Our Brands. Our Heritage. Our Future. Unsere Marken. Unsere Tradition. Unsere Zukunft. DaimlerChrysler Group Key Figures DaimlerChrysler has a unique portfolio of strong and successful brands: brands, which delight our customers; brands, which have decisively influenced the history of the automotive industry and the development of the automobile, and which continue to do so; brands, which are crucial for the future success of our company; and brands, which fascinate people around the world again and again – today and in the future. 2 0 0 2 t r o p e R l a u n n A Our Brands. Our Heritage. Our Future. DaimlerChrysler AG Stuttgart, Germany Auburn Hills, USA www.daimlerchrysler.com Annual Report 2002 Amounts in millions Revenues European Union of which: Germany North America of which: USA Other markets 2002 US $ 1 2002 3 2001 3 2000 3 02/01 Change in % 156,838 149,583 152,873 162,384 48,803 46,546 45,640 50,348 24,242 23,121 24,340 25,988 92,091 87,831 91,916 95,939 81,454 77,686 81,132 84,503 15,944 15,206 15,317 16,097 Employees (at year-end) 365,571 372,470 416,501 Research and development costs 6,455 6,156 6,008 7,395 Investments in property, plant and equipment 7,492 7,145 8,896 10,392 Cash provided by operating activities 18,659 17,796 15,944 16,017 Operating profit (loss) Operating profit adjusted 2 Net income (loss) per share (in US $/1) Net income adjusted 2 per share (in US $/1) 2 Total dividend Dividend per share (in 1) 7,186 6,112 4,947 4.91 3,490 3.46 1,593 6,854 5,829 4,718 4.68 3,329 3.30 1,519 1.50 (1,318) 1,345 (662) (0.66) 730 0.73 1,003 1.00 9,752 5,213 7,894 7.87 3,481 3.47 2,358 2.35 1 Rate of exchange: 11 = US$1.0485 (based on the noon buying rate on Dec. 31, 2002). 2 To exclude one-time effects, see pages 68-73. -2 +2 -5 -4 -4 -1 -2 +2 -20 +12 . +333 . . +356 +352 +51 +50 Our Brands. Our Heritage. Our Future. Unsere Marken. Unsere Tradition. Unsere Zukunft. DaimlerChrysler Group Key Figures DaimlerChrysler has a unique portfolio of strong and successful brands: brands, which delight our customers; brands, which have decisively influenced the history of the automotive industry and the development of the automobile, and which continue to do so; brands, which are crucial for the future success of our company; and brands, which fascinate people around the world again and again – today and in the future. 2 0 0 2 t r o p e R l a u n n A Our Brands. Our Heritage. Our Future. DaimlerChrysler AG Stuttgart, Germany Auburn Hills, USA www.daimlerchrysler.com Annual Report 2002 Amounts in millions Revenues European Union of which: Germany North America of which: USA Other markets 2002 US $ 1 2002 3 2001 3 2000 3 02/01 Change in % 156,838 149,583 152,873 162,384 48,803 46,546 45,640 50,348 24,242 23,121 24,340 25,988 92,091 87,831 91,916 95,939 81,454 77,686 81,132 84,503 15,944 15,206 15,317 16,097 Employees (at year-end) 365,571 372,470 416,501 Research and development costs 6,455 6,156 6,008 7,395 Investments in property, plant and equipment 7,492 7,145 8,896 10,392 Cash provided by operating activities 18,659 17,796 15,944 16,017 Operating profit (loss) Operating profit adjusted 2 Net income (loss) per share (in US $/1) Net income adjusted 2 per share (in US $/1) 2 Total dividend Dividend per share (in 1) 7,186 6,112 4,947 4.91 3,490 3.46 1,593 6,854 5,829 4,718 4.68 3,329 3.30 1,519 1.50 (1,318) 1,345 (662) (0.66) 730 0.73 1,003 1.00 9,752 5,213 7,894 7.87 3,481 3.47 2,358 2.35 1 Rate of exchange: 11 = US$1.0485 (based on the noon buying rate on Dec. 31, 2002). 2 To exclude one-time effects, see pages 68-73. -2 +2 -5 -4 -4 -1 -2 +2 -20 +12 . +333 . . +356 +352 +51 +50 Our Brands. Our Heritage. Our Future. Unsere Marken. Unsere Tradition. Unsere Zukunft. DaimlerChrysler Group Key Figures DaimlerChrysler has a unique portfolio of strong and successful brands: brands, which delight our customers; brands, which have decisively influenced the history of the automotive industry and the development of the automobile, and which continue to do so; brands, which are crucial for the future success of our company; and brands, which fascinate people around the world again and again – today and in the future. 2 0 0 2 t r o p e R l a u n n A Our Brands. Our Heritage. Our Future. DaimlerChrysler AG Stuttgart, Germany Auburn Hills, USA www.daimlerchrysler.com Annual Report 2002 Amounts in millions Revenues European Union of which: Germany North America of which: USA Other markets 2002 US $ 1 2002 3 2001 3 2000 3 02/01 Change in % 156,838 149,583 152,873 162,384 48,803 46,546 45,640 50,348 24,242 23,121 24,340 25,988 92,091 87,831 91,916 95,939 81,454 77,686 81,132 84,503 15,944 15,206 15,317 16,097 Employees (at year-end) 365,571 372,470 416,501 Research and development costs 6,455 6,156 6,008 7,395 Investments in property, plant and equipment 7,492 7,145 8,896 10,392 Cash provided by operating activities 18,659 17,796 15,944 16,017 Operating profit (loss) Operating profit adjusted 2 Net income (loss) per share (in US $/1) Net income adjusted 2 per share (in US $/1) 2 Total dividend Dividend per share (in 1) 7,186 6,112 4,947 4.91 3,490 3.46 1,593 6,854 5,829 4,718 4.68 3,329 3.30 1,519 1.50 (1,318) 1,345 (662) (0.66) 730 0.73 1,003 1.00 9,752 5,213 7,894 7.87 3,481 3.47 2,358 2.35 1 Rate of exchange: 11 = US$1.0485 (based on the noon buying rate on Dec. 31, 2002). 2 To exclude one-time effects, see pages 68-73. -2 +2 -5 -4 -4 -1 -2 +2 -20 +12 . +333 . . +356 +352 +51 +50 Divisions Mercedes Car Group Percentage of Sales Amounts in millions Operating profit Operating profit adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 3,166 3,166 52,603 2002 3 3,020 3,020 50,170 2001 3 2,951 2,961 47,705 2,616 2,495 2,061 2,930 2,794 2,402 1.232,334 1,229,688 101,778 102,223 Chrysler Group Amounts in millions Operating profit (loss) Operating profit (loss) adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 639 2002 3 609 1,381 63,100 1,317 60,181 2001 3 (5,281) (2,183) 63,483 3,308 3,155 5,083 2,162 2,062 2,201 2,822,659 2,755,919 95,835 104,057 9% S-Class/SL 19% E-Class 39% C-Class/CLK/SLK/ Sport Coupe 14% A-Class 9% M-Class/G-Class 10% smart 24% Light Trucks 20% Minivans 32% SUVs Services Amounts in millions Operating profit Operating profit adjusted1 2002 US $ 3,208 1,011 2002 3 3,060 964 2001 3 612 578 Revenues 16,460 15,699 16,851 Investments in property, plant and equipment Employees (Dec. 31) 100 95 10,521 112 9,712 Operating profit Operating profit adjusted1 2002 US $ 947 783 2002 3 903 747 2001 3 1,181 205 Revenues 2,855 2,723 4,507 Investments in property, plant and equipment Research and development expenditure Employees (Dec. 31) 1 To exclude one-time effects 144 358 137 168 341 21,184 390 21,101 Percentage of Sales Other Activities 24% Passenger Cars Amounts in millions Commercial Vehicles Amounts in millions Operating profit (loss) Operating profit adjusted1 2002 US $ (360) 185 2002 3 (343) 176 2001 3 (514) 51 Revenues 29,778 28,401 28,572 Percentage of Sales 51% Vans (incl. V-Class) Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 1,324 1,263 1,484 44% Trucks/Unimogs 1,006 959 1,015 485,408 492,851 94,111 96,644 5% Buses Financial Diary 2003 | 161 Investor Relations Internet Services Financial Diary 2003 The interactive Annual Report 2002 is the electronic counterpart of the printed version. It can be used on the Internet, has a user-friendly navigation system and offers convenient additional functions. Interesting background information is available via numerous links to other pages or videos. An extensive “Investor Relations” section is a part of the Group’s Internet site at www.daimlerchrysler.com. It offers practically everything that interested persons, investors and analysts would like to know about the company’s business and shares. It includes, for example, the Group’s consolidated annual and interim reports, the individual financial statements of Daimler- Chrysler AG, and reports to the US Stock Exchange Commission (SEC). In addition, you will find current share-price movements, reports, presentations, an over- view of various performance measures and a mailing service. Before the Annual Meeting we offer an extensive service for our shareholders, with, among other things, the possibility to order entrance tickets online or to authorize proxies and issue voting instructions. Annual Results Press Conference Annual Report Presentation February 20, 2003, 10:00 a.m. Mercedes-Benz Event Center (MEC) Sindelfingen Analysts’ and Investors’ Conference Call February 20, 2003, 3:00 p.m. Annual Meeting April 9, 2003, 10:00 a.m. Messe Berlin Interim Report Q1 2003 April 24, 2003 Interim Report Q2 2003 July 24, 2003 Interim Report Q3 2003 October 21, 2003 2 | Chairman’s Letter 6 | Board of Management 8 | Business Review 12 | Outlook 16 | DaimlerChrysler Worldwide 18 | Mercedes Car Group 26 | Chrysler Group 34 | Commercial Vehicles 42 | Executive Automotive Committee 44 | Services 48 | Other Activities 52 | Research and Technology 54 | Alternative Drive Systems 56 | DaimlerChrysler and the Environment 58 | Global Procurement and Supply 60 | DaimlerChrysler’s Social Responsibility 64 | Human Resources 67 | Financial Reporting 144 | Major Subsidiaries 146 | Supervisory Board 147 | Report of the Supervisory Board 150 | Corporate Governance 156 | International Representative Offices 157 | Seven-Year Summary 158 | The DaimlerChrysler Share 160 | Addresses / Information 161 | Financial Diary 2003 Divisions Mercedes Car Group Percentage of Sales Amounts in millions Operating profit Operating profit adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 3,166 3,166 52,603 2002 3 3,020 3,020 50,170 2001 3 2,951 2,961 47,705 2,616 2,495 2,061 2,930 2,794 2,402 1.232,334 1,229,688 101,778 102,223 Chrysler Group Amounts in millions Operating profit (loss) Operating profit (loss) adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 639 2002 3 609 1,381 63,100 1,317 60,181 2001 3 (5,281) (2,183) 63,483 3,308 3,155 5,083 2,162 2,062 2,201 2,822,659 2,755,919 95,835 104,057 9% S-Class/SL 19% E-Class 39% C-Class/CLK/SLK/ Sport Coupe 14% A-Class 9% M-Class/G-Class 10% smart 24% Light Trucks 20% Minivans 32% SUVs Services Amounts in millions Operating profit Operating profit adjusted1 2002 US $ 3,208 1,011 2002 3 3,060 964 2001 3 612 578 Revenues 16,460 15,699 16,851 Investments in property, plant and equipment Employees (Dec. 31) 100 95 10,521 112 9,712 Operating profit Operating profit adjusted1 2002 US $ 947 783 2002 3 903 747 2001 3 1,181 205 Revenues 2,855 2,723 4,507 Investments in property, plant and equipment Research and development expenditure Employees (Dec. 31) 1 To exclude one-time effects 144 358 137 168 341 21,184 390 21,101 Percentage of Sales Other Activities 24% Passenger Cars Amounts in millions Commercial Vehicles Amounts in millions Operating profit (loss) Operating profit adjusted1 2002 US $ (360) 185 2002 3 (343) 176 2001 3 (514) 51 Revenues 29,778 28,401 28,572 Percentage of Sales 51% Vans (incl. V-Class) Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 1,324 1,263 1,484 44% Trucks/Unimogs 1,006 959 1,015 485,408 492,851 94,111 96,644 5% Buses Financial Diary 2003 | 161 Investor Relations Internet Services Financial Diary 2003 The interactive Annual Report 2002 is the electronic counterpart of the printed version. It can be used on the Internet, has a user-friendly navigation system and offers convenient additional functions. Interesting background information is available via numerous links to other pages or videos. An extensive “Investor Relations” section is a part of the Group’s Internet site at www.daimlerchrysler.com. It offers practically everything that interested persons, investors and analysts would like to know about the company’s business and shares. It includes, for example, the Group’s consolidated annual and interim reports, the individual financial statements of Daimler- Chrysler AG, and reports to the US Stock Exchange Commission (SEC). In addition, you will find current share-price movements, reports, presentations, an over- view of various performance measures and a mailing service. Before the Annual Meeting we offer an extensive service for our shareholders, with, among other things, the possibility to order entrance tickets online or to authorize proxies and issue voting instructions. Annual Results Press Conference Annual Report Presentation February 20, 2003, 10:00 a.m. Mercedes-Benz Event Center (MEC) Sindelfingen Analysts’ and Investors’ Conference Call February 20, 2003, 3:00 p.m. Annual Meeting April 9, 2003, 10:00 a.m. Messe Berlin Interim Report Q1 2003 April 24, 2003 Interim Report Q2 2003 July 24, 2003 Interim Report Q3 2003 October 21, 2003 2 | Chairman’s Letter 6 | Board of Management 8 | Business Review 12 | Outlook 16 | DaimlerChrysler Worldwide 18 | Mercedes Car Group 26 | Chrysler Group 34 | Commercial Vehicles 42 | Executive Automotive Committee 44 | Services 48 | Other Activities 52 | Research and Technology 54 | Alternative Drive Systems 56 | DaimlerChrysler and the Environment 58 | Global Procurement and Supply 60 | DaimlerChrysler’s Social Responsibility 64 | Human Resources 67 | Financial Reporting 144 | Major Subsidiaries 146 | Supervisory Board 147 | Report of the Supervisory Board 150 | Corporate Governance 156 | International Representative Offices 157 | Seven-Year Summary 158 | The DaimlerChrysler Share 160 | Addresses / Information 161 | Financial Diary 2003 Divisions Mercedes Car Group Percentage of Sales Amounts in millions Operating profit Operating profit adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 3,166 3,166 52,603 2002 3 3,020 3,020 50,170 2001 3 2,951 2,961 47,705 2,616 2,495 2,061 2,930 2,794 2,402 1.232,334 1,229,688 101,778 102,223 Chrysler Group Amounts in millions Operating profit (loss) Operating profit (loss) adjusted1 Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 2002 US $ 639 2002 3 609 1,381 63,100 1,317 60,181 2001 3 (5,281) (2,183) 63,483 3,308 3,155 5,083 2,162 2,062 2,201 2,822,659 2,755,919 95,835 104,057 9% S-Class/SL 19% E-Class 39% C-Class/CLK/SLK/ Sport Coupe 14% A-Class 9% M-Class/G-Class 10% smart 24% Light Trucks 20% Minivans 32% SUVs Services Amounts in millions Operating profit Operating profit adjusted1 2002 US $ 3,208 1,011 2002 3 3,060 964 2001 3 612 578 Revenues 16,460 15,699 16,851 Investments in property, plant and equipment Employees (Dec. 31) 100 95 10,521 112 9,712 Operating profit Operating profit adjusted1 2002 US $ 947 783 2002 3 903 747 2001 3 1,181 205 Revenues 2,855 2,723 4,507 Investments in property, plant and equipment Research and development expenditure Employees (Dec. 31) 1 To exclude one-time effects 144 358 137 168 341 21,184 390 21,101 Percentage of Sales Other Activities 24% Passenger Cars Amounts in millions Commercial Vehicles Amounts in millions Operating profit (loss) Operating profit adjusted1 2002 US $ (360) 185 2002 3 (343) 176 2001 3 (514) 51 Revenues 29,778 28,401 28,572 Percentage of Sales 51% Vans (incl. V-Class) Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) 1,324 1,263 1,484 44% Trucks/Unimogs 1,006 959 1,015 485,408 492,851 94,111 96,644 5% Buses Financial Diary 2003 | 161 Investor Relations Internet Services Financial Diary 2003 The interactive Annual Report 2002 is the electronic counterpart of the printed version. It can be used on the Internet, has a user-friendly navigation system and offers convenient additional functions. Interesting background information is available via numerous links to other pages or videos. An extensive “Investor Relations” section is a part of the Group’s Internet site at www.daimlerchrysler.com. It offers practically everything that interested persons, investors and analysts would like to know about the company’s business and shares. It includes, for example, the Group’s consolidated annual and interim reports, the individual financial statements of Daimler- Chrysler AG, and reports to the US Stock Exchange Commission (SEC). In addition, you will find current share-price movements, reports, presentations, an over- view of various performance measures and a mailing service. Before the Annual Meeting we offer an extensive service for our shareholders, with, among other things, the possibility to order entrance tickets online or to authorize proxies and issue voting instructions. Annual Results Press Conference Annual Report Presentation February 20, 2003, 10:00 a.m. Mercedes-Benz Event Center (MEC) Sindelfingen Analysts’ and Investors’ Conference Call February 20, 2003, 3:00 p.m. Annual Meeting April 9, 2003, 10:00 a.m. Messe Berlin Interim Report Q1 2003 April 24, 2003 Interim Report Q2 2003 July 24, 2003 Interim Report Q3 2003 October 21, 2003 2 | Chairman’s Letter 6 | Board of Management 8 | Business Review 12 | Outlook 16 | DaimlerChrysler Worldwide 18 | Mercedes Car Group 26 | Chrysler Group 34 | Commercial Vehicles 42 | Executive Automotive Committee 44 | Services 48 | Other Activities 52 | Research and Technology 54 | Alternative Drive Systems 56 | DaimlerChrysler and the Environment 58 | Global Procurement and Supply 60 | DaimlerChrysler’s Social Responsibility 64 | Human Resources 67 | Financial Reporting 144 | Major Subsidiaries 146 | Supervisory Board 147 | Report of the Supervisory Board 150 | Corporate Governance 156 | International Representative Offices 157 | Seven-Year Summary 158 | The DaimlerChrysler Share 160 | Addresses / Information 161 | Financial Diary 2003 Our Brands. Our Heritage. Our Future. Our customers and employees are attached to all of our brands through unique and very personal experiences. In this Annual Report we are delighted to present a range of vehicles from our brands, photographed in many locations all over the world. Welcome to the fascinating world of DaimlerChrysler. Mercedes Car Group Chrysler Group Commercial Vehicles Division DaimlerChrysler Services Strategic Partners 2 | Chairman’s Letter The year 2002 was a satisfactory one for DaimlerChrysler, considering the very difficult market conditions and growing political uncertainty worldwide. With real GDP growth of 1.8% in 2002 the world economy suffered another tough year. Whereas North America and parts of emerging Asia had been able to keep the world engine at least running, Japan, continental Europe and South America disappointed again. The high degree of uncertainty and the global lack of consumer and investor confidence have been major obstacles to a more favorable development. DaimlerChrysler performance in 2002. In view of the economic situation, on the whole we are satisfied with the results for 2002. We have increased our Operating Profit to 15.8 billion. While markets for passenger cars and commercial vehicles deteriorated, we recorded an Operating Profit of more than four times the previous year’s level. In addition, we strengthened further the company’s balance sheet, with amplified cash flow and significant debt reduction. This is an accomplishment of our entire team at DaimlerChrysler – a great effort for which the Board of Management would like to extend its sincere appreciation to our employees all around the world. The increased strength of our earning capacity and our confidence in the future development of our Group is also reflected in our dividend recommendation. We will propose to the Annual General Meeting an increase in the dividend from 11 to 11.50 per share. This corresponds to a total dividend payment of 11.52 billion. DaimlerChrysler Outlook 2003. 2002 was an important year on our road to sustainable profitability. Based on what is now a much improved foundation, we will continue to increase our efficiency in all divisions and to push ahead with our product offensives. Furthermore, we will continue to work cross-divisionally to maximize the individual strengths of our businesses across the Group. For 2003, on a Group level we are planning to achieve higher earnings than last year. Against the current difficult economic background, it would be irresponsible to give a more detailed outlook. Those factors of our business over which we have direct influence are under control. We have to bear in mind, however, that the increasing uncertainty surrounding global economics and politics can affect our business. Chairman’s Letter | 3 Divisional review. As far as sales, revenues and Operating Profit are concerned, the Mercedes Car Group again surpassed the record results of the previous year. At the same time, Mercedes-Benz has been able to gain market share in predominantly declining markets. As a result, the brand with the star continued to strengthen its leading position among the luxury brands. At present, we have the most attractive and up-to-date product line-up in our history and we will vigorously continue our product offensive. The Chrysler Group has made outstanding progress: substantial cost reductions as well as significant increases in efficiency have been achieved, sooner than was expected. The Operating Profit has exceeded our original planning. This result was achieved in an extremely challenging business environment, as the US market in 2002 was dominated by very high incentives. We have every indication that this trend will continue. With much improved quality and image, a large variety of attractive models in the pipeline and continued efficiency enhancements, the Chrysler Group is well positioned for this increasing competition. In our Commercial Vehicles Division, the past year was characterized by significant progress with the restructuring of our American commercial vehicles subsidiary Freightliner. Here we achieved break-even much earlier than originally forecast. In Europe and Latin America, our trucks, buses and vans were able to maintain their position in a difficult environment. Despite the improved results for last year, we are not satisfied with the profit in absolute terms. Therefore, we are working diligently at turning our position as the world’s market leader into increased profitability. Our Services division has made very good progress. The past year has shown a significant increase in Operating Profit. DaimlerChrysler Services continued to focus on the automotive business and strengthen its support for our car and truck brands – through extended financial services offered by the this year’s founded DaimlerChrysler Bank, for example. Our alliance partner Mitsubishi Motors has made great strides forward with its restructuring program. In addition to its cost saving and efficiency enhancement initiatives, there is now strong emphasis on future products. Strategy implementation. The achievements of 2002 demonstrate that DaimlerChrysler is moving steadily ahead. However, we have not yet reached our ultimate target which is to become the leading automotive company. We strive to be present in every important market, with fascinating brands and products at the leading edge of innovation and technology. This is our strategy and we will further implement it with vigor and dedication: 4 | Chairman’s Letter – On a global scale, DaimlerChrysler is the automotive company with the best-balanced regional structure, covering every important market. In the Triad markets – USA, Western Europe and Japan – we suffer from stagnation and increasing competition. For this reason we have opened new and important opportunities in South East Asia, the location for the most dynamic future growth in world markets. Our participation in Fuso will further strengthen our position in Japan. The joint venture with Hyundai Motor Company provides us with access to the Korean commercial vehicle market and – by taking advantage of low cost structures in Korea – we will be able to serve markets we had previously to ignore. At present, China is of special importance to us. It is undoubtedly a market with tremendous prospects, and one in which DaimlerChrysler will further strengthen its mid-term competitive position. – Our brands are distinctively positioned and combine to present the most powerful portfolio in our industry. No other manufacturer offers such an attractive variety at comparable production volumes. We will continuously develop this range further. Recent examples are the reintroduction of Maybach and the product extension at smart. At DaimlerChrysler, such decisions are governed by the strictest multi-brand management approach: company-wide exchange of best practice while always safe-guarding the extraordinary uniqueness of all of our brands. – Our customers’ needs are the engine that drives our product development. Today we offer virtually any customer a vehicle tailored to his or her requirements. It is clear, however, that the needs and wishes of customers will in future become even more varied. In order to meet this demand, we will launch more than 40 attractive new models over the next three years. The new Mercedes-Benz E-Class station wagon, the Mercedes McLaren SLR, the smart forfour, the Chrysler Crossfire and the Chrysler Pacifica, the Dodge LX, the Mercedes-Benz Accelo truck, and the new Mercedes-Benz Vito are but a few. Our partner Mitsubishi Motors expects to launch twelve new vehicles between 2002 and 2007. – On top of this, we enjoy our industry’s lead position in technology and innovation – a place we have occupied since the invention of the automobile more than a century ago. Our aim is to continue to provide customers with cutting-edge innovations that have clear and recognizable value. For example, DaimlerChrysler follows with dedication its vision of accident-free driving. By combining active and passive safety features, the car of the future should be able to predict a possible accident and to support the driver’s reaction if necessary. Furthermore, DaimlerChrysler is accelerating its efforts in the research and development of engines using alternative fuels. We are the company developing both methanol and hydrogen technology. That means that we are very well prepared for varying environmental scenarios. Chairman’s Letter | 5 The constant progress made in terms of implementing our strategy is further leveraged through close inter-divisional cooperation and integration. This integration process is driven by the Executive Automotive Committee (EAC), which serves as a steering group for our worldwide auto- motive business. The EAC ensures extensive Group-wide exchanges of technologies, know-how and components. In 2002, the EAC dealt successfully with a multitude of cross-divisional projects. We have already realized a number of significant savings. Furthermore, during 2004 the first products of joint development programs will be on the road. The DaimlerChrysler Share. The stock markets have not yet given tangible recognition to our achievements, nor to our potential. Many investors appreciate the substantial strides that our company has made. However, the current difficult conditions in the worldwide capital markets mean that our progress is not yet fully mirrored in the share price. Nonetheless, we are confident that in the mid-term our share price will reflect more appropriately the underlying strength of our company. Excellence in people. DaimlerChrysler is very well prepared for the challenges of the future. This is also due to the fact that we can rely on the support of our extraordinary employees, over 360,000 people who combine professionalism with creativity and great compassion. They are people whose quality, enthusiasm and confidence blend in a unique corporate culture that has built us into one of the world’s most respected employers. Our culture extends beyond pure business. One such area in which we feel the need for tremendous dedication is Corporate Social Responsibility. DaimlerChrysler regards itself as a fully active member of society. Our well-known initiative against HIV/AIDS is but one example from a long list of social responsibility programs aimed at deserving humanitarian, environmental, social and cultural causes. You will find an overview of our various activities in this area in a separate chapter of this Annual Report. Dear shareholders, During 2002, DaimlerChrysler has made significant progress on its way to sustainable profitability. Looking ahead, it is certain that the climate for 2003 will be a very challenging one. Nonetheless, my colleagues on the Board of Management and I have no doubt that your company will manage to continue on its successful path. Sincerely yours 6 | The Board of Management The Board of Management Jürgen E. Schrempp Age: 58 Chairman of the Board of Management Appointed until 04/2005 Wolfgang Bernhard Manfred Bischoff Eckhard Cordes Age: 42 Age: 60 Age: 52 Günther Fleig Age: 54 Chief Operating Officer Aerospace & Industrial Businesses Commercial Vehicles Human Resources Chrysler Group Appointed until 12/2003 Appointed until 12/2008 & Labor Relations Director Appointed until 09/2007 Appointed until 09/2004 The Board of Management | 7 Dieter Zetsche Age: 49 Manfred Gentz Age: 61 Rüdiger Grube Age: 51 Jürgen Hubbert Age: 63 Finance & Controlling Corporate Development Mercedes Car Group Klaus Mangold Age: 59 Services Appointed until 12/2004 Appointed until 09/2007 Appointed until 04/2005 Appointed until 12/2003 Thomas W. Sidlik Gary C. Valade Klaus-Dieter Vöhringer Thomas Weber Age: 53 Procurement & Age: 60 Age: 61 Age: 48 Global Procurement & Supply Research & Technology Research & Technology Chrysler Group Supply Chrysler Group Appointed until 12/2003 Retired on Deputy Member Appointed until 12/2008 Appointed until 12/2008 December 31, 2002 of the Board of Management Appointed until 12/2005 8 | Business Review Business Review Operating profit excluding one-time effects of 35.8 billion, more than four times as high as in 2001 despite unfavorable global economic backdrop | Continued high earnings at Mercedes Car Group | Significantly improved efficiency at Chrysler Group and Freightliner | Increased earnings at Services | Net income of 34.7 billion again strongly positive (2001: net loss of 30.7 billion); adjusted to exclude one-time effects 53.3 billion (2001: 50.7 billion) | Proposed dividend of 51.50 per share (2001: 51.00) Significant earnings improvement due to measures taken to improve competitiveness In 2002, DaimlerChrysler achieved an operating profit excluding one-time effects of 15.8 billion. Despite difficult market conditions worldwide, this result is more than four times as high as in 2001 (11.3 billion). The significant improvement in earnings was primarily due to the successful implementation of programs to increase efficiency and improve competitiveness in all business units, in particular at Chrysler Group and Freightliner. Operating profit including one-time effects was 16.9 billion, after an operating loss of 11.3 billion in 2001. Positive one-time effects were reported totalling 12.6 billion. These include one-time gains as a result of the sale of our 49.9% ownership interest in T-Systems ITS (formerly debis Systemhaus) and of the sale of our 40% stake in TEMIC. One-time expenses of 11.6 billion were incurred at Chrysler Group in connection with the turn- around plan announced in February 2001, as well as at the Commercial Vehicles and Services divisions (see pages 68-71). Despite higher expenditure on the introduction of new models and difficult market conditions, the contribution to earnings of 13.0 billion made by the Mercedes Car Group division slightly exceeded the high prior year’s result. Chrysler Group again achieved a positive operat- ing profit, 11.3 billion excluding and 10.6 billion includ- ing one-time effects, reflecting in particular the positive effects on profitability from the activities aimed at cutting costs and improving efficiency. The moderate increase in the Commercial Vehicles division’s operating profit (adjusted to exclude one-time effects) over the prior year’s result was partly the result of the progress made at Freightliner and was achieved against the back- drop of an unfavorable market situation. The Services division succeeded in increasing its adjusted operating profit due to more favorable refinancing conditions and a lower risk-provisioning requirement in the financial- services business. Other Activities contributed a total of 1747 million (2001: 1205 million) to the Group’s total operating profit excluding one-time effects, reflecting in particular the higher profit contribution from Mitsubishi Motors (see pages 50-51). The MTU Aero Engines business unit and EADS also made positive contributions to DaimlerChrysler’s operating profit once again (see pages 48-50). Net income excluding one-time effects rose to 13.3 billion, after 10.7 billion in 2001 (net earnings per share of 13.30 after earnings per share of 10.73 in 2001). Including one-time effects, net income rose to 14.7 billion after a net loss of 10.7 billion in the prior year, and earnings per share improved to 14.68 after a loss per share of 10.66 in 2001. Proposed higher dividend of 31.50 As a result of the significant improvement in earnings, the Board of Management and the Supervisory Board will propose to the shareholders at the Annual Meeting that the dividend for 2002 is increased to 11.50 per share (2001: 11.00). The total dividend distribution will therefore increase from 11,003 million to 11,519 million. No stimulus from the global economy In the first half of 2002 there were still hopes of a global economic upswing in the second half of the year. Unfortunately this did not materialize. Although growth in North America was a little stronger than in the weak prior year, it was not strong and stable enough to deliver any real stimulus to the world economy, and growth rates in Western Europe remained at a low level. Japan’s economic output declined once again in 2002, and economic and financial crises led to recession in many of the countries of South America. However, there were above-average growth rates in the emerging markets of Business Review | 9 Asia and in Eastern Europe. Weighted for each country’s share of the Group’s revenues, there was economic growth in the markets in which DaimlerChrysler operates of 1.8%, which was better than the 1.2% of 2001 but still well below the long-term trend of slightly more than 3%. During the course of the year, the euro appreciated in value by 19% against the US dollar, by 7% against the British pound and by 8% against the Japanese yen. Difficult markets worldwide The competitive situation in the international auto- motive industry intensified in 2002, for both passenger cars and commercial vehicles in nearly all market segments. Supported by high sales incentives and attractive financing packages, total unit sales in the United States of 17.1 million passenger cars and commercial vehicles were still at a high level (2001: 17.5 million). However demand for passenger cars in Japan and Western Europe was weak once again, although some stabilizing effects came from the strong market in the United Kingdom and continuing strong demand for diesel vehi- cles in Western Europe. The size of the overall market in Germany decreased for the third year in succession. Demand for passenger cars in South America declined substantially, and there was no significant stimulus from the markets of Eastern Europe. The only growth region was Asia excluding Japan, with significantly higher sales in nearly all markets. Developments in the commercial vehicle sector were marked by the continuing poor condition of markets in North America, South America and Western Europe. After a slump in recent years, demand for heavy and medium trucks in North America was still at a low level, despite purchases brought forward due to new exhaust emission regulations in the United States. In Western Europe there was a sharp downturn in demand for light and heavy-duty commercial vehicles. Operating Profit In millions DaimlerChrysler Group Mercedes Car Group 1 Chrysler Group 1 Commercial Vehicles 1 Services 1 Other Activities 1 DaimlerChrysler Group 1 2002 US $ 7,186 3,166 1,381 185 1,011 783 6,112 2002 3 6,854 3,020 1,317 176 964 747 2001 3 (1,318) 2,961 (2,183) 51 578 205 5,829 1,345 1 Excluding one-time effects; including one-time effects see table on page 68. 2002 US $ 2002 3 2001 3 156,838 149,583 152,873 52,603 63,100 29,778 16,460 2,855 50,170 60,181 28,401 15,699 2,723 47,705 63,483 28,572 16,851 4,507 Revenues In millions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Consolidated Revenues in billions of 3 Other markets USA European Union 175 150 125 100 75 50 25 ´98 ´99 ´00 ´01 ´02 Note: The chapters “Business Review”, “Analysis of the Financial Situation” and “Outlook” correspond to the management report of the Daimler- Chrysler Group, which is based on the consolidated financial statements compiled according to United States Generally Accepted Accounting Principles (US GAAP). 10 | Business Review Unit sales of 4.5 million vehicles Despite weak demand in many important markets in 2002, DaimlerChrysler achieved unit sales of 4.54 million passenger cars and commercial vehicles, slightly more than in 2001 (4.48 million vehicles). Mercedes Car Group was once again very successful. Unit sales of 1.23 million vehicles slightly exceeded the prior year’s high level, with the result that the division improved its market position worldwide (see pages 18-25). Chrysler Group’s unit sales of 2.82 million vehicles of the Chrysler, Jeep® and Dodge brands slightly exceeded the prior year’s level (2.76 million). Market share in the United States was also nearly unchanged at 12.9%, after 13.0% in 2001 (see pages 26-33). Due to the weakness of demand worldwide, unit sales of 485,400 trucks, vans and buses by the Commercial Vehicles division were slightly lower than the level of 492,900 vehicles sold in 2001 (see pages 34-41). Consolidated revenues close to prior year’s level DaimlerChrysler achieved total revenues of 1149.6 billion in 2002, close to the level of 2001 (-2%). The small decrease was caused by currency translation effects and changes in the consolidated Group. While the Mercedes Car Group division increased its revenues significantly, Chrysler Group (due to currency translation effects) and Commercial Vehicles were a little below the prior year’s figures. As expected, the revenues achieved by Services of 115.7 billion were also below the figure for 2001. This was mainly due to currency translation effects and strong demand for the special financing programs in the United States, which led to a shift in customer preferences from leasing to financing (see pages 44-47). The revenues generated by MTU Aero Engines, included in the segment of Other Activities, were below the level of the prior year due to weak demand for civil aircraft. From a regional point of view, DaimlerChrysler’s revenues in the European Union rose by 2% to 146.5 billion, although revenues in Germany decreased by 5%. In the NAFTA region revenues fell by 4% to 187.8 billion, but measured in US dollars they actually increased. Revenues of 115.2 billion in the rest of the world were close to the prior year’s level. 365,571 employees At the end of 2002, DaimlerChrysler employed 365,571 people (Dec. 31, 2001: 372,470). The main reasons for the reduction in the size of the workforce were the implementation of the turnaround plans at Chrysler Group and Freightliner and the adjustment of produc- tion capacities in the Commercial Vehicles division (see pages 64-66). Global focus of purchasing processes In order to better utilize the advantages of a global pro- curement organization, DaimlerChrysler reorganized its purchasing activities in 2002. In 2002, we purchased goods and services worldwide worth 1102.1 billion (2001: 1106.5 billion). Of this total, 36% was accounted for by Mercedes Car Group, 42% by Chrysler Group, 19% by Commercial Vehicles and 3% by the other busi- nesses (see pages 58-59). 313.3 billion invested in the future Last year, the DaimlerChrysler Group invested 17.1 billion in property, plant and equipment and 16.2 billion in research and development. Major investments were made by Mercedes Car Group to make preparations for the production of the new E-Class, the Maybach and the smart roadster, as well as to expand the Tuscaloosa plant for the production of the Grand Sport Tourer (GST) and the Rastatt plant for the successor to the A-Class. The most important projects for the Chrysler, Jeep® and Dodge brands were the preparations for the Pacifica (a new segment-busting family vehicle), the new Durango light truck and the new Viper and Crossfire sports cars. The main investments made by the Commercial Vehicles division were for the new Actros, the successor model to the Vito, and the new Freightliner Business Class M2. DaimlerChrysler’s research and development depart- ments employed a total of more than 27,500 persons at the end of 2002. In addition to developing new vehicles to renew and extend our product range, priority was given to new engine technologies and electronic systems to enhance traffic safety. (see pages 52-53). Business Review | 11 Continued concentration on the automotive business In 2002, we continued to implement our strategy of concentrating on the automotive business and related services. With effect from January 1, 2002, DaimlerChrysler exercised its option to sell its remaining 49.9% owner- ship interest in T-Systems ITS (formerly debis System- haus) to Deutsche Telekom AG. This transaction led to a cash inflow of 14.7 billion and a one-time gain of 12.5 billion. Effective April 1, 2002, we sold our 40% ownership interest in Conti Temic microelectronic GmbH (formerly TEMIC) to Continental AG. The resulting one-time gain of 10.2 billion was accounted for in the second quarter of 2002. In the Services division we reached agreements in 2002 covering the scheduled disposal of additional parts of the Capital Services portfolio (non-automotive financial services). This reorganization of the Capital Services portfolio led to a one-time loss of 10.3 billion. After obtaining a full banking license for the Daimler- Chrysler Bank, from July 2002 we were able to expand our range of financial services (see page 47). EAC: successful coordination of automotive activities The Executive Automotive Committee (EAC), established in 2001, continued to work successfully. The EAC coordinates all automotive issues across the three automotive divisions, secures the identity of the Group’s brands, and accelerates the realization of synergies. In the year 2002, the work of the EAC focused on optimizing the Group-wide portfolio of products, power- trains and components (see pp. 42-43). The Truck Product Decision Committee was set up during 2002 to develop cross-market strategies and initiatives, and to prepare the resulting decisions for the truck business (see page 40). Intensified cooperation with our partners in Asia In May 2002, together with our partners, Mitsubishi Motors Corporation and Hyundai Motor Company, we founded the Global Engine Alliance LLC. This new Investments in Property, Plant and Equipment In millions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Research and Development Expenditure In millions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities 2002 US $ 7,492 2,616 3,308 1,324 100 144 2002 US $ 6,455 2,930 2,162 1,006 358 2002 3 7,145 2,495 3,155 1,263 95 137 2002 3 6,156 2,794 2,062 959 341 2001 3 8,896 2,061 5,083 1,484 112 168 2001 3 6,008 2,402 2,201 1,015 390 company is developing a new generation of 4-cylinder gasoline engines for use in future models from Chrysler Group, Hyundai Motor Company and Mitsubishi Motors. The projected production volume of up to 1.5 million units a year will make it one of the most widely used engines in the industry, yielding significant economies of scale for the companies involved. In November 2002, DaimlerChrysler exercised its contractually agreed option to acquire a 50% ownership interest in the commercial-vehicle business of Hyundai Motor, which is due to be spun off into a separate com- pany. DaimlerChrysler will thus obtain direct access to Asia’s third-largest market for commercial vehicles, South Korea, in which Hyundai is the biggest-selling manufacturer. In March 2003, we intend to acquire a 43% ownership interest for 1 760 million in Mitsubishi Fuso Truck & Bus Corporation (MFTBC) from our alliance partner Mitsubishi Motors. MFTBC is the market leader in Japan with a share of around 30% and also has a strong position in the markets of Southeast Asia. By expanding our activities in Asia and cooperating more intensively with our Asian partners, DaimlerChrysler will be able to participate better in the potential offered by the Asian markets, which are the fastest growing in the world and where already more than 50% of all commercial vehicles are sold (see pages 50-51). 12 | Outlook Outlook Growth in earnings expected despite difficult conditions | Product offensive to bring further growth for Mercedes Car Group | Chrysler Group to continue progress and to boost competitiveness with new products | Commercial Vehicles division: continued optimization of products and production methods with more economies of scale | Further expansion of automotive services | 342 billion to secure the future Slight recovery of global economy in 2003 Due to increasing economic and political uncertainty, prospects for the world economy worsened after the summer of 2002. Nevertheless, we assume that global economic growth will recover towards the end of 2003 and in the following years. The preconditions for such an improvement are a reasonably stable global political framework and a return of confidence among investors and consumers. The economies of the United States and the European Union, including Germany, should resume steady growth in the coming years, while Japan is unlikely to overcome its prolonged recession soon. We anticipate above-average growth rates for Asian emerging markets and Eastern Europe, and from 2004 also for South America. Overall, we expect the world economy to grow by 2.7% in 2003 and by about 3% in 2004 and 2005. Furthermore, we assume that compared with the average exchange rates for 2002, the euro will streng- then moderately against the US dollar, the Japanese yen and the British pound in the period from 2003 to 2005. Continuation of difficult market conditions Against this macroeconomic background, automotive markets will probably improve only slowly. We anticipate some decrease in overall demand in North America in 2003, even if car manufacturers continue to offer gener- ous incentives in the United States. Nor do we expect any significant recovery in the passenger car markets of Western Europe and Japan this year. The same applies to international commercial-vehicle markets, for which we do not see an uptrend in 2003 because of the macroeconomic background. In the United States we expect a further significant decline in demand for heavy trucks in the first half of 2003 due to purchases brought forward in the prior year in anticipa- tion of new emission requirements. From 2004 onwards we expect unit sales of passenger cars and commercial vehicles to increase again as a result of improvements in the global economy. Modest growth prospects for major automobile markets, shorter product lifecycles and worldwide sur- plus manufacturing capacity will further intensify competition and put upward pressure on unit costs in all market segments. In addition, stricter environmental and safety regulations will require substantial expendi- ture by all manufacturers. In this situation the im- portance of brands and successful brand management as a competitive advantage will increase (see page 42). Customers’ increasingly specific demands, particularly for niche products and segment-busting vehicles with universal applications, should create growth opportuni- ties which DaimlerChrysler will vigorously pursue. Earnings improvements for DaimlerChrysler despite difficult markets DaimlerChrysler plans to achieve an increase in earnings in the years 2003 through 2005, based on a large number of attractive new models and the successful implementation of programs for increasing efficiency and competitiveness. Closer coordination of our global activities and the resultant cost savings, knowledge transfer within the Group, as well as the cooperation with our Asian partners should generate higher earnings. In particular, projects initiated by the Executive Automotive Committee (EAC) will ensure that the potential of cross-divisional cooperation is fully exploited (see pages 42-43). A precondition for the expected improvement in earnings, however, is that conditions remain stable in our most important markets. Outlook | 13 Significant increases in revenues as of 2004 On the basis of our current markets forecasts, for 2003 we expect revenues of around the same level as in 2002. This reflects not only the difficult situation in important markets, but also our assumption of an appreciation of the euro against the US dollar. After currency translation this assumption would therefore lead to lower revenues measured in euros from Chrysler Group, Freightliner and the Services division. In the following years, revenue growth will continue to be affected by our assumption of further appreciation of the euro against the dollar. As a result of improving markets and the introduction of new models, we expect revenues to grow significantly by 2005, with the biggest gains being made in Asia. Further growth for Mercedes Car Group In the coming years, the Mercedes Car Group will not only continuously renew its range of vehicles within the scope of the already initiated second product offensive, but will also selectively expand and broaden its product portfolio. In addition, there should be sustained effi- ciency improvements in procurement, production, devel- opment and distribution, partly as a result of optimizing processes. By taking these measures the division expects to sustain growth in revenues, unit sales and earnings, and to strengthen its market position world- wide. Product renewals in 2003 will include the E-Class station wagon, the CLK convertible and the Mercedes- Benz SLR super-sports car. The Maybach, which will be widely available in 2003, will reinforce DaimlerChrysler’s leading position in the top market segment. A roadster and a roadster coupe will also be added to the smart range this year, followed by a four-seater (smart forfour) in 2004. Mercedes Car Group will continue to launch numerous new models in the following years. Revenues In billions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Investment in Property, Plant and Equipment In billions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Research and Development Expenditure In billions DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities Plan 2003 3 Target 2005 3 151 51 60 28 14 3 163 56 61 33 17 3 Plan 2003 3 2003-2005 3 8.4 3.0 3.7 1.4 0.1 0.2 24.0 8.8 10.3 4.1 0.3 0.5 Plan 2003 3 2003-2005 3 5.8 2.4 2.0 1.0 0.4 17.6 7.3 6.2 3.1 1.0 Forward-Looking Statements in this Annual Report: This Annual Report contains forward-looking statements that reflect the current views of DaimlerChrysler management about future events. The words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions are intended to identify forward-looking statements. These statements are subject to many risks and uncertainties. The major risk factors and risk management at DaimlerChrysler are described on pages 78-83 of this Annual Report. The legal note on forward-looking statements in this Annual Report can be found on page 143. 14 | Outlook Strategic refocus by Chrysler Group Having returned to profitability, Chrysler Group will focus on differentiating its products from the competition in both design and quality, and on defining new segments with a series of innovative products. At the same time, increased collaboration within the DaimlerChrysler Group and with our partner Mitsubishi Motors should strengthen Chrysler Group’s cost position and margins and enhance its innovative flair. Examples of the new long-term product strategy include the versatile Chrysler Pacifica sports tourer, the Chrysler Crossfire sports car and the new Dodge Durango light truck, all of which will be launched in 2003. They will be followed in 2004 by the first models of a new generation of rear-wheel drive vehicles under the Chrysler and Dodge brands. Overall, Chrysler Group plans to extend its market position in a highly competitive environment to signifi- cantly boost its profitability in the coming years. Commercial Vehicles division to improve efficiency and utilize economies of scale As a result of profit-improving measures currently being applied in nearly all areas of the Commercial Vehicles division, we anticipate an increase in earnings in the coming years, despite weak markets. Closer coor- dination of our worldwide activities as well as close cooperation with our Asian partners should also lower costs. The division will continue its product offensive by launching various new vehicles in 2003. For example, we plan to present a successor to the Mercedes-Benz Vito van, and in South America the Accelo light truck will be launched. We see additional opportunities in the van segment: after the Sprinter we will also launch the successor to the Vito in North America. Moreover, together with our partners we will benefit from the further growth of Asian markets. Expansion of automotive services The Services division will expand its core business of automotive services. Global partnership agreements reached with the Group’s automotive brands should contribute significantly to further cost reductions and process optimization in our key markets. Among other things, the marketing of ex-lease vehicles will be improved and new services will be developed in collaboration with the automotive brands. The DaimlerChrysler Bank will introduce new invest- ment products and extend its “RoadMiles” bonus scheme, which offers customers bonus points that can be redeemed for attractive merchandise items. With the expansion of mobility management services, the focus will be on providing telematics services and parti- cipating in toll-collection systems outside Germany. Mitsubishi Motors: sustained growth with new products Mitsubishi Motors (MMC) will continue to implement its successful restructuring program and introduce innovative products to secure long-term profitability and growth. With a new, distinctive design, the Mitsubishi brand is also to be repositioned worldwide. There will be closer cooperation with Daimler-Chrysler in product development, procurement and distribution. Together with Chrysler Group, for example, MMC is developing common platforms for mid-sized cars and, from 2004, a new four-seater smart will be built on a platform devel- oped jointly with MMC. In March 2003, DaimlerChrysler intends to acquire for around 1760 million a 43% ownership interest in Mitsubishi Fuso Truck and Bus Corporation (MFTBC), which was spun off from MMC at the beginning of 2003 and will cooperate closely with the Group’s Commercial Vehicles division. Outlook | 15 With an array of highlights at the 2003 North American International Auto Show in Detroit, DaimlerChrysler once again impressively demonstrated its technological and innovative leadership and the unique fascination of its brands. Upper picture: Dodge Avenger Concept, Dodge Kahuna Concept and Dodge Tomahawk Concept Lower picture: The new Mercedes-Benz E-Class station wagon Limited growth potential for the aircraft industry Growth prospects for the aerospace industry have suffered as a result of weaker demand for civil aircraft caused by the terrorist attacks on September 11, 2001 and by tight budgets in the public sector. However, due to its sizeable order backlog, a structural shift towards larger Airbus versions, and a strong competitive position in both civil and military markets, EADS expects its revenues to grow in the coming years. Its current cost- reduction program and highly flexible production system should enable EADS to achieve significantly positive earnings even if difficult market conditions continue. MTU Aeroengines anticipates a further decline in demand for civil-aircraft engines in 2003 and 2004, but this is likely to be more than offset by growth in its maintenance and military-engines businesses. The cost- reduction program that has been initiated should ensure that earnings remain at a high level. 342 billion to secure the future In the planning period of 2003 through 2005, Daimler- Chrysler will spend about 142 billion on property, plant and equipment, and research and development. With closer cooperation between the divisions, as well as with our Asian partners in the context of various pro- jects, DaimlerChrysler’s resources will be applied even more efficiently. A large part of this expenditure will be spent on the development and preparation of new vehi- cles and components. We also plan to spend significant sums on the modernization of manufacturing facilities and on researching into and developing new technolo- gies to enhance the safety, environmental compatibility and economics of road transport. 