Daimler AG
Annual Report 2005

Plain-text annual report

Driven by Values Annual Report 2005 Key Figures DaimlerChrysler Group Amounts in millions of € Revenues Western Europe of which: Germany NAFTA of which: United States Other markets Discontinued operations Employees (at year-end) Investments in property, plant and equipment Research and development expenditure Cash provided by operating activities Operating profit Net income per share (in €) Total dividend Dividend per share (in €) 2005 2004 2003 05/04 Change in % 149,776 142,059 136,437 47,337 20,948 77,611 67,015 24,828 – 48,845 22,315 73,266 64,232 19,948 – 51,157 24,182 73,477 64,757 13,736 (1,933) 382,724 384,723 362,063 6,580 5,649 12,353 5,185 2,846 2.80 1,527 1.50 6,386 5,658 11,060 5,754 2,466 2.43 1,519 1.50 6,614 5,571 13,826 5,686 448 0.44 1,519 1.50 +5 -3 -6 +6 +4 +24 – -1 +3 -0 +12 -10 +15 +15 +1 0 Divisions Unit Sales Structure >> >> Divisions Amounts in millions of € Mercedes Car Group Operating profit (loss) Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) Chrysler Group Operating profit (loss) Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) Commercial Vehicles Operating profit Revenues Investments in property, plant and equipment Research and development expenditure Unit sales Employees (Dec. 31) Financial Services Operating profit Revenues Contract volume Investments in property, plant and equipment Employees (Dec. 31) Other Activities Operating profit Revenues Investments in property, plant and equipment Research and development expenditure Employees (Dec. 31) 2005 2004 2003 05/04 Change in % (505) 50,015 1,629 2,418 1,216,838 104,345 1,534 50,118 3,083 1,710 2,812,993 83,130 2,093 40,634 1,743 1,281 824,867 117,183 1,468 15,439 117,724 45 11,129 591 2,396 109 240 18,164 1,666 49,630 2,343 2,634 1,226,773 105,857 1,427 49,498 2,647 1,570 2,779,895 84,375 1,332 34,764 1,184 1,226 712,166 114,602 1,250 13,939 102,399 91 11,224 456 2,200 134 228 20,636 3,126 51,446 2,939 2,687 1,216,938 104,151 (506) 49,321 2,487 1,689 2,637,867 93,062 811 26,806 958 946 500,981 88,014 1,240 14,037 98,199 76 11,035 1,329 4,084 169 420 20,192 . +1 -30 -8 -1 -1 +7 +1 +16 +9 +1 -1 +57 +17 +47 +4 +16 +2 +17 +11 +15 -51 -1 +30 +9 -19 +5 -12 Unit Sales Structure Mercedes Car Group S-Class/SL/Maybach E-Class/CLS C-Class/CLK/SLK/Sport Coupe A-Class/B-Class M-Class/R-Class/G-Class smart 6% 22% 33% 21% 8% 10% Chrysler Group Passenger cars Light trucks Sports tourers Minivans SUVs Commercial Vehicles Trucks Vans Buses 23% 21% 11% 19% 26% 62% 33% 5% Doing business means creating values that last. One of these values is mobility – our customers’ independence to get to wherever they want to go, whenever and in whatever manner they choose. To fulfill our customers’ desire for mobile independence, we have been developing and producing inno- vative passenger cars and powerful commercial vehicles for 120 years. We also offer our customers a full range of sophisti- cated financial services. We at DaimlerChrysler are working on this all over the world. Responsible and open to innovation, we deliver top performance day after day. Mercedes Car Group Chrysler Group Commercial Vehicles DaimlerChrysler Financial Services Contents Annual Report 2005 4 Essentials 28 Management Report 70 Divisions 4 Our Values 7 Driven by Values 16 Chairman’s Letter 20 Board of Management 22 Important Events 24 DaimlerChrysler Shares 72 Mercedes Car Group 76 Chrysler Group 80 Commercial Vehicles 84 Financial Services 86 Other Activities 28 Overview 30 Business and Strategy 37 Profitability 47 Liquidity and Capital Resources 53 Financial Position 55 Capital Expenditure 55 Research and Develop- ment 56 Procurement and Supply 56 Workforce 57 Events after the End of the 2005 Financial Year 58 Risk Report 64 Outlook 88 Cross-Divisional Activities 90 Sustainability at DaimlerChrysler 92 Human Resources 94 Research and Technology 96 DaimlerChrysler and the Environment 98 Global Procurement and Supply 100 Social Responsibility What defines the world of Daimler- Chrysler – and what makes us different from other companies? This chapter provides fundamental and personal information, helping you to get to know and understand the world of DaimlerChrysler. The Management Report is prepared in accordance with German Accounting Standard DRS 15 and is audited by independent auditors. In this chapter, the Board of Manage- ment provides information on the busi- ness situation, the Group’s finances, cash flow and profitability, and the opportunities and risks of future deve- lopments. DaimlerChrysler comprises four divisions. DaimlerChrysler is committed to the principles of sustainability. This chapter describes the business developments of the divisions. In addition, we report here on new pro- ducts, major investments and the measures we have initiated to enhance quality and efficiency. This chapter provides details of the Group’s cross-divisional activities. Economic, ecological and social respon- sibility are the basis of our actions. 2 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information 102 Corporate Governance 122 Consolidated Financial Statements 203 Additional Information 104 Corporate Governance Report 110 Compensation Report 114 Declaration of Compli- ance with the German Corporate Governance Code 116 Report of the Supervisory Board 120 Members of the Supervisory Board 121 Report of the Audit Committee 122 Overview 124 Statement by the Board of Management 125 Report of Independent Registered Public Accounting Firm 126 Consolidated Financial Statements 203 Transition to International Financial Reporting Standards (IFRS) 204 Ten-Year Summary 206 Glossary 207 Index 208 International Represen- tative Offices Addresses/ Information/ Internet DaimlerChrysler Worldwide Financial Calendar 2006 The system of corporate management and supervision at DaimlerChrysler is oriented towards the German Cor- porate Governance Code and inter- national standards. DaimlerChrysler’s consolidated finan- cial statements are prepared in accor- dance with US Generally Accepted Accounting Principles (US GAAP) and are audited by independent auditors. In this section, you will find more facts and figures, supplementary information and practical suggestions for other sources of information. This chapter explains the functions, interactions and compensation of the bodies of the company, especially the Board of Management and the Supervisory Board. In this chapter, the consolidated finan- cial statements are shown in full detail. 3 Top Performance Developing outstanding and durable technologies, producing innovative and appealing products, offering customer-oriented services and consistently delivering top performance in all of these areas – that’s what we are doing to ensure that Daimler- Chrysler maintains and enhances its leading position in global markets. We are working on this with all our strength, tremendous commitment and a clear focus on the future. 4 Responsibility As automotive pioneers, we take responsibility and meet the challenges connected with the automobile, which has become an indispensable part of our daily lives. We are continually developing new and sustainable solutions for greater traffic safety, lower fuel consumption, reduced pollutant and noise emissions, and future-oriented transportation concepts. We act responsibly, transparently and reliably – both inside and outside our company. 5 Open-mindedness We have clear ideas about the future of our company, and we pursue our goals for the benefit of our customers, shareholders and employees. Our continued success depends on our ability to respond creatively to change. We know that the world is con- stantly on the move, and we are prepared to alter our thoughts and actions if a situation calls for it. After all, only those who are open to change can be successful over the long term. 6 Driven by Values Ever since Gottlieb Daimler and Carl Benz invented the auto- mobile, their strong pioneering spirit has inspired us to deliver outstanding automotive innovations. Through our product design, automotive engineering and safety technology, we are pioneering innovators developing groundbreaking automotive concepts that promote individual mobility for millions of people all over the world. So that our customers experience the fascinating values embodied by our exceptional automobiles — now and in the future. 7 Christoph Goeser has big ambitions and the right partner. Innovative “Our customers expect innovative advisory services. They have high demands, which we have been satisfying for many years. They trust us and recommend us to others. I am aware of this responsibility and do my best every day - in my own company, as chairman of the REM AG and as Honorary Consul for the Republic of Slovakia. As well as performance, I place great importance on personal appearance. Both aspects should ideally complement each other. That’s also what I like about my car. You could say that the S-Class suits me perfectly.” Carl Benz and Gottlieb Daimler invented the automobile almost simultaneously in the year 1886. This pioneering spirit is a constant spur for our engineers to develop the safest and most innovative automobiles in the world. 9 For Janice Ford-Johnson and her Jeep® Commander there is always something new to discover. Individual “There are no two days alike in my life. My job and my lively family make sure of that. My grandchildren Tamir and Taariq are the liveliest of all: fishing for salmon, inline skating, playing the drums – it’s a good thing that Grandma’s so active and has a car you can fit nearly every- thing and everybody into: Just yesterday I had half a baseball team in it. But my Jeep® Commander is comfortable as well as practical. It does everything you ask of it and has a lot of character – like me! Maybe that’s why I like it so much.” A lot has happened since the first Jeep® was developed in 1941. An uncomfortable military vehicle was then adapted to civilian use, allowing owners like Janice Ford-Johnson to enjoy the freedom, adventure, mastery, authenticity and capability of Jeep® vehicles. 11 You can rely on Jürgen Behm and his Actros. Reliable “I only slow down when I have to. In my business the important thing is to keep moving, one day after another. Waiting around doesn’t get you anywhere: get in the cab and drive, that’s what it’s all about. Direct-gear transmission, injection pressure, planetary hubs – that’s all very well. But when I’m on the road only one thing counts: getting myself and the goods to the right place at the right time in good condition. In a word: ‘reliability’. That’s why I decided on the Actros BlackEdition. And I would do the same thing again. Because it’s never let me down.” In 1896, Gottlieb Daimler built the first motorized truck in Stuttgart. Up to the present day, Mercedes-Benz trucks have always been among the most reliable in the world. So that people like Jürgen Behm can do their job. 13 For over twenty years Bill Golling has offered his customers the right vehicle with the right financing solution by Chrysler Financial. Excellent “For over twenty years, DaimlerChrysler Financial Services, specifically Chrysler Financial, has served as my automotive finance partner of choice. Because of their dedication to the success of my business, I consider them one of my most important business relationships. Whether it’s financial solutions for my dealership operations or retail or lease offerings, I have found that their people, products and processes are solely dedicated to helping me sell more vehicles. Currently, Chrysler Financial finances more than 90 percent of our retail and lease customers. They provide an outstanding blend of customer service and innovative automotive financing solutions. Now that’s what I consider excellent value.” Since the introduction of the Dodge Polara with the powerful HEMI engine in 1964, Chrysler Financial has provided dealers like Bill Golling with the finest automotive financing products and services to help drive sales of Chrysler, Jeep® and Dodge vehicles. 15 I have held the top position at DaimlerChrysler since the beginning of this year. For me, it is the most interesting job in the entire automotive industry and a great professional challenge. With this letter, I address you personally for the first time in a DaimlerChrysler Annual Report. This Annual Report provides you with detailed information on business develop- ments, our financial situation and DaimlerChrysler in general. I’ll begin with a brief overview of the current situation. DaimlerChrysler is one of the world’s most renowned automotive companies, offering a broad spectrum of unique brands. With our comprehensive range of passenger cars and commercial vehicles, we are represented worldwide in nearly all markets and market segments. Last year alone, we launched 17 new models. We safeguard our market position through innovation and pioneering technologies. Examples include new systems designed to improve traffic safety such as BAS PLUS brake assistance and PRE-SAFE® occupant protection, as well as BlueTec – the cleanest diesel engines in the world. Although we are not yet where we want to be, our strengths give us confidence in our future. We know that we need to do more to improve our profitability. Last year we did not cover our cost of capital, and this is something we are striving to change. We can only create the right conditions for a sustainable increase in the value of our company – and thus also for the positive development of our share price – through long-term profitable growth. In view of the difficult competitive environment, this is an ambitious goal. We have therefore initiated a far-reaching transformation process throughout DaimlerChrysler so that we can permanently improve our competitiveness. 17 All of the measures taken in this context have one thing in common: We will get faster, more flexible, leaner and more efficient, and seek to achieve operational excellence in everything we do. At the same time, we are working on improving our cost structure in order to match the level of our best competitors. However, it would be shortsighted to look only at costs. Our focus is on products. In this area we want to achieve even more - with the more efficient use of our resources. We aim to combine our strengths within DaimlerChrysler to develop, produce and sell compelling top-quality products that provide maximum customer benefit. Ultimately, our products will be the measure of our success. And we are already making progress in this regard. The Mercedes-Benz brand now has the youngest and most comprehensive product range in its long history. With the S-, B-, M- and R-Class, Mercedes-Benz launched four completely new model series in 2005 – more than ever before. With its new vehicles, the Chrysler Group is increasingly setting itself apart from its North American competitors in terms of quality, innovation and design. Last year, it launched the Dodge Charger, the Ram Mega Cab, the Viper Coupe and the Jeep® Commander, as well as the powerful and sporty SRT vehicles. Our Commercial Vehicles division profits from its global reach and will continue to supply vehicles tailored to local markets at competitive prices. Thanks to strong products – such as the new vehicles of the Axor and Atego families, the new Mercedes-Benz and Setra buses and the FUSO Canter – we set new records for unit sales of commercial vehicles in 2005. We are pioneers in the market with our hybrid drive and BlueTec diesel technology. 18 In total, we will launch approximately 50 new vehicles in the years 2005 through 2008. To do this, we will invest nearly €35 billion in the next three years. This will be the foundation for our future success. Our Annual Report motto is “Driven by Values”. Top performance, responsibility and open-mindedness are the principles behind our actions. We place a top priority on adherence to ethical principles. We intend to live these values – internally and externally - enabling our customers to experience “driving values” with our products. I have great confidence in our company. DaimlerChrysler undoubtedly has the potential to create sustainable value for you, our shareholders, and concurrently for our customers, our employees and society in general. My colleagues and I will make every effort to ensure that we realize this potential. I cordially invite you to join us on this path forward. Yours sincerely, Dieter Zetsche 19 Board of Management Jürgen E. Schrempp | 61 Chairman of the Board of Management until December 31, 2005 Dieter Zetsche | 52 Chairman of the Board of Management / Head of Mercedes Car Group | Appointed until 2010 Thomas W. LaSorda | 51 Chrysler Group | Appointed until 2007 Andreas Renschler | 47 Truck Group | Appointed until 2007 Bodo Uebber | 46 Finance & Controlling / Financial Services | Appointed until 2011 Thomas Weber | 51 Group Research & Mercedes Car Group Development | Appointed until 2010 20 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Günther Fleig | 57 Human Resources & Labor Relations Director | Appointed until 2009 Rüdiger Grube | 54 Corporate Development | Appointed until 2007 Eric R. Ridenour | 47 Chief Operating Officer (COO) Chrysler Group | Appointed until 2008 Thomas W. Sidlik | 56 Global Procurement & Supply | Appointed until 2008 Retired from the Board of Management: Jürgen E. Schrempp | 61 retired on December 31, 2005 Eckhard Cordes | 55 retired on August 31, 2005 Jürgen Hubbert | 66 retired on April 6, 2005 21 Important Events in 2005 Two world premieres in Detroit. At the North American International Auto Show, the Mercedes Car Group presents the new M-Class and the Chrysler Group presents the new Dodge Charger. New Van Technology Center (VTC) opened. A total of 1,000 jobs from the Stuttgart region are brought together at the new VTC. The VTC will enable the Vans business unit to further enhance its quality and efficiency, thus creating the right conditions for global growth. january february march april may july Mercedes Car Group starts CORE program. The Merce- des Car Group initiates a com- prehensive program to improve efficiency and increase earn- ings. As a result of the CORE program, the Mercedes Car Group intends to achieve a return on sales of 7% by 2007. World premiere of Mercedes- Benz R-Class in New York. The grand sports tourer is a combination of well-known vehicle categories such as sporty sedan, station wagon, van and sport utility vehicle (SUV), creating a new, unique profile. Presentation of new busi- ness model for smart brand. The new business model aims to reduce fixed costs while increasing productivity. Successful maiden flight of Airbus A380. The successful first flight on April 27, 2005 of the world’s biggest passen- ger aircraft, the Airbus A380, is a milestone in the history of civil aviation. Supervisory Board decides on changes to top manage- ment. Dr. Dieter Zetsche becomes Chairman of the Board of Management of Daimler- Chrysler AG as of January 1, 2006. Chrysler Group improves productivity. The highly respected Harbour Report North America shows that the Chrysler Group increased productivity by 4.2% in 2004. Over the last three years, the Chrysler Group has improved its manufacturing productivity by an industry-leading 19%. 22 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Pioneering innovations at the Commercial Vehicles Show in Amsterdam. Amongst others BlueTec diesel technology for the Atego and Axor truck series and the new hybrid-drive Canter light truck are presented for the first time. DaimlerChrysler obtains largest order for hybrid bus- es. DaimlerChrysler Commer- cial Buses North America receives an order to supply 500 Orion VII buses with hybrid drive to the New York transport authorities. This is the world’s biggest order for hybrid buses to date. Financial Services starts financing company in China. DaimlerChrysler Auto- motive Finance (China) Ldt. starts business providing financing for passenger cars and commercial vehicles, including insurance and dealer financing. One year of reliable opera- tions for Toll Collect. Toll Collect’s electronic toll system for trucks over 12 metric tons has been running smoothly since starting on January 1, 2005. Its functions are expanded with the new On-Board-Unit 2 soft- ware on January 1, 2006. september october november december New factory for World Engine. In Dundee, Michigan, series production starts of the World Engine, developed together with partners Mit- subishi Motors and Hyundai Motor. This new 4-cylinder gasoline engine will benefit from substantial economies of scale. DaimlerChrysler sells shareholding in Mitsubishi Motors. DaimlerChrysler sells its shareholding in MMC for €970 million. The alliance projects with MMC are to be continued. Sale of DaimlerChrysler Off- Highway business unit to EQT. As part of the strategic focus on the core business, DaimlerChrysler sells its busi- ness unit that produces large diesel engines. The transaction is to be closed during 2006. World premiere of new S-Class at Frankfurt Motor Show. The new S-Class is fitted with around a dozen pio- neering innovations to offer the highest levels of automotive safety and comfort. Board of Management de- cides on staff reductions at the Mercedes Car Group. The Board of Management approves a package of mea- sures with the goal of reducing the Mercedes Car Group’s workforce in Germany by 8,500 jobs. 23 DaimlerChrysler Shares Positive development of international stock markets | Significant gains for DaimlerChrysler’s share price | Some 70,000 shareholders use our Personal Internet Service Development of DaimlerChrysler Shares and Important Indices End of 2005 End of 2004 05/04 % change DaimlerChrysler shares (in €) 43.14 35.26 DAX 30 Dow Jones Euro Stoxx 50 Dow Jones Industrial Average Nikkei Dow Jones Stoxx Auto Index S&P Automobiles Industry Index 5,408 3,579 10,718 16,111 231 94 4,256 2,951 10,783 11,489 193 159 +22 +27 +21 -1 +40 +20 -41 Stock Exchange Data of DaimlerChrysler Shares International securities identification number DE0007100000 German securities identification number CUSIP Stock-exchange abbreviation Reuters ticker symbol Bloomberg ticker symbol 710000 D1668R123 DCX DCXGn.DE, DCX.N DCX:GR Upward trend for international stock exchanges. European and Asian stock exchanges climbed significantly during the year 2005. However, the US indices Dow Jones, Nasdaq and S&P 500 did not rise sharply until the end of the year, following a weaker phase. In general, markets profited from distinctly stron- ger buyer interest – a result of continuing solid economic growth in the United States and Asia, and also in some Europe- an countries. The moderate level of interest rates and the significant appreciation of the US dollar against the euro and the yen also had a positive impact in 2005. The gains made by German stocks were partially a result of their still relatively low levels compared internationally. On the other hand, the development of stock prices in the automotive sector was nega- tively affected by the high prices of raw materials, especially oil – in New York the price of crude oil climbed from about US $40 to US $61 per barrel during the year. As a result of the hurri- canes in the Gulf of Mexico and the Southern states of the USA, the oil price was actually around US $70 per barrel for a while. In this situation, automobile manufacturers’ share prices deve- loped very differently: US producers’ stocks fell significantly due to the increasingly intense competition in the United States, falling profits and repeated downgrading by the rating agencies. On the other hand, the stocks of European and Asian automa- kers rose, in some cases quite significantly. This was also reflec- ted by the development of the auto indices: in the year 2005, the US index S&P Automobiles Industry fell by 41%, while the Euro- pean Dow Jones Stoxx Auto Index rose by 20%. Positive development of DaimlerChrysler’s share price. At the beginning of last year, DaimlerChrysler’s share price did not continue its strong climb of the end of 2004. This was parti- ally due to significant increases in raw-material prices, overall higher customer incentives in the US car market and rising inte- rest rates in the United States. Many investors were afraid that the Chrysler Group would no longer be able to generate sustai- 24 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler Share Price (high/low) Share Price Index (in €) 45.00 42.50 40.00 37.50 35.00 32.50 30.00 DaimlerChrysler Dow Jones STOXX Auto Index DAX 140 130 120 110 100 90 80 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Dec 30 2004 Feb 28 2005 April 29 2005 June 30 2005 Aug 31 2005 Oct 31 2005 Dec 30 2005 Significantly higher free float. DaimlerChrysler has a broad shareholder base of approximately 1.5 million shareholders. At the end of 2005, the biggest shareholder was the Kuwait In- vestment Authority with a holding of 7.2%. In total, institutional investors held 70.4% of our equity and private investors held 22.4%. Around 74% of our capital stock was in the hands of Euro- pean investors and around 17% was held by US investors. Deutsche Bank reduced its shareholding in DaimlerChrysler during 2004, at first from 10.4% to 6.9% in July, and then from 6.9% to 4.4% in November. As this holding is no longer regarded as a strategic investment, compared with the prior year, the free float increased by 10.4 percentage points to 92.8%. The weighting of DaimlerChrysler shares in various indices therefore rose. In the German DAX 30 index, DaimlerChrysler’s shares were ranked in fifth position at the end of 2005 with a weighting of 7.0%. In the Dow Jones Euro Stoxx 50 index, our stock was represented with a weighting of 2.2%. Global trading volume in DCX amounted to around 1.7 billion shares in 2005 (2004: 1.5 billion), of which about 111 million were traded in the United States (2004: 123 million) and 1,577 million in Germany (2004: 1,336 million). ned positive earnings in this environment. Another factor was the weakness of the Mercedes Car Group in terms of profitability. Pressure to sell DCX was predominant, particularly in April, with the result that our stock was at a low for the year of €29.78 at the end of that month. Although our profits for the first quarter exceeded market expectations, the share price did not benefit due to the weakening stock-market sentiment at that time. A significant upward trend started in May, and accelerated follo- wing the announcement of the figures for the second quarter and the change in the management decided upon by the Super- visory Board. The share price benefited not only from an impro- ved stock-market environment, but also from the growing confidence that the CORE efficiency-improving program at the Mercedes Car Group would be successfully implemented and that business was developing positively in the Commercial Vehi- cles and Financial Services divisions. The equity market also honored the fact that the Chrysler Group achieved appropriate earnings in a difficult environment. Although Deutsche Bank placed 35 million DaimlerChrysler shares with institutional invest- ors at the end of July, the upward trend continued during the summer months: our share price gained approximately 50% from May until the end of September. On September 28, it reached a high for the year of €45.92 (US $55.15), followed by increased profit taking. Another negative factor was the growing fear of inflation and a difficult car market in the United States. After this weaker phase, the share price at first climbed more signifi- cantly in November, but came under pressure once again at the end of that month due to the sale of another 25 million shares by Deutsche Bank. Distinctly firmer stock markets, reductions in raw-material prices and a considerably stronger US dollar had a positive impact in December. The closing price at the end of 2005 was €43.14 in Frankfurt (Xetra) and US $51.03 in New York. The generally positive development of DaimlerChrysler’s share price continued at the beginning of 2006. 25 Statistics End of 2005 End of 2004 05/04 % change +1 +1 +23 -12 Capital stock (in millions of €) Number of shares (in millions) 2,647 1,018.2 2,633 1,012.8 Market capitalization (in billions of €) Number of shareholders (in millions) Weighting in share indices DAX 30 Dow Jones Euro Stoxx 50 Long-term credit ratings Standard & Poor’s Moody’s Fitch Dominion Bond 43.9 1.5 7.0% 2.2% BBB A3 BBB+ A- 35.7 1.7 6.4% 1.9% BBB A3 BBB + A – Statistics per Share 2005 € 2004 € 05/04 % change Net income (basic) Net income (diluted) Dividend Stockholders’ equity (Dec. 31) Share price: year-end high low 1 Frankfurt Stock Exchange 2.80 2.80 1.50 35.80 43.14 1 45.92 1 29.78 1 2.43 2.43 1.50 33.10 35.26 1 39.41 1 31.63 1 +15 +15 - +8 +22 +17 -6 Extensive Investor Relations activities. As in the prior year, the Investor Relations department provided timely information on the company to analysts, institutional investors, rating agencies and private shareholders. Our communication activities for institutional investors and analysts included roadshows in the major financial centers of Europe, North America and Asia, as well as a large number of one-on-one meetings in Stuttgart and Auburn Hills. We also carried out presentations of the company at the international motor shows in Detroit, Frankfurt, Geneva and Tokyo. We provi- ded information to the capital market on our quarterly results and important changes at the company by means of conference calls, which were simultaneously transmitted on the Internet. The key areas of capital-market communication included the Group’s current development, the outlook for full-year 2005, the positioning of the divisions in their respective competitive environments and the strategic orientation of the Group. Expanded Investor Relations information service on the Internet. As a part of DaimlerChrysler’s corporate website, the Investor Relations section at www.daimlerchrysler.com/ investor was accessed more than 40,000 times a month last year, equivalent to around 1,300 visitors each day. 42% of visitors accessed the German version, while 58% accessed the pages in English. We continued expanding our Internet information service for shareholders in 2005. For example, via DaimlerChrysler’s IR section, users are able to access the reports, analyses and profit estimates that are published on external finance web- sites by investment companies and financial analysts. At the end of the year, detailed information on bonds was included in our Internet service. 26 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Shareholder Structure as of Dec. 31, 2005 By type of shareholder Kuwait Investment Authority Institutional investors Retail investors 7.2% 70.4% 22.4% By region Germany Europe excluding Germany USA Rest of the world 47.5% 26.7% 16.5% 9.3% The Personal Internet Service is also available to the sharehol- ders with additional attractive functions outside the period of the Annual Meeting, acting as an additional platform for electronic communication by Investor Relations. For example, it allows personal data in the share register to be viewed and processed online. In addition, shareholders can gain information on the company in electronic form even more effectively than before. Access to the Personal Internet Service and further information on it can be found at https://register.daimlerchrysler.com. Strong visitor interest in the Annual Meeting. More than 8,400 shareholders attended the Annual Meeting of DaimlerChrysler AG held at the International Congress Center (ICC) in Berlin on April 6, 2005. Approximately 38% of the equity capital was represented at the Annual Meeting. In the voting on the nine items on the agenda, the Annual Meeting adopted the recommenda- tions of the management with large majorities. More than 40 shareholder spokespersons asked a total of nearly 350 questions at the Annual Meeting, which were answered by the Board of Management and the Supervisory Board. In addition, Daimler- Chrysler’s shareholder service replied by telephone or e-mail to some 5,000 inquiries on the Annual Meeting and other issues connected with our stock. Shareholders go online. Our electronic information and com- munication service, which we are continually expanding and improving for our shareholders, is becoming increasingly popular: • The number of shareholders registered in DaimlerChrysler’s Personal Internet Service increased by 40% to some 70,000 in the year 2005. • For the first time, 35,000 shareholders received their invita- tions to the 2005 Annual Meeting by e-mail instead of by post. • A quarter of the entrance tickets for the Annual Meeting were ordered online. • 14,000 shareholders took advantage of the possibility to exercise their voting rights at the Annual Meeting via the Internet. • And around 50,000 shareholders have already decided to have their documents for the 2006 Annual Meeting sent by e-mail. As a part of our comprehensive approach, DaimlerChrysler’s Personal Internet Service provides support to the shareholders on all aspects of the Annual Meeting. In this way, we make it easier for our shareholders to exercise their voting rights, cut costs and protect the environment by reducing the use of paper. 27 Management Report Business developments at DaimlerChrysler in the year 2005 were generally satisfactory in view of the difficult market conditions. Revenues and unit sales increased again. We achieved the earnings target we had set for the Group – despite the substantial burdens of restructuring expenses, significant increases in material and oil prices, and less favorable euro/US dollar hedging rates than in the prior year. In order to improve the Group’s profitability over the long term, during the year under review we implemented measures designed to increase efficiency in all divisions. The Mercedes Car Group is to be returned to a path of sustainable competitiveness and profitability as a result of the CORE program. We consistently continued our strategy of focusing on our core competencies by disposing of operations that are not part of our core business. 28 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contents 30 Business and Strategy 55 Capital Expenditure • The company • New management model • Strategy • Economy and the industry • Business developments 37 Profitability • Statements of income • Dividend • Operating profit • Performance measures • Return on net assets and value added 47 Liquidity and Capital Resources • Principles and objectives of financial management • Cash flow • Refinancing • Ratings 53 Financial Position 55 Research and Development 56 Procurement and Supply 56 Workforce 57 Events after the End of the 2005 Financial Year 58 Risk Report • Risk management system • Economic risks • Industry and business risks • Finance market risks • Legal risks • Overall risks 64 Outlook • The world economy • Automotive markets • Unit sales • Revenues and earnings • Capital expenditure • Research and development • Workforce 29 Business and Strategy The company DaimlerChrysler AG was formed in November 1998 as a result of the merger between Daimler-Benz AG and Chrysler Cor- poration. The Group can look back on a tradition of more than one hundred years, featuring pioneering achievements in automotive engineering by both of its predecessor companies. Today, DaimlerChrysler is a leading supplier of superior pas- senger cars, sport-utility vehicles, sports tourers, minivans and pick-ups, and the world’s largest manufacturer of commercial vehicles. In addition, DaimlerChrysler holds a 33% interest in the European Aeronautic Defence and Space Company (EADS), one of the world’s leading companies in the field of aerospace and defense technology. With its strong brands and a comprehensive portfolio of automo- biles ranging from small cars to heavy trucks, supplemented by tailored services along the automotive value chain, Daimler- Chrysler is active in nearly all of the world’s markets. The Group has production facilities in a total of 20 countries. The worldwide networking of research and development activities and of production and sales locations gives DaimlerChrysler considerable potential to enhance efficiency and gain advan- tages in an internationally competitive environment. Of DaimlerChrysler’s total revenues of €149.8 billion in the year 2005, 31% was generated by the Mercedes Car Group, 33% by the Chrysler Group, 26% by Commercial Vehicles, 9% by Finan- cial Services and 1% by Other Activities. At the end of 2005, DaimlerChrysler employed more than 382,700 people worldwide. The products supplied by the Mercedes Car Group range from the high-quality small cars of the smart brand to the premium vehicles of the brands Mercedes-Benz, Mercedes-Benz AMG and Mercedes-Benz McLaren, and the Maybach luxury sedans. Most of these vehicles are produced in Germany, but the division also has production facilities in the United States, France, South Africa, Brazil, India, Malaysia, Thailand, Vietnam and Indonesia. 30 Future production facilities will also include China. The Group’s most important markets in 2005 were Germany with 29% of unit sales, the other markets of Western Europe (35%), the United States (19%) and Japan (4%). The Chrysler Group develops, produces and distributes pas- senger cars, sports tourers, minivans, sport-utility vehicles and light trucks under the Chrysler, Jeep® and Dodge brands. In addition, the Chrysler Group manufactures and markets spare parts and accessories for the MOPAR brand. Most of its pro- duction facilities are in the United States, Canada and Mexico. In 2005, 82% of its vehicles were sold in the United States, 8% in Canada and 4% in Mexico. 6% of its vehicles were expor- ted to markets outside the NAFTA region. Within a worldwide network, DaimlerChrysler’s Commercial Vehicles division develops and produces trucks, vans and buses under the brands Mercedes-Benz, Freightliner, Sterling, Western Star, FUSO, Setra, Thomas Built Buses and Orion. The product range covers small vans, medium and heavy-duty trucks for local and long-distance deliveries and for con- struction sites, as well as tourist, urban and overland buses. It also supplies vehicles for special applications and the Unimog multi-function vehicle. The division’s most important sales markets are the United States, with 22% of unit sales in 2005, Germany (13%), the other markets of Western Europe (20%), Asia (22%) and South America (7%). The Financial Services division supports the unit sales of the DaimlerChrysler Group’s automotive brands in 39 countries. Its product portfolio mainly comprises tailored financing and lea- sing packages for dealers and customers, but it also provides services such as insurance and fleet management. The focus of Financial Services’ activities is in North America and Western Europe. In Germany, in addition to automotive financial services, the division’s product portfolio also includes investment pro- ducts and credit-card services. DaimlerChrysler Financial Services also holds a 45% interest in the Toll Collect consortium, which on January 1, 2005 launched an electronic toll system for trucks over 12 metric tons on autobahns in Germany. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Consolidated Revenues by Division Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities 31% 33% 26% 9% 1% DaimlerChrysler – Business Portfolio (as of March 1, 2006) Mercedes Car Group Chrysler Group Truck Group Financial Services Van, Bus, Others Mercedes-Benz Passenger Cars Chrysler Trucks Europe/ Latin America Americas EADS (33%) Jeep ® Dodge smart Maybach Trucks NAFTA Europe, Africa Asia/Pacific Vans FUSO Buses & Coaches The Other Activities segment primarily comprises our 33% shareholding in the European Aeronautic Defence and Space Company (EADS). In line with our strategy of focusing on our core business, in December 2005, we reached an agreement with the Swedish financial investor EQT covering the sale of the Off-Highway business unit. New management model On January 24, 2006, DaimlerChrysler presented a new manage- ment model designed to improve the Group’s competitiveness and promote further profitable growth. The new model will fur- ther integrate the Group’s functions, focus operations areas more closely on their core processes, and encourage internal collaboration. In addition, it will reduce the duplication of activities. The structural changes include the consolidation and integration of all administrative functions, such as Finance and Controlling, Human Resources and Strategy. These functions will be centra- lized to report to the responsible Board of Management mem- ber for each function throughout the Group. The duplication of activities between the corporate level and the operating level will be eliminated, thereby reducing complexity within the Group. The integration of administrative functions will result in shorter, faster and leaner reporting channels and decision-making. Within the framework of the new management model, we have also decided to merge the product development of the Mercedes Car Group and the Board of Management area of Research & Technology in the new Board of Management area of Group Re- search & Mercedes Car Group Development as of March 1, 2006. The new area will take on more responsibility for the pre- development activities of all the automotive divisions. Also starting in March 2006, Commercial Vehicles will focus on its core business of trucks, with the new name of “Truck Group”; buses and vans will be directly managed as separate units and will be included in the new Van, Bus, Others seg- ment in the future. The new structure will create additional synergies between the truck brands as well as a sharper focus on customers and the competition. The direct management of the bus and van operations will facilitate a stronger orien- tation towards the specific requirements of customers and markets in these segments. Due to the commonality of power- trains and components, the Bus unit will report to the head of the Truck Group and the Van unit will report to the head of the Mercedes Car Group. Furthermore, the location of the Group’s headquarters in Germany will be transferred from Stuttgart-Möhringen to Stutt- gart-Untertürkheim. The central administrative functions will therefore be located in Stuttgart-Untertürkheim (Germany) and Auburn Hills (United States). With the implementation of the new management model, we intend to reduce our administrative expenses, which are currently significantly higher than the industry average, by an annual €1.5 billion per year. €0.5 billion of this total will be realized by other efficiency programs already running, like CORE in the Mercedes Car Group. In order to achieve the goals of the new management model, personnel capacities will also have to be adjusted. This will lead to a total reduction of up to 20% in the number of persons employed in administrative departments during the years of 2006 through 2008, and 30% in management positions. This is equi- valent to 6,000 jobs worldwide. Preparations for implementing the new management model began immediately after its announcement in January 2006. The total expenditure incurred for the implementation of the pro- gram in the years 2006 through 2008 is likely to be in the region of €2 billion. 31 Strategy DaimlerChrysler’s strategy has the goal of increasing corporate value through profitable growth. We intend to assume a leading role in the worldwide automotive industry. With regard to the quality of our products and services, the positioning of our brands and our profitability, we are striving to achieve a top position in international competition. Our strategy is therefore based on the following four pillars: – Superior Products & Customer Experience: We aim to sup- ply top-quality products supported by excellent services that our customers perceive as being superior to the competition. Some examples are fascinating vehicles such as the new S-Class, the R-Class and the B-Class from Mercedes-Benz, the Chrysler 300C, the Dodge Charger, the Actros heavy-duty truck and the Citaro city bus. Our customers’ excellent respon- se to these vehicles and the numerous national and interna- tional awards they have won demonstrate their exceptional position. – Leading Brands: We strive to establish clearly positioned brands with excellent reputations, which complement each other to form a tremendous product portfolio. Consistent brand management ensures that the identity of the individual brands is protected while economies of scale are utilized. – Innovation & Technology Leadership: We aim to secure the mobility of tomorrow and set ourselves apart from the com- petition through innovation and technology leadership. Our highly qualified research and development engineers create the technological basis for innovations that set new trends and offer customers genuine added value. Our innovation leader- ship is demonstrated by pioneering safety innovations such as PRESAFE® preventive occupant protection and DISTRONIC PLUS proximity and cruise control from Mercedes-Benz, Blue- Tec diesel technology and Active Brake Assist for commercial vehicles, and the innovative Stow’n Go™ seating and storage system offered by the Chrysler Group’s minivans. Most of the- se innovations benefit not just one of the Group’s brands, but create competitive advantages in worldwide competition for all of our vehicles. – Global Presence & Network: We are a strong, globally active automobile manufacturer with networked operations. This enables us also to participate in the dynamic growth of the emerging markets outside North America, Western Europe and Japan. We intend to achieve a sustained improvement in our cost position as a result of rising unit sales and our world- wide network of production plants and research and develop- ment facilities. Prerequisites for the achievement of these strategic goals are: – Operational Excellence: We intend to attain a leading posi- tion in international competition with regard to operational excellence. We are therefore creating clear structures, lean processes and short paths in all areas of the company and at all stages of the value chain, and are making full use of the possibilities offered by standardization and modularization. – High-Performing, Inspired People: The creativity, moti- vation and commitment of our workforce is the foundation of our success. 32 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler ScoreCard. These six strategy elements are the essential features of the DaimlerChrysler ScoreCard. In addition to conventional financial performance measures, we also use non-financial parameters such as quality statistics, customer and employee satisfaction, brand image, market share and productivity developments. These parameters are assessed at the divisional level with the use of measurable performance indicators. The Group’s medium-term and long-term goals are broken down in the ScoreCard to the respective reporting periods. The goals are linked with concrete measures for the individual functions down to the departmental level. These goals are then integrated into the employees’ personal target agreements. By means of the DaimlerChrysler ScoreCard, the Board of Management is informed in a timely and comprehensive manner about the current position of the Group and its divisions along the entire value chain. Deviations are recognized at an early sta- ge and any required corrections are immediately initiated. The DaimlerChrysler ScoreCard helps us to achieve our goals, so that we can continue increasing DaimlerChrysler’s corporate value through profitable growth. In order to further improve the transparency, measurability and control of our human resources work worldwide, we are currently introducing a “Global Human Resources ScoreCard”. The defi- ned success factors include employee satisfaction and our ima- ge as an employer, which are also part of the DaimlerChrysler ScoreCard. In addition, indicators are recorded for the business units within the “Global Human Resources Score-Card” such as the staff turnover rate, which was 7.3% worldwide in 2005 (2004: 5.3%). The increase was primarily a result of the measures taken at the Mercedes Car Group in 2005 for socially accep- table staff reductions and the efficiency-improving programs at the other divisions. Activities in Northeast Asia. Our activities in Northeast Asia will be at the focus of our regional expansion in the coming years. In 2005, DaimlerChrysler set up a regional management organization for Northeast Asia, covering China, Taiwan and South Korea, in order to expand business operations in this region more effectively. We made further progress with the development of Daimler- Chrysler’s business operations in China last year. Beijing Benz-DaimlerChrysler Automotive Co. Ltd., a joint ven- ture between DaimlerChrysler and Beijing Automotive Industry Holding Company (BAIC), obtained a license to produce the Mercedes-Benz C-Class and E-Class cars in August 2005. It is planned to produce 20,000 vehicles annually in China in the medium term. These models are to be produced at a new plant in the southeast of Beijing. The existing production in China of Jeep® sport-utility vehicles is also to be transferred to this new plant. Furthermore, in 2005, the Chrysler Group made firm plans to produce the Chrysler 300C in China as well as minivans in China and Taiwan. In September 2005, the Chinese banking authorities approved the establishment of a financing company for passenger cars and commercial vehicles. As a result, DaimlerChrysler Automo- tive Finance (China) Ltd. commenced operations already two months later in November. By taking these steps, we have created important conditions for the expansion of our sales in the markets of Northeast Asia. 33 Economic Growth Global Automotive Markets Gross domestic product, growth rate (in %) 2004 2005 Unit sales growth rate 2005/2004 (in %) Passenger cars Commercial vehicles 10 8 6 4 2 NAFTA Western Europe Japan Asia excluding Japan Other markets Western Europe Japan USA 1 South America 1 China Source: Global Insight Source: German Association of the Automotive Industry (VDA) 1 Segment passenger vehicles including light trucks Economy and the industry The world economy. Following strong growth in the year 2004, the growth of the world economy slowed down last year. This development was primarily due to the sharp increase in energy and raw-material prices, rising interest rates and less expan- sive public-sector spending. Economic developments in North America, Japan and most of the emerging economies were comparatively favorable. However, growth rates in Western Euro- pe failed to meet expectations. Once again, developments in the euro zone were disappointing, particularly in Germany. Overall, the global economic imbalance actually increased. The United States’ trade deficit rose to more than 6% of its gross domestic product. At the same time, the trade surpluses of China and the oil-exporting countries increased significantly. In total, the economies of DaimlerChrysler’s sales markets, weighted for each country’s share of the Group’s revenues, grew by 3.0%. Although this was in line with the long-term trend, it was significantly lower than the strong growth of 3.7% recorded in the prior year. During the course of the year, the euro depreciated against the US dollar by approximately 13%, but much less significantly against the British pound and the Japanese yen. Automotive markets. The overall expansion of global automo- bile markets slowed down slightly in 2005. This was partially due to the significant increase in the price of oil and the conse- quential loss of customers’ purchasing power. In this situation, demand was influenced more than ever by manufacturers’ pro- duct and price strategies. However, as a result of lively invest- ment activity, worldwide markets for commercial vehicles expan- ded again in 2005. Portfolio changes. In March 2005, DaimlerChrysler and Mitsu- bishi Motors Corporation (MMC) reached a settlement concer- ning expenses incurred as a result of quality actions and recall campaigns at Mitsubishi Fuso Truck and Bus Corporation (MFTBC). As a part of this settlement, an additional 20% of the shares in MFTBC were transferred to DaimlerChrysler free of charge, thus increasing our shareholding in MFTBC to 85%. Fur- thermore, DaimlerChrysler and MMC agreed on future opera- tional cooperation between the two companies in various areas. Effective November 17, 2005, DaimlerChrysler sold its stake in MMC for €970 million. Our shareholding had fallen during 2005 from 19.7% to 12.4% due to the issue of new shares by MMC. Existing cooperative projects between DaimlerChrysler and MMC will not be affected by the sale and will continue unchanged. The possibility of cooperating on other new projects is also being investigated. As a part of the Group’s focus on its core business, debis Air- Finance, one of Financial Services’ business units, was sold to Cerberus Capital Management on June 30, 2005. In September 2005, DaimlerChrysler acquired the minority of shares in MTU Friedrichshafen GmbH that were still held by the family shareholders, thus creating the right conditions to dispose of the Off-Highway business unit. In December 2005, we reached an agreement with EQT, a Swedish financial investor, on the sale of the business unit. The transaction includes both MTU Friedrichshafen GmbH and the off-highway activities of Detroit Diesel Corporation (DDC). The transfer of ownership is likely to take place in the first quarter of 2006. The business portfolio of Commercial Vehicles was also further rationalized in the context of the “Global Excellence” strategic initiative. In December 2005, we sold our fire-truck and rescue- vehicle operations under the brand of American LaFrance to Patriarch Partners, LLC, a financial investor. 34 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Sales Structure Mercedes Car Group S-Class/SL/Maybach E-Class/CLS C-Class/CLK/SLK/Sport Coupe A-Class/B-Class M-Class/R-Class/G-Class smart 6% 22% 33% 21% 8% 10% Chrysler Group Passenger cars Light trucks Sports tourers Minivans SUVs 23% 21% 11% 19% 26% Commercial Vehicles Trucks Vans Buses 62% 33% 5% Sales of passenger cars and light trucks decreased in the United States towards the end of 2005 as a result of the repeated increase in fuel prices and lower sales incentives. However, the total market reached the previous year’s volume of 16.9 million vehicles. The market of Western Europe stagnated with total sales of 14.5 million passenger cars. Growth in Germany and France was offset by lower demand in Italy and the United Kingdom. Following a decrease in demand in Japan towards the end of the year, full-year sales were about the same as in the prior year. The emerging markets of South America continued to show strong growth rates. There were differing develop- ments of unit sales in the markets of Central and Eastern Europe: Demand in the new EU member states decreased overall due to the high inflow of used vehicles, whereas the Russian market continued to expand. Driven by double-digit growth rates in the Chinese automobile market, the emerging markets of Asia were once again the main source of growth for the global automotive industry. The world’s major markets for commercial vehicles continued to expand in 2005. In North America, there was another sharp rise in demand for heavy-duty and medium-duty trucks, and unit sales also increased in Western Europe due to continuing strong demand from transport companies. However, rates of expansion were lower than in the prior year. In Japan, sales of commercial vehicles revived in the second half of 2005 due to purchases brought forward as a reaction to new national and regional emission regulations, leading to a slight increase in total market volume. Business developments Unit sales. DaimlerChrysler sold a total of 4.8 million vehicles in 2005, surpassing the prior-year figure by 3%. We achieved new record unit sales for both passenger cars and commercial vehicles. Unit sales by the Mercedes Car Group of 1.2 million vehicles were similar to the level of 2004. The Mercedes-Benz brand launched the S-Class and M-Class successor models in 2005, as well as opening up a new market segment with its new B-Class and R-Class sports tourers. In addition, the range of gasoline and diesel engines was enhanced with a new gene- ration of V6 and V8 engines. Building on the success of these new products, the Mercedes-Benz brand’s business revived significantly in the second half of the year. Unit sales by Mer- cedes-Benz Passenger Cars therefore increased by 2% to 1,092,500 vehicles despite somewhat difficult market conditions. In the year under review, 124,300 smart branded cars were shipped to dealers (2004: 152,100); retail sales totaled 143,100 units (2004: 139,600). The brand thus slightly improved its position in a significantly declining market for small cars (see pages 72 ff). The Chrysler Group continued its product offensive in 2005 with all-new models such as the Dodge Charger, the Jeep® Com- mander and the new Dodge Ram Mega Cab pickup. Unit sales increased by 1% to 2.8 million vehicles of the Chrysler, Jeep® and Dodge brands. In an extremely competitive US market, retail sales increased by 4% to 2.3 million vehicles. The Chrysler 300/ 300C, the Dodge Magnum, the Jeep® Grand Cherokee and the Chrysler and Dodge minivans with their innovative Stow’n Go™ seating and storage system all continued their positive sales trends. The Chrysler Group improved its position in the US market in the segments of passenger cars and sports tourers as well as minivans and sport-utility vehicles. Market share in the Unites States increased from 12.8% to 13.2% (see pages 76 ff). 35 Consolidated Revenues (in billions of €) Western Europe USA Other markets 175 150 125 100 75 50 25 2001 2002 2003 2004 2005 The Commercial Vehicles division continued its very positive development of the prior year, increasing unit sales by 16% to a new record of 824,900 trucks, vans and buses. This was prima- rily a result of the division’s attractive product range, in addition to ongoing favorable market conditions. Growth in the Trucks business segment was particularly strong (+ 25% to 509,300 vehi- cles). Sales of vans (+ 2% to 267,200 units) and buses (+ 10% to 36,200 units) also increased. The FUSO business unit contri- buted 178,900 vehicles to the Truck business segment’s unit sales in 2005. Due to the date of its first-time consolidation, FUSO’s unit sales were only included for eight months of the prior year (118,100 vehicles) (see pages 80 ff). The Financial Services division developed very positively in all of its regions in 2005. Contract volume increased by 15% to €117.7 billion; adjusted for the effects of currency translation, the increase amounted to 3%. At the end of 2005, the worldwide portfolio comprised 6.4 million leased and financed vehicles. New business decreased from €50.9 billion to €48.2 billion, lar- gely due to the above-average volume of special-financing pro- grams in 2004 (see pages 84 f). Revenues. DaimlerChrysler’s total revenues increased by 5% to €149.8 billion in 2005. After a weaker first half, the Mercedes Car Group’s revenues for the full year slightly exceeded the level of the prior year as a result of the market success of the new models launched during 2005. The Chrysler Group’s revenues increased due to higher unit sales by 1% to €50.1 billion. The Commercial Vehicles division increased its revenues by 17% to €40.6 billion. This was due to the positive sales development, as well as the consolidation for the full year of the FUSO busi- ness unit, which had only been consolidated for eight months in 2004. Without the FUSO business unit, there would have been an increase of 13%. The Financial Services division contributed €15.4 billion to the Group’s total revenues (2004: €13.9 billion). The revenues of €2.1 billion generated by the DaimlerChrysler Off-Highway business unit, which is included in the Other Activi- ties segment, were 18% higher than in the prior year. In regional terms, DaimlerChrysler’s revenues in the NAFTA region increased by 6% to €77.6 billion, while revenues of €47.3 billion in Western Europe were slightly lower than in 2004 (-3%). In the rest of the world, we expanded our business volu- me by 24% to €24.8 billion. Revenues In millions of € DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities . 2005 2004 05/04 % change 149,776 142,059 50,015 50,118 40,634 15,439 2,396 49,630 49,498 34,764 13,939 2,200 +5 +1 +1 +17 +11 +9 36 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Profitability Research and development expenses amounted to €5.6 billion in 2005 compared to €5.7 billion in 2004. Research and development expenses as a percentage of revenues were 3.8% in 2005 compared to 4.0% in 2004. Other income was €1.0 billion in 2005 and €0.9 billion in 2004. In 2005, other income included a gain of €0.2 billion from the sale of Chrysler Group’s Arizona Proving Grounds vehicle testing facility. The prior-year figure included a gain of €0.1 billion from the settlement of the dispute with Bombardier relating to the sale of DaimlerChrysler Rail Systems GmbH (Adtranz). Financial income for 2005 was €0.2 billion, compared with a financial loss of €1.1 billion in 2004. The distinct improvement was primarily a result of the €1.5 billion improvement in the income from investments. Income from investments for the year under review includes a gain of €0.7 billion realized on the sale of the shares in Mitsubishi Motors Corporation (MMC). There was an additional positive effect on income from investments from the substantially improved per- formances of Toll Collect and EADS, whereas the result for the prior year was significantly worsened by the Group’s investment in MMC: the total loss contributed by MMC amounted to €0.6 bil- lion. The disposal of the Group’s 10.5% equity interest in Hyundai Motor Company (HMC) resulted in a gain of €0.3 billion in 2004. Statements of income The Group’s revenues increased by 5% from €142.1 billion in 2004 to €149.8 billion in 2005. In 2005, cost of sales was €122.9 billion compared to €114.6 billion in 2004, a 7% increase. The increase in cost of sales was largely proportionate to the increase in revenues. In addition, gross margin decreased from 19.4% in 2004 to 17.9% in 2005, mainly as a result of expenses incurred in connection with the realignment of the smart business model (€0.8 billion) and the headcount reduction program at the Mercedes Car Group (€0.5 billion). Selling expenses were €12.0 billion in 2005 compared to €11.4 billion in 2004, a 5% increase. The increase in selling expenses primarily reflects the fact that Mitsubishi Fuso Truck and Bus Cor- poration (MFTBC) was included in the Group’s consolidated results for twelve months in 2005 and for only eight months during 2004. It is also due to additional expenses relating to both the realignment of the smart business model (€0.1 billion) and the headcount reduction program at Mercedes Car Group (€0.1 billion). Selling expenses as a percentage of revenues were 8% in each of 2005 and 2004. General administrative expenses reached €6.1 billion in 2005 compared to €6.0 billion in 2004, a 1% increase. Changes in the scope of consolidation (primarily MFTBC) and increased legal and other consulting costs were the primary drivers for the increase. General administrative expenses as a percentage of revenues were 4.1% in 2005, a slight decrease compared to 4.2% in 2004. Other expenses were €0.9 billion in 2005 and €0.6 billion in 2004. This increase was primarily due to €0.2 billion in expenses related to the realignment of the smart business model. 37 Development of Earnings (in billions of €) Dividend per Share (in €) Operating profit Net income 7.5 6.0 4.5 3.0 1.5 1.50 1.00 0.50 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 The net interest expense of €0.6 billion was €0.3 billion higher than in the prior year, primarily due to unrealized losses from the mark-to-market valuation of derivative financial instruments that did not qualify for hedge accounting treatment. The DaimlerChrysler Group recorded net income of €2.8 billion in 2005, compared with €2.5 billion in the prior year. Based on the reported net income, earnings per share amounted to €2.80, compared with €2.43 in 2004. The other financial loss amounted to €0.1 billion (2004: €0.2 billion). In 2005, charges were recognized relating to the valua- tion of derivative hedging transactions, partially offset by increa- sed income from the sale of securities. In addition, the other financial loss was negatively impacted in the prior year particu- larly by the write-down of loan receivables due from debis Air- Finance. Unlike operating profit, which decreased primarily due to substan- tial expenses from the realignment of smart and the headcount reduction initiative at Mercedes-Benz Passenger Cars, net income for the year increased by 15%. This increase was partially influ- enced by the result of our shareholding in MMC. In 2005, the sale of MMC shares resulted in a net gain of €0.5 billion, whereas the year 2004 was impacted by non-operating expenses of €0.6 billion. Dividend The Board of Management and the Supervisory Board will re- commend the distribution of €1,527 million of unappropriated profits of DaimlerChrysler AG or €1.50 per share to the share- holders for their approval at the Annual Meeting to be held on April 12, 2006. The proposed dividend takes account not only of the development of operating profit and cash flow in 2005, but also of our expectations for the coming years. A dividend of €1,519 million or €1.50 per share was distributed in 2004. The income tax expense amounted to €0.5 billion in 2005 (2004: €1.2 billion). Related to income before income taxes of €3.4 billion (2004: €3.5 billion), the effective tax rate was 14.9%, compared with 33.3% in the prior year. The effective tax rate was reduced in both years by profit contributions from EADS, which are mainly exempt from income tax, and by tax-free gains inclu- ded in net periodic pension costs and net postretirement benefit costs. The comparatively low effective tax rate in 2005 primarily reflec- ted the composition of the Group’s pre-tax earnings, which included largely tax-free income from the settlement agreement associated with our investment in MFTBC, the sale of Daimler- Chrysler’s shares in MMC, and the sale of other securities. Opposing effects resulted primarily from tax expenses arising due to the distribution of earnings, which had previously been retained, by non-US companies to their parent company in the United States. In 2004, the effective tax rate was additionally reduced by the tax-free gain realized on the sale of the Group’s 10.5% share- holding in HMC. Opposing effects resulted primarily from non- tax-deductible losses arising from our investments in MMC and debis AirFinance. Additional information on income taxes can be found in Note 9 of the Notes to the Consolidated Financial Statements. 38 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Operating profit Operating Profit (Loss) by Segment 2005 2004 05/04 Amounts in millions of € % change Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities Eliminations DaimlerChrysler Group (505) 1,534 2,093 1,468 591 4 5,185 1,666 1,427 1,332 1,250 456 (377) 5,754 . +7 +57 +17 +30 . -10 DaimlerChrysler posted an operating profit of €5,185 million in 2005, compared with €5,754 million in the prior year. Exclu- ding charges relating to the realignment of the smart business model (€1,111 million), there was an increase in the Group’s operating profit. Higher prices for materials and crude oil affected operating results in all of the industrial divisions. In addition, less favorable euro-dollar hedging conditions than in 2004 burdened ear- nings at the Mercedes Car Group and the Commercial Vehicles Division. At the Mercedes Car Group, the measures taken to improve efficiency as a part of the CORE program had a positive impact on operating results during the course of the year; nonetheless, earnings for the full year were negative. The worsened profi- tability was primarily due to charges relating to the realignment of the smart business model and the costs of the headcount re- duction program at the Mercedes Car Group. In a difficult market environment, the Chrysler Group achieved an increase in unit sales and a higher operating profit than in 2004. The Commer- cial Vehicles Division also developed positively in 2005; ope- rating profit increased primarily as a result of the continued very positive development of unit sales in all business units. Finan- cial Services improved its operating profit, mainly due to signifi- cantly lower charges from the involvement in Toll Collect. Other Activities’ operating profit exceeded the prior year’s result. The Mercedes Car Group posted an operating loss of €505 million for 2005, compared with an operating profit of €1,666 million in the prior year. Charges on earnings totaling €1,111 million arose in connection with the realignment of the smart business model. These were primarily due to compensation payments to dealers and suppliers, impairments recognized on production facilities, risk provisions for contractual commit- ments and the write-down of vehicle inventories. In addition, ex- penses of €570 million were incurred relating to the headcount reduction program at Mercedes-Benz Passenger Cars, for both voluntary severance agreements and early retirements, which had been accepted by approximately 5,000 employees by the end of 2005. The operating result was negatively impacted by the continuation of measures initiated within the framework of the quality improving program. Further charges in the operational business resulted from less favorable currency-hedging rates than in the prior year (particu- larly for the US dollar), a less favorable model mix and higher raw-material prices. The model mix was negatively impacted by the S-Class model changeover in the fall and by volume growth in the low-margin segments of the A-Class and the B-Class. There were positive effects on earnings from the 2% increase in unit sales by the Mercedes-Benz brand overall; in total, the division’s unit sales were at the same level as in the prior year, despite lower sales by smart. 39 The Commercial Vehicles division continued its positive development of the prior year and increased its operating profit from €1,332 million to €2,093 million. The increase in earnings was due primarily to the positive deve- lopment of unit sales in all business units, especially the inter- national market success of the products of the Trucks business segment, as well as the efficiency improvements achieved by implementing the “Global Excellence” program. In total, unit sales increased by 16% to 824,900 trucks, vans and buses in 2005. The operating profit achieved in the year 2005 includes exceptional income of €276 million from the settlement reached with MMC relating to charges for quality actions and recall campaigns at MFTBC. In addition, impairments of €87 million were recognized relating to the sale of all the major parts of the US subsidiary American LaFrance. Substantial charges from price increases for raw materials, especially the sustained high price of steel, and negative currency effects were more than offset. Prior-year earnings were impacted by charges of €475 million arising at MFTBC. On the other hand, there was income of €60 million from the termination of the engine joint venture with HMC. The efficiency-enhancing measures taken as a part of the CORE program led to a constant improvement in operating results during the year. As a result of the positive verdict by the Euro- pean Court in the case concerning the alleged infringement of EU competition rules, a provision of €60 million that had been accrued for this purpose was released with a corresponding effect on earnings. Although market conditions remained difficult in North America, the Chrysler Group posted an operating profit of €1,534 million in 2005, compared with an operating profit of €1,427 million in the prior year. Positive effects on 2005 operating profit include an increase in worldwide factory unit sales, a €240 million gain on the sale of the Arizona Proving Grounds vehicle testing facility and a decre- ase in turnaround plan charges and charges for workforce re- duction actions, as well as lower tooling amortization expense of €105 million. These effects were partially offset by negative net pricing, shifts in market mix, charges of €99 million related to financial support provided to supplier Collins & Aikman and contractual penalty and asset impairment charges of €107 million primarily as a result of a decision to reduce contractual purcha- se volumes of the Chrysler Crossfire. The Chrysler Group’s 2004 operating profit was negatively im- pacted by restructuring charges totaling €283 million, incurred in connection with the turnaround plan and other workforce reduction charges and was favorably impacted by an adjustment of €95 million to correct the calculation of an advertising accrual. In 2005, income of €36 million was recorded as a result of adjustments to prior estimates associated with the turnaround plan. 40 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The segment’s prior-year earnings were affected by a series of special items. The agreement reached with Bombardier to settle all disputes relating to the sale of DaimlerChrysler Rail Systems GmbH (Adtranz) resulted in income of €120 million. An impair- ment of €70 million was recognized on the value of the invest- ment of DASA AG in debis AirFinance, and MMC contributed an operating loss of €27 million. Eliminations with an effect on the income statement resulted primarily from the leasing business in Germany and the in- crease in inventory financing of European dealers. Any gains or losses arising from vehicle deliveries between the divi- sions have no effect at the Group level and have therefore been eliminated. In the past financial year, the operating profit posted by Financial Services improved by 17% to €1,468 million. The earnings development in 2005 was a result of increased revenues generated by attractive financial services products, the positive development of risk costs and improved efficiency. There was a negative impact from higher interest rates, parti- cularly in the United States. The increase also reflects lower charges from the division’s involvement in Toll Collect (€54 million versus €472 million in 2004). This reduction is related to startup losses in 2004 and the successful start of the system on January 1, 2005. In addition, prior-year earnings were negatively affected by an impairment recognized on the investment in debis AirFinance (€102 million). This investment was sold in 2005 within the context of the strategic focus on automotive financial services. The Other Activities segment increased its operating profit by €135 million to €591 million in 2005. The improved performance was primarily due to the significantly increased profit contribution from EADS resulting from higher Airbus deliveries and stronger earnings by the Space division. The DaimlerChrysler Off-Highway business unit also made a higher contribution to the operating profit of Other Activities. 