Daimler AG
Annual Report 1996

Plain-text annual report

Daimler-Benz is well on the way to becoming a sustainably profitable corporation again. By streamlining our portfolio, we have created a sound economic basis for future growth. Our new management organization gives our 23 business units significantly more autonomy which will allow them to respond flexibly to the challenges of worldwide competition while emphasizing customer orientation. The use of new controlling instruments and the preparation of the financial statements in accordance with the more investor-oriented U.S. accounting principles mean improved disclosure both internally and externally. A satisfactory return for our investors, attractive products and services for our customers, and challenging and secure jobs for our workforce: These are the objectives we are pursuing with our value-based management. DAIMLERBENZ AKTIENGESELLSCHAFT PASSENGER CARS S-, E-, C-, A- AND M-CLASS SMART TRUCKS EUROPE COMMERCIAL VEHICLES NAFTA VANS EUROPE COMMERCIAL VEHICLES DRIVE TRAINS EUROPE BUSES EUROPE COMMERCIAL VEHICLES LATIN AMERICA UNIMOG CIVIL AIRCRAFT AND HELICOPTERS DEFENSE AND CIVIL SYSTEMS AEROSPACE AEROENGINES MILITARY AIRCRAFT SATELLITES SPACE SYSTEMS INFRASTRUCTURE FINANCIAL SERVICES/ INSURANCE BROKERAGE IT SERVICES SERVICES TELECOMMUNICATIONS AND MEDIA SERVICES TRADING REAL ESTATE MANAGEMENT DIRECTLY RAIL SYSTEMS MANAGED MICROELECTRONICS BUSINESSES M T U / D I E S EL ENGINES CONTENTS LETTER TO THE STOCKHOLDERS AND FRIENDS OF OUR COMPANY 2 BOARD OF MANAGEMENT 5 BUSINESS REVIEW 6 AUTOMOTIVE 13 AEROSPACE 20 SERVICES 25 DIRECTLY MANAGED BUSINESSES 29 RESEARCH AND TECHNOLOGY 34 PERSONNEL 36 DAIMLER-BENZ IN SOCIETY 38 DAIMLER-BENZ IN THE FINANCIAL MARKETS 41 VALUE-BASED MANAGEMENT, US GAAP AND NEW CONTROLLING INSTRUMENTS 44 DISCUSSION AND ANALYSIS OF THE FINANCIAL SITUATION 46 FINANCIAL STATEMENTS 51 SUPERVISORY BOARD 81 REPORT OF THE SUPERVISORY BOARD 82 ADDRESSES AND INTERNATIONAL REPRESENTATION OFFICES 84 MAIOR SUBSIDIARIES OF DAIMLER-BENZ AG 86 DAIMLER-BENZ IN FIGURES 88 MAIOR DIFFERENCES BETWEEN GERMAN AND U.S. ACCOUNTING PRINCIPLES 90 LETTER TO THE STOCKHOLDERS AND FRIENDS OF OUR COMPANY • We have increased revenues by 10 per cent to DM 106.3 billion. In my letter to you one year ago, I said our number one goal was to return Daimler-Benz to profitability. I referred to the difficult path that lay before us and to the tough decisions and actions that we would have to take to achieve our aim. We have proposed a dividend of DM 1.10 per DM 5 share, which will be paid entirely from earnings gen erated from our operating business, and at the same time increases stockholders' equity as the basis for future growth. One year later, I am happy to report to you that we have succeeded in this goal. The profit we achieved in 1996 represents a milestone in this effort. The measures taken in 1995 and 1996 are beginning to pay off. And we have created the basis for a further improvement of earnings in the future. Daimler-Benz is once more a profitable company. We have refocussed our company on its traditional strenghts and values. We have eliminated businesses that either were not profitable or did not fit within our strategy. We have set strict return on capital targets for all our business units. Today, Daimler-Benz is a provider of transporta technologically advanced traffic systems and tion products, services, with a portfolio of 23 business units with high growth and earnings potential. This enables us to allocate our resources to those projects that earn the highest return. Daimler-Benz is a company which will continue on its course of increasing shareholder value. The 1996 figures speak for themselves: • We have achieved an operating profit of DM 2.4 billion in 1996, after a large operating loss in 1995, when we were streamlining. But we could not have done this without our em ployees who are largely responsible for our regained profitability. We could not have achieved what we have achieved without their commitment and dedication and without the constructive approach taken by employee representatives and management at every step of the way during the past two years. We recognize the contribution of our employees to making production in Germany more competitive. We have concluded numerous individual plant agreements involving 135,000 employees in German factories which include guarantees for permanent em ployment for all apprentices in these plants. Daimler-Benz presently offers apprenticeships to approximately 9,200 young people in Germany. However, despite this initial success, we must remember that the 1996 results represent only the first stage on the way to restoring our company to its tradi tional levels of profitability. In addition, we have not yet achieved our goal of being in a leading position in each of our markets with high quality products and services. Not only do we want to lead in terms of the quality of our products, but we also want to be a leader in terms of our return on capital. • The figures reflect the streamlined portfolio as well as operational improvements in nearly all business units. The programs to boost efficiency have brought down costs significantly and improved our competitive position. Therefore, our top priority continues to be the achievement of a minimum return of 12 per cent on capital employed. While we have recently come a good deal closer to this goal, we cannot rest on our laurels. The profitability of the world's best competitors set the standard for the return targets in each respective result The trebling of orders for Airbus in 1996 was business unit. We are still some way short in this regard. due in no small measure to this success. However, much However, the fact that we occupy a leading position in remains to be done to remain competitive in the ever- many of our markets gives us confidence for the future. changing aerospace industry. As the worldwide industry We are especially confident about Mercedes-Benz continues to consolidate, most notably in the United States through the merger of Boeing and McDonnell vehicles. Our strategy is to offer the best products in all our market segments over the long term and we are Douglas; and as defense and space technology budgets continue to decline, a European solution is the only way well on our way to achieve that goal. Our current the European aerospace industry can remain competi- product drive and vehicle offerings are unprecedented in the history of Mercedes-Benz passenger cars. In 1997, tive. Dasa is a driving force in this process. we will launch three new models which we expect will meet with great success: The A-class, the M-class and the CLK; our whole range of vehicles will all have addi- tional innovations. Overall, we plan to expand our sales from 645,000 units in 1996 to more than 1 million vehicles in 2000. Daimler-Benz InterServ ices (debis), our services unit, has become one of the leading companies in its sector generating excellent results and creating new jobs. We are very satisfied with its progress, debis will continue to develop internationally with promising new busi- nesses started in sectors such as telecommunications New approaches to marketing and sales underpin and media services. our strategy. We have reinforced the position of a board Adtranz, the joint rail venture with Asea Brown member in charge of Sales and Marketing. We have ex- Boveri (ABB), which is the market leader in this sector growing by 8 per cent a year, is strategically well posi- panded our resources in this area. In this context, the tioned. The operational start-up problems of the first decision to continue to use the star exclusively for the year will be resolved this year. At TEMIC, we are focus- Mercedes-Benz logo will also strengthen this division. sing our growth on vehicle electronics, an activity which is growing much faster than the market. MTU-Eriedrichs- hafen - the Diesel Engines business unit - has consist- ently succeeded with new products in new markets as In commercial vehicles, we are world leader in terms of sales. We have cut costs by between 20 and 30 per cent and achieved a better price/performance ratio than our competitors with our new products - the Sprinter, the Vito, and the Actros, the latter of which was named well. Truck of the Year. However, despite advances in pro- ductivity, our earnings are still unsatisfactory. We will pursue expansion of our market position, especially in North and South America, and will continue our product drive this year by focussing on the new light class in Europe. We will also refocus ourselves and intensify our efforts to achieve earnings in our European truck business that meet our new, stringent requirements. Daimler-Benz Aerospace (Dasa) introduced its major initiative to improve competitiveness and has made significant progress in enhancing its productivity as a In conclusion, we have made good progress in our operations. We have identified the major contributors to earnings and have laid the groundwork for continued profitable growth. But growth can be sustained only in areas where we enjoy clear superiority over our corn- petitors. That is why we are concentrating on the areas where we excel on a worldwide basis. The acquisition by our subsidiary Freightliner in North America of Ford's heavy truck business is an example of this strategy. And we are now embarking on efforts to further globalize our activities, particularly in Asia and in Latin America. cash flow have become part of the language of the entirt company and part of our corporate philosophy. In conclusion, we believe we have succeeded in wha we set out to do. We have restored Daimler-Benz to pro) itability, and we have laid the foundations for futurt growth. Our central focus is the enhancement of long term value-creation. We are fully aware that success for the future will require that we are closer than ever to our customers and to our markets. We must continue to produce the best quality products in the markets ir which we choose to do business. And we must occup) the leading position in those markets. In the end, our customers will decide whether we succeed or fail anc therefore, the customer must be at the forefront of all that we do. People - both inside the company and ir the market place - are the key to our success. At Daimler-Benz, we view the increase in the market value of our company, as reflected in its stock price, as an expression of the expectations that our shareholders have of us and our work. We are encouraged by this confidence and will continue to work to achieve new levels of efficiency and profitability for Daimler-Benz AG in the coming years. In the interest of securing our competitive position for the long term, we will continue to enhance our position as a leader in research and development In 1996, we invested DM 5.6 billion in this area and were among the leading German companies in terms of the number of patent applications. As an example of our leading position in this area, we presented the first zero- emission vehicle in the world, a passenger car that runs on fuel cell technology in everyday conditions. But a great deal more has taken place in your company to firmly establish a comprehensive concept of value-based leadership. This concept of value-creation requires different thinking on all decision levels; it not only requires bottom-line orientation, but also efficient structures, processes and - not least - a totally new approach to personnel management. With the group's new management structure which has been in place since early April, we are shifting responsibilities down the line to our managers in order to encourage a new sense of entrepreneurship and ownership within the company, thus making us more efficient and quick to respond to the needs of the market. Additional improvement in speed and efficiency will be achieved by the end of 1997 by further organiz ational streamlining. We plan to involve employees more directly in the effort to improve earnings; models are being developed. Employees should be rewarded according to the con tribution of value they make to the company. In addi tion, at the annual shareholders' meeting we will pro pose expansion of the value-based stock option incen tive system to include the second level of management. 1996 marks the first time we have prepared our accounts in accordance with U.S. accounting principles which gives our investors worldwide the transparency they require. This means that our success as well as our shortcomings will be reported with new clarity. The terms operating profit, return on capital employed, and BOARD OF MANAGEMENT from left to right: Dr. rer. pol. Eckhard Cordes born 1950 in Neumiinster, member of the Board of Management since 1996, responsible for Corporate Development and Directly Managed Businesses, under contract until 2002. Dr. rer. pol. Manfred Bischoff born 1942 in Calw, member of the Board of Management since 1995, responsible for the Aerospace Division (Daimler-Benz Aerospace), under contract until 2000. Heiner Tropitzsch born 1942 in Hannover, member of the Board of Management since 04/01/1997, responsible for Human Resources, under contract until 2002. Dr. jur. Klaus Mangold born 1943 in Pforzheim, member of the Board of Management since 1995, responsible for the Services Division (Daimler-Benz InterServices), under contract until 2000. Jtirgen Hubbert born 1939 in Hagen, member of the Board of Management since 04/01/1997, responsible for the Passenger Car Division, under contract until 2002. Dr. phil. Kurt J. Lauk born 1946 in Stuttgart, member of the Board of Management since 04/01/1997, responsible for the Commercial Vehicles Division, under contract until 2002. Dr.-Ing. Dieter Zetsche born 1953 in Istanbul, member of the Board of Management since 04/01/1997, responsible for Sales and Marketing, under contract until 2002. Klaus-Dieter Vohringer born 1941 in Dessau, member of the Board of Management since 04/01/1997, responsible for Research and Technology, under contract until 2002. Jiirgen E. Schrempp born 1944 in Freiburg, member of the Board of Management since 1987. Chairman, under contract until 2000. Dr. jur. Manfred Gentz born 1942 in Riga, member of the Board of Management since 1983, responsible for Finance and Controlling, under contract until ?ooo. Retired from the Board of Management: Ernst G. Stöckl (on 09/20/1996), Helmut Werner (on 01/31/1997), Prof. Dr.-Ing. Hartmut Weule (on 12/31/1996) BUSINESS REVIEW Daimler-Benz concluded fiscal 1996 with a profit Consolidated net income according to United States generally accepted accounting principles totaled DM 2.8 billion (1995: DM -5.7 billion); the operating profit - the standard for measuring the success of our operational business - reached DM 2.4 billion (1995: DM 7.2 billion loss). We achieved this pleasing growth in income by streamlining the group's portfolio. The market success of our new products and our programs to enhance efficiency in all business units have contributed to the improved results, as have the more favorable exchange rates. The new management structure that became effective on April 1, 1997 creates the conditions for accelerating decision-making processes in the company. It extends greater autonomy to the business units, allowing them to respond flexibly to the market while emphasizing customer orientation. Following the encouraging development of business on the whole in the first three months of 1997, we expect our operating profit to continue to grow this year. For the medium-term future, each individual business unit is to yield a return of more than 12% on the capital employed, thus increasing the value of Daimler-Benz. NET INCOME CLEARLY POSITIVE AGAIN noticeably as compared to the 1995 figure. Services were able Consolidated net income as determined using U.S. to increase their share markedly to DM 0.3 billion. The Directly generally accepted accounting principles reached DM 2.8 Managed Businesses contributed a total of DM -0.6 billion to billion in 1996, an especially positive improvement following the group's operating profit. the heavy DM 5.7 billion loss in fiscal 1995. On the whole, business was pleasing in the first three We were also able to noticeably increase our operating months of 1997. In view of the good order situation we expect profit - the standard for measuring the success of our this development to continue in the coming months as well. operational business - to DM 2.4 billion. This pleasing development of results was primarily accomplished with the stream lining of the group portfolio initiated in 1995 and continued in the year under review, by which we eliminated sources of losses and increased our earning power. In this con nection, extensive non-recurring expend itures that had to be taken into account in the 1995 financial statements had a significant impact on earnings in that year. The growth in earnings in 1996 was not only a result of the elimination of these expenses, however, but was also achieved with the po sitive development of our operational business related to the market success of our new products, the programs to boost On this basis, and as a consequence of the advantageous strength of the U.S. dollar, we expect the operating profit to increase yet again in 1997. DM I.I0 DIVIDEND In the financial statements of Daimler- Benz AG prepared in accordance with Ger man accounting principles for the year 1996, net income amounts to DM 1.3 billion (1995: DM -6.6 billion). When comparing this total with the previous year's result, it should be taken into consideration that the figure reported in 1995 contained an extra ordinary loss of DM -5.1 billion resulting from non-recurring expenditures arising within the group and the full write-off of our efficiency in all units, and the more favorable exchange rates. interest in Fokker. As in the previous years, our vehicle business played a Considering that the result from our operational business central role in the Company's operating profit, contributing a is clearly positive once again, we propose to our shareholders total of DM 2.7 billion. While the contribution of Aerospace that a dividend in the amount of DM 1.10 per DM 5 par value was still negative at DM -0.2 billion, it did improve quite share be paid out of unappropriated retained earnings. With growth in nearly all of the important markets. Revenues in share capital totaling DM 2,577 million, the payout amount the European Union totaled DM 65.3 billion; comparably is DM 567 million. calculated, this was 16% higher than in 1995. In the EU countries outside of Germany, we achieved a 18% increase, WORLD ECONOMY RELATIVELY FLAT while our revenues in Germany were up 14% to DM 39.2 billion. We were able to achieve this noticeable increase in Our business volume in the USA rose to DM 19.1 billion (1995: earnings despite the fact that the overall economic conditions DM 17.4 billion). In the other markets, revenues reached DM in the markets that are important for Daimler-Benz did not 22.0 billion, outperforming the previous year's level by 9%. improve significantly. The economic growth in the indus trialized countries, at 2%, was only slightly higher than in VIGOROUS GROWTH IN ALL SEGMENTS the previous year and varied considerably from region to All of the Company's business segments contributed to region. the expansion of consolidated revenues. In the Automotive Because of the weak development in the first half of the business (Mercedes-Benz) our revenues grew 8% to DM 77.6 year, growth rate in Western Europe - and above all in billion, above all due to the success of the many new vehicle Germany - declined perceptibly. It was not until the second types launched in 1995 and 1996. half of the year that the lower interest rates, the stronger U.S. When comparably calculated, the Aerospace Division dollar, and the stabilization of exchange rates within Europe (Daimler-Benz Aerospace) improved its revenues by 13% to led to a more favorable economic climate in these important DM 13.1 billion, while Services (Daimler-Benz InterServices) markets. recorded a 12% expansion; its revenues also totaled DM 13.1 The stable upward trend in the U.S. economy continued to pick up speed. Cata lysts included private consumption and persistently brisk investment activity. As a result of government spending programs, the Japanese economy also ex perienced vigorous growth in 1996. The international economic significance of the newly industrializing and developing countries became more pronounced in the year under review. Prominent factors in cluded the stabilization of the economies in the Latin American countries and the above- average growth rates in certain Central and Eastern European countries and the Asian region. billion. The external revenue of the Directly Managed Businesses reached DM 8.0 billion. Without internal deliveries, Mercedes- Benz contributed 71% to the revenues of Daimler-Benz, Daimler-Benz Aerospace (Dasa) 12%, Daimler-Benz InterServices (debis) 10%, and the Directly Managed Busi nesses 7%. CONCENTRATION ON CORE COMPETENCIES In the year under review, we continued the review of our corporate portfolio that we had first initiated in 1995. The most essen tial criteria we referred to were the market position of the individual activities, the CONSOLIDATED REVENUES NOTICEABLY IMPROVED competitive situation, the assessment of potential returns and Against this economic background, we increased consoli risks, future capital requirements, and the strategic import dated revenues to DM 106.3 billion in 1996, surpassing the ance within the group. By focusing on our core competencies previous year's total of DM 96.5 billion (adjusted for changes we reduced the number of businesses we maintain to 23 in the consolidated group) by 10%. We recorded significant instead of the 35 we had in mid-1995. We completed the reorganization of the business activities commercial vehicles, aerospace, services, rail systems, micro- electronics, and diesel engines. of AEG Daimler-Benz Industrie in 1996. Upon the recording of the change in the Commercial Registry in September 1996, AEG AG merged with Daimler-Benz AG with retroactive effect NEW MANAGEMENT ORGANIZATION IN THE as of January 1,1996. The assets of AEG AG had already been DAIMLER-BENZ GROUP In tandem with the strategic development of the group, spun off to EHG Elektroholding GmbH at that point. The Energy Systems Technology and Systems and Automation we also reviewed our structures and processes. The result Technology units were sold to companies specializing in these was the new organizational structure we presented in January activities in the year under review. The Sorting and Recog- 1997, which has been in place since April 1, 1997. Its objective is to make administrative and planning processes within the nition Systems business unit was sold to Siemens AG with economic effect as of January 1, 1997. Of the former activities group faster and more cost effective and efficient. The units active in the market have been given significantly expanded of AEG Daimler-Benz Industrie, the Daimler-Benz group is autonomy, which will enable them to respond flexibly and now concentrating on Rail Systems (Adtranz), Microelec- effectively to the challenges of worldwide competition while tronics (TEMIC), and Diesel Engines (MTU Friedrichshafen) as Directly Managed Businesses. We had already transferred emphasizing customer orientation. Rail Systems to Adtranz, a 50:50 joint venture with ABB, on An important element of the new corporate structure is the merger of Mercedes-Benz AG with Daimler-Benz AG. December 31, 1995. After the sale of Bayern-Chemie Airbag GmbH at the end of 1996, TEMIC will focus increasingly on Consolidating the two headquarters eliminates one manage- the automotive electronics and semiconductor sectors in the ment level. At the same time, it underscores the fact that the vehicle business will constitute the focus of the group's future. activities in the foreseeable future. Following the discontinuation of our financial support for Fokker in January 1996 and the transfer of Dornier Luftfahrt Decision-making processes were greatly accelerated at GmbH in June 1996 to a company in which the American Dasa when we dissolved the former intermediate levels Fairchild Aircraft Inc. holds a majority share, Daimler-Benz Aircraft, Defense, and Space Systems. We consolidated the information and reconnaissance systems product areas, Aerospace withdrew from direct business with regional aircraft. Due to the difficult competition conditions and our together with sensor systems, within the Defense and Civil position in this market, we no longer consider it justifiable to Systems business unit. continue these activities. Within the context of our concen- tration on core competencies, Dasa transferred its majority share in Dornier Medizintechnik to Singapore Technologies archic in January 1996. Singapore Technologies plans to intensify its involvement in this sector. Administrative expenses are also being noticeably reduced in the central units at debis. We have streamlined the hier- levels in this division. debis Financial Services and debis Insurance Brokerage are being consolidated within one unit. Daimler-Benz InterServices stepped up its activities in the telecommunications and media services sector in an effort to STRENGTHENING EARNING POWER In the year under review, we implemented targeted take advantage of the opportunities of this growth market. debis withdrew from the Marketing Services business unit measures to reinforce the earning power of the 23 business units remaining in the group. In the medium-range future, because this activity is not among the core competencies of all units within the group are expected to yield a return above the group and its market position was not able to join the 12% and thus higher than the cost of capital employed. This is lead in each of the relevant sectors. Following the realignment of the portfolio, Daimler-Benz meant to ensure that the contribution of each individual is now active in the following businesses: passenger cars, business unit enhances the value of our Company. Above all at TEMIC and Adtranz and in the business units Trucks Europe, Unimogs, and Drive trains Europe, we have decided to pursue vigorous campaigns to lead these busines ses to produce the 12% minimum return on capital employed. Notwithstanding