16 | DaimlerChrysler Worldwide DaimlerChrysler Worldwide 104 production locations worldwide | More than 13,000 sales outlets in over 200 countries | Focus of sales on the NAFTA region and Europe | Stronger market position in the fast-growing Asian markets through cooperation with Mitsubishi Motors Corporation and Hyundai Motor Company Europe Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities NAFTA Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities Production locations Sales outlets Revenues in millions of 3 Employees 8 – 19 – – 2 – – – 31,604 94,521 3,614 275 14,776 60,790 5,294 – 38,502 95 3 5,157 1,101 4,026 18,186 Production locations Sales outlets Revenues in millions of 3 Employees 1 38 17 – – 2 – – – 12,173 1,906 55,304 94,903 9,970 19,611 5,369 48 1 – 9,994 1,453 2,386 5,426 2,832 Note: Unconsolidated revenues of each division (segment revenues) DaimlerChrysler Worldwide | 17 South America Africa Production locations Sales outlets Revenues in millions of 3 Employees Production locations Sales outlets Revenues in millions of 3 Employees Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities 1 2 3 – – – – – – 714 9 1 254 449 1,125 649 1,088 10,706 – 149 9 – 296 – Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities 1 1 2 – – – – – – 296 2 – 790 236 735 – 155 6 3,881 – 948 – 459 – Asia Australia/Oceania Production locations Sales outlets Revenues in millions of 3 Employees Production locations Sales outlets Revenues in millions of 3 Employees Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities 3 2 2 – – – – – – 4,694 396 345 8 1,231 1,519 1,125 3 2 – 140 152 490 137 166 Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other Activities – – – – – – – – – 359 3 – 634 182 – – 511 537 – 104 2 764 177 – 18 | Mercedes Car Group Mercedes Car Group Operating profit and unit sales slightly higher than prior-year levels | Significant increase in revenues | New E-Class sedan and CLK coupe successfully launched | Return to the ultra-luxury segment with the Maybach brand | Growth continues at smart Operating profit and sales remain high In 2002, the operating profit, unit sales and revenues of the Mercedes Car Group exceeded the prior year’s high levels despite difficult market conditions. The Mercedes Car Group, which operated under the name of Mercedes-Benz Passenger Cars & smart until December 31, 2002, includes the brands, Mercedes- Benz, Maybach, smart, Mercedes-Benz AMG and Mercedes-Benz McLaren. Amounts in millions Operating profit Operating profit adjusted 1 Revenues Investments in property, plant and equipment Research and development expenditure Production (units) Sales (units) Employees (Dec. 31) 1 To exclude one-time effects 2002 US $ 3,166 3,166 52,603 2,616 2,930 2002 3 3,020 3,020 50,170 2,495 2,794 2001 3 2,951 2,961 47,705 2,061 2,402 1,238,927 1,249,951 1,232,334 1,229,688 101,778 102,223 The division was largely unaffected by the generally unfavorable markets, posting worldwide unit sales of 1,232,300 passenger cars (2001: 1,229,700 units) and thereby strengthening its position in nearly all key markets. Revenues increased by 5% to 150.2 billion (2001: 147.7 billion). Operating profit of 13,020 million (2001: 12,961 million) was slightly higher than the high level of adjusted operating profit in the prior year. This was achieved despite substantial spending on the E-Class and CLK coupe model changeovers, the introduction of the updated S-Class and the Maybach start up. There was further substantial expenditure in 2002 for the forthcoming expansion of the smart family, the succes- sors to the A-Class and M-Class, and the addition to our product range of the Grand Sport Tourer (see page 20). Mercedes-Benz gains market share Sales of Mercedes-Benz brand vehicles in 2002 were at the record level of the prior year, totaling 1,110,000 units. Whereas unit sales increased by 3% in Western Europe (excluding Germany), they actually decreased by 4% in Germany itself. Unit sales in the United States rose 3%, while in Japan they fell by 6%. Thanks to its strong range of young products, Mercedes-Benz was able to gain market share and strengthen its compe- titive position in some key regions despite a generally difficult environment. Little Mercedes prefers to travel by Mercedes. For Mercedes, Nora and Jonas, Mom’s car is simply the best. That’s why this family of five’s Mercedes-Benz C-Class station wagon is in daily use. Even the holiday to the South of France begins on the way there. If only all beautiful things were so practical, thinks Mom. But after surfing, Dad’s wet suit has to go into the roof-box. Too sandy – says Mercedes. www.daimlerchrysler.com/livingbrands 20 | Mercedes Car Group Upper picture: Pioneering technology, fascinating design and superior equipment – just six months after production started, the 100,000th E-Class sedan was handed over to a customer, making this the most successful model launch in the history of Mercedes-Benz. Lower picture: Lifestyle, functionality and innovation are important features of the smart roadster, for which its designers have created an original, unmistakable and dynamic shape. New E-Class and new CLK coupe particularly successful The new E-Class sedan was particularly successful with more than 179,200 units delivered since its market launch in March 2002. This was made possible by a significant reduction in the time needed to ramp up production to full capacity – only three and a half months for the new model compared to twelve months for its predecessor. With the help of the new E-Class, the Mercedes-Benz brand was able to extend its lead in the premium segment, in which it now has a worldwide market share of more than 25%. We expect sales of approximately 250,000 E-Class vehicles in 2003, the first full year of production. The new CLK coupe also enjoyed strong demand. More than 33,300 units were delivered between its market launch (May in Europe and Japan, September in the United States) and the end of the year. We anti- cipate sales of more than 50,000 CLK coupes in 2003. A total of 478,300 C-Class cars were sold worldwide during 2002. Demand was particularly strong for the station wagon (73,500 units, + 27%) and the Sport Coupe (74,300 units, + 25%). In a very competitive market segment, demand for the A-Class decreased for lifecycle reasons, with sales falling by 10% to 171,500 units. However, sales of the long-wheelbase version increased significantly (+ 57% to 69,100 units). Overall, more than 910,000 A-Class cars have been sold since the model was introduced in October 1997. Mercedes-Benz has thus successfully established itself with a premium vehicle in the sub- compact segment. S-Class sedans and coupes, which were successfully improved and updated in September, continued to per- form well. The SL roadster, launched in the fall of 2001, attracted a lot of interest: more than 31,600 units were sold in 2002. The M-Class is still benefiting from the com- prehensive model update of 2001, with 100,000 units sold last year. As a result of this strong demand, the Tuscaloosa, Alabama plant again ran at full capacity. Mercedes Car Group | 21 35th anniversary of AMG Mercedes-AMG GmbH, in which DaimlerChrysler has a 51% interest, marked its 35th anniversary in 2002 with new high-performance automobiles and an expansion of its Affalterbach plant. Additions to its product range include the E 55 AMG and the C 30 CDI AMG, as well as the AMG versions of the updated S-Class and CL- Class. With an engine delivering 476 hp, the E 55 AMG is the most powerful Mercedes-Benz E-Class of all time, while the C 30 CDI AMG, which is the first ever high- performance diesel sports car, delivers 231 hp. Mercedes-AMG has invested around 120 million in new manufacturing facilities, the most important of which is the new engine production area. In accordance with AMG’s policy, a single technician is responsible for the entire assembly process of each engine, and documents this fact by signing the engine rating plate. Pioneering innovations enhance safety The Mercedes-Benz brand traditionally incorporates the highest degree of vehicle safety. Researchers and developers continually strive to ensure that the brand’s pioneering role in safety is maintained through the application of forward-looking technologies. One example is PRE-SAFE, a pre-crash occupant-protection system which has been supplied as standard in S-Class vehicles since the model update in September 2002. Mercedes- Benz has thus inaugurated a new era by combining active and passive safety features. PRE-SAFE can recognize risk situations at an early stage and take appropriate preventive measures. At the first indication of skidding, for example, the system automatically closes the sunroof, tightens the seatbelts, and places the passenger seat in the optimal position. Mercedes-Benz also plans to introduce another safety-enhancing feature in the spring of 2003. Mercedes-Benz headlights will be able to swivel and illuminate curves to assist safer cornering. When a car enters a bend, the headlights swivel in the corres- ponding direction, illuminating 90% more of the road than conventional headlights. The Maybach 62 marks the return of an ultra-luxury brand, and sets new standards at the top end of the passenger-car market in terms of exclusiveness and individuality, while continuing the tradition of the legendary Maybach automobiles. Unit Sales 2002 1 Mercedes-Benz S-Class/SL E-Class C-Class of which: CLK SLK Sport Coupe A-Class M-Class G-Class smart Mercedes Car Group of which: Germany Western Europe (excl. Germany) NAFTA Unites States (retail sales) South America Asia/Australia (excl. Japan) Japan 1,000 Units 1,110 107 242 478 60 30 74 171 102 9 122 1,232 417 419 232 213 13 61 47 02/01 in % - 0 + 1 + 20 - 6 - 7 - 28 + 25 - 10 - 0 + 46 + 5 + 0 - 4 + 4 + 1 + 3 - 16 + 5 - 2 1 Group figures, unless otherwise indicated, including leased vehicles 22 | Mercedes Car Group smart roadster and smart roadster coupe unveiled In September 2002, we presented the smart roadster and the smart roadster coupe in Berlin, both of which met with an enthusiastic reception from the automotive press. Their launch in April 2003 will revive the segment of lightweight, compact roadsters. Both the roadster and the roadster coupe will be produced at the smart- ville plant in Hambach, France, where a total of 1100 million has been invested in the production line for the two new cars. The smart roadster and roadster coupe, the four-seater smart forfour (to be launched in 2004) and additional planned new models will trans- form smart from a one-product to a multi-product brand. The company will have a new logo and a new slogan, “open your mind” to underscore this develop- ment. With the expansion of the product family, the smart sales-and-service network will also be upgraded to meet the challenges of the future. smart successfully launched in new markets Sales of smart brand city coupes and convertibles increased by 5% in 2002 to 122,300 units. This success is in particular due to the model update implemented in March 2002. Important markets were Germany, with sales of 43,600 units in 2002, Italy (32,000 units) and France (8,600 units). This innovative car concept car has also been attracting an increasing number of customers in right-hand drive markets such as the United Kingdom (9,600 units) and Japan (6,100 units). The smart was also introduced to new markets such as Croatia, South Africa, Hong Kong and Taiwan last year. It is now available in 24 countries, and in view of strong interest worldwide, additional markets will follow. One of the things adding to customer appeal is the increase in the resale value of the smart city coupe: According to EurotaxSchwacke, the leading assessor of used-car prices in Germany, it has the highest resale value of all cars in the mini-car segment, selling on average at around 77% of its new price after two years. A special version of the smart, the open-top two- seater smart crossblade, was presented in Geneva in March 2002. Production of this car is limited to 2,000 numbered units. In March 2002, smart GmbH and Brabus GmbH an- nounced the formation of a 50-50 joint venture, smart-Brabus GmbH. This company will cater for the special-equipment versions of current and future models, reflecting the fact that many smart drivers want to be able to personalize and upgrade their cars. The exclusive “smart-Brabus 1st edition” has been available since June 2002, also in limited numbers. Open your mind – Rome has no limits with a smart. Narrow alleys and chic boutiques are an invitation to stroll and linger. No problem finding a parking space with the smart if you feel like shopping or a coffee. Mirella and Bella have found the right shoes at last, Angelo and Maria are planning their first date, Donatella gets to know the details over a cappuccino. Ciao Roma! www.daimlerchrysler.com/livingbrands 24 | Mercedes Car Group Majority holding in Formula 1 engine manufacturer Ilmor DaimlerChrysler increased its stake in Ilmor Engineering Ltd. from 25% to 55% in December 2002, and has agreed to gradually acquire the remaining shares by 2005. Ilmor Engineering Ltd. and DaimlerChrysler have been responsible for the development, design and production of Mercedes-Benz Formula 1 engines since 1993, and the company has now been renamed Mercedes-Ilmor. It will more closely combine Ilmor’s expertise with the extensive resources of Daimler- Chrysler, thereby strengthening the foundation for a high-performance, cost-efficient and highly flexible Formula 1 engine system. This in turn will create the conditions necessary for developing high-performance engines for various other applications. The return of the Maybach The legendary Maybach brand has made a comeback after a 60-year absence. In July 2002 we presented the Maybach 62 in New York and at the end of September the Maybach 57 in Paris. Even more important than the media’s exceptionally positive response to the new high- end luxury limousines, was the great interest shown by potential customers. We commenced delivery of the Maybach at the end of 2002, and there are already orders for the planned output of approximately 1,000 units in 2003. The Maybach is produced by a dedicated manufactur- ing facility at DaimlerChrysler’s Sindelfingen plant, where more than 300 highly qualified men and women ensure that each Maybach is perfect in every way and can fulfill the wishes of the most discerning customers. High-tech manufacturing processes and equipment combined with hand-crafted luxury are what set the pro- duction process apart for this super-premium vehicle. The new Maybach continues the tradition of the Maybach automobiles of the 1920s and 30s, whose bodies were also carefully assembled by hand. The arrival of the new Maybach in New York was a very important event for me and my family, says Irmgard Schmid-Maybach. Her grandfather’s vision had come true at last. The best automobile in the world is back, and a highlight not only on German or American roads. The legend lives. www.daimlerchrysler.com/livingbrands Due to currency-translation effects, Chrysler Group’s revenues of 160.2 billion (2001: 1 63.5 billion) decreased by 5%. Measured in US dollars revenues equaled the previous year’s level. Substantial quality gains In 2002, the quality of Chrysler, Jeep® and Dodge vehicles improved considerably. Among other things, this is indicated by the fact that warranty costs per vehicle have fallen significantly in recent years. In the 2002 J.D. Power “Initial Quality Survey” (IQS), Chrysler Group improved by 10% over 2001 and by 26% over 1998. In Strategic Vision’s “Total Quality Index” (TQI), both the Chrysler PT Cruiser and the Dodge Dakota received top honors. In addition, “Consumer Reports” magazine noted that among domestic manufacturers Chrysler Group had the fewest problems per hundred vehicles after three years in service. 26 | Chrysler Group Chrysler Group Operating profit excluding one-time effects of 31.3 billion (2001: operating loss of 32.2 billion) | Significantly better earnings than originally anticipated due to lower costs, increased efficiency and higher unit sales | Successful launch of new products: Dodge Ram and Viper | Substantially improved product quality Earnings goal significantly exceeded Despite the intense competition in North America and the need for generous sales incentives, Chrysler Group achieved an operating profit excluding one-time effects of 11.3 billion (2001: operating loss of 12.2 billion). The target set in the turnaround plan of February 2001 of breaking even in 2002 was thus significantly exceeded. Including one-time effects, which were primarily a result of the restructuring expenditure planned in 2001, oper- ating profit of 10.6 billion was still distinctly positive. The reasons for this result were that the restructuring measures led to greater cost savings and efficiency improvements than originally targeted, but higher unit sales also played a part (see page 69). Worldwide, Chrysler Group sold 2.82 million pas- senger cars, minivans, sport-utility vehicles and light trucks (2001: 2.76 million). In the United States, Chrysler Group achieved unit sales of 2,277,100 vehicles, 4% higher than the prior year. This reflects growth in key vehicle segments, particularly for the Dodge Ram Pickup (+15%), the Jeep® Liberty (+93%) and the Neon compact car (+18%). Retail sales in the US decreased by 3% to 2,205,500 units, while market share was 12.9% (13.0% in 2001). Amounts in millions Operating profit (loss) Operating profit (loss) adjusted 1 Revenues Investments in property, plant and equipment Research and development expenditure Production (units) Unit sales Employees (Dec. 31) 1 To exclude one-time effects 2002 US $ 639 1,381 2002 3 609 1,317 63,100 60,181 3,308 2,162 3,155 2,062 2001 3 (5,281) (2,183) 63,483 5,083 2,201 2,749,903 2,679,411 2,822,659 2,755,919 95,835 104,057 Drive is love – this was obvious at the final annual meeting of the official PT Cruiser Owner Club in Myrtle Beach, South Carolina. Jim and PT-Ken, Martha, PT-Brian and Ronald proudly presented their PTs. Like their cruisers, everybody is special. There are lively discussions on the beach and at the hotel, and everyone will be sure to be there for the next meeting. Life is PT. www.daimlerchrysler.com/livingbrands 28 | Chrysler Group Extended powertrain warranties In July 2002 Chrysler Group introduced an industry- leading warranty for the powertrains of Chrysler, Jeep® and Dodge vehicles for seven years or 70,000 miles (7/70). The warranty covers engines, transmissions/ transaxles, transfer cases and axles, is fully transferable to subsequent owners, and is given on all new Chrysler Group vehicles purchased or leased. Unit Sales 2002 1 Total of which: Passenger cars Light trucks Minivans SUVs 2 United States Canada Mexico Rest of the world 1 Shipments (including leased vehicles) 2 Including the PT Cruiser 1,000 units 2,823 684 672 559 908 2,277 254 120 172 02/01 in % + 2 - 2 + 13 - 6 + 4 + 4 + 5 - 10 - 8 The Jeep® Cherokee combines excellent off-road abilities with extremely capable on-road qualities. Strengthening Chrysler’s competitive position After making good progress with the turnaround plan, Chrysler Group is establishing its long-term strategy for the future. Its purpose is to set Chrysler Group apart from the competition and turn it into a new company. This approach combines the legendary creativity of Chrysler Group with new processes and cost structures and enhanced quality awareness in order to achieve a substantially stronger competitive position. Chrysler Group will focus on gaining product leadership in its market segments, taking advantage of its reputation for eye-catching design and its ability to consistently build innovative and segment-defining vehicles. Furthermore, the resources available within the Daimler- Chrysler Group and from our alliance partners, Mitsubishi Motors Corporation and Hyundai Motor Company, will be mobilized to increase the competitive- ness of Chrysler Group products. Key elements in this context will be sharing technologies and combining pur- chasing. With this new strategic focus Chrysler Group expects to increase sales by one million units over the next decade, despite a difficult market environment, and to achieve a sustained improvement in profitability. Chrysler Group | 29 Upper picture: The all-new Chrysler Crossfire sport coupe combines classic proportions and technology from Europe with the power and personality of American high-performance cars. Lower picture: Bold, capable and powerful – the all-new Dodge Ram Heavy Duty 3500 is aimed at the heart of the heavy-duty market with a new engine and, for the first time on a Ram, a single rear wheel option. New vehicles added to Chrysler brand In the spring of 2003 the Chrysler brand will present two completely new models, the Chrysler Pacifica and the Chrysler Crossfire, which will be of great signi- ficance for the entire Chrysler Group. The new Pacifica combines the spaciousness of a minivan with the versatility of a sports-utility vehicle and the comfort of a sedan. It will therefore create a new market segment. Production of the Chrysler Pacifica began in early 2003 at Chrysler Group’s assembly plant in Windsor, Canada. The Pacifica is being built on a new platform, but will use existing corporate components from other vehicles such as the proven 3.5 liter V6 engine from the Chrysler 300M. The Pacifica will be delivered to customers from the spring of 2003. The new Chrysler Crossfire demonstrates just how quickly today’s Chrysler Group can take and implement decisions. Only eighteen months after the decision to produce the car, this new sport coupe combining American design and German technology will be on sale starting in the spring of 2003. Early in 2004, we will launch the convertible version of the PT Cruiser, another innovative variation of this successful model. Its key features will not only be its unique design, but also its practicality: the four-seater can be converted in a very short time into an open four- seater. Additional specialty versions of the PT Cruiser for the North American market are the Flame vehicles, the Woodies (with exterior wood trim) and the limited edition Dream Cruiser/Street Cruiser series. There is also a range of new attractive engines for the European market. In total, the Chrysler brand sold 665,300 vehicles in 2002 (2001: 775,500). 30 | Chrysler Group The plant produces the Quad Cab models of the Dodge Ram 1500 series, the Dodge Dakota Regular, Club Cab and Quad Cab pickup trucks. Significant improvements in quality have been made. For example, the 2002 Dodge Ram 1500 Quad Cab was ranked first in owner satisfaction among four-door pick- up trucks in AutoPacific Inc.’s 2002 Vehicle Satisfaction Score (VSS) study. Another new Dodge product in 2002 was the Dodge Viper SRT-10, which reinforces the brand’s reputation for exciting high-performance automobiles. With an 8.3-liter, 10-cylinder engine delivering over 500 horse- power, the Viper continues its tradition as the ultimate American sports car while setting new benchmarks for performance and design. Overall, Dodge increased it unit sales by 7% to 1,561,800 vehicles (2001: 1,457,300). Only in a Jeep®: fun, freedom and legendary off-road ability The successful Jeep® brand, which includes the Jeep® Grand Cherokee, the Jeep® Liberty (Cherokee outside the United States) and the Jeep® Wrangler, continues to be the benchmark for off-road excellence. Some additional attractive models were added in 2002. The Renegade name made a comeback to the Jeep® lineup as an adventurous version of the success- ful Jeep® Liberty. Also introduced to the Jeep® lineup last year was the Jeep® Wrangler Rubicon. This vehicle, named after one of the most difficult off-road tracks in North America, delivers tremendous capabilities as the ultimate all-terrain vehicle. The new Jeep® logo and the relaunch of the tradition- al “Only in a Jeep®” catchphrase project the brand’s essence: fun, freedom and exceptional off-road capa- bility. First successfully used in the 1980s, it conveys the go-anywhere, do-anything capability of every Jeep®. The new logo is a graphic representation of the radiator grill and windshield of the Wrangler – an icon of the brand. Helped by growing sales of the Liberty, the Jeep® brand posted total unit sales of 595,600 vehicles last year (2001: 523,100). Continued success of the Dodge Ram/Motor Trend’s Truck of the Year Sales of Dodge Ram pickup trucks totaled 396,900 units in the US, up 15% over the previous year. The heavy-duty Dodge Ram 2500 and 3500 pickups, both launched during 2002, contributed significantly to this success. The Saltillo engine plant in Mexico started production of the new, high-performance 5.7-liter HEMI engine, which is initially being used in Ram pickups. The HEMI is the most powerful engine available in the market for mass-produced pickup trucks. In December, Motor Trend magazine selected the Dodge Ram as its Truck of the Year. The strong demand for Dodge pickup trucks has led Chrysler Group to introduce a third shift at the assembly plant in Warren, Michigan, which will result in 1,000 more jobs at this facility. The plant’s capacity will be increased by 21% to approximately 338,000 units a year. The track from the small silver- mining town of Taxco in Mexico to Acapulco can be driven “only in a Jeep”. Two and a half days of fun and energy, pushing the limit for both man and machine. The terrain alter- nates between jungle-like forests, patches of desert and gushing rivers. Every hurdle is shared and overcome together. In the evening, beans and enchiladas are served in front of the tent, accompanied by conversations that could only take place under the Mexican night sky. www.daimlerchrysler.com/livingbrands 32 | Chrysler Group Harnessing Mopar as the fourth brand of Chrysler Group At the Specialty Equipment Market Association (SEMA) trade show in November 2002, Chrysler Group announced that Mopar, Chrysler Group’s parts and accessories brand, is to be more effectively positioned as a specialist for enhancing and individualizing motor vehicles. Mopar expects to attract customer interest with the introduction of Mopar Speedshops, a concept for in-dealership accessories and customization stores (stores-within-stores). Pioneering automotive concepts At the most recent Pebble Beach Concours d’Elegance in August 2002, the Chrysler brand presented the first vehicle in its next generation of trend-setting concept cars, the Chrysler California Cruiser. This all-new vehicle builds on the uniquely American blend of unusual design and maximum practicality which has made the Chrysler PT Cruiser so popular. As a versatile all-round vehicle with an innovative rear hatch and a multi-function interior, the Chrysler California Cruiser builds on what owners love about their PT Cruisers. This enhanced visibility and wider availability of Additional concept vehicles at the Los Angeles and Detroit shows earlier this year were designed to highlight the Dodge brand. The Dodge Durango and Dodge Magnum are two important production-intent models that significantly underscore Dodge’s strong brand values across the brand’s entire product line. Other concept vehicles included the Dodge Avenger, Dodge Kahuna and the Dodge Tomahawk – a motor- cycle study powered by a 500-horsepower Viper V-10 engine. Mopar performance parts at Chrysler, Jeep® and Dodge dealerships will enable customers to add their own personal touches – an increasingly popular option for US car buyers under twenty-five years of age. Chrysler Group has adopted a three-pronged ap- proach to promote the sales of high-value automotive accessories: – Offering a number of niche vehicles designed and customized by Chrysler Group’s Performance Vehicle Operations Team, such as the Dodge SRT-4, the Dodge Ram SRT-10 and the Dodge Viper SRT-10. – Close cooperation with the top after-market special- ists to demonstrate that Chrysler Group vehicles are the best choice for customization. – Supplying Mopar parts and accessories through the dealerships. In this way Chrysler Group utilizes the potential of the accessories business to fulfill customers’ wishes and enhance customer loyalty. A day at the race – all Viper fans meet regularly at Doug Levin’s place to talk about cars and cruise together. Sure, Doug and his friends are also in the bleachers when the vehicles line up at the start for the NASCAR Closing Race Final in 2002. The Dodge Viper tuner from Miami doesn’t miss a single race with Bill Elliot in Dodge No. 9. And in the evening, the Viper Club is tuning again. www.daimlerchrysler.com/livingbrands Successful restructuring at Freightliner The Freightliner/Sterling/Thomas Built Buses business unit returned to profitability in the second quarter of 2002 – two quarters earlier than anticipated. This was largely due to the implementation of the restructuring program initiated in October 2001, which significantly exceeded the original cost-cutting targets for 2002. Another important factor was that unit sales rose by 14% from the very low level of 2001 to 114,000 vehicles, mainly because of advanced purchasing of heavy-duty vehicles in anticipation of new emission requirements (EPA 2000) which took effect in the United States in October 2002. US sales of Class 8 (15 metric tons gross vehicle weight and up) Freightliner-, Sterling- and Western Star-brand vehicles amounted to 56,000 units, up 2% on the prior year. However, sales of Class 6/7 vehicles (8.8 to 15 metric tons) fell to 32,000 units (2001: 37,000 units). With an overall market share of 38% (2001: 39%), DaimlerChrysler is still the market leader for Class 8 vehicles in the US. Our market share in Class 6/7 was 28% (2001: 27%). 34 | Commercial Vehicles Commercial Vehicles Adjusted operating profit at 3176 million above prior year’s figure | Successful restructuring program at Freightliner | New products boost competitiveness | Expansion of strategic partnerships in Asia Earnings higher despite difficult markets In 2002, the Commercial Vehicles division sold a total of 485,400 trucks, buses and vans comprising the brands, Mercedes-Benz, Freightliner, Sterling, Western Star, Thomas Built Buses, Setra, Orion and American LaFrance (2001: 492,900). DaimlerChrysler thus main- tained its position as the world’s biggest manufacturer of commercial vehicles in a very difficult market environment. Revenues totaled 128.4 billion (2001: 128.6 billion). Decreases in Europe (- 3%) and South America (- 25%) were almost offset by increases in the NAFTA region (+5%). Operating profit excluding one-time effects totaled 1176 million (2001: 151 million) surpass- ing, as targeted, the prior year’s figure. The key factor in this improved performance was the successful imple- mentation of the turnaround plan at the Freightliner/ Sterling/Thomas Built Buses business unit. Including one-time effects there was an operating loss of 1343 million. One-time charges arose at varlous business units in a total amount of 1519 million, primarily as a result of structural changes, but also due to a special depreciation of production facilities in connection with the long-term product and production strategy (see page 70). Amounts in millions Operating profit (loss) Operating profit adjusted 1 Revenues Investments in property, plant and equipment Research and development expenditure Production (units) Unit sales (units) Employees (Dec. 31) 1 To exclude one-time effects 2002 US $ (360) 185 2002 3 (343) 176 2001 3 (514) 51 29,778 28,401 28,572 1,324 1,006 1,263 959 483,029 485,408 94,111 1,484 1,015 494,866 492,851 96,644 The most economical transport solution with the best service. It all started with a used Mercedes-Benz truck shortly after the Berlin wall came down. Today Michael Erck’s transport company has a fleet of 150 trucks, which are on the road nationwide, night and day, to make sure that we have milk in our coffee at break- fast time. For 2003 he has already ordered 30 new Mercedes-Benz Actros trucks. Each of his drivers would like one of his own. Michael says he’s working on it. www.daimlerchrysler.com/livingbrands 36 | Commercial Vehicles Upper picture: The Mercedes-Benz Travego embodies the elegant tour-bus generation of the future, harmoniously blending innovative and distinctive design with Mercedes-Benz-specific brand elements. Lower picture: The Sterling Acterra is today’s answer to customers’ need for a medium-duty truck designed for best-in-class maneuverability, ride, handling and ruggedness. Preparing for the future, the business unit has been investing in new products and production facilities. A new medium-duty Freightliner truck, the Business Class M2, was launched in February 2002. The Sterling and Western Star brands have also introduced new products and new equipment variants. As part of the restruc- turing program, production of Western Star trucks was transferred to the plant in Portland, Oregon. A new factory for Thomas Built Buses will reach full production capacity in early 2004. In addition, as foreseen by the restructuring plan, work has begun on consolidating production of American LaFrance fire trucks and auxil- iary vehicles in Charleston, South Carolina. Mercedes-Benz Trucks remains successful in a difficult market environment Unit sales at the Mercedes-Benz Trucks business unit fell by 6% from 2001, to 101,700 vehicles. The primary reason was the slowdown in the Western European market, especially in Germany. Nevertheless, with 60,300 units sold (2001: 67,300) and a market share of 21% (2001: 21%), Mercedes-Benz was once again the leading brand in Western Europe for trucks over six metric tons. The Axor heavy-duty truck was introduced at the end of 2001, and was well received by customers, who were attracted by its economy and large capacity. Through the success of this new vehicle and the con- tinued excellent market position of the Actros, we were able to increase our share of the market in Western Europe to 18% (2001: 17%) in the high-margin segment of semi-trailer trucks above 16 metric tons. The business unit posted considerably higher unit sales in markets outside Western Europe, with 21% of all trucks produced in Europe sold in countries outside this region. The Actros was particularly successful, with more than 10,000 units being sold in these markets. The most important of these markets were Eastern Europe, the Near and Middle East and South Africa. Despite the continuing slowdown in South America, the business unit sold 21,800 Mercedes-Benz trucks in the region (2001: 23,700). In Brazil and Argentina, it maintained its lead with market shares of 34% (2001: 34%) and 33% (2001: 35%), respectively. Commercial Vehicles | 37 The most important new model in 2002 was the Actros, which had its premiere at the International Auto Show (IAA) in Hanover and was well received by customers and automotive journalists. Its distinctive characteristics are its more powerful engines, a new axle and suspension concept, improved aerodynamics and a redesigned driver’s cab. Mercedes-Benz Vans still leads the field The Mercedes-Benz Vans business unit sold 236,600 vehicles worldwide in 2002, nearly matching the figure for 2001. With a market share of 18% (2001: 19%) in the segment of 2 to 6 metric tons, Mercedes-Benz Vans is still the market leader in Western Europe. Whereas the Sprinter was able to maintain its strong market position in the heavy vans segment, in the segment of mid-size vans the market share of the Vito decreased due to the model changeover scheduled for 2003. In the spring of 2002, DaimlerChrysler introduced the new Vaneo, which is positioned as a premium product in this segment. The updated Sprinter model was introduced at the International Auto Show (IAA) in Hanover in September 2002. This new model is more attractive and, thanks to longer service intervals, more economical. Another new feature is the Electronic Stability Program (ESP). DaimlerChrysler is the first vehicle manufacturer to offer this system in this van segment. To strengthen its presence in the US van market in early 2003, Daimler- Chrysler plans to offer the Sprinter, which has been sold successfully in the US under the Freightliner brand name since the middle of 2001, as a Dodge brand vehicle as well. We also plan to launch the Sprinter in Canada and Mexico. The licensing agreement with Volkswagen AG for the production of the Sprinter van by Volkswagen was renewed to cover successor models as well. The updated Mercedes-Benz Sprinter appeals with a new design and a world first. The Sprinter is the first van series worldwide for which all models can be supplied with the ESP electronic stability program. Unit Sales 2002 1 World of which: Vans 2 Trucks 3 Buses Unimogs Europe of which: Germany Western Europe (excluding Germany) of which: France United Kingdom Italy NAFTA of which: United States South America (excluding Mexico) of which: Brazil Asia 1,000 Units 02/01 in % 485 246 212 25 2 287 103 162 32 33 23 118 100 37 30 24 - 2 - 5 + 3 - 8 - 23 - 2 - 3 - 5 - 10 + 14 + 4 + 11 + 12 - 14 - 12 - 8 1 Wholesale figures (including leased vehicles) 2 Including the Mitsubishi L200 pickup and the Mitsubishi Pajero in South Africa 3 Including schoolbuses by Thomas Built Buses and bus chassis by Freightliner 38 | Commercial Vehicles exhaust-emission limits. At the beginning of September, the business unit began assembling medium-duty transmissions in Brazil for installation in trucks all over the world. In addition, the establishment of Axle Alliance Company in Detroit enables our axles to be used in the NAFTA region. In the year under review, the Powersystems business unit posted revenues of 15.1 billion, compared to 15.6 billion in 2001. Most of its products were supplied to the vehicle units of the Commercial Vehicles division. Integration of Off-Highway business DaimlerChrysler’s Off-Highway business unit, which is run by MTU Friedrichshafen, is responsible for drive systems for ships, power generation facilities, railroads, industrial and construction machines (including agricultural machines) and military vehicles. Integration of off-highway activities at Detroit Diesel Corporation, the Commercial Vehicles division and MTU Friedrichs- hafen was nearly completed during the year under review. Production was coordinated, while sales operations were combined in worldwide sales centers which are geared to meet the needs of individual markets. Buses unit combines international business activities In order to strengthen its position as the world’s leading bus manufacturer, in 2002 DaimlerChrysler combined its urban and transit bus business in North America with the worldwide bus business of the Mercedes-Benz and Setra brands. All activities are now centered in the DaimlerChrysler Buses business unit. Despite difficult conditions in nearly all key markets, in 2002 DaimlerChrysler sold a total of 25,100 complete buses and chassis of the brands Mercedes-Benz, Setra and Orion and increased its market share in nearly all regions. DaimlerChrysler remained the market leader in Western Europe, with 5,900 vehicles sold (2001: 6,400) and a market share of 26% (2001: 25%), as well as in South America, where sales declined to 10,300 units (2001: 11,100). However, with market shares of 46% in Mexico (2001: 41%), 50% in Brazil (2001: 52%), and 91% in Argentina (2001: 72%) we are still Number 1 in these markets as well. Middle East markets are increasingly important as reflected by the 19% increase in sales to 800 units. DaimlerChrysler presented many new bus products at the International Auto Show (IAA) in September 2002, among them the Setra S 431 DT double-decker luxury travel coach. Other premieres are planned for 2003, in- cluding the US version of the Setra TopClass 400 and further variations of the modular chassis program. Greater worldwide coordination of components DaimlerChrysler Powersystems’ expertise in diesel engines, transmissions, axles and steering systems ensures DaimlerChrysler’s commercial vehicles access to state-of-the-art technology. In the year under review, DaimlerChrysler consistently pursued its global components strategy. Its aim is to further reduce the cost of drive system assemblies by linking the company’s activities in a worldwide network. For example, the Series 900 diesel engines have now become truly global engines produced in a worldwide network of production facilities in Germany and Brazil, and soon in South Korea as well. They are already pow- ering Mercedes-Benz, Freightliner and Sterling trucks, and Hyundai trucks will soon be added. Detroit Diesel successfully concluded its certification for the new US Touring pays off with Setra buses, says Georg Marti from a third generation bus-owning family in Switzerland. He only uses Setra buses, because customer satisfaction is the key to his success. After a journey in one of the new TopClass 400, his travel groups arrive at their destination in comfort and safety. Not only the passengers, but also the drivers are already looking forward to the next tour. www.daimlerchrysler.com/livingbrands 40 | Commercial Vehicles Hyundai Truck Company will manufacture trucks, buses and drive systems. This joint venture will provide DaimlerChrysler with access to the South Korean mar- ket and a cost-effective production base. Together with our partner, we are building an engine manufacturing plant in Chonju, which will go into operation in 2004. Truck Product Decision Committee established The recently formed Truck Product Decision Committee began work in October 2002. It was created to develop cross-brand strategies and initiatives and to prepare strategic decisions in the commercial-vehicle segment with regard to the Mercedes-Benz, Freightliner, Sterling and Western Star brands, as well as the Fuso and Hyundai partner brands. Among its goals is to coordinate the production and marketing of commercial vehicles and to ensure the coordinated use of technologies, innovations and components. One of the first recommendations of the new committee was to link the product program of Mercedes-Benz trucks in Brazil more closely to the European product program in the medium term, in order to offer our Brazilian customers even more attractive products while also increasing our competitiveness. Revenues of more than 11.6 billion slightly exceeded last year’s volume for this business unit and were generated primarily by customers outside the Daimler- Chrysler Group. One of MTU Friedrichshafen’s pioneering technologies is the “HotModule,” a high-temperature fuel cell for stationary power generation that will soon be ready for series production. Eight field-trial facilities, where customers are able to test the fuel cells under everyday conditions, were operating at the end of 2002. Another successful field of activity at MTU involves the development and production of drive shafts. Construction of an assembly line for delivering drive shafts to manufacturers of passenger cars and light commercial vehicles in the NAFTA region began in the fall of 2002 in Charleston, South Carolina. At the world’s biggest trade fair for rail systems, Innotrans 2002 in Berlin, Off-Highway presented its new 20V 4000 engine and new Rail PowerPack, a logical continuation of its business in the rail-systems market. Its goal is to become the recognized market leader for drive systems in the growth market of off-highway applications. Strategic partnerships in Asia expanded To strengthen its presence in Asia – the world’s largest and fastest-growing market for commercial vehicles – DaimlerChrysler strengthened its strategic alliance with Mitsubishi Motors Corporation (MMC) and increased its strategic partnership with Hyundai Motor Company (HMC). MMC spun off its commercial-vehicle division into a separate company named Mitsubishi Fuso Truck & Bus Corporation (MFTBC) at the beginning of 2003. DaimlerChrysler intends to acquire 43% of the shares in MFTBC for 1760 million in March 2003. The new company is the market leader in Japan and is strong in other key Asian markets. Cooperation with HMC on diesel engine production for commercial vehicles, which began in June 2001, will be considerably strengthened by our 50% holding in HMC’s commercial-vehicle operations. The new Daimler On the road again – with their Freightliner Columbia, Patricia and Don Richards cover over 250,000 miles a year in the USA. They are a typical trucking couple – the Freightliner is their home on wheels, and they value it highly for its strength, comfort and reliability. The Richards have no need for a TV set – the road makes for better entertainment. www.daimlerchrysler.com/livingbrands 42 | Executive Automotive Committee Executive Automotive Committee Basis established for successful brand management | Coordination of all brands’ product planning | Numerous projects decided on and now being implemented | Strong focus on generating synergies Continuation of EAC’s successful work In 2002, the Executive Automotive Committee (EAC) did groundbreaking work as a platform for the discussion and preparation of decisions affecting more than one of our automotive divisions. The committee coordinates all cross-divisional issues, protects the identity of the Group’s brands, and accelerates the realization of synergy potential. Last year, the EAC particularly focused on evaluating and optimizing the Group’s portfolio of products, powertrains and components. Expanded multi-brand management In recent years, multi-brand management has become one of the main challenges facing the automotive indus- try. Whereas in 1980, 28 independent manufacturers had an average of only two brands each, the remaining eleven independent car manufacturers now have an average of more than six different brands each. Daimler- Chrysler owns six passenger car brands, eight commercial vehicles brands and one accessories brand, supplemented by DaimlerChrysler Services’ comprehensive range of financial services for DaimlerChrysler’s automotive brands. The challenge now consists of managing the interplay between brand differentiation and economies of scale. One goal is to strengthen the identity of the individual brands and increase their value. At the same time, economies of scale must be achieved by means of cross-divisional cooperation and the exchange and common use of components, systems and platforms, in order to improve the overall cost position and thus to make the whole Group even more competitive. However, none of the Mercedes-Benz platforms will be shared with other brands. Our brand management is based on our “Brand Guide- lines,” which describe the profile and differentiating criteria of each individual brand. The guidelines are being expanded to include regulations for sharing com- ponents by business units and the importance of such a strategy to the brands. Market success in the future will increasingly depend on our ability to maintain each brand’s own specific character. We are therefore work- ing intensively on strengthening the brand-related attributes that influence the design of the products and the values associated with each particular brand. DaimlerChrysler’s brand portfolio gives us the tremen- dous ability to offer attractive products in all segments and to all customer groups worldwide. Cross-brand product planning (long range product plan) A detailed comparison of product planning has been carried out with the goal of identifying product overlaps and gaps in market coverage. One of the findings of this analysis is that there is hardly any product overlap within the DaimlerChrysler Group. However, there is a gap in the small-car segment, which is to be closed in the year 2004 with the launch of the smart four-seater (smart forfour). Furthermore, the committee identified possibilities for the joint creation of vehicle architectures. A good exam- ple is the rapidly growing sport-utility and sport-tourer segment, in which we plan to utilize market potential by implementing a coordinated, cross-brand strategy. Having comprehensive information on all vehicle segments worldwide, on their appeal, their future potential and the degree of competition, provides a basis for developing new, innovative products and opens up opportunities for exploiting synergies across the individual business units. Executive Automotive Committee | 43 Organization of the Executive Automotive Committee Board of Management Executive Automotive Committee Chairmen: Schrempp, Hubbert Mercedes Car Group Chrysler Group Commercial Vehicles Corporate Development Hubbert Zetsche Cordes Grube Alliance Partner: Mitsubishi Motors Bischoff 1 1 In his function as member of the Board of Mitsubishi Motors Corporation appointed by DaimlerChrysler Close cooperation with regional subsidiaries The strategies we developed with the help of our global sales and marketing organization continued to be suc- cessfully implemented in 2002. The EAC discussed, initiated and realized numerous projects with represen- tatives of the various regions. One of the main issues in 2002 was the structuring of the sales organization in view of the Block Exemption Regulation for the sale of automobiles in the European Union – particularly its impact on the Group and the options which Daimler- Chrysler might have. As well as the activities we have already initiated with our strategic sales partners in Japan and South Korea, in the future we intend to strengthen our presence in the Chinese market. The numerous projects currently under way in China make it necessary to establish a uniform Group presence in that country and increase our market effectiveness. To this end we have also reorganized our regional res- ponsibilities in China. Identifying synergy potential with components One of the tasks of the EAC is to utilize opportunities to standardize components for use by different divisions or business units. In order to prevent dilution of brands, only those components were selected that are not relevant to brand identity and which can be sourced globally. Under the leadership of the EAC the Procure- ment and Development departments defined major groups of components, formed corresponding teams and developed a cross-divisional component strategy, thus enabling substantial savings to be made (see pages 58-59). Joint use of engines and transmissions In order to exploit synergies, existing and future engine and transmission series were also examined. One exam- ple of the findings was that there are currently eight different families of four-cylinder in-line engines at the DaimlerChrysler Group. By the year 2005 we intend to reduce this number by 25%. The “World Engine” is to contribute significantly to this goal. This is a four- cylinder gasoline engine that is to be developed and manufactured jointly by Chrysler Group, Mitsubishi Motors Corporation and Hyundai Motor Company. Starting in 2005, these three partners together should produce about 1.5 million of these engines each year. Cooperation on environmental issues The tightening of legislation worldwide regarding such matters as fuel consumption and emission standards, occupant safety requirements and the recycling of vehi- cles requires closer cooperation between the divisions. Research and development expertise gained in the field of pioneering alternative drive systems will be applied over the whole Group even more quickly in the future. Another example of how processes can be shared is provided by the method developed by Mercedes-Benz for dealing with end-of-life vehicles. This is now also employed by Chrysler Group, and our alliance partner Mitsubishi Motors has decided to use it as well. Operating profit including one-time effects totaled 13.1 billion (2001: 10.6 billion). This figure includes a one-time gain of 12.5 billion resulting from the sale of the remaining 49.9% of T-Systems ITS (formerly debis Systemhaus) to Deutsche Telekom. On the other hand, there was a one-time charge of 1107 million due to the economic crisis in Argentina (further devaluation of the Argentine peso against the US dollar), as well as losses from the sale of parts of our Capital Services portfolio and a valuation adjustment to the remainder totaling 1281 million (see pages 68-69). Revenues, new business and contract volume below prior year’s level Revenues at DaimlerChrysler Services totaled 115.7 billion in 2002, which, as expected, was below the figure for the prior year. Apart from the weakening of the US dollar against the euro, this change was mainly the result of strong demand for our special financing programs in the United States, which led to a shift in customer preferences from leasing to financing. 44 | Services Services DaimlerChrysler Services increases adjusted operating profit by 67% to 3964 million | US business is main source of earnings | Refocus on automotive services almost completed | DaimlerChrysler Bank successfully adds deposit services to its product range | Toll Collect consortium obtains contract for truck toll system in Germany Significant earnings increase in operative business Despite difficult global market conditions, Daimler- Chrysler Services was able to significantly exceed its earnings targets in 2002. Operating profit excluding one-time effects totaled 1964 million, an increase of 67% over the prior year’s figure. The increase was primarily due to a considerable improvement in the marketing of off-lease vehicles and more favorable refinancing conditions. The lower risk- provisioning requirement in the United States for Chrysler Group vehicles and Freightliner trucks also had a positive effect on earnings. However, credit risks increased in Europe, particularly in the business of financing commercial vehicles. Operating profit was also impacted by the declining residual values of off- lease vehicles in the United States, caused by the general fall in prices for used vehicles. Improvements to our processes and systems for limiting credit losses also improved earnings. Amounts in millions Operating profit Operating profit adjusted 1 Revenues Contract volume Investments in property, plant and equipment Employees (Dec. 31) 1 To exclude one-time effects 2002 US $ 3,208 1,011 2002 3 3,060 964 2001 3 612 578 16,460 15,699 16,851 114,551 109,252 128,379 100 95 10,521 112 9,712 As the biggest chemicals company in the world, BASF needs to focus entire- ly on its own business. That’s why it uses the professional services of DaimlerChrysler Services Fleet Management to look after its fleet of vehicles. Because we take care of everything: We advise our customers on how to optimize their fleet costs, and deal with ordering and financing their vehicles. In this way our custo- mers are always mobile, have maxi- mum transparency, and can save up to 30% of total fleet costs. A clever idea. Our customers think so too. www.daimlerchrysler.com/livingbrands 46 | Services New business was down only slightly, to 151.8 billion (-4%), despite the increased use of incentive programs in the United States, particularly in the second half of the year. The decrease was due to changes in the value of the US dollar. Fleet management activities were significantly expanded in 2002, with the managed fleet totaling around 300,000 vehicles at year end, an increase of 10% on the prior year. Contract volume of 1109.3 billion was down 15% from the prior year, mainly due to changes in the relative value of the US dollar. The sale of a substantial part of the Capital Services portfolio also contributed to the reduction. With a total portfolio of 183.1 billion (2001: 1103.4 billion), North America remains the most important mar- ket for DaimlerChrysler Services. In Germany, contract volume increased by 6% to 112.2 billion as a result of sales-promotion activities. In the other countries of the European Union contract volume rose from 18.7 billion in 2001 to 19.1 billion last year, and our leasing and sales-financing business in the Asia/Pacific region also expanded. Workforce numbers rose 8% in the year under review, to 10,521. At the end of 2002, a total of 5,426 people were employed by DaimlerChrysler Services in the NAFTA region, and 2,510 in Germany. The new North American headquarters of DaimlerChrysler Services provide an open, creative and innovative working atmosphere. Growing importance of financial services in a difficult market environment Economic conditions in DaimlerChrysler’s key sales markets remained very difficult in 2002, particularly in the United States, where the market was characterized by very high sales incentives. In this situation Daimler- Chrysler Services’ financial-services activities played a key role in supporting the sale of Group vehicles and contributed correspondingly to the overall success of DaimlerChrysler. One out of every three vehicles sold was either financed by or leased from DaimlerChrysler Services. DaimlerChrysler Services concluded leasing and sales financing contracts for 2.0 million new vehi- cles worldwide in 2002, meaning that approximately 8,000 Group vehicles were sold each day with the sup- port of our financial services. In view of this situation, methods for controlling credit risks and residual-value risks are becoming increasingly important. By further improving coordination between DaimlerChrysler Ser- vices and the sales organizations of the vehicle divi- sions, we intend to achieve a more customer-oriented linkage between the Group’s products and the corre- sponding services offered to our customers. One result of this strategy has been the creation of global partner- ship agreements between DaimlerChrysler Services and the automotive divisions. These agreements include market-specific regulations for the treatment of the residual-value risks associated with lease returns. Services | 47 Expanded activities in Asia As part of its activities to support DaimlerChrysler’s long-term strategy, the Services division also expanded its business operations in Asia last year. In order to gain a solid foothold in Asia’s second-largest automobile market, we established a leasing and sales-financing company in South Korea. We also opened up a liaison office in China, a market which we view as having enormous growth potential. Moreover, by concentrating essential management functions for the United States, Canada and Mexico as well as brand-financing activities at our new North American headquarters in Farmington Hills, Michigan, DaimlerChrysler Services will be able to operate even more efficiently in this region in the future. Refocus on the core automotive business With the sale of its remaining shares in T-Systems ITS and parts of Capital Services’ non-automotive portfolio, DaimlerChrysler Services virtually completed the refo- cus of its operations on the core automotive business. The non-automotive items sold included commercial real estate and the asset-based-lending business. In addition, an agreement was reached on the transfer of Capital Services’ business-jet activities in the United States. The cash flow generated through the sale of parts of the Capital Services portfolio will be used to further strengthen our sales-financing business. Daimler- Chrysler Services also plans to extend its leading position in the fleet-management sector. Successful launch of deposit-banking business After acquiring a full banking license, the Daimler- Chrysler Bank significantly expanded its range of ser- vices in Germany beginning on July 1, 2002. Its product portfolio now consists of money-market accounts, sav- ings plans, fixed-interest savings plans, and credit cards with the attractive RoadMiles rewards program. In the first six months, more than 50,000 customers made deposits totaling almost 1800 million – even better than the goals we had set ourselves. With a 30% share of non Group customers, DaimlerChrysler Bank has succeeded in substantially expanding the customer base for vehicle sales. DaimlerChrysler Bank’s money-market account (3.6% interest rate; without any restrictions on the amount deposited) offered extremely attractive terms in the German deposit market at the end of 2002. The bank’s fixed-interest accounts have terms ranging from two to six years. In addition, the RoadMiles rewards program offers customers bonus points not only for pur- chases made with the DaimlerChrysler and Mercedes credit cards, but also when they make investments through the DaimlerChrysler Bank. These points can be redeemed for attractive merchandise items. Contract awarded for satellite-based toll system In September 2002, the Toll Collect consortium, in which DaimlerChrysler Services has a 45% interest, was awarded a contract by the German government for the construction and operation of a satellite-based toll system for trucks over twelve metric tons in Germany. The system is scheduled to go into operation in August 2003, and the operator contract is to run for twelve years. Annual revenues of 1500 million are projected. With Toll Collect, Germany will obtain one of the world’s most modern and intelligent systems for collect- ing road tolls. Toll Collect is based on innovative satellite and mobile-radio technologies. As this flexible system can be adapted to other countries’ specific needs, Daimler- Chrysler Services plans to tender for toll-collection systems in various other European countries and also in Asia. 48 | Other Activities Other Activities High incoming orders at MTU Aero Engines despite difficult engine market | EADS achieves earnings and revenues targets in spite of challenging market conditions | Good progress with restructuring at Mitsubishi Motors Significant increase in earnings in 2002 The Other Activities segment consists of MTU Aero Engines and shareholdings in EADS (33%) and Mitsubishi Motors Corporation (37.1%), together with Corporate Research, our real-estate activities, and our holding and finance companies. Our 40% holding in TEMIC was also part of this segment until April 1, 2002, when it was sold to Continental AG. Our share of the operating results of EADS and Mitsubishi Motors is included in the operating profit of DaimlerChrysler one quarter later. DaimlerChrysler’s operating profit for 2002 thus includes these companies’ contributions for the period of October 2001 through September 2002. The operating profit of the Other Activities segment totaled 10.9 billion in 2002 (2001: 11.2 billion), and includes a one-time gain of 1156 million from the sale of our remaining 40% stake in TEMIC and related activities. In the year 2001, there was an aggregate one-time gain of 11.0 billion representing the net effect of the sale of Adtranz and 60% of TEMIC, the Group’s share of the one-time income generated at EADS by the share swap associated with the formation of Airbus SAS, and the charge arising from the restructuring program at Mitsubishi Motors. Other Activities’ adjusted operating profit totaled 1747 million in 2002 (2001: 1205 million). Other Activities Amounts in millions Operating profit Operating profit adjusted 2002 US $ 947 783 2002 3 903 747 2001 3 1,181 205 MTU Aero Engines Global operations at MTU Aero Engines Together with its partners, the MTU Aero Engines business unit develops and manufactures civil and military aircraft engines as well as industrial gas turbines. As the world’s largest independent provider of maintenance services for civil-aviation engines, MTU Aero Engines also performs repair and overhaul on aircraft engines and on industrial gas turbines. MTU Aero Engines Amounts in millions Revenues Incoming orders Employees (Dec. 31) 2002 US $ 2,093 2,014 2002 3 2,215 2,131 8,376 2001 3 2,487 2,183 7,839 High level of incoming orders despite ongoing difficulties in the engine market The effects of the terrorist attacks of September 11, 2001 led to a significant decline in revenues in the civil aviation sector in 2002, which also impacted business developments at MTU Aero Engines. The business unit’s revenues decreased by 11% compared with the previous year to 12.2 billion. A particularly sharp decline of 30% was recorded in the civil engines and spare-parts business. This decline was, however, partially offset by an increase in revenues at the maintenance locations and in the military business. The latter benefited in the year under review primarily from the production start-up of the EJ200 engine used in the Eurofighter jet. Incoming orders of 12.1 billion in 2002 nearly reached the level of 2001 (-2%). The high level of orders for the GP7000 engine for the Airbus A380 was offset by the depreciation of the US dollar against the euro in 2002. Additionally, orders from government authorities were down 9%, mainly due to the delay in finalizing contracts for the A400M military transport plane. Despite difficult markets in 2002, MTU Aero Engines GmbH made a significant positive contribution to Group operating profit. Other Activities | 49 A turbine disk, manufactured by MTU Aero Engine Components The new Airbus A340-600, the newest four-engine long-haul passenger aircraft of the Airbus family. It features low fuel consumption and thus lower operating costs than any other long-haul aircraft. New projects safeguard future success Despite difficult markets, MTU Aero Engines plans to continue its growth strategy by winning a larger share of future engine projects. In this context the selection of the MTU high-pressure compressor for Pratt & Whitney’s PW6000 civil-aircraft engine is a significant milestone, as it is the first time that MTU Aero Engines has participated independently in a project involving the design, development and production of a core component for a civil engine. Pratt & Whitney’s choice of MTU creates a base for further increasing MTU Aero Engines’ share of orders for new engine components and participating more in major future development programs. EADS Revenues and earnings on target The European Aeronautic Defence and Space Company (EADS) is the world’s second-largest aerospace and defense enterprise. EADS achieved its revenues and earnings targets for the year 2002 despite difficult mar- ket conditions and governments’ budget constraints. EADS prepares its financial statements according to the International Accounting Standards (IAS), and reported total revenues of 129.9 billion in 2002, 3% lower than in 2001. Earnings before interest and taxes (EBIT before good- will amortization and one-time effects) reached 11.0 billion (2001: 11.1 billion) in the first nine months. This positive result was due to the continuing market success of the company’s products, as well additional cost-cutting measures and synergies from integration. On February 10, 2003, EADS announced that its EBIT for the full year should be slightly higher than its target of 11.4 billion. Incoming orders at EADS totaled 131.0 billion in 2002, once again exceeding revenues. The order backlog of 1168 billion at the end of the year was equivalent to more than five years’ revenues. EADS also expects a further substantial increase in orders in the short term, mainly as a result of recent successes at Airbus and planned defense programs such as the Airbus A400M military transporter, the British Skynet 5 satellite system, and the Meteor guided missile. 