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GRENKELEASING AG GROUP BALANCE SHEET AS OF DECEMBER 31, 2005 INCOME STATEMENT FOR FISCAL YEAR 2005 CASH FLOW STATEMENTS FOR 2004 AND 2005 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT GRENKELEASING AG GROUP - FACTS AND FIGURES Important Key Figures of the GRENKELEASING AG Group 2 Presentation of Liquidity 3 Group Management Report for Fiscal Year 2005 4 Consolidated Income Statement for Fiscal Year 2005 14 Consolidated Balance Sheet as of December 31, 2005 15 Statement of Changes in Consolidated Equity for Fiscal Year 2005 16 Consolidated Cash Flow Statement for 2004 and 2005 18 Notes to the Consolidated Financial Statements for Fiscal Year 2005 20 Audit Opinion 67 Supervisory Board Report 68 Dates 2006 70 2 IMPORTANT KEY FIGURES OF THE GRENKELEASING AG GROUP 2005 New business (cost of new lease contracts)* Contribution margin 1 of new business Number of new contracts* Number of new contracts without projects 419,048 47,448 56,450 53,445 Net interest income from leasing business Expenses from settlement of claims Profit from insurance business Profit from new business Profit from disposals (income exceeding the calculated residual value) Result from currency translation Sundry operating income Costs of new contracts Costs of current contracts Project costs and basic distribution costs Management costs Other costs Amortization/ depreciation on Goodwill 60,620 16,124 13,668 15,871 3,449 440 412 12,399 3,852 6,068 8,177 1,068 0 EBIT (Profit from ordinary operations) Other interest Expenses from the fair value measurement 46,772 -626 -393 EBT (Net profit for the period before taxes) Net profit for the period (consolidated pursuant to IFRS) Earnings per share (IFRS) Dividend** 45,753 29,027 2.13 0.50** Embedded value of the lease portfolio* 257 (incl. Equity before taxes) Embedded value of the lease portfolio* 226 (incl. Equity after taxes) Cost/Income Ratio 40.6 Share of IT products in the lease portfolio*** Share of corporate customers in the lease portfolio*** Mean acquisition value*** Mean term of contract Volume of leased assets**** Number of current contracts Average number of employees***** 87 99 7.4 46 1,200 167,226 339 * incl. currency adjustment and franchise partners ** dividend for fiscal year 2005 will be proposed to the shareholders' meeting on May 9, 2006 *** based on new business **** at cost including lease-purchase ***** FTEs excluding directors KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Change 15% 19% 10% 16% 8% 13% 18% 19% 136% 48% 16% 15% 6% 1% 8% -31% -- 19% 425% -83% 24% 23% 22% 15% 16% -6% -2% 0% 6% 2% 19% 15% 19% 2004 Unit 363,247 39,935 51,546 46,146 EURk EURk Units Units 56,248 14,269 11,619 13,373 1,461 EURk EURk EURk EURk EURk 297 356 10,781 3,630 5,984 7,546 1,544 307 EURk EURk EURk EURk EURk EURk EURk EURk 39,293 -119 -2,249 EURk EURk EURk 36,925 23,629 1.74 0.40** EURk EURk EUR EUR 224 EURm 195 EURm 43.2 % 89 99 7.0 45 1,008 145,180 285 % % EURk Months EURm Units Persons 3 PRESENTATION OF LIQUIDITY KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The cash flow for the fiscal year 2005 presented in the consolidated cash flow statement in the financial statements shows the development of cash and cash equivalents. In addition to this liquidity status in the narrowest sense as of the balance sheet date, however, the decisive factor for the success of our business is which cash and cash equivalents are available in the short term to finance our business. Therefore, we are supplementing the cash flow statement with the following liquidity calculation. EURk Cash and cash equivalents Transitory items Adjusted cash and cash equivalents Funds used for advance financing Loans for advance financing Readily available funds Receivables from tax authorities Discount ABCP New balance Change in "new balance" Beginning of year to balance sheet date Jan. 1, 2004 Dec. 31, 2004 Dec. 31, 2005 47,548 -13,966 33,582 30,721 -1,658 62,645 5,924 20,211 62,166 -16,048 46,118 9,678 -36 55,760 13,845 42,607 55,677 -17,800 37,877 12,591 -6 50,462 13,422 59,132 88,780 112,212 123,016 Jan. 1. - Dec 31, 2004 23,432 Jan. 1. - Dec 31, 2005 10,804 GRENKELEASING AG is the parent company of the GRENKELEASING AG Group - referred to below as "GRENKELEASING". All the figures and statements published in the Annual Report refer to the GRENKELEASING AG Group. 4 GRENKELEASING AG, BADEN-BADEN GROUP MANAGEMENT REPORT FOR FISCAL YEAR 2005 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 1 Business Performance in 2005 1.1 Corporate Structure and Group Affiliations The GRENKELEASING AG Group traces its origins back to a sole proprietorship founded in 1978. In 1979, this sole proprietorship was contributed to a limited partnership, GRENKELEASING KG in BadenBaden, Germany. Over the years, other companies were added, over which Wolfgang Grenke had a controlling influence. In 1993, these companies were restructured and merged into a group, and consolidated financial statements were then drawn up for the first time. At the end of 1997, the shareholders founded GRENKELEASING AG ("AG") and Grenke Investitionen Verwaltungs Kommanditgesellschaft auf Aktien (the "KGaA"). The AG and the KGaA are two separate legal entities in a unitary enterprise, the AG being the operating company and the KGaA the holding company. Their foundation was geared toward concentrating the activities of the Group in Germany in these two companies. WEBLEASE NETBUSINESS AG ("WEBLEASE") will continue to operate as an independent operating company in Germany due to its function as a virtual leasing company until current lease contracts and the new business generated in the first half of 2005 have been wound up completely. Since the second half of the year, it has only concluded new contracts in the name of and for the account of GRENKELEASING AG. Its online business was also taken over by GRENKELEASING AG. The AG acquired 100% of the shares in MAUDEN S.p.A., Milan, Italy, by way of purchase agreement dated February 6, 2001. In a purchase agreement dated June 5, 2001, the AG acquired 100% of the shares in EKOMA s.r.o., Prague, Czech Republic, which was renamed GRENKELEASING s.r.o. in 2005. The formation of GRENKE ALQUILER S.A., Barcelona, Spain, was notarized on October 30, 2001. The AG holds 100% of the shares. It also acquired 100% of the shares in ZOOPLUS.COM AG, Unterföhring, Germany, by way of purchase agreement dated December 4, 2001. The company changed its name to GRENKE Locazione S.r.l. and moved its registered office to Milan, Italy. In the fall of 1997, in collaboration with HewlettPackard, the Group invested in a foreign operating company, GRENKELEASING AG, Vienna, Austria, for the first time. In the same way, the second operating company abroad commenced operations in Switzerland in the fall of 1999. This was followed by GRENKE LOCATION SAS (formerly GRENKE LOCATION S.A.) in Schiltigheim near Strasbourg, France, in November 1999. In August 2000, GRENKELEASING AG took over the internet service provider and software developer haberichter.net GmbH by way of a share deal. haberichter.net was merged with Weblease Leasing GmbH (now WEBLEASE NETBUSINESS AG) in fiscal year 2001, in order to offer all internet services from one company. In fiscal year 2002, the following subsidiaries were founded: GRENKELEASING ApS, Herlev, Denmark, Grenkefinance N.V., Maasbree, Netherlands, and GRENKE LIMITED, Dublin, Ireland. These were followed in 2003 by GRENKE FINANCE Plc., Dublin, Ireland, GRENKE LEASING S.r.l., Milan, Italy, and GRENKELEASING AB, Stockholm, Sweden, and GRENKE LEASE Sprl, Brussels, Belgium, which was founded in 2005. In the United Kingdom, Poland, Germany and Norway, we use a franchise system. The companies in Guildford, near London, UK, and Poznan, Poland, commenced operations in 2003 on the basis of a franchise agreement. GRENKE AS, Oslo, Norway, concluded a franchise agreement on May 12, 2005. GRENKELEASING AG provides the expertise, the operational infrastructure, services and the right to use its name. 5 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT This allows us to limit the costs during the start-up phase and increase the public recognition of the GRENKELEASING AG Group. In the fiscal year, the Group supplemented its product range with the services factoring and vehicle leasing, which are also offered through franchise partners. The newly acquired partners, GRENKE AUTOLEASING GmbH and GRENKEFACTORING GmbH signed a franchise agreement with GRENKELEASING AG on April 19, 2005 and June 26, 2005, respectively. The German corporate governance code was amended on June 2, 2005. On July 11, 2005, the Supervisory Board and Board of Directors unanimously approved the declaration of compliance of the German corporate governance code dated June 2, 2005 in full. The Company's corporate governance principles and declaration of compliance are published in full on the GRENKELEASING AG website (www.grenkeleasing.de) in German and English. The GRENKELEASING AG Group thus offers its services in 15 countries through 12 subsidiaries and three franchise partners. 1.1.1 Group Profit and Loss Transfer Agreements GRENKELEASING AG, Baden-Baden, Germany, concluded domination and profit and loss transfer agreements with Grenke Investitionen Verwaltungs KGaA, Baden-Baden, Germany, and WEBLEASE NETBUSINESS AG, Baden-Baden, Germany, in 2001 and 2002, respectively. The domination and profit and loss transfer agreement with WEBLEASE NETBUSINESS AG, Baden-Baden, Germany, was terminated with effect as of December 31, 2005. 1.1.2 GRENKELEASING AG's Corporate Governance Principles The principles of value-oriented and transparent management and controls have acquired significant importance in the assessment and valuation of listed companies. Under the German Transparency and Disclosure Act ["Transparenz- und Publizitätsgesetz": TransPuG], all listed companies also have a duty to disclose their compliance with and any deviation from the requirements of the German corporate governance code. The Board of Directors, Supervisory Board and managers of GRENKELEASING AG identify with these principles and view the duty of corporate governance as an important measure to increase the confidence of current and future customers, shareholders, lenders, employees, business partners and the public. 1.2 Significant Events During the Fiscal Year Following a review of GRENKELEASING AG in the spring of 2003, the rating agency Standard & Poor's gave the Company a counterparty rating of "BBB+" for long-term liabilities and an "A-2" for short-term liabilities, with a stable outlook. Standard & Poor's updated and confirmed its rating on October 5, 2005. On October 30, 2003, the GRENKELEASING AG Group broadened its refinancing base by issuing a debut bond. A bond of EUR 200m with a term of three years (maturing on October 30, 2006) and a coupon of 4.5% was placed under the lead of Deutsche Bank AG. However, the Board of Directors limited the bond to EUR 170m. The bond was issued by GRENKE FINANCE Plc., Dublin, Ireland, a 100% subsidiary of GRENKELEASING AG, and guaranteed by the parent company. The bond was directed at both institutional and private investors. The cash flow was used to repurchase receivables of EUR 173,012k from Hewlett Packard International Bank, from earlier refinancing of the contract portfolio, thereby financing them at better conditions. The bond is part of a debt issuance program (DIP) with a total volume of EUR 500m which provides a standardized framework for future borrowings. Under this program, various mediumterm notes (MTN) and a floating-rate bond with a volume of EUR 100m were issued in fiscal year 2005. The program was updated with effect as of January 6, 2006 and confirmed by the Finance Sector Supervisory 6 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Committee ("Commission de Surveillance du Secteur Germany also indicates an upturn in the domestic Financier": CSSF). economy. A third ABCP (asset-backed commercial paper) program, arranged by Skandinaviska Enskilda Banken AB, Stockholm (SEB), Sweden, was concluded on December 21, 2004 with terms almost identical to those of the previous two programs. Initial financing was raised on February 16, 2005. The tax filings of the German companies were audited up to 1999. Provisions in the required amount had been recognized in the financial statements of the prior year. All resulting payment obligations were met in due time. The tax field audit from 2000 onward is expected to begin in the second half of 2006 due to the heavy workload of the responsible tax office. The local tax authorities in France announced that they would perform a tax field audit for the French company, GRENKE LOCATION SAS, Schiltigheim, France, beginning in February 2006 for fiscal years 2003 and 2004. 1.3 Economic Conditions and Industry Performance Economic growth in Europe was more sluggish in 2005 than in the prior year. At the beginning of the year, experts forecast GDP growth of around 1.4% in the euro zone for 2005 compared with 2.1% in 2004. In line with this, the growth rate in Germany - our most important national market ­ sank from 1.6% in the prior year to just under 1% at the end of 2005. At the reporting date, there were indications of a continuing upturn in 2006. The ifo institute is anticipating a significant increase in economic activity in Europe. There are also more and more positive indications for growth in Germany. This growth is primarily being driven by foreign demand, which is expected to increase considerably due to the positive international environment and the fact that the eurodollar exchange rate has improved again. In addition, the gradual increase in gross fixed capital formation in After the estimated 4% growth in the information and telecommunications market (IT) in Europe in the first half of 2005, growth in the second half of the year slowed significantly. Most recently, the European Information Technology Observatory (EITO) estimated growth of just under 3%. EITO also forecasts the same rate for 2006. In the fiscal year, the companies of the GRENKELEASING AG Group also seized their market opportunities. By focusing on small-ticket IT leasing, brand name independence, flexibility, a high degree of automation and strategic partnerships with retailers and manufacturers, the Group was able to boost new business by 13.6%. We intend to continue this success in the new year. 1.4 Financing Lease receivables are sold primarily to financial institutions through special purpose entities under three ABCP programs or to GRENKE FINANCE Plc. (via factoring). The agreements secure financing of new business for several years even when volumes rise. Despite an increasing volume of new business, only a fraction of the ABCP programs had been utilized (68% as of December 31, 2005). The programs are revolving, i.e. repaid refinancing can be replaced by new refinancing. Further funds were raised by GRENKE FINANCE Plc. under the debt issuance program or by issuing borrower's note loans. A high equity ratio continued to give us sufficient financial leeway. 7 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 1.5 Personnel/Stock Option Programs capital and are listed for trading on the stock exchange Due to the brisk expansion of our network of branch offices, the number of employees (weighted average of full-time equivalents, excluding the Board of Directors) rose from 285 in 2004 to 339 employees in 2005. An increase of 45 employees is planned for 2006. Groupwide, staff turnover stood at 8.90% in the fiscal year. The Group attaches great importance to training for its employees. Thus, for example, 43 employees successfully completed their training at the Verwaltungsakademie in Freiburg to become Leasingund Finanzierungswirte (certified leasing and financing consultants). A further 5 employees are currently attending the same course. Since October 2004, GRENKELEASING AG, together with its subsidiaries in Switzerland and France, has been training students of Berufsakademie Lörrach. There are currently six students studying for degrees in international business management, (a 3.5-year program), and two students studying for degrees in commercial computer science (a 3-year program). The Company is planning to create more trainee positions for these subjects in 2006. The Company also offers apprenticeships for office clerks. The first tranche of stock options issued under the IPO stock option program in 2001 did not meet the exercise requirements in the fiscal year and, as there is no remaining exercise period in 2006, cannot be exercised. These options will expire as of March 31, 2006. The stock options issued under the second employee stock option program of 2002 reached the exercise target. The employees were able to exercise half of their stock options at a price of EUR 19.64 in 2004 and a quarter of their options in fiscal year 2005. Exercising the options was possible in three exercise periods and the shares were offered at EUR 20.93 (first exercise period), EUR 19.84 (second exercise period), and EUR 16.62 (third exercise period). The remainder of the vested options can still be exercised in 2006. The new shares were created from the conditional 1.6 Capital Expenditure EUR 2,585k was invested in property, plant and equipment and intangible assets in 2005. Our investments were mainly in equipment for our new European branches. We also upgraded and extended our IT infrastructure. 1.7 Sales and Customer Structure GRENKELEASING AG mainly leases information technology products (hereinafter referred to as "IT"). It has focused on the cost-effective processing of leasing business involving relatively small transaction values (small-ticket IT leasing) and achieved a leading position in Central Europe in this market segment. Due to the low acquisition costs involved and the consequently reduced contribution margin per contract, direct selling in the field of small-ticket IT leasing is hardly worth its while. This is why the leasing contracts predominantly come about by way of manufacturers and retailers (vendor programs). We intend to exploit and expand the clear opportunities for growth, especially in other European countries, which this market segment presents over the years to come. A number of new products were developed in the fiscal year and made available to dealers to strengthen customer ties. Direct sales and business with cooperation partners were also extended and supported. The traditionally broad-based lessee structure continues to show no signs of change. No lessee has accumulated total liabilities of more than 2% of group equity. The average net acquisition value per contract is EUR 7,427 (prior year: EUR 7,047). The industry structure of our portfolio corresponds largely to the structure of the German economy. 8 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT A quality management system was set up with the particular aim of supporting customer focus. GRENKELEASING AG offers its entire range of services via the internet (www.grenkeleasing.com and www.weblease-europe.com). It has expanded its presence in France, Italy, the Czech Republic, Austria, Denmark, Spain, Sweden, Switzerland, Ireland, Belgium, and the Netherlands. In addition, the business concept has been implemented as franchises in the UK and Poland since 2003 and in Norway since 2005. Furthermore, franchise partnerships were concluded in 2005 with German partners active in vehicle leasing and factoring. Strategic sales partnerships have been developed further. GRENKELEASING AG renewed its partnership with IBM Global Financing in October 2005. The project provides a leasing program for small and medium-sized enterprises which facilitates IT financing for small and medium-sized customers which is even faster, simpler and more flexible. GRENKELEASING AG in Germany and its subsidiaries in France, Spain, and Belgium will be the service providers for the processing of lease contracts which are concluded as part of the IBM Financing Advantage. We have also strengthened our longstanding and successful collaboration with Bechtle AG further. 