the significantly improved orders situation and the revaluation of the U.S. dollar as compared to the German mark, we continued the programs we had introduced at Dasa in 1995 to promote competitiveness. It is still our goal to generate a profit even if the dollar were to remain at a low rate for long periods. increased on a permanent basis. At the end of December 1996, Daimler-Benz Aerospace employed a total of 44,936 persons (comparably calculated for 1995: 46,892 persons). Daimler- Benz InterServices increased its workforce by 1,304 to 11,500 employees. If the previous year's total is adjusted to reflect structural changes, the number of employees at the Directly Managed Businesses remained nearly unchanged at 31,005 persons. GLOBALIZATION OF PURCHASING ACTIVITIES The Daimler-Benz group purchased goods and services EMPLOYMENT SITUATION STABILIZED worldwide worth a total of DM 66.9 billion in 1996. Employees by Segments At Year-End Thanks to the success of the pro grams to boost efficiency we had already implemented and the encouraging pros pects for all business units on the whole, the employment situation at Daimler- Benz stabilized again following the per sonnel cuts in the previous years. Con tributing factors included the internal agreements for most of our German factories concluded with the employee representatives, which make it possible for us to greatly reduce personnel ex penses while increasing the flexibility and efficiency of our workforce. We thus improved the conditions for competitive production in Germany and safeguarded jobs there. At December 31,1996, we employed Just under three quarters of the pur chases were for the Automotive busi ness, 10% for Daimler-Benz Aerospace, 8% for Daimler-Benz InterServices, and 8% for the Directly Managed Businesses. It remains a high priority of our ac tivities to continue to tap internatio nal purchasing markets. Our objective is to make use of cost advantages while at the same time limiting currency risks. We are concentrating our efforts on the Asian and Pacific growth markets above all. As always, however, we are still com mitted to cooperating with our German partners, whose quality consciousness and innovation potential is respected around the world. a total of 290,029 employees worldwide (1995: 310,993 persons), of which 222,821 worked in Germany (1995: 242,086 persons). The lower number of employees as compared to the previous year is primarily related to structural changes such as the disinvestment of businesses at AEG and Dasa. A total of 199,099 persons were employed by Mercedes- Benz at year-end 1996 (1995: 197,164 persons). The layoffs at Daimler-Benz Aerospace were not as heavy as originally planned, predominantly because the order situation at Air bus picked up remarkably and production volume could be We are continuing our purchasing drive in Eastern Ger many; at this point we are concentrating on stabilizing the business relations we have already established. CAPITAL EXPENDITURES INCREASED TO DM 6.2 BILLION The investments of the Daimler-Benz group in property, plant, and equipment (excluding effects from first consolida tions) climbed to DM 6.2 billion in 1996 (1995: DM 4.8 billion). Once again, the majority of our capital expenditures went toward securing the future of our Automotive business with a total of DM 4.5 billion (1995: DM 3.3 billion). In the Passenger Car Division, the engine plant in Stutt gart-Bad Cannstatt, the preparations for production of the A-Class in Rastatt, and the transition to new paint technologies were among the most important investments. The most important project outside of Germany was the preparation for production of the M-Class in the USA. The capital expenditures made in the Commercial Vehicle Division were also primarily focused on the production of new vehicles and assemblies. Priorities included the heavy-duty Actros truck, the new light class, and the new engines, drive trains, and axles. Purchasing Volume DM 66.9 Billion (1995: DM 66.9 Billion) DM 0.6 billion were invested at Dasa in 1996; one of the most important pro jects was the expansion of production capacities for the planned volume run up in the Airbus program, debis invested DM 0.2 billion, and the Directly Managed Businesses a total of DM 0.5 billion. The investment volume of Daimler-Benz AG reached nearly DM 0.5 billion, of which DM 0.4 billion were spent on the Pots- damer Platz real estate project. As a consequence of the growing leasing business, capital expenditures for leased equipment were once again on a high level at DM 6.1 billion. Daimler-Benz expects to invest near ly DM 20 billion in property, plant and equipment in the 1997 to 1999 planning period. Here, too, the emphasis will be on the Passenger Car and Commercial Vehicle divisions. Because of the product drive, another noticeable expansion in the automotive sector is on the horizon in fiscal 1997; the investment volume will therefore tend to decrease in the following years. In the financial services sector, we expect business volume and hence capital expenditures for leased equipment to continue to increase. DM 8.8 BILLION SPENT ON RESEARCH AND DEVELOPMENT We spent a total of DM 8.8 billion on research and develop ment projects in 1996 (1995: DM 8.9 billion). Of this amount, DM 3.3 billion (1995: DM 3.6 billion) were allocated to contract development services rendered almost exclusively by Daim ler-Benz Aerospace. As in the past, the majority of the funds allocated to our own research and development was spent on securing the future of our vehicle business, because customer-oriented innovations form the basis of our product drive. Of a total of DM 4.0 billion (1995: DM 3.7 billion), DM 2.9 billion were related to passenger cars and DM 1.1 billion to the commercial vehicle sector. The focus of our activities remained developing new-generation vehicles and assemblies to the production stage. We have become significantly more efficient in research and development for the automotive sector thanks to new forms of interdisciplinary teamwork and the intensified involvement of the supplier industry. These factors alone made it possible to develop so many attractive products within such a short time at competitive costs. A total of DM 3.7 billion was spent at Daimler-Benz Aerospace on research and development (comparably calcu lated for 1995: DM 4.0 billion), of which DM 3.0 billion were related to projects completed under contract for third parties (comparably cal culated for 1995: DM 3.3 billion). Among the most important projects in the aircraft sector were the expansion of the Air bus program with new model versions, the Eurofighter, and the Tiger and NH90 Eurocopter programs. In the Propulsion Systems business unit, the EJ200 engines, PW4000 growth, and PW500 were chief pursuits, and in the Defense unit the sensor and information systems product areas. Research and development in the space systems infrastructure and space systems satellites areas, which in the year under review reached a volume of more than DM 2.0 billion, predominantly concerned third-party contracts. Adtranz used its research and development expenditures, totaling DM 316 million, on a new generation of track-bound vehicles with tilt technology, on fully automated passenger transport systems, and on innovative solutions in the operation control technology sector among other products. TEMIC primarily concentrated on innovative products in the automotive electronics sector, spending DM 324 million on R&D in 1996. Key areas included airbag systems, electronic stability programs, and sensory systems for automotive applications. Research and Development Expenditure DM 8.85 Billion (1995: DM 8.94 Billion) MTU Friedrichshafen developed the new 2000 and 4000 engine series to the production phase in cooperation with Detroit Diesel Corporation (DDC). More over, work on fuel cell technology con tinued and development efforts were initiated for the commercial high-end engine series. MTU Friedrichshafen spent a total of DM 106 million (1995: DM 99 million) on research and develop ment. In the period from 1997 to 1999, the funds we use in the Daimler-Benz group in connection with our own research and development projects will remain at the present high level of more than DM 5 billion per year. We will continue to focus more than 70% of total expenditures on the group's automotive business. OUTLOOK We expect the subdued upward trend in the world econ omy to continue in the coming years. Based on the export business, an upswing is on the horizon for the economies of Western Europe. But this development will be limited as a result of the reserved spending policies pursued by various EU member countries in order to comply with the criteria for accession to the European monetary union. The German economy will most likely pick up speed again in 1997, with growth around 2%. Prominent factors will be the export business above all, as well as investment activities to a limited extent, while the expansion of private consumption will probably be below average. The upward trend in the U.S. economy related to brisk domestic demand will continue its seventh consecutive year in 1997, although presumably somewhat weaker than before. The economy in Japan, on the other hand, may lose a great deal of vitality again as a result of a more restrictive fiscal policy. Growth prospects for the Pacific Rim countries and various countries in Central and Eastern Europe remain better than average. The econ omy is also expected to accelerate in the Latin American countries in 1997. Against the background of an overall revitalization of the economy that is only moderate at best, growth in the pas senger car and commercial vehicle mar kets will be limited in 1997. However, we do expect the Automotive business of Daimler-Benz to develop significantly more favorably than the industry on the whole in 1997. The Passenger Car Division expects to continuously increase its sales in the coming years. We plan to expand our position in the market for luxury cars worldwide by introducing attractive new models in the existing series while at the same time tapping additional markets and customer groups with new products. In the Commercial Vehicle Division, the success of our product drive will enable us to boost sales yet again. Aside from the new Actros, the persistently encouraging van business will be an especially beneficial factor in 1997. We plan to systematically expand our truck business in North America by taking over Ford's heavy truck activities. By the turn of the millennium, Daimler-Benz will most likely produce and sell in excess of one million passenger cars and 450,000 commercial vehicles per year. After making adjustments for structural changes, we ex pect the business volume of our Directly Managed Businesses to steadily increase. With attractive new products and a competent, worldwide service network, Adtranz has created the conditions to reinforce its leading international position in rail systems. TEMIC will concentrate its activities more decidedly on the needs of the automotive industry in the future. Innova tive products in the vehicle electronics and semiconductor sectors are the basis for future growth in this respect. MTU-Friedrichshafen is counting on revenue to expand yet again in the next few years. New growth will be stimulated by the market introduction of the new 2000 and 4000 engines series in particular, which are specially designed to satisfy the needs of commercial markets. With the strategic realignment of the group and the new organizational structure, we laid the foundation in 1996 for sound growth for the Company. But to a large extent, the development of business and earnings in the coming years will also depend on how the economic situation and above all the U.S. dollar progress in the markets that are important to us. Another significant factor will be the response to our new products in the international markets. We expect revenues in the Aerospace business to grow markedly in 1997, above all because of the pleasing develop ment of orders in the commercial jet sector. The Propulsion Systems business unit will also be able to profit from the revival of the commercial jet market. In the Space Systems unit, revenues are likely to increase in conjunction with the invoicing of major projects. In the Defense and Civil Systems unit, Dasa is counting on a slight growth in revenues along with the emerging upturn of business in the defense sector. On the basis of the programs we have introduced to enhance competitiveness and the strong U.S. dollar, the earning power of the Aerospace Division will improve yet again in the operational area. The Airbus partners signed a memorandum of under standing in January 1997 that stipulates the conversion of the consortium to a corporation by the year 1999, marking another important step toward the consolidation of the European aerospace industry. The service industry will be one of the world's most dynamic growth sectors in 1997 as well. Daimler-Benz InterServices will take advantage of the opportunities con nected with this growth and expects to be able to sustain the positive development of recent years. The internationalization of activities in all business units will be instrumental in this undertaking. We are projecting the high growth to continue in all business units at debis, a development that will not only be supported by internal transactions, but in an increasing measure by our transactions with outside customers. We are convinced that we will be able to improve our market share in all units. The Financial Services/Insurance Brokerage and Trading units will profit from the expansion of industrial business at Daimler-Benz and the growing importance of these services in connection with systems solutions. The IT Ser vices unit will focus its service range more emphatically than before on the needs of individual customer groups and continue to expand its international presence. AUTOMOTIVE Fiscal 1996 was very successful for our vehicle business on the whole. Sales of passenger cars and commercial vehicles as well as revenue reached an all-time high, and we were also able to increase our contribution to the Daimler-Benz group's operating profit to DM 2.7 billion. The attractive product innovations we had launched in 1995 were primarily responsible for this success. We continued our product drive in 1996 with the SLK roadster, the new T-Models of the C- and E~Class, the V-Class, the new Actros heavy trucks, and the Vito and Vario vans. We made additional progress in the globalization of our activities, thus creating the conditions for opening up new markets. AUTOMOTIVE BUSINESS VARIES SIGNIFICANTLY REVENUE SIGNIFICANTLY INCREASED FROM MARKET TO MARKET The development of our vehicle business was significantly Against the background of slow growth in the world more favorable than in the automotive industry in general, economy, the development of the automotive markets that above all because of the many successful new products we are important to us was highly varied in 1996. introduced to the market. For instance, sales of new passenger cars in Western Revenue was up 8% to DM 77.6 billion. We achieved double- Europe rose by almost 7% to 12.8 million vehicles. In North digit growth rates both in Europe and in Japan. At DM 30 America, a slight drop was recorded in the passenger car billion, our revenue in Germany was 6% higher than in the market despite the favorable economic situation, while sales previous year and in the USA we also recorded a 6% increase, in Japan were up 5%. The development in various countries of to DM 12.6 billion. Eastern Europe remained dynamic. Important markets in the The foreign share in our business volume was unchanged Asian region, on the other hand, were not able to continue the brisk growth of the previous years, especially in the sales of luxury cars. Demand for passenger cars in Mexico began to recover from the very low level of activity, and slight growth was recorded in the South American markets as a whole. All in all, the upward trend in the We stern European commercial vehicle market continued in 1996, but the truck sector became a great deal more sluggish in the second half of the year. The growth was primarily contributed by vans under 6 tons, while sales of trucks over 6 tons failed to reach the previous year's level. The development of the overseas mar at 61%; the share contributed by Western Europe outside of Germany was 23%. We generated 16% of our earnings in the USA and 4% in Japan. Revenue in the Passenger Car Division increased by 14% to DM 45.9 billion, while earnings in the Commercial Vehicle Divisi on stabilized at the 1995 level at DM 31.7 billion. PASSENGER CAR DIVISION EXPANDS MARKET POSITION Sales of the Passenger Car Division increased worldwide to 645,000 passenger cars and off-road vehicles, setting a new record in the company's history (1995: 590,200 units). We achieved double-digit kets was characterized by a noticeable decline in demand for growth rates in numerous important markets, and thus medium- and heavy-duty trucks in North America. In Brazil, noticeably improved our position worldwide in the market for too, demand for commercial vehicles was weaker. In contrast, luxury cars. The E-Class contributed the majority of this the market situation in Mexico and Argentina achieved greater growth; its sales increased by 46% to 291,500 vehicles. stability again in 1996. Sales of passenger cars in Germany, at 264,000 units, were 10% higher than in 1995. Because sales in the luxury car segment increased by only 3%, our market share in this category rose to 26%. Mercedes-Benz had an 8% share of the overall market, which was also noticeably higher than in the previous year (7.5%). Outside of Germany, we sold nearly 381,000 Mercedes- Benz passenger cars in 1996, surpassing the previous year's record by 9%. Business remained successful in the Western European markets outside of Germany, where we increased sales by 10% to 174,000 vehicles and continued to expand our market position. In the United States, Mer cedes-Benz once again came close to the 1986 record. A total of 90,800 passenger cars were sold, which represents an 18% increase over the previous year. Since the market for luxury cars rose by only 2% in the USA, our share in this segment climbed to 10.1% (1995: 8.7%). In Japan, our new car sales increased by 17%, reaching a new high of 41,000 units. In the process, our market share in the luxury class rose to approximately 10%. In Eastern and Southern Europe, Latin America, the Middle East, Australia, South Africa, and Canada, our sales also surpassed the previous year's level. In the important markets in the Far East, however, we were not able to repeat the remarkable volume of 1995 due to weak overall demand for luxury cars. In response to the growing demand for our passenger cars and the successful production startup of the new T-Models of the C- and E-Class and the SLK roadster, we were able to ramp up our production output to 645,200 units (1995: 600,300 units) in 1996. SALES REACH A RECORD LEVEL IN THE COMMERCIAL VEHICLE DIVISION The Commercial Vehicle Division sold a total of 348,100 vans, trucks, buses, and Unimogs in the year under review, outdistancing the record level of 1995 by another 9%. The development of the Vans Europe unit was especially encouraging; its sales increased by 32% to a total of 151,100 units. This success was predominantly related to the new Sprinter and Vito vans. Although we experienced temporary bottlenecks in delivery because of the tremendous demand for these vehicles, our share in the Western European van market jumped from 12.7% to 15.5%. Because of the difficult market conditions in Western Europe, and, in particular, be cause of buyer resistance in anticipation of the model change in the heavy-duty truck class, sales of the Trucks Europe unit dropped to 64,400 units in 1996 (1995: 70,000 units). While our market share fell to 23% (1995: 25%), we were still able to assert our position as the market leader for trucks over 6 tons in Western Europe. The new heavy Actros truck, which we introduced at the IAA commercial vehicle show in September 1996, was named Truck of the Year 1997. Our American subsidiaries, which we have consolidated within the Nafta Commercial Vehicles and Latin American Commercial Vehicles units, were not quite able to keep up with the sales level of the previous year due to the challenging situation in the local markets as a whole. The North and South American facilities sold a total of 123,400 commercial vehicles. The Freightliner Corporation, however, maintained the record sales level of 1995 by selling nearly 75,000 vehicles in North America. Because the overall market for trucks in Classes 6 to 8 (over 8.8 tons) shrank by 12% in North America after years of growth, Freightliner's market share climbed to 22% (1995: 19%). The new CLK Coupe is distinguished by its dynamic appearance and its numerous technical innovations. Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. Not least because of the success of the new Century Class, which was launched in October 1995, Freightliner was able to significantly expand its market position in the heavy-duty Class 8 (over 15 tons) to a 29% share (1995: 26%). However, the dramatic setback in the market meant that even Freightliner's sales dropped to 53,900 units (1995: 63,200 units). Nonetheless, the pleasing growth in Classes 6 and 7 compensated for the lower sales. Thanks to its successful double-nameplate strategy, EvoBus GmbH managed to increase its sales by 11% in 1996. A total of more than 6,400 Mercedes-Benz and Setra buses in the category over 8 tons were delivered, as well as 900 Mercedes-Benz chassis. In Germany, we were able to expand our total market share slightly to 36% for Mercedes-Benz and 22% for Setra. Our market share in Western Europe remained at 16% for Mercedes-Benz and 9% for Setra. Mercedes-Benz do Brasil asserted its position in the Brazilian market in the category of trucks over 6 tons, where it now holds a 39% share (1995: 38%). In the bus sector, it even expanded its share to 70% (1995: 67%), but suffered noticeable declines in sales due to the weak condition of the market in general. We produced a total of 340,700 commercial vehicles worldwide in 1996 (1995: 329,700 units). The lower production volume in the trucks sector was more than offset by the significantly higher volume of vans. Production of buses and bus chassis reached another record level at 34,000 units (1995: 27,800 units). Business was favorable on the whole for our companies in Argentina and - albeit from a low previous level - in Mexico. Primary factors included both the market situation in general and the attractive new products we introduced in these markets. PRODUCT DRIVE PURSUED MORE INTENSIVELY The year 1996 was marked by the introduction of numer ous new products and assemblies. Obligation to tradition: The T-Modet of the E-Class is a trendsetter in its class. It has all of the characteristics of the successful sedan, including attractive design, innovative technology, and customizable features, as well as generous and versatile interior space for family needs and recreation. The Sprinter is an example of maximum customer orientation. Its variety and efficiency can hardly be beaten. Thanks to the market success of the Sprinter, Mercedes-Benz managed to increase its market share in the Western European van market from 12.7% to 15.5%. In the Passenger Car Division, the new T-Models of the C- and E-Class were launched in March 1996, followed by the SLK roadster and the V-Class, a minivan produced on the same platform as the Vito at our facility in Vitoria, Spain. We will be expanding our product range in 1997 with the CLK coupe, the compact A-Class, and the M-Class, an all-wheel-drive sport/utility vehicle manufactured in the USA. We will also launch the new V-engines, which will make our range of drive assemblies significantly more attractive. The product drive will be continued in 1998 with the introduction of the Smart, a compact vehicle designed for urban traffic that will be sold as an independent nameplate. In the Commercial Vehicle Division we revamped our entire van line in 1995 and 1996 and expanded it with vehicles in the 2.0 to 2.7 ton range. The most important product innovation in 1996 was the Actros, the new heavy-duty series at Mercedes-Benz. Other new products in 1996 were the Unimog UX 100, four new buses assembled by EvoBus GmbH, the MB 800 light truck, which was developed in Turkey and is now produced there;, and an updated truck manufactured in Brazil. The Actros construction-site vehicles will be introduced to the Western European truck market in fall 1997 and the new light truck class in 1998. GLOBAL PRESENCE EXPANDED We made new progress in the globalization of our activities in 1996, thus creating the conditions for opening up new markets. An important milestone for our intensified involvement in South America was the decision to construct a new passenger car plant in Juiz de Fora, Brazil. The A-Class will be produced there for the Latin American market starting in 1999. In the Commercial Vehicle Division, we began assembling the Sprinter in Argentina and the Vito in Poland. Moreover, a joint venture agreement was signed for the production of Mercedes-Benz buses in China. TARGETED MEASURES TO INCREASE EARNING POWER INTRODUCED We introduced comprehensive measures to reduce costs and boost productivity in order to reinforce our earning power in the automotive business. We concentrated on the Trucks Europe and Drivetrains Europe units as well as the Unimog production in Gaggenau, Germany. Our new products - with which we have achieved substantial cost advantages as compared to the predecessor models - are a decisive part of this effort. For instance, we have already significantly improved our cost position in the Trucks Europe unit with the Actros, primarily because of the more efficient overall concept with its greatly reduced parts count and leaner production processes. At EvoBus GmbH, the production network between the plants in Mannheim, Ulm/Neu- Ulm, and Ligny is opening up new potentials for cutting costs. SUCCESS THROUGH PARTNERSHIP WITH SUPPLIERS As part of the TANDEM co- operation concept, we have in tensified our cooperation with supplier companies at all levels in the past few years. Sup pliers are now involved in the development of new-generation vehicles at a very early stage, and we are also transferring more and more responsibility for the development and pro duction of complete systems to our suppliers. Not least because of the constructive cooperation with the supplier industry, we have succeeded in shortening the product development process by approximately 15%. But our suppliers have also contributed suppliers have also contributed to the improvement of our cost position for existing and new products. Our purchasing structures were expanded worldwide in connection with the globalization strategy of our automotive business. Our purchasing volume rose by 7% to DM 50.3 billion in the year under review. The increase over the previous year was primarily due to the higher production volume, but it was also related to the lower degree of manufacturing penetration. i F 200 IMAGINATION CONCEPT CAR The idea of combining design with innovation inspired the development of the F 200 Imagination concept car we presented at the 1996 auto motive salon in Paris. The two- door coupe is equipped with futuristic systems that will con ceivably be used in high-end Mercedes-Benz models in the coming millennium. In addition, the concept car demonstrates how technical innovations can open new perspectives for the design of future high-end au tomobiles. The relationship between form and function is therefore especially close in this concept car: it enables the for mal and functional experience of technological innovations. Among the most important innovations on board the F 200 Imagination is a trendsetting driving dynamic system where the driver controls all of the movements of the car with de vices called side-sticks that are installed in the door trim panel and central console of the coupe concept car. The F 200 no longer has any of the conventional control or linkage ele ments such as a steering wheel, steering column, or pedals - the driver's commands are transmitted exclusively through electronic technology. Engineers call this system "drive-by- wire." Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. The Aerospace Division (Dasa) expanded its business volume by 13% to DM 13.1 billion. The recovery of the aircraft market was confirmed by incoming orders for aircraft that were three times higher than in the previous year. An encouraging revival of business activity was also observed for Propulsion Systems. In the Space Systems sector we concluded contracts for major projects that will play a key role in the future. We have initiated a restructuring of the Airbus consortium with our partners to reinforce our position in the commercial jet market. The persistent implementation of our competition drive is intended to permanently strengthen earning power. Dasa already managed to improve its contribution to the operating prof it of the Daimler-Benz group from DM-7.2 billion to DM-0.2 billion in 1996. A I R L I N ES B E G IN TO T A KE O FF The growth of the air travel industry continued to stabilize in 1996. In international passenger traffic, an 8% increase was recorded, as in 1995, while growth in the Asia/Pacific region was again above-average at close to 10%. Commercial traffic in Europe continued to develop favorably, rising by slightly more than 8% (1995: 7.8%). In the USA, the increase was comparable to the previous year at just under 4% (1995: 3.5%). Thanks to the expanding traffic vol ume and the recognizable success of ra tionalization measures, the airlines were able to boost their income substantially after the heavy losses experienced in the period between 1991 and 1993 and the first signs of recovery that had become apparent in 1994. The improved earnings situation, the increasing necessity to replace fleets, and the renewed growth in traffic volume led airlines to intensify their purchasing activities significantly. In addition, the aircraft manufacturers are still engaged in fierce competition that is primarily focused on pricing. The situation is advantageous for the airline companies and caused orders for commercial jets with more than one hundred seats to jump to 1,088 units (1995: 562 units). The number of aircraft ordered was thus twice as high as in the previous year, and was once again of a magnitude last experienced at the beginning of this decade. Due to persistent cost reduction measures, the European Airbus partners were able to improve their position in inter national competition with more favorable pricing and increase their market share in the orders placed in 1996 to 39% (1995: 18%). The downward trend in deliveries came to a standstill. At a total of 397 aircraft, the figure of the previous year was exceeded for the first time in the last four years (1995: 380 units). Airbus Industrie delivered 32% of this total (1995: 33%). In view of the encouraging ordering situation, aircraft manufacturers plan to increase deliveries significantly in 1997. At the same time as the positive de velopment of the aircraft market, demand for civil jet engines and replacement parts began to recover. Price pressure for equip ping new aircraft, however, remained high. Procurement programs for military jet en gines were delayed due to the persistently strained situation affecting government budgets. Engine manufacturers are there fore concentrating increasingly on the civil sector, which makes competitive pressure here even higher. P U B L IC S P E N D I NG P O L I CY R E S E R V ED Government spending policy in Germany and other western industrialized countries was again very reserved as a result of the strained financial situation; delays and cancellations of planned programs were necessary, above all Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. in the guided missile sector, which is causing additional SIGNIFICANT REVIVAL OF BUSINESS adjustment pressure in that area. The defense budget may for After making adjustments for substantial changes in the the defense industry cannot be expected in the next few years. consolidated group, the revenue of the Aerospace Division To complicate matters in the European defense industry, rose 13% to DM 13.1 billion (1995: DM 11.5 billion). Increasing competitors in the USA are joining forces to form large and revenues from the civil jet engine sector and high invoicing capable organizations. The European industry's response to for military jets and space projects contributed to this growth. this new challenge can be only limited at best as long as Revenue in Germany, which at DM 4.2 billion (1995: DM national interests take precedence over sensible economic 3.6 billion) represented approximately 32% of total revenue, measures. was up 14%. Significant factors included extensive invoic The government funds provided for space research ing for services in the Eurofighter development program remained below the previous year's level. Due to financial bottlenecks in France and Ger many, no funding was available for the satellite-based recon naissance programs planned by the two countries. The same ap plies to the urgently needed military transport jet for Eu rope. Because government fund ing is still limited, aerospace companies worldwide have been concentrating on commer cial global satellite and carrier markets. In commercial com munications, the most impor tant market for satellite applica tions, the demand for satellites increased yet again in response to the new communications services, the deregulation of and higher sales of jet engines. Foreign revenue grew 13% to DM 8.9 billion (1995: DM 7.9 bil lion). The increase in revenue from the USA was above average (+35%) as a result of expanded deliveries of engine components. We achieved vigorous growth in incoming orders; when comparably calculated, the increase was the equivalent of 56% to DM 17.1 billion (1995: DM 10.9 billion). What was de cisive here was above all the upward trend in the civil air craft business, which was ac companied by a brisk upsurge in orders for commercial jets. But in the helicopter segment, too, incoming orders were sig nificantly higher than in the previous year. The Space Sys the markets, and the opening up of additional regions. Despite intensified harsh price competition, the European tems unit booked several major contracts for long-term projects, such as the COF space station module and the ERS aerospace industry was able to expand its position in the successor program Envisat 1. commercial satellite and carrier market. When comparably calculated, revenue in the Aerospace The procurement of military helicopters is still highly Division increased 14% to DM 6.0 billion (1995: DM 5.3 billion). limited. In the civil market for helicopters, on the other hand, While revenues from the Airbus program were below the a recovery became apparent in 1996, but because of existing previous year's level due to a different product mix, the overcapacities competition in this sector remains fierce. invoicing of services for the Eurofighter 2000 development program and deliveries of Tornado subassemblies led to an especially vigorous surge in revenue in the military aircraft sector. Another significant growth factor was the helicopter sector, where the revival of business with civil helicopters more than offset the decline in military programs. Customer orders in the Aircraft unit rose by 69% to DM 8.9 billion in 1996 (comparably calculated; 1995: DM 5.2 billion), primarily as a result of the doubled contract volume at Daimler-Benz Aerospace Airbus. In the Space Systems unit, we recorded a gratifying 14% increase in revenue to DM 2.1 billion (DM 1.8 billion) because of invoicing for a number of large projects. Among the most important contributions to this growth were the Envisat, COF (Columbus Orbital Facility), Ariane, Globalstar, and Nahuel space programs. Customer orders, at DM 3.6 billion (1995: DM 2.0 billion), were 78% higher than in 1995. This was primarily due to the contracts with a volume of over one billion German marks concluded for the development of the Colum bus research station. In the Defense and Civil Systems unit, revenue remained at the previous year's level at DM 2.6 billion. But the develop ment was highly varied in individual areas. Customer orders increased markedly by 21% to DM 2.4 billion (comparably calculated for 1995: DM 2.0 billion). The information systems and sensor systems segments made the most significant con tribution to the expansion. The revenue generated by the Propulsion Systems unit was up 33% to DM 2.3 billion (1995: DM 1.7 billion). The higher demand on the part of the airlines for jet engines, replacement parts, and maintenance services caused revenue from the civil sector to increase by 41%. In the military business, revenues grew 27% due to the higher sales of replacement parts and the delivery of RB199 engines for Tornado aircraft. Customer orders rose 31% to DM 2.1 billion (1995: DM 1.6 billion). Primarily because of another delay in the production con tract for the EJ200 development program (engine for the Eurofighter), we recorded lower orders in the military sec tor. This was offset by higher orders for jet engines and replacement parts in the civil market. EARNING POWER STRENGTHENED In February 1996, we sold our majority stake in Dornier In the period from the founding of Dasa in 1989 until Medizintechnik to Singapore Technologies, which plans to 1995, the U.S. dollar lost 24% of its value as compared to the increase its involvement in this sector in the future. We German mark, which weakened the competitiveness of the transferred Extel Systems Wedel GmbH (ESW), a company civil aircraft and jet engine construction business above all. that is not one of our core businesses either, to management Toward the end of the period, the dollar's impact was espe and an investment group. The transfer was retroactively cially dramatic. This led us to introduce a competition initia effective January 1, 1996. Our fifty percent share in Ange- tive in 1995 in order to restore the earning power of all corpo wandte Solarenergie ASE GmbH went to our former partner rate units active in the world market even at times when the in this joint venture, Nukem. dollar is weak. In 1996, we were able to conclude agreements with the employee representatives at Daimler-Benz Aero AIRBUS CONSORTIUM REORGANIZED space Airbus and MTU in Munich that will allow us to suc In a memorandum of understanding, we agreed with our cessfully achieve the planned cost reductions by the end of partners Aerospatiale, British Aerospace, and Casa that the 1997. Aside from the unavoidable personnel cutbacks, the existing Airbus consortium will be converted to a corporation agreed-upon package includes the introduction of new organi zational structures with shorter reporting and decision-making channels and the implementa tion of location-specific, flexible working time models. Moreo ver, we divested the Peißenberg plant and created an independ ent corporation in anticipation of the sale that was also decided as part of the competition initia tive. The Speyer plant became an autonomous entity as well, and effective January 1, 1997, was taken over by its employ ees. by the year 1999. Unlike the existing Airbus consortium, which is prima rily responsible for marketing, sales, and product support for the Airbus aircraft, the future company - controlled by a joint European management structure - will have compre hensive corporate responsibil ity for all development, pro duction, and sales activities of the entire Airbus program, in cluding profit responsibility. In 1997, the four Airbus part ners, who will also be the shareholders of the new corporation, will review which of After discontinuing our financial support for Fokker in their activities should be included in the new entity. lanuary 1996 and transferring the control of Dornier Luft- This decision is at the same time an important step toward fahrt GmbH to the American regional aircraft manufacturer the consolidation of Europe's aerospace industry, an effort Fairchild Aircraft Inc. in June 1996, we withdrew from direct that in consideration of the latest development in the business activities in the regional aircraft sector. Fairchild is advancing process of concentration within this sector in the globally established and manufactures the 19-seat Metro USA is gaining special significance. turboprop aircraft. The new partner sees an opportunity to expand the worldwide market position of the Dornier 328 as part of its product family. SERVICES Fiscal 1996 was highly successful for the Services Division (debis). As in the previous years, we succeeded in substantially expanding our business volume in this division. The Financial Services, Insurance Brokerage, IT Services, Telecommunications and Media Services, Trading, and Real Estate Management units generated revenues totaling DM 13.1 billion (+12%). The results of this division continued to develop favorably as well. Its contribution to the operating profit of the Daimler-Benz group rose to DM 288 million. SERVICES: ENGINE OF ECONOMIC GROWTH In the past few years, a far-reaching transition has shifted the value-added structure in all of the industrialized coun tries toward the service sector. In the coming years, the trend toward a service-oriented society will be even more pro nounced. Although the development of the overall economy in Germany clearly failed to meet expectations and the only encouraging trend was in exports, the service sector still pro gressed satisfactorily on the whole. In the first half of 1996, the value added in the service sector sur passed the contribution of industrial un dertakings. The potential for services is far from exhausted. Compared to other indus trialized countries, Germany still needs to catch up in the service sector. While in dustry contributes 35% to the German gross national product, its share in the overall economic value added in other ma jor industrialized countries such as Japan, the USA, and France is already signifi cantly lower. R E V E N UE I N C R E A S ED SIGNIFICANTLY AGAIN At debis, revenue rose 12% in 1996 to DM 13.1 billion. As in the previous years, all of the business units were able to substantially increase their revenues. The Financial Services/Insurance Brokerage unit again contrib uted the largest share to consolidated revenue. Due to the first-time consolidation of newly acquired companies in the IT Services unit and of the French leasing and financing com pany Mercedes-Benz Financement, which in 1995 was still included at equity in the Daimler-Benz consolidated financial statements, revenue increased by approximately DM 400 million. This was offset by a reduction in revenue in roughly the same order of magnitude as a result of the disinvestment of the Marketing Services unit. The development in the individual markets was quite varied. The growth in the EU countries outside of Germany was especially pleasing; we succeeded in boosting our revenue in this region by 40% as compared to the previous year to DM 1.5 billion. Revenue in North America rose only slightly. We generated 56% of our revenues in Germany, 11% in the EU outside of Germany, 29% in North America, and 4% in the other markets. The expanded range of services offered in all business units and the internationalization of our activities formed the basis for this very favorable development. The encouraging growth at Mercedes-Benz had an advantageous effect on the leasing and financing business for vehicles. POSITIVE DEVELOPMENT IN ALL BUSINESS UNITS The Financial Services/Insurance Bro kerage unit had a highly successful year in 1996. We increased our contract volume for financial services by another 27% to more than DM 33 billion, and thus service a total of 676,200 units worldwide (1995: 570,900 units). Our companies in Germany, Great Britain, and the USA figured especially prominently in this positive development, debis Financial Services expanded its business base and laid the groundwork for additional growth by opening up new mar kets and targeting new customer groups, above all in Eastern Europe and in the Asia/Pacific region. The debis leasing com panies also played a decisive role in the overall expansion; their focus was predominantly concentrated on financing so lutions for corporate products in the non-automotive sector. Business relations with Adtranz are becoming increasingly significant as Adtranz is making increasing use of our know- how and the services we offer in intelligent financing. We also expanded our activities in financial engineering, most importantly in the tax-oriented leasing fund. Businesses in the public sector are also becoming more important to us. In our insurance activities we achieved noticeable growth in all sectors. Business with corporate customers, which makes up 57% of total revenue, increased by 20% to DM 59 million. We thus succeeded in securing our position in Germany as a leading technology-based insurance brokerage for the trade. We also expanded our business with private customers to DM 13 million. The premiums collected reached a total of DM 926 million by year-end. In the IT Services business unit we continued the upward trend of the previous years. Revenue and sales were up yet again, with all divisions contributing to the 20% growth in revenue to DM 2.4 billion. We succeeded in increasing business with companies outside of the Daimler-Benz group, and we now generate 58% of our revenue from non-group customers. The expansion of our innovative, industry-specific comprehensive solutions has proven to be extremely successful. This meant we were able to greatly expand the number of high-volume contracts in the past year. At the same time, trendsetting new services were placed on the market, including solutions for using the Internet as an electronic marketing tool, for making the transition from the mark to the euro, and for adjusting software programs to the year 2000. We have also increased our offers of IT solutions for municip alities, states, and federal governments, debis has, for instance, become actively involved in the German lean government project supervised by Prof. Dr. Scholz. Our Telecommunications and Media Services unit is active in a dynamic growth market. The positive trend in this unit was supported by the development in the cellular com munications sector, debitel succeeded in nearly doubling its customer base to more than one million and taking the lead among network-independent cellular communications providers in Germany and Europe. The revenue of the group climbed 73% to DM 1.6 billion. As in the previous years, business developed favorably in the Trading unit, which is primarily engaged in countertrade activities. We were able to provide the means for exports valued at DM 556 million in weak currency countries. Our 95 employees (1995: 90) generated revenue that rose 11% to DM 445 million. Aside from merchandise trading, commodities trading was our second-most important source of revenue. The primary focus of the Real Estate Management unit is overseeing the construction of the Potsdamer Platz project in Berlin. Because some of the first sections of the complex will be completed and occupied as early as 1997, we have stepped up marketing for the office facilities and residential units. debis AG and nearly 600 of its employees will move into their new headquarters on Potsdamer Platz in September 1997. We have also provided construction management services for non- group customers. This includes the Spittelmarkt project, also in Berlin, the development of a residential community in the Ahrensdorfer Heide region, and the supervision of other projects in Germany. NEW HOLDING STRUCTURE AT CAP GEMINI In spring 1996, we agreed on changes in the holding structure at Cap Gemini Sogeti together with the other prin cipal shareholders, debis now holds a 24.4% share in the new Cap Gemini and is directly involved in the company's deci sion-making process via the management and supervisory boards. The new structure already had a positive effect on the development of the company in the first year. The group's revenue increased 15% to FRF 15.9 billion. But even more importantly, Cap Gemini managed to improve its earnings significantly in fiscal 1996. Because of our participation quota, the company is included in the consolidated financial statements at equity. FOCUSING THE PORTFOLIO In the course of reviewing the corporate portfolio, we have decided to withdraw from our activities in the Marketing Services unit because its focus is not among the core com petencies of the Daimler-Benz group. In order for this unit to secure its market position and catch up with the market Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. leaders, substantial investments having no defensible relation to the strategic significance of this business unit would have been necessary. In cooperation with management, which had been successful in the past, we reorganized the operating units as part of a management buyout. The existing jobs were thus largely preserved and - as a result of staff continuity - existing relations with customers were maintained. debis is well-prepared for the tasks of the future with its present business structure. The mainstays of debis are Financial Services and Insurance Brokerage, IT Services, and Telecommunications and Media Services. They are complemented by the Trading and Real Estate Management units. GLOBALIZATION CONTINUED In 1996, the Services Division vigorously pursued the globalization of its activities that had been inaugurated in the previous years. The increased international involvement targets the growth markets of Southeast Asia as well as Eastern Europe. We have continued to intensify our activities in the CIS countries, most notably in Russia. The Trading unit supports the CIS countries in financing projects and acquiring investment goods. In the IT services sector, we have already been active in St. Petersburg since 1994. We will develop software for the Russian market in a joint effort with the University of St. Petersburg. We are also emphatically concentrating on opening up markets in Southeast Asia. The Financial Services/Insurance Brokerage unit has laid the groundwork for the additional expansion of the leasing and financing business in the Asia/ Pacific region. We have established companies in Thailand, Singapore, Hong Kong, Taiwan, and Australia to support the sales of corporate products, in particular Mercedes-Benz passenger cars and commercial vehicles. This region is a strategically important market with substantial growth potential for the Services Division and for the Daimler-Benz group as a whole. Even when it comes to complex financing solutions, debis Financial Services is a reliable and competent partner. There are two reasons why our offers have no limits: First, because our companies operate on a worldwide basis, and second, because there is nothing that cannot be financed - from the SLK roadster to a ferry which is pow ered by MTU engines. DIRECTLY MANAGED BUSINESSES Adtranz, the joint venture for rail products in which ABB and Daimler-Benz each hold a 50 percent stake, completed its first full fiscal year in 1996, with revenue totaling DM 5.7 billion. The Microelectronics business unit managed to increase its revenue by 12% in 1996, reaching DM 2.5 billion. TEMIC profited from the high demand for vehicle electronics applications related to the favorable automotive market. Net income was reduced by regressive pricing in the semiconductor business and by start-up contracts in vehicle electronics. The MTU/Diesel Engines unit boosted its revenue by 11% to DM 1.6 billion. Aside from the expansion of business, the improved cost structures led to a very gratifying increase in earnings. The directly managed industrial affiliates contributed a total of DM-585 million to the operating profit of the Daimler-Benz group. R A IL S Y S T E MS M A SS TRANSIT In the mass transit sector, Adtranz took advantage of its GROWING MARKET FOR RAIL SYSTEMS wide product range and global presence to win important Adtranz, the joint venture held by Daimler-Benz and ABB, contracts in the promising Asian market. At the same time, generated revenue totaling DM 5.7 billion in its first full fiscal Adtranz reinforced its leading position in Europe and North year. Customer orders reached DM 5.7 billion as well. America. The worldwide market for rail systems