50 | Other Activities Major contracts for Airbus in a difficult market At the end of 2002, Airbus had 300 new orders, thereby maintaining its strong market position, equivalent to a market share of 54% in terms of both units and value. Airbus was awarded major contracts by easyJet (for 120 aircraft of the A319 jet) and by FedEx (for 10 freight- version A380 jets). Firm orders for A380 aircraft increased to 95 units in 2002. With 303 planes delivered in 2002, Airbus also achieved its goal of delivering 300 aircraft. On December 31, 2002, there was an order backlog for 1,505 Airbus aircraft, equivalent to full pro- duction capacity for more than five years related to production levels at the end of the year. Success in the defense segment The success of EADS in the defense segment was largely due to orders for missile systems and defense electronics. Mitsubishi Motors Further improvement in earnings Mitsubishi Motors Corporation (MMC), the fourth-largest Japanese automaker, continued to restructure in 2002 and succeeded in increasing sales, revenues and earnings. In the first six months of the financial year ending on March 31, 2003, sales of MMC vehicles were up 8% to 874,000 units (1st half 2001/02: 808,000 units). Unit sales of passenger cars increased to 798,000 during the same period (1st half 2001/02: 736,000). Within these overall numbers, sharp declines in sales in Japan (-10%) and Europe (-8%) were more than offset by substantial increases in North America (+12%) and other markets (+25%). Unit sales of commercial vehicles increased to 76,000 in the first six months of the financial year (1st half 2001/02: 72,000). This was largely due to higher sales in Asia, the Middle East and Africa. Together with its North American partners, EADS was Revenues during the first six months of the financial selected as preferred bidder to supply mission aircraft and radar systems to the US Coast Guard. EADS thus strengthened its long-term competitive position in this strategically important market. Other EADS units developing as planned The Aeronautics unit developed positively in 2002, largely as a result of a solid performance by the Euro- copter helicopter production company. However, due to ongoing market weakness, the Space unit remains problematical. Restructuring and operating-cost control measures within this business will therefore continue to have top priority in 2003. year ending on March 31, 2003 increased by 6% to ¥1,619 billion (113.9 billion), the first rise since 1997. Whereas revenues from worldwide passenger car sales were up 8% to ¥1,276 billion (110.9 billion), a severe contraction in the Japanese market for commercial vehicles made it impossible to equal the previous year’s ¥352.4 billion (1st half 2002/03: ¥342.5 billion = 12.9 billion). The operating profit according to Japanese GAAP of ¥23.5 billion (1201 million) for the first six months of 2002/2003 was ¥36.6 billion (1313 million) higher than in the first half of 2001/02. This improvement was primarily due the progress made with the restructuring program, but also to the growth in revenues. Significant progress with restructuring The restructuring program at Mitsubishi Motors has made significant progress. The earnings improvement target for the first half of fiscal year 2002/03 was significantly exceeded. In June 2002, MMC left the Japanese supplier organization Kashiwa-Kai. That move allowed it to implement a more cost-efficient pro- curement process that can be conducted on a broader international supplier base. MMC therefore expects the 15% savings in material costs targeted for financial year 2003/04 to be achieved sooner than planned. Other Activities | 51 Product offensive ensures future growth In November 2002, MMC launched the new Colt com- pact car in the Japanese market. The initial sales phase for this important new model has to date been successful. After one month of sales, more than 15,000 vehicles had been ordered. The introduction of the new Colt marked the beginning of an extensive product offensive, in which the Mitsubishi brand is to be redefined worldwide with a new distinctive design to attract additional customers. MMC plans to launch some 12 new models in various versions in North America, Europe, Asia and other markets between 2002 and 2007. Intensified cooperation in the alliance On September 20, 2002, the DaimlerChrysler Super- visory Board and the Board of Mitsubishi Motors agreed to further intensify the cooperation between the two companies. As a result, on January 6, 2003, MMC spun off its commercial-vehicle division into a separate com- pany known as Mitsubishi Fuso Truck & Bus Corporation (MFTBC). DaimlerChrysler intends to purchase 43% of MFTBC in March 2003 for approx-imately 1760 million. Mitsubishi Group companies (among them Mitsubishi Corporation, Mitsubishi Heavy Industries, Bank of Tokyo Mitsubishi) will acquire 15% of the new company for approximately 1265 million. The remaining 42% will be retained by MMC. The new company is expected to generate substantial cost and efficiency advantages for both DaimlerChrysler and MFTBC through joint purchasing and sales organizations, consolidation of investments, and the joint development of vehicle chassis, powertrains and other components. The Mitsubishi Colt, launched in November 2002, was the third-best selling car in Japan in the following month. The development of shared platforms also intensified in 2002. The Colt model introduced last November in Japan is based on a common B-segment platform that will also be used in the four-seater smart in 2004. Similar projects are under way between MMC and Chrysler Group for C- and D-segment vehicles. In general, these projects will generate synergies for MMC and Daimler- Chrysler in research and development, procurement and production (see pages 42-43). In September 2002, MMC also signed contracts with DaimlerChrysler dealers in Canada to facilitate its entry into the Canadian market. A similar approach was taken for Mexico in January 2003, and is planned for South Africa and Eastern Europe. DaimlerChrysler has also begun to sell smart cars in Japan through MMC dealers. MMC and DaimlerChrysler have also entered into a production partnership in China, whereby MMC will manufacture the Pajero Sport and the Outlander at Beijing Jeep in China. 52 | Research & Technology Research & Technology Research and development expenditure remains high at 36.2 billion | Focus on refining conventional and alternative drive technologies | Emergency braking system for commercial vehicles unveiled | Significant progress made with driver assistance systems Securing a competitive edge through innovation Innovation is a decisive factor for DaimlerChrysler when it comes to setting ourselves apart from rival manufacturers in the automotive industry. The techno- logical basis for ensuring continual innovation is provided by Corporate Research and the development departments in the divisions. In 2002, DaimlerChrysler invested a total of 16.2 billion (2001: 16.0 billion) in research and development for new products and technologies. On December 31, 2002, a total of 2,600 people (2001: 2,700) were employed at Corporate Research, with a further 24,900 (2001: 25,400) working in the development departments at the Mercedes Car Group, Chrysler Group, and Commercial Vehicles. In 2002, activities at Corporate Research and Technology focused on the following seven technology fields: – Drive technology – Vehicle construction and man-machine interaction – Materials technology – Production technology – Intelligent transportation systems – Software and process technology – Electronics and mechatronics Reducing fuel consumption and vehicle emissions One of the major challenges in safeguarding the future of the automobile is to achieve a sustainable reduction in CO2 emissions, particularly by cutting fuel con- sumption. Given the fact that conventional drive techno- logy – i.e. the internal-combustion engine – is extremely widespread, in 2002 DaimlerChrysler continued to work hard toward meeting targets – some of them self- imposed, some legislative – for reducing fuel consump- tion and vehicle emissions. In this context, the company is conducting extensive research into systems to limit soot particles and other emissions in diesel exhaust. In 2002, we also focused on the continuous enhance- ment of conventional engine technology as well as refining alternative drive systems, in particular starter- generator drives and hybrid and fuel-cell systems (see page 54). Moreover, we intend to consistently utilize lightweight construction techniques in order to reduce vehicle weight as well as wind and roll resistance. In the area of gasoline and diesel engines, our re- search activities focused on improved combustion and fuel injection, new types of supercharger systems, innovative exhaust-emission control systems, and continuously variable transmission technology. We have also been examining the potential of new fuels, including diesel produced from biomass or natural gas. In our opinion, both of these alternatives can make a significant contribution toward the development of more environment-friendly road transport (see pages 56-57). Road safety In order to further increase safety and comfort, we have developed the “Predictive Powertrain,” which combines various trip-related data such as the journey destination, the volume of traffic, the terrain along the route chosen, and the driving style of the person at the wheel. On this basis, the system determines the appropriate engine characteristics, engine speed and gear changes in order to achieve the lowest possible fuel consumption, without any sacrifice in driving comfort. Research & Technology | 53 The automatic emergency braking system, Protector, first gives the driver an acoustic and visual warning of an imminent front-end collision. If he does not react, the system decelerates the truck with maximum braking force. A further example of a system that plans ahead is the “Protector,” an emergency braking system for commer- cial vehicles. Here a radar system alerts the driver to a dangerous situation and then automatically applies the brakes if a collision appears imminent. “Protector” marks the first time that an active braking system which is responsive to its environment has been developed for mass production. The system was awarded a runners- up prize for the German Future Prize, an award presented by Germany’s president in recognition of pioneering technology and innovations. Intelligent controls for relaxed and comfortable driving With the increasing number of controls for the heating, air-conditioning, radio, car phone, navigation system, and the comfort settings for the engine and suspension, the requirement of easy operability is also growing. Given such a broad range of features, it is important that they can be operated intuitively without any unnecessary distraction to the driver. Our new analytical tool ADAM (Advanced Driver Atten- tion Metrics) offers a way of accurately determining the degree to which driver assistance and information systems distract the person behind the wheel. Thanks to ADAM, we can now optimize new control systems at a very early stage of the development process. Such systems include a voice-operated information system known as the “Mobility Butler.” In a natural voice dialog, the “Butler” accepts instructions, carries them out, and helps the driver with a range of tasks. We have already successfully tested an initial “Butler” prototype that helps drivers find a parking space. Customer response to such developments is tested at our newly opened Customer Research Center (CRC) in Berlin-Marienfelde. Here we analyze a range of vehicle components as well as vehicle-related services and the operation of complete vehicles on the road. For exam- ple, in order to ensure the high-quality feel to a vehicle interior that is so typical of our brands, we test cus- tomers’ tactile, visual and auditory responses to vehicle features in specially equipped laboratories. 54 | Alternative Drive Concepts Alternative Drive Concepts Alternative drive concepts are the key to sustainable mobility | Hybrid vehicles use less fuel than conventional drive systems | Start of customer tests for fuel-cell vehicles – a major milestone toward market launch The vision of sustainable mobility From a medium and, above all, a long-term perspective, DaimlerChryler believes that another key to realizing the vision of sustainable mobility lies with alternative drive concepts and the use of new biogenic or regenera- tive fuels (see pages 56-57). One of the pillars of our corporate strategy, which aims at securing a long-term increase in the value of the company, is to strengthen our innovative and technological leadership in drive technology. DaimlerChrysler is therefore working inten- sively to develop hybrid drive and fuel-cell technologies. Enhanced performance with hybrid drive systems For a number of years now, DaimlerChrysler has been developing hybrid vehicles on the basis of several different platforms. During this time, we have show- cased a whole range of hybrid concept vehicles, including the Mercedes-Benz A-Class “Hyper,” the “smart hyper,” the Dodge Durango and the Chrysler Sebring. The hybrid concept offers an intelligent combination of the conventional internal-combustion engine and electric drive technology. In vehicles such as the Chrysler Sebring, as unveiled in April 2002, this can significantly reduce fuel consumption along with substantial improvements in performance. Nevertheless, the complexity of hybrid technology means significantly higher manufacturing costs. So only in exceptional cases, for example the Dodge RAM Contractor Special, can hybrid vehicles be marketed economically. DaimlerChrysler is therefore focusing on lowering the manufacturing costs of hybrids. First fuel-cell vehicles undergo customer tests Since 1994, when the company presented its inaugural fuel-cell concept car, NECAR 1, DaimlerChrysler has developed and tested 20 different prototypes. They have been based on company models ranging from the Mercedes-Benz A-Class to the Jeep® Commander and the Mercedes-Benz Sprinter, and included NEBUS, a fuel-cell bus. In October 2002, DaimlerChrysler unveiled its first fuel-cell vehicles destined for fleet use. The program comprises 30 fuel-cell-powered Mercedes- Benz Citaro city buses and 60 Mercedes-Benz A-Class vehicles. Beginning in 2003, the Citaros will be delivered to transport operators in ten major European cities. The A-Class vehicles, which are easily recog- nizable by their “F-Cell” logos, are to take part in collaborative testing projects with customers around the world, starting in 2003, to find out how they perform in everyday use. The buses will operate in normal service in cities with differing climates and terrain. At the same time, they will introduce this clean and innovative form of transportation to several thousand passengers in Europe every day. The completion of the fuel-cell concept phase at DaimlerChrysler is another milestone on the road to launching this trendsetting drive technology on the market. The field tests are expected to yield important information for the further development of this for- ward-looking technology. Fuel-cell drives are substantially more efficient than internal-combustion engines. As such, they offer great potential for reducing CO2 emissions. Given the radical modifications to the drive concept that this technology entails, it is still in the early stages of what will be a long-term development process. Moreover, the market launch of such vehicles will require the creation of an infrastructure for the supply and distribution of hydrogen or methanol. Mass production is therefore not expected before the next decade. “I am particularly fascinated by the fact that this pioneering technology offers zero-emission mo- bility without fossil fuels,” says Rainer Bickel, responsible for prototyping and testing the Citaro fuel-cell bus. As part of an EU project, in 2003 a total of 30 Mercedes-Benz Citaro city buses will be delivered to customers in ten major European cities and proven in service over a period of two years. The necessary hydrogen infrastructure will be built up and tested in parallel. Energy for the future. www.daimlerchrysler.com/livingbrands 56 | DaimlerChrysler and the Environment DaimlerChrysler and the Environment Reduced environmental impact from vehicle production and operation | Further decrease in total fleet consumption | Project launched to produce diesel and methanol from biomass | Group-wide promotion of environment-protection projects Ongoing process to achieve sustainable mobility and environmental protection Back in 1992, government representatives from 180 countries pledged their support for the concept of sustainable development at the United Nations Confer- ence on the Environment and Development in Rio de Janeiro. Ten years later, an initial assessment of the progress made reveals two significant facts: On the one hand, more effort is still required to realize the vision of enduring environmental protection and sustainable mobility. On the other hand, the last few years have seen significant advances and improvements in many areas. We at DaimlerChrysler have also implemented numer- To reduce the amount of waste paint temporarily stored in basins, ous changes in recent years with a view to significantly reducing the impact on the environment from the pro- duction and operation of our vehicles. Measures already taken include the introduction of certified environmental management systems at our plants and a substantial reduction in emissions resulting from production pro- cesses. We have, for example, reduced specific solvent emissions by up to 80%. At the same time, significantly enhanced efficiency in dealing with resources and greater use of renewable raw materials in vehicle manu- facturing are both helping to ease the burden on the environment. Along with such improvements, we have also achieved a significant cut in fuel consumption and CO2 emissions for our vehicles through measures taken within individual product lifecycles and from one model generation to the next. As a result, the average fuel con- sumption of our entire passenger-car fleet in Germany has fallen by over 22% since 1995. after water and solvents are extracted the solid residue is compressed into pellets. The high-purity methanol that is gained in this way can be used as fuel in internal-combustion engines or fuel cells. Around 40% of the total research budget at Daimler- Chrysler is dedicated to the issues of fuel consumption and emissions. In particular, we are working hard to develop fuel-cell and hybrid drives and to create highly efficient internal-combustion engines (see page 52). Indeed, the internal-combustion engine still has poten- tial for improvement. However, even though renowned environmental organizations regard the level of emissions produced by today’s gasoline engines as extremely low, work remains to be done in the area of fuel consumption. In order to bring about a further reduction in total fleet consumption, it is crucial that the company intro- duce low-consumption models for every vehicle segment. The real challenge here consists of maintain- ing a healthy balance between low consumption on the one hand and continued product appeal on the other. Proof that this can be achieved is offered by the market success of the smart cdi, which is by far the most popular ultra-fuel-efficient vehicle (three liters of fuel per 100 kilometers) in Germany. DaimlerChrysler and the Environment | 57 Renewable fuels – an option for the future Nevertheless, it is clear that efforts to improve the environmental credentials of motor-vehicle traffic must focus on more than just the car itself. Of even greater importance is the optimization of the entire vehicle-fuel complex. In this respect, alternative fuels, and renewable fuels in particular, have an important role to play. Even though oil supplies are set to last well into the medium term, we are naturally also investigating possible alter- natives. As part of the so-called Choren project, we are therefore looking into ways of turning biomass into diesel fuel or methanol. In the coming years, we can expect to see a development in this field similar to what has already occurred with the use of renewable materials in vehicle production. The issue of renewable fuels is also closely linked to the question of drive technology. From a “well-to-wheel” perspective, which is a holistic approach considering all aspects ranging from oil drilling to the drive train, it is already evident that the use of renewable fuels even with conventional combustion engines would make a significant contribution to reducing CO2 emissions. Alongside our core objective, which is the continued enhancement of the efficiency of our drive systems, we therefore actively promote the introduction of envir- onmentally compatible fuels in the market. Promoting innovations in environmental protection In order to boost environmental awareness among our employees, we have been awarding our own “Envi- ronmental Leadership Award” for several years now. This prize, which is presented to company employees or suppliers throughout the world, honors exceptional achievements in the field of environmental protection. At the same time, both the statistics and the sheer range of different projects demonstrate just how firmly environmental protection is rooted in our corporate culture. In 2002 alone, we received more than 100 proposals for environmental improvements from over 50 company locations in a total of eleven countries. – In Valencia, Venezuela, DaimlerChrysler employees teach classes on the subject of environmental pro- tection at ten schools on a voluntary basis. In this way, they are actively helping the company to fulfil its social responsibilities. A total of 37,000 people are involved in related environmental projects. – The amount of special waste produced at the Sindel- fingen plant in Germany has been reduced by 99%, resulting in savings of nearly 135 million. This exam- ple shows that innovative methods of reducing waste support the achievement of both ecological and economic objectives. – By exploiting the gas that previously went unused at a nearby waste disposal site, the heating station at the Chrysler plant in St. Louis, Missouri, has been able to cut annual CO2 emissions by 15,000 tons while saving more than 1300,000. The breadth of our commitment to environmental pro- tection has also received international recognition. At the Johannesburg Environmental Summit in Septem- ber 2002, for example, DaimlerChrysler was presented with the “World Summit Business Award.” The com- pany’s dedication to this issue is also one of the reasons why we are listed on the Dow Jones Sustainability Index. 58 | Global Procurement & Supply Global Procurement & Supply Total purchasing valued at 3102.1 billion | New organization for global procurement | Significant reduction in variety of components Continued implementation of global procurement management In 2002, DaimlerChrysler purchased goods and services valued at 1102.1 billion (2001: 1106.5 billion). For the automotive divisions alone, Global Procurement & Supply (GP&S) purchases were worth 199.8 billion (2001: 1101.2 billion). Due to stronger competition between suppliers, GP&S aligned its organization and processes to enhance global coordination, and to accelerate the internal transfer of knowledge and technology. These measures are designed to optimize the global supply base. Global procurement focused on efficient suppliers Intense competition within the automotive industry and the increasing complexity of vehicles mean heavier demands on suppliers. The selection of cost-efficient suppliers and the utilization of economies of scale are thus becoming increasingly important. DaimlerChrysler purchased about 40% of its goods and services in Germany during the period under review, and a further 8% in other countries of the European Union. North America’s share was around 48%. Due to the sharper focus on Asian markets, we are also intensively analyz- ing the potential for more procurement there. In 2002, approximately 700 online bidding events were processed via the Covisint Internet platform. Covisint, a company whose shareholders include DaimlerChrysler and several other automobile manu- facturers, provided the required technology and carried out the bidding procedures. This underscores the increasing importance of online bidding as an efficient procurement instrument. New organization and processes for global procurement In order to achieve cost savings combined with im- proved quality for non-production material (goods which do not flow into our products, but which are needed for their production, such as machines), the new Inter- national Procurement Services (IPS) organization has been formed, so that materials with global synergy potential are purchased by just one department. GP&S also implemented a lead-buyer model for pro- duction material (goods which flow directly into the products, such as steel, paint or tires) so as to enhance communication and coordination among the procure- ment departments of Mercedes Car Group, Chrysler Group and the Commercial Vehicles division. The lead buyers oversee the procurement of certain materials and parts, worldwide, in cooperation with the buyers for each vehicle brand. This reorganization of GP&S represents a major milestone in leveraging DaimlerChrysler’s purchasing power more effectively and managing resources globally. Standardized information technology and processes To facilitate the work of the new organization, processes were standardized and a common commodity coding system was established for all parts and components to be purchased. Based on state-of-the-art information technology, existing procurement systems across all GP&S operations were integrated to enable a global flow of information. A data warehouse provides the detailed information needed for worldwide commodity management. Global Procurement & Supply | 59 Reduced variety of parts due to concentration in material groups Within the context of the commodity strategies initiated by the Executive Automotive Committee (EAC), we also grouped together suppliers with identical or similar product ranges and defined groups of common parts or materials. With an optimized supply base Daimler- Chrysler can increase purchases from its best-perform- ing suppliers and lower their costs as well. By defining common commodities, significantly higher volumes of single parts or materials can be purchased. This also creates economies of scale for our suppliers. In order to protect our brands, only those components which are of minor importance for brand identity are selected for such grouping (see pages 42-43). Implementation of the commodity strategies Within the framework of implementing our commodity strategy we took the following decisions in 2002: In the past, DaimlerChrysler used 14 different steer- ing pumps in its various vehicles. Investigations have shown that it is possible to reduce this number, so that by 2006 just three versions will be needed. This standardization will also result in a smaller number of suppliers. One common tire-pressure sensor is to be developed from the three existing components. The new design will meet the needs of Mercedes Car Group, Chrysler Group and Mitsubishi Motors, our alliance partner, in terms of electrical, temperature and system require- ments. In addition, substantial savings will be made by reducing the variety of valve designs and by standar- dizing rear-wiper motors. In the future, identical motors will be used in several vehicle lines. We have also been able to use price transparency in exhaust systems in one business unit to eliminate price differentials elsewhere. Substantial savings potential from combined procurement: In the future, only one type of sensor will be used worldwide to measure tire pressure. Yet another example is an agreement among the Mercedes-Benz Trucks and Freightliner/Sterling/ Thomas Built Buses business units to use identical air-conditioning compressors in some of their vehicles. And together with the development departments we are currently analyzing whether Mercedes-Benz radiators can be fitted to Freightliner trucks. In order to achieve even greater cost savings for future models and vehicle series, we hold frequent work- shops in which know-how is pooled and new ideas are generated. 60 | DaimlerChrysler’s Social Responsibility DaimlerChrysler’s Social Responsibility for acting responsibly at all of our company’s locations. They augment DaimlerChrysler’s own guidelines through which we have committed ourselves in writing to equal opportunities, health care and work safety, protection of the environment, and the Integrity Code (see page 153). For the Global Compact to succeed, all employees have to be committed to its objectives. DaimlerChrysler and its newly established World Employee Committee are cooperating closely to achieve this goal. Reflecting our commitment to social responsibility, we support social, humanitarian, cultural, environmental and scientific projects worldwide. The company donates money in emergencies, sponsors projects of public benefit and supports various foundations. With all of our social involvement we show that we care. It is a principle that guides all of our social activities. DaimlerChrysler assumes social responsibility worldwide | Support for social, humanitarian, cultural, ecological and scientific projects | Support for the principles of the UN’s Global Compact | Commitment to reducing HIV/AIDS in South Africa | Publication of first social-responsibility report DaimlerChrysler – global player and good corporate citizen As an automotive and services company operating globally, DaimlerChrysler is part of a larger community. We are aware of our social responsibility at every location where we do business – and in the world as a whole. Our customers’ acceptance of our products and services makes it possible for us to make positive contri- butions for the benefit of the environment and society all over the world. DaimlerChrysler endeavors to create a better future by working closely with decision-makers in politics, business and society at large. Principles underlying our actions: the Global Compact and the Integrity Code DaimlerChrysler believes people everywhere should benefit from globalization, no matter where they live. We therefore support the Global Compact initiated by UN Secretary General Kofi Annan. The principles con- tained in the Global Compact also constitute guidelines Principles of the “Global Compact” Human Rights 1. Businesses should support and respect the protection of internationally proclaimed human rights within their sphere of influence; and 2. make sure they are not complicit in human rights abuses. Labour 3. Businesses should uphold the freedom of association and, the effective recognition of the right to collective bargaining; 4. the elimination of all forms of forced and compulsory labour; 5. the effective abolition of child labour; and 6. eliminate discrimination in respect of employment and occupation. Environment 7. Businesses should support a precautionary approach to environmental challenges; 8. undertake initiatives to promote greater environmental responsibility; and 9. encourage the development and diffusion of environmentally friendly technologies. Sprinter for the main meal of the day. On behalf of various charities, the “Table Service” organization collects donated food every day and distributes it to the needy in the form of a warm lunch. So that they can do this work, DaimlerChrysler has provided 100 Mercedes-Benz Sprinters free of charge for this table service. www.daimlerchrysler.com/markenerlebnis 62 | DaimlerChrysler’s Social Responsibility DaimlerChrysler: a good corporate citizen The company’s support of the World Childhood Foun- dation (WCF) is just one example of DaimlerChrysler’s committment to improving living conditions worldwide, and of the seriousness with which the company takes its responsibilities as a good corporate citizen. DaimlerChrysler is one of the co-founders of this charitable organization initiated by Sweden’s Queen Silvia, and has supported its work with a donation of 11 million. The WCF looks after destitute street children who have been sexually abused and who would other- wise have virtually no chance of ever living a decent life. The Foundation currently helps needy children in 37 projects worldwide. It is not just the company but also its employees who Jane Alexander, “African Adventure” (1999-2002); Last year, the “African support this project: During their free time, approxi- mately 600 DaimlerChrysler employees from 14 music ensembles simultaneously staged benefit concerts on behalf of the WCF at eleven locations throughout Germany. Responsibility for employees: the fight against HIV/AIDS The acquired immune-deficiency syndrome, AIDS, is the most common cause of death in many countries, includ- ing South Africa. As a result, the company loses many highly skilled employees. As part of its Workplace Initiative on HIV/AIDS, DaimlerChrysler South Africa is providing medical care for those who need it as well as information on the disease and on methods to prevent it from spreading. Other members of this public-private project are the South African government, the German Society for Technical Cooperation (GTZ), trade unions and various international organizations such as UNAIDS. Protecting employees and their families against AIDS has top priority at DaimlerChrysler. The company was honored by the United Nations for its efforts in combating AIDS when UN Secretary General Kofi Annan presented the Award for Business Excellence in the Workplace to CEO Jürgen E. Schrempp in June 2002. Jürgen E. Schrempp was also appointed chairman of the Global Business Coalition on HIV/AIDS. Adventure” sculpture installation was shown outside South Africa for the first time in exhibitions of the artist’s work at DaimlerChrysler’s premises in Stuttgart and Berlin. In recognition of her outstanding artistic achievement, Jane Alexander was given the “DaimlerChrysler Award for South African Sculpture 2002”. Intercultural exchange The need for greater intercultural understanding and dialogue is one of the most pressing challenges of our time, and DaimlerChrysler considers it a social and corporate responsibility to promote cultural exchange among people of different backgrounds. The New York–Berlin bridge Following the terrible events of September 11, 2001, German Chancellor Gerhard Schröder initiated a program that enabled 1,000 New York teenagers aged 16 to 18 to tour Germany. DaimlerChrysler took a leading role in this project, which was designed to provide young people with an insight into German culture and society. A picture is worth a thousand words In addition to sponsoring talented young musicians and numerous orchestras, DaimlerChrysler also supports the fine arts. For example, DaimlerChrysler sponsors numerous cultural and art events in Germany and the United States. DaimlerChrysler’s own art collection is regularly exhibited to employees and the public. In South Africa DaimlerChrysler awarded a prize to young artists, whose work was subsequently exhibited in Germany. DaimlerChrysler’s Social Responsibility | 63 In 2002, the DaimlerChrysler Corporation Fund provided financial support for “Degas and the Dance,” an extra-ordinary exhibition at the Detroit Institute of Arts of masterpieces by the Impressionist artist, Edgar Degas. The paintings, drawings and sculptures in this unique exhibition were loaned by 97 art collections in eleven countries. First DaimlerChrysler social-responsibility report In order to better present the many social projects sponsored by DaimlerChrysler, the company published its first social-responsibility report in November 2002. “Social Responsibility – A Commitment to the Future”, which can also be downloaded from the Internet at www.daimlerchrysler.com, provides in-depth information on our efforts to improve opportunities for young people, promote dialogue and cooperation with univer- sities and training centers, support social initiatives, promote environmental-protection projects, and sponsor the arts and culture throughout the world. It also describes DaimlerChrysler’s activities in this field at several locations where the company does business. Mobility: road safety for everyone As an automaker, DaimlerChrysler is especially con- cerned with traffic safety. Thanks to a number of tech- nical innovations ranging from the airbag to the night vision system, the company is close to realizing its vision of “accident-free driving.” In addition, we want everyone – and children and teenagers in particular – to know how to behave properly in traffic situations. In addition to our participation in the Global Road Safety Partnership in conjunction with the World Bank, DaimlerChrysler initiates its own projects. One of them, the “Fit for a Kid” project in the United States, shows parents how to properly install and use child-safety seats. The global MobileKids project meanwhile provides children between eight and twelve with traffic- safety information. The international “Mobile Kids” project teaches children between the ages of eight and twelve to use their bicycles, skateboards and kickboards with more awareness and safety. Technology and innovation DaimlerChrysler sets great importance in attracting qualified young professionals to work in research and technology, so we try to contact young people at an early stage in their career. The best known competition for up-and-coming scientists in Germany is “Young Researchers”, in which DaimlerChrysler offers the Prospects Forum for national winners and runners-up. DaimlerChrysler also believes it has a social responsibility to encourage dialogue among universities, the business community, and up- and-coming scientists and researchers. DaimlerChrysler is convinced that the prospects for technical professions are excellent, and therefore the company was actively involved in Baden-Württemberg’s Young Women’s Technology Day 2002 for female students from grades nine through twelve. The company was one of its main sponsors and offered a program of its own as well. DaimlerChrysler’s involvement in such projects is designed to interest young women in a career in technology, an area where they are traditionally underrepresented. 64 | Human Resources so-called flexi-pools, working-time accounts, new shift models, working-time budgets, and the use of temporary employees in the holiday season. Together such mea- sures introduce an element of flexibility equivalent to around +/- 25% of the company’s capacity in Germany, enabling it to respond rapidly to fluctuations in demand with little effect on costs. The introduction of long-term working-time accounts in Germany launched yet another innovative and forward-looking instrument for achieving greater flexibility. With the help of these measures taken to increase flexibility, the company was able to maintain approximately 3,000 jobs in the year 2002. Against a background of continuing uncertainties regarding market developments, DaimlerChrysler plans to further intensify its activities in this area. Employee stock program successful in 2002 The employee stock program was restructured in 2001 to allow employees to purchase a total of 90 shares per year in three purchasing rounds (30 shares per round). In 2002, around 45,300 employees participated in the three purchasing rounds (2001: 44,600), bringing the total number of employee stockholders at year-end 2002 to 126,000. Employee shares are an important instrument for us to encourage employee retention and to allow employees to participate more directly in the company’s success. Human Resources Continued implementation of global human resources strategy | 365,571 employees worldwide (2001: 372,470), decrease mainly at Chrysler Group and Commercial Vehicles | Greater flexibility to adapt to fluctuations in demand 365,571 employees worldwide At December 31, 2002, DaimlerChrysler employed 365,571 people worldwide (2001: 372,470). Of this total, approximately 191,574 worked in Germany (2001: 191,158), and 101,437 in the United States (2001: 104,871). The decrease in the size of the Group’s workforce was the result not only of staff reductions connected with the measures taken at Chrysler Group to reduce costs and increase efficiency, but also of the sale of production facilities such as in Graz, Austria, and of the restructuriing activities at the Commercial Vehicles division. Overall, the total number of employees was reduced by 6,900 during 2002. Responding flexibly to fluctuations in demand. DaimlerChrysler is taking various measures to increase its flexibility to respond to fluctuations in demand, while maintaining its permanent core workforce. These measures include adjusting employee numbers (work- force flexibility) and employees’ working hours (working- time flexibility) to actual requirements by means of Employees (Dec. 31) DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Services Other 1 2002 2001 365,571 101,778 95,835 94,111 42,142 10,521 21,184 372,470 102,223 104,057 96,644 38,733 9,712 21,102 1 MTU Aero Engines, Corporate Research department, real-estate activities, and holding and finance companies We are the Berlin-Marienfelde facility. The oldest production plant in the DaimlerChrysler Group offers its em- ployees, from apprentices to production manager, the right opportunities for individual development. The outstand- ing levels of qualification and motiva- tion of the Berlin workforce, combined with their wealth of ideas and flexi- bility, have been a decisive factor for the success of the plant for 100 years. www.daimlerchrysler.com/livingbrands 66 | Human Resources World Employee Committee established In 2002, the management of the Group in consultation with international employee representatives founded the World Employee Committee, an important information and discussion panel for worldwide employment issues. Mutual understanding and good working relationships facilitate further progress with the global linkage of our activities. e-business activities further expanded DaimlerChrysler has continuously expanded its e-business activities at Human Resources in recent years. In this context our employees are gradually being introduced to internal e-business applications. This accelerates and simplifies internal processes and allows direct interaction. All employee-related e-business applications are consolidated in the DCeLife program. The Employee Portal, which is the individual employee’s personal gateway to DC eLife, provides information to employees at all DaimlerChrysler locations in Germany, as well as handling working processes and personal applications. The electronic travel service, for example, brings together 70 travel agencies in a virtual Travel Service Center that registers approximately 180 online bookings per day. In addition, the ePeople project has standardized web-based personnel management processes and established an online network for human resources departments throughout Germany. The first ePeople applications have been successfully introduced. We intend to gradually make our e-business applications available at our locations worldwide. Comprehensive executive assessment with LEAD In 2002, we continued to develop our global executive assessment and development instrument, LEAD (Leadership Evaluation And Development). LEAD is designed to identify management potential in a timely manner, promote talent, and ensure that the company’s management requirements will be met over the long term. In 2002, the LEAD process generated a comprehensive overview of global potential at DaimlerChrysler and identified a large number of high-potential managers at all levels, thus enabling the Group to meet its future needs for specialists and executive staff and offering attractive career prospects to our employees. The LEAD process was also instrumental in the recruitment of an international team for Asia in 2002. In 2003, LEAD will be expanded to include master craftsmen and non- managerial salaried employees, so that persons with potential can be systematically identified and promoted at an earlier stage. Attracting young professionals and graduates Last year, DaimlerChrysler cooperated closely with numerous colleges and universities in order to recruit young, talented professionals to the company. These recruitment efforts focused primarily on university graduates and young professionals with a technical background. Various events, such as the International Engineers Day, the Passenger Cars Development Career Workshop, and the Women’s Career Workshop, enabled potential recruits to gain a practical insight into the inner workings of the company. In addition, customized job-entry and employee-development programs will ensure the successful integration of the approximately 2,400 young people we hired around the world in 2002. Training and continuing education to meet future demands Training and continuing education are crucial to business success. For this reason, DaimlerChrysler invested some 1310 million in training and further education programs in 2002. Experienced employees are also prepared for the constantly changing demands that are placed upon them, in line with the philosophy of lifelong learning. At the end of the year, the company had 10,300 trainees in Germany (2001: 10,400). A thank you to our staff We would like to thank all our employees for their initia- tive, commitment and achievements. We are convinced that the ability, enthusiasm and energy of our emp- loyees will enable us to continue our successful deve- lopment in the future. We also extend our thanks to the employee representatives for their constructive cooperation. Financial Reporting | 67 Financial Reporting 68 | Analysis of the Financial Situation 114 | Notes to Consolidated Balance Sheets 68 | Operating Results 73 | Performance Measures 114 | Goodwill 114 | Other Intangible Assets 75 | Financial position and Cash Flow 115 | Property, Plant and Equipment, net 78 | Risk Report 115 | Equipment on Operating Leases, net 83 | Events after the end of the 2002 financial year 115 | Inventories 84 | Statement by the Board of Management 115 | Trade Receivables 85 | Independent Auditors’ Report 115 | Receivables from Financial Services 86 | Consolidated Statements of Income (Loss) 116 | Other Receivables 88 | Consolidated Balance Sheets 116 | Securities, Investments and Long-Term Financial Assets 89 | Consolidated Statements of Changes in 118 | Liquid Assets Stockholders’ Equity 118 | Prepaid Expenses 90 | Consolidated Statements of Cash Flows 118 | Stockholders’ Equity 92 | Consolidated Fixed Assets Schedule 120 | Stock-Based Compensation 94 | Notes to Consolidated Financial Statements 123 | Accrued Liabilities 94 | Basis of Presentation 128 | Financial Liabilities 94 | Summary of Significant Accounting Policies 129 | Trade Liabilities 102 | Scope of Consolidation 103 | Equity Method Investments 129 | Other Liabilities 129 | Deferred Income 104 | Accquisitions and Dispositions 130 | Other Notes 106 | Notes to Consolidated Statements of Income (Loss) 130 | Litigation and Claims 106 | Functional Costs and Other Expenses 132 | Commitments and Contingencies 107 | Other Income 133 | Information About Financial Instruments and Derivatives 108 | Turnaround Plan for the Chrysler Group 136 | Retained Interests in Sold Receivables and Sales of 109 | Financial Income, net 110 | Income Taxes Finance Receivables 138 | Segment Reporting 112 | Cumulative Effects of Changes in Accounting 140 | Earnings (Loss) per Share Principles 141 | Related Party Transactions 113 | Extraordinary Items 142 | Compensation and share ownership of the members of the Board of Management and the Supervisory Board and further additional information concerning German Corporate Governance Code 68 | Analysis of the Financial Situation Analysis of the Financial Situation Group operating profit 36.9 billion (2001: 31.3 billion operating loss); adjusted for one-time effects operating profit of 35.8 (2001: 31.3) billion | Substantial improvement in earnings despite difficult market conditions worldwide | Significant progress in implementation of turnaround plans at Chrysler Group and in the Freightliner, Sterling and Thomas Built Buses business unit | Balance sheet particularly impacted by exchange rate effects and the recording of pension accruals | Cash flows impacted by improved earnings and disposal gains 1. Operating Results Operating profit up significantly despite global market weakness In 2002, DaimlerChrysler recorded an operating profit of 16.9 billion, compared with an operating loss of 11.3 billion in the previous year. Gains on the sale of our investments in T-Systems ITS (formerly debis Systemhaus) and Conti Temic microelectronic (formerly TEMIC) totaling 12.6 billion had a positive impact on operating profit for 2002. One-time expens- es totaling 11.6 billion which mainly resulted from restructur- ing measures taken at the Chrysler Group and in the Commer- cial Vehicles segment (11.0 billion) and from impairments on long-lived assets in the Commercial Vehicles segment (10.2 billion), had a negative impact on operating profit for 2002. The Services segment incurred costs of 10.4 billion in connec- tion with the intended sale of portions of the Capital Services portfolio (financial services activities outside the automotive sector) and as a result of the decision of the Argentine govern- ment to reform its financial system and monetary policy. Operating Profit (Loss) by Segments In millions Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Eliminations DaimlerChrysler Group Adjusted for one-time effects 2002 US $ 3,167 639 (360) 3,208 947 (414) 7,187 6,112 2002 3 3,020 609 (343) 3,060 903 (395) 6,854 5,829 2001 3 2,951 (5,281) (514) 612 1,181 (267) (1,318) 1,345 Note: The chapters “Business Review”, “Analysis of the Financial Situation” and “Outlook” correspond to the consolidated business review report of DaimlerChrysler Group based on the Financial Statements compiled according to generally accepted accounting princi- ples in the United States of America (U.S. GAAP). Additional one-time expenses in 2002 of 128 million resulted from the impairment of an e-business investment, which affected the Chrysler Group and Commercial Vehicles seg- ments. Operating loss of the previous year was negatively impacted by one-time charges totaling 12.7 billion. The one-time effects affecting operating profit in the 2002 and 2001 financial years for each segment are presented in the table on page 69. Adjusted to exclude these one-time effects, operating profit in 2002 was 15.8 billion, up considerably compared to the previous year (11.3 billion). Chrysler Group accounted for a significant portion of this increase in operating profit, which was achieved despite difficult global market conditions. The positive impacts from Chrysler Group were principally caused by the performance improvement measures initiated in 2001. The other segments also increased their profit contributions over the previous year’s levels. Operating profit of Mercedes Car Group up on previous year The operating profit of the Mercedes Car Group segment was 13.0 billion in the current year, a slight increase compared to the previous year. In the 2002 financial year, the segment generated unit sales of 1,232,300 units and revenues of 150.2 billion, which exceeded the previous year’s unit sales (+ 0.2%) and revenues (+ 5.2%) despite the overall decline of the global market. With 2002 global unit sales of 1,110,000 vehicles, the Mercedes-Benz passenger cars brand nearly matched the high unit sales level of the previous year (1,113,500 vehicles). The slight decline in unit sales was accompanied by an increase in expenditures attributable to investments in connection with the S-Class facelift and the second product initiative. The second product initiative was successfully continued in 2002 with the market launch of the new E-Class sedan and the CLK coupe in the first six months of 2002. However, these negative impacts on operating profit were more than offset by further increases in efficiency and an improved product mix, which resulted from the launch of the new E-Class and the CLK coupe. smart reduced its operating loss from 2001 to 2002, largely through unit sales increases from 116,200 to 122,300 vehicles. The rise in unit sales was largely due to positive market acceptance of the smart city-coupe and the smart con- vertible, as well as the full availability of the right-hand drive version in the UK. Development costs for the smart roadster and the smart roadster coupe, both of which are scheduled for Analysis of the Financial Situation | 69 launch in April 2003, and for a new four-seater (forfour) being designed and manufactured in collaboration with Mitsubishi Motors, which is scheduled for launch in 2004, had a negative impact on operating profit. Positive operating results posted at Chrysler Group Chrysler Group achieved an operating profit of 10.6 billion in 2002 compared to an operating loss of 15.3 billion in the prior year. The 2002 operating profit includes restructuring charges of 10.7 billion while the 2001 operating loss includes restruc- turing charges of 13.1 billion resulting from the turnaround plan implemented in February 2001 in response to an increas- ingly competitive and weakening US automotive market. The turnaround plan is designed to improve Chrysler Group’s financial performance and market position. The restructuring One-Time Effects included in Operating Profit (Loss) by Segments In millions Mercedes Car Group Impairment charges Chrysler Group Turnaround plan Impairment charges Commercial Vehicles Restructuring charges Impairment charges Services Gains on disposals of business Impairment charges Economic crisis in Argentina Other Activities Dilution gains and gains on disposals of businesses Restructuring charges Impairment charges 2002 US $ – – (742) (728) (14) (544) (276) (268) 2,198 2,605 (295) (112) 163 163 – – 2002 3 – – (708) (694) (14) (519) (263) (256) 2,096 2,484 (281) (107) 156 156 – – 2001 3 (10) (10) (3,098) (3,064) (34) (565) (534) (31) 34 292 (166) (92) 976 1,335 (351) (8) DaimlerChrysler Group 1,075 1,025 (2,663) Operating Profit (Loss) adjusted for One-time Effects In millions Industrial Business Financial Services DaimlerChrysler Group 2002 US $ 5,073 1,039 6,112 2002 3 4,838 991 5,829 2001 3 782 563 1,345 charges in 2001 primarily related to workforce reductions, asset write-downs and contract cancellation costs. The addi- tional restructuring charges recognized in 2002 were for costs associated with the idling, closing or disposal of certain manu- facturing facilities and ongoing workforce reduction measures as well as revisions of estimates based upon information currently available or actual settlements. The operating profit in 2002 also includes impairment charges of 114 million while the operating loss in 2001 includes impairment charges of 134 million allocated to Chrysler Group relating to Daimler- Chrysler’s e-business activities. Adjusted to exclude one-time effects, the 2002 operating profit amounted to 11.3 billion (2001: 12.2 billion loss). This significant improvement was primarily the result of cost reduc- tions and other actions taken as part of the turnaround plan, lower customer satisfaction costs and increased shipments, partially offset by net vehicle price reductions. The net vehicle price reductions are the result of higher vehicle pricing which was more than offset by higher sales incentives attributable to intense competitive pressures in the North American market. Consistent with industry patterns, US dealer inventory levels rose from 442,000 units at December 31, 2001 to 517,000 units at December 31, 2002. The Chrysler Group market share in the US and Canada decreased slightly in 2002 compared to 2001. Improved earnings in the Commercial Vehicles segment through rigorous restructuring The Commercial Vehicles segment posted an operating loss of 10.3 billion for the current year (2001: 10.5 billion). Due principally to the continued weakness of the global commer- cial vehicle markets, personnel restructuring measures were initiated in the Mercedes-Benz Trucks, DaimlerChrysler Power- systems and DaimlerChrysler Buses and Coaches business units in 2002, which resulted in one-time charges of 10.3 billion. These charges also include exit costs of a production plant in Mannheim. The restructuring program at the Freight- liner, Sterling and Thomas Built Buses business unit, initiated in the previous year, resulted in further charges in 2002. In addition, impairment charges of 10.2 billion were incurred in connection with the partial sale of a subsidiary as well as with a change in the long-term product and production strategy. 70 | Analysis of the Financial Situation The operating loss of 10.5 billion in the previous year was negatively impacted by one-time expenses of 10.6 billion, which were largely due to restructuring measures and costs incurred in connection with weak market developments in the Freightliner, Sterling and Thomas Built Buses business unit. Adjusted to exclude one-time effects, operating profit in the Commercial Vehicles segment was up 10.1 billion to 10.2 bil- lion despite the weak market development in Western Europe and South America. Increased sales realized in anticipation of the introduction of new emission standards in the United States led to higher revenues and improved profit margins which nearly compensated for the weak demand in the truck markets. In addition, the restructuring measures implemented at Freightliner, Sterling and Thomas Built Buses significantly contributed to the improvement in operating profit, much ear- lier than anticipated, whereas the difficult market environment prevented the other business units from approximating the operating profit levels of the previous year. Earnings trend for Services positively impacted by favorable refinancing conditions In 2002, the Services segment recorded an operating profit of 13.1 billion (2001: 10.6 billion). The operating profit was impacted by one-time effects in both years. The 2002 operating profit included a one-time gain of 12.5 billion from the sale of our 49.9% equity interest in T-Systems ITS to Deutsche Telekom. In contrast, the continued economic crisis in Argentina (further devaluation of the Argentine peso against the US dollar) led to one-time expenses totaling 10.1 billion. Additional expenses of 10.3 billion resulted from write- downs of lease receivables and impairments of certain leased assets recognized in connection with portions of the Capital Services portfolio (financial services outside the automotive sector) sold or held for sale. Operating profit of the previous year was positively impact- ed by the sale of the remaining 10% investment in debitel to Swisscom, which resulted in a gain of 10.3 billion. The Argen- tine government’s restructuring of its finance and banking industry resulted in one-time expenses of 10.1 billion in 2001. In addition, in connection with an agreement to sell a portion of the Capital Services portfolio to GE Capital that was con- cluded in early 2002, 10.2 billion of expenses were incurred, which were included in the results for the 2001 financial year. Adjusted to exclude one-time effects, the operating profit in 2002 amounted to 11.0 billion, which was significantly higher than the operating profit of 10.6 billion for the previous year. The improvement in earnings was largely due to favorable refi- nancing conditions arising from continued low interest rates in our key markets and improved re-marketing management for returned leased vehicles, particularly in the United States. In addition, despite deteriorating economic conditions, provi- sions for credit losses decreased resulting in an improvement in operating profit. This decrease is mainly attributable to lower provisions for credit losses in the United States for the leasing and financing business of Chrysler Group and Freight- liner vehicles. The lower provisions for credit losses in the United States were partially offset by higher provisions for credit losses mainly in Europe and Mexico, in particular relat- ing to the commercial vehicles portfolio. Also offsetting the overall decrease in risk provisions were impairment charges of 10.3 billion due to declining resale prices of used passenger cars in North America. The operating profit was also negative- ly impacted by a loss of 10.1 billion related to the 35% equity method investment in debis AirFinance. Additionally, this investment debited the Other Activities segment with 118 million. Improved profit contributions of EADS and Mitsubishi Motors in Other Activities Other Activities comprises the investments in the European Aeronautic Defence and Space Company EADS N.V. (“EADS”) and Mitsubishi Motors Corporation, both of which are accounted for using the equity method of accounting. In addi- tion, the MTU Aero Engines business unit, the holding and finance companies, the real estate activities and central corporate research are included in this segment. The Rail Systems (Adtranz) and Automotive Electronics (TEMIC) business units were part of this segment through the date of their respective sales. The 10.9 billion operating profit of Other Activities in 2002 was down from the previous year’s level of 11.2 billion. A gain of 10.2 billion was recognized in April 2002 in connection with the sale of the 40% equity interest in Conti Temic micro- electronic and its associated activities (formerly TEMIC). In the previous year, operating profit was positively im- pacted by the Group’s equity method share of the gain arising at EADS in connection with their formation of Airbus SAS (10.9 billion), the sale of 60% of the Group’s interest in TEMIC to Continental AG (10.2 billion) and the sale of the Rail Systems business unit (10.3 billion). The positive effect of these transactions was partially offset by the Group’s equity method share of the impact of the restructuring program (10.4 billion) initiated at Mitsubishi Motors in 2001. Analysis of the Financial Situation | 71 Adjusted to exclude the one-time effects noted above, operat- ing profit increased significantly by 10.5 billion to 10.7 billion in 2002. impact on financial results. Due to the economic and currency crisis in Argentina, 10.1 billion of expenses were recognized in other financial income in 2001. As a result of more efficient management of resources, further cost reductions, increased synergy effects, and the continuing market success of its products, EADS contributed to the improvement in operating profit in 2002, despite continued economic declines, by maintaining sales within the civil aviation market. Mitsubishi Motors recorded a significantly higher operating profit, primarily due to the continued implementation of their restructuring plan and increased revenues in Europe and North America. In the Japanese market, revenues continued to decline. MTU Aero Engines could not reach the 2001 operating profit level due to the difficult markets for industrial gas tur- bines and civil-aviation engines. Eliminations in the operating profit Operating profit eliminations increased from 2001 to 2002 primarily due to the expansion of leasing operations in Ger- many and the increase of inventory financing of European dealers. From a group perspective, the profits generated from increased vehicle deliveries between the segments were unrealized and thus eliminated. Financial result characterized by gains from sales In 2002, the financial result was 12.2 billion, considerably higher than the previous year (10.2 billion). The financial results of both years were considerably influenced by one- time effects. In 2002 gains from the sales of investments in T-Systems ITS and Conti Temic microelectronic, totaling 12.6 billion, contributed to the increase in income from investments. One-time expenses of 128 million resulted from an impairment of an investment in an e-business company of the Group. The financial result of the previous year was positively impacted by one-time effects totaling 10.7 billion. Income from investments included one-time gains recognized in connection with the establishment of Airbus SAS at EADS and from the sale of the remaining 10% interest in debitel to Swisscom. The Group’s equity method share in the loss of Mitsubishi Motors, which was negatively impacted by restruc- turing charges, and expenditures related to impairments within the e-business activities of the Group had a negative Adjusted to exclude the one-time effects noted above in both years, the 2002 financial result increased by 10.2 billion to financial expense of 10.3 billion compared to the previous year. Results from investments rose by 10.5 billion to income of 10.1 billion, primarily due to the improved earnings situa- tion at EADS and Mitsubishi Motors, which are accounted for using the equity method. Other financial result fell by 10.3 billion to an expense of 10.1 billion due to lower income from sales of securities. Net interest expense of 10.3 billion, was down slightly from the previous year. The effects on operating profit of the operating investments were allocated to the respective segment’s operating profit. In 2002 this resulted in a positive overall contribution to ope- rating profit of 10.5 billion, of which 10.8 billion related to the investments in EADS and Mitsubishi Motors. Other invest- ments reduced the operating profit by 10.3 billion. These operative investments negatively impacted the financial result by a total of 128 million. Income taxes In 2002, the Group recorded income tax expense of 11.2 billion, compared with an income tax benefit of 10.8 billion in the previous year. Based on the earnings before income taxes of 16.1 billion (2001: 11.5 billion loss before income taxes), the effective tax rate was 19.4% compared with the previous year’s rate of 52.4%. The low effective tax rate in 2002 was principally due to the tax-free sale of the investments in T-Systems ITS and Conti Temic microelectronic. The high tax rate in 2001 was due to the pre-tax loss report- ed in 2001 combined with the tax-free sales of the remaining debitel shares, the Rail Systems business unit, and 60% of the Group’s interest in TEMIC. Because of the pre-tax loss report- ed in 2001, the tax-free gains realized in 2001 had the effect of increasing the effective tax rate. Additional information on income taxes can be found in Note 9 to the Consolidated Financial Statements. 