GAGFAH SA Investing in the Shares involves risks - Corporate-ir
Transcription
GAGFAH SA Investing in the Shares involves risks - Corporate-ir
GAGFAH S.A. Offering of up to 42,750,000 Registered Shares This is an initial public offering of up to 42,750,000 existing shares, each such share with a nominal value of u1.25, or the Shares, of GAGFAH S.A., a joint stock corporation (société anonyme) organized under the laws of the Grand Duchy of Luxembourg and qualifying as a securitization company under the Luxembourg Securitization Law of March 22, 2004 (loi du 22 mars 2004 relative à la titrisation), or the Company. The Selling Shareholders (as defined herein) are offering the Shares. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Shareholders. This offering consists of a public offering and a listing of the Shares in the Federal Republic of Germany and private placements in certain jurisdictions outside the Federal Republic of Germany. In the United States of America, the Shares will be offered for sale to qualified institutional buyers as part of a private placement in reliance on Rule 144A under the U.S. Securities Act of 1933, as amended, or the Securities Act, and to a limited number of accredited investors in transactions exempt from the registration requirements of the Securities Act. Outside the United States of America, the Shares will be offered in reliance on Regulation S under the Securities Act. The Selling Shareholders will grant an option to the Underwriters (as defined herein), exercisable for 30 calendar days following the date on which the Shares commence trading on the Official Market Segment of the Frankfurt Stock Exchange, to purchase up to an additional 2,137,500 Shares at the offer price, less the underwriting discount, solely to cover over-allotments, if any, in connection with this offering. See ‘‘The Offering—Information on the Shares—Stabilization, Over-Allotments and Greenshoe Option’’ and ‘‘Underwriting.’’ Prior to this offering, there has been no public market for the Shares. The Company will apply for admission of its entire share capital, consisting of 225,000,000 Shares, to trading on the Official Market Segment (amtlicher Markt) of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) (Prime Standard) under the symbol GFJ. We expect that the Shares will be admitted to trading on the Frankfurt Stock Exchange on or about October 19, 2006, and that trading in the Shares will commence on or about October 23, 2006. Investing in the Shares involves risks. See ‘‘Risk Factors’’ beginning on page 16. Price Range: u17 to u19 per Share This prospectus has been approved by the Luxembourg Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier), or CSSF, which is the competent authority in Luxembourg for the purposes of the Directive 2003/71/EC of the European Parliament and of the Council of November 4, 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, or the Prospectus Directive, and relevant implementing measures in Luxembourg, in particular the Luxembourg Law on Securities Prospectuses of July 10, 2005 (loi du 10 juillet 2005 relative aux prospectus pour valeurs mobilières), as a prospectus issued in compliance with the Prospectus Directive and relevant implementing measures in Luxembourg for the purposes of giving information with regard to the Company and the public offering and listing of the Shares in the Federal Republic of Germany. The Shares have not been and will not be registered under the Securities Act and may not be offered or sold in the United States of America or to U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. For a description of the restrictions on resale and transfer of the Shares being offered, see ‘‘Underwriting.’’ The Underwriters (as defined herein) are severally offering the Shares, subject to receipt and acceptance by them of, and subject to their right to reject, any order in whole or in part. The Shares will be represented by one or more global certificates, which will be deposited with Clearstream Banking AG, Frankfurt am Main. The Underwriters expect that the Shares will be delivered through the facilities of Clearstream or Euroclear on or about October 25, 2006. Joint Global Coordinators Deutsche Bank Goldman Sachs International Joint Bookrunners Deutsche Bank Goldman Sachs International Dresdner Kleinwort Morgan Stanley Co-Managers DZ BANK JP Morgan/Sal. Oppenheim jr. & Cie. October 6, 2006 Lehman Brothers NORD/LB In making an investment decision, investors should rely on their own examination of the Company, and the terms of this offering, including the merits and risks involved. Any decision to buy the Shares should be based solely on this prospectus. No person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this prospectus. If any information is given or any representations are made, such information or representations must not be relied upon as having been authorized by us or Deutsche Bank, Goldman Sachs International, Dresdner Kleinwort, Morgan Stanley, JP Morgan/Sal. Oppenheim jr. & Cie. and Lehman Brothers, together, the Underwriters, DZ BANK and NORD/LB, together with JP Morgan, Lehman Brothers and Sal. Oppenheim jr. & Cie., the Co-Managers, any of their respective affiliates, advisers or selling agents or any other person. At any time following the date of this prospectus, the information contained in this prospectus may no longer be correct and our affairs may have changed. No representation is made by us or the Underwriters or any of our or their respective representatives to prospective investors as to the legality of an investment in the Shares, and prospective investors should not construe anything in this prospectus as legal, business or tax advice. Prospective investors should consult their own advisers as to the legal, tax, business, financial and related aspects of an investment in the Shares. The Underwriters are acting exclusively for us and the Selling Shareholders and no one else in connection with the offering and will be responsible to any other person for providing the protection afforded to their clients or for providing advice in relation to the offering. This prospectus does not constitute or form part of an offer to sell, or a solicitation of an offer to buy, any security other than the Shares. The distribution of this prospectus and this offering of Shares may, in certain jurisdictions, be restricted by law and this prospectus may not be used for the purpose of, or in connection with, any offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized, or to any person to whom it is unlawful to make such an offer or solicitation. Persons into whose possession this prospectus comes are required to inform themselves of and observe all such restrictions. Neither we nor any of the Underwriters accept any legal responsibility for any violation by any person, whether or not a prospective investor, of any such restrictions. No action has been or will be taken in any jurisdiction other than the Federal Republic of Germany that would permit a public offering of the Shares or the possession, circulation or distribution of this prospectus or any other material relating to us or the Shares in any jurisdiction where action for that purpose is required. Accordingly, the Shares may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the Shares may be distributed or published in or from any country or jurisdiction except under circumstances that would result in compliance with any applicable rules and regulations of any such country or jurisdiction. STABILIZATION In connection with this offering, Deutsche Bank, acting as Stabilization Manager, or persons acting on its behalf, may (but will be under no obligation to), to the extent permitted by applicable law, over-allot or effect transactions with a view to supporting the market price of the Shares at a level higher than that which might otherwise prevail in the open market for a limited period after the issue date. However, the Stabilization Manager is not required to enter into such transactions. Such stabilizing, if commenced, may be discontinued at any time, and may only be undertaken beginning on the date on which the Shares are first listed on the official market segment (amtlicher Markt) of the Frankfurt Stock Exchange, and must be completed no later than 30 calendar days after such date, such period referred to herein as the Stabilization Period. In connection with this offering, the Stabilization Manager, or any persons acting on its behalf, may, for stabilization purposes, over-allot shares up to a maximum of 5% of the total number of Shares, i.e., 2,137,500 Shares, comprised in the offering. For the purposes of covering short positions, the Selling Shareholders have granted the Underwriters an option, or the Greenshoe Option, pursuant to which the Stabilization Manager may require the Selling Shareholders to sell additional Shares up to an aggregate maximum of 5% of the total number of Shares comprised in the offering, at the offer price. The Greenshoe Option is exercisable in whole or in part, upon notice by the Stabilization Manager, at any time during the Stabilization Period, but only to the extent of the over-allotment. i Any Shares made available pursuant to the Greenshoe Option will be issued on the same terms and conditions as the Shares being issued in the offering and will form a single class for all purposes with the other Shares. CERTAIN DEFINED TERMS In this prospectus, unless the context otherwise requires, • The ‘‘Company’’ refers to GAGFAH S.A.; • ‘‘We,’’ ‘‘us,’’ ‘‘our’’ and ‘‘Group’’ refer to GAGFAH S.A. and its subsidiaries on a consolidated basis, and statements such as ‘‘we believe,’’ ‘‘we expect,’’ and ‘‘we estimate’’ refer to the beliefs, expectations and estimates of the board of directors of the Company and management of the Company’s subsidiaries; • The ‘‘GAGFAH GmbH Group’’ refers to GAGFAH GmbH and its subsidiaries on a consolidated basis; • The ‘‘NILEG GmbH Group’’ refers to NILEG Immobilien Holding GmbH and its subsidiaries on a consolidated basis. ‘‘NILEG Holding’’ refers to NILEG Immobilien Holding GmbH and ‘‘NILEG Norddeutsche’’ refers to NILEG Norddeutsche Immobiliengesellschaft mbH; • The ‘‘WOBA GmbH Group’’ refers to WOBA Dresden GmbH and its subsidiaries on a consolidated basis, and ‘‘WOBA GmbH’’ refers to WOBA Dresden GmbH; • ‘‘Acquisition 1’’ refers to GAGFAH Acquisition 1 GmbH; and • ‘‘Selling Shareholders’’ refers to the entities, except for ‘‘Free Float,’’ set forth in the table under ‘‘Principal and Selling Shareholders’’; and • ‘‘Fortress Investment’’ refers to Fortress Investment Group LLC, a company organized under the laws of the State of Delaware, and/or, as applicable, its subsidiaries and affiliates. Other defined terms used throughout this prospectus are indicated in the text. PRESENTATION OF FINANCIAL INFORMATION Consolidated Financial Statements The Company’s audited consolidated annual accounts as of and for the period beginning July 12, 2005 and ended December 31, 2005, including the notes thereto, or the Audited Consolidated Short Year Financial Statements, set forth in the Financial Information section of this prospectus, and the unaudited consolidated financial statements as of and for the six months ended June 30, 2006, including the notes thereto, or the Unaudited Condensed Consolidated Interim Financial Statements, were each prepared in accordance with the international financial reporting standards, or IFRS, as applicable at the time of the preparation of such financial statements. Neither the Audited Consolidated Short Year Financial Statements nor the Unaudited Condensed Consolidated Interim Financial Statements include comparable financial information for prior periods since the Company did not exist prior to July 12, 2005. Financial data included in this prospectus relating to the Company and its consolidated subsidiaries is derived from the Audited Consolidated Short Year Financial Statements and the Unaudited Condensed Consolidated Interim Financial Statements. Ernst & Young S.A., 6, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg, independent auditors, and registered member of the Institut des Réviseurs d’Entreprises, have issued an unqualified auditor’s report with respect to the Audited Consolidated Short Year Financial Statements. Unconsolidated Financial Information The Company’s audited unconsolidated annual accounts as of and for the period beginning July 12, 2005 and ended December 31, 2005, including the notes thereto, or the Audited Unconsolidated Short Year Financial Statements, set forth in the Financial Information section of this prospectus, and the Company’s unaudited unconsolidated interim accounts as of and for the six months ended June 30, 2006, including the notes thereto, or the Unaudited Unconsolidated Interim ii Financial Statements, set forth in the Financial Information section of this prospectus, were each prepared in accordance with accounting principles generally accepted in the Grand Duchy of Luxembourg, or Luxembourg GAAP, as applicable at the time of the preparation of such financial statements. Neither the Audited Unconsolidated Short Year Financial Statements nor the Unaudited Unconsolidated Interim Financial Statements include comparable financial information for prior periods since the Company did not exist prior to July 12, 2005. Ernst & Young S.A. have issued an unqualified auditor’s report with respect to the Audited Unconsolidated Short Year Financial Statements. Pro Forma Financial Information The Company’s unaudited pro forma consolidated financial information as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005, including the notes thereto, or the Unaudited Pro Forma Consolidated Financial Information, set forth in the Financial Information section of this prospectus, were prepared on the terms of the principles of the Institute of Public Auditors in Germany, Düsseldorf (Institut der Wirtschaftsprüfer in Deutschland e.V., Düsseldorf—IDW) for the preparation of Pro Forma Financial Information (IDW AcPS AAB 1.004 ‘‘Preparation of Pro Forma Financial Information’’). The underlying figures of the unaudited pro forma consolidated financial information are prepared in accordance with IFRS. GAGFAH GmbH Financial Statements GAGFAH GmbH, together with its subsidiaries, represents approximately 51% of our Group, based upon residential units owned pro forma as of June 30, 2006, and, based on the respective historical financial information, approximately 63% of our Group’s pro forma profit from the lease of investment property for the year ended December 31, 2005 and approximately 66% of our Group’s pro forma profit from the lease of investment property for the six months ended June 30, 2006. See ‘‘Selected Group Pro Forma Financial Data.’’ In September 2006, Fortress Investment contributed indirect interests in GAGFAH GmbH and certain Eurobonds to the Company. GAGFAH GmbH’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2005, including the notes thereto, or the Audited GAGFAH GmbH Consolidated Annual Financial Statements, set forth in the Financial Information section of this prospectus, and GAGFAH GmbH’s unaudited consolidated financial statements as of and for the six months ended June 30, 2006 and 2005, including the notes thereto, or the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements, set forth in the Financial Information section of this prospectus, were each prepared in accordance with IFRS, as applicable at the time of the preparation of such financial statements. Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Mittlerer Pfad 15, 70499 Stuttgart, Germany, independent auditors, registered with the German Chamber of Public Accountants (Wirtschaftsprüferkammer), or Ernst & Young AG, have issued an unqualified auditor’s report with respect to the Audited GAGFAH GmbH Consolidated Annual Financial Statements. FFO, EBIT, EBITDA; Critical Accounting Policies; Rounding Adjustments We have included funds from operations, or FFO, as a financial measure in this prospectus because we believe that FFO constitutes an important measure of funds generated from continuing operations and the cash we have available for paying dividends. We compute FFO as EBITDA, as defined below, reduced by the profit from measurement of the investment properties at fair value, net interest paid to third parties and current income tax expense. We believe that FFO is an appropriate measure for the determination and evaluation of our operating performance, since individual items that relate to non-cash expenses not affecting our liquidity are eliminated. However, FFO is not a measure of operating performance or liquidity under IFRS or U.S. GAAP and should not be considered as an alternative to our income or cash flow measures as determined in accordance with IFRS. Furthermore, no standard definition exists for FFO. Thus, the FFO or measures with similar names as presented by other companies may not necessarily be comparable to our FFO. We have also included earnings before interest and taxes, or EBIT, in this prospectus because we believe that EBIT constitutes a comprehensive measure of earnings from all sources before interest and taxes. EBIT is included in our IFRS consolidated financial statements. However, EBIT is not a measure of operating performance or liquidity under IFRS or U.S. GAAP and should not be iii considered as an alternative to our income or cash flow measures as determined in accordance with IFRS. Furthermore, no standard definition exists for EBIT. Thus, EBIT or measures with similar names as presented by other companies may not necessarily be comparable to our EBIT. We have included earnings before interest, taxes, depreciation and amortization, or EBITDA, as a financial measure in this prospectus because management uses EBITDA to report and assess net profitability from continuing operations. EBITDA provides management with a better view of earnings from continuing operations by separating the costs of non-recurring items, capitalization (interest), taxes and non-economic depreciation from operating earnings. We compute EBITDA as EBIT plus restructuring costs and depreciation and amortization. However, EBITDA is not a measure of operating performance or liquidity under IFRS and should not be considered as an alternative to our income or cash flow measures as determined in accordance with IFRS. Furthermore, no standard definition exists for EBITDA. Thus, EBITDA or measures with similar names as presented by other companies may not necessarily be comparable to our EBITDA. The preparation of our financial statements in accordance with IFRS requires our management to make assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies as of the date of the financial statements and the reported amounts of asset values, revenues and expenses during the period under review. Critical accounting policies require complex or subjective judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Thus, to the extent that actual events differ from our management’s estimates and assumptions, there could be a material impact on our financial statements. Investors should read the discussion under ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors Affecting Our Results of Operations’’ and the corresponding notes in the Financial Information section of this prospectus. In accordance with commercial accounting, some numerical figures (including percentages) in this prospectus have been rounded to the nearest whole number or tenth of a million (euro). As a result, figures shown as totals in some tables may not be the exact arithmetic aggregation of the rounded figures that precede them. Percentages cited in the text, however, were calculated using the actual values rather than the rounded values. Accordingly, in certain cases it is possible that the percentages in the text differ from percentages based on the rounded values. NOTICE TO INVESTORS IN THE EUROPEAN ECONOMIC AREA This prospectus has been prepared on the basis that all offers of Shares (other than the offers contemplated in the prospectus, as amended, in the Federal Republic of Germany once the prospectus has been approved by the Luxembourg Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier), or the CSSF, and notified to the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), in accordance with Directive 2003/71/EC, or the Prospectus Directive as implemented in, respectively, the Grand Duchy of Luxembourg and the Federal Republic of Germany will be made pursuant to an exemption under the Prospectus Directive, as implemented in member states of the European Economic Area, or EEA, from the requirement to produce an approved prospectus for offers of Shares. Accordingly, any person making or intending to make any offer, resale or other transfer within the EEA, other than in the Federal Republic of Germany, of Shares subject to the placement contemplated in this prospectus may only do so in circumstances under which no obligation arises for us or any of the Underwriters to produce an approved prospectus for such offer. Neither we nor the Underwriters have authorized, nor do any of us authorize, the making of any offer of offered Shares through any financial intermediary, other than offers made by the Underwriters which constitute the final placement of Shares contemplated in this prospectus. In relation to each Member State of the EEA, or Relevant Member State, which has implemented the Prospectus Directive an offer to the public of any Shares which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State, other than the offers contemplated in the prospectus in the Federal Republic of Germany once the prospectus has been (a) approved by the CSSF, (b) published in accordance with Luxembourg statutory rules and (c) notified to the German Federal Financial Services Supervisory Authority, except that an offer to the public in that Relevant Member State of any offered Shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State: iv • to qualified investors as defined in Article 2.1. (e), 2.2 of the Prospectus Directive, as implemented in the Relevant Member States of the EEA; • by the Underwriters to fewer than 100 natural or legal persons (other than qualified institutional investors as defined in the Prospectus Directive as implemented in the Relevant Member States of the EEA); or in any other circumstances falling within Article 3(2) of the Prospectus Directive provided that no such offer of Shares shall result in a requirement for the publication by us or any Joint Bookrunner of an approved prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an ‘‘offer to the public’’ in relation to the offered Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the offered Shares so as to enable an investor to decide to purchase the offered Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and includes any relevant implementing measure in each Relevant Member State. NOTICE TO UNITED KINGDOM INVESTORS In the United Kingdom, this prospectus and the offering are only addressed to and directed at (i) persons who are ‘‘qualified investors’’ within the meaning of Article 2(1)(e) of the Prospectus Directive (Directive 2003/71/EC), or Qualified Investors, with professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or the Order and Qualified Investors falling within Article 49(2)(a) to (d) of the Order (‘‘high net worth companies, unincorporated associations, etc.’’), and (ii) persons to whom it may otherwise lawfully be communicated (such persons in (i) and (ii) above together being referred to as Relevant Persons). In the United Kingdom, this prospectus must not be acted on or relied on by persons who are not Relevant Persons, and any investment or investment activity to which this prospectus relates is available only to Relevant Persons, and will be engaged in only with such persons. This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other person. NOTICE TO INVESTORS IN BELGIUM This offering does not constitute a public offering in Belgium. The offer may not be advertised and the Shares may not be offered or sold, and this prospectus or any other offering material relating to the Shares may not be distributed, directly or indirectly, to any persons in Belgium other than to (i) qualified investors as defined in Article 10 of the Act of June 16, 2006 on public offerings of investment instruments and the admission of investment instruments to trading on a regulated market, or (ii) other investors in circumstances which do not require the publication by the issuer of a prospectus, information circular, brochure or similar document pursuant to Article 3 of the aforementioned Act. The offering has not been and will not be notified to, and this prospectus or any other offering material relating to the Shares has not been and will not be approved by the Belgian Banking, Finance and Insurance Commission (Commission bancaire, financière et des assurances/Commissie voor het Bank-, Financie- en Assurantiewezen). Any representation to the contrary is unlawful. NOTICE TO INVESTORS IN FRANCE Neither this prospectus nor any other offering material relating to the Shares has been prepared in the context of a public offer of securities in the Republic of France within the meaning of Article L.411-1 of the French Code monétaire et financier and Articles 211-1 et seq. of the General Regulations of the Autorité des marchés financiers and has therefore not been and will not be submitted to the clearance procedures of the Autorité des marchés financiers in France or notified to the Autorité des marchés financiers after clearance of the Commission de Surveillance du Secteur Financier. The Shares have not been offered, sold or otherwise transferred and will not be offered, sold or otherwise transferred, directly or indirectly, to the public in the Republic of France. Neither this prospectus nor any other offering material relating to the Shares has been or will be (i) released, issued, distributed or caused to be released, issued or distributed to the public in the Republic of France or (ii) used in connection with any offer for subscription or sale of the Shares to the public in the Republic of France. v Any offers, sales or other transfers of the Shares in the Republic of France will be made in accordance with Article L.411-2 of the French Code monétaire et financier only (i) to qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case, and except as otherwise stated under French laws and regulations, investing for their own account, all as defined in and in accordance with Articles L.411-2, D.411-1 to D.411-4, D.734-1, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier and/or (ii) to investment services providers authorized to engage in portfolio management on a discretionary basis on behalf of third parties, or (iii) in a transaction that, in accordance with Article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier and Article 211-2 of the General Regulations (Règlement Général) of the Autorité des marchés financiers, does not constitute a public offer (appel public à l’épargne), in each case in compliance with Articles L.341-1 to L.341-17 of the French Code monétaire et financier. Such Shares may be resold directly or indirectly only in compliance with Articles L.411-1, L.411-2, L.412-1, L.621-8 through L.621-8-3 and L.341-1 to L.341-17 of the French Code monétaire et financier. NOTICE TO INVESTORS IN ITALY The offering of the Shares in Italy has not been registered with the Commissione Nazionale per la Società e la Borsa, or CONSOB, pursuant to Italian securities legislation and, accordingly, the Shares cannot be offered, sold or delivered in the Republic of Italy nor may any copy of this prospectus or any other document relating to the Shares be distributed in Italy except (a) in accordance with article 100(a) of Legislative Decree no. 58 of February 24, 1998, or the Financial Act, to professional investors (operatori qualificati) as defined under article 25 and 31, second paragraph, of CONSOB Regulation no. 11522 of July 1, 1998 as subsequently amended, or the Regulations, or (b) in any other circumstance where an express exemption to comply with the investment solicitation rules is provided in accordance with article 100 of the Finacial Act. Any offer, sale or delivery of the Shares or distribution of copies of this prospectus or any other document relating to the Shares in Italy must be made: (a) by an investment firm, bank or intermediary permitted to conduct such activities in Italy in accordance with the Financial Act and Legislative Decree no. 385 of September 1, 1993, or the Banking Act; (b) in compliance with the provisions of the Banking Act, the Financial Act and the rules and regulations adopted thereunder, as well as the implementing guidelines of the Bank of Italy and CONSOB; and in compliance with any other applicable laws and regulations and other possible requirements or limitations which may, from time to time, be imposed by Italian authorities. NOTICE TO INVESTORS IN BAHRAIN This offer is a private placement. It is not subject to the regulations of the Bahrain Monetary Agency that apply to public offerings of securities and the extensive disclosure requirements and other protections that these regulations contain. This prospectus is therefore intended only for ‘‘professional clients’’ or ‘‘market counterparties’’ as defined by the Bahrain Monetary Agency. The securities offered pursuant to this prospectus may only be offered in Bahrain in minimum subscriptions of US$250,000 (or equivalent in other currencies). The Bahrain Monetary Agency assumes no responsibility for the accuracy and completeness of the statements and information contained in this prospectus and expressly disclaims any liability whatsoever for any loss howsoever arising from reliance upon the whole or any part of the contents of this prospectus. NOTICE TO INVESTORS IN OMAN The Information contained in this prospectus neither constitutes a public offer of securities in the Sultanate of Oman as contemplated by the Commercial Companies Law of Oman (Sultani Decree vi 4/74) or the Capital Market Law of Oman (Sultani Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy Non-Omani securities in the Sultanate of Oman as contemplated by article 6 of the Executive Regulations to the Capital Market Law (issued vide Ministerial Decision No. 4/2001). Additionally, this prospectus is not intended to lead to the conclusion of any contract of whatsoever nature within the territory of the Sultanate of Oman. NOTICE TO INVESTORS IN SAUDI ARABIA This prospectus includes information given in compliance with the Offers of Securities Regulations, or the Regulation. This prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Regulations. It should not be distributed to any other person, or relied upon by any other person. The Capital Market Authority does not take any responsibility for the contents of this prospectus, does not make any representation as to its accuracy or completeness, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this document you should consult an authorized financial adviser. NOTICE TO INVESTORS IN THE UNITED ARAB EMIRATES This prospectus is not intended to constitute an offer, sale or delivery of the Shares or other securities under the laws of the United Arab Emirates, or UAE. The offering Shares have not been and will not be registered under Federal Law No. 4 of 2000 concerning the Emirates Securities and Commodities Authority and the Emirates Security and Commodity Exchange, or with the UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. The offering, the offering Shares and interests therein have not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities in the UAE, and do not constitute a public offer of securities in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise. This prospectus is strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the offering Shares may not be offered or sold directly to the public in the UAE. NOTICE TO INVESTORS IN HONG KONG The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Each Underwriter has represented and agreed that: 1. it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Shares other than (a) to ‘‘professional investors’’ as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a ‘‘prospectus’’ as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and 2. it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Shares, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Shares which are or are intended to be disposed of only to persons outside Hong Kong or only to ‘‘professional investors’’ as defined in the Securities and Futures Ordinance and any rules made under that Ordinance. vii NOTICE TO INVESTORS IN SINGAPORE This prospectus has not been and will not be lodged with or registered as a prospectus by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289) of Singapore, or the SFA. Accordingly, neither this prospectus nor any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Shares may be issued, circulated or distributed, nor may any of the Shares (or any one of them) be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, in Singapore other than: (i) to an institutional investor specified in Section 274 of the SFA; (ii) to an accredited investor or other person, in accordance with the conditions specified in Section 275 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. Section 276 of the SFA will have to be complied with upon the subsequent sale of shares acquired pursuant to an exemption under Section 274 or Section 275 of the SFA. There are further restrictions on the sale of securities of a corporation, and of the rights and interests in a trust, where such corporation or trust has acquired shares pursuant to an exemption under Section 275 of the SFA, and where the sole business or purpose of such corporation or trust is to hold investments, and each shareholder of the corporation or each beneficiary of the trust (as the case may be) is an accredited investor. NOTICE TO INVESTORS IN AUSTRALIA This prospectus is not a prospectus that has been lodged or is required to be lodged with the Australian Securities and Investments Commission. Offers of Shares will only be made to persons to whom excluded offers or excluded invitations may be made in accordance with the Corporations Act. viii TABLE OF CONTENTS PAGE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 INDUSTRY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 LEGAL ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 PRINCIPAL AND SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 GENERAL INFORMATION ON THE GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 DESCRIPTION OF SHARE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 CERTAIN ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 INDEX TO THE FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Project12 14/7/06 8:23 am Page 1 [THIS PAGE LEFT INTENTIONALLY BLANK] SUMMARY This summary does not contain all of the information that you should consider before making an investment in the Company’s Shares and should be read as an introduction to this prospectus. Any decision to invest in the Shares should be based on this prospectus as a whole. You should read this entire prospectus carefully, including ‘‘Risk Factors’’ and the financial statements, including the notes thereto, which are included herein beginning on page F-2, before making an investment decision. Where a claim relating to the information contained in this prospectus is brought before a court, the plaintiff investor might, under the respective national legislation of the Relevant Member State of the European Economic Area, need to bear the costs of translating this prospectus before legal proceedings are initiated. With regard to the content of this summary, civil liability attaches to those persons who have tabled the summary including any translation thereof, and applied for its notification, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of this prospectus. Except as set out hereafter, the Company assumes responsibility for the contents of this prospectus and declare that the information contained in this prospectus is, to its knowledge, in accordance with the facts and contains no omission likely to affect its import, and that it has taken all reasonable care to ensure that the information contained in this prospectus is in accordance with the facts and contains no omission likely to affect its import. Each of the Selling Shareholders, in their capacity as offerors of the Shares, assumes responsibility for the respective information given with respect to each of them in ‘‘Principal and Selling Shareholders’’ so far as such information relates to the offering of the Shares and to the Selling Shareholders themselves. The Selling Shareholders declare that such information is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import, and that the Selling Shareholders have taken all reasonable care to ensure that such information is in accordance with the facts and contains no omission likely to affect its import. CB Richard Ellis GmbH assumes responsibility for the information given in ‘‘Valuation Report,’’ which is based upon the information supplied by the respective principal or third parties instructed by the respective principal. CB Richard Ellis GmbH declares that such information is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import, and that the CB Richard Ellis GmbH have taken all reasonable care to ensure that such information is in accordance with the facts and contains no omission likely to affect its import. OUR GROUP General Information on our Group The Company is a joint stock corporation organized under the laws of the Grand Duchy of Luxembourg qualifying as a securitization company under the Luxembourg Securitization Law of March 22, 2004. Our core business is the acquisition, ownership and management of a geographically diversified and well maintained residential property portfolio throughout Germany. With a portfolio of approximately 151,000 apartments located throughout Germany, we are one of the largest privately held residential property owners and operators in Germany and we will become the largest listed residential property company in Germany upon completion of the offering. We believe residential real estate in Germany and in particular residential apartment buildings are a very stable asset class. This is supported in Germany by (i) a long tenancy stay of almost ten years (weighted average tenancy stay of all rented apartments in Germany), (ii) a low vacancy rate of 4.3% partly due to low supply of new housing and (iii) favorable demographic developments in the foreseeable future. Furthermore, we believe that the trend of cities, municipalities and large corporations selling their residential housing stock provides significant opportunities for accretive growth and we are well positioned to take advantage of this trend. We currently own approximately 151,000 apartments located throughout Germany with significant concentrations only in Dresden and Berlin. Approximately 94% of our pro forma profits from operations for the six months ended June 30, 2006 are derived from rental income. The portfolio is characterized by a stable tenant base with an average current tenant tenure of approximately twelve years and an occupancy rate of approximately 94% as of June 30, 2006. Our residential portfolio has been formed through Fortress Investment’s initial acquisition of the GAGFAH GmbH Group in 2004, our acquisition of the NILEG GmbH Group in 2005, various portfolios totaling over 5,000 units in 1 2005 and 2006 and the WOBA GmbH Group in 2006, a combination which has created significant operational and financial synergy opportunities, many of which we have yet to realize. The Company aims to pay out a substantial portion of its funds from operations, or FFO, to meet its objective of paying out a stable and growing quarterly dividend to its shareholders. The Company’s corporate structure offers investors an opportunity to invest indirectly in the German residential real estate market in a tax efficient manner. As the Company is a securitization company incorporated in Luxembourg, the Company does not expect any withholding tax on distributions made by it, provided that the Company pays out all of our otherwise taxable earnings as dividends. Our residential portfolio generates stable and predictable cash flows and, as of September 30, 2006, the Company had approximately u1.5 billion in share premium available in accordance with Luxembourg law from which to declare dividends. As a result, the Company is targeting a dividend per Share of u0.17 for the quarter ending December 31, 2006, and u0.71 for the full year ending 2007. These dividend targets are based on a number of assumptions and should not be regarded as profits or earnings forecasts. There can be no assurance that the Company will be able to achieve these targets. As a securitization company, in calculating taxable net income based on its unconsolidated financial statements, the Company is able to deduct from net income dividends payable to its shareholders as business expenses. Strengths We believe that the combination of our size, geographic diversity across Germany, scale of operations and reputation as a respected German trade buyer makes us a strong player in the residential real estate market in Germany and positions us well to continue to successfully acquire and integrate both small and large residential property portfolios at accretive levels. Our most significant competitive strengths are: In-depth local market knowledge and focus on German residential real estate Our significant nationwide market presence through our properties located in more than 300 cities and towns throughout Germany gives us a competitive advantage over smaller or less diversified property companies, funds or investors aiming to take advantage of the trend of cities, municipalities and corporate entities selling their residential housing stock. We have developed an in-depth knowledge of regional residential markets which enables us to identify, evaluate, acquire and efficiently manage portfolios in all key markets throughout Germany. High-quality asset portfolio We currently own approximately 151,000 apartments totaling approximately nine million m_. Our apartments have experienced substantial repairs and maintenance spend over the last years and we believe our portfolio is among the highest quality multi-family portfolios in Germany. Proven track record of successful acquisitions We have developed significant acquisition experience and expertise through the successful acquisition of approximately 151,000 residential units in both large as well as smaller sized portfolio transactions in Germany. We believe we are perceived as a respected German trade buyer in highly politicized auctions as proven by our acquisitions of the GAGFAH GmbH and WOBA GmbH Groups. Efficient operating platform We have the operational capability and capacity to integrate and operate both large and small residential property acquisitions at low marginal costs and to realize sustainable ongoing cost savings which allow us to acquire assets more efficiently and to better compete against other smaller or less geographically diversified investors. Access to capital resources In acquiring assets we have a competitive advantage over investors who do not have the same access to both debt and equity capital resources as we do. We have significant experience and expertise in debt financing and have structured and raised over u5 billion at competitive terms to 2 finance our acquisitions in Germany. Access to public equity and debt markets in combination with our financing expertise should allow us to purchase a substantial amount of residential property at a very attractive cost of capital. Skilled management team with extensive experience The senior management team that operates the Company’s respective subsidiaries consists of very experienced senior managers with a broad spectrum of expertise. The Chief Executive Officer of the GAGFAH GmbH Group has served as the mayor of Oberhausen and consequently has valuable contacts with other mayors and politicians. The Chief Financial Officer of the GAGFAH GmbH Group has served in similar functions at Thiel Logistik AG Luxembourg. The Chief Operating Officer of the GAGFAH GmbH Group has extensive experience in cost optimization and process control as a result of his experience as Chief Executive Officer of Dynamit Nobel AG. Strategy The Company’s principle objectives are to pay out a substantial portion of its FFO in the form of quarterly dividends and to increase its earnings and dividends per share through organic and accretive growth. Key elements of our strategy to achieve these objectives include: Continue to increase returns from current portfolio We plan to continue to increase returns from our current portfolio while maintaining or improving tenant stability and their quality of accommodation. Over time we plan to continue to increase rents to market levels to the extent permitted by German law and existing rent restrictions. We believe that our portfolio is currently under-rented by 9% based on external appraisal reports. We also plan to continue to lease-up vacant units and we have established a dedicated internal brokerage team, implemented economic incentives for management and introduced advertising and marketing campaigns to drive our lease-up activities. With particular focus on our portfolio in Dresden (the WOBA GmbH Group portfolio), we will pursue selected modernizations of units in disrepair to facilitate their lease-up and rent increases. The partial or full refurbishment of a building includes construction measures such as the change of floor plans, the installation of a new electricity and heating system, the installation of a low energy consumption system and the construction of balconies. Increase profitability through operating efficiencies Our size, geographic footprint and centralized corporate infrastructure should enable us to achieve significant ongoing cost savings upon the integration of new portfolios into our operational infrastructure. We intend to reduce general and administrative expenses of our Group by optimizing cost saving initiatives successfully implemented at the GAGFAH GmbH and NILEG GmbH Groups and through the replication of these cost saving initiatives at the WOBA GmbH Group and new acquisitions. In addition, we expect to achieve further cost reductions with regard to repairs, maintenance and capital expenditure by taking advantage of our purchasing power resulting from our size and centralized purchasing function and through continuous active cost management and review. Accretively grow our residential real estate portfolio in Germany We plan to take advantage of the trend of cities, municipalities and corporations selling their residential housing stock by targeting both smaller-sized as well as large portfolio acquisitions in Germany. We will pursue acquisitions which will be earnings accretive and our acquisition strategy will continue to focus on reasonably priced residential portfolios where we can improve cash flow and earnings through integration and realization of synergies. Our current goal is to acquire approximately u1.4 billion of residential real estate per year. We expect to finance our acquisitions by using cash available and, when required the proceeds of equity issuances and long-term fixed rate debt. 3 Add incremental earnings through reinvestment of privatization proceeds We will selectively sell individual apartments to current tenants and reinvest the proceeds in new apartments where deemed economically advantageous, i.e., where the privatization of units and reinvestment of the proceeds generates higher returns than holding the assets and hence increases earnings per Share. However, our business plan is not predicated on selling individual apartment units and we are currently targeting to sell approximately 2,000 individual units to tenants or investors per year (i.e., only 1.3% of the current portfolio). Use financial leverage to enhance our return-on-equity, our earnings per Share and our funds from operations per Share The stability of residential real estate as an asset class together with our access to low-cost long-term fixed rate debt financing provides us with an attractive opportunity to use significant financial leverage to enhance our return-on-equity, our earnings per Share and our FFO per Share as the yield on our asset portfolio exceeds our cost of capital. We currently expect to target leverage levels for our business of up to 75% of our gross asset value, although we may choose to utilize higher leverage levels in selected circumstances as deemed appropriate by management. Board of Directors . . . . . . . . . . . . . . . . . . . Wesley R. Edens, Robert I. Kauffman, Randy A. Nardone, Burkhard U. Drescher, Yves Wagner, PhD, Dieter H. Ristau and Dr. Jürgen Allerkamp. Issued Share Capital . . . . . . . . . . . . . . . . . 225,000,000 Shares representing a nominal share capital of u281,250,000. Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ernst & Young S.A., 6, rue du Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. Employees . . . . . . . . . . . . . . . . . . . . . . . . . . As of August 31, 2006, we employed through the Company’s subsidiaries a total of 1,522 individuals, pro forma. 4 SUMMARY OF THE OFFERING Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The offering consists of a public offering in the Federal Republic of Germany and international private placements outside the Federal Republic of Germany of up to 42,750,000 Shares (up to 44,887,500 Shares assuming full exercise of the Greenshoe Option) by the Selling Shareholders. The Selling Shareholders reserve the right to increase or decrease the number of offered Shares after consultation with the Joint Bookrunners. In the United States of America, the Shares will be offered for sale to qualified institutional buyers as part of a private placement in reliance on Rule 144A under the Securities Act. Outside the United States of America, the Shares will be offered in reliance on Regulation S under the Securities Act. Offered Shares. . . . . . . . . . . . . . . . . . . . . . . Each of the registered Shares has a nominal value of u1.25. All of the Shares are fully paid in. Offer Period. . . . . . . . . . . . . . . . . . . . . . . . . This offering will commence on October 10, 2006 and end (i) on October 18, 2006 at 12:00 noon (Central European Time) for Group employees and certain employees and business affiliates of the Selling Shareholders and their affiliates entitled to receive a preferential allotment; (ii) on October 19, 2006 at 12:00 noon (Central European Time) for retail investors and (iii) on October 20, 2006 at 2:00 p.m. (Central European Time) for institutional investors. The Selling Shareholders, together with the Joint Bookrunners reserve the right to extend or shorten the offering period or to terminate this offering, without prior notice, at any time and for any reason. To the extent that the terms of this offering are amended, such amendment will be published by means of electronic media, such as Reuters or Bloomberg, and on the Company’s website (http://www.gagfah.com). The Underwriters will severally offer the Shares, subject to receipt and acceptance by them of, and their right to reject, any order in whole or in part. Joint Global Coordinators . . . . . . . . . . . . Deutsche Bank and Goldman Sachs International. Joint Bookrunners . . . . . . . . . . . . . . . . . . . Deutsche Bank, Dresdner Kleinwort, Goldman Sachs International and Morgan Stanley. Co-Managers . . . . . . . . . . . . . . . . . . . . . . . . DZ BANK, JP Morgan/Sal. Oppenheim jr. & Cie., Lehman Brothers and NORD/LB Underwriters . . . . . . . . . . . . . . . . . . . . . . . . Deutsche Bank, Dresdner Kleinwort, Goldman Sachs International, Morgan Stanley, JP Morgan/Sal. Oppenheim jr. & Cie. and Lehman Brothers 5 Price Range and Offer Price. . . . . . . . . . . The price range within which investors may submit purchase orders is between u17 and u19 per Share. The Selling Shareholders reserve the right to raise or lower the upper and/or lower limit(s) of the price range following consultation with the Joint Bookrunners. Any changes to the terms of this offering would be published via an by means of electronic media, such as Reuters or Bloomberg, and on the Company’s website (http://www.gagfah.com). Investors, including investors who have purchased Shares pursuant to the offering, would not be informed individually. The Selling Shareholders expect to determine the offer price together with the Joint Bookrunners on the basis of a bookbuilding process on or about October 20, 2006. The offer price is expected to be published by means of electronic media, such as Reuters or Bloomberg, and on the Company’s website, on or about October 20, 2006. Following its publication in electronic media, investors may obtain the offer price from the Joint Bookrunners. Delivery and Payment . . . . . . . . . . . . . . . . Delivery of the Shares against payment of the offer price and the standard commission is expected to take place on or about October 25, 2006. See ‘‘The Offering— Information on the Shares—Delivery and Settlement.’’ Stabilization and Over-Allotments . . . . . . In connection with this offering, Deutsche Bank is acting as Stabilization Manager for the account of the Underwriters and may, either itself or through its affiliates, take measures to stabilize the stock exchange or market price of the Shares in order to counterbalance any existing sales pressure. The Stabilization Manager may take stabilization measures beginning on the date on which the Shares are first listed, and must complete stabilization measures, if any, no later than 30 calendar days after such date. The Selling Shareholders will grant the Stabilization Manager, for the account of the underwriters, an option, or the Greenshoe Option, to acquire up to 2,137,500 additional Shares, i.e., up to 5% of the total shares offered in this offering, at the offer price less commissions, within 30 calendar days following the listing of our shares on the Frankfurt Stock Exchange. The Stabilization Manager may exercise the Greenshoe Option only to the extent necessary to cover short positions, if any. After the end of the Stabilization Period, the Stabilization Manager will publish without undue delay (unverzüglich) information in the Frankfurter Allgemeine Zeitung announcing whether or not stabilization measures were implemented, the date that stabilization measures commenced, the date of the last stabilization transaction and the price range within which stabilization transactions occurred for each date on which a stabilization measure was implemented. The Stabilization Manager will publish in the same manner, without undue delay after the end of the Stabilization Period, notification of the exercise of the Greenshoe Option, the date of such exercise, as well as the number and type of Shares involved. See ‘‘The Offering.’’ 6 General Allotment Criteria . . . . . . . . . . . . There are no agreements relating to the allotment method among the Selling Shareholders and the Underwriters prior to the commencement of the offer period. The Selling Shareholders and the Underwriters will adhere to the Principles for the Allotment of Share Issues to Retail Investors (Grundsätze für die Zuteilung von Aktienemissionen an Privatanleger) issued on June 7, 2000, by the Exchange Commission of Experts (Börsensachverständigenkommission) of the German Federal Ministry of Finance (Bundesministerium der Finanzen). Preferential Allotment . . . . . . . . . . . . . . . . The Selling Shareholders may allot up to 10% of the Shares on a preferential basis to (a) Group employees in Germany and (b) certain employees and business affiliates of the Selling Shareholders and their affiliates. Any such opportunity will be provided only to such employees and business affiliates in jurisdictions where doing so can be done in accordance with applicable securities and other laws. Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . We expect to file on or about October 11, 2006 for admission of the Company’s entire share capital, consisting of 225,000,000 Shares, to trading on the Official Market Segment (amtlicher Markt) and to the sub-segment thereof with additional obligations arising from admission (Prime Standard) of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) under the symbol GFJ. We expect that the Shares will be admitted to trading on the Frankfurt Stock Exchange on or about October 19, 2006. We expect that trading in the Shares on the Frankfurt Stock Exchange will commence on or about October 23, 2006. Lock-up Agreements . . . . . . . . . . . . . . . . . To the extent permitted by law, the Company will agree, for up to four months following commencement of trading in the Shares, not to announce or effect a capital increase from authorized capital or to propose a capital increase to the shareholders’ meeting, without the prior written consent of the Joint Global Coordinators, such consent not to be unreasonably withheld. The same applies to issuing any financial instruments that include conversion rights or option rights to the Shares and to any economically comparable transactions. The restrictions set forth above will not apply to the issuance of the Shares or options thereover (i) to our management or employees or our associated companies in connection with a future management or employee investment program or to former employees or third party consultants, and (ii) provided certain conditions are met, in connection with acquisitions or joint ventures. Subject to certain exceptions, the Selling Shareholders will agree, for up to four months following delivery of the Shares, not to sell, distribute, transfer or otherwise dispose of any of the Shares or other securities without the prior written consent of the Joint Global Coordinators, such consent not to be unreasonably withheld. The same rule applies to transactions having the same economic effect as a sale. Such restrictions, however, will not prohibit any of 7 the Selling Shareholders from pledging or otherwise providing their Shares as security for indebtedness and will not prevent any person or entity benefiting from such pledge or security from selling, distributing, transferring or otherwise disposing of such Shares in exercising its rights with respect to such pledge or security. Use of Proceeds and Costs of the Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company will not receive any proceeds from the offering. The Selling Shareholders will receive all proceeds from the offering and pay all fees and commissions in connection with the offering. The Company will bear certain costs incurred in connection with this offering other than the fees and commissions paid to the Underwriters. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . Each of the Shares is entitled to one vote at the Company’s general shareholders’ meeting. See ‘‘Description of Share Capital — Voting Rights, General Shareholders’ Meeting.’’ Dividend Rights. . . . . . . . . . . . . . . . . . . . . . Following this offering, each of the Shares will be entitled to any dividends declared after October 1, 2006. To the extent permitted by law, the Company currently aims to make quarterly dividend distributions of a substantial portion of our funds from operations to the Company’s shareholders. See ‘‘Description of Share Capital’’ and ‘‘Dividend Policy.’’ International Securities Identification Number (ISIN) . . . . . . . . . . . . . . . . . . . . . . LU0269583422 German Securities Code (WKN) . . . . . . . A0LBDT Common Code. . . . . . . . . . . . . . . . . . . . . . . 026958342 Trading Symbol . . . . . . . . . . . . . . . . . . . . . . GFJ Paying and Depositary Agent. . . . . . . . . . Deutsche Bank AG, Taunusanlage 12, 60325 Frankfurt am Main, Germany. 8 SUMMARY SELECTED FINANCIAL INFORMATION The following tables set forth the selected unaudited pro forma financial data for our Group for the year ended December 31, 2005 and as of and for the six months ended June 30, 2006 and the historical financial data for the GAGFAH GmbH Group for the years ended December 31, 2004 and 2005 and for the six-month periods ended June 30, 2005 and 2006. The selected unaudited pro forma financial data for our Group as of and for the year ended December 31, 2005 and the six months ended June 30, 2006 are prepared on the terms of the principles of the Institute of Public Auditors in Germany, Düsseldorf (Institut der Wirtschaftsprüfer in Deutschland e.V., Düsseldorf—IDW) for the preparation of Pro Forma Financial Information (IDW AcPS AAB 1.004 ‘‘Preparation of Pro Forma Financial Information’’). The underlying figures of the unaudited pro forma consolidated financial information are prepared in accordance with IFRS. The historical financial data for the GAGFAH GmbH Group for the years ended December 31, 2004 and 2005 and for the six-month periods ended June 30, 2005 and 2006 are prepared in accordance with IFRS and should be read in conjunction with the Unaudited Pro Forma Consolidated Financial Information and historical financial statements and related notes thereto included elsewhere in this prospectus. Our Group’s pro forma consolidated income statement data for the year ended December 31, 2005 and the six months ended June 30, 2006 and balance sheet data as of June 30, 2006 have been derived from the Unaudited Consolidated Pro Forma Financial Information included in the Financial Information section of this prospectus. The pro forma results for the year ended December 31, 2005 and the six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for a future fiscal year or semi-annual period for our Group. The pro forma consolidated income statements generally reflect the (i) historical audited results for the periods during which each acquired company was a member of our Group and (ii) pro forma adjusted results of operations for the periods prior to joining our Group. For purposes of the pro forma income statements, the actual audited historical financial figures have been adjusted to reflect the cost of acquisition financing based upon the debt in place at the time of joining our Group. Please also see our Pro Forma Consolidated Financial Information in the Financial Information section of this prospectus. Our historical consolidated income statement data and balance sheet data as of and for the years ended December 31, 2004 and 2005 have been derived from the Audited GAGFAH GmbH Consolidated Annual Financial Statements, and as of and for the six months ended June 30, 2005 and 2006 have been derived from the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements, each included in the Financial Information section of this prospectus. The results for any annual or interim period are not necessarily indicative of the results that may be expected for a future fiscal year or six-month period for the GAGFAH GmbH Group or for our Group. Please see the Audited GAGFAH GmbH Consolidated Annual Financial Statements and the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements in the Financial Information section of this prospectus. 9 Selected Group unaudited pro forma financial data For the year For the six months ended ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma consolidated income statement data Profit from the lease of investment property. . . . . . . . . . . . . . . . . . . Profit/(loss) from the sale of investment property . . . . . . . . . . . . . . Profit from measurement at fair value . . . . . . . . . . . . . . . . . . . . . . . . Other operating income and expense (net expense) . . . . . . . . . . . . Profit from operations before restructuring . . . . . . . . . . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings before interest and taxes (EBIT)(1) . . . . . . . . . . . . . . . . . . Net financing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations before taxes . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Net profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340.4 (0.2) 41.1 (73.7) 307.5 67.5 234.1 403.8 (169.7) 3.5 (173.2) (79.6) (252.8) 204.7 6.9 33.1 (26.9) 217.8 10.2 207.8 41.3 166.5 31.2 135.3 (5.9) 129.4 Pro forma other financial measures Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funds from operations (FFO)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 1.8 221.2 78.7 As of June 30, 2006 (unaudited) Pro forma consolidated balance sheet data Investment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 7,641.3 5,543.3 (1) Earnings before interest and taxes (EBIT) is a comprehensive measure of earnings from all sources before interest and taxes. EBIT is included in our IFRS consolidated financial statements. (2) Earnings before interest, taxes, depreciation and amortization (EBITDA) is computed as EBIT plus restructuring expense and depreciation and amortization. (3) Funds from operations (FFO) is computed as EBITDA less profit from measurement at fair value, net interest expense on third party debt, and current income tax expense. Reconciliation of pro forma EBIT to pro forma EBITDA For the year For the six months ended ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234.1 207.8 67.5 7.1 308.7 10.2 3.2 221.2 Reconciliation of pro forma EBITDA to pro forma FFO For the year For the six months ended ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less Profit from measurement at fair value . . . . . . . . . . . . . . . . . . . . . . . . Net interest expense on third party debt . . . . . . . . . . . . . . . . . . . . . . Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 221.2 41.1 261.1 4.7 33.1 109.2 0.2 Pro forma FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 78.7 10 We present EBITDA and FFO because they are important supplemental measures of our operating performance used by management to measure earnings from continuing operations. EBITDA and FFO are measures of our operating performance that are not required by, nor presented in accordance with, IFRS and should not be considered alternatives to other performance measures under IFRS. EBITDA and FFO have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our operating results as reported under IFRS. See ‘‘EBITDA’’ and ‘‘FFO’’ in ‘‘Discussion of our Group’s Principal Unaudited Pro forma Income Statement Data and Other Financial Measures.’’ Other companies in our industry may calculate EBIT, EBITDA and FFO differently or may use them for different purposes, thereby limiting their usefulness as a comparative measure. Selected GAGFAH GmbH Group Historical Financial Data For the year ended December 31, 2004 2005 (v millions) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) Consolidated income statement data Profit from the lease of investment property . . . . . . . . . Gain/(loss) from the sale of investment property . . . . . Profit from measurement at fair value . . . . . . . . . . . . . . Other operating income and expense (net expense). . . Profit from operations before restructuring . . . . . . . . . . Restructuring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings before interest and taxes (EBIT)(1). . . . . . . . . Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations before taxes. . Income taxes expense/(benefit). . . . . . . . . . . . . . . . . . . . . Profit or loss from continuing operations . . . . . . . . . . . . Gain/(loss) from discontinued operations . . . . . . . . . . . . Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.4 0.0 41.8 (27.1) 217.1 0.0 225.2 79.5 145.7 (0.3) 146.1 (8.1) 138.0 217.6 (0.8) 60.5 (39.0) 238.3 35.7 202.6 367.1 (164.5) (35.6) (128.9) (44.0) (172.9) 117.4 (7.2) 44.0 (27.8) 126.3 0.0 126.3 110.6 15.7 (3.9) 19.6 (42.3) (22.8) 139.9 2.9 14.2 (26.0) 131.0 10.2 120.8 91.0 29.8 0.3 29.5 0.1 29.6 Consolidated other financial measures Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) . . . . . . . . . . . . . . . . . . . . . . Funds from operations (FFO)(3) . . . . . . . . . . . . . . . . . . . . 236.8 131.7 242.9 13.6 128.6 1.0 133.5 58.2 As of December 31, 2004 2005 (v millions) Consolidated balance sheet data Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,003.9 1,417.3 4,165.6 3,415.1 As of June 30, 2005 2006 (unaudited) (unaudited) (v millions) 4,108.8 3,418.2 4,199.2 3,439.1 (1) Earnings before interest and taxes (EBIT) is a comprehensive measure of earnings from all sources before interest and taxes. EBIT is included in the GAGFAH GmbH Group’s IFRS financial statements. (2) Earnings before interest, taxes, depreciation and amortization (EBITDA) is computed as EBIT plus restructuring expenses and depreciation and amortization. (3) Funds from operations (FFO) is computed as EBITDA less profit from measurement at fair value, net interest expense on third party debt and current income tax expense. 11 Reconciliation of EBIT to EBITDA For the year ended December 31, 2004 2005 (v millions) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus Restructuring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 225.2 202.6 126.3 120.8 0.0 11.6 35.7 4.6 0.0 2.3 10.2 2.5 EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236.8 242.9 128.6 133.5 Reconciliation of EBITDA to FFO For the year ended December 31, 2004 2005 (v millions) EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less Profit from measurement at fair value . . . . . . . . . . . . . . Net interest expense on third party debt . . . . . . . . . . . . Current income tax expense/(benefit) . . . . . . . . . . . . . . . 236.8 FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131.7 41.8 65.9 (2.5) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) 242.9 128.6 133.5 60.5 168.7 0.1 44.0 83.3 0.3 14.2 60.8 0.3 13.6 1.0 58.2 The following table presents GAGFAH GmbH Group’s net cash changes for the years ended December 31, 2004 and 2005 and the six-month periods ended June 30, 2005 and 2006. For the year ended December 31, 2004 2005 (v millions) Cash flows from operating activities . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . . . . . . . . . . Cash flows from financing activities . . . . . . . . . . . . . . . . . Other changes to cash and cash equivalents from changes to consolidated group . . . . . . . . . . . . . . . . . . . 125.7 (109.0) (114.2) Net change to cash and cash equivalents . . . . . . . . . . . . Ending cash balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97.5) 152.1 12 0.0 91.9 37.7 (158.8) 15.0 (14.2) 137.8 For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) 18.6 (22.7) 4.2 44.5 (2.6) (8.6) 0.0 0.0 0.1 152.2 33.3 171.1 Summary of Risk Factors Before deciding to purchase Shares, you should carefully consider certain risks. The following is a summary of these risks: Risks related to the German residential real estate market • Real estate investments involve certain general risks. • Real estate valuation is grounded on certain assumptions and may change, and the summaries of the valuation reports included in this prospectus may not accurately reflect the value of the real estate to which the reports relate. • German laws protecting residential tenants and existing restrictions on the rate of rental increases, could make it more difficult to increase the rents of residential units we own. • Certain legal frameworks within which we operate, in particular landlord-tenant and environmental laws and regulations, could change to our detriment. • If former property owners displaced between 1933 and 1990 bring property restitution and/or allocation claims, we could incur significant costs in connection with such claims. • Demand for residential real estate could decline as a result of population decline in Germany or regions within Germany, and the number of households and the amount of space needed per person might not increase to the extent projected, or at all. Risks related to the Company and our business • Funds managed by Fortress Investment will continue to indirectly hold a majority of the Shares following the offering, and thereby can exercise control over us; Fortress Investment’s decisions may not always be in the best interests of minority shareholders. • There may be conflicts of interest between us and certain funds managed by Fortress Investment. • As a securitization company under Luxembourg law without its own business operations, the Company is dependent on the cash flows from its operating subsidiaries. • Our operating businesses were recently transferred to us, we have a limited operating history on a combined basis, and we are therefore subject to the risks generally associated with the formation of any new business and the combination of existing businesses. • The acquisition agreements through which we purchased our real estate portfolios impose on us certain social obligations, restrict our ability to increase rents and provide for onerous penalties for violations. • The integration of past portfolio acquisitions, and any future portfolio acquisitions, into a single, combined business may not be successful. • Our strategy to successfully operate our business relies on assumptions and contingencies that may prove to be incorrect. • An increase in the vacancy rates of our residential real estate portfolio could have a material adverse effect on rental income and operating profit. • We are limited in our abilities to decrease costs by rationalizing employment levels. • We may not be able to extend our existing credit arrangements, refinance our debt on substantially similar terms when it matures or obtain acquisition financing on financially attractive terms as and when needed. • Our subsidiary companies have entered into various contractual restrictions in connection with our or Fortress Investment’s acquisition of those companies, and there are significant penalties (including the potential foreclosure upon and sale of the shares of the subsidiary companies) that will be invoked if we fail to perform under such contractual restrictions. • If the Company’s subsidiaries breach covenants under our existing or future financing agreements, we could be forced to sell properties owned by the Company’s subsidiaries. 13 • Competition for the acquisition of strategic assets from buyers that have lower costs of capital or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively. • We may be adversely affected by the illiquidity of real estate investments. • The geographic concentration of our residential real estate in certain areas of Germany makes rental income, operating profit and financial condition dependent on general economic and demographic trends in Germany and sub-regions within Germany. • The age of our residential real estate and environmental and other factors could cause expenditures for renovation, maintenance, and modernization to be higher than expected. • Modernization or new construction projects could exceed their budgets or overrun their deadlines. • The departure of one or more members of the senior management of the Company’s subsidiaries would be detrimental to our business. • We may be required to make significant additional reserves for satisfying future pension and other obligations. • We may incur environmental liabilities. • If we fail to meet legal requirements in connection with subsidies, government grantors could reclaim such subsidies. • We may be exposed to losses and liabilities (including tax liabilities) in respect of our assets as a result of the acts or omissions of vendors or previous owners or occupiers or relating to the prior period of ownership. • We may be subject to liability following the disposal of investments. • If the seller of certain real estate withdraws from the asset sale and purchase agreement, Acquisition 1 may be obligated to retransfer property to such seller. • Certain of our affiliates own significant participations and have assumed liability in several closed property funds. • The use of standardized contracts could result in claims for damages against us under a number of contracts, or in the loss of certain rights and privileges or of their respective rights to claim damages, if errors or problems arise in connection with the enforcement of such contracts. • We may not be granted building permits, or may be granted them only subject to onerous conditions, or additional requirements may be imposed on existing building permits. • We may suffer material losses caused by fire or other causes in excess of insurance proceeds. Risks related to taxation • The Company may lose the tax benefits to which Luxembourg securitization vehicles are entitled if it does not operate in a manner which will enable it to qualify as a securitization vehicle or if the European Commission were to conclude that the tax treatment which securitization vehicles receive in Luxembourg constitute impermissible state aid. • The amount of interest that the Company is able to deduct for tax purposes may substantially decrease. • Transfers of profit in the form of distributions to the Company by certain of its subsidiaries would trigger ‘‘recapture taxation’’ due to the existence of untaxed earnings. • Interest rate on shareholder loans may be questioned in a tax audit. • We may incur tax liabilities arising from past reorganizations. • The use of loss carry forwards is restricted under German tax law. • Our ability to use the loss carry forwards of GAGFAH GmbH and certain other Group companies for trade tax purposes may be limited. 14 • Certain investors may suffer negative tax consequences under the German Controlled Foreign Corporation (CFC) Rules (Aussensteuergesetz). • U.S. investors generally will suffer adverse U.S. federal income tax consequences if the Company is characterized as a passive foreign investment company, or PFIC. • The Company believes that it currently qualifies as an operating company for purposes of the U.S. Employees Retirement Income Security Act, or ERISA, and therefore is not subject to the fiduciary requirements of ERISA with respect to its assets. Risks related to the offering • The Shares have not been publicly traded and there can be no assurance that a liquid trading market will develop in the Shares following the initial offering and listing of the Shares. • The market price and trading volume of the Shares may be volatile, which could result in rapid and substantial losses for the shareholders. • Investors with a reference currency other then the euro may be subject to foreign exchange risks when investing in the Shares. • Fluctuation of market interest rates may have an adverse effect on the value of your investment in the Shares. • Future offerings of debt or equity securities by us may adversely affect the market price of the Shares. • The timing of dividend payments, if any, is subject to certain conditions, and your investment will be subordinate to claims of the Company’s creditors and the creditors of the Company’s subsidiaries. • The Company may not be able to meet its dividend payment objectives. • Issuances of new shares in the future could lead to dilution of shareholders’ interests. • Future sales of existing shareholders’ Shares may depress the stock price. 15 RISK FACTORS Before deciding to purchase the Shares, you should carefully review and consider the following risk factors and the other information contained in this prospectus. The occurrence of one or more of these risks alone or in combination with other circumstances may have a material adverse effect on our business and cash flows, financial condition and results of operations. The risks discussed below may not prove to be exhaustive and are based on certain assumptions made by us which later may prove to be incorrect or incomplete. The risks discussed below may not be the only risks to which we are exposed. The order in which the risks are presented does not reflect the likelihood of their occurrence or the magnitude or significance of the individual risks. Additional risks and uncertainties of which we are not currently aware or which we do not consider significant at present could likewise have a material adverse effect on our business and cash flows, financial condition and results of operations. The market price of the Shares could fall if any of these risks were to materialize, in which case you could lose all or part of your investment. You should conduct such independent investigation and analysis regarding the terms of the Shares and all relevant market and economic factors as you deem appropriate to evaluate the merits and risks of an investment in the Shares as well as your personal circumstances. We disclaim any responsibility to advise purchasers of Shares of the risks and investment considerations associated with the purchase of the Shares as they may come into existence following the date of this prospectus. However, as part of such independent investigation and analysis, you should consider all the information set forth in this prospectus, including the considerations set forth below. An investment in the Shares involves certain risks including, among others, real estate market, private equity market, equity market, bond market, foreign exchange, interest rate, market volatility, investment risk, tax risk and political risks (which may include a change of tax treatment) and any combination of these and other risks. You should be experienced with respect to transactions involving securities such as the Shares, in terms of both the risks associated with the economic terms of the Shares and the risks associated with the way in which the issuance of the Shares is structured. You should also understand the risks associated with an investment in the Shares and should only reach an investment decision after careful consideration, with your legal, tax, accounting and other advisers, of (i) the suitability of an investment in the Shares in the light of your own (and, if you are acquiring the Shares in a fiduciary capacity, your beneficiary’s) particular financial, fiscal and other circumstance and, (ii) the information set out in this document. You should not construe any statement in this prospectus as advice. RISKS RELATED TO THE GERMAN RESIDENTIAL REAL ESTATE MARKET Real estate investments involve certain general risks. Investing in real estate (including real estate assets, real estate securities and securities securitizing real estate assets) is subject to various risks, including adverse changes in national or international economic conditions, adverse local market conditions, the financial conditions of tenants, buyers and sellers of real estate, changes in availability of debt financing, changes in interest rates, real estate tax rates and other operating expenses, environmental laws and regulations, planning laws and other governmental rules and fiscal policies, environmental claims arising in respect of properties acquired with undisclosed or unknown environmental problems or as to which inadequate reserves had been established, energy prices, changes in the relative popularity of real estate types and locations leading to an oversupply of space or a reduction in demand for a particular type of real estate in a given market, the quality and strategy of real estate and asset management risks due to dependence on cash flow, risks and operating problems arising out of the presence of certain construction materials, as well as force majeure acts, terrorist events, under-insured or uninsurable losses and other factors which are beyond our control. In addition, as experience has demonstrated, real estate assets are subject to long-term cyclical trends that give rise to significant volatility in values. Many of these factors could cause fluctuations in occupancy rates, rent schedules or operating expenses, causing a negative effect on the returns derived from real estate investments. Accordingly, the capital value of real estate investments may be significantly diminished in the event of a sudden downward turn in real estate market prices or the occurrence of any of the other factors noted above. Such a decrease in value would have a material adverse effect on our results of operations and profitability and, as a result, on the value of and return on the Shares. 16 Real estate valuation is grounded on certain assumptions and may change, and the summaries of the valuation reports included in this prospectus may not accurately reflect the value of the real estate to which the reports relate. Valuations of properties are based on common standardized valuation principles but in addition are generally a matter of opinion of the independent valuer who prepares the valuation report. As a result, such valuations are subject to uncertainty. The valuation reports summarized in this prospectus are made on the basis of assumptions which may prove in hindsight to not have been accurate. There can be no assurance that the valuations of the real estate would reflect actual sale prices in the event that such real estate were to be sold or liquidated, even where any such sale or liquidation were to occur shortly after the relevant valuation date. Valuation of properties generally takes into account, inter alia, market conditions, changes in the relative popularity of real estate types and locations, the financial conditions of tenants, estate tax rates and other operating expenses, potential claims arising in respect of undisclosed or unknown environmental problems and risks and operating problems arising out of the presence of certain construction materials. As some of these valuation parameters may change over time, the valuation of properties may fluctuate as well. Accordingly, the capital value of real estate investments may be significantly diminished in the event of a sudden downward turn in real estate market prices or the occurrence of any of the other factors noted above. Such a decrease in value would have a material adverse effect on our financial conditions and results of operations and profitability and, as a result, on the value of and return on the Shares. Additionally, to the extent that real estate included in the summarized valuation reports have been overvalued, we may be required to write down the value of such real estate as recorded on the Company’s balance sheet. Such a write down would have a material adverse effect on the Company’s balance sheet and profitability and, as a result, on our profitability and the value of and return on the Shares. German laws protecting residential tenants and existing restrictions on the rate of rental increases, could make it more difficult to increase the rents of residential units we own. In Germany, the landlord-tenant relationship is subject to a significant level of statutory regulation which, for the most part, provides far-reaching social protection for the tenants under residential leases. According to German law, for example, a landlord may not increase residential rents by more than an aggregate of 20% over a three-year period. See ‘‘Legal Environment—General Constraints of German Rental Law.’’ The landlord may only terminate a lease agreement if there is a legitimate interest in so doing. In addition to such generally applicable rent increase restrictions, we and our affiliates are subject to additional restraints on rent increases arising from the acquisition agreements through which the real estate portfolio was purchased. See ‘‘—Risks Related to the Company and our Business—The acquisition agreements through which we purchased our real estate portfolio impose on us certain social obligations, restrict our ability to increase rents and provide for onerous penalties for violations’’ and ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ Such restrictions limit our ability to impose rent increases as the increase may not exceed the average cost of living index for a defined amount. Further mandatory legal provisions impose occupancy restrictions on landlords who have received public subsidies with regard to residential units. Approximately 16% of our real estate portfolio is subject to occupancy rights and 17% to restrictions on the rate of rent increases due to public rental subsidies. The assumptions in our business plan with respect to the effect of occupancy rights and restrictions on rent increases may prove to be inaccurate. To the extent that the assumptions made are inaccurate, our rental income and operating profit may not grow over time as quickly as we have assumed or may remain static and thus adversely affect the value of and the return on the Shares. Certain legal frameworks within which we operate, in particular landlord-tenant and environmental laws and regulations, could change to our detriment. Our business depends on a certain legal framework generally applicable to residential real estate. This includes, in particular, landlord-tenant law and other corresponding legal provisions. Changes in German or European legal requirements, or in the interpretation or application of certain requirements, could, as a result, adversely affect our business. In particular, the German government’s 17 elimination as of January 1, 2006 of homeowners’ allowances (Eigenheimzulage) may result in a decreased turnover of tenants of residential units which in turn might limit the number of units for which we could adjust the rental prices to market standard once they have been vacated. Furthermore, German law regulating rent increases may change and further inhibit our ability to increase rents. See ‘‘Legal Environment—General Constraints of German Rental Law.’’ Stricter environmental regulations could increase our expenses. For example, if regulations governing the handling of asbestos or other hazardous construction materials are made stricter, we may be forced to take unplanned remedial action. Furthermore, changes in laws protecting tenants against eviction could restrict our flexibility, and changes in regulations governing the allocation of incidental or upgrade expenses to tenants could adversely affect their profitability. Changes in the legal framework within which we operate could have a material adverse effect on our level of rental income and operating profit. In response to negative publicity regarding investment in Germany by non-German investors, in particular hedge funds and private equity funds, certain entities and individuals within the German federal government are considering the proposals for legislation aimed at deterring such investment. Such legislation is expected to attempt, in particular, to deter investors from burdening residential real estate management companies with certain levels of debt. The passage of any such legislation could adversely affect how non-German investors manage their existing, and make future, investments in Germany. Since a majority of the Shares is owned by non-German investors, in particular Fortress Investment, the passage of any such legislation could ultimately have a material adverse effect on our ability to manage our business, our cash flows and our profitability. If former property owners displaced between 1933 and 1990 bring property restitution and/or allocation claims, we could incur significant costs in connection with such claims. From 1933 through 1945, the incumbent fascist regime perpetuated the expropriation (Enteignung) of property from Jewish individuals and others. From 1945 through 1990, the Soviet forces occupying the former German Democratic Republic, or GDR, and the government of the GDR, pursued the nationalization of privately owned real estate (Volkseigentum). As a result, no system of restoration of real estate to the pre-1933 status existed in the former GDR until 1990. The German Restitution Act (Gesetz zur Regelung offener Vermögensfragen) entitles individuals or entities who suffered expropriation prior to the reunification of Germany in 1990 to bring claims for restitution of lost real estate or compensation for expropriation. While certain restitution claims for real estate were barred after December 31, 1992, the Jewish Claims Conference filed in 1992 a general claim due to the difficulty of specifying individual claims prior to the December 31, 1992 deadline. This general claim lists numerous former owners of real estate and their respective heirs who may be entitled to restitution or compensation under the German Restitution Act. It is not clear, however, how much real estate could be affected by the general claim. If specific claims are brought concerning real estate, the German Restitution Act requires that current owners of such real estate become subject to restrictions on material changes to, and transfer of, the real estate. Since the processing of claims may take up to several years, such restrictions may be in effect for that duration. If specific claims are successful, the owner(s) of the relevant real estate may be forced to transfer the real estate to the claimant. In particular, certain companies within the WOBA GmbH Group are currently subject to approximately 37 restitution claims affecting 190 apartment units. As a result of the pursuit by the government of the GDR to nationalize privately owned real estate, the state became the owner of virtually all real estate (Volkseigentum). Following the reunification of Germany in October 1990, title to residential real estate owned by the government of the GDR was transferred to the municipalities in which such real estate was situated. The re-transfer of such real estate to individuals and non-public entities has been complex and has encountered difficulties. For example, due to conflicting claims to real estate, the City of Dresden has not yet transferred certain land plots (Flurstücke) to WOBA GmbH. Moreover, housing cooperatives (Wohnungsgenossenschaften) may bring claims regarding real estate already transferred by the City of Dresden to WOBA GmbH. There is no cutoff date by which housing cooperatives must file allocation claims, subject to limited exceptions. Should an allocation claim be successfully brought, we, in particular WOBA GmbH and/or its subsidiaries, could be forced to transfer real estate to the claimant under certain circumstances, including if the City of Dresden elects for a transfer and the WOBA GmbH entity is contractually bound to transfer the real estate. 18 Were any claims such as those mentioned above to be brought in connection with real estate owned by us, in particular WOBA GmbH and/or its subsidiaries, we would be severely limited in our ability to manage the real estate and may even be forced to transfer real estate to successful claimants. Any such limitations or compulsory transfers of real estate would have a material adverse effect on our cash flow, results of operations and profitability. Demand for residential real estate could decline as a result of population decline in Germany or regions within Germany, and the number of households and the amount of space needed per person might not increase to the extent projected, or at all. We expect Germany’s population to remain largely stable until 2020, when it is expected to begin to decline. See ‘‘Industry.’’ Nevertheless, the population of Germany could begin to decline before 2020. A decline in Germany’s population would lead to lower demand for housing, and, as a result, adversely affect our ability to achieve higher average rent levels. We also expect the number of households and the amount of space needed per person to increase. Moreover, German tenant households may decide to purchase housing rather than continue to rent housing at historic levels. If the population begins to decline sooner than we expect, and the number of households and average amount of space needed per person does not increase or increases more slowly than we expect, or more individuals decide to purchase rather than to rent housing, our rental income and operating profit would be negatively impacted, as would our profitability and the value of and return on the Shares. RISKS RELATED TO THE COMPANY AND OUR BUSINESS Funds managed by Fortress Investment will continue to indirectly hold a majority of the Shares following the offering, and thereby can exercise control over us; Fortress Investment’s decisions may not always be in the best interests of minority shareholders. After the completion of the offering, we expect that various investment funds that are managed by or affiliated with Fortress Investment, will beneficially own approximately 72.2% of the Company’s issued share capital assuming no exercise of the Greenshoe Option, or approximately 71.4% assuming full exercise of the Greenshoe Option. This concentration of ownership may have the effect of, among other things, delaying, preventing or deterring a change in control of the Company, which could deprive shareholders of an opportunity to receive a premium for their Shares as part of a sale or merger and may negatively affect the market price of the Shares. Further, the Company’s seven-member board of directors, or the Board, includes three members who are not independent of Fortress Investment, through whom Fortress Investment may directly exercise significant influence over our significant business decisions as well as over any strategic decision in relation to our business. The interests of Fortress Investment may differ from the interests of the minority shareholders. As the largest beneficial shareholders with the ability to use their majority voting power to exercise control over operations and business strategy, Fortress Investment will be able to influence significantly our affairs and actions, including matters requiring shareholder approval, such as the election of directors; mergers, consolidations or acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Fortress Investment’s interests may conflict with your interests. Their control of the Company could delay, deter or prevent acts that may be favored by our other shareholders such as hostile takeovers, changes in control of the Company and changes in management. See ‘‘Principal and Selling Shareholders—Agreement Among Fortress Investment and Major Indirect Shareholders of the Company.’’ As a result of such actions, the market price of the Shares could decline or shareholders might not receive a premium for their Shares in connection with a change of control of the Company. There may be conflicts of interest between us and certain funds managed by Fortress Investment. Fortress manages and invests in other real estate related and private equity investment vehicles (including but not limited to Newcastle Investment Corp., Eurocastle Investment Limited, the Drawbridge Special Opportunities Funds, the Drawbridge Long Dated Value Funds and the Fortress Partners Fund), and certain members of the Board also serve or may serve as officers and/or directors of these other entities. This may lead to conflicts of interest. For example, certain investments 19 appropriate for us may also be appropriate for one or more of these other investment vehicles and neither Fortress Investment, any of its investment advisory subsidiaries active in Germany or any of is representatives on the Board will have any obligation to direct or facilitate the making of any particular investment through us rather than through another such investment vehicle. In particular, Eurocastle Investment Limited, a European publicly traded company listed on Euronext in Amsterdam and managed by Fortress, is in the business of buying and selling German commercial real estate. Although our business is primarily focused on German residential real estate rather than commercial property, our portfolios do include a small number of commercial properties. Eurocastle will not be restricted from competing for acquisitions in the German real estate sector. In addition, the Drawbridge Special Opportunities Funds have historically provided financing to certain acquirors of German residential real estate as well as pursuing a variety of other investments in the German real property sector, and will continue to pursue such investment opportunities after the offering. Funds managed by Fortress Investment may also engage in additional real estate related or private equity investment opportunities in the future which may also compete with us for investments or business opportunities. Also, in their capacity as controlling shareholders of the Company, funds managed by Fortress Investment may seek to cause us to take courses of action which in their judgment could enhance their investment in us but which might involve risks to other shareholders of the Company or adversely affect other shareholders of the Company. As a securitization company under Luxembourg law without its own business operations, the Company is are dependent on the cash flows from its operating subsidiaries. The Company is organized as a securitization company under Luxembourg law with no independent business operations. It is entirely dependent on the cash flows from its subsidiaries. To generate sufficient cash flows, the Company’s subsidiaries have to maintain the required levels of profitability with regard to their operating performance which will depend on many factors, including, but not limited to, the vacancy rates of our apartments, the ability to maintain or increase rental rates, the availability of opportunities for the acquisition of properties, the level and volatility of interest rates, readily accessible funding alternatives, conditions in the financial markets and general economic conditions. Further, future financing agreements entered into by the Company’s subsidiaries or changes in tax laws and other applicable legislation may effectively limit the amount of cash available to the Company’s subsidiaries to pay to the Company or may otherwise restrict the Company’s subsidiaries’ ability to make cash contributions. Negative developments in connection with any such factors or at the level of each subsidiary, including any impairment of the ability by such subsidiary to continue making distributions of cash to the Company, will have a material adverse effect on our business, cash flow and results of operations. Our operating businesses were recently transferred to us, we have a limited operating history on a combined basis, and we are therefore subject to the risks generally associated with the formation of any new business and the combination of existing businesses. The Company has been operating since August 30, 2005 as a securitization vehicle under the Luxembourg Securitization Law of March 22, 2004 (loi du 22 Mars 2004 relative á la titrisation). Through a series of acquisitions and contributions, the Company acquired three large German residential real estate companies and their real estate portfolios and also a smaller additional portfolio of German residential real estate assets. These portfolios comprise the NILEG GmbH Group, the WOBA GmbH Group, the GAGFAH GmbH Group and Acquisition 1. Prior to the acquisition of the NILEG GmbH Group in August 2005, the Company had no assets. We are therefore subject to the risks generally associated with the formation of any new business and the combination of existing businesses, including the risk that expected efficiencies and economies of scale or the implementation of our business strategy are not realized. There can be no assurance that we will be able to successfully integrate or oversee the combined operations of the GAGFAH GmbH, NILEG GmbH, WOBA GmbH Groups and Acquisition 1. As substantial parts of our current real estate portfolio (e.g., the GAGFAH GmbH Group) have been acquired only recently by the Company, the Company’s Audited Consolidated Short Year Financial Statements and Unaudited Condensed Consolidated Interim Financial Statements do not include all real estate portfolios which it currently owns through its subsidiaries and, therefore, only provide limited information as to our consolidated operational results. The financial performance 20 reflected in our most recent unaudited pro forma consolidated financial information may not be indicative of our future performance and the respective results of operations, financial condition and cash flows of the GAGFAH GmbH, NILEG GmbH and WOBA GmbH Groups and Acquisition 1 for periods prior to the acquisitions when they operated under a different management as separate, stand alone entities pursuing independent strategies may not necessarily be indicative of their performance as part of our combined portfolios. Further, the presentation of pro forma financial information included in this prospectus is based on certain assumptions which may prove to be incorrect and have not been independently verified to the same extent compared to audited financial information. The acquisition agreements through which we purchased our real estate portfolios impose on us certain social obligations, restrict our ability to increase rents and provide for onerous penalties for violations. The agreements through which we purchased the GAGFAH GmbH, NILEG GmbH and WOBA GmbH Group portfolios contain various long-term restrictions on the manner in which the Company’s subsidiaries can operate the respective real estate. See ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ Part of the real estate portfolio of Acquisition 1 is also subject to such restrictions. Pursuant to these restrictions, we are precluded from, among other things, substantially altering our revenue base or investing in assets other than real estate, making divestitures of units or real estate at our discretion to other market participants or investment funds, and increasing rent levels above a certain threshold. Further the Company and certain of the Company’s subsidiaries are subject to numerous additional social obligations some of which we must pass on to buyers of the shares in the Company’s subsidiaries or non-tenants acquiring units from us. The penalties for violations of these provisions are onerous and, depending on the specific restriction violated, may amount to u500 million. See ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group— Contractual constraints concerning the GAGFAH GmbH Group.’’ The restrictions and obligations imposed on us by these agreements restrict our ability to operate in a manner that seeks to maximize profits and impose on us social obligations, the cost of which cannot be easily estimated. In addition, these provisions could prevent us from taking appropriate steps in the event we should be required to dispose of assets or take other actions to avoid bankruptcy or foreclosure. Our ability to generate additional liquidity by short-term divestitures of units or object may be further impaired. In addition, we are required to implement various internal control systems to ensure our compliance with these restrictions and obligations to avoid that any penalty becomes payable by us; however, our internal controls and guidelines may not be sufficient to monitor compliance and social charters may be breached inadvertently. Our failure to allocate monetary and other resources to ensure compliance with these provisions, or our failure to comply with these provisions at all, would have a material adverse effect on our ability to operate the business and could subject us to significant penalties or force us into liquidation, and thereby decrease revenues and operating profit. In addition, in order to secure certain of the Company’s and its subsidiaries’ obligations in connection with the aforementioned acquisition agreements, the German Federal Insurance Agency for Employees was granted, and continues to hold, a pledge over the shares of GAGFAH GmbH. The German Federal Insurance Agency for Employees may foreclose on these shares in the event that the Company or one of its subsidiaries breaches certain contractual, including social, obligations, in order to cover the onerous penalty payments that the Company or its subsidiaries would be obligated to pay in the event of such breach, and such foreclosure could have a material adverse effect on our balance sheets, cash flows and profits. The integration of past portfolio acquisitions, and any future portfolio acquisitions, into a single, combined business may not be successful. We acquired our entire real estate portfolio during the past 24 months. To the extent that attractive opportunities arise, we intend to make additional portfolio acquisitions of German residential properties. We believe that our success will depend upon our ability to integrate all of our portfolio acquisitions, into a combined business on an operational basis (although we will be required to maintain certain limitations on legal integration of the Company’s subsidiaries based on contractual requirements in the agreements under which such subsidiaries were acquired). There can be no assurance that we will be able to successfully integrate or oversee the combined operations of the GAGFAH GmbH, NILEG GmbH and WOBA GmbH Groups and Acquisition 1 and any future potential portfolio acquisitions. 21 In addition to any internal inabilities in integrating acquisitions, legal and contractual restrictions and obligations may make integration more difficult. For example, we are subject to contractual obligations under each of the acquisition agreements pursuant to which we acquired our real estate portfolio (including particularly the acquisition agreements relating to the GAGFAH GmbH acquisition), which limit our ability to fully integrate acquisitions on a legal and operational basis. See ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ For example, we are required to maintain the economic identity of certain legal entities and locations, and we are precluded from terminating certain employees of certain legal entities. In addition, in connection with the acquisition of GAGFAH GmbH, the German Federal Insurance Agency for Employees retained, and continues to hold, one ‘‘golden’’ share in GAGFAH GmbH which grants the German Federal Insurance Agency for Employees certain corporate governance and approval rights, and as such the German Federal Insurance Agency for Employees maintains a certain degree of high-level control over the operations of GAGFAH GmbH. We may further depend on the continuation of certain agreements or arrangements at relatively favorable terms which the former holders of part of our real estate portfolio were able to agree with suppliers, contractors and service providers. Moreover, laws governing pensions, labor unions and works councils, may also limit our ability to integrate acquisitions and especially to move groups of employees from one legal entity to another. To the extent that we are not able to successfully integrate our current portfolio and any future potential portfolio acquisitions, we may be prevented from increasing revenues or reducing costs by achieving economies of scale in the manner that it anticipates. Such a failure could cause reduced levels of rental income and operating profit and the value of, and the return on, the Shares. Our strategy to successfully operate our business relies on assumptions and contingencies that may prove to be incorrect. The success of our business model depends in part on our subsidiaries’ ability to achieve an expected level of rental increases through the renovation of the existing real estate portfolio and properties which we may acquire and our ability to estimate and control the costs of renovation. Even if the real estate we have acquired, or will acquire in the future, is suitable for residential revitalization and refurbishment, such acquisitions could prove unsuccessful. The assumptions with respect to achievable rental levels, rental increases, vacancy rates, renovation costs, personnel and overhead expenses, and for repairs, maintenance and capital expenditures and similar matters that we have made, or will make, in acquiring a real estate portfolio may prove partly or wholly inaccurate. Furthermore, while we have tried to address known contingencies in the refurbishment and renovation contracts we have entered into, or expect to enter into, unexpected problems or unrecognized risks could arise that are outside the parameters of these contracts. The resolution of such unanticipated problems and risks could require that we expend unanticipated amounts of capital; or it may be the case that such problems and risks cannot be addressed in an economically reasonable manner. Further, our business plans for the NILEG GmbH and WOBA GmbH Groups include discontinuation of operations and the implementation of cost saving initiatives, respectively. Over the next 24 months, we intend to discontinue operations in four main areas of the NILEG GmbH Group: (i) stable commercial real estate, (ii) commercial project development, (iii) residential project development, and (iv) land development. Due to general market volatility and the illiquidity of real estate investments, there can be no assurance that we will be able to discontinue operations in these areas within the timeframe anticipated or receive payment upon sale of assets under agreements that are commercially acceptable or reflect market value. Our business plan for the WOBA GmbH Group anticipates significant reductions in costs. For example, the current core vacancy is expected to be reduced significantly by 2011, but this reduction depends on both effective implementation of operational improvements, as well as the success of an actively marketed relocation program, both of which may not materialize. If we have made inaccurate assumptions, e.g., with respect to the level of rental increases we can achieve, the costs of renovation, and other capital expenditures, or the cost associated with the discontinuation of business operations, the profitability of operations and the value of our real estate portfolios could be impaired. If we are unable to discontinue operations at the NILEG GmbH Group in a manner we have planned, or are unable to implement our planned cost saving initiatives at the WOBA GmbH Group, this could have a material adverse effect on our financial condition and result of operations. 22 An increase in the vacancy rates of our residential real estate portfolio could have a material adverse effect on rental income and operating profit. As of June 30, 2006, the average vacancy rate of our Group’s residential real estate portfolio was approximately 6.2%. The vacancy rate could rise, particularly in residential facilities at the lower quality end of our portfolio and in less attractive locations, or in regions with weak infrastructures. In particular, the portfolio holdings of the WOBA GmbH Group, located primarily in the City of Dresden, had a vacancy rate of 13.8% (core portfolio) as of June 30, 2006 and, due to weaker economic regional performance and overall lower quality of the rentable units in the portfolio, are more susceptible to increased vacancy rates than the portfolio holdings of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. In addition, it is a significant part of our business plan to renovate and refurbish select portions of the WOBA GmbH Group that have the highest vacancy rates, and if these efforts do not result in substantial decreases in the vacancy rates for such real estate after the renovations have been completed, our financial performance relative to our business plan may be adversely affected. The rental income foregone and the additional fixed costs that would arise for maintenance of vacant residential units would negatively affect our operating profit. In addition, a prolonged period of higher vacancy rates could lower rent levels generally and make it more difficult to increase average rent levels. An inability to generate expected rents, to decrease vacancy levels or to increase rents would have a material adverse effect on our balance sheet, results of operations and profitability and the value of, and the return on, the Shares. We are limited in our abilities to decrease costs by rationalizing employment levels. Certain legal and contractual restrictions as well as restrictions from collective bargaining agreements limit our ability to rationalize employment levels. We are subject to numerous laws designed to protect employees from the termination of their employment agreements. In addition, as a result of our obligations pursuant to the various sale and purchase agreements in connection with real estate to which we are a party, we are required, inter alia: • in certain subsidiaries to refrain from terminating employment agreements without cause (Verbot ordentlicher Kündigungen) for a significant time period from the date certain portfolios were acquired; • in certain subsidiaries to refrain from terminating employment agreements for business-related reasons (betriebsbedingte Kündigungen) for a significant period of time; • to refrain from terminating certain company pension plans for a significant period of time from the date certain portfolios were acquired; and • to comply with certain employment and collective bargaining terms and agreements (einzelund tarifvertragliche Bedingungen und Betriebsvereinbarungen) that were in existence at the time we made such acquisitions. Should we breach any such covenants, the relevant sale and purchase agreements provide for onerous penalties, such as the payment of u125,000 for each violation of certain covenants against terminating employees of GAGFAH GmbH without cause. See ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ Since the legal and contractual restrictions set forth above constrain our ability to rationalize employment levels, management will be limited in achieving cost savings by engaging in termination measures. Our inability to achieve cost savings in this manner could have a material adverse effect on our cash flows, results of operations and profitability and the value of, and the return on, the Shares. We may not be able to extend our existing credit arrangements, refinance our debt on substantially similar terms when it matures or obtain acquisition financing on financially attractive terms as and when needed. We may require additional capital to finance or refinance our debt, capital expenditures, future acquisitions and working capital requirements. In order to undertake our planned programs such as for refurbishment, or to acquire further real estate portfolios, we will likewise need to borrow additional funds or to raise additional equity capital. The extent of our future capital requirements will depend on many factors which are beyond our control, and our ability to meet such capital requirements will depend on future operating performance and ability to generate cash flows. Additional sources of financing may include equity, hybrid debt/equity and debt financings or other arrangements. There can be no assurance that we will be able to obtain additional financing on acceptable terms, or at all, when required. 