1.8 Structure of the Supplier Base The supplier structure continues to be broad based. No supplier has a share of new business larger than 4% 2 Business Situation of the Group During the reporting period, the Chairman of the Board of Directors, Wolfgang Grenke, sold 150,000 shares in a warrant transaction; Directors Mark Kindermann, Thomas Konprecht, and Michael Kostrewa sold 20,000, 55,000, and 25,000 shares, respectively, off the floor. Directors have exercised options issued under the stock option program to acquire a total of 6,050 shares. On December 23, 2005, the Chairman of the Board of Directors sold 100,000 shares in a warrant transaction which is linked to a share price (increase of 20.8% after one year) on a specified date. In addition, the Chairman of the Board of Directors and main shareholder of GRENKELEASING AG, Wolfgang Grenke, transferred 40,000 GRENKELEASING shares to Kulturstiftung Festspielhaus, Baden-Baden, Germany, and 675,000 GRENKELEASING shares to the non-profit foundation GRENKE-Stiftung, Baden-Baden, Germany, in 2004. In addition to pursuing charitable purposes and promoting young people and sports development, the GRENKE foundation supports art and urban development projects in Baden-Baden, Germany. Another of its focuses is on promoting science and research into preventive medicine, in particular combating drug addiction. The performance of the GRENKELEASING share price was influenced in 2005 by the upward trend on the stock markets in Europe and the positive development of the Company's business. The share price rose from EUR 34.85 on December 30, 2004 to EUR 48.30 (XETRA closing price) on December 30, 2005, an increase of 38.59%. 2.1 Shares GRENKELEASING AG shares have been listed on the Frankfurt Stock Exchange since April 2000. The Company has issued 13,643,646 shares. 43.64% of these are registered shares held by Mr. and Mrs. Grenke and their dependent sons, leaving a free float of 56.36%. 9 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.1.1 Liquidity The solvency of the group companies is to be preserved at all times. The Board of Directors of GRENKELEASING AG thus attaches great importance to maintaining sufficient liquidity. The Group's liquidity has risen further due to the growth in earnings. The AG manages the Group's liquid assets for the group companies in a cash pool. The Company has sufficient liquidity. 2.1.2 Refinancing Funding of the leasing business (new business) is secure for several years to come. Our direct financing partners are Deutsche Bank AG, Commerzbank AG and Stadtsparkasse Baden-Baden. The special purpose entities of the ABCP programs are assisted by Deutsche Bank AG (Rheingold), WestLB (Compass) and SEB AB (Kebnekaise). Private placements were made under the debt issuance program through Deutsche Bank and WestLB. As part of a borrowers' note loan at GRENKE FINANCE Plc., financing was raised through a major German insurance company. In keeping with the provisions of our quality management system, our financing arrangements are audited (avoidance of double financing; actual acquisition of the leased property) on a quarterly basis by independent auditors. We generated net income for the year of EUR 29,027k (2004: EUR 23,629k), which is an increase of 22.8%. Earnings per share increased from EUR 1.74 in 2004 to EUR 2.13 and thus by 22.4%. Conclusion of New Contracts The number of new lease and lease-purchase contracts (including those concluded by the franchise companies in Poland, the UK, and Norway) rose from 51,546 in the prior year to 56,450, continuing in the trend of the prior years: Number of new contracts in 2005 compared to prior year Contracts 50,000 40,000 30,000 20,000 10,000 0 1999 2000 2001 2002 2003 2004 2005 2.2 Earnings Development of Results Group earnings from leasing (composed of net interest earnings after the settlement of claims arising from the leasing business, insurance business, earnings from exploiting third-party rights including follow-up leases and profit from new business) increased year-on-year by EUR 9,052k or by 13.2 % to EUR 77,484k (prior year EUR 68,432k). 67.5% of the new business ­ in terms of the cost of the assets leased in new contracts ­ is attributable to Germany, 32.5% to other countries. New business in France performed particularly well, increasing by 36.6%. Thanks to the growth in the home market, our market share in Germany was improved. Stringent cost management reduced the cost-income ratio from 43.2% in the prior year to 40.6%. As a result, earnings before other interest, measurement of financial instruments and taxes (EBIT) rose from EUR 39,293k in 2004 to EUR 46,772k in the fiscal year. 10 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.3 Net Worth and Financial Position 3 Risk Management The Group's net worth is characterized by a high proportion of lease receivables (80% of the balance sheet total as in the prior year) compared with a smaller proportion of refinancing liabilities (71.8% of the balance sheet total; prior year: 70.3%). The increase in short-term liabilities relates mainly to liabilities from refinancing. In addition to the increased volume of ABCP financing, this is primarily due to the fact that the bonds issued as part of the debt issuance program totaling EUR 170m will become due in 2006. The development of lease receivables is directly connected to new business. 2.4 Business Situation in the Various Regions The foreign subsidiaries' efforts in opening up markets have once against made a positive contribution to the Group's growth compared to 2004. Additional foreign branches have increased our foreign presence. The subsidiaries in France and Switzerland in particular made a disproportionately high contribution to growth. The positive results in the Netherlands and Spain point toward a similar development to that in France and Switzerland. The companies in the other countries are performing as planned. The risk management system (RMS) of GRENKELEASING AG has the function of systematically identifying, assessing, documenting and disclosing risks. It is designed to enable employees and management to address risks responsibly and make the most of the opportunities that present themselves. The risk management system introduced in 2003 was extended further in fiscal year 2005 and a new risk management tool was developed. The function of the RMS and the result of measures taken are reviewed by the internal audit department. The internal audit department reports directly to the Board of Directors. 3.1 Credit Risk Since 1994, we have assessed the creditworthiness of our lessees using a scoring system. The quality of this system has been proven by the level of loss experienced since its implementation. A quarterly review of losses is carried out by automated database queries. The scoring system is being enhanced on an ongoing basis by specialist staff. 3.2 Counterparty Risk 2.5 Structure of Services and Leased Assets In keeping with the Group's basic strategy, we concentrate on office technology and communication equipment, especially IT systems, printers, software, photocopiers and telecommunications products. This specialization entails the risk of new business being affected if these products suffer a sales slump. This risk would, however, seem to be well worth taking in view of continuing high demand for this technology, the fact that the share of lease financing used in such investments is still relatively low, and that a recovery is forecast for the IT industry. A diversification of retailer relationships addresses this risk. Retailers are assessed on a systematic basis. This procedure is part and parcel of our quality management system, with an evaluation being conducted on a quarterly basis. 11 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 3.3 Process Risk Our business processes are documented in our quality management manual and are updated on an ongoing basis. TÜV Management Service GmbH issued the Company with DIN EN ISO 9001:1994 certification in 1998. Our quality management was tested and certified in 2005 by Technical Control Association officers from TÜV Management Service GmbH in accordance with the new standard DIN EN ISO 9001:2000. In addition to the German branches, the companies in Austria, France, Switzerland and Grenke Investitionen Verwaltungs KGaA, which is in charge of asset sales, have since been certified. GRENKELEASING AG's quality management is an important factor in ensuring the quality of our services and the satisfaction of customers and business partners. Consistent and ongoing improvement is part of our corporate philosophy. The Board of Directors regularly assesses the effectiveness of the management system and any corrections are made on a timely basis. and, as such, IT organization and processes are subject to regular internal review. 3.4 Contractual Risk Contractual risk is limited by the fact that the majority of the contracts concluded by the Company provide for full cost recovery. As a rule, no maintenance or warranty risks are entered into. 3.5 Sales Risk Ongoing marketing measures serve to mitigate sales risk. These include Gathering information Product development Procedural improvements Developing sales channels The current audit report confirms that GRENKELEASING AG has an outstanding management system, operated to a high standard. According to the report, the requirements of ISO 9001:2000 are met in full. Any original leasing contracts which have not been scanned in are kept in fireproof cabinets/safes. Thus, even in the event of damage to property (caused by fire, etc.), sufficient precautions have been taken. Contract data is stored and updated in our IT system, mainly using specially developed programs. In-house development of programs is part and parcel of our quality management system. Original contract data is stored both in branch offices as well as in the central contract management division in Baden-Baden, Germany. Automatic backup programs and automatic power-interruption facilities safeguard data maintenance. IT systems play an important role in the processing and administration of our leasing business, 13 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 4.2 Overview of Group Companies and Branch Offices 4.3 Anticipated Performance For further details on companies belonging to the GRENKELEASING AG Group (please also refer to the table of consolidated companies in the notes to the consolidated financial statements): GRENKELEASING AG has its head office in Baden-Baden, Germany, and branch offices in Berlin, Bremen, Dusseldorf, Dortmund, Dresden, Erfurt, Frankfurt am Main, Hamburg, Hanover, Cologne, Leipzig, Magdeburg, Mannheim, Memmingen, Mönchengladbach, Munich, Nuremberg, Stuttgart and Rostock, all in Germany. GRENKELEASING AG has a - direct or indirect - 100% shareholding in WEBLEASE NETBUSINESS AG, BadenBaden, Germany, GLG Grenke-Leasing GmbH, BadenBaden, Germany, and Grenke Investitionen Verwaltungs KGaA, Baden-Baden, Germany. As of the balance sheet date, the following foreign companies were wholly owned by GRENKELEASING AG: GRENKELEASING AG, Vienna, Austria, GRENKELEASING AG, Basel, Switzerland, GRENKELEASING s.r.o., Prague, Czech Republic, GRENKE ALQUILER S.A., Barcelona, Spain, GRENKE Locazione S.r.l., Milan, Italy, GRENKELEASING ApS, Herlev, Denmark, Grenkefinance N.V., Maasbree, Netherlands, GRENKE LIMITED, Dublin, Ireland, GRENKE LOCATION SAS, Schiltigheim, France, GRENKE FINANCE Plc., Dublin, Ireland, GRENKELEASING S.r.l., Milan, Italy, GRENKELEASING AB, Stockholm, Sweden, and directly owned with 99.93% and indirectly with 0.07%: GRENKE LEASE Sprl, Brussels, Belgium, which was founded in 2005. Business developed very well over the last twelve months and was above market expectations. The GRENKELEASING AG Group has made preparations to capture an above-average share of the forecast economic upturn by further expanding its position in a lucrative market niche and thus its market share in Europe. We should continue to achieve a constant increase in the value of the business through consistent customer focus, efficient contract processing, effective risk management and refinancing on favorable terms. Investments made in market positioning and securing the future of the Group, particularly with respect to opening up the European market further and expanding our pioneering IT infrastructure, will continue to be pursued in the rigorous implementation of our corporate strategy. The cost leadership in the small-ticket IT leasing segment should expand further, primarily due to the continued development of and improvement in business processes. The Group's target for 2006 is to achieve yet again substantial two-digit growth in new business, with profits developing accordingly. Baden-Baden, Germany, January 19, 2006 GRENKELEASING AG The Board of Directors 14 GRENKELEASING AG, BADEN-BADEN CONSOLIDATED INCOME STATEMENT FOR FISCAL YEAR 2005 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Note Jan. 1. - Dec. 31, Jan. 1. - Dec. 31, 2005 2004 EURk Income from interest on lease receivables 3.1 Expenses from interest on refinancing liabilities 3.2 Net interest income from leasing business 3 Expenses from settlement of claims 4 Net interest income after settlement of claims from leasing business Income from insurance business Expenses from insurance business Profit from insurance business Profit from new business 5 Income from disposals Expenses from disposals Profit from disposals 6 Other operating income 7 82,100 21,480 60,620 16,124 44,496 15,221 1,553 13,668 15,871 11,397 7,948 3,449 852 74,114 17,866 56,248 14,269 41,979 13,330 1,711 11,619 13,373 8,490 7,029 1,461 653 Personnel expenses Operating expenses Administrative expenses Consulting and audit fees Distribution costs (without commissions) Amortization/ depreciation Other operating expenses Other taxes Profit/ loss from ordinary operations Expenses from the fair value measurement Other interest income Other interest expenses Net profit for the period before taxes 8 17,486 15,353 3,979 4,047 2,478 2,201 9 2,068 2,039 2,874 2,806 10 1,609 1,802 640 1,285 430 259 46,772 39,293 -393 -2,249 799 671 1,425 790 45,753 36,925 Income taxes Deferred taxes Net profit for the period 11 15,218 14,556 11 1,508 -1,260 29,027 23,629 Earnings per share (basic) Earnings per share (diluted) 12 2.13 1.74 EUR 12 2.13 1.74 EUR Average shares outstanding (basic) Average shares outstanding (diluted) 12 13,625,560 Units 13,554,145 Units 12 13,632,986 Units 13,581,915 Units 15 GRENKELEASING AG, BADEN-BADEN CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Assets EURk Current assets Cash on hand and balances with banks Financial assets Lease receivables Trade receivables Lease assets for sale Tax receivables Other current assets Total current assets Non-current assets Lease receivables Property, plant and equipment Intangible assets Deferred tax assets Other non-current assets Total non-current assets Total assets Liabilities and equity Liabilities Current liabilities Liabilities from the refinancing of lease receivables Trade payables Tax liabilities Provisions Current portion of non-current bank liabilities Financial instruments with negative fair value Other current liabilities Deferred lease payments Total current liabilities Non-current liabilities Liabilities from the refinancing of lease receivables Non-current bank liabilities, less the current portion Deferred tax liabilities Other non-current liabilities Total non-current liabilities Equity Capital stock Capital reserve Revenue reserves Currency translation Hedging reserve Pension reserve Profit carryforward Total equity Total liabilities and equity Note Dec. 31, 2005 Dec. 31, 2004 55,677 13 374 14 326,783 15 1,471 13,483 16 3,578 17 20,190 421,556 14 534,045 18 23,656 19 2,568 21 20,094 20 72,848 653,211 1,074,767 62,166 1,347 290,069 1,002 12,615 3,542 15,769 386,510 451,334 19,323 2,027 18,218 49,362 540,264 926,774 341,011 6,917 22 3,728 23 1,318 614 24 1,039 3,646 56,316 414,589 25 430,587 4,710 21 47,500 1,239 484,036 26 17,440 59,485 705 -274 -192 -8 98,986 176,142 1,074,767 237,192 8,594 11,547 1,308 576 0 2,037 49,853 311,107 414,025 5,396 44,146 1,698 465,265 17,387 58,682 53 -95 -1,676 0 76,051 150,402 926,774 16 GRENKELEASING AG, BADEN-BADEN STATEMENT OF CHANGES IN CONSOLIDATED EQUITY FOR FISCAL YEAR 2005 Subscribed capital EURk Equity as of Jan. 1, 2004 Payment of dividend in 2004 for 2003 Fair value measurement of hedging instruments Deferred taxes on hedging reserve Issue of shares Net profit for 2004 Changes in the cosolidated group Currency translation 17,287 100 Equity as of Dec. 31, 2004 17,387 Equity as of Jan. 1, 2005 Payment of dividend in 2005 for 2004 Pension reserve Deferred taxes on pension reserve Fair value measurement of hedging instruments Deferred taxes on hedging reserve Allocation into legal reserves Issue of shares Net profit for 2005 Currency translation 17,387 53 Equity as of Dec. 31, 2005 17,440 Capital reserve 57,248 1,434 Revenue reserves 53 Hedging reserve Reserve for actuarial gains and losses -587 0 -1,085 -4 58,682 53 -1,676 0 58,682 53 -1,676 0 -11 3 1,461 23 652 803 59,485 705 -192 -8 17 Currency translation -267 172 -95 -95 -179 -274 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Profit carryforward 56,885 -4,463 23,629 76,051 76,051 -5,440 -652 29,027 98,986 Equity apportionable to shareholder 130,619 -4,463 -1,085 -4 1,534 23,629 172 150,402 150,402 -5,440 -11 3 1,461 23 856 29,027 -179 176,142 Equity apportionable to minority interests 13 -13 0 0 0 Consolidated equity 130,632 -4,463 -1,085 -4 1,534 23,629 -13 172 150,402 150,402 -5,440 -11 3 1,461 23 0 856 29,027 -179 176,142 18 KEY FIGURES PRESENTATION OF LIQUIDITY GRENKELEASING AG, BADEN-BADEN MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT CONSOLIDATED CASH FLOW STATEMENT FOR 2004 AND 2005 EURk Net profit for the period before taxes Non-cash items contained in net profit for the period and reconciliation to cash flow from operating activities + Amortization/ depreciation -/+ Profit/ loss from the disposals of equipment and intangible assets -/+ Investment income -/+ Non-cash changes in equity +/- Increase/ decrease in other provisions - Additions of lease receivables + Payments by lessees + Disposals/ reclassifications of lease receivables at residual carrying values +/- Changes from other set-offs - Interest income from lease receivables - Increase in other receivables from lessees +/- Currency translation differences = Change in lease receivables + Additions of liabilities from the refinancing of lease receivables - Payment of annuities to refinancers - Disposal of liabilities from the refinancing of lease receivables + Interest expenses from lease liabilities + Change from fair value measurement +/- Currency translation differences = Change in liabilities from the refinancing of lease receivables Changes in other assets/liabilities -/+ Increase/decrease in other assets +/- Increase/decrease in deferred lease payments +/- Increase/decrease in other liabilities = Cash flow from operating activities -/+ Taxes paid/ received - Interest paid + Interest received = Net cash flow from operating activities Jan. 1. - Dec. 31, Jan. 1. - Dec. 31, 2005 2004 45,753 36,925 1,560 -30 626 1,209 10 -420,842 320,247 66,350 -114 -82,100 -3,161 195 -119,425 425,469 -176,978 -148,878 21,480 -537 -174 120,382 -20,685 6,463 513 36,376 -23,073 -1,425 799 12,677 1,802 -52 119 -985 -1,168 -369,544 282,490 56,621 -123 -74,114 -7,586 -385 -112,641 325,206 -141,543 -63,980 17,866 679 186 138,414 -23,323 7,188 -3,604 42,675 -12,043 -790 671 30,513 19 EURk - Purchase of equipment and intangible assets + Proceeds from sale of equipment and intangible assets = Cash flow from investing activities +/- Raising/ repayment of bank liabilities - Dividend payment + Payments from stock option program - Issue of loans = Cash flow from financing activities Cash funds at beginning of period Cash on hand and balances with banks - Bank liabilities from overdrafts = Cash and cash equivalents at beginning of period +/- Change due to currency translation = Cash funds after currency translation Cash funds at the end of period Cash on hand and balances with banks - Bank liabilities from overdrafts = Cash and cash equivalents at the end of period Change in cash funds during period Net cash flow from operating activities + Cash flow from investing activities + Cash flow from financing activities = Total cash flow KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Jan. 1. - Dec. 31, Jan. 1. - Dec. 31, 2005 2004 -2,585 67 -1,330 137 -2,518 -623 -5,440 856 -11,471 -16,678 -1,193 -1,530 -4,463 1,534 -8,689 -13,148 62,166 -36 62,130 60 62,190 47,548 -1,658 45,890 68 45,958 55,677 -6 55,671 -6,519 12,677 -2,518 -16,678 -6,519 62,166 -36 62,130 16,172 30,513 -1,193 -13,148 16,172 20 GRENKELEASING AG, BADEN-BADEN KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR 2005 1 Commercial Register and Purpose of the Company GRENKELEASING AG (hereinafter also referred to as "GRENKELEASING" or the "Company") is a stock corporation with its registered office at Neuer Markt 2, Baden-Baden, Germany. The Company is entered at Baden-Baden local court in the commercial register, department B, under No. 1836. The purpose of the Company is to conduct leasing transactions for all types of movable assets, to manage lease contracts for third parties, to broker property insurance for leased assets and to conduct all other related transactions. The leasing business of the GRENKELEASING AG Group mainly concentrates on small-ticket leasing of IT products, such as PCs, notebooks, servers, monitors and other peripheral devices, software, telecommunication and copier equipment and other IT products. Almost all contracts provide for full cost recovery. This means that the payments to be made by the lessee during the basic lease period, including the guaranteed residual values, exceed acquisition and contract cost. GRENKELEASING AG, as a listed parent company which makes use of an organized market within the meaning of Sec. 2 (5) WpHG ["Wertpapierhandelsgesetz": German Securities Trading Act] (the share has been listed in the "Prime Standard" since January 1, 2003 and was allocated to the SDAX index by Deutsche Börse on February 11, 2003), has prepared its consolidated financial statements in accordance with Sec 315 a HGB ["Handelsgesetzbuch": German Commercial Code] on the basis of the International Financial Reporting Standards (IFRSs) published by the International Accounting Standards Board (IASB) and as endorsed by the EU. All International Financial Reporting Standards (IFRSs) (formerly International Accounting Standards (IAS)) mandatorily applicable for fiscal year 2005 as well as all interpretations by the International Financial Reporting Interpretations Committee (IFRIC) (formerly the Standing Interpretations Committee (SIC)) were observed. In previous years, the Company had also prepared its consolidated financial statements in accordance with IFRSs, applying the exempting provisions of Sec. 292 a HGB ["Handelsgesetzbuch": German Commercial Code]. 