72 | Analysis of the Financial Situation Consolidated Statements of Income (Loss) In millions Revenues Cost of sales 2002 US $ 2002 3 2001 3 156,838 149,583 152,873 (127,348) (121,457) (128,394) Selling, administrative and other expenses (19,180) (18,293) (18,331) Research and development (6,365) (6,071) Other income 830 792 (5,933) 1,212 Reconciliation Operating Profit (Loss) (728) (694) (3,064) In millions Turnaround plan expenses – Chrysler Group Income (loss) before financial income Financial income, net Income (loss) before income taxes Income taxes Minority interests Income (loss) before extra- ordinary items and cumulative effects of changes in account- ing principles Extraordinary items – gains on disposals of businesses, net of taxes Cumulative effects of changes in accounting principles: transition adjustments resulting from adoption of SFAS 142 Net income (loss) Net income (loss) adjusted for one-time effects 1 4,047 2,315 6,362 (1,233) (15) 3,860 2,208 6,068 (1,177) (14) (1,637) 154 (1,483) 777 44 5,114 4,877 (662) – – (167) 4,947 (159) 4,718 – – (662) 3,490 3,329 730 1 2002: Further restructuring charges in connection with the turnaround plan at Chrysler Group, restructuring measures and impairment charges in the Commercial Vehicles segment, write-downs of lease receivables in connection with the sale of portions of the Capital Services portfolio and charges relating to the economic crisis in Argentina, gains arising from the sales of the investments in T-Systems ITS and Conti Temic micro- electronic, impairments of an investment in an e-business company as well as from the initial application of new accounting standards. 2001: Turnaround plan Chrysler Group, restructuring of Freightliner, Sterling and Thomas Built Buses business unit, Mitsubishi Motors restructuring, charge related to the recover- ability of lease receivables of the capital services portfolio, impairment charge relating to e-business activities and the economic crisis in Argentina, gain arising at EADS in con- nection with the formation of Airbus SAS, sale of the remaining 10% equity interest in debitel, sale of 60% of the Group’s interest in TEMIC, sale of Adtranz. Income (loss) before financial income + Pension and postretirement benefit expenses other than service cost + Operating profit (loss) from affiliated and associated com- panies and financial income (loss) from related operating companies + Gains (losses) from the sale of operating businesses + Miscellaneous items Operating profit (loss) 2002 US $ 2002 3 2001 3 4,047 3,860 (1,637) (254) (242) (450) 518 494 2,768 107 7,186 2,640 102 6,854 516 292 (39) (1,318) Considerable improvement in net income The Group recorded net income of 14.7 billion in 2002, compared with a net loss of 10.7 billion in 2001. Based on the reported net income, earnings per share amounted to 14.68 compared with a loss per share of 10.66 in 2001. In 2002, the initial application of the new US Accounting Standard SFAS 142 and the associated change in the method of accounting for goodwill and intangible assets resulted in impairments of goodwill being recorded by certain of our equity method investments, principally EADS. Our pro rata share of those impairment charges, which are presented in a separate line in the 2002 Statement of Income (loss), negatively impacted earnings by 10.2 billion. The one-time effects described in the discussion of operat- ing profit and financial income increased Group net income by a total of 11.6 billion after taxes (2001: 11.4 billion earnings reduction). Adjusted to exclude the one-time effects noted above and to impairments from the initial application of SFAS 142, Group net income increased by 12.6 billion to 13.3 billion. Adjusted for these one-time effects, basic earnings per share were 13.30 compared with 10.73 in 2001. Analysis of the Financial Situation | 73 Development of Earnings In billions of 3 Operating Profit Net Income 12 10 8 6 4 2 ´99 ´00 ´01 ´02 In accordance with SFAS 142, goodwill and intangible assets with indefinite useful lives are no longer amortized and thus net income and operating profit are no longer negatively impacted by the amortization of those assets. If SFAS 142 had been applied as of January 1, 2001, the net loss and operating loss for 2001 would have been reduced by 10.4 billion and reported loss per share would have been 10.40 lower. DaimlerChrysler AG earnings In the current year, DaimlerChrysler AG’s financial statements prepared in accordance with the German Commercial Code (HGB) showed net income of 16.3 billion as compared with earnings of 10.8 billion in the previous year. Results from ordi- nary business activities amounted to 17.5 billion (2001: 11.4 billion). These results were impacted by the high financial result of 18.1 billion (2001: 11.0 billion) which reflected the increased profit transfer of DaimlerChrysler Services AG fol- lowing the sale of the investment in T-Systems ITS. Operating result, which is defined as the results from ordinary business activities less the financial result, was - 10.6 billion (2001: 10.4 billion). Total income taxes of 11.2 billion (2001: 10.6 billion) resulted largely from taxes on increased profits from ordinary business activites. The results from ordinary business activities less tax expense resulted in net income of 16.3 billion. Management transferred half of the 2002 net income (13.15 billion) to retained earnings and the other half to unappropriated profits. In the previous year, unappropriated profits of 11.0 billion were reported after withdrawing 10.2 billion from retained earnings, which was distributed in full to the shareholders during 2002. The annual financial statements and Management Report of DaimlerChrysler AG are published in the Federal Gazette and are filed with the Stuttgart Commercial Register. Dividend of 31.50 per share At the Annual Meeting on April 9, 2003, the Board of Manage- ment and the Supervisory Board will propose the distribution of 11.5 billion of unappropriated profits, or 11.50 per share, to shareholders and the transfer of the remaining amount of 11.65 billion to retained earnings. The equity entitled to dividend payments amounts to 12,633 million as of December 31, 2002. 2. Performance Measures Integrated management tools To manage and control the Group as a whole and its business units, management employs modular and closely integrated management tools. The implemented control system with its performance standards promotes cross-divisional trans- parency and comparability as well as capital market-oriented investment control within the DaimlerChrysler Group. Within the control framework, DaimlerChrysler differen- tiates between the Group level and the operating level of the business units and segments. On the Group level, economic value added is an absolute earnings ratio calculated by subtracting the weighted average cost of capital from net operating income. The calculation of net operating income, an after-tax figure, is illustrated in the table on page 75. Economic value added is the core element of the control system and therefore represents the most impor- tant performance standard at DaimlerChrysler. Development of return on net assets Net operating income, which is derived from Group net income adjusted to exclude one-time effects, amounted to 14.3 billion (15.7 billion including these one-time effects) in the current year. In connection with the decrease of net assets from 165.9 billion to 165.0 billion (annual average), this resulted in a return on net assets of 6.7% after taxes (2001: 2.5%) for the DaimlerChrysler Group. The Mercedes Car Group segment considerably exceeded the hurdle rate of return of 13.0% before taxes. The comprehensive programs to improve prof- itability initiated in the Chrysler Group in 2001 had a positive impact compared with the previous year. However, with a return on net assets of 6.8% (2001: – 8.2%), the hurdle rate of return was not yet achieved in 2002. The Commercial Vehicles segment and Financial Services have not yet achieved the minimum required rate of return, primarily due to the continu- ally strained economic situation in some key markets. In connection with the slight decline in average net assets, the significant increase in the Group’s net operating income led to a considerable improvement of the RONA compared with the previous year (2002: 6.7%; 2001: 2.5%), but the eco- nomic value added of 10.9 billion was still negative (calculated on the basis of a cost of capital rate of 8.0% after taxes). Net assets are derived from the consolidated balance sheet, as illustrated by the following table. 74 | Analysis of the Financial Situation In the calculation of the corporate profitability ratio, return on net assets (RONA), net operating income is divided by the capital employed within the Group. This shows the extent to which the DaimlerChrysler Group as a whole generates or exceeds the rate of return required by its investors and creditors. The required rate of return and the weighted average cost of capital for the Group are derived from the minimum returns that investors and creditors expect for equity and capital pro- vided by outside sources. The cost of equity is determined in accordance with the capital asset pricing model, using the interest rate for long-term, risk-free securities (e.g. govern- ment bonds, fixed-interest bonds) plus a risk premium for investment in shares. The cost of capital from outside sources is derived from the required rate of return for obligations entered into by the company with the outside sources provid- ing the capital. At the level of the industrial business units and segments, economic value added is calculated as operating profit less the weighted average cost of capital. The calculation is based on the result before interest and taxes, since this reflects the area of responsibility of management more accurately than an after-tax figure. The capital base is net assets, i.e. assets less non-interest-bearing liabilities. The financial services activities usually apply return on equity as a controlling benchmark. The objective of an adequate cost of capital rate is to promote value-adding investment projects and exploit corre- sponding growth opportunities. In this way the company is continually pursuing the goal of creating sustained value for DaimlerChrysler’s shareholders. To account for a series of changes both in DaimlerChrysler’s capital structure and capital market requirements, the cost of capital was recalculated in 2002. The various amended para- meters of the cost of capital determined in accordance with the capital asset pricing model resulted in a drop in the cost of consolidated capital rate overall to 8.0% after taxes (2001: 9.2%). Beginning in 2002, this leads to a minimum required rate of return of 13.0% before taxes (2001: 15.5%) for the industrial business units and 14.0% before taxes (2001: 17.0%) for Financial Services. However, in order to create sustained value for the DaimlerChrysler shareholders, the business units and segments are required to considerably exceed this hurdle. The objective is derived from benchmarks with the best com- parable companies and exceeds the minimum requirements. Analysis of the Financial Situation | 75 Net Assets and Return on Net Assets 1 3. Financial Position and Cash Flow 2002 2001 2002 2001 (annual average, in billions of 3) Net Assets % % Return on Net Assets DaimlerChrysler Group (after taxes) Industrial business (before interest and taxes) Mercedes Car Group Chrysler Group Commercial Vehicles Services 2 Other Industrial Activities 3 65.0 65.9 6.7 2.5 46.9 12.1 19.5 8.5 1.1 5.7 54.7 11.1 26.6 9.2 2.2 5.6 Stockholders’ Equity 10.3 25.0 6.8 2.1 0.9 1.4 26.7 (8.2) 0.6 1.9 7.2 13.1 Return on Equity 4 Financial Services 9.3 9.6 10.6 5.9 1 Adjusted for one-time effects. 2 Due to the disposal of the investments in T-Systems ITS to Deutsche Telekom, the investment was included only through March 2002. 3 Due to the disposition of business units, figures are not comparable with the prior year. The sold business unit Rail Systems was included through April 2001. The business unit Automotive Electronics was included through March 2001, thereafter at equity until it was completely sold on April 1, 2002. 4 Before taxes. Net Assets 1 of the DaimlerChrysler Group In millions Stockholders’ equity 2 Minority interests Financial liabilities of the industrial segment Pension provisions of the industrial segment Net assets 2002 3 2001 3 33,565 39,184 432 12,201 15,864 62,062 417 15,701 12,608 67,910 1 Represents the value at year-end; the average for the year was 365.0 billion (2001: 365.9 billion). 2 Adjusted for the effects from the application of SFAS 133. Reconciliation to Net Operating Income In millions Net income (loss) One-time effects Net income (loss) adjusted for one-time effects Minority interests Interest expense related to industrial activities, after taxes Interest cost of pensions related to industrial activities, after taxes Net operating income 2002 3 4,718 1,389 3,329 14 458 534 4,335 2001 3 (662) (1,392) 730 (44) 422 539 1,647 Decrease of total assets Year-on-year, the Group’s total assets decreased by 10% to 1187.3 billion. The lower value of the US dollar over the pre- vious year was a key factor. Following further devaluation of the US dollar, the assets and liabilities of our US Group com- panies were translated at the exchange rate of 11 = US $ 1.0487 (2001: 11 = US $ 0.8813) as of December 31, 2002. This resulted in correspondingly lower balance sheet amounts in euros. Currency effects accounted for 121.2 billion of the total decrease in consolidated total assets, adjusted for cur- rency impacts total assets increased by 11.1 billion. Due to developments in the international capital markets during the year 2002 and the reduction of the discount rate for valuation of the pension obligations, the pension plan assets were lower than DaimlerChrysler’s accumulated benefit obligation as of December 31, 2002. In accordance with US- GAAP, such underfunding as of the balance sheet date requires the Group to record additional pension accruals with- out an effect on earnings. The pension accrual was adjusted by an amount representing unrecognized prior service costs. Any remaining additional pension accrual is accounted for as a reduction in equity. The underfunded status of the pension plans also requires that any existing prepayments to the pen- sion funds be netted against the pension accrual. As of December 31, 2002, the DaimlerChrysler Group was required to record additional pension accruals of 14.7 billion and intan- gible assets of 12.3 billion, reduce prepaid pension assets by 17.6 billion and equity (after taxes) by 16.3 billion. On the assets side, fixed assets decreased by 12% to 136.3 billion in the current reporting year, mainly due to currency effects and lower additions to fixed assets. Year-on-year, financial assets decreased considerably to a total of 19.3 billion (2001: 112.4 billion). The reduction was due mainly to the sale of the investments in T-Systems ITS and in connection with the streamlining of Capital Services portfolio in the United States. The 17.8 billion (22%) decrease in leased equipment was due mainly to exchange rate changes. In addition, favorable financing rates in the United States led customers to a shift from operating lease agreements to sales financing agree- ments, which are reported under receivables from financial services. 76 | Analysis of the Financial Situation Balance Sheet Structure In billions of 3 Balance Sheet Structure of the Industrial Business In billions of 3 207 45% 207 18% Fixed assets 187 42% 187 18% Stockholders’ equity Property, plant and equipment 109 37% 109 26% 100 36% 100 25% Stockholders’ equity Non-fixed assets 56% 50% 20% 57% 44% 23% Accrued liabilities 55% Liabilities 42% of which: Financial liabilities of which: Liquidity Deferred taxes and prepaid expenses 7% 2% ’02 7% 5% ’01 5% ’01 4% ’02 Deferred taxes and income The 12.6 billion (5%) increase in receivables from financial services was due mainly to a reduction in sales of receivables and the increase in sales financing agreements in the United States. Overall, the leasing and sales financing business accounted for 180.3 billion, i.e. 43%, of our total assets. Inventories – less advance payments received – are report- ed in the consolidated balance sheet at 115.6 billion (2001: 116.8 billion). Adjusted for currency effects (11.4 billion), inventories increased by 10.3 billion, in particular as a result of pending market launches for new products in the Mercedes Car Group and higher levels of used vehicles in the Services Division. On the other hand, the inventory in the Chrysler Group Division decreased. Trade accounts receivable decreased to 16.3 billion (2001: 16.4 billion). The reduction was mainly influenced by currency exchange rate effects, offset by an increase at Chrysler Group due to higher sales. The increase in other receivables to 117.6 billion (2001: 116.2 billion) was principally due to the strong increase in derivative financial instruments as a result of the changed currency exchange rates. Other fixed assets 17% Inventories Receivables Liquidity Deferred taxes and prepaid expenses 14% 17% 11% 5% ’02 16% 14% 13% 10% 10% ’01 43% Accrued liabilities 37% 35% 32% Liabilities Deferred taxes and income 2% ’01 ’02 Year-on-year, liquid funds fell by 14% to 112.4 billion. Liquid funds are actively managed within the Group to ensure a mini- mum level of corporate liquidity. The total decrease in liquid funds is comprised of 11.6 billion relating to cash and cash equivalents and 10.5 billion relating to securities. On the liabilities side, Group equity decreased by 10% to 134.9 billion (2001: 139.0 billion). The decrease was mainly due to the additional pension liability, exchange rate effects, and the dividends distributed for the 2001 financial year (11.0 billion). On the other hand, consolidated net income of 14.7 billion had the effect of increasing equity. The equity ratio, adjusted for the proposed dividend distribution for 2002 (11.5 billion), declined 0.5 percentage points to 17.8% (2001: 18.3%). The equity ratio for the industrial business amounted to 24.8% (2001: 25.7%). Accruals rose by 11.5 billion to 143.7 billion. The increase was mainly due to additional pension accruals as a result of the underfunded status of the pension plans, higher tax and warranty accruals, and accruals for sales incentives. Further- more the accruals were reduced by currency effects amount- ing to 14.6 billion, the valuation of accruals for derivative financial instruments, and utilization of accruals in connection with the turnaround plans at Chrysler Group and in the Freight- liner, Sterling and Thomas Built Buses business unit. Analysis of the Financial Situation | 77 Trade payables and other liabilities decreased by 13.2 billion to 121.2 billion. In addition to the adjustment for currency effects (12.6 billion), the decrease was mainly due to the reduction in trade payables in the Chrysler Group, offset by higher trade payables in the Mercedes Car Group and Commercial Vehicles segments. The Group’s financial liabilities amounted to 179.1 billion as of the balance sheet date, which are mainly used for refinanc- ing of the leasing and sales financing business of the Services segment. The significant decrease in financial liabilities compared with the previous year was due primarily to currency effects of 18.6 billion and repayments (net) from higher Group operating cash inflows. Statement of cash flows impacted by disposal gains and improved earnings The increase in cash provided by operating activities of 11.9 billion to 117.8 billion was primarily caused by the significant improvement in net income. The decrease in cash used for investing activities (112.9 billion, 2001: 114.0 billion) was impacted by partially offsetting developments. Cash used for investing activities of industrial business was reduced by 14.8 billion to 11.6 billion (2001: 16.4 billion), whereas cash used of Financial Services increased by 13.8 billion (111.3 billion, 2001: 17.5 billion). The decrease in the Industrial Business was mainly a result of proceeds from the sales of the investments in T-Systems ITS and TEMIC. An additional factor was the lower investment in property, plant and equipment, due primarily to improved production and development processes and fluctuations relat- ed to product launches. The increase at Financial Services was principally the result of, in comparison to 2001, higher Net increase (decrease) in cash and cash equivalents In millions of 3 17,796 10,715 -12,946 -5,270 -1,195 9,100 Cash and cash equivalents 31.12. 2001 Cash provided by operating activities Cash used for investing activities Cash used for financing activities Effect of foreign exchange rate changes Cash and cash equivalents 31.12. 2002 net additions to receivables from financial services of 18.1 billion, mainly due to lower proceeds from the sale of finance receivables. This increase was partially offset by the lower increase in equipment for operating leases of 14.5 billion. Cash used for financing activities in 2002 amounted to 15.3 billion, and was mainly a reflection of net repayments of financial liabilities (14.3 billion). In addition, cash of 11.0 billion was used to pay the dividend for the 2001 financial year. Cash and cash equivalents with an original maturity of three months or less decreased by 11.6 billion to 19.1 billion, compared to December 31, 2001, including a currency trans- lation effect of 11.2 billion. Total liquidity, which also includes long-term investments and securities, decreased from 114.5 billion to 112.4 billion. Refinancing at the DaimlerChrysler Group In 2002, the refinancing activities of the DaimlerChrysler Group were conducted on the basis of improved operating cash flows, proceeds from the sale of assets outside the Group’s core activities, in particular the investment in T-Systems ITS, and weaker financial services business compared with the previous year. To cover the financial resources requirements, which were considerably lower compared to the previous year, DaimlerChrysler used a broad spectrum of financial and capital market instruments across the global network of regional holding companies and finance companies. The Group issued the only benchmark transaction in 2002 by simultaneously floating a euro bond and a US dollar bond amounting to 13.2 billion in January. In addition to these two major bonds, DaimlerChrysler covered the ongoing funding requirements through smaller transactions over the remainder of the year, as the Group used medium-term note programs in the form of public bonds and private placements. Securitizations of receivables, in particular those of the Financial Services business in the United States, are being used on an ongoing basis to refinance the Group. By establish- ing a US dollar 3.0 billion asset-backed commercial paper program in the United States, DaimlerChrysler attracted a new group of investors. 78 | Analysis of the Financial Situation 4. Risk Report Integrated risk management system Within the framework of their global activities and as a result of the increasingly intense competition in all markets, the business units of the DaimlerChrysler Group are exposed to a great number of risks, which are inextricably linked with corporate business. Effective management and control instru- ments, combined within a uniform risk management system which is continuously improved, are deployed for the early detection, evaluation and management of risks. The risk management system is an integral part of the overall planning, control and reporting process in all relevant legal units and central functions. It is aimed at the systematic detection, assessment, controlling and documentation of risks. Taking defined risk categories into account, risks are identified by management of the business units and segments and the key associated companies and assessed with respect to the likelihood of occurrence and the possible extent of damage. The communication and reporting of relevant risks is controlled by value limits set by management. Within the framework of risk management, measures are developed and initiated as required to avoid, reduce and prevent risks. The key risks are monitored in the framework of risk monitoring. The aim of the Group’s risk management system is to enable corporate management to identify key risks at an early stage and initiate counter measures. Compliance with uniform Group guidelines, as defined in a risk management manual applicable for the entire Group, is checked by the internal audit department. In addition, external auditors test the early risk detection system integrated into the risk management system for its fundamental suitability for early detection of developments that could jeopardize the continued existence of the company. Risks from overall economic development Following a short phase of recovery, the global economy again lost a great deal of momentum in the current year. The eco- nomic outlook for 2003 as a whole has also deteriorated per- ceptibly since the anticipated upturn did not fully materialize and was later and weaker than expected. Consequently, the economic risks for the earnings situation at DaimlerChrysler grew during the same period. Possible triggers of an unfavorable economic development could be a sustained drop in consumption in the United States, associated with a corresponding downturn of the most impor- tant growth engine for the global economy, as well as the pos- sible negative consequences of an escalation of military action in Iraq either in terms of duration and/or scope. The ongoing structural problems of the Japanese economy hold further risk potential, both with respect to the signifi- cance of Japan as a market and because of the increased investment at Mitsubishi Motors. The possible negative effects of a Japanese economic recession on the developing countries of Asia could likewise negatively influence the joint investment with Hyundai Motor Company. A geographically restricted risk potential exists in connec- tion with the ongoing crises in individual developing countries (South America, Asia, Eastern Europe). Industry- and company-specific risks The weak overall economic development and stagnating mar- kets are increasingly affecting the automobile industry. Strong competitive pressures are reducing earnings and increasing the nature and extent of discount financing offers. Sales incen- tives in the new vehicle business in turn affect the price level in the used vehicle business. In addition to industry-specific market developments, unit sales also depend on general politi- cal conditions. Conditions relating to emissions, fuel economy and energy prices affect growth in various product segments and therefore also the profitability of the company. Innovative products and services provided by the company are the key success factors for the DaimlerChrysler Group. This success is decisively influenced by research activities and the development of new products, the timely execution of product launches and the achievement of defined efficiency improvement objectives while at the same time maintaining quality. Any quality reductions could result in increased war- ranty liabilities and damage the Group’s image, which could negatively impact unit sales. The successful continuation of the turnaround programs initiated at Chrysler Group, in the Freightliner, Sterling and Thomas Built Buses business unit, and at Mitsubishi Motors is decisive for the profitability of DaimlerChrysler. Against the background of the strategic orientation of the Group, recruiting and expanding manage- ment potential in the engineering professions and for employ- ment in Asia is essential. Other operating risks, such as risks relating to information technology, play a less important role. Analysis of the Financial Situation | 79 DaimlerChrysler’s services business includes financial and mobility services. The financing and leasing of the Group’s new vehicle business are extremely important. The necessary capital is largely refinanced by the external financial markets, with associated exchange rate and interest rate risks. In addi- tion, risks of counterparty default in the financing business and residual value risks exist, which can arise with the market- ing of returned lease vehicles. With the formation of Daimler- Chrysler Bank in 2002, the range of services was extended to include financial investing. The resulting extended spectrum of risks has no significant influence on the Group. DaimlerChrysler has a proportionate share of the risks of Mitsubishi Motors in line with its investment stake. Above all, the risks are contingent on the overall economic development in Japan and in the NAFTA region. Risks from warranty com- mitments could also be detrimental to the earnings situation at Mitsubishi Motors. As a result of the investment in EADS, DaimlerChrysler is also partially exposed to their risks. The current significant drop in the number of airline passengers is manifested in the cost-cutting measures adopted by many airlines. This could lead to a further reduction in the demand for aircraft and to increased competition in the aircraft business with pressure on EADS’ profitability. It is unlikely that such losses will be compensated by increased demand in the military sector. Transparency of market risks The DaimlerChrysler Group is exposed to market risks from changes in foreign currency exchange rates and interest rates. To a minor degree the Group is also exposed to changes in market prices of equity securities. These changes may adversely affect DaimlerChrysler’s operating results and finan- cial condition. The Group seeks to manage and control these risks primarily through its regular operating and financing activities, but, when we deem it appropriate, through the use of derivative financial instruments. DaimlerChrysler evaluates these market risks by monitoring changes in key economic indicators and market information on an ongoing basis. In order to quantify the foreign exchange rate risk, interest rate risk and equity price risk of the Group on a continuous basis, DaimlerChrysler’s risk management control systems employ value-at-risk analyses as recommended by the Bank for International Settlements. The value-at-risk calculations employed by DaimlerChrysler express potential losses in fair values and are based on the variance-covariance-approach assuming a 99% confidence level and a holding period of five days. Estimates of volatilities and correlations are primarily drawn from the RiskMetrics™ datasets and supplemented by additional exchange rate, interest rate and equity price information. The Group does not use financial instruments for specula- tive purposes. Following organizational standards in the international banking industry, DaimlerChrysler maintains risk management control systems independent of Corporate Treasury and with a separate reporting line. Foreign exchange rate management The global nature of DaimlerChrysler’s business activities results in cash receipts and payments denominated in various currencies. Cash inflows and outflows of the business seg- ments are offset and netted if they are denominated in the same currency. Within the framework of central currency management, currency exposures are regularly assessed and hedged with suitable financial instruments according to exchange rate expectations, which are constantly reviewed. The net assets of the Group which are invested in subsidiaries and affiliated companies outside the euro zone are generally not hedged against currency risks. However, in specific circumstances, DaimlerChrysler seeks to hedge the currency risk inherent in certain of its long-term investments. The following table shows values-at-risk figures for Daimler- Chrysler’s 2002 and 2001 portfolio of derivative financial instruments used to hedge the underlying currency exposure. We have computed the average exposure based on an end- of-quarter basis. Value-at-Risk In millions of 3 Exchange rate sensitive derivative financial instruments 1 12.31. 2002 Average for 2002 12.31. 2001 Average for 2001 236 304 368 430 1 Forward foreign exchange contracts, foreign exchange swap contracts, currency options. 80 | Analysis of the Financial Situation The average and period-end values-at-risk of derivative financial instruments used to hedge exchange rate risk decreased in 2002, primarily as a result of lower foreign exchange rate volatilities, despite a slightly increased foreign exchange derivatives’ volume. Asset and liability management DaimlerChrysler holds a variety of interest rate sensitive assets and liabilities to manage its liquidity and cash needs of the day-to-day operations. A substantial volume of interest rate sensitive assets and liabilities is related to the leasing and sales financing business operated by DaimlerChrysler Services. The leasing and sales financing business enters into transactions with customers which primarily result in fixed- rate receivables. DaimlerChrysler’s general policy is to match funding in terms of maturities and interest rates. However, for a limited portion of the receivables portfolio, the funding does not match in terms of maturities and interest rates. As a result, DaimlerChrysler is exposed to risks due to changes in interest rates. DaimlerChrysler coordinates funding activities of the indus- trial business and financial services at the Group level. It uses interest rate derivative instruments, such as interest rate swaps, forward rate agreements, swaptions, caps and floors, to achieve the desired interest rate maturities and asset/ liability structures. The following table shows value-at-risk figures for Daimler- Chrysler’s 2002 and 2001 portfolio of interest-rate sensitive financial instruments. We have computed the average exposure based on an end-of-quarter basis. Value-at-Risk In millions of 3 Interest-rate-sensitive financial instruments 12.31. 2002 Average for 2002 12.31. 2001 Average for 2001 157 185 334 272 In 2002, the average and period-end value-at-risk of our portfolio of interest rate sensitive financial instruments decreased, primarily due to less volatile interest rates and a reduced mismatch in terms of interest rate maturities between both, the receivables from the Group’s leasing and sales financing business and the respective funding of that business. Equity price risk management DaimlerChrysler also holds to a minor degree investments in equity securities as a part of its strategy to manage excess liquidity. The Group hedges the risk inherent in these securi- ties mainly through equity derivatives. Since DaimlerChrysler has significantly reduced the portfolio of equity securities in 2001, the corresponding market risk is currently not material. Thus, the Group is not presenting the value-at-risk figures for the remaining equity price risk. According to international banking standards we do not include investments in equity securities, which we classify as long term investments in the equity price risk assessment. Ratings On July 19, 2002, the rating agency Standard & Poor’s (S&P) upgraded the outlook of DaimlerChrysler’s long-term rating from negative to stable after the publication of the second- quarter financial statements. S&P’s explanation was that the measures to improve performance were taking hold at the Chrysler Group and Freightliner. The long-term and short-term ratings remained unchanged, at BBB+ and A-2 respectively. The rating agency Moody’s Investors Service (Moody’s) did not change DaimlerChrysler’s rating or outlook in 2002. At the year-end, the long-term rating from Moody’s was A-3 with a negative outlook, and the short-term rating was P-2. Legal proceedings Various legal proceedings are pending against the Group. DaimlerChrysler believes that such proceedings, other than the purported class actions by South African plaintiffs and the shareholder lawsuit discussed below, constitute ordinary routine litigation incidental to its business. Various legal proceedings pending against DaimlerChrysler Corporation allege defects in various components (including door and liftgate latches, occupant restraint systems, seats, brake systems, and fuel systems) in several different vehicle models or allege design defects relating to vehicle stability (rollover propensity), pedal misapplication (sudden accelera- tion), or crashworthiness. Some of these proceedings seek repair or replacement of the vehicles or compensation for their alleged reduction in value, while others seek recovery for personal injuries. Adverse decisions in these proceedings could require DaimlerChrysler Corporation to pay substantial compensatory and punitive damages, or undertake service actions, recall campaigns or other costly actions. Analysis of the Financial Situation | 81 combination agreement, the defendants misrepresented that DaimlerChrysler would operate as two equal companies, while they always intended to relegate Chrysler to division status and to replace Chrysler’s management with executives from Daimler-Benz. The complaints generally seek (a) actual damages, including an acquisition premium, (b) “recissory” damages representing the difference between the value of the Chrysler common stock exchanged and the present value of the DaimlerChrysler shares, (c) compensatory and, in the indi- vidual actions, punitive damages, (d) an order unwinding the transaction, (e) pre- and post-judgment interest, and (f) such other relief as may be just and proper. In April 2001, all of the pending class action complaints were consolidated into a single consolidated class action complaint that included two claims not previously alleged in any of the complaints. The new claims alleged that DaimlerChrysler had violated US secu- rities laws by making false and misleading statements in 1999 and 2000 regarding its prospects for the year 2000. On May 9, 2001, DaimlerChrysler filed motions to dismiss all three complaints. In March 2002, the Court granted the motion as to the consolidated class action complaint, denied the motion as to the Tracinda Corporation complaint except for the civil conspiracy claim in that complaint, and denied the motion as to the other complaint filed by Glickenhaus & Co., et al. The Court subsequently allowed the class action plaintiffs to amend their complaint, which is now pending. These cases have been consolidated for purposes of discovery and are captioned In re: DaimlerChrysler AG Securities Litigation. The parties substantially completed discovery in January 2003. In February 2003, DaimlerChrysler filed motions seeking summary judgment on all claims in the cases. The Group is presently scheduled for trial of all the consolidated actions in the second quarter of 2003. DaimlerChrysler believes the complaints in this litigation are without merit and plans to continue defending against them vigorously. On February 18, 1999, a jury awarded $54.75 million (152.22 million) in compensatory damages and $3.7 million (13.5 million) in punitive damages to the owners of approxi- mately 75,000 1988 3/4 -1990 model year Chrysler vehicles in Crawley vs. Chrysler Corporation, a class action lawsuit tried in the Court of Common Pleas, Philadelphia, Pennsylvania. The complaint alleged that the air bags in those vehicles were defective because the vent hole positions could cause hand burns when the air bags deploy. DaimlerChrysler Corporation appealed the decision and in October 2002, the court of appeals decertified the class and vacated the judgment. Four purported class action lawsuits are pending in various US and Canadian courts that allege that the paint applied to 1982-1997 model year Chrysler, Plymouth, Jeep® and Dodge vehicles delaminates, peels or chips as the result of defective paint, paint primer, or application processes. Plaintiffs seek compensatory and punitive damages, costs of repair or replacement, attorneys’ fees and costs. Six other previously reported class action lawsuits regarding paint delamination have been dismissed. DaimlerChrysler received a “statement of objections” from the European Commission on April 1, 1999, which alleged that it violated EC competition rules by impeding cross-border sales of Mercedes-Benz passenger cars to final customers in the European Economic Area. In October 2001, the European Commission found that DaimlerChrysler infringed EC compe- tition rules and imposed a fine of approximately 172 million. DaimlerChrysler’s appeal is pending. As previously reported, in the fourth quarter of 2000, Tracinda Corporation filed a lawsuit in the United States Dis- trict Court for the District of Delaware against DaimlerChrysler AG and some of the members of its Supervisory Board and Board of Management (Messrs. Kopper, Schrempp and Gentz). Shortly thereafter, other plaintiffs filed a number of actions against the same defendants, making similar claims to those in the Tracinda complaint. Two individual lawsuits and one consolidated class action lawsuit are pending. The plaintiffs, current or former DaimlerChrysler shareholders, allege that the defendants violated US securities law and committed fraud in obtaining approval from Chrysler stockholders of the business combination between Chrysler and Daimler-Benz in 1998. In essence, the complaints allege that by describing the transaction as a “merger of equals” in the proxy statement/ prospectus and other statements preceding the special meet- ing of Chrysler stockholders called to vote on the business 82 | Analysis of the Financial Situation support the dismissal of many of these claims. Although DaimlerChrysler’s expenditures to date in connection with such claims have not been material to its financial condition, it is possible that the number of these lawsuits will continue to grow, especially those alleging life-threatening illness, and that the company could incur significant costs in the future in resolving these lawsuits. In September 2000, Freightliner LLC, DaimlerChrysler’s North American commercial vehicles subsidiary, acquired Western Star Trucks Holdings Ltd., a Canadian company engaged in the design, assembly, and distribution of heavy duty trucks and transit buses. Prior to its acquisition by Freightliner, Western Star had completed the sale of ERF (Holdings) plc, a company organized in England and Wales and engaged in the assembly and sale of heavy duty trucks, to MAN AG and MAN Nutzfahrzeuge AG for CAD 195 million. In September 2002, MAN filed a claim against Freightliner Ltd. (formerly Western Star) with the London Commercial Court for breach of representations and warranties in the share pur- chase agreement. The claim includes allegations that ERF’s accounts and financial statements were misstated and seeks to recover damages in excess of GBP 300 million. Freightliner Ltd. intends to defend itself vigorously against such claims. A purported class action lawsuit was filed in 2002 in the United States District Court for the District of New Jersey against DaimlerChrysler’s subsidiary Mercedes-Benz USA, LLC (MBUSA), and against MBUSA’s wholly-owned subsidiary Mercedes-Benz Manhattan, Inc. The lawsuit alleges that MBUSA and Mercedes-Benz Manhattan participated in a price fixing conspiracy among Mercedes-Benz dealers. A motion for class certification is pending. MBUSA and Mercedes-Benz Manhattan intend to defend themselves vigorously. In addition, the Antitrust Division of the US Department of Justice, New York Regional Office, advised MBUSA and Mercedes-Benz Manhattan that it is conducting a criminal investigation in con- nection with the allegations made in the lawsuit. MBUSA and Mercedes-Benz Manhattan have been served with grand jury subpoenas in connection with this investigation. As previously reported, on April 30, 2001, DaimlerChrysler sold its subsidiary, DaimlerChrysler Rail Systems GmbH (also known as Adtranz), to Bombardier, Inc. for cash consideration of $725 million. In July 2002, Bombardier filed a request for arbitration with the International Chamber of Commerce in Paris, and asserted claims for sales price adjustments under the terms of the sale and purchase agreement as well as claims for alleged breaches of contract and misrepresenta- tions. Bombardier seeks total damages of approximately 1960 million. The agreement limits the amount of such price adjust- ments to 1150 million, and, to the extent legally permissible, the amount of other claims to an additional 1150 million. We plan to continue defending against such claims vigorously. Like other companies in the automotive industry, Daimler- Chrysler (primarily DaimlerChrysler Corporation) have experi- enced a growing number of lawsuits which seek compensato- ry and punitive damages for illnesses alleged to have resulted from direct and indirect exposure to asbestos used in some vehicle components (principally brake pads). Typically, these lawsuits name many other corporate defendants and may also include claims of exposure to a variety of non-automotive asbestos products. A single lawsuit may include claims by multiple plaintiffs alleging illness in the form of asbestosis, mesothelioma or other cancer or illness. The number of claims in these lawsuits increased from approximately 14,000 at the end of 2001 to approximately 19,000 at the end of January 2003. In the majority of these cases, the plaintiffs do not specify their alleged illness and provide little detail about their alleged exposure to components in our vehicles. Some plain- tiffs do not exhibit current illness, but seek recovery based on potential future illness. In 2001, DaimlerChrysler and other automobile manufacturers asked the federal bankruptcy court in Delaware overseeing the bankruptcy proceedings of an automotive supplier, Federal-Mogul Corporation, to consoli- date all of the asbestos brake cases pending in state courts throughout the US with the asbestos brake litigation involving Federal Mogul supervised by the bankruptcy court. Daimler- Chrysler believed that consolidation would reduce the cost and complexity of defending these individual cases. In 2002, the bankruptcy court decided that it did not have the authority to consolidate these cases, and the US Court of Appeals upheld that decision. The US Supreme Court in January 2003 denied DaimlerChrysler's request and that of other manufac- turers to review the decision. DaimlerChrysler believes that many of these lawsuits involve unsubstantiated illnesses or assert only tenuous connections with components in our vehicles, and that there is credible scientific evidence to Analysis of the Financial Situation | 83 Litigation is subject to many uncertainties, and Daimler- Chrysler cannot predict the outcome of individual matters with assurance. It is reasonably possible that the final resolution of some of these matters could require DaimlerChrysler to make expenditures, in excess of established reserves, over an extended period of time and in a range of amounts that cannot reasonably estimated. Although the final resolution of any such matters could have a material effect on Daimler- Chrysler's consolidated operating results for a particular reporting period, DaimlerChrysler believes that it should not materially affect its consolidated financial position. Overall risk There are no discernible risks that could jeopardize the continued existence of the company. 5. Events after the end of the 2002 financial year No events that are of material importance to DaimlerChrysler and could lead to a changed evaluation of the company, other than the developments already mentioned, have occurred after the end of the 2002 financial year. The development of business in the first two months is consistent with the state- ments in the Outlook section. Three lawsuits have recently been brought against Daimler- Chrysler AG or some of its affiliates raising claims arising out of the practice of apartheid in South Africa before 1994. In particular, on September 27, 2002, a putative class action covering claims arising between 1952 and 1994, captioned Digwamaje v. Bank of America, No. 02-CV-6218 (RCC) (S.D.N.Y.), was filed in the United States District Court for the Southern District of New York naming 84 US, European and Japanese companies, including DaimlerChrysler AG, as defen- dants. On November 11, 2002, 91 individuals filed a lawsuit captioned Khulumani v. Barclays National Bank Ltd., Civ. A. No. 02-5952 (E.D.N.Y.) in the United States District Court for the Eastern District of New York against 22 US, European and Japanese corporate defendants, including DaimlerChrysler AG and Daimler-Benz Industrie. This lawsuit covers the period from 1960 to 1993. On November 19, 2002, another putative class action lawsuit, Ntsebeza v. Holcim Ltd., No. 02-74604 (RWS) (E.D. Mich.), was filed in the United States District Court for the Eastern District of Michigan naming as defen- dants four US and European companies, including Daimler- Chrysler Corporation, and asserting claims arising from 1948 to 1993. All three lawsuits allege, in essence, that the corpo- rate defendants knew about or participated in human rights violations and other abuses of the South African apartheid regime, cooperated with the apartheid government during that period, and benefitted financially from such cooperation. The plaintiffs assert various claims, including conspiracy, aiding and abetting the apartheid regime, violations of the Racketeer- ing Influence and Corrupt Organizations Act, violations of international law and the Alien Tort Claims Act, unjust enrich- ment and unfair and discriminatory labor practices. The plain- tiffs seek compensatory and punitive damages, disgorgement of purported illicit profits, an accounting, restitution of the value of defendants’ purported unjust enrichment, and other forms of relief, including in the Digwamaje case the establish- ment of a “historic commission”. Plaintiffs in the Digwamaje case purport to seek compensatory damages in excess of $200 billion and punitive damages in excess of $200 billion. The complaints in the other two lawsuits do not specify damages. DaimlerChrysler intends to defend against these claims vigorously. 84 | Statement by the Board of Management Preliminary Note The accompanying consolidated financial statements (consoli- dated balance sheets as of December 31, 2002 and 2001, con- solidated statements of income (loss), cash flows and changes in stockholders’ equity for each of the financial years 2002, 2001 and 2000) were prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). In order to comply with Section 292a of the HGB (German Commercial Code), the consolidated financial statements were supplemented with a consolidated business review report and additional explanations. Therefore, the consolidated financial statements, which have to be filed with the Commercial Register and published in the Federal Gazette, comply with the Fourth and Seventh Directives of the Euro- pean Community. For the interpretation of these directives we relied on the statement by the German Accounting Standards Committee. The consolidated financial statements and the consolidated business review report as of December 31, 2002 prepared in accordance with Section 292a of the HGB (German Commer- cial Code) and filed with the Commercial Register in Stuttgart under the number HRB 19 360 will be provided to share- holders on request. Statement by the Board of Management The Board of Management of DaimlerChrysler AG is respon- sible for preparing the accompanying financial statements. We have installed effective controlling and monitoring sys- tems to guarantee compliance with accounting principles and the adequacy of reporting. These systems include the use of uniform guidelines group-wide, the use of reliable software, the selection and training of qualified personnel, and regular reviews by our internal auditing department. Taking the legal requirements into consideration we have integrated the group’s early warning systems into a risk management system. This enables the Board of Management to identify significant risks at an early stage and to initiate appropriate measures. KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the consolidated financial statements, which were prepared in accordance with generally accepted accounting principles in the United States of America, and issued an unqualified audit report. Together with the independent auditors, the Supervisory Board’s Financial Audit Committee examined and discussed the consolidated financial statements including the business review report and the auditors’ report in depth. Subsequently, the entire Supervisory Board reviewed the documentation related to the financial statements. The result of this examina- tion is included in the Report of the Supervisory Board. Jürgen E. Schrempp Manfred Gentz Independent Auditors’ Report | 85 Independent Auditors’ Report The Supervisory Board DaimlerChrysler AG: We have audited the accompanying consolidated balance sheets of DaimlerChrysler AG and subsidiaries (“Daimler- Chrysler”) as of December 31, 2002 and 2001, and the related consolidated statements of income (loss), changes in stock- holders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of DaimlerChrysler’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of DaimlerChrysler Corporation or certain of its consolidated subsidiaries (“Daimler- Chrysler Corporation”) for the year ended December 31, 2000, which statements reflect total revenues constituting 42 percent of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion for the year ended December 31, 2000, insofar as it relates to the amounts included for Daimler- Chrysler Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu- ating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial posi- tion of DaimlerChrysler as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with generally accepted accounting principles in the United States of America. As discussed in Note 10 to the consolidated financial state- ments, DaimlerChrysler adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, in 2002 and Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, in 2000. Stuttgart, Germany February 11, 2003 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Wiedmann Wirtschaftsprüfer Krauß Wirtschaftsprüfer 86 | Consolidated Statements of Income (Loss) Consolidated Statements of Income (Loss) (in millions, except per share amounts) Revenues Cost of sales Gross margin Selling, administrative and other expenses Research and development Other income Turnaround plan expenses – Chrysler Group Income (loss) before financial income Financial income (expense), net (therein gain on issuance of associated company stock of 1747 in 2001) Income (loss) before income taxes Effects of changes in German tax law Income taxes Total income taxes Minority interests Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items: Gains on disposals of businesses, net of taxes (therein gain on issuance of subsidiary and associated company stock of 12,418 in 2000) Cumulative effects of changes in accounting principles: transition adjustments resulting from adoption of SFAS 142, SFAS 133 and EITF 99-20, net of taxes Net income (loss) Earnings (loss) per share Basic earnings (loss) per share Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items Cumulative effects of changes in accounting principles Net income (loss) Diluted earnings (loss) per share Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items Cumulative effects of changes in accounting principles Net income (loss) Consolidated Note 2002 (Note 1) $ 2002 3 Year ended December 31, 2000 2001 3 3 34. 5. 156,838 149,583 152,873 162,384 (127,348) (121,457) (128,394) (134,370) 29,490 28,126 24,479 28,014 5. 6. 7. 8. 9. 11. 10. 35. (19,180) (6,365) (18,293) (6,071) 830 (728) 4,047 2,315 6,362 – (1,233) (1,233) (15) 792 (694) 3,860 2,208 6,068 – (1,177) (1,177) (14) (18,331) (5,933) 1,212 (3,064) (1,637) 154 (1,483) – 777 777 44 (18,303) (6,337) 946 – 4,320 156 4,476 (263) (1,736) (1,999) (12) 5,114 4,877 (662) 2,465 – – (167) 4,947 (159) 4,718 5.08 – (0.17) 4.91 5.06 – (0.16) 4.90 4.84 – (0.16) 4.68 4.82 – (0.15) 4.67 – – (662) (0.66) – – (0.66) (0.66) – – (0.66) 5,516 (87) 7,894 2.46 5.50 (0.09) 7.87 2.45 5.44 (0.09) 7.80 The accompanying notes are an integral part of these Consolidated Financial Statements. Consolidated Statements of Income (Loss) | 87 Industrial Business 1 Financial Services 1 2002 3 Year ended Dec. 31, 2000 2001 3 3 133,883 136,020 147,260 (108,276) (113,342) (120,474) 25,607 22,678 26,786 2002 3 15,700 (13,181) 2,519 Year ended December 31, 2000 2001 3 16,853 (15,052) 1,801 3 (in millions) 15,124 Revenues (13,896) Cost of sales 1,228 Gross margin (1,715) (1,575) (1,244) Selling, administrative and other expenses (16,578) (6,071) 724 (694) 2,988 2,327 5,315 (800) (11) (16,756) (5,933) 1,160 (3,064) (1,915) 146 (1,769) (17,059) (6,337) 842 – 4,232 166 4,398 743 46 (2,152) (11) – 68 – 872 (119) 753 (377) (3) 4,504 (980) 2,235 373 – (124) 4,380 – – (980) 5,516 – 10 7,761 (35) 338 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 52 – 278 8 286 34 (2) 318 – – 318 – – – – – – – – – Research and development 104 Other income – 88 (10) 78 153 (1) 230 – (97) 133 – – – – – – – – Turnaround plan expenses – Chrysler Group Income (loss) before financial income Financial income (expense), net (therein gain on issuance of associated company stock of 1747 in 2001) Income (loss) before income taxes Effects of changes in German tax law Income taxes Total income taxes Minority interests Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items: Gains on disposals of businesses, net of taxes (therein gain on issuance of subsidiary and associated company stock of 12,418 in 2000) Cumulative effects of changes in accounting principles: transition adjustments resulting from adoption of SFAS 142, SFAS 133 and EITF 99-20, net of taxes Net income (loss) Earnings (loss) per share Basic earnings (loss) per share Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items Cumulative effects in changes in accounting principles Net income (loss) Diluted earnings (loss) per share Income (loss) before extraordinary items and cumulative effects of changes in accounting principles Extraordinary items Cumulative effects of changes in accounting principles Net income (loss) 1 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. 88 | Consolidated Balance Sheets Consolidated Balance Sheets (in millions) Assets Goodwill Other intangible assets Property, plant and equipment, net Investments and long-term financial assets Equipment on operating leases, net Fixed assets Inventories Trade receivables Receivables from financial services Other receivables Securities Cash and cash equivalents Non-fixed assets Deferred taxes Prepaid expenses Total assets (thereof short-term 2002: 368,118; 2001: 368,676) Liabilities and stockholders’ equity Capital stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Stockholders’ equity Minority interests Accrued liabilities Financial liabilities Trade liabilities Other liabilities Liabilities Deferred taxes Defered income Total liabilities (thereof short-term 2002: 372,791; 2001: 380,874) Consolidated Industrial Business1 Financial Services1 Note 2002 (Note 1) $ At December 31, 2001 2002 At December 31, 2001 2002 At December 31, 2001 2002 3 3 3 3 3 3 12. 13. 14. 20. 15. 16. 17. 18. 19. 20. 21. 9. 22. 2,171 2,993 38,028 9,742 29,613 82,547 16,401 6,602 54,614 18,425 3,453 9,573 2,071 2,855 36,269 9,291 28,243 78,729 15,642 6,297 52,088 17,573 3,293 9,130 2,371 492 41,165 12,375 36,002 92,405 16,754 6,430 49,512 16,188 3,759 10,746 2,009 2,755 36,111 8,922 3,313 53,110 13,965 6,005 10 11,159 2,911 8,191 2,311 351 41,016 11,349 3,004 58,031 15,338 6,134 26 7,512 3,318 7,375 62 100 158 369 24,930 25,619 1,677 292 52,078 6,414 382 939 60 141 149 1,026 32,998 34,374 1,416 296 49,486 8,676 441 3,371 109,068 104,023 103,389 42,241 39,703 61,782 63,686 3,788 1,009 3,613 962 3,010 8,606 3,496 866 2,930 8,480 117 96 80 126 196,412 187,327 207,410 99,713 109,144 87,614 98,266 2,761 8,104 31,618 (5,876) – 2,633 7,729 30,156 (5,604) – 2,609 7,286 26,441 2,668 – 23. 36,607 34,914 39,004 26,294 29,009 453 45,832 82,949 12,941 9,271 432 43,712 79,112 12,342 8,843 417 42,194 90,908 14,157 10,262 105,161 100,297 115,327 2,424 5,935 2,312 5,660 4,851 5,617 25. 26. 27. 28. 9. 29. 414 42,709 12,201 12,106 6,152 30,459 (4,425) 4,262 403 41,158 15,701 13,773 7,431 36,905 (2,212) 3,881 8,620 18 1,003 66,911 236 2,691 9,995 14 1,036 75,207 384 2,831 69,838 78,422 6,737 1,398 7,063 1,736 159,805 152,413 168,406 73,419 80,135 78,994 88,271 Total liabilities and stockholders’ equity 196,412 187,327 207,410 99,713 109,144 87,614 98,266 1 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. The accompanying notes are an integral part of these Consolidated Financial Statements. Consolidated Statements of Changes in Stockholders’ Equity | 89 Consolidated Statements of Changes in Stockholders’ Equity (in millions of 3) Balance at January 1, 2000 Net income Other comprehensive income (loss) Total comprehensive income Increase in stated value of capital stock Issuance of capital stock Purchase of capital stock Re-issuance of treasury stock Dividends Capital stock 2,565 Additional paid-in capital 7,329 – – 44 – – – – – – (44) 1 – – – Balance at December 31, 2000 2,609 7,286 Net loss Other comprehensive income (loss) Total comprehensive loss Purchase of capital stock Re-issuance of treasury stock Dividends – – – – – – – – – – Balance at December 31, 2001 2,609 7,286 Retained earnings 23,925 7,894 – – – – – (2,358) 29,461 (662) – – – (2,358) 26,441 Accumulated other comprehensive income (loss) Cumulative translation adjustment Available- for-sale securities Derivative financial instruments 1,922 – 1,363 347 – (149) – – (408) – – – – – – – – – – – – – – – Minimum pension liability (28) – 6 – – – – – 3,285 198 (408) (22) – 565 – (137) – – – 3,850 – – – 61 – – 71 – – – – (884) – – – (337) (906) – – Net income Other comprehensive income (loss) Total comprehensive loss Issuance of shares upon conversion of notes Purchase of capital stock Re-issuance of treasury stock Dividends Other – – 24 – – – – Balance at December 31, 2002 2,633 – – 482 – – – (39) 7,729 4,718 – – (3,250) (135) 1,402 (6,289) – – – (1,003) – – – – – – – – – – – – – – – – – – – – – 30,156 600 (74) 1,065 (7,195) Treasury stock – – – – – (88) 88 – – – – (66) 66 – – – – – 49 (49) – – – Total 36,060 7,894 812 8,706 – 1 (88) 88 (2,358) 42,409 (662) (385) (1,047) (66) 66 (2,358) 39,004 4,718 (8,272) (3,554) 506 49 (49) (1,003) (39) 34,914 The accompanying notes are an integral part ot these Consolidated Financial Statements. 