23 If we do not generate sufficient cash flows or if we are unable to obtain sufficient funds from future equity or debt financings or at acceptable interest rates, we may not be able to pay our debts when due or to fund other liquidity needs. Any or all, or combination, of these factors would severely limit operating flexibility, and would have a material adverse impact on our cash flows, financial condition and results of operations. Our subsidiary companies have entered into various contractual restrictions in connection with our or Fortress Investment’s acquisition of those companies, and there are significant penalties (including the potential foreclosure upon and sale of the shares of the subsidiary companies) that will be invoked if we fail to perform under such contractual restrictions. To secure certain of our obligations in connection with, inter alia, our acquisitions of the GAGFAH GmbH, NILEG GmbH and WOBA GmbH Groups, the shares in certain of our subsidiaries are subject to pledges. These obligations include obligations vis-à-vis our financing banks, pursuant to which such shares are pledged as collateral for the indebtedness of various subsidiaries. See ‘‘—Risks Related to our Business—The acquisition agreements through which we purchased our real estate portfolio impose on us certain social obligations, restrict the ability to increase rents and provide for onerous penalties for violations’’ and ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ The shares of GAGFAH GmbH, Immo Service Dresden GmbH, Bau- und Siedlungsgesellschaft Dresden mbH, Liegenschaft Weißig GmbH, Wohnbau Nordwest GmbH and SÜDOST WOBA DRESDEN GmbH, or SÜDOST WOBA are subject to such pledges. The NILEG GmbH Group acquisition financing facility is expected to be replaced by a refinancing arrangement which is likely to be implemented in the fourth quarter of 2006. Should we fail to fulfill our contractual obligations toward any financing bank, the shares in GAGFAH GmbH or one of our other significant subsidiaries might be sold in a compulsory auction. Such a sale would in effect, mean the sale of substantial portions of the real estate portfolios the Company owns indirectly through such subsidiaries and would therefore have a material adverse effect on our balance sheet, cash flows and profits. If the Company’s subsidiaries breach covenants under their existing or future financing agreements, we could be forced to sell properties owned by such subsidiaries. Various loans that the Company’s subsidiaries obtain are secured by mortgages on real estate. Although we seek to obtain mortgages securing indebtedness which encumber only the particular real estate to which the indebtedness relates, any particular loans may be collateralized by other real estate as well. If recourse on any loan incurred to acquire or refinance any particular property includes other of our properties, the equity in such other real estate could be reduced or eliminated through foreclosure on that loan. If a loan is secured by a mortgage on a single property, we could lose that property through foreclosure if we default on that loan. If we were to default on a loan, it is possible that we would become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs. In addition, a default under a loan or financing agreement would most likely trigger cross-defaults under our other loan agreements, possibly making all of the borrowings immediately due and payable. If we do not have sufficient cash resources or other credit facilities available to make such repayments, certain companies may be forced to sell some or all of the assets comprising our real estate portfolio. To the extent that our borrowings are secured against all or a portion of the real estate owned by our subsidiaries, a lender may be able to seize the real estate and sell it. Any of the above could negatively affect our operating profits and balance sheets. Competition for the acquisition of strategic assets from buyers that have lower costs of capital or lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively. Several foreign and domestic competitors, in particular financial investors, have similar asset acquisition objectives as we do, along with greater financial resources and lower costs of capital than we may be able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to compete and successfully implement our growth strategy. Intensified competition for acquisitions could result in increasing purchase prices. There is significant competition 24 among potential acquirers in the German residential real estate industry, and there can be no assurance that we will be able to implement successfully our growth strategy or to complete acquisitions, which could limit our ability to grow our business effectively. We may be adversely affected by the illiquidity of real estate investments. Residential real estate such as that in which we have invested and may invest in the future is relatively illiquid. Such illiquidity may generally affect the ability to vary our portfolios or dispose of or liquidate parts of our portfolios in a timely fashion or at satisfactory prices in response to changes in economic, real estate market or other conditions. According to our business plan we intend to resell certain residential units to tenants, owner-occupants or investors. Further, we and our respective subsidiaries are subject to additional restraints with regard to our ability to sell residential units pursuant to the acquisition agreements through which we acquired our current real estate portfolio and which, among others, limit our ability to sell to specific investors or at a specific price. See ‘‘—Risks Related to our Business—The acquisition agreements through which we purchased our real estate portfolio impose on us certain social obligations, restrict the ability to increase rents and provide for onerous penalties for violations’’ and ‘‘Legal Environment—Additional Constraints on the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group.’’ In particular, where we have committed not to divest more than a limited number of units or buildings within the same municipality to the same investors and to offer the respective tenants a right of first refusal at a certain discount to market price, our ability to resell such residential units within a certain period is compromised. Such an inability to resell residential units within the anticipated timeframe or at the price as initially expected and the resultant expenses and potential losses, would have an adverse effect on our balance sheets, results of operations and profitability and the value of, and return on, the Shares. The geographic concentration of our residential real estate in certain areas of Germany makes rental income, operating profit and financial condition dependent on general economic and demographic trends in Germany and sub-regions within Germany. Our residential real estate portfolio is located exclusively in Germany, with particular focus in the Dresden and Berlin areas. Due to this concentration, adverse changes in the general political, demographic, legal or economic conditions in Germany, especially in the Dresden and Berlin areas, could have material adverse effect on our rental income, operating profit, and financial conditions. Moreover, our current strategy is to continue to acquire and operate primarily residential real estate in Germany only. This strategy limits our ability to diversify investments, both geographically and by type of real estate purchased, and our lack of geographic and industry diversification increases the risk of investment. A downturn in demand for rental apartments in Germany may have a more pronounced negative effect on our rental income and on the value of our assets generally than if we had diversified our investments. The age of our residential real estate and environmental and other factors could cause expenditures for renovation, maintenance, and modernization to be higher than expected. More than 43% of the residential real estate in our portfolio was constructed between 1946 and 1965, and an additional 17% was constructed before 1946. Numerous factors, including the age of the relevant building structure, the material and substances used at the time of construction or currently unknown building code violations, could result in substantial unbudgeted costs for refurbishment, modernization, decontamination required to remove and dispose of any hazardous materials (e.g., asbestos) which are harmful to the health of the residents or other maintenance or upgrade work. Any failure by us to undertake appropriate repair work in response to the factors described above could adversely affect the rental income earned from affected real estate. Incurrence by us of unforeseen costs to remove or dispose of these substances and hazardous materials or to repair resultant damage from them, or exposure to claims for damages associated therewith, could negatively affect our operating profit, cash flow, and the value of, and the return on the Shares. Modernization or new construction projects could exceed their budgets or overrun their deadlines. Modernization, complementary, or new construction projects could exceed their budget or overrun their completion deadlines. This could occur, for example, as a result of bankruptcy of a 25 general contractor or the need to engage other service providers. Budget or deadline overruns, as well as the discontinuation of projects after incurrence of substantial expenditures, could adversely affect our operating profit and may require us to provide for additional reserves to sufficiently allocate toward our potential liabilities arising in connection therewith. The departure of one or more members of the senior management of the Company’s subsidiaries would be detrimental to our business. The success of our business depends significantly on the members of our management, including the members of the respective boards of directors, managers and other key management personnel of the GAGFAH GmbH, NILEG GmbH and WOBA GmbH Groups. Further, our ability to successfully manage our business operations depends to a certain extent on the industry and management experience of certain persons serving on the Board who are affiliated with Fortress Investment. The departure of one or more of such individuals would pose a significant threat to our further expansion planned and our ability to retain their market position and the value of, and the return on, the Shares. We may be required to make significant additional reserves for satisfying future pension and other obligations. As of June 30, 2006, we had aggregate reserves of u107.7 million on our pro forma consolidated balance sheet allocated toward future pension obligations. We allocated reserves in this amount based on actuarial assumptions and estimates that we believe were accurate at the time they were made. To the extent that any such assumptions or estimates prove to be inaccurate, we may need to allocate significant additional amounts to reserves to satisfy future pension and potentially other obligations. Any such allocations, in particular unanticipated allocations, could have a material adverse effect on our results of operation and financial condition. We may incur environmental liabilities. We may be liable for the costs of removal, investigation or remediation of hazardous or toxic substances located on or in a property owned or operated by us. The costs of any required removal, investigation or remediation of such substances may be substantial, and it may be impossible, for numerous reasons, for us to have recourse against the seller of the property or the party that may otherwise be responsible for the hazardous or toxic substance. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell or lease the real estate or to borrow using the real estate as security. Laws and regulations, as these may be amended over time, may also impose liability for the release of certain materials into the air or water from a property, including asbestos, and such release can form the basis for liability to third persons for personal injury or other damages. In addition, we may be required to provide for additional reserves to sufficiently allocate toward our potential obligations to remove and dispose of any hazardous and toxic substances which could have a negative effect on our balance sheets, our operating profit and cash flow, and the value of, and the return on, the Shares. If we fail to meet legal requirements in connection with subsidies, government grantors could reclaim such subsidies. We and certain of our affiliates have obtained numerous public housing subsidies in, among others, the federal state of Berlin, Hamburg and North Rhine-Westphalia. The availability of these subsidies to us and certain of our affiliates depends on such entities’ respective fulfillment of certain contractual terms, terms in administrative orders (Bescheide) and legal requirements. For example, in connection with real estate located in Berlin, the German Federal Insurance Agency for Employees has granted subsidies in the form of loans to Eintracht Wohnungsbau-AG, which was merged into GAGFAH AG in 1996. As of June 30, 2006, these loans were valued at an aggregate amount of approximately u20.9 million on our pro forma consolidated balance sheet. The condition of such subsidies provide, among other things, that the landlord of the subsidized apartment may not charge more than a certain level of rent, and may lease the apartment only to certain eligible persons (e.g., persons with low income). Should our respective subsidiaries to which subsidies have been granted fail to fulfill such terms and other legal requirements in connection with the subsidies, such that it is no longer eligible for the subsidies, government grantors could reclaim such subsidies, including any applicable interest, in full. The loss of such subsidies would have a material adverse effect on our cash flow, our ability to manage our real estate holdings and profitability. 26 We may be exposed to losses and liabilities (including tax liabilities) in respect of our assets as a result of the acts or omissions of vendors or previous owners or occupiers or relating to the prior period of ownership. We may be exposed to losses and liabilities including, but not limited to, tax, regulatory and certification compliance liabilities, in respect of assets we have acquired, or will acquire in the future, as a result of the acts and omissions of the relevant vendors or previous owners or occupiers of such assets or relating to the prior period of ownership in question. We, or, to the extent real estate portfolios have been originally acquired by other entities and subsequently contributed to us, the original acquirers, only have had the opportunity to carry out a limited due diligence exercise prior to agreeing to purchase an asset and/or the corporate holding structures of an asset, and we may not have been able to verify fully that the owners of the properties have obtained, and/or the properties comply with, all planning permissions and conditions, building permits, licenses, fire and health and safety certificates and related regulations. Also, we or the original acquirers, as the case may be, may not have been able to undertake (or obtain results for) all searches (including title and security searches), inspections and surveys (including intrusive environmental and asbestos investigations and technical surveys) that we might otherwise carry out in relation to comparable acquisitions. Furthermore, there can be no assurance as to the adequacy or accuracy of information provided during any due diligence exercise or that such information will remain accurate in the period from conclusion of the due diligence exercise until acquisition of the relevant assets. If any such risks materialize, our balance sheets, our operating profit and cash flow, and the value of, and the return on, the Shares could be materially adversely affected. We may be subject to liability following the disposal of investments. When we dispose of our assets, we may be required to give certain representations, warranties and undertakings in relation to those divestitures and to pay damages to the extent that any such representations or warranties turn out to be inaccurate or incomplete. As a consequence, we may become involved in disputes or litigation concerning such representations, warranties and undertakings and may be required to make payments to third parties as a result of such disputes or litigation. If we do not have cash available to conduct such litigation or make such payments we may be required to borrow funds, or, if we were unable to borrow funds to make such payments, we may be forced to sell investments to obtain such funds which in turn cause reduced levels of rental income and operating profit and the value of, and the return on, the Shares. If the seller of certain real estate withdraws from the asset sale and purchase agreement, Acquisition 1 may be obligated to retransfer property to such seller. In December 2005, Acquisition 1 purchased for u136 million a real estate portfolio of approximately 4,400 residential units from LEG Rheinland Köln GmbH, LEG Wohnen GmbH, LEG Landesentwicklungsgesellschaft Nordrhein-Westfalen GmbH, LEG Wohnungsbau Rheinland GmbH and LEG Gesellschaft für Vertrieb und Mieterprivatisierung mbH, or, together, LEG NRW. The sale and purchase agreements provide for the assumption by Acquisition 1 of existing debts owed by LEG NRW, which is subject to the consent of the original lenders. The original lenders have not, as of the date hereof, given consent. Should the lenders withhold consent, LEG NRW is entitled to withdraw from the sale and purchase agreements, and Acquisition 1 would be obligated to retransfer the real estate portfolio to LEG NRW. Such a retransfer would have a material adverse effect on Acquisition 1’s operations and, as a result, our profitability and value of, and return on the Shares. Certain of our affiliates own significant participations and have assumed liability in several closed property funds. GAGFAH M Immobilien-Management GmbH, or GAGFAH M, a subsidiary of GAGFAH GmbH, has a significant holding (as of June 30, 2006, between 47% and 87%) in 20 closed property funds (Haus- und Boden-Fonds der Bremer Treuhand), or HB Funds, with a total subscribed nominal capital (Zeichnungskapital) of those funds in the amount of approximately u75.8 million. As a result of acting as trustee for the HB Funds pursuant to a trust agreement, GAGFAH M has assumed liability for the HB Funds’ debts. For the past several years, the HB Funds’ revenues, in the aggregate, have exceeded and therefore covered the majority of their expenses. If an HB Fund becomes illiquid, GAGFAH M may need to terminate the trust arrangement in order to take recourse against the trust beneficiaries with respect to the liabilities it would owe to the lenders of the funds. 27 However, since GAGFAH M has a significant holding of the funds’ interests, such recourse would be limited to the amount of interest due by the third party holders. In addition, if such third parties are not in a position to reimburse GAGFAH M, GAGFAH M’s claim for recourse could have little or no value, which could adversely affect the operations and profit of GAGFAH M. See ‘‘Business—Legal, Administrative and Similar Proceedings—Legal Proceedings—HB Funds.’’ The use of standardized contracts could result in claims for damages against us under a number of contracts, or in the loss of certain rights and privileges or of their respective rights to claim damages, if errors or problems arise in connection with the enforcement of such contracts. Because our business involves a large number of individual units and tenants, each with a relatively small individual value, we maintain numerous legal relationships, in particular with tenants, contractors and service providers, any one of which is not financially material to us. As a means of efficiently managing these legal relationships, we often make use of standardized documents and form contracts. These documents and contracts often contain ambiguities or errors, and the fact that any given document or contract is standardized may cause a significant number of contractual terms or even the validity of a large number of contracts to be affected. Due to frequent changes in the law, particularly in case law regarding general terms and conditions (allgemeine Geschäftsbedingungen), the use of such standardized contractual terms is not without risk. For example, it is possible that, as a result of changes to statutes or case law, ambiguities or errors in standard contract terms may give rise to claims or cause such subsidiaries to lose certain rights and privileges, or their right to claim damages which, in turn, could adversely affect our rental income and operating profit and, as a result, our profitability and the value of, and return on, the Shares. We may not be granted building permits, or may be granted them only subject to onerous conditions, or additional requirements may be imposed on existing building permits. Regulation of the construction and renovation of buildings is such that until a building permit is granted, it is uncertain whether the relevant authorities will approve a construction project and what additional requirements may be imposed in connection with the building permit. If we are not granted a building permit, or are granted one only subject to onerous conditions, our rental income that we expect to generate from the relevant real estate could be considerably less than originally calculated. If a renovation project becomes financially unfeasible because a building permit is not granted, or a permit is granted only subject to onerous conditions, the relevant entity may not be able to carry out the project and any expenditure already incurred will be lost. Moreover, changes in the requirements for construction or modernization of existing real estate could result in unforeseen additional costs. Any increase in operating costs resulting from the above-described events would adversely affect our operating profit. In addition, our remaining project development activities may be substantially impaired if the granting of a building permit is substantially delayed, made subject to additional administrative building constraints (baurechtliche Auflagen) or declined altogether. We may suffer material losses caused by fire or other causes in excess of insurance proceeds. Our real estate properties could suffer physical damage caused by fire or other causes, resulting in losses (including loss of rent), which may not be fully compensated by insurance. In addition, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods or terrorism or that may be uninsurable or are not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, also might result in insurance proceeds being insufficient to repair or replace the real estate if it is damaged or destroyed. Under such circumstances, the insurance proceeds may be inadequate to restore the previous economic position with respect to the affected real estate. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in the affected real estate which would be negatively reflected in our balance sheets, as well as anticipated future rental income from that real estate. In addition, we may have to repair the damage caused by uninsured risks. We would also remain liable for any debt or other financial obligation related to that real estate, which would be negatively reflected in its balance sheet and, as a result, adversely impact our profitability and the value of, and return on, the Shares. 28 RISKS RELATED TO TAXATION The Company may lose the tax benefits to which Luxembourg securitization vehicles are entitled if it does not operate in a manner which will enable it to qualify as a securitization vehicle or if the European Commission were to conclude that the tax treatment which securitization vehicles receive in Luxembourg constitutes impermissible state aid. Securitization vehicles benefit from certain advantageous tax rules. See ‘‘Taxation—Luxembourg Taxation—Taxation of the Company.’’ The Company intends to operate in a manner that will enable it to qualify as a securitization vehicle under the Luxembourg Securitization Law. In addition, the Luxembourg direct tax authorities have confirmed to the Company that it is entitled to the income and net worth tax benefits applicable to securitization vehicles. However, if the Luxembourg tax authorities were to reach the conclusion in the future that the Company’s actual activities were in relevant parts different from those which formed the basis for their confirmation, they might re-assess the situation. If the Company were unable to qualify as a securitization vehicle, it would cease to benefit from the tax rules applicable to securitization vehicles which include the ability to deduct dividends paid to shareholders as a business expense and dividends not being subject to Luxembourg withholding tax. The Company’s ability to pay dividends is dependent, in part, upon its treatment as a securitization vehicle. If the Company is unable to qualify as a securitization company, this could have a material adverse effect on its results of operations and financial condition and its ability to pay dividends. In addition, in February 2006 the European Commission requested the Luxembourg government to provide it with certain information regarding the tax regime of securitization vehicles. Depending on the conclusions the Commission will reach as a result of this information exchange, it may decide to investigate the tax regime under the Luxembourg Securitization Law from a state aid perspective. Currently, a formal investigation procedure under Article 88 of the EC Treaty has not yet been launched. If as a result of such an investigation the Commission were to reach the conclusion that the tax regime under the Luxembourg Securitization Law were providing aid to securitization vehicles with state resources which distort or threaten to distort competition by favoring securitization vehicles, insofar as the tax regime of securitization vehicles would affect trade between Member States, part or all of the special rules applicable to securitization vehicles may be held incompatible with the common market principles of the European Union. As a consequence, the Commission might ask Luxembourg as a first step to suspend the tax regime of the Luxembourg Securitization Law and to recover provisionally the tax benefits granted to securitization vehicles, although provisional recovery can only be requested, if there are no doubts about the illegal character of the state aid and there exists an urgency to act and a serious risk of substantial and irreparable damage to a competitor. If the Commission, as a second step, would find the tax regime under the Luxembourg Securitization Law incompatible with the common market principles of the European Union, the Luxembourg tax authorities would be required to receive repayment of all tax benefits that would be considered state aid from the securitization vehicles under the Luxembourg procedural rules and subject to statute of limitation provisions. As a result, if such an investigation were to conclude that such impermissible state aid is given to securitization vehicles, the Company may be required to pay a substantial amount in income tax on profits earned in prior years and/or may not get the benefit of the tax regime of the securitization vehicle on a going forward basis. The Company’s ability to pay dividends is dependent, in part, upon its treatment as a securitization vehicle. If the Company is required to pay a substantial amount in income tax on profits earned in prior years and/or do not get the benefit of the tax regime of the securitization vehicle on a going forward basis it could have a material adverse effect on its results of operations and financial condition and the Company’s ability to pay dividends. The amount of interest that the Company is able to deduct for tax purposes may substantially decrease. The Company’s subsidiaries are financed by significant shareholder and third party loans, taking into account the thin capitalization limitations set forth in the existing law and the present interpretation of the law on deductibility of interest by the tax authorities. Due to past reorganizations, the relevant equity in our Group as a basis for such safe haven is likely to decrease in the future. Furthermore, according to the German tax authorities, their current interpretation of the law on deductibility of interest, upon which the financing of our Group is based, will be under future review. Finally, although no draft legislation exists as of the date of this prospectus, there are plans under political discussion in Germany to generally limit the deductibility of interest expenses for 29 income and corporate income tax purposes in the future. As a result of the above, in particular the proposed legislative change, the overall tax burden for our Group companies in Germany could be increased substantially which would adversely affect our after tax profit and cash flow, and our ability to pay dividends. Transfers of profit in the form of distributions to the Company by certain of its subsidiaries would trigger ‘‘recapture taxation’’ due to the existence of untaxed earnings. GAGFAH GmbH and most of the entities within the NILEG GmbH Group (for purposes of this risk factor only, ‘‘EK02 Entities’’) are formerly charitable housing companies that have substantial amounts of untaxed earnings (for purposes of this risk factor only, ‘‘EK02 Amounts’’). These EK02 Amounts are a holdover of the former German corporate imputation tax system (körperschaftsteuerliches Anrechnungsverfahren), which was replaced in 2001-02 by the current ‘‘half income tax system’’ (Halbeinkünfteverfahren). Under current German tax law, distributions of EK02 Amounts made through the year 2018 (distributed in 2019) trigger a recapture tax of 45.2% of the distributed amount at the level of the respective distributing EK02 Entity. The tax law provides for a statutory assumption as to when and to what extent a certain distribution is deemed to be made out of the EK02 Amount, depending primarily on the relation between the entity’s EK02 Amount and its tax equity. Under these rules, none of our EK02 Entities is currently in a position to make distributions that are not qualified as EK02 distributions. Such distributions (including constructive dividends) would lead to a significant increase of the tax burden and thus impact our after tax profit and financial condition and the Company’s ability to pay dividends. A tax efficient transfer of funds from the EK02 Entities can, as a result, only be achieved by the payment of interest on shareholder loans, which does not qualify as a ‘‘distribution’’ within the meaning of the EK02 rules. Interest rate on shareholder loans may be questioned in a tax audit. Under German tax law, interest payments on shareholder loans can be recharacterized as constructive dividends triggering the same consequences in respect of EK02 as regular distributions. Such a reclassification could in particular occur to the extent that the loan agreement is found not to meet the arm’s length standard (e.g., to the extent that the current interest rate of 13% p.a. is considered higher than the rate which German tax courts regard as the appropriate comparable rate). As yet, the respective shareholder financing arrangements within our Group have not yet been subjected to an audit by the German tax authorities. If interest payments on the shareholder financing were reclassified into constructive dividends, this could lead to a substantial increase of our tax burden (due to the non-deductibility of interest expenses at the respective German company and a recapture taxation in the event of distributions out of the EK02 Amounts referred to above) and thus impact our after tax profit and financial condition and the Company’s ability to pay dividends. We may incur tax liabilities arising from past reorganizations. Our Group has been the subject of material restructurings in the past. Although we have attempted to address most of the relevant tax issues arising from previous restructurings (including, in particular, real estate transfer tax, the impact of the special rules of Section 13 of the German Income Tax Act applicable to our Group, income tax and the tax impact or neutrality of restructurings) by applying for binding tax rulings of the competent tax authorities, we have not addressed all tax issues related thereto. As a consequence, a future tax audit could question some or all of the positions taken by our Group not covered by binding tax rulings and thus may materially and adversely affect our after tax profit and financial condition. The use of loss carry forwards is restricted under German tax law. Some of our Group companies have significant loss carry forwards for corporate income and trade tax purposes which under current law can only be offset against positive income up to u1,000,000 in full, with any excess taxable income available to offset only up to 60% (so-called ‘‘Minimum Taxation’’). Further legislative restrictions for the use of loss carry forwards are under discussion, which may adversely impact our after tax profit and cash flow. In addition, more than 50% of the shares of our Group companies with loss carry forwards were transferred in the past so that the respective loss carry forward can only be used in case the business is not continued with predominantly new assets. As the interpretation of this provision has not been finally clarified, the use of loss carry forwards might be questioned in a tax audit with the effect of a substantially increased tax burden. 30 Our ability to use the loss carry forwards of GAGFAH GmbH and certain other Group companies for trade tax purposes may be limited. Certain of our Group companies that are German companies with limited liability (Gesellschaft mit beschränkter Haftung) (GAGFAH GmbH, NILEG Norddeutsche, Wohnungsgesellschaft Norden GmbH, or WGN mbH, Wohnungsbau Niedersachsen GmbH, or WBN GmbH and Osnabrücker Wohnungsgesellschaft mbH, or OWG) have transferred their assets and liabilities to German limited partnerships (Kommanditgesellschaft). The companies with limited liability are the sole general partner of their limited partnerships’ subsidiaries and are exposed to unlimited liability for the obligation of the limited partnerships. Under the articles of each limited partnership, the limited partner of the limited partnerships will not participate in the limited partnerships’ profits or losses or in any built-in gains (stille Reserven). It is currently unclear whether a limited partnership is disregarded for trade tax purposes. The German tax authorities have offered the view that they will consider a limited partnership as a separate taxpayer for trade tax purposes. Under this view, it would not be possible for the income realized at the level of the limited partnerships to be set off for trade tax purposes by the trade tax loss carry forward at the level of the companies with limited liability, which may materially and adversely affect our after tax profit and financial condition. Certain investors may suffer negative tax consequences under the German Controlled Foreign Corporation (CFC) Rules (Außensteuergesetz). As described under ‘‘Taxation—German Taxation,’’ shareholders subject to unlimited tax liability in Germany may suffer negative tax consequences from the CFC legislation if such shareholders own either individually at least 1% or in aggregate more than 50% of the Company’s share capital. U.S. investors generally will suffer adverse U.S. federal income tax consequences if the Company is characterized as a passive foreign investment company, or PFIC. The Company believes that it is not, and based on the Company’s present assets, income and activities does not believe it is likely to become in the near future, a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. However, whether the Company is a PFIC is determined annually, and could change depending among other things upon the Company’s income and assets, the market value of the Company’s stock and changes in the Company’s activities and assets and in the assets and gross receipts of subsidiaries in which the Company owns at least a 25% interest. Accordingly, no assurance can be given that the Company will not become a PFIC in the current or a future taxable year. Further, the rules applicable to the determination of whether rents and gains from self-managed real estate are active income are uncertain in the context of affiliated corporations. Accordingly, no assurance can be given that the U.S. Internal Revenue Service will not successfully challenge this position. If the Company were treated as a PFIC for any taxable year, then prospective purchasers that are U.S. persons generally would be subject to adverse U.S. federal income tax consequences (regardless of whether the Company continued to be a PFIC). If the Company were a PFIC, U.S. Holders may be able to make a tax election to mitigate some of the adverse consequences, which could require the holder to include certain amounts in the holder’s income annually, regardless of whether the Company actually makes any distribution. The Company believes that it currently qualifies as an operating company for purposes of ERISA and therefore is not subject to the fiduciary requirements of ERISA with respect to its assets. The Company believes that it currently qualifies as an operating company for purposes of ERISA and therefore is not subject to the fiduciary requirements of ERISA with respect to its assets. In addition, the Company intends to take steps as may be reasonably appropriate to continue to enable us to qualify as an operating company. Nonetheless, there may be no assurance that the Company will continue to so qualify. See ‘‘Certain ERISA Considerations.’’ RISKS RELATED TO THE OFFERING The Shares have not been publicly traded and there can be no assurance that a liquid trading market will develop in the Shares following the initial offering and listing of the Shares. Prior to this offering, the Shares were not publicly traded. The Selling Shareholders and the Joint Bookrunners will set the offer price of the Shares following a bookbuilding process. There can be no 31 assurance that the offer price will be equivalent to the price at which the Shares will be traded following this offering, or that liquid trading will develop and be sustained following the initial listing of the Shares. Investors may be unable to sell their Shares quickly or at all if no active trading market develops in the Shares. The market price and trading volume of the Shares may be volatile, which could result in rapid and substantial losses for the shareholders. Even if an active trading market develops, the market price of the Shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in the Shares may fluctuate and cause significant price variations to occur. If the Share price declines significantly, you may be unable to resell your Shares at or above your purchase price. No assurance can be given that the share price will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the Share price or result in fluctuations in the price or trading volume of the Shares include: • variations in quarterly results; • changes in earnings estimates; • the contents of published research reports about us or the German real estate industry or the failure of securities analysts to cover the Shares in the Issuer following this offering; • additions or departures of key management personnel; • any increased indebtedness we may incur or lease obligations we may enter into in the future; • actions by institutional shareholders; • changes in market valuations of similar companies; • announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; • speculation or reports by the press or by the investment community with respect to us or the German real estate industry in general; • increases in market interest rates that may lead purchasers of the Shares to demand a higher yield; • changes or proposed changes in laws or regulations affecting the German real estate industry or enforcement of these laws and regulations, or announcements relating to these matters; and • general market and economic conditions. Investors with a reference currency other then the euro may be subject to foreign exchange risks when investing in the Shares. The Company’s equity capital is denominated in euro, and the vast majority of our revenues and expenses have been and will continue to be incurred in euro. Furthermore, all returns will be distributed in euro. If your reference currency is a currency other than the euro, you may be adversely affected by any reduction in the value of euro relative to your reference currency. You may also incur the further transaction costs of converting euro into another currency. As a result, you are strongly urged to consult your financial advisers with a view to determining whether you should enter into hedging transactions to off-set these currency risks. Fluctuation of market interest rates may have an adverse effect on the value of your investment in the Shares. One of the factors that investors may consider in deciding whether to buy or sell the Shares is the expected dividend yield, or the expected dividend payment per Share as a percentage of the Share price. If market interest rates increase, prospective investors may desire a higher rate of return on the Shares and therefore may seek securities paying higher dividends or interest or offering a higher rate of return than that of the Shares in the Company. As a result, market interest rate fluctuations and other capital market conditions can affect the demand for and market value of the Shares. For instance, if interest rates rise, the market price of the Shares may decrease, because current stockholders and potential investors will likely require a higher dividend yield and rate of return on the Shares as interest-bearing securities, such as bonds, offer more attractive returns. 32 Future offerings of debt or equity securities by us may adversely affect the market price of the Shares. In the future, the Company may plan to increase its capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, series of preferred shares or shares of common stock. Issuance of securities with conversion rights or additional equity offerings may dilute the economic and voting rights of existing shareholders if made without granting subscription rights to existing shareholders or reduce the market price of the Shares, or both. The Company’s articles of association currently provide for the issuance of up to 7.775 billion additional shares as authorized capital. The Company may issue all of these shares without any action or approval by the shareholders and without reserving any pre-emptive subscription rights to the shareholders. Because the Company’s decision to issue securities in any future offering will depend on market conditions and other factors beyond its control, the Company cannot predict or estimate the amount, timing or nature of future offerings. Thus, holders of common stock bear the risk of our future offerings reducing the market price of the common stock and diluting their Share holdings in the Company. Should the Company be liquidated, lenders with respect to other borrowings, would receive a distribution of its available assets prior to the holders of common stock. The timing of dividend payments, if any, is subject to certain conditions, and your investment will be subordinate to claims of the Company’s creditors and the creditors of the Company’s subsidiaries. At present, the majority of the Company’s income generated is derived from payments made by the its subsidiaries in connection with the intra-group financing arrangements between the Company and the its subsidiaries, i.e. repayments of the principal amounts initially advanced by us together with payments of interest due on those advances. See ‘‘—Risks Related to the Company and our Business—As a securitization company under Luxembourg law without its own business operations, the Company is dependent on the cash flows from its operating subsidiaries.’’ Investment in the Shares involves risk arising from potential fluctuations in the amount and timing of receipt of the principal and interest payments. In particular, prospective purchasers of such Shares should be aware that the amount and timing of payment of the principal and interest or other such payments will depend, inter alia, upon the terms of such financing arrangements and the laws of the jurisdiction governing such loans. In addition, as shareholders are subordinated to our creditors and the creditors of the Company’s subsidiaries, the claims of such creditors may affect the amount available to the Company to distribute dividends with respect to the Shares or the amount available to the Company’s subsidiaries to make scheduled payments under the intra-group financing facility (which in turn may affect the amount available to us to distribute dividends). Shareholders are only entitled to profits realized by the Company and is available premium and reserves. The Company may not be able to meet its dividend payment objectives. The Company’s ability to pay dividends depends on a number of factors, including, but not limited to, the following: • the progress of our business; • the successful management of our existing properties; • the ability to profit from both management and sale of properties; • cash received from the Company’s subsidiaries; • classification of intra-group loans granted by us to our operating subsidiaries under German tax law; • qualification as ‘‘foreign investment fund’’ under German law; • the Company’s status as a securitization vehicle under Luxembourg law; • taxes paid by the Company’s subsidiaries as well as by the Company; • our net profits; • restrictions contained in our respective third party financing agreement as to intra-group payments; • performance on contracts; and • the Company’s ability pursuant to Luxembourg corporate law to pay quarterly dividends. 33 Any of these factors, individually or in combination, might restrict the Company’s ability to pay dividends. Moreover, the Company’s lenders may block dividend payments if certain financial ratios are not met. Since the Company’s ability to pay dividends is dependent on such factors, an investment in the Shares may not be suitable for all investors, in particular those with fixed or low incomes who rely on investment income to cover living expenses. Issuances of new shares in the future could lead to dilution of shareholders’ interests. As part of our strategy, we aim to acquire a significant amount of additional assets per year. In order to finance further acquisitions, the Company may raise additional capital in the future. Shareholders’ ownership interests could be diluted by certain actions, including the following: • issuance of new shares without granting pre-emptive or other subscription rights to existing shareholders in order to raise new equity capital; • exercise of conversion rights or options by the holders of convertible or warrant-linked bonds that we may issue in the future; and • acquisition of risks through the acquisition of securities including shares of other companies or equity interests in other companies in exchange for new shares. Future sales of existing shareholders’ Shares may depress the stock price. There are 225 million Shares of the Company’s stock outstanding. Following successful completion of this offering, existing shareholders will hold approximately 80% of the Shares outstanding (or 79% of the Shares outstanding if the Greenshoe Option is exercised in full). Existing shareholders will enter into lock-up agreements with the Underwriters with respect to their Shares. See ‘‘The Offering—Information on the Shares—Market Protection Agreement/Limitations on Disposal (Lock-up).’’ If existing shareholders who have entered into such lock-up agreements sell substantial amounts of their Shares on the open market following expiration of the lock-up agreements, or if the market anticipates that such sales might occur, the Share price could decrease significantly. 34 GENERAL INFORMATION RESPONSIBILITY FOR THIS PROSPECTUS Except as set out hereafter, the Company assumes responsibility for the contents of this prospectus and declare that the information contained in this prospectus is, to its knowledge, in accordance with the facts and contains no omission likely to affect its import, and that it has taken all reasonable care to ensure that the information contained in this prospectus is in accordance with the facts and contains no omission likely to affect its import. Each of the Selling Shareholders, in their capacity as offerors of the Shares, assumes responsibility for the respective information given with respect to each of them in ‘‘Principal and Selling Shareholders’’ so far as such information relates to the offering of the Shares and to the Selling Shareholders themselves. The Selling Shareholders declare that such information is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import, and that the Selling Shareholders have taken all reasonable care to ensure that such information is in accordance with the facts and contains no omission likely to affect its import. CB Richard Ellis GmbH assumes responsibility for the information given in ‘‘Valuation Report,’’ which is based upon the information supplied by the respective principal or third parties instructed by the respective principal. CB Richard Ellis GmbH declares that such information is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import, and that the CB Richard Ellis GmbH have taken all reasonable care to ensure that such information is in accordance with the facts and contains no omission likely to affect its import. This prospectus constitutes a prospectus pursuant to the Prospectus Directive, and the Commission Regulation (EC) 809/2004 and has been approved on October 6, 2006 by the CSSF as competent authority within the meaning of the Luxembourg Law on Securities Prospectuses of July 10, 2005 (Loi du 10 juillet 2005 relative aux prospectus pour valeurs mobilières) implementing the Prospectus Directive. SUBJECT MATTER OF THIS PROSPECTUS This prospectus has been prepared in connection with the offering of up to 42,750,000 existing registered Shares of common stock (up to 44,887,500 Shares assuming full exercise of the Greenshoe Option), each such Share with a nominal value of u1.25, and in connection with the listing of the Company’s entire share capital, consisting of 225,000,000 shares, on the Frankfurt Stock Exchange. The Shares will entitle the holders thereof to receive any dividend declared after October 1, 2006. The Selling Shareholders expect to determine the offer price and the over-allotment of Shares, together with the Joint Bookrunners on or about October 20, 2006 on the basis of a bookbuilding process. INFORMATION DERIVED FROM THIRD PARTIES This prospectus contains a number of references to data, statistical information and studies prepared by third parties on such topics as the German real estate market, the real estate business in general and related subjects. We have accurately reproduced such information and, as far as we are aware and are able to ascertain from information published by such third parties, no facts have been omitted which would render the reproduced information inaccurate or misleading. Nevertheless, you are advised to consider this with caution. Market studies are often based on information or assumptions that may not be accurate or appropriate, and their methodology is inherently predictive and speculative. You should note that our estimates are based on such third-party data. Neither we nor the Underwriters have independently verified the figures, market data or other information on which third parties have based their studies. Accordingly, we make no representation or warranty as to the accuracy of any such information from third-party studies included in this prospectus. Upon our request, CB Richard Ellis GmbH, Feuerbachstrasse 26–32, 60325 Frankfurt am Main, Germany, has prepared a valuation report regarding certain real estate owned by our Group. See ‘‘Valuation Report.’’ FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements. A forward-looking statement is any statement that does not relate to historical facts and events, and can be identified by the use of such 35 words and phrases as ‘‘according to estimates,’’ ‘‘anticipates,’’ ‘‘assumes,’’ ‘‘believes,’’ ‘‘could,’’ ‘‘estimates,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘is of the opinion,’’ ‘‘may,’’ ‘‘plans,’’ ‘‘potential,’’ ‘‘predicts,’’ ‘‘projects,’’ ‘‘should,’’ ‘‘to the knowledge of,’’ ‘‘will,’’ ‘‘would’’ and similar expressions, which are intended to identify a statement as forward-looking. This applies, in particular, to statements containing information on future financial results, plans, or expectations regarding our business and management, our future growth or profitability and general economic and regulatory conditions and other matters affecting our Group. Forward-looking statements reflect our current view of future events, are based on assumptions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The occurrence or non-occurrence of an assumption could cause our actual financial condition and results to differ materially from, or fail to meet expectations expressed or implied by, such forward-looking statements. Our business is subject to a number of risks and uncertainties that could also cause a forward-looking statement, estimate or prediction to become inaccurate. Accordingly, you should not place undue reliance on the forward-looking statements herein and you are strongly advised to read the following sections of this prospectus: ‘‘Risk Factors,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ ‘‘Industry,’’ ‘‘Business’’ and ‘‘Legal Environment.’’ These sections include more detailed descriptions of factors that might have an impact on our business and the industry in which we operate. Neither we, senior management nor the Underwriters can give any assurance regarding the future accuracy of the opinions set forth herein or as to the actual occurrence of any predicted developments. After the date of this prospectus, neither we nor the Underwriters assume any obligation, except as required by law, to update any forward-looking statements or to conform these forward-looking statements to our actual results. DOCUMENTS AVAILABLE FOR INSPECTION The following documents will be available for inspection during regular business hours at our offices, 14a, rue des Bains, L-1212 Luxembourg, Grand Duchy of Luxembourg, as well as at the offices of each of the Joint Global Coordinators: • The Company’s articles of incorporation; • Our financial statements, including the following: 䡩 The Company’s Audited Consolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005; 䡩 The Company’s Unaudited Condensed Consolidated Interim Financial Statements as of and for the six months ended June 30, 2006; 䡩 The Company’s Audited Unconsolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005; 䡩 The Company’s Unaudited Unconsolidated Interim Financial Statements as of and for the six months ended June 30, 2006; 䡩 The Audited GAGFAH GmbH Consolidated Annual Financial Statements as of and for the year ended December 31, 2005 and 2004; 䡩 The Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements as of and for the six months ended June 30, 2006 and 2005; and 䡩 The Unaudited Pro Forma Consolidated Financial Information as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005. Any future annual and interim reports prepared by us may be obtained at our offices, from the Company’s website (http://www.gagfah.com) and from the paying and depositary agent, Deutsche Bank, Taunusanlage 12, 60325 Frankfurt am Main, Germany. 36 THE OFFERING SUBJECT MATTER OF THE OFFERING This offering consists of up to 42,750,000 existing registered Shares (up to 44,887,500 Shares assuming full exercise of the Greenshoe Option), each such Share with a nominal value of u1.25, and with full dividend rights with respect to any dividend declared after October 1, 2006. This offering consists of a public offering in the Federal Republic of Germany to retail and institutional investors and a private placement outside the Federal Republic of Germany, each such offering outside of the United States of America in reliance on Regulation S under the Securities Act. In the United States of America, the Shares will be offered for sale to qualified institutional buyers in reliance on Rule 144A under the Securities Act. Immediately prior to this offering, all of the Company’s share capital was held by the Selling Shareholders set forth in the table in ‘‘Principal and Selling Shareholders.’’ Following completion of this offering and assuming full placement of the offered Shares and full exercise of the Greenshoe Option, the Selling Shareholders will together hold approximately 80% of the Company’s share capital. The Selling Shareholders will receive consideration for the sale of their Shares (after deduction of agreed fees and commissions). Deutsche Bank, Dresdner Kleinwort, Goldman Sachs International and Morgan Stanley are Joint Bookrunners in this offering. Deutsche Bank, Dresdner Kleinwort, Goldman Sachs International, Morgan Stanley, JP Morgan/Sal. Oppenheim jr. & Cie. and Lehman Brothers, are Underwriters in this offering. PRICE RANGE, OFFER PERIOD, OFFER PRICE AND ALLOTMENT The price range within which investors may submit purchase orders is between u17 and u19 per Share. The Selling Shareholders reserve the right to raise or lower the upper and/or lower limit(s) of the price range following consultation with the Joint Bookrunners. Any changes to the terms of this offering would be published by means of electronic media, such as Reuters or Bloomberg, and on the Company’s website (http://www.gagfah.com); investors, including investors who have purchased Shares pursuant to this offering, would not be informed individually. The Selling Shareholders expect to determine the offer price together with the Joint Bookrunners on or about October 20, 2006 on the basis of a bookbuilding process. The offer price is expected to be published by means of electronic media, such as Reuters or Bloomberg and on the Company’s website, on or about October 20, 2006. Following its publication in the electronic media, investors may obtain the offer price from the Joint Bookrunners. This offering will commence on October 10, 2006 and end (i) on October 18, 2006 at 12:00 noon (Central European Time) for Group employees and certain employees and business affiliates of the Selling Shareholders and their affiliates entitled to receive a preferential allotment; (ii) on October 19, 2006 at 12:00 noon (Central European Time) for retail investors and (iii) on October 20, 2006 at 2:00 p.m. (Central European Time) for institutional investors. The Selling Shareholders reserve the right to increase or decrease the number of shares offered after consultation with the Joint Bookrunners. The Selling Shareholders together with the Joint Bookrunners reserve the right to extend or shorten the offer period or to terminate this offering, without prior notice, at any time and for any reason. To the extent that the terms of this offering are amended, such amendment will be published by means of electronic media, such as Reuters or Bloomberg, and on the Company’s website (http://www.gagfah.com). The Underwriters will severally offer the shares, subject to receipt and acceptance by them of, and their right to reject, any order in whole or in part. Changes in the number of offered shares, changes to the price range or the extension or shortening of the offer period will not result in the expiration of the purchase offers which have already been submitted. 37 TIMETABLE We anticipate the following timetable for the offering, which is subject to extension or shortening. October 6, 2006. . . . . . . . . . . . . . . . . . . . Approval of prospectus by the CSSF Notification of the prospectus by the CSSF to the German Federal Financial Supervising Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) October 9, 2006. . . . . . . . . . . . . . . . . . . . CSSF posts approved prospectus on the website of the Luxembourg Stock Exchange Publication of the notice in the Frankfurter Allgemeine Zeitung, of the prospectus on the Company’s website and the website of the Luxembourg Stock Exchange October 10, 2006 . . . . . . . . . . . . . . . . . . Commencement of the offer period October 11, 2006 . . . . . . . . . . . . . . . . . . Filing of application for listing on Frankfurt Stock Exchange From October 10, 2006 to October 20, 2006. . . . . . . . . . . . . . . . . . . Marketing (roadshow) October 18, 2006. . . . . . . . . . . . . . . . . . . Employees and other persons eligible for a preferential allotment of Shares in connection with the offer must submit their orders for Shares by 12:00 noon (Central European Time) October 19, 2006. . . . . . . . . . . . . . . . . . . Close of the offer period for retail investors (natural persons) at 12:00 noon (Central European Time) Admission to trading by the Frankfurt Stock Exchange October 20, 2006. . . . . . . . . . . . . . . . . . . Close of the offer period for institutional investors at 2:00 p.m. (Central European Time) Determination of the offer price and allotment; publication of the offer price via an electronic media No earlier than one day after the expiration of the offer period. . . . . . . . Publication of the offer price in the Frankfurter Allgemeine Zeitung; publication of the allotment principles applied in the placement by way of a press release On or about October 23, 2006 . . . . . . . First day of trading On or about October 25, 2006 . . . . . . . Book-entry delivery of Shares against payment of the offer price INFORMATION ON THE SHARES Voting Rights Each Share carries one vote at the Company’s general shareholders’ meeting. See ‘‘Description of Share Capital—Voting Rights, General Shareholders’ Meeting.’’ There are no restrictions on voting rights. Our principal shareholders do not have different voting rights. Dividend Rights Following this offering, each of the Shares will be entitled to any dividends declared after October 1, 2006. The Company currently aims to make quarterly dividend distributions of a substantial portion of our FFO to the Company’s shareholders. See ‘‘Dividend Policy.’’ 38 Form and Representation of the Shares All of the Shares have been and, according to the Company’s current articles of incorporation, will be issued as registered Shares. Each of the Company’s registered Shares has a nominal value of u1.25. All of the Shares are fully paid. The Company’s current share capital in the amount of u281,250,000 is represented by one or several global registered share certificates which will be deposited with Clearstream Banking AG, Frankfurt am Main, Germany. The Shares which are the subject of the offering provide holders thereof with the same rights as any of the Company’s other shares and do not provide any rights or advantages in excess thereof. Delivery and Settlement Delivery of the Shares against payment of the offer price is expected to take place on or about October 25, 2006. The Shares will be made available to you as co-ownership interests in the respective global certificate. At your discretion, the Shares purchased in this offering will be credited to a securities deposit account maintained by a bank with Clearstream Banking AG, Neue Börsenstrasse 1, 60457 Frankfurt am Main, Germany, for your account or to the securities deposit account of a participant in Euroclear Bank S.A./N.V., 1, Boulevard Roi Albert III, B-1120 Brussels, Belgium, as operator of the Euroclear system, or Clearstream Banking S.A., L-2967 Luxembourg, Grand Duchy of Luxembourg. ISIN/German Securities Code (WKN)/Common Code/Trading Symbol International Securities Identification Number (ISIN). . . . . . . . . . . . German Securities Code (Wertpapierkennnummer) (WKN) . . . . . . . Common Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading Symbol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LU0269583422 A0LBDT 026958342 GFJ Transferability The Shares are freely transferable in accordance with the legal requirements for registered shares. Except for the restrictions set forth in ‘‘—Market Protection Agreement/Limitations on disposal (Lock-up)’’ and ‘‘Underwriting—Selling Restrictions,’’ there are no prohibitions on disposal or restrictions with respect to the transferability of the Shares. Selling Shareholders A table setting forth the shareholders who will sell Shares as part of this offering, the number of Shares held by each and the number of Shares each intends to sell as part of this offering is included under ‘‘Principal and Selling Shareholders.’’ General Allotment Criteria There are no agreements relating to the allotment method among the Selling Shareholders and the Underwriters prior to the commencement of the offer period. The Selling Shareholders and the Underwriters will adhere to the Principles for the Allotment of Share Issues to Retail Investors (Grundsätze für die Zuteilung von Aktienemissionen an Privatanleger) issued on June 7, 2000, by the Exchange Commission of Experts (Börsensachverständigenkommission) of the German Federal Ministry of Finance (Bundesministerium der Finanzen). After the end of the offer period, the Selling Shareholders and the Underwriters will determine the details of the allotment method used with respect to retail investors and publish them in accordance with the Principles for the Allotment of Share Issues to Retail Investors. Preferential Allotment The Selling Shareholders may allot up to 10% of the Shares on a preferential basis to (a) Group employees in Germany and (b) certain employees and business affiliates of the Selling Shareholders and their affiliates. Any such opportunity will be provided only to such employees and business affiliates in jurisdictions where doing so can be done in accordance with applicable securities and other laws. 39 Stabilization Measures, Over-Allotments and Greenshoe Option In connection with this offering, Deutsche Bank, or the Stabilization Manager, or persons acting on its behalf will act as Stabilization Manager and may (but will be under no obligation to), to the extent permitted by applicable law, over-allot or effect transactions with a view to supporting the market price of the Shares at a level higher than that which might otherwise prevail in the open market for a limited period after the issue date. However, the Stabilization Manager is not required to enter into such transactions. Therefore, there is no guarantee that stabilization measures will be initiated at all. Such stabilizing, if commenced, may be discontinued at any time, and may only be undertaken beginning on the date on which the Shares are first listed on the official market segment (amtlicher Markt) of the Frankfurt Stock Exchange, and must be completed no later than 30 calendar days after such date, such period referred to herein as the Stabilization Period. In connection with this offering, the Stabilization Manager, or any persons acting on its behalf, may, for stabilization purposes, over-allot Shares up to a maximum of 5%, i.e., 2,137,500 Shares, of the total number of Shares comprised in the offering. For the purposes of covering short positions, the Selling Shareholders have granted the Underwriters an option, or the Greenshoe Option, pursuant to which the Stabilization Manager may require the Selling Shareholders to sell additional Shares up to an aggregate maximum of 5% of the total number of Shares comprised in the offering, at the offer price. The Greenshoe Option is exercisable in whole or in part, upon notice by the Stabilization Manager, at any time during the Stabilization Period, but only to the extent of the over-allotment. Any Shares made available pursuant to the Greenshoe Option will be issued on the same terms and conditions as the Shares being issued in the offering and will form a single class for all purposes with the other Shares. After the end of the Stabilization Period, the Stabilization Manager will publish without undue delay (unverzüglich) information in the Frankfurter Allgemeine Zeitung announcing whether or not stabilization measures were implemented, the date that stabilization measures commenced, the date of the last stabilization transaction and the price range within which stabilization transactions occurred for each date on which a stabilization measure was implemented. The Stabilization Manager will publish in the same manner, without undue delay after the end of the Stabilization period, notification of the exercise of the Greenshoe Option, the date of such exercise, as well as the number and type of Shares involved. Market Protection Agreement/Limitations on Disposal (Lock-up) The Company has agreed with the Joint Global Coordinators that it will not, without their prior written consent, such consent not to be unreasonably withheld, for a period of four months following commencement of trading in the Shares: • announce or effect a capital increase from authorized capital; • propose a resolution for a capital increase to the Company’s general shareholders’ meeting; or • directly or indirectly offer, pledge, allot, issue, sell, contract to sell, sell an option to buy, buy an option to sell, or otherwise transfer or dispose of the Shares or other securities which are convertible into or exchangeable for the Shares, or which otherwise represent the right to acquire the Shares, nor enter into or perform any transaction (including swap transactions) that transfers to a third party, in whole or in part, the economic risk of holding the Shares regardless of whether any such transaction is to be settled by delivery of the Shares, or in cash, or by other consideration. The restrictions set forth above will not apply to the issuance of shares in the Company or options thereof (i) to senior management or employees of our associated companies in connection with a future management or employee investment program and (ii) provided certain conditions are met, in connection with acquisitions or joint ventures. The Selling Shareholders have agreed with the Joint Global Coordinators that they will not, without the prior written consent of the Joint Global Coordinators, such consent not to be unreasonably withheld, for a period of four months following commencement of trading in the Shares: • directly or indirectly offer, sell, contract to sell, sell an option to buy, or buy an option to sell any shares in the Company that they hold or any other securities which are convertible into or exchangeable for shares in the Company, or otherwise assign or sell such securities; 40 • enter into any transaction (including swap transactions) that transfers to a third party, in whole or in part, the economic risk of holding the shares; • regardless of whether any such transaction is to be settled by delivery of shares, or in cash, or by other consideration; or • initiate, vote in favor of, or in any other way support a capital increase of the Company. The restrictions set forth above will not apply to a transfer of the Shares to the Selling Shareholders’ respective affiliates, provided that such affiliates agree to be bound by the preceding obligations. Such restrictions also will not prohibit any of the Selling Shareholders from pledging or otherwise providing their Shares as security for indebtedness and will not prevent any person or entity benefiting from such pledge or security from selling, distributing, transferring or otherwise disposing of such Shares in exercising its rights with respect to such pledge or security. Admission to the Frankfurt Stock Exchange and Commencement of Trading We expect to file on or about October 11, 2006 for admission of the Company’s entire share capital, consisting of 225,000,000 Shares, to trading on the Official Market Segment (amtlicher Markt) and to the sub-segment thereof with additional obligations arising from admission (Prime Standard) of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) under the symbol GFJ. We expect that the Company’s entire share capital will be admitted to trading on the Frankfurt Stock Exchange on or about October 19, 2006. We expect that trading in the Shares on the Frankfurt Stock Exchange will commence on or about October 23, 2006. Designated Sponsors Deutsche Bank and Goldman Sachs each assume the function of a designated sponsor of the Shares traded on the Frankfurt Stock Exchange with Deutsche Bank and Goldman Sachs each being entitled to designate an appropriately admitted third party to perform its functions. Pursuant to the designated sponsor agreement among Deutsche Bank, Goldman Sachs and the Company, Deutsche Bank and Goldman Sachs will, inter alia, place limited buy and sell orders for the Shares in the electronic trading system of the Frankfurt Stock Exchange during daily trading times. The designated sponsors are expected thereby to improve liquidity of the market for the Shares. This prospectus will be posted by the CSSF on the website of the Luxembourg Stock Exchange. In addition, this prospectus will be available from the Company and the Underwriters at no charge during regular business hours. 41 USE OF PROCEEDS The Company will not receive any proceeds from the offering. The Selling Shareholders will receive all proceeds from the offering and will pay all fees and commissions in connection with the offering. Assuming an offer price at the mid-point of the price range, the gross proceeds to the Selling Shareholders from the sale of 42,750,000 Shares (or 44,887,500 Shares if the Greenshoe Option is exercised in full) pursuant to this offering would amount to u769,500,000 (or u807,975,000 if the Greenshoe Option is exercised in full). The Selling Shareholders estimate that the costs of the offering to be borne by them, based on an offer price at the mid-point of the price range, would amount to u19,237,500 (or u20,199,375 if the Greenshoe Option is exercised in full), which includes fees and commissions, including the incentive fee (see ‘‘Underwriting — Commissions’’), to be paid by them to the Underwriters. Based on these assumptions, the Selling Shareholders estimate that the net proceeds to be received by them would amount to u750,262,500 (or u787,775,625 if the Greenshoe Option is exercised in full). The Company will bear certain costs incurred in connection with this offering other than the fees and commissions paid to the Underwriters. The Company estimates that its total costs will be between approximately u8,000,000 and approximately u10,000,000. 42 DIVIDEND POLICY Subject to applicable law, all Shares are entitled to participate equally in dividends when, as and if declared by the shareholders at the Company’s general shareholders’ meeting and/or the Board out of funds legally available for such purposes. Luxembourg law provides that claims for dividends will lapse five years after the date such dividends have been declared. The Company’s aim is to pay out a substantial portion of its funds from operations, or FFO, as a dividend to its shareholders. The Company currently intends to pay dividends quarterly to the extent permitted by law. The Company’s goal is to pay a dividend in the fourth quarter of 2006 in an annualized amount of u0.68 per Share (i.e., a single payment of u0.17 per share) and in 2007 in an annualized amount of u0.71 per Share. As of September 30, 2006, the Company had approximately u1.5 billion in Share premium available in accordance with Luxembourg law from which to declare dividends. These dividend targets are based on a number of assumptions and should not be regarded as profits or earnings forecasts. There can be no assurance that we will be able to achieve these targets. See ‘‘Risk Factors—Risks Related to the Offering and the Shares—the Company may not be able to meet our dividend payment objectives.’’ For a description of the Luxembourg statutory framework within which the Company is able to declare dividends, see ‘‘Description of Share Capital—Share Capital and Shares—Dividends.’’ 43 CAPITALIZATION The following table shows the Company’s capitalization (including indebtedness) as of June 30, 2006, on a pro forma basis to give effect to the Company’s acquisition of the GAGFAH GmbH Group. The information in the following table has been derived from the Unaudited Pro Forma Consolidated Financial Information as of and for the six months ended June 30, 2006, prepared in accordance with IFRS, reproduced in the Financial Information section of this prospectus. This table should be read in conjunction with the Unaudited Pro Forma Consolidated Financial Information as of and for the six months ended June 30, 2006 and the notes thereto. See ‘‘Financial Information.’’ The pro forma total capitalization of u8,433.3 million reflected in the table below has not changed materially since June 30, 2006. In addition, as a result of the application of a portion of the proceeds from a draw-down on a long-term facility to pay previously existing loans, as of July 31, 2006 short term financial liabilities declined by approximately u388.2 million and long term financial liabilities increased by approximately u397.9 million. Pro Forma as of June 30, 2006 (unaudited) (v millions) Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324.4 Non-current liabilities Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred governmental loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,034.8 105.8 Current liabilities Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred governmental loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508.5 3.5 Shareholders’ equity Subscribed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281.3 1,603.2 494.0 77.9 Shareholders’ equity, total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,456.3 Capitalization, total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,433.3 44 SELECTED FINANCIAL INFORMATION The following tables set forth the selected unaudited pro forma financial data for our Group for the year ended December 31, 2005 and as of and for the six months ended June 30, 2006 and the historical financial data for the GAGFAH GmbH Group for the years ended December 31, 2004 and 2005 and for the six-month periods ended June 30, 2005 and 2006. The selected unaudited pro forma financial data for our Group for the year ended December 31, 2005 and as of and for the six months ended June 30, 2006 are prepared on the terms of the principles of the Institute of Public Auditors in Germany, Düsseldorf (Institut der Wirtschaftsprüfer in Deutschland e.V., Düsseldorf – IDW) for the preparation of Pro Forma Financial Information (IDW AcPS AAB 1.004 ‘‘Preparation of Pro Forma Financial Information’’). The underlying figures of the unaudited pro forma consolidated financial information are prepared in accordance with IFRS. The historical financial data for the GAGFAH GmbH Group for the years ended December 31, 2004 and 2005 and for the six-month periods ended June 30, 2005 and 2006 are prepared in accordance with IFRS and should be read in conjunction with the Unaudited Pro Forma Consolidated Financial Information and historical financial statements and related notes thereto included elsewhere in this prospectus. Our Group’s pro forma consolidated income statement data for the year ended December 31, 2005 and the six months ended June 30, 2006 and balance sheet data as of June 30, 2006 have been derived from the Unaudited Pro Forma Consolidated Financial Information included in the Financial Information section of this prospectus. The pro forma results for the year ended December 31, 2005 and the six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for a future fiscal year or semi-annual period for our Group. The pro forma income statements generally reflect the (i) historical audited results for the periods during which each acquired company was a member of our Group and (ii) pro forma adjusted results of operations for the periods prior to joining our Group. For purposes of the pro forma income statements, the actual audited historical financial figures have been adjusted to reflect the cost of acquisition financing based upon the debt in place at the time of joining our Group. Please also see our Pro Forma Consolidated Financial Information in the Financial Information section of this prospectus. Our historical Consolidated income statement data and balance sheet data as of and for the years ended December 31, 2004 and 2005 have been derived from the Audited GAGFAH GmbH Consolidated Annual Financial Statements, and as of and for the six months ended June 30, 2005 and 2006 have been derived from the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements, each included in the Financial Information section of this prospectus. The results for any annual or interim period are not necessarily indicative of the results that may be expected for a future fiscal year or six-month period for the GAGFAH GmbH Group or for our Group. Please see the Audited GAGFAH GmbH Consolidated Annual Financial Statements and the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements in the Financial Information section of this prospectus. 45 Selected Group unaudited pro forma financial data For the year For the six months ended ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma consolidated income statement data Profit from the lease of investment property . . . . . . . . . . . . . . . . . Profit/(loss) from the sale of investment property. . . . . . . . . . . . . Profit from measurement at fair value . . . . . . . . . . . . . . . . . . . . . . Other operating income and expense (net expense). . . . . . . . . . . Profit from operations before restructuring . . . . . . . . . . . . . . . . . . Restructuring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings before interest and taxes (EBIT)(1). . . . . . . . . . . . . . . . . Net financing expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations before taxes. . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . Net profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340.4 (0.2) 41.1 (73.7) 307.5 67.5 234.1 403.8 (169.7) 3.5 (173.2) (79.6) (252.8) 204.7 6.9 33.1 (26.9) 217.8 10.2 207.8 41.3 166.5 31.2 135.3 (5.9) 129.4 Pro forma other financial measures Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funds from operations (FFO)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 1.8 221.2 78.7 As of June 30, 2006 (unaudited) Pro forma consolidated balance sheet data Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 7,641.3 5,543.3 (1) Earnings before interest and taxes (EBIT) is a comprehensive measure of earnings from all sources before interest and taxes. EBIT is included in our IFRS consolidated financial statements. (2) Earnings before interest, taxes, depreciation and amortization (EBITDA) is computed as EBIT plus restructuring costs and depreciation and amortization. (3) Funds from operations (FFO) is computed as EBITDA less profit from measurement at fair value, net interest expense on third party debt, and current income tax expense. 46 Reconciliation of pro forma EBIT to pro forma EBITDA For the year For the six months ended ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Restructuring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234.1 207.8 67.5 7.1 10.2 3.2 Pro forma EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 221.2 Reconciliation of pro forma EBITDA to pro forma FFO For the six For the year ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Pro forma EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less Profit from measurement at fair value. . . . . . . . . . . . . . . . . . . . . . . . Net interest expense on third party debt. . . . . . . . . . . . . . . . . . . . . . Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 221.2 41.1 261.1 4.7 33.1 109.2 0.2 Pro forma FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 78.7 We present EBITDA and FFO because they are important supplemental measures of our operating performance used by management to measure earnings from continuing operations. EBITDA and FFO are measures of our operating performance that are not required by, nor presented in accordance with IFRS and should not be considered alternatives to other performance measures under IFRS. EBITDA and FFO have limitations as analytical tools, and should not be considered in isolation, or as substitutes for analysis of our operating results as reported under IFRS. See ‘‘EBITDA’’ and ‘‘FFO’’ in ‘‘Discussion of our Group’s Principal Unaudited Pro forma Income Statement Data and Other Financial Measures.’’ Other companies in our industry may calculate EBIT, EBITDA and FFO differently or may use them for different purposes, thereby limiting their usefulness as a comparative measure. 47 Selected GAGFAH GmbH Group Historical Financial Data For the year ended December 31, 2004 2005 (v millions) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) Consolidated income statement data Profit from the lease of investment property. . . . . . . . . . Gain/(loss) from the sale of investment property . . . . . . Profit from measurement at fair value . . . . . . . . . . . . . . . Other operating income and expense (net expense) . . . Profit from operations before restructuring . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings before interest and taxes (EBIT)(1) . . . . . . . . . Net interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/(loss) from continuing operations before taxes . . Income taxes expense/(benefit) . . . . . . . . . . . . . . . . . . . . . Profit or loss from continuing operations . . . . . . . . . . . . . Gain/(loss) from discontinued operations. . . . . . . . . . . . . Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.4 0.0 41.8 (27.1) 217.1 0.0 225.2 79.5 145.7 (0.3) 146.1 (8.1) 138.0 217.6 (0.8) 60.5 (39.0) 238.3 35.7 202.6 367.1 (164.5) (35.6) (128.9) (44.0) (172.9) 117.4 (7.2) 44.0 (27.8) 126.3 0.0 126.3 110.6 15.7 (3.9) 19.6 (42.3) (22.8) 139.9 2.9 14.2 (26.0) 131.0 10.2 120.8 91.0 29.8 0.3 29.5 0.1 29.6 Consolidated other financial measures Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) . . . . . . . . . . . . . . . . . . . . . . . Funds from operations (FFO)(3) . . . . . . . . . . . . . . . . . . . . 236.8 131.7 242.9 13.6 128.6 1.0 133.5 58.2 As of December 31, 2004 2005 (v millions) Consolidated balance sheet data Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,003.9 1,417.3 4,165.6 3,415.1 As of June 30, 2005 2006 (unaudited) (unaudited) (v millions) 4,108.8 3,418.2 4,199.2 3,439.1 (1) Earnings before interest and taxes (EBIT) is a comprehensive measure of earnings from all sources before interest and taxes. EBIT is included in the GAGFAH GmbH Group’s IFRS financial statements. (2) Earnings before interest, taxes, depreciation and amortization (EBITDA) is computed as EBIT plus restructuring expenses and depreciation and amortization. (3) Funds from operations (FFO) is computed as EBITDA less profit from measurement at fair value, net interest expense on third party debt and current income tax expense. 48 Reconciliation of EBIT to EBITDA For the year ended December 31, 2004 2005 (v millions) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 225.2 202.6 126.3 120.8 0.0 11.6 35.7 4.6 0.0 2.3 10.2 2.5 EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236.8 242.9 128.6 133.5 Reconciliation of EBITDA to FFO For the year ended December 31, 2004 2005 (v millions) EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less Profit from measurement at fair value . . . . . . . . . . . . . . . Net interest expense on third party debt . . . . . . . . . . . . . Current income tax expense/(benefit) . . . . . . . . . . . . . . . . 236.8 FFO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131.7 41.8 65.9 (2.5) For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) 242.9 128.6 133.5 60.5 168.7 0.1 44.0 83.3 0.3 14.2 60.8 0.3 13.6 1.0 58.2 The following table presents GAGFAH GmbH Group’s net cash changes for the years ended December 31, 2004 and 2005 and the six-month periods ended June 30, 2005 and 2006. For the year ended December 31, 2004 2005 (v millions) Cash flows from operating activities . . . . . . . . . . . . . . . . . Cash flows from investing activities. . . . . . . . . . . . . . . . . . Cash flows from financing activities. . . . . . . . . . . . . . . . . . Other changes to cash and cash equivalents from changes to consolidated group . . . . . . . . . . . . . . . . . . . . 125.7 (109.0) (114.2) Net change to cash and cash equivalents . . . . . . . . . . . . . Ending cash balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97.5) 152.1 49 0.0 91.9 37.7 (158.8) 15.0 (14.2) 137.8 For the six months ended June 30, 2005 2006 (unaudited) (unaudited) (v millions) 18.6 (22.7) 4.2 44.5 (2.6) (8.6) 0.0 0.0 0.1 152.2 33.3 171.1 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See ‘‘General Information—Forwardlooking Statements’’ for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with our historical and unaudited pro forma consolidated financial information and the notes related thereto and the other financial information appearing elsewhere in this prospectus, including ‘‘Capitalization,’’ ‘‘Summary—Summary Selected Financial Information’’ and ‘‘Selected Financial Information.’’ The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to, those listed under ‘‘Risk Factors’’ and included elsewhere in this prospectus. Certain industry issues also affect our results of operations and are described in ‘‘Industry’’. Please refer to ‘‘—Overview—Basis of Presentation’’ below for information on the financial information and statements that form the basis of this discussion. OVERVIEW Our Group The Company is a Luxembourg securitization company incorporated in July 2005. Through a series of acquisitions and contributions, we have acquired three leading German real estate management companies, the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group, and their respective real estate portfolios and also a smaller additional portfolio of German residential real estate assets (Acquisition 1). The Company together with its affiliates owns the GAGFAH GmbH Group, the NILEG GmbH Group, the WOBA GmbH Group and Acquisition 1, and together they are herein referred to as ‘‘we’’, ‘‘us’’, ‘‘our’’ or ‘‘our Group.’’ Our Group’s real estate operations commenced on September 30, 2004 with the acquisition of the GAGFAH GmbH Group by affiliates of the Company. As of June 30, 2006 the GAGFAH GmbH Group owned, 76,488 units and managed for third parties an additional 22,694 units. The GAGFAH GmbH Group was contributed to the Company by affiliates in September 2006. Since the acquisition of the GAGFAH GmbH Group, we have acquired an additional 74,773 German residential units through the acquisitions of the NILEG GmbH Group in August 2005 (26,229 units), Acquisition 1 in December 2005 (with the acquisition of three separate property portfolios totalling 5,259 units in 2005 and 2006) and the WOBA GmbH Group in April 2006 (43,285 units). Our core business is the acquisition, ownership and management of a geographically diversified and well maintained residential real estate portfolio in Germany. As of June 30, 2006, we owned 151,261 apartments totaling approximately 9 million m_ (approximately 97.5 million ft2). The average building age in our portfolio is 46 years, with the majority of the buildings having been constructed between 1950 and 1979. Our real estate portfolio had a pro forma carrying value of approximately u7,641.3 million as of June 30, 2006 and a total pro forma profit from rental real estate of u204.7 million for the six months ended June 30, 2006. See ‘‘Basis of Presentation’’ and ‘‘Selected Financial Information’’ for an explanation of pro forma financial data. Approximately 94% of our pro forma profits from operations for the six months ended June 30, 2006 are derived from rental income. Our portfolio is characterized by a stable tenant base with average current tenant tenure of approximately 12 years and an occupancy rate of approximately 94%. The average apartment size is 60 m_ (646 ft2) with an average rent of u285 per month. We have developed significant acquisition experience and expertise through the successful acquisition of over 150,000 residential units in both large and smaller sized portfolio transactions in Germany since September 2004. The six acquisitions to date have involved both large, highly publicized, competitive auctions (GAGFAH GmbH Group and WOBA GmbH Group) as well as in privately negotiated transactions. Besides the large-scale transactions, we have acquired over 5,000 residential units in small—to mid-sized transactions since December 2005. Our database covers over 150,000 owned residential units and approximately 25,000 units that we manage for other owners. The size and geographic diversity of the properties in our database provide us with useful market information for making accretive acquisition decisions on target properties throughout Germany. 50 We intend to use a substantial portion of our funds from operations to enable us to meet our objective of paying stable and growing quarterly dividends to the Company’s shareholders. Basis of Presentation Management’s discussion and analysis of results of operations and financial condition is based on both the pro forma results for our Group for the year ended December 31, 2005 and the six months ended June 30, 2006 as well as the historical results of operations and financial position of the GAGFAH GmbH Group for the years ended December 31, 2004 and 2005 and the six months ended June 30, 2005 and 2006. As indicated previously in ‘‘—Overview—Our Group,’’ our Group was formed through six prior acquisitions and contributions occurring at various times since September 30, 2004. There is no historical accounting period covered by historical Group financial results that includes all or nearly all of the members of our Group because of our complex acquisition history. As such, the historical Group accounts are not comparable to the financial results of our Group that can be expected to occur at the time of or after the date of the offering. To address this issue, management’s discussion and analysis includes a discussion and analysis of selected financial data from the pro forma financial results of our Group included in the Financial Information section of this prospectus for the year ended December 31, 2005 and the six months ended June 30, 2006. Our Unaudited Pro Forma Consolidated Financial Information provides the best historical reference for the combined financial results of our Group as constituted at the time of the offering. Management’s discussion and analysis also includes a discussion and analysis of the selected financial data from the historical financial results of GAGFAH GmbH Group included in the Financial Information section of this prospectus for the years ended December 31, 2004 and 2005 and the six months ended June 30, 2005 and 2006. The GAGFAH GmbH Group represents approximately 51% of our Group, based upon residential units owned pro forma as of June 30, 2006, and, based on the respective historical financial information, approximately 66% of our Group’s pro forma profit from the lease of investment property for the six months ended June 30, 2006. See ‘‘Selected Financial Information—Selected Group unaudited pro forma financial data.’’ Historical financial data from the other components of our Group for periods prior to 2005 is based upon assets and ownership that are not comparable to the assets and related operations that were acquired by us. Furthermore, historical financial data is not available for the NILEG GmbH Group, Acquisition 1 or the WOBA GmbH Group prior to 2005 in IFRS. As a result, management’s discussion and analysis includes comparative financial data for the GAGFAH GmbH Group, which is the only component of our Group for which comparable financial data exists for periods prior to 2005. In accordance with commercial accounting, some numerical figures (including percentages) in this management’s discussion and analysis have been rounded to the nearest whole number or tenth of a million (euro). As a result, figures shown as totals in some tables may not be the exact arithmetic aggregation of the rounded figures that precede them. Percentages cited in the text, however, were calculated using the actual values rather than the rounded values. Accordingly, in certain cases it is possible that the percentages in the text differ from percentages based on the rounded values. Segments Our Group We manage our business and analyze our results and performance on the basis of two business segments: real estate management and real estate sales. The real estate management segment, or Real Estate Management, comprises the management of our real estate portfolios to safeguard and grow the value of our assets. Through Real Estate Management we also manage approximately 25,000 residential units for third-party owners. The real estate sales segment, or Real Estate Sales, primarily comprises the sale of apartment units to tenants, owner-occupiers who were not tenants at the time of sale, and capital investors (collectively, privatization of apartment units), as well as other sales of residential and commercial real estate in the portfolio. Real Estate Sales was established as an independent division at the GAGFAH GmbH Group, the results of which began to be reported separately to management in October 2004. We are in the process of identifying additional properties to privatize among the assets owned by the NILEG GmbH Group. As such, the segment reporting of the financial condition and results of operations for 51 Real Estate Sales for 2004 and 2005 is a relatively minor component of the overall results and position of our Group for those years. We expect Real Estate Sales to become a more significant component of our profit in the future. For 2005 and the six months ended June 30, 2006, our pro forma earnings before interest and taxes, or EBIT, for our segments, before restructuring expenses, is as follows: Real Estate Management 2005 EBIT before restructuring expenses . . . . . . . . . . . . . . . . . . EBIT before restructuring expenses for the six months ended June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Real Estate Unallocated Sales Costs(1) (unaudited) (v millions) Group 381.4 (8.6) (65.3) 307.5 237.8 4.5 (24.5) 217.8 Unallocated costs are expenses, costs and other income of activities not allocable to segment operations, such as overhead costs and expenses at our headquarters. GAGFAH GmbH Group The GAGFAH GmbH Group manages its business in the same manner as our Group and analyzes its results and performance on the basis of the same two segments, Real Estate Management and Real Estate Sales. The GAGFAH GmbH Group manages approximately 22,700 residential units owned by third parties. For 2005 and the six months ended June 30, 2006, the GAGFAH GmbH Group’s EBIT before restructuring for each segment is as follows: Real Estate Real Estate Unallocated Management Sales Costs(1) (v millions) 2005 EBIT before restructuring expenses . . . . . . . . . . . . . . . EBIT before restructuring expenses for the six months ended June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) GAGFAH GmbH Group 278.1 (6.5) (33.3) 238.3 154.1 1.2 (24.3) 131.0 Unallocated costs are expenses, costs and other income of activities not allocable to segment operations, such as overhead costs and expense at GAGFAH GmbH Group’s headquarters. Significant Factors Affecting Our Result of Operations There are a number of factors that have in the financial years ended December 31, 2004 and 2005, and the six months ended June 30, 2006, or could in the future affect our Group’s results of operations, including the following: Economic developments in the German residential real estate market Changes to the economic conditions of the German residential real estate market influence our Real Estate Management and Real Estate Sales. As set forth in ‘‘Industry’’, the German residential real estate industry is characterized by a stable tenant base, average tenancy tenure of almost ten years (12 years in our portfolio), and low vacancy and home ownership rates, all of which cause our Real Estate Management business to be stable and predictable. In 2005 and the six months ended June 30, 2006, real estate market conditions have been very stable, with little change in overall market levels of rents, housing prices and housing stock. (See ‘‘Industry.’’) As a result, we do not believe that our results of operations have been materially affected by economic conditions since 2005. Changes to the market value of German real estate could affect Real Estate Sales, but this segment is relatively small in comparison to Real Estate Management. Political and regulatory developments may also affect our ability to rent and manage properties in accordance with our business plans if such developments were to limit our ability to increase rents over time. Rental income Over 80% of our Group’s pro forma revenues (approximately 80% in 2005 and 83% in the six months ended June 30, 2006) is income from the leasing of investment property (rental income). The 52 most significant component of revenue, other than rental income, is income from the sale of investment property, which was approximately 15% and 12% of total revenues for 2005 and the six months ended June 30, 2006, respectively. Rental income is expected to continue to be the predominant portion of revenues in the future. Rental income is attributable to a stable tenant base with over 12 years of average tenant tenure and over 140,000 separate leases. Rental properties are geographically dispersed throughout Germany, with the largest concentrations of apartment units located in Dresden, Berlin, Hamburg, Hanover and Bielefeld. See ‘‘Business—Business Overview—Portfolio.’’ DISCUSSION OF OUR UNAUDITED PRINCIPAL PRO FORMA CONSOLIDATED INCOME STATEMENT DATA AND OTHER FINANCIAL MEASURES Profit From the Lease of Investment Property Profit from the lease of investment property represents the excess of income from the leasing of investment property over the related operating expenses for the generation of rental income. Under IFRS, our apartment units and other rental properties are classified as investment properties. Our pro forma profit from the lease of investment property is the primary component of our profit from operations. Pro forma profits from the lease of investment property is computed as follows for 2005 and the six months ended June 30, 2006: For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Income from the leasing of investment property (rents) . . . . . . . . . . . . . . . Less: Expenses for interest on hereditary building rights (ground rent). . . . . . Operating expenses for the generation of rental income . . . . . . . . . . . . . 779.5 402.5 2.5 436.6 0.8 197.0 Profit from the lease of investment property. . . . . . . . . . . . . . . . . . . . . . . . 340.4 204.7 Income from the leasing of investment property Income from the leasing of investment property represents charges to tenants in Real Estate Management, including net cold rent, income for recoverable expenses from tenants, and rent from subsidized apartments. In 2005, our pro forma income from the leasing of investment property was u779.5 million. Approximately 65% of such rental income was attributable to net cold rent. Charges to tenants for recoverable expenses represented approximately 32% of income from the leasing of investment property. Rent from subsidized apartments and other units was approximately 3% of income from the leasing of investment property. In the six months ended June 30, 2006, our pro forma income from the leasing of investment property was u402.5 million. Operating expenses for the generation of rental income Operating expenses for the generation of rental income is composed of real estate operating expenses, maintenance costs, personnel expenses for operational staff, taxes, real estate management expenses, write-offs of tenant receivables, administrative expenses, and depreciation of intangible and tangible operating assets. In 2005, our pro forma operating expenses for the generation of rental income totalled approximately u436.6 million. Real estate operating expenses are primarily the costs for water, sewer and heating and in 2005, represented approximately 49% of operating expenses for the generation of rental income. Maintenance costs, which in 2005 represent approximately 29% of operating expenses for the generation of rental income, include small repairs and improvements to enhance and maintain the value of the portfolio. Personnel costs, taxes and real estate management expenses in 2005, represented approximately 22% of operating expenses for the generation of rental income. Our apartment leases provide for the chargeback of a large portion of operating expenses for the generation of rental income to tenants, so our Group is protected from the risks of inflation and commodity pricing with respect to such costs. In the six months ended June 30, 2006, our pro forma operating expenses for the generation of rental income were u197.0 million. 53 Gain/(Loss) From the Sale of Investment Property Gain/(loss) from the sale of investment property is the excess of income from the sale of investment property (sales proceeds) over the carrying amounts of the investment property sold (with respect to gains) and the excess of carrying amounts over proceeds (with respect to losses). This is the primary income component of EBIT for Real Estate Sales. In 2005, pro forma loss from the sale of investment property was u0.2 million, while in the six months ended June 30, 2006, we had a pro forma gain from the sale of investment property of u6.9 million. The carrying amount of investment property sold is based upon fair value, as determined under IAS 40, of the applicable investment properties. See ‘‘—Profit From Measurement at Fair Value.’’ Profit From Measurement at Fair Value Profit from measurement at fair value is the net increase in the annual valuation of investment properties that our Group performs according to standards described in IAS 40, which requires investment property to be shown on the financial statements at fair value. As of December 31, 2005, our IAS 40 valuations for the investment properties indicated a net increase to the pro forma values of our investment properties of approximately u41.1 million over the values of our investment properties as of December 31, 2004. This net increase is reflected as profit in 2005 under IFRS. In the six months ended June 30, 2006, pro forma profit from measurement at fair value was u33.1 million for our Group. Our IAS 40 fair market valuation module is based on the discounted cash flow, or DCF valuation method as applied to each investment property. The DCF method is identified in IAS 40.46(c) as a permitted procedure for the determination of fair value of real estate. The DCF method calculates the value of the property as the net present value of future projected net cash flows. Our valuations of our investment properties are periodically verified by an independent third-party valuation. (See ‘‘—Critical Accounting Policies—Investment Property.’’) Other Operating Income and Expense (Net Expense) Other operating income and expense (net expense) for our Group was a pro forma net expense of u73.7 million and u26.9 million in 2005 and the six months ended June 30, 2006, respectively. Other operating income was, on a pro forma basis, u40.4 million in 2005 and u23.8 million in the six months ended June 30, 2006. In 2005 and the six months ended June 30, 2006, our Group’s pro forma other operating expenses were u114.1 million and u50.7 million, respectively. Other operating expenses include the following: For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 86.4 19.2 2.4 42.1 6.2 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114.1 50.7 54 Profit From Operations Before Restructuring Expenses Our Group’s pro forma profit from operations before restructuring expenses is the sum of the following items: For the year For the six ended months ended June December 31, 2005 30, 2006 (unaudited) (unaudited) (v millions) Profit from the lease of investment property . . . . . . Gain/(loss) from the sale of investment property . . . Profit from the measurement at fair value . . . . . . . . Other operating income and expenses (net expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit from operations before restructuring expenses . . . . . . . . . . . . . . . . 340.4 (0.2) 41.1 (73.7) 204.7 6.9 33.1 (26.9) 307.5 217.8 Restructuring Expenses Pro forma restructuring expenses relate to our Group’s continuing rationalization of costs and integration of processes as we continue to combine operations of the acquired companies and portfolios to realize efficiencies. Restructuring costs comprise consulting fees, financing costs, land register charges and severance and similar payments. In 2005, pro forma restructuring expenses were u67.5 million. In the six months ended June 30, 2006, restructuring expenses were u10.2 million. Earnings Before Interest and Taxes (EBIT) In 2005 and the six months ended June 30, 2006, our pro forma EBIT was approximately u234.1 million and u207.8 million, respectively. Net Financing Expense Net financing expense is the sum of interest expense on borrowings and the costs of refinancing of our Group’s indebtedness, reduced by interest income and the profit from the measurement at fair value of derivatives. In 2005, our Group incurred refinancing costs for debt at the GAGFAH GmbH Group and the NILEG GmbH Group. In the six months ended June 30, 2006, we incurred refinancing costs for debt at the WOBA GmbH Group. The profit from the measurement at fair value of derivatives is the mark-to-market of a portion of our interest rate swaps that are not considered to be hedges under IFRS. Our pro forma net financing expense for 2005 and the six months ended June 30, 2006 is the sum of the following items: For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Interest expense (current). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense (refinancing). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.2 143.1 114.1 13.0 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit from measurement at fair value of derivatives . . . . . . . . . . . . . . . . . . . . 411.3 7.1 0.4 127.1 4.9 80.9 Net financing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403.8 41.3 Profit/(Loss) From Continuing Operations Before Taxes In 2005, our Group’s pro forma loss from continuing operations before taxes was approximately u169.7 million, computed as EBIT of u234.1 million, reduced by net interest expense of u403.8 million. We had a pro forma profit from continuing operations before taxes of u166.5 million for the six months ended June 30, 2006. 55 Income Tax Expense Our pro forma income tax expense for continuing operations was u3.5 million in 2005 and u31.2 million in the six months ended June 30, 2006. Our current and deferred income tax expenses for the two periods were as follows: For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax (benefit)/expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (1.2) 0.2 31.0 Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 31.2 Income tax expense for discontinued operations is reflected in the loss from discontinued operations. See ‘‘—Loss From Discontinued Operations’’. Profit/(Loss) From Continuing Operations In 2005, our pro forma loss from continuing operations was u173.2 million, computed as loss from continuing operations before taxes of u169.7 million, such loss being increased by income tax expense for continuing operations of u3.5 million. We had a pro forma profit from continuing operations in the six months ended June 30, 2006 of u135.3 million. Loss From Discontinued Operations Loss from discontinued operations is the net loss after income taxes relating to our Group’s discontinued property development businesses. In 2005, we had a pro forma net loss from discontinued operations of u79.6 million. Our pro forma loss from discontinued operations in the six months ended June 30, 2006 was u5.9 million. Net Profit/(Loss) Our pro forma net profit/(loss) is computed as the sum of the profit or loss from continuing operations and the loss from discontinued operations. In 2005, we had a pro forma net loss of u252.8 million. In the six months ended June 30, 2006, we had a pro forma net profit of u129.4 million. EBITDA EBITDA is a non-IFRS financial measure that our Group’s management uses to report and assess net profitability from continuing operations. EBITDA is earnings before interest, taxes, depreciation and amortization and non-recurring items, such as restructuring expense. EBITDA provides management with a better view of earnings from continuing operations by separating the costs of non-recurring items, capitalization (interest), taxes and non-economic depreciation from operating earnings. The following is a reconciliation of pro forma EBIT to pro forma EBITDA for our Group. For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234.1 207.8 67.5 7.1 10.2 3.2 EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.7 221.2 Funds From Operations (FFO) Funds from operations, or FFO, is a non-IFRS financial measure that our Group’s management uses to report the funds generated from continuing operations. Management uses FFO as a measure 56 of our Group’s generation of funds for investment and the payment of dividends to shareholders. FFO is computed as EBITDA, reduced by the profit from measurement of the investment properties at fair value, net interest paid to third parties and current income tax expense. The following is a reconciliation of pro forma EBITDA to pro forma FFO for our Group. For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (unaudited) (v millions) EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Profit from measurement at fair value . . Net interest expense on third party debt Current income tax expense . . . . . . . . . . ........................... 308.7 221.2 ........................... ........................... ........................... 41.1 261.1 4.7 33.1 109.2 0.2 FFO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 78.7 DISCUSSION OF OUR UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA Investment Property Under IFRS, investment property is property held for the production of long-term rental income and capital appreciation. See ‘‘—Critical Accounting Policies.’’ Approximately 99.7% of our investment property is land and buildings used to generate residential and commercial rental income or gain from sale. The other 0.3% of investment property is undeveloped land held for capital appreciation. As of June 30, 2006, our pro forma carrying value of investment property was approximately u7,641.3 million. Investment property is stated at fair value, reflecting market conditions as of the dates of the respective balance sheets. We determine the fair value of our investment properties by using the discounted cash flow method. The resulting valuation is periodically substantiated by a third party appraisal. Financial Liabilities As at June 30, 2006, our pro forma financial liabilities were approximately u5,543.3 million, of which u508.5 million were current liabilities and u5,034.8 million were long-term liabilities. DISCUSSION OF THE GAGFAH GMBH GROUP’S PRINCIPAL INCOME STATEMENT DATA AND OTHER FINANCIAL MEASURES Profit From the Lease of Investment Property In 2005, the GAGFAH GmbH Group’s profits from the lease of investment property was the primary component of the GAGFAH GmbH Group’s profits from operations, being approximately 91% of the profit from operations before restructuring expenses. Profits from the lease of investment property is computed as follows in 2005 and the six months ended June 30, 2006. For the year For the six ended months ended December 31, 2005 June 30, 2006 (unaudited) (v millions) Income from the leasing of investment property (rents) . . . . . . . . . . . . . . . . . Less: Expenses for interest on hereditary building rights (ground rent) . . . . . . . . Operating expenses for the generation of rental income . . . . . . . . . . . . . . . 