41 Consolidated Statements of Income Amounts in millions of € 2005 2004 05/04 Reconciliation of Group Operating Profit to Income before Financial Income 2005 2004 05/04 % change Amounts in millions of € % change Revenues Cost of sales Gross profit 149,776 142,059 (122,894) (114,567) 26,882 27,492 Selling, administrative and other expenses Research and development (18,984) (5,649) Other income Goodwill impairment Turnaround plan Chrysler Group Income before financial income Financial income (expense), net Income before income taxes Income tax expense Minority interests Income from continuing operations Cumulative effects of changes in accounting principles: transition adjustment resulting from adoption of FIN 47 Net income (17,972) (5,658) 895 - (145) 4,612 (1,077) 3,535 (1,177) 108 2,466 966 (30) 36 3,221 217 3,438 (513) (74) 2,851 (5) 2,846 – 2,466 Operating profit 5,185 5,754 -10 Pension and postretirement benefit expenses, other than current and prior service costs and settlement/ curtailment losses Operating (profit) loss from affiliated and associated companies and financial (income) loss from related operating companies Miscellaneous items Income before financial income (1,175) (845) -39 (640) (149) 3,221 87 (384) 4,612 . +61 -30 +5 -7 -2 -6 0 +8 . . -30 . -3 +56 . +16 . +15 “Pension and postretirement benefit expenses, other than current and prior service costs and settlement/curtailment losses” is the sum of the interest cost, the expected return on plan assets, and the amortization of unrecognized net actuarial gains or losses. Operating profit excludes these components of the net periodic pension and postretirement benefit expense, since they are driven by financial factors and are not within the respon- sibility of the divisions. The reconciliation item “Operating (profit) loss from affiliated and associated companies and financial (income) loss from re- lated operating companies” includes the contributions to ear- nings from our operating investments which are reported as a component of financial income (expense), net, in the consoli- dated statements of income. These contributions are allocated to the operating profit (loss) of the respective divisions. In 2005, this resulted in a positive overall contribution to opera- ting profit of €640 million (2004: a negative contribution of €87 million). The increase was primarily a result of the improved proportionate share of the earnings of Toll Collect and EADS. An additional factor is that the prior-year result included impair- ment charges relating to the Group’s investment in debis AirFinance. 42 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Reconciliation by Reportable Segment of Operating Profit to Income (Loss) before Financial Income Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities Total Segments Eliminations Amounts in millions of € 2005 Operating profit (loss) Pension and postretirement benefit expenses, other than current and prior service costs and settlement/ curtailment losses Operating (profit) loss from affiliated and associated companies and financial (income) loss from related operating companies Miscellaneous items Income (loss) before financial income 2004 Operating profit (loss) Pension and postretirement benefit expenses, other than current and prior service costs and settlement/ curtailment losses Operating (profit) loss from affiliated and associated companies and financial (income) loss from related operating companies Miscellaneous items Income (loss) before financial income (505) 1,534 2,093 1,468 591 5,181 (33) (1,030) (55) (14) - (552) (1) - 503 (47) (42) 1,949 (6) 38 (5) 1,495 (51) (1,175) (706) (102) (268) (730) (149) 3,127 4 - 90 - 94 1,666 1,427 1,332 1,250 456 6,131 (377) 5,754 (34) (697) (55) (5) (54) (845) 2 – 1,634 9 (5) 734 (9) (364) 904 549 (4) 1,790 (539) (11) (148) 12 (384) 4,914 – 75 – (302) (845) 87 (384) 4,612 Daimler- Chrysler Group 5,185 (1,175) (640) (149) 3,221 In 2004, the reconciliation item “Miscellaneous items” consisted almost solely of the share of minority interests in the expenses for the quality actions and recall campaigns at MFTBC. These expenses were allocated to minority interests and not to ope- rating profit as they were caused by quality problems at MFTBC which arose before the acquisition of shares in that company by DaimlerChrysler. 43 Performance measures The performance measures used at the DaimlerChrysler Group are oriented towards our investors’ interests and expectations, and provide a basis for value-based management. Value added. For purposes of performance measurement, DaimlerChrysler differentiates between Group and division/ business unit level. Value added is one element of the perfor- mance measurement system at both levels and is calculated as the difference between the operating result and the cost of capital of the average net assets in that period. Value Added = Profit Measure − Net Assets × Cost of Capital (%) ⎧ ⎪⎪⎪⎪⎪⎪⎨⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎩ Cost of Capital Alternatively, value added can be calculated from the return on net assets (RONA) by multiplying the difference between RONA and the cost of capital rate by the average net assets in that period. Value Added = ⎛ ⎜ ⎝ Return on Net Assets (RONA) − Cost of Capital (%) ⎞ ⎟ ⎠ × Net Assets Value added shows to which extent the Group and its divisions/ business units have achieved or exceeded the minimum return requirements of the shareholders and creditors, thus creating additional value. The methodology of value added is based on the figures provided by external reporting in accordance with US GAAP. This secures transparency both within the Daimler- Chrysler Group and towards shareholders and creditors. Profit measure. The profit measure used at Group level is net operating income, which can be derived from net income as shown in the income statement. At the level of divisions/busi- ness units, operating profit is used. Operating profit can be derived from income before financial income, and reflects the specific earnings responsibility of the divisions/business units. Net assets. Net assets are calculated at Group level from the balance sheet components of stockholders’ equity (including minority interests) and the financial liabilities and accrued pen- sion obligations of the industrial business. At the division/ business unit level of the industrial business, net assets are cal- culated on the basis of the allocable operating components of assets and liabilities. In the financial services business, per- formance measurement is on an equity basis, in line with the usual practice in the banking business. The average net assets are calculated as an average of the net assets at the beginning and the end of the financial year. Cost of capital. The required rate of return on net assets and thus the cost of capital are derived from the minimum returns that investors expect on their invested capital. Due to their long-term financing character, unfunded pension obligations are included in addition to equity and debt when calculating the Group’s cost of capital. The cost of equity is calculated according to the capital asset pricing model (CAPM), using the interest rate for long-term, risk-free securities (such as government bonds and other fixed-interest securities) plus a risk premium reflecting the specific risks of an investment in DaimlerChrysler shares. The cost of debt is derived from the required rate of return for obligations entered into by the Group with external lenders. The cost of capital of the unfunded pen- sion obligations is calculated on the basis of discount rates used according to US GAAP. The Group’s cost of capital is then a result of the weighted average of the individually required rates of return; in the year under review, the cost of capital amounted to 7% after taxes. At industrial division/business unit level, the cost of capital amounted to 11% before taxes; for the financial services business a cost of equity of 14% before taxes was used. 44 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Return on Net Assets (RONA) DaimlerChrysler Group (after taxes) (in %) 9 7.5 6 4.5 3 1.5 2001 2002 2003 2004 2005 Cost of Capital In % Group, after taxes Industrial divisions, before taxes Financial Services, before taxes 2005 2004 Return on net assets and value added 7 11 14 8 13 14 Net operating income amounted to €3.6 billion in 2005, com- pared with €3.2 billion in the prior year. In combination with nearly unchanged average net assets of €55.3 billion, this led to a return on net assets for the Group of 6.6% (2004: 5.7%). Value added thus increased by €1.1 billion to minus €0.2 billion. Return on net assets. The profitability ratio return on net assets (RONA) has a special significance as a fundamental component of value added in DaimlerChrysler’s performance measurement system. As a quotient of the profit measure and average net assets, RONA allows a statement to be made on the profitability of the Group or the industrial divisions/business units. To assess the profitability of the financial services business, return on equity (ROE) is used. The Mercedes Car Group division’s return on net assets of minus 3.8% in 2005 was lower than the minimum required rate of return. The significant decrease compared with the prior year was primarily a result of changes in earnings due to the re- alignment of the business model at smart and expenses relating to the headcount reduction program at the Mercedes Car Group. Additional charges arose from changed currency hedg- ing rates, a less favorable model mix and higher raw-material prices. The slight reduction in net assets could not offset the lower earnings. The development of net assets was due to liabilities relating to the workforce reduction initiative, higher provisions for product guarantees as well as impairments recognized in connection with the realignment of the business model at smart. The Chrysler Group division’s return on net assets of 18.2% (2004: 16.4%) significantly surpassed the minimum required rate of return. The increase compared with the prior year was partially due to the lower net assets, but was mainly a result of the improved operating profit as a consequence of higher unit sales. Additional factors were income from the sale of fixed assets and lower expenses from the turnaround plan. With a return on net assets of 19.0%, Commercial Vehicles also significantly exceeded the minimum required rate of return, despite a higher level of net assets. As well as efficiency impro- vements, this positive result was primarily due to the market success of the Trucks business segment. As a result of Other Activities’ increased earnings, its return on net assets rose from 13.4% to 18.8%. 45 The Financial Services division recorded an increase in return on equity to 16.2% (2004:14.8%). The factors behind this impro- vement included lower risk costs and an increased volume of leasing and sales-financing business, as well as lower charges from the division’s involvement in Toll Collect. These positive effects were partially offset by higher interest rates. The minimum required rate of return was surpassed, as in the prior year. Value Added Amounts in millions of € 2005 2004 05/04 % change Reconciliation to Net Operating Income 2005 2004 05/04 Amounts in millions of € % change Net income (loss) Minority interests Interest expense related to industrial activities, after taxes Interest cost of pensions related to industrial activities, after taxes Net operating income 2,846 74 2,466 (108) 192 295 523 3,635 512 3,165 +15 . -35 +2 +15 DaimlerChrysler Group (236) (1,306) +82 Net assets are derived from the consolidated balance sheet – as shown in the following table. Net Assets and Return on Net Assets 2005 2004 2005 2004 (Annual average, in billions of €) Net assets % Return on net assets Net Assets 1 of the DaimlerChrysler Group Amounts in millions of € 2005 2004 05/04 35,824 653 31,460 909 4,146 8,330 15,413 56,036 13,867 54,566 % change +14 -28 -50 +11 +3 Stockholders’ equity 2 Minority interests Financial liabilities of the industrial segment Pension provisions of the industrial segment Net assets 1 Represents the value at year-end; the average for the year was €55.3 billion (2004: €55.9 billion). 2 Adjusted for the effects from the application of SFAS 133. DaimlerChrysler Group, (after taxes) Industrial divisions, (before interest and taxes) Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities 1 55.3 55.9 6.6 5.7 13.2 8.4 11.0 4.8 13.5 8.7 9.7 4.7 (3.8) 18.2 19.0 18.8 12.3 16.4 13.8 13.4 Stockholders’ equity Return on equity 2 Financial Services 9.1 8.4 16.2 14.8 1 Other Activities contain the Off-Highway business unit and the equity investment in EADS. 2 Before taxes. 46 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Liquidity and Capital Resources Principles and objectives of financial management Financial management at DaimlerChrysler consists of capital structure management, cash and liquidity management, pension asset management, market price risk management (foreign exchange rates, interest rates, and commodities) and credit and financial country risk management. Financial management is performed worldwide in a standardized way for all Group entities by Treasury. Financial management is guided by a framework of guidelines, limits and benchmarks. Financial management is separated from other financial func- tions such as financial controlling, reporting, settlement and accounting. These functions are not covered by Treasury but by the controlling and accounting departments in the companies of the Group. Capital structure management designs the capital structure for the Group and all of its subsidiaries. Decisions regarding the capitalization of Financial Services companies, production, dis- tribution, financing or regional holding companies are based on standardized Group guidelines. The capital resources of Group companies also depend on refinancing conditions in local banking markets. In addition, it is necessary to adhere to the provisions of the law as well as to so-called thin-capitalization rules in the taxation legislation of various countries, as well as various capital transaction restrictions on the transfer of capital and currencies imposed by various countries. Cash management determines cash requirements and sur- pluses on a worldwide basis. The number of external bank transactions is minimized by the Group’s internal netting of cash requirements and surpluses. Netting is done by cash- concentration or cash-pooling procedures. DaimlerChrysler has established standardized processes and systems in order to control its bank accounts and the execution of automated payment transactions. Liquidity management secures DaimlerChrysler’s ability to meet its payment obligations at any time. For this purpose, liquidity planning provides information about all cash flows from operating and financial activities for a rolling planning period of twelve months. Resulting financing requirements are covered by the use of appropriate instruments for liquidity management. Liquidity surpluses are invested in the money market to optimize return. Besides operational liquidity, DaimlerChrysler keeps liquidity reserves, which are available on a short-term basis. These liquidity reserves include a pool of receivables from the financial services business which are readily available for securitization in the capital market, as well as confirmed syndicated credit lines with varying maturities. Management of market price risk aims at minimizing the impact of fluctuations in foreign exchange rates, interest rates and commodity prices on the results of the divisions and the Group. The Group’s overall exposure to these market price risks is determined to provide the basis for hedging decisions. These cover the selection of the hedging instrument and the definition of the hedging volume and corresponding period. Decisions on foreign exchange rates, interest rates, commodities and asset- liability management are regularly made by the respective committees. 47 Management of pension funds comprises the optimal invest- ment in terms of the risk-return profile of pension assets to cover the corresponding pension liabilities. The major part of pension assets is held in separate pension funds and is not available for general business purposes. The funds are allocated to different asset classes such as equities and bonds based on an optimization process which takes into account the expected growth of pension liabilities. The performance of the asset management is measured by comparing with defined benchmark indices. Decisions on ordinary and extraordinary capital con- tributions to the pension funds are centralized worldwide in the newly established “Global Pension Committee”. Further infor- mation on pension liabilities is available in Note 25a of the Notes to the Consolidated Financial Statements. The risk volume which is subject to credit risk management includes all worldwide creditor positions of DaimlerChrysler with financial institutions, issuers of securities and end custo- mers. Credit risk with financial institutions and issuers arises primarily from the trading of derivative financial instruments and the investments executed by liquidity management. The management of this credit risk is based on an internal limit system, which reflects the creditworthiness of the respective financial institution or issuer. The credit risk with end cus- tomers results from granting a payment period for goods and services. Similarly, an internal assessment of the customers’ creditworthiness provides the basis for quantifying the associa- ted risk. In order to hedge these risks, bank guarantees are often demanded before delivery is initiated. 48 Financial country risk management includes various risk aspects: the risk from investments in subsidiaries and joint ventures, the risk from cross-border financing of Group compa- nies in risk countries and the risk from direct sales to end customers in these countries. DaimlerChrysler has developed an internal limit system which divides all countries with DaimlerChrysler operations into risk categories. Credit volu- mes are restricted according to the country classification or higher guarantees are considered. Available instruments for hedging country risk such as Hermes insurance are frequently employed. On top of that, a committee sets and restricts the level of hard-currency risk for Financial Services companies in risk countries. Cash flow Cash provided by operating activities of €12.4 billion was higher than in the prior year (€11.1 billion). The increase was primarily due to the inventory-related receivables from financial services, which had risen significantly in 2004 as a result of higher stocks of vehicles held by dealers, reducing cash provi- ded by operating activities in that period. In 2005, the nega- tive effect from changes of these receivables on cash provided by operating activities was significantly lower. Cash provided by operating activities also increased due to the generally lower cash outflows for tax payments, caused in particular by de- creasing taxable income in Germany. Tax payments in the United States were higher than in the prior year, however, as the tax- loss carryforwards had been used up. An additional factor was the shift in the financial services business from finance lease to operate lease contracts which led to increased cash provided by operating activities. The reason for this is that with finance- leasing contracts, only the interest portion of the leasing install- ments is reflected in cash provided by operating activities, while the amortization portion is reflected within investment activities. With operate lease contracts, however, the entire leasing installments are recognized in cash provided by opera- ting activities. Opposing effects reducing cash provided by operating activities resulted from changes in the volumes of trade receivables and trade liabilities and increased inven- tories. Contributions to pension funds of €1.7 billion were also slightly higher than in the prior year (€1.6 billion). 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Net Increase (Decrease) in Cash and Cash Equivalents (maturing within 3 months or less) (in millions of €) 12,353 7,381 -11,222 -1,513 620 7,619 Cash and cash equivalents 12/31/2004 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 12/31/2005 The reduction of €5.5 billion in cash used for investing acti- vities to €11.2 billion was primarily attributable to the develop- ment of receivables from financial services provided to end customers. This was due not only to a lower volume of new finan- cing contracts, but also to increased payments received on existing receivables. Proceeds from the sale of such receivables decreased, however. Additionally, the acquisition and sale of securities reduced the cash outflow for investing activities, pri- marily due to the sale of the Group’s remaining shares in MMC. There were opposing effects increasing the cash outflow for investing activities caused by the increase in equipment on ope- rating leases and higher payments for the acquisition of shares in subsidiaries and associated companies, mainly due to the ac- quisition of the remaining shares in MTU Friedrichshafen and capital injections for joint ventures. Furthermore, proceeds from the sale of shares in subsidiaries and associated companies decreased; in the prior year this item had been boosted by the disposal of the Group’s shares in HMC. Capital expenditure for property, plant and equipment increased slightly. The cash flow from financing activities resulted in a net cash outflow of €1.5 billion in 2005. This was mainly a result of the dividend distribution at DaimlerChrysler AG for 2004 (€1.5 bil- lion). Borrowing and the repayment of financial liabilities were nearly in balance, with a slight shift towards short-term refinan- cing. In the prior year, the net increase in financial liabilities offset the dividend distribution. In 2005 the exercise of stock options resulted in a cash inflow from the issue of shares of €0.2 billion. Cash and cash equivalents with an original maturity of three months or less increased by €0.2 billion compared with Decem- ber 31, 2004 as a result of currency translation effects. Total liquidity, which also includes long-term investments and securi- ties, increased from €11.7 billion to €12.6 billion. Free cash flow of the industrial business, the parameter used by DaimlerChrysler to measure the financing capability increased by €0.3 billion to €2.1 billion. Free Cash Flow Industrial Business 2005 2004 Amounts in billions of € Cash provided by operating activities Cash used for investing activities Changes in cash and cash equivalents (maturing after 3 months) and short term securities Free cash flow industrial business 6.2 (4.8) 0.7 2.1 3.8 (2.9) 0.9 1.8 05/04 Change 2.4 (1.9) (0.2) 0.3 The increase was mainly due to lower cash outflows for tax pay- ments as a result of decreasing taxable income in Germany. An additional factor was that increased payments were received by the industrial business from companies in the financial ser- vices business in connection with tax groups in the United States. The free cash flow was also increased by the sale of the Group’s remaining shares in MMC and its interest in debis AirFinance during 2005. In the prior year, the corresponding increase from the sale of the Group’s shares in HMC was lower. There were negative effects from the stronger increase in working capital and the realignment of the business model at smart. In addi- tion, the free cash flow was reduced in 2005 by the increased utilization of provisions, also in connection with quality actions. Taking into consideration the dividends paid by Financial Services to the industrial business, the free cash flow of the industrial business significantly surpassed the total dividend distribution planned by DaimlerChrysler to its shareholders for the 2005 financial year. 49 The net liquidity of the industrial business, which is equi- valent to liquidity less nominal debt on the balance sheet date, increased by €5.1 billion to €7.3 billion. Net Liquidity Industrial Business 2005 2004 Amounts in billions of € Cash and cash equivalents (maturing within 3 months) Cash and cash equivalents (maturing after 3 months) Short-term securities Liquidity Nominal debt 1 Net liquidity 6.8 0.1 4.5 11.4 (4.1) 7.3 6.4 0.4 3.5 10.3 (8.1) 2.2 1 Bookvalue of financial liabilities adjusted for market valuation 05/04 Change 0.4 (0.3) 1.0 1.1 4.0 5.1 The significant increase in net liquidity is mainly due to the positive free cash flow as well as the effects of currency trans- lation. An additional factor was the dividends paid by the finan- cial services business to the industrial business. Opposing effects resulted primarily from the dividend distribution by DaimlerChrysler AG for the 2004 financial year. Refinancing DaimlerChrysler’s refinancing measures are primarily determi- ned by the Group’s financial services activities. To cover a relatively low requirement for additional funding compared with the prior year and to refinance debts becoming due, Daimler- Chrysler once again used a broad spectrum of financial and capital-market instruments. The book value of the main refinan- cing instruments and the weighted average interest rates for the year 2005 are shown in the table below: Average interest rates 2005 Book value Dec. 31, 2005 Book value Dec. 31, 2004 in % amounts in millions of € 5.70 4.08 47,432 9,104 44,679 6,824 4.54 17,472 17,664 Bonds/notes Commercial paper Liabilities to banks The financial instruments shown in the above table as of Decem- ber 31, 2005 are mainly denominated in the following currencies: 57% in US dollars, 21% in euros, 8% in Canadian dollars, 3% in British pounds and 3% in Japanese yen. The financial liabilities shown in the consolidated balance sheet, which in particular also include deposits from direct banking business as well as liabilities from capital lease and residual value guarantees, amounted to €80,932 million on December 31, 2005 (2004: €76,270 million). Of the financial liabilities, €76,786 mil- lion or 95% was accounted for by the financial services business (2004: €67,940 million or 89%). Detailed information on the amounts and terms of the financial liabilities is available in Note 26 of the Notes to the Consolidated Financial Statements. 50 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information A part of this US $18 billion credit facility serves as collateral for borrowings within the commercial-paper program. In order to hedge the liquidity of an asset-backed commercial- paper program in North America, DaimlerChrysler has an ad- ditional credit facility with a consortium of international banks, which was increased to a volume of US $6.2 billion in 2005 (2004: US $5.2 billion). This liquidity hedging can only be utilized by the trusts to which DaimlerChrysler sold receivables in the context of this program. The liquid reserves, short-term and long-term credit lines and the possibility to generate cash inflows by securitizing receiv- ables give the Group sufficient financial flexibility of above €50 billion to cover its refinancing needs at any time. In 2005, DaimlerChrysler successfully issued benchmark notes denominated in US dollars and euros. There were also smaller issues of medium-term note programs in the form of private place- ments. In addition, the securitization of receivables, mainly in the field of financial services, was utilized particularly in the United States, but also in Canada and Germany. In 2005, DaimlerChrysler sold retail receivables in an amount of €11,575 million (2004: €10,294 million). Within the context of a revolving credit facility for securitizing wholesale receivables, DaimlerChrysler also sold wholesale receivables in an amount of €33,922 million (2004: €35,414 million) to trusts and received proceeds of €33,892 mil- lion (2004: €35,393 million). With these transactions, the Group received income of €182 million in 2005 and €250 million in 2004. See Note 34 of the Notes to the Consolidated Financial Statements for further information on the sale of receivables. At the end of 2005, DaimlerChrysler had short-term and long- term credit lines totaling €35.4 billion, of which €17.9 billion was not utilized. These credit lines include a US $18 billion syn- dicated global credit facility with international banks in a total of three tranches: the first tranche comprises a 5-year credit line maturing in May 2008, allowing DaimlerChrysler AG and va- rious subsidiaries to draw a total of US $7 billion under this facility. DaimlerChrysler North America Holding can draw a total of US $6 billion under a 364-day facility maturing in May 2006. The originally 7-year tranche with a volume of US $5 billion and maturing in July 2006 was transformed earlier than necessary in 2004 into a new facility of DaimlerChrysler AG with the same volume and a term of five years, i.e. until December 2009. In December 2005, we made use of our contractual option to ex- tend this credit facility by another year (until 2010). In December 2006, the term can again be extended until December 2011. 51 Ratings Short-term credit ratings Standard & Poor’s Moody’s Fitch Dominion Bond Long-term credit ratings Standard & Poor’s Moody’s Fitch Dominion Bond 2005 2004 A-2 P-2 F2 R-1- BBB A3 BBB+ A- A-2 P-2 F2 R-1- BBB A3 BBB+ A- On July 19, 2005, Fitch Ratings (Fitch) revised the outlook on DaimlerChrysler’s BBB+ rating to stable from positive. The short-term rating was affirmed at F2. The outlook revision re- flected Fitch’s view that given the recent performance of the Mercedes Car Group and competitive pressures at the Chrysler Group, an upgrade of the ratings for DaimlerChrysler is unlikely in the short term. Fitch noted that the financial profile of the Group remains strong. On August 2, 2005, Dominion Bond Rating Service (Dominion) changed the outlook of the long-term rating of DaimlerChrysler to negative from stable. Dominion stated that the change re- flects the fact that profitability, although acceptable, is weak for the rating and that they believe that the near term prospects at DaimlerChrysler’s main businesses are mixed. Business diver- sity has enabled DaimlerChrysler to stay profitable and is a key strength supporting the ratings. During the year 2005, the rating agency Standard & Poor’s Rating Services (S&P) kept its long-term rating of BBB and its short-term rating of A-2 unchanged. The outlook of the long- term rating remained stable. On August 1, 2005, Moody’s Investor Service (Moody’s) confir- med the A3 long-term and the P-2 short-term rating of Daimler- Chrysler but changed the outlook of the long-term rating to nega- tive from stable. Moody’s stated that the change reflects the challenges DaimlerChrysler is facing to strengthen margins going forward in particular of the Mercedes Car Group division and to reach a break-even position at smart. In addition, Moody’s mentioned the pressure the Chrysler Group is facing in the United States to maintain a trend of improving profitability as a result of rising incentives and competitive pressures and the re- liance on the current robustness of the performance of the Com- mercial Vehicles division. Moody’s highlighted that Daimler- Chrysler’s A3/P-2 ratings continue to reflect the overall strength of the Group’s franchise, particularly Mercedes-Benz’s market position as a global luxury passenger car brand, the Group’s scope and geographically well-spread operations. 52 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Financial Position The Group’s total assets increased by 10% compared with the prior year to €201.6 billion, primarily due to the appreciation of the US dollar. The assets and liabilities of our US companies were translated into euros using the exchange rate of €1 = US $ 1.1797 as of December 31, 2005 (prior year: €1 = US $1.3621 as of December 31, 2004). This lower exchange rate resulted in correspondingly higher balance sheet amounts in euros. €15.2 billion of the increase in total assets resulted from the effects of currency translation. Adjusted for currency translation effects, total assets increased by €3.6 billion. The financial-services business accounted for €99.6 billion of the balance sheet total (2004: €88.0 billion). This was equi- valent to 49% of the DaimlerChrysler Group’s total assets and liabilities (2004: 48%). On the assets side of the balance sheet, property, plant and equipment increased by 8% to €36.7 billion. This development was primarily caused by currency translation, with opposing effects from the impairment of assets in an amount of €0.5 billion relating to the realignment of the smart business model. Financial assets decreased by 10% to €6.4 billion. One reason for this decrease was the sale of the Group’s remaining shares in MMC. The lower net carrying amount of our investment in EADS primarily resulted from the evaluation of derivative finan- cial instruments at EADS. This effect was only partially offset by the Group's proportionate share of the net income of EADS, which is accounted for using the equity method. Leased equipment increased by €7.5 billion to €34.2 billion, due to altered exchange rate parities as well as the growth of the operate lease business. The latter was partially caused by a shift from sales-financing contracts, which are entered under receivables from financial services, to increased operate lease contracts. Balance Sheet Structure (in billions of €) Fixed assets 202 41% 183 183 40% 18% 202 18% Stockholders’ equity and minority interests 23% Accrued liabilities 23% Non-fixed assets 54% 57% 54% 53% Liabilities 42% 40% of which: Financial liabilities of which: Liquidity Other assets 6% 5% 6% 3% 5% 6% 2005 2004 2004 2005 Other liabilities Inventories – less advance payments received – increased to €19.1 (2004: €16.8) billion. The increase was due not only to currency translation effects, but also to the launch of new models and intense competition in the market. Receivables from financial services amounted to €61.1 billion on December 31, 2005 (2004: €56.8 billion). Adjusted for currency translation effects, the decrease amounted to €1.5 billion. The outstanding balance of sold and securitized re- ceivables from financial services, which are accounted off-balan- ce, was including effects from currency translation, higher than in the prior year. For additional information, see Note 34 of the Notes to the Consolidated Financial Statements. The decrease in other assets from €12.9 billion to €8.7 billion was primarily due to the valuation and redemption of deriva- tives. Total liquidity increased, as intended, by 8% to €12.6 billion, and comprised cash and cash equivalents (€7.7 billion) and marketable securities (€4.9 billion). As of December 31, 2005, assets and liabilities held for sale related to the Off-Highway business unit, the sale of which will probably be completed in the first quarter of 2006. At the balance sheet date 37% of all assets had a maturity of less than one year (2004: 38%). On the liabilities side stockholders’ equity amounted to €36.4 billion (2004: €33.5 billion). The increase was mainly due to the Group’s net income as well as currency translation effects. There were opposing effects from distribution of the dividend for the 2004 financial year and the valuation of derivative financial instruments (which had no effect on the income state- ment). The equity ratio, adjusted for the proposed dividend distribution for the 2005 financial year (€1.5 billion), remained almost unchanged and was 17.3% (2004: 17.5%). The equity ratio for the industrial business amounted to 24.8% (2004: 25.2%). 53 Balance Sheet Structure of the Industrial Business (in billions of €) Property, plant and equipment 102 36% 95 36% 95 26% 102 25% Stockholders’ equity and minority interests 43% 45% Accrued liabilities Other fixed assets 14% 15% Inventories Receivables Liquidity Other assets 17% 16% 12% 17% 11% 10% 11% 5% 30% 26% Liabilities Other liabilities 1% 4% 2005 2004 2004 2005 The decrease in minority interests resulted primarily from the change in the Group’s equity interest in Mitsubishi Fuso Truck and Bus Corporation (MFTBC). As of December 31, 2005, DaimlerChrysler held 85% of MFTBC’s shares (2004: 65%). Accrued liabilities increased from €41.9 billion to €46.7 billion, mainly due to currency translation effects. The increase in other accrued liabilities was caused by the changed market valuation of derivatives due to the appreciation of the dollar against the euro as well as higher accruals for product guarantees. The in- crease in accruals for product guarantees was partially related to the quality offensive at the Mercedes Car Group. The Group’s financial liabilities amounted to €80.9 billion on the balance sheet date (2004: €76.3 billion). Adjusted for the effects of currency translation, this item decreased by €0.5 billion. The financial liabilities shown in the consolidated balance sheet primarily serve to refinance the leasing and sales finan- cing business. The change in trade liabilities from €12.9 billion to €14.6 billion was mainly caused by currency translation effects. Deferred income increased to €8.3 billion (2004: €6.3 billion), due not only to currency translation, but also to higher advance rental payments resulting from the expanded operate lease portfolio and higher sales of vehicles with guaranteed residual values. At the balance sheet date 43% of all liabilities had a maturity of less than one year (2004: 42%). 54 The funded status of the Group’s pension obligations chan- ged from being underfunded by €6.6 billion to being under- funded by €7.2 billion in 2005. On the balance sheet date, the Group’s pension obligations amounted to €41.5 billion, com- pared with €34.4 billion at the end of the prior year. The increa- se was primarily a result of the currency translation effects of €3.4 billion and the reductions in discount rates for pension plans by 0.8 of a percentage point to 4.0% for German plans, and by 0.4 of a percentage point to 5.4% for non-German plans. The plan assets available to finance the pension obligations increased due to currency translation effects (€3 billion) and the good per- formance of the stock markets from €27.8 billion to €34.3 billion. The yield realized on the German plan assets in 2005 was 16.9%; the foreign plan assets returned a yield of 12.1%. In addition, the plan assets increased due to contributions of €1.7 billion (2004: €1.6 billion). The funded status of the other postretirement benefit obli- gations changed from an undercover of €12.8 billion to an undercover of €15.8 billion in 2005. The obligations totaled €17.7 billion on the balance sheet date (2004: €14.4 billion). €2.3 billion of the increase was due to the effects of currency translation. The obligations also increased as a result of the reduction in the discount rate of 0.3 of a percentage point to 5.7%. The other changes resulted from the normal annual in- crease less payments to beneficiaries. Other postretirement benefit obligations were covered by plan assets of €1.9 billion (2004: €1.5 billion). Additional information on pension plans and similar obliga- tions is available in Note 25a of the Notes to the Consolidated Financial Statements. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Capital Expenditure Research and Development The DaimlerChrysler Group invested a total of €6.6 billion in property, plant and equipment in 2005 (2004: €6.4 billion). For the Mercedes Car Group, the focus was on preparing for the production of the new M-Class and R-Class at the plant in Tusca- loosa, USA, the new V6 and V8 engines and the successors to the C-Class and the smart fortwo. The main areas for the Chrysler Group were the preparation of production facilities for new model introductions and further improvements in plant efficiency and flexibility. The volume of investment in the Com- mercial Vehicles division was significantly higher than in the prior year. This was primarily due to preparations for the production startup of the new Sprinter and investments related to new truck generations and new low-emission engines fulfilling worldwide emission regulations. Investments in Property, Plant and Equipment Amounts in millions of € % change 2005 2004 05/04 DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities 6,580 1,629 3,083 1,743 45 109 6,386 2,343 2,647 1,184 91 134 +3 -30 +16 +47 -51 -19 Research and development expenditure totaled €5.6 billion in 2005 (2004: €5.7 billion). The Mercedes Car Group’s most important projects were the successor models for the C-Class and the smart fortwo. Research and development work at the Chrysler Group was once again influenced by the product offen- sive, in particular the renewal and extension of the Jeep® and Dodge model ranges. The Commercial Vehicles division’s key projects included the new generation of trucks for Europe, the United States and Japan, and various new low-emission engines. Some additional areas of R&D activities were new drive-system technologies, especially hybrid drive and fuel-cell drive, and elec- tronic systems designed to enhance traffic safety. At the end of 2005, more than 28,200 people worked in Daimler- Chrysler’s research and development departments, of whom 2,600 were employed in the corporate Research and Technology department and 25,600 were employed in the divisions (see page 94). We spent a total of €1.5 billion on environmental protection in 2005. Most of these funds were applied to reduce the fuel consumption and emissions of our vehicles. For example, we reduced the consumption of our fleet of vehicles in Germany by 30% in the period of 1990 to 2005. DaimlerChrysler there- fore made an above-average contribution to achieving the voluntary commitment declared by the German Automotive Industry Association (VDA) of a 25% reduction. For the con- tinuing reduction of CO2 emissions, we are also utilizing the potential of biofuels. We are modifying our vehicles so that the blend of biofuel to conventional fuel can be doubled from 5% to 10%. Research and Development Expenditure 2005 2004 05/04 Amounts in millions of € % change DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities 5,649 2,418 1,710 1,281 240 5,658 2,634 1,570 1,226 228 -0 -8 +9 +4 +5 55 Procurement and Supply Workforce Employees by Division DaimlerChrysler Group 382,724 Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Financial Services Other Activities 104,345 83,130 117,183 48,773 11,129 18,164 Employment situation. As of December 31, 2005, Daimler- Chrysler employed 382,724 people worldwide (end of 2004: 384,723). Of this total, 182,060 were employed in Germany (2004: 185,154) and 97,480 in the United States (2004: 98,119). The number of trainees at year-end was 9,880 (2004: 10,047). Compared with the prior year, employment increased by 2% at Commercial Vehicles, where employees were recruited due to the high demand for trucks, particularly in the Trucks Europe/Latin America and Trucks NAFTA business units. At the Mercedes Car Group (-1%), the Chrysler Group (-1%) and Finan- cial Services (-1%), employment levels were slightly lower than at the end of the prior year (see page 92). Staff reductions at the Mercedes Car Group. At the end of September 2005, the Board of Management approved a pack- age of measures to be taken at the Mercedes Car Group aiming to reduce the workforce in Germany by 8,500 jobs. The staff reductions are to be achieved as a result of voluntary severance agreements over a period of twelve months, and will contri- bute to increasing the productivity of the Mercedes Car Group and thus helping to secure the competitiveness of its facilities in Germany. DaimlerChrysler stands by the “Safeguarding the Future 2012” agreement reached in the year 2004, which provides for voluntary retirement as a first step in the case of any need for personnel reductions. By the end of 2005, ap- proximately 5,000 Mercedes Car Group employees had either already left the company or had signed agreements on their departure (see pages 74 and 92). Our Procurement and Supply organization has the goal of build- ing up the world’s most effective supply chain, thus contributing to an increase in corporate value. In the year 2005, we identi- fied and utilized additional synergy potential. In order to contin- uously improve the efficiency and effectiveness of our work, we defined three strategic areas for action: leveraging our global scale, the efficient management of our global supply base, and the use of globally uniform IT structures and processes. By bundling our purchasing worldwide, we maximize our volumes and the resulting price advantages. For this purpose, we estab- lished the Material Strategy and Innovation Council (MSIC). The MSIC coordinates the worldwide activities of our vehicle divi- sions in the fields of engineering, procurement, cost analysis, and research and technology. For example, with the aid of the MSIC, many opportunities have already been identified for cost reduction and innovation. The rising prices of raw materials and the growing danger of insolvencies in the supply industry were particularly important for our work in 2005. In order to limit the impact of rising raw material prices on our material costs at an early stage, we care- fully monitor the market prices of raw materials. In addition, we cooperate with our suppliers to achieve continuous improve- ments in products and processes so that lasting price advan- tages can be realized. Whenever necessary, we enter into long- term agreements to guarantee reliable supplies and limit the effects of future price increases; this also enhances planning security for our suppliers. A modern system of risk management helps us to identify and analyze the financial situation of our suppliers. This allows us to react to suppliers’ financial difficulties in good time, thus mini- mizing the financial risks and any impact on DaimlerChrysler’s production (see page 98 f). 56 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Events after the End of the 2005 Financial Year New management model for DaimlerChrysler. On January 24, 2006, DaimlerChrysler presented a new management model designed to improve the Group’s competitiveness and promote further profitable growth. More detailed information on this subject can be found on page 31 of this Annual Report. Further events after the end of the 2005 financial year. Since the end of the 2005 financial year, there have been no further occurrences that are of major significance to Daimler- Chrysler and which would lead to a modified assessment of the Group’s position. The course of business in the first two months of 2006 confirms the statements made in the chapter, “Outlook”. 57 Risk Report Risk management system Within the framework of their global activities and as a result of increasingly intense competition in all markets, Daimler- Chrysler’s divisions and business units are exposed to a large number of risks, which are inextricably linked with their busi- ness activities. Effective management and control instruments are combined into a uniform risk management system, meeting the requirements of applicable law and subject to continuous improvement, which is employed for the early detection, evalua- tion and management of risks. The risk management system is integrated into the value-based management and planning system. It is an integral part of the overall planning, control and reporting process in all relevant legal entities and central functions, and aims to systematically identify, assess, control and document risks. Taking defined risk categories into account, risks are identified by the management of the divisions and business units, the key associated companies and the central departments, and assessed regarding their probability of oc- currence and possible extent of damage. The assessment of the possible extent of damage usually takes place in terms of the risks’ effect on operating profit. The communication and repor- ting of relevant risks is controlled by value limits set by manage- ment. The responsible persons also have the task of developing, and initiating as required, measures to avoid, reduce and hedge risks. Major risks and the countermeasures taken are moni- tored within the framework of a regular controlling process. As well as the regular reporting, there is also an internal reporting obligation within the Group for risks arising unexpectedly. The Group’s central Risk Management department regularly reports on the identified risks to the Board of Management and the Supervisory Board. The risk management system enables the Board of Management to identify key risks at an early stage and to initiate suitable countermeasures. By carrying out targeted audits, the Corporate Audit department monitors compliance with the statutory frame- work and the Group’s internal guidelines as defined in the Risk Management Manual, and, if required, initiates appropriate action. In addition, the external auditors test the system for the early detection of risks that is integrated into the risk man- agement system in terms of its fundamental suitability for the early recognition of developments that could jeopardize the continued existence of the company. Economic risks Following the dynamic development of the world economy in 2004, economic expansion slowed down in all regions in 2005. Although general conditions were relatively unfavorable and potential risks increased, global growth was only slightly below the long-term trend. Two factors with a particularly negative impact were the continuation of high raw-material prices and the rapid growth of the United States’ current-account deficit. The stable growth of the world economy in 2006 that is antici- pated by most economists and also by DaimlerChrysler depends significantly upon how these factors develop in the future. Daimler- Chrysler’s financial position, results of operations and cash flows are therefore still exposed to substantial economic risks. Due to the great importance for the global economy of developments in the United States, an isolated severe slowdown of economic expan- sion there would have negative consequences for the rest of the world. 58 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The US economy is increasingly dependent on the inflow of for- eign capital to finance its rapidly growing current-account deficit, and this situation has become a source of considerable risk po- tential. If the capital inflows cease to be available in the required volumes, the country’s current-account deficit will have to be corrected. This could be done by means of higher interest rates and a drastic depreciation of the US dollar, leading to signifi- cantly lower growth in the United States and thus also in other regions of the world. Additional risks that would weaken eco- nomic growth in the United States are a further increase in capi- tal-market interest rates and a fall in real-estate values, which to a certain extent are inflated by speculation. Both of these fac- tors would substantially reduce private consumption. A marked reduction in growth rates in China would also be strategically relevant for the Group, as this is currently the most dynamic automobile market in the world and has enormous potential for the future. In view of China’s economic power and the sharp increase in the flows of international investment and trade with China, such a slump would not only have serious con- sequences for the whole of Asia, but could also cause signifi- cant growth losses for the world economy, with negative effects on DaimlerChrysler’s projects. Potential economic crises in the other emerging markets in which the Group has production faci- lities could also be of particular relevance. But crises in emer- ging markets where the Group is solely active in a sales function would result in a more limited risk exposure. Disappointing economic developments in large parts of the Euro- pean Union, especially Germany, have considerable risk poten- tial due to the region’s importance as a major sales market for DaimlerChrysler. In particular, if the ongoing weakness of do- mestic demand leads to stagnation, this could have a substantial impact on demand for automobiles. The situation of the Japa- nese economy is similar, although its prospects have improved somewhat. A renewed weakening of the Japanese economy would not only reduce the Group’s exports to Japan, but would also place a substantial burden on the earnings trend of our subsidiary, Mitsubishi Fuso Truck and Bus Corporation. An additional important potential risk is to be seen in the high level of raw-material prices, particularly crude oil. If prices remain high or actually continue rising, the assumed economic development will be jeopardized. Private households’ purcha- sing power would fall and companies’ costs would increase, and these two factors combined would have a negative impact on growth in the oil-importing countries. With a long-term rise in the price of oil, some economies could even slip into recession. Risks for market access and the global networking of the Group’s facilities could arise as a result of the failure or significant delay of multilateral trade liberalization, in particular due to the weakening of international free trade in favor of regional trade blocks or a return to protectionist tendencies. A sharp rise in bilateral free-trade agreements outside the European Union could affect DaimlerChrysler’s position in key foreign markets, particularly in Southeast Asia, where Japan is increasingly gaining preferred market access. Finally, the world economy could be negatively influenced by a sustained deterioration in consumer and investor confidence. This could be triggered by geopolitical and military instability, concern about a possible sharp drop in share prices, the battle against terrorism and the fear of an influenza pandemic. 59 Industry and business risks Weak economic developments, overcapacity in the automotive industry and sluggish consumer demand could have an impact on vehicle manufacturers. This would primarily affect Daimler- Chrysler’s major markets in Western Europe and the NAFTA region. In the United States, which is still the engine of the glo- bal economy, high competitive pressure in the automobile market in recent years has led to the proliferation of special financing offers and price incentives. Continued weak econo- mic developments could make such discount financing and price incentives necessary in the future, at similar or even higher levels. This would not only reduce our earnings from the sale of new vehicles, but would also lead to lower prices in the used- car market and thus to falling residual values. As a result of intensifying competition in Western Europe, the practice of offe- ring discount financing and price incentives is spreading also in this region. In order to achieve the targeted level of prices, factors such as brand image and product quality as well as additional technical features resulting from innovative research and development are becoming increasingly important. In view of increasing price pressure, it is essential for the Group’s future profitability to realize efficiency improvements while ful- filling DaimlerChrysler’s own high quality standards. This also applies to the successful implementation of the CORE program and the restructuring initiated in this context for the realign- ment of the smart business model. Product quality has a major influence on a customer’s decision to buy a particular brand of passenger car or commercial vehicle. Technical problems could lead to further recall and repair campaigns, or could even necessitate new developments requiring type approval from the relevant authorities. Furthermore, deteriorating product qua- lity can also lead to higher warranty and goodwill costs. Legal and political frameworks also have a considerable impact on DaimlerChrysler’s future business success. Regulations concerning exhaust emissions and fuel consumption and the development of energy prices play a particularly important role. The Group monitors these factors and attempts to antici- pate foreseeable requirements during the phase of product development. DaimlerChrysler counteracts procurement risks through targe- ted commodity and supplier risk management. But in view of developments in international supply markets, the effects of these measures are limited. If prices remain at their current level for a long time, or actually continue to rise, this would re- sult in a negative impact on the Group’s profitability. Increa- sing pressure in procurement and sales markets could also seriously jeopardize the financial situation and continued operations of suppliers and dealers. To an increasing extent, individual or joint support actions will be required by auto- mobile manufacturers such as DaimlerChrysler in order to safe- guard production and sales. If important suppliers should get into difficulties due to their financial situation, this could have a negative effect on the production and sales of vehicles and thus also on DaimlerChrysler’s profitability. Production and business processes could also be disturbed by unforeseeable events such as natural disasters or terrorist attacks. Consumer confidence would be significantly affected, and production could be interrupted by supplier problems and intensified security measures at territorial borders. In addition, our manufacturing processes could be disturbed by failures at the data centers. Security measures and emergency plans have been prepared for such eventualities. Although other IT risks in the fields of network, application and system management or outsourcing and supplier management have a very low probabi- lity of occurrence, the effect of such a case arising would also have a negative impact on earnings. 60 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler’s Financial Services division is primarily invol- ved in the provision of financing and leasing for Group products, as well as insurance and services in the field of fleet manage- ment. The international orientation of this business and the raising of capital are linked with credit, exchange rate and inte- rest rate risks. DaimlerChrysler counteracts these risks by means of appropriate market analyses and the use of derivative financial instruments. In addition, the U.S. Internal Revenue Service (IRS) has challenged the tax treatment of certain leveraged leases by various companies, including DaimlerChrysler, and we are currently in discussions with the IRS. Although we believe that our tax treatment is appropriate and in compliance with appli- cable tax law and regulations, the resolution of this matter could have a significant negative impact on our cash flows. Due to DaimlerChrysler’s involvement in the development of a system to record and charge tolls for the use of highways in Germany by trucks with more than 12 metric tons gross vehicle weight, we are exposed to a number of risks which could have negative effects on the Group’s financial situation, cash flows and profitability. The development and operation of the elec- tronic toll collection system is the responsibility of the operator company, Toll Collect GmbH, in which DaimlerChrysler holds a 45% ownership interest and which is included in the consolida- ted financial statements using the equity method of accounting. In addition to DaimlerChrysler’s membership of the consortium and its equity interest in Toll Collect GmbH, guarantees were issued supporting obligations of Toll Collect GmbH towards the Federal Republic of Germany concerning the completion and operation of the toll system. The toll system went into operation on January 1, 2005 with slightly reduced functionality. On January 1, 2006, the toll system was installed with full functio- nality as specified in the operator contract. Risks can arise primarily due to lower tolls derived from the system, offsetting alleged claims by the Federal Republic of Germany, or a refusal to grant the final operating license. Additional information on the electronic toll collection system and the related risks can be found in the Notes to the Consolidated Financial Statements: see Note 3 (Significant Equity Method Investments), Note 31 (Legal Proceedings) and Note 32 (Contingent Obligations and Other Commercial Commitments). DaimlerChrysler bears a proportionate share of the risks of its subsidiaries and its associated and affiliated companies in line with its share of their equity capital. Finance market risks The DaimlerChrysler Group is exposed to market risks from changes in foreign currency exchange rates, interest rates and equity prices. Furthermore, commodity price risks arise from procurement. These market risks may adversely affect Daimler- Chrysler’s operating results, financial condition and cash flow. The Group seeks to manage and control these risks primarily through its regular operating and financing activities, and if ap- propriate, through the use of derivative financial instruments. Additional information on financial instruments and derivatives is available in Note 33 of the Notes to the Consolidated Finan- cial Statements. DaimlerChrysler evaluates these market risks by monitoring changes in key economic indicators and market information on an ongoing basis. To quantify the exchange rate risk, interest rate risk and equity price risk of the Group on a continuous basis, DaimlerChrysler’s risk management systems employ value-at-risk analyses as re- commended by the Bank for International Settlements. The value- at-risk calculations employed by DaimlerChrysler express potential losses in fair values assuming a 99% confidence level and a holding period of five days. This method is based on the variance- covariance approach of the RiskMetrics™ model. Estimates of volatilities and correlations are drawn from the RiskMetrics™ datasets and supplemented by additional exchange rate, inte- rest rate and equity price information. The Group does not use derivative financial instruments for speculative purposes. Any market sensitive instruments, including equity and fixed in- terest bearing securities, that DaimlerChrysler holds for pension plans or similar obligations are not included in this quantitative and qualitative analysis. Please refer to Note 25a of the Notes to the Consolidated Financial Statements for additional information regarding the Group’s pension plans. 61 In accordance with the organizational standards in the international banking industry, DaimlerChrysler maintains risk management control systems independent of Corporate Treasury and with a sep- arate reporting line. Exchange rate risks. The global nature of DaimlerChrysler’s business activities results in cash receipts and payments deno- minated in various currencies. For the assessment of currency exposures, the cash inflows and outflows of the business seg- ments are offset and netted out if they are denominated in the same currency. Currency exposures are regularly assessed and gradually hedged with suitable financial instruments, pre- dominantly foreign exchange forwards and currency options, 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 spe- cific circumstances, DaimlerChrysler hedges the currency risk inherent in certain of its long-term investments. Besides this, DaimlerChrysler does not generally hedge the currency transla- tion risk which arises from our subsidiaries which report their revenues and results in a functional currency other than the euro. The following table shows value-at-risk figures for DaimlerChrysler’s 2005 and 2004 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 Amounts in millions of € Dec. 31, 2005 Average for 2005 Dec. 31, 2004 Average for 2004 Exchange rate sensitive derivative financial instruments 1 281 253 148 256 1 Forward foreign exchange contracts, foreign exchange swap contracts, currency options. 62 The average value-at-risk of our derivative financial instruments used to hedge exchange rate risks in 2005 is almost unchanged to that of 2004. The increase in the period-end value-at-risk is primarily a result of a higher foreign exchange derivatives’ volume in US dollars. Due to exchange rate fluctuations, especially of the US dollar and other major currencies against the euro, DaimlerChrysler is exposed to exchange rate risks and resultant transaction risks. These transaction risks primarily affect the Mercedes Car Group division, as a significant portion of its revenues are generated in foreign currencies while most of its costs are incurred in euros. The Commercial Vehicles division is also exposed to such trans- action risks, but only to a minor degree because of its worldwide production network. Chrysler Group’s transaction risks are low, as most of its revenues and costs are generated in US dollars. Interest rate risks. DaimlerChrysler holds a variety of interest rate sensitive financial instruments to manage its liquidity and the cash needs of the day-to-day operations. A substantial vol- ume of interest rate sensitive assets and liabilities is related to the leasing and sales financing business operated by Daimler- Chrysler Financial Services. The leasing and sales financing busi- ness 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 the 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 struc- tures (asset and liability management). The following table shows value-at-risk figures for DaimlerChrysler’s 2005 and 2004 portfolio of interest rate sensitive financial instruments. We have computed the average exposure based on an end-of-quarter basis. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Legal risks Various legal proceedings are pending against DaimlerChrysler. In our view, most of these proceedings constitute ordinary, routine litigation that is incidental to our business. However, the possibility cannot be excluded that the final resolution of some of these lawsuits could cause DaimlerChrysler to incur substan- tial costs and cash outflows. Although the final resolution of any such lawsuit could have a material effect on the Group’s earnings in any particular period, DaimlerChrysler believes that any resulting obligations are unlikely to have a sustained effect on the Group’s financial position, results of operations and cash flow. Information on various legal proceedings can be found in Note 31 of the Notes to the Consolidated Financial Statements. Overall risks There are no discernible risks that, either alone or in combina- tion with other risks, could jeopardize the continued existence of the company. Value-at-Risk Amounts in millions of € Dec. 31, 2005 Average for 2005 Dec. 31, 2004 Average for 2004 Interest-rate-sensitive financial instruments 89 90 73 75 In 2005, the average and the period-end values-at-risk of our portfolio of interest rate sensitive financial instruments in- creased, primarily due to more volatile interest rates and a weaker euro mainly in relation to the US dollar. Equity price risks. DaimlerChrysler holds investments in equity securities and equity derivatives. In accordance with internatio- nal banking standards, DaimlerChrysler does not include invest- ments in equity securities that the Group classifies as long- term investments in the equity price risk assessment. Equity derivatives used to hedge the market price risk of investments accounted for using the equity method are also not included in this assessment. Changes in the fair market value of these derivatives essentially offset changes in the fair market value of the underlying investment. The remaining equity price risk in 2005 and 2004 was not, and is currently not, material to the Group. Thus, DaimlerChrysler does not present the value-at-risk figures for the remaining equity price risk. Commodity price risks. Associated with DaimlerChrysler’s busi- ness operations, the Group is exposed to changes in prices of commodities. DaimlerChrysler addresses those procurement risks by a concerted commodity and supplier risk management. To a minor extent, DaimlerChrysler uses derivative commodity instruments to reduce some of the Group’s commodity price risk, mainly the risk associated with the purchase of precious metals. The risk resulting from these derivative commodity in- struments in 2005 and 2004 was not, and is currently not, sig- nificant to the Group. Therefore, DaimlerChrysler does not separately present the value-at-risk figures for its derivative commodity instruments. 63 Outlook The statements made in the Outlook section are based on the operative planning of the DaimlerChrysler Group for the years 2006 through 2008. This planning is based on premises regard- ing the economic situation resulting from assessments made by renowned economic institutes, as well as the ambitious targets of our divisions. The forecasts for future business developments are oriented towards the opportunities and risks offered by the anticipated market conditions and the competitive situation during the planning period. The world economy Present economic conditions and global indicators for consumer, business and investor sentiment suggest that the world eco- nomy will expand in 2006 at about the same rate as last year. This should be assisted by ongoing stable growth in the United States, although US interest rates are likely to continue rising with a resulting negative impact on domestic demand. Growth in Western Europe, and in particular in Germany, might acce- lerate slightly, but from a relatively low level. It is still uncertain whether or not Japan has really overcome its growth weakness, but economic opportunities now seem to outweigh the risks. Growth in the emerging markets will probably slow down a little in 2006, mainly due to slightly less dynamism in the rapidly expanding Chinese economy and rather lower growth rates in the Middle East. Northeast Asia will continue to be the region with the strongest growth, followed closely by India and Eastern Europe. Growth is likely to accelerate in particular in the new EU member states of Central and Eastern Europe in 2006. Over- all, the world economy should expand at a rate of slightly more than 3%, like in 2005 and in line with the long-term trend. Risks for the global economy are to be seen in rising raw-material prices, especially of oil, and the possible correction of the US foreign-trade deficit, which would result in weaker domestic demand in the United States and the significant depreciation of the US dollar. Our planning is based on the assumption that compared with average exchange rates during 2005, in the coming years, the euro will appreciate against the US dollar and the British pound, and will remain fairly stable against the Japanese yen. Automotive markets In line with the development of the world economy, growth in global demand for automobiles in 2006 will be at about the same rate as in 2005. Whereas demand for passenger cars in nearly all of the emerging markets is likely to increase signifi- cantly, the best that can be expected for the North American market for passenger cars and light trucks and the Western European markets for passenger cars is that volumes will remain at the same level as in 2005. Slight growth is anticipated for Japan, the world’s second-largest market for passenger cars, as a result of further improvements in economic conditions in Japan. Global demand for commercial vehicles should remain at a high level for the year 2006. As a result of purchases brought for- ward in connection with new emission regulations due to come into force in the year 2007, the North American market for heavy trucks could expand again slightly in full-year 2006. A similar pattern of demand is emerging in Japan. Demand in Western Europe should remain stable in 2006. For the year 2007, we anti- cipate a significantly lower market volume due to the cyclical weakening of the major markets for commercial vehicles, exac- erbated by stricter emission regulations in the United States and Japan. Most of the growth in worldwide demand for vehicles in the coming years will continue to be in the emerging markets of Asia, in South America, and increasingly in Central and Eastern Europe, due to the dynamic growth in purchasing power, improved infrastructures and the generally increasing need for mobility in those regions. 64 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler assumes that competitive pressure will inten- sify due to the industry’s worldwide over-capacity. Additional factors are stricter safety and environmental regulations, the fulfillment of which will cause substantial costs for all produc- ers. Therefore, one of the factors for success in the future will be the ability to achieve competitive advantages through inno- vative products and strong brands. In this context, it will also become increasingly important to have a worldwide market presence with the possibility to participate in the growth of the emerging markets. Unit sales Only weak growth the major passenger car markets is anticipa- ted in the coming years. The Mercedes Car Group plans for unit sales in 2006 at a similar level to the prior year, combined with an improved model mix. Unit sales should then increase again in 2007 and 2008. This expansion will be based on the new products already launched in the year 2005 and those sched- uled for the next few years. With the new B-Class and R-Class models we are opening up the sports-tourer market segment for the Mercedes-Benz brand and thus attracting new customers. The new S-Class, which will be fully available in 2006, under- scores the innovation and technology leadership of the Mercedes- Benz brand. We intend to further extend our leading market position in the premium segment with this superb automobile. Improved penetration of the Asian markets should also con- tribute to growing sales. We see opportunities above all in China, where the Mercedes Car Group plans to assemble its C-Class and E-Class models and to further develop its sales organization. Unit sales of the smart brand should be boosted by the suc- cessor model to the smart fortwo in 2007. The possibility of launching the new model in the US market is being investi- gated. As a result of the CORE efficiency-improving program and the new business model for the smart brand, the profitability of the Mercedes Car Group should increase continuously during the planning period of 2006 through 2008. We aim to achieve a return on sales of 7% in the year 2007. Parallel to the measures being taken to improve profitability, the Mercedes Car Group continues to implement its quality offensive. The Chrysler Group plans to further improve its competitive position in the coming years. With an array of attractive new models, we intend to achieve world-class levels of performance in customer experience and operational excellence, i.e. pro- duct quality and productivity. To achieve this, the Chrysler Group will launch ten all-new models in 2006 followed by several more new vehicles in the following years. This should strength- en our market position in the highly competitive North Ame- rican market. But the Chrysler Group also intends to sell more vehicles outside the NAFTA region, assisted by the Dodge brand, which we are now launching in Europe. The product range for export markets will be significantly expanded in the coming years. One focus of the Chrysler Group’s regional expansion is in China, where minivans and the Chrysler 300 and 300C are to be produced in the future in addition to the existing production of Jeep® vehicles. In the coming years, we will further improve the efficiency and flexibility of our manufacturing processes. Fur- thermore, the Chrysler Group will reduce costs by making more use of the existing know-how within the DaimlerChrysler Group and thus standardizing components and using shared vehicle architecture for several models. As a result of its generally im- proved competitiveness and the new products launched in 2006, the Chrysler Group anticipates stable unit sales in 2006 but significantly higher volumes in the following years. 