90 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in millions) Net income (loss) Income (loss) applicable to minority interests Cumulative effects of changes in accounting principles Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gains on disposals of businesses Depreciation and amortization of equipment on operating leases Depreciation and amortization of fixed assets Change in deferred taxes Equity (income) loss from associated companies Change in financial instruments (Gains) losses on disposals of fixed assets/securities Change in trading securities Change in accrued liabilities Turnaround plan expenses - Chrysler Group Turnaround plan payments - Chrysler Group Changes in other operating assets and liabilities: – inventories, net – trade receivables – trade liabilities – other assets and liabilities Cash provided by operating activities Purchases of fixed assets: – Increase in equipment on operating leases – Purchases of property, plant and equipment – Purchases of other fixed assets Proceeds from disposals of equipment on operating leases Proceeds from disposals of fixed assets Payments for investments in businesses Proceeds from disposals of businesses Change in cash from exchange of businesses Additions to receivables from financial services Repayments of receivables from financial services: – Finance receivables collected – Proceeds from sales of finance receivables Acquisitions of securities (other than trading) Proceeds from sales of securities (other than trading) Change in other cash Cash used for investing activities Consolidated 2002 (Note 1) $ 4,947 15 166 2002 3 4,718 14 159 (2,773) 7,595 6,688 (2,645) 7,244 6,379 281 17 224 (624) 269 3,473 728 (537) 6 (320) (510) (986) 268 16 214 (595) 257 3,312 694 (512) 6 (305) (486) (942) Year ended December 31, 2000 2001 3 (662) (44) – (768) 7,254 7,022 (1,058) (97) (409) (600) (4) 2,825 3,064 (365) (725) 620 (838) 729 3 7,894 12 87 (5,568) 6,487 7,131 1,220 244 (90) (455) 22 1,778 – – (876) (731) (424) (714) 18,659 17,796 15,944 16,017 (18,563) (17,704) (17,951) (7,492) (330) 15,845 921 (587) 5,962 – (7,145) (315) 15,112 878 (560) 5,686 – (8,896) (655) 11,042 1,043 (821) 1,680 – (19,117) (10,392) (480) 8,285 862 (4,883) 311 (1,351) (129,363) (123,379) (130,863) (116,507) 58,803 61,072 (5,562) 5,637 83 56,083 58,247 (5,305) 5,376 80 53,251 76,662 (2,151) 3,531 142 44,276 63,649 (7,786) 10,224 200 (13,574) (12,946) (13,986) (32,709) Change in commercial paper borrowings and short-term financial liabilities Additions to long-term financial liabilities Repayment of financial liabilities Dividends paid (including profit transferred from subsidiaries) Proceeds from issuance of capital stock (including minority interests) Purchase of treasury stock 3,038 10,447 (17,947) (1,064) 51 (51) 2,898 9,964 (17,117) (1,015) 49 (49) Cash provided by (used for) financing activities (5,526) (5,270) (12,431) 26,582 (10,394) (2,367) 75 (66) 1,399 (3,238) 29,257 (9,152) (2,379) 112 (88) 14,512 Effect of foreign exchange rate changes on cash and cash equivalents (maturing within 3 months) Net increase (decrease) in cash and cash equivalents (maturing within 3 months) Cash and cash equivalents (maturing within 3 months) At beginning of period At end of period (1,253) (1,195) 276 501 (1,694) (1,615) 3,633 (1,679) 11,235 9,541 10,715 9,100 7,082 10,715 8,761 7,082 The accompanying notes are an integral part ot these Consolidated Financial Statements. Consolidated Statements of Cash Flows | 91 Industrial Business 2 Financial Services 2 Year ended December 31, 2000 2001 2002 3 338 3 35 Year ended December 31, 2000 2001 3 318 2 – 3 (in millions) 133 Net income (loss) 1 97 Income (loss) applicable to minority interests Cumulative effects of changes in accounting principles Adjustments to reconcile net income (loss) to net cash provided by operating activities: – 6,700 (6) 6,964 – Gains on disposals of businesses 6,280 Depreciation and amortization of equipment on operating leases 122 766 94 9 4 (55) 20 – – (166) 9 (169) 1,245 8,955 105 537 (7) (44) – (7) 353 – – (176) 80 (7) 2,173 10,285 84 630 59 (14) (1) – 36 – – Depreciation and amortization of fixed assets Change in deferred taxes Equity (income) loss from associated companies Change in financial instruments (Gains) losses on disposals of fixed assets/securities Change in trading securities Change in accrued liabilities Turnaround plan expenses – Chrysler Group Turnaround plan payments – Chrysler Group Changes in other operating assets and liabilities: (151) – inventories, net (33) 74 (91) – trade receivables – trade liabilities – other assets and liabilities 7,104 Cash provided by operating activities Purchases of fixed assets: (12,862) (14,334) (15,551) – Increase in equipment on operating leases (93) (65) 10,138 50 (28) 518 – (111) (91) 7,091 52 (20) 224 – (52) (58) – Purchases of property, plant and equipment – Purchases of other fixed assets 4,911 Proceeds from disposals of equipment on operating leases 26 Proceeds from disposals of fixed assets (160) Payments for investments in businesses 13 – Proceeds from disposals of businesses Change in cash from exchange of businesses 3 7,761 11 (10) (5,568) 207 7,047 590 185 (76) (454) 22 1,742 – – (725) (698) (498) (623) 8,913 (3,566) (10,340) (422) 3,374 836 (4,723) 298 (1,351) 133 (123,611) (131,070) (116,640) Additions to receivables from financial services – – (5,594) 8,355 385 56,083 58,247 (55) 93 271 53,251 76,662 (220) 1,150 (125) 44,276 63,649 (2,192) 1,869 (185) Repayments of receivables from financial services: – Finance receivables collected – Proceeds from sales of finance receivables Acquisitions of securities (other than trading) Proceeds from sales of securities (other than trading) Change in other cash (6,445) (12,615) (11,314) (7,541) (20,094) Cash used for investing activities 1,264 3,100 (347) (393) 2,523 2,324 (2,356) (2,370) (224) (88) 1,772 1,707 8,054 (9,421) (581) 276 – 35 (13,695) 23,482 (10,047) (11) 163 – (2,845) 26,734 Change in commercial paper borrowings and short-term financial liabilities Additions to long-term financial liabilities (11,476) Repayment of financial liabilities (9) 336 Dividends paid (including profit transferred from subsidiaries) Proceeds from issuance of capital stock (including minority interests) – Purchase of treasury stock (108) 12,740 Cash provided by (used for) financing activities 471 (108) 53 Effect of foreign exchange rate changes on cash and cash equivalents (maturing within 3 months) 30 (1,459) (2,432) 2,689 (220) Net increase (decrease) in cash and cash equivalents (maturing within 3 months) Cash and cash equivalents (maturing within 3 months) 7,859 6,400 3,371 939 682 3,371 902 682 At beginning of period At end of period 1 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. 2002 3 4,380 11 124 (2,645) 544 6,257 (498) (78) 205 (599) 312 3,292 694 (512) 172 (314) (317) (2,187) 8,841 (4,842) (7,052) (250) 4,974 828 (532) 5,168 – 232 – – (5,250) 5,283 (191) (1,632) 1,191 1,910 (7,696) (434) (227) (49) (5,305) (1,087) 817 7,344 8,161 3 (980) (46) – (762) 290 6,917 (1,595) (90) (365) (600) 3 2,472 3,064 (365) (549) 540 (831) (1,444) 5,659 (3,617) (8,785) (564) 3,951 991 (801) 1,456 – 207 – – (1,931) 2,381 267 (88) (66) 1,507 223 944 6,400 7,344 92 | Consolidated Fixed Assets Schedule Consolidated Fixed Assets Schedule (in millions of 3) Goodwill Other intangible assets Intangible assets Land, leasehold improvements and buildings including buildings on land owned by others Technical equipment and machinery Other equipment, factory and office equipment Advance payments relating to plant and equipment and construction in progress Property, plant and equipment Investments in affiliated companies Loans to affiliated companies Investments in associated companies Investments in related companies Loans to associated and related companies Long-term securities Other loans Investments and long-term financial assets Equipment on operating leases 2 1 Currency translation changes with period end rates. 2 Excluding initial direct costs. Acquisition or Manufacturing Costs Balance at January 1, 2002 Currency change Change in consolidated companies 3,980 1,034 5,014 (547) (227) (774) 20,999 36,946 (1,776) (4,240) 23,734 (2,815) 5,914 87,593 1,059 (852) (9,683) (49) 143 8,574 1,871 341 369 368 – (121) (65) (36) 4 (7) 1 14 15 18 5 3 31 57 33 6 1 (4) – 1 (1) Additions Reclassifica- tions Disposals 132 2,689 2,821 (62) 106 44 6 127 133 Balance at December 31, 2002 3,498 3,489 6,987 381 808 350 2,061 614 1,760 19,358 33,820 858 1,961 1,361 22,380 5,144 7,191 340 43 617 68 30 70 6 (4,462) (90) – – – 2 – – – 2 44 109 3,844 162 5,666 81,224 1,221 98 94 2,732 614 6,339 1,258 39 247 68 296 197 298 3,960 22,365 9,703 37,689 12,725 48,388 (274) (6,274) 36 192 1,174 17,704 The consolidated fixed assets schedule is part of the Notes to Consolidated Financial Statements. Consolidated Fixed Assets Schedule | 93 Depreciation/Amortization Book Value 1 Balance at January 1, 2002 Currency change Change in consolidated companies Additions Reclassifica- tions Disposals Balance at December 31, 2002 Balance at December 31, 2002 Balance at December 31, 2001 (in millions of 3) 1,609 542 2,151 (204) (56) (260) 9,174 23,054 (646) (2,385) 14,074 (1,572) 1 3 4 (1) (7) (3) 126 (21) 46,428 (4,624) 1 (10) 130 – (2) 210 1 1 10 – – – (4) – – – 350 (4) 12,598 (1,669) 9 7 2 – – (1) (1) 16 44 40 175 215 684 2,756 2,929 16 6,385 23 – – 40 14 – 1 78 7,244 (18) 19 1 (16) (5) 28 (8) (1) – – – – – – – – – 1 49 50 1,427 634 2,061 2,071 2,855 4,926 2,371 Goodwill 492 Other intangible assets 2,863 Intangible assets 365 1,684 8,830 21,729 10,528 12,091 11,825 13,892 1,174 14,282 8,098 9,660 Land, leasehold improvements and buildings including buildings on land owned by others Technical equipment and machinery Other equipment, factory and office equipment – 114 3,223 44,955 23 139 5,552 36,269 1,082 5,788 Advance payments relating to plant and equipment and construction in progress 41,165 Property, plant and equipment 929 Investments in affiliated companies 87 143 Loans to affiliated companies – – 2 2 – 1 7 – 244 13 – 9 6,339 1,014 283 197 289 8,576 1,661 340 368 358 28 8,583 412 9,634 9,291 28,055 12,375 35,790 Investments in associated companies Investments in related companies Loans to associated and related companies Long-term securities Other loans Investments and long-term financial assets Equipment on operating leases 2 94 | Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Basis of Presentation 1. Summary of Significant Accounting Policies General – The consolidated financial statements of Daimler- Chrysler AG and subsidiaries (“DaimlerChrysler” or the “Group”) have been prepared in accordance with Generally Accepted Accounting Principles in the United States of Ameri- ca (“U.S. GAAP”). All amounts herein are shown in euros and for the year 2002 amounts are also presented in U.S. dollars (“$”), the latter being unaudited and presented solely for the convenience of the reader at the rate of 11 = $1.0485, the Noon Buying Rate of the Federal Reserve Bank of New York on December 31, 2002. Certain amounts reported in previous years have been reclassified to conform to the 2002 presentation. Commercial practices with respect to certain products man- ufactured by DaimlerChrysler necessitate that sales financing, including leasing alternatives, be made available to the Group’s customers. Accordingly, the Group’s consolidated financial statements are also significantly influenced by activi- ties of its financial services business. To enhance the readers’ understanding of the Group’s consolidated financial state- ments, the accompanying financial statements present, in addition to the audited consolidated financial statements, unaudited information with respect to the financial position, results of operations and cash flows of the Group’s industrial and financial services business activities. Such information, however, is not required by U.S. GAAP and is not intended to, and does not represent the separate U.S. GAAP financial position, results of operations or cash flows of the Group’s industrial or financial services business activities. Transac- tions between the Group’s industrial and financial services business activities principally represent intercompany sales of products, intercompany borrowings and related interest, and other support under special vehicle financing programs. The effects of transactions between the industrial and financial services businesses have been eliminated within the industrial business columns. Use of Estimates – Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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. DaimlerChrysler’s financial position, results of operations, and cash flows are subject to numerous risks and uncertainties. Factors that could affect DaimlerChrysler’s future financial statements and cause actual results to vary materially from expectations include, but are not limited to, further adverse changes in global economic conditions; overcapacity and intense competition in the automotive industry; the concentrations of DaimlerChrysler’s revenues derived from the United States and Western Europe; the significant portion of Daimler- Chrysler’s workforce subject to a collective bargaining agree- ment; fluctuations in currency exchange rates and interest rates; significant legal proceedings and environmental and other government regulations. Principles of Consolidation – The accompanying consolidated financial statements include the financial statements of DaimlerChrysler AG and all of its material, majority-owned subsidiaries. All significant intercompany transactions and balances relating to these majority-owned entities have been eliminated. Investments in Associated Companies – Significant invest- ments in which DaimlerChrysler has 20% to 50% of the voting rights or the ability to exercise significant influence over the operating and financial policies of the investee (“associated companies”) such as the European Aeronautic Defence and Space Company EADS N.V. (“EADS”) and Mitsubishi Motors Corporation (“MMC”) are accounted for using the equity method. Because the financial statements of EADS and MMC are not made available timely to DaimlerChrysler in order to apply the equity method of accounting, the Group’s propor- tionate share of the results of operations of these associated companies are included in DaimlerChrysler’s consolidated financial statements on a three month lag. An impairment loss on its investment in an associated company is recognized when the loss in value of the investment is determined to be other than temporary. Foreign Currencies – The assets and liabilities of foreign operations where the functional currency is not the euro are generally translated using period-end exchange rates while the statements of income (loss) and the statements of cash flows are translated using average exchange rates during the respective periods. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss). The assets and liabilities of foreign operations in highly inflationary economies are translated into euro on the basis of period-end rates for monetary assets and liabilities and at his- torical rates for non-monetary items, with resulting translation gains and losses recognized in earnings. Further, in such eco- nomies, depreciation and gains and losses from the disposal of non-monetary assets are determined using historical rates. Due to the economic and political situation in Argentina, assets and liabilities of Argentine subsidiaries at December 31, 2001 were translated from Argentine peso (“ARP”) into euro using the first subsequent rate after the balance sheet date at which exchanges could be made (11 = ARP 1.498). Notes to Consolidated Financial Statements | 95 The exchange rates of the significant currencies of non-euro countries used in preparation of the consolidated financial statements were as follows: Exchange rate at December 31, 2001 2002 31 = 3.71 0.65 31 = 2.05 0.61 2002 31 = 2.78 0.63 Annual average exchange rate 2000 2001 31 = 2.11 0.62 31 = 1.69 0.61 BRL GBP JPY 124.39 115.33 118.04 108.69 99.47 Currency Brazil Great Britain Japan United States USD 1.05 0.88 0.95 0.90 0.92 Revenue Recognition – Revenue for sales of vehicles, service parts and other related products is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price of the transaction is fixed and determinable, and collectibility is rea- sonably assured. Revenues are recognized net of discounts, cash sales incentives, customer bonuses and rebates granted. Non-cash sales incentives that do not reduce the transaction price to the customer are classified within cost of sales. Shipping and handling costs are recorded as cost of sales in the period incurred. DaimlerChrysler uses price discounts (primarily at the Chrysler Group) to adjust market pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic con- ditions, the amount of excess industry production capacity, the intensity of market competition, and consumer demand for the product. The Group may offer a variety of sales incen- tive programs at any given point in time, including: cash offers to dealers and consumers, lease subsidies which reduce the consumer’s monthly lease payment, or reduced financing rate programs offered to consumers. The Group records as a reduction to revenue at the time of sale to the dealer the estimated impact of sales incentives programs offered to dealers and consumers. This estimated impact represents the incentive programs offered to dealers and consumers as well as the expected modifications to these programs in order for the dealers to sell their inventory. The accrued liability for sales incentives is based on the estimated cost of the sales incentive programs and the number of vehi- cles held in dealers’ inventory. The majority of vehicles held in dealers’ inventory are sold to consumers within the next quarter and the sales incentives accrued liability is adjusted to reflect actual experience. When below market rate loans under special financing pro- grams are used to promote sales of vehicles and the vehicle is financed by the Services segment, the effect of the rate differential at the contract origination date is recorded as unearned income in the consolidated balance sheet. Services amortizes the unearned income balance into earnings using the interest rate method over the original (contractual) life of the receivables. Upon prepayment or sale of the receivable, the unamortized unearned income is recognized into earnings. Sales under which the Group guarantees the minimum resale value of the product are accounted for as operating leases with the related revenues and costs deferred at the time of title passage. Revenue from operating leases is recog- nized on a straight-line basis over the lease term. Revenue on long-term contracts is generally recognized under the per- centage-of-completion method based upon contractual mile- stones or performance. Revenue from sales financing and finance lease receivables is recognized using the interest method. Recognition of revenue is generally suspended when a finance or lease receiv- able becomes contractually delinquent for periods ranging from 60 to 120 days. The Group offers extended warranty contracts for certain products. Revenues from these contracts are deferred and recognized into income over the contract period in proportion to the costs expected to be incurred based on historical infor- mation. In circumstances in which there is insufficient histori- cal information, income is recognized on a straight-line basis. A loss on these service contracts is recognized in the period, if the sum of expected costs for services under the contract exceeds unearned revenue. The Group sells significant amounts of finance receivables as asset-backed securities through securitization. The Group sells a portfolio of receivables to a non-consolidated trust and usually remains as servicer, and is paid a servicing fee. Servic- ing fees are earned on a level-yield basis over the remaining term of the related sold receivables. In a subordinated capacity, the Group retains residual cash flows, a beneficial interest in principal balances of sold receivables and certain cash deposits provided as credit enhancements for investors. Gains and losses from the sales of finance receivables are recog- nized in the period in which sales occur. In determining the gain or loss for each qualifying sale of finance receivables, the investment in the sold receivable pool is allocated between the portion sold and the portion retained based upon their relative fair values. 96 | Notes to Consolidated Financial Statements retained interest (the pool-by-pool method) is considered other- than-temporary. Other-than-temporary impairment adjust- ments are generally recorded as a reduction of revenue. Product Warranties – A liability for the expected warranty- related costs is established when the product is sold, upon lease inception, or when a new warranty program is initiated. Estimates for accrued warranty costs are primarily based on historical experience. Because portions of the products sold and warranted by the Group contain parts manufactured (and warranted) by suppliers, the amount of warranty costs accrued also contains an estimate of recoveries from suppliers. Research and Development and Advertising – Research and development and advertising costs are expensed as incurred. Sales of Newly Issued Subsidiary Stock – Gains resulting from the issuance of stock by a Group subsidiary or equity method investment which reduces DaimlerChrysler’s percent- age ownership (“dilution gains”) are recorded in the statement of income (loss). Stock-based Compensation Plans – At December 31, 2002, DaimlerChrysler has various stock appreciation rights plans (“SARs”), two stock option plans and a medium term incentive award plan which are described more fully in Note 24. For the periods presented herein, the Group has applied the recog- nition and measurement provisions of APB Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for those plans. The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the fair value method of Statement of Financial Accounting Standards No. (“SFAS”) 123, “Accounting for Stock-Based Compensation,” had been applied to all outstanding and unvested stock options in each period. Estimated Credit Losses – DaimlerChrysler determines its allowance for credit losses based on a systematic, ongoing review and evaluation performed as part of the credit-risk evaluation process. The evaluation considers historical loss experience, the size and composition of the portfolios, current economic events and conditions, the estimated fair value and adequacy of collateral and other pertinent factors. Certain homogeneous loan portfolios are evaluated collectively, taking into consideration primarily historical loss experience adjusted for the estimated impact of current economic events and con- ditions, including fluctuations in the fair value and adequacy of collateral. Other receivables, such as wholesale receivables and loans to large commercial borrowers, are evaluated in- dividually for impairment based on the fair value of collateral. Credit exposures deemed to be uncollectible are charged against the allowance for doubtful accounts. Valuation of Retained Interests in Sold Receivables – DaimlerChrysler retains residual beneficial interests in certain pools of sold and securitized retail and wholesale finance receivables. Such retained interests represent the present value of the estimated residual cash flows after repayment of all senior interests in the sold receivables. The Group deter- mines the value of its retained interests using discounted cash flow modeling upon the sale of receivables and at the end of each quarter. The valuation methodology considers historical and projected principal and interest collections on the sold receivables, estimated future credit losses arising from the collection of the sold receivables, and expected repayment of principal and interest on notes issued to third parties and secured by the sold receivables. The Group recognizes unrealized gains or losses attributable to the change in the fair value of the retained interests, which are recorded in a manner similar to available-for-sale securi- ties, net of related income taxes as a separate component of accumulated other comprehensive income (loss) until realized. The Group is not aware of an active market for the purchase or sale of retained interests, and accordingly, determines the estimated fair value of the retained interests by discounting the expected cash flow releases (the cash-out method) using a discount rate that is commensurate with the risks involved. In determining the fair value of the retained interests, the Group estimates the future rates of prepayments, net credit losses and forward yield curves. These estimates are developed by evaluating the historical experience of comparable receivables and the specific characteristics of the receivables sold, and forward yield curves based on trends in the economy. An impairment adjustment to the carrying value of the retained interests is recognized if the expected cash flows decline below the cash flows inherent in the cost basis of an individual Notes to Consolidated Financial Statements | 97 Net income (loss) (in millions of 1) Net income (loss), as reported before extraordinary items and cumulative effects of changes in accounting principles Add: Stock-based employee compensation expense included in reported net income, net of related tax effects Deduct: Total stock-based employee compensation expense determinded under fair value based method for all awards, net of related tax effects Pro forma net income (loss) Earnings (loss) per share (in 1): Basic – as reported before extraor- dinary items and cumulative effects of changes in accounting principles Basic – pro forma Diluted – as reported before extraordinary items and cumulative effects of changes in accounting principles Diluted – pro forma Year ended December 31, 2000 2001 2002 4,877 (662) 2,465 35 12 8 (149) 4,763 (84) (734) (20) 2,453 4.84 4.72 (0.66) (0.73) 2.46 2.45 4.82 4.71 (0.66) (0.73) 2.45 2.44 Pension and Other Post Retirement Plans – The measure- ment of pension and postretirement benefit liabilities is based upon the projected unit credit method in accordance with SFAS 87, “Employers’ Accounting for Pensions,” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Oth- er Than Pensions,” respectively. As permitted under SFAS 87 and SFAS 106, changes in the amount of either the projected benefit obligation (for pension plans), the accumulated benefit obligation (for other postretirement plans) or plan assets resulting from experience different from that assumed and from changes in assumptions can result in gains and losses not yet recognized in the Group’s consolidated financial state- ments. The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the fair value or market-related value of plan assets. Amortization of an unrecognized net gain or loss is included as a component of the Group’s net periodic benefit plan cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10 percent of the greater of 1) the projected benefit obligation (for pension plans) or the accumu- lated postretirement benefit obligation (for other postretire- ment plans) or 2) the fair value or market-related value of that plan’s assets. In such case, the amount of amortization recognized by the Group is the resulting excess divided by the average remaining service period of active employees expected to receive benefits under the plan (see Note 25a). Earnings Per Share – Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share reflects the potential dilution that would occur if all securities and other contracts to issue Ordinary Shares were exercised or con- verted (see Note 35). Net income represents the earnings of the Group after minority interests. Intangible Assets – Purchased intangible assets, other than goodwill, with a definite useful life, are valued at acquisition cost and are amortized over their respective useful lives (2 to 10 years) on a straight-line basis. Goodwill and intangible assets with an indefinite useful life are no longer amortized as a result of the adoption of SFAS 142, “Goodwill and Other Intangible Assets” in 2002 (see New Accounting Pronounce- ments). The Group now evaluates the recoverability of its goodwill at least annually or when significant events occur or there are changes in circumstances that indicate the fair value of a reporting unit of the Group is less than its carrying value. The Group determines the fair value of each of its reporting units by estimating the present value based on cash flows. Prior to the adoption of SFAS 142, goodwill derived from acquisi- tions that were completed before July 1, 2001, was capitalized and amortized over 3 to 40 years. Goodwill acquired in busi- ness combinations after June 30, 2001, and intangible assets with an indefinite useful life acquired after June 30, 2001, were not amortized in accordance with SFAS 142. Goodwill acquired in business combinations that were completed before July 1, 2001, and intangible assets with an indefinite useful life acquired before July 1, 2001, were amortized until December 31, 2001. Property, Plant and Equipment – Property, plant and equip- ment is valued at acquisition or manufacturing costs less accumulated depreciation. Depreciation expense is recognized using either the declining balance method until the straight- line method yields larger expenses or the straight-line method. The costs of internally produced equipment and facilities include all direct costs and allocable manufacturing overhead. Costs of the construction of certain long-term assets include capitalized interest, which is amortized over the estimated useful life of the related asset. The following useful lives are assumed: buildings – 10 to 50 years; site improvements – 5 to 33 years; technical equipment and machinery – 3 to 30 years; and other equipment, factory and office equip- ment – 2 to 33 years. 98 | Notes to Consolidated Financial Statements For the Group’s subsidiaries in Germany, depreciation expense for property, plant and equipment placed in service before January 1, 2001 is being recognized using either the straight-line method or the declining balance method until the straight-line method yields larger expenses. Property, plant and equipment placed in service at these companies after December 31, 2000 is depreciated using the straight-line method of depreciation. This change in accounting method for new additions beginning January 1, 2001 was made to reflect improvements in the design and flexibility of manufacturing machinery and equipment and improvements in maintenance practices. These improvements have resulted in more uniform productive capacities and maintenance costs over the useful life of an asset, and straight-line depreciation is preferable in these circumstances. The effect of this change in method on net income in 2002 and on the net loss in 2001 was not significant. As part of its Turnaround Plan objectives (see Note 7), the Chrysler Group has lengthened its platform life-cycles and is aggressively pursuing a strategy to use manufacturing equipment for more than one product launch. The Chrysler Group performed an extensive engineering review of the assets utilized in its manufacturing facilities. These studies resulted in revisions to the estimated remaining useful lives as well as a reduction in estimated salvage values of certain manufacturing machinery, equipment and tooling to better represent the revised platform strategy and the increased use of flexible manufacturing techniques in its facilities. The change in these estimated useful lives and salvage values was applied to existing assets and new additions beginning in 2002. The change in estimates resulted in reduced deprecia- tion and amortization expenses of machinery, equipment and tooling of 1324 million (1206 million, net of taxes, or 10.20 per diluted share) for the year ended December 31, 2002. Leasing – The Group is a lessee of property, plant and equip- ment and lessor of equipment, principally passenger cars and commercial vehicles. All leases that meet certain specified criteria intended to represent situations where the substantive risks and rewards of ownership have been transferred to the lessee are accounted for as capital leases. All other leases are accounted for as operating leases. Rent expenses on operat- ing leases, where the Group is lessee, is recognized over the respective lease terms using the straight-line method. Equip- ment on operating leases, where the Group is lessor, is carried initially at its acquisition cost and is depreciated over the contractual term of the lease, using the straight-line method, to its estimated residual value. The estimated residual value is initially determined using published third party information as well as historical and projected experience about expected resale values for the types of equipment leased. Long-Lived Assets – The Group evaluates its long-lived assets (which includes equipment on operating leases where the Group is lessor, but excludes goodwill) in accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (see New Accounting Pro- nouncements). This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of assets to be held and used is assessed by comparing the carrying amount of an asset or asset group to the expected future undiscounted net cash flows of the asset or group of assets. If an asset or group of assets is considered to be impaired, the impairment to be recognized in the Group’s financial statements is measured as the amount by which the carrying amount of the asset or group of assets exceeds fair value. Long-lived assets meeting the criteria to be considered as held for sale are reported at the lower of their carrying amount or fair value less costs to sell. Non-fixed Assets – Non-fixed assets represent the Group’s inventories, receivables, securities and cash, including amounts to be realized in excess of one year. In the accompa- nying notes, the portion of assets and liabilities to be realized and settled in excess of one year has been disclosed. Inventories – Inventories are valued at the lower of acqui- sition or manufacturing cost or market, cost being generally determined on the basis of an average or first-in, first-out method (“FIFO”). Certain of the Group’s U.S. inventories are valued using the last-in, first-out method (“LIFO”). Manufactur- ing costs comprise direct material and labor and applicable manufacturing overheads, including depreciation charges. Notes to Consolidated Financial Statements | 99 Commitments and Contingencies – Liabilities for loss contin- gencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. DaimlerChrysler accrues for losses associated with environ- mental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recog- nized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expendi- tures for environment remediation obligations are not dis- counted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Deposits from Direct Banking Business – Demand deposit accounts are classified as financial liabilities. Interest paid on demand deposit accounts is recognized in cost of sales as incurred. New Accounting Pronouncements – In July 2001, the Finan- cial Accounting Standards Board (“FASB”) issued SFAS 141, “Business Combinations,” and SFAS 142. SFAS 141 requires that the purchase method of accounting be used for all busi- ness combinations initiated after June 30, 2001. SFAS 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from good- will and those acquired intangible assets that are required to be included in goodwill. SFAS 142 requires that goodwill no longer be amortized, but instead tested for impairment at least annually. SFAS 142 also requires recognized intangible assets with a definite useful life to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 144 (see below). Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with SFAS 142 until its life is determined to no longer be indefinite. Marketable Securities and Investments – Securities and certain investments are accounted for at fair value, if readily determinable. Unrealized gains and losses on trading securi- ties, representing securities bought principally for the purpose of near term sales, are included in earnings. Unrealized gains and losses on available-for-sale securities are included as a component of accumulated other comprehensive income (loss), net of applicable taxes. All other securities are recorded at cost. Unrealized losses on all marketable securities and investments that are other than temporary are recognized in earnings. Cash equivalents – The Group’s liquid assets are recorded under various balance sheet captions as more fully described in Note 21. For purposes of the consolidated statements of cash flows, the Group considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Financial Instruments — DaimlerChrysler uses derivative financial instruments such as forward contracts, swaps, options, futures, swaptions, forward rate agreements, caps and floors for hedging purposes. The accounting of financial instruments is based upon the provisions of SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 137 and 138 (see Note 10). SFAS 133 requires that all derivative instruments are recognized as assets or liabilities on the balance sheet and measured at fair value, regardless of the purpose or intent for holding them. Changes in the fair value of derivative instruments are recognized periodically either in earnings or stockholders’ equity, as a component of accumulated other comprehensive income (loss), depending on whether the derivative is designated as a hedge of changes in fair value or cash flows. For derivatives designated as fair value hedges, changes in fair value of the hedged item and the derivative are recognized currently in earnings. For derivatives designated as cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income on the balance sheet, net of applicable taxes, until the hedged item is recog- nized in earnings. The ineffective portions of the fair value changes are recognized in earnings immediately. Derivatives not meeting the criteria for hedge accounting are marked to market and impact earnings. SFAS 133 also requires that certain derivative instruments embedded in host contracts be accounted for separately as derivatives. Further information on the Group’s financial instruments is included in Note 32. 100 | Notes to Consolidated Financial Statements DaimlerChrysler adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001, and January 1, 2002, respective- ly. These Statements require that goodwill acquired in a business combination completed after June 30, 2001, and any intangible asset determined to have an indefinite useful life acquired after June 30, 2001, should not be amortized. Goodwill acquired in business combinations completed before July 1, 2001, and any intangible assets with indefinite useful lives acquired before July 1, 2001, were amortized until December 31, 2001. SFAS 142 required the Group to evaluate its existing intangible assets and goodwill and to make any necessary reclassifications in order to conform with the new separation requirements at the date of adoption. The Group reassessed the estimated useful lives and residual values of all intangible assets other than goodwill and determined that no adjust- ments regarding amortization periods were necessary. In connection with the transitional impairment evaluation, SFAS 142 required DaimlerChrysler to perform an assessment of whether there is an indication that goodwill is impaired as of January 1, 2002. To accomplish this, DaimlerChrysler (1) identified its reporting units, (2) determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units, and (3) determined the fair value of each reporting unit. DaimlerChrysler completed this first step of the transitional assessment for all of the Group’s reporting units by June 30, 2002, and determined there was no indication that goodwill had been impaired as of January 1, 2002. Accord- ingly, no transitional goodwill impairment charge was necessary. Companies accounted for by DaimlerChrysler using the equity method, such as EADS and MMC are also subject to the requirements of SFAS 141 and SFAS 142. Daimler- Chrysler’s proportionate share of its equity method investees’ (primarily EADS) transitional goodwill impairment charge resulting from the adoption of SFAS 142 was 1159 million (10.16 per share). This transitional impairment charge and the related per share amount are reported as the cumulative effect of a change in accounting principle in the Group’s consolidated statement of income (loss) for the year ended December 31, 2002 (see Note 10). In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” The statement applies to legal obligations associated with the retirement of tangible long- lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associat- ed asset retirement costs are capitalized as part of the carry- ing amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life. The Group adopted SFAS 143 on January 1, 2003. The adoption of SFAS 143 did not have a material impact on the Group’s consolidated financial statements. In August 2001, the FASB issued SFAS 144, which retains the previous requirement to recognize an impairment loss only if the carrying amounts of long-lived assets to be held and used are not recoverable from their expected undiscounted future cash flows. However, goodwill is no longer required to be allocated to these long-lived assets when determining their carrying amounts. SFAS 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off be considered held and used until it is disposed. SFAS 144 requires the depreciable life of an asset to be abandoned, be revised to its shortened useful life. SFAS 144 requires all long-lived assets to be disposed of by sale, be recorded at the lower of its carrying amount or fair value less cost to sell and to cease deprecia- tion (amortization). Thus, future operating losses from dis- continued operations are no longer recognized before they occur. SFAS 144 is effective January 1, 2002. The adoption of SFAS 144 compared to previous requirements, except for good- will, did not have an impact on the Group’s consolidated finan- cial statements. In December 2001, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 01-06, “Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.” SOP 01-06 aligns accounting guidance related to loans and trade receivables for all entities. The measurement provisions of the Statement only apply to financial institutions. The disclosure and classification requirements for loans and trade receivables apply to all entities. This SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001. Notes to Consolidated Financial Statements | 101 In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections.” SFAS 145 requires gains and losses on extinguishments of debt to be classified as gains or losses from continuing operations rather than as extraordinary items as previously required under SFAS 4, unless the gains and losses meet the criteria to be classified as extraordinary pursuant to APB 30. SFAS 145 also amends SFAS 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-lease back transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-lease back transactions. The rescission of SFAS 4 is effective for fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. The adoption of these provisions had no impact on the Group’s consolidated financial statements. In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The State- ment requires that a liability for costs associated with exit or disposal activities be recognized in the period in which the costs are incurred if a reasonable estimate of fair value can be made. Under current accounting guidance, a liability can be recognized when management has committed to an exit plan. The requirements under SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. The adoption of this Statement will affect the Group’s accounting for exit and disposal activities initiated after December 31, 2002. In November 2002, the Emerging Issue Task Force (“EITF”) reached a final consensus on EITF 00-21, “Revenue Arrange- ments with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting of revenue arrangements with multiple deliverables by a vendor. The Issue outlines an approach to determine when a revenue arrangement for multiple deliverables should be divided into separate units of accounting and, if separation is appropriate, how the arrange- ment consideration should be allocated to the identified accounting units. The consensus reached in the Issue will be effective for DaimlerChrysler in its financial statements begin- ning July 1, 2003. DaimlerChrysler will apply the consensus prospectively in 2003. DaimlerChrysler is currently determin- ing the impact of the adoption of EITF 00-21 on the Group’s consolidated financial statements. Also in November 2002, the FASB issued FASB Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Require- ments for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB state- ments 5, 57, and 107 and rescission of FASB Interpretation 34.” This Interpretation elaborates on the disclosure to be made by a guarantor in its financial statements regarding obli- gations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation due to the issuance of the guarantee. Disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002 (see Notes 25 b and 31). The recognition and measurement provi- sions are effective for guarantees issued or modified after December 31, 2002. DaimlerChrysler is currently determining the impact of the recognition and measurement provisions of FIN 45 on the Group’s consolidated financial statements. In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensa- tion” to provide alternative methods of transition for a volun- tary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 requires more prominent disclosures in both interim and annu- al financial statements about the method of accounting used for stock-based employee compensation and the effect of the method used on reported results. DaimlerChrysler applies APB 25 that uses an intrinsic value based approach to measure compensation expense. The Group is currently considering the adoption of SFAS 123 in 2003. Under SFAS 123, compen- sation expense of stock option plans is measured at the grant date based on the fair value of the award using an option-pric- ing model. Compensation expense is recognized over the serv- ice period with an offsetting credit to equity (paid-in capital). If adopted, use of the fair value based method will result in additional compensation expense in the Group’s statement of income (loss) depending upon the number, price and other significant terms of the stock options granted (see Note 24). In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which clarifies the application of the consolidation rules to certain variable interest entities. FIN 46 established a new multi-step model for the consolidation of variable interest enti- ties when a company has a controlling financial interest based either on voting interests or variable interests. Consolidation based on variable interests is required by the primary benefici- ary if the equity investors lack essential characteristics of a 102 | Notes to Consolidated Financial Statements controlling financial interest or if the equity investment at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary of a variable interest entity is the par- ty that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. FIN 46 also provides disclosure requirements related to investments in variable interest entities, whether or not those entities are consolidated. For DaimlerChrysler, FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to vari- able interest entities in which DaimlerChrysler obtains an interest after that date. For variable interest entities created prior to February 1, 2003, the consolidation requirements of FIN 46 will be effective as of July 1, 2003. DaimlerChrysler utilizes various special purpose entities to securitize wholesale and retail automotive receivables in the ordinary course of business. Public retail and public wholesale transactions typically involve the sale of a portfolio of receivables through trusts that issue securities to the public. These trusts meet the criteria in SFAS 140 for qualifying special purposes entities (QSPE) and therefore, such securitizations are treated as sales with de-recognition of the transferred receivables. In these transactions, DaimlerChrysler generally receives a servicing fee in exchange for primarily collecting payments, responding to inquiries of obligors on the sold receivables and furnishing the reports as required under the respective servicing agreements. DaimlerChrysler retains a subordinated beneficial interest in the receivables sold and legally its risk of loss is limited to the amount of the carrying value of these retained interests. These transactions are not subject to the provisions of FIN 46. DaimlerChrysler also sells automotive receivables to multi- seller and multi-collateralized bank conduits, which are considered variable interest entities, in the ordinary course of business. DaimlerChrysler generally remains as servicer. DaimlerChrysler also retains residual beneficial interests in the receivables sold which are designed to absorb substantial- ly all of the credit, prepayment, and interest-rate risk of the receivables transferred to the conduit. These transactions are subject to the provisions of FIN 46. DaimlerChrysler is cur- rently evaluating whether it is the primary beneficiary of these variable interest entities and therefore would be required to consolidate them. The outstanding balance of receivables sold to QSPEs and corresponding retained interest balance as of December 31, 2002 are approximately 122.9 billion and 13.2 billion, respec- tively. The outstanding balance of receivables sold to conduits and corresponding retained interest balance as of December 31, 2002 are approximately 17.2 billion and 11.0 billion, respec- tively. To a limited extent, DaimlerChrysler uses off-balance-sheet leasing structures. In these structures, a variable interest entity is established and owned by third parties. The variable interest entity raises funds by issuing debt and equity securi- ties to third party investors. The variable interest entity uses the debt and equity proceeds to purchase property and equipment, which is leased by the Group and used in the nor- mal course of business. At the end of the lease term, Daimler- Chrysler generally has the option to purchase the property and equipment at fair value or re-lease the property and equip- ment under new terms. DaimlerChrysler is currently evaluating whether its interests in these entities require consolidation or information to be disclosed when FIN 46 becomes effective. If these entities are required to be consolidated in accordance with FIN 46, their aggregate size is not expected to be material to the Group's consolidated financial statements. Further, the Group’s maximum exposure to loss as a result of its involvement with these entities is also not expected to be significant. DaimlerChrysler is evaluating the extent to which it has involvement in other entities, in addition to those described above, and whether its interests are subject to the require- ments of FIN 46. It is reasonably possible that Daimler- Chrysler may be required to consolidate or disclose informa- tion about any of these entities when FIN 46 becomes effective. However, DaimlerChrysler believes the aggregate size and the Group’s maximum exposure to loss as a result of its involvement with these entities is also insignificant. 2. Scope of Consolidation Scope of Consolidation – DaimlerChrysler comprises 451 German and non-German subsidiaries (2001: 470). A total of 102 (2001: 102) companies are accounted for in the con- solidated financial statements using the equity method of accounting. During 2002, 45 subsidiaries were included in the consolidated financial statements for the first time. A total of 64 subsidiaries were no longer included in the consolidated group. Significant effects of changes in the consolidated group on the consolidated balance sheets and the consolidat- ed statements of income (loss) are explained further in the notes to the consolidated financial statements. A total of 305 subsidiaries (“affiliated companies”) are not consolidated as their combined influence on the financial position, results of operations, and cash flows of the Group is not material (2001: 296). The effect of such non-consolidated subsidiaries for all years presented on consolidated assets, revenues and net income (loss) of DaimlerChrysler was approximately 1%. In Notes to Consolidated Financial Statements | 103 The following tables present, on a three month lag, summa- rized U.S. GAAP financial information for EADS and MMC (amounts shown on a 100% basis in millions of 1) which are the basis for applying the equity method in the Group’s consolidated financial statements: EADS Income statement information Revenues Net income Balance sheet information Fixed assets Non-fixed assets Total assets Stockholders’ equity Minority interests Accrued liabilities Other liabilities Total liabilities and stockholders’ equity MMC Income statement information Revenues Net income (loss) Balance sheet information Fixed assets Non-fixed assets Total assets Stockholders’ equity Minority interests Accrued liabilities Other liabilities Total liabilities and stockholders’ equity 2002 28,769 521 2001 27,004 2,598 At December 31, 2001 2002 26,254 19,207 45,461 13,143 942 8,262 23,114 45,461 2002 27,847 154 2002 10,465 11,971 22,436 1,422 121 5,039 15,854 22,436 26,505 22,119 48,624 11,409 598 11,149 25,468 48,624 2001 30,057 (1,209) 2001 11,974 12,697 24,671 1,528 (61) 5,800 17,404 24,671 addition, 5 (2001: 5) companies administering pension funds whose assets are subject to restrictions have not been included in the consolidated financial statements. The consolidated financial statements include 112 associated companies (2001: 96) accounted for at cost and recorded under invest- ments in related companies as these companies are not material to the respective presentation of the financial position, results of operations or cash flows of the Group. 3. Equity Method Investments At December 31, 2002, the significant investments in compa- nies accounted for under the equity method were the following: Company European Aeronautic Defence and Space Company EADS N.V. Mitsubishi Motors Corporation Ownership percentage 33.0% 37.1% Further information with respect to the transactions which resulted in the Group’s holdings in EADS and MMC is presented in Note 4 (Acquisitions and Dispositions) and Note 11 (Extra- ordinary Items). The aggregate quoted market prices as of December 31, 2002, for DaimlerChrysler’s shares in EADS and MMC were 12,627 million and 11,124 million, respectively. The carrying value of the significant investments exceeded DaimlerChrysler’s share of the underlying reported net assets by approximately 1840 million at December 31, 2002. The excess of the Group’s initial investment in equity method com- panies over the Group’s ownership percentage in the underly- ing net assets of those companies is attributed to certain fair value adjustments with the remaining portion considered as investor level goodwill. The fair value adjustments and good- will are accounted for in the respective equity method invest- ment balances. Under the equity method, investments are stated at initial cost and are adjusted for subsequent contri- butions and DaimlerChrysler’s share of the equity investees’ earnings, losses and distributions. Investor level goodwill relating to the Group’s investments in EADS and MMC was being amortized over a 20 year period until December 31, 2001. After December 31, 2001, such goodwill was no longer amortized as a result of adopting SFAS 142. The total carrying value, including goodwill, of each equity method investment will continue to be evaluated for impairment when conditions indicate that a decline in fair value below the carrying amount is other than temporary. 104 | Notes to Consolidated Financial Statements 4. Acquisitions and Dispositions DaimlerChrysler signed contracts to sell a controlling (51%) interest in VM Motori S.p.A. and its 100% ownership interest in Detroit Diesel Motores do Brasil Ltda, both wholly-owned subsidiaries of DaimlerChrysler, in the fourth quarter of 2002. The sales of these ownership interests are expected to be concluded in the first quarter of 2003. The expected losses from the sales of these ownership interests has been allocat- ed to impairment losses on (1) long-lived assets in the dispos- al groups held for sale, (2) goodwill in the disposal groups held for sale, (3) long-lived assets to be retained and (4) goodwill to be retained. The total goodwill impairment charge recognized in 2002 amounted to 140 million and is included in other expenses of the Commercial Vehicles segment (see Note 5). Within the consolidated balance sheet, 1122 million of total assets and 1102 million total liabilities have been classified as held for sale at December 31, 2002. DaimlerChrysler will account for the remaining 49% of VM Motori S.p.A. using the equity method. On January 6, 2003, MMC spun off its “Fuso Truck and Bus” division, creating Mitsubishi Fuso Truck and Bus Corporation (“MFTBC”). Pursuant to a share sale and purchase agreement with MMC dated September 20, 2002, DaimlerChrysler agreed to purchase from MMC a non-controlling (43%) interest of MFTBC’s shares for approximately 1760 million in cash. Ten Mitsubishi Group companies, including Mitsubishi Corporation, Mitsubishi Heavy Industries and Bank of Tokyo-Mitsubishi, entered into a separate share sale and purchase agreement with MMC pursuant to which they agreed to purchase from MMC a total minority interest of 15% of MFTBC’s shares for approximately 1265 million in cash. DaimlerChrysler and the Mitsubishi Group purchasers expect to consummate their respective transactions in March 2003. After the transactions are executed, MMC will hold a non-controlling (42%) interest in MFTBC. DaimlerChrysler will account for its investment in MFTBC using the equity method with the excess of the pur- chase price of DaimlerChrysler’s share of the underlying net assets of MFTBC allocated to any identifiable tangible and intangible assets based on estimated fair values. Any remaining excess purchase price will be allocated to investor-level goodwill. In June 2001, DaimlerChrysler entered into a commercial vehicle joint venture agreement with Hyundai Motor Company (“HMC”). In a first phase, the Group and HMC established DaimlerHyundai Truck Corporation (“DHTC”). The Group acquired a non-controlling (50%) interest in DHTC. DHTC was formed to produce and/or distribute engines and engine parts. The commercial vehicle joint venture agreement with HMC also included an option for the Group to acquire 50% of the commercial vehicle business of HMC. Pursuant to this option, which DaimlerChrysler exercised in December 2002, HMC is in the process of contributing its entire commercial vehicle business to a new legal entity. Subject to receiving all necessary governmental approvals, DaimlerChrysler currently plans to acquire a 50% interest in that entity from HMC for 1400 million at the end of February 2003. DaimlerChrysler will account for its investment in the commercial vehicle business using the equity method with the excess of the purchase price of DaimlerChrysler’s share of the underlying net assets allo- cated to any identifiable tangible and intangible assets based on estimated fair values. Any remaining excess purchase price will be allocated to investor-level goodwill. The purpose of the new commercial vehicle joint venture is to design, produce and distribute commercial vehicles above 4t gross vehicle weight (GVW), including buses, as well as components for those vehicles. DaimlerChrysler and HMC intend to combine their commercial vehicle and engine joint ventures in the first half of 2003. The Group continues to hold a 10% equity interest in HMC, which was acquired in two installments in September 2000 and in March 2001 for approximately 1484 million and is accounted for as an available-for-sale security. During 2002, in separate transactions, the Group acquired various dealerships in Europe and completed certain other acquisitions, none of which were material. The aggregate purchase price paid in these separate acquisitions resulted in additions to goodwill of approximately 1132 million. Notes to Consolidated Financial Statements | 105 In October 2000, DaimlerChrysler acquired all the remai- ning outstanding shares of Detroit Diesel Corporation for approximately 1500 million. The acquisition of the remaining 78.6% interest in Detroit Diesel was accounted for using the purchase method of accounting and resulted in goodwill of approximately 1310 million, which was being amortized on a straight-line basis using an useful life of 20 years until December 31, 2001. After December 31, 2001, goodwill will no longer be amortized, but instead tested for impairment at least annually, as a result of adopting SFAS 142. In October 2000, DaimlerChrysler Services AG and Deutsche Telekom AG formed a joint venture in the area of information technology. In accordance with the agreement, Deutsche Telekom received a 50.1% interest in T-Systems ITS through an investment of approximately 14,571 million for new shares of T-Systems ITS (see Note 11). In January 2002, DaimlerChrysler exercised its option to sell to Deutsche Telekom the Group’s 49.9% interest in T-Systems ITS for pro- ceeds of 14,694 million. The sale was consummated in March 2002 with the termination of the joint venture, resulting in a gain of 12,484 million. In September 2000, DaimlerChrysler acquired 100% of the outstanding shares of the Canadian company Western Star Trucks Holdings Ltd. for approximately 1500 million. The acquisition was accounted for using the purchase method of accounting and resulted in goodwill of approximately 1380 million, which was being amortized on a straight-line basis using a useful life of 20 years until December 31, 2001. After December 31, 2001, goodwill will no longer be amortized, but instead tested for impairment at least annually, as a result of adopting SFAS 142. Information on the exchange of the Group’s controlling interest in DaimlerChrysler Aerospace for shares of EADS and the related initial public offering of EADS in July 2000 is included in Note 11. On October 18, 2000, DaimlerChrysler acquired a 34% equity interest in MMC for approximately 12,200 million. At the closing date of the transaction, the Group also purchased MMC bonds with an aggregate face value of JPY19,200 million and a stated interest rate of 1.7% for 1206 million, which are convertible into shares of MMC stock. The bonds are only convertible by DaimlerChrysler in the event that its ownership percentage would be diluted below 34% upon conversion of previously issued convertible bonds. To the extent not con- verted, the bonds and accrued interest are due on April 30, 2003. In June 2001, Volvo AB sold its 3.3% interest in MMC, plus its operational contracts with MMC, to DaimlerChrysler for $297 million (1343 million) increasing DaimlerChrysler’s interest in MMC to 37.3%. In November 2002, a rights offering at MMC reduced the Group’s interest to 37.1%. In August 2000, DaimlerChrysler signed a sale and purchase agreement with the Canadian company Bombardier Inc. for the sale of DaimlerChrysler Rail Systems GmbH (“Adtranz”). With the closing of the transaction on April 30, 2001, control over the operations of Adtranz was transferred to Bombardier on May 1, 2001. Accordingly, the operating results of Adtranz are included in the consolidated financial statements of DaimlerChrysler through April 30, 2001. The sales price of $725 million was received during 2001. On July 5, 2002, Bombardier filed a request for arbitration with the International Chamber of Commerce, Paris, and thereby raised claims for sales price adjustments under the terms of the sale and pur- chase agreement as well as claims for alleged breaches of contract and misrepresentation, and seeks total damages of approximately 1960 million. The sale and purchase agreement limits the amount of such price adjustments to 1150 million, and, to the extent legally permissible, the amount of other claims to an additional 1150 million. DaimlerChrysler believes the complaints are without merit and is defending itself vigor- ously against such claims in the current arbitration proceed- ings. Due to uncertainties with respect to the ultimate out- come of these proceedings, the Group has recognized a par- tial after-tax gain of 1237 million on the sale of Adtranz in the fourth quarter of 2001, representing the maximum possible adjustment to the sales price and the aforementioned maxi- mum amount with respect to any further claims in accordance with the sale and purchase agreement. In April 2001, DaimlerChrysler completed the sale of 60% of the interest in TEMIC to Continental AG for 1398 million, resulting in a pretax gain of 1209 million. In April 2002, DaimlerChrysler exercised its option to sell to Continental AG the Group’s 40% interest in Conti Temic microelectronic for proceeds of 1215 million, resulting in a pretax gain of 1128 million. 