463.7 245.9 2.2 243.9 0.6 105.3 Profit from the lease of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . 217.6 139.9 Income from the leasing of investment property In 2005 approximately 69% of income from the leasing of investment property was attributable to ‘‘net cold rent’’. In addition to net cold rent, tenants are charged for their ratable shares of operating 57 expenses of their respective apartment buildings and consequently this amount is entirely set-off by an equivalent expense in operating expenses for the generation of rental income. Charges to tenants for operating expenses represented approximately 28% of income from the leasing of investment property in 2005. Rent from subsidized apartments and other units was approximately 3% of income from the leasing of investment property in 2005. In the six months ended June 30, 2006 approximately 60% of such rental income was attributable to net cold rent, charges to tenants for operating expenses represented 36% and rent from subsidized apartments and other units represented approximately 4%. Operating expenses for the generation of rental income Operating expenses for the generation of rental income consist of property operating expenses, maintenance costs, property management expenses, personnel costs and taxes. Property operating expenses are primarily the costs for water, sewer and heating and in 2005 and the six months ended June 30, 2006 represented approximately 50% and 69% respectively, of operating expenses for the generation of rental income. Maintenance costs, which in 2005 and the six months ended June 30, 2006 represented approximately 28% and 10% respectively, of operating expenses for the generation of rental income, include small repairs and improvements to enhance and maintain the value of the portfolio. Personnel costs, taxes and property management expenses in 2005 and the six months ended June 30, 2006 represented approximately 22% and 21% respectively of operating expenses for the generation of rental income. A large portion of these expenses are charged back to tenants as an additional component of their rents, so the GAGFAH GmbH Group is protected from the risk of inflation and commodity pricing with respect to such costs by the terms of its leases with tenants. Gain/(Loss) From the Sale of Investment Property In 2005, loss from the sale of investment property was u0.8 million. In 2005, the u0.8 million loss from the sale of investment property is made up of a u7.4 million profit generated from privatization sales of 483 units and a loss of u8.2 million from a block sale of 1,481 apartments in Berlin, Gießen, Marburg and Hanover. In the six months ended June 30, 2006, gain from the sale of investment property was u2.9 million and was entirely attributable to the privatization sales of 175 apartment units in Real Estate Sales. Profit From Measurement at Fair Value Profit from measurement at fair value is the net increase in the annual valuation of investment property that the GAGFAH GmbH Group performed according to Group standards described in IAS 40 (fair value). In 2005, the IAS 40 valuation for the investment property indicated an increase of approximately u60.5 million over the values of the investment property as of December 31, 2004. This net increase is reflected as income of the GAGFAH GmbH Group under IFRS. The GAGFAH GmbH Group’s IAS 40 fair market valuation module is based on the discounted cash flow, or ‘‘DCF’’ valuation method as applied to each investment property. The DCF method is identified in IAS 40 as a permitted procedure to determine the fair value of investment property as part of a valuation of real estate properties. The DCF method calculates the value of the property as the net present value of future projected net cash flows for investment property. The GAGFAH GmbH Group’s valuation of its investment properties is periodically verified by an independent third party valuation. In the six months ended June 30, 2006, profit from measurement at fair value was u14.2 million. Other Operating Income and Expense (Net Expense) Other operating income and expense was a net expense of u39.0 million in 2005. Other operating income for 2005 was approximately u18.4 million, being composed of earnings from other services income (u1.2 million) and other income (u17.2 million). Other operating expenses include selling expenses (u5.8 million), general and administrative expenses (u41.6 million) and other expenses not attributable to specific functional areas (u10.0 million). In 2005, other operating expenses were approximately u57.4 million, of which approximately 73% were attributable to general and administrative expenses. In the six months ended June 30, 2006, other operating income and expense was a net expense of u26.0 million, composed of u3.5 million of operating income and u29.5 million of operating expenses. 58 Profit From Operations Before Restructuring Expenses In 2005, profit from operations before restructuring expenses was computed as follows: For the year ended December 31, 2005 (v millions) Profit from the lease of investment property . . . . Gain/(loss) from the sale of investment property. Profit from the measurement at fair value . . . . . . Other income and expense (net expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit from operations before restructuring costs and investment expenses . . . . . . . . . . . . . . 217.6 (0.8) 60.5 (39.0) 238.3 In the six months ended June 30, 2006, profit from operations before restructuring expenses was u131.0 million. Restructuring Expenses Restructuring expenses of the GAGFAH GmbH Group comprise consulting fees, financing costs, land register charges, severance and similar payments. In 2005 and the six months ended June 30, 2006 consulting fees and severance costs were approximately 55% and 27% of restructuring costs, respectively. In 2005, restructuring expenses were approximately u35.7 million, and in the six months ended June 30, 2006, they were u10.2 million. Earnings Before Interest and Taxes (EBIT) In 2005, EBIT for the GAGFAH GmbH Group was approximately u202.6 million, computed as profits from operations before restructuring costs (u238.3 million) reduced by restructuring expenses (u35.7 million). EBIT was u120.8 million for the six months ended June 30, 2006. Net Financing Expense In 2005, the GAGFAH GmbH Group had net financing expense of approximately u213.4 million and refinancing costs from the retirement of prior loans and swap breakage costs of approximately u153.7 million, for combined interest expenses of u367.1 million. The u213.4 million of interest expense is composed of u168.7 million of interest on third party debt and approximately u44.7 million of interest expense on shareholder loans. In the six months ended June 30, 2006, net interest expense was approximately u91.0 million, of which approximately u60.8 million was net interest expense on third party loans and u30.2 million was interest payable on shareholder loans. Profit/(loss) from continuing operations before taxes In 2005, the loss from continuing operations before taxes was approximately u164.5 million, computed as EBIT of u202.6 million, reduced by net interest expense of u367.1 million. The GAGFAH GmbH Group had a profit from continuing operations before taxes of u29.8 million in the six months ended June 30, 2006. Income tax expense/(benefit) In 2005, the GAGFAH GmbH Group had an income tax benefit (the equivalent of negative tax expense or income) of approximately u35.6 million related to the loss from continuing operations. In the six months ended June 30, 2006, income taxes for continuing operations were a net expense of u0.3 million. Profit/(loss) from continuing operations Loss from continuing operations was approximately u128.9 million in 2005, computed as the loss from continuing operations of u164.5 million, reduced by the income tax benefit of u35.6 million. The GAGFAH GmbH Group had a profit from continuing operations of u29.5 million for the six months ended June 30, 2006. Profit/(loss) from discontinued operations Loss from discontinued operations is the net loss after income taxes from the discontinuation of the GAGFAH GmbH Group’s property development business. In 2005, the net loss from discontinued 59 operations was approximately u44.0 million. In the six months ended June 30, 2006, the GAGFAH GmbH Group had a profit from discontinued operations of u0.1 million. Net profit/(loss) In 2005, the GAGFAH GmbH Group’s net loss was u172.9 million, which is the sum of the loss from continuing operations of u128.9 million and the loss from discontinued operations of u44.0 million. The GAGFAH GmbH Group had a net profit of u29.6 million in the six months ended June 30, 2006. EBITDA EBITDA is a non-IFRS financial measure that management of the GAGFAH GmbH Group uses to report and assesses net profitability from continuing operations. EBITDA is earnings before interest, taxes, depreciation and amortization and non-recurring items, such as restructuring expense. EBITDA provides the GAGFAG GmbH Group management with a better view of earnings from continuing operations by separating the costs of non-recurring items, capitalization (interest), taxes and non-economic depreciation from operating earnings. The following is a reconciliation of the GAGFAH GmbH Group’s EBIT to EBITDA for 2005. For the year ended December 31, 2005 (v millions) EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.6 EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242.9 35.7 4.6 In the six months ended June 30, 2006, the GAGFAH GmbH Group’s EBITDA was u133.5 million. Funds From Operations (FFO) FFO is a non-IFRS financial measure that the GAGFAH GmbH Group management uses to report the funds generated from continuing operations. The GAGFAH GmbH Group management uses FFO as a measure of the GAGFAH GmbH Group’s generation of funds for investment and the payment of dividends to shareholders. FFO is computed as EBITDA, reduced by the profit from measurement of the investment properties at fair value, net interest paid to third parties and current income tax expense. The following is a reconciliation of 2005 EBITDA to FFO for the GAGFAH GmbH Group. For the year ended December 31, 2005 (v millions) EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Profit from measurement at fair value . . Net interest expense on third party debt Current income tax expense . . . . . . . . . . ....................................... 242.9 ....................................... ....................................... ....................................... 60.5 168.7 0.1 FFO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 In the six months ended June 30, 2006, the GAGFAH GmbH Group’s FFO was u58.2 million. DISCUSSION OF THE GAGFAH GMBH GROUP’S BALANCE SHEET DATA Investment Property Under IFRS, investment property is property held for the production of long-term rental income and capital appreciation. Approximately 99.7% of the GAGFAH GmbH Group’s investment property is land and buildings used to generate residential and commercial rental income or gain from sale. The remaining 0.3% of investment property is undeveloped land held for capital appreciation. 60 As at December 31, 2005, investment property was approximately u4,165.6 million. Investment property is stated at fair value, reflecting market conditions as of the dates of the respective balance sheets. The GAGFAH GmbH Group determines the fair value of its investment property by using a discounted cash flow method. The resulting valuation is periodically substantiated by a third party appraisal. (See ‘‘—Critical Accounting Policies—Investment Property.’’) The most recent third party appraisal of the GAGFAH GmbH Group’s investment property was performed in June 2006. See ‘‘Valuation Report.’’ As at June 30, 2006, the carrying value of the GAGFAH GmbH Group’s investment property was u4,199.2 million. Financial Liabilities As at December 31, 2005, the GAGFAH GmbH Group’s financial liabilities were approximately u3,415.1 million, of which u39.5 million were current liabilities and u3,375.6 million were long-term liabilities. Of the total financial liabilities of u3,415.1 million, u475.0 million were shareholder loans and the remaining u2,940.1 million of financial liabilities were due to third parties. As of December 2005, government loans related to rent-subsidized apartments were approximately 4% of the GAGFAH GmbH Group’s financial liabilities. As at June 30, 2006, the GAGFAH GmbH Group’s financial liabilities were approximately u3,439.1 million. GAGFAH GMBH GROUP COMPARATIVE FINANCIAL DATA The comparative financial data for the years ended December 31, 2004 and 2005 and for the six months ended June 30, 2005 and 2006 is derived from the Audited GAGFAH GmbH Consolidated Annual Financial Statements and the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements included in the Financial Information section of this prospectus. We commenced operations with the acquisition of the GAGFAH GmbH Group on September 30, 2004. All other German residential assets and companies of our Group were purchased on or after August 31, 2005. The only historical financial data for our Group for annual periods prior to 2005 that is available in IFRS or for comparable operations relates to the GAGFAH GmbH Group for 2004. Historical financial data for the NILEG GmbH Group, Acquisition 1 and the WOBA GmbH Group for periods prior to 2005 is based upon assets and ownership that is not comparable to the assets and related operations that were acquired by our Group. The GAGFAH GmbH Group’s comparative financial data reflects the prior performance and trend analysis for a significant portion of the operations included in our Group (51% of our Group, based upon residential units owned pro forma as of June 30, 2006, and, based on the respective historical financial data, approximately 63% of our Group’s pro forma profit from the lease of investment property for the year ended December 31, 2005 and approximately 66% of our Group’s pro forma profit from the lease of investment property for the six months ended June 30, 2006 and provides comparability without distortion from acquisitions in 2005 and 2006. See ‘‘Selected Financial Information—Selected Group unaudited pro forma financial data.’’ Further, the GAGFAH GmbH Group is the only portion of our portfolio that has been held and managed by us during the relevant prior periods. The Audited GAGFAH GmbH Consolidated Annual Financial Statements and the Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements, each set forth in the Financial Information section of this prospectus, were prepared in accordance with IFRS, as applicable at the time of the preparation of such financial statements. Comparison of the Year Ended December 31, 2005 to the Year Ended December 31, 2004 Profit from the lease of investment property In 2005, profit from the lease of investment property was approximately u217.6 million, as compared to u202.4 million in 2004, an increase of approximately 7.5%. The net increase in profit from the lease of investment property is primarily due to a u3.4 million increase in rents and a reduction of operating expenses for the generation of rental income of u11.7 million (4.6%). The increase in rental income of u3.4 million represents a 1.1% increase of the annual rental income in 2005 of u320.6 million over 2004 rental income of u317.2 million. The net increase to rental income is due to rent increases instituted during 2005 of approximately 3.3% per square meter of leasable space. The predominant part of this rent increase is due to an increased net rent of the rented units whereas the vacancy level of 3% remained relatively stable throughout 2005. 61 The average monthly net cold rent on December 31, 2005 was u5.00 per square meter, up from u4.84 per square meter on December 31, 2004. The rent increases are partially offset by a net reduction to the size of the portfolio of 881 units during 2005. As of December 31, 2005, the GAGFAH GmbH Group’s portfolio was 76,721 units, as compared to 77,602 units on December 31, 2004. The largest factor in the u11.7 million decline in operating expenses for the generation of rental income (4.6%) in 2005 as compared to 2004 was a reduction in maintenance costs of u10.4 million attributable to an optimization program to reduce maintenance expense through efficiencies and cost control. The overall decline in operating expenses for the generation of rental income in 2005 was partially offset by the costs of several other cost reduction and rent increase projects which were initiated during the second half of 2005. These projects include the restructuring of the regional and central processes in property management, such as centralization of property accounting and rent management. Other focus activities in the second half of 2005 were projects to further reduce vacancies, rent receivables and bad debts from current and former tenants. These structural changes have led to increased management efficiency that will allow the GAGFAH GmbH Group to manage future acquisitions with the current central staff, thereby reducing the incremental cost of managing additional units. While the costs for these projects were primarily incurred in 2005, we expect the full impact of the changes will be more fully realized in 2006. Other operating income and expense Other operating income and expense was a net expense of u39.0 million in 2005 and u27.1 million in 2004. Other operating income for 2005 was u18.4 million as compared to u7.0 million in 2004, an increase of u11.4 million. Approximately 80% of the u11.4 million increase in other income in 2005 (u9.2 million) relates to the sale of an investment in shares of a non-controlled subsidiary. Other operating expense was u57.4 million in 2005. In 2004, other operating expense was u34.1 million, yielding an increase to other operating expenses in 2005 of u23.3 million. The largest increases to other operating expense in 2005 was an increase of u5.6 million in selling expenses attributable to Real Estate Sales, an increase of u5.4 million in the salaries of administrative staff related to the centralization of operations, the formation of new functions, such as acquisitions, and a contribution to a non-profit organization for the benefit of delinquent tenants of u5.0 million. Profit from operations before restructuring expenses Profit from operations before restructuring expenses was u238.3 million in 2005, up 9.8% from u217.1 million in 2004. The u21.2 million increase is primarily attributable to increased profits from the lease of investment property of u15.2 million, profit from measurement at fair value of u18.7 million, offset by an increase to the net expense of other operating income and expenses of u11.9 million. Earnings before interest and taxes (EBIT) EBIT was u202.6 million in 2005, down u22.6 million from u225.2 million in 2004. The 10% decrease is due to restructuring expenses of u35.7 million incurred in 2005. The GAGFAH GmbH Group did not incur restructuring expenses in 2004. Net financing expense In 2005, net financing expense was u367.1 million. In 2004, net financing expense was u79.5 million. The u287.6 million increase in total interest expense in 2005 is composed of a u133.9 million increase in interest expense related to outstanding obligations and u153.7 million of costs related to the refinancing of substantially all of the debt in the GAGFAH GmbH Group other than debt related to subsidized apartments (the carrying amount of which was u122.3 million on December 31, 2005). As of January 1, 2005, the acquisition companies of the GAGFAH GmbH Group were merged into the GAGFAH GmbH Group, resulting in additional debt of u1,488.0 million being undertaken by the GAGFAH GmbH Group and additional interest expense on outstanding debt increasing by u133.9 million. 62 Loss from discontinued operations In 2005, loss from discontinued operations was u44.0 million, as compared to u8.1 million in 2004. The GAGFAH GmbH Group discontinued its construction activities and project and land development in 2005. The u8.1 million loss from discontinued operations in 2004 reflects the results of such activities as if such operations had been discontinued and separately reported throughout 2004. The increased loss in 2005 is primarily the result of a write-down to the values of the development properties of u35.7 million upon discontinuing such operations in 2005. The writedowns of assets related to the discontinued operations was in line with management’s expectations at the time of the acquisition of the GAGFAH GmbH Group in September 2004. Net profit/(loss) The 2005 net loss of the GAGFAH GmbH Group was u172.9 million, while the GAGFAH GmbH Group had a net profit of u138.0 million in 2004. The primary components for the u310.9 million reduction in net profit from 2004 to 2005 were u35.7 million of restructuring expenses and incremental interest expenses of u287.6 million. Comparison of the Six Months Ended June 30, 2006 to the Six Months Ended June 30, 2005 Profit from the lease of investment property In the six months ended June 30, 2006, profit from the lease of investment property was u139.9 million, as compared to u117.4 million for the six months ended June 30, 2005. The u22.5 million of additional profits (an increase of approximately 19.2%) is primarily due to a u8.3 million increase in rents and a reduction of operating expenses for the generation of rental income of u6.0 million (5.3%). The increase in rental income of u8.3 million represents a 3.6% increase of the semi-annual rental income for the respective six-month periods. The net increase to rental income is primarily due to the continuation of rent increases instituted during 2005 of approximately 3.3% per square meter of leasable space. The largest factor in the u6.0 million reduction in operating expenses for the generation of rental income 5.3% in 2005 was a reduction in maintenance costs of u8.0 million attributable to an optimization program to reduce maintenance expense through efficiencies and cost control. Gain/(loss) from the sale of investment property In the six months ended June 30, 2006, gain from the sale of investment property was u2.9 million (an increase of u10.1 million from the loss from the sale of investment property in the six months ended June 30, 2005 of u7.2 million). This was entirely attributable to the privatization sales of 174 apartment units in GAGFAH GmbH’s Real Estate Sales segment as opposed to block sales that accounted for a loss in the first six months of 2005. Other operating income and expense Other operating income and expense was a net expense of u26.0 million in the six months ended June 30, 2006 and u27.8 million in the six months ended June 30, 2005. Other operating income for the six months ended June 30, 2006 was approximately u3.5 million as compared to approximately u1.6 million in the six months ended June 30, 2005, an increase of u1.9 million. Other operating expenses were u29.5 million in the six months ended June 30, 2006. In the six months ended June 30, 2005, other operating expenses were u29.4 million, yielding an increase to other operating expenses in the six months ended June 30, 2006 of u0.1 million. Profit from operations before restructuring expenses Profit from operations before restructuring was u131.0 million for the six months ended June 30, 2006, up 3.7% from u126.3 million in the six months ended June 30, 2005. The u4.7 million increase is primarily attributable to increased profits from the lease of investment property of u16.5 million and additional gain from the sale of investment property of u10.2 million, partially offset by a decrease in income from the decrease in profit measured at fair value of u29.8 million. 63 Earnings before interest and taxes (EBIT) EBIT was u120.8 million in the six months ended June 30, 2006, down u5.5 million from u126.3 million in the six months ended June 30, 2005. The 4.4% decrease is primarily due to the u4.7 million increase in profit from operations before restructuring in the six months ended June 30, 2006, offset by u10.2 million of restructuring costs incurred in the six-month period ended June 30, 2006. The GAGFAH GmbH Group did not incur restructuring expenses in the six months ended June 30, 2005. Net interest expense In the six months ended June 30, 2006, net interest expense was approximately u91.0 million, as compared to u110.6 million in the six months ended June 30, 2005. In October 2005, almost all of the GAGFAH GmbH Group’s debt was refinanced with a net decrease in interest rates of approximately 1.8%. The net decrease of u19.6 million is due to the lower interest rates attributable to the refinancing. Profit/(loss) from discontinued operations In the six months ended June 30, 2006, the GAGFAH GmbH Group had a gain from discontinued operations of u0.1 million, as compared to a loss from discontinued operations of u42.3 million in the six months ended June 30, 2005. The GAGFAH GmbH Group discontinued its construction activities and project and land development in the six months ended June 30, 2005. The u42.3 million loss from discontinued operations in the six months ended June 30, 2005 is primarily the result of a write-down to the values of the development properties of u30.4 million upon discontinuing such operations in the six months ended June 30, 2005. Net profit/(loss) The GAGFAH GmbH Group’s net profit for the six months ended June 30, 2006 was u29.6 million, while the net loss for the six months ended June 30, 2005 was u22.8 million. The net increase in net profit of u52.4 million is primarily due to an increase in net profit from the lease of investment property of u22.5 million, additional gain from the sale of investment property of u10.2 million, and reduced interest expenses of u19.6 million. LIQUIDITY AND CAPITAL RESOURCES OF OUR GROUP AND THE GAGFAH GMBH GROUP Overview The short-term, operational liquidity requirements for both our Group and the GAGFAH GmbH Group arise primarily from the need to fund operating expenses and capital expenditures in Real Estate Management and selling expenses, debt service costs and capital expenditures in preparation for sale in Real Estate Sales. To date, our Group and the GAGFAH GmbH Group have met their respective operational liquidity requirements through cash flow generated from operations. Our Group and the GAGFAH GmbH Group have stable and predictable monthly cash inflows. The large number of leases (over 140,000 and 70,000 for our Group and the GAGFAH GmbH Group, respectively) with a highly stable tenant base (average tenure of 12 years) creates stability and predictability. Apartment leases for both our Group and the GAGFAH GmbH Group require monthly prepayments of net cold rent and estimated operating expenses, which makes the predictable cash flows periodic and prepaid. As such, our Group and the GAGFAH GmbH Group can accurately control cash flows and meet operational liquidity requirements. Our Group and the GAGFAH GmbH Group expect to continue to meet short-term, operational liquidity requirements through cash flow generated from rental operations. Future acquisitions are expected to be undertaken primarily by our Group rather than by the GAGFAH GmbH Group. We expect to fund future acquisitions through a combination of debt and future equity offerings. 64 Cash flows for the GAGFAH GmbH Group The following table presents the GAGFAH GmbH Group’s net cash changes for the years ended December 31, 2004 and 2005 and the six month periods ended June 30, 2005 and 2006. For the years ended December 31, 2004 2005 (v millions) Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . Other changes to cash and cash equivalents from changes to consolidated group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change to cash and cash equivalents . . . . . . . . . . . . . . . . For the six months ended June 30, 2005 2006 (unaudited) (v millions) . . . 125.7 (109.0) (114.2) 91.9 37.7 (158.8) 18.6 (22.7) 4.2 44.5 (2.6) (8.6) . . 0.0 (97.5) 15.0 (14.2) 0.0 0.1 0.0 33.3 152.1 137.8 152.2 171.1 Ending cash balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Because our Group’s unaudited pro forma financial information, with the underlying figures prepared in accordance with IFRS, does not include a pro forma cash flow statement, a comparable data on cash flow for our Group for 2005 and the six months ended June 30, 2006 is not available. Cash flow from operating activities The cash flow from operating activities is primarily the net cash inflow from rental operations in Real Estate Management. In 2005, the GAGFAH GmbH Group’s cash flow from operating activities declined approximately u33.8 million, from u125.7 million in 2004 to u91.9 million in 2005. This decline is due to an increase in interest paid of u56.9 million. Cash flow from investing activities Cash flow from investing activities increased by u146.7 million in 2005 to u37.7 million. The net increase is principally due to the sale of shares in a non-controlled subsidiary (u70.0 million) in 2005, reduced cash outlays for investments in property, plant and equipment (u27.0 million), reduced payouts for new investment property (u15.9 million) and additional proceeds from the sales of property, plant and equipment of u9.7 million. Cash flow from financing activities Cash flow from financing activities declined by u44.6 million, to a net cash outflow of u158.8 million. This net cash outflow used in financing activities is almost entirely attributable to cash payments for raising new financing and to refinance the GAGFAH GmbH Group’s debts, which was u163.0 million in 2005. Investments of our Group and GAGFAH GmbH The main drivers behind our Group’s and the GAGFAH GmbH Group’s investments are acquisitions of residential units and expenditures for maintenance and modernization of our portfolio of investment properties. As stated above in ‘‘—Liquidity and Capital Resources of our Group and GAGFAH GmbH—Overview,’’ future acquisitions are expected to be undertaken primarily by our Group rather than by the GAGFAH GmbH Group. This would make most efficient use of the capital and tax structure for our Group. Maintenance and modernization expenditures mainly comprise regular maintenance measures and repair work designed to maintain or improve the quality and marketability of our investment properties. Under IFRS, these expenditures are accounted for as a portion of operating expenses for the generation of rental income. Maintenance expenditures in Real Estate Management were approximately u26.6 million in 2005 and u10.6 million in the six months ended June 30, 2006. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditure or capital resources. 65 Working Capital We believe that our Group will have sufficient working capital to meet the present requirements for the next 12 months following the date of this prospectus. Group Financing Overview We employ financial leverage to finance a portion of our investments and to enhance our returns from the investments. We have financed our property investments with long-term debt to match the long-term nature of our property investments. It is our Group’s policy to enter into long-term interest rate hedges in order to lock in our interest cost for the terms of our loans and to protect our existing investments from the risks of interest rate increases. We intend to continue this strategy with respect to future acquisitions undertaken to enhance returns to shareholders, consistent with our growth strategy. Current financing As of June 30, 2006, our Group had pro forma financial liabilities of u5,543.3 million, primarily comprised of the following long-term debt facilities. Scheduled Maturities Balance as of Interest June 30, 2006 2006 2007 2008 2009 2010+ Rate Swap Rate Margin Debt GAGFAH Term Loan . . . GAGFAH Senior Debt . . NILEG Term Loan . . . . . NILEG Senior Debt. . . . . WOBA Term Loan . . . . . WOBA Senior Debt. . . . . Acquisition 1 Senior Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,660 352 1,162 161 937 226 18 (v millions) — — 19 9 — — 1 6 — — 226 0 — 1 — 13 — 4 — 0 1 — 18 — 7 — 0 1 2,660 3.4720% 293 2.54% 1,162 Euribor 143 1.49% 937 Euribor 0 4.01% 15 1.55% Total Fixed Interest Rate 2.9735% NA NA NA 3.1925% 0.7500% NA NA 3.6782% 0.6500% NA NA NA NA 3.4720% 2.5400% 3.9425% 1.4900% 4.3282% 4.0113% 1.5500% The GAGFAH GmbH Group portfolio On October 18, 2005, and later amended on August 18, 2006, the GAGFAH GmbH Group entered into a long-term credit facility with Deutsche Bank AG, and Goldman Sachs Credit Partners L.P. as lenders, for an aggregate amount of up to u3,028.5 million to finance its portfolio of investment properties. The GAGFAH GmbH Group portfolio is financed in two parts: an 8-year term loan for u2,660 million, and a u352.0 million senior subsidized facility, primarily in connection with publicly subsidized housing. Each of these financings are secured by real estate owned by the GAGFAH GmbH Group. Quarterly interest payments are due, beginning on February 15, 2006. At June 30, 2006, the 8-year term loan was fully drawn. The loan is scheduled to be repaid in full on the maturity date of August 15, 2013 and there is no required repayment prior to such date, unless a portion of the collateral for the loan is removed from the collateral base by sale. The current interest rate on the term loan is 3.4720%. The fixed rate will be reduced to 3.32195% once mortgage security is in place for at least 95% of the properties securing the term loan. At June 30, 2006, the loans primarily in connection with publicly subsidized housing had a book value of u352 million. These loans have an attractive current weighted average interest rate of approximately 2.54%. The loans have various amortization profiles but generally require approximately 0% to 3% of the current unpaid principal balance to be repaid per annum. The NILEG GmbH Group portfolio On December 2, 2005, the NILEG GmbH Group entered into a credit facility agreement with HSH Nordbank AG and Morgan Stanley Bank International Limited as lenders. The NILEG GmbH Group portfolio is financed under two parts: (i) an existing acquisition facility for u1,187 million, and (ii) loans totaling u120 million primarily in connection with publicly subsidized housing and secured by real estate owned by the NILEG GmbH Group. At June 30, 2006, u1,162 million of the existing acquisition facility was drawn. The current interest rate on the loan is 3 month Euribor plus a margin of 75 basis points. 66 In order to eliminate the risk of interest rate fluctuations during the loan term, we have hedged the interest rate cost of the facility through an interest rate swap. The swap has a notional value of u1.100 billion and the maturity of the swap is August 31, 2013. The swap results in our Group paying fixed interest at 3.1925% plus the applicable margin. It is expected that the existing acquisition facility will be refinanced during the next six months with proceeds from a new 7-year term loan. At June 30, 2006, the loans primarily in connection with publicly subsidized housing had a book value of u120 million. These loans have an attractive current weighted average interest rate of approximately 1.49%. The loans have various amortization profiles but generally require approximately 0% to 2% of the current unpaid principal balance to be repaid per annum. The WOBA GmbH Group portfolio On April 5, 2006, the WOBA GmbH Group purchasers as initial borrowers, entered into a credit facility agreement with Lehman Brothers Europe Limited and Deutsche Bank AG with an aggregate amount of up to u1,201 million to finance the WOBA GmbH Group portfolio. The loan is secured by the real estate owned by the WOBA GmbH Group. Quarterly interest payments are due starting August 15, 2006. At June 30, 2006, u937 million of the loan had been drawn down. The loan is scheduled to be repaid in full on the maturity date of May 15, 2013, and there are no required repayments prior to maturity. The current interest rate on the term loan is 3 month Euribor plus a margin of 65 basis points. In order to eliminate the risk of interest rate fluctuations during the loan term, we have hedged the interest rate cost of the facility through an interest rate swap. The swap has a notional value of u1.201 billion and the maturity of the swap exactly matches the maturity of the term loan. The swap results in our Group paying fixed interest at 3.678% plus the applicable margin. At June 30, 2006, the loans primarily in connection with publicly subsidized housing had a book value of u226 million. These loans have an attractive current weighted average interest rate of approximately 4.01%. The loans have various amortization profiles but generally require approximately 0% to 3% of the current unpaid principal balance to be repaid per annum. The Acquisition 1 portfolio The financing of the Acquisition 1 portfolio is currently limited to loans primarily in connection with publicly subsidized housing. These loans are secured by the real estate covered by the government subsidies. At June 30, 2006, the loans had a book value of u18 million. These loans have an attractive current weighted average interest rate of approximately 1.55%. The loans have various amortization profiles but generally require approximately 0% to 3% of the current unpaid principal balance to be repaid per annum. 67 CONTRACTUAL OBLIGATIONS The following table summarizes our material contractual obligations and commitments as of June 30, 2006:(1) Payment Due by Period Total Less than 1 Year Long-Term Debt Obligations(2) . . . . . . . . . . . Operating Lease Obligations . . . . . . . . . . . . . Rental Payments . . . . . . . . . . . . . . . . . . . . . . . IT Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Contracts (cleaning, phone, copying machines). . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumption of personal liability for the redemption of loans. . . . . . . . . . . . . . . . . . . 5.5 1.0 9.9 19.0 0.0 0.7 1.6 5.5 0.0 0.3 2.0 8.7 0.0 0.0 0.4 3.5 5.5 0.0 5.9 1.4 1.1 0.5 0.4 0.2 0.0 0.2 0.0 0.0 0.0 0.2 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.7 8.3 11.4 4.1 13.0 Contractual Obligation 1-3 Years 3-5 Years (unaudited) (v millions) More than 5 Years (1) Additionally, the following obligations of our Group exist but are not quantifiable and therefore not reflected in the table above: (a) Short put to buy the remaining shares from Landeshauptstadt Dresden. (b) Refinancing costs and prepayment penalties related to WOBA group loans that were, as of June 30, 2006, expected to be refinanced pursuant to the Loan Agreement between Lehman Brothers International (Europe) and Blitz 06-652 GmbH and CM Komplemetär 05-525 GmbH & Co. KG. The loans were refinanced and the refinancing costs and prepayment penalties were paid in July 2006 in an amount of approximately u9.7 million. (c) Lease agreement between SÜDOST WOBA and Immobilien-Vermietungsgesellschaft Knappertsbusch & Co. Südost WOBA Striesen KG (Lessor), under which annual payments of u 2,735,000 are due until 2009. The amount of the annual payment however is linked to the change in interest rates. There is a short put to buy the real estate at a contractually fixed purchase price on August 30, 2029. (d) Contracts relating to the maintenance of real property. Due to the nature of the agreements as part of the day-to-day business, the specific amounts cannot be determined. (2) For a detailed breakdown of the Long Term Debt Obligations, see ‘‘—Liquidity and Capital Resources of our Group and the GAGFAH GmbH Group—Group Financing—Current Financing.’’ QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Investing in German residential real estate is subject to various market risks, including adverse economic changes, inflation and interest rate fluctuations. These factors could cause adverse fluctuations to rental income, operating expenses, real estate valuation and the availability and cost of acquisition properties and financing. All of these risks would be likely to affect both our Group and the GAGFAH GmbH Group in similar manners, so references to our Group in this subsection should be interpreted to being equally applicable to the GAGFAH GmbH Group. General Economic Conditions Adverse changes to international, national or local economic conditions could adversely affect our Group’s rental operations in Real Estate Management and privatizations in Real Estate Sales. All property owned by us is located in Germany, so adverse changes to the German economy and local economic conditions in Germany are particularly applicable to our Group. Adverse changes to German national and local market conditions could affect the financial conditions of tenants, buyers and sellers of German residential real estate, which could, in turn, cause reductions in rental income in Real Estate Management, the values of units to be sold in the privatization program in Real Estate Sales and the availability of acquisition properties to be acquired or financed. We do not believe that adverse changes to general economic conditions, particularly in Germany, would be expected to have as significant an effect on the net profit from rental operations in Real Estate Management as many other businesses because of the long-term stability of our Group’s tenant base and the relative inelasticity of rental demand. The privatization program in Real Estate Sales could be more adversely affected, but Real Estate Sales is a relatively small portion of our Group’s overall business. 68 Inflation Inflation generally affects our costs, but we do not believe that our results have been, or will be, materially and adversely affected by inflation. Inflation would be expected to affect both our income and expenses, so we would not expect a disproportionately negative affect on net rental operations. Further, approximately 50% of our operating expenses are chargeable to tenants, so we are partially insulated from the risks of cost increases for a material portion of its cost base. Interest Rate Fluctuations Interest rate fluctuations could adversely affect our financing costs on existing indebtedness and the cost and availability of financing for new investments. Further, interest rate fluctuations could adversely affect the level of the privatization sales in Real Estate Sales. Interest rates are highly sensitive to many factors, including international and German domestic and local economic conditions and monetary policies in Germany. Interest rates on German real estate are also affected by other factors specific to real estate markets in Germany, such as real estate values and overall liquidity in the real estate finance and equity markets. Increases in interest rates could generally subject us to the risk of losses related to earnings and cash flow derived from rental operations and privatization sales. We currently hedge our interest rate exposure and expects to maintain this policy prospectively. At present, we have fixed or hedged approximately 100 percent of our financial obligations through their respective maturities in 2013. Therefore, we have little current exposure to loss or reduced income or cash flow on existing borrowings. Increases in interest rates could adversely affect our ability to sell existing properties in Real Estate Sales because of additional financing costs to be borne by potential buyers, or could limit our ability to profitably finance new acquisitions. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that we believe are most important in portraying our financial condition and results of operations, and which require the greatest amount of subjective or complex judgments by management. The critical accounting policy used by our Group with the greatest potential to impact its results of operations is the valuation of its investment properties, which, as of June 30, 2006, accounts for approximately 88% of our total assets on our pro forma consolidated balance sheet and is subject to numerous judgments. For further detail on this, and other critical accounting policies we use, please see Note C to the Audited Consolidated Short Year Financial Statements in the Financial Information section of this prospectus. Investment property Investment property is property held for the long term to earn rentals and capital appreciation. Investment property is measured at acquisition cost plus other transaction costs, in accordance with IAS 40. Investment properties are stated at fair value upon subsequent measurement dates, such as the dates of our Group’s and the GAGFAH GmbH Group’s financial statements. Fair value reflects the market conditions as of the dates of the financial statements. Management exercises material judgment in the assessment of market conditions and the application of such conditions to our Group’s and the GAGFAH GmbH Group’s determinations of fair value of their respective investment properties. The fair values determined by our Group and the GAGFAH GmbH Group are reflected as the carrying values of their respective investment properties on their balance sheets and the change in the measured fair values are reflected on their respective income statements as profit or loss. The measurement of the fair value of the investment properties held by our Group and the GAGFAH GmbH Group is periodically verified by independent third-party valuations. Approximately 94% of the value of our Group’s investment property has been verified by third-party valuation. The third-party valuations of our Group were slightly greater than the fair values determined by management under IAS 40. Our IAS 40 fair market valuation model is based on the DCF valuation method as applied to each investment property. The DCF method is identified in IAS 40.46(c) as a permitted procedure to determine the fair value of investment property as part of a valuation of real estate properties. The DCF method calculates the value of the property as the net present value of future projected net cash flows for investment property. 69 Our IAS 40 valuation model uses market-oriented or typified (non-objective, non-enterprise-specific) figures where relevant, e.g. for capitalization rates, administrative expenses, and specific rates of cost increase. Cash flows are calculated over a detailed planning period of ten years. Net cash flows are calculated from the realizable rent less the risk relating to loss of rent, vacancy expenses, non-allocable operating expenses and administrative and maintenance costs. Depending on the market rent and the individual adjustment options, the realizable rent is adjusted to the forecasted market rent, based on the current rent level. This adjustment of rents to market results in higher growth rates in the initial years. The compound annual growth rate for rents used in our DCF valuation model for the first 3 years is approximately 2.5%. For the remainder of the 10-year planning period, the compound annual growth rate assumption is approximately 1.2%. In the eleventh year, a residual value is included in the DCF calculation for each investment property. The residual value is calculated by applying a property specific capitalization rate to the projected net cash flow for such property in the eleventh year. Projected net cash flows for each investment property (including the projected residual value) are discounted at a rate which is based on the average 10-year yield on German Federal securities and adjusted to the specific property risk, which takes into account additional uncertainties in the cash flows with respect to each property. Financial Instruments We determine on each reporting date whether there are any objective indications of the impairment of a financial asset or group of financial assets. If impairment is established, the amount of impairment is recognized as a loss. For current trade receivables and other current receivables, we assume that the carrying amount reflects a reasonable approximation of fair value. The fair value of the non-current receivables is determined using a mathematical method by discounting the future cash flows with the market interest rate, as there is no active market for these assets. CURRENT TRADING AND PROSPECTS We have performed in line with the 2006 budget during the period since June 30, 2006 and we expect this to continue during the remainder of the year. We believe that our financial and trading prospects remain favorable based on a strong pipeline of potential acquisitions and continued improvements to the management of the existing portfolio. In 2006, we have directly or indirectly purchased approximately u1.9 billion of new property and have contractual obligations to purchase approximately u80 million in additional properties. We expect to refinance the approximately u1.1 billion indebtedness of the NILEG GmbH Group on or about the date of the Offering. The refinancing will reduce the NILEG GmbH Group financing costs, although our Group will incur prepayment and other costs in 2006 in connection with the refinancing. 70 INDUSTRY INTRODUCTION With approximately 82 million inhabitants and a gross domestic product of approximately u2.25 trillion in 2005, Germany has the largest population and economy of any country in the European Union. After a two-year stagnation period, the gross domestic product of the German economy increased by 1.6% in 2004 and 0.9% in 2005 (source: German Federal Statistics Office (Statistisches Bundesamt)). Gross domestic product is forecast to grow at 1.8% in 2006 and 1.7% in 2007 (source: IFO Institut für Wirtschaftsforschung: Konjunkturprognose June 29, 2006). GERMAN RESIDENTIAL REAL ESTATE MARKET Germany has the largest residential property stock in Europe and is comprised of 39.4 million dwelling units of which 80.4% are in the western German states and western Berlin (the former West Germany), and 19.6% in the eastern German states and in eastern Berlin (the former East Germany). Approximately 22.7 million units (or 58%) are rented apartments and 16.6 million units (or 42%) are owner-occupied. Owners of rented units are comprised of private investors with 13.5 million units, municipal housing and other communal housing enterprises with a stock of approximately 3.3 million units, building co-operatives with 2.1 million units, housing enterprises with 1.7 million units, banks, insurance companies and corporates with 1.5 million units and other owners with 0.5 million units (source: Innova Research: Deutsche Wohnimmobilienmärkte—einige Schlaglichter—Initiative Immobilienaktie, October 2005; German Federal Statistics Office). The average apartment size in Germany is 86 m_ (926 ft_) (source: German Federal Statistics Office, 2004). Residential rental apartments in Germany are characterized by a stable tenant base with an average tenancy stay of almost ten years (weighted average tenancy stay of all rented apartments in Germany) and a low vacancy rate of 4.3%, partly due to the low supply of new housing (source: German Federal Statistics Office; Euroconstruct: Euroconstruct Conference, Amsterdam, June 2006). Since 2004 the residential real estate market in Germany has experienced a substantial inflow of capital from international investors for the acquisition of residential real estate. Since that time, over 550,000 residential units were sold for over u20 billion which represents only approximately 1.4% of the total housing stock in Germany. Sellers were mainly cities, municipalities and large German corporations. We expect this trend to continue as local governments monetize their property portfolios as a result of tight budget situations and German corporations continue seeking the release of tied up capital to concentrate on their core business. Development of Housing Sales and Rental Prices Since the mid-1990s residential real estate prices in Germany have decreased slightly whereas most other European countries and the US have experienced substantial increases. From 1995 to 2005 housing prices decreased by approximately 2% in Germany (source: IFS-Städtebauinstitut: Preisentwicklung für Wohneigentum in Deutschland, whereas prices increased by approximately 178% in Spain (source: Banco de Espagna), approximately 177% in the United Kingdom (source: ODPM Office of the Deputy Prime Minister), approximately 170% in the Netherlands (source: The Dutch Land Registry Office, Kadaster), approximately 113% in France (source: Insee Institut National de la Statistique et des Études Économiques, 1996-2005) and approximately 106% in the United States of America (source: OFHEO Office of Federal Housing Enterprise Oversight). Apartment rents in Germany as a national average increased only slightly from u6.00 per square meter in 1995 to u6.13 per square meter in 2005 (source: BulwienGesa AG). Under corporate and public ownership, apartment rents are often below market levels as these owners are focusing on providing low-cost housing and rents are often subject to rent restrictions. See ‘‘Legal Environment.’’ Home Ownership Rate The home ownership rate of approximately 43% in Germany (the proportion of owner-occupant households to all households) is one of the lowest in Western Europe and well below the E.U. average of 66% (source: German Federal Statistics Office; Euroconstruct). The main reason for the comparatively low level of home ownership in Germany has been the shortage of residential housing available to buy as well as the low level of rents, which made buying 71 residential property financially unattractive for occupants. In response to the housing shortage after World War II and the strong housing demand resulting from the recovery of the German economy in the 1950s and 1960s the German government and German corporations built a high proportion of subsidized or low price rental accommodation. We expect the structure of the German housing industry to change over the medium term with local governments and corporations selling more of their residential property stock and public subsidies running out. We believe that this will lead to an increase of rents to market levels and an increased investment in residential real estate by owner-occupiers. Change in Stock of Residential Housing Units in Germany Over the past ten years, the construction of units in buildings with three or more units (net of units becoming obsolete) decreased by over 90% from 275,862 units in 1994 to 20,408 units in 2004 (source: German Federal Statistics Office). The decline in the construction of new residential housing units is largely attributable to high construction costs, the scarcity of land available for construction, low risk-adjusted returns for developers and strict regulations, particularly regarding building construction. Demographic Developments Germany has been and is facing substantial demographic changes. The population has aged rapidly during the past 50 years and anticipated low birth rates and increased life expectancy will result in an older society in Germany with the country’s average age rising to 48 years of age in 2030 from 41 years of age today (source: United Nations Population Division, World Population Prospects, 2000). Although the German Federal Office for Building and Regional Planning projects (source: German Federal Office for Building and Regional Planning: Raumordnungsprognose 2020/2050 (Bundesamt für Bauwesen und Raumordnung)) that due to such demographic changes the population of Germany will decline in the very long-run, current projections do not anticipate a material decline of the German population until at least 2020. They do, however, anticipate an increase in the number of households in Germany by 1.3 million households or 3.4% between 2005 and 2020 and therefore an increase in the demand for residential units. This is mainly due to a substantial reduction of household sizes and increased living space utilized per person as well as other social factors such as increasing divorce rates and people starting families later. We expect these trends to have a positive impact on residential property rents and unit price growth. Statutory Limits on Rent Increases For residential rental agreements that are not subject to rent restrictions, German law permits the landlord to increase the rent up to local market levels. The maximum aggregate increase permitted, however, over a three-year period cannot exceed 20%. In addition, German law permits a landlord to increase the annual rent by 11% of the expenditures the landlord has incurred for renovation of the relevant apartments. A tenant, however, is entitled to terminate a lease if the landlord increases the rent. The tenant has until the end of the second month following the landlord’s notice of the rent increase to decide whether to terminate the lease. The tenant may then terminate the lease with two months prior notice. Rental agreements relating to apartments purchased with publicly subsidized financing are subject to further rent restrictions. The maximum amount of any rent increase with respect to such apartments is limited to an amount necessary to cover costs, which are calculated at the time of the construction of the apartment and then adjusted over time. The costs include administrative and maintenance costs in accordance with fixed statutory amounts and not in accordance with actual expenditures. Once the publicly subsidized financing has been repaid, the landlord has the right beginning with the following year to increase the rent up to market level in stages. 72 BUSINESS INTRODUCTION The Company is a joint stock corporation organized under the laws of the Grand Duchy of Luxembourg qualifying as a securitization company under the Luxembourg Securitization Law of March 22, 2004. Our core business is the acquisition, ownership and management of a geographically diversified and well maintained residential property portfolio throughout Germany. With a portfolio of approximately 151,000 apartments located throughout Germany, we are one of the largest privately held residential property owners and operators in Germany and the Company will become the largest listed residential property company in Germany upon completion of the offering. The Company aims to pay out a substantial portion of its FFO in the form of stable and growing quarterly dividends to its shareholders. See ‘‘Dividend Policy’’ for a description of what earnings the Company expects to retain within the Company. We believe residential real estate in Germany and in particular residential apartment buildings are a very stable asset class. This is supported in Germany by (i) a long tenancy stay of almost ten years (weighted average tenancy stay of all rented apartments in Germany), (ii) a low vacancy rate of 4.3% partly due to low supply of new housing and (iii) favorable demographic developments in the foreseeable future. We expect residential housing to continue to provide stable investment characteristics. Furthermore, we believe that the trend of cities, municipalities and large corporations selling their residential housing stock provides significant opportunities for accretive growth and we are well positioned to take advantage of this trend. We have the operational capability and capacity to efficiently integrate and operate both large and small residential property acquisitions at low marginal costs and to realize sustainable ongoing cost savings. This provides us with a significant ongoing cost advantage and allows us to acquire assets more efficiently than and to better compete against smaller or less geographically diversified investors. Given the size, breadth and efficiency of our nationwide operating platform, we believe that we are well positioned to successfully acquire, integrate and operate new residential units throughout Germany. We currently own approximately 151,000 apartments located throughout Germany with significant concentrations only in Dresden and Berlin. Approximately 94% of our pro forma profits from operations for the six months ended June 30, 2006 are derived from rental income. The portfolio is characterized by a stable tenant base with an average current tenant tenure of approximately twelve years and an occupancy rate of approximately 94% as of June 30, 2006. The average apartment size is 60m_ (646 ft_) with an average rent of u285 per month. Our residential portfolio has been formed through Fortress Investment’s initial acquisition of the GAGFAH GmbH Group in 2004, our acquisition of the NILEG GmbH Group in 2005, various portfolios totaling over 5,000 units in 2005 and 2006 and the WOBA GmbH Group in 2006, a combination which has created significant operational and financial synergy opportunities, many of which we have yet to realize. We have centralized all corporate functions for the GAGFAH GmbH and NILEG GmbH Groups and expect further cost savings and synergies from the acquisition of the WOBA GmbH Group. We maintain an efficient operational network with 32 local customer centers and approximately 430 on site caretakers throughout Germany. Each customer center services approximately 5,000 apartments and their specific responsibilities include rent collection, maintenance contracting, new leases, lease resolutions and lease renewals and other property management tasks. Our on site caretakers are responsible for maintenance, small repairs and other smaller facility management tasks. Our network of customer centers and caretakers provides us with real time information and direct knowledge of the needs and behavior of our tenants which helps our continuous efforts to retain existing and attract new tenants. Furthermore, this level of market activity provides real time in-depth knowledge of the regional residential markets in Germany. Our strategy is to organically and accretively grow our earnings and dividends by (i) the growth of income generated by our current portfolio, in particular by increasing rents to market level over time while maintaining current quality of living and tenant stability, increasing occupancy and selective modernizations to facilitate lease-up and increasing rents; (ii) profitability increase through realization of operating efficiencies with a focus on realizing cost synergies from the acquisition of the WOBA GmbH Group, by continuous review and rationalization of general and administrative costs, reducing repairs, maintenance and capital expenditure spend mainly by taking advantage of our 73 purchasing power; (iii) accretive acquisitions of smaller-sized as well as larger asset portfolios; (iv) re-investment of proceeds of selected privatizations, i.e., sales to current tenants. The Company aims to pay out a substantial portion of our FFO to meet the Company’s objective of paying out a stable and growing quarterly dividend to its shareholders. See ‘‘Dividend Policy’’ for a description of what earnings we expect to retain within the Company. Our corporate structure offers investors an opportunity to invest indirectly in the German residential real estate market in a tax efficient manner. Since the Company is incorporated in Luxembourg and qualifies as a securitization company in Luxembourg, the Company does not expect any withholding tax on distributions made by it, provided that the Company pays out all of its otherwise taxable earnings as dividends. See ‘‘Taxation—Luxembourg Taxation—Taxation of the Company’’ and ‘‘Risk Factors—Risks Related to Taxation—The Company may lose its current status as a securitization vehicle if it does not operate in a manner which will enable it to qualify as a securitization vehicle or if the European Commission were to conclude that the tax treatment which securitization vehicles receive in Luxembourg constitutes impermissible state aid.’’ Our residential portfolio generates stable and predictable cash flows and, as of September 30, 2006, the Company had approximately u1.5 billion in share premium available in accordance with Luxembourg law from which to declare dividends. As a result, the Company is targeting a dividend per Share of u0.17 for the quarter ending December 31, 2006, and u0.71 for the full year ending 2007. These dividend targets are based on a number of assumptions and should not be regarded as profits or earnings forecasts. There can be no assurance that the Company will be able to achieve these targets. See ‘‘Risk Factors—Risks Related to the Offering and the Shares—The Company may not be able to meet its dividend payment objectives.’’ We finance our Group on a long-term basis, minimizing our exposure to short term interest rate risk. With respect to our existing portfolio, the weighted average remaining term on our existing financing is 7.4 years and substantially all our interest rate risk has been hedged so that the financing costs are fixed at a weighted average rate of 3.6% per annum. Giving pro forma effect to the acquisition of all assets and companies included in the GAGFAH GmbH Group as of June 30, 2006, as if such acquisitions had occurred on January 1, 2005, our funds from operations, or FFO, amounted to u1.8 million for fiscal 2005, and u78.7 million for the six months ending June 30, 2006. For a description of how we calculate FFO, see ‘‘Summary—Summary of Consolidated Financial Information.’’ COMPETITIVE STRENGTHS We believe that the combination of our size, geographic diversity across Germany, scale of operations and reputation as a respected German trade buyer makes us a strong player in the residential real estate market in Germany and positions us well to continue to successfully acquire and integrate both small and large residential property portfolios at accretive levels. Our most significant competitive strengths are: In-depth Local Market Knowledge and Focus on German Residential Real Estate Our significant nationwide market presence through our properties located in more than 300 cities and towns throughout Germany gives us a competitive advantage over smaller or less diversified property companies, funds or investors aiming to take advantage of the trend of cities, municipalities and corporate entities selling their residential housing stock. We have developed an in-depth knowledge of regional residential markets which enables us to identify, evaluate, acquire and efficiently manage portfolios in all key markets throughout Germany. Our assets are directly managed through a streamlined operational network with six regional offices in Dresden, Essen, Berlin, Hamburg, Hanover and Frankfurt am Main. High-quality Asset Portfolio We currently own approximately 151,000 apartments totaling approximately nine million m_. The apartments are located in over 300 towns and cities across Germany, with significant concentrations in Dresden and Berlin. Our apartments have experienced substantial repairs and maintenance spend over the last years and we believe our portfolio is among the highest quality multi-family portfolios in Germany. For example, the WOBA GmbH Group spent approximately u1.2 billion in total or u25,000 per unit on property maintenance in the last ten years. Proven Track Record of Successful Acquisitions We have developed significant acquisition experience and expertise through the successful acquisition of approximately 151,000 residential units in both large as well as smaller sized portfolio 74 transactions in Germany. We believe we are perceived as a respected German trade buyer in highly politicized auctions as proven by our acquisitions of the GAGFAH GmbH and WOBA GmbH Groups. Besides these large scale transactions, we have acquired over 5,000 residential units in small to mid-sized transactions since December 2005. Our acquisition experience positions us well to continue to successfully make accretive acquisitions of reasonably priced portfolios and to integrate such new portfolios onto our platform without causing disruption to our operations. Efficient Operating Platform We have the operational capability and capacity to integrate and operate both large and small residential property acquisitions at low marginal costs and to realize sustainable ongoing cost savings. Our nationwide presence and size of our business enables us to minimize incremental general and administrative expense and provides us with cost savings in the purchasing of goods and services and cost efficiencies with respect to our corporate functions. Our significant ongoing cost advantages allow us to acquire assets more efficiently and to better compete against other smaller or less geographically diversified investors. Access to Capital Resources In acquiring assets we have a competitive advantage over investors who do not have the same access to both debt and equity capital resources as we do. Access to low-cost debt capital on a long-term and fixed rate basis is, we believe, one of the key success criteria when making asset-based investments. We have significant experience and expertise in debt financing and have structured and raised over u5 billion at competitive terms to finance our acquisitions in Germany. Access to public equity and debt markets in combination with our financing expertise should allow us to purchase a substantial amount of residential property at a very attractive cost of capital. Skilled Management Team With Extensive Experience The senior management team that operates the Company’s respective subsidiaries consists of very experienced senior managers with a broad spectrum of expertise. The Chief Executive Officer of the GAGFAH GmbH Group has served as the mayor of Oberhausen and consequently has valuable contacts with other mayors and politicians. The Chief Financial Officer of the GAGFAH GmbH Group has served in similar functions at Thiel Logistik AG Luxembourg. The Chief Operating Officer of the GAGFAH GmbH Group has extensive experience in cost optimization and process control as a result of his experience as Chief Executive Officer of Dynamit Nobel AG. STRATEGY The Company’s principle objectives are to pay out a substantial portion of its FFO in the form of quarterly dividends and to increase our earnings and dividends per share through organic and accretive growth. Key elements of our strategy to achieve these objectives include: Continue to Increase Returns From Current Portfolio We plan to continue to increase returns from our current portfolio while maintaining or improving tenant stability and their quality of accommodation. Over time we plan to continue to increase rents to market levels to the extent permitted by German law and existing rent restrictions. We believe that our portfolio is currently under-rented by 9% based on external appraisal reports. We also plan to continue to lease-up vacant units and we have established a dedicated internal brokerage team, implemented economic incentives for management and introduced advertising and marketing campaigns to drive our lease-up activities. We have been able to increase the monthly rents from residential units existing as part of the GAGFAH GmbH assets as of January 1, 2005 by 3.5% for the period from January 2005 to June 2006. With particular focus on our portfolio in Dresden (the WOBA GmbH Group portfolio), we will pursue selected modernizations of units in disrepair to facilitate their lease-up and rent increases. The partial or full refurbishment of a building includes construction measures such as the change of floor plans, the installation of a new electricity and heating system, the installation of a low energy consumption system and the construction of balconies. One example of a modernization project is the full refurbishment of our units in the Reicker Viertel in Dresden in 2005. We have invested u5.2 million and achieved an increase in average rents from u1.96 per m_ to u5.36 per m_ while simultaneously reducing vacancy from 74% to 5%. 75 Increase Profitability Through Operating Efficiencies Our size, geographic footprint and centralized corporate infrastructure should enable us to achieve significant ongoing cost savings upon the integration of new portfolios into our operational infrastructure. We intend to reduce general and administrative expenses of our Group by optimizing cost saving initiatives successfully implemented at the GAGFAH GmbH and NILEG GmbH Groups and through the replication of these cost saving initiatives at the WOBA GmbH Group and new acquisitions. In addition, we expect to achieve further cost reductions with regard to repairs, maintenance and capital expenditure by taking advantage of our purchasing power resulting from our size and centralized purchasing function and through continuous active cost management and review. We have realized significant cost savings through the integration and centralization of corporate administrative functions of the GAGFAH GmbH and NILEG GmbH Groups and various other cost saving initiatives including the outsourcing of non-core operations, such as the call center, invoice processing and claims management. We have been able to reduce the general and administrative expenses and repair and maintenance expenses in the GAGFAH GmbH Group by 35% for the period from January 1, 2005 to June 30, 2006 (annualized). Accretively Grow Our Residential Real Estate Portfolio in Germany We plan to take advantage of the trend of cities, municipalities and corporations selling their residential housing stock by targeting both smaller-sized as well as large portfolio acquisitions in Germany. We will pursue acquisitions which will be earnings accretive and our acquisition strategy will continue to focus on reasonably priced residential portfolios where we can improve cash flow and earnings through integration and realization of synergies. We have the operational capability and capacity to integrate and operate both large and small residential property acquisitions at low marginal costs and to realize sustainable ongoing cost savings. Since December 2005 we have, in addition to the acquisition of the WOBA GmbH Group, already acquired various portfolios totaling over 5,000 units for approximately u200 million. Our current goal is to acquire approximately u1.4 billion of residential real estate per year. We expect to finance our acquisitions by using cash available and, when required, the proceeds of equity issuances and long-term fixed rate debt. Add Incremental Earnings Through Reinvestment of Privatization Proceeds We will selectively sell individual apartments to current tenants and reinvest the proceeds in new apartments where deemed economically advantageous, i.e., where the privatization of units and reinvestment of the proceeds generates higher returns than holding the assets and hence increases earnings per share. However, our business plan is not predicated on selling individual apartment units and we are currently targeting to sell approximately 2,000 individual units to tenants or investors per year (i.e., only 1.3% of the current portfolio). Use Financial Leverage to Enhance Our Return-on-equity, Our Earnings Per Share and Our Funds From Operations Per Share The stability of residential real estate as an asset class together with our access to low-cost long-term fixed rate debt financing provides us with an attractive opportunity to use significant financial leverage to enhance our return-on-equity, our earnings per Share and our FFO per Share as the yield on our asset portfolio exceeds our cost of capital. We currently expect to target leverage levels for our business of up to 75% of our gross asset value, although we may choose to utilize higher leverage levels in selected circumstances as deemed appropriate by management. Our access to long-term fixed-rate financing minimizes the effects on our financing costs of short-term fluctuations in interest rates. BUSINESS OVERVIEW Portfolio We own a geographically diversified and well maintained residential property portfolio located throughout Germany. We currently own approximately 151,000 apartments totaling approximately nine million m_ or approximately 97.5 million ft_. The average building age is 46 years, with the majority built between 1950 and 1979. Our portfolio is characterized by a stable tenant base with an average current tenant tenure of approximately twelve years and an occupancy rate of approximately 94%. The average apartment size is 60m_ (646 ft_) with an average rent of u285 per month. Our residential property portfolio includes 26,088 publicly subsidized rent restricted apartments. 76 See ‘‘Legal Environment.’’ The following table gives an overview of our residential property portfolio as at June 30, 2006: % of Total In-Place Rent mo/m2 (w) CBRE Market Rent mo/m2 (w) Vacant % 281.9 127.2 91.3 17.2 54 25 18 3 5.02 4.33 4.73 4.15 5.41 4.44 5.63 4.94 2.7 13.8 4.8 7.1 517.6 100 4.75 5.17 6.2 Rental Area m2 Average Unit Size m2 In-Place Rent Annualized (w millions) 76,488 43,285 26,229 5,259 4,676,556 2,445,977 1,607,782 344,849 61 57 61 66 Total. . . . . . . . . . . . . . . . . . . . . 151,261 9,075,164 60 Group Residential Portfolio GAGFAH GmbH Group WOBA GmbH Group. . . NILEG GmbH Group . Acquisition 1 . . . . . . . . . . . . . . Units . . . . . . . . . . . . Our portfolio is located in over 300 towns and cities across Germany, with significant concentrations only in Dresden and Berlin. The following table illustrates, inter alia, the geographic spread of our residential portfolio as of June 30, 2006: Rental Area m2 Average Unit Size m2 In-Place Rent Annualized (w millions) 43,285 22,684 10,226 5,517 4,182 3,602 2,827 2,478 2,427 2,014 1,958 1,750 1,669 1,500 1,428 1,404 1,380 1,351 1,303 1,256 2,445,977 1,330,273 645,651 345,349 277,268 223,843 168,973 188,287 159,067 133,955 110,512 102,587 105,675 101,848 96,238 89,835 83,556 76,271 89,831 70,617 57 59 63 63 66 62 60 76 66 67 56 59 63 68 67 64 61 56 69 56 Subtotal Top 20 Cities . . . . . . 114,241 Other Cities . . . . . . . . . . . . . . 37,020 6,845,612 2,229,552 Total . . . . . . . . . . . . . . . . . . . . 151,261 9,075,164 Top 20 Cities Dresden . . . . Berlin . . . . . . Hamburg. . . . Hanover . . . . Bielefeld . . . . Osnabrück . . Braunschweig Cologne . . . . Essen . . . . . . Freiburg . . . . Frankfurt . . . Dusseldorf . . Iserlohn. . . . . Bonn . . . . . . . Duisburg . . . . Leverkusen . . Mannheim. . . Nuremberg . . Dortmund . . . Göttingen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Total In-Place Rent mo/m2 (w) CBRE Market Rent mo/m2 (w) Vacant % 127.2 69.9 39.2 21.5 14.0 12.7 9.9 13.6 9.8 8.8 9.1 7.9 5.5 6.6 5.0 5.7 5.4 5.1 5.0 4.2 24.6 13.5 7.6 4.2 2.7 2.5 1.9 2.6 1.9 1.7 1.8 1.5 1.1 1.3 1.0 1.1 1.0 1.0 1.0 0.8 4.33 4.38 5.06 5.20 4.20 4.74 4.89 6.02 5.13 5.45 6.86 6.41 4.36 5.41 4.29 5.29 5.38 5.55 4.64 4.93 4.44 4.39 6.44 5.92 4.75 5.51 5.41 6.96 5.95 5.37 7.19 7.00 4.45 6.37 4.83 6.07 5.52 5.87 4.81 5.15 13.8 1.7 2.2 5.6 1.8 2.8 3.2 2.4 8.8 1.3 0.6 2.7 4.7 3.5 12.1 1.2 0.9 2.6 2.0 0.8 60 60 386.0 131.6 74.6 25.4 4.70 4.92 5.07 5.49 6.7 4.6 60 517.6 100.0 4.75 5.17 6.2 Dresden is the city with the largest concentration of assets in our portfolio. We acquired these assets as part of the Company’s acquisition of the WOBA GmbH Group in April 2005. Dresden is the capital of the German state of Saxony and a major university city in eastern Germany with seven universities and 38,000 students. Since 2000, Dresden’s population has grown by 3% from 472,350 to 487,199 residents with an increase in the number of households of 9% from 242,857 households in 2000 to 264,667 households in 2005 (source: City of Dresden). Feri Research expects both population and households to continue to increase in the foreseeable future. Over the past years, Dresden has developed into a modern service and high-technology location, which is reflected in significant GDP growth over the past years. With an average GDP growth of 7.4% between 2001 and 2004, Dresden has significantly outgrown Germany, which had an average GDP growth of 0.6% during the same time period. In addition to our residential apartment portfolio, we own 1,962 commercial units which are primarily retail stores located on the ground floor of our residential apartment buildings and 25,396 parking spaces which typically belong to our residential apartment buildings. 77 Operations Our operational network is structured to operate and manage our portfolio in an efficient manner. We operate through a streamlined operational network with six regional offices in Dresden, Essen, Berlin, Hamburg, Hanover and Frankfurt am Main, 32 local customer centers and approximately 430 on site caretakers throughout Germany. Each customer center services approximately 5,000 apartments and is in close proximity to its dedicated portfolio and tenants. Responsibilities include rent collection, maintenance contracting, new leases, lease resolutions and lease renewals and other property management tasks. We estimate that, on average, our customer centers conclude approximately 17,000 new leases per year. Our on site caretakers are responsible for maintenance, small repairs and other smaller facility management tasks. Our network of customer centers and caretakers provides us with real time information and direct knowledge of the needs and behavior of our tenants which supports our continuous efforts to retain existing tenants and attract new tenants. This level of market knowledge allows us to maintain an in-depth knowledge of the regional residential markets in Germany. All our corporate functions, such as information technology, human resources, accounting, finance and purchasing, have been centralized for the GAGFAH GmbH and the NILEG GmbH Groups and we expect significant cost savings from the acquisition of the WOBA GmbH Group. HISTORY The Company was founded in Luxembourg in July 2005 and, together with its affiliates, owns the GAGFAH GmbH Group, the NILEG GmbH Group, Acquisition 1 and the WOBA GmbH Group. In September 2004, funds managed by Fortress Investment acquired the GAGFAH GmbH Group, which, as of June 30, 2006, owned 76,488 residential units, through two intermediate holding companies incorporated in the Republic of Ireland. GAGFAH GmbH was founded in 1918 and, prior to the Company’s acquisition thereof, the German Federal Insurance Agency for Employees (Bundesversicherungsanstalt für Angestellte), now part of the integrated German Social Security Insurance Authority (Deutsche Rentenversicherung), owned a majority of the shares in GAGFAH GmbH. In August 2005, the Company acquired the NILEG GmbH Group, which, as of June 30, 2006, owned 26,229 residential units. The NILEG GmbH Group’s primary assets include the residential units formerly owned by Norddeutsche Landesbank Girozentrale. In November 2005, the Company acquired the shares in Acquisition 1. Since then, the Company has acquired three separate asset portfolios which we hold through Acquisition 1. These asset portfolios comprise, as of June 30, 2006, a total of 5,259 residential units. In April 2006, the Company acquired the WOBA GmbH Group, which, as of June 30, 2006, owned 43,285 residential units. The WOBA GmbH Group’s primary assets include residential units formerly owned by the City of Dresden. Fortress Investment, through various funds it controls, sponsored the investment which formed the foundation of our Group. See ‘‘Management—Founders.’’ MATERIAL AGREEMENTS In the course of our business operations, companies within our Group regularly enter into numerous agreements. Set forth below are descriptions of certain agreements material to us. 78 Energy Services Agreements Until the present, we have managed heating and water supply, meter reading and invoicing to tenants on an individual basis with local energy service providers. In order to maximize cost efficiency, we are in the process of centralizing the supply of certain services to us by national energy services providers. As part of this process, we have entered into the following energy services agreements: • GAGFAH M Immobilienmanagement GmbH, or GAGFAH M, and a major German energy services provider entered into an agreement on June 1, 2006. Pursuant to this agreement, the energy services provider supplies and installs meters for heating and water for apartments of GAGFAH M and its affiliates, as well as other apartments GAGFAH M administrates via agency agreements (Geschäftsbesorgungsverträge) for the NILEG GmbH Group and unrelated third parties. In addition, the energy services provider carries out meter readings and invoicing for heating and water for tenants of GAGFAH M, its affiliates, the NILEG GmbH Group and the unrelated third parties. This agreement replaced a previous framework agreement between the parties dated July 12, 2005 and has a fixed initial term of ten years. The agreement is then renewed automatically for further terms of five years unless terminated by either party with six months prior written notice before the end of each term. GAGFAH M is entitled, however, to present to the service provider once every calendar year three written and binding offers from comparable providers of the contractual services and request the contractual remuneration to be modified in accordance with the alternative offer most favorable to GAGFAH M. Should the parties fail to reach agreement on such modification within one month, GAGFAH M is entitled to terminate the agreement upon two months prior written notice before the end of the respective billing period. Moreover, both parties are entitled to terminate the agreement for cause, in particular if the provider substantially failed to meet the agreed quality standards. • WOBA GmbH entered into a cooperation agreement dated September 16, 2004 with a major regional energy services provider relating to the exclusive supply of electricity, district heating energy, natural gas and tap water. On the basis of this cooperation agreement, WOBA GmbH and its subsidiaries have entered into separate agreements with the provider with respect to their individual properties. Such separate agreements provide that WOBA GmbH shall permit the provider to publish advertisements in its tenants’ journal (WOBA plus) and at its local service centers. In exchange, the provider shall grant WOBA GmbH a reimbursement of 2.5% of the previous year’s revenues. In 2005, the aggregate revenues of such agreements amounted to approximately u26 million, generating earnings of approximately u640,000 for WOBA GmbH. The exact costs and the reimbursement depend on the amount of electricity, long-distance heating energy, natural gas and tap water used on the WOBA GmbH Group’s properties. The cooperation agreement does not affect the validity of any agreement regarding the supply of electricity, heating energy, natural gas and tap water existing at the time WOBA GmbH entered into the cooperation agreement. Financing Agreements The GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group entered into three material credit agreements. • On October 18, 2005, amended on August 18, 2006, GAGFAH I Invest GmbH & Co. KG, or GAGFAH I, and GAGFAH A Asset GmbH & CO. KG, or GAGFAH A, as borrowers entered into a credit facility agreement with Deutsche Bank AG as lender in an aggregate amount of up to u3,028,500,000. The facility is divided into two parts: (i) an 8-year term loan for u2,660,000,000, and (ii) a u368,500,000 senior subsidized facility, primarily in connection with publicly subsidized housing, reduced to u367,644,929 in the August 18, 2006 amendment. Each loan may only be used to refinance the borrowers existing loan facilities aggregating u783,665,562. Each of these financings is secured by real estate. Interest payments are due starting February 2006 on every following February 15, May 15, August 15 and November 15 in each year. Additionally, the credit facility was used by GAGFAH I in order to refinance another existing facility in full in aggregate not exceeding u1,458,000,000. The borrowers utilized the credit facility as well to repay and make available certain inter-company loans, to meet any prepayment fees payable in connection with the refinancing of the above mentioned existing loan facilities secured by property security, to pay certain break costs incurred in relation to hedging existing on the date of the credit facility agreement and to pay certain general costs and expenses. At June 30, 2006, the 8-year term loan was fully drawn. 79 The aggregate amount of the loans made to GAGFAH A shall not exceed u165,000,000. Interest payments are due starting February 2006 on every following February 15, May 15, August 15 and November 15 in each year. At June 30, 2006 the loan was fully drawn. The loan shall be repaid in full on the maturity date of August 15, 2013, and there is no required repayment prior to such date, assuming the loan continues to perform. The initial interest rate on the term loan was 2.9735% plus a margin of 59 basis points. The margin has been reduced to 49.845 basis points beginning August 23, 2006 and will be reduced to 34.845 basis points once mortgage security is in place for at least 95% of the properties securing the term loan, which is expected in November 2006. At June 30, 2006, the loans primarily in connection with publicly subsidized housing had a book value of u352 million. These loans have a current weighted average interest rate of approximately 2.6%. The loans have various amortization profiles but generally require approximately 0% to 3% of the current unpaid principal balance to be repaid per annum. • On December 2, 2005, NLG Acquisition GmbH as original borrower entered into a credit facility agreement with HSH Nordbank AG and Morgan Stanley Bank International Limited as lenders. Other entities of the NILEG GmbH Group can accede to the credit facility agreement, e.g. for purposes of refinancing their existing loans or financing of construction project entities. The lenders have granted the borrower three credit facilities in the aggregate amount of u1,227,000,000 and a guarantee commitment for the amount of u16,840,884.34. Pursuant to the credit facility agreement, the borrower was allowed to utilize an amount of up to u298,000,000 for the financing of the acquisition of the NILEG GmbH Group, an amount of up to u889,000,000 to refinance existing loans of the NILEG GmbH Group and up to u40,000,000 as a construction facility for construction project entities. Following the merger of NLG Acquisition GmbH and NILEG Holding, the latter has taken over the position as the borrower under the credit agreement. At June 30, 2006, u1,162,000,000 of the existing acquisition facility was drawn. The current interest rate on the loan is 3 month Euribor plus a margin of 75 basis points. The principal repayment (amortization) of the loan amount is scheduled to begin on December 31, 2007 and to occur in steps of 0.3125% of the outstanding loan amounts every three months and the remaining outstanding loan amount on August 31, 2012. In order to eliminate the risk of interest rate fluctuations during the loan term, we have hedged the interest rate cost of the facility through an interest rate swap. The swap has a notional value of u1,100,000,000 and the maturity of the swap is August 30, 2013. The swap results in us paying fixed interest at 3.1925% plus the applicable margin. At June 30, 2006, the loans primarily in connection with publicly subsidized housing had a book value of u120 million. These loans have a current weighted average interest rate of approximately 1.7%. The loans have various amortization profiles but generally require approximately 0% to 2% of the current unpaid principal balance to be repaid per annum. In the case of early repayment of the loans, cost-based rent principles will continue to apply for a 10-year period. • On April 5, 2006, the WOBA Purchasers as initial borrowers entered into a credit facility agreement with Lehman Brothers Europe Limited and Deutsche Bank AG as lenders with an aggregate amount of up to u1,201,000,000. The credit facility enabled the WOBA Purchasers to finance the acquisition of the WOBA GmbH Group. Additionally, SÜDOST WOBA, WOBA NORDWEST, Bau und Siedlungsgesellschaft Dresden mbH and Liegenschaften Weißig GmbH are able to accede to the credit facility agreement as additional borrowers, e.g. for purposes such as refinancing of existing loan facilities as well as associated costs, accrued interest, costs incurred as a result of breaking any existing hedging arrangements and prepayment fees, if any, and general corporate purposes. The additional borrowers may draw under the credit facility up to an aggregate amount of u791,000,000. The borrowers shall repay the loans (and all other amounts outstanding) in full on May 15, 2013. At June 30, 2006, u1,153,000,000 of the facility had been drawn. Interest payments are due starting August 15, 2006 and on every February 15, May 15, August 15 and November 15 in each year thereafter. The current interest rate on the term loan is 3 month Euribor plus a margin of 65 basis points. At June 30, 2006, u1,153,000,000 of the loan had been drawn down. In order to eliminate the risk of interest rate fluctuations during the loan term, we have hedged the interest rate cost of the facility through an interest rate swap. The swap has a 80 notional value of u1,201,000,000 and the maturity of the swap exactly matches the maturity of the term loan. The swap results in us paying fixed interest at 3.678% plus the applicable margin. • On September 29, 2006, Acquisition 1, as borrower, entered into a bridge financing with Deutsche Bank AG, as lender, for an aggregate amount of u108.8 million. The bridge financing is secured by guarantees provided by the four entities that are referred to as the Fortress Residential Investment Deutschland Fund, or FRID. It is expected that the bridge financing will be refinanced within the next month, and at such time the FRID guarantees will terminate. See ‘‘Related Party Transactions—Related Party Transactions of the Company and its Affiliates—Transactions of Currently Related Parties—GAGFAH Acquisition 1 GmbH as party to related party transactions.’’ LEGAL, ADMINISTRATIVE AND SIMILAR PROCEEDINGS Set forth below is a description of material court proceedings (including any pending or threatened proceedings of which we are aware) which occurred in the twelve months prior to this offering and which may have, or have recently had, a significant effect on the financial position or results of operations of the Company or our Group. Legal Proceedings Mülheim an der Ruhr / Riege To support substantive proceedings against GAGFAH GmbH and GAGFAH M, the insolvency administrator of the construction company Riege Bauatelier Planungs- und Projektentwicklungsgesellschaft mbH, or Riege, has applied for legal aid (Prozesskostenhilfe) at the Regional Court of Essen (Landgericht Essen) regarding three construction projects in Mülheim an der Ruhr (Neue Mitte Broich, Wohnen im Dichterviertel and Wohnen am Dorf Saarn) in 2001. The Regional Court of Essen dismissed the administrator’s application. The Regional Court of Appeals of Hamm (Oberlandesgericht Hamm) confirmed the dismissal in 2005. Following this dismissal and after several professional providers of litigation funding (Prozessfinanzierer) rejected funding thereof, the insolvency administrator of Riege did not further pursue the legal proceedings against GAGFAH GmbH and GAGFAH M. With permission of the insolvency administrator, Riege filed applications for payment orders (Mahnbescheide) and filed three lawsuits against GAGFAH GmbH and GAGFAH M with the Regional Court in Essen after GAGFAH GmbH and GAGFAH M had objected. The lawsuits seek approximately u0.7 million in connection with Neue Mitte Broich (against GAGFAH M), approximately u6.4 million in connection with Wohnen im Dichterviertel and approximately u7.4 million in connection with Wohnen am Dorf Saarn (both against GAGFAH GmbH and GAGFAH M as joint debtors) for outstanding remuneration under a general contractor agreement, for additional services and for loss of profit. The lawsuits are currently pending at the Regional Court in Essen. GAGFAH GmbH and GAGFAH M believe that these claims are without merit. However, to cover any potential liability arising from this dispute, GAGFAH GmbH and GAGFAH M have allocated to reserves an amount which they have deemed sufficient to cover any potential liability arising out of this dispute. München 36 / Aidenbachhöfe Several court proceedings are pending with regard to a construction project in Munich (Bauprojekt München 36). GAGFAH M and the construction company which constructed the project buildings for GAGFAH M disagree about additional construction costs and defects of the buildings. The construction company has brought suit against GAGFAH M seeking compensation for alleged construction costs of approximately u1.55 million. Currently, expert opinions (Sachverständigengutachten) regarding the constructor’s alleged claims and GAGFAH M’s counterclaims regarding defects of the buildings are being prepared. In addition, with respect to the alleged defects of the property, the board of condominium owners (Wohnungseigentümergemeinschaft) of that project initiated two procedures of gathering evidence (selbständige Beweisverfahren) against GAGFAH M. The court set the preliminary values of the 81 claims (vorläufige Streitwerte) of these two evidence proceedings at approximately u50,000 and u3.0 million. As these procedures are of a preparatory nature and are not yet completed, the ultimate outcome of any litigation on the merits, in particular whether and to what extent ultimately a claim against GAGFAH M, if any, will be reimbursed by the construction company, cannot be predicted. Further, also with respect to the defects, GAGFAH M and the condominium owners disagree about whether the construction has been formally accepted in accordance with the German construction law (baurechtliche Abnahme). The owners have obtained a declaratory judgment (Feststellungsurteil) from the Regional Court of Munich (Landgericht München I) against GAGFAH M confirming the owners’ view that the acceptance has not occurred. GAGFAH M has entered an appeal against the decision with the Regional Court of Appeals of Munich (Oberlandesgericht München), where the case is currently pending. The Regional Court of Munich has set the value of the dispute at u1.0 million. With respect to the lack of acceptance, an additional 65 individual condominium owners have initiated proceedings against GAGFAH M at the Regional Court of Munich. The plaintiffs in these proceedings initially received from GAGFAH M guaranties (Bürgschaften) under the ordinance on brokers and property developers (Makler- und Bauträgerverordnung) as security for the portions of the purchase prices paid and returned such guaranties to GAGFAH M when acceptance was declared. The plaintiffs now claim the re-granting of such guaranties until defects of the real estate are remedied (the total value of such guarantees is approximately u20 million) and damages in total of approximately u1.5 million. One of these cases has been selected for a ‘‘pilot trial’’ and is currently pending while all other similar proceedings are dormant. Schweizer Viertel, Berlin In connection with certain real estate located in Berlin, sold by the Federal Republic of Germany in 1999, the Federal Republic of Germany claims to be entitled to contractual penalties of up to u2.14 million and/or the right to rescind various contractual arrangements due to the late completion of certain sections of the construction project. On August 23, 2004, the parties entered into an agreement to clarify and amend their contractual relationship and agreed to commence negotiations with respect to the claims alleged by the Federal Republic of Germany. The Federal Republic of Germany undertook not to pursue their claims during these negotiations. These negotiations are currently ongoing. HB Funds GAGFAH M acts as trustee of 20 closed end real estate funds, or the HB Funds. See ‘‘Risk Factors—Risks related to the company and our business—Certain of our affiliates own significant participations and have assumed liability in several closed property funds’’. The HB Funds are structured as a fractional co-ownership (Bruchteilsgemeinschaft) within the meaning of Section 741 of the German Civil Code. The administration of such funds is carried out by GAGFAH M on behalf of VHB Grundstücksverwaltungsgesellschaft ‘‘Haus- und Boden-Fonds’’ mbH, or VHB. Due to the structure of the funds’ a priority notice of conveyance (Auflassungsvormerkung) in favour of all of the funds, interest holders was entered into the land register (Grundbuch) for all relevant real estate. Three of the funds (No. 24, 34 and 36) were dissolved in 2003 because they were not able to cover their own expenses and therefore were almost illiquid. With respect to fractional co-ownerships, the German Insolvency Code (Insolvenzordnung) does not provide regulations regarding insolvency administration. Therefore, a fractional co-ownership is not able to file for insolvency. Following the proposal to sell the funds’ real estate to cover the funds’ expenses and liabilities, the funds’ interest holders resolved with an affirmative majority, but not unanimous, that GAGFAH M and VHB should try to sell the funds’ real estate. However, no third party was willing to pay a price for the funds’ real estate in an amount sufficient to cover their respective debts. As GAGFAH M as trustee of the funds had full personal liability and would have to take recourse from the funds’ interest holders pro rata, the interest holders resolved with an affirmative majority (about 94%) that GAGFAH M should purchase the funds’ assets at a price equal to its liabilities, thus eliminating any further contribution or liability obligations of the other interest holders. To enable the sale and the unencumbered conveyance of real estate, all priority notices had to be removed from the land register as a condition precedent, which required the consent of every interest holder of the funds. In case an interest holder would refuse to give its consent, or his address was 82 unknown, GAGFAH GmbH filed court proceedings to substitute such consent by court decision. Several Local Courts (Amtsgerichte) have decided in favour of GAGFAH GmbH, stating the rightfulness of GAGFAH GmbH’s procedure. However, in some cases legal proceedings are still pending. Currently, we do not foresee that the other HB Funds will become illiquid in the foreseeable future. However, should a fund become illiquid, due to the fact that the structure of the other 20 funds is similar to the structure of the dissolved funds no. 24, 34 and 36, this will incur the personal liability of GAGFAH M and, accordingly, might result in a number of court proceedings, either to claim recourse from the funds’ interest holders, or to substitute certain interest holders decisions. No other known pending or threatened litigation Our business involves the rental and sale of apartments and the construction and administration of real estate which, as a matter of course, exposes us to a certain amount of small-scale litigation (e.g., litigation against tenants over rent payments, refurbishment or modernization measures) and other legal proceedings. We believe, however, that, other than the proceedings described above, no other pending or threatened proceedings will materially affect our financial position or profitability. Administrative and Similar Proceedings Restitution claims Our portfolio, especially in Dresden, is subject to a number of restitution claims regarding assets expropriated or compulsorily sold in the time prior to the German Reunification in 1990. In the past years, although most restitution claims have been settled, the WOBA GmbH Group is currently facing a number of restitution claims. NORDWEST WOBA is currently facing 13 restitution claims regarding 151 units, and SÜDOST WOBA is subject to 23 restitution claims regarding 32 units and Liegenschaften Weißig GmbH is subject to one restitution claim regarding seven units, which are at various stages of proceeding. Additional properties of the WOBA GmbH Group may be affected by restitution or compensation claims. Regarding restitution claims for real estate and enterprises, the deadline for filing restitution claims expired on December 31, 1992, and regarding movable assets on June 30, 1993. Although these deadlines were meant to be definitive exclusion periods (Ausschlussfristen), there are some exceptions which increase legal uncertainty. For example, victims of the National Socialists (Nationalsozialisten) may under certain conditions lodge further restitution claims in the future. These proceedings are generally filed by the Jewish Claims Conference, which may claim Jewish assets without heirs. The Jewish Claims Conference is the legal successor to heirless and/or unclaimed Jewish property in the former GDR. To cover the risks regarding restitution claims, we have allocated an amount of u11.26 million to reserves. Additionally, the City of Dresden undertook the obligation to release us of any restitution claims filed by the Jewish Claims Conference and restitution claims which were not known and therefore not covered by the allocated reserves as to the date of the Company’s acquisition of the WOBA GmbH Group from the City of Dresden. See ‘‘Risk factors—Risks related to the German real estate market—If former property owners displaced between 1933 and 1990 bring property restitution and/or allocation claims, we could incur significant costs in connection with such claims.’’ EMPLOYEES As of August 31, 2006, we employed on a permanent basis, through our various subsidiaries, a total of 1,522 individuals, pro forma. As of the date of this prospectus, the number of our employees has not materially changed since August 31, 2006. 83 The following table provides, except as otherwise indicated, an overview of the average number of employees for the entities indicated for the years ended December 31, 2004 and 2005 and for the six months ended June 30, 2006: For the year ended December 31, 2004 The Company . . . . . . . . . . . . . . . . . Our Group . . . . . . . . . . . . . . . . . . . The GAGFAH GmbH Group . . . . Our Group (unaudited pro forma) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 — — 951 — — 218(1) 944 1,764 For the six months ended June 30, 2006 (unaudited) — 185(1) 879 1,480 (1) As of period end. The following table provides a breakdown, as of June 30, 2006, of full-time equivalents (FTEs) employed, pro forma, across our Group in our primary areas of activity: Area of Activity As of June 30, 2006 Caretakers . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate managers . . . . . . . . . . . . . . . . . Corporate, acquisitions, privatization . . . Development . . . . . . . . . . . . . . . . . . . . . . . . 431 577 408 64 INSURANCE We are covered by comprehensive general liability insurance and other types of insurance policies that are standard within our industry. We believe that our insurance coverage is sufficient and in line with industry practice. 84 LEGAL ENVIRONMENT GENERAL CONSTRAINTS OF GERMAN RENTAL LAW German rental law distinguishes between the rental of residential and commercial real estate. The residential rental law applicable to most of our real estate is characterized by far-reaching social protection for tenants and thus, for the most part, favors tenants. This imposes constraints on landlords, particularly with respect to terminations and rent increases. Statutory Termination Protection Generally, a landlord can give notice of termination for residential tenancies only if the landlord has a legitimate interest in the termination of the tenancy. The law presumes a legitimate interest where the tenant has breached the rental contract, the landlord requires the property for its own use (Eigenbedarfskündigung), or if without the termination of the contract an ‘‘appropriate economic use of the property’’ would be impossible (Verwertungskündigung). The landlord’s ability to terminate on the grounds of ‘‘appropriate economic use’’ is intended to promote the interest of the free economic disposition of real estate. Additionally, it requires that the landlord would suffer a substantial disadvantage through the continuation of the tenancy. The landlord’s intention to convert apartments to condominiums (Eigentumswohnungen), however, does not meet the legal requirements for termination on the ground of ‘‘appropriate economic use.’’ For a period of three years after acquiring ownership of a property, Section 577a of the German Civil Code (Bürgerliches Gesetzbuch) prevents a new landlord from terminating the lease on the grounds of own use or the appropriate economic use if the tenant had been in possession of the apartment before condominium conversion. State governments can, by regulation, extend this period up to 10 years in areas where the availability of residential real estate is considered to be insufficient. The states of North Rhine-Westphalia (six to eight years) and Hamburg (ten years), among others, have extended this period. Statutory Limits on Rent Increases For residential rental agreements not subject to rent restrictions, the landlord is able to adjust the rent up to local market rent levels. The maximum aggregate increase permitted over a three-year period cannot exceed 20%. In addition, the landlord may increase the annual rent by 11% of expenditures it has incurred for renovation of apartments that are financed without any public subsidies. Statutory Restrictions on the Sale of Residential Housing In the event of a sale of an apartment that had been converted into a condominium to a third party, German law provides the tenant a right of first refusal at the same price and terms as agreed with the third party. The right of first refusal does not apply if, at the time the tenant took possession of the premises, the apartment had already been converted to condominium status pursuant to the German Condominium Act (Gesetz über das Wohnungseigentum und das Dauerwohnrecht). Statutory Occupancy Restrictions Subsidized housing is subject to certain statutory occupancy restrictions as well as occupancy restrictions pursuant to the terms and conditions of public grants. The extent and nature of these restrictions is described in more detail under ‘‘—Restrictions Applicable to Subsidized Housing’’ below. Maintenance Obligations Under German law, a landlord has a responsibility for maintenance of the property as a whole (including the structure, the roof and the exterior of the building as well as the interior of the individual apartments in a building). Furthermore, while it is possible (subject to various limitations) to transfer the responsibility for the interior maintenance to the tenant, the landlord may not assign his responsibilities with respect to all other areas to the tenants and continues to be obliged in this regard. 85 ADDITIONAL CONSTRAINTS ON THE GAGFAH GMBH GROUP, THE NILEG GMBH GROUP AND THE WOBA GMBH GROUP Contractual Constraints Concerning the GAGFAH GmbH Group Pursuant to an agreement between GAG ACQ Beteiligungs GmbH, UC ACQ Beteiligungs GmbH, as purchasers, and GAG ACQ. Ireland Limited and UC ACQ. Ireland Limited, as their shareholders, together referred to as the GAGFAH Purchasers, and the German Federal Insurance Agency for Employees (Bundesversicherungsanstalt für Angestellte), now part of the integrated German Social Security Insurance Authority (Deutsche Rentenversicherung Bund), dated September 30, 2004, or the BfA SPA, the GAGFAH Purchasers agreed to a number of undertakings and covenants, in particular as to the legal and economic structure of the GAGFAH GmbH Group, its employees and its real estate and leases. Pursuant to an obligation of the BfA SPA, the GAGFAH Purchasers undertook to bind the GAGFAH GmbH Group entities to these undertakings and covenants. All restrictions, therefore, directly apply to the GAGFAH GmbH as well as its subsidiaries. GAGFAH GmbH has also implemented related restrictions in its articles of association. Until September 30, 2014, a sale of shares in GAGFAH GmbH, including divestitures in connection with an initial public offering of GAGFAH GmbH itself (but not an initial public offering of the indirect parent company of GAGFAH GmbH), is subject to the prior written approval of the German Federal Insurance Agency for Employees. The GAGFAH Purchasers are also subject to certain limitations on the changes they can make to the legal ownership structure of GAGFAH GmbH. The BfA SPA undertakings and covenants include the following, among other things: Contractual constraints concerning GAGFAH GmbH and the GAGFAH GmbH Group structure The GAGFAH Purchasers and the GAGFAH GmbH Group agreed to maintain the registered office of the company GAGFAH GmbH in Germany, to keep the word ‘‘GAGFAH’’ in the business name of GAGFAH GmbH and to maintain GAGFAH GmbH’s economic identity (wirtschaftliche Identität), each until September 30, 2014. The economic identity obligation means that (A) at least 66% of the employees of GAGFAH GmbH and each of its affiliates must remain employed in the real estate business or related business areas and, (B) on a consolidated basis, either (i) at least 66% of the turnover (Umsatzerlöse) is generated from the rental, lease, administration or sale of real estate or (ii) at least 66% of the fixed assets (excluding loans to affiliated companies) consist of real estate or shareholdings in real estate related companies. The GAGFAH Purchasers and the GAGFAH GmbH Group are subject to a fine of up to u500 million for any violation of this undertaking. Contractual constraints concerning the GAGFAH GmbH Group’s real estate and leases The GAGFAH Purchasers and the GAGFAH GmbH Group also agreed to comply with all applicable statutory provisions that aim to protect and are in the interest of tenants. They are subject to a penalty of u125,000 per leased apartment in the case of violation, if the tenant has incurred a damage of at least u1,000. In addition, until September 30, 2014, the GAGFAH Purchasers and the GAGFAH GmbH Group entities are prohibited from selling the assets of the local branches of GAGFAH GmbH or GAGFAH M Immobilienmanagement GmbH, or GAGFAH M, in Berlin, Essen, Frankfurt, Hamburg or Munich if doing so would make the continuing operations of such branch not economically viable for GAGFAH GmbH or GAGFAH M respectively. The penalty in the event of breach of this obligation is u150 million or 75% of the proceeds, whichever is greater. This restriction does not apply to apartments which, as of March 31, 2004, were current assets (Umlaufvermögen) of GAGFAH M, GSW Wohnbau GmbH, HaBeGe Bau- und Projektentwicklungsgesellschaft mbH, SCHWEIZER VIERTEL Grundstücks GmbH, GbR Stadtwaldplatz Essen or Dreisam Wohn- und Gewerbebau GmbH. Until September 30, 2014, when selling to third parties leased individual apartments in buildings with more than one leased apartment, or leased buildings with only one apartment, the GAGFAH Purchasers and the GAGFAH GmbH Group entities must offer the respective tenants a pre-emption right with at least four months notice at a discount of 15% of the market price (i.e., the price for the respective apartment or building free of any tenants; Leerverkaufspreis). Additionally, the GAGFAH Purchasers and the GAGFAH GmbH Group entities cannot sell to third parties individual leased apartments in buildings with more than one leased apartment unless at least 30% of the leased 86 apartments in such building have been sold to the relevant tenants, their children, spouses, partners or parents or (with respect to vacant apartments) to new owner-occupiers. Until September 30, 2009, no more than two buildings located in the same municipality may be sold or otherwise transferred to the same entity or affiliates of such entity during a period of four months. The GAGFAH Purchasers and the GAGFAH GmbH Group are subject to a fine of 200% of the proceeds from the sale of any unit made in violation of this undertaking. This restriction does not apply to apartments which as of March 31, 2004 were current assets of GAGFAH M, GSW Wohnbau GmbH, HaBeGe Bau- und Projektentwicklungsgesellschaft mbH, SCHWEIZER VIERTEL Grundstücks GmbH, GbR Stadtwaldplatz Essen or Dreisam Wohn- und Gewerbebau GmbH. As regards apartments leased as of September 30, 2004, the GAGFAH Purchasers and the GAGFAH GmbH Group entities also agreed not to seek termination on the grounds of own use or appropriate economic use until September 30, 2014, and to grant tenants over 60 years of age on September 30, 2004 the same protection with respect to the aforementioned grounds for termination for the full duration of their respective lease agreements. In accordance with the BfA SPA, the GAGFAH Purchasers and the GAGFAH GmbH Group entities in spring 2005 made a written offer to amend the lease agreements of those tenants who are to benefit from the protection described in the preceding sentence accordingly. Failure to comply with the aforementioned obligations subjects the GAGFAH Purchasers and the GAGFAH GmbH Group to a penalty of u125,000 per leased apartment. Moreover, the GAGFAH Purchasers and the GAGFAH GmbH Group must continue to comply with the restrictions under the Residential Property Restrictions Act (Wohnungsbindungsgesetz) in the event of a prepayment of loans granted to the relevant GAGFAH GmbH Group company in relation to apartments that are either publicly subsidized or co-financed by the German Federal Insurance Agency for Employees. The GAGFAH Purchasers and the GAGFAH GmbH Group are required to pay a penalty for a breach of these social obligations amounting to u125,000 per leased apartment affected by the violation. Further, they must pass on these social obligations, including the respective contractual penalty, to any purchaser of such real estate. As regards the aggregate of the apartments leased as of September 30, 2004 (taken as a portfolio), until September 30, 2009, the average annual rent increase for apartments that were under lease on September 30, 2004 is limited to 1.5 percentage points over the previous year’s increase in the consumer price index for Germany. From October 1, 2009 until September 30, 2014, the limitation is three percentage points over the previous year’s increase in the consumer price index for Germany. Rent increases resulting from modernizations or renovations remain unaffected. The GAGFAH Purchasers and the GAGFAH GmbH Group are required to pay a penalty for a breach of these social obligations in an amount of u125,000 per leased apartment affected by the violation. Further, they must pass on these social obligations, including the respective contractual penalty, to any purchaser of such real estate. In addition, for apartments that were under lease on September 30, 2004, luxury modernization is not permitted without the lessee’s approval. A luxury modernization in this context is a modernization measure within the meaning of Sections 554 and 559 of the German Civil Code that is substantially above the standard of comparable modernization measures carried out within the previous three years in other apartments of GAGFAH or a GAGFAH GmbH Group company (excluded from this definition are modernization measures to which the tenant is obliged to consent pursuant to Section 554 of the German Civil Code without giving the landlord the right to raise the rent pursuant to Section 559 of the German Civil Code). The GAGFAH Purchasers and the GAGFAH GmbH Group are required to pay a penalty for a breach of these social obligations in an amount of u125,000 per leased apartment affected by the violation. Further, they must pass on these social obligations, including the respective contractual penalty, to any purchaser of such real estate. Furthermore, until September 30, 2014 the GAGFAH Purchasers and the GAGFAH GmbH Group entities may not terminate lease agreements on the grounds of own use or on grounds of appropriate economic use of the property in case of buildings converted into condominiums. In case of the sale of a GAGFAH GmbH Group legal entity, all restrictions must be passed on to the purchaser of such entity. 