As filed with the Securities and Exchange Commission on March 28, 2005
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
REGISTRATION STATEMENT
on
SCHEDULE B
under the
SECURITIES ACT OF 1933
----------------
Landeskreditbank Baden-Wurttemberg -
Forderbank
(Name of Registrant)
The State of Baden-Wurttemberg
(Guarantor and Co-Signatory)
----------------
Puglisi & Associates
850 Library Avenue, Suite 204
P.O. Box 885
Newark, Delaware 19715
(Name and address of Authorized Representative)
----------------
Copies to:
Stephan Hutter, Esq.
Shearman & Sterling LLP
Gervinusstrasse 17
60322 Frankfurt am Main
Germany
+49 69 9711-1000
----------------
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective. The securities covered
by this Registration Statement are to be offered on a delayed or continuous
basis pursuant to Release Nos. 33-6240 and 33-6424 under the Securities Act of
1933.
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Proposed
Maximum
Offering Proposed Maximum Amount of
Title of each Class of Amount to Price per Aggregate Registration
Securities to be Registered be Registered (1) Unit (2) Offering Price (3) Fee
- --------------------------------------------------------------------------------------------------------------------------------
Debt Securities................................. $5,000,000,000 $5,000,000,000 $588,500
- --------------------------------------------------------------------------------------------------------------------------------
Guarantee of the State of Baden-Wurttemberg...... -- --
================================================================================================================================
(1) In United States dollars or its equivalent in one or more other
currencies, currency units or composite currencies, as determined by
reference to an index or, if the Debt Securities are to be offered at a
discount, the approximate proceeds to the Registrant.
(2) The proposed maximum offering price per unit will be determined from
time to time by the Registrant in connection with, and at the time of,
the issuance by such Registrant of securities registered herewith.
(3) Estimated for the sole purpose of computing the registration fee
pursuant to Rule 457(o).
----------------
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion, dated March 28, 2005
PROSPECTUS
L-BANK
Staatsbank fur Baden-Wurttemberg
Landeskreditbank Baden-Wurttemberg - Forderbank
a corporation under public law of
The State of Baden-Wurttemberg
Debt Securities
Landeskreditbank Baden-Wurttemberg - Forderbank, an institution
organized under public law of the State of Baden-Wurttemberg ("L-Bank"), may
from time to time offer up to $5,000,000,000 (or its equivalent in other
currencies or composite currencies or in amounts determined by reference to an
index) aggregate principal amount of its debt securities consisting of bonds,
notes and/or other evidences of indebtedness ("Debt Securities"). The Debt
Securities will be unconditional obligations of L-Bank.
Under our governing law, the Debt Securities will benefit from an
explicit guaranty by the State of Baden-Wurttemberg.
For each offer and sale of Debt Securities under this prospectus, we
will provide a prospectus supplement with the specific terms of each issue.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __, 2005
TABLE OF CONTENTS
About This Prospectus..........................................................1
Forward-Looking Information....................................................2
Terms Used In This Prospectus..................................................2
Prospectus Summary.............................................................3
Application Of Proceeds........................................................5
L-Bank.........................................................................5
General...............................................................5
Business.............................................................11
Debt Record..........................................................24
Capitalization.......................................................24
Management Information...............................................25
Recent Developments..................................................31
Management...........................................................33
Employees............................................................36
Regulation and Supervision Of L-Bank
In The Federal Republic Of Germany.................................37
The State Of Baden-Wurttemberg................................................50
General..............................................................50
Economy..............................................................51
Foreign Trade And Foreign Exchange...................................55
Public Finance.......................................................57
Public Debt..........................................................60
Debt Record..........................................................62
Budget Of The State Of Baden-Wurttemberg.............................64
Description Of The Debt Securities............................................65
Currency Conversion Rates.....................................................70
Taxation......................................................................72
United States Federal Income Taxation................................72
Federal Republic Of Germany Taxation.................................82
Summary Of Certain Differences Between Generally Accepted
German And United States Accounting Principles.....................86
Plan Of Distribution..........................................................92
Limitations On Actions Against The State Of Baden-Wurttemberg.................93
Enforcement Of Civil Liabilities Against L-Bank...............................93
Legal Opinions................................................................93
Authorized Representative In The United States................................93
Official Statements And Documents.............................................93
Independent Accountants.......................................................94
Glossary......................................................................95
Financial Statements Of L-Bank...............................................F-1
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission (the "SEC") utilizing a "shelf"
registration process. Under this shelf registration process, we may sell any
combination of the Debt Securities described in this prospectus in one or more
offerings up to a total U.S. dollar amount registered with the SEC (or the
equivalent in other currencies). This prospectus provides you with a general
description of the Debt Securities we may offer. Each time we sell Debt
Securities, we will provide a prospectus supplement that will contain specific
information about
the terms of that offering. The prospectus supplement may also add, update or
change information contained in this prospectus.
You should rely only on the information provided in this prospectus or
any prospectus supplement. We have not authorized anyone else to provide you
with different or additional information. We are not making an offer of the Debt
Securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the dates set forth on the respective cover pages of
such documents.
FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements. Statements that
are not historical facts, including statements about our and Baden-Wurttemberg's
beliefs and expectations, are forward-looking statements. These statements are
based on current plans, estimates and projections and therefore you should not
place undue reliance on them. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect" and similar words are intended to
identify forward-looking statements. Forward-looking statements speak only as of
the date they are made, and neither we nor Baden-Wurttemberg undertake any
obligation to update publicly any of them in light of new information or future
events. Forward-looking statements involve inherent risks and uncertainties. We
caution you that actual results may differ materially from those contained in
any forward-looking statements.
TERMS USED IN THIS PROSPECTUS
In this prospectus, references to "Euro" or "EUR" are to the single
European currency adopted by certain participating Member States of the European
Union, including the Federal Republic of Germany, as of January 1, 1999.
References to "Deutsche Mark" or "DM" are to the former national currency unit
of the Federal Republic of Germany, which ceased to be legal tender in the
Federal Republic of Germany as of January 1, 2002. References to "U.S. dollars,"
"U.S.$" or "$" are to United States dollars. See "Currency Conversion Rates" for
information regarding the rates of conversion of Euros into U.S. dollars for
subsequent periods.
Except as otherwise required by the context, references in this
prospectus to "L-Bank," "we," "us" or "our" are to Landeskreditbank
Baden-Wurttemberg - Forderbank, and references to "Baden-Wurttemberg" are to the
State of Baden-Wurttemberg, a federal state of the Federal Republic of Germany.
---------------
2
PROSPECTUS SUMMARY
The following summary should only be read in connection with, and is
qualified by, the more detailed information and financial data presented
elsewhere in this prospectus.
L-Bank
L-Bank is the state development bank of Baden-Wurttemberg, one of the
states of the Federal Republic of Germany. We were established by statute
effective December 1, 1998, as a result of the separation of the state
development business from the commercial banking business of the former
Landeskreditbank Baden-Wurttemberg, whereby all assets and liabilities of the
state development business were transferred to us. We are wholly-owned by
Baden-Wurttemberg.
We provide funding in support of the numerous development activities of
Baden-Wurttemberg, acting as the state's own development bank. Pursuant to our
governing law, we carry out our business not as a competitor to, but as a
supportive partner of, private, cooperative and public-sector banks operating in
the open market.
As Baden-Wurttemberg's state development bank our main responsibilities and
activities are:
o the financing, primarily on a subsidized basis, of housing
construction, trade, industry, agriculture and forestry,
environmental protection, urban renewal and development projects,
as well as improvements to the state infrastructure in the form
of loans, grants, guaranties or equity capital, with special
focus on providing support for small and medium-sized enterprises
in Baden-Wurttemberg; and
o administering the application of funds for a large number of
state, federal and European Union financial aid programs,
especially for family benefits.
The government of Baden-Wurttemberg, the German federal government and
other public authorities -- including institutions of the European Union -- all
fund our activities by way of loans and grants. In addition we employ own funds.
At December 31, 2003, we had total assets of EUR 46.2 billion. Our net
profit for the year ended December 31, 2003 amounted to EUR 103.4 million. The
following table shows our total assets as of December 31 of, and net profit for,
each of the years indicated (in millions of EUR):
2003 2002 2001
------ ------ ------
Total assets.......................... 46,225 43,585 43,391
Net profit............................ 103.4 86.6 105.7
Under our governing law, the State of Baden-Wurttemberg guaranties all
of our obligations in respect of money borrowed by us, debt obligations issued
by us, including the Debt Securities described herein, forward or future
contracts, rights under option agreements, other credits extended to us, as well
as credit extended to third parties that we expressly guaranty. Under this
explicit guaranty, if we fail to make any payment of principal or interest or
any other amount required to be paid with respect to the Debt Securities
described herein when that payment is due and payable, Baden-Wurttemberg will be
liable for that payment as and when it becomes due and payable.
3
In addition, our governing law provides for certain guaranty and
maintenance obligations of Baden-Wurttemberg, which are described under
"L-Bank--General--Responsibility of Baden-Wurttemberg--Guaranty Obligation" and
"--Maintenance Obligation."
The State of Baden-Wurttemberg
Baden-Wurttemberg is the third largest, by area, of Germany's 16 states
(Lander). Baden-Wurttemberg is situated in southwestern Germany. It comprises an
area of 13,803 square miles, approximately 10% of Germany's total area. At the
beginning of 2003, Baden-Wurttemberg had 10.7 million inhabitants, or 12.9% of
Germany's total population of 82.5 million. Baden-Wurttemberg has an elected
parliament that legislates in areas not delegated to the German federal
government.
Baden-Wurttemberg is one of the most heavily industrialized states in
Germany and has one of the strongest economies of all the German states,
contributing 14.8% of Germany's gross domestic product in 2003. In terms of GDP
and employment, approximately one-half of Baden-Wurttemberg's economy is based
on the activities of small and medium-sized commercial enterprises, many of
which are involved in manufacturing and focused on technology, and the other
half consists of large industry.
Several well-known companies are located in Baden-Wurttemberg, such as
DaimlerChrysler, Porsche, Bosch, IBM Germany, Asea Brown Boveri Germany and
Hewlett-Packard Germany. This strong concentration of manufacturing activity
exposes the economy of Baden-Wurttemberg to a degree of cyclical pressure. In
addition to manufacturing enterprises, many universities and research
institutions also support the Baden-Wurttemberg economy.
Baden-Wurttemberg has its own budget separate from that of Germany. Tax
revenues in Germany are apportioned among the federal, state and municipal
governments. Financially stronger states, such as Baden-Wurttemberg contribute
revenues to financially weaker states.
For a discussion of the economic, political and financial situation in
Baden-Wurttemberg, see "The State of Baden-Wurttemberg."
4
APPLICATION OF PROCEEDS
As may be more specifically described in the relevant prospectus
supplement, we will use the net proceeds from the sale of the Debt Securities
for our financing and securities activities.
L-BANK
GENERAL
Introduction
L-Bank is the state development bank of Baden-Wurttemberg, one of the
states of the Federal Republic of Germany. We were established by statute
effective December 1, 1998, as a result of the separation of the state
development business from the commercial banking business of the former
Landeskreditbank Baden-Wurttemberg, whereby all assets and liabilities of the
state development business were transferred to us.
We provide funding in support of the numerous development activities of
Baden-Wurttemberg, acting as the state's own development bank. Pursuant to our
governing law, we carry out our business not as a competitor to, but as a
supportive partner of, private, cooperative and public-sector banks operating in
the open market.
We were established as an independent public law institution (Anstalt
des offentlichen Rechts) for an indefinite term under the Act concerning
Landeskreditbank Baden-Wurttemberg - Forderbank (Gesetz uber die
Landeskreditbank Baden-Wurttemberg - Forderbank, the "L-Bank Act"), as enacted
and amended by the State of Baden Wurttemberg. Our powers and internal
organization are further defined by our statutes (Satzung der Landeskreditbank
Baden-Wurttemberg - Forderbank, the "L-Bank Statutes"). We are a member of the
Federal Association of German Public Sector Banks (Bundesverband Offentlicher
Banken Deutschlands e.V.), Berlin.
Our headquarters are located at Schlossplatz 10, 76131 Karlsruhe,
Federal Republic of Germany, and our telephone number is +49 (0) 721-1500. We
also maintain a branch office in Stuttgart.
As Baden-Wurttemberg's state development bank our main responsibilities
and activities are:
o the financing, primarily on a subsidized basis, of housing
construction, trade, industry, agriculture and forestry,
environmental protection, urban renewal and development projects,
as well as improvements to the state infrastructure in the form
of loans, grants, guaranties or equity capital, with a special
focus on providing support for small and medium-sized enterprises
(SMEs) in Baden-Wurttemberg; and
o administering the application of funds for a large number of
state, federal and European Union financial aid programs,
especially for family benefits.
We also invest in securities in furtherance of our responsibilities as
a development bank.
The government of Baden-Wurttemberg, the German federal government and
other public authorities -- including institutions of the European Union -- all
fund our activities by way of loans and grants. In addition, we employ own
funds. The ongoing difficulties of the federal government and the government of
Baden-Wurttemberg to balance their budgets could result in a reduction of the
support of development programs, which could negatively affect the volume of our
business in the years to come.
5
In certain areas of financing, for example as part of our lending in
support of housing and agriculture, we extend loans on a fiduciary basis by
granting loans in our own name but on behalf and at the sole risk of certain
German or supranational governmental or quasi-governmental entities on terms
specified by such entities ("fiduciary loans"). The funds used for such
fiduciary loans are supplied entirely by the relevant financing entity. We also
administer loans granted in the name of other entities on behalf and at the sole
direction of such entities, using funds supplied entirely by such entities
("administrative loans"). See "--Business--Loan Portfolio Risks." We earn a fee
for our fiduciary and administrative responsibilities in those transactions.
Under certain public assistance programs, we extend grants to third
parties on behalf of Baden-Wurttemberg, the Federal Republic of Germany and/or
the European Union. In this context, we do not commit our own funds but
administer funds of such governmental authorities or their subdivisions. We earn
an administration fee for processing applications centrally and settling the
relevant payments.
Our activities are not subject to corporate income tax or trade tax in
Germany.
Under German law we prepare financial statements on an unconsolidated
basis only; we are currently not required to prepare consolidated financial
statements. The majority interests declared in the financial statements are of
minor significance overall. For this reason, we did not prepare consolidated
financial statements for the period (ss. 296 sub-section 2 German Commercial
Code (Handelsgesetzbuch)). Throughout this description we therefore discuss our
unconsolidated financial statements, which were prepared in accordance with the
provisions of the German Commercial Code (Handelsgesetzbuch), the German Banking
Act (Kreditwesengesetz - KWG), the Bank Accounting Directive Law of 1990
(Bankenbilanzrichtlinie-Gesetz) and the Regulation on the Accounting Principles
applied to Credit Institutions and Financial Services Institutions (Verordnung
uber die Rechnungslegung der Kreditinstitute und
Finanzdienstleistungsinstitute).
At December 31, 2003, we had total assets of EUR 46.2 billion. Our
business is concentrated predominantly in lending at fixed interest rates. At
the same date, we had outstanding credits of EUR 44.6 billion, of which 26.3%
(EUR 11.7 billion) were loans to credit institutions, 55.1% (EUR 24.6 billion)
were loans to customers, and 18.0% (EUR 8.3 billion) were holdings of debt or
equity securities, excluding equity investments (as defined below) and
repurchases of our own notes. All amounts with respect to loans made and
securities held by us are based on the book values included in our balance sheet
on the relevant date.
6
The following table sets out our assets and outstanding credits,
together with certain other selected financial data, for each of the years
indicated:
Assets, Outstanding Credits and Other Selected Financial Data
(in millions of EUR)
2003 2002 2001
---------- ---------- ----------
(in millions of EUR)
Total assets(1)......................................... 46,225 43,585 43,391
Total outstanding credits(2)............................ 44,659 41,910 40,420
Loans to credit institutions(3)......................... 11,761 10,562 9,774
Loans to customers(4)................................... 24,584 23,258 23,287
Securities held(5)...................................... 8,314 8,089 7,359
Total fiduciary assets(6)............................... 512 667 816
Total guaranties(7)..................................... 1,229 1,069 432
Total commitments made(8)............................... 9,008 7,104 7,380
Net profit(9)........................................... 103 87 106
- ----------------
(1) Total assets at December 31 of the year indicated.
(2) Total outstanding credits consist of outstanding loans (other than
fiduciary loans and administrative loans) and holdings of debt or equity
securities (excluding equity investments and repurchased own notes) at
December 31 of the year indicated.
(3) Loans to credit institutions include mortgage loans, loans to public
authorities and entities organized under public law and other obligations
of credit institutions.
(4) Loans to customers (i.e., non-credit institutions) include mortgage loans,
loans to public authorities and entities organized under public law and
other obligations of customers.
(5) Aggregate book value of all debt or equity securities (excluding equity
investments and repurchased own notes), held by us at December 31 of the
year indicated. An "equity investment" (Beteiligung) is an investment in
another company (whether affiliated or non-affiliated) that we intend to
hold on a long-term basis in order to establish a permanent relationship
that contributes to our own business. See "--Business--Securities
Activities" and "--Glossary--Equity investments in non-affiliated
companies; equity investments in affiliated companies."
(6) Fiduciary assets consist of loans that are made by us in our name but on
behalf of other entities with funds entirely supplied by, and for a purpose
and on terms specified by, such other entities. See "--Business--Loan
Portfolio Risks" and "--Glossary--Fiduciary assets; fiduciary liabilities."
Amounts are as of December 31 of the year indicated.
(7) Total guaranties are contingent liabilities in respect of guaranties and
indemnity agreements as of December 31 of the year indicated.
(8) Total commitments represent the volume of funds committed by us for loans
(including fiduciary loans and administrative loans in an amount of EUR
121.6 million in 2003, EUR 120.0 million in 2002 and EUR 116.7 million in
2001), grants and guaranties and for the purchase of investment securities
during the year indicated, including amounts to be disbursed in future
years and not including amounts disbursed during the year indicated
pursuant to commitments made in prior years.
(9) Net profit is the difference between total income and total expenses before
allocations to retained earnings reserves for the year indicated. See also
our balance sheets and statements of income included elsewhere in this
prospectus.
Responsibility of Baden-Wurttemberg
Ownership. We are wholly owned by Baden-Wurttemberg.
Explicit and Unconditional Guaranty of Baden-Wurttemberg. The L-Bank
Act (Section 5(3)) provides expressly that the State of Baden-Wurttemberg
guaranties all of our obligations in respect of money borrowed by us, debt
obligations issued by us, forward or future contracts, rights under option
agreements, other credits extended to us, as well as credit extended to third
parties that we expressly guaranty. Under this explicit guaranty, if we fail to
make any payment of principal or interest or any other amount required to be
paid with respect to the Debt Securities described herein when that payment is
due and payable, Baden-Wurttemberg will be liable for that payment as and when
it becomes due and payable.
Baden-Wurttemberg's obligation under this explicit guaranty ranks
equally, without any preference, with all of its other present and future
unsecured and unsubordinated indebtedness. Holders of securities issued by us
may enforce this obligation directly against Baden-Wurttemberg without first
7
having to take legal action against us. The explicit guaranty of
Baden-Wurttemberg is strictly a matter of statutory law and is not evidenced by
any contract or instrument. It may be subject to defenses available to us with
respect to the obligations covered. The explicit guaranty constitutes a charge
on public funds that, as a legally established obligation, would be payable
without the need of any appropriation or other action to be taken by the
parliament of Baden-Wurttemberg.
In case of a change of Baden-Wurttemberg's ownership in us, our
liquidation or an amendment to the L-Bank Act, our payment obligations incurred
prior to such event, including the obligations in respect of the Debt Securities
described herein, the explicit guaranty of Baden-Wurttemberg would continue to
support our payment obligations incurred prior to such an event.
Guaranty Obligation. The guaranty obligation (Gewahrtragerhaftung) is
based on an express statutory provision included in the L-Bank Act (Section
5(2)). In accordance with this provision, Baden-Wurttemberg is without
restriction directly liable to our creditors for all of our liabilities if they
have not been satisfied out of our assets. The guaranty obligation is unlimited
in amount and covers any and all of our obligations arising out of the conduct
of our business.
The guaranty obligation applies to the Debt Securities described herein
in addition to the explicit guaranty of Baden-Wurttemberg. However, the explicit
guaranty confers a stronger right to the holders of our notes insofar as under
the explicit guaranty the noteholder does not have to demonstrate to
Baden-Wurttemberg that our obligations have not been satisfied by us out of our
assets.
As with the explicit guaranty, the guaranty obligation constitutes a
charge on public funds that, as legally established obligation, would be payable
without the need of any appropriation or other action to be taken by the
parliament of Baden-Wurttemberg.
In the event of a change of Baden-Wurttemberg's ownership in us, our
liquidation or an amendment to the L-Bank Act, our payment obligations incurred
prior to such event, including the obligations in respect of the Debt Securities
described herein, the guaranty obligation would continue to support our payment
obligations incurred prior to such an event.
Maintenance Obligation. The principle of maintenance obligation
(Anstaltslast) is independent of and supplements the principle of guaranty
obligation. The maintenance obligation is codified in the L-Bank Act (Section
5(1)). It means, in general terms, that the public body that has established and
owns a public law institution (Anstalt des offentlichen Rechts), in particular a
public law credit institution such as L-Bank, is required under law to maintain
the economic viability of such institution, to keep it in a position to perform
its functions and to enable it, through the allocation of liquid funds or by
other appropriate means, to perform its obligations when due. The maintenance
obligation constitutes (i) an obligation to ensure our solvency, because it
includes an obligation of Baden-Wurttemberg to compensate any shortfall by which
our liabilities exceed our assets and (ii) an obligation to ensure our
liquidity, because it includes an obligation of Baden-Wurttemberg to provide
liquidity to us as necessary to meet our obligations as they come due.
Furthermore Baden-Wurttemberg would be required on its own authority to take
steps to enable us to perform our obligations when due. The maintenance
obligation is an obligation of Baden-Wurttemberg only to us, and not to any
third party. While the maintenance obligation does not constitute a formal
guaranty of our obligations by Baden-Wurttemberg, the effect of the maintenance
obligation is that our obligations, including our obligations to the holders of
the Debt Securities described herein, are fully backed by the credit of
Baden-Wurttemberg.
As with the explicit guaranty and the guaranty obligation, the
maintenance obligation constitutes a charge on public funds that, as legally
established obligation, would be payable without the need of any appropriation
or other action to be taken by the parliament of Baden-Wurttemberg.
8
Understanding with the European Commission. Following a complaint
lodged with the European Commission by the European Banking Federation alleging
that the maintenance obligation and the guaranty obligation constitute state aid
within the meaning of Art. 87 of the Treaty establishing the European Community
(referred to as "EC Treaty"), an understanding (referred to as "Understanding
I") between the EU Commission and the Federal Republic of Germany concerning the
future successive abolition of those obligations regarding public banks was
reached on July 17, 2001. In a further understanding (referred to as
"Understanding II") with the Federal Republic of Germany on March 1, 2002, the
European Commission clarified that the state support mechanisms may continue for
development banks engaged in noncompetitive public functions such as for
instance, state financing measures concerning housing, small and medium-sized
enterprises, environmental protection, technology, innovation, infrastructure
and risk capital. Therefore, the maintenance and guaranty obligation and the
explicit guaranty of Baden-Wurttemberg continue to exist for us.
After December 31, 2007, new activities of a development bank falling
outside the allowed areas permitted by Understanding II will be treated as state
aid under the EC Treaty and must be either discontinued or transferred to
independent subsidiaries without state support. As a consequence, the advantages
resulting from state guaranties for such new activities will be treated as
impermissible state aid within the meaning of Art. 87 EC Treaty. In addition,
Understanding II clarifies that a violation of the state aid rules by single
development activities will have no effect on the continued existence of the
state guaranties as such.
As a development bank engaged in aforementioned noncompetitive public
functions, we will remain a beneficiary of the maintenance obligation, the
guaranty obligation as well as the explicit guaranty of Baden-Wurttemberg. On
March 10, 2004, the parliament of Baden-Wurttemberg slightly amended the L-Bank
Act and the L-Bank Statutes to reflect more precisely the activities permitted
to us by Understanding II; the amendments will become effective as of December
31, 2007. In our view, Understanding II does not, apart from minor adjustments,
require us to give up any activities.
Insolvency of L-Bank. Pursuant to Section 12 of the Insolvency Law
(Insolvenzordnung) and Section 45 of the Baden-Wurttemberg Law Implementing the
Judiciary Law (Gesetz zur Ausfuhrung des Gerichtsverfassungsgesetzes), public
law institutions are not capable of being subject to insolvency proceedings.
Therefore, as a public law institution, we can currently only be dissolved in
accordance with the L-Bank Statutes and with the L-Bank Act.
Supervision of L-Bank. Pursuant to the L-Bank Act and the L-Bank
Statutes, we are subject to supervision by the Ministry of Finance of
Baden-Wurttemberg in consultation with the ministry of Baden-Wurttemberg having
jurisdiction for the particular matter concerned. We are also subject to the
supervision of the Federal Supervisory Authority for Financial Services
(Bundesanstalt fur Finanzdienstleistungsaufsicht) in conjunction with the
Federal Central Bank (Deutsche Bundesbank). For more information about our
supervision, see the discussion under the heading "--Regulation and Supervision
of L-Bank in the Federal Republic of Germany."
In addition, the State Accounting Office (Landesrechnungshof) of
Baden-Wurttemberg, which is responsible to the parliament of Baden-Wurttemberg
(Landtag), has an unrestricted right to audit us at any time, in particular with
regard to our compliance with the Baden-Wurttemberg Budgeting Principles Act
(Landeshaushaltsordnung), the law setting forth the principles and guidelines
relating to, among other things, the administration of public funds.
Our supervisory board (Verwaltungsrat) establishes guidelines for, and
oversees, the conduct of our business. Pursuant to the L-Bank Act, our
supervisory board is composed of eight representatives of the government of
Baden-Wurttemberg and seven other members, all of whom are appointed by the
9
government of Baden-Wurttemberg and vested with voting rights. In addition, the
supervisory board includes three advisory members without voting rights. The
government of Baden-Wurttemberg appoints one of the representatives of
Baden-Wurttemberg in our supervisory board as chairman of the supervisory board.
See "--Management."
10
BUSINESS
Our principal business is providing loans and other types of financings
relating to:
o the construction, purchasing and renovation of housing;
o trade and industry, business start-ups and small and medium sized
enterprises (SMEs);
o infrastructural development; and
o social welfare.
We also act as agent for Baden-Wurttemberg, for the Federal Republic of
Germany and for the European Union in administering a wide range of public
financial assistance programs and offer certain other banking-related services.
In support of our primary activities as a state development bank and for risk
management purposes, we also regularly invest in securities.
Housing
Our principal financing activity consists of the extension of loans and
guaranties related to the construction, renovation and purchase of single and
multi-family houses and apartment buildings. We also issue grants with respect
to such housing. At December 31, 2003, housing loans totaling EUR 21,836 million
accounted for 56.4% of our total outstanding loans. Of the outstanding housing
loans, a majority was granted to individuals.
The following table sets out our loans and commitments in connection
with housing-related financing for each of the years indicated:
Housing-Related Financing
Loans and Commitments
2003 2002 2001
---------- ---------- ----------
(in millions of EUR, except for %)
Loans outstanding(1).................................... 21,836 21,941 22,279
% of total loans outstanding............................ 56.4 61.0 64.7
Commitments made(2)..................................... 1,139 973 1,062
% of total commitments made............................. 12.6 13.7 14.4
- ----------------
(1) Loans outstanding at December 31 of the year indicated. Loans outstanding
do not include fiduciary loans, and administrative loans.
(2) Commitments represent the volume of funds committed by us for loans
(including fiduciary loans and administrative loans), grants and guaranties
during the year indicated, including amounts to be disbursed in future
years and not including amounts disbursed during the year indicated
pursuant to commitments made in prior years.
We administer the State Housing Program of Baden-Wurttemberg, which
encompasses several different housing assistance programs, including
Baden-Wurttemberg state programs and joint programs of Baden-Wurttemberg and the
Federal Republic of Germany. Those programs are intended to address the housing
needs of targeted groups of people, such as large families, the elderly, the
severely handicapped and single-parent families. Housing assistance programs
included in the State Housing Program provide grants and loans at below-market
interest rates for the construction, expansion and renovation of residential
buildings, including apartment buildings, single and multi-family houses,
company housing and special care housing. Such programs provide financing either
to the builder or, in the case of housing sold to a member of a targeted group,
the purchaser. Some programs promote rental
11
housing while other programs support home-ownership and the purchase of existing
housing by members of targeted groups.
Our housing-related activities are funded partly from public funds and
partly from our own funds. In 2003, Baden-Wurttemberg contributed EUR 223.7
million to the State Housing Program, a decrease of 12.4 % from the amount it
contributed in 2002. In 2003, we committed an amount of EUR 19.5 million,
compared to EUR 19.5 million in 2002, to assist in the building, modernization
or purchase of 4,344 housing units, compared to 4,538 in 2002.
Trade and Industry-Related Financings; Financing of Business Start-ups and Small
and Medium Sized Companies
In respect of trade and industry related financing, we administer
several public assistance programs sponsored by Baden-Wurttemberg alone or
jointly with the Federal Republic of Germany. Those programs primarily support
small and medium-sized businesses located in Baden-Wurttemberg. They provide
business start-up assistance and financing for investments in technology,
environmental protection measures, forestry and agriculture. We provide
liquidity assistance to companies, offering low-interest financing for growth
and consolidation, mergers and acquisitions, debt restructurings and short- and
medium-term investments, and also issue guaranties required, for example, in
connection with foreign trade activities.
We provide financing both to financial institutions, which then lend
the proceeds to eligible borrowers, and to borrowers directly. Our financings
take the form of loans, equity capital investments, guaranties and other
instruments.
In most cases, we extend loans to financial institutions, typically
commercial, cooperative or savings banks, which in turn lend the funds to
borrowers. In such financing transactions, the intermediary bank bears the
credit risk with respect to the ultimate borrower, while we bear the credit risk
with respect to the intermediary bank. In effect, we thereby pass on the
responsibility and administrative cost of granting and servicing loans to the
intermediary bank. Where we take the credit risk of companies, we do so by
taking sub-participations in loans extended by intermediary banks to their
customers or, where required by the relevant public assistance program, by
extending loans to customers directly.
In order to reduce the credit risk of intermediary banks and thereby
enhance their capabilities to extend more loans, especially to small and
medium-sized companies, we also extend guaranties of collection in favor of
intermediary banks, offer protection with respect to individual creditors or
portfolios of creditors by way of credit default swaps and sometimes invest in
asset-backed securities sponsored by other banks or in credit linked notes.
Using these financing techniques, we do not, except for direct equity
investments described below, establish a direct customer relationship with the
ultimate creditor. We thereby fulfill our role as a state development bank, not
competing with commercial or public banks.
12
The following table shows our loans and commitments in this area of
business for each of the years indicated:
Trade and Industry-Related Financing
Loans and Commitments
2003 2002 2001
---------- ---------- ----------
(in millions of EUR, except for %)
Loans outstanding(1).................................... 3,775.7(3) 3,765.73 3,457.29
% of total loans outstanding............................ 8.58 9.16 8.51
Commitments made(2)..................................... 1,131.45 1,267.83 1,383.99
% of total commitments made............................. 12.56 17.85 18.75
- ----------------
(1) Loans outstanding at December 31 of the year indicated. We do not make
fiduciary loans or administrative loans in this area of financing.
(2) Commitments represent the volume of funds committed by us for loans, grants
and guaranties during the year indicated, including amounts to be disbursed
in future years and not including amounts disbursed during the year
indicated pursuant to commitments made in prior years.
(3) Of the total amount of loans outstanding approximately 93% represents loans
to credit institutions and 7% represents loans to customers, either
directly or by way of sub-participating in loans made by other credit
institutions.
In 2003, the majority of our total commitments with respect to start-up
and SME financings were commitments to financial institutions (L-Bank taking the
credit risk of those financial institutions).
Generally, loans that we extend in this area of financing have an
original term of between three and 12 years; in exceptional cases the original
term may be up to 20 years.
We also provide equity capital to start-up businesses as well as to
established small and medium-sized companies. We make those investments through
a business unit operating under the brand name L-EA (L-EigenkapitalAgentur).
However, all investments are included on our balance sheet. Specialized external
management teams working on the basis of consultancy contracts advise us in the
preparation of our investment decisions. Investment decisions (acquisitions and
sales of equity) in this area of business are being taken by our board of
management following the completion of a thorough due-diligence process. We try
to ascertain the reputational, operational and legal risks of each investment,
and especially we examine the business plans, business strategies and, if
already available the financial statements of the target companies. If advisable
we consult external legal or business advisors before we take a final decision.
Investment decisions exceeding the amount of two million Euro are to be taken by
our supervisory board.
The focus of our investments is directed at venture capital, in
particular at information and communications technology and biotechnology, and
towards equity investments financing the expansion or ownership restructuring of
established small and medium-sized companies. As a general rule, we only invest
in minority holdings and as a co-investor -- on equal terms -- with other
private investors. We generally do not invest in stock exchange listed
companies.
The maximum capital we envisage to invest through L-EA over the years
amounts to approximately EUR 253 million (including amounts already invested).
We do not intend to become a permanent investor in those companies; instead, we
intend to exit our investments on terms we deem favorable to us by way of
private or public sales. So far, we have also invested in private equity and
venture capital funds as well as in companies directly. In exceptional cases we
also grant mezzanine financing to companies in which we are invested.
In addition to our own investments, we hold minority interests in two
specialized private equity-companies, which undertake similar investments:
Mittelstandische Beteiligungsgesellschaft
13
Baden-Wurttemberg mbH, in which we hold 26.8%, and BWK GmbH
Unternehmensbeteiligungs-gesellschaft, in which we hold 10%, both located in
Stuttgart.
Furthermore, under our equity joint venture guaranty program, we assume
the default risk of equity investments by venture capital companies and private
investors in small and medium-sized businesses by way of guaranties. Those
guaranties cover amounts of up to 50% of the respective individual investments.
The following table sets out the amounts invested in each year
indicated:
Total Equity Investments(1)
2003 2002 2001
---------- ---------- ----------
(in thousands of EUR)
Direct investments in companies......................... 6,508 6,073 7,114
Investments in private equity funds .................... 3,732 4,725 1,854
Mezzanine financings ................................... 5,700(2) 0 64
Commitments(3).......................................... 12,600 9,319 9,583
- ----------------
(1) Holdings in companies for strategic purposes as of December 31 of the year
indicated, not including Mittelstandische Beteiligungsgesellschaft
Baden-Wurttemberg mbH and BWK GmbH Unternehmensbeteiligungsgesellschaft.
(2) In 2003, as a matter of policy, we increased our engagement in mezzanine
financings to complement our direct equity investment in order to further
strengthen the capital structure of our companies we are invested in.
(3) Commitments to further payments for equity or parts in equity funds.
Infrastructure
In order to enhance Baden-Wurttemberg's economic and technical
infrastructure, we administer several public assistance programs and provide
financing for different investments in this respect. We administer programs
sponsored by Baden-Wurttemberg, the Federal Republic of Germany and the European
Union. Through those programs we provide assistance and financing primarily for
investments in technology, tourism and economic infrastructure predominantly on
a local community level, as well as for investments to enhance the development
of rural areas and transport infrastructure.
We provide the relevant financing in the form of loans, grants as well
as guaranties. Through a network of subsidiaries, we maintain real estate
investments focused on business parks, technology parks and industrial parks in
Baden-Wurttemberg.
In most cases, we extend loans to financial institutions, typically
commercial, cooperative or savings banks, which on-lend the funds to the
ultimate borrower at the interest rate and for the purpose specified by us. The
intermediary bank bears the credit risk of the borrower, while we bear the
credit risk of the intermediary bank. In some cases we lend directly to
borrowers. In addition we increasingly extend funds to local authorities and
other political subdivisions of the Federal Republic of Germany or
Baden-Wurttemberg.
14
The following table shows our loans and commitments in connection with
infrastructure-related financing for each of the years indicated:
Infrastructure-Related Financing(1)
Loans and Commitments
2003 2002 2001
---------- ---------- ----------
(in millions of EUR, except for %)
Loans outstanding(2).................................... 4,043.14 2,156.01 2,172.38
% of total loans outstanding............................ 9.18 5.25 5.34
Commitments made(3)..................................... 3,571.99 1,399.62 1,373.54
% of total commitments made............................. 39.65 19.7 18.61
- ----------------
(1) Not including real estate investments.
(2) Loans outstanding at December 31 of the year indicated. Loans outstanding
do not include fiduciary loans and administrative loans.
(3) Commitments represent the volume of funds committed by us for loans
(including fiduciary loans and administrative loans) during the year
indicated, including amounts to be disbursed in future years.
Social Welfare
In support of our owner, the State of Baden-Wurttemberg, we administer
a wide range of financial assistance programs, such as for the support of
facilities for handicapped or addicted people or for the construction of
hospitals, distributing funds provided by German state and federal governments
and the European Union. As of December 31, 2003, we administered 29 such
programs, an increase of 20 programs compared to the number of programs we
administered at December 31, 2002. In the course of 2003, we acted as a conduit
for disbursing financial aid totaling EUR 734 million.
We earn a fee for the administration of the funds, which is intended to
at least cover the costs we incur in connection with such administration.
In order to manage and process financial aid packages efficiently, we
have developed a number of software solutions. In 2003, we completed further
development work on our proprietary software, which handles data capture,
processing and evaluation for state subsidy programs, and which meets the high
standards for reporting and monitoring laid down by the European Union.
Additionally, we are the central authority for distributing federal and
state family benefits in Baden-Wurttemberg. We also provide advice to young
families in all matters relating to family benefits and statutory parental
leave.
In 2003, we approved 137,168 applications for federal family benefits,
an increase of 0.5% from 2002, and 31,649 applications for state benefits, an
increase of 0.8% from 2002. The volume of approved federal and state benefits
amounted to EUR 368.5 million and EUR 80.2 million, respectively, representing
increases of 0.7% and 13.6%, respectively, compared to 2002. The increases
reflect new higher income thresholds and an increase in the number of families
eligible for such benefits.
Securities Activities
To diversify the overall risk profile of our credit-portfolio and in
order to stabilize our liquidity position and to manage interest rate risks, we
regularly purchase debt securities of financial institutions and other issuers,
including public authorities and supranational organizations, in the market. We
conduct these activities in support of, and to manage the risks arising from,
our primary activities as a state development bank.
15
At December 31, 2003, 99.8% of the securities in our portfolio were
interest-bearing securities and 0.2% consisted of equity securities, such as
shares and other non-interest-bearing securities. Equity securities representing
an 'equity investment' (Beteiligung), that is an investment in another company
(whether affiliated or not affiliated with us) that we intend to hold on a
long-term basis in order to establish a permanent relationship that contributes
to our own business, are not included in our securities portfolio. See
"--Glossary--Equity investments in non-affiliated companies; equity investments
in affiliated companies."
The following table shows the aggregate book value of securities held
by us at December 31 of each of the years indicated:
Securities Portfolio
2003 2002 2001
---------- ---------- ----------
(in millions of EUR, except for %)
Total securities held(1)................................ 8,314.2 8,089.3 7,359.2
of which:
Interest-bearing securities(2)....................... 8,300.7 8,069.4 7,321.3
% of total securities(2).......................... 99.8 99.8 99.5
Equity securities(3)................................. 13.5 20.0 37.9
% of total securities(3).......................... 0.2 0.2 0.5
- ----------------
(1) Aggregate book value of debt and equity securities, excluding equity
investments and repurchased own notes (Balance Sheet assets items 4a, 4b
and 5), held by us at December 31 of the year indicated. An 'equity
investment' (Beteiligung) is an investment in another company (whether
affiliated or non-affiliated) that we intend to hold on a long-term basis
in order to establish a permanent relationship that contributes to our own
business. See "--Glossary--Equity investments in non-affiliated companies;
equity investments in affiliated companies."
(2) Consists of notes or bonds and other interest-bearing securities (excluding
repurchased own notes).
(3) Equity securities in 2002 and 2001 include profit participation rights
(Genussscheine).
Loan Portfolio Risks
We maintain a policy of conservative evaluation of our loan portfolio.
We establish what we believe to be adequate reserves to take account of all
identifiable risks in our loan portfolio.
At year-end 2003, 56.4% of our total outstanding loans (other than
fiduciary loans and administrative loans) and guaranties were backed by credit
support, (compared to 55.6% at year-end 2002): 37.9% of total loans (compared to
40.9% at year-end 2002) were secured by mortgages and other collateral and 18.5%
(compared to 14.7% at year-end 2002) were loans to, or guarantied by, the
Federal Republic of Germany or Baden-Wurttemberg, political subdivisions thereof
or other governmental authorities, or were insured.
According to our internal guidelines determined by the board of
management direct lendings generally have to be secured, unless the debtor is,
or is guaranteed by, a Member State of the European Union, a municipality or by
another public law entity of a Member State of the European Union, or if the
debtor is a company engaged in the utility sector and the majority of its equity
is owned by any of the public law entities mentioned before. Furthermore, credit
support may not be required, if the debtor has a high degree of
credit-worthiness and other credit institution would normally extend loans to
this company on an unsecured basis. We have established an internal rating
framework and each debtor is classified according to a predefined rating
methodology suitable for the category of debtors to which the debtor belongs. As
a general rule, credit support is not necessary, if the debtor is classified in
one of the two highest internal rating categories.
16
At December 31, 2003, most of our loans and guaranties not backed by
credit support were made to banks and other credit institutions.
As part of our lending in support of housing and agriculture, we make
fiduciary loans, which are loans in our name on behalf of other entities, and
administrative loans, which are loans in the name of other entities on behalf of
the other entities, in each case using funds supplied by other entities. We do
not bear any credit risk in connection with fiduciary loans and administrative
loans. See "General--Introduction" and "--Glossary--Fiduciary assets; fiduciary
liabilities."
In accordance with the L-Bank Statutes, if loans and guaranties
extended by us are secured, they are generally secured on a junior basis.
Housing-related loans are usually secured by junior mortgages or, on a temporary
basis until the perfection of a mortgage, by bank guaranties or guaranties by
local authorities or entities established under public law. Bridge loans to
persons with an unmatured building-society savings contract (nicht
zuteilungsreifer Bausparvertrag) are additionally secured by an assignment of
such contract. Because of the risk inherent in junior mortgages, the
municipality in which the housing construction is located is, subject to its
prior approval, obligated by law to cover one-third of any losses incurred by
us, provided that the relevant loan is granted under the State Housing Program
and is used for the construction of houses or apartments. A Baden-Wurttemberg
state administrative regulation, however, limits our claims under the guaranty
to an amount based on a ratio of 75% of the overall reasonable cost.
In certain areas of financing, such as trade-, industry- and
agriculture-related lending, we very frequently extend loans through
intermediary banks that on-lend the funds to their own borrowers -- the end
customers. In addition to assuming the credit risk, we generally require
intermediary banks to secure such loans. To a very limited extent we may
guaranty collection of loans made by intermediary banks. Trade and
industry-related loans are in most cases secured by mortgages or security
interests in equipment, accounts receivable and other collateral.
In various areas of our business we make loans, including fiduciary
loans, to entities and, to a limited extent, to individuals -- German and
foreign -- that are incorporated or located outside of Germany, purchase debt
securities of foreign issuers and make equity investments in foreign entities.
To the extent these transactions are not denominated in Euros, we generally
hedge any currency risks by means of currency swaps. See "Business--Funding and
Investment Policy."
17
The following table sets forth our cross-border loans, securities
holdings, guaranties and derivatives at December 31, 2003:
Cross-Border
Loans, Securities Holdings, Guaranties and Derivatives
Other Member Other
European States of Other countries and
Monetary the European industrialized supra-national
Total Union(1) Union(2) USA countries(3) organizations
--------- --------- ------------ -------- -------------- --------------
As of December 31, 2003
(in thousands of EUR(4))
Loans(5)................ 421,942 286,637 21,084 59,915 25,365 28,941
Securities(6)........... 3,935,642 2,717,191 1,031,314 114,878 55,284 16,975
Equity investments...... 6,956 0 0 5,980 0 976
Guaranties(7)........... 536,580 457,427 1,914 0 0 77,239
Derivatives(8).......... 1,728,292 353,608 857,357 434,566 82,761 0
--------- --------- ------------ -------- -------------- --------------
Total................... 6,629,412 3,814,863 1,911,669 615,339 163,410 124,131
========= ========= ============ ======== ============== ==============
- ----------------
(1) The countries participating in the European Monetary Union are Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain.
(2) As of December 31, 2003, the Member States of the European Union that did
not participate in the European Monetary Union were Denmark, Sweden and the
United Kingdom.
(3) Includes Switzerland, Canada, Norway, Australia, Iceland, Japan and Turkey.
(4) Any amounts denominated in foreign currencies are expressed in Euros based
on the rate of exchange on December 31, 2003.
(5) This item includes loans to credit institutions, companies, individuals and
public authorities, but does not include fiduciary loans. We generally do
not make cross-border administrative loans.
(6) This item includes debt securities (excluding repurchased own notes) and
equity securities.
(7) This item includes contingent liabilities in respect of guaranties, check
guaranties and indemnity agreements.
(8) This item consists primarily of interest rate and currency swaps for
hedging purposes, including credit derivatives.
Approximately 57% (EUR 3,815 million) of the amount of our cross-border
loans, securities holdings, guaranties and derivatives involve individuals or
entities located in countries participating in the European Monetary Union.
Approximately 86% (EUR 5,727 million) involve individuals or entities located
within the European Union.
Loan and Securities Loss Reserves
Our public mandate requires us to consider loan and other investments
that, due to their risk profile, commercial banks would refuse to contemplate
for commercial reasons. This is reflected in our contributions to risk
provisions. We make extensive specific and general loan loss reserves in our
loan and securities portfolio. We believe that our policy in this respect is
prudent and that our reserves are sufficient to provide for all identifiable and
potential risks in our loan and securities portfolio.
We establish specific reserves to provide for any identifiable risks
relating to specific loans or securities, specific reserves to provide for
identifiable risks relating to groups of borrowers or types of loans and a
general reserve intended to provide for potential risks not presently
identifiable but that are inherent in the loan and securities portfolio. In
accordance with German law and generally accepted accounting principles in
Germany, the foregoing reserves are created by reducing the loan and securities
balances reserved against and are not separately reflected as a reserve in the
balance sheet. On the liabilities side of our balance sheet, we are permitted
according to section 340g German Commercial
18
Code, as a credit institution, to establish reserves against general banking
risks in a special item called "Fund for general bank risks". Allocations to, or
withdrawals from, this item must be reflected in our income statement. See
"--Summary of Certain Differences Between Generally Accepted German and United
States Accounting Principles."
Loans and payments made under guaranties are written off when our
management determines that there is no chance of recovery.
The following table sets forth the aggregate amount of interest and
principal payments in arrears on claims with an original maturity of four years
or more, the aggregate amount of loans and guaranty payments (and
housing-related loans and guaranty payments) written off by us and the aggregate
amount of recoveries on loans and guaranty payments previously written off for
each of the years indicated:
Credit Arrears, Write-Offs and Recoveries
2003 2002 2001
---------- ---------- ----------
(in millions of EUR)
Arrears(1).............................................. 68.0 57.6 42.3
Write-offs(2):
Total................................................ 116.8 95.6 162.7
Housing-related...................................... 106.0 88.8 153.7
Recoveries(3)........................................... 2.2 3.0 3.4
- ----------------
(1) Aggregate amount of principal and interest payments in arrears on claims at
December 31 of the year indicated.
(2) Aggregate amount of loans and guaranty payments written off during the year
indicated.
(3) Aggregate amount received during the year indicated in connection with
loans and guaranty payments written off in previous years.
The weaker German economy and the high number of commercial
bankruptcies in recent years, in particular in 2001 and 2003, have led to an
increase in loan and securities loss reserves.
In connection with our establishment on December 1, 1998, all assets of
the state development agency business of the former Landeskreditbank
Baden-Wurttemberg were transferred to us. Part of those assets was a large
portfolio of housing-related loans in eastern Germany, primarily in the federal
state of Saxony, which are secured by junior mortgages. The table above
therefore includes loan loss reserves with respect to commercial properties and
building projects in eastern Germany, established in accordance with generally
accepted German accounting principles. Except for the extension of loans in
connection with the restructuring of existing loans, we have not extended new
loans relating to real estate located in eastern Germany since our establishment
and are merely servicing those loans currently in our portfolio.
Reserves for Interest Subsidies
We also maintain reserves to support interest rate subsidies, which is
the difference between the prevailing market interest rate and the interest rate
we charge our customers under the public economic and social assistance programs
that we administer. These reserves are calculated on the basis of an amount
representing the difference between a fictitious yield over the entire term of
the subsidized loan, which is based on the market interest rate at the time that
the loan is being made, and the actual aggregate interest payments to be made by
the customer over the term of the loan. The reserves for interest subsidies are
funded by Baden-Wurttemberg and the German federal government, other public
authorities and by us. See "--Glossary--Deferred items" and "--Contingency
reserves."