106 | Notes to Consolidated Statements of Income (Loss) Notes to Consolidated Statements of Income (Loss) 5. Functional Costs and Other Expenses Selling, administrative and other expenses are comprised of the following: (in millions of 3) Selling expenses Administration expenses Goodwill amortization and impairments Other expenses Year ended December 31, 2000 2001 2002 12,059 11,823 11,666 5,390 5,539 5,921 40 804 184 785 279 437 18,293 18,331 18,303 Moderate demand and strong competition in the European market for commercial vehicles resulted in idle capacity at one of the Group’s German assembly plants. Consequently, DaimlerChrysler determined that it does not expect to recover the carrying value of certain long-lived assets (primarily manufacturing equipment and tooling) at this plant. In accor- dance with the provisions of SFAS 144, an impairment charge amounting to 1201 million was recognized in 2002. The charge is included in cost of sales of the Commercial Vehicles segment. In 2002, a goodwill impairment charge of 140 million was recognized in connection with the contracted sale of control- ling interests in two businesses in the Commercial Vehicles segment (see Note 4). In October 2002, DaimlerChrysler reached a final agree- ment with GE Capital to sell a significant portion of its port- folio of corporate aircraft, consisting of finance lease receiv- ables and owned aircraft currently under operating leases. The sale will be consummated in tranches beginning in November 2002 over a period of approximately 12 months. The agree- ment contains provisions for DaimlerChrysler to receive a share of future payments throughout the remaining term of the contracts in the portfolio. As a result of current economic conditions, the Group also re-evaluated the recoverability of its remaining leasing portfolio in the fourth quarter of 2002. In connection with the sale agreement, the Group classified finance lease receivables with a carrying value of 1493 million and equipment under operating leases with a carrying value of 140 million as held for sale at December 31, 2002. The Services segment recognized impairment losses amounting to 1191 million in other expenses and 120 million in cost of sales related to the assets held for sale and the re-evaluation of the remaining portfolio. In 2002, due to declining resale prices of used passenger cars and commercial vehicles in North America, DaimlerChrysler recognized impairment charges totaling 1256 million upon re- evaluation of the recoverability of the carrying value of its leased vehicles. This re-evaluation was performed using product specific cash flow information. As a result, the carry- ing values of these leased vehicles were determined to be impaired as the identifiable undiscounted future cash flows were less than their respective carrying values. In accordance with SFAS 144, the resulting impairment charges, recorded as a component of cost of sales in the Services segment, repre- sent the amount by which the carrying values of such vehicles exceeded their respective fair market values. Following a decision of DaimlerChrysler’s Board of Manage- ment in the fourth quarter of 2001, DaimlerChrysler, GE Capi- tal and other financial services providers reached an agree- ment during the six months ended June 30, 2002 to purchase a portion of the DaimlerChrysler’s commercial real estate and asset-based lending portfolios in the United States for 11,260 million. The decision resulted in a charge of 1166 million, which is included in other expense of the Services segment in 2001. As discussed in Note 7, the DaimlerChrysler Supervisory Board approved a multi-year turnaround plan for the Chrysler Group in February 2001. The related charges are presented as a separate line item on the accompanying consolidated statements of income (loss) and are not reflected in cost of sales or selling, administrative and other expenses. In October 2001, the DaimlerChrysler Board of Management approved a turnaround plan for its North American truck subsidiary Freightliner. The turnaround plan is designed to return Freightliner to sustainable profitability and comprises four main elements: material cost savings, production cost savings, overhead reductions and improvements to the exist- ing business model. The implementation of the turnaround plan resulted in charges of 1310 million, reflecting employee termination benefits of 183 million, asset impairment charges of 1170 million, and other costs to exit certain activities of 157 million (see Note 25b). The charges were recorded in cost of sales (1173 million) and selling, administrative and other expenses (1137 million) in 2001. Employee termination bene- fits related to voluntary and involuntary severance measures affected hourly and salaried employees. As a result of the voluntary and involuntary measures, 1,314 and 1,484 hourly and salaried employees were affected by the plan in 2002 and 2001, respectively. The amount of employee termination benefit paid and charged against the liability was 138 million in 2002. Notes to Consolidated Statements of Income (Loss) | 107 Based on its investment in MMC and the corresponding stra- tegic alliance entered into in the fourth quarter 2000, Daimler- Chrysler conducted a review of its compact car strategy in 2000, and concluded that it was necessary to revise the cur- rent strategic plan for the smart brand, including restructuring of supplier contracts. As a result, the carrying values of cer- tain of the brand’s long-lived assets were determined to be impaired as the identifiable, undiscounted future cash flows from the operation of such assets were less then their respec- tive carrying values. In accordance with SFAS 121, “Account- ing for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of,” DaimlerChrysler recorded an impairment charge of 1281 million. The impairment charge represents the amount by which the carrying values of such assets exceeded their respective fair market values. The im- pairment relates principally to the carrying values of the man- ufacturing facility, equipment and tooling. In addition, charges of 1255 million were recorded related to fixed cost reimbur- sement agreements with MCC smart suppliers. The charges were recorded in cost of sales (1494 million) and other expenses (142 million) for the year 2000. In 2000, DaimlerChrysler recorded an impairment charge in cost of sales of approximately 1500 million for certain leased vehicles in the Services segment. Declining resale prices of used vehicles in the North American and the U.K. markets required the Group to re-evaluate the recoverability of the carrying values of its leased vehicles. This re-evaluation was performed using product specific cash flow information. As a result, the carrying values of these leased vehicles were deter- mined to be impaired as the identifiable undiscounted future cash flows from such vehicles were less than their respective carrying values. In accordance with SFAS 121, the resulting pre-tax impairment charges represent the amount by which the carrying values of such vehicles exceeded their respective fair market values. Personnel expenses included in the statement of income (loss) are comprised of: (in millions of 3) Wages and salaries Social levies Net pension cost (see Note 25a) Net postretirement benefit cost (see Note 25a) Other expenses for pensions and retirements Year ended December 31, 2000 2001 2002 19,701 20,073 21,836 3,132 3,193 3,428 152 630 1,119 1,173 59 26 327 830 79 24,163 25,095 26,500 Number of employees (annual average): Hourly employees Salaried employees Trainees/apprentices Year ended December 31, 2000 2001 2002 232,304 244,938 270,814 125,110 122,094 165,117 13,263 12,512 13,663 370,677 379,544 449,594 In 2001 and 2000, 28 people were employed in each of the years in joint venture companies. Information on the remuneration to the current members of the Supervisory Board and the Board of Management is in- cluded in Note 37. In 2002, disbursements to former members of the Board of Management of DaimlerChrysler AG and their survivors amounted to 19 million. An amount of 1150 million has been accrued for pension obligations to former members of the Board of Management and their survivors. As of December 31, 2002, no advances or loans existed to members of the Board of Management of DaimlerChrysler AG. 6. Other Income Other income includes gains on sales of property, plant and equipment (149 million, 1104 million and 1106 million in 2002, 2001 and 2000, respectively) and rental income, other than relating to financial services leasing activities (1197 million, 1191 million and 1178 million in 2002, 2001 and 2000, respectively). In 2001, gains on sales of companies of 1465 million were recognized in other income. 108 | Notes to Consolidated Statements of Income (Loss) The pretax amounts for turnaround plan charges since initia- tion in the first quarter of 2001 are comprised of the following: (in millions of 3) Reserve balance at January 1, 2001 Initial charges Additional charges Adjustments Net charges Payments Amount charged against assets Amount recognized by and transferred to the employee benefit plans Currency trans- lation adjustment Reserve balance at December 31, 2001 Additional charges Adjustments Net charges Payments Amount charged against assets Amount recognized by and transferred to the employee benefit plans Currency trans- lation adjustment Reserve balance at December 31, 2002 Workforce reductions Asset write-downs Other costs Total – 1,403 93 (122) 1,374 (211) – 836 148 – 984 – – 808 27 (129) 706 (154) – 3,047 268 (251) (3,064) (365) – (984) (63) (1,047) (695) 38 506 353 (41) 312 (297) – – – 269 30 299 – – 21 510 99 (16) 83 (695) 59 1,016 721 (27) 694 (215) (512) – (299) (6) (305) (152) (89) 280 – – – – (152) (67) (156) 305 585 7. Turnaround Plan for the Chrysler Group The DaimlerChrysler Supervisory Board approved a multi-year turnaround plan for the Chrysler Group in 2001. Key initiatives for the turnaround plan over the period 2001 through 2003 include a workforce reduction and an elimination of excess capacity. The workforce reduction affected represented and non-represented hourly and salary employees. To eliminate excess capacity, the Chrysler Group is idling, closing or disposing of certain manufacturing plants, eliminating shifts and reducing line speeds at certain manufacturing facilities, and adjusting volumes at component, stamping and powertrain facilities. The net charges recorded for the plan in 2001 were 13,064 million (11,934 million net of taxes) and are presented as a separate line item on the accompanying consolidated state- ments of income (loss) (12,555 million and 1509 million would have otherwise been reflected in cost of sales and selling, administrative and other expenses, respectively). The initial charges of 13,047 million were recorded in February 2001 with the approval of the turnaround plan. Additional charges of 1268 million in 2001 resulted from the subsequent impairment and disposal costs associated with a component plant as well as costs for a special early retirement program. The return to income adjustments of 1251 million in 2001 include revisions of estimates based upon information currently available or actual settlements. These adjustments reflect lower than anticipated costs associated with workforce reduction initiatives, including the involuntary severance benefits, and favorable resolution of supplier contract cancellation claims. The net charges recorded for the plan in 2002, were 1694 million (1439 million net of taxes) and are presented as a sep- arate line item on the accompanying consolidated statements of income (loss) (1680 million and 114 million would have otherwise been reflected in cost of sales and selling, adminis- trative and other expenses, respectively). These charges were for additional costs associated with the idling, closing or dis- posal of certain manufacturing facilities in 2002 and 2003 and ongoing workforce reduction measures as well as revisions of estimates based upon information currently available or actual settlements. Notes to Consolidated Statements of Income (Loss) | 109 Workforce reduction charges in 2002 and 2001 relate to early retirement incentive programs (1160 million and 1725 million, respectively) and involuntary severance benefits (1152 million and 1649 million, respectively). The voluntary early retirement programs, accepted by 3,175 and 9,261 employ- ees in 2002 and 2001, respectively, are formula driven based on salary levels, age and past service. In addition, 5,106 and 7,174 employees were involuntarily affected by the plan in 2002 and 2001, respectively. The amount of involuntary severance benefits paid and charged against the liability was 1199 million and 1131 million in 2002 and 2001, respectively. The amount recognized by and transferred to the employee benefit plans represents the cost of the special early retirement programs and the curtailment of prior service costs actuarially recognized by the pension and postretirement health and life insurance benefit plans. As a result of the planned idling, closing or disposal of certain manufacturing facilities, the recovery of the carrying values of certain long-lived assets at these plants were deter- mined to be impaired. Accordingly, the Chrysler Group recorded impairment charges of 1299 million in 2002 and 1984 million in 2001. The impairment charges represent the amount by which the carrying values of the property, plant, equipment and tooling exceeded their respective fair market values as determined by third party appraisals or comparative market analyses developed by the Chrysler Group. The Chrysler Group sold the Dayton Thermal Products facility on May 1, 2002 to a joint venture company with Behr America, Inc. and will maintain a minority interest for two years. In addition, the Chrysler Group sold the Graz, Austria plant to Magna International Inc. on July 12, 2002. The exit costs of these two plant sales were provided for in the Turnaround Plan charges. Other costs primarily include supplier contract cancellation costs. Other key initiatives of the plan include additional cost reduction and revenue enhancing measures. Specifically, in an effort to reduce costs, suppliers were requested to voluntarily reduce the prices charged for materials and services. Under the revenue enhancement measures of the turnaround plan, certain dealer programs were replaced with a new perform- ance-based incentive program under which dealers may earn cash payments based on levels of achievement compared to pre-assigned monthly retail sales objectives as well as 24 individual sales offices throughout the United States were reorganized into eight regional business centers. 8. Financial Income, net (in millions of 3) Income from investments of which from affiliated companies 144 (2001: 1(2); 2000: 124) Gains, net from disposals of investments and shares in affiliated and associated companies Write-down of investments and shares in affiliated companies Income (loss) from companies included at equity Income (loss) from investments, net Other interest and similar income of which from affiliated companies 19 (2001: 131; 2000: 120) Interest and similar expenses of which from affiliated companies 121 (2001: 121; 2000: 114) Interest income (expense), net Income from securities and long-term receivable of which from affiliated companies 17 (2001: 19; 2000: 110) Write-down of securities and long-term receivable Other, net Other financial income (loss), net Year ended December 31, 2000 2001 2002 74 24 73 2,645 320 1 (63) (109) (54) (16) 2,640 97 332 (244) (224) 720 1,040 1,268 (1,040) (1,317) (320) (277) (988) 280 84 291 (71) (125) (112) 2,208 (16) (176) 99 154 161 (3) (58) 100 156 In 2002 the Group sold its 49.9%-interest in T-Systems ITS. This sale resulted in a gain of 12,484 million, which is included in gains from disposals of investments and shares in affiliated and associated companies (see Note 4). In 2001, EADS, an equity method investee of the Group, created a new company, Airbus SAS, and contributed all of its Airbus activities into the new company for a 100% ownership interest. Also in 2001, Airbus SAS issued new shares to BAe Systems in exchange for all of its Airbus activities. As a result of this transaction, EADS’ ownership interest in Airbus SAS, which is consolidated by EADS, was diluted to 80%. Daimler- Chrysler recognized under U.S. GAAP its share of the gain resulting from the formation of Airbus SAS in the amount of 1747 million in income (loss) from companies included at equity. The Group capitalized interest expenses related to qualifying construction projects of 1147 million (2001: 1275 million; 2000: 1181 million). 110 | Notes to Consolidated Statements of Income (Loss) 9. Income Taxes Income (loss) before income taxes consists of the following: (in millions of 3) Germany Non-German countries Year ended December 31, 2000 2001 2002 4,379 1,689 6,068 4,498 (5,981) (1,483) 2,729 1,747 4,476 Income tax expense (benefit) is comprised of the following components: (in millions of 3) Current taxes Germany Non-German countries Deferred taxes Germany Non-German countries Year ended December 31, 2000 2001 2002 1,195 (286) 793 (512) (430) 637 698 (1,695) 1,177 (777) (45) 1,160 1,490 (606) 1,999 For German companies, the deferred taxes at December 31, 2002 are calculated using a federal corporate tax rate of 26.5% (2001 and 2000: 25%) for deferred taxes which will reverse in the next year and 25% (2001 and 2000: 25%) for deferred taxes which will reverse after one year. Deferred taxes are also calculated with a solidarity surcharge of 5.5% for each year on federal corporate taxes payable plus the after federal tax benefit rate for trade tax of 11.842% (2001 and 2000: 12.125%) for deferred taxes which will reverse in the next year and 12.125% (2001 and 2000: 12.125%) for deferred taxes which will reverse after one year. Including the impact of the surcharge and the trade tax, the tax rate applied to German deferred taxes amounts to 39.8% (2001 and 2000: 38.5%) for deferred taxes which will reverse in the next year and 38.5% (2001 and 2000: 38.5%) for deferred taxes which will reverse after one year. In 2002, the German government enacted new tax legis- lation for the purpose of financing the flood disaster which, among other changes, increased the Group’s statutory corporate tax rate for German companies from 25% to 26.5%, effective for the calendar year 2003. The effect of the increase in the tax rate on the deferred tax assets and liabilities of the Group’s German companies was recognized in the year of enactment and as a result, a net charge of 13 million is includ- ed in the consolidated statement of income (loss) in 2002. In 2000, the German government enacted new tax legislation which, among other changes, reduced the Group’s statutory corporate tax rate for German companies from 40% on retained earnings and 30% on distributed earnings to a uniform 25%, effective for the Group’s year beginning January 1, 2001. The significant other tax law change is the exemption from tax for certain gains and losses from the sale of shares in affiliated and unaffiliated companies. The effects of the reduction in the tax rate and other changes on the deferred tax assets and liabilities of the Group’s German companies were recognized in the year of enactment. As a result, a net charge of 1263 million is included in the consolidated statement of income (loss) in 2000. The effects of the reduction in the tax rate resulted in deferred tax expense of 1373 million. The exemp- tion from tax for certain gains from the sale of shares resulted in deferred tax benefit of 1110 million due to the elimination of the net deferred tax liabilities on the net unrealized gains. The effect of the tax law changes in Germany in 2002 and 2000 are reflected separately in the reconciliations presented below. For the year ending December 31, 2000, the German corpo- rate tax law applied a split-rate imputation with regard to the taxation of the earnings of a corporation. In accordance with the tax law in effect for 2000, retained corporate income was initially subject to a federal corporate tax of 40% plus a soli- darity surcharge of 5.5% on federal corporate taxes payable. Including the impact of the surcharge, the federal corporate tax rate amounted to 42.2%. Upon distribution of certain retained earnings generated in Germany to stockholders, the corporate income tax rate on the earnings was adjusted to 30%, plus a solidarity surcharge of 5.5% on the distribution corporate tax, for a total of 31.65%, by means of a refund for taxes previously paid. Under the new German corporate tax system, during a 15 year transition period beginning on January 1, 2001, the Group will continue to receive a refund on the distribution of retained earnings which existed as of December 31, 2000. As of December 31, 2002, the Group has used substantially all of its credit for German corporate tax on the distribution of retained earnings. A reconciliation of expected income taxes to actual income tax expense (benefit) determined using the applicable German corporate tax rate for the calendar year of 25% (2001: 25%; 2000: 40%) plus a solidarity surcharge of 5.5% on federal cor- porate taxes plus the after federal tax benefit rate for trade taxes of 12.125% (2001: 12.125%; 2000: 9.3%) for a combined statutory rate of 38.5% in 2002 (2001: 38.5%; 2000: 51.5%) is as follows: (in millions of 3) Expected expense (benefit) for income taxes Tax rate differential with non-German countries Gains from sales of business interests (T-Systems ITS, TEMIC, Adtranz, debitel) Trade tax rate differential Changes in valuation allowances on German deferred tax assets Tax effect of equity method investments Amortization of non-deductible goodwill Tax free income and non-deductible expenses Effect of changes in German tax laws Dividend distribution credit at DC AG Other Actual expense (benefit) for income taxes (1,012) (31) – 2 – 114 3 (57) 60 5 52 (76) – – 6 48 263 (491) 83 1,177 (777) 1,999 In 2002, income tax credits from dividend distribution reflected the tax benefit from the 2001 dividend distribution of 11.00 per Ordinary Share paid in 2002. In 2000, income tax credits from dividend distribution reflected the tax benefit from the dividend distribution of 12.35 per Ordinary Share to be paid for that year. Notes to Consolidated Statements of Income (Loss) | 111 Year ended December 31, 2000 2001 2002 Deferred income tax assets and liabilities are summarized as follows: 2,336 (571) 2,305 (in millions of 3) (238) 96 (346) Property, plant and equipment (191) (50) 29 – (28) – Investments and long-term financial assets Equipment on operating leases Inventories Receivables Net operating loss and tax credit carryforwards Pension plans and similar obligations (25) 113 Other accrued liabilities At December 31, 2001 2002 611 2,132 956 709 663 3,002 3,424 4,938 1,733 1,138 120 365 2,135 689 697 1,369 3,078 3,682 6,340 1,331 944 423 19,426 21,053 (241) 19,185 (3,733) (7,855) (115) (145) 20,908 (4,095) (8,286) (385) (2,558) (2,542) (472) (388) (448) (482) (1,497) (4,794) (112) (673) (399) (567) (188) (514) (197) (333) (17,884) (22,749) 1,301 (1,841) Liabilities Deferred income Other Valuation allowances Deferred tax assets Property, plant and equipment Equipment on operating leases Inventories Receivables Securities Prepaid expenses Pension plans and similar obligations Other accrued liabilities Taxes on undistributed earnings of non-German subsidiaries Liabilities Other Deferred tax liabilities Deferred tax assets (liabilities), net At December 31, 2002, the Group had corporate and trade tax net operating losses (“NOLs”) amounting to 15,234 million (2001: 14,668 million) and credit carryforwards amounting to 11,788 million (2001: 11,552 million), determined in accor- dance with U.S. GAAP. The corporate tax NOLs and credit carryforwards relate to losses of non-German companies and German non-Organschaft companies and are partly limited in their use to the Group. The valuation allowances on deferred tax assets of German and non-German operations increased by 196 million. In future periods, depending upon the financial results, management’s estimate of the amount of the deferred tax assets considered realizable may change, and hence the valuation allowances may increase or decrease. 10. Cumulative Effects of Changes in Accounting Principles Goodwill and Other Intangible Assets: Adoption of SFAS 142 – DaimlerChrysler adopted SFAS 142 on January 1, 2002. The transitional goodwill impairment charge recognized in the consolidated statement of income (loss) in 2002 by Daimler- Chrysler was 1159 million (10.16 per share), which represents the Group’s proportionate share of the transitional goodwill impairment charges from equity method investees, primarily EADS (see Note 1). Beneficial Interests in Securitized Financial Assets: Adoption of EITF 99-20 – As of July 1, 2000, DaimlerChrysler adopted EITF 99-20 which specifies, among other things, how a trans- feror that retains an interest in a securitization transaction, or an enterprise that purchases a beneficial interest, should account for interest income and impairment. The cumulative effect of adopting EITF 99-20 was a charge of 199 million (net of income tax benefits of 158 million). Derivative Financial Instruments and Hedging Activities: Adoption of SFAS 133 and SFAS 138 – DaimlerChrysler elect- ed to adopt SFAS 133 on January 1, 2000. Upon adoption of this Statement, DaimlerChrysler recorded a net transition adjustment gain of 112 million (net of income tax expense of 15 million) in the statement of income (loss) and a net transi- tion adjustment loss of 1349 million (net of income tax benefit of 1367 million) in accumulated other comprehensive income. Adoption of SFAS 138 did not have an impact on the Group’s consolidated statement of income (loss). 112 | Notes to Consolidated Statements of Income (Loss) The Group has various income tax years unresolved with the taxing authorities. The open years are either under review by taxing authorities or not yet under examination. The Group believes it has made adequate provision for any future income taxes that may be owed for all open years. Net deferred income tax assets and liabilities in the con- solidated balance sheets are as follows: (in millions of 3) At December 31, 2002 thereof noncurrent Total At December 31, 2001 thereof noncurrent Total Deferred tax assets 3,613 1,714 3,010 425 Deferred tax liabilities (2,312) (1,535) (4,851) (4,761) Deferred tax assets (liabilities), net 1,301 179 (1,841) (4,336) DaimlerChrysler recorded deferred tax liabilities for non-Ger- man withholding taxes of 1288 million (2001: 1371 million) on 15,760 million (2001: 17,421 million) in cumulative undistrib- uted earnings of non-German subsidiaries and additional German tax of 1111 million (2001: 1143 million) on the future payout of these foreign dividends because the earnings are not intended to be permanently reinvested in those opera- tions. The Group did not provide income taxes or non-German withholding taxes on 16,950 million (2001: 112,357 million) in cumulative earnings of non-German subsidiaries because the earnings are intended to be indefinitely reinvested in those operations. It is not practicable to estimate the amount of unrecognized deferred tax liabilities for these undistributed foreign earnings. Including the items charged or credited directly to related components of accumulated other comprehensive income (loss) and the expense (benefit) for income taxes of extraordi- nary items and from changes in accounting principles, the expense (benefit) for income taxes consists of the following: (in millions of 3) 2002 2001 2000 Expense (benefit) for income taxes before extraordinary items Income tax expense of extraordinary items Income tax benefit from changes in accounting principles Stockholders’ equity for items in accu- mulated other comprehensive income 1,177 (777) 1,999 – – – – 324 (53) (2,699) (1,522) (507) (1,284) (338) 1,932 In 2002, tax benefits of 1175 million from the reversal of de- ferred tax asset valuation allowances at subsidiaries of MMC were recorded as a reduction of the investor level goodwill relating to the Group’s investment in MMC. Notes to Consolidated Statements of Income (Loss) | 113 11. Extraordinary Items In October 2000, Adtranz sold its fixed installations business which primarily focuses on rail electrification and traction power to Balfour Beatty for 1153 million resulting in an extra- ordinary after-tax gain of 189 million (net of income tax expense of 152 million). In 2000, Ballard Power Systems Inc., a developer of fuel cells and related power generation systems, issued additional common shares to its shareholders. DaimlerChrysler elected not to purchase additional shares thereby reducing its owner- ship interest. The dilution of its ownership interest resulted in an extraordinary gain of 173 million. In October 2000, DaimlerChrysler and Deutsche Telekom The gains from each of the foregoing transactions are reported as extraordinary items in the consolidated statements of income (loss) for the year 2000 because U.S. GAAP requires such presentation when a significant disposition of assets or businesses occurs within two years subsequent to accounting for a business combination using the pooling- of-interests method. combined their information technology activities in a joint venture. In accordance with an agreement announced on March 27, 2000, Deutsche Telekom received a 50.1% interest in T-Systems ITS through an investment of approximately 14.6 billion for new shares of T-Systems ITS. In 2000, the transaction resulted in an extraordinary after-tax gain of 12,345 million. The agreements also confer on Deutsche Telekom the option to acquire from the Group, and on DaimlerChrysler the option to sell to Deutsche Telekom, the Group’s 49.9% interest in T-Systems ITS. The DaimlerChrysler option was exercised in January 2002 (see Note 4). DaimlerChrysler accounted for its interest in T-Systems ITS using the equity method until February 28, 2002. In July 2000, the Group exchanged its controlling interest in DaimlerChrysler Aerospace for shares of EADS, which subse- quently completed its initial public offering. EADS is a global aerospace and defense company which was established through a merger of Aerospatiale Matra S.A., DaimlerChrysler Aerospace AG and Construcciones Aeronauticas S.A. (“CASA”). DaimlerChrysler accounted for the shares of EADS received in the exchange at their fair value on that date and recorded an extraordinary after-tax gain of 13,009 million. The Group accounts for its 33% interest in EADS using the equity method of accounting. DaimlerChrysler has the right to sell all of its ownership interest in EADS to certain French shareholders. This put option may be exercised immediately in the event of a voting deadlock on certain matters or at certain times after three years. The price is based on the average closing mid- market price of EADS shares during the 30 trading days prior to the exercise of the put option. 114 | Notes to Consolidated Balance Sheets Notes to Consolidated Balance Sheets 12. Goodwill Information with respect to changes in the Group’s goodwill is presented in the Consolidated Fixed Asset Schedule included herein. Upon adoption of SFAS 142, intangible assets relating to distribution rights with a net carrying amount of 144 million were reclassified from goodwill to other intangible assets. In 2002, goodwill of 161 million was recorded in connection with the acquisition of dealerships in Europe and 171 million was recorded in connection with certain other acquisitions, none of which were material. A goodwill impairment charge of 140 million was recognized in connection with the contracted sales of two businesses in the Commercial Vehicles segment (see Note 4). The remaining changes in the carrying amount of goodwill primarily relate to currency translation adjustments. At December 31, 2002, the carrying value of goodwill, excluding investor level goodwill, allocated to the Group’s reportable segments are: Mercedes Car Group (1104 million), Chrysler Group (11,165 million), Commercial Vehicles (1696 million), Services (162 million) and Other Activities (144 million). There is no goodwill that has not been allocated to a report- ing unit as of December 31, 2002. DaimlerChrysler’s investor level goodwill in companies accounted for using the equity method was 1845 million at December 31, 2002. Such goodwill is not subject to the impairment tests required by SFAS 142. Instead, the total investment, including investor level goodwill, will continue to be evaluated for impairment when conditions indicate that a decline in fair value of the investment below the carrying amount is other than temporary. Adjusted Prior Period Information Net income (loss) and earnings (loss) per share for the years ended December 31, 2001 and 2000, adjusted to exclude goodwill amortization expense (including amounts recognized in income (loss) from investments representing investor level equity method goodwill amortization) and investee level good- will amortization resulting from the Group’s investment in EADS, were as follows: Net income (loss) (in millions of 1) Reported net income (loss) Goodwill amortization Goodwill amortization – investee level Adjusted net income (loss) Income (loss) per share (in 1): Reported income (loss) per share – basic Goodwill amortization Goodwill amortization – investee level Adjusted income (loss) per share – basic Reported income (loss) per share – diluted Goodwill amortization Goodwill amortization – investee level Adjusted income (loss) per share – diluted Year ended December 31, 2000 2001 (662) 7,894 236 168 297 93 (258) 8,284 (0.66) 0.24 0.16 (0.26) (0.66) 0.24 0.16 (0.26) 7.87 0.30 0.09 8.26 7.80 0.29 0.09 8.18 13. Other Intangible Assets Information with respect to changes in the Group’s other intangible assets is presented in the Consolidated Fixed Asset Schedule included herein. Other intangible assets comprise: (in millions of 3) Other intangible assets subject to amortization Gross carrying amount Accumulated amortization Net carrying amount Other intangible assets not subject to amortization At December 31, 2001 2002 1,036 (634) 402 2,453 2,855 897 (542) 355 137 492 DaimlerChrysler’s other intangible assets subject to amortiza- tion primarily represent software. In 2002, additions of 1374 million were recognized with a weighted average useful life of 6 years. Distribution rights amounting to 144 million were reclassified from goodwill to other intangible assets on January 1, 2002. The aggregate amortization expense for the years ended December 2002, 2001 and 2000, was 1175 million, 1172 million and 1153 million, respectively. Amortization expense for the gross carrying amount of other intangible assets at December 31, 2002, is estimated to be 1138 million in 2003, 196 million in 2004, 159 million in 2005, 129 million in 2006 and 118 million in 2007. Other intangible assets not subject to amortization represent intangible pension assets. The Group recorded an intangible pension asset totaling 12.3 billion in connection with the require- ment to recognize an additional minimum pension liability in 2002, principally at the Chrysler Group (see Note 25a). Notes to Consolidated Balance Sheets | 115 14. Property, Plant and Equipment, net Information with respect to changes in the Group’s property, plant and equipment is presented in the Consolidated Fixed Assets Schedule included herein. Property, plant and equipment includes buildings, technical equipment and other equipment capitalized under capital lease agreements of 1152 million (2001: 1148 million). Depreciation expense and impairment charges on assets under capital lease arrangements were 115 million (2001: 113 million; 2000: 1188 million). 15. Equipment on Operating Leases, net Information with respect to changes in the Group’s equipment on operating leases is presented in the Consolidated Fixed Assets Schedule included herein. Of the total equipment on operating leases, 127,361 million represent automobiles and commercial vehicles (2001: 135,015 million). Noncancellable future lease payments due from customers for equipment on operating leases at December 31, 2002 are as follows: (in millions of 3) 2003 2004 2005 2006 2007 thereafter 16. Inventories (in millions of 3) 6,699 3,745 2,217 628 204 172 13,635 At December 31, 2001 2002 Raw materials and manufacturing supplies 1,900 2,251 Work-in-process thereof relating to long-term contracts and programs in process Finished goods, parts and products held for resale Advance payments to suppliers Less: Advance payments received thereof relating to long-term contracts and programs in process 1127 (2001: 1110) 2,693 3,038 11,567 11,904 63 97 16,223 17,290 (581) (536) 15,642 16,754 Certain of the Group’s U.S. inventories are valued using the LIFO method. If the FIFO method had been used instead of the LIFO method, inventories would have been higher by 1724 million (2001: 11,102 million). For the years ended December 31, 2002, 2001 and 2000, inventory quantities were reduced, which resulted in a liquidation of LIFO inventory carried at lower costs which prevailed in prior years. The effect of the liquidation was to decrease cost of sales by 142 million, 129 million and 114 million in 2002, 2001and 2000, respectively. 17. Trade Receivables (in millions of 3) Receivables from sales of goods and services Long-term contracts and programs, unbilled, net of advance payments received Allowance for doubtful accounts At December 31, 2001 2002 6,879 7,052 47 6,926 (629) 6,297 24 7,076 (646) 6,430 As of December 31, 2002, 1110 million of the trade receiv- ables mature after more than one year (2001: 1136 million). 18. Receivables from Financial Services (in millions of 3) Receivables from: Sales financing Finance leases Initial direct costs Unearned income Unguaranteed residual value of leased assets Allowance for doubtful accounts At December 31, 2001 2002 41,386 16,423 57,809 250 38,882 17,400 56,282 248 (5,590) (6,833) 1,178 53,647 (1,559) 52,088 1,417 51,114 (1,602) 49,512 As of December 31, 2002, 134,472 million of the financing receivables mature after more than one year (2001: 135,551 million). 116 | Notes to Consolidated Balance Sheets Changes in the allowance for doubtful accounts for receiv- ables from financial services were as follows: (in millions of 3) Balance at beginning of year Provisions for credit losses Net credit losses Reversals Currency translation and other adjustments Balance at end of year Year ended December 31, 2000 2001 890 1,446 (783) (88) 137 1,602 599 755 (455) (9) – 890 2002 1,602 1,004 (639) (36) (372) 1,559 Sales financing and finance lease receivables consist of retail installment sales contracts secured by automobiles and commercial vehicles. Contractual maturities applicable to receivables from sales financing and finance leases in each of the years following December 31, 2002 are as follows: 20. Securities, Investments and Long-Term Financial Assets Information with respect to the Group’s investments and long- term financial assets is presented in the Consolidated Fixed Assets Schedule included herein. Securities included in non- fixed assets are comprised of the following: (in millions of 3) Debt securities Equity securities Equity-based funds Debt-based funds At December 31, 2001 2002 1,871 2,314 29 84 1,309 3,293 120 91 1,234 3,759 (in millions of 3) 2003 2004 2005 2006 2007 thereafter 19,810 11,735 9,549 6,362 3,377 6,976 57,809 Actual cash flows will vary from contractual maturities due to future sales of finance receivables, prepayments and charge- offs. 19. Other Receivables (in millions of 3) Receivables from affiliated companies Receivables from related companies 1 Retained interests in sold receivables and subordinated asset backed certificates Other receivables and other assets Allowance for doubtful accounts At December 31, 2001 2002 1,118 1,265 1,250 1,041 4,241 11,672 18,296 (723) 5,482 9,141 16,914 (726) 17,573 16,188 1 Related companies include entities which have a significant ownership in DaimlerChrysler or entities in which the Group holds a significant investment. As of December 31, 2002, 13,847 million of the other receiv- ables mature after more than one year (2001: 12,584 million). Notes to Consolidated Balance Sheets | 117 Carrying amounts and fair values of debt and equity securities included in securities and investments for which fair values are readily determinable are classified as follows: (in millions of 3) Available-for-sale Trading Securities Investments and long-term financial assets available-for-sale Cost Fair value At December 31, 2002 Unrealized Loss Gain Cost Fair value At December 31, 2001 Unrealized Loss Gain 3,085 202 3,287 685 3,972 3,086 207 3,293 728 4,021 19 6 25 43 68 18 1 19 – 19 3,327 460 3,787 731 4,518 3,295 464 3,759 987 4,746 34 6 40 316 356 66 2 68 60 128 The aggregate costs, fair values and gross unrealized holding gains and losses per security class are as follows: (in millions of 3) Equity securities Debt securities issued by the German government and its agencies Municipal securities Debt securities issued by non-German governments Corporate debt securities Equity-based funds Debt-based funds Asset-backed securities Other marketable debt securities Available-for-sale Trading Cost 695 4 13 275 710 94 Fair value 733 4 14 277 715 84 1,308 1,309 323 348 3,770 202 3,972 330 348 3,814 207 4,021 At December 31, 2002 Unrealized Loss Gain 44 – 1 2 6 – 1 8 – 62 6 68 6 – – – 1 10 – 1 – 18 1 19 Fair value 1,083 At December 31, 2001 Unrealized Loss Gain 333 69 Cost 819 112 27 520 588 96 112 27 523 592 91 1,239 1,234 247 410 4,058 460 4,518 253 367 4,282 464 4,746 – – 3 7 – – 7 – 350 6 356 – – – 3 5 5 1 43 126 2 128 The estimated fair values of investments in debt securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. (in millions of 3) Due within one year Due after one year through five years Due after five years through ten years Due after ten years At December 31, 2001 2002 2,011 493 228 265 1,477 1,007 422 202 2,997 3,108 Proceeds from disposals of available-for-sale securities were 15,254 million (2001: 13,402 million; 2000: 19,422 million). Gross realized gains from sales of available-for-sale securities were 1157 million (2001: 1425 million; 2000: 1275 million), while gross realized losses were 123 million (2001: 1145 million; 2000: 1140 million). DaimlerChrysler uses the specific identification method as a basis for determining cost and calculating realized gains and losses. Other securities classified as cash equivalents were approx- imately 14.6 billion and 16.6 billion at December 31, 2002 and 2001, respectively, and consisted primarily of purchase agreements, commercial paper and certificates of deposit. 118 | Notes to Consolidated Balance Sheets 21. Liquid Assets Liquid assets recorded under various balance sheet captions are as follows: (in millions of 3) Cash and cash equivalents 1 2002 At December 31, 2000 2001 originally maturing within 3 months 9,100 10,715 7,082 originally maturing after 3 months Total cash and cash equivalents Securities Other 30 9,130 3,293 5 31 10,746 3,759 20 45 7,127 5,378 5 12,428 14,525 12,510 1 Cash and cash equivalents are mainly comprised of cash at banks, cash on hand and checks in transit The following represents supplemental information with respect to cash flows: (in millions of 3) Interest paid Income taxes paid (refunded) Year ended December 31, 2000 2001 2002 3,615 1,178 4,616 (624) 5,629 775 22. Prepaid Expenses Prepaid expenses are comprised of the following: (in millions of 3): Prepaid pension cost Other prepaid expenses At December 31, 2001 2002 243 719 962 7,584 1,022 8,606 As of December 31, 2002, 1352 million of the total prepaid expenses mature after more than one year (2001: 17,632 million). As a result of the underfunded status of the accumulated pension benefit obligations in 2002, DaimlerChrysler elimi- nated prepaid pension cost totaling 17.6 billion (see Note 23 and Note 25a). 23. Stockholders’ Equity Number of Shares Issued and Outstanding DaimlerChrysler had issued and outstanding 1,012,803,493 registered Ordinary Shares of no par value at December 31, 2002 (2001: 1,003,271,998). Each share represents a nominal value of 12.60 of capital stock. Treasury Stock In 2002, DaimlerChrysler purchased approximately 1.1 million (2001 and 2000: 1.4 million) Ordinary Shares in connection with an employee share purchase plan, of which 1.1 million (2001: 1.2 million; 2000: 1.4 million) were re-issued to employees. The remaining 0.2 million in 2001 were resold in the market. Authorized and Conditional Capital Through April 30, 2003, the Board of Management is author- ized, upon approval of the Supervisory Board, to increase capital stock by a total of up to an aggregate nominal amount of approximately 1256 million and to issue Ordinary Shares of up to an aggregate nominal amount of approximately 126 million to employees. DaimlerChrysler is authorized to issue convertible bonds and notes with warrants in a nominal volume of up to 115 billion with a term of up to 20 years by April 18, 2005. The convertible bonds and notes with warrants shall grant to the holders or creditors option or conversion rights for new shares in DaimlerChrysler in a nominal amount not to exceed 1300 million of capital stock. DaimlerChrysler is also entitled to grant up to 96,000,000 rights (representing up to a nominal amount of approximately 1250 million of capital stock) with respect to the DaimlerChrysler Stock Option Plan by April 18, 2005. In 2002, 7,035 Ordinary Shares of DaimlerChrysler were issued upon exercise of options from the Stock Option Plan 1996. DaimlerChrysler is authorized through October 10, 2003, to acquire treasury stock for certain defined purposes up to a maximum nominal amount of 1260 million of capital stock, representing approximately 10% of issued and outstanding capital stock. Convertible Notes In June 1997, DaimlerChrysler issued 5.75% subordinated mandatory convertible notes due June 14, 2002, with a nominal amount of 166.83 per note. These convertible notes repre- sented at the date of issue a nominal amount of 1508 million including 7,600,000 notes which could be converted, subject to adjustment, into 0.86631 newly issuable shares of Daimler- Chrysler AG for each note before June 4, 2002. During 2002, 17,927 DaimlerChrysler Ordinary Shares were issued upon exercise (2001: 87; 2000: 92). On June 14, 2002, the manda- tory conversion date, 7,572,881 notes were converted into 9,506,483 newly issued Ordinary Shares of DaimlerChrysler AG. The conversion price of 152.72 was determined on June 8, 2002, on the basis of the average closing auction price for Notes to Consolidated Balance Sheets | 119 the shares in Xetra-trading for the period between May 13, 2002 and June 7, 2002. Because this conversion price was below the adjusted minimum conversion price of 153.19, the number of shares was calculated based on the adjusted minimum conversion price. Thus each shareholder received 1.25643 Ordinary Shares of DaimlerChrysler AG per note. Fractions that remained after aggregation were settled in cash based on a conversion rate of 152.72 amounting to a total cash payment of 10.4 million. During 1996, DaimlerChrysler Luxembourg Capital S.A., a wholly-owned subsidiary of DaimlerChrysler, issued 4.125% bearer notes with appertaining warrants due July 5, 2003, in the amount of 1613 million (with a nominal value of 1511 each) entitling the bond holders to subscribe for a total of 12,366,324 shares (7,728,048 of which represent newly issued shares totaling 1383 million) of DaimlerChrysler. According to the note agreements the option price per share is 142.67 in consideration of exchange of the notes or 144.49 in cash. During 2002, 50 options for the subscription of newly issued DaimlerChrysler Ordinary Shares (2001: -; 2000:10,416) were exercised. Comprehensive Income The changes in the components of accumulated other comprehensive income (loss) are as follows: (in millions of 3) Unrealized gains (losses) on securities (incl. retained interests): Pretax Tax effect Net Pretax Tax effect Net Pretax 2002 2001 Tax effect 2000 Net Unrealized holding gains (losses) 122 (77) 45 (129) 149 20 (250) Reclassiffication adjustments for (gains) losses included in net income (loss) Unrealized gains (losses) on securities Unrealized gains (losses) on derivatives Hedging variability of cash flows: (223) (101) 43 (34) (180) (135) (46) (175) (111) 38 (157) (137) 61 (189) 46 (6) 40 (204) 55 (149) Unrealized derivative gains (losses) 2,417 (952) 1,465 (708) 257 (451) (1,932) 978 (954) Reclassification adjustments for (gains) losses included in net income (loss) Unrealized derivative gains (losses) Foreign currency translation adjustments Minimum pension liability adjustments Other comprehensive income (loss) (111) 2,306 (3,170) (10,006) (10,971) 48 (904) (63) 1,402 (80) (3,250) 829 121 598 3,717 2,699 (6,289) (8,272) (1,436) (892) (307) (50) (33) 552 507 522 71 565 (884) (385) 1,113 (819) 1,474 8 (474) (567) 411 (111) (2) 338 546 (408) 1,363 6 812 120 | Notes to Consolidated Balance Sheets Miscellaneous The minority stockholders of Dornier GmbH, a subsidiary of DADC Luft- und Raumfahrt Beteiligungs AG, have the right, exercisable at any time, to exchange their shareholdings in Dornier for cash or holdings in DaimlerChrysler AG or its subsi- diary DaimlerChrysler Luft- und Raumfahrt Holding Aktien- gesellschaft. Some of the Dornier minority stockholders partially exercised this right in 2001. In 2002, an additional minority shareholder partially exercised his right to transfer his Dornier shares to DaimlerChrysler AG. Under the German corporation law (Aktiengesetz), the amount of dividends available for distribution to shareholders is based upon the unappropriated accumulated earnings of DaimlerChrysler AG (parent company only) as reported in its statutory financial statements determined in accordance with the German commercial code (Handelsgesetzbuch). For the year ended December 31, 2002, DaimlerChrysler manage- ment has proposed a distribution of 11,519 million (11.50 per share) of the 2002 earnings of DaimlerChrysler AG as a dividend to the stockholders. As a result of the underfunded status of the accumulated pension benefit obligations in 2002, DaimlerChrysler was required to recognize an additional minimum pension liability of 16.3 billion, after tax (see Note 22 and Note 25a). 24. Stock-Based Compensation The Group currently has two stock option plans, various stock appreciation rights (“SARs”) plans and medium term incentive awards, which are accounted for based on APB 25. Stock Option Plans In April 2000, the Group’s shareholders approved the Daimler- Chrysler Stock Option Plan 2000 which provides for the granting of stock options for the purchase of DaimlerChrysler Ordinary Shares to eligible employees. Options granted under the Stock Option Plan 2000 are exercisable at a reference price per DaimlerChrysler Ordinary Share determined in advance plus a 20% premium. The options become exercisable in equal installments on the second and third anniversaries from the date of grant. All unexercised options expire ten years from the date of grant. If the market price per Daimler- Chrysler Ordinary Share on the date of exercise is at least 20% higher than the reference price, the holder is entitled to receive a cash payment equal to the original exercise premium of 20%. The table below shows the basic terms of options issued (in millions) under the Stock Option Plan 2000: Year of Grant 2000 2001 2002 Reference price Convesion price Options granted Options outstanding Options exercisable At December 31, 2002 162.30 155.80 142.93 174.76 166.96 151.52 15.2 18.7 20.0 15.0 18.2 19.8 7.5 – – In May 2000, certain shareholders challenged the approval of the Stock Option Plan 2000 at the stockholders’ meeting on April 19, 2000. In October 2000, the Stuttgart District Court (Landgericht Stuttgart) dismissed the case and the Stuttgart Court of Appeals (Oberlandesgericht Stuttgart) dismissed an appeal in June 2001. The shareholders appealed the decision of the Stuttgart Court of Appeals to the Federal Supreme Court (Bundesgerichtshof) in July 2001. In March 2002, the Federal Supreme Court decided not to admit the appeal. In April 2002, a constitutional appeal was filed against this decision. The Stock Option Plan 2000, approved by the share- holders of DaimlerChrysler AG in April 2000, was judicially confirmed lawful and valid by the above named courts and remains valid unless a court decides to the contrary. DaimlerChrysler established, based on shareholder approvals, the 1998, 1997 and 1996 Stock Option Plans (former Daimler-Benz plans), which provide for the granting of options for the purchase of DaimlerChrysler Ordinary Shares to certain members of management. The options granted under the plans are evidenced by non-transferable convertible bonds with a principal amount of 1511 per bond due ten years after issuance. During certain specified periods each year, each convertible bond may be converted into 201 Daimler- Chrysler Ordinary Shares, if the market price per share on the day of conversion is at least 15% higher than the predeter- mined conversion price and the options (granted in 1998 and 1997) have been held for a 24 month waiting period. The basic terms of the rights issued (in millions) under these plans are as follows: Bonds granted in Stated interest rate Conversion price Number of Rights Rights outstanding Rights convertible At December 31, 2002 1996 1997 1998 5.9% 5.3% 4.4% 142.62 165.90 192.30 0.9 7.4 8.2 – 6.0 6.6 – – – Notes to Consolidated Balance Sheets | 121 In the second quarter of 1999, DaimlerChrysler converted all options granted under the 1998 and 1997 Stock Option Plans into SARs. All terms and conditions of the new SARs are identical to the stock options which were replaced, except that the holder of a SAR has the right to receive cash equal to the difference between the exercise price of the original option and the fair value of the Group’s stock at the exercise date rather than receiving DaimlerChrysler Ordinary Shares. Analysis of the stock options issued is as follows (options in millions): Balance at beginning of year Options granted Bonds sold Converted Forfeited Repayment Exchanged for SARs Outstanding at year-end Exercisable at year-end 2002 Average exercise price per share Number of stock options Number of stock options 33.6 20.0 – – 370.43 51.52 – – 15.3 18.7 – – (0.5) 61.29 (0.4) – – 53.1 7.6 – – 63.40 374.56 – – 33.6 0.1 2001 Average exercise price per share 174.65 66.96 – – 70.08 – – 70.43 142.62 2000 Average exercise price per share Number of stock options 0.1 15.2 142.62 74.76 – – – – – – – – – – 15.3 0.1 74.65 142.62 In conjunction with the consummation of the merger between Daimler-Benz and Chrysler in 1998, the Group implemented a SAR plan through which 22.3 million SARs were issued at an exercise price of $75.56 each, of which 17.0 million SARs are outstanding and exercisable at year-end 2002. The initial grant of SARs replaced Chrysler fixed stock options that were converted to DaimlerChrysler Ordinary Shares as of the con- summation of the merger. SARs which replaced stock options that were exercisable at the time of the consummation of the merger were immediately exercisable at the date of grant. SARs related to stock options that were not exercisable at the date of consummation of the merger became exercisable in two installments; 50% on the six-month and one-year anniver- saries of the consummation date. For the year ended December 31, 2002, the Group recognized compensation expense on stock options of 157 million (2001: 119 million; 2000: 113 million). Stock Appreciation Rights Plans In 1999, DaimlerChrysler established a stock appreciation rights plan (the “SAR Plan 1999”) which provides eligible employees of the Group with the right to receive cash equal to the appreciation of DaimlerChrysler Ordinary Shares sub- sequent to the date of grant. The stock appreciation rights granted under the SAR Plan 1999 vest in equal installments on the second and third anniversaries from the date of grant. All unexercised SARs expire ten years from the grant date. The exercise price of a SAR is equal to the fair market value of DaimlerChrysler’s Ordinary Shares on the date of grant. On February 24, 1999, the Group issued 11.4 million SARs at an exercise price of 189.70 each, of which 10.7 million SARs are outstanding and exercisable at year-end 2002. As discussed above (see “Stock Option Plans”), in the second quarter of 1999 DaimlerChrysler converted all options granted under its existing stock option plans from 1997 and 1998 into SARs. 122 | Notes to Consolidated Balance Sheets A summary of the activity related to the Group’s SAR plans as of and for the years ended December 31, 2002, 2001 and 2000 is presented below (SARs in millions): Outstanding at beginning of year Grandet Exercised Forfeited Outstanding at year-end SARs exercisable at year-end 2002 Weighted- average exercise price 384.75 – – 78.31 79.13 379.13 Number of SARs 42,5 – – (2.2) 40.3 40.3 2001 Weighted- average exercise price 182.87 – – 85.93 84.75 184.75 Number of SARs 44.5 – – (2.0) 42.5 42.5 2000 Weighted- average exercise price 180.25 – – 78.52 82.87 180.63 Number of SARs 45.8 – – (1.3) 44.5 33.6 The table below presents the underlying assumptions as well as the resulting fair values and total values (in millions of 1): Stock options granted in Expected dividend yield Expected volatility Risk-free interest rate Expected lives (in years) Fair value per option Total value by award 2002 2.0% 30% 4.2% 2001 4.6% 33% 4.2% 3 318.70 374.0 3 112.15 227.2 2000 3.8% 25% 4.8% 3 19.50 144.4 Compensation expense or benefit (representing the reversal of previously recognized expense) on SARs is recorded based on changes in the market price of DaimlerChrysler Ordinary Shares. For the years ended December 31, 2002 and 2000 the Group recognized compensation benefits of 19 million and 158 million respectively, in connection with SARs. For the year ended December 31, 2001, the SARs had no effect on the consolidated statement of income (loss). Medium Term Incentive Awards The Group grants medium term incentives to certain eligible employees that track, among other things, the value of the DaimlerChrysler Ordinary Shares at the beginning of three year performance periods. The amount ultimately earned in cash at the end of a performance period is particularly based on the degree of achievement of corporate goals derived from competitive and internal planning benchmarks and the value of DaimlerChrysler Ordinary Shares at the end of three year performance periods. The benchmarks include return on net assets and return on sales. The Group issued 1.2 million medium term incentives in 2002 (2001: 0.9 million; 2000: 0.7 million). For the year ended December 31, 2002 the Group recog- nized compensation expense of 120 million (2001: 117 million; 2000: 114 million) in connection with the medium term incentive awards. Fair Value Information Had the Group adopted SFAS 123, stock options would have been accounted for based on their fair values. The fair values of the DaimlerChrysler stock options issued in 2002, 2001 and 2000 were calculated at the grant dates with a modified Black-Scholes option pricing model, which considers the terms of issuance. Notes to Consolidated Balance Sheets | 123 The following information with respect to the Group’s pen- sion plans is presented by German Plans and non-German Plans (principally comprised of plans in the U.S.): Foreign currency exchange rate changes – (3,829) At December 31, 2002 Non- German Plans German Plans At December 31, 2001 Non- German Plans German Plans 10,483 24,139 9,579 21,878 384 1,622 16 1,199 – 37 – 198 612 1 613 (179) 140 1,026 404 1,696 109 563 (765) 25 226 629 (1) 45 – 63 2 292 2 964 (506) (1,852) (483) (1,761) 10,941 22,008 10,483 24,139 7,503 24,125 7,908 25,962 – (3,465) – 1,199 (1,101) (1,756) (720) (1,309) Service cost Interest cost Plan amendments Actuarial losses Dispositions Acquisitions and other Settlement/ curtailment loss Benefits paid Projected benefit obligations at end of year Change in plan assets: Fair value of plan assets at beginning of year Foreign currency exchange rate changes Actual return (loss) on plan assets Employer contributions 807 621 713 843 Plan participant contributions Dispositions Acquisitions and other – – – 21 – 36 – – – 25 (865) 17 Benefits paid (420) (1,827) (398) (1,747) Fair value of plan assets at end of year 6,789 17,755 7,503 24,125 25. Accrued Liabilities Accrued liabilities are comprised of the following: 2002 Due after one year Total At December 31, 2001 Due after one year Total (in millions of 3) Pension plans and similar obligations (see Note 25a) 15,909 14,658 12,647 11,650 (in millions of 3) Income and other taxes 3,621 1,602 2,393 651 Other accrued liabilities (see Note 25b) 24,182 9,876 43,712 26,136 27,154 42,194 10,104 22,405 Change in projected benefit obligations: Projected benefit obligations at beginning of year a) Pension Plans and Similar Obligations Pension plans and similar obligations are comprised of the following components: (in millions of 3) Pension liabilities (pension plans) Accrued postretirement health and life insurance benefits Other benefit liabilities At December 31, 2001 2002 7,393 2,612 8,167 349 9,442 593 15,909 12,647 As a result of the underfunded status of the accumulated pen- sion benefit obligations, DaimlerChrysler recognized additional pension liabilities amounting to 14.7 billion in 2002, which did not impact the consolidated statement of income (loss). Of the 14.7 billion, the Group recognized 12.3 billion as an intangible pension asset (see Note 13) and 12.4 billion within accumulated other comprehensive income (see Note 23). As described in Note 5 and Note 7, DaimlerChrysler imple- mented in 2001 restructuring plans at Freightliner and Chrysler Group, including certain workforce reduction initia- tives. The impacts on the pension and postretirement obliga- tions resulting from settlements and curtailments of these turnaround plans are contained in the following disclosures. Pension Plans The Group provides pension benefits to substantially all of its hourly and salaried employees. Plan benefits are principally based upon years of service. Certain pension plans are based on salary earned in the last year or last five years of employment while others are fixed plans depending on ranking (both wage level and position). At December 31, 2002, plan assets were invested in diversi- fied portfolios that consisted primarily of debt and equity securities, including 14,855 shares of DaimlerChrysler Ordi- nary Shares with a market value of 10.4 million in a Canadian plan. Assets and income accruing on all pension trust and relief funds are used solely to pay pension benefits and admin- ister the plans. 