87 Contractual constraints concerning the GAGFAH GmbH Group’s employees In the BfA SPA, the GAGFAH Purchasers and the GAGFAH GmbH Group agreed to certain restrictions concerning employment. With respect to employees of the GAGFAH GmbH Group, the GAGFAH Purchasers and the GAGFAH GmbH Group undertook: • that until September 30, 2014, the GAGFAH Purchasers and the GAGFAH GmbH Group entities will not terminate any employment agreements without cause (Verbot ordentlicher Kündigungen). The GAGFAH Purchasers and the GAGFAH GmbH Group are subject to a penalty of u125,000 for each violation of this undertaking; • to uphold the membership of GAGFAH M and GAGFAH Projektentwicklungs- und— steuerungsgesellschaft mbH, or GAGFAH P, in the German Employer’s Association for the Housing and Real Estate Industry (Arbeitgeberverband der Wohnungs- und Immobilienwirtschaft) through September 30, 2014; • that until September 30, 2014 GAGFAH M and GAGFAH P will not unilaterally terminate certain company pension plans; • to retain supervisory boards at GAGFAH GmbH as well as at GAGFAH M even if such supervisory boards would no longer be mandatory for those companies, it being agreed that, in such case, the constitution of such supervisory boards must still meet the essential requirements under the respective employee co-determination laws, i.e. in particular that one-third of the board members are elected by the companies’ employees (drittelparitätischer Aufsichtsrat); and • to extend the existing employee bonus programs (Erfolgsbeteiligungsprogramm). Further termination restrictions resulting from individual employment agreements, as well as from collective bargaining agreements, apply to several GAGFAH GmbH Group companies. Other undertakings under the BfA SPA The GAGFAH Purchasers also agreed to extend the social services rendered by the GAGFAH GmbH Group, in particular by establishing an advisory board which provides tenants a forum to discuss any lease issues, by hiring social workers and by further developing social programs addressed to students and pupils. They further agreed to establish a non-profit foundation (GAGFAH Stiftung Mensch und Wohnen) which they will fund with u5.0 million. Such foundation, the purpose of which is to support the cohabitation of tenants as well as to help tenants in situations of personal distress, has been incorporated by acknowledgement by the authorities on August 31, 2006. In addition, until September 30, 2014, the GAGFAH Purchasers are not permitted to sell and transfer any shares in GAGFAH GmbH or increase the stated capital of GAGFAH GmbH without prior written approval by the German Federal Insurance Agency for Employees. Furthermore, the German Federal Insurance Agency for Employees is still a shareholder in GAGFAH GmbH, holding one ‘‘golden’’ share in the nominal amount of u100. Accordingly, the German Federal Insurance Agency for Employees has additional information and approval rights reflected in the articles of association of GAGFAH GmbH. In particular, the articles of association of GAGFAH GmbH provide for a shareholder committee of three members including a German Federal Insurance Agency for Employees representative and stipulate the requirement of unanimous resolutions for the following transactions: • any sale and/or assignment of shares in GAGFAH GmbH; • any capital increases and/or measures under the German Law Regulating the Transformation of Companies (Umwandlungsgesetz), in case such transaction results in a third party (i.e., any party not being a subsidiary of GAGFAH GmbH) becoming a shareholder in GAGFAH GmbH; and • any ‘‘critical measure’’ (kritische Maßnahme) regarding the Social Charter. The GAGFAH Purchasers must inform the German Federal Insurance Agency for Employees, by the end of June each year, of all legal transactions and measures they have undertaken in the previous year that are legally or factually related to their social welfare obligations. A certified accountant must audit our report regarding our compliance with such social obligations. With respect to 2004 and 2005, the GAGFAH Purchasers provided respective audited reports to the German Federal Insurance 88 Agency for Employees. The 2004 report was approved by the German Federal Insurance Agency for Employees; the approval of the 2005 report is currently pending. In the event of a breach of an obligation under the BfA SPA which would entitle the German Federal Insurance Agency for Employees to request contractual penalty payments, the GAGFAH Purchasers agreed on a cure period to remedy the breach of three months as from the date of the breach (in case of gross negligence) or otherwise as from the date the GAGFAH Purchasers and the GAGFAH GmbH Group obtain positive knowledge of such breach. In order to secure payment of any contractual penalties the GAGFAH Purchasers granted a guarantee due and payable upon first request in the amount of u50 million and a pledge (second ranking after any collateral of financing banks) of the shares in GAGFAH GmbH limited to the amount of u150 million. To date, the German Federal Insurance Agency for Employees has not claimed any breach of any obligation under the BfA SPA, and consequently no contractual penalties have been claimed. Contractual constraints concerning GAGFAH Acquisition 1 GmbH GAGFAH Acquisition 1 GmbH, or Acquisition 1, purchased various housing portfolios as asset deals. In connection with the purchase of a portfolio of about 4,400 units located in North-Rhine Westphalia, or the LEG Portfolio, on December 22, 2005, Acquisition 1 is required to follow a ‘‘Codex for Sale Restrictions’’ (Kodex für Wohnungsverkäufe) for all lease agreements existing as of December 31, 2005. As regards the sale of individual apartments, Acquisition 1 is obligated prior to any sale to a third party to offer individual apartments to the relevant tenants subject to the condition that the purchasing tenant’s monthly expenses shall not rise above the previous rent. If the tenant decides not to buy the apartment, and it is sold to a third party, Acquisition 1 has agreed to oblige such third party to incorporate the following provision in the lease contract it enters into with the respective tenant: • the lease agreement shall not be terminated on the grounds of lessor’s own use; • a luxury modernization for the purpose of increasing the rent is not permitted; and • the tenant is granted a lifetime right of residence (lebenslanges Wohnrecht). These obligations do not expire after a prescribed period. In the case of a sale of apartment buildings, Acquisition 1 is obliged to avoid termination of lease agreements on the ground of the new owner’s own use by selling only those properties that have the required number, if any, of apartments free of tenants at the time of the sale. Moreover, if the purchaser of an apartment building terminates a lease agreement on the ground of its own use, Acquisition 1 is obliged, if possible, to offer the tenant a similar apartment in the same area. In relation to the real estate portfolio of about 750 units in Freiburg, Germany, which Acquisition 1 acquired from the City of Freiburg, in December 2005, Acquisition 1 agreed to grant protection to tenants in accordance with a Social Charter (Sozialcharta) and to oblige any subsequent purchaser to assume the same social obligations. The Social Charter contains restrictions on the termination of lease agreements, rent increases, luxury modernizations and the sale of individual apartments. These restrictions, with the exception of the prohibition of a termination of lease agreements on the grounds of own use and appropriate economic use in the case of tenants 60 years of age or older, expire on December 31, 2010. In addition, Acquisition 1 agreed to invest u4,000,000 on the Freiburg real estate portfolio within five years as from the effective date of the acquisition (December 31, 2005). Contractual Constraints Concerning the NILEG GmbH Group Contractual constraints concerning the NILEG GmbH Group’s real estate and leases The NILEG GmbH Group real estate portfolio is also subject to certain restrictions. Pursuant to an agreement with Norddeutsche Landesbank Girozentrale (NORD/LB) dated July 13 and 14, 2005, NLG Acquisition GmbH (formerly Magnet 101. V V GmbH) assumed the social obligations resulting from the acquisition of Osnabrücker Wohnungsbaugesellschaft mbH, or OWG, from the City of Osnabrück in 2002 and of two other companies, Wohnungsbau Niedersachsen GmbH, or WBN GmbH, and Wohnungsgesellschaft Norden mbH, or WGN mbH, from the German Federal Railways Fund (Bundeseisenbahnvermögen) in December 2000. NILEG Holding was merged up-stream into NLG Acquisition GmbH, which was then renamed ‘‘NILEG Holding GmbH’’ and is now subject to the aforementioned contractual constraints. 89 In addition, the purchase price to be paid under the agreement may increase in case NILEG Norddeutsche sells any of its participations in Städtische Wohnungsbau GmbH Göttingen, Wohnungsbaugesellschaft für den Landkreis Goslar, Lehrter Bau- und Wohnungsgesellschaft mbH or Wohnungsbaugesellschaft Salzgitter (including its participation in WBV Wohnbetreuungs- und Verwaltungs GmbH Salzgitter). According to an agreement of December 19, 2002, the residential units of OWG are subject to the following restrictions: (i) until December 2012 the statutory right of first refusal (Section 577 of the German Civil Code) for the respective tenant in the event of the sale of the apartment is extended to the tenant’s relatives and other members of the tenant’s household designated by the tenant; (ii) until December 2012, for lease agreements that existed as of December 19, 2002 with tenants, their spouses or domestic partners who were 65 years of age or older on the said date, the grounds for termination for ‘‘own use’’ and ‘‘appropriate economic use’’ are excluded; these tenants, their spouses or domestic partners are granted a lifelong protection against these grounds for termination; and (iii) until December 19, 2007, rent increases are limited to a maximum of 3% per year plus inflation over the previous year’s increase in the consumer price index for Germany, unless the increase reflects expenditure incurred for refurbishment or increased running costs. These obligations have to be passed on to each purchaser and subsequent owner of the apartment in question. NILEG Holding is required to pay a penalty for a breach of the social obligations set forth above in an amount determined by the City of Osnabrück. The amount of the penalty, however, is revisable by a court. Finally, the city of Osnabrück remains a minority shareholder in OWG and, therefore, has one representative in the supervisory board of OWG. NILEG Holding (formerly named NLG Acquisition GmbH) has assumed further reaching social obligations vis-à-vis the German Federal Railways Fund under the sale and purchase agreement regarding the shares of WBN GmbH and WGN mbH dated December 13, 2000 as amended on June 15 and 17, 2005 as well as under an undertaking concluded on August 24, 2006. In the course of the NILEG GmbH Group’s restructuring, the real estate of WGN mbH and WBN GmbH was transferred into two asset entities in the legal form of a German limited partnership (WGN Asset GmbH & Co. KG, or WGN Asset KG, and WBN Asset GmbH & Co. KG, or WBN Asset KG), with WBN GmbH and WGN mbH as the respective sole personal liable partner (Komplementär) of the respective Asset KG and a German limited liability company, or WGN Beteiligungs GmbH and WBN Beteiligungs GmbH as the respective sole limited partner (Kommanditist). WBN Asset KG and WGN Asset KG took over liability for the obligation from the aforementioned sale and purchase agreement. WBN GmbH and WGN mbH will continue following the principles of ‘‘operational social institutions’’ (betriebliche Sozialeinrichtungen) of the federal railways. As a result, the German Federal Railways Fund’s directing and determining influence must continue to the extent necessary to secure and enforce the social purposes of WGN mbH and WBN GmbH. Further, the German Federal Railways Fund remains a minority shareholder in WGN mbH and WBN GmbH and, therefore, has influence on the companies, in particular it reserves the right to appoint four of the eight members of the respective supervisory boards of WGN mbH and WBN GmbH and to participate in a joint committee regarding the compliance with the obligations vis-à-vis the German Federal Railways Fund. In the case of a tie in either case, a supervisory board member designated by the German Federal Railways Fund will cast the decisive vote. Certain measures require the consent of the supervisory board or the German Federal Railways Fund, including: • the conversion of apartments into condominiums; • any sale of the shares in WBN GmbH and WGN mbH, WBN Asset KG, WGN Asset KG, WBN Beteiligungs GmbH and WGN Beteiligungs GmbH; • encumbrances of real estate as collateral for loans which are not entered into in the regular course of business; the consent to issue land charges will only be granted if agreed with the creditor of the land charge that a utilization is restricted by, among other things, limiting the acquiring party’s right in a compulsory action pursuant to Section 57 of the German Forced Administration of Property and Foreclosure Act (Zwangsvollstreckungs- und Verwaltungsgesetz), and the accession of the acquiring party regarding the contractual restrictions; • the determination of the scope of maintenance measures; • any luxury refurbishments; • the sale of apartments or houses; and 90 • entering into, changing, terminating, or canceling service agreements by which the respective Asset KG acts as client and contracts third parties to provide services, especially property management and selling land. WGN mbH and WBN GmbH are obliged to permanently manage their residential portfolios as long as they act as the sole personally liable partners of the Asset KGs on the basis of the civil law contribution duties, and in the event that WGN mbH or WBN GmbH cease being shareholders, on the basis of agency agreements. A pledging of shares of WGN mbH and WBN GmbH is only allowed under the condition that a public auction is only permissible if the buyer assumes these restrictions stipulated in the Privatization Agreement. Moreover, until February 23, 2011, WBN GmbH and WGN mbH are prohibited from, inter alia, selling more than 50% of the total housing portfolio existing as at February 23, 2001. When selling leased individual apartments to third parties, WBN GmbH and WGN mbH must offer the respective tenants a pre-emption right with at least two months’ notice at a discount of 10% of the market price (the price for the apartment free of any tenant (Leerverkaufspreis)). In addition, the German Federal Railways Fund and Deutsche Bahn and their affiliates have the right to house these employees and civil servants of the federal railways, of the German Federal Railways Fund and of their respective affiliates, including retired former employees, their families and members of their household, or Privileged Persons. Apartments of WBN GmbH or WGN mbH rented as of December 13, 2000 to a Privileged Person only can be sold to such tenant or his/her close relatives provided he/she is still leasing the apartment as of the date of the sale without interruption. Any sale to third parties of apartments or houses rented to this Privileged Person is excluded unless more than half of the number of the other tenants does not belong to the privileged group. WBN GmbH and WGN mbH are prohibited from rent increases of more than 3% per year plus inflation on an annual basis until December 13, 2010 and from undertaking any luxury refurbishing of apartments without the tenant’s consent. Further, NILEG Holding, WBN GmbH and WGN mbH agreed to invest until December 13, 2010 an average of at least u12.78/m_ per year for maintenance and modernization of the apartments rented to members of the privileged group provided the apartment is not up for sale. WBN GmbH and WGN mbH are also prohibited from exercising statutory termination rights on the grounds of ‘‘own use’’ or ‘‘appropriate economic use’’ in relation to all lease agreements that existed as at December 13, 2000. The undertakings vis-à-vis the German Federal Railways Fund are guarded by contractual penalties, e.g. a payment of the higher of 100% of the proceeds or u35,000 per apartment in case of an unauthorized sale of apartments. NILEG Holding also agreed to various information and instruction rights and reporting requirements regarding the compliance with the obligations vis-à-vis the German Federal Railways Fund. Contractual constraints concerning the NILEG GmbH Group’s employees Additionally, the NILEG GmbH Group is subject to restrictions concerning employees. With respect to the NILEG GmbH Group’s employees as of July 13 and 14, 2005 and having an employment agreement without a fix term (unbefristetes Arbeitsverhältnis), NILEG Holding undertook, unless otherwise agreed for the better of the employees with the competent works council (Betriebsrat) that: • until September 1, 2006, it will not terminate any NILEG GmbH Group employment agreements for business-related reasons (betriebsbedingte Kündigungen); • until September 1, 2010 it will not terminate more than 36 employment agreements in the NILEG GmbH Group for business-related reasons; • trainees completing their apprenticeship in 2010 or earlier should be offered a job for at least one year provided they successfully pass the exams; • until September 1, 2015, it will not terminate for business-related reasons any employment agreements with employees of at least 53 years of age as at September 1, 2005; • until September 1, 2015, substantial operations in Hamburg, Hanover and Osnabrück are to be continued unless essential reductions or even a shut-down of the facilities is required due to a reduction of the business volume; and • to ensure that any acquirer of the NILEG GmbH Group companies assumes such undertakings and covenants. 91 In addition, NILEG Holding and OWG are subject to certain restrictions on employees of OWG being employed already as at December 19, 2002. Regarding such employees, NILEG Holding and OWG undertook that: • until December 19, 2007 they will not terminate any OWG employment agreements for business-related reasons (betriebsbedingte Kündigungen); • until December 19, 2012 they will not terminate any OWG employment agreement of an employee who, as at December 19, 2002, was 55 years of age or older for business-related reasons (betriebsbedingte Kündigungen); and • OWG will continue its membership in Employees’ Retirement Fund for Federal and State Government Employees (Versorgungsanstalt des Bundes und der Länder) it being understood that this is permissible under the articles of the Employees’ Retirement Fund for Federal and State Government Employees subject to either a guarantee by a government entity or an insurance or a bank or by an additional payment of 15% to the cost share. Further, NILEG Holding, WGN mbH and WBN GmbH are subject to certain restrictions concerning employees of WGN mbH and WBN GmbH being ordinarily employed (fest angestellt) as at December 13, 2000. Regarding such employees NILEG Holding, WGN mbH and WBN GmbH have undertaken: • that no employment relationships of such employees shall be terminated unless (i) terminations for breach of conduct and (ii) terminations aimed at changing terms and conditions of employment (Änderungskündigung) rather than at terminating employment entirely. For each failure to comply with this restriction, NILEG Holding, WGN mbH and WBN GmbH are subject to a fine of approximately u52,000; • to maintain any collective bargaining agreements and works agreements regarding pensions and existing as at December 13, 2000 until all such employees retire; • to maintain any other collective bargaining agreements and works agreements existing as at December 13, 2000 until at least the year 2010; and • to offer to all employees as at December 13, 2000 who were at that time, also tenants of an apartment of WGN mbH or WBN GmbH, to change the respective lease agreement to the extent that any termination on the grounds of own use (Eigenbedarfskündigung) is excluded. In the course of the restructuring of the NILEG GmbH Group, NILEG Holding agreed with the German Federal Railways Fund in particular to additional undertakings regarding WGN mbH and WBN GmbH as of August 24, 2006. NILEG Holding, WGN mbH and WBN GmbH undertook without any time limitations: • to offer until September 24, 2006, to re-hire employees who had left the company on the basis of the works agreements (Betriebsvereinbarungen) of November 25, 2005 and January 11, 2006, under the condition that the severance payment is paid back; • to employ a minimum of 50 full-time employees at WGN mbH and a minimum of 38 full-time employees at WBN GmbH; in addition the headcount is to be increased within six months, so that an average of six to seven full-time employees per 1,000 apartments is reached and maintained by each of WGN GmbH and WBN GmbH for managing and selling apartments; it is permitted, however, to transfer employees of GAGFAH GmbH Group or of other NILEG GmbH Group companies to NILEG Holding, WGN mbH or WBN GmbH in order to fulfill these requirements; • to employ the staff within the respective company regarding employees employed on July 26, 2006 and not to transfer to other entities or to lease these employees to other entities (Arbeitnehmerverleihung); • to renounce terminations for business-related reasons regarding employees of WGN mbH and WBN GmbH; • to immediately inform the German Federal Railways Fund of every dismissal of employees and to immediately fill positions that have become vacant in order to maintain the thresholds as set out above; 92 • to seek for prior consent of the German Federal Railways Fund before concluding, terminating or amending (i) works agreements that deal with maintaining jobs, (ii) reconciliation of interest agreements (Interessenausgleichsvereinbarungen) and social plans, and (iii) the accommodation of conflicting interests, and the termination of employment contracts. However, no consent will be required for dismissals due to personal conduct; and • to report on the headcount within two weeks of the end of a quarter. However, breach of this obligation does not incur a contractual penalty. NILEG Holding is subject to a penalty fee in the amount of u500,000 to the German Federal Railways Fund for each breach of the obligations laid out above, if not mentioned otherwise. We have also entered into loan agreements that provide use restrictions with regard to occupancy rights, rent control and the termination or transfer/privatization with respect to the properties of certain NILEG GmbH Group entities. Contractual Constraints Concerning the WOBA GmbH Group Pursuant to an agreement between Blitz 06-652 GmbH and CM Komplementär 05-525 GmbH & Co. KG, together the WOBA Purchasers, and the City of Dresden dated February 16/March 10, 2006, or WOBA SPA, both parties agreed to a number of undertakings and covenants, in particular as to the legal and economic structure of the WOBA GmbH Group, the WOBA GmbH Group’s employees, and its real estate and leases. The WOBA Purchasers undertook to oblige WOBA GmbH, SÜDOST WOBA GMBH, WOHNBAU NORDWEST GMBH, Bau- und Siedlungsgesellschaft Dresden mbH, Liegenschaften Weißig GmbH, Dienstleistungs- und Bauhof Dresden GmbH and Immo Service Dresden GmbH to comply with the restrictions as well. The WOBA SPA undertakings and covenants are set forth below: Contractual constraints concerning WOBA GmbH and the WOBA GmbH Group structure The WOBA Purchasers agreed: • to maintain until April 5, 2016 the WOBA GmbH Group’s ‘‘Economic Identity,’’ which requires that at least 2/3 of WOBA GmbH Group’s turnover is generated from rent or other income from real estate related-activities; • to keep until April 5, 2016 the names ‘‘WOBA’’ and ‘‘Dresden’’ in the business name of WOBA GmbH; • to maintain the registered corporate seat—without any time limitation—and, until April 5, 2016, the actual place of business of WOBA GmbH and of its property holding subsidiaries in Dresden; • not to change WOBA GmbH’s corporate form into an Aktiengesellschaft unless a control agreement (Beherrschungsvertrag) with Blitz 06-652 GmbH is entered into; • to ensure that WOBA GmbH, directly or indirectly, manages at least 41,000 apartments (minus the apartments to be dismantled) within the territory of the City of Dresden as owner, leaseholder or holder of a heritable building right (Erbbauberechtigter). In case the WOBA GmbH Group manages fewer than 35,000 apartments, it is liable to a fine of u5,000 for each apartment short of the total of 35,000 apartments for each year; • to submit until 2017, in each case within the first six months of each calendar year, a report to the City of Dresden, summarizing any sales of, and other transactions concerning apartments and apartment buildings of WOBA GmbH Group companies as well as changes in the real estate portfolios of those companies conducted in the previous financial year; and • to the extent permitted by law, to award contracts preferably to small and medium-sized companies resident in Dresden. Moreover, the WOBA Purchasers submitted to ensure that, until April 5, 2016, the articles of association of WOBA GmbH provide for a facultative supervisory board and that, at the request of the City of Dresden, the respective mayor (Oberbürgermeister) of the City of Dresden or a person designated by the mayor, will be elected as a member of the supervisory board. Further, the WOBA Purchasers agreed not to sell, transfer or merge any shares in WOBA GmbH and its subsidiaries, to include a third party in any capital increase, to liquidate or to otherwise 93 dispose of essential parts of the companies without consent of the City of Dresden. If the WOBA Purchasers do not comply with these terms they would be liable to a contractual fine of the higher of u10.0 million, or 100% of the proceeds from such transaction or the respective fraction of the purchase price paid to City of Dresden at the acquisition of the WOBA GmbH Group (calculated pro rata to the residential units concerned). The City of Dresden also has a pre-emption right in case the WOBA Purchasers intend to sell shares in WOBA GmbH before April 5, 2016. Contractual constraints concerning the WOBA GmbH Group’s real estate and leases The WOBA Purchasers and the WOBA GmbH Group have also assumed several social obligations concerning the protection of tenants. They must comply with all applicable statutory provisions that aim to protect and are in the interest of tenants, as well as with all mandatory contractual provisions favoring tenants. The WOBA Purchasers and the WOBA GmbH Group also agreed that until April 5, 2016, the total average rent for the lease agreements of the WOBA GmbH Group existing on April 5, 2006 will, for any time period of twelve months, not be raised by more than the total increase of the consumer price index for Germany in the respective period plus 3%. In addition, with regard to apartments the rents of which are at least 20% below the local reference rent, the amount of the rent increase is limited to 70% of what is permissible by law. In case of a violation of either of these two obligations, the WOBA Purchasers and the WOBA GmbH Group will incur a penalty in the amount of ten times the part of the rent in excess of the permitted limit for each month of non-compliance. Until April 5, 2016 termination of lease agreements on the grounds of the owner’s own use or ‘‘appropriate economic use’’ is excluded. For tenants 60 years of age or older and also for tenants who are severely disabled (in each case as of April 5, 2006); these grounds for termination are excluded without the aforementioned time limit. Should a tenant who qualifies for the protection described in the preceding sentence, be requested by WOBA GmbH Group to move into another WOBA GmbH Group apartment due to the tenant’s previous apartment being affected by the Dresden dismantling program or refurbishment measures, the tenant will also be entitled to the aforementioned level of protection and will be treated as if he or she had already been living in the new apartment on April 5, 2006. Furthermore, for apartments that had been leased on April 5, 2006, a luxury modernization is not permitted without the lessee’s approval. A luxury modernization in this context is a modernization measure to which the tenant is obliged to consent pursuant to Section 554 of the German Civil Code but that is substantially above the standard for comparable modernization measures carried out within the previous three years in other apartments owned by the WOBA GmbH Group. The WOBA Purchasers and the WOBA GmbH Group also agreed to spend an average amount (based on the expenditures in three consecutive years) of u5 (plus VAT) per year per square meter of the floor space of each WOBA GmbH Group apartment on maintenance measures until April 5, 2016. This obligation, if not complied with, is subject to a penalty of 200% of the amount that should have been spent on maintenance measures in one calendar year but was not, and does not apply to those apartments affected by the aforementioned dismantling program. The WOBA Purchasers and the WOBA GmbH Group must submit to the City of Dresden a comprehensive report by June 30 of each year on their compliance with the obligation described in this paragraph. Irrespective of the statutory obligations under Section 554a of the German Civil Code, the WOBA Purchasers and the WOBA GmbH Group agreed to ensure that, until April 5, 2016, in the case of fundamental refurbishment and modernization measures, an appropriate portion of apartments will be suitable for the needs of disabled people, taking into consideration both business needs and actual demand. The WOBA Purchasers and the WOBA GmbH Group also assumed several obligations in relation to the sale of real estate and individual apartments. Until April 5, 2016, when selling leased individual apartments or leased one-family-homes, such must be offered first to the respective tenants with at least three months’ notice and at a discount of 15% of the market price (i.e., the price at which individual apartments free of any tenants in Dresden that are of comparable structure, location, size and interior appliances and that are in a comparable state were sold in the preceding twelve months). The WOBA Purchasers and the WOBA GmbH Group are subject to a penalty in the amount of the proceeds from the sale of any unit made in violation of this obligation, but at least u50,000. Those objects that were already designated for sale at the time of the acquisition of the WOBA GmbH 94 Group through the WOBA Purchaser as well as new leases entered into after the acquisition are excluded from the aforesaid obligation. Moreover, until April 5, 2016, in the case of sales of apartment buildings prior to conversion into individual condominiums, the WOBA Purchasers and the WOBA GmbH Group agreed to contractually oblige the respective purchaser to assume the obligations described in this paragraph for the remaining duration of the ten-year-period. In the case of failure to pass on the relevant obligations to the purchaser, the WOBA Purchasers and the WOBA GmbH Group will be liable to pay a penalty of u2,000,000 for each calendar year until April 5, 2016 or an amount of u20,000 per apartment sold without assumption of the obligations by the purchaser, whichever amount is higher. The WOBA Purchasers and the WOBA GmbH Group also agreed to abstain from unilaterally terminating three ten-year-contracts entered into by WOBA GmbH Group companies granting occupancy rights to the City of Dresden. For each violation of the obligations under these contracts, they incur a penalty of u1,000 per month of non-compliance (limited to an aggregate amount of u5,000 for each individual case provided they report the violation, once it is detected, without undue delay). The WOBA Purchasers and the WOBA GmbH Group also agreed to designate a number of additional apartments to be covered by the occupancy rights under the aforementioned contracts until April 5, 2016, so that the total number of apartments for which occupancy rights exist shall increase to 8,000. The City of Dresden shall be entitled to prolong, in writing, the three ten-year-contracts granting occupancy rights twice by five years each, if the City of Dresden provides proof of a need for such occupancy rights. The WOBA Purchasers are also obligated to ensure that the WOBA GmbH Group companies comply with all statutory and contractual constraints in the area of town planning and urban development (städtebauliche Entwicklung). Irrespective of existing obligations as regards the dismantling (Rückbau) of real estate, the WOBA Purchasers and the WOBA GmbH Group agreed to dismantle an additional 3,881 units until December 31, 2010. If they fall short of the targets set for the dismantling obligations until June 30, 2011, they will incur a penalty of u20,000 for each apartment not dismantled despite the obligation to do so. Finally, the WOBA Purchasers and the WOBA GmbH Group agreed to ensure that the tenants of the WOBA GmbH Group will participate in the foundation ‘‘GAGFAH Mensch und Wohnen’’ and that, in addition and from 2007 until 2016, spend at least u120,000 per year for measures to develop neighborhood communication. Contractual constraints concerning the WOBA GmbH Group’s employees The WOBA Purchasers and the WOBA GmbH Group are also subject to the following restrictions concerning employment in the WOBA GmbH Group: • The WOBA Purchasers and the WOBA GmbH Group undertook that until April 5, 2011 there will be no terminations for business-related reasons or terminations aimed at changing terms and conditions of employment other than a full termination of employment (betriebsbedingte Beendigungs- oder Änderungskündigungen) of any employees of WOBA GmbH, Immo Service Dresden GmbH Bau- und Siedlungsgesellschaft Dresden mbH and of Dienstleistungs- und Bauhof Dresden GmbH save terminations pending as at April 1, 2006. The WOBA Purchasers and the WOBA GmbH Group are required to pay a contractual penalty for a breach of these obligations in an amount of u10,000 per month for each employee affected by the violation until the respective employee is either reemployed or the termination is rescinded. • The WOBA Purchasers further undertook to comply with any existing employment and collective bargaining terms and agreements (einzel- und tarifvertragliche Bedingungen und Betriebsvereinbarungen) of the WOBA GmbH Group. Further, they agreed to enter into 25 trainee agreements per year, beginning in 2007 until 2016. All restrictions shall be passed on to any legal successor of any of the WOBA GmbH Group entities. 95 RESTRICTIONS APPLICABLE TO SUBSIDIZED HOUSING Federal, state and local governments are statutorily obliged to provide subsidized housing that is intended and suitable for broad segments of the population based on size, layout and rent. Publicly subsidized housing is subject to two material requirements: • the tenant occupying the subsidized apartment must provide a housing eligibility certificate of the relevant authority; and • the landlord may not charge more than a ‘‘cost-based’’ rent. In addition, federal, state and municipal governments and, in the past, state-owned corporations such as the former Deutsche Bundesbahn (now Deutsche Bahn AG), subsidize housing for civil servants of the federal railways or similar personnel groups with housing assistance funds from public budgets. Restrictions in Connection with Public Subsidies Approximately 16,000 or 21% of the GAGFAH GmbH Group real estate, 6,000 units or 22% of the NILEG GmbH Group real estate and approximately 1,500 units or 3.4% of the WOBA GmbH Group housing portfolio are ‘‘publicly subsidized’’ and are therefore subject to restrictions on rent and/or occupancy. Together with the contractual constraints mentioned above, see ‘‘—Contractual Constraints concerning the WOBA GmbH Group—Contractual constraints concerning the WOBA GmbH Group’s real estate and leases’’ approximately 10.000 units or 22% of the WOBA GmbH Group housing portfolio is subject to restrictions on rent and/or occupancy rights. The statutory foundations of subsidized housing in Germany are specifically contained in the First and Second Housing Construction Acts (Erstes und Zweites Wohnungsbaugesetz), the New Construction Rent Ordinance (Neubaumietenverordnung) and the Residential Property Restrictions Act (Wohnungsbindungsgesetz), the Regulation on Property Cost Assessment (II. Berechnungsverordnung), as well as the Housing Promotion Act (Wohnraumförderungsgesetz), which replaced the First and Second Housing Construction Acts on January 1, 2002. With respect to the real estate portfolios of the WOBA GmbH Group companies, public subsidies were also granted under the Historic Debt Relief Act (Altschuldenhilfegesetz) which provided financial support for the municipalities and municipally owned housing companies that had acquired ownership of real estate of the former German Democratic Republic upon the reunification of Germany in 1990. Moreover, the WOBA GmbH Group companies have received subsidies under State Housing Programs (Landesmietwohnungsprogramme). The restrictions arising from these subsidies expire by November 30, 2009. If the scheduled repayment of the public subsidies has occurred, the landlord has the right from the following year to bring the rent up to market levels in stages, however, subject to rent increase restrictions set forth in the German Civil Code (i.e., rent increase in aggregate of 20% over a three-year-period). In addition, the rent increase restriction stipulated in the applicable social charter may apply accordingly. In the case of early repayment of any public funds that had been borrowed, cost-based rent principles will continue to apply for a 10-year period. With respect to the selection of tenants, publicly subsidized housing is subject to the condition that the subsidy recipient may rent only to persons who can present a housing eligibility certificate. The restrictions in connection with the publicly subsidized loans run out in 2013 for 29% and in 2020 for 38% of the publicly subsidized units of the GAGFAH GmbH Group. The restrictions related with the publicly subsidized units of the NILEG GmbH Group run out in 2013 for 21% of the relevant units. For publicly subsidized housing, the subsidy recipient may only charge ‘‘cost-based’’ rent during the subsidy period specified by law. The cost-based rent is the rent required to cover all current costs of the property. It is initially calculated taking into account the costs at the time of the construction of the apartment and is adjusted over time. Increases of the running costs may result in an increase of the average rent and of the individual rent accordingly but are, with certain limited exceptions, generally subject to the consent of the respective subsidy provider. The cost-based rent includes administrative and maintenance costs in accordance with fixed statutory amounts, and not in accordance with actual expenditure. With respect to the hive-down of assets from GAGFAH GmbH to GAGFAH I in 2005, GAGFAH I applied for the consent of the 30 public lenders/subsidy providers. One lender, the City of Frankfurt am Main, disapproved the transfer and requested repayment of its loans in the total amount 96 of approximately u180,000. Six lenders have already approved the transfer and 23 of the providers of subsidies to GAGFAH GmbH will not decide on such approval prior to review of the financial statements of GAGFAH I as of and for the year ended December 31, 2005. Those documents have been provided in the meantime and we are confident that the approvals will be granted. All subsidized loans of the WOBA GmbH Group have been repaid. In some cases the consent of the respective subsidy provider has to be obtained prior to the sale of any publicly subsidized housing. Moreover, should an apartment be converted into a condominium and sold for personal use (Eigennutzung), any public subsidies will be claimed back. In a few cases, in addition to public subsidies from the Federal Government or a state, there is also a subsidy from the respective municipality that, as a result of such subsidies, grants occupancy rights by which the municipality has the right to designate the respective tenant. In relation to the subsidies granted to WOBA GmbH Group companies under the Historic Debt Relief Act, the City of Dresden obtained occupancy rights that affect a maximum of 15% of the WOBA GmbH Group portfolios. The occupancy rights granted to the City of Dresden have only been exercised to a small extent. Restrictions in Connection with Investment Funding Certain modernization measures of apartment buildings as well as the construction of apartment buildings in urban areas within the territory of the former German Democratic Republic are eligible for investment funding under the Investment Funding Act of 1999 (Investitionszulagengesetz 1999). Between 1999 and 2004, WOBA GmbH Group companies have received such funding for approximately 80% to 90% of their housing assets. The granting of investment funding is not coupled with occupancy rights, rent control or comparable restrictions. The recipient of the funding is, however, obligated to rent out the subsidized rental units for residential housing purposes only, for a period of five years upon completion of the works. In cases of non-compliance, the funding can be reclaimed. Restrictions in Connection with Subsidies by Housing Assistance Funds Use restrictions on the owner’s power of disposal over the real estate result not only from public subsidies, but also as a condition of constructing apartments with housing assistance funds for civil servants of the federal railways or similar employee groups. 27,000 units and thus more than 90% of the NILEG GmbH Group portfolio are subject to these restrictions. Even though these housing units are not considered ‘‘publicly subsidized’’ within the meaning of the Second Housing Construction Act, the funding provider can demand that the owner of a housing unit lets the occupancy-restricted unit only to tenants designated by the funding provider, who holds the occupancy right. Additionally, the funding provider can require the owner of the housing to charge only a cost-based rent. RESTRICTIONS FOR PROPERTIES AFFECTED BY MONUMENT PROTECTION AND/OR SPECIAL URBAN PLANNING LEGISLATION With regard to restrictions on use and disposal, some of our real estate is situated in urban redevelopment areas (Sanierungsgebiete) and preservation areas (Erhaltungsgebiete). Additionally, some of the real estate is listed as historical monuments. The applicable statutory regime in these cases is that of the Federal Building Code and the Historical Monument Protection Acts (Landesdenkmalschutzgesetze) of the individual German federal states. Such laws usually impose restrictions on the use of the properties and the entire site and oblige the owner to maintain the protected building and its environment. With respect to real estate situated in an urban redevelopment area, we are required to obtain the permission of the relevant public authority for demolition or alteration of buildings, entering into lease agreements with a fixed term of more than one year, the sale of the property and the granting of encumbrances. In addition, at the end of the redevelopment measure the relevant municipality will levy a compensation charge (Ausgleichsbetrag). A relatively small number of our real estate is situated in preservation areas, which requires us to obtain the permission of the relevant public authority for demolition, alteration of buildings or change of use. Also, ordinances valid for up to five years may determine that permission is required for the establishment of individual ownership for personal use (condominium and part-ownership) in respect of residential units. 97 We believe that approximately 7% of the GAGFAH GmbH Group real estate and 10.5% of the WOBA GmbH Group real estate is listed as monuments, which requires that the properties be maintained for historical, artistic, scientific or urban development interests. The owner is under a specific obligation to maintain and repair the real estate listed as historical monuments. The competent authority enforces compliance with these obligations. Any change to the building itself or its use requires specific permission. The seller must notify any proposed transfer of a listed historical monument to the relevant authority, and the state usually has a statutory pre-emption right. LIABILITY FOR ENVIRONMENTAL CONTAMINATION Liability for environmental contamination and hazardous soil contamination may arise under public law and civil law provisions. Liability under public law cannot be excluded by contract. Civil law warranty liability, by contrast, can be limited or excluded by contract. See ‘‘Risk Factors—Risks Related to the Company and Our Business—We may incur environmental liabilities.’’ Public Law Soil contamination Pursuant to the Federal Soil Protection Act (Bundesbodenschutzgesetz), the parties responsible for environmental contamination include, among others, the party that caused the contamination, its legal successor, the owner of the contaminated property and each previous owner of the contaminated property (if such former owner transferred the property after the entering into force of the Federal Soil Protection Act on March 1, 1999 and knew or should have known about the contamination), as well as the person with actual control over the property. With regard to these potentially liable parties, there is no general ranking as to which of the parties is primarily liable. It is within the discretion of the relevant local authority to decide which party shall be held liable. The party most likely to be held liable is the current owner of the contaminated site, because it is legally entitled to carry out the required remedial measures. Furthermore, the liability of the entities and persons who can be held liable by the authorities for remediation does not require a showing of negligence or intent on the part of the liable parties. The Federal Soil Protection Act authorizes the local authority to require risk inspections, investigations, remedial measures, and other necessary measures for the protection against hazardous soil changes or residual environmental contamination. The Federal Soil Protection Act contains a statutory indemnity obligation on the part of the responsible parties that, irrespective of an official order, allocates liability among the parties in accordance with their respective contribution to the cause of the contamination. The indemnity obligation can be transferred by express contractual agreement. Asbestos German law distinguishes between two types of asbestos, or ACM, non-friable and friable, which require different treatments: • non-friable ACM: if the asbestos containing material is not friable and does not release fibers into the air, it does not pose a threat to human health and there is no obligation to remove the asbestos unless reconstruction is carried out; and • friable ACM is typically found in components for fire prevention, noise protection, damp and heat insulation and protection. The German Guidelines on Friable ACM (Asbest-Richtlinie) contains criteria according to which the ACM and the necessary remediation measures can be evaluated according to three different categories of priority. ACM which is graded priority I requires immediate remediation; priority II requires further evaluation after two years; and priority III requires a further evaluation after five years. Remediation measures comprise removal, coating of ACM and separation from the air. If an apartment shows a defect concerning asbestos, the tenant has the right to reduce the rent accordingly. German courts have ruled that a defect can be assumed if a danger to health cannot be excluded and has, therefore, allowed a rent reduction also in cases of priority II and III, which pursuant to the guideline would only require a monitoring of the ACM. Furthermore, if a defect exists at the time of entering into the contract, the tenant may claim damages. Tenants also have the right to remove the defect themselves and claim appropriate compensation for their expenses. 98 Potential public law responsibility Investigations carried out in May 2005 showed that some of the NILEG GmbH Group properties are contaminated with ACM and polycyclic aromatic hydrocarbons, or PAH, which will require remediation work to the concerned buildings. In the course of an investigation carried out in December 2005, contaminations with ACM, PAH as well as polychlorinated Biphenyls, or PCB were also identified in a small number of WOBA GmbH Group properties. Regarding the GAGFAH GmbH Group, investigations carried out in September 2005 showed that the main concerns of this portfolio are ACM containing materials within the buildings. As there is no legal obligation for an immediate removal, as described above, the costs related to potential remediation measures are mostly to be regarded as medium- to long-term costs. In addition, further investigations carried out in 1992 and 2005 showed soil contaminations with arsenic and lead in parts of the portfolio located in Leverkusen with remediation cost estimated at u1.0 million. Except small parts of the contaminated area remediation measures have not been carried out, yet, and will presently be necessary. With respect to units Acquisition 1 acquired from GIVAG Gesellschaft für Immobilien- und Vermögensanlagen AG, or GIVAG, investigations that have been carried out in February 2005 discovered in some parts of the portfolio construction materials which were partly contaminated with ACM, artificial mineral fibers, or AMF, PAH and PCB as well as with timber preservatives. However, since an immediate removal is mostly not necessary, the predominant part of the remediation costs that have to be taken into account are also to be regarded as long-term costs. With respect to LEG NRW investigations that have been carried out in October 2005 discovered a couple of soil and groundwater contaminations. According to the investigations the predominant part of the remediation costs that have to be taken into account are again to be regarded as long-term costs. Regarding the WOBA GmbH Group, the environmental consultants investigated the portfolio in January 2006. According to the results of their investigations, a part of the portfolio contains PAH and/or ACM containing materials as well as a multiplicity of man-made mineral fibers isolation materials. However, since an immediate removal is not necessary, the costs that have to be taken into account are again to be regarded as medium- to long-term costs. Civil Liability Civil liability for environmental contamination can arise under contractual warranty obligations and under statutory obligations. Warranty claims can generally be waived or limited by contractual provisions. The statutory claims can oblige the party causing contamination of the soil to pay damages or to remedy the contamination and its consequences. We could be subject to such liability for damages or remediation if a property owned by us had detrimental effects on the property of third parties. This civil liability exists independent of any official action taken in accordance with the provisions of the Federal Soil Protection Act. 99 MANAGEMENT BOARD OF DIRECTORS The management of the Company is vested in a board of directors, or the Board. The Company’s articles of incorporation provide that the Board must comprise at least three members and no more than twelve members. The Board meets as often as required by the interests of the Company. A majority of the members of the Board in office present or represented at a Board meeting constitutes a quorum, and resolutions are adopted by the simple majority vote of the Board members present or represented. The Board may also take decisions by means of resolutions in writing signed by all directors. The Company’s general shareholders’ meeting elects directors and decides their respective terms, each may not exceed six years. Directors may be reelected. The Company’s general shareholders’ meeting may dismiss one or more directors at any time, with or without cause by a resolution passed by simple majority vote, irrespective of the number of Shares present at such general shareholders’ meeting. If the Board has a vacancy, the remaining directors have the right to fill such vacancy on a temporary basis pursuant to the affirmative vote of a majority of the remaining directors. The term of a temporary director elected to fill a vacancy expires at the end of the term of office of the replaced director, provided, however, that the next general shareholders’ meeting shall be requested definitively to elect any temporary director. The Company’s articles of incorporation provide that if and for as long as the Shares are listed on one or more regulated stock exchanges, the Board shall be composed so as generally to include three independent directors (save in the case of a vacancy for reasons of death, retirement, resignation, dismissal, removal or otherwise). Pursuant to the Company’s articles of incorporation (and subject to overriding requirements of law or stock exchange regulations), an independent director is a director who does not have a significant business relationship with the Company that would create a conflict of interest which could impair the independence of such director’s judgment nor is an immediate family member of any executive of the Company. Within the limits provided for by law, the Board may delegate to one or more persons the daily management of the Company and the authority to represent the Company, provided that if such delegation is made to one or more directors, the delegation is subject to the prior authorization of the Company’s general shareholders’ meeting. The business address of the members of the Board is that of the Company’s headquarters at 14a, rue des Bains, L-1212 Luxembourg, Grand Duchy of Luxembourg. The Board comprises the following directors: Name Date of Appointment Wesley R. Edens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 29, 2006 Robert I. Kauffman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 29, 2006 Randal A. Nardone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 29, 2006 Burkhard U. Drescher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 5, 2006 Yves Wagner, PhD* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 5, 2006 Dieter H. Ristau* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 5, 2006 Dr. Jürgen Allerkamp*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 5, 2006 * Principal Activity Member Chairman Member Member Member Member Member Independent director Directors Wesley R. Edens: Wesley R. Edens, 44, has been a principal and the chairman of the management committee of Fortress since co-founding the firm in 1998. Mr. Edens is primarily responsible for the day-to-day operations and management of Fortress’s private equity business and is the chairman and Chief Executive Officer of both Newcastle Investment Corp. and Eurocastle Investment Limited. Mr. Edens serves on the boards of Brookdale Senior Living Communities Inc., Aircastle Limited, Green Tree Inc., Italfondiario S.P.A., and Mapeley Limited, and serves as the chairman and Chief Executive Officer of Global Signal Inc. Prior to co-founding Fortress, Mr. Edens was partner and managing director of BlackRock Financial Management Inc. and Lehman Brothers. Robert I. Kauffman: Robert I. Kauffman, 42, has been a principal and a member of the management committee of Fortress Investment since co-founding the firm in 1998. Mr. Kauffman is 100 primarily responsible for Fortress Investment’s European investment operations. He also serves as Chairman of Italfondiario, Fortress Investment’s Italian Real Estate and Loan Business. Prior to co-founding Fortress Investment, Mr. Kauffman was a managing director of the principal finance group of UBS from May 1997 to May 1998, and prior to that, was a principal of BlackRock Financial Management. Mr. Kauffman was with Lehman Brothers from 1986 to 1994 and served as executive director of Lehman Brothers International in London beginning in 1992. Mr. Kauffman received a Bachelor of Science in Business Administration from Northeastern University. Randal A. Nardone: Randal A. Nardone, 51, has been a principal and a member of the management committee of Fortress since co-founding the firm in 1998. Mr. Nardone is primarily responsible for Fortress’s structured finance and legal matters. He has been a director of Eurocastle since August 2006. Prior to co-founding Fortress, Mr. Nardone was a managing director of UBS, a principal of BlackRock Financial Management Inc. and managing director of BlackRock Asset Investors. In addition, Mr. Nardone was a partner and a member of the executive committee at the law firm of Thacher Proffitt & Wood LLP, which he joined in 1980, and ran the structured finance group starting in 1993. Mr. Nardone was awarded a Bachelor of Arts in English and biology from the University of Connecticut and a Doctor of Jurisprudence from Boston University School of Law. Burkhard U. Drescher: Burkhard U. Drescher, 55, is a member of the Board and is Chief Executive Officer of the GAGFAH GmbH Group, the NILEG GmbH Group, and Acquisition 1, and is Managing Director of the WOBA GmbH Group. Mr. Drescher has 24 years of professional experience, and joined our Group in 2006. Mr. Drescher has degrees in business sciences and chemistry. Prior to joining our Group, he was mayor of the City of Oberhausen, Germany and a member of the management board of RAG Immobilien AG. Mr. Drescher is responsible for administration, portfolio management and business communication. Yves Wagner, PhD: Yves Wagner, PhD, 47, was appointed to the Board in October 2006. In addition, Mr Wagner is an independent director of several management companies. He is co-founder and partner of The Directors’ Office, a Luxembourg company supervised by the CSSF, providing substance and assistance in particular in risk management supervision of management companies and funds. Prior thereto, Mr. Wagner was Chief Executive Officer of Fortis Investment Luxembourg, after serving as a director for many years in the asset management division of Banque Générale du Luxembourg (Fortis Group). Mr. Wagner is also a lecturer at several universities and is President of the Luxembourg Society of Financial Analysts. Dieter H. Ristau: Dieter H. Ristau, 58, was appointed a member of the Board in October 2006. Prior to joining our Group, Dieter H. Ristau was Chief Executive Officer of Allianz Global Investors Luxembourg S.A. and Chairman of the boards of Dresdner International Management Services Ltd., Ireland and Dresdner Fund Adminstration Ltd., Cayman Islands. Dr. Jürgen Allerkamp: Dr. Jürgen Allerkamp, 50, was appointed to the Board in October 2006. Dr. Allerkamp has degrees in law and political science. He began his career as a legal officer with Westdeutsche Landesbank. Prior to joining our Group, he was secretary of the management board and head of the legal department at Stadtsparkasse Dresden. In 1996, Dr. Allerkamp was appointed a full member of the management board of Stadtsparkasse Dresden and in 1998, he was appointed to the Board of NORD/LB. Terms of Appointment Unless otherwise determined by the general shareholders’ meeting, the terms of Board members expire on the date of the general shareholders’ meeting approving the Company’s accounts for financial year 2011. Compensation and Shareholdings of Board Members Wesley R. Edens, Robert I. Kauffman, Randal A. Nardone and Burkhard U. Drescher are not party to service agreements with the Company and receive no compensation as Board members. They are reimbursed for expenses associated with the attendance of Board meetings. Yves Wagner, Dieter H. Ristau and Dr. Jürgen Allerkamp are party to service agreements with the Company and receive compensation for their services as Board members and are reimbursed for their expenses. Such compensation consists of, on an annual basis, u25,000 plus 5,000 Shares in the Company. The service agreements do not provide for the receipt of any benefits upon termination of such service agreements. 101 We provide all Board members with directors and officers insurance. The total compensation paid to members of the Board in 2006 is expected to be u75,000 plus 15,000 Shares in the Company. Wesley R. Edens, Robert I. Kauffman and Randal A. Nardone each hold significant investments in each of the Selling Shareholders except for ZG Holdings cv and Entities affiliated with Cypress Grove International. See ‘‘Principal and Selling Shareholders.’’ Burkhard U. Drescher will be granted options to purchase Shares in the Company as a member of the senior management of the Company’s subsidiaries. For the number of options Mr. Drescher will hold, shortly following this offering, see ‘‘—Senior Management of the Company’s Subsidiaries—Compensation and Shareholdings of the Senior Management of the Company’s Subsidiaries.’’ Directorships Held by Board Members Except as set forth below, no director has held any directorship of any company (other than companies in our Group and companies which are subsidiaries of companies of which the Directors is or was a member) or partnerships within the past five years: Director Current Directorships/Partnerships Wesley R. Edens . . . . . . . Aerofort Investments LLC Aircastle Advisors LLC Aircastle Limited (f/k/a Aircastle Investment Limited) Alterra Healthcare Corporation Auburn BAI Liquidating LLC Bailbo LLC BC Holdings GP Ltd. BlackRock Fortress Liquidating LLC Brookdale Living Communities, Inc. Brookdale Senior Living Inc. Eurocastle Investment Limited FABP Subsidiary (GAGAQ) LLC FCF UK Limited FCF III UK Limited FCF UK (A) III Limited FEBC-ALT Holdings Inc. FEBC-ALT Investors LLC FIC BM LLC FIC GSA Mezzanine Borrower LLC FIC Houston LLC FIF III Air AVT Holdco LLC FIF III Air AVT Acquisition LLC FIF III CLIF Holding LLC FIF III CLI Holding Limited FIF III Holmar Ltd. FIF III Holmar A Ltd. FIF III Holmar B Ltd. FIF III Holmar C Ltd. FIF III Holmar D Ltd. FIF III Holmar E Ltd. FIF III Holmar LLC FIF III Liberty Holdings LLC FIF III MIJAC Holdings Limited FIF III MIJAC LLC FIF III MJATV Holdings Limited FIF III MJATV LLC FIF III Star LLC FIFPI GP LLC FIG Advisors LLC FIG GP (Texas) LLC FIG HCRS LLC 102 Former Directorships/Partnerships 3020361 Nova Scotia Company 6027 LLC Aircastle (Advisor) International Limited Aircastle Investment Holdings Limited Aircastle Bermuda Holding Limited Aircastle Bermuda Holding II Limited Aircastle Bermuda Holding III Limited Aircastle Bermuda Holding IV Limited Aircastle Bermuda Holding V Limited Aircastle Bermuda Holding VI Limited Aircastle Bermuda Holding VII Limited Aircastle Bermuda Holding VIII Limited Aircastle Bermuda Holding IX Limited ABH 10 Limited ABH 11 Limited ABH 12 Limited Aircastle Bermuda Securities Limited Alfa Invest Sprl Ascend Residential Construction Inc. Ascend Residential Holdings Inc. Ascend Residential Mortgage Inc. Ascend Residential Properties Inc. Austin (Canada) Investment Company Austin Holdings Corporation BC Holdings (UK) Limited Beta Invest Sprl Canadian Century Development Corporation Centrum Invest Sprl FBZ Corp. FEBC ALT Acquisition Inc. FIC Management Inc. FIF ML Acquisition LLC FIF III Liberty Acquisition LLC FIF III Holdco Star Ltd. FIF ML Acquisition LLC FIF REOC LLC FIT Alt Prov LLC FIT HUD Dogwood LLC FIT HUD Ivy LLC FIT HUD Northwesterly LLC FIT HUD R-Crest LLC FIT HUD Riverside LLC Director Current Directorships/Partnerships FIG Partners Pool (P2) LLC FIG Partners Pool (A) LLC FIG Partners Pool (P) LLC FIG Promote Holdings LLC FIG Promote II KE LLC FIG Promote II LLC FIG Promote III KE LLC FIG Promote III LLC FIG Promote LLC FIT AERO Holding LLC FIT Aero Iceland Ltd. FIT Aero Investments Ltd FIT Capital Trading LLC FIT CCRC LLC FIT CFN Holdings LLC FIT CP GP LLC FIT CP Holdings LLC FIT CP LLC FIT DVI LLC FIT FHA Acqusition LLC FIT GSL LLC FIT HUD Acquisition LLC FIT HUD Presidential LLC FIT HUD Renaissance LLC FIT Kansas Christian LLC FIT Mapeley Holdings Ltd. FIT Cypress Homes LLC FIT Cypress Village LLC FIT Foxwood Springs LLC FIT Ramsey LLC FIT Skyline LLC FIT Foxwood Springs Homes LLC FIT Oklahoma Christian LLC FIT Robin Run GP Inc. FIT REN Holdings GP Inc. FIT REN LLC FIT-ALT Investor LLC Fortress Asset Trust Fortress Brookdale Acquisition LLC Fortress Brookdale Investment Fund LLC Fortress Canada Investment Corp. Fortress Cayman Holdings LLC Fortress Capital Finance III (A) LLC Fortress Capital Finance III (B) LLC Fortress Capital Finance III (C) LLC Fortress Capital Finance III (CIF-A) LLC Fortress Capital Finance III (CIF-B) LLC Fortress Capital Finance III (CIF-C) LLC Fortress Capital Finance III (CIF-D) LLC Fortress Capital Finance III (D) LLC Fortress Capital Finance III (E) LLC Fortress Cayman Partners LLC Fortress CBO Holdings I Inc. Fortress CBO Investments I Corp Fortress CBO Investments I, Limited Fortress CCRC Acquisition LLC Fortress Finance (Belgium) Sprl Fortress Investment Fund GP (Holdings) LLC (f/k/a Fortress Fund III GP (Holdings) LLC) Fortress Fund III GP LLC 103 Former Directorships/Partnerships FIT LTC Holdings LLC FIT NBA California Christian LLC FIT NBA Barton Stone LLC FIT NBA Lenoir LLC FIT Outsource LLC FIT PINN BL LLC FIT-ALT SNH Loan LLC Fortress (Canada) Investment Company Fortress East State Urban Renewal LLC Fortress West State Urban Renewal LLC Fortress Fund MM Inc. Fortress Depositor LLC Fortress GSA Missouri LLC Fortress GSA San Diego Properties Holdings LLC Fortress IOFP Holdings LLC Fortress IOFP LLC Fortress Residential Holdings LLC Fortress Residential Holdings REO LLC Fortress Residential LLC Fortress Residential REO LLC Fortress TA Holdings LLC Fortress TA I LLC Fortress TA LLC FP Investment LLC FRIT BPC Acquisition LLC FRIT CDC KF Acquisition LLC FRIT GC-GM Adrian LLC FRIT GC-GM Acquisition LLC FRIT GC-GM Albuquerque LLC FRIT GC-GM Dayton LLC FRIT GC-GM Las Vegas LLC FRIT PRT Bridge Acquisition LLC FRIT PRT Lending LLC IEFFE Acquisition S.p.A. Italfondiario SpA IVY TWR LLC GMZ Funding III LLC Mapeley Steps Contractor Limited Melodicum Sprl NCS II LLC Newcastle Investment Holdings Corp. PRT PSA LLC Polytrophys Sprl RECONN, Inc. RESG CN Acquisition LLC Seminole Sprl Univest International (Japan) LLC Univest International LLC Director Current Directorships/Partnerships Fortress Fund MM II LLC Fortress Fund MM LLC Fortress Fund IV GP Holdings Ltd. Fortress GSA Aurora L.L.C. Fortress GSA Burlington L.L.C. Fortress GSA Callowhill L.L.C. Fortress GSA Concord L.L.C. Fortress GSA E Street L.L.C. Fortress GSA Huntsville L.L.C. Fortress GSA Kansas City LLC Fortress GSA Norfolk L.L.C. Fortress GSA Parfet L.L.C. Fortress GSA Properties Holdings LLC Fortress GSA Properties LLC Fortress GSA Properties SPE, LLC Fortress GSA Providence L.L.C. Fortress GSA Sacramento L.L.C. Fortress GSA San Diego LLC Fortress GSA Securities LLC Fortress GSA Securities SPE, LLC Fortress GSA Suffolk L.L.C. Fortress Houston GP LLC Fortress HQ LLC Fortress Investment Fund III (Fund B) (GAGACQ Sub) LLC Fortress Investment Fund III (Fund C) (GAGACQ Sub) LLC Fortress Investment Fund III (Fund D) (GAGACQ Sub) LLC Fortress Investment Fund III (Fund E) (GAGACQ Sub) LLC Fortress Investment Fund III (GAGACQ Subsidiary) LLC Fortress Investment Group (UK) Ltd Fortress Investment Group LLC Fortress Investment Group U.L.C. Fortress Investment Holdings LLC Fortress Investment Trust II Fortress IOFP 2, LLC Fortress Oldcastle S.L.P. LLC Fortress Pinnacle Investment Fund LLC Fortress Principal Investment Group LLC Fortress Principal Investment Holdings II LLC Fortress Principal Investment Holdings III LLC Fortress Principal Investment Holdings IV LLC Fortress Principal Investment Holdings LLC Fortress PSERS Investments LP Fortress Registered Investment Trust Fortress Subsidairy (GAGACQ) LLC Fortress UK Acquisition Company FPS DIP LLC FRID GP Holdings Limited FRIT Capital Trading LLC FRIT Ital Sp Acquisition LP FRIT PINN LLC FRIT SP LP GAG ACQ. IRELAND LIMITED Global Signal Inc. GMZ Funding LLC Green Tree Investment Holdings LLC Harbour Acquisition GP LLC Harbour Acquisition LP 104 Former Directorships/Partnerships Director Current Directorships/Partnerships IMPAC Commercial Assets Corporation IMPAC Commercial Holdings Inc. Ital FT Investment Holdings IV LLC Ital FT Investment Holdings V LLC Ital Investment Holdings I LLC Ital Investment Holdings II LLC Ital Investment Holdings III LLC Ital SP Acquisition GP LLC Ital Tre Investors L.P. Karl S.A. GateHouse Media Holdco, Inc. (f/k/a Liberty Group Holdco Inc.) GateHouse Media Operating Inc. (f/k/a Liberty Group Operating Inc.) GateHouse Media, Inc. (f/k/a Liberty Group Publishing Inc.) Little Creek LIV Holdings LLC Mapeley Columbus Holdings Limited Mapeley Columbus Limited Mapeley Holding Company Limited Mapeley HR Co. Limited MAPELEY LIMITED Mapeley STEPS Holdings Limited Mapeley STEPS Limited Mapeley U.K. Co. Limited Monterrey Belgium S.A. NC Circle Holdings II LLC NC Circle Holdings LLC Newcastle 2005-1 Asset-Backed Note LLC Newcastle CDO Holdings LLC Newcastle CDO I Corp. Newcastle CDO I, Limited Newcastle CDO II Corp. Newcastle CDO II Holdings LLC Newcastle CDO II Limited Newcastle CDO III Corp. Newcastle CDO III Holdings LLC Newcastle CDO III, Limited Newcastle CDO IV Corp. Newcastle CDO IV Holdings LLC Newcastle CDO IV, Limited Newcastle CDO V Corp. Newcastle CDO V Holdings LLC Newcastle CDO V, Limited Newcastle CDO VI Corp. Newcastle CDO VII Corp. Newcastle CDO VI Holdings LLC Newcastle CDO VII Holdings LLC Newcastle CDO VI, Limited Newcastle CDO VII Limited Newcastle Investment Corp. Newcastle Investment Holdings LLC Newcastle MH I LLC Newcastle Mortgage Securities LLC Newcastle OPCO LLC NIC Airport Corporate Center, LLC NIC Apple Valley I, LLC NIC Apple Valley II, LLC 105 Former Directorships/Partnerships Director Current Directorships/Partnerships NIC Apple Valley III, LLC NIC BR LLC NIC CNL LLC NIC CR LLC NIC CSR LLC NIC Dayton Towne Center, LLC NIC DBRepo LLC NIC DP LLC NIC GCMRepo LLC NIC GR LLC NIC GS LLC NIC GSE LLC NIC HOLDINGS I LLC NIC NK LLC NIC TRS Holdings, Inc. NIC 2 River Place LLC NIC 4 River Place LLC NIC WL LLC NIH TRS Holdings, Inc. GAGFAH S.A. Paladin Asset Management LP Portland Acquisition I LLC RESG Acquisition Corp. RESG Acquisition LLC RESG MIDL Corp. RIC Coinvestment Fund LP RIC Coinvestment Fund GP LLC Shannon Health Care Realty, Inc. Shannon Health Properties, Inc. Shannon Property Management Inc. SP GP LLC SPM Two, Inc. Stelfort III Acquisition Inc. Stelfort III Holding Inc. Stelfort III Holdings (Cayman) Ltd. Titan Energy GP LLC Torre Real Speculative SGR P.A. US Ski WPRM LLC Robert I. Kauffman . . . . . BAI Liquidating LLC Bailbo LLC BC Holdings GP Ltd. BlackRock Fortress Liquidating LLC FCF Consulting S.r.l. FCF Deutschland GmbH FCF Servizi Italia S.r.l. FCF UK (A) III Limited FIC BM LLC FIF IV Flat LLC FIG Italia S.r.l. FIT Mapeley Holdings Ltd. Fortress Asset Trust Fortress Canada Investment Corp. Fortress CBO Holdings I Inc. Fortress CBO Investments I Corp. Fortress CBO Investments I, Limited Fortress Deutschland GmbH Fortress Finance Belgium Sprl Fortress Germany Asset Management GmbH Fortress GSA Aurora L.L.C. Fortress GSA Burlington L.L.C. 106 Former Directorships/Partnerships Aircastle (Advisor) International Limited Bastion Limited Partner S.a.r.l. Bastion Lux Participation S.a.r.l. Bastion Managing Partner S.a.r.l. Belfry Limited Partner S.a.r.l. Belfry Lux Participation S.a.r.l. Belfry Managing Partner S.a.r.l. Boxcleaver Acquisitions GP Ltd. Eurocastle Investment Limited FIFPI GP LLC SPV leffe Due s.r.l. SPV leffe Tre s.r.l. 3020361 Nova Scotia Company LLC 6027 LLC Alfa Invest Sprl Ascend Residential Construction Inc. Ascend Residential Holdings Inc. Ascend Residential Mortgage Inc. Ascend Residential Properties Inc. Austin (Canada) Investment Company Austin Holdings Corporation Beta Invest Sprl Director Current Directorships/Partnerships Fortress Fortress Fortress Fortress Fortress Fortress Fortress Fortress Fortress Fortress GSA GSA GSA GSA GSA GSA GSA GSA GSA GSA Callowhill L.L.C. Concord L.L.C. E Street L.L.C. Huntsville L.L.C. Kansas City LLC Norfolk L.L.C. Parfet L.L.C. Properties Holdings LLC Properties LLC Properties SPE, LLC Fortress GSA Providence L.L.C. Fortress GSA Sacramento L.L.C. Fortress GSA San Diego LLC Fortress GSA Securities LLC Fortress GSA Securities SPE, LLC Fortress GSA Suffolk L.L.C. Fortress Houston GP LLC Fortress HQ LLC Fortress Investment Group (UK) Ltd Fortress Investment Group LLC Fortress Investment Group U.L.C. Fortress Investment Group Germany GmbH Fortress Investment Holdings II Fortress IOFP 2, LLC Fortress Oldcastle S.L.P. LLC Fortress Principal Investment Group LLC Fortress Principal Investment Holdings II LLC Fortress Principal Investment Holdings III LLC Fortress Principal Investment Holdings IV LLC Fortress Servicing Deutschland GmbH FRIT ITAL, S.L. Harbour Acquisition GP LLC Holmar Acquisition Ltd. Holmar Holding Limited Ital FT Investment Holdings I LLC Ital FT Investment Holdings II LLC Ital Investment Holdings III LLC Ital Investment Holdings IV LLC Ital Investment Holdings V LLC Ital SP Acquisition GP LLC ITAL Tre Investors L.P. Italfondiario SpA Karl S.A. Mapeley Columbus Holdings Limited Mapeley Estates Limited Mapeley Holding Company Limited Mapeley HR Co. Limited Mapeley STEPS Holdings Limited Mapeley U.K. Co. Limited Moenia Nova S.r.l. Monterrey Belgium S.A. SP GP LLC SPV IEFFE S.r.l. Torre Real Estate Speculative SGR P.A. Randal A. Nardone . . . . . Alterra Healthcare Corporation BAI Liquidating LLC Bailbo LLC BC Holdings GP Ltd. BlackRock Fortress Liquidating LLC Boxclever Acquisition GP Ltd. 107 Former Directorships/Partnerships Castello Gestione Credit S.r.l. Centrum Invest Sprl FIC Management Inc. Fortress (Canada) Investment Company Fortress Depositor SPE Inc. Fortress Depositor LLC Fortress East State Urban Renewal LLC Fortress Fund MM Inc. Fortress GSA Missouri LLC Fortress GSA San Diego Properties Holdings LLC Fortress IOFP Holdings LLC Fortress IOFP LLC Fortress Residential Holdings LLC Fortress Residential Holdings REO LLC Fortress Residential LLC Fortress Residential REO LLC Fortress TA Holdings LLC Fortress TA I LLC Fortress TA LLC Fortress West State Urban Renewal LLC Finial SARL Luxgate SARL Melodicum Sprl NCS II LLC Newel SARL Newcastle Investment Holdings Corp. Polytrophys Sprl Sienna Holdings Limited Sienna Investments Limited Simon Storage Holding Limited Univest International (Japan) LLC 3020361 Nova Scotia Company 6027 LLC Aircastle Advisors LLC Aircastle Limited Aircastle (Advisor) International Limited Aircastle Investment Holdings Limited Director Current Directorships/Partnerships Brookdale Living Communities, Inc. FCF Deutschland GmbH FCF UK Limited FCF III UK Limited FCF UK (A) III Limited FIC BM LLC FIC GSA Mezzanine Borrower LLC FIC Houston LLC FIF III Air AVT Holdco LLC FIF III Air AVT Acquisition LLC FIF III CLIF Holding LLC FIF III CLI Holding Limited FIF III Holmar Ltd. FIF III Holmar A Ltd. FIF III Holmar B Ltd. FIF III Holmar C Ltd. FIF III Holmar D Ltd. FIF III Holmar E Ltd. FIF III Holmar LLC FIF III Liberty Holdings LLC FIF III MIJAC Holdings Limited FIF III MIJAC LLC FIF III MJATV Holdings Limited FIF III MJATV LLC FIF III Star LLC FIG HCRS LLC FIT Aero Iceland Ltd. FIT Aero Investments Ltd FIT Capital Trading LLC FIT CCRC LLC FIT CFN Holdings LLC FIT CP GP LLC FIT CP Holdings LLC FIT CP LLC FIT DVI LLC FIT FHA Acqusition LLC FIT GSL LLC FIT Holdings LLC FIT HUD Acquisition LLC FIT HUD Presidential LLC FIT HUD Renaissance LLC FIT Kansas Christian LLC FIT Mapeley Holdings Ltd. FIT Cypress Homes LLC FIT Cypress Village LLC FIT Foxwood Springs LLC FIT Ramsey LLC FIT Skyline LLC FIT Foxwood Springs Homes LLC FIT Oklahoma Christian LLC FIT Robin Run GP Inc. FIT REN Holdings GP Inc. FIT REN LLC FIT-ALT Investor LLC Fortress Brookdale Acquisition LLC Fortress Canada Investment Corp. Fortress Cayman Holdings LLC Fortress Cayman Partners LLC Fortress Capital Finance III (A) LLC Fortress Capital Finance III (B) LLC 108 Former Directorships/Partnerships Aircastle Bermuda Holding Limited Aircastle Bermuda Holding II Limited Aircastle Bermuda Holding III Limited Aircastle Bermuda Holding IV Limited Aircastle Bermuda Holding V Limited Aircastle Bermuda Holding VI Limited Aircastle Bermuda Holding VII Limited Aircastle Bermuda Holding VIII Limited Aircastle Bermuda Holding IX Limited ABH 10 Limited ABH 11 Limited ABH 12 Limited Aircastle Bermuda Securities Limited Alfa Invest Sprl Ascend Residential Holdings Inc. Ascend Residential Mortgage Inc. Ascend Residential Properties Inc. Austin (Canada) Investment Company Austin Holdings Corporation Beta Invest Sprl Centrum Invest Sprl FBZ Corp. FIC Management Inc. FIF III Liberty Acquisition LLC FIF III Holdco Star Ltd. FIF ML Acquisition LLC FIT Alt Prov LLC FIT HUD Dogwood LLC FIT HUD Ivy LLC FIT HUD Northwesterly LLC FIT HUD R-Crest LLC FIT HUD Riverside LLC FIT LTC Holdings LLC FIT NBA California Christian LLC FIT NBA Barton Stone LLC FIT NBA Lenoir LLC FIT Outsource LLC FIT PINN BL LLC Fortress (Canada) Investment Company Fortress Depositor LLC Fortress Depositor SPE, Inc. Fortress East State Urban Renewal LLC Fortress West State Urban Renewal LLC Fortress Fund MM Inc. Fortress GSA Missouri LLC Fortress GSA San Diego Properties Holdings LLC Fortress IOFP Holdings LLC Fortress IOFP LLC Fortress Residential Holdings LLC Fortress Residential Holdings REO LLC Fortress Residential LLC Fortress Residential REO LLC Fortress TA Holdings LLC Fortress TA I LLC Fortress TA LLC FRIT BPC Acquisition LLC FRIT CDC KF Acquisition LLC FRIT GC-GM Adrian LLC FRIT GC-GM Acquisition LLC FRIT GC-GM Albuquerque LLC Director Current Directorships/Partnerships Fortress Capital Finance III (C) LLC Fortress Capital Finance III (CIF-A) LLC Fortress Capital Finance III (CIF-B) LLC Fortress Capital Finance III (CIF-C) LLC Fortress Capital Finance III (CIF-D) LLC Fortress Capital Finance III (D) LLC Fortress Capital Finance III (E) LLC Fortress CBO Holdings I Inc. Fortress CBO Investments I Corp Fortress CBO Investments I, Limited Fortress CCRC Acquisition LLC Fortress Fund IV GP Holdings Ltd. Fortress GSA Aurora L.L.C. Fortress GSA Burlington L.L.C. Fortress GSA Callowhill L.L.C. Fortress GSA Concord L.L.C. Fortress GSA E Street L.L.C. Fortress GSA Huntsville L.L.C. Fortress GSA Kansas City LLC Fortress GSA Norfolk L.L.C. Fortress GSA Parfet L.L.C. Fortress GSA Properties Holdings LLC Fortress GSA Properties LLC Fortress GSA Properties SPE, LLC Fortress GSA Providence L.L.C. Fortress GSA Sacramento L.L.C. Fortress GSA San Diego LLC Fortress GSA Securities LLC Fortress GSA Securities SPE, LLC Fortress GSA Suffolk L.L.C. Fortress Houston GP LLC Fortress HQ LLC Fortress Investment Group (UK) Ltd Fortress Investment Group LLC Fortress Investment Group U.L.C. Fortress Investment Holdings II LLC Fortress IOFP 2, LLC Fortress IW Coinvestment Fund GP Holdings Ltd. Fortress GSA Mortgage LLC Fortress Oldcastle S.L.P. LLC Fortress Principal Investment Group LLC Fortress Principal Investment Holdings II LLC Fortress Principal Investment Holdings III LLC Fortress Principal Investment Holdings IV LLC Fortress Realty Holdings Inc. Fortress Subsidairy (GAGACQ) Coinvestors (Cayman) Ltd. Fortress Subsidiary (GAGACQ) Investors Ltd. Fortress UK Acquisition Company FPS DIP LLC FRID GP Holdings Limited FRIT Capital Trading LLC FRIT Holdings LLC FRIT ITAL, S.L. FRIT PINN LLC GAG ACQ. IRELAND LIMITED GMZ Funding LLC GMZ Funding II LLC Green Tree Investment Holdings LLC Green Tree Advance Receivables LLC 109 Former Directorships/Partnerships FRIT GC-GM Dayton LLC FRIT GC-GM Las Vegas LLC GMZ Funding III LLC IEFFE Acquisition S.p.A. Italfondiario SpA IVY TWR LLC Mapeley Columbus Limited Mapeley Columbus II Limited Mapeley U.K. Co. Limited Melodicum Sprl NCS II LLC PRT PSA LLC Polytrophys Sprl Rampart Real Estate Investment Group LLC RECONN, Inc. Seminole Sprl Director Current Directorships/Partnerships Green Tree HE/HI Corp. Green Tree MH Corp. Green Tree Servicing Corp. GSA EQ Borrower LLC Harbour Acquisition GP LLC Holmar Acquisition Ltd. IMPAC Commercial Assets Corporation Ital FT Investment Holdings IV LLC Ital FT Investment Holdings V LLC Ital Investment Holdings I LLC Ital Investment Holdings II LLC Ital Investment Holdings III LLC Ital SP Acquisition GP LLC Karl S.A. GateHouse Media Holdco, Inc. (f/k/a Liberty Group Holdco Inc.) GateHouse Media Operating Inc. (f/k/a Liberty Group Operating Inc.) GateHouse Media, Inc. (f/k/a Liberty Group Publishing Inc.) LIV Holdings LLC Mapeley Columbus (Jersey) Limited Nationstar Regular Holdings Ltd. NC Circle Holdings II LLC NC Circle Holdings LLC Newcastle 2005-1 Asset-Backed Note LLC Newcastle CDO Holdings LLC Newcastle CDO I Corp. Newcastle CDO I, Limited Newcastle CDO II Corp. Newcastle CDO II Holdings LLC Newcastle CDO II Limited Newcastle CDO III Corp. Newcastle CDO III Holdings LLC Newcastle CDO III, Limited Newcastle CDO IV Corp. Newcastle CDO IV Holdings LLC Newcastle CDO IV, Limited Newcastle CDO V Corp. Newcastle CDO V Holdings LLC Newcastle CDO V, Limited Newcastle CDO VI Corp. Newcastle CDO VII Corp. Newcastle CDO VI Holdings LLC Newcastle CDO VII Holdings LLC Newcastle CDO VI, Limited Newcastle CDO VII Limited Newcastle MH I LLC Newcastle Mortgage Securities LLC Newcastle OPCO LLC NIC Airport Corporate Center, LLC NIC Apple Valley I, LLC NIC Apple Valley II, LLC NIC Apple Valley III, LLC NIC BR LLC NIC CNL LLC NIC CR LLC NIC CSR LLC NIC Dayton Towne Center, LLC NIC DBRepo LLC NIC DP LLC NIC GCMRepo LLC 110 Former Directorships/Partnerships Director Current Directorships/Partnerships NIC GR LLC NIC GS LLC NIC GSE LLC NIC HOLDINGS I LLC NIC NK LLC NIC TRS Holdings, Inc. NIC 2 River Place LLC NIC 4 River Place LLC NIH TRS Holdings, Inc. RESG Acquisition Corp. RESG MIDL Corp. Shannon Health Care Realty, Inc. Shannon Health Properties, Inc. Shannon Property Management Inc. SP GP LLC Stelfort III Acquisition Inc. Stelfort III Holding Inc. Stelfort III Holdings (Cayman) Ltd. Torre Real Speculative SGR P.A. WPRM LLC Burkhard U. Drescher . . . Essener Forum Baukommunikation e. V. STEAG Fernwärme GmbH Fraunhofer Umsicht Yves Wagner, PhD . . . . . . The Directors’ Office Spandilux SA European Credit Fund Sicav LODH Multi-Advisers Fund Management Company SA CLS Summit Alternative Fund LIA (Lux-Investment Advisors) Manulife Global Fund RMF Umbrella Sicav Dieter H. Ristau . . . . . . . Private Trust Management Company S.A., Lux. Institutional Trust Management S.A., Lux. Microcap 07 S.C.A. (SICAR), Luxembourg DRCM Global Investment Fund plc, Ireland Pegasus Strategic Investment Company plc, Ireland 111 Former Directorships/Partnerships RAG Immobilien Beteiligungs-GmbH RAG Wohnimmobilien GmbH STEAG Walsum Immobilien AG EBV GmbH Stadtwerke Oberhausen AG Energieversorgung Oberhausen AG RWE AG PBO Projektentwicklungs- und Beteiligungsgesellschaft Oberhausen mbH ENO Entwicklungsgesellschaft Neu-Oberhausen mbH DSM GmbH VkA OGM GmbH WBO GmbH GMVA GmbH GEG mbH TZU GmbH OBG mbH HDT GmbH TMO GmbH VkA GmbH RAG Immobilien AG Montan-Grundstücksgesellschaft mbH Rhein Lippe Wohnen GmbH GFW (Gesellschaft für Wirtschaftsförderung) Stiftung Industriedenkmalpflege und Geschichtskultur — Allianz Global Investors Luxembourg S.A. Alllianz Global Investors Ireland Ltd. Allianz Global Investors Fund Allianz Global Distributor Fund Allianz Dresdner Premier DBLA Latin Bond Fund Director Current Directorships/Partnerships Dresdner Fund Administration (Cayman) Ltd. Cayman Islands Former Directorships/Partnerships RP Rendite Plus Dresdner Portfolio Management Dresdner Euro Money Management Allianz Dresdner Hedgefonds Allianz Global Investors Selections Amadeus Capital Vision PLC dit-RCM Asian Selections Fund Dresdner RCM India Fund plc DBLA-Dresdner RCM Latin American Selections Fund plc International Investment Portfolios plc Weser Ems Investment Company plc Global High Tech Growth Westdeutsche Landesbank Dr. Jürgen Allerkamp . . . . Norddeutsche Landesbank Girozentrale (NORD/LB) Öffentliche Lebensversicherung Braunschweig Stadtsparkasse Dresden Öffentliche Sachversicherung Braunschweig Porzellanmanufaktur Fürstenberg NILEG Holding GmbH LHI Leasing GmbH Munich Öffentliche Feuerversicherung Sachsen-Anhalt Öffentliche Lebensversicherung Sachsen-Anhalt Deka Immobilien Investment GmbH LBS Norddeutsche Landesbausparkasse A/s NORD/LB Latvija Riga AB Bankas NORD/LB Lietuva Vilnius B + S Card Service GmbH ConCardis GmbH Druckhaus A. Limbach Brunswick Chamber of Commerce and Industry Stiftung NORD/LB-Öffentliche Braunschweig Stiftung Sport und Kultur für Braunschweig Mortgage Lending and Housing Policy Committee of the German Association of Public Sector Banks (VÖB) Private Customer Business Committee of the German Savings Bank Organisation School of Fine Arts Brunswick Foundation Council of the Lower Saxony Savings Bank Foundation CORPORATE GOVERNANCE The Company complies with the corporate governance regime of the Grand Duchy of Luxembourg. AUDIT COMMITTEE The Company’s articles of incorporation provide that the Board may create various committees, including an audit committee. The Board expects to establish an audit committee, of which it will appoint the members. The Company will publish any such appointments on its website (http://www.gagfah.com). The Company’s audit committee shall be composed of at least three Board members, of whom at least one will be independent, but the Board may also appoint persons to the Company’s audit committee who are not members of the Board. The primary tasks of the Company’s audit committee will be: • to assist the Board in fulfilling its oversight responsibilities relating to the integrity of our financial statements, including periodically reporting to the Board on its activities; and • to make recommendations for the appointment, compensation, retention and oversight of, and consider the independence of the Company’s external auditors and perform such other duties imposed by applicable laws and regulations of the regulated market or markets on which the Shares are listed, as well as any other duties entrusted to the committee by the Board. 112 COMPENSATION COMMITTEE The Board expects that it will establish a compensation committee, which will review the Company’s compensation policy, determine the remuneration of executive directors and the senior management of the Company’s subsidiaries and exercises discretion with regard to employee and management benefit schemes. The Company will publish any appointments to its compensation committee on its website (http://www.gagfah.com). The compensation committee shall be composed of at least three Board members, of which at least one will be independent. The Board may also appoint persons to the compensation committee who are not members of the Board. SENIOR MANAGEMENT OF THE COMPANY’S SUBSIDIARIES Members of the senior management of the Company’s subsidiaries are integral to the management of the Company’s subsidiaries. With the exception of Burkhard U. Drescher, members of the Board are not members of the senior management of the Company’s subsidiaries. As a result, of the members of the Board, only Mr. Drescher is active in the day-to-day management of the Company’s subsidiaries. The following individuals are members of the senior management of the Company’s respective subsidiaries: Name Business address Principal Activity Burkhard U. Drescher . . . . . . . . . . . . . . . . . . . . . Huyssenallee 36-38 45128 Essen, Germany Huyssenallee 36-38 45128 Essen, Germany Huyssenallee 36-38 45128 Essen, Germany Friedrich-List-Platz 2 01069 Dresden, Germany Huyssenallee 36-38 45128 Essen, Germany Huyssenallee 36-38 45128 Essen, Germany Chief Executive Officer, Managing Director Chief Financial Officer, Managing Director Chief Operating Officer, Managing Director Managing Director Martin Löffler . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jörg Deisel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reiner Seifert . . . . . . . . . . . . . . . . . . . . . . . . . . . . Worna Zohari . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dr. Ulrich Weber* . . . . . . . . . . . . . . . . . . . . . . . . * Chief Sales Officer, Managing Director Chief Investment Officer, Managing Director Dr. Ulrich Weber will be appointed shortly after the date hereof. Burkhard U. Drescher, Martin Löffler, Jörg Deisel and Worna Zohari each are, and Dr. Ulrich Weber will become, officers and managing directors of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. Burkhard U. Drescher and Reiner Seifert are each Managing Directors of WOBA GmbH. Burkhard U. Drescher: Burkhard U. Drescher, 55, is a member of the Board and is Chief Executive Officer of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1, and is Managing Director of the WOBA GmbH Group. Mr. Drescher has 28 years of professional experience, and joined our Group in 2006. Mr. Drescher has degrees in business sciences and chemistry. Prior to joining our Group, he was mayor of the City of Oberhausen, Germany and a member of the management board of RAG Essen, Germany. Mr. Drescher is responsible for administration, portfolio management and business communication. Martin Löffler: Martin Löffler, 46, is Chief Financial Officer of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. Mr. Löffler has 21 years of professional experience, and joined our Group in 2006. Following completion of his studies of business administration, Mr. Löffler worked in the finance departments of several listed companies. Before joining our Group, Mr. Löffler was Chief Financial Officer of Thiel Logistik AG Luxembourg, a company listed on the Frankfurt Stock Exchange. Mr. Löffler is responsible for controlling, finances, accounting, taxes, investor relations and information technology. Jörg Deisel: Jörg Deisel, 52, is Chief Operating Officer of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. Mr. Deisel has 25 years of professional experience, and joined our Group in August 2005. After obtaining a degree in electrical science, Mr. Deisel worked 113 for several German and international companies for 15 years as chief executive officer with a focus on strategic repositioning. Before joining our Group, he was Chief Executive Officer of Dynamit Nobel AG where he was responsible for the restructuring of the company. Thereafter, Mr. Deisel also served as a consultant on international mergers and acquisitions. Mr. Deisel is responsible for real estate management and human resources. Reiner Seifert: Reiner Seifert, 47, is Managing Director of WOBA GmbH. Mr. Seifert has 20 years of professional experience, and joined the WOBA GmbH Group in 1997. After obtaining a degree in business administration, Mr. Seifert worked for Arthur Andersen GmbH and Wohnbau Nordwest GmbH. Mr. Seifert has been a member of the management board of WOBA GmbH since 2003, and is responsible for all matters related to the WOBA GmbH Group. Worna Zohari: Worna Zohari, 35, is Chief Sales Officer of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. Mr. Zohari has 13 years of professional experience, and joined our Group in July 2005. After completion of his studies of real estate economics, Mr. Zohari qualified as a professional member of the Royal Institution of Chartered Surveyors. Mr. Zohari worked for a brokerage company and was an authorized representative (Prokurist) for Viterra AG, then the largest real estate company in Germany. Thereafter, he also served as a consultant on real estate portfolio purchases and privatization processes for international investors. Mr. Zohari is responsible for real estate sales and project development. Dr. Ulrich Weber: Dr. Ulrich Weber, 39, will be appointed Chief Investment Officer of the GAGFAH GmbH Group, the NILEG GmbH Group and Acquisition 1. Dr. Weber has 14 years of professional real estate experience. After completion of his studies of business administration at the University of St. Gallen, Switzerland, Dr. Weber spent five years working for two German development companies where he was primarily responsible for acquisition/disposition and asset management. In 1998, he founded Bauconcept Gesellschaft für Immobilien-Investitionen mbH, a Berlin-based property development company which was successfully active in the residential and office markets of Berlin and Dresden. In 2003, Dr. Weber founded apellas Property Management GmbH together with Soros Real Estate Investors C.V., a real estate private equity fund. Under Dr. Weber’s leadership, apellas has successfully invested in the residential and office markets in Berlin, Hamburg and Hanover. Dr. Weber will be responsible for acquisitions and investments. Agreements Between Members of Senior Management of the Company’s Subsidiaries and the Company Burkhard U. Drescher is party to an agreement with the Company pursuant to which the Company guaranteed the performance of certain obligations of GAGFAH GmbH to Mr. Drescher set forth in a service agreement between Mr. Drescher and GAGFAH GmbH. As of the date hereof, GAGFAH GmbH has performed such obligations. Compensation and Shareholdings of the Senior Management of the Company’s Subsidiaries Members of the senior management of the Company’s subsidiaries are party to service agreements with certain subsidiaries within our Group. With the exception of the service agreement to which Burkhard U. Drescher is a party, none of such service agreements provide for benefits upon termination. The service agreement for Mr. Drescher provides that if Mr. Drescher terminates such agreement under certain circumstances, he is entitled to a gross payment of u1,000,000. Such payment is made in lieu of any claims of Mr. Drescher arising from the service agreement except for vested equity awards. We expect that the total cash compensation of members of the senior management of the Company’s subsidiaries in 2006, consisting of base salaries for each member and guaranteed cash bonuses for two members, will amount to at least u2,195,000. In addition, each member of the senior management of the Company’s subsidiaries is entitled to payment of a discretionary bonus and, except for Dr. Ulrich Weber, will receive additional compensation through participation in the Company’s stock option plan. See ‘‘Description of Share Capital—Share Capital and Shares—Stock Option Plan.’’ The following members of the senior management of the Company’s subsidiaries will be granted, shortly after the offering, stock options in the respective amounts set forth below. 114 Name Number of stock options* Burkhard U. Drescher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Martin Löffler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jörg Deisel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reiner Seifert. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Worna Zohari . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dr. Ulrich Weber. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,150 156,167 193,018 73,429 144,763 0 * The exercise price per stock option is u0.01. All of the option grants are subject to vesting conditions, certain of which will be satisfied upon the successful completion of this offering. Through Tangentum Erste Vermögensbeteiligungs GmbH & Co KG, Dr. Ulrich Weber holds a significant investment in the Company. As agreed with and paid by Cypress Grove International and its co-investment funds, who are invested in, among other entities, the Company, Dr. Ulrich Weber, furthermore, is entitled to receive a certain percentage of incentive performance fees vesting over the life of the investments. For details on Mr. Weber’s investment in the Company, see ‘‘Principal and Selling Shareholders.’’ Certain members of management will be provided interest-bearing loans to provide them with liquidity in order to pay certain income taxes arising from the exercise of their stock options. We currently expect to issue shares following this offering as part of a severance payment to a former employee of our Group. CERTAIN INFORMATION ON THE MEMBERS OF THE BOARD OF DIRECTORS, AUDIT COMMITTEE, COMPENSATION COMMITTEE AND SENIOR MANAGEMENT OF THE COMPANY’S SUBSIDIARIES No member of the Board or the senior management of the Company’s subsidiaries has, within the past five years, been convicted of any fraudulent offenses, publicly incriminated and/or sanctioned by statutory or regulatory authorities (including professional associations) or, acting in the capacity of a member of the administrative, management or supervisory entity or as a founder of an issuer, been associated with any bankruptcies and/or insolvencies, receiverships or liquidations except as indicated with respect to certain companies under ‘‘—Directorships Held by Board Members’’. No member of the Board or the senior management of the Company’s subsidiaries has, within the past five years, been deemed by a court to be unfit for membership in an administrative, management or supervisory entity of a company or to be unfit to exercise management duties or to manage the business of an issuer. None of the members of the Board or the senior management of the Company’s subsidiaries are related to one another by blood or marriage. CONFLICTS OF INTEREST Fortress Investment and its affiliates are not limited or restricted from investing or engaging in any business or managing any fund that invests in real estate related or private equity investments, whether in Germany or otherwise. Neither Fortress Investment nor its affiliates are obligated to offer us any investment opportunities, whether in Germany or otherwise and any decision to do so will be entirely within their discretion. Fortress Investment and its affiliates engage in a broad spectrum of activities, including investment advisory activities, and have extensive investment and business activities that are independent from, and may from time to time conflict with, ours. Certain affiliates of Fortress Investment advise, sponsor or act as investment managers to investment funds, portfolio companies of private equity investment funds and other persons or entities (including investors in our Group) that have investment objectives that overlap with ours and that may, therefore, compete with us for investment and business opportunities. A number of collective investment vehicles currently managed by Fortress Investment, including (but not limited to) Eurocastle Investment Limited, the Fortress Private Equity Funds, the Drawbridge Special Opportunities Funds and the Drawbridge Long Dated Value Funds, have or may have investment objectives which will result in such vehicles potentially making investments that are similar in nature to investments we shall seek to make. Fortress Investment does not have any obligation to direct to us investment opportunities which meet our investment objectives. Certain directors and/or employees of Fortress Investment serve or may serve as directors or executive officers of the Company. Such directors and/or employees of Fortress Investment may also 115 serve as directors or executive officers of one or more existing or future funds managed by Fortress Investment, including funds that invest in the same sectors in which we expect to operate and invest. Such individuals may, therefore, have obligations to the investors in funds managed by Fortress Investment which may, in particular circumstances, conflict with our interests or those of our investors. See ‘‘Risk Factors—Risk Related to our Business—There may be conflicts of interest between our Group and certain funds managed by Fortress Investment.’’ FOUNDERS The Company was initially incorporated by the following entities: Name Address NLG Acquisition Holdings Management S.àr.l. . . . . . . . . . . 14A, rue des Bains, L-1212 Luxembourg Status Unlimited partner Fortress Investment Fund III L.P.. . . . . . . . . . . . . . . . . . . . 1209 Orange Street, Wilmington, DE 19801, U.S.A. Limited partner Fortress Investment Fund III (Fund B) L.P. . . . . . . . . . . . . 1209 Orange Street, Wilmington, DE 19801, U.S.A. Limited partner Fortress Investment Fund III (Fund C) L.P. . . . . . . . . . . . . 1209 Orange Street, Wilmington, DE 19801, U.S.A. Limited partner Fortress Investment Fund III (Fund D) L.P. . . . . . . . . . . . . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Investment Fund III (Fund E) L.P. . . . . . . . . . . . . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Investment Fund III (Coinvestment Fund A) L.P . . 1209 Orange Street, Wilmington, DE 19801, U.S.A. Limited partner Fortress Investment Fund III (Coinvestment Fund B) L.P. . . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Investment Fund III (Coinvestment Fund C) L.P. . . 1209 Orange Street, Wilmington, DE 19801, U.S.A. Limited partner Fortress Investment Fund III (Coinvestment Fund D) L.P. . . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Residential Investment Deutschland (Fund A) L.P. . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Residential Investment Deutschland (Fund B) L.P. . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Residential Investment Deutschland (Fund C) L.P. . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner Fortress Residential Investment Deutschland (Fund D) L.P. . P.O. Box 309 GT, Ugland House South Church Street, Georgetown, Grand Cayman, Cayman Islands Limited partner 116 RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS OF THE COMPANY AND ITS AFFILIATES The following is a summary of our most significant transactions with related parties for the years ended 2003, 2004 and 2005, for the six months ended June 30, 2006 and the period to the date of this prospectus. See ‘‘Financial Information.’’ All transactions with related parties have been entered into under conditions based on international price comparison methods according to IAS 24 (arm’s length principle) or under conditions to our favor. Transactions of Currently Related Parties The Company has acquired all shares of GAG ACQ. Ireland Limited from several Fortress Investment funds pursuant to an agreement dated October 4, 2006 and, additionally acquired two series of Eurobonds in GAG ACQ. Ireland Limited and UC ACQ. Ireland Limited from the same Fortress Investment funds as well as several Drawbridge Funds that are shareholders of UC ACQ. Ireland Limited on September 29, 2006. The Drawbridge Funds as unrelated third parties continue to hold the shares in UC ACQ. Ireland Limited. Furthermore, the profits of UC ACQ. Ireland Limited accrue to the Company as the future holder of the Eurobonds. The Company has acquired the shares for approximately u40,000 and the Eurobonds for the issuance of new shares. See ‘‘General Information on the Company—Acquisition, Refinancing and Integration of the GAGFAH GmbH Group—Integration of the GAGFAH GmbH Group’’. Investors’ agreement relating to certain shareholders of GAGFAH GmbH The Company entered into an investors’ agreement on or about October 4, 2006 with certain co-investor funds relating to the shares of GAGFAH GmbH, GAG ACQ. Ireland Limited and UC ACQ. Ireland Limited under which (i) the co-investor funds are not entitled to directly or indirectly transfer their shares in UC ACQ. Ireland Limited without the consent of the Company and (ii) the co-investor funds shall cause UC ACQ. Ireland Limited to vote its shares in GAGFAH GmbH so as to elect the members designated by the Company to the supervisory board or advisory board or any other similar body of GAGFAH GmbH. The investors’ agreement will terminate when the Company no longer directly or indirectly owns shares of GAGFAH GmbH. GAGFAH Acquisition 1 GmbH as party to related party transactions On September 29, 2006, Acquisition 1, as borrower, entered into a bridge financing with Deutsche Bank AG, as lender, for an aggregate amount of u108.8 million. The bridge financing is secured by guarantees provided by the four entities that are referred to as the Fortress Residential Investment Deutschland Fund, or FRID. It is expected that the bridge financing will be refinanced within the next month, and at such time the FRID guarantees will terminate. Acquisition 1 used the bridge financing as partial repayment of a shareholder loan provided by the Company. The Company used the proceeds of such repayment to (i) distribute the share premium related to the Class R shares in the aggregate amount of approximately u57 million pro rata to FRID, the holders of the Class R shares and (ii) repay certain shareholder loans provided by FRID in the aggregate amount of approximately u51.8 million. GAGFAH GmbH Group as party to related parties transactions Mr. Peter Breddemann, a current member of the supervisory board of GAGFAH GmbH was a tenant of an apartment owned by a GAGFAH GmbH Group company until September 30, 2004. The annual rent was approximately u4,000 as of September 30, 2004. As of today, Mr. Breddemann rents a garage from a GAGFAH GmbH Group company for an annual rent of approximately u500. NILEG GmbH Group as party to related parties transactions NILEG Norddeutsche formerly held 50% of the limited partnership interest in the limited partnership NILEG & Berliner Bau Beteiligungs GmbH & Co. KG and 50% of the shares in such entity’s general partner NILEG & Berliner Bau Verwaltungs GmbH, a project joint venture of NILEG Norddeutsche and Berliner Bau Projektentwicklung GmbH under German law, which was 117 founded in 2005 for the establishment of residential units in Denia, Spain. On July 14, 2006, NILEG Norddeutsche sold its shares in the joint venture to the joint venture partner. In 2005, NILEG Norddeutsche rendered support services worth approximately u77,000 to the joint venture. Blitz 06-652 GmbH as party to related parties transactions In the course of the acquisition of the WOBA GmbH Group by Blitz 06-652 GmbH and CM Komplementär 05-525 GmbH & Co. KG, or together the WOBA Purchasers, several Fortress Investment funds, as shareholders, entered into a guarantee agreement with Lehman Brothers as hedging/financing bank on March 27, 2006 in favor of Blitz 06-652 GmbH. This guarantee agreement was terminated following Blitz 06-652 GmbH’s acquisition of the WOBA GmbH Group. Transactions of Former Related Parties Since the Company’s acquisition of the GAGFAH GmbH Group, the NILEG GmbH Group and the WOBA GmbH Group, some of the existing business relationships between the former shareholders of such groups were terminated, while others are still ongoing. The material business relationships of the relevant groups with their former shareholders and other related parties of the former shareholders, are set forth below. GAGFAH GmbH Group Prior to the GAGFAH Purchasers’ acquisition, the majority of GAGFAH GmbH’s shares were owned by the German Federal Insurance Agency for Employees (Bundesversicherungsanstalt für Angestellte), a public entity of the Federal Republic of Germany. From 1991 to 1996, GAGFAH GmbH Group entities, or as legal successor of EINTRACHT Wohnungsbauaktiengesellschaft, which was merged into GAGFAH AG in 1996, entered into several loan agreements with the German Federal Insurance Agency for Employees. As at June 30, 2006, the aggregate amount outstanding under all such loans by German Federal Insurance Agency for Employees to the GAGFAH GmbH Group was approximately u45.8 million (including approximately u20.9 million under loans initially granted to EINTRACHT Wohnungsbauaktiengesellschaft). The GAGFAH Purchasers acquired seven heritage building rights (Erbbaurechte) for approximately u49.7 million from the German Federal Insurance Agency for Employees in connection with their acquisition of the GAGFAH GmbH Group. Udo Bachmann was until July 31, 2006 a member of the management boards of, inter alia, GAGFAH GmbH, GAGFAH M and NILEG Holding, and is party to a lease agreement for an apartment, an office and a garage with GAGFAH M dated October 30, 2002. The annual rent under the lease agreements, excluding incidental costs, amounted to approximately u19,200 from 2003 through 2005. Under a loan agreement of October 30, 2002, Udo Bachmann granted to GAGFAH M an interest-free loan of u60,000 with no fixed maturity date. GAGFAH M recently paid back the loan to Udo Bachmann except for an amount equal to two monthly net rents as a deposit under the lease agreement. In return, the monthly rent will be increased by u200 per month from October 2006 onwards. In addition, GAGFAH M administered two properties owned by Udo Bachmann at market terms. Udo Bachmann has terminated one of the rental management agreements effective as of June 30, 2006 while GAGFAH M has terminated the other rental management agreement, effective as of December 31, 2006. Several former members of the supervisory boards of GAGFAH GmbH Group companies, at that time appointed by the employees of the GAGFAH GmbH Group companies, are tenants of apartments owned by a GAGFAH GmbH Group company. The annual rent of all these tenants are at market terms. Two former members of the supervisory board of GAGFAH GmbH received employee loans of about u4,000 and u2,500, respectively as of December 31, 2005 and 2004. NILEG GmbH Group Prior to its acquisition, the NILEG GmbH Group was owned by three entities, Norddeutsche Landesbank Girozentrale, or NordLB, Bremer Landesbank Kreditanstalt Oldenburg—Girozentrale, or BLB, and Landschaftliche Brandkasse Hannover, or VGH. 118 Prior to the acquisition, the main external financing of the NILEG GmbH Group was provided by NORD LB through loans to all NILEG GmbH Group entities, in the aggregate amount of approximately u698,068,000. In connection with the Company’s acquisition of the NILEG GmbH Group, however, on September 1, 2005 the loans were terminated for the material NILEG GmbH Group entities. Additionally, NordLB granted several avals to NILEG GmbH Group companies. However, entities of the NILEG GmbH Group are still parties to approximately 160 loan agreements with NordLB and its affiliates. On June 30, 2006, the amount outstanding under the loans was approximately u78.5 million. On August 14, 1998, NILEG Norddeutsche entered into a commercial lease agreement with NordLB with respect to the property ‘‘Stöckheimer Markt’’. The contract has a fixed term of ten years, and grants NordLB an option to extend the term of the contract twice, for five-year terms each. Notwithstanding this option, the contract term automatically extends for successive one-year terms until it is terminated by either party. NordLB pays annual rent of approximately u86,891 plus expenses. NordLB has not given a deposit or comparable security. On June 21, 2006, NILEG Norddeutsche sold the concerned property to an unrelated third party. According to Section 566 and Section 578 of the German Civil Code, the purchaser automatically superseded NILEG Norddeutsche as lessor. On February 28, 2000, NILEG Norddeutsche entered into a commercial lease agreement with NORDCON Investment Management AG, NORDCON Vermögensmanagement GmbH and NORDCON Asset Management Holding GmbH, subsidiaries of NordLB, or together referred to as NORDCON, regarding office space for bank purposes. The agreement was amended on August 30, 2004. The initial contract term expires on February 28, 2010, at which time it automatically extends for a further five years until either party terminates it 12 months prior to the end of the contractual rental period. NORDCON pays a monthly rent in the amount of u11,000 plus expenses. A deposit or comparable security has not been given by NordLB. On June 21, 2006, NILEG Norddeutsche sold the concerned property to an unrelated third party. According to Section 566 and Section 578 of the German Civil Code, the purchaser automatically superseded NILEG Norddeutsche as lessor. NILEG Norddeutsche or its legal predecessor entered into 17 agreements with Norddeutsche Facility-Management GmbH, or NordFM, a NordLB subsidiary, concerning various facility management and administration services for several NILEG Norddeutsche properties. In 2005, such expenses totaled u236,983.23 (u204,467.57 in 2004, u151,695.16 in 2003). As of June 30, 2006 the expenses amounted to u170,807,24. As part of the sale of properties dated June 20/21, 2006, 6 of these agreements were transferred to the purchaser of the properties. On May 8, 2001, Osnabrücker Wohnungsbaugesellschaft mbH, or OWG, a subsidiary of NILEG Holding, which prior to its acquisition by NILEG Holding was owned by the City of Osnabrück, entered into a service agreement with Klinikum Osnabrück GmbH, regarding emergency and other services relating to assisted living services to be rendered by Klinikum Osnabrück GmbH at the property Veilchenstraße 24, Osnabrück. The contract term began on June 1, 2001 and has no specified term. Either party may terminate the contract 6 months prior to the end of each year. OWG makes monthly payments of u23.00 for emergency services for each apartment plus extra fees for any additional services requested, which are passed on to the apartments tenants. In 2005, the aggregate costs amounted to u4,301 (u4,301 in 2004, u4,202 in 2003). For the six months ended June 30, 2006 the costs aggregated to u2,024. Additionally, OWG entered into a lease agreement with the City of Osnabrück on April 9, 1998, which was last amended on May 3, 2002. OWG rents three semi-detached houses and receives an annual rent of approximately u35,996. The initial contract term runs until June 30, 2012, and automatically extends for a further five-year term, if neither party terminates the agreement with one year notice before the end of term. OWG granted the City of Osnabrück a 20% discount on rent in exchange for the City taking over the maintenance and repair duties for the buildings. Furthermore, OWG entered into a commercial lease agreement with the City of Osnabrück on May 5, 2003 regarding a residential unit used by a kindergarten. The contract is based on standard terms and there is no term limit. OWG receives an annual rent in the amount of u11,695, including costs. Prior to the closing of the Company’s acquisition of the NILEG GmbH Group, its entities transferred shares in 11 entities to NordLB and its subsidiaries. Such entities included NORDIG 119 Norddeutsche Investitionsgesellschaft mbH (100 % subsidiary of NILEG Norddeutsche) and NILEG Grundstücks- und Verwaltungs-GmbH (100 % subsidiary of NILEG Norddeutsche). NILEG Norddeutsche also transferred two real properties and one receivable against the City of Bad Doberan to NordLB. These transactions were part of the NILEG GmbH Group acquisition and therefore were not dealt with as usual business proceedings under market conditions. WOBA GmbH Group All shares in WOBA GmbH were owned by the City of Dresden, prior to their purchase by Blitz 06-652 GmbH and CM Komplementär 05-525 GmbH & Co. KG, or the WOBA Purchasers. WOBA GmbH and its subsidiaries entered into agreements with the City of Dresden in several business areas. In the course of the reorganization of the WOBA GmbH Group in 2005, prior to its sale, several of the contractual relationships for services typically provided by a public entity, e.g. related urban reorganization measures (städtebauliche Sanierungsmaßnahmen) and architectural and structural, engineering, and consulting, were outsourced to Stadtentwicklungs- und -sanierungsgesellschaft Dresden mbH, or STESAD, a former WOBA GmbH affiliate, which was hived off to the City of Dresden in the pre-acquisition reorganization process and was not acquired by the WOBA Purchasers. The WOBA GmbH Group still renders similar services to the City of Dresden; however, since December 31, 2005, the majority of these services is rendered by STESAD as a 100% subsidiary of the City of Dresden. See ‘‘Related Party Transactions—Transactions of Former Related Parties—Real Estate Services’’ below. In the course and as party of the pre-acquisition reorganization, WOBA GmbH sold all of its shares of two entities to the City of Dresden or to parties related to the City of Dresden. The entities are STESAD (100%) and Objektgesellschaft Kongresszentrum Neue Terasse Dresden GmbH, or NTD, (58%). In addition, WOBA GmbH purchased Liegenschaften Weißig GmbH (100%) and Bauund Siedlungsgesellschaft Dresden GmbH (100%) from a party related to the City of Dresden. In 2004, Immo Service Dresden GmbH, a subsidiary of WOBA Dresden GMBH purchased 100% of Dienstleistungs- und Bauhof Dresden GmbH from a party related to the City of Dresden. Loans and guarantees The City of Dresden granted WOBA GmbH and WOHNBAU NORDWEST two shareholder loans, one in the amount of u169,600 (WOHNBAU NORDWEST) on December 14, 1995, and one in the amount of u162,000,000 (WOBA GmbH) on November 17, 2003. The latter has been allocated to company reserves and terminated on March 31, 2006. In addition, the City of Dresden and Bau- und Siedlungsgesellschaft Dresden GmbH, or BSGD, received several loans, which were transferred to WOHNBAU NORDWEST later on. Meanwhile these loans have been completely redeemed. In 2000 and 2001, SÜDOST WOBA granted four guarantees in the aggregate amount of u1,159,600 to the City of Dresden, in accordance with Section 8, paragraph 2(d) of the Act on the Priority of Investments concerning Re-Transfer Claims in terms of the German law on legal estate (Investitionsvorranggesetz). Furthermore, on May 16, 2003 SÜDOST WOBA granted several coverage guarantees (Erschließungsbürgschaften) regarding ProhlisZentrum to the City of Dresden in an aggregate amount of approximately u23,700. Regarding the parking garage located at Metzer Straße, WOHNBAU NORDWEST gave warranty guarantees (Gewährleistungsbürgschaften) to the City of Dresden in an aggregate amount of u2,840 dated December 8, 2003, and a contract fulfillment guarantee (Vertragserfüllungsbürgschaft) in the amount of u10,000 dated August 4, 2005. Other finance-related transactions, subsidies and related allowances In the years 2003 through 2005, the City of Dresden granted WOHNBAU NORDWEST several allowances regarding demolishment, modernization and construction purposes in different properties, e.g. refurbishing roof and facade at the property Hauptstraße 2, demolishing a building at Wildsruffer Straße 12 or erecting the parking garage located at Metzer Straße. Theses allowances were for the aggregate amount of u2,090,450. During the same time period, the City of Dresden also granted SÜDOST WOBA similar allowances in the aggregate amount of u125,868. From 2003 through 2006, SÜDOST WOBA received other allowances, some as appreciation funds (Aufwertungsmittel), and some as subsidies granted under the Social City Program (Programm 120 soziale Stadt). These allowances add up to approximately u1,352,400 and were granted for a period of either 15 years (those granted under the Social City Program) or 18 years (all other funds). Real estate services Since December 31, 2005, STESAD is no longer part of the WOBA GmbH Group. Prior to this date, STESAD itself or as legal successor to STESAD Immobilien GmbH, a WOBA GmbH subsidiary, entered into 35 service agreements with the City of Dresden. These contracts provide for various services, such as janitorial services, management services, construction supervision services and consultancy services. In the years 2004 and 2005, STESAD and the City of Dresden entered into 6 agreements regarding the remuneration for the refurbishments (Stadterneuerung und Stadtentwicklung) carried out by STESAD in favor of the City of Dresden in several districts of Dresden. Theses agreements, as well as the performed services, are based on a trust agreement between the parties, dated January 2, 2004, regarding planning and administration of such measures. The agreements enabled STESAD a contractual remuneration in aggregate of up to u1,127,864. In addition, STESAD and the City of Dresden entered into 13 consultancy contracts relating to refurbishment work and into 2 construction supervision contracts. For services performed under these contracts, STESAD is enabled to remunerations up to u425,821 in 2005. On December 30, 2005, all of theses agreements were transferred to STESAD. In the years 2003 to 2005, STESAD entered into 9 consultancy contracts with the City of Dresden regarding the refurbishment of several districts of Dresden. As of December 30, 2005, the agreements enabled to remuneration in an aggregate amount of u249,586 for such services rendered. In addition, STESAD and the City of Dresden entered into 3 administration agreements (Verwalterverträge) regarding the provision of services for properties owned by the City of Dresden. For services performed under these contracts, STESAD was enabled to remunerations of up to u950,321 in the years 2003 to 2005. On December 30, 2005, all of theses agreements were transferred to STESAD. In the years 2003 to 2005, WOBA GmbH Group entities entered into 4 construction supervision agreements (Baubetreuungsverträge) and one architectural agreement with the City of Dresden regarding, inter alia, demolishment and refurbishment measures, e.g. dismantling at property Wildsruffer Straße 12, replacement of windows at properties Wallstraße 19-21/Dr.