19
Sources of Funds
Our principal sources of funds are the capital and money markets,
subscribed capital, capital surplus, retained earnings and public funds. At
December 31, 2003, our total assets, excluding fiduciary assets of EUR 511.9
million, amounted to EUR 45.7 billion. Of those total assets, 89.9% were
financed through long-term and short-term borrowings in the capital and money
markets, and 0.9% were financed through our retained earnings. The balance was
financed from other liabilities, including reserves.
We raise funds in the capital markets by issuing a variety of bonds,
notes and medium and long term loans evidenced by promissory notes placed with
investors (Schuldscheindarlehen). In 2003, we raised EUR 6,422 million (a 22.1%
decrease from EUR 8,248 million in 2002) through 40 issuances (27 in 2002) of
bonds and notes in the German and international capital markets. In 2001, we
established a EUR 20 billion debt issuance program, under which we have issued
EUR 8.6 billion by December 31, 2003.
The following table shows our borrowings made in the capital markets,
categorized by type of instrument, during each of the years indicated:
Capital Market Borrowings(1)
2003 2002 2001
------------------- --------------------- --------------------
millions millions millions
of EUR % of EUR % of EUR %
-------- ------ ---------- ------- --------- ------
Types of borrowings
Domestic bonds and notes....................... 1,492 23.2 1,045 12.7 3,880 56.7
International bonds and notes.................. 3,481 54.2 5,051 61.2 1,203 17.6
----- ---- ----- ---- ----- ----
Total bonds and notes.......................... 4,973 77.4 6,096 73.9 5,083 74.3
Schuldscheindarlehen and other borrowings(2)... 1,449 22.6 2,152 26.1 1,760 25.7
-- ----- ---- ----- ---- ----- ----
Total capital market borrowings................ 6,422 100.0 8,248 100.0 6,843 100.0
===== ===== ===== ===== ===== =====
- ----------------
(1) For information on the maturities of our outstanding capital markets
borrowings, see "Financial Statements of L-Bank--Supplementary Information
on Debt of L-Bank."
(2) Schuldscheindarlehen are a financing method of the German capital market,
where the lending entity, generally a bank, insurance company or public
pension fund, receives a promissory note evidencing its loan to the
borrower and stating the terms of such loan. Original maturities of
Schuldscheindarlehen range from one to 30 years.
As part of our liquidity management, we also raise funds in the money
markets, including short-term deposits from other banks. To fund our loans, we
also use the overdraft facility of the European Central Bank (drawdowns from
this facility are secured by eligible securities) and securities repurchase
agreements. See the notes to our financial statements included in this
prospectus.
We also borrow from credit institutions, insurance companies and other
lenders under loan agreements. To fund loans under various public assistance
programs, we borrow funds appropriated in the Baden-Wurttemberg and German
federal budgets. Baden-Wurttemberg and Germany also contribute all the funds for
grants. We use funds supplied by the Baden-Wurttemberg and German federal
governments and other German, foreign or supranational entities to make
fiduciary loans and administrative loans. Grants and administrative loans do not
appear on our balance sheet.
20
The following table shows our borrowings outstanding at December 31 of
each of the years indicated:
Outstanding Borrowings(1)
2003 2002 2001
---------- ---------- ----------
(in millions of EUR)
Bonds and notes issued(2)............................... 16,415.7 14,582.2 12,517.0
Liabilities to credit institutions(3)................... 18,900.4 19,729.2 21,629.4
Liabilities to customers(3)............................. 5,160.3 3,996.1 4,150.0
Subordinated liabilities................................ 598.8 444.8 442.2
-------- -------- --------
Total................................................... 41,075.2 38,752.3 38,738.6
======== ======== ========
- ----------------
(1) See our financial statements, together with the related notes, included in
this prospectus and "--Glossary."
(2) The equivalent balance sheet item is "certificated liabilities"; see
"--Glossary--Certificated liabilities." This item includes bearer
mortgage-backed bonds (Hypothekenpfandbriefe).
(3) Includes registered mortgage-backed bonds (Hypothekennamenspfandbriefe).
For more information concerning our borrowings at the end of 2003,
including the range of interest rates paid by us and a repayment schedule, see
"Financial Statements of L-Bank--Supplementary Information on Debt of L-Bank."
Funding and Investment Policy
Through our funding and investment policy we seek to achieve the most
favorable terms possible with respect to funds raised in the capital and money
markets. We also seek to minimize interest rate, exchange rate and currency
risks by using various hedging instruments.
The terms of most of our fixed-interest loans prohibit prepayments by
the borrower prior to ten years after the loan is made. Variable-rate loans,
however, may generally be prepaid at any time upon three months' notice. 94% of
our loans outstanding as of December 31, 2003 were at fixed interest rates. It
is our policy to exercise our right to preclude prepayments or to charge a
breakage fee to compensate us for any loss that we would incur by reinvesting
the loan proceeds at the prevailing market rate.
As of December 31, 2003, we were party to interest rate and currency
derivatives transactions with a total notional value of EUR 92.5 billion. We use
interest rate and currency swaps for the purpose of hedging our investments in
debt securities and our own issuance of debt and, in the past, to a limited
extent, for trading purposes. We principally enter into swap transactions only
with counterparties with a rating at least comparable to A3 or A- by a reputable
rating agency.
We use derivative transactions for hedging purposes only, either in
form of micro hedges (hedging single transactions) or macro hedges. We implement
separate portfolio hedges to a very limited extent only. We employ micro hedges
to hedge all our assets or liabilities containing an interest rate structure.
Currency positions will be hedged once marketable sizes have been attained in
the respective currency. According to German GAAP, such derivative transactions
are not to be included in the balance sheet, but have to be disclosed
separately, see "Financial Statements of L-Bank--Notes to the annual financial
statements of Landeskreditbank Baden-Wurttemberg - Forderbank for the financial
year ended December 31, 2003."
21
The total income and expenses of micro and macro hedges are reflected
in the positions "Interest Income" and "Interest Expenses" in our income
statement, without differentiating between micro and macro hedges.
Separate portfolio hedges are of minimal importance in the context of
our activities. The net effect of hedging in the context of portfolio hedges is
reflected in the position "Net Income from Financial Operations" in our income
statement. Losses reflecting negative market values of those portfolio hedges
are being accounted for in the balance sheet under the item "Contingency
Reserves" together with all other reserves built by us.
Risk Control
The measurement, monitoring and control of risks are all integral
functions of our global bank control system. Our board of management formulates
our risk policy and establishes the appropriate procedural framework for its
implementation. Our risk management system was designed to ensure that we can
estimate our risk exposure at any time and implement alternative risk management
options as required. The system consists of five subprocesses: risk
identification, risk evaluation, risk management, risk monitoring and risk
communication.
Risks are identified -- that is, analyzed, structured and allocated --
by our risk controlling team in cooperation with the individual divisions in
which the risks arise. Our risk categories, which correspond to those set forth
in the German accounting standards, include counterparty default risk, market
risk, liquidity risk and operational risk. The data resulting from our risk
identification process are used as the basis for the quantitative and
qualitative evaluation of risks. For market risks and counterparty default
risks, we calculate the value at risk. For other risks, we use estimates as the
basis for evaluation. The results of the evaluation process are continually
documented, monitored by our risk controlling team and reported in near
real-time. At the same time, our operating units evaluate the market risk for
management purposes.
Risk management is the responsibility of our operating units, our board
of management and our lending committee, in each case acting within approved
limits and up to certain assigned competence levels.
Counterparty default risk
Counterparty default risks embody the greatest proportion of specific
risks to which we as a whole are exposed. They comprise credit risk, settlement
risk, country risk and investment portfolio risk. We evaluate counterparty
default risks using rating methods tailored to the peculiarities of each market
segment. In the case of commercial transactions and loans connected with liquid
investments and management of our own books of account, counterparty default
risks are limited by applying counterparty and country limits, which are
proposed by our lending analysis division and approved by our board of
management. Individual country limits are allocated and supervised according to
a set of guidelines established each year by our board of management.
Market risk
Our market risks consist primarily of interest rate risks and, to a
lesser extent, of currency risks. In addition, certain of our subsidiaries, such
as property development companies, are also exposed to price risks in the form
of real estate risks. These companies may incur potential losses as a result of
adverse developments affecting building costs or property prices and rents. To
control these risks, our board of management specifies value-at-risk and
stop-loss limits. Each day the risk controlling team uses
22
the historical simulation method to calculate the value at risk represented by
interest rate and currency risks. Back testing is used to check the reliability
of the calculation method applied. To estimate potential losses in the event of
extreme market fluctuations, we also carry out stress tests and simulate extreme
and worst-case scenarios.
To further limit our interest rate risk, our board of management
regularly defines a budgeted risk structure, which represents the target
interest rate risk profile. The permissible variance of the actual risk
structure to the budgeted risk structure is defined by setting a limit per range
of maturities. To quantify real-estate risks, we use worst-case projections to
calculate the potential reduced return on invested capital at the time of sale.
The shortfall in earnings is estimated by reference to historical and projected
trends in real-estate prices. Our risk controlling team monitors interest rate
and currency risks. The value-at-risk and stop-loss figures calculated each day
are compared with the specified limits. The team also monitors adherence to the
budgeted risk structure and authorized limits. A daily risk and performance
report is submitted to our board member responsible for controlling risks and
the board member responsible for the trading divisions.
Liquidity risk
Our liquidity management, which is the responsibility of our treasury
division, is based on a computer-generated liquidity projection, which takes
into account all foreseeable, scheduled payment flows over the next twelve
calendar months. The reporting system assesses, monitors and reports on the
liquidity risk. Our liquidity factor is calculated monthly, in line with the
reporting requirements of Principle II (governing liquidity) of the German
Banking Act (see "--Regulation and Supervision of L-Bank in the Federal Republic
of Germany--Liquidity Requirements").
Operational risk
Operational risk covers the potential for losses as a result of risks
associated with operational systems or processes. It includes operating risks
arising as a result of human or technical error, as well as legal risks arising
from contractual agreements or the underlying legislative framework. In
accordance with our system for analyzing and evaluating operational risks, all
product-related processes in the individual divisions are analyzed once a year
and evaluated with the help of experts. Any risks identified are assigned to one
of five risk categories. These are measured according to the financial impact
that potential exposure may have on our net worth and the frequency with which
such risks may arise over a twelve-month period. The value at risk is calculated
by analyzing the loss rate separately from the extent of the losses.
23
DEBT RECORD
We have always paid promptly when due the full amount of principal of
and interest on our indebtedness.
CAPITALIZATION
The following table shows our capitalization at December 31, 2003:
Capitalization at December 31, 2003(1)
(in millions of EUR)
Liabilities
Liabilities to credit institutions(2)...................................................... 18,900
Liabilities to customers(3)................................................................ 5,160
Certificated liabilities(4)................................................................ 16,416
Subordinated liabilities(5)................................................................ 599
Profit participation rights................................................................ 0
Equity
Subscribed capital(6)...................................................................... 250
Capital surplus............................................................................ 951
Retained earnings reserves(7).............................................................. 426
---------
Total capitalization................................................................... 42,702
=========
- ----------------
(1) See our balance sheet included elsewhere in this prospectus.
(2) Includes EUR 11,700.0 million of liabilities with a remaining maturity of,
or that are subject to redemption or repayment in, less than five years.
Liabilities to credit institutions include registered mortgage-backed bonds
(Hypothekennamenspfandbriefe).
(3) Includes EUR 1,654.0 million of debt with a remaining maturity of, or that
are subject to redemption or repayment in, less than five years.
Liabilities to customers (i.e. non-credit institutions) include registered
mortgage-backed bonds (Hypothekennamenspfandbriefe).
(4) Includes EUR 14,273.5 million of bonds and notes with a remaining maturity
of, or that are subject to redemption or repayment in, less than five
years. This item includes bearer mortgage-backed bonds
(Hypothekenpfandbriefe).
(5) Includes EUR 22.8 million of liabilities with a remaining maturity of, or
that are subject to redemption or repayment in, less than five years. See
"Financial Statements of L-Bank--Financial Statements of L-Bank as of and
for the year ended December 31, 2003--Notes to the Financial Statements."
(6) Our original subscribed capital was DM 450 million (equivalent of EUR 230.1
million). As of January 1, 1999, the subscribed capital was increased to
EUR 250 million.
(7) For capitalization purposes, we are not subject to any legal reserves.
Between January 1, 2004, and January 31, 2005, we publicly issued
bonds, notes and miscellaneous liabilities (including privately placed bonds and
notes, Schuldscheindarlehen and other borrowings) with an aggregate value of EUR
7,383 million. In addition, between January 1, 2004, and January 31, 2005, we
issued subordinated debt in an aggregate amount of EUR 313 million and profit
participation rights in an aggregate amount of 520 million in the capital
markets to strengthen our capital basis. These items are not reflected in the
capitalization table above. Apart from these items, there have been no material
changes in our capitalization since December 31, 2003.
24
MANAGEMENT INFORMATION
Introduction
The following Management information is based on our audited
unconsolidated annual financial statements as of and for the fiscal years ended
December 31, 2003, 2002 and 2001.
Our financial statements as of and for the fiscal years ended December
31, 2003, 2002 and 2001 were prepared using German GAAP, as contained in the
German Commercial Code (Handelsgesetzbuch), in particular in the Supplemental
Regulations for Banks (Sections 340 et seq. of the German Commercial Code), and
in the German Accounting Principles applied to Credit Institutions and Financial
Services Institutions (Verordnung uber die Rechnungslegung der Kreditinstitute
und Finanzdienstleistungsinstitute).
For details regarding the principles governing the preparation of our
financial statements, see the notes to our financial statements included in this
prospectus and "--Regulation and Supervision of L-Bank in the Federal Republic
of Germany--Financial Statements and Audits." For a description of certain terms
used in our balance sheet and statement of income, see "Glossary."
German GAAP differs in certain respects from the generally accepted
accounting principles of other countries, such as the United States. For a
discussion of certain differences between German GAAP and U.S. GAAP, see
"--Summary of Certain Differences between Generally Accepted German and United
States Accounting Principles."
Balance Sheet
Our total assets increased by EUR 2.6 billion, or 6.1%, in 2003 to EUR
46.2 billion at December 31, 2003, as compared to EUR 43.6 billion at December
31, 2002. In addition to public sector lending, loans to small and medium sized
businesses have been the major contributor to this growth. Loans to credit
institutions (assets item 2, "receivables from credit institutions") increased
by 11.3% in 2003 to EUR 11.8 billion and represented 25.4% of total assets at
December 31, 2003 (compared to 24.2% at December 31, 2002). The increase was
primarily caused by a growing number of purchases of registered securities
issued by public-law credit institutions in the context of our treasury
management and for reasons of risk diversification. Loans to customers other
than credit institutions (assets item 3, "receivables from customers") increased
by 5.7% in 2003 to EUR 24.6 billion and represented 53.2% of total assets at
December 31, 2003 (compared to 53.4 % at December 31, 2002). Borrowings from
credit institutions (liabilities item 1, "liabilities to credit institutions")
decreased by 4.2% over the previous year and amounted to an aggregate of EUR
18.9 billion at December 31, 2003. Borrowings from customers (liabilities item
2, "liabilities to customers") increased by 29.1% and amounted to an aggregate
of EUR 5.2 billion at December 31, 2003. This increase (liabilities item 2,
"liabilities to customers") was due primarily to the demand of insurance
companies for structured debt certificate borrowings (strukturierte
Schuldscheine). Bonds and notes issued (liabilities item 3, "certificated
liabilities") amounted to EUR 16.4 billion at December 31, 2003.
25
The following table shows the development in certain balance sheet
items at December 31 of the year indicated:
Development of the L-Bank Balance Sheet
2003 2002 2001
---------- ---------- ----------
(in millions of EUR)
ASSETS
Cash reserve.............................................. 257.5 246.0 335.7
Total receivables(1)...................................... 36,344.8 33,820.4 33,061.4
Receivables from credit institutions.................... 11,760.7 10,562.2 9,774.2
Receivables from customers (i.e. non-credit 24,584.1 23.258.2 23,287.1
institutions)...........................................
Fiduciary assets.......................................... 511.9 666.6 816.3
Securities(2)............................................. 8,511.4 8,296.8 8,722.7
Other Assets(3)........................................... 599.1 555.1 455.4
---------- ---------- ----------
Total Assets.............................................. 46,224.7 43,584.9 43,391.4
========== ========== ==========
EQUITY AND LIABILITIES
Liabilities(4)............................................ 24,060.7 23,725.3 25,779.4
Liabilities to credit institutions...................... 18,900.4 19,729.2 21,629.4
Liabilities to customers................................ 5,160.3 3,996.1 4,150.0
Certified liabilities..................................... 16,415.7 14,582.2 12,517.0
Subordinated liabilities.................................. 598.8 444.8 442.2
Fund for general bank risks............................... 129.0 108.9 108.9
Contingency reserves...................................... 749.8 817.5 867.0
Deferred items............................................ 977.5 1,087.6 1,308.4
Other liabilities(5)...................................... 1,663.9 1,260.5 896.8
Own resources (including subscribed capital, capital surplus,
retained earnings reserved and distributed profit)........ 1,629.3 1,558.2 1,471.6
---------- ---------- ----------
Total liabilities......................................... 46,224.7 43,584.9 43,391.4
========== ========== ==========
- ----------------
(1) Total receivables include loans and other obligations with an original
maturity or non-prepayment period of less than five years as well as those
with an original maturity or non-prepayment period of five years or longer.
(2) Aggregate book value of all debt and equity securities (including
repurchased own notes) except equity investments, held by us at December 31
of the year indicated. An 'equity investment' (Beteiligung) is an
investment in another company (whether affiliated or non-affiliated) that
we intend to hold on a long-term basis in order to establish permanent
relationship that contributes to our own business. See
"--Business--Securities Activities" and "--Glossary--Equity investments in
non-affiliated companies; equity investments in affiliated companies."
(3) Includes equity investments in affiliated and non-affiliated companies,
tangible assets, deferred charges and prepaid expenses and other assets
(assets item 11).
(4) Liabilities include liabilities with an original maturity or non-prepayment
period of less than five years as well as those with an original maturity
or non-prepayment period of five years or longer.
(5) Includes fiduciary liabilities.
Our "credit volume" consists of loans to credit institutions and loans
to customers other than credit institutions. As of December 31, 2003, our credit
volume amounted to EUR 36.3 billion, an increase of 7.5% compared to year-end
2002. At December 31, 2003, loans to credit institutions accounted for
approximately 32.4% of our credit volume, compared to 31.2% at December 31,
2002. The outstanding amount for loans to credit institutions increased by 11.3%
to EUR 11.8 billion in 2003, compared to EUR 10.6 billion in 2002. Loans to
customers other than credit institutions accounted for approximately 67.6% of
the credit volume at December 31, 2003, compared to 68.8% at December 31, 2002.
The outstanding amount of loans to such customers increased by 5.7% to EUR 24.6
billion in
26
2003, compared to EUR 23.3 billion at December 31, 2002. The outstanding amount
of securities holdings (i.e. assets items 4a, 4b and 5) increased by 2.8% to EUR
8.3 billion (EUR 8.1 billion at December 31, 2002).
We are not required to classify our loans according to their maturity.
Our assets can, however, be characterized as long term. At December 31, 2003,
38.7%, or EUR 4.5 billion, of the loans to credit institutions and 81.3%, or EUR
20.0 billion, of the loans to customers other than credit institutions were
long-term loans (i.e., loans with an original maturity and non-prepayment period
of five years or longer). The notes to our financial statements required by the
German Commercial Code present our loans according to their original maturity.
See "Financial Statements of L-Bank--Financial Statements of L-Bank as of and
for the year ended December 31, 2003--Notes to the Financial Statements."
At December 31, 2003 our commitments for loans and guaranties totaled
EUR 9.0 billion, an increase of EUR 1.9 billion or 26.8% from EUR 7.1 billion of
commitments at December 31, 2002. This was mainly due to the significant
increase in infrastructure related financing.
Commitments for infrastructure increased by 155% to EUR 3.6 billion at
December 31, 2003, compared to a 1.9% increase to EUR 1.4 billion at December
31, 2002. This significant increase in 2003 is due to the fact that the area of
infrastructure financing was explicitly mentioned as a permitted business
activity of state development banks in the context of Understanding II (for a
discussion of Understanding II, see "--General--Responsibility of
Baden-Wurttemberg--Understanding with the European Commission"). We therefore
placed a specific emphasis on the development of this business area in 2003. We
do not anticipate similar growth rates in future years, but intend to develop
this business area in line with all other business areas of our bank with
moderate growth rates.
Housing loan commitments increased by 17.1% to EUR 1.1 billion at
December 31, 2003, compared to a 8.5% decrease to EUR 0.9 billion in 2002. The
increase in 2003 is to be seen in the context of publicly announced plans by the
federal government to cut subsidies for families to buy or build their first
homes. This caused many families to invest in first homes in 2003. In trade and
industry-related financing, there was a 10.8% decrease to EUR 1.1 billion in
commitments at December 31, 2003, compared to a 8.4% decrease to EUR 1.3 billion
at December 31, 2002. The decrease in 2002 and 2003 is to be seen in the context
of the general economic slowdown experienced in those years.
At December 31, 2003, the outstanding amount of bonds and notes
(certificated liabilities) had increased by 12.6% to EUR 16.4 billion from EUR
14.6 billion at December 31, 2002, which in turn was a 16.5% increase over EUR
12.5 billion in 2001. Both increases are caused by the establishment of our Debt
Issuance Program in 2001 which, because of its flexibility, facilitates the
issuance of structured bonds and notes on the international capital markets. See
"--Business--Sources of Funds."
Our equity ratio (the percentage of equity to total assets) decreased
to 3.5% at December 31, 2003, compared to 3.6% at December 31, 2002 and to 3.4%
at December 31, 2001.
Statement of Income
In a difficult economic environment for credit institutions, we
realized comparatively stable earnings. Our operating profit increased by EUR
22.1 million to EUR 317.5 million for the year ended December 31, 2003.
27
The following table shows our earnings position for the years 2003,
2002 and 2001:
Earnings Position
Change(1) Change(1)
----------- -----------
2003 2003/2002 2002 2002/2001 2001
---------- ----------- --------- ----------- ----------
(in EURO millions) (in %) (in EURO millions) (in %) (in EUR
millions)
Interest and similar income(2).......... 2,380.8 (115.5) (4.6) 2,496.3 100.6 100.2 2,395.74
Interest expenses....................... (1,972.1) 131.7 (6.2) (2,103.8) 98.3 4.9 (2,005.5)
---------- ------- --------- ------ ----------
Net interest income................... 408.8 16.3 4.1 392.5 2.3 0.6 390.2
Net fee and other income(3)............. 59.7 4.8 8.8 54.9 3.3 6.3 51.6
---------- ------- --------- ------ ----------
Gross profit.......................... 468.5 21.1 4.7 447.4 5.6 1.3 441.8
General administrative expenses(4)...... (120.9) 7.6 (5.9) (128.5) (7.9) 6.5 (120.6)
Other operating expenses................ (30.1) (6.7) 28.5 (23.4) (14.9) 174.5 (8.5)
---------- ------- --------- ------ ----------
Operating profit...................... 317.5 22.1 7.5 295.5 (17.2) (5.5) 312.6
Non-operating expenses(5)............... (214.1) (5.2) 2.5 (208.9) (1.9) 0.9 (207.0)
========== ======= ========= ====== ==========
Net profit............................ 103.4 16.9 19.5 86.6 (19.1) (18.1) 105.7
Allocation to retained earnings reserves 103.0 17.5 20.5 85.5 (18.6) (17.8) 104.1
Carried forward from previous year...... 2.0 (31.3) (94.1) 33.2 1.6 5.1 31.6
Distributable profit.................. 2.4 (31.9) (93.0) 34.3 1.1 3.2 33.2
- ----------------
(1) Percentage changes are calculated on the basis of unrounded figures.
(2) Similar income consists of current income from stocks, shares and other
non-interest bearing securities and equity investments in non-affiliated
companies and affiliated companies.
(3) Other income consists of net income from financial transactions and other
operating income.
(4) Includes depreciation and accumulated amortization on tangible and
intangible assets.
(5) Consists of write-offs, reserves in respect of loans and securities,
allocations to reserves for interest subsidies and income tax.
Net Interest Income. In addition to interest income from lending and
money market transactions and from interest-bearing securities and debt register
receivables (Schuldbuchforderungen), our net interest income also includes
current income from stocks, shares and other non-interest-bearing securities and
equity investments in non-affiliated and affiliated companies.
In an environment of generally declining interest rates, our interest
and similar income decreased by EUR 115.5 million, or 4.6%, to EUR 2,380.8
million in 2003, as compared with EUR 2,496.3 million in 2002. At the same time,
the decrease in interest income was more than offset by a EUR 131.7 million, or
6.3%, decrease in interest paid from EUR 2,103.8 million in 2002 to EUR 1,972.1
million in 2003. In total, net interest income of EUR 408.8 million at year end
2003 therefore increased by EUR 16.3 million, or 4.1%, from EUR 392.5 million in
2002.
In 2002, net interest income increased by EUR 2.3 million, or 0.6%,
from EUR 390.2 million in 2001 to EUR 392.5 million in 2002.
In the context of our macro hedging of the banking book, certain
interest rate positions remain temporarily unhedged. Such positions will be
hedged depending on the prevailing interest rate environment. The hedging in
such circumstances may generate additional interest income. The increase in net
interest income discussed above in the context of the financial year 2003 was
due in part to such effects.
To control the risks of unhedged positions, our board of management
specifies tight value-at-risk and stop-loss limits. Each day the risk
controlling team uses the historical simulation method to calculate the value at
risk represented by interest rate and currency risks. Back testing is used to
check the
28
reliability of the calculation method applied. To estimate potential losses in
the event of extreme market fluctuations, we also carry out stress tests and
simulate extreme and worst-case scenarios.
To further limit our interest rate risk, our board of management
regularly defines a budgeted risk structure, which represents the target
interest rate risk profile. The permissible variance of the actual risk
structure to the budgeted risk structure is defined by setting a limit per range
of maturities. The value-at-risk and stop-loss figures calculated each day are
compared with the specified limits. We also monitor adherence to the budgeted
risk structure and authorized limits. A daily risk and performance report is
submitted to our board member responsible for controlling risks and the board
member responsible for the hedge activities. For a general discussion on our
measurement, monitoring and control of risks, see "--Business--Risk Control."
Net Fee and Other Income. Net fee and other income consist of net
commission income, net income from financial transactions and other operating
income. Net fee and other income increased by EUR 4.8 million, or 8.8%, from EUR
54.9 million in 2002 to EUR 59.7 million in 2003, where a EUR 5.4 million, or
46.5%, increase in net commission income, was the main contributing factor,
primarily due to an increase in commission expenses, guaranties and receipts
from the processing of grants and subsidies.
Net fee and other income increased by EUR 3.3 million, or 6.3%, from
EUR 51.6 million in 2001 to EUR 54.9 million in 2002.
General administrative expenses. The following table sets forth the
principal components of our general administrative expenses for the years ended
December 31, 2003, 2002 and 2001:
General Administrative Expenses
Change(1) Change(1)
2003 2003/2002 2002 2002/2001 2001
------------ ------------ ------------ ------------ ------------
(in millions (in %) (in millions (in %) (in millions
of EUR) of EUR) of EUR)
Wages and salaries....................... 58.3 2.0 3.5 56.3 4.4 8.5 51.9
Social security, pension and other benefit
and welfare expenses..................... 15.7 (7.1) (31.0) 22.8 6.6 40.7 16.2
----- ----- ----- ---- -----
Total expenditure on personnel......... 74.0 (5.1) (6.4) 79.1 11.0 16.2 68.1
Other general administrative expenses.... 35.8 (2.5) (6.6) (38.3) 5.1 15.2 33.3
Depreciation and amortization on intangible
and tangible assets...................... 11.1 0.0 0.0 11.1 (8.2) (42.6) 19.3
===== ==== ==== ===== ===== ====== ====
Total general administrative expenses.. 120.9 (7.6) (5.9) 128.5 7.9 6.5 120.6
- ----------------
(1) Percentage changes are calculated on the basis of unrounded figures.
Total personnel expenses (wages and salaries, fringe benefits and
expenses for retirement pensions and benefits) decreased by EUR 5.1 million, or
6.4%, to EUR 74.0 million in 2003, while they increased by EUR 11.0 million, or
16.2%, from EUR 68.1 million in 2001 to EUR 79.1 million in 2002. The increase
in 2002 was caused by a pay rise due to a collective bargaining agreement, see
"--Employees" and by higher salaries for parts of the staff which achieved a
higher job classification. Another reason was that, due to a change in law, we
had to make provisions for future employer's assistance payments for sickness
and illness costs for the first time. At the same time, the number of our
employees decreased by 1.1% from 1,147 at December 31, 2002 to 1,134 at December
31, 2003.
Total general administrative expenses, which in addition to personnel
expenses also include other general administrative expenses and depreciation and
amortization on intangible and tangible assets, decreased by EUR 7.6 million, or
5.9%, to EUR 120.9 million in 2003, following a EUR 7.9 million, or 6.5%,
increase from EUR 120.6 million in 2001 to EUR 128.5 million in 2002.
29
Other Operating Expenses. Other operating expenses increased by 28.5%,
or EUR 6.7 million, to EUR 30.1 million in 2003, after having increased by EUR
14.9 million, or 174.5%, to EUR 23.4 million in 2002 from EUR 8.5 million in
2001. The increase in other operating expenses in 2003 compared to 2002 was
caused by exceptional maintenance costs for buildings. The main contributing
factor to the increase in other operating expenses in 2002 as compared to 2001
was a contribution in the amount of EUR 15.3 million, which we first made in
2002, pursuant to an agreement with Baden-Wurttemberg for infrastructure
developments in Baden-Wurttemberg. We are scheduled to continue to make such
contributions in the amount of EUR 15.3 million annually until 2006.
Operating Profit. For the reasons described above, our operating profit
(before non-operating expenses) increased by EUR 22.1 million, or 7.5%, to EUR
317.5 million in 2003 compared with EUR 295.5 million in 2002. The operating
profit for 2002 represented a EUR 17.2 million, or 5.5%, decrease over the 2001
operating profit of EUR 312.6 million.
Non-operating expenses. The following table sets forth the principal
components of our non-operating expenses for the years ended December 31, 2003,
2002 and 2001:
Non-Operating Expenses
Change(1) Change(1)
2003 2003/2002 2002 2002/2001 2001
------------ ---------------- ------------ --------------- ------------
(in millions (in %) (in millions (in %) (in millions
of EUR) of EUR) of EUR)
Depreciation and amortization on
receivables and certain securities,
together with allowances for possible
loan losses(2)...................... (138.3) (5.7) 4.3 (132.7) 39.3 (22.8) (171.9)
Income (loss) from write-ups
(write-downs on equity investments in
non-affiliated and affiliated
companies and securities treated as
fixed assets........................ (6.6) (2.0) 42.6 (4.6) (57.8) (108.7) 53.1
Cost arising from assignments....... (0.0) 0.0 (20.0) (0.0) 13.0 (99.6) (13.0)
Taxes............................... (0.3) 0.4 (58.0) (0.8) 0.1 (11.4) (0.8)
======= ==== ======= ===== ======
Allocation to reserves for interest
rate reductions(3).................. (68.8) 2.0 2.8 (70.8) 3.6 (4.8) (74.3)
Total non-operating expenses........ (214.1) (5.2) 2.5 (208.9) (1.9) 0.9 (207.0)
- ----------------
(1) Percentage changes are calculated on the basis of unrounded figures.
(2) Includes a transfer of EUR 20.1 million to the fund for general bank risks
for the year ended December 31, 2003. See "--Business--Loan and Securities
Loss Reserves" and "--Glossary."
(3) See "--Business--Reserves for Interest Subsidies."
The net effect of non-operating expenses increased by EUR 5.2 million,
or 2.5%, to EUR 214.1 million in 2003, after having increased by EUR 1.9
million, or 0.9%, from EUR 207.0 million in 2001 to EUR 208.9 million in 2002.
Non-operating expenses in 2001 were influenced by a book profit of EUR 57
million resulting from a sale of our investment in Sachsische Aufbaubank GmbH.
Net profit. Our net profit (after non-operating expenses) increased to
EUR 103.4 million for the year ended December 31, 2003, compared to EUR 86.6
million for the year ended December 31, 2002, after having decreased by EUR 19.2
million, or 18.1%, from EUR 105.7 million for the year ended December 31, 2001.
The decrease in 2002 was mainly due to the fact that we sold a participation in
2001 in Sachsische Aufbaubank GmbH, the increase in 2003 was caused by a higher
net interest income.
30
RECENT DEVELOPMENTS
Development of our Business
As of January 31, 2005 and 2004, respectively, we had committed funds
as follows:
January 31, 2005 January 31, 2004
----------------------------- -----------------------------
(in millions of EUR)
Housing............................. 623.3 1,145.8
Trade and Industry.................. 2,029.2 1,260.7
Infrastructure...................... 3,077.2 3,751.1
Family support...................... 430.5 483.1
Securities.......................... 1,912.8 1,615.3
The decrease in infrastructure financing as of January 31, 2005
compared to January 31, 2004 is mainly due to the fact that this business area
has seen a particular increase in 2003; see "--Management Information--Balance
Sheet." We intend to develop this business area with a more moderate growth rate
in the future.
The decrease in housing related financing is partly due to the fact
that public assistance programs in this area for 2004 were approved by the
public administration of Baden-Wurttemberg only by the end of March 2004,
thereby limiting the volume of new business in this area in 2004. At the same
time, the funds committed by Baden-Wurttemberg for interest subsidies in housing
related financing were reduced. Additionally, due to a general slowdown in
economic activity, the demand for such loans has generally decreased in 2004.
In the context of our legal and statutory missions we are currently
preparing the entering into an agreement financing the acquisition of shares by
our counterparty in a publicly listed Baden-Wurttemberg company. The exact
structure of the transaction has not been determined yet; as a consequence of
the planned transaction, however, we will bear over the term of the agreement
(approximately seven years) the risk of price fluctuations of the target
company's shares, which have a current value of approximately EUR 475 million.
Change of Ownership Structure in our Equity Investments
Until December 31, 2004 we held 10.915% of BW-Holding GmbH (the
"Holding"), which is the largest shareholder of Baden-Wurttembergische Bank AG
("BW-Bank"). The other shareholders in the Holding were Landesbank
Baden-Wurttemberg ("LBBW") and a foundation wholly owned by Baden-Wurttemberg
(Landesstiftung Baden-Wurttemberg GmbH, the "Foundation"). On December 15, 2004,
we agreed with Baden-Wurttemberg and the Foundation to buy the Foundation's
28.45% interest in the Holding, contributing such interest, together with our
existing interest in the Holding, to LBBW against a 4.923% participation in
LBBW. This transaction became effective as of January 1, 2005. As a result, each
of Baden-Wurttemberg and the Savings Bank Association of Baden-Wurttemberg hold
35.611% in LBBW, while the City of Stuttgart holds 18.932% and each of the
Savings Bank and Clearing Association of Rheinland-Pfalz and us now hold 4.923%.
The Act establishing LBBW (the "LBBW Act") will likely be amended to reflect the
new ownership structure. For strategic reasons we agreed to these transactions
in order to strengthen our position in LBBW, which is now the fourth largest
bank in Germany in terms of total assets. For us, a direct investment in LBBW is
preferable to an equity interest in a subsidiary of LBBW. We also saw an
advantage in not being the smallest shareholder.
Since January 1, 2005 we thereby have been one of the guarantors
(Gewahrtrager) of LBBW, which means that we are jointly and severally liable to
creditors of LBBW, together with the other
31
guarantors - the other owners of LBBW - for obligations of LBBW. However,
according to Section 4(4) of the LBBW Act and Section 2(4) of LBBW's statutes,
in relation to the other guarantors of LBBW our liability is limited to that
portion of the obligations incurred by LBBW on or after January 1, 2005 that
corresponds to our ownership interest in LBBW. To the extent we are required to
make payments to LBBW's creditors under our guaranty obligation in excess of our
liability in relation to the other guarantors, we will have an indemnity claim
against the other guarantors.
In addition, we are required, together with the other guarantors, to
maintain the economic viability of LBBW, to keep it in a position to perform its
functions and to enable it, through the allocation of liquid funds or by other
appropriate means, to perform its obligations when due. However, similar to the
guaranty obligation mentioned above, in relation to the other guarantors of LBBW
our liability is limited to an amount equal to that portion that corresponds to
our ownership interest in LBBW. To the extent we are required to make payments
to LBBW under our maintenance obligation in excess of our liability in relation
to the other guarantors, we will have an indemnity claim against the other
guarantors.
For a general description of these support mechanisms see
"--General--Responsibility of Baden-Wurttemberg--Guaranty Obligation" and
"--Maintenance Obligation."
On July 18, 2005 the maintenance obligation in respect of LBBW will
cease to exist pursuant to Understanding I and the guaranty obligation will only
have effect for then existing obligations of LBBW that mature until December 31,
2015. See "--General--Responsibility of Baden-Wurttemberg--Understanding with
the European Commission."
Budget of Baden-Wurttemberg for 2005/2006
Pursuant to the new budget for the years 2005 and 2006, which the
parliament of Baden-Wurttemberg adopted on February 23, 2005, we are expected to
distribute EUR 100 million to Baden-Wurttemberg in each of 2005 and 2006 out of
our annual net profit.
It is also currently under discussion in connection with the
Baden-Wurttemberg budget for 2005 and 2006 that we might purchase from
Baden-Wurttemberg certain claims of Baden-Wurttemberg for future interest
payments from third parties, in particular from LBBW, in the amount of up to EUR
707 million in net present value. Any purchase of such claims would be made at
prevailing market conditions.
32
MANAGEMENT
Board of Management
Our business is managed by our board of management (Vorstand), which
consists of at least three members: the chairman, the vice chairman and at least
one other member. Members of the board of management are full-time employees of
L-Bank and are employed for terms not longer than five years. Their contracts
may be renewed for consecutive terms. The chairman and the vice chairman of our
board of management are nominated by our supervisory board and appointed on the
basis of a resolution of the government of Baden-Wurttemberg. The supervisory
board appoints the remaining members of the board of management.
The chairman of the board of management serves as our chief executive
officer. The members of our board of management and the dates of their first
appointments are:
Date of first
Name appointment
- ---- -----------
Christian Brand, Chairman 1998
Jurgen Hagele, Vice Chairman 1998
Dr. Manfred Schmitz 2000
Supervisory Board
Our supervisory board (Verwaltungsrat) establishes guidelines for the
conduct of our business and supervises the overall conduct of our affairs.
Pursuant to the L-Bank Act, our supervisory board consists of 15
members, of which eight are representatives of the government of
Baden-Wurttemberg and the remaining seven are non-governmental members. The
current Chairman of our supervisory board is the Baden-Wurttemberg Minister of
Economic Affairs and the Vice Chairmen are the Minister of Finance, the Minister
of the Interior and the Minister for Food and Rural Planning, respectively.
Alternates are designated for each member. The members and alternates of the
supervisory board are appointed by the government of Baden-Wurttemberg for
five-year terms of office and may serve consecutive terms.
We are not subject to the Co-Determination Law (Mitbestimmungsgesetz),
which requires that the supervisory board of a company includes representatives
of the employees. Our supervisory board does, however, include representatives
of our staff as consultative members.
The members of our supervisory board and their respective deputy
members are:
Full members: Deputy members:
Ernst Pfister*, Chairman Dr. Horst Mehrlander* Prof. Dr. Willi Weiblen*
Baden-Wurttemberg Minister of State Secretary at the Assistant Undersecretary and Head
Economic Affairs Baden-Wurttemberg Ministry of of the Department of Economic and
Economic Affairs Structural Policy at the
Baden-Wurttemberg Ministry of
Economic Affairs
33
Gerhard Stratthaus*, Vice Chairman Prof. Dr. Wolfgang Reinhart* Walter Leibold*
Baden-Wurttemberg Minister of State Secretary at the Assistant Undersecretary and Head
Finance Baden-Wurttemberg Ministry of of the Department of Financial
Finance Policy and Investments at the
Baden-Wurttemberg Ministry of
Finance
Heribert Rech*, Vice Chairman Max Munding Prof. Konrad Freiherr von Rotberg*
Baden-Wurttemberg Minister of the Undersecretary at the Assistant Undersecretary and Head
Interior Baden-Wurttemberg Ministry of the of the Department of
Interior Constitutional, Municipal,
Savings Bank and Legal Affairs at
the Baden-Wurttemberg Ministry of
the Interior
Willi Stachele*, Vice Chairman Rainer Arnold* --
Baden-Wurttemberg Minister for Food Undersecretary at the
and Rural Planning Baden-Wurttemberg Ministry for
Food and Rural Planning
Stefan Mappus* Dieter Hillebrand* Klaus Roscheisen*
Baden-Wurttemberg Minister of the State Secretary at the Assistant Undersecretary and Head
Environment, Transport and Baden-Wurttemberg Ministry of the of the Administration Department
Communications Environment, Transport and at the Baden-Wurttemberg Ministry
Communications of the Environment, Transport and
Communications
Tanja Gonner* Bernhard Bauer* Christian Luft*
Baden-Wurttemberg Minister of Undersecretary at the Assistant Secretary and Head of
Social Affairs Baden-Wurttemberg Ministry of the Central Office at the
Social Affairs Baden-Wurttemberg Ministry of
Social Affairs
Rudolf Bohmler* Hermann Strampfer* Reiner Moser*
State Secretary at the Assistant Undersecretary and Head Assistant Secretary and Head of
Baden-Wurttemberg Ministry of State of Dept. I at the the Budget and Fiscal Policy, Tax
Baden-Wurttemberg Ministry of Appraisal, Real Estate and
State Investments Section of the
Ministry of State
Dr. Rainer Hagele* Dr. Rudolf Kuhner* Norbert Schmitt*
Undersecretary at the Assistant Undersecretary and Assistant Secretary and Head of
Baden-Wurttemberg Ministry of Head of Dept. III at the the State Investment and Banking
Finance Baden-Wurttemberg Ministry of Section at the
State Baden-Wurttemberg Ministry of
Finance
Klaus Hackert Joachim Wohlfeil --
President of the Baden-Wurttemberg President of the Karlsruhe
Association of Craftsmen Chamber of Craftsmen
34
Wirtsch.-Ing. Bernd Bechtold Dr.-Ing. Hansjorg Rieger --
President of the Chamber of Managing Partner of RUD-
Commerce and Industry, Kettenfabrik Rieger & Dietz,
Karlsruhe, Managing director of Aalen
b.i.g. Bechtold
Ingenieurgesellschaft mbH,
Karlsruhe
Heinz Kalberer Gerhard Rosswog --
Lord Mayor of Vaihingen Chairman of the Board of
Badischer Genossenschaftsverband
Raiffeisen-Schulze-Delitzsch
e.V., Karlsruhe
Gisela Graber Frank Zach --
Deputy Chairman of the Regional Head of the Trade and Industry
Chapter VER.DI e.V., Stuttgart Department of the
Baden-Wurttemberg Chapter of
Deutscher Gewerkschaftsbund
Otwin Brucker Dr. Jurgen Schutz --
President of the Baden-Wurttemberg Vice President of the
Association of Municipalities Baden-Wurttemberg Association of
District Councils
Gerhard Burkhardt Andreas Schmitz --
Chairman of the Board of Management Spokesman of the General Partners
of the Verband of HSBC Trinkaus & Burkhardt
Baden-Wurttembergischer KGaA, Dusseldorf
Wohnungsunternehmen e.V., Stuttgart
Marco Freiherr von Maltzan Wilhelm Freiherr von Haller --
Chairman of the Board of Management Member of the Board of Management
of BERU AG, Ludwigsburg of Deutsche Bank AG, Stuttgart
* Representatives of the government of Baden-Wurttemberg.
Advisory members:
Rudiger Ruhnow......................Chairman of the Central Staff Council at
L-Bank, Karlsruhe
Reiner Enzmann......................Chairman of the Staff Council of L-Bank,
Karlsruhe
Gabriele Propp......................Chairman of the Staff Council of L-Bank,
Stuttgart
An advisory board (Beirat) consisting of 54 members advises the board
of management and the supervisory board on general matters relating to us and
furthers the exchange of experience among us, private business and public
administration. Members of our advisory board are appointed by our board of
management in consultation with the Baden-Wurttemberg Ministry of Finance for a
term of five years.
35
Remuneration
For the year ended December 31, 2003, the aggregate amount of the
direct remuneration paid by us to members of our board of management was EUR
1.585 million, to members of our supervisory board EUR 0.16 million and to
members of the Advisory Board and its committees (including travel expenses) EUR
0.214 million. In 2003, the aggregate amount of remuneration paid to retired
members of our board of management and their surviving dependents was EUR 1.048
million. Provisions amounting to EUR 11.271 million were set-aside in 2003 to
cover pension liabilities in respect of retired members of our board of
management. See also the notes to our financial statements included in this
prospectus.
EMPLOYEES
During 2003, the average number of employees employed by us was 1,134
persons (including trainees and part-time employees and excluding staff gaining
work experience, cleaning and temporary staff). See also the notes to our
financial statements included in this prospectus.
Our employee-related expenses, including salaries and wages, pension
contributions and other employee benefits, amounted to EUR 74.0 million in 2003.
We provide various employee benefits, including a non-contributory pension
(supplemental to the statutory pension). Most of our employees are covered by
collective bargaining agreements negotiated with the union VER.DI.
36
REGULATION AND SUPERVISION OF L-BANK
IN THE FEDERAL REPUBLIC OF GERMANY
Introduction to the German Banking System
The German banking system comprises a variety of public sector and
private sector banks of two general types: universal banks and specialized
banks. We are a specialized state development bank (Forderbank) that is subject
to the same regulation, in particular the German Banking Act (Kreditwesengesetz
- - KWG), as all other German banks.
The German Banking Act and Regulation by the Federal Supervisory Authority for
Financial Services
On May 1, 2002, the three former separate supervisory authorities for
the financial sector, -- the Federal Banking Supervisory Office
(Bundesaufsichtsamt fur das Kreditwesen), the Federal Securities Supervisory
Office (Bundesaufsichtsamt fur den Wertpapierhandel) and the Federal Insurance
Supervisory Office (Bundesaufsichtsamt fur das Versicherungswesen) -- were
combined into a single comprehensive financial services supervisory authority,
the Federal Supervisory Authority for Financial Services (Bundesanstalt fur
Finanzdienstleistungsaufsicht, the "BaFin"). The BaFin supervises banks,
insurance companies and financial services institutions.
All banks in Germany, including us, are subject to comprehensive
governmental supervision and regulation on a consolidated basis by the BaFin in
accordance with the German Banking Act. The BaFin is authorized to issue
regulations and guidelines implementing the provisions of the German Banking Act
and other laws affecting German banks. Its main purpose is to protect the
soundness of the German banking system. The German Banking Act and the
regulations issued thereunder have been amended over time in order to keep them
in line with internationally accepted principles. In doing so, Germany has
implemented the recommendations on banking supervision issued by the Basle
Committee on Banking Supervision (the "Basle Committee") at the Bank for
International Settlements and transformed the relevant European Council
Directives into German law.
In April 2003, the Basle Committee on Banking Supervision issued its
third Consultative Paper for a New Basle Capital Accord ("Basle II") that will
replace the current Basle Capital Standards. On June 25, 2004, the Basle
Committee on Banking Supervision approved, and one day later the central bank
governors and the heads of bank supervisory authorities in the Group of Ten
(G10) countries endorsed, the publication of the International Convergence of
Capital Measurement and Capital Standards: a Revised Framework. The goal of the
Basle Committee is that implementation by the member states shall take place by
year-end 2006. Basle II focuses on three key elements, or pillars: (i) minimum
capital requirements, which enhance the measurement framework of Basle I, the
first pillar; (ii) supervisory review of bank's capital adequacy, the second
pillar; and (iii) market discipline through effective public disclosure to
provide for sound banking practices, the third pillar.
In addition to this capital regulation, Basle II has the goal to
increase substantially the risk sensitivity of the minimum capital requirements
by closely aligning banks' capital requirements with prevailing modern risk
management practices.
Under the German Banking Act, all German banking and financial services
institutions are required to have a license from the BaFin to carry on business.
The BaFin supervises the operations of all banks, including us, to ensure that
they conduct their business in accordance with the provisions of the German
Banking Act and other applicable German laws and regulations. Particular
emphasis is placed on
37
compliance with capital adequacy and liquidity requirements, lending limits and
prudential standards governing lending imposed by the German Banking Act and the
regulations promulgated thereunder.
Cooperation by the BaFin and the Bundesbank
The BaFin carries out its banking supervisory role in cooperation with
the Federal Central Bank (Deutsche Bundesbank, the "Bundesbank"), as required
under the German Banking Act. The BaFin has the sole authority to issue
administrative orders (Verwaltungsakte) and general regulations (Verordnungen)
binding on German banks. The BaFin must obtain the Bundesbank's consent before
it issues any general regulations in areas that require the Bundesbank's consent
under the German Banking Act, such as the regulations concerning capital
adequacy and liquidity requirements.