and products Adtranz supplies automated turnkey transit systems for developed positively on the whole. Economic and environ driverless operation to Singapore and the Malaysian capital mental considerations mean that the growth in passenger Kuala Lumpur. In Shanghai, China, Adtranz received a follow- volume for both local and long-distance traffic cannot be up order to develop the first phase of the municipal subway accommodated by individual travel alone. Because the system. The deliveries comprise 35 trains with five cars each, operation of rail systems is relatively energy efficient and together with the relevant traction current and signal systems. therefore environmentally friendly, this sector has extremely Adtranz supplies tramways to numerous cities in Europe and high growth potential. In Europe, for example, high-speed North America with a light-weight construction that improves trains are increasingly being put into service. The dynamically passenger comfort and reduces operating costs. developing urban areas represent a growing market for turnkey rail systems. REGIONAL AND INTERCITY TRAFFIC Adtranz continued to expand its position in key markets The growing demand for reliable and cost-efficient regio in fiscal 1996. Joint ventures were founded in China with nal high-speed trains connecting urban centers with the Shenyang Railway Signal Factory and Changchun Car Com surrounding areas and with important regional junction points pany. In addition, companies in the signal systems and track- provides attractive market opportunities for Adtranz. We bound products sectors were acquired in Great Britain, Ger received orders from Germany, Great Britain, the Scandinavian many, India, Poland, Hungary, and various African countries. countries, and Australia for regional vehicles with high- Adtranz has created the conditions for profitable growth powered traction systems and flexible vehicle construction in the coming years with its strong global network and and for signal systems equipped with telecommunications technological expertise, and with the active support of its two technology. parent companies, ABB and Daimler-Benz. High-speed trains with top speeds of over 250 km/h are an interesting alternative to air travel for quick intercity connections. In this sector, Adtranz is maintaining its long standing cooperative ventures with regard to the German ICE and the Italian ETR500. Adtranz also delivers trains with tilt technology that can handle curves in the existing railway network some 30 percent faster than trains with non-tilting cars. Adtranz manufactures the VT 611 railcar train with active electric tilt technology for Deutsche Bahn AG. Some technical problems were experienced when the vehicles were first put into operation. Following an intensive joint review by Adtranz and Deutsche Bahn AG, the trains will start regular operation in May 1997, in time for the schedule change. Adtranz also received contracts from Sweden and Switzerland, and in Southern China, Adtranz concluded a leasing agreement for a tilting train that will be delivered in 1998. In order to meet the market demand to improve service on non-electrified lines, Adtranz in a joint venture with General Electric in USA have designed and built a light weight locomotive, the "Blue Tiger". An order for 30 locomotives was placed from Pakistan Railways. In the important electric locomotive sector, Adtranz won a contract from Italy for the delivery of state-of-the-art three- phase electric locomotives. Electric locomotives from the new 101 Class are being delivered to Deutsche Bahn. SIGNAL SYSTEMS AND CUSTOMER SERVICE Train operators using the latest signaling and operation control systems from Adtranz are able to react optimally to changes in rail travel, and this is an essential prerequisite for the competitiveness of any carrier. Major contracts were secured for signal systems in Sweden, Great Britain, Germany, Spain, Russia, India, and Brazil. For many train operators, extending the service life of existing track-bound vehicles is a cost-effective alternative to purchasing new equipment. For these customers, Adtranz has established an efficient, worldwide technical service network that offers comprehensive services for upgrading and retrofitting trains. Major contracts for this sector came from Eastern Europe and Africa in particular. DEVELOPMENT WORK INTENSIFIED Driverless and wholly automated vehicles for transporting passengers are gaining increasing importance in rail travel. Together with Daimler-Benz Research, Adtranz North America is developing new vehicle concepts featuring enhanced passenger comfort, higher transportation capacity, and contemporary design. When combined with advanced elec tronic lane guidance systems, significantly lower mileage costs can be achieved. In the development and testing phase, moreover, expenses are reduced significantly with the use of high-performance models and simulation technologies. Rail travel costs have been reduced by shifting operation control functions from the rails to the train and by using radio as a signaling medium. Adtranz is a key player in Europe in the exploration and realization of this technology. In collaboration with European railroad companies and Daim ler-Benz Research, Adtranz is testing key technologies for future operation control systems, such as cost-efficient satellite-based tracking and navigation, automated materials- handling technology, and model-based process management. Pilot operation together with Deutsche Bahn AG featuring the new radio-controlled operation control systems is planned for startup in 1998. MICROELECTRONICS REVENUE 12% HIGHER The Microelectronics business unit, which consists of the Semiconductors, Vehicle Electronics, and Gas Generators units, received customer orders totaling DM 2.3 billion in 1996, and was thus able to maintain the high level experienced in the previous year. Revenue increased 12% to DM 2.5 billion. Although business in the semiconductor sector was mar ked by a sharp fall in prices in connection with the overall contraction of this market, TEMIC succeeded in slightly increasing its revenues in this unit thanks to strong volume growth. The Vehicle Electronics unit profited from the brisk activity in the automotive business and was able to expand its earnings dramatically by 30%. The Gas Generators unit also achieved double-digit growth. Because of the changing market situation in the gas generator sector, which is characterized by an increasing number of manufacturers who are joining together, we decided at the end of 1996 to divest this mechanics and pyrotechnics unit and concentrate our vehicle equipment efforts even Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. more than previously on vehicle electronics. A modified INNOVATIVE VEHICLE ELECTRONICS PRODUCTS management concept was chosen for the Microsystems unit; We expect the strong growth in the Vehicle Electronics the change entails the partial withdrawal from this activity unit to continue in the future. This growth will primarily be and the allocation of the remaining activities to the Vehicle supported by innovative products for drive systems, comfort Electronics unit. enhancement, chassis systems, as well as ABS and airbag systems. They are being developed with external partners and MICROELECTRONICS COMPETENCY CENTER with the Passenger Car and Commercial Vehicle divisions at In order to meet the challenges of the global market, Daimler-Benz. The products include state-of-the-art diesel TEMIC positioned itself in attractive markets early on and injection systems, electronic stability programs, airbag shifted capacities to regions where production costs are deployment systems, and sensor technology. The innovative competitive or established new facilities there. For instance, competency of this unit is underscored by the fact that for for more than twenty years TEMIC has been operating its three years the majority of its revenue has been generated largest production facility in Manila, Philippines, where with products that are not yet available on the market. In the semiconductor chips are installed and tested and various year under review, we founded the two subsidiaries TEMIC electronic motor vehicle components are produced. TEMIC Automotive Electric Motors GmbH, in Oldenburg and Berlin, has been supplying the NAFTA market with vehicle electronics and Automotive Distance Control Systems GmbH (ADC), in manufactured at the Cuautla plant in Mexico since 1995. Heerbrugg. The new companies develop and manufacture TEMIC is the competency center for microelectronics electric motors for the automotive industry and automotive within the Daimler-Benz group. TEMIC's contribution is vital distance control systems using radar and infrared technology. in our effort to be ahead of our competitors in launching vehicle electronics innovations in the passenger car and commercial M T U / D I E S EL E N G I N ES vehicle sectors. At the same time, TEMIC is present in the free market as an independent company. More than 80% of PRESENTATION OF THE NEW ENGINE SERIES its revenue is generated from outside customers. Around half The MTU/Diesel Engines unit consists of MTU Motoren- of TEMIC's business volume comes from Europe and just under und Turbinen-Union Friedrichshafen GmbH with its sub a quarter each from Asia and North America. sidiaries. MTU is a leading manufacturer of compact high- performance diesel engines for ships, track-bound products, NEW STRUCTURE IN THE SEMICONDUCTOR UNIT off-highway vehicle applications, and decentralized energy A new structure was introduced in the Semiconductor unit systems. Moreover, the MTU group manufactures drive shafts in 1996, which has made it possible to differentiate clearly for passenger cars and light commercial vehicles and injection between the two product areas integrated circuits (ICs) and systems for large diesel engines. Fiscal 1996 was dedicated discrete components. The objective of the new structure is to to the preparations for the market introduction of the 2000 establish even greater customer proximity. We plan to achieve and 4000 series developed together with the American partner double-digit growth rates each year in the future. Because of Detroit Diesel Corporation. At the same time, MTU expanded high demand for power MOS semiconductors, which until its regional market presence. An important facility for sales now TEMIC has manufactured exclusively in Santa Clara, and service activities in the dynamic Chinese growth market California, we will open a new production facility in Itzehoe was added to the sales network with the newly established in the first of 1997. We have strengthened our presence in the sales subsidiary in Suzhou, Shanghai. Chinese growth market with additional joint ventures in By expanding business in Germany as well as in the Shanghai. growth markets in Asia and North America, the Diesel Eng- ines unit managed to increase its revenue by 11% to DM 1.6 Decentralized electric supply companies are increasingly billion and also achieved noticeable growth in customer orders. depending on environmentally compatible, low-emission We introduced focused efforts to continue to reduce costs in diesel-engine and gas-turbine systems. MTU delivered a gas- response to the persistent price pressure of our competitors. turbine system for Gottingen University that generates steam These efforts were instrumental in achieving the significant and hot water from the turbine's exhaust gas using combined improvement of earnings. heat and power generation technology. Budget cuts and export restrictions were responsible for GROWTH COURSE CONTINUED WITH PROPULSION stagnant demand in the military vehicle sector. Nonetheless, SYSTEMS FOR SHIPS MTU achieved higher market shares with the newly developed Propulsion systems for ships contributed more than half 880 engine series thanks to a large contract from the German of the revenue generated by the Diesel Engines unit. Demand Army among other things. for large, high-speed ferries was especially brisk in 1996. The The brisk demand for injection systems produced by our MTU group achieved a worldwide market share of over 60% subsidiary L'Orange continued, with most orders coming from in this segment. More than 130 large engines and gas turbines outside of Germany. The development of common rail having a total output of 800,000 kW were already sold in this technology is highly important; in 1997 it was used on a large segment. Business in Asia was particularly successful. MTU scale for the first time worldwide. Deliveries of drive shafts managed to gain access to the Japanese market for the first grew dynamically, especially to Mercedes-Benz AG for time with two contracts for large engines. passenger cars, vans, and light commercial vehicles. MTU Worldwide demand for navy and government ships again expects another increase in this sector following production failed to revitalize in 1996. Revenue and customer orders startup for new vehicle models. remained at the level of the previous year. An important contract was the complete propulsion system including mari S O R T I NG A ND R E C O G N I T I ON S Y S T E MS ne sets for the new F 124 frigate generation of the German Navy. MTU expects another slight recovery worldwide in AEG ELECTROCOM DIVESTED procurement programs for navy and government ships in the In the course of focusing the group portfolio on core coming years. competencies, we sold our wholly-owned subsidiaries AEG Electrocom GmbH, Konstanz, and AEG ElectroCom Interna OTHER APPLICATIONS ALSO SUCCESSFUL tional Inc., Irving, Texas, to the Automation Technology unit We experienced a noticeable revival in business with at Siemens AG, Nuremberg. Siemens will take over these diesel-powered track-bound vehicles. In addition to the mo activities with retroactive effect as of January 1, 1997. torization of new vehicles, the updating and retrofitting of AEG Electrocom, which was last managed by Daimler-Benz old vehicles is also gaining importance. MTU received sig AG, is a leading supplier of sorting and recognition systems nificant follow-up contracts from Deutsche Bahn AG and for postal automation. At year-end 1996, it employed 3,400 from Asia. persons worldwide and generated revenues totaling DM 1.1 In the dump truck sector, the trend toward increasingly billion (1995: DM 0.6 billion). larger vehicles with higher payloads continued in 1996. To handle the special power requirements, the MEGA dump trucks with up to 310-ton loading capacity are equipped with MTU engines, which guarantees high availability and reliability even under extreme weather conditions. RESEARCH AND TECHNOLOGY Shorter development times, lower production costs, and better product quality are the most important objectives in product development. We therefore plan to continue to boost efficiency in these areas by establishing and expanding integrated processes as well as a global network of research, development, and production sites. In this regard, we are increasingly relying on computer-assisted development methods such as theoretical simulation and virtual reality technologies. To integrate the virtual reality tools used group-wide, the Virtual Reality Competence Center was established at the Daimler-Benz Research Center in Ulm in 1996. In design applications, wooden or clay models are steadily being replaced with virtual reality technologies. Shapes can now be modified within seconds at little to no additional cost. Virtual reality technologies can also be used to explore ergonomic conditions in work environments in the design stage. This is how we optimized the driver's cabin in Adtranz's new commuter train and the control cabin in Dasa's anti aircraft system among other projects. Applications for this technology in vehicle development include the simulation of crash events and cross-wind sensitivity. COMPETENCE CENTER FOR VIRTUAL REALITY In September 1996, the Competence Center for Virtual Reality started its operation at the Research Center in Ulm, Germany. It will support all of the business units within the group as both a research lab and a service center for questions relating to virtual reality technology. The objective is to jointly develop innovative solutions to overcome the gaps between the services offered by commercial virtual reality suppliers and industry-specific requirements. Moreover, the Center will identify problems that recur frequently within the Daimler- Benz group, develop tools that solve problems as universally as possible, and support professional suppliers in software development. WORLDWIDE DEVELOPMENT NETWORK In the future, product development will be handled increasingly by a worldwide production, development, and research network. The cooperation between research, advance development, development, production, marketing, and sales in the definition and planning of products is also becoming more complex. It is therefore necessary to take conscious advantage of the potentials of sophisticated information technology in the product development phase. In this connection we use various data, video, and audio communication methods and systems in ongoing product projects to enable the simultaneous development of a vehicle at different locations. At the same time we also explore how development partners who do not have access to our centralized systems can be included in the data network. COMPUTER-ASSISTED PRODUCT DEVELOPMENT The Daimler-Benz group is increasingly treating its customers as co-producers in the development of new pro ducts. We are entering new realms of communication with our customers by using virtual auto shows on the Internet and virtual showrooms. The possibilities range from purchas ing and consulting to the active involvement of customers in the development of new products. Customers can now interactively choose the features they want in a vehicle and experience the product with their specifications on the fly, albeit virtually. By using a system for the virtual design of vehicle interiors in conjunction with an ergonomics bench test, we are able to study how our customers respond to the interior space, color, and configuration of our vehicles. This tool is meant to provide pointers for the next steps in the development of the product during the planning phase. Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. PERSONNEL In a year marked by extensive changes within the corporate structure, the success of the Daimler-Benz group and the realization of its goals depend on the capabilities and commitment of our workforce more than ever. Our personnel efforts are therefore focused on persuading employees to identify themselves with the objectives of the Company and to emphatically support them. To this end, we need and want to harmonize the interests of the staff and the Company as effectively as possible. TRAINING AND QUALIFICATION A HIGH PRIORITY In light of the globalizing markets and increasingly inter national competition, we need to maintain and strengthen our potential with qualified and capable employees. Training and qualification programs therefore remain a high prior ity in the Daimler-Benz group. At year-end 1996, the group employed a total of 12,600 trainees and interns. We have also consciously developed the programs designed to expand the scope for making decisions and taking action for all employees. And we are emphatically pursuing our objective to make our personnel cost structure competitive on an international scale. COMPENSATION SYSTEMS ENHANCED We are continuously improving the compensation systems for our employees to make them more attractive and align them more closely to the competition. Performance and success orientation will be given more emphasis than before. Beyond individual variable income factors, we are also interested in involving our workforce more effectively in the development and success of the Company. We are also exploring concepts for new forms of social security benefits based on our employees' personal initiative and the related potentials for individualized provisions. In doing so, we hope to maintain the effectiveness and attractiveness of the benefits system within the Daimler-Benz group and at the same time ensure that costs remain manageable. STOCK OPTIONS INTRODUCED In many international companies it is customary to offer stock options to management staff. The objective of this type of offer is to give executive personnel a special incentive for performance by involving them in increasing the Company's value, which is generally expressed by the value of its stock. Since 1996, we have offered top management stock options that can be acquired with a convertible bond subscribed from the executive's net income. The response to this offer was extremely positive. We have therefore decided to offer stock options to an expanded group of management staff in the future. INTERNATIONAL EXPERIENCE GAINS IMPORTANCE We plan to utilize the competitive advantages associated with our management potential more efficiently than in the past. Job rotation and foreign assignments are the prere quisites for vertical development. In consideration of the increasing globalization of our business activities, internatio nal experience is to become an integral part of long-term, individualized personnel and promotion planning. Personnel development has also become a key element in the strategic management of the group's divisions. The quality of manage ment meetings, capabilities assessment, promotion plans, and training programs was further improved by developing our existing management planning system. STABLE EMPLOYMENT SITUATION IN THE DAIMLER-BENZ GROUP At December 31, 1996, we employed a total of 290,029 employees worldwide, of which 222,821 worked in Germany. Compared to the total workforce at year-end 1995, the number of employees dropped by some 21,000 persons, primarily as a result of the disinvestments at AEG and Dasa. Without these structural changes, the number of employees remained nearly unchanged. Along with the positive business prognosis in all corporate units since the second half of 1996, the employment situation has also become more stable on the whole. Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. DAIMLER-BENZ IN SOCIETY Two important events defined the development of environmental policy in 1996: the implementation of the Eco Audit Ordinance in all operations and the enforcement of the Recycling and Waste Law. The Daimler-Benz group spent a total of DM 960 million on environmental protection in 1996; our investment volume totaled DM 185 million. In the coming years a key focus of our efforts will be to increase the integration of environmental protection in our product and production planning processes. As part of its social involvement, Daimler-Benz is deeply committed to promoting the younger generation. We take our social responsibility seriously and endorse concrete projects and programs to inspire the younger members of our society to expand their horizons. Eco AUDIT AND ENVIRONMENTAL COMMUNICATION In December 1995, the Eco Audit Ordinance effective throughout the EU was transferred to German law. This legislative act specifically defined the scope within which individual facilities of a company can voluntarily submit to an environmental audit and publish the result in the form of an environmental statement. In the Daimler-Benz group, en vironmental audits, like quality audits, are largely performed by in-house specialists; the environmental statement intended for the public and the environmental program are validated by external experts. We have already trained more than 50 experts from various locations and corporate units to qualify them for professionally performing internal audits. By the end of 1996 a total of 13 plants within the Daimler-Benz group had submitted to the eco audit, and other plants are about to undergo the process. Daimler-Benz has been publishing a comprehensive en vironmental report each year since 1994. Because of our openness in communicating about environmental issues in the report, the response it has generated has been unusually positive, and this was also confirmed by the results of a questionnaire we included in the 1996 report. INCREASED PRODUCT RESPONSIBILITY The new Recycling and Waste Law increases the re sponsibility of companies for the residual materials they generate in the production, disposal, and recycling of their products. The ordinances on taking back electronics scrap and used cars are especially prominent issues. Daimler-Benz had already taken various measures several years ago in anticipation of these regulations. As an example, Daimler-Benz Research developed a process for recycling electronics scrap that sets new standards both in terms of efficiency and environmental compatibility. Printed and bare board assemblies are stripped down to their component parts and recycled or disposed of separately. We set other examples in recycling residual materials from the vehicle sector. Since 1991, Mercedes-Benz has been buying back retired Mercedes cars at market conditions as the first automotive manufacturer in Germany to initiate this kind of program. And since March 1993 we have also been taking back used parts from repair and service stations - including bumpers, batteries, electronic parts, and mixed plastics - through the Mercedes-Benz Recycling System free of charge and recycling them. In 1996 alone, we collected some 11,000 tons of residual materials, of which more than 7,000 tons could be recycled. We have predefined the relevant specifications to ensure that our vehicles comply with the necessary degree of re- cyclability. Some 85% of the component parts of a passenger car can already be recovered at this point. In the new Actros nearly 80% of all raw materials, coolants, and lubricants can be easily recycled while another 15% are also capable of being recycled. As another important contribution to recycling, we used an increased proportion of recyclates in the E-Class and the Actros, for instance in the trunk and firewall paneling and for acoustic insulation. We also made new progress in production processes in 1996. By employing minimum lubrication in processing aluminum integral components for aircraft, Daimler-Benz Research succeeded in drastically reducing the volume of the necessary but problematic cooling lubricants used in conventional