2 Summary of Significant Accounting Principles The consolidated financial statements for the fiscal year ended December 31, 2005 comprise GRENKELEASING AG and the companies it controls. This control is normally evidenced when the Group holds, either directly or indirectly, 50% (or more) of the voting rights in a company or of its share capital and/or is able to govern the financial and operating policies of an enterprise so as to benefit from its activities. Minority interests in equity and net profit or loss for the period are presented separately in the balance sheet and the income statement. The financial statements of the companies included in GRENKELEASING AG's consolidated financial statements have all been drawn up on the basis of uniform accounting and valuation methods. The financial statements have been prepared as of the balance sheet date of the consolidated financial statements and audited by independent auditors, where required by local law. The consolidated financial statements have been prepared in euros (EUR). 21 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.1 New Mandatory Accounting Standards Since the end of 2003, the IASB has made various amendments to the existing IFRSs and published new IFRSs and International Financial Reporting Interpretation Committee (IFRIC) interpretations which, unless described otherwise below, are mandatory for companies for all fiscal years beginning on or after January 1, 2005. GRENKELEASING AG decided against earlier application, although it was permitted. The relevant amendments/publications are outlined below, followed by their impact, if any, on recognition and measurement in the financial statements of GRENKELEASING AG. On December 17, 2003, the IASB published the revised IAS 32 "Financial Instruments ­ Disclosure and Presentation" and IAS 39 "Financial Instruments Recognition and Measurement". The "Amendment to IAS 39 Financial Instruments: Recognition and Measurement - Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk" was published in March 2004. This amendment relates to macro hedging and allows interest rate risk to be hedged at portfolio level. The "Amendment to IAS 39 Financial Instruments: Recognition and Measurement Transition and Initial Recognition of Financial Assets and Liabilities" was published in December 2004. On December 18, 2003, the IASB published a number of revised accounting standards in the scope of its Improvement Project. These are the 13 standards IAS 1, IAS 2, IAS 8, IAS 10, IAS 16, IAS 17, IAS 21, IAS 24, IAS 27, IAS 28, IAS 31, IAS 33 and IAS 40. On February 19, 2004, the IASB published the standard IFRS 2, "Share-based Payment", on accounting for share option plans and similar compensation based on the value of shares. This standard governs the financial reporting of transactions in which the reporting entity grants equity instruments such as its own shares or share options in return for goods or services received. On March 31, 2004, the IASB published the standard IFRS 3, "Business Combinations", and the fundamentally revised IAS 36 and IAS 38. The main changes are the abolition of the pooling of interests method and of goodwill amortization in favor of the impairment-only approach. As a rule, adoption of IFRS 3 is compulsory for all business combinations which were closed on or after March 31, 2004. In relation to differences arising from transactions closed before this date, IFRS 3 allows the transition to the impairment-only approach for fiscal years beginning on or after March 31, 2004. On March 31, 2004, the IASB also published the standard IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations". This standard governs the measurement and presentation of non-current assets held for sale and discontinued operations. On November 11, 2004, the IFRIC published the interpretation "Amendment to the Scope of SIC-12 ­ Consolidation - Special Purpose Entities". This amendment now includes equity compensation plans in the scope of SIC-12. Post-employment benefit plans as well as all other long-term employee benefits are no longer included in the scope of SIC-12. 12 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 3.6 Interest Rate Risk 3.8 Country Risk Over the term of a contract, the lease payments are subject to price risk determined by interest rates. Match funding is achieved through the sale of receivables. This ensures that the interest charge for GRENKELEASING AG is fixed and known for any point in time. Match funding is not necessarily achieved under the ABCP programs and through private placements. The exposure to rising interest rates is hedged by interest rate derivatives. The Company bears the interest risk for self-financed contracts or contracts with advance financing. The risks that could arise from the different legal systems in each country are identified with the help of local legal and tax advisors and are taken into consideration in the lease contracts. The business model is adjusted accordingly. 3.9 Risk Summary The risk management system is appropriate and suitable for recognizing significant risks at an early stage. 3.7 Currency Risk To finance the office building in Baden-Baden, Germany, the Company raised a loan in Swiss francs. This loan is not currency hedged. Due to the amount and the development of the EUR/CHF exchange rate, the currency risk is immaterial. Additional foreign currency risks may arise in the refinancing of franchise partners in the UK, Poland, and Norway as well as the subsidiary in the Czech Republic. In order to minimize these risks, the exchange rates are hedged using derivatives. Sufficient precautions have been taken to offset credit risk, counterparty risk and similar risks arising from our leasing business. The corresponding write-downs, valuation adjustments, and accruals disclosed in the annual financial statements were computed at an appropriate level using conservative benchmarks. With respect to the future development of GRENKELEASING AG, there are no particular business-related risks beyond the normal range. 4 Additional Disclosures 4.1 Events of Particular Significance after the Close of Fiscal Year 2005 At the time of this report, there were no events of particular significance after the close of fiscal year 2005. 22 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.2 Voluntary Adoption of New Accounting Standards Apart from the IFRSs whose application is mandatory for fiscal year 2005, the IASB has also published other IFRSs and IFRICs which have already received EU endorsement but which will only become mandatory at a later date. Below, only those standards and interpretations which could be relevant for GRENKELEASING AG are described. Voluntary early application of these standards is explicitly permitted or encouraged. However, GRENKELEASING AG only applies this option where mentioned explicitly below. On December 2, 2004, the IFRIC published IFRIC 4 "Determining whether an Arrangement contains a Lease". IFRIC 4 defines which contracts should be treated as leases even if they are not designated as such. On December 16, 2004, the IASB published amendments to IAS 19 "Employee Benefits ­ Actuarial Gains and Losses, Group Plans and Disclosures". This amendment extends the disclosure requirements in the notes and introduces the recognition of actuarial gains and losses in equity as an alternative to the existing methods. GRENKELEASING is accounting for pension obligations for the first time in its financial statements for 2005, applying the newly implemented alternative treatment of recognition of actuarial gains and losses. Accordingly, the necessary disclosures have been made in the notes. On June 16, 2005, the IASB published the final fair value option according to IAS 39. These amendments restrict in some cases the previously applicable provisions on full fair value measurement in IAS 39 (2004). Other amendments in IAS 32 and IFRS 1 also arose in connection with the revision of the fair value option. Application of IFRIC 4, the amendments to IAS 19, the fair value option and the provisions on "Cash Flow Hedge Accounting of Forecast Intragroup Transactions" under IAS 39, is mandatory for fiscal years beginning on or after January 1, 2006; earlier application is encouraged. On August 18, 2005, the IASB published the standard IFRS 7 "Financial Instruments: Disclosures". This standard supersedes the existing IAS 30 and adopts all provisions regarding disclosures in the notes contained in IAS 32. In this connection, the capital disclosure requirements in IAS 1 were amended or added. This Standard has completely restructured the disclosure requirements for financial instruments. Disclosures on the objectives, methods, risks, security and management processes are now required. The disclosure provisions of IFRS 7 and the modified capital disclosure requirements of IAS 1 shall apply to periods beginning on or after January 1, 2007; earlier application is encouraged. The new provisions of IFRS 7 do not affect measurement at GRENKELEASING, but more detailed disclosures and presentations are required. On April 14, 2005, the IASB published the final version of the rules for "Cash Flow Hedge Accounting of Forecast Intragroup Transactions". This amendment to IAS 39 allows intragroup transactions to qualify as a hedge under certain restrictive conditions. 23 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.3 Effects of the New Standards on GRENKELEASING AG The Improvement Project has led to the following changes in the presentation of the financial statements in relation to IAS 1: As a consequence of the clarification in IAS 32 (2004) of the classification of equity and debt, minority interests are now accounted for as an equity component. Minority interests will therefore in the future be shown in the balance sheet as an equity item (IAS 1.68). Columns will be added to the statement of changes in equity to allow the separate disclosure of amounts attributable to minority interests and the parent (IAS 1.96). Following the amendment to IAS 17, the initial direct costs must be recognized in measuring operating and finance leases. With operating leases, the lessor has to recognize initial direct costs and the cost of purchase of the leased asset as an asset and amortize them to the expected residual value over the useful life or the lease term. For a finance lease, the initial direct costs are considered in determining the present value, thereby increasing the net investment. Overheads are not included in initial direct costs as they are not directly attributable to a lease. This was an option allowed by the original IAS 17 which has now been made compulsory. The application of the new IAS 17 will not have any implications for GRENKELEASING AG as the option had already been exercised in prior years. GRENKELEASING AG does not offer land or property leases, which is why the amendments made in relation to such leases do not affect the financial statements. The reconciliation of the consolidated profit or loss net of minority interests is no longer required. Instead, the shares in profit attributable to minority interests and the parent are disclosed on the face of the income statement (IAS 1.82). The net profit or loss for the period will be used as the basis for the cash flow statement instead of the net profit or loss for the period after minority interests. IAS 1.113 requires the judgments management has made in the process of applying the entity's accounting policies that have a significant effect on the amounts recognized in the financial statements to be disclosed. The amendment of IAS 21 relevant to GRENKELEASING AG concerns currency translation of goodwill arising on the acquisition of foreign operations. This now has to be disclosed in the functional currency of the foreign operation and shall be translated at the closing rate. This affects GRENKELEASING AG in relation to the goodwill arising on the acquisition of GRENKELEASING s.r.o, formerly EKOMA s.r.o., Prague, Czech Republic. The two other goodwill items relate to acquisitions of companies whose functional currency is the euro, which means that there are no changes as a result of the amendment to IAS 21. Under IAS 1.116, information about assumptions concerning the future and other key sources of estimating uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in future fiscal years has to be disclosed in the notes to the financial statements. The nature and carrying amounts of such assets and liabilities on the balance sheet date must be disclosed. 24 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The goodwill arising from the acquisition of GRENKELEASING s.r.o. (formerly EKOMA s.r.o.), Prague, Czech Republic, was fixed as of December 31, 2004 in the local currency (CZK) and will be rolled forward in the same currency. The goodwill will therefore be translated at the closing rate on each balance sheet date, the difference being recognized in equity as a currency translation adjustment. As of December 31, 2005, goodwill was increased by EUR 49k directly in equity. IAS 32 deals with the presentation of financial instruments and the related disclosure requirements. The relevant disclosures for GRENKELEASING AG were included in the financial statements as of December 31, 2004. Changes in the current year are described separately below. The disclosure requirements for the notes were extended in IAS 33. In addition to the number of shares outstanding, the number of dilutive potential ordinary shares and contingently issuable dilutive ordinary shares now have to be disclosed. These disclosures are also required for the comparative period. The revised IAS 39 provides for a further classification of financial assets. It also determines that all changes in the fair value of available-for-sale financial assets now have to be recognized in a separate item of equity until they are derecognized or an impairment loss is charged. On disposal, the cumulative gain or loss is transferred to net profit or loss. The option was introduced of allowing an entity to measure a financial asset or financial liability that was originally carried at amortized cost to be measured at fair value through profit or loss (fair value option). Furthermore, the hedge accounting requirements were adapted. These changes do not directly affect GRENKELEASING AG because all of its securities were previously designated as "held for trading". GRENKELEASING AG does not apply the fair value option or the amended/additional hedge accounting rules. For the Company, the first-time mandatory application of IFRS 2 entails only extended disclosures in the notes as none of its employee stock option programs were issued or altered after November 7, 2002; these disclosures were already included in the financial statements as of December 31, 2004. The effects of the first-time application of IFRS 3 in conjunction with the amendments to IAS 36 and IAS 38 on GRENKELEASING AG are limited to the application of the impairment-only approach. In accordance with the transitional provision of IFRS 3.79, amortization of the goodwill arising from the acquisition of an operation prior to March 31, 2004 will be discontinued as of December 31, 2004. The net carrying amounts of goodwill are now classified as a new acquisition cost and are no longer amortized as of January 1, 2005. This resulted in an EUR 307k increase in earnings compared with the prior year. Under IAS 36.90, however, goodwill should be tested for impairment annually, regardless of whether or not there is evidence of an impairment. GRENKELEASING AG performs the compulsory annual impairment test of its goodwill on the basis of its semi-annual financial statements. The other IFRSs revised as part of the Improvement Project or otherwise newly issued or amended which have not been explicitly mentioned above have no effect on the financial statements of GRENKELEASING AG because the relevant accounting alternatives were already permitted and applied under the original versions of the IFRSs concerned and the effects of any changes in relation to measurement were individually and in absolute terms immaterial for the financial statements, or the pertinent provisions are not ­ currently ­ relevant for the financial statements of GRENKELEASING AG. 25 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.4 Changes in Presentation Compared With the Prior Year In order to improve the clarity and informative value of the financial statements, the following changes in presentation were made compared with the prior year: 2.5 Consolidation Principles The consolidated financial statements contain all assets and liabilities and all expenses and income of GRENKELEASING AG and of the subsidiaries it controls after eliminating all material intragroup transactions. Due to their immateriality for the financial statements, inventories, which were previously shown under a separate balance sheet item are now presented in the item "other current assets". Only receivables/liabilities in connection with income taxes are now shown under tax receivables and liabilities. VAT, which was also disclosed in this item in the prior year, is now shown under "other current assets" or "other current liabilities", as appropriate. The prior year's disclosure was adjusted accordingly. As of December 31, 2005, the Company discloses a provision for pensions under non-current liabilities. First-time recognition was necessitated by a change in legislation in Switzerland which introduced an obligation for companies to make additional contributions to their compulsory funded retirement benefit plans as from January 1, 2005. However, no separate disclosure was made for reasons of immateriality (please see Note 25 for more details). Subsidiaries are included in the consolidated group for as long as the Parent Company is able to exercise a controlling influence over them. The purchase method of accounting was used for acquisitions. Companies acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. No businesses were acquired in 2004 or 2005, such that the provisions of IFRS 3 "Business Combinations" published by the IASB on March 31, 2004 did not apply. IFRS 3 must be applied for the first time in fiscal year 2005 for past business acquisitions made by GRENKELEASING AG. The most significant effect for GRENKELEASING AG is the abolition of systematic amortization of goodwill as of January 1, 2005; an impairment test must be carried out at least once a year instead (see also 2.15.3). In addition to GRENKELEASING AG, the following subsidiaries are included in the consolidated financial statements: 26 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Name Registered office Investment 2005 Investment 2004 Germany GLG Grenke-Leasing GmbH Baden-Baden 100% 100% Grenke Investitionen Verwaltungs KGaA Baden-Baden 100% 100% (84.4% directly, 15.6% indirectly via GLG Grenke-Leasing GmbH WEBLEASE NETBUSINESS AG Baden-Baden 100% 100% Abroad GRENKELEASING s.r.o.