Factoring KB, a.s. Annual Report 2006

Transcription

1 Factoring KB, a.s. Annual Report

2 Your Business. Our Guarantee. Professionalism Social Responsibility Factoring KB, a.s. is part of the Komerční banka Group which is well aware of its commitments stemming from its corporate status. It fulfils these commitments through sponsorship and donations based on the three principal values of the Société Générale Group: professionalism, innovation and team spirit. The long-term main pillars of the sponsorship strategy are culture, amateur sport and education.

3 Team Spirit Innovation Factoring KB, a.s., has been present on the Czech market since It is a daughter company (100% owned) of Komerční banka, a.s., which results in the Company s inclusion in the Société Générale Group. 1

4 2

5 Contents 4 Company Profile 6 Financial Highlights 8 Foreword of the Chairman of the Board of Directors 10 Report of the Board of Directors 11 Strategic Objectives of the Company for Major Events in Market Development and Market Share 13 Business Activities 14 Marketing Activities 14 Product Base 15 Information Technology 16 Human Resources 16 Comments on the Financial Situation and Business Results 17 Statutory Bodies 17 Board of Directors 18 Supervisory Board 18 Management 18 Organisational Structure 19 Ownership Structure 20 Report of the Supervisory Board 21 Auditor s Report 23 Sworn Statement 24 Financial Section 46 Report on Relations Among Related Entities 3

6 Company Profile Factoring KB is a member of the International Group Factors Chain International. Business Name: Factoring KB, a.s. Legal Form: Joint stock company ID No.: Official Address: Lucemburská 1170/7, Prague 1 Foundation Date: 4 August 1997 Registered Capital: CZK 84,000,000 Memberships & Associations: Factors Chain International from 30 July 2000 Asociace factoringových společností ČR (Czech Association of Factoring Companies) from November 2000 Czech Leasing and Financial Association from

7 The Company was founded as a daughter company of Komerční banka, a.s. (further also as KB or Komerční banka ) for the purposes of providing factoring services. From its founding, the company has been a member of the Financial Group of the parent bank, and from 2002 also an active meber of the Financial Group of Société Générale Banque (further also as Société Générale ). The memberships in both financial groups is of key importance to the Company s overall development bringing with it, at the same time, new incentives for the further development of cooperation with the other group members both at home and abroad. Factoring KB, a.s. provides a collection of factoring services, which includes purchases, management, collections and financing of receivables, including takeover of risks as regards declared or undeclared insolvency of a domestic or foreign debtor. In the first place, the Company offers its services to domestic business entities and within its membership in Factors Chain International (further as FCI ) also to other members of this international association. From 2006, within the framework of the services rendered, the Company offers a new product accession to liabilities resulting from trade activities, i.e. a product for financing of inputs of the client company. The following strategic objectives had been chosen for 2006: Emphasis on cross-selling activities within the Financial Group of Komerční banka, a.s.; Expansion of the existing product base by new possibilities in financing; Improvement in the overall standard of services with the aim of retaining the existing clients; and Stable development and modernisation of the information system. General targets of the Company were similar to those in the previous year and they primarily consisted of: Maintaining and strengthening of the Company s position on the market; Applications of new approaches in the cooperation with Komerční banka and Société Générale; and To be a steadily profitable company. Also in 2006, the Company successfully met its strategic objectives and was actively engaged in cooperation with Komerční banka particularly in its acquisition activities. As compared to 2005, the Company managed to increase its sales volumes by 24% bringing thus the total sales up to CZK 17,075 million, which was the best result in the Company s history. The strategic objective for 2006 was increasing cross-selling activities within the KB Group. 5

8 Financial Highlights Unit Total assets CZK million 5, , Registered capital CZK million Equity capital CZK million Profit/loss CZK million After-tax profit CZK thousand Market share % Total sales CZK million 17, , Domestic factoring sales CZK million 14, , International factoring sales CZK million 2, , Volume of adjustments CZK million Total revenues CZK million Total costs CZK million Average employee headcount persons In a year-on-year comparison, the Company sales have increased by 24 %. 6

9 Factoring turnover (CZK million) 20,000 15,000 10,000 5, ,554 8,094 8,064 9,192 11,666 13,738 17, In 2006 Factoring KB achieved the highest turnover in its history CZK 17,075 million. 7

10 Foreword of the Chairman of the Board of Directors Factoring KB is experiencing its most successful year in the Company s history. Dear Ladies and Gentlemen, Dear Business Partners, It is my pleasure to submit to you the Annual Report of Factoring KB, a.s. for In the introduction, I would like to confirm that we continue the growth trend and that 2006 has been the most successful year in the history of our Company. Practically all our targets we set for the year were met, some of them were even exceeded by quite a lot. At the same time, we managed to create the potential for further improvements in our activities, particularly through the application of new software and modification of work procedures. As in the previous period, a decisive share in our success is based on our cooperation with our parent company, Komerční banka, a.s. and Société Générale Group. In spite of ever-widening competition in the factoring segment in the Czech Republic, we have managed to increase the Company s sales volume up to CZK 17,075 million, i.e. by 24% compared to the same figure in the previous year. In 2006, our market share amounted to 16.3%. In the sphere of costs, Factoring KB, a.s. has successfully maintained the previous trends. We significantly improved our debtor-reminding and collection activities, where we fully launched the operations of the outsourced reminder centre (the call centre ). At the same time, we have amplified the processes of risk management that significantly participate in spite of a certain conservative strategy in the financial successes of the Company. In the sphere of finances, we succeeded, as compared to 2005, in increasing our after-tax profit by 52%, i.e. up to CZK 27,521 thousand. 8

11 In 2007, the following tasks still are before us: segmentation of our client base, improvement and modification of our client treatment processes and adjustments of our software in a manner allowing us to implement electronic document circulation within Factoring KB, a.s. One of the most important activities in 2007 will be the relocation to our new premises providing thus for our further development in the years to come. In conclusion, allow me to say my thanks to all the Company s employees, particularly for their commitment in 2006, and wish them success and satisfaction in In addition, I would like to thank to our clients for the partnership relations and confidence in Factoring KB, a.s. Yours respectfully, Milan Corjak Chairman of the Board of Directors and CEO 9

12 Report of the Board of Directors In 2006, the share of international deals increased to15 % was the second year after the accession of the Czech Republic to the European Union. This step can be characterised as beneficial for our country; our national economy is growing mostly due to the entry of foreign investors to the Czech market and consequently to the foundation of new companies as well as the continuing development of already existing domestic or foreign companies and joint ventures. This is reflected in considerable growth of the gross domestic product and foreign trade. The growth in the production induces an increased trade exchange, which in turn brings about growth in the volume of factoring deals as a form of funding of trade relations as well as security in mutual payments. For Factoring KB, a.s., 2006 was an extraordinary year as regards the volume of actually realised deals, particularly in the sphere of international factoring, the share of which grew from 8% to 15% in paralel with the growth in the total sales of the Company by 24%. At the same time, this year was also very successful in collection of our receivables; we managed to collect the sum of CZK 8 million of completely written-off debts. Likewise as in the previous year, we successfully continued in the conclusion of new contractual relations, the positive influence of which can be expected in years to come. Furthermore, a new communication system was successfully implemented and a new product launched. In this way, the Company was able to finance purchases of goods and materials for the creation of products focused on both the domestic and international markets. In 2007, our Company intends to relocate its offices into new, more modern and spacious premises; nevertheless, in our business activities, we will continue in close cooperation with Komerční banka, a.s. and other members of the KB Financial Group. Also, we will continue in the strengthening of our cooperation with other factoring companies members of the Financial Group of Société Générale mostly in the area of international factoring and mutual exchange of experience. This cooperation as well as the participation of our Company in the international association of factoring companies (FCI) will undoubtedly contribute to maintaining and strengthening of the Company competitive edge in the factoring market. 10