processes. Compared to conventional proces sing, the volume of coolants consumed was reduced from Hier gab es ein Produkt- oder Stimmungsbild ohne Text oder Zahlen. Es wurde in der PDF-Datei weggelassen, um eine nutzerfreundliche Dateigröße zu erreichen. Here was a product or mood picture without text or figures. It was omitted in the pdffile to improve the usability of the file size. approximately 3,000 liters per hour to 0.02 liters per hour. AZUBI POWER The new lubricant is environmentally compatible and is in Trainees participating in the Daimler-Benz trainee project fact even approved for the use in food processing. Because "Azubi Power" demonstrate just how much fantasy, initiative, coolants can now be avoided almost entirely, the shavings and innovative drive young people have. In addition to their generated in the process can be routed to metals recycling professional training, the trainees, who in Germany are called without any additional pretreatment. by the acronym Azubis, spend nine months working on a project exploring a topic they select from the fields economics, EMISSIONS REDUCED YET AGAIN ecology, technology, and social policy. The result and the We made important headway in the reduction of motor proposed solutions are then presented at a grand finale event vehicle emissions in fiscal 1996. The new natural gas engine to invited guests from the Company, politics, and the media. specially developed for the Sprinter and now also sold on the The project takes place in a different region each year. After market achieves significantly improved combustion with Munich in 1995, the ongoing 1996/97 project is under way in extremely low emissions thanks to a new gas injection sys Saxony/Saxony-Anhalt. tem. The new gas engine currently has the lowest pollutant emissions of any vehicle using fossil-fuel drive technology, STRUCTURAL SUPPORT IN MANNHEIM and in terms of fuel consumption is comparable to diesel After more than five years of successful work, Daimler- engines. Benz continued its structural support campaign in Mann Daimler-Benz underscored its leading role in fuel-cell heim in 1996. The tangible assistance provided above all technology with the introduction of the second-generation to unemployed youth from the Rhine/Neckar region in NECAR II fuel-cell car. While NECAR I was still the size of a cooperation with municipal, regional, and employment ad rolling laboratory, the fuel cell in NECAR II is small enough ministrations and private sponsors has become known as to fit into the trunk. The fuel-cell vehicle does not produce the Mannheim Model. Daimler-Benz plays a leading role in any emissions other than water. If this technology can be this effort. The experiences gathered in projects such as the marketed in a mass-produced vehicle in the first decade of bicycle workshop are now being transferred to other cities the next century, it will represent a substantial contribution like Berlin. Although this type of model support cannot solve to the improvement of our air quality as it is twice as efficient structural problems in general, it does provide sensible as combustion engines. incentives for the re-employment of the unemployed. AWARD OF EXCELLENCE EUROPEAN YOUTH CONGRESSES As part of its social involvement, Daimler-Benz organizes In connection with the Mannheim Model, several Euro the Daimler-Benz Award of Excellence youth project together pean youth congresses are organized each year on Re with the Goethe Institute. Since 1991, about a quarter million unification Day, most recently in Berlin. Topics include xeno students from high schools in the USA and Canada participate phobia, youth unemployment, and political disenchantment. in an essay competition about Germany. The fifty best essays The organizer is the Child and Youth Foundation, in which are rewarded with a study trip to Germany to explore German Daimler-Benz is a member. Tangible support projects for un geography, history, culture, and music, but above all to learn employed youth were developed at the congresses in Hoyers- the language and develop mutual understanding through werda and Rostock. contact with their peers. The Daimler-Benz Award of Excellence is thus a bridge across the Atlantic to promote understanding among young people. In the course of 1996 and in the first few months of 1997, the increase in value of the Daimler-Benz share clearly outperformed the German Stock Index (DAX), which proves that it is a worthwhile investment for our shareholders. We are securing the financial independence of the Company with our broadly diversified activities in the corporate treasury and in refinancing while at the same time taking advantage of the potentials of the international financial markets with innovative financial instruments. THE INTERNATIONAL STOCK MARKETS The development of the international stock markets was reached DM 122.75 (comparably calculated in consideration of the capital increases since implemented). for the most part encouraging in 1996. This was primarily because of low interest rates and the high liquidity of investors. The American Dow Jones Index and the FTSE 100 in Great Britain recorded 26% and 12% growth respectively, reaching new all-time highs. The German stock market was also in very good shape in the year under review. Above all in the second half of 1996, higher profit forecasts - not least as a consequence of the noticeable devaluation of the German mark as compared to other important currencies - and the continued decline of interest rates in the bond mar ket stimulated the price performance of German companies. The German Stock In dex (DAX) reached 2,889 points by year- end, which was 28% higher than at the end of 1995. The positive trend continued in the first few months of 1997. THE DAIMLER-BENZ SHARE The Daimler-Benz share outperformed the German Stock Index in 1996. In the last three months of the year in particular, the officially quoted price of our share climbed at an above-average rate and reached DM 105.50 by year-end. Our shareholders thus recorded a 46% capital appreciation. The Daimler-Benz share continued to climb until end of February 1997, gaining another 16.1% since the end of 1996. On February 11, 1997, the all-time high of December 5, 1986 was surpassed when our share's value Daimler-Benz shares were also among the volume leaders on the German stock exchanges in 1996. With 2.1 billion shares and a market value of DM 176 billion, our stock was in the second place in terms of trade volume, which represents 8% of the volume of all German shares. Aside from being listed on the German stock exchanges and in the electronic trading system IBIS, options for our shares are traded on the German Futures Exchange DTB. In fiscal 1996 some 1.2 million contracts were concluded for Daimler-Benz shares. Daim ler-Benz was thus among the three highest- volume shares on the DTB. The trading volume of our share on the foreign exchanges increased by 58% to 257 million units. The increase in volume was especially pronounced in London. CAPITAL STOCK The capital stock of Daimler-Benz AG increased by DM 8.5 million to DM 2,577 million in 1996. Of this amount, DM 5.3 million pertained to the issuance of em ployee shares. The remaining increase in capital stock resulted from the exercise of stock options that had been issued to members of the Board of Management and Supervisory Board in the summer of 1996. With an officially quoted value of DM 63 billion (as of the end of February 1997) and more than 450,000 shareholders, Daimler-Benz is among the largest public corporations on the German stock exchange. Nearly two-thirds of our capital stock is widely held. Deutsche Bank is currently holding a share of about 23%. Kuwait is the second-largest shareholder at just under 13%. C O N V E R S I ON TO T HE DM 5 S H A RE Effective July 1, 1996, the par value of the Daimler-Benz share was converted from DM 50 to DM 5, thus making our share even more attractive to private investors. The threshold for participating in variable trading was raised from 50 to 100 shares, but in consideration of the lower price as a result of the change in par value, private investors now have access to this form of trading with significantly lower invest ments as well. In New York, where our share is traded in the form of American Depository Shares (ADS), the value of each interim certificate is now the equivalent of one common share having a nominal value of DM 5. The same applies to our Singapore Depository Shares (SDS) listed on the Singapore exchange. T HE D E V E L O P M E NT OF A D A I M L E R - B E NZ S T O CK P O R T F O L IO The yield of a share is largely dependent on the share's price when it is purchased and sold. Because of the high degree of fluctuation characterizing the price of the Daimler-Benz share in the past few years, its performance can vary greatly for German shareholders. For foreign investors, the additio nal effects of changing currency parities also apply, which means the return can differ significantly from the yield in German marks. Shareholder who invested in Daimler- Benz shares for approximately six years yielded a 16.9% return in German marks per annum; the return on a twelve-year investment was 9.7%. These calculations are based on the assumption that the proceeds from subscription rights and dividends (without a tax credit) were consistently reinvested in Daimler-Benz shares. I N V E S T OR R E L A T I O NS In connection with the value-oriented corporate policy of Daimler-Benz, we inten sified our contact with the financial mar kets in 1996. Aside from the regularly published annual reports and interim reports in which we address all of our existing and potential shareholders, per sonal contact is a high priority in relations with institutional investors and financial analysts. As a result of the active interest in our Company, the number of such contacts has increased considerably. Moreover, the corporate presentations given in our most important stock markets in Germany and abroad have helped reinforce investor confidence in our Company. At our Annual General Meeting on May 22, 1996, we recorded a record attendance of 10,000 shareholders and guests. Nearly 70% of the capital stock was represented, which is as high as in previous years. BROADLY DIVERSIFIED REFINANCING The refinancing needs of the Daimler-Benz group are primarily defined by the financial services sector and its dynamic growth. In principle, we refinance this need in the relevant local currency. To optimize costs we take advantage of a highly diversified blend of market segments, currencies, and financial instruments. Moreover, we made use of asset backed securities in 1996 as well. FINANCING INSTRUMENTS As a rule, short-term borrowing is accomplished by taking up credit lines with banks. To optimize costs, we have also established local commercial paper programs in some markets. For instance, our North American holding company has a U.S. dollar commercial paper program, which was increased from USD 4.5 billion to USD 6.0 billion in August 1996. We predominantly cover the capital needs of the com panies within the group that exceed short-term requirements with capital market financing. To this end, we resort to both Euro Bonds and our Euro Medium-Term Note Program (EMTN). In addition, we offered a U.S. MTN program totaling more than USD 1 billion for subscription in September 1996, which allows us to access the largest capital market in the world. In particular, it also gives us an opportunity to negotiate loans having a very long maturity. Within the scope of this pro gram, Daimler-Benz North America Corp. issued a ten-year Yankee Bond worth more than USD 500 million. Finally, in June 1996 we issued a warrant bond for the first time in the Daimler-Benz group. With the issuance of a total amount of DM 1.2 billion, we were able to take advantage of the favorable capital market conditions and at the same time secure an entirely new investor base for the Company. INTEREST AND CURRENCY MANAGEMENT The allocation of the assets available within the group to money market and capital market investments forms the foundation of our interest management policy. The short-term funds available in the money market serve to maintain the Company's liquidity at all times. Available funds are con solidated on a daily basis by way of cash concentration for the purpose of uniform liquidity management. In Germany, this is accomplished through the corporate treasury, and abroad through the financial and regional holding companies allo cated to it. We invest the majority of our liquidity in fixed-interest bearing securities and stocks by resorting the instruments of modern portfolio management. To minimize risks we adhere to a limit determined by the Board of Management using the value-at-risk method. Within the scope of our currency management program, we account for foreign exchange risks in the operational sector and align the relevant hedging strategies in accordance with continuously monitored exchange rate forecasts. Hedging is becoming increasingly important to us in light of our growing business volume in newly industrializing countries. Deriva tive instruments are used exclusively to hedge against market risks within the scope of interest and currency management. In order to ensure efficient control, the individual trading sectors are kept separate from the administrative functions of management, financial bookkeeping, and financial control ling; this separation extends to organizational and physical aspects as well as to systems management. CREDIT RATING Daimler-Benz AG has been rated by the international agencies Moody's Investor Services and Standard & Poor's for both short-term and long-term bonds. The ratings supplied by the two agencies for long-term debt, A1 and A+ respectively, and Prime-1 and A -l for short-term paper, are on a high level within an international context. The Prime-1 short-term rating assigned by Moody's is in fact among the best of the categories available. Because Daimler-Benz AG generally guarantees the bonds issued by companies within the group, they also profit from the high ratings. With our listing on the New York Stock Exchange (NYSE) in October 1993, Daimler-Benz was the first German company to establish direct access to the world's largest and most important capital market. In so doing, we initiated a process that not only permanently affects our external reporting, but also our accounting and our internal controlling instruments. The objective of this process is to increase the transparency and efficiency of our external and internal reporting while at the same time improving the methodological basis for a corporate management attuned to the returns expected by our investors without neglecting the entitled interests of our employees, customers, and society on the whole. U N D E R S T A N D I NG V A L U E - B A S ED M A N A G E M E NT The permanent and continuous expansion of our com pany's value is only possible when the interests of all groups that contribute to our success are given the appropriate degree of consideration. Our economic performance and satisfactory returns for our shareholders depend on motivated employees, first German company to present an entire year's financial statements in accordance with U.S. GAAP while at the same time complying with the provisions of the German Law to Facilitate Equity Borrowing. The report thus also conforms with EU guidelines and European accounting principles. satisfied customers, and reliable and innovative suppliers. On IMPROVED EXTERNAL DISCLOSURE the other hand, only a profitable company is in a position to Instead of providing various figures concerning the obtain the funds required for securing the future from the economic performance of the Company that are derived using capital market at relatively favorable terms and to offer its the HGB and U.S. GAAP but that in some instances differ employees secure and challenging jobs and thus earn their significantly from each other because of the distinct account long-term commitment. Management at Daimler-Benz is ing philosophies, we supply a complete set of figures in therefore dedicated to increasing the value of the Company conformance with U.S. GAAP for our shareholders, the for the benefit of everyone involved. financial analysts, and the interested public. In so doing, we The new controlling instruments in the Daimler-Benz fulfill accounting standards of the highest reputation group to support this objective include preparing the balance worldwide, and we believe our approach more clearly and sheet in accordance with American accounting principles accurately reflects the economic performance, financial (generally accepted accounting principles or U.S. GAAP) and situation, and net worth of the Company than any other reporting that is both internally and externally informative, accounting system available at this time. This is not least due topical, and transparent. to the fact that U.S. accounting principles focus on investor information rather than creditor protection, which is the do 1996 F I N A N C I AL S T A T E M E N TS P R E P A R ED E N T I R E LY IN minant concern under German accounting principles. A C C O R D A N CE W I TH U.S. G A AP F OR T HE F I R ST T I ME Discretionary valuation is greatly limited, and the allocation Since our listing on the New York Stock Exchange we have increasingly aligned our external reporting in accordance with the information requirements of the international financial world. Important stages in the process included reconciling the result and equity capital according to German accounting principles (HGB) to conform with net income and stockholders' equity as defined by U.S. GAAP and providing additional information on the individual corporate segments. For the period between January and June 1996, we then presented the interim report prepared in accordance with U.S. GAAP for the first time. With our 1996 annual report, we are the of income and expenses to the individual accounting periods is based on strict economic considerations. A D V A N T A G ES F OR A LL S H A R E H O L D E RS Using U.S. accounting principles makes it significantly easier for internationally active financial analysts or experienced institutional investors to accurately asses the financial situation and development of the Company. Moreover, it improves disclosure at Daimler-Benz as well as comparability on an international scale. This also helps promote the worldwide acceptance of our stock. accordance with the interest requirements of the stockholders' equity and external funds tied to the capital employed. For stockholders' equity, we assume an interest requirement of 14%, which is in agreement with market standard returns on risk-free investments and a risk premium derived from the capital market. The average interest rate for external funds is 8%. In this instance, we assume that the ratio of stockholders' equity to external funds is 2:1. I N S T R U M E N TS F OR V A L U E - O R I E N T ED C O R P O R A TE M A N A G E M E NT The activities that exceed the minimum interest require ment of 12% increase the value of the Company because their income exceeds the costs for the capital employed. Conversely, activities that fail to achieve the 12% minimum over the long term decrease the value of Daimler-Benz. The standard for measuring an activity is thus not the return generated in a single period; what is decisive is whether in the course of the entire product life cycle the return on the capital employed is adequate from a corporate and market perspective. This applies in particular to startup businesses, which cannot gene rate satisfactory earnings until the product begins to mature. A return is adequate from a market perspective when it at least covers the costs of the capital employed, which is our minimum return of 12%. Moreover, we are committed to achiev ing the value that good competitors realize with comparable activities. We therefore regularly carry out benchmarks and best-practice comparisons to establish the strategic target returns for our business units. As a result, the medium- and long-term requirements for many business units are noticeably higher than the 12% minimum return requirement. The operating profit in accordance with U.S. GAAP thus forms the instrumental basis for value-oriented corporate management. In addition, we assess the longer-term earning power of a given activity on the basis of the expected cash flow and the resulting earnings value for the reporting period. O P E R A T I NG P R O F IT AS A C E N T R AL V A L UE The operating profit will be the primary focus of our performance analysis in the future. It is a key figure for measuring the operating performance of the Company and its individual units. Based on the profit and loss statement prepared under U.S. GAAP, the operating profit is essentially made up of revenues and other income minus the cost of sales and other expenditures. The difference is adjusted to accommodate a few positions. Other important figures included in our external reporting are the net earnings per share and the liquidity statistics provided in the cash flow statement on page 55 of this report. I N T E R N AL C O N T R O L L I NG ON T HE B A S IS OF B A L A N CE S H E ET V A L U ES IN A C C O R D A N CE W I TH U.S. G A AP The U.S. GAAP not only made Daimler-Benz more trans parent from an external perspective. Because the earnings figures as derived with American accounting principles accurately reflect the economic performance of the Company, we are now able to use figures from our external reporting for the internal controlling of the Company and its individual business units rather than relying on the internal operating profit used in the past. We thus make use of the same figures both internally and externally to measure the economic performance of the Company and the business units. M I N I M UM R E T U R N: 12% In order to do justice to the interest requirements of the capital market, we have established a minimum return for all business units. The criterion that defines this minimum return, and at once the essential control figure for our operational business, is the operating profit, which we relate to the capital used for the operational output of goods and services. The capital employed for operational purposes is defined as the capital employed by the industrial activities on the basis of book values under U.S. GAAP minus trade accounts payable. For the financial services business, however, which is a bank like activity, we use stockholders' equity rather than capital employed as the reference figure for the operating profit. This approach is in accordance with standard practice. The pre tax interest rate of 12% that we expect from each of our business units on a medium-term basis is determined in DISCUSSION AND ANALYSIS OF THE FINANCIAL SITUATION Significantly higher earnings in the operational business and substantially lower non-recurring expenditures as compared to the previous year have led consolidated net income under U.S. GAAP to increase from DM-5.7 billion to DM 2.8 billion in 1996, and instead of the DM 7.2 billion loss in 1995, we achieved a DM2.4 billion operating profit. The favorable earnings trend picked up speed in the second half of the year. Due to the profitable results, we were not only able to strengthen stockholders' equity; the ratio between most balance sheet items is consistently improving, as are the financial indicators. ADVANCES IN THE OPERATIONAL BUSINESS AND FEWER SPECIAL EXPENDITURES The streamlining of our portfolio at AEG alone and our withdrawal from Fokker resulted - under U.S. GAAP - in expenditures of DM 3.8 billion in 1995. Other expenses were Consolidated net income under U.S. GAAP reached DM connected to the special depreciation taken in the U.S. 2.8 billion in fiscal 1996, and thus was positive again after the DM 5.7 billion loss of the previous year. The growth in financial statements and the amortization of goodwill totaling operating profit was within the same order of magnitude, DM 2.9 billion of which DM 2.6 billion were attributed to Dasa. totaling DM 2.4 billion after the DM 7.2 billion loss in 1995. There were also structural expenditures of DM 1.4 billion, This pleasing development of earnings was related to the most of which had to do with the competition initiative at improved results in the operational business; contributing Dasa. Non-recurrent expenditures in 1995 had thus totaled factors included the market success of new products and the DM 8.1 billion. programs to boost efficiency in all business units, as well as the more favorable exchange rate situation. In the 1995 financial statements, we had to carry considerable non- recurring expenditures in connection with the restructuring of various activities. The volume of these expenditures was significantly lower in the year under review. But special factors impacted the operating profit in 1996 as well; they reached some DM 1.1 billion. For the most part, these expenses were generated in conjunction with the liquidation of the remaining activities at AEG and additional structural measures that were necessary in Aerospace, Microelectronics, and Rail Systems. It should be taken into consideration in this respect that in accordance with U.S. GAAP, unlike under German com- mercial law, such non-recurring expenditures are not treated as an extraordinary loss and had thus impacted the 1995 (U.S. GAAP) operating profit. IMPROVED STRUCTURE OF THE STATEMENT OF INCOME Consolidated revenues reached DM 106.3 billion in 1996, surpassing the 1995 total of DM 103.0 billion by 3.3%. After adjusting the previous year's figure for changes in the consolidated group, the increase was 10%. The growth in revenues was primarily achieved with the substantial expansion of business volume in the Automotive business by some DM 5.5 billion. But in Services we also managed to boost revenues by DM 1.4 billion. Revenues in Aerospace, on the other hand, were DM 2 billion lower. After making adjustments for changes in the consolidated group, above all with respect to Fokker and Dornier Luftfahrt, revenues in this division actually increased by 13%. The revenues of the Directly Managed Businesses totaled DM 8.0 billion; the previous year's figure, DM 10.2 billion, represents the revenues from the former corporate unit AEG