* Prague/Czech Republic 100% 100% GRENKE ALQUILER S.A. Barcelona/Spain 100% 100% Grenkefinance N.V. Maasbree/Niederlande 100% 100% GRENKELEASING AG Basel/Switzerland 100% 100% GRENKELEASING AG Vienna/Austria 100% 100% GRENKELEASING ApS Herlev/Denmark 100% 100% GRENKE LIMITED Dublin/Ireland 100% 100% GRENKE FINANCE Plc. Dublin/Ireland 100% 100% GRENKE LOCATION SAS Schiltigheim/France 100% 100% GRENKE Locazione S.r.l. Milan/Italy 100% 100% GRENKE LEASING S.r.l. Milan/Italy 100% 100% GRENKELEASING AB Stockholm/Sweden 100% 100% GRENKE LEASE Sprl** Brussels/Belgium 100% -- The balance sheet date of all subsidiaries is December 31, 2005. * EKOMA s.r.o. was renamed GRENKELEASING s.r.o. on September 26, 2005. ** On April 14, 2005, the capital stock of GRENKE LEASE Sprl in Brussels, Belgium, of EUR 1,500k was transferred. The subsidiary was entered in the commercial register on May 13, 2005. GRENKELEASING AG holds a direct interest of EUR 1,499k and an indirect interest of EUR 1k through its German subsidiary, GLG Grenke-Leasing GmbH. Investment EUR Equity Dec. 31, 2005 Net income/loss 2005 Grenke Investitionen Verwaltungs KGaA* GLG Grenke-Leasing GmbH WEBLEASE NETBUSINESS AG* GRENKE LOCATION SAS GRENKELEASING AG GRENKELEASING AG GRENKELEASING s.r.o. (prior EKOMA s.r.o.)** GRENKE ALQUILER S.A.** GRENKE Locazione S.r.l.** Grenkefinance N.V.** GRENKE LEASING S.r.l.** GRENKELEASING ApS** GRENKE LIMITED** GRENKE FINANCE Plc.** GRENKELEASING AB** GRENKE LEASE Sprl** * after transfer of profits ** preliminary result Baden-Baden Baden-Baden Baden-Baden Schiltigheim/France Basel/Switzerland Vienna/Austria Prague/Czech Republic Barcelona/Spain Milan/Italy Maasbree/Niederlande Milan/Italy Herlev/Denmark Dublin/Ireland Dublin/Ireland Stockholm/Sweden Brussels/Belgium 780,828.96 333,992.92 213,342.69 9,446,532.24 3,540,916.07 557,998.03 403,636.52 486,558.75 481,084.89 217,732.25 2,320,422.27 237,133.94 151,331.12 3,103,500.61 617,349.28 1,387,443.49 0 22,163.90 0 1,786,085.57 1,595,377.44 -32,483.61 20,608.73 156,037.17 -263,372.53 227,063.09 -1,039,164.38 -238,095.08 -476,834.79 970,081.46 -319,504.35 -112,556.51 27 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.6 Foreign Currency Translation 2.6.1 Foreign Currency Transactions Foreign currency transactions are translated at the closing rate on the date of the transaction. Foreign currency monetary items (e.g. cash and cash equivalents, receivables and liabilities) are subsequently translated using the closing rate as of the end of the fiscal year, with any translation differences reported in net profit or loss. Non-monetary items carried at historical cost are not subsequently translated, the rate on initial recognition being used. 2.6.2 Foreign Entities Foreign financial statements in foreign currencies are translated according to the functional currency concept in accordance with IAS 21. The assets and liabilities of the consolidated foreign entities are translated using the closing rate and expenses and income at annual average rates, since these entities are financially, economically and organizationally autonomous. Differences from foreign currency translation are reported directly in equity. The development of the exchange rates of the currencies used in the Group to the euro is illustrated below: Closing rate Dec. 31, 2005 Average rate 2005 CHF 1.5510 1.5483 CZK 29.0000 29.7820 DKK 7.4605 7.4518 GBP* 0.6853 0.6838 PLN* 3.8600 4.0230 SEK 9.3885 9.2822 * Currency of the franchise companies, loans are granted in foreign currency Closing rate Dec. 31, 2004 1.5429 30.4640 7.4388 0.7051 4.0845 9.0206 Average rate 2004 1.5438 31.8910 7.4399 0.6787 4.5268 9.1243 2.7 Historical Cost Principle The consolidated financial statements are based on historical cost accounting. Unless otherwise stated, assets and liabilities are disclosed at nominal value less necessary allowances. 2.8 Leases 2.8.1 Finance Leases Under a finance lease, substantially all the risks and rewards incident to legal ownership are transferred by the lessor to the lessee. The lease payment receivable is thus treated by the lessor as repayment of principal and finance income to reimburse and reward the lessor for its investment and services. Assets from a finance lease are recognized in the balance sheet as receivables at an amount equal to the net investment, i.e. the present value of the residual receivables of all lease contracts existing at the end of a fiscal year. The net investment value is calculated on the basis of the net cost of the leased assets less a special lease payment made by the lessee. Initial direct costs incurred in connection with contract conclusion are offset against income over the entire term of the lease contract by proportionately reducing the unearned finance income by these initial costs. Finance income is recognized such that a constant periodic rate of return on the outstanding residual receivable is generated. 28 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.8.2 Operating Leases Operating lease property is disclosed in the balance sheet based on the type of asset (see Note 18). Lease income from operating leases is recognized on a straight-line basis over the lease term. After the original lease contract has expired, the contract may be extended or a follow-on contract concluded. This leads to the lease being remeasured. In cases where the criteria for an operating lease are met, the leased asset is disclosed as an asset from the start of the extension period. It is carried at fair value. 2.9 Liabilities from the refinancing of lease receivables Liabilities from the refinancing of lease receivables result from the sale of a portion of the lease receivables to the respective refinancer. Such liabilities are carried at the present value of the outstanding payments to the refinancers. The originally agreed rate is used as the discount rate for fixed-interest loans. Upon repayment, regular payments are split into an interest portion and a principal component. The interest portions are disclosed as expenses from interest on lease liabilities. 2.10 Cash and Cash Equivalents The cash and cash equivalents in the balance sheet comprise cash on hand and bank balances. Negative current account balances were deducted from cash and cash equivalents for the cash flow statement. 2.11 Financial Assets and Liabilities Apart from securities, financial assets include derivatives that serve as hedging instruments. Derivatives are classified as assets held for trading unless they are designated hedging instruments in a hedging relationship. Securities are also assigned to the category of "assets held for trading". Financial assets held for trading are initially recognized at cost plus any transaction costs incurred and are carried at fair value on subsequent measurement. Securities are measured at their quoted market values at the balance sheet date. The derivate financial instruments used in the Company are valued using either Bloomberg (interest rate swaps) or the measurement bases provided by the banks (forward exchange contracts). Any adjustments other than hedge accounting adjustments are recognized in profit or loss. As a rule, they are recognized for the first time as of the settlement date. When hedging transactions are entered into to hedge the exposure to variability in cash flows, certain derivatives are allocated to certain underlying contracts that are attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction (cash flow hedge). The hedging instruments in a hedge are also recognized at fair value. However, changes in value relating to the effective portion are recognized in the cash flow hedge reserve, a separate item under equity. Any ineffectiveness is recognized in profit or loss. Effectiveness is measured as of every single reporting date using the hypothetical derivative method. 29 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Financial liabilities (e.g. bonds, loans against borrower's note, non-current bank liabilities) are initially recognized at cost and are carried at amortized cost on subsequent measurement. If a financial liability is the underlying contract in a fair value hedge, it is carried at fair value on subsequent measurement. If the fair value hedge has to be reversed, the hedged item is then carried at amortized cost rather than at fair value. In this case, the adjustment required for measurement at fair value is amortized over the residual term of the hedged item. The depreciation rates are based on the following economic lives: Years Office buildings 33 Furniture, fixtures and office equipment IT hardware 3 Vehicle fleet 4-5 Leasehold improvements 10 Other (office equipment) 3-20 2.12 Trade Receivables and Other Assets Receivables and other assets are carried at their nominal value. Adequate flat-rate specific bad debt allowances are recognized to account for the credit risk from trade receivables. 2.13 Inventories Inventories are measured at the lower of cost and net realizable value. 2.14 Property, Plant and Equipment Property, plant and equipment are recognized at cost plus directly attributable costs net of accumulated depreciation and accumulated impairment losses. Finance charges were not disclosed. Property, plant and equipment are subject to straight-line depreciation according to their expected economic life. When property, plant and equipment are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognized in net profit or loss. The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. 2.15 Intangible Assets 2.15.1 Licenses, Software Licenses are carried at cost plus acquisition charges. The cost of software is capitalized and treated as an intangible asset if these costs are not an integral part of the related hardware. As licenses and software have limited useful lives, they are subject to systematic straight-line amortization over their economic life, generally three years. 2.15.2 Internally Generated Intangible Assets An intangible asset developed as part of a project is only recognized if the Group is able to prove the technical feasibility of completing the intangible asset for internal use or sale and the intention to complete the intangible asset and use or sell it. In addition, the generation of future economic benefits by the asset, the availability of resources to complete the asset, and the ability to measure the expenditure attributable to the intangible asset during its development must exist. Internally generated intangible assets are measured at the cost of conversion. The cost comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended. 30 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The capitalized amounts are amortized over the period during which the project is expected to generate revenue or during which the software can probably be amortized. Given the technical developments expected in future years, the economic life is assumed to be three years. The capitalized amount of development expenses is tested for impairment annually if the asset is not yet in use or if there are indications during the year that the asset may be impaired. 2.15.3 Goodwill Goodwill resulting from acquisitions is defined as the positive difference between the purchase price of an investment and the fair value of the assets and liabilities at the time of the acquisition. Goodwill was amortized straight-line over its economic life until December 31, 2004. Following the implementation of IFRS 3, all existing goodwill was frozen at the value recognized as of December 31, 2004 and systematic amortization ceased at this time. This fixed value is now considered to be the new historical cost. Instead of systematic straightline amortization, all goodwill must now be tested for impairment at least once a year pursuant to IAS 36 to prove its adequate valuation ("impairment-only approach"). This regular impairment test will be conducted in the third quarter of each year on the basis of the six-month figures. If there are indications that goodwill might be impaired, more frequent tests must be conducted in addition to the mandatory annual impairment test. 2.16 Impairment of Assets amount is the higher of an asset's net selling price and its value in use. The net selling price is the amount obtainable from the sale of an asset in an arm's length transaction less the costs of disposal. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. The recoverable amount is estimated for individual assets or, if this is not possible, for the cash-generating unit to which the asset belongs. The carrying amounts of goodwill will be reviewed to assess the probability of continuing future benefits in accordance with the rules described in 2.15.3. The future economic benefits are determined by the recoverable amount. An impairment is recognized in net profit or loss if the recoverable amount is lower than the carrying amount of the respective cashgenerating unit. If the reason for an impairment recorded in a prior period ceases to apply, an impaired asset is written up. Exceptions to this rule exist only for impairments of goodwill which may, on no account, be written up. 2.17 Provisions Provisions are carried at their probable settlement amount if a present obligation (legal or constructive) exists for the Group due to an event occurring prior to the balance sheet date, it is probable that settlement of the obligation will lead to an outflow of resources embodying economic benefits, and if a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Assets within the meaning of IAS 36.1 are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized as soon as the carrying amount of an asset exceeds its recoverable amount. The recoverable 31 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 2.18 Deferred Tax Liabilities and Assets Deferred tax liabilities are calculated using the liability method in accordance with IAS 12. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of an asset or a liability for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets for previously non-utilized loss carryforwards are recognized if it is probable that taxable profit will be available to utilize these carryforwards. Since the grant is conditional on retention of the subsidized asset at the business, repayment obligations lead to an increase in the carrying amount and an adjustment of interest income. 2.20 Income from Insurance Business Income from insurance business comprises premiums for insurance policies which the lessees must conclude via GRENKELEASING if they do not insure the leased assets themselves. The insurance premiums are collected annually; these amounts are deferred and released to income pro rata temporis. Deferred tax assets and liabilities are recognized on the basis of tax rates anticipated for the period in which the temporary differences will reverse. For this purpose, tax rates that have been enacted or substantively enacted by the balance sheet date are used. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are not discounted and are classified as non-current assets (liabilities) in the balance sheet. 2.19 Government Grants Government grants relate to investment grants applied for pursuant to Sec. 2 InvZulG ["Investitionszulagengesetz 1999": German Investment Grant Act 1999]. The allowance represents a grant for an asset; the carrying amount of the corresponding lease receivable is netted with this amount. This leads to increased income from interest on lease receivables spread over the term of the lease. 2.21 Sale of Leased Assets Sales are recognized upon transfer of benefits and burdens. 2.22 Use of Assumptions and Estimates In preparing the consolidated financial statements, assumptions and estimates have been made which have had an effect on the recognition and carrying amounts of assets and liabilities, income and expenses and contingent liabilities. Assumptions and estimates generally relate to the uniform determination of useful lives of assets within the Group, the measurement of provisions, the recoverability of receivables from terminated contracts, the recognition of realizable residual values for leased assets and the probability of future tax benefits. The actual values may in some cases differ from the assumptions and estimates. Any changes will be recognized in profit or loss as and when better information is available. 32 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The main estimating uncertainties and the associated disclosure requirements are in the following areas: Assumptions made in impairment tests for measuring goodwill Measurement of allowances on non-performing lease receivables on the basis of the recoverability rate Consideration of estimated residual values at the end of the lease term in determining the present value of lease receivables Recognition of leased assets for sale at estimated residual values The cash flows used in the measurement of discounted cash flows are based on current business plans and internal plans for the next three years. This involved making assumptions as to future revenues and costs. Assumptions as to future cash flows were made on the basis of past figures, and past income patterns were projected into the future. If significant assumptions differ from actual figures, impairment losses may have to be recognized in the future. The terminal growth rate does not exceed the long-term growth rate of the industry in which the cash-generating units operate. Average costs of capital of approx. 