13 Strategic Objectives of the Company for 2007 The basic strategic goals of the Company in 2007 indisputably include the following: Full use of synergies within the framework of Komerční banka and the Financial Group of Société Générale; Focusing on larger enterprises of the Corporate Segment; Strengthening of the Company s position on the factoring market; and Participation in tenders for providing of factoring services. As in past years, the Company will continue in its policy of full use of the synergies existing within Komerční banka and the Financial Group of Société Générale, with the aim of offering our clients top quality services focused to the satisfaction of their financial needs with the simultaneous application of pruděny approaches from the side of the Company and Group. Acquisitions and marketing policies, risk management system, development of information technologies, human resources, corporate financing system, tax consultancy issues, etc. belong among the main spheres of cooperation. In its acquisition policy, the Company will continue in focusing its attention on mid-sized businesses, however, we will fully pursue the effort of also rendering services to large-sized and international corporations interested in selected services, such as insurance of some of their customers and/or management of receivables. Factoring KB, a.s. will pursue the goal of further growth in its total sales, thus strengthening its position on the Czech factoring market. Even in the forthcoming year, the sphere of the domestic market should remain the key sphere of the rendered services; nevertheless, the Company will aim its effort for an increased share in the sphere of non-recourse factoring using insurance as well as an increase in the share of international factoring in total Company sales. Prerequisites for further growth in the sales volume are represented by offering all the existing products with an increasing share of the so-called reverse factoring or, as applicable, financing of purchases of goods, materials and raw stock. Such financing of purchases should also contribute to widening of the product range and maintaining/enhancing the Company s client portfolio. Finally, the Company will exert every effort in the coming year to achieve growth in gross and net profits, while preserving the increasing trend of labour productivity. Factoring KB makes full use of synergies within the framework of the KB Group and Société Générale. 11

14 Major Events in 2006 In January 2006, the so called call centre was put into service; this contributed to timely activities in the collection of overdue receivables and running of checks on certain receivables. In this way, increased attention was paid to the debtors unhurried in the settlement of their liabilities. Close cooperation with the bank in the sphere of acquisitions and marketing, support for the trading activities of the Company and full commissioning of the new communications system with our clients led to the increase in the Company s sales volumes and conclusion of new deals. Even for the next period, the risk management policy can be characterised as a conservative one, fully respecting prudent business approaches, which, however, leads at the same time to the loss of some business deals. A higher level of caution leads on the other hand to an increase in the volume of insured deals, and through this, to a broader offer within the non-recourse factoring structure. In accordance with this concept, the Company focused on closer cooperation with commercial insurers, which resulted in the introduction of new products and growth in the volume of insured deals. The Company continued in close cooperation in the sphere of risk insurance against debtor insolvency, provided namely by Komerční úvěrová pojišťovna EGAP, a.s. and Euler Hermes Čescob, úvěrová pojišťovna, a.s. The Company also cooperates, in the risk coverage area related to the foreign debtor insolvencies, with its foreign partners other members of Factors Chain International (FCI), and conversely, the Company provides such services, on a larger scale, in cases of imports performed by Czech entities. Market Development and Market Share Factoring KB is the fourth largest factoring company in the Czech Republic. In 2006, the Czech factoring market was influenced mostly by the members of the Czech Association of Factoring Companies (Asociace factoringových společností ČR), the number of which increased to seven. The market growth dynamics in 2006 were substantially higher than the year before; 25% growth was noted in a comparison with a mere 6% in The total sales of factoring companies, the Association members, amounted to CZK 105,000 million. The interest in the factoring services was reflected in the overall Company development; the Company acquired many new clients and concluded the historically largest number of new contracts. In 2006, Factoring KB, a.s. was the fourth largest factoring company in the Czech Republic with a market share of 16.3%. 12

15 Business Activities In 2006, the Company's sales equalled CZK 17,075 million; this represented an increase of 24%, which made this year, by the sales volume achieved, the most successful one in the history of the Company. This significant growth was caused by growth in volumes and numbers of factoring deals mostly in 2005 and As compared to the previous year, the number of concluded deals was at the same level, or grew slightly. The total number of newly concluded contracts was 332, accounting thus for a 3% increase compared to The Company gives emphasis on the growth in security of separate factoring deals with the aim of minimising commercial risks. These circumstances contributed to further growth in insured deals that accounted for 34% of the total sales of the Company. In domestic factoring, non-recourse factoring deals (insured) accounted for 30% of domestic factoring, as compared to 23% in 2005 with the parallel growth of the total sales volume. In international factoring, the volume of insured deals, or deals guaranteed within the FCI, accounted for 90% of the total export factoring volume. Owing to the considerable intensification of the cooperation within Société Générale, as well as the FCI, a significant increase in the export factoring has been achieved. Our Company also continued in providing reverse factoring services for the reasons of further expansion of the client portfolio. This specific product enables the full use of factoring services by financially weak business entities or utilisation in cases, where this source of funding is used under a high exposure concurrently with a risk consisting of high concentration to a single business entity. Owing to the cooperation with the FCI, significant growth in the import factoring volume has been achieved. The Company placed a new product of accession to liabilities for the purpose of financing of inputs of both current and potential clients on the market. This product represents another possibility of development in the financing of business entities as well as a significant expansion of the product base. It is a welcome opportunity for clients enabling them to use new possibilities of financing with the use of a modern financial instrument. This product is offered to business entities, the financial standing of which is verified by the guarantee granted by the relevant insurer. At the same time, this enhances the range of products that are processed as regards the minimisation of commercial risks. Compared to the 2005 results, the domestic factoring volume increased by 15%, and that of international factoring by 123%. Import factoring took a major share in the growth of the international factoring volume. Domestic factoring accounted for 85% of the total volumes, while the share of international factoring grew up to 15%. Significant growth in the Company s sales resulted in its bigger revenues. The Company continues in the trend of highly growing revenues as compared to the growth of costs. It is obvious that this fact results in a positive trend in the development of the Company s total financial results. As in the previous years, the Company was financed through short-term operating loans, both in domestic and foreign currencies, provided by the Company s shareholder, as well as ČSOB, Česká spořitelna and Raiffeisenbank. 13

16 Marketing Activities In the marketing sphere, the Company continued in providing and organising specialised training courses for the employees of its parent company. The Company took an active part in the presentation campaigns organised by the shareholder focused on the support of acquisition activities and presentations of the Company, particularly in the segment of small- and middle-sized companies. On its websites, the Company continued in data updates connected with the Company s activities focused on the support and development in presentations of the current product base. It is the Company s determination to make further its public presence through published advertisements and interviews of the Company s CEO in the media. Product Base In 2006, the Company focused its attention on product base development, in particular to the demand of the market and clients. Owing to the sustained and ever-growing pressure of competitors, the Company proceeded to the implementation of a new product accession to liabilities resulting from trade activities into practical use. In the course of 2006, this new product became very popular with existing clientele as well as in the acquisition activities in newly concluded business deals. Factoring KB has introduced a new product accession to liabilities resulting from trade activities, to the market. In the past year, the Company offered the following products: Domestic recourse factoring; Domestic factoring with insurance; Export factoring within the factor-factor system; Export factoring with insurance; Export recourse factoring; Reverse factoring; Import factoring; and Accession to a liabilities. 14

17 Information Technology In the course of 2006, a new communication system, efactoring providing the Company s clients, over the Internet, with a secure access to all data necessary for successful cooperation with our Company, was launched. For the purposes of data transfer, the efactoring system provides a qualitatively higher level of safety, wider and clearly arranged volume of client information while preserving the back compatibility with of batch files of the original system, which is still used by a not negligible part of our clientele for the maximum automation of their communications with us. Furthermore, the system digitally supports the products that had to be processed manually in the past. In the future development of this channel, we intend to automate and offer to our business partners, in digital form, part of specialised information that is currently provided, upon phone requests and queries, by our employees personally. In 2006, a new communication system efactoring was launched. During this year, a new CRM system was also put into service; this system provides for centralised management of data and contacts as regards our clients, including a specialised support of the call centre and the whole routine of sending reminders to the debtors. In the system further development in the time horizon of future years, we intend to introduce the support for electronic archiving of key data and specialised support of other departments and organisational units of our Company. A new proxy server has been acquired and commissioned in order to provide a higher standard of the computer network and Internet connection security. In order to provide for regular renewals and implementation of security modifications in all operating systems of workstations and servers within of our Company, a WSUS server has been acquired and commissioned. Within the regular replacements of hardware equipment, planned replacements of equipment were made. 15