124 | Notes to Consolidated Balance Sheets A reconciliation of the funded status to the amounts recog- nized in the consolidated balance sheets is as follows: At December 31, 2002 Non- German Plans German Plans At December 31, 2001 Non- German Plans German Plans 4,152 4,253 2,980 14 (3,837) (8,762) (2,168) (4,112) (6) (2,507) (5) (3,261) – (11) – (24) 309 (7,027) 807 (7,383) (in millions of 3) Funded status 1 Unrecognized actuarial net losses Unrecognized prior service cost Unrecognized net obligation at date of initial application Net liability (asset) recognized Amounts recognized in the consolidated balance sheets consist of: Prepaid pension cost – Accrued pension liability 3,484 (243) 3,909 Intangible assets – (2,453) – (7,584) 2,164 – 448 (137) Accumulated other comprehensive income Net liability (asset) recognized (3,175) (8,240) (1,357) (110) 309 (7,027) 807 (7,383) 1 Difference between the projected benefit obligations and the fair value of plan assets. The measurement dates for the Group’s pension plans are principally December 31. Assumed discount rates and rates of increase in remuneration 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 pension plans are situated. The weighted- average assumptions used in calculating the actuarial values for the principal pension plans were as follows (in %): Weighted-average assumptions: Discount rate Expected return on plan assets (at the beginning of the year) Rate of long-term compensation increase 2002 2001 German Plans 2000 5.8 7.9 3.0 6.0 7.9 3.0 6.5 7.9 3.0 2002 6.7 10.1 5.4 Non-German Plans 2000 2001 7.4 10.1 5.4 7.7 10.2 5.5 Notes to Consolidated Balance Sheets | 125 The expected return on plan assets for 2003 is 7.5% for German plans and 8.5% for non-German plans (primarily U.S. plans). The components of net pension cost were as follows for the years ended December 31, 2002, 2001 and 2000: (in millions of 3) Service cost Interest cost Expected return on plan assets Amortization of: Unrecognized net actuarial (gains) losses Unrecognized prior service cost Unrecognized net obligation Other Net periodic pension cost (benefit) Settlement/curtailment loss Net pension cost The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were 131,206 million and 123,882 million, respectively, as of December 31, 2002, 110,224 mil- lion and 17,934 million, respectively, as of December 31, 2001 and 11,697 million and 1343 million, respectively, as of December 31, 2000. Other Postretirement Benefits Certain DaimlerChrysler operations in the U.S. and Canada provide postretirement health and life insurance benefits to their employees. Upon retirement from DaimlerChrysler the employees may become eligible for continuation of these benefits. The benefits and eligibility rules may be modified periodically. At December 31, 2002, plan assets were invested in diversified portfolios that consisted primarily of debt and equity securities. 2002 Non- German Plans 384 1,622 German Plans 198 612 2001 Non- German Plans 404 1,696 German Plans 242 696 2000 Non- German Plans 433 1,570 German Plans 226 629 (595) (2,692) (649) (2,750) (625) (2,487) 74 – – – 334 1 335 3 291 1 – (391) 208 (183) – – – – 161 1 162 (11) 356 148 – (157) 625 468 3 1 – 1 318 – 318 (18) 371 146 (6) 9 – 9 The following information is presented with respect to the Group’s postretirement benefit plans: (in millions of 3) Change in accumulated postretirement benefit obligations: Accumulated postretirement benefit obligations at beginning of year Foreign currency exchange rate changes Service cost Interest cost Plan amendments Actuarial losses Settlement/curtailment loss Acquisitions and other Benefits paid Accumulated postretirement benefit obligations at end of year At December 31, 2001 2002 15,095 (2,454) 262 1,062 (90) 2,863 59 7 12,857 652 257 1,033 (18) 941 186 (13) (871) (800) 15,933 15,095 Change in plan assets: Fair value of plan assets at beginning of year Foreign currency exchange rate changes Actual losses on plan assets Employee and employer contributions Benefits paid 2,982 (447) (294) 1 (10) 2,995 167 (181) 9 (8) Fair value of plan assets at end of year 2,232 2,982 126 | Notes to Consolidated Balance Sheets A reconciliation of the funded status to the liability recog- nized for accrued postretirement health and life insurance benefits in pension plans and similar obligations is as follows: The expected return on plan assets for 2003 is 8.5%. The components of net postretirement benefit cost were as follows for the years ended December 31, 2002, 2001 and 2000: (in millions of 3) Funded status 1 Unrecognized actuarial net losses Unrecognized prior service cost Net liabilitiy recognized At December 31, 2001 2002 13,701 (4,979) (555) 8,167 12,113 (1,828) (843) 9,442 1 Difference between the accumulated postretirement obligations and the fair value of plan assets. Assumed discount rates and rates of increase in remuneration used in calculating the accumulated postretirement benefit obligations together with long-term rates of return on plan assets vary according to the economic conditions of the coun- try in which the plans are situated. The weighted-average assumptions used in calculating the actuarial values for the postretirement benefit plans were as follows (in %): (in millions of 3) Service cost Interest cost Expected return on plan assets Amortization of: Unrecognized net actuarial (gains) losses Unrecognized prior service cost Other Net periodic postretirement benefit cost Settlement/curtailment loss Net postretirement benefit cost 2002 262 1,062 (345) 2001 257 1,033 (346) 38 76 – (7) 82 – 1,093 26 1,119 1,019 154 1,173 2000 208 873 (308) 5 54 (2) 830 – 830 The following schedule presents the effects of a one-percent- age-point change in assumed health care cost trend rates: 2002 2001 2000 (in millions of 3) 1%-increase 1%-decrease Weighted-average assumptions at December 31: Discount rate 6.8 7.4 7.7 Expected return on plan assets (at the beginning of the year) Health care inflation rate in following (or “base”) year Ultimate health care inflation rate (2008) 10.5 10.5 10.4 10.0 5.0 6.9 5.0 7.5 5.0 Effect on total of service and interest cost components Effect on accumulated postretirement benefit obligations 178 (144) 1,811 (1,525) Prepaid Employee Benefits In 1996 DaimlerChrysler established a Voluntary Employees’ Beneficiary Association (“VEBA”) trust for payment of non- pension employee benefits. At December 31, 2002 and 2001, the VEBA had a balance of 12,833 million and 13,648 million, respectively, of which 12,140 million and 12,848 million, respectively, were designated and restricted for the payment of postretirement health care benefits. No contributions to the VEBA trust were made in 2002, 2001 and 2000. Notes to Consolidated Balance Sheets | 127 b) Other Accrued Liabilities Other accrued liabilities consisted of the following: (in millions of 3) Accrued warranty costs and price risks Accrued losses on uncompleted contracts Restructuring Accrued personnel and social costs Accrued sales incentives Other At December 31, 2001 2002 9,120 507 758 2,286 4,813 6,698 9,213 549 1,190 2,386 4,395 9,421 24,182 27,154 Accruals for restructuring comprise certain employee termi- nation benefits and costs which are directly associated with plans to exit specified activities. The changes in these provisions are summarized as follows: (in millions of 3) Balance at January 1, 2000 Utilizations and transfers Reductions Additions Balance at December 31, 2000 Utilizations and transfers Reductions Additions Balance at December 31, 2001 Utilizations and transfers Reductions Additions Balance at December 31, 2002 Termination benefit 407 (229) (43) 16 151 (947) (135) 1,504 573 (461) (57) 323 378 Exit cost 188 (56) (34) 11 109 (275) (144) 927 617 (358) (39) 160 380 Total liabilities 595 (285) (77) 27 260 (1,222) (279) 2,431 1,190 (819) (96) 483 758 In connection with the Group’s restructuring, provisions were recorded for termination benefits of 1323 million (2001: 11,504 million; 2000: 116 million), in 2002 principally within Chrysler Group (see Note 7) and Commercial Vehicles, in 2001 principally within Chrysler Group (see Note 7) and Freightliner (see Note 5) and in 2000 principally within Mercedes Car Group and Commercial Vehicles. In connection with these restructuring efforts, the Group effected workforce reductions of approximately 11,500 employees (2001: 17,700; 2000: 2,600) and paid termination benefits of 1431 million (2001: 1269 million; 2000: 1135 million), of which 1359 million (2001: 1227 million; 2000: 1120 million) were charged against previously established liabilities. At December 31, 2002, the Group had liabilities for estimated future terminations for approximately 7,100 employees. In 2002, exit costs primarily result from restructuring within Chrysler Group. Exit costs in 2001 primarily due to the restructuring within Chrysler Group and Freightliner. In 2000 exit costs primarily result from the restructuring of industrial businesses. The Group issues various types of contractual product war- ranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term (see Note 31). In addition, the accrued liability for product warranties covers expected costs for policy coverage, recall campaigns and buyback commitments. The changes in provisions for those product warranties are summarized as follows: (in millions of 3) Balance at January 1, 2002 Currency change Utilizations and transfers Changes from product warranties issued in 2002 Changes from prior period product warranties issued Balance at December 31, 2002 9,059 (1,057) (4,384) 5,423 (27) 9,014 128 | Notes to Consolidated Balance Sheets 26. Financial Liabilities (in millions of 3) Notes/Bonds Commercial paper Liabilities to financial institutions Liabilities to affiliated companies Deposits from direct banking business Loans, other financial liabilities Liabilities from capital lease and residual value guarantees Short-term financial liabilities (due within one year) Notes/Bonds of which due in more than five years: 111,492 (2001: 110,712) Liabilities to financial institutions of which due in more than five years: 11,911 (2001: 12,702) Liabilities to affiliated companies of which due in more than five years: 1– (2001: 1–) Loans, other financial liabilities of which due in more than five years: 128 (2001: 166) Liabilities from capital lease and residual value guarantees of which due in more than five years: 1249 (2001: 1209) Long-term financial liabilities Maturities 2004- 2097 2004- 2020 Aggregate nominal amounts of financial liabilities maturing during the next five years and thereafter are as follows: At December 31, 2001 2002 12,971 17,726 (in millions of 3) 2003 2004 2005 2006 2007 there- after Financial liabilities 30,204 12,285 9,643 9,058 3,259 13,016 At December 31, 2002, the Group had unused short-term credit lines of 111,026 million (2001: 15,796 million) and unused long-term credit lines of 110,597 million (2001: 120,322 million). The credit lines include an $18 billion revolving credit facility with a syndicate of international banks. The credit agreement is comprised of a multi-currency revolv- ing credit facility which allows DaimlerChrysler AG and several subsidiaries to borrow up to $5 billion until 2006, a U.S. dollar revolving credit facility which allows DaimlerChrysler North America Holding Corporation, a wholly-owned subsidiary of DaimlerChrysler AG, to borrow up to $6 billion available until 2004, and a multi-currency revolving credit facility for working capital purposes which allows DaimlerChrysler AG and several subsidiaries to borrow up to $7 billion until 2003. A part of the $18 billion facility serves as a back-up for commercial paper drawings. 9,494 5,593 339 768 29 7,480 7,183 361 - 86 1,134 1,106 30,328 33,942 38,887 47,632 8,465 8,194 62 193 71 82 1,177 48,784 79,112 987 56,966 90,908 Weighted average interest rates for notes/bonds, commercial paper and liabilities to financial institutions are 6.3%, 2.6% and 5.3%, respectively, at December 31, 2002. Commercial paper is denominated in euros and U.S. dollars and includes accrued interest. Bonds and liabilities to financial institutions are largely secured by mortgage conveyance, liens and assignment of receivables of approximately 11,754 million (2001: 11,804 million). Notes to Consolidated Balance Sheets | 129 27. Trade Liabilities (in millions of 3) Trade liabilities 28. Other Liabilities (in millions of 3) Liabilities to affiliated companies Liabilities to ralated companies Other liabilities Total 12,342 At December 31, 2002 Due after five years Due after one year At December 31, 2001 Due after five years Due after one year Total 1 1 14,157 12 1 At December 31, 2002 Due after five years Due after one year – 3 708 711 – – 151 151 Total 416 293 9,553 10,262 At December 31, 2001 Due after five years Due after one year – – 828 828 – – 232 232 Total 338 161 8,344 8,843 As of December 31, 2002, other liabilities include tax liabilities of 1827 million (2001: 1620 million) and social benefits due of 1782 million (2001: 1877 million). 29. Deferred Income As of December 31, 2002, 11,989 million of the total deferred income is to be recognized after more than one year (2001: 11,911 million). 130 | Other Notes Other Notes 30. Litigation and Claims Three lawsuits have recently been brought against Daimler- Chrysler AG or some of its affiliates raising claims arising out of the practice of apartheid in South Africa before 1994. In particular, on September 27, 2002, a putative class action covering claims arising between 1952 and 1994, captioned Digwamaje v. Bank of America, No. 02-CV-6218 (RCC) (S.D.N.Y.), was filed in the United States District Court for the Southern District of New York naming 84 U.S., European and Japanese companies, including DaimlerChrysler AG, as defen- dants. On November 11, 2002, 91 individuals filed a lawsuit captioned Khulumani v. Barclays National Bank Ltd., Civ. A. No. 02-5952 (E.D.N.Y.) in the United States District Court for the Eastern District of New York against 22 U.S., European and Japanese corporate defendants, including DaimlerChrysler AG and Daimler-Benz Industrie. This lawsuit covers the period from 1960 to 1993. On November 19, 2002, another putative class action lawsuit, Ntsebeza v. Holcim Ltd., No. 02-74604 (RWS) (E.D. Mich.), was filed in the United States District Court for the Eastern District of Michigan naming as defendants four U.S. and European companies, including Daimler- Chrysler Corporation, and asserting claims arising from 1948 to 1993. All three lawsuits allege, in essence, that the corpo- rate defendants knew about or participated in human rights violations and other abuses of the South African apartheid regime, cooperated with the apartheid government during that period, and benefitted financially from such cooperation. The plaintiffs assert various claims, including conspiracy, aiding and abetting the apartheid regime, violations of the Racketeering Influence and Corrupt Organizations Act, violations of interna- tional law and the Alien Tort Claims Act, unjust enrichment and unfair and discriminatory labor practices. The plaintiffs seek compensatory and punitive damages, disgorgement of purported illicit profits, an accounting, restitution of the value of defendants’ purported unjust enrichment, and other forms of relief, including in the Digwamaje case the establishment of a “historic commission.” Plaintiffs in the Digwamaje case purport to seek compensatory damages in excess of $200 billion and punitive damages in excess of $200 billion. The complaints in the other two lawsuits do not specify damages. DaimlerChrysler intends to defend against these claims vigorously. Like other companies in the automotive industry, Daimler- Chrysler (primarily DaimlerChrysler Corporation) have experi- enced a growing number of lawsuits which seek compensatory and punitive damages for illnesses alleged to have resulted from direct and indirect exposure to asbestos used in some vehicle components (principally brake pads). Typically, these lawsuits name many other corporate defendants and may also include claims of exposure to a variety of non-automotive asbestos products. A single lawsuit may include claims by multiple plaintiffs alleging illness in the form of asbestosis, mesothelioma or other cancer or illness. The number of claims in these lawsuits increased from approximately 14,000 at the end of 2001 to approximately 19,000 at the end of January 2003. In the majority of these cases, the plaintiffs do not specify their alleged illness and provide little detail about their alleged exposure to components in DaimlerChrysler vehicles. Some plaintiffs do not exhibit current illness, but seek recovery based on potential future illness. In 2001, DaimlerChrysler and other automobile manufacturers asked the federal bank- ruptcy court in Delaware overseeing the bankruptcy proceed- ings of an automotive supplier, Federal-Mogul Corporation, to consolidate all of the asbestos brake cases pending in state courts throughout the U.S. with the asbestos brake litigation involving Federal Mogul supervised by the bankruptcy court. DaimlerChrysler believed that consolidation would reduce the cost and complexity of defending these individual cases. In 2002, the bankruptcy court decided that it did not have the authority to consolidate these cases, and the U.S. Court of Appeals upheld that decision. The U.S. Supreme Court in Janu- ary 2003 denied DaimlerChrysler’s request and that of other manufacturers to review the decision. The Group believes that many of these lawsuits involve unsubstantiated illnesses or assert only tenuous connections with components in Daimler- Chrysler vehicles, and that there is credible scientific evidence to support the dismissal of many of these claims. Although DaimlerChrysler’s expenditures to date in connection with such claims have not been material to its financial condition, it is possible that the number of these lawsuits will continue to grow, especially those alleging life-threatening illness, and that the Group could incur significant costs in the future in resolving these lawsuits. In the fourth quarter of 2000, Tracinda Corporation filed a lawsuit in the United States District Court for the District of Delaware against DaimlerChrysler AG and some of the members of its Supervisory Board and Board of Management (Messrs. Kopper, Schrempp and Gentz). Shortly thereafter, other plaintiffs filed a number of actions against the same defendants, making similar claims to those in the Tracinda complaint. Two individual lawsuits and one consolidated class action lawsuit are pending. The plaintiffs, current or former DaimlerChrysler shareholders, allege that the defendants violated U.S. securities law and committed fraud in obtaining Other Notes | 131 approval from Chrysler stockholders of the business combina- tion between Chrysler and Daimler-Benz in 1998. In essence, the complaints allege that by describing the transaction as a “merger of equals” in the proxy statement/prospectus and other statements preceding the special meeting of Chrysler stockholders called to vote on the business combination agreement, the defendants misrepresented that Daimler- Chrysler would operate as two equal companies, while they always intended to relegate Chrysler to division status and to replace Chrysler’s management with executives from Daimler- Benz. The complaints generally seek (a) actual damages, including an acquisition premium, (b) “recissory” damages representing the difference between the value of the Chrysler common stock exchanged and the present value of the DaimlerChrysler Ordinary Shares, (c) compensatory and, in the individual actions, punitive damages, (d) an order unwinding the transaction, (e) pre- and post-judgment interest, and (f) such other relief as may be just and proper. In April 2001, all of the pending class action complaints were consolidated into a single consolidated class action complaint that included two claims not previously alleged in any of the complaints. The new claims alleged that DaimlerChrysler had violated U.S. securities laws by making false and misleading statements in 1999 and 2000 regarding its prospects for the year 2000. On May 9, 2001, DaimlerChrysler filed motions to dismiss all three complaints. In March 2002, the Court granted the motion as to the consolidated class action complaint, denied the motion as to the Tracinda Corporation complaint except for the civil conspiracy claim in that complaint, and denied the motion as to the other complaint filed by Glickenhaus & Co., et al. The Court subsequently allowed the class action plaintiffs to amend their complaint, which is now pending. These cases have been consolidated for purposes of discovery and are captioned In re: DaimlerChrysler AG Securities Litigation. The parties substantially completed discovery in January 2003. In February 2003, DaimlerChrysler filed motions seeking summary judgment on all claims in the cases. The Group is presently scheduled for trial of all the consolidated actions in the second quarter of 2003. DaimlerChrysler believes the complaints in this litigation are without merit and plans to continue defending against them vigorously. In September 2000, Freightliner LLC, DaimlerChrysler’s North American commercial vehicles subsidiary, acquired Western Star Trucks Holdings Ltd., a Canadian company engaged in the design, assembly, and distribution of heavy duty trucks and transit buses. Prior to its acquisition by Freightliner, Western Star had completed the sale of ERF (Holdings) plc, a company organized in England and Wales and engaged in the assembly and sale of heavy duty trucks, to MAN AG and MAN Nutzfahrzeuge AG for CAD 195 million. In September 2002, MAN filed a claim against Freightliner Ltd. (formerly Western Star) with the London Commercial Court for breach of representations and warranties in the share purchase agreement. The claim includes allegations that ERF’s accounts and financial statements were misstated and seeks to recover damages in excess of GBP 300 million. Freightliner Ltd. intends to defend itself vigorously against such claims. A purported class action lawsuit was filed in 2002 in the United States District Court for the District of New Jersey against DaimlerChrysler’s subsidiary Mercedes-Benz USA, LLC (“MBUSA”), and against MBUSA’s wholly-owned subsidiary Mercedes-Benz Manhattan, Inc (“MBM”). The lawsuit alleges that MBUSA and MBM participated in a price fixing conspiracy among Mercedes-Benz dealers. A motion for class certification is pending. MBUSA and MBM intend to defend themselves vig- orously. In addition, the Antitrust Division of the U.S. Depart- ment of Justice, New York Regional Office, advised MBUSA and MBM that it is conducting a criminal investigation in con- nection with the allegations made in the lawsuit. MBUSA and MBM have been served with grand jury subpoenas in con- nection with this investigation. Various other claims and legal proceedings have been asserted or instituted against the Group, including product liability and other lawsuits, some of which purport to be class actions. In the event of adverse decisions in these proceedings, DaimlerChrysler could be required to pay substantial compen- satory and punitive damages, or undertake service actions, recall campaigns or other costly actions. Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. It is reasonably possible that the final resolution of some of these matters may require the Group to make expenditures, in excess of established reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated. The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than likely. Although the final resolution of any such matters could have a material effect on the Group’s consoli- dated operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, the Group believes that any resulting adjustment should not mate- rially affect its consolidated financial position. See Note 4 for a description of claims raised by Bombardier. 132 | Other Notes 31. Commitments and Contingencies Obligations from issuing guarantees as a guarantor (excluding product warranties) are as follows: (in millions of 3) Guarantees for third party liabilities Guarantees under buy-back commitments Performance guarantees and environmental risks Other Maximum potential future obligation 2001 2002 2,119 2,839 3,232 3,280 581 830 608 616 At December 31, Amount recognized as a liability 2001 2002 370 609 370 246 317 673 200 231 6,762 7,343 1,595 1,421 Guarantees for third party liabilities principally represent guarantees of indebtedness of non-consolidated affiliated companies and third parties and commitments by Group companies as to contractual performance by joint venture companies and certain non-incorporated companies, partnerships, and project groups. The term under these arrangements generally cover the range of the related indebtedness of the non-consolidated affiliated companies and third parties or the contractual performance period of joint venture companies, non-incorporated companies, partnerships, and project groups. The parent company of the Group (DaimlerChrysler AG) provides guarantees to third parties of certain obligations of its consolidated subsidiaries. At December 31, 2002, these guarantees amounted to 151.7 billion. To a lesser extent, consolidated subsidiaries provide guarantees to third parties of obligations of other consolidated subsidiaries. All intercompany guarantees are eliminated in consolidation and therefore are not reflected in the above table. Guarantees under buy-back commitments principally repre- sent arrangements whereby the Group guarantees specified trade-in values for assets or products sold to non-consolidated affiliated companies and third parties. Such guarantees provide the holder with the right to return purchased assets or products back to the Group in connection with a future purchase of products or services. The table above excludes residual value guarantees related to arrangements for which revenue recognition is precluded due to the Group’s obligation to repurchase assets sold to unrelated guaranteed parties. Performance guarantees principally represent pledges or indemnifications related to the quality or timing of perform- ance by third parties or participations in performance gua- rantees of consortiums. Performance guarantees typically pro- vide the purchaser of goods or services with the right to be reimbursed for losses incurred or other penalties if the third party or the consortium fails to perform. Amounts accrued under performance guarantees reflect estimates of probable losses resulting from a third party’s failure to perform under obligating agreements. DaimlerChrysler Services, Deutsche Telekom, and Compagnie Financiere et Industrielle des Autoroutes S.A. (“Cofiroute”), (individually, the “partners;” collectively, the “consortium”), entered into an agreement with the Federal Republic of Germany (“FRG”) to develop and operate a toll collection system for the use of German roadways by commercial vehicles over 12 tons (gross vehicle weight). DaimlerChrysler Services and Deutsche Telekom each represent 45% of the consortium and Cofiroute represents the remaining 10%. Pursuant to the agreement, the partners have guaranteed the successful completion of the toll system, in phases with applicable late penalties, with ultimate completion scheduled for August 2003. The partners have also guaranteed the successful operation of the toll system. In the event the toll system is not developed on schedule or does not operate effectively upon completion, the consortium will be obligated to pay penalties which cannot be presently estimated. These guarantees have not been included in the table above since they relate, in part, to the Group’s own future performance. The Group is subject to potential liability under certain gov- ernment regulations and various claims and legal actions that are pending or may be asserted against DaimlerChrysler con- cerning environmental matters. The maximum potential future obligation related to certain environmental guarantees cannot be estimated due to numerous uncertainties including the enactment of new laws and regulations, the development and application of new technologies, the identification of new sites for which the Group may have remediation responsibility and the apportionment and collectibility of remediation costs when other parties are involved. When circumstances indicate that payment is probable, guarantees made by the Group are recognized as a liability in the consolidated balance sheet with an offsetting amount recorded as an expense. Other Notes | 133 The Group periodically initiates voluntary service actions and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles it sells. The Group records a liability for product warranty, including the estimated cost of these service and recall actions, when the related sale is recognized based on historical experience as to product failures as well as current information on repair costs. The Group also enters into extended product warranty arrangements in consideration for a separate arrangement fee. The consideration received in extended product warranty arrangements is deferred and amortized to revenue over the term of the extended warranty period. Costs related to extended product warranty services contracts are expensed as incurred. The ultimate costs associated with product war- ranty arrangements cannot be estimated due to numerous uncertainties including the enactment of new laws and regu- lations, the number of vehicles affected by service or recall actions, and the nature of the corrective action which may result in adjustments to the established liabilities (see Note 25b). In accordance with FIN 45, the obligations associated with product warranties are not reflected in the above table. In addition to the above guarantees and warranties, in connection with certain production programs, the Group has committed to purchase various levels of outsourced manufac- tured parts and components over extended periods at market prices. The Group has also committed to purchase or invest in the construction and maintenance of various production facilities. Amounts under these guarantees represent commit- ments to purchase plant or equipment at market prices in the future. As of December 31, 2002, commitments to purchase outsourced manufactured parts and components or to invest in plant and equipment are approximately 1 3.7 billion. These amounts are not reflected in the above table. The Group also enters into noncancellable operating leases for facilities, plant and equipment. Total rentals under operat- ing leases charged to expense in 2002 in the statement of income (loss) amounted to 1737 million (2001: 1819 million; 2000: 1881 million). Future minimum lease payments under noncancellable lease agreements which have initial or remain- ing terms in excess of one year at December 31, 2002 are as follows: 32. Information About Financial Instruments and Derivatives a) Use of Financial Instruments The Group conducts business on a global basis in numerous major international currencies and is, therefore, exposed to adverse movements in foreign currency exchange rates. The Group uses bonds, medium-term-notes, commercial paper and bank loans in various currencies. As a consequence of using these types of financial instruments, the Group is exposed to risks from changes in interest and foreign currency exchange rates. DaimlerChrysler holds financial instruments, such as financial investments, variable- and fixed-interest bearing securities and to a minor extent equity securities that subject the Group to risks from changes in interest rates and market prices. DaimlerChrysler manages the various types of market risks by using derivative financial instruments. Without these instruments the Group’s market risks would be higher. DaimlerChrysler does not use derivative financial instruments for purposes other than risk management. Based on regulations issued by regulatory authorities for financial institutions, the Group has established guidelines for risk controlling procedures and for the use of financial instruments, including a clear segregation of duties with regard to operating financial activities, settlement, accounting and controlling. Market risks are quantified according to the “value-at-risk” method which is commonly used among banks. Using historical variability of market data, potential changes in value resulting from changes of market prices are calculated on the basis of statistical methods. b) Fair Value of Financial Instruments The fair value of a financial instrument is the price at which one party would assume the rights and/or duties of another party. Fair values of financial instruments have been determined with reference to available market information at the balance sheet date and the valuation methodologies discussed below. Considering the variability of their value-determining factors, the fair values presented herein are only an indication of the amounts that the Group could realize under current market conditions. (in millions of 3) 2003 2004 2005 2006 2007 thereafter Operating leases 581 348 275 214 191 1,074 134 | Other Notes The carrying amounts and fair values of the Group’s financial instruments are as follows: (in millions of 3) Financial instruments (other than derivative instruments): Assets: Financial assets Recaivables from financial service Securities Cash and cash equivalents At December 31, 2002 Carrying amount Fair value At December 31, 2001 Carrying amount Fair value 1,870 1,870 1,209 1,209 52,088 52,622 49,512 49,678 3,293 3,293 3,077 3,077 9,130 9,130 11,428 11,428 Other receivables 5 5 20 20 Liabilities: Financial liabilities 79,112 83,861 90,908 94,513 Derivative instruments: Assets: Currency contracts Interest rate contracts Equity contracts Liabilities: Currency contracts Interest rate contracts Equity contracts 1,759 3,776 – 105 302 – 1,759 3,776 – 105 302 – 477 1,011 4 806 1,434 4 477 1,011 4 806 1,434 4 The methods and assumptions used to determine the fair values of financial instruments are summarized below: Financial Assets and Securities – The fair values of securities were estimated using quoted market prices. The Group has certain equity investments in related and affiliated companies not presented in the table, as these investments are not publicly traded and determination of fair values is impracti- cable. Receivables from Financial Services – The carrying amounts of variable rate finance receivables were estimated to approxi- mate their fair values since the contract rates of those receiv- ables approximate current market rates. The fair values of fixed rate finance receivables were estimated by discounting expected cash flows using the current interest rates at which comparable loans with identical maturity would be made as of December 31, 2002 and 2001. The carrying amounts of Cash and Other receivables approximate fair values due to the short-term maturities of these instruments. Financial Liabilities – The fair value of publicly traded debt was estimated using quoted market prices. The fair values of other long-term notes and bonds were estimated by discount- ing future cash flows using market interest rates over the remaining term. The carrying amounts of commercial paper and borrowings under revolving credit facilities were assumed to approximate fair value due to their short maturities. Currency Contracts – The fair values of forward foreign exchange contracts were based on European Central Bank reference exchange rates adjusted for the respective interest rate differentials (premiums or discounts). Currency options were valued on the basis of quoted market prices or on estimates based on option pricing models. Interest Rate Contracts – The fair values of existing instru- ments to hedge interest rate risks (e. g. interest rate swap agreements) were estimated by discounting expected cash flows using market interest rates over the remaining term of the instrument. Interest rate options are valued on the basis of quoted market prices or on estimates based on option pricing models. Equity Contracts – The fair values of existing instruments to hedge equity price risk (e. g. futures or options) were deter- mined on the basis of quoted market prices or on estimates based on option pricing models. c) Credit Risk The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. DaimlerChrysler manages the credit risk exposure to financial institutions through diversification of counterparties and review of each counterparties’ financial strength. Daimler- Chrysler does not have a significant exposure to any individual counterparty, based on the rating of the counterparties per- formed by established rating agencies. DaimlerChrysler Services has established detailed guidelines for the risk mana- gement process related to the exposure to financial services customers. Additional information with respect to receivables from financial services and allowance for doubtful accounts is included in Note 18. Other Notes | 135 d) Accounting for and Reporting of Financial Instruments (Other than Derivative Instruments) The income or expense of the Group’s financial instruments (other than derivative instruments), with the exception of receivables from financial services and financial liabilities related to leasing and sales financing activities, is recognized in financial income, net. Interest income on receivables from financial services and gains and losses from sales of receiv- ables are recognized as revenues. Interest expense on finan- cial liabilities related to leasing and sales financing activities are recognized as cost of sales. The carrying amounts of the financial instruments (other than derivative instruments) are included in the consolidated balance sheets under their related captions. e) Accounting for and Reporting of Derivative Instru- ments and Hedging Activities Foreign Currency Risk Management As a consequence of the global nature of DaimlerChrysler’s businesses, its operations and its reported financial results and cash flows are exposed to the risks associated with fluc- tuations in the exchange rates of the U.S. dollar, the euro and other world currencies. The Group’s businesses are exposed to transaction risk whenever revenues of a business are denominated in a currency other than the currency in which the business incurs the costs relating to those revenues. This risk exposure primarily affects the Mercedes Car Group segment. The Mercedes Car Group segment generates its rev- enues mainly in the currencies of the countries in which cars are sold, but it incurs manufacturing costs primarily in euros. The Commercial Vehicles segment is subject to transaction risk, to a lesser extent, because of its global production net- work. At Chrysler Group revenues and costs are principally generated in U.S. dollars, resulting in a relatively low transac- tion risk for this segment. The Other Activities segment is exposed to transaction risk resulting primarily from the U.S. dollar exposure of the aircraft engine business, which Daimler- Chrysler conducts through MTU Aero Engines. In order to mitigate the impact of currency exchange rate fluctuations, DaimlerChrysler continually assesses its expo- sure to currency risks and hedges a portion of those risks through the use of derivative financial instruments. Responsi- bility for managing DaimlerChrysler’s currency exposures and use of currency derivatives is centralized within the Group’s Currency Committee. The Currency Committee, which con- sists of two separate subgroups, one for the Group’s vehicle businesses and one for MTU Aero Engines, is comprised of members of senior management from each of the respective businesses as well as from Corporate Treasury and Risk Con- trolling. Corporate Treasury implements decisions concerning foreign currency hedging taken by the Currency Committee. Risk Controlling regularly informs the Board of Management of the actions of Corporate Treasury based on the decisions of the Currency Committee. Interest Rate and Equity Price Risk Management DaimlerChrysler holds a variety of interest rate sensitive assets and liabilities to manage the liquidity and cash needs of its day-to-day operations. In addition a substantial volume of interest rate sensitive assets and liabilities is related to the leasing and sales financing business which is operated by DaimlerChrysler Services. In particular, the Group’s leasing and sales financing business enters into transactions with customers, primarily resulting in fixed rate receivables. DaimlerChrysler’s general policy is to match funding in terms of maturities and interest rates. However, for a limited portion of the receivables portfolio funding does not match in terms of maturities and interest rates. As a result, DaimlerChrysler is exposed to risks due to changes in interest rates. Daimler- Chrysler coordinates funding activities of the industrial business and financial services on the Group level. The Group uses interest rate derivative instruments such as interest rate swaps, forward rate agreements, swaptions, caps and floors to achieve the desired interest rate maturities and asset/ liability structures. The Group assesses interest rate risk by continually identi- fying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Group maintains risk management control systems independent of Corporate Treasury to monitor interest rate risk attributable to DaimlerChrysler’s outstanding interest rate exposures as well as its offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including value-at-risk analyses, to estimate the expected impact of changes in interest rates on the Group’s future cash flows. DaimlerChrysler also holds, to a minor extent, investments in equity securities as part of its strategy to manage excess liquidity. The risk inherent in these securities is hedged through the use of equity derivatives. 136 | Other Notes The Group assesses equity price risk by continually monitor- ing changes in key economic, industry and market information and maintains risk management control systems independent of Corporate Treasury to monitor risks attributable to both DaimlerChrysler’s investments as well as its offsetting hedge positions. The risk control systems involve the use of analy- tical techniques, including value-at-risk analyses, to estimate the potential loss and support the risk management of the Group’s investments. Information with Respect to Fair Value Hedges Gains and losses in fair value of recognized assets and liabi- lities and firm commitments of operating transactions as well as gains and losses on derivative financial instruments desig- nated as fair value hedges of these recognized assets and liabilities and firm commitments are recognized currently in revenues or cost of sales, as the transactions being hedged involve sales or production of the Group’s products. Net gains and losses in fair value of both recognized financial assets and liabilities and derivative financial instruments designated as fair value hedges of these financial assets and liabilities are recognized currently in financial income, net. For the year ended December 31, 2002, net gains of 134 million (2001: net losses of 117 million) were recognized in operating and financial income, net, representing principally the component of the derivative instruments’ gain or loss excluded from the assessment of hedge effectiveness and the amount of hedging ineffectiveness. Information with Respect to Cash Flow Hedges Changes in the value of forward foreign currency exchange contracts and currency options designated and qualifying as cash flow hedges are reported in accumulated other compre- hensive income. These amounts are subsequently reclassified into operating income, in the same period as the underlying transactions affect operating income. Changes in the fair val- ue of derivative hedging instruments designated as hedges of variability of cash flows associated with variable-rate long- term debt are also reported in accumulated other comprehen- sive income. These amounts are subsequently reclassified into financial income, net, as a yield adjustment in the same period in which the related interest on the floating-rate debt obligations affect operating income. For the year ended December 31, 2002, no gains or losses (2001: net losses of 112 million), representing principally the component of the derivative instruments’ gain/loss excluded from the assessment of the hedge effectiveness and the amount of hedge ineffectiveness, were recognized in operat- ing and financial income, net. For the year ended December 31, 2002, no gains or losses (2001: gains of 11 million) had to be reclassified from accu- mulated other comprehensive income into earnings as a result of the discontinuance of cash flow hedges. It is anticipated that 1517 million of net gains included in accumulated other comprehensive income at December 31, 2002, will be reclassified into earnings during the next year. As of December 31, 2002, DaimlerChrysler held derivative financial instruments with a maximum maturity of 43 months to hedge its exposure to the variability in future cash flows from foreign currency forecasted transactions. Information with Respect to Hedges of the Net Investment in a Foreign Operation In specific circumstances, DaimlerChrysler seeks to hedge the currency risk inherent in certain of its long-term invest- ments, where the functional currency is other than the euro, through the use of derivative and non-derivative financial instruments. For the year ended December 31, 2002, net gains of 1127 million (2001: net gains of 153 million) hedging the Group’s net investments in certain foreign operations were included in the cumulative translation adjustment with- out affecting DaimlerChrysler’s net income (loss). 33. Retained Interests in Sold Receivables and Sales of Finance Receivables The fair value of retained interests in sold receivables was as follows: (in millions of 3) Fair value of estimated residual cash flows, net of prepayments, from sold receivables, before expected future net credit losses Expected future net credit losses on sold receivables Fair value of net residual cash flows from sold receivables Restricted cash accounts Retained subordinated securities Retained interests in sold receivables, at fair value At December 31, 2001 2002 4,119 5,311 (644) (787) 3,475 4,524 2 764 2 956 4,241 5,482 In 2002, the Group recorded an impairment charge of 198 million on the retained interest in sold receivables resulting from a decline in the expected pool by pool cash flows. This decrease in cash flows was primarily the result of an increase in the estimate of future credit losses. At December 31, 2002, the significant assumptions used in estimating the residual cash flows from sold receivables and the sensitivity of the current fair value to immediate 10% and 20% adverse changes are as follows: Other Notes | 137 (in millions of 3) Assumption percentage Impact on fair value based on adverse 20% 10% change change Actual and projected credit losses for receivables securitized were as follows: Prepayment speed, monthly 1.5% (11) (16) Estimated remaining net credit losses as a percentage of receivables sold Residual cash flow discount rate, annualized Actual and projected credit losses Percentages as of: December 31, 2002 December 31, 2001 1.3% (61) (122) 12.0% (33) (66) December 31, 2000 December 31, 1999 Receivables securitized in 2001 2002 2000 2.6% 2.4% 2.4% 2.3% 1.7% 1.2% 1999 2.6% 2.2% 1.1% 1.0% The effect of a 10% and 20% adverse change in the discount rate used to compute the fair value of the retained subor- dinated securities would be a decrease of 118 million and 134 million, respectively. Similar changes to the monthly prepay- ment speed and the estimated remaining net credit losses as a percentage of receivables sold for the retained subordinated securities would have no adverse effect on the fair value of the retained subordinated securities. These sensitivities are hypothetical and should be used with caution. The effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in reality, changes in one assumption may result in changes in another, which might magnify or counteract the sensitivities. Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. The amount shown above for each year is a weighted average for all securitizations during that year and outstanding at December 31, 2002. Certain cash flows received and paid to securitization trusts were as follows: (in millions of 3) 2002 2001 Proceeds from new securitizations 10,705 18,219 Proceeds from collections reinvested in previous wholesale securitizations Amounts reinvested in previous wholesale securitizations Servicing fees received Receipt of cash flow on retained interest in securitized receivables 49,888 56,040 (49,965) (56,040) 304 553 353 580 The outstanding balance, delinquencies and net credit loss- es of sold receivables and other receivables, of those financial services businesses that sell receivables, as of and for the years ended December 31, 2002 and 2001, respectively, were as follows: (in millions of 3) Retail receivables Wholesale receivables Total receivables managed Less: receivables sold Receivables held in portfolio Outstanding balance at 2001 58,224 17,448 75,672 2002 48,476 16,754 65,230 (30,103) (42,312) 35,127 33,360 Delinquencies > 60 days at 2001 Net credit losses for the year ended 2001 2002 584 24 608 (182) 426 652 19 671 (342) 329 691 18 709 (310) 399 2002 506 – 506 (160) 346 138 | Other Notes During the year ended December 31, 2002, DaimlerChrysler sold 18,653 million (2001: 119,290 million) and 149,592 million (2001: 157,372 million) of retail and wholesale receiv- ables, respectively. From these transactions, the Group recog- nized gains of 1162 million (2001: 1414 million) and 1201 million (2001: 1182 million) on sales of retail and wholesale receivables, respectively. Significant assumptions used in measuring the residual inter- est resulting from the sale of retail and wholesale receivables were as follows (weighted average rates for securitizations completed during the year) at December 31, 2002 and 2001: (in millions of 3) Prepayment speed assumption (monthly rate) Estimated lifetime net credit losses (an average percentage of sold receivables) Residual cash flows discount rate (annual rate) 2002 1.0- 1.5% Retail 2001 1.0- 1.5% Wholesale 2001 1 2002 1 2.6% 2.4% 0.0% 0.0% 12.0% 12.0% 12.0% 10.0% 1 For the calculation of wholesale gains, the Group estimated the average wholesale loan liquidated in 210 days. In 2002, the Group’s financial services business in North America developed an asset-backed commercial paper pro- gram to be used as part of its securitization activities. To support the asset-backed commercial paper program, several banks have provided contractually committed liquidity facili- ties aggregating $3 billion. As of December 31, 2002, no receivables have been sold into this program and none of the liquidity facilities have been utilized. 34. Segment Reporting In 2002, the Board of Management decided to rename the Mercedes-Benz Passenger Cars & smart segment to Mercedes Car Group, effective as of January 1, 2003. The decision to rename the segment was made to reflect the recently enhanced brand portfolio and did not impact the composition of this reportable segment. Information with respect to the Group’s reportable segments follows: Mercedes Car Group. This segment includes activities relat- ed mainly to the development, design, manufacture, assembly and sale of passenger cars and off-road vehicles under the brand names Mercedes-Benz, smart and Maybach as well as related parts and accessories. Chrysler Group. This segment includes the development, design, manufacture, assembly and sale of cars and trucks under the brand names Chrysler, Jeep® and Dodge and related automotive parts and accessories. Commercial Vehicles. This segment is involved in the devel- opment, design, manufacture, assembly and sale of vans, trucks, buses and Unimogs as well as related parts and acces- sories. The products are sold mainly under the brand names Mercedes-Benz and Freightliner. Services. The activities in this segment extend to the marketing of services related to financial services (principally retail and lease financing for vehicles and dealer financing), insurance brokerage, trading and information technology. In October 2000, the information technology activities were contributed into a joint venture. The Group’s 49.9% interest in T-Systems ITS is included at equity subsequent to that date. In January 2002, DaimlerChrysler exercised its option to sell to Deutsche Telekom the Group’s 49.9% interest in T-Systems ITS. The sale was consummated in March 2002 with the termination of the joint venture. Other Activities. These activities principally represents the business MTU Aero Engines and the Group’s equity method investments in MMC, EADS and Automotive Electronics. Other Activities also contains corporate research, real estate acti- vities and holding and financing companies. In April 2001, DaimlerChrysler completed the sale of 60% of the interest in its Automotive Electronics activities to Continental AG. The Group’s 40% interest in the Automotive Electronics activities (Conti Temic microelectronic) is included at equity from that date. In April 2002, DaimlerChrysler exercised its option to sell to Continental AG the Group’s remaining 40% interest in Conti Temic microelectronic. The Group’s management reporting and controlling systems use accounting policies that are substantially the same as those described in Note 1 in the summary of significant accounting policies (U.S. GAAP). The Group measures the performance of its operating segments through “Operating Profit.” Segment Operating Profit is defined as income (loss) before financial income included in the consolidated state- ment of income (loss), modified to exclude pension and postretirement benefit expenses other than service costs, to include pretax operating profit (loss) from affiliated and associated companies, to include financial income (loss) from related operating companies, to include gains (losses) from the sale of operating businesses, and to include or exclude certain miscellaneous items. Intersegment sales and revenues are generally recorded at values that approximate third-party selling prices. Revenues are allocated to countries based on the location of the customer; long-lived assets are disclosed according to the physical location of these assets. Capital expenditures represent the purchase of property, plant and equipment. Other Notes | 139 Segment information as of and for the years ended December 31, 2002, 2001 and 2000 follows: (in millions of 3) 2002 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization 2001 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization 2000 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization Mercedes Car Group Chrysler Group Commercial Vehicles Services Other Activities Eliminations Consolidated 46,796 3,374 50,170 3,020 22,103 2,495 1,652 44,002 3,703 47,705 2,951 20,558 2,061 1,853 40,822 2,878 43,700 2,145 19,355 2,096 2,038 59,716 465 60,181 609 26,905 1,496 28,401 (343) 52,807 15,269 3,155 4,276 1,263 1,210 27,084 1,488 28,572 (514) 13,765 1,934 15,699 3,060 87,833 95 6,804 14,975 1,876 16,851 612 2,401 322 2,723 903 – 149,583 (7,591) (7,591) (395) – 149,583 6,854 33,970 (24,655) 187,327 137 157 – 7,145 (255) 13,844 4,136 371 4,507 1,181 – 152,873 (8,245) (8,245) (267) – 152,873 (1,318) 16,232 100,570 31,200 (24,475) 207,410 1,484 922 112 7,071 168 197 (12) (217) 8,896 15,190 28,521 1,283 29,804 1,212 15,879 1,128 847 15,322 2,204 17,526 2,457 94,369 282 6,603 10,314 301 10,615 3,590 – 162,384 (7,633) (7,633) (153) – 162,384 9,752 34,298 (18,287) 199,274 547 425 – (204) 10,392 13,587 62,676 807 63,483 (5,281) 63,325 5,083 5,364 67,405 967 68,372 501 53,660 6,339 3,878 Capital expenditures for equipment on operating leases for 2002, 2001 and 2000 for the Services segment amounted to 112,862 million, 114,334 million and 115,551 million, respectively. The Operating Profit of the Mercedes Car Group segment for the year ended December 31, 2000, includes 1470 million of non-cash charges related to the adoption of the European Union’s directive regarding end-of-life vehicles and related to fixed cost reimbursement agreements with MCC smart suppliers. For the year ended December 31, 2001, Operating Loss of the Chrysler Group segment includes 11,715 million of non- cash turnaround plan charges, other than depreciation and amortization. The Operating Loss of the Commercial Vehicles segment for the year ended December 31, 2002, includes 1161 million (2001: 1353 million) of non-cash turnaround plan and other charges, other than depreciation and amortization. For the years ended December 31, 2002, 2001 and 2000, Operating Profit of the Services segment includes 110 million, 141 million and 11 million, respectively, from the equity investment in T-Systems ITS, representing the Group’s per- centage share of the Operating Profit of T-Systems ITS. In addition, Operating Profit of the Services segment for the year ended December 31, 2000, includes a non-cash gain of 12,315 million from the transaction involving T-Systems ITS (see Note 11). At December 31, 2001 and 2000, the identifi- able assets of the Services segment includes 12,193 million and 12,152 million, respectively, of the investment in T-Systems ITS. For the year ended December 31, 2002, Operating Profit of the Services segment includes impairment charges of 1537 million, which primarily relate to equipment on operating leases and receivables from financial services. For the year ended December 31, 2002, Operating Profit of the Other Activities segment includes 1778 million from EADS and MMC, the significant companies accounted for using the equity method. For the year ended December 31, 2001, Oper- ating Profit of the Other Activities segment includes 1694 140 | Other Notes million from EADS and MMC, including a 1876 million gain from the formation of Airbus SAS. For the year ended Decem- ber 31, 2000, Operating Profit of the Other Activities segment includes 13,259 million from EADS and MMC, including a 13,303 million gain in connection with the exchange of the Group’s controlling interest in DaimlerChrysler Aerospace for shares in EADS (see Note 11). At December 31, 2002, 2001 and 2000, the identifiable assets of the Other Activities segment include 15,714 million, 15,393 million and 15,143 million, respectively, of investments in these equity method investees. A reconciliation to Operating Profit (Loss) follows: (in millions of 3) Income (loss) before financial income Pension and postretirement benifit expenses other than service costs Operating income (loss) from affiliated and associated com- panies, and financial income (loss) from related companies Gains (losses) from the sale of operating businesses Miscellaneous items Consolidated Operating Profit (Loss) 2002 2001 2000 3,860 (1,637) 4,320 (242) (450) (228) 494 2,640 102 516 292 (39) (35) 5,832 (137) 6,854 (1,318) 9,752 Revenues from external customers presented by geographic region are as follows: (in millions of 3) 2002 2001 2000 1 Excluding Germany Germany 23,121 24,340 25,988 European Union1 23,425 21,300 24,360 United States 77,686 81,132 84,503 Other American countries 12,104 13,585 14,762 Other Asia countries Consolidated 6,284 6,208 5,892 6,963 6,308 6,879 149,583 152,873 162,384 Germany accounts for 119,627 million of long-lived assets (2001: 120,584 million; 2000: 117,450 million), the United States for 144,758 million (2001: 158,850 million; 2000: 151,996 million) and other countries for 114,344 million (2001: 112,971 million; 2000: 119,633 million). 35. Earnings (Loss) per Share The computation of basic and diluted earnings (loss) per share for “Income (loss) before extraordinary items and cumulative effects of changes in accounting principles” is as follows: (in millions of 3 or millions of shares, except earnings (loss) per share) Year ended December 31, 2000 2001 2002 Income (loss) before extraordinary items and cumulative effects of change in accounting principles – basic Interest expense on convertible bonds and notes (net of tax) Income (loss) before extraordinary items and cumulative effects of change in accounting principles – diluted 4,877 (662) 2,465 12 – 18 4,889 (662) 2,483 Weighted average number of shares outstanding – basic Dilutive effect of convertible bonds and notes Weighted average number of shares outstanding – diluted 1,008.3 1,033.2 1,033.2 5.6 – 10.7 1,013.9 1,033.2 1,013.9 Earning (loss) per share before extraordinary items and cumulative effects of changes in accounting principles Basic Diluted 4.84 4.82 (0.66) (0.66) 2.46 2.45 Other Notes | 141 See Note 23 for shares issued upon conversion of bonds and notes in 2002. Because the Group reported a loss before extraordinary items and cumulative effects of changes in accounting princi- ples for the year ended December 31, 2001, the diluted loss per share does not include the antidilutive effects of convert- ible bonds and notes. Had the Group reported income before extraordinary items and cumulative effects of changes in accounting principles for the year ended December 31, 2001, the weighted average number of shares outstanding would have potentially been diluted by 10.7 million shares resulting from the conversion of bonds and notes. Stock options issued in 2002, 2001 and 2000 in connection with the Stock Option Plan 2000 were not included in the computation of diluted earnings per share for all years pre- sented, because the options’ underlying exercise prices were greater than the average market prices for DaimlerChrysler Ordinary Shares on December 31, 2002, 2001 and 2000. Income tax charges of 1263 million relating to changes in German tax laws were included in the consolidated statement of income for the year ended December 31, 2000 and result- ed in a reduction of basic and diluted earnings per share of 10.26 and 10.26 in 2000 (see Note 9). 