65 In 2006, the Commercial Vehicles division aims to achieve unit sales at the same high level as in the prior year. Due to a weak- ening of demand in Western Europe, North America and Japan, unit sales are expected to fall in 2007, with the possibility of an increase in 2008. We intend to make the commercial vehicles business less dependent on cyclical market fluctuations in the future as a result of the Global Excellence optimization program, so that sustained positive earnings can be achieved also under difficult market conditions. In this way, we intend to utilize our cost advantages as the world’s biggest manufacturer of com- mercial vehicles better than in the past. In addition, we will strengthen Commercial Vehicles’ competitive position in the years 2006 through 2008 with numerous new products. These in- clude the successor model to the Sprinter, the new Premium Class from Freightliner, and the new touring buses from Mer- cedes-Benz. Within the context of our worldwide growth strategy, we will push forward with the integration of FUSO and utilize the opportunities presented in Asia, especially in China. Within the framework of the new management model (see page 31), as of March 2006, the Commercial Vehicles division will focus on the development, production and distribution of trucks, and the division will therefore be renamed “Truck Group”. Buses and vans will be directly managed as separate units and will be included in the Van, Bus, Others segment. The new structure should create additional synergies and facilitate a stronger orientation towards the specific requirements of customers and markets in the individual segments. The Financial Services division will continue to make an impor- tant contribution to vehicle sales and to the financial success of the DaimlerChrysler Group. The key challenges in the coming years are growing competition from internationally active banks and from alternative sales channels on the Internet, inten- sified competition in the automobile markets, and, from today’s perspective, increasing levels of interest rates all over the world. In order to meet these challenges, the Financial Services division will further enhance its process quality and efficiency, aided by the improvement of its risk-management system. The growth in Asian markets targeted by DaimlerChrysler’s vehicle brands is to be supported with tailored financial services. For example, in November 2005 the division started business operations in China, where we are the first provider to offer customers and dealers financing and insurance packages for passenger cars and commercial vehicles from one source. In total, we antici- pate a slight increase in contract volume during the planning period. EADS anticipates a generally stable development of the world- wide civil-aircraft market with strong demand in the years 2006 through 2008. Due primarily to rising Airbus deliveries, EADS’ volume of business should continue to grow in the coming years. This development will be assisted by the new A380 wide-body aircraft, which should be delivered to customers starting at the end of the year 2006. EADS also expects generally positive developments for its defense and space operations, despite the continuation of very tight government budgets. On the basis of the divisions’ planning, in 2006 we expect DaimlerChrysler’s unit sales to be in the magnitude of the prior-year. We anticipate positive sales impetus in the following years, primarily as a result of the new products launched by the Chrysler Group and upcoming new products from the Mercedes Car Group. 66 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Investments in Property, Plant and Equipment 2006 - 2008 (in billions of €) DaimlerChrysler Group 19.1 Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities 7.2 7.7 3.8 0.1 0.3 Revenues and earnings Capital expenditure During the planning period of 2006 through 2008, Daimler- Chrysler expects to invest a total of approximately €19 billion on property, plant and equipment. At the Mercedes Car Group, the focus of investment will be on advance expenditure for the successor models to the present C-Class and E-Class. Principle investments by the Chrysler Group will be in the modernization of its plants and the continuation of the product offensive. At the Commercial Vehicles division, major investments are planned in connection with the new modular platforms for heavy-duty and medium-duty trucks and for a new family of engines for heavy-duty trucks. DaimlerChrysler also plans to invest substan- tial funds in the further expansion of its business activities in China. Investments in property, plant and equipment In billions of € 2005 2006-2008 DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Financial Services Other Activities 1 6.6 1.6 3.1 1.7 0.1 0.1 19.1 7.2 7.7 3.8 0.1 0.3 1 Excluding the Off-Highway business unit in the period of 2006 through 2008 Adjusted for exchange-rate effects, revenues in 2006 will proba- bly increase slightly. In the following years, we expect revenues to increase significantly in line with rising unit sales. In regional terms, the main source of growth will be the dynamic markets of Asia. DaimlerChrysler anticipates an improvement in profitability in 2006, with continuous increases in operating profit during the following years. The driving force of this positive earnings trend is on the one hand our product offensive with more than 50 new vehicles in the period of 2005 through 2008. On the other hand, an important contribution will come from the efficiency-improving programs that we have initiated in all of the divisions and which are being pushed steadily forward. The Mercedes Car Group in particular should be able to substantially boost its profitability as a result of its CORE efficiency-improving program. An additional factor that should have a positive impact on earnings in the coming years is the closer networking of our worldwide activities and in particular the knowledge transfer and closer cooperation within the Group. A fundamental condition for the targeted increase in earnings is a generally stable economic and political situation and the moderate increase in the worldwide demand for automobiles expected for the years of 2006 through 2008. Opportunities and risks may arise from the development of currency exchange rates, interest rates and raw-material prices. An important step to achieve our goals is the new management model for DaimlerChrysler, which we announced in January 2006. By implementing this program, we intend to generally im- prove the Group’s competitiveness and create the right condi- tions for further profitable growth (see page 31). 67 Research and Development Expenditure 2006 - 2008 (in billions of €) DaimlerChrysler Group 15.5 Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities 6.4 4.7 3.8 0.6 Research and development Within the framework of DaimlerChrysler’s new management model, we are merging our Group-wide area of Research and Technology with the product development of the Mercedes Car Group to form the new Board of Management area of Group Research & Mercedes Car Group Development. This new area will continue to work as a research competence center for the entire Group, and will take on more responsibility for the prede- velopment activities of all the automotive divisions. This will shorten the launch periods for future technologies, enhance our customer focus and avoid the duplication of work. With this new organization, we will be able to apply our research and development expenditure more efficiently in the coming years. We are optimizing work processes and concentrating on those projects that create the maximum added value for our customers. In addition, we are intensifying the cooperation bet- ween the various internal research and development departments and with the supplier industry. We will establish more so-called “project houses” in which engineers from different countries and divisions will work together. We will increasingly utilize the possibilities of modularization and standardization, wherever this is compatible with the identity of our brands. For example, we will reduce the number of vehicle architectures in the com- ing years while significantly increasing the number of versions based on shared vehicle architectures. This strategy will en- able us to continue to offer a wide range of attractive new mod- els while achieving substantial savings with regard to material and development costs and further enhancing the quality of our products. Research and development expenditure In billions of € 2005 2006-2008 DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Other Activities 1 5.6 2.4 1.7 1.3 0.2 15.5 6.4 4.7 3.8 0.6 1 Excluding the Off-Highway business unit in the period of 2006 through 2008 During the period of 2006 through 2008, DaimlerChrysler will invest a total of €15.5 billion in its research and development activities. As a result of the targeted efficiency improvements, the annual expenditure will be slightly below the level of recent years in all of the automotive divisions. One focus of Daimler- Chrysler’s research and development expenditure will be on the new models planned by the Mercedes Car Group and the Chrysler Group. Some of the key projects in the Commercial Vehicles division are the new truck platforms and new engines fulfilling future emission regulations in the United States, West- ern Europe and Japan. Significant expenditure is also planned for new technologies with which we intend to improve the safety, environmental com- patibility and fuel economy of road vehicles. 68 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Workforce As a result of the anticipated production volumes and productivi- ty advances, DaimlerChrysler assumes that compared with the end of 2005, the size of its workforce will decrease continuously during the planning period of 2006 through 2008. Due to the sale of the Off-Highway business unit, the number of employees is likely to fall by around 7,000 in the first quarter of 2006. The staff-adjustment measures being taken at the Mercedes Car Group for its locations in Germany will result in a reduction of approximately 8,500 jobs by the end of September 2006. And the implementation of the new management model will lead to a reduction of around 6,000 jobs in administrative functions worldwide by the end of 2008. Forward-looking statements in this Annual Report: This Annual Report contains forward-looking statements that reflect management’s current views with respect to future events. The words “anticipate”, “assume”, “believe”, “estimate”, “expect”, “intend”, “may”, “plan”, “project” and “should” and similar expressions identify forward-looking statements. Such statements are sub- ject to risks and uncertainties, including, but not limited to: an economic downturn in Europe or North America; changes in currency exchange rates, interest rates and in raw material prices; introduction of competing products; increased sales incentives; the effective implementation of our New Management Model, and the CORE program, including the new business model for smart, at the Mercedes Car Group; renewed pres- sure to reduce costs in light of restructuring plans announced by our major competitors in NAFTA; supply interruptions of production materials, resulting from shortages, labor strikes or supplier insolvencies; the resolution of pending governmental investigations; and decline in resale prices of used vehicles. If any of these or other risks and uncer- tainties occur (some of which are described under the heading “Risk Report” on pages 58 ff in this Annual Report and under the heading “Risk Factors” in the Annual Report on Form 20-F filed with the Securities and Exchange Commission), or if the assumptions underlying any of these statements prove incorrect, then actual results may be materi- ally different from those expressed or implied by such statements. We do not intend or assume any obligation to update any forward-looking statement, which speaks only as of the date on which it is made. 69 Divisions DaimlerChrysler sold a total of 4.8 million vehicles in 2005 (+ 3%). The increase was primarily due to the success of the numerous new models that we launched during that year. Although its major new models were not available until the second half of the year, the Mercedes Car Group posted unit sales similar to the level of the prior year. The Chrysler Group slightly increased its unit sales compared with 2004, and the Commercial Vehicles division posted a significant rise. The Financial Services division continued its strategy of focusing on the core automotive business and supported the automotive divisions with tailored financial services. Our associated company, EADS, continued developing very positively during the year under review. 70 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contents 72 Mercedes Car Group 84 Financial Services • Attractive new models generate • Positive business developments sales momentum in 2005 • Greater efficiency due to CORE • Contract volume increases to €117.7 billion • Market presence established to China • Toll Collect system running smoothly in Germany; conversion to new OBU 2 software completed • Increase in operating profit 86 Other Activities • Significantly higher contribution to earnings from EADS • Agreement reached on sale of DaimlerChrysler Off-Highway business unit • Disposal of shares in Mitsubishi Motors Corporation program • Quality offensive takes effect • Operating profit negatively impacted by necessary workforce reductions and restructuring measures 76 Chrysler Group • Positive business developments in a difficult market • Improved manufacturing productivity and flexibility • New products successful in the market • Next product offensive in 2006 • Slight increase in operating profit 80 Commercial Vehicles • Favorable developments in global commercial-vehicle markets • Positive trend continues for all business units • Implementation of “Global Excellence” initiative • Numerous new products presented • Very high operating profit 71 Mercedes Car Group Attractive new models generate sales momentum | Greater efficiency through CORE program | Quality offensive takes effect | Operating profit negatively impacted by necessary workforce reductions and restructuring measures Amounts in millions of € % change 2005 2004 05/04 Operating profit (loss) Revenues Investments in property, plant and equipment Research and development expenditure Production Unit sales Employees (Dec. 31) (505) 50,015 1,666 49,630 1,629 2,343 2,418 2,634 1,214,855 1,246,726 1,216,838 1,226,773 104,345 105,857 . +1 -30 -8 -3 -1 -1 Business developments affected by new models and re- structuring measures. The Mercedes Car Group, comprising the brands Mercedes-Benz, Maybach, smart, Mercedes-Benz AMG and Mercedes-Benz McLaren, sold 1,216,800 vehicles in 2005 (2004 : 1,226,800). The success of the new models launched in the market led to significantly higher revenues for the Mercedes-Benz brand in the second half of the year. As a result, unit sales in 2005 were slightly higher than the figure recorded in 2004. Revenues of €50.0 billion slightly exceeded the prior year’s level. Within the framework of the CORE program, the Mercedes Car Group initiated various measures to boost efficiency during 2005, leading to a substantial improvement in profitability as the year progressed. Nevertheless, the division posted an operating loss of €505 million for the full year (2004: operating profit of €1.7 billion). This decline in profitability was primarily caused by two factors: on the one hand the special charges of €1.1 billion associated with the realignment of the business model at smart, and on the other hand expenses of €570 million related to the announced workforce reductions at the Mercedes Car Group’s locations in Germany (see page 39). Mercedes-Benz successfully launches new models. The Mercedes-Benz brand introduced four important new models in 2005: the successor models for the M-Class and S-Class, and the new B-Class and R-Class Sports Tourers. Engine line- ups were significantly upgraded with the launch of the new generation of V6 and V8 gasoline and diesel engines. Thanks to the success of the new models and engines, unit sales of the Mercedes-Benz brand rose 2% to 1,092,500 vehicles in 2005, despite difficult market conditions. Unit sales in the United States increased by 4%, and sales in Western Europe excluding Germany were up 2% from the figure recorded in 2004. In Germany, however, an intensely competitive environment and consumers’ reluctance to buy in the run-up to model change- overs led to a 5% decline in sales. The Mercedes-Benz brand was particularly successful in Asia in the year under review. Unit sales in Japan increased by 18% in 2005, and we sold 11,500 vehicles in the rapidly growing Chinese market, an increase of 18% from the figure recorded in 2004. Unit sales of the S-Class in 2005 did not reach the prior year’s level due to consumers’ reluctance to buy prior to the model changeover in October. Although model lifecycle factors led to a decline in C-Class sales, the new V6 gasoline and diesel en- gines – as well as the new Sport Edition – generated positive sales momentum in the second half of the year. Although unit sales did not equal the prior-year figure, the E-Class remained the clear leader in its segment with a global market share of 27% in 2005. The CLS coupe was a particularly successful mem- ber of the E-Class model family, recording sales of 51,600 units (2004: 8,100). Unit sales of the new A-Class, of which the successor model was launched in 2004, were much higher in 2005 than in the prior year, and sales of M-Class vehicles rose significantly following the model changeover. 72 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information With the innovative R-Class, Mercedes-Benz affirms its role as a technology leader and trendsetter in the automotive industry. New S-Class features numerous innovations. The Mercedes Car Group unveiled the new S-Class at the International Motor Show (IAA) in Frankfurt in September 2005. The model was sub- sequently launched in Western Europe and has met with an ex- tremely positive response from customers and the press. With its numerous innovations, the new S-Class continues the tradi- tion established by the world’s most successful sedan in the lux- ury segment. Exemplary safety and the highest levels of comfort remain the outstanding attributes of the S-Class. Following in the footsteps of its predecessors, the new S-Class introduces numerous technical innovations as standard features: the “anti- cipatory” Brake Assist BAS PLUS system, DISTRONIC PLUS prox- imity cruise control, the PRE-SAFE® precautionary occupant protection system, and the new night vision system offer the latest advanced technology for accident prevention. At the same time, the highest levels of driving comfort are guaranteed by a new dynamic multi-contour seat, the Active Body Control system (ABC), the further refined AIRMATIC suspension system, and an all-new automatic climate control system. As a preview of the drive systems of the future, we also presented two visions of the new S-Class with hybrid drive at the IAA: the Direct Hybrid (in combination with a gasoline engine) and the BlueTec Hybrid (with a diesel engine). Sales of the new S-Class sedan totaled 20,500 units by the end of the year under review. B-Class and R-Class launch the Sports tourer segment. The Mercedes-Benz brand expanded its range of products in 2005 to include two completely new vehicles: the B-Class and the R-Class. These two sports tourer models combine the advantages of sporty sedans, station wagons, vans and sport-utility vehicles (SUV) into an independent individual profile, thereby enabling us to win over new customer groups for the Mercedes-Benz brand. The B-Class, which has been available in Europe since June 2005, met with a very positive response from our customers and the media, a fact that was reflected in the excellent unit sales figure of 62,200 vehicles for the model’s first year on the market. The space-saving arrangement of the engine and transmission in the B-Class is based on the sandwich concept used in the A-Class. It enables the new Sports tourer to offer the interior spaciousness of larger sedans and station wagons despite its compact outer dimensions. The model’s EASY-VARIO system makes it possible to alter the design of the interior in a great variety of ways with just a few manual adjustments. The R-Class, which we launched in the United States in Septem- ber 2005, is outstanding for its innovative interior concept, extra- ordinary design, and the dynamic handling of an upper-range automobile. The highest levels of safety are provided by perma- nent all-wheel drive, pneumatic suspension at the rear axle or all-round AIRMATIC suspension, the 4ETS electronically controlled traction system, and ESP®. A total of 8,300 R-Class sports tour- ers were sold in the United States in the year under review. A shorter version of the model will go on sale in Western Europe in the spring of 2006. Refined power in the new M-Class. The new M-Class has met with a very positive response among customers and the press. A total of 66,900 new M-Class vehicles have been sold since the model was launched in the United States in April 2005 and in Western Europe the following August. The new M-Class under- scores its exceptional position in the off-road segment with its state-of-the-art technology and three powerful new engines. The model was one of the first SUVs to be awarded five stars (the best possible result) in both the front and side-impact tests con- ducted by the National Highway Traffic Safety Administration in the United States. 73 The Maybach 57 combines luxury and driving dynamics at the highest level: state-of-the-art technology and high per- formance with the perfection appropriate for this brand. Product offensive continues with launch of numerous at- tractive new products. The E 320 BLUETEC was unveiled at the North American Auto Show in Detroit in January 2006. Featur- ing the world’s cleanest diesel engine, this car will be launched in the United States in the fall of 2006. With this first series- version BLUETEC passenger car, Mercedes-Benz will establish “BLUETEC” as the name of a generation of particularly econo- mical and clean diesel engines. To great acclaim, Mercedes-Benz also presented the new GL-Class, a new model in the growth segment of large SUVs. The R-Class with a wheelbase appropri- ate to European requirements debuted in February 2006. As the year progresses, we will launch the technically all-new gen- eration of the E-Class, the new high-end coupe – the CL-Class, and the upgraded SL-Class. A successful year for Mercedes-Benz in motor sport. 2005 was a successful year in motor sport for Mercedes-Benz. The brand finished second in both the Formula One Drivers’ and Con- structors’ championships, first in the Driver, Team, and Manu- facturer classifications in the German Touring Car Masters (DTM), and first in the Drivers’ and Constructors’ championships in the Formula 3 Euro Series. Mercedes-Benz won 36 of the 49 races the brand participated in: McLaren-Mercedes drivers finished first in ten of 18 Formula One Grand Prix races, the C-Class was the winning vehicle in eight of eleven DTM races, and Mercedes engines were victorious in 18 of 20 Formula 3 races. Quality offensive takes effect. The extensive measures being implemented within the framework of our quality offensive en- abled us to significantly improve the quality of our vehicles in the year under review. Internal analyses as well as numerous ex- ternal studies have shown this to be the case. In the 2005 J.D. Power Initial Quality Study, for example, the Mercedes-Benz brand moved up five notches and is now once again among the top five vehicle brands. Mercedes-Benz passenger cars were also rated among the best automobiles in three vehicle classes in the German ADAC breakdown statistics. These successes represent only an initial step, however, as we continue to pursue our objective of making our products number one in the world when it comes to quality. 74 Consistent implementation of the CORE program. In Feb- ruary 2005, we launched the efficiency-improving CORE program as a means of returning the Mercedes Car Group to lasting competitiveness. Our objective here is to achieve a return on sales of 7% by 2007. We systematically examined the entire value chain of the Mercedes Car Group in seven different task areas in terms of efficiency, costs and quality. Then, in the ini- tial phase of CORE, we began implementing measures designed to achieve a short-term improvement in earnings. Examples of such measures included reducing expenditures for materials, personnel, energy and information technology, and simplifying warehouse logistics systems. In addition, we examined all our current projects and canceled those vehicle and engine pro- jects that promised to be unprofitable. Some of these measures began taking effect in 2005, as reflected in the development of earnings throughout the year. The second phase of CORE, which began in September 2005, involves the implementation of structural measures, whereby our ultimate goal is to be able to develop, produce and sell first-class products of the highest quality under competitive conditions. To do this, we have to make our processes faster, leaner and better, reduce our costs, and focus on the essentials. Workforce reductions at German locations. In view of the on- going difficult market situation and intensely competitive con- ditions, an adjustment of capacities at the Mercedes Car Group in conjunction with efforts to increase productivity had become unavoidable. For this reason, at the end of September 2005, the Board of Management approved a package of measures calling for workforce reductions of 8,500 persons at the Mercedes Car Group locations in Germany. This headcount reduction, to be achieved through voluntary agreements within a period of twelve months, is designed to help secure the competitiveness of Ger- man locations — and thus the success of the Mercedes Car Group – over the long term. By the end of 2005, approximately 5,000 employees had signed agreements on their departure from the Mercedes Car Group or had already left. This means that just three months after the start of the voluntary program, about 60% of the twelve-month goal had been already been achieved. €570 million of the approximately €950 million in total charges associated with the workforce reductions were already recognized in the fourth quarter of 2005. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The smart fortwo convertible is less than three meters long, stylish in all situations, and has built-in safety: the smart fortwo has got what it takes. And with fuel consumption of 3.4 liters per 100 kilometers, the cdi version is the world’s best-selling “three-liter” car. Maybach expands its product range. The Maybach high-end luxury brand expanded its range of models in 2005, thereby further boosting the brand’s appeal. The exclusive Maybach 62 and 57 models were joined by the even more powerful and versatile Maybach 57 S at the end of the year. Since the brand was revived, Maybach has delivered some 1,500 vehicles around the world in an economic environment that has been challeng- ing also for the luxury car sector. 300 of these automobiles were delivered in 2005. smart improves its position in a contracting market. Unit sales of the smart brand totaled 124,300 vehicles in the year under review (2004 : 152,100). This figure can be broken down into 43,700 smart forfour vehicles (2004 : 59,100), 75,300 smart fortwo cars (2004 : 79,500), and 5,300 smart roadsters (2004 : 13,600). As retail sales increased to a total of 143,100 vehicles (2004 : 139,600), dealers’ inventories were significantly reduced during the year. The most important sales markets for the smart brand remained Germany (35,000 units; - 28%) and Italy (30,800 units; - 22%). A big success for the smart brand was the launch of the smart fortwo cdi in Canada, where we sold 4,100 units of that model in 2005 – significantly more than originally anticipated. The smart fortwo cdi remains the world’s best-selling “three-liter” car (with fuel consumption of 3.4 liters per 100 kilometers). Beginning in the spring of 2006, it will be possible to retrofit diesel-particulate filters in all smart diesel cars. At the same time, our smart forfour diesel models will be fitted with diesel filters; smart fortwo diesel models have been fitted with this equipment since January 2006. smart implements its restructuring program. Within the framework of the restructuring program initiated for smart in April 2005, we discontinued production of the smart roadster and development of the planned smart SUV. The workforce was reduced from 1,350 to 750 employees at smart headquarters, and there was a reduction of 125 employees at the Hambach plant. We also restructured our marketing activities and ex- panded our dealership network from 930 to 1,120 sales outlets. In addition, we incorporated smart’s procurement, design, aftersales and IT into the Mercedes-Benz organization. As a re- sult of these measures, we succeeded in reducing fixed costs at smart by 26% in the year under review. Unit sales 2005 1 Mercedes-Benz of which: S-Class/SL/Maybach/SLR E-Class/CLS C-Class of which: CLK SLK Sports coupe A/B-Class M/R-Class G-Class smart Mercedes Car Group of which: Germany Western Europe (excluding Germany) NAFTA United States (retail sales) South America Asia/Oceania (excluding Japan) Japan 1 Group sales, unless otherwise indicated (including leased vehicles) 1,000 units 1,093 72 265 398 58 59 33 263 90 5 124 1,217 355 422 254 224 10 74 48 05/04 % change +2 -17 -10 -16 -27 +10 -29 +84 +27 -16 -18 -1 -8 -3 +6 +1 -2 +11 +17 75 Chrysler Group Positive business developments in a difficult market | Improved manufacturing productivity and flexibility | New products successful in the market | Next product offensive in 2006 | Slight increase in operating profit Amounts in millions of € % change 2005 2004 05/04 Operating profit Revenues Investments in property, plant and equipment Research and development expenditure Production Unit sales Employees (Dec. 31) 1,534 50,118 1,427 49,498 3,083 2,647 1,710 1,570 2,760,467 2,652,186 2,812,993 2,779,895 83,130 84,375 +7 +1 +16 +9 +4 +1 -1 Continuation of positive business developments. Although market conditions remained difficult in North America, business developments at the Chrysler Group were generally positive in 2005, primarily due to successful new products and measures taken to reduce costs and improve quality. This was also re- flected by the division’s operating profit, which increased slight- ly to €1.5 billion (2004: €1.4 billion) (see page 40). Worldwide, the Chrysler Group posted factory unit sales (ship- ments to dealers) of 2.8 million Chrysler, Jeep® and Dodge brand passenger cars, sports tourers, minivans, sport-utility vehicles and light trucks in 2005, an increase of 1% compared to the prior year. The United States was the largest market with 2.3 million vehicles (+ 1%), followed by Canada with 209,900 vehicles (-1%) and Mexico with 122,500 vehicles (+ 11%). The Chrysler Group also shipped 175,200 vehicles to markets out- side the NAFTA region, an increase of 3% over the prior year. Worldwide retail and fleet sales increased by 5% to 2.8 million vehicles, with fleet sales accounting for 26% of total US sales (2004: 22%). Due to higher unit sales, the Chrysler Group’s revenues of €50.1 billion were 1% above the prior-year level. 76 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The 2007 Dodge Caliber is a five-door vehicle that provides a new slant on one of the world’s most competitive segments. Improved position in the US market. The Chrysler Group in- creased its retail and fleet sales in the US market by 4% to 2.3 million vehicles. Its market share rose to 13.2% (2004: 12.8%). It improved its market position not only in the passenger-car and sports-tourer segments, but also with minivans and SUVs. Successful models once again were the Chrysler 300/300C with sales of 144,000 vehicles (+ 35%), the Dodge Magnum with 52,500 vehicles sold (+ 34%), and the Jeep® Grand Cherokee with 213,600 units (+ 18%). Unit sales of Chrysler and Dodge mini- vans increased due to the ongoing success of the innovative Stow’n GoTM seating and storage system by 5% to 407,500 vehi- cles. The Chrysler Group also achieved sales increases with the models Dodge Sprinter (+92%) and Chrysler PT Cruiser (+15%). However, sales of the Dodge Durango and the Dodge Ram decreased by16% and 6%, respectively. Although they were not available until May and September, 44,800 and 17,000 units were sold of the all-new Dodge Charger and Jeep® Commander respectively. At the end of the year, dealers in the United States had inven- tories totaling 598,200 vehicles, equivalent to 85 days’ supply (end of 2004: 600,600 vehicles and 81 days). Product offensive in 2005. In addition to improving efficiency and product quality, another strategic goal of the Chrysler Group is to achieve a sustained improvement in its competitive posi- tion as a result of launching new models. Therefore, the Chrysler Group continued its product offensive in 2005 with award-win- ning products such as the Dodge Charger, the Jeep® Commander and the new Dodge Ram Mega Cab pickup truck. The Dodge Charger sports sedan was selected as “Best Vehicle” in the large-car category by Consumer Guide magazine. The police-car versions of the Dodge Charger and Dodge Magnum models, equipped with either a 3.5-liter V6 or a 5.7-liter HEMI- V8 engine, achieved best-in-class rankings in the Michigan State Police vehicle evaluation program. The Jeep® Commander, the first Jeep® with three rows of seats, has drawn strong reviews from the general public and the media. And the Dodge Ram Mega Cab pickup truck with its best-in-class interior room, maximum power and payload capability secured Truckin’ magazine’s “Truck of the Year” title. Finally, to satisfy the growing demand for vehicles with all- round high performance, the Chrysler Group expanded its SRT (Street and Racing Technology) line-up with five new vehicles: the Chrysler 300C SRT8, the Dodge Charger SRT8, the Dodge Magnum SRT8 and the Dodge Viper SRT10 sports coupe; the Jeep® Grand Cherokee SRT8, the most powerful Jeep® vehicle ever, will arrive in dealerships in early 2006. Expanded product range also outside North America. Midterm, the Chrysler Group plans to further develop its pres- ence in international markets. In 2005, the Chrysler Group also expanded its range of products available in international mar- kets with diesel and right-hand-drive versions of the Chrysler 300C and the improved PT Cruiser with a significantly upgraded 2.2-liter diesel engine. In the second quarter of 2005, the Jeep® Grand Cherokee was introduced for customers outside North America with an all-new V6 diesel engine. Since July 2005, the new Jeep® Grand Cherokee has been as- sembled for international markets by Magna Steyr in Graz, Aus- tria. This plant also produces sedan and touring versions of the Chrysler 300C, as well as the Chrysler Voyager and Grand Voyager minivans with the Stow’n GoTM seating and storage system. In total, 79,500 vehicles were produced under license in Graz in 2005 (2004: 64,000). Starting in early 2006, the Jeep® Commander will also be built in Graz. Additionally, Chrysler Group will launch the Dodge brand in markets outside North America and plans to substantially add to the portfolio of products offered. 77 The 2007 Jeep® Compass with its modern, urban styling, is designed to appeal to a new class of entry-level Jeep buyers. In September 2005, the Chrysler Group announced that Beijing- Benz-DaimlerChrysler Automotive, Ltd. (BBDCA), a joint venture between DaimlerChrysler AG, DaimlerChrysler (China), Ltd. and Beijing Automotive Industry Holding Co., Ltd. (BAIC), will begin production of the Chrysler 300 sedan for the Chinese market at the end of 2006. In addition, license agreements have been finalized for the production of minivans in China and Taiwan. Increased manufacturing productivity. By the year 2007, the Chrysler Group aims to close the gap with the best competitors in the North American market in terms of vehicle quality and pro- ductivity. In 2005, additional measures were taken to achieve further productivity improvements and to optimize manufactur- ing processes, including more intensive support and training for assembly employees. In cooperation with the United Automo- bile, Aerospace, and Agricultural Implement Workers of America (UAW), new workplace practices are being introduced that are designed to foster greater creativity and innovation among pro- duction staff while improving their working environment. The results of the measures that have been implemented in recent years can be seen in the Harbour Report North America 2005 – a highly respected report measuring the productivity of automobile manufacturers in North America. Harbour’s latest study shows that the Chrysler Group once again reduced its overall hours per vehicle, by 4.2% to 35.85 hours in 2004, and Chrysler Group plants are at the top of their respective seg- ments: subcompact cars, minivans, front- and rear-wheel drive transmissions, and engine production. Over the last three years, the Chrysler Group has improved its manufacturing productivity by an industry-leading 19%. More flexibility in the plants. In order to make the plants even more flexible and competitive, new manufacturing technologies and processes have been added, so that multiple vehicles can be assembled on the same line. The latest example of this is the Toledo North Assembly Plant (TNAP) in Ohio, where the new Dodge Nitro will be produced alongside the Jeep® Liberty. And in 2006, the Belvidere Plant will lead the Chrysler Group in manufacturing flexibility, starting with the Dodge Caliber and the Jeep® Compass and a third model in late 2006. Pioneering agreement signed with trade union. Another important factor to increase flexibility and reduce costs in the Company’s Canadian plants is the new three-year collective- bargaining agreement signed with the National Automobile, Aero- space, Transportation and General Workers Union of Canada (CAW) in September 2005. This agreement reduces the annual rate of increase in wages and retirement-pension and health- care costs by more than half compared with historic trends, while giving the Chrysler Group enhanced flexibility with regard to personnel deployment and workplace practices. Production start of World Engine. The Chrysler Group is forging new paths in the development and manufacture of engines. In October 2005, the Global Engine Manufacturing Alliance (GEMA), a joint venture between the Chrysler Group, Hyundai Motor Company and Mitsubishi Motors, started the series production of the World Engine at a new manufacturing facility in Dundee, Michigan. This engine was jointly developed by the three partners and forms a platform for small, economical and low-emission four-cylinder gasoline engines. 78 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The 2007 Chrysler Aspen – the first Chrysler SUV – offers elegant Chrysler styling, capability, performance and abundant premium amenities. The new World Engine family, with 1.8, 2.0 and 2.4-liter versions, will be offered by the Chrysler Group starting in 2006 with the Dodge Caliber, followed by other models. At the end of 2006, a second plant will commence production in Dundee, Michigan. Together with two other World Engine plants in South Korea and a plant in Japan, the maximum production capacity for the World Engine will be approximately 1.8 million units. GEMA is a completely new business model, bundling the strengths of the individual partners and achieving substantial cost advanta- ges from the high volume of output. Due to the flexible use of highly-qualified personnel and state-of-the-art manufacturing technology, GEMA is expected to set new productivity stan- dards for engine production. Attractive new products in 2006. The Chrysler Group will launch 10 all-new products in 2006 – more than in any other year in its history – including the Chrysler Aspen, the Jeep® Wrangler, the Jeep® Compass, the Dodge Caliber and the Dodge Nitro. The 2007 Chrysler Aspen – the first Chrysler SUV – offers elegant Chrysler styling, capability, performance and abundant premium amenities. It is the latest addition to the Chrysler brand showroom - a premium SUV that’s a value alternative to luxury-priced competitors. The all-new Dodge Caliber combines a sporty, coupe-like profile with the strength and functionality of an SUV. It will be the first compact vehicle from the Chrysler Group to be offered with all-wheel drive, and the first Chrysler Group vehicle to be fitted with all versions of the new World Engine. In Europe and other markets outside North America, the Dodge Caliber will be offered with a 2.0-liter turbo-diesel engine. The five-passenger Dodge Nitro will be a mid-size SUV designed to attract a customer seeking distinctive style, sporty performance and cargo flexibility. At the Frankfurt International Motor Show (IAA) in September 2005, the Jeep® brand hinted at its planned portfolio expansion with the world premiere of the Jeep® Patriot and the Jeep® Compass concept vehicles. In 2006, the Chrysler Group will begin production of two new SUVs for global markets inspired by these vehicles. The powerful yet fuel-efficient 2.4-liter World Engine and the state-of-the-art 2.0-liter turbo-diesel (for inter- national markets) will be available for these compact SUVs. Unit sales 2005 1 Total thereof: Passenger cars Light trucks Sports tourers Minivans SUVs United States Canada Mexico Other markets 1 Factory shipments (including leased vehicles) 1,000 units 2,813 644 589 298 551 731 2,305 210 123 175 05/04 % change +1 +6 -12 +6 +7 +3 +1 -1 +11 +3 79 Commercial Vehicles Favorable developments in global commercial-vehicle markets | Positive trend continues for all business units | Implementation of “Global Excellence” initiative | Numerous new products presented | Very high operating profit 2005 2004 05/04 Amounts in millions of € % change Operating profit Revenues Investments in property, plant and equipment Research and development expenditure Production Unit sales Employees (Dec. 31) 2,093 40,634 1,332 34,764 1,743 1,184 1,281 834,657 824,867 117,183 1,226 718,787 712,166 114,602 +57 +17 +47 +4 +16 +16 +2 Unit sales, revenues and operating profit up sharply. In 2005, the Commercial Vehicles division built on the very positive developments of the prior year, increasing unit sales by 16% to a new record of 824,900 trucks, vans and buses. Revenues at the division rose by 17% to €40.6 billion. At €2.1 billion, operating profit was significantly higher than the €1.3 billion recorded in 2004 (see page 40). Very positive development of truck sales in all major mar- kets. The Trucks business segment again posted a significant increase in sales in the year under review: Unit sales of 509,300 trucks exceeded the prior year’s figure by 25%. This positive development was due not only to ongoing very favorable devel- opments in all key markets, but also to the great success en- joyed by our attractive products as well as the consolidation for the full year of the FUSO business unit, which was only consoli- dated for eight months of the prior year. Sales record at Trucks Europe/Latin America. Unit sales at the Trucks Europe/Latin America business unit totaled 148,000 vehicles, an increase of 8% from the prior year – and also a new record. High rates of growth were recorded in all important Western European markets, as well as in Turkey and the Near and Middle East. In Western Europe, the Mercedes-Benz brand maintained its leading position in the segment for medium and heavy-duty trucks by posting unit sales of 74,100 vehicles (2004: 66,100) and gaining a market share of 22% (2004: 22%). With unit sales of 36,000 vehicles (2004: 32,900), Germany was the most important market for Mercedes-Benz trucks in Western Europe. Market share in Germany reached 42% in 2005 (2004: 42%). Sales of the high-quality Actros truck developed particularly well throughout the year. 80 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information From the premium product portfolio of DaimlerChrysler, the world's largest manufacturer of commercial vehicles with strong, attractive brands: the Mercedes-Benz Actros, the Freight- liner Coronado and the FUSO Canter. (from left to right) Truck sales also increased slightly in Latin America (excluding Mexico) to 31,300 units. We confirmed our leading position in Brazil in the year under review, attaining a market share of 31%. This was due in particular to our successful products featuring high levels of customer utility in the category of heavy- duty trucks. Sharp increase in North American sales. The Trucks NAFTA business unit posted a 20% increase in sales to 182,400 units in 2005. Market volume rose particularly sharply in the Class 8 segment (heavy-duty trucks over 15 metric tons gross vehicle weight). Sales of the Freightliner, Sterling and Western Star brands in this segment were up 28% to 111,900 units, and market share for those brands rose from 35% to 36%. The Trucks NAFTA unit sold 51,200 vehicles in Classes 5-7 (medium-duty trucks), gaining a market share of 23% (2004: 50,500 vehicles and 25% market share). As part of the “Global Excellence” initiative and the associated portfolio review, Commercial Vehicles sold its American LaFrance firefighting and rescue-vehicle business to the investment firm Patriarch Partners, LLC in December 2005. Development activities at the division in the year under review focused on chassis, cabs and engines. Among other things, this was due to the preparations associated with the more strin- gent emission regulations planned in the US (EPA07), which will come into force in January 2007. The share of Group-pro- duced major components used in Freightliner and Sterling trucks was further increased. FUSO strengthens market position in Asia. The FUSO busi- ness unit sold 178,900 trucks and buses worldwide in 2005. A total of 59,000 of these vehicles were sold in the brand’s home market of Japan, while 119,900 were sold in other countries. Due to the date of FUSO’s first-time consolidation, the prior-year figure of 118,100 vehicles sold applies only to eight months of 2004. Market volume for commercial vehicles declined in Japan in the first half of 2005, only to recover sharply as a result of higher demand in the second half of the year. This recovery also resulted from purchases brought forward due to the upcoming JPN 05 emission regulations, which will have to be fulfilled by all com- petitors as of September 2007. FUSO’s market share in Japan fell from 27% to 23% as a result of the 2004 recall measures and the temporary exclusion of the brand from public-sector invita- tions to tender. Sales outside Japan rose, however, primarily dri- ven by the solid development of export markets, purchases brought forward in advance of more stringent emission regula- tions, and the introduction of the new generation of the Canter light truck. 81 Presentation of pioneering new products and technologies. In early 2005, we began offering the Viano van with a diesel- particulate filter as standard equipment. And the Vito van is the only vehicle in its class to offer such a filter as an option. We presented the new Viano 4MATIC with all-wheel drive at the In- ternational Motor Show (IAA) in Frankfurt in September 2005. At the Amsterdam Commercial Vehicle Show in October 2005, the Trucks Europe/Latin America business unit presented a range of impressive new truck products, such as the Actros “Cruiser” 1860 LS concept truck and equipment for new appli- cations for Axor construction vehicles. We also unveiled our BlueTec diesel technology for the Atego and Axor truck series and presented the new hybrid-drive Canter light truck. 8,600 trucks with BlueTec were already sold in 2005. The Vito 4x4 van with all-wheel drive also debuted in Amsterdam. At the technology conference in Papenburg in the fall of 2005, we presented safety innovations such as an emergency braking system for the Actros truck, which will be available as of June 2006 as the “Active Brake Assist”, as well as alternative drive con- cepts such as natural gas and hybrid drive for trucks and vans. The new Mercedes-Benz Sprinter is a pioneer for automotive safety. The safest van in its class, the Mercedes-Benz Viano was awarded five stars in the EURO NCAP test. Record sales by the Vans business unit. The Vans business unit also set a new sales record, selling 267,200 vehicles world- wide, an increase of 2%. This sales growth was mainly due to significantly higher demand for the Sprinter van, which set a new sales record of 164,000 units in its last year of production (2004: 151,300). More than 1.3 million Sprinter vans were sold throughout the model’s entire product lifecycle, underscoring the Mercedes-Benz Sprinter’s position as the benchmark for its class over the last ten years. We have unveiled the successor to the Sprinter at the end of the year 2005 to the press. Whereas unit sales of vans in Europe were slightly lower than in the prior year, sales increased in the NAFTA region. With a market share of 16% (2004: 17%), the business unit maintained its leading position in the segment for medium and large vans in Western Europe in the year under review. As a result of their excellent handling, comfort, functionality and design, the Vito and Sprinter models were named “Courier, Express and Parcel Van of the Year 2005” in their respective segments. The trade magazine “Firmenauto” also presented both models with awards for their active-safety systems. In addition, the Viano van received five stars (the top rating) for its high safety standards in a comparative test conducted by Dekra, a German certification organization. Bus and coach sales increase. Worldwide sales by the Buses business unit with the brands Mercedes-Benz, Setra and Orion rose by 10% to 36,200 buses, coaches and chassis. The success of our products enabled us to expand our leading position in the class of buses over 8 metric tons gross vehicle weight by increasing our global market share to 17% from 16% in 2004. The Buses business unit sold 8,400 vehicles (2004: 8,800) in Eu- rope. Unit sales in South America were up 2% to 14,600 vehicles. With a market share of 49%, we were able to maintain our leading position in this region as well. In Mexico, we succeeded in ex- panding our leading market position with sales of 5,800 buses, coaches and chassis (up 28%) and a market share of 55% (2004: 53%). The Buses business unit was also very successful in the Middle East region, selling 2,300 units (2004: 400), most of which were chassis built in Brazil. 82 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information A new era for large city buses: the Mercedes- Benz “CapaCity” - 19.54 meters long. The Buses segment continued its product offensive in Europe. The unit’s full-line range of products was expanded in the fall of 2005 to include the new generation of the Mercedes-Benz Tra- vego travel coach, the new Mercedes-Benz Citaro Low Entry urban and overland bus, and the new Setra MultiClass 400 overland bus. Our broad range of environmentally friendly drive systems, such as the fuel-cell drive used in Mercedes-Benz Citaro urban buses and the hybrid drive used in Orion-brand buses in North America, once again confirmed our leadership in innovation and technology for buses in the year under review. Success with “Global Excellence”. The Commercial Vehicles division presented its “Global Excellence” program in June 2005. This program is based on four initiatives and should improve the competitiveness of all of the division’s business units. The “Optimizing the Business Model” initiative includes measu- res to reduce the division’s susceptibility to cyclical fluctuations and to ensure that it remains profitable even in years when com- mercial vehicle markets are sluggish. The “Operational Excel- lence” initiative focuses on reducing material costs and fixed costs, optimizing processes worldwide and creating greater flexibility at the division’s production plants. The primary focus of the “Growth in Global Commercial Vehicle Markets” initia- tive is on intensifying activities in Asian markets with high growth potential. The FUSO business unit plays a key role in the latter initiative, which will integrate it more firmly into the Trucks seg- ment. The goal of the fourth initiative – “Future Product Gene- rations” – is to consolidate and expand the division’s innovation leadership through the introduction of new technologies and products. Unit sales in 2005 1 in 1,000 05/04 units % change Total thereof: Vans Trucks 2 Buses & Coaches Other products 3 Europe thereof: Germany Western Europe (excluding Germany) thereof: United Kingdom France Italy NAFTA thereof: United States South America thereof: Brazil Asia/Australia 825 267 502 44 12 322 111 166 36 32 18 218 183 62 35 181 1 Group sales (including leased vehicles) 2 Including school buses from Thomas Built Buses and chassis from Freightliner 3 Mitsubishi L200 pickup and Mitsubishi Pajero manufactured in South Africa +16 +2 +24 +18 +12 +1 -0 +2 -2 +7 +1 +23 +21 +11 -2 +39 83 Financial Services Positive business developments in 2005 | Contract volume increases to €117.7 billion | Market presence established in China | Toll Collect system running smoothly in Germany; conversion to new OBU 2 software completed | Increase in operating profit Amounts in millions of € Change in % 2005 2004 05/04 Operating profit Revenues Contract volume Investments in property, plant and equipment Employees (Dec. 31) 1,468 15,439 117,724 1,250 13,939 102,399 45 91 11,129 11,224 +17 +11 +15 -51 -1 Stable business development at DaimlerChrysler Financial Services. The Financial Services division once again developed very positively in all regions in 2005. Contract volume rose by 15% to €117.7 billion; when adjusted for exchange-rate effects, con- tract volume increased by 3%. At the end of the year, Financial Services’ global portfolio comprised 6.4 million leased and fi- nanced vehicles. New business totaled €48.2 billion in an ex- tremely competitive market environment in 2005 (2004: €50.9 billion). Operating profit rose by 17% from the prior year to €1.5 billion. DaimlerChrysler Financial Services employed 11,129 people worldwide at the end of 2005, similar to the number a year earlier (see page 41). In line with our strategy of clearly focusing on financial services along the automotive value chain, we renamed the division DaimlerChrysler Financial Services at the beginning of 2005. The new name reinforces the identity of Financial Services. It also sends a clear message that the division is a global provider of excellent financial services and a source of effective sales support for the automotive brands within the DaimlerChrysler Group. Improved cooperation with dealers and vehicle brands in North and South America. As part of an organizational re- structuring program, we combined all of our financial services activities in North and South America into the “Americas” re- gion. Contract volume in this region increased by 18% to €85.9 billion, accounting for 73% of the total portfolio; when adjusted for exchange-rate effects, the increase was 1%. New business in the region decreased from €35.1 billion to €31.8 billion. This was a result of adjustments made to incentive programs in the form of the Bonus Cash program at Chrysler Financial. Such changes had caused a substantial increase in new business in the prior year. We further expanded our close cooperation with the Group’s vehicle brands in 2005. Detailed discussions with dealers led to the creation of new financial products for contract extensions (bridge leases) and for the signing of new leasing and financing contracts ahead of time (lease pull-ahead). Demand for Freight- liner trucks was very high in the year under review. In order to accelerate delivery of Freightliner trucks to customers, we op- timized our credit-approval processes in the Truck Financial unit by carrying out creditworthiness checks at an earlier stage. In addition, we expanded the passenger-car financing process to include a new module for electronic contracts (eContracts), which was tested in pilot operation. Processes for credit appli- cations and checking contract data underwent further auto- mation in the year under review, resulting in even better quality of service for our dealers. Surveys of Chrysler and Mercedes- Benz dealerships conducted by J.D. Power and Associates con- firmed that our dealers are very satisfied with the financial services we provide. 84 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler Financial Services is the first choice provider of financial services for all of the Group's brands, and now has more than six million leasing and financing contracts. Positive business development in the Europe, Africa, Asia/ Pacific region. The Europe, Africa, Asia/Pacific region also developed positively in 2005. At €31.8 billion, contract volume was up 8% from the prior year. Business developments were particularly dynamic in South Africa, Turkey and Thailand. The portfolio in the core European markets of the United Kingdom, Italy and France remained stable at €7.3 billion. Contract vol- ume in the eastern European countries of Poland, Hungary, the Czech Republic, Slovakia and Slovenia rose by 7% to €0.9 bil- lion. In Germany, DaimlerChrysler Bank, our largest company in this region, provided attractive products that once again led to an increase in leased and financed vehicles’ share of the total number of Group-brand vehicles sold. The bank managed a con- tract volume of €15.2 billion at the end of the year under re- view (2004 : €14.5 billion), serving some 987,000 customers, or 7% more than in 2004. Contract volume in the Africa and Asia/ Pacific region increased by 23% to €5.4 billion. New financial products and our penetration of new markets en- abled us to further consolidate our position as a captive financial services provider in 2005. By standardizing processes for cre- dit and contracts, we were able to improve our cost situation and thus also our competitive position. We are now the first automotive financial services company to have launched a European platform for asset-backed securities (ABS). This platform enables our European subsidiaries to securitize automotive credit receivables and place them on the capital market. In November 2005, the division became the first financial servi- ces company to offer passenger car and truck financing, as well as insurance, in China. The offerings target both dealers and retail customers. Through its activities, Financial Services is supporting the DaimlerChrysler Group as it enters this stra- tegically important market. Our activities in China will initially focus on the fast-growing business centers of Beijing, Shang- hai and Guangzhou. Fleet Management expands its international presence. The Fleet Management unit benefited from the growing demand for comprehensive multi-brand fleet management solutions in the year under review. The unit offers everything from con- sulting and vehicle procurement services (including financing and leasing solutions) to fleet-related activities such as fleet- vehicle resale and disposal services and the provision of infor- mation for supporting fleet management. The services pro- vided by Fleet Management are geared toward local fleet opera- tors as well as companies that operate large international fleets. Our objective with regard to both customer groups is to provide optimal service to new and existing customers and to make them better acquainted with the products of the Daimler- Chrysler Group. We further expanded our presence in Europe with the inclusion of fleet management in the product portfolio of our Swiss subsidiary, and we now offer fleet management solutions and services in 12 countries around the world. Toll Collect system for trucks is running smoothly. The toll collection system successfully launched in Germany at the be- ginning of 2005 for trucks over 12 metric tons gross vehicle weight has proved to be reliable and has remained extremely sta- ble even when pushed to maximum capacity. A total of 482,000 of the first-version on-board units (OBU 1) were in use in the year under review, with the Toll Collect system registering 24 billion kilometers traveled. The new OBU 2 on-board unit soft- ware, which makes it possible to update operating information via mobile telephony, was gradually installed in trucks through- out 2005, and the switch from OBU 1 to OBU 2 took place on schedule on January 1, 2006. DaimlerChrysler Financial Services holds a 45% share in the Toll Collect consortium. 85 Other Activities Significantly higher contribution to earnings from EADS | Agreement reached on sale of DaimlerChrysler’s Off-Highway business unit | Disposal of shares in Mitsubishi Motors Corporation Amounts in millions of € % change 2005 2004 05/04 EADS Operating profit Revenues Investments in property, plant and equipment Research and development expenditure 591 2,396 109 240 456 2,200 134 228 Employees (Dec. 31) 18,164 20,636 +30 +9 -19 +5 -12 Continued focus on core business operations. The Other Activities segment mainly comprises our 33% holding in the European Aeronautic Defence and Space Company (EADS) and the DaimlerChrysler Off-Highway business unit. It also includes Corporate Research, our real estate activities, and our holding and finance companies. Since June 30, 2004, our holding in Mitsubishi Motors (MMC) has been included in the consolidated financial statements as a financial investment shown at fair value. The further exercise of options on MMC mandatory convertible bonds led to a re- duction of our holding in MMC from 19.7% to 12.4% as the year progressed. Then, on November 17, 2005, we sold our entire stake in MMC (see page 34). As part of our strategy of focusing even more closely on our core business operations, we reached an agreement in December 2005 with EQT, a Swedish financial investor, on the sale of the DaimlerChrysler Off-Highway busi- ness unit. The transaction includes both MTU Friedrichshafen GmbH and the off-highway activities of Detroit Diesel Corpo- ration (DDC). The transfer of ownership is likely to take place in the first quarter of 2006. Impressive growth continues at EADS. EADS, one of the world’s leading aerospace and defense companies, continued to grow in 2005, and expects both revenues and earnings to surpass its prior-year figures once again. The company will pub- lish its results for the 2005 financial year on March 8, 2006. During the first nine months of 2005, revenues at EADS as de- fined by the International Financial Reporting Standards (IFRS) rose from €21.5 billion to €23.4 billion. A major reason for this positive development was the increase in Airbus aircraft deli- veries. In addition, both the Space division and the Defence & Security Systems division increased their business volumes during this period. Between January and September 2005, EADS achieved an EBIT (earnings before interest, taxes, goodwill amortization and exceptional items) of €2.1 billion (Jan.-Sept. 2004: €1.5 billion). Incoming orders at EADS increased by 88% in the first nine months of the year, to €38.8 billion (Jan.-Sept. 2004: €20.6 bil- lion). At €210.4 billion, the order backlog at the end of Sep- tember was substantially higher than the €184.3 billion recorded at the end of the 2004 financial year. EADS thus had the largest order backlog in the aerospace and defense industry. For full-year 2005, EADS expects revenues to increase to more than €33 billion and EBIT to rise to €2.75 billion (2004: €31.8 billion and €2.4 billion respectively). Airbus maintains global market leadership. Airbus delivered 378 aircraft in 2005 (2004: 320), thus outperforming its main competitor, Boeing, for the third consecutive year. With 1,055 firm orders received, Airbus set a new record for incoming orders in the aircraft industry. The enormous success of Airbus is also reflected by its order backlog of 2,177 civil aircraft as of Decem- ber 31, 2005 (Dec. 31, 2004: 1,500). 86 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Airbus’ 21st century flagship, the A380, introduces a new era of airline transportation, carrying 555 passengers aboard the most spacious and efficient aircraft in the world. New Airbus projects for future growth. The Airbus A380, the world’s largest passenger aircraft, successfully completed its maiden flight on April 27, 2005. By the beginning of January 2006, more than 220 test flights had been successfully conducted with three A380 aircraft. At the end of 2005, Airbus had received 159 firm orders and commitments from 16 customers for the new Airbus flagship. The program for the new A350 long-distance aircraft was officially launched on October 6, 2005. EADS is continuing its strategy of internationalization with the new aircraft, as partners from China and other countries participate in the A350 program. At the end of 2005, Airbus had received 172 firm orders and commitments for the A350. In addition, six Chinese airlines ordered a total of 150 aircraft of the A320 family in December 2005. This is the largest order Airbus has received from China to date, and it underscores the tremendous importance of the rapidly growing Chinese market. Positive developments at other EADS divisions. The Eurocop- ter division also maintained its leading position in the helicopter market in 2005. No other helicopter manufacturer can boast such a broad product range in both the civil and military sectors. Eurocopter operates in all growth regions around the world: In 2005, the division reached an agreement with Chinese partners to jointly develop and produce a new transport helicopter. Signs of market recovery have been confirmed in the space sector. The Space division reached breakeven in 2004, and EADS expects it to make a positive contribution to earnings in full- year 2005. Moreover, the decisions made by the ESA Council of Ministers Conference in December 2005 will open up new business opportunities for the German aerospace industry. The agreement to further develop the Ariane program and recent European Mars research initiatives are particularly positive sig- nals in this regard. Despite tight defense budgets in Europe, EADS expects to achieve further growth in its defense business. Germany’s parti- cipation in the development of the MEADS ground-based air defense system illustrates the fact that urgently needed projects for modernizing and strengthening armed forces can only be conducted within an international and transatlantic framework. At the same time, activities in the services sector – providing secure communication systems for example – are becoming in- creasingly important for long-term business developments. DaimlerChrysler Off-Highway Growth continues in a difficult market environment. Despite higher prices for oil and raw materials, the off-highway diesel- engine market expanded in the year under review, although at a lower rate than the growth recorded in 2004. Developments were particularly positive in the segments for commercial ship- ping, raw-materials transport and infrastructure projects. Strong growth in revenues and incoming orders. Revenues at the DaimlerChrysler Off-Highway business unit increased by 18% to €2.1 billion in the year under review. This growth was primarily due to the Power Generation segment (engines for stationary electricity generators), engines for use in mining, agricultural and construction vehicles and the Marine segment. Incoming orders at the Off-Highway business unit rose by 27% to €2.3 billion in the year under review. Nearly all segments contributed to this positive development. 87 Cross-Divisional Activities DaimlerChrysler’s financial success is based on the trust of the people in all of the countries in which the Group is present. This is why economic, ecological and social responsibility is firmly anchored in our corporate strategy. We are convinced that entre- preneurial success and social responsibility go hand in hand, and that value creation always depends on value orientation within society. Our actions are based on these principles. 88 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contents 90 Sustainability at DaimlerChrysler 96 DaimlerChrysler and the • Committed to the principle of sustainability • Activities in 2005 92 Human Resources • Number of employees worldwide at prior year’s level • Further enhancement of Global Human Resources Strategy • Workforce reduction program being implemented at Mercedes Car Group and in preparation for Group administrative functions Environment • €1.5 billion spent on environmental protection • Mercedes-Benz S-Class is first vehicle to receive environmental certification • BlueTec technology for the world’s cleanest diesel engine • Driving with the environment in mind: hybrid drive concepts • Environmental Leadership Awards for our employees’ commitment to the environment • Implementation of “Safeguarding the 98 Global Procurement and Supply Future 2012” agreement • Approximately 9,900 traineeships worldwide 94 Research and Technology • Investment of €5.6 billion in research and development • On the road to accident-free driving with innovative safety systems • Alternative drive systems for sustainable mobility • Innovative materials reduce costs and help protect the environment • Advanced global alignment of purchasing activities • Additional cost advantages and progress with efficiency • Managing rising raw-material prices • Global Supplier Awards presented 100 Social Responsibility • Worldwide social commitment • Enhancement of “Global Sustain- ability Network” • Comprehensive dialogue with policy makers, the business community and society • Help for disaster victims • Action to improve traffic safety for children 89 Sustainability at DaimlerChrysler In order to ensure the long-term success of the DaimlerChrysler Group, we have committed ourselves to the guiding principle of sustainability. This commitment entails an awareness of responsibility in three areas: We bear responsibility for our Group’s business performance and longterm economic success. We conserve the earth’s resources and help to preserve an intact envi- ronment for present and future generations. We live up to our responsibilities toward our customers, employees, shareholders and society as a whole; the DaimlerChrysler Group regards itself as an integral part of all the communities within which it operates. 90 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information “Sustainability Profile 2005” is our first report on the Group’s manifold activities in the important field of sustainability. Committed to the principle of sustainability. At Daimler- Chrysler, profitable growth and a sense of responsibility for society and the environment are two sides of the same coin. That’s why sustainability is an important guiding principle of our business operations – in the interests of our customers, employees, shareholders and society. As a vehicle manufacturer with worldwide operations, Daimler- Chrysler bears a great burden of responsibility. Several hundred thousand people are involved in the production and distribution of our products all over the globe. Our vehicles are on the road in almost every country in the world. They satisfy people’s need for mobility and offer flexible alternatives for transporting goods. By laying the foundation for individual mobility and independence, they play a significant role in modern societies. At the same time, the manufacture and operation of our vehicles requires the use of natural resources, and our business opera- tions influence society in many different ways. The growing net- working of the world economy and people’s increasing need for mobility is altering the economic, ecological, social and poli- tical conditions in which we live. Striking the right balance be- tween these conditions and DaimlerChrysler’s business success is a global challenge for the future. The guiding principle of sustainability is an integral part of our corporate strategy. It is in line with our internal guidelines and is a key component of our corporate values and business strategy, whose objectives are to ensure the Group’s long-term business success. Activities in 2005. Sustainability management at Daimler- Chrysler was significantly enhanced during 2005. In order to further enhance the Group’s sustainability profile, the various sustainability initiatives were strategically combined. Specific sustainability goals and measures were defined within DaimlerChrysler’s economic, ecological and social respon- sibility. And as part of an improved process of sustainability reporting, we published a report entitled “DaimlerChrysler Sus- tainability Profile 2005” in July. We regard the reappearance of DaimlerChrysler’s shares in the renowned Dow Jones Sustainability Index (DJSI) in Septem- ber 2005 as confirmation that our work in this area has been effective. You will find a comprehensive summary of our activities in the field of sustainability in the report “DaimlerChrysler Sustainabi- lity Profile 2005” and on our website at www.daimlerchrysler.com/sustainability. 91 Human Resources Number of employees worldwide at prior year’s level | Further enhancement of Global Human Resources Strategy | Workforce reduction program being implemented at Mercedes Car Group and in preparation for Group administrative functions | Implementation of “Safeguarding the Future 2012” agreement | Approximately 9,900 traineeships worldwide Employees (at December 31 ) DaimlerChrysler Group Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Financial Services Other Activities 1 2005 2004 382,724 104,345 83,130 117,183 48,773 11,129 18,164 384,723 105,857 84,375 114,602 48,029 11,224 20,636 1 DaimlerChrysler Off-Highway business unit, Corporate Research, real-estate activities and holding and finance companies 382,700 employees at year-end, slightly lower than prior- year figure. On December 31, 2005, DaimlerChrysler employed 382,724 people worldwide (2004: 384,723). Of this total, 182,060 worked in Germany (2004: 185,154) and 97,480 in the United States (2004: 98,119). The number of trainees totaled 9,880 (2004: 10,047). Commercial Vehicles posted a particularly large increase in the number of employees compared to the prior year (+ 2%). The increase in hiring in this division was due to strong demand for trucks, especially in the Europe/Latin America and Trucks NAFTA regions. The number of employees at the Mercedes Car Group (- 1%), the Chrysler Group (- 1%) and Financial Services (- 1%) was slightly lower than the previous year’s figures. Further enhancement of the Global Human Resources Strategy. Our Global Human Resources Strategy defines uni- form principles, standards and processes for our business operations worldwide. It does this in line with the requirements of our business units, which are also globally oriented. That’s why DaimlerChrysler defined uniform core challenges for its hu- man resources departments all over the world. For the core challenge, “Outstanding Performance and Productivity”, it insti- tuted measures aimed at strengthening DaimlerChrysler’s com- petitiveness. Important issues in this area were the reduction and limitation of labor costs and the maintenance and enhance- ment of our employees’ productivity and competitiveness. We have defined the personnel principles supporting the establish- 92 ment and expansion of our business operations in China in the “Human Resources China Book”, which establishes uniform standards and increases efficiency. The introduction of a global “Human Resources ScoreCard” will enable us to more effec- tively measure and monitor the work of our human resources activities all over the world. Workforce reductions at the Mercedes Car Group, new management model for DaimlerChrysler. At the end of Sep- tember 2005, the Board of Management set a goal for the Mercedes Car Group of reducing the number of employees at its German locations by 8,500. The plan calls for these work- force adjustments to be completed over a period of twelve months (by the end of September 2006) through voluntary severance agreements. The achieved increase in productivity will consider- ably improve the competitiveness of Mercedes-Benz. Daimler- Chrysler will adhere to the “Safeguarding the Future 2012” agreement, which was concluded in 2004 and calls for voluntary measures in the initial phase of a headcount reduction. The actions taken for voluntary departures and early retirements should lead to expenses of approximately €950 million, €570 million of which was already booked in 2005. Within the frame- work of implementing the new management model announced in January 2006, the number of persons employed in administra- tive functions will be reduced by up to 20% by the end of 2008. Implementation of the “Safeguarding the Future 2012” agreement. DaimlerChrysler plans to use the “Safeguarding the Future 2012” agreement reached in summer 2004 bet- ween the Group’s management and the General Labor Council primarily to achieve the following goals: improving competi- tiveness, strengthening innovation power, increasing employee flexibility and safeguarding jobs in Germany. With the aim of achieving the agreed cost savings of €500 million annually in the medium term, initial steps were taken toward implementing appropriate measures in the year under review. The most impor- tant of these measures were: – For all employees covered by the collective bargaining agree- ment with DaimlerChrysler AG, compensation levels will be reduced by 2.79% as of January 1, 2006. The compensation levels for new employees were already reduced in 2005. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The diversity of our cus- tomers is reflected by the diversity of our workforce, which contributes to DaimlerChrysler’s success. – For senior executives in Germany, the variable compensation for 2006 will be reduced by 10% in addition to the reduction of their regular monthly salaries. – In 2005, we worked on a comprehensive restructuring of the compensation system, in connection with implementing the Compensation Framework Agreement (ERA) beginning in 2007. Extensive measures were taken at all production locations in Germany in order to introduce a uniform compensation system for salaried employees and wage earners. – In industry-related service units, we have so far transferred approximately 4,000 employees to the services-sector earn- ings agreement. – In 2005, approximately 3,500 new skilled workers were trans- ferred to the internal staff-rotation program (“DCmove”). Of this total, 350 were deployed in jobs at various locations in Germany. This program increases the flexibility of staff assign- ments at DaimlerChrysler and simplifies the exchange of employees between different production locations. The young skilled workers in the program are given systematic support and have the opportunity to enhance their expertise in a var- iety of work situations. Progress in health care and workplace safety. At the Chrysler Group, we have cooperated with the labor unions to continue improving workplace safety and company healthcare programs. These measures have been positively received. For example, in 2005, the Chrysler Group received an award from the US Acad- emy for Occupational and Environmental Medicine in recogni- tion of its innovative healthcare and workplace safety programs and the significant decrease in work-related injuries at its pro- duction locations. Management Development: LEADing the way to success. Management development at DaimlerChrysler, which we are stan- dardizing at our locations throughout the world with the help of our management tool LEAD (Leadership Evaluation and Deve- lopment), ensures compliance with Group-wide quality standards. We have supplemented the LEAD program with the “Individual Development Plan.” The courses offered by the DaimlerChrysler Corporate University help our top managers ensure that their qualifications remain world-class. Diversity of our workforce will enable us to achieve long- term success. In order to boost its competitiveness, Daimler- Chrysler deliberately employs men and women with different areas of expertise, types of experience and points of view. The diversity of our employees in terms of age, gender or nationality ensures that they complement one another and is one of the keys to our success. Women are traditionally underrepresented in technology-oriented companies, especially in Germany. Our Global Diversity Council has taken action to help remedy this situation. In an initial step, it set a target corridor for each divi- sion regarding the proportion of women in management posi- tions, with the aim of achieving these targets by 2008. Image campaign – “Pioneers Welcome”. Global operations can be successfully supported by human resources depart- ments that recruit, integrate and train well-qualified and moti- vated employees. DaimlerChrysler has launched a new per- sonnel image campaign called “Pioneers Welcome” in order to recruit outstanding university graduates and other skilled workers even in economically difficult times. Training programs ensure top employee performance over the long term. In 2005, approximately 2,600 men and women completed their traineeships at DaimlerChrysler locations in Germany, matching the very high figure of the previous year. In addition, 472 gratuates entered junior management training programs. We are thus offering young people career prospects while underscoring our responsibility to society. Daimler- Chrysler currently employs approximately 8,300 trainees in Germany and 9,900 worldwide. Providing job training to young people will continue to be a focus of our human-resources work in the future. A thank you to our employees. The Board of Management thanks all of DaimlerChrysler’s employees for their initiative, commitment and achievements. We are convinced that their ability, enthusiasm and energy will secure a successful future for the Group. We also extend our thanks to the employee re- presentatives for their constructive cooperation in 2005. 93 Research and Technology Investment of €5.6 billion in research and development | On the road to accident-free driving with innovative safety systems | Alternative drive systems for sustainable mobility | Innovative materials reduce costs and help protect the environment Research safeguards competitiveness. The Group’s research units provide the impetus for the technological expertise that will ensure a bright future for DaimlerChrysler. All of our activities here are geared toward the goals of safeguarding individual mobility, conserving resources, creating innovations that benefit our customers, and securing competitive advantages. To this end, DaimlerChrysler invested a total of €5.6 billion in research and development in 2005 (2004: €5.7 billion). At the end of 2005, Corporate Research employed 2,600 people (2004: 2,900), and a further 25,600 men and women were employed in the development departments at the Mercedes Car Group, Chrysler Group, and Commercial Vehicles (2004: 26,100). Their research and development work focused on five core tech- nology fields in 2005: – Drive technology – Vehicle layout and the human-machine interaction – Production and materials technology – Electric/electronic systems and intelligent transportation systems – Software and process technology The results of this research work are applied by all of the busi- ness units in the Group’s various product brands. Our research units also focus on the general issues of diagnostics, testing procedures and prevention. In addition, we conduct analyses throughout the Group of the various social developments and trends that result from the introduction of new technologies, so that we can identify in a timely manner the new demands that will be placed on our products and our company in the future. The vision of accident-free driving. Our long-term objective is to develop vehicles for our customers so that they can drive accident-free. As we work toward this goal, the new S-Class and its innovative systems are once again setting standards, parti- cularly in the field of active safety. The new Brake Assist PLUS system, for example, uses radar tech- nology to monitor the area in front of the vehicle. If the vehicle gets too close to the car in front, the system will calculate the 94 braking force needed to avoid a collision and then warn the driver of the imminent danger. When Brake Assist PLUS is combined with the PRE-SAFE® occupant protection system, the result is a unique anticipatory safety system that supports drivers even more effectively than before. In addition, the new night vision assistant provides for greater safety on dark roads. This system has two infrared headlights that illuminate the road, significantly extending the driver’s range of vision. An infrared camera records the reflected image of the road ahead and displays this on the dashboard. These and other systems are gradually transforming our vision of accident-free driving into reality. Further advances are being made with the next generation of assistance systems. These will focus on intersections as a common site of accidents. To this end, we have refined our anti- cipatory systems within the framework of the publicly funded INVENT project. More specifically, we have examined how drivers can best be supported in dangerous situations, especially those that occur at intersections. At the 2005 International Motor Show (IAA) in Frankfurt, we presented the prototype of a video- based assistance system that demonstrated for the first time how accidents at intersections can be prevented in the future. At the heart of the system is a module containing image process- ing algorithms that recognize traffic lights and signs, as well as a second module that analyzes the movements of cross traffic. Drivers who fail to react to a dangerous situation are warned of it in several stages – first visually, then acoustically, and, if necessary, even by means of a brief automatic emergency braking maneuver. Our goal here is to develop intelligent assis- tance systems that can interpret critical situations before an accident becomes unavoidable, utilizing the extra time gained to make a decisive contribution to the realization of accident- free driving. The most frequent types of accident involving commercial ve- hicles are rear-end accidents and vehicles leaving the road. Rear-end accidents alone account for a quarter of all truck acci- dents. We will achieve a drastic reduction in this kind of accident with the new emergency braking system that is to be offered 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information F 600 HYGENIUS – The new research vehicle with pioneering fuel-cell drive and customer-oriented innovations for safety and driving pleasure. on all Mercedes-Benz trucks as of 2006. And our Lane Assistant gives a warning when a vehicle is about to leave its lane. This innovative system will be available also on the new generation of Setra and Mercedes-Benz travel buses starting in 2006. corresponds to consumption of 2.9 liters of diesel fuel per 100 kilometers. We also succeeded in significantly improving the cold-start capability of the fuel cell in the F600 HYGENIUS to - 25°C. Pioneer in the development of fuel cells. DaimlerChrysler believes that fuel-cell drive will make a unique contribution to sustainable mobility. Our fuel-cell buses, which have covered more than one million kilometers in over 70,000 hours of opera- tion in the most diverse climates and terrains, have convincingly demonstrated the reliability and robustness of fuel-cell drive. A new operational test began in Beijing in 2005 with three Mer- cedes-Benz Citaro fuel-cell buses. As a result, there are now 36 Citaro buses with fuel-cell drive on the road in regular service around the world – by far the largest test fleet. In the year under review, more than 100 of our fuel-cell vehicles were in use with customers, a figure that cannot be matched by any other com- pany in the automotive industry. Much more important than the number of vehicles on the road, however, are the results of the practical tests for which they have been put to use. These tests are helping to accelerate the development of fuel-cell technology toward marketability. The alliance between DaimlerChrysler, Ballard and Ford for the further development of fuel-cell technology has now been reorga- nized: DaimlerChrysler and Ford have acquired Ballard Power Systems AG in Nabern, Germany, and established the NuCellSys GmbH joint venture in order to move ahead even more quickly with the integration of fuel-cell drive into motor vehicles. F600 HYGENIUS – the fuel cell moves a step closer to series production. The F600 HYGENIUS marks a major step toward series production by fuel-cell drive systems, which we hope to achieve sometime between 2012 and 2015. To this end, we refined the fuel-cell drive concept for this family-friendly research vehicle. One result of this work is that the F600 HYGENIUS has a power out- put of 85 kW (115 hp). The fuel-cell stacks used in the car are also 40% smaller than was previously the case, yet generate 30% more power and consume 16% less energy. The F600 HYGENIUS can travel more than 400 kilometers on a tank of hydrogen, which Optimized human-machine interaction. Another focus of our research involves the question of how to optimize the interac- tion between humans and machines. Our answer in the F600 HYGENIUS is an instrument cluster consisting of two high-reso- lution color displays that serve as virtual instruments. These in- struments appear to be 1.4 meters in front of the driver, which eliminates the need for the driver’s eyes to constantly adjust to changing distances, resulting in much less driver fatigue. A fur- ther innovation is the dual-mode operating concept, with controls on the instrument panel and the COMAND unit located on the armrest. This new vehicle and operating concept is linked to a user-recognition system and allows for more rapid, more intui- tive and safer control than conventional systems. Paint technology improved with paint foils. DaimlerChrysler is taking a completely new approach when it comes to manu- facturing painted plastic exterior components. The solution here is to use plastic components coated with paint foils. The first step involves forming a paint-coated foil into a thin outer skin that gives the component its final shape. After the paint hardens, the component is filled with foam. The result is a stable painted part that can be directly used in the assembly of a vehicle’s exte- rior. We are now preparing the application of this technique in the series production of passenger cars and commercial vehicles. This innovative technology offers both economic and ecological benefits. For example, the fact that we no longer conduct wet painting operations means there are no paint residues or fumes that have to be recycled or disposed of at great expense. This also conserves resources and eases the burden on the environ- ment. In addition, there is no loss of quality, as the paint foils fulfill all criteria for exterior components with respect to color and resistance to scratching and chemicals. 95 DaimlerChrysler and the Environment €1.5 billion spent on environmental protection | Mercedes-Benz S-Class is first vehicle to receive environmental certification | BlueTec technology for the world’s cleanest diesel engine | Driving with the environment in mind: hybrid drive concepts | Environmental Leadership Awards for our employees’ commitment to the environment DaimlerChrysler takes on responsibility. At DaimlerChrysler, environmental protection is an integral aspect of sustainable mobility and of our corporate strategy, which is oriented toward long-term value enhancement. That’s why we take a holistic ap- proach toward our measures to protect the environment, across the entire value creation process. In both the production and application of our products, we aim to save resources and avoid emissions. To achieve this goal, we spent €1.5 billion on environ- mental protection in 2005. Environment-oriented product development. As the recipi- ent of the world’s first environmental certificate for an automo- bile, the new S-Class is setting benchmarks for environmental protection as well as in other areas. For example, the new S350 more than meets the currently valid emission limits, with nitro- gen oxide emissions that are more than 85% below permissible levels and hydrocarbon emissions that are approximately 75% lower than the limit. What’s more, we are using an even larger proportion of renewable raw materials and recycled materials in the new S-Class than in its predecessor model. As a result, we already reached the 95% quota of recyclable materials that will be required by law in 2015; that also applies to the new A-Class, which was introduced in 2004. In the certificate, the certification board of TÜV Management GmbH confirmed that we have integrated environmental protection considerations into the development process of the S-Class. BlueTec technology firmly established in the market. In 2004, we celebrated the market launch of BlueTec engines for Mercedes-Benz commercial vehicles. These engines employ Selective Catalytic Reduction (SCR) technology. The use of BlueTec technology can reduce nitrogen oxide emissions by up to 80%. As a result, these engines already comply with the emission limits set by the Euro 4 and Euro 5 standards, which will go into effect in 2006 and 2009 respectively. What’s more, in 2005 we introduced particulate filters as stan- dard equipment in all diesel-powered Mercedes-Benz passenger car models. In the next step, we also intend to exploit the tre- mendous potential of BlueTec in passenger cars. To this end, we 96 are currently testing the application of SCR technology in passen- ger cars in many countries throughout the world. In June 2005, we introduced the first diesel passenger car with SCR technology at the Innovation Symposium in Washington. The vehicle invol- ved – the Mercedes-Benz “bionic car” – is a concept vehicle. In September 2005 we presented the S320 BLUETEC HYBRID at the International Auto Show in Frankfurt to demonstrate the capabilities of BlueTec in the luxury segment. Both cars are currently the cleanest diesel-operated vehicles in the world, and they comply with all of the future emission limits known to us today. BlueTec is clearly playing a key role in mak- ing diesel-operated vehicles more environmentally friendly than ever before. Drive concepts of the near future: direct hybrid, BlueTec hybrid and two-mode hybrid. In city traffic, the advantages of hybrid technology lead to noticeably lower fuel consumption and lower emissions. At the IAA 2005 we employed the new S-Class to demonstrate how hybrid technology can be used to achieve significant additional reduction in both fuel consump- tion and emissions. Our objective is to make gasoline engines as efficient as diesel engines, and diesel engines as clean as gasoline engines. The S320 BLUETEC HYBRID is clear proof that the combination of BlueTec and hybrid technology not only results in lower nitro- gen oxide emissions but also reduces diesel fuel consumption by an additional 20%. The intelligent combination of direct injec- tion and hybrid technology in the S350 DIRECT HYBRID reduces gasoline consumption by 25% compared to the previous model. Both concept vehicles – BLUETEC HYBRID and DIRECT HYBRID – are thus paving the way for the drive technologies of tomorrow and have the potential for higher efficiency and environmental compatibility while boosting driving comfort and enjoyment. We are cooperating with General Motors Corporation on the development of hybrid technology. In our Hybrid Competence Center in Troy, Michigan, USA, we are working together to de- velop a two-mode hybrid drive system. At the end of 2005, the BMW Group joined this alliance of equal partners. By pooling 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information BlueTec – Innovative and modern emission treatment for the world’s cleanest diesel engine. our development know-how, we can offer our customers superior vehicles with an attractive performance and appealing comfort, fuel consumption and emission levels at competitive prices. Be- cause these features are interpreted differently for each model, the distinctive product characteristics and the different brand attributes remain untouched. The two-mode hybrid drive system uses smaller electric motors than the existing single-mode system, and therefore requires significantly less space in a vehicle. A vehicle with a two-mode system can operate either with the two electric motors, with only the combustion engine, or with both drive systems simulta- neously. That makes it possible to fully exploit the fuel savings and performance potential of the hybrid drive system – in city driving, at higher constant speeds on country roads and high- ways, when passing, on steep slopes or when pulling a trailer. Environmentally friendly hybrid buses in everyday use. Our Orion brand hybrid buses demonstrate that hybrid techno- logy opens up plenty of potential not only for passenger cars but also for commercial vehicles. They also underscore our long- term commitment to innovative products and environmentally friendly technologies. Compared to diesel buses with conventio- nal drive systems, the Orion hybrid buses not only significantly reduce emission values and fuel consumption, but also deliver better driving performance. In 2005, we received a major order for 500 Orion VII hybrid city buses from the local public trans- portation authorities of New York City. This supplements past orders from New York City Transit and the Metropolitan Trans- portation Authority (MTA Bus) for 200 and 125 Orion hybrid buses respectively. In addition, we supply the Aero HEV low-entry city bus from FUSO with hybrid drive. Hybrid Sprinters are also in the trial stage and are being used by customers in everyday operations. And the FUSO Canter truck with hybrid drive is about to go into series production. Alternative fuels as a future energy source. Alternative fuels can make a significant contribution to environmentally compati- ble mobility due to their more favorable CO2 balance, as well as reducing dependence on fossil fuels. We are therefore working hard in this area, for example to develop applications for bio- mass-to-liquid (BTL) fuels and biodiesel. In the field of BTL fuels (SunDiesel), we are cooperating with Choren Industries and Volkswagen. SunDiesel has proven its suitability as an alterna- tive fuel for passenger cars and commercial vehicles both on the engine test bench and in practical use. The cooperation agreed upon in 2005 between Choren Industries and Shell is an important step on the way to the large-scale production and marketing of SunDiesel. In the United States, the tank of every Jeep Liberty CRD is already filled up in the assembly plant with B5 fuel (diesel with a 5% blend of biodiesel). We have entered into a partnership with Bio- diesel Industries Inc. and NextEnergy Inc. in order to push for- ward with the development of biodiesel technology. We are al- ready very successful with the Flex-Fuel vehicles of the Chrysler Group - for example with minivans, the Dodge Ram 1500, the Dodge Stratus and the Chrysler Sebring. These are vehicles with engines that can run on either conventional gasoline or a mix- ture of gasoline and 85% bioethanol (E85). The Chrysler Group has already sold 1.5 million such vehicles, which also offer sig- nificant consumption and emission advantages. DaimlerChrysler Environmental Leadership Award. In 2005 we once again honored our employees’ commitment to preserv- ing the environment with our annual Environmental Leadership Award. The following projects received the Environmental Lead- ership Award for 2005: – Dry treatment at the Untertürkheim plant. This is a new pro- cess for the treatment of metals for mass production which allows us to dispense with the previously used “cooling lubri- cant” chemical mixture. – Abaca natural fibers for passenger car exteriors. The fibers of the abaca plant stand up to the extremely high stress to which vehicle exteriors are subjected. The world’s first use of these fibers in series-produced car exteriors was in the spare tire well covers of A-Class vehicles. – Jatropha plant from India delivers biodiesel. The extremely undemanding tropical plant jatropha curcas has been cultiva- ted since January 2004 on previously useless wasteland in India. It provides oil-rich seeds from which biodiesel can be extracted. 97 Global Procurement and Supply Advanced global alignment of purchasing activities | Additional cost advantages and progress with efficiency | Managing rising raw-material prices | Global Supplier Awards presented For all of our main commodities we have defined how they are to be purchased – locally like body stampings, globally coordi- nated like air conditioning devices (Lead Buying) or centrally like leather (Central Buying). In addition, we established the Material Strategy and Innovation Council (MSIC), which coordinates the global activities of our automotive divisions in the fields of engineering, procurement, cost analysis and research and technology. MSIC has already identified and implemented many opportunities to combine volu- mes and reduce costs, while improving quality and innovation. We also develop commodity strategies for major grouping of purchases. These plans define the procurement for all of the DaimlerChrysler business units. More than 80% of our total spend with suppliers worldwide is covered by commodity stra- tegies. Global supplier management with Extended Enterprise™. Our global supplier management is based on three key instru- ments: First, supplier management with Extended Enterprise™. This program identifies the four value drivers quality, cost, technology and supply as a basis for the global performance-based coope- ration. In addition, it integrates the conduct-related aspects in- tegrity, commitment and communication, which both sides – DaimlerChrysler and its suppliers – acknowledge as a basis for cooperation. In top-level executive meetings with our suppliers, we discuss individual performance, supplier capabilities and agree on measures for continuous improvement. Global alignment of procurement and supply activities. Our Group-wide organization, Global Procurement & Supply, is re- sponsible for purchasing goods and services at DaimlerChrysler. It includes the units Procurement Mercedes-Benz Passenger Cars/smart, Procurement and Supply Chrysler Group and Procu- rement Commercial Vehicles, as well as International Procure- ment Services, which is responsible for purchasing non-production materials and services. Our primary objective is to increase corporate value by optimi- zing the Group’s supply chain network. In concrete terms, this means creating an effective global procurement network to fur- ther improve the quality, cost, technology and supply of the purchased goods and services. Our strategic goals. In order to continuously improve the efficiency and effectiveness of our operations, we have defined three strategic areas for action: – Global Scale Leverage. We are constantly identifying and reali- zing new synergy potentials within our global organization. – Global Supply Base Management. We analyze, evaluate and support our suppliers on the basis of quantitative parameters as well as conduct-related aspects. On an annual basis, we present awards to the best performing suppliers. – Global Infrastructure and Processes. We provide our suppliers and divisions with a globally integrated purchasing system. In order to achieve these goals, we actively involve our suppliers in the processes and infrastructures of procurement and supply. Advantages from bundling purchasing volumes. By bundling our purchasing volumes worldwide, we achieve the maximum possible volumes enabling us to realize significant price advan- tages. This globally coordinated procurement (lead buying) gives us substantial economies of scale when purchasing goods and material. We also have central buying for select commodi- ties, managed through “one face to the supplier” for a specific commodity, supported by brand representatives from the parti- cipating purchasing units. 98 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The DaimlerChrysler Supplier Portal provides our suppliers with full online transparency of their performance. The External Balanced Scorecard (EBSC) has become a valuable tool internally and externally averaging 18,000 page hits per month. Second, our External Balanced Scorecard (EBSC) was further developed so that it now covers 80% of our supplier base. With the help of EBSC, our suppliers can compare their performance relative to the competition in the categories of cost, quality, technology and supply; in this way we provide our suppliers with an honest and fair evaluation process which is available online. Third, effective communication. This is the foundation for all of the supporting measures. In 2005, we saw a continuation of intense global competition, continued rises in raw-material prices and changing market conditions. We therefore intensified com- munication with our suppliers to prepare solutions and offsets to enhance our joint competitiveness. As a result, we were able to secure our production processes in this more difficult envi- ronment. Increased efficiency through standardization. Through the global alignment of processes and infrastructures, we provide our internal and external partners with a globally integrated and cost-optimized procurement network. For example, our global supplier portal provides worldwide access to almost all of the Group’s supplier applications. With a single sign-on and a com- mon framework, we currently offer more than 160 procurement and supply applications to over 50,000 active users. The conti- nuous rollout of a common procurement system is another area of standardized infrastructure that enables us to cover nearly our total volume of business worldwide. Risk-management systems guarantee continuous supply. In the year under review, financially distressed suppliers and a significant increase in supplier bankruptcies were a major chal- lenge. We met these challenges with the help of risk-manage- ment systems that we had already introduced in previous years. With these tools and processes, we are able to continuously evaluate the financial health of our suppliers and to react in suf- ficient time. We thus minimized the impact on production and financial risks. In addition, managing the continued increase in raw-material prices has developed into a key competitive factor. As a result of ongoing high demand, mounting speculation in the commo- dity markets and unforeseen natural disasters, raw-material prices in 2005 remained at the historically high levels reached in the second half of 2004. We permanently monitor the prices of raw materials and react appropriately in this situation. We also work with our suppliers to ensure that we achieve continuous improvements in products and processes, as well as realizing lasting price advantages. Wherever appropriate, we enter into long-term agreements to maintain our supply of materials and to minimize the impact of future price rises; this also enhances planning security for our suppliers. DaimlerChrysler Global Supplier Awards 2005. To its best suppliers, Global Procurement and Supply presented the DaimlerChrysler Global Supplier Awards for 2005. With these awards, we recognize outstanding performance on the basis of the External Balanced Scorecard as well as in the areas of communication, commitment and integrity. All global suppliers providing over €1 million in volume to at least two of the Group’s automotive business units were eligible for the awards. The awards were presented to the top suppliers in the following cate- gories: – Powertrain: Denso – Exterior: Gentex – Chassis: Mubea – Interior: Johnson Controls – Electric/Electronic: Yazaki – General Goods & Services: Dell – Manufacturing Goods & Services: Marposs – Logistics: NYK Line 99 Social Responsibility Worldwide social commitment | Enhancement of “Global Sustainability Network” | Comprehensive dialogue with policy makers, the business community and society | Help for disaster victims | Action to improve traffic safety for children DaimlerChrysler assumes social responsibility. Through its worldwide operations, DaimlerChrysler has a positive impact on society and on people’s living conditions. Therefore, we strengthened our social commitment once again in 2005, because stable societies are a precondition for a good business environ- ment. As one of the founding members of the UN “Global Com- pact” initiative, we are committed to supporting and promoting its guidelines. We have anchored the spirit of the Global Compact in our Principles of Social Responsibility and our Integrity Code. Numerous initiatives demonstrate how seriously we take these principles. Expanded “Global Sustainability Network”. By using the locally grown abaca fibers in the Philippines as a substitute for glass fibers in components for the A-Class, we have imple- mented another project for the increased utilization of natural materials in vehicle production. For several years now, Daimler- Chrysler has been using coconut fibers from the Brazilian rain forest as a part of the POEMA project. In India, we support research on the jatropha plant as a source of biodiesel. Through the “Global Sustainability Network”, DaimlerChrysler helps people locally by creating qualified jobs, protecting the environ- ment and ecosystems, and increasing the share of renewable resources in industrial production (see page 97). Intensified transatlantic dialogue. Good and strong trans- atlantic relations are a key element of DaimlerChrysler’s role as a German-American company – this is why we continuously help foster dialogue on both sides of the Atlantic involving all of the important groups and decision-making bodies. Most promi- nently in 2005, we hosted the US-German Round Table, an annual symposium organized by the Association of German Industry (BDI) and the US-based International Management and Develop- ment Institute (IMDI). At this event, US congressmen and German business leaders debated key issues of the twenty-first century. And in June 2005, DaimlerChrysler organized an event at the Convention Center in Washington DC showcasing our products and underscoring our impact on American society – from the creation of jobs to the transport of school children. Help your neighbor. The DaimlerChrysler Corporation Fund and the Group’s employees provide support to many communi- ty-based organizations through our “Good Neighbors, Good Citizens®” program in the United States. Since 1953, we have assisted numerous non-profit organizations and charities in the four areas of community vitality, public policy, future work- force and employee volunteerism. Support is provided in the form of active help as well as substantial financial donations. Through this kind of partnership with numerous charitable or- ganizations, we contribute to improving social stability. Further- more, our employees throughout the United States donated over US $8.6 million to the United Way charity in 2005. In 2004, DaimlerChrysler employed 8,400 disabled people in Germany, significantly exceeding the minimum rate stipulated by law. In addition, the Group ordered goods and services worth €43 million from companies primarily employing disabled per- sons. For example, we are the biggest customer of the disabled workshops in Sindelfingen, purchasing 40% of their output. The Group also follows the good corporate citizen approach in other areas – for example, through our longstanding partnership with the International Olympic Committee (IOC). Furthermore, in the context of the Olympic Solidarity development aid program established in 1996, DaimlerChrysler is constructing new sports facilities in primary and middle schools in China and Tibet, pri- marily to the benefit of less privileged groups. In Germany, we supported various cultural events in 2005 with the aim of helping young artists to achieve their interna- tional breakthrough. 100 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information For the future of Afghanistan: a Mercedes-Benz Vito for a DaimlerChrysler training project in Kabul. Disaster relief efforts. In 2005, DaimlerChrysler responded quickly and effectively to a series of natural disasters. For example, the victims of the tsunami disaster in Southeast Asia received aid worth more than €2 million in addition to numerous donations from our employees all over the world. Furthermore, our local subsidiaries provided transportation for rescue as well as supplying drinking water and other goods. Also, a special reconstruction fund was set up to help rebuild facilities such as schools, hospitals and orphanages. In the weeks following the destruction caused by hurricane Kat- rina in the United States, DaimlerChrysler and its employees once again demonstrated their support with donations totaling more than US $7 million. This included 100 new vans and sport utility vehicles that were sent to the area fully loaded with relief goods. A benefit concert organized by DaimlerChrysler raised a sum of US $500,000, which was donated to the chari- table organization “Habitat for Humanity” to help build housing for flood victims. Ongoing commitment to the fight against HIV/AIDS. As a major employer, we are concerned about the wellbeing of our employees. Therefore, DaimlerChrysler is deeply committed to the battle against the immune weakness, AIDS. Within the framework of our “Workplace Initiative on HIV/AIDS”, we pro- vide free medical treatment to employees in South Africa and their families. We also promote education and prevention. The positive results of this initiative encouraged us to extend our fight – adjusted to local conditions – to other countries and Group companies. In 2005, we developed a global HIV/AIDS policy to provide a framework for tailored programs throughout all operations. Training gives young people a valuable opportunity. Job training not only helps individuals to make a living, it also con- tributes to the economic development and stability of these societies. This is particularly true in regions with a risk of insta- bility. Therefore, DaimlerChrysler has begun to establish a network of training centers. In Kabul (Afghanistan), Beit Sahour (Palestine) and Perm (Russia), we enable young people to acquire a sound training as mechanics. In addition, Daimler- Chrysler supports an agricultural training center in Harar (Ethiopia) run by the aid organization “People for People”. Mondialogo: intercultural learning and sustainable devel- opment. Together with UNESCO, DaimlerChrysler has founded the Mondialogo initiative. The goal of Mondialogo is to improve the dialogue between various cultures. In addition, we aim to fos- ter understanding, respect and acceptance among young people. In May 2005, we presented the Mondialogo Engineering Award to young engineers who had developed joint concepts to combat poverty and promote sustainable development. The second Mondialogo School Contest, initiated in November 2005, attrac- ted more than 35,000 students from 138 countries. More safety for children in road traffic. Playful learning is the principle behind MobileKids, DaimlerChrysler’s unique traf- fic-safety initiative designed for children between the ages of eight and twelve. It includes a TV cartoon series (“The Nimbols”) and an interactive Internet game platform (“Mokitown”) with more than half a million registered users. Children in Italy, Sin- gapore, India, Israel, Malaysia and China are able to participate in numerous MobileKids activities. We also promote children’s safety in road traffic with other worldwide initiatives such as the “Global Road Safety Program” and “Seat-Check” in the United States. Responsible partnerships create mutual trust. Since the social development of economies is also in the interest of the DaimlerChrysler Group, we are entering into an increasing number of “responsibility partnerships” with politics, society and non-government organizations (NGOs). These partner- ships foster trust, reduce alienation and build bridges between different cultures and value systems, ultimately supporting our overall goal – the success of DaimlerChrysler. 101 Corporate Governance The Board of Management and the Supervisory Board of DaimlerChrysler are committed to the principles of good corporate governance. National and international investors rightly expect the company to be managed and supervised responsibly, transparently, and with a long-term orientation. We orient our actions towards these expectations and have therefore designed our system of corporate governance to reflect international standards and to be transparent. On the following pages, the Board of Management and the Supervisory Board explain the principles of corporate governance at DaimlerChrysler. Further information can be found on our website at www.daimlerchrysler.com/corpgov_e. 102 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contents 104 Corporate Governance Report 116 Report of the Supervisory Board • General conditions • DaimlerChrysler’s corporate bodies • Principles guiding our actions • Directors’ Dealings 110 Compensation Report • Compensation of the Board of Management • Compensation of the Supervisory Board • Cooperation between the Supervisory Board and the Board of Management • Issues discussed at the meetings in the year 2005 • Report on the work of the committees • Personnel changes in the Supervisory Board and the Board of Management 120 Members of the Supervisory Board 114 Declaration of Compliance with the German Corporate Governance Code 121 Report of the Audit Committee • Deviations from the Recommendations • Issues discussed at the meetings of the of the German Corporate Governance Code Audit Committee • Deviations from the Suggestions of the German Corporate Governance Code 103 Corporate Governance Report General conditions DaimlerChrysler’s corporate bodies DaimlerChrysler is a stock corporation with its domicile in Ger- many. The legal framework for corporate governance there- fore derives from German law, particularly the Stock Corpora- tion Act, the Codetermination Act and legislation concerning capital markets, as well as from the Memorandum and Articles of Incorporation of DaimlerChrysler AG. As our shares are listed on stock exchanges outside Germany, and in particular on the New York Stock Exchange (NYSE), we also have to adhere to those countries’ capital-market legis- lation and the listing requirements applicable at those stock exchanges. We are therefore in favor of the convergence of inter- national stock-exchange regulations. A description of the differences between DaimlerChrysler’s cor- porate-governance principles and those applicable to US com- panies under NYSE corporate-governance listing standards can be seen on our website at www.daimlerchrysler.com/corpgov_e. Shareholders and the Annual Meeting. The company’s share- holders exercise their rights and cast their votes at the Annual Meeting. Each share in DaimlerChrysler AG entitles its owner to one vote. There are no shares with multiple voting rights, no preferred or privileged stock, and no maximum voting rights. Various important decisions can only be made by the Annual Meeting. These include the decision on the appropriation of dis- tributable profits, the ratification of the actions of the members of the Board of Management and the Supervisory Board, the election of the independent auditors and the election of mem- bers of the Supervisory Board. The Annual Meeting also makes decisions on amendments to the Memorandum and Articles of Incorporation, capital measures, and the approval of certain intercompany agreements. The influence of the Annual Meet- ing on the management of the company is limited by law, how- ever. The Annual Meeting can only make management deci- sions if it is requested to do so by the Board of Management. Separation of corporate management and supervision. DaimlerChrysler AG is obliged by the German Stock Corporation Act to apply a dual management system featuring the strict separation of the two boards responsible for managing and for supervising the company (two-tier board). With this system, the company’s Board of Management is responsible for the exec- utive functions, while the Supervisory Board monitors the Board of Management. No person may be a member of these two boards at the same time. Supervisory Board. In accordance with the German Codeter- mination Act, the Supervisory Board of DaimlerChrysler AG comprises 20 members. Half of them are elected by the share- holders at the Annual Meeting. The other half comprises members who are elected by the company’s employees in Ger- many. The members representing the shareholders and the members representing the employees are equally obliged by law to act in the company’s best interests. 104 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Annual Meeting » Supervisory Board » Board of Management each share in DaimlerChrysler AG entitles its owner to one vote election of shareholder representatives 10 shareholder representatives + 10 employee representatives appointment, monitoring and advisory tions to the Supervisory Board, concerning the appropriation of distributable profits and capital measures for example. Final- ly, the Audit Committee approves services provided by the independent auditors or affiliated companies to DaimlerChrysler AG or to companies of the DaimlerChrysler Group that are not directly related to the annual audit. The Supervisory Board is convinced of the independence of the members of Audit Committee representing the shareholders. The Chairman of the Audit Committee, Mr. Bernhard Walter, has special expertise and experience in the application of account- ing principles and internal monitoring systems. Therefore, the Supervisory Board has appointed Mr. Walter as Financial Expert. The Mediation Committee is formed solely to perform the func- tions laid down in Section 31, Subsection 3 of the German Codetermination Act. Accordingly, it has the task of making proposals for the appointment of members of the Board of Management if a previous proposal did not obtain the legally required majority of votes. Board of Management. As of December 31, 2005, the Board of Management of DaimlerChrysler AG comprised ten members. The duties of the Board of Management include setting the Group’s strategic focus and managing its business. It is also responsible for preparing the individual and consolidated annual financial statements and the quarterly financial state- ments, and for installing and monitoring a risk-management system. The Rules of Procedure define the areas of responsibili- ty of the Board of Management and its members; these are described on pages 20 and 21 of this Annual Report. The Supervisory Board monitors and advises the Board of Man- agement in its management of the company. Its duties also include appointing and recalling members of the Board of Man- agement, as well as deciding on their compensation, whereby the details of the compensation of the Board of Management’s members are delegated to the Presidential Committee. How- ever, the Supervisory Board reviews and advises on the struc- ture of the system of compensation whenever this is neces- sary. It also reviews the individual and consolidated annual financial statements and reports to the Annual Meeting on the results of its review. The work of the Supervisory Board is coordinated by its Chair- man. The Supervisory Board has formed three committees: the Presidential Committee, the Audit Committee and the Medi- ation Committee. The Presidential Committee has particular responsibility for the contractual affairs of the members of the Board of Manage- ment and determines their compensation. It also supports and advises the Chairman of the Supervisory Board and his deputy and prepares the meetings of the Supervisory Board. The Audit Committee deals with questions of accounting and risk management. It discusses the effectiveness of the internal control systems and regularly receives reports on the work of the Corporate Audit department. It also discusses the interim financial statements and the annual financial statements, individual and consolidated, of DaimlerChrysler AG. The Audit Committee makes recommendations concerning the selec- tion of independent auditors, assess such auditors’ suitability and independence, and, after the independent auditor is elected by the Annual Meeting, commissions it to conduct the annual audit of the individual and consolidated financial statements, negotiates an audit fee and determines the focus- es of that audit. The Audit Committee receives reports from the independent 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 recommenda- 105 Audit Committee Presidential Committee Mediation Committee Supervisory Board Principles guiding our actions Integrity Code and compliance activities. The Integrity Code is a guideline for behavior which has been in effect since 1999 and which was revised in 2003 that defines a binding framework for the actions of all our employees worldwide. Among other things, the guidelines define correct behavior in international business and in any cases of conflicts of inter- est, questions of equal treatment, proscription of corruption, the role of internal monitoring systems and the duty to con- form with applicable law and other internal and external regula- tions. DaimlerChrysler expects all of its employees to adhere strictly to the Integrity Code. Already in the year 2003, the Audit Committee of the Super- visory Board established a Business Practices Office (BPO) at the DaimlerChrysler Group with two contact centers in Stuttgart and Auburn Hills. Employees can submit confidential complaints to the BPO concerning suspected violations of accounting regulations or the Integrity Code. In addition, the Corporate Compliance Operations department was established at the beginning of 2006 with the objective of securing a uniform compliance organization throughout the Group. This organization will ensure that DaimlerChrysler’s business practices in the entire Group are examined in detail and that guidelines are updated and implemented as neces- sary. Possible violations of anti-corruption laws, internal guide- lines and rules of conduct are examined; necessary counter- measures are initiated and their implementation is monitored. Compliance managers will be deployed in DaimlerChrysler subsidiaries and certain regions. In addition, training programs will be designed with a focus on corporate compliance and will be executed worldwide. The Corporate Compliance organi- zation will report directly to the Chairman of the Board of Management of DaimlerChrysler. The Sales Practices Hotline, which was established in 2005, is also allocated to the Corporate Compliance organization. Our officers have again been notified in several events and written communications of the special significance of the Integrity Code to our company. The Sales Practices Hotline is particularly res- ponsible for replying to questions from sales personnel regard- ing the correct business approach to public-sector institutions, and in this context also accepts information on any questionable events for further investigation. Reports are regularly submitted to the Audit Committee of the Supervisory Board on the complaints received by the BPO and the Sales Practices Hotline and the processing of such complaints. Code of Ethics. In July 2003, we approved a “Code of Ethics”. This code addresses the members of the Board of Management and a large number of senior officers who have a significant influence on planning and reporting in the context of the annual and interim financial statements. The provisions of the code aim to prevent mistakes by the persons addressed and to pro- mote ethical behavior as well as the complete, appropriate, accurate, timely and clear disclosure of information on the Group. The wording of the Code of Ethics can be seen on our website at www.daimlerchrysler.com/corpgov_e. Risk management. DaimlerChrysler has a risk-management system commensurate with its position as a company with global operations (see pages 58 ff). The risk-management sys- tem is one component of the overall planning, controlling and reporting process. Its goal is to enable the company’s man- agement to recognize significant risks at an early stage and to initiate appropriate countermeasures in a timely manner. The Chairman of the Supervisory Board has regular contacts with the Board of Management to discuss not only the Group’s strat- egy and business development but also the issue of risk man- agement. The Corporate Audit department monitors adherence to the legal framework and Group standards by means of targeted audits, and, if required, initiates appropriate actions. 106 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Accounting principles. The consolidated financial statements of the DaimlerChrysler Group are prepared in accordance with the United States Generally Accepted Accounting Princi- ples (US GAAP). Details of US GAAP can be found in the Notes to the Consolidated Financial Statements (see Note 1). The annual financial statements of DaimlerChrysler AG, which is the parent company, are prepared in accordance with the accounting guidelines of the German Commercial Code (HGB). Both sets of financial statements are audited by independent auditors. Transparency. DaimlerChrysler regularly informs its share- holders, financial analysts, shareholders’ associations, the media and the interested public on the situation of the Group and on any significant changes in its business. We have posted an overview of all the significant information disclosed in the year 2005 on our website at www.daimlerchrysler.com/ir/ annualdoc05. Fair disclosure. In principle, all new facts that are communi- cated to financial analysts and institutional investors are simul- taneously also made available to all shareholders and the interested public. If any information is made public outside Ger- many as a result of the regulations governing capital markets in the respective countries, we also make this information avail- able without delay in Germany in the original version, or at least in English. In order to ensure that information is provided quickly, DaimlerChrysler makes use of the Internet and of other methods of communication. Financial calendar. All the dates of important disclosures (e.g. the Annual Report, interim reports, the Annual Meeting) are announced in advance in a Financial Calendar. The Financial Calendar can be seen inside the rear cover of this Annual Report and on our website at www.daimlerchrysler.com/ir/calendar. Ad-hoc publicity. In addition to its regular scheduled repor- ting, DaimlerChrysler discloses, in accordance with applicable law without delay, any so-called inside information which directly affects the Group. Major shareholdings. DaimlerChrysler also reports without delay after receiving notification that by means of acquisition, disposal or any other method, the shareholding in Daimler- Chrysler AG of any person or institution has reached, exceeded or fallen below 5, 10, 25, 50 or 75 percent of the company’s voting rights. Shares held by the Board of Management and the Supervi- sory Board. As of December 31, 2005, the members of the Board of Management held a total of 8.5 million shares, options or stock appreciation rights of DaimlerChrysler AG (0.833% of the shares issued). As of the same date, the members of the Supervisory Board held a total of 0.1 million shares, options or stock appreciation rights of DaimlerChrysler AG (0.012% of the shares issued). Directors’ Dealings. In 2005, the following securities trans- actions took place involving members of the Board of Manage- ment and the Supervisory Board and certain senior officers who regularly have access to inside information and who are authorized to make significant business decisions (and, in accordance with the provisions of the German Securities Trading Act, involving persons in a close relationship with the aforementioned persons). DaimlerChrysler discloses these transactions without delay after receiving notification of them. This information is also available on our website at www.daimlerchrysler.com/corpgov_e. 107 Directors’ Dealings Date Name Function Type and place of transaction Number of shares 1 May 2, 2005 Mr. Bodo Uebber Board of Management Acqusition of shares, Frankfurt May 4, 2005 Dr. Michael Mühlbayer Senior officer Acqusition of shares, Frankfurt May 25, 2005 Mr. Thomas W. LaSorda Board of Management Acqusition of shares, New York May 25, 2005 Mr. Thomas W. LaSorda Board of Management Acqusition of shares, New York May 25, 2005 Mr. Thomas W. LaSorda Board of Management Acqusition of shares, New York May 26, 2005 Mr. Thomas W. LaSorda Board of Management Acqusition of shares, New York July 11, 2005 Ms. Christine K. Cortez July 15, 2005 Mr. Gary E. Dilts July 15, 2005 Mr. Gary E. Dilts July 19, 2005 Ms. Nancy Rae Senior officer Senior officer Senior officer Senior officer Sale of shares, New York Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange July 19, 2005 Ms. Nancy Rae Senior officer Sale of new shares, Frankfurt July 28, 2005 Mr. Robert G. Liberatore Senior officer Sale of shares, New York July 29, 2005 Dr. Eckhard Cordes Board of Management Acquisition of shares by exercise of options, off-exchange July 29, 2005 Dr. Eckhard Cordes Board of Management Sale of new shares, Frankfurt July 29, 2005 Mr. Günter Egle Senior officer July 29, 2005 Mr. Günter Egle July 29, 2005 Mr. Wolfgang Diez July 29, 2005 Mr. Wolfgang Diez July 29, 2005 Mr. Ulrich Walker July 29, 2005 Mr. Ulrich Walker July 29, 2005 Mr. Herbert Kauffmann July 29, 2005 Mr. Herbert Kauffmann Aug. 1, 2005 Mr. Harald Bölstler Senior officer Senior officer Senior officer Senior officer Senior officer Senior officer Senior officer Senior officer Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acquisition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Aug. 1, 2005 Mr. Harald Bölstler Senior officer Sale of new shares, Frankfurt Aug. 1, 2005 Mr. Thomas W. Sidlik Board of Management Acqusition of shares by exercise of options, off-exchange Aug. 1, 2005 Mr. Thomas W. Sidlik Board of Management Sale of new shares, Frankfurt Aug. 1, 2005 Dr. Albert Kirchmann Senior officer Acqusition of shares by exercise of options, off-exchange 3,000 1,500 570 1,300 1,900 2,423 3,000 22,500 22,500 24,000 24,000 7,000 92,500 92,500 15,000 15,000 20,000 20,000 20,000 20,000 20,000 20,000 10,000 10,000 50,000 50,000 8,500 Price €30.64 €30.39 $40.68 $40.40 $40.39 $40.27 $40.42 €34.40 €34.74 €34.40 €35.20 $48.11 €34.40 €39.58 €34.40 €39.80 €34.40 €40.20 €34.40 €40.04 €34.40 €39.63 €34.40 €40.52 €34.40 €40.52 €34.40 Total volume (rounded) €91,920 €45,585 $23,188 $52,520 $76,741 $97,574 $121,278 €774,000 €781,650 €825,600 €844,800 $336,770 €3,182,000 €3,661,150 €516,000 €597,000 €688,000 €804,000 €688,000 €800,800 €688,000 €792,600 €344,000 €405,200 €1,720,000 €2,026,000 €292,400 Aug. 1, 2005 Dr. Albert Kirchmann Senior officer Sale of new shares, Frankfurt 8,500 €40.46 €343,910 1 The information pertains to no par value registered shares of DaimlerChrysler AG with a pro rata amount of €2.60 of the capital stock. 108 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Date Name Function Type and place of transaction Aug. 1, 2005 Mr. David H. Olsen Senior officer Aug. 1, 2005 Mr. David H. Olsen Aug. 2, 2005 Mr. Peter M. Rosenfeld Aug. 2, 2005 Mr. Peter M. Rosenfeld Aug. 2, 2005 Ms. Christine K. Cortez Aug. 2, 2005 Ms. Christine K. Cortez Aug. 3, 2005 Mr. Paul S. Halata Senior officer Senior officer Senior officer Senior officer Senior officer Senior officer Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Aug. 3, 2005 Mr. Paul S. Halata Senior officer Sale of new shares, Frankfurt Aug. 3, 2005 Mr. Hans-Heinrich Weingarten Senior officer Acqusition of shares by exercise of options, off-exchange Aug. 3, 2005 Mr. Hans-Heinrich Weingarten Senior officer Sale of new shares, Frankfurt Aug. 4, 2005 Dr. Rolf Bartke Senior officer Acqusition of shares by exercise of options, off-exchange Aug. 4, 2005 Dr. Rolf Bartke Senior officer Sale of new shares, Frankfurt Aug. 4, 2005 Mr. Thomas W. Sidlik Board of Management Acqusition of shares by exercise of options, off-exchange Aug. 4, 2005 Mr. Thomas W. Sidlik Board of Management Sale of new shares, Frankfurt Aug. 5, 2005 Mr. George Murphy Senior officer Aug. 5, 2005 Mr. George Murphy Aug. 8, 2005 Mr. Susan J. Unger Aug. 18, 2005 Mr. Frank J. Ewasyshyn Sept. 5, 2005 Dr. Gerald Weber Senior officer Senior officer Senior officer Senior officer Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Sale of shares, New York Sale of shares, New York Acqusition of shares by exercise of options, off-exchange Sept. 5, 2005 Dr. Gerald Weber Senior officer Sale of new shares, Frankfurt Sept. 12, 2005 Mr. Earl G. Graves Supervisory Board Sale of shares, New York Nov. 22, 2005 Mr. Hubertus Troska Senior officer Nov. 22, 2005 Mr. Hubertus Troska Dec. 12, 2005 Mr. Steven A. Torok Senior officer Senior officer Acqusition of shares by exercise of options, off-exchange Sale of new shares, Frankfurt Acqusition of shares by exercise of options, off-exchange Dec. 13, 2005 Mr. Steven A. Torok Senior officer Sale of new shares, Frankfurt Dec. 21, 2005 Mr. Helmut Lense Supervisory Board Sale of shares, Frankfurt Number of shares 1 Price 9,000 €34.40 9,000 12,000 12,000 22,500 22,500 20,000 20,000 15,000 15,000 27,500 27,500 25,000 25,000 22,500 22,500 18,200 2,500 17,000 17,000 501 4,000 4,000 20,000 20,000 224 €40.01 €34.40 €41.36 €34.40 €40.52 €34.40 €41.26 €34.40 €41.08 €34.40 €40.65 €34.40 €40.65 €34.40 €40.36 $50.84 $51.63 €34.40 €40.70 $52.08 €34.40 €44.17 €34.40 €42.90 €42.81 1 The information pertains to no par value registered shares of DaimlerChrysler AG with a pro rata amount of €2.60 of the capital stock. Total volume (rounded) €309,600 €360,090 €412,800 €496,320 €774,000 €911,700 €688,000 €825,200 €516,000 €616,200 €946,000 €1,117,875 €860,000 €1,016,250 €774,000 €908,100 $925,288 $129,075 €584,800 €691,900 $26,092 €137,600 €176,680 €688,000 €858,000 €9,589 109 Compensation Report As an element of the Corporate Governance Report, the Com- pensation Report summarizes the principles that are applied to determine the compensation of the Board of Management of DaimlerChrysler AG and explains the level and structure of its members’ compensation. Furthermore, the principles and level of the compensation of the Supervisory Board are also described. Compensation of the Board of Management Responsibility. Responsibility for determining the structure and level of compensation of the Board of Management of DaimlerChrysler AG is delegated by the Supervisory Board to the Presidential Committee (see page 105). The principles to be applied have been laid down by the Supervisory Board in the Rules of Procedure for the Presidential Committee. If requested by the Committee, the Supervisory Board also holds discussions on the structure of the compensation system for the Board of Management and regularly reviews this structure. Goals. The aim of the compensation system for the Board of Management is to compensate the members of the Board of Management commensurately with their areas of activity and responsibility when compared internationally. The system should also clearly and directly reflect in the variability of com- pensation the joint and individual performance of the Board of Management members and the success of the Group. For this purpose, the compensation system comprises a base salary, an annual bonus and an element of stock-based compen- sation as variable compensation with a long-term incentive effect and risk component. In order to ensure the competitiveness and appropriateness of Board of Management compensation, its structure, the indivi- dual components and the total compensation are reviewed each year in relation to a benchmark group of companies in the United States and Europe. For this purpose, the Presidential Committee is regularly assisted by external consultants. Structure of Board of Management compensation. Board of Management compensation in 2005 comprised three compo- nents, set out below: – The fixed base salary, paid in twelve monthly installments, is related to the area of responsibility of each Board of Management member. – The annual bonus is variable cash compensation, the level of which is related to the fixed base salary and varies in relation to the degree to which DaimlerChrysler’s planned operating profit is achieved. Additional targets may also be taken into account, such as the development of total shareholder return in relation to comparable automotive companies. When set- ting the level of the annual bonus, the Presidential Committee of the Supervisory Board also has the possibility to reflect the Board of Management members’ individual performance, which is not directly reflected in the performance of the Group, with a supplementary payment or deduction of up to 25%. The operating-profit target is determined annually in advance on the basis of the planning approved by the Super- visory Board. As of the 2006 financial year, the level of the annual bonus is related not only to the achievement of the operating-profit target, but in equal measure also to the comparison of the achieved operating profit with the respective prior-year result. 110 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information – The new model of stock-based compensation, which was applied for the first time in the 2005 financial year, is the so- called Performance Phantom Share Plan. This plan is linked to the long-term development of corporate value and is based on the factors of performance orientation, bench- mark comparison and share ownership. This new component of compensation replaced the two components granted in 2004 for the last time, the medium-term incentive plan and the stock option plan. The new model takes into consideration all of the key criteria recommended in connection with good corporate gover- nance. With a term of four years, the plan is oriented toward mid-term performance targets, while also having a long- term effect through the obligation to hold shares. With this model, target achievement is measured in terms of the return on net assets that is actually achieved by the Group and its return on sales compared with the relevant com- petitors, which are BMW, Ford, GM, Honda, Iveco, Toyota, Volvo and VW. Due to the allocation of phantom shares at the beginning of the four-year period, the development of Daimler- Chrysler’s share price is taken into consideration; these phan- tom shares are also entitled to a dividend during the four- year period. After three years, the final number of phantom shares is calculated from the degree of target achievement. These phantom shares must then be held for one more year. After four years, the amount to be paid out is calculated by multiplying the number of phantom shares by the share price relevant at that time. The members of the Board of Man- agement have to use a quarter of this gross amount paid out to purchase “real” DaimlerChrysler shares, so that the stipulations arising from the guidelines for share ownership are fulfilled (see below). No retroactive change in the defined performance targets or the comparative parameters is possible in connection with allocating the stock-based compensation. Guidelines for share ownership. As a supplement to these three components of Board of Management compensation, the Presidential Committee of the Supervisory Board of Daimler- Chrysler AG has approved Stock Ownership Guidelines for the Board of Management, under which the members of the Board of Management are required to invest a portion of their private assets in DaimlerChrysler shares within a period of several years and to hold these shares until the end of their Board of Management membership. The real shares acquired in the context of the new stock-based compensation are generally to be used to fulfill the provisions of these guidelines, but the shares can also be acquired in a different way. Total Board of Management compensation in 2005. The total compensation paid by Group companies to the mem- bers of the Board of Management of DaimlerChrysler AG is calculated from the amount of compensation paid in cash and from the non-cash benefits in kind. €9.3 million was paid as fixed compensation, €24.6 million as short-term and medium-term performance-related compen- sation, and €1.0 million as long-term performance-related compensation. This totaled an amount of €34.9 million in 2005. In 2005, the members of the Board of Management were grant- ed a total of 454,914 phantom shares within the framework of the long-term stock-based compensation, the so-called Per- formance Phantom Share Plan. Payment is made for these phantom shares, depending on internal and external perfor- mance targets for continuous activity in the Board of Manage- ment, in the year 2009. The reference share price for the allocation of the phantom shares is the average price of Daimler- Chrysler shares between January 1, 2005 and the day before the first meeting of the Presidential Committee in which the allocation is decided upon. This value was €35.41 per phantom share in 2005. Disclosure of those amounts will then take place in connection with the performance-related compensation for the year 2009. 111 Stock options were exercised in 2005 relating to the stock option plans of previous years. Members of the Board of Man- agement exercised a total of 167,500 options from the Stock Option Plan 2003. Further details of directors’ dealings can be found in the Corporate Governance Report (see page 107 ff). Information on stock-based compensation is given in Note 24 of the Notes to the Consolidated Financial Statements. Board of Management Members whose term of office ended in 2005 were entitled to receive compensation earned before the respective retirement date from current mid-term and the new 2005 long-term share-based remuneration components calculated on a pro-rata basis. We also had expenditures in connection with certain previously accrued retirement benefit obligations of other Board of Management members. The aggre- gate amount of both items is €23.8 million. Pensions. The pension agreements of the Board of Manage- ment members with DaimlerChrysler AG in 2005 included a commitment to an annual retirement pension, which is calcu- lated as a percentage of the fixed annual base salary. In 2005, disbursements to former members of the Board of Management of DaimlerChrysler AG and their survivors amounted to €16.9 million. An amount of €292.2 million has been accrued for pension obligations to former members of the Board of Management and their survivors. As of the 2006 financial year, the pension agreements of the Board of Management members with DaimlerChrysler AG have been changed over to defined-contribution pension plans. Sideline activities of the Board of Management members. Members of the Board of Management require the consent of the Supervisory Board before commencing any sideline activ- ities. This ensures that neither the time required nor the compensation paid for such activities lead to any conflict with the members’ duties to the Group. Insofar as such sideline activities are memberships of other supervisory boards or comparable boards, these are disclosed in the annual financial statements of DaimlerChrysler AG and on the Internet. No compensation is paid to Board of Management members for other positions held at companies of the Group. Compensation of the Supervisory Board Supervisory Board compensation in 2005. The compen- sation of the Supervisory Board is determined by the Annual Meeting of DaimlerChrysler AG and is governed by the com- pany’s Articles of Incorporation. The current regulation spec- ifies that the members of the Supervisory Board receive, in addition to the refund of their expenses and the costs of any value-added tax incurred by them in the performance of their office, a fixed compensation of €75,000, three times this amount for the Chairman of the Supervisory Board, twice this amount for the Deputy Chairman of the Supervisory Board and the Chairman of the Audit Committee, 1.5 times this amount for the chairmen of other Supervisory Board commit- tees and 1.3 times this amount for members of Supervisory Board committees. If a member of the Supervisory Board exer- cises several of the aforementioned functions, he shall be remunerated solely for the function with the highest compen- sation. The individual compensation of the members of the Supervisory Board is shown in the table on the right. 112 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The members of the Supervisory Board and its committees receive a meeting fee of €1,100 for each Supervisory Board meeting and committee meeting that they attend. Compensation of the members of the Supervisory Board Name Function Total 2005 € Hilmar Kopper Chairman of the Supervisory Board 243,700 Except for the compensation paid to the employee representa- tives within the Supervisory Board in accordance with their con- tracts of employment, no compensation was paid for services provided personally beyond the aforementioned board and com- mittee activities, in particular for advisory or agency services. The compensation paid in 2005 to the members of the Supervisory Board of DaimlerChrysler AG for their services to the Group therefore totaled €2.0 million. Loans to members of the Board of Management or the Supervisory Board. In 2005, no advances or loans existed to members of the Board of Management or the Supervisory Board of DaimlerChrysler AG. Erich Klemm 1 Deputy Chairman of the Supervisory Board Heinrich Flegel Member of the Supervisory Board Nate Gooden 2 Member of the Supervisory Board Earl G. Graves Member of the Supervisory Board Victor Halberstadt Thomas Klebe 1, 3 Arnaud Lagardère 5 Member of the Supervisory Board (retired April 6, 2005) Member of the Supervisory Board and of the Presidential Committee Member of the Supervisory Board (since April 6, 2005) Jürgen Langer 1 Member of the Supervisory Board Robert J. Lanigan Member of the Supervisory Board Helmut Lense 1 Member of the Supervisory Board Peter A. Magowan Member of the Supervisory Board William A. Owens Member of the Supervisory Board Gerd Rheude 1 Udo Richter 1 Member of the Supervisory Board Member of the Supervisory Board Wolf Jürgen Röder 1 Member of the Supervisory Board Manfred Schneider Stefan Schwaab 1 Bernhard Walter Member of the Supervisory Board and of the Presidential Committee Member of the Supervisory Board and of the Audit Committee Member of the Supervisory Board and Chairman of the Audit Committee Lynton R. Wilson 4 Member of the Supervisory Board Mark Wössner Member of the Supervisory Board 168,700 80,500 79,400 77,200 20,826 107,400 56,579 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 106,300 111,800 164,300 80,500 80,500 1 The members representing the employees have stated that their compensation should be paid to the Hans-Böckler Foundation, in accordance with the guidelines of the German Trade Union Federation. 2 Mr. Gooden abstained from receiving his compensation and meeting fees. At his request, these amounts were paid to the Hans-Böckler Foundation. 3 Dr. Klebe also received €2,000 in meeting fees for his activity as a member of the Supervisory Board of DaimlerChrysler Luft- und Raumfahrt Holding AG 4 Mr. Wilson also received €18,900 for committee activities at Mercedes-Benz Canada and DaimlerChrysler Canada Inc. 5 Mr. Lagardère also receives compensation for his activity as Chairman of the Board of Directors of EADS N.V.. For 2004, the total amount was €320,000. Due to variable compensation components, the respective amount for 2005 is not yet available. 