18 Human Resources The Company practised the principles of an active staffing policy in order to motivate its employees to meet the planned tasks and objectives. The Company paid special attention to the development of employee professional skills with an emphasis on improved professional conduct in providing factoring services to clients and in the sphere of communication skills. During the first quarter of the year, the implementation of changes in the Company s internal links and processes was completed. The increase in trading activities put the new organisational structure under pressure and created the need for optimisation of work competences of individual employees. In the sphere of human resources, the Company made an effort to maximally use the synergies resulting from its cooperation with KB. This proved particularly beneficial in acquisitions of new employees and preparations/implementations of training courses. The internal share value, in a year-on-year comparison, has increased almost by 17 %. Comments on the Financial Situation and Business Results In view of the Company s financial position and results, 2006 can be evaluated as very successful for the Company. Almost all the financial targets set out in the Business Plan of the Company were met. The Company achieved the highest net profit in its history CZK 27,521,000. The share internal value increased, year-on-year, by almost 17%. The Company revenues came mostly from the factoring services. Likewise, as compared to the previous years, the most important part of the revenues was created in domestic factoring. The share of international factoring services in total Company sales in 2006 amounted to 15.27%. Total revenues amounted to CZK 260,958,000 compared to the level of total costs at CZK 225,353,000. As in the previous years, the Company created provisions for overdue receivables, the balance value of which was CZK 75,503,000 as at 31 December

19 Statutory Bodies Board of Directors Milan Corjak Chairman of the Board of Directors and Chief Executive Officer Born on 28 May 1955 in Pilsen. In 1979, he graduated from the Technical University of Mechanical and Electrical Engineering in Pilsen. From 1991 to 2004, Mr. Corjak occupied several positions in the management of Komerční banka, a.s., first as the Deputy Branch Manager for Operations, later as the Branch Manager and eventually as the Director of the Trading Division Prague-West. In the 2003/2004 period, Mr. Corjak held the position of the Director of the Prague Region. From 1 January 2005, Mr. Corjak performed the duties of Chairman of the Board of Directors and CEO. Tomáš Kunst Vice-Chairman of the Board of Directors and First Deputy CEO Born in 1965 in Čeladná. In 1987, he graduated from the University of Economics, Faculty of National Economy. Prior to his joining the factoring innovation team in Komerční banka, a.s. (1996), Mr. Kunst worked in TRANSFINANCE, a.s. from 1995 and from 1996 in the position of Head of the Domestic Factoring Department. In the Company, Mr. Kunst executes the duties of the Member of the Board of Directors (from 4 August 1997) and the Vice-Chairman of the Board of Directors and First Deputy CEO (from 1 December 1999). Marcela Chalušová Member of the Board of Directors and Deputy CEO Born in 1955 in Prague. In 1978, she graduated from the University of Economics, Faculty of National Economy. Until 1989, Ms. Chalušová worked as a programmer-analyst, later in Česká spořitelna, a.s. in the position of a Specialist, then Head of Department (from 1992 to 1994) and from 1994, she held the position of Director of the Trade Financing Department. From 1999, Ms. Chalušová specialised in the sphere of factoring. In January 2000, Ms. Chalušová joined the Board of Directors and she was appointed to the position of the Deputy CEO. The Board of Directors worked in the current composition from 1 January

20 Supervisory Board Jana Švábenská Chairman of the Supervisory Board from 31 May 2005 Eva Březinová Vice-Chairman of the Supervisory Board from 30 June 2003 Petr Kulhánek Member of the Supervisory Board from 10 September 2003 In the course of 2006, no changes took place in the composition of the Supervisory Board. Management Milan Corjak Tomáš Kunst Marcela Chalušová Chief Executive Officer First Deputy CEO Deputy CEO The composition of the Company s senior management is identical to the composition of the Board of Directors. Organisational Structure Chief Executive Officer CEO s Office (Secretary) First Deputy CEO Deputy CEO Financial Director Client Risk Dept. Commercial Risk Dept. IT System Dept. Client Service Domestic Dept. Client Service International Dept. Market & Trade Dept. Financial Dept. 18

21 Ownership Structure Shareholder Share in Registered Capital (%) Komerční banka, a.s. 100 Total 100 In 2006, the General Meeting of Shareholders was held, on 28 April The General Meeting of Shareholders approved the Final Accounts for 2005 and Report of the Board of Directors on the Company s Business and State of the Company s Assets for 2005, decided on the profit appropriations and acknowledged the Supervisory Board Report and the Report on Relations between Related Parties. Factoring KB, a.s. actively cooperates with KB, particularly in the sphere of acquisition activities 19

22 Report of the Supervisory Board On an ongoing basis, the Supervisory Board of Factoring KB, a.s. carried out tasks stipulated to it by the provisions of the Commercial Code and the Company s Article of Association. The Supervisory Board performed regular supervision over the Company s activities, approved strategic objectives of the Company and presented its proposals and suggestions to the Board of Directors in order to improve the Company s operations. Having examined the Company s annual financial statements for the period from 1 January to 31 December 2006, considering the external auditor s report on the annual financial statements, the Supervisory Board states that the accounting records and files were maintained in a conclusive manner and in accordance with the generally applicable rules regulating accounting of non-financial institutions. The accounting records express truly, in all material respects, the Company s financial situation as at 31 December Furthermore, the Supervisory Board further reviewed the Report on Relations between Related Parties for the period from 1 January to 31 December 2006 as prepared by the Company as the controlled entity under Section 66(a), paragraph 9 of the Commercial Code. The Supervisory Board states that based on its review, it has not found any materially incorrect information disclosed in that Report and that the Board of Directors of the Company has not identified, based on its evaluation of the relationships, any damage caused to the Company in the relations with its controlling entity. Based on the above facts, the Supervisory Board recommends that the General Meeting approve the Company s annual financial statements for In Prague, on 18 May 2007 Jana Švábenská Chairman of the Supervisory Board 20

23 Auditor s Report Office Address: Nile House Karolinská 654/ Prague 8 Czech Republic Tel.: Fax: DeloitteCZ@deloitteCE.com Independent Auditor s Report to the Shareholders of Factoring KB, a.s. Deloitte Audit s.r.o. Registered address: Týn 641/ Prague 1 Czech Republic Registered at the Municipal Court in Prague, Section C, File Id Nr Tax Id Nr.: CZ Having its registered office at: Na Poříčí 36, Praha 1 Identification number: Principal activities: Provision of factoring and forfaiting services Report on the Financial Statements Based upon our audit, we issued the following audit report dated 28 February 2007 on the financial statements which are included in this annual report on pages 26 to 45: We have audited the accompanying financial statements of Factoring KB, a.s., which comprise the balance sheet as of 31 December 2006, and the profit and loss account, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Statutory Body's Responsibility for the Financial Statements The Statutory Body is responsible for the preparation and fair presentation of these financial statements in accordance with accounting regulations applicable in the Czech Republic. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Act on Auditors and International Standards on Auditing and the related application guidelines issued by the Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 21

24 Opinion In our opinion, the financial statements give a true and fair view of the financial position of Factoring KB, a.s. as of 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with accounting regulations applicable in the Czech Republic. Report on the Related Party Transactions Report We have also reviewed the factual accuracy of the information included in the related party transactions report of Factoring KB, a.s. for the year ended 31 December 2006 which is included in this annual report on pages 46 to 48. This related party transactions report is the responsibility of the Company s Statutory Body. Our responsibility is to express our view on the related party transactions report based on our review. We conducted our review in accordance with International Standard on Review Engagements (ISRE) 2400 and the related application guidelines issued by the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the review to obtain moderate assurance as to whether the related party transactions report is free of material factual misstatements. A review is limited primarily to inquiries of Company personnel and analytical procedures and examination, on a test basis, of the factual accuracy of information, and thus provides less assurance than an audit. We have not performed an audit of the related party transactions report and, accordingly, we do not express an audit opinion. Nothing has come to our attention based on our review that indicates that the information contained in the related party transactions report of Factoring KB, a.s. for the year ended 31 December 2006 contains material factual misstatements. Report on the Annual Report We have also audited the annual report for consistency with the financial statements referred to above. This annual report is the responsibility of the Company s Statutory Body. Our responsibility is to express an opinion on the consistency of the annual report and the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and the related application guidelines issued by the Chamber of Auditors of the Czech Republic. Those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the information included in the annual report describing matters that are also presented in the financial statements is, in all material respects, consistent with the relevant financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the information included in the annual report is consistent, in all material respects, with the financial statements referred to above. In Prague on 8 June 2007 Audit firm: Deloitte Audit s.r.o. Certificate no. 79 Represented by: Statutory auditor: Diana Rogerová, authorised employee Diana Rogerová, certificate no Audit Tax Consulting Financial Advisory Member of Deloitte Touche Tohmatsu 22