The Bundesbank is responsible for the ongoing monitoring of German
banks. This comprises in particular the analysis of submitted reports and
examinations for the purpose of determining capital adequacy and risk
management. The Bundesbank performs its monitoring functions primarily through
its nine regional offices (Hauptverwaltungen) which are responsible for
different states and the banks that have their corporate seat therein. We report
to, and are monitored by, the Hauptverwaltung for the State of
Baden-Wurttemberg, which is based in Stuttgart.
Capital Adequacy Requirements
The German Banking Act and the regulations promulgated thereunder
contain certain capital adequacy requirements.
Solvency Ratio
Under the German risk-based capital adequacy rules as set forth in the
so-called Principle I of the "Principles on the Own Funds and Liquidity of
Institutions" (Grundsatze uber die Eigenmittel und die Liquiditat der
Institute), each bank's ratio (the "Solvency Ratio") of Liable Capital (defined
below) to risk-weighted assets and certain off-balance sheet items (described
below) must equal at least 8% at the end of each business day.
Solvency Ratio = Liable Capital
--------------------------------------------------
Risk-weighted assets and off-balance sheet items
The above formula does not relate to a bank's market risk position and
to Tier III Capital, both of which are discussed below.
Liable Capital
As described below, at least half of Liable Capital must be Core
Capital. Pursuant to the German Banking Act and calculated on the basis of the
accounting rules of the German Commercial Code, for a bank such as us, "Liable
Capital" (the numerator of the Solvency Ratio) consists principally of:
(1) paid-in subscribed capital;
(2) capital reserves;
(3) earnings reserves which are disclosed in the bank's annual
balance sheet;
38
(4) net profits which are shown in audited interim financial
statements and which will not be used for distribution or the
payment of taxes;
(5) the fund for general bank risks (pursuant to Section 340g of the
German Commercial Code, a bank may create a reserve fund from its
after-tax retained earnings if advisable in its reasonable
commercial judgment in light of the special risks inherent in the
banking business);
(6) capital paid in by silent partners which meets certain conditions
set forth in the German Banking Act, including subordination to
all creditors and participation in the bank's losses;
(7) reserves for general banking risks (pursuant to Section 340f of
the German Commercial Code, a bank may record on its balance
sheet certain receivables and securities, which are neither
investment securities nor part of the trading portfolio, at a
lower value than that permitted for industrial and other
non-banking corporations if the use of a lower value is advisable
in its reasonable commercial judgment to safeguard against the
special risks inherent in the banking business), provided that
such reserves may not exceed 4% of the book value of such
receivables and securities;
(8) capital paid in consideration of profit participation rights
(Genussrechte) which meets certain conditions set forth in the
German Banking Act, including subordination to all creditors and
participation in the bank's losses;
(9) long-term subordinated debt (with a term of at least five years)
meeting certain conditions set forth in the German Banking Act,
including subordination to all non-subordinated creditors;
(10) certain revaluation reserves (banks may allocate amounts equaling
a certain percentage of the difference between the book value and
the actual value of certain assets to revaluation reserves; these
revaluation reserves may, in an amount up to 1.4% of the
risk-weighted assets and certain off-balance sheet items, be
counted as Liable Capital, if the Core Capital of the bank
amounts to at least 4.4% of such risk-weighted assets and
off-balance sheet items); and
(11) reserves pursuant to Section 6b of the German Income Tax Act
(Einkommensteuergesetz).
The German Banking Act also requires that balance sheet losses and
certain intangible assets (including goodwill), certain investments in banks or
financial services institutions and certain other items be deducted in computing
Liable Capital.
Core Capital is the portion of Liable Capital set forth in items (1)
through (6) above, less balance sheet losses, certain intangible assets
(including goodwill) and certain other items. Supplementary Capital is the
portion of Liable Capital referred to in items (7) through (11), less certain
deductions. In our case, Core Capital consists of (i) paid-in subscribed
capital, (ii) retained earnings reserves (including capital surplus) and (iii)
the fund for general bank risks pursuant to Section 340g of the German
Commercial Code.
In our case Supplementary Capital consists of (i) long-term
subordinated debt, (ii) profit participation capital and (iii) reserves for
general bank risks pursuant to Section 340f of the German Commercial Code. The
German Banking Act provides that the aggregate amount of Supplementary
39
Capital must not exceed the Core Capital. In addition, the sum of long-term
subordinated debt must not exceed 50% of the Core Capital. Core Capital reflects
the same concept as Tier I Capital and Supplementary Capital reflects a similar
concept as Tier II Capital (as such terms are used in the United States capital
adequacy rules).
Risk Weighted Assets and Off-Balance Sheet Items
To compute risk-weighted assets (the first part of the denominator of
the Solvency Ratio), the assets of a bank are assigned to six broad categories
(0%, 10%, 20%, 50%, 70% and 100%) of relative credit risk depending on the
debtor or on the type of instrument or collateral securing the asset. The
valuation basis of each asset, being its book value subject to certain
accounting adjustments, is multiplied by the percentage weight applicable to its
risk category to arrive at the risk-weighted value.
The valuation basis for computing risk-weighted off-balance sheet items
(the second part of the denominator of the Solvency Ratio) depends on the type
of the off-balance sheet item. The valuation basis (1) for swap transactions and
any credit support obligation assumed in connection therewith is the principal
amount or -- in absence of such principal amount -- the current market value of
the underlying asset, and (2) for forward or futures contracts and rights under
option agreements and any credit support obligation assumed in connection
therewith, the current market value of the right of the bank to obtain delivery
or of the obligation of the counterparty to accept delivery of the underlying
asset assuming actual performance of the contract. For all other off-balance
sheet items, the valuation basis is their book value subject to certain
accounting adjustments.
To compute risk-weighted off-balance sheet items (the second part of
the denominator of the Solvency Ratio), different rules apply depending on the
type of off-balance sheet items. The valuation basis of off-balance sheet items,
other than swap transactions, forward or futures contracts and rights under
option agreements, is adjusted according to their risk classification depending
on the type of instrument (20, 50 and 100 percent). Swap transactions, forward
or futures contracts, and rights under option agreements, along with any credit
support obligation assumed in connection therewith, are taken into account
according to the mark-to-market method. Under that method, the asset is taken
into account with the amount required to cover (replacement value) if the
counterparty defaults plus an additional amount for future increase of risk.
After such adjustment of the valuation basis, the off-balance sheet
items are risk-weighted in the same manner as on-balance sheet items and for
that purpose are assigned to the credit risk categories depending on the type of
the counterparty or the debtor and multiplied by the applicable percentage
weights.
Own Funds
The Solvency Ratio deals with the credit risks of a bank. The German
Banking Act also requires market risk positions of banks to be covered by
adequate capital. In that regard, two concepts are used by the German Banking
Act: (1) Own Funds (Eigenmittel) and (2) the distinction between trading
transactions which are allocated to a bank's trading book (Handelsbuch) (the
"Trading Book") and non-trading transactions which are allocated to a bank's
investment book (Anlagebuch) (the "Investment Book").
40
Own Funds consist of Liable Capital plus Tier III Capital. Tier III
Capital consists of:
(1) short-term subordinated debt (with a term of at least two years
but less than five years) that meets certain conditions set forth
in the German Banking Act, including subordination to all
non-subordinated creditors, and
(2) the net profits which would be realized if, at the end of a given
day:
(i) all positions in the Trading Book were settled,
(ii) all foreseeable expenses and distributions on capital were
deducted, and
(iii) all probable losses that would be incurred in the
Investment Book if the bank were liquidated were deducted.
The sum of Tier III Capital plus the portion of Supplementary Capital
that is not required to cover risk positions in the Investment Book (in order to
meet the Solvency Ratio requirement) and therefore is eligible to support market
risks must not exceed 250% of the portion of Core Capital that is not required
to cover risk positions in the Investment Book (in order to meet the Solvency
Ratio requirement) and therefore is eligible to support market risks.
Trading Book and Investment Book
The Trading Book of a bank is comprised of the following:
(1) securities, money market instruments, derivatives and marketable
obligations and participations (all "instruments") that are held
by the bank for its own account for resale or trading;
(2) instruments held and transactions entered into for the purpose of
hedging the market risk of the Trading Book and transactions to
refinance such hedging;
(3) transactions subject to the designation of the counterparty
(Aufgabegeschafte);
(4) receivables for fees, interest and dividends related to positions
in the Trading Book; and
(5) repurchase agreements, loans or similar transactions related to
positions in the Trading Book.
Banks must establish guidelines for the inclusion of transactions in
their Trading Book, which must be submitted to the BaFin and the Bundesbank. The
Investment Book of a bank consists of all transactions that are not contained in
the Trading Book as set forth above.
Covering Market Risk Positions
Market risk positions are foreign exchange positions, commodity
positions and positions allocated to the Trading Book. The sum of the amounts of
market risk positions and, under certain circumstances, separately computed
option positions, may not exceed, at the close of each business day, the
difference between the bank's Own Funds and an amount equal to 8% of the
risk-weighted assets and off-balance sheet items. Additionally, an overall ratio
of the bank's eligible capital (numerator) to the sum of (1) risk-weighted
assets and off-balance sheet items plus (2) market risk positions and certain
41
option positions, both multiplied by 12.5 (denominator), must be computed and
must also be equal to at least 8%. The eligible capital is composed of the
Liable Capital not used to cover other risks under Principle I and that portion
of the Tier III Capital that is used to cover market risk positions and options.
(The bank must also report to the BaFin for information purposes the ratio of
Tier III Capital that remains unused but constitutes part of Own Funds to the
above-mentioned denominator of the overall ratio). As a result, the amount of
market risk positions must be covered by Liable Capital or Tier III Capital,
whereas under the Solvency Ratio requirement, risk weighted assets and
off-balance sheet items must be covered by Liable Capital. Therefore, (1) Tier
III capital may only be used to cover market risk positions but not counterparty
risk related to assets or off-balance sheet items, and (2) Liable Capital not
used to cover counterparty risk related to assets and off-balance sheet items
may be used to cover market risk positions. Principle I does not permit Own
Funds that have already been used to cover a risk to cover other risks under
Principle I.
The risk-weighted values of such market risk positions and certain
option positions must be computed in accordance with rules set forth in
Principle I or, in the case of market risk positions, in accordance with the
bank's internal risk computation models which have been approved by the BaFin.
During the period covered by this prospectus we have always met the
risk-weighted capital adequacy rules of the German Banking Act.
Liquidity Requirements
The German Banking Act and the regulations issued by the BaFin and its
predecessors also contain liquidity requirements. According to Principle II,
banks must compute a liquidity factor at the end of every calendar month. The
liquidity factor is the quotient of liquid assets to payment obligations during
four time bands: (1) one day to one month; (2) more than one month to three
months; (3) more than three months to six months; and (4) more than six months
to twelve months. The liquidity factor for the one-month time band must not be
less than 1. The excess of liquid assets over payment obligations in one of the
other time bands may be counted as liquid assets for the succeeding time band.
The ratios between the respective liquid assets over the payment obligations in
the other three time bands are calculated for monitoring purposes only. The
liquidity factor and the monitoring ratios must be submitted at the end of each
calendar month to the Bundesbank, which passes the reports on to the BaFin.
At December 31, 2003 and at the end of every calendar month during the
period covered by this prospectus, we met the liquidity requirements of the
German Banking Act.
Limitation on Large Credits
Own Funds and the distinction between Trading Book and Investment Book
are also relevant for the limitations on large credits. The term "credit" is
defined to include all items on the asset side of the balance sheet, derivative
transactions and related guaranties and equivalent off-balance sheet positions.
The term includes equity investments. Large credits are credits to a single
borrower or a connected group of borrowers that equal or exceed 10% of the
Liable Capital or Own Funds depending on whether the credit is allocated to the
Investment Book or to the combined Investment Book and Trading Book. There is no
separate Trading Book lending limit. The term "borrower" includes certain
affiliates of the borrower. The limitations on large credits are applied on a
risk-weighted basis in a manner similar to the application of the risk-weighted
capital adequacy rules discussed above.
42
The German Banking Act as it applies to us establishes the following
lending limits:
(1) A bank's aggregate disbursed large Investment Book credits may
not exceed eight times the bank's Liable Capital. A large
Investment Book credit of a bank is defined as the sum total of
credits extended to any one borrower or connected group of
borrowers that are allocated to the Investment Book and that, in
the aggregate, are equal to or exceed 10% of the bank's Liable
Capital.
(2) A bank's aggregate disbursed large combined Investment
Book/Trading Book credits may not exceed eight times the bank's
Own Funds. A large combined Investment Book/Trading Book credit
of a bank is defined as the sum total of all credits extended to
any one borrower or connected group of borrowers (allocated to
the Investment Book or to the Trading Book) that, in the
aggregate, are equal to or exceed 10% of the bank's Own Funds.
(3) The aggregate amount of credits extended by a bank to one
borrower or connected group of borrowers that are allocated to
the Investment Book, i.e., a borrower's Investment Book credit
position, may not exceed 25% of the bank's Liable Capital (20% in
the case of a credit to the bank's unconsolidated parent,
subsidiary or sister company).
(4) The aggregate amount of credits extended by a bank to one
borrower or connected group of borrowers that are allocated to
the Investment Book or the Trading Book, i.e., the borrower's
aggregate credit position, may not exceed 25% of the bank's Own
Funds (20% in the case of a credit to the bank's unconsolidated
parent, subsidiary or sister company).
(5) In case total aggregate credits extended to one borrower or
connected group of borrowers that are allocated to the Trading
Book or the Investment Book, i.e., the borrower's aggregate
credit position (see (4) above), exceed (even with approval of
the BaFin) the 25% (or 20% in the case of a credit to the bank's
unconsolidated parent, subsidiary or sister company) of the
bank's Own Funds ceiling, credits extended to such borrower or
connected group of borrowers that are allocated to the Trading
Book shall not, in the aggregate, exceed five times the bank's
Own Funds that are not required to cover risk positions in the
Investment Book.
(6) There is an additional over-all lending limit to the effect that
the aggregate portions of the borrower's aggregate credit
position (credits that are allocated to the Trading Book or the
Investment Book) (see (4) above) that exceed 25% (or 20% in the
case of a credit to the bank's unconsolidated parent, subsidiary
or sister company) of the bank's Own Funds ceiling for more than
ten days shall, in the aggregate, not exceed six times the bank's
Own Funds that are not required to cover risk positions in the
Investment Book.
A bank must report its large credits to the Bundesbank, which forwards
the reports with its comments to the BaFin. With the approval of the BaFin, a
bank may exceed the eight times Liable Capital or Own Funds and the 25% (or 20%)
of Liable Capital or Own Funds ceilings referred to in paragraphs (1) to (4)
above, if the amount exceeding these ceilings is covered by Liable Capital and
Own Funds, respectively. The amounts of Liable Capital used to cover such excess
amount must be disregarded when computing the adequacy of Liable Capital under
the capital adequacy rules discussed above. If the 25% (or 20%) ceiling and the
eight times Liable Capital ceiling or Own Funds ceiling are exceeded, the larger
of both excess amounts must be covered by Liable Capital (in the cases of
paragraphs (1) and (3) above) and (in the cases of paragraphs (2), (4), (5) and
(6) above), Own Funds, respectively. A bank must notify the BaFin and the
Bundesbank without delay if it exceeds these ceilings. If a bank exceeds the
five times Own Funds ceiling referred to in paragraph (5) above or the six times
Own Funds
43
ceiling referred to in paragraph (6) above, it must report this fact to the
BaFin and the Bundesbank and must cover such excess amounts with Own Funds.
Limitations on Qualified Participations
The total nominal value (as opposed to the book value or price paid) of
a deposit-taking bank's Qualified Participations (as defined below) in an
enterprise (other than a bank, financial services institution, financial
enterprise, insurance company or bank service enterprise) may not exceed 15% of
the Liable Capital of such bank, and the aggregate nominal value of all such
Qualified Participations may not exceed 60% of such bank's Liable Capital. With
the approval of the BaFin, a bank may exceed the 15% and 60% limitation on
investments if it covers the Qualified Participations in excess of these limits
by Liable Capital. If both limitations are exceeded, the larger of both excess
amounts must be covered by Liable Capital. "Qualified Participation" is defined
in the German Banking Act as a (1) direct or indirect investment in at least 10%
of the capital or the voting rights of the target enterprise or (2) the ability
to exercise a significant influence over the management of the target
enterprise. An investment is indirect not only when it is made by one or more
subsidiaries but also when it is made by an enterprise with a "similar
relationship". All of the shares of an enterprise which the bank owns indirectly
through one or more subsidiaries are fully attributed to the bank.
Policies on Trading Activities
Pursuant to a 1995 release of the predecessor of the BaFin, German
banks must observe minimum requirements with respect to transactions relating to
money market activities, securities, foreign exchange, precious metals and
derivatives. The release stresses the responsibility of senior management for
the proper organization and monitoring of trading and sales activities, requires
that banks adopt written policies regarding such activities, imposes specific
requirements with respect to activities in new products and deals with the
qualifications and remuneration of trading and sales staff, record retention,
risk controlling and management and the internal organization of trading, sales,
settlement and accounting.
Reporting Requirements
In order to enable the BaFin and the Bundesbank to monitor compliance
with the German Banking Act and other applicable legal requirements and to
obtain information on the financial condition of the German banks, the BaFin and
the Bundesbank require the periodic filing of information.
Each bank must file with the BaFin or the Bundesbank, or both, among
other things, the following information:
(1) immediate notice of certain organizational changes, the extension
or increase of large credits, the acquisition or disposal of 10%
or more of the equity of another company or certain changes in
the amount of such equity investment, and the commencement or
termination of certain non-banking activities;
(2) monthly balance sheet and statistical information and annual
audited unconsolidated and consolidated financial statements;
(3) the acquisition or disposal of a Substantial Participation, or an
increase or decrease of a Substantial Participation which results
in the investment reaching or passing the threshold of 20%, 33%
or 50% of such voting rights or capital, as well as the fact that
the bank became or ceased to be a subsidiary of another
enterprise, if the bank has knowledge of such facts; and on an
annual basis, the names and addresses of holders of Substantial
Participations in
44
the bank and its foreign subsidiary banks, and the amount of such
investment if the bank has knowledge of such facts (the
definition of "Substantial Participation" is substantially
identical to the definition of Qualified Participation, as set
forth above);
(4) monthly compliance statements with regard to the capital adequacy
rules and the requirements on liquidity and statements on certain
foreign lending; and
(5) quarterly statements listing the borrowers to whom the reporting
bank has outstanding loans of EUR 1.5 million or more and certain
information about the amount and the type of the loan, including
syndicated loans exceeding this amount even if the reporting
bank's share does not reach EUR 1.5 million.
If several banks report to the Bundesbank loans of EUR 1.5 million or
more to the same borrower, the Bundesbank must inform the reporting banks of the
total reported indebtedness and of the type of such indebtedness of such
borrower and of the number of reporting lending banks.
Enforcement Powers
In order to secure compliance with the German Banking Act and the
regulations issued thereunder, the BaFin and the Bundesbank may require
information and documents from a bank and the BaFin may examine a bank without
having to give any particular reason. The BaFin may attend meetings of the
bank's supervisory board, its managing board and shareholders (and require such
meetings to be convened). In practical terms, because the BaFin has access to
our books and records in Germany, it is able to monitor our worldwide
activities.
To ensure that German banks, including us, fully comply with all
applicable legislation and reporting requirements, the BaFin requires that they
maintain an effective and independent internal auditing department of adequate
size and quality. A bank must also establish a written plan of organization,
which sets forth the responsibilities of its employees and operating procedures.
The internal auditing department must examine compliance with this plan and
these responsibilities and procedures.
If the BaFin discovers irregularities, it has a wide range of
enforcement powers. The BaFin can challenge the qualifications of the bank's
management. If the Own Funds of a bank are not adequate, or if the liquidity
requirements are not met and if the bank has failed to remedy the deficiency
within a period set by the BaFin, the BaFin may prohibit or restrict the
distribution of profits or the extension of credit.
If a bank is in danger of defaulting on its obligations to creditors,
the BaFin may take emergency measures to avert default. In this connection, it
may, inter alia: (1) issue instructions relating to the management of the bank,
(2) prohibit or restrict the acceptance of deposits and the extension of credit,
(3) prohibit or restrict the management of the bank from carrying on their
functions and (4) appoint supervisors. If these measures are inadequate, the
BaFin may revoke the bank's license and, if appropriate, order that the bank be
closed. To avoid the insolvency of a bank, the BaFin has the authority to
prohibit payments and disposals of assets, to suspend customer services, and to
prohibit the acceptance of payments other than the payment of debt owed to the
bank. In addition, violations of the German Banking Act may result in criminal
and administrative penalties.
Powers of the European Central Bank Affecting L-Bank's Conduct of Business
The European System of Central Banks ("ESCB") consists of the European
Central Bank ("ECB") and the national central banks of the 25 Member States of
the European Union (the "National
45
Central Banks"). The ECB and the National Central Banks of the 12 Member States
of the European Union that have transferred their monetary sovereignty to the
ECB and have introduced the Euro as their currency are referred to as the
"Eurosystem". The primary objective of the ESCB is to maintain price stability,
to define and implement the monetary policy of the European Community, to
conduct foreign exchange operations, hold and manage the official foreign
reserves of the Member States and promote the smooth operation of payment
systems. The ESCB is governed by the decision-making bodies of the ECB.
The National Central Banks of the Member States of the European Union
that are part of the Eurosystem retain the functions that are not transferred to
the Eurosystem. Thus, the Bundesbank continues to act as discount window for
banks for eligible securities whereby the discount rate is computed on the basis
of the so-called base rate. The base rate is adjusted on January 1 and July 1 of
each year by the number of percentage points by which the ECB's interest rate
for its most recent main refinancing operations has been raised or lowered since
the last change in the base rate.
The ECB requires credit institutions, including us, established in the
12 Member States of the European Union that are members of the Eurosystem, to
hold minimum reserves on accounts maintained with their respective National
Central Banks, which, in our case, are held by the Bundesbank. By issuance of
the regulation on minimum reserves, the ECB, as of January 1, 1999, set a 0%
reserve ratio on the following liability categories: "deposits with agreed
maturity over two years," "deposits redeemable with notice period over two
years," "repurchase agreements (repos)" and "debt securities issued with an
agreed maturity over two years." For all other deposits, debt securities issued
and money market instruments, the ECB set a 2% reserve ratio. The ECB may at any
time change the reserve ratios. Liabilities to other institutions subject to the
Eurosystem's minimum reserve system and liabilities to the ECB and the National
Central Banks are not included in the basis for minimum reserves. Furthermore
the ECB imposes statistical reporting obligations on credit institutions
resident in Member States of the Eurosystem to enable the ECB to fulfill the
ESCB's tasks.
Securities Trading--Regulation by the BaFin
The Securities Trading Act (Wertpapierhandelsgesetz) of 1995, as
amended (the "Securities Trading Act"), prohibits insider trading with respect
to securities admitted to trading or included in the over-the-counter market at
a German exchange or the exchange in another Member State of the European Union
or the European Economic Area. The Securities Trading Act also requires that the
issuer of securities admitted to trading on a German stock exchange publish
promptly any new fact relating to the issuer which is not publicly known if such
fact could have a material influence on the market price of such securities due
to its effects on the financial condition or the overall business performance of
the issuer.
The BaFin supervises securities trading and deals with irregularities
in the securities market. To enable the BaFin to carry out its securities
trading supervisory functions, the German banks and the other institutions that
are members of a German stock exchange are subject to comprehensive reporting
requirements with respect to all transactions in securities and derivatives that
are listed or traded on an exchange or other organized market in Germany or
another Member State of the European Union or a Member State of the European
Economic Area. The reporting obligation applies to transactions for a bank's own
account as well as for the account of its customers.
The Securities Trading Act also introduced so-called "Rules of Conduct"
for securities services enterprises, i.e., credit institutions and financial
services institutions engaged in the purchase and sale of securities or
derivatives for others or the intermediation of transactions in securities or
derivatives. In practice, the Rules of Conduct therefore apply principally to
all German banks. The BaFin has broad
46
powers to investigate securities services enterprises with a view to monitoring
compliance with the Rules of Conduct. The Securities Trading Act provides for an
annual examination by the BaFin of a bank's compliance with its obligations
under the Securities Trading Act; in addition, independent accountants are
required to prepare a report annually on a bank's compliance with the reporting
requirements under the Securities Trading Act.
Supervision by the State of Baden-Wurttemberg
Pursuant to the L-Bank Act and the L-Bank Statutes, we are subject to
supervision by the Ministry of Finance of Baden-Wurttemberg in consultation with
the ministry of Baden-Wurttemberg having jurisdiction over the particular matter
concerned. The ministries are entitled to request information, undertake audits,
send representatives to meetings of our supervisory board, request that such
meetings be called and rescind unlawful resolutions and other actions of our
supervisory board or board of management. Furthermore, those ministries may
order us to perform legally required actions and, if we do not comply with such
demand or order, the ministries may themselves take such action. These
supervisory powers do not include the right to exercise influence over business
decisions by our board of management or supervisory board.
In addition, we are subject to auditing by the State Audit Office
(Landesrechnungshof) of Baden-Wurttemberg.
Financial Statements and Audits
Our financial statements are prepared in accordance with the German
Commercial Code, the German Banking Act (Kreditwesengesetz - KWG), general
corporate law, the Bank Accounting Directive Law of 1990
(Bankenbilanzrichtlinie-Gesetz), and the Regulation on the Accounting Principles
applied to Credit Institutions and Financial Services Institutions (Verordnung
uber die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute)
issued by the Federal Minister of Justice (in conjunction with the Federal
Minister of Finance and the Federal Central Bank). The accounting principles set
forth in the above statutes and regulations are referred to herein as "German
GAAP."
Under German law, we must be audited annually by German independent
accountants (Wirtschaftsprufer) who are appointed annually by our supervisory
board. The BaFin must be informed of and may reject such appointment. The
independent accountants are required to prepare annually a long form audit
report (Prufungsbericht) on the financial statements prepared by our management,
and submit it to our supervisory board, our Guarantor, the BaFin and the Federal
Central Bank. This comprehensive audit report is in contrast to the much shorter
audit reports typically prepared for other German companies. The contents of the
report are prescribed in a regulation issued by the BaFin. In particular, the
auditor must review that the bank is in compliance with: (1) the regulatory
reporting requirements; (2) the large credit limitations; (3) the limitations on
extension of credit to related companies; (4) the requirements of the capital
adequacy and liquidity principles (described above) and (5) the regulations
concerning the prudent granting of credit. The audit report must also discuss in
detail certain large or important loans and review compliance with certain
provisions of the German Banking Act, match assets and liabilities bearing
interest at fixed rates according to maturity and assets and liabilities bearing
interest at floating rates according to interest periods, and explain the effect
of a change in interest rates on the unmatched portion of such assets and
liabilities, respectively. The auditor's opinion opines as to compliance with
German GAAP and all applicable legal requirements.
The audit reports of PwC for the years ended December 31, 2003, 2002
and 2001, dated March 29, 2004, April 8, 2003 and April 9, 2002, respectively,
each refer to a management report that has not been included to this prospectus.
The examinations of and the audit reports upon such management
47
reports are required under German auditing standards. Those examinations were
not made in accordance with Statement on Standards for Attestation Engagements
No. 10, "Management's Discussion and Analysis." PwC does not provide an opinion
on this information or on the financial statements included in this prospectus
in accordance with U.S. GAAP or U.S. attestation standards.
In addition, each year an independent accountant designated by the
BaFin must conduct an examination of any bank that acts as depositary of
customers' securities under the German Depositary Act (Depotgesetz). The
examination is made in accordance with the Depositary Act and concludes with an
opinion as to the proper execution of trading orders by such bank for its
customers and as to the safekeeping of securities for such customers.
Deposit Protection and Investor Compensation
In Germany, private sector commercial banks, credit institutions
organized under public law and credit cooperative institutions each have their
own system of deposit protection and investor compensation. According to the
German Act on Deposit Protection and Investor Compensation of 1998, as amended
("Deposit Protection Act", Einlagensicherungs- und Anlegerentschadigungsgesetz),
the association of the German credit institutions organized under public law
(Bundesverband Offentlicher Banken Deutschlands e.V., "VOB") established a
company under the name Entschadigungseinrichtung des VOB GmbH
("Entschadigungseinrichtung GmbH") to provide deposit protection and investor
compensation for customers of German credit institutions organized under public
law. We are a member of the Entschadigungseinrichtung GmbH.
A creditor of L-Bank has a direct claim against
Entschadigungseinrichtung GmbH if (i) the BaFin determines that we are unable to
repay deposits (as defined in the Deposit Protection Act) or to satisfy
obligations resulting from the securities businesses for reasons that are
directly connected to our financial situation, and that no prospects exist for
the repayment of the deposits or the satisfaction of the obligations and (ii)
the creditor is eligible for compensation. A direct claim against
Entschadigungseinrichtung GmbH is limited to 90% of the customer's deposits and
our obligations to the customer resulting from the securities businesses
respectively, and may not exceed in any case EUR 20,000.
The Entschadigungseinrichtung GmbH is funded through annual
contributions by its members in the amount of 0.008% of their liabilities to
non-bank customers as shown in their most recent balance sheet. In such
determination, certain liabilities may be excluded. Member institutions may be
required to make additional contributions in case the funds of the
Entschadigungseinrichtung GmbH fall below an amount that equals twice the amount
of the aggregate contributions of all member institution for the previous year.
Furthermore, we are a member of the Freiwilliger
Einlagensicherungsfonds des VOB, a voluntary deposit protection fund,
established by the VOB, that supplements the statutory protection of the Deposit
Protection Act. This deposit protection fund covers deposits and obligations to
customers. The compensation by this fund is not limited, but customers do not
have a claim against this fund.
The Debt Securities described herein are not covered by the funds
referred to above.
48
[MAP OF GERMANY AND BADEN-WURTTEMBERG]
49
THE STATE OF BADEN-WURTTEMBERG
GENERAL
Location, Area and Population
The Federal Republic of Germany was founded on May 24, 1949 when its
constitution, codified in the Grundgesetz (the "German Constitution"), took
effect. Baden-Wurttemberg is one of Germany's 16 states (Lander), together with
Bavaria (Bayern), Berlin, Brandenburg, Bremen, Hamburg, Hesse (Hessen), Lower
Saxony (Niedersachsen), Mecklenburg-Western Pomerania (Mecklenburg-Vorpommern),
North-Rhine Westphalia (Nordrhein-Westfalen), Rhineland-Palatinate
(Rheinland-Pfalz), Saarland, Saxony (Sachsen), Saxony-Anhalt (Sachsen-Anhalt),
Schleswig-Holstein and Thuringia (Thuringen).
The State of Baden-Wurttemberg
Baden-Wurttemberg is located in southwestern Germany. It is bordered on
the east by Bavaria, on the north by Hesse, on the west by the Alsace region of
France and Rhineland-Palatinate, and on the south by Switzerland. The largest
cities are Stuttgart, Mannheim, Karlsruhe, Freiburg and Heidelberg.
Baden-Wurttemberg encompasses an area of 13,803 square miles, or
approximately 10% of Germany's total area of 137,829 square miles.
Baden-Wurttemberg is the third-largest state of Germany by area, after Bavaria
and Lower Saxony.
At the beginning of 2003, Baden-Wurttemberg had 10.7 million
inhabitants, or 12.9% of Germany's total population of 82.5 million.
Baden-Wurttemberg is the third largest state of Germany by population, after the
states of North Rhine-Westphalia and Bavaria.
Politics and Foreign Relations
Many governmental powers have been allocated by the Constitution to the
federal government. The states have for instance legislative jurisdiction
regarding such areas as the educational system, cultural affairs and police
powers. The state enforces and administers not only state laws but also, subject
to supervision by federal authorities, most of the federal laws in Germany. The
administration of the courts on the lower level is the responsibility of the
states whereas the administration of the highest court is the responsibility of
the federal government. There is no separation between the state and the federal
judicial system as in the United States. Baden-Wurttemberg, like the other
states of Germany, has an elected parliament and an administration headed by a
Prime Minister (Ministerprasident) who is elected by the state parliament.
On March 25, 2001, elections for representatives to the parliament of
Baden-Wurttemberg were held. The parliament of Baden-Wurttemberg currently
consists of the following numbers of representatives of four political parties:
the Christian Democratic Union (CDU), 63 representatives; the Social Democratic
Party (SPD), 45 representatives; Alliance 90/the Greens, 10 representatives; and
the Free Democratic Party (FDP/DVP), 10 representatives; the CDU and FDP have
formed a government in coalition. The next elections will be held in the spring
of 2006.
Because foreign relations are reserved to the German federal government
under Article 32 of the German Constitution, Baden-Wurttemberg may not maintain
foreign relations with other countries without the consent of the German federal
government.
50
ECONOMY
General
Germany
The economy of Baden-Wurttemberg, as a state of Germany, must be
considered in the context of the German economy as a whole. Germany's economic
system has developed since 1945 into what has come to be called the soziale
Marktwirtschaft, generally understood to mean a socially-conscious market
economy, combining the free initiative of the individual with social principles.
The German Constitution guaranties freedom of private enterprise and private
property. The state mainly has an administrative function in the market economy,
setting the general framework of conditions within which market processes take
place. In Germany, there is almost no state intervention in price and wage
competition.
The German economy is one of the largest in the world. Compared with
its international rank as an industrialized nation, Germany is relatively poor
in raw material resources. It depends largely on imports for its raw material
needs. This foreign dependence is particularly significant in minerals such as
copper, bauxite, manganese, titanium, rock phosphate, tungsten and tin. Germany
currently imports nearly two-thirds of its energy requirements, including
virtually all of its oil and a significant portion of its natural gas, as well
as all of the enriched uranium needed for nuclear energy.
Exports and imports of goods and services contributing to the GDP (at
current prices) since 1999 have developed as follows:
Contribution of Exports and Imports of Goods and Services to GDP* in Germany
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in %)
Exports/GDP.......................................... 37.3 36.6 35.2 33.5 30.4
Imports/GDP.......................................... 32.7 31.4 31.9 31.9 29.6
- ----------------
* Date of computation of GDP: August 2004.
Source: Own calculations, based on: Federal Central Bank, Monthly Report,
November 2003 and November 2004, Table IX. 1.
Baden-Wurttemberg
Baden-Wurttemberg is one of the most highly industrialized states in
Germany and has one of the strongest economies of all the German states. In
terms of GDP and employment, approximately one-half of Baden-Wurttemberg's
economy is based on the activities of small and medium-sized commercial
enterprises, many of which are involved in manufacturing and focused on
technology, and the other half consists of large industry. Several well-known
companies are located in Baden-Wurttemberg, such as DaimlerChrysler AG, Porsche
AG, Robert Bosch GmbH, IBM Germany, Asea Brown Boveri Germany and
Hewlett-Packard Germany. This strong concentration of manufacturing activity
exposes the economy of Baden-Wurttemberg to a degree of cyclical pressure. In
addition to manufacturing enterprises, many universities and research
institutions also support the Baden-Wurttemberg economy.
The real growth rates of Baden-Wurttemberg's and Germany's GDP (at 1995
prices) since 1999 have developed as follows:
Real Growth Rates*
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
51
(in %)
Baden-Wurttemberg.................................... (0.2) 0.2 2.6 3.3 2.3
Germany.............................................. (0.1) 0.2 0.8 2.9 2.0
- ----------------
* Date of computation: August 2003/February 2004.
Source: State Statistical Office Baden-Wurttemberg and Federal Statistical
Office, data on economy and prices, available at
www.statistik.baden-wuerttemberg.de/VolkswPreise/ArbeitskreisVGR/
tab02.asp.
Gross Domestic Product
The following table shows the GDP of Baden-Wurttemberg in comparison to
the GDP of Germany for each of the years indicated:
Development of GDP*
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in billions of EUR)
At current prices for the year indicated:
Baden-Wurttemberg's GDP................................ 314.3 312.4 306.2 293.9 285.9
Germany's GDP.......................................... 2,129.2 2,110.4 2,073.7 2,030.0 1,978.6
At constant 1995 prices:
Baden-Wurttemberg's GDP................................ 291.2 291.8 291.1 283.7 274.8
Germany's GDP.......................................... 1,987.7 1,989.7 1,986.2 1,969.5 1,914.8
- ----------------
* Date of computation: August 2003/February 2004.
Source: State Statistical Office Baden-Wurttemberg and Federal Statistical
Office, data on economy and prices, available at
www.statistik.baden-wuerttemberg.de/VolkswPreise/ArbeitskreisVGR/
tab01.asp and .../tab02.asp.
The following table shows the per capita GDP of Baden-Wurttemberg in
comparison to the per capita GDP of Germany for each of the years indicated:
Per Capita GDP in Baden-Wurttemberg and Germany*
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands of EUR)
At current prices for the year indicated:
Baden-Wurttemberg................................ 29.4 29.4 29.0 28.0 27.4
Germany.......................................... 25.8 25.6 25.2 24.7 24.1
- ----------------
* Date of computation: August 2003/February 2004.
Source: State Statistical Office Baden-Wurttemberg and Federal Statistical
Office, data on economy and prices, available at
www.statistik.baden-wuerttemberg.de/VolkswPreise/ArbeitskreisVGR/
tab01.asp.
Industrial Structure
General Position of Industry
The largest share of the gross value added to the GDP of
Baden-Wurttemberg is attributable to services and other activities and to
manufacturing. Commerce and transportation, like agriculture and forestry, are
of less significance.
The following table shows the gross value added in current prices to
the GDP of Baden-Wurttemberg during each of the years indicated:
52
Gross Value Added in Baden-Wurttemberg*
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in %)
Attributable to:
Manufacturing........................................... 37.3 37.7 38.4 38.8 38.2
Agriculture and forestry................................ 0.8 0.8 0.9 1.0 1.0
Commerce and transportation............................. 15.8 15.8 15.8 15.2 14.7
Services and other activities........................... 46.1 45.7 44.9 45.0 46.1
- ----------------
* Date of computation: August 2003/February 2004.
Source: State Statistical Office Baden-Wurttemberg and own calculations, data
on economy and prices, available at www.statistik.baden-wuerttemberg.
de/VolkswPreise/Landesdaten/LRt2101.asp.
Branches of Industry
The branches of industry with the greatest significance in
Baden-Wurttemberg are the machinery, electrical engineering and automotive
industries. Of somewhat less importance are the chemical industry and the
textile and garment industries. Together with the metalworking industries, these
six branches employ about three quarters of the persons employed in industrial
enterprises in Baden-Wurttemberg.
From a geographic perspective, Baden-Wurttemberg's industrial structure
is evenly spread throughout its territory. In addition to the industrial center
in the central Neckar area around Stuttgart, there are a number of other
industrial centers, including Mannheim, Karlsruhe, Ulm, Heilbronn and
Villingen-Schwennigen. The primarily rural, less densely-populated areas of
Baden-Wurttemberg are also for the most part well supplied with industrial
enterprises. The small and medium-sized (SME) component of the economy of
Baden-Wurttemberg is particularly pronounced.
Tourism
Baden-Wurttemberg has numerous bathing resorts and is one of the most
significant states for spas in Germany. The city of Heidelberg, home of the
oldest university in Germany, and other well known tourist destinations, such as
the Black Forest and Lake Constance, attract many German and foreign tourists.
Baden-Wurttemberg is one of the states with the largest amount of tourist
traffic in Germany.
Prices and Wages
Prices in Germany generally have been stable. In 2003, prices increased
by 1.1%, and in 2002 by 1.4%. Since January 1, 1999, the European Central Bank
(ECB) has assumed the task of conducting the single monetary policy for the
Euro-zone, having a free hand to maintain price and currency stability in the
Euro-zone. Before 1999, monetary policy in Germany was conducted by the Deutsche
Bundesbank, which served as a model for the ECB in respect of its independence
from political influence.
The following table shows the development of prices in Germany during
each of the years indicated:
Cost-of-living Index for all Households
(changes from previous year in %, 1995 = 100)
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Total......................................................... 1.1 1.4 2.0 1.4 0.6
53
Food........................................................ (0.1) 1.0 5.1 (0.6) (1.1)
Other consumer goods without energy......................... 0.3 0.8 0.3 (0.3) 0.1
Energy*..................................................... 4.0 0.3 5.7 14.0 4.0
Services without rents...................................... 1.4 2.4 2.4 1.0 0.3
Rents....................................................... 1.2 1.4 1.2 1.2 1.1
- ----------------
* Electricity, gas and fuel.
Source: Federal Central Bank, Monthly Report October 2003 und October 2004,
Table IX. 7.
The following table shows information concerning wages and salaries in
industry and commerce (including construction) in Baden-Wurttemberg for each of
the years indicated:
Wages and Salaries in Industry and Commerce
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(monthly averages in EUR)
Industry:
Gross weekly earnings
Blue collar, male.................................. 628 614 606 595 581
Blue collar, female................................ 461 449 441 436 423
Industry and Commerce:
Gross monthly earnings
White collar, male................................. 3,889 3,775 3,688 3,593 3,562
White collar, female............................... 2,677 2,587 2,516 2,441 2,387
- ----------------
Source: State Statistical Office Baden-Wurttemberg, data on employment,
available at www.statistik.baden-wuerttemberg.de/ArbeitsmErwerb/
Landesdaten/LRt1901.asp and .../LRt1902.asp.
Employment and Labor
Unemployment rates reached high levels during the 1980s and 1990s,
exceeding 9% from 1994 on, compared to unemployment rates in the 1970s of
between 0.9% and 4.7%. These high unemployment rates were due to a variety of
reasons, including competition from inexpensive foreign products,
computerization of factories and offices, the reunification of Germany and the
effects of a world economic recession. The unemployment rate in
Baden-Wurttemberg remains consistently lower than that of Germany as a whole. In
October 2004 the unemployment rate in Baden-Wurttemberg was 6.1% (in thousands:
333), compared with the unemployment rate for Germany of 10.1% (in thousands:
4,207) in the same month. Since January 1, 2004, labor market statistics no
longer classify unemployed persons who take part in suitability statement
measures and training measures as unemployed. Using the same criteria, the
unemployment rates for the previous years would, therefore, have been lower by
approximately 0.2%.
Source: Federal Labor Office, data on employment, available at
www.pub.arbeitsamt.de/hst/services/statistik/detail/d.html,
Arbeitslose - nach ........Landern - Arbeitslosenquoten.
The following table shows the amount and rate of unemployment for each
of the years indicated:
Unemployment
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(annual average)
Baden-Wurttemberg Unemployment (in thousands)......... 337 295 264 281 325
Unemployment rate (in %)............................... 6.1 5.4 4.9 5.4 6.5
Germany ..............................................
Germany Unemployment rate (in %)....................... 10.5 9.8 9.4 9.6 10.5
54
- ----------------
Source: Federal Labor Office, data on employment, Jahresberichte, Arbeitsmarkt
2001, pp. 165 and 166 and Arbeitsmarkt 2003, pp. 131 and 134,
available at www.pub.arbeitsamt.de/hst/services/statistik/000100/html/
jahr/index.shtml.
Trade unions are few but large in Germany and in Baden-Wurttemberg. The
largest labor organization is the German Trade Union Federation (Deutscher
Gewerkschaftsbund), which, as of August 2004, was the umbrella organization for
eight individual trade unions. Trade unions enroll workers from an entire
industry, regardless of the kind of work a person does (the "one union, one
industry" principle). Generally, the employers of a given industry deal with
only one negotiating partner on the labor side. In comparison to other
countries, there are relatively few labor strikes in Germany because of certain
statutory provisions that regulate labor disputes. For example, any strike must
be approved by an affirmative vote of three quarters of a trade union's members.
Unions and employers, without government intervention, enter into
collective bargaining agreements called Tarifvertrage. The Tarifvertrage apply
in practice to all workers in the industry concerned, whether they are unionized
or not, if the employing firm is a member of the relevant association of
employers, as most are. The terms of Tarifvertrage are binding on both sides.
Deviations are permissible only if they benefit employees. Such deviations
regarding salaries and wages are fairly frequent.
Social Legislation and Services
Baden-Wurttemberg and its inhabitants participate in Germany's
comprehensive system of social legislation and services. This system includes
public health insurance, retirement and disability pensions, workmen's
compensation, unemployment insurance, child welfare programs, care of the
physically and mentally handicapped, allowances to orphans and single persons
with dependents, and general public assistance to persons in need.
The costs of the social insurance system are borne by the insured and
their employers through social contributions (Sozialbeitrage), by direct
contributions from federal, state and municipal governments, and by others. The
most important part of the social insurance system--retirement pensions, health
insurance, insurance for nursing care, and unemployment insurance--is funded
primarily by equal contributions from employers and employees.
FOREIGN TRADE AND FOREIGN EXCHANGE
Foreign Trade
The economy of Baden-Wurttemberg has a substantial connection to
foreign trade. Preliminary figures show that in 2003, goods with a value of
approximately EUR 661.6 billion were exported from Germany, approximately EUR
106.8 billion of which were exported from Baden-Wurttemberg. In comparison,
imports to Germany for 2003 have been preliminarily valued at EUR 535.4 billion,
approximately EUR 84.0 billion of which were imported to Baden-Wurttemberg.
According to these figures, exports from and imports to Baden-Wurttemberg in
2003 constituted 16.1% of the exports and 15.7% of the imports, respectively, of
Germany.
Source: http://www.destatis.de/basis/d/aussh/aushtab1.php.
The following table shows information concerning the foreign trade of
Baden-Wurttemberg for each of the years indicated:
55
Baden-Wurttemberg's Foreign Trade
2003* 2002 2001
-------- -------- --------
(in millions of EUR)
Total exports....................................................... 106,840 103,762 105,615
Machinery........................................................ 23,616 24,345 25,070
Automotive....................................................... 27,224 27,441 25,547
Electrical products.............................................. 10,131 10,800 11,499
Chemical products................................................ 10,736 9,376 12,468
Fine mechanical and optical products............................. 6,047 6,249 6,378
Ultimate destinations of exports
Industrialized western countries.................................... 83,359 80,492 82,218
USA.............................................................. 13,033 14,003 14,580
EU countries..................................................... 55,729 51,760 52,330
France........................................................ 10,997 10,885 10,910
Great Britain and Northern Ireland............................ 7,966 7,914 7,291
Italy......................................................... 8,548 7,818 7,786
Austria....................................................... 5,631 5,494 5,556
Switzerland...................................................... 6,285 6,459 6,750
Developing countries............................................. 10,349 11,186 11,919
Countries in the process of reform(1)............................ 13,100 12,013 11,411
Total imports....................................................... 83,997 77,928 81,808
Industrialized western countries................................. 64,768 60,144 63,502
EU countries..................................................... 43,825 39,499 42,137
Developing countries............................................. 7,578 7,899 8,646
Countries in the process of reform(1)............................ 11,644 9,878 9,643
- ----------------
Source: State Statistical Office Baden-Wurttemberg,
Aussenhandelsdatenbank, available at
http://www.statistik.baden-wuerttemberg.de/AHDB and
www.statistik.baden-wuerttemberg.de/HandelBeherb/Landesdaten/LRt1303.asp
and.../LRt1304.asp and .../LRt1306.asp and
www.statistik.baden-wuerttemberg.de/HandelBeherb/Landeskennzahlen.asp.
* Preliminary figures
(1) Consists of former Eastern Bloc countries and Asian countries with state-run
economies.
Foreign Exchange
Since January 1, 1999 Germany's currency is the Euro, the common
currency of the Member States of the European Union participating in the third
stage of the EU's Economic and Monetary Union. The Euro is freely convertible.
Currency and capital transactions may be made without approval or a license.
The Euro-zone follows a mutual monetary policy formulated by the
European Central Bank, or ECB. The ECB is a politically independent institution
whose main goal is to pursue price stability free of political influence.
The following table sets forth, for the periods indicated, average
exchange rates between the Euro and the U.S. dollar, the Swiss Franc and the
Japanese Yen:
Average Exchange Rate
3rd quarter 2nd quarter 1st quarter
Currency 2004 2004 2004 2003 2002 2001
- ------------------------- -------- -------- -------- -------- -------- --------
U.S. Dollar.............. 1.2220 1.2046 1.2497 1.1312 0.9456 0.8956
56
Swiss Franc.............. 1.5363 1.5374 1.5686 1.5212 1.4670 1.5105
Japanese Yen............. 134.38 132.20 133.97 130.97 118.06 108.68
- ----------------
Source: European Central Bank, Monthly Bulletin, November 2004, Table 8.2, page
S 68.
PUBLIC FINANCE
State Budget
The state government of Baden-Wurttemberg has its own budget
independent from the budget of the federal government of Germany. The state
budget is drafted for one year or two consecutive years (the current budget is
drafted for the years 2005 and 2006) and adopted by the Baden-Wurttemberg
parliament (Landtag). The fiscal year for the state budget is the calendar year.
In addition, the Minister of Finance presents in parliament a medium-term
financial plan based on planning figures collected from the various state
ministries. In general, a medium-term plan is drafted each year, and sets forth
for the current year and the four years to come the projected expenditures that
the Baden-Wurttemberg government believes will be necessary, how funds to meet
those expenditures are expected to be obtained, and how the projected budgetary
development will fit into the projected development of the economy as a whole.
The currently applicable plan runs from 2004 to 2008. The medium-term financial
plan assists the parliament in adopting the budget and provides the bases for
the next budget.
