collection provider on the German market, the GFKL Group’s banking and non-banking segments both profited from this. At the same time, GFKL continued to develop its strategic competitive position by acquiring further holdings.

As of balance sheet date, the volume of non-performing loans accepted for processing (banking segment) amounted to € 11.3 billion (previous year € 7.5 billion). As regards the servicing of terminated consumer loans by Proceed Collection Services GmbH (PCS), one highlight of the year was the prolongation of an existing service agreement concluded with a major German bank. This mandate is one of the three largest assignments carried out by PCS. Moreover, the company acquired a number of unsecured loan portfolios on its own account; these include two larger packages with a nominal value totaling approximately € 180 million.

In the segment covering collateralized loans, 2007 saw two institutional investors award subsidiary Proceed Portfolio Services GmbH trustee mandates for processing 560 industrial loan commitments.

In October 2007, GFKL took an important step towards expanding its position on the German NPL market: as part of a strategic partnership, the company acquired a share of 48% each in two service companies belonging to BAG Bankaktiengesellschaft from Hamm. As a central competence center for processing non-performing and/or written-off loans, BAG holds a leading position as a servicer in the cooperative banking sector. With the companies HFI Finanz- und Investitions-Beratungsgesellschaft Hamm mbH and VR Inkasso GmbH, which will be managed by GFKL and BAG together as joint ventures, GFKL is aiming at expanding its position as a collection specialist on this market significantly.

GFKL’s foreign activities as an NPL specialist in Portugal developed well during 2007. In April, the company entered Spain as a new market. In the company’s opinion, this market’s early stage of development means that opportunities for expansion are very good. In just the first nine months, the company took over two large NPL portfolios for processing, consisting of approximately 360,000 loans in all. Activities in Austria were terminated after Bank Austria Creditanstalt awarded its mandate to a competitor.

In the collection sector’s non-banking segment, Sirius Inkasso GmbH enjoyed another successful business year. The company, which specializes in the collection of small receivables in bulk business, accepted its 1,000,000th receivable for processing in 2007. At the same time, the number of personnel rose to more than 100. In 2007, the company expanded its wide client base in the insurance sector, consisting of 15 mandates, to include clients in the telecommunications and commercial sectors.

At the beginning of 2007, the GFKL Group accelerated its foreign collection activities by taking over Wolter Inkasso OHG, which specializes in receivables collection abroad. As the exclusive German partner of the Global Credit Solutions Group (GCS), one of the most important international collection networks, the company collaborates with partners in more than 100 countries. For purposes of workflow optimization and the maximum exploitation of common strengths, Wolter Inkasso was integrated into GFKL subsidiary Domnowski Inkasso GmbH from Hamm.

As regards business in Germany, the conclusion of two distribution partnerships was particularly significant for Domnowski Inkasso GmbH. The company firstly reached an agreement with Buhl Data Service GmbH concerning the integration of its collection services into the services provided by the well-known software program “WISO-Kaufmann”. The company sees this as creating a significant multiplier effect in distribution terms. The same applies to the integration of Domnowski Inkasso’s collection services into intellectual-property-rights products offered by Neue Rechtsschutz Versicherungsgesellschaft AG (NRV). This means that insurance cover taken out by NRV’s clients will include services provided by Domnowski Inkasso as the company’s exclusive partner.

In 2007, the subsidiary Zyklop Inkasso Deutschland GmbH launched the InkassoCard. Zyklop Inkasso reimburses card holders all process costs incurred until the receivable is declared legally enforceable, insofar as it is not collected successfully within 60 days after receipt of the ruling. As far as the company is aware, this service is unique in Germany.

The subsidiary INKASSO BECKER WUPPERTAL GmbH & Co. KG (IBW) won an important mandate during the business year. In February, the company took over a total of 25,000 receivables with a nominal volume of € 7.5 million from a well-known mail order company.

As of the balance sheet date, the GFKL Group was servicing a receivables volume amounting to € 695.0 million (previous year € 500.3 million) in the collection sector’s non-banking segment.

Moreover, debifact Factoring GmbH & Co. KG, formerly a cooperative partner of IBW and now a GFKL subsidiary, concluded a general agreement with a leading franchiser in the solarium sector in February 2007. By the end of the year, 83 of the client’s 515 own solaria and chain franchise partners were debifact customers.