DBI and is thus not comparable. Including other income, which predominantly relates to the disposal of assets and currency translation gains from open payments and deliveries, revenues and other income increased by DM 3.0 billion to DM 107.7 billion. In contrast, the cost of sales decreased by DM 1.9 billion to DM 84.7 billion, and selling expenses, general administra tive costs, and other expenses fell by DM 4.9 billion to DM 16.0 billion. In relation to revenues, the two largest cost elements thus dropped from a total of 104% in 1995 to 95%. Key factors were the improved utilization of production capacities as a result of the revitalization of business and our withdrawal from loss-making business units. The substantially lower non-recurring expenditures, which had been included in these positions in the income statement in 1995, also had an effect. The funds spent on our own research and development projects increased by DM 0.2 billion to DM 5.6 billion; their share in revenues remained unchanged at 5%. OPERATING PROFIT SUBSTANTIALLY HIGHER Based on the gross profit before the financial results and income taxes, which is reported at DM 1.5 billion in the statement of income as compared to the DM 8.2 billion loss in 1995, the operating profit for the Daimler-Benz group was DM 2.4 billion in 1996 (1995: DM 7.2 billion loss). Our Automotive business contributed DM 2.7 billion, once again the highest share in the group's operating profit (1995: DM 2.1 billion). The growth in sales in the passenger car and vans sectors and the currency development were decisive factors for the renewed increase in earnings; in certain segments of the Commercial Vehicle Division, on the other hand, we experienced a noticeable decline in revenues. The units involved were for the most part Trucks Europe, Trucks Nafta, and Commercial Vehicles Latin America. While the contribution of Aerospace was still negative at DM -0.2 billion, it did improve markedly from the previous year's total of DM -7.2 billion. In this case, the reduction of non-recurring and structural expenditures was a key element. Moreover, as a result of the measures already implemented within the context of our programs to boost productivity, most of the units generated profits on an operational level as well. Services expanded their contribution to DM 0.3 billion (1995: DM 0.1 billion). The Financial Services/Insurance Brokerage unit remained the primary source of income here, but IT Services and Telecommunications and Media Services also generated significantly higher earnings. The Directly Managed Businesses in total charged a loss of DM 0.6 billion to the group's operating profit. Profits in the Diesel Engines and Sorting and Recognition Systems units were offset by losses in the Microelectronics unit and in rail systems due to the amortization of goodwill allocated to this sector. Other expenses were also related to the companies included in this segment in which we are liquidating the remaining activities of AEG AG following its merger with Daimler-Benz AG. Because the previous year's figure of DM -2.2 billion represents the result of the former AEG group, these values cannot be compared. NET INCOME POSITIVE AGAIN other financial services companies in the market we have The financial result fell by DM 0.4 billion to DM 0.5 billion essentially presented the financial services activities of Daim in 1996. This was predominantly due to expenditures from ler-Benz as if they were operated by an independent company the valuation of financial instruments following the revaluation (stand-alone approach). For instance, the vehicles included of the U.S. dollar and other currencies. under leased equipment are not reported at the group's Consolidated net income reached a total of DM 2.8 billion, manufacturing costs, but at market value. recovering from the high DM 5.7 billion loss in the previous Nevertheless, there are close relations between the year. The net income was noticeably affected by deferred financial services business and the other units within the taxes, which have to be included in accordance with U.S. law. group, which have a corresponding effect on the statements This meant that although tax payments actually totaled DM of income and balance sheets. For instance, our financial 0.9 billion, additional tax revenue in the amount of DM 0.7 services companies are not only financed by borrowing from billion had to be included in the statement of income due to various effects that were for the most part non recurring. CONSOLIDATED BALANCE SHEET STRONGLY INFLUENCED BY THE FINANCIAL SERVICES BUSINESS The balance sheet of the Daimler-Benz group is still influenced to a large degree by the above-aver age expansion in the finan cial services business, which we primarily utilize third parties, but also with funds from the Daimler- Benz group (intercompany loans). From the perspec tive of the financial serv ices business, the latter represent financial liabili ties; these amounts are eliminated upon consolida tion with the balance sheet of Daimler-Benz because from the perspective of the group they are not liabili ties vis-a-vis third parties. Similarly, the interest on these loans reduce the operating profit of the fi nancial services sector as a flexible instrument in connection with our worldwide while from the perspective of the Daimler-Benz group the in sales strategy. But our business with products not manu terest charges are offset against the interest income arising to factured by the Daimler-Benz group is also gaining increas the organizational units granting the relevant intercompany ing importance; in this respect the standards we apply to loans to the financial services companies. measure risks and profitability are just as stringent as for our The operating profit shown in the separate statement business with corporate products. of income for the financial services business (cf. p. 52) is In an effort to make the special influence of the financial DM 264 million. In this instance it should be taken into services business on the structure of the consolidated balance consideration that although this figure predominantly sheet more intelligible, we are including a separate comprises the financial services business of debis, it also consolidated statement of income, balance sheet and cash flow pertains to such activities of other divisions within the Daim statement for our financial services activities with this annual ler-Benz group. In addition, the operating profit does not report for the first time. In the interest of comparability with contain any allocation to the administrative costs of Daimler- Benz and debis. Accordingly, its comparability with the and DM 4.8 billion respectively. On the liabilities side, the segment contribution of Services (debis) shown on page 47 is financial liabilities position alone was up nearly DM 4.9 billion, limited at best. above all in conjunction with refinancing for the financial The dynamic increase in operating profit from DM 145 services business. million to DM 264 million is largely related to the growth of Again on the assets side, fixed assets totaled DM 35.7 new business for our companies in Germany, but certain billion, or 12% higher than in 1995. Without the leased European companies outside of Germany also improved their equipment included in this figure, fixed assets grew 8% to earnings significantly. DM 23.7 billion. While the property, plant, and equipment On the whole, the balance sheet total for the financial position in the balance sheet, at DM 18.2 billion, was DM 1.6 services business at December 31,1996, was DM 34.5 billion. billion higher than in the previous year, financial assets This represents a DM 6.5 billion increase as compared to year- decreased by DM 1.3 billion to DM 3.5 billion. This is especially end 1995. Among the more important changes on the assets side, leased equip ment jumped by DM 1.3 bil lion to DM 12.7 billion and financial services accounts receivables by DM 4.8 billion to DM 19.1 billion. This ad ditional expansion of busi ness was financed with the financial liabilities, which increased by DM 5.9 billion to DM 29.2 billion and thus made up nearly 85% of the balance sheet total. The proportion of stockholders' equity used for the financial services business is relative- lv low in comparison to our due to the fact that the Ad- tranz joint venture reported at equity in 1995 was now included in the consolidated financial statements along with its prorated assets and liabilities. The gross inventories in the balance sheet were up from DM 17.9 billion to DM 18.6 billion. As a result of the growth in advance payments received from DM 3.6 billion to DM 5.0 billion, net inventories dropped from DM 14.3 billion to DM 13.6 billion; their share in the balance sheet total is now 12% (1995:14%). Inventories industrial business, and at year-end 1996 totaled DM 2.1 mainly in the Automotive business were lower. Accounts billion, or 6% of the balance sheet total. receivable trade and other receivables fell slightly by DM 0.2 billion to a total DM 19.8 billion. Securities, on the other hand, STRUCTURES OF THE CONSOLIDATED jumped from DM 9.0 billion to DM 9.8 billion and cash from BALANCE SHEET IMPROVED DM 3.2 billion to DM 4.6 billion. Liquidity which is mainly The balance sheet total of the Daimler-Benz group as at shown in these positions increased by DM 2.5 billion to DM December 31, 1996, increased by DM 10.4 billion over year- 14.8 billion. Prepaid expenses and deferred taxes, at DM 10.0 end 1995 to DM 112.5 billion. On the assets side, the growth billion, were DM 0.4 billion higher than in the previous year. in the balance sheet total is mainly influenced by the change On the liabilities side, stockholders' equity rose by DM in the leased equipment and leasing and sales financing 3.5 billion to DM 26.4 billion; its share in the balance sheet accounts receivables positions, which rose bv DM 2.2 billion total grew from 22% to 23% after the loss in the previous year had led to a noticeable decline. In this respect, the allocation making adjustments for changes in the consolidated group of retained earnings from the group's net income was and currency effects as well as the improved financial results especially influential, but the more favorable exchange rates (before expenses and income not affecting payments). In in translating stockholders' equity from the foreign companies to German marks was also an important factor. The pro portion of fixed assets covered by stock holders' equity improved from 72% to 74%. The increase in provisions reported in the balance sheet was below average, rising by DM 1.2 billion to a total of DM 34.9 billion. Pension provisions grew by DM 0.7 billion to DM 16.2 billion, and other provisions by DM 0.6 billion to DM 18.7 billion. The proportion of provisions in the balance sheet total thus dropped from 33% to 31%. In contrast, financial liabilities again surged upward at an above-average rate; at DM 27.2 billion their share in total capital is now 24% as compared to 22% in the 1995 financial statements. DM 20.6 billion, or nearly three quarters of the financial liabilities, are tied to the financial services business alone. As previously, both the fixed assets (without taking the influence of the finan cial services business into account) and the net inventories are adequately covered by stockholders' equity and long- and me dium-term provisions. INCREASE IN CASH FLOW FROM OPERATING ACTIVITIES The cash flow from operating activities increased by DM 4.7 billion to DM 10.2 billion. This was predominantly related to the development of working capital after the previous year, more working capital had been tied up due to the expansion of inventories at Mercedes-Benz in par ticular. The cash flow from investment activities totaling DM 12.2 billion (1995: DM 10.7 billion) was still influenced by the growing leasing and sales financing business. At DM 6.1 billion (1995: DM 5.2 billion), nearly half of the gross invest ments were allocated to additions to leased assets; an additional factor was the net increase of sales financing receivables to DM 3.1 billion (1995: DM 2.1 billion). The development of the affiliated companies had the opposite effect. In this respect, proceeds from the sale of affiliated com panies totaling DM 1.1 billion were off set by significantly lower expenditures for the acquisition of affiliated companies totaling DM 0.5 billion (1995: DM 2.2 billion). The cash flow from financial activities, at DM 2.2 billion (1995: DM 2.3 billion), remained nearly unchanged and was largely influenced by the growth in net borrowed funds to DM 1.9 billion. Overall, the development of the individual cash flows led to a DM 0.4 billion increase in cash and cash equivalents up to 3 months and a DM 2.5 billion increase in liquidity. C O N S O L I D A T ED S T A T E M E N TS OF I N C O ME The accompanying notes are an integral part of these Consolidated Financial Statements. C A SH F L OW S T A T E M E N TS The accompanying notes are an integral part of these Consolidated Financial Statements. N O T ES TO C O N S O L I D A T ED F I N A N C I AL S T A T E M E N TS BASIS OF PRESENTATION the period. The assets and liabilities of foreign subsidiaries I. SUMMARY OF ACCOUNTING POLICIES operating in highly inflationary economies are remeasured into DM on the basis of period end rates for monetary assets General - T he consolidated financial statements of Daim and liabilities and at historical rates for non-monetary items, ler-Benz Aktiengesellschaft and subsidiaries ("Daimler- with resulting translation gains and losses being recognized Benz" or the "Group") have been prepared in accordance in income. Further, in such economies, depreciation and with United States generally accepted accounting principles gains and losses from the disposal of non-monetary assets is ("U.S. GAAP"), except that the Group has accounted for cer determined using historical rates. tain joint ventures in accordance with the proportionate Revenue Recognition - Revenue is recognized when title method of accounting (See note 2). All amounts herein are passes or services are rendered net of discounts, customer shown in millions of Deutsche Marks ("DM" or "marks"). bonuses and rebates granted. Revenue on long-term con Commercial practices with respect to certain of the prod tracts is generally recognized under the percentage-of-com- ucts manufactured by Daimler-Benz necessitate that sales fi pletion method based upon contractual milestones or per nancing, including leasing alternatives, be made available to formance. Revenue from finance receivables is recorded on the Group's customers. Accordingly, the Group's consolidat the interest method. Operating lease income is recorded ed financial statements are significantly influenced by activ when earned. ities of a number of "captive" financing entities. To enhance Product Related Expenses - Expenditures for advertising the readers' understanding of the Group's consolidated fi and sales promotion and for other sales related expenses are nancial statements, the accompanying financial statements charged to expense as incurred. Provisions for estimated present, in addition to the consolidated financial statements, costs related to product warranty are made at the time the information with respect to the financial position, results of products are sold. Research and development costs are ex operations and cash flows of the Group's financial services pensed as incurred. business activities. Such information however is not required Net Income Per Share - Net income per share has been by U.S. GAAP and is not intended to, and does not, represent calculated by dividing the net income by the weighted the separate U.S. GAAP financial position, results of opera average number of Ordinary Shares and common stock tions or cash flows of the Group's financial services business equivalents outstanding (See note 16). Net income is deter activities. Amounts with respect to the financial services mined after deducting the minority interests' share of earn business are presented prior to intercompany eliminations of ings of subsidaries. transactions with other Group companies. Intangible Assets — Purchased intangible assets are val Consolidation -All material companies in which Daimler- ued at acquisition cost and are amortized over their respec Benz has legal or effective control are consolidated. Signifi tive useful lives (3 to 10 years). Goodwill derived from acqui cant investments in which Daimler-Benz has an ownership sitions is capitalized and amortized over 5 to 20 years. The interest in the range of 20% to 50% ("associated companies") Group periodically assesses the recoverability of its goodwill are generally included using the equity method of account based upon projected future cash flows. ing. For certain investments in joint ventures, Daimler-Benz Property, Plant and Equipment - Property, plant and uses the proportionate method of accounting (see note 2). equipment is valued at acquisition or manufacturing cost Other investments are accounted for at cost. The effects of and subsequently depreciated using an accelerated deprecia intercompany transactions have been eliminated. tion method until such time that the straight-line method Foreign Currencies - Based upon Statement of Financial yields a larger expense, when the straight-line method is uti Accounting Standard "SFAS 52", the assets and liabilities of lized, over the assets' useful lives as follows: buildings - 17 to foreign subsidiaries are generally translated into DM on the 50 years; site improvements - 8 to 20 years; technical facili basis of period end exchange rates while the income State ties and machinery - 3 to 20 years; and facilities, factory and ments are translated using average exchange rates during office equipment - 2 to 10 years. Leasing - The Group is a lessee of property, plant and equipment and lessor of equipment, principally passenger cars and commercial vehicles. All leases that meet certain specified criteria under U.S. GAAP intended to represent sit uations where the substantive risks and rewards of owner ship have been transferred to the lessee are accounted for as capital leases. All other leases are accounted for as operating leases. Equipment on operating lease, where the Group is lessor, is valued at acquisition cost and generally depreciated over the assets' useful lives, generally three to seven years, using the straight line method. Current Assets - Current assets represent the Group's in including receivables, securities and cash, ventories, amounts due in excess of one year. Marketable Securities and Investments - Securities are accounted for at fair values, if readily determinable. Unreal ized gains and losses on trading securities, that is, securities bought principally for the purposes of selling them in the near term, are included in income. Unrealized gains and loss es on available-for-sale securities are included in stockhold ers' equity, net of applicable income taxes. Securities which could be held until maturity are included in available-for-sale as the Group does not have the positive intent to hold them to maturity. All other securities are recorded at cost. Unrealized losses on all marketable securities and investments that are other than temporary are recognized in earnings. Inventories - Inventory is valued at the lower of acquisi tion or manufacturing cost or market, cost being generally determined on the basis of an average or first-in, first-out method. Certain of the Group's U.S. businesses' inventories are valued using the last-in, first-out method. Manufacturing costs comprise direct material and labor and applicable man ufacturing overheads, including depreciation charges. Financial Instruments - It is Daimler-Benz' policy not to engage in trading activities. Financial instruments, including derivatives, which are not designated as hedges of specific assets, liabilities or firm commitments are marked to market and any resulting unrealized gains or losses are recognized in income. Gains and losses on financial instruments used to manage interest rate and currency risks of identifiable as sets, liabilities or firm commitments are deferred and recog nized along with the effects of the related transaction. Accrued liabilities - The valuation of pension liabilities is based upon the projected unit credit method required by SFAS 87. An accrued liability for taxes and other expenses is recorded, when an obligation with third parties has been in curred, its utilization is probable and the amount can be rea sonably estimated. Use of estimates - The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Adtranz together with the amortization of the excess of the cost of its investment over its share of the investment's net assets would be reported as a net amount in financial in come, net in the Group's statement of income. Additionally, Adtranz would have an impact on the Group's reported cash flows only to the extent the Group received cash dividends. For purposes of its United States financial reporting obliga tion, Daimler-Benz has requested and received permission from the United States Securities and Exchange Commission ("SEC") to prepare its consolidated financial statements with this departure from U.S. GAAP. financial Summarized consolidated information of Adtranz as of and for the year ended December 31, 1996 fol lows. The amounts represent those used in the Daimler-Benz consolidation, including goodwill resulting from the forma tion of Adtranz. Other companies included in the consolida tion according to the pro-rata method are not material. 2. A C Q U I S I T I ON A ND P RO R A TA C O N S O L I D A T I ON In late December 1995 the Group and Asea Brown Boveri Ltd. ("ABB") completed formation of a joint venture of their rail systems businesses to be known as Adtranz. In connec tion therewith, the Group contributed its rail systems busi nesses to Adtranz and paid U.S. $900 to ABB in return for a 50% interest in the joint venture. As part of the formation of Adtranz, the Group and ABB also entered into an option agreement whereby, for certain periods during 1998 through 2005, the Group has the right (call option) to purchase ABB's 50% interest in Adtranz for U.S. $1,800 plus a premium calculated on the basis of Adtranz' meeting or exceeding certain future earnings thresholds. In addition, for certain periods during 1998 through 2005, ABB has the right (put option) to require the Group to purchase ABB's 50% interest in Adtranz at prices calculated in accordance with the same criteria except that the price for the put option is lower than the price for the call option assuming the same future earnings. At December 31, 1995 the Group's investment in Adtranz was valued on the basis of the equity method of accounting and included DM 1,094 representing the excess of the pay ment, made by the Group to ABB, over the fair value of the the Group's share of the net assets of Adtranz. Since January 1, 1996 the Group accounts for its investment in Adtranz us ing the pro-rata method of consolidation. Accordingly, Daim ler-Benz reports its 50% proportionate interest of the assets and liabilities, revenues and expenses and cash flows in Adtranz. The Group believes that such method of financial statement presentation, which is permitted by the regula tions of the Seventh Directive of the European Community and the Standards of the International Accounting Standards Committee, better illustrates its consolidated financial posi tion, results of operations and cash flows to the reader of the Group's consolidated financial statements. Under U.S. GAAP, Daimler-Benz' investment in Adtranz is required to be accounted for using the equity method of accounting. The differences in accounting treatment be tween the pro-rata and equity methods would not effect re ported stockholders' equity or net income of Daimler-Benz. Under the equity method of accounting, Daimler-Benz' net investment in Adtranz would be included within investments in the balance sheet and its share of the net income or loss of 3. BUSINESS REORGANIZATION MEASURES During 1995 and extending into 1996 the Group imple mented certain measures designed to increase the Group's competitiveness and earnings. Such measures consisted principally of: (a) Beginning in 1995 and continuing in 1996 the Group spun off certain non-core businesses and other net assets of AEG Aktiengesellschaft ("AEG") into EHG Elektro Holding GmbH, closed the AEG corporate headquarters and merged AEG with Daimler-Benz AG. Thereafter the divestitures of the Energy Systems Technology and Auto mation Divisions were completed. In June, 1996 the shareholders of AEG approved the merger of AEG with Daimler-Benz AG and in September, 1996, effective Janu ary 1, 1996, such merger was formally registered in the trade register. As part of the merger, the Group pur chased the outstanding minority interest of AEG. In con nection with the foregoing transactions, the Group re corded charges to operations of approximately DM 300 and DM 1,600 in 1996 and 1995, respectively. See note 25 for information regarding the sale of the recognition and sorting systems business. (b) In January 1996 Daimler-Benz announced that, effective immediately, it would discontinue financial support for NV Koninklijke Nederlandse Vliegtuigenfabriek ("Fok- ker"), the Dutch aircraft manufacturer. Subsequent to the announcement Fokker requested and received, in accord ance with Dutch law, protection from its creditors. In con nection therewith, control Of Fokker was placed with a third-party administrator. On March 15, 1996 Fokker for mally filed for bankruptcy under the laws of The Nether lands. The Group recorded a charge in the 1995 statement of income of DM 2,158 for discontinuing such investment. During 1996 the Group realized gains of approximately DM 100 from the proceeds of sales of certain inventories in excess of the inventories' previously written-down value. (c) Beginning in 1994 and accelerating in 1995, the DM ap preciated significantly against the U.S. dollar, the curren cy in which a significant percentage of the Aerospace di visions revenues are denominated. An appreciation of the DM relative to the U.S. dollar results in the Group receiving, when converted to DM, less revenue (and cash proceeds) from the sales of its products. In addition, Aer ospace