7% were used to discount the cash flows. Non-performing lease receivables are carried at nominal value less appropriate bad debt allowances. The amounts of bad debt allowances are determined using percentages and processing categories. Percentages are calculated using statistical methods. They are reviewed once a year for validity. Processing statuses are grouped together in processing categories set up with a view to risk. The following table illustrates the processing categories: Category 0 1 2 3 4 5 6 7 8 9 Description Current contract not in arrears Current contract in arrears Terminated contract with serviced installment agreement Terminated contract (recently terminated or court order for payment applied for) Legal action (pending or after objection to court payment order) Order of attachment issued Statement in lieu of oath (applied for or issued) Derecognized Being settled (not terminated) Discharged (completely paid) A decrease in value is assumed for categories 2 to 7 as the contracts have been terminated due to defaults in payment. The allowance rates range between 5% and 100%. Estimated residual values are taken into account in determining the present value of lease receivables. Estimated residual values comprise anticipated sales proceeds and any revenues generated in a renewal period. Residual values are taken into account upon conclusion of the corresponding lease contracts on the basis of the anticipated values. Revenues are a best estimate based on statistical analyses. If the posttransaction recoverable amount is lower than expected (from sale and subsequent lease), the lease receivables are written down, whereas an increase in recoverable amount is not recognized. Leased assets for sale are measured on the basis of the average sales proceeds per age group realized in the past fiscal year in relation to the original acquisition cost. 33 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 3 Net Interest Income From Leasing Business 4 Expenses From Settlement of Claims 3.1 Income from Interest on Lease Receivables Income from interest on lease receivables amounts to EUR 82,100k (prior year: EUR 74,114k). This includes EUR 116k (prior year: EUR 186k) from the recognition of investment grants (see Note 2.19) and EUR 851k from interest on loans to franchisees (prior year: EUR 214k). Flat-rate specific bad debt allowances are calculated based on historical rates for the collectability of a receivable in conjunction with its categorization (percentage-of-receivables approach). 3.2 Expenses from Interest on Refinancing Liabilities Interest expense from refinancing liabilities amounts to EUR 21,480k (prior year: EUR 17,866k). This item also includes the interest income of EUR 977k (prior year: EUR 598k) generated by the loans issued under the ABCP programs (asset-backed commercial paper) (see Note 20). EURk Provision to specific bad debt allowances Income from settlement of claims Expenses from eliminating receivables from claims Summe 2005 16,464 20,899 20,559 16,124 2004 14,165 23,185 23,289 14,269 34 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 5 Profit From New Business Revenues from new business are comprised as follows: EURk 2005 2004 Recognition of new lease receivables Share of revenues from prior leases Revenues from processing fees Revenues from special lease payments Total 420,842 1,989 1,448 1,087 425,366 369,544 1,973 1,578 994 374,089 Expenses from new business are comprised as follows: EURk 2005 2004 Cost of newly acquired leased assets Commissions paid to dealers Total 402,913 6,582 409,495 354,767 5,949 360,716 Profit From New Business 15,871 13,373 6 Profit From Disposals 2005 2004 EURk Revenues from subsequent leases Depreciation of leased assets in the subsequent lease period Accounting gains (prior year: accounting losses) on the disposal of the lease receivables Total 11,397 9,278 1,330 3,449 8,490 6,810 -219 1,461 Revenues from subsequent leases relate to lease income recognized after the end of the basic lease term. Accounting gains/ losses from the disposal of lease receivables result from the revenues of terminated contracts less the disposal of the lease receivables at their carrying amount. 7 Other Operating Income Other operating income breaks down as follows: 2005 2004 EURk Income from currency translation Franchise fees received Accounting gains on the sale of equipment Other items Total 440 297 195 94 35 90 182 172 852 653 35 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 8 Personnel Expenses 2005 2004 EURk Salaries Social security and other benefit costs Total 14,332 3,154 17,486 12,624 2,729 15,353 The average number of staff during the fiscal year totaled 339 (prior year: 285). Part-time staff were counted on a proportionate basis. Social security and other benefit costs include pension costs of EUR 46k (prior year: EUR 32k). 9 Consulting and Audit Fees The consulting and audit fees of EUR 2,068k (prior year: EUR 2,039k) include auditor's fees totaling EUR 699k. The auditor's fees in fiscal year 2005 break down as follows: Auditing fees Certification and valuation fees Fees for tax advisory services Fees for other services EUR 395k EUR 226k EUR 14k EUR 64k 10 Depreciation of Property, Plant and Equipment and Amortization of Intangible Assets 2005 2004 EURk Equipment Office buildings Software licenses and development cost Goodwill Total 1,136 301 172 0 1,609 1,052 296 147 307 1,802 36 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 11 Income Taxes 2005 2004 EURk Current taxes Deferred taxes Total 15,218 1,508 16,726 14,556 -1,260 13,296 Reconciliation of the Average Effective Tax Rate and the Applicable Tax Rate Reconciliation of the expected applicable tax rate of GRENKELEASING AG to the effective tax rate related to EBT (100%) is as follows: Applicable Tax Rate 2005 2004 Trade tax Corporate income tax (25% on income after trade tax) Solidarity surcharge (5.5% of corporate income tax) Average applicable tax rate GRENKELEASING AG 16.96% 20.78% 1.14% 38.88% 16.85% 20.79% 1.14% 38.78% Tax reductions due to tax-free income Tax increases due to non-deductible expenses Changes due to foreign taxes Balance of tax reductions and increases due to changes in tax rates** Effect of tax-free dividend income* Backpayments of tax from prior years*** Average effective tax rate for the Group 0.00% 0.34% -2.56% -0.32% 0.00% 0.22% 36.56% -0.07% 0.74% -1.65% 0.00% -1.80% 0.00% 36.00% * In 2004, the tax-free income was mainly connected to two securities lending transactions effected in the prior year. In these lending transactions, German or foreign shares were transferred to GRENKELEASING AG for a period of up to 2 months. GRENKELEASING AG received tax-free dividend income totaling EUR 2,652k. In the financial statements, the dividend income was netted with the compensation expenses incurred in the same amount, reflecting the substance of the transaction. No withholding tax is deducted at source from dividend payments on foreign shares, nor is any German tax on investment income withheld in Germany pursuant to Sec. 43 EStG ["Einkommensteuergesetz": German Income Tax Act]. The net dividend is 95% exempt from corporate income tax pursuant to Sec. 8b (1) and (5) KStG ["Körperschaftsteuergesetz": German Corporate Income Tax Act]. The compensation payments were fully tax deductible in both cases. ** The following changes in tax rates for the calculation of deferred taxes have been made in each of the countries: France 33.33% (prior year: 34.33%); Czech Republic 24% (prior year: 31%); Netherlands 30.5% (prior year: 34.5%); and Denmark 28% (prior year: 32%). *** Backpayments of tax from prior years amount to EUR 100k 37 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 12 Earnings per Share The calculation of both diluted and basic earnings is based on the respective net profit for the period. In calculating the average number of shares in fiscal year 2005, the unchanged number of ordinary shares and the proportionate number of shares that may be issued on the basis of warrants were taken into account. There was a dilutive effect in fiscal year 2005 due to the current employee stock option programs (see Note 32) because of the potentially exercisable stock options. 2005 2004 No. Shares issued at beginning of period Average number of new shares issued under the stock option program Average number of shares outstanding at end of period (undiluted) Employee stock option program Average number of shares outstanding at end of period (diluted) Potential number of shares Number of diluted shares at end of period (incl. shares with a potentially dilutive effect) 13,601,938 23,622 13,625,560 7,426 13,632,986 42,502 13,675,488 13,523,848 30,297 13,554,145 27,770 13,581,915 425,678 14,007,593 The new shares issued under the stock option program do not take full effect in the first year because these shares are not considered until after the issue date. Furthermore, in the fiscal year, options under the second option program were exercised on all three dates (exercise period between May 4, 2005 and May 31, 2005: 33,614 options; July 29, 2005 to August 25, 2005: 5,942 options; October 28, 2005 and November 24, 2005: 2,152 options), whereas they were only exercised in one period (August 13, 2004 to September 9, 2004) in the prior year. All shares which could have already been issued due to fixed terms or restrictions have a dilutive effect. All shares which could potentially be issued in the future if certain conditions or restrictions are met, have a potentially dilutive effect. 13 Financial Assets Dec. 31, 2005 Dec. 31, 2004 EURk Other securities Interest rate swaps Other derivative financial instruments with a positive fair value Total 294 409 80 416 0 522 374 1.347 38 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The fair value disclosed under interest rate swaps in the prior year related exclusively to an interest rate swap dating back to 2003 with a nominal amount of EUR 170m. As the relative change in value was outside the corridor of 80% to 125% prescribed in IAS 39 for the measurement of effectiveness, the hedging relationship, which had originally been accounted for as a fair value hedge, had to be dissolved and the interest rate swap had to be accounted for as a standalone derivative. As of March 24, 2005, this interest rate swap was sold for EUR 355k, thus incurring a loss of EUR 61k. As of March 23, 2005, two other interest rate swaps were concluded. The first interest rate swap with a volume of EUR 100m has a term from June 22, 2005 to September 22, 2006 and its terms are based on those of the floating rate debenture issued on March 22, 2005. The first interest rate swap is used as a cash flow hedge of the above debenture. By means of the interest rate swap, the interest rate for the specified period is fixed at 2.609%. As of the balance sheet date, this swap had a positive fair value of EUR 80k. This amount includes accrued interest of EUR 3k. The second interest rate swap had an initial volume of EUR 133m. Its term starts on September 22, 2006 and expires on September 22, 2010. The volume of the interest rate swap will amortize over its term. The interest rate was fixed at 3.2925%. The other terms for this swap are also based on those of the floating rate debenture issued on March 22, 2005. The second interest rate swap had a negative fair value of EUR 302k as of the balance sheet date. This amount is disclosed under financial instruments with negative fair value. No accrued interest had to be recognized because the term begins in the future. The debenture and the new interest rate swaps are the first elements in a new financing strategy under which, in the future, almost all of GRENKELEASING AG will separate refinancing and interest rate hedging in order to obtain maximum flexibility for its refinancing activities. The resulting risks (variable cash flows) will be hedged by appropriate interest rate derivatives whose terms will be based on those of an underlying portfolio of lease contracts. As both derivatives have been proven to be 100% effective, the changes in fair value in relation to their clean value (excluding accrued interest) were recognized fully in equity. The sale of two interest rate swaps (payer swaps) with a total volume of EUR 244m and a cap with a volume of EUR 610k gave rise to a loss totaling EUR 127k in connection with the new interest rate hedging strategy. In addition, forward exchange contracts are used to hedge the cash flows from the loans granted to the franchise companies in Poland and the UK. The Company buys the lease receivables generated by the franchisee in the foreign currency (pound sterling and Polish zloty) and receives payments in those currencies over the term of the underlying lease contracts. In the past, hedge accounting was not applied for foreign exchange transactions due to their immateriality. Other securities mainly comprise shares and corporate bonds. Measurement at fair value resulted in income of EUR 41k in fiscal year 2005 (prior year: EUR 17k). 39 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 14 Lease Receivables EURk Outstanding minimum lease payments + Unguaranteed residual values Gross investment - Unearned (outstanding) finance income Net investment - Present value of unguaranteed residual values Present value of minimum lease payments EURk Gross total investment Present value of outstanding minimum lease payments Dec. 31, 2005 Dec. 31, 2004 808,764 126,584 935,348 138,189 797,159 98,205 698,954 692,966 111,182 804,148 123,253 680,895 84,808 596,087 Less than 1 year 1 and 5 years More than 5 years 330,934 230,646 595,455 463,305 8,959 5,003 40 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The reconciliation of gross investment only contains contracts still running on the balance sheet date. The following adjustments have to be made to reconcile net investment to the carrying amount of lease receivables disclosed in the balance sheet: Dec. 31, 2005 Dec. 31, 2004 EURk Changes in performing lease receivables Balance at beginning of period + Change in the period Lease receivables (current + non-current) from current contracts at period-end 680,895 116,264 797,159 575,840 105,055 680,895 Changes in non-performing lease receivables Gross receivables at beginning of period - accumulated valuation allowances at beginning of period = Non-performing lease receivables at beginning of period + Change in gross receivables during the period - Disposals of gross receivables during the period + Disposal of accumulated valuation allowances during the period - Addition of accumulated valuation allowances during the period Non-performing lease receivables at period-end 130,101 -69,593 60,508 20,092 14,096 8,454 11,289 63,669 113,335 -60,413 52,922 23,655 6,889 3,000 12,180 60,508 Lease receivables (carrying amounts of current and non-current receivables) at beginning of period Lease receivables (carrying amounts of current and non-current receivables) at period-end 741,403 860,828 628,762 741,403 EURk Current lease receivables Non-current lease receivables Total Present value of minimum lease payments Present value of residual values Other receivables from lessees Carrying amount 230,700 468,254 698,954 32,414 65,791 98,205 63,669 0 63,669 326,783 534,045 860,828 Receivables from non-performing contracts are included in other current receivables. 15 Trade Receivables Trade receivables of EUR 1,471k (prior year: EUR 1,002k) mainly relate to receivables from dealers and third parties. They comprise receivables from the sale of leased assets. 41 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 16 Tax Receivables Dec. 31, 2005 EURk Advance tax payments France Other items Total 3,458 120 3,578 17 Other Current Assets Dec. 31, 2005 EURk VAT refund claim Receivables from franchisees (refinancing) Direct debits at end of month Prepaid expenses Factoring receivables Other items Total 10,196 7,721 737 474 207 855 20,190 Please see Note 20 for details of what the receivables from franchisees entail. Dec. 31, 2004 3,458 84 3,542 Dec. 31, 2004 10,304 2,486 804 302 1,215 658 15,769 42 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 18 Property, Plant and Equipment at Cost Overview for Fiscal Year 2004: Land and buildings EURk Cost as of Jan. 1, 2004 Currency translation differences Additions Disposals Reclassifications Cost as of Dec. 31, 2004 10,718 0 52 0 0 10,770 Accumulated depreciation as of Jan. 1, 2004 465 Currency translation differences 0 Additions 296 Disposals 0 Reclassifications 0 Accumulated depreciation as of Dec. 31, 2004 761 Net carrying amounts as of Dec. 31, 2004 Net carrying amounts as of Dec. 31, 2003 10,009 10,253 Other equipment, furniture and fixtures Leased assets from operating leases 6,192 0 1,187 758 0 6,621 2,966 0 1,052 672 0 3,346 3,275 3,226 5,850 0 6,999 6,810 0 6,039 0 0 6,810 6,810 0 0 6,039 5,850 Total 22,760 0 8,238 7,568 0 23,430 3,431 0 8,158 7,482 0 4,107 19,323 19,329 43 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Overview for Fiscal Year 2005: EURk Cost as of Jan. 1, 2005 Currency translation differences Additions Disposals Reclassifications Cost as of Dec. 31, 2005 Land and buildings Other equipment, furniture and fixtures Assets under construction Leased assets from operating leases Total 10,770 6,621 0 0 5 0 1 1,623 279 358 0 0 0 10,771 7,891 279 6,039 0 13,164 9,278 0 9,925 23,430 5 15,067 9,636 0 28,866 Accumulated depreciation as of Jan. 1, 2005 Currency translation differences Additions Disposals Reclassifications Accumulated depreciation as of Dec. 31, 2005 761 0 301 0 0 1,062 3,346 5 1,136 339 0 4,148 0 0 4,107 0 0 5 0 9,278 10,715 0 9,278 9,617 0 0 0 0 0 5,210 Net carrying amounts as of Dec. 31, 2005 9,709 3,743 279 9,925 23,656 Depreciation on leased assets from operating leases is shown in profit from disposals (see Note 6). 44 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 19 Intangible Assets at Cost Overview for Fiscal Year 2004: EURk Cost as of Jan. 1, 2004 Currency translation differences Additions Disposals Reclassifications Cost as of Dec. 31, 2004 Development costs 0 0 0 0 0 0 Goodwill 3,170 0 0 0 0 3,170 Softwarelicenses 662 0 91 44 0 709 Accumulated amortization as of Jan. 1, 2004 0 Currency translation differences 0 Additions 0 Disposals 0 Reclassifications 0 Accumulated amortization as of Dec. 31, 2004 0 999 443 0 0 307 147 0 44 0 0 1,306 546 Net carrying amounts as of Dec. 31, 2004 Net carrying amounts as of Dec. 31, 2003 0 1,864 163 0 2,171 219 Overview for Fiscal Year 2005: EURk Cost as of Jan. 1, 2005 Currency translation differences Additions Disposals Reclassifications Cost as of Dec. 31, 2004 Development costs 0 0 408 0 0 408 Goodwill 1,864 49 0 0 0 1,913 Softwarelicenses 709 0 274 49 0 934 Accumulated amortization as of Jan. 1, 2005 0 Currency translation differences 0 Additions 35 Disposals 0 Reclassifications 0 Accumulated amortization as of Dec. 31, 2005 35 0 546 0 0 0 137 0 31 0 0 0 652 Net carrying amounts as of Dec. 31, 2005 373 1,913 282 Development costs mainly relate to internally developed factoring software and webshop programming. Total 3,832 0 91 44 0 3,879 1,442 0 454 44 0 1,852 2,027 2,390 Total 2,573 49 682 49 0 3,255 546 0 172 31 0 687 2,568 45 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 20 Other Non-Current Assets Dec. 31, 2005 Dec. 31, 2004 EURk ABCP loans Loans to franchisees (refinancing) Other items 59,132 13,146 570 42,607 6,671 84 Total 72,848 49,362 In addition to the liquidity reserve of 2% of the refinancing volume drawn on under the three ABCP programs, ABCP loans include loans to the SPEs which need to be granted as collateral for the refinancing volume under the respective agreements. These loans depend on the refinancing volume and on the origin of the receivables refinanced through the SPEs. The interest income generated in this connection is netted with the interest expense from refinancing liabilities. The loans to franchisees (see Notes 17 and 28) comprise loans granted mainly to refinance the lease agreements concluded by the franchisees. By way of security for the loan receivables, the franchisees have assigned both title to the leased assets and the claim to lease receivables. The loans are therefore equivalent to a purchase of receivables. As such, interest income generated from such loans of EUR 851k is recognized as income from interest on lease receivables. 21 Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are split among the following items: Dec. 31, 2005 Dec. 31, 2004 EURk Deferred tax assets Tax loss carryforwards Remeasurement of lease liabilities Total 12,979 7,115 20,094 13,057 5,161 18,218 Deferred tax liabilities Remeasurement of lease receivables Other remeasurements Total 47,047 453 47,500 43,905 241 44,146 46 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 22 Tax Liabilities Dec. 31, 2005 Dec. 31, 2004 EURk Corporate income tax Trade tax 3,220 508 5,679 5,868 Summe 3,728 11,547 The foreign VAT of EUR 393k, which was disclosed under tax liabilities in the prior year, was reclassified as "other current liabilities". 