113 Declaration of Compliance with the German Corporate Governance Code Section 161 of the German Stock Corporation Act (AktG) requi- res the Board of Management and the Supervisory Board of a listed stock corporation to declare each year that the recom- mendations of the “German Corporate Governance Code Government Commission” published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette have been and are being met or, if not, which recommendations have not been or are not being applied. Shareholders must be given permanent access to such declaration. The Board of Management and the Supervisory Board of DaimlerChrysler AG declare that both the recommendations and the suggestions of the “German Corporate Governance Code Government Commission”, have been and are being met. The Board of Management and the Supervisory Board also intend to follow the recommendations and suggestions of the German Corporate Governance Code in the future. The following recom- mendations and suggestions are the only ones not been or being applied: The German Corporate Governance Code (“Code”) contains rules with varying binding effects. Apart from outlining aspects of the current German Stock Corporation Act, it contains recom- mendations from which companies are permitted to deviate. However, if they do so, they must disclose this each year. The Code also contains suggestions which can be ignored without giving rise to any disclosure requirement. The Board of Management and the Supervisory Board of DaimlerChrysler AG have decided to disclose not only deviations from the Code’s recommendations (see I.) but also – without being legally obliged to do so – deviations from its suggestions (see II.). For the period from December 2004 until July 20, 2005, the fol- lowing declaration refers to the Code in effect as of May 21, 2003. For the corporate governance practice of DaimlerChrysler AG since July 21, 2005, this declaration refers to the require- ments of the Code in effect as of June 2, 2005, published in the electronic Federal Gazette on July 20, 2005. I. Deviations from the Recommendations of the German Corporate Governance Code 1. Deductible with the D&O insurance (Code Clause 3.8, Paragraph 2) The Directors’ and Officers’ Liability (D&O) insu- rance obtained by DaimlerChrysler AG for the Board of Manage- ment and the Supervisory Board does not provide any insurance cover for intentional acts and omissions or for breaches of duty knowingly committed. Insurance cover is limited to negligent breaches of duty by members of the Board of Management and 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 on a deductible for negligence on the part of the members of the Supervisory Board, as Daimler- Chrysler AG endeavors to staff its Supervisory Board with prominent members of the community from Germany and ab- road 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 negligen- ce. The fact that a deductible is fairly unusual in other countries makes this even more of a problem. 114 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information On the part of members of the Board of Management, the D&O insurance of DaimlerChrysler AG envisages a deductible for cases of ordinary or gross negligence. Moreover, in cases of a grossly negligent breach of duty by a member of the Board of Management, the Presidential Committee of the Supervisory Board which is responsible for the Board of Management’s service contracts may agree to make a percentage deduction from the variable portion of the compensation of the member of the Board of Management concerned. In terms of its overall financial result, this would be the same as an additional deductible. In the view of DaimlerChrysler AG, this rule enables individual cases to be judged more fairly on their merits than the blanket approach of the Code. 2. Individualized reporting of Board of Management compensation (Code Clause 4.2.4) As in the past, the com- pensation for the Board of Management is not reported indi- vidually. The compensation of the Board of Management for the 2005 fiscal year will also be 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 compensation between fixed and performance-related components is appropriate and whether the structure of such compensation provides adequate incenti- ves for the Board of Management. As the Board of Manage- ment operates according to the principle of collective responsi- bility, the incentives provided for the Board of Management as a whole are the decisive factor, not those for each individual member. For the 2006 fiscal year, the compensation will be published in accordance with the provisions of the German Law on the Disclosure of the Compensation of Members of the Board of Management (Vorstandsvergütungsoffenlegungsgesetz). 3. Approval of sideline activities (Code Clause 4.3.5) For reasons of practicality, approval of sideline activities by mem- bers of the Board of Management has been granted by the Chairman of the Supervisory Board. In future the Supervisory Board will reach a decision regarding approval in its entirety. 4. Compensation of the Supervisory Board (Code Clause 5.4.7, Paragraph 2) As long as the ways by which criteria for the assessment of success can adequately be structured are still subject to substantial legal uncertainties, no performance-related compensation shall be set. II.Deviations from the Suggestions of the German Corpora- te Governance Code 1. Broadcast of the Annual Meeting (Code Clause 2.3.4) The Annual Meeting of DaimlerChrysler AG will be broadcast on the Internet until the end of the Board of Management’s report. Continuing the broadcast after this point, particularly the broadcast of individual shareholders’ spoken contributions could be construed as interference in those shareholders’ privacy rights. For this reason the company will further on not broad- cast this part of the Annual Meeting. 2. Variable compensation of the Supervisory Board rela- ting to the company’s long-term success (Code Clause 5.4.7) We draw attention to the comments on I. 4. with regard to the introduction of performance-related compensation. Stuttgart, December 2005 The Board of Management The Supervisory Board 115 Report of the Supervisory Board In five meetings during the 2005 financial year, the Supervisory Board dealt in detail with the business situation of Daimler- Chrysler and the strategic development of the Group and its divisions. In addition to important personnel decisions, the agendas of the meetings also included various individual issues that were dealt with and discussed together with the Board of Management. Cooperation between the Supervisory Board and the Board of Management. In its meetings, the Supervisory Board was regularly and fully informed by the Board of Management about the situation of the Group, particularly its business and financial developments, personnel situation, investment plans and questions of fundamental business policy and strategy. The Board of Management presented the Group’s key perfor- mance figures to the Supervisory Board in the form of monthly reports, and submitted in good time those issues requiring the specific approval of the Supervisory Board. The Supervisory Board approved these issues after reviewing various documents, making inquiries with the Board of Management and holding intensive discussions with the members of the Board of Manage- ment. The Supervisory Board was also kept fully informed of specific matters between its meetings, and in urgent cases it was requested to pass resolutions in writing. In addition, the Chairman of the Board of Management informed the Chair- man of the Supervisory Board in regular individual discussions about all important developments and forthcoming decisions. Whenever necessary, the Supervisory Board also convened without the Board of Management. In an environment featuring generally stable growth of the world economy, but at lower rates than in the prior year due to the higher level of interest rates and above all the repeated sharp rise in the price of crude oil, the Supervisory Board dealt in 2005 in depth with the development of the individual divisions. One major focus of discussions throughout the year was the development of the Mercedes Car Group, both of Mercedes- Benz Passenger Cars and of the smart brand. In the middle of the year, a personnel decision was made with great signifi- cance for the Group’s future: the appointment of the new Chair- man of the Board of Management as of January 1, 2006. 116 Issues discussed at the meetings in the year 2005. In the meeting held in February 2005, the Supervisory Board dealt with the audited 2004 financial statements of DaimlerChrysler AG, the 2004 consolidated financial statements, the 2004 man- agement report of DaimlerChrysler AG, the 2004 Group man- agement report and the proposal made by the Board of Management on the appropriation of earnings. The Supervisory Board also received information on the settlement agreement approved a short time before with Mitsubishi Motors Corpora- tion concerning compensation payments to DaimlerChrysler for charges incurred in connection with the acquisition of Mitsu- bishi Fuso Truck & Bus Corporation. Other issues dealt with at the meeting were a discussion about the development of alter- native drive systems and a report on the Group’s interest in debis AirFinance, the sale of which was approved by the Super- visory Board later in the same year. The main topic dealt with in the meeting in April 2005 was the situation of the Mercedes Car Group. The Supervisory Board received a presentation of the restructuring plans for smart, and subsequently approved the program after detailed discussion of the required personnel reductions and the effects on the quar- terly results. In line with its principle of dealing with strategic issues in each regular meeting, the Supervisory Board was given a presentation by the Board of Management on the strategy of the Commercial Vehicles division and business activities planned or already implemented in Asia, particularly in China. The meeting held in July focused on the personnel decisions in the Board of Management and on the interim report on the first half of the year. In this context, the business development and strategy of the Financial Services division was described in detail. Approval was granted for DaimlerChrysler Financial Ser- vices to apply for a license to establish an industrial bank in the United States. Another item on the agenda was information con- cerning the engagement of KPMG Deutsche Treuhand-Gesell- schaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, to conduct the independent audit and the important audit issues determined by the Audit Committee in conjunction with KPMG. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Hilmar Kopper Chairman of the Supervisory Board In addition, the Supervisory Board discussed the effects of bridge financing that had previously been approved in writing for an insolvent supplier, as well as various internal corporate restructuring measures in North America. In the meeting held in September, consultations centered on the staff-reduction program at the Mercedes Car Group. The Supervisory Board approved the funds required to achieve the reduction goals set by the Board of Management. Further- more, the Board of Management reported on the completed acquisition of the remaining shares in MTU Friedrichshafen GmbH, which had previously been approved by the Supervisory Board in writing. Approval was granted for the planned sale of a vehicle testing facility in the United States and for additional investments for the production of vehicles in China by the Chrysler Group. The Supervisory Board received reports on the course of business and the competitive situation at the Chrysler Group, the strategy of the Procurement department and new legal developments in the field of corporate gover- nance. In December, the main subjects for discussion were the operative planning for the period of 2006 through 2008 and the approval of a financing limit for the 2006 financial year. The planning data was backed up by extensive documentation and was debated in depth. In this context, the Board of Man- agement also reported to the Supervisory Board in detail on the company’s risk-monitoring system and its results. A report was given on the sale of shares in Mitsubishi Motors Corpora- tion, which the Supervisory Board had previously approved. In addition, the Supervisory Board gave its approval for the sale of the DaimlerChrysler Off-Highway business unit, which includes MTU Friedrichshafen, subject to a defined limit for the ongoing negotiations. Corporate governance. A number of corporate-governance issues were also dealt with in the December meeting. In this context, pursuant to Section 161 of the German Stock Corpora- tion Act, the declaration of compliance with the German Corporate Governance Code in its version of June 2, 2005 was approved. Following one of the Code’s recommendations, the Supervisory Board stated that in its view, it is capable of independently advising and monitoring the Board of Management provided that more than half of the members representing the share- holders are independent directors. After due investigation, it stated that this condition is also fulfilled at DaimlerChrysler AG and that the members of the Audit Committee representing the shareholders also fulfill the criterion of independence. Any possible conflicts of interest connected with the Group’s involvement in Toll Collect or the sale of the Off-Highway business unit caused by other board positions held by some members of the Supervisory Board were avoided, since those members disclosed such positions to the entire Super- visory Board and did not participate in the discussions or voting on the relevant topics. Two members of the Supervisory Board, Mr. Earl G. Graves and Mr. Arnaud Lagardère, attended fewer than half of the meetings held during 2005. Report on the work of the committees. The Presidential Committee convened six times in 2005, and dealt in detail with various Board of Management matters and compensation issues. Another major topic was the discussion about changing the pension plan for the members of the Board of Manage- ment from a defined-benefit to a defined-contributions plan. At the beginning of 2006, the Committee was involved in the plans for a new management structure and the changes in Board of Management members’ responsibilities intended in this context. 117 In addition, the Presidential Committee prepared the plenary meetings and dealt with questions of corporate governance. The Audit Committee met nine times in 2005. Details of these meetings are given in a separate report of this committee (see page 121). The Mediation Committee, a body formed in accordance with the stipulations of the German Codetermina- tion Act, was not required to convene last year. The Supervisory Board was regularly informed about the work, and especially the decisions, of the committees. Personnel changes in the Supervisory Board. After Mr. Hal- berstadt announced that he would retire from the Supervisory Board for personal reasons with effect as of the 2005 Annual Meeting, in April 2005, that Annual Meeting approved the proposal to appoint Mr. Arnaud Lagardère as a member of the Supervisory Board representing the shareholders for a period of 5 years. Personnel changes in the Board of Management. During the year, the Supervisory Board made decisions on various Board of Management matters. In February 2005, the Supervisory Board resolved to reappoint Mr. Thomas Weber for a period of five years as of January 1, 2006 with unchanged responsibility for the area of “Research and Technology”. Mr. Jürgen Hubbert, previously responsible for the “Executive Automotive Committee”, retired from the Board of Management of DaimlerChrysler AG upon the expiry of his period of office on April 6, 2005. 118 In July 2005, the Supervisory Board accepted the early retire- ment of the Chairman of the Board of Management, Mr. Jürgen E. Schrempp, effective December 31, 2005. It also resolved to appoint Mr. Dieter Zetsche Chairman of the Board of Manage- ment effective January 1, 2006, and to extend his membership by another five years. With an unchanged period of office until 2007, Mr. Thomas W. LaSorda was appointed CEO of the Chrysler Group as successor to Mr. Zetsche. Mr. LaSorda’s previous position of Chief Operating Officer of the Chrysler Group was allocated to Mr. Eric R. Ridenour, who was newly appointed as a member of the Board of Management for an initial period of three years. In August 2005, the Supervisory Board accepted the early retire- ment of Mr. Eckhard Cordes, effective August 31, 2005, and in this context resolved that Mr. Zetsche would become CEO of the Mercedes Car Group effective September 1, 2005 and that Mr. LaSorda and Mr. Ridenour would already assume their new duties on that date. In January 2006, the Board of Management reported to the Supervisory Board on plans for a new management structure at the Group and the schedule prepared for its implementation. In this context, the Supervisory Board approved various changes in Board of Management members’ responsibilities. In February 2006, the Supervisory Board resolved to reappoint Mr. Bodo Uebber for a period of five years as of December 16, 2006 with unchanged responsibility for the area of “Finance & Controlling/Financial Services.” Audit of the 2005 financial statements. The DaimlerChrysler AG financial statements and the management report for 2005 were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Berlin and Frankfurt am Main, and were given an unqualified audit opinion. The same applies to the consolidated financial statements prepared according to US GAAP, which were supplemented with a group management report and additional notes. Pursuant to Articles 57 and 58 of the Introductory Law of the German Com- mercial Code (EGHGB) in connection with Section 292a of 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information the German Commercial Code (HGB), the US GAAP consolidated financial statements presented in this report grant exemption from the obligation to prepare consolidated financial statements in accordance with German law. The financial statements and the appropriation of earnings pro- posed by the Board of Management, as well as the auditors’ report, were submitted to the Supervisory Board. They were thoroughly inspected by the Audit Committee and the Super- visory Board and discussed in the presence of the auditors, who reported on the results of their audit. The Supervisory Board has declared itself in agreement with the results of the audit and has established that there are no objections to be made. The Supervisory Board has approved the financial statements presented by the Board of Management. The financial state- ments are thereby adopted. Finally, the Supervisory Board has also examined the appropriation of earnings proposed by the Board of Management and is in agreement with that proposal. Appreciation. The Supervisory Board expresses its gratitude to the management and the departing members of the Super- visory Board and the Board of Management. Particular thanks are due to Mr. Jürgen E. Schrempp for more than 40 years’ successful work for DaimlerChrysler, thereof more than 10 years as the Chairman of the Board of Management. He rende- red outstanding services to the Group. The Supervisory Board also thanks the employees of the Daimler- Chrysler Group for their outstanding personal commitment and their achievements in 2005. Stuttgart-Möhringen, February 2006 The Supervisory Board Hilmar Kopper Chairman 119 Members of the Supervisory Board Hilmar Kopper Frankfurt am Main Chairman of the Supervisory Board of DaimlerChrysler AG Chairman Arnaud Lagardère Paris General Partner and CEO of Lagardère SCA (since April 6, 2005) Erich Klemm 1 Sindelfingen Chairman of the Corporate Works Council, DaimlerChrysler Group and DaimlerChrysler AG Deputy Chairman Prof. Dr. Heinrich Flegel 1 Stuttgart Director Research Materials and Manufacturing, DaimlerChrysler AG, Chairman of the Management Representative Committee, DaimlerChrysler Group Nate Gooden 1 Detroit Vice President of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) Earl G. Graves New York Publisher, Black Enterprise Magazine Dr. Thomas Klebe 1 Frankfurt am Main Director Department for General Shop Floor Policy and Codetermination, German Metalworkers’ Union (IG Metal) Jürgen Langer 1 Frankfurt am Main Chairman of the Works Council of the Frankfurt/Offenbach Dealership, DaimlerChrysler AG Robert J. Lanigan Toledo Chairman Emeritus of Owens-Illinois, Inc.; Founding Partner, Palladium Equity Partners Helmut Lense 1 Stuttgart Chairman of the Works Council, Untertürkheim Plant, DaimlerChrysler AG Peter A. Magowan San Francisco President of San Francisco Giants William A. Owens Kirkland Retired President and Chief Executive Officer of Nortel Networks Corporation Gerd Rheude 1 Wörth Chairman of the Works Council, Wörth Plant, DaimlerChrysler AG Udo Richter 1 Bremen Chairman of the Works Council, Bremen Plant, DaimlerChrysler AG Wolf Jürgen Röder 1 Frankfurt am Main Member of the Executive Board of the German Metalworkers’ Union (IG Metal) Dr. rer. pol. Manfred Schneider Leverkusen Chairman of the Supervisory Board of Bayer AG Stefan Schwaab 1 Gaggenau Vice Chairman of the Corporate Works Council, DaimlerChrysler Group and DaimlerChrysler AG, Vice Chairman of the Works Council Gaggenau Plant, DaimlerChrysler AG Bernhard Walter Frankfurt am Main Former Spokesman of the Board of Management of Dresdner Bank AG Lynton R. Wilson Toronto Chairman of the Board of CAE Inc.; Chairman Emeritus, Nortel Networks Corporation Dr.- Ing. Mark Wössner Munich Former CEO and Chairman of the Supervisory Board of Bertelsmann AG Committees of the Supervisory Board: Committee pursuant to Section 31, Subsection 3 of the German Law of Industrial Codetermination Hilmar Kopper (Chairman) Erich Klemm Dr. rer. pol. Manfred Schneider Dr. Thomas Klebe Presidential Committee Hilmar Kopper (Chairman) Erich Klemm Dr. rer. pol. Manfred Schneider Dr. Thomas Klebe Audit Committee Bernhard Walter (Chairman) Hilmar Kopper Erich Klemm Stefan Schwaab Retired from the Supervisory Board: Prof. Victor Halberstadt Amsterdam Professor for Public Economics at Leiden University, Netherlands (retired April 6, 2005) 1 Representative of the employees 120 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Report of the Audit Committee Bernhard Walter Chairman of the Audit Committee The Audit Committee convened nine times in 2005. In February 2005, in the presence of the external auditors the Audit Com- mittee reviewed the financial statements and the consolidated financial statements for 2004 with the respective management reports, including the annual report on Form 20-F, and the proposal on the appropriation of earnings made by the Board of Management. The audit reports and important accounting matters were discussed in detail with the external auditors. The Audit Committee then recommended that the Supervisory Board agree to the Board of Management’s proposal on the appropriation of distributable profits and approve the financial statements. In further meetings during the course of the year, the Audit Committee held detailed discussions with the Board of Management attended by the external auditors concerning the 2005 half-year financial statements and the interim reports on the first and third quarters of 2005. The Audit Committee’s work in the year 2005 focused in partic- ular on the investigations taking place in the company that were initiated by the United States Securities and Exchange Commission (SEC). In each regular meeting, as well as in the additional special meetings convened for that purpose, the Audit Committee received information about the progress of the investigations from the company’s management and the lawyers and external auditors involved in the investigations. This included receiving reports on the existence, application and monitoring of international guidelines and rules of conduct, the further development of compliance management, and the elimination of deficits identified at the Group. The Audit Com- mittee also met several times to discuss these matters with- out any other representatives of the company. The willingness of DaimlerChrysler’s management to cooperate fully in these investigations also applies to the Audit Committee. The Audit Committee regularly examined the qualifications and independence of the external auditors, and, in a particular matter, their efficiency. In this context, during the year, the Audit Committee monitored the implementation of the princi- ples decided upon for the approval of services provided by the external auditors. After receiving the approval of the Annual Meeting, the Audit Committee engaged KPMG Deutsche Treu- hand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsge- sellschaft, Berlin and Frankfurt am Main, to conduct the annual audit, negotiated the audit fee of the external auditors and determined the important audit issues for the year 2005. In addition, the Audit Committee dealt regularly with complaints and criticism with regard to accounting, the internal monitoring systems and the annual audit that were received confidentially, and if so desired anonymously, from DaimlerChrysler employ- ees, and received information separately concerning violations of Section 302, Subsection 5 of the Sarbanes-Oxley Act. The Audit Committee also received regular reports, taking into con- sideration any justified complaints or criticism, about he intro- duction and effectiveness of the internal monitoring of financial reporting relating to the correct implementation of the provi- sions of the Sarbanes-Oxley Act. Furthermore, in the year 2005, the Audit Committee was occu- pied with new accounting standards and their interpretation, as well as with the status of the introduction within the compa- ny of the International Financial Reporting Standards. The Audit Committee was also occupied with the risk-monitoring system, the company’s risk reports and the risks from legal proceedings, the reports and programs of the Corporate Audit department, the Group’s effective tax rate and tax structure, new statutory developments of relevance for the Audit Committee, and the Group’s interest-rate and exchange-rate management. Once again in the year 2005, the Audit Committee conducted a specific self-evaluation of its activities. Stuttgart-Möhringen, February 2006 The Audit Committee Bernhard Walter Chairman 121 Consolidated Financial Statements The accompanying consolidated financial statements (consolidated ba- lance sheets as of December 31, 2005 and 2004, consolidated statements of income, cash flows and changes in stockholders’ equity for each of the financial years 2005, 2004 and 2003 as well as notes to consolidated financial statements) were prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). In order to comply with Section 57 and 58 of the EGHGB (Introductory Law to German Commercial Code) in conjunction with Section 292a of the HGB (German Commercial Code), the consolidated financial state- ments were supplemented with the Group management 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 Directive of the European Community. For the interpretation of these directives we relied on Article 2 of the German Amendment Accounting Standard No. 2 issued by the German Accounting Standards Committee. The consolidated financial statements and the Group management report as of December 31, 2005, prepared according Section 57 and 58 of the EGHGB in conjunction with Section 292a of the HGB and filed with the Commercial Register in Stuttgart under the number HRB 19 360, will be provided to shareholders on request. 122 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contents 122 Overview 124 Statement by the Board of Management Notes to Consolidated Financial Statements – 134 Basis of Presentation 125 Report of Independent Registered Public Accounting Firm 151 Notes to Consolidated State- ments of Income (Loss) 126 Consolidated Statements of 160 Notes to Consolidated Balance Income (Loss) Sheets 128 Consolidated Balance Sheets 129 Consolidated Statements of Changes in Stockholders’ Equity 130 Consolidated Statements of Cash Flows 132 Consolidated Fixed Assets Schedule 182 Notes to Consolidated Statements of Cash Flows 182 Other Notes 123 Statement by the Board of Management The Board of Management of DaimlerChrysler AG is responsible for preparing the accompanying financial statements. We have implemented effective controlling and monitoring systems to guarantee compliance with accounting principles and the adequacy of reporting. These systems include the application 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. In accordance with German legal requirements we have inte- grated 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 Aktienge- sellschaft Wirtschaftsprüfungsgesellschaft audited the consoli- dated financial statements, which were prepared in accordance with US generally accepted accounting principles, and issued an unqualified audit report. Together with the independent auditors, the Supervisory Board’s Audit Committee examined and discussed the consolidated financial statements including the business review report and the auditors’ report in depth. Subsequently, the entire Super- visory Board reviewed the documentation related to the conso- lidated financial statements. The result of this examination is included in the Report of the Supervisory Board. Dieter Zetsche Bodo Uebber 124 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Report of Independent Registered Public Accounting Firm The Supervisory Board DaimlerChrysler AG: We have audited the accompanying consolidated balance sheets of DaimlerChrysler AG and subsidiaries (“DaimlerChrysler”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of DaimlerChrysler’s management. Our re- sponsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments 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 in- cludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial posi- tion of DaimlerChrysler as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with generally accepted accounting principles in the United States of America. As described in Note 11 to the consolidated financial state- ments, DaimlerChrysler adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” in 2005. As de- scribed in Note 1 to the consolidated financial statements, DaimlerChrysler changed its method of accounting for stock- based compensation in 2003. As described in Notes 3 and 11 to the consolidated financial statements, DaimlerChrysler also adopted the required portions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51”, in 2003. Stuttgart, February 23, 2006 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Nonnenmacher Wirtschaftsprüfer Krauß Wirtschaftsprüfer 125 Consolidated Statements of Income (Loss) Note 2005 Year ended December 31, 2003 2004 Consolidated 35. 5. 149,776 142,059 136,437 (122,894) (114,567) (109,926) 26,882 27,492 26,511 5. (18,984) (17,972) (17,772) (5,649) (5,658) (5,571) 895 – (145) 4,612 689 – (469) 3,388 – (1,960) 966 (30) 36 3,221 – 217 217 3,438 (513) (74) 2,851 – – (5) 2,846 6. 12. 7. 8. 9. 10. 10. 11. 36. (1,077) (1,077) 3,535 (1,177) 108 2,466 – – – 2,466 2.80 2.43 – – – – – – 2.80 2.43 2.80 2.43 – – – – – – 2.80 2.43 (832) (2,792) 596 (979) (35) (418) 14 882 (30) 448 (0.41) 0.01 0.87 (0.03) 0.44 (0.41) 0.01 0.87 (0.03) 0.44 (in millions of €, except per share amounts) Revenues Cost of sales Gross profit Selling, administrative and other expenses Research and development Other income Goodwill impairment Turnaround plan Chrysler Group Income before financial income Impairment of investment in EADS Other financial income (expense), net (therein loss on issuance of associated company stock of €135 million in 2004 and gain on issuance of related company stock of €24 million in 2003) Financial income (expense), net Income (loss) before income taxes Income tax (expense) benefit Minority interests Income (loss) from continuing operations Income from discontinued operations, net of taxes Income on disposal of discontinued operations, net of taxes Cumulative effects of changes in accounting principles: transition adjustments resulting from adoption of FIN 47 and FIN 46R, net of taxes Net income (loss) Earnings per share Basic earnings per share Income (loss) from continuing operations Income from discontinued operations Income on disposal of discontinued operations Cumulative effects of changes in accounting principles Net income Diluted earnings per share Income (loss) from continuing operations Income from discontinued operations Income on disposal of discontinued operations Cumulative effects of changes in accounting principles Net income The accompanying notes are an integral part of these Consolidated Financial Statements. 126 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Industrial Business 1 Financial Services 1, 2 Year ended December 31, 2003 2004 2005 Year ended December 31, 2003 2004 2005 (in millions of €, except per share amounts) 134,340 128,133 122,397 15,436 13,926 14,040 Revenues (110,326) (103,771) (98,937) (12,568) (10,796) (10,989) Cost of sales 24,014 24,362 23,460 (17,725) (16,741) (16,374) (5,649) (5,658) (5,571) 921 (30) 36 1,567 – 192 192 1,759 133 (63) 1,829 – – (5) 1,824 833 – (145) 2,651 637 – (469) 1,683 – (1,960) (1,043) (1,043) 1,608 (442) 113 1,279 – – – 1,279 (775) (2,735) (1,052) (352) (30) (1,434) 14 882 (30) (568) 2,868 (1,259) 3,130 (1,231) 3,051 Gross profit (1,398) Selling, administrative and other expenses – 45 – – 1,654 – 25 25 1,679 (646) (11) 1,022 – – – – 62 – – 1,961 – (34) (34) 1,927 (735) (5) 1,187 – – – – 52 – – Research and development Other income Goodwill impairment Turnaround plan Chrysler Group 1,705 Income before financial income – Impairment of investment in EADS Other financial income (expense), net (therein loss on issuance of associated company stock of €135 million in 2004 and gain on issuance of related company stock of €24 million in 2003) Financial income (expense), net Income (loss) before income taxes Income tax (expense) benefit (57) (57) 1,648 (627) (5) Minority interests 1,016 Income (loss) from continuing operations – – – Income from discontinued operations, net of taxes Income on disposal of discontinued operations, net of taxes Cumulative effects of changes in accounting principles: transition adjustments resulting from adoption of FIN 47 and FIN 46R, net of taxes 1,022 1,187 1,016 Net income (loss) Earnings per share Basic earnings per share Income (loss) from continuing operations Income from discontinued operations Income on disposal of discontinued operations Cumulative effects of changes in accounting principles Net income Diluted earnings per share Income (loss) from continuing operations Income from discontinued operations Income on disposal of discontinued operations Cumulative effects of changes in accounting principles Net income 1 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. 2 Contains the financing and leasing business of the Financial Services segment without Mobility Management and activities of DaimlerChrysler Financial Services AG. 127 Consolidated Balance Sheets (in millions of €) 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 assets Securities Cash and cash equivalents Non-fixed assets Deferred taxes Prepaid expenses Disposal group Off-Highway, assets held for sale Total assets (thereof short-term 2005: €74,909; 2004: €68,679) Liabilities and stockholders’ equity Capital stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock Stockholders’ equity Minority interests Accrued liabilities Financial liabilities Trade liabilities Other liabilities Liabilities Deferred taxes Deferred income Disposal group Off-Highway, liabilities held for sale Total liabilities (thereof short-term 2005: €86,399; 2004: €77,158) Consolidated Industrial Business 1 Financial Services 1, 2 Note At December 31, 2004 2005 At December 31, 2004 2005 At December 31, 2005 2004 12. 13. 14. 20. 15. 16. 17. 18. 19. 20. 21. 9. 22. 10. 1,881 3,191 36,739 6,356 34,238 82,405 19,139 7,595 61,101 8,731 4,936 7,711 2,003 2,671 34,017 7,039 26,711 72,441 16,805 7,001 56,785 12,931 3,884 7,782 1,822 3,133 36,565 6,084 3,629 51,233 17,674 7,348 – 4,654 4,502 6,894 109,213 105,188 41,072 7,249 1,391 1,374 4,213 1,030 – 7,060 1,299 1,374 1,945 2,602 33,851 6,763 3,099 48,260 15,330 6,805 – 9,216 3,474 6,782 41,607 4,071 953 – 59 58 174 272 30,609 31,172 1,465 247 61,101 4,077 434 817 58 69 166 276 23,612 24,181 1,475 196 56,785 3,715 410 1,000 68,141 63,581 189 92 – 142 77 – 201,632 182,872 102,038 94,891 99,594 87,981 2,647 8,221 31,688 (6,107) – 2,633 8,042 30,361 (7,514) – 23. 36,449 33,522 26,859 25,445 653 46,682 80,932 14,591 9,053 104,576 4,203 8,298 771 25. 26. 27. 28. 9. 29. 10. 909 41,938 76,270 12,920 8,745 97,935 2,312 6,256 – 614 45,389 4,146 14,381 6,561 25,088 (2,309) 5,626 771 885 40,864 8,330 12,710 6,110 27,150 (3,854) 4,401 – 9,590 39 1,293 76,786 210 2,492 8,077 24 1,074 67,940 210 2,635 79,488 70,785 6,512 2,672 – 6,166 1,855 – 165,183 149,350 75,179 69,446 90,004 79,904 Total liabilities and stockholders’ equity 201,632 182,872 102,038 94,891 99,594 87,981 1 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. 2 Contains the financing and leasing business of the Financial Services segment without Mobility Management and activities of DaimlerChrysler Financial Services AG. The accompanying notes are an integral part of these Consolidated Financial Statements. 128 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Consolidated Statements of Changes in Stockholders’ Equity (in millions of €) Capital stock Additional paid-in capital Retained earnings Cumulative translation adjustment Available- for-sale securities Derivative financial instruments Minimum pension liability Treasury stock Accumulated other comprehensive loss Balance at January 1, 2003 2,633 7,819 30,485 Net income Other comprehensive income (loss) Total comprehensive income Stock based compensation Issuance of shares upon conversion of notes Purchase of capital stock Re-issuance of treasury stock Dividends – – – – – – – – – 95 1 – – – Balance at December 31, 2003 2,633 7,915 Net income Other comprehensive loss Total comprehensive income Stock based compensation Purchase of capital stock Re-issuance of treasury stock Dividends – – – – – – – – 127 – – – Balance at December 31, 2004 2,633 8,042 Net income Other comprehensive income (loss) Total comprehensive income Stock based compensation Issuance of new shares Purchase of capital stock Re-issuance of treasury stock Dividends Other – – – 14 – – – – Balance at December 31, 2005 2,647 – – 87 141 – – – (49) 8,221 448 – – – – – (1,519) 29,414 2,466 – – – – (1,519) 30,361 2,846 – – – – – (1,519) – 465 – (1,628) – – – – – (74) – 407 – – – – – 1,065 – 1,162 (7,317) – 444 – – – – – – – – – – (1,163) 333 2,227 (6,873) – (715) – (206) – (369) – (748) – – – – – – – – – – – – – – – – (1,878) 127 1,858 (7,621) – 2,727 – (18) – (1,223) – (79) – – – – – – – – – – – – – – – – – – – – – – – – 31,688 849 109 635 (7,700) – – – – – (28) 28 – – – – – (30) 30 – – – – – – (21) 21 – – – The accompanying notes are an integral part of these Consolidated Financial Statements. Total 35,076 448 385 833 95 1 (28) 28 (1,519) 34,486 2,466 (2,038) 428 127 (30) 30 (1,519) 33,522 2,846 1,407 4,253 87 155 (21) 21 (1,519) (49) 36,449 129 Consolidated Statements of Cash Flows * (in millions of €) Net income (loss) Income (loss) applicable to minority interests Cumulative effects of changes in accounting principles Gains on disposals of shares in companies Impairment of investment in EADS Depreciation and amortization of equipment on operating leases Depreciation and amortization of fixed assets Change in deferred taxes Equity (income) loss from equity method investments Change in financial instruments (Gains) losses on disposals of fixed assets/securities Change in trading securities Change in accrued liabilities Turnaround plan expenses (gains) – Chrysler Group Turnaround plan payments – Chrysler Group Consolidated Year ended December 31, 2003 2004 2005 2,846 74 5 (732) – 6,341 6,312 (809) (103) 298 (1,370) (4) 170 (36) (92) 2,466 (108) – (281) – 5,445 5,817 (593) 933 (275) (520) (26) 1,344 145 (219) 448 35 30 (956) 1,960 5,579 5,838 644 538 160 (424) 71 1,015 469 (279) Net changes in inventory-related receivables from financial services (207) (2,455) (2,670) 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 Investments in/collections from wholesale receivables Proceeds from sale of wholesale receivables Investments in retail receivables Collections on retail receivables Proceeds from sale of retail receivables Acquisitions of securities (other than trading) Proceeds from sales of securities (other than trading) Change in other cash Cash used for investing activities Change in commercial paper borrowings and short-term financial liabilities Additions to long-term financial liabilities Repayment of long-term financial liabilities Dividends paid (including profit transferred from subsidiaries) Proceeds from issuance of capital stock (including minority interests) Purchase of treasury stock Cash provided by (used for) financing activities 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 The accompanying notes are an integral part of these Consolidated Financial Statements. * For other information regarding Consolidated Statements of Cash Flows, see Note 30. 130 (1,519) (443) 802 820 (1,393) 242 1,186 (648) (293) (441) 1,081 1,021 12,353 11,060 13,826 (20,236) (6,580) (272) 11,643 1,098 (552) 516 (5,195) 5,288 (17,678) (6,386) (514) 10,468 741 (264) 1,218 (5,978) 6,331 (27,073) (30,488) 21,262 8,612 (10,773) 11,025 15 17,148 9,531 (4,211) 3,481 (81) (15,604) (6,614) (303) 11,951 643 (1,021) 1,209 (10,432) 10,260 (28,946) 16,577 9,196 (5,175) 4,785 (134) (11,222) (16,682) (13,608) 1,407 14,322 (15,867) (1,575) 227 (27) (1,513) 620 238 7,381 7,619 2,453 15,013 (13,370) (1,547) 30 (30) 2,549 (313) (3,386) 10,767 7,381 129 16,436 (12,518) (1,537) 44 (36) 2,518 (1,069) 1,667 9,100 10,767 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Industrial Business 1 Financial Services 1, 2 Year ended December 31, 2003 2004 2005 Year ended December 31, 2003 2004 2005 (in millions of €) (568) 1,022 1,187 1,016 Net income (loss) 1,824 63 5 (732) – 667 6,251 (356) (92) 297 (1,320) (3) 93 (36) (92) 1,279 (113) – (281) – 544 5,693 (1,211) 951 (288) (524) (29) 1,198 145 (219) (1,518) (1,535) 210 1,193 (805) 3,753 (3,828) (6,298) (496) 4,514 705 (244) 1,176 30 30 (956) 1,960 609 5,735 194 539 141 (424) 82 1,098 469 (279) (502) (500) 1,082 715 6,785 (3,973) (6,539) (250) 4,577 606 (967) 1,179 (207) (2,455) (2,670) 29,911 (27,849) 37,346 (34,938) 4,457 (3,848) (115) (4,210) 3,445 (189) (2,869) 1,481 2,661 (6,953) (585) (255) (30) 3,829 (3,206) (361) (4,963) 4,687 (207) (3,180) (1,392) 5,469 (4,229) (908) (220) (36) (3,681) (1,316) (291) (3,088) 9,469 6,381 (981) 1,308 8,161 9,469 (419) 806 989 6,220 (4,181) (6,537) (253) 4,996 1,066 (566) 186 26,963 (27,246) 3,818 (2,824) (504) (10,773) 11,017 75 (4,763) 848 2,297 (4,609) (287) 195 (27) (1,583) 548 422 6,381 6,803 11 – – – 5,674 61 (453) (11) 1 (50) (1) 77 – – – (1) (24) (4) (169) 6,133 5 – – – 5 – – – Income (loss) applicable to minority interests Cumulative effects of changes in accounting principles Gains on disposals of shares in companies Impairment of investment in EADS 4,901 4,970 Depreciation and amortization of equipment on operating leases 124 618 (18) 13 4 3 146 – – – 142 32 (7) 157 7,307 103 450 (1) 19 – (11) (83) – – – 209 59 (1) 306 7,041 Depreciation and amortization of fixed assets Change in deferred taxes Equity (income) loss from equity method investments Change in financial instruments (Gains) losses on disposals of fixed assets/securities Change in trading securities Change in accrued liabilities Turnaround plan expenses (gains) – Chrysler Group Turnaround plan payments – Chrysler Group Net changes in inventory-related receivables from financial services 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: (16,055) (13,850) (11,631) – Increase in equipment on operating leases (43) (19) 6,647 32 14 330 (32,158) 32,534 (30,891) 24,086 9,116 – 8 (60) (6,459) 559 12,025 (11,258) (1,288) 32 – 70 72 (184) 1,000 816 (88) (18) 5,954 36 (20) 42 (35,889) 34,180 (34,945) 20,996 9,646 (1) 36 108 (75) (53) 7,374 37 (54) 30 (47,778) 45,198 (32,775) 19,783 9,557 (212) 98 73 – 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 Investments in/collections from wholesale receivables Proceeds from sale of wholesale receivables Investments in retail receivables Collections on retail receivables Proceeds from sale of retail receivables Acquisitions of securities (other than trading) Proceeds from sales of securities (other than trading) Change in other cash (13,813) (10,428) Cash used for investing activities 972 12,352 (6,417) (962) 285 – 6,230 (22) (298) 1,298 1,000 1,521 10,967 (8,289) (629) 264 Change in commercial paper borrowings and short-term financial liabilities Additions to long-term financial liabilities Repayment of long-term financial liabilities Dividends paid (including profit transferred from subsidiaries) Proceeds from issuance of capital stock (including minority interests) – Purchase of treasury stock 3,834 Cash provided by (used for) financing activities (88) 359 939 1,298 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 Additional information about the Industrial Business and Financial Services is not required under U.S. GAAP and is unaudited. 2 Contains the financing and leasing business of the Financial Services segment without Mobility Management and activities of DaimlerChrysler Financial Services AG. 131 Consolidated Fixed Assets Schedule (in millions of €) 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 Balance at January 1, 2005 Currency change Change in consolidated companies Additions Reclassifica- tions Disposals Balance at December 31, 2005 Acquisition or Manufacturing Costs 3,049 3,477 6,526 20,995 32,536 361 417 778 1,145 2,766 22,797 2,242 4,268 80,596 1,026 247 4,334 1,033 242 611 258 7,751 35,080 494 6,647 17 – 15 8 10 29 – 79 4,425 16 – 16 (15) 4 5 16 10 (161) (108) 21 (22) – – (4) (274) 275 176 274 450 270 847 – 169 169 377 1,976 520 205 725 3,082 4,132 7,214 393 1,854 22,379 36,275 1,502 1,517 1,856 26,207 4,002 6,621 (4,053) (183) 47 4,150 4,680 89,541 930 138 3,983 768 73 607 226 126 48 513 568 190 180 244 165 47 140 312 11 147 15 837 9 – (14) 5 – – 201 201 20,236 (187) 14,933 44,896 1,869 6,725 1 Currency translation changes with period end rates. The consolidated fixed assets schedule is part of the Notes to Consolidated Financial Statements. 132 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Balance at January 1, 2005 Currency change Change in consolidated companies Additions Reclassifica- tions Disposals Balance at December 31, 2005 Balance at December 31, 2005 Balance at December 31, 2004 (in millions of €) Depreciation/Amortization Book Value 1 1,046 806 1,852 9,570 21,436 130 57 187 465 1,596 15,497 1,448 76 46,579 15 3,524 211 10 (2) 253 164 12 64 712 1 – 5 – – – – 6 8,369 1,035 – (5) (5) 9 (3) 3 – 9 (8) (6) 7 (17) – – (4) (28) 56 30 201 231 671 3,005 2,351 12 6,039 32 2 – 4 1 – 3 42 6,341 – 2 2 (7) (9) 57 (2) 39 – – – – – – – – (41) 5 120 125 1,201 941 2,142 207 1,697 10,501 24,328 1,881 3,191 5,072 11,878 11,947 2,003 2,671 4,674 11,425 11,100 1,484 17,872 8,335 7,300 – 101 4,579 3,388 52,802 36,739 4,192 34,017 815 237 766 132 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 3,973 4,336 Investments in associated companies 588 72 606 219 780 78 599 194 Investments in related companies Loans to associated and related companies Long-term securities Other loans 72 – – 60 164 11 56 164 6 10 180 1 1 7 363 5,102 369 6,356 10,658 34,238 7,039 26,711 Investments and long-term financial assets Equipment on operating leases 133 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 America (“U.S. GAAP”). All amounts are presented in millions of euros (“€”). Certain amounts reported in previous years have been reclassi- fied to conform to the 2005 presentation. In connection with an internal investigation of certain accounts, transactions and payments, DaimlerChrysler made adjustments to its January 1, 2003 stockholders’ equity balance to correct for misstatements in years prior to 2003 and recognized charges in its 2005 consolidated financial income statement to correct for misstatements in the years 2003 and 2004 (see Note 31). DaimlerChrysler also adjusted its January 1, 2003 stockholders’ equity balance and recognized charges in its 2005 income relating to the years 2003 and 2004 to correct the accounting for certain derivative instruments that did not qualify for hedge accounting treatment, deferred income taxes of its U.S. subsidiaries, and other minor misstatements. The charges recognized for 2003 and 2004 had the effect of reducing oper- ating profit by €55 million, financial income by €58 million, tax expense by €7 million, and 2005 net income by €106 million in the 2005 statement of income. The total adjustments relating to the years prior to 2003 had the effect of increasing stockholders’ equity as of January 1, 2003 by €72 million. The 2003 and 2004 misstatements were not material to those years and the charges recognized in 2005 to correct the mis- statements of those years were not material to the consolidated statement of income for 2005. In addition, the adjustments to January 1, 2003 stockholders’ equity to correct the cumula- tive misstatements as of that date were not material to be- ginning stockholders’ equity as of January 1, 2003. 134 Commercial practices with respect to certain products manu- factured 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 activities of its financial services business. To enhance the readers’ under- standing of the Group’s consolidated financial statements, the accompanying financial statements present, in addition to the audited consolidated financial statements, unaudited infor- mation with respect to the results of operations and financial position of the Group’s industrial and financial services busi- ness 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 results of operations and financial position of the Group’s industrial or financial services business activities. Information concerning the financial services busi- ness activities of the Group contains the financing and leasing business of the Financial Services segment without Mobility Management and the activities of DaimlerChrysler Financial Ser- vices AG. Transactions between the Group’s industrial and financial services business activities principally represent inter- company sales of products, intercompany borrowings and related interest, and other support under special vehicle financ- ing 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 in conformity with U.S. GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Significant items related to such estimates and assump- tions include recoverability of investments in equipment on operating leases, collectibility of sales financing and finance lease receivables, realizability of investments in associated compa- nies, warranty obligations, sales incentive obligations, valuation of derivative instruments, and assets and obligations related to employee benefits. Actual amounts could differ from those estimates. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Foreign Currencies. The assets and liabilities of foreign opera- tions where the functional currency is not the euro are gen- erally translated into euro using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss. The statements of income and the statements of cash flows are translated using average exchange rates during the respective periods. The exchange rates of the U.S. dollar, as the significant foreign currency, used in preparation of the consolidated financial statements were as follows: 2005 € 1 = 2004 € 1 = 2003 € 1= Exchange rate at December 31, 1.1797 1.3621 1.2630 Average exchange rates First Quarter Second Quarter Third Quarter Fourth Quarter 1.3113 1.2594 1.2199 1.1897 1.2497 1.2046 1.2218 1.2977 1.0735 1.1355 1.1248 1.1885 The assets and liabilities of foreign operations in highly infla- tionary economies are translated into euro on the basis of peri- od-end rates for monetary assets and liabilities and at histori- cal rates for non-monetary items, with resulting translation gains and losses recognized in earnings. Further, for foreign opera- tions in such economies, depreciation and gains and losses from the disposal of non-monetary assets are determined using historical rates. In all periods presented the Group had foreign operations in one economy that was considered highly inflation- ary. Risks and uncertainties. DaimlerChrysler’s financial position, results of operations, and cash flows are subject to numerous risks and uncertainties. Factors that could affect Daimler- Chrysler’s future financial statements and cause actual results to vary materially from expectations include, but are not limited to, adverse changes in global economic conditions; overcapa- city and intense competition in the automotive industry; depen- dence on suppliers of parts and services, primarily single source suppliers; the concentrations of DaimlerChrysler’s rev- enues derived from the United States and Western Europe; the significant portion of DaimlerChrysler’s workforce subject to collective bargaining agreements; fluctuations in currency exchange rates, interest rates and commodity prices; 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 sub- sidiaries and certain variable interest entities for which Daimler- Chrysler is determined to be the primary beneficiary (see Note 2). All significant intercompany accounts and transactions relating to consolidated subsidiaries and consolidated variable interest entities have been eliminated. Investments in Associated Companies. Significant equity investments in which DaimlerChrysler does not have a control- ling financial interest, but has the ability to exercise signifi- cant influence over the operating and financial policies of the investee (“associated companies”) are accounted for using the equity method. The excess of DaimlerChrysler’s initial investment in equity method companies over the Group’s ownership percentage in the underlying net assets of those companies is attributed to certain fair value adjustments with the remaining portion recog- nized as goodwill (“investor level goodwill”) which is not amor- tized. A decline in fair value of an investment in any associated com- pany below its carrying amount that is deemed to be other than temporary results in a reduction in carrying amount of the investment to fair value. The impairment is charged to earnings and a new cost basis for the investment is established. The European Aeronautic Defence and Space Company EADS N.V. (“EADS”) represents a significant associated company. Because the financial statements of EADS are not made avail- able timely to DaimlerChrysler in order to apply the equity method of accounting, the Group’s proportionate share of the results of operations of this associated company are included in DaimlerChrysler’s consolidated financial statements on a three month lag. 135 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 reasonably assured. Revenues are recognized net of discounts, cash sales incen- tives, customer bonuses and rebates granted. Non-cash sales incentives that do not reduce the transaction price to the cus- tomer are classified within cost of sales. Shipping and handling costs are recorded as cost of sales in the period incurred. When below market rate loans under special financing programs are used to promote sales of vehicles and the Financial Ser- vices segment finances the vehicle, the effect of the rate differ- ential at the contract origination date is deducted from rev- enues and recorded as unearned income in the consolidated balance sheet. The Financial Services segment amortizes the unearned income balance into earnings using the interest method over the original (contractual) life of the receivables. Upon prepayment or sale of the receivable, the unamortized un- earned income is recognized into earnings. Sales under which the Group guarantees the minimum resale value of the product, such as in sales to certain rental car company customers, are accounted for similar to an operating lease in accordance with Emerging Issues Task Force (“EITF”) 95-1, “Revenue Recognition on Sales with a Guaranteed Mini- mum Resale Value.” The guarantee of the resale value may take the form of an obligation by DaimlerChrysler to pay any defi- ciency between the proceeds the customer receives upon resale in an auction and the guaranteed amount or an obligation to reacquire the vehicle after a certain period of time at a set price. Gains or losses from resale of these vehicles are included in gross profit. Revenue from operating leases is recognized on a straight-line basis over the lease term. 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 receivable be- comes contractually delinquent for periods ranging from 60 to 120 days. DaimlerChrysler uses price discounts to adjust market pricing in response to a number of market and product factors, includ- ing: pricing actions and incentives offered by competitors, economic conditions, 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 incentive programs at any 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 pro- grams offered to dealers and consumers. This estimated im- pact represents the incentive programs offered to dealers and consumers as well as the expected modifications to these pro- grams in order for the dealers to sell their inventory. The Group offers extended, separately priced warranty con- tracts 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 information. In circumstances in which there is insuffi- cient historical information, income from extended warranty contracts is recognized on a straight-line basis. A loss on these contracts is recognized in the current period if the sum of expected costs for services under the contract exceeds unearn- ed revenue. For transactions with multiple deliverables, such as when vehi- cles are sold with free service programs, the Group allocates revenue to the various elements based on their relative fair val- ues when criteria for separation are met. 136 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Sales of receivables. The Group transfers significant amounts of automotive finance receivables in the ordinary course of business to trusts in “asset-backed securitizations” and “whole loan sales” and usually remains as servicer for a servicing fee. The accounting for securitized sold receivables is based upon the financial component approach that focuses on control according to the provisions of Statement of Financial Account- ing Standards (“SFAS”) 140, “Accounting for Transfers and Ser- vicing of Financial Assets and Extinguishment of Liabilities.” Servicing fees are recognized on a consistent yield basis over the remaining term of the related receivables sold. Gains and losses from the sale of finance receivables are recog- nized as revenues in the period in which the sale occurs. In determining the gain or loss for each qualifying sale of finance receivables, the investment in the receivable pool sold is allo- cated between the portion sold and the portion retained based upon their relative fair values. Further information on the Group’s securitized sold receivables is included in Note 34. Estimated Credit Losses. DaimlerChrysler determines its allo- wance for credit losses based on an ongoing systematic review and evaluation performed as part of the credit-risk evaluation process. The evaluation performed considers historical loss ex- perience, 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 adjust- ed 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 for impairment individually based on the fair value of the underlying collateral. Credit exposures deemed to be uncollectible are charged against the allowance for doubtful accounts. Daimler- Chrysler generally does not originate or purchase receivables for resale. Loans that are classified as held for sale are carried at the lower of cost or market when it is determined that mar- ket price for the loan represent the estimated future cash flows on the loan. Research and Development and Advertising. Research and development and advertising costs are expensed as incurred. Sales of Newly Issued Subsidiary Stock. Gains and losses re- sulting from the issuance of stock by a Group subsidiary to third parties that reduce DaimlerChrysler’s percentage owner- ship (“dilution gains and losses”) and DaimlerChrysler’s share of any dilution gains and losses reported by its investees accounted for under the equity method are recognized in the Group’s consolidated statement of income in the line item “Other financial income (expense), net.” Income taxes. Current income taxes are determined based on respective local taxable income and tax rules. In addition, current income taxes include adjustments for uncertain tax pay- ments or tax refunds for periods not yet assessed. Deferred tax reflects the changes in deferred tax assets and liabilities ex- cept for changes recognized in other comprehensive loss. Deferred tax assets or liabilities are determined based on tem- porary differences between financial reporting and the tax basis of assets and liabilities including differences from consoli- dation, loss carry forwards and tax credits. Amortization of these differences or realization of loss carry forwards and tax credits are based on enacted local tax rules and tax rates. DaimlerChrysler recognizes a valuation allowance on deferred tax assets if it is more likely than not that the benefit from the deferred tax asset will not be realized. Discontinued Operations. The results of operations of dis- continued Group components and gains or losses from their dis- posal are each presented separately net of tax in the Group’s statement of income for all periods presented. A Group compo- nent is considered a discontinued operation if its operations and cash flows have been or will be eliminated from the ongoing activities of the Group as a result of the disposal transaction, the Group will not have any significant subsequent continuing involvement with the component, and the component can be clearly distinguished operationally and for financial reporting purposes. If not disposed of by the balance sheet date, to qualify as discontinued operations, a component must also meet the conditions to be classified as held for sale. Net assets of a discontinued Group component classified as held for sale are measured at the lower of its carrying amount or fair value less cost to sell. Gains from the sale of a discontinued Group component are recognized in the period realized and report- ed separately. 137 Pension and Other Postretirement Plans. The measurement 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, “Employ- ers’ Accounting for Postretirement Benefits Other Than Pen- sions,” respectively. As permitted under SFAS 87 and SFAS 106, changes in the amount of either the projected benefit obliga- tion (for pension plans), the accumulated benefit obligation (for other postretirement plans) or differences between actual and expected return on plan assets and from changes in assumptions can result in gains and losses not yet recognized in the Group’s consolidated financial statements. 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 peri- odic 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 accumulated postretirement benefit obligation (for other postretirement 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). DaimlerChrysler elected retroactive application as of January 1, 2004, to account for subsidies provided under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Act”). Under certain conditions, the Medicare Act provides for subsidies related to postretirement healthcare ben- efits that reduce the accumulated postretirement benefit obli- gation (“APBO”) of companies in the United States. See Note 25a for further information about the impact of the Medicare Act on the Group’s consolidated financial statements. Earnings Per Share. Basic earnings per share are calculated by dividing income from continuing operations and net income, respectively, by the weighted average number of shares out- standing. Diluted earnings per share reflect the potential dilu- tion that would occur if all securities and other contracts to issue ordinary shares were exercised or converted (see Note 36). Goodwill and Other Intangible Assets. The Group accounts for all business combinations initiated after June 30, 2001, using the purchase method of accounting. Goodwill represents the excess of the cost of an acquired entity over the fair val- ues assigned to the assets acquired and the liabilities assumed after taking into consideration the types of acquired intan- gible assets that are required to be recognized and reported separately from goodwill. Goodwill acquired and intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment. DaimlerChrysler evaluates the recoverability of its goodwill at least annually or when significant events occur or there are changes in circumstances that indicate the fair val- ue of a reporting unit of the Group is less than its carrying val- ue. The Group determines the fair value of each of its reporting units by estimating the present value of their future cash flows. In addition, any recognized intangible asset determined to have an indefinite useful life is tested at least annually for impair- ment until its life is determined to no longer be indefinite. Intan- gible assets with estimable useful lives are valued at acquisition cost, are amortized on a straight-line basis over their res- pective estimated useful lives (2 to 10 years) to their estimated residual values, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. 138 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Property, Plant and Equipment. Property, plant and equipment is valued at acquisition or manufacturing costs plus the fair value of related asset retirement costs, if any and if reasonably estimable, less accumulated depreciation. Plant and equipment under capital leases are stated at the lower of present value of minimum lease payments or fair value less accumulated amor- tization. Depreciation expense is recognized using the straight- line method. The costs of internally produced equipment and facilities include all direct costs and allocable manufacturing overhead including depreciation charges as well as the fair val- ue of related asset retirement cost, if any. Costs of the con- struction of certain long-term assets include capitalized interest, which is amortized over the estimated useful life of the related asset. Property, plant and equipment are depreciated over the following useful lives: Impairment of Long-Lived Assets. Long-lived assets held and used, such as property, plant and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indi- cate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset or asset group to the estimated future undiscounted cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or group of assets exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the Group’s financial state- ments by the amount by which the carrying amount of the asset or group of assets exceeds fair value of the asset or group of assets. Assets and liabilities held for sale. Long-lived assets and disposal groups classified as held for sale (including discontin- ued operations) are disclosed separately. Long-lived assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. See Notes 4 and 10 for further information. 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 accompanying notes, the portion of assets to be realized in excess of one year has been disclosed. Inventories. Inventories are valued at the lower of acquisition or manufacturing cost or market, cost being generally deter- mined 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”). Manufacturing costs comprise direct material and labor and applicable manufactur- ing overheads, including depreciation charges. Buildings Site improvements Technical equipment and machinery Other equipment, factory and office equipment 10 to 50 years 5 to 40 years 3 to 30 years 2 to 33 years Leasing. Leasing includes all arrangements that transfer the right to use specified property, plant or equipment for a stated period of time, even if the right to use such property, plant or equipment is not explicitly described in an arrangement. The Group is a lessee of property, plant and equipment and lessor of equipment, principally passenger cars and commercial vehi- cles. 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 expense on operating lease where the Group is lessee is recognized over the respective lease terms using the straight-line method. Equipment on operating leases where the Group is lessor is carried initially at its acquisition or production 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 deter- mined using published third party information as well as projec- tions based on historical experience about expected resale values for the types of equipment leased. 139 Marketable Securities and Investments. Securities and cer- tain investments are accounted for at fair value, if fair value is readily determinable. Unrealized gains and losses on trading securities, representing securities bought and held 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 loss, net of applicable taxes, until realized. All other securi- ties and investments are recorded at cost. A decline in value of any available-for-sale security or cost method investment below cost that is deemed to be other than temporary results in an impairment charge to earnings that reduces the carrying amount of the security or the cost method investment to fair value establishing a new cost basis. Valuation of Retained Interests in Securitized Sold Receiv- ables. DaimlerChrysler retains residual beneficial interests in certain pools of sold and securitized retail and wholesale finance receivables. The retained interest balance represents DaimlerChrysler’s right to receive collections on the transferred receivables in excess of amounts required by the securitiza- tion trust to pay the interest and principal to investors, servicing fees, and other required payments. The Group determines the value of its retained interests using discounted cash flow mod- eling 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 securitized sold receiv- ables, expected future credit losses arising from the collection of the securitized sold receivables, and estimated 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 securities, net of related income taxes as a component of accumulated other comprehensive loss until realized. The Group is not aware of an active market for the purchase or sale of retained inter- ests, and accordingly, determines the estimated fair value of the retained interests by discounting the estimated 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 retain- ed interests is recognized in the period a decline in the estimat- ed cash flows below the cash flows inherent in the cost basis of an individual retained interest (the pool-by-pool method) is considered to be other than temporary. Other than temporary impairment adjustments are generally recorded as a reduction of revenue. 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 those highly liquid instru- ments with original maturities of three months or less to be cash equivalents. Derivative Instruments and Hedging Activities. Daimler- Chrysler uses derivative financial instruments such as forward contracts, swaps, options, futures, swaptions, forward rate agreements, caps and floors for hedging purposes. The account- ing of derivative instruments is based upon the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. On the date a derivative contract is entered into, DaimlerChrysler designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or a hedge of a net investment in a foreign opera- tion. DaimlerChrysler recognizes all derivative instruments as assets or accrued liabilities on the balance sheet and measures them at fair value, regardless of the purpose or intent for hold- 140 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information ing them. Changes in the fair value of derivative instruments are recognized periodically either in earnings or stockholders’ equi- ty, as a component of accumulated other comprehensive loss, depending on whether the derivative is designated as a hedge of changes in fair value or cash flows. For derivatives designat- ed 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 loss on the balance sheet, net of applicable taxes, until the hedged item is recognized in earnings. The ineffective portions of the fair value changes are recognized in earnings immediately. Deriva- tives 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 33. Commitments and Contingencies. Liabilities for loss contin- gencies are recorded when it is probable that a liability to third parties has been incurred and the amount can be reasonably estimated. Liabilities for loss contingencies are regularly adjust- ed as further information develops or circumstances change. The accrued liability for 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 esti- mate of recoveries from suppliers. The accrued liability for sales incentives is based on the esti- mated cost of the sales incentive programs and the number of vehicles 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 recent actual experience. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34” DaimlerChrysler recognizes, at inception of a guarantee, a liability for the fair value of the non-contin- gent portion of the obligation due to the issuance of the guaran- tee. DaimlerChrysler applies these provisions for guarantees issued or modified after December 31, 2002. If performance under the guarantee is probable and the amount can be reason- ably estimated, a liability for the contingent obligation is re- cognized for any guarantee regardless of its date of issuance. Further information on the Group’s obligations under guaran- tees is included in Note 25b and 32. DaimlerChrysler records the fair value of an asset retirement obligation in the period in which it incurs a legal obligation asso- ciated with the retirement of tangible long-lived assets and subsequently adjusts the carrying amount for changes in expect- ed cash flows and the passage of time. 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. 141 Stock-Based Compensation. DaimlerChrysler adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2003. Compensation expense for all stock-options granted after De- cember 31, 2002, has been measured principally at the grant date based on the fair value of the equity award using a modi- fied Black-Scholes option-pricing model. Compensation expense is recognized over the employee service period with an offset- ting credit to equity (paid-in capital). DaimlerChrysler options granted prior to January 1, 2003, continue to be accounted for using the intrinsic value based approach under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Compensa- tion expense under APB 25 was measured at the grant date based on the difference between the strike price of the equity award and the fair value of the underlying stock as of the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period. (in millions of €) 2005 2004 2003 Year ended December 31, Net income 2,846 2,466 448 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma net income Earnings per share (in €) Basic Basic – pro forma Diluted Diluted – pro forma 57 81 81 (59) 2,844 (113) 2,434 2.80 2.80 2.80 2.79 2.43 2.40 2.43 2.40 (164) 365 0.44 0.36 0.44 0.36 Further information on stock-based compensation is included in Note 24. New Accounting Standards Not Yet Adopted. In December 2004 the FASB issued SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R establishes the account- ing for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123R also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the enti- ty’s equity instruments or that may be settled by the issuance of those equity instruments. Equity-classified awards are meas- ured at grant date fair value and are not subsequently remea- sured. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. SFAS 123R originally applied to all awards granted after July 1, 2005, and to awards modified, repurchased or cancelled after that date. The effective date of SFAS 123R was deferred by an SEC Rule until the beginning of the first annual period beginning after June 15, 2005. DaimlerChrysler will adopt SFAS 123R as of Jan- uary 1, 2006, using a modified version of prospective applica- tion. DaimlerChrysler expects the cumulative effect from the adoption of SFAS 123R to increase expense by €9 million in the first quarter of 2006. In June 2005 the FASB ratified EITF 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements).” EITF 05-5 provides guidance on the accounting for the German Altersteilzeit (“ATZ”) early retirement program and other types of benefit arrangements with the same or simi- lar terms. The ATZ program is an early retirement program in Germany designed to create an incentive for employees within a certain age group, to transition from full or part-time employ- ment into retirement before their legal retirement age. The ATZ program provides the employee with a bonus which is reim- bursed by subsidies from the German government if certain conditions are met. According to EITF 05-5, the bonuses provid- ed by the employer should be accounted for as postemployment benefits under SFAS 112, “Employer’s Accounting for Post- retirement Benefits,” with compensation cost recognized over the remaining service period beginning when the individual agreement is signed by the employee and ending when the active service period ends. The government subsidy should be recognized when the employer meets the necessary criteria and is entitled to the subsidy. The effect of applying EITF 05-5 should be recognized prospectively as a change in accounting estimate in fiscal years beginning after December 15, 2005. DaimlerChrysler expects the adoption of EITF 05-5 to result in income after taxes of approximately €0.1 billion from the reduc- tion of the related provision that will be recognized in the income of the first quarter 2006 in the Group’s consolidated financial statements. 142 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information 2. Scope of Consolidation and Certain Variable Interest Entities Scope of Consolidation. DaimlerChrysler comprises, besides DaimlerChrysler AG, 494 (2004: 485) German and non- German subsidiaries as well as 4 (2004: 4) companies (variable interest entities) that have been consolidated in accordance with the requirements of FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities” (“FIN 46R”). A total of 96 (2004: 105) companies are accounted for in the consolidated financial statements using the equity method of accounting. During 2005, 18 subsidiaries were included in the consolidated financial statements for the first time. A total of 9 subsidiaries were no longer included in the consolidated group. The effects of changes in the Group’s con- solidated balance sheets and the consolidated statements of income, if material, are explained further in the notes to the con- solidated financial statements. In addition, 3 (2004: 3) compa- nies administering pension funds whose assets are subject to restrictions have not been included in the consolidated financial statements. The impact of non-consolidated subsidiaries (affili- ated companies) and investments that were not accounted for using the equity method of accounting (associated compa- nies) on the consolidated financial position, results of opera- tions or cash flows of the Group was neither material for indi- vidual companies nor in the aggregate. Variable Interest Entities. DaimlerChrysler applied the provi- sions of FIN 46R to special purpose entities as of December 31, 2003, and to all other entities as of March 31, 2004. The imple- mentation of FIN 46R resulted in the consolidation of several leasing arrangements that were off-balance in the past and qualify as special purpose entities as defined in FIN 46R. Daimler- Chrysler is the primary beneficiary of those structures and, accordingly, consolidated them effective December 31, 2003. Under the leasing arrangements, variable interest entities were established which raised funds by issuing either debt or equity securities to third party investors. The variable interest entities used the debt and equity proceeds to purchase property and equipment, which is leased by the Group and used in the normal course of business. At the end of the lease term, Daimler- Chrysler generally has the option to purchase the property and equipment or re-lease the property and equipment under new terms. Total assets of those consolidated entities amount to €0.5 billion and €0.7 billion and total liabilities amount to €0.7 billion and €0.8 billion as of December 31, 2005 and 2004, respectively. The cumulative effect of consolidating these spe- cial purpose entities on the Group’s consolidated statement of income in 2003 was €(30) million, net of taxes of €35 million (€(0.03) per share). The assets consist primarily of property, plant and equipment that generally serves as collateral for the entities’ long-term borrowings. The creditors of these entities do not have recourse to the general credit of the Group, except to the extent of guarantees provided. In addition, DaimlerChrysler has equity or other variable inter- ests in a number of other variable interest entities where it is not the primary beneficiary. Among these entities are Toll Collect, multi-seller bank conduits, and other variable interest entities. Note 3 provides disclosure about the Group’s involve- ment in Toll Collect, while multi-seller bank conduits are dis- cussed in Note 34. DaimlerChrysler’s aggregate maximum expo- sure to loss arising from its investments in the other variable interest entities was €0.4 billion as of December 31, 2005. 143 The carrying amount of DaimlerChrysler’s investment in EADS at December 31, 2005 and 2004 was €3,564 million and €3,854 million, respectively. DaimlerChrysler’s share of the underly- ing reported net assets of EADS exceeded the carrying value of DaimlerChrysler’s investment at December 31, 2005 and 2004, by €1,899 million, primarily as a result of the impairment recognized in the third quarter of 2003. The market value at December 31, 2005, of DaimlerChrysler’s investment in EADS based on quoted market prices was €8,507 million. The following table presents summarized U.S. GAAP financial information for EADS, which was the basis for applying the equi- ty method in the Group’s consolidated financial statements: EADS (in millions of €) 2005 2004 2003 Income statement information 1 Revenues Net income Balance sheet information 2 Fixed assets Non-fixed assets Total assets Stockholders’ equity Minority interests Accrued liabilities Other liabilities 32,542 30,977 27,650 980 753 348 32,462 36,935 69,397 16,557 1,811 10,825 40,204 29,331 34,525 63,856 17,434 1,971 9,299 35,152 Total liabilities and stockholders’ equity 69,397 63,856 1 For the period October 1 to September 30. 2 Balance sheet information as of September 30. 3. Significant Equity Method Investments EADS. At December 31, 2005, the European Aeronautic Defence and Space Company EADS N.V. (“EADS”) was the most significant investment accounted for under the equity method. The Group’s legal ownership percentage in EADS as of De- cember 31, 2005, was 30%. On July 7, 2004, DaimlerChrysler entered into a securities lend- ing agreement with Deutsche Bank AG concerning 22,227,478 EADS shares (3% of the voting stock). The securities lending has several tranches with terms ranging between three and four years. As collateral, DaimlerChrysler received a lien on a securities account of equivalent value as the shares loaned by DaimlerChrysler. Because this transaction does not meet the criteria of a sale, the loaned shares continue to be carried as investments on the balance sheet and, accordingly, our proportionate share of EADS’ income is still accounted at a per- centage of 33%. As of September 30, 2003, DaimlerChrysler determined that the decline in fair value below the carrying value of its investment in EADS was other than temporary. To evaluate the fair value of the investment the Group used the market price of a share of EADS common stock, multiplied by the number of shares owned. In making that determination, DaimlerChrysler consider- ed the duration and severity of the decline and the reasons for the decline. Although EADS is involved in a variety of busi- nesses, it is primarily an aircraft manufacturer because of its Airbus division, which manufactures commercial aircraft and rep- resents more than 60 % of EADS’ revenues. As a consequence, EADS’ share price declined as a result of the negative outlook for the airline industry in the aftermath of the terrorist attacks at September 11, 2001, the outbreak of the SARS disease, the war in Iraq and the decline of the U.S. dollar compared to the euro which further depressed market participants’ expectations for the commercial airline industry. Consequently, Daimler- Chrysler reduced the carrying value of its investment in EADS by €1.96 billion to its market value, based on the quoted mar- ket price, which approximated €3.5 billion at that time. As a result of the impairment a new cost basis was established. DaimlerChrysler’s equity in the earnings or losses of EADS was €324 million, €249 million and €(1,845) million in 2005, 2004 and 2003, respectively, including investor-level adjust- ments. DaimlerChrysler’s equity in the earnings or losses of EADS is shown in the Group’s statements of income within “Financial income (expense), net,” except for the other than temporary impairment of €1,960 million in 2003, which is included in a separate caption within “financial income (expense), net.” 144 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information MMC. On April 22, 2004, the Board of Management and the Supervisory Board of DaimlerChrysler AG decided to withdraw from providing any financial support to Mitsubishi Motors Corporation (“MMC”) and not to participate in a recapitalization of MMC anticipated to occur in July 2004. At the time of this decision, DaimlerChrysler held 37% of MMC’s voting stock and was represented by 3 of the 8 (37.5%) of the members of MMC’s board of directors. Between DaimlerChrysler’s Board vote on April 22, 2004, and the MMC shareholder meeting on June 29, 2004, MMC worked with its other significant shareholders, lenders and potential investors on a restructuring plan that included a recapitalization of MMC which was presented for vote at the June 29 sharehold- er meeting. DaimlerChrysler was not party to those discussions nor did DaimlerChrysler participate in any of the measures set forth in the restructuring plan; however, DaimlerChrysler’s concurrence to the measures was required as its ownership level at such time provided it with veto powers. On June 29, 2004, the shareholders of MMC approved the restructuring plan which resulted in a new investor obtaining a 33.3% interest in MMC’s voting stock, thereby becoming MMC’s largest shareholder, and in the issuance of three classes of convertible preferred instruments to other investors and some existing MMC shareholders (not including DaimlerChrysler). The new investor that acquired a 33.3% voting interest entered into a contractual agreement with MMC that awarded it the unilateral right to make significant operating decisions. In addi- tion, the new shareholder acted in concert with other large institutional shareholders who together with the new sharehold- er own a majority of the voting stock. Accordingly, such Japan- ese shareholder groups who acted in concert in the recapitaliza- tion were in a position to control MMC. The MMC board of directors was comprised of 12 board mem- bers in total, with DaimlerChrysler’s board representation re- duced to 2 board members (16.7%) which did no longer enable DaimlerChrysler to block or veto any matters coming to a vote at board level. DaimlerChrysler’s ownership interest in voting stock was diluted from 37.0% to 24.7% in the second quarter of 2004. The dilution below one-third was significant because Japanese laws require a one-third minimum quorum to afford shareholder protective rights, e.g. in cases of the dissolution of the company, the sale of all or substantial part of the business of the company, or agreements to merge with other companies. As a result, Daimler- Chrysler no longer had the blocking and veto rights that DaimlerChrysler believes are essential to exercise significant influence by ownership interest. DaimlerChrysler surrendered significant rights by agreeing not to oppose the restructuring plan. Upon conversion of the mandatory convertible preferred instruments issued to other MMC investors, DaimlerChrysler’s interest in MMC’s voting stock would have been further diluted to below 11%. Furthermore, all executive officers appointed by Daimler- Chrysler resigned and all other DaimlerChrysler expatriates, in total more than 50 managers that were assigned to this investee, left MMC prior to June 30, 2004, and returned to DaimlerChrysler. Even prior to the June 29, 2004 shareholder meeting, an announcement was made on May 24, 2004 inform- ing MMC employees that DaimlerChrysler’s assignees had been released from their managerial responsibilities and had delegated their responsibilities to other managers, none of whom were related to DaimlerChrysler. Based on the factors outlined above, DaimlerChrysler lost its ability to significantly influence MMC’s operating and financial policies. Consequently, as of the annual shareholders’ meeting of MMC on June 29, 2004, DaimlerChrysler ceased to account for its investment in MMC using the equity method and has accounted for MMC shares as a marketable security at fair val- ue until the disposition of such shares (see Note 20). Through June 29, 2004, the results from MMC were included in the Group’s consolidated statements of income using the equity method of accounting. The Group’s proportionate share in the negative results of MMC through June 29, 2004 and 2003, was €(655) million and €(281) million, respectively. The amount for 2004 includes the effects from the dilution of the Group’s interest in MMC of €(135) million and related real- ized gains from currency hedging of the net investment of €195 million (after tax €120 million). These effects from the dilution as well as these realized gains from currency hedging are reflected in DaimlerChrysler’s consolidated statement of in- come in the line item “financial income (expense), net”. In November 2005, DaimlerChrysler sold all of its MMC shares for €970 million in cash. Due to the gain on that sale, Daimler- Chrysler’s financial income and net income for 2005 increased by €681 million and €502 million, respectively. The following table presents summarized U.S. GAAP financial information for MMC, which was the basis for applying the equi- ty method in the Group’s consolidated financial statements: MMC (in millions of €) Income statement information 1 Revenues Net loss 2004 2003 9,858 (1,730) 27,129 (759) 1 2004 for the period October 1, 2003 to March 31, 2004; 2003 for the period October 1, 2002 to September 30, 2003, respectively. 145 Toll Collect. In 2002, our subsidiary DaimlerChrysler Financial Services AG (formerly DaimlerChrysler Services AG), Deutsche Telekom AG and Compagnie Financiere et Industrielle des Autoroutes S.A. (Cofiroute) contracted with the Federal Repub- lic of Germany to develop and, within a joint venture company, install and operate a system for electronic collection of tolls from all commercial vehicles over 12t GVW using German high- ways. DaimlerChrysler Financial Services AG and Deutsche Tele- kom AG each hold a 45% equity interest and Cofiroute holds the remaining 10% equity interest in both the consortium (Toll Collect GbR) and the joint venture company (Toll Collect GmbH) (together “Toll Collect”). DaimlerChrysler accounts for its 45% ownership interest in Toll Collect using the equity method of accounting. The Group has a significant variable interest in Toll Collect, a variable interest entity, but determined that it is not the primary beneficiary and therefore not required to consolidate Toll Collect. In the operating agreement, each of the consortium members (including DaimlerChrysler Financial Services AG) has provided guarantees supporting the obligations of Toll Collect GmbH towards the Federal Republic of Germany. These guaran- tees are described in more detail below. Cofiroute’s risks and obligations are limited to €70 million. DaimlerChrysler Financial Services AG and Deutsche Telekom AG are jointly obliged to indemnify Cofiroute for amounts exceeding this limitation. The following table presents summarized U.S. GAAP financial information for Toll Collect, which was the basis for applying the equity method in the Group’s consolidated financial state- ments: Toll Collect (in millions of €) 2005 2004 2003 Income statement information for the year Revenues Net loss 522 (143) – (1,071) – (206) Balance sheet information as of December 31 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities Total liabilities and equity 457 467 924 (789) 38 1,675 924 458 77 535 (934) 1,173 296 535 During the construction period of the toll collection system, the most significant assumptions used in accounting for the in- vestment in Toll Collect related to the launch date of the toll collection system, the estimated cost to design and construct the system, and the operation of the system. According to the Operating Agreement, the toll collection sys- tem was to be operational no later than August 31, 2003. After a delay in the launch date of the toll collection system, which resulted in a loss of revenue for Toll Collect and in payments of contractual penalties for delays, the toll collection system was introduced on January 1, 2005, with on-board units that allowed for slightly less than full technical performance in accordance with the technical specification (phase 1). On January 1, 2006, the toll collection system was installed and started to operate with full effectiveness as specified in the Operating Agreement (phase 2). On December 20, 2005 Toll Collect GmbH received a preliminary operating permit as specified in the Operating Agreement. Toll Collect GmbH expects to receive a final operat- ing permit in April 2006. Failure to obtain the final operating permit by January 1, 2007, at the latest, may lead to termina- tion of the operating agreement by the Federal Republic of Germany. With the successful start of phase 1, for the period beginning January 1, 2005, Toll Collect GmbH received remuneration for the infrastructure and the operation of the toll collection system from the Federal Republic of Germany. Certain immaterial penalties have been set off from the remuneration by the Feder- al Republic of Germany. According to the implementation agreement of April 23, 2004, the Federal Republic of Germany paid Toll Collect GmbH only 95% of the fees which would other- wise had been payable under the Operating Agreement due to the slightly reduced technical functionality during phase 1. Failure to perform various obligations under the Operating Agreement may result in penalties, additional revenue reduc- tions and damage claims that could become significant over time. However, penalties and revenue reductions are capped at €75 million per year until September 30, 2006, at €150 million per year thereafter until the final operating permit has been issued, and at €100 million per year following issuance of the final operating permit. These cap amounts are subject to a 3% increase for every year of operation. 146 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information During phase 1 any offsetting with claims of the Federal Repub- lic of Germany stemming from the period before January 1, 2005, including contractual penalties and damages, was exclud- ed. The exclusion of offsetting according to the implementa- tion agreement does not cover damages and contractual penal- ties arising with the beginning of phase 1. In phase 2 there are no limitations to offsetting by the Federal Republic of Ger- many. In case of any offsetting Toll Collect GmbH insofar may not receive remuneration. In case of offsetting, the consortium members may be required to provide Toll Collect GmbH with sufficient liquidity. The Operating Agreement calls for submission of all disputes related to the toll collection system to arbitration. The Federal Republic of Germany has initiated arbitration proceedings against DaimlerChrysler Financial Services AG, Deutsche Tele- kom AG and the consortium. According to the statement of claims received in August 2005, the Federal Republic of Germany is seeking damages, including contractual penalties and reim- bursement of lost revenues that allegedly arose from delays in the operability of the toll collection system. See Note 31 for additional information. Each of the consortium members (including DaimlerChrysler Financial Services AG) have provided guarantees supporting the obligations of Toll Collect GmbH towards the Federal Republic of Germany relating to the completion and operation of the toll collection system, which are subject to specific triggering events. In addition, DaimlerChrysler AG has guaranteed bank loans obtained by the consortium. The guarantees are describ- ed in detail below: – Guarantee of bank loan. DaimlerChrysler AG issued a guaran- tee to third parties up to a maximum amount of €600 million, which represents a 50% share of security to bank loans obtained by the consortium. – Guarantee of obligations. Towards the Federal Republic of Ger- many the consortium members have jointly and severally guaranteed the obligations of Toll Collect GmbH resulting from the operating agreement concerning the delivery and operation of the toll collection system. This guarantee expires one year after the successful launch of the completed toll collection system which we expect in April 2006. – Equity Maintenance Undertaking. The consortium members have the obligation to contribute, on a joint and several basis, additional funds to Toll Collect GmbH as may be necessary for Toll Collect GmbH to maintain a minimum equity (based on German Commercial Code accounting principles) of 15% of total assets (so called “Equity Maintenance Undertaking”). This obligation will terminate on August 31, 2015, when the Operating Agreement expires, or earlier if the agreement is terminated. Such obligation may arise if Toll Collect GmbH is subject to revenue reductions caused by underperformance, if the Federal Republic of Germany is successful in claiming lost revenues against Toll Collect GmbH for any period the system was not fully operational or if Toll Collect GmbH incurs penalties that may become payable under the above men- tioned agreements. If such penalties, revenue reductions and other events reduce Toll Collect GmbH’s equity to a level that is below the minimum equity percentage agreed upon, the consortium members are obligated to fund Toll Collect GmbH’s operations to the extent necessary to reach the required minimum equity. While DaimlerChrysler’s maximum future obligation resulting from the guarantee of the bank loan can be determined (€600 million), the Group is unable to accurately estimate its maxi- mum exposure to loss resulting from the guarantee of obliga- tions and the guarantee in form of the equity maintenance undertaking due to the various uncertainties described above. Therefore, in addition to the maximum exposure from the guarantee of the bank loan and the risks already provided for under the established accruals, the Group’s exceeding maxi- mum exposure to loss could be material. debis AirFinance. In November 1995, DaimlerChrysler assumed a 45% equity ownership interest in debis AirFinance B.V. (“dAF”), an Amsterdam registered Private Limited Liability Company that was established for purposes of leasing aircraft and related technical equipment to airlines and financial intermediaries. Several banks held the remaining ownership interests in dAF. DaimlerChrysler held significant variable interests in dAF, a variable interest entity, but determined that it was not the pri- mary beneficiary and therefore not required to consolidate dAF. DaimlerChrysler’s involvement with dAF consisted primari- ly of its equity interest and also subordinated loans receivable and unsecured loans provided to dAF. In the fourth quarter of 2004, DaimlerChrysler recorded impairment charges of €222 million relating to its investment which were based on esti- mates of the fair value of DaimlerChrysler’s proportionate share of dAF’s underlying equity and of the loans provided to dAF. 147 In June 2005, as part of the Group’s ongoing strategy to focus on its core automotive business, DaimlerChrysler sold its 45% equity interest in dAF and its outstanding subordinated loans receivable and unsecured loans to dAF for €325 million in cash to Cerberus Capital Management, L.P., subject to indemni- fication for exposures incurred prior to the sale up to a maxi- mum of $30 million. The sale did not have a material impact on the Group’s net income. Prior to the sale, DaimlerChrysler accounted for its investment in dAF using the equity method of accounting. Subsequent to DaimlerChrysler’s acquisition of a controlling interest in MFTBC, a number of quality problems concerning MFTBC vehicles spanning production years since July 1974 were identified. During the second and third quarters of 2004, DaimlerChrysler was able to comprehensively assess those quality issues and define necessary technical solutions and a course of action to implement them. The estimates of cost in the interim periods of 2004 were based on the status of the investigation and DaimlerChrysler’s best estimate of the proba- ble costs to be incurred to address and remedy the identified quality issues. Of the €1.1 billion quality costs recorded in 2004 by MFTBC, (i) €0.1 billion was recognized in “Financial income (expense), net” in the statement of income representing DaimlerChrysler’s proportionate share of the results of MFTBC, which was in- cluded on a one month lag relating to amounts attributed to re- finements to estimates that were made before MFTBC was fully consolidated, (ii) €0.7 billion to cost of sales representing the sum of the 43% attributed to the March 2003 investment (for which the purchase price allocation period was closed) and the 35% of the costs attributed to minority shareholders of MFTBC; (iii) €0.2 billion to goodwill attributed to the 22% inter- est acquired in 2004; and (iv) €0.1 billion to deferred tax assets. DaimlerChrysler assigned €95 million of the aggregate prelimi- nary purchase price to registered trademarks that are not subject to amortization, €81 million to technology with a useful life of 10 years, €49 million to other identifiable intangible assets and €14 million to acquired in-process R&D that was ex- pensed in the periods the investments were made. In addition, DaimlerChrysler assigned €6,206 million to tangible assets acquired and €5,469 million to liabilities assumed. The remain- ing €275 million was allocated to goodwill of the Commercial Vehicles segment and is not expected to be deductible for tax purposes. 4. Acquisitions and Dispositions Acquisitions MFTBC. On March 14, 2003, as part of the Group’s global com- mercial vehicle strategy, DaimlerChrysler acquired from MMC a 43% non-controlling interest in Mitsubishi Fuso Truck and Bus Corporation (“MFTBC”) for €764 million in cash plus certain direct acquisition costs. MFTBC is involved in the development, design, manufacture, assembly and sale of small, mid-size and heavy-duty trucks and buses, primarily in Japan and other Asian countries. Also, on March 14, 2003, ten Mitsubishi Group companies entered into a separate share sale and purchase agreement with MMC pursuant to which they purchased from MMC 15% of MFTBC’s shares for approximately €266 million in cash. On March 18, 2004, DaimlerChrysler acquired from MMC an additional 22% interest in MFTBC for €394 million in cash, thereby reducing MMC’s interest in MFTBC to a non-controlling 20%. The aggregate amount paid by DaimlerChrysler for its 65% controlling interest in MFTBC was €1,251 million, consisting of consideration paid plus direct acquisition costs in 2003 and 2004 (€770 million and €394 million, respectively), plus a re-allocation of €87 million of the initial purchase price of MMC pertaining to MFTBC and previously included in the Group’s investment in MMC, which was an equity method investee of DaimlerChrysler when the business combination with MFTBC was consummated. DaimlerChrysler has included the consoli- dated results of MFTBC beginning at the consummation date in the Group’s Commercial Vehicles segment. Prior to then, the Group’s proportionate share of MFTBC’s results was included in the Commercial Vehicles segment using the equity method of accounting (see also Note 35). 148 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information During the first quarter of 2005, MFTBC finished investigating the product quality reports and finalized its conclusions about the issues that required action. The level of information reached during this process enabled DaimlerChrysler to refine its estimate of the probable cost and an additional amount of €5 million was recorded in the first quarter of 2005. MFTBC expects to be able to complete the majority of the field cam- paigns by the end of the first quarter of 2006. Under the two share purchase agreements under which Daimler- Chrysler acquired 43% and 22%, respectively, of MFTBC shares, DaimlerChrysler had the right to a price adjustment if the warranty reserve recorded on the books of MFTBC proved to be inadequate. Negotiations with MMC resulted in a settle- ment agreement on March 4, 2005, in which the parties agreed on such a price adjustment. Under the terms of the settlement agreement, DaimlerChrysler received (i) MMC’s remaining 20% stake in MFTBC, (ii) a cash payment of €72 million, (iii) promis- sory notes having an aggregate face value of €143 million, payable in four equal installments over the next four years and (iv) certain other assets and rights pertaining to the distribution of MFTBC products in one Asian market. The parties also clarified the terms of their cooperation under other, ongoing agreements. The fair value assigned to the consideration re- ceived from MMC was €0.5 billion and has been allocated to income and goodwill consistent with DaimlerChrysler’s account- ing for the quality issues subsequent to the business combina- tion. Accordingly, €0.3 billion was recognized as a reduction of cost of sales in the first quarter of 2005 based on Daimler- Chrysler’s proportionate after-tax loss recorded in the second and third quarter of 2004 relating to quality measures and €0.2 billion was recognized as reduction of goodwill. As a result of the settlement with MMC, DaimlerChrysler’s controlling interest in MFTBC increased from 65% to 85% and the aggregate purchase price after giving effect to the price reduction was €1,014 million. As of June 30, 2005, goodwill of €53 million related to final purchase price allocation of MFTBC was allocated to the Commercial Vehicles segment. The good- will is not expected to be deductible for tax purposes. Dispositions Off-Highway business. In September 2005, DaimlerChrysler acquired the 11.65% interest in MTU Friedrichshafen GmbH (“MTU-F”) held by minority shareholders for €171 million in cash, including direct transaction costs. DaimlerChrysler has subse- quently owned 100% of the MTU-F shares. As a result of this transaction, DaimlerChrysler recorded a preliminary goodwill of €134 million that was allocated to goodwill of the Other Activi- ties segment. On December 27, 2005, as part of the Group’s ongoing strategy to focus on its core automotive business, DaimlerChrysler ent- ered into a share sale and purchase agreement with the Swedish investor group EQT regarding the sale of a major portion of its Off-Highway Business Unit, including the MTU-F Group and the Off-Highway activities of Detroit Diesel Corporation. The sale price, which still has to be determined finally, is based on an enterprise value of €1,600 million which is subject to adjust- ments for cash, debts, pensions and a standardized net working capital. The closing of the transaction, which is expected to occur in the first quarter of 2006, is subject to certain closing conditions, e.g. approval of the relevant anti-trust authorities. Further- more, the transaction has to be submitted for review by the Federal Ministry of Economics and Technology under the German Foreign Trade and Payments Act (see Note 10 for presentation). ALF. In the third quarter of 2005, as part of the Group’s ongoing strategy to focus on its core automotive business, Freightliner, a wholly-owned U.S. subsidiary of DaimlerChrysler, entered into an agreement to sell major parts of its subsidiary American LaFrance (“ALF”), a fire-truck manufacturer, to an U.S. invest- ment company. The sale was closed in the fourth quarter of 2005. Prior to the sale and based upon the agreed purchase price, Freightliner recorded asset impairment charges in 2005 of €87 million, related to the write-down of inventories and cer- tain long-lived assets, which are reflected in cost of sales and other operating expenses of the Commercial Vehicles segment. 149 In September 2003, as part of the Group’s ongoing strategy to focus on its core automotive business, DaimlerChrysler sold its 50% interest in CTS Fahrzeug-Dachsysteme GmbH to Porsche AG for €55 million in cash, resulting in a pretax gain of €50 million which is included in financial income (expense), net, of the Mercedes Car Group segment. Prior to the sale, DaimlerChrysler accounted for CTS Fahrzeug-Dachsysteme GmbH using the cost method. Hyundai. In May 2004, as part of the realignment of its strate- gic alliance with Hyundai Motor Company (“HMC”), Daimler- Chrysler terminated discussions with HMC regarding the forma- tion of a commercial vehicles joint venture. Also in May 2004, DaimlerChrysler sold its non-controlling 50% interest in Daimler- Hyundai Truck Corporation (“DHTC”) to HMC for a total pretax gain of €60 million (€27 million was recognized in other income and €33 million is recognized in financial income (expense), net), which is attributed to the Commercial Vehicles segment. In August 2004, as part of the realignment of its strategic alliance with HMC, DaimlerChrysler sold its 10.5% stake in HMC for €737 million in cash, resulting in a pretax gain of €252 mil- lion that is included in financial income (expense), net. MTU Aero Engines. On December 31, 2003, as part of the Group’s ongoing strategy to focus on its core automotive busi- ness, DaimlerChrysler sold its 100% equity interest in MTU Aero Engines GmbH (“MTU Aero Engines”) to Kohlberg, Kravis Roberts & Co. Ltd. (“KKR”), an investment company. The sales price for the operative business of MTU Aero Engines amount- ed to €1,450 million. Excluding cash, cash equivalents and debts, which remain at MTU Aero Engines, the net sales price amounted to €1,052 million. Consideration received by DaimlerChrysler included a note receivable from KKR and cash of €877 million. As a result of this transaction, DaimlerChrysler paid a compensation of $250 million to United Technologies Corporation, the parent company of Pratt & Whitney, in January 2004. In 2003, DaimlerChrysler realized a gain of €882 million from this sale, net of taxes of €149 million. The operating re- sults and cash flows from MTU Aero Engines’ business are in- cluded in DaimlerChrysler’s consolidated financial statements through December 31, 2003. However the operating results and gain are presented as discontinued operations in accordance with SFAS 144 (see Note 10). Other dispositions. In November 2003, as part of the Group’s ongoing strategy to focus on its core automotive business, DaimlerChrysler sold a 60% interest in Mercedes-Benz Lenkun- gen GmbH, its 100% interest in Mercedes-Benz Lenkungen U.S. LLC and its 100% interest in the steering activities of DaimlerChrysler do Brasil Ltda. to ThyssenKrupp Automotive AG (“ThyssenKrupp”) for €42 million in cash. DaimlerChrysler’s remaining 40% interest in Mercedes-Benz Lenkungen GmbH was subject to put and call options held by DaimlerChrysler and ThyssenKrupp, respectively, of approximately €28 million. The sales resulted in an aggregate pretax gain of €11 million in 2003, which is included in other income of the Commercial Vehicles segment. DaimlerChrysler’s remaining 40% interest in Mercedes-Benz Lenkungen GmbH was accounted for using the equity method. In November 2005, the Group exercised its Put Option to sell its remaining 40%-stake in ThyssenKrupp Presta SteerTec (formerly: Mercedes-Benz Lenkungen GmbH) to ThyssenKrupp for a purchase price of €28 million. 150 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Notes to Consolidated Statements of Income 5. Functional Costs and Other Expenses Selling, administrative and other expenses are comprised of the following: (in millions of €) Selling expenses Administration expenses Other Expenses Year ended December 31, 2003 2004 2005 11,960 11,403 11,763 6,092 932 6,008 561 5,351 658 18,984 17,972 17,772 In 2005, selling expenses include advertising costs of €2,512 million (2004: €2,748 million, 2003: €2,965 million). Headcount reduction initiative at Mercedes Car Group. In September 2005, DaimlerChrysler initiated a program to enhance the competitiveness of the Mercedes Car Group. The program is expected to reduce headcount by 8,500 employees in Germany, primarily through voluntary termination contracts. The initiative is expected to be finalized during the second half of 2006. The individual benefits are based on age, salary levels and past service. As of December 31, 2005, approximately 5,000 employees have signed severance contracts. For the contracts signed prior to December 31, 2005, expenditures of €670 million will be incurred; €570 million were recorded in income for 2005, primari- ly within cost of sales. An amount of €100 million is available under the terms of a deferred compensation fund set up under the Compensation Framework Agreement (ERA), a collective bargaining agreement in Germany. Under this agreement, Daimler- Chrysler had to recognize a liability in prior years for ERA as a portion of the compensation increase in these years was to be unconditionally paid to employees at a later date. In an agree- ment with the worker’s council of DaimlerChrysler, it was deter- mined that the fund should be used for purposes such as ter- mination and early retirement benefits with any unused balance distributed to employees otherwise. In 2005, €70 million were paid and €600 million remain within other liabilities at Decem- ber 31, 2005. smart realignment. Based on the unit sales development of the smart roadster and the smart forfour and the downward revisions to forecasted sales targets, DaimlerChrysler reduced its production and notified suppliers about declining production at the beginning of 2005. These developments resulted in increased operating and cash flow losses and an expectation that losses would continue in future periods. Therefore, DaimlerChrysler evaluated the recoverability of the carrying amount of the long-lived assets that generate cash flows largely independent of other assets and liabilities of the Group. The smart roadster had been assembled in a plant in France until the decision to cease production, whereas the asset group related to the smart forfour consists of owned real estate and equipment of a Dutch plant as well as leased equipment located with suppliers, but carried on DaimlerChrysler’s balance sheet. As a result of the impairment tests, DaimlerChrysler recognized charges of €444 million in 2005 in “cost of sales” representing the excess of the carrying amount of these long- lived assets over their fair value. After the impairment charge, the remaining carrying amount of the assets represented the estimated fair value of land and buildings and other assets. 151 As a result of the deterioration of operations in the first quarter of 2005, DaimlerChrysler decided to cease production of the smart roadster by the end of 2005 and provide incentives to dealers related to those vehicles. Thus, also included as a reduction of revenue or in “cost of sales” during 2005 were €140 million, to recognize the effects of inventory write-downs, higher incentives and lower residual values of vehicles. Further costs related to the realignment of smart during 2005, amounting to €301 million, arose primarily from supplier claims which resulted from the discontinuation of the smart roadster and the reduction of the production volume for the smart for- four. Estimated payments to the dealer network are also includ- ed. These charges were recognized in “cost of sales” and in “selling expenses”. In connection with the activities related to the smart business unit, DaimlerChrysler also decided in 2005 not to proceed with the development of the smart SUV that was scheduled to be introduced in 2006. As a result of the decision to abandon the smart SUV, tooling and equipment located in the designated assembly plant in Brazil and equipment still under construction with suppliers for which firm purchase orders were in place, €61 million were written off in 2005 by a charge to “other ex- penses” to the extent those assets could not be redeployed for other purposes. Charges of €104 million were recognized dur- ing 2005 related to the liabilities arising from the cancellation of supply contracts and were recognized as “other expenses”. In addition, plans to reduce workforce at the locations in Böblin- gen (Germany) and Hambach (France) were approved in 2005. According to those plans, by December 31, 2005, 185 employ- ees have been transferred to other Group operations and con- tinue to provide services there while 236 German employees had accepted termination benefits in accordance with the terms of a collective bargaining agreement consisting of cash sever- ance, continued pay for a period after the end of service and job placement assistance; the employee services ended with the acceptance of the termination benefits. Therefore, charges for employee termination benefits of €24 million are included in 2005. In addition, charges for consulting services have been recorded totaling to €7 million in 2005. A goodwill impairment charge of €30 million was recognized in 2005 (see Note 12). All charges related to the realignment of smart, amounting to €1,111 million, relate to the Mercedes Car Group segment. The development of balances accrued in 2005, which lead to payments in subsequent periods, is summarized as follows: (in millions of €) Workforce reduction Other costs Balance at January 1, 2005 Net charges Payments Balance at December 31, 2005 – 24 (16) 8 – 552 (443) 109 Total – 576 (459) 117 The Mercedes Car Group expects the remaining balance of €117 million to be paid in 2006. Others. In 2003, DaimlerChrysler recognized an impairment charge amounting to €77 million related to certain long-lived assets (primarily property, plant and equipment) at a production facility in Brazil. The charge is included in cost of sales of the Mercedes Car Group segment. 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 sepa- rate line item on the accompanying consolidated statements of income (loss) and are not reflected in cost of sales or selling, administrative and other expenses. 152 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Personnel expenses and number of employees. Personnel expenses included in the statement of income are comprised of: 6. Other Income Other income consists of the following: (in millions of €) 2005 2004 2003 (in millions of €) Year ended December 31, 2003 2004 2005 Year ended December 31, Wages and salaries 19,750 18,750 18,897 Social security and payroll costs Net pension cost (see Note 25a) Net postretirement benefit cost (see Note 25a) Other expenses for pensions and retirements 3,371 1,131 3,294 948 3,178 837 1,331 1,173 1,290 148 51 85 25,731 24,216 24,287 Number of employees (annual average): Hourly employees Salaried employees Trainees/apprentices 2005 2004 2003 232,836 139,220 14,409 229,763 134,949 14,307 226,989 129,656 14,039 386,465 379,019 370,684 Information on the remuneration to the current and former members of the Board of Management and to the current mem- bers of the Supervisory Board is included in Note 38. Gains on sales of property, plant and equipment Rental income, other than relating to financial services Gains on sales of companies Reimbursement of contract costs Government subsidies Other miscellaneous items 351 101 64 – 33 417 966 94 100 128 – 30 543 895 58 110 11 17 63 430 689 Other miscellaneous items consist of reimbursements under insurance policies, income from licenses, reimbursements of certain non-income related taxes and customs duties, income from various employee canteens and other miscellaneous items. Gains on sales of property, plant and equipment for the year ended December 31, 2005, include a €240 million gain on the sale of the Chrysler Group’s Arizona Proving Grounds vehicle testing facility. Due to the repurchase of a note by its issuer, a gain of €53 mil- lion was realized in 2005 and is included in gains on sales of property, plant and equipment. The note was issued by MTU Aero Engines Holding AG to DaimlerChrysler in the context of the sale of MTU Aero Engines GmbH in 2003. As result of the settlement agreement in connection with the sale of DaimlerChrysler Rail Systems GmbH (Adtranz) in 2004, a gain of €120 million which had been deferred since 2001 was realized as other income. 153 7. Turnaround Plan for the Chrysler Group In 2001, the Supervisory Board of DaimlerChrysler AG approved a multi-year turnaround plan for the Chrysler Group. Key initia- tives for the multi-year turnaround plan included a workforce reduction and an elimination of excess capacity. The net gains recorded for the plan in 2005 were €36 million (€23 million net of taxes) and are presented as a separate line item on the accompanying consolidated statements of income (€34 million and €2 million would have otherwise been reflected in cost of sales and selling, administrative and other expenses, respectively). These adjustments were due to modifications of estimates related to workforce reductions and facility closures in 2005 and prior years. The net charges recorded for the plan in 2004 were €145 mil- lion (€89 million net of taxes) and are presented as a separate line item on the accompanying consolidated statements of in- come (€139 million and €6 million would have otherwise been reflected in cost of sales and selling, administrative and other expenses, respectively). These adjustments were due to modifi- cations of estimates related to workforce reductions and facili- ty closures in 2004 and prior years. The net charges recorded for the plan in 2003 were €469 mil- lion (€288 million net of taxes) and are presented as a separate line item on the accompanying consolidated statements of income (loss) (€462 million and €7 million would have other- wise been reflected in cost of sales and selling, administrative and other expenses, respectively). These adjustments were associated with the planned closing, significant downsizing and sale of certain manufacturing facilities between 2003 and 2005. The adjustments were also the result of modifications to previous estimates due to actual settlements or additional available information. Workforce reduction charges in 2005, 2004 and 2003 were €(15) million, €154 million and €209 million respectively. The charges for the voluntary early retirement programs, accepted by 223, 503 and 1,827 employees in 2005, 2004 and 2003, respectively, were formula driven based on salary levels, age and past service. Additionally, 618, 5,417 and 1,355 employees were involuntarily affected by the plan in 2005, 2004 and 2003, respectively. The amount of involuntary severance bene- fits paid and charged against the liability were €30 million, €51 million and €20 million in 2005, 2004 and 2003, respectively. The Chrysler Group recorded impairment charges of €(3) mil- lion, €43 million and €249 million in 2005, 2004 and 2003, respectively. The 2005 impairment charges represent an adjust- ment to prior estimates related to facility closures. The 2004 and 2003 impairment charges represent the amount by which the carrying values of the property, plant, equipment and tool- ing exceeded their respective fair market values. In addition, accruals for other costs related to divestiture and closure actions included net charges and adjustments of €(18) million, €(52) million and €11 million during the years ended December 31, 2005, 2004 and 2003, respectively. During the years ended December 31, 2005, 2004 and 2003, the Chrysler Group made cash payments of €92 million, €219 million and €279 million, respectively, for charges previously recorded. The Chrysler Group expects to make additional cash payments of approximately $58 million in 2006 for the previously recorded charges. The Chrysler Group may recognize additional adjust- ments to the turnaround plan charges in 2006 primarily relating to the closure or sale of selected operations. As of December 31, 2005, 2004 and 2003, the Chrysler Group had workforce reduction reserves of €102 million, €160 million and €198 million, respectively. In addition, reserves for other costs were €18 million, €60 million and €148 million as of December 31, 2005, 2004 and 2003, respectively. 154 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information In 2003, MTU-F created a new company, MTU CFC Solutions GmbH (“MTU CFC”), and contributed all of its fuel cell activities into a new company for 100% ownership interest. Also in 2003, MTU CFC issued new shares to RWE Fuel Cells GmbH for a capital contribution. MTU-F did not participate in this increase in share capital causing the ownership interest of MTU-F in MTU CFC to dilute to 74.9%. As a result of this transaction, DaimlerChrysler realized a gain of €24 million, which is included in “gain (loss) from the dilution of shares in affiliated companies and investments accounted for under the equity method”. The Group capitalized interest expenses related to qualifying construction projects of €73 million (2004: €70 million; 2003: €100 million). – (1,960) (50) (44) 9. Income Taxes (798) (538) (606) (2,437) Income before income taxes consists of the following: 539 490 521 (in millions of €) Germany Non-German countries Year ended December 31, 2003 2004 2005 (103) 3,541 3,438 448 3,087 3,535 (736) 1,332 596 8. Financial Income (Expense), net (in millions of €) Year ended December 31, 2003 2004 2005 Income from investments of which from affiliated companies € 28 (2004: € 36; 2003: € 37) Gains, net from disposals of investments and shares in affiliated and associated companies Gain (loss) from the dilution of shares in affiliated companies and investments accounted for under the equity method Impairment of investment in EADS (Note 3) Write-down of investments and shares in affiliated companies Gain (loss) from companies included at equity Income (loss) from investments, net Other interest and similar income of which from affiliated companies € 33 (2004: € 5; 2003: € 20) Interest and similar expenses of which from affiliated companies € 26 (2004: € 32; 2003: € 16) Interest expense, net Income (loss) from securities and long-term receivables of which from affiliated companies € 2 (2004: € 2; 2003: € 1) Write-down of securities and long-term receivables Other, net Other financial income (loss), net 55 86 732 291 (135) 37 44 24 – – (31) 103 859 (1,112) (573) 200 (5) (264) (69) 217 (790) (300) 18 (122) (67) (171) (911) (390) (15) (19) 69 35 (1,077) (2,792) In 2005, DaimlerChrysler sold all of its MMC shares. The gain on that sale amounted to €681 million and is included in “Gains, net from disposals of investments and shares in affiliated and associated companies”. In 2004, the dilution of DaimlerChrysler’s interest in MMC resulted in a loss of €135 million which is reflected in “Gain (loss) from the dilution of shares in affiliated companies and invest- ments accounted for under the equity method”. Realized gains from DaimlerChrysler’s currency hedging of the net invest- ment in MMC of €195 million are included in “Loss from compa- nies included at equity”. The income (loss) in Germany includes the income (loss) from companies included at equity if the shares of those companies are held by German companies. In 2003, the write-down of the investment in EADS of €1,960 million is also included. 155 Income tax expense is comprised of the following components: (in millions of €) Current taxes Germany Non-German countries Deferred taxes Germany Non-German countries Year ended December 31, 2003 2004 2005 3 1,319 (309) (500) 513 847 923 (502) (91) 1,177 766 (432) 172 473 979 For German companies, the deferred taxes at December 31, 2005 were calculated using a federal corporate tax rate of 25% (2004 and 2003: 25%). Deferred taxes were also calculated with a solidarity surcharge of 5.5% for each year on federal cor- porate taxes plus the after federal tax benefit rate for trade tax of 12.125% for each year. Therefore, the tax rate applied to German deferred taxes amounted to 38.5% (2004 and 2003: 38.5%). For non-German companies, the deferred taxes at period-end were calculated using the enacted tax rates. In 2004, the U.S. government enacted the American Jobs Cre- ation Act of 2004 (“Act”), that provides for a special one-time tax deduction of 85% of certain earnings of non-U.S. subsidia- ries that are repatriated to the U.S., provided certain criteria are met. DaimlerChrysler North America Holding Corporation, a wholly-owned U.S. subsidiary of DaimlerChrysler, completed in 2005 its evaluation of the Act. In 2005, DaimlerChrysler repatriated $2.7 billion of dividends to the U.S., leading to an income tax expense of €66 million. In the reconciliation of expected income tax expense to actual income tax expense the expense is included in the line “foreign tax rate differential”. In 2003, the German government enacted new tax legislation which, among other changes, provides that, beginning January 1, 2004, 5% of dividends received from German companies and 5% from certain gains from the sale of shares in affiliated and unaffiliated companies are no longer tax-free while losses from the sale of shares in affiliated and unaffiliated companies continue to be non-deductible. The change in tax legislation resulted in a deferred tax expense due to the deferred tax liabil- ities on the unrealized gains. The effect of the increase in the deferred tax liabilities of the Group’s German companies was recognized in the year of enactment and as a result, a deferred tax expense of €64 million was included in the consolidated statement of income (loss) in 2003. A reconciliation of expected income tax expense to actual income tax expense determined using the applicable German corporate tax rate for the calendar year of 25% (2004: 25%; 2003: 26.5%) plus a solidarity surcharge of 5.5% on federal cor- porate taxes payable plus the after federal tax benefit rate for trade taxes of 12.125% (2004: 12.125%; 2003: 11.842%) for a combined statutory rate of 38.5% in 2005 (2004: 38.5%; 2003: 39.8%) is included in the following table. In 2003, for the pur- pose of financing the flood disaster in Germany and effective only for the calendar year 2003, the increased federal corporate tax rate of 26.5% instead of 25% was used for calculating the current taxes in Germany. (in millions of €) Year ended December 31, 2003 2004 2005 Expected expense for income taxes Foreign tax rate differential Trade tax rate differential Non-deductible impairment of investment in EADS Tax effect of equity method investments Tax-free income and non-deductible expenses Effect of changes in German tax laws Other Actual expense for income taxes 1,324 (544) (50) – (15) (194) – (8) 513 1,361 (357) (43) – 291 (88) – 13 1,177 237 (489) (37) 780 159 269 64 (4) 979 156 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information In 2005, tax free income at foreign companies arose relating to the compensation for MFTBC, the sale of other securities and in connection with the net periodic postretirement benefit costs. The reduction of the calculated expected tax expenses on those issues is included in the line “foreign tax rate differential”. Moreover, the line “foreign tax rate differential” includes all other reconciling items between expected and actual expense for income taxes at foreign companies. In 2005, DaimlerChrysler sold all of its MMC shares. The real- ized gain – with the exception of the net gains from hedging the Group’s net investment in MMC – was tax-free. The expected tax expense on the tax free gain was reversed in the line “tax free income and non-deductible expenses” with an amount of €82 million. In 2004, the non tax-deductible loss of MMC resulting from accounting under the equity method and from the dilution of DaimlerChrysler’s interest in MMC affected the line “tax effect of equity method investments” negatively by €298 million due to the missing tax benefit. The Group has various open income tax years unresolved with the taxing authorities in various jurisdictions. The open years are either currently under review by certain taxing authorities or not yet under examination. In 2003, the line “foreign tax rate differential” above included a tax benefit and related interest of €571 million which resulted in connection with agreements reached with the U.S. tax authorities on a claim pertaining to additional research and development credits for tax years 1986 through 1998. In 2003, the line “tax-free income and non- deductible expenses” included a tax expense and related inter- est of €318 million pertaining primarily to tax costs associated with developments resulting from the examination by the Ger- man tax authorities of the Group’s German tax returns for the years 1994 to 1998. Deferred income tax assets and liabilities are summarized as follows: In 2004, DaimlerChrysler sold its investment in HMC and real- ized a tax-free gain of €252 million. This led to a positive recon- ciling item of €97 million in the line “tax-free income and non- deductible expenses”. (in millions of €) Intangible assets Property, plant and equipment At December 31, 2004 2005 401 520 55 699 Investments and long-term financial assets 3,135 2,678 Tax-free gains included in net periodic pension costs at the German companies also reduced the expected tax expense. Moreover, the line “tax-free income and non-deductible expens- es” includes all other effects at German companies due to tax-free income and non-deductible expenses. Equipment on operating leases Inventories Receivables Net operating loss and tax credit carryforwards Pension plans and similar obligations Other accrued liabilities Liabilities Deferred income Other Valuation allowances Deferred tax assets Intangible assets Property, plant and equipment Equipment on operating leases Receivables Prepaid expenses Pension plans and similar obligations Other accrued liabilities Taxes on undistributed earnings of non-German subsidiaries Liabilities Other 727 752 749 1,854 5,125 6,477 2,516 1,670 111 24,037 (640) 23,397 (932) (3,987) (7,125) (3,482) (360) (2,479) (311) (261) (1,010) (404) 651 675 834 2,814 4,315 5,515 3,000 1,371 95 22,702 (573) 22,129 (852) (3,798) (6,699) (4,540) (370) (2,096) (148) (307) (1,012) (406) Deferred tax liabilities Deferred tax assets (liabilities), net (20,351) (20,228) 3,046 1,901 157 At December 31, 2005, the Group had corporate tax net operat- ing losses (“NOLs”) amounting to €1,528 million (2004: €1,705 million), trade tax NOLs amounting to €129 million (2004: €81 million) and tax credit carryforwards amounting to €868 million (2004: €1,640 million). The corporate tax NOLs mainly relate to losses of foreign companies and are partly limited in their use to the Group. Of the total amount of corporate tax NOLs at December 31, 2005, €25 million expire at various dates from 2006 through 2009, €704 million in 2010, €275 million expire at various dates from 2018 through 2025 and €524 million can be carried forward indefinitely. The tax credit carryforwards mainly relate to U.S. companies and are partly limited in their use to the Group. Of the total amount of credit carryforwards at December 31, 2005, €107 million expire from 2010 through 2015, €181 million expire from 2023 through 2025 and €580 million can be carried forward indefinitely. The trade tax NOLs are not limited in their use. The companies of the Off-Highway Business unit, which are shown as held for sale, are included at December 31, 2005 in the corporate and trade tax NOLs with €21 million each. The valuation allowances, which relate to deferred tax assets of foreign companies that DaimlerChrysler believes will more likely than not expire without benefit increased by €67 million from December 31, 2004 to December 31, 2005. In future peri- ods DaimlerChrysler’s estimate of the amount of the deferred tax assets considered realizable may change, and hence the valuation allowances may increase or decrease. Net deferred income tax assets and liabilities in the consolidat- ed balance sheets are as follows: (in millions of €) At December 31, 2005 At December 31, 2004 thereof non-current thereof non-current Total Total Deferred tax assets 7,249 2,880 4,213 1,944 Deferred tax liabilities (4,203) (4,099) (2,312) (2,222) Deferred tax assets (liabilities), net 3,046 (1,219) 1,901 (278) DaimlerChrysler recorded deferred tax liabilities for non-Ger- man withholding taxes of €188 million (2004: €222 million) on €3,764 million (2004: €4,434 million) in cumulative undistrib- uted earnings of non-German subsidiaries and additional German tax of €73 million (2004: €85 million) on the future payout of these foreign dividends to Germany because as of today, the earnings are not intended to be permanently reinvested in those operations. 158 The Group did not provide income taxes or non-German with- holding taxes on €13,831 million (2004: €9,626 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 unrec- ognized deferred tax liabilities for these undistributed foreign earnings. Including the items charged or credited directly to related com- ponents of stockholders’ equity and the expense (benefit) of discontinued operations and from changes in accounting princi- ples, the expense (benefit) for income taxes consists of the following: (in millions of €) Year ended Deczember 31, 2003 2004 2005 Expense for income taxes of continuing operations Expense for income taxes of discontinued operations Income tax benefit from changes in accounting principles Stockholders’ equity for items in accumulated other comprehensive loss Stockholders’ equity for U.S. employee stock option expense in excess of amounts recognized for financial purposes 513 1,177 – (3) – – 979 202 (35) (1,065) (754) 1,055 – (555) (9) 414 – 2,201 In 2004 and 2003, tax benefits of €2 million and €105 million from the reversal of deferred tax asset valuation allowances at subsidiaries of MMC were recorded as a reduction of the in- vestor level goodwill relating to the Group’s investment in MMC. 10. Disposal Group Off-Highway, Assets and Liabilities Held for Sale and Discontinued Operations Disposal Group Off-Highway, Assets and Liabilities Held for Sale. On December 27, 2005, DaimlerChrysler entered into a share sale and purchase agreement regarding the sale of a major portion of its Off-Highway Business Unit. The closing is expected to occur in the first quarter of 2006 (see Note 4). As a result of DaimlerChrysler’s significant anticipated continu- ing sales of products to the Off-Highway business which are expected to continue beyond one year after disposal, the opera- tions of the Off-Highway business have not been presented as discontinued operations in DaimlerChrysler’s consolidated income statements. However, the assets and the liabilities of the Off-Highway busi- ness that are part of the transaction have each been aggregated and presented in separate lines on the consolidated balance sheet. 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The assets held for sale and liabilities held for sale are shown on a consolidated basis and are comprised of the following: 11. Cumulative Effects of Changes in Accounting Princi- ples Conditional Asset Retirement Obligation. As of December 31, 2005, DaimlerChrysler adopted the provisions of FIN 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” pertaining to the accounting for legal asset retirement obligations whose timing or method of settlement is conditional on a future event. For existing conditional asset retirement obligations whose fair value could be reasonably determined, DaimlerChrysler recognized the liability and related additional long-lived asset and adjusted the liability and the asset, respectively, for cumulative accre- tion and accumulated depreciation to the date of adoption. The cumulative effect of adopting FIN 47 was a reduction of net income of €5 million, net of taxes of €3 million (€0.00 per share), recognized separately in the consolidated statement of income in 2005. Variable Interest Entities. DaimlerChrysler adopted the provi- sions of FIN 46R pertaining to the consolidation of variable interest entities that are special purpose entities as of Decem- ber 31, 2003, and to all other entities as of March 31, 2004 (see Note 2). The cumulative effect of adopting FIN 46R was a reduction of net income of €30 million, net of taxes of €35 mil- lion (€0.03 per share), recognized in the consolidated state- ment of income in 2003. (in millions of €) Assets held for sale Intangible assets Goodwill Property, plant and equipment Investments and long-term financial assets Inventories Receivables and other assets Other Liabilities held for sale Minority interests Accrued liabilities Liabilities Other At December 31, 2005 20 309 212 80 395 316 42 1,374 4 603 157 7 771 Discontinued Operations. The results of MTU Aero Engines and the gain on sale are reported as discontinued operations. However, for segment reporting purposes, the revenues and operating profit of MTU Aero Engines are included in the Other Activities segment revenues and operating profit in 2003 (see Notes 4 and 35). The operating results of the discontinued operations were as follows in 2003: (in millions of €) Revenues Income before income taxes Income taxes Earnings from discontinued operations Year ended December 31, 2003 1,933 67 (53) 14 159 Notes to Consolidated Balance Sheets will impairment test is performed to measure the amount of goodwill impairment loss. As a result of the 2005 goodwill impairment test, a goodwill impairment charge at smart of €30 million was recognized. 13. Other Intangible Assets Information with respect to changes in the Group’s other intan- gible assets is presented in the Consolidated Fixed Asset Schedule included herein. Other intangible assets comprise: (in millions of €) Other intangible assets subject to amortization Gross carrying amount Accumulated amortization Net carrying amount Other intangible assets not subject to amortization At December 31, 2004 2005 1,628 (941) 687 2,504 3,191 1,309 (806) 503 2,168 2,671 DaimlerChrysler’s other intangible assets subject to amortiza- tion represent concessions, industrial property rights and similar rights (€298 million) as well as software developed or obtained for internal use (€342 million). The additions in 2005 of €244 million (2004: €215 million) with a weighted aver- age useful life of 6 years primarily include software developed or obtained for internal use. The aggregate amortization expense for the years ended December 2005, 2004 and 2003, was €201 million, €169 million and €178 million, respectively. 12. Goodwill Information with respect to changes in the Group’s goodwill is presented in the Consolidated Fixed Asset Schedule included herein. The carrying amount of goodwill as of December 31, 2005, compared to the previous year, decreased by €122 million. This decrease relates to goodwill of €309 million attributable to the business unit Off-Highway and is included in the separate line item “assets held for sale” as of December 31, 2005 (see Note 10). Additions to goodwill of €134 million from the acqui- sition of the minority interests in MTU-F in 2005 form part of that goodwill (see Note 4). Furthermore, the goodwill of MFTBC was reduced by €200 million (see Note 4). Currency translation effects of €232 million led to an increase of goodwill. At December 31, 2005 and 2004, the carrying value of goodwill allocated to the Group’s reporting segments are (excluding investor level goodwill of €55 million and €51 million, respec- tively): Mercedes Car Group Chrysler Commerc. Vehicles Group Financial Services Other Activities total (in millions of €) 2005 2004 199 177 1,035 898 547 670 63 62 37 196 1,881 2,003 The company conducts a goodwill impairment test at least annu- ally to identify potential goodwill impairment. In this regard, the company compares the fair value of a reporting unit with its carrying amount, including goodwill allocated to the respective reporting unit. The fair values of the reporting units are calculat- ed using discounted future cash flows. If the carrying amount of a reporting unit exceeds its fair value, a second step of the good- 160 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Estimated aggregate amortization expense for other intangible assets for the next five years is: 15. Equipment on Operating Leases, net (in millions of €) 2006 2007 2008 2009 2010 Amortization expense 213 136 109 54 40 Other intangible assets not subject to amortization represent primarily intangible pension assets. 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 €262 million (2004: €245 million). Deprecia- tion expense and impairment charges on assets under capital lease arrangements were €47 million (2004: €34 million; 2003: €19 million). Future minimum lease payments due for property, plant and equipment under capital leases at December 31, 2005 amount- ed to €472 million and are due as follows: (in millions of €) Future minimum lease payments 2006 2007 2008 2009 2010 there- after 75 72 53 33 30 209 The reconciliation of future minimum lease payments from capital lease agreements to the corresponding liabilities is as follows: (in millions of €) December 31, 2005 Amount of future minimum lease payments Less interest included Liabilities from capital lease agreements 472 133 339 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, €33,644 million represent automobiles and commercial vehicles (2004: €26,017 million). Noncancellable future lease payments due from customers for equipment on operating leases at December 31, 2005 amount- ed to €15,500 million and are due as follows: 2006 2007 2008 2009 2010 there- after 7,918 4,350 2,225 738 149 120 (in millions of €) Future lease payments 16. Inventories (in millions of €) At December 31, 2004 2005 1,906 2,924 1,746 2,545 Raw materials and manufacturing supplies Work-in-process Finished goods, parts and products held for resale 14,414 12,805 Advance payments to suppliers Less: Advance payments received 47 19,291 (152) 19,139 75 17,171 (366) 16,805 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 €753 mil- lion (2004: €601 million). At December 31, 2005, inventories include €322 million of company cars of DaimlerChrysler pledged as collateral to the DaimlerChrysler Pension Trust e.V. The pledge was made in 2004 due to the requirement to provide collateral for certain vested employee benefits in Germany. 161 17. Trade Receivables Receivables from financial services are comprised of the fol- lowing: (in millions of €) Receivables from sales of goods and services Allowance for doubtful accounts At December 31, 2004 2005 8,135 (540) 7,595 7,592 (591) 7,001 (in millions of €) Receivables from: Retail Wholesale Other As of December 31, 2005, €115 million of the trade receivables mature after more than one year (2004: €283 million). Allowance for doubtful accounts At December 31, 2004 2005 46,947 11,961 3,367 62,275 (1,174) 61,101 44,202 10,670 3,020 57,892 (1,107) 56,785 Changes in the allowance for doubtful accounts for trade receiv- ables were as follows: (in millions of €) Year ended December 31, 2003 2004 2005 Balance at beginning of year Charged to costs and expenses Amounts written off Currency translation and other changes Balance at end of year 591 41 (75) (17) 540 587 49 (160) 115 591 629 23 (48) (17) 587 As of December 31, 2005, receivables from financial services with a carrying amount of €37,896 million mature after more than one year (2004: €35,598 million). Receivables from finan- cial services are generally secured by vehicles or other assets. Maturities. Contractual payments from the receivables from financial services at December 31, 2005 amounted to €66,235 million and are as follows: (in millions of €) 2006 2007 2008 2009 2010 there- after 18. Receivables from Financial Services Maturities 25,600 13,338 11,014 6,701 3,533 6,049 Types of receivables. Retail receivables include loans and finance leases to end users of the Group’s products who purchased their vehicle either from a dealer or directly from DaimlerChrysler. Wholesale receivables represent loans for floor financing pro- grams for vehicles sold by the Group’s automotive businesses to the dealer or loans for assets purchased by the dealer from third parties, primarily used vehicles traded in by the dealer’s customer or real estate such as dealer showrooms. Other receivables mainly represent investments in leases in- volving the purchase of non-automotive assets by parties other than retail customers or the Group’s dealers. Actual cash flows will vary from contractual maturities due to future sales of finance receivables, prepayments and write-offs. Allowances. Changes in the allowance for doubtful accounts for receivables from financial services were as follows: (in millions of €) Year ended December 31, 2003 2004 2005 Balance at beginning of year Charged to costs and expenses Amounts written off Reversals Currency translation and other changes Balance at end of year 1,107 559 (420) (137) 65 1,174 1,265 467 (413) (84) (128) 1,107 1,559 553 (492) (63) (292) 1,265 162 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Sales-type and direct-financing contracts. Finance leases consist of sales-type leases of vehicles to the Group’s direct retail customers and direct-financing leases of vehicles to cus- tomers of the Group’s independent dealers. Included in retail and other receivables are investments in finance leases involv- ing minimum lease payments of €15,309 million and €14,072 million, unearned income of €2,496 million and €2,602 million, initial direct costs of €43 million and €47 million and estimated unguaranteed residual values of €623 million and €660 million at December 31, 2005 and 2004, respectively. Leveraged lease contracts. Investments in leveraged leases are included in the line “other”. Leveraged leases are comprised of the following: (in millions of €) Rentals receivable (net of principal and interest on nonrecourse debt) Deferred investment tax credits Unguaranteed residual values Unearned income At December 31, 2004 2005 4,586 (41) 4,545 588 (1,780) 3,353 4,039 (40) 3,999 617 (1,638) 2,978 As of December 31, 2005, an amount of €2,775 million (2004: € 2,421 million) of deferred income tax liabilities was related to leveraged leases. Presentation in Consolidated Statements of Cash Flows. Wholesale receivables from the sale of vehicles from the Group’s inventory to independent dealers as well as retail receivables from the sale of DaimlerChrysler’s vehicles directly to retail customers relate to the sale of the Group’s inventory. The cash flow effects of such receivables are presented as “net changes in inventory-related receivables from financial servic- es” within the consolidated cash flows from operating activi- ties. All cash flow effects attributable to receivables from finan- cial services that are not related to the sale of inventory to DaimlerChrysler’s independent dealers or direct customers are classified as investing activities within the consolidated state- ments of cash flows. Sale of receivables. Based on market conditions and liquidity needs, DaimlerChrysler may sell portfolios of retail and whole- sale receivables to third parties, which typically results in the derecognition of the transferred receivables from the balance sheet. Retained interests in securitized sold receivables are classified as other assets in the Group’s consolidated balance sheets (see Note 19). For additional information on retained interests in sold receivables and the sale of finance receivables, see Note 34. 