25 Sworn Statement Factoring KB, a.s. hereby declares that all the information and data presented in this Annual Report are complete and correct. Furthermore, the Company confirms that the Report contains all the information that might be important in the investors decision-making process. In addition, Factoring KB, a.s. hereby declares that until the date of processing of this Annual Report no negative changes in the financial situation and/or other changes that could influence correct and proper evaluation of the financial situation of Factoring KB, a.s. have occurred. In Prague, on 18 May 2007 On behalf of the Board of Directors signed by: Milan Corjak Chairman of the Board of Directors and CEO Tomáš Kunst Vice-Chairman of the Board of Directors and First Deputy of CEO 23

26 Financial Section 24

27 26 Balance Sheet as of 31 December Profit and Loss Statement for the year ended 31 December Cash Flow Statement as of 31 December Statement of Changes in Equity as of 31 December Notes to the Financial Statements as of 31 December Report on Relations Among Related Entities 25

28 Balance Sheet as of 31 December 2006 CZK thousand Gross Adjustment Net Net Assets Total assets 5,449, ,253 5,324,145 4,441,835 B. Fixed assets 67,780 49,750 18,030 21,007 B.I. Intangible fixed assets 36,798 28,326 8,472 8,709 B.I.3. Software 33,852 28,326 5,526 2,173 B.I.7. Intangible fixed assets under construction 2,946 2,946 6,536 B.II. Tangible fixed assets 30,982 21,424 9,558 12,298 B.II.2. Structures B.II.3. Individual movable assets and sets of movable assets 29,052 21,236 7,816 7,067 B.II.6. Other tangible fixed assets B.II.7. Tangible fixed assets under construction ,691 C. Current assets 5,380,965 75,503 5,305,462 4,419,743 C.II. Long-term receivables 7,013 7,013 5,707 C.II.5. Long-term prepayments made ,799 C.II.8. Deferred tax asset 6,843 6,843 2,908 C.III. Short-term receivables 5,306,100 75,503 5,230,597 4,352,916 C.III.1. Trade receivables 3,398,715 66,405 3,332,310 2,741,519 C.III.7. Short-term prepayments made 1,906,700 9,098 1,897,602 1,611,146 C.III.8. Estimated receivables 95 C.III.9. Other receivables C.IV. Current financial assets 67,851 67,851 61,120 C.IV.1. Cash on hand C.IV.2. Cash at bank 67,701 67,701 60,921 D.I. Other assets ,085 D.I.1. Deferred expenses ,085 26

29 CZK thousand Liabilities & Equity Total liabilities & equity 5,324,145 4,441,835 A. Equity 188, ,983 A.I. Share capital 84,000 84,000 A.I.1. Share capital 84,000 84,000 A.II. Capital funds 6,000 6,000 A.II.1. Share premium 6,000 6,000 A.III. Statutory funds 4,685 3,906 A.III.1. Statutory reserve fund / Indivisible fund 4,240 3,338 A.III.2. Statutory and other funds A.IV. Retained earnings 66,694 50,033 A.IV.1. Accumulated profits brought forward 66,694 50,033 A.V. Profit or loss for the current period (+/-) 27,521 18,044 B. Liabilities 5,134,076 4,278,216 B.I. Reserves 1,287 1,219 B.I.4. Other reserves 1,287 1,219 B.III. Short-term liabilities 3,270,517 2,729,687 B.III.1. Trade payables 3,257,649 2,716,105 B.III.5. Payables to employees 1,028 1,130 B.III.6. Social security and health insurance payables B.III.7. State tax payables and subsidies 3,774 5,297 B.III.10. Estimated payables 1,659 1,653 B.III.11. Other payables 5,717 4,753 B.IV. Bank loans and borrowings 1,862,271 1,547,310 B.IV.2. Short-term bank loans 1,862,271 1,547,310 C. I. Other liabilities 1,169 1,636 C.I.1. Accrued expenses 1,169 1,636 27

30 Profit and Loss Statement for the year ended 31 December 2006 CZK thousand II. Production 97,609 86,161 II.1. Sales of own products and services 97,609 86,161 B. Purchased consumables and services 38,105 34,263 B.1. Consumed material and energy 2,715 3,287 B.2. Services 35,390 30,976 + Added value 59,504 51,898 C. Staff costs 30,337 26,225 C.1. Payroll costs 21,579 18,776 C.2. Remuneration to members of statutory bodies C.3. Social security and health insurance costs 7,850 6,587 C.4. Social costs D. Taxes and charges E. Depreciation of intangible and tangible fixed assets 10,998 10,407 III. Sales of fixed assets and material 805 III.1. Sales of fixed assets 805 F. Net book value of fixed assets and material sold 282 F.1. Net book value of sold fixed assets 282 G. Change in reserves and provisions relating to operating activities and complex deferred expenses 5,039 (15,985) IV. Other operating income 510,726 42,794 H. Other operating expenses 517,127 72,189 * Operating profit or loss 6,696 2,346 X. Interest income 88,793 70,618 N. Interest expenses 43,296 30,678 XI. Other financial income 68,734 30,947 O. Other financial expenses 85,322 44,824 * Financial profit or loss 28,909 26,063 Q. Income tax on ordinary activities 8,084 10,365 Q.1. due 12,020 11,572 Q.2. deferred (3,936) (1,207) ** Profit or loss from ordinary activities 27,521 18,044 *** Profit or loss for the current period (+/-) 27,521 18,044 **** Profit or loss before tax 35,605 28,409 28

31 Cash Flow Statement as of 31 December 2006 CZK thousand P. Opening balance of cash and cash equivalents 61,120 64,235 Cash flows from ordinary activities Z. Profit or loss from ordinary activities before tax 35,605 25,931 A.1. Adjustments for non-cash transactions (12,483) (9,978) A.1.1. Depreciation of fixed assets 10,998 10,407 A.1.2. Change in provisions and reserves 5,039 (13,507) A.1.3. Profit/(loss) on the sale of fixed assets (523) A.1.5. Interest expense and interest income (45,497) (39,940) A.1.6. Adjustments for other non-cash transactions 16,976 33,585 A.* Net operating cash flow before changes in working capital 23,122 15,953 A.2. Change in working capital (353,460) (364,433) A.2.1. Change in operating receivables and other assets (906,258) (877,195) A.2.2. Change in operating payables and other liabilities 552, ,762 A.** Net cash flow from operations before tax and extraordinary items (330,338) (348,480) A.3. Interest paid (43,754) (31,551) A.4. Interest received 88,793 71,562 A.5. Income tax paid from ordinary operations (14,307) (11,671) A.*** Net operating cash flows (299,606) (320,140) Cash flows from investing activities B.1. Fixed assets expenditures (8,020) (17,811) B.2. Proceeds from fixed assets sold 805 B.*** Net investment cash flows (8,020) (17,006) Cash flow from financial activities C.1. Change in payables from financing 314, ,706 C.2. Impact of changes in equity (604) (675) C.2.5. Payments from capital funds (604) (675) C.*** Net financial cash flows 314, ,031 F. Net increase or decrease in cash and cash equivalents 6,731 (3,115) R. Closing balance of cash and cash equivalents 67,851 61,120 29

32 Statement of Changes in Equity as of 31 December 2006 CZK thousand Share Capital Statutory Accumulated Accumulated Profit or Total capital funds funds profits losses loss for equity brought brought the current forward forward period Balance at 31 December ,000 6,000 3,341 33, , ,614 Distribution of profit or loss 0 0 1,240 16,733 0 (17,973) 0 Payments from capital funds 0 0 (675) (675) Profit or loss for the current period ,044 18,044 Balance at 31 December ,000 6,000 3,906 50, , ,983 Distribution of profit or loss 0 0 1,383 16,661 0 (18,044) 0 Payments from capital funds 0 0 (604) (604) Profit or loss for the current period ,521 27,521 Balance at 31 December ,000 6,000 4,685 66, , ,900 30