23 Provisions Provisions for other costs take all recognizable risks from contingent liabilities into account. They contain provisions for lease, consulting and financial statement costs. Jan. 1, 2005 EURk 1,308 Currency differences 0 Additions Utilization 1,294 1,244 Reversals Dec. 31, 2005 40 1,318 24 Financial Instruments with negative Fair Value Dec. 31, 2005 Dec. 31, 2004 EURk Interest rate swaps Other derivative financial instruments with a negative fair value 302 0 737 0 Total 1,039 0 In addition to the negative fair value of an interest rate swap described in Note 13, the Company disclosed negative fair values in connection with forward exchange contracts for the first time in the fiscal year. As of December 31, 2005, all forward exchange transactions in relation to pound sterling and Polish zloty had a negative fair value of EUR 737k. The forward exchange contracts relate to a total volume of EUR 18,088k and have residual maturities of between 1 and 54 months. 47 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 25 Non-Current Liabilities The classification of non-current liabilities by residual maturities is shown in the schedule of liabilities below: Type of liability EURk Total 1 to 5 years More than 5 years Secured amount Liabilities from the refinancing of lease receivables (prior year) Bank liabilities (prior year) Other liabilities* (prior year) 430,587 414,025 4,710 5,396 1,239 1,698 430,382 413,045 2,196 2,152 1,211 1,698 205 980 2,514 3,244 28 0 261,955 220,711 8,000 8,000 0 0 * thereof pensions of EUR 28k (prior year: EUR 0k) The bank liabilities include the non-current portion of a loan totaling CHF 8,179k (originally CHF 11,724k) which was translated at the exchange rate on the balance sheet date. It runs from December 23, 2002 to June 30, 2016 (the original term until December 30, 2017 was reduced) and bears interest of 2.95% p.a. The loan is secured by a land charge of EUR 8,000k on the office building in favor of Commerzbank Aktiengesellschaft, Baden-Baden branch, entered in the Oos land register under no. 6080 on December 18, 2002. Current and non-current lease receivables totaling EUR 477,261k (prior year: EUR 377,153k) have been assigned to the refinancing institutions to secure the liabilities from the refinancing of lease receivables. The GRENKELEASING AG Group has three asset-backed commercial paper (ABCP) programs with a total volume of EUR 575,000k. The ABCP program organized by Deutsche Bank AG with Rheingold No. 9 Limited has a volume of EUR 175,000k. The ABCP program organized by WestLB with Compass Variety Funding Limited has a volume of EUR 250,000k. Another program was concluded with SEB in December 2004 and first drawn on in February 2005. The ABCP with Kebnekaise Funding Limited, arranged by SEB, has a volume of EUR 150,000k. The programs' average interest rate in 2005 was 2.6% (prior year: 2.6%). The program with Deutsche Bank AG runs until September 2006. The program with WestLB has an indefinite term. At the end of fiscal year 2005, 68% (prior year: 53%) of the refinancing facilities provided under the ABCP programs had been utilized. Interest rate hedges (caps and swaps) were concluded to hedge the variable cash flows from the placement of commercial papers under the ABCP programs. Any costs incurred are charged on to GRENKELEASING. In return, the Company participates in the interest rate hedge as the benefit paid to the ABCP program resulting from the related hedge is passed on to GRENKELEASING. The costs incurred by GRENKE-LEASING are classified as transaction costs under IAS 39 and amortized over the term of the underlying refinancing packages. 48 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Pensions As of January 1, 2005, the present value of the obligation under the defined benefit pension plan for Switzerland amounted to EUR 196k (CHF 302k). Less the fair value of the plan assets of EUR 204k (CHF 315k), the notional carrying amount in the opening balance sheet would have been EUR 8k (CHF 13k). As this amount is of secondary importance to the net assets, financial position and results of operations of GRENKELEASING AG, no retroactive adjustment was made and the amount to be recognized in the opening balance sheet was recognized in this period. The calculation according to the expert opinion by Expertisa AG is based on the following actuarial assumptions: Discount rate: Dec. 31, 2005: 3.50% Dec. 31, 2004: 3.50% Estimated future salary increases: Dec. 31, 2005: 3.00% Dec. 31, 2004: 3.00% Estimated future pension amendments: Dec. 31, 2005: 0.00% Dec. 31, 2004: 0.00% Expected return on plan assets: Dec. 31, 2005: 2.00% Dec. 31, 2004: 2.00% On the basis of the actuarial report, the following income and expenses were recognized in the fiscal year 2005: Service cost: Interest expense: Income from interest on plan assets EUR 23k (CHF 35k) EUR 7k (CHF 11k) EUR 4k (CHF 6k) The liability disclosed in the balance sheet totaled EUR 28k (CHF 43k) as of December 31, 2005. This amount comprises a present value of the obligation (DBO) of EUR 221k (CHF 343k), a fair value of the plan assets of EUR 193k (CHF 300k) and an actuarial loss of EUR 11k (CHF 17k). The actuarial loss was recognized in equity in a separate item under the capital reserve in accordance with the revised IAS 19. Change in defined benefit obligations: EURk Defined benefit obligation at beginning of period Interest expense Current service cost Benefits paid Actuarial gains recognized under equity Currency translation differences from foreign plans Defined benefit obligation at end of period Development of plan assets: Fair value of plan assets at beginning of period Expected return Employer contributions Benefits paid Actuarial losses recognized under equity Currency translation differences from foreign plans Fair value of plan assets as of December 31, 2005 2005 194 7 23 0 3 0 221 203 4 0 0 14 0 193 49 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 26 Equity For the development of equity, we refer to the statement of changes in equity. Statement of recognized income and expense EURk Change in the fair value of financial instruments using for hedging purposes recognized under equity Adjustment item for the currency translation of foreign subsidiaries Actuarial gains/losses from defined benefit pension commitments and similar obligations Tax on items taken directly to or transferred from equity Net income recognized directly in equity Net profit for the period after tax Total recognized income and expense for the period 2005 -219 -274 -11 30 -474 29,027 28,553 2004 -1.679 -95 0 3 -1.771 23,629 21,858 The fully paid-in subscribed capital of GRENKELEASING AG amounts to EUR 17,440k (prior year: EUR 17,387k). It is divided into 13,643,646 (prior year: 13,601,938) no-par bearer shares. The change on the prior year is attributable to the exercise of stock options in 2005 under the second stock option plan (see Note 32). A total of 41,708 options were exercised and exchanged for shares. The shareholders' meeting adopted a resolution authorizing the Board of Directors, with the approval of the Supervisory Board, to increase the Company's share capital by April 30, 2010 up to a nominal amount of EUR 8,500k by issuing new no-par bearer shares in return for cash and/or non-cash contributions. The approved capital increase may be performed in tranches. The shareholders are to be granted a share subscription right. However, under certain conditions, the Board of Directors is authorized to wholly or partly exclude the subscription rights of shareholders in capital increases in return for cash contributions, with the approval of the Supervisory Board. The articles of incorporation were amended accordingly. In this connection, the approved capital of EUR 5,963k, which expired on February 28, 2005, was cancelled. There is also conditional capital of EUR 1,627k. The conditional capital is divided into two tranches. Tranche I ("conditional capital I") was created in connection with the IPO in the amount of EUR 959k. As a result of the resolution passed by the shareholders' meeting on April 16, 2002, the conditional increase in capital of up to EUR 959k, approved on February 28, 2000, was reduced by EUR 180k. "Conditional capital I" now only amounts to EUR 779k. On the same date, the shareholders' meeting also approved a further conditional increase ("conditional capital II") of EUR 948k. These changes were entered in the commercial register on June 7, 2002. In fiscal year 2004, "conditional capital II" was used when 78,090 stock options were exercised, thereby decreasing by EUR 100k to EUR 848k. In fiscal year 2005, "conditional capital II" was used when 41,708 stock options were exercised, thereby decreasing by EUR 53k to EUR 795k. 50 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The resolution on the appropriation of the retained earnings of GRENKELEASING AG for fiscal year 2004 was approved by the shareholders' meeting on May 3, 2005. Retained earnings EUR 31,054,189.70 Exercise period after shareholders' meeting 2005: EUR 19.65 per option/share Exercise period after publication of QII: EUR 18.56 per option/share Distribution of a dividend of EUR 0.40 per no-par share for a total of 13,601,938 no-par shares Transfer to revenue reserves Profit carryforward (to new account) EUR 5,440,775.20 -- EUR 25,613,414.50 The dividend was paid to the shareholders of GRENKELEASING AG on May 4, 2005. In fiscal year 2004, a dividend of EUR 4,462,869.84 was distributed to the shareholders, which is equivalent to EUR 0.33 per share for a total of 13,523,848 no-par shares. The Board of Directors has proposed a dividend of EUR 0.50 per share for the fiscal year. Exercise period after publication of QIII: EUR 15.34 per option/share This resulted in an amount of EUR 803k which was transferred to the capital reserve (see Note 32). In addition to GRENKELEASING AG's revenue reserves, revenue reserves also comprise the revenue reserves and profits of the consolidated subsidiaries. As cash flow hedges were accounted for for the first time, a hedge reserve was recognized in equity in fiscal year 2003. Changes in the value of derivatives designated as hedging instruments in cash flow hedges are recognized in equity. The change in the fair value during the fiscal year is EUR 1,461k (prior year: EUR -1,085k) plus deferred taxes of EUR 23k (prior year: EUR -4k). The capital reserve of EUR 59,485k (prior year: EUR 58,682k) mainly results from the IPO of GRENKELEASING AG in April 2000. A provision for input VAT on IPO costs recognized in the year of flotation was reversed following the judgment of the European Court of Justice of June 26, 2003. The option to offset these costs against the capital reserve was used in 2000. The reversal resulted in an effect of EUR 211k in 2003, less the effect of deferred taxes of EUR 81k. The capital reserve changed in 2004 and 2005 as a result of the exercise of stock options issued under the second stock option program. The difference between the exercise price and the notional par value (EUR 18.36 per option/share for 2004) of EUR 1,434k was allocated to the capital reserve. As options were exercised on more than one date, there were the following differences between the exercise price and the notional par value in 2005: As a result of the first-time recognition of pension provisions in accordance with the revised IAS 19, an amount of EUR -11k was recognized in equity due to the recognition of actuarial gains and losses. As a corresponding liability is not recognized in Switzerland, the deferred taxes attributable to the actuarial gains/losses (EUR 3k) were also recognized under equity. 51 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 27 Segment Reporting The segment information was calculated as follows: The GRENKELEASING AG Group's risks and rates of returns are primarily determined by the geographical regions in which it operates. In accordance with IAS 14, certain items of information in the financial statements have therefore been disclosed by regions ("primary segments") and by divisions ("secondary segments"). Regional segmentation makes a distinction as to whether lessees are based in Germany, France, Switzerland, or in another country. The "other countries" segment comprises Austria, Italy, the Czech Republic, Spain, the Netherlands, Denmark, Sweden and Ireland. For segmentation by divisions, a distinction is made according to the type of acquisition, i.e. which lease contracts were acquired through conventional channels, via specialist dealers or via the subsidiary WEBLEASE NETBUSINESS AG, i.e. via e-commerce shops, and which were acquired through direct conclusion on the internet. The gains and losses from the contracts settled using the internally developed internet software are allocated to the internet segment. Segment revenue comprises revenue from capitalizing lease receivables, sales revenues from leased assets, insurance revenue and interest income. Segment result is calculated before taxes (EBT). Amortization/depreciation relates to property, plant and equipment and intangible assets and the portion of goodwill amortization from the acquisition of consolidated subsidiaries directly attributable to the segment. Capital expenditure relates to additions of property, plant and equipment and intangible assets including the portion of goodwill attributable to the segment. Operating segment assets and liabilities are comprised of the operating assets and/or borrowings ­ excluding interest-bearing claims and liabilities and without taxes. The revenue listed in the segment reporting was reclassified in fiscal year 2005 for reconciliation purposes. Segment revenue now contains expenses for commissions. The prior year figures were adjusted accordingly. Segment revenue breaks down as follows: EURk Income from interest on lease receivables Profit from new business Insurance revenues Sales proceeds Total 2005 82,100 15,871 15,221 11,397 124,589 2004 74,114 13,373 13,330 8,490 109,307 52 GRENKELEASING AG, BADEN-BADEN SEGMENT REPORTING AS OF DECEMBER 31, 2005 REGIONS (PRIMARY REPORTING FORMAT) Segment Germany Dec. 31, 2005 Dec. 31, 2004 EURk Revenues 89,780 81,976 Segment result Earnings before taxes Income taxes Net profit 34,200 29,255 Amortization/depreciation 1,179 1,245 Capital expenditure 2,015 799 Segment assets Unallocated items Total assets 679,115 711,281 Segment liabilities Unallocated items Total liabilities 536,380 575,983 Segment France Dec. 31, 2005 Dec. 31, 2004 20,448 7,212 15,817 4,814 162 195 157,697 162 182 119,152 117,143 85,811 GRENKELEASING AG, BADEN-BADEN DIVISIONS (SECONDARY REPORTING FORMAT) EURk Revenues Segment result Capital expenditure Segment assets Segment internet Dec. 31, 2005 Dec. 31, 2004 Segment conventional leasing business Dec. 31, 2005 Dec. 31, 2004 63,827 23,414 1,324 540,310 52,609 17,734 640 437,288 60,762 22,339 1,261 514,282 56,698 19,191 690 471,203 53 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Segment Switzerland Dec. 31, 2005 Dec. 31, 2004 Segment Other countries Dec. 31, 2005 Dec. 31, 2004 Reporting Segments Dec. 31, 2005 Dec. 31, 2004 5,949 2,816 52 117 30,671 20,551 4,813 2,347 8,412 1,525 42 98 30,171 216 258 187,109 22,867 173,323 6,701 509 353 251 47,887 35,626 124,589 45,753 45,753 16,726 29,027 1,609 2,585 1,054,592 20,175 1,074,767 847,397 51,228 898,625 109,307 36,925 36,925 13,296 23,629 1,802 1,330 908,491 18,283 926,774 720,287 56,085 776,372 Total Segments Dec. 31, 2005 Dec. 31, 2004 124,589 45,753 2,585 1,054,592 109,307 36,925 1,330 908,491 54 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 28 Franchise System GRENKELEASING AG intends to expand into other markets using the business model that has been tried and tested in many European countries. To this end, it employs a franchise system. GRENKELEASING only dissolves or agrees to dissolve contracts prematurely (repurchase, exchange option, termination, etc.) if the loss (i.e. due to lost interest) is borne by the lessee. 29.2 Hedging Philosophy Grenke Leasing Ltd., Guildford, UK, and GRENKELEASING Sp.z o.o, Poznan, Poland, operate on this basis. Three new franchise companies were founded in fiscal year 2005: GRENKE AUTOLEASING GmbH, registered office in Bremen, Germany (by agreement dated April 19, 2005) GRENKE LEASING AS, registered office in Oslo, Norway (by agreement dated May 12, 2005) GRENKEFACTORING GmbH registered office in Baden-Baden, Germany (by agreement dated July 26, 2005) Derivatives are used when, and only when, underlying contracts require hedging. Underlying contracts are the contractual obligations entered into by GRENKELEASING in order to achieve the Company's objectives. Treasury is not a separate profit center. The use of derivatives is therefore limited to hedging the profits of GRENKELEASING to the extent stipulated in the Company's articles of incorporation and bylaws. We currently do not engage in macro hedging, i.e. grouping individual positions to hedge the net position. GRENKELEASING AG provides its know-how, infrastructure and funds for refinancing lease contracts under a franchise agreement. However, it does not own shares in the above franchisees, nor does it have control over the franchisees' business policies. 29 Financial Instruments and Financial Risk Strategy 29.1 Business Model The transactions hedged according to this definition are hedged in terms of volume or amount, with various instruments being used. The choice of instrument is always a management decision based on the risk profile, i.e. the income opportunity associated with the risk in question. For example, besides benefiting from falling interest rates, interest rate caps also entail a risk of rising finance costs until the strike is reached, whereas swaps fix a specified interest rate for the term of the swap. As a small-ticket IT leasing company, GRENKELEASING offers lease contracts for mobile IT assets for B2B customers on the market. To date, the contractual terms for the lease portfolio, i.e. all lease contracts, have been fixed for the duration of each individual contract. This means that both the monthly payments and the interest rate used in calculating the payments are fixed when the contract is concluded. Neither of the parties can subsequently amend these terms. 29.3 Financial Risk Identification GRENKELEASING's business processes are currently exposed to the following financial risks: 55 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 29.3.1 Interest Risks Such risks may arise when the payment obligations for interest-bearing liabilities are not hedged by corresponding asset positions (in this case interestbearing lease contracts with end customers) or derivatives, either in terms of their maturity or amount. See Note 29.4 for details. from a deterioration in the creditworthiness of lessees after conclusion of the contract. They can be hedged using credit derivatives or traditional credit insurance strategies. Such instruments have not been used to date due to GRENKELEASING's many years of experience and proven performance in this area of risk management. 29.3.2 Currency Risks These risks currently exist in financing for group companies or franchisees outside the euro area. These risks will not be hedged until the amount outstanding reaches EUR 1,000k. This amount was exceeded in Poland and the UK. Therefore, the future repayment amounts in foreign currency expected from the franchise partners were hedged with forward exchange transactions in December 2004. This means that the exchange rate for the financing extended by GRENKELEASING AG in Polish zloty and pounds sterling to GRENKELEASING Sp.z.o.o., Poland, and Grenke Leasing Ltd., UK, is known and fixed. Denmark, the Czech Republic, Sweden and Norway currently have an insignificant outstanding volume. As payment of financing and hedging of cash flows through forward exchange contracts coincide and the underlying spot rates are therefore similar, the hedges are effective in accordance with IFRSs. The derivatives used are disclosed under financial assets or liabilities at their fair value as of the balance sheet date. Switzerland is not included in this area, as lease refinancing is solely provided in Switzerland by Swiss banks in local currency. 