-Külz-Ring 9-13 and construction of a day-care center at the property located at Hermsdorfer Straße 14. In addition, WOBA GmbH and the City of Dresden entered into a management agreement (Geschäftsbesorgungsvertrag) regarding erecting and furbishing a sports school center at the properties located at Messering 1-4 and 24-27. Lease contracts and related contracts Prior to the acquisition of WOBA GmbH Group, WOBA GmbH or its affiliates entered into 41 lease agreements with the City of Dresden. They comprise commercial leases (e.g. shops, offices, medical practices, a museum and space, which is subleased for a kindergarten) as well as residential leases. Seven of these agreements have been terminated prior to the initial offering of the Shares. Moreover, WOBA GmbH and WOHNBAU NORDWEST entered into 4 granting agreements (Gestattungsverträge) with the City of Dresden. Moreover, on June 30, 2006, WOHNBAU NORDWEST and the City of Dresden entered into a retroactive lease contract regarding several footpaths that have been used by the City of Dresden during construction works at the property Postplatz. The contract term is from June 1, 2005 to September 5, 2005, and from June 1, 2005, to December 31, 2005. For this usage WOHNBAU NORDWEST received an amount of u1,265. In the years 2000 and 2006, SÜDOST WOBA, WOHNBAU NORDWEST and Liegenschaften Weißig GmbH, a WOBA GmbH subsidiary, entered into 3 allocation agreements (Belegungsrechtssverträge) with the City of Dresden regarding an aggregate amount of 8,001 apartments. Under these contracts such WOBA GmbH affiliate is obliged to rent out empty apartments to persons who have met certain eligibility criteria (e.g. persons with a low income), upon request by the City of Dresden. Moreover, the rent for these apartments has to be kept at a moderate level, with the City of Dresden defining the maximum rent amount. Property management contracts On March 14, 2001, the City of Dresden and WOHNBAU NORDWEST entered into a management agreement regarding the provision of, inter alia, commercial administration, technical 121 services and further specified services to 414 properties owned by the City of Dresden. The contract term retroactively began on January 1, 2001, and is concluded for an unlimited period of time. It is concluded at arm’s length. Either party can terminate the contract with 6 months notice before the end of each calendar year. WOHNBAU NORDWEST GmbH, or WOHNBAU NORDWEST received a remuneration depending on the actual rents and the kind of property, i.e. residential, commercial and untenanted flats as well as garages. The agreement was transferred to STESAD in 2003. In the years 2002 and 2003, WOHNBAU NORDWEST entered into 2 management agreements with the City of Dresden regarding the termination of all tenancies in the properties Wildsruffer Straße 12 and Terrassenufer 14, since these properties were to be demolished. Both agreements have been fulfilled and are therefore terminated. For rendered services WOHNBAU NORDWEST received an aggregate amount of u1,130,000. In addition, in 1995 and 2000 Bau- und Siedlungsgesellschaft Dresden GmbH entered into 2 management agreements regarding the administration of properties in respect of tenancy management services. Both contracts were transferred to Baustoffhandelsgesellschaft Weißig GmbH on May 8, 2006, a company not affiliated to the WOBA GmbH Group. On August 31, 1993, WOHNBAU NORDWEST and the City of Dresden entered into an operating agreement regarding the administration of a residential accommodation to take in e.g. resettlers and homeless persons. For rendering such service in 2005 WOHNBAU NORDWEST received an aggregate amount of u305,646 (approximately u417,652 in 2004; approximately u406,597 in 2003). For the six months ended June 30, 2006, WOHNBAU NORDWEST received an aggregate amount of u138,612. Real estate acquisitions and related barter agreements On February 9, 2006, WOHNBAU NORDWEST and the City of Dresden entered into a barter agreement regarding areas in the boundary Altstadt I. WOHNBAU NORDWEST transferred an area in an aggregate amount of 888 m2 to the City of Dresden and received an area of 77 m2. In addition, WOBA GmbH received a payment of u1,589,600. On July 28, 2005, SÜDOST WOBA and the City of Dresden entered into a barter agreement regarding several public street grounds in Dresden. SÜDOST WOBA transferred such areas in an aggregate amount of 2,695 m2 to the City of Dresden and received areas in an aggregate amount of 2,580 m2. Either party made no additional payment. On December 29, 1994, the City of Dresden transferred several properties to WOHNBAU NORDWEST without any required payment but, instead, imposed the condition regarding properties which title allocation implies certain insecurities and which are subject to restitution claims, that in case WOHNBAU NORDWEST sold the properties, the purchase price had to be paid to the City of Dresden. In the meantime WOHNBAU NORDWEST has sold some of these properties and made respective payments to the City of Dresden or has made provisions in their balance. Dismantling contracts In the years 2004 to 2006 WOBA GmbH, or its affiliates, and the City of Dresden entered into 27 dismantling agreements regarding the demolishment of numerous properties. The demolishment are subsidized by the City of Dresden in an aggregate amount of u10,909,460 partly payable in installments until 2009. In 2005, the WOBA GmbH Group received respective subsidies in an aggregate amount of u1,621,170 (u2,769,480 in 2004). The subsidies are granted following the demolishment of the respective properties. 122 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth principal beneficial shareholders of the Company immediately prior to the offering, and the expected ownership of Shares by these shareholders immediately following the offering, on the bases of (i) no exercise of the Greenshoe Option and (ii) full exercise of the Greenshoe Option. See ‘‘Underwriting—Greenshoe Option and Share Lending’’. It is expected that all principal shareholders will sell Shares in the offering pro rata to their holdings prior to the offering. The following table is based on the assumption that all Shares offered by the Selling Shareholders will be sold. Prior to the Offering Number of Shares Fortress Subsidiary (GAGACQ) LLC . . 32,555,412 FABP Subsidiary (GAGACQ) LLC. . . . 1,378,007 Fortress Investment Fund III LP . . . . . . 6,939,957 Fortress Investment Fund III (Fund B) LP . . . . . . . . . . . . . . . . . . . . 5,933,782 Fortress Investment Fund III (Fund C) LP . . . . . . . . . . . . . . . . . . . . 1,240,805 Fortress Investment Fund III (Fund D) LP . . . . . . . . . . . . . . . . . . . . 2,847,910 Fortress Investment Fund III (Fund E) LP . . . . . . . . . . . . . . . . . . . . 200,046 Fortress Subsidiary (GAGACQ) Investors (Cayman) Ltd. . . . . . . . . . . . 31,948,503 Fortress Subsidiary (GAGACQ) Co-Investors (Cayman) Ltd. . . . . . . . . 12,679,326 Fortress Investment Fund III (Coinvestment Fund A) LP. . . . . . . . . 648,365 Fortress Investment Fund III (Coinvestment Fund B) LP . . . . . . . . . 1,273,802 Fortress Investment Fund III (Coinvestment Fund C) LP . . . . . . . . . 328,072 Fortress Investment Fund III (Coinvestment Fund D) LP. . . . . . . . . 1,563,650 Fortress Residential Investment Deutschland (Fund A) LP. . . . . . . . . . 25,767,424 Fortress Residential Investment Deutschland (Fund B) LP . . . . . . . . . . 15,403,452 Fortress Residential Investment Deutschland (Fund C) LP . . . . . . . . . . 10,589,964 Fortress Residential Investment Deutschland (Fund D) LP. . . . . . . . . . 6,874,048 Fortress Investment Fund III (GAGACQ Subsidiary) LLC . . . . . . . 13,721,572 Fortress Investment Fund III (Fund B) (GAGACQ Subsidiary) LLC . . . . . . . 11,732,178 Fortress Investment Fund III (Fund C) (GAGACQ Subsidiary) LLC . . . . . . . 2,453,300 Fortress Investment Fund III (Fund D) (GAGACQ Subsidiary) LTD . . . . . . . 5,630,841 Fortress Investment Fund III (Fund E) (GAGACQ Subsidiary) LLC . . . . . . . 395,528 Drawbridge Special Opportunities Fund LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,937,181 Drawbridge Special Opportunities Fund Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,544,506 Entities affiliated with Cypress Grove International(2) . . . . . . . . . . . . . . . . . . . 10,276,224 ZG Holdings cv(3) . . . . . . . . . . . . . . . . . . 14,136,145 Free Float . . . . . . . . . . . . . . . . . . . . . . . . — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000,000 In % (approx.) Indirect participations(1) After the Offering without exercise of the assuming full exercise of the Greenshoe Option Greenshoe Option Number of In % Number of In % Shares (approx.) Shares (approx.) 14.47% 26,369,884 0.61% 1,116,186 3.08% 5,621,365 11.72% 0.50% 2.50% 26,060,607 1,103,095 5,555,436 11.58% 0.49% 2.47% 2.64% 4,806,363 2.14% 4,749,992 2.11% 0.55% 1,005,052 0.45% 993,264 0.44% 1.27% 2,306,807 1.03% 2,279,752 1.01% 0.09% 162,037 0.07% 160,137 0.07% 14.20% 25,878,287 11.50% 25,574,777 11.37% 5.64% 10,270,254 4.56% 10,149,800 4.51% 0.29% 525,176 0.23% 519,016 0.23% 0.57% 1,031,780 0.46% 1,019,679 0.45% 0.15% 265,738 0.12% 262,622 0.12% 0.69% 1,266,557 0.56% 1,251,702 0.56% 11.45% 20,871,613 9.28% 20,626,823 9.17% 6.85% 12,476,796 5.55% 12,330,463 5.48% 4.71% 8,577,871 3.81% 8,477,266 3.77% 3.06% 5,567,979 2.47% 5,502,675 2.45% 6.10% 11,114,473 4.94% 10,984,118 4.88% 5.21% 9,503,064 4.22% 9,391,608 4.17% 1.09% 1,987,173 0.88% 1,963,867 0.87% 2.50% 4,560,981 2.03% 4,507,488 2.00% 0.18% 320,378 0.14% 316,620 0.14% 2.64% 4,809,117 2.14% 4,752,713 2.11% 1.13% 2,061,050 0.92% 2,036,877 0.91% 3.70% 8,226,117 5.09% 11,315,984 19.00% 44,887,500 100.00% 225,000,000 3.66% 5.03% 19.95% 100.00% 4.57% 8,323,741 6.28% 11,450,277 0.00% 42,750,000 100.00% 225,000,000 (1) The rights and privileges with regard to matters such as voting, dividends and liquidation preference are equal among all Shares. Fortress Investment either is the general partner, or has investment discretion, or both, of or over certain of the funds named in this table. 123 (2) Represents: (a) 4,837,019 Shares beneficially held by Cypress Grove International.D L.P. through CG Phoenix D Ltd; (b) 2,013,832 Shares beneficially held by Cypress Grove International.E L.P. through CG Phoenix E Ltd; (c) 850,049 Shares beneficially held by CGI Co-Invest.D1 L.P through CGI Phoenix Co D1 Ltd.; (d) 1,281,445 Shares beneficially held by CGI Co-Invest.D2 L.P. through CGI Phoenix Co D2 Ltd; (e) 814,288 Shares beneficially held by CGI Co-Invest.E1 L.P through CGI Phoenix Co E1 Ltd.; and (f) 479,591 shares held by Tangentum Erste Vermögensbeteiligungs GmbH & Co. KG., or Tangentum. Although there is no equity ownership between Tangentum and the entities affiliated with Cypress Grove International set forth above, share ownership by Tangentum in GAGFAH S.A. is included in total figure in the table above due to an agreement entered into between Tangentum and CGI (as defined below). The 479,591 shares held by Tangentum represent 411,078 shares beneficially held by Dr. Ulrich Weber and 68,513 shares beneficially held by Claus Merten. The business address of entities affiliated with Cypress Grove International is c/o Grove International Partners LLP, Attn: Dang T. Phan, 126 East 56th Street, Suite 1120, New York, New York 10022, United States of America. The business address of Tangentum is Tangentum Erste Vermögensbeteiligungs GmbH & Co. KG, Attn. Dr. Ulrich Weber, Schumannstrasse 6, 10117 Berlin, Germany. (3) The business address of ZG Holdings cv is M&C Corporate Services Limited, P.O. Box 3096-T, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Except as otherwise indicated, the business address of all shareholders set forth in the table above is c/o Fortress Investment Group LLC, 1345 Avenue of the Americas, 46th Floor, New York, NY 10105, United States of America. Except as disclosed elsewhere in this prospectus, none of the Selling Shareholders has had any material relationship within the past three years with the Company, any of its predecessors or subsidiaries other than as a direct or indirect shareholder. Agreement among Fortress and Major Indirect Shareholders of the Company The four entities that are referred to as the Fortress Residential Investment Deutschland Fund, or FRID, entered into a share purchase agreement, or SPA, with certain entities, or CGI Investors, affiliated with (i) Dr. Ulrich Weber and Claus Merten or (ii) Cypress Grove International or its co-investment funds, collectively CGI, on September 28, 2006, whereby FRID sold Shares of the Company to the CGI Investors for US$150 million. The shares sold by FRID represented at the time of sale 4.57% of the issued share capital of the Company. On September 28, 2006, the CGI Investors entered into a shareholders agreement with the Company and the FRID entities. Under the terms of the agreement, the CGI Investors agreed that, certain apellas companies which are affiliated with the CGI Investors are required for a defined term, to refer to the Company all German residential real estate transactions sourced by them, and will not compete in Germany on the acquisition of residential real estate with the Company or GAGFAH GmbH for a period of ten years. The agreement also provides for various customary rights and obligations on the part of each party, including rights for the CGI Investors to have a non-voting observer attend meetings of the Board, certain restrictions on the ability of the CGI Investors to transfer their shares and customary anti-dilution protections for the CGI Investors. The agreement also provides that Dr. Ulrich Weber will become the Chief Investment Officer of GAGFAH GmbH and will also be entitled to receive a certain percentage of incentive performance fees paid by CGI. See ‘‘Management.’’ Furthermore, certain other employees will be offered to become employees of GAGFAH GmbH and then would cease to be employees of apellas Property Management GmbH. Agreement among Fortress and the Zwirn/DBSO Holders On September 29, 2006, ZG Holdings cv and the two Drawbridge Special Opportunities Funds that are Selling Shareholders (collectively, the ‘‘Zwirn/DBSO Holders’’) agreed in a shareholders agreement with the various Fortress funds to certain post-offering restrictions on transfer of the Shares owned by the Zwirn/DBSO Holders. Those restrictions provide that the Zwirn/DBSO Holders will not transfer their Shares without the consent of the Fortress funds until the one-year anniversary of the offering. However, the Zwirn/DBSO Holders will have the right to sell Shares during the lock-up period if the Fortress fund sell their Shares, in an amount pro rata to the Shares sold by the Fortress funds. 124 GENERAL INFORMATION ON THE GROUP HISTORY AND FORMATION OF THE COMPANY GAGFAH S.A. (formerly named ‘‘NLG Acquisition Holdings S.C.A.’’ and ‘‘NLG Acquisition Investments S.C.A.’’), or the Company, was incorporated on July 12, 2005 as a corporate partnership limited by shares (société en commandite par actions) under the laws of the Grand Duchy of Luxembourg and entered into the commercial register of Luxembourg on July 27, 2005 (register de commerce et des sociétés de Luxembourg). On August 30, 2005, the Company changed its object clause to that of a securitization company pursuant to the Luxembourg Securitization Law of March 22, 2004 (loi du 22 mars 2004 relative à la titrisation), or the Luxembourg Securitization Law. On September 29, 2006, the Company was transformed into a joint stock corporation (societé anonyme) under the laws of the Grand Duchy of Luxembourg and the Company’s articles of incorporation, including its object clause, were fully restated. The Company proceeded to acquire NILEG Holding, WOBA GmbH and GAGFAH Acquisition 1 and received its indirect interest in GAGFAH GmbH, as a contribution in kind, of the Eurobonds and acquired the shares in GAG ACQ. Ireland Limited. In connection with these acquisitions (other than the Shares in GAG ACQ. Ireland Limited) and for the contribution in kind, the Company issued shares of a different classes, namely Class N, Class W, Class R and Class G. • The Class N shares were issued against a contribution in cash on August 30, 2005 in relation with the acquisition and securitization of the shares of Nileg Holding. • The Class W shares were issued against a contribution in cash on April 4, 2006 in relation with the acquisition and securitization of the shares of WOBA Dresden Holding. • The Class R shares were issued against a contribution in cash on May 31, 2006 in relation with the acquisition and securitization of the shares of GAGFAH Acquisition 1. • The Class G shares were issued on September 29, 2006 in relation with the contribution in kind and securitization of the Eurobonds. Each class of shares constituted separate stock compartments. Each stock compartment corresponded to a distinct part of the assets and liabilities of the Company and any share premium paid in respect of any shares of a specific stock compartment upon their issuance was allocated to a share premium reserve account corresponding to that specific stock compartment. As between the shareholders and the creditors of the company, each stock compartment was treated as a separate entity. In addition the Company had issued one Class B share which was held by the unlimited partner and manager of the Company (commandité-gérant), in representation of its unlimited partnership interest in the Company. On September 29, 2006, the Company’s general shareholders’ meeting resolved to convert the shares of all classes of issued shares (other than the Class B share) into shares of a single class and to pool the existing compartments of the Company into a single compartment, and to cancel the Class B share. As a result, the Company’s Shares are of a single class, each such share having identical rights. At the same general shareholders’ meeting in the course of the transformation of the Company into a joint stock company, the Company changed its name to GAGFAH S.A. The general shareholders’ meeting also created an authorized share capital within the Company, set the rules for the appointment of the Board, determined the procedures for Board meetings and amended and restated the articles of incorporation of the Company in their entirety. The Company, through certain subsidiaries, acquired various German real estate portfolios both by means of asset and share transactions entered into since 2004. For more information on corporate restructuring, see ‘‘—Acquisition, Refinancing and Integration of the GAGFAH GmbH Group,’’ ‘‘—Acquisition and Refinancing of the NILEG GmbH Group,’’ ‘‘—Acquisition of the WOBA GmbH Group’’ and ‘‘Acquisition of GAGFAH Acquisition 1 GmbH.’’ COMPANY’S NAME, REGISTERED OFFICE, FISCAL YEAR AND DURATION The legal and commercial name of the Company is GAGFAH S.A. The Company’s registered office is at 14a, rue des Bains, L-1212 Luxembourg, Grand Duchy of Luxembourg (Telephone: +352 26 20 64 22), and the Company is registered in the commercial register of Luxembourg under the registration number B 109526. 125 The Company’s fiscal year is the calendar year. In the year of its incorporation, the Company ran a shortened fiscal year from July 12, 2005 through December 31, 2005. The Company is established for an unlimited period. As a Luxembourg joint stock corporation (société anonyme), the Company is governed by the laws of the Grand Duchy of Luxembourg. In particular, the Company is subject to the Luxembourg Commercial Companies Law of August 10, 1915 (loi du 10 août 1915 sur les sociétés commerciales), or the Luxembourg Company Law, and, due to its status as a securitization company, the Luxembourg Securitization Law. The Company’s auditors are Ernst & Young S.A., 6, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg, an independent public accounting firm and registered member of the Institut des Réviseurs d’Entreprises. CORPORATE PURPOSE OF THE COMPANY Pursuant to Article 4 of the Company’s articles of incorporation, the Company’s corporate purpose is securitizations and any activity ancillary or related thereto and/or provided for under and subject to the Luxembourg Securitization Law, through the acquisition and/or assumption, directly or through another undertaking of any kind, of risks relating to claims, any other type of assets (including, without limitation, any kind of securities, loans, receivables and other assets, including assets related to residential real estate in Germany) or any kind of obligations assumed by third parties or inherent to all or part of the activities of third parties, collectively referred to herein as the ‘‘underlying assets.’’ The Company may issue, directly or indirectly through intermediary companies, any kind of securities of any form or nature whatsoever including, without limitation, shares, notes and debt instruments as well as options or warrants giving rights for additional shares, whose value, return or yield depend on the risks relating to the underlying assets. The Company may also borrow or raise funds in the form of loans or otherwise from any entity in order to fund or partly fund the acquisition or assumption of underlying assets and/or to comply with any payment or other obligation we have under any of our securities or under any agreement to be entered into in the context of a securitization. The Company may sell, assign, re-acquire and dispose of any and all of the underlying assets through any means (including by means of sale, assignment, exchange, conversion, contribution or through derivative or swap transactions). Within the context of securitizations, the Company may (directly or indirectly) (i) acquire, hold and dispose in any form, by any means, whether directly or indirectly, of participations, rights and interests in, and obligations of, Luxembourg and/or foreign companies or other entities active in any sector (including real estate assets); (ii) acquire or assume risks by means of granting loans to Luxembourg and/or foreign entities; (iii) by purchase, subscription, or in any other manner, as well as the transfer by sale, exchange or in any other manner of stock, bonds, debentures, notes, units and other securities or financial instruments of any kind and contracts on one or more thereon or related thereto; and (iv) provide any financial assistance to the undertakings forming part of its groups by providing without limitation guarantees or securities or loans in any form; (v) acquire and own, administer, develop and manage a portfolio (including, among others, the assets referred to in (i), (ii) and (iii) in this paragraph). The Company may further acquire, hold and dispose of interests in partnerships, limited partnerships, trusts, funds and other entities. To the fullest extent permitted by law, the Company may grant any kind of security interests on its assets under any law to any investor, trustee, security trustee, security agent, fiduciaryrepresentative, or any other person representing investors or any other party involved in the securitization or with whom the Company entered into agreements in connection with a securitization in order to secure the payment or other obligations under any security issued or agreement entered into by us for the purpose of the securitization of such assets. The Company may enter into any agreement or instruments (including, without limitation, derivatives) and may issue, sign, approve or ratify any document and may do and allow all things and acts which are necessary to prepare, carry out and wind up or are incidental to, a securitization. The Company may assign, transfer or otherwise dispose of part or all of the underlying assets in such manner and for such compensation as the Board or any person appointed for such purpose shall approve at such time. 126 The Company may perform all commercial, technical and financial or other operations, which are directly or indirectly connected with or are necessary or useful to facilitate the accomplishment of our purpose (while however always remaining within the scope of the Luxembourg Securitization Law). The Company may, from time to time, hold funds received from issuances of shares or other securities in the Company pending investment by means of securitization. In addition, the Company may retain certain funds not distributed in accordance with the terms of its dividend policy. The Board may decide to allocate funds to an account, or a reserve account, established by the Company to hold at all time funds sufficient to cover the expenses and fees relating to the Company’s activities as determined by the Board. Such activities include, in particular, ongoing management expenses (including overhead), remuneration of the Board members, out-of-pocket expenses of the Board members, insurance fees and service fees. Reserve account funds will be distributed to holders of shares in the Company if the Board determines that incurrence of further short term operating costs of working capital expenditures is unlikely. DIRECTORS OF THE COMPANY No director shall, solely as a result of being a director, be prevented from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any contract in which any director is in any way interested be liable to be avoided, in account of his position as director nor shall any director who is so interested be liable to account for the Company or the shareholders for any remuneration, profit or other benefit realized by the contract by reason of the director holding that office or of the fiduciary relationship thereby established. Any director having an interest in a transaction submitted for approval to the Board conflicting with that of the Company, shall be obliged to advise the Board thereof and to cause a record of his statement to be included in the minutes of the meeting. He may not take part in these deliberations. At the next following general meeting, before any other resolution is put to vote, a special report shall be made on any transactions in which any of the directors may have had an interest conflicting with that of the Company. No shareholding qualification for directors is required. Directors and other officers, past and present, are entitled to indemnification from the Company to the fullest extent permitted by law against liability and all expenses reasonably incurred by him in connection with any claim, action, suit or proceeding in which he is involved by virtue of his being or having been a director. The Company may purchase and maintain for any director or other officer insurance against any such liability. No indemnification shall be provided against any liability to the Company or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. No indemnification will be provided in the event of a settlement (unless approved by a court or the Board), nor will indemnification be provided in defending proceedings (criminal) in which that Director or officer is convicted of an offense. ACQUISITION, REFINANCING AND INTEGRATION OF THE GAGFAH GMBH GROUP Acquisition and Refinancing of GAGFAH GmbH GAGFAH Gemeinnützige Aktiengesellschaft für Angestellten-Heimstätten, or GAGFAH AG, was established by several employees’ associations in Berlin and first entered into the commercial register in 1918. Since 1953, the German Federal Insurance Agency for Employees (Bundesversicherungsanstalt für Angestellte), Berlin (now part of the integrated German Social Security Insurance Authority (Deutsche Rentenversicherung)) has held the majority of the shares in GAGFAH AG. In 1997, the operating business of GAGFAH AG and the company’s entire workforce (with the exclusion of the caretakers in Berlin, who were transferred directly to VHB Grundstücksverwaltungsgesellschaft mbH) were transferred to GAGFAH Immobilien-Management GmbH, or GAGFAH M, while GAGFAH AG itself retained the majority of the real estate of the GAGFAH GmbH Group. In 1999, GAGFAH AG acquired a 66% shareholding in GSW Wohnbau GmbH, or GSW, which was increased to 94.9% in 2003. On September 30, 2004, various Fortress Investment funds and a foreign co-investor acquired over 97% of the shares in GAGFAH AG through Irish and German acquisition vehicles. Over the 127 next few months, the remaining minority shares were acquired in cash transactions, with the exception of a single share in the nominal value of u100 that was retained by the former majority shareholder, the German Federal Insurance Agency for Employees. The Fortress Investment funds held via a wholly-owned Irish subsidiary (GAG ACQ. Ireland Limited) approximately 82.48% of the shares in GAGFAH AG. The remaining nearly 17.52% of the GAGFAH AG shares were acquired by co-investor funds via an Irish acquisition vehicle (UC ACQ. Ireland Limited). For the financing of most of the purchase price for the respective participation in GAGFAH AG, GAG ACQ. Ireland Limited and UC ACQ. Ireland Limited each issued interest-bearing Eurobonds to their respective shareholders. The respective financing amount was then provided by the Irish acquisition vehicles to the respective German acquisition vehicles by means of equity and shareholder loans. Additional funding was made through bank loans. In late 2004, shortly after the purchase of all the remaining share capital in GAGFAH AG from the German Federal Insurance Agency for Employees and several minority shareholders (with the exception of the single share that was retained by the former majority shareholder, the German Federal Insurance Agency for Employees), the legal form of GAGFAH AG was converted from a stock corporation (Aktiengesellschaft) to a German company with limited liability, pursuant to the rules of the German Reorganization Act (Umwandlungsgesetz), and in this context changed its name to GAGFAH GmbH. The articles of association of GAGFAH GmbH grant to the German Federal Insurance Agency for Employees certain rights linked to the German Federal Insurance Agency for Employees’ minority equity interest (with the nominal value of u100). Consequently, certain business decisions, including, but not limited to, ‘‘critical measures’’ relating to the sale of real estate, the termination of lease agreements and certain other measures require the consent of the German Federal Insurance Agency for Employees. See ‘‘Legal Environment—Additional Constraints on GAGFAH GmbH, NILEG Holding and WOBA GmbH.’’ To consolidate the acquisition financing with the income of the GAGFAH GmbH portfolio, the German acquisition companies were merged ‘‘down-stream’’ into GAGFAH GmbH. The mergers became effective upon their registration in the commercial register on June 15, 2005. In order to make the mergers feasible from a corporate law perspective, the hidden reserves in GAGFAH GmbH’s portfolio were realized for German GAAP purposes. GAGFAH GmbH therefore formed in 2005 a subsidiary in the form of a limited partnership (GAGFAH I Invest GmbH & Co. KG, or GAGFAH I KG) with a German limited liability company (GAGFAH B Beteiligungs GmbH, or GAGFAH B) as the sole limited partner (Kommanditist) and GAGFAH GmbH as the sole general partner (Komplementär). Under a ‘‘hive-down’’ agreement, GAGFAH GmbH transferred all its assets and liabilities, including its real estate portfolio, to GAGFAH I KG, except for (a) 6% of the shares in GAGFAH M, (b) all the shares in HEIMAG München Gemeinnützige Heimstätten-Aktiengesellschaft, or HEIMAG, which have been sold in December 2005 to GEWOFAG Gemeinnützige Wohnungsfürsorge AG, Munich, Germany and (c) the existing profit and loss transfer agreement between GAGFAH GmbH and GAGFAH M. The hive-down became effective upon its entry into the commercial register on May 10, 2005. Tax authorities issued binding rulings confirming the tax neutrality of certain post-closure measures specified above, in particular: • the transfer of GAGFAH GmbH’s assets and liabilities to GAGFAH I Invest GmbH & Co. KG in the course of the hive-down is neutral for both income tax and real estate transfer tax purposes; and • the down-stream merger of the German acquisition companies into GAGFAH GmbH does not lead to hidden profit distributions which could trigger EK02 recapture taxation. The down-stream merger does also not trigger real estate transfer tax. In order to improve its financing structure, the major part of the GAGFAH GmbH Group’s bank loans and the entire acquisition bank financing was refinanced through a new bank loan in October 2005. To achieve a better risk assessment and thus more favorable conditions by the refinancing bank, certain real estate assets of GAGFAH M were transferred by means of a hive-down into a subsidiary in the form of a limited partnership (GAGFAH A Asset GmbH & Co. KG, or GAGFAH A KG) with GAGFAH B as sole limited partner and GAGFAH M as the sole general partner. GAGFAH A KG and GAGFAH I KG are the borrowers under the new financing structure. 128 Integration of the GAGFAH GmbH Group In 2006 the GAGFAH GmbH Group was integrated into the Company by means of contributions in kind of the respective Eurobonds held not only by the various Fortress Investment funds but also by the co-investor funds, each in exchange for shares issued by the Company. The Company further acquired the shares in GAG ACQ. Ireland Limited held by the Fortress Investment funds. The neutrality of this transaction for real estate transfer tax purposes was confirmed by a binding tax ruling issued on July 21, 2006 by the competent tax office. The Eurobonds received by the Company were replaced by new Eurobonds maturing September 29, 2024 subscribed to by the Company on September 29, 2006 with substantially the same terms other than the extension of the maturity date. In connection with the integration, the Company and the co-investor funds entered into a shareholders agreement under which (i) the co-investor funds are not entitled to directly or indirectly transfer their shares in UC ACQ. Ireland Limited without the consent of the Company and (ii) the co-investor funds shall cause UC ACQ. Ireland Limited to vote its shares in GAGFAH GmbH so as to elect the members designated by the Company to the supervisory board or advisory board or any other similar body of GAGFAH GmbH. The shareholders agreement will terminate when the Company no longer directly or indirectly owns shares of GAGFAH GmbH. ACQUISITION AND REFINANCING OF THE NILEG GMBH GROUP NILEG Immobilien Holding GmbH, or NILEG Holding was established as a German limited liability company and registered in the commercial register in Hanover, Germany, in 1995. It served as the holding company for the combined real estate activities of Norddeutsche Landesbank Girozentrale, or NORD/LB, and from 1995 until February 2004 operated under the legal name NORD/LB-Immobilien-Holding GmbH. In two separate transactions, one closed on August 31, 2005 and the other closed on September 2, 2005, the Company acquired via NLG Acquisition GmbH, a German acquisition company in the form of a limited liability company, 100% of the shares in NILEG Holding from NORD/LB as well as a total of 14.81% of the equity interest in NILEG Real Estate GmbH & Co. Management KG, or NILEG KG, 14.81% of the shares in NILEG Real Estate GmbH (the general partner of NILEG KG) and 1.2% of the shares in NILEG Norddeutsche Immobiliengesellschaft mbH, or NILEG Norddeutsche, from different sellers. An unrelated third party NEPTUNO Verwaltungsund Treuhand-Gesellschaft mbH, a German limited liability company wholly owned by Sal. Oppenheim jr. & Cie. Kommanditgesellschaft auf Aktien, acquired an equity interest of 5.19% in NILEG KG and 5.19% of the shares in NILEG Real Estate GmbH. The Company has funded the German acquisition company by means of equity and shareholder loans. Additional funding was made through bank loans. Prior to the transfer of shares and equity interests to the Company set out in the preceding paragraph, the respective general partners (all of which are German companies with limited liability (Gesellschaften mit beschränkter Haftung) of NILEG Objektgesellschaft Office-Center Plaza Hannover GmbH & Co. Immobilien KG and other real estate partnerships withdrew from these partnerships, which led to the termination of each partnership and an accrual of the partnerships’ assets to NILEG Norddeutsche, which held 100% of the equity interest in each of the partnerships. Subsequent to its acquisition, NILEG Holding was merged up-stream into the acquisition company, NLG Acquisition GmbH. Effective on August 29, 2006, NILEG Norddeutsche acquired a 94.9% shareholding in Wohnungsgesellschaft Norden mit beschränkter Haftung, or WGN mbH, and WGN mbH acquired a 94.9% shareholding in WBN GmbH, from NILEG Holding, which resulted in a debt push-down of part of the acquisition bank debt to NILEG Norddeutsche and WGN mbH. In order to improve the financing structure of the NILEG GmbH Group, part of its existing bank debt and the acquisition bank financing is expected to be refinanced in the fourth quarter of October 2006 by a new bank loan. To achieve a better risk assessment and thus more favourable conditions by the refinancing banks, entities of the NILEG GmbH Group (i.e., NILEG GmbH, WGN mbH, WBN GmbH and OWG) transferred their real estate assets to wholly owned limited partnerships (Kommanditgesellschaft) by means of asset hive-downs that are expected to be effected in October 2006. In each of these partnerships, the respective NILEG GmbH Group company is the 129 general partner to whom all the profit and losses as well as the assets and hidden reserves are attributed, and another GmbH, again wholly owned by the respective NILEG GmbH Group Company serves as a limited partner, with only a fixed interest-bearing minimal capital contribution. The income tax neutrality of the respective asset transfers to the partnerships was confirmed by binding tax rulings issued by the respective competent tax offices. ACQUISITION OF THE WOBA GMBH GROUP WOBA DRESDEN GmbH, or WOBA GmbH, was established by the City of Dresden as a wholly-owned German limited liability company in 2003 through a contribution in kind of 94.9% of the shares in each WOHNBAU NORDWEST, SÜDOST WOBA and STESAD Immobilien GmbH in exchange for shares in WOBA. Approximately 5.1% of the shares in WOHNBAU NORDWEST, SÜDOST WOBA and STESAD Immobilien GmbH were retained by the City of Dresden. WOBA GmbH served as combined holding company of the City of Dresden’s real estate activities. On April 5, 2006 the Company acquired, through Blitz 06-652 GmbH, a wholly-owned acquisition vehicle in the form of a German company with limited liability, 100% of the shares in WOBA GmbH from the City of Dresden. Approximately 5.1% of the shares in WOHNBAU NORDWEST, SÜDOST WOBA, Bau- und Siedlungsgesellschaft Dresden mbH and Liegenschaften Weißig GmbH were acquired by a co-investor partnership in the form of a German limited partnership, in which the German acquisition vehicle holds an interest of 94.9%. The remaining approximately 5.1% of the equity interest is held by an unrelated German company with limited liability ultimately wholly owned by KG Allgemeine Leasing GmbH & Co., a German limited partnership. The Company has funded the German acquisition company by means of equity and shareholder loans. Additional funding was provided through bank loans. It is contemplated that WOBA GmbH enters into a profit and loss transfer and domination agreement with each of WOHNBAU NORDWEST, SÜDOST WOBA, Bau- und Siedlungsgesellschaft Dresden mbH and Liegenschaften Weißig GmbH and form a tax group for income tax purposes as of January 1, 2006. It is further contemplated that Blitz 06-652 GmbH enters into a profit and loss transfer and domination agreement with WOBA GmbH and form another tax group for income tax purposes as of January 1, 2007. ACQUISITION AND REFINANCING OF GAGFAH ACQUISITION 1 GMBH In November 2005, the Company further acquired 100% of the shares in GAGFAH Acquisition 1 GmbH, or Acquisition 1, a German limited liability shelf company, through which the Company has purchased several German real estate portfolios by means of asset deals in 2005 and 2006. On September 29, 2006, Acquisition 1, as borrower, entered into a bridge financing with Deutsche Bank AG, as lender, for an aggregate amount of u108.8 million. The bridge financing is secured by guarantees provided by the four entities that are referred to as the Fortress Residential Investment Deutschland Fund, or FRID. It is expected that the bridge financing will be refinanced within the next month, and at such time the FRID guarantees will terminate. See ‘‘Related Party Transactions—Related Party Transactions of the Company and its Affiliates—Transactions of Currently Related Parties—GAGFAH Acquisition 1 GmbH as party to related party transactions.’’ CURRENT GROUP STRUCTURE The following chart shows the simplified structure of our Group following the corporate restructuring outlined in the preceding section. For simplification purposes, the chart does not show economically insignificant minority interests or interposed entities which hold interests in the Company’s indirect subsidiaries which are part of our Group’s corporate structure. GAGFAH S.A. GAGFAH GmbH Group NILEG GmbH Group WOBA GmbH Group 130 GAGFAH Acquisition 1 GmbH MATERIAL SUBSIDIARIES The following table shows our material subsidiaries held directly or indirectly as of June 30 2006, except as otherwise indicated, with a book value representing at least 10% of our consolidated shareholders’ equity or at least 10% of our consolidated net income. The table also shows affiliated companies in which, as of June 30 2006 we held at least 10% of the issued share capital and which are significant for our business. Each subsidiary in the table below is incorporated in the Federal Republic of Germany. The city in which each respective subsidiary has its registered office is stated following such subsidiary’s name in the table below. The figures are taken from statutory financial statements prepared in accordance with accounting principles generally accepted in Germany (Handelsgesetzbuch). 131 Name and registered office Business GAGFAH GmbH (Essen) . . . . . . . . . . . . . . . . . . . . . . . . Holding Real estate GAGFAH M Immobilienmanagement GmbH (Essen) . . . . . management Real estate GAGFAH I Invest GmbH & Co. KG (Essen). . . . . . . . . . . management Real estate GAGFAH A Asset GmbH & Co. KG (Essen) . . . . . . . . . . management (Financial Dividends liabilities)/ Book value received financial of parent Outstanding from Group receivables Held by the Subscribed company’s contributions companies to/from the Company as capital as Reserves as holding as to capital from Company as of June 30, of June 30, of June 30, Net income of June 30, as of June subsidiary of June 30, 2006 2006 2006 in 2006 2006 30, 2006 in 2006 2006 % (v millions) (v millions) (v millions) (v millions) (v millions) (v millions) (v millions) 100.00(1) 52.0(1) 532.6(1) (56.5) 277.8(1) 0.0(1) 0.0 505.2(1) 132 0.0(1) 0.0 70.0(1) 0.0(1) 0.0 0.0(1) 1,095.8(1) (282.2)(1) 1.6 1,095.8(1) 0.0(1) 0.0 0.0(1) 100.00(1) 189.4(1) (3.2)(1) 11.6 177.9(1) 0.0(1) 0.0 0.0(1) NILEG Immobilien Holding GmbH (Hanover) . . . . . . . . . . Holding 100.00 0.0 36.7 (21.9) 126.0 0.0 0.0 219.4 NILEG Norddeutsche Immobiliengesellschaft mbH Real estate (Hanover) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . management 100.00 17.9 57.3 1.4 179.0 0.0 0.0 0.0 94.81 10.0 157.5 (0.3) 159.7 0.0 0.0 0.0 94.10 1.6 16.0 0.0 26.1 0.0 0.0 0.0 94.88 12.1 (173.0) 3.9 162.0 0.0 0.0 0.0 94.85 11.2 (158.8) 3.9 136.0 0.0 0.0 0.0 100.00 0.03 22.3 3.3 20.0 0.0 0.0 149,429.0 100.00 15.0 672.0 7.6 937.2 0.0 0.0 0.0 99.74 51.2 316.9 9.9 466.0 0.0 0.0 0.0 99.74 100.00 51.1 0.0 243.6 238.2 (6.3) (20.5) 233.7 261.5 0.0 0.0 0.0 0.0 0.0 400.4 NILEG Real Estate GmbH & Co. Management KG (Hanover) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Holding Real estate Osnabrücker Wohnbau GmbH (Osnabrück) . . . . . . . . . . . . management Real estate Wohnungsgesellschaft Norden mbH (Hanover) . . . . . . . . . . management Real estate Wohnungsbau Niedersachsen GmbH (Hanover) . . . . . . . . . management Real estate GAGFAH Acquisition 1 GmbH (Essen). . . . . . . . . . . . . . . management Real estate WOBA Dresden GmbH (Dresden) . . . . . . . . . . . . . . . . . . management Real estate WOHNBAU NORDWEST GmbH (Dresden) . . . . . . . . . . management Real estate SÜDOST WOBA Dresden GmbH (Dresden) . . . . . . . . . . . management Blitz 06-652 GmbH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Holding 100.00(1) 70.0(1) 100.00(1) (1) As of the date hereof rather than as of June 30, 2006. Since the Company only recently acquired the GAGFAH GmbH Group, as of June 30, 2006 the GAGFAH GmbH Group subsidiaries were not included in the Unaudited Condensed Consolidated Interim Financial Statements. See ‘‘—Acquisition, Refinancing and Integration of the GAGFAH GmbH Group—Integration of the GAGFAH GmbH Group.’’ DESCRIPTION OF SHARE CAPITAL SHARE CAPITAL AND SHARES The Company has an authorized share capital of u10,281,250,000, consisting of a single class represented by 8,225,000,000 Shares, each such Share with a nominal value of u1.25. As of September 30, 2006, the Company has an issued share capital of u281,250,000, represented by 225,000,000 Shares. The Company’s articles of incorporation authorize the Board to issue Shares within the limits of the authorized share capital at such times and on such terms as the Board or its delegates may decide for a period commencing on September 29, 2006 and ending on the date five years after the date that the minutes of the shareholders’ meeting held on September 29, 2006 approving such authorization have been published in the Luxembourg official gazette. Accordingly, the Board may issue up to 8,000,000,000 Shares until the latter date. The Company’s authorized share capital is determined (and may be increased, reduced or extended) by the Company’s articles of incorporation, as amended from time to time, by the decision of the Company’s shareholders at an extraordinary general shareholders’ meeting. Under Luxembourg law, existing shareholders benefit from a pre-emptive subscription right on the issuance of Shares for cash consideration. However, the Company’s shareholders have, in accordance with Luxembourg law, authorized the Board to suppress, waive or limit any pre-emptive subscription rights of shareholders provided by law to the extent the Board deems such suppression, waiver or limitation advisable for any issuance or issuances of Shares within the scope of the Company’s authorized unissued share capital. Such Shares may be issued above, at or below market value (down to nil) as well as by way of incorporation of available reserves and premium. The Shares are issued in registered form only. In accordance with Luxembourg law, the Company keeps a shareholders’ register at 14a, rue des Bains, L-1212 Luxembourg, the registered office of the Company. Ownership of registered Shares will be established by inscription in the shareholders’ register. The Company may appoint registrars in different jurisdictions, each of whom may maintain a separate register for the Shares entered in such register. Shareholders may elect to be entered into one of these registers and to transfer their Shares to another of register so maintained. At present, the Company has no separate shareholders’ registers other than the shareholders’ register maintained at the Company’s registered office. Transfer of Shares The Shares are freely transferable in accordance with the legal requirements for registered shares. Variation of Rights; Amendments of the Company’s Articles of Incorporation All or any of the rights attached to the Shares may from time to time (whether or not the Company is being wound up) be varied by decision of the extraordinary general shareholders’ meeting in the manner required for the amendment of the Company’s articles of incorporation. Any provisions of the Company’s articles of incorporation may be amended by resolution of the shareholders at an extraordinary general shareholders’ meeting. Changes in Share Capital The Company may by resolution adopt at an extraordinary general meeting in the manner required for amendment of the Company’s articles of incorporation, increase, reduce, consolidate or sub-divide its Shares or any of them. In addition, the Board is authorized to issue Shares up to the total amount of the authorized unissued share capital. The Company may proceed to the repurchase of its own shares within the limits laid down by law. The shareholders’ general meeting has authorized the Company (or any wholly-owned subsidiary), to purchase, acquire or receive shares in the Company up to 10% of the issued share capital from time to time, from time to time over the stock exchange or in privately negotiated transactions, and in the case of acquisition for value, at a purchase price being not less than u10 and not more than u40 and on such terms as shall be determined by the Board. Such authorization, which may be renewed, was granted for a period of 18 months starting on September 29, 2006. 133 Dividends The Company may declare and pay dividends in accordance with Luxembourg Company law. Dividends may be declared by the general meeting of shareholders. The Company’s articles of incorporation also provide that the Board has the power to decide on and distribute interim dividends in accordance with the provisions applicable to commercial companies as set forth, in particular, in Section 72-2 of the Luxembourg Company Law. Article 72 of the Luxembourg Company Law requires companies to create an undistributable reserve. Such reserve may not be distributed to shareholders (save in the case of a solvent liquidation or in certain circumstances a reduction of share capital). Each year at least 5% of the net profits of the Company shall be allocated to such reserve; this allocation shall cease to be compulsory when the reserve has reached an amount equal to one-tenth of the issued share capital, but shall again be compulsory if the reserve falls below such one-tenth. The Company may by resolution at the annual general shareholders’ meeting declare dividends. No such dividend shall exceed the amount of net profits (including reserves and premium available for distribution) remaining once 5% of the net profit has been deducted and allocated to the undistributable reserve. Interim dividends may be declared and paid by the Board subject to complying with conditions required by law. No dividend or other moneys payable on or in respect of a Share shall bear interest required to be paid by the Company. Any dividend unclaimed after a period of five years from the date on which such dividend was declared or became due for payment shall be forfeited and shall revert to the Company. Dividends may be declared or paid in any currency. The shareholders in a general meeting may, upon the recommendation of the Board, vote to permit shareholders to elect to receive a dividend (in whole or in part) by the distribution of Shares in lieu of cash. The entitlement to Shares shall be as nearly as possible equal to the cash amount of the dividend that each shareholder elects to forego. Shareholders in certain territories may be excluded by the Board from the offer where the Board believes that such exclusion is necessary or advisable due to legal or practical problems in any territory, or if the Board believes that the offer should not be made to them for any other reason. Stock Option Plan On the basis of the authorizations granted by the extraordinary shareholders’ meeting held on September 29, 2006, the Board has enacted a stock option plan with a duration of 10 years. Options under the stock option plan may be granted to employees (including former employees), executives and/or members of governing or supervisory corporate entities of the Company or of those companies of which it is the direct or indirect parent. Options under the stock option plan may also be granted to consultants and other third-party business partners of the Company or of those companies of which it is the direct or indirect parent. The stock option plan provides that options will have to be exercised during an exercise period to be set by the Board or on its behalf at the time of allocation of the options, but not exceeding 10 years following allocation. The exercise period and the exercise price will be determined at the time the options are granted. Such price may be at a value below market value. It is expected that the members of the senior management that will be the beneficiaries of the options will, upon exercise, only pay a nominal subscription price in which case the difference between the issue price of the Shares and the price paid by the employee will be paid to the Company by the group company of which the relevant beneficiary is an employee, an executive or a member of the governing or supervisory corporate body. The maximum number of Shares issuable upon exercise of options granted under the stock option plan will be a number of Shares not exceeding 1% of the authorized share capital (including the issued share capital) of the Company. The number of Shares that may be issued is subject to adjustment in case of certain transactions affecting the share capital of the Company such as the issue of bonus Shares and Share splits. As of the date hereof, no stock options have been allocated. Employee Equity Compensation Program In addition to the stock option plan, the Board intends in the near future to establish an employee equity compensation program to be administered by it. Under this program, the Board 134 expects to grant equity in a form such as Shares or stock options to employees and former employees of the Company’s subsidiaries (other than the senior management of the Company’s subsidiaries). The Company expects that the initial equity grants will amount, in aggregate, to up to approximately 500,000 Shares. These Shares will be issued by way of incorporation of available reserve and premium. VOTING RIGHTS, GENERAL SHAREHOLDERS’ MEETING Each Share carries one vote at the Company’s general shareholders’ meeting. There are no restrictions on voting rights, and each Share represents identical voting rights. Shareholders may attend general shareholders’ meetings in person or appoint a proxy to attend and vote on their behalf. The Board may establish further conditions that must be fulfilled by shareholders wishing to participate in any shareholders’ meeting, including the determination of a record date as provided by the Company’s articles of incorporation. Shareholders’ meetings are called by sending the convening notice to shareholders inscribed in the register by registered mail or by publishing convening notices in accordance with Luxembourg Company law and the Company’s articles of incorporation, as well as with applicable stock exchange regulations of the jurisdiction(s) where the Shares are listed. In accordance with Luxembourg Company law, convening notices are published twice, at an interval of no fewer than eight days, the second notice appearing at least eight days before the day of the meeting in the official gazette of the Grand Duchy of Luxembourg, the Mémorial, and a Luxembourg newspaper. The Company’s annual general shareholders’ meeting shall be held in Luxembourg at the registered office of the Company, or at such other place as may be specified in the convening notice of the meeting, on April 21 at 2:00 p.m. (Central European Time). If such day is a legal holiday in Luxembourg the annual general meeting shall be held on the next following business day. As used in this section ‘‘Description of Share Capital,’’ ‘‘business day’’ means Monday through Friday, excluding any public holidays in the Grand Duchy of Luxembourg. Other general meetings of shareholders may be called as often as the interest of the Company demand and be held at such place and time as may be specified in the respective convening notices of the meeting. If the entire issued share capital of the Company is represented at a general meeting, no convening notice is required for the meeting to be held and the proceedings at such general meeting will be deemed valid. The Board is obliged to call a general shareholders’ meeting, to be held within thirty days after receipt of such request, whenever a group of shareholders representing at least one-tenth of the issued and outstanding Shares entitled to vote at the meeting requests such a meeting in writing, indicating the agenda of the proposed meeting. There is no quorum requirement for an ordinary general shareholders’ meeting, and resolutions are adopted by a simple majority vote of the votes cast. An extraordinary general shareholders’ meeting amending the articles of incorporation of the Company must have a quorum of at least 50% of the Shares issued and outstanding. If such quorum is not achieved, such extraordinary general shareholders’ meeting may be reconvened at a later date with no quorum requirements by means of the appropriate notification procedures under the Luxembourg Company Law. If an extraordinary general shareholders’ meeting is adjourned for lack of a quorum, notices must be published twice in each of the Mémorial and two separate Luxembourg newspapers, at 15-day intervals. The second notice must appear at least 15 days prior to such an extraordinary general shareholders’ meeting. In both cases resolutions of such extraordinary general shareholders’ meeting are to be adopted by a two-thirds majority of the votes cast. If a proposed resolution consists of changing the Company’s jurisdiction of incorporation or of increasing the shareholders’ commitments, the unanimous consent of all shareholders is required. Directors may be elected at an ordinary meeting. Cumulative voting is not permitted. The Board may determine a date preceding the general shareholders’ meeting as the record date for admission to the general meeting. In the case of Shares held through fungible securities accounts, each shareholder may exercise all rights attached to its Shares and, in particular, may participate in and vote at the shareholders’ meetings upon presentation of a certificate issued by the financial institution or professional depositary holding such shareholder’s Shares, evidencing deposit and certifying the number of Shares recorded in the relevant account on the record date and that they are blocked until and including the date of the relevant meeting. 135 Certificates as such described above must be submitted no fewer than five days prior to the shareholders’ meeting to the Company at its registered address or at the address stated in the convening notice or, if the Shares are listed on a regulated stock exchange, to an agent of the Company located in the country of such listing and designated in the convening notice. In the event that a shareholder votes by proxy, such shareholder must file the required certificate and a completed proxy form within the same period of time at the registered office of the Company or with any local agent of the Company duly authorized to receive such proxies. The Board may, if it deems advisable, shorten these time periods and admit shareholders (or their proxies) who have filed the appropriate documents (no matter when filed) to the general shareholders’ meeting. The Board may determine such other conditions that must be fulfilled by shareholders for them to take part in any shareholders’ meeting in person or by proxy. ACCESS TO CORPORATE RECORDS Shareholders may, however, inspect the Company’s annual and interim financial statements and auditor’s reports at the Company’s registered office during the 15 day period prior to the annual general shareholders’ meeting as well as the list of sovereign debt, shares, bonds and other company securities held by the Company. DISTRIBUTION OF ASSETS ON WINDING-UP In the event of liquidation, dissolution or winding-up of the Company, the net assets remaining after payment of all debts, charges and expenses shall be distributed to the shareholders in proportion to their respective shareholdings. In the event of the dissolution of the Company for whatever reason or whatever time, the liquidation will be performed by liquidators appointed by the general meeting or, if no liquidators are so appointed, by the Board who will be endowed with the powers provided by Article 144 et seq of the Luxembourg Company Law. Once all debts, charges and liquidation expenses have been met, any balance resulting shall be paid to the shareholders. DEVELOPMENT OF THE COMPANY’S SHARE CAPITAL The Company was incorporated on July 12, 2005 as a corporate partnership limited by shares (Société en Commandite par Actions) under the Laws of the Grand Duchy of Luxembourg with a share capital of u31,000 divided into 24,799 Class A shares held by the limited partners and one Class B share held by the unlimited partner. At an extraordinary meeting dated August 30, 2005, the shareholders of the Company resolved (i) to create two classes of shares, the Class N shares and the Class G shares and to reclassify the existing 24,799 Class A shares into Class N shares, each of the existing Class A shares being converted into one Class N share with a nominal value of u1.25, and (ii) to increase the corporate capital by an amount of u3,652,101.25 so as to raise it from u31,000 to u3,683,101.25, through the issue of 2,921,681 new Class N shares with a nominal value of u1.25 per share. At an extraordinary meeting dated April 4, 2006, the shareholders of the Company resolved (i) to create one additional class of shares, the Class W shares, and (ii) to increase the corporate capital by an amount of u4,956,250 so as to raise it from u3,683,101.25 to u8,639,351.25, through the issue of 3,965,000 Class W shares with a nominal value of u1.25 per share. At an extraordinary meeting dated May 31, 2006, the shareholders of the Company resolved (i) to create one additional class of shares, the Class R shares, and (ii) to increase the corporate capital by an amount of u51,360,648.75 so as to raise it from u8,639,351.25 to u60,000,000 by an issue of 41,088,519 new Class R shares, with a nominal value of u1.25 per share. At a general shareholders’ meeting held on September 28, 2006 the shareholders resolved to distribute part of the share premium relating to the Class R shares pro rata to the class R shareholders. At a first extraordinary meeting dated September 29, 2006, the shareholders of the Company resolved (i) to create one additional class of shares, the Class G shares, and (ii) to increase the corporate capital by an amount of u221,250,000 so as to raise it from u60,000,000 to u281,250,000 by an issue of 177,000,000 new Class G shares, with a nominal value of u1.25 per share. 136 At a second extraordinary meeting dated September 29, 2006, the shareholders of the Company resolved to transform the Company into a société anonyme, to create an authorized unissued share capital in an amount of u10,000,000,000 and to transform all the classes of shares (other than the one Class B share) into one single class of common shares. The shareholders resolved to convert all Class N shares, all Class W shares, all Class R shares and all Class G shares into shares of a sole class of shares of 225,000,000 shares and to cancel the Class B share while transferring nominal value of the Class B share to the share premium of the Company. As a result, as of the date hereof, the Company has an issued share capital of u281,250,000 represented by a single class of 225,000,000 shares, each such share with a nominal value of u1.25. SHAREHOLDING DISCLOSURE AND REPORTING DUTIES In accordance with the Luxembourg law of December 4, 1992 regarding the information to be published when a major holding in a listed company is acquired or disposed of (loi du 4 décembre 1992 sur les informations à publier lors de l’acquisition et de la cession d’une participation importante dans une société cotée en bourse), or the Luxembourg 1992 Law, in case a natural or legal entity governed by public or private law (for purposes of this subsection only, a ‘‘person’’) acquires or disposes of a holding in the Company and where following such acquisition or disposal, the proportion of voting rights held by that person reaches or exceeds any of the thresholds of 10%, 20%, 33.33%, 50% or 66.67% of the total voting rights existing when the situation giving rise to the declaration occurs, or falls below such thresholds, such person must simultaneously notify the Company and the Luxembourg Financial Sector Surveillance Commission (Commission de Surveillance du Secteur Financier) within seven calendar days of the proportion of voting rights it holds following such acquisition or disposal. ‘‘Acquiring a holding’’ means not only the purchase of Shares but also the acquisition by any other means as more fully described in the Luxembourg 1992 Law. In order to determine whether a person is required to make a declaration pursuant to the Luxembourg 1992 Law, Articles 7 and 8 of the Luxembourg 1992 Law assimilate the voting rights held by such person to the voting rights held by certain other persons, including where one person controls another or where they act in concert. If the Company receives such a declaration, it must in turn disclose it to the public in each Relevant Member State of the European Economic Area, or Relevant Member, in which its Shares are officially listed on a stock exchange as soon as possible but, in any event, not later than nine calendar days following the receipt of such declaration. So long as the required information has not been declared and published in accordance with the Luxembourg 1992 Law, the exercise of the voting rights attached to the Shares concerned is suspended. Upon admission of the Shares to trading on the Frankfurt Stock Exchange, the Company will become subject to certain provisions of the German Securities Trading Act (Wertpapierhandelsgesetz), which governs disclosure to shareholders and reporting duties. These provisions state that the Company, if one of its shareholders reaches, exceeds or falls below certain thresholds with respect to the percentage of its voting rights in the Company as a result of acquisitions, disposals or other means, must make a publication in the nationally circulated official national journal accredited by the national stock exchanges (Börsenpflichtblatt) disclosing this fact and the percentage of voting rights held by such shareholder. These thresholds are set at 5%, 10%, 25%, 50% and 75% of a listed company’s voting rights. The Company must make this publication without delay and in no event later than nine calendar days after the Company has obtained knowledge of the relevant facts. These thresholds are calculated in accordance with the German Securities Trading Act on the basis of effective, rather than direct, control of voting rights. 137 VALUATION REPORT Set forth below is a valuation report prepared by CB Richard Ellis GmbH, Feuerbachstr. 26 – 32, 60325 Frankfurt am Main, Germany, which includes the core properties of the GAGFAH GmbH Group, the core properties of the NILEG GmbH Group and the core properties of the WOBA GmbH Group. We have included this valuation report with the consent of CB Richard Ellis GmbH. This valuation report does not include Acquisition I which includes assets we acquired on December 31, 2005, March 27, 2006, and May 30, 2007. The valuation report does not cover any of our other assets. 138 Direct Dial: 0049 30 72 61 54 0 Direct Fax: 0049 30 72 61 54 100 Email: [email protected] Direct Dial: 0049 69 17 00 77 0 Direct Fax: 0049 69 17 00 77 77 Email: [email protected] October 6, 2006 VALUATION REPORT Estimate of Market Value in accordance with the definition and guidance as settled by the Royal Institution of Chartered Surveyors of The RESIDENTIAL REAL ESTATE PORTFOLIO of GAGFAH GmbH, Multiple Locations, Germany Clients: GAGFAH S.A. 14a, Rue des Bains L-1212 Luxembourg Grand Duchy of Luxembourg Deutsche Bank AG Taunusanlage 12 60325 Frankfurt am Main Germany Goldman Sachs International Peterborough Court 133 Fleet Street London, EC4A 2BB United Kingdom Dresdner Bank AG Jürgen-Ponto-Platz 1 60301 Frankfurt am Main Germany Morgan Stanley Bank AG Junghofstrasse 13-15 60311 Frankfurt am Main Germany DZ BANK Platz der Republik 60265 Frankfurt am Main Germany JP Morgan c/o 10 Aldermanbury London EC2V 7RF, United Kingdom Lehman Brothers 25 Bank Street, London E14 5LE, United Kingdom Nord LB Friedrichswall 10 30159 Hanover Germany Sal Oppenheim jr. & Cie. Untermainanlage 1 60329 Frankfurt am Main Germany Prepared by: CB Richard Ellis GmbH Feuerbachstraße 26 – 32 60325 Frankfurt am Main Germany Date of Issue: October 6, 2006 139 1. Instruction This report has been prepared for the purpose of inclusion in the prospectus to be published by the Company in connection with the proposed global offering of ordinary registered shares by the Company. 2. The Portfolio The total portfolio comprises an aggregate total of some 178,294 lease units in various locations all over Germany. Some 96% of the portfolio by lettable accommodation area comprises residential units, these numbering 146,555 units in total and providing an aggregate area of some 9 million m2 of lettable accommodation. The residential element of the portfolio also generates some 93% of the total portfolio income, this being slightly in excess of u471.8 million net annual income. The remainder of the portfolio comprises: • 1,853 miscellaneous commercial units which extend to an aggregate lettable accommodation area of 301,996 m2 and generate an annual income in the order of u24.4 million per annum. • 28,727 individual garage and parking units which generate an annual income in the order of u7.8 million per annum. • Seven senior residential homes in six separate locations (Berlin, Buxtehude, Dortmund, Essen, Hamm and Hanover), providing an aggregate lettable accommodation area of 51,690 m2 and generating an annual rental income of some u4.6 million per annum. • The portfolio also comprises some 900,000 m2 of land which are held freehold by WOBA. For some parts of the land (245,173 m2) a ground lease has been granted to various owners, amounting to a total annual income of u0.08 million. • 1,445 other lease units generating a total annual income of u0.7 million per annum. In terms of unit numbers, some 16% of the total of 178,294 lease units comprise parking and garage spaces but account for less than 1.6% of total portfolio income. The various commercial units comprise only 1% of the total portfolio by unit volume and just about 4.8% of portfolio income. The senior homes are let to single tenants who operate and manage the properties independently. The rental income derived from these assets accounts for less than 1% of aggregate portfolio income. The other lettable units account for less than 0.2% of total portfolio income. 3. Basis of Valuation These valuations have been prepared in accordance with the current edition of the RICS Appraisal and Valuation Standards Manual (the Red Book). The valuers responsible for this work are qualified asset valuers as defined in the Red Book. Our valuation is on the basis of Market Value (MV), which is defined as: The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion. In interpreting the definition, CBRE has applied the commentary within Practice Statement (PS) 3.2 of the RICS Appraisal and Valuation Standards Manual and as settled by the International Valuation Standards Committee. The core valuation uses the investment or comparable sales method and assumes the continued leasing of the entire portfolio, including appropriate assumptions about vacancies, rent developments and maintenance requirements. Your attention is drawn to the valuation procedure and assumptions which have been adopted in the preparation of this report and valuation. These are set out in detail in section 6 of this report. The properties of each portfolio have been valued individually by adoption of an appropriate clustering approach. Nevertheless, our valuation for each portfolio has been undertaken on the assumption that the assets will be marketed as a single portfolio. 140 Accordingly Market Value indicated in this report and valuation comprises the valuation of the assets as a single portfolio for each of the 3 portfolios. Our assessment of market value reflects a premium attributable to buildings which could be separated and single apartments which could be sold individually at a premium to the underlying ‘‘block sale’’ price. The premium is based on two significant factors: • Potential investors can invest at a relatively low investment volume; • Tenant and vacant sales are not yield-driven investments, but rather based on personal preferences. CBRE considers that purchasers of the portfolio would reflect this potential in their pricing. 4. 4.1 Valuation Introduction The properties have been valued individually by adoption of an appropriate clustering approach. Nevertheless, our valuation for each portfolio has been undertaken on the assumption that the assets will be marketed as a single portfolio. Accordingly, Market Value indicated in this report and valuation comprises the valuation of the assets as a portfolio. Each of the 3 subject portfolios has been valued as single portfolios. All figures are exclusive of purchase costs and VAT. Reporting Currency is the euro. 4.2 Opinion of Value On the basis of the information contained in this report, CBRE is of the opinion that the aggregate market value of the GAGFAH Portfolio amounts to some: w7,604,096,000 (euro seven billion, six hundred four million and ninety six thousand) On the basis of the information contained in this report, CBRE is of the opinion that the aggregate market value of the pure GAGFAH Residential Portfolio as of March 31, 2006 is w4,227,044,000 (euro four billion, two hundred twenty-seven million and forty-four thousand) On the basis of the information contained in this report, CBRE is of the opinion that the aggregate market value of the WOBA Residential Portfolio as of December 31, 2005 is w1,869,249,000 (euro one billion, eight hundred sixty nine million and two hundred forty nine thousand) On the basis of the information contained in this report, CBRE is of the opinion that the aggregate market value of the NILEG Residential Portfolio as of December 31, 2005 is w1,507,803,000 (euro one billion, five hundred seven million and eight hundred three thousand) The aggregate value of u7,604,096,000 includes an amount of approx. u210,783,000 which is based on the consideration that a professional and knowledgeable purchaser of the portfolio will sell properties suitable for privatization as single apartments to tenants, owner occupiers and investors. 4.3 Total Gross Current Income The total gross current income of the portfolio excluding the car parking sums up to some u497,795,000 per annum. 4.4 Total Estimated Gross Rental Value The total estimated gross rental value of the portfolio excluding the car parking sums up to some u565,594,000 per annum. 141 5. Valuation Methodology The valuation of the various asset categories was undertaken through adoption of one of the following two approaches: • Investment Method • Direct Sales Comparable Method. Table 1: Valuation Approaches Property Type Valuation Approach Single Family House (SFH) Multi Family House (MFH) Parking/Garages Commercial Senior Residences Comparable Method Investment Method Comparable Method Investment Method Investment Method Values have been calculated for each individual asset i.e. on House Unit Level Specific details are as follows. 5.1 Investment Method The following primary methodology has been applied to those properties which have been valued by the Investment Method in accordance with the above table: 5.1.1 Base Capital Value A base capital value has been calculated by capitalizing gross rental income at market level in perpetuity at a market-derived yield. The following adjustments to this base capital value have been adopted in order to arrive at market value: 5.1.2 Market Level Adjustment In order to reflect ‘‘top slice’’ (above market) and below market elements of the overall rental income at Market Level, adjustments have been made where necessary i.e. the difference between current rental income and rental income at market level for the leased space has been capitalized with the same yield applied to calculate the base capital value for an appropriate term of years. This term has been chosen as follows: Below Market In case of rent restricted assets the term has been determined by choosing the expiry date of the underlying restrictions. For all other assets it has been assumed that rents will be increased in accordance with German law and the specific rent restrictions agreed during the acquisition of GAGFAH. German law limits the maximum increase to not more than 20.0% over a 3 year period. Individual agreements in relation to the acquisition of the portfolios have been reflected in accordance with these agreements. Above Market Above market elements have been capitalised over 5 years, reflecting half of the period of 10 years, which has been assumed to be the average turnover in the portfolio. 5.1.3 Adjustment for Vacancy In case of vacant lease units CBRE has applied an adjustment to the base capital value in order to reflect any costs associated with the letting of the vacant unit. Specifically CBRE has deducted the capitalized gross rental income at market level allocated to the vacant unit over an appropriate period of time between 3 and 18 months depending on the quality of the location of the asset. For the NILEG portfolio an appropriate period of time between 3 and 12 months has been chosen taking into account the very good standard of the properties. Moreover CBRE has applied refurbishment costs for the vacant units. 142 5.1.4 Adjustment for Abnormal Outgoings Capital values have been adjusted if non recoverable items such as the following deviated from those which are regarded as market average for the underlying asset classes: • Ongoing maintenance expenditure and tenants’ improvements (in accordance with assessments made on the basis of the property inspections and our experience of corresponding expenditure levels derived from technical assessments undertaken in connection with similar transactions; • Management costs; • A suitable void allowance; • Non recoverable service charges. 5.1.5 Adjustment for Hereditary Building Rights A deduction has been made where necessary in order to reflect any hereditary building rights/ground leases. Ground leases have been treated by capitalizing the yearly ground lease by the capitalization rate applied to the subject property until maturity. Ground leases have also been reflected within our valuations by adoption of appropriate adjustments to our selected capitalization yields. 5.1.6 Adjustment for Immediate Repairs Costs of immediate repairs for the GAGFAH core portfolio have been incorporated within our valuations in accordance with property inspections and our experience of corresponding expenditure levels derived from technical assessments undertaken in connection with similar transactions. Costs of immediate repairs for the NILEG and WOBA core portfolio have been incorporated within our valuations in accordance with a clustering process taking into account the type of property and the construction year of the specific property. As far as third party advisors prepared relevant reports during one of the 3 relevant valuations, these reports have been reflected accordingly. 5.1.7 Adjustments for Subsidised Loans GAGFAH Residential Portfolio CBRE has applied a positive adjustment for subsidised loans under the Second Housing Act (Zweites Wohnbaufördergesetz). This type of loan is to be viewed as an integral part of the property rather than a personal instance of the borrower and has accordingly been reflected in our valuations. Accordingly, any interest rate advantage in comparison with the market average finance rate has to be valued together with the subject property. Should the subsidised interest rate be below the current interest rate for a 10 year property financing period, that the difference between the publicly-available finance condition and the subsidised loan has been capitalized with the capitalization rate applicable for the underlying asset over the fixed interest rate period. Where the subsidised loan was granted in conjunction with rent restrictions, the difference between market rental value and current rental value has been capitalized with the capitalization rate applied on the underlying assets over the fixed interest rate period. NILEG Residential Portfolio CBRE has applied a positive adjustment for subsidised loans under the Second Housing Act. This type of loan is to be viewed as an integral part of the property rather than a personal instance of the borrower and has accordingly been reflected in our valuations. Accordingly, any interest rate advantage in comparison with the market average finance rate has to be valued. Should the subsidised interest rate be below the current interest rate for a 10 year property financing period, that the difference between the publicly-available finance condition and the subsidised loan has been capitalized. CBRE has not been able to allocate the subsidized loan advantage to individual properties. 143 WOBA Residential Portfolio CBRE has not been provided with any data regarding subsidised loans. 5.2 Direct Sales Comparable Method The following primary methodology has been applied to those properties which have been valued by the Direct Sales Comparable Method. 1. Through analysis of comparable transactions, CBRE has derived sales prices on a per sq m basis for residential condominium units and Single-Family homes, which have been applied on the relevant units to calculate a base capital value by multiplying the lease area with the derived sales price. As such CBRE has taken into account that units might be sold to different types of investors and sales values have been determined accordingly. 2. CBRE has applied an approach consistent with the above to the valuation of all garage units and all other parking facilities within the portfolio. 3. Further deductions have been made where necessary in order to reflect any negative impact of hereditary building rights. 4. Appropriate deductions have been made in order to reflect deferred maintenance expenditure in accordance with assessments made on the basis of the property inspections and our experience of corresponding expenditure levels derived from technical assessments undertaken in connection with similar transactions. 5. Positive adjustments have been made where applicable in order to reflect any impact of subsidised loans. 5.3 Privatization Potential—Relevant Valuation Considerations In conjunction with the valuation process, detailed consideration has been given to the suitability of the assets for potential privatization (i.e. sale of apartments in accordance with GAGFAH’s business plan and investment strategy for the GAGFAH Residential Portfolio or in accordance with analysis results of third party advisors for the WOBA Residential Portfolio). 5.3.1 Suitability for Privatization GAGFAH RESIDENTIAL PORTFOLIO The evaluation of a property’s suitability for privatization has been based upon the following primary criteria. • All properties held under the terms of Erbbaurechte (Hereditary Building Rights or long ground leases) are excluded. • Properties subject to the receipt of various forms of subsidy which are not due to expire before 2011 are excluded. • Over 75% of apartments (Lease Units) within the property (House Unit) have a lettable accommodation area of at least 55 m2. • The House Unit has a maximum of five upper floors in all locations except Hamburg, where buildings of six floors are included. • The minimum average passing rent on the property/House Unit is u4.00/m2/month. • Wherever the micro location has been classified as ‘‘modest’’ during our site visits, the property has been excluded from the privatization process. • Any property with one or more commercial units has been excluded from the privatization process. WOBA RESIDENTIAL PORTFOLIO The evaluation of a property’s suitability for privatization has been based upon the following primary criteria. 144 • Properties subject to the receipt of various forms of subsidy are excluded. • Apartments (Lease Units) with a lettable accommodation area of at least 55 m2. • The House Unit has a maximum of four upper floors. • The minimum average passing rent on the property/House Unit is u3.00/m2/month. • Wherever the micro location has been classified as ‘‘modest’’ during our site visits, the property is excluded. • Any property including one or more commercial units has been excluded from the privatization process. • Moreover, the privatization process has been limited to the districts of Johannvorstadt, Plauen and Striesen. NILEG RESIDENTIAL PORTFOLIO The evaluation of a property’s suitability for privatization has been based upon the following primary criteria. • All properties held under the terms of Erbbaurechte (Hereditary Building Rights or long ground leases) are excluded. • Properties subject to the receipt of various forms of subsidy which are not due to expire before 2010 are excluded. Over 75% of apartments (Lease Units) within the property (House Unit) have a lettable accommodation area of at least 55 m2. • The House Unit has a maximum of four upper floors in all locations. • The minimum average passing rent on the property/House Unit is u3.00/m2/month. • Wherever the Micro Location has been classified as national communication road. • Any property including one or more commercial units has been excluded from the privatization process. • Any property rented with an average tenant age of more than 65 years. • Any property with investor sales restrictions lower than 50%. • Moreover, the privatization process has been limited to the Top 20 Portfolio Locations. • All properties held in partial ownership are suitable for privatization. 5.3.2 5.3.2.1 Privatization Value Introduction Detailed consideration has been given to the potential of privatization in conjunction with GAGFAH´s strategy and business plan. CBRE has undertaken a detailed analysis of this process and has taken into account several discussions with GAGFAH representatives. Moreover, CBRE has reflected discussions with local residential agents and companies specialising in tenant, investor and owner occupier privatization during comparable transactions. 5.3.2.2 Determination of Condominium Sales Prices The determination of condominium sales prices has been based on our observation of privatization activities in Germany, which are typically driven by sales to tenants within the first 6 to 12 month of the marketing process. In order to increase the number of sales within this short time frame it is common market practice to offer leased apartments to resident tenants at a purchase price which provides a discount of 10% – 20% on prices for comparable vacant apartments. This discounted purchase opportunity is normally restricted to a limited timeframe. It is similarly our experience that sales prices to investors are typically higher than or equal to equivalent sales prices to tenants. This is primarily due to the tenant’s legal right of pre-emption in 145 respect of his own apartment. Sales prices to investors are, however, generally lower than sales prices achieved on vacant apartments, this due firstly to the fact that the remainder needs to be valued on a discounted basis, and secondly the investor’s requirement to achieve a specific target yield. This relationship between the three target group price categories provided the basis for further observation, analysis and ultimately application to our valuations. Vacant sales prices adopted within our valuations are based on detailed market research and analysis of comparable transactions. In order to determine the appropriate discount level to be applied to sales to tenants, CBRE has adopted a methodology whereby an analysis has been undertaken in order to determine the price a tenant could afford to pay for his property without facing any additional burden as an owner in comparison with his situation as a tenant. This analysis was based on the current rental level, the legally possible maximum rental increase over a three year period, any additional owner-related payments, and interest payments at a market-derived level. Any amortization has been viewed as personal savings and has not therefore comprised part of this consideration. The results of this calculation have been compared with the results of the vacant sales price analysis. Where the calculated sales price was not found to be in a range between 10% and 20% below the market-established vacant possession value, both values were reviewed and, after additional research, one of the values was adapted to a reasonable level. Investor sales prices have been calculated on the basis of appropriate capitalization rates, these based upon detailed market research and analysis of comparable transactions. The outcome has been compared with both the vacant possession and tenant sales values and subsequently modified to a reasonable level within a range of 5% and 10% below the vacant possession value if considered necessary. 5.3.2.3 Determination of Condominium Sales Quotas During our external site visits of the selected Reference Properties within each Valuation Unit, an assessment was carried out of the immediate local environment of the property in terms of neighbouring property types and general residential amenity/living quality of the micro location. Adopting this location quality determinant as a primary indicator, projected tenant sales quotas have been based upon the premise that tenant sales are more likely in better locations. It has been assumed that privatization will not be implemented in modest locations. The vacant sales quota has been determined on the basis of wide consultation with agents and advisory firms specializing in privatization activities. 5.3.2.4 Separation and Other Privatization Costs During our site visits CBRE, additionally undertook an assessment of the physical condition of the properties in accordance with the details set out above. This condition assessment focused upon the façade, the external facilities, the building entrance and the windows. In those cases where it has been identified that part of the building has been classified as being defective, CBRE has applied certain costs considered necessary to improve the building for privatization purposes. Supplemental to the above CBRE has applied an allowance per unit in order to cover the costs for the technical and legal separation of the properties (measurements, legal fees etc.) in accordance with our discussions with agents and advisory firms specialised in privatization activities. 5.3.2.5 Privatization Value CBRE has assumed that the privatization process will be implemented over an eight year period for the GAGFAH Residential Portfolio and over a five year period for the NILEG and WOBA Residential Portfolios and have capitalized sales revenues and costs over half of the marketing period with an appropriate capitalization rate. 5.4 Selection of Capitalization Yields and Comparable Sales Values A range of research sources have been adopted in order to determine capitalization yields and comparable sales values. These are public market sources (such as HVB Expertise, ARC Research 146 and RDM (Ring Deutscher Makler), BulwienGesa AG and others), local residential agents and sales evidence (Several thousand comparable sales transactions derived from a diverse range of sources were analysed in order to establish sales prices per sq m and associated yield levels. This analysis was undertaken according to location, type of property, age of building etc.). 6. Transaction Costs No allowances have been made for any expenses of realization or for taxation which might arise in the event of a disposal of the portfolio. Our valuation is net of acquisition costs. 7. Net Annual Rent Receivable We set out our estimates of the net annual rent currently receivable reflecting the sum of the contractually agreed rental payments receivable from the Properties as at 16 June 2006. In providing these estimates, we define ‘‘Net Annual Rent Receivable’’ as ‘‘the current income or income estimated by the valuer’’: (i) ignoring any special receipts or deductions arising from the Property; (ii) excluding Value Added Tax and before taxation (including tax on profits and any allowances for interest on capital or loans); and (iii) after making deductions for superior rents (but not for amortization), and any disbursements including, if appropriate, expenses of managing the Property and allowances to maintain it in a condition to command its rent. In accordance with German market conventions the Properties are not let on effective full repairing and insuring leases in accordance with UK market conventions and as such the Net Annual Rent receivable reflects an appropriate allowance for disbursements. 8. Assumptions and Sources of Information Surveys and enquiries upon which all of our valuations are based are carried out by General Practice surveyors making appropriate investigations and having regard to the purpose of the valuation. Our reports and valuations are prepared in accordance with the current edition of the RICS Appraisal and Valuation Standards Manual. The valuers responsible for the work are qualified asset valuers as defined in the Red Book. Our work is on the basis of the standard assumptions set out below, unless specifically varied by our report: 8.1 Condition and Pollution Hazards Unless specifically instructed to carry out a structural survey, tests of service installations, site investigation or environmental survey, our valuations assume: (i) That no materials have been used in the construction of the buildings which are deleterious, hazardous or likely to give rise to structural defects. (ii) That all relevant statutory requirements have been complied with. (iii) That the site is physically capable of development or redevelopment, when appropriate, and that no special or unusual costs will be incurred in providing foundations and infrastructure. (iv) That the property is not adversely affected by any form of pollution. (v) That there are no archaeological remains on or under the land which could adversely impact on value. (vi) CBRE does, however, reflect the general condition of the premises evident from our inspection and any defects of which CBRE is made aware as summarised in our report. As far as third party advisors prepared relevant reports during one of the 3 relevant valuations, these reports have been reflected accordingly. 8.2 Environmental Contamination In preparing our valuations CBRE has assumed that no contaminative or potentially contaminative use is, or has ever been, carried out at the property. Unless specifically instructed, CBRE does not 147 undertake any investigation into the past or present uses of either the property or any adjoining or nearby land, to establish whether there is any potential for contamination from these uses and assume that none exists. Should it, however, be subsequently established that such contamination exists at any of the properties or on any adjoining land or that any premises have been or are being put to contaminative use, this may be found to have a detrimental effect on the value reported. In preparing our valuations, CBRE has assumed that all necessary consents and authorizations for the use of the property and the processes carried out at the property are in existence, will continue to subsist and are not subject to any onerous conditions. As far as third party advisors prepared relevant reports during one of the 3 relevant valuations, these reports have been reflected accordingly. 8.3 Tenure and Tenancies CBRE relies upon information supplied as to the property, tenure, tenancies, permitted uses and related matters. CBRE assumes such information to be accurate, up-to-date and complete. Where possible, this information has been confirmed at our inspection. CBRE assumes that the interest being valued is in all respects good and marketable. CBRE does not examine the title documents and, therefore, assumes that, apart from any matters mentioned in our report, the interest is not subject to any onerous restrictions, to the payment of any unusual outgoings or to any charges, easements or rights of way. CBRE assumes that any outstanding requirements of repairing covenants will be met. 8.4 Planning and Highway Inquiries CBRE makes only general enquiries of the local planning authorities and has relied upon information provided to us. Such information is assumed to be correct. No formal searches are instigated. Except where stated to the contrary, CBRE is informed that there are no local authority planning or highway proposals that might involve the use of compulsory purchase powers or otherwise directly affect the property. Our Valuations are prepared on the assumption that the premises comply with all relevant statutory enactments and building regulations and that a valid and up-to-date fire certificate has been issued. CBRE also assumes that all necessary consents and authorizations for the use of the property and the process carried out therein have been obtained and will continue to subsist and are not subject to any onerous conditions. CBRE further assumes that there are no outstanding obligations or liabilities arising out of the provisions regulating these issues. 8.5 Inspections The 3 subject portfolios have been divided into Valuation Clusters. For each of the valuation clusters a Reference Property has been identified and inspected on an external ‘‘drive-by’’ basis. During the different processes we have been able to carry out for some of the properties internal inspections. These internal inspections have been carried out in order to obtain a general impression as to the specification and layout of the individual apartments, as well as the physical condition of the internal fixtures and fittings. 8.6 Site and Floor Areas Unless stated to the contrary, CBRE has not measured the property nor taken check measurements and have relied upon areas recorded in documentation supplied. CBRE has, however, where possible checked these areas by taking measurements from scale plans. 8.7 Tenant Status Although CBRE reflects its general understanding of a tenant’s status in our valuation, CBRE makes no enquiries about the financial status of tenants, and relies upon GAGFAH to advise us if tenants are in default of rental payments, or where there appear grounds for concern. CBRE assumes that appropriate enquiries were made when leases were originally exchanged, or when consent was granted to tenants to assign or underlet. 148 8.8 Plant and Machinery In this real estate valuation CBRE includes those items of plant and machinery normally considered to be part of the building service installations and which would pass with the property on a sale or letting. CBRE excludes all items of process plant and machinery and equipment, together with their special foundations and supports, furniture and furnishings, vehicles, stock and loose tools, and tenants’ fixtures and fittings. 8.9 Special Purchaser Value Unless otherwise stated, our valuations do not reflect any element of marriage value or special purchaser value which could possibly be realised by a merger of interests or by a sale to an owner or occupier of an adjoining property, other than insofar as this would be reflected in offers made in the open market by prospective purchasers apart from the purchaser with a special interest. 8.10 Valuation Date Property values may change over time. Should you wish to dispose of this property or part thereof, or to accept a charge over it as security for a loan after the valuation date, we would advise a further consultation with us. 8.11 Costs of Realization No explicit allowance is made in our valuations for the costs of realization or any tax liability. No allowance has been made for any mortgage or similar financial encumbrance over the property. Our valuations exclude Value Added Tax. 8.12 VAT No allowance has been made in our valuation for the possible effect on value of non-recoverable VAT (Mehrwertsteuer) on purchase as a result of one or more of the tenants not being liable to pay VAT in addition to rent. 8.13 Sources of Information In the preparation of this report and valuation CBRE has necessarily relied upon information provided by GAGFAH GmbH, NILEG GmbH and Fortress and other sources. CBRE has assumed this information to be accurate and reliable and unless otherwise specifically stated within this report, this has not been checked or verified by CBRE. In the event of open questions arising, CBRE has made reasonable assumptions appropriate to customary valuation practice in the jurisdiction where the relevant property is based. CBRE does not accept any responsibility or liability associated with inaccurate information which has been provided by a third party. In the event that any of the information contained in the above-mentioned documents, obtained from the above-mentioned sources should indeed prove to be incorrect, the accuracy of our valuations could be affected. In such event CBRE reserves the right to amend the valuations accordingly. 9. Independence The total fees, including the fee for this assignment, earned by CB Richard Ellis GmbH (or other companies forming part of the same group of companies within the UK and Germany) from the addressees to this report (or other companies forming part of the same group of companies) is less than 5.0% of the respective companies. Yours faithfully Yours faithfully Ulf Buhlemann FRICS Director—Head of Valuation Germany Jacob Volckerts Director—Head of Investment Advisory Services For and on behalf of For and on behalf of CB Richard Ellis GmbH CB Richard Ellis GmbH 149 CB RICHARD ELLIS GMBH VALUATIONS(1) Units Dresden . . . . . Berlin . . . . . . Hamburg . . . . Hanover. . . . . Cologne . . . . . Osnabrück . . . Bielefeld . . . . Frankfurt . . . . Braunschweig . Dusseldorf . . . Essen. . . . . . . Bonn . . . . . . . Munich . . . . . Freiburg. . . . . Leverkusen. . . Nuremberg . . . Stuttgart. . . . . Mannheim . . . Dortmund . . . Göttingen. . . . Other Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rentable Space (m_) Property Value (CBRE) In-Place Net Cold Rent (annualized) In-Place Net Cold Rent (mo/m_) % of Value (Valued Residential Properties only) . . . . . . . . . . . . . . . . . . . . . 42,551 22.785 10,251 5,577 2,481 3,682 4,181 1,958 2,659 1,722 1,954 1,514 652 1,128 1,404 1,355 1,043 1,391 1,303 1,256 35,708 2,413,657 1.336.149 647,675 349,093 188,546 228,771 277,190 110,512 156,272 99,915 125,278 102,940 47,781 71,307 89,835 76,624 57,518 84,419 89,831 70,617 2,143,915 1,744,743,700 897.862.200 619,328,400 336,726,100 234,504,600 177,810,400 182,270,500 145,155,500 128,681,200 120,384,100 122,773,800 110,081,700 105,888,200 84,295,000 74,511,800 80,072,700 80,080,700 72,422,100 74,486,400 57,590,900 1,726,548,600 130,044,134 69,854,627 38,611,567 21,268,325 13,592,152 13,075,989 13,944,394 8,954,564 8,858,354 7,615,295 8,070,770 6,676,902 4.312,735 5,268,173 5,692,964 5,111,528 4,676,547 5,388,222 4,995,951 4,143,522 121,547,796 4.49 4.36 4.97 5.08 6.01 4.76 4.19 6.75 4.72 6.35 5.37 5.41 7.52 6.16 5.28 5.56 6.78 5.32 4.63 4.89 4.72 24.3% 12.5% 8.6% 4.7% 3.3% 2.5% 2.5% 2.0% 1.8% 1.7% 1.7% 1.5% 1.5% 1.2% 1.0% 1.1% 1.1% 1.0% 1.0% 0.8% 24.1% Valued Residential Properties . . . . . . . . . . . . . 146,555 8,767,845 7,176,218,600 501,704,512 4.77 100.0% Units not Valued. . . . . . . . . . . . . . . . . . . . . . . 5,259 344,849 17,169,572 4.15 Total Residential. . . . . . . . . . . . . . . . . . . . . . . 151,814 9,112,694 518,874,083 4.74 Commercial, Parking, & Other Units & Pachtland & Land & Subsidized Loans & Demolition Properties . . . . . . . . . . . . . . . . . Grand Total(2) . . . . . . . . . . . . . . . . . . . . . . . . 32,301 184,115 427,877,400.0 7,604,096,000 HB Funds, land (GAGFAH GmbH Group and NILEG GmbHGroup), land with third party leaseholds, as shown above 5.259 units of GAGFAH Acquisition 1 GmbH(3) . . . 465,443,552 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,069,539,552 32,977,051 551,851,135 (1) As of March 31, 2006. Minor variations in terms of units, rental income and value differ from certain similar information included elsewhere in this prospectus due to the ongoing process of unit disposals. (2) These figures represent the status of the three individual Valuation Reports at their individual Valuation Dates. Minor variations in terms of units, rental income and value differ from certain similar information included elsewhere in this prospectus due to the ongoing process of unit disposals. (3) Valued by the GAGFAH GmbH Group. 150 TAXATION LUXEMBOURG TAXATION The following is a summary discussion of certain material Luxembourg tax consequences with respect to the Company and its Shares. This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular holder of Shares, and does not purport to include tax considerations that arise from rules of general application or that are generally assumed to be known to holders of Shares. It is not intended to be, nor should it be construed to be, legal or tax advice. This discussion is based on Luxembourg laws and regulations as they stand on the date of this prospectus and is subject to any change in law or regulations or changes in interpretation or application thereof that may take effect after such date. Prospective investors in the Shares should therefore consult their own professional advisers as to the effects of state, local or foreign laws and regulations, including Luxembourg tax law and regulations, to which they may be subject. Please be aware that the residence concept used under the respective headings below applies for Luxembourg income tax assessment purposes only. Any reference in the present section to a tax, duty, levy impost or other charge or withholding of a similar nature refers to Luxembourg tax law and/or concepts only. Also, please note that a reference to Luxembourg income tax encompasses corporate income tax (impôt sur le revenu des collectivités), municipal business tax (impôt commercial communal), a solidarity surcharge (contribution au fonds de chômage), as well as personal income tax (impôt sur le revenu) generally. Investors may further be subject to net wealth tax (impôt sur la fortune) as well as other duties, levies or taxes. Corporate income tax, municipal business tax as well as the solidarity surcharge (which are collectively referred to as Luxembourg corporation taxes) invariably apply to most corporate taxpayers resident of Luxembourg for tax purposes. Individual tax payers are generally subject to personal income tax and the solidarity surcharge. Under certain circumstances, where an individual taxpayer acts in the course of the management of a professional or business undertaking, municipal business tax may apply as well. Taxation of the Company Net worth tax As a securitization company within the meaning of the Luxembourg law of March 22, 2004 on securitization (loi du 22 Mars 2004 relative à la titrisation), the Company is exempt from the annual net worth tax (impôt sur la fortune) which is 0.5% of the net worth of the companies to which it applies. Capital duty As a securitization company, at the date of incorporation of the Company, a fixed capital duty (droit d’apport) of u1,250 was payable in respect of the issued and paid-up share capital. On future capital increases, no capital duty will become due. Corporate income tax The Company will be liable for Luxembourg corporation taxes. The aggregate maximum applicable rate, including corporate income tax (impôt sur le revenu des collectivités), municipal business tax (impôt commercial communal) and a contribution to the employment fund, is 29.63% for the fiscal year ending 2006 for a company established in Luxembourg City. Liability for such corporation taxes extends to the Company’s worldwide profits including capital gains, subject to the provisions of any relevant double taxation treaty. The taxable income of the Company is computed by application of the Luxembourg income tax law of December 4, 1967, as amended (loi concernant l’impôt sur le revenu), as commented and currently applied by the Luxembourg tax authorities. As a securitization company, in calculating taxable net income based on its unconsolidated financial statements, the Company is able to deduct from net income dividends payable to its shareholders as business expenses. The Company is a fully taxable Luxembourg resident and should therefore, from a Luxembourg tax perspective, be able to benefit from double taxation treaties and European directives on income tax matters (e.g. Council Directive of July 23, 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, or 151 80/435/EEC; Council Directive of July 23, 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, or 90/434/EEC; Council Directive of June 3, 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, 2003/49/EC). Thin capitalization rules As a securitization company, the Company is not subject to Luxembourg’s thin capitalization rules. Taxation of Investors This tax disclosure is limited to the tax consequences to investors owning Shares in the Company.. This discussion therefore is limited to taxation issues in respect of the holding and selling of these Shares. Withholding tax As a securitization company, no withholding tax is due in Luxembourg on distributions and other proceeds paid by the Company to its shareholders. The Luxembourg law of December 23, 2005 on payments of interest or similar income to Luxembourg individual residents and the Luxembourg laws dated June 21, 2005, or the Laws, implementing the European Council Directive 2003/48/EC on the taxation of savings income, or the EU Savings Directive and several agreements concluded between Luxembourg and certain dependant territories of the European Union only apply to payments which qualify as ‘‘interest’’ as per the EU Savings Directive. The concept of interest is limited to income from debt-claims of every kind (bonds, debentures, loan agreements, etc.). The Luxembourg Income Tax Law (loi concernant l’impôt sur le revenu) not having modified the concept of ‘‘interest’’ income as defined under the EU Savings Directive, when implementing it into domestic legislation, dividend payments on shares do not fall under the withholding tax regime set forth under the EU Savings Directive. Non-resident shareholders Capital gains realized by a shareholder of the Company who is not a resident of Luxembourg for tax purposes and who has no permanent establishment or permanent representative to which the Shares are attributable are not taxable in Luxembourg, except if the Shares are part of a substantial participation of more than 10% in the Company and provided these Shares are sold within six months of their acquisition or, under certain conditions, the shareholder has been a resident of Luxembourg in the past. Resident shareholders Shareholders will not become residents, or be deemed to be resident in Luxembourg, by reason only of the holding of the Shares. Shareholders who are residents of Luxembourg for tax purposes or who have a permanent establishment or permanent representative in Luxembourg must for income tax purposes include any income (dividends, capital gains, liquidation proceeds in excess of their cost base) received or accrued on their Shares in their taxable income for the year. They will, however, not be subject to any Luxembourg income tax on the repayment of principal. Luxembourg resident shareholders who are holding companies subject to the amended law of July 31, 1929 or undertakings for collective investment subject to the amended law of December 20, 2002 are tax exempt entities in Luxembourg and thus are not subject to any Luxembourg tax on income received or accrued on the Shares, or on gains realized on the sale or disposal of Shares. Net wealth tax Shares held by Luxembourg resident corporate taxpayers in respect to the Company will be subject to an annual net worth tax charge (impôt sur la fortune) of 0.5%. Non-resident individual shareholders and resident individual shareholders are exempt from net worth tax in Luxembourg. 