continued to suffer significant operating losses as a result of continued low levels of demand in the aircraft market and shrinking government budgets in the space and defense sectors. As a result of the foregoing the Group instituted comprehensive cost-cutting and restruc turing measures, including personnel reductions of ap proximately 4,000 employees in Germany and the sale of three German production facilities. The Group recorded a charge of DM 878 in the 1995 statement of income to cov er the cost of such measures. In addition, Daimler-Benz also recorded a charge to DM 2,558 in 1995 to write-off goodwill relating to the acquisition of certain businesses included within Aerospace and to write-down certain long-term assets. During 1996 the aerospace industry experienced a signif icant increase in demand. As a consequence, higher pro- duction requirements resulted, especially for Daimler- Benz Aerospace Airbus GmbH, in a reduction of its provi sion for restructuring measures by approximately DM 300. d) During 1996 the Group contributed its Dornier aircraft business into a newly formed holding company 80% owned by Fairchild Industries Corporation, an American aircraft manufacturer. In connection therewith, the Group recorded charges of approximately DM 435, of which a portion included the businesses' loss from opera tions up to the date of contribution. The Group is account ing for its 20% investment in the holding company using the equity method of accounting. At year end 34,655 people (1995: 12,365 people) were employed in joint venture companies. The total remuneration paid by Group companies to the members of the Board of Management of Daimler-Benz AG amounted to DM 14 in 1996. The remuneration paid to the members of the Supervisory Board of Daimler-Benz AG totals DM 2 in 1996. Disbursements to former members of the Board of Management of Daimler-Benz AG and their survi vors amounted to DM 16 in 1996. An amount of DM 105 at December 31, 1996 has been accrued in the financial state ments of Daimler-Benz AG and Mercedes-Benz AG for pen sion obligations to former members of the Board of Manage ment and their survivors. As of December 31, 1996, there existed no advances and loans to members of the Board of Management of Daimler-Benz AG. 6. INCOME TAXES come is initially subject to a federal corporation tax of 45% Income (loss) before income taxes and minority interest plus a surcharge of 7.5% on the federal corporate tax payable. for the years ending December 31, 1996 and 1995, amounted After giving effect to the surcharge, the federal corporate tax to DM 1,961 and DM (7,233), respectively, of which DM 1,200 rate increases to 48.375%. Upon distribution of retained earn and DM (6,874), respectively, have been generated by the ings to stockholders, the corporate income tax rate on the Group's operations in Germany. distributed earnings is adjusted to 30%, plus the surcharge of The provisions for income taxes (credit) follow: 7.5% on the federal corporate rate for a total of 32.25%, by receiving a refund for taxes previously paid on income in ex cess of 30%. Upon distribution of retained earnings in the form of a dividend, German stockholders are entitled to a tax credit in the amount of federal income taxes previously paid by the corporation. A reconciliation of income taxes determined using the German federal corporate rate of 48.375% plus the after fed eral tax benefit rate for trade taxes of 8.625% for a combined statutory rate of 57% is as follows: German corporate tax law applies a split-rate imputation system with regard to the taxation of the income of a corpora tion and its stockholders. In general, retained corporate in- agement's estimate of the amount of the deferred tax assets considered realizable may change, and hence, the valuation allowance may increase or decrease. Deferred income tax assets and liabilities are summa rized as follows: During 1996 the Group's consolidated valuation allow ances decreased by DM 1,052. In 1996 the Group realized income tax benefits from the utilization of loss carryforwards of DM 673 relating to entities in the Aerospace division. The tax benefits of such loss carryforwards had been fully re served as of December 31,1995 since the entities had a histo ry of operating losses prior to 1996 and such losses were lim ited as to their use. Tax benefits recognized from other changes to the valuation allowances in 1996 included the merger of the former AEG into Daimler-Benz AG during 1996 after which the German loss carryforwards of AEG could be utilized by the Group's German group of companies that file a combined tax return ("Organschaft"). Prior to the merger such NOL's were limited as to their use and accordingly were fully reserved for. In addition, during 1996 the Group realized tax benefits related to investments written-down in previous years. In 1995 the Group was unable to recognize the tax benefits of DM 260 resulting from losses incurred by Fokker for which financial support was discontinued. The amount of the Group's deferred tax allowances estab lished at December 31,1996 and 1995 were based upon man agement's belief that it was more likely than not that not all of the deferred tax assets would be realized. In future peri ods, depending upon Daimler-Benz' financial results, man- At December 31, 1996, the Group had net operating loss es ("NOLs") and corporate tax credit carryforwards amount ing to approximately DM 16,551 (1995: DM 17,591). The ma jority of the NOLs relate to the German group of companies which are included in the filing of a combined tax return ("Organschaft") and have an unlimited carryforward period under German tax law. The remainder of the NOL's relate to losses of non-Organschaft companies and are limited in their use to the company or group which generated the loss. Net deferred income tax assets and liabilities in the con solidated balance sheets are as follows: Deferred tax liabilities have not been recognized on unre ber 31, 1996 and 1995, respectively. Determination of the mitted earnings of non-German subsidiaries intended to be amount of unrecognized deferred tax liabilities is not practi indefinitely reinvested (DM 2,527 and DM 2,709 at Decem cable. NOTES TO THE CONSOLIDATED BALANCE SHEETS ings and technical equipment capitalized under capital lease agreements, of DM 498 and DM 683 at December 31, 1996 7. PROPERTY, PLANT AND EQUIPMENT, NET and 1995, respectively. Depreciation expense on assets un Information with respect to the Group's property, plant and equipment is presented in the Fixed Assets schedule in cluded herein. Property, plant and equipment include build- der capital lease arrangements was DM 86 and DM 121 in 1996 and 1995, respectively. 8. EQUIPMENT ON OPERATING LEASES, NET Noncancellable future lease payments due from custom Information with respect to the Group's equipment on ers for equipment on operating leases at December 31, 1996 operating lease is presented in the Fixed Assets schedule in amounted to DM 6,573 and are due as follows: cluded herein. Of the total equipment on operating lease DM 11,402 and DM 8,882 at December 31, 1996 and 1995, re spectively, represent automobiles and commercial vehicles. The amount for equipment on operating leases in 1996 and 1995 include initial direct costs of contracts of DM 118 and DM 108, respectively. Raw materials and manufacturing supplies Work in process thereof realting to long-term contracts and programs in process DM 1,485 (1995: DM 371) Finished goods, parts and goods purchased for resale Advance payments to suppliers Less: Advance payments received thereof relating to long-term contracts and programs in process DM 582 (1995: DM 641) Certain of the Group's U.S. businesses' inventories are valued using the last-in, first-out method. If the FIFO method had been used instead of the UFO method, inventories would have been higher by DM 299 and DM 240 at December 31, 1996 and 1995, respectively. Receivables from sales of goods and services Long-term contracts and programs, unbilled, net of advance payments received n. RECEIVABLES FROM FINANCIAL SERVICES Sales financing and finance lease receivables consist of retail installment sales contracts secured by automobiles and commercial vehicles. Contractual maturities applicable to re ceivables from sales financing and finance leases maturing in each of the five years following December 31, 1996 are as follows: As of December 31, 1996 and 1995 DM 11,098 and DJV 8,142 of the total financing receivables mature after mon than one year. Receivables from affiliated companies Receivables from related companies ]) Other receivables and other assets 1) Related companies include entities which have a significant ownership in Daimler-Benz or entities in which the Group holds a significant investment. 13. SECURITIES AND INVESTMENTS Information with respect to the Group's investments and long-term financial assets is presented in the Fixed Assets schedule included herein. Securities included in current as sets are comprised of the following: Carrying amounts and fair values of debt and equity se curities included in securities and investments for which fair values are readily determinable are classified as follows: Aggregate cost, fair values and gross unrealized holding gains or losses per security class are the following: The cost and estimated fair values of investments in debt Proceeds from sales of available-for sale securities in securities at December 31,1996 and 1995, by contractual ma 1996 and 1995 were DM 1,126 and DM 337, respectively. turity, are shown below. Expected maturities may differ from Gross realized gains in 1996 and 1995 from sales of available- contractual maturities because borrowers may have the right for-sale securities on a specific identification basis were DM to call or prepay obligations with or without penalty. 22 and DM 6, respectively. Gross realized losses in 1996 and 1995 from sales of available-for-sale securities on a specific identification basis were DM 6 and DM 1, respectively. 14. CASH AND CASH EQUIVALENTS equivalents include DM 174 and DM 658 at December 31, As of December 31, 1996 and 1995 cash and cash equiva 1996 and 1995, respectively, of amounts on deposit with a lents include DM 1,337 and DM 283, respectively, of deposits related party. with maturities of more than three months. Cash and cash 15. ADDITIONAL CASH FLOW INFORMATION The following information with respect to cash flows is Liquid assets recorded under various balance sheet cap provided: tions as of December 31, 1996 and 1995 are as follows: Cash and cash equivalents available within 3 months Deposits which mature after 3 months Securities Other 16. STOCKHOLDERS' EOUITY amounts based upon a 5 DM per share nominal value. Due to At December 31, 1995 the Group had issued and out the issuance of shares to employees and the conversion of standing 51,368,736 Ordinary Shares with a nominal (par) options into shares the number of issued and outstanding value of 50 DM per share. On May 22, 1996 the Group, upon Ordinary Shares increased to 515,396,396 as of December the approval of its shareholders, reduced the nominal value 31, 1996. of its Ordinary Shares from 50 DM per share to 5 DM per Daimler-Benz stockholders on June 26, 1991, authorized share effective July 1, 1996. This resulted in an increase in through June 30, 1996 the issuance of Ordinary Shares of up the number of Ordinary Shares outstanding from 51,368,736 to DM 600 nominal value of which the remaining unutilized shares to 513,687,360 shares. Per share information for all portion of DM 367 expired in 1996. On May 22, 1996 the periods presented has been adjusted to reflect per share stockholders approved the issuance of Ordinary Shares up to an aggregate amount of DM 500 nominal value through April 30,2001. At the annual general meeting held on May 18, 1994 Daimler-Benz was authorized by its stockholders to issue Or dinary Shares of DM 20 nominal value to employees of which DM 9 are unissued and expire on April 30, 1999. In 1996 and 1995, 1,050,000 and 700,000 Ordinary Shares, respectively, were issued to employees leading to increases of capital stock and additional paid-in capital of DM 6 and DM 3 and DM 80 and DM 44, respectively. Subject to preemptive rights of existing stockholders, Daimler-Benz in the stockholders' meeting held on May 18, 1994 and May 22, 1996 has received the authority for future issuances of Ordinary Shares up to DM 300 in connection with convertible bonds and bonds with warrants. This au thority, which limits the total nominal value of such convert ible bonds and bonds with warrants to be issued to DM 2,000 and which expires on April 30, 1999, was used during 1996 for the issuance of convertible notes by Daimler-Benz Capital (Luxembourg) AG. Convertible notes in the amount of DM 750 were issued with a nominal value of 1,000 DM each, in cluding a total of 7,690,500 options which, on the basis of the option agreement, entitle the bearer of the option to sub scribe for Ordinary Shares of Daimler-Benz AG. The option price per share is DM 95.07 in consideration of exchange of the notes or DM 98.65 in cash. During 1996 options for the subscription of 36 shares have been exercised. Proceeds from issuance of the notes, net of expenses, were DM 711. On May 22, 1996 the shareholders of Daimler-Benz ap proved establishment of The Stock Option Plan of the Daim ler-Benz Group (the "Plan") which provides for the granting to certain members of management options for the purchase of Daimler-Benz Ordinary Shares. Daimler-Benz has reserved up to DM 40 of contingent authorized nominal capital for the issuance of new Ordinary Shares under the Plan. The options granted under the Plan are evidenced by non-transferable 5.9% convertible bonds due 2006 with a principal amount of 1,000 DM per bond (the "Convertible Bonds"). Each Convert ible Bond entitles the holder thereof to convert the bond into Ordinary Shares with an aggregate nominal value of 1,000 DM (equating to 200 shares). For convertible bonds sold in 1996 the conversion price per share was DM 83.77 (the stock exchange price as of May 23, 1996), of which the remaining DM 78.77 must be paid in cash. Every year the conversion privilege under the bond can be exercised only within four periods of three weeks each, if the stock exchange price per Ordinary Share is at least 115 % of the predetermined conver sion price. Activity during 1996 with respect to the Plan fol lows: As a consequence of the foregoing activity, capital stock increased by DM 3 and additional paid-in capital by DM 52. Daimler-Benz adopted the disclosure-only option under SFAS No. 123, Accounting for Stock-Based Compensation, as of Ja nuary 1, 19°6. If the accounting provisions of the new State ment had been adopted, the effect on 1996 net income would have been immaterial. The minority stockholders of Dornier have the right to exchange their interest in Dornier for holdings of equal value in Daimler-Benz Aerospace or Ordinary Shares of Daimler- Benz AG and such options are exercisable at any time. If such rights were exercised in full, the number of Ordinary Shares of Daimler-Benz AG which would be exchangeable for Dorni er shareholdings would not be material to the Group or its stockholders. Under German corporation act, the amount of dividends available for distribution to shareholders is based upon the earnings of Daimler-Benz AG (parent company only) as re ported in its statutory financial statements determined in ac cordance with the German commercial code (Handelsgesetz- buch). At December 31, 1996 Daimler-Benz AG had retained earnings of DM 7,342. For the year ended December 31, 1996 Daimler-Benz management has proposed to distribute DM 567 of the 1996 earnings of Daimler-Benz AG as a dividend to the stockholders. A) RETIREMENT PLANS Pension plans and similar obligations are comprised of the following components: The Group operates various defined benefit pension plans all based upon years of service. Some pension plans are based on salary earned in the last year of employment and some are fixed DM-amount plans depending on ranking (both wage level and position). The funded status of the Group's major retirement plans is as follows: Plan assets consist primarily of investments in equity and fixed interest securities and real estate. Assumed discount rates and rates of increase in remu neration used in calculating the projected benefit obligations together with long-term rates of return on plan assets vary according to the economic conditions of the country in which the retirement plans are situated. The average factors used in the principal retirement plans were as follows: Certain of the Group's U.S. operations provide postretire- ment medical benefits to their employees. The net periodic pension cost for the years ended December 31, 1996 and 1995 was DM 26 and DM 25, respectively. In connection with the Group's workforce reduction pro gram the Group recorded in 1996 and 1995 provisions for termination benefits of DM 423 and DM 842, respectively, principally within Mercedes-Benz, AEG-DBI and Daimler-Benz Aerospace. During 1996 and 1995 the Group effected work force reductions of approximately 11,800 and 14,800 employ ees, respectively. In this connection with certain of such re ductions DM 745 and DM 1,489 in 1996 and 1995, respect ively, of termination benefits were paid of which DM 556 and 1,132 in 1996 and 1995, respectively, were charged against previously established liabilities. At December 31, 1996 the Group had liabilities for estimated future terminations of ap proximately 16,300 employees. Exit costs in 1995 mainly result from plans to reduce the production capacity of AEG-DBI and Daimler-Benz Aerospace and in 1996 relate exclusively to businesses of the former AEG DBI. At December 31, 1996 and 1995, liabilities to financial institutions include approximately DM 721 and DM 609, re spectively, owed to related parties. Commercial paper is de nominated in DM and U.S. dollars and includes accrued inter est. Bonds and liabilities to financial institutions are largely secured by mortgage conveyance, liens and assignment of receivables of approximately DM 2,381 and DM 2,516, as of December, 1996 and 1995. Aggregate amounts of financial liabilities maturing dur ing the next five years and thereafter are as follows: At year end 1996 and 1995, the Group had unused non- cancellable short-term credit lines of DM 14,255 and DM 13,581, respectively, and unused non-cancellable long-term credit lines of DM 5,672 and DM 5,703, respectively. Liabilities to related companies are primarily obligations of Daimler-Benz Aerospace Airbus GmbH to Airbus Industrie G.I.E., Toulouse. ber 31, 1996 and 1995 tax liabilities include withheld em ployee taxes of DM 972 and DM 985, respectively, and social benefits due of DM 906 and DM 1,182, respectively. Other liabilities mainly relate to payroll obligations of the month of December and related tax liabilities. As of Decem OTHER NOTES 21. LITIGATION AND CLAIMS Various legal actions, governmental investigations, pro ceedings and claims are pending or may be instituted or as serted in the future against the Group. Litigation is subject to many uncertainties; the outcome of individual litigated mat ters is not predictable with assurance; and it is reasonably possible that some of the matters could be decided unfavora bly to the Group. Although the amount of liability at Decem ber 31, 1996 with respect to these matters cannot be ascer tained, the Group believes that the resulting liability, if any, should not materially affect the consolidated financial posi tion of the Group at December 31, 1996. from such customer financing commitments is considered remote. The Group's obligations under the foregoing financing commitments of Airbus consortium are joint and several with its other partners in the consortium. In the event that Airbus, despite the underlying collateral, was unable to hon our its obligations, the Group is confident that each of its oth er consortium partners would be responsible for their propor tionate share of Airbus' obligations. In connection with the Group's acquisition of Messer- schmitt-Bolkow-Blohm GmbH ("MBB") in 1989 and the relat ed indirect acquisition of all outstanding shares of DA and in order to facilitate the complete privatisation of MBB and, through DA, its activities as the German participant in Air bus Industrie, the Government of the Federal Republic of Ger many agreed to: (i) assume responsibility for the repayment of certain bank loans guaranteed by the Government in the past and, un der certain conditions, further to assume responsibility for certain additional loans which DA has since repaid, (ii) continue funding a substantial portion of certain already launched Daimler-Benz Aerospace Airbus development programs, (iii)continue to provide certain exchange rate guarantees for 1991, 1990 and 1989, and (iv) defer its immediate rights to any repayment of develop ment grants and other advances made to Daimler-Benz Aerospace Airbus and its predecessor companies. The development grants and other advances are repaya ble by DA, on a contingent basis, through DA making annual payments equal to 40% of the pretax profits as defined, if any, of DA for the preceding fiscal year, beginning for the fiscal year 2002 (subject to advance to the year 2000 under certain conditions). Each annual payment is contingent on DA hav ing earned pretax profits in the preceding year. Such pretax profits are subject to reduction by application of any prior years' (beginning with the year 2002) cumulative loss carry forwards. DA may not pay dividends prior to the commence ment date of the 40% profit sharing obligation; provided that if it were to do so it would be required to commence profit sharing payments at the same time. The payments of 40% of annual pretax profits will be made on the foregoing contin gent basis until all development grants and other advances Contingent liabilities represent principally guarantees of indebtedness of non-consolidated affiliated companies and third-parties and commitments by Group companies as to contractual performance by joint venture companies. Daim ler-Benz Aerospace is also obligated to make certain guaran teed dividend payments to minority shareholders. As part of the government supported Airbus Develop ment Program, the Group is committed to incur future devel opment costs. At December 31, 1996 the remaining commit ment aggregated DM 136. In addition the Group has pledged the assets of Daimler-Benz Aerospace Airbus GmbH ("DA") acquired with development funds, to the Federal Republic of Germany. Airbus Industries G.I.E. ("Airbus consortium") has given a performance guarantee to Agence Executive, the French go vernment agency overseeing Airbus; such performance guar antee has been assumed by DA to the extent of its 37.9 % participation in the Airbus consortium. At December 31, 1996, in connection with DA's participa tion in the Airbus consortium, the Group was contingently liable related to the consortium's irrevocable financing com mitments in respect of aircraft on order, including options, for delivery through 2001 or later. In addition, the Group was also contingently liable related to credit guarantees and par ticipation in financing receivables of Airbus consortium un der customer finance programs. When entering into such customer financing commitments Airbus consortium has generally established a secured position in the aircraft being financed. Airbus consortium and the Group believe that the estimated fair value of the aircraft securing such commit ments would substantially offset any potential losses from the commitments. As Airbus consortium has not, historically, experienced a problem accessing such collateral, the proba bility of Airbus consortium experiencing material losses are repaid. Because the amount of these annual payments, if any, will depend upon the profitability of DA beginning with the year 2002 and because such profitability will be a func tion of numerous unpredictable factors, including the then prevailing dollar/mark exchange rate, the Group is unable to predict with certainty how long DA will remain subject to the contingent 40% profit sharing obligation. However, the Group currently believes it likely that the repayment term will ex tend over a period of decades from the year 2002. The Group may not sell or transfer a majority of the capital stock of DA without the consent of the German Federal Government. In the normal course of business, the Group sells to third- parties certain of its financial services assets. During the years ended December 31, 1996 and 1995 the Group sold as sets for proceeds of DM 1,774 and DM 817, respectively. In connection with such sales, at December 31, 1996 the Group remained liable under recourse provisions for DM 341. 