Generally, expenditures by Baden-Wurttemberg are permitted only if they
are explicitly provided for in the budget. In the event that the factual basis
for the budget calculation changes significantly during the fiscal year, the
Ministry of Finance must draft a supplementary budget, which also must be
adopted by parliament.
The appropriations in the budget are administered by Baden-Wurttemberg
ministries. This administration is under the unlimited supervision of the State
Accounting Office (Landesrechnungshof) of Baden-Wurttemberg, an agency organized
under public law. The State Accounting Office is strictly separated from the
state administration and is responsible only to parliament.
The following table provides a summary of Baden-Wurttemberg's revenues
and expenditures for each of the years indicated:
Revenues and Expenditures
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in billions of EUR)
Revenues (1)(2)............................... 31.6 31.4 30.5 31.9 30.6
Taxes......................................... 22.3 22.0 21.3 22.1 23.0
Other......................................... 9.3 9.4 9.2 9.9 7.6
Expenditures (1)(3)........................... 31.7 31.7 31.0 31.7 30.4
- ----------------
(1) Because, in 2000, Baden-Wurttemberg began to use a valuation method that
employed net borrowings, rather than gross borrowings as in previous years,
a comparison of the figures for 2000 to those for previous years has only
limited value. Repayment expenses that were included in Revenues totaled
EUR 3.5 billion in 2004, EUR 3.1 billion in 2003, EUR 3.5 billion in 2002,
EUR 2.6 billion in 2001 and EUR 3.5 billion in 2000.
(2) Includes revenues from borrowings and special financial transactions.
(3) Includes redemption of borrowings and special financial transactions.
Source: State Ministry of Finance, Department (Abteilung) 2, Team (Referat) 21.
For further information concerning the budget of Baden-Wurttemberg, see
"--Budget of the State of Baden-Wurttemberg."
57
Taxation
The system of apportionment of the tax revenues in Germany and its
states is governed by Articles 106, 106a and 107 of the German Constitution.
Article 106 allocates customs duties and specified special taxes to the
federal government and estate taxes, automobile taxes and other specified
transaction taxes to the states. Article 106 further provides that revenue
arising from personal income tax, corporate income tax and value added tax shall
belong jointly to Germany and the individual states (Gemeinschaftsteuern). The
revenue of municipalities consists principally of portions of personal income
tax, payments from the states, non-personal taxes, such as real estate
(Grundsteuer) and trade tax (Gewerbesteuer), and local tax on consumption and
expenditures (ortliche Verbrauchs- und Aufwandsteuern). Since January 1, 1996,
pursuant to Article 106a of the German Constitution, a certain amount of the
federal government's revenue has been allocated to public transportation in the
various states.
Accordingly, the tax revenues of Baden-Wurttemberg include taxes that
are due solely to Baden-Wurttemberg and Baden-Wurttemberg's share of the joint
federal and state taxes.
The following table sets forth the tax revenues of Baden-Wurttemberg
for each of the years indicated:
Tax Revenues
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(in millions of EUR)
Share of the Gemeinschaftsteuern and share 19,611
of trade tax............................... 19,387 18,669 19,342 20,369
Taxes exclusively allocated to the state...... 2,694 2,610 2,634 2,721 2,618
Total......................................... 22,305 21,997 21,304 22,063 22,987
- ----------------
Source: State Ministry of Finance, Department 5, Team 52.
The following table sets forth the projected tax receipts of
Baden-Wurttemberg for each of the years indicated:
Projected Tax Revenues
2008(1) 2007(1) 2006(1) 2005(1)
------- ------- ------- -------
(in millions of EUR)
Projected tax revenues (1).................... 25,100 24,060 22,960 21,880
- ----------------
(1) Tax Appraisal May 2004.
Source: State Ministry of Finance, Department 5, Team 52.
Revenue Equalization
While the German federal government and the individual German states
have separate budgets and different sources of revenue enabling them to carry
out their respective functions and duties, a system of revenue equalization
(Finanzausgleich) is intended to ensure that each state, irrespective of its own
revenues, is sufficiently funded to fulfill its constitutional functions. This
system of revenue equalization has both "horizontal" and "vertical" aspects.
58
So-called "horizontal" revenue equalization (Landerfinanzausgleich),
provided for in Article 107 of the German Constitution, is intended to effect an
appropriate financial equalization among financially weaker and stronger states.
The German Constitution requires the federal legislature to ensure by federal
law that states whose revenues are on the average greater than those of other
states are obligated to transfer part of their tax revenues to the financially
weaker states. Horizontal revenue equalization has the effect that the financial
condition of an individual state, and thus its credit standing, is for the most
part consistent with the average level of all states.
Since Baden-Wurttemberg has an above-average economy in comparison with
the other German states, it is considered a "stronger" state for the purpose of
revenue equalization. It is therefore obligated to make regular equalization
payments.
Articles 106, 106a and 107(1) of the German Constitution provide for
the allocation, adjustments and distribution of tax revenues between the federal
government and the states (so called "vertical" revenue equalization). In
addition, they provide for special support payments from the federal government
to individual states in order to enable such states to meet financial burdens
imposed by the federal government or to support financially weaker states.
Furthermore, pursuant to Article 107(2) of the German Constitution, the federal
statute implementing the "horizontal" revenue equalization may also provide for
special support payments by the federal government to financially weaker states
in order to provide supplemental coverage for their general financial needs.
The federal government and the individual states are jointly entitled
to the revenues from personal income tax, corporate income tax and value added
tax. Whereas the revenues from personal and corporate income tax are shared
equally by the federal government and the individual states, the revenues from
the value added tax are prorated from time to time subject to the financial
needs of the federal government and the several states.
In the event of an extreme budget emergency in any state, the
constitutional principle of federal solidarity requires the federal government
and the other state governments to support, by appropriate constitutional means
such as financial aid, such state in order to enable it to remedy its budget
emergency and to fulfill its constitutional functions.
German Unity Fund
Pursuant to the Act of June 25, 1990 implementing the treaty of May 18,
1990, between the Federal Republic of Germany and the German Democratic
Republic, which laid the foundation for German unification in October 1990, the
German legislature established the German Unity Fund (Fonds Deutsche Einheit) to
provide financial support to the new German states. The federal government is
liable for the repayment of principal of and interest on the borrowings of the
German Unity Fund. (Source: Bundesgesetzblatt (BGBl) II 1990, pp. 518 seq.)
Until December 31, 2004, for the payment of interest on such securities
and borrowings, the German Unity Fund receives contributions from the federal
budget in the amount of 10% of the total borrowings outstanding at the end of
the preceding year. The 11 original German states must reimburse the federal
government for 50% of such contributions. In addition, beginning in 1995, the 11
original German states were each obligated to provide for an additional payment
in the amount of EUR 1.1 billion annually to the central government. The five
new German states are exempt from any payments. Because of low market interest
rates, the total regular annual payments were reduced from 10% in 1998 to 6.8%
in 2004.
59
The following table sets forth the incurred and projected payments of
Baden-Wurttemberg with respect to the German Unity Fund for each of the years
indicated:
German Unity Fund Repayment Obligations
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(in millions of EUR)
Baden-Wurttemberg payments.......................... 344 379 389 461 500
Payments of all obligated German states............. 2,071 2,208 2,185 2,570 2,725
- ----------------
Source: State Ministry of Finance, Department 5, Team 52.
PUBLIC DEBT
Summary of Debt
At December 31, 2004, Baden-Wurttemberg's total outstanding direct debt
amounted to EUR 37.6 billion. In 2004, Baden-Wurttemberg spent 8.4% of its tax
revenues on interest payments.
The following table sets forth the total principal amount of direct
debt of Baden-Wurttemberg outstanding at December 31 of each of the years
indicated:
2004(3) 2003(3) 2002(3) 2001(3) 2000(2)
------- ------- ------- ------- -------
(in millions of EUR)
Direct debt(1).................................. 37,554 35,676 33,378 31,897 29,506
- ----------------
(1) Does not include public sector debt.
(2) Includes borrowing for the purchase of a silent participation in LBBW for an
amount of EUR 302.9 million.
(3) Includes borrowing for the purchases of silent participations in LBBW for a
total amount of EUR 1,312.6 million (EUR 302.9 million in 2000 and EUR
1,009.7 million in 2001).
Source: State Ministry of Finance, Department 2, Team 26.
In addition to its own direct debt obligations, at December 31, 2004,
Baden-Wurttemberg had liabilities to the public sector and others in the amount
of approximately EUR 1.6 billion. Furthermore, Baden-Wurttemberg guarantied the
payment of the principal of and interest on certain obligations of various
public and private enterprises.
The following table sets forth the aggregate principal amount of such
debt guarantied by Baden-Wurttemberg outstanding at December 31 of each of the
years indicated:
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(in millions of EUR)
Guarantied Debt(1)...................... 10,870 10,895 10,720 10,437 10,396
- ----------------
(1) Does not include obligations under existing support mechanisms, such as
maintenance obligation (Anstaltslast), explicit guaranty or guaranty
obligation (Gewahrtragerhaftung) with respect to liabilities of certain
state-owned entities organized under public law.
Source: State Ministry of Finance, Department 5, Team 54.
In the period from 1952 to 2003, the long-term average default rate for
the aggregate guarantied debt amounted to 0.91%. The aggregate guarantied debt
contains guarantied debt for economic development programs, the long-term
average default rate of which amounted to 7.33%.
60
For more detailed information regarding Baden-Wurttemberg's debt and
guaranties, see the tables in "Debt Record."
Debt Service
The following table sets forth the projected debt service requirements
for each of the years indicated in respect of all of the direct debt of
Baden-Wurttemberg outstanding at December 31 of each of the years indicated:
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
(in millions of EUR)
Debt Service Requirements............... 8,473 7,847 7,516 7,172 5,556
- ----------------
Source: State Ministry of Finance, Department 2, Team 26.
61
DEBT RECORD
Since its formation in 1952, Baden-Wurttemberg has always paid promptly
when due the full amount of the principal of and interest on its indebtedness.
Direct Debt of Baden-Wurttemberg as of December 31, 2003(1)
Principal
Interest rate Date of Amount
Debt (%) issue Maturity Outstanding
- ----------------------------------------------- -------------- --------- ----------- -----------------
(in millions of EUR)
Bonds and Government bonds
(1.) 6.20% of 1993............................ 6.20 1993 2013 255.6
(2.) 6.50% of 1993............................ 6.50 1993 2024 43.5
(3.) 6.50% of 1995............................ 6.50 1995 2005 255.6
(4.) 6.00% of 1996............................ 6.00 1996 2006 255.6
(5.) 6.50% of 1996............................ 6.50 1996 2006 255.6
(6.) 6.50% of 1996............................ 6.50 1996 2006 255.6
(7.) 6.25/7.75% of 1996....................... 6.25/7.75 1996 2026 127.8
(8.) 6.125% of 1996........................... 6.125 1996 2006 306.8
(9.) 6.00/7.625% of 1996...................... 6.00/7.625 1996 2027 153.4
(10.) 6.75% of 1996........................... 6.75 1996 2026 51.1
(11.) 5.75% of 1998........................... 5.75 1998 2028 511.3
(12.) 4.75% of 1998........................... 4.75 1998 2008 383.5
(13.) 5.50% of 2000........................... 5.50 2000 2008 50.0
(14.) 6.90% of 2000 (HKD500 million)(2)....... 6.90 2000 2005 75.0
(15.) 2.03% of 2001 (JPY3.0 billion)(3)....... 2.03 2001 2016 27.3
(16.) 3-M-GBPLibor-0.205% of 2002 3-M-GBP
(100 Mio.GBP)(4)............................ Libor-0.205% 2002 2005 161.3
(17.) 4.50% of 2002........................... 4.50 2002 2005 750.0
(18.) 4.75% of 2002........................... 4.75 2002 2008 500.0
(19.) 4.78% of 2002........................... 4.78 2002 2008 100.0
(20.) 2.75% of 2002 (600 Mio CHF)(5).......... 2.75 2002 2007 408.9
(21.) 3.25% of 2003........................... 3.25 2003 2008 1,500.0
(22.) 3.50% of 2003........................... 3.50 2003 2010 750.0
(23.) 3.38% of 2004............................ 3,38 2004 2009 1,250.0
Total bonds and government bonds............... 8,678.1(6)
Other borrowings(7)............................ 28,875.6(6)
-----------------
Baden-Wurttemberg's total direct
debt(1)..................................... 37,553.6(6)
=================
- ----------------
(1) Does not include liabilities to the public sector.
(2) This debt is carried at a value of EUR 75 million, which expresses a
notional Euro/Hong Kong dollar exchange rate of EUR 1.00 = HKD 6.66667.
(3) This debt is carried at a value of EUR 27.3 million, which expresses a
notional Euro/Japanese yen exchange rate of EUR 1.00 = JPY109.89011.
(4) This debt is carried at a value of EUR 161.3 million, which expresses a
notional Euro/pound Sterling exchange rate of EUR 1.00 = GBP0.61996.
(5) This debt is carried at a value of EUR 408.9 million, which expresses a
notional Euro/Swiss Francs exchange rate of EUR 1.00 = CHF1.46735.
(6) The total shown here is the rounded exact amount.
(7) Medium- and long-term loans evidenced by promissory notes placed with
investors (Schuldscheindarlehen) and credit line agreements with a
remaining term of up to approximately 35 years (2038). The following table
presents a maturity break down of these borrowings:
62
Outstanding
Principal
Maturity Amount
-------------------- ------------------
(in millions of
EUR)
2005............... 3,836.2
2006............... 2,834.3
2007............... 4,030.1
2008............... 2,455.8
2009 1,704.0
>2009.............. 14,015.2
Total.............. 28,875.6
========
Source: State Ministry of Finance, Department 2, Team 26.
Internal Guarantied Debt as of December 31, 2004, 2003, 2002 and 2001
2004 2003 2002 2001
-------- -------- -------- --------
(in millions
of EUR)
1. Suretyships(1)
(a) Economic development........................ 50.3 50.3 42.4 46.6
(b) Housing..................................... 204.1 204.1 204.1 204.1
(c) Public Enterprises.......................... 10,117.6 10,143.2 9,990.0 9,705.4
(d) Charitable and educational institutions and
other purposes.............................. 10.9 10.9 10.9 10.9
2. Guaranties(2) and other credit support
(a) Economic development........................ 10.2 10.2 15.3 15.3
(b) Contingent liabilities under the Nuclear
Energy Law (Atomgesetz)..................... 52.3 52.4 52.3 50.3
(c) Other....................................... 6.1 6.1 6.1 6.1
3. Suretyships for Sureties(3) and Guaranties for
Guarantors(4) for the benefit of
Burgschaftsbank Baden-Wurttemberg GmbH 418.1 418.1 398.4 398.4
Total(5)............................................ 10,869.6 10,895.3 10,719.5 10,437.1
== ======== ======== ======== ========
- ----------------
(1) Surety (Burgschaft) by the State for the performance of the obligations of
another (Administrative Rule No. 1 to Section 39 of the Budgeting
Principles Act of Baden-Wurttemberg (Landeshaushaltsordnung) in connection
with Sections 765 et seq. of the German Civil Code (Burgerliches Gesetzbuch
-- BGB)).
(2) Agreements, independent of the underlying agreement, by which the state
secures a monetary interest of the recipient of the guaranty by agreeing to
assume the responsibility for the occurrence of a specific event, in
particular to assume, in whole or in part, the risk of a future contingent
loss (Administration Rule No. 2 to Section 39 of the Budgeting Principles
Act of Baden-Wurttemberg).
(3) A suretyship for a surety (Ruckburgschaft) is a suretyship within the
meaning of Sections 765 et seq. BGB that is given by the State in favor of
a surety by which the State promises to reimburse the surety, in whole or
in part, for payments made by the surety under his suretyship.
(4) A guaranty for a guarantor (Ruckgarantie) is a guaranty, being an agreement
independent of the underlying agreement, that is given by the State in
favor of a guarantor by which the State promises to reimburse the
guarantor, in whole or in part, for payments made by the guarantor under
his guaranty.
(5) In addition to the contingent liabilities arising from Burgschaften,
Garantien, and other warranties shown in the table above, Baden-Wurttemberg
is currently liable under existing support mechanisms, such as maintenance
obligation (Anstaltslast), explicit guaranty or guaranty obligation
(Gewahrtragerhaftung) with respect to liabilities of certain state-owned
entities organized under public law.
Source: State Ministry of Finance Baden-Wurttemberg, Department 5, Team 54.
63
BUDGET OF THE STATE OF BADEN-WURTTEMBERG
The following table sets forth the revenues and expenditures of
Baden-Wurttemberg for the years indicated.
Revenues and Expenditures for the fiscal years ended December 31, 2004,
2003, 2002, and 2001
Year ended Year ended Year ended Year ended
December December 31, December December
31, 2004 Change(1) 2003 Change(1) 31, 2002 Change(1) 31, 2001
------------ --------- ------------- --------- ------------- --------- -----------
(in billions (in %) (in billions (in %) (in billions (in %) (in billions
of EUR) of EUR) of EUR) of EUR)
I. Revenue
1. Taxes 22.3 1.4 22.0 3.3 21.3 (3.4) 22.1
2. Net borrowing(2) 2.0 0.0 2.0 9.4 1.9 (17.4) 2.3
3. Miscellaneous revenues 7.2 (2.2) 7.4 1.0 7.3 (3.0) 7.6
4. Total 31.6 0.5 31.4 3.1 30.5 (4.3) 31.9
------------ --------- ------------- --------- ------------- --------- -----------
II. Expenditures
1. Public servants 13.1 2.1 12.8 0.5 12.7 3.5 12.3
2. Investments(3) 2.6 (10.8) 2.9 (5.3) 3.1 (25.1) 4.1
3. Interest payments 1.9 3.2 1.8 8.0 1.7 4.8 1.6
4. Principal payments 0.1 30.9 0.1 2.0 0.1 68.9 0.0
5. Payments for horizontal
revenue equalization(4) 2.1 14.2 1.9 2.6 1.8 (21.3) 2.3
6. Miscellaneous expenditures 11.5 (6.2) 12.3 5.7 11.6 2.7 11.3
7. Total 31.7 (0.1) 31.7 2.4 31.0 (2.2) 31.7
III. Adjusted total expenditures(5) 31.3 0.7 31.0 0.9 30.8 (2.5) 31.6
------------ --------- ------------- --------- ------------- --------- -----------
- ----------------
(1) Percentage changes are calculated on the basis of unrounded figures.
(2) In the capital markets. Net borrowings include borrowings to finance the
purchases of silent participations in LBBW for an amount of EUR 1,009.7
million in 2001.
(3) Investments include the purchases of silent participations in LBBW for an
amount of EUR 1,009.7 million in 2001.
(4) Actual payments, not payment obligations, for the year indicated.
(5) Formal budget volume minus retirement of debt in the capital markets and
special financing procedures.
Source: State Ministry of Finance, Department 2, Team 21.
Projected Total Indebtedness
The following table sets forth projected total indebtedness of
Baden-Wurttemberg as formulated in the State's most recent medium term plan
drafted in 2004:
2005 2006 2007 2008
------ ------ ------ ------
(in millions of EUR)
Projected total indebtedness incurred....................... 1,990 1,990 1,7 1,500
- ----------------
Source: State Ministry of Finance, Department 2, Team 21.
64
DESCRIPTION OF THE DEBT SECURITIES
The following is a brief summary of the terms and conditions of the
Debt Securities to be issued by L-Bank in distinct series from time to time, and
an agency agreement dated March 22, 2005, among L-Bank, Deutsche Bank
Aktiengesellschaft and Deutsche Bank Trust Company Americas, pursuant to which
the Debt Securities will be issued (the "Agency Agreement"). Copies of the
Agency Agreement and the forms of the Debt Securities are filed as exhibits to
the Registration Statement of which this prospectus is a part. This summary does
not purport to be complete and is qualified in its entirety by reference to such
exhibits. The particular terms of each issue of Debt Securities will be
described in the prospectus supplement relating to such Debt Securities. Matters
presented in this summary may be varied if so specified in a prospectus
supplement.
General
The prospectus supplement that relates to your Debt Securities will
specify the following terms:
o the title of the Debt Securities;
o whether the Debt Securities will be Senior Debt Securities or
Subordinated Debt Securities;
o the price or prices at which we will issue the Debt Securities;
o the aggregate principal amount, and any limitation of that
amount, of the Debt Securities;
o the currency in which the Debt Securities will be denominated and
the denominations in which we may issue the Debt Securities;
o the maturity date or dates of the Debt Securities, on which we
must repay principal;
o the currency or currencies and in which we may pay principal and
interest;
o the interest rate, if any, which the Debt Securities will bear
and, if variable, the method by which the interest rate will be
determined;
o the date from which interest will accrue, and the dates on which
we must pay interest, and the record dates for payment of
interest;
o whether any amount payable on the Debt Securities will be
determined based on an index, price or formula, and how any such
amount will be determined;
o where and how we will pay principal and interest;
o whether and in what circumstances the Debt Securities may be
redeemed before maturity;
o whether the Debt Securities may be issued in fully registered
form, in bearer form with interest coupons, or both and any
restrictions on the exchange of one form for the other;
o in the case of bearer Debt Securities, any applicable United
States tax restrictions;
65
o whether any part or all of the Debt Securities will be in the
form of a global security and the circumstances in which a global
security is exchangeable for certificated (physical) Debt
Securities; and
o any other terms of the Debt Securities.
If applicable, the prospectus supplement that relates to your Debt
Securities will describe whether and in what circumstances they will be
exchangeable for other Debt Securities. The prospectus supplement that relates
to your Debt Securities will also describe any special United States federal
income tax or other considerations applicable to your Debt Securities.
There will be a registrar and principal paying agent or a principal
paying agent, as applicable, generally referred to as "Agents", for us in
connection with each series of Debt Securities. The duties of the Agents are
governed by the Agency Agreement and the particular terms of each issue of Debt
Securities. The Agents may resign from their office and we may replace any
Agent, which is our agent. The Agents are not trustees for the holders of Debt
Securities, nor do they have trustees' responsibilities or duties to act for
them. So long as no conflict or interest arises, the Agents may engage or be
interested in any financial or other transaction with us.
The Debt Securities will not be insured by the FDIC (Federal Deposit
Insurance Corporation).
Rank of Securities
The applicable Pricing Supplement will specify whether the Debt
Securities will be Senior Debt Securities or Subordinated Debt Securities.
Senior Debt Securities
The Senior Debt Securities will constitute our unsecured and
unsubordinated obligations, and will rank pari passu in priority of payment and
in all other respects without any preference among themselves (whether by reason
of priority of date of issue or otherwise) and pari passu with all our other
unsecured and unsubordinated obligations that have not been accorded by law
preferential rights.
Subordinated Debt Securities
The Subordinated Debt Securities will constitute our unsecured
obligations, and will rank pari passu in priority of payment and in all other
respects without any preference among themselves (whether by reason of priority
of date of issue or otherwise) and pari passu with all our other unsecured
subordinated obligations that have not been accorded by law preferential rights.
The Subordinated Debt Securities will be subordinate and junior in right of
payment, in the events and to the extent and in the manner provided in the
Subordinated Debt Security, to all our other obligations except those which by
their terms rank pari passu with or junior to the Subordinated Debt Securities.
Subordination. Our obligations to pay the principal amount of the
Subordinated Debt Securities will be our subordinated obligations, which means
that, in the event of insolvency proceedings over our assets or our liquidation,
our obligations under the Subordinated Debt Securities will be subordinated to
the claims of all our unsubordinated creditors so that in any such event no
amounts will be payable under the Subordinated Debt Securities until the claims
of all our unsubordinated creditors have been satisfied in full.
66
Pursuant to a Baden-Wurttemberg statute adopted in accordance with
German federal law, bankruptcy or insolvency proceedings cannot be instituted by
or against us. In the case of a change in our ownership or liquidation or an
amendment to the L-Bank Act, our obligation to pay liabilities incurred prior to
such event, including our obligations to the holders of the Subordinated Debt
Securities, would continue to be supported by Baden-Wurttemberg's Guaranty
Obligation. See "L-Bank--General--Responsibility of Baden-Wurttemberg."
We intend that the proceeds of the Subordinated Debt Securities of any
series qualify as Supplementary Capital under German capital adequacy rules
implementing pertinent EU capital adequacy regulations described above in
"L-Bank--Regulation and Supervision of L-Bank in Germany--Capital Adequacy
Requirements." Certain provisions in the Subordinated Debt Securities relate to
such capital treatment as set forth in the German Banking Act. Such provisions
include, without limitation:
(i) the subordination in right of payment under the Subordinated
Debt Securities described above in "Subordination";
(ii) the requirement that Subordinated Debt has been made
available to us for a period of at least 5 years;
(iii) a prohibition of any amendment to the Subordinated Debt
Securities to shorten the term thereof, to shorten any applicable
notice period or to change, modify or restrict the subordination
provisions thereof, in each case irrespective of any consent of the
holders thereof;
(iv) a waiver by the holders of the Subordinated Debt Securities
of any and all rights they may have to set off claims under the
Subordinated Debt Securities against any claims they may have against
us;
(v) a reference to German law that may require that, in the event
that we redeem or repay the Subordinated Debt Securities other than in
accordance with the terms provided therein, the holders of such
Subordinated Debt Securities, notwithstanding any agreements to the
contrary, pay to us any amounts received by them from us or any Agent
in such redemption or repayment, unless, at the time of such
redemption or repayment, we shall have replaced the Liable Capital
created by such Subordinated Debt Securities with capital of equal or
higher status under the capital adequacy rules applicable to us or the
German Federal Supervisory Authority for Financial Services
(Bundesanstalt fur Finanzdienstleistungsaufsicht) has consented to
such redemption or repurchase;
(vi) except to the extent permitted by applicable law, an express
prohibition on us, directly or indirectly, acquiring for our own
account any of the Subordinated Debt Securities, financing the
acquisition for the account of any other person of any of the
Subordinated Debt Securities or accepting a lien, security interest or
other encumbrance on any of the Subordinated Debt Securities to secure
any obligation owed to us; and
(vii) except to the extent permitted without impairing the
qualification of the proceeds of the initial sale of the Subordinated
Debt Securities as our Tier 2 Capital pursuant to German capital
adequacy law and regulations, an express prohibition on the direct or
indirect provision by us or any third party of security for our
obligations under Subordinated Debt Securities.
67
Taxes
Unless otherwise specified in the applicable prospectus supplement, all
payments by us in respect of the Debt Securities shall be made without deduction
or withholding of taxes or other duties, unless such deduction or withholding is
required by law. In the event of such deduction or withholding, we will not be
required to pay any additional amounts in respect of the Debt Securities.
No Termination for Default
Unless otherwise specified in the applicable prospectus supplement, the
Debt Securities will not provide for any defaults or events of defaults
entitling the holders thereof to demand immediate redemption of the Debt
Securities.
Clearing and Settlement
Provisions relating to the clearing and settlement of the Debt
Securities will be described in the applicable prospectus supplement.
Substitution of L-Bank
We may at any time substitute for us any other company as principal
debtor in respect of the Debt Securities. Any such substitution will not require
the consent of holders of the Debt Securities, but we will be required to
guaranty the obligations of the substitute obligor under the Debt Securities. No
substitution may occur if such substitution would result in the loss for holders
of Debt Securities of the benefit of the guaranty obligation, the maintenance
obligation and the explicit guaranty of Baden Wurttemberg, and unless the
substitute obligor is in a position to fulfill all payment obligations under the
Debt Securities without being required to withhold tax at source in an amount
which exceeds at the time of effectiveness of such substitution the relevant
amounts levied by withholding or deduction in the place of our domicile or tax
residence.
It is possible that a substitution of another company as principal
debtor in respect of the Debt Securities will result in the recognition of gain
or loss for United States federal income tax or German tax purposes by the
holders of the Debt Securities of that series and possibly other adverse tax
consequences to those holders. Neither the issuer nor the substitute obligor
will be required to indemnify the holders of Debt Securities against any tax
imposed on a holder of Debt Securities in respect of such substitution. Holders
should consult their own tax advisors regarding the tax consequences of such a
substitution. See "--Taxation--Federal Republic of Germany Taxation" and
"--Taxation--United States Federal Income Taxation."
Additional Debt Securities
We reserve the right, from time to time without the consent of the Debt
Securities holders of the Debt Securities, to issue additional Debt Securities,
on terms identical in all respects to those set forth in the terms and
conditions of the Debt Securities (except as to the date from which interest
shall accrue), so that such additional Debt Securities shall be consolidated
with, form a single issue with and increase the aggregate principal amount of,
the Debt Securities. The term "Debt Securities" shall, in the event of such
increase, also include such additional issued Debt Securities.
68
Governing Law; Jurisdiction
Governing law. The Agency Agreement is and the Debt Securities as well
as our rights and duties and those of the holders of the Debt Securities will be
governed by and will be construed in accordance with the laws of the Federal
Republic of Germany.
Jurisdiction. The courts in Frankfurt am Main, Germany have
jurisdiction for any action or other legal proceedings ("Proceedings") arising
out of or in connection with the Notes. The jurisdiction of such courts is
exclusive according to Section 38 of the German Code of Civil Procedure
(Zivilprozessordnung) for proceedings solely involving merchants (Kaufleute),
legal persons under public law (juristische Personen des offentlichen Rechts),
special funds under public law (offentlich-rechtliche Sondervermogen) or persons
not subject to the general jurisdiction of the courts of Germany (Personen ohne
allgemeinen Gerichtsstand), otherwise it is nonexclusive.
69
CURRENCY CONVERSION RATES
The following table sets forth, for the periods indicated, certain
information concerning the exchange rates between Euros and U.S. dollars based
on the noon buying rates in The City of New York for cable transfers in Euros,
as certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rates" and each a "Noon Buying Rate"):
Period End(1) Average(1)(2)
----------------- -----------------
($ per EUR 1.00)
2001...................... 0.8901 0.8952
2002...................... 1.0485 0.9454
2003...................... 1.2597 1.1315
2004...................... 1.3538 1.2438
2005 (through March 18)... 1.3311 1.3211
- ----------------
(1) The Noon Buying Rates at each period end and with respect to the average
for each period differed from the exchange rates used in the preparation of
the our financial statements. Source:
http://www.federalreserve.gov/releases/g5a/,
http://www.federalreserve.gov/releases/G5/ and
http://www.federalreserve.gov/releases/h10/Hist/dat00_eu.txt.
(2) The average of the Noon Buying Rates on the last business day of each month
during the relevant period.
Monthly Average Exchange Rates
Euro to U.S. Dollar (1)
2004 January........................ 1.2638
February....................... 1.2640
March.......................... 1.2261
April.......................... 1.1989
May............................ 1.2000
June........................... 1.2146
July........................... 1.2266
August......................... 1.2191
September...................... 1.2224
October........................ 1.2507
November....................... 1.2997
December....................... 1.3406
2005 January........................ 1.3123
February....................... 1.3013
- ----------------
(1) Source: Federal Reserve Bank of New York, Federal Reserve Statistical
Release, Foreign Exchange Rates (monthly),
http://www.federalreserve.gov/releases/G5/
On January 1, 1999, Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain (the
"participating states") commenced a new stage of economic and monetary union and
introduced a single currency, the Euro, in substitution for their prior
currencies. Greece adopted the Euro as its legal currency effective January 1,
2001. Bills and coins in Euros were circulated for the first time on January 1,
2002. On March 18, 2005, the Noon Buying Rate between the Euro and U.S. dollar
was EUR 1.00 = U.S.$ 1.3311.
The conversion rates between the former currencies of each
participating state and the Euro were fixed irrevocably by the Council of the
European Union on December 31, 1998. The prior currency of Germany, the Deutsche
Mark or DM, had a fixed value relative to the Euro of EUR 1.00 = DM 1.95583.
Information for periods prior to January 1, 1999 contained in certain sections
of this Offering Circular was originally prepared in Deutsche Mark. In these
sections, the Euro amounts for these periods have been calculated on the basis
of the official fixed conversion rate of EUR 1.00 = DM 1.95583. The use of
70
this conversion rate for periods prior to January 1, 1999 does not take into
account the value of the Deutsche Mark before January 1, 1999, which may have
been different than on that date.
No representation is made that the Deutsche Mark, Euro or U.S. dollar
amounts referred to herein could have been or could be converted into Deutsche
Mark, Euro or U.S. dollars, as the case may be, at any particular rate.
There are, except in limited embargo circumstances, no legal
restrictions in the Federal Republic of Germany on international capital
movements and foreign exchange transactions. However, for statistical purposes
only, every individual or corporation residing in the Federal Republic of
Germany must report to the Federal Central Bank (Deutsche Bundesbank), subject
to a number of exceptions, any payment received from or made to an individual or
a corporation resident outside of the Federal Republic of Germany if such
payment exceeds EUR 12,500 (or the equivalent in a foreign currency).
71
TAXATION
UNITED STATES FEDERAL INCOME TAXATION
The following summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of Debt Securities to
U.S. Holders (as defined below) is based upon U.S. laws (including the Internal
Revenue Code of 1986, as amended (the "Code")), regulations, rulings, judicial
decisions and administrative pronouncements, currently in effect, all of which
are subject to change or changes in interpretation, possibly on a retroactive
basis. It deals only with Debt Securities that are purchased at their original
issue price (as defined below) and held as capital assets and does not purport
to deal with persons in special tax situations, such as financial institutions,
insurance companies, regulated investment companies, dealers in securities or
currencies, tax-exempt entities, persons holding Debt Securities as a straddle,
hedging or conversion transaction, persons owning (directly, indirectly or by
attribution) 10% or more of our outstanding share capital or voting stock,
persons whose functional currency is not the U.S. dollar or holders other than
original purchasers.
Prospective purchasers of Debt Securities should consult the relevant
prospectus supplement for any additional or modified disclosure of tax
consequences that may be relevant to that particular issue of Debt Securities
and are urged to consult their own tax advisors in determining the United
States, German and any other tax consequences to them of the purchase, ownership
and disposition of Debt Securities.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Debt Security that is for United States federal income tax purposes (i) a
citizen or individual resident of the United States, (ii) a corporation (or
other entity taxable as a corporation for U.S. federal income tax purposes),
created or organized in or under the laws of the United States, any state
thereof or the District of Columbia, (iii) an estate whose income is subject to
United States federal income taxation regardless of its source or (iv) a trust,
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. If a partnership
holds Debt Securities, the tax treatment of a partner generally will depend upon
the status of the partner and the activities of the partnership. A partner in a
partnership that holds Debt Securities is urged to consult its own tax advisor
regarding the specific tax consequences of the purchase, ownership and
disposition of the Debt Securities.
For purposes of this summary, a "Foreign Currency Debt Security" means
a Debt Security on which all payments which a U.S. Holder is entitled to receive
are denominated in or determined by reference to the value of a single Foreign
Currency, as defined below.
Debt Securities Denominated in U.S. dollars
Payments of Interest. Payments of qualified stated interest (as defined
below) on a Debt Security generally will be taxable to a U.S. Holder as ordinary
interest income at the time such payments are accrued or are received in
accordance with the U.S. Holder's regular method of tax accounting.
The interest income received by a U.S. Holder generally will be income
from sources outside the United States, and with certain exceptions, will be
treated separately, together with other items of "passive" income, or in certain
cases, "financial services" income, for purposes of calculating any foreign tax
credit allowable under U.S. federal income tax laws. Under recently enacted
legislation, for taxable years beginning after December 31, 2006, interest
income generally will constitute "passive category" income or, in the case of
certain U.S. Holders, "general category" income, for foreign tax credit
purposes.
72
Original Issue Discount. The following summary is a general discussion
of the U.S. federal income tax consequences to U.S. Holders of the purchase,
ownership and disposition of Debt Securities issued with original issue discount
("Discount Debt Securities") (other than Short-Term Debt Securites, which are
discussed below) under applicable Treasury regulations (the "OID Regulations")
issued by the U.S. Treasury and the Internal Revenue Service ("IRS"). Additional
rules applicable to Discount Debt Securities that are denominated in or
determined by reference to a currency other than the U.S. dollar are described
under "Foreign Currency Debt Securities" below. Notice will be given in the
applicable prospectus supplement when the Issuer determines that a particular
Debt Security will be a Discount Debt Security.
For United States federal income tax purposes, original issue discount
is the excess of the stated redemption price at maturity of a Debt Security over
its issue price, if such excess equals or exceeds a de minimis amount (generally
0.25% of the Debt Security's stated redemption price at maturity multiplied by
the number of complete years to its maturity from its issue date or, in the case
of a Debt Security providing for the payment of any amount other than qualified
stated interest (as defined below) prior to maturity, multiplied by the weighted
average maturity of such Debt Security). The issue price of each Debt Security
in an issue of Debt Securities equals the first price at which a substantial
amount of such Debt Securities has been sold (ignoring sales to bond houses,
brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers). The stated redemption price at
maturity of a Debt Security is the sum of all payments provided by the Debt
Security other than "qualified stated interest" payments. The term "qualified
stated interest" generally means stated interest that is unconditionally payable
in cash or property (other than debt instruments of the issuer) at least
annually at a single fixed rate (or a variable rate, in certain circumstances
described below under "--Variable Debt Securities"). In addition, under the OID
Regulations, if a Debt Security bears interest for one or more accrual periods
at a rate below the rate applicable for the remaining term of such Debt Security
(e.g., Debt Securities with teaser rates or interest holidays), and if the
greater of either the resulting foregone interest on such Debt Security or any
"true" discount on such Debt Security (i.e., the excess of the Debt Security's
stated principal amount over its issue price) equals or exceeds a specified de
minimis amount, then the stated interest on the Debt Security would be treated
as original issue discount rather than qualified stated interest.
Payments of qualified stated interest on a Debt Security are taxable to
a U.S. Holder as ordinary interest income at the time such payments are accrued
or are received in accordance with the U.S. Holder's regular method of tax
accounting. A U.S. Holder of a Discount Debt Security must include original
issue discount in income as ordinary income for United States federal income tax
purposes as it accrues under a constant yield method in advance of receipt of
the cash payments attributable to such income, regardless of such U.S. Holder's
regular method of tax accounting. In general, the amount of original issue
discount included in income by the initial U.S. Holder of a Discount Debt
Security is the sum of the daily portions of original issue discount with
respect to such Discount Debt Security for each day during the taxable year (or
portion of the taxable year) on which the U.S. Holder held the Discount Debt
Security. The daily portion of original issue discount on any Discount Debt
Security is determined by allocating to each day in any accrual period a ratable
portion of the original issue discount allocable to that accrual period. An
accrual period may be of any length and the accrual periods may vary in length
over the term of the Discount Debt Security, provided that each accrual period
is no longer than one year and each scheduled payment of principal or interest
occurs either on the first day or final day of an accrual period. The amount of
original issue discount allocable to each accrual period is generally equal to
the difference between (i) the product of the Discount Debt Security's adjusted
issue price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and
appropriately adjusted to take into account the length of the particular accrual
period) and (ii) the amount of any qualified stated interest payments allocable
to such accrual period. The adjusted issue price of a Discount Debt Security at
the beginning of any accrual period is the
73
sum of the issue price of the Discount Debt Security plus the amount of original
issue discount allocable to all prior accrual periods minus the amount of any
prior payments on the Discount Debt Security that were not qualified stated
interest payments. Under these rules, U.S. Holders generally will have to
include in taxable income increasingly greater amounts of original issue
discount in successive accrual periods.
Variable Debt Securities. Under the OID Regulations, "Variable Debt
Securities" are subject to special rules whereby a Variable Debt Security will
qualify as a "variable rate debt instrument" if (a) its issue price does not
exceed the total noncontingent principal payments due under the Variable Debt
Security by more than an amount equal to the lesser of (x) 0.015 multiplied by
the product of the total noncontingent principal payments and the number of
complete years to maturity from the issue date or (y) 15% of the total
noncontingent principal payments and (b) it provides for stated interest, paid
or compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A current value of a rate is the value of the rate on any date that is
no earlier than three months prior to the first day on which that value is in
effect and no later than one year following that first day. A "qualified
floating rate" is any variable rate where variations in the value of such rate
can reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds in the currency in which the Variable Debt Security is
denominated. Although a multiple of a qualified floating rate will generally not
itself constitute a qualified floating rate, a variable rate equal to the
product of a qualified floating rate and a fixed multiple that is greater than
..65 but not more than 1.35 will constitute a qualified floating rate. A variable
rate equal to the product of a qualified floating rate and a fixed multiple that
is greater than .65 but not more than 1.35, increased or decreased by a fixed
rate, will also constitute a qualified floating rate. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Debt Security (e.g., two or more qualified floating rates with values
within 25 basis points of each other as determined on the Variable Debt
Security's issue date) will be treated as a single qualified floating rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a maximum numerical limitation (i.e., a cap), a minimum numerical limitation
(i.e., a floor) or a restriction on the amount of increase or decrease in the
stated interest (i.e., a governor) may, under certain circumstances, fail to be
treated as a qualified floating rate under the OID Regulations unless such
restrictions are fixed throughout the term of the Debt Security or are
reasonably expected not to affect the yield on the Debt Security significantly.
An "objective rate" is a rate that is not itself a qualified floating rate but
which is determined using a single fixed formula and that is based on objective
financial or economic information. A rate will not qualify as an objective rate
if it is based on information that is within the control of the issuer (or a
related party) or that is unique to the circumstances of the issuer (or a
related party), such as dividends, profits, or the value of the issuer's stock
(although a rate does not fail to be an objective rate merely because it is
based on the credit quality of the issuer). An objective rate is a "qualified
inverse floating rate" if the rate is equal to a fixed rate minus a qualified
floating rate, as long as variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Debt Security provides for
stated interest at a fixed rate for an initial period of one year or less
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Debt Security's issue
date is intended to approximate the fixed rate (e.g., the value of the variable
rate on the issue date does not differ from the value of the fixed rate by more
than 25 basis points), then the fixed rate and the variable rate together will
constitute either a single qualified floating rate or objective rate, as the
case may be.
74
If a Variable Debt Security that provides for stated interest at either
a single qualified floating rate or a single objective rate throughout the term
thereof qualifies as a variable rate debt instrument under the OID Regulations
and if the interest on such Debt Security is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually, then all
stated interest on such Debt Security will constitute qualified stated interest
and will be taxed accordingly. Thus, a Variable Debt Security that provides for
stated interest at either a single qualified floating rate or a single objective
rate throughout the term thereof and that qualifies as a variable rate debt
instrument under the OID Regulations will generally not be treated as having
been issued with original issue discount unless the Variable Debt Security is
issued at a "true" discount (i.e., at a price below the Debt Security's stated
principal amount) in excess of a specified de minimis amount. The amount of
qualified stated interest and the amount of original issue discount, if any,
that accrues during an accrual period on such a Variable Debt Security is
determined under the rules applicable to fixed rate debt instruments by assuming
that the variable rate is a fixed rate equal to (i) in the case of a qualified
floating rate or qualified inverse floating rate, the value as of the issue date
of the qualified floating rate or qualified inverse floating rate, or (ii) in
the case of an objective rate (other than a qualified inverse floating rate), a
fixed rate that reflects the yield that is reasonably expected for the Variable
Debt Security. The qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual period
exceeds (or is less than) the interest assumed to be paid during the accrual
period pursuant to the foregoing rules.
In general, any other Variable Debt Security that qualifies as a
variable rate debt instrument will be converted into an equivalent fixed rate
debt instrument for purposes of determining the amount and accrual of original
issue discount and qualified stated interest on the Variable Debt Security. The
OID Regulations generally require that such a Variable Debt Security be
converted into an equivalent fixed rate debt instrument by substituting any
qualified floating rate or qualified inverse floating rate provided for under
the terms of the Variable Debt Security with a fixed rate equal to the value of
the qualified floating rate or qualified inverse floating rate, as the case may
be, as of the Variable Debt Security's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Variable Debt Security is converted into a fixed rate that reflects the yield
that is reasonably expected for the Variable Debt Security. In the case of a
Variable Debt Security that qualifies as a variable rate debt instrument and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Variable Debt Security provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Debt Security as of the Variable Debt
Security's issue date is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate or
a qualified inverse floating rate, the Variable Debt Security is then converted
into an equivalent fixed rate debt instrument in the manner described above.
Once the Variable Debt Security is converted into an equivalent fixed
rate debt instrument pursuant to the foregoing rules, the amount of original
issue discount and qualified stated interest, if any, are determined for the
equivalent fixed rate debt instrument by applying the general original issue
discount rules to the equivalent fixed rate debt instrument and a U.S. Holder of
the Variable Debt Security will account for such original issue discount and
qualified stated interest as if the U.S. Holder held the equivalent fixed rate
debt instrument. In each accrual period appropriate adjustments will be made to
the amount of qualified stated interest or original issue discount assumed to
have been accrued or paid with respect to the equivalent fixed rate debt
instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Variable Debt Security during the accrual
period.
75
If a Variable Debt Security does not qualify as a variable rate debt
instrument under the OID Regulations, then the Variable Debt Security would be
treated as a contingent payment debt obligation under applicable Treasury
regulations (the "CPDI Regulations"). The CPDI Regulations generally require a
U.S. Holder of such an instrument to include future contingent and noncontingent
interest payments in income as such interest accrues based upon a projected
payment schedule. Moreover, in general, under the CPDI Regulations, any gain
recognized by a U.S. Holder on the sale, retirement or other disposition of a
contingent payment debt instrument will be treated as ordinary income and all or
a portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The United States federal
income tax treatment of any Variable Debt Securities that are treated as
contingent payment debt obligations will be more fully described in the
applicable prospectus supplement. Persons considering the purchase of Variable
Debt Securities should carefully examine the applicable prospectus supplement
and should consult their tax advisors regarding the tax consequences of holding
and disposing of Variable Debt Securities.
Sale or other Disposition of a Debt Security. Except as discussed
elsewhere in this summary, upon the sale, retirement or other disposition of a
Debt Security, a U.S. Holder generally will recognize taxable gain or loss in an
amount equal to the difference between the amount realized on the sale,
retirement or other disposition (other than amounts attributable to accrued and
unpaid interest, including accrued original issue discount, that a Holder has
not already included in gross income, which will be taxable as ordinary interest
income) and such U.S. Holder's adjusted tax basis in the Debt Security. A U.S.
Holder's adjusted tax basis in a Debt Security generally will equal such U.S.
Holder's initial investment in the Debt Security increased by any original issue
discount included in income and decreased by any payment on the Debt Security
other than a payment of qualified stated interest. Any gain or loss recognized
on a sale, retirement or other disposition of a Debt Security, other than
amounts attributable to interest, generally will be treated as U.S. source gain
or loss and generally will be long-term capital gain or loss if the Debt
Security was held for more than one year. In the case of a U.S. Holder who is an
individual, capital gains, if any, generally will be subject to U.S. federal
income taxation at preferential rates if specified minimum holding periods are
met. The deductibility of capital losses is subject to limitations.
Optional Redemption
Certain of the Debt Securities may be redeemable at our option prior to
their stated maturity and/or may be repayable at the option of the holder prior
to their stated maturity. Debt Securities containing such features may be
subject to rules that differ from the general rules discussed above. Investors
intending to purchase Debt Securities with such features should carefully
examine the applicable prospectus supplement and should consult their own tax
advisors, since the tax consequences with respect to original issue discount
will depend, in part, on the particular terms and features of the purchased Debt
Securities.
Election to Treat All Interest as Original Issue Discount
A. U.S. Holder generally may elect to include in income all interest
(including stated interest, original issue discount, de minimis original issue
discount and unstated interest) that accrues on a Debt Security by using the
constant yield method applicable to original issue discount, subject to certain
limitations and exceptions. The election may not be revoked without the consent
of the IRS. U.S. Holders should consult their own tax advisors regarding the
advisability of making this election.
76
Short-Term Debt Securities
Debt Securities that have a fixed maturity of one year or less
("Short-Term Debt Securities") generally will be treated as having been issued
with original issue discount in an amount equal to the excess of the sum of the
total principal and the interest payments on the Debt Security over its issue
price. Except as noted below, an individual and certain other cash method U.S.
Holders generally are not required to include accrued original issue discount on
Short-Term Debt Securities in their income currently. However, such Holders may
be required to include any stated interest in income when the interest is
received if such receipt occurs prior to maturity. Any gain realized by such
U.S. Holders on the sale, exchange or maturity of Short-Term Debt Securities
generally will be ordinary income to the extent of the original issue discount
accrued through the date of the sale, retirement or other disposition. In
addition, a portion of the deductions otherwise allowable to the U.S. Holder for
interest on borrowings allocable to the Short-Term Debt Security may be required
to be deferred until the Debt Security matures. Notwithstanding the foregoing, a
cash method U.S. Holder of a Short-Term Debt Security may elect to accrue
original issue discount on a current basis (in which case the limitation on the
deductibility of interest described above will not apply). U.S. Holders who
report income for United States federal income tax purposes under the accrual
method, and certain other holders (including banks and dealers in securities),
are required to accrue original issue discount on a Short-Term Debt Security on
a straight-line basis unless an election is made to accrue the original issue
discount under a constant yield method (based on daily compounding).
In the case of a Short-Term Debt Security that is also a single Foreign
Currency Debt Security, the amount of original issue discount subject to current
accrual and the amount of any exchange gain or loss on a sale, retirement or
other disposition generally are determined under the same rules that apply to
accrued interest on a single Foreign Currency Debt Security held by a holder
using the accrual method of accounting.
