GFKL Financial Services AG - Letter to the Shareholders

Essen, 19. August 2003

Dear Sir/Madam,

Regardless of the tense economic situation in Germany and the corresponding effects on investment activity, new business and the profitability of the leasing sector developed most satisfactorily in the first half of 2003. By June 30, 2003, the new leasing business was up around 58% on the first half of 2002. The current contribution to earnings from this business unit increased by 37%.

The financial sourcing sector also developed very positively. While the effects of the recession nevertheless made themselves negatively apparent in the leasing sector through the increasing need for provisions, the financial outsourcing sector profited from the fact that the banks are currently exhibiting considerable willingness to hand the responsibility for assets and processes over to GFKL. Various new mandates were acquired and inventories of orphaned assets purchased. The financial outsourcing sector was able to increase its profit by 56% in the first half of 2003, thus making an even more significant contribution to the positive development of the consolidated net income. The proportion contributed by this sector to the consolidated net income now amounts to 54%.

Results in the first half of 2003

During the first half-year, the development of the Group again exceeded all expectations. Compared to the first half of 2002, it was possible to increase consolidated earnings before taxes from 7.3 million Euro to 9.2 million Euro, a rise of 26%.

The earnings situation of the Group was significantly affected by the increase in new business as well as by the portfolio acquisitions and the sale of leasing and hirepurchase receivables into the ABCP programs. Compared to the first half of 2002, the net interest income increased from 21.8 million Euro to 24.4 million Euro.

In the first half-year, the leasing sector increased its contribution to net income from 3.7 million Euro to 5.0 million Euro, a rise of 37%. The volume of new business in the leasing sector rose from 123 million Euro to 194 million Euro. Compared to the first half of 2002, the number of new commitments rose from approximately 2,700 agreements to 4,200.

The emerging negative economic developments in Germany and the general deterioration in payment behavior were also considered when determining the accruals for bad debts. Appropriate accruals for bad debts were set up for all highrisk items. During the period from the beginning of the business year to June 30, 2003, they were increased from 18.8 million Euro to 21.6 million Euro, corresponding to 0.75% per annum of the outstanding receivables. Compared to the business year 2002, this means a decrease of approximately 0.25 per cent. A credit policy which has again been tightened up and adapted to conform with the general economic conditions and the continuation of the high margins maintained to date have had a marked effect.

In view of the new portfolio acquisitions and the addition of two companies acquired in the first half-year, earnings before taxes in the financial outsourcing area increased by 2.2 million Euro from 2.7 million Euro to 5.9 million Euro.

With these acquisitions and also with the purchase of two German leasing companies, total assets have increased from 361.5 million Euro to 395.8 million Euro since the start of the business year. However, refinancing through the Asset-Backed Commercial Paper programs means that a large proportion of the leasing and hire-purchase receivables, the equivalent of 433.1 million Euro, is not listed in the balance sheet.

In the last six months, the shareholders’ equity increased from 78.8 million Euro to 84.1 million Euro. Because of the sale of receivables into the ABCP programs, the equity ratio largely remained constant despite the retained half-year result, and amounted to 21.2% as of June 30. The weighted return on shareholders’ equity amounted to 13.1% as of June 30.

Highlights of the first half of 2003

Integration of SchmidtBank Leasing GmbH (now SBL Mobilien GmbH)
Because of the necessary reissue and subsequent audit of the historical annual accounts of the company formerly known as SchmidtBank Leasing GmbH (now SBL Mobilien GmbH), delays arose in the issue of the IAS consolidated accounts. However, the hindrance to the preparation of the consolidated accounts for the GFKL Group caused by the missing opening balance values of SBL Mobilien GmbH has now been removed, and the consolidated accounts according to IAS/IFRS for the business year 2002 were issued with an unqualified audit report.

Acquisition of RCU Leasing GmbH & Co. KG.
As of January 1, 2003, the Group acquired all business shares in RCU Leasing GmbH & Co. KG and RCU Leasing Verwaltungsgesellschaft mbH. RCU Leasing GmbH & Co. KG was founded in its original form in Berlin in 1989. The new business generated in the business year 2002 covered 1,052 agreements with a volume of approximately 30.5 million Euro. With this acquisition, the company moved its headquarter from Berlin to Essen with effect from June 6, 2003; the sales staff were transferred to GFKL Mobilien GmbH, thus expanding the latter’s sales network around the sites in Dortmund and Berlin.