Software and Systems sectors

In March 2007, the GFKL Group took over ID Innovative Datenverarbeitung GmbH (ID), thereby bringing about a significant development in its software business. Founded in 1991, the Kevelaer-based company develops and distributes software components for financial service providers, especially for the insurance sector. ID and its applications are represented in 17 European countries, and the company was designated an IBM Premier Business Partner during the year under review. This means that ID holds a distinguished international position within the IBM organization, and as a partner profits from joint distribution activities and access to technical expertise.

In September 2007, GFKL bundled the Group’s software and consulting competences for the insurance sector in the subsidiary GENEVA-ID GmbH with the aim of creating synergies and providing customers with integrated solutions for the entire insurance process. This affected ID’s business activities as well as those of the Wiese + Partner group (Hamburg) and has program service GmbH (Hamburg/Mönchengladbach). The companies concerned will retain their locations. GENEVA-ID is domiciled in Hamburg. The company’s range of solutions covers scalable application products, business process outsourcing and individual IT projects. The name “GENEVA”, an abbreviation of “Generalisierte Versicherungs-Anwendungen“ (Generalized Insurance Applications), reflects the philosophy behind the company’s generalized approach to the development and distribution of solutions for the insurance sector.

Market preparations for the electronic insurance confirmation process, which will be obligatory for all new vehicle registrations from March 1, 2008 and obligatory for all other vehicle insurance processes from September 2008, were significant for the course of business at ID/GENEVA-ID. Moreover, the subsidiary successfully concluded the roll-out of IT systems in Italy, Spain and Belgium for the insurance division of a leading Japanese automobile group.

During the business year 2007, ABIT AG gained another major bank, one of Germany’s leading commercial banks, as a customer for its software applications of the ABIT Banknology© platform. The mandate involves process support in the workout segment. Moreover, during the business year 2007, ABIT successfully implemented a major process-optimizing project relating to charging-order processing at a major private bank in Germany.

In the Systems segment, 2007 saw subsidiary ADA – Das Systemhaus GmbH successfully conclude a series of major projects, such as the delivery and installation of IT systems for ITERGO/Münchner Rückversicherung.

Having gained 50 new customers in 2007, some of which generate high revenues, ADA succeeded in laying a good foundation for further growth in 2008. The strategic reorientation of the service/logistics organization and the associated amalgamation of sectors at the Essen site were also concluded successfully.

Sales

During the business year, the GFKL Group’s consolidated revenues rose by 16.8% from € 1,031.2 million to € 1,204.9 million. The Credit, Collection and Software segments all contributed to this increase, while the Systems segment booked a slight decline in revenues. The following table shows the development of sales in each business area:

In the Credit sector, 63% (€ 72.0 million) of the € 113.6 million increase in revenues was generated by long-term recurring business, while acquisition effects totaled € 41.6 million (37%). In contrast, the significant increase in revenues in the Collection segment is distributed almost equally between organic growth and acquisitions. The latter accounted for € 30.8 million (56%) of the increase in revenues.

The acquisition of ID Innovative Datenverarbeitung GmbH in February 2007 was a major factor influencing the increase in revenues in the Software division. The GFKL Group’s software and consulting competence for the insurance industry was bundled in this company, renamed GENEVA-ID GmbH, in 2007; its contribution to revenues amounted to € 14.1 million.

The revenues of € 146.3 million in the Systems sector were largely generated by ADA – Das SystemHaus GmbH, and were once again sustained by business with domestic customers in 2007. In this context, sales declined by approximatly € 18.0 million during the business year as expected. This was due above all to the increase in sales tax effected in 2007 and the resulting advance purchases made in 2006 by customers who are not entitled to deduct input tax.

Research and development

The GFKL Group carried out no superordinate research and development work during the business year.

Personnel

Calculated according to posts, the GFKL Group employed an average of 2,453 personnel in the business year 2007 (previous year 1,752 personnel); there were 2,624 personnel as of the balance sheet date (previous year 2,088). Moreover, the holding and its subsidiaries were training a total of 64 apprentices as of December 31, 2007 (previous year 53).

In order to strengthen a common company culture and foster team spirit, GFKL carries out an annual 270-degree feedback oriented on the criteria of the nine corporate principles. The aim is to promote communication between personnel and between employees and management while gaining knowledge concerning opportunities for organizational and personal development.

In 2007, the Geva Institute in Munich and the magazine “Karriere” awarded GFKL the “Top Employer” seal of approval for the second time in a row. The award was based on a company assessment according to 14 criteria in 6 categories. The judges identified the company’s personnel development, work climate, company culture, employee satisfaction, performance orientation, job security and leading market position as particular strengths.

Consolidated Annual Report for the Business Year 2007