Investors considering the purchase of Short-Term Debt Securities should
carefully examine the applicable prospectus supplement and should consult their
tax advisors regarding the U.S. federal income tax consequences of holding and
disposing of such Debt Securities.
Index Linked Debt Securities
The applicable prospectus supplement will discuss the material U.S.
federal income tax consequences with respect to any Debt Securities the payments
on which are determined by reference to any index. Investors considering the
purchase of Index-Linked Interest Debt Securities should carefully examine the
applicable prospectus supplement and should consult their tax advisors regarding
the U.S. federal income tax consequences of holding and disposing of such Debt
Securities.
Dual Currency Debt Securities
A Debt Security may be issued in circumstances where interest payments
on the Debt Security is denominated in or determined by reference to one
currency and the principal portion of the Debt Security may be denominated in or
determined by reference to another currency ("Dual Currency Debt Securities").
Investors considering the purchase of Dual Currency Debt Securities should
carefully examine the applicable prospectus supplement and should consult their
tax advisors regarding the U.S. federal income tax consequences of holding and
disposing of such Debt Securities.
Foreign Currency Debt Securities
As used herein, "Foreign Currency" means a currency or currency unit other
than U.S. dollars.
77
Interest--Cash Method. A U.S. Holder who uses the cash method of
accounting for United States federal income tax purposes and who receives a
payment of interest on a Debt Security (other than original issue discount, the
treatment of which is described below under "--Interest--Accrual Method") will
be required to include in income the U.S. dollar value of the Foreign Currency
interest amount (based on the exchange rate on the date of receipt) regardless
of whether the payment is in fact converted to U.S. dollars at that time. A cash
method U.S. Holder, therefore, may recognize exchange gain or loss (as discussed
below) on the receipt of an interest payment on a Foreign Currency Debt Security
if such payment is converted from Foreign Currency by an entity in the chain of
payment using an exchange rate other than the spot rate on the date of
constructive receipt of the payment by the U.S. Holder. A cash method U.S.
Holder will have exchange gain or loss attributable to a subsequent disposition
of any Foreign Currency received as payment.
Interest--Accrual Method. A U.S. Holder who uses the accrual method of
accounting for United States federal income tax purposes, or who otherwise is
required to accrue interest prior to receipt, will be required to include in
income the U.S. dollar value of the amount of interest income (including
original issue discount and reduced by any principal payments previously
received to the extent applicable) that has accrued and is otherwise required to
be taken into account with respect to a Debt Security during an accrual period.
The U.S. dollar value of such accrued income will be determined by translating
such income at the average rate of exchange in effect for the interest accrual
period or, with respect to an accrual period that spans two taxable years, at
the average rate for the partial period within the U.S. Holder's taxable year. A
U.S. Holder may elect, however, to translate such accrued interest income at the
spot rate on the last day of the accrual period, or the last day of the taxable
year in the case of a partial accrual period. If the last day of an accrual
period is within five business days of the date of receipt of the accrued
interest, a U.S. Holder may translate such interest at the spot rate on the date
of receipt. The above election will apply to all debt obligations held by the
U.S. Holder at the beginning of the first taxable year to which the election
applies and may not be changed without the consent of the IRS. A U.S. Holder
should consult a tax advisor before making the above election. A U.S. Holder
will recognize exchange gain or loss (which will be treated as ordinary income
or loss) with respect to accrued interest on the date such interest is received,
and generally will not be treated as an adjustment to interest income or
expense. The amount of ordinary income or loss recognized will equal the
difference, if any, between the U.S. dollar value of the Foreign Currency
payment (determined on the basis of the spot rate on the date such payment is
received) in respect of such accrual period and the U.S. dollar value of
interest income that has accrued during such accrual period (as determined
above).
Original Issue Discount. In the case of a Discount Debt Security
denominated in a Foreign Currency, a U.S. Holder must determine original issue
discount allocable to each accrual period in units of the Foreign Currency using
the constant yield method described in "--Debt Securities Denominated in U.S.
Dollars--Original Issue Discount." Accrued original issue discount is translated
into U.S. dollars and the amount of Foreign Currency gain or loss on the accrued
original issue discount in the same manner as described in "--Interest--Accrual
Method" above for qualified stated interest accrued by an accrual method U.S.
Holder. U.S. Holders should note that because the cash payment in respect of
accrued original issue discount generally will not be made until maturity or
other disposition of the Discount Debt Security, a greater possibility exists
for fluctuations in foreign currency exchange rates (and the required
recognition of exchange gain or loss) than in the case of Foreign Currency Debt
Securities issued without original issue discount. U.S. Holders are urged to
consult their tax advisors regarding the interplay between the application of
the original issue discount and foreign currency exchange gain or loss rules.
Sale, Retirement or other Disposition of Foreign Currency Debt
Securities. Except as discussed above with respect to Short-Term Debt
Securities, upon the sale, retirement or other disposition of a Debt Security, a
U.S. Holder will recognize taxable gain or loss equal to the difference between
the amount
78
realized on the sale, retirement or other disposition and the U.S. Holder's
adjusted tax basis in the Debt Security. To the extent the amount realized
represents accrued but unpaid interest, however, such amounts must be taken into
account as interest income as described above. The amount realized will be based
on the U.S. dollar value of the Foreign Currency on the date the payment is
received or the Debt Security is disposed of (or deemed disposed of as a result
of a material change in the terms of the Debt Security). In the case of a Debt
Security that is denominated in Foreign Currency and is traded on an established
securities market, a cash basis U.S. Holder (or, upon election, an accrual basis
U.S. Holder) will determine the U.S. dollar value of the amount realized by
translating the Foreign Currency at the spot rate on the settlement date of the
sale.
A U.S. Holder's initial tax basis in a Debt Security will be the U.S.
dollar value of the Foreign Currency amount paid for such Debt Security,
determined on the date of such purchase. A U.S. Holder's adjusted tax basis in a
Debt Security generally will equal the cost of the Debt Security to such Holder,
increased by the amounts of original issue discount previously included in
income by the Holder with respect to such Debt Security and reduced by any
payment under the Debt Security other than a payment of qualified stated
interest. In the case of a Debt Security that is denominated in Foreign Currency
and is traded on an established securities market, a cash basis U.S. Holder (or,
upon election, an accrual basis U.S. Holder) will determine the U.S. dollar
value of the amount paid by translating the Foreign Currency at the spot rate on
the settlement date of the purchase.
Except as discussed in the following paragraph with respect to exchange
gains or losses, any gain or loss recognized upon the sale, retirement or other
disposition of a Debt Security generally will be capital gain or loss and will
be long-term capital gain or loss if at the time of sale, retirement or other
disposition the Debt Security has been for more than one year. The deductibility
of capital losses is subject to significant limitations.
Gain or loss realized upon the sale, retirement or other disposition of
a Debt Security that is attributable to fluctuations in currency exchange rates
will constitute exchange gain or loss with respect to the principal amount and
generally will be taxable as U.S. source ordinary income or loss and will not be
treated as interest income or expense. Gain or loss attributable to fluctuations
in exchange rates generally will equal the difference between the U.S. dollar
value of the Foreign Currency purchase price of the Debt Security, determined on
the date the payment is received or the Debt Security is disposed of, and the
U.S. dollar value of the Foreign Currency purchase price of the Debt Security,
determined on the date the U.S. Holder acquired the Debt Security. Such exchange
gain or loss will be recognized only to the extent of the total gain or loss
realized by the U.S. Holder on the sale, retirement or other disposition.
Disposition of Foreign Currencies. A U.S. Holder will have a tax basis
in any Foreign Currency received as interest or on the sale, retirement or other
disposition of a Debt Security equal to the U.S. dollar value of such Foreign
Currency at the spot rate on the date the Foreign Currency is received. Any
exchange gain or loss realized by a U.S. Holder on a subsequent conversion of
Foreign Currency generally will be ordinary income or loss.
Foreign Source Income
Interest income (including any amounts deducted or withheld on account
of foreign taxes) and original issue discount on a Debt Security generally will
constitute foreign source income, and generally will be considered "passive"
income (or, for certain U.S. Holders, "financial services" income) for purposes
of computing the foreign tax credit allowable under U.S. federal income tax
laws. Under recently enacted legislation, for taxable years beginning after
December 31, 2006, interest income generally will constitute "passive category"
income or, in the case of certain U.S. Holders, "general
79
category" income. The rules governing the foreign tax credit are complex. U.S.
Holders are urged to consult their tax advisors in this regard.
Withholding Taxes
In the event that foreign law requires the Issuer to deduct or withhold
from payments on the Debt Securities, the Issuer will not be required to pay a
gross-up or any additional amounts. In such case, U.S. Holders will recognize
more income for U.S. federal income tax purposes than the actual amounts
received from the Issuer.
Substitution of L-Bank
It is possible that a substitution of another company as principal
debtor in respect of the Debt Securities will cause a taxable exchange for U.S.
federal income tax purposes of existing Debt Securities for new Debt Securities
by the holders of the Debt Securities. Such an exchange would require holders to
recognize taxable gain or loss for U.S. federal income tax purposes. In the
event that such a substitution results in the recognition of taxable income or
gain to any holder, neither the Issuer nor the substitute obligor will be
required to indemnify a holder for any tax incurred by such holder as a result
of such a substitution (see "Description of the Debt Securities--Substitution of
L-Bank"). Holders should consult their own tax advisers regarding the possible
tax consequences of a substitution of the Issuer including any tax consequences
arising in any other taxing jurisdiction.
U.S. Information Reporting and Backup Withholding
Payments of principal, premium, if any, and interest (including
original issue discount) on, and proceeds from the sale, retirement or other
disposition of the Debt Securities may be subject to information reporting to
the IRS and possible backup withholding. Backup withholding of United States
federal income tax at a current rate of 28% may apply to payments made in
respect of the Debt Securities to holders who are not exempt recipients and who
fail to provide certain identifying information (such as the holder's taxpayer
identification number) and make any other required certification. Payments made
in respect of the Debt Securities to a U.S. Holder must be reported to the IRS,
unless the U.S. Holder is an exempt recipient or otherwise establishes an
exemption. U.S. persons who are required to establish their exempt status
generally must provide IRS Form W-9 (Request for Taxpayer Identification Number
and Certification). Non-U.S. Holders generally will not be subject to U.S.
information reporting and backup withholding. However, these Holders may be
required to provide certification of non-U.S. status (generally on IRS Form
W-8BEN) in connection with payments received in the United States or through
certain U.S.-related financial intermediaries.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules from a payment to a Holder may be credited against such
Holder's United States federal income tax liability and a Holder may obtain a
refund of any excess amounts withheld by filing the appropriate claim for refund
with the IRS and furnishing all required information to the IRS in a timely
manner.
Tax Return Disclosure Requirements
A U.S. Holder may be required to report a sale, retirement or other
taxable disposition of its Debt Securities on IRS Form 8886 (Reportable
Transaction Disclosure Statement) if it recognizes a foreign currency exchange
loss that exceeds $50,000 in a single taxable year from a single transaction in
the Debt Securities, if such U.S. Holder is an individual or trust, or higher
amounts for other non-individual U.S. Holders. U.S. Holders are advised to
consult their tax advisors in this regard.
80
We have included the federal income tax discussion above for holders'
general information only and it may not be applicable depending upon a holder's
particular situation. U.S. Holders should consult their own tax advisors with
respect to the tax consequences under state, local, foreign and other tax laws
and the possible effects of changes in federal or other tax laws.
81
FEDERAL REPUBLIC OF GERMANY TAXATION
German Tax Considerations
The following is a general discussion of certain German tax
consequences of the acquisition, ownership and disposition of the Debt
Securities offered by us. This discussion does not purport to be a comprehensive
description of all tax consequences that may be relevant to a decision to invest
in the Debt Securities. In particular, this discussion does not consider any
specific tax consequences that may apply due to facts or circumstances of a
particular investor. This summary is based on the laws of Germany as currently
in force and applied on the date of this prospectus. Such laws are subject to
changes, possibly with retroactive effect.
Prospective investors in the Debt Securities are urged to consult their
own tax advisors as to the tax consequences of the acquisition, ownership and
disposition of the Debt Securities, including the effect of any state or local
taxes, under the tax laws of Germany and any other relevant jurisdiction.
German Residents
Taxation of Interest Income
Under German tax law payments of interest on the Debt Securities
(including payments made in respect of interest that accrued up to a disposition
of a Debt Security and is credited separately, in the following "Accrued
Interest"--Stuckzinsen) to persons who are residents of Germany (in particular,
persons whose residence, habitual abode, statutory seat or place of management
is located in Germany, a "German Holder") are subject to German income or
corporate income tax (plus solidarity surcharge thereon, which is currently
levied at a rate of 5.5%). Payments for Accrued Interest rendered upon the
acquisition of a Debt Security may be deducted from the Debt Security holder's
income, if separately accounted for, and may, therefore, reduce such Debt
Security holder's personal income tax liability. Corresponding to such
reduction, however, the Debt Security holder will be taxable in respect of
interest payments that accrued when the Debt Security holder was not actually
holding the Debt Security to the extent such interest is paid to the Debt
Security holder. Interest income derived from the Debt Securities will also be
subject to trade tax on income if the Debt Securities are held in a German
business establishment for trade tax purposes.
Withholding Tax on Interest Income
If the Debt Securities are kept or administered in a custodial account
maintained by a German Holder with a German branch of a German or foreign bank
or financial services institution (a "German Disbursing Agent"), a 30%
withholding tax (Zinsabschlag) on the gross amount of interest payments,
including Accrued Interest, plus a 5.5% solidarity surcharge thereon, will be
levied, resulting in a total withholding tax charge of 31.65%.
Withholding tax (including a solidarity surcharge thereon) might be
credited as prepayments against the German Holder's liability for German
personal or corporate income tax (and the respective solidarity surcharge), or,
if in excess of such liability, refunded upon application.
German Holders who are individuals holding the Debt Securities as
private assets ("Private German Investors") are entitled to an annual standard
deduction (Werbungskosten-Pauschbetrag) of (euro)51 ((euro)102 for married
couples filing jointly) in computing their income from capital investment
(including income earned from the Debt Securities) as well as an annual
exemption (Sparer-Freibetrag) of (euro)1,370 ((euro)
82
2,740 for married couples filing jointly) with respect to income from the Debt
Securities and other investment income they receive.
Disposition or Redemption of the Debt Securities
The following applies in respect of Debt Securities that do not qualify
as Financial Innovations (as described under the following caption "Special
Rules for Financial Innovations").
Capital gains resulting from the disposition or redemption of Debt
Securities (or, as the case may be, from the payment at maturity of the Debt
Securities) realized by Private German Investors are generally taxable if the
capital gain is realized within one year after the acquisition of the Debt
Securities. Capital losses realized by Private German Investors may only be
offset against capital gains resulting from a disposition of Debt Securities or
from other private transactions within the same calendar year and, subject to
various limitations, in the preceding year or in subsequent years.
Capital gains realized by Private German Investors are only taxable if
the aggregate amount derived from all taxable private transactions exceeds an
amount of (euro) 512 in one calendar year.
Capital gains derived by Private German Investors from the disposition
or redemption of Debt Securities are not subject to German income tax if the
Debt Securities are sold or redeemed more than one year after their acquisition.
Irrespective of a holding period, any capital gain resulting from the
disposition or redemption of Debt Securities (or, as the case may be, from the
payment at maturity of the Debt Securities) are subject to income or corporate
income tax, including trade tax, if such Debt Securities are held as business
assets of a German Holder.
Special Rules for Financial Innovations
To the extent Debt Securities are classified as financial innovations
("Financial Innovations"; Finanzinnovationen), special provisions apply to the
disposition or redemption, or upon maturity, of the Debt Securities. In
particular, any debt instrument may classify as a Financial Innovation if it
provides for a floating interest rate, an issue discount or an optional
redemption right.
In case Debt Securities are classified as Financial Innovations,
capital gains arising upon the disposition or redemption, or upon maturity, of
the Debt Securities realized by a German Private Investor (including capital
gains so derived by a secondary or subsequent purchaser who is a German Private
Investor) are fully subject to income tax, provided no yield to maturity
(Emissionsrendite) can be established. In case a yield to maturity can be
established, only the extent of the capital gain attributable to such yield to
maturity during the period the respective German Private Investor held the Debt
Security is subject to income tax.
The amount taxed due to the classification of a Debt Security as a
Financial Innovation is subject to 30% withholding tax (plus a solidarity
surcharge of 5.5% thereon) if the Debt Securities are kept or administered in a
custodial account by the same German Disbursing Agent since the acquisition of
the Debt Securities. If the Debt Securities have not been so kept in a custodial
account by the same German Disbursing Agent, withholding tax will be imposed at
the same rate on 30% of the proceeds received upon a disposition or redemption,
or upon the maturity, of the Debt Securities. As described above, such
withholding tax might be credited or refunded upon application.
83
Non-German Residents
Income derived from the Debt Securities by persons who are not tax
residents of Germany ("Non-German Holders") is in general exempt from German
income or corporate income taxation, and no withholding tax must be withheld
(even if the Debt Securities are kept with a German Disbursing Agent), provided
the Debt Securities are not (i) held as German business assets by the Non-German
Holder or (ii) presented for payment at the offices of a German branch of a
German or foreign bank or financial services institution in an
over-the-counter-transaction (Tafelgeschaft).
If the Debt Securities are held as German business assets by a
Non-German Holder, such holder is subject to a tax treatment similar to that
described above under the caption "German Residents."
If the Debt Securities are involved in an over-the-counter-transaction,
as described above, income derived therefrom will be subject to withholding tax.
European Union Directive on the Taxation of Savings Income
The Council of the European Union (the "Council") on June 3, 2003
adopted a directive regarding the taxation of savings income (the "Directive").
Under the Directive, Member States will be required to provide to the tax
authorities of another Member State details of payments of interest (or other
similar income) paid by a person within its jurisdiction to an individual
resident in that other Member State except that, from the date of implementation
of the Directive, Belgium, Luxembourg and Austria will instead operate a
withholding system for a transitional period in relation to such payments (the
ending of such transitional period being dependent upon the conclusion of
agreement relating to information exchange with certain other countries and, in
the case of Austria, to approval by the Austrian Parliament). The Directive will
take effect from July 1, 2005 (subject to the ratification of the agreements
entered into with certain third countries, including dependent and associated
territories of Member States) or such other date as the Council may determine.
Gift or Inheritance Taxation, Stamp Duty
No estate, inheritance or gift taxes with respect to any Debt
Securities will arise under the laws of Germany, if, in the case of estate and
inheritance taxes, both the decedent and the beneficiary, and, in the case of
gift taxes, both the donor and the donee, are Non-German Holders and such Debt
Securities are not attributable to a permanent establishment in Germany. In the
case of a decedent, donor or heir who is a German national, this only applies if
such person has been a Non-German Holder for more than five consecutive years.
No stamp, issue, registration or similar taxes or duties will be payable in
Germany in connection with the issuance, delivery or execution of the Debt
Securities.
Substitution of L-Bank
It is possible that a substitution of L-Bank by another company as
principal debtor in respect of the Debt Securities could lead to gain equal to
the difference between the fair market value of the Debt Securities as of the
date of the substitution and the relevant acquisition cost of the Debt
Securities, which would be subject to the same rules applicable to a disposition
of the Debt Securities (discussed above). In the event that such a substitution
results in the recognition of taxable income or gain to any holder, neither the
issuer nor the substitute obligor will be required to indemnify a holder for any
income tax or tax incurred by such holder as a result of such a substitution
(see "Description of the Debt Securities--Substitution of L-Bank").
84
Prospective investors are urged to consult their own tax advisers
regarding the possible tax consequences of such a substitution of L-Bank
including any tax consequences arising in any other taxing jurisdictions.
85
SUMMARY OF CERTAIN DIFFERENCES BETWEEN GENERALLY ACCEPTED GERMAN
AND UNITED STATES ACCOUNTING PRINCIPLES
Our audited financial statements for the years ended December 31, 2003,
2002 and 2001 have been prepared in accordance with generally accepted
accounting standards in Germany ("German GAAP") (see "Regulation and Supervision
of L-Bank in the Federal Republic of Germany--Financial Statements and Audits"),
which emphasize the concept of "prudence" (Vorsichtsprinzip) in the presentation
of the financial statements in order to protect the interest of creditors in
general. Our financial statements are not prepared in accordance with the
accounting and financial reporting practices followed in the United States and
have not been prepared in accordance with the accounting rules and regulations
adopted by the Securities and Exchange Commission under the Securities Act of
1933. As a result, our financial statements included in this prospectus may
differ substantially from financial statements prepared in accordance with
accounting principles generally accepted and financial reporting practices
followed in the United States ("U.S. GAAP").
The matters described below summarize certain differences between
German GAAP and U.S. GAAP at December 31, 2003 and as of the date of this
prospectus that may be material in the context of our financial statements. We
are not required to prepare and have not prepared any reconciliation of our
financial statements and any related footnote disclosures between German GAAP
and U.S. GAAP and have not quantified such differences. The following summary
should not be taken as exhaustive discussion of all differences. No attempt has
been made to identify all disclosures, presentation or classification
differences that would effect the manner in which transactions or events are
presented in financial statements or notes thereto. In making an investment
decision, investors must rely upon their own examination of the Company, the
terms of the offering and the financial information. Potential investors should
consult their own professional advisors for an understanding of the differences
between German GAAP and U.S. GAAP, and how those differences might affect the
financial information herein.
Financial Statements Presentation
Under German GAAP, the components of unconsolidated financial
statements are balance sheet, income statement and notes to the financial
statements while for consolidated financial statements, in addition, a statement
of changes in shareholders' equity and a cash flow statement are required.
German GAAP requires one year of comparatives. The Company is required to use a
particular balance sheet and income statement format and to address in their
notes certain disclosures in accordance with the German Commercial Code.
Under U.S. GAAP, financial statements comprise balance sheets, income
statements, statements of changes in shareholders' equity, cash flow statements
and notes to the financial statements for both unconsolidated and consolidated
financial statements. Financial statements for SEC registrants include two years
of comparatives (to the current year) for all statements except for the balance
sheet. Material components of each financial statement or line item have to be
disclosed separately and in a sufficient detail in the financial statements
including the notes to the financial statements.
Scope of Consolidation
Under German GAAP, consolidation of all majority-owned subsidiaries is
required. However, if the subsidiaries are of minor significance, the necessary
information cannot be obtained without unreasonable expense or delay and unless
the shares are held for purpose of sale or the control is temporary, German GAAP
permits excluding these subsidiaries from the consolidation. Similar
considerations apply to equity investments where significant influence is
exercised.
86
Under U.S. GAAP, the determination when an entity is to be consolidated
has traditionally been determined based on a voting control model and,
accordingly, all subsidiaries should be consolidated. While this model is still
applicable, new FASB Interpretation No. 46 'Consolidation of Variable Interest
Entities' ("FIN 46") has broadened the scope of consolidation to include a risk
and rewards model. Variable interest entities ("VIEs"), which often are special
purposes entities, in which a parent does not have a controlling voting interest
but the parent absorbs the majority of the VIE's expected losses or residual
returns must also be consolidated. The equity method of accounting is generally
required for investments where the parent company has more than 20% of the
voting rights or if factors indicate that significant influence exists.
Receivables (loans) and liabilities
Under German GAAP, receivables (loans) and liabilities are classified
according to the period after which the obligor thereof may, or may be required
to, repay in full such receivables or liabilities. The Regulation on the
Accounting Principles applied to Credit Institutions and Financial Services
Institutions (Rechnungslegungsverordnung fur Kreditinstitute und
Finanzdienstleistungsinstitute), together with ss. 340 et seq. German Commercial
Code (Handelsgesetzbuch), which mainly comprise German GAAP for credit
institutions, requires that a bank classifies receivables and liabilities on its
balance sheet into short-term assets and liabilities that are payable on demand
(taglich fallig) and other assets and liabilities.
Under U.S. GAAP, financial institutions do not present so classified
balance sheets.
Property and equipment
Under German GAAP, property and equipment are reported at acquisition
or manufacturing cost, as applicable, and reduced by scheduled depreciation in
accordance with their estimated economic useful life. In practice, depreciation
is carried out on the basis of the depreciation tables issued by the Federal
Ministry of Finance. Based on the modified lower of cost or market principle,
any expected permanent impairment of property and equipment results in
additional depreciation. This additional depreciation is reversed when the
reason for the impairment no longer exists.
U.S. GAAP requires that property and equipment be carried at cost less
scheduled depreciation in accordance with the estimated economic useful life of
the asset. U.S. GAAP requires that assets be reviewed for impairment. If the sum
of the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized.
Such impairment losses shall not be reversed.
Investment securities
Under German GAAP, investment securities are defined in Section 7 of
the Regulation on Accounting by Credit Institutions (Verordnung uber die
Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute); in the
balance sheet they are disclosed under "Notes and other interest-bearing
securities" and "shares and other non interest-bearing securities." In
disclosing income and expenses, a distinction is made between securities held in
trading portfolios (Handelsbestand) and those held as liquidity reserves in the
liquidity portfolio (Liquiditatsreserve) (securities which are neither treated
as fixed assets nor held for trading purposes). In both cases the securities are
carried as current assets and are valued, for each type of security separately,
at the lower of cost or market value at the balance sheet date and included in
income.
87
Under U.S. GAAP, investments in equity and debt securities are
classified into the categories trading, available-for-sale or held-to-maturity
(for debt securities only). Debt securities held to maturity are carried at
amortized cost. Held to maturity and available for sale securities are subject
to (other-than-temporary) impairment tests. Trading and available-for-sale
securities are recorded at fair value and changes of trading securities in fair
value are included in the income statement. Changes in the fair value of
available-for-sale securities are included in other comprehensive income, a
separate component of equity, unless a decline in fair value is deemed to be
other-than-temporary. If the decline is other-than-temporary the loss is
included in the income statement.
Provision for loan losses
Under German GAAP credit institutions are permitted to create loss risk
provisions that, in accordance with German law, are not disclosed.
The credit risk of the loan and securities portfolio is continuously
assessed with respect to each individual exposure. Specific provisions are
established in the loan portfolio and in the current asset securities portfolio
held as liquidity reserve by writing down the book value of each such item
according to its assessed risk (Einzelwertberichtigung). In addition, a general
provision is established for risk that is not individually identifiable but is
inherent in the loan portfolio (Pauschalwertberichtigung). Like specific
provisions, general provisions are deducted from the assets reserved against and
are therefore not shown separately on the balance sheet.
Under U.S. GAAP, general, unspecified reserves are not permitted. For
loans that are individually deemed impaired, specific reserves are determined
based on the present value of future cash flows discounted at the loan's
effective interest rate, or where the loan is collateral based on the fair value
of the collateral provided. Where available, the observable market price of the
loan can be used. U.S. GAAP requires recognition of a loss when (a) information
available prior to issuance of the financial statements indicates that it is
probable that an asset has been impaired at the date of the financial statements
and (b) the amount of the loss can be reasonably estimated, even though the
particular loans that are not collectible may not be identifiable.
Certain provisions and reserves
There are two provisions in the German Commercial Code
(Handelsgesetzbuch), which allow banks to establish reserves against general
banking risks. Pursuant to section 340g German Commercial Code banks may carry a
special item called "Fund for General Banking Risks" (Sonderposten fur
allgemeine Bankrisiken) on the liability side of their balance sheet for
protection against general banking risks. However, such a fund may only be
established if, in accordance with reasonable commercial judgment, the special
risks inherent in the business of banks require the establishment of such a
fund. Any additions to the Fund for General Banking Risks or any profits derived
from its dissolution must be reflected separately in the bank's income
statement, (see section 340g(2), German Commercial Code), see "Glossary." By
transferring EUR 20.1 million in 2003 L-Bank followed this rule. Funds for
general banking risks established pursuant to section 340g German Commercial
Code are counted as part of core capital.
In addition, banks may have contingency reserves for general banking
risk, which are permitted by section 340f German Commercial Code. According to
this rule, a bank may record on its balance sheet certain receivables, debt
securities and equity securities that are held as part of the "liquidity
reserve" at a lower value than that permitted for industrial and other
nonbanking corporations, if this is necessary, in accordance with reasonable
commercial judgment, to safeguard against the special risks inherent in the
business of banks. The reserves created by such recording of lower values may
not exceed
88
four percent of the total book value of such receivables and securities. Banks
need not report in their financial statements on the creation and dissolution of
such reserves for general banking risks. With respect to presentation in the
income statement, banks are permitted to offset (without disclosure) profits
from the sale of certain securities (in the so-called liquidity portfolio) and
the revaluation of receivables (i.e., payments received on loans previously
written-off or write-backs of risk provisions) against write-downs of the
respective receivables and securities. Based on the foregoing, we disclose the
net result from movements in risk provisions and management of the liquidity
portfolio.
Besides sections 340f and 340g German Commercial Code
(Handelsgesetzbuch) there are no other possibilities for we to establish general
reserves.
Assets, liabilities and pending transactions have been valued in
accordance with general provisions of ss.ss. 252 et seq. of the German
Commercial Code (Handelsgesetzbuch), taking into account the special rules
applying to credit institutions, ss.ss. 340e et seq. of the German Commercial
Code (Handelsgesetzbuch).
Under U.S. GAAP, provisions are only recorded when certain criteria are
met. A provision is only recognized when (a) information available prior to
issuance of the financial statements indicates that it is probable that an asset
has been impaired at the date of the financial statements and (b) the amount of
the loss can be reasonably estimated.
Derivative Instruments and Hedge Accounting
Under German GAAP, derivative instruments and embedded derivatives may
be included in a financial institution's trading book or investment book.
Trading derivatives are treated as current assets and accordingly carried at the
lower of cost or market. That is, while unrealized losses on trading derivatives
are recorded in current income, unrealized gains are not recognized. Hedge
accounting is permitted as micro-hedge, portfolio-hedge or macro-hedge (often
referred to as a gap hedge). Derivative financial instruments used for hedging
purposes are generally accounted for as off-balance-sheet transactions and, in
the case of the bank, are disclosed in notes to the financial statements.
Unrealized gains and losses of both the derivative financial instrument and
hedged items are generally not recorded on the balance sheet or in the income
statement. The related income and expense of a derivative financial instrument,
such as interest income related to interest rate swaps, is reported on a basis
consistent with the underlying hedged position pro rata temporis, often
resembling synthetic instrument accounting. Credit-default swaps in the non
trading book / investment book provided as credit risk protection are disclosed
as contingent liabilities.
Under U.S. GAAP, all derivative instruments and embedded derivatives
are recorded on the balance sheet at fair value as either assets or liabilities,
regardless of any hedge relationship that might exist. Changes in the value of
derivative instruments are recognized in the income statement as they arise,
unless they satisfy stringent criteria for hedge accounting (including
designation and high effectiveness), supported by formal documentation. The
accounting treatment of the hedging instruments as well as the hedged items
depends on the type of hedge designation (fair value hedge or cash flow hedge),
the offset being in either current income or other comprehensive income. Also
depending on the hedge designation, the carrying value of the hedged item may
need to be adjusted to offset the changes in the fair value of the hedging
derivative. Any ineffectiveness resulting from the hedge relationship is
recognized in income.
89
Loan origination fees
Under German GAAP, the direct costs incurred in the origination of new
loans are expensed as general administrative expense in the period incurred.
Loan origination fees received are recognized in the income statement as
commission income upon closing of the transaction unless such fees are
determined to be in lieu of interest. In that case, these fees are deferred and
recognized as interest income over the life of the loan (generally using
straight-line amortization).
U.S. GAAP requires that loan origination fees net of certain direct
loan origination costs are deferred and recognized over the life of the related
loan as an adjustment of yield using the effective interest method. Loan
commitment fees are deferred, except for certain retrospectively determined
fees. Commitment fees meeting specified criteria are recognized over the loan
commitment period; all other commitment fees shall be recognized as an
adjustment of yield over the related loan's life or, if the commitment expires
unexercised, recognized in income upon expiration of the commitment.
Pension provisions
Under German GAAP, pension obligations are determined using actuarial
principles, whereby the ongoing and future pension obligations and benefit
obligations to retired beneficiaries are determined using a certain valuation
benchmark (partial value) in line with tax regulations.
Under U.S. GAAP, the annual pension cost comprises the estimated cost
of benefits accruing in the period as determined in accordance with SFAS 87,
"Employers' Accounting for Pensions" which requires readjustment of the
significant actuarial assumptions annually to reflect current market and
economic conditions. Under SFAS 87, a pension asset representing the excess plan
assets over benefit obligations is disclosed and deferred in the balance sheet.
The pension benefit obligation is calculated by using a projected unit credit
method. Actuarial gains or losses within a 10% "corridor" are disclosed and can
be deferred.
Reacquired own debt securities
Under German GAAP, debt securities that are re-acquired with the
intention of resale are recorded as assets at acquisition cost, and subsequently
valued at the lower of cost or market. Gains or losses on resale of such
securities are recorded in current income.
Under U.S. GAAP, repurchased debt securities result in a reduction of
outstanding liabilities on the balance sheet, irrespective of whether the
securities are intended for resale or not. The difference between the cost of
re-acquisition and the book value of outstanding debt is recorded in current
income.
Assets and liabilities held in trust
Under German GAAP, assets and the equal liabilities held in trust are
recorded on the balance sheet. Under U.S. GAAP, these items would likely not be
recorded on the balance sheet.
Guaranties
Under German GAAP, a guarantor records an accrual and a corresponding
charge to the income statement when an enterprise has a present obligation as a
result of a past event and it is expected, based on available evidence, that
payment would have to be made to the guarantied party.
90
Under U.S. GAAP, a guarantor is required to recognize, at the inception
of certain guaranties, a liability for the fair value of the obligation
undertaken in issuing the guaranty.
91
PLAN OF DISTRIBUTION
We may sell the Debt Securities in any of three ways:
o through one or more underwriters;
o directly to one or a limited number of institutional purchasers;
or
o through agents.
Each prospectus supplement with respect to the Debt Securities will set
forth the terms of the offering of the Debt Securities, including the name or
names of any underwriters or agents, the purchase price of the Debt Securities
and the net proceeds to L-Bank from such sale, any underwriting discounts, agent
commissions or other items constituting underwriters' or agents' compensation,
any initial public offering price, any discounts or concessions allowed or
reallowed or paid to dealers and any securities exchanges on which the Debt
Securities may be listed.
If underwriters are used in the sale, the Debt Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Debt Securities may be offered to the public either through underwriting
syndicates represented by managing underwriters, directly by underwriters which
may include one or more investment banking firms or through others, as
designated. Unless otherwise set forth in the applicable prospectus supplement,
the obligations of the underwriters to purchase the Debt Securities will be
subject to certain conditions precedent and the underwriters will be obligated
to purchase all of the Debt Securities offered thereby if any are purchased. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
We may sell the Debt Securities directly to one or more institutional
purchasers or through agents designated by us from time to time. Any agent
involved in the offer or sale of the Debt Securities will be named, and any
commissions payable by us to such agent will be set forth, in the applicable
prospectus supplement. Unless otherwise indicated in such prospectus supplement,
any such agent will be acting on a best efforts basis for the period of its
appointment and will not be acquiring such Debt Securities for its own account.
Limitations on sales to United States persons of Debt Securities in
bearer form, if any, will be described in the prospectus supplement relating
thereto.
Agents and underwriters may be entitled under agreements entered into
with us to indemnification by us against certain civil liabilities, including
liabilities under the Securities Act of 1933, or to contribution with respect to
payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for us in the ordinary course of business.
92
LIMITATIONS ON ACTIONS AGAINST THE STATE OF BADEN-WURTTEMBERG
The State of Baden-Wurttemberg will not waive any immunity from
jurisdiction in the United States for any purpose. Baden-Wurttemberg is,
however, subject to suit in competent courts in Germany. The United States
Foreign Sovereign Immunities Act may provide an effective means of service and
preclude granting sovereign immunity in actions in the United States arising out
of or based on the United States federal securities laws. Under that Act,
execution upon the property of Baden-Wurttemberg in the United States to enforce
a judgment is limited to an execution upon property of Baden-Wurttemberg used
for the commercial activity on which the claim was based. A judgment of a United
States state or federal court may not be enforceable in a German court if based
on jurisdiction based on the United States Foreign Sovereign Immunities Act or
if based on the United States federal securities laws or if such enforcement
would otherwise violate German public policy or be inconsistent with German
procedural law. Under the laws of the Federal Republic of Germany, certain
property of Baden-Wurttemberg is not subject to attachment or to seizure.
ENFORCEMENT OF CIVIL LIABILITIES AGAINST L-BANK
We are located in Germany and the members of our board of management
and our supervisory board, as well as the experts and governmental officials
referred to in this prospectus, are non-residents of the United States, and all
or a substantial portion of our assets and of certain of such other persons are
located outside the United States. As a result, it may be difficult or
impossible for investors to obtain jurisdiction over those persons in
proceedings brought in courts in the United States, or to realize in the United
States upon judgments of United States courts against those persons, including
judgments predicated upon civil liabilities under the United States securities
laws. There may be doubt as to the enforceability in the German courts in
original actions of liabilities predicated upon U.S. securities laws and as to
the enforceability in German courts of judgments of United States courts
including judgments imposing liabilities predicated upon U.S. securities laws.
LEGAL OPINIONS
Certain legal matters, including the validity of the Debt Securities
offered hereby, will be passed upon on our behalf by an authorized member of our
legal department, and on behalf of the underwriters by Shearman & Sterling LLP,
Frankfurt am Main.
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
The name and address of the authorized representative of L-Bank and
Baden-Wurttemberg in the United States for purposes of the United States
Securities Act of 1933 is Puglisi & Associates, 850 Library Avenue, Suite 204,
P.O. Box 885, Newark, Delaware 197159.
OFFICIAL STATEMENTS AND DOCUMENTS
The information set forth herein relating to Baden-Wurttemberg and
Germany has, except as stated below, been derived from publications of the
Baden-Wurttemberg Statistical Office, the Federal Labor Office, the
Baden-Wurttemberg Ministry of Finance, the Federal Statistical Office, the
European Central Bank or the Federal Central Bank, all of which are official
public documents, or from Baden-Wurttemberg state or German federal statutes,
all of which are official public documents.
The information in the tables included in the section captioned "The
State of Baden-Wurttemberg--Public Finance" (except for "--State Budget"), the
information in the table regarding debt guarantied by Baden-Wurttemberg included
in the section captioned "--Public Debt--
93
Summary of Debt" and the information in the table entitled "Internal Guarantied
Debt as of December 31, 2003, 2002, 2001 and 2000" included in the section
captioned "--Debt Record" has been supplied by Walter Leibold, Assistant
Undersecretary (Ministerialdirigent) of the Baden-Wurttemberg Ministry of
Finance, in his official capacity and is included herein on his authority.
The information in the tables included in the sections captioned "The
State of Baden-Wurttemberg--Public Finance--State Budget," "--Public Debt"
(other that the information in the table regarding debt guarantied by
Baden-Wurttemberg included in the section captioned "--Summary of Debt") and
"--Budget of the State of Baden-Wurttemberg," as well as the information in the
table entitled "Direct Debt of Baden-Wurttemberg as of December 31, 2003"
included in the section entitled "--Debt Record" has been supplied by Gunther
Benz, Assistant Undersecretary (Ministerialdirigent) of the Baden-Wurttemberg
Ministry of Finance, in his official capacity and is included herein on his
authority.
INDEPENDENT ACCOUNTANTS
The financial statements as of December 31, 2003, 2002 and 2001 and for
the years then ended, included in this prospectus, have been audited by PwC
Deutsche Revision Aktiengesellschaft Wirtschaftsprufungsgesellschaft ("PwC"),
independent accountants, as stated in their reports appearing herein.
The audit reports of PwC for the years ended December 31, 2003, 2002
and 2001, dated March 29, 2004, April 8, 2003 and April 9, 2002, respectively,
each refer to a management report that has not been included in this prospectus.
The examinations of and the audit reports upon such management reports are
required under German auditing standards. Those examinations were not made in
accordance with Statement on Standards for Attestation Engagements No. 10,
"Management's Discussion and Analysis." PwC does not provide an opinion on this
information or on the financial statements included in this prospectus in
accordance with U.S. GAAS or U.S. attestation standards.
94
GLOSSARY
This glossary describes certain terms that are used in our financial
statements. It is not a part of our financial statements.
Cash on hand, cash at Federal Central Bank and cash in postal giro accounts
We are obligated to deposit minimum reserves with the Federal Central
Bank and other central banks pursuant to the Regulation on Minimum Reserves of
September 12, 2003 issued by the European Central Bank. Some of our deposits
with the Federal Central Bank included in this item consist of such minimum
reserves. See "--Regulation and Supervision of L-Bank in Germany--Powers of the
Federal Central Bank Affecting L-Bank's Conduct of Business."
Receivables from credit institutions
This item includes all amounts due from German and non-German banks,
unless the obligations are notes, bonds or other interest bearing securities
that are eligible for listing on a stock exchange (entered in Item 4 b)).
Receivables from customers
This item includes all amounts due from customers that are not credit
institutions, unless the obligations are notes, bonds or other interest bearing
securities that are eligible for listing on a stock exchange (entered in Item 4
b)).
This Item 3 encompasses mortgage-backed loans (Hypothekendarlehen) made
by us that meet certain requirements of the Law on Mortgage-backed Bonds and
Similar Securities Issued by Public Law Credit Institutions (Gesetz uber die
Pfandbriefe und verwandten Schuldverschreibungen offentlich-rechtlicher
Kreditanstalten). Such loans may be used as security (cover) for mortgage-backed
bonds issued by us (Hypothekenpfandbriefe). This Item 3 also includes loans to
public authorities and entities organized under public law (Kommunalkredite).
These are loans, e.g., to municipalities, counties, special purpose associations
of municipalities and counties (Zweckverband), and other entities and
associations established under German public law (Anstalten and Korperschaften),
and to member states of the European Union and their territorial subdivisions
meeting certain requirements, and loans guarantied by such entities. Such loans
may be used as security (cover) for public debt-backed bonds issued by us
(Offentliche Pfandbriefe, also referred to as Kommunalobligationen). See
"--Business--Sources of Funds."
Notes and other interest-bearing securities
This item includes interest-bearing debt securities that are eligible
for listing on a stock exchange, such as bearer securities
(Inhaberschuldverschreibungen), negotiable debt securities that are part of an
offering, and other money market instruments (such as commercial paper,
euro-notes and certificates of deposit), medium-term notes (with maturities of
generally 3-6 years) in bearer form (Kassenobligationen) and book-entry
securities (Schuldbuchforderungen). This item may include securities that are
part of the trading portfolio, securities that form part of the fixed assets
portfolio and securities that are part of the liquidity portfolio. See
"--Summary of Material Differences between Generally Accepted German and United
States Accounting Principles."
Bonds that are eligible as collateral for loans under the open-market
operations and the marginal lending facility at the European Central Bank must
be presented separately in the balance sheet (Item 4
95
aa, ab, ba and bb; ,,...eligible as collateral at the Federal Central Bank) even
if they are already serving as collateral for other obligations. Eligible
securities are set forth on a list of securities eligible as collateral
maintained by the European Central Bank. Loans under the marginal lending
facility are short-term loans extended by the Federal Central Bank (acting for
the European Central Bank in Germany) to banks that are secured by collateral
and usually bear interest at a rate of 1% over the rate for open-market
operations.
Bank's own notes
This item consists of securities that are eligible for listing on a
stock exchange that we issued in a public offering and later repurchased.
Securities issued that are not eligible for listing on a stock exchange and that
we repurchased are deducted from Item 3 a) on the liabilities side of the
Balance Sheet.
Shares and other non-interest-bearing securities
This item includes shares that are not contained in Items 6 or 7. It
also includes profit participation rights (Genussscheine) that are bearer or
negotiable instruments and that are eligible for listing on a stock exchange,
and all other non-interest-bearing securities that are listed on a stock
exchange. This item principally contains investment shares that are part of our
fixed assets portfolio. See "--Summary of Material Differences between Generally
Accepted German and United States Accounting Principles."
Equity investments in non-affiliated companies; equity investments in affiliated
companies
An "equity investment" (Beteiligung), as defined in ss. 271(1) of the
German Commercial Code (Handelsgesetzbuch), is a direct or indirect equity
interest in another company that we intend to hold on a long-term basis in order
to establish a permanent relationship that contributes to our business. Equity
interests of 20% or more are subject to a rebuttable presumption that they are
Beteiligungen.
"Non-affiliated companies" are companies that do not fulfill the
definition of "affiliated companies." "Affiliated companies" (verbundene
Unternehmen) within the meaning of ss. 271(2) of the German Commercial Code
(Handelsgesetzbuch) are companies (i) that are wholly or more than 50%-owned, or
otherwise controlled, by us, (ii) our interest in which is characterized as an
equity investment (Beteiligung) and (iii) which must be fully consolidated with
us in accordance with ss. 290 of the German Commercial Code (Handelsgesetzbuch).
Thus, our investments in all affiliated companies are Beteiligungen.
A Beteiligung can be an investment (i) in an affiliated company or (ii)
in a company that is not an affiliated company if the conditions of ss. 271(1)
of the equity investment in the German Commercial Code (Handelsgesetzbuch) are
met. Item 6 refers to equity investments in companies that are not affiliated
companies, whereas Item 7 refers to equity investments in affiliated companies.
A credit institution (Kreditinstitut) is defined in ss. 1(1), KWG which
enumerates certain activities as banking activities and provides that any
enterprise engaging in one or more of such banking activities commercially or on
a scale that requires a commercially organized business operation requires a
license pursuant to ss. 32(1), sentence 1, KWG.
A financial services institution (Finanzdienstleistungsinstitut) is
defined in ss. 1(1a), KWG which enumerates certain activities as financial
service activities and provides that any enterprise other than a credit
institution engaging in one or more of such financial service activities
commercially or on a scale that requires a commercially organized business
operation requires a license pursuant to section 32(1), sentence 1, KWG.
96
Companies in which a company owns at least 20 % of the capital must be
listed pursuant to ss. 285 No. 11 of the German Commercial Code
(Handelsgesetzbuch) in the Notes to Financial Statements. Such Notes indicate
which of the companies listed pursuant to ss. 285 No. 11 of the German
Commercial Code (Handelsgesetzbuch) are affiliated companies.
Fiduciary assets; fiduciary liabilities
The major portions of "fiduciary assets" and "fiduciary liabilities"
consist of fiduciary loans, which are loans made by us in our name but on behalf
of other entities with funds entirely supplied by, and for a purpose and on
terms specified by, such other entities. Our liability in connection with
fiduciary loans is limited to our duties as trustee of the other entities'
funds, and we bear no credit risks with respect to fiduciary loans. See
"--General--Introduction," and "--Business--Loan Portfolio Risks." An equal
amount appears under fiduciary loans on both the assets and the liabilities side
of our Balance Sheet.
Administrative loans, which are loans made by us in the name of other
entities on behalf of and at the sole direction of such entities using funds
entirely supplied by such entities, do not appear on our Balance Sheet. See
"--General--Introduction" and "--Business--Loan Portfolio Risks."
Tangible assets
This item includes land and buildings used by us for our business
activities and furniture and office equipment.
Liabilities to credit institutions
This item includes all kinds of liabilities to German and non-German
credit institutions, unless the liabilities are certificated liabilities (which
are included in Item 3 on the liabilities side). This item includes, among
others, registered debt securities (Namensschuldverschreibungen), negotiable
debt securities that are not part of an offering, registered money market
instruments, registered mortgage-backed bonds (Hypothekennamenspfandbriefe) and
obligations arising out of securities transactions or arising out of settlement
accounts and obligations arising from bills of exchange (drafts) sold by us for
which we have not received any payments from customers. This item also includes
medium or long term loans evidenced by non-negotiable promissory notes placed
with investors by credit institutions (Schuldscheindarlehen).
Liabilities to customers
This item includes all kind of liabilities to German and non-German
customers other than credit institutions, unless these obligations are
certificated liabilities (which are included in Item 3 on the liabilities side).
This item includes, among others, registered debt securities, negotiable debt
securities that are not part of an offering, registered mortgage-backed bonds
(Hypothekennamenspfandbriefe) and registered money market instruments. This item
also includes non-negotiable promissory notes placed with investors
(Schuldscheindarlehen).
Certificated liabilities
Certificated liabilities are debt obligations that are evidenced by a
transferable certificate other than a certificate registered in the name of the
holder. "Notes and bonds issued" are bearer debt securities
(Inhaberschuldverschreibungen) and negotiable debt securities that are part of
an offering, in each case irrespective of whether they are eligible for listing
on a stock exchange or not. Debt securities issued by us that are not eligible
for listing on a stock exchange and that were repurchased by us are deducted
from
97
Item 3 a) on the liabilities side of our Balance Sheet. "Money market
securities" are bearer debt securities, and negotiable debt securities that are
part of an offering, irrespective of whether they are eligible for listing on a
stock exchange.
For a description of the types, amounts and maturities of, and interest
rates on, bonds and notes issued by us, see "--Business--Sources of Funds" and
"Financial Section--Supplementary Information on Debt of L-Bank."
Other liabilities
This item includes, among other things, equalization for exchange rate
differences, financial liabilities in swap transactions and premiums on the sale
of options.