33 Notes to the Financial Statements as of 31 December General Information 1.1. Incorporation and Description of the Business Factoring KB, a.s. (hereinafter the Company ) was formed as a joint stock company by a Memorandum of Association on 24 July 1997 and was incorporated following its registration in the Register of Companies maintained at the Court in Prague on 4 August The Company s issued share capital is CZK 84 million. The Company s financial statements have been prepared as of and for the year ended 31 December The reporting year is the calendar year. The following table shows individuals and legal entities with an equity interest greater than 20 percent and the amount of their equity interest: Shareholder Ownership percentage (%) Komerční banka, a.s. 100 Total 100 The Company is primarily engaged in the provision of factoring and forfaiting services Changes in and Amendments to the Register of Companies There were no changes in and amendments to the Register of Companies Organisational Structure of the Company Organisational Structure of Factoring KB, a.s. until 28 February 2006 CEO Secretariat First Deputy CEO Deputy CEO IT Systems Domestic Factoring Finance Client Risks International Factoring Marketing Accounting 31

34 Organisational Structure of Factoring KB, a.s. since 1 March 2006 CEO Secretariat First Deputy CEO Deputy CEO Financial director Client risks Business risks IT Department Client service Czech Republic Client service international Sales and Marketing Finance 1.4. Group Identification Factoring KB, a.s. is included in the Komerční banka, a.s. Financial Group Board of Directors and Supervisory Board Position Name Board of Directors Chairman Milan Corjak Vice-Chairman Tomáš Kunst Member Marcela Chalušová Supervisory Board Chairman Jana Švábenská Member Eva Březinová Member Petr Kulhánek There were no changes in the Company s Board of Directors and the Supervisory Board during the reporting period. 2. Basis of accounting and general accounting principles The Company s accounting books and records are maintained and the financial statements were prepared in accordance with the Accounting Act 563/1991 Coll., as amended; the Regulation 500/2002 Coll. which provides implementation guidance on certain provisions of the Accounting Act for reporting entities that are businesses maintaining double-entry accounting records, as amended, and Czech Accounting Standards for Businesses. The accounting records are maintained in compliance with general accounting principles, specifically the historical cost valuation basis, the accruals principle, the prudence concept and the going concern assumption. These financial statements are presented in thousands of Czech crowns ( CZK ), unless stated otherwise. 32

35 3. Summary of Significant Accounting Policies 3.1. Tangible Fixed Assets Purchased tangible fixed assets are stated at cost less accumulated depreciation. Tangible fixed assets include assets with an acquisition cost greater than CZK 40,000 on an individual basis and an estimated useful life greater than one year. The cost of fixed asset improvements exceeding CZK 40,000 per asset for the period increases the acquisition cost of the related fixed asset. Depreciation is charged so as to write off the cost of tangible fixed assets over their estimated useful lives, using the straight line method, on the following basis: Category of assets Depreciation period in years Buildings 30 Machinery and equipment 3 12 Vehicles 4 Furniture and fixtures 6 12 Assets with an acquisition cost lower than CZK 40,000 on an individual basis and an estimated useful life greater than one year are expensed in the period of acquisition. The gain or loss arising from the sale or the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised through the profit and loss account Intangible Fixed Assets Purchased intangible fixed assets are stated at cost less accumulated amortisation. Intangible fixed assets include assets with an acquisition cost greater than CZK 60,000 on an individual basis and an estimated useful life greater than one year. The cost of fixed asset improvements exceeding CZK 40,000 per asset for the period increases the acquisition cost of the related fixed asset. Amortisation of intangible fixed assets is recorded on a straight line basis over their estimated useful lives as follows: Number of years Software 3 Assets with an acquisition cost lower than CZK 60,000 on an individual basis and an estimated useful life greater than one year are expensed in the period of acquisition Non-Current Financial Assets The Company records no non-current financial assets Inventory The Company carries no inventory and has no warehouse in place. All overhead materials are expensed as purchased Receivables Upon origination, receivables are stated at their nominal value. The receivables are reported at carrying amounts as reduced by appropriate provisions for doubtful and bad amounts. Receivables acquired for consideration or through an investment are stated at cost. 33

36 3.6. Trade Payables Trade payables are stated at their nominal value Loans Loans are reported at nominal value. The portion of long-term loans maturing within one year from the balance sheet date is included in short-term loans Accounting Treatment for Factoring Transactions Factoring involves purchasing short-term receivables at nominal values that arose from supplies of goods or services to a number of regular customers and are before their due dates. The factor makes a prepayment to the supplier (pre-funding) which can amount up to 90 percent of the nominal value of the receivable. Amounts due from purchased receivables and prepayments made are reported as Trade receivables and Short-term prepayments made on the face of the Company s balance sheet. Amounts payable arising from purchased receivables are presented within Trade payables on the face of the Company s balance sheet. Following payment by the customer, the remaining balance of the receivable is funded to the suppliers. The factor collects a fee in respect of the provision of the services. The fee reflects the costs involved in processing the ceded receivables and interest on the provided pre-funding which corresponds to the rates attached to short-term bank loans. Commissions and interest on pre-funding are reported within the profit and loss account lines Sale of own products and services and Interest income respectively. Products that represent the Company s principal operations specifically include: Domestic recourse factoring (relation between a supplier and customer in the Czech Republic); recourse means that unless the debt is recovered within 90 days after maturity, it is assigned back to the supplier; Domestic non-recourse factoring (with insurance) whereby the risk of a customer s failure to settle a receivable is eliminated by the compensation provided by an insurer; Export recourse factoring (relation between a supplier and customer abroad) with a recourse sanction; recourse means that unless the debt is recovered within 90 days after maturity, it is assigned back to the supplier; Export factoring that is operated by two factors. In this respect, the Company is a member of the international association of factoring companies FCI, where all potential risks are hedged by the factoring company on the territory of the country of the customer; Export factoring with insurance which includes an element of participation in the risk of the customer s insolvency; and Import factoring with insurance which enables the obtaining of a short-term customer loan for goods purchased from foreign suppliers without the necessary hedging by banking instruments. During the reporting period, the Company offered a new product Funding of payables to its clients. Following the framework contract entered into with a customer, the payables of the customer to domestic suppliers are funded up to the amount of the insurance limit Provisioning and Reserving Policies Provisions are made based on the results of the inventory taking, to the extent that the valuation of assets does not correspond with the actual balance. Reserves are intended to cover future obligations or expenditure, the nature of which is clearly defined and which are either likely to be incurred or certain to be incurred, but which are uncertain as to the amount or the date on which they will arise. In the year ended 31 December 2006, the Company recognised provisions against receivables (commissions, interest, receding, pre-funding) on the basis of count procedures as of 31 December 2006 by reference to the aging categories of individual receivables and taking into account the risk profile and the estimated rate of collection. Reserves are intended to cover future obligations or expenditure, the nature of which is clearly defined and which are either likely to be incurred or certain to be incurred, but which are uncertain as to the amount or the date on which they will be used. Reserves for outstanding vacation days are recognised on the basis of an analysis of outstanding vacation days as of the balance sheet date and the average payroll costs, including social security and health insurance costs according to individual employees. 34

37 3.10. Foreign Currency Translation During the accounting period, transactions denominated in foreign currencies are translated using daily exchange rates as announced by the Czech National Bank (CNB). At the balance sheet date, financial assets and current assets and liabilities in foreign currencies are translated using the effective exchange rate announced by the CNB as of that date. Any resulting foreign currency translation differences are recorded through the current year s financial expenses or revenues as appropriate Finance Leases The Company has not entered into any finance lease agreements Taxation Depreciation of Fixed Assets for Tax Purposes Depreciation of fixed assets is calculated using the straight-line method for tax purposes Current Tax Payable The tax currently payable is based on taxable profit for the reporting period. Taxable profit differs from net profit as reported in the profit and loss account because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Company s liability for current tax is calculated using tax rates that have been enacted by the balance sheet date Value Added Tax The Company is registered as a VAT payer Deferred Tax Deferred tax is accounted for using the balance sheet liability method. Under the liability method, deferred tax is calculated at the income tax rate that is expected to apply in the period when the tax liability is settled or the asset realised. The balance sheet liability method focuses on temporary differences which are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount that will be deductible for tax purposes in the future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is charged or credited to the profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset and reported on an aggregate net basis in the balance sheet Use of Estimates The presentation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management of the Company believes that the estimates and assumptions used will not significantly differ from the actual results and outcomes in the following reporting periods Revenue Recognition The Company generates its revenues primarily from remuneration (commission) for each ceded receivable, and from interest on the provided purchase price prepayments. Other revenues principally comprise charges for changes in contractual terms and conditions, applications for factoring services, and other fees. 35