36. Related Party Transactions The Group purchases materials, supplies and services from numerous suppliers throughout the world in the ordinary course of our business. These suppliers include firms in which the Group holds an ownership interest and firms that are affiliated with some members of DaimlerChrysler’s Supervisory Board. Mitsubishi Motor Manufacturing of America, a subsidiary of Mitsubishi Motors Corporation, produces the Dodge Stratus and Chrysler Sebring coupes for the Group. As discussed in Note 3, DaimlerChrylser owns a 37% equity interest in Mitsubishi Motors Corporation. DaimlerChrysler has an agreement with McLaren Cars Ltd., a wholly owned subsidiary of TAG McLaren Holdings Ltd., for the design and production of a new high-performance sports car, the SLR, which DaimlerChrysler expects to launch by the end of 2003. The Group owns a 40% equity interest in TAG McLaren Holdings Ltd. DaimlerChrysler increased its stake in the Formula 1 engine manufacturer Ilmor Engineering Ltd. from 25% to 55% in December 2002 and has agreed to gradually acquire the remaining shares by 2005. The company has been renamed Mercedes-Ilmor. Ilmor Engineering Ltd. and DaimlerChrysler have been responsible for the development, design and production of Mercedes-Benz Formula 1 engines since 1993, which DaimlerChrysler supplies to the West McLaren team in support of motor sport activities under the Mercedes-Benz brand. In May 2002, DaimlerChrysler Corporation sold its Dayton thermal products facility to Behr Dayton Thermal Products LLC, a joint venture company in which Behr America, Inc. owns a majority interest and DaimlerChrysler Corporation owns a minority interest. DaimlerChrysler Corporation is required to maintain its minority interest through May 2004 and to pur- chase products from the joint venture company under a supply agreement entered into in connection with the sale. The Group’s subsidiaries DaimlerChrysler Coordination Cen- ter S.A. (DCCC) and DaimlerChrysler Aerospace AG (DASA) granted a series of loans to debis Air Finance B.V. (dAF). Through DaimlerChrysler’s subsidiaries DaimlerChrysler Ser- vices AG and DaimlerChrysler Aerospace AG, the Group holds a 45% non-controlling interest in debis Air Finance B.V. The total book value of these loans as of December 31, 2002, was 1519 million, the highest aggregate amount outstanding during 2002 was 1546 million. The interest rates are partially fixed, partially based on Libor. The Group purchases products and services from T-Systems ITS GmbH, an information technology company. As discussed in Note 4, the Group beneficially owned a 49.9% equity inter- est in T-Systems through a joint venture prior to March 2002 and then decided to exit the joint venture by exercising its option to sell its interest to Deutsche Telekom for 14.7 billion. The sale closed in March 2002. The Group continues to pur- chase products from T-Systems ITS. As discussed in Note 4, in April, 2002, DaimlerChrysler exercised its option to sell its 40% interest in Conti Temic microelectronic GmbH to Continental. The Group continues to purchase products from Conti Temic. The following represent transactions with shareholders: – DaimlerChrysler incurred expenses of approximately $846,000 in 2002 for advertising and related marketing activities with a U.S. magazine. Earl G. Graves, member of DaimlerChrysler’s Supervisory Board and shareholder of DaimlerChrysler AG, is the Chairman, Chief Executive Officer and sole stockholder of the magazine’s ultimate parent company. – DB Value GmbH, a wholly owned subsidiary of Deutsche Bank AG, owns approximately 12% of DaimlerChrysler’s outstand- ing shares. Deutsche Bank AG and its subsidiaries provided the Group with various financial and other services for which they were paid reasonable and customary fees. Hilmar Kop- per, the Chairman of DaimlerChrysler’s Supervisory Board and shareholder of DaimlerChrysler AG, was also Chairman of the Supervisory Board of Deutsche Bank AG until May 22, 2002. 142 | Other Notes 37. Compensation and share ownership of the members of the Board of Management and the Supervisory Board and further additional information concerning German Corporate Governance Code Remuneration – The total remuneration paid by Group com- panies to the members of the Board of Management of Daimler- Chrysler AG are calculated from the amount of compensation paid in cash and from the non-cash benefits in kind. The total remuneration in 2002 for the members of the Board of Man- agement of DaimlerChrysler AG amount to 150.8 million, of which 113.4 million is fixed and 137.4 million is short-term and mid-term incentive remuneration components. In 2002, no compensation resulted from long-term incentive remunera- tion components. In 2002, 3.03 million stock options from the Stock Option Plan 2000 were granted to members of the Board of Manage- ment as a long-term remuneration component. Also in 2002, 476,500 performance-based awards were granted to the members of the Board of Management based on a 3 year per- formance plan. For detailed information on stock based compensation programs, see Note 24. The remuneration paid in 2002 to the members of the Supervisory Board of DaimlerChrysler AG for services in all capacities to the Group amounted 12.5 million. Directors’ Dealings – Transactions of ordinary shares, options and derivatives of DaimlerChrysler AG and Group related com- panies1, exercised by members of the Board of Management as well as by their spouses and first-grade relatives since July 1, 2002, which are to be published according to Article 15a of the German Securities Trading Act, are listed below: Name Dr. Dieter Zetsche Prof. Klaus-Dieter Vöhringer Prof. Klaus-Dieter Vöhringer Prof. Klaus-Dieter Vöhringer Prof. Klaus-Dieter Vöhringer Type of Trans- action Purchase Purchase Purchase Purchase Purchase Title (Security or Right) Share Share Share Share Share Company DCAG DCAG DCAG DCAG DCAG Nominal Amount 12.60 12.60 12.60 12.60 12.60 Date of Transaction Number of Units 7/3/2002 9/4/2002 9/19/2002 9/25/2002 10/9/2002 4,255 1,000 1,000 2,000 1,000 Price in 3 46.93 39.50 37.90 34.92 31.90 Members of the Supervisory Board as well as their spouses and first-grade relatives exercised no transactions of ordinary shares, options and derivatives of DaimlerChrysler AG and Group related companies1 in the second half of 2002, which are to be published. Share Ownership – As of December 31, 2002, the current members of the Board of Management and the members of the Supervisory Board as a group owned 9.6 million Ordinary Shares, options or derivatives (SAR) of DaimlerChrysler AG (0.95% of all outstanding shares). Transactions with Related Parties – For transactions with shareholders, please see last paragraph of Note 36. 1 at the present time: EADS and Maschinenfabrik Esslingen AG Cautionary Statement Regarding Forward-Looking Statements | 143 If any of these risks and uncertainties occur, or if the assumptions underlying any of our forward-looking statements prove incorrect, then our actual results may be materially different from those we express or imply by such statements. We do not intend or assume any obligation to update these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. Cautionary Statement Regarding Forward-Looking Statements This annual report contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions to identify forward- looking statements. These statements are subject to many risks and uncertainties, including: – changes in general political, economic and business conditions, especially an economic downturn or slow economic growth in Europe or North America; – changes in currency exchange rates and interest rates; – introduction of competing products and lack of accep- tance of our new products or services; – increased competitive pressures which limit our ability to reduce sales incentives and raise prices; – whether Chrysler Group, Freightliner, and Mitsubishi Motors will be able to continue to implement their turnaround plans successfully and especially whether they will be able to meet their revenue enhancement, efficiency and cost reduction initiatives; – shortages or interruptions in the supply of fuel or production materials, or labor strikes; – changes in laws, regulations and government policies, particularly those relating to vehicle emissions, fuel economy and safety, and the outcome of current pending and possible future legal proceedings; – decline in resale prices of used vehicles; – changes in business strategy; and – other risks and uncertainties, some of which we describe under the heading “Risk Report” on the pages 78 to 83 of this annual report. 144 | Major Subsidiaries of the DaimlerChrysler Group Major Subsidiaries of the DaimlerChrysler Group Mercedes Car Group smart GmbH, Böblingen Mercedes-Benz U.S. International, Inc., Tuscaloosa DaimlerChrysler India Private Limited, Poona DaimlerChrysler South Africa (Pty.) Ltd., Pretoria 4 Chrysler Group DaimlerChrysler Motors Company LLC, Auburn Hills 4 DaimlerChrysler Corporation, Auburn Hills DaimlerChrysler Canada Inc., Windsor DaimlerChrysler de Mexico S.A. de C.V., Mexico City Commercial Vehicles EvoBus GmbH, Stuttgart 4 Mercedes-Benz Lenkungen GmbH, Düsseldorf Mercedes-Benz España S.A., Madrid Detroit Diesel Corporation, Detroit Freightliner LLC, Portland 4 Mercedes-Benz Mexico S.A. de C.V., Mexico-City 4 DaimlerChrysler do Brasil Ltda., São Bernardo do Campo DaimlerChrysler Argentina S.A., Buenos Aires 4 P.T. DaimlerChrysler Indonesia, Jakarta 4 Mercedes-Benz Türk A.S., Istanbul MTU Friedrichshafen GmbH, Friedrichshafen 4 Ownership 1 in % Stockholders’ equity 2 in millions of 3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 95.0 66.9 88.4 76 257 56 356 9,949 5 5 5 297 27 278 157 536 93 205 27 76 118 51 Revenues 3 in millions of 3 Employment at year-end 2002 2001 2002 2001 974 3,029 56 2,048 996 3,155 62 1,807 1,245 1,906 345 3,881 1,037 1,888 347 4,450 60,181 – 14,414 8,568 – 63,483 15,692 9,414 96,040 – 12,767 5 8,083 5 – 107,369 13,052 5 10,287 5 1,887 272 2,895 1,856 8,692 586 1,986 261 2,752 1,849 8,072 626 1,323 1,731 176 138 629 322 153 478 1,273 1,128 10,078 10,969 1,250 5,499 5,919 12,340 960 9,799 888 1,222 3,489 6,688 1,295 5,262 6,342 12,810 967 10,958 957 1,231 3,364 6,200 Major Subsidiaries of the DaimlerChrysler Group | 145 Vehicle Sales Organization Mercedes-Benz USA, L.L.C., Montvale 4 DaimlerChrysler France S.A.S, Le Chesnay 4 DaimlerChrysler Belgium Luxembourg S.A., Brussels DaimlerChrysler Nederland B.V., Utrecht 4 DaimlerChrysler UK Ltd., Milton Keynes 4 DaimlerChrysler Danmark AS, Copenhagen DaimlerChrysler Sverige AB, Malmo DaimlerChrysler Italia S.p.A., Rome 4 DaimlerChrysler Schweiz AG, Zurich Mercedes-Benz Hellas S.A., Athens DaimlerChrysler Japan Co., Ltd., Tokyo DaimlerChrysler Australia/Pacific Pty. Ltd., Mulgrave 4 Services DaimlerChrysler Services AG, Berlin DaimlerChrysler Bank AG, Stuttgart DaimlerChrysler Services Leasing GmbH, Stuttgart DaimlerChrysler Services North America L.L.C., Farmington Hills Chrysler Capital Company L.L.C., Norwalk DaimlerChrysler Insurance Company, Farmington Hills debis Financial Services Inc., Norwalk Other Activities MTU Aero Engines GmbH, Munich 4 European Aeronautic Defence and Space Company EADS, N.V., Amsterdam 6 Mitsubishi Motors Corporation, Tokyo 7 Hyundai Motor Company, Seoul Ownership 1 in % Stockholders’ equity 2 in millions of 3 Revenues 3 in millions of 3 Employment at year-end 2002 2001 2002 2001 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 346 154 61 60 177 23 20 170 59 27 53 199 989 546 36 11,287 11,396 3,466 1,108 1,162 5,226 292 475 3,370 1,009 199 2,340 1,109 0 340 945 3,252 1,160 1,193 4,769 289 459 2,934 1,128 199 2,511 967 0 342 1,712 1,644 2,818 658 761 2,517 388 491 575 410 167 441 764 304 1,622 5 1,549 2,190 655 679 1,535 361 439 537 419 157 457 729 314 1,483 5 6,018 8,220 11,200 4,665 4,341 413 130 20 110 154 130 112 121 348 22 73 56 23 97 152 100.0 412 2,215 2,487 8,376 7,839 33.0 37.1 10.5 11,510 2,038 8,416 19,996 13,852 10,846 8 20,685 14,176 18,949 103,787 102,967 61,100 49,000 66,700 50,000 1 Relating to the respective parent company. 2 Stockholders’ equity taken from national financial statements; stockholders’ equity converted at year-end exchange rates. 3 Converted at average annual exchange rates. 4 Preconsolidated financial statements. 5 Included in the consolidated financial statements of the parent company. 6 Details based on the consolidated financial statements of September 30, 2002 (stockholders’ equity at September 30, 2002; revenues January through September 2002/2001; employees at September 30, 2002/2001). 7 Details based on the consolidated financial statements of September 30, 2002 (stockholders’ equity at September 30, 2002; revenues April through September 2002/2001; employees at September 30, 2002/ 2001). 8 Revenues January through June 2002. 146 | Members of the Supervisory Board Members of the Supervisory Board Hilmar Kopper Frankfurt am Main Chairman of the Supervisory Board of DaimlerChrysler AG Chairman Erich Klemm 1 Sindelfingen Chairman of the Corporate Works Council, DaimlerChrysler Group and DaimlerChrysler AG Deputy Chairman Manfred Göbels 1 Stuttgart Director, Services and Mobility Concept, DaimlerChrysler AG Nate Gooden 1 Detroit Vice President of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) (since June 26, 2002) Earl G. Graves New York Publisher and CEO of Black Enterprise magazine Prof. Victor Halberstadt Amsterdam Professor of Public Economics at Leiden University, Netherlands Robert J. Lanigan Toledo Chairman Emeritus of Owens-Illinois, Inc.; Founder Partner, Palladium Equity Partners Helmut Lense 1 Stuttgart Chairman of the Labor Council, Untertürkheim Plant, DaimlerChrysler AG Peter A. Magowan San Francisco President of San Francisco Giants Gerd Rheude 1 Wörth Chairman of the Labor Council, Wörth Plant, DaimlerChrysler AG Udo Richter 1 Bremen Chairman of the Labor Council, Bremen Plant, DaimlerChrysler AG Wolf Jürgen Röder 1 Frankfurt am Main Member of the Executive Council of the German Metalworkers’ Union Dr. rer. pol. Manfred Schneider Leverkusen Chairman of the Supervisory Board of Bayer AG Peter Schönfelder 1 Augsburg Chairman of the Labor Council, Augsburg Plant, EADS Deutschland GmbH Stefan Schwaab 1 Gaggenau Vice Chairman of the Corporate Labor Council, DaimlerChrysler Group and DaimlerChrysler AG, Vice Chairman of the Labor Council Gaggenau Plant, DaimlerChrysler AG G. Richard Thoman New York Former President and Chief Executive Officer of Xerox Corporation; Managing Partner, Corporate Perspectives Bernhard Walter Frankfurt am Main Former Chairman of the Board of Management of Dresdner Bank AG Lynton R. Wilson Toronto Chairman of the Board of CAE Inc.; Chairman of the Board of Nortel Networks Corporation Dr.-Ing. Mark Wössner Munich Former CEO and Chairman of the Supervisory Board of Bertelsmann AG Bernhard Wurl 1 Frankfurt am Main Responsible for Labor and Codetermination Policy, German Metalworkers’ Union Committees of the Supervisory Board: Committee pursuant to Section 27, Subsection 3 of the German Law of Industrial Codetermination Hilmar Kopper (Chairman) Erich Klemm Dr. rer. pol. Manfred Schneider Bernhard Wurl Presidential Committee Hilmar Kopper (Chairman) Erich Klemm Dr. rer. pol. Manfred Schneider Bernhard Wurl Audit Committee Hilmar Kopper (Chairman) Erich Klemm Stefan Schwaab Bernhard Walter Retired from the Supervisory Board: Stephan P. Yokich 1 † Detroit President of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) (retired May 31, 2002, deceased August 16, 2002) 1 Representative of the employees Report of the Supervisory Board | 147 Report of the Supervisory Board In five meetings during the 2002 financial year, the Super- visory Board dealt in detail with the business situation of DaimlerChrysler, the future strategic development of the Group and its business units, and various other issues, and also discussed these matters with the Board of Management. The Presidential Committee met three times in 2002, primarily to deal with Board of Management issues, but also with questions of corporate governance, and to prepare the plenary meetings. The Audit Committee convened three times with the external auditors to discuss the financial statements for 2001, the financial statements for the first half of 2002, and, for the first time, the interim report on the third quarter. After receiving the approval of the Annual Shareholders’ Meet- ing, the Audit Committee engaged KPMG Deutsche Treuhand- Gesellschaft AG, Wirtschaftsprüfungsgesellschaft (KPMG), a company of auditors, to conduct the annual audit, and also determined the audit emphasis for 2002. The Mediation Committee, a body formed in accordance with the stipulations of the German Law of Industrial Codetermination, was not required to convene last year. In its meetings the Supervisory Board was regularly and fully informed by the Board of Management regarding the situation of the company, particularly its business and financial status, the personnel situation, business developments, investment plans and questions of fundamental business policy. In addition, there was regular monthly reporting in which the Board of Management presented the company’s key perfor- mance figures, and written reports were submitted on special matters. The Chairman of the Supervisory Board was also kept regularly informed of all important developments and deci- sions through separate discussions with the Board of Manage- ment. No conflicts of interest of any of the members of the Supervisory Board occurred during 2002. The focus of the Supervisory Board’s discussions was on the current situation of the company and the development of the individual business units against the backdrop of a difficult global economy. In this context, questions concerning the Group’s automotive product portfolio were also dealt with. In connection with the commercial vehicles business, the main issue was the Asian strategy and cooperation with Mitsubishi Motors Corporation (MMC) and Hyundai Motor Company (HMC). Another topic was the further development of corpo- rate governance at DaimlerChrysler, in view of new legislation in the United States and Germany. In the meeting in February 2002, particular attention was paid to the annual financial statements of DaimlerChrysler AG and the consolidated financial statements. After detailed dis- cussions, the medium-term planning for 2002 through 2004 (including investment, human-resources and earnings targets) and financing requirements for 2002 were approved. The Supervisory Board also received a detailed report on the situation and strategy of the Mercedes Car Group division. Furthermore, the Supervisory Board consented to the sale of the Austrian Eurostar plant to Magna Steyr, with the pro- duction of the minivans and the Cherokee remaining in Graz. Preparations for the Annual Shareholders’ Meeting were also dealt with in detail. In April 2002, the Supervisory Board approved the financing of capital expenditure for the construction of a new engine plant in Kölleda, Thuringia. In this plant, which will employ 500 persons, gasoline engines for Mitsubishi and smart vehicles are to be produced as a joint venture between Daimler- Chrysler AG and MMC. The Board of Management provided the Supervisory Board with detailed information on the situa- tion at EADS and the general state of the aerospace industry. The Supervisory Board passed resolutions concerning the financing of equipment for the production of the CLK convert- ible and the Crossfire at the Karmann company. In addition, a capital increase at Freightliner LLC was also approved. 148 | Report of the Supervisory Board In the July meeting, the Supervisory Board discussed the strategy of the Commercial Vehicles division. In this context it received a detailed report from the Board of Management on the division’s strategic goals and their consequences, as well as on the present state of the market for commercial vehicles. The report on the first half of 2002 was presented and infor- mation was received on the engagement of KPMG as external auditors for the 2002 financial year and on the main areas of this audit as determined by the Chairman of the Supervisory Board. The Supervisory Board also consented to the closure and sale plans for some of Chrysler Group’s component plants. The Supervisory Board also dealt intensively with the situation at MMC, including the progress of restructuring measures, and with general market developments in Asia. The focus of September’s meeting was on decisions con- cerning the Commercial Vehicles division. The Supervisory Board agreed to the acquisition of a 43% equity interest in the spun-off commercial-vehicles business of MMC. It also con- sented to the acquisition of a 50% stake in Hyundai Motor Company’s commercial-vehicles business, also to be spun off. Within this context the Supervisory Board also dealt with the issue of financing at MMC. Important decisions were also tak- en on personnel matters. Klaus-Dieter Vöhringer, responsible for research and technology, retired from the Board of Man- agement on December 31, 2002. As his successor, the Super- visory Board appointed Thomas Weber as deputy member of the Board of Management for a period of three years with effect from January 1, 2003. In view of their good work, Wolf- gang Bernhard and Rüdiger Grube, both hitherto deputy mem- bers of the Board of Management, were made full members. The Board of Management informed the Supervisory Board in detail on Chrysler Group’s situation and current strategic considerations, including the future product portfolio. In the context of restructuring Formula One racing activities, the gradual acquisition of a 75% ownership interest in Ilmor UK was approved. In the last meeting of the year 2002 on December 12, follow- ing detailed discussions, the Supervisory Board approved the medium-term corporate planning for 2003 through 2005 (including investment, human-resources and earnings targets), as well as the scope of financing limits for the year 2003. Decisions were taken on the further financing of Toll Collect GmbH and debis AirFinance. In addition, the Supervisory Board received reports on regulations connected with the German Corporate Governance Code and the Sarbanes-Oxley Act, and discussed their implementation at the company. After detailed consultations, a Declaration of Compliance in accor- dance with Section 161 of the German Stock Corporation Law (AktG) and new Rules of Procedure for the Supervisory Board and its committees were approved. At the end of January 2003 and following a recommendation by the Presidential Committee, the Supervisory Board took several decisions regarding the reduction of the size of the Board of Management and its rejuvenation. The appointments of Manfred Bischoff, Klaus Mangold and Gary C. Valade will expire on December 16, 2003. In addition to his own respon- sibilities, Rüdiger Grube will then assume the duties of Mr. Bischoff relating to the Group’s investment in Mitsubishi Motors Corporation. After Mr. Mangold’s departure, respon- sibility for the Services division will be transferred to Bodo Uebber, who was appointed deputy member of the Board of Management for a period of three years with effect from December 16, 2003. Thomas W. Sidlik, who was re-appointed for a further five years from December 16, 2003, will on that date also take over responsibility for global procurement and supply from Mr. Valade. Mr. Sidlik’s present responsibility of procurement and supply for Chrysler Group will no longer be a Board of Management position. It is planned that Messrs. Bischoff, Mangold and Valade will continue to be available to the company on an advisory basis. In order to ensure continuity in the Board of Management, also with effect from December 16, 2003, the Supervisory Board extended the appointment of Manfred Gentz for another year and the appointments of Eckhard Cordes and Dieter Zetsche for a further five years. The areas of responsibility of these three members will remain unchanged. Report of the Supervisory Board | 149 The DaimlerChrysler AG financial statements for 2002 and the management report were audited by KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft, Berlin and Frankfurt/Main, and certified without qualification. The same applies to the consolidated financial statements according to US GAAP. These are prepared in euros and supplemented by a management report and additional notes pursuant to Section 292a of the German Commercial Code (HGB). In accordance with Section 292a of the HGB, the US GAAP consolidated financial statements presented in this report grant exemption from the obligation to produce con- solidated financial statements according to German Law. All financial statements and the appropriation of earnings proposed by the Board of Management, as well as the audi- tors’ reports, were submitted to the Supervisory Board. They were inspected by the Audit Committee and the Supervisory Board and discussed in the presence of the auditors. The Supervisory Board has declared itself in agreement with the results of the statutory audit and has established that there are no objections to be made. In its meeting on February 19, 2003, the Supervisory Board approved the consolidated financial statements for 2002, approved, and thereby adopted, the financial statements of DaimlerChrysler AG for 2002, and consented to the appropria- tion of earnings proposed by the Board of Management. Effective May 31, 2002, Stephen P. Yokich retired from his position as a member of the Supervisory Board represent- ing the employees. Mr. Nate Gooden was appointed as his successor with effect from June 26, 2002. The Supervisory Board expresses its gratitude to the management and employees of DaimlerChrysler AG for their outstanding individual efforts and achievements in 2002. Stuttgart-Möhringen, February 2003 The Supervisory Board Hilmar Kopper Chairman 150 | Corporate Governance Corporate Governance The issue of the management and control of stock corpora- tions is the subject of lively discussion among large sections of the public under the heading of “corporate governance”. DaimlerChrysler supports all the initiatives that aim to improve corporate governance, and many of the resulting principles and recommendations have long been practiced at our com- pany. In particular due to the fact that our company has its roots in Germany and the United States, the Board of Manage- ment and the Supervisory Board intend to ensure that Daimler-Chrysler’s corporate governance system complies with international standards and is transparent. This report has these aims. General conditions The legal framework for the corporate governance of DaimlerChrysler as a stock corporation with its headquarters in Germany derive from German Law, particularly the Stock Corporation Law, the Co-determination Act, legislation concerning the capital market, and the company’s articles of association. Due to the listing of our company at foreign stock exchanges, especially at the New York Stock Exchange, these countries’ applicable capital-market legislation and their stock exchanges’ listing regulations are also important. In this legal framework, much public attention has been paid to the Sarbanes-Oxley Act in the United States. As DaimlerChrysler is listed at the New York Stock Exchange and is therefore also obliged to observe these legal stipulations, we are in favor of equivalent international stock exchange regulations. Shareholders and the Annual Meeting The company's shareholders exercise their rights and cast their votes at the Annual Meeting. Each share in Daimler- Chrysler AG entitles its owner to one vote. There are no shares with multiple voting rights, no preferred, privileged stock, and no maximum voting rights. Various important decisions can only be taken by the Annual Meeting. These include: – the appropriation of net income and – in such cases as specified by the law – the adoption of the annual financial statements and the approval of the consolidated financial statements; – the ratification of the acts of the members of the Board of Management and the Supervisory Board; – the election of the independent auditors; – the election of members of the Supervisory Board and, if necessary, their dismissal; – amendments to the Articles of Association; – the raising of capital – also for stock-based compensation – and capital reductions; – approval to buy back shares, limited to 10% of the issued shares; – consent to certain inter-company agreements. The influence of the Annual Meeting on the management of the company is limited. Management decisions can only be taken by the Annual Meeting if it is requested to do so by the Board of Management. Dual management system DaimlerChrysler AG is obliged by the German Commercial Code to apply a dual management system. With this system, the company’s Board of Management is responsible for the executive functions, while the Supervisory Board appoints, monitors and advises the Board of Management. The mem- bers of the Board of Management bear shared responsibility for managing the company, while the Chairman of the Board of Management coordinates the work of the Board of Management. The Supervisory Board is involved in decisions which are of fundamental importance, and the work of the Supervisory Board is coordinated by its own chairman. Half of the members of the Supervisory Board are elected by the shareholders at the Annual Meeting. The other half are elected by the company’s German employees. The members representing the shareholders and the members representing the employees are equally obliged to act in the company’s best interests. Additional information is available on the Internet at www.daimlerchrysler.com/corpgov_e. Corporate Governance | 151 Annual Meeting all shareholders Supervisory Board 10 shareholder representatives 10 employee representatives Board of Management 13 executive members Supervisory Board 10 shareholder representatives 10 employee representatives Presidential Committee 2 shareholder and 2 employee representatives Audit Committee 2 shareholder and 2 employee representatives Mediation Committee 2 shareholder and 2 employee representatives Board of Management 13 executive members (chairman, 5 members of operating divisions, 7 members with functional responsibility) Committees of the Board of Management, e.g. EAC Chairman’s Council International Advisory Board Chairman of the Board of Management and 11 additional members Board of Management and 13 additional members The Supervisory Board The Supervisory Board has formed three committees: the Presidential, the Audit and the Mediation Committee. The Presidential Committee has particular responsibility for the contractual affairs of the Board of Management, and enters into contracts with them. Otherwise, it supports and advises the Chairman of the Supervisory Board and his deputies and prepares the meetings of the Supervisory Board. The Audit Committee deals with questions of accounting and risk management. It discusses the interim and year-end financial statements of the DaimlerChrysler Group and of DaimlerChrysler AG. The Audit Committee makes recommen- dations concerning the selection of external auditors, and, after these are elected by the Annual Meeting, commissions them to conduct the annual audit and determines the main focus of this audit. The Audit Committee receives reports from the external auditors on any accounting matters that might be regarded as critical and on any differences of opinion with the Board of Management. In addition, it makes recommen- dations to the Supervisory Board, for example, concerning the appropriation of net income and capital measures. In the future the Audit Committee will also approve all non-audit services that are to be performed by the external auditors. The Mediation Committee is formed solely to perform the functions laid down in Section 31, Subsection 3 of the German Codetermination Act. According to this stipulation, it has the task of making proposals for the appointment of members of the Board of Management if a previously proposed appoint- ment did not obtain the legally required majority of two thirds of the votes. The Board of Management At present, the Board of Management of DaimlerChrysler AG comprises thirteen members. The rules of procedure define the areas of responsibility of the entire Board of Management, its Chairman and the individual members. The areas of responsibility of the individual Board of Management members can be found on pages 6 and 7of this Annual Report. The management structure reflects the global orientation of the company and its concentration on the automotive business, while facilitating a strong focus on markets and customers. The Board of Management of DaimlerChrysler is organized into five operative divisions (Mercedes Car Group, Chrysler Group, Commercial Vehicles, Services, Industrial Holdings) and into seven functional areas, including crossdivisional functions such as Finance & Controlling, Procurement and Human Resources. 152 | Corporate Governance The Chairman of the Supervisory Board has regular contacts with the Board of Management to advise not only on the Group’s strategy and business developments, but also to discuss the issue of risk management. Transparency DaimlerChrysler regularly informs its shareholders, financial analysts, shareholders’ associations, the media and the interested public on the situation of the company and on any significant changes in its business. In accordance with the principle of fair disclosure, all share- holders are equally treated with regard to the disclosure of information. All new facts that DaimlerChrysler communicates to institutional investors and financial analysts are simultane- ously also made available to the shareholders. If any information is made public outside Germany as a result of the regulations governing capital markets in the respective countries, the company also makes this information available without delay in Germany in the original version, or at least in English. In order to ensure that information is provided quickly and equally, DaimlerChrysler makes full use of the Internet, but also of other methods of communication. In a financial diary all the dates of important disclosures (e.g. the Annual Report, interim reports, the Annual Meeting) are published in advance. The financial diary can also be accessed on the Internet, at www.daimlerchrysler.com/ir/calendar. In addition to its regular scheduled reporting, Daimler- Chrysler also reports without delay any new facts which may arise within the company’s areas of activity and which are not known to the public, if these facts are likely to have a sub- stantial impact on the stock-market price of DaimlerChrysler’s shares due to their effects on the company’s assets, financial situation or general course of business (ad-hoc publications). DaimlerChrysler also reports, in accordance with the require- ments of the law and without any delay, after being informed that by means of acquisition, disposal or any other method, the shareholding in DaimlerChrysler AG of any person or insti- tution has reached, exceeded or fallen below 5, 10, 25, 50 or 75%. The Executive Automotive Committee The Executive Automotive Committee (EAC) has been estab- lished as a committee of the Board of Management. The task of the EAC is to coordinate all cross-divisional automotive issues and to identify potential for improving efficiency. The EAC prepares Board of Management decisions and regularly informs the Board of Management of its activities. Further details of the work of the EAC can be found on pages 42 and 43 of this Annual Report. The Chairman’s Council The Chairman’s Council is headed by the Chairman of the Board of Management of DaimlerChrysler AG, and reflects elements of US and German corporate governance. It advises the Board of Management, primarily on questions of global business strategy. The International Advisory Board The International Advisory Board (IAB) consults with the Board of Management of DaimlerChrysler once a year on develop- ments in the fields of the global economy, technology, politics and society, and their effects on the company’s activities. The IAB is composed of high-ranking international per- sonalities from the fields of economics, politics and science. Guest speakers are also invited to hold talks on issues of current relevance. Financial statements The consolidated financial statements of the DaimlerChrysler Group are prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP). Details of US GAAP can be found on page 94 of this Annual Report. The year-end financial statements of DaimlerChrysler AG are prepared in accordance with the accounting guidelines of the German Commercial Code (HGB). Both sets of financial statements are audited by an independent company of auditors. Risk management DaimlerChrysler has a risk-management system commen- surate with its situation as a company with global operations (details can be found on page 78 et seq. of this Annual Report or on the Internet at www.daimlerchrysler.com/corpgov_e under transparency). The risk-management system is one component of the overall planning, controlling and reporting process. Its goal is to enable the company’s management to recognize significant risks at an early stage and to initiate appropriate countermeasures. Corporate Governance | 153 Any securities transactions conducted by members of the Board of Management or the Supervisory Board (or by persons regarded by the German Securities Trading Law as being similarly situated) are disclosed by DaimlerChrysler without delay after the company is informed of such transactions (directors’ dealings), in accordance with the requirements of the German Securities Trading Law. The relevant details are given in the Notes to the Consolidated Financial Statements on page 142 of this Annual Report, and, in accordance with the requirements of the law, are also available on the Internet at www.daimlerchrysler.com/corpgov_e. Integrity code The Integrity Code is a guideline that has been in effect since 1999. It defines binding limits to the activities of all employees worldwide, and is regularly referred to. Among other things, it contains rules of conduct concerning international trans- actions, conflicts of interest, the issue of equality, the role of internal monitoring systems, the right to the fulfillment of statutory standards, as well as other internal and external regulations. Declaration of compliance with the German Corporate Governance Code (convenience translation) Section 161 of the German Stock Corporation Act (AktG) requires the Board of Management and the Supervisory Board of a listed stock corporation to give a declaration each year that the recommendations of the “German Corporate Governance Code Government Commission” published by the Federal Ministry of Justice in the official section of the elec- tronic Federal Gazette are being or have been met, or, if not, which recommendations are not being or have not been applied. As 2002 is the first year in which such declarations are mandatory, they can consist merely of a statement to the effect that the recommendations are being met, or, if not, which recommendations are not being applied. This declaration must be made available to shareholders at all times. The German Corporate Governance Code (the “Code”) contains rules with varying binding effect. Apart from outlining aspects of the current German Stock Corporation Act, it contains recommendations from which companies are per- mitted to deviate. However, if they do so, they must disclose this fact each year. The Code also contains suggestions, which can be ignored without giving rise to any disclosure require- ment. The Board of Management and the Supervisory Board of DaimlerChrysler AG have decided to disclose not only devia- tions from the Code’s recommendations (see I.), but also – without being legally obliged to do so – deviations from its suggestions (see II). For reasons of language simplicity, only the masculine gender is used in this text, which form should be understood to include both male and female persons. (This declaration is also available on the Internet at www.daimlerchrysler.com/corpgov_e.) 1 I. Recommendations The Board of Management and the Supervisory Board of DaimlerChrysler AG declare that the recommendations of the “German Corporate Governance Code Government Commission“, published on November 26, 2002 by the Federal Ministry of Justice in the official section of the elec- tronic Federal Gazette, are being met. The following recommendations are the only ones not being applied: 1. Clause 3.8, Paragraph 2 (Directors’ and officers’ liability insurance for the Board of Management and the Supervisory Board) 1 If the company takes out a D&O (directors’ and officers’ liability insurance) policy for the Board of Management and the Supervisory Board, a suitable deductible shall be agreed in accordance with clause 3.8, para. 2 of the Code. The D & O insurance obtained by DaimlerChrysler AG for the Board of Management and Supervisory Board does not provide any insurance cover for intentional acts and omissions or for breaches of duty knowingly committed. Insurance cover is provided only for negligent breaches of duty by members of the Board of Management and the Supervisory Board, so that this is the only context in which the question of the agreement of a deductible arises. It is not advisable to agree a deductible for negligence on the part of the members of the Supervisory Board. DaimlerChrysler AG endeavors to staff its Supervisory Board with prominent members of the community from Germany and abroad who have extensive business experience, and the company may be impeded in this aim if members of its Supervisory Board have to accept far-reaching liability risks for potential negligence. The fact that a deductible is still fairly unusual in other countries makes this even more of a problem. Nor does the D & O insurance of DaimlerChrysler AG envisage any deductible for ordinary or gross negligence on the part of members of the Board of Management. In cases of a grossly negligent breach of duty by a member of the Board of Management, the Presidential Committee of the Supervisory Board, with responsibility for human resources, may agree to 154 | Corporate Governance 4. Clause 7.1.4 (List of third-party companies) 1 Clause 7.1.4 of the Code requires the company to publish a list of third -party companies stating, i. a. the operating results for the last financial year. The company has decided not to publish the operating results of these companies for the past financial year, firstly because the control mechanisms of DaimlerChrysler AG are geared not to legal entities but to business units, whose results are shown by way of the segmental reporting, and secondly because such disclosure of results does not provide any meaningful information as the accounting principles on which they are based vary from country to country. Finally, showing individual year-end statements separately without precisely defining which subsidiaries are included in the consolidated accounts could be very misleading. II. Suggestions There is no obligation to provide any explanation for deviations from suggestions. The Board of Management and the Supervisory Board of DaimlerChrysler AG declare that the suggestions of the “German Corporate Governance Code Government Commission”, published on November 26, 2002 by the Federal Ministry of Justice in the official section of the electronic Federal Gazette, are being met. The following suggestions are the only ones not being applied: 1. Clause 2.3.3 (Proxy voting at the Annual Meeting) 1 Clause 2.3.3 of the Code requires the Board of Management to appoint a representative to ensure that the shareholders’ voting right is exercised in accordance with the shareholders’ instructions; this representative should also be contactable during the Annual Meeting. make a percentage deduction from the variable portion of the remuneration of the member of the Board of Management concerned. In terms of its economic result, this is the same as a deductible. In the view of DaimlerChrysler AG this rule enables individual cases to be judged more fairly on their mer- its than the blanket approach of the Code. 2. Clause 4.3.5 (Approval of side line activities) 1 Clause 4.3.5 of the Code states that Members of the Board of Management may only take on side line activities, in particular Supervisory Board mandates outside the enterprise, with the approval of the Supervisory Board. For reasons of practicality relating to the way in which the Supervisory Board works, such consent is granted not by the whole Board but by the Chairman of the Supervisory Board. For the same reason, such approval is required only in cases where the additional activity is a paid position (but not, for example, for honorary positions on advisory boards or boards of governors). The Presidential Committee will be informed about the decisions of the Chairman of the Supervisory Board accordingly. 3. Clause 5.4.5 (Compensation of the Supervisory Board) 1 Clause 5.4.5, para. 2 of the Code states that members of the Supervisory Board shall receive performance-related as well as fixed compensation. It is intended to decide about a proposal for the appropriate amendment of the articles of association in order to award a performance-related pay element to the members of the Supervisory Board at a later point of time. Clause 5.4.5, para. 3 of the Code states that payments made by the enterprise to members of the Supervisory Board or advantages granted for services provided individually, in particular advisory or agency services, shall be listed sepa- rately in the Notes to the Consolidated Financial Statements. The company plans to list such information separately from fiscal 2004. The shareholder representatives on the Super- visory Board will be up for re-election in 2004. For this reason it seems appropriate to start the separate listing from this point in time, and, until then, to present a summarized account of the payments or benefits granted to all members of the Supervisory Board. Corporate Governance | 155 As explained below with regard to Clause 2.3.4 of the Code, the company does not intend to broadcast its entire Annual Meeting on the Internet. Generally, there will therefore be no need to contact the company’s voting rights representative during the Annual Meeting. Furthermore, there is a possibility of technical problems in trying to ensure the availability of such a representative using the communication media current- ly available. 2. Clause 2.3.4 (Broadcast of the Annual Meeting) 1 Clause 2.3.4 of the Code states that the company should make it possible for shareholders to follow the Annual Meeting using modern communication media (e.g. the Internet). The Annual Meeting will be broadcast on the Internet until the end of the Board of Management’s report. To continue the broadcast after this point, in particular to broadcast the contri- butions of individual shareholders, could also be construed as interference in the shareholders’ privacy rights. For this rea- son the company has decided not to make such a broadcast. 3. Clause 4.2.4 (Compensation of the Board of Management) 1 Clause 4.2.4 states that the compensation paid to members of the Board of Management should be reported individually in the Notes to the Consolidated Financial Statements. The remuneration of the members of the Board of Manage- ment is reported, broken down into fixed and variable elements and into components with a long-term incentive effect. This information is crucial for assessing whether the division of such remuneration into guaranteed and performance-related components is appropriate and whether the structure of such remuneration provides adequate incentives for the Board of Management. This information will be disclosed for the first time in 2003 for fiscal 2002. As the Board of Management operates according to the principle of collective responsibility, the decisive factor is the incentives provided for the Board of Management as a whole. In other respects, there is a risk that listing these figures separately will lead to a leveling of performance-related and task-related differences in pay. 4. Clause 5.2 (Chairman of the Audit Committee) 1 Clause 5.2 of the Code states that the Chairman of the Super- visory Board should not chair the Audit Committee. The Chairman of the Supervisory Board currently chairs the Audit Committee. To avoid a reallocation of responsibilities during the current term of office of the Supervisory Board, the Chairman of the Supervisory Board will continue to chair the Audit Committee until the new shareholders’ Supervisory Board representatives are elected in fiscal 2004. Subsequently, the Supervisory Board will again decide on the matter. 5. Clause 5.4.4 (Election of Supervisory Board members) 1 Clause 5.4.4 of the Code states that the need for change can be met by structuring the Supervisory Board so that members can be elected or re-elected at different times and for differing periods of office. The company intends to introduce differing terms of office when the new shareholders’ representatives are elected to the Supervisory Board in 2004, because to do otherwise would require intervention in existing appointments. 6. Clause 5.4.5 (Disclosure of Supervisory Board compensation) 1 Clause 5.4.5, para. 3 of the Code states that the compensation paid to members of the Supervisory Board should be reported individually in the Notes to the Consolidated Financial Statements, subdivided according to components. Performance- related remuneration should also contain components based on the long-term performance of the enterprise. This information will be listed separately from fiscal 2004. In 2004, the new shareholders’ representatives will be elected to the Supervisory Board. For this reason it seems appropriate to carry out the separate listing from this point in time, and until then to present a summarized account for all members of the Supervisory Board. Stuttgart, in December 2002 DaimlerChrysler AG The Board of Management The Supervisory Board 1 The text in brackets is not part of the compliance declaration. 156 | International Representative Offices International Representative Offices Berlin Phone Fax Abidjan Phone Fax +49 30 25 94 11 00 +49 30 25 94 11 09 +225 21 75 1001 +225 21 75 1090 Abu Dhabi Phone Fax +97 14 8833 200 +97 14 8833 201 Bangkok Phone Fax Beijing Phone Fax Brussels Phone Fax +662 334 6100 +662 676 5550 +86 10 6590 0158 +86 10 6590 6237 +32 2 23311 33 +32 2 23311 80 Budapest Phone Fax +361 451 2233 +361 451 2201 Buenos Aires Phone Fax +54 11 4801 3585 +54 11 4808 8702 Cairo Phone Fax Caracas Phone Fax Hanoi Phone Fax +20 2 524 6127 +20 2 524 6700 +58 241 613 2540 +58 241 613 2542 +84 8 8959 710 +84 8 8958 714 Hong Kong Phone Fax +85 2 2594 8876 +85 2 2594 8801 Istanbul Phone Fax +90 212 482 3520 +90 212 482 3521 Kiev Phone Fax Lagos Phone Fax +380 44 235 5251 +380 44 235 5288 +234 1 2612 088 +234 1 4618 728 Ljubljana Phone Fax +386 61 1883 797 +386 61 1883 799 London Phone Fax Madrid Phone Fax +44 193 28 67 350 +44 193 28 60 738 +34 91 484 6161 +34 91 484 6019 Melbourne Phone Fax +61 39 566 9104 +61 39 566 9110 Mexico City Phone Fax +52 55 5081 7376 +52 55 5081 7674 Moscow Phone Fax +7 095 926 4018 +7 095 745 2614 New Delhi Phone Fax +91 1 1410 4959 +91 1 1410 5226 Paris Phone Fax Pretoria Phone Fax Rome Phone Fax +33 1 39 23 5400 +33 1 39 23 5442 +27 12 677 1502 +27 12 666 8191 +39 06 4144 2405 +39 06 4121 9097 São Paulo Phone Fax +55 11 4178 0602 +55 11 4173 7118 Seoul Phone Fax +82 2 2112 2656 +82 2 2112 2600 Singapore Phone Fax +65 6849 8321 +65 6849 8493 Skopje Phone Fax Sofia Phone Fax Taipei Phone Fax +389 2 114 016 +389 2 114 754 +359 2 91 988 77 +359 2 945 40 48 +886 2 2715 9696 +886 2 2715 2776 Tashkent Phone Fax +998 71 120 6374 +998 71 120 6674 Teheran Phone Fax Tel Aviv Phone Fax Tokyo Phone Fax Warsaw Phone Fax +98 21 204 6047 +98 21 204 6126 +972 9957 9091 +972 9957 6872 +81 3 5572 7172 +81 3 5572 7126 +48 22 697 7040 +48 22 654 8633 Washington D.C. Phone Fax +1 202 414 6747 +1 202 414 6716 Windsor, Ontario Phone Fax +1 519 973 2101 +1 519 973 2226 Zagreb Phone Fax +38 51 489 1500 +38 51 489 1501 Seven-Year Summary | 157 Seven-Year Summary 1 Amounts in millions of 3 From the statements of income: Revenues Personnel expenses of which: Wages and salaries Research and development expenditure Operating profit (loss) Operating margin Financial income Income (loss) before income taxes and extraordinary items Net operating income Net operating income as % of net assets (RONA) Net income (loss) Net income (loss) per share (1) Diluted net income (loss) per share (1) Net income per share (excluding one-time effects) (1) Diluted net income per share (excluding one-time effects) (1) Cash dividend Cash dividend per share (1) Cash dividend including tax credit 3 per share (1) From the balance sheets: Property, plant and equipment Leased equipment Current assets of which: Liquid assets Total assets Stockholders’ equity of which: Capital stock Accrued liabilities Liabilities of which: Financial liabilities Debt-to-equity ratio Mid- and long-term provisions and liabilities Short-term provisions and liabilities Current ratio Net assets (annual average) Credit rating, long-term Standard & Poor’s Moody’s From the statements of cash flows: Investments in property, plant and equipment Investments in leased equipment Depreciation of property, plant and equipment Depreciation of leased equipment Cash provided by operating activities Cash used for investing activities From the stock exchanges: Share price at year-end Frankfurt (1) New York (US $) Average shares outstanding (in millions) Average dilutive shares outstanding (in millions) 1996 1997 1998 1999 2000 2001 2002 101,415 117,572 131,782 149,985 162,384 152,873 149,583 21,648 17,143 5,751 6,212 6.1% 408 5,693 – – 4,022 4.09 4.05 4.24 4.20 – – – 23,111 7,905 54,888 12,851 23,370 18,656 25,033 19,982 6,501 6,230 5.3% 633 6,145 4,946 10.9% 6,547 4.282 4.212 4.28 4.21 – – – 6,693 8,593 6.5% 763 8,093 6,359 12.7% 4,820 5.03 4.91 5.58 5.45 2,356 2.35 3.36 28,558 11,092 68,244 17,325 29,532 14,662 75,393 19,073 26,158 21,044 7,575 11,012 7.3% 333 9,657 7,032 13.2% 5,746 5.73 5.69 6.21 6.16 2,358 2.35 3.36 36,434 27,249 93,199 18,201 26,500 21,836 7,395 9,752 6.0% 156 4,476 4,383 7.4% 7,894 7.87 7.80 3.47 3.45 2,358 2.35 3.36 25,095 20,073 6,008 (1,318) (0.9%) 154 (1,483) 1,647 2.5% (662) (0.66) (0.66) 0.73 0.73 1,003 1.00 – 24,163 19,701 6,156 6,854 4.6% 2,208 6,068 4,335 6.7% 4,718 4.68 4.67 3.30 3.30 1,519 1.50 – 40,145 33,714 99,852 12,510 41,165 36,002 36,269 28,243 103,389 104,023 14,525 12,428 101,294 124,831 136,149 174,667 199,274 207,410 187,327 22,355 2,444 32,135 41,672 25,496 114% 36,989 41,950 – – – – 6,721 4,891 4,427 1,159 9,956 27,960 2,391 36,007 54,313 34,375 123% 45,953 50,918 85% 30,367 2,561 35,057 62,527 40,430 133% 47,601 58,181 79% 36,060 2,565 38,211 90,560 64,488 179% 55,291 83,315 66% 42,409 2,609 36,985 39,004 2,609 42,194 34,914 2,633 43,712 109,661 115,327 100,297 84,783 200% 75,349 81,516 67% 90,908 233% 87,532 80,874 64% 79,112 227% 79,622 72,791 72% 45,252 50,062 53,174 59,489 65,882 64,986 – – 8,051 7,225 5,683 1,456 A + A 1 8,155 10,245 4,937 1,972 A + A 1 9,470 19,336 5,655 3,315 A A 2 BBB+ A 3 BBB+ A 3 10,392 19,117 6,645 6,487 8,896 17,951 7,580 7,254 7,145 17,704 6,385 7,244 12,337 16,681 18,023 16,017 15,944 17,796 (8,745) (14,530) (23,445) (32,110) (32,709) (13,287) (12,946) – – 981.6 994.0 – – 949.3 968.2 83.60 96.06 959.3 987.1 77.00 78.25 1,002.9 1,013.6 44.74 41.20 1,003.2 1,013.9 48.35 41.67 1,003.2 1,003,2 29.35 30.65 1,008.3 1,013.9 Average annual number of employees 419,758 421,661 433.939 463,561 449,594 379,544 370,677 1 Certain amounts reported in previous years have been reclassified to conform to the 2002 presentation. 2 Excluding one-time positive tax effects, especially due to extra distribution of 110.23 per share. 3 For our stockholders who are taxable in Germany. There is no tax credit from 2001 due to a change in the corporate income tax system. 158 | The DaimlerChrysler Share The DaimlerChrysler Share Disappointing capital markets in 2002 | Sluggish economic conditions and unstable political environments create uncertainty | DCX outperformed the DAX during 2002 International stock markets in 2002 Following a weak 2001, international capital markets trended lower again in 2002. For the third year in a row, leading inter- national indices, such as the S&P 500, the Dow, the Nikkei, Euro Stoxx 50 and the DAX, finished the year significantly lower than they began. The DAX recorded the sharpest drop among major global indices ending the year down 44%. The downward trend began in May, after relative stability in the first few months of the year. Gloomier sentiment followed early indications that the economic recovery in the US and Europe might not proceed as rapidly as had been anticipated. Share values deteriorated further also as a result of investor uncertainty resulting from poor corporate earnings and account- ing scandals. In the fall, markets were further negatively impacted by the general weakness of the world’s major economies and speculation concerning possible military action in the Middle East. Nevertheless, European automotive stocks remained rel- atively firm in this difficult market environment and performed significantly better than the S&P 500, the Nasdaq, the DAX and Euro Stoxx 50. DCX performance in 2002 The DaimlerChrysler share was unable to escape the effects of world market conditions. The share price was impacted at the beginning of the year by external forecasts of a likely decline in automotive sales, particularly in the US, and the drop in earnings that this might entail. However, between March and May when it became apparent that demand in the US was stronger than expected, the DaimlerChrysler share price rose and remained stable at this higher level. Thus, in the period following the announcement of the results for 2001 on February through to the the end of May, DCX shares rose 37% to 155.44. This made the share one of the best performers in the automotive sector and the strongest in the DAX. Although DaimlerChrysler’s earnings in the second and third quarters significantly exceeded market expectations and the company had raised its earnings forecast for the remainder of the year, DCX was unable to escape the general malaise in the markets. Thus the share price fell in August and September as a result of the expectation of a sales decline in international automotive markets in 2003, the possibility of armed conflict in the Middle East and a relative sluggishness in the capital markets. DCX closed on December 30 at 129.35 in Frankfurt and at $30.65 in New York. Nevertheless, DCX was one of the few shares in 2002 to outperform the DAX over the year as a whole. DaimlerChrysler stock was again among the most liquid in the world in 2002, with a global trading volume of 1.6 billion shares (2001: 1.3 billion), of which 154 million were traded in the US (2001: 130 million) and 1,469 million in Germany (2001: 1,169 million). Investor relations activities Activities at DaimlerChrysler Investor Relations during the year under review focused particularly on providing consistent reliable and timely information on the company to institutional investors, financial analysts, rating agencies and shareholders. The most important channels for informing our shareholders on corporate strategy and the company’s performance were the Annual Meeting in Berlin, which was attended by more than 10,000 people, and the Investor Relations section of the DaimlerChrysler website. Our communication activities for institutional investors and analysts in 2002 included road- shows in the major financial centers of Europe, North America and Asia, along with one-on-one meetings at our headquarters in Stuttgart. We also provided information on our quarterly results to the investment community through conference calls that were simultaneously broadcast on the Internet. The DaimlerChrysler Share | 159 Share Price Index Development of Important Indices 120 110 100 90 80 70 60 50 40 Jan. 2 Feb. 28 April 30 June 28 Aug. 30 Oct. 31 Dec. 30 DaimlerChrysler MSCI Automobiles Index DAX DaimlerChrysler Share Price (high/low) in 3 3 60 55 50 45 40 35 30 25 20 Jan. ´02 Feb. ´02 March ´02 April ´02 May ´02 June ´02 July ´02 Aug. ´02 Sept. ´02 Oct. ´02 Nov. ´02 Dec. ´02 Status End of 2002 Status End of 2001 % Change Dow Jones Industrial Average Nasdaq Composite FTSE 100 Nikkei Dow Jones Euro Stoxx 50 DAX 30 Dow Jones Stoxx Auto Europa MSCI World Index Automobiles For comparison: DaimlerChrysler share (in 1) 8,342 1,336 3,940 8,579 2,386 2,893 154 73 10,022 1,950 5,217 10,543 3,806 5,160 218 81 29.35 48.35 - 17 - 32 - 24 - 19 - 37 - 44 - 29 - 10 - 39 Statistics December 31 Capital stock (in millions) Number of shares (in millions) 2002 US $ 2,761 Market capitalization (in billions) 31.04 Number of shareholders (in millions) Weighting on share index DAX 30 Dow Jones Euro Stoxx 50 Credit rating, long-term Standard & Poor’s Moody’s 2002 3 2,633 1,012.8 29.73 2001 3 2,609 1,003.3 48.51 1.8 1.9 8.1% 2.1% BBB+ A3 6.8% 2.2% BBB+ A3 Shareholder Structure at of Dec. 31, 2002 Statistics per Share By type of shareholder Major shareholders 19% Free float 81% 12% 7% 54% Deutsche Bank AG Kuwait Investment Authority Institutional investors By region 27% Retail investors 8% 14% Rest of the world USA 21% Europe excluding Germany 57% Germany 2002 US $ 3.46 3.46 36.31 30.65 3 50.88 3 29.79 3 2002 3 3.30 3.30 1.50 34.63 29.35 2 55.44 2 28.16 2 2001 3 0.73 0.73 1.00 38.88 48.35 2 58.19 2 27.24 2 Net income (basic) 1 Net income (diluted) 1 Dividend Stockholders’ equity (Dec. 31) Share price: year-end high low 1 Excluding one-time effects 2 Frankfurt Stock Exchange 3 New York Stock Exchange 160 | Addresses / Information Addresses Information DaimlerChrysler AG 70546 Stuttgart Germany Phone +49 711 17 0 Fax +49 711 17 94022 www.daimlerchrysler.com DaimlerChrysler Corporation Auburn Hills, MI 48326-2766 USA Phone +1 248 576 5741 www.daimlerchrysler.com Investor Relations Stuttgart Phone +49 711 17 92261 +49 711 17 95277 +49 711 17 94075 +49 711 17 94109 Fax New York Phone +1 212 909 9080 +1 212 909 9085 Fax Publications for our shareholders: - DaimlerChrysler Annual Report (German, English) - Form 20-F (English) - DaimlerChrysler Interim Reports for 1st, 2nd and 3rd quarters (German, English) - DaimlerChrysler Environment Report (German, English) - DaimlerChrysler Social Responsibility Report (German, English) The financial statements of DaimlerChrysler Aktiengesellschaft prepared in accordance with German GAAP were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, and an unqualified opinion was rendered thereon. These publications can be requested from: DaimlerChrysler AG, 70546 Stuttgart, Germany The information can also be ordered by phone or fax using the following number: +49 711 17 92287