Deferred items
This item consists of interest subsidies (the entire amount of
subsidized interest over the life of a subsidized loan) received from
Baden-Wurttemberg, the Federal Republic of Germany, the European Union or other
public authorities. On each interest payment date for any particular subsidized
loan, an amount equal to the subsidized portion of the interest, to the extent
not debited from an interest support reserve, is taken into income under income
Item 1 on the statement of income. See "--Contingency reserves" and
"--Business--Reserves for Interest Subsidies." Besides that, this item consists
of deferred income in connection with our own securities issues and our lending
business, in each case not yet taken into income on a pro rata basis.
Contingency reserves
This item includes reserves for pensions and similar obligations (Item
7 a)), reserves for taxes (Item 7 b)) and other reserves (Item 7 c)). The amount
to be accrued for our pension liabilities each year is the present value of
future payments computed by an actuarial method using a 6 % rate of discount.
The other reserves consist in large part of a reserve for interest
subsidies (the entire amount required over the course of a subsidized loan to
cover the difference between the actual interest payable by the borrower and the
yield from a market based interest rate) to the extent not covered by funds
supplied by Baden-Wurttemberg, the Federal Republic of Germany or the European
Union. On each interest payment date for any particular subsidized loan, an
amount equal to the subsidized portion of the interest, to the extent not taken
into income from deferred income, is debited from the reserve and credited to
income under income Item 1 on the statement of income. Expenses item
"Allocations to reserves for interest rate reductions" on the statement of
income indicates the net cost of interest rate subsidies. See "--Deferred items"
and "--Business--Reserves for Interest Subsidies."
The remaining amount of other reserves relates, among other things, to
reserves for contingent liabilities arising from export and other guaranties and
from swap and other option transactions, and liabilities in connection with an
obligation to grant early retirement benefits to staff members.
Fund for general bank risks
Funds for General Banking Risks pursuant to ss. 340g, German Commercial
Code are counted as part of core capital. Under that provision, banks may carry
a special item called "Fund for general bank risks" (Sonderposten fur allgemeine
Bankrisiken) on the liabilities side of their balance sheet for protection
against general banking risks. However, such a fund may only be established if,
in accordance with reasonable commercial judgment, the special risks inherent in
the business of banks require the
98
establishment of such a fund. Any additions to the Fund for general bank risks
or any profits derived from its dissolution must be reflected separately in the
bank's income statement. See "--Regulation and Supervision of L-Bank in
Germany--The Banking Act and Banking Regulation by the Federal Supervisory
Authority for Financial Services."
Equity
See "--Capitalization."
Retained profit and reserves
We are not subject to any legal obligation or any obligation provided
for in the L-Bank Statutes to establish retained earnings reserves.
Contingent liabilities relating to negotiated cleared bills of exchange
This item includes contingent liabilities relating to negotiated
cleared bills of exchange settled with customers. It does not include
liabilities in connection with instruments deposited with the Federal Central
Bank as collateral for the marginal lending facility or open market operations.
Liabilities relating to guaranties and indemnity agreements
This item includes contingent liabilities in respect of guaranties,
credit default swaps, guaranties on bills of exchange, check guaranties and
indemnity agreements.
Depreciation and accumulated amortization on receivables and certain securities,
together with allowances for possible loan losses
This item represents depreciation and valuation adjustments on loans
and certain securities in accordance with ss. 340f(3) German Commercial Code
(Handelsgesetzbuch). See also "--Business--Loan and Securities Loss Reserves."
Depreciation and accumulated amortization on equity investments in
non-affiliated companies, affiliated companies and securities treated as fixed
assets; income from additions to equity investments in non-affiliated companies,
affiliated companies and securities treated as fixed assets
This item represents in accordance with ss. 340c(2) German Commercial
Code (Handelsgesetzbuch) the net expense or income from write-downs or
write-ups, respectively, on investment holdings (equity investments in
affiliated and non-affiliated companies and securities that form part of the
fixed assets portfolio; see "--Equity investments in non-affiliated companies;
equity investments in affiliated companies," "--Notes and other interest-bearing
securities" and "--Shares and other non-interest-bearing securities").
Allocations to reserves for interest rate reductions
This item represents our net cost of interest rate subsidies. See
"--Contingency reserves" and "--Business--Reserves for Interest Subsidies."
99
Derivative Transaction
Derivative transactions are primarily concluded in order to control
interest rate exposure; they are not valued for balance sheet purposes due to
the fact that under German GAAP derivative transactions are off-balance sheet
transactions (they are however valued for risk managing and risk monitoring
purposes). Derivative transactions are also concluded in order to hedge balance
sheet items in trading books of a bank, and furthermore a bank can trade
derivatives on its own account. Such derivative transactions are valued for the
purpose of the balance sheet of a bank. Market values for those derivatives are
based on interest rates prevailing on the last day of the year on which there is
a liquid market. Where transactions are concluded for hedging purposes in a
trading book, they are valued together with the relevant balance sheet items,
creating a net position.
100
FINANCIAL STATEMENTS OF L-BANK
INDEX TO FINANCIAL STATEMENTS
Financial Statements of L-Bank as of and for the year ended December 31, 2003
Balance Sheet...........................................................F-3
Statement of Income.....................................................F-7
Notes to the Financial Statements.......................................F-9
Independent Auditors' opinion dated March 29, 2004.....................F-28
Financial Statements of L-Bank as of and for the year ended December 31, 2002
Balance Sheet..........................................................F-30
Statement of Income....................................................F-34
Notes to the Financial Statements......................................F-36
Independent Auditors' opinion dated April 8, 2003......................F-57
Financial Statements of L-Bank as of and for the year ended December 31, 2001
Balance Sheet..........................................................F-59
Statement of Income....................................................F-53
Notes to the Financial Statements......................................F-65
Independent Auditors' opinion dated April 9, 2002......................F-82
Supplementary Information on Debt of L-Bank.................................F-83
F-1
FINANCIAL STATEMENTS OF L-BANK
AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 2003
F-2
Landeskreditbank Baden-Wurttemberg - Forderbank - Balance sheet as of
December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Assets EUR EUR EUR EUR
1. Cash reserve
a) Cash on hand 42,241.10 35,219.32
b) Cash at central banks 257,485,390.46 246,001,697.70
hereof:
at Federal Central Bank
EUR 257,485,390.46 (246,001,697.70)
c) Cash in postal giro accounts --.-- --.--
257,527,631.56 246,036,917.02
- ------------------------------------------------------------------------------------------------------------------------------
2. Receivables from credit institutions
a) Payable on demand 91,035,045.39 67,679,885.74
b) Other receivables 11,669,629,275.91 10,494,519,446.74
11,760,664,321.30 10,562,199,332.48
- ------------------------------------------------------------------------------------------------------------------------------
3. Receivables from customers
thereof:
Mortgage loans
EUR 19,689,099,500.70 (19,846,929,401.53)
loans to public authorities and entities
organized under public law
EUR 3,065,463,938.41 (1,574,644,829.13)
24,584,056,954.30 23,258,188,570.40
- ------------------------------------------------------------------------------------------------------------------------------
4. Notes and other interest-bearing securities
a) Money market securities --.--
aa) Due from public-sector issuers --.--
thereof: eligible as collateral at
Federal Central Bank
EUR --.--(--.--)
ab) Due from other issuers --.-- --.-- --.--
thereof: eligible as collateral at --.--
Federal Central Bank
EUR --.--(--.--)
b) Bonds and notes
ba) Due from public-sector issuers 1,291,958,910.34 1,804,824,339.36
thereof: eligible as collateral at
Federal Central Bank
EUR 1,171,231,022.49
bb) Due from other issuers 7,008,756,949.33 6,264,559,928.09
thereof: eligible as collateral at 8,300,715,859.67 8,069,384,267.45
Federal Central Bank
EUR 5,473,135,432.82
(4,764,364,662.78)
c) Bank's own notes 197,221,813.93 207,469,685.79
Principal amount:
EUR 192,768,923.69 (198,787,248.89)
8,497,937,673.60 8,276,853,953.24
- ------------------------------------------------------------------------------------------------------------------------------
Carried forward: 45,100,186,580.76 42,343,278,773.14
F-3
Landeskreditbank Baden-Wurttemberg - Forderbank - Balance sheet as of
December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Equity and Liabilities EUR EUR EUR EUR
1. Liabilities to credit institutions
a) Payable on demand 112,389,611.08 192,408,782.68
b) With an agreed maturity or notice period 18,788,060,340.35 19,536,796,366.75
18,900,449,951.43 19,729,205,149.43
- ------------------------------------------------------------------------------------------------------------------------------
2. Liabilities to customers
a) Savings deposits
aa) With an agreed notice period --.-- --.--
of three months
ab) With an agreed notice period --.-- --.--
exceeding three months --.--
b) Other liabilities
ba) Payable on demand 122,014,468.53 115,740,022.12
bb) With an agreed maturity or 5,038,300,154.25 3,880,373,942.62
notice period
5,160,314.622.78 5,160,314,622.78 3,996,113,964.74
- ------------------------------------------------------------------------------------------------------------------------------
3. Certificated liabilities
a) Notes and bonds issued 16,415,697,411.11 14,582,209,402.22
b) Other certificated liabilities --.-- --.--
thereof: money market securities
EUR --.-- (--.--)
own acceptances and promissory notes
outstanding
EUR --.-- (--.--)
16,415,697,411.11 14,582,209,402.22
- ------------------------------------------------------------------------------------------------------------------------------
4. Fiduciary liabilities 511,876,387.93 666,549,301.80
thereof: fiduciary loans
EUR 511,274,426.95 (665,947,340.82)
- ------------------------------------------------------------------------------------------------------------------------------
5. Other liabilities 1,152,003,643.91 593,926,755.76
- ------------------------------------------------------------------------------------------------------------------------------
6. Deferred items 977,461,922.06 1,087,576,610.33
- ------------------------------------------------------------------------------------------------------------------------------
7. Contingency reserves
a) Reserves for pensions and similar 83,308,717.00
obligations 14,000.00 80,509,012.00
b) Reserves for taxes 666,492,854.26 15,437,306.66
c) Other reserves 721,532,963.27
749,815,571.26 817,479,281.93
- ------------------------------------------------------------------------------------------------------------------------------
8. Subordinated liabilities 598,818,103.10 444,760,064.00
- ------------------------------------------------------------------------------------------------------------------------------
Carried forward: 44,466,437,613.58 41,917,820,530.21
F-4
Landeskreditbank Baden-Wurttemberg - Forderbank - Balance sheet as of
December 31, 2003
- ----------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ----------------------------------------------------------------------------------------------
Assets EUR EUR
- ----------------------------------------------------------------------------------------------
Brought forward: 45,100,186,580.76 42,343,278,773.14
- ----------------------------------------------------------------------------------------------
5. Shares and other
non-interest-bearing securities 13,498,105.66 19,960,602.95
- ----------------------------------------------------------------------------------------------
6. Equity investments in non-affiliated companies 173,361,827.53 155,447,573.28
thereof:
in credit institutions
EUR 976,726.00 (121,539,351.59)
in financial services institutions
EUR --.-- (--.--)
- ----------------------------------------------------------------------------------------------
7. Equity investments in affiliated companies 102,008,403.08 110,108,403.08
thereof:
in credit institutions EUR --.-- (--.--)
in financial services institutions EUR --.--
(--.--)
- ----------------------------------------------------------------------------------------------
8. Fiduciary assets 511,876,387.93 666,549,301.80
thereof: fiduciary loans
EUR 511,274,426.95 (665,947,340.82)
- ----------------------------------------------------------------------------------------------
9. Intangible assets --.-- --.--
- ----------------------------------------------------------------------------------------------
10. Tangible assets 122,665,210.34 125,982,633.07
- ----------------------------------------------------------------------------------------------
11. Other assets 60,145,306.87 47,369,786.03
- ----------------------------------------------------------------------------------------------
12. Deferred charges and prepaid expenses 140,946,144.52 116,207,303.09
- ----------------------------------------------------------------------------------------------
Total assets 46,224,687,966.69 43,584,904,376.44
F-5
Landeskreditbank Baden-Wurttemberg - Forderbank -- Balance sheet as of
December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- -----------------------------------------------------------------------------------------------------------------
Equity and Liabilities EUR EUR EUR
- -----------------------------------------------------------------------------------------------------------------
Brought forward: 44,466,437,613.58 41,917,820,530.21
- -----------------------------------------------------------------------------------------------------------------
9. Fund for general bank risks 129,000,000.00 108,905,170.69
- -----------------------------------------------------------------------------------------------------------------
10. Equity
a) Subscribed capital 250,000,000.00 250,000,000.00
b) Capital surplus 950,850,789.69 950,850,789.69
c) Retained profit and reserves
ca) Legal reserves --.-- --.--
cb) Reserve for treasury stock --.-- --.--
cc) Statutory reserves --.-- --.--
cd) Other retained profit 426,000,000.00 323,000,000.00
d) Distributable profit 2,399,563.42 34,327,885.85
1,629,250,353.11 1,558,178,675.54
- -----------------------------------------------------------------------------------------------------------------
Total equity and liabilities 46,224,687,966.69 43,584,904,376.44
-----------------------------------------
1. Contingent liabilities
a) Contingent liabilities relating to negotiated
cleared bills of exchange --.-- --.--
b) Liabilities relating to guarantees
and indemnity agreements 1,228,502,273.82 1,068,613,953.30
c) Liabilities relating to securities covering
third-party liabilities --.-- --.--
1,228,502,273.82 1,068,613,953.30
- -----------------------------------------------------------------------------------------------------------------
2. Other obligations
a) Repurchase obligations from the sale of
securities with put options --.-- --.--
b) Placement and underwriting obligations --.-- --.--
c) Irrevocable credit commitments 1,359,288,687.00 1,317,885,351.80
1,359,288,687.00 1,317,885,351.80
- -----------------------------------------------------------------------------------------------------------------
F-6
Landeskreditbank Baden-Wurttemberg - Forderbank
Statement of income for the period from January 1, 2003 to December 31, 2003
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- ---------------------------------------------------------------------------------------------------------------------------
1. Interest income from
a) Lending and money market transactions 2,004,110,774.01 2,101,601,820.39
b) Fixed-interest securities and
debt register receivables 371,061,706.59 389,841,589.13
2,375,172,480.60 2,491,443,409.52
- ---------------------------------------------------------------------------------------------------------------------------
2. Interest expenses 1,972,054,532.46 2,103,783,365.73
403,117,948.14 387,660,043.79
- ---------------------------------------------------------------------------------------------------------------------------
3. Current income from
a) Shares and other
non-interest-bearing securities 463,406.51 605,093.36
b) Equity investments in non-affiliated 5,202,792.35 4,260,374.41
companies
c) Equity investments in affiliated companies --.-- --.--
5,666,198.86 4,865,467.77
- ---------------------------------------------------------------------------------------------------------------------------
4. Commission income 28,279,542.78 25,081,128.77
- ---------------------------------------------------------------------------------------------------------------------------
5. Commission expenses 11,258,353.10 13,459,113.11
- ---------------------------------------------------------------------------------------------------------------------------
6. Net income from financial transactions 2,093,939.16 2,109,754.84
- ---------------------------------------------------------------------------------------------------------------------------
7. Other operating income 40,596,141.64 41,134,887.96
- ---------------------------------------------------------------------------------------------------------------------------
8. General administrative expenses
a) Personnel expenses
aa) Wages and salaries 58,288,976.05 56,331,911.21
ab) Social security, pension and other
benefit and welfare expenses 15,711,878.08 22,767,299.91
thereof: for pensions 74,000,854.13 79,099,211.12
EUR 6,275,576.65 (8,945,552.10)
b) Other general administrative expenses 35,791,136.20 38,311,138.11
109,791,990.33 117,410,349.23
- ---------------------------------------------------------------------------------------------------------------------------
9. Depreciation and accumulated amortization
on intangible assets and tangible assets, 11,077,630.14 11,082,488.64
including property and equipment
- ---------------------------------------------------------------------------------------------------------------------------
10. Other operating expenses 30,105,729.78 23,436,330.00
- ---------------------------------------------------------------------------------------------------------------------------
Carried forward: 317,520,069.23 295,463,002.15
F-7
Landeskreditbank Baden-Wurttemberg - Forderbank
Statement of income for the period from January 1, 2003 to December 31, 2003
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------
EUR EUR
- --------------------------------------------------------------------------------------------------
Brought forward: 317,520,069.23 295,463,002.15
- --------------------------------------------------------------------------------------------------
11. Depreciation and accumulated
amortization
on receivables and certain securities,
together with allowances for possible
loan losses 138,327,759.32 132,669,003.32
thereof: transferred to special item
"Fund for general bank risks"
EUR 20,094,829.31 (--.--)
- --------------------------------------------------------------------------------------------------
12. Depreciation and accumulated
amortization
on equity investments in non-affiliated
companies, affiliated companies and
securities treated as fixed assets 6,610,878.35 4,636,327.14
- --------------------------------------------------------------------------------------------------
13. Costs arising from loss assignments 40,000.00 50,000.00
- --------------------------------------------------------------------------------------------------
14. Result from ordinary business operations 172,541,431.56 158,107,671.69
- --------------------------------------------------------------------------------------------------
15. Taxes on income 220,398.14 573,556.01
- --------------------------------------------------------------------------------------------------
16. Other taxes, where not shown
under item 10 95,151.53 177,782.24
- --------------------------------------------------------------------------------------------------
17. Allocation to reserves for
interest rate reductions 68,795,701.38 70,778,025.06
- --------------------------------------------------------------------------------------------------
18. Net profit 103,430,180.51 86,578,308.38
- --------------------------------------------------------------------------------------------------
19. Balance brought forward
from the previous year 1,969,382.91 33,249,577.47
105,399,563.42 119,827,885.85
- --------------------------------------------------------------------------------------------------
20. Transfers to retained profit and reserves
to other retained profit and reserves 103,000,000.00 85,500,000.00
- --------------------------------------------------------------------------------------------------
21. Distributable profit 2,399,563.42 34,327,885.85
- --------------------------------------------------------------------------------------------------
F-8
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
General principles
Landeskreditbank Baden-Wurttemberg - Forderbank (L-Bank) was
established by legislation passed on November 11, 1998, which came into effect
on December 1, 1998. In accordance with ss. 2 para. 1 subpara. 1 of the L-Bank
Act, the share capital of the Bank is EUR 250 million.
The financial statements for L-Bank have been drawn up in accordance
with the provisions of the German Commercial Code (Handelsgesetzbuch [HGB]) and
the Regulation on the Accounting Principles Applied to Credit Institutions
(Verordnung uber die Rechnungslegung fur Kreditinstitute [RechKredV]).
Headings and items on the balance sheet and statement of income are
classified in accordance with the financial statement forms that appear in
RechKredV. In the process, L-Bank has added an extra item to the expenses side
of the statement of income, "Allocation to reserves for interest rate
reductions" (ss. 265 para. 5 HGB).
The majority interests declared in the financial statements are of
minor significance overall. For this reason the Bank did not prepare
consolidated financial statements for the period (ss. 296 para. 2 HGB).
Foreign currency translation principles
Foreign currency amounts have been translated in accordance with the
provisions set out in ss. 340h HGB and declaration BFA 3/95. Assets and
liabilities denominated in foreign currencies, together with unprocessed spot
exchange transactions, have been translated at the middle spot rate on December
30, 2003, being the last day of the year on which there was a liquid foreign
exchange market.
For purposes of currency translation, currency items have been
calculated by offsetting claims and obligations arising from on-balance-sheet
and off-balance-sheet transactions in the respective currencies. These
transactions were classified and valued using the special cover option in the
respective currencies. Accordingly, all expenses and earnings arising from
currency translation are shown in the income statement as required by ss. 340 h
para. 2 subparas. 1 and 2 HGB; there was no requirement to show income under a
separate heading as the items outstanding on the balance sheet date fall within
the same timeframe.
Methods of accounting and valuation
Assets, liabilities and pending transactions have been valued in
accordance with the general provisions of ss.ss. 252 ff. HGB, taking into
account the special rules applying to credit institutions (ss.ss. 340e ff. HGB).
Receivables from credit institutions and customers are shown at par
value, liabilities to credit institutions and customers at redemption value. Any
interest-based differences are shown under deferrals and pre-payments and
written back pro rata temporis. Service charges are entered immediately.
Low-interest or non-interest-bearing receivables are discounted. Reserves for
interest rate subsidies are set up to cover loans made under the auspices of
development programs. Zero bonds and similar securities issued are shown at the
issue price plus interest calculated up to the balance sheet date pro rata
temporis.
All recognized individual risks and country risks arising out of the
Bank's lending business were appropriately provided for, either by accumulated
amortization for losses on individual loan accounts or by reserves. Lump-sum
reserves have been established to cover latent credit risks, and the Bank
maintains prudential reserves to cover general banking risks. Individual
provisions and lump-sum reserves have been deducted from the assets or
liabilities side as appropriate, as has the reserve for general banking risks
set up in compliance with ss. 340f HGB.
F-9
Securities in the trading portfolio and liquidity reserve are valued
strictly according to the principle of lower of cost or market value as at the
balance sheet date. Securities treated as fixed assets are shown at net book
value, differences between book value and redemption value (i.e. premiums or
discounts) being marked up or down pro rata to term.
Equity investments in non-affiliated and affiliated companies are
valued at the lower of acquisition cost or fair value, according to the rules
applying to fixed assets.
Tangible assets are valued at acquisition or production cost, less
scheduled depreciation. Where the value of an item is expected to continue to
decline, unscheduled depreciation has been applied as appropriate. Minor fixed
assets are fully depreciated in the year of acquisition.
Reserves for pension commitments and for obligations under the Bank's
employee pension scheme have been calculated using the method of computation
provided for in ss. 6a of the German Income Tax Act (Einkommensteuergesetz
[EStG]) applying the updated Heubeck mortality tables. Adequate provisions have
been made to cover the early retirement scheme provided for by collective
agreement and the part-time employment scheme devised for employees approaching
retirement, as well as any obligations arising in connection with long-service
bonuses and other benefits.
Other reserves are set at the amount deemed necessary by the exercise
of reasonable business judgment to cover all uncertain liabilities and potential
losses on pending transactions.
The Bank concludes derivative transactions primarily in order to
control interest rate exposure - they are not valued. The Bank also trades in
derivatives in order to hedge balance sheet items and on its own account. Market
values are based on interest rates prevailing at December 30, 2003, being the
last day of the year on which there was a liquid foreign exchange market.
Transactions for hedging purposes are valued together with the relevant balance
sheet items.
The market values of bonds, notes and derivatives held for the Bank's
own account are determined individually as at the balance sheet date. The Bank
currently holds four portfolios governed by EUR interest rate risks and offsets
valuation gains and losses within these portfolios. In accordance with the
non-parity principle, any positive balance is not appropriated, whereas a
provision is made to cover a negative balance.
Principles of the German Banking Act (Kreditwesengesetz [KWG])
Throughout 2002, the Bank adhered to Principle I (relating to capital
adequacy) and Principle II (relating to liquidity).
F-10
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Maturities of selected balance sheet items
(to final maturity or first call)
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Receivables from credit institutions
payable on demand 91,035 67,680
due in three months or less 2,447,805 2,456,809
due in more than three months to one year 1,233,705 1,015,186
due in more than one year to five years 3,440,884 2,997,131
due in more than five years 4,547,235 4,025,393
- --------------------------------------------------------------------------------------------
Receivables from customers
due in three months or less 727,522 502,867
due in more than three months to one year 1,051,845 649,987
due in more than one year to five years 2,817,343 2,400,261
due in more than five years 19,987,347 19,705,074
- --------------------------------------------------------------------------------------------
Notes and other interest-bearing securities
Loans and notes payable in
the following year 791,624 808,708
- --------------------------------------------------------------------------------------------
Liabilities to credit institutions
payable on demand 112,390 192,409
due in three months or less 4,016,730 3,402,134
due in more than three months to one year 1,261,686 1,764,600
due in more than one year to five years 6,309,218 4,488,868
due in more than five years 7,200,426 9,881,194
- --------------------------------------------------------------------------------------------
Liabilities to customers
payable on demand 122,014 115,740
due in three months or less 780,463 279,202
due in more than three months to one year 257,834 95,178
due in more than one year to five years 493,734 873,225
due in more than five years 3,506,268 2,632,769
- --------------------------------------------------------------------------------------------
Certificated liabilities
due in three months or less 368,727 635,384
due in more than three months to one year 2,917,473 1,816,999
due in more than one year to five years 10,987,280 10,140,068
due in more than five years 2,142,217 1,989,758
thereof under subitem
"Notes and bonds issued"
payable in the following year: TEUR
3,286,200
- --------------------------------------------------------------------------------------------
F-11
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Notes individual balance sheet items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Receivables from credit institutions
Under this heading are shown:
o receivables from
non-affiliated companies 128,000 286,209
o subordinated receivables 0 0
- --------------------------------------------------------------------------------------------
Receivables from customers
Under this heading are shown:
o receivables from affiliated companies 140,598 151,453
o receivables from
non-affiliated companies 230,430 247,276
o subordinated receivables 2,271 8,476
- --------------------------------------------------------------------------------------------
Notes and other
interest-bearing securities
The subitem "Bonds and notes"
does not include any certificated
subordinated receivables or receivables
from affiliated or non-affiliated companies.
Of the securities shown
under this heading:
o listed securities account for 8,341,014 8,116,537
o unlisted securities account for 156,924 160,317
Securities amounting to TEUR 8,192,630
are assigned to fixed assets.
Of these, TEUR 2,074,605
are valued as fixed assets.
- --------------------------------------------------------------------------------------------
F-12
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Notes to individual sheet items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Shares and other non-fixed interest securities
This item includes:
o subordinated assets in the amount of 0 6,462
o non-affiliated companies account for - -
Of the marketable securities included in this item:
o listed securities account for 0 6,462
o unlisted securities account for - -
- --------------------------------------------------------------------------------------------
Equity investments in non-affiliated companies
Of the marketable securities included under equity
investment in non-affiliated companies:
o listed securities account for 0 120,563
o unlisted securities account for 0 0
- --------------------------------------------------------------------------------------------
Equity investments in affiliated companies
This item does not include equity investments
which have been certified as marketable securities.
- --------------------------------------------------------------------------------------------
Fiduciary assets
This item is broken down as follows:
o Receivables from credit institutions 171,036 181,189
o Receivables from customers 340,841 485,361
- --------------------------------------------------------------------------------------------
Tangible assets
This item includes:
o real estate and buildings utilized
for the Bank's own activities 86,359 89,631
o furniture and office equipment 12,408 13,003
- --------------------------------------------------------------------------------------------
F-13
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and deferred items
Assets
o Difference between net loan proceeds or
original cash outlay and lower par (nominal)
value of receivables 78,922 54,480
o Difference between amount issued and
higher amount repayable of payables 55,385 53,770
- --------------------------------------------------------------------------------------------
Liabilities to credit institutions
Under this heading are shown:
o liabilities to affiliated companies - -
o liabilities to non-affiliated companies 0 713
- --------------------------------------------------------------------------------------------
Liabilities to customers
Under this heading are shown:
o liabilities to affiliated companies 14,615 26,679
o liabilities to non-affiliated companies - -
----------------
- --------------------------------------------------------------------------------------------
Fiduciary liabilities
Fiduciary liabilities are divided up into:
o liabilities to credit institutions 66,746 85,759
o liabilities to customers 445,131 580,790
- --------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and deferred items
Liabilities
o Difference between net loan proceeds or
original cash outlay and higher par (nominal)
value of receivables 28,982 36,485
o Difference between amount issued and
lower amount repayable of payables 1,477 2,338
- --------------------------------------------------------------------------------------------
F-14
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Subordinated liabilities
This item does not include any liabilities
to affiliated or non-affiliated companies.
Interest expenses in respect of subordinated
liabilities 21,493 18,412
- --------------------------------------------------------------------------------------------
Individual subordinated issues exceeding 10%
of the total amount of the subordinated liabilities
break down as follows:
Currency Amount in millions Interest rate (%) Due on
----------------------------------------------------------------------
EUR 85 Zero coupon issue Dec. 30, 2010
----------------------------------------------------------------------
EUR 250 4.1250 Jan. 14, 2009
----------------------------------------------------------------------
All subordinated liabilities constitute exclusively supplemental capital and
meet the requirements of the German Banking Act (Kreditwesengesetz [KWG]). Of
significance here is the subordinated nature of the Bank's liabilities in
relation to all non-subordinated liabilities due to other creditors. In the
event of liquidation, subordinated creditors are only entitled to receive
payment after all liabilities due to other creditors have been paid in full.
Retrospective limitation of the subordinated nature of the liability or the
original maturity (of at least five years) or the agreed period of notice, is
precluded.
In accordance with state legislation, L-Bank is unable to file for insolvency.
F-15
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Individual material items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Other assets
o Premiums on interest rate options 6,396 9,695
o Objets d'art 13,715 13,722
o Real estate and buildings in the current asset
portfolio 15,544 8,763
- --------------------------------------------------------------------------------------------
Other liabilities
o Adjustment item for foreign exchange valuation
of off-balance-sheet transactions 1,108,223 492,026
o Liabilities arising from contributions to state
highway construction project 15,339 15,339
o One-off payments on swaps due at maturity 11,321 4,700
o Liabilities relating to outstanding premiums on
interest rate options 6,956 9,275
o Trade payables 3,040 4,433
o Deductible taxes 2,434 2,461
- --------------------------------------------------------------------------------------------
Deferred items on the liability side
o Prepaid interest subsidies received from third
parties 907,619 1,007,367
o One-off payments on swaps due at maturity 38,899 40,822
- --------------------------------------------------------------------------------------------
Contingency reserves
o Under other reserves:
reserves for L-Bank interest subsidies 560,589 611,450
- --------------------------------------------------------------------------------------------
Commissions paid
o Commissions paid for administration of loans
in a fiduciary capacity 7,698 9,580
- --------------------------------------------------------------------------------------------
Other operating income
o Rental income 7,155 8,018
o Income from services to third parties 16,645 15,949
- --------------------------------------------------------------------------------------------
F-16
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Individual material items
- --------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------
Depreciation and accumulated amortization on equity
investments in non-affiliated companies, affiliated
companies and securities treated as fixed assets
o Unscheduled depreciation 17,705 4,720
- --------------------------------------------------------------------------------------------
Other operating expenses
o Expenses relating to grants and subsidies
provided under development programs managed
on behalf of the state of Baden-Wurttemberg 18,407 18,407
- --------------------------------------------------------------------------------------------
Total value of assets and debts
denominated in foreign currencies
o Assets 678,508 761,808
o Debts 4,612,033 3,455,007
The risk of exchange rate fluctuations arising from
balance sheet items denominated in foreign currencies
is essentially covered by off-balance-sheet
hedging transactions
- --------------------------------------------------------------------------------------------
Book value of assets sold for repurchase (true repo
agreements pursuant to ss. 340b para. 4 HGB)
In the context of sell and buy-back transactions
with other credit institutions 0 78,646
- --------------------------------------------------------------------------------------------
Assets lodged as security for liabilities
For other liabilities
o interest rate futures transactions 0 4,703
- --------------------------------------------------------------------------------------------
F-17
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Other financial obligations
- ----------------------------------------------------------------------------------------------------------
The total sum of other financial obligations
existing at the balance sheet date which are not
included in the balance sheet or shown below the
line is of minor significance to an evaluation
of the Bank's financial position.
Transactions involving derivatives
- ----------------------------------------------------------------------------------------------------------
At the balance sheet date, the following Replacement costs were calculated on the basis of
transactions involving financial derivatives market prices. All contracts with a positive
(forward transactions as defined in ss. 36 market value have been taken into account; they
RechKredV) formed part of L-Bank's portfolio. The have not been set off against contracts with a
majority of the transactions were undertaken in negative market value by contracting party. Taking
order to hedge interest rate and exchange rate all existing netting agreements into account,
fluctuations. The respective credit risk replacement costs have fallen by EUR 1,776
equivalents have been calculated using the market million, from EUR 2,509 million to EUR 733
valuation method based on the appropriate million.
counterparty weighting with the corresponding
percentage add-on. The practice of netting - the The following tables do not include fully hedged
offsetting of negative market values - was not derivative structures incorporated into standard
applied. Bank products.
Transactions involving derivatives - by contracting party
- ---------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2003
- ---------------------------------------------------------------------------------------------------------------------
Credit risk
Nominal values Nominal values equivalents Replacement costs
- ---------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- ---------------------------------------------------------------------------------------------------------------------
o Banks in the OECD 85,515 71,195 568 1,903
o Public-sector institutions in the OECD 549 75 35 32
o Other counterparties
(incl. stock exchange contracts) 7,489 6,429 829 574
Total 93,553 77,699 1,432 2,509
- ---------------------------------------------------------------------------------------------------------------------
F-18
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Transactions involving derivatives - by maturity
- -------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate Interest rate Currency Currency Credit derivative Credit derivative
risks risks risks risks risks risks
- -------------------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------------------
Residiual maturities
o up to 3 months 5,062 5,850 452 169 20 100
o up to 1 year 19,185 6,615 921 28 30 55
o up to 5 years 25,176 24,422 3,139 3,144 566 340
o more than 5 37,854 36,256 715 435 433 285
years
Total 87,277 73,143 5,227 3,776 1,049 780
- -------------------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives - by volume
- ------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2003
- ------------------------------------------------------------------------------------------------------------------
Credit risk Replacement
Nominal values Nominal values equivalents costs
- ------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- ------------------------------------------------------------------------------------------------------------------
Interest rate risks
o Interest rate swaps 86,625 72,138 635 2,078
o Interest rate options
- bought 0 0 0 0
- sold 0 0 - -
o Caps 383 895 0 0
o Stock exchange contracts 0 110 0 0
o Other forward transactions 269 0 35 31
Interest rate risks - total - 87,277 73,143 670 2,109
- ------------------------------------------------------------------------------------------------------------------
Currency risks
o Forward exchange deals 498 176 2 5
o Cross-currency interest rate 4,729 3,600 63 40
swaps
Currency risks - total - 5,227 3,776 65 45
- ------------------------------------------------------------------------------------------------------------------
Credit derivatives
o Credit default swaps
o as guarantor 675 525 343 2
o as guarantee 20 0 0 0
o Credit-linked notes
o as guarantor 354 255 354 353
Credit derivatives - total - 1,049 780 697 355
- ------------------------------------------------------------------------------------------------------------------
All credit default swaps have been assigned to investments. Credit default swaps
for which the Bank is acting as guarantor appear under contingent liabilities at
their nominal value. Credit-linked notes are shown under securities.
The transactions reported above include the following commercial transactions:
- ------------------------------------------------------------------------------------------------------------------
F-19
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Transactions involving derivatives - commercial transactions
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Credit risk
Nominal values Nominal values equivalents Replacement costs
- --------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- --------------------------------------------------------------------------------------------------------------------
0 Interest rate contracts 1,370 3,879 17 62
Total 1,370 3,879 17 62
- --------------------------------------------------------------------------------------------------------------------
Statement on tax liability
- --------------------------------------------------------------------------------------------------------------------
Under ss.5 para. 1 no. 2 of the Corporation Tax Act (Korperschaftsteuergesetz [KStG]) and ss.3 no. 2 of the Trade
Tax Act (Gewerbesteuergesetz [GewStG]), Landeskreditbank Baden-Wurttemberg - Forderbank is exempt from corporation
tax and trade tax.
- --------------------------------------------------------------------------------------------------------------------
F-20
L-Bank's equity holdings pursuant to ss. 285 no. 11 HGB
- ---------------------------------------------------------------------------------------------------------------
No. Name/Registered office Holding Equity capital (*) Net income/loss (*)
in % in Euro'000 in Euro '000
- ---------------------------------------------------------------------------------------------------------------
(direct)
1. Austria Beteiligungsgesellschaft mbH, Stuttgart 33.34 35,588 809
- ---------------------------------------------------------------------------------------------------------------
2. Industriepark Gottmadingen AG, Gottmadingen 100.00 25,813 1,573
- ---------------------------------------------------------------------------------------------------------------
3. MBG Mittelstandische Beteiligungsgesellschaft Baden- 26.80 16,175 978
Wurttemberg GmbH, Stuttgart
- ---------------------------------------------------------------------------------------------------------------
4. PT German Centre Indonesia, 83.67 -4,661(**) 1,735(**)
Bumi Serpong Damai, Indonesia
- ---------------------------------------------------------------------------------------------------------------
5. Technologiepark Karlsruhe GmbH, Karlsruhe 96.00 17,743 -568
- ---------------------------------------------------------------------------------------------------------------
6. Technologieparks Tubingen-Reutlingen, Tubingen 100.00 11,790 -462
- ---------------------------------------------------------------------------------------------------------------
7. StEP Stuttgarter EngineeringPark GmbH, Stuttgart 100.00 53,315 -532
- ---------------------------------------------------------------------------------------------------------------
8. STAIR Stuttgart Airpark GmbH, Stuttgart 100.00 665 -710
- ---------------------------------------------------------------------------------------------------------------
9. Mentasys GmbH, Karlsruhe 38.64 728 -918
- ---------------------------------------------------------------------------------------------------------------
10. detectis GmbH, Freiburg 39.43 -2 -845
- ---------------------------------------------------------------------------------------------------------------
11. Sympore GmbH, Reutlingen 27.95 -810 -1,922
- ---------------------------------------------------------------------------------------------------------------
12. Complexio GmbH, Freiburg 37.55 163 -125
- ---------------------------------------------------------------------------------------------------------------
13. Elexxion GmbH, Radolfzell 32.43 101 -49
- ---------------------------------------------------------------------------------------------------------------
14. Greenovation GmbH 33.82 -262 -1,648
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
(*) For last available financial year in each case
(**) Exchange rate as at Dec. 31, 2003: 1 euro = 10,617 rupiah
PT German Centre Indonesia was provided with a Letter of Support in respect of
financial year 2004, which capitalized the company sufficiently for it to meet
its obligations as they fall due.
Notes to the annual financial statements of
Landeskreditbank Baden-Wurttemberg - Forderbank -
for the financial year ended December 31, 2003
Fixed assets analysis
- ----------------------------------------------------------------------------------------------------------------------------
EUR '000
- ----------------------------------------------------------------------------------------------------------------------------
Write-offs Write-offs
Fixed assets - Historical and and
balance sheet cost Write- cumulative Book value depreciation
items - Jan. 1, 2003 Additions Retirements Transfers ups depreciation Dec. 31, 2003 in 2003
- ----------------------------------------------------------------------------------------------------------------------------
Notes and other
interest-bearing
securities 7,513,809 8,033,700 0
- ----------------------------------------------------------------------------------------------------------------------------
Shares and
other non-fixed-
interest
securities 0 Net adjustment in compliance with 0 0
- --------------------------------- ss. 34, para. 3, subpara. 2 RechKredV: ----------------------------------------------
Equity 187,701 TEUR 487,877 173,362 -6,705
investments in
non-affiliated
companies
- ----------------------------------------------------------------------------------------------------------------------------
Equity 119,682 102,008 -11,000
investments in
affiliated
companies
- ----------------------------------------------------------------------------------------------------------------------------
Tangible assets 174,778 8,167 -663 0 0 -59,617 122,665 -11,077
- ----------------------------------------------------------------------------------------------------------------------------
Other assets 13,741 37 -42 0 0 -22 13,714 -7
- ----------------------------------------------------------------------------------------------------------------------------
F-21
Landeskreditbank Baden-Wurttemberg - Forderbank -
hedging account for mortgage bonds at December 31, 2003
- --------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------
EUR million EUR million
- --------------------------------------------------------------------------------
Mortgage bonds issued 2,295 3,104
Specific assets allocated for hedging
o receivables from credit institutions 162 206
o receivables from customers 2,568 3,234
Surplus cover 435 336
F-22
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2003
Total emoluments paid out to authorities and administrative bodies
of Landeskreditbank Baden-Wurttemberg - Forderbank - in 2003
- ------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- ------------------------------------------------------------------------------------------------------------
o Board of Governors 160 160
o Board of Management 1,585 1,582
o Former members of the Board of Management
or their dependents 1,048 890
o Advisory Council (incl. travel expenses) 214 214
o Pension reserves for former members of the
Board of Management and their dependents 11,271 11,413
- ------------------------------------------------------------------------------------------------------------
Loans to members of administrative bodies (incl. contingent liabilities)
- ------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- ------------------------------------------------------------------------------------------------------------
o - Board of Governors 346 683
o - Board of Management 1,140 1,218
- ------------------------------------------------------------------------------------------------------------
Average number of staff employed in 2003
- ------------------------------------------------------------------------------------------------------------
Male Female Total
- ------------------------------------------------------------------------------------------------------------
Employees 506 628 1,134
of whom: full-time employees 495 420 915
part-time employees 11 208 219
excluding trainees, temporary staff, students
on placement, volunteers, cleaning staff
- ------------------------------------------------------------------------------------------------------------
F-23
Directorships held by members of the Board of Management and employees of
L-Bank pursuant to ss. 340a para. 4 no. 1 HGB
Christian Brand, Chairman of the Board of Management
Baden-Wurttembergische Bank AG, Stuttgart Member of the Supervisory Board
BWK GmbH Unternehmensbeteiligungsgesellschaft, Stuttgart Member of the Supervisory Board
Clariant GmbH, Frankfurt Member of the Supervisory Board
Sachsische Aufbaubank - Forderbank, Dresden Member of the Board of Governors
Tourismus-Marketing GmbH Baden-Wurttemberg, Stuttgart Vice Chairman of the Supervisory Board
Vorarlberger Landes- und Hypothekenbank AG, Bregenz Member of the Supervisory Board
Jurgen Hagele, Vice Chairman of the Board of Management
Business-Park Goppingen GmbH, Goppingen Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Chairman of the Supervisory Board
Dr. Manfred Schmitz, Member of the Board of Management
MBG Mittelstandische Beteiligungsgesellschaft
Baden-Wurttemberg GmbH, Stuttgart Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Vice Chairman of the Supervisory Board
Peter Arnold, Executive Officer
Business-Park Goppingen GmbH, Goppingen Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Member of the Supervisory Board
PT German Centre Indonesia, Bumi Serpong Damai, Indonesia Chairman of the Supervisory Board
Lothar Mierisch, Executive Officer
Finanzierungsgesellschaft fur Offentliche Vorhaben
des Landes Baden-Wurttemberg mbH, Stuttgart Member of the Board of Governors
Walter Weik, Executive Officer
Landsiedlung Baden-Wurttemberg GmbH, Stuttgart Member of the Supervisory Board
MBW Marketing- und Absatzforderungsgesellschaft fur Agrar- und
Forstprodukte aus Baden-Wurttemberg mbH, Stuttgart Member of the Supervisory Board
Stadtbau GmbH Pforzheim, Pforzheim Member of the Supervisory Board
Jurgen Schnieder, Head of Department
PT German Centre Indonesia, Bumi Serpong Damai, Indonesia Member of the Supervisory Board
F-24
Authorities of Landeskreditbank
Baden-Wurttemberg -- Forderbank
Board of Management Members of the Board of Governors 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Christian Brand Full members: Advisory members:
Chairman
State government representatives:
Jurgen Hagele Dr. Walter Doring MdL
Vice Chairman Minister of Economic
Affairs
Chairman
Dr. Manfred Schmitz Wirtsch.-Ing. Rudiger Ruhnow
Member of the Board of Gerhard Stratthaus MdL Bernd Bechtold Chairman of the Central Staff
Management Minister of Finance President of the Karlsruhe Council at L-Bank, Karlsruhe
Vice Chairman Chamber of Commerce and Industry
(from Dec. 1, 2003)
Prof. Dr. Dieter Puchta Dr. Thomas Schauble MdL Heinz Kalberer Reiner Enzmann
Member of the Board of Minister of the Interior Lord Mayor of Vaihingen Chairman of the Staff Council
Management (to June 30, Vice Chairman of L-Bank, Karlsruhe
2003)
Willi Stachele MdL
Minister for Food and Rural Planning
Vice Chairman
Ulrich Muller MdL Gisela Graber Gabriele Propp
Minister of the Environment, Deputy Chairman of the Regional Chairman of the Staff Council
Transport and Communications Chapter ver.di e.V., Stuttgart of L-Bank, Stuttgart
Dr. Friedhelm Repnik MdL Otwin Brucker
Minister of Social Affairs President of the Baden-Wurttemberg
Association of Municipalities
Rudolf Bohmler
State Secretary at the Ministry of
State Gerhard Burkhardt
Chairman of the Board of
Dr. Rainer Hagele Management of the Verband baden-
Undersecretary at the Ministry of wurttembergischer
Finance Wohnungsunternehmen e.V.,
Stuttgart
Other members: Dr. Christoph Niemann
Member of the Supervisory Board of
Klaus Hackert HSBC Trinkaus & Burkhardt KGaA,
President of the Baden-Wurttemberg Dusseldorf (to Nov. 30, 2003)
Association of Craftsmen
Marco Freiherr von Maltzan
Norbert Keller Chairman of the Board of
President of the Karlsruhe Chamber Management of BERU AG,
of Commerce and Industry (to Nov. Ludwigsburg (from Dec. 1, 2003)
30, 2003)
F-25
- -----------------------------------------------------------------------------------------------------------------------------------
State government
deputy representatives
Dr. Karl Epple Hermann Strampfer Frank Zach Prof. Konrad Freiherr von
Undersecretary at the Ministry Assistant Undersecretary and Head of the Trade and Industry Rotberg Assistant
of Economic Affairs (to Nov. Head of Dept. I at the Department of the Undersecretary and Head
30, 2003) Ministry of State Baden-Wurttemberg Chapter of DGB of the Department of
Constitutional,
Municipal, Savings Bank
and Legal Affairs at the
Ministry of the Interior
Dr. Horst Mehrlander Julian Wurtenberger Georg Mehl Klaus Roscheisen
State Secretary at the Assistant Undersecretary and Senator (retd.) Assistant Undersecretary and
Ministry of Economic Affairs Head of Dept. II at the Wustenrot & Wurttembergische AG Head of the Administration
(from Dec. 1, 2003) Ministry of State (to Nov. 30, (to Nov. 30, 2003) Department at the Ministry
2003) of the Environment,
Transport and Communications
Wolfgang Ruckert MdL Dr. Rudolf Kuhner Assistant Dr. Jurgen Schutz Christian Luft
State Secretary at the Undersecretary and Head of Vice President of the Assistant Secretary and Head
Ministry of Finance Dept. III at the Ministry of Baden-Wurttemberg Association of of the Central Office at the
State (from Dec. District Councils (from Dec. 1, Ministry of Social Affairs
1, 2003) 2003)
Roland Eckert Undersecretary Deputy representatives: Karl-Heinz Reinheimer Bernhard Giess
at the Ministry of the Honorary Chairman of the Assistant Secretary and Head
Interior (to Jan. 31, 2003) Joachim Wohlfeil Bundesverband Freier of the State Budget, Real
President of the Karlsruhe Wohnungsunternehmen e.V., Estate and Investments
Chamber of Craftsmen Sindelfingen (to Nov. 30, 2003) Section of the Ministry of
State (to March 23, 2003)
Max Munding Undersecretary at Dr. Ing. Hansjorg Rieger Andreas Schmitz Reiner Moser
the Ministry of the Interior Managing Partner of General Partner of HSBC Trinkaus Assistant Secretary and Head
(from Feb. 1, 2003 to Nov. 30, RUD-Kettenfabrik Rieger & & Burkhardt KGaA, Dusseldorf of the Budget and Fiscal
2003) Dietz, Aalen (from Dec. 1, 2003) Policy, Tax Appraisal, Real
Estate and Investments
Section of the Ministry of
State (from March 24, 2003)
Heribert Rech MdL Egon Gushurst Wilhelm Freiherr von Haller Norbert Schmitt
State Secretary at the Certified Public Accountant Member of the Board of Management Assistant Secretary and Head
Ministry of the Interior (from and Honorary President of Deutsche Bank AG of the State Investment and
Dec. 1, 2003) Badischer Genossenschaftsverband Banking Section at the
Raiffeisen-Schulze-Delitzsch Ministry of Finance
e.V., Karlsruhe (to Nov. 30,
2003)
Rainer Arnold Undersecretary Gerhard Rosswog Spokesman for Prof. Dr. Willi Weiblen
at the Ministry for Food and the Board of Management of Assistant Undersecretary and
Rural Planning Badischer Genossenschaftsverband Head of the Department of
Raiffeisen-Schulze-Delitzsch Economic and Structural Policy
e.V., Karlsruhe (from Dec. 1, at the Ministry of Economic
2003) Affairs
Stefan Mappus MdL Walter Leibold
State Secretary at the Assistant Undersecretary and Head
Ministry of the Environment, of the Department of Financial
Transport and Communications Policy and Investments at the
Ministry of Finance
Bernhard Bauer Undersecretary
at the Ministry of Social
Affairs
F-26
Proposal of the Board of Management for the appropriation of retained profits
EUR 103.0 million of the net profit for the financial year 2003 has already been
appropriated to retained profit and reserves. Of the remaining distributable
profit totaling EUR 2,399,563.42, the Board of Management proposes that EUR
2,000,000 should be appropriated to retained profit and reserves, and that the
remaining EUR 399,563.42 should be carried forward to next year's account.