29.3.3 Risks From Changes in the Equity of Group Companies Outside the Euro Area Adjustments in value due to the translation of financial statements prepared in a foreign currency have not been necessary due to the relative insignificance of the companies concerned. 29.4 Detailed Risk Review The following review focuses solely on the liabilities side of the balance sheet, i.e. GRENKELEASING's financing and refinancing. As explained above, there is no interest rate risk for any of the lease contracts recognized on the assets side. 29.4.1 Sales of Receivables Agreements Such agreements are currently in place with Stadtsparkasse Baden-Baden, Commerzbank AG and with UBS in Switzerland. In all cases, they involve refinancing of lease contracts with matching terms. For this purpose, individual lease contracts with similar terms are grouped together and lease receivables are purchased for the same term. This ensures that the interest charge for GRENKELEASING is fixed and known at any time in the future. Therefore there is no interest risk. For this reason, derivatives are not used for this financing. 29.4.2 ABCP Programs The three ABCP programs with Deutsche Bank AG, WestLB and SEB provide for the purchase of GRENKELEASING receivables from German, Austrian and French lessees. There is therefore no currency risk. As the amount of financing provided is always identical to the balance of sold receivables (less discounts, etc.), the hedging strategy must be based on the sold receivables portfolio. 29.3.4 Cash Flow Risks By cash flow risks, we mean the risk of non-payment of installments by lessees. Such risks almost always result 56 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Contrary to 29.4.1, the interest rates on the asset and liabilities side do not match because the purchase of the receivables is financed in the commercial paper market. The reference rate for all programs is onemonth EURIBOR, i.e. interest is variable. The exposure to rising interest rates is hedged by interest rate caps or interest rate swaps. The respective institutes issuing the programs are the counterparties for the interest rate caps and swaps, which is why GRENKELEASING cannot recognize them. 29.4.3 Bond Under the Debt Issuance Program (DIP) with a total volume of EUR 500,000k, GRENKELEASING is able to issue debentures with a term of up to 5 years. On October 30, 2003, a bond of EUR 170,000k with a 3year term and a fixed coupon of 4.5% p.a. was placed on the market, again under the DIP. The issuer was GRENKE FINANCE Plc., Dublin, Ireland, with a guarantee from the Parent Company. The bond was listed on the stock exchange in Luxembourg. The bond was given a BBB rating by Standard & Poor's. Under the terms of the bond, the coupon will be increased by 0.5% or 1.5% from 4.5% in the event of the bond being downgraded by Standard and Poor's by one or two notches, respectively. 29.4.4 Loans Against Borrower's Notes The floating rate debentures for a total of EUR 56,000k were repaid on time as of May 16, 2005. The interest payment obligation was also met. GRENKELEASING's variable interest payments based on the 6-month EURIBOR were fully hedged by an interest rate cap over the entire term. In fiscal year 2005, GRENKE FINANCE Plc., Dublin, Ireland, raised a bullet borrower's note loan of EUR 20,000k. Its term starts on December 6, 2005 and expires on December 5, 2010. The borrower's note loan bears interest of 3.773% p.a. which is due in arrears at the end of each quarter, as of March 30, June 30, September 30 and December 30. The first interest payment will be made as of March 30, 2006. GRENKELEASING AG is party to the agreement and has joint and several liability. In addition, a borrower's note loan of EUR 17,000k with a five-year term was raised on December 20, 2005. The term began on December 22, 2005. Interest is charged in arrears at 3-month EURIBOR plus a premium of 0.61% p.a. The interest payment dates are March 22, June 22, September 22 and December 22 each year. As the loan had an issue price of 99.637%, a discount of EUR 72k is being released over its term. Under the Debt Issuance Program (DIP), GRENKE FINANCE plc., Dublin, Ireland, issued another debenture with a nominal value of EUR 100,000k and a term of five years on March 22, 2005. The debenture carried variable interest on the basis of 3-month EURIBOR plus a credit spread of 0.60 %. GRENKELEASING AG has assumed the unconditional and irrevocable guarantee for the proper and timely payment of interest and principal and any other amounts payable for the debenture. 57 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 29.4.5 Private Placements Further debentures (medium-term notes) with the following key terms were issued under the debt issuance program: Description Term Nominal value from to in EUR Loans against borrower's notes Fixed-interest debenture Fixed-interest debenture Fixed-interest debenture Fixed-interest debenture Zero bond Apr. 27, 2004 - Apr. 27, 2009 May 10, 2004 - May 10, 2005 Jun. 10, 2004 - Jun. 10, 2009 Oct. 1, 2004 - Apr. 1, 2005 Dec. 7, 2004 - May 17, 2005 Jun. 13, 2005 - Jun. 13, 2006 1,000,000 2,000,000 20,000,000 25,000,000 40,000,000 20,000,000 *The total interest amount of the zero bond is reflected by the discount. Interest Discount rate in EUR 4.75% 2.80% 5.00% 2.75% 2.79% 0.00% 10,800 7,200 215,000 10,000 -495,000* The fixed-interest debentures and zero bonds that matured in fiscal year 2005 were redeemed as planned on their due dates together with the final interest payment. In addition, a zero bond with a nominal amount of EUR 20,000k and a term beginning on June 13, 2005 was issued on May 31, 2005. The bond matures on June 13, 2006. The zero bond had an issue price of 97.525%, equating to effective interest of 2.503% over its term (*). All debentures are bullet debt securities and are subject to constant rating. If the Standard & Poor's rating were to be downgraded, the interest rate on the EUR 20,000k fixed-interest debenture will be adjusted (raised) by between 0.5 and 1.5 percentage points. As a downgrading is not expected, no hedge has been concluded to date. As the interest payable on the debentures is fixed, there is no interest rate risk which would have to be hedged. 29.5 Hedge Effectiveness Accounting in accordance with IAS/IFRSs requires documentation and a risk analysis when derivative financial instruments are used. The link between the underlying item and the hedging instrument forms the decisive basis for an effective hedge. As it uses derivatives for interest rate and currency hedging, GRENKELEASING applies hedge accounting in accordance with IAS 39. Hedge effectiveness, as required by IFRS, is in line with GRENKELEASING's intention of using derivatives only to hedge risks from designated hedged items and to never enter into derivatives for speculative reasons. The tests of effectiveness for each financial derivative accounted for in a hedge in accordance with IAS 39 were performed as of the end of each quarter using the hypothetical derivative method. The documentation of each hedging relationship describes the hedged item, hedged risk, strategy, hedging instrument, estimate of effectiveness and names the counterparty. 58 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The specifications of the various derivatives used by GRENKELEASING are described below. 29.5.1 Forward Exchange Contracts The hedged item for all forward exchange hedges is determined by the installments from the financing of the leasing business in the respective currency area. These foreign currency cash flows are the basis for the forward contracts. The hedge can be classified as highly effective because only the actual cash flows, and never a higher amount, are hedged. Ideally, the dates of financing the foreign exchange hedge coincide to ensure the best possible hedge of the exposure to cash flow variability. No hedge was accounted for in accordance with IAS 39 ("cash flow hedge") due to its relative insignificance. 29.5.2 Interest Rate Swaps in Connection with Debentures tested using a method allowed under IAS/IFRS. To date, the hedging relationships between interest rate swaps and existing and planned DIP placements have proven to be highly effective. Both the change-invariable cash flow method and the hypothetical derivative method result in 100% effectiveness. 30 Fair Value of Primary Financial Instruments Fair value is the amount for which financial instruments would be exchanged, sold, bought or settled on the balance sheet date between knowledgeable, willing contracting parties in an arm's length transaction. The fair value of lease receivables is estimated by using, instead of the internal rate, an interest rate which would be available for full refinancing. A commercial rate of interest on December 31, 2005 was used for liabilities from refinancing. The parameters of the underlying contract, i.e. those of the financing (liability), are considered first and foremost when contracting interest rate swaps. For this reason, the interest rate terms of the swaps on the variable side are identical to those of the underlying item. Furthermore, the notional amount of the swaps is never greater than the volume of the hedged financing. The active integration of existing and future planned refinancing transactions allows a forwardlooking risk management. Quarterly tests of effectiveness will be conducted as part of this ongoing analysis, in which the effectiveness of the hedges is Financial instruments whose fair value differs from their carrying amount are listed below: EURk Lease receivables Liabilities from refinancing the lease receivables Fair value 2005 Carrying amount 2005 938,432 772,588 860,828 771,598 Fair value 2004 Carrying amount 2004 814,084 653,260 741,403 651,217 59 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT 31 Contingent Liabilities and Other Financial Obligations No contingent liabilities existed as of the balance sheet date which must be stated in the balance sheet or in the notes. The Company has other financial obligations related to rent and lease contracts. The resulting financial obligations are presented below: Dec. 31, 2005 Dec. 31, 2004 EURk Rent and lease obligations Of which due in the following year Of which due in 2 to 5 years Of which due in more than 5 years 2,279 4,533 2,796 1,293 2,255 1,070 Total 9,608 4,618 The Company entered into a purchase obligation for a contract value of EUR 696k in connection with the extension of the GRENKELEASING AG headquarters in Baden-Baden, Germany. The purchase obligation will become due in 2006 or 2007 depending on the progress of construction work. Under three agreements regarding the sale of receivables of Grenke Investitionen Verwaltungs KGaA to secure all receivables of the holding company (Grenke Investitionen Verwaltungs KGaA) from the operating company, the operating company (GRENKELEASING AG) assigns to the holding company the following from lease contracts with end lessees (sublease contract) for leased assets, which are the subject of a purchase agreement between the operating company and the holding company: all receivables, claims and rights arising from these sublease contracts, including any claims from extended leases following expiry of the originally agreed lease, any claims for compensation payments and for residual values, and payment of a purchase price from the sale of the respective leased asset. Claims from loan and property insurance from the respective sublease contract are also assigned, as are possible claims from repurchase obligations on the part of suppliers of leased assets or of third parties. The buyer of the receivables acquires the equitable lien on the leased assets on which the respective receivable purchase agreement is based. Our Irish subsidiary, GRENKE FINANCE Plc., Dublin, Ireland realized income from intragroup factoring in 2004. In our view, this is an active service as defined by Sec. 8 (1) No. 5 AStG ["Außensteuergesetz": German Foreign Investment Tax Act]. It is not subject to imputed dividend taxation under Sec. 10 (1) AStG at Company level. This interpretation of law is also supported by the recent ruling of the European Court of Justice on VAT which, we believe, also applies to income tax law. We also endorse the view expressed in the literature on the subject that the application of the imputed dividend taxation provisions as unreasonable antiabuse regulations constitutes an unlawful discrimination against equity investments in foreign companies and may not, therefore, be applied in taxing GRENKELEASING AG. 60 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The view held by the tax authorities would result in imputed dividend taxation of EUR 716k, and thus increase tax expenditure. Objections are pending to six assessment notices on the separate and uniform determination of tax bases for 2000 for GLG Grenke-Leasing GmbH & Co. BadenBaden KG, GLG Grenke-Leasing GmbH & Co. Düsseldorf KG, GLG Grenke-Leasing GmbH & Co. Hamburg KG, GLG Grenke-Leasing GmbH & Co. München KG, GLG GrenkeLeasing GmbH & Co. Nürnberg KG, and GLG GrenkeLeasing GmbH & Co. Stuttgart KG. The assets of the above companies were merged into GRENKELEASING AG as of February 28, 2000. The amended tax assessment notices from the tax authorities differ from our application for amendment of the tax assessment notices for 2000 following the incorporation of the tax audit findings for the years 1996 to 1999. If the tax authorities' view proves correct, tax expense would increase by EUR 92k. The tax authorities in France have completed their audit of the French subsidiary GRENKE LOCATION SAS. There were differences of opinion between ourselves and the tax authorities on the allocation of the intragroup two-tier financing. An expert third party issued a tax opinion on this matter stating that GRENKE LOCATION SAS stood a good chance that the matter recognized by us had been presented clearly and transparently. The French tax authorities issued GRENKE LOCATION SAS with a tax assessment notice that did not take this opinion into consideration. The Company has lodged an appeal against this notice. Payment of EUR 3,458k was made in 2004 subject to reservations and without acknowledging the assessment notice to avoid the negative publicity that would follow an entry in the commercial register. This amount was recognized as a receivable from the tax authorities as, on the basis of the tax opinion, we assume that our view will be confirmed. 32 Employee Stock Option Programs The first employee stock option program (IPO stock option program) was launched in connection with the stock market floatation of the GRENKELEASING AG share. A further stock option program followed in 2002. These employee stock option programs are intended to allow members of the Board of Directors and the other employees of the Company and of its affiliated companies to directly participate in the future growth in corporate value. For this purpose, the shareholders' meeting created "conditional capital I" of EUR 959k for the first time on February 28, 2000; this was entered in the commercial register on March 2, 2000. As a result of the resolution passed by the shareholders' meeting on April 16, 2002, the conditional increase in capital approved on February 28, 2000 was reduced by EUR 180k. "Conditional capital I" now only amounts to EUR 779k. The shareholders' meeting approved a further conditional increase ("conditional capital II") of EUR 948k. These changes were entered in the commercial register on June 7, 2002. In fiscal year 2004, "conditional capital II" was used when 78,090 stock options were exercised, thereby decreasing by EUR 100k to EUR 848k. In fiscal year 2005, "conditional capital II" was used when 41,708 stock options were exercised, thereby decreasing by EUR 53k to EUR 795k. 61 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The conditional capital serves to secure share subscription rights from the stock option program. A maximum total of 1,492,000 stock subscription rights will be issued; each allows one share in GRENKELEASING AG to be acquired. Subscription rights are as follows: Members of the Board of Directors of GRENKELEASING AG maximum of 203,880 subscription rights Other employees of GRENKELEASING AG maximum of 969,490 subscription rights Other employees of companies affiliated to GRENKELEASING AG maximum of 318,630 subscription rights The subscription rights were issued in initial tranches; further tranches will be issued in subsequent years. Subscription rights will be issued within five years following entry of the conditional capital in the commercial register. Employees exercised a total of 78,090 options. In 2005, the options exercisable in 2005 (42,502 options) were able to be exercised together with the options not exercised in the prior year (6,632 options) in the exercise periods after the shareholders' meeting and after the publication of the results for the second and third quarters. The exercise price is determined for each exercise period on the basis on the average price of 20 trading days. In addition, the options issued under the second employee stock option program which cannot be exercised until 2006 can be exercised during the relevant exercise periods in 2006 without having to meet any further exercise requirements. The calculated average price in the first relevant exercise period between March 30, 2005 and April 26, 2005 was EUR 34.03. The first exercise period for the maximum of 85,396 exercisable options in this year was between May 4 and May 31, 2005. The exercise price was EUR 20.93. During this period, 33,614 options were exercised by employees. The share price must exceed a specified target price for the subscription rights under the employee stock option programs to be exercised, and the subscription rights may be exercised no earlier than two years after being issued. The exercise price is dependent on the issue price and may fall if the target price is exceeded. The average price in the second relevant exercise period between June 24, 2005 and July 21, 2005 was EUR 36.21. In this year, the second exercise period was between July 27 and August 25, 2005. The exercise price was EUR 19.84. During this period, 5,942 options were exercised by employees. All of the employee stock option programs provide for the possibility of a cash settlement in the event of the exercise of options. The Board of Directors would have to adopt a resolution for this for a particular year. On the basis of the share's performance in the prior year and in fiscal year 2004, the performance target of the second employee stock option program (EUR 28.51) was met in the reference period in July/August 2004 so that the options issued under the second employee stock option program were able to be exercised. The first exercise date for the maximum number of exercisable subscription rights (86,778) was August 13, 2004. The exercise price was EUR 19.64. The average price in the third relevant exercise period between September 22, 2005 and October 20, 2005 was EUR 42.64. In this year, the third exercise period was between October 28 and November 24, 2005. The exercise price was EUR 16.62. During this period, 2,152 options were exercised by employees Total conditional capital II of EUR 948,446.66 divided by 742,000 options yields a nominal value per option of EUR 1.27823. Due to the exercise of a total of 41,708 options in 2005, the capital stock increased by EUR 53,312.42 and the capital reserve by EUR 803,884.12. 