38 3.15. Year-on-Year Changes in Valuation, Depreciation or Accounting Policies In the year ended 31 December 2006, there were no year-on-year changes in valuation, depreciation or accounting policies. The Company revised the financial statements for the year ended 31 December 2005 to reflect the change in the format of financial statement for the year ended 31 December The portion of short-term trade payables of CZK 4,753 thousand which relates to the non-defined income and withheld payments is presented as Other Payables. In the year ended 31 December 2005, the Company revised the policy of accounting for the re-ceding of receivable Cash Flow Statement The cash flow statement is prepared using the indirect method. Cash equivalents include current liquid assets easily convertible into cash in an amount agreed in advance. Cash and cash equivalents can be analysed as follows: CZK thousand Cash on hand and cash in transit Cash at bank 67,701 60,921 Cash and cash equivalents Total cash and cash equivalents 67,851 61,120 Cash flows from operating, investment and financial activities presented in the cash flow statement are not offset Hedging against the Risk of Insolvency of the Business Partner In the case of recourse factoring, the business partner is required to sign a bill declaration and a blank promissory note. Potential risks attached to other products (refer to Note 3.8.) are covered by insurers or factoring firms in the customer s country. 4. Additional information on the Balance Sheet and Profit and Loss Account 4.1. Fixed Assets Intangible Fixed Assets Cost CZK thousand 2005 Additions Disposals 2006 Software 25,355 10,571 2,074 33,852 Acquisition of assets 6,536 7,233 10,823 2,946 Total 31,891 17,804 12,897 36,798 Accumulated Amortisation CZK thousand 2005 Additions Disposals 2006 Software 23,182 7,218 2,074 28,326 Total 23,182 7,218 2,074 28,326 36

39 Net Book Value CZK thousand Software 2,173 5,526 Acquisition of assets 6,536 2,946 Total 8,709 8,472 During the year ended 31 December 2006, the Company predominantly purchased software related to the factoring system. During the year, the Company wrote off an investment under construction of CZK 252 thousand. Amortisation of intangible fixed assets was CZK 7,218 thousand and CZK 6,737 thousand for the years ended 31 December 2006 and 2005, respectively. The aggregate amount of directly expensed low value intangible assets was CZK 473 thousand and CZK 207 thousand for the years ended 31 December 2006 and 2005, respectively Tangible Fixed Assets Cost CZK thousand 2005 Additions Disposals 2006 Buildings Individual movable assets 27,829 4,507 3,284 29,052 Machines and equipment 15,898 4,439 3,093 17,244 Vehicles 7, ,717 Furniture and fixtures Low value assets 3, ,139 Other assets Acquisition of tangible FA 3,691 1,038 4, Total 33,228 5,545 7,791 30,982 Accumulated Depreciation CZK thousand 2005 Additions Disposals 2006 Buildings Individual movable assets 20,762 3,759 3,285 21,236 Machines and equipment 14,505 1,923 3,093 13,335 Vehicles 2,044 1,822 3,866 Furniture and fixtures Low value assets 3, ,139 Other assets Total 20,929 3,780 3,285 21,424 Net Book Value CZK thousand Buildings Individual movable assets 7,067 7,816 Machines and equipment 1,393 3,909 Vehicles 5,604 3,851 Furniture and fixtures Low value assets Other assets Acquisition of tangible FA 3, Total 12,298 9,558 37

40 During the year ended 31 December 2006, the Company predominantly purchased computers. Depreciation of tangible fixed assets was CZK 3,780 thousand and CZK 3,671 thousand for the years ended 31 December 2006 and 2005, respectively. The aggregate amount of directly expensed low value tangible assets was CZK 524 thousand and CZK 1,256 thousand in the years ended 31 December 2006 and 2005, respectively Assets Held under Finance and Operating Leases The Company has not entered into any finance or operating lease agreements Pledged Fixed Assets The Company has not pledged any fixed assets Receivables Long-Term Receivables The Company reports long-term receivables of CZK 7,013 thousand which predominantly consist of a deferred tax asset of CZK 6,843 thousand and long-term prepayments made of CZK 170 thousand Short-Term Receivables CZK thousand Short-term Amounts due from purchased recourse receivables 3,246,267 2,713,125 Amounts due from non-recourse pre-funding 31,440 30,002 Commissions from purchased receivables 5,950 4,019 Interest on pre-funding 14,802 11,161 Re-ceding 41,866 26,909 Bills of exchange to be collected Amounts due from accession to debt 52,642 0 Other trade receivables 4,914 16,272 Provisions against trade receivables (66,405) (60,803) Total trade receivables 3,332,310 2,741,519 Short-term prepayments made Receivables from pre-funding 1,905,139 1,620,171 Operating prepayments 1, Provisions against prepayments made (9,098) (9,729) Total prepayments made 1,897,602 1,611,146 Other short-term receivables Total short-term receivables 5,230,597 4,352,916 Amounts due from purchased receivables represent nominal values of receivables purchased as part of the provision of factoring services. The schedule of the aging of accounts receivable does not present receivables from purchased recourse receivables where the Company concurrently records an amount payable to the supplier (refer to Note ) and bills of exchange which were fully provided for. 38

41 Aging of Accounts Receivable thousand Before due date Overdue Total Total overdue Year Category years days days days years and greater 2006 Commissions 4,294 1, ,656 5,950 Provisions Interest 13, ,646 14,802 Provisions ,270 1,277 Re-ceding 10,075 4,418 3,626 7,277 14,335 2,135 31,791 41,866 Provisions 3,373 3,010 6,221 14,335 2,135 25,701 29,074 Non-recourse purchases 4,528 8,519 2,550 15,843 31,440 31,440 Provisions 4,528 7,746 2,550 15,843 30,667 30,667 Amounts due from the accession to debt 51, ,642 Provisions Other receivables , ,137 4,914 Provisions 3 3,838 3,841 3, Commissions 2, ,132 4,019 Provisions Interest 9, ,455 11,161 Provisions ,226 1,263 Re-ceding 5,120 1,968 5,671 9, ,198 21,789 26,909 Provisions 32 5,658 8, ,198 19,268 19,268 Non-recourse purchases 3,963 2,199 6,317 17,523 26,039 30,002 Provisions 2,199 3,839 17,523 23,561 23,561 Other receivables 918 3,967 11,387 15,354 16,272 Provisions 3,840 11,387 15,227 The maturity of amounts due from pre-funding is established reflecting the specific factoring contract with the client. The average maturity is 90 days. The average maturity for invoices issued in respect of commissions, interest and re-ceding is 30 days. The Company maintains no amounts due from related parties Financial Assets CZK thousand Cash Cash equivalents Current accounts 67,701 60,921 Total current financial assets 67,851 61, Shareholder s Equity Share Capital The registered share capital as of 1 January 2006 consisted of 400 shares with a nominal value of CZK 100,000 per share and 4,400 ordinary shares with a nominal value of CZK 10,000. The share capital balance remained unchanged during the year ended 31 December The shares are registered, carry voting rights, are fully negotiable but not readily marketable. The share premium account of CZK 6,000 thousand represents the difference between the issue and nominal values of the shares. 39