23. INFORMATION ABOUT FINANCIAL INSTRUMENTS A) USE OF FINANCIAL INSTRUMENTS In the course of normal business Daimler-Benz uses fi nancial instruments, including securities, bonds, commer cial paper, and, as a consequence, may be exposed to risks from changes in interest and currency exchange rates as well as share prices. Daimler-Benz uses derivative financial in struments as a means of hedging to reduce such risks. With out the use of these instruments the Group's exposure to market risks may be higher. Based on regulations issued by regulatory authorities for financial institutions, the Group has established guidelines for risk assessment procedures and controls for the use of financial instruments. They include a clear segregation of duties with regard to trading on one side and execution, ac counting and controlling on the other. Market risk to which the portfolio of financial instru ments of Daimler-Benz AG and its German subsidaries may be exposed is quantified according to the "value-at-risk" method which is commonly used among banks. Using histor ical variability of market values, a potential loss resulting from changes of market prices is calculated on the basis of statistical methods. The maximum acceptable market risk The Group is jointly and severally liable for certain non- incorporated companies, partnerships and project groups. The total rentals under operating leases, charged as an expense in the statement of income amounted to DM 885 and DM 878 in the years ended December 31, 1996 and 1995, respectively. The future minimum lease payments under rental and lease agreements, that have initial or remaining terms in ex cess of one year at December 31, 1996 are as follows: has been fixed by management in the form of a risk capital which has been approved for one year. The adherence to the risk capital is regularly monitored. It is the Group's intention to extend the "value-at-risk" approach to all subsidaries with significant treasury activity. B) NOTIONAL AMOUNTS AND CREDIT RISK The contract or notional amounts shown below do not al ways represent amounts exchanged by the parties and, thus, are not necessarily a measure for the exposure of Daimler- Benz through its use of derivatives. The notional amounts of off-balance sheet financial in struments are as follows: Currency contracts include foreign exchange forward and option contracts which are mainly utilized to hedge exist ing assets and liabilities, firm commitments and anticipated transactions denominated in foreign currencies (principally U.S. dollars, Japanese Yen and major Euro-currencies). The principal objective of the Group's hedging transactions is to reduce the exposure of its foreign denominated future cash flows to exchange rate fluctuations. The Group has entered into currency contracts to cover foreign exchange risks on certain anticipated foreign currency transactions relating to sales and purchase transactions expected to occur within a period of one to five years. The Group enters into interest and interest rate cross-cur rency swaps, interest rate forward and futures contracts and interest rate options in order to reduce funding costs, to di versify sources of funding, or to alter interest rate exposures arising from mismatches between assets and liabilities. The Group may be exposed to credit-related losses in the event of non-performance by counterparties to financial in struments. Counterparties to the Group's financial instru ments represent, in general, international financial institu tions. Daimler-Benz does not have a significant exposure to any individual customer or counterparty, based on the rating of the counterparties performed by established rating agen cies. The Group believes the overall credit risk related to uti lized derivatives is insignificant. c) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current trans action between willing parties. Fair values of financial instru ments have been determined with reference to available mar ket information and the valuation methodologies discussed below. However, considerable management judgement is re quired in interpreting market data to arrive at fair values. Accordingly, the fair values presented herein may not be in dicative of the amounts that the Group could realize in a cur rent market exchange. The carrying amounts and fair values of the Group's fi nancial instruments are as follows: The carrying amounts of the on-balance sheet financial instruments in the table are included in the balance sheets under the indicated captions. The carrying amounts of the off-balance sheet financial instruments are included under other assets and accrued liabilities. The carrying values of cash, other receivables and accounts payable approximate fair values due to the short-term maturities of these instru ments. In determing the fair values of derivative financial instru ments certain compensating effects from underlying transac tions (e.g. firm commitments and anticipated transactions) are not taken into consideration. At December 31, 1996 and 1995 the Group had deferred net unrealized gains on forward currency exchange contracts and options of DM 462 and DM 646, respectively, purchased against firm foreign currency denominated sales commitments extending for varying peri ods between three and twenty-four months. The methods and assumptions used to determine the fair values of financial instruments are summarized below: Financial Assets and Securities - Fair value of securities in the long-term portfolio was estimated using quoted market prices. The Group has certain equity investments in related and affiliated companies not listed in the table. Since certain of these investments are not publicly traded, determination of fair values is impracticable. The fair value of securities in the short-term portfolio was estimated using quoted market prices. Receivables from Financial Services - The carrying value of variable rate finance receivables was estimated to approxi mate fair value since they are priced at current market rates. The fair value of fixed rate finance receivables was estimated by discounting expected cash flows using the current rates at which loans of similar credit quality and maturity would be obtained made as of December 31, 1996 and 1995. Financial Liabilities - Fair value of publicly traded debt was estimated using quoted market prices. The fair value of other long-term notes and bonds was estimated by discount ing future cash flows using rates currently available for debt of similar terms and remaining maturities. The carrying val ues of commercial paper and borrowings under revolving credit facilities were assumed to approximate fair value due to their short maturities. Interest Rate Contracts - The fair values of existing inter est rate and cross currency interest rate swap agreements were estimated by discounting expected cash flows using market interest rates over the remaining term of the instru ment. Options are valued on the basis of quoted market pric es or on estimates based on option pricing models. Currency Contracts - The fair value of forward foreign ex change contracts is based on quoted prices for contracts of similar terms. Options are valued on the basis of quoted mar ket prices or on estimates based on option pricing models. Other Financial Guarantees - Because of the individual nature of these guarantees estimation of the fair value is not practicable. 24. SEGMENT REPORTING • Services - services related to information technology, fi Daimler-Benz operates in four divisions; a description of nancial services, insurance brokerage, trading, telecom the products and services from which each segment derives munication and media and real estate management. its revenues follows: • Directly managed businesses (DMB) - In 1996 represents • Automotive — design, manufacture, assembly and sale of 50% interest in Adtranz and microelectronics and auto- passenger cars and commercial vehicles principally un mation processing products and diesel engines. In 1995 der the trade mark Mercedes-Benz as well as related represented the AEG-DBI corporate unit which included parts and accessories. each of the foregoing business activities plus other busi • Aerospace - development, production and sale of com nesses including products for the transmission and dis mercial and military aircraft and helicopters, of satellites tribution of electricity. and related space transportation systems, defense related Sales and revenues related to transactions between seg products, including radar and radio systems, and propul ments are generally recorded at values that approximate sion systems. commercial selling prices. (1) In 1996 includes Adtranz accounted for using the proportionate method of accounting. See Note 2. (2) Includes DM 2,443 of automobiles leased to customers under oper ating leases that have been sold to Group leasing and sales financ ing entities with guarantees as to the residual value of the products at the end of such leases. (3) 1996 Aerospace operating loss includes charges of DM 435 related to the aircraft business of Dornier offset by approximately DM 300 of reductions in provisions for restructuring measures. See Note 3. (4) In 1995 the Aerospace operating loss includes DM 5,594 of charges related to restructuring measures, goodwill and other write-offs and the decision to discontinue financial support for Fokker. In 1995 the DMB operating loss includes DM 1,596 of charges related to restruc turing of AEG (see note 3) and write downs to fixid assets (DM 331). (5) Includes Aerospace write-downs to fixed assets, including goodwill, of DM 2,558 and DMB DM 331. A reconciliation of income before financial income and taxes to operating profit follows: (1) 1996 operating profit includes charges of DM 435 related to the air craft business of Dornier offset by approximately DM 300 of reduc tions in provisions for restructuring measures. 1995 operating loss includes DM 7,190 of charges related to restructuring measures, goodwill and other write-offs, the decision to discontinue financial support for Fokker and the restructuring of AEG. See note3. Geographic information with respect to the Group's reve nues, net income and identifiable assets follows: 25. SUBSEQUENT EVENTS In January, 1997 the Group agreed to sell its interests in AEG Electrocom GmbH and AEG/ElectroCom International, Inc., the Group's recognition and sorting systems business, to Siemens AG. In addition, in February, 1997, the Group's U.S. commer cial vehicle subsidiary, Freightliner Corporation, entered into a letter of intent with Ford Motor Company ("Ford") providing for the acquisition by Freightliner of certain of Ford' s heavy duty truck businesses, principally in North America. PROPOSAL FOR THE ALLOCATION OF UNAPPROPRIATED PROFIT The annual financial statements of Daimler-Benz AG as of December 31, 1996, show an unappropriated profit of DM 648,875,451.55. It will be proposed at the Annual General Meeting that this amount be applied as follows: The financial statements of Daimler-Benz Aktiengesellschaft and the consolidated financial statements prepared in accordance with German GAAP were audited by KPMG Deutsche Treuhand-Gesellschaft Aktien gesellschaft Wirtschaftsprufungsgesellschaft and an unqualified opinion was rendered thereon. These financial statements will be published in the Bundesanzeiger (federal registry) and filed at the County Court House in Stuttgart. T he financial statements may be obtained from Daimler-Benz AG, Poststelle, 70546 Stuttgart, Tel./Fax. 0711/17-92287. SUPERVISORY BOARD Hilmar Kopper Frankfurt/Main Member of the Board of Managing Directors, Deutsche Bank AG Chairman Karl Feuerstein*) Mannheim Chairman of the Corporate Labor Council, Daimler-Benz Group Deputy Chairman Willi Bohm*) Worth Member of the Labor Council of the Mercedes-Benz Plant Worth Erich Klemm*) Sindelfingen Chairman of the Labor Council of the Mercedes-Benz Plant Sindelfingen Peter Schonfelder*) Augsburg Member of the Labor Council, Daimler-Benz Aerospace AG Martin Kohlhaussen Frankfurt/Main Chairman of the Board of Managing Directors, Commerzbank AG Rudolf Kuda*) Frankfurt/Main Departmental Manager, Office of the Board of Management, Metalworkers' Union Prof. Dr. jur. Johannes Semler Kronberg/Taunus Attorney at Law Bernhard Wurl*) Frankfurt/Main Departmental Manager, Office of the Board of Management, Metalworkers' Union Helmut Lense*) Committees of the Supervisory Dr. h.c. Birgit Breuel Berlin General Commissioner of EXPO 2000 Stuttgart Chairman of the Labor Council of the Mercedes-Benz Plant Unterturkheim Prof. Hubert Curien Paris Former Minister of Research and Technology of the Republic of France Walter Riester*) Frankfurt/Main Second Chairman, Metalworkers' Union Jiirgen Sarrazin Frankfurt/Main Chairman of the Board of Managing Directors, Dresdner Bank AG Dr. jur. Roland Schelling Stuttgart Attorney at Law Herbert Schiller*) Frankfurt/Main Chairman of the Corporate Labor Council, debis AG (since 10/25/1996) Dr. jur. Michael Endres Frankfurt am Main Member of the Board of Managing Directors, Deutsche Bank AG Manfred Gobels *) Stuttgart Chairman of the Senior Managers' Committee, Daimler-Benz Group Ulrich Hartmann Diisseldorf Chairman of the Board of Management and CEO, VEBA AG *) Employee representatives. Dr. rer. pol. Manfred Schneider Leverkusen Chairman of the Board of Management, Bayer AG Outgoing Member of the Supervisory Board: Wolfgang Gabele*) Bremen (on 10/04/1996) Board: Committee pursuant to §27 Sec. 3 MitbestG Hilmar Kopper (Chairman) Karl Feuerstein Prof. Dr. jur. Johannes Semler Bernhard Wurl Executive Committee Hilmar Kopper (Chairman) Karl Feuerstein Prof. Dr. jur. Johannes Semler Bernhard Wurl Audit Committee Hilmar Kopper (Chairman) Karl Feuerstein Willi Bohm Dr. h.c. Birgit Breuel REPORT OF THE SUPERVISORY BOARD In 1996, the Supervisory Board and the Board of Management jointly reviewed the development and situation of the group at four regular meetings and one extraordinary meeting. Individual issues were also discussed. The Executive Committee met twice during the course of the year under review and among other things treated matters relating to the Board of Management. The Audit Committee also met twice, and together with the inde pendent auditors discussed the 1995 financial state ments and the interim report for the first six months of 1996 at length. The Committee formed pursuant to the German Law on Codetermination did not need to meet. At each of the meetings, the Board of Management informed in detail of the development of business and the financial situation of the Company and each individual business unit with a management report and as part of its monthly reporting. Special events beyond the scope of the individual treatment of issues at the meetings were reported in writing and by means of oral reports. Moreover, the Chairman of the Supervisory Board was continu ously advised by the Board of Manage ment in individual meetings. the Supervisory Board the business plan for The regular items treated at the Supervisory Board meeting in February the included medium-range future together with the investment, personnel, and earnings planning and the Company's refinan cing needs. The 1995 financial statements were re viewed at the meeting in April. In addition, any matters requiring approval as per the articles of incorporation were also discussed. The selection of the other items treated was governed by the measures resulting from the review of the group's portfolio initiated by the Board of Management in mid- 1995. The key topic at the special meeting in January 1996 was thus the discontinuation of financial support for Fokker, and at the meeting in April the merger of AEG AG with Daimler-Benz AG, which became legally effective on September 20, 1996. The group's sub stantial sources of loss were thus eliminated. Several important activities were sold as part of the earnings-oriented and strategic streamlining of the portfolio, for instance the Industrial Automation, Po wer Transmission, and Postal Automation units formerly belonging to AEG. Noteworthy measures taken' at Dasa included the sale of Dornier Medizintechnik and at TEMIC the sale of Bayern-Chemie. Other individual items the Supervisory Board at tended to concerned the negotiations with the German government about the realization of the Eurofighter program at Dasa and the restructuring of Dornier re gional jets with the sale of Dasa's majority interest to Eairchild. At debis the Board of Management reported in detail on the risk positions within the Financial Ser vices business unit, the activities relating to the move able property and real estate leasing fund, and the successful restructuring at Cap Gemini. Moreover, the Board of Management informed the Supervisory Board in depth on developments at Adtranz and the progress of the project on Pots- latz in Berlin. On the basis of damer the reports described in the foregoing, the Supervisory Board reviewed the management activities of the Board of Management. In addition, the Board of Manage ment presented the overall strategy of Mercedes-Benz and the strategy for the Asian and Latin American regions. With respect to the commercial sector, the Board of Management elucidated the competitive situation and the cost position in Western Europe and explained the new passenger car projects Smart, A-Class, and M-Class. At debis the Supervisory Board reviewed the overall strategy and, in particular, the advancing globalization in the financial services sector as well as strategic projects in the Telecommunications and Media Services unit. The discussion of strategies at Dasa concentrated for the most part on commercial aircraft and in this regard on Dasa's position with respect to the corporate restructuring of Airbus and the development of the A3 XX wide-body jet. At TEMIC, the focus was on the restruc- turing measures introduced and the streamlining of activities. In the second half of the year, the Supervisory Board consulted the Board of Management at length about the overall strategy and realignment of the corporate structure including the merger of Mercedes-Benz AG with Daimler-Benz AG, a topic that was ultimately dealt with conclusively at the special Supervisory Board meeting on January 23, 1997. With the new management struc ture, the Board of Management has created a signifi cantly leaner organization, which will enable the rele vant business units to operate more expeditiously and efficiently in the market. The 1996 financial statements of Daimler-Benz AG, the consolidated financial statements and the combined business review according to German accounting principles were examined, along with the accounting principles used, by KPMG Deutsche Treuhand-Gesell- schaft AG Wirtschaftsprüfungsgesellschaft, Frankfurt/ Main, and endorsed with an unqualified audit certifi cate. With restriction on the proportionate method of consolidation for joint ventures which is used by Daim ler-Benz and specifically allowed by the Securities and Exchange Commission (SEC), this is also valid for the consolidated financial statements according to U.S. GAAP. These documents, together with the Board of Management's proposed appropriation of earnings and the independent auditors' audit report, were presented to the Supervisory Board. They were reviewed by the Audit Committee and the Supervisory Board and discussed together with the auditors. The Supervisory Board noted and approved the results of the indepen dent auditors' examination and following its own examination found no grounds for objection. In its meeting on April 11, 1997, the Supervisory Board ac knowledged the 1996 consolidated financial statements, approved and ratified the 1996 financial statements of Daimler-Benz AG, and agreed with the Board of Manage ment's proposed appropriation of earnings. Upon the completion of the merger of AEG AG with Daimler-Benz AG on September 20, 1996, Mr. Stockl resigned from the Board of Management of Daimler- Benz AG. The Supervisory Board mandate of Mr. Gabele, Chairman of the Corporate Labor Council and the Joint Labor Council of AEG AG, expired in the course of the sale of AEG Anlagen- und Automatisierungstechnik GmbH. Mr. Schiller, Chairman of the Corporate Labor Council of debis AG, was appointed by the Stuttgart District Court as his successor on October 25, 1996. The Board of Management member responsible for the Research and Technology department, Prof. Weule, resigned from the Board of Management at his own request upon the expiration of his contract on December 31, 1996. The Supervisory Board appointed Mr. Vohrin- ger as his successor on January 23, 1997. In the meeting on April 3, 1996, the Supervisory Board appointed Dr. Cordes as a deputy member of the Board of Management effective July 1, 1996 and on January 23, 1997 as a regular member of the Board of Management effective April 1, 1997. He is responsible for corporate development and the Directly Managed Businesses. At his own request Mr. Werner resigned prematurely from the Board of Management effective January 31, 1997 In the meeting on January 23, 1997, the following additional changes in the Board of Management, to take effect on April 1, 1997, were resolved in connection with the new structure of Daimler-Benz AG: Dr. Gentz trans ferred his responsibility for the Personnel department, which until then he had directed in addition to the Fi nance department, to Mr. Tropitzsch, who was ap pointed as personnel director and was newly appointed to the Board of Management alongside Mr. Hubbert (Passenger Car Division), Dr. Lauk (Commercial Vehicle Division), and Dr. Zetsche (Sales and Marketing). We would like to extend our special thanks to the departing board members for their successful efforts in the Company and for their advice and commitment. Stuttgart-Mohringen, April 1997 Tie Supervisory Board ADDRESSES AND INTERNATIONAL REPRESENTATION OFFICES ADDRESSES DAIMLER-BENZ CORPORATE REPRESENTATIVE OFFICES Daimler-Benz AG D-70546 Stuttgart Tel. (49) 711-17 1 Fax (49) 711-17 94022 Daimler-Benz Aerospace AG D-81663 Munich Tel. (49) 89-607 0 Fax (49) 89-607 26481 Daimler-Benz InterServices (debis) AG P. 0. Box 33 06 25 D-14176 Berlin Tel. (49) 30-89787 260 Fax (49) 30-89787 393 Rail Systems ABB Daimler-Benz Transportation GmbH P. 0. Box 13 01 27 D-13601 Berlin Tel. (49) 30-3832 0 Fax (49) 30-3832 2000 Microelectronics TEM1C TELEFUNKEN microelectronic GmbH P.O. Box 35 35 D-74025 Heilbronn Tel. (49) 7131-67 0 Fax (49) 7131-67 2340 MTU/Diesel Engines MTU Friedrichshafen GmbH D-88040 Friedrichshafen Tel. (49) 7541-90 0 Fax (49) 7541-90 5000 M A J OR SUBSIDIARIES OF DAIMLER-BENZ AG MAJOR DIFFERENCES BETWEEN GERMAN AND U.S. ACCOUNTING PRINCIPLES FUNDAMENTAL DIFFERENCES This becomes most relevant in the calculation of un German and U.S. accounting principles are based on realized profits from the evaluation of foreign currency fundamentally different perspectives. While accounting under amounts as at the balance sheet date and from derivative the German HGB emphasizes the principle of caution and financial instruments. creditor protection, the availability of relevant information for According to German accounting regulations, securities shareholder decision-making is the chief objective of U.S. are to be valued at the lower of cost or market. American accounting. The comparability of the financial statements - regulations, on the other hand, call for securities to be reported both from year to year and from company to company - and at the higher market prices as well; the changes in the market the determination of performance on an accrual basis therefore value are either to be reflected directly in the profit and loss rank higher under U.S. GAAP than under the HGB. statement or in stockholders' equity. PROVISIONS booked in accordance with the realization principle, while In U.S. accounting practice, provisions are not listed under U.S. GAAP the percentage of completion method is used. For long-term production, revenues and expenses are separately as a rule, but under liabilities. In order to comply with the stipulations of the EU guidelines, we still list LEASING provisions in the balance sheet notwithstanding the Ameri Under U.S. GAAP, the accrual of leased equipment is not can treatment. The possibilities to form provisions are related to the legal owner, but the economic owner. In a capital significantly more restrictive under U.S. GAAP than under lease (sales financing) the risks and opportunities arising from the HGB. Provisions can be formed when an obligation exists the ownership of leased equipment are primarily realized by towards a third party that is likely to be satisfied and when the lessee, without the lessee simultaneously acquiring legal the anticipated amount of the necessary provision can be ownership. U.S. GAAP treat such a capital lease like a reliably estimated. Provisions for expenses are not allowed purchase, in other words, the lessee capitalizes the leased under American regulations as a rule. equipment and lists a relevant liability. The lessor, in turn, Unlike in German accounting, pension provisions are records a receivable from sales financing and revenue from determined in consideration of anticipated wage and salary the sale of the leased equipment. increases. Rather than using the 6% discount rate employed in German tax law, the relevant real interest rates of individual DEFERRED TAXES states define the U.S. value. In accordance with U.S. GAAP, capitalized or accrued deferred taxes have to be reported if they are derived from GOODWILL temporary differences between tax valuations and valuations According to American accounting principles, goodwill in the consolidated balance sheet. Tax losses carried forward has to be capitalized and amortized over its expected period represent an economic benefit because of the reduced tax in use. The period in use in this instance depends on the type payments in future balance sheets. At the time the loss arises, of business acquired. Offsetting this value against stock the future or deferred tax advantage is capitalized in relation holders' equity, which is an option under the HGB, is not to its realizability. allowed. UNREALIZED PROFITS Under German law the imparity principle means that only unrealized losses must be included in the balance sheet, while under U.S. GAAP certain unrealized profits also have to be recorded. SHAREHOLDER INFORMATION Publications for our shareholders: Balance Sheet Press Conference: Daimler-Benz Annual Report (German, English and French) Form 20-F (English) Mercedes-Benz Annual Report (German and English) Daimler-Benz Aerospace (Dasa) Annual Report (German and English) April 16, 1997 10:00 am Kultur- und KongreBzentrum (Congress Centre) Stuttgart, Germany Annual General Meeting: May 28, 1997 10:00 am Daimler-Benz InterServices (debis) Annual Report Hanns-Martin-Schleyer-Halle (German and English) Stuttgart, Germany Daimler-Benz Interim Reports for 1st, 2nd and 3rd quarters (German, English and French) Disk with financial information (English; editable MS EXCEL tables) Daimler-Benz will be reporting on the first quarter of 1997 at the Balance Sheet Press Conference on April 16, 1997, on the first six months with a semi-annual report published on July 31, 1997, and on the first nine months The above publications can be requested from: at the beginning of November 1997. Daimler-Benz AG D-70546 Stuttgart The information can also be ordered by phone (answering machine) or fax under the following number: (49)711-17 92287 Additional information on Daimler-Benz is available on the internet at http://www.daimler-benz.com. Investor Relations: Tel: (49) 711-17 92283 or 17 92261 Fax: (49) 711-17 94109 Conception and content: Daimler-Benz AG, RKB Design: Peter Schmidt Studios, Hamburg Daimler-Benz AG, KOM This report has been printed on the Igepa-paper "Evergreen" produced with 100% chlorine-free bleached flbves ItfiY 

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