62 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT As all of the stock option programs were launched before November 7, 2002, the options do not need to be measured in accordance with IFRS 2, i.e. recognizing any changes in value in profit or loss. Hence, the exercise of the options was not recognized in net profit or loss. The following table shows the stock options issued under this program as of December 31, 2005: IPO Stock Option Program Units Members of the Board of Directors Maximum number of subscription rights 100,000 Issued under the 1st SOP (2000) 30,396 Remainder 69,604 Retransfer as a result of employees leaving the Company -- Issued under the 2nd SOP (2001) 30,396 Remainder 39,208 Retransfer as a result of employees leaving the Company -- Derecognized by shareholders' meeting 2002 39,208 Balance on Dec. 31, 2005 0 Employees Employees of affiliated companies 528,000 218,630 309,370 47,920 276,652 80,638 44,552 65,277 59,913 122,000 30,620 91,380 11,588 60,220 42,748 25,608 36,060 32,296 Total 750,000 279,646 470,354 59,508 367,268 162,594 70,160 140,545 92,209 The last measurement period for the targets of the first tranche of the first employee stock option program ended on November 5, 2004. The average price of EUR 33.12 for the measurement period was not reached; this meant that all options issued in this tranche (220,138) expired as of March 31, 2005. The performance target for 2005 for the second tranche of the first employee stock option program was EUR 58.10. This target was not reached in the last measurement period preceding the publication of the interim report for the third quarter of 2005. As there will be no further exercise period in 2006, the last opportunity for exercising the related options was after the publication of the interim report for the third quarter, the 297,108 options issued under the second tranche will expire as of March 31, 2006. Stock Option Program II Units Members of the Board of Directors Maximum number of subscription rights 103,880 Issued under the 1st SOP (2002) 24,200 Remainder 79,680 Retransfer as a result of employees leaving the Company -- Balance on Dec. 31, 2005 79,680 Employees Employees of affiliated companies 441,490 108,984 332,506 8,386 340,892 196,630 65,740 130,890 20,812 151,702 Total 742,000 198,924 543,076 29,198 572,274 63 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT As the target price was exceeded once in 2004, the remaining options may be exercised during the relevant exercise periods in the years to come (25 % each year). However, the exercise price will be determined separately for each exercise period in the relevant reference period. The reference price for 2005 was EUR 32.78; for 2006 it is EUR 38.00. A total of 7,426 stock options can be exercised and therefore have a dilutive effect as of December 31, 2005 (prior year: 26,546 stock options). As of December 31, 2005, 42,502 stock options are potentially dilutive (prior year: 425,678 stock options). The outstanding options from the second employee stock option program were measured using option pricing models. The value per option was EUR 31.66. The options from the second tranche of the first employee stock option program were not measured because they cannot be exercised anymore. 33 Related Party Disclosures GRENKELEASING AG renders various services for related entities in its ordinary course of business. Conversely, the various group companies also render services within the GRENKELEASING Group as part of their business purpose. These extensive deliveries of goods and services are transacted at market prices. In addition, various agreements are in place between the Group and the franchise companies under which the group companies provide their know-how, infrastructure and funds for refinancing lease contracts. In addition to the franchise fees totaling EUR 142k (prior year: EUR 94k), the Group generated income from interest on loans of EUR 852k (prior year: EUR 214k). As of the balance sheet date, apart from the loans (see Notes 17 and 20), there were receivables from franchisees totaling EUR 207k (prior year: EUR 15k). In accordance with the articles of incorporation and bylaws, the Supervisory Board of GRENKELEASING AG has six members. The members of the supervisory board in fiscal year 2005 were: Prof. Dr. Ernst-Moritz Lipp, Chairman, from July 11, 2005 Professor of international finance and general manager, Baden-Baden, Germany Mr. Gerhard E. Witt, Deputy Chairman (Chairman until July 11, 2005) Accountant and tax advisor, Baden-Baden, Germany Ms. Renate Hauss, until May 3, 2005 (employee of GRENKELEASING AG), Business administration graduate, Bühl, Germany Mr. Dieter Münch (Deputy Chairman until July 11, 2005) Retired bank officer, Weinheim, Germany Dr. Oliver Nass, since May 3, 2005 commercial general manager, Paris, France Herr Erwin Staudt, since May 3, 2005 economics graduate, President of the soccer club VfB Stuttgart 1893 e.V., Leonberg, Germany Frau Dr. Brigitte Sträter Owner and manager of the PR agency CENA, Düsseldorf, Germany The Supervisory Board's remuneration (including payments for supplementary services) totaled EUR 86k (prior year: EUR 101k). Mr. Münch has 75 (prior year: 75) shares. Ms. Hauss had 4,492 stock options, of which 894 have been exercised. On December 31, 2005, Ms. Hauss had 3,300 stock options (SOP 2000) which were no longer valid. Ms. Hauss was granted the stock options solely on the basis of her employee status and under GRENKELEASING's compensation system. The compensation system applies to all employees, and Ms. Hauss participates in the employee stock option 64 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT program in accordance with the principle of nondiscrimination under labor law. In accordance with Sec. 113 (1) Sentence 2 Alt. 1 AktG, supervisory board remuneration is defined in Article 10 of GRENKELEASING AG's articles of incorporation and bylaws. This provision does not permit the participation of the members of the Supervisory Board in one of the employee stock options programs. This also applies, without exception, to Ms. Hauss. been appointed until the end of the shareholders' meeting which is to decide on their exoneration for fiscal year 2009. Remuneration of the Supervisory Board breaks down as follows: EURk Total Remuneration Additional services AG KGaA The control of the Board of Directors by the Supervisory Board in its capacity as a monitoring body required by law is in no way jeopardized by the granting of stock options as such options are granted to Ms. Hauss solely on the basis of her function as an employee of GRENKELEASING AG. Furthermore, according to the most recent ruling by the Federal Court of Justice of February 16, 2004, the granting of options does not conflict with Ms. Hauss' function as a member of the Supervisory Board. R. Hauss 6,5 Prof. Dr. Lipp 9 D. Münch 12,5 Dr. O. Nass 5 E. Staudt 5 Dr. B. Sträter 32 G. Witt 16 Total 86 4 2,5 0 90 0 10 2,5 0 50 0 50 0 90 23 12 4 0 54 9 23 In addition to her work for the Supervisory Board, Dr. Sträter also assisted the Company in public relations. Ms. Renate Hauss, Mr. Gerhard E. Witt and Mr. Dieter Münch are also supervisory board members of Grenke Investitionen Verwaltungs KGaA, Baden-Baden. Mr. Dieter Münch is also a member of the supervisory board of Weisenburger Bau + Grund AG, Halle/Saale. Mr. Staudt is also a member of the supervisory boards of PROFI Engineering Systems AG, Darmstadt, USU AG, Möglingen, and Hahn Verwaltungs-GmbH, Fellbach. Prof. Dr. Lipp is also a member of the advisory boards for TFL International GmbH, Weil am Rhein, Germany, Burkart Verwaltungen GmbH, Singen, Germany, and 2D Holding GmbH, Laichingen, Germany. None of the other members of the Supervisory Board of GRENKELEASING AG were members of any other supervisory boards or oversight bodies within the meaning of Sec. 125 (1) Sentence 3 AktG. Mr. Witt and Prof. Dr. Lipp have been appointed until the end of the shareholders' meeting which is to decide on their exoneration for fiscal year 2007. The remaining members of the Supervisory Board have 65 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The Board of Directors of GRENKELEASING AG is comprised as follows: Mr. Wolfgang Grenke, businessman, Baden-Baden, (Chairman) Special responsibility: Strategy, corporate development, internal audit Mr. Thomas Konprecht, graduate programmer, certified leasing and financial consultant (VWA) Düsseldorf, (Deputy Chairman) Special responsibility: Marketing, sales, management services Mr. Mark Kindermann, business graduate, Bühl Special responsibility: Administration, accounting, legal, personnel, quality management Mr. Michael Kostrewa, businessman and industrial IT graduate, Gaggenau Special responsibility: information technology, e-business The Supervisory Board appointed one more director with effect from October 1, 2005. Dr. Uwe Hack, a business administration graduate from Metzingen, Germany, is responsible for investor relations, treasury and financial control at GRENKELEASING AG. Mr. Wolfgang Grenke holds sole power of representation. The other members of the Board of Directors represent GRENKELEASING AG jointly with another member of the Board of Directors or with an authorized signatory. The remuneration of the Board of Directors is as follows: Total remuneration Compensation in Fixed portion Variable portion kind from SOP EURk Wolfgang Grenke Thomas Konprecht Michael Kostrewa Mark Kindermann Dr. Uwe Hack Total 283 19 221 43 211 15 165 31 140 10 110 20 142 11 111 20 98 0 67 31 874 55 674 145 In the fiscal year and in the prior year, the members of the Board of Directors did not receive any GRENKELEASING AG stock options ­ in accordance with the above mentioned Stock Option Program II. All of the Directors exercised stock options in May 2005. Overall, the Board of Directors exercised 18,150 options. The number of shares and exercisable options is shown below: No. Wolfgang Grenke Thomas Konprecht Michael Kostrewa Mark Kindermann Total Shares as of Dec. 31, 2005 5,019,419 384,080 84,600 70,953 5,559,052 2004 5,167,219 537,430 167,149 89,853 5,961,651 Options as of Dec. 31, 2005 13,252 9,938 6,628 6,628 36,446 2004 26,504 19,876 13,256 13,256 72,892 66 KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Mr. Wolfgang Grenke is also a member of the board of directors of GRENKE Locazione S.r.l., Milan, Italy, CEO of GRENKE ALQUILER S.A., Barcelona, Spain, and general manager of GLG Grenke-Leasing GmbH, Baden-Baden, Germany. He is the chairman of the supervisory board of WEBLEASE NETBUSINESS AG, Baden-Baden, Germany, GRENKE LOCATION S.A.S., Schiltigheim, France, and GRENKELEASING AG, Vienna, Austria. He is also a member of the advisory board of Deutsche Bank AG, Freiburg region, Germany. Mr. Mark Kindermann is also a member of the board of directors of GRENKE LIMITED, Dublin, Ireland, of GRENKELEASING AB, Kista (Stockholm), Sweden, and of GRENKE FINANCE Plc., Dublin, Ireland. He is a member of the supervisory board of WEBLEASE NETBUSINESS AG, Baden-Baden, Germany, of GRENKELEASING AG, Vienna, Austria, and of Grenkefinance N.V., Maasbree, Netherlands. Mr. Thomas Konprecht is also a member of the board of directors of Grenkefinance N.V., Maasbree, Netherlands, a member of the supervisory board of GRENKELEASING AB, Kista (Stockholm), Sweden, of GRENKELEASING AG Vienna, Austria, and general manager of GLG Grenke-Leasing GmbH, Baden-Baden, Germany, and of GRENKELEASING ApS Herlev, Denmark. Mr. Michael Kostrewa is also a member of the board of directors of GRENKE LIMITED, Dublin, Ireland, of GRENKELEASING AB, Kista (Stockholm), Sweden, and of GRENKE FINANCE Plc., Dublin, Ireland. 34 Events After the Balance Sheet Date In January 2006, the French tax authorities announced they were going to conduct a tax audit at GRENKE LOCATION SAS, Schiltigheim, France. It is due to commence in February 2006. 35 Declaration Pursuant to Sec. 161 AktG The Board of Directors and Supervisory Board of GRENKELEASING AG have made the declaration for 2005 pursuant to Sec. 161 AktG and made this available continuously to shareholders. Baden-Baden, Germany, January 19, 2006 The Board of Directors 67 AUDIT OPINION KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT We have audited the consolidated financial statements prepared by GRENKELEASING AG, BadenBaden, Germany, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and notes to the consolidated financial statements, together with the group management report for the business year from January 1 to December 31, 2005. The preparation of the consolidated financial statements and the group management report in accordance with IFRS, as adopted by the EU, and the requirements of German commercial law pursuant to § [Article] 315 a Abs. [paragraph] 1 HGB ["Handelsgesetzbuch": ,,German Commercial Code"] are the responsibility of Group's management. Our responsibility is to express an opinion on the consolidated financial statements and group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements, whether due to error or fraud, materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accountingrelated internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis as part of the audit. The audit includes assessing the annual financial statements of those entities included in the consolidated financial statements, the determination of entities to be included in the consolidation, the accounting principles and consolidation standards used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, on the basis of knowledge we have gained during the audit, the consolidated financial statements comply with IFRS, as adopted by the EU, the requirements of German commercial law pursuant to § 315a Abs. 1 HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides an appropriate view of the Group's position and appropriately presents the opportunities and risks of future development. Eschborn/Frankfurt am Main, January 19, 2006 Ernst & Young AG Wirtschaftsprüfungsgesellschaft Eckl Wirtschaftsprüferin Kirch Wirtschaftsprüfer 68_69 SUPERVISORY BOARD REPORT KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT Prof. Dr. Ernst-Moritz Lipp Chairman Dear Shareholders, At its meeting on July 11, 2005, the Supervisory Board elected me as its Chairman. The Supervisory Board thanked the current Chairman, Gerhard E. Witt, for his many years of service and his willingness to continue to be available as a deputy chairman and chairman of the audit committee. necessary resolutions, where required by the law, the articles of incorporation or the bylaws. Among other things, the Supervisory Board received the minutes of the meetings of the Board of Directors as well as the documents prepared for these meetings. The following items were on the agenda of Supervisory Board meetings in 2005 Once again, GRENKELEASING AG experienced vigorous growth in fiscal year 2005, delivering consistently high profit margins. We are pressing ahead with our foreign growth strategy and our foreign business has become a key value driver. The supervisory board has appointed another experienced director, Dr. Hack, to bolster the foundation for the Company's future growth. Throughout the fiscal year, the Board of Directors of GRENKELEASING AG provided the Supervisory Board with detailed and comprehensive information on the economic position, strategic development, status of business planning, recent events, and the personnel situation of GRENKELEASING AG. At a total of four Supervisory Board meetings ­ held on January 24, April 18, July 11, and November 21, 2005 ­ the Supervisory Board discussed the reports submitted by the Board of Directors in depth and passed the Approval of the financial statements of GRENKELEASING AG as of December 31, 2004 Approval of the consolidated financial statements of GRENKELEASING AG as of December 31, 2004 Adoption of the Supervisory Board Report to the Shareholders' Meeting Definition of the items on the agenda for the Shareholders' Meeting Proposal to the Shareholders' Meeting for the election of two new Supervisory Board members Resolutions by the Board of Directors requiring Supervisory Board approval Resolutions concerning amendments to the articles of incorporation (e.g. German Law on Corporate Integrity and Modernization of the Right of Avoidance: "UMAG") Approval of the current "Corporate Governance Code" Report on the risk management system Elements and functioning of the scoring system KEY FIGURES PRESENTATION OF LIQUIDITY MANAGEMENT REPORT INCOME STATEMENT BALANCE SHEET STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT NOTES AUDIT OPINION SUPERVISORY BOARD REPORT The Supervisory Board thus fulfilled its obligation to review and monitor the management of the Company as provided for by law and by the articles of incorporation and bylaws. The financial statements of GRENKELEASING AG as of December 31, 2005 prepared by the Board of Directors, the management report of the Company for fiscal year 2005, the consolidated financial statements as of December 31, 2005 and the group management report for fiscal year 2005 were submitted to the Supervisory Board for review. The proposal on the appropriation of profits of GRENKELEASING AG made by the Board of Directors was submitted to the Supervisory Board. The financial statements were audited by the auditing firm elected by the shareholders' meeting on May 3, 2005, Ernst & Young AG, Wirtschaftsprüfungsgesellschaft, Eschborn/ Frankfurt am Main, Germany. The accounting methods used in preparing the individual financial statements of GRENKELEASING AG were in keeping with the provisions of German commercial law. The audit of the financial statements for the year ended December 31, 2005 was conducted pursuant to Sec. 317 HGB ["Handelsgesetzbuch": German Commercial Code] and in compliance with the generally accepted principles for the audit of financial statements adopted by the Institute of Public Auditors in Germany (IDW). GRENKELEASING AG Group. The auditor attended the meeting of the audit committee to discuss the financial statements and provided explanations. The audit committee satisfied itself of the auditor's independence. The Supervisory Board reviewed the financial statements presented to it by the Board of Directors and the auditor and discussed the results in its meeting on January 23, 2006. The auditor attended the meeting and reported on the significant audit results. Having duly conducted its own examination, the Supervisory Board raised no objections to the findings from the audit of the financial statements conducted by the auditor and thus approved and adopted the financial statements of GRENKELEASING AG and the GRENKELEASING AG Group. The Supervisory Board concurs with the Board of Directors' proposal on the appropriation of profits. All members of the Supervisory Board have voluntarily undertaken to observe the corporate governance principles effective in the fiscal year. The Supervisory Board extends its thanks to the Directors and to all the Company's employees whose dedication and initiative contributed to the Group's excellent performance in the last fiscal year. The consolidated financial statements of GRENKELEASING AG for the fiscal year from January 1 to December 31, 2005 were prepared in accordance with International Financial Reporting Standards (IFRSs) as applicable in the EU and the provisions of Sec. 315 a (1) HGB. The audit of the consolidated financial statements was conducted pursuant to Sec. 317 HGB in compliance with the generally accepted principles for the audit of financial statements adopted by the Institute of Public Auditors in Germany (IDW AuS 450). Baden-Baden, Germany, January 2006 For the Supervisory Board Prof. Dr. Ernst-Moritz Lipp Chairman An unqualified audit opinion was rendered on both the financial statements of GRENKELEASING AG and the consolidated financial statements of the 70 DATES 2006 03/01/2006 27/01/2006 04/04/2006 27/04/2006 09/05/2006 04/07/2006 27/07/2006 04/10/2006 26/10/2006 Publication New Business and Contribution Margin1 Publication of the Annual Accounts for 2005, Balance Press Conference/DVFA Analyst Conference in Frankfurt Publication New Business and Contribution Margin1 Publication of Financial Statements of Q1 2006 General Meeting, Baden-Baden Publication New Business and Contribution Margin1 Publication of Financial Statements of Q2 2006 Publication New Business and Contribution Margin1 Publication of Financial Statements of Q3 2006 DVFA Analyst Conference in Frankfurt You may find the glossary to this report on www.grenkeleasing.com GRENKELEASING AG Neuer Markt 2 D - 76532 Baden-Baden Telefon: +49 (0) 7221 - 5 00 72 04 Telefax: +49 (0) 7221 - 5 00 71 12 www.grenkeleasing.de www.weblease-europe.com www.asset-broker.de E-Mail: [email protected] 

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