Karlsruhe, March 16, 2004
Landeskreditbank Baden-Wurttemberg - Forderbank
/s/ Christian Brand /s/ Jurgen Hagele /s/ Dr. Manfred Schmitz
- -------------------- ------------------ ------------------------
Christian Brand Jurgen Hagele Dr. Manfred Schmitz
F-27
Independent Auditors' opinion
We have audited the financial statements of Landeskreditbank
Baden-Wurttemberg - Forderbank - ("L-Bank" or "the Bank"), Karlsruhe, for the
financial year ending December 31, 2003. The accounting and preparation of the
financial statements and of the management report of the Bank in accordance with
German commercial law are the responsibility of the Board of Managing Directors
of L-Bank. Our responsibility is to express an opinion based on our audit on the
financial statements and the management report of the Bank. We conducted our
audit of the financial statements in accordance with ss. 317 HGB (the German
Commercial Code and the German generally accepted standards for the audit of
financial statements promulgated by the "Institut der Wirtschaftspufer" (IDW,
the German Institute of Certified Public Accountants). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the presentation of the net assets, financial position, and results of operation
in the financial statements, drawn up in accordance with the German generally
accepted accounting principles, and in the management report of the Bank are
free of material misstatement. Knowledge of the business activities and the
economic and legal environment of the Bank and evaluations of possible
misstatements are taken into account in the determination of audit procedures.
The effectiveness of the accounting-related internal control system and the
evidence supporting the disclosures in the books and records, the financial
statements, and the management report of the Bank are primarily examined on a
test basis within the framework of the audit. The audit of the financial
statements includes assessing the accounting principles applied and the
significant estimates made by the Board of Managing Directors of L-Bank and
evaluating the overall presentation of the financial statements and management
report of the Bank. We believe that our audit provides a reasonable basis for
our opinion.
Our audit did not lead to any objections.
In our opinion, the financial statements give a true and fair view of
the net assets, financial position, and results of operations of the Bank in
accordance with German generally accepted accounting principles. Seen in total,
the management report of the Bank is an accurate representation of the position
of the Bank and accurately reflects the risks entailed in its future
development.
Stuttgart, March 29, 2004
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/ Schuldt /s/ Apitzsch
- ------------------------ ------------------------
Schuldt ppa. Apitzsch
Auditor Auditor
F-28
FINANCIAL STATEMENTS OF L-BANK
AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 2002
F-29
Landeskreditbank Baden-Wurttemberg - Forderbank - Balance sheet as of December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Assets Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
1. Cash reserve
a) Cash on hand 35,219.32 34,509.31
b) Cash at central banks 246,001,697.70 335,645,325.62
thereof: at Federal Central Bank
EUR 246,001,697.70 (335,645,325.62)
c) Cash in postal giro accounts -.- -.-
246,036,917.02 335,679,834.93
- --------------------------------------------------------------------------------------------------------------------------------
2. Receivables from credit institutions
a) Payable on demand 67,679,885.74 63,689,244.49
b) Other receivables 10,494,519,446.74 9,710,543,892.79
10,562,199,332.48 9,774,233,137.28
- --------------------------------------------------------------------------------------------------------------------------------
3. Receivables from customers 23,258,188,570.40 23,287,140,379.02
thereof:
mortgage loans
EUR 19,846,929,401.53 (19,967,862,497.92)
loans to public authorities and entities
organized under public law
EUR 1,574,644,829.13 (1,490,664,208.07)
- --------------------------------------------------------------------------------------------------------------------------------
4. Notes and other fixed-interest securities
a) Money market securities
aa) Due from public-sector issuers 0.00 0.00
thereof: eligible as collateral
at Federal Central Bank
EUR -.- (-.-)
ab) Due from other issuers 0.00 0.00 0.00
thereof: eligible as collateral 0.00
at Federal Central Bank
EUR -.- (-.-)
b) Bonds and notes
ba) Due from public-sector issuers 1,804,824,339.36 1,586,528,000.59
thereof: eligible as collateral
at Federal Central Bank
EUR 1,618,044,726.23
(1,385,845,636.43)
bb) Due from other issuers 6,264,559,928.09 5,734,742,009.58
thereof: eligible as collateral 8,069,384,267.45 7,321,270,010.17
at Federal Central Bank
EUR 4,764,364,662.78
4,745,949,371.52)
c) Bank's own notes 207,469,685.79 1,363,487,926.63
Principal amount: 8,276,853,953.24 8,684,757,936.80
EUR 198,787,248.89 (1,311,469,555.12)
Carried forward: 42,343,278,773.14 42,081,811,288.03
F-30
- --------------------------------------------------------------------------------------------------------------------------------
Equity and Liabilities Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
1.0 Liabilities to credit institutions
a) Payable on demand 192,408,782.68 257,468,529.10
b) With an agreed maturity or notice
period 19,536,796,366.75 21,371,955,624.79
19,729,205,149.43 21,629,424,153.89
- --------------------------------------------------------------------------------------------------------------------------------
2.0 Liabilities to customers
a) Savings deposits
aa) With an agreed notice period -.- -.-
of three months
ab) With an agreed notice period -.- -.-
exceeding three months -.-
b) Other liabilities
Ba) Payable on demand 115,740,022.12 82,302,965.30
bb) With an agreed maturity or 3,880,373,942.62 4,067,716,506.49
notice period 3,996,113,964.74 3,996,113,964.74 4,150,019,471.79
- --------------------------------------------------------------------------------------------------------------------------------
3.0 Certificated liabilities
a) Notes and bonds issued 14,582,209,402.22 12,517,035,139.85
b) Other certificated liabilities -.- -.-
Thereof: money market securities 14,582,209,402.22 12,517,035,139.85
EUR -.- (-.-)
own acceptances and promissory notes
outstanding
EUR -.- (-.-)
- --------------------------------------------------------------------------------------------------------------------------------
4.0 Fiduciary liabilities 666,549,301.80 816,284,765.82
thereof: fiduciary loans
EUR 665,947,340.82 (815,682,804.85)
- --------------------------------------------------------------------------------------------------------------------------------
5.0 Other liabilities 593,926,755.76 80,508,648.58
- --------------------------------------------------------------------------------------------------------------------------------
6.0 Deferred items 1,087,576,610.33 1,308,442,177.07
- --------------------------------------------------------------------------------------------------------------------------------
7.0 Contingency reserves
a) Reserves for pensions and similar
Obligations 80,509,012.00 74,551,058.90
b) Reserves for taxes 15,437,306.66 14,099,306.66
c) Other reserves 721,532,963.27 778,399,144.47
817,479,281.93 867,049,510.03
- --------------------------------------------------------------------------------------------------------------------------------
8.0 Subordinated liabilities 444,760,064.00 442,166,011.68
Carried forward: 41,917,820,530.21 41,810,929,878.71
F-31
Landeskreditbank Baden-Wurttemberg -
Forderbank - Balance sheet as of December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Assets Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
Brought forward: 42,343,278,773.14 42,081,811,288.03
- --------------------------------------------------------------------------------------------------------------------------------
5.0 Shares and other 19,960,602.95 37,940,125.39
non-interest-bearing
securities
- --------------------------------------------------------------------------------------------------------------------------------
6.0 Equity investments in 155,447,573.28 149,938,251.52
non-affiliated companies
thereof:
in credit institutions
EUR 121,539,351.59
(121,539,351.59)
in financial services
institutions
EUR -.- (-.-)
- --------------------------------------------------------------------------------------------------------------------------------
7.0 Equity investments in 110,108,403.08 22,408,403.08
affiliated companies
thereof:
in credit institutions
EUR -.- (-.-)
in financial services
institutions EUR -.-
(-.-)
- --------------------------------------------------------------------------------------------------------------------------------
8.0 Fiduciary assets 666,549,301.80 816,284,765.82
thereof: fiduciary
loans
EUR 665,947,340.82
(815,682,804.85)
- --------------------------------------------------------------------------------------------------------------------------------
9.0 Intangible assets -.- -.-
- --------------------------------------------------------------------------------------------------------------------------------
10.0 Tangible assets 125,982,633.07 141,462,084.46
- --------------------------------------------------------------------------------------------------------------------------------
11.0 Other assets 47,369,786.03 51,591,829.83
- --------------------------------------------------------------------------------------------------------------------------------
12.0 Deferred charges and 116,207,303.09 89,998,668.43
prepaid expenses
Total assets 43,584,904,376.44 43,391,435,416.56
- --------------------------------------------------------------------------------------------------------------------------------
F-32
- --------------------------------------------------------------------------------------------------------------------------------
Equity and Liabilities Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
Brought forward: 41,917,820,530.21 41,810,929,878.71
- --------------------------------------------------------------------------------------------------------------------------------
9.0 Fund for general bank risks 108,905,170.69 108,905,170.69
- --------------------------------------------------------------------------------------------------------------------------------
10.0 Equity
a) Subscribed capital 250,000,000.00 250,000,000.00
b) Capital surplus 950,850,789.69 950,850,789.69
c) Retained profit and reserves
ca) Legal reserves -.- -.-
cb) Reserve for treasury stock -.- -.-
cc) Statutory reserve -.- -.-
cd) Other retained profit 323,000,000.00 237,500,000.00
d) Distributable profit 34,327,885.85 33,249,577.47
1,558,178,675.54 1,471,600,367.16
Total equity and liabilities 43,584,904,376.44 43,391,435,416.56
- --------------------------------------------------------------------------------------------------------------------------------
1.0 Contingent liabilities
a)Contingent liabilities relating to
negotiated cleared bills of exchange -.- -.-
b)Liabilities relating to guarantees and
indemnity agreements 1,068,613,953.30 431,759,983.85
c)Liabilities relating to securities
covering third-party liabilities -.- -.-
1,068,613,953.30 431,759,983.85
- --------------------------------------------------------------------------------------------------------------------------------
2.0 Other obligations
a)Repurchase obligations from the sale
of securities with put options -.- -.-
b)Placement and underwriting obligations -.- -.-
c)Irrevocable credit commitments 1,317,885,351.80 1,522,977,890.47
1,317,885,351.80 1,522,977,890.47
F-33
Landeskreditbank Baden-Wurttemberg - Forderbank
Statement of income for the period
from January 1, 2002 to December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
1.0 Interest income from
a)Lending and money market
transactions 2,101,601,820.39 2,032,059,758.72
b)Fixed-interest securities and
debt register receivables 389,841,589.13 357,301,098.12
2,491,443,409.52 2,389,360,856.84
- --------------------------------------------------------------------------------------------------------------------------------
2.0 Interest expenses 2,103,783,365.73 2,005,496,735.15
387,660,043.79 383,864,121.69
- --------------------------------------------------------------------------------------------------------------------------------
3.0 Current income from
a)Shares and other
non-interest-bearing securities 605,093.36 792,889.41
b)Equity investments in
non-affiliated companies 4,260,374.41 5,561,935.66
c)Equity investments in
affiliated companies -.- -.-
4,865,467.77 6,354,825.07
- --------------------------------------------------------------------------------------------------------------------------------
4.0 Commission income 25,081,128.77 25,624,281.98
- --------------------------------------------------------------------------------------------------------------------------------
5.0 Commission expenses 13,459,113.11 12,485,132.48
- --------------------------------------------------------------------------------------------------------------------------------
6.0 Net income from financial 2,109,754.84 1,230,345.09
transactions
- --------------------------------------------------------------------------------------------------------------------------------
7.0 Other operating income 41,134,887.96 37,234,241.31
- --------------------------------------------------------------------------------------------------------------------------------
8.0 General administrative expenses
a) Personnel expenses
aa) Wages and salaries 56,331,911.21 51,901,035.42
ab) Social security, pension
and other benefit and
welfare expenses thereof:
for pensions 22,767,299.91 16,177,612.27
EUR 8,945,552.10 79,099,211.12 68,078,647.69
(7,707,050.11)
b) Other general administrative
expenses 38,311,138.11 33,253,509.08
117,410,349.23 101,332,156.77
- --------------------------------------------------------------------------------------------------------------------------------
9.0 Depreciation and accumulated 11,082,488.64 19,309,431.37
amortization on intangible
assets and tangible assets
including property and equipment
- --------------------------------------------------------------------------------------------------------------------------------
10.0 Other operating expenses 23,436,330.00 8,539,154.54
- --------------------------------------------------------------------------------------------------------------------------------
11.0 Depreciation and accumulated 132,669,003.32 171,947,306.05
amortization on receivables and
certain securities, together
with allowances for possible
loan losses
Carried forward: 162,793,998.83 140,694,633.93
F-34
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- --------------------------------------------------------------------------------------------------------------------------------
Brought forward: 162,793,998.83 140,694,633.93
- --------------------------------------------------------------------------------------------------------------------------------
12.0 Depreciation and accumulated 4,636,327.14 -.-
amortization on equity
investments in non-affiliated
companies, affiliated companies
and securities treated as fixed
assets
- --------------------------------------------------------------------------------------------------------------------------------
13.0 Income from additions to equity -.- 53,172,310.19
investments in non-affiliated
companies, affiliated companies
and securities treated as fixed
assets
- --------------------------------------------------------------------------------------------------------------------------------
14.0 Costs arising from loss 50,000.00 13,026,267.23
assignments
- --------------------------------------------------------------------------------------------------------------------------------
15.0 Result from ordinary business 158,107,671.69 180,840,676.89
operations
- --------------------------------------------------------------------------------------------------------------------------------
16.0 Taxes on income 573,556.01 672,108.74
- --------------------------------------------------------------------------------------------------------------------------------
17.0 Other taxes, where not shown 177,782.24 176,062.72
under item 10
- --------------------------------------------------------------------------------------------------------------------------------
18.0 Allocation to reserves for 70,778,025.06 74,336,681.36
interest rate reductions
- --------------------------------------------------------------------------------------------------------------------------------
19.0 Net profit 86,578,308.38 105,655,824.07
- --------------------------------------------------------------------------------------------------------------------------------
20.0 Balance brought forward from the 33,249,577.47 31,646,572.41
previous year
119,827,885.85 137,302,396.48
- --------------------------------------------------------------------------------------------------------------------------------
21.0 Transfers to retained profit and 85,500,000.00 104,052,819.01
reserves to other retained
profit and reserves
- --------------------------------------------------------------------------------------------------------------------------------
22.0 Distributable profit 34,327,885.85 33,249,577.47
- --------------------------------------------------------------------------------------------------------------------------------
F-35
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
General principles
Landeskreditbank Baden-Wurttemberg - Forderbank (L-Bank) was
established by legislation passed on November 11, 1998, which came into effect
on December 1, 1998. In accordance with ss. 2 para. 1 subpara. 1 of the L-Bank
Act, the share capital of the Bank is EUR 250 million.
The financial statements for L-Bank have been drawn up in accordance
with the provisions of the German Commercial Code (Handelsgesetzbuch [HGB]) and
the Regulation on the Accounting Principles Applied to Credit Institutions
(Verordnung uber die Rechnungslegung fur Kreditinstitute [RechKredV]).
Headings and items on the balance sheet and statement of income are
classified in accordance with the financial statement forms that appear in
RechKredV. In the process, L-Bank has added an extra item to the expenses side
of the statement of income, "Allocation to reserves for interest rate
reductions" (ss. 265 para. 5 HGB).
The majority interests declared in the financial statements are of
minor significance overall. For this reason the Bank did not prepare
consolidated financial statements for the period (ss. 296 para. 2 HGB).
Foreign currency translation principles
Foreign currency amounts have been translated in accordance with the
provisions set out in ss. 340h HGB and declaration BFA 3/95. Assets and
liabilities denominated in foreign currencies, together with unprocessed spot
exchange transactions currencies, together with unprocessed spot exchange
transactions, have been translated at the middle spot rate on December 30, 2002.
For purposes of currency translation, currency items have been
calculated by offsetting claims and obligations arising from on-balance-sheet
and off-balance-sheet transactions in the respective currencies. These
transactions were classified and valued using the special cover option in the
respective currencies. Accordingly, all expenses and earnings arising from
currency translation are shown in the income statement as required by ss. 340h
para. 2 subparas. 1 and 2 HGB; there was no requirement to show income under a
separate heading as the items outstanding on the balance sheet date fall within
a limited timeframe.
Methods of accounting and valuation
Assets, liabilities and pending transactions have been valued in
accordance with the general provisions of ss.ss. 252 ff. HGB, taking into
account the special rules applying to credit institutions (ss.ss. 340e ff. HGB).
Receivables from credit institutions and customers are shown at par
value, liabilities to credit institutions and customers at redemption value. Any
interest-based differences are shown under deferrals and prepayments and written
back pro rata temporis. Service charges are entered immediately. Low-interest or
non-interest-bearing receivables are discounted. Reserves for interest rate
subsidies are set up to cover loans made under the auspices of development
programs. Zero bonds and similar securities issued are shown at the issue price
plus interest calculated up to the balance sheet date pro rata temporis.
All recognized individual risks and country risks arising out of the
Bank's lending business were appropriately provided for, either by accumulated
amortization for losses on individual loan accounts or by reserves. Lump-sum
reserves have been established to cover latent credit risks, and the Bank
maintains prudential reserves to cover general banking risks. Individual and
lump-sum accumulated amortization/reserves have been deducted from the assets or
liabilities side as appropriate, as has the reserve for general banking risks
set up in compliance with ss. 340f HGB.
F-36
Securities in the trading portfolio and liquidity reserve are valued
strictly according to the principle of lower of cost or market value as at the
balance sheet date. Securities treated as fixed assets are shown at net book
value, differences between book value and redemption value (premium/discounts)
being marked up or down pro rata to term.
Equity investments in non-affiliated and affiliated companies are
valued at the lower of acquisition cost or fair value, according to the rules
applying to fixed assets.
Tangible assets are valued at acquisition or production cost, less
scheduled depreciation. Where the value of an item is expected to continue to
decline, unscheduled depreciation has been applied as appropriate. Minor fixed
assets are fully depreciated in the year of acquisition.
Reserves for pension commitments and for obligations under the Bank's
employee pension scheme have been calculated using the method of computation
provided for in ss. 6a of the German Income Tax Act (Einkommensteuergesetz
[EStG]) applying the updated Heubeck mortality tables. Adequate provisions have
been made to cover the early retirement scheme provided for by collective
agreement and the part-time employment scheme devised for senior employees, as
well as any obligations arising in connection with long-service bonuses and
other benefits.
Other reserves are set at the amount deemed necessary by the exercise
of reasonable business judgment to cover all uncertain liabilities and potential
losses on pending transactions.
The Bank concludes derivative transactions primarily in order to
control interest rate exposure - they are not valued. The Bank also trades in
derivatives in order to hedge balance sheet items and on its own account. Market
values are based on interest rates prevailing at December 30, 2002. Transactions
for hedging purposes are valued together with the relevant balance sheet items.
The market values of bonds, notes and derivatives held for the Bank's
own account are determined individually as at the balance sheet date. The Bank
currently holds four portfolios governed by EUR interest rate risks and offsets
valuation gains and losses within these portfolios. In accordance with the
non-parity principle, any positive balance is not appropriated, whereas a
provision is made to cover a negative balance.
Principles of the German Banking Act (Kreditwesengesetz [KWG])
Throughout 2002, the Bank adhered to Principle I (relating to capital
adequacy) and Principle II (relating to liquidity).
F-37
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Maturities of selected balance sheet items
(to final maturity or first call)
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Receivables from credit institutions
payable on demand 67,680 63,689
due in three months or less 2,456,809 2,943,491
due in more than three months to one year 1,015,186 657,886
due in more than one year to five years 2,997,131 2,740,300
due in more than five years 4,025,393 3,368,867
- --------------------------------------------------------------------------------------------------------------------
Receivables from customers
due in three months or less 502,867 474,632
due in more than three months to one year 649,987 719,364
due in more than one year to five years 2,400,261 2,263,512
due in more than five years 19,705,074 19,829,632
no fixed maturity 0 0
- --------------------------------------------------------------------------------------------------------------------
Notes and other interest-bearing securities
Loans and notes payable in the following year 808,708 726,732
- --------------------------------------------------------------------------------------------------------------------
Liabilities to credit institutions
payable on demand 192,409 257,468
due in three months or less 3,402,134 5,403,174
due in more than three months to one year 1,764,600 1,943,089
due in more than one year to five years 4,488,868 3,884,975
due in more than five years 9,881,194 10,140,718
- --------------------------------------------------------------------------------------------------------------------
Liabilities to customers
payable on demand 115,740 82,303
due in three months or less 279,202 363,286
due in more than three months to one year 95,178 146,862
due in more than one year to five years 873,225 1,068,285
due in more than five years 2,632,769 2,489,283
- --------------------------------------------------------------------------------------------------------------------
Certificated liabilities
payable on demand 0 2,045
due in three months or less 635,384 985,533
due in more than three months to one year 1,816,999 702,913
due in more than one year to five years 10,140,068 7,773,132
due in more than five years 1,989,758 3,053,412
thereof under subitem
"Notes and bonds issued"
payable in the following year: TEUR 2,452,383
F-38
- --------------------------------------------------------------------------------------------------------------------
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Receivables from credit institutions
Under this heading are shown:
o receivables from non-affiliated companies 286,209 210,478
o subordinated receivables 0 0
- --------------------------------------------------------------------------------------------------------------------
Receivables from customers
Under this heading are shown:
o receivables from affiliated companies 151,453 192,528
o receivables from non-affiliated companies 247,276 196,055
o subordinated receivables 8,476 175
- --------------------------------------------------------------------------------------------------------------------
Notes and other interest-bearing securities
The subheading "Bonds and notes" does not include any certificated
subordinated receivables or receivables from affiliated or non-affiliated
companies.
Of the securities shown under this heading:
o listed securities account for 8,116,537 8,543,378
o unlisted securities account for 160,317 141,380
Securities amounting to EUR 7,638 million were assigned to fixed asset. Of
these, EUR 1,638 million were valued as fixed assets.
F-39
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Shares and other non-interest-bearing securities
Under this heading are shown:
o subordinated assets in the amount of 6,462 -
o non-affiliated companies account for - -
Of the marketable securities shown under this heading:
o listed securities account for 6,462 24,240
o unlisted securities account for - -
- --------------------------------------------------------------------------------------------------------------------
Equity investments in non-affiliated companies
Of the marketable securities included under equity investments in
non-affiliated companies:
o listed securities account for 120,563 120,563
o unlisted securities account for 0 0
- --------------------------------------------------------------------------------------------------------------------
Equity investments in affiliated companies
This item does not include equity investments which have been certified as
marketable securities.
- --------------------------------------------------------------------------------------------------------------------
Fiduciary assets
This item is broken down as follows:
o receivables from credit institutions 181,189 191,115
o receivables from customers 485,361 625,170
- --------------------------------------------------------------------------------------------------------------------
Tangible assets
This item includes:
o real estate and buildings utilized for
the Bank's own activities 89,631 93,555
o furniture and office equipment 13,003 12,408
- --------------------------------------------------------------------------------------------------------------------
F-40
- --------------------------------------------------------------------------------------------------------------------
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and deferred items
- - Assets
o Difference between net loan proceeds or original cash
outlay and lower par (nominal) value of receivables 54,480 34,297
o Difference between amount issued and higher
amount repayable of payables 53,770 47,530
- --------------------------------------------------------------------------------------------------------------------
Liabilities to credit institutions
Under this heading are shown:
o liabilities to affiliated companies - -
o liabilities to non-affiliated companies 713 17,292
- --------------------------------------------------------------------------------------------------------------------
Liabilities to customers
Under this heading are shown:
o liabilities to affiliated companies 26,679 9,331
o liabilities to non-affiliated companies - -
- --------------------------------------------------------------------------------------------------------------------
Fiduciary liabilities
Fiduciary liabilities are divided up into:
o liabilities to credit institutions 85,759 99,177
o liabilities to customers 580,790 717,108
- --------------------------------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and deferred items
- - Liabilities
o Difference between net loan proceeds or
original cash outlay and higher par (nominal)
value of receivables 36,485 41,059
o Difference between amount issued and lower
amount repayable of payables 2,338 3,023
- --------------------------------------------------------------------------------------------------------------------
F-41
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Notes to individual balance sheet items
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
Subordinated liabilities
This item does not include any liabilities to affiliated or non-affiliated
companies.
Interest expenses in respect of subordinated
liabilities 18,412 18,298
Individual subordinated issues exceeding 10% of the total amount of the
subordinated liabilities break down as follows:
Currency Amount in millions Interest rate (%) Due on
EUR 85 0.0000 Dec. 30, 2010
EUR 50 4.0800 Jan. 23, 2009
EUR 250 4.1250 Jan. 14, 2009
EUR 50 4.4600 Jan. 20, 2014
All subordinated liabilities constitute exclusively supplemental capital and
meet the requirements of the German Banking Act (Kreditwesengesetz [KWG]). Of
significance here is the subordinated nature of the Bank's liabilities in
relation to all non-subordinated liabilities due to other creditors. In the
event of liquidation, subordinated creditors are only entitled to receive
payment after all liabilities due to other creditors have been paid in full.
Retrospective limitation of the subordinated nature of the liability or the
original maturity (of at least five years) or the agreed period of notice, is
precluded.
In accordance with state legislation, L-Bank is unable to file for insolvency.
F-42
- --------------------------------------------------------------------------------------------------------------------
Individual material items
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Other assets
o Premiums on interest rate options 9,695 18,164
o Objets d'art 13,722 13,637
- --------------------------------------------------------------------------------------------------------------------
Other liabilities
o Delivery commitments arising from
securities operations 87,483 49,692
o Adjustment item for foreign exchange
valuation 492,026 7,596
o One-off payments on swaps due at maturity 4,700 0
o Liabilities relating to outstanding
premiums on interest rate options 9,275 11,594
o Trade payables 4,433 6,649
o Deductible taxes 2,461 2,352
- --------------------------------------------------------------------------------------------------------------------
Deferred items
o Prepaid interest subsidies received from
third parties 1,007,367 1,220,285
o One-off payments on swaps due at maturity 40,822 43,430
- --------------------------------------------------------------------------------------------------------------------
Contingency reserves
o Under other reserves, reserves for L-Bank
interest subsidies 611,450 654,094
- --------------------------------------------------------------------------------------------------------------------
Commissions paid
o Commissions paid for administration of
loans in a fiduciary capacity 9,580 10,260
- --------------------------------------------------------------------------------------------------------------------
Other operating income
o Rental income 8,018 12,041
o Income from services to third parties 15,949 18,915
- --------------------------------------------------------------------------------------------------------------------
F-43
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Individual material items Dec. 31, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Depreciation and accumulated amortization on
intangible assets and tangible assets
o Unscheduled depreciation 0 8,028
- --------------------------------------------------------------------------------------------------------------------
Other operating expenses
o Expenses relating to grants and subsidies
provided under development programs
managed on behalf of the state of
Baden-Wurttemberg 18,407 3,068
- --------------------------------------------------------------------------------------------------------------------
Total value of assets and debts denominated in
foreign currencies
o Assets 761,808 762,891
o Debts 3,455,007 1,587,830
The risk of exchange rate fluctuations arising from balance sheet items
denominated in foreign currencies is essentially covered by
off-balance-sheet hedging transactions.
- --------------------------------------------------------------------------------------------------------------------
Book value of assets sold for repurchase (true
repo agreements pursuant to ss. 340b para. 4 HGB)
o Open-market transactions with Federal
Central Bank 0 98,090
o In the context of sell and buy-back
transactions with other credit
institutions 78,646 0
- --------------------------------------------------------------------------------------------------------------------
Assets lodged as security for liabilities
For liabilities to credit institutions
o open-market transactions with Federal
Central Bank 0 98,090
For other liabilities
o interest rate futures transactions 4,703 4,969
- --------------------------------------------------------------------------------------------------------------------
Other financial obligations
o The total sum of other financial obligations existing at the balance sheet
date which are not included in the balance sheet or shown below the line is
of minor significance to an evaluation of the Bank's financial position.
Transaction involving derivatives
- --------------------------------------------------------------------------------
o At the balance sheet date, the following transactions involving financial
derivatives (forward transactions as defined in ss. 36 RechKredV) formed
part of L-Bank's portfolio. The majority of the transactions were
undertaken in order to hedge interest rate and exchange rate fluctuations.
The respective credit risk equivalents have been calculated using the
market valuation method based on the appropriate counterparty weighting
with the corresponding percentage add-on. The practice of netting - the
offsetting of negative market values - was not applied.
o Replacement costs were calculated on the basis of market prices. All
contracts with a positive market value have been taken into account; they
have not been set off against contracts with a negative market value by
contracting party. Taking all existing netting agreements into account,
replacement costs have fallen by EUR 1,490 million, from EUR 2,326 million
to EUR 836 million.
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Credit risk
Nominal values Nominal values equivalents Replacement costs
- --------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- --------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives - by
contracting party (incl. commercial
transactions)
o Banks in the OECD 71,195 65,476 934 2,068
o Public-sector institutions in the OECD 75 0 0 0
o Other counterparties (incl. stock
exchange contracts) 6,429 5,379 324 258
- --------------------------------------------------------------------------------------------------------------------
Total 77,699 70,855 1,258 2,326
- --------------------------------------------------------------------------------------------------------------------
F-45
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives
- -------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2002
- -------------------------------------------------------------------------------------------------------------------
Interest rate Interest rate Currency risks Currency risks
risks risks
- -------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives -
maturity (incl. commercial transactions)
Residual maturities
o up to 3 months 5,850 3,810 169 0
o up to 1 year 6,615 6,384 28 0
o up to 5 years 24,422 22,518 3,144 0
o more than 5 years 36,256 36,398 435 0
- -------------------------------------------------------------------------------------------------------------------
Total 73,143 69,110 3,776 0
- -------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- ---------------------------------------------------------------------------------------------------------------------
Credit Credit
derivatives derivatives
- ---------------------------------------------------------------------------------------------------------------------
EUR million EUR million
- ---------------------------------------------------------------------------------------------------------------------
Residual maturities
o up to 3 months 100 0
o up to 1 year 55 0
o up to 5 years 340 0
o more than 5 years 285 0
- ---------------------------------------------------------------------------------------------------------------------
Total 780 0
- ---------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Nominal values Nominal values Credit risk Replacement
equivalents costs
----------------------------------------------------------------------
EUR million EUR million EUR million EUR million
----------------------------------------------------------------------
Transactions involving derivatives - by
volume (incl. commercial transactions)
- --------------------------------------------------------------------------------------------------------------------
Interest rate risks
o Interest rate swaps 72,138 67,845 625 2,028
o FRAs 0 250 0 0
o Interest rate options - sold 0 0 0 0
o Caps 895 895 0 0
o Stock exchange contracts 110 120 0 0
- --------------------------------------------------------------------------------------------------------------------
Total interest rate risks 73,143 69,110 625 2,028
- --------------------------------------------------------------------------------------------------------------------
Currency risks
o Forward exchange deals 176 103 1 2
o Cross-currency interest rate swaps 3,600 1,642 55 41
- --------------------------------------------------------------------------------------------------------------------
Total currency risks 3,776 1,745 56 43
- --------------------------------------------------------------------------------------------------------------------
Credit derivatives
o Credit default swaps - protection seller 525 0 322 1
F-46
- --------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Nominal values Nominal values Credit risk Replacement
equivalents costs
----------------------------------------------------------------------
EUR million EUR million EUR million EUR million
----------------------------------------------------------------------
o Credit-linked notes - protection
seller 255 0 255 255
- --------------------------------------------------------------------------------------------------------------------
Total credit derivatives 780 0 577 256
- --------------------------------------------------------------------------------------------------------------------
All credit default swaps have been assigned to investments and appear under
contingent liabilities at their nominal value. Credit-linked notes are
shown under securities.
- --------------------------------------------------------------------------------
F-47
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Transactions involving derivatives
- --------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Credit risks Replacement
Nominal values Nominal values equivalents costs
-----------------------------------------------------------------
EUR million EUR million EUR million EUR million
-----------------------------------------------------------------
Transactions involving derivatives - commercial
transactions
- --------------------------------------------------------------------------------------------------------------------
- - Interest rate contracts 3,879 4,139 32 100
- --------------------------------------------------------------------------------------------------------------------
Total 3,879 4,139 32 100
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement on tax liability
- --------------------------------------------------------------------------------
Under ss. 5 para. 1 no. 2 of the Corporation Tax Act
(Korperschaftsteuergesetz [KStG]) and ss. 3 no. 2 of the Trade Tax Act
(Gewerbesteuergesetz [GewStG]), Landeskreditbank Baden-Wurttemberg -
Forderbank is exempt from corporation tax and trade tax.
- --------------------------------------------------------------------------------
F-48
- --------------------------------------------------------------------------------
L-Bank's equity holdings pursuant to ss. 285 no. 11 HGB
- --------------------------------------------------------------------------------------------------------------------
No. Name/Registered office Holding Equity capital Net income/loss 1)
- --------------------------------------------------------------------------------------------------------------------
in %
(direct) in EUR '000 in EUR '000
- --------------------------------------------------------------------------------------------------------------------
1.0 Austria Beteiligungsgesellschaft mbH, 33.34 35,670 805
Stuttgart
2.0 Industriepark Gottmadingen AG, Gottmadingen 100.00 5,740 (**)
MBG Mittelstandische Beteiligungsgesellschaft
3.0 Baden-Wurttemberg, GmbH, Stuttgart 26.80 15,197 1,402
PT German Centre Indonesia, Bumi Serpong
4.0 Damai, Indonesia 83.67 -7,391(*) -4,056(*)
5.0 Technologiepark Karlsruhe GmbH, Karlsruhe 96.00 3,310 -486
6.0 Technologieparks Tubingen-Reutlingen, Tubingen 100.00 1,752 -218
StEP Stuttgarter EngineeringPark GmbH,
7.0 Stuttgart 100.00 10,147 -970
8.0 Business-Park Goppingen GmbH, Goppingen 40.00 3,119 26
9.0 STAIR Stuttgart Airpark GmbH, Stuttgart 100.00 1,375 -625
10.0 Mentasys GmbH, Karlsruhe 32.00 1,646 -379
11.0 detectis GmbH, Freiburg 39.43 791 -413
12.0 Sympore GmbH, Reutlingen 27.95 -1,883 -2,166
13.0 Complexio GmbH, Freiburg 33.80 (***) (***)
14.0 Elexxion GmbH, Radolfzell 36.00 (***) (***)
- ---------------------------------------------------------------------------------------------------------------
(*) Exchange rate: 1 euro = 9,188 rupiah
(**) Profit and loss transfer agreement existed until June 30, 2002
(***) Established in 2002
1) Last available financial year in each case
- ------------------------------------------------------------------------------
Equity investments in non-affiliated
companies pursuant to ss. 340a para. 4 no. 2 HGB
- ------------------------------------------------------------------------------
No. Name/Registered office
- ------------------------------------------------------------------------------
1.0 Baden-Wurttembergische Bank AG, Stuttgart
- ------------------------------------------------------------------------------
F-49
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank - for the financial year ended December 31, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fixed assets analysis
- --------------------------------------------------------------------------------
EUR `000
- ---------------------------------------------------------------------------------------------------------------------
Write-offs Write-offs
Fixed assets Historical and Book value and
- - balance cost cumulative Dec. 31, depreciation
sheet items - Jan. 1, 2002 Additions Retirements Transfers Write-ups depreciation 2002 in 2002
- ---------------- ------------ ----------- ------------ ----------- --------- ------------- ------------ -------------
Notes and 7,481,851 0
other
interest-bearing
securities 6,428,934
Shares and
other
non-interest-
bearing securities 0 Net adjustments in compliance 0 0
Equity with ss. 34 para. 3 subpara. 2 RechKredV:
investments in TEUR 1,109,666
non-affiliated
companies 176,825 155,448 -4,720
Equity
investments in
affiliated
companies 31,982 110,108 0
Tangible assets 180,113 11,158 -16,493 0 0 -48,795 125,983 -11,082
Other assets 13,663 88 0 0 0 -19 13,722 -3
- ---------------- ------------ ----------- ----------- ------------ ----------- ------------ ---------- -------------
- --------------------------------------------------------------------------------
Landeskreditbank Baden-Wurttemberg - Forderbank - hedging account for mortgage
bonds at December 31, 2002
- ------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec 31, 2001
- ------------------------------------------------------------------------------------------
EUR million EUR million
- ------------------------------------------------------------------------------------------
Mortgage bonds issued 3,104 3,808
Specific assets allocated for hedging
- - receivables from credit institutions 206 137
- - receivables from customers 3,234 4,268
Surplus cover 336 597
- ------------------------------------------------------------------------------------------
F-50
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total emoluments paid out to authorities and administrative bodies of
Landeskreditbank Baden-Wurttemberg - Forderbank - in 2002 (EUR '000)
- ----------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- ----------------------------------------------------------------------------------------------------------------------
- Board of Governors 160 130
- Board of Management 1,582 1,380
- Former members of the Board of
Management or their dependents 890 793
- Advisory Council (incl. travel expenses) 214 200
- Pension reserves for former members of the
Board of Management and their dependents 11,413 9,364
- ----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Loans to members of administrative bodies
(incl. contingent liabilities)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Dec. 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- ----------------------------------------------------------------------------------------------------------------------
- Board of Governors 683 540
- Board of Management 1,218 1,492
- ----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average number of staff employed in 2002
- ----------------------------------------------------------------------------------------------------------------------
male female total
- ----------------------------------------------------------------------------------------------------------------------
Total no. of employees 508 639 1,147
of whom:full-time employees 497 432 929
part-time employees 11 207 218
trainees (not included in the total number)
excluding temporary staff, students on placement,
volunteers, cleaning staff
- ----------------------------------------------------------------------------------------------------------------------
F-51
Directorships held by members of the Board
of Management and employees of L-Bank pursuant
to ss. 340a para. 4 no. 1 HGB
- --------------------------------------------------------------------------------
Christian Brand, Chairman of the Board of Management
- ------------------------------------------------------------ ---------------------------------------------------------
Baden-Wurttembergische Bank AG, Stuttgart Member of the Supervisory Board
BWK GmbH Unternehmensbeteiligungsgesellschaft, Stuttgart Member of the Supervisory Board
Clariant GmbH, Frankfurt Member of the Supervisory Board
Sachsische Aufbaubank GmbH, Dresden Member of the Supervisory Board
Tourismus-Marketing GmbH Baden-Wurttemberg, Stuttgart Vice Chairman of the Supervisory Board
Vorarlberger Landes-und Hypothekenbank AG, Bregenz Member of the Supervisory Board
- ----------------------------------------------------------------------------------------------------------------------
Jurgen Hagele, Vice Chairman of the Board of Management
- ----------------------------------------------------------------------------------------------------------------------
Business-Park Goppingen GmbH, Goppingen Member of the Supervisory Board (from Oct. 18, 2002)
Industriepark Gottmadingen AG, Gottmadingen Chairman of the Supervisory Board (from Oct. 11, 2002)
- ----------------------------------------------------------------------------------------------------------------------
Dr. Manfred Schmitz, Member of the Board of Management
- ----------------------------------------------------------------------------------------------------------------------
MBG Mittelstandische Beteiligungsgesellschaft
Baden-Wurttemberg GmbH, Stuttgart Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Vice Chairman of the Supervisory Board
- ----------------------------------------------------------------------------------------------------------------------
F-52
- ----------------------------------------------------------------------------------------------------------------------
L-Bank employees
- ----------------------------------------------------------------------------------------------------------------------
Peter Arnold, Executive Officer
- ----------------------------------------------------------------------------------------------------------------------
Business-Park Goppingen GmbH, Goppingen Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Member of the Supervisory Board
PT German Centre Indonesia, Bumi Serpong Damai,
Indonesia Chairman of the Supervisory Board
- ----------------------------------------------------------------------------------------------------------------------
Stephan Tribull, Executive Officer
- ----------------------------------------------------------------------------------------------------------------------
Finanzierungsgesellschaft fur Offentliche Vorhaben Member of the Board of Governors (to Dec. 31,
des Landes Baden-Wurttemberg mbH, Stuttgart 2002)
- ----------------------------------------------------------------------------------------------------------------------
Walter Weik, Executive Officer
- ----------------------------------------------------------------------------------------------------------------------
Landsiedlung Baden-Wurttemberg GmbH, Stuttgart Member of the Supervisory Board
MBW Marketing- und Absatzforderungsgesellschaft fur
Agrar- und Forstprodukte aus Baden-Wurttemberg mbH,
Stuttgart Member of the Supervisory Board
Stadtbau GmbH Pforzheim, Pforzheim Member of the Supervisory Board
- ----------------------------------------------------------------------------------------------------------------------
Jurgen Schnieder, Group Manager
- ----------------------------------------------------------------------------------------------------------------------
PT German Centre Indonesia, Bumi Serpong Damai, Member of the Supervisory Board
Indonesia
- ----------------------------------------------------------------------------------------------------------------------
F-53
Authorities of Landeskreditbank
Baden-Wurttemberg - Forderbank
- --------------------------------------------------------------------------------
Members of the Board
Board of Management: of Governors 2002
Christian Brand, Full members: Advisory members:
Chairman
Hans Beerstecher State government Other members 2) Rudiger Ruhnow
Vice Chairman representatives 1) Chairman of the Central
(to Aug. 31, 2002) Staff Council at L-Bank,
Karlsruhe
Jurgen Hagele Dr. Walter Doring MdL Klaus Hackert Reiner Enzmann
Vice Chairman Minister of Economic President of the Chairman of the Staff
(from Sept. 1, 2002) Affairs - Chairman Baden-Wurttemberg Council of L-Bank,
Association of Craftsmen Karlsruhe
Dr. Manfred Schmitz Gerhard Stratthaus MdL Norbert Keller Gabriele Propp
Member of the Board Minister of Finance President of the Karlsruhe Chairman of the Staff
of Management Vice Chairman Chamber of Commerce Council of L-Bank,
and Industry Stuttgart
Prof. Dr. Dieter Puchta Dr. Thomas Schauble MdL Heinz Kalberer
Member of the Board Minister of the Interior Lord Mayor of Vaihingen
of Management Vice Chairman
(from Aug. 1, 2002)
Willi Stachele MdL Gisela Graber
Minister for Food Deputy Chairman
and Rural Planning of the Regional Chapter
Vice Chairman ver.di e.V., Stuttgart
Ulrich Muller MdL Otwin Brucker
Minister of the Environment, President of the
Transport and Baden-Wurttemberg
Communications Association
of Municipalities
Dr. Friedhelm Repnik MdL Gerhard Burkhardt
Minister of Social Affairs Chairman of the
Board of Management
of the Verband
baden-wurttembergischer
Wohnungsunternehmen
e.V., Stuttgart
Rudolf Bohmler Dr. Christoph Niemann
State Secretary at Member of the
the Ministry of State Supervisory Board
of HSBC Trinkaus &
Burkhardt KGaA, Dusseldorf
Klaus Fischer
Undersecretary (retd.)
(to Sept. 30, 2002)
Dr. Rainer Hagele
Undersecretary at the
Ministry of Finance
(from Oct. 01, 2002)
- --------------------------------------------------------------------------------
Deputy members:
State government Deputy representatives:
deputy representatives
Dr. Karl Epple Joachim Wohlfeil Karl-Heinz Reinheimer Klaus Roscheisen
Undersecretary at the President of the Karlsruhe Honorary Chairman of Assistant Undersecretary
Ministry of Economic Chamber of Craftsmen Bundesverband Freier and Head of the
Affairs Wohnungsunternehmen Administration
e.V., Sindelfingen Department
at the Ministry of the
Environment, Transport
and Communications
Wolfgang Ruckert MdL Dr. Ing. Hansjorg Rieger Wilhelm Freiherr Christian Luft
State Secretary at the Managing Partner von Haller Assistant Secretary
Ministry of Finance of RUD-Kettenfabrik Member of the Board and Head of the Central
Rieger & Dietz, Aalen of Management Office at the Ministry
of Deutsche Bank AG of Social Affairs
Roland Eckert Egon Gushurst Prof. Dr. Willi Weiblen Bernhard Giess
Undersecretary at the Certified Public Accountant Assistant Undersecretary Assistant Secretary and
Ministry of the Interior and Honorary and Head of the Head of the State Budget,
President of Badischer Department of Economic Real Estate and Investments
Genossenschaftsverband and Structural Policy Section of the Ministry of
Raiffeisen-Schulze- at the Ministry State
Delitzsch e.V., Karlsruhe of Economic Affairs
Rainer Arnold Frank Zach Walter Leibold Norbert Schmitt
Undersecretary at Head of the Trade and Assistant Undersecretary Assistant Secretary and
the Ministry for Food Industry Department and Head of the Head of the State
and Rural Planning of the Baden-Wurttemberg Department of Financial Investments
Chapter of DGB Policy and Investments and Banking
at the Ministry of Finance Section at the Ministry
of Finance
Stefan Mappus Georg Mehl Prof. Konrad Freiherr
State Secretary at Senator (retd.) von Rotberg
the Ministry of the Wustenrot & Assistant Undersecretary
Environment, Transport Wurttembergische AG and Head of the Department
and Communications of Constitutional,
Municipal, Savings Bank
and Legal Affairs at the
Ministry of the Interior
Bernhard Bauer
Undersecretary at the
Ministry of Social Affairs
Hermann Strampfer
Assistant Undersecretary
and Head of Dept. I
at the Ministry of State
Julian Wurtenberger 1) ex officio members
Assistant Undersecretary 2) personally appointed
and Head of Dept. II
at the Ministry of State
F-55
Proposal of the Board of Management
for the appropriation of retained profits
- --------------------------------------------------------------------------------
EUR 85.5 million of the net profit for the financial year 2002 has already been
appropriated to retained profit and reserves. The Board of Management proposes
that the remaining distributable profit of EUR 34,327,885.85 should be carried
forward to next year's account.
Karlsruhe, March 25, 2003
Landeskreditbank Baden-Wurttemberg - Forderbank
/s/ Christian Brand /s/ Jurgen Hagele
- ----------------------------- -----------------------------
Christian Brand Jurgen Hagele
/s/ Dr. Manfred Schmitz /s/ Prof. Dr. Dieter Puchta
- ----------------------------- -----------------------------
Dr. Manfred Schmitz Prof. Dr. Dieter Puchta
F-56
Independent Auditors' opinion
We have audited the financial statements of Landeskreditbank
Baden-Wurttemberg - Forderbank - ("L-Bank" or "the Bank"), Karlsruhe, for the
financial year ending December 31, 2002. The accounting and preparation of the
financial statements and of the management report of the Bank in accordance with
German commercial law are the responsibility of the Board of Managing Directors
of L-Bank. Our responsibility is to express an opinion based on our audit on the
financial statements and the management report of the Bank. We conducted our
audit of the financial statements in accordance with ss. 317 HGB (the German
Commercial Code and the German generally accepted standards for the audit of
financial statements promulgated by the "Institut der Wirtschaftsprufer" (IDW,
the German Institute of Certified Public Accountants). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the presentation of the net assets, financial position, and results of operation
in the financial statements, drawn up in accordance with the German generally
accepted accounting principles, and in the management report of the Bank are
free of material misstatement. Knowledge of the business activities and the
economic and legal environment of the Bank and evaluations of possible
misstatements are taken into account in the determination of audit procedures.
The effectiveness of the accounting-related internal control system and the
evidence supporting the disclosures in the books and records, the financial
statements, and the management report of the Bank are primarily examined on a
test basis within the framework of the audit. The audit of the financial
statements includes assessing the accounting principles applied and the
significant estimates made by the Board of Managing Directors of L-Bank and
evaluating the overall presentation of the financial statements and management
report of the Bank. We believe that our audit provides a reasonable basis for
our opinion.
Our audit did not lead to any objections.
In our opinion, the financial statements give a true and fair view of the net
assets, financial position, and results of operations of the Bank in accordance
with German generally accepted accounting principles. Seen in total, the
management report of the Bank is an accurate representation of the position of
the Bank and accurately reflects the risks entailed in its future development.