42 4.5. Reserves CZK thousand Reserve for Reserve for Total outstanding social security reserves vacation days and health insurance Balance at 31 December ,219 Charge for reserves ,287 Release of reserves ,219 Balance at 31 December , Payables Trade Payables CZK thousand Short-term Suppliers 4,727 9,333 Purchased receivables 3,252,922 2,706,772 Other payables 5,717 4,753 Total 3,263,366 2,720,858 The payables to suppliers are before their due dates. The Company s payables of CZK 3,252,922 thousand and CZK 2,706,772 thousand as of 31 December 2006 and 2005, respectively, which arose from the purchased receivables under the provision of factoring services, represent recourse factoring, that is, unless the customer settles its debts within the recourse period of 90 days, the purchased debt is assigned back to the supplier. Prepayments that take the form of pre-funding are made in respect of these payables Intercompany Payables The Company reported aggregate payables of CZK 1,582 thousand to Komerční banka, a.s. as of 31 December 2006, which are presented within trade payables. These balances predominantly consist of fees for the use of Komerční banka s distribution network totalling CZK 1,431 thousand, advisory services of CZK 113 thousand, contribution to the bonus for winners for the organisation of the competition totalling CZK 30,000 and fees for rent and services of regional workplaces within the KB network of CZK 8,000 (2005: CZK 4,975 thousand). In addition, the payable of CZK 242 thousand is recorded as an accrued expense (refer to Note 4.8.). The payable to Penzijní fond KB of CZK 22,000 is recorded within payables arising from social security and health insurance Bank Loans 2006 CZK thousand Purpose Balance at Interest Interest rate Form of collateral Bank/creditor 31 December expense 2006 KB loan 485,375 12,577 under a specific contract None KB loan 2, O/N LIBOR + FV None KB loan 74,527 2,282 O/N EURIBOR + FV None ČSOB loan 500,000 11,519 PRIBOR + FV Guarantee of Komerční banka, a.s. ČS loan 700,000 16,441 PRIBOR + FV Guarantee of Komerční banka, a.s. RaiffeisenBank loan 100, PRIBOR + FV Guarantee of Komerční banka, a.s. Total 1,862,271 43,296 Note: FV fixed variance 40

43 2005 CZK thousand Purpose Balance at Interest Interest rate Form of collateral Bank/creditor 31 December expense 2006 KB loan 375,380 7,172 under a specific contract None KB loan 4, M LIBOR + FV None KB loan 67,421 1,948 3M EURIBOR + FV None ČSOB loan 500,000 10,520 PRIBOR + FV Guarantee of Komerční banka, a.s. ČS loan 600,000 9,393 PRIBOR + FV Guarantee of Komerční banka, a.s. IEC loan 0 1,517 3M PRIBOR + FV None Total 1,547,310 30,678 Note: FV fixed variance 4.8. Temporary Liabilities CZK thousand Accrued expenses 1,169 1,636 Total temporary liabilities 1,169 1,636 Accrued expenses primarily include outstanding interest on bank loans which predominantly consist of the outstanding interest on the loan provided by Československá obchodní banka, a. s. in the amount of CZK 642 thousand (2005: CZK 623 thousand), outstanding interest from the loan provided by Česká spořitelna, a.s. in the amount of CZK 157 thousand (2005: CZK 933 thousand), outstanding interest on the loan provided by Raiffeisenbank a.s. in the amount of CZK 128 thousand (2005: CZK 0). As of 31 December 2006, accrued expenses in respect of Komerční banka, a.s. amounted to CZK 242 thousand (2005: CZK 80,000) Income Tax on Ordinary and Extraordinary Activities CZK thousand Income tax charge on ordinary activities 12,020 11,572 Deferred tax (3,936) (1,207) Total 8,084 10,365 The charge for the year can be reconciled to the profit per the profit and loss account as follows: CZK thousand Profit before tax 35,605 28,409 Tax at the domestic income tax rate for the relevant year 8,545 7,386 Tax effect of expenses that are not deductible in determining taxable profit 13,205 18,529 Tax effect of tax deductible expenses (9,670) (14,283) Tax effect of tax deductions (60) (60) Current changes in the deferred tax (3,936) (1,207) Total income tax on ordinary and extraordinary activities 8,084 10,365 The effective tax rate was 22.7 percent and 36.5 percent as of 31 December 2006 and 2005, respectively. 41

44 Deferred Tax The deferred tax asset/(liability) is analysed as follows: Deferred Tax Arising from CZK thousand Accumulated depreciation and amortisation of fixed assets (56) (599) Receivables 6,585 3,209 Reserves Other 5 5 Total 6,843 2,908 Analysis of movements CZK thousand 1 January ,908 Current changes charged to the profit and loss account 3, December , Details of Income by Principal Activity CZK thousand In-country Cross-border Total In-country Cross-border Total Commission 85,158 12,451 97,609 76,977 9,184 86,161 Interest on pre-funding 79,790 8,958 88,748 64,259 6,326 70,585 The Company principally generates its income from commissions collected in respect of each ceded receivable and interest on prepayments made to settle the purchase price. Interest on current account balances amounted to CZK 45,000 and CZK 33,000 for the years ended 31 December 2006 and 2005, respectively Services Services primarily include the following items: CZK thousand Repairs and maintenance, travel and representation expenses 769 1,044 Rental 2,736 2,778 Telephone fees and postal charges 1,419 1,539 Software maintenance 1,706 1,699 Legal services 1,411 1,098 Commission paid to an import factor 1,575 1,577 Analysis of the risk of EGAP and ČESCOB insurance 3,522 2,397 Services of Komerční banka, a.s. 15,837 13,696 Other services 6,415 5,148 Total services Details about services of Komerční banka, a.s. are provided in Note

45 4.12. Change in Reserves and Provisions Relating to Operating Activities and Complex Deferred Expenses CZK thousand Change in reserves (68) (558) Change in statutory provisions against receivables 3,287 1,336 Change in tax non-deductible provisions against receivables (8,258) 15,207 Total (5,039) 15, Other Operating Income and Expenses For the year ended 31 December 2006, the Company recorded other operating expenses of CZK 517,127 thousand (2005: CZK 72,189 thousand), which predominantly include the expense arising from the re-ceding of receivables of CZK 504,904 thousand and the write-off of receivables of CZK 11,781 thousand. The sundry operating expenses total CZK 442 thousand. As of 31 December 2006, the Company records other operating income of CZK 510,726 thousand (2005: CZK 42,794 thousand). Other operating income predominantly consists of income from the re-ceding of receivables of CZK 504,904 thousand, income from written-off receivables of CZK 100 thousand, fees for changes in contractual terms, applications for provision of factoring services and entry and monitoring fees of CZK 5,017 thousand and sundry operating income of CZK 705 thousand, of which the most significant item was the refunded court fee of CZK 341 thousand Financial Expenses and Income Financial expenses primarily consist of the following items: CZK thousand Interest on short-term loans 40,883 28,602 Interest on overdraft facilities 2,413 2,076 Total interest expense 43,296 30,678 Exchange rate losses 68,187 30,753 EGAP, ČESCOB and other insurance premiums 11,187 8,607 Banking expenses 3,080 2,834 Bank guarantee 2,331 1,867 Other charges Total other financial expenses 85,322 44,824 Financial income primarily consist of the following items: CZK thousand Interest on pre-funded purchased receivables 88,748 70,585 Interest on current and term accounts Total interest income 88,793 70,618 Foreign exchange gains 68,734 30,947 Total other financial income 68,734 30,947 43

46 4.15. Related Party Transactions For the years ended 31 December 2006 and 2005, the Company generated financial income of CZK 43,000 and CZK 33,000, respectively, from transactions with Komerční banka, a.s. The services that Komerční banka, a.s. provided to the Company for the year ended 31 December 2006 principally include: CZK thousand Advisory and consulting services Use of trade mark 2,941 2,941 Fee for the use of Komerční banka s distribution network 12,315 10,248 Expenses on promotion and advertising of the Komerční banka, a.s. Group Financial expenses 20,406 13,927 Other services of Komerční banka, a.s Financial expenses principally consist of interest on granted short-term loans of CZK 14,990 thousand (2005: CZK 9,248 thousand), banking fees of CZK 3,053 thousand (2005: CZK 2,805 thousand), and the fee for a bank guarantee of CZK 2,331 thousand (2005: CZK 1,867 thousand). In the year ended 31 December 2006, the Company substantially increased the volume of transactions conducted through Komerční banka s distribution network which led to a year-on-year increase in the related fees of CZK 2,067 thousand. In the year ended 31 December 2006, the Company effected no sale or purchase of fixed assets or non-current financial assets in relation to Komerční banka, a.s. Komerční banka, a.s. provided guarantees for loans granted to Factoring KB, a.s. by Česká spořitelna, a.s., Československá obchodní banka, a. s. and RaiffeisenBank a.s. in the total amounts of CZK 1,300 million and CZK 1,100 million as of 31 December 2006 and 2005, respectively. 5. Employees, Management and Statutory Bodies 5.1. Staff Costs and Number of Employees The following tables summarise the average number of the Company s employees and managers and staff costs (exclusive of bonuses paid to the members of the statutory bodies) for the years ended 31 December 2006 and 2005: 2006 CZK thousand Number Payroll Social security Other Total staff costs and health costs costs insurance Staff 35 15,572 5, ,666 Management 3 6,007 2, ,203 Total 38 21,579 7, , CZK thousand Number Payroll Social security Other Total staff costs and health costs costs insurance Staff 34 14,277 4, ,609 Management 3 4,499 1, ,158 Total 37 18,776 6, ,767 The number of employees is based on the average recalculated headcount. The category of management includes the Company s CEO and Deputy CEOs. 44