19. Other Assets (in millions of €) Receivables from affiliated companies Receivables from related companies 1 Retained interests in sold receivables Other receivables and other assets Allowance for doubtful accounts At December 31, 2004 2005 696 324 2,215 5,664 8,899 (168) 8,731 1,174 588 2,202 9,228 13,192 (261) 12,931 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, 2005, €2,618 million of the other assets mature after more than one year (2004: €3,494 million). Changes in the allowance for doubtful accounts related to receivables included in other assets were as follows: (in millions of €) Year ended December 31, 2003 2004 2005 Balance at beginning of year Charges (releases) to costs and expenses Amounts written off Currency translation and other changes Balance at end of year 261 (18) (90) 15 168 888 61 (702) 14 261 723 134 (2) 33 888 163 20. Securities, Investments and Long-Term Financial Assets Information with respect to the Group’s total investments and long-term financial assets is presented in the Consolidated Fixed Assets Schedule included herein. The carrying amounts of participations (investments that are not accounted for under the equity method) and long-term (marketable) securities which are shown among “Investments and long-term financial assets” in the Consolidated Balance Sheets are comprised of the follow- ing: (in millions of €) Participations with a quoted market price Participations without a quoted market price Total participations Long-term securities At December 31, 2004 2005 332 256 588 606 503 277 780 599 The main changes in investments in participations were caused by the sale of the stake in MMC (see Note 3). Investments without a quoted market price were tested for im- pairment when an impairment indicator occurred. In 2005 and 2004, investments without a quoted market price with carrying amounts of €20 million were tested for impairment. In 2005 and 2004, no impairments were recognized. The disclosure of short-term securities is made in the Consoli- dated Balance Sheets among “Securities” and is recorded sepa- rately in available-for-sale and trading: (in millions of €) Available-for-sale Trading Short-term securities At December 31, 2004 2005 4,773 163 4,936 3,725 159 3,884 As of December 31, 2005, the table below shows the (amor- tized) costs, fair values, gross unrealized holding gains and loss- es per security class of investments with a quoted market price, long-term and short-term available-for-sale securities. The aggregate amounts of unrealized losses on investments which are in a continuous unrealized loss position for less than 12 months and the aggregate amounts of unrealized losses on in- vestments which are in a continuous unrealized loss position for 12 months or longer are shown separately together with their appropriate fair values. (in millions of €) Equity securities Equity-based funds Debt securities issued by the German government and other political subdivisions Debt securities issued by non-German governments Corporate debt securities Mortgage-backed securities Securities backed by other assets Other debt securities Debt-based funds Cost Fair value Unrealized gain Unrealized Loss less1 year Unrealized loss Fair value Unrealized Loss 1 year or more Unrealized loss Fair value Unrealized Loss total Unrealized loss Fair value 279 272 664 273 205 205 778 2,796 318 190 260 228 777 2,796 317 190 260 229 388 1 – – 9 1 – – 1 12 – – 34 547 68 – – – 3 – – 1 6 1 – – – 5,326 5,711 400 661 11 – – – – 26 35 – – – 61 – – – – 3 1 – – – 4 12 – – 34 573 103 – – – 3 – – 1 9 2 – – – 722 15 164 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information As of December 31, 2004, these values were as follows: (in millions of €) Equity securities Equity-based funds Debt securities issued by the German government and other political subdivisions Debt securities issued by non-German governments Corporate debt securities Mortgage-backed securities Securities backed by other assets Other debt securities Debt-based funds Cost Fair value Unrealized gain Unrealized Loss less1 year Unrealized loss Fair value Unrealized Loss 1 year or more Unrealized loss Fair value Unrealized Loss total Unrealized loss Fair value 560 175 948 175 360 360 128 1,718 361 170 819 135 132 1,726 361 170 820 135 394 – 1 4 12 1 – 1 – – – – – 96 41 – – – 4,426 4,827 413 137 – – – – 4 1 – – – 5 134 – 1 – – – – – – 135 6 – 1 – – – – – – 7 134 – 1 – 96 41 – – – 6 – 1 – 4 1 – – – 272 12 The estimated fair values of investments in debt securities (excluding debt-based funds), by contractual maturity, are shown below. Expected maturities may differ from contractual matu- rities because borrowers may have the right to call or prepay obligations with or without penalty. (in millions of €) Due within one year Due after one year through five years Due after five years through ten years Due after more than ten years At December 31, 2004 2005 1,164 1,703 508 1,170 4,545 1,157 1,624 330 458 3,569 Proceeds from disposals of long-term and short-term available- for-sale securities were €10,336 million (2004: €3,702 million; 2003: €2,743 million). Gross realized gains from sales of these securities were €847 million (2004: €254 million; 2003: €8 million), while gross realized losses were €8 million (2004: €3 million; 2003: €15 million). The proceeds and realized gains from the sale of the stake in MMC in 2005 (see Note 3) and HMC in 2004 (see Note 4) are included in these figures. The pro- ceeds from the sale of the stake in HMC are shown in the Con- solidated Statements of Cash Flows among the line item “Pro- ceeds from disposals of businesses”, the remaining proceeds are disclosed in the line item “Proceeds from sales of securities (other than trading)”. The unrealized losses included in the 2005 statement of income related to trading securities were €6 million (2004 and 2003: -). There are no unrealized gains in these securities (2004: €2 mil- lion; 2003: €10 million). DaimlerChrysler uses the weighted average cost method as a basis for determining cost and calculating realized gains and losses. 165 21. Liquid Assets 23. Stockholders’ Equity Liquid assets recorded under various balance sheet captions are as follows: (in millions of €) Cash and cash equivalents 1 originally maturing within 3 months originally maturing after 3 months Total cash and cash equivalents Securities At December 31, 2004 2005 7,619 92 7,711 4,936 7,381 401 7,782 3,884 12,647 11,666 1 Cash equivalents originally maturing within 3 months include commercial papers, certificates of deposit of €5.5 billion and €3.6 billion at December 31, 2005 and 2004, cash at banks, cash on hand and checks in transit. 22. Prepaid Expenses Prepaid expenses are comprised of the following: (in millions of €) Prepaid pension cost Other prepaid expenses At December 31, 2004 2005 595 796 246 784 1,391 1,030 As of December 31, 2005, €809 million of the total prepaid ex- penses mature after more than one year (2004: €435 million). As a result of the overfunded status of the accumulated pension benefit obligations of one pension plan, the prepaid pension cost increased in 2005 by €0.3 billion. Number of Shares Issued and Outstanding as well as Trea- sury Stock. DaimlerChrysler had issued and outstanding 1,018,172,696 registered Ordinary Shares of no par value at December 31, 2005 (2004: 1,012,824,191). This increase relates to the issuance of new Ordinary Shares upon exercises in connection with the Stock Option Plan 2000 (tranche 2003). Each share represents a nominal value of €2.60 of capital stock. In 2005, DaimlerChrysler purchased approximately 0.7 million (2004: 0.8 million; 2003: 1.3 million) Ordinary Shares in con- nection with an employee share purchase plan, of which 0.7 million (2004: 0.8 million; 2003: 1.3 million) were re-issued to employees. Authorized and Conditional Capital. On April 6, 2005, the annual meeting authorized DaimlerChrysler through October 6, 2006, to acquire treasury stocks for certain defined purposes up to a maximum nominal amount of €263 million of capital stock, representing nearly 10% of the issued and outstanding capital stock. On April 9, 2003, the annual meeting authorized the Board of Management through April 8, 2008, upon approval of the Super- visory Board, to increase capital stock by issuing new, no par value registered shares in exchange for cash contributions total- ing €500 million as well as by issuing new, no par value regis- tered shares in exchange for non-cash contributions totaling €500 million and to increase capital stock by issuing Ordinary Shares to employees totaling €26 million. Furthermore, the Board of Management, with the consent of the Supervisory Board, was authorized to issue convertible bonds and/or notes with warrants with a total face value up to €15 bil- lion and with a maturity of no more than twenty years prior to April 5, 2010, and to grant conversion or option rights for new shares in DaimlerChrysler with an allocable portion of the capi- tal stock of up to €300 million as more closely defined in the fixed terms and conditions. From the Stock Option Plan 1996 on December 31, 2005, out- standing rights in a nominal volume of €0.1 million could result in 22,110 new shares of DaimlerChrysler AG. In 2005, 2004 and 2003, no options were exercised from this Plan. 166 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Comprehensive Income/(Loss). The changes in the compo- nents of accumulated other comprehensive loss are as follows: (in millions of €) Unrealized gains (losses) on securities (incl. retained interests): Year ended December 31, 2005 Net Tax effect Pretax Year ended December 31, 2004 Net Tax effect Pretax Year ended December 31, 2003 Net Tax effect Pretax Unrealized holding gains (losses) 511 (136) 375 277 (10) 267 731 (146) 585 Reclassification adjustments for (gains) losses included in net income Unrealized gains (losses) on securities Unrealized gains (losses) on derivatives hedging variability of cash flows: (512) (1) 119 (17) (393) (592) (18) (315) 119 109 (473) (255) (206) 476 77 (69) (178) 407 Unrealized derivative gains (losses) (3,552) 1,270 (2,282) 2,339 (900) 1,439 4,406 (1,682) 2,724 Reclassification adjustments for (gains) losses included in net income Unrealized derivative gains (losses) Minimum pension liability adjustments Foreign currency translation adjustments Changes in other comprehensive income/(loss) 1,517 (2,035) (458) 812 1,059 (1,223) (2,957) (618) 1,149 249 (1,808) (369) (2,506) 1,900 944 (738) (1,562) 1,162 (170) 91 (79) (1,224) 2,548 179 2,727 (635) 342 1,065 1,407 (2,792) 476 (80) 754 (748) 662 (218) 444 (715) (1,598) (30) (1,628) (2,038) 1,440 (1,055) 385 Exchange rate effects on the components of other comprehen- sive loss principally are shown within changes of the cumulative translation adjustment. Effective October 1, 2004, the Chrysler Group prospectively changed the functional currency of DaimlerChrysler Canada Inc. (“DCCI”), its Canadian subsidiary, from the U.S. dollar to the Canadian dollar. This change resulted from several significant economic and operational changes within DCCI, including a reduction of U.S. sourced components. The initial implementa- tion of this change in functional currency had the effect of increasing the value of the net assets of the Group and the accumulated other comprehensive loss by €179 million in 2004. Miscellaneous. Under the German corporation law (Aktienge- setz), the amount of dividends available for distribution to shareholders is based upon the unappropriated accumulated earnings of DaimlerChrysler AG (parent company only) as re- ported in its statutory financial statements determined in accor- dance with the German commercial code (Handelsgesetzbuch). For the year ended December 31, 2005, DaimlerChrysler man- agement has proposed a distribution of €1,527 million (€1.50 per share) of the 2005 earnings of DaimlerChrysler AG as a divi- dend to the stockholders. 24. Stock-Based Compensation As of December 31, 2005, the Group has awards outstanding that were issued under a variety of plans including (1) the 2005 Performance Phantom Share Plan, (2) the 2000 and 1996 stock option plans, (3) various stock appreciation rights (“SARs”) plans and (4) the medium term incentive awards. As discussed in Note 1, DaimlerChrysler adopted the provisions of SFAS 123 prospectively for all awards granted after De- cember 31, 2002. Awards granted in previous periods will con- tinue to be accounted for using the provisions of APB 25 and related interpretations. Performance Phantom Share Plan. In 2005 the Group adopted the “Performance Phantom Share Plan” under which virtual shares (phantom shares) are granted to eligible employ- ees entitling them to receive cash paid out after four years. The amount of cash paid to eligible employees is based on the number of phantom shares that vest (determined over a three year performance period) times the quoted price of Daimler- Chrysler’s Ordinary Shares (determined as an average price over a specified period at the end of the four-year service). The number of phantom shares that vest will depend on the achie- vement of Group performance goals as compared with competi- tive and internal benchmarks (return on net assets and return on sales). The Group will not issue any common shares in con- nection with the Performance Phantom Share Plan. 167 Analysis of the phantom shares issued is as follows: (in millions) Outstanding at the beginning of the year Granted phantom shares Forfeitures/Disposals Outstanding at year end Number of phantom shares – 3.6 – 3.6 In 2005 the group recognized €30 million of compensation expenses related to the Performance Phantom Share Plan. The Group considers the Performance Phantom Share Plan in the accrued liabilities. Because the payment per vested phantom share depends on the quoted price of one DaimlerChrysler Ordi- nary Share, the quoted price represents the fair value of each phantom share. The proportionate compensation expense for 2005 is determined based on the year-end quoted price of DaimlerChrysler Ordinary Shares as well as the estimated target achievement grades as of December 31, 2005. Stock Option Plans. In April 2000, the Group’s shareholders approved the DaimlerChrysler 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 determin- ed in advance plus a 20% premium. The options become exer- cisable in equal installments on the second and third anni- versaries from the date of grant. All unexercised options expire ten years from the date of grant. If the market price per DaimlerChrysler 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 pre- mium of 20%. In 2005, no options were granted under the Stock Option Plan 2000. DaimlerChrysler established, based on shareholder approvals, the 1998, 1997 and 1996 Stock Option Plans (former Daimler- Benz plans), which provided for the granting of options for the purchase of DaimlerChrysler Ordinary Shares to certain members of management. The options granted under the plans 1997 and 1998 were evidenced by non-transferable converti- ble bonds with a principal amount of €511 per bond due ten years after issuance. During certain specified periods each year, each convertible bond could have been converted into 201 DaimlerChrysler Ordinary Shares, if the market price per share on the day of conversion was at least 15% higher than the predetermined conversion price and the options had been held for a 24 month waiting period. 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. All terms and conditions of the options granted under the plan 1996 are identical to the stock options which were granted under the plans 1997 and 1998, except that the plan 1996 in- cludes no waiting period. The options granted under the plan 1996 were not converted into SARs. The basic terms of the bonds and the related stock options / SARs issued (in millions) under these plans are as follows: Related stock options granted Stock options/SARs At December 31, 2005 exercisable outstanding The table below shows the basic terms of options issued (in millions): Stated interest rate Conversion price Bonds granted in Reference price Exercise price Options granted Options outstanding Options exercisable At December 31, 2005 Year of grant 2000 2001 2002 2003 2004 €62.30 €55.80 €42.93 €28.67 €36.31 €74.76 €66.96 €51.52 €34.40 €43.57 15.2 18.7 20.0 20.5 18.0 13.3 16.7 18.5 13.8 17.3 13.3 16.7 18.5 4.3 – 1996 1997 1998 5.9% 5.3% 4.4% €42.62 €65.90 €92.30 0.9 7.4 8.2 . 4.6 5.3 . 4.6 5.3 The Group will not issue any common shares in connection with the plans 1997 and 1998. 168 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Analysis of the stock options issued is as follows: (options in millions; per share amounts in €) Balance at beginning of year Options granted Exercised Forfeited Expired Outstanding at year-end Exercisable at year-end 2005 Average exercise price per share Number of stock options 2004 Average exercise price per share Number of stock options 2003 Average exercise price per share Number of stock options 86.5 – (5.3) (0.3) (1.3) 79.6 52.8 52.78 – 34.40 41.42 60.13 53.92 60.82 71.6 18.0 – (1.4) (1.7) 86.5 40.2 55.18 43.57 – 40.79 65.92 52.78 65.92 53.1 20.5 – (1.2) (0.8) 71.6 23.1 63.40 34.40 – 51.83 74.76 55.18 71.71 For the year ended December 31, 2005, the Group recognized compensation expense on stock options (before taxes) of €87 million (2004: €119 million; 2003: €95 million). The fair values of the DaimlerChrysler stock options issued in 2004 and 2003 were measured at the grant date (beginning of April) based on a modified Black-Scholes option-pricing mod- el, which considers the specific terms of issuance. For options granted to the Board of Management in 2004 and for which – according to the recommendations of the German Corporate Governance Code – the Presidential Committee can impose a limit or reserve the right to impose such a limit in the case of exceptional and unpredictable developments, are calculated with the intrinsic value at December 31. The table below pres- ents the underlying assumptions as well as the resulting fair val- ues and total values (in millions of €): Expected dividend yield Expected volatility Risk-free interest rate Expected lives (in years) Fair value per option Total value by award 2004 2003 4.4% 33% 2.6% 3 €7.85 131.9 5.6% 35% 2.9% 3 €6.00 123.0 Unearned compensation expense (before taxes) of all outstand- ing and unvested stock options as of December 31, 2005, that are not subject to a possible limitation according the recom- mendation of the German Corporate Governance Code, totals €35 million (2004: €125 million; 2003: €122 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 Daimler- Chrysler Ordinary Shares subsequent 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 mil- lion SARs at an exercise price of €89.70 each ($98.76 for Chrysler employees), of which 8.2 million SARs are outstanding and exercisable at December 31, 2005. 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. 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 10.0 million SARs are outstanding and exercisable at December 31, 2005. 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 anniversaries of the consummation date. 169 A summary of the activity related to the Group’s SAR plans as of and for the years ended December 31, 2005, 2004 and 2003 is presented below: (SARs in millions; per share amounts in €) 2005 Weighted- average exercise price Number of SARs 2004 Weighted average exercise price 2003 Weighted average exercise price Number of SARs Number of SARs Outstanding at beginning of year 32.5 71.37 36.3 74.24 40.3 79.13 Granted Exercised Forfeited Outstanding at year-end SARs exercisable at year-end 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, 2005, 2004 and 2003, the Group recognized no compensation expense in con- nection with SARs, because the options underlying exercise prices were greater than the market price for DaimlerChrysler Ordinary Shares at December 31, 2005. Medium Term Incentive Awards. The Group granted medium term incentives to certain eligible employees with three year performance periods. The amount ultimately earned in cash at the end of a performance period is primarily based on the de- gree of achievement of corporate goals derived from competitive and internal planning benchmarks and the value of Daimler- Chrysler Ordinary Shares at the end of three year performance periods. The benchmarks are return on net assets and return on sales. In 2005 no medium term incentive awards (2004: 0.7 million awards; 2003: 1.3 million awards) were issued. The Group considers the medium term incentive awards with their fair value in the accrued liabilities and recognized €25 million gains (2004: €12 million expenses; 2003: €35 million expenses) from the valuation of this accrued liability. – – (4.5) 28.0 28.0 – – 67.16 76.65 76.65 – – (3.8) 32.5 32.5 – – 72.54 71.37 71.37 – – (4.0) 36.3 36.3 – – 75.00 74.24 74.24 25. Accrued Liabilities Accrued liabilities are comprised of the following: (in millions of €) Total 2005 Due after one year At December 31, 2004 Due after one year Total Pension plans and similar obligations (see Note 25a) Income and other taxes Other accrued liabilities (see Note 25b) 15,482 12,845 13,923 12,634 3,396 1,166 3,344 1,884 27,804 46,682 11,839 25,850 24,671 41,938 8,771 23,289 a) Pension Plans and Similar Obligations Pension plans and similar obligations are comprised of the fol- lowing components: (in millions of €) Pension liabilities (pension plans) Other postretirement benefits Other benefit liabilities At December 31, 2004 2005 5,275 9,825 382 5,606 8,021 296 15,482 13,923 The decrease of the pension liabilities of €0.3 billion resulted primarily from the transfer of the Group’s Off-Highway pension liabilities to “Disposal Group Off-Highway, Liabilities Held for Sale” (see Note 10). 170 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The increase in accrued other postretirement benefits of €1.8 billion resulted mainly from currency exchange rate effects and from the annual increase of the accruals less payments to beneficiaries. 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 employ- ment while others are fixed plans depending on ranking (both wage level and position). Funded Status. The following information with respect to the Group’s pension plans is presented by German Plans and non-German Plans (principally comprised of plans in the U.S.) The funded status of the projected benefit obligations is as follows: (in millions of €) Projected benefit obligations Less fair value of plan assets Funded status At December 31, 2005 German Non-German Plans Plans Total At December 31, 2004 German Non-German Plans Plans Total 41,514 15,163 26,351 34,448 (34,348) (10,590) (23,758) (27,804) 7,166 4,573 2,593 6,644 12,628 (9,019) 3,609 21,820 (18,785) 3,035 A reconciliation of the funded status to the amounts recognized in the consolidated balance sheets is as follows: (in millions of €) Funded status Amounts not recognized: Unrecognized actuarial net losses Unrecognized prior service cost Net assets recognized Amounts recognized in the consolidated balance sheets consist of: Prepaid pension cost Accrued pension liability Disposal group off-highway, liabilities held for sale Intangible assets Accumulated other comprehensive loss Net assets recognized At December 31, 2005 German Non-German Plans Plans Total At December 31, 2004 German Non-German Plans Plans Total 7,166 4,573 2,593 6,644 3,609 3,035 (13,270) (5,299) (2,470) (8,574) (2) (728) (7,971) (2,468) (7,846) (11,356) (4,166) (2,143) (6,855) (2) (559) (595) 5,275 321 (2,375) – 3,141 321 – (11,200) (4,190) (8,574) (728) (595) 2,134 – (2,375) (7,010) (7,846) (246) 5,606 – (2,074) (10,141) (6,855) – 2,927 – – (3,486) (559) (7,190) (2,141) (6,296) (246) 2,679 – (2,074) (6,655) (6,296) In 2005 DaimlerChrysler used the rates from the 2005 Heubeck mortality tables G for the valuation of the German pension obli- gations. Previously, DaimlerChrysler used the rates from 1998 Heubeck mortalitiy tables. The new mortality tables reflect longer living expectation for current employees and lower living expectation for retirees, which resulted in a minor increase of projected benefit obligations for 2005. 171 The development of the projected benefit obligation and the plan assets in 2005 and 2004 is as follows: (in millions of €) Change in projected benefit obligations: At December 31, 2005 German Non-German Plans Plans Total At December 31, 2004 German Non-German Plans Plans Total Projected benefit obligations at beginning of year 34,448 12,628 21,820 Foreign currency exchange rate changes Service cost Interest cost Plan amendments Actuarial losses 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 on plan assets Employer contributions Plan participant contributions Acquisitions and other Benefits paid Fair value of plan assets at end of year 3,391 739 1,874 233 2,923 53 49 (2,196) 41,514 – 296 588 – 2,163 53 – (565) 15,163 3,391 443 1,286 233 760 – 49 (1,631) 26,351 27,804 9,019 18,785 3,038 3,951 1,661 18 – (2,124) 34,348 – 1,518 534 – – (481) 10,590 3,038 2,433 1,127 18 _ (1,643) 23,758 32,132 (1,351) 681 1,878 67 2,146 852 134 (2,091) 34,448 26,328 (1,252) 2,854 1,649 19 188 (1,982) 27,804 11,165 – 256 586 – 1,110 58 3 (550) 12,628 8,183 – 664 638 – – (466) 9,019 20,967 (1,351) 425 1,292 67 1,036 794 131 (1,541) 21,820 18,145 (1,252) 2,190 1,011 19 188 (1,516) 18,785 Plan Assets. At December 31, 2005, plan assets were invest- ed in diversified portfolios that consisted primarily of debt and equity securities. Assets and income accruing on all pension trust and relief funds are used solely to pay pension benefits and administer the plans. The Group’s pension asset allocation at December 31, 2005 and 2004, and target allocation for the year 2006, are presented in the following table: 2006 planned 56 35 4 3 2 Plan Assets German Plans 2004 2005 56 36 2 2 4 56 36 1 2 5 2006 planned 61 24 9 5 1 Plan Assets Non-German Plans 2004 2005 61 25 7 5 2 61 28 5 4 2 (in % of plan assets) Equity securities Debt securities Alternative investments Real estate Other 172 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Alternative investments consist of private equity and debt investments and, beginning in 2005 investments in commodi- ties and hedge funds. Every 3–5 years, or more frequently if appropriate, Daimler- Chrysler conducts asset-liability studies for its major pension funds. DaimlerChrysler uses the expertise of external invest- ment and actuarial advisors. These studies are intended to de- termine the optimal long-term asset allocation with regard to the liability structure. The resulting Model Portfolio allocation is intended to minimize the economic cost of defined benefit schemes and to limit the risks to an appropriate level. The Model Portfolio is then expanded to a medium term Bench- mark Portfolio. The Benchmark Portfolio matches the asset class weights in the Model Portfolio, but expands the asset class- es by adding of sub-asset-classes with corresponding weights and assigning specific capital market indices to each sub-asset- class. Modern Portfolio Theory is then applied to determine an optimal one-year target allocation, the performance of which is tracked against the Benchmark Portfolio. (in %) Average assumptions: Discount rate Rate of long-term compensation increase The following weighted average assumptions were used to determine net periodic pension cost: The entire process is overseen by investment committees which consist of senior financial management from treasury and cer- tain appropriate executives. The investment committees meet regularly to approve the asset allocations, review the risks and results of the major pension funds and approve the selec- tion and retention of external managers of specific portfolios. The majority of investments are in international blue chip equi- ties and high quality government and corporate bonds. To main- tain a wide range of diversification and to improve return oppor- tunities, up to approximately 20% of assets are allocated to private equity, high yield debt, convertible instruments, emerg- ing markets, commodities and hedge funds. Internal controlling units monitor all investments regularly. External depositary banks provide safekeeping of securities and reporting of trans- actions and assets. Assumptions. The measurement date for the Group’s pension obligations and plan assets is generally December 31. The measurement date for the Group’s net periodic pension cost is principally January 1. Assumed discount rates and rates of increase in remuneration used in calculating the projected ben- efit 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 following weighted average assumptions were used to determine benefit obligations: 2005 German Plans 2003 2004 2005 Non-German Plans 2003 2004 4.0 3.0 4.8 3.0 5.3 3.0 5.4 4.4 5.8 4.5 6.2 4.5 (in %) Average assumptions: Discount rate Expected return on plan assets (at the beginning of the year) Rate of long-term compensation increase 2005 German Plans 2003 2004 2005 Non-German Plans 2003 2004 4.8 7.5 3.0 5.3 7.5 3.0 5.8 7.5 3.0 5.8 8.5 4.5 6.2 8.5 4.5 6.7 8.5 5.4 173 Expected Return on Plan Assets. The expected rate of return for German and non-German plan assets is primarily derived from asset allocation of pension funds and expected future re- turns for the various asset classes in portfolios. The invest- ment committees survey banks and large asset portfolio man- agers about their expectations of future returns of the relevant market indices. The allocation weighted average return expecta- tions serves an initial indicator for the expected rate of return on plan assets for each pension fund. In addition, we consider long-term actual portfolios results and historical market returns in evaluation in order to reflect the long-term character of the expected rate. From January 1, 2003 to December 31, 2005, the expected rate of return was 7.5% and 8.5% for German and non-German plans, respectively. For 2006, the expected rates of return on plan assets for German and non-German plans are the same as the respective rates used in 2005. Net Pension Cost. The components of net pension cost were for the years ended December 31, 2005, 2004 and 2003 as follows: (in millions of €) Service cost Interest cost Expected return on plan assets Amortization of: Unrecognized net actuarial (gains) losses Unrecognized prior service cost Net periodic pension cost Settlement/curtailment loss Net pension cost 2005 Non- German Plans German Plans 296 588 443 1,286 Total 739 1,874 2004 Non- German Plans German Plans 256 586 425 1,292 Total 681 1,878 2003 Non- German Plans German Plans 256 632 344 1,397 Total 600 2,029 (2,377) (673) (1,704) (2,339) (614) (1,725) (2,379) (509) (1,870) 600 279 1,115 16 1,131 183 – 394 – 394 417 279 721 16 737 372 292 884 64 948 141 – 369 – 369 231 292 515 64 579 226 287 763 74 837 173 – 552 50 602 53 287 211 24 235 174 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contributions. Employer contributions to the Group’s defined benefit pension plans were €1,661 million and €1,649 million for the years ended December 31, 2005 and 2004, respectively. Employer cash contributions to the Group’s defined benefit pen- sion plans are expected to approximate €1.9 billion in 2006, of which €0.5 billion is estimated to be needed to satisfy minimum funding and contractual requirements and an additional €1.4 billion is expected to be contributed at the Group’s discretion. Estimated Future Pension Benefit Payments. Pension bene- fits pertaining to the Group’s German and non-German plans were €565 million and €1,631 million, respectively during 2005, and €550 million and €1,541 million, respectively during 2004. The total estimated future pension benefits to be paid by the Group’s pension plans for the next 10 years approximates €25.4 billion and are expected to be paid as follows: Other Postretirement Benefits Certain DaimlerChrysler operations in the U.S. and Canada pro- vide postretirement health and life insurance benefits to their employees. Upon retirement from DaimlerChrysler, the employ- ees may become eligible for continuation of these benefits. The benefits and eligibility rules may be modified. Funded Status. The funded status of the accumulated postre- tirement benefit obligations is as follows: (in millions of €) Accumulated postretirement benefit obligations Less fair value of plan assets Funded status At December 31, 2004 2005 17,711 (1,912) 15,799 14,355 (1,547) 12,808 (in billions of €) 2006 2007 2008 2009 2010 German Plans Non-German Plans Total 0.6 1.7 2.3 0.6 1.8 2.4 0.6 1.8 2.4 0.7 1.8 2.5 0.7 1.9 2.6 2011- 2015 3.9 9.3 13.2 Accumulated Benefit Obligation. For all pension plans that have an accumulated benefit obligation in excess of plan assets, information pertaining to the accumulated benefit obligation and plan assets are presented as follows: A reconciliation of the funded status to the liability recognized for accrued postretirement health and life insurance benefits in pension plans and similar obligations is as follows: (in millions of €) Funded status Amounts not recognized: At December 31, 2004 2005 15,799 12,808 Unrecognized actuarial net losses (6,189) (4,721) Unrecognized prior service cost Net liability recognized 215 9,825 (66) 8,021 (in millions of €) At At December 31, December 31, December 31, 2003 2004 2005 At Projected benefit obligation Accumulated benefit obligation Plan Assets 41,099 39,379 33,953 33,749 32,627 27,141 31,487 30,547 25,660 The pretax increase of the minimum pension liability in 2005 resulted in a reduction of stockholder’s equity by €170 million (2004: €1,224 million) and is included in other comprehensive loss. 175 Asset allocation is based on a Benchmark Portfolio designed to diversify investments among the following primary asset classes: U.S. Equity, International Equity and U.S. Fixed Income. The objective of the Benchmark Portfolio is to achieve a reasonable balance between risk and return. The investment process is overseen by Investment Committees which consist of senior financial management and other appro- priate executives. The Investment Committees meet regularly to approve the asset allocations and review the risks and results of the funds and approve the selection and retention of external managers of specific portfolios. The majority of investments reflect the asset classes designat- ed by the Benchmark Portfolio. To maintain a wide range of diversification and improve return possibilities, a small percent- age of assets (approximately 5%) is allocated to highly promis- ing markets such as High Yield Debt and Emerging Markets. Internal controlling units monitor all investments regularly. External depositary banks provide safekeeping of securities as well as reporting of transactions and assets. Estimated Future Subsidies due to Medicare Act. The total estimated future subsidies due to Medicare Act for the next 10 years approximate €717 million and are expected to be re- ceived as follows: (in millions of €) 2006 2007 2008 2009 2010 2011- 2015 Medicare Act 53 57 61 65 69 412 The development of the accumulated postretirement benefit obligations and the plan assets in 2005 and 2004 is as follows: (in millions of €) At December 31, 2004 2005 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 Benefits paid 14,355 2,280 273 917 (289) 1,004 15 (844) 14,910 (1,053) 255 863 4 127 46 (797) Accumulated postretirement benefit obligations at end of year 17,711 14,355 Change in plan assets: Fair value of plan assets at beginning of year Foreign currency exchange rate changes Actual gains (losses) on plan assets Plan participant contributions Benefits paid 1,547 241 134 1 (11) 1,531 (132) 160 – (12) Fair value of plan assets at end of year 1,912 1,547 Plan Assets. At December 31, 2005, plan assets were invested in diversified portfolios that consisted primarily of debt and equity securities. Assets and income accruing on all pension trust and relief funds are used solely to pay benefits and admin- ister the plans. The Group’s other benefit plan asset allocation at December 31, 2005 and 2004, and target allocations for 2006 are as follows: (in % of plan assets) Equity securities Debt securities Real estate 2006 planned 2005 2004 65 35 – 67 33 – 68 32 – 176 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Contributions. DaimlerChrysler did not make any contributions to its other postretirement plans in 2005 or 2004 and does not expect to make any contributions in 2006. Assumptions. The measurement date for the Group’s accumu- lated other postretirement benefit obligations and plan assets is generally December 31. The measurement date for the Group’s net periodic postretirement benefit cost is principally January 1. 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 country in which the plans are situated. U.S. postretirement benefit plan assets utilize an asset alloca- tion substantially similar to that of the pension assets so the expected rate of return is the same for both pension and postretirement benefit plan asset portfolios. Accordingly, the information about the expected rate of return on pension plan assets described above also applies to postretirement plan assets. For 2006 the expected rate of return on plan assets is the same as the rate applied in 2005. The assumptions have a significant effect on the amounts reported for the Group’s health care plans. The following sched- ule presents the effects of a one-percentage-point change in assumed ultimate health care cost inflation rates as from 2011: The weighted average assumptions used to determine the bene- fit obligations of the Group’s postretirement benefit plans at December 31 were as follows (in %): (in millions of €) 1-Percentage- 1-Percentage- Point Decrease Point Increase 2005 2004 2003 Average assumptions: Discount rate Health care inflation rate in following (or “base”) year Ultimate health care inflation rate (2011/2011/2008) 5.7 7.4 5.0 6.0 8.0 5.0 6.3 8.0 5.0 The weighted average assumptions used to determine the net periodic postretirement benefit cost of the Group’s postretire- ment benefit plans were as follows (in %): Effect on total of service and interest cost components Effect on accumulated postretirement benefit obligations 191 (129) 2,223 (1,805) Net Postretirement Benefit Cost. The components of net periodic postretirement benefit cost for the years ended De- cember 31, 2005, 2004 and 2003 were as follows: (in millions of €) 2005 2004 2003 Service cost Interest cost Expected return on plan assets 2005 2004 2003 Amortization of: Average assumptions: Discount rate 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 (2011) 6.0 8.5 8.0 5.0 6.3 8.5 8.0 5.0 6.8 8.5 10.0 5.0 Unrecognized net actuarial (gains) losses Unrecognized prior service cost Net periodic postretirement benefit cost Settlement/curtailment loss Net postretirement benefit cost 273 917 (155) 301 (8) 1,328 3 1,331 255 863 (159) 208 3 1,170 3 1,173 278 983 (217) 220 24 1,288 2 1,290 177 Estimated Future Postretirement Benefit Payments. Postretirement benefits paid pertaining to the Group’s plans were €844 million and €797 million during 2005 and 2004, respectively. The total estimated future postretirement benefits to be paid by the Group’s plans for the next 10 years approxi- mate €11.6 billion and are expected to be paid as follows: (in billions of €) 2006 2007 2008 2009 2010 2011- 2015 Expected payments 1.0 1.0 1.1 1.1 1.2 6.2 Prepaid Employee Benefits. In 1996 DaimlerChrysler estab- lished a Voluntary Employees’ Beneficiary Association (“VEBA”) trust for payment of non-pension employee benefits. At De- cember 31, 2005 and 2004, the VEBA trust had a balance of €2,392 million and €2,023 million, respectively, of which the long-term assets in the VEBA trust of €1,835 million and €1,474 million, respectively, are reported as plan assets for the accumu- lated postretirement benefit obligations and not reported in DaimlerChrysler’s Consolidated Balance Sheets. The short-term assets in the VEBA trust are classified as cash and marketable securities in DaimlerChrysler’s Consolidated Balance Sheets. No contributions to the VEBA trust were made in 2005, 2004 and 2003. DaimlerChrysler does not expect to make any contribu- tions to the VEBA trust in 2006. b) Other Accrued Liabilities Other accrued liabilities consisted of the following: (in millions of €) Product guarantees Accrued sales incentives Accrued personnel and social costs Derivative financial instruments Other At December 31, 2004 2005 11,632 10,877 5,381 3,219 1,706 5,866 4,680 2,938 326 5,850 27,804 24,671 The Group issues various types of product guarantees under which it generally guarantees the performance of products delivered and services rendered for a certain period or term (see Note 32). The accrued liability for these product guarantees covers expected costs for legally and contractually obligated warranties as well as expected costs for policy coverage, recall campaigns and buyback commitments. The liability for buy- back commitments represents the expected costs related to the Group’s obligation, under certain conditions, to repurchase a vehicle from a customer. Buybacks may occur for a number of reasons including litigation, compliance with laws and regulations in a particular region and customer satisfaction issues. The changes in provisions for those product guarantees are summarized as follows: (in millions of €) 2005 2004 Balance at January 1 10,877 9,230 Currency change and change in consolidated companies Utilizations and transfers Product guarantees issued in respective year Changes from prior period product guarantees issued Balance at December 31 767 334 (5,587) (4,712) 5,012 563 4,807 1,218 11,632 10,877 The amount included in the line item “Product guarantees issued in respective year” represents the additions to the accruals for product guarantees recognized in the corresponding year for products sold in this year. In 2005, “Changes from prior period product guarantees issued” are partly offset by payments received from suppliers in settle- ment of claims for recovery of the costs for recall campaigns. 178 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The Group also offers customers the opportunity to purchase separately priced extended warranty and maintenance contracts. The revenue from these contracts is deferred at the inception of the contract and recognized into income over the contract period in proportion to the costs expected to be incurred based on historical information. Included in “Deferred income” on the Consolidated Balance Sheets, the deferred revenue from these contracts is summarized as follows: 26. Financial Liabilities (in millions of €) Short-term: Notes/Bonds Commercial paper (in millions of €) 2005 2004 Balance at January 1 Currency change and transfers Deferred revenue current period Earned revenue current period Balance at December 31 1,115 226 694 (487) 1,548 1,129 (147) 611 (478) 1,115 The provisions for derivative financial instruments are mainly due to exchange rate risks from financial liabilities and future sales revenues. The deviation from previous year is especially attributable to the changed currency relation of the Euro in rela- tion to the U.S. dollar. At December 31, 2004 2005 12,530 9,104 9,860 417 3,045 27 1,500 36,483 10,760 6,824 10,309 438 2,945 608 1,422 33,306 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) Long-term: Notes/Bonds of which due in more than five years €10,939 (2004: €10,492) Liabilities to financial institutions of which due in more than five years €1,469 (2004: €1,265) Liabilities to affiliated companies of which due in more than five years €– (2004: €–) Deposits from direct banking business of which due in more than five years €9 (2004: €9) Loans, other financial liabilities of which due in more than five years €– (2004: €–) Liabilities from capital lease and residual value guarantees of which due in more than five years €210 (2004: €210) Long-term financial liabilities Maturities 2007-2097 34,902 33,919 2007-2019 7,612 7,355 76 – 160 179 – 69 1,699 44,449 80,932 1,442 42,964 76,270 Weighted average interest rates for notes/bonds, commercial paper, liabilities to financial institutions and deposits from direct banking business are 5.70 %, 4.08 %, 4.54 % and 2.24 %, respectively, at December 31, 2005. Commercial papers are primarily denominated in euros and U.S. dollars and include accrued interest. Liabilities to financial in- stitutions are partly secured by mortgage conveyance, liens and assignment of receivables of approximately €2,219 million (2004: €2,232 million). 179 Aggregate nominal amounts of financial liabilities maturing dur- ing the next five years and thereafter are as follows: (in millions of €) 2006 2007 2008 2009 2010 there- after Financial liabilities 36,601 13,474 11,760 4,169 2,370 12,482 At December 31, 2005, the Group had unused short-term credit lines of €7,099 million (2004: €9,278 million) and unused long-term credit lines of €10,806 million (2004: €8,981 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 revolving credit facility which allows DaimlerChrysler AG to borrow up to $5 billion until De- cember 2009 and $4.8 billion until December 2010, respective- ly, an U.S. dollar revolving credit facility which allows Daimler- Chrysler North America Holding Corporation, a wholly-owned subsidiary of DaimlerChrysler AG, to borrow up to $6 billion available until May 2006, and a multi-currency revolving credit facility for working capital purposes which allows Daimler- Chrysler AG and several subsidiaries to borrow up to $7 billion until May 2008. A part of the $18 billion facility serves as back- up for commercial paper drawings. 27. Trade Liabilities (in millions of €) Trade liabilities 28. Other Liabilities (in millions of €) Liabilities to affiliated companies Liabilities to related companies Other liabilities 180 At December 31, 2005 At December 31, 2004 Due after one and before five years Total Due after five years Due after one and before five years Total Due after five years 14,591 1 – 12,920 2 – At December 31, 2005 At December 31, 2004 Due after one and before five years Due after five years – 5 260 265 224 – 139 363 Total 334 96 8,623 9,053 Due after one and before five years Due after five years 10 – 542 552 – – 166 166 Total 354 77 8,314 8,745 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information As of December 31, 2005, other liabilities include tax liabilities of €1,147 million (2004: €803 million) and social benefits due of €808 million (2004: €774 million). 29. Deferred Income As of December 31, 2005, €3,105 million of the total deferred income is to be recognized after more than one year (2004: €2,088 million). 181 Notes to Consolidated Statements of Cash Flows Other Notes 30. Consolidated Statements of Cash Flows 31. Legal Proceedings The following cash flows represent supplemental information with respect to net cash provided by operating activities: (in millions of €) Interest paid Income taxes paid Year ended December 31, 2003 2004 2005 3,652 700 3,092 1,373 3,207 937 For the year ended December 31, 2005, net cash provided by financing activities included payments/(proceeds) of early ter- minated cross currency hedges, related to financial liabilities, of €72 million (2004: €(1,304) million; 2003: €(556) million). Various legal proceedings are pending against the Group. We believe that such proceedings in the main constitute ordinary routine litigation incidental to its business. The official receiver of Garage Bernard Tutrice S.A., France, a former customer of DaimlerChrysler France S.A.S., filed a lawsuit against DaimlerChrysler France in the commercial court of Versailles in November 2003. The complaint seeks damages of €455 million alleged to have resulted from tax fraud committed by the former Chairman of Tutrice S.A. who was convicted of tax fraud in April, 2001. In January 2006, the court ordered DaimlerChrysler France to pay €30 million in compensatory damages, and rejected the rest of the claim. In October 2005, DaimlerChrysler Australia/Pacific Pty. Ltd. (“DCAuP”) settled the previously reported actions filed in the Supreme Court of New South Wales by National Australia Bank Limited and the liquidator in connection with the financial failure of a customer. The settlement agreement provides for payment by DCAuP of AUD 55 million and a release from all further claims. 182 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information DaimlerChrysler AG in its capacity as successor of Daimler- Benz AG is a party to a valuation proceeding (Spruchstellen- verfahren) relating to a subordination and profit transfer agree- ment that existed between Daimler-Benz AG and the former AEG AG (“AEG”). In 1988, former AEG shareholders filed a peti- tion to the regional court in Frankfurt claiming that the con- sideration and compensation stipulated in the agreement was inadequate. In 1994, a court-appointed valuation expert con- cluded that the consideration provided for in the agreement was adequate. Following a Federal Constitutional Court decision in an unrelated case, the Frankfurt court in 1999 instructed the expert to employ a market value approach in its valuation analysis rather than the capitalized earnings value approach previously used. The court also instructed the expert in 2004 to take into account additional findings of the Federal Supreme Court elaborating further on the valuation issue addressed by the Federal Constitutional Court. In September 2004, the expert delivered the requested valuation opinion. If the new opinion were to be followed by the Frankfurt court, the valuation ratio would increase significantly in favour of the AEG share- holders. DaimlerChrysler believes the original consideration and compensation to be adequate and the second valuation opinion to be unwarranted. DaimlerChrysler intends to defend itself vigorously against the claims in this proceeding. In 1999, former shareholders of Daimler-Benz AG instituted a valuation proceeding (Spruchstellenverfahren) against Daimler- Chrysler AG at Stuttgart district court. These proceedings relate to the merger of Daimler-Benz AG and DaimlerChrysler AG in connection with the business combination of Daimler-Benz and Chrysler Corporation in 1998. In the course of the merger, 1.8% of all shares in Daimler-Benz AG were involuntarily exchanged for DaimlerChrysler shares. Some shareholders claim that the ratio used in the course of the merger did not correspond to the actual value of the Daimler-Benz shares. An expert commis- sioned by the court presented his report in December 2005. In it, he has calculated various alternative values for payments to be made. These alternatives range from confirming the appropriateness of the ratio used to considerable payments to be made to the former Daimler-Benz shareholders with respect to the involuntarily exchanged shares. DaimlerChrysler contin- ues to view the exchange ratio set by the company at the time as appropriate, and the alternative values calculated by the court expert as unfounded. We intend to continue defending ourselves vigorously against these claims. Various legal proceedings are pending against DaimlerChrysler AG or its subsidiaries alleging defects in various components (including occupant restraint systems, seats, brake systems, tires, ball joints, engines and fuel systems) in several different vehicle models or allege design defects relating to vehicle stabil- ity (rollover propensity), pedal misapplication (sudden acce- leration), brakes (vibration and brake transmission shift inter- lock), or crashworthiness. Some of these proceedings are filed as class action lawsuits that seek repair or replacement of the vehicles or compensation for their alleged reduction in value, while others seek recovery for damage to property, personal injuries or wrongful death. Adverse decisions in one or more proceedings could require DaimlerChrysler or its subsidiaries to pay partially substantial compensatory and punitive damages, or undertake service actions, recall campaigns or other costly actions. Seven purported class action lawsuits are pending in various U.S. courts regarding alleged front disc brake judder in 1999–2004 model year Jeep® Grand Cherokee vehicles and the treatment of related warranty claims. Plaintiffs seek compensatory and punitive damages, costs of repair or replace- ment, attorneys’ fees and costs. Three purported class action lawsuits are pending in various U.S. 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 puni- tive damages, costs of repair or replacement, attorneys’ fees and costs. Seven other previously reported class action lawsuits regarding paint delamination have been dismissed. In November 2004, a jury awarded $3.75 million in compensatory damages and $98 million in punitive damages against Daimler- Chrysler Corporation in Flax v. DaimlerChrysler Corporation, a case filed in Davidson County Circuit Court in the state of Tennessee. The complaint alleged that the seat back in a 1998 Dodge Grand Caravan was defective and collapsed when the Caravan was struck by another vehicle resulting in the death of an occupant. In June 2005 the trial court reduced the punitive damage award to $20 million in response to motions filed by DaimlerChrysler Corporation challenging the verdict and the damage awards. DaimlerChrysler Corporation is appealing the verdict and the damage awards. In October 2005, the Arizona Court of Appeals reversed the $50 million punitive damages award and affirmed the $3.75 million compensatory damages award in Douglas v. DaimlerChrysler Cor- poration, a case involving the front seat back strength of a1996 Dodge Ram club cab pickup. DaimlerChrysler Corporation is defending approximately 25 other complaints involving vehicle seat back strength. 183 The U.S. Environmental Protection Agency filed a complaint in the U.S. District Court for the District of Columbia against DaimlerChrysler Corporation in December 2005 alleging defects in catalytic converters and on-board diagnostic systems in certain Chrysler Group vehicles, and failure to properly disclose defects in such converters. The parties have agreed to the terms of a consent decree in settlement of the complaint. The settlement requires DaimlerChrysler Corporation to, among other things, extend the warranties on catalytic converters in certain 1996 – 2000 vehicles, and reprogram the powertrain control modules in certain 1996 – 1998 vehicles with updated on-board diagnostic systems calibrations. DaimlerChrysler Cor- poration also settled a related parallel administrative proceed- ing with the California Air Resources Board. The estimated cost of such remedial actions and related settlement payments is approximately $95 million. 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 ve- hicle components (principally brake pads). Typically, these suits name many other corporate defendants and may also include claims of exposure to a variety of non-automotive asbestos pro- ducts. A single lawsuit may include claims by multiple plain- tiffs alleging illness in the form of asbestosis, mesothelioma or other cancer or illness. The number of claims in these law- suits increased from approximately 14,000 at the end of 2001 to approximately 28,000 at the end of 2005. In the majority of these cases, plaintiffs do not specify their alleged illness and provide little detail about their alleged exposure to compo- nents in DaimlerChrysler’s vehicles. Some plaintiffs do not exhib- it current illness, but seek recovery based on potential future illness. DaimlerChrysler believes that many of these lawsuits in- volve unsubstantiated illnesses or assert only tenuous connec- tions with components in its vehicles, and that there is credible scientific evidence to support the dismissal of many of these claims. Although DaimlerChrysler’s expenditures to date in con- nection 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. A class action lawsuit was filed in 2002 against Mercedes-Benz USA, LLC (“MBUSA”), and its wholly-owned subsidiary Mercedes- Benz Manhattan, Inc., and is pending in the United States Dis- trict Court for the District of New Jersey. The lawsuit alleges that those companies participated in a price fixing conspiracy among Mercedes-Benz dealers. MBUSA and Mercedes-Benz Manhattan continue to defend themselves vigorously. DaimlerChrysler received a “statement of objections” from the European Commission on April 1,1999, which alleged that the Group violated EU 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 EU compe- tition rules and imposed a fine of approximately €72 million. On September 15, 2005, the Court of First Instance of the Euro- pean Court of Justice annulled the decision in part and reduced the fine to an amount of €9.8 million. Neither party appealed the judgment, which is now final. More than 80 purported class action lawsuits alleging viola- tions of antitrust law are pending against DaimlerChrysler and several of its U.S. subsidiaries, six other motor vehicle manu- facturers, operating subsidiaries of those companies in both the United States and Canada, the National Automobile Dealers Association and the Canadian Automobile Dealers Association. Some complaints were filed in federal courts in various states and others were filed in state courts. The complaints allege that the defendants conspired to prevent the sale to U.S. consumers of vehicles sold by dealers in Canada in order to maintain new car prices at artificially high levels in the U.S. They seek treble damages on behalf of everyone who bought or leased a new vehicle in the U.S. since January 1, 2001. DaimlerChrysler believ- es the complaints against it are without merit and plans to defend itself against them vigorously. DaimlerChrysler Services North America LLC (“DCSNA”) settled the two previously reported class action lawsuits alleging racially discriminatory credit practices. The court approved set- tlements require, among other things, training programs for employees, consumer financial literacy programs, and commu- nity outreach for African-Americans and Hispanics. The Federal Republic of Germany has initiated arbitration pro- ceedings against DaimlerChrysler Financial Services AG, Deutsche Telekom AG and Toll Collect GbR. The statement of claims of the Federal Republic of Germany was received in August 2005. The Federal Republic of Germany is mainly seek- ing damages, contractual penalties and the transfer of intellec- tual property rights to Toll Collect GmbH. In particular, the Federal Republic of Germany is claiming lost revenues of €3.51 billion plus interest (€236 million through July 31, 2005) for the period September 1, 2003, through December 31, 2004, and contractual penalties of approximately €1.65 billion through July 31, 2005 plus interest (€107 million through July 31, 2005). Since some of the contractual penalties, among other things, are dependent on time and further claims for contractual penalties have been asserted by the Federal Republic of Germany, the amount claimed as contractual penalties may increase. Daimler- Chrysler believes the claims of the Federal Republic of Ger- many are without merit and intends to defend itself vigorously against these claims. 184 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Freightliner LLC acquired in September 2000 Western Star Trucks Holdings Ltd. Prior to its acquisition by Freightliner, Western Star had completed the sale of a truck manufacturer, ERF (Hold- ings) plc, to MAN AG for CAD195 million. In September 2002, MAN filed a claim against Freightliner Ltd. (formerly Western Star) with the London Commercial Court for fraud and breach of representations and warranties in the share purchase agree- ment, alleging that ERF’s accounts and financial statements were misstated and seeking damages in excess of GBP300 mil- lion. Freightliner Ltd. subsequently filed a contribution claim with that court against Ernst & Young, ERF’s and Western Star’s auditors. In October 2005, the court ruled that Freightliner Ltd. was vicariously liable for fraud by an employee of ERF in connection with the preparation of ERF’s financial accounts, and also found in favor of Ernst & Young on the contribution claim. Freightliner Ltd. has appealed both decisions on liability. In December 2005, the court awarded MAN an interim payment of GBP250 million, based on a minimum estimate of the parties, which amount significantly exceeds Freightliner Ltd.’s net assets. A hearing to determine final damages may be deferred until resolution of the appeals. In a related matter, MAN sued Freightliner LLC in February 2005 alleging that assets were fraudulently transferred from Freightliner Ltd. while the above described proceeding was pending, and seeking payment from Freightliner LLC of the damages awarded against Freightliner Ltd. in that proceeding. The complaint, which was amended in December 2005, is pending in Multnomah County Circuit Court in the state of Oregon. Freightliner LLC intends to defend itself vigorously in this matter. Tracinda Corporation filed a lawsuit in 2000 against Daimler- Chrysler AG and some of the members of its Supervisory Board and Board of Management alleging that the defendants violated U.S. securities law and committed fraud in obtaining approval from Chrysler stockholders of the business combination be- tween Chrysler and Daimler-Benz in 1998. On April 7, 2005, the United States District Court for the District of Delaware ren- dered a judgment in favor of the defendants and against Tracin- da Corporation on all claims finding that there had been no fraud and no violation of U.S. securities laws. Tracinda is appea- ling the decision and filed its opening brief with the United States Court of Appeals for the Third Circuit in January 2006. A purported class action was filed against DaimlerChrysler AG and some members of its Board of Management in 2004 in the United States District Court for the District of Delaware on behalf of current or former DaimlerChrysler shareholders who are neither citizens nor residents of the United States and who acquired their DaimlerChrysler shares on or through a foreign stock exchange. On January 24, 2006, the Court granted DaimlerChrysler’s motion to dismiss the complaint, declining to exercise jurisdiction over the case. The complaint, which had not yet been served on any member of DaimlerChrysler’s Board of Management, contained allegations similar to those in the Tracinda complaint and the prior class action complaint. On February 17, 2006, the plaintiffs filed a notice of appeal of this decision to the United States Court of Appeals for the Third Cir- cuit. Several lawsuits, including putative class action lawsuits, were filed in 2002 against a large number of companies from a wide variety of industries and nationalities asserting claims relating to the practice of apartheid in South Africa. One of the lawsuits names DaimlerChrysler AG as a defendant and another one names a U.S. subsidiary of DaimlerChrysler AG as a defendant. The lawsuits were consolidated in the United States District Court for the Southern District of New York for pretrial purposes. On November 29, 2004, the Court granted a motion to dismiss filed by a group of defendants, including DaimlerChrysler. Plaintiffs filed notices of appeal of the Court’s decision. The appeal has now been fully briefed. Oral argument was held in January 2006. In August 2004, the U.S. Securities and Exchange Commission (“SEC”) opened a formal investigation into possible violations by DaimlerChrysler of the anti bribery, record keeping and internal control provisions of the U.S. Foreign Corrupt Practices Act (FCPA). The U.S. Department of Justice (“DOJ”) has also request- ed information in this regard. DaimlerChrysler is voluntarily sharing with the DOJ and the SEC information from its own inter- nal investigation of certain accounts, transactions and pay- ments, primarily relating to transactions involving government entities, and is providing the agencies with information pursuant to outstanding subpoenas and other requests. Following is a summary of information DaimlerChrysler uncovered to date in connection with its internal investigation. Further issues may arise as the company completes its investigation. – DaimlerChrysler determined that improper payments were made in a number of jurisdictions, primarily in Africa, Asia and Eastern Europe. These payments raise concerns under the U.S. FCPA, German law, and the laws of other jurisdictions. – In connection with its internal investigation, DaimlerChrysler has identified and selfreported potential tax liabilities to tax authorities in several jurisdictions. These tax liabilities of DaimlerChrysler AG and certain foreign affiliates result from misclassifications of, or the failure to record, commissions and other payments and expenses. – DaimlerChrysler determined that certain payable accounts related to consolidated subsidiaries were not eliminated dur- ing consolidation. – DaimlerChrysler is taking action to address and resolve the issues identified in the course of our investigation to safe- guard against the recurrence of improper conduct. This includes evaluating and revising its governance policies and internal control procedures. 185 DaimlerChrysler is responding to the SEC’s request. The DOJ has also requested information in this regard. In addition, the United Nations Independent Inquiry Committee (“IIC”) that investigated the administration and management of the United Nations Oil-for-Food Program asked DaimlerChrysler to provide assistance in the IIC’s evaluation of certain transactions under that Program. On October 27, 2005, the IIC issued its final report on the United Nations Oil-for-Food Program, which includes a narrative describing DaimlerChrysler’s alleged conduct during the Program. In its report, the IIC concludes that Daimler- Chrysler knowingly made or caused to be made a kickback pay- ment of approximately €6,950 to the former Government of Iraq, that a DaimlerChrysler employee signed two side agree- ments to make additional payments, and that this conduct was in contravention of Program rules and the United Nations sanctions against Iraq. It is possible that additional payments may be identified as a result of the ongoing SEC and DOJ inves- tigations. If the DOJ or the SEC determines that violations of U.S. law have occurred, it could seek criminal or civil sanctions, including monetary penalties, against DaimlerChrysler and certain of its employees. The BaFin (German Federal Financial Supervisory Authority) is investigating whether DaimlerChrysler AG’s public ad hoc dis- closure on July 28, 2005 that Professor Schrempp will leave the company at the end of 2005 was timely. If the BaFin determines that the company improperly filed such disclosure, it could fine DaimlerChrysler up to €1 million. In a related matter, the Dis- trict Attorney’s Office in Stuttgart closed the previously report- ed investigation of alleged insider trading in DaimlerChrysler shares by two DaimlerChrysler senior executives prior to the ad hoc disclosure. In January 2006 the District Attorney’s Office also opened an investigation of alleged insider tipping by the Chairman of our Supervisory Board in advance of such disclosure. In February 2006, shareholders of DaimlerChrysler who claim damages based on the alleged unduly delayed ad hoc disclosure filed an application for a model case pursuant to German law (KapMuG). Litigation is subject to many uncertainties and DaimlerChrysler cannot predict the outcome of individual matters with assur- ance. It is reasonably possible that the final resolution of some of these matters could require the Group to make expendi- tures, in excess of established reserves, over an extended peri- od of time and in a range of amounts that DaimlerChrysler cannot reasonably estimate. Although the final resolution of any such matters could have a material effect on the Group’s consolidated operating results for a particular reporting period, DaimlerChrysler believes that it should not materially affect its consolidated financial position. In connection with these issues, DaimlerChrysler recognized charges in its 2005 consolidated statement of income to correct misstatements relating to the years 2003 and 2004 which had the effect of reducing 2005 operating profit by €16 million and reducing 2005 net income by €64 million. In addition, Daimler- Chrysler adjusted stockholders’ equity as at January 1, 2003 to correct accumulated misstatements in the periods 1994 through 2002 which had the effect of reducing the January 1, 2003 balance of stockholders’ equity by €222 million. DaimlerChrysler recognized a charge of €125 million in the third quarter of 2005 with respect to tax liabilities that had been identified in the course of the internal investigation by the date the unaudited interim financial statements for the third quarter 2005 were issued. Following its continued investigation of the misstatements discussed above, DaimlerChrysler subsequent- ly determined that any adjustments for pre-2003 periods should be reflected in the January 1, 2003 balance of stockholders’ equity. Accordingly, DaimlerChrysler reversed €100 million of the €125 million charge originally recognized in the third quarter 2005. This amount is reflected in the €222 million reduction of the January 1, 2003 balance of stockholders’ equity. DaimlerChrysler’s internal investigation into possible violations of law is ongoing. If the DOJ or the SEC determines that viola- tions of U.S. law have occurred, it could seek criminal or civil sanctions, including monetary penalties, against Daimler- Chrysler and certain of its employees, as well as additional changes to its business practices and compliance programs. DaimlerChrysler also determined that for a number of years a portion of the taxes related to compensation paid to expatriate employees was not properly reported. In connection with this underpayment of taxes, DaimlerChrysler recognized charges in its 2005 consolidated statement of income to correct corre- sponding overstatements relating to the years 2003 and 2004 which had the effect of reducing 2005 operating profit by €34 million and reducing 2005 net income by €25 million. In addition, DaimlerChrysler adjusted stockholders’ equity as at January 1, 2003 to correct accumulated overstatements of net income in the periods 1994 through 2002 which had the effect of reduc- ing the January 1, 2003 balance of stockholders’ equity by €84 million. DaimlerChrysler voluntarily reported potential tax liabilities resulting from these issues to the tax authorities in several jurisdictions. In November 2004, the SEC issued a formal order of investiga- tion concerning 13 named participants in the United Nations Oil-for-Food Program seeking to determine whether there had been acts in violation of the provisions of the Securities Ex- change Act of 1934 requiring the maintenance of books, records and accounts, the maintenance of internal accounting controls and prohibiting specified payments to foreign officials for improp- er purposes. In July 2005, the SEC supplemented the formal order of investigation to add DaimlerChrysler to the list of named companies. In that regard, DaimlerChrysler received an order from the SEC to provide a written statement and to produce certain documents regarding transactions in that Program. 186 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information 32. Contingent Obligations and Commercial Commitments Contingent Obligations. Obligations from issuing guarantees as a guarantor (excluding product warranties) are as follows: (in millions of €) Guarantees for third party liabilities Guarantees under buy-back commitments Other contingent obligations At December 31, Maximum potential future obligations 2004 2005 At December 31, Amount recognized as a liability 2004 2005 1,819 2,653 1,499 249 3,567 1,646 273 4,572 412 406 125 943 486 536 178 1,200 Guarantees for third party liabilities principally represent guar- antees of indebtedness of non-consolidated affiliated compa- nies 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 terms under these arrangements generally cover the range of the related indebtedness of the non-consolidated affiliated companies and third parties or the contractual per- formance period of joint venture companies, non-incorporated companies, partnerships, and project groups. The parent company of the Group (DaimlerChrysler AG) provides guaran- tees for certain obligations of its consolidated subsidiaries towards third parties. At December 31, 2005, these guarantees amounted to €54.0 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. DaimlerChrysler AG provides a guarantee to Deutsche Bank AG to cover the obligations of employees that are participating in its corporate credit card program for corporate travel expenses which is operated by Deutsche Bank AG. To date, Daimler- Chrysler has not incurred any significant payments from that guarantee which amounted to €651 million as of December 31, 2004. In March 2005, DaimlerChrysler AG and Deutsche Bank AG concluded an additional agreement that supplements the existing framework agreement, limiting the guarantee for current and future credit card obligations arising from that pro- gram to €20 million. Guarantees under buy-back commitments principally represent arrangements whereby the Group guarantees specified trade-in or resale values for assets or products sold to non-consolidated affiliated companies and third parties. Such guarantees pro- vide the holder with the right to return purchased assets or prod- ucts back to the Group, partially also 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. Other contingent obligations principally include pledges or indemnifications related to the quality or timing of performance by third parties or participations in performance guarantees of consortiums. Performance guarantees typically provide the pur- chaser of goods or services with the right to be reimbursed for losses incurred or other penalties if the third party or the con- sortium 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 AG and its wholly owned subsidiary Daimler- Chrysler Financial Services AG have provided various guarantees towards third parties with respect to the investment in Toll Collect. See Note 3 for detailed information regarding Toll Col- lect including the guarantees issued. Of the guarantees men- tioned in Note 3, only the €600 million guarantee for the bank loan is reflected in the above table in the line “Guarantees for third party liabilities”. The other guarantees are not reflected in the above table since the maximum potential future obliga- tion resulting from the remaining guarantees cannot be accurate- ly estimated. Accruals established in this regard are also not included in the above table. When circumstances indicate that payment is probable and the amount is reasonably estimable, guarantees made by the Group are recognized as a liability in the consolidated balance sheet in accordance with SFAS 5 “Accounting for Contingencies”, with an offsetting amount recorded as an expense (contin- gent obligation). For guarantees issued or modified after Decem- ber 31, 2002, the Group records guarantees at fair value, unless a higher amount must be accrued for in accordance with SFAS 5 (non-contingent obligations). Both contingent obliga- tions and non-contingent obligations are included in the column “Amount recognized as a liability” in the table above. In accordance with FIN 45, the obligations associated with pro- duct warranties are not reflected in the above table. See Note 25b for accruals relating to such obligations. 