Stuttgart, April 8, 2003
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/ Schuldt /s/ Apitzsch
- -------------------------- --------------------------
(Schuldt) (ppa. Apitzsch)
Auditor Auditor
F-57
FINANCIAL STATEMENTS OF L-BANK
AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 2001
F-58
Landeskreditbank Baden-Wurttemberg - Forderbank Balance Sheet as of
December 31, 2001
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
Assets EUR EUR EUR
- -------------------------------------------------------------------------------------------------------------------------
1. Cash reserve
a)Cash on hand 34,509.31 39,179.89
b)Cash at central banks thereof: 335,645,325.62 262,610,279.02
at Federal Central Bank
EUR 335,645,325.62 (262,610,279.02) --.-- --.--
c)Cash in postal giro accounts
335,679,834.93 262,649,458.91
- -------------------------------------------------------------------------------------------------------------------------
2. Receivables from credit institutions
a)Payable on demand 63,689,244.49 104,543,718.61
b)Other receivables 9,710,543,892.79 8,614,021,037.03
9,774,233,137.28 8,718,564,755.64
- -------------------------------------------------------------------------------------------------------------------------
3. Receivables from customers thereof: 23,287,140,379.02 23,542,029,894.07
mortgage loans
EUR 19,967,862,497.92 (19,624,989,802.48)
loans to public authorities and entities
organized under public law
EUR 1,490,664,208.07 (1,993,864,928.47)
- -------------------------------------------------------------------------------------------------------------------------
4. Notes and other interest-bearing securities
a)Money market securities
aa)due from public-sector issuers --.-- 119,773,273.43
thereof: eligible as collateral
at Federal Central Bank
EUR --.-- (--.--)
ab)due from other issuers --.-- --.-- 90,693,403.11
thereof: eligible as collateral 210,466,676.54
at Federal Central Bank
EUR --.-- (25,188,369.86)
b)Bonds and notes
ba)due from public-sector issuers 1,586,528,000.59 1,552,657,037.07
thereof: eligible as collateral
at Federal Central Bank
EUR 1,385,845,636.43
(1,310,679,084.17)
bb)due from other issuers 5,734,742,009.58 4,165,589,256.20
thereof: eligible as collateral 7,321,270,010.17 5,718,246,293.27
at Federal Central Bank
EUR 4,745,949,371.52
(3,751,359,206.05)
c)Bank's own notes 1,363,487,926.63 79,533,584.28
principal amount:
EUR 1,311,469,555.12 (80,020,758.45)
8,684,757,936.80 6,008,246,554.09
- -------------------------------------------------------------------------------------------------------------------------
5. Shares and other
non-interest-bearing securities 37,940,125.39 19,700,340.32
Carried forward: 42,119,751,413.42 38,551,191,003.03
F-59
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
Equity and Liabilities EUR EUR EUR
1. Liabilities to credit institutions
a)Payable on demand 257,468,529.10 276,968,022.77
b)With an agreed maturity
or notice period 21,371,955,624.79 21,582,145,698.52
21,629,424,153.89 21,859,113,721.29
- -------------------------------------------------------------------------------------------------------------------------
2. Liabilities to customers
a)Savings deposits
aa)with an agreed notice period
of three months --.-- --.--
ab)with an agreed notice period
exceeding three months --.-- --.--
b)Other liabilities
ba)payable on demand 82,302,965.30 --.-- 76,341,483.24
bb)with an agreed maturity 4,153,761,895.75
or notice period 4,067,716,506.49
4,150,019,471.79 4,150,019,471.79 4,230,103,378.99
- -------------------------------------------------------------------------------------------------------------------------
3. Certificated liabilities
a)Notes and bonds issued 12,517,035,139.85 7,901,018,199.10
b)Other certificated liabilities --.-- --.--
thereof: money market 12,517,035,139.85 7,901,018,199.10
securities
EUR --.-- (--.--)
own acceptances and promissory
notes outstanding
EUR --.-- (--.--)
- -------------------------------------------------------------------------------------------------------------------------
4. Fiduciary liabilities 816,284,765.82 999,658,505.71
thereof: fiduciary loans -------------------
EUR 815,682,804.85 (999,056,544.74)
- -------------------------------------------------------------------------------------------------------------------------
5. Other liabilities 80,508,648.58 875,972,379.87
- -------------------------------------------------------------------------------------------------------------------------
6. Deferred items 1,308,422,177.07 1,445,373,419.35
- -------------------------------------------------------------------------------------------------------------------------
7. Contingency reserves
a)Reserves for pensions and
similar obligations 74,551,058.90 68,317,013.24
b)Reserves for taxes 14,099,306.66 12,756,102.70
c)Other reserves 778,399,144.47 802,979,203.78
867,049,510.03 884,052,319.72
- -------------------------------------------------------------------------------------------------------------------------
8. Subordinated liabilities 442,166,011.68 439,685,205.61
- -------------------------------------------------------------------------------------------------------------------------
9. Fund for general bank risks 108,905,170.69 108,905,170.69
Carried forward: 41,919,835,049.40 38,743,882,300.33
F-60
Landeskreditbank Baden-Wurttemberg - Forderbank - Balance sheet as of
December 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
Assets EUR EUR EUR
- -------------------------------------------------------------------------------------------------------------------------
Brought forward: 42,119,751,413.42 38,551,191,003.03
- -------------------------------------------------------------------------------------------------------------------------
6. Equity investments in
non-affiliated companies 149,938,251.52 269,616,096.92
thereof: in credit institutions
EUR 121,539,351.59 (250,163,056.28)
thereof: in financial services
institutions EUR --.-- (--.--)
- -------------------------------------------------------------------------------------------------------------------------
7. Equity investments in
affiliated companies 22,408,403.08 7,908,403.08
thereof: in credit institutions
EUR --.-- (--.--)
thereof: in financial services
institutions EUR --.-- (--.--)
- -------------------------------------------------------------------------------------------------------------------------
8. Fiduciary assets 816,284,765.82 999,658,505.71
thereof: fiduciary loans
EUR 815,682,804.85 (999,056,544.74)
- -------------------------------------------------------------------------------------------------------------------------
9. Intangible asset --.-- --.--
- -------------------------------------------------------------------------------------------------------------------------
10. Tangible assets
141,462,084.46 154,226,120.96
- -------------------------------------------------------------------------------------------------------------------------
11. Other assets 51,591,829.83 53,573,086.61
- -------------------------------------------------------------------------------------------------------------------------
12. Deferred charges
and prepaid expenses 89,998,668.43 73,653,627.11
- -------------------------------------------------------------------------------------------------------------------------
Total assets 43,391,435,416.56 40,109,826,843.42
F-61
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
Equity and Liabilities EUR EUR EUR
- -------------------------------------------------------------------------------------------------------------------------
Brought forward: 41,919,835,049.40 38,743,882,300.33
- -------------------------------------------------------------------------------------------------------------------------
10. Equity
a) Subscribed capital 250,000,000.00 250,000,000.00
b) Capital surplus 959,850,789.69 950,850,789.69
c) Retained profit and reserves
ca) Legal reserves --.-- --.--
cb) Reserve for treasury stock --.-- --.--
cc) Statutory reserve --.-- --.--
cd) Other retained profit 237,500,000.00 133,447,180.99
d) Distributable profit 33,249,577.47 31,646,572.41
1,471,600,367.16 1,365,944,543.09
- -------------------------------------------------------------------------------------------------------------------------
Total equity and liabilities 43,391,435,416.56 40,109,826,843.42
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
1. Contingent liabilities
a) Contingent liabilities relating
to negotiated cleared bills
of exchange --.-- --.--
b) Liabilities relating to guarantees
and indemnity agreements 431,759,983.85 245,533,713.29
c) Liabilities relating to
securities covering
third-party liabilities --.-- --.--
- -------------------------------------------------------------------------------------------------------------------------
2. Other obligations
a) Repurchase obligations from the
sale of securities with put options --.-- --.--
b) Placement and underwriting
obligations --.-- --.--
c) Irrevocable credit commitments 1,522,977,890.47 1,343,927,525.78
1,522,977,890.47 1,343,927,525.78
F-62
Landeskreditbank Baden-Wurttemberg - Forderbank
Statement of income for the period from January 1, 2001 to December 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR
- -------------------------------------------------------------------------------------------------------------------------
1. Interest income from
a) Lending and money
market transactions 2,032,059,758.72 1,948,023,353.09
b) Fixed-interest securities and
debt register receivables 357,301,098.12 219,230,720.39
2,389,360,856.84 2,167,254,073.48
- -------------------------------------------------------------------------------------------------------------------------
2. Interest expenses 2,005,496,735.15 1,822,330,843.71
383,764,121.69 344,923,229.77
- -------------------------------------------------------------------------------------------------------------------------
3. Current income from
a) Shares and other
non-fixed interest securities 792,889.41 937,829.17
b) Equity investments in
non-affiliated companies 5,561,935.66 4,603,214.10
c) Equity investments in
affiliated companies --.-- --.--
6,354,825.07 5,541,043.27
- -------------------------------------------------------------------------------------------------------------------------
4. Commission income 25,624,281.98 22,800,272.64
- -------------------------------------------------------------------------------------------------------------------------
5. Commission expenses 12,485,132.48 11,593,564.30
- -------------------------------------------------------------------------------------------------------------------------
6. Net income from financial 1,230,345.09 701,067.31
transactions
- -------------------------------------------------------------------------------------------------------------------------
7. Other operating income 37,234,241.31 34,257,301.95
- -------------------------------------------------------------------------------------------------------------------------
8. General administrative expenses
a) Personal expenses
aa) Wages and salaries 51,901,035.42 50,130,033.55
ab) Social security, pension
and other benefit
and welfare expenses 16,177,612.27 16,002,335.28
thereof: for pensions 68,078,647.69
EUR 7,707,050.11 (7,637,649.44)
b) Other general administrative 33,253,509.08 38,311,374.90
expenses
101,332,156.77 104,443,743.73
- -------------------------------------------------------------------------------------------------------------------------
9. Depreciation and accumulated
amortization on intangible
assets and tangible assets,
including property and equipment 19,309,431.37 9,780,367.98
- -------------------------------------------------------------------------------------------------------------------------
10. Other operating expenses 8,539,154.54 7,719,656.91
- -------------------------------------------------------------------------------------------------------------------------
11. Depreciation and accumulated
amortization on receivables
and certain securities,
together with allowances
for possible loan losses 171,947,306.05 125,005,674.58
Carried forward: 140,694,633.93 149,679,907.44
F-63
Dec. 31, 2001 Dec. 31,2000
- -------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR
- -------------------------------------------------------------------------------------------------------------------------
Brought forward: 140,694,633.93 149,679,907.44
- -------------------------------------------------------------------------------------------------------------------------
12. Income from additions
to equity investments in
non-affiliated companies
affiliated companies and
securities treated as fixed assets 53,172,310.19 93,544,044.44
- -------------------------------------------------------------------------------------------------------------------------
13. Costs arising from
loss assignments 13,026,267.23 3,212,358.01
- -------------------------------------------------------------------------------------------------------------------------
14. Result from ordinary 180,840,676.89 240,011,553.87
business operations
- -------------------------------------------------------------------------------------------------------------------------
15. Extraordinary earnings --.-- 4,608,667.15
- -------------------------------------------------------------------------------------------------------------------------
16. Extraordinary expenditure --.-- 90,755,963.48
- -------------------------------------------------------------------------------------------------------------------------
17. Extraordinary result --.-- 86,167,296.33
- -------------------------------------------------------------------------------------------------------------------------
18. Taxes on income 672,108.74 638,481.14
- -------------------------------------------------------------------------------------------------------------------------
19. Other taxes, where not
shown under item 10 176,062.72 171,058.44
- -------------------------------------------------------------------------------------------------------------------------
20. Allocation to reserves
for interest rate reductions 74,336,681.36 56,392,186.16
- -------------------------------------------------------------------------------------------------------------------------
21. Net profit 105,655,824.07 96,642,531.80
- -------------------------------------------------------------------------------------------------------------------------
22. Balance brought forward 31,646,572.41 27,803,517.05
from the previous year 137,302,396.48 124,446,048.85
- -------------------------------------------------------------------------------------------------------------------------
23. Transfer to retained profit and reserves
to other retained profit and reserves 104,052,819.01 92,799,475.44
- -------------------------------------------------------------------------------------------------------------------------
24. Distributable profit
33,249,577.47 31,646,572.41
F-64
Notes to the annual financial statements of Landeskreditbank Baden-Wurttemberg -
Forderbank for the financial year ended December 31, 2001
General principles
Landeskreditbank Baden-Wurttemberg - Forderbank (L-Bank) was established by
legislation passed on November 11, 1998, which came into effect on December 1,
1998. In accordance with ss. 2 para. 1 subpar. 1 of the L-Bank Act, the share
capital of the Bank is EUR 250 million.
The financial statements for L-Bank have been drawn up in accordance with
the provisions of the German Commercial Code (Handelsgesetzbuch [HGB] and the
Regulation on the Accounting Principles Applied to Credit Institutions
(Verordnung uber die Rechnunglegung fur Kreditinstitute [RechKredV]).
Headings and items on the balance sheet and statement of income are
classified in accordance with the financial statement forms that appear in
RechKredV. In the process, L-Bank has added an extra item to the expenses side
of the statement of income, "Allocation to reserves for interests rate
reductions" (ss. 265 para. 5 HGB).
The majority interests declared in the financial statements are of minor
significance overall. For this reason the Bank did not prepare consolidated
financial statements for the period (ss. 296 para. 2 HGB).
Foreign currency translation principles
Foreign currency amounts have been translated in accordance with the
provisions set out in ss. 340 h HGB and declaration BFA 3/95. For purposes of
currency translation, currency items have been calculated by offsetting claims
and obligations arising from on-balance-sheet and off-balance-sheet transactions
in the respective currencies. These transactions were classified and valued
using the special cover option in the respective currencies. Accordingly, all
expenses and earnings arising from currency translation are shown in the income
statement as required by ss. 340 h para. 2 subparas. 1 and 2 HGB; there was no
requirement to show income under a separate heading as the items outstanding on
the balance sheet date fall within a limited timeframe.
Methods of accounting and valuation
Assets and liabilities have been valued in accordance with the general
provisions of ss.ss. 252 ff. HGB, taking into account the special rules applying
to credit institutions (ss.ss. 340e ff. HGB).
Receivables from credit institutions and customers are always shown at par
value, liabilities to credit institutions and customers at redemption value. Any
interest-based differences are shown under deferrals and repayments and written
back pro rata temporis. Service charges are entered immediately. Low-interest or
non-interest-bearing receivables are discounted. Reserves for interest rate
subsidies are set up to cover loans associated with development programs. Zero
bonds and similar securities issued are shown at the issue price plus interest
calculated up to the balance sheet date pro rata temporis.
All recognized individual risks and country risks arising out of the Bank's
lending business were appropriately provided for, either by accumulated
amortization for losses on individual loan accounts or by reserves. Lump-sum
reserves have been established to cover latent credit risks, and the Bank
maintains prudential reserves to cover general banking risks. Individual and
lump-sum accumulated amortization/reserves have been deducted from the assets or
liabilities side as appropriate, as has the reserve for general banking risks
set up in compliance with ss. 340f HGB.
Securities in the trading portfolio and liquidity reserve are valued
strictly according to the principles of lower of cost or market value as at the
balance sheet date. Securities treated as fixed assets are shown at net book
value, differences between book value and redemption value (premiums/discounts)
being marked up or down pro rata to term.
F-65
Equity investments in non-affiliated and affiliated companies are valued at
the lower of acquisition cost or fair value, according to the rules applying to
fixed assets.
Tangible assets are valued at acquisition or production cost, less
scheduled depreciation. Where the value of an item is expected to continue to
decline, unscheduled depreciation has been applied as appropriate. Minor fixed
assets are fully depreciated in the year of acquisition.
Reserves for pension commitments and for obligations under the Bank's
employee pension scheme have been calculated using the method of computation
provided for in ss. 6 a of the German Income Tax Act (Einkommensteuergesetz
[EstG]) applying the updated Heubeck mortality tables. Adequate provisions have
been made to cover the early retirement scheme provided for by collective
agreement, the part-time employment scheme devised for senior employees and any
obligations arising in connections with long service bonuses.
Other reserves are set at the amount deemed necessary by the exercise of
reasonable business judgment to cover all uncertain liabilities and potential
losses on pending transactions.
The Bank concludes derivative transactions primarily in order to control
interest rate exposure - they are not valued. The Bank also trades in
derivatives in order to hedge balance sheet items and on its own account.
Transactions for hedging purposes are valued together with the relevant balance
sheet items.
The market values of bonds, notes and derivatives held for the Bank's own
account are determined individually as at the balance sheet date. The Bank
currently holds four portfolios governed by EUR interest rate risks and offsets
valuation gains and losses within these portfolios. In accordance with the
non-parity principle, any positive balance is not appropriated, whereas a
provision is made to cover a negative balance.
Principles of the German Banking Act (Kreditwesengesetz [KWG])
Throughout 2001, the Bank adhered to Principle I (relating to capital
adequacy) and Principle II (relating to liquidity).
F-66
Maturities of selected balance sheet
items
(to residual maturity or first call)
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Receivables from credit institutions
payable on demand 63,689 104,544
due in three months or less 2,943,491 2,668,785
due in more than three months to one year 657,886 559,018
due in more than one year to five years 2,740,300 2,652,054
due in more than five years 3,368,867 2,744,163
- -------------------------------------------------------------------------------------------------------------------------
Receivables from customers
due in three months or less 474,632 1,057,291
due in more than three months to one 719,364 418,969
year
due in more than one year to five years 2,263,512 2,209,080
due in more than five years 19,829,632 19,856,090
no fixed maturity -- --
- -------------------------------------------------------------------------------------------------------------------------
Notes and other interest-bearing
securities
Loan and notes
payable in the following year 726,732 772,887
- -------------------------------------------------------------------------------------------------------------------------
Liabilities to credit institutions
payable on demand 257,468 276,968
Due in three months or less 5,403,174 5,799,658
Due in more than three months to one 1,943,089 2,081,271
year
Due in more than one year to five years 3,884,975 4,002,709
Due in more than five years 10,140,718 9,698,507
- -------------------------------------------------------------------------------------------------------------------------
Liabilities to customers
payable on demand 82,303 76,342
Due in three months or less 362,286 267,760
Due in more than three months to one 146,862 112,651
year
Due in more than one year to five years 1,068,285 730,429
Due in more than five years 2,489,283 3,042,922
- -------------------------------------------------------------------------------------------------------------------------
Certificated liabilities
payable on demand 2,045 --
Due in three months or less 985,533 227,354
Due in more than three months to one 702,913 301,304
year
Due in more than one year to five years 7,773,132 5,358,146
Due in more than five years 3,053,412 2,014,215
thereof under sub-item
"Notes and bonds issued" payable
In the following year: TEUR 1,690,491
F-67
Notes to individual balance sheet items
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Receivables from credit institutions
Under this heading are shown:
o receivables from
non-affiliated companies 210,478 948,437
o subordinated receivables -- --
- -------------------------------------------------------------------------------------------------------------------------
Receivables from customers
Under this heading are shown:
o receivables from affiliated companies 192,528 129,858
o receivables from non-affiliated companies 196,055 156,462
o subordinated receivables 175 175
- -------------------------------------------------------------------------------------------------------------------------
Notes and other interest-bearing
securities
The subheading "Bonds and notes" does not include any certificated subordinated
receivables or receivables from affiliated or non-affiliated companies
Of the securities shown
Under this heading
o listed securities account for 8,543,378 5,804,190
o unlisted securities account for 141,380 204,057
Securities amount to EUR 6,540 million were assigned to fixed assets. Of these,
EUR 2,915 million were valued as fixed assets.
- -------------------------------------------------------------------------------------------------------------------------
Shares and
Other non-fixed interest securities
Under this heading are shown:
o subordinated assets in the amount of -- --
o non-affiliated companies account for -- --
Of the marketable securities shown under this heading:
o listed securities account for 24,240 5,594
o unlisted securities account for -- --
F-68
Notes to individual balance sheet items
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Equity investments in non-affiliated
companies
Of the marketable securities included under equity investments in non-affiliated
companies:
o listed securities account for 120,563 120,563
o unlisted securities account for 0 0
- -------------------------------------------------------------------------------------------------------------------------
Equity investments in affiliated
companies
This item does not include equity investments which have been certified as
marketable securities
- -------------------------------------------------------------------------------------------------------------------------
Fiduciary assets
This item is broken down as follows:
o receivables from credit institutions 191,115 200,758
o receivables from customers 625,170 798,901
- -------------------------------------------------------------------------------------------------------------------------
Tangible assets
This item includes:
o real estate and building
utilized for the Bank's own activities 93,555 97,545
o furniture and office equipment 12,408 12,257
- -------------------------------------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and
deferred items
Assets
o Differences between net loan proceeds or original
cash outlay and lower par (nominal) value of receivables 34,297 27,549
o Differences between amount issued and higher amount
repayable of payables 47,530 37,644
- -------------------------------------------------------------------------------------------------------------------------
Liabilities to credit institutions
Under this heading are shown:
o liabilities to affiliated companies -- --
o liabilities to non-affiliated companies 17,292 543,082
- -------------------------------------------------------------------------------------------------------------------------
Liabilities to customers
Under this heading are shown:
o liabilities to affiliated companies 9,331 4,518
o liabilities to non-affiliated companies -- --
F-69
Notes to individual balance sheet items
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Fiduciary liabilities
Fiduciary liabilities are divided up into:
o liabilities to credit institutions 99,177 111,987
o liabilities to non-affiliated companies 717,108 887,671
- -------------------------------------------------------------------------------------------------------------------------
Deferred charges, prepaid expenses and
deferred items
Liabilities
o Difference between net loan proceeds or original cash outlay
and higher par (nominal) value of receivables 41,059 45,107
o Difference between amount issued and lower amount repayable
of payables 3,023 2,392
- -------------------------------------------------------------------------------------------------------------------------
Subordinated liabilities
This item does not include any
liabilities to affiliated or
non-affiliated companies
For subordinated liabilities, interest
expenses were incurred in the amount of 18,298 18,190
Individual subordinated issues exceeding 10% of the total amount of the
subordinated liabilities, are as follows:
Currency Amount in millions Interest rate Due on
(%)
DM 167 0.0000 Dec. 30, 2010
EUR 50 4.0800 Jan. 23, 2009
EUR 250 4.1250 Jan. 14, 2009
EUR 50 4.4600 Jan. 20, 2014
All subordinated liabilities constitute exclusively supplemental capital and
meet the requirements of the General Banking Act (Kreditwesengesetz [KWG]). Of
significance here is the subordinated nature of the Bank's liabilities in
relation to non-subordinated liabilities due to other creditors. In the event of
liquidation, subordinated creditors are only entitled to receive payment after
all liabilities due to other creditors have been paid in full.
Retrospective limitation of the subordinated nature of the liability or the
original maturity (of at least five years) or the agreed period of notice, is
precluded.
In accordance with state legislation, L-Bank is unable to file for insolvency.
F-70
Individual material items
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Other assets
o Premium on interest rate options 18,164 26,766
o Objects d'art 13,637 13,626
- -------------------------------------------------------------------------------------------------------------------------
Other liabilities
o Delivery commitments arising
from securities operations 49,692 774,336
o Adjustment item for foreign
exchange valuation 7,596 76,468
o Liabilities relating to
outstanding premiums on interest
rate options 11,594 13,912
o Trade payables 6,649 5,740
o Deductible taxes 2,352 2,427
- -------------------------------------------------------------------------------------------------------------------------
Deferred items
o Prepaid interest subsidies
received from third parties 1,220,285 1,339,676
o One-off payments on swaps due
at maturity 43,430 56,610
- -------------------------------------------------------------------------------------------------------------------------
Contingency reserves
o Under other reserves,
reserves for L-Bank interest
subsidies 654,094 695,804
- -------------------------------------------------------------------------------------------------------------------------
Commissions paid
o Commissions paid for
administration of loans in a
fiduciary capacity 10,260 11,432
- -------------------------------------------------------------------------------------------------------------------------
Other operating income
o Rental income 12,041 8,443
o Income from services to third parties 18,915 20,626
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and accumulated
amortization on intangible assets and
tangible assets
o Unscheduled depreciation 8,028 --
- -------------------------------------------------------------------------------------------------------------------------
Extraordinary result
o Nonrecurrent charges incurred
by the early repayment of high
interest refinancing -- 90,776
o Nonrecurrent earnings from
the early repayment of
high-interest refinancing -- 4,609
F-71
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR '000 EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Total value of assets and debts denominated in foreign
currencies
Assets 762,891 844,625
Debts 1,587,830 344,349
The risks of exchange rate fluctuations arising from balance sheet items
denominated in foreign currencies is essentially covered by off-balance-sheet
hedging transactions
- -------------------------------------------------------------------------------------------------------------------------
Book value of assets sold for repurchase (true repo
agreements pursuant to ss. 340 b. para. 4 HGB)
Open market transactions with Federal Central Bank 98,090 1,060,955
In the context of sell and buy-back transactions
with other credit institutions -- 162,360
- -------------------------------------------------------------------------------------------------------------------------
Assets surrendered as security for liabilities
For liabilities to credit institutions
o open-market transactions with Federal Central
Bank for other liabilities 98,090 1,060,955
o interest rate future transactions 4,969 5,255
- --------------------------------------------------------------------------------
Other financial obligations
The total sum of other financial obligations existing at the balance sheet date,
which are not included in the balance sheet or shown below the line, is of minor
significance to an evaluation of the Bank's financial position.
- --------------------------------------------------------------------------------
Transactions involving derivatives
At the balance sheet date, the following transactions involving financial
derivatives (forward transactions as defined in ss. 36 RechKredV) formed part of
L-Bank's portfolio. The majority of the transactions were undertaken in order to
hedge interest rate and exchange rate fluctuations. he respective credit risk
equivalents have been calculated using the market valuation method based on the
appropriate counterparty weighting with the corresponding percentage add-on. The
practice of netting - the offsetting of negative market values - was not
applied. Replacement costs were calculated on the basis of market prices. All
contracts with a positive market value have been taken into account; they have
not been set off against contracts with a negative market value by contracting
party.
Transactions involving derivatives - by contracting party
- --------------------------------------------------------------------------------
Credit risk Replacement
Nominal values equivalents costs
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------------
Banks in the OECD 65,476 48,958 330 977
Other counterparties 5,379 1,781 84 110
(incl. stock
exchange contracts)
Total 70,855 50,739 414 1,087
Transactions involving derivatives - by maturity
- --------------------------------------------------------------------------------
Interest rate risks Currency risk
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------------
Residual maturities
Up to 3 months 3,810 3,393 80 679
Up to 1 year 6,384 3,525 46 195
Up to 5 years 22,518 15,925 1,255 147
over 5 years 36,398 26,601 364 274
Total 69,110 49,444 1,745 1,295
F-72
Transactions involving derivatives - by volume
- --------------------------------------------------------------------------------
Credit risk Replacement
Nominal values equivalents costs
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------------
Interest rate risks
Interest rate swaps 67,845 47,918 387 1,071
FRAs 250 200 0 0
Interest rate options
- -sold- 0 0 - -
Caps 895 895 1 0
Stock exchange contracts 120 431 - -
Total interest rate 69,110 49,444 388 1,071
risks
Currency risks
Forward exchange deals 103 833 0 1
Cross-currency interest
rate swaps 1,642 462 26 15
Total currency risks 1,745 1,295 26 16
Transactions involving derivatives - commercial transactions
- --------------------------------------------------------------------------------
Credit risk Replacement
Nominal values equivalents costs
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
EUR million EUR million EUR million EUR million
- -------------------------------------------------------------------------------------------------------------------------
Interest rate contracts 4,139 5,825 25 63
Total 4,139 5,285 25 63
Statement on tax liability
Under ss. 5 para. 1 no. 2 of the Corporation Tax Act (Korperschaftsteuergesetz
[KStG]) and ss. 3 no. 2 of the Trade Tax Act (Gewerbesteuergesetz [GewStG]),
Landeskreditbank Baden-Wurttemberg - Forderbank is exempt from corporation tax
and trade tax.
F-73
L-Bank's equity holdings pursuant to ss. 285 no. 11 HGB
- --------------------------------------------------------------------------------
Holding Equity Capital Net income/loss 1)
- -------------------------------------------------------------------------------------------------------------------------
No. Name/Registered office in $ in EUR '000 In EUR '000
- -------------------------------------------------------------------------------------------------------------------------
Other assets (direct)
1. Austria Beteiligungsgesellschaft mbH, Stuttgart 33.34 35,601 1,273
2. Industriepark Gottmadingen AG, Gottmadingen 100.00 627 (**)
3. MBG Mittelstandische Beteiligungsgesellschaft
Baden-Wurttemberg GmbH, Stuttgart 26.80 13,795 1,973
4. PT German Centre Indonesia, Bumi Serpong Damai,
Indonesia 83.67 - 2,947 (*) - 7,183 (*)
5. Technologiepark Karlsruhe GmbH, Karlsruhe 96.00 1,797 - 527qq
6. Technologieparks Tubingen-Reutlingen, Tubingen 100.00 1,971 - 29
7. StEP Stuttgarter EngineeringPark GmbH, Stuttgart 100.00 2,117 - 383
8. Business-Park Goppingen GmbH, Goppingen 40.00 1,232 - 18
9. Buropark Fasanenhof GmbH, Stuttgart 100.00 (***) (***)
10. SCIO Knowledge Systems GmbH, Karlsruhe 32.00 (***) (***)
11. detectis GmbH, Freiburg 39.43 (***) (***)
(*) Exchange rate: 1 euro = 10,400 rupiah
(**) Profit and loss transfer agreement exists
(***) Established in 2001
1) Last available financial year in each case
Equity investments in non-affiliated companies pursuant to ss. 340 a para. 4 no.
2 HGB
- ------------------------------------------
No. Name/Registered office
- ------------------------------------------
1. Baden-Wurttembergische Bank AG, Stuttgart
F-74
Fixed assets analysis
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Fixed Historical Write-offs Book Write-offs
assets cost and value and
- balance Jan. 1, cumulative Dec. 31, depreciation
sheet items 2001 Additions Retirements Transfers Write-ups depreciation 2001 in 2001
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Notes Net adjustment in compliance
and other
fixed- with ss. 34, para. 3, subpara. 2
interest RechKredV:
securities 4,964,464 TEUR 1,305,129 6,410,731 0
- -------------- ------------ ---------------------------------------------------------------- ------------ ------------
Shares and
other
non-fixed-
interest
securities 5,551 0 0
- -------------- ------------ ---------------------------------------------------------------- ------------ ------------
Equity
investments
in
non-affiliated
companies 295,564 149,938 - 939
- -------------- ------------ ---------------------------------------------------------------- ------------ ------------
Equity
investments
in affiliated
companies 12,369 22,408 - 5,113
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Tangible
assets 173,662 6,606 - 151 0 0 - 38,655 141,462 - 19,309
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other
assets 13,638 15 0 0 0 - 16 13,637 - 5
- -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-75
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2001 Dec. 31,2000
- -------------------------------------------------------------------------------------------------------------------------
Landeskreditbank Baden-
Wurttemberg - Forderbank hedging
account for mortgage bonds
at December 31, 2001 (EUR million)
Mortgage bonds issued 3,808 4,458
Cover for specific assets
o Receivables from credit institutions 137 0
o Receivables from customers 4,268 4,532
Surplus cover 597 73
- -------------------------------------------------------------------------------------------------------------------------
Total emoluments paid out to
authorities and administrative bodies of
Landeskreditbank Baden-Wurttemberg
- -Forderbank in 2001 (EUR '000)
Board of Governors 130 167
Board of Management 1,380 1,581
Former members of the Board of
Management of their dependents 793 787
Advisory Council (incl. travel
expenses) 200 213
Pension reserves for former members
of the Board of Management and their
dependents 9,364 8,316
- -------------------------------------------------------------------------------------------------------------------------
Loans to members of administrative
bodies (EUR'000) (incl. contingent
liabilities)
Board of Governors 540 4,233
Board of Management 1,492 1,745
- -------------------------------------------------------------------------------------------------------------------------
Average number of staff employed in 2001
male female Total
Total number of employees 496 599 1,095
of whom: full-time employees 487 412 899
part-time employees 9 187 196
trainees
(not included in the total number)
excluding temporary staff, students on placement,
volunteers, cleaning staff
F-76
Directorships held by members of the Board of Management and employees of
L-Bank pursuant to ss. 340 a para. 4 no.1 HGB
Christian Brand,Chairman of the Board of Management
Baden-Wurttemberg Bank AG, Stuttgart Member of the Supervisory Board
BWK GmbH Unternehmensbeteiligungsgesellschaft, Member of the Supervisory Board
Stuttgart
Clariant GmbH, Frankfurt Member of the Supervisory Board
LEG Landesentwicklungsgesellschaft Member of the Supervisory Board
Baden-Wurttemberg mbH, Stuttgart (to Dec. 31, 2001)
Sachsische Aufbaubank GmbH, Dresden Member of the Supervisory Board
SG Holding AG, Stuttgart Member of the Supervisory Board
(to Nov. 29, 2001)
Tourismus-Marketing GmbH Baden-Wurttemberg, Vice Chairman of the Supervisory
Stuttgart Board
Unternehmensbeteiligungsgesellschaft Chairman of the Supervisory Board
Baden-Wurttemberg AG, Stuttgart i. L. (to July 12, 2001)
Vorarlberger Landes- und Hypothekenbank AG, Member of the Supervisory Board
Bregenz
Hans Beerstecher,Vice Chairman of the Board of Management
Business-Park Goppingen GmbH, Goppingen Vice Chairman of the Supervisory
Board
GWZ Gesellschaft fur internationale wirtschaftliche Member of the Supervisory Board
Zusammenarbeit Baden-Wurttemberg mbH, Stuttgart
Industriepark Gottmadingen AG (IPG), Chairman of the Supervisory Board
Gottmadingen
Jurgen Hagele,Member of the Board of Management
Sachsische Aufbaubank GmbH, Dresden Member of the Supervisory Board
(to Dec. 19, 2001)
Dr.Manfred Schmitz, Member of the Board of Management
MBG Mittelstandische Beteiligungsgesellschaft Member of the Supervisory Board
Baden-Wurttemberg GmbH, Stuttgart
Industriepark Gottmadingen AG (IPG), Member of the Supervisory Board
Gottmadingen (from Aug. 29, 2001)
Vice Chairman of the Supervisory
Board
(from Dec. 14, 2001)
F-77
L-Bank employees
Peter Arnold, Executive Officer
Business-Park Goppingen GmbH, Goppingen Member of the Supervisory Board
Industriepark Gottmadingen AG (IPG), Gottmadingen Vice Chairman of the Supervisory
Board
(to Dec. 14, 2001)
Member of the Supervisory Board
(from Dec. 14, 2001
PT German Centre Indonesia, Bumi Serpong Damai, Chairman of the Supervisory Board
Indonesia
Stephan Tribull, Executive Officer
Finanzierungsgesellschaft fur Offentliche Vorhaben Member of the Board of Governors
des Landes Baden-Wurttemberg mbH, Stuttgart
Walter Weik, Executive Officer
Landsiedlung Baden-Wurttemberg GmbH, Stuttgart Member of the Supervisory Board
MBW Marketing- und Absatzforderungsgesellschaft Member of the Supervisory Board
fur Agrar- und Forstprodukte aus Baden-Wurttemberg
mbH, Stuttgart
Stadtbau GmbH Pforzheim, Pforzheim Member of the Supervisory Board
Jurgen Schnieder, Group Manager
PT German Centre Indonesia, Bumi Serpong Damai, Member of the Supervisory Board
Indonesia
F-78
Authorities of Landeskreditbank Baden-Wurttemberg - Forderbank
Board Members of the - Other members -2) Advisory members:
of Management: Board of Governors
2001
Christian Brand Full members: Klaus Hackert Rudiger Ruhnow
Chairman President of the Chairman of the
Baden-Wurttemberg Central Staff Council
Association of Landeskreditbank
of Craftsmen Baden-Wurttemberg
- Forderbank
Hans Beerstecher - State government Norbert Keller Reiner Enzmann
Vice Chairman representatives - 1) President of the Chairman of the
Karlsruhe Chamber of Staff Council
Commerce and Industry at the Head Office
of Landeskreditbank
Baden-Wurttemberg
- Forderbank
Jurgen Hagele Dr. Walter Doring MdL Heinz Kalberer Gabriele Propp
Minister of Economic Lord Mayer of Chairman of the
Affairs- Chairman - Vaihingen Staff Council at the
Branch Office of
Landeskreditbank
Baden-Wurtemberg
- Forderbank
Dr. Manfred Schmitz Gerhard Stratthaus MdL Gisela Graber
Minister of Finance Head of the
- Vice Chairman Baden-Wurttemberg
Chapter of DAG
Dr. Thomas Schauble MdL Otwin Brucker
Minister of Interior President of the
- Vice Chairman Baden-Wurttemberg
Association of
Municipalities
Gerdi Staiblin Gerhard Burkhardt
Minister of Rural Chairman of the
Planning Board of Management
- Vice Chairman - of the Verband
to June 30, 2001 baden-wurttembergischer
Wohnungs-unternehmen
e.V.
Willi Stachele MdL Dr. Christoph Niemann
Minister for Food and General Partner of
Rural Planning HSBC Trinkaus &
- Vice Chairman - Burkhardt KgaA
from July 1, 2001
Ulrich Muller MdL
Minister of the
Environment, Transport
and Communication
Dr. Friedhelm Repnik
MdL
Minister of Social
Affairs
Rudolf Bohmler
State Secretary at the
Ministry of State
Klaus Fischer
Undersecretary at the
Ministry of Finance
F-79
Deputy members - Deputy Prof. Dr. Willi Weiblen Klaus Roscheisen
representatives - Assistant Undersecretary Assistant
- State government and Head of the Undersecretary and
deputy Joachim Wohlfeil Department of Economic Head of the
respresentatives - President of the and Structural Policy Administration
Karlsruhe Chamber at the Ministry of Department at the
Dr. Karl Epple of Craftsmen Economic Affairs Ministry of the
Undersecretary at Environment, Transport
the Ministry of Dr. Ing.Hansjorg Roeger Prof. Dr. Ulrich Hieber and Communications
Economic Affairs President of the Assistant Undersecretary from July 1, 2001
East Wurttemberg and Head of the
Wolfgang Ruckert MdL Chamber of Commerce Department of Christian Luft
State Secretary at and Industry Construction Law, Urban Assistant Secretary
the Planning, Housing and and Head of the
Ministry of Finance Historic Monuments Central Office at the
Egon Gushurst at the Ministry of Ministry of Social
President and Economic Affairs Affairs
Roland Eckert Chairman of the to Sep. 30, 2001
Undersecretary at Management Board of
the Badischer Genossen- Walter Leibold
Ministry of the schaftsverband Assistant Undersecretary Bernhard Giess
Interior Raiffeisen - Schulze- and Head of the Assistant Secretary
Delitzsch d.V. Department of Financial and Head of the
Rainer Arnold Policy and Investments State Budget,
Undersecretary at Frank Zach at the Ministry of Finance Real Estate and
the Head of the Trade and Investments Section
Ministry of Industry Department of Prof. Konrad Freiherr von of the Ministry
Rural Planning the Baden-Wurttemberg Rotberg of State
Chapter of DGB Assistant Undersecretary and
Stefan Mappus Head of the Department of
State Secretary at Georg Mehl Constitutional, Municipal, Norbert Schmitt
the Senator (retd.) Savings Bank and Legal Assistant Secretary
Ministry of the Wustenrot & Wurttem- Affairs and Head of the
Environment, bergische AG at the Ministry of the State Investments
Transport Interior and Banking
and Communications Karl-Heinz Reinheimer Section at the
Honarary Chairman Prof. Dr. Jurgen Patzold Ministry of Finance
Bernhard Bauer of Bundesverband Assistant Undersecretary and
Undersecretary at Frier Wohnungs- Head of the Administration
the unternehmen e.V. Department at the Ministry of
Ministry of the Environment, Transport
Social Affairs Wilhelm Freiherr von and Communications to
Haller June 30, 2001
Hermann Strampfer Member of the Board
Assistant of Management
Undersecretary and of Deutsche Bank AG
Head of Dept. I at
the
ministry of State
Julian Wurtenberger
Assistant
Undersecretary and
Head of Dept. II at
the
Ministry of State
1) ex officio members
2) personally appointed
F-80
Proposal of the Board of Management for the appropriation of retained profits
EUR 104,1 million of the net profit for the 2001 financial year has already been
appropriated to retained profit. The Board of Management proposes that the
remaining distributable profit in the amount of EUR 33,249,577.47 should be
carried forward to next year's account.
Karlsruhe, March 26, 2002
Landeskreditbank Baden-Wurttemberg - Forderbank -
/s/ Christian Brand /s/ Hans Beerstecher /s/ Jurgen Hagele /s/ Dr. Manfred Schmitz
- -------------------- -------------------- -------------------- -----------------------
Christian Brand Hans Beerstecher Jurgen Hagele Dr. Manfred Schmitz
F-81
Independent Auditors' opinion
We have audited the financial statements of Landeskreditbank
Baden-Wurttemberg - Forderbank - ("L-Bank" or "the Bank"), Karlsruhe, for the
financial year ending December 31, 2001. The accounting and preparation of the
financial statements and of the management report of the Bank in accordance with
German commercial law are the responsibility of the Board of Managing Directors
of L-Bank. Our responsibility is to express an opinion based on our audit on the
financial statements and the management report of the Bank. We conducted our
audit of the financial statements in accordance with ss. 317 HGB (the German
Commercial Code and the German generally accepted standards for the audit of
financial statements promulgated by "Institut der Wirtschaftsprufer" (IDW, the
German Institute of Certified Public Accountants). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
presentation of the net assets, financial position, and results of operation in
the financial statements, drawn up in accordance with the German generally
accepted accounting principles, and in the management report of the Bank are
free of material misstatement. Knowledge of the business activities and the
economic and legal environment of the Bank and evaluations of possible
misstatements are taken into account in the determination of audit procedures.
The effectiveness of the accounting-related internal control system and the
evidence supporting the disclosures in the books and records, the financial
statements, and the management report of the Bank are primarily examined on a
test basis within the framework of the audit. The audit of the financial
statements includes assessing the accounting principles applied and the
significant estimates made by the Board of Managing Directors of L-Bank and
evaluating the overall presentation of the financial statements and management
report of the Bank. We believe that our audit provides a reasonable basis for
our opinion.
Our audit did not lead to any objections.
In our opinion, the financial statements give a true and fair view of the
net assets, financial position, and results of operations of the Bank in
accordance with German generally accepted accounting principles. Seen in total,
the management report of the Bank is an accurate representation of the position
of the Bank and accurately reflects the risks entailed in its future
development.
Stuttgart, April 9, 2002
PWC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/ Schuldt /s/ Apitzsch
- ------------------------------ ------------------------------
Schuldt ppa. Apitzsch
Auditor Auditor
F-82
SUPPLEMENTARY INFORMATION ON DEBT OF L-BANK
Debt of L-Bank at December 31, 2003
Principal amount
outstanding
Year of incurrence Maturity (in millions of EUR)
------------------ -------- ---------------------
1. Bonds and Notes issued
a) Bonds(1) 1994-1998 2004-2008 1,076.3
b) Notes(2) 1999-2003 2004-2043 15,339.4
--------
16,415.7
2. Liabilities(3)
a) Liabilities to credit institutions(4) 1952-2003 2004-2043 18,900.4
b) Liabilities to customers(5) 1957-2003 2004-2051 2,912.1
c) Borrowings from the Federal Republic of Germany(6) 0
d) Borrowings from the State of Baden-Wurttemberg(6) 1953-2003 2004-2008 2,247.1
e) Borrowings from the State of Saxony 1993 2099 1.1
--------
24,060.8
3. Subordinated Liabilities
a) Bonds and Notes(7) 1999-2003 2009-2015 297.4
b) Others(8) 1999-2003 2008-2023 301.4
--------
598.8
Total debt outstanding(9) 41,075.3
========
- ---------------
(1) This item consists of mortgage-backed bonds (Hypothekenpfandbriefe).
(2) This item consists of other bonds and notes. See "L-Bank--Business--Source
of Funds."
(3) Liabilities include liabilities with an original maturity or non-prepayment
period of less than four years, as well as those with an original maturity
or non-prepayment period of four years or longer.
(4) Liabilities to credit institutions include mortgage-backed bonds and public
debt-backed bonds issued by L-Bank and other liabilities of L-Bank.
(5) Liabilities to customers (i.e. non-credit institutions) include
mortgage-backed bonds and public debt-backed bonds issued by L-Bank and
other liabilities of L-Bank except liabilities to Germany,
Baden-Wurttemberg and the state of Saxony.
(6) The dates of maturity of borrowings from Baden-Wurttemberg or Germany match
the dates of maturity of loans made by L-Bank with such funds in connection
with subsidized loan programs.
(7) Includes Bonds and Notes in foreign currencies.
(8) Includes other borrowings in foreign currencies and medium and long-term
loans evidenced by promissory notes placed with investors
(Schuldscheindarlehen).
(9) Includes the following debt in foreign currencies:
Currency Amount
(currency in millions)
U.S. Dollar 30,962.0
Australian Dollar 200.9
Canadian Dollar 105.9
Swiss Franc 665.8
Danish Kroner 0.2
British Pound 78.5
Japanese Yen 804.6
Norwegian Kroner 139.4
F-83
Repayment Schedule for Debt of L-Bank
Outstanding at December 31, 2003
(in millions of EUR)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-2023
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------
Bonds and Notes
Principal 3,059 4,810 1,244 1,834 3,113 166 1,080 15 30 173 0 403
Interest 606 463 307 254 191 93 85 26 26 30 21 151
Other liabilities
Principal 5,024 1,746 1,519 943 2,610 3,892 666 940 273 419 499 522
Interest 845 759 671 584 534 367 156 125 79 67 50 195
Total 9,534 7,778 3,741 3,616 6,448 4,518 1,987 1,106 409 690 571 1,271
- --------------------
(1) Certain outstanding debt of L-Bank matures after 20 years. Repayments
thereof scheduled after 2023 are not included in this table.
(2) Floating rate interest is calculated on the basis of the most recent
interest rate adjustment made before December 31, 2003.
(3) The repayment schedule with respect to borrowings by L-Bank from Germany
and Baden-Wurttemberg includes only the minimum required amortization since
the terms of such borrowings provide for repayment by L-Bank generally at
the time that L-Bank has been repaid by the ultimate recipient of such
funds under the relevant public support programs. Other liabilities include
liabilities to credit institutions and liabilities to customers (excluding
loans granted with funds provided by the federal or state governments or by
Kreditanstalt fur Wiederaufbau), subordinated liabilities and profit
participation capital.
F-84
U.S.$5,000,000,000
[L-BANK LOGO]
Staatsbank fur Baden-Wurttemberg
Prospectus
Dated ___________, 2005
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Amount of Funded Debt and Estimated Amount of Floating Debt
The only type of secured debt L-Bank has outstanding are
mortgage-backed bonds (Hypothekenpfandbriefe). See
"L-Bank--Glossary--Receivables from customers" in the prospectus. The security
for such debt is determined in accordance with the Law on Mortgage-backed Bonds
and Similar Securities Issued by Public Law Credit Institutions (Gesetz uber die
Pfandbriefe und verwandten Schuldverschreibungen offentlich-rechtlicher
Kreditanstalten). When loans or other indebtedness constituting security for
L-Bank's mortgage-backed bonds are repaid, they are replaced on a regular basis
by other eligible security without notice to the bondholders.
All of the debt of Baden-Wurttemberg is unsecured. Hence, there is no
provision for substitution of security with regard thereto.
Estimated Expenses
It is estimated that the expenses, other than underwriting fees and
commissions, payable by L-Bank in connection with the issuance and sale of the
notes will be as follows:
Securities and Exchange Commission Registration Fee................ $588,500
Auditors' Fees and Expenses........................................ $ 35,000
Legal Fees......................................................... $ 50,000
Total............................................ $673,500
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereto) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the
II-1
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-2
SIGNATURE OF LANDESKREDITBANK BADEN-WURTTEMBERG - FORDERBANK
Pursuant to the requirements of the Securities Act of 1933,
Landeskreditbank Baden-Wurttemberg - Forderbank has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Karlsruhe, Federal Republic of Germany, on March
28, 2005.
LANDESKREDITBANK BADEN-WURTTEMBERG - FORDERBANK
By /s/ Christian Brand
------------------------------------------
Christian Brand
Chairman of the Board of Management
By /s/ Jurgen Hagele
----------------------------------------
Jurgen Hagele
Vice Chairman of the Board of Management
II-3
SIGNATURE OF THE STATE OF BADEN-WURTTEMBERG
Pursuant to the requirements of the Securities Act of 1933, the State
of Baden-Wurttemberg has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stuttgart, Federal Republic of Germany, on March 28, 2005.
THE STATE OF BADEN-WURTTEMBERG
By /s/ Gerhard Fink
--------------------------------------------
Gerhard Fink
Attorney in Fact
II-4
SIGNATURE OF AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the
Authorized Representative of Landeskreditbank Baden-Wurttemberg - Forderbank and
the State of Baden-Wurttemberg in the United States has duly signed this
Registration Statement on March 28, 2005.
PUGLISI & ASSOCIATES
By /s/ Donald J. Puglisi
--------------------------------------------
Donald J. Puglisi
II-5
Exhibit
Number Description of Exhibits
- ------ -----------------------
1.1 Form of Subscription Agreement for the Debt Securities of
Landeskreditbank Baden-Wurttemberg - Forderbank.
3.1 Act Concerning Landeskreditbank Baden-Wurttemberg - Forderbank
(English language translation).
3.2 Statutes of Landeskreditbank Baden-Wurttemberg - Forderbank
(English language translation).
4.1 Agency Agreement dated March 22, 2005, for Debt Securities,
including Forms of Debt Securities of Landeskreditbank
Baden-Wurttemberg - Forderbank.
4.2 Form of Debt Securities (included in Exhibit 4.1).
5.1 Opinion (including consent) of Shearman & Sterling LLP in respect
of the legality of the Debt Securities.
23.1 Consent of PwC Deutsche Revision Aktiengesellschaft
Wirtschaftsprufungsgesellschaft.
23.2 Consent of Shearman & Sterling LLP (included in Exhibit 5.1).
23.3 Consent of Gunther Benz, Ministerialdirigent, Ministry of
Finance, State of Baden-Wurttemberg.
23.4 Consent of Walter Leibold, Ministerialdirigent, Ministry of
Finance, State of Baden-Wurttemberg.
24 Power of Attorney.
II-6