47 5.2. Loans, Borrowings, and Other Benefits Provided During the years ended 31 December 2006 and 2005, the members of the Company s Board of Directors and Supervisory Board received bonuses of CZK 468 thousand and CZK 458 thousand, respectively, in addition to their basic salaries. In addition, members of the Board of Directors are entitled to use a car pursuant to their contracts entered into with the Company. 6. Contingent Liabilities and off Balance Sheet Commitments As of 31 December 2006 and 2005, the Company had contingencies arising from import factoring of CZK 24,893 thousand and CZK 30,840 thousand, respectively. 7. Legal Disputes As of 31 December 2006, the Company acted as a plaintiff in court cases brought against its debtors with a view to recovering receivables in the aggregate amount of approximately CZK 117 million which arose from factoring transactions. The Company has recognised provisions against these receivables pursuant to applicable legislation and its internal guidance (refer to Notes 3.9. and 4.2.). The Company is involved in no legal disputes where it would be named as the defendant. 8. Significant Post Balance Sheet Events No significant events occurred subsequent to the balance sheet date. 45

48 Report on Relations Among Related Entities for the year ended 31 December 2006 (hereinafter the Report on Relations ) Factoring KB, a.s. having its registered office at Na Poříčí 36, Corporate ID , incorporated in the Register of Companies maintained at the Municipal Court in Prague, Section B, File 4861, (hereinafter referred to as Factoring KB ), is part of a business group (holding company) in which the following relations between Factoring KB and its controlling entity and further between Factoring KB and other entities controlled by the same controlling entity (hereinafter referred to as related entities ) exist. This report on relations between the entities stated below was prepared in accordance with the provision of Section 66a (9) of Act 513/1991 Coll., as amended (the Commercial Code) for the year ended 31 December 2006, that is, from 1 January 2006 to 31 December 2006 (hereinafter referred to as the reporting period ). I. Introduction In the period starting on 1 January 2006 and ending on 31 December 2006, the Company was a member of Société Générale S.A., a holding company having its place of business at 29, blvd. Haussmann, Paris, France, registered in the French Companies Register under: R.C.S. Paris B (1955 B 12022) (hereinafter referred to as SG or SG Paris ). In the 2006 Accounting Period, the Company had relations with the following Interconnected Persons: Company Registered office Share of SG in the voting rights of the Company (%) Komerční banka, a.s. Na Příkopě 33/ 969, Prague

49 II. Arrangements with Related Entities A. Contracts and Agreements with the Controlling Entity and Other Related Entities I. Contracts and Agreements Entered into during the Reporting Period Type of agreement Contractual party Performance Counter-performance Damage incurred by the Company Amendments to the Framework contract for Komerční banka, a.s. Interest and fees Provision of financial None the provision of financial services according to the price list services Contracts for the use of the safety deposit box Komerční banka, a.s. Fees according Provision of the safety None to the price list deposit box Contract for the issuance and use of a payment card Komerční banka, a.s. Fees according Issuance and use None to the price list of payment cards Contract for the rent of non-residential premises, movable Komerční banka, a.s. Contractual fee Provision of None assets and payment for services relating to their use non-residential premises and movable assets Contract for cooperation in the competition Komerční banka, a.s. Contractual fee Organisation and None performance of the competition Contract for the payment of insurance Komerční banka, a.s. Payment of insurance Conclusion of an insurance None by insurers policy for Factoring KB risks II. Performance Received and Provided during the Reporting Period under Contracts Entered into in Prior Reporting Periods Type of agreement Contractual party Performance Counter-performance Damage incurred by the Company Framework contract for the provision of financial services, Komerční banka, a.s. Interest and fees Provision of financial None including amendments according to the price list services Contracts for the opening and maintenance of a CZK current Komerční banka, a.s. Contractual fees Account maintenance None account with Komerční banka, a.s., including amendments thereto Contract for the opening and maintenance of a USD current account Komerční banka, a.s. Contractual fees Account maintenance None with Komerční banka, a.s., including an amendment thereto Contract for the opening and maintenance of a EUR current account Komerční banka, a.s. Contractual fees Account maintenance None with Komerční banka, a.s., including an amendment thereto Contract for the opening and maintenance of a CHF current account Komerční banka, a.s. Contractual fees Account maintenance None with Komerční banka, a.s., including an amendment thereto Contract for the opening and maintenance of a GBP current account Komerční banka, a.s. Contractual fees Account maintenance None with Komerční banka, a.s., including an amendment thereto Contract for the opening and maintenance of an SKK current account Komerční banka, a.s. Contractual fees Account maintenance None with Komerční banka, a.s., including an amendment thereto Contract for the opening and maintenance of a PLN current Komerční banka, a.s. Contractual fees Account maintenance None account with Komerční banka, a.s. Contracts for the use of the safety deposit box Komerční banka, a.s. Fees according Provision of the safety None (one of them revoked on 31 January 2006) to the price list deposit box Contract for the use of direct banking, Komerční banka, a.s. Fees according Provision of direct None including an amendment thereto to the price list banking services Contracts for the issuance of payment cards Komerční banka, a.s. Fees according Issuance and provision None (one of them revoked on 21 March 2006) to the price list of payment cards Contracts for the lease of non-residential premises, movable assets Komerční banka, a. s. Contractual fees Provision of non-residential None and payment for the services relating to their use premises and movable assets Subcontract for advisory services, including an amendment thereto Komerční banka, a.s. Contractual fees Risk management advice None 47

50 Type of agreement Contractual party Performance Counter-performance Damage incurred by the Company Framework contract for cooperation Komerční banka, a.s. Contractual fees Provision of efficient None cooperation Subcontract for cooperation Komerční banka, a.s. Fees according Provision of banking None to the price list information Licence Agreement Komerční banka, a.s. Contractual fees Provision of trademark None Data processing contract Komerční banka, a.s. Contractual fees Processing of client None information Distribution contract, including amendments thereto Komerční banka, a.s. Contractual fees Mediation of the sale None of products Agreement on the determining of individual prices Komerční banka, a.s. Contractual price Individual prices for None services charged on client current accounts B. Other Legal Acts Implemented by Factoring KB in the Interest of the Controlling Entity and Other Related Entities During the reporting period, Factoring KB implemented no legal acts in the interest of the controlling entity and other related entities. C. Measures Taken or Implemented by Factoring KB in the Interest of or at the Initiative of the Controlling Entity and Other Related Entities During the reporting period, Factoring KB did not take or implement any measures that would be in the interest of or at the initiative of the related entities. III. Conclusions The Board of Directors of Factoring KB has reviewed all arrangements put in place between Factoring KB and the related entities during the reporting period and states that Factoring KB incurred no damage as a result of any contracts, agreements, any other legal acts or any other measures taken or implemented by Factoring KB in the reporting period. Made in Prague, on 5 February 2007 For and on behalf of Milan Corjak Tomáš Kunst Marcela Chalušová Chairman of the Board of Directors Vice-Chairman of the Board of Directors Member of the Board of Directors 48

51 Factoring KB, a.s. Old address: Na Poříčí 36, P.O.Box 59, Praha 1 New address: Lucemburská 1170/7, Praha 3 phone: fax: info@factoringkb.cz internet: Consulting, design and production: B.I.G. Prague, Hill & Knowlton Associate 2007 The photographs on the cover and pages 1, 5, 12, 24 are from the National Theatre Archive. Photographer: Hana Smejkalová cover: performance of Raymonda, Interior of National Theatre building page 1: performance of Raymonda page 5: performance of Raymonda page 12: performance La clemenza di Tito page 24: performance of Raymonda

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