187 Commercial Commitments. In addition to the above guaran- tees and warranties, in connection with certain production programs, the Group has committed to purchase various levels of outsourced manufactured parts and components over ex- tended 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 commitments to purchase plant or equipment at market prices in the future. As of December 31, 2005, commit- ments to purchase outsourced manufactured parts and compo- nents or to invest in plant and equipment are approximately €10.1 billion. These amounts are not reflected in the above table. Collins & Aikman Corporation (“C&A”), a major tier one supplier to the automotive industry, initiated bankruptcy reorganization proceedings in the U.S. and similar proceedings in England. During 2005, DaimlerChrysler Corporation, along with other major customers of C&A, agreed to provide price increases and financing to C&A. DaimlerChrysler’s portion of the 2005 price increases and funding commitment was $120 million and is included in cost of sales on the accompanying consolidated statements of income (loss). DaimlerChrysler agreed to provide an additional $70 million of price increases for calendar year 2006. DaimlerChrysler also agreed to accelerate payments for tooling and to fund other DaimlerChrysler program specific capital expenditures in 2005 and 2006, as well as to fund launch costs as needed throughout 2005. In addition, DaimlerChrysler also provided financial support of €13 million in Europe in 2005 to support the continuation of component deliveries, to finance specific investments and to secure launch costs. DaimlerChrysler would be significantly adversely affected in the near term by a sudden and prolonged interruption in the sup- ply of components from C&A. Such an interruption would affect production of nearly all Chrysler Group vehicles as well as the Mercedes Car Group’s M-Class and R-Class vehicles in Alaba- ma, and all Commercial Vehicle Division vans in Europe. It would also delay the launch of future vehicle projects in our Vans business unit. The Group also enters into noncancellable operating leases for facilities, plant and equipment. Total rentals under operating leases charged to expense in 2005 in the statement of income amounted to €946 million (2004: €902 million; 2003: €747 million). Future minimum lease payments under noncancellable lease agreements as of December 31, 2005 are as follows: (in millions of €) 2006 2007 2008 2009 2010 there- after Operating leases 805 588 401 344 304 1,134 Future payments to be received from the subleasing of these facilities, plant and equipment to third parties total €297 million. In 2003, DaimlerChrysler signed an agreement with the City of Hamburg, Germany, a holder of approximately 6% of the com- mon shares of DaimlerChrysler Luft- und Raumfahrt Holding Aktiengesellschaft (“DCLRH”), a majority-owned subsidiary of the Group. Pursuant to the terms of the agreement and upon execution of the agreement, DaimlerChrysler holds a call option for the City’s interest in DCLRH, exercisable on or after January 1, 2005, and the City of Hamburg holds a put option exercisable at the earlier of October 1, 2007, or upon the occurrence of certain events which are solely within the control of Daimler- Chrysler. DaimlerChrysler believes the likelihood that these certain events will occur is remote. Upon exercise of either option, the City of Hamburg would have received a minimum considera- tion of its interest in DCLRH of €450 million in cash or shares of EADS or a combination of both. The agreement was amended in July 2004 with respect to the exercise price of the put option, so that the City of Hamburg may only put its interest in DCLRH to the Group for €450 million in cash. As a consideration for the amendment, the City of Hamburg is entitled to receive an addi- tional payment upon execution of the option equal to 10% of the appreciation of EADS shares in excess of a share price of €21 up to a share price of €26. 33. Information about Financial Instruments and Deriva- tives a) Use of Financial Instruments The Group conducts business on a global basis in numerous international currencies and is therefore exposed to fluctuations in foreign currency exchange rates. The Group uses, among others, 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 money mar- ket investments, variable- and fixed-interest bearing securities, and to a lesser extent, equity securities for managing excess liq- uidity that subject the Group to risks from changes in interest rates and market prices. DaimlerChrysler manages the various types of market risks by using, among others, derivative financial instruments. In addition, equity investments in publicly traded companies also expose the Group to equity price risk, which, if deemed appropriate, DaimlerChrysler hedges through the use of derivative financial instruments. Without these derivative finan- cial instruments the Group’s exposure to these market risks would be higher. DaimlerChrysler does not use derivative finan- cial instruments for purposes other than risk management. 188 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Based on regulations issued by regulatory authorities for finan- cial 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 operat- ing financial activities, settlement, accounting and controlling of financial instruments. 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 result- ing from changes of market prices are calculated on the basis of statistical methods. DaimlerChrysler is also exposed to market price risks associated with the purchase of commodities. To a minor degree, Daimler- Chrysler uses derivative instruments to reduce market price risks, primarily with respect to precious metals. The risk result- ing from derivative commodity instruments is not significant to the Group and thus not included in the following discussion. The contract volumes at December 31 of derivative financial instruments used for hedging currency- and interest-rate risks are shown in the table below. The contract or notional amounts shown do not always represent amounts exchanged by the parties and are not necessarily a measure for the exposure of DaimlerChrysler through its use of derivatives. (in millions of €) Currency contracts Interest rate contracts At December 31, 2004 2005 25,082 42,407 20,226 38,313 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 par- ty pertaining to such instrument. The fair values of financial instruments have been determined with reference to market information available at the balance sheet date and the valua- tion 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. The carrying amounts and fair values of the Group’s financial instruments are as follows: At December 31, 2005 Fair value Carrying amount At December 31, 2004 Fair value Carrying amount 1,361 1,361 1,610 1,610 61,101 61,246 56,785 57,558 4,936 4,936 3,884 3,884 7,711 7,711 7,782 7,782 (in millions of €) Financial instruments (other than derivative instruments): Assets: Financial assets Receivables from financial services Securities Cash and cash equivalents Liabilities: Financial liabilities 80,932 82,129 76,270 78,244 Derivative instruments: Assets: Currency contracts Interest rate contracts Equity contracts Liabilities: Currency contracts Interest rate contracts Equity contracts 181 546 73 646 867 209 181 546 73 646 867 209 1,287 2,667 90 152 196 65 1,287 2,667 90 152 196 65 Derivative instruments representing assets are included in other assets (see Note 19) at fair value, while derivative instru- ments representing liabilities are included in other accrued lia- bilities (see Note 25b) at fair value. 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 are determined using quoted market prices. The Group has certain equity investments in related and affiliated companies which are not presented in the table since they are not public- ly traded and determination of fair values is impracticable. In addition, equity investments in associated companies are also not considered in this presentation. For a presentation of the carrying amount and fair value of EADS, the most significant investment of DaimlerChrysler in associated companies, please refer to Note 3. 189 Receivables from Financial Services. The carrying amounts of variable rate finance receivables approximate their fair values since the contract rates of those receivables approximate current market rates. The fair values of fixed rate finance receiv- ables were determined by discounting expected cash flows, using the current interest rates at which comparable loans with identical maturity could be borrowed as of December 31, 2005 and 2004. Cash and Other assets. The carrying amounts of Cash and ther assets approximate fair values due to the short-term matu- rities of these instruments. Financial Liabilities. The fair value of publicly traded debt was determined using quoted market prices. The fair values of other long-term bonds were determined by discounting 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 ex- change rates adjusted for the respective interest rate differentials (premiums or discounts). Currency options were valued based on quoted market prices or option pricing models. Interest Rate Contracts. The fair values of instruments to hedge interest rate risks (e. g. interest rate swap agreements, cross currency interest rate swap agreements) were determined by discounting expected cash flows, using market interest rates over the remaining term of the instrument. Interest rate options are valued based on quoted market prices or option pricing models. Equity Contracts. The fair values of instruments to hedge equity price risk were determined on the basis of quoted market prices or 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 counterparty’s financial strength. Based on the rating of the counterparties performed by established rating agencies, DaimlerChrysler does not have a significant exposure to any individual counterparty. DaimlerChrysler Financial Services has established detailed guidelines for the risk manage- ment 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. d) Accounting for and Reporting of Financial Instruments (Other than Derivative Instruments) The income or expense arising from the Group’s financial instru- ments (other than derivative instruments), is recognized in financial income, net, with the exception of receivables from finan- cial services and financial liabilities related to leasing and sales financing activities. Interest income on receivables from financial services and gains and losses from sales of receiv- ables are recognized as revenues. Interest expense on financial 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 corresponding captions. e) Accounting for and Reporting of Derivative Instruments and Hedging Activities Foreign Currency Risk Management. As a consequence of the global nature of DaimlerChrysler’s businesses, its opera- tions and its reported financial results and cash flows are ex- posed to the risks associated with fluctuations in the exchange rates of the U.S. dollar and other world currencies against the euro. 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. The Mercedes Car Group segment is primarily exposed to such risk. The Mercedes Car Group generates its revenues 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 network. At Chrysler Group, revenues and costs are principally generated in U.S. dollars, resulting in a rel- atively low transaction risk for this segment. The Other Activi- ties segment is indirectly exposed to transaction risk though its equity investment in EADS, which is accounted for using the equity method. To mitigate the impact of currency exchange rate fluctuations, DaimlerChrysler continually assesses its exposure to currency risks and hedges a portion of those risks through the use of derivative financial instruments. Responsibility for managing DaimlerChrysler’s currency exposures and use of currency derivatives is centralized within the Group’s Currency Commit- tee. The Currency Committee consists of members of senior management from Corporate Treasury, each of the operating businesses as well as from Risk Controlling. Corporate Treasury implements the decisions concerning foreign currency hedg- ing 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. 190 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Interest Rate and Equity Price Risk Management. Daimler- Chrysler holds a variety of interest rate sensitive assets and lia- bilities to manage the liquidity and cash needs of its day-to-day operations. In addition a substantial volume of interest rate sen- sitive assets and liabilities is related to the leasing and sales financing business which is operated by DaimlerChrysler Finan- cial Services. In particular, the Group’s leasing and sales financ- ing 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. DaimlerChrysler coordinates funding activities of the industrial business and financial services on the Group level. The Group uses interest rate derivative instru- ments 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 identifying 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 ana- lytical techniques, including value-at-risk analyses, to estimate the expected impact of changes in interest rates on the Group’s future cash flows. Excess liquidity invested in equity securities and the correspon- ding risks of derivative financial hedging instruments for equities were not material to the Group in the reporting periods presented. To a certain extent, the equity price risk from in- vestments in publicly traded companies is hedged through deriv- ative financial instruments. Fair Value Hedges. Gains and losses from fluctuations in the fair value of recognized assets and liabilities and firm commit- ments of operating transactions as well as gains and losses arising from derivative financial instruments designated as fair value hedges of these recognized assets and liabilities and firm commitments are recognized currently in revenues or cost of sales, if the transactions being hedged involve sales (including the leasing and sales financing business) or production of the Group’s products. When the hedged items are recognized in financial income, net, net gains and losses from fluctuations in the 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 also recognized in financial income, net. For the year ended December 31, 2005, net losses of €58 million (2004: net losses of €49 million) were recognized in operating and financial income, net, representing principally the component of the derivative instruments’ gain or loss exclud- ed from the assessment of hedge effectiveness and the amount of hedging ineffectiveness. 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 comprehensive loss. These amounts are subsequently reclassified into operating income in the same period the under- lying transactions affect operating income. Changes in the fair value 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 loss. These amounts are subsequently reclassified into the income statement as a yield adjustment in the same period in which the related interest on the floating-rate debt obligations affect earnings. If the interest sensitive hedged items affect operating income (including the leasing and sales financing busi- ness), the effects from the hedging instruments are also recog- nized in operating income. If the interest sensitive hedged items affect financial income, net, the corresponding effects from the hedging instruments are likewise classified in financial in- come, net. For the year ended December 31, 2005, €41 million losses (2004: losses of €6 million), representing principally the compo- nent of the derivative instruments’ gain/loss excluded from the assessment of the hedge effectiveness and the amount of hedge ineffectiveness, were recognized in operating and finan- cial income, net. During 2005, DaimlerChrysler recorded expenses of €1 million as a result of the discontinuance of cash flow hedges (2004: no gains and losses were recorded). It is anticipated that €90 million of net gains included in accu- mulated other comprehensive loss at December 31, 2005, will be reclassified into earnings during the next year. As of December 31, 2005, DaimlerChrysler held derivative financial instruments with a maximum maturity of 27 months to hedge its exposure to the variability in future cash flows from foreign currency forecasted transactions. 191 The Group also transfers automotive finance receivables to third- party trusts in transactions wherein it does not retain a beneficial interest in the transferred receivables (whole loan sales). In whole loan sales, all risk of loss related to the sold receivables is transferred from DaimlerChrysler to the purchaser. The Group generally remains as servicer for the sold receivables. Trusts and Third-Party Entities. Trusts sponsored by Daimler- Chrysler are considered Qualifying Special Purpose Entities (“QSPEs”) under SFAS 140 and are not consolidated by the Group. The third-party entities are multi-seller and multi-col- lateralized bank conduits. These trusts are considered to be vari- able interest entities (“VIEs”) under FIN 46R. A bank conduit generally receives substantially all of its funding from issuing asset-backed securities that are cross-collateralized by the assets held by the entity. Although its interest in these VIEs is significant, DaimlerChrysler has concluded that it is not the primary beneficiary of these bank conduits and therefore is not required to consolidate them under FIN 46R. Assumptions in Measuring the Retained Interests and Sen- sitivity Analysis. At December 31, 2005 and 2004, significant assumptions used in measuring the residual interest resulting from the sale of retail and wholesale receivables were as follows (weighted average rates for securitizations completed during the respective year): Prepayment speed assumption (monthly rate) Lifetime (in months) Estimated lifetime net credit losses (an average percentage of sold receivables) Residual cash flows discount rate (annual rate) 2005 1.25%- 1.5% 18 Retail 2004 Wholesale 2004 2005 1.5% 18 1 3 1 3 1.9% 2.3% 0.0% 0.0% 12.0% 12.0% 12.0% 12.0% 1 For the calculation of wholesale gains, the Group estimated that all sold wholesale loans would be liquidated within 210 days. Hedges of the Net Investment in a Foreign Operation. In specific circumstances, DaimlerChrysler hedges the currency risk inherent in certain of its long-term investments 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, 2005, net gains of €213 million (2004: €120 million) from hedging the Group’s net investment in MMC were reclassified into the income statement. For further infor- mation, also see the discussion in Note 3. In addition, net loss- es of €8 million from hedging the Group’s net investments in foreign operations were included in the cumulative transition adjustment without affecting DaimlerChrysler’s net income in 2004. 34. Retained Interests in Securitized Sold Receivables and Sale of Finance Receivables DaimlerChrysler uses securitization transactions to improve shareholder returns and diversify its funding sources. In the ordi- nary course of the business the Group sells significant portions of its automotive finance receivables to trusts and third-par- ties entities in “asset-backed securitizations” and “whole loan sales”. The information given below relates only to transfers of finance receivables which qualified for de-recognition accord- ing to the criteria in SFAS 140. Description of Securitization Transactions. Asset-backed securitizations (“ABS”) involve the sale of financial assets by DaimlerChrysler to trusts that are Special Purpose Entities (“SPE”). The SPEs purchase the assets with cash raised through the issuance of beneficial interests (usually debt instruments) to third-party investors. The sold financial assets consist of retail receivables with an expected average lifetime of several months at the time of the securitization and short-term wholesale receiv- ables which are securitized using a revolving-period structure. The investors in the beneficial interests have recourse to the assets in the trusts and benefit from credit enhancements, such as overcollateralization. In a subordinated capacity, the Group retains residual beneficial interests in the sold receiv- ables designed to absorb substantially all credit, prepayment, and interest-rate risk of the receivables transferred to the trusts. The retained interest balance represents DaimlerChrysler’s right to receive collections on the transferred receivables in excess of amounts required by the trust to pay interest and principal to investors, servicing fees, and other required payments. To sup- port the European ABS-program DaimlerChrysler also provided a subordinated loan to one trust. The Group’s maximum expo- sure to loss as a result of its involvement with these entities is limited to the amount of the carrying value of retained interests and the provided subordinated loan. 192 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Actual and projected net lifetime credit losses for retail receiv- ables securitized were as follows: Actual and projected credit losses Perccentages as of December 31, 2005 December 31, 2004 December 31, 2003 December 31, 2002 2002 1.8% 1.9% 2.4% 2.6% Receivables securitized in 2005 2004 2003 1.6% 2.0% 2.5% 1.8% 2.3% 1.9% 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, 2005. At December 31, 2005, the significant assumptions used in esti- mating 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: (in millions of €) Assumption percentage Impact on fair value based on adverse 20% 10% change change Prepayment speed, monthly 1.5% (8) (14) Expected remaining net credit losses as a percentage of receivables sold Residual cash flow discount rate, annualized 0.9% 12.0% (23) (16) (45) (32) The effect of a 10% and 20% adverse change in the discount rate used to compute the fair value of the retained subordinated securities would be a decrease of €2 million and €3 million, respectively. Similar changes to the monthly prepayment speed and the expected 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 subor- dinated securities. These sensitivities are hypothetical and should be used with cau- tion. 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 coun- teract the sensitivities. Retained Beneficial Interests in Securitized Sold Receiv- ables. As there is no active market for retained interests, the Group determines the value of its retained interests using discounted cash flow modeling upon the sale of receivables. The valuation methodology considers historical and projected principal and interest collections on the sold receivables, expected future credit losses arising from the collection of the sold receivables, and estimated repayment of principal and interest. For more details on the valuation of retained interests in securi- tized sold receivables please see Note 1. The fair value of retained interests in securitized sold receivables was as follows: (in millions of €) 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 Retained subordinated securities Other retained interests At December 31, 2004 2005 2,266 2,190 (286) (369) 1,980 1,821 233 2 379 2 Retained interests in sold receivables 2,215 2,202 At December 31, 2005, the Group also recognized a subordinat- ed loan with a carrying value of €25 million to a trust related to the European ABS-platform. 193 The fair value of Retained Interests in sold receivables and the subordinated loan are included in other assets (see Note 19). Sale of Finance Receivables. During the year ended Decem- ber 31, 2005, DaimlerChrysler sold in asset-backed securitization transactions €10,059 million (2004: €9,329 million) and €33,922 million (2004: €35,414 million) of retail and wholesale receivables, respectively. From these transactions, the Group recognized gains of €11 million (2004: €79 million) and €169 million (2004: €157 million). During the year ended December 31, 2005, the Group sold €1,516 million (2004: €965 million) of retail receivables in whole loan sales and recognized gains of €2 million (2004: €14 million). As of December 31, 2005, the outstanding balance of receivables serviced in connection with whole loan sales was €1,931 million (2004: €1,361 million). The cash flows in connection with the mentioned transactions between DaimlerChrysler and the securitization trusts were as follows: (in millions of €) 2005 2004 Proceeds from new securitizations 15,093 11,360 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 sold receivables 33,892 35,393 (33,922) (35,414) 214 998 183 686 The outstanding balance, delinquencies and net credit losses of sold receivables and other receivables, of those companies that sell receivables, as of and for the years ended December 31, 2005 and 2004, respectively, were as follows: (in millions of €) Managed retail receivables Managed wholesale receivables Total receivables managed Less: Retail receivables sold Less: Wholesale receivables sold Total receivables sold Retail receivables recognized in balance sheets Wholesale receivables recognized in balance sheets Receivables recognized in balance sheets Outstanding balance at 2004 Delinquencies > 60 days at 2004 2005 Net credit losses for the year ended 2004 2005 38,963 15,142 54,105 (14,287) (5,880) (20,167) 24,676 9,262 33,938 111 8 119 (32) – (32) 79 8 87 116 6 122 (24) – (24) 92 6 98 428 6 434 (155) (3) (158) 273 3 276 390 3 393 (144) – (144) 246 3 249 2005 48,216 18,979 67,195 (14,677) (8,703) (23,380) 33,539 10,276 43,815 194 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The following summarizes the outstanding balance of the re- ceivables sold to the QSPEs and VIEs and the corresponding retained interest balances as of December 31, 2005: (in millions of €) Variable interest entities Qualifying special purpose entities Retained Receivables interest in sold receivables sold 3,815 19,565 23,380 367 1,848 2,215 Servicing Assets and Servicing Liabilities. Servicing assets (Servicing liabilities) represent the present value derived from retaining the right (obligation) to service securitized receivables compared to adequate servicer compensation. During the year ended December 31, 2005, the Group recognized servicing assets of €7 million (2004: €1 million) and related amortization of €2 million (2004: €2 million). The Group also recognized servicing liabilities of €10 million (2004: €8 million) and related amortization of €13 million (2004: €11 million). At December 31, 2005, the fair value of servicing assets on sold receivables was €6 million (2004: €1 million), and the fair value of servicing liabilities was €15 million (2004: €15 million). These values were determined by discounting expected cash flows at current market rates. Liquidity Facilities of Special Purpose Entities. To support the Group’s asset-backed commercial paper program in North America, a group of financial institutions has provided con- tractually committed liquidity facilities aggregating $6.2 billion which expire in September 2006, and are subject to annual renewal. These liquidity facilities can only be drawn upon by the special purpose entity to which the Group’s North American financial services companies will sell receivables under this pro- gram. As of December 31, 2005, none of the liquidity facilities have been utilized. 35. Segment Reporting Information with respect to the Group’s reportable segments follows: Mercedes Car Group. This segment includes activities related 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, Setra, Freightliner, and Mitsubishi and Fuso. Financial Services. The activities in this segment primarily extend to the marketing of services related to financial services (principally retail and lease financing for vehicles and dealer financing) and insurance brokerage. This Segment is also engaged in toll collection. In 2005, DaimlerChrysler renamed its Services segment to Financial Services, to emphasize its focus on the financial services business. Other Activities. This segment comprises businesses, opera- tions and investments not allocated to one of DaimlerChrysler’s other business segments. It includes the Group’s equity me- thod investment EADS, the business unit DC Off-Highway which is primarily comprised of the MTU-F Group and the Off-Highway activities of Detroit Diesel Corporation, the real estate and corporate research activities, the holding companies and financ- ing subsidiaries through which the Group refinances the capital needs of the operating businesses in the capital markets. The Group’s equity investment in MMC is included in this segment using the equity method of accounting through June 29, 2004, and thereafter as an investment in related companies, accounted for at fair value. In November 2005, DaimlerChrysler sold all of its MMC shares (see also Note 3). Through December 31, 2003, this segment includes the MTU Aero Engines business unit. On December 27, 2005, DaimlerChrysler entered into a share sale and purchase agreement with the Swedish investor group EQT regarding the sale of a major portion of its Off-Highway Business Unit. The closing is expected to occur in the first quarter of 2006 (see also Note 4). On January 24, 2006, DaimlerChrysler presented a new manage- ment model. As part of the new management model, Daimler- Chrysler intends to change the composition of its business seg- ments by reporting the van and bus business units with its Other Activities. As a result of these changes, the Commercial Vehicles segment will be renamed the Truck Group. 195 Management Reporting and Controlling Systems. 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), except for revenue recognition between the automotive business segments and the Services segment in certain mar- kets. The Group measures the performance of its operating segments through “operating profit”. DaimlerChrysler’s consolidated oper- ating profit (loss) is the sum of the operating profits and losses of its reportable segments adjusted for consolidation and elimination entries. Segment operating profit (loss) is computed starting with income (loss) before income taxes, minority in- terests, discontinued operations, and the cumulative effect of changes in accounting principles, and then adjusting that amount to 1) exclude pension and postretirement benefit income or expenses, other than current and prior year service costs and settlement/curtailment losses, 2) exclude gains from the sale of the 12.4% stake in MMC in 2005 and the 10.5% stake in HMC in 2004, impairment of investment in EADS in 2003, 3) exclude interest and similar income and interest and similar expenses, 4) exclude other financial income (loss), net and 5) include or exclude certain miscellaneous items. In addition, this result is further adjusted to a) include pre-tax income (loss) from dis- continued operations, adjusted to exclude or include the recon- ciling items 1 to 5 described above, b) include pre-tax gain (loss) on the disposal of discontinued operations, and c) include the Group’s share of all of the above reconciling items included in the net earnings (losses) of investments accounted for at equity. Intersegment sales and revenues are generally recorded at val- ues 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. Segment information as of and for the years ended December 31, 2005, 2004 and 2003 follows: Mercedes Car Group Chrysler Commercial Vehicles Group Financial Services Other Activities Discontinued Total Operations/ Segments Eliminations Consolidated 46,429 3,586 50,015 (505) 27,081 1,629 2,418 46,082 3,548 49,630 1,666 26,945 2,343 1,854 48,025 3,421 51,446 3,126 24,199 2,939 1,789 50,086 32 50,118 1,534 55,372 3,083 3,336 49,485 13 49,498 1,427 45,869 2,647 3,368 49,321 – 49,321 (506) 47,147 2,487 3,927 38,356 2,278 40,634 2,093 21,712 1,743 1,313 32,940 1,824 34,764 1,332 20,156 1,184 1,058 25,304 1,502 26,806 811 14,713 958 890 12,798 2,641 15,439 1,468 99,635 45 5,757 11,646 2,293 13,939 1,250 88,036 91 4,976 11,997 2,040 14,037 1,240 83,239 76 5,087 2,107 149,776 – 149,776 289 8,826 2,396 158,602 (8,826) (8,826) – 149,776 591 5,181 4 5,185 29,251 233,051 (31,419) 201,632 109 168 6,609 12,992 (29) (381) 6,580 12,611 1,906 294 2,200 456 142,059 7,972 150,031 6,131 – 142,059 (7,972) (7,972) (377) – 142,059 5,754 26,526 207,532 (24,660) 182,872 134 164 6,399 11,420 (13) (308) 6,386 11,112 3,723 361 4,084 1,329 138,370 7,324 145,694 6,000 (1,933) (7,324) (9,257) (314) 136,437 – 136,437 5,686 31,227 200,525 (22,075) 178,450 169 196 6,629 11,889 (15) (290) 6,614 11,599 (in millions of €) 2005 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization 2004 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization 2003 Revenues Intersegment sales Total revenues Operating Profit (Loss) Identifiable segment assets Capital expenditures Depreciation and amortization 196 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Mercedes Car Group. In 2005, the operating profit (loss) of the Mercedes Car Group segment includes charges of €570 mil- lion for the headcount reduction initiative at Mercedes Car Group. Of this amount, €70 million were already cash effective in 2005 (see Note 5). An accrual established in connection with a case alleging infringe- ment of EU competition law was reduced by €60 million as a result of a favorable decision by the Court of First Instance of the European Court of Justice. This amount is included in selling expenses in the consolidated statement of income and in the operating results of the Mercedes Car Group segment in 2005. The operating profit (loss) of the Mercedes Car Group segment for 2005 includes charges of €1,111 million associated with the realignment of the business model for smart. Thereof €535 mil- lion are attributable to impairment charges and write-downs and €576 million are attributable to expected payments in the cur- rent or future periods (see Note 5). In 2003, operating profit of the Mercedes Car Group includes a non-cash impairment charge amounting to €77 million related to certain long-lived assets (primarily property, plant and equip- ment) at a production facility in Brazil. Chrysler Group. In 2005, the Chrysler Group recorded a €240 million gain on the sale of its Arizona Proving Grounds vehicle testing facility and a €36 million benefit as a result of adjustments to prior estimates associated with the Chrysler Group turnaround plan (see also Note 7), which were partially offset by charges of €99 million related to the financial support provided to supplier Collins & Aikman (see Note 32). In 2004, the Chrysler Group’s operating results were negatively impacted by a €145 million charge related to the turnaround plan, a €138 million charge for early retirement incentives and other workforce reductions, partially offset by an adjustment of €95 million to correct the calculation of an advertising accrual to more accurately reflect expected payments. In 2003, the Chrysler Group’s operating results were negatively impacted by a €469 million charge related to the turnaround plan. Also during 2003, the Chrysler Group and Financial Ser- vices segments agreed to an arrangement regarding the sharing of risks associated with the residual values of certain leased vehicles. In addition, the Chrysler Group and Financial Services segments negotiated reduced pricing on certain retail financing programs offered by the Chrysler Group as sales incentives in 2003. The adjusted pricing reflected the then current favorable funding environment as well as Financial Services becoming the exclusive provider of selected discount consumer financing for the Chrysler Group. Both arrangements resulted in a favor- able impact of €244 million on the 2003 operating profit of the Chrysler Group, and a corresponding decrease of €244 million on the 2003 operating profit of Financial Services. Neither arrangement had any effect on the Group's consolidated operat- ing results. Commercial Vehicles. As discussed in Note 4, on March 18, 2004, DaimlerChrysler acquired an additional 22% interest in MFTBC from MMC for €394 million in cash, thereby increasing the Group’s ownership interest in MFTBC to a controlling 65%. As a result of the acquisition and first time consolidation of MFTBC in March 2004, the identifiable segment assets of the Commercial Vehicles segment increased by €4.3 billion. Subsequent to the acquisition of the controlling interest in MFTBC, a number of quality problems of MFTBC vehicles that were pro- duced before DaimlerChrysler first acquired a stake in MFTBC were identified (see Note 4 for additional information). As of December 31, 2004, DaimlerChrysler made a true-up based on the preliminary evaluation of the probable costs associated with the quality measures and recall campaigns at MFTBC which substantially confirmed the estimates made in the third quarter 2004. Total expenses arising from the recall issues reduced 2004 operating profit of the Commercial Vehicle segment by €475 million. The reduction in operating profit consisted of €70 million classified as financial income (expense), net, in the Group’s 2004 statement of operations and €735 million classi- fied as cost of sales, net of €330 million attributed to the minor- ity interests’ share in those costs. As expenses attributed to minority interests are not allocated to operating profit, they are included in the line “Miscellaneous items, net” in the reconcili- ation of total segment operating profit to consolidated income before income taxes, minority interests, and discontinued operations. The following settlement with MMC associated with the quality issues and recall campaigns at MFTBC resulted in a favorable impact of €276 million, which is included in the operating profit of the Commercial Vehicles segment in 2005. 197 Financial Services. In 2005, 2004 and 2003, the Financial Services segment recorded charges of €54 million, €472 million and €241 million related to the participation in Toll Collect. The charges in 2004 were mainly the result of revaluing the system’s total costs and extra operating expenses required to guarantee the start of the system on January 1, 2005. In 2004, the operating profit of the Financial Services segment includes non-cash impairment charges of €102 million associat- ed with the investment made in dAF. Capital expenditures for equipment on operating leases for 2005, 2004 and 2003 for the Financial Services segment amounted to €16,055 million, €13,850 million and €11,631 million, respec- tively. With respect to two agreements entered into in 2003 with the Chrysler Group segment, the 2003 operating profit of Financial Services were unfavorably impacted by €244 million. See dis- cussion at Chrysler Group above. Other Activities. In 2005, operating profit of the Other Activi- ties segment includes primarily the Group’s share in the gains of EADS of €757 million (see Note 3). In 2004 and 2003, the proportionate results of the investments in EADS and MMC together amounted to €548 million and €278 million, respec- tively. The 2004 amount also included the results from the dilu- tion of the Group’s interest in MMC (loss of €135 million) and related currency hedging effects (gain of €195 million). Due to the loss of significant influence on MMC at June 29, 2004, the Group’s share in the losses of MMC is only included for the corresponding period (see Note 3 for additional information). As a result of the repurchase of a note by MTU Aero Engines Holding AG, a gain of €53 million is included in the operating profit of the Other Activities segment for 2005 (see Note 6). At December 31, 2005, the identifiable assets of the Other Activities segment include €3,564 million related to the carry- ing values of the investment in EADS. In 2004 and 2003, the carrying values of the investments in EADS and MMC together amounted to €4,313 million and €4,542 million, respectively. In connection with the sale of Adtranz in 2001, a settlement agreement with Bombardier was reached in 2004 with respect to all claims asserted. This settlement resulted in a favorable impact of €120 million on the 2004 operating profit of the Other Activities segment. In addition, the operating profit of 2004 of the Other Activities segment includes non-cash impairment charges of €70 million associated with the investment made in dAF. The 2003 operating profit of Other Activities includes a gain of €1,031 million from the sale of MTU Aero Engines. Following the sale transaction, effective December 31, 2003, MTU Aero Engines’ assets and liabilities were deconsolidated. Revenues, operating profit, capital expenditures, and depreciation and amortization of the Other Activities segment include MTU Aero Engines through December 31, 2003 (see also Notes 4 and 10). The reconciliation of total segment operating profit (loss) to consolidated income (loss) before income taxes, minority inter- ests, discontinued operations and cumulative effects of changes in accounting principles is as follows: (in millions of €) 2005 2004 2003 Total segment operating profit 5,181 6,131 6,000 Elimination and consolidation amounts Total Group operating profit Pension and postretirement benefit expenses, other than current and prior service costs and settlement/ curtailment losses Gain from the sale of the 12.4% stake in MMC Gain from the sale of the 10.5% stake in HMC Impairment of investment in EADS Interest and similar income Interest and similar expenses Other financial income (loss), net Miscellaneous items, net Pre-tax income from discontinued operations, adjusted to exclude or include the above reconciling items Pre-tax income on disposal of discontinued operations The Group’s share of the above reconciling items included in the net losses of investments accounted for at equity Consolidated income before income taxes, minority interests, cumulative effects of changes in accounting principles and discontinued operations 4 5,185 (377) 5,754 (314) 5,686 (1,175) (845) (870) 681 – – – 539 (1,112) (69) (149) – – 252 – 490 (790) (171) (384) – – – – (1,960) 521 (911) 35 (308) (84) (1,031) (462) (771) (482) 3,438 3,535 596 198 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Revenues from external customers presented by geographic region are as follows: (in millions of €) 2005 2004 2003 1 Excluding Germany Germany Western Europe 1 United States Other American countries Other Discontinued Asia countries operations Consolidated 20,948 22,315 24,182 26,389 26,530 26,975 67,015 64,232 64,757 13,919 11,295 10,399 12,525 10,093 6,786 8,980 7,594 5,271 – – (1,933) 149,776 142,059 136,437 Germany accounts for €20,682 million of long-lived assets (2004: €21,209 million; 2003: €21,164 million), the United States for €44,007 million (2004: €35,250 million; 2003: €36,430 million) and other countries for €17,716 million (2004: €15,982 million; 2003: €13,102 million). 36. Earnings (Loss) per Share The computation of basic and diluted earnings (loss) per share for “Income (loss) from continuing operations” is as follows: (in millions of € or millions of shares, except earnings (loss) per share) Year ended December 31, 2003 2004 2005 Income (loss) from continuing operations – basic Interest expense on convertible bonds and notes (net of tax) Income (loss) from continuing operations – diluted 2,851 2,466 (418) – – – 2,851 2,466 (418) Weighted average number of shares outstanding – basic Dilutive effect of stock options in 2005 and 2004 Weighted average number of shares outstanding – diluted 1,014.7 1,012.8 1,012.7 3.0 1.7 – 1,017.7 1,014.5 1,012.7 Earnings (loss) per share from continuing operations Basic Diluted 2,80 2,80 2.43 2.43 (0.41) (0.41) Because the Group reported a loss from continuing operations for the year ended December 31, 2003 the diluted loss per share does not include the antidilutive effects of convertible bonds and notes. Had the Group reported income from con- tinuing operations for the year ended December 31, 2003 the weighted average number of shares outstanding would have potentially been diluted by 0.5 million shares resulting from the conversion of bonds and notes. 199 Stock options to acquire 65.7 million, 67.1 million and 71.6 mil- lion DaimlerChrysler Ordinary Shares that were issued in con- nection with the 2000 Stock Option Plan were not included in the computation of diluted earnings (loss) per share for 2005, 2004 and 2003, respectively, because the options’ underlying exercise prices were higher than the average market prices of DaimlerChrysler Ordinary Shares in these periods. 37. Related Party Transactions The Group purchases materials, supplies and services from numerous suppliers throughout the world in the ordinary course of its business. These suppliers include companies in which the Group holds an ownership interest and companies that are affiliated with some members of DaimlerChrysler AG’s Super- visory Board or Board of Management. In recent years, DaimlerChrysler initiated several cooperation projects with MMC. In November 2005, DaimlerChrysler sold its remaining 12.4% interest in MMC. Current cooperation proj- ects will not be affected by the sale, and will continue as previously agreed. Examples of such projects are the joint devel- opment and production of engines, the shared use of vehicle architecture and the joint production of passenger cars, sports utility vehicles and pickup trucks in Europe, North America, China and South Africa. DaimlerChrysler has an agreement with McLaren Cars Ltd., a wholly owned subsidiary of McLaren Group Ltd., for the pro- duction of the Mercedes McLaren super sports car, which DaimlerChrysler launched into the markets in 2004. The Group owns a 40% equity interest in McLaren Group Ltd. As described in more detail in Note 3, DaimlerChrysler provides a number of guarantees with respect to Toll Collect, a joint venture in which DaimlerChrysler holds an equity interest of 45%. Mr. Bernhard Walter, a member of the Supervisory Board of DaimlerChrysler AG, is also a member of the Supervisory Board of Deutsche Telekom AG, one of the other investors in Toll Collect. In 2003, DaimlerChrysler sold 60% of its equity interest in Mercedes-Benz Lenkungen GmbH to ThyssenKrupp Automotive AG. Since then, DaimlerChrysler accounted for its remaining 40% equity interest in the company using the equity method of accounting. Mr. Bernhard Walter, a member of Daimler- Chrysler’s Supervisory Board, abstained from the voting for the approval of the sale since he is also a member of the Super- visory Board of ThyssenKrupp AG, the parent company of ThyssenKrupp Automotive AG. As described in Note 4, Daimler- Chrysler sold its remaining 40% equity interest in the company to ThyssenKrupp Automotive AG. The Group continues to pur- chase products from this company. In May 2002, our wholly owned subsidiary DaimlerChrysler Corporation (“DCC”) sold its Dayton Thermal Products Plant to Behr Dayton, a joint venture company with Behr America Inc. As of May 1, 2004, DCC sold its remaining minority interest in the joint venture to Behr America Inc. DCC is required to pur- chase products from the former joint venture at competitively- based prices under a supply agreement entered into in connec- tion with the sale. The supply agreement is valid from April 2002 through April 2008. Product pricing was based on the existing cost structure of the Dayton Thermal Products Plant and was comparable to pricing in effect prior to the transaction. In 2004, Dr. Mark Wössner, a member of DaimlerChrysler’s Supervisory Board, received payments for the rental of premis- es to Westfalia Van Conversion GmbH, a wholly owned sub- sidiary of DaimlerChrysler AG, in the amount of €1 million. DaimlerChrysler engages in commercial transactions negotiated at arms length with its equity investee EADS. DaimlerChrysler does not consider these transactions to be material to us either individually or in the aggregate. Mr. Lagardère, a member of the Supervisory Board of DaimlerChrysler AG, is also one of two chairmen of the board of directors of EADS. From time to time, DaimlerChrysler Group companies may pur- chase goods and services (primarily advertising) from, and sell or lease vehicles or provide financial services to, Lagardère Group companies in the ordinary course. Mr. Lagardère is the general partner and chief executive officer of their ultimate parent company, Lagardère SCA, a publicly traded company. 200 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information The following represent transactions with shareholders: DaimlerChrysler incurred expenses of approximately $800,000 in 2005 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. 38. Compensation of the Members of the Board of Manage- ment and the Supervisory Board and Further Additional Information Concerning German Corporate Governance Code Compensation. The total compensation paid by Group related companies to the members of the Board of Management of DaimlerChrysler AG is calculated from the amount of com- pensation paid in cash and from benefits in kind. Thereof €9.3 million account for fixed, €24.6 million for short- term and mid-term and €1.0 million for long-term incentive compensation components. This is correspondent to a sum of €34.9 million in 2005. In 2005, 454,914 phantom shares were granted to the mem- bers of the Board of Management from the long-term share- based compensation component. The cash pay-out for these shares will be effective in 2009 in the event of continuous service on the Board of Management and dependent on the achievement of internal and external goals. The information on the pay-out will be part of the performance-oriented compensa- tion disclosure for the business year 2009. For detailed infor- mation on stock-based compensation programs, see Note 24. In 2005, stock options granted in 2003 were exercisable. In this context, Members of the Board of Management exercised 167,500 stock options. Board of Management Members, whose term of office expired in 2005, were entitled to receive compensation earned before the respective retirement date from current mid-term and the new 2005 long-term share-based remuneration components calculated on a pro-rata basis. We also had expenditures in con- nection with certain previously accrued retirement benefit obli- gations of other Board of Management Members. The aggregate amount of both items is €23.8 million. In July 2005, DCC and Haden Prism LLC (“Haden”) entered into an agreement under which Haden will construct and operate a vehicle paint facility within the Chrysler Group’s manufacturing complex in Toledo, Ohio, as part of a supplier colocation project scheduled to begin operation in 2006. Haden is an indirect sub- sidiary of Haden International Group, Inc., which is 75% owned by Palladium Equity Partners (“Palladium”), a private investment firm with investments in several other companies. Robert J. Lanigan, a member of the Supervisory Board of DaimlerChrysler AG, is a partner and an investor in Palladium. DaimlerChrysler Canada Inc. paid CAD1.2 million to a subsidiary of Mosaic Sales Solutions Holding Company for field market- ing services pursuant to a competitively bid contract awarded in April 2005. The chief executive officer of the subsidiary, Tony LaSorda, is the brother of Thomas LaSorda, a member of the Board of Management of DaimlerChrysler AG who assumed responsibility for the Chrysler Group in September 2005. During 2005, Deutsche Bank AG reduced its 11.8% share own- ership as of December 31, 2004, and now holds less than 5% of our outstanding shares. Deutsche Bank AG and its sub- sidiaries provided the Group with various financial and other services for which they were paid reasonable and customary fees. DaimlerChrysler also guarantees the obligations of its employees under the company’s corporate credit card program for corporate travel expenses with Deutsche Bank AG in the event the employees default on their obligations to Deutsche Bank AG. This guarantee, which amounted to €651 million as of December 31, 2004, was reduced to €20 million during 2005. DaimlerChrysler so far has not incurred any major pay- ments to Deutsche Bank AG from that guarantee. On July 7, 2004, DaimlerChrysler entered into a securities lend- ing agreement with Deutsche Bank AG concerning 22,227,478 of its shares in EADS (approximately 3% of the voting stock). As collateral, DaimlerChrysler received a lien on a securities account of equivalent value as the shares loaned by Daimler- Chrysler. 201 39. Principal Accountant Fees and Services The fees, billed by the independent auditors KPMG for profes- sional services in 2005, 2004 and 2003 are comprised of: (in millions of €) Audit fees Audit-related fees Tax fees All other fees Year ended December 31, 2003 2004 2005 42 11 5 4 62 39 14 6 5 64 34 7 6 3 50 The aggregate amount of expenditures paid by DaimlerChrysler for the year ended December 31, 2005, to provide pension, retirement and similar benefits for former members of the board of management and their survivors was €16.9 million. An amount of €292.9 million has been accrued for pension obliga- tions to former members of the Board of Management and their survivors. The compensation paid in 2005 to the members of the Supervi- sory Board of DaimlerChrysler AG for services in all capacities to the Group amounted to €2.0 million. The individual compen- sation paid to the members of the Supervisory Board is dis- closed as part of the compensation report in accordance with a recommendation of the German corporate governance code. Except for the compensation paid to employee representatives within the Supervisory Board in accordance with their con- tracts of employment, no compensation was paid for services provided personally beyond the aforementioned Board activi- ties, in particular for advisory or agency services. As of December 31, 2005, no advances or loans existed to members of the Board of Management or Supervisory Board of DaimlerChrysler AG. Transactions with Related Parties. For transactions with related parties, which are shareholders of DaimlerChrysler AG, see the last section of Note 37. Third Party Companies. At December 31, 2005, Daimler- Chrysler was shareholder of a significant company, that meet the criteria of a third party company according German Cor- porate Governance Codex: Name of the company Headquarters Stake in % 1 Equity in millions of € 2 Net income in millions of € 2 Tata Motors Limited Mumbai, India 6.8 828 253 1 As of December 31, 2005 2 Based on national consolidated financial statements for the year ended March 31, 2005 202 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Transition to International Financial Reporting Standards (IFRS) EU directive on the application of IFRS. In July 2002, the European Parliament and the European Council passed a direc- tive on the application of IFRS. All companies oriented towards the capital market that are domiciled in an EU country are obliged to prepare their consolidated financial statements in accordance with IFRS for financial years beginning on or after January 1, 2005. The member states are allowed, however, to postpone the mandatory application of IFRS until 2007 for companies that are only listed with debt certificates or that already apply inter- nationally recognized standards for purposes of stock-exchange listings outside the European Union. The latter is applicable in particular for companies, such as DaimlerChrysler, which are listed on the New York Stock Exchange and therefore prepare their consolidated financial statements in accordance with US GAAP. In Germany, this postponement option was implemented in December 2004 within the context of the Financial State- ments Law Reform Act (BilReG). On the basis of current planning, at the beginning of 2007, we will probably prepare and publish our first consolidated financial statements according to IFRS as additional information on the 2006 financial year (including 2005 as a comparative period). Effects of the differences between IFRS and US GAAP. In September 2002, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) included a “Short-term Convergence” project in their project plan with the goal of quickly eliminating a number of existing diver- gences. In the long term, IASB and FASB continue to pursue the goal of reducing or eliminating any remaining differences through joint projects and by coordinating future work programs. In addition, it was agreed that the respective interpretation com- mittees would collaborate on convergence in terms of inter- pretation and application. DaimlerChrysler supports the ongoing convergence between IFRS and US GAAP. Although progress has already been made on the way to achieving a substantial reduction in the differences between the two systems, signifi- cant differences still exist. DaimlerChrysler expects the applica- tion of IFRS to have only limited effects on the comparability and continuity of financial reporting. On the basis of the present regulations, we assume that the number of differences between US GAAP and IFRS with a significant impact on our consolida- ted financial statements is low, and that primarily the following areas will be affected. Research and development expenditure. According to US GAAP, research and development costs are generally to be recorded as an expense immediately. According to IFRS, a dif- ference is to be made between research and development. Research costs are to be entered immediately as an expense, whereas development costs that fulfill specific criteria are to be capitalized and amortized. Qualifying special-purpose entities (QSPE). Qualifying speci- al-purpose entities are established to achieve a defined goal such as conducting a leasing transaction or selling receivables. According to US GAAP, QSPEs are exempt from the obligation to consolidate. But according to IFRS, the general consolidation regulations apply. For DaimlerChrysler, this regulation means that additional special-purpose companies will be consolidated compared with US GAAP, particularly relating to the sale of re- ceivables. Pension obligations. In conformance with IFRS 1, First-time Adoption of International Financial Reporting Standards, Daimler- Chrysler will not apply the provisions of IAS 19, Employee Be- nefits, retroactively to the period since its performance-related pension plans were created. Accordingly, the net pension obli- gation or the net pension-plan assets for performance-related pension plans as of January 1, 2005 is based on the actuarially calculated projected benefit obligation, taking future salary increases into consideration (defined-benefit obligation – DBO), less the market value of the plan assets. Differences to the values entered according to US GAAP will be netted off with reserves in the IFRS opening balance sheet. Due to the signi- ficance of acturial losses not yet recognized, which have accu- mulated at DaimlerChrysler in recent years, this effect resulting from the introduction of IFRS is likely to have the greatest impact on shareholders’ equity. 203 Ten-Year Summary Amounts in millions of € 1996 1997 1998 1999 2000 2001 1 2002 1 2003 1 2004 1 2005 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 (€) Diluted net income (loss) per share (€) Total dividend Dividend per share (€) Dividend including tax credit 3 per share (€) 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) 204 100,233 116,057 130,122 148,243 160,278 150,422 147,408 136,437 142,059 149,776 23,370 18,656 25,033 19,982 21,648 17,143 5,616 6,212 6.2% 120 5,406 – – 4,022 4.09 4.05 – – – 6,364 6,230 5.4% 594 5,995 4,946 10.9% 6,547 4.28 2 4.21 2 – – – 26,158 21,044 7,438 11,012 7.4% 278 9,473 6,552 12.3% 5,746 5.73 5.69 2,358 2.35 26,500 21,836 7,241 9,752 6.1% 110 4,280 8,796 14.8% 7,894 7.87 7.80 2,358 2.35 25,095 20,073 5,848 (1,346) (0.9%) 131 (1,703) 332 0.5% (593) (0.59) (0.59) 1,003 1.00 24,163 19,701 5,942 6,827 4.6% 2,746 6,439 6,116 9.4% 5,098 5.06 5.03 1,519 1.50 24,287 18,897 5,571 5,686 4.2% 24,216 18,750 5,658 5,754 4.1% (2,792) (1,077) 596 1,467 2.5% 448 0.44 0.44 1,519 1.50 3,535 3,165 5.7% 2,466 2.43 2.43 1,519 1.50 25,731 19,750 5,649 5,185 3.5% 217 3,438 3,635 6.6% 2,846 2.80 2.80 1,527 1.50 6,540 8,593 6.6% 493 7,697 5,829 11.6% 4,820 5.03 4.91 2,356 2.35 3.36 3.36 3.36 – – – – - 23,111 7,905 54,888 12,851 28,558 11,092 68,244 17,325 29,532 14,662 75,393 19,073 36,434 27,249 93,199 18,201 40,145 33,714 41,180 36,002 36,285 28,243 32,933 24,385 34,017 26,711 36,739 34,238 99,852 103,414 104,104 103,881 105,188 109,213 12,510 14,536 12,439 14,296 11,666 12,647 101,294 124,831 136,149 174,667 199,274 207,616 187,527 178,450 182,872 201,632 22,355 2,444 32,135 41,672 25,496 114% 36,989 41,950 – – 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% 42,422 2,609 36,972 38,928 2,609 42,476 109,661 115,337 84,783 200% 75,336 81,516 67% 91,395 235% 87,814 80,874 64% 35,076 2,633 43,995 99,883 78,824 225% 79,778 72,673 72% 34,486 2,633 39,544 95,745 75,311 218% 73,422 70,542 74% 33,522 36,449 2,633 41,938 97,935 76,270 228% 72,192 77,158 67% 2,647 46,682 104,576 80,932 222% 78,784 86,399 65% 45,252 50,062 53,174 59,496 66,094 65,128 59,572 55,885 55,301 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Amounts in millions of € 1996 1997 1998 1999 2000 2001 1 2002 1 2003 1 2004 1 2005 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 4 6,721 4,891 4,427 1,159 9,956 8,051 7,225 5,683 1,456 8,155 10,245 4,937 1,972 9,470 19,336 5,655 3,315 12,337 16,681 18,023 10,392 19,117 6,645 6,487 16,017 8,896 17,951 7,580 7,254 7,145 17,704 6,385 7,244 6,614 15,604 5,841 5,579 6,386 17,678 5,498 5,445 6,580 20,236 6,039 6,341 15,944 15,909 13,826 11,060 12,353 Cash used for investing activities 4 (8,745) (14,530) (23,445) (32,110) (32,709) (13,287) (10,839) (13,608) (16,682) (11,222) From the stock exchanges: Share price at year-end Frankfurt (€) New York (US $) – – – – 83.60 96.06 77.00 78.25 44.74 41.20 48.35 41.67 29.35 30.65 37.00 46.22 35.26 48.05 43.14 51.03 Average shares outstanding (in millions) Average diluted shares outstanding (in millions) 981.6 949.3 959.3 1,002.9 1,003.2 1,003.2 1,008.3 1,012.7 1,012.8 1,014.7 994.0 968.2 987.1 1,013.6 1,013.9 1,003.2 1,013.9 1,012.7 1,014.5 1,017.7 Rating: Credit rating, long-term Standard & Poor’s Moody’s Fitch Dominion Bond – – – – – – – – A + A 1 – – A + A 1 – – A A 2 – – BBB+ A 3 – – BBB+ A 3 – – BBB A3 BBB+ A- BBB A3 BBB+ A- BBB A3 BBB+ A- Average annual number of employees 419,758 421,661 433,939 463,561 449,594 379,544 370,677 370,684 379,019 386,465 1 Some amounts and ratios have been adjusted compared with our reporting in previous years. See also Note 1 of the Notes to the Consolidated Financial Statements. 2 Excluding one-time positive tax effects, especially due to extra distribution of 10.23 € 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. 4 Periods before 2002 not adjusted for the effects of inventory-related receivables from Financial Services. 205 Glossary Code of Ethics. The DaimlerChrysler Code of Ethics applies to the members of the Board of Management and senior executives who have a significant influence on planning and reporting in connection with the year-end and quarterly financial statements. The regulations contained in the Code are designed to avoid misconduct and to ensure ethical behavior and the correct dis- closure of information on the Group. Consolidated Group. The consolidated Group is the total of all those companies that are consolidated, i.e. fully consolidated companies and companies consolidated using the equity method. Corporate governance. The term corporate governance applies to the proper management and monitoring of a company. The structure of corporate governance at DaimlerChrysler AG is deter- mined by Germany’s Stock Corporation Act, Codetermination Act and capital-market legislation, as well as international capital- market laws and stock-exchange listing regulations. Cost of capital. The cost of capital is a product of the average capital invested and the cost-of-capital rate. The cost-of-capital rate is derived from the investors’ required rate of return (see page 44). CSR – corporate social responsibility. A collective term for the social responsibility assumed by companies, including eco- nomical, ecological and social aspects. Equity method. Accounting and valuation method for share- holdings in associated companies and joint ventures, as well as subsidiaries that are not fully consolidated. Free float. Free float is the percentage of a company’s shares held by shareholders who hold less than 5% of that company’s shares in total (see page 25). Goodwill. Goodwill is the term for the amount by which the price paid for a company exceeds the value of the shareholders’ equity of that company when its assets and liabilities are valued at current market value. IFRS – International Financial Reporting Standards. IFRS is a set of standards and interpretations developed by an inde- pendent private-sector committee, the International Accounting Standards Board (IASB). IFRS includes regulations for compa- nies’ external accounting and reporting. DaimlerChrysler will probably prepare and publish consolidated financial statements according to IFRS for the first time at the beginning of 2007 for the 2006 financial year (see page 203). Integrity Code. Our Integrity Code has been in use since 1999 and was revised and expanded in 2003. It sets out a binding framework for the actions of all our employees worldwide. Net assets. Net assets are the capital invested by the Group and the industrial divisions; they are defined as the total of sha- reholders’ equity plus financial liabilities and the accrued pen- sion liabilities of the industrial business. The relevant capital base for the financial services business is shareholders’ equity (see page 44). Net operating income. Net operating income is the opera- tional profit measure after taxes and the relevant parameter for measuring the Group’s operating performance. Fair value. The amount for which an asset or liability could be exchanged in an arm’s length transaction between knowledgeable and willing parties who are independent of each other. Operating profit. Operating profit is the operational profit mea- sure before taxes (see page 39). 206 04 Essentials | 28 Management Report | 70 Divisions | 88 Cross-Divisional Activities | 102 Corporate Governance | 122 Consolidated Financial Statements | 203 Additional Information Index Rating. An assessment of a company’s creditworthiness issued by rating agencies. ROE – return on equity. For the financial services business, return on investment is measured by means of ROE (return on equity). ROE is defined as a quotient of operating profit and shareholders’ equity. RONA – return on net assets. For the Group as a whole and for the industrial divisions, return on investment is measured by means of RONA (return on net assets). RONA is defined as a quotient of net operating income (for the Group) or operating profit (for the industrial divisions) and net assets (see page 45). Sarbanes-Oxley Act. The Sarbanes-Oxley Act was passed in the United States in 2002. This new law resulted in additional regulations for the protection of investors, including greater responsibility for management and the audit committee. In par- ticular, requirements concerning the accuracy and complete- ness of published financial information have become stricter, and disclosure and auditing duties have been expanded. US GAAP – United States Generally Accepted Accounting Principles. The principles of accounting, evaluation and dis- closure that are generally followed in the United States and which are applied by DaimlerChrysler. Value-at-risk. Measures the potential future loss (related to market value) for a given portfolio in a certain period and for which there is a certain probability that it will not be exceeded. Value added. Value added indicates the extent to which the operational profit measure exceeds the cost of capital. When value added is positive, return on net assets is higher than the cost-of-capital (see page 45). Auditors’ report Capital expenditure Cash flow Code of Ethics Compensation system Consolidated Group CORE Corporate Governance Deferred taxes Dividends EADS Earnings per share (EPS) Equity method Financial income Goodwill Integrity Code Investor Relations Liabilities Net assets Net income Operating profit Pension obligations Portfolio changes Profitability Quality Ratings Revenues RONA - return on net assets Safeguarding the Future 2012 Sarbanes-Oxley Act Segment reporting Shareholders’ equity Shares Stock options Strategy Toll Collect Unit sales Value added World Engine 125 55, 67 48, 130 f, 182 106 110 ff 143 74 102 ff 155 ff 43 87, 144 199 f 144 ff 42, 155 160 106 26 179 ff 44 43 39 ff, 196, 198 170 ff 33 37 ff 74 52 36, 196, 199 45 92 121 195 ff 53, 129, 166 f 24 ff, 166 111, 167 ff 32 23, 85, 146 f 35 f, 72, 76, 80 45 23, 78 207 International Representative Offices Hanoi Phone +84 8 8958 710 Fax +84 8 8958 714 Hong Kong Phone +86 10 6598 3388 Fax +86 10 6590 6265 Istanbul Phone +90 212 482 3520 Fax +90 212 482 3521 Jakarta Phone +62 21 86 899 100 Fax +62 21 86 899 611 Kiev Phone +380 44 206 8080 Fax +380 44 206 8088 Kuala Lumpur Phone +603 2246 8811 Fax +603 2246 8812 Lagos Phone +234 1 461 8727 Fax +234 1 261 2945 Ljubljana Phone +386 1 5883 798 Fax +386 1 5883 799 Madrid Phone +34 91 484 6161 Fax +34 91 484 6019 Melbourne Phone +61 39 566 9104 Fax +61 39 566 9110 Mexico City Phone +52 55 5081 7313 Fax +52 55 5081 7479 Milton Keynes Tel. +44 190 8245 800 Fax +44 190 8245 802 Moscow Phone +7 495 745 2616 Fax +7 495 745 2614 New Delhi Phone +91 20 2750 5800 Fax +91 20 2750 5951 Paris Phone +33 1 39 23 5400 Fax +33 1 39 23 5442 Pretoria Phone +27 12 677 1502 Fax +27 12 666 8191 Rome Phone +39 06 4144 2405 Fax +39 06 4121 9097 São Paulo Phone +55 11 4173 7171 Fax +55 11 4173 7118 Seoul Phone +82 2 2112 2555 Fax +82 2 2112 2644 Singapore Phone +65 6849 8321 Fax +65 6849 8493 Berlin Phone +49 30 2594 1100 Fax +49 30 2594 1109 Abidjan Phone +225 21 75 1001 Fax +225 21 75 1090 Abu Dhabi Phone +97 1 4 8833 200 Fax +97 1 4 8833 201 Bangkok Phone +66 2344 6100 Fax +66 2676 5550 Beijing Phone +86 10 6590 6227 Fax +86 10 6590 6337 Brussels Phone +32 2 23311 33 Fax +32 2 23311 80 Budapest Phone +36 1 8877 002 Fax +36 1 8877 001 Buenos Aires Phone +54 11 4808 8719 Fax +54 11 4808 8702 Cairo Phone +20 2 529 9120 Fax +20 2 529 9105 Caracas Phone +58 241 613 2460 Fax +58 241 613 2462 208 Skopje Phone +389 2 2580 000 Fax +389 2 2580 401 Sofia Phone +359 2 919 8811 Fax +359 2 945 4014 Taipei Phone +886 2 2715 9696 Fax +886 2 2719 2776 Tashkent Phone +998 71 120 6374 Fax +998 71 120 6674 Teheran Phone +98 21 2204 6047 Fax +98 21 2204 6126 Tel Aviv Phone +972 9 957 9091 Fax +972 9 957 6872 Tokyo Phone +81 3 5572 7172 Fax +81 3 5572 7126 Warsaw Phone +48 22 312 7200 Fax +48 22 312 7201 Washington D.C. Phone +1 202 414 6756 Fax +1 202 414 6729 Windsor, Ontario Phone +1 519 973 2201 Fax +1 519 973 2226 Zagreb Phone +385 1 348 6600 Fax +385 1 348 6601 Addresses/Information/Internet DaimlerChrysler AG 70546 Stuttgart Phone +49 711 17 0 Fax +49 711 17 22244 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 95256 +49 711 17 95277 +49 711 17 94109 +49 711 17 94075 Fax Auburn Hills Phone +1 248 512 2812 Phone +1 248 512 2923 +1 248 512 2912 Fax Publications for our shareholders: • Annual Report (German, English) • Form 20-F (English) • Interim Reports for the 1st, 2nd and 3rd quarters (German, English) • Environment Report (German, English) • Social Responsibility Report (German, English) • Sustainability Report (German, English) The financial statements of DaimlerChrysler AG prepared in accordance with German GAAP were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, and an unqualified opinion was rendered thereon. These financial statements are published in the German Federal Gazette and are filed with the Commercial Registry of the Stuttgart District Court. The aforementioned publications can be requested from: DaimlerChrysler AG Investor Relations HPC 0324 70546 Stuttgart Germany The documents can also be ordered by phone or fax using the following number: +49 711 17 92287 www.daimlerchrysler.com/investors Additional information on the Internet. Special information on our shares and earnings developments can be found in the “Investor Relations” section of our website. It includes the Group’s annual and interim reports, the company financial statements of DaimlerChrysler AG, and reports to the US Securities and Exchange Commission (SEC) for all the financial years since 1998. You can also find topical reports, presenta- tions, an overview of various performance measures, informa- tion on the share price, and other services. DaimlerChrysler Worldwide Mercedes Car Group Chrysler Group Commercial Vehicles Sales Organization Automotive Businesses Financial Services Other Activities Europe Production locations Sales outlets Revenues in millions of € Employees NAFTA Production locations Sales outlets Revenues in millions of € Employees South America Production locations Sales outlets Revenues in millions of € Employees Africa Production locations Sales outlets Revenues in millions of € Employees Asia Production locations Sales outlets Revenues in millions of € Employees Australia/Oceania Production locations Sales outlets Revenues in millions of € Employees 10 - 30,088 92,930 1 - 12,043 4,472 1 - 202 1,083 1 - 1,358 5,520 3 - 5,531 340 - - 718 - - - 3,060 244 30 - 45,439 82,321 2 - 438 560 1 - 321 - 1 - 461 5 - - 208 - 19 - 17,201 57,477 18 - 12,770 26,838 3 - 1,932 13,414 1 - 1,410 1,081 9 - 6,116 18,340 - - 679 33 - 5,333 - 42,225 - 4,965 - 2,777 - 611 - - - 232 - - - 1,152 - 2,643 - 243 - 1,128 - 76 6,208 4,602 - 33 8,609 5,326 - 9 133 279 - 1 218 505 - 12 109 194 - 4 145 223 3 209 1,234 14,795 2 533 466 1,930 - 59 38 - - 43 27 - - 151 357 839 - 71 163 600 Note: Unconsolidated revenues of each division (segment revenues). Financial Calendar 2006 Annual Press Conference Mercedes Event Center (MEC) Sindelfingen February 16, 2006 10 a.m. CET Analysts’ and Investors’ Conference Call February 16, 2006 2.30 p.m. CET Presentation of the Annual Report 2005 March 6, 2006 Annual Meeting Messe Berlin April 12, 2006 10 a.m. CET Interim Report Q1 2006 April 27, 2006 Interim Report Q2 2006 July 27, 2006 Interim Report Q3 2006 October 25, 2006 << << DaimlerChrysler Worldwide Addresses DaimlerChrysler Stuttgart, Germany Auburn Hills, USA www.daimlerchrysler.com 

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