152 Non-resident corporate taxpayers will only be subject to net worth tax in Luxembourg on such shares that they may hold via a permanent establishment in Luxembourg. The mere holding of the shares in Luxembourg custody accounts does not create a permanent establishment or a permanent representative in Luxembourg. Absent any permanent establishment or a permanent representative in Luxembourg, non resident corporate taxpayers will not be subject to net worth tax in Luxembourg as a result of them holding Shares in the Company. Where net worth tax becomes due, the taxable basis is determined by deducting debts incurred by the taxpayer in connection with the acquisition of the Shares in the Company. Luxembourg resident shareholders and shareholders who have a permanent establishment or a permanent representative in Luxembourg to which the Shares of the Company are attributable are subject to Luxembourg wealth tax on the Shares, except if the shareholder is (i) a resident or non-resident individual taxpayer, (ii) a holding company subject to the amended law of 31 July 1929, (iii) an undertaking for collective investment subject to the amended law of December 20, 2002, (iv) a securitization company governed by the law of March 22, 2004 on securitization or (v) a company governed by the law of June 15, 2004 on venture capital vehicles. Other tax consequences Stamp taxes and transfer taxes There is no Luxembourg registration tax, stamp duty or any other similar tax or duty payable in Luxembourg by the holders of Shares as a consequence of the issuance of the Shares, nor will any of these taxes be payable as a consequence of a subsequent transfer, repurchase or redemption of the Shares. Gift taxes No estate or inheritance tax is levied on the transfer of Shares upon death of a holder of Shares in cases where the deceased was not a resident of Luxembourg for inheritance tax purposes and no gift tax is levied upon a gift of Shares if the gift is not passed before a Luxembourg notary or recorded in a deed registered in Luxembourg. Where a holder of Shares is a resident for tax purposes of Luxembourg at the time of his death, the Shares are included in its taxable estate for inheritance tax or estate tax purposes. VAT As a result of its activities and in light of European case law we have been advised that the Company should be considered an ‘‘entrepreneur’’ for value added tax, or VAT, purposes. As a result of this characterization, certain services rendered by foreign service providers to the Company may be deemed to be located on Luxembourg territory. This may lead to a reverse charge mechanism in Luxembourg at applicable rates at the time the taxable service will have been provided, presently either 12% or 15%, depending on the nature of the services. However, since VAT exemption applies on the management of securitization vehicle in Luxembourg, the VAT costs for the Company should be rather limited to a short list of services (such as lawyers fees, custody services, etc.). GERMAN TAXATION The following is a summary discussion of certain material German tax consequences with respect to the taxation of our Group companies and our German resident shareholders. This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular holder of shares, and does not purport to include tax considerations that arise from rules of general application or that are generally assumed to be known to holders of shares. It is not intended to be, nor should it be construed to be, legal or tax advice. This discussion is based on German laws and regulations in force on the date of this prospectus and is subject to any change in law or regulations or changes in interpretation or application thereof that may take effect after such date. Prospective investors in the Company’s Shares should therefore consult their own professional advisors as to the effects of state, local or foreign laws and regulations, including German tax law and regulations, to which they may be subject. Taxation of our Group Companies General Income Tax Rules Applicable To Our Group Companies All of our German Group companies are subject to corporate income tax and trade tax. Some of our group companies may apply for a special trade tax status. It is, however, not intended to take 153 advantage of the proposed REIT legislation. This may be reconsidered after the respective legislation has been enacted. Due to historic reasons, some of our German Group companies are subject to certain specific rules applicable to formerly charitable and therefore tax exempt housing companies. See Section 13 of the German Corporation Tax Law (Körperschaftsteuergesetz), which provides for limitations regarding tax deprecation and special rules for the determination of capital gains and Section 38 of the German Corporation Tax Law (EK02). See ‘‘Risk Factors—Risks related to Taxation—Transfers of profit in the form of distributions to the Company by certain of its subsidiaries would trigger ‘‘recapture taxation’’ due to the existence of untaxed earnings.’’ Some of our German Group companies have loss carry forwards for tax purposes. No Investment Fund The Company should not qualify as a foreign investment fund in terms of the German Investment Tax Act and thus the German fund taxation rules should not apply. On January 23, 2006, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) issued a ruling according to which the Company, then organized as a société en commandité par actions, does not qualify as a foreign fund in the meaning of the German Investment Act. This qualification should also apply for tax purposes. German Controlled Foreign Corporation Rules (Aussensteuergesetz) Under the German tax rules on controlled foreign corporations (which are in general applicable to foreign corporations earning passive low-taxed income and which do not qualify as foreign investment funds for German tax purposes) passive income earned by such corporations may be subject to full taxation at the level of the German shareholder regardless of any dividend distributions. The German CFC rules will apply to individuals and/or entities, which are subject to German unlimited tax liability, provided that either (a) the shareholder holds at least 1% in the Company’s share capital or (b) in total more than 50% of the Shares or voting rights are held by individuals or entities subject to German unlimited tax liability. The Company will derive almost all of its income as low-taxed interest income, which will be subject to immediate taxation in the hands of the shareholders if one of the above criteria is fulfilled. Taxation of the Company’s Shareholders Taxation of Dividends Only half of the dividends received by a German-resident individual are subject to income tax (plus solidarity surcharge of 5.5% thereon). For corporate shareholders, subject to certain restrictions, dividends are exempt from corporate income tax. However, 5% of the dividends are deemed non-deductible business expenses and are thus subject to tax so that effectively 95% are tax-exempt. Special rules apply to banks, financial service companies, financial companies, certain insurance companies and pension funds. Subject to certain conditions and upon sufficient proof, Luxembourg withholding tax, if any, on dividend distributions may be credited against German income or corporate tax levied on the dividend distributions. Upon application, the taxpayer may instead opt for a deduction of the creditable Luxembourg withholding tax from its taxable income. If the Shares form part of a German trade or business the dividend is also subject to trade tax, unless the shareholder holds 10% or more of the issued share capital in the Company at the beginning of the calendar year in which the dividend is paid. Special rules apply for certain insurance companies and pension funds. Taxation of Capital Gains An individual will be subject to tax on half of the capital gains from the disposal of Shares if (i) the Shares are sold within one year after their acquisition or (ii) the shareholder (or in the case of a gratuitous transfer its predecessor) at any time during the five years preceding the sale held, directly or indirectly, 1% or more of the issued share capital of the Company or (iii) the Shares are held as a business asset. 50% of a loss from the disposal of Shares may be deductible subject to certain restrictions. 154 Capital gains from the disposal of Shares by corporate shareholders are generally tax-free. However, 5% of the gains will be deemed non-deductible business expenses and are thus subject to tax so that effectively 95% of the gains are tax-exempt. Losses from the disposal of Shares are non-deductible. Special rules do apply to banks, financial service companies, financial companies, certain insurance companies and pension funds. If the Shares form part of a German trade or business capital gains from the disposal of Shares will generally also be subject to trade tax. The tax applies to 50% of the capital gains realized by individuals and 5% of the gains realized by corporations. Special rules apply to banks, financial service companies, finance companies, certain insurance companies and pension funds. Inheritance and Gift Tax The transfer of Shares by means of inheritance or gift is subject to German inheritance and gift tax only if one of the following circumstances applies: • the testator, donor, heir, donee or any other beneficiary has his or her residence or habitual abode in Germany at the time of the transfer; or • regardless of the personal circumstances listed under (i), the testator’s or donor’s Shares belong to a business asset attributable to a permanent establishment in Germany or business asset for which a permanent representative has been appointed in Germany. The few currently applicable inheritance and gift taxation treaties to which Germany is a party generally provide that German inheritance or gift tax is levied only in case (i) and, with certain restrictions, in case (ii). Special regulations apply to certain German expatriates and former German citizens. Other German Taxes No German stock exchange transfer tax, value added tax, stamp duty or similar tax is levied on the acquisition, the sale or other disposal of Shares. Under certain circumstances an entrepreneur may opt to have value added tax levied on a transaction involving the disposal of Shares, when such transaction is executed for the enterprise of another entrepreneur. Net wealth tax (Vermögenssteuer) is, at present, not levied in Germany. 155 CERTAIN ERISA CONSIDERATIONS GENERAL The U.S. Employee Retirement Income Security Act of 1974, as amended, or ERISA, and Section 4975 of the United States Federal Income Tax Code, or the Code, impose certain restrictions on (a) employee benefit plans (as defined in Section 3(3) of ERISA) that are subject to Title I of ERISA, (b) plans (as defined in Section 4975(e)(1) of the Code) that are subject to Section 4975 of the Code, including individual retirement accounts or Keogh plans, (c) any entities whose underlying assets include plan assets by reason of a plan’s investment in such entities (each of (a), (b) and (c), a ‘‘Plan’’) and (d) persons who have certain specified relationships to Plans (‘‘Parties in Interest’’ under ERISA and ‘‘Disqualified Persons’’ under the Code). Moreover, an insurance company’s general account may be deemed to include assets of the Plans investing in the general account (e.g., through the purchase of an annuity contract), and such insurance company might be treated as a Party in Interest with respect to a Plan by virtue of such investment. Note, however, that assets of an insurance company general account will not be treated as ‘‘plan assets’’ for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code to the extent such assets relate to contracts issued to employee benefit plans on or before December 31, 1998 and the insurer satisfies various conditions. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA, and ERISA and the Code prohibit certain transactions between a Plan and Parties in Interest or Disqualified Persons with respect to such Plan. Violations of these rules may result in the imposition of excise taxes and other penalties and liabilities under ERISA and the Code. PROHIBITED TRANSACTIONS The Underwriters and the Co-Managers or certain affiliates thereof may be ‘‘Parties-in-Interest’’ or ‘‘Disqualified Persons’’ with respect to a number of Plans. Accordingly, investment in the Shares by a Plan that has such a relationship could be deemed to constitute a transaction prohibited under Title I of ERISA or Section 4975 of the Code (e.g., the indirect transfer to or use by Party-in-Interest or Disqualified Person of assets of a Plan). Such transactions may, however, be subject to one or more statutory or administrative exemptions such as Section 408(b)(17) of ERISA, which exempts certain transactions with non-fiduciary service providers; Prohibited Transaction Class Exemption, or PTCE, 90-1, which exempts certain transactions involving insurance company pooled separate accounts; PTCE 91-38, which exempts certain transactions involving bank collective investment funds; and PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a ‘‘qualified professional asset manager;’’ PTCE 95-60, which exempts certain transactions involving insurance company general accounts; PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by an ‘‘in-house asset manager;’’ or another available exemption. Such exemptions may not, however, apply to all of the transactions that could be deemed prohibited transactions in connection with a Plan’s investment. If a purchase or transfer were to result in a non-exempt prohibited transaction, such purchase or transfer may have to be rescinded. By its purchase, each investor will be deemed to have represented that either (i) it is not a Plan that is subject to the prohibited transaction rules of ERISA or the Code or (ii) its acquisition and holding of the Units will not constitute a non-exempt prohibited transaction under ERISA or the Code. PLAN ASSETS If a Plan invests in an ‘‘equity interest’’ of an entity that is neither a ‘‘publicly offered security’’ nor a security issued by an investment company registered under the U.S. Investment Company Act of 1940, the Plan’s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity’s underlying assets, unless it is established that the entity is an ‘‘operating company’’ or that equity participation by ‘‘benefit plan investors’’ is not ‘‘significant.’’ The Shares are ‘‘equity interests’’ for purposes of the Plan Assets Regulation; the Company will not be registered under the U.S. Investment Company Act of 1940; the Shares will not be registered under U.S. securities laws and we do not intend to monitor whether equity participation by ‘‘benefit plan investors’’ is ‘‘significant.’’ Therefore, if the Company does not qualify as an ‘‘operating company,’’ its assets could be deemed to be the assets of Plans investing in the Shares. If its assets were deemed to constitute the assets of an investing Plan, (i) transactions involving its assets could be 156 subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code, (ii) the Company’s assets could be subject to ERISA’s reporting and disclosure requirements, and (iii) the fiduciary causing the Plan to make an investment in the Shares could be deemed to have delegated its responsibility to manage the assets of the Plan. THE ‘‘OPERATING COMPANY’’ EXCEPTION For purposes of ERISA, an ‘‘operating company’’ is defined as ‘‘an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital.’’ The Company is primarily engaged, directly or through majority-owned subsidiaries, in providing modern services in the property sector, unrelated to the mere investment of capital. In addition, it provides residential housing and housing services to persons in Germany, owning a portfolio of residential housing units as described herein. Moreover, the Company also owns commercial properties and engages in the project development business. Accordingly, we believe that it currently qualifies as an operating company and therefore is not subject to the fiduciary requirements of ERISA with respect to its assets. We intend to take steps as may be reasonably appropriate to continue to enable the Company to qualify as an operating company. Nonetheless, there may be no assurance that it will continue to so qualify. 157 UNDERWRITING SUBJECT OF AND AGREEMENTS ON UNDERWRITING On or about October 20, 2006, the Company, the Selling Shareholders and the Underwriters are expected to enter into an underwriting agreement with respect to the offer and sale of the offered Shares in connection with the offering. The offering consists of up to 42,750,000 existing Shares (up to 44,887,500 Shares assuming full exercise of the Greenshoe Option) from the holdings of the Selling Shareholders. The offering consists of a public offering and listing of the Shares in the Federal Republic of Germany and private placements in certain jurisdictions outside the Federal Republic of Germany, each in accordance with Regulation S under the Securities Act. In the United States of America, the Shares will be offered to qualified institutional buyers in accordance with Rule 144A under the Securities Act. This offering will commence on October 10, 2006 and end (i) on October 18, 2006 at 12:00 noon (Central European Time) for group employees and certain employees and business affiliates of the Selling Shareholders and their affiliates entitled to receive a preferential allotment; (ii) on October 19, 2006 at 12:00 noon (Central European Time) for retail investors and (iii) on October 20, 2006 at 2:00 p.m. (Central European Time) for institutional investors. The Shares have not been and will not be registered under the Securities Act and are being offered and sold in the United States of America only pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, including in the United States of America to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States of America in reliance on Regulation S under the Securities Act. The offer price is expected to be set on or about October 20, 2006 by the Selling Shareholders, and the Joint Bookrunners together with the assistance of the order book prepared during the bookbuilding process. The following table sets forth the number of Shares to be underwritten by each of the Underwriters as part of the offering: Maximum Number of Shares to be Underwritten(1) Deutsche Bank AG Taunusanlage 12 60325 Frankfurt am Main, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goldman Sachs International Peterborough Court, 133 Fleet Street London EC4A 2BB, United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dresdner Bank Aktiengesellschaft Jürgen-Ponto-Platz 1 60301 Frankfurt am Main, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Morgan Stanley Bank AG Junghofstrasse 13-15 60311 Frankfurt am Main, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J.P. Morgan Securities Ltd. c/o 10 Aldermanbury London EC2V 7RF, United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lehman Brothers International (Europe) 25 Bank Street London E14 5LE, United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sal. Oppenheim jr. & Cie. Untermainanlage 1 60329 Frankfurt am Main, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Without exercise of the Greenshoe Option 158 9,262,500 9,262,500 9,262,500 9,262,500 1,425,000 2,850,000 1,425,000 42,750,000 The Underwriters will pay the Selling Shareholders the offer price for the existing Shares (less agreed commissions and expenses) at the time of the delivery of the existing Shares. COMMISSIONS The Underwriters will offer the offered Shares at the offer price. The Selling Shareholders will pay the Underwriters a commission of 1.875% of the proceeds from the offering, i.e., the number of Shares actually sold (including the Shares allotted as part of the Greenshoe Option) multiplied by the offer price. In addition, the Selling Shareholders may, in their sole discretion, pay the Joint Bookrunners or Co-Managers an incentive fee of up to 0.625% of the proceeds of the offering of the Shares (including the Shares allotted as part of the Greenshoe Option). GREENSHOE OPTION In connection with this offering, Deutsche Bank, acting as Stabilization Manager, or any persons acting on its behalf, may, for stabilization purposes, over-allot Shares up to a maximum of 5% of the total number of Shares comprised in the offering. For the purposes of allowing the Stabilization Manager to cover short positions resulting from any such over-allotments and/or from sales of Shares effected by the Stabilization Manager during the Stabilizing Period, the Selling Shareholders have granted the Underwriters a Greenshoe Option pursuant to which the Stabilization Manager may require the Selling Shareholders to sell additional Shares up to a maximum of 5% of the total number of Shares comprised in the offering, at the offer price. The Greenshoe Option is exercisable in whole or in part, upon notice by the Joint Bookrunners, at any time during the Stabilizing Period but only to the extent of the over-allotment. Any Shares made available pursuant to the Greenshoe Option will be issued on the same terms and conditions as the Shares being issued in the offering and will form a single class for all purposes with the other Shares. The Selling Shareholders have granted Deutsche Bank, on behalf of the Underwriters, the right to borrow shares from the Selling Shareholders, pro rata to the amount of shares each Selling Shareholder is offering to sell, up to the amount of the Greenshoe Option. This right terminates, at the latest, on the 30th calendar day following the commencement of trading in the Shares. Borrowed shares or shares of the same class must be purchased or returned no later than two business days after expiration of the securities lending agreement. As used in this section ‘‘Underwriting,’’ ‘‘business day’’ means Monday through Friday, excluding any public holidays in the Grand Duchy of Luxembourg or in Frankfurt am Main. All borrowed shares may only be used to satisfy delivery obligations with respect to short positions in connection with the allocation of the Shares, until such short positions are covered either by the exercise of the Greenshoe Option or through market purchases. TERMINATION, INDEMNITY The underwriting agreement is expected to provide that under certain circumstances the Underwriters may terminate the underwriting agreement and their obligation thereunder to purchase the Shares. If the underwriting agreement is terminated, which can occur up to two business days after the commencement of trading, the offering will not take place, allocations of Shares to investors will become ineffective, and investors will not have any claim to delivery of the Shares. Any claims with respect to fees paid and costs incurred by investors in connection with subscriptions will arise solely under the legal relationship between the respective investor and the institution with which the buy order was placed. If investors have sold any of the Shares before such Shares were delivered to them by book-entry transfer, and they are unable to fulfill their obligation from the purchase agreement to deliver such Shares following the termination by the Underwriters of the underwriting agreement, the legal consequences will be determined exclusively on the basis of the relationship between the investor and his or her buyer. Under the underwriting agreement, the Company and the Selling Shareholders are expected to undertake to indemnify the Underwriters from certain liability risks arising in connection with the offering. OTHER RELATIONSHIPS Some of the Underwriters or their affiliates have engaged and may, from time to time, engage in commercial transactions or perform services in the ordinary course of business with members of our Group. They have received and are expected to receive customary fees and commissions for these services. 159 SELLING RESTRICTIONS United States of America Pursuant to the underwriting agreement, the Underwriters have each agreed to publicly offer the offered Shares exclusively in Germany and to refrain from offering or selling the Shares, either directly or indirectly, in the United States of America or to residents of the United States of America or for their account, except pursuant to an exemption from, or in a transaction not subject to, the registration and disclosure requirements of U.S. securities laws, and unless all further applicable U.S. legal provisions have been complied with. The Shares have not been and will not be registered under the Securities Act and may only be offered and sold in the United States of America or to U.S. persons only pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, including in the United States of America to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States of America in reliance on Regulation S under the Securities Act. European Economic Area Each Underwriter will individually represent and warrant to the Company and the Selling Shareholders that in relation to each Relevant Member State of the EEA which has implemented the Prospectus Directive an offer to the public of any Shares which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State, other than the offers contemplated in the prospectus in the Federal Republic of Germany once the prospectus has been (a) approved by the Luxembourg Commission, (b) published in accordance with Luxembourg statutory rules and (c) notified to the German Federal Financial Services Supervisory Authority, except that an offer to the public in that Relevant Member State of any Shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State: • to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; • to any legal entity which has two or more of (1) an average of at least 250 employees during the last fiscal year; (2) a total balance sheet of more than u43,000,000 and (3) an annual net turnover of more than u50,000,000, as shown in its last annual or consolidated accounts; • by the Underwriters to fewer than 100 natural or legal persons (other than qualified institutional investors as defined in the Prospectus Directive); • in any other circumstances falling within Article 3(2) of the Prospectus Directive; or • provided that no such offer of shares shall result in a requirement for the publication by us or any Joint Bookrunner of an approved prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an ‘‘offer to the public’’ in relation to the Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Shares so as to enable an investor to decide to purchase the Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and includes any relevant implementing measure in each Relevant Member State. United Kingdom Each Underwriter will individually represent and warrant to the Company and the Selling Shareholders that (i) it has only communicated, will communicate or will cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the offer or sale of the offered Shares in circumstances in which Section 21(1) FSMA does not apply to the Company; and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to all activities in relation to the offered Shares in, from or otherwise involving the United Kingdom. 160 INDEX TO FINANCIAL INFORMATION Page GAGFAH S.A. Consolidated Financial Statements (IFRS) Audited Consolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Auditor’s Report regarding the Audited Consolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 . . . . . . . . . . . . F-54 Unaudited Condensed Consolidated Interim Financial Statements as of and for the six months ended June 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-55 GAGFAH S.A. Unconsolidated Financial Statements (Luxembourg GAAP) Audited Unconsolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-72 Auditor’s Report regarding the Audited Unconsolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 . . . . . . . . . . . . F-78 Unaudited Unconsolidated Interim Financial Statements as of and for the six months ended June 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-79 GAGFAH GmbH Consolidated Financial Statements (IFRS) Audited GAGFAH GmbH Consolidated Annual Financial Statements as of and for the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85 Auditor’s Report regarding the Audited GAGFAH GmbH Consolidated Annual Financial Statements as of and for the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . F-139 Unaudited GAGFAH GmbH Condensed Consolidated Interim Financial Statements as of and for the six months ended June 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-140 GAGFAH S.A. Pro Forma Consolidated Financial Information Pro Forma Consolidated Financial Information as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-156 Auditor’s Report regarding the Pro Forma Consolidated Financial Information as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005. . . . . . . F-170 F-1 GAGFAH S.A. Société Anonyme (formerly NLG Acquisition Investments S.C.A. Société en Commandite par Actions) Audited Consolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 (in accordance with IFRS) F-2 GAGFAH S.A. Société Anonyme CONSOLIDATED BALANCE SHEET December 31, 2005 (expressed in EUR k) Note Assets Non-current assets Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E.1. E.2. E.3. E.4. E.7. E.9. December 31, 2005 2,453 1,574,431 33,160 3,039 656 1,442 1,615,181 Current assets Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current tax claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 E.5. E.6. E.4. E.7. E.8. E.10. 127,047 15,229 4,326 3,195 223 79,678 E.14. 229,698 107,838 337,536 1,952,717 GAGFAH S.A. Société Anonyme CONSOLIDATED BALANCE SHEET December 31, 2005 (expressed in EUR k) December 31, 2005 Equity and liabilities Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subscribed capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity attributable to the shareholders of the parent company . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E.11. 3,683 327,119 368 −106,081 225,089 20,287 245,376 Liabilities Non-current liabilities Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. 12.1. E. 12.2. E. 8. E. 13.1. E. 13.2. E. 12.1. 12,322 1,295 66,680 1,312,469 3,246 21,540 1,417,552 Current liabilities Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities in connection with assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. E. E. E. E. E. 12.1. 12.2. 12.3. 13.1. 13.2. 12.1. 580 32,035 9,235 42,584 203,583 1,109 E. 14. 289,126 663 289,789 Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,707,341 Total equity and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,952,717 F-4 GAGFAH S.A. Société Anonyme CONSOLIDATED INCOME STATEMENT For the period from July 12, 2005 (date of incorporation) to December, 31 2005 (expressed in EUR k) Note Income from the leasing of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses for hereditary building rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses for the generation of rental income . . . . . . . . . . . . . . . . . . . . F.1. F.2. Jul. 12 to Dec. 31, 2005 42,517 91 26,479 Profit from the leasing of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,947 Income from the sale of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying amount of the investment property sold . . . . . . . . . . . . . . . . . . . . . . . . . . 14,251 15,973 Loss from the sale of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.3. Unrealized gains from fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses from fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . −1,722 30,563 −23,588 Result from fair value measurement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.4. 6,975 Result from other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.5. F.6. F.7. F.8. F.9. −1,635 594 9,914 5,882 3,403 Profit from operations before restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,536 F.10. Profit from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −20,335 F.11. Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense (periodical) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income (periodical) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Result from the fair value measurement of derivatives. . . . . . . . . . . . . . . . . . . . . . Interest (refinancing) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.12. F.13. 29,676 −76,497 F.14. Loss for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereof attributable to: Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −22,013 517 4,281 −8,338 −46,821 Loss from continued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −933 −21,268 Loss from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,871 −31,813 −108,310 F.15. −2,229 Shareholders of the parent company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −106,081 Weighted average number of shares: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111,715 Basic and diluted loss per share attributable to the shareholders of the parent company in EUR: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −50.23 F-5 GAGFAH S.A. Société Anonyme CASH FLOW STATEMENT For the period from July 12, 2005 (date of incorporation) to December, 31 2005 (expressed in EUR k) Profit from operations (adjusted for the loss from discontinued operations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in the value of investment property . . . . . . . . . . . . . . . . . . . . . . . . Amortization, depreciation and impairment losses on intangible assets and property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from the disposal of investment property. . . . . . . . . . . . . . . . . . . . . . Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note Jul. 12 to Dec. 31, 2005 F. 4. −52,136 −5,708 F. 7. F. 3. Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received from the sale of investment property . . . . . . . . . . . . . . . . . Cash paid for investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873 1,722 −1,054 −344 1,071 −61,468 36,565 1,501 28,740 −1,514 –51,752 16,562 −148,959 −132,397 Cash paid for investments in property, plant and equipment. . . . . . . . . . Cash received from disposals of property, plant and equipment . . . . . . . Changes in financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for the acquisition of subsidiaries less cash and cash equivalents acquired from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . −30,819 21 21 B. 1. −522,913 Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received from equity contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid (–) to minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received from raising financial liabilities . . . . . . . . . . . . . . . . . . . . . . Cash repayments of financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense for refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −686,087 331,195 −86 1,437,275 −942,554 -8,338 Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817,492 Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,653 Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 E. 9. 25 79,678 GAGFAH S.A. Société Anonyme STATEMENT OF CHANGES IN CONSOLIDATED EQUITY PURSUANT TO IFRSs For the period from July 12, 2005 (date of incorporation) to December, 31 2005 (expressed in EUR k) Subscribed Legal capital Share premium reserve July 12, 2005 . . . . . . . . . . . Shareholder contributions . . . . . . . . . Loss for the year . . . . . . . Change in shareholdings and the consolidated group . . . . . . . . . . . . . . . Dec. 31, 2005 . . . . . . . . . . . 31 0 3,652 0 327,119 0 0 0 3,683 327,119 0 Revenue reserves 0 368 0 0 −106,081 0 F-7 Equity attributable to the shareholders of the parent Minority company interests Total equity 31 0 31 331,139 0 −106,081 −2,229 331,139 −108,310 0 0 22,516 22,516 368 −106,081 225,089 20,287 245,376 GAGFAH S.A. Société Anonyme GROUP SEGMENT REPORT As of December, 31 2005 (expressed in EUR k) Segment revenues from third parties. . . . Transactions with other segments. . . . . . . Segment revenues . . . . . . . . . . . . . . . . . . . . EBITDA per segment . . . . . . . . . . . . . . . . Result from fair value measurement . . . . Segment write-downs . . . . . . . . . . . . . . . . . EBIT (before restructuring) . . . . . . . . . . . Restructuring expenses. . . . . . . . . . . . . . . . EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial result/interest expense. . . . . . . . Loss from continued operations before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations . . Loss from continued operations . . . . . . . . Loss from discontinued operations . . . . . Loss for the year . . . . . . . . . . . . . . . . . . . . . Segment assets . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . . . . Segment investments (investments in property, plant and equipment or intangible assets) . . . . . . . . . . . . . . . . . . . Significant non-cash segment expenses . . Real estate management Real estate sales Group function/ consolidation Group (continued operations) 42,517 0 42,517 15,947 6,975 0 22,922 0 22,922 14,251 0 14,251 −2,557 0 0 −2,557 0 −2,557 1,047 0 1,047 −8,889 0 873 −9,762 31,871 −41,633 57,815 0 57,815 4,501 6,975 873 10,603 31,871 −21,268 −25,553 1,601,469 123,328 674 46 350,573* 1,583,967* −46,821 29,676 −76,497 −31,813 −108,310 1,952,717* 1,707,341* 148,958 3,179 0 2,520 30,818* 35,838* 179,776* 41,537* The items marked (*) include effects from discontinued operations. F-8 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 A. GENERAL INFORMATION The Company GAGFAH S.A. (the ‘‘Company’’) has been incorporated on July 12, 2005 as a Luxembourg ‘‘S.C.A.’’ under the name NLG Acquisition Holdings S.C.A. On August 30, 2005 it changed its denomination in NLG Acquisition Investments S.C.A. and with shareholder resolution from September 29, 2006 the company was transformed and renamed to GAGFAH S.A. It is registered at the trade register under number B 109526 and has its registered office at 14a, Rue des Bains, L-1212 Luxembourg. GAGFAH S.A. is the Group’s ultimate parent company. The core business of GAGFAH S.A. is the management of its own real estate portfolio and third-party portfolios. As of the balance sheet date, the Group managed a total of approximately 27,400 apartments and approximately 6,800 other units including 11 commercial properties from commercial property operations. Due to the planned sale of these operations, they are disclosed in the balance sheet under assets held for sale. GAGFAH S.A.. also operates in the area of real estate sales. Property construction/development operations have been discontinued by the management in December 2005. Consolidated Financial Statements GAGFAH S.A. has prepared its consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC)—formerly Standards Interpretations Committee (SIC)—since its formation. All IFRSs that must be applied for the fiscal year were taken into account. The abbreviated fiscal year of GAGFAH S.A. starts on July 12 and ends on December 31, 2005. In future, the fiscal year of GAGFAH S.A. will be the calendar year. If the fiscal year of any subsidiaries deviates from the calendar year, additional financial statements as of the fiscal yearend are prepared. The consolidated financial statements have been prepared on a historical cost basis, except for investment properties, derivative financial instruments and available-for-sale financial investments that have been measured at fair value. The carrying amounts of recognized assets and liabilities that are hedged items in fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged. The consolidated financial statements have been prepared in euros (EUR). Unless stated otherwise, all values are rounded to the nearest thousand of euros (EUR k). In line with the recommendations of the European Public Real Estate Association (EPRA), the income statement was classified according to the cost of sales method. New Accounting Standards In addition to the IFRSs whose application is mandatory for fiscal year 2005, the IASB has also published other IFRSs and IFRICs which have already received EU endorsement but which will only become mandatory at a later date. Only those standards that may be of relevance to the Group are explained below. Voluntary early application of the relevant standards and interpretations is explicitly permitted or encouraged. NILEG did not apply any of the relevant standards and interpretations. On December 16, 2004, the IASB announced an amendment to IAS 19, ‘‘Employee Benefits’’, with regard to the recording of gains and losses from changes in actuarial assumptions for defined benefit pension obligations. In addition to existing immediate recognition in the income statement or the corridor method, the amendment allows the full recognition of unrealized actuarial gains and losses directly in equity. Under this method, the pension obligation is disclosed at its current present value. Any deferred taxes arising are offset directly against equity. The amendment is compulsory for fiscal years beginning on or after January 1, 2006; earlier adoption is encouraged. On August 18, 2005, the IASB published the standard IFRS 7, ‘‘Financial Instruments: Disclosures’’. This standard supersedes the existing IAS 30 and incorporates all provisions regarding disclosures in F-9 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 the notes contained in IAS 32. In this connection, the capital disclosure requirements in IAS 1 were amended or supplemented. This standard has completely restructured the disclosure requirements for financial instruments. Disclosures on the objectives, methods, risks, security and management processes are now required. Adoption is compulsory for fiscal years beginning on or after January 1, 2007; earlier adoption is encouraged. The new provisions of IFRS 7 do not affect measurement at NILEG, but detailed disclosures in the notes and detailed presentations are required. Application of the newly published IFRS 6, IFRS 7, IFRIC 4 and IFRIC 5, which had been endorsed by the EU as of December 31, 2005 and which had not been applied voluntarily in advance by the Company or which are expected to be irrelevant, is not expected to have any significant effect on the net assets, financial position and results of operations. B. CONSOLIDATED GROUP AND CONSOLIDATION METHODS 1. Consolidated Group 19 subsidiaries were included in the consolidated financial statements of GAGFAH S.A. on the basis of full consolidation since GAGFAH S.A. governs the financial and operating policies of these entities. Normally, control is possible if an entity holds the majority of voting rights, either directly or indirectly. In addition, six joint ventures were included in the consolidated financial statements on a proportionate consolidation basis. The composition of the GAGFAH S.A. Group is presented in the list of shareholdings attached as Exhibit (1). Company Formations, Acquisitions and Sales Acquisition of the NILEG Group GAGFAH S.A.—operating at that time as NLG Acquisition Holdings S.C.A. —acquired Magnet 101. V V GmbH, Frankfurt, Germany, by a purchase and assignment agreement dated July 13, 2005. NLG Acquisition Holdings S.C.A. (acquirer) also took control of the acquired company on this date. The company’s name was changed to NLG Acquisition GmbH by shareholder resolution on this date and entered in the commercial register on October 25, 2005. The acquisition costs, which were paid in full in the fiscal year, came to EUR 28k. NLG Acquisition GmbH’s assets comprised cash and cash equivalents of EUR 25k. The resulting positive difference of EUR 3k was initially recognized as goodwill and then subsequently written down to its fair value (EUR 0k) as of the balance sheet date. NLG Acquisition GmbH in turn acquired all the shares in NILEG Immobilien Holding (old) and a 94.81% investment in both NILEG Real Estate GmbH & Co. Management KG and NILEG Real Estate GmbH from Norddeutsche Landesbank Girozentrale, Landschaftliche Brandkasse Hannover and Bremer Landesbank Kreditanstalt Oldenburg—Girozentrale—by purchase agreements dated July 13/14, 2005. NILEG Real Estate GmbH & Co. Management KG and NILEG Real Estate GmbH were already subsidiaries of NILEG Holding (old) prior to this acquisition. 14.81% of the stakes acquired in both companies were held by minority interests. The minority interests were acquired directly in this acquisition transaction so that following the acquisition NLG Acquisition GmbH had a direct interest of 14.81% and, through NILEG Holding (old), an indirect interest of 80.00% in NILEG Real Estate GmbH & Co. Management KG and NILEG Real Estate GmbH. As part of the same transaction, NEPTUNO Verwaltungs- und Treuhand-Gesellschaft mbH (hereinafter also referred to as ‘‘NEPTUNO’’) acquired a 5.19% stake in both NILEG Real Estate & Co. Management KG and NILEG Real Estate GmbH. At the same time, NLG Acquisition GmbH granted NEPTUNO a put option granting the latter the right to sell its investments in both aforementioned companies at a fixed purchase price of EUR 9,727k to a company named by NLG Acquisition GmbH at any time. NEPTUNO was also guaranteed a minimum return on its F-10 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 contribution to the capital account of NILEG Real Estate & Co. Management KG independent of corporate profits. Therefore, NEPTUNO does not participate in any losses incurred by this company. The minimum return is variable and linked to the 3-month EURIBOR. Since the capital account of NEPTUNO is classified as debt under IFRSs due to the non-profit-linked return on the investment, no minority interests are disclosed under equity in the consolidated financial statements of NILEG in this regard. The shareholding is recorded on the liabilities side under financial liabilities. The nominal value of the liability to minority interests corresponds to the price of the put option. In the abovementioned purchase agreements, a transfer date of August 31, 2005 was agreed for all shares included in the transaction outlined above. As of September 1, 2005, NLG Acquisition GmbH (acquirer) took control of the acquired companies. With the exception of Scholz Hofheim GmbH & Co. KG, all companies in Exhibit (1) included in the consolidated financial statements were acquired and consolidated for the first time. Scholz Hofheim GmbH & Co. KG was established by NILEG GmbH in the fiscal year with a contribution to equity of EUR 1,000k. The acquired net assets and goodwill of NILEG Group break down as follows: EUR k Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, property, plant and equipment and other financial assets . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,538,043 11,351 12,058 165,779 18,239 5,500 46,892 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,797,862 12,814 50,436 1,005,166 119,975 Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of acquisition: Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incidental acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,188,391 2,131 611,602 Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash outflows due to acquisition: Cash outflows in the fiscal year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash acquired with the subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589,000 Net cash outflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remaining purchase price liabilities due to acquisition: Deferred purchase price payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability to NEPTUNO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522,883 Purchase price liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,225 The goodwill relates to the assembled workforce and to expected synergy effects. F-11 588,805 195 569,775 46,892 9,498 9,727 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The acquisition had an impact on overall profit or loss. The disclosures required by IFRS 3.67 and IFRS 3.70 have not been made as they are impracticable. The disclosures required by IFRS 3.67 have not been made since the acquired company prepared its financial statements in accordance with the German Commercial Code [‘‘Handelsgesetzbuch’’: HGB] and the calculation of the IFRS carrying amounts would involve an unreasonably high effort. The disclosures required by IFRS 3.70 have not been made since, due to the length of the period of just one month, the preparation of interim financial statements for all the individual companies for the period would involve an unreasonably high effort. As of September 1, 2005, NILEG Immobilien Holding GmbH (old) was merged into NLG Acquisition GmbH as the absorbing company. The merger took legal effect through entry in the commercial register on December 19, 2005. On November 1, 2005, NLG Acquisition GmbH was renamed NILEG Immobilien Holding GmbH. The merger was treated as a transaction under common control. As the merger was performed on the acquisition date, it did not have any impact on equity. No companies were sold in the fiscal year. Acquisition of GAGFAH Acquisition 1 GmbH GAGFAH S.A. acquired Blitz 05-132 GmbH, Munich, Germany, by purchase and assignment agreement dated November 25, 2005. GAGFAH S.A. (acquirer) also took control of the acquired company on this date. The company’s name was changed to GAGFAH Acquisition 1 GmbH and its registered office relocated to Essen by shareholder resolution on this date. The changes were entered in the commercial register on February 12, 2006. The acquisition costs came to EUR 27k and were recognized as a purchase price liability under other liabilities as of December 31, 2005. NLG Acquisition GmbH’s assets comprised cash and cash equivalents of EUR 25k. The resulting positive difference of EUR 2k was initially recognized as goodwill and then subsequently written down to its fair value (EUR 0k) as of the balance sheet date. The fiscal year of GAGFAH Acquisition 1 GmbH runs from December 1 to November 30 of the following year. The period from the company’s registration to November 30, 2005 constitutes an abbreviated fiscal year. For consolidation purposes, GAGFAH Acquisition 1 GmbH prepared additional financial statements as of December 31, 2005. 2. Consolidation Principles In addition to GAGFAH S.A., all major subsidiaries where control pursuant to IAS 27.13 exists are fully consolidated. Control exists when GAGFAH S.A. holds the majority of voting rights either directly or indirectly, may govern the financial and operating policies of the Company, or is entitled to appoint the majority of supervisory board members. The financial statements of the individual subsidiaries are included in the consolidated financial statements in accordance with IFRSs using the uniform accounting policies stipulated by GAGFAH S.A. For the companies acquired in 2005, capital consolidation was performed using the purchase method in accordance with IFRS 3, under which the acquisition cost of the investment is offset against the respective share in the net assets (in line with the Group’s interest), measured at fair value, as of the acquisition date. The assets and liabilities of the relevant subsidiaries are measured at fair value. If the acquired share in the net assets of the subsidiary exceeds the cost of the investment, the amounts of the share in the net assets and the acquisition cost are reassessed as prescribed by IFRS 3.56. Any excess remaining after that reassessment is treated as a lucky buy and is recognized immediately in profit or loss. All intercompany receivables and liabilities (and provisions), revenues, expenses and income, as well as gains and losses are eliminated. F-12 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Subsidiaries are fully consolidated from the date of acquisition, i.e. the date on which the Group obtains control. Inclusion in the consolidated financial statements ends as soon as the parent ceases to have control. An adjustment item for minority interests is recognized for shares in fully consolidated subsidiaries that do not belong to the parent company. Pursuant to IAS 27.33, the adjustment item is disclosed under consolidated equity as a separate item from the equity of the parent company. Minority interests in consolidated profit or loss are recorded separately in the consolidated income statement as a ‘‘thereof item below profit or loss in accordance with IAS 27.33. The shares in joint ventures are included in the consolidated financial statements on a proportionate consolidation basis. For proportionate consolidation, the same methods are generally applied as for the consolidation of subsidiaries. Required consolidation entries for relationships with proportionately consolidated companies are performed in accordance with the respective share in equity. C. ACCOUNTING POLICIES 1. Intangible Assets Acquired Intangible Assets Acquired intangible assets with a finite useful life are initially measured at cost and, if they are depreciable, amortized straight line over their expected useful lives in accordance with IAS 38.97. The software licenses recorded under intangible assets are amortized over a useful life of three to five years. Goodwill Any goodwill arising on the distribution of the acquisition cost over the assets acquired and liabilities/contingent liabilities assumed in a business combination represents the excess of the cost of a business acquisition over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary on the acquisition date. Pursuant to IFRS 3.51, goodwill is recorded as an asset on the date of acquisition. In accordance with IFRS 3.55, it is not amortized, but subject to an annual impairment test pursuant to IAS 36. Following initial recognition, goodwill is measured in accordance with IFRS 3.54 at original cost less any accumulated impairment losses. For the purpose of impairment testing, the acquired goodwill is allocated to each cash-generating unit expected to benefit from the synergies of the combination as of the acquisition date. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill linked to the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. When a subsidiary is disposed of, the allocable amount of goodwill is included in determining the gain or loss on disposal. F-13 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 2. Interests in Joint Ventures The Group has interests in joint ventures. A joint venture is defined as a contractual arrangement between two or more parties to undertake economic activities that are subject to joint control. A jointly controlled entity is a joint venture which entails the formation of a separate entity in which each venturer has an interest. The Group accounts for its interest in the joint venture on the basis of proportionate consolidation. The Group combines its share in the assets, liabilities, income and expenses of the joint venture with the relevant items in the consolidated financial statements. The financial statements of the joint ventures are prepared as of the same balance sheet date of the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. If contributions are made or assets sold to the joint ventures, recognition of the portion of a gain or loss from the transaction reflects the substance of the transaction. When the Group purchases assets from a joint venture, it does not recognize its share of the profits of the joint venture from the transaction until it resells the assets to an unrelated party. 3. Leases Leases are assessed in accordance with their substance. For finance leases, a group company is the lessee provided it alone has been transferred all the risks and rewards incidental to ownership of the leased asset. The leased asset is capitalized at the inception of the lease at the lower of the fair or present value of the minimum lease payments. The lease payments are divided into interest and principal payments; the lease liability thus accrues interest on an ongoing basis. Finance costs are recorded directly as expenses. If it is not sufficiently certain that the ownership has been transferred at the end of the lease term, the leased assets are amortized/depreciated over their remaining useful lives or over the remaining term of the lease using the shorter of the two periods. Lease payments under operating leases are recognized as an expense on a straight-line basis over the lease term. If a group company acts as lessor but all risks and rewards incidental to ownership of the leased asset remain with the Group, the lease is considered an operating lease. Initial direct costs are capitalized and recorded as an expense over the term of the lease in line with the rent received. The rental agreements concluded by the group companies as the lessor with tenants of residential properties as part of their operating activities do not represent leases within the meaning of IAS 17 since the rental agreements were mostly concluded for an indefinite period rather than for a fixed term. The tenants have an unilateral right to termination giving the statutory notice period. All GAGFAH S.A. leases are classified as operating leases. 4. Investment Property Property held in the long term to earn rentals is carried as investment property. These properties generate cash flows that are incurred largely independently of the other assets held by the Group. Undeveloped land held for capital appreciation is also included in this item. This balance sheet item does not include owner-occupied real estate (e.g. administrative buildings) or property held for sale in the scope of ordinary activities. Where buildings are both owner-occupied and leased to third parties, the relevant parts of the buildings are accounted for separately in accordance with IAS 40.10 only if the leased part of the property can be disposed of separately or leased separately in the scope of a finance lease transaction. Investment property is measured at cost plus any incidental purchase costs or transaction costs at the time of addition in accordance with IAS 40.20. F-14 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Investment property is stated at fair value upon subsequent measurement. The fair value reflects the market conditions as of the balance sheet date. All investment property is measured by GAGFAH S.A. itself at the end of each fiscal year. CB Richard Ellis Deutschland GmbH performed an external appraisal with respect to the fair value as of August 31, 2005 in compliance with the International Valuation Standards (IVS) set out by the International Valuation Standards Committee (IVSC), which did not take account of any debt. This appraisal confirmed the results of the Group’s measurement of the investment property portfolio. The valuation module of GAGFAH S.A. uses market-oriented or typified (objective, non-entity-specific) figures where relevant (e.g. capitalization rate, administrative expenses, segment-specific rates of cost increase). The cash flows are calculated over a detailed planning period of ten years. In the eleventh year, a residual value is included in the calculation. The net cash flows are calculated from the realizable rent less the risk relating to loss of rent, vacancy expenses, non-allocable operating expenses and administrative and maintenance costs. Depending on the market rent and the individual adjustment options, the realizable rent is adjusted to the forecast market rent, based on the current rent level. The directly allocable management costs are calculated in line with how the property is classified in central portfolio management. With its central portfolio management system, GAGFAH S.A. is pursuing its objective of increasing the value of and return on its entire portfolio in the long term. Decisions relating to investments and divestments as well as larger-scale modernization measures within the real estate portfolio are therefore taken on the basis of the portfolio management system. The cash flows are discounted at an interest rate adjusted to the specific property, which takes account of additional uncertainties in the cash flows. Administrative expenses are calculated at EUR 240.00 p.a. for each residential or utility unit. Maintenance costs were set at 1.2%, operating expenses at 1.4% and administrative expenses at 2%. Based on current realizable rent, an annual adjustment of approx. 6.3% to market rent was assumed. Depending on the macro location and the portfolio allocation of the property being valued, an increase of between 0.0% and a maximum of 1.75% p.a. in market rent was assumed. Any gains or losses on a change in the fair value of the investment property are recognized in profit or loss in the period in which they arise. Investment properties are derecognized when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses from the discontinuation or disposal of the investment property are recognized in the year in which it was discontinued or disposed of. Properties are allocated to the investment property portfolio if there is a change in their usage evidenced by the end of owner occupation, the beginning of a lease agreement with another party or the end of construction or development. Properties are taken out of the investment property portfolio if there is a change in their usage evidenced by the beginning of owner occupation or the beginning of development with a view to resale. 5. Property, Plant and Equipment Other property, plant and equipment of GAGFAH S.A. is accounted for at cost less accumulated depreciation and impairment losses in accordance with the cost method of IAS 16.30. If properties are owner-occupied within the scope of operating activities, they are disclosed under the balance sheet item property, plant and equipment. F-15 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognized. The residual values of the items of property, plant and equipment, the useful lives and depreciation methods are reviewed at the end of each fiscal year and adjusted as necessary. In the case of larger renovations, the relevant components are recognized as replacement investments if the recognition criteria are met. Assets under construction for lease or administrative purposes or for non-specified purposes are recognized at cost less any impairment losses charged. Cost includes consideration paid for third-party services and, for qualifying assets, borrowing costs that were capitalized in accordance with group accounting policies. Furniture and fixtures as well as technical equipment and machines are disclosed at cost less accumulated depreciation and any impairment losses recognized. Payments on account are accounted for at cost. Systematic amortization/depreciation on property, plant and equipment is generally based on the following useful lives: Useful life Technical equipment and machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 20 years 3 to 13 years The residual carrying amounts and useful lives are reviewed and adjusted if required at every balance sheet date. Impairment losses are recognized on the basis of impairment tests pursuant to IAS 16.63 in conjunction with IAS 36.59 if the carrying amount exceeds the higher of the value in use or the net selling price. If the reasons for impairment cease to apply, the impairment is reversed in accordance with IAS 36.110. 6. Borrowing Costs Borrowing costs are expensed as incurred, except for borrowing costs relating to qualifying assets, in accordance with IAS 23.10. If borrowing costs can be allocated directly to the acquisition, construction or production of assets, they are capitalized as part of cost in accordance with the capitalization option of IAS 23.11 (allowed alternative treatment). A further prerequisite for the capitalization of borrowing costs is that the amount can be measured reliably and the capitalized borrowing costs are matched by a probable future benefit. As soon as costs including borrowing costs arise for the asset and preparations commence for the production of the asset, the borrowing costs are capitalized as part of cost in accordance with IAS 23.20. Pursuant to IAS 23.25, capitalization ceases once all required actions have been performed in order to render the asset usable or saleable. For construction or renovation projects, this is the completion of construction date. If the production process is interrupted for a long period, capitalization of the borrowing costs is suspended for this period in accordance with IAS 23.23. In the normal course of business, (mortgage) loans are raised on a regular basis specifically for the production of an asset. Thus, only the interest actually incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings is capitalized. The capitalized borrowing costs correspond to the specific borrowing costs of the relevant asset. F-16 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 7. Impairment of Items of Property, Plant and Equipment and Intangible Assets At every balance sheet date, GAGFAH S.A. reviews the carrying amounts of its items of property, plant and equipment and intangible assets except for goodwill in order to ascertain whether there are any indications of impairment of these assets. If there are indications, the recoverable amount of the asset (or cash-generating unit) is estimated. The recoverable amount is the higher of the fair value less costs to sell and the value in use. If the estimated recoverable amount of an asset (or the cash-generating unit) is less than the carrying amount, the latter is reduced to the recoverable amount and the impairment loss is recognized immediately in profit or loss. If the impairment is subsequently reversed, the carrying amount of the asset (or cash-generating unit) is increased to the newly estimated recoverable amount. This increased value may not exceed the carrying amount that would arise after taking account of amortization/depreciation if no impairment had been recognized in the prior periods. The amount of any reversal must be included immediately in profit or loss for the period. Once a reversal has been made, the amortization/depreciation charge must be adjusted in future reporting periods in order to allocate the adjusted carrying amount of the asset, less a residual carrying amount, systematically over its remaining useful life. 8. Financial Instruments A financial instrument is any contract that gives rise to both a financial asset for one entity and a financial liability or equity instrument for another entity. a) Primary Financial Assets IAS 39.9 divides financial assets into four categories for the purpose of subsequent measurement and recognition. • Financial assets measured at fair value through profit or loss • Held-to-maturity financial instruments • Loans granted and receivables • Available-for-sale financial assets The financial assets are classified in accordance with the respective purpose for which they were acquired. Of the four categories listed above, only the last two are relevant to GAGFAH S.A. If securities are purchased within the Group, these are treated as ‘‘available-for-sale financial assets’’. ‘‘Loans granted and receivables’’ and ‘‘available-for-sale financial assets’’ are initially measured at fair value plus transaction costs directly allocable to the acquisition of the financial asset in accordance with IAS 39.43. Transaction costs mainly include commissions, broker fees and notary fees. Assets allocated to the category ‘‘available-for-sale financial assets’’ are measured at fair value with gains and losses being carried in a separate equity item. The loss or gain accumulated in equity is recognized in profit or loss when the financial investment is derecognized or impaired. The fair value of available-for-sale financial assets traded on organized financial markets is determined through reference to the market price on the balance sheet date. If there is no active market, measurement methods that rely on recent market transactions on arm’s length terms are used. If no fair value can be reliably measured, the asset is subsequently measured at amortized cost. Regular way purchases or sales of financial assets are accounted for as of the settlement date, and thus as of the date the asset is delivered. GAGFAH S.A. determines on every balance sheet date whether there are any objective indications of the impairment of a financial asset or group of financial assets. F-17 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Financial assets are derecognized when the contractual rights or obligations underlying the financial instrument no longer exist (elimination) or have been transferred to a third party (transfer). Primary and acquired loans and receivables with fixed or determinable payments that are not traded on an active market are categorized as loans granted and receivables. In this category, GAGFAH S.A. has trade receivables and other long-term loans in particular. After initial recognition, loans granted and receivables are measured at amortized cost using the effective interest method in accordance with IAS 39.46 (a), provided the fair value is not lower. Low-interest-bearing receivables due in more than one year are recognized at the discounted amount taking account of appropriate interest. If there are objective indications of impairment, the asset is tested for impairment in accordance with IAS 39.58 in conjunction with IAS 39.63 et seq. If impairment is established, the expected cash flows are estimated and capitalized with the interest rate used for first-time recognition. If a loss arises as the difference as compared with the carrying amount, this amount is recorded in profit or loss. Gains or losses on the disposal of loans granted and receivables are disclosed as other operating income or expenses. With regard to ‘‘rent receivables’’, the receivables from current rental agreements and rental agreements which are no longer in place are grouped together in order to test them jointly for impairment and specific bad debt allowances are recognized on the basis of past experience. For other loans and receivables, appropriate allowances are charged on an item-by-item basis (if required) for uncollectible amounts. Subsequent reversals in accordance with IAS 39.65 are recognized in profit and loss. For current trade receivables and other current receivables, the Company assumes that the carrying amount reflects a reasonable approximation of fair value. The fair value of the non-current loans granted and receivables is determined by discounting the future cash flows with the market interest rate, as there is no active market for these assets. b) Primary Financial Liabilities The primary financial liabilities within the group entities of GAGFAH S.A. comprise in particular financial liabilities and trade payables. Pursuant to IAS 39.14, financial liabilities are recognized on the date on which GAGFAH S.A. becomes a party to the contractual provisions governing the financial instruments. Financial liabilities are initially recognized in accordance with IAS 39.43 at fair value plus transaction costs that are directly allocable to the raising of the financial liability. Following initial recognition, the financial liabilities are measured at amortized cost using the effective interest method (IAS 39.47). The fair value of the financial liabilities normally equals the amount received. Liabilities that bear no or low interest, for which the lenders receive occupancy rights for apartments at discounted rent in return, are recognized at amortized cost using the effective interest method. The liabilities are initially measured at fair value on the date the government grant was granted using the market level of interest at that time. The difference between the collected amount and the fair value is disclosed separately as a deferred item and allocated in subsequent years on a proportionate basis over the term of the loan as ‘‘revenues from real estate management’’; by contrast, the interest expense is recorded at amortized cost using the effective interest method. Any subsidized loans raised are revalued as of the date of acquisition. In this regard, any future cash flows are discounted using the market interest rate prevalent on the date of acquisition. The difference F-18 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 between the discounted cash flows and the liability outstanding on the date of acquisition represents the deferred item to be released over the residual term. This item is carried on the balance sheet under ‘‘deferred government loans’’. Financial liabilities—or parts thereof—are derecognized as soon as the liability is extinguished, i.e. when the obligations stipulated in the agreement are settled or cancelled. Gains or losses from financial liabilities are recorded in profit or loss in accordance with IAS 39.56 when the financial liability is derecognized. The amortization of transaction costs is also recorded in the income statement. For current trade payables and other current financial liabilities, the Company assumes that the carrying amount reflects a reasonable approximation of fair value. c) Derivative Financial Instruments and Hedging Relationships In the fiscal year, the group entities of GAGFAH S.A. used interest rate swaps to hedge against interest rate risks. The hedges were initially measured at fair value with reference to the market values of similar financial instruments. In subsequent measurement, gains or losses from changes in the fair value were immediately recognized in profit or loss. These hedge transactions were not recognized in the financial statements due to their lack of effectiveness. Derivative financial instruments are disclosed under current financial assets. Upon termination of the hedge, all costs in connection with the interest rate swap (swap break costs) were recognized in profit or loss. The result from the fair value measurement of the derivatives contains effects from changes in the value of derivatives. 9. Inventories Inventories are initially measured at cost. Cost comprises all costs directly allocable to the production process and an appropriate share of overheads. Financing costs are allocated to production costs if they are directly linked to financing within the meaning of IAS 23.11. Inventories are measured at the lower of cost or net realizable value as of the balance sheet date in accordance with IAS 2.9. Net realizable value is the estimated selling price less all estimated costs of completion and marketing and selling expenses. If inventories are sold, their carrying value is recognized as an expense in the year in which the related revenue is recognized in accordance with IAS 2.34. Since the resolution to discontinue property construction/development operations was passed, revenues have been disclosed in the result from discontinued operations in the income statement. In December 2005 the company has resolved to abandon its property construction/development business. Following the resolution to cease operations, the business was abandoned. No new projects will be undertaken and current projects will be sold in their current stage of completion. Where contractual obligations are in place, projects will be continued in individual cases. 10. Provisions for Pensions GAGFAH S.A. recognizes defined benefit plans for its employees. The provisions for pensions from defined benefit plans are calculated using the projected unit credit method stipulated under IAS 19.64 with an actuarial valuation performed at each balance sheet date. This method takes into account both the pensions known and expectancies acquired as of the balance sheet date and the increases in salaries and pensions to be expected in the future. F-19 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Actuarial gains and losses are incurred if, in the course of the fiscal year, the actual development deviates from assumptions made at the beginning of the fiscal year or if the parameters determined at the end of the fiscal year are different to those determined at the beginning of the fiscal year. The total (accumulated) actuarial gains and losses existing at the end of the fiscal year develop from the gains or losses existing at the beginning of the fiscal year less amortization plus additions in the fiscal year. In accordance with IAS 19.92, actuarial gains and losses accumulated as of the balance sheet date are first recognized when the net gains and losses at the end of the prior reporting period exceed the greater of 10% of the present value of the defined benefit obligation at that date (before deducting plan assets) and 10% of the fair value of any plan assets at that date. Actuarial gains and losses exceeding the 10% corridor of the obligation are, where appropriate, spread over the expected average residual number of years of service for each employee under the defined benefit plan. 11. Other Provisions In accordance with IAS 37.14, other provisions are recognized if a legal or constructive obligation in respect of a third party exists that results from a past event and it is likely that the Company will be called on to meet this obligation and the anticipated amount of the provision can be reliably estimated. In accordance with IAS 37.36, the provisions are measured at the amount of the best estimate of the expenditure required to meet the present obligation as of the balance sheet date. Provisions expected to be utilized after more than one year are discounted in accordance with IAS 37.45 and recognized in the amount of the present value of the expected expenditure. Provisions for restructuring expenses are recognized when the Group has prepared a detailed formal restructuring plan and made this plan available to the relevant parties. 12. Assets Held for Sale and Liabilities Related to Those Assets and Discontinued Operations Assets held for sale or disposal groups are disclosed as a separate item on the balance sheet when their sale is highly probable and the assets or disposal groups, in their current condition, are available for immediate sale. Assets held for sale or disposal groups are recognized at the lower of their carrying amount and fair value less costs to sell. Assets held for sale or disposal groups are disclosed in a separate balance sheet item. For a breakdown of the corresponding items in the fiscal year, we refer to the disclosures in section E. 14. The result of the discontinued operations is disclosed as a separate item in the income statement. It includes the result of discontinued operations and the result of the disposal groups that meet the criteria of a discontinued operation. For more information on the composition of the item and the net cash flows attributable to the discontinued operations, please refer to section F. 14. 13. Deferred Taxes Deferred taxes are recognized using the liability method for all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. Deferred income tax assets are recognized for all deductible temporary differences, the unused tax losses carried forward and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the unused tax losses carried forward and unused tax credits can be utilized. The following exceptions exist: F-20 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 • Deferred income tax assets which arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss, may not be recognized. • Deferred income tax credits which arise from deductible temporary differences in connection with investments in subsidiaries, associates and interests in joint ventures, may only be recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and sufficient taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available against which all or part of the deferred tax asset can be utilized. Deferred tax assets and liabilities are measured using the tax rates expected to apply to the period when the asset is realized or the liability is settled based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Income tax relating to items recognized directly in equity is recognized under equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset against each other when the Group has an enforceable right to set off the current tax assets against the tax liabilities and these assets and liabilities relate to income taxes levied by the same tax authority for the same taxable entity. 14. Income and Expenses Income and expenses for the fiscal year are accounted for irrespective of the date of payment. Revenues from leasing and sales are recognized when the owed service has been rendered, or the risks of ownership have been transferred and the amount of expected consideration can be reliably estimated. The rental income equal to the target rent less sales deductions is recognized monthly on rendering of the service. The prepayments for operating expenses factored into the rent are recognized as revenues in the amount in which allocable operating expenses were incurred in the fiscal year. Any remaining difference is either disclosed as a rent receivable or liability. Revenue from the sale of land is recognized when: • the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; • no rights of disposal or control over the sold items remain with GAGFAH S.A.; • the amount of revenue can be measured reliably; • it is sufficiently probable that the proceeds from the sale will flow to the entity; • the costs incurred or to be incurred in respect of the transaction can be measured reliably. Management fees are only recognized as revenues from third-party real estate management if the agreed management services (including chargeable part-services) have been rendered. Contract revenue and contract costs relating to construction contracts are recognized pursuant to IAS 11. Construction contracts solely relate to the discontinued property construction/development operations. Profit attributable to the proportion of work completed must be determined on the basis of the revenue and expenses estimated and recognized on an ongoing basis by reference to the percentage-of-completion method as defined in IAS 11.22. This requires a sufficiently reliable estimate of the total contract revenue and total contract costs. When the outcome of a contract cannot be estimated reliably, IAS 11.32 requires revenue to be recognized only to the extent of contract costs incurred that it is probable will be recoverable. F-21 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Contract costs are recognized as an expense in the period in which they are incurred. Prepayments received are offset against receivables. The difference is recognized as a receivable or liability on contracts that have not yet been invoiced. Other revenues are recognized when the service has been rendered, the risks of ownership have been transferred, and the amount of expected consideration can be measured reliably. 15. Government Grants Government grants are recognized if there is reasonable assurance that the grants will be received and the entity will comply with all the conditions attaching to them. Pursuant to IAS 20.12, they should be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. GAGFAH S.A. companies receive government grants in the form of redemption subsidies and low-interest loans. Construction cost allowances are, where they relate to construction work, deducted from cost and released over the useful life of the subsidized asset. If the allowances do not relate to capitalizable maintenance work, they are recognized immediately in profit or loss. The redemption subsidies, which are granted in the form of rent, interest and other redemption subsidies, are recognized in profit or loss in line with the service rendered. They are disclosed under income from the leasing of investment property. The low-interest loans relate to government assistance. They are recognized at present value on the basis of the market interest rate prevalent on the date of issue. The difference is posted to a deferred item which is released to income from the leasing of investment property on a straight-line basis over the remaining term. 16. Cash Flow Statement The consolidated cash flow statement is prepared in accordance with the provisions of IAS 7. It is split into the three parts: cash flows from operating, investing and financing activities. For mixed transactions, cash flows are allocated to more than one area as appropriate. Cash flows from operating activities are disclosed using the indirect method, under which the profit or loss for the period is translated into cash flow in a reconciliation. The cash flows from investing and financing activities are calculated on the basis of payments. Cash and cash equivalents only comprise cash. All liabilities to banks and other lenders are termed financial liabilities. Interest received and paid is disclosed separately in cash flows from operating activities. In the fiscal year, refinancing costs of EUR 8,338k were incurred for the repayment of existing financial liabilities through a global loan. These refinancing costs, which must be classified as interest expenses, are disclosed as cash flows from financing activities because they were not generated from operating activities. Tax payments are disclosed separately in full under operating activities as they cannot be allocated to the individual business areas. 17. Estimates and the Exercise of Judgment by Management a) The Exercise of Judgment Management exercises judgment in recognizing and measuring items; this can have a significant influence on the amounts disclosed in the financial statements. Major estimates requiring the exercise of judgment include the calculation of fair values for the valuation of investment property or the F-22 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 performance of impairment tests, the recognition of provisions, estimating useful lives of property, plant and equipment, or assessing the recoverability of trade receivables and deferred tax assets or the adequate valuation of inventories. b) Uncertainties Relating to Estimates The preparation of the consolidated financial statements requires to a certain extent assumptions and estimates to be made which have an effect on the carrying amounts of recognized assets and liabilities, income and expenses and contingent liabilities. The assumptions and estimates relate mainly to the measurement of investment property, the uniform group calculation of useful lives for property, plant and equipment and the recognition and measurement of provisions. The assumptions and estimates are based on parameters which are derived from the current knowledge at the time. In particular, the circumstances prevailing at the time of preparing the consolidated financial statements and the realistic future development of the global and industry environment were used to estimate cash flows. Where these conditions develop differently than assumed, and beyond the sphere of influence of management, the actual figures may differ from those anticipated. If there are deviations between actual and anticipated development, the assumptions, and where necessary, the carrying amounts of the relevant assets and liabilities, are adjusted accordingly. At the date of preparing the consolidated financial statements, the underlying assumptions and estimates were not subject to any significant risk such that from today’s point of view, it is not likely that the carrying amounts of assets and liabilities will have to be adjusted significantly in the subsequent fiscal year. D. SEGMENT REPORTING The Group’s primary reporting format is based on its business segments. Each segment represents a strategic business area with unique products and services. The Group’s business segments are: – Real estate management – Real estate sales – Property construction/development – Commercial real estate There is also a group functions segment. The property construction/development was abandoned in the fiscal year. Furthermore, the commercial real estate segment was discontinued in the fiscal year and a plan for its sale was prepared. As a result, the internal reporting department will in the future only provide the management and supervisory board with reports on the continued business segments real estate management and real estate sales. Real estate management comprises the management of own and third-party portfolios of rental apartments and other properties, management activities for condominium associations and special lease management. Alongside the sale of existing properties of the group companies, the real estate sales segment also comprises the acquisition, carving up and resale of housing portfolios. The same accounting policies apply to the segments as to the consolidated financial statements. The overheads incurred by the Company’s headquarters are not split between the segments. Intragroup transactions between the segments are carried out at arm’s length. The listed investments are additions to intangible assets, investment property, and property, plant and equipment. F-23 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Segment assets do not contain cash. No reporting by geographical segment was prepared as all the activities relate to Germany. No segment reports were prepared for the prior period as GAGFAH S.A. did not conduct any operating activities in that period. Information on these segments is shown below: Real estate management EUR k Real estate sales EUR k Group function/ discontinued operations*/ consolidation EUR k Segment revenues. . . . . . . . . . . . . . . . . . Segment result (EBITDA) . . . . . . . . . . 42,517 15,947 14,251 −2,557 1,047 −8,889 57,815 4,501 Result from fair value measurement. . Segment write-downs . . . . . . . . . . . . . . . EBIT (before restructuring) . . . . . . . . . 6,975 0 22,922 0 0 −2,557 0 873 −9,762 6,975 873 10,603 Restructuring expenses . . . . . . . . . . . . . EBIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 22,922 0 −2,557 −31,871 −41,633 −31,871 −21,268 Financial result . . . . . . . . . . . . . . . . . . . . Loss from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations . . . . . . . . . . . . . . . . . . . . . . Loss from continued operations . . . . . Loss from discontinued operations . . . Profit/loss for the year . . . . . . . . . . . . . . Group EUR k −25,553 −46,814 29,676 −76,490 −31,813 −108,310 Segment assets . . . . . . . . . . . . . . . . . . . . 1,601,469 674 350,573* 1,952,717* Segment liabilities . . . . . . . . . . . . . . . . . 123,328 46 1,583,967* 1,707,341* Segment investments (investments in property, plant and equipment or intangible assets) . . . . . . . . . . . . . . . . Significant non-cash segment expenses . . . . . . . . . . . . . . . . . . . . . . . . 148,958 0 30,818* 179,776* 3,179 2,520 41,537* 49,727* The items marked (*) include effects from discontinued operations. In the above table, the information on the discontinued ‘‘property construction/development’’ and ‘‘commercial real estate’’ segments were included in the column with group functions and eliminations and is, for this reason, explained in more detail below. Income of EUR 43,481k was generated in the property construction/development segment. These were contrasted by segment expenses of EUR 75,013k. No transactions with other segments were carried out in the fiscal year. The segment loss (EBITDA) amounted to EUR 31,532k. Segment assets of EUR 138,824k and segment liabilities of EUR 19,708k are attributable to the property construction/development segment. Segment expenses contain non-cash expenses of EUR 40,641k. No tax expenses were incurred in the fiscal year. Income of EUR 2,648k was generated in the commercial real estate segment. This was contrasted by segment expenses of EUR 2,929k. No transactions with other segments were carried out in the fiscal year. The segment loss (EBITDA) thus amounts to EUR 281k. Segment assets of EUR 107,838k and segment liabilities of EUR 663k are attributable to the commercial real estate segment. Segment expenses contain non-cash expenses of EUR 1,930k. No tax expenses were incurred in the fiscal year. F-24 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 E. NOTES TO THE CONSOLIDATED BALANCE SHEET 1. Intangible Assets Intangible assets with a finite life mainly comprise software licenses for user programs. Amortization of licenses is included in the income statement under the item ‘‘general and administrative expenses’’. With the exception of goodwill from the acquisition of the NILEG Group, there are no intangible assets with an indefinite useful life. For the purposes of reviewing recoverability, the goodwill was assigned to the real estate management segment as cash generating unit. The recoverable amount of the cash generating unit is determined based on a value in use calculation. To determine the value in use, the present value of the Company’s future net cash flow is calculated using a risk-adjusted discount rate of 8.5%. A planning period of three years was used to determine future profits. The figures were not extrapolated. No impairment loss had to be recorded. Please refer to the statement of changes in consolidated non-current assets, which is attached as Exhibit (2). 2. Investment Property The following overview shows the development of the real estate portfolio since July 12, 2005: EUR k As of July 12, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions from the acquisition of subsidiaries/joint ventures . . . . . . . . . . . . . . . . . . . . . . . . Reclassification as assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,538,043 −109,105 148,958(1) −15,972 5,532 6,975 As of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,574,431 Reclassifications to investment properties of EUR 5,532k were mainly attributable to pre-construction expenses (EUR 3,001k) as well as to inventories (EUR 2,500k). (1) EUR 364k thereof relate to additions of subsequent acquisition costs. Investment property breaks down by region as follows: Total fair value Dec, 31, 2005 EUR k Region North/coast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579,154 779,347 139,200 54,535 22,195 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,574,431 Land with residential buildings is leased under agreements which are concluded for an indefinite period and are subject to statutory notice periods. For investment property which did not generate any rental income during the fiscal year, no noteworthy direct operating expenses were incurred. F-25 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The shareholders of the NILEG Holding subgroup agreed in the share purchase agreement to observe extensive welfare conditions which, in addition to the rent control conditions, safeguard NILEG’s portfolio as follows: The rental agreements in place on the date the agreement was notarized may not be terminated for owner occupancy (Sec. 573 (2) No. 2 BGB [‘‘Burgerliches Gesetzbuch’’: German Civil Code]) or because the land cannot be put to adequate economic use (Sec. 573 (2) No. 3 BGB). In the case of rental agreements with rent protection that existed on the date the purchase agreement was notarized, annual rent increases may not exceed 3% plus the increase in the consumer price index (in %). Rent increases resulting from the need to modernize or renovate or due to abolition of the inappropriate occupancy fee are not affected. Possible rent increases not implemented can be realised in later years. Renovation work resulting in a rent increase may only be carried out with the tenant’s permission. Renovation work which, based on legal requirements or provisions in the rental agreement, stating that such work may be carried out without the need to obtain permission from the tenant may continue to be carried out without the tenant’s permission. By the end of 2010, an average annual amount of at least EUR 12.78 per m2 of living space must be invested in maintenance and improvements. This obligation relates to the properties owned by WBN or WG Norden on the date the agreement was concluded, which are inhabited by authorized groups of people and are not intended for sale. Apartments inhabited by the same rent protected tenants since the day the agreement was notarized may only be sold to the tenants themselves or, with their permission, to their spouses, relatives or other persons named by the tenant. Multiple-family units, either in their entirety or as condominiums rented out to rent protected tenants, may only be sold when more than half of the apartments in the multiple-family unit are inhabited by tenants not covered by rent protection. By the end of 2010, a maximum of 50% of each of the housing portfolios held by WG Norden and WBN (net of any additions) may be sold. There are no material contractual obligations to purchase, construct or develop investment property or carry out repairs, maintenance or improvements. 3. Property, Plant and Equipment The breakdown of property, plant and equipment is presented in the statement of changes in consolidated non-current assets, which is attached as Exhibit (2). Reclassifications of EUR 5,971k were made from pre-construction expenses to assets under construction (EUR 2,637k), investment property (EUR 3,001k) as well as to inventories (EUR 333k). No contractual obligations were entered into in 2005 for investments in property, plant and equipment in 2005 for subsequent years. F-26 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 4. Other Financial Assets Other financial assets break down as follows: Dec. 31, 2005 EUR k Non-current Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,983 56 3,039 Current Derivative financial instruments measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,326 4,326 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 7,365 Inventories The inventories of GAGFAH S.A. break down as follows as of December 31, 2005: Dec. 31, 2005 EUR k Land held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfinished development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,617 65,319 90 21 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,047 Land held for sale and unfinished construction/development business. development projects refer to the abandoned The land held for sale is fully attributable to the discontinued property construction/development operations and breaks down as follows: Dec. 31, 2005 EUR k Land and land rights without buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pre-construction expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and land rights with unfinished buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and land rights with finished buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,197 1,773 36,982 18,665 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,617 In the fiscal year, GAGFAH S.A. sold inventories totaling EUR 33,741k. Impairment losses were charged on some of the inventories following measurement at the lower net realizable value, with costs yet to be incurred being deducted from the discounted sale price. Impairment losses totaling EUR 38,142k were posted to reflect the (lower) net realizable value. These impairment losses relate mainly to land and land rights with finished and unfinished buildings. F-27 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 6. Receivables Receivables break down as follows: Dec. 31, 2005 EUR k Current Rent receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from sales of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from third-party real estate management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from construction management services not yet invoiced . . . . . . . . . . . . . . . . . . Receivables from operating expenses not yet invoiced. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962 10,048 1,883 35 946 1,020 107 228 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,229 There are no restrictions on ownership or disposal for the disclosed receivables. Of the receivables, only the ‘‘rent receivables’’ contain interest bearing items. Invoiced receivables contain no interest rate risk due to their short-term nature. Receivables from sales of land do not represent a material credit risk due to their contractual structure. All other receivables are unsecured and therefore represent a theoretical maximum credit risk in the amount of their positive fair value. 7. Other Assets Other assets break down as follows: Dec. 31, 2005 EUR k Non-current Maintenance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current Input tax receivables from the German tax office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590 66 656 271 230 2,694 3,195 3,851 Of the other assets, only the input tax receivables from the German tax office contain interest bearing items. Other assets contain no interest rate risk due to their short-term nature. All remaining other assets are unsecured and represent a theoretical maximum credit risk in the amount of their positive fair value. For more information on the derivatives measured at fair value, please refer to section H. 1. F-28 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 8. Current Tax Claims As of December 31, 2005, GAGFAH S.A. discloses current tax claims of EUR 223k. These are mainly related to claims from corporate income tax and withholding tax on interest. 9. Deferred Tax Assets A uniform tax rate of 40.14% is generally applied to all group companies. This comprises a corporate income tax rate including solidarity surcharge of 26.38%. Trade tax is charged at 13.76% due to the deductibility of corporate income tax. Deferred tax assets and liabilities are netted when there is a legally enforceable right to offset the current tax assets against the current tax liabilities, and when the deferred tax assets and liabilities relate to the same taxpayer. Deferred taxes are attributable to differences from recognition and measurement of the individual balance sheet items and to tax loss carryforwards: As of July 12, 2005 EUR k Additions from the acquisition of subsidiaries/joint ventures EUR k Effect on income EUR k As of December 31, 2005 EUR k 0 0 0 6,429 0 5,626 −6,429 918 −5,406 0 918 220 0 12,055 −10,917 1,138 0 0 0 3 0 301 0 304 0 3 301 304 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12,058 −10,616 1,442 Investment property . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 49,101 0 1 1,334 −11,738 −1,737 1 −2,770 60,839 1,737 0 4,104 Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . 0 50,436 −16,244 66,680 Deferred taxes Balance sheet Investment property . . . . . . . . . . . . . . . . . . . . . . . . . Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss carryforwards Corporate income tax . . . . . . . . . . . . . . . . . . . . . . . . Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities resulted from investment property, partly also from deferred tax claims that resulted from the differences between the carrying values disclosed in the IFRS balance sheet and the tax balance sheet. The tax base values are based on the continued recognition of the property at fair value at the date on which former non-profit housing companies become taxable. As of December 31, 2005, the Group had corporate income tax loss carryforwards of EUR 298m and trade tax loss carryforwards of EUR 198m. These are based on information available at the time of preparing the financial statements and may be carried forward indefinitely pursuant to legislation in force as of December 31, 2005. Per period, tax gains of a maximum EUR lm and 60% of the amount above this figure may be netted with loss carryforwards. No deferred taxes were recognized on temporary differences of EUR 47m, corporate income tax loss carryforwards of EUR 298m as well as trade tax loss carryforwards of EUR 196m, as these are not expected to be realized in subsequent years. F-29 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 10. Bank Balances and Cash on Hand This item contains cash and cash equivalents in the form of cash on hand, checks and bank balances of EUR 79,678k. The Group’s cash and cash equivalents are recorded at their nominal value. The cash is held as overnight money with a term of up to one month and bears interest of 1.25% to 2.00%. The Group holds no other short-term cash and cash equivalents with a term of more than three months or long-term bank balances. Of the cash and cash equivalents, EUR 2,522k was pledged as collateral for bank guarantees as of December 31, 2005. The remaining cash and cash equivalents do not serve as collateral for bank loans and are available in the short term. 11. Equity Information on equity can be taken from the statement of changes in consolidated equity. The subscribed capital of EUR 31k was increased by EUR 3,652k to EUR 3,683k by resolution of the extraordinary shareholders’ meeting on August 30, 2005. The funds were contributed on the same day. Subscribed capital relates to the parent company’s capital stock of EUR 3,683k and comprises 2,946,481 shares. Share premium of EUR 327,119k represents the additional capital paid in by the shareholders. Revenue reserves contain the loss incurred by the consolidated entities and amounted to EUR –106,081k as of December 31, 2005. Minority interests of EUR 20,287k comprise adjustment items for minority interests in equity subject to mandatory consolidation and their share in profit and loss. Minority interests break down as follows among NILEG Immobilien Holding GmbH subgroup entities: • NILEG GmbH EUR 579k • WBN EUR 6,711k • WG Norden GmbH EUR 7,512k • OWG EUR 5,485k For more information on the minority interest in the net for the year, please refer to our comments on the income statement (Section F. 15 of the notes to the consolidated financial statements). 12. Provisions 12.1. Provisions for Pensions and Similar Obligations GAGFAH S.A. manages defined benefit plans for WBN and WG Norden employees and has set up a performance-related pension scheme for this purpose. The pension scheme is based on the method of direct commitment, whereby provisions based on actuarial valuations of existing pension obligations are recognized on the balance sheet. The provisions are measured according to the projected unit credit method in accordance with IAS 19. The amount of the obligation is based on the present value of the earned and realistic pension entitlements on the measurement date, including probable future increases in pensions and salaries. In addition to its own pension scheme, the Company also participates in the pension scheme (hereinafter referred to as the ‘‘VBL’’) organized by the pension institution of the Federal Republic of Germany and the Federal States. Due to their participation agreement with the VBL, NILEG GmbH and OWG are participants in the VBL and are therefore F-30 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 subject to all the rights and obligations arising from the VBL’s statutes and regulations. VBL is an incorporated public body supported jointly by the German government and states. Its purpose is to provide employees of the participating employers in the public sector with company benefits in the form of old-age pensions, reduced earning capacity pensions, and survivor’s pensions. The benefits provided by the VBL, as long as they relate to compulsory insurance, are funded on a pay-as-you-go basis. VBL thus constitutes a multi-employer defined benefit plan which pursuant to IAS 19.30 (a) was accounted for as if it were a defined constitution plan as the VBL does not make available sufficient information to permit treatment as a performance-related plan. NILEG is not aware of any specific information on any surpluses or deficits in the plan or any future effects that such surpluses or deficits may have. However, an external appraisal currently being conducted has valued NILEG’s insufficiently financed pension obligations at EUR 24.9m. This can be regarded as indicative of current deficits in the plan. This may result in NILEG having to pay higher future contribution payments to the VBL. Assessment of Benefits The age limits for old-age pensions, disability pensions, survivor’s and orphan’s pensions are the same as those for statutory pension insurance. There is a waiting period often years until a vested claim can be secured. There are two pension schemes, both of which have the following features: o Employees who joined WBN and WG Norden between January 1, 1991 and December 13, 2000 have a right to direct pension commitments. These include old-age, disability, survivor’s and orphan’s pensions. The invalidity and old-age pension amounts to 0.6% of gross income earned in every creditable year of service. o Employees who joined WBN and WG Norden before January 1, 1991 have a right to an old-age pension, disability pension or a survivor’s pension. The disability and old-age pension amounts to 1.0% of gross income earned in every creditable year of service. In the past, NILEG GmbH entered into a limited number of individual pension commitments. The benefits include old-age, disability, survivor’s and orphan’s pensions in accordance with the pensions for civil servants of the state of Lower Saxony. The level of the old-age and survivor’s pension is determined on the basis of the last gross salary received. The following tables present an overview of the plans. Number of Commitments The following groups are entitled to employer-funded pension benefits: Dec. 31, 2005 Number Active employees • Non-vested expectancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • Vested expectancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested expectancies of employees no longer with the Company . . . . . . . . . . . . . . . . . . . . . Current pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 73 114 10 94 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 F-31 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The following group-wide parameters were used to calculate the obligations: Dec. 31, 2005 In % p.a.: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase, pension increase in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of living adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In years: Actual retirement age Men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75 2.0 2.0 4.0 – 5.0 62 or 63 62 or 60 Not before 60 For death and disability, the 2005G mortality tables by Prof. Dr. Klaus Heubeck were used. The salary trend accounts for the various reasons for salary increases, e.g. increases under collective wage agreements, promotions, etc. The assumed turnover rate corresponds to the average turnover rate in Germany. Internal turnover tables provided by the actuary were used to factor this into the valuation. If the actual development during the year deviates from the assumptions made at the beginning of the fiscal year or other parameters are set at the end of the fiscal year than at the beginning, (additional) actuarial gains or losses arise. Provisions are recognized for obligations to current and former employees from future and current benefit entitlements. The pension provisions developed as follows in the fiscal year: 2005 EUR k As of July 12, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions from the acquisition of subsidiaries/joint ventures . . . . . . . . . . . . . . . . . . . . . . . . Pension expenses for the fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct pension payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12,814 272 −184 Provision as of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,902 Reconciliation of liabilities from defined benefit obligations to the recognized pension provisions: Dec. 31, 2005 EUR k Defined benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial gains/losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,898 4 Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,902 F-32 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The pension obligation is calculated as follows: 2005 EUR k As of July 12, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions from the acquisition of subsidiaries/joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct pension payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12,814 115 157 −4 −184 Obligation as of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,898 The total pension expense in the consolidated income statement breaks down as follows: Jul. 12 to Dec. 31, 2005 EUR k Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 157 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 The current service cost is disclosed under general and administrative expenses and the interest expense under interest expense (periodical). 12.2. Other Provisions The other pension provisions developed as follows in the fiscal year: Other provisions Phased retirement EUR k Restructuring EUR k Severance payments EUR k Obligations from project business EUR k Total EUR k As of July 12, 2005 . . . . . . . . . . . . Additions from the acquisition of subsidiaries/joint ventures. . Utilization . . . . . . . . . . . . . . . . . . . Reversals . . . . . . . . . . . . . . . . . . . . Allocation. . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 952 241 1 170 0 2,870 0 32,876 71 0 0 180 2,472 99 1,674 1,494 3,495 3,210 1,675 34,720 As of Dec. 31, 2005 . . . . . . . . . . . 880 30,006 251 2,193 33,330 Thereof non-current. . . . . . . . . . . . Thereof current. . . . . . . . . . . . . . . . 880 0 0 30,006 0 251 415 1,778 1,295 32,035 All of the provisions recognized as of the balance sheet date meet the recognition criteria of IAS 37.14. Accordingly, provisions were only set up for current obligations to third parties as a result of a past event which are highly likely to lead to a future outflow of resources and whose amount can be reliably estimated. In 2000 the Group concluded a works agreement on phased retirement. This model allows employees above the age of 55 to make a smooth transition into retirement and ensures employment for younger employees. The existing agreements were concluded in 2003 and 2004. No new agreements were concluded in the fiscal year. The provisions for phased retirement totaling EUR 880k recognized as of December 31, 2005 are classed as non-current long-term benefits. F-33 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The provision for restructuring relates to employee severance payments and other costs related to the strategic repositioning of the NILEG Holding subgroup. For more information on this, please refer to the comments on restructuring expenses (F. 10). EUR 1,005k of the allocations to provisions for restructuring relate to the discontinued property construction/development operations. The severance payments relate to costs incurred in connection with the departure of employees. The provisions for obligations from the project business relate to warranty obligations for known cases of liability (EUR 527k), litigation costs (EUR 638k) as well as potential losses (EUR 1,028k). A portion of the warranty obligations is non-current, the rest current. The outflows of cash and cash equivalents from non-current provisions are largely expected within the next five years. No major refunds are expected. No asset items have been recognized for refunds. 12.3. Liabilities for Income Taxes As of December 31, 2005, the Group had obligations from corporate income tax and trade tax totaling EUR 9,235k. Liabilities broke down as follows: Dec. 31, 2005 EUR k Corporate income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,694 2,541 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,235 13. Liabilities 13.1. Financial Liabilities Financial liabilities total EUR 1,355,053k. Of this, EUR 1,312,469k relates to non-current liabilities and EUR 42,584k to current liabilities. These broke down as follows in the fiscal year: Liabilities to banks total EUR 1,318,249k and mainly relate to liabilities from the financing of housing construction and acquisition financing. Transaction costs of EUR 7,749k from raising financial liabilities were offset against liabilities. Liabilities to other lenders amount to EUR 36,804k and mainly relate to liabilities from the financing of housing construction, with EUR 9,727 to NEPTUNO (minority shareholder of NILEG Real Estate GmbH & Co. Management KG) and to deferred purchase price payments of EUR 9,498k. For presentation purposes and in accordance with IAS 32.74 in conjunction with IAS 32.67, the remaining term of a financial liability is based on the earlier date of the end of the interest lock-in period or the last principal repayment. The fair values of the financial liabilities break down as follows: Dec. 31 2005 Carrying amount Fair value EUR k EUR k Global loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Privately financed loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government annuity loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,153,867 129,910 71,276 1,153,867 130,224 71,988 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,355,053 1,356,079 F-34 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The freely financed loans and government annuity loans break down according to interest rate and due date as follows: Average weighted interest rate in % Due date EUR k Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Between one and five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,598 82,163 86,425 4.29 3.25 1.60 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,186 2.25 Of the total financial liabilities, EUR 1,283,777k relates to privately financed loans. These in turn comprise a global loan of EUR 1,153,868k. This loan has a term of seven years and bears variable interest at the 3-month EURIBOR plus 75 basis points. The effective interest rate of this global loan is 4.77%. Of the financial liabilities to banks and other lenders that existed as of December 31, 2005, EUR 115,171k was secured by charges on property or rights of lien. The market value of the financial liabilities was determined using mathematical methods on the basis of the market information available on the balance sheet date. Non-interest bearing or low-interest loans in return for which occupancy rights have been granted at conditions below market rent are carried at amortized cost. In accounting for the acquisition of subsidiaries, acquisition cost was determined on the basis of the fair values of the loans as of the acquisition date. The refinancing carried out during the fiscal year involved the repayment of numerous small loans using a variable-rate global loan. Overall, 402 loans totaling EUR 847,164k were repaid in the fiscal year. F-35 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 13.2. Other Liabilities Other liabilities mainly include liabilities from the purchase of land, liabilities to shareholders not included in the tax group, prepayments received, trade payables and other liabilities. As of the balance sheet date, this item broke down as follows: Other liabilities Dec. 31, 2005 EUR k a) Non-current Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jubilee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 354 3,246 b) Current Liabilities from the purchase of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities to shareholders not included in the tax group . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from operating expenses not yet invoiced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from construction management services not yet invoiced. . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jubilee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,351 36,398 10,474 9,573 4,754 3,553 904 476 20,053 47 203,583 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,829 Prepayments received are mainly attributable to the construction and redevelopment operations. Trade payables mainly contain liabilities from maintenance and from construction management. Rent liabilities primarily relate to deposits and collateral received. Liabilities from operating expenses not yet invoiced relate to refund claims of tenants from incidental expenses. Other liabilities mainly comprise deferred liabilities of EUR 20,946k. This amount mainly consists of maintenance work already carried out (EUR 3,827k), administrative expenses (EUR 4,653k), and personnel liabilities (EUR 1,372k). All items disclosed by GAGFAH S.A. as other liabilities are non-interest bearing. There is no interest rate risk. The jubilee provisions of GAGFAH S.A., as is the case with the pension commitments, are made by way of a direct commitment. Corresponding liabilities are determined on the basis of actuarial principles. As of December 31, 2005, jubilee benefits of EUR 401k had been recognized for employees. 14. Assets Held for Sale and Liabilities Related to These Assets The primary objective of Fortress Investment GROUP LLC is to expand its residential real estate portfolio in Germany. In line with the current strategy of focusing on the management of and trade in residential real estate, a decision was made in the fiscal year to sell the commercial real estate operations of NILEG GmbH and NORD/IMG GmbH. The sale is scheduled to take place within a year and negotiations have already taken place with a number of interested parties. The result attributable to the discontinued operation and the net cash flow are presented in section F. 14. F-36 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The assets held for sale and liabilities related to these assets break down as follows: Dec. 31, 2005 EUR k Assets Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 107,838 107,838 Liabilities Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663 Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,175 663 F. NOTES TO THE CONSOLIDATED INCOME STATEMENT 1. Income from the Leasing of Investment Property Income from the leasing of investment property of GAGFAH S.A. breaks down as follows: Jul. 12 to Dec. 31, 2005 EUR k Rental income, fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocations charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk of default on allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent, interest and expense subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,768 10,032 136 1,581 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,517 The rental income is mainly attributable to the leasing of land with residential buildings. The rent, interest and expense subsidies primarily relate to government allowances to allow lower rent to be charged for subsidized housing. 2. Operating Expenses for the Generation of Rental Income Operating expenses for the generation of rental income break down as follows: Jul. 12 to Dec. 31, 2005 EUR k Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maintenance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses for real estate management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 9,223 10,367 173 709 4,607 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,479 The maintenance costs include expenses for modernization work (EUR 5,683k), new rentals (EUR 808k), minor repairs and ongoing maintenance (EUR 3,876k). F-37 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 3. Income from the Sale of Investment Property Income from the sale of investment property of EUR 14,251k is attributable to the sale of developed land. 4. Result from Fair Value Measurement Income totaling EUR 6,975k from changes in value arose in connection with the measurement of investment property in the fiscal year. The result from fair value measurement breaks down as follows: Jul. 12 to Dec. 31, 2005 EUR k Land with leased residential properties (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land without buildings (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,695 −720 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,975 5. Result from Other Services The result from other services breaks down as follows: Jul. 12 to Dec. 31, 2005 EUR k Revenues from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third-party expenses from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,440 −1,052 −2,023 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −1,635 Revenues from other trade include lease income from landfills and other real estate services. 6. Selling Expenses Expenses that are directly related to the sales success of GAGFAH S.A. are recorded under this item. They are primarily attributable to sales, advertising and public relations. Selling expenses break down as follows: Jul. 12 to Dec. 31, 2005 EUR k Selling expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and public relations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 159 76 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 594 F-38 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 7. General and Administrative Expenses Jul. 12 to Dec. 31, 2005 EUR k Salaries for administrative staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,424 5,617 873 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914 Other administrative expenses mainly include legal, consulting and audit fess (EUR 1,991k), costs for office supplies, IT and telecommunications (EUR 747k), premises expenses (EUR 571k), personnel administration costs (EUR 239k), fees and contributions (EUR 154k), travel expenses (EUR 105k), motor vehicle expenses and repairs (EUR 94k) and costs of procuring money (EUR 36k). 8. Other Operating Income All income not directly allocable to the various functional areas is disclosed under other operating income (EUR 5,882k). 9. Other Operating Expenses All expenses not directly allocable to the various functional areas are disclosed under other operating expenses (EUR 3,403k). These include losses on the disposal of non-current assets of EUR 463k, non-deductible input taxes of EUR 199k and other taxes of EUR 72k. 10. Restructuring Expenses In connection with the closer interaction between the NILEG Holding subgroup and the GAGFAH group (see also section H.5.) planned by Fortress, a framework compensation agreement was concluded on November 25, 2005 between the employer and the works council in conjunction with a works agreement, which governs the socially acceptable arrangement for the restructuring and integration process. The plans comprise the relocation of the central commercial and administrative operations to Essen, joint customer centers to optimize real estate management and the integration and harmonization of the IT systems. This will generate costs of EUR 21,081k for the resultant reduction in headcount, EUR 9,480k for the closure and remodeling of customer centers and EUR 1,310k for legal services. The expenses will mainly relate to personnel expenses in the real estate management and group functions segment and are therefore attributable to continued operations. The restructuring expenses of EUR 31,871k correspond with the allocation to provisions for restructuring in addition to the restructuring expenses of EUR 1,005k for the discontinued property construction/development operations correspond to the allocation to the provision for restructuring measures (E 12.2). Most of the restructuring expenses were reclassified from general and administrative expenses and other operating expenses and disclosed separately in the income statement. 11. Result from Other Financial Assets The result from other financial assets mainly comprises impairment losses of EUR 1,360k and income from profit distributions of EUR 599k. F-39 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 12. Interest Expense (Current) The current interest expense of EUR 22,013k mainly relates to interest on liabilities to banks. The item includes interest expenses of EUR 9,426k from a variable-rate global loan, EUR 790k from the amortization of the present value of the government loans, EUR 356k from discounting non-current deferred liabilities and EUR 157k from the interest component of the pension obligations. 13. Income Taxes for Continued Operations Income taxes break down as follows: Jul. 12 to Dec. 31, 2005 EUR k Corporate income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solidarity surcharge on corporate income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax back payments for prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,128 65 1,605 18 26,860 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,676 No income taxes were incurred for discontinued operations. Based on consolidated net profit/loss before tax, anticipated tax income of −EUR 31,563k was calculated for the fiscal year. This contrasts with effective tax expenses of EUR 29,676k. The anticipated tax income was calculated on the basis of a tax rate for the Group of 40.14%. Jul. 12 to Dec. 31, 2005 EUR k Loss for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −108,303 29,676 −78,627 Anticipated tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −31,563 Income taxes not related to the period and other adjustments to current income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-free income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax portion for non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent trade tax effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of non-capitalised deferred taxes on temporary differences . . . . . . . . . . . . . Effects of non-capitalised deferred taxes on loss carryforwards . . . . . . . . . . . . . . . . . Other tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,265 -3,272 7,266 7,716 3,117 47,502 −3,355 Effective income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,676 Income taxes relating to the period prior to July 11, 2005 are disclosed under income taxes not related to the period and result from intercompany trade. The tax portion for non-deductible expenses mainly relates to non-deductible operating expenses from intragroup sales of equity investments. The effects in particular of the addition of half of the interest on permanent debt are disclosed under permanent trade tax effects. The effects from the measurement of deferred tax assets that result from the expected realization of deferred taxes are disclosed under the items ‘‘change in unrecognized deferred taxes on temporary differences’’ and ‘‘change in unrecognized deferred taxes on loss carryforwards’’. F-40 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 14. Loss From Discontinued Operations The result from discontinued operations splits up as follows: Jul. 12 to Dec. 31, 2005 Property construction/ development EUR k Jul. 12 to Dec. 31, 2005 Income from the sale of development properties . . . . . . . . . . . . . . . Income from third-party real estate management . . . . . . . . . . . . . . Income from real estate management . . . . . . . . . . . . . . . . . . . . . . . . Carrying amount of the development properties sold . . . . . . . . . . . Write-downs on development properties . . . . . . . . . . . . . . . . . . . . . . Result from fair value measurement. . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses from the sale of development properties. . . . . . . . Expenses from real estate management . . . . . . . . . . . . . . . . . . . . . . . Expenses from third-party real estate management (outside service costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,512 2,970 0 −33,741 −38,142 0 −740 0 0 0 2,648 0 0 −1,267 0 −999 −789 −1,248 −182 −172 0 −663 0 0 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −31,532 −281 Commercial real estate EUR k The cash flows from discontinued operations break down as follows: Jul. 12 to Dec. 31, 2005 EUR k EUR k Property construction/ Commercial development real estate EUR k Total Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −12,324 1,649 −10,675 Net cash outflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −12,324 1,649 −10,675 15. Result from Minority Interests EUR 2,229k of profit/loss relates to minority interests. Losses at the following companies are attributable to minority interests: WG Norden EUR 1,156k, WBN EUR 815k, NILEG GmbH EUR 194k and OWG EUR 64k. Jul. 12 to Dec. 31, 2005 EUR k Minority interests in profit/loss Minority interests in loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −2,229 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −2,229 G. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT The consolidated cash flow statement provides additional information on liquidity as part of GAGFAH S.A.’s consolidated financial statements and thus serves to present the Group’s financial position. The cash flow statement shows how cash and cash equivalents changed in GAGFAH S.A. over the course of the fiscal year. Cash flows are explained in accordance with IAS 7 and are split up into inflows and outflows of funds from operating activities, investing activities and financing activities. F-41 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The cash flows only contain cash and cash equivalents with terms of up to three months in accordance with IAS 7.7. They comprise all cash and cash equivalents disclosed in the balance sheet and break down as follows: Dec. 31, 2005 EUR k Bank balances Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In current accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blocked accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,702 33,454 2,522 Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,678 Bank balances in blocked accounts refer to bank guarantees from the property development business to which GAGFAH S.A. does not have direct access. The cash flows from financing activities include interest paid and costs of procuring money of EUR 8,338k. This relates to cash paid for early repayment penalties in connection with the restructuring of the NILEG Holding subgroup’s bank liabilities. H. OTHER NOTES 1. Financial Risk Management Hedging Policies and Financial Derivatives On December 31, 2005, the derivative financial instruments of GAGFAH S.A. comprised option agreements and interest rate swaps. The method used for recording gains or losses depends on whether the derivative was a designated hedge and whether hedge accounting was used in the financial statements. GAGFAH S.A. did not perform hedge accounting in the fiscal year. Changes in the fair value of the derivatives are therefore recorded in the income statement. The fair value of derivative financial instruments depends on fluctuations in the underlying interest rates and other variable market factors. The fair value of these derivatives is disclosed in the balance sheet on the assets side under the item ‘‘other assets’’, or on the liabilities side under the item ‘‘other liabilities’’. Interest Rate Swaps Interest rate swaps are used in connection with the interest rate risk management of GAGFAH S.A. to hedge future cash flows from variable-rate loans. The interest rate swaps were recorded on the date the agreement was concluded and accounted for at fair value upon initial and subsequent recognition. The fair value of interest rate swaps is determined by discounting the expected future cash flows over the remaining life of the interest rate swap based on current market rates and term structures of interest rates. All swap agreements were concluded exclusively with reputable financial institutions in accordance with specific group guidelines as regards approval, restriction and management. The following interest rate swaps existed as of the balance sheet date: Dec. 31, 2005 EUR k Hedged loans (nominal volume) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of the interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-42 1,100,000 4,326 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The market values of the interest rate swaps are determined and monitored at regular intervals on the basis of the market data available on the balance sheet date and suitable valuation methods. The calculations as of December 31, 2005 were based on the following term structures: Interest Interest Interest Interest rate rate rate rate for for for for six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.637% 2.825% 3.173% 3.411% The residual term of the interest rate swaps is more than five years—the same as the residual term of the underlying global loan. As of December 31, 2005, a total of EUR 4,281k from the change in the fair value of the interest rate swap was recognized through profit or loss in the item ‘‘Result from the fair value measurement of derivatives’’. The contractual agreements pertaining to the interest rate swaps contain fixed three-monthly interest payments (3.1925%), variable three-month Euribor interest payments as well as a term of eight years. Option Agreements At the end of the fiscal year, GAGFAH S.A. group entities had two option agreements on shares in German limited liability companies. The assets linked to the option agreements do not have a quoted market price in an active market. Furthermore, the fair value cannot be measured using a recognized method due to the lack of measurement parameters. For this reason, the existing option agreements are recognized at (historical) cost in line with of IAS 39.46c and IAS 39 AG80. The (historical) cost of all option agreements amounted to EUR 0k. The first option agreement contains a call option of NBN Norddeutsche Beteiligungsgesellschaft für Immobilien in Niedersachsen m.b.H. (buyer), who, at any time until December 31, 2008 has the right to acquire the shares in Städtische Wohnungsbau GmbH Göttingen, Wohnungsgesellschaft m.b.H für den Landkreis Goslar, Lehrter Wohnungsbau GmbH and Wohnungsbaugesellschaft mit beschränkter Haftung Salzgitter, at a fixed price as defined in the agreement. However, NILEG Norddeutsche Immobiliengesellschaft m.b.H. (seller) has the opportunity to prevent the buyer from exercising this option by paying the buyer a fixed amount. Furthermore, this option agreement contains a put option for the seller, who, at any time between October 1, 2010 and December 31, 2011, has the right to sell the above mentioned shares at the same fixed price. The second option agreement contains a put option which entitles NEPTUNO to sell its shares in NILEG Real Estate GmbH and NILEG Real Estate GmbH & Co. Management KG at the fixed price of EUR 9,727k at any time to a company to be named by NILEG. This option right is not subject to any time limit. The corresponding liability is included in financial liabilities (we refer to E 13.1). F-43 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 The options existing as of the balance sheet date break down as follows: Dec. 31, 2005 EUR k Put option (writer): – Nominal volumes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (Historical) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Call option (writer): – Nominal volumes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (Historical) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Put option: – Nominal volumes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (Historical) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,727 0 9,498 0 9,498 0 Financial risks comprise one of the main risk categories of the GAGFAH S.A. group entities. For this reason, the future success of the Company depends heavily on the systematic handling of financial risks through recognition, analysis and action. The monitoring, control and proper analysis of the business opportunities available to the GAGFAH S.A. group entities and the risks they face forms an important part of the company culture. The risk management system of GAGFAH S.A. covers the following areas: 䡲 Risk policies and guidelines 䡲 Risk inventory 䡲 Risk analysis/assessment 䡲 Risk management 䡲 Risk monitoring Risks are managed in a qualified and timely manner in accordance with the risk management policies defined by management. The guidelines define roles and responsibilities, lay the foundation of the risk management system and provide the framework for the assessment and management of risks. Risks are managed in a proactive manner using the early warning system. The internal audit function monitors compliance with the guidelines. The risk management procedures applied to the key categories of financial risk of the GAGFAH S.A. group entities are described below: Interest Rate Risk The interest rate risks include the risk that future expected cash flows from a financial instrument could fluctuate due to changes in the market interest rate. In particular, GAGFAH S.A. faces the risk of interest rate fluctuations in the area of financing. It is company policy to mitigate these risks using financial derivatives. Derivatives are only used to manage interest rate risks and exclusively serve hedging purposes. Pure trading transactions without an underlying transaction (speculative transactions) are not entered into. The Group is mainly financed by a variable-interest long-term loan (‘‘global loan’’). The resulting interest rate risks could have an effect on cash flow. To mitigate or avoid these interest rate risks, GAGFAH S.A. has entered into a corresponding interest rate swap. All hedging measures are coordinated and carried out centrally by the Group’s treasury department. When entering into hedging transactions, the Group only selects as partners reputable national and international banks whose credit rating is reviewed regularly by rating agencies. F-44 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Management receives regular reports on interest rate risk factors for GAGFAH S.A. The strategies pursued by the Company allow the use of derivatives if there are underlying assets or liabilities, contractual claims or obligations or planned operating transactions. Liquidity Risk The liquidity risk is the risk that an entity may not be in a position to raise funds to meet commitments associated with a contract. Liquidity risk arises from the possibility that tenants may not be able to settle obligations to the Company under the terms of the lease agreements. Furthermore, liquidity risk also comprises the risk that financial assets cannot be sold quickly at fair value due to market bottlenecks (market liquidity risk). A liquidity plan based on a fixed planning horizon ensures that the GAGFAH S.A. group entities have sufficient liquidity at all times. GAGFAH S.A. helps its subsidiaries with certain financing arrangements by providing guarantees. These guarantees pose a risk in as much as they could be utilized. GAGFAH S.A. monitors these risks in close collaboration with its subsidiaries and takes appropriate measures where necessary. Credit Risk Credit risk from financial assets comprises the danger that a contractual partner defaults and therefore amounts at most to the positive fair value of the asset vis-à-vis the relevant counterparty. With regard to primary financial instruments, credit risk is accounted for by the recognition of bad debt allowances. Derivative financial instruments are only entered into with reputable banks. This helps to limit the actual credit risk of these instruments. Risks from Equity Investments Financial risks from equity investments result from a negative deviation from planned income or possible expenses from equity investments. The risks are managed with the support of the central functions of GAGFAH S.A., which influences the equity investments and offers them administrative support. Currency Risk Currency risk results from the fact that the value of a financial instrument can change due to exchange rate fluctuations. The GAGFAH S.A. group entities do not currently generate cash flows in foreign currencies. As a result, they are not exposed to exchange rate risks. F-45 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 2. Joint Ventures The joint ventures serve the development and subsequent sale of property. NILEG & CDS Wohnbau Verwaltungsgesellschaft mbH is the general partner of NILEG & CDS Wohnbau GmbH & Co. KG. The Group’s share in the net assets, liabilities, income and expenses of the joint ventures breaks down as follows: Current assets . . . . . . . . . Current liabilities . . . . . . Non-current liabilities . . Income . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . Grundstücksentwicklungsgesellschaft Oesselse “Langes Feld” GbR (50%) EUR k NILEG & CDS Wohnbau Verwaltungsgesellschaft mbH (51%) EUR k NILEG & CDS Wohnbau GmbH & Co. KG (55%) EUR k Objekt Kassel GbR (50%) EUR k Objekt Dresden GbR (50%) EUR k Lühnde IHG and NILEG GbR (50%) EUR k 7 7 0 6,773 1,134 5,639 64 1 63 506 6 500 16 1 0 7,611 77 6,596 0 0 0 0 15 938 42 3 119 70 31 18 63 58 4 1 0 164 For NILEG & CDS Wohnbau GmbH & Co. KG joint control is exercised by the two partners based on provisions in the respective articles of association. 3. Contingent Liabilities and Other Financial Obligations Contingent Liabilities As of the balance sheet date, the following contingent liabilities were not evident from the balance sheet: Dec. 31, 2005 EUR k From personal liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 The contingent liabilities from personal liability relate to the assumption of personal liability for the expense loans of numerous private individuals. There is currently no evidence to suggest that the Group will have to repay these liabilities. Other Financial Obligations As of the balance sheet date, the Group had unsettled obligations from non-cancelable operating leases, which were due as follows: Within one year EUR k Between one and five years EUR k More than five years EUR k Total EUR k Lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650 586 584 3,124 0 5,662 1,234 9,372 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,236 3,708 5,662 10,606 The operating leases mainly relate to IT equipment and vehicles. No extension clauses, price adjustment clauses or purchase options exist. The rental agreement relates to offices and runs until 2018. The Group has the option to extend this agreement twice, each time for a further five year period. There are no other extension or purchase options in place. The agreement contains a rent adjustment clause which is linked to changes in the consumer price index. F-46 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 4. Number of Employees and Personnel Expenses An average of 401 staff was employed by the Group in the fiscal year. The average number of employees is presented below, broken down by business area and function: Full-time employees 2005 Part-time employees 2005 7 5 287 46 0 4 52 0 345 56 Authorized signatories/authorized agents . . . . . . . . . . . . . . . . . . . . Central functions (C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wage earners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furthermore, the Group had an average of 17 trainees in the fiscal year. Personnel expenses came to EUR 7,070k and break down as follows: July 12 to December 31, 2005 EUR k Wages and salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Of which expenses for the VBL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Of which expenses for statutory pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 5,602 1,468 128 517 Related Party Transactions Natural persons related to GAGFAH S.A. within the meaning of IAS 24.9 are the management of GAGFAH S.A. and close family members (e.g. domestic partners, children) of the aforementioned persons. Related parties of GAGFAH S.A. within the meaning of IAS 24.9 include the ultimate parent company, all subsidiaries and associates, as well as certain companies not included in the consolidated financial statements. GAGFAH S.A., Luxembourg, is a securitization company managed by Fortress Investment Group LLC. Related parties that are controlled by GAGFAH S.A. or over which GAGFAH S.A. may exercise significant influence are included in the consolidated financial statements and recorded in the list of shareholdings showing the relevant share in capital in Exhibit 1. Fortress Investment Group LLC exercises common control over the following entities: Fortress Subsidiary (GAGACQ) LLC FABP Subsidiary (GAGACQ) LLC Fortress Investment Fund III LP Fortress Investment Fund III (Fund B) LP Fortress Investment Fund III (Fund C) LP Fortress Investment Fund III (Fund D) LP Fortress Investment Fund III (Fund E) LP Fortress Subsidiary (GAGACQ) Investors LP Fortress Subsidiary (GAGACQ) Co-Investor (Cayman) LP Fortress Investment Fund III (Coinvestment Fund A) LP Fortress Investment Fund III (Coinvestment Fund B) LP Fortress Investment Fund III (Coinvestment Fund C) LP Fortress Investment Fund III (Coinvestment Fund D) LP Fortress Residential Investment Deutschland (Fund A) LP Fortress Residential Investment Deutschland (Fund B) LP Fortress Residential Investment Deutschland (Fund C) LP F-47 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Fortress Residential Investment Deutschland (Fund D) LP Drawbridge Special Opportunities Fund LP Drawbridge Special Opportunities Fund Ltd. GAG ACQ. Ireland Ltd. UC ACQ. Ireland Ltd. GAGFAH GmbH Accordingly, these entities are also related parties to GAGFAH S.A. In addition, Fortress Investment Group LLC controls a multitude of other entities which, however, are not relevant for the business of GAGFAH S.A. All transactions with related parties are executed at arm’s length on the basis of international methods of price comparison in accordance with IAS 24. NILEG & Berliner Bau Beteiligungs GmbH & Co. KG is defined as a related party within the meaning of IAS 24. NILEG GmbH holds a 50% interest in NILEG & Berliner Bau Beteiligungs GmbH & Co. KG. The equity investment is carried at cost. The transactions between NILEG & Berliner Bau Beteiligungs GmbH & Co. KG and NILEG GmbH relate to third-party real estate management services rendered by NILEG GmbH (EUR 77k). As of December 31, 2005, these services had not been paid for by NILEG & Berliner Bau Beteiligungs GmbH & Co. KG. In September 2005, the managements of the NILEG subgroup and GAGFAH GmbH, Essen, Germany, resolved to collaborate in the areas of business development and day-to-day operations. In connection with this decision, NILEG and GAGFAH have already begun to provide services to each other. The two have entered into a contract for services effective December 28, 2005. GAGFAH will provide NILEG with management and advisory services as well as services relating to its day-to-day operations. Between September 1, 2005 and December 31, 2005, the NILEG subgroup procured services totaling EUR 142k from GAGFAH. The NILEG subgroup invoiced GAGFAH for services amounting to EUR 55k. No payments had been made as of the balance sheet date. No doubtful receivables existed as of the balance sheet date. No provisions were made for bad or doubtful debt in the fiscal year. 5.1. Members of Management and the Supervisory Board of NILEG Members of Management of NILEG: Matthias Moser Member Wilhelm Gehrke Chief Acquisition Officer Jorg Deisel Chief Operation Officer Worna Zohari Chief Sales Officer Bernd Hermann Chief Technology Officer (until December 19, 2005) (since November 1, 2005) (since November 1, 2005) (since November 1, 2005) (until December 31, 2005) Members of the Supervisory Board Matthias Moser Robert Ian Kauffman Oliver Kolle Nicolai Kuss Dr. Jürgen Allerkamp General Manager, Fortress Deutschland GmbH (since December 19, 2005) President, Fortress Investment Group LLC (since December 19, 2005) Associate, Fortress Deutschland GmbH (since December 19, 2005) Associate, Fortress Deutschland GmbH (since December 19, 2005) Member of the management board, NORD/LB Norddeutsche Landesbank (since December 19, 2005) The constituent meeting of the supervisory board took place on April 20, 2006. At that meeting, Mr. Kauffman was elected chairman and Mr. Moser his deputy. F-48 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 5.2. Total Remuneration and Loans Granted Remuneration of the General Managers of NILEG: In the fiscal year, the general managers of NILEG received remuneration totaling EUR 364.7k for the performance of their duties within the Group. Current management remuneration comprises a fixed and a variable component (management bonuses). Of total remuneration, EUR 96.8k relates to fixed remuneration, EUR 91.1k to basic remuneration and EUR 5.7k to fixed benefits in kind, which mainly comprise the provision of company cars. The management bonuses totaling EUR 250.0k include annually recurring, business-performancelinked components. In addition, the members of management received other compensation of EUR 17.9k. This mainly comprised expense reimbursements. As of December 31, 2005, no advances or loans had been granted to general managers or members of the supervisory board. Pension Obligations and Other Pension Benefits One employee receives a pension in accordance with the regulations pertaining to civil servants for the state of Lower Saxony. The level of the old-age and survivor’s pension is determined on the basis of the last gross salary received. The claim against the Company is reduced by the pension benefits which the employee receives due to his former employment for the state of Lower Saxony or his statutory pension. Jubilee Benefits No obligations exist to members of the management board with regard to jubilee benefits. Severance Payments No severance payments were paid to members of the management board in the fiscal year. 6. Management The operating management is performed by the NILEG management team, whereas NLG Acquisition Holdings Management S.á.r.l., Luxembourg, is responsible for various administrative matters. This entity does not receive any remuneration for its services. 7. Events After the Balance Sheet Date On April 5, 2006 GAGFAH S.A. purchased WOBA Dresden GmbH via its 100% investment in Blitz 06-652 GmbH. On that date, the company with its subsidiaries owned 48,100 residential units, 1,225 commercial units and 10,206 garages and other units. In June 2006 GAGFAH S.A. sold part of the commercial real estate operations, comprising seven properties, to an acquirer. The purchase price of EUR 79,650k corresponds to the carrying amount of the properties as of December 31, 2005. Another property was sold in June 2006 for a purchase price corresponding to the carrying amount as of December 31, 2005 of EUR 11,000k. In the first half of fiscal year 2006, the shares in NILEG Dienstleistungen GmbH were sold resulting in a loss on disposal of EUR 257k for the NILEG Holding subgroup. On September 29, 2006 the Company was transformed and renamed to GAGFAH S.A. Also on September 29, 2006, bearer loan notes securities (herein referred to as the ‘‘eurobonds’’) issued by GAG ACQ. Ireland Ltd, Dublin, Ireland, and UC ACQ. Ireland Ltd., Dublin, Ireland were contributed to GAGFAH S.A. as a contribution in kind. Both Irish companies are controlled by F-49 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Fortress Investment Group LLC. In this connection 177,000k of new shares have been issued to the former owners of the eurobonds and the share capital of GAGFAH S.A. has been increased to EUR 281,250k. The total value of the contribution in kind was approved to be EUR 830,000k. Also, by October 7, 2006, GAGFAH S.A. is expected to acquire all shares in GAG ACQ. Ireland Ltd., Dublin, Ireland, the majority shareholder of GAGFAH GmbH at nominal value, i.e. for a price of EUR 40k. On the same day, the investors’ agreement in place between the shareholders of GAG ACQ. Ireland Ltd., and UC ACQ. Ireland Ltd. is expected to be amended to provide GAGFAH S.A. control over UC ACQ. Ireland Ltd. via this agreement. An IPO of the shares in GAGFAH S.A. is set to take place by the end of 2006. This report includes forward-looking statements that relate to the continued course of business. These statements are based on prudent assumptions. However, due to residual risks and uncertainties, no assurance can be given that these assumptions will prove to be correct collectively or individually. 8. Declaration of Management GAGFAH S.A.’s management assumes responsibility for the preparation, completeness and accuracy of the consolidated financial statements and group management report as well as for other information contained in the annual report. These consolidated financial statements have been drawn up in compliance with International Financial Reporting Standards (IFRSs) as adopted by the EU. An effective internal monitoring and control system ensures that data used for preparing the consolidated financial statements are complete and reliable. The system is based on uniform group guidelines on accounting, risk management pursuant to the Law on Control and Transparency in Business [‘‘Gesetz zur Kontrolle und Transparenz im Unternehmensbereich’’: KonTraG], an integrated control concept as part of value-based management, and reviews performed by the internal audit function. This allows management to identify significant risks at an early stage and implement the necessary countermeasures. Luxembourg, October 2, 2006 GAGFAH S.A. The Management F-50 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 EXHIBITS (1) List of Shareholdings Company name 1 Registered office Subsidiaries Included in the Consolidated Financial Statements GAGFAH S.A. 2 GAGFAH Acquisition 1 GmbH (formerly Blitz 05-132 GmbH) 3 NILEG Immobilien Holding GmbH (NILEG) 4 7 WTCH-World Trade Center Hannover GmbH (WTCH) NORD/LB-Immobiliengesellschaft für Mecklenburg-Vorpommern mbH (NORD/IMG) Norddeutsche Wohnungsbau-Beteiligungs GmbH & Co. KG (NWB) Osnabrücker Wohnungsbau GmbH (OWG) 8 NILEG Real Estate GmbH 9 NILEG Real Estate GmbH & Co. Management KG NILEG Norddeutsche Immobiliengesellschaft mbH (NILEG GmbH) NILEG Dienstleistungen GmbH 5 6 10 11 12 13 14 15 16 17 NILEG Objektgesellschaft Hannover Verwaltungsgesellschaft mbH NILEG Objektgesellschaft Berlin Verwaltungsgesellschaft mbH NILEG Objektgesellschaft Frankfurt Verwaltungsgesellschaft mbH NILEG Objektgesellschaft Office-Center Plaza Hannover Verwaltungsgesellschaft mbH Scholz-Hofheim GmbH & Co. KG 18 Wohnungsgesellschaft Norden GmbH (WG Norden) Wohnungsbau Niedersachsen GmbH (WBN) 19 NILEG Immobilienservice GmbH (NILEG IS) 20 Wohnungsbau-Beteiligungs-GmbH für Osnabrück (WBO) F-51 Luxembourg, Luxembourg Essen, Germany (formerly Munich, Germany) Hanover, Germany Hanover, Germany Schwerin, Germany Hanover, Germany Osnabrück, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Wetzlar, Germany Hanover, Germany Hanover, Germany Hanover, Germany Hanover, Germany Share in capital Held by 100.00% 1 100.00% 1 100.00% 3 100.00% 3 100.00% 3 94.10% 6 94.81% 3 94.81% 3 94.00% 5.685% 100.00% 9 3 10 100.00% 17 100.00% 18 100.00% 7 100.00% 10 100.00% 10 94.88% 10 94.85% 17 100.00% 18 100.00% 3 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 Company name Registered office Share in capital Held by 50.00% 10 50.00% 10 50.00% 10 50.00% 10 51.00% 10 55.00% 10 Joint Ventures (as Defined by IAS 31) Included in the Consolidated Financial Statements on a Proportionate Basis 21 Objekt Kassel GbR 22 Objekt Dresden GbR 23 Lühnde IHG and NILEG GbR 24 Grundstücksentwicklungsgesellschaft Oesselse ‘‘Langes Feld’’ GbR NILEG & CDS Wohnbau Verwaltungsgesellschaft mbH NILEG & CDS Wohnbau GmbH & Co. KG 25 26 Other Financial Assets of 20% or More(1) 27 28 29 NILEG & Berliner Bau Verwaltungs-GmbH, Bollendorf NILEG & Berliner Bau Beteiligungs-GmbH & Co. KG NILEG & Berliner Bau GmbH 30 S-Immobilienmanagement GmbH & Co. KG 31 Hannover Region Grundstücksgesellschaft Verwaltung mbH & Co. Businesspark Hannover Nord KG IDB Königsdamm GmbH & Co. KG Wohnungsbaugesellschaft mbH Salzgitter Lehrter Wohnungsbau GmbH 32 33 34 35 36 (1) (2) (3) (4) Wohnstätten Wohnungsgesellschaft mbH WBV Wohnbau Betreuungs- & Verwaltungs GmbH Bollendorf, Germany Bollendorf, Germany Bollendorf, Germany Hann. Münden, Germany Hanover, Germany Buxtehude, Germany Salzgitter, Germany Lehrte, Germany Hanover, Germany Salzgitter, Germany Hanover, Germany Hanover, Germany Hildesheim, Germany Hildesheim, Germany Hanover, Germany Hanover, Germany Share in capital Total equity EUR k Net profit/loss Held by 50.00% 24(2) 1(2) 10 50.00% 3(2) 0(2) 10 100.00% 24(2) 0(2) 28 50.00% 138(2) 10(2) 10 33.33% 850(4) 84(4) 10 33.33% 1,289(3) 1,348(3) 10 25.05% 34,664(2) l,045(2) 10 28.44% 10,322(2) 471(2) 10 20.00% 1,196(4) 167(4) 10 100.00% 26(2) 0(2) 33 Due to its immateriality included in the consolidated financial statements at cost less the required writedowns. As of December 31,2004 As of June 30,2005 As of December 31,2003 F-52 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 (2) Statement of Changes in Consolidated Non-Current Assets Cost Carrying amounts Accumulated amortization, depreciation and impairment losses As of Jul. 12, 2005 Change in the consolidated group Additions Disposals Reclassifications As of Dec. 31, 2005 0 0 527 2,130 36 0 5 0 0 0 558 2,130 0 0 240 0 5 0 235 0 323 2,130 0 2,657 36 5 0 2,688 0 240 5 235 2,453 0 38 0 0 −30 8 0 1 0 1 7 0 2,151 72 14 −1 2,208 0 220 0 220 1,988 0 0 196 0 2,637 2,833 0 0 0 0 2,833 0 4,209 2,190 7 −5,971 421 0 413 0 413 8 0 0 28,324 0 0 28,324 0 0 0 0 28,324 0 6,398 30,782 21 −3,365 33,794 0 634 0 634 33,160 Other financial assets Securities . . . . . . . Other loans . . . . . 173 0 4,163 84 7 15 0 43 0 0 4,343 56 0 0 1,360 0 0 0 1,360 0 2,983 56 173 4,247 22 43 0 4,399 0 1,360 0 1,360 3,039 Total . . . . . . . . . . 173 13,302 30,840 69 −3,365 40,881 0 2,234 5 2,229 38,652 Intangible assets Industrial rights . . Goodwill . . . . . . . F-53 Property, plant and equipment Technical equipment and machines . . . . . Other equipment, furniture and fixtures . . . . . . . Assets under construction . . . Pre-construction expenses. . . . . . Payments on account. . . . . . . As of July 12, 2005 Additions As of Dec. 31, 2005 Disposals As of Dec. 31, 2005 The following auditor’s report refers to the consolidated annual accounts prepared on the basis of Luxembourg legal and regulatory requirements as well as the directors’ report of GAGFAH S.A. for the short fiscal year ending December 31, 2005 as a whole and not solely to the consolidated annual accounts. The directors’ report, together with the consolidated annual accounts, for the short fiscal year ending December 31, 2005 is available at the office of GAGFAH S.A. but is not included in this prospectus. INDEPENDENT AUDITOR’S REPORT To the Shareholders of GAGFAH S.A. Société Anonyme (Formerly NLG Acquisition Investments S.C.A.) At your request, we have audited the accompanying consolidated annual accounts of GAGFAH S.A. (formerly NLG Acquisition Investments S.C.A.) for the period from July 12, 2005 to December 31, 2005, and have read the related directors’ report. These consolidated annual accounts and the directors’ report are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated annual accounts based on our audit and to check that the directors’ report is consistent with the consolidated annual accounts. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors, as well as evaluating the overall annual accounts presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated annual accounts give, in conformity with Luxembourg legal and regulatory requirements, a true and fair view of the consolidated financial position of GAGFAH S.A. as at December 31, 2005 and of the consolidated results of its operations for the period then ended. The directors’ report is consistent with the annual accounts. ERNST & YOUNG Société Anonyme Réviseur d’Entreprises signed Michael HORNSBY Luxembourg, October 2, 2006 F-54 GAGFAH S.A., Luxembourg (formerly NLG Acquisition Investments S.C.A.) Unaudited Condensed Consolidated Interim Financial Statements as of and for the six months ended June 30, 2006 (in accordance with IFRS) F-55 GAGFAH S.A. Condensed Consolidated Income Statement for the Period From January 1 to June 30, 2006 (Unaudited) Note Income from the leasing of investment property . . . . . . . . . . . . . . . . . . . . Expenses for hereditary building rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses for the generation of rental income . . . . . . . . . . . . . G.6.1 G.6.2 Profit from the leasing of investment property. . . . . . . . . . . . . . . . . . . . . . Income from the sale of investment property. . . . . . . . . . . . . . . . . . . . . . . Carrying amount of the investment property sold . . . . . . . . . . . . . . . . . . . Jan. 1 to Jun. 30, 2006 EUR k 122,625 −128 −72,288 50,209 G.6.3 34,997 −32,949 Profit from the sale of investment property . . . . . . . . . . . . . . . . . . . . . . . . 2,048 Unrealized gains from fair value measurement . . . . . . . . . . . . . . . . . . . . . Unrealized losses from fair value measurement . . . . . . . . . . . . . . . . . . . . . 75,188 −64,234 Result from fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G.6.4 10,954 Result from other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G.6.5 G.6.6 G.6.6 G.6.7 G.6.7 5,311 −587 −14,974 6,799 −2,930 Profit from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,830 Investment result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . . . . . . . . . . 57,059 Interest expense (periodical) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income (periodical) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Result from fair value measurement of derivatives . . . . . . . . . . . . . . . . . . Interest (refinancing) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G.6.8 G.6.8 Profit from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,550 G.6.9 Profit from continued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . −38,807 1,020 71,259 −12,981 −15,421 62,129 G.6.10 −6,042 Income taxes for discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −6,042 Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,087 Thereof attributable to: Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –813 Shareholders of the parent company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,900 Weighted average number of shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,662,561 Basic and diluted earnings per share in EUR. . . . . . . . . . . . . . . . . . . . . . . 4.88 F-56 GAGFAH S.A. Condensed Consolidated Balance Sheet as of June 30, 2006 (Unaudited) Assets Note Jun. 30, 2006 EUR k Non-current assets Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 3,442,083 11,994 22,080 11,410 35,114 2,453 1,592,780 33,160 3,039 656 1,442 3,525,762 1,633,530 108,778 17,588 70,387 12,915 4,115 3,230 153,204 108,698 15,229 4,326 3,188 7 223 79,678 Subtotal current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,217 95,191 465,408 211,349 107,838 319,187 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,991,170 1,952,717 60,000 1,030,631 5,504 3,503 −50,808 1,048,830 34,049 3,683 327,119 368 0 −106,081 225,089 20,287 1,082,879 245,376 6,697 12,596 22,596 162,835 2,071,916 3,135 26,193 0 12,322 1,295 66,680 1,312,469 3,246 21,540 2,305,968 1,417,552 Current assets Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current tax claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances and cash on hand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity and liabilities Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subscribed capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remeasurement reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity attributable to the shareholders of the parent company . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Non-current liabilities Non-current liabilities to shareholders . . . . . . . . . . . . . . . . . . . . . . . . Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-57 G.5.1 G.5.2 G.5.3 G.5.5 G.5.7 G.5.10 Dec. 31, 2005 (adjusted) EUR k G.5.5 G.5.6 G.5.7 G.5.8 G.5.9 G.5.11 G.5.12 G.5.13 G.5.15 G.5.15 GAGFAH S.A. Condensed Consolidated Balance Sheet as of June 30, 2006 (Unaudited) continued Assets Note Jun. 30, 2006 EUR k Current liabilities Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31, 2005 (adjusted) EUR k 631 26,252 9,860 474,608 88,567 2,320 580 32,035 9,235 42,584 203,583 1,109 Subtotal current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,238 84 602,322 2,908,290 289,126 663 289,789 1,707,341 Total equity and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,991,170 1,952,717 F-58 G.5.13 G.5.14 G.5.15 G.5.15 GAGFAH S.A. Condensed Statement of Changes in Consolidated Equity for the Period From January 1 to June 30, 2006 (Unaudited) Subscribed capital EUR k As of January 1, 2006 (audited) . . . . . . . . . . . . . . Capital reserve EUR k Equity attributable to the shareholders of Legal Remeasurement Revenue the parent Minority reserve reserve reserves company interests EUR k EUR k EUR k EUR k EUR k Total equity 3,683 327,119 368 0 −106,081 225,089 20,287 245,376 . . . . 0 0 0 56,317 0 0 0 703,512 0 0 0 5,136 3,503 0 3,503 0 0 55,273 55,273 0 3,503 55,273 58,776 764,965 0 814 814 0 3,503 56,087 59,590 764,965 . 0 0 0 0 0 0 644 644 . 0 0 0 0 0 0 12,304 12,304 As of June 30, 2006 (unaudited) . . . . . . . . . . . . 60,000 1,030,631 5,504 3,503 −50,808 1,048,830 34,049 1,082,879 Result from swap measurement . . . . . . . . . . Profit for the year . . . . . . . . Total profit for the period . . . Capital increase . . . . . . . . . . Current change minority interests in liabilities . . . . . Change in shareholdings and consolidated group . . . . . . As yet, no resolution has been passed on the appropriation of profits for fiscal year 2005 since no shareholders’ meeting had been held prior to the date on which these interim consolidated financial statements were prepared. F-59 GAGFAH S.A. Condensed Consolidated Cash Flow Statement for the Period From January 1 to June 30, 2006 (Unaudited) Jan. 1 to Jun. 30, 2006 EUR k Profit from operations (adjusted for loss from discontinued operations) . . . . . . . . . . . . . . . . . . . Remeasurement of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-downs on property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on the disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses on the disposal of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on the disposal of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in deferred government loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,788 −9,299 491 105 −1,956 837 209 −70 1,019 −41,727 3,186 −128,280 −11,931 −13,145 Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −149,773 Cash received from the sale of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for investments in investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . paid for investments in property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . received for disposals of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . paid for investments in other financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . received from the disposal of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . paid from the acquisition of subsidiaries after deducting cash held by the subsidiaries. . 45,192 −13,450 −118,031 −2,425 1 −45 200 −934,722 Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −905,249 Cash Cash Cash Cash Cash Cash received from equity contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764,965 Cash paid (–) to minorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −2,128 Cash received from the raising of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,235 Cash repayments of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −431,789 Interest paid and cost of procuring money for refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −16,620 Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132,663 Change in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,641 Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,678 Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-60 157,319 Cash and cash equivalents comprise all cash and cash equivalents disclosed in the balance sheet and break down as follows: Jun. 30, 2006 EUR k Cash on hand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blocked accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In current accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 34,203 13,730 105,215 4,115 Bank balances, cash on hand and securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,319 Cash and cash equivalents as of the balance sheet date include balances on blocked accounts (security retainers from the property development business) of EUR 34,203k, to which GAGFAH S.A. does not have direct access. F-61 Notes to the Condensed Interim Consolidated Financial Statements (Unaudited) 1. General Information These condensed interim consolidated financial statements of GAGFAH S.A., Luxembourg, have been prepared in accordance with the provisions of International Accounting Standard (IAS) 34 as adopted in the European Union. The condensed interim consolidated financial statements do not contain all the disclosures and explanations required in annual financial statements and should be read in conjunction with the consolidated financial statements as of December 31, 2005. The value as of December 31, 2005 was used as a reference value for the notes to the balance sheet. No prior-year comparative figures were provided in the notes to the income statement as the Company was formed on July 12, 2005. The company’s name was formerly NLG Acquisition Investments S.C.A.. It was transformed and renamed to GAGFAH S.A. via shareholder resolution from September 29, 2006. 2. Consolidated Group and Consolidation Methods Consolidated Group 30 subsidiaries were included in the consolidated financial statements of GAGFAH S.A. as of June 30, 2006 on the basis of full consolidation since GAGFAH S.A. holds the majority of shares, either directly or indirectly. In addition, six joint ventures were included on the basis of proportional consolidation. Company Formations, Acquisitions and Sales Under purchase agreement dated February 16, 2006/March 10, 2006, GAGFAH S.A. acquired all the shares in WOBA DRESDEN GmbH from the city of Dresden through a wholly-owned subsidiary (Blitz 06-652 GmbH). In addition, another company (CM Komplementär 05-525 GmbH & Co. KG), in which the acquisition company has a direct investment of 94.9%, acquired the minority shares in the following companies of the WOBA DRESDEN group which had been held by WOBA DRESDEN GmbH and the city of Dresden: • 5.27% Bau- und Siedlungsgesellschaft Dresden mbH • 5.25% Liegenschaften Weißig GmbH • 5.10% WOHNBAU NORDWEST GmbH • 5.10% SÜDOST WOBA DRESDEN GmbH The date of execution agreed in the purchase agreement of February 16, 2006/March 10, 2006 was subject to a number of conditions precedent. In accordance with the execution protocol dated April 5, 2006, the conditions precedent were found to be met and it was agreed that the date of execution would be April 5, 2006. Accordingly, the parties agreed that all transactions provided for under the purchase agreement of February 16, 2006/March 10, 2006 would take effect on April 5, 2006. The acquiring companies took control of the acquired companies on this date. The acquired companies had approx. 48,100 residential units, 1,225 commercial units and 10,206 garages and other units as of the acquisition date. F-62 The acquired net assets of the WOBA Dresden group break down as follows: EUR k Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 1,831,288 3,583 9,962 37,486 3,266 3,484 26,940 50,133 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,871 Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt capital made available by the shareholders long term . . . . . . . . . . . . . . . . . . . . . . . . . Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,886 6,301 195 28,279 80,771 823,608 5,934 19,946 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977,920 Fair value of net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988,951 Cost of acquisition: Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incidental acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987,103 1,848 Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988,951 Cash outflows due to acquisition: Cash outflows in the fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988,951 Cash acquired with the subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash outflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,286 934,665 The acquisition had an impact on total profit or loss for the year. From January 1, 2006 to April 4, 2006 the WOBA Dresden group generated revenues of EUR 51,806k which split up into revenues of EUR 48,346k from the leasing of investment property and EUR 3,460k from the sale of investment property. The additional disclosures required by IFRS 3.67 and IFRS 3.70 have not been made as they are impracticable. The disclosures required by IFRS 3.67 have not been made since the acquired company prepared its financial statements in accordance with the German Commercial Code [‘‘Handelsgesetzbuch’’: HGB] and the calculation of the IFRS carrying amounts would involve an unreasonably high expense. The additional disclosures pursuant to IFRS 3.70 have not been made since it would involve an unreasonably high expense to prepare interim financial statements pursuant to IFRS for all group companies for the period in question. Consolidation Principles The consolidation methods applied were the same as those applied in the previous set of consolidated financial statements. A more detailed description can be found in the notes to the consolidated financial statements as of December 31, 2005. 3. Accounting Policies The half-yearly financial statements of the entities included in the consolidated financial statements have been drawn up on the basis of uniform accounting policies. The accounting policies applied were the same as those used in the previous set of consolidated financial statements. These are described in more detail in the notes to the consolidated financial statements as of December 31, 2005. The accounting policies applied in the preparation of the condensed interim consolidated financial statements are in line with the methods used in preparing the consolidated financial statements for the F-63 fiscal year as of December 31, 2005 except for the following new provisions of IAS 39 ‘‘Financial Instruments’’: Recognition and measurement (‘‘IAS 39’’) which are mandatory for all reporting periods beginning on or after January 1, 2006: • Financial guarantees and credit commitments: This new regulation has expanded the scope of IAS 39. The amendment relates to the recognition of financial guarantees and credit commitments by the guarantor. According to the revised version of IAS 39, financial guarantee and credit commitments must be recognized at fair value in the case of first-time recognition. Subsequent valuation requires revaluation at the higher of the amount which must be determined in accordance with IAS 37 ‘‘Provisions, Contingent Liabilities and Contingent Assets’’, and the amount initially recognized, less, if required, the accumulated amortization recognized in profit and loss in accordance with IAS 18 ‘‘Revenue’’. • The hedging of planned internal group transactions: This amendment to IAS 39 has made it possible to define the currency risk from highly probable internal group transactions as a cash flow hedge. Such recognition requires the transaction to be denominated in a currency different to the functional currency of the company and the currency risk must have an effect on the financial statements. • Fair value option: The possibility of valuing every financial asset or financial liability at fair value through profit and loss has been limited by the amendment. However, the application of these amendments has no effect on the interim consolidated financial statements. The condensed interim consolidated financial statements do not contain all the disclosures and explanations required in annual financial statements and should be read in conjunction with the consolidated financial statements as of December 31, 2005. Until December 31, 2005, profits and losses incurred when remeasuring interest rate swaps used to hedge interest rate risks within the group were recognized immediately in the income statement only. It was not possible to recognize hedges in the balance sheet due to their lack of effectiveness. Since the acquisition of the WOBA group, the criteria of IAS 39.88 are met and the Group now also recognizes hedges in the balance sheet. The hedging instruments (mainly interest rate swaps) are used to hedge cash flows from floating-rate liabilities. The effective portion of profit or loss from the hedging instruments is recognized directly under equity and the ineffective portion under profit or loss. The amounts recognized under equity are recognized in the income statement in the period in which the hedged transaction impacts the profit or loss for the period. If the forecast transaction is no longer expected to occur, the amounts previously recorded in equity are recognized in net profit and loss for the period. The consolidated financial statements as of December 31, 2005 differ from the audited consolidated financial statements for December 31, 2005 of GAGFAH S.A. in that the following changes were made: In the reporting period, development properties of EUR 18,349k were reclassified from current assets to investment property. The reason for this classification is, in contrast to the utilization originally planned, the Group has now decided to retain the property in the long term with the aim of generating rental income and value increases. In order to ensure the comparability of the consolidated financial statements as of June 30, 2006, this change in planning was adjusted in the comparative figures as of December 31, 2005 accordingly. 4. Segment Reporting In accordance with its primary reporting format, GAGFAH S.A. is divided into the real estate management and real estate sales segments. With the acquisition, LLC Fortress Investment Group LLC and the Company’s management decided to discontinue part of its operations. Commercial real estate operations, which had previously been a segment and qualifies as a separate major line of business within the meaning of IFRS 5.32 will be sold. Project development operations will also be discontinued. Management decided to discontinue these operations in December 2005. As a result, no new projects will be taken on or commenced. Existing projects will be sold or otherwise disposed of at their 2005 stage of completion. Existing projects will only be continued in exceptional cases where continuation is required to reach a stage of completion that permits their sale or disposal. Commercial real estate F-64 and property construction/development operations will be wound up by the end of 2006. The commercial real estate segment is presented separately in the balance sheet under discontinued operations. Information on the segments for the first six months of fiscal year 2006 is presented below: Group function/ discontinued Real estate operations*/ management Real estate sales consolidation EUR k EUR k EUR k Group EUR k Segment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment result (EBITDA) . . . . . . . . . . . . . . . . . . . . . . . . 122,625 50,209 34,997 2,048 0 −5,661 157,622 46,596 Result from fair value measurement . . . . . . . . . . . . . . . . Segment write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,954 0 61,163 0 0 2,048 0 491 −6,152 10,954 491 57,059 Financial result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/loss from continued operations before taxes . . . . Income taxes for continued operations . . . . . . . . . . . . . . Profit/loss from continued operations . . . . . . . . . . . . . . . Loss from discontinued operations . . . . . . . . . . . . . . . . . Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,491 77,550 −15,421 62,129 −6,042 56,087 Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,442,083 1,480 547,607* 3,991,170* 2,890,990* 2,908,290* Segment liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,300 0 Segment investments (investments in property, plant and equipment or intangible assets) . . . . . . . . . . . . . . Significant non-cash segment expenses . . . . . . . . . . . . . . 13,450 1,388 0 0 2,425* 12,851* 15,875* 14,239* The items marked (*) include effects from discontinued operations. In the above table, the information on the discontinued ‘‘property construction/development’’ and ‘‘commercial real estate’’ segments were included in the column with group functions and eliminations and is, for this reason, explained in more detail below. Revenues of EUR 19,639k were generated in the property construction/development segment. This was contrasted by segment expenses of EUR 30,301k. No transactions with other segments were carried out in the fiscal year. The segment result (EBITDA) amounted to EUR −10,662k. Segment assets of EUR 109,414k and segment liabilities of EUR 13,984k are attributable to the property construction/development segment. Segment expenses contain non-cash expenses of EUR 7,652k. No tax expenses were incurred in the fiscal year. Revenues of EUR 18,679k were generated in the commercial real estate segment. This was contrasted by segment expenses of EUR 14,059k. No transactions with other segments were carried out in the fiscal year. The segment result (EBITDA) amounted to EUR 4,620k. Segment assets of EUR 95,191k and segment liabilities of EUR 84k are attributable to the commercial real estate segment. Segment expenses contain non-cash expenses of EUR 1,654k. No tax expenses were incurred in the fiscal year. 5. Notes to the Condensed Consolidated Balance Sheet 5.1 Intangible Assets Goodwill of EUR 2,130k from the acquisition of the NILEG Group is recognized under intangible assets. There were no indications on the date of preparing these interim financial statements that would have required an impairment test to be performed on the goodwill. Other intangible assets relate to software licenses for applications. F-65 5.2 Investment Property The following overview shows the development of the real estate portfolio since January 1, 2006. The reference value as of December 31, 2005 includes the reclassification of properties from current assets to investment property performed in 2006. 2006 EUR k As of January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes to the consolidated group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,592,780 1,831,288 11,915 −35,896 28,261 13,735 As of June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,442,083 Investment property breaks down by region as follows: Region Jun. 30, 2006 EUR k Dec. 31, 2005 EUR k East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,879,780 139,383 50,953 550,706 821,261 54,535 139,200 22,195 580,703 796,147 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,442,083 1,592,780 There are no material contractual obligations to purchase, construct or develop investment property or carry out repairs, maintenance or improvements. Sections G. 6. 1 and G. 6. 2 of this report contain comments on income of EUR 122,625k from the leasing of investment property and operating expenses of EUR 72,288k for the generation of rental income. 5.3 Property, Plant and Equipment As of the balance sheet date, property, plant and equipment came to EUR 11,994k and largely consisted of assets under construction (EUR 8,741k) and other equipment, furniture and fixtures (EUR 3,188k). The decrease in property, plant and equipment compared to December 31, 2005 is primarily due to reclassifications from prepayments to investment property in connection with the acquisition of real estate in Freiburg. 5.4 Other Financial Assets Other financial assets of EUR 22,080k (prior year: EUR 3,039k) mainly comprise long-term cash flow hedges of EUR 18,996k (prior year: 0k). 5.5 Inventories Inventories of GAGFAH S.A. break down as follows: Jun. 30, 2006 EUR k Dec. 31, 2005 EUR k Land held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfinished development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,329 61,361 88 43,268 65,319 111 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,778 108,698 Land held for sale and unfinished development relate to the discontinued construction/development operations. F-66 In the reporting period, GAGFAH S.A. sold inventories totaling EUR 14,271k. Impairment losses totaling EUR 7,652k were charged on some of the inventories following measurement at the lower net realizable value, with costs yet to be incurred being deducted from the discounted sale price. The adjustment of the prior-year figures relates to the reclassification of property held for sale to investment property due to a change in the intention to sell these properties in connection with the discontinuation of the property construction/development operations. 5.6 Receivables As of June 30, 2006, GAGFAH S.A. discloses current tax claims totaling EUR 17,588k (prior year: EUR 15,229k). Of this, EUR 9,163k (prior year: EUR 10,048k) is due to sales of land and EUR 5,070k (prior year: EUR 962k) from leasing activities. Furthermore, receivables of EUR 1,544k (prior year: EUR 1,883k) arose from third-party real estate management and EUR 840k (prior year: EUR 1,020k) from other trade. There are also receivables due to GAGFAH GROUP management services amounting to EUR 971k (prior year: EUR 55). Overall, impairment losses of EUR 8,895k were recognized for doubtful debts. There are no restrictions on ownership or disposal for the disclosed receivables. 5.7 Financial Assets Financial assets contain a SWAP of EUR 58,278k (prior year: EUR 4,326k). In addition, the item includes current cash flow hedges of EUR 12,109k. 5.8 Other Assets As of June 30, 2006, GAGFAH S.A. discloses other assets totaling EUR 24,325k (prior year: EUR 3,844k), of which EUR 12,915k (prior year: EUR 3,188k) is current and EUR 11,410k (prior year: EUR 656k) non-current. Most non-current assets are entitlements to investment grants of EUR 10,513k (prior year: EUR 0k). Of current assets, EUR 4,388k (prior year: EUR 271k) relates to claims from tax offices and EUR 1,598k (prior year: EUR 0k) to receivables from a property exchange. They also contain entitlements to investment grants of EUR 1,287k (prior year: EUR 0k) and other receivables. 5.9 Current Tax Claims As of June 30, 2006, GAGFAH S.A. discloses current tax claims of EUR 3,230k (prior year: EUR 223k). These relate to claims from tax on investment income and the solidarity surcharge. 5.10 Deferred Taxes Deferred tax assets of EUR 35,114k (prior year: EUR 1,442k) result from loss carryforwards and temporary differences. Deferred tax liabilities of EUR 162,835k (prior year: EUR 66,680k) result exclusively from temporary differences. 5.11 Bank Balances and Cash on Hand This item includes bank balances of EUR 153,148k and cash on hand of EUR 56k. The time deposits of GAGFAH S.A. have terms of between one day and three months and accrue interest of between 1.70% and 2.73%. The balances in current accounts are demand deposits and mainly accrue interest at the interbank rate less 0.5% p.a. 5.12 Equity The development of equity of GAGFAH S.A. is presented in the statement of changes in equity. F-67 5.13 Other Provisions As of June 30, 2006, GAGFAH S.A. discloses other provisions totaling EUR 48,848k (prior year: EUR 33,330k). Of this, EUR 19,609k (prior year: EUR 30,006k) relates to restructuring, with a non-current portion of EUR 8,960k and a current portion EUR 10,649k. Restructuring provisions of EUR 9,367k were utilized in the reporting period. In addition, there were disposals of EUR 1,030k due to the sale of NILEG Dienstleistungen GmbH. Of the remaining current provisions of EUR 15,603k, EUR 6,472k (prior year: EUR 0k) relates to repayment obligations for sales pursuant to the Investment Priority Act [‘‘Investitionsvorrangsgesetz’’: InVorG] and EUR 1,740k (prior year: EUR 0k) to decontamination. The remaining non-current provisions of EUR 13,636k mainly relate to demolition costs (EUR 10,513k; prior year: EUR 0k). There are also phased retirement obligations totaling EUR 3,794k (prior year: EUR 880k), EUR 2,211k of which are non-current. The increase in provisions for phased retirement is due to the acquisition of the WOBA DRESDEN group. 5.14 Liabilities for Income Taxes The Group’s liabilities for income taxes came to EUR 9,860k (prior year: EUR 9,235k) in the reporting period. The liabilities mainly relate to corporate income tax (EUR 7,063k). The item also includes trade tax liabilities of EUR 2,797k. 5.15 Liabilities 5.15.1 Financial Liabilities The financial liabilities of EUR 2,546,524k (prior year: EUR 1,355,053k) break down as follows for the fiscal year: Liabilities to banks amount to EUR 2,071,648k (prior year: EUR 1,318,249k) and liabilities to other lenders to EUR 474,876k (prior year: EUR 36,804k). This item comprises non-current financial liabilities of EUR 2,071,916k (prior year: EUR 1,312,469k). Of the current and non-current liabilities to banks and other lenders, a total of EUR 541,305k (prior year: EUR 115,171k) is secured in rem. EUR 760,847k (prior year: EUR 0k) is secured by a bank guarantee. No collateral has been provided for the remaining EUR 1,225,148k (prior year: EUR 1,239,882k). Of the total financial liabilities, EUR 2,248,880k (prior year: EUR 1,283,777k) relates to freely financed loans. These in turn comprise a global loan of EUR 1,909,127k (prior year: EUR 1,153,867k). The fair values of the financial liabilities break down as follows: Jun. 30, 2006 Carrying amount Fair value EUR k EUR k Global loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder loans . . . . . . . . . . . . . . . . . . . . . . . . . . . Freely financed loans . . . . . . . . . . . . . . . . . . . . . . . . Government annuity loans. . . . . . . . . . . . . . . . . . . . Dec. 31, 2005 Carrying amount Fair value EUR k EUR k 1,909,127 55,252 284,501 297,644 1,914,576 55,252 280,271 299,295 1,153,867 1,153,867 0 0 129,910 130,224 71,276 71,988 2,546,524 2,549,394 1,355,053 1,356,079 The fair values of the loans are determined on the basis of market data using appropriate measurement methods. The shareholder loans are current. The freely financed loans include deferred purchase price payments of EUR 9,498k and liabilities of EUR 9,727k to NEPTUNO Verwaltungs- und Treuhandgesellschaft mbH (minority shareholder of NILEG Real Estate GmbH & Co. Management KG) in connection with the acquisition of the NILEG group. 5.15.2 Other Liabilities As of June 30, 2006, GAGFAH S.A. discloses other liabilities totaling EUR 91,702k (prior year: EUR 206,829k). The decrease in other liabilities is mainly due to the liabilities from the sale of real estate which no longer existed as of June 30, 2006 (prior year: EUR 117,351k). F-68 Of other current liabilities totaling EUR 88,567k, EUR 43,728k relate to deferred liabilities (prior year: EUR 20,946k). In addition, trade payables of EUR 10,538k, rent liabilities of EUR 12,852k and prepayments received of EUR 8,564k were disclosed under current liabilities. 6. Notes to the Condensed Consolidated Income Statement 6.1 Income From the Leasing of Investment Property Income from the leasing of investment property of the GAGFAH subgroup breaks down as follows: Jan. 1 to Jun. 30, 2006 EUR k Rental income, fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocations charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent, interest and expense subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,477 30,394 380 1,374 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,625 Income from the leasing of investment property is mainly attributable to the leasing of land with residential and commercial buildings. The rent, interest and expense subsidies primarily relate to government allowances to allow lower rent to be charged for subsidized housing. The effects of economic trends on income from the leasing of investment property are immaterial in the reporting period. The same is also true of seasonal effects. 6.2 Operating Expenses for the Generation of Rental Income Operating expenses for the generation of rental income include operating expenses of EUR 33,145k and maintenance costs of EUR 16,826k. This item also includes personnel expenses of EUR 4,751k, real estate tax of EUR 2,437k and chargeable costs (EUR 8,282k) of the GAGFAH Group in coherence with the contribution of real estate management services. 6.3 Income from the Sale of Investment Property Income from the sale of investment property of EUR 34,997k is attributable to the sale of developed land. 6.4 Result from Fair Value Measurement Unrealized net gains of EUR 10,954k on changes in value arose in connection with the measurement of investment property in the reporting period. These mainly relate to properties with leased residential and commercial buildings. 6.5 Result from Other Services The result from other services of EUR 5,311k is mainly shaped by revenues of EUR 419k from third-party real estate management and revenues from other services of EUR 8,372k. These include EUR 6,148k from the completion and sale of a joint venture property in Dresden. This income contrasts with expenses totaling EUR 3,481k from third-party real estate management and other services, EUR 1,764k of which relates to personnel expenses. 6.6 Selling Expenses and General and Administrative Expenses Selling expenses of EUR 587k predominantly comprise expenses for sales, advertising and marketing. Of these expenses, EUR 458k relates to administrative expenses and EUR 61k to personnel. General and administrative expenses of EUR 14,974k mainly include salaries for administrative staff of EUR 6,474k and other administrative expenses of EUR 7,510k. Most of these expenses (EUR 6,818k) relate to legal, consulting and audit fees. F-69 6.7 Other Operating Income and Expenses All income not directly allocable to the various functional areas is disclosed under other operating income (EUR 6,799k). Of other operating expenses of EUR 2,930k, EUR 1,794k relates to administrative expenses. 6.8 Interest Expense and Income from the Fair Value Measurement of Derivatives Interest expenses are mainly due to current interest on bank loans to finance the real estate portfolio (EUR 38,807k) and to refinancing (EUR 12,981k). Income from the fair value measurement of derivatives amounts to EUR 71,259k and results from the fair value measurement of swaps. 6.9 Income Taxes Income taxes comprise deferred taxes (EUR 15,452k) and income taxes (−EUR 31k). 6.10 Profit/Loss from Discontinued Operations before Taxes The property development business and the project and land development activities in the property construction/development segment are being discontinued. Existing projects will be sold or otherwise disposed of at their 2005 stage of completion. Existing projects will only be continued in exceptional cases where continuation is required to reach a stage of completion that permits their sale or disposal. The result from discontinued operations splits up as follows: January 1 to June 30, 2006 Property Commercial construction/development real estate EUR k EUR k Income from the sale of development properties . . . . . . . . . . . . . . . . . Income from real estate management . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from third-party real estate management . . . . . . . . . . . . . . . . . Carrying amount of the development properties sold . . . . . . . . . . . . . Income from the sale of commercial real estate . . . . . . . . . . . . . . . . . . Carrying amount of the commercial property sold . . . . . . . . . . . . . . . . Other expenses from the sale of development properties . . . . . . . . . . Expenses from third-party real estate management (outside service costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses from real estate management . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-downs on development properties . . . . . . . . . . . . . . . . . . . . . . . . Result from fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,057 0 582 −14,271 0 0 −7,323 0 7,679 0 0 11,000 −11,000 0 −1,055 0 0 −7,652 0 0 −1,230 −175 0 −1,654 Loss from discontinued operations before taxes . . . . . . . . . . . . . . . . . . −10,662 4,620 7. Other Notes 7.1 Financial Risk Management The methods of financial risk management have not changed since the last consolidated financial statements. A detailed description of the interest rate, liquidity and credit risks as well as the financial risk management of GAGFAH S.A. is provided in the notes to the consolidated financial statements for fiscal year 2005. 7.2 Contingent Liabilities and Financial Obligations Obligations from leasing and renting are not material. F-70 7.3 Employees Jun. 30, 2006 Authorized signatories/authorized agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaried employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wage earners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 128 54 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 In addition, 15 trainees and 137 part-time staff were employed as of the half-yearly cut-off date. 7.4 Related Party Transactions Major transactions with related parties have been commented on in the notes to the consolidated financial statements for the last fiscal year. Therefore, only the major changes in the reporting period are commented on below (please refer to the relevant explanations in the notes to the consolidated financial statements for fiscal year 2005). GAGFAH provides NILEG with management and advisory services as well as services relating to its day-to-day operations. In the period from January 1, 2006 to June 30, 2006, NILEG procured services totaling EUR 6,282k from GAGFAH. NILEG invoiced GAGFAH for services amounting to EUR 837k. No payments had been made as of the balance sheet date. Furthermore the GAGFAH Group procures services for the GAGFAH Acquisition 1 GmbH according to acquisitions. GAGFAH invoiced EUR 2,000k for rendered services during the reporting period. No payments had been made as of the balance sheet date. 7.5 Management and Supervisory Board There were no changes to management in the reporting period. 7.6 Significant Events After the Interim Reporting Period On September 29, 2006 the Company was transformed and renamed to GAGFAH S.A. Also on September 29, 2006, bearer loan notes securities (herein referred to as the ‘‘eurobonds’’) issued by GAG ACQ. Ireland Ltd. Dublin, Ireland, and UC ACQ. Ireland Ltd., Dublin, Ireland were contributed to GAGFAH S.A. as a contribution in kind. Both Irish companies are controlled by Fortress Investment Group LLC. In this connection 177,000k of new shares have been issued to the former owners of the eurobonds and the share capital of GAGFAH S.A. has been increased to EUR 281,250k. The total value of the contribution in kind was approved to be EUR 830,000k. Also, by October 7, 2006, GAGFAH S.A. is expected to acquire all shares in GAG ACQ. Ireland Ltd., Dublin, Ireland, the majority shareholder of GAGFAH GmbH at nominal value, i.e. for a price of EUR 40k. On the same day, the investors’ agreement in place between the shareholders of GAG ACQ. Ireland Ltd. and UC ACQ. Ireland Ltd. is expected to be amended to provide GAGFAH S.A. control over UC ACQ. Ireland Ltd. via this agreement. An IPO of the shares in GAGFAH S.A. is set to take place by the end of 2006. F-71 GAGFAH S.A. Société Anonyme (formerly NLG Acquisition Investments S.C.A. Société en Commondite par Actions) Audited Unconsolidated Short Year Financial Statements as of and for the period beginning July 12, 2005 and ended December 31, 2005 (in accordance with Luxembourg GAAP) F-72 GAGFAH S.A. Société Anonyme BALANCE SHEET December 31, 2005 (expressed in EUR) December 31, 2005 ASSETS Financial assets Shares in affiliated companies (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to affiliated companies (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,055,000 213,001,558 359,056,558 Current assets Receivables from group companies (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at bank, in CCP accounts and in hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,986,347 6,755,378 16,741,725 375,798,283 LIABILITIES Share capital and reserves Share capital (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserve (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Result for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,683,101 327,118,953 368,310 8,150,323 339,320,687 Other provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,691 Short-term liabilities Amounts owed to group companies (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,397,905 27,000 36,424,905 375,798,283 F-73 GAGFAH S.A. Société Anonyme PROFIT AND LOSS ACCOUNT For the period from July 12, 2005 (date of incorporation) to December 31, 2005 (expressed in EUR) Jul. 12 to Dec. 31, 2005 EXPENSES Interest and similar expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 65,902 — 8,150,323 8,216,424 INCOME Interest and similar income (Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,216,424 8,216,424 F-74 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 NOTE 1—GENERAL INFORMATION GAGFAH S.A. (the ‘‘Company’’) has been incorporated on July 12, 2005 as a Luxembourg ‘‘S.C.A.’’ under the name NLG Acquisition Holdings S.C.A. On August 30, 2005 it changed its denomination in NLG Acquisition Investments S.C.A. and with shareholder resolution from September 29, 2006 the company was transformed and renamed to GAGFAH S.A. It is registered at the trade register under number B 109526 and has its registered office at 14a, Rue des Bains, L-1212 Luxembourg The Company is a securitization company governed by the law of March 22, 2004 on securitization. The corporate object of the Company is the acquisition and/or the assumption of risks resulting from the obligations assumed by third parties or relating to all or part of the activities of third parties, either directly or through intermediary entities, by issuing securities the value or return of which is dependent upon such risks. The Company may provide any financial assistance to the undertakings forming part of the group of the Company such as, among others, the providing of loans and the granting of guarantees or securities in any kind or form. The Company may borrow in any kind or form and issue bonds or notes. In a general fashion, the Company may carry out any commercial, industrial or financial operation, which it may deem useful in the accomplishment and development of its purpose, always remaining within the scope of activities authorized for securitization companies under the law of March 22, 2004 on securitization. NOTE 2—VALUATION PRINCIPLES AND METHODS General principles: The Company maintains its books and records in Euro (‘‘EUR’’) and the annual accounts have been established in conformity with applicable legal requirements in Luxembourg including the following significant accounting policies: Currency translation: Current assets and liabilities stated in currencies other than EUR are translated at the exchange rates prevailing at the date of the balance sheet. Transactions denominated in currencies other than EUR are translated at the exchange rates prevailing at the date of transaction. Realized exchange gains and losses and unrealized exchange losses are recorded in the statement of profit and loss. Unrealized exchange gains are not recognized. Financial assets: Financial assets, including participation and loans granted to group-related companies and shareholders, are stated at acquisition cost. Write-downs are recorded if, in the opinion of the Directors, there is any permanent impairment in value. Receivables and Debts: Receivables and Debts are recorded at their nominal value. Receivables are written down to their recoverable amount if there is a permanent impairment. NOTE 3—SHARES IN AFFILIATED COMPANIES On July 13, 2005, the Company acquired 100% shares in Magnet 101. W GmbH for an amount of EUR 28,000. This company was subsequently renamed to NILEG Immobilien Holding GmbH and the Company made a capital increase of EUR 126,000,000 to bring its total investment in this company to EUR 126,028,000. The share in the underlying net equity of this company amounts to EUR 36.7 million as of December 31, 2005. According to the management of the Company, there is no impairment on this investment. On November 25, 2005, the Company acquired 100% shares in Blitz 05-132 GmbH for an amount of EUR 27,000. This company was subsequently renamed to GAGFAH Acquisition 1 GmbH and the F-75 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 NOTE 3—SHARES IN AFFILIATED COMPANIES—CONTINUED Company made a capital increase of EUR 20,000,000 to bring its total investment in this company to EUR 20,027,000. The share in the underlying net equity of this company amounts to EUR 19.7 million as of November 30, 2005. NOTE 4—LOANS TO GROUP COMPANIES As of December 31, 2005, the Company has a loan granted to NILEG Immobilien Holding GmbH amounting to EUR 197,190,000 interest included. The interest rate is 13% and the maturity date is August 31, 2025. The shareholder loan for the GAGFAH Acquisition 1 GmbH amounts to EUR 15,811,558 bearing a 13% interest rate and has a maturity date as of September 30, 2024. NOTE 5—RECEIVABLES FROM GROUP COMPANIES As at December 31, 2005, the receivables from NILEG Immobilien Holding GmbH are outstanding with an amount of EUR 9,986,347 for two shareholder loans and for refund prepaid costs with an amount of EUR 986,347. The first shareholder loan has an amount of EUR 5,000,000 and a maturity date as of July 31, 2006. The second shareholder loan with an amount of EUR 4,000,000 has a maturity date as of January 31, 2006. Both shareholder loans are without interests. NOTE 6—SHARE CAPITAL As of July 12, 2005, the Company has been incorporated with a paid-in share capital amounting to EUR 31,000 divided into 24,799 Class A shares with a nominal value of EUR 1.25 each and 1 Class B share with a nominal value of EUR 1.25. The Class B share is subject to certain restrictions as regard to its transferability. On August 30, 2005, the partners of the Company resolved to increase the share capital from EUR 31,000 up to EUR 3,683,101.25 by issuance of 2,921,681 new Class N shares with a nominal value of 1.25 each fully subscribed and paid in cash and the possibility to create and to convert the Class A shares in Class N shares. This capital increase has been done together with the issuance of a total share premium of 327,487,263.45. The Shareholders decided during that same meeting to allocate an amount of 368,310.13 from the share premium to the legal reserve. As of December 31, 2005, the share capital is set to 3,683,101.25 divided by 2,946,480 Class N shares of EUR 1.25 each and 1 Class B share with a nominal value of EUR 1.25 each. NOTE 7—LEGAL RESERVE Under Luxembourg law an amount equal to at least 5 percent of the profit of the year must be allocated to a legal reserve until such reserve equals 10 percent of the issued share capital. This reserve is not available for dividend distribution. NOTE 8—OTHER PAYABLES TO GROUP COMPANIES As of December 31, 2005, the Company has debts towards group companies. These debts have no maturity date and bear interest at market rates. The principal amount and accrued interest amount to EUR 36,397,905 as of December 31, 2005. NOTE 9—TAXES The Company is subject to all taxes applicable to Luxembourg commercial companies. NOTE 10—SUBSEQUENT EVENTS On April 4, 2006, the Company decided the creation of Class W shares and has increased its share capital and share premium for respectively 4,956,250 and 642,543,750 through the issuance of 3,965,000 new Class W shares with a nominal value of 1.25 each. F-76 GAGFAH S.A. Société Anonyme NOTES TO THE ANNUAL ACCOUNTS December 31, 2005 NOTE 10—SUBSEQUENT EVENTS—CONTINUED On May 31, 2006, the Company decided the creation of new Class R shares and has increased its share capital and share premium for respectively 51,360,648.75 and 66,104,767.49 through the issuance of 41,088,519 new Class R shares with a nominal value of 1.25 each. The shareholders’ meeting resolves that out of the share premium, an amount of EUR 5,136,065 shall be immediately allocated to the legal reserve. On April 05, 2006, the Company purchased WOBA Dresden GmbH via its 100% investment in Blitz 06-652 GmbH. On that date, this company with its direct and indirect subsidiaries owned about 48,100 residential units, approximately 1,225 commercial units and some 10,206 garages and other units. On September 29, 2006 the Company was transformed and renamed to GAGFAH S.A. Also on September 29, 2006, bearer loan notes securities (herein referred to as the ‘‘eurobonds’’) issued by GAG ACQ. Ireland Ltd, Dublin, Ireland, and UC ACQ. Ireland Ltd., Dublin, Ireland were contributed to GAGFAH S.A. as a contribution in kind. Both Irish companies are controlled by Fortress Investment Group LLC. In this connection 177,000k of new shares have been issued to the former owners of the eurobonds and the share capital of GAGFAH S.A. has been increased to EUR 281,250k. The total value of the contribution in kind was approved to be EUR 830,000k. Also, by October 7, 2006, GAGFAH S.A. is expected to acquire all shares in GAG ACQ. Ireland Ltd., Dublin, Ireland, the majority shareholder of GAGFAH GmbH at nominal value, i.e. for a price of EUR 40k. On the same day, the investors’ agreement in place between the shareholders of GAG ACQ. Ireland Ltd., and UC ACQ. Ireland Ltd. is expected to be amended to provide GAGFAH S.A. control over UC ACQ. Ireland Ltd. via this agreement. An IPO of the shares in GAGFAH S.A. is set to take place by the end of 2006. F-77 INDEPENDENT AUDITOR’S REPORT To the Shareholders of GAGFAH S.A. Société Anonyme (Formerly NLG Acquisition Investments S.C.A.) We have audited the accompanying annual accounts of the GAGFAH S.A. (formerly NLG Acquisition Investments S.C.A.) for the period ended December 31, 2005. These annual accounts are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors, as well as evaluating the overall annual accounts presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying annual accounts give, in conformity with Luxembourg legal and regulatory requirements, a true and fair view of the financial position of GAGFAH S.A. as at December 31, 2005, and of the results of its operations for the period then ended. ERNST & YOUNG Société Anonyme Réviseur d’Entreprises signed Michael HORNSBY Luxembourg, October 2, 2006 F-78 GAGFAH S.A. (formerly NLG Acquisition Investments S.C.A.) Unaudited Unconsolidated Interim Financial Statements as of and for the six months ended June 30, 2006 (in accordance with Luxembourg GAAP) F-79 GAGFAH S.A. BALANCE SHEET June 30, 2006 (expressed in EUR) (Unaudited) June 30, 2006 ASSETS Financial assets Shares in affiliated companies (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to affiliated companies (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,551,909 625,686,366 1,033,238,275 Current assets Receivables from group companies (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at bank, in CCP accounts and in hand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,633,079 1,464 7,049,026 150,683,569 1,183,921,844 LIABILITIES Share capital and reserves Share capital (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserve (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unappropriated retained earnings brought forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Result for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000,000 1,030,631,406 5,504,375 8,150,322 21,831,721 1,126,117,824 Other provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,524,000 Short-term liabilities Amounts owed to group companies (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,252,020 28,000 55,280,020 1,183,921,844 The accompanying notes form an integral part of the annual accounts F-80 GAGFAH S.A. PROFIT AND LOSS ACCOUNT For the period from January 1, 2006 to June 30, 2006 (expressed in EUR) (Unaudited) Jan. 1, to Jun. 30, 2006 EXPENSES Interest and similar expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,727,875 — 21,831,721 24,559,596 INCOME Interest and similar income (Notes 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,559,596 24,559,596 F-81 GAGFAH S.A. NOTES TO THE INTERIM ACCOUNTS (UNAUDITED) June 30, 2006 NOTE 1—GENERAL INFORMATION GAGFAH S.A. (‘‘the Company’’) has been incorporated on July 12, 2005 as a Luxembourg ‘‘S.C.A.’’ under the name NLG Acquisition Holdings S.C.A.. On August 30, 2005 it changed its denomination in NLG Acquisition Investments S.C.A. and with shareholder resolution from September 29, 2006 the company was renamed to GAGFAH S.A.. It is registered at the trade register under number B 109526 and has its registered office at 5, Boulevard de la Foire, L-1528 Luxembourg. The Company is a securitization company governed by the law of March 22, 2004 on securitization. The corporate object of the Company is the acquisition and/or the assumption of risks resulting from the obligations assumed by third parties or relating to all or part of the activities of third parties, either directly or through intermediary entities, by issuing securities the value or return of which is dependent upon such risks. The Company may provide any financial assistance to the undertakings forming part of the group of the Company such as, among others, the providing of loans and the granting of guarantees or securities in any kind or form. The Company may borrow in any kind or form and issue bonds or notes. In a general fashion, the Company may carry out any commercial, industrial or financial operation, which it may deem useful in the accomplishment and development of its purpose, always remaining within the scope of activities authorized for securitization companies under the law of 22 March 2004 on securitization. NOTE 2—VALUATION PRINCIPLES AND METHODS General principles: The Company maintains its books and records in Euro (‘‘EUR’’) and the annual accounts have been established in conformity with applicable legal requirements in Luxembourg including the following significant accounting policies: Currency translation: Current assets and liabilities stated in currencies other than EUR are translated at the exchange rates prevailing at the date of the balance sheet. Transactions denominated in currencies other than EUR are translated at the exchange rates prevailing at the date of transaction. Realized exchange gains and losses and unrealized exchange losses are recorded in the statement of profit and loss. Unrealized exchange gains are not recognized. Financial assets Financial assets, including participation and loans granted to group-related companies and shareholders, are stated at acquisition cost. Write-downs are recorded if, in the opinion of the Directors, there is any permanent impairment in value. Receivables and Debts: Receivables and Debts are recorded at their nominal value. Receivable are written down to their recoverable amount if there is a permanent impairment. NOTE 3—SHARES IN AFFILIATED COMPANIES On July 13, 2005, the Company acquired 100% shares in Magnet 101. VV GmbH for an amount of EUR 28,000. This company was subsequently renamed to NILEG Immobilien Holding GmbH and the Company made a capital increase of EUR 126,000,000 to bring its total investment in this company to EUR 126,028,000. F-82 GAGFAH S.A. NOTES TO THE INTERIM ACCOUNTS (UNAUDITED) June 30, 2006 NOTE 3—SHARES IN AFFILIATED COMPANIES—CONTINUED On November 25, 2005, the Company acquired 100% shares in Blitz 05-132 GmbH for an amount of EUR 27,000. This company was subsequently renamed to GAGFAH Acquisition 1 GmbH and the Company made a capital increase of EUR 20,000,000 to bring its total investment in this company to EUR 20,027,000. On February 23, 2006, the Company acquired 100% shares in Blitz 06-652 GmbH for an amount of EUR 28,000. This company was subsequently equipped with equity of EUR 261,496,908.92 via a capital increase in order to acquire the WOBA Dresden GmbH on April 04, 2006. NOTE 4—LOANS TO GROUP COMPANIES The Company had a loan granted to NILEG Immobilien Holding GmbH amounting to EUR 209,475,000.00 interests included. The interest rate is 13 % p.a. and the maturity date is August 31, 2025. The shareholder loan for the GAGFAH Acquisition 1 GmbH has an amount of EUR 15,811,558 with 13% interest and a maturity date as of September 30, 2024 and the shareholder loan for the Blitz 06-652 GmbH has an amount of EUR 400,399,808.22. NOTE 5—RECEIVABLES FROM GROUP COMPANIES As at June 30, 2006, the receivable from NILEG Immobilien Holding GmbH and Gagfah Acquisition 1 GmbH are outstanding with an amount of EUR 143,633,079.11. The receivable from NILEG Immobilien Holding GmbH is an amount of EUR 9,986,347.09 for two shareholder loans and for refund prepaid costs with an amount of EUR 986,347.09. The first shareholder loan has an amount of EUR 5,000,000.00 and a maturity date as of July 31, 2006. The second shareholder loan with an amount of EUR 4,000,000.00 has a maturity date as of January 31, 2006. Both shareholder loans are without interests. The shareholder loan for the Gagfah Acquisition 1 GmbH has an amount of EUR 133,617,531.42 with interests and a maturity date as of September 30, 2024. For the Acquisition of Blitz 05-661 GmbH the company has to receive EUR 29,201.20 from WOBA. NOTE 6—SHARE CAPITAL As of July 12, 2005, the Company has been incorporated with a paid-in share capital amounting to EUR 31,000 divided into 24,799 Class A shares with a nominal value of EUR 1.25 each and 1 Class B share with a nominal value of EUR 1.25 each. The Class B share is subject to certain restriction as regard to its transferability. On August 30, 2005, the partners of the Company resolved to increase the share capital from EUR 31,000 up to EUR 3,683,101.25 by issuance of 2,921,681 new Class N shares with a nominal value of 1.25 each fully subscribed and paid in cash and the possibility to create and to convert the Class A shares in Class N shares. This capital increase has been done together with the issuance of a total share premium of 327,487,263.45. The Shareholders decided during that same meeting to allocate an amount of 368,310.13 from the share premium to the legal reserve. On April 4, 2006, the Company decided the creation of Class W shares and has increased its share capital and share premium for respectively 4,956,250 and 642,543,750 through the issuance of 3,965,000 new Class W shares with a nominal value of 1.25 each. On May 31, 2006, the Company decided the creation of new Class R shares and has increased its share capital and share premium for respectively 51,360,648.75 and 66,104,767.49 through the issuance of 41,088,519 new Class R shares with a nominal value of 1.25 each. The shareholders meeting resolves that out of the share premium, an amount of EUR 5,136,065.00 shall be immediately allocated to the legal reserve. F-83 GAGFAH S.A. NOTES TO THE INTERIM ACCOUNTS (UNAUDITED) June 30, 2006 NOTE 6—SHARE CAPITAL—CONTINUED As of June 30, 2006 the share capital is set to EUR 60,000,000.00 divided by 24,799 shares of Class A, 2,921,681 shares of Class N, 3,965,000 shares of Class W and 41,088,519 shares of Class R of EUR 1.25 each and 1 share of Class B with a nominal value of EUR 1.25. NOTE 7—LEGAL RESERVE Under Luxembourg law an amount equal to at least 5 percent of the profit of the year must be allocated to a legal reserve until such reserve equals 10 percent of the issued share capital. This reserve is not available for dividend distribution. NOTE 8—OTHER PAYABLES TO GROUP COMPANIES As of June, 30, 2006 the Company has debts towards group companies. These debts had no maturity date and bear interest. The principal amount and accrued interest amount to EUR 55,252,020 as of June 30, 2006. NOTE 9—TAXES The Company is subject to all taxes applicable to Luxembourg commercial companies. F-84 GAGFAH GmbH, Essen Audited Consolidated Annual Financial Statements as of and for the year ended December 31, 2005 (in accordance with IFRS) F-85 GAGFAH GmbH Consolidated Income Statement for the Period From January 1 to December 31 2005 (in EUR k) No. Income from the leasing of investment property . . . . . . . . . . . . . . . Expenses for interest on hereditary building rights . . . . . . . . . . . . . Operating expenses for the generation of rental income . . . . . . . . F.1. 2005 2004 463,710 2,190 243,913 460,152 2,151 255,621 217,607 202,380 77,345 78,127 12,079 12,081 Loss from the sale of investment property . . . . . . . . . . . . . . . . . . . . −782 −2 Unrealized gains on measurement at fair value . . . . . . . . . . . . . . . . Unrealized losses from measurement at fair value. . . . . . . . . . . . . . 158,265 −97,810 108,797 −67,025 F.2. Profit from the lease of investment property . . . . . . . . . . . . . . . . . . Proceeds from the sale of investment property. . . . . . . . . . . . . . . . . Carrying amounts of the investment property sold . . . . . . . . . . . . . F.3. Profit from measurement at fair value . . . . . . . . . . . . . . . . . . . . . . . . F.4. 60,455 41,772 Profit from other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.5. F.6. F.7. F.8. F.9. 1,275 5,751 41,632 17,163 10,030 776 187 32,510 6,272 1,404 238,305 217,097 35,674 0 202,631 217,097 0 1 8,108 1 202,632 225,206 216,571 3,172 153,735 84,631 5,130 0 −164,502 145,705 Profit from operations before restructuring. . . . . . . . . . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.10. Profit from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit from associates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.11. Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . . . . . Interest expenses (current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income (current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expenses (refinancing) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F.12. F.12. Profit/loss from continued operations before taxes . . . . . . . . . . . . . Income taxes for continued operations . . . . . . . . . . . . . . . . . . . . . . . F.13. Profit/loss from continued operations . . . . . . . . . . . . . . . . . . . . . . . . . −35,585 −349 −128,917 146,054 Loss from discontinued operations before taxes. . . . . . . . . . . . . . . . F.14. −43,602 −7,875 Income taxes for discontinued operations . . . . . . . . . . . . . . . . . . . . . F.13. 352 193 Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . −43,954 −8,068 Net profit/loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −172,871 137,986 Attributable to: Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,588 1,263 Shareholders of the parent company . . . . . . . . . . . . . . . . . . . . . . . −176,459 136,723 The following notes are an integral part of these consolidated financial statements. F-86 GAGFAH GmbH Consolidated Balance Sheet as of December 31, 2005 (in EUR k) No. Assets Non-current assets Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments measured using the equity method . . . . . . . Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current assets Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances and cash on hand. . . . . . . . . . . . . . . . . . . . . . . . . . . E.1. E.2. E.3. E.4. E.6. E.7. E.9. E.5. E.6. E.7. E.8. E.10. Dec. 31, 2005 Dec. 31, 2004 2,133 4,165,601 61,974 0 1,791 26 0 89,830 620 4,003,906 113,124 62,847 1,749 560 2,203 54,125 4,321,355 4,239,134 101,605 54,034 12,300 3,716 137,780 168,131 19,116 9,878 4,793 152,059 309,435 353,977 4,630,790 4,593,111 52,000 11,471 734,772 798,243 42,743 52,000 0 2,763,469 2,815,469 40,391 840,986 2,855,860 87,830 7,756 3,375,582 2,789 134,574 86,027 2,865 1,067,191 2,530 140,656 3,608,531 1,299,269 5,673 42,158 268 39,505 88,420 5,249 5,287 1,446 306 350,130 75,523 5,290 Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,273 3,789,804 437,982 1,737,251 Total equity and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,630,790 4,593,111 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity and liabilities Equity Subscribed capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity attributable to the shareholders of the parent company . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Non-current liabilities Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E.11. E.11. E.11. E.11. E.12. E.12. E.14. E.14. E.14. E.12. E.12. E.13. E.14. E.14. E.14. The following notes are an integral part of these consolidated financial statements. F-87 GAGFAH GmbH Consolidated Cash Flow Statement for the Period From January 1 to December 31, 2005 (in EUR k) 2005 2004 Earnings before interest and taxes (adjusted for the loss from discontinued operations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in the value of investment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization, depreciation and write-downs on property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends from associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit/loss according to the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses on the disposal of property, plant and equipment . . . . . . . . . . . . . . . . . Gains on the disposal of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in deferred government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,030 −60,455 217,331 −41,772 4,588 2,000 0 −9,191 782 566 −6,123 3,172 −131,464 66,527 7,248 42,774 12,400 11,606 1,000 −8,108 −18 2 −6,013 −5,428 5,128 −74,589 52,194 −7,977 −6,422 −11,189 Cash flows from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,854 125,745 Cash received from the sale of investment property. . . . . . . . . . . . . . . . . . . . . . Cash paid for investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,153 −43,614 12,079 −59,516 84,393 78,308 paid for investments in property, plant and equipment . . . . . . . . . . . . . . received from disposals of property, plant and equipment. . . . . . . . . . . . received from the sale of associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . paid for the acquisition of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . −34,659 9,829 70,000 −23 −61,654 117 0 −62 Cash Cash Cash Cash Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,686 −109,036 Cash paid (−) to minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received from raising financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for the redemption of financial liabilities . . . . . . . . . . . . . . . . . . . . . . Interest paid and the cost of raising finance for restructuring. . . . . . . . . . . . . . −175 2,698,775 −2,694,432 −163,001 −172 1,230 −115,294 0 Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −158,833 −114,236 Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −29,293 −97,527 Cash and cash equivalents at the beginning of the year. . . . . . . . . . . . . . . . . . . Change in cash and cash equivalents due to changes in the consolidated group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,059 249,586 15,014 0 Bank balances and cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,780 152,059 The following notes are an integral part of these consolidated financial statements. F-88 GAGFAH GmbH Statement of Changes in Consolidated Equity According to IFRSs (in EUR k) 2005 Equity attributable to the shareholders of Minority the parent company interests Subscribed capital Capital reserve Revenue reserves Jan. 1, 2005 . . . . . . . . . . . . . . . . . . Net profit/loss . . . . . . . . . . . . . . . . Dividend payments. . . . . . . . . . . . Contributions in kind from the shareholders. . . . . . . . . . . . . . . . Waiver of receivables . . . . . . . . . . Change in shareholdings and the consolidated group. . . . . . . 52,000 0 0 0 0 0 0 842 842 -1,061 −219 Dec. 31, 2005 . . . . . . . . . . . . . . . . . 52,000 11,471 734,772 798,243 42,743 840,986 2,763,469 −176,459 0 2,815,469 −176,459 0 0 0 −1,853,080 0 11,471 0 −1,853,080 11,471 0 Total equity 40,391 3,588 −175 2,855,860 −172,871 −175 0 −1,853,080 0 11,471 GAGFAH GmbH Statement of Changes in Consolidated Equity According to IFRSs (in EUR k) Subscribed Capital capital reserve 2004 Revenue reserves Equity attributable to the shareholders of Minority the parent company interests Total equity Jan. 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . 52,000 0 2,626,991 2,678,991 39,430 2,718,421 Net profit . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payments . . . . . . . . . . . . . . . . Contributions in kind by the shareholders . . . . . . . . . . . . . . . . . . . . Waiver of receivables. . . . . . . . . . . . . . . Change in shareholdings and the consolidated group . . . . . . . . . . . . . . . 0 0 0 0 136,723 0 136,723 0 1,263 −172 137,986 −172 0 0 0 0 0 0 0 0 0 0 0 0 0 0 −245 −245 −130 −375 Dec. 31, 2004 . . . . . . . . . . . . . . . . . . . . . . 52,000 0 2,763,469 2,815,469 40,391 2,855,860 The following notes are an integral part of these consolidated financial statements. F-89 NOTES GAGFAH GmbH, Essen IFRS Consolidated Financial Statements for Fiscal Year 2005 F-90 CONTENTS A. B. C. D. E. F. GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CONSOLIDATED GROUP AND CONSOLIDATION METHODS. . . . . . . . . . . . . . . . . . . 1. CONSOLIDATED GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. CONSOLIDATION PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACCOUNTING POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. INTANGIBLE ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. LEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. INVESTMENT PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. BORROWING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. IMPAIRMENT OF ITEMS OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. FINANCIAL INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. INVENTORIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. PROVISIONS FOR PENSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. DEFERRED TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. INCOME AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. GOVERNMENT GRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. CASH FLOW STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. ESTIMATES AND THE EXERCISE OF JUDGMENT BY MANAGEMENT. . . . SEGMENT REPORTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOTES TO THE CONSOLIDATED BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. INTANGIBLE ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. INVESTMENT PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. EQUITY INVESTMENTS MEASURED USING THE EQUITY METHOD . . . . . 5. INVENTORIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. CURRENT TAX CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. DEFERRED TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. BANK BALANCES AND CASH ON HAND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. LIABILITIES FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOTES TO THE CONSOLIDATED INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . 1. INCOME FROM THE LEASING OF INVESTMENT PROPERTY . . . . . . . . . . . . . 2. OPERATING EXPENSES FOR THE GENERATION OF RENTAL INCOME . . 3. INCOME FROM THE SALE OF INVESTMENT PROPERTY . . . . . . . . . . . . . . . . . 