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SECTION 3 BUSINESS OVERVIEW Financial summary 1 Year ended 31 December ($000) 2001A 2 2002A 2 2003A 2004F 2005F Net Revenue – Advisory 12,134 3,001 4,120 – Investment management 60,052 94,812 107,231 – Principal investment 7,517 3,806 11,252 Total Net Revenue 82,036 83,226 79,704 101,619 122,604 Operating costs 3 (31,150) (32,419) (34,705) Operating profit before bonuses 48,555 69,199 87,899 NOTES 1.All amounts in foreign currencies for historical financial information in 2001-2003 and forecast financial information for 2004 and 2005 are translated at constant exchange rates based on the rates assumed for the 2004 Forecasts. Prior to the Offer, the Group managed its activities with US dollars as its benchmark currency. Historical financial information has been prepared from statements prepared in US dollars.The use of constant exchange rates, whilst not consistent with Australian GAAP, has been adopted in the table above, as Babcock & Brown believes that this basis provides a more meaningful insight into the activities and financial performance of Babcock & Brown given the prior practice of managing its activities using the US dollar as its benchmark currency. 2. Babcock & Brown did not segment revenues or operating costs by Business Group prior to 2003. 3. Includes operating costs attributable to the segment and allocated corporate overhead costs. Management discussion and analysis Historicals 2003 compared with 2002 Net Revenue in this segment declined 4.2% in this period from $83.2 million to $79.7 million notwithstanding the successful first full year of operations for the Electronics business. Net Revenue in the Aircraft business declined from 2002 to 2003 particularly with respect to European airlines reflecting continued soft conditions in the airline industry as a result of the Iraq War. The Rail business’ Net Revenue also declined between 2002 and 2003, as its activities were restructured to focus more on investment syndication and asset management, as opposed to its previous focus on opportunistic asset trading. Although up-front fees and trading gains declined, the value of assets under management increased and with it, the potential for future earnings from annuity-like management and remarketing fees. 2002 compared with 2001 Net Revenue increased 1.5% from $82.0 million to $83.2 million as an increase in Net Revenue from the Rail business offset a decline in the Aircraft business caused by deteriorating airline industry conditions precipitated by the events of 11 September 2001.The Rail business increased Net Revenues by over 25% in its third full-year of operation principally due to profitable asset trading activities.The Electronics business only began operations in June 2002 and therefore only had a small Net Revenue contribution during the year. Forecasts The principal drivers of the Aircraft businesses revenues are: • Volume of aircraft acquired and syndicated or sold to investors – drives acquisition and syndication fees • Size of managed portfolio – drives management fees • Turnover of portfolio – drives remarketing fees and sale/exit fees • Aircraft values and lease rates – drive principal trading profits and performance fees 74
SECTION 3 BUSINESS OVERVIEW BABCOCK & BROWN PROSPECTUS Acquisition and syndication volume is forecast to increase in both 2004 and 2005 based on the continued recovery of the airline industry outside of the US and the need for additional aircraft to meet the growing global demand for air travel after a three-year downturn.The forecast volumes assumed are consistent with current expectation of investor appetite for leased aircraft product and the growth trends experienced so far in 2004. Higher syndication volumes also have the benefit of driving management fee growth as the size of the portfolio increases. The Rail business’ 2004 Forecast Net Revenues are driven by the purchase and syndication to investors of several railcar portfolios.Two of these transactions have already been completed and another has been identified and is currently in the process of being finalised. 2005 Forecast Net Revenues are also assumed to be driven principally by this purchase-and-syndication activity at a level which reflects Babcock & Brown’s current view of the availability of suitable railcar stock and investor demand for the assets. The majority of the Electronics business’ Forecast Net Revenues in 2004 are expected to be achieved from the sale of equipment owned by existing investment partnerships managed by BBEM.The remaining revenue is assumed to be generated by business initiatives launched during this year. Net Revenues from trading activities in 2005 are forecast to remain at 2004 levels. Net Revenues from new business areas are assumed to grow slightly between 2004 and 2005. 75
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