Akquisition of WKV Leasing GmbH
As of April 22, 2003, GFKL Financial Services AG acquired all shares in WKV Leasing GmbH, Stuttgart, from WKV Bank GmbH, Stuttgart, a subsidiary of the Baden-Württembergische Bank (BW Bank). In an agreement dated May 28, 2003, it was decided that WKV Leasing GmbH should merge with Proceed Securitization Services GmbH. On being entered into the commercial register, the merger became retroactively effective as of January 1, 2003.

The company had no personnel at the time of the takeover. The acquisition of WKV Leasing GmbH was purely for the purpose of portfolio acquisition. Therefore, the company did not continue operations after being merged with Proceed Securitization Services GmbH. With this in mind, Proceed Securitization Services GmbH purchased all receivables from WKV Leasing GmbH as of April 22, 2003, and undertook to repay a refinancing loan taken out by the acquired company from General Electric Capital Deutschland GmbH, Cologne, amounting to 12.8 million Euro.

Proceed Portfolio Services GmbH received the mandate for the administration of the portfolio consisting of approximately 950 leasing and hire-purchase agreements. The majority of these agreements, with a volume of 10.6 million Euro, were refinanced via the Tulip ABCP program.

Acquisition of a leasing portfolio from DCC Leasing GmbH
In February 2003, the entire German leasing portfolio, with a receivables volume of approximately 8 million Euro, was purchased from DCC Leasing GmbH, Bad Homburg, an indirect subsidiary of the US American Dana Corporation in Toledo, Ohio. The administration and collection of the receivables was taken over by Proceed Portfolio Services GmbH.

phinware AG and phinConsult GmbH
As of May 5, 2003, GFKL Financial Services AG acquired all shares in phinware AG and phinConsult GmbH. phinware AG, Düsseldorf, is a leading provider of software for receivables management with more than 200 installations and 4,500 users in Germany. phinware AG’s clients include the major German banks and collection agencies as well as public service and insurance companies. phinware AG’s products include the online application www.optimahn.de, with which court orders can be applied for via the Internet. phinConsult GmbH is a consulting company specializing in receivables management which supports banks and other companies in the process of setting up or restructuring their collection activities.

Through this purchase, GFKL has strengthened its market position in the financial outsourcing sector, in particular acquiring important expertise in the development of innovative solutions for receivables management. The solutions make it possible to combine the advantages of outsourcing with those of insourcing. Moreover, the sales structures of phinware AG and the other consolidated companies in the financial outsourcing area are to be used reciprocally to their mutual benefit.

In the course of the acquisition of phinware AG and phinConsult GmbH, the Group gained its first mandate for »intelligent collection«. It consists of the setup, endowment and operation of an external collection company as part of an outsourcing measure for a German insurance company.

Expansion of the refinancing basis
In order to account for the increase in the volume of new business and the redirection of the leasing business, the refinancing basis was again expanded. In May 2003, the Group was able to gain the Royal Bank of Scotland as a new refinancing partner, thereby obtaining an ABCP line with an initial volume of 150 million Euro. By the end of the half-year, 70 million Euro had already been drawn on through regrouping from other refinancing lines. The possibility of increasing this line by another 100 million Euro as needed was allowed for at the time the line was granted.

With this new line, the Group has a total 700 million Euro in refinancing lines on the basis of Asset-Backed Commercial Papers at its disposal, of which just over 70% was being exploited as of June 30, 2003. Negotiations are currently being held with an reputable American bank about a fourth ABCP refinancing line. The use of this fourth line will initially depend on the possibility of making another major portfolio purchase.

Forecast

For the business year 2003, the executive board is expecting business activities to continue developing positively, and is counting on an increase in the consolidated net income of at least 20% up on the excellent result of 2002.

Here I would like to express my thanks once again to all staff and business partners for the commitment with which all together have contributed to the success of GFKL.

Yours faithfully,


Dr. Peter Jänsch
GFKL Financial Services AG

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