4. RESULT FROM FAIR VALUE MEASUREMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. RESULT FROM OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. SELLING EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. OTHER OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-91 F-93 F-95 F-95 F-95 F-97 F-97 F-97 F-97 F-98 F-99 F-99 F-100 F-102 F-102 F-102 F-102 F-103 F-103 F-104 F-104 F-105 F-109 F-109 F-109 F-110 F-110 F-111 F-111 F-112 F-112 F-112 F-113 F-113 F-114 F-118 F-118 F-121 F-121 F-121 F-121 F-121 F-122 F-122 F-122 F-123 G. H. 9. OTHER OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. RESTRUCTURING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. RESULT FROM ASSOCIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. INTEREST EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. RESULT FROM DISCONTINUED OPERATIONS BEFORE TAXES . . . . . . . . . . NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT . . . . . . . . . . . . . . . . . . . OTHER NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. FINANCIAL RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. CONTINGENT LIABILITIES AND FINANCIAL OBLIGATIONS . . . . . . . . . . . . . 3. INFORMATION ON THE ADOPTION OF ACCOUNTING UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS) . . . . . . 4. NUMBER OF EMPLOYEES AND PERSONNEL EXPENSES . . . . . . . . . . . . . . . . . 5. RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. MANAGEMENT AND SUPERVISORY BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. EVENTS AFTER THE BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. DECLARATION OF MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) LIST OF SHAREHOLDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-92 F-123 F-123 F-123 F-123 F-124 F-124 F-126 F-127 F-127 F-127 F-128 F-130 F-130 F-131 F-133 F-133 F-135 F-135 A. General Information The Company GAGFAH Gesellschaft mit beschränkter Haftung (hereinafter also referred to as ‘‘GAGFAH’’ or ‘‘GAGFAH GmbH’’) was entered in the commercial register of Essen on December 10, 2004. It was formed through the reorganization of GAGFAH Gemeinnützige Aktien-Gesellschaft für Angestellten-Heimstätten (hereinafter also referred to as ‘‘GAGFAH AG’’), Essen-Berlin, Germany, after the Federal Insurance Office for Salaried Employees [‘‘Bundesversicherungsanstalt für Angestellte’’: BVA] fulfilled its legal obligation to sell its shares in GAGFAH AG. The reorganization became legally effective on December 16, 2004 when the second registered office of GAGFAH GmbH in Berlin was deregistered. GAGFAH GmbH is registered in the Federal Republic of Germany as a legal entity with its registered office at Huyssenallee 36/38, Essen. GAGFAH GmbH is the parent company of the GAGFAH Group and is owned by GAG ACQ. Ireland Limited, Clonee, County Meath, Ireland (hereinafter also referred to as ‘‘GAGACQ’’) and UC ACQ. Ireland Limited, Clonee, County Meath, Ireland (hereinafter also referred to as ‘‘UCACQ’’), two of the acquisition companies managed by Fortress Investment Group LLC. GAGACQ holds 82.48% and UCACQ 17.52% of the shares in GAGFAH GmbH. The shares of the two companies in the capital stock of GAGFAH GmbH amount to EUR 42,891,900 and EUR 9,108,000, respectively. Deutsche Rentenversicherung Bund [German Pension Insurance Federal Institution] (formerly ‘‘Bundesversicherungsanstalt für Angestellter’’: Federal Insurance Office for Salaried Employees) (hereinafter referred to as BfA) retains a share in the amount of EUR 100. The acquisition companies have undertaken to hold their shares in GAGFAH for a minimum of ten years and not to sell without the approval of the BfA. The core business of GAGFAH including all its subsidiaries (hereinafter also referred to as the ‘‘GAGFAH Group’’) is the management of its own real estate and third-party real estate. As of the balance sheet date, the Group managed a total of 97,433 apartments (prior year: 100,066) and 27,939 other units (prior year: 27,540). It also operates in the area of real estate sales. Consolidated Financial Statements GAGFAH exercised the option pursuant to Sec. 315a (3) HGB [‘‘Handelsgesetzbuch’’: German Commercial Code] to voluntarily prepare consolidated financial statements in accordance with EU Regulation No. 1606/2002 of the European Parliament and Council dated July 19, 2002 on the application of international accounting standards. Accordingly, for the first time, GAGFAH has prepared its consolidated financial statements as of December 31, 2005 in accordance with International Financial Reporting Standards (IFRSs) — formerly International Accounting Standards (IAS) — and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) — formerly Standing Interpretations Committee (SIC). The accounting complies with the International Financial Reporting Standards as adopted by the EU. All IFRSs that must by applied for fiscal year 2005 were taken into account. In preparing consolidated financial statements in accordance with IFRSs for the first time, the stipulations of IFRS 1 on the first-time preparation of consolidated financial statements in accordance with IFRSs were given particular consideration. Moreover, the additional disclosure requirements of Sec. 315a (1) in conjunction with (3) HGB were observed. The fiscal year of GAGFAH and its subsidiaries included in consolidation is the calendar year. With the exception of investment property, land and buildings, derivative financial instruments and available-for-sale financial investments, which are measured at fair value, the consolidated financial statements have been prepared using the acquisition cost method. The carrying amounts of recognized assets and liabilities that are hedged are adjusted to record changes in the fair values attributable to the risks that are being hedged. The consolidated financial statements have been prepared in euros (EUR). Unless stated otherwise, all figures are rounded to the nearest thousand of euros (EUR k). The prior-year financial statements were prepared using the same principles as the financial statements as of December 31, 2005. In line with the recommendations of the European Public Real Estate Association (EPRA), the income statement was classified according to the cost of sales method. F-93 New Accounting Standards Since the end of 2003, the IASB has made various amendments to the existing IFRSs and published new IFRSs and IFRIC interpretations which, unless stated otherwise below, are mandatory for all fiscal years beginning on or after January 1, 2005. The amendments and publications relevant to these consolidated financial statements are described below. On December 18, 2003, the IASB published revised accounting standards in the scope of its Improvement Project. These are the 13 standards IAS 1, IAS 2, IAS 8, IAS 10, IAS 16, IAS 17, IAS 21, IAS 24, IAS 27, IAS 28, IAS 31, IAS 33 and IAS 40. The IASB published the accounting standard IFRS 3 and revised the standards IAS 36 and IAS 38 in connection with Phase 1 of the Business Combinations Project. In addition, the accounting standards IAS 32 and IAS 39 were revised. As first-time adopter of IFRSs, GAGFAH applied the aforementioned standards from January 1, 2004. On March 31, 2004 the IASB published IFRS 3, ‘‘Business Combinations’’, and the revised standards IAS 36 and IAS 38. In derogation of the basic principle of retrospective application of the IFRSs applicable as of the reporting date, IFRS 1, ‘‘First-Time Adoption of International Financial Reporting Standards’’, sets forth the option of exempting business combinations that were reported in accordance with other accounting standards prior to the transition date from application of IFRS 3, ‘‘Business Combinations’’. GAGFAH utilized this exemption option and retained the accounting methods used for business combinations prior to the transition date January 1, 2004. The group applies IFRS 3 in conjunction with the revised standards IAS 36 and IAS 38 for business combinations after January 1, 2004. Goodwill and intangible assets with indefinite useful lives are tested for impairment. On March 31, 2005, the IASB published the standard IFRS 5, ‘‘Non-Current Assets Held for Sale and Discontinued Operations’’. The Company applied this standard from January 1, 2004 (IFRS opening balance sheet). Apart from the aforementioned IFRSs whose application is mandatory for fiscal year 2005, the IASB has also published other IFRSs and IFRICs which have already received EU endorsement but which will only become mandatory at a later date. Only those standards that may be of relevance to the Group are explained below. Voluntary early application of the relevant standards is expressly permitted and recommended. GAGFAH did not apply any of the relevant standards and interpretations early. On December 16, 2004, the IASB announced an amendment to IAS 19, ‘‘Employee Benefits’’, with regard to the recording of gains and losses from changes in actuarial assumptions from defined benefit pension obligations. In addition to the existing immediate recognition as income or the corridor method, the amendment allows the full recognition of unrealized actuarial gains and losses in equity with no effect on income. Under this method, the pension obligation is disclosed at its current present value. Any deferred taxes arising are offset directly against equity. The amendment is compulsory for fiscal years beginning on or after January 1, 2007; earlier adoption is encouraged. GAGFAH did not adopt the amendment earlier. On August 18, 2005, the IASB published the standard IFRS 7, ‘‘Financial Instruments: Disclosures’’. This standard supersedes the existing IAS 30 and incorporates all provisions regarding disclosures in the notes contained in IAS 32. In this connection, the capital disclosure requirements in IAS 1 were amended or supplemented. This standard has completely restructured the disclosure requirements for financial instruments. Disclosures on the objectives, methods, risks, security and management processes are now required. Adoption is compulsory for fiscal years beginning on or after January 1, 2007; earlier adoption is encouraged. The new provisions of IFRS 7 do not affect measurement at GAGFAH, but detailed disclosures in the notes and detailed presentations are required. GAGFAH did not adopt the amendments earlier. Application of the newly published IFRS 6, IFRS 7, IFRIC 4 and IFRIC 5, which had been endorsed by the EU as of December 31, 2005 and which had not been applied voluntarily in advance by the Company or which are expected to be irrelevant, is not expected to have any significant effect on the net assets, financial position and results of operations. F-94 B. Consolidated Group and Consolidation Methods 1. Consolidated Group 15 companies were included in the consolidated financial statements of GAGFAH on the basis of full consolidation as GAGFAH holds the majority of shares, either directly or indirectly, in these companies. A further 20 fractional ownership funds (‘‘HB-Fonds’’) were included on the basis of full consolidation. The investment in an associate was measured using the equity method. The composition of the GAGFAH group is presented in the list of shareholdings attached as Exhibit (1). Company Formations, Acquisitions, Sales and Mergers The following companies were formed in fiscal year 2005 and included in the consolidated financial statements for the first time: • GAGFAH I Invest GmbH & Co. KG (hereinafter also referred to as ‘‘GAGFAH I’’) • GAGFAH A Asset GmbH & Co. KG (hereinafter also referred to as ‘‘GAGFAH A’’) • GAGFAH B Beteiligungs GmbH (hereinafter also referred to as ‘‘GAGFAH B’’) In addition, 44% of the shares in GbR Stadtwaldplatz, Essen, Germany, were acquired by GAGFAH M Immobilien-Management GmbH (hereinafter also referred to as ‘‘GAGFAH M’’) and 6% by Neues Schweizer Viertel Betriebs + Service GmbH & Co. KG (hereinafter also referred to as ‘‘SVB’’). With the 50% share in GbR Stadtwaldplatz which GAGFAH M already held, this company is now wholly owned by the GAGFAH Group. The following companies were sold in 2005: GAGFAH GmbH sold its 50% investment in HEIMAG AG, Munich, Germany, which was measured using the equity method, for a purchase price of EUR 70,000k to GEWOFAG Gemeinnützige Wohnungsfürsorge AG, Munich, Germany, by share sale agreement dated December 28, 2005. The shares were transferred with economic effect as of December 30, 2005. The gain on the sale, which is disclosed under ‘‘other operating income’’, amounts to EUR 9,153k. The shares were previously disclosed in segment reporting in the area of real estate management. The acquisition companies GAGACQ GmbH, Frankfurt am Main, Germany, and UCACQ GmbH, Frankfurt am Main, Germany, merged with GAGFAH GmbH on January 1, 2005. In terms of company structure, these companies were situated between the Irish acquisition companies and GAGFAH GmbH as an acquisition vehicle. The merger was not a business combination within the meaning of IFRS 3 since the prerequisite of the bringing together of separate businesses was not met and the transaction was performed between businesses under common control. In accounting for the transaction, the separate entity approach was adopted as the IFRSs do not contain any specific regulations for such a case and the downstream merger was treated as a contribution in kind to the Company by the shareholders. The contribution in kind was made at the carrying amount. No profit was capitalized. The difference between the assets and liabilities was recognized directly under equity in the revenue reserves. Furthermore, in fiscal year 2005, the GAGFAH Group resolved to discontinue the real estate construction/development business area, including the property development business, project and land development. This business area has since been classified as a discontinued operation within the meaning of IFRS 5.32. The Company is currently negotiating the sale of its shares in GSW Wohnbau GmbH, Freiburg, Germany (hereinafter also referred to as ‘‘GSW’’). Notes on the net loss from discontinued operations are provided in a separate section. 2. Consolidation Principles 2.1. Subsidiaries In addition to GAGFAH, all major subsidiaries where control pursuant to IAS 27.13 exists are fully consolidated. Control exists when GAGFAH holds the majority of voting rights either directly or indirectly, may exercise control over the financial and business policies of the Company, or is entitled to appoint the majority of supervisory board members. F-95 Shares in fractional ownership real estate funds (‘‘HB-Fonds’’) are included in the consolidated financial statements in accordance with IAS 27 in conjunction with SIC 12. Although GAGFAH as owner of the fund shares through its subsidiary GAGFAH I does not have a majority shareholding in all of the funds in all cases, GAGFAH has economic control of all the funds. In its function as trustee, the subsidiary GAGFAH M acts as borrower vis-à-vis the lenders and assumes personal liability in relation to the latter. The financial statements of the individual subsidiaries are included in the consolidated financial statements in accordance with IFRSs using the uniform accounting and measurement methods stipulated by GAGFAH. All intercompany receivables and liabilities (and provisions), revenues, expenses and income, as well as gains and losses are eliminated. Any significant intercompany profits must be eliminated pursuant to IAS 27.25. Subsidiaries are fully consolidated from the date of acquisition, i.e. the date on which the Group obtains control. Inclusion in the consolidated financial statements ends as soon as the parent ceases to have control. An adjustment item for minority interests is set up for shares in fully consolidated subsidiaries not held by the parent company, which corresponds to the minority interest in the remeasured net assets of the subsidiary (full remeasurement method). In accordance with IAS 27.33, the adjustment item is disclosed under consolidated equity, separate from the equity of the parent company, and is affected by all consolidation entries recognized in profit or loss as a rule. Minority interests in consolidated net profit or loss are also recorded separately in the consolidated income statement in accordance with IAS 27.33. 2.2. Associates The subsidiaries over which GAGFAH has a significant influence in accordance with IAS 28.6, but which it neither controls nor jointly controls, are disclosed as associates. The Company is considered to have a significant influence when it holds at least 20% of the voting rights. Pursuant to IAS 28.13, shares in associates are accounted for using the equity method, i.e. at the Group’s share in the net assets of the relevant associate, and increased or decreased in accordance with the Group’s share in the associate’s net profit or loss. In fiscal year 2004, only the Company’s investment in HEIMAG was measured as an associate using the equity method. For this purpose, the associate prepared financial statements as of the date of the consolidated financial statements in accordance with IFRSs. Recognition and measurement follow the IFRS accounting principles of GAGFAH. The investment in HEIMAG was deconsolidated in fiscal year 2005 as it was sold. F-96 C. Accounting Policies 1. Intangible Assets Acquired Intangible Assets Acquired intangible assets with a finite useful life are initially measured at cost and, if they are depreciable, amortized straight line over their expected useful lives in accordance with IAS 38.97. The software licenses recorded under intangible assets are amortized over a useful life of three years. Goodwill Goodwill arising upon capital consolidation represents the excess of the cost of a business acquisition over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary on the acquisition date. Pursuant to IFRS 3.51, goodwill is recorded as an asset on the date of acquisition. In accordance with IFRS 3.55, it is not amortized, but subject to an annual impairment test pursuant to IAS 36. Following initial recognition, goodwill is measured in accordance with IFRS 3.54 at original cost less any accumulated impairment losses. For the purpose of impairment testing, the acquired goodwill is allocated to each cash-generating unit expected to benefit from the synergies of the combination as of the acquisition date. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill linked to the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. When a subsidiary is disposed of, the allocable amount of goodwill is included in determining the gain or loss on disposal. 2. Leases Leases are assessed in accordance with their substance. For finance leases, a group company is the lessee provided it alone has the risks and rewards incidental to ownership of the leased item. The leased item is capitalized at the inception of the lease with the lower of the fair or present value of the minimum lease payments. The lease payments are divided into interest and principal payments; the lease liability thus bears interest on an ongoing basis. Finance costs are recorded directly as expenses. If it is not sufficiently certain that the ownership has been transferred, the leased items are amortized/depreciated over their remaining useful lives or over the remaining term of the lease using the shorter of the two periods. Lease payments from operating leases are recorded as expenses straight line over the term of the agreement. The rental agreements concluded by the Group as part of its operating activities do not represent leases within the meaning of IAS 17 since the rental agreements were mostly concluded for an indefinite period rather than for a fixed term. The tenants have a unilateral right to termination giving the statutory notice period. If a group company acts as lessor but all risks and rewards incidental to ownership of the leased property remain with the Group, the lease is considered an operating lease. Initial direct costs are capitalized and recorded as an expense over the term of the lease in accordance with the rent received. 3. Investment Property Investment property is defined as property held in the long term to earn rentals and/or for capital appreciation. These properties generate cash flows that are incurred largely independently of the other assets held by the Group. Undeveloped land held for capital appreciation is also included in this item. F-97 This balance sheet item does not include owner-occupied real estate (e.g. administrative buildings) or property held for short-term sale in the scope of ordinary activities. Where buildings are both owner-occupied and leased to third parties, the relevant parts of the buildings are accounted for separately in accordance with IAS 40.10 only if the leased part of the property can be disposed of separately or leased separately in the scope of a finance lease transaction. Investment property is measured at cost plus any incidental purchase costs or transaction costs at the time of addition in accordance with IAS 40.20. Investment properties are stated at fair value upon subsequent measurement. The fair value reflects the market conditions as of the balance sheet date. All investment property is measured by GAGFAH itself at the end of each fiscal year. In its calculation of the fair value as of August 31, 2005 in compliance with the International Valuation Standards (IVS) set out by the International Valuation Standards Committee (IVSC), which did not take account of any debt, CB Richard Ellis Deutschland GmbH subjected the results of the group measurement of the investment property portfolio to an external examination and confirmed these results. GAGFAH’s valuation module uses market-oriented or typified (non-objective, non enterprise-specific) figures where relevant (e.g. capitalization rate, administrative expenses, segment-specific rates of cost increase). The cash flows are calculated over a detailed planning period of ten years. In the eleventh year, a residual value is included in the calculation. The net cash flows are calculated from the realizable rent less the risk relating to loss of rent, vacancy expenses, non-allocable operating expenses and administrative and maintenance costs. Depending on the market rent and the individual adjustment options, the realizable rent is adjusted to the forecast market rent, based on the current rent level. The directly allocable management costs are calculated depending on how the property is classified in central portfolio management. With its central portfolio management system, GAGFAH is pursuing its objective of increasing the value of and return on its entire portfolio in the long term. Decisions relating to investments and divestments as well as larger-scale modernization measures within the real estate portfolio are therefore taken on the basis of the portfolio management system. The cash flows are discounted at an interest rate adjusted to the specific property, which takes account of additional uncertainties in the cash flows. Administrative expenses are calculated at a flat rate of EUR 240.00 per m_ of living or usable space. A rate of price inflation of 1.4% or 1.2% per annum was applied to all cost figures. Based on the current realizable rent, rental income is adjusted to the market rent every three years observing the statutory restrictions. Depending on the macro location and the portfolio allocation of the property being valued, a 0.9% increase or −0.7% increase per annum in the market rent is assumed. Any gains or losses on a change in the fair value of the investment property are recognized in profit or loss in the period in which they arise. Investment properties are derecognized when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses from the discontinuation or disposal of the investment property are recognized in the year in which it was discontinued or disposed of. Properties are allocated to the investment property portfolio if there is a change in their usage evidenced by the end of owner occupation, the beginning of a lease agreement with another party or the end of construction or development. Properties are transferred from the investment property portfolio if there is a change in their usage evidenced by the beginning of owner occupation or the beginning of development with a view to resale. 4. Property, Plant and Equipment The property, plant and equipment of the GAGFAH Group is accounted for at cost less accumulated depreciation and impairment losses in accordance with the cost method of IAS 16.30. F-98 If properties are owner-occupied as part of operating activities, these are disclosed under the balance sheet item ‘‘Property, plant and equipment’’. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognized. The residual values of the items of property, plant and equipment, the useful lives and depreciation methods are reviewed at the end of each fiscal year and adjusted as necessary. In the case of larger renovations, the relevant components are recognized as replacements if the recognition criteria are met. Land and buildings held for the provision of services or for administrative purposes are recognized in the balance sheet at amortized cost. Cost includes consideration paid for third-party services and, for qualifying assets, borrowing costs. Assets under construction for lease or administrative purposes or for non-specified purposes are recognized at cost less any impairment losses charged. Cost includes consideration paid for third-party services and, for qualifying assets, borrowing costs. Furniture and fixtures as well as technical equipment and machines are disclosed at cost less accumulated depreciation and any impairment losses recognized. Systematic amortization/depreciation of property, plant and equipment is generally based on the following useful lives: Useful life Commercial and other buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technical equipment and machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 years 20 to 25 years 3 to 13 years The residual carrying amounts and useful lives are reviewed and adjusted if required at every balance sheet date. Impairment losses are recognized pursuant to IAS 16.63 in conjunction with IAS 36.59 if the carrying amount is higher than the value in use or the net selling price. If the reasons for impairment cease to apply, the impairment is reversed in accordance with IAS 36.110. 5. Borrowing Costs Borrowing costs are expensed as incurred in accordance with IAS 23.10. If borrowing costs cannot be allocated directly to the acquisition, construction or production of assets, they are capitalized as part of cost in accordance with the capitalization option of IAS 23.11 (allowed alternative treatment). A further prerequisite for the capitalization of borrowing costs is that the amount can be measured reliably and the capitalized borrowing costs are matched by a probable future benefit. As soon as costs including borrowing costs arise for the asset and preparations commence for the production of the asset, the borrowing costs are capitalized as part of cost in accordance with IAS 23.20. Pursuant to IAS 23.25, capitalization ceases once all required actions have been performed in order to render the asset usable or saleable. For construction or renovation projects, this is the completion of construction date. If the production process is interrupted for a long period, capitalization of the borrowing costs is suspended for this period in accordance with IAS 23.23. In the normal course of business, (mortgage) loans are raised on a regular basis specifically for the production of an asset. Thus, only the interest actually incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings is capitalized. The capitalized borrowing costs correspond to the specific borrowing costs of the relevant asset. 6. Impairment of Items of Property, Plant and Equipment and Intangible Assets At every balance sheet date, the GAGFAH Group reviews the carrying amounts of its items of property, plant and equipment and intangible assets in order to ascertain whether there are any F-99 indications of impairment of these assets. If there are indications, the recoverable amount of the asset (or cash-generating unit) is estimated. The recoverable amount is the higher of the fair value less costs to sell and the value in use. If the estimated recoverable amount of an asset (or the cash-generating unit) is less that the carrying amount, the latter is reduced to the recoverable amount and any impairment loss is recognized immediately in profit or loss. If the impairment is subsequently reversed, the carrying amount of the asset (or cash-generating unit) is increased to the newly estimated recoverable value. This increased amount may not exceed the carrying amount that would arise after taking account of amortization/depreciation if no impairment had been recognized in the prior periods. The amount of any reversal must be included immediately in net profit or loss for the period. Once a reversal has been made, the amortization/depreciation charge must be adjusted in future reporting periods in order to allocate the adjusted carrying amount of the asset, less a residual carrying amount, systematically over its remaining useful life. 7. Financial Instruments A financial instrument is any contract that gives rise to both a financial asset for one entity and a financial liability or equity instrument for another entity. Gains or losses on the disposal of financial instruments are disclosed as other operating income or expenses. Impairment losses are disclosed as other operating expenses. Other results from financial instruments, mainly interest, are disclosed in the financial result. a) Primary Financial Assets IAS 39.9 divides financial assets into four categories for the purpose of subsequent measurement: • Financial assets and financial liabilities measured at fair value through profit or loss • Held-to-maturity financial instruments • Loans granted and receivables • Available-for-sale financial assets The financial assets are classified in accordance with the respective purpose for which they were acquired. Within the GAGFAH Group, primary financial assets chiefly come under the category ‘‘loans granted and receivables’’. If securities are purchased within the Group, these are treated as ‘‘available-for-sale financial assets’’. Shares in subsidiaries and equity investments are also classified as ‘‘available-for-sale financial assets’’. ‘‘Loans granted and receivables’’ and ‘‘available-for-sale financial assets’’ are initially measured at fair value plus transaction costs directly allocable to the acquisition of the financial asset in accordance with IAS 39.43. Transaction costs mainly include commissions, broker fees or notary fees. Assets allocated to the category ‘‘available-for-sale financial assets’’ are measured at fair value with gains and losses being carried in a separate equity item. The loss or gain accumulated in equity is recognized in profit or loss when the financial investment is derecognized or impaired. The fair value of financial investments traded on organized financial markets is determined through reference to the market price on the balance sheet date. If there is no active market, measurement methods that rely on recent market transactions on arm’s length terms are used. If no fair value can be reliably measured, the asset is subsequently measured at amortized cost. Regular way purchases or sales of financial assets are accounted for as of the settlement date, and thus as of the date the asset is delivered. GAGFAH determines on every balance sheet date whether there are any objective indications of the impairment of a financial asset or group of financial assets. Financial assets are derecognized when the contractual rights or obligations underlying the financial instrument no longer exist (elimination) or have been transferred to a third party (transfer). F-100 Primary and acquired loans and receivables with fixed or determinable payments that are not traded on an active market are categorized as loans granted and receivables. In this category, the GAGFAH Group has trade receivables and other long-term loans in particular. After initial recognition, loans granted and receivables are measured at amortized cost using the effective interest method in accordance with IAS 39.46 (a), provided the fair value is not lower. Low-interest-bearing receivables due in more than one year are recognized at the discounted amount taking account of appropriate interest. If there are objective indications of impairment, the asset is tested for impairment in accordance with IAS 39.58 in conjunction with IAS 39.63 et seq. If impairment is established, the expected cash flows are estimated and capitalized with the interest rate used for first-time recognition. If a loss arises as the difference as compared with the carrying amount, this amount is recorded in profit or loss. For rent receivables, receivables from current rental agreements and rental agreements which are no longer in place are grouped together in order to test them jointly for impairment and specific bad debt allowances are recognized on the basis of past experience. For other loans and receivables, appropriate allowances are charged on an item-by-item basis (if required) for uncollectible amounts. Subsequent reversals in accordance with IAS 39.65 are recognized in profit and loss. For current trade receivables and other current receivables, the Company assumes that the carrying amount reflects a reasonable approximation of fair value. The fair value of the non-current loans granted and receivables is determined using a mathematical method by discounting the future cash flows with the market interest rate, as there is no active market for these assets. b) Primary Financial Liabilities The primary financial liabilities within the GAGFAH Group comprise in particular financial liabilities, trade payables and rent liabilities. Financial liabilities are initially recognized at fair value plus transaction costs that are directly allocable to the raising of the financial liability in accordance with IAS 39.43. Following initial recognition, the financial liabilities are measured at amortized cost using the effective interest method (IAS 39.47). The fair value of the financial liabilities at the time of addition normally corresponds to the collectible amount. Liabilities that bear no or low interest, for which the lenders receive occupancy rights for apartments at discounted rent in return, are recognized at amortized cost using the effective interest method. The liabilities are initially measured at fair value on the date the government grant was granted using the market level of interest at that time. The difference between the collected amount and the fair value is disclosed separately as a deferred item and allocated in subsequent years on a proportionate basis over the term of the loan as ‘‘revenues from housing management’’; by contrast, the interest expense is recorded at amortized cost using the effective interest method. Financial liabilities — or parts thereof — are derecognized when the liability is extinguished, i.e. when the obligations stipulated in the agreement are discharged, canceled or expire. Gains and losses from financial liabilities are recorded in profit or loss in accordance with IAS 39.56 when the financial liability is derecognized. The amortization of transaction costs is also recorded in the income statement. For current trade payables and other current liabilities, the Company assumes that the carrying amount reflects a reasonable approximation of fair value. The fair value of the non-current financial liabilities is determined using a mathematical method by discounting the future cash flows with the market interest rate, as there is no active market for these liabilities. c) Hedging Agreements Interest rate swaps were used in fiscal year 2005 for the first time within the GAGFAH Group for a short period to hedge interest rate risks. The hedges were initially measured at fair value with F-101 reference to the market values of similar financial instruments. In subsequent measurement, gains or losses from changes in the fair value were immediately recognized in profit or loss. Due to the short term of the hedge, no use was made of the hedge accounting option. Upon termination of the hedge, all costs in connection with the interest rate swap (swap break costs) were recognized in profit or loss. 8. Inventories ‘‘Inventories’’ include land and buildings held for sale as well as other inventories. Other inventories are initially measured at cost. Cost comprises all costs directly allocable to the production process and an appropriate share of overheads. Financing costs are allocated to production costs if they are directly linked to financing within the meaning of IAS 23.11. The inventories are measured at the lower of cost or net realizable value as of the balance sheet date in accordance with IAS 2.9. Net realizable value is the estimated selling price less all estimated costs of completion and marketing and selling expenses. If inventories are sold, their carrying value is recognized as an expense in the year in which the related revenue is recognized in accordance with IAS 2.34. Since the discontinuation of the property construction/development business, the revenues have been disclosed in the result from discontinued operations in the income statement. 9. Provisions for Pensions GAGFAH offers its employees defined retirement benefit plans. The retirement benefit plans are described in detail under ‘‘Other Notes’’ in the section ‘‘Employee Benefits/Retirement Benefit Plans’’. The provisions for pensions from defined benefit plans are calculated using the projected unit credit method stipulated under IAS 19.64 with an actuarial valuation performed at each balance sheet date. This method takes into account both the pensions known and expectancies acquired as of the balance sheet date and the increases in salaries and pensions to be expected in the future. Actuarial gains and losses are incurred if, in the course of the fiscal year, the actual development deviates from assumptions made at the beginning of the fiscal year or if the parameters determined at the end of the fiscal year are different to those determined at the beginning of the fiscal year. The total (accumulated) actuarial gains and losses existing at the end of the fiscal year develop from the gains or losses existing at the beginning of the fiscal year less amortization plus additions in the fiscal year. In accordance with IAS 19.92, actuarial gains and losses accumulated as of the balance sheet date are first recognized when the net gains and losses at the end of the prior reporting period exceed the greater of 10% of the present value of the defined benefit obligation at that date (before deducting plan assets) and 10% of the fair value of any plan assets at that date. Actuarial gains and losses exceeding the 10% corridor of the obligation are, where appropriate, spread over the expected average residual number of years of service for each employee under the defined benefit plan. 10. Other Provisions In accordance with IAS 37.14, other provisions are recognized if a legal or constructive obligation in respect of a third party exists that results from a past event and it is likely that the Company will be called on to meet this obligation and the anticipated amount of the provision can be reliably estimated. In accordance with IAS 37.36, the provisions are measured at the amount of the best estimate of the expenditure required to meet the present obligation as of the balance sheet date. Provisions expected to be utilized after more than one year are discounted in accordance with IAS 37.45 and recognized in the amount of the present value of the expected expenditure. 11. Deferred Taxes Deferred taxes are recognized using the liability method for all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. F-102 Deferred income tax assets are recognized for all deductible temporary differences, the carryforward of unused tax assets and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilized. The following exceptions were taken into account: • Deferred income tax assets which arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss, may not be recognized. • In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets may only be recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and sufficient taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available against which all or part of the deferred tax asset can be utilized. Deferred tax assets and liabilities are measured using the tax rates expected to apply to the period when the asset is realized or the liability is settled based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset against each other when the Group has an enforceable right to set off current tax assets against its tax liabilities and these assets and liabilities relate to income taxes levied by the same tax authority for the same taxable entity. 12. Income and Expenses Income and expenses of the fiscal year are accounted for regardless of the date of payment. Revenues from leasing and sales are recognized when the owed service has been rendered, or the risks of ownership have been transferred and the amount of expected consideration can be reliably estimated. The rental income equal to the target rent less sales deductions is recognized monthly on rendering of the service. The prepayments for operating expenses factored into the rent are recognized as revenues in the amount in which allocable operating expenses were incurred in the fiscal year. Any remaining difference is either disclosed as a rent receivable or liability. Revenue from the sale of land is recognized when: • the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; • no rights of disposal or control over the sold items remain with the GAGFAH Group; • the amount of revenue can be measured reliably; • it is sufficiently probable that the fee from the sale will flow to the entity; • the costs incurred or to be incurred in respect of the transaction can be measured reliably. Management fees are only recognized as revenues from third-party real estate management if the agreed management services (including chargeable part-services) have been rendered. Other revenues are recognized when the owed service has been rendered, and the risks of ownership have been transferred and the amount of expected consideration can be measured reliably. 13. Government Grants Pursuant to IAS 20.12, government grants should be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. Companies in the GAGFAH Group receive government grants in the form of construction cost allowances, redemption subsidies, redemption loans and low-interest loans. Construction cost allowances are, where they relate to construction work, deducted from cost and released over the useful life of the subsidized asset. If the allowances do not relate to capitalizable maintenance work, they are taken to income immediately. F-103 The redemption subsidies, which are granted in the form of rent, interest and other redemption subsidies, are recognized as income. They are disclosed under income from the leasing of investment property. With the exception of the loans secured by charges on property, for which a modified waiver of receivables was issued, the redemption loans have been recognized as liabilities. The low-interest loans relate to government assistance. They are recognized at present value on the basis of the market interest rate prevailing at the date of issue. The difference is posted to a deferred item which is released to income from the leasing of investment property on a straight-line basis over the remaining term. 14. Cash Flow Statement The consolidated cash flow statement is prepared in accordance with the provisions of IAS 7. It is split into the three parts: cash flows from operating, investing and financing activities. For mixed transactions, cash flows are allocated to more than one area as appropriate. Cash flows from operating activities are disclosed using the indirect method, under which the net profit or loss for the period is translated into cash flow in a reconciliation. The cash flows from investing and financing activities are calculated on the basis of payments. Cash and cash equivalents are defined as the balance of cash and cash equivalents and all securities with a residual term (at the acquisition date) of less than three months, less the liabilities from overdrafts disclosed under current financial liabilities which are part of the group-wide cash management system. Financial liabilities are all liabilities to banks and other lenders. Interest received and paid is disclosed separately in cash flows from operating activities. In fiscal year 2005, GAGFAH incurred refinancing costs for the repayment of existing financial liabilities through a global loan of EUR 163,001k. These refinancing costs comprising interest expenses of EUR 153,735k and transaction costs of EUR 9,266k are disclosed under cash flows from financing activities due to a lack of operating connection. Tax payments are disclosed separately in full under operating activities as they cannot be allocated to the individual business areas. 15. Estimates and the Exercise of Judgment by Management a) The Exercise of Judgment Management exercises its judgment in recognizing and measuring items; this can have a significant influence on the amounts disclosed in the financial statements. Major estimates requiring the exercise of judgment include the recognition of provisions, estimating useful lives of property, plant and equipment, or assessing the recoverability of trade receivables and deferred tax assets or the adequate valuation of inventories. b) Uncertainties Relating to Estimates The preparation of the consolidated financial statements requires to a certain extent assumptions and estimates to be made which have an effect on the carrying amounts of recognized assets and liabilities, income and expenses and contingent liabilities. The assumptions and estimates relate mainly to the measurement of investment property, the uniform group calculation of useful lives for property, plant and equipment and the recognition and measurement of provisions. The assumptions and estimates are based on parameters which are derived from the current knowledge at the time. In particular, the circumstances prevailing at the time of preparing the consolidated financial statements and the realistic future development of the global and industry environment were used to estimate cash flows. Where these conditions develop differently than assumed, and beyond the sphere of influence of management, the actual figures may differ from those anticipated. If there are deviations between actual and anticipated development, the assumptions, and where necessary, the carrying amounts of the relevant assets and liabilities, are adjusted accordingly. At the date of preparing the consolidated financial statements, the underlying assumptions and estimates were not subject to any significant risk such that from today’s point of view, it is not likely that the carrying amounts of assets and liabilities will have to be adjusted significantly in the subsequent fiscal year. F-104 D. Segment Reporting The primary segment reporting format within the GAGFAH Group is based on the internal structure of the organization and management as well as internal reporting to management and the supervisory board, with the Group being divided into the following segments: • Real estate management • Real estate sales Real estate management comprises the management of own and third-party portfolios of rental apartments and other properties, management activities for condominium associations and special lease management. Real estate sales were transferred to GAGFAH M as an independent business division in October 2004. Alongside the sale of existing properties of the group companies, this division also comprises the carving up and resale of housing portfolios. In order to improve comparability over time, the prior-year figures for this segment also include the revenues and expenses from the period prior to establishment as an independent business division which are attributable in substance to this area. There is also a property construction/development segment. The business activities of this segment are classified as discontinued operations pursuant to IFRS 5. The same accounting policies apply to the segments as to the consolidated financial statements. The overheads incurred by the Company’s headquarters are not split between the segments. Intragroup transactions between the segments are carried out at arm’s length conditions. The listed investments are additions, including own work capitalized, to intangible assets, investment property and property, plant and equipment. Apart from the segment classified under IFRS 5, the segment assets do not comprise any cash and cash equivalents. No reporting by geographical segment was prepared as all the activities relate to Germany. F-105 GAGFAH GmbH Group Segment Report as of December 31, 2005 (in EUR k) Segment revenues from third parties . . . . . . . . Transactions with other segments . . . . . . . . . . . Segment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . Segment profit/loss (EBITDA) . . . . . . . . . . . . . Result from fair value measurement . . . . . . . . . Segment write-downs . . . . . . . . . . . . . . . . . . . . . . EBIT (before restructuring) . . . . . . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . Investment result . . . . . . . . . . . . . . . . . . . . . . . . . EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial result/interest expenses. . . . . . . . . . . . Result from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations. . . . . . . Loss from continued operations. . . . . . . . . . . . . Loss from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for discontinued operations . . . . Loss from discontinued operations . . . . . . . . . . Loss for the period . . . . . . . . . . . . . . . . . . . . . . . . Segment assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities. . . . . . . . . . . . . . . . . . . . . . . . . Segment investments (investments in property, plant and equipment or intangible assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Significant non-cash segment expenses . . . . . . . Real estate management Real estate sales 463,710 1,159 464,869 219,631 60,455 −1,078 279,008 77,345 279,008 Group function/discontinued operation*/consolidation 77,345 −6,200 −1,159 −1,159 −31,038 −126 −6,326 −3,339 −34,377 −6,326 −34,377 Group 541,055 0 541,055 182,393 60,455 −4,543 238,305 −35,674 1 202,632 −367,134 −164,502 −35,585 −128,917 4,167,581 50,159 43,614 4,165 The items marked (*) include effects from discontinued operations. F-106 49,825 −43,602 352 −43,954 −172,871 413,384* 4,630,790* 3,739,645* 3,789,804* 34,659* 1,887* 78,273* 6,052* GAGFAH GmbH Group Segment Report as of December 31, 2004 (in EUR k) Real estate management Real estate sales Group function/discontinued operation*/consolidation Segment revenues from third parties . . . . . . . . Transactions with other segments . . . . . . . . . . . Segment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 460,152 1,133 461,285 12,079 0 12,079 0 −1,133 −1,133 472,231 0 472,231 Segment profit/loss (EBITDA) . . . . . . . . . . . . . 204,946 −30 −15,653 189,263 Result from fair value measurement . . . . . . . . . Segment write-downs . . . . . . . . . . . . . . . . . . . . . . EBIT (before restructuring) . . . . . . . . . . . . . . . . Restructuring expenses . . . . . . . . . . . . . . . . . . . . Net profit for the period from equity investments measured using the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment result . . . . . . . . . . . . . . . . . . . . . . . . . EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial result/interest expenses. . . . . . . . . . . . Result from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for continued operations. . . . . . . Profit from continued operations . . . . . . . . . . . . Loss from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes for discontinued operations . . . . Loss from discontinued operations . . . . . . . . . . Net profit for the period . . . . . . . . . . . . . . . . . . . Segment assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities. . . . . . . . . . . . . . . . . . . . . . . . . Segment investments (investments in property, plant and equipment or intangible assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Significant non-cash segment expenses . . . . . . . 41,772 −1,669 245,049 −12,260 −27,913 41,772 −13,938 217,097 0 −9 −39 8,108 245,049 −39 −19,805 Group 8,108 1 225,206 −79,501 145,705 −349 146,054 4,089,240 108,198 75,837 377 116,752 17,474 7 192 The items marked (*) include effects from discontinued operations. F-107 −7,875 193 −8,068 137,986 428,034* 4,593,111* 1,628,676* 1,737,251* 4,411* 2,797* 121,170* 20,463* The segment report for the discontinued property construction/development business breaks down as follows: segment revenues total EUR 81,750k (prior year: EUR 86,658k) and comprise segment revenues from third parties of EUR 80,725k (prior year: EUR 84,742k). By contrast, segment expenses of EUR 125,352k (prior year: EUR 89,209k) were incurred. No transactions with other segments were carried out in the fiscal year or the prior year. The segment loss comes to −EUR 43,602k (prior year: −EUR 7,875k). The segment loss includes write-downs on inventories (land without buildings) of EUR 35,725k (prior year: EUR 12,888k). Segment assets of EUR 58,858k (prior year: EUR 124,452k) and segment liabilities of EUR 20,023k (prior year: EUR 22,066k) are attributable to discontinued operations. No investments were made in either year. Besides the abovementioned write-downs, segment expenses include other non-cash expenses in the form of allocations to provisions for warranties of EUR 5,838k (prior year: EUR 487k) and bad debt allowances of EUR 386k (prior year: EUR 190k). Taking the tax expense of EUR 352k (prior year: EUR 193k) into account, the segment loss from discontinued operations can be reconciled to the loss from discontinued operations in the income statement of −EUR 43,954k (prior year: −EUR 8,068k). F-108 E. Notes to the Consolidated Balance Sheet 1. Intangible Assets Intangible assets with a finite life chiefly comprise software licenses for user programs. Amortization of licenses is included in the income statement under the item ‘‘general and administrative expenses’’. There are no intangible assets with an indefinite useful life. Please refer to the statement of changes in non-current assets, which is attached as an exhibit to the notes. 2. Investment Property The development of investment property is shown in the statement of changes in non-current assets, which is attached as an exhibit to the notes. 2005 EUR k 2004 EUR k As of Jan. 01, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in the consolidated group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,003,906 65,835 43,614 78,127 69,918 60,455 3,865,384 0 59,516 12,081 49,315 41,772 As of Dec. 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,165,601 4,003,906 Investment property breaks down by region as follows: Total fair value Dec. 31, 2005 Dec. 31, 2004 EUR k EUR k Region East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880,255 1,282,603 1,008,084 591,453 403,206 826,200 1,241,931 989,368 551,264 395,143 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,164,601 4,003,906 Land with residential and commercial buildings is leased under agreements which are concluded for an indefinite period and are subject to statutory notice periods. These agreements may as a rule only be terminated unilaterally by the tenant. Income from the leasing of investment property (including rent, interest and other redemption subsidies) totaling EUR 463,710k (prior year: EUR 460,152k) relates exclusively to investment property. Operating expenses for the generation of rental income total EUR 243,913k (prior year: EUR 255,621k) and also relate exclusively to investment property. For investment property which did not generate any rental income during the fiscal year, no noteworthy direct operating expenses were incurred. The shareholders of GAGFAH agreed in the share purchase agreement to observe extensive welfare conditions which, in addition to the rent control conditions, safeguard GAGAFH’s portfolio as follows: During the first two years of the period of acquired rights (contractually defined as a period of ten years following transfer of the shares to GAGFAH), leased residential property owned by GAGFAH may not be sold to any parties other than the respective tenants or their close family members. Furthermore, no general marketing may be undertaken during the period of acquired rights. This means that assets of the group companies may not be sold in such a volume that continuation of the companies no longer makes financial sense. Accordingly, it is only possible to hive off real estate into open and closed-end real estate funds to a limited extent. If the individual sale of a leased condominium unit or leased building with just one residential unit is planned, that unit must first be offered to the respective tenant. F-109 Individual sales of condominium units with more than one rental apartment may be made to persons other than the tenants of the property or their close family members during the period of acquired rights if at least 30% of the rental apartments in that building have already been sold to the respective tenants or their close family members or, in the case of vacant apartments, have been sold to new owner-occupiers. In addition, for a period of five years following transfer of the shares to the new shareholders, no more than two buildings in the same municipality may be sold to the same buyer, including affiliates of the buyer, within four months of each other. There are also selling restrictions on the real estate held as investment property of the 20 fully consolidated fund companies. The assets of the fund companies are based on fractionally shared joint ownership as defined by Secs. 741 et seq. BGB [‘‘Bürgerliches Gesetzbuch’’: German Civil Code]. The legal claim of each fund shareholder is secured via a charge on property in the form of a priority notice. Sales of this investment property are only possible with the approval of all fund shareholders or the appointed trustees. The fair value of these properties comes to EUR 210,519k (prior year: EUR 204,526k). Besides the fund property this situation also applies to nine other properties totaling EUR 48,301k (prior year: EUR 46,598k). As of the balance sheet date, the BfA was the owner of seven plots of hereditary building right land in Berlin. In connection with the takeover of shares in GAGFAH GmbH by GAGACQ and UCACQ, an agreement was also concluded on the purchase of this land. By agreement dated September 15, 2004, title to the hereditary building right land passed to the acquisition companies. The land purchase price paid totaling EUR 49,709k corresponds to the fair value of the land which the BfA had calculated close to the time of the sale. Due to the merger of GAGACQ GmbH and UCACQ GmbH into GAGFAH GmbH as of January 1, 2005, the hereditary building right land was contributed to GAGFAH GmbH at amortized cost (EUR 51,450k) as of the merger date. No other major contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or improvements exist. 3. Property, Plant and Equipment The breakdown of property, plant and equipment is presented in the statement of changes in non-current assets, which is attached as an exhibit. Land and buildings relate exclusively to owner-occupied commercial buildings. EUR 2,887k (prior year: EUR 4,035k) of additions to technical equipment and machines in the fiscal year mainly relates to the cost of broadband facilities of MediaHome at the GAGFAH Group’s residential properties. Additions to furniture and fixtures amounting to EUR 1,708k (prior year: EUR 1,342k) relate chiefly to new acquisitions of EUR 939k at GAGFAH M (mainly cars, IT equipment and office furniture) and new acquisitions of EUR 434k at VHB Grundstücksverwaltungsgesellschaft ‘‘Haus- und Boden-Fonds’’ mbH (VHB) (mainly equipment for caretakers). Completed properties of EUR 69,918k (prior year: EUR 49,315k) were reclassified as investment property from assets under construction. The land with owner-occupied buildings is encumbered with individual charges on property of EUR 49,899k (prior year: EUR 15,342k). There are also charges on property with joint liability totaling EUR 30,909k (prior year: EUR 0k). No investments exist in property, plant and equipment for subsequent years for which contractual obligations had been entered into as of the balance sheet date (prior year: EUR 6,115k). 4. Equity Investments Measured Using the Equity Method This related to GAGFAH GmbH’s 50% equity investment in HEIMAG in the prior year. In fiscal year 2005, a distribution of EUR 2,000k was recognized. On December 30, 2005, the equity investment in GEWOFAG Gemeinnützige Wohnungsfürsorge AG, Munich, Germany, was sold. F-110 5. Inventories The inventories of the GAGFAH Group broke down as follows as of December 31, 2005: Dec. 31, 2005 EUR k Dec. 31, 2004 EUR k Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,592 13 168,119 12 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,605 168,131 The land is attributable in full to discontinued operations and breaks down as follows: Dec. 31, 2005 EUR k Dec. 31, 2004 EUR k Land and land rights with finished buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and land rights without buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and land rights with unfinished buildings . . . . . . . . . . . . . . . . . . . . . . . . . . Land with hereditary building rights of third parties . . . . . . . . . . . . . . . . . . . . . Pre-construction expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,592 34,523 14,658 972 847 60,096 78,937 25,680 1,348 2,058 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,592 168,119 The disclosure of land and land rights without buildings relates to land in the following condition: Dec. 31, 2005 EUR k Dec. 31, 2004 EUR k Undergoing third-party development or undeveloped . . . . . . . . . . . . . . . . . . . . Undergoing own development or already developed . . . . . . . . . . . . . . . . . . . . . 22,958 11,565 63,698 15,239 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,523 78,937 Land with hereditary building rights of third parties relates to land with detached houses. The properties have already been sold, mainly to owner-occupiers; hereditary building rights have been granted for the land. The Company plans to sell this land to the owners of the properties. Of the land and land rights with unfinished buildings, no detached houses (prior year: 83) and 74 apartments (prior year: 77) were sold and the benefits and burdens transferred in the fiscal year. No apartments were reclassified as investment property. With regard to land and land rights with finished buildings, the benefits and burdens were transferred for 73 detached houses (prior year: 103) and 32 apartments (prior year: 66). Seven apartments (prior year: 94) and one commercial unit (prior year: 1) were reclassified as investment property. Borrowing costs of EUR 20k (prior year: EUR 131k) for construction projects financed by loans were recognized as part of cost for the land held for sale in the fiscal year. In the reporting period, GAGFAH sold inventories totaling EUR 67,497k (prior year: EUR 70,601k). Impairment losses were charged on some of the inventories following measurement at the lower net realizable value, with costs yet to be incurred being deducted from the discounted sale price. Impairment losses to reflect the (lower) net realizable value were posted totaling EUR 7,898k (prior year: EUR 6,723k). 6. Receivables Receivables break down as follows: a) Non-current Receivables from sales of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from third-party real estate management . . . . . . . . . . . . . . . . . . . . F-111 Dec. 31, 2005 Dec. 31, 2004 EUR k EUR k 26 0 7 553 26 560 Dec. 31, 2005 Dec. 31, 2004 b) Curent EUR k Rent receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from sales of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from third-party real estate management . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR k 1,957 49,799 662 649 10 957 0 1,691 8,454 225 442 35 1,573 6,696 54,034 19,116 Overall, impairment losses of EUR 6,052k (prior year: EUR 4,671k) were recognized for doubtful debts. Receivables from sales of land included receivables of EUR 41,192k from real estate sales as of December 31, 2005. There are no restrictions on ownership or disposal for the disclosed receivables. 7. Other Assets Other assets relate mainly to refund claims of EUR 2,405k (prior year: EUR 3,673k) from the cost of clean-up operations, claims of EUR 0k (prior year: EUR 1,968k) from the rescission of a land purchase agreement, insurance claims of EUR 5,352k (prior year: EUR 1,298k) and claims of EUR 1,583k (prior year: EUR 1,204k) from construction defects. 8. Current Tax Claims As of December 31, 2005, GAGFAH disclosed current tax claims of EUR 3,716k (prior year: EUR 4,793k). EUR 3,376k thereof related to claims from corporate income tax and withholding tax on interest. 9. Deferred Taxes For the group entities, a uniform tax rate of 40.39% (prior year: 40.39%) is applied which corresponds to the statutory tax rate. This comprises a corporate tax rate including solidarity surcharge of 26.38%. Trade tax is charged at 14.02% due to the deductibility of corporate income tax. Deferred taxes are attributable to differences from recognition and measurement of the individual balance sheet items and to tax loss carryforwards: Dec. 31, 2005 Dec. 31, 2004 EUR k EUR k Balance sheet Investment properties . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect on results Effect on results 2005 2004 EUR k EUR k 63,571 1,493 262 758 5,833 1,745 3,871 77,533 −74 −449 −523 44,020 622 83 255 1,672 0 1,039 47,691 0 −77 −77 19,551 871 179 503 4,161 1,745 2,832 29,842 −74 −372 −446 −8,820 −105 −35 −48 122 0 142 −8,744 49 12 61 Deferred tax assets (after netting) on temporary differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss carryforwards Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets on loss carryforwards. . . . . . . 77,010 47,614 29,396 −8,683 12,820 12,820 6,511 6,511 6,309 6,309 4,210 4,210 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 89,830 54,125 35,705 4,473 F-112 With regard to investment property, deferred taxes arise from the differences in carrying amounts for tax purposes, which are based on the continued recognition of the property at the carrying amount at the date on which former non-profit housing companies become taxable, compared to measurement at fair value pursuant to IAS 40 in the IFRS consolidated financial statements. Deferred taxes in connection with pension provisions mainly relate to a 2.25 percentage point higher discount rate for tax purposes (prior year: 1.25) and the prohibition of recognizing liabilities for tax purposes. The reason for the deferred tax liabilities in connection with financial liabilities is the difference between the compounded amount of the government loans and the reversal of the deferred item recognized in this regard. As of December 31, 2005, there were loss carryforwards for corporate income tax of EUR 596m (prior year: EUR 124m) and trade tax loss carryforwards of EUR 348m (prior year: EUR 46m). These are based on information available at the time of preparing the financial statements and may be carried forward indefinitely pursuant to legislation in force as of December 31, 2005. Per period, tax gains of a maximum EUR 1m and 60% of the amount above this figure may be netted with available loss carryforwards. No deferred taxes were recognized on temporary differences of EUR 94m (prior year: EUR 477m), corporate income tax loss carryforwards of EUR 596m (prior year: EUR 124m) or trade tax loss carryforwards of EUR 256m (prior year: EUR 0m) as they are not expected to be realized in subsequent years. 10. Bank Balances and Cash on Hand This item comprises bank balances of EUR 137,700k (prior year: EUR 152,001k) and cash on hand of EUR 80k (prior year: EUR 58k). The time deposits are held with terms of one to two months and bear interest of 2.00% to 2.10%, the average interest rate being 2.06%. 11. Equity Subscribed capital relates to the parent company’s capital stock of EUR 52,000k, which is unchanged against the prior year, and is divided into 520,000 voting shares with a nominal value of EUR 100 each. The allocation to the capital reserve is the result of the waiver of an interest liability to shareholders. (Please refer to section G. 5. for more information on the underlying loans). The revenue reserves contain allocations from the result for the fiscal year or prior years where not distributed. Credit and debit differences from capital consolidation for acquisitions prior to December 31, 1993 were also netted in the revenue reserves. Adjustments not affecting income from first-time application of IFRSs were also transferred to the revenue reserves. The difference from the contribution in kind in connection with the transfer of the assets and liabilities of GAGACQ GmbH and UCACQ GmbH to GAGFAH GmbH of EUR 1,853,080k was offset against the revenue reserves with no effect on income. (Please refer to the merger transaction in section B. 1.). Minority interests comprise adjustment items for minority interests in equity subject to mandatory consolidation and their share in profit and loss. F-113 Minority interests break down as follows among GAGFAH group entities: HB-Fonds 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 23. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 29. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 33. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 35. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 37. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HB-Fonds 38. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. Provisions 12.1 Provisions for Pensions and Similar Obligations Dec. 31, 2005 EUR k Dec. 31, 2004 EUR k 1,026 1,501 1,601 2,022 1,522 966 1,915 2,447 1,372 4,351 2,590 2,511 1,973 2,495 2,512 4,113 1,168 2,122 1,366 2,667 503 865 1,293 1,547 1,453 1,313 713 1,866 2,182 1,370 4,501 2,789 2,331 1,739 2,332 2,036 3,668 2,114 2,067 1,634 2,194 384 42,743 40,391 Company pensions in the GAGFAH Group are granted both by way of defined contribution and defined benefit commitments. Under defined contribution plans, the Company pays contributions to public or private pension insurance schemes on the basis of statutory or contractual requirements. GAGFAH does not have any other benefit obligations beyond payment of contributions. The current contribution payments are disclosed as an expense in the relevant year under personnel expenses of the functional areas. They came to EUR 229k (prior year: EUR 207k). Employer contributions of EUR 3,630k (prior year: EUR 3,595k) were remitted to statutory pension insurance. The GAGFAH Group manages defined benefit plans for its employees. There are various types of employer-funded pension plans for company pensions. GAGFAH M and GAGFAH P grant their employees company pensions under Pension Regulation 2002 (hereinafter referred to as ‘‘VO 2002’’). The group works agreement on company pensions (VO 2002) also applies with restrictions for employees of VHB. Assessment of Benefits The GAGFAH Group pays old-age pensions, early-retirement pensions, invalidity pensions, widow’s/widower’s and orphan’s pensions. The old-age, early retirement and invalidity pensions are calculated as the sum of the individual pension components awarded every September 30 (assessment month) during pensionable service. A pension contribution is 0.6% of the pensionable earnings. If the pensionable earnings exceed the threshold for monthly contributions to statutory pension insurance in the month of assessment, the excess is included in the calculation of the pension component at 1.8%. The assessment base for widow’s/widower’s pensions and orphan’s pensions is the pension benefit which would have been paid to the beneficiary if his/her employment had ended directly before F-114 his/her death due to a complete reduction in earning capacity. The widow’s/widower’s pension amounts to 60% of the assessment base; the orphan’s pension amounts to 10% for a child with one parent and 20% for a child with no parents. Ongoing pension payments and statutory vested and statutory carried expectancies have been insured against the consequences of the insolvency of GAGFAH M/P pursuant to the Company Pensions Act [‘‘Gesetz zur Verbesserung der betrieblichen Altersversorgung’’: BetrAVG]. In this connection, GAGFAH M/P pays premiums to the Mutual Benefit Association for Pension Security [‘‘Pensions-Sicherungs-Verein Versicherungsverein auf Gegenseitigkeit’’: PSVaG], Cologne, Germany, the carrier for statutory insolvency protection for company pensions. Number of Commitments The following groups are entitled to employer-funded pension benefits: Dec. 31, 2005 No. Dec. 31, 2004 No. Active employees • Non-vested expectancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • Vested expectancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 542 400 399 Vested expectancies of employees no longer with the Company. . . . . . . . . . . . . . Current pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 62 755 799 60 749 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,567 1,608 The considerable increase in vested expectancies between December 31, 2004 and December 31, 2005 is due to the new statutory rules on vesting under which the required period of service was reduced from ten to five years and the minimum age on achieving the required period of service was cut from 35 to 30. The following group-wide parameters were used to calculate the obligations: 2005 2004 in % p.a.: Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase, pension increase in service. . . . . . . . . . . . . . . . . . . . Cost of living adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75 2.00 1.00 – 2.00 4.00 – 5.00 4.75 2.00 1.00 – 1.50 4.00 – 5.00 In years: Actual retirement age Men. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 or 63 62 or 60 Not before 60 62 or 63 62 or 60 Not before 60 For death and disability, the 2005 G mortality tables of Dr. Klaus Heubeck were used in fiscal year 2005 (prior year: 1998 mortality tables). The salary trend accounts for the various reasons for salary increases, e.g. increases under collective wage agreements, promotions, etc. If the actual development during the year deviates from the assumptions made at the beginning of the fiscal year or other parameters are set at the end of the fiscal year than at the beginning, (additional) actuarial gains or losses arise. Provisions are set up for obligations from future and current benefit entitlements to current and former employees. The provisions are measured according to the projected unit credit method in accordance with IAS 19. The amount of the obligation is based on the present value of the earned and realistic pension entitlements on the measurement date, including probable future increases in pensions and salaries. F-115 The pension provisions developed as follows in the fiscal year: 2005 EUR k 2004 EUR k Provision as of Jan. 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension expense in the fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct pension payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,314 7,459 −5,270 90,318 5,989 −4,993 Provisions as of Dec. 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,503 91,314 Reconciliation of liabilities from defined benefit obligations to the recognized pension provisions: 2005 EUR k 2004 EUR k Defined benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial gains/losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,115 −18,612 91,011 303 Provision as of Dec. 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,503 91,314 The pension obligation is calculated as follows: 2005 EUR k 2004 EUR k Obligation as of Jan. 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gains/losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct pension payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,011 1,504 1,724 4,208 18,938 −5,270 87,001 1,426 0 4,569 3,008 −4,993 Obligation as of Dec. 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,115 91,011 Due to an increase in commitments, past service costs of EUR 1,724k (prior year: EUR 0k) arose. The total pension expense in the income statement breaks down as follows: 2005 EUR k 2004 EUR k Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes to the plan due to an increase in commitments . . . . . . . . . . . . . . . . . . . . Actuarial gains (−) or losses recognized in the income statement. . . . . . . . . . . . . 1,504 4,208 1,724 23 1,426 4,569 0 −6 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,459 5,989 The current service cost is disclosed under personnel expenses of the relevant functional areas and the interest expense in the financial result. 12.2 Other Provisions Other provisions developed as follows in the fiscal year: January 1, Interest December 31, thereof thereof 2004 Utilization Reversal Addition effect 2004 non-current current Other accruals EUR k Warranty obligations . . . . . . . Severance payments, litigation costs and similar risks . . . . . Provision for construction activities . . . . . . . . . . . . . . Restructuring provisions . . . . . Other provisions . . . . . . . . . . EUR k EUR k EUR k EUR k EUR k EUR k EUR k .. 4,127 554 498 487 −275 3,287 2,466 821 .. 337 110 153 273 −2 345 19 326 .. .. .. 0 445 12 0 345 10 0 50 0 0 656 13 0 −41 −1 0 665 14 0 366 14 0 299 0 Total . . . . . . . . . . . . . . . . . . . . 4,921 1,019 701 1,429 −319 4,311 2,865 1,446 F-116 January 1, Interest December 31, thereof thereof 2005 Utilization Reversal Addition effect 2005 non-current current Other provisions EUR k Phased retirement . . . . . . . . . . Warranty obligations . . . . . . . . Severance payments, litigation costs and similar risks . . . . . . Provision for sales commissions . Provision for construction activities . . . . . . . . . . . . . . . Restructuring provisions . . . . . . Provision for BfA obligation . . . Other provisions . . . . . . . . . . . EUR k EUR k EUR k EUR k EUR k EUR k EUR k . . 0 3,287 0 819 0 539 6,741 5,838 0 145 6,741 7,912 6,741 988 0 6,924 . . 345 0 260 0 71 0 1,047 2,213 −2 0 1,059 2,213 27 0 1,032 2,213 . . . . 0 665 0 14 0 178 0 0 0 66 0 15 17,101 12,223 2,133 70 0 41 0 1 17,101 12,685 2,133 70 0 0 0 0 17,101 12,685 2,133 70 Total . . . . . . . . . . . . . . . . . . . . 4,311 1,257 691 47,366 185 49,914 7,756 42,158 All of the provisions recognized as of the balance sheet date meet the recognition criteria of IAS 37.14. Accordingly, provisions were only set up for current obligations to third parties which arose in the past and which are highly likely to lead to a future outflow of resources and whose amount can be reliably estimated. GAGFAH concluded a collective agreement on phased retirement in 2005. This model allows employees above the age of 55 to make a smooth transition into retirement and ensures employment for younger employees. 18 such agreements were concluded in the reporting period. In legal terms, the agreements are based on the German Phased Retirement Act [‘‘Altersteilzeitgesetz’’: AltTZG], the Third Law on New Labor Market Services dated July 1, 2004 and the collective agreement for the housing industry. Under the group works agreement on phased retirement at GAGFAH M, the ‘‘block model’’ was chosen, whereby the phased retirement period may not be shorter than two years nor longer than six and is spread over a work phase (first phase, full-time employment) and a release phase (second phase). The relevant employees receive gross monthly pay based on the agreed working time pursuant to the arrangements under the collective agreements in place. The employees receive this pay for the entire duration of the phased retirement. The negotiated part-time pay is adjusted for increases under collective wage agreements throughout the duration of the phased retirement. Capital-forming payments are granted in line with the agreed part-time work, i.e. also in the release phase. Provisions were set up for phased retirement for the first time as of December 31, 2005. The total provisions of EUR 6,741k recognized as of the balance sheet date are non-current. Warranty provisions totaling EUR 7,912k (prior year: EUR 3,287k) were mainly set up for known cases of liability from project business. The majority of the warranty obligations are current. The provisions for severance payments, litigation costs and similar risks relate to estimated costs in connection with employees leaving the Company and litigation relating to project business. As of the balance sheet date, provisions of EUR 1,059k (prior year: EUR 345k) had been recognized. Provisions for sales commissions were set up for sales projects which are already underway. The provision for construction activities serves to fulfill notarized commitments to buyers of individual apartments to renovate parts of fractionally owned buildings. Due to the extensive restructuring measures within the GAGFAH Group for the closure of selected branches, additional provisions of EUR 12,223k were set up in fiscal year 2005. The provisions of EUR 12,685k (prior year: EUR 665k) recognized as of the balance sheet date are all current. The allocation to the provisions was made via the restructuring expenses item. The provision for BfA obligations [‘‘BfA’’: Federal Insurance Office for Salaried Employees] covers the risk that the Company fails to let the agreed number of apartments to BfA employees. The anticipated outflows of cash and cash equivalents from non-current provisions are largely expected within the next five years. No major refunds are expected. No asset items have been recognized for refunds. F-117 13. Liabilities for Income Taxes As of December 31, 2005, the Group had obligations from corporate income tax and trade tax totaling EUR 268k (prior year: EUR 306k). The liabilities developed as follows in the fiscal year: January 1, 2005 EUR k Utilization EUR k Reversal EUR k Allocation EUR k December 31, 2005 EUR k 111 195 −90 −183 −3 −4 94 148 112 156 306 −273 −7 242 268 Corporate income tax . . . . . . . . . . . . . . . . . . . Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. Liabilities 14.1 Financial Liabilities The financial liabilities of EUR 3,415,087k (prior year: EUR 1,417,321k) break down as follows for the fiscal year: Liabilities to banks amount to EUR 2,867,190k (prior year: EUR 1,269,992k) and liabilities to other lenders to EUR 547,897k (prior year: EUR 147,329k). Of the liabilities to other lenders, EUR 475,019k (prior year: EUR 0k) relates to a shareholder loan (cf. section H. 5.). This item comprises non-current financial liabilities of EUR 3,375,582k (prior year: EUR 1,067,191k). Non-interest bearing or low-interest loans in return for which occupancy rights have been granted at conditions below market rent are carried at amortized cost. Cost is determined on the basis of the market interest on the date of raising the loan. The discounted amount totals EUR 139,823k (prior year: EUR 145,946k). Due to the compounding of these loans, there was an additional interest expense of EUR 7,287k (prior year: EUR 6,670k) in the fiscal year. Of the current and non-current liabilities to banks and other lenders, a total of EUR 3,410,558k (prior year: EUR 1,191,388k) is secured by charges on property. EUR 3,161k is secured by a bank guarantee. No collateral has been provided for the remaining EUR 1,368k. Of the total financial liabilities, EUR 3,292,784k (prior year: EUR 1,295,292k) relates to freely financed loans. These in turn comprise a global loan of EUR 2,610,916k (prior year: EUR 0k). This loan has an eight-year term and a fixed interest rate of EUR 3.19%. The effective rate of interest is 3.89%. The fair values of the financial liabilities break down as follows: 2005 Carrying amount EUR k Fair value EUR k 2004 Carrying amount EUR k Fair value EUR k Global loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freely financed annuity loans . . . . . . . . . . . . . . . . . Government annuity loans. . . . . . . . . . . . . . . . . . . . Financial liabilities of the funds . . . . . . . . . . . . . . . Other financial liabilities . . . . . . . . . . . . . . . . . . . . . 2,610,916 475,019 86,758 122,303 75,764 44,327 2,550,515 502,643 95,909 195,164 75,764 44,327 0 0 872,341 122,029 81,538 341,413 0 0 920,184 192,218 81,538 341,413 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,415,087 3,464,322 1,417,321 1,535,353 The fair values of the loans are determined on the basis of market data using appropriate measurement methods. The global loan was measured using the following interest structure as of December 31, 2005: 2.64% (interest for 6 months), 2.83% (interest for 1 year), 3.17% (interest for five years) and 3.41% (interest for 10 years). Please refer to section H. 5. for information regarding the maturity, interest rate and measurement of the shareholder loan. The due dates of the freely financed loans and government annuity loans and the other financial liabilities including the relevant interest rate for each maturity grouping break down as follows: F-118 Due date EUR k Interest rates Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Between 1 and 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Between 6 and 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,083 35,294 16,251 197,760 3.36% 4.19% 4.85% 1.55% Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,388 2.24% Breakdown of due dates and interest rates for each maturity grouping (financial liabilities of the funds): Due date EUR k Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Between 1 and 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Between 6 and 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,774 23,094 11,255 35,641 6.51% 5.90% 5.12% 1.43% Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,764 4.11% 14.2 Interest rates Other Liabilities Other liabilities broke down as follows as of the balance sheet date: Other Liabilities a) Non-current Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jubilee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Current Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from third-party real estate management . . . . . . . . . . . . . . . . . . . . . . Liabilities from operating expenses not yet invoiced . . . . . . . . . . . . . . . . . . . . . Liabilities to investees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jubilee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31, 2005 EUR k Dec. 31, 2004 EUR k 1,567 1,222 1,574 956 2,789 2,530 12,102 3,186 43,483 63 6,676 302 819 75 21,714 9,969 5,320 40,355 306 6,493 284 894 126 11,776 88,420 75,523 Trade payables relate to open obligations from trading activities. The average period taken for payment was 45 days. Non-current trade payables of EUR 1,567k (prior year: EUR 1,574k) are due in between one and five years. Rent liabilities chiefly relate to deposits and collateral received. The liabilities to investees are owed by MediaHome to TCC TeleCommunication Company GmbH. Liabilities from operating expenses not yet invoiced relate to refund claims of tenants from incidental expenses. GAGFAH has agreed to pay jubilee benefits to its employees for 25 and 40 years of service. The jubilee cash benefits amount to two or three months’ salary and are paid by GAGFAH directly. The jubilee commitments of GAGFAH, as also the pension commitments, are made by way of a direct commitment. Corresponding provisions are determined on the basis of actuarial reports. As of December 31, 2005, jubilee obligations of EUR 1,297k (prior year: EUR 1,082k) had been recognized. In fiscal year 2005, 15 employees of the GAGFAH Group received jubilee benefits, thereof 13 for 25 years of service and 2 for 40 years. F-119 Other liabilities comprise accruals of EUR 20,437k (prior year: EUR 11,344k), of which EUR 5,333k (prior year: EUR 4,084k) is attributable to personnel. The other accruals relate to construction and maintenance work by third parties not yet invoiced and administrative costs. Liabilities are secured by guarantees in the following amounts: EUR 3,186k (prior year: EUR 5,320k) for prepayments received, EUR 40,000k (prior year: EUR 37,041k) for rent liabilities, and EUR 0k (prior year: EUR 2,299k) for trade payables. 14.3 Deferred Government Loans This item contains the deferred interest portion granted on extension of loans in connection with measures to promote the construction of housing. The deferred item is released to income from the leasing of investment property on a straight-line basis over the term of the interest lock-in. F-120 F. Notes to the Consolidated Income Statement 1. Income From the Leasing of Investment Property Income from the leasing of investment property of the GAGFAH Group breaks down as follows: 2005 EUR k 2004 EUR k Rental income, fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocations charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk of default on allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent, interest and other redemption subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,641 131,068 633 451 10,917 317,159 131,082 267 2,466 9,178 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463,710 460,152 Income from the leasing of investment property is mainly attributable to the leasing of land with residential and commercial buildings. The rent, interest and other redemption subsidies primarily relate to government allowances to allow lower rent to be charged for subsidized housing. 2. Operating Expenses for the Generation of Rental Income Operating expenses for the generation of rental income break down as follows: 2005 EUR k 2004 EUR k Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maintenance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses for housing management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt allowances and write-downs on other assets. . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization and depreciation on intangible assets and property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,956 67,805 27,852 11,996 6,426 4,165 3,953 125,128 78,176 21,559 12,062 6,364 4,198 3,771 760 4,363 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,913 255,621 Operating expenses comprise non-allocable operating expenses of EUR 1,126k (prior year: EUR 1,117k). EUR 18,485k (prior year: EUR 33,718k) of the maintenance expenses relates to expenses for planned maintenance work and EUR 26,625k (prior year: EUR 33,884k) to minor repairs and ongoing maintenance. Other taxes largely comprise allocable real estate tax of EUR 11,828k (prior year: EUR 11,701k). 3. Income From the Sale of Investment Property Income from the sale of investment property of EUR 77,345k (prior year: EUR 12,079k) is attributable to the sale of developed land. 4. Result From Fair Value Measurement Income totaling EUR 60,455k (prior year: EUR 41,772k) from changes in value arose in connection with the measurement of investment property in the fiscal year. EUR 54,983k thereof (prior year: EUR 45,784k) relates to land with leased residential and commercial buildings. F-121 The result from changes in value due to measurement at fair value breaks down as follows: Land with leased residential and commercial buildings . . . . . . . . . . . . . . . . . . . . . . . . Land without buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land with hereditary building rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property of the fully consolidated fractional ownership real estate funds . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 2005 EUR k 2004 EUR k 54,983 −431 −90 5,993 60,455 45,784 −4,012 0 0 41,772 2005 EUR k 2004 EUR k 6,503 2,147 −2,706 −3,269 −1,400 1,275 4,008 3,482 −3,218 −707 −2,789 776 Result From Other Services The result from other services breaks down as follows: Revenues from third-party real estate management . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenues from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third-party expenses from third-party real estate management . . . . . . . . . . . . . . . . . Third-party expenses from other trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenues from third-party real estate management are attributable to fees for the management of property owned by third parties. EUR 1,922k (prior year: EUR 1,980k) of revenues from other trade relates to commissions for insurance brokerage and EUR 225k (prior year: EUR 509k) to the provision of radio and TV programs. In 2004, trade of EUR 993k was also generated from the deployment of staff for third parties. 6. Selling Expenses Expenses that are directly related to the sales success of GAGFAH are recorded under this item. They are primarily attributable to sales, advertising and marketing. Selling expenses break down as follows: Real estate management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 2005 EUR k 2004 EUR k 321 5,430 5,751 155 32 187 2005 EUR k 2004 EUR k 16,676 11,275 4,588 2,825 1,837 1,809 1,743 1,215 1,156 1,139 1,105 612 544 6,383 41,632 3,755 2,953 1,628 1,898 973 386 1,107 279 522 312 319 7,103 32,510 General and Administrative Expenses Salaries for administrative staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization and depreciation on intangible assets and property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post and telephone expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs of owner-occupied commercial buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible input tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repair and maintenance of furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs of procuring money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses for staff leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Court and lawyers’ fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-122 8. Other Operating Income Other operating income breaks down as follows: 2005 EUR k 2004 EUR k Income from the sale of associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Processing fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elimination of liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receipt of receivables written off in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on hereditary building rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from the reversal of provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,153 1,517 1,509 817 777 691 2,699 0 501 549 1,914 235 701 2,372 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,163 6,272 Income from the sale of associates comprises income from the sale of the equity investment in HEIMAG. 9. Other Operating Expenses All expenses not directly allocable to the various functional areas are disclosed under other operating expenses of EUR 10,030k (prior year: EUR 1,404k). This includes a contribution of EUR 5,000k (prior year: EUR 0k) to a non-profit association for tenants in arrears, losses on the disposal of property, plant and equipment of EUR 98k (prior year: EUR 13k), and bad debt allowances of EUR 145k (prior year: EUR 121k). 10. Restructuring Expenses Restructuring expenses split up as follows: 2005 EUR k 2004 EUR k Consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Severance payments and release expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of land register entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of procuring money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,553 9,797 5,424 900 0 0 0 0 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,674 0 11. Result From Associates The result from associates includes the result from HEIMAG. The HEIMAG shares were sold in 2005. The gain on the sale of the HEIMAG shares is disclosed under other operating expenses. 12. Interest Expenses The rise in interest expenses (current) is due to the merger of the acquisition companies GAGACQ GmbH and UCACQ GmbH into GAGFAH GmbH and the related assumption of acquisition financing of EUR 1,487,986k. EUR 7,287k (prior year: EUR 6,670k) of interest expenses (current) also relates to the amortization of the present value of the government loans. EUR 4,208k (prior year: EUR 4,569k) also relates to the interest component of the pension obligations. The interest (refinancing) is exclusively attributable to the redemption of financial liabilities. F-123 13. Income Taxes Income taxes break down as follows: 2005 2004 EUR k EUR k Corporate income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . thereof for discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solidarity surcharge on corporate income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . thereof for discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . thereof for discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax refunds from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . thereof for discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax backpayments for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 194 22 11 572 155 −556 −8 0 −35,705 887 101 47 6 439 86 −6,022 0 20 4,473 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −35,233 −156 thereof for discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 193 For fiscal year 2005, tax income of EUR 75,569k (prior year: tax expense of EUR 55,662k) was expected on the basis of the consolidated net profit before tax. This is contrasted by effective tax income of EUR 35,233k (prior year: EUR 156k). The anticipated tax expense/income was calculated on the basis of an average tax rate for the Group of 40.39%. 2005 EUR k 2004 EUR k Result from continued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Result from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net profit/loss before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected tax expense/income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −164,502 −43,602 −208,104 −84,053 145,705 −7,875 137,830 55,662 Tax income for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-free income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non−deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent trade tax effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in unrecognized deferred taxes on temporary differences. . . . . . . . . . . . . . . Change in unrecognized deferred taxes on loss carryforwards . . . . . . . . . . . . . . . . . . Other tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −548 −4,746 16 23,944 −133,410 160,400 3,164 −35,233 −6,007 −806 20 −2,405 −59,651 9,288 3,743 −156 Reversals of liabilities for income taxes are disclosed under tax income for prior years. The reversal for the prior year relates to distribution charges in connection with profit distributions which were planned but not executed. The tax-free income in the current year relates largely to the tax-free sale of an equity investment. The effects, in particular, of the addition of half of the interest on permanent debt in the fiscal year and the extended trade tax deduction made in the prior year are disclosed under permanent effects from trade tax. The items ‘‘change in unrecognized deferred taxes on temporary differences’’ and ‘‘change in unrecognized deferred taxes on loss carryforwards’’ contain the effects of unrecognized deferred tax assets which are not likely to be realized in subsequent years. 14. Result From Discontinued Operations Before Taxes The property development business and the project and land development business are being discontinued. The projects which have already been started will be continued until adequately marketable. Construction of 25 detached or row houses and 51 condominiums began in the fiscal year. In addition, 195 rental apartments and one commercial unit were completed and recognized as non-current assets. 138 completed units are disclosed in the Group’s current assets, 93 thereof are condominiums and 45 detached or row houses. The net profit for the comparative year 2004 was calculated as if the discontinuation of operations had already been resolved. F-124 The result from discontinued operations splits up as follows: 2005 EUR k 2004 EUR k Income from the sale of development properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying amount of the sold development properties . . . . . . . . . . . . . . . . . . . . . . . . . Expenses for development properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-downs on development properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,725 −67,497 −17,158 −2,683 −35,725 1,025 −2,289 84,742 −70,601 −6,368 −4,440 −12,888 1,916 −236 Result from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . −43,602 −7,875 The land and land rights disclosed under inventories were written down by EUR 30,394k as the underlying carrying amount was higher than the fair value. Expenses for development properties comprise personnel expenses of EUR 6,084k (prior year: EUR 4,184k) and outside service costs EUR 11,074k (prior year: EUR 2,184k) for the construction department. The cash flows from discontinued operations break down as follows: 2005 EUR k 2004 EUR k Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −1,296 −1,718 Net cash outflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,296 1,718 F-125 G. Notes to the Consolidated Cash Flow Statement The consolidated cash flow statement provides additional information on liquidity as part of GAGFAH’s consolidated financial statements and thus serves to present the Group’s financial position. The cash flow statement shows how cash and cash equivalents changed in the GAGFAH Group over the course of the fiscal year. The cash flows were commented on separately broken down by cash flows from operating, investing and financing activities for fiscal year 2005 and the prior year in line with IAS 7. The cash flows only contain cash and cash equivalents with terms of up to three months in accordance with IAS 7.7. It comprises all cash and cash equivalents disclosed in the balance sheet and breaks down as follows: Dec. 31, 2005 Dec. 31, 2004 EUR k EUR k Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blocked accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank balances Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In current accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 273 58 236 911 130,086 6,430 131,550 14,896 5,319 Bank balances and cash on hand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,780 152,059 Cash and cash equivalents as of the balance sheet date included cash from HB-Fonds of EUR 6,430k (prior year: EUR 5,319k) and balances on blocked accounts of EUR 273k (prior year: EUR 236k) to which the GAGFAH Group does not have direct access. The balances on blocked accounts relate to security retainers from property development business. The cash flow from financing activities includes interest paid and the cost of procuring money of EUR 163,001k (prior year: EUR 0k). This includes swap break costs and early repayment penalties in connection with the rescheduling of the GAGFAH Group’s bank liabilities. Non-Cash Transactions The following investing and financing transactions did not have an effect on cash and cash equivalents: • The acquisition of net assets by the shareholders by way of a non-cash contribution (after deduction of cash funds of EUR 14,976k) of −EUR 1,868,056k. • Conversion of debt into equity (waiver of receivables) of EUR 11,471k. F-126 H. Other Notes 1. Financial Risk Management The Group’s principal financial instruments, other than derivatives, comprise bank loans, bank overdrafts, and cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade receivables and payables, which arise directly from its operations. The Group also enters into derivative transactions, including in particular interest swaps. The purpose is to manage the interest rate risks arising from the Group’s operations and its sources of finance. It continues to be the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, and credit risk. The GAGFAH Group is not exposed to foreign currency risk. Interest Rate Risk In connection with ordinary activities, GAGFAH is exposed to financial risks with regard to interest. Fluctuations in cash flow can result from these risks. To mitigate or avoid these risks, GAGFAH has developed group guidelines for the use of derivative financial instruments. The guidelines relate to the approval, limitation and control of such transactions. Under the strategies pursued by the Company, the use of derivatives is allowed if there are underlying assets or liabilities, contractual claims or obligations and forecast operative transactions. Derivatives are only used to manage interest rate risks and exclusively serve hedging purposes. Pure trading transactions without an underlying transaction (speculative transactions) are not entered into. Management receives regular reports on interest rate risk factors for the Group. The internal audit function monitors compliance with the guidelines. As in the prior year, there were no derivative financial instruments as of the balance sheet date. Liquidity Risk The Group requires sufficient liquidity to meet its financial obligations. The liquidity risk is defined as the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk arises from the possibility that tenants may not be able to settle obligations to the Company under the terms of the lease agreements. The granularity and wide spread of the individual risks ensures that the cash flows from operating activities are sufficiently stable. There are sufficient cash and cash equivalents. The Group hedges liquidity risks using corresponding financial planning instruments. They show the anticipated development of cash and cash equivalents using a planning horizon of up to three years. The 12-month liquidity analysis is updated on the basis of actual figures. Credit Risk The credit risk from financial assets comprises the danger that a contractual partner defaults and therefore amounts at most to the positive fair value of the asset vis-à-vis the relevant counterparty. With regard to other financial assets, the credit risk is accounted for by the recognition of specific bad debt allowances. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. 2. Contingent Liabilities and Financial Obligations Obligations from leasing and renting are not material. F-127 3. Information on the Adoption of Accounting Under International Financial Reporting Standards (IFRSs) In preparing the consolidated financial statements in accordance with IFRSs for the first time, use was made of the following simplification options afforded by IFRS 1: • For business combinations which took place before the transition to IFRSs, GAGFAH made use of the option in IFRS 1.15 in conjunction with IFRS 1, Note B. • In accounting for employee benefits, GAGFAH made use of the simplification option of IFRS 1.20, pursuant to which all cumulative actuarial gains or losses may be recognized until the date of transition to IFRSs. As a result of the transition to accounting under IFRSs, equity developed as follows between January 1, 2004 and December 31, 2004: Equity Jan. 1, 2004 Dec. 31, 2004 EUR k EUR k Value under German GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remeasurement of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of depreciation on property, plant and equipment . . . . . . . . . . . . Recognition of equity investments measured using the equity method . . . . . . Full consolidation of fractionally owned real estate funds (HB-Fonds) . . . . . Adjustment of general bad debt allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of pension provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognition of the discount on liabilities to banks and other lenders . . . . . . . Recognition of government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversal of the provision for group restructuring . . . . . . . . . . . . . . . . . . . . . . . . Discounting of non-current provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631,913 1,960,875 3,924 47,297 38,989 335 −20,995 694 −12,147 8,692 320 58,598 −73 689,178 2,037,564 6,486 53,015 40,007 345 −20,860 582 −13,522 8,692 319 54,125 −71 Value under IFRSs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718,422 2,855,860 As a result of the transition to IFRSs, the consolidated result for 2004 changed as follows: Net profit for the period 2004 EUR k Value under German GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remeasurement of investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of depreciation on property, plant and equipment. . . . . . . . . . . . . . . . . . . . Recognition of equity investments measured using the equity method . . . . . . . . . . . . . Full consolidation of fractionally owned real estate funds (HB-Fonds). . . . . . . . . . . . . Adjustment of general bad debt allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of pension provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognition of the discount on liabilities to banks and other lenders . . . . . . . . . . . . . . Recognition of government loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounting of non-current provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,656 76,689 2,562 5,718 1,018 10 134 −112 −1,374 −1 −4,473 −841 Value under IFRSs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,986 The adjustments required according to IFRSs are based, in particular, on the following: • Remeasurement of investment property relates to the recognition at fair value in accordance with IAS 40. Land and buildings, provided the criteria are met (held for renting and/or capital appreciation), are disclosed in a separate balance sheet item, ‘‘investment property’’, and measured pursuant to the provisions of IAS 40. The fair value method is used in this connection. The reclassified property was recognized in the German GAAP consolidated financial statements in the items ‘‘land and land rights with residential buildings’’ and ‘‘land with commercial and other F-128 buildings’’. The other land and buildings are disclosed as ‘‘property, plant and equipment’’ and measured at cost in accordance with IAS 16. This relates to land which was disclosed in the German GAAP consolidated financial statements as ‘‘land with commercial and other buildings’’. Land with residential buildings, land without buildings, land with hereditary building rights of third parties and commercial or other buildings leased to third parties were reclassified in full as investment property. • The adjustment of write-downs on owner-occupied land with commercial and other buildings is attributable to the useful lives of real estate used for administrative purposes measured in accordance with IFRSs. • The recognition of equity investments measured using the equity method relates to the investment in HEIMAG. For the purposes of measurement using the equity method, the associate prepared a balance sheet in accordance with IFRSs. Recognition and measurement follow the IFRS accounting principles of the GAGFAH Group. • In contrast to the pro rata recognition of individual assets and liabilities under German GAAP, the shares in fractionally owned real estate funds (‘‘HB-Fonds’’) were fully consolidated. Property was recognized at fair value in this connection. Land with residential buildings is disclosed at fair value under investment property. • General bad debt allowances on receivables from the sale of land, third-party real estate management, trade receivables and other assets in the amount of 2% of the carrying amount before specific bad debt allowances less the original amount of the receivables and government receivables were reversed. • The pension provisions are determined using the projected unit credit method pursuant to IAS 19 taking future salary and pension increases into account and an interest rate based on market yields at the balance sheet date on high quality corporate bonds. In the opening IFRS balance sheet, all actuarial gains and losses were recorded in equity (‘‘fresh start’’). Since the date of transition to IFRSs, the corridor approach has been applied for all plans. In the German GAAP financial statements, measurement is based on the carrying amount for tax purposes and an interest rate of 6% p.a. Measurement-related changes in pension provisions were disclosed under personnel expenses under German GAAP. Under IFRSs, however, the interest component is disclosed under interest expenses. • German GAAP sets forth a recognition option in Sec. 250 (2) HGB for discounts on liabilities to banks and other lenders, but no use was made of this option. Pursuant to IAS 39.10, discounts must be recognized. Discounts were deducted from the relevant liability and released using the effective interest method. The counter entry was made in revenue reserves in the opening balance sheet as the discounts were recognized as expenses in the past. • The changed treatment of government loans affected the amount of liabilities. Liabilities that bear no or low interest, in return for which the lenders receive occupancy rights for apartments at discounted conditions in return, are recognized at amortized present value. Present value was determined for the first time using the market interest rate on the date on which the government loan was granted. The discount represents the advance payment of a fee for the authority for the promotion of housing construction and is disclosed separately as a deferred item and released to ‘‘revenues from housing management’’ over the term of the government loan; at the same time, interest expenses increase due to the amortization of the present value. • No deferred taxes were recognized in the financial statements according to German GAAP. In the IFRS financial statements, deferred taxes were recognized on temporary differences and deferred tax assets on loss carryforwards. • The provision for group restructuring disclosed in the German GAAP financial statements was not recognized in the IFRS financial statements as it is a provision for expenses. • Non-current provisions were discounted in line with IAS 37. F-129 4. Number of Employees and Personnel Expenses An average of 944 (prior year: 951) staff were employed by the Group in fiscal year 2005. The average number of employees is presented below, broken down by business area and function: Full-time employees 2005 2004 Authorized signatories/authorized agents . . . . . . . . . . . . . . . . . . . Salaried employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wage earners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part-time employees 2005 2004 33 524 290 38 534 278 0 68 29 0 71 30 847 850 97 101 An average of 29 (prior year: 38) trainees and 143 (prior year: 133) other part-time staff were also employed by the Group. Personnel expenses come to EUR 73,004k (2004: EUR 50,117k) and break down as follows: Wages and salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 2005 EUR k 2004 EUR k 61,232 7,842 3,901 29 40,065 8,069 1,954 29 73,004 50,117 Related Party Transactions Natural persons related to the GAGFAH Group within the meaning of IAS 24.9 are the management of GAGFAH GmbH, the supervisory board and close family members (e.g. domestic partners, children) of the aforementioned persons. Annual rental income including incidental expenses of EUR 23k (prior year: EUR 23k) results from a rental agreement with one member of management of the parent company. As part of this business relationship, GAGFAH I received an interest-free and redemption-free lessee loan in the amount of EUR 60k on November 1, 2002. The remaining balance of the liability came to EUR 60k (prior year: EUR 60k) as of December 31, 2005. Furthermore, one member of management holds 3.1% of the shares in GSW Wohnbau GmbH (GSW). The properties acquired in prior years by this member of management have been transferred to GAGFAH for special lease management. GAGFAH M receives direct administration fees from the condominium association as well as for the special management. A rental agreement exists with a former member of the supervisory board, which generates annual rental income of EUR 4k (prior year: EUR 5k). In addition, an employer loan was granted to one former member of the supervisory board, which is carried at EUR 4k (prior year: EUR 3k). With regard to the compensation paid to management and the supervisory board, we refer to section 6.2 ‘‘Total Remuneration and Loans Granted’’. Transactions relating to the leasing of apartments and temporary employment contracts were concluded in a limited scope with close family members of management and the supervisory board. Related parties of the GAGFAH Group within the meaning of IAS 24.9 include the ultimate parent company, all subsidiaries and associates. GAGFAH GmbH is the parent company of the GAGFAH Group. The ultimate parent company is GAG ACQ. Ireland Limited, Clonee, County Meath, Ireland. Related parties that are controlled by GAGFAH or over which GAGFAH may exercise significant influence are included in the consolidated financial statements and recorded in the list of shareholdings including the relevant capital in Exhibit 1. For the non-consolidated companies, additional information on equity and profit or loss is included. All transactions with related parties are executed on the basis of international methods of price comparison in accordance with IAS